Conagra: Cutting Fair Value Estimate on Challenged Long-Term Outlook, but Shares Still Undervalued

After updating our forecasts and revising our long-term views, we are cutting our fair value estimate for Conagra CAG to $33 per share from $46.50, mostly from a roughly 150-basis-point reduction in our midcycle operating margin forecast as we expect competition to erode recent expansion. Even at our reduced fair value estimate, shares look undervalued as we think the market is overweighting the near-term volume challenges Conagra is facing. As the rapid price increases of the recent past slow, we think consumers will return to more normalized buying patterns.

Our fair value estimate implies a 12 times 2024 adjusted EPS multiple and a 10 times enterprise value to 2024 adjusted EBITDA multiple. We forecast sales to grow about 1% in 2024, as the tail-end of inflation-related price increases offset the resulting volume declines. The near-term price increases should help adjusted operating margin to reach nearly 16%, up about 300 basis points and in line with management guidance of 16% to 16.5%.

Longer term, Conagra’s targets include low-single-digit organic sales growth and mid- to high-teens adjusted operating margin. We forecast sales to grow about 2.3% per year after, mostly from volume growth. However, longer term, we expect margins to fall back to about 15%, as the competitiveness in Conagra’s categories resumes, and it no longer benefits from pandemic-induced sales growth or price increases.

We maintain Conagra’s economic moat rating of none. For food producers, brand intangible assets and cost advantage are the typical sources of competitive advantage. We think Conagra’s brands lack sufficient leadership across several product categories to amass an entrenched standing with retail partners. Additionally, we do not see evidence of a cost advantage, as direct operating margins lag the median for food producers.