Conagra Earnings: Prudent Execution Paves the Way for Profitability Gains; Shares Remain Undervalued

Conagra CAG closed its (May-ended) fiscal 2023 book with solid results—organic net sales were in line with our $3 billion estimate and adjusted EPS of $0.62 outpaced our $0.55 forecast. However, a bland fiscal 2024 outlook of 1% organic net sales growth and $2.70-$2.75 in adjusted EPS (we had forecast 2.1% and $2.70, respectively) on softer demand expectations should leave our $46.50 fair value estimate largely unchanged. Shares still appear attractive, trading 30% below our valuation. We remain optimistic about Conagra’s long-term margin improvement prospects, with our forecast calling for 18% adjusted operating margins long-term (from 14.6% in fiscal 2023), supported by a normalized cost environment and ongoing supply chain initiatives.

In the quarter, Conagra’s organic sales grew 2.2%, as a 9.9% lift from price/mix was mostly offset by a 7.7% drop in volume (including a 0.5% adverse impact from temporary supply chain disruptions). Its adjusted gross margin swelled 216 basis points to 27% on pricing actions and productivity gains. While we believe Conagra’s strategic product innovation in fast-growing categories, such as frozen and snacks (68% of fiscal 2023 U.S. retail sales), has helped the firm improve its price elasticity relative to its historical levels, we don’t think this suggests brand strength. For one, while management noted consumers are buying fewer items to stretch dollars—prompting a slowdown across multiple categories—we don’t believe this is a pervasive phenomenon given the strong results that narrow-moat General Mills and wide-moat McCormick recently reported. Further, despite lack of details, our contention on Conagra’s inferior brand positioning is buoyed by the $345 million brand impairment charge recorded in the quarter. Lastly, we think the firm’s relative underinvestment (spending 3% of sales on marketing and research and development versus 6% for peers) will eventually pressure its market share, underpinning our no-moat rating.