Conagra’s Q3 Margin Improvements Bode Well for Near-Term Outlook

Our $44.50 per share valuation of no-moat Conagra CAG should rise by a low- to mid-single-digit percentage after the company announced solid third-quarter (period ended Feb. 26) results, including 6% organic net sales growth and a little over 320 basis points of adjusted operating margin improvement (to 16.9%). The strong recent performance does not materially alter our long-term forecast (2% revenue growth, 17% average operating margins over the next decade). We believe the shares are somewhat attractive as market sentiment likely underestimates Conagra’s long-term margin prospects.

Pricing drove the top-line performance, with a 15% improvement in price/mix offset by a 9% decline in volume (consistent with historical elasticities, according to management, after considering a modest impact from manufacturing disruptions). Management reports inflation is moderating (partly as the company laps ever-increasing prices a year ago), and with pricing catching up to costs, we believe the company’s top line should stabilize in fiscal 2024. Sales growth contributed to third-quarter margin expansion, as did a mix shift toward more lucrative items. The solid quarter led management to boost its full-year targets, now calling for $2.70-$2.75 in adjusted EPS (previously $2.60-$2.70), and our $2.65 estimate should rise into the new range.

Although the company benefited from price increases to cover inflation and decisions to deprioritize sales of low-margin items, we continue to believe Conagra does not benefit from an economic moat. The company’s adjusted returns on invested capital (including goodwill) have been mired in the midsingle digits for years, and we believe limited investment in marketing and innovation call the company’s long-term market standing into question. Our long-term forecast calls for only modest improvement, into the high-single digits by the end of our decadelong explicit forecast.