ConAgra Brands (NYSE: CAG) has been a value pick for income investors for some time now and never has that been more true. The company is proving why the consumer staples are where risk-averse investors want to be by outperforming on the top and bottom lines and providing favorable guidance. The best news coming out of the FQ1 report, however, is that share prices fell nearly 4.0% despite the good news and are back within a range that has been a buying zone for institutional investors for the last 18 months or so. The institutions own about 84% of the stock at this time and it looks like that figure could grow. In regard to the value, this stock trades at only 13X its earnings while paying a safe 3.9% yield which is among the best value combinations in the sector.
"The strength of our brands and continued execution of the Conagra Way playbook resulted in strong sales and adjusted operating profit during the first quarter. We continued to deliver improved service and productivity as we navigate ongoing inflationary pressures and industry-wide supply chain challenges. Our strong start to fiscal 2023 reaffirms our confidence in our outlook for the balance of the fiscal year as we remain focused on generating value for our shareholders,” said ConAgra CEO Sean Connolly.
ConAgra Brands Flexes Pricing Power
ConAgra Brands had a great FQ1 and a quarter that proves the value of the company’s strategy. ConAgra repositioned the portfolio to focus on the upper-tier brands before the COVID-19 pandemic began and has been building on early gains ever since. This quarter, the company reported $2.9 billion in net revenue for a gain of 9.4% over last year, 8% in the two-year stack, and nearly 22% versus the prepandemic 2019 period. The strength was driven by a 9.7% increase in organic sales that was offset by a slight FX headwind. The organic sales were in turn driven by a 14.3% increase in price and a -4.6% decline in volume that was less than expected.
Moving on to the earnings, the company reported a decline in margin and net loss on a GAAP basis but this is due to non-cash impairments that have no bearing on the cash flow. On an adjusted basis, the operating margin came in at 13.7% and was compounded by a decline in share count that left the adjusted EPS up 14% versus last year. The $0.57 in earnings also beat the consensus by a nickel and are accompanied by a positive outlook for the rest of the fiscal year. The company says there may be some weakness in the Q2 period but pricing actions are offsetting cost increases and margins should improve to an average of 15% by the end of the year. The takeaway is that revenue growth 4% to 5% and EPS growth of 1% to 5% bracket the consensus estimate with ample room for upside surprises.
The Analysts Are Holding ConAgra
The analysts are holding ConAgra Brands but the sentiment is warming. There’ve been several commentaries since the earnings release but the one that stands out comes from Evercore ISI. They rate ConAgra Brands at Outperform and have set the Wall Street high price target of $40 which is a good 20% above the current price action. The stock price may move lower in the near term but a move up to the top of the range, if not a move up to the $40 level, is expected within the next few quarters.
"Factors supporting FY23 earnings growth include relative pricing power especially in frozen entrees and snacks (65% of sales) with stable overall portfolio share trends, improving pricing net of commodity inflation, some easing in supply chain and friction cost comparisons in the 2H, and higher A&P spend," says analyst David Palmer.