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Why Is Conagra (CAG) Up 7.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Conagra Brands (CAG). Shares have added about 7.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Conagra due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Conagra Q1 Earnings & Sales Lag Estimates

Conagra Brands posted first-quarter fiscal 2019 results. Conagra's quarterly adjusted earnings from continuing operations rose 2.2% to 47 cents, though it fell short of the Zacks Consensus Estimate of 49 cents. Notably, this marked the company's first earnings miss after four consecutive beats. The year-over-year upside was backed by reduced effective tax rate and lower share count, which compensated for escalated SG&A expenses, reduced equity method investment earnings, and a d ecline in pension and postretirement non-service income.

Conagra generated net sales of $1,834.4 million, which climbed 1.7% year over year but came below the Zacks Consensus Estimate of $1,847 million. Sales growth was driven by contributions from Angie's BOOMCHICKAPOP and Sandwich Bros. buyouts to the tune of about 200 (basis points) bps. On the contrary, divestitures of Trenton production facility and the Canadian Del Monte business weighed on sales growth to the tune of 120 bps. Continued strength in Refrigerated & Frozen and Grocery & Snacks segments, in particular, also drove sales.

Further, organic sales (excluding Trenton) inched up 1.2%, courtesy of strength in all four segments. During the quarter, volumes remained flat, whereas price/mix improved. Higher volumes at Refrigerated & Frozen, Grocery & Snacks, and International segments were negated by the effects of value-over-volume strategy in the company's Foodservice segment. As for price/mix, the same was backed by better pricing and mix, which more than offset higher retailer investments to aid brand saliency, customer trial and improved distribution.

Gross Margin

Adjusted gross profit fell 0.6% to $524.2 million, with adjusted gross margin contracting 60 bps to 28.6%. The downside stemmed from elevated transportation and input costs, and greater retailer investments. This was somewhat cushioned by supply-chain productivity, improved price/mix and gains from recent buyouts.

Segmental Details

Grocery & Snacks: The segment's quarterly sales came in at $771 million, up 3.4% year over year. Notably, Angie's BOOMCHICKAPOP acquisition contributed nearly 330 bps to net sales growth. Organic sales grew just 0.1% as volumes rose 0.1% but price/mix remained flat. Volume growth was fueled by strength in snacks items like Slim Jim, Duke's, Act II and Orville Redenbacher's along with solid Chef Boyardee strong performance. These factors negated softness in various non-key grocery brands.

Refrigerated & Frozen: Net sales jumped 3.2% to $635 million, as Sandwich Bros.' buyout contributed about 180 bps to net sales growth. Organic sales increased 1.4%. Markedly, volumes and price/mix increased 0.5% and 0.9%, respectively. Volumes were backed by focus on innovation in certain categories.

International: Net sales climbed 1.5% to $194 million, which was hurt by adverse currency movements to the tune of about 320 bps. Further, Angie's BOOMCHICKAPOP buyout boosted net sales growth by nearly 90 bps, whereas the divestiture of the Canadian Del Monte business lowered net sales growth by roughly 250 bps. On an organic basis, net sales jumped 6.8%, courtesy of 4.4% volume growth, which was backed by improved snacks businesses in Mexico and Canada. Also, price/mix grew 1.9%, owing to better pricing.

Foodservice: The segment's quarterly sales declined 6.9% year over year to $234 million, owing to Trenton sale that accounted for about 700 bps of the decline. Organic sales climbed 0.1%, owing to soft volumes, which fell 5% due to the company's focus on its value-over-volume strategy. This strategy caused the company to exit certain under-performing businesses, which weighed on volumes. Price/mix rose 5.1% on the back of favorable product mix and better pricing, countering inflation.

Other Financial Fundamentals

Advertising and promotion (A&P) costs were 22.1% lower at $43 million, as management continues to shift investments from A&P marketing to the aforementioned retailer investments. Further, equity method investment earnings slumped nearly 46% to $16 million.

Conagra exited the quarter with cash and cash equivalents of $74.8 million, senior long-term debt (excluding current portion) of $3,037.8 million and total stockholders' equity of $3,815.0 million. In the first quarter, the company generated net cash of $94.7 million from operating activities (continued operations).

During the quarter, Conagra paid quarterly dividend per share of 21.25 cents. Further, management intends to retain its existing annual dividend per share rate during fiscal 2019, owing to Pinnacle Foods' buyout.

Other Developments

During the first quarter, the company concluded the sale of its Canadian Del Monte processed fruit and vegetable business to Bonduelle Group. Further, Conagra remains on track to acquire Pinnacle Foods, which is expected to close by the end of October 2018, subject to certain approvals.

Fiscal 2019 & Q2 Outlook

Conagra reiterated its outlook for fiscal 2019. Net sales are anticipated to increase 0.5-1.5%. Organic sales are expected to increase 1-2%, excluding the impacts from the sale of the Trenton facility.

Adjusted gross margin is expected to be 29.7-30.0%, while input cost inflation is guided between 3.0% and 3.2%. Management projects adjusted operating margin to be 15.0-15.3%. Effective tax rate is likely to be 23-24%.

Q2 View

Organic net sales growth (excluding Trenton) is expected between flat and slightly down. Net sales growth is anticipated to be nearly 40 bps lower than organic net sales growth. Adjusted operating margin is expected to be 14.4-14.7%.

Finally, Conagra envisions adjusted earnings to be 57-60 cents per share for the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.35% due to these changes.

VGM Scores

At this time, Conagra has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Conagra has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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