Conagra's (CAG) Growth Prospects Bright Amid Margin Pressure

On Jun 15, we issued an updated research report on premium consumer goods company Conagra Brands, Inc. (NYSE:CAG) .

Inside Story

Conagra expects that its unique value-over-volume strategy will help boost the company's top line in the upcoming quarters. Under this, the company ensures that its robust volume performance is not driven by price discounts but by stronger innovation, as well as new merchandising, distribution and consumer trail-related investments. For instance, new investments to strengthen the frozen products business will likely drive the Refrigerated & Frozen segment’s sales, going forward. On the other hand, brand-renovation initiatives executed to reinforce the snacks business will likely aid in improving Grocery & Snacks segment’s near-term sales. Per our estimates, the company’s sales are projected to be up 1.7% in fiscal 2019 (ending May 2019).

Moreover, the company expects that robust top-line growth, share-repurchase activities, lower tax rates and divestiture of low margin businesses will likely continue to improve its bottom line in the upcoming quarters. The company currently projects earnings of $2.03-$2.05 per share in fiscal 2018 (ended May 2018), higher than the prior view of $1.84-$1.89 per share.

Additionally, Conagra intends to boost its competency by reshaping the company’s portfolio through strategic inorganic moves. For instance, the acquisition of Angie's Artisan Treats, LLC (completed in October 2017) has been strengthening the company’s snacking business. Furthermore, the Sandwich Bros. buyout (completed in February 2018) has been fortifying its frozen products business.

The company also remains on track to boost shareholders’ remuneration on the back of dividends and share-buyback offers.

Over the last three months, shares of this Zacks Rank #3 (Hold) company have rallied 4.3%, as against the 3.7% loss incurred by the industry.

However, Conagra believes input price inflation of nearly 3.7% will continue to depress its near-term margins. Also, other issues such as higher transportation expenses, increased retailer-based marketing investments and costs associated with the integration of newly-acquired businesses might continue to dent margins in the near future.

Additionally, Conagra conducts its business in a highly competitive industry. Intense competition increases the bargaining power of consumers and exposes the company to risks of market share loss. Moreover, in order to increase or retain demand from prospective end users, Conagra not only needs to ensure good product quality and prices, but also has to maintain greater corporate transparency by ascertaining health and wellness aspects of products. Maintaining the desired level of transparency often becomes challenging for the company.

Stocks to Consider

Medifast, Inc. (NYSE:MED) sports a Zacks Rank #1 (Strong Buy). The company’s earnings per share (EPS) are predicted to grow 15% in the next three to five years. You can see the complete list of today’s Zacks #1 Rank stocks here.

Associated British Foods (LON:ABF) PLC (OTC:ASBFY) holds a Zacks Rank #2 (Buy). The company’s EPS is predicted to grow 9.50%, in the next three to five years.

The Chefs' Warehouse, Inc. (NASDAQ:CHEF) also carries a Zacks Rank of 2. The company’s EPS is predicted to grow 22%, in the next three to five years.

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