Conagra Brands: Improving Outlook And Discounted Valuation

Investment Thesis - Conagra Brands, Inc. is expected to see positive revenue growth in FY25 due to easing year-over-year comparisons and sequential volume recovery, supported by innovative product launches that will help gain market share [2] - The company is well-positioned to benefit from consumer acceptance of frozen foods, which offer quality, convenience, and superior value [2] - The stock is currently trading at a discount compared to historical averages, indicating potential for re-rating as growth resumes [2] Revenue Analysis and Outlook - After strong growth from FY21 to FY23, Conagra's sales turned negative in FY24 due to reduced consumer spending amid inflation, resulting in a 1.7% year-over-year decline in net sales to $3.032 billion in Q3 2024 [3] - Organic sales declined by 2% year-over-year, primarily due to a 1.8% decrease in volume and a 0.2% negative impact from price/mix [3] - The Grocery & Snacks segment saw a 3.4% increase in net sales year-over-year, while the Refrigerated & Frozen segment experienced an 8.1% decline [3][4] - The International segment's net sales grew by 4.6% year-over-year, driven by favorable FX impacts and organic sales growth [3] Margin Analysis and Outlook - In Q3 2024, the gross margin improved by 2 basis points year-over-year to 28.7%, aided by cost savings and productivity improvements [13] - Selling, general, and administrative expenses increased by 11% year-over-year, leading to a contraction in adjusted operating margin by 49 basis points to 16.4% [13] - The adjusted operating margin increased in the Grocery & Snacks, International, and Foodservice segments, while it declined in the Refrigerated & Frozen segment [14] Innovation and Market Share - Conagra generated approximately $1.6 billion in sales from products introduced in the last five years, showcasing the success of its innovation strategy [6] - The company has gained 1 percentage point market share in the Frozen foods category over the past year, with 51.9% of its portfolio holding or gaining unit share in Q3 FY24 [8][11] Valuation - CAG stock is trading at 11.06x FY25 consensus EPS estimate of $2.70, lower than its 5-year average forward P/E of 13.54x, indicating a potential for valuation re-rating [20] - The company has a forward dividend yield of 4.69%, which is attractive compared to peers [20][21] Conclusion - The company is expected to achieve positive revenue growth in FY25, driven by easing comparisons, volume recovery, market share gains, and favorable trends in the frozen food category [23] - The margin outlook is positive due to operating leverage and cost reduction initiatives, while the current valuation presents a buying opportunity [23]