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Conagra (CAG) Gains on Portfolio Refinement, Costs High

Zacks Equity Research

Conagra Brands, Inc. CAG is well positioned on the back of its robust growth initiatives. Focus on reshaping portfolio and strengthening the growing snacks business are some of the factors driving Conagra amid cost inflation and soft Foodservice sales. Markedly, shares of the company have surged 38.4% year to date, outpacing the industry’s growth of 12.7%.

Let’s delve deeper.   

Factors Narrating Conagra’s Growth Story

Conagra is boosting competency by acquiring high-margin businesses and selling the less profitable ones to reshape portfolio. The company’s latest developments on this front include the divestiture of Gelit and the acquisition of Pinnacle Foods. Previously, the company took over Angie's Artisan Treats, which is strengthening its snacking business. Sandwich Bros.’ buyout has also been a valuable inclusion in Conagra’s frozen business. Notably, the company has exited private label brands and non-key businesses, including Spicetec and JM Swank, while it also concluded Lamb Weston’s LW spin-off in 2016. These endeavors are expected to continue aiding Conagra’s transformation into a pure-play branded food company.

Conagra is on track with the integration of the Pinnacle Foods buyout and realization synergies from the same. In fact, the companies’ complementary portfolios, cultures and supply chain are making the integration process easier. Notably, the buyout boosted its fourth-quarter fiscal 2019 net sales and is likely to continue boosting performance in the forthcoming periods.

Well, Conagra is undertaking initiatives to boost the frozen and the snacking businesses. The company has several initiatives lined up for the frozen category, which are expected to release in the first half of fiscal 2020. It is also on track with innovation plans for the snacking business, which includes meat snacks with bold flavors and optimized packaging. Such efforts are likely to yield results in the forthcoming periods.

Will Hurdles be Offset?

Conagra’s Foodservice segment sales have been witnessing year-over-year declines for six straight quarters now. In fourth-quarter fiscal 2019, sales at this segment declined 12.6% year over year, due to the sale of the Wesson oil business and the Trenton facility. Well, the company’s focus on its value-over-volume strategy has also been hitting sales of this segment for some time. Also, inflation driven pricing adjustments were a drag. Continued impacts from these factors may hurt Foodservice sales.

Also, like various other food companies such as Campbell Soup CPB and TreeHouse Foods THS, Conagra is witnessing cost inflation. During the fourth quarter, the company’s gross profit declined mainly due to input cost inflation, reduced profits stemming from the divestiture of the Wesson oil business and lower organic sales. Notably, the company witnessed inflation in areas such as transportation, crops and packaging. Persistence of escalated costs is a threat.

Nonetheless, we believe that robust growth strategies will help this Zacks Rank #3 (Hold) company counter these hurdles and keep its solid momentum alive.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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