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Here's Why Conagra (CAG) Has Rallied 15% Since Q3 Earnings

Zacks Equity Research

Amid an otherwise disturbed market, we have Conagra Brands, Inc. CAG that has seen its shares gain as much as 15% since it had reported third-quarter fiscal 2020 results on Mar 31. The bullish run despite a soft performance can be attributable to the company’s raised view for fiscal 2020 on the back of coronavirus-led demand in the retail business.

Incidentally, during its third-quarter earnings call, management stated that its fourth-quarter to-date performance is gaining from solid shipments and consumption in the domestic retail business, stemming from the growing spread of COVID-19. This has helped the company counter softness in the foodservice business. Despite the uncertain situation, management expects to exceed its previously-projected sales and profit targets for fiscal 2020, given an undisturbed supply-chain network.

Consequently, net sales growth is expected to exceed the higher end of the previously-projected 10-10.5% range. Organic sales growth is likely to exceed the higher end of the flat to 0.5% up range. Further, management projects the adjusted operating margin to be greater than the higher end of the 15.8-16.2% band. Adjusted earnings for the fiscal are now anticipated to surpass the previously-projected range of $2.00-$2.07 per share.

At a time when uncertainty around the impact of COVID-19 has caused a lot of companies to withdraw their forecasts, Conagra’s upgraded guidance is surely a treat to investors. In fact, this Zacks Rank #3 (Hold) company has been in investors’ good books for quite some time, courtesy of its splendid growth endeavors. Markedly, Conagra’s shares have rallied 16.8% in the past six months against the industry’s decline of 9.6%.

Before discussing Conagra’s impressive growth initiatives, it is worth noting that the company announced cash bonuses for its workers at all its production and distribution facilities across United States, Mexico and Canada. This reflects management’s efforts to reward its employees, given their constant dedication toward catering to consumers’ demand for food amid the global pandemic.

Conagra’s Strategies in Place

The company has been benefiting from its efforts to refine portfolio, as part of which it tries to acquire high margin-generating businesses while divesting the less profitable ones. To this end, Conagra’s buyout of Pinnacle Foods (concluded in 2018) has been aiding. The company has generated total cost synergies of $145 billion since Pinnacle Foods’ buyout. The buyout is likely to continue boosting the company’s performance in the forthcoming periods. Notably, the company expects synergies of roughly $180 million for fiscal 2020 and about $305 million through fiscal 2022.

Additionally, the company exited private-label brands and non-key businesses, including the Lender's bagel business, DSD snacks business, Wesson oil business, Gelit, the Trenton production facility and the Canadian Del Monte business. The company also concluded the sale of its peanut butter manufacturing facility (in Streator) after the end of the second quarter of fiscal 2020. Though these divestitures may hurt sales in the short run, these endeavors are expected to help Conagra focus on areas with better potential.

Notably, Conagra has been focusing on boosting the frozen and snacks businesses. In the third quarter of fiscal 2020, both categories performed well. In fact, total snack sales grew 2.9% during the quarter, backed by meat snacks and seeds businesses. Conagra gained market share in many of its snacks categories during the quarter. It is on track with a range of innovation and brand-building efforts for exploring growth prospects in these areas. Such efforts are likely to yield results in the forthcoming periods.

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