ConAgra Brands (NYSE:CAG) is down about 6% year to date (YTD); however, it looks set to rise. We expect an upside of over 8% in the stock with a target price of $43 per share. We believe that the company's strategy to optimize business portfolio, innovation in products, improved efficiency of pricing with lower promotional expenses, and softness in input costs will lead to an expansion in the company's gross margins. Furthermore, we expect the recent restructuring to improve SG&A optimization, thus supporting the operating margins. While we expect a fall in net revenues over the next couple of years, we forecast the company to reach sustainable sales growth by 2020.
Expected Improvement in Profitability
Gross margins of ConAgra Brands have continued to increase over the past few quarters, expanding roughly 250bps year over year (YoY) to 31.1% in 2Q 2017.
We believe that the company's strategy of portfolio optimization with more focus on value compared to volumes will continue to drive improvement in gross margins in future. For example, the recent acquisition of Frontera reflects the management's strategy of expansion into trending and high-value categories. We believe that the acquisition will help the company benefit from growth of Gourmet Mexican Cuisine and support its profitability going forward.
Furthermore, ConAgra Brands plans to accelerate its innovation progress in fiscal-year 2017, and roll out new high value products in 2018. Looking at the success of pricing decisions taken by the company over the past few quarters, we remain confident about ConAgra Brands' innovation abilities and expect the pricing of new products to support profitability.
While business portfolio optimization, efficient pricing decisions, and improvement in supply chain productivity are expected to continue supporting improvement in gross margins, ConAgra Brands' restructuring initiatives are expected to support its operational profitability. The company's SG&A declined about 21% in 2Q FY17, reflecting the
