Conagra Brands: People Need To Eat

Oct. 07, 2022 1:19 AM ETConagra Brands, Inc. (CAG)10 Comments


  • Food inflation has pinched consumer budgets, but people need to eat.
  • Conagra enjoyed a strong increase in the top line driven by pricing, though volumes were down across the board.
  • The earnings are growing, and the guidance was reiterated, which was bullish.
  • A strong dividend and repurchases being made are reasons to own this stock while we wait for the market to stabilize.
  • Looking for a helping hand in the market? Members of BAD BEAT Investing get exclusive ideas and guidance to navigate any climate. Learn More »
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Our many followers know what is going on. This market is treacherous. While there have been some signs of life in a few previous sessions, the market has been in a bear state almost all year, with select rallies. Over the last month and a half, there has been some serious pain. September was particularly hard, as the averages got slammed, while individual stocks have been obliterated in many cases. It has been ugly. It all is due to inflation in the price of nearly everything over the last year, and subsequently the Federal Reserve's actions to combat the increase in prices by effectively weakening the economy through rate hikes. All of it has combined to uncertainty on the Street. There is fear. There is confusion on what the right valuations are. We do not know how far the Fed will go, or how far they will actually raise rates. At the same time, we truly do not have a sense of what the damage will be, but consensus seems to be a mild to moderate recession, at least looking at the damage to stocks.

Investing is tough right now. But we are encouraging our members to own dividend paying stocks of companies selling products people need. And people need to eat. Enter Conagra Brands (NYSE:CAG), which is of course a global food conglomerate. They have benefited from some pricing power during this inflation craze, but at the same time, they have seen rising labor costs, elevated input costs, but strong demand. We like the company because we see revenues holding up relatively well during a recession, the stock is reasonably valued, and there is a solid dividend being paid. We want to own names like this. The earnings were just reported, and they were highly anticipated as they were a gauge for the impact of a weakening consumer, and the outlook was set to give a read on this key part of the consumer economy. Let us discuss.

Headline performance strong

In the just reported quarter, Conagra enjoyed a strong increase in the top line. In fact, net sales increased 9.5% to $2.9 billion. These revenues beat consensus by $60 million. This was from 9.7% organic growth which was a result of much better pricing (inflation) and a good mix which was up 14.3% higher. Once concern was volumes, however, which dipped 4.6%. The company attributed this to "elasticity" but that is a weak excuse. Demand was down, though we will say demand may have shifted based on pricing. Also, despite being a global brand, currency only hurt by 0.2% on sales.

Looking at the segments, sales for the Grocery & Snacks segment were up 10.5% to $1.2 billion in the quarter. Pricing and the mix rose 16.6%, but again we saw volume decreased 6.1%. Over in the Refrigerated & Frozen segment, we saw sales rose 9.6% to $1.2 billion in the quarter. Like in Grocery, we saw pricing and the mix increase 12.1% and volume decreased 2.5%. Finally, in the International segment, sales were down 1.3% to $234 million as there was a 1% increase in organic sales. This increase was from an 8.4$ jump in pricing and mix, but volume dropped 7.4%. Further currency weighed 2.3%.

While we don't like the volume decline, what we do love is that profits are up. In the quarter, gross profit increased 7.0% to $720 million. The higher organic sales helped, while supply chain efficiency improvements helped. But make no mistake, the costs of goods sold were up 15%, and that was due to inflation on input costs, as we talked about in the open. This led to gross margin pressure. That was a negative as margins were down from 25.38% to 24.8%. Other expenses and costs were on the rise too, though a lot of this was expected. Selling, general, and administrative expense jumped off the page in the report skyrocketing 139.1% to $742 million. Of course, we need to be aware this was due to a huge $386 million goodwill/brand charge as a result of higher interest rates. Backing this out, we see selling, general, and administrative expenses popped 10.5% to $263 million.

As we mentioned, rates were up. This led to a higher net interest expense. These expenses were up to $97 million, rising 3.0%. Overall, adjusted EBITDA was up a nice 9.1% to $547 million in the quarter. At the bottom line we like what we saw, as adjusted net income was up a nice 14.2% to $275 million, or $0.57 per share, beating by $0.02 versus consensus. Overall, this was a solid performance. We like the growth. The outlook is strong too.

Guidance reiterated

Make no mistake, one of the big concerns was not just performance in the quarter, but whether the forward view was in jeopardy. We were pleased to see management stand behind its forecast to start the fiscal year. Thanks to higher pricing, the company sees organic net sales growth of 4% to 5% compared to fiscal 2022. However, the problem here is that this likely suggests volumes will be down some. This remains to be seen, and we do not know how a recession could impact volume further. The company sees strong operating margin of approximately 15%, and this means when you factor in interest and capex, gross margins should be around 25% or so. Overall, earnings are slow growing, with adjusted EPS slated to rise 1% to 5% versus last year. Now keep in mind, this slow growth comes with shareholder-friendly policies we like.

Shareholder-friendly with good value

The company has been repurchasing shares, and this increases EPS long-term, thereby increasing shareholder value. In this past quarter alone, Conagra repurchased 1.4 million shares for approximately $50 million. At the same time, the company is paying a near 4% dividend yield here. They are paying $0.33 quarterly, and this is a nice payout while you wait for a rebound. The valuation here is also attractive in our opinion. The FWD P/E is cheaper than the broader market at 13.9X, while the PEG on a FWD basis is 2.6. The price to cash flow of 10.5 is quite attractive relative to other consumer staples, and the price to book is a paltry 1.75. The price is attractive.

Take home

We have a quality company here at a fair price. We like the valuation and the 4% yield. If recession is coming, remember, people need to eat, and we want to own companies just like this. Get paid to wait while the company repurchases shares. The inflation in food prices helped the top line, but weighed a little on margins. Still, the company is in fine shape and the guidance being reiterated is bullish. Let the stock sell off and do some buying here.

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