Conagra Manufacturers: Bettering Outlook And Discounted Valuation (NYSE:CAG)

Funding Thesis

Conagra Manufacturers, Inc.’s (NYSE:CAG) income progress ought to flip constructive in FY25, supported by easing Y/Y comparisons and sequential quantity restoration. As well as, the corporate’s good execution when it comes to launching progressive merchandise ought to assist it acquire market share and assist income progress. The corporate can also be well-positioned to capitalize on client acceptance and utilization of the frozen meals class as a consequence of its high quality, comfort, and superior relative worth.

On the margin entrance, the corporate ought to profit from working leverage as quantity recovers, value discount actions, and productiveness enchancment initiatives just like the linked store flooring plan. The inventory is buying and selling at a reduction in comparison with its historic averages, and I see a possible for re-rating as the corporate returns to progress subsequent 12 months. The enticing valuation, coupled with enhancing income outlook and good margin enlargement prospects, makes CAG inventory an excellent purchase.

Income Evaluation and Outlook

Following the great progress from FY21 to FY23 pushed by sturdy value will increase, CAG’s gross sales turned adverse in FY24 as shoppers diminished spending on discretionary gadgets amid persisting inflationary pressures, leading to decrease volumes.

Within the third quarter of 2024, the corporate’s web gross sales declined by 1.7% Y/Y to $3.032 billion. Excluding a 0.3% favorable impression of FX, natural gross sales declined by 2% Y/Y. This was as a consequence of a 1.8% lower in quantity because of industry-wide decrease consumption tendencies and a 0.2% adverse impression from value/combine, largely pushed by the strategic commerce investments within the quarter.

Phase-wise, the Grocery & Snacks phase’s web gross sales elevated by 3.4% Y/Y pushed by a 4.2% constructive impression from value/combine as a consequence of favorable model combine and advantages from inflation-driven pricing carried out within the prior 12 months. Natural volumes declined by 0.8% as a consequence of continued decrease industry-wide consumption tendencies.

Within the Refrigerated & Frozen phase, web gross sales decreased by 8.1% Y/Y brought on by a quantity decline of three.3% and a adverse value/combine impression of 4.8%. The decline in quantity was as a consequence of continued decrease consumption tendencies, whereas the worth/combine declined primarily as a consequence of a rise in strategic investments within the frozen enterprise.

Within the Worldwide phase, web gross sales grew by 4.6% Y/Y attributed to a 3.6% favorable impression of FX and natural gross sales progress of 1%. The rise in natural gross sales was pushed by quantity progress of two.7% as a consequence of energy within the Mexico and International Export companies, partially offset by a 2.7% lower in value/combine.

Lastly, the Foodservice phase’s web gross sales have been down 0.9% Y/Y on a reported and natural foundation as a consequence of a quantity decline of 4.8% because of the corporate’s give attention to lowering or exiting much less worthwhile enterprise in decrease precedence classes and softness in food-away-from-home visitors. The natural gross sales decline was partially offset by a value/combine enhance of three.8%.

Trying ahead, the corporate ought to profit from easing comparisons over the approaching quarters. The corporate’s natural progress slowed from 6.1% Y/Y in Q3 2023 to 2.2% Y/Y in This autumn 2023 after which turned adverse within the first three quarters of this 12 months. So, comparisons are simpler for the present quarter (This autumn FY24) and subsequent 12 months. The corporate’s quantity progress can also be turning into much less worse sequentially. The sharp enhance in costs over the previous couple of years negatively impacted volumes. Nonetheless, as shoppers modify to previous will increase and future value will increase change into far more measured with inflationary headwinds subsiding, I consider quantity ought to proceed to see sequential restoration. Easing comparisons coupled with sequential quantity restoration bodes effectively for the corporate’s income progress shifting ahead, and I count on the corporate’s progress to show constructive in FY25.

Whereas the inflationary atmosphere continues to weigh on buyer pockets, at-home meals are effectively positioned as they’re a extra inexpensive possibility in comparison with consuming out which, in line with administration, are ~4x dearer on common.

The corporate must also profit from innovation and good execution, which ought to assist it acquire share. In 2023, the corporate generated ~$1.6 bn in gross sales from merchandise launched over the past 5 years, indicating the success of its product innovation technique.

The corporate has accomplished an excellent job when it comes to growing consumption at lunch by bowl innovation and plans to copy comparable success for dinner innovation. Explaining the corporate’s strategy on the CAGNY Convention earlier this 12 months, the corporate’s COO Thomas McGough mentioned,

“In single-serve meals, our bowl innovation grew class quantity. It elevated consumption on the lunch event. Bowls signify simply 25% of class quantity, however they’ve contributed 60% of class progress. And that is the place our portfolio breadth is an actual energy. We develop innovation platforms like bowls after which we leverage the breadth of our portfolio to succeed in extra shoppers and drive larger scale. Consequently, this platform is approaching $1 billion in gross sales and as you may see, we will maintain success with a really spectacular vary of latest gadgets inside this phase of the class.

We’re taking the identical strategy to the dinner event, which is a large alternative for us. It is the biggest meal event, however one by which we’re underdeveloped. Like bowls, we’re creating a platform, and we will aggressively innovate throughout the breadth of our portfolio. We, actually, have one thing for everybody, starting with these new Wholesome Alternative trendy dinners.

On Marie Callender, we’re elevating and modernizing conventional dinner favorites. In entrance of these with hungrier appetites, we’re introducing Hungry-Man combos and Marie Callender duos which can be excessive in protein and Evol has at all times been on the forefront of latest delicacies and can proceed to be so with these culinary-inspired recipes. If you take a look at the dinner event, there’s the only real event that these single-serve meals fulfill. However in — however there is a phase referred to as multi-serve meals. It is a totally different job. And this class progress — class progress on this phase is, truly, accelerating. Italian is America’s favourite delicacies, and we’re increasing our line with these premium Bertolli entrees that you simply examine with these new Bertolli Appetizers for an entire at-home meal that is like going out. And for these feeding bigger households, we’re modernizing and premiumizing Chef Boyardee, and we’re shifting it into the Frozen class. These are unbelievably nice merchandise. The shoppers put together simply quarter-hour at about $2 per serving.”

The corporate’s good execution has helped it acquire ~1 proportion level market share within the Frozen meals class over the past 12 months, and about 51.9% of the corporate’s portfolio is gaining or holding unit share in Q3 FY24, in comparison with 39.9% a 12 months in the past.

This improved execution makes me optimistic concerning the firm’s progress prospects.

The corporate can also be poised to profit from increased ranges of client acceptance and utilization of the Frozen meals class pushed by high quality, comfort, and superior relative worth. Total, I count on the corporate’s income progress to show constructive within the coming quarters, and I’m optimistic about long-term progress prospects as effectively.

Margin Evaluation and Outlook

In Q3 2024, the corporate’s gross margin was favorably impacted by value financial savings and productiveness enchancment which greater than offset the adverse impacts of decrease natural web gross sales, reasonable enter value inflation, and unfavorable working leverage. Consequently, the full adjusted gross margin improved by 52 bps Y/Y to twenty-eight.7% within the quarter.

Nonetheless, promoting, basic, and administrative bills (SG&A), which embrace promoting and promotional bills (A&P), elevated by 11% Y/Y within the quarter as a consequence of increased incentive compensation and elevated investments in A&P.

Adjusted working margin contracted by 49 bps Y/Y to 16.4% as the advantages from gross margin enlargement have been greater than offset by increased SG&A.

On a phase foundation, the adjusted working margin elevated by 261 bps Y/Y in Grocery and Snacks, 161 bps Y/Y in Worldwide, and 383 bps Y/Y in Foodservice segments. However, the Refrigerated & Frozen phase’s adjusted working margin declined by 385 bps Y/Y as a consequence of an elevated merchandising and A&P funding and hard Y/Y comparability because the Q3 2023 gross margin benefited from the timing of inflation-driven value will increase.

Trying ahead, the corporate’s margin outlook is constructive. The corporate’s margins ought to profit from working leverage as quantity progress turns constructive. The provision chain constraints and inflation are easing, and the corporate is doing an excellent job in taking pricing motion within the chosen pockets (e.g. tomatoes in Q3) the place the inflation remains to be a headwind. So, I count on the corporate to profit from constructive value/value as effectively.

On its Investor Day in 2022, administration additionally laid out a $1 billion value discount plan, and on the CAGNY convention earlier this 12 months, administration famous that they’re on observe to ship these financial savings by optimizing the provision chain and leveraging digital applied sciences to drive productiveness. One good instance of administration’s productiveness enchancment initiatives is the Linked Store Flooring, the place the corporate is putting in sensors on the manufacturing line to gather real-time knowledge to drive efficiency enhancements and determine potential sources of fabric waste.

I consider these cost-saving initiatives coupled with quantity restoration bodes effectively for the corporate’s margin enlargement within the coming quarters.

Valuation

CAG inventory is presently buying and selling at 11.06x FY25 (ending Might) consensus EPS estimate of $2.70 and 10.57x FY26 consensus EPS estimate of $2.83 which is decrease than its 5-year common ahead P/E of 13.54x. The corporate’s EV/EBITDA (FWD) of 9.86x can also be decrease than its 5-year historic EV/EBITDA of 11.35x.

The corporate has a wholesome ahead dividend yield of 4.69% and ranks properly on Searching for Alpha’s Quant Dividend Grades.

The corporate’s valuation a number of has been pressured by progress headwinds in FY24. Nonetheless, with the corporate poised to return to progress within the coming quarters, there’s a good probability of valuation a number of re-rating increased. The nice factor is traders are getting paid to attend given the corporate’s excessive dividend yield of 4.69%. Therefore, I consider CAG inventory is an efficient purchase on the present ranges.

Dangers

I’m anticipating inflation to reasonable but when it accelerates increased, it could impression each volumes and margins as it can put stress on client pockets and the worth/value could flip adverse. If administration fails to ship on its cost-reduction initiatives, the margin upside could not materialize.

Conclusion

I count on the corporate’s income to show constructive in FY25 with the assistance of easing comps, sequential quantity restoration, market share beneficial properties from innovation and good execution, and favorable consumption numbers within the Frozen meals class. The margin outlook can also be positive-driven by working leverage and value discount initiatives. Additional, the valuation is decrease than it has traditionally been and there’s a good potential for re-rating as the corporate returns to progress. Given good progress prospects and a reduced valuation, I’ve a purchase score on CAG inventory.