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What Was behind Conagra Brands’ Stellar 3Q Earnings Growth?

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Mar. 23 2018, Updated 1:09 p.m. ET

EPS surpassed estimates

Conagra Brands (CAG) reported better-than-expected fiscal 3Q18 earnings on March 22, 2018. Conagra Brands’ adjusted earnings of $0.61 per share surpassed analysts’ expectations of $0.56 and jumped 27.1% on a YoY (year-over-year) basis.

Conagra Brands has been reporting stellar bottom-line growth over the past several quarters thanks to the increased productivity savings and tight control on SG&A expenses. Moreover, the company has also exceeded analysts’ expectations in the past three quarters.

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What drove Conagra’s 3Q EPS

The company’s adjusted EPS got a major boost from the lower effective tax rate, which contributed $0.09 to its bottom line. Besides, the lower outstanding share count, the YoY decline in the SG&A rate and interest expenses, and increased income from Ardent Mills’ joint venture further supported its bottom-line growth rate in fiscal 3Q18. However, inflation in input products and transportation costs and lower volumes remained a drag.

Similar to Conagra Brands, General Mills’ (GIS) fiscal 3Q18 EPS also took a hit from the inflation in commodity prices and increased transportation costs. Anticipating increased cost pressure, General Mills’ management also lowered its adjusted EPS forecast for fiscal 2018.

Notably, analysts expect the profitability of packaged food manufacturing companies including J.M. Smucker (SJM), Hershey (HSY), Kellogg (K), Mondelēz (MDLZ), and Campbell Soup (CPB) among others, to take a hit from the significant margin headwinds arising from the inflation in manufacturing and logistics costs.

Guidance update

Despite significant cost pressure, Conagra Brands increased its fiscal 2018 EPS guidance. The company now expects its adjusted EPS from continuing operations to be in the range of $2.03 to $2.05. Earlier, Conagra Brands expected its fiscal 2018 EPS to be at the higher end of the projected range of $1.95 to $2.02.

Improved pricing and mix, share repurchases, and lower tax rates are likely to drive the company’s earnings growth rate.

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