Weak organic sales and soft margins could hurt EPS
Conagra Brands (CAG) is scheduled to announce its results for Q2 of fiscal 2019 tomorrow. We believe Conagra Brands’ top line will benefit from its recent acquisitions. Conagra’s acquisition of Bros. of Wisconsin and Angie’s BOOMCHICKAPOP are expected to support the net sales growth rate. However, we are cautious on organic sales. Conagra Brands’ second-quarter organic sales are projected to stay flat or fall marginally, as a tough YoY comparison and higher retailer investments are likely to remain a drag.
However, we expect higher pricing and an improved mix to support second-quarter organic sales. In comparison, the net sales of other major food stocks accelerated in the recent past thanks to the acquisition of fast-growing brands. However, organic sales remained subdued, indicating continued pressure in the base business.
We expect Conagra Brands’ profit margins to remain weak as soft organic sales and increased packaging, transportation, and commodities costs are likely to take a toll on its margins. Moreover, a shift in its marketing strategy could further pressure margins.
We believe weakness in the organic sales growth rate, soft margins, and higher interest costs could hurt Conagra Brands’ second-quarter EPS growth rate. The EPS growth rates of General Mills (GIS), J.M. Smucker (SJM), Campbell Soup (CPB), and Kellogg (K) are also taking a hit from increased interest costs.
Wall Street estimates for Q2 of fiscal 2019
Wall Street expects Conagra Brands to report net sales of $2.4 billion, up 11.1% on a YoY basis. Analysts expect the company’s acquisition of fast-growing in-demand brands to support its net sales growth rate.
However, analysts expect Conagra Brands’ adjusted earnings to remain flat at $0.55 per share in the second quarter.