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Will Pressure on Conagra Brands’ Earnings Hurt Its Stock?

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Dec. 4 2020, Updated 10:52 a.m. ET

Earnings likely to remain subdued

Shares of Conagra Brands (CAG) were up 9.5% on a year-to-date basis as of February 22. Incremental sales from a recent acquisition drove the stock higher. However, pressure on margins and EPS could stall the uptrend in the stock.

Conagra Brands’ earnings are expected to decline significantly in the second half of fiscal 2019. The company’s gross margins are expected to remain low, reflecting higher input and logistics costs. Softness in organic sales is projected to pressure margins and EPS as well. The sales of the company’s Trenton facility and Canadian Del Monte business are expected to hurt its net sales growth.

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Conagra Brands’ acquisition of Pinnacle Foods is expected to drive strong double-digit sales growth. However, the debt it undertook to finance the deal is expected to drive interest expenses higher, which is likely to hurt EPS in the upcoming quarters. Also, an increase in the company’s outstanding share count is likely to take a toll on its EPS.

Higher interest costs from funding acquisitions are affecting the bottom lines of most US packaged food companies. J.M. Smucker (SJM), General Mills (GIS), Hershey (HSY), and Kellogg (K) are also taking a hit to their EPS from the rise in interest expenses. Higher input, packaging, and transportation costs continue to affect their EPS as well.

Wall Street estimates

Wall Street expects Conagra Brands’ to decline 19.3% in the third quarter of its fiscal year. Its EPS are projected to decrease 15.7% in the fourth quarter. For the full year, EPS are projected to decline about 3%.

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