Valuation still within reach

Conagra Brands (CAG) stock rose 12.8% on March 21 following the company’s release of its fiscal 2019 third-quarter results, which indicated a better-than-expected performance on the profitability front. 

Conagra’s bottom line marked a YoY (year-over-year) fall as an increase in interest expenses and a higher outstanding share count lowered its earnings. However, its adjusted earnings surpassed analysts’ consensus estimate on the back of strong productivity savings and improved organic sales.

CAG Stock Soars ~13% on Q3 2019 EPS Beat—Will It Rise Further?

Conagra Brands impressed with its operating margins, which expanded YoY. The company also lowered its debt by $685 million within five months of the closing of its Pinnacle Foods acquisition. The development is likely to boost investors’ confidence and lower pressure on CAG’s earnings from the reduction in its interest expenses.

Moreover, management’s positive commentary on Pinnacle’s integration and execution is encouraging. Conagra Brands stock took a significant beating soon after its management stated that Pinnacle had fallen short on execution and innovation in the second quarter of fiscal 2019.

Despite yesterday’s ~13% rise, Conagra Brands stock is trading at a forward PE multiple of 12.2x, ~28% lower than its two-year average of 16.9x. The stock is also trading at a significant discount to the majority of its peers. Shares of the Kellogg Company (K), the J.M. Smucker Company (SJM), the Campbell Soup Company (CPB), and General Mills (GIS) are trading at forward PE multiples of 14.2x, 13.5x, 15.2x, and 15.4x, respectively.

We expect Conagra Brands’ top line to sustain its momentum in the coming quarters driven by acquisitions and strength in its base business. Meanwhile, productivity savings are likely to support the company’s operating margin. Its earnings could remain pressured in the near term and mark a YoY decline. However, base business improvements, debt reduction, and cost-saving initiatives are likely to drive the company’s bottom line in fiscal 2020. Moreover, Conagra Brands offers a dividend yield of 3.7%.

Stock performance

Shares of Conagra Brands are up 20.9% YTD (year-to-date) as of March 21. In comparison, General Mills, Mondelēz (MDLZ), J.M. Smucker, and Campbell Soup stocks are up 28.5%, 22.1%, 19.4%, and 14.7%, respectively, YTD and have outperformed the broader markets. The S&P 500 has risen 13.9% so far this year.

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