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What to Expect from Conagra Brands’ Q2 Earnings

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Conagra Brands (CAG) will announce its earnings for the second quarter of fiscal 2020 before the markets open on Thursday. We expect the company’s second-quarter earnings to be more or less in line with the first quarter.

What to expect in Q2 earnings

Conagra Brands’ sales could continue to grow at a double-digit rate. The incremental sales from the Pinnacle Foods acquisition will likely drive the company’s top-line growth. Also, strength in the legacy brands could continue to support Conagra Brands’ top-line growth.

However, the pace of the revenue growth could decelerate sequentially. Planned divestitures and competitive headwinds might hurt the company’s top-line growth. Also, brand building investments with retailers could remain a drag.

We think that Conagra Brands’ organic sales could remain subdued, which reflects lower volumes. However, a favorable product mix and higher net pricing could support organic sales growth.

On the bottom-line front, we expect Conagra Brands’ adjusted earnings to continue to decline. Weakness in the base business and margin headwinds will likely put pressure on the bottom line. Also, interest expenses and the higher outstanding share count could pull down the company’s earnings.

Notably, Conagra Brands’ adjusted EPS has declined in the last three consecutive quarters. Higher interest expenses, due to increased debt related to Pinnacle Foods’ acquisition, took a toll on the company’s profitability. Also, an increase in the average outstanding share count dragged the EPS down.

Analysts’ expectations for Conagra Brands’ earnings 

Wall Street expects Conagra Brands to post revenues of $2.8 billion in the second quarter. The projection implies growth of 17.4% YoY (year-over-year). Analysts expect Pinnacle Foods’ acquisition to drive the company’s top-line growth. However, negative currency rates, lower volumes, and divestitures will likely limit the sales growth rate.

Conagra Brands’ margins could stay low, which would reflect lower organic sales and dilution from Pinnacle Foods.

Meanwhile, analysts expect Conagra Brands to post an adjusted EPS of $0.57 in the second quarter. Analysts’ estimate reflects a YoY decline of about 15%. Lower margins, higher interest expenses, and a YoY increase in the share count could hurt the company’s EPS.

In comparison, Wall Street projects low sales growth for General Mills (GIS) in the second quarter. Weak volumes could hurt General Mills’ organic and net sales growth. Also, the company’s EPS will likely have low-single-digit growth in the second quarter.

Earlier, J.M. Smucker (SJM) and Campbell Soup (CPB) had disappointing top-line performances. Flat volumes and lower pricing in coffee and peanut butter took a toll on J.M. Smucker’s underlying sales. However, the company beat Wall Street’s expectations on the bottom-line front due to lower taxes.

Campbell Soup’s top line also fell short of analysts’ consensus estimate. Lower volumes impacted the company’s organic sales. However, Campbell Soup beat Wall Street’s consensus estimate on the bottom-line front.

Conagra Brands stock outgrows broader markets

Despite a weak bottom-line performance and lower-than-expected sales in the first quarter, Conagra Brands stock has risen 36.7% year-to-date. Similar to most of its peers, Conagra Brands stock has outperformed the broader markets by a wide margin.

In comparison, the S&P 500 has risen 27.4%. Meanwhile, General Mills and Campbell Soup shares have risen 34.0% and 44.8%, respectively.

Analysts have a consensus target price of $31.47 on Conagra Brands stock, which implies an upside of 7.8% based on its closing price of $29.19 on Tuesday.

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