High-Yielding Conagra Moves Up On Solid Results
Conagra Brands (NYSE: CAG) has long been a favorite of ours. Not only does the company present value relative to its peers and the broad market but it also delivers a high yield. Along with that, the company has been working hard over the past few years to reposition the portfolio and those efforts continue to pay off. While year-over-year growth was weak in the calendar third-quarter results remain strong and point to continued improvement in the balance sheet, free cash flow, and dividend safety. In our view, Conagra is a highly attractive stock for dividend growth investors, and right now looks like a great time to buy some more shares.
A Good Quarter For Conagra Brands
Conagra Brands had a good quarter despite the omnipresent impact of inflation and systemic supply chain issues. The company's $2.65 in consolidated revenue is down 1.1% over last year but beat the consensus by 475 basis points. Last year, revenue grew more than 12% during the pantry loading phase of the pandemic so a little giveback is not unexpected. The 2-year growth remained strong at 5.3% and 7% organic which is the more important metric for this reporting period.
Digging into the details, organic sales fell only 0.4% but were impacted another 110 basis points due to divestiture. FX tailwinds added 0.5% into the mix to give us the 1.1% year-over-year decline. On an organic basis, sales are down -2% on volume offset by a 1.6% impact from pricing and mix. The company has been raising prices to offset inflation and indicated future pricing actions are to come. On a segment basis, the grocery and refrigerated segments were the only two to decline, falling -4.9% and -2.5%. The international segment grew by 8.1% in tandem with economic reopenings while the Food Service segment grew by a not-surprising 20.1%.
The bad news is in the margin but even there there is a silver lining. The operating margin fell 534 basis points on a GAAP basis and 604 basis points on an adjusted basis to come in at 14.1%. This nearly but not entirely offset the revenue gains to deliver GAAP earnings of $0.49 and adjusted earnings of $0.50 to beat the consensus estimates by $0.02 and $0.01.
Looking forward, the company expects inflation to persist but for revenue strength and pricing actions to keep up with those gains. The company upped its revenue guidance to +1% from flat and its expectations for inflation to +11% from the previous 9%. This should leave the adjusted operating margin at 16% or unchanged for the previous guidance and the EPS at $2.50 which is also unchanged from the previous guidance and above the consensus estimate. In our view, there is upside risk in the earnings outlook.
Conagra Has A Good Yield To Value Ratio
Conagra is trading and only 14X its consensus for earnings while the most highly valued stocks in the group are trading closer to 30X earnings if not above. At the same time, Conagra yields over 3.6% while others in the group are closer to 2% and sometimes lower. The payout is safe with a payout ratio of 50% and the balance sheet was recently strengthened by divestitures but the outlook for dividend growth is a little cloudy. The company is still carrying a fair amount of debt so we don't expect robust dividend increases but there is a favorable outlook for future increases.
The Technical Outlook: Conagra Brands Reverses Within A Range
Shares of Conagra brands have been trading within a range since the early spring but appear to be reversing within that range. The Q1 results have price action up more than 1.5% in early pre-market trading and trading at a new near-term high. This move is accompanied by bullish indicators that suggest if not confirm reversal within the range. In our view, shares of Conagra should hit the $36 Pricetarget.com analysts consensus fairly quickly and then move up to retest the $40 level by the end of the year.
Companies in This Article:
