Conagra Brands: Another Reason To Go Long Consumer Staples In 2023

Key Points

• Conagra Brands proved why consumer staples should still be on your radar. 
• The company offers a value to its peers and a high yield. 
• The stock is breaking out and on track for a new all-time high. 

The Consumer Staples NYSEARCA: XLY sector has been a go-to sector for the last several years and Conagra Brands NYSE: CAG has just proven why it and they should still be on investor’s radars. The company is proving to be resilient in the face of rising costs and uncertain economic conditions. It is offering not only a value relative to its peers but a higher-than-average dividend that qualifies as “high yield” relative to the S&P 500 NYSEARCA: SPY.

The takeaway here is that Conagra Brands just beat estimates on the top and bottom lines, showed tremendous pricing power and issued favorable guidance that has the market on the move and ready to tackle another new all-time high. 

Conagra Brands Guidance Has Shares At New Highs 

The Q2 results and guidance have price action in Conagra brands up more than 2.0% in premarket trading and at a new high. This is an almost 6-year high that dates back to well before the pandemic began, so is a very noteworthy move. The strength is driven by an 8.2% increase in revenue that outpaced the consensus by 100 basis points and was coupled with an increase in margins.

Revenue strength was driven by gains in all segments, led by a 14% increase in the retail snacks business, which is good news for Pepsico NASDAQ: PEP when it reports. On an organic basis, sales are up 8.6% and offset by a 0.3% FX-related headwind. 

The best news is in the margin. The company increased its adjusted gross and operating margins to levels above the Marketbeat.com consensus estimates. The AGM expanded by 310 and the AOP by 237 to drive a 26.6% increase in the adjusted earnings. Adjusted earnings of $0.86 are up 26.6% YOY, and this strength is expected to continue into the 2nd half of the fiscal year. 

The guidance is moving this market as it includes increasing all metrics. The company is now expecting revenue growth from 7% to 8%, with an operating margin of 15.3% to 15.6%. This should drive adjusted EPS of $2.60 to $2.70, more than $0.10 above the consensus estimate at the low end of the range. Assuming the company’s momentum continues, this guidance may also be too low. 

Conagra Brands Is A High-Yield Value Stock 

Conagra Brands is offering value in the Consumer Staples trading at only 15X its earnings. This compares to the highest-valued stocks like Hormel NYSE: HRL, The Clorox Company NYSE: CLX and Lamb Weston NYSE: LW, which trade in a range of 25X to 35X. At the same time, the stock is yielding about 3.4%, which is among the highest yields in the group, and it is relatively safe.

The company’s leverage ratio is a low 0.8X, and it has a 4.2X coverage ratio, so there is cash flow on the books to cover the payment and extend the 3-year history of dividend increases to 4 and 5 years at the least.  Kraft Heinz NASDAQ: KHC is the only stock in the group with a higher yield and comparable value and it, too, is well-exposed to the retail snacks business. 

The analysts have yet to come out with commentary but rest assured it is on the way. The trend in sentiment is bullish so investors might expect to see the sentiment continue to firm and the consensus price target rise. As it is, the analysts have the stock set at a Firm Hold/Weak Buy with a price target now below the stock's trading level (but trending higher). 

The Technical Outlook: Conagra Brands Breaks Out 

Conagra Brands is in the midst of a breakout that is best viewed with monthly data. The 3.3% price gain has it trading near $40 and at the highest since mid-2017. Assuming the market follows through on the signals and the news, this stock should at least retest the all-time highs if not break out to a new one.