Conagra Brands, Inc (NYSE: CAG), This Break Out Is A Signal To Buy

Stay At Home Trends Have Legs

If I’ve said it once I’ve said it twice, the stay at home trends have legs. Regardless of the headlines, the scenes of beaches flooded with tourists, most people are staying close to home. Now, with the resurgence of COVID-19 linked to the reopening, the decision to stay home has been reinforced.

The stay-at-home mentality will eventually dissipate, but not until there are treatments and vaccines for COVID. Until then, there are plenty of reasons for people to stay buttoned up at home and spending their money on high-quality staples items. Items peddled by the likes of Conagra Brands.

Conagra Brands (NYSE: CAG) just reported earnings and I am not surprised the company beat on the top and bottom lines. The trend I am seeing in 2nd quarter earnings so far is the analysts are too conservative. The spending trends are too strong, the economic rebound is robust, and companies with the right exposure are kicking the pants off their consensus targets.

Strong Results, Raised Guidance, Iffy Analysts

Conagra, a consumer staples giant focused on premium label products like Banquet, Chef Boyardee, Dukes, and Birds Eye, saw its revenue grow a hair more than 26% in the calendar 2nd quarter of the year, the fiscal 4th quarter. Analysts had been expecting a solid gain in revenue but not quite that large. GAAP EPS fell short of consensus, the only negative I see, but there are mitigating factors. GAAP EPS grew nearly 60% YOY while adjusted EPS of $0.75 beat by $0.08 or nearly 12%, nearly doubling from last year.

The reason for the strength is a combination of factors underpinned by organic growth. Organic growth of 21.5% beat consensus by 370 basis points and was compounded by sales mix and pricing. On a segment basis, the company operates in three primary segments and saw double-digit growth in all three.

"The significant volume increase was primarily driven by consumers increasing their at-home food consumption as a result of the COVID-19 pandemic, which benefited the company's retail businesses and negatively impacted the Foodservice segment.”

The best part of the report is that management sees the sales strength and earnings leverage persist through the next fiscal year. Guidance for the full-year 2021 was increased to a range above the current consensus. Considering the analyst’s community was only iffy on the stock before, the average rating is only slightly bullish, I predict a round of upgrades in the not-too-distant future.

The Yield Is Safe And Sound

Conagra isn’t exactly a dividend-growth stock but that doesn’t matter. While it doesn’t have a track record of consistent, annual increases the history shows this company is a dividend-grower long-term. There was one distribution cut, way back in 2006, but since then Conagra has managed 8 increases.

At today’s prices, the company is yielding close to 2.5% and has a positive potential for future distribution increases. The payout ratio based on the company’s own guidance for fiscal 2021 is a low 32% so the payout is safe at face value. Factor in 2020’s earnings growth, the outlook for growth in 2021, and a sound financial statement and Conagra’s payout begins to look safe indeed. The only thing holding them back from increasing the payout now is plans to deleverage the company, a plan that will only improve future profitability, and odds for dividend increases.

“The Company exceeded its free cash flow guidance and reduced its leverage ratio to 4.0x as of the end of the fiscal year; the Company continued progressing against its deleveraging commitments in the fourth quarter by reducing total debt by $271 million and net debt by $725 million. The Company remains on track to deliver its fiscal 2022 algorithm and remains committed to achieving its leverage target of 3.5x to 3.6x by the end of fiscal 2021.”

The Technical Outlook: A Break Out In Progress

There is really nothing not to like about the CAG chart. The stock was in a nice break-out pre-COVID due to rapidly improving fundamentals. The pandemic correction only offered a stunning entry opportunity for this stock that the market made good use of. Now, after consolidating for three months, shares of CAG are breaking out again and ready to continue the rally begun earlier in the year. Today’s news has shares up more than $35.50 to trade right at previous highs. Once those highs are broken, I see this stock marching up to retest the all-time high near the $42 level at least.