Conagra Offers High-Yield And Deep-Value For Income Investors
There are a lot of things to like about Conagra Brands (NYSE:CAG) and the list is only getting longer. The company has been in a major portfolio repositioning/growth-oriented effort for several years and those efforts are paying off. The fiscal 2nd quarter results are not only strong and point to continued growth, but the company has achieved its deleveraging goals well ahead of expectations. With debt on the decline, free-cash-flow, and free-cash-flow-conversion on the rise, the 3.1% dividend and value look more attractive than ever.
Conagra Brands Beats Consensus, Guides Higher
Conagra Brands reported a great quarter, if one that did not quite “blow away” the consensus estimates. The $3.0 billion in net consolidated revenue is up 6.4% from the previous year and beat by a very slim $0.02 billion margin. On an organic basis, revenue is up 8.1% versus the consensus of 8.3%. Organic growth was driven by a 6.6% volume increase that was boosted by a 1.5% increase in price and mix.
On a segment basis, all segment save Foodservice saw strong gains as well. The Grocery & Snacks segment grew 12.5%, Refrigerated & Frozen grew 6.8%, and International grew 6.6% while Foodservice declined 23.1%. The silver lining is that stay-at-home food trends are expected to linger long into the future and there is a rebound expected for food-away-from-home in the second half of 2021.
Moving down the report, the company was able to leverage its cost-saving efforts and product demand. Both the net operating and adjusted operating margins improved by 250 basis points to exceed the consensus estimates. This led to a 45% increase in GAAP earnings and a 28.6% increase in adjusted earnings that both their targets. On a GAAP basis, eps of $0.81 beat by $0.07 while the adjusted $0.77 in earrings beat by $0.04.
Looking forward, the company is expecting the gains in revenue to be sticky and to build on them. The guidance for the 3rd quarter is calling for 6% to 8% in organic revenue growth and EPS in the range of $0.56 to $0.60 versus the $0.57% expected. Based on some recent news from Costco that estimate may be conservative. Costco reported a 12% increase in December same-store sales growth that was underpinned by the frozen foods category.
Conagra’s Is A Great Value/Yield Proposition
Conagra is trading at only 14X this year’s earnings and 13.5X next year’s earnings making it a value relative to the broad market and the consumer staples group. The broad market is trading closer to 22X its forward earnings while the most highly-valued stocks in the consumer food staples group trade closer to 30X earnings. Add to that a group-leading and market-beating 3.0% yield and the value is even more attractive, add in the high-probability of future dividend increases and the value/yield proposition gets even better.
At face value, the company is paying out about 40% of its earnings which is good but there’s more. Along with earnings growth, the company is quickly deleveraging its balance sheet at the same time. These actions are juicing the free-cash-flow growth putting the company in a great position to pay for growth initiatives and increase the yield. As for deleveraging, Conagra paid down $2.3 billion in debt to bring its leverage ratio below 4X FCF and hits its target nearly a year ahead of target.
The Technical Outlook: Range-Bound, Waiting For A Signal
Shares of CAG held fairly steady after the earnings release and are trading in the lower half of a multi-month trading range. The range has a bottom near $34 and potential support near $35 or about 2% to 5% below the recent price action. If price action confirms support at one of these levels sideways to upward price action should ensue. In the bull case, if price action is able to move higher from current levels and move above the short-term 30-day EMA a move to the top of the range is expected. Regardless of the near-term price action, the longer-term outlook is bullish with new all-time highs expected in early to mid-2021.
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