Inflation Drags On Conagra Brands Results

Conagra Brands To Raise Prices, Shares Move Higher 

Conagra Brands NYSE: CAG had a good quarter when it comes to revenue but the ravaging impact of inflation is everywhere in the report. Not only is inflationary pressure cutting into the bottom line but it is also having an impact on volume sales and the company is planning to raise prices again. The takeaway from the report is that guidance for revenue is lowered despite an increase in the expectation for revenue and both figures could come in weak. We like Conagra for its value, its yield, the outlook for dividend growth, and the overall health of the business but now is not the time to put more money into this name. 

Conagra Brands Steadies After Mixed Results 

Conagra Brands FQ3 2022 results were not only mixed but compounded by an expectation for inflation to cut deeper into results than previously forecast. The $2.91 billion in revenue is up 5.1% from last year and beat the Marketbeat.com consensus estimate by 245 basis points but the strength did not carry through to the bottom line. 

The gain in revenue is due in large part to pricing efforts and product mix and offset by a 2.6% decline in volume. The decline in volume is blamed on higher prices so we expect to see this develop into a trend. On an organic basis, offsetting the impacts of divestitures, the company grew 6% YOY and 7.8% in the two-year stack. On a segment basis, the Foodservice segment led with a gain of 18.9% followed by a 6.2% increase in Grocery/Snacks, a 2.9% increase in Frozen/Refrigerated, and a 0.1% increase in the International segment. 

Moving down to the earnings, the company reported a 387 basis point contraction in the operating margin, 230 adjusted, that left both the GAAP and adjusted earnings lower than last year. The GAAP earnings of $0.45 are down 22% from last year while the adjusted $0.58 is down 1.7% and only as expected versus the 245 basis points of outperformance on the top line. 

As tepid as the results are, it is the guidance that is most worrying, not only for Conagra but for the broad market in general as well as the consumer because prices are going up, margins are still under pressure, and inflation is as yet unchecked. On the top line, the company increased its target for revenue growth in Q4 based on pricing actions but also increased the expectation for inflation and lowered the target for earnings. The new target for revenue is above the consensus but the EPS target is below consensus and inflation is still rising. 

Don’t Worry, Conagra’s Dividend Is Still Safe 

The outlook for inflation and earnings is worrying in regards to the share price but should have no impact on the dividend. The payout is still less than 55% of the FY EPS target and cash flow is still sound. The balance sheet has some debt on it but it is well-managed and coming down so should be less and less of a problem as time moves on. The company also has a history of distribution increases so we won’t be surprised to see another one at the end of the fiscal year, small as it may be. 

The Technical Outlook: Rangebound Conagra Still Is 

Conagra Brands bounced off of a bottom in mid-March and made a strong rally to the top of the range but it looks like resistance is still at the top of the range Worse, it looks like resistance has moved lower to the $35 where the next reversal may take place. If price action can close near the high of the movement it may continue up to the $36 level. If not, we may see this stock begin to sell off. In that scenario, we’d become interested again with shares near $30 and the dividend yield closer to 4.0%.