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Ishan Majumdar
Ishan Majumdar
Articles (131)  | Author's Website |

Conagra Brands: Frozen Foods and Staples Lead the Way

The company delivered a solid result backed by growth in the frozen food and staples segments

July 10, 2020 | About:

The Covid-19 pandemic has adversely impacted the food-service industry, and the corresponding benefit with respect to consumer demand has been enjoyed by packaged food companies. Frozen and canned foods, in particular, have seen a sharp spike in demand owing to the higher shelf life and the convenience associated with eating at home.

Conagra Brands, Inc. (NYSE:CAG) is one of the large players within this space to have benefitted from the situation and delivered an excellent result. The company continues to have a strong upside, in my opinion, with an expected surge across the frozen foods and staples segments and solid cash flows that are being used by the management to reduce the capital gearing.

Company overview

Conagra Brands, formerly ConAgra Foods, Inc., is a packaged food company that operates mainly in the U.S market. The company has a wide variety of packaged food offerings such as grocery and snacks, refrigerated foods, frozen foods and food service.

Conagra Brands distributes branded and customized food products, as well as commercially branded foods. Foodservice is a key segment of the company which accounts for around 11% of revenue as it supplies vegetable, spice and grain products to a range of restaurants, foodservice operators and commercial customers.

While over 90% of its revenues are from the U.S., the company does have distribution in Canada and Mexico. It has a wide distribution network, and its products are sold through grocery stores, convenience stores, mass merchandise stores and club stores.

The company employs close to 18,000 people and has its headquarters in Chicago, Illinois.

Financial results

Conagra Brands reported an excellent result for its fourth quarter of fiscal 2020. The company reported revenue of $3.29 billion, an increase of 25.8% as compared to the corresponding quarter of the previous year. The company managed to beat the analyst consensus estimate of $3.15 billion by a significant margin.

This was largely driven by an increase of organic net sales by 21.5%, with double-digit growth in all three retail segments. Conagra Brands saw its diluted earnings per share (EPS) from continuing operations for the fourth quarter grow by 57.7% to $0.41 whereas its adjusted EPS more than doubled to $0.75, beating the analyst consensus estimate of $0.66.

One of the biggest drivers of the strong results was excellent e-commerce growth. As a result, the company’s top line for the entire fiscal year grew by 15.9% and its adjusted EPS grew by 13.4% to $2.28 per share. The management was also able to generate a significant amount of free cash in the year to deleverage the company and remain committed to achieving its leverage target ratio of 3.5 to 3.6 by the end of fiscal 2021.

Frozen foods and staples

Frozen foods have seen a marked rise. The company’s performance in the staples category has been even better, and the management believes that staples have now become more relevant than ever before. Conagra’s staples business grew an incredible 46.3% for the quarter. Each of the company’s six brands showed a remarkable growth, with Chef Boyardee and Hunt’s leading the pack with growth rates of 62.4% and 59.5% respectively.  

Final thoughts

Conagra Brands has had an impressive performance in the past 12 months with a stock price appreciation of 30% and a dividend yield of 2.4%. The company has a vast portfolio of highly valuable food brands such as Birds Eye, Marie Callender's, Banquet and Healthy Choice.

The macro for packaged foods remains strong with the remote working environment gaining popularity across corporates. With all these factors in play, coupled with a strong balance sheet, I think Conagra Brands continues to be a stock to look out for in the packaged foods space.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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