Conagra (CAG, Financial)’s increasing focus on product innovation could provide it with a competitive advantage versus sector peers.
The packaged foods company is investing in plant-based alternatives to meat following its acquisition of Pinnacle in 2018, with demand for meat alternatives forecast to rise rapidly.
Although its most recent quarterly results were disappointing, the stock appears to have recovery potential following its 28% decline over the last year.
Product innovation
The company is investing heavily in product innovation in order to increase differentiation versus rivals. For example, in the most recent quarter it sought to modernize its Marie Callender brand through improved flavor profiles that include simplified labels and higher quality ingredients. This is expected to align the company’s products more closely with changing consumer tastes, with customers demanding cleaner labels as they become increasingly health conscious. This forms part of a wider effort by the company to offer bolder flavors across its range of products, as it seeks to strengthen customer loyalty.
Conagra is rationalizing its portfolio, with lower-performing products expected to be gradually replaced by new offerings. Although this may put pressure on overall sales in the short run, it expects to capitalize on growth opportunities in previously neglected segments.
Acquisition synergies
Conagra’s acquisition of Pinnacle in the third quarter of 2018 is set to deliver synergies for the combined business. So far, $31 million of synergies have been recognized, with the integration process still not complete.
In addition to adding new brands and delivering synergies, the acquisition places Conagra in a strong position to capitalize on changing consumer tastes. For example, the Gardein brand was acquired as part of the deal. It is the second-largest operator in the U.S. meat alternative segment, having quadrupled sales of plant-based meat alternatives over the last four years.
Conagra believes that plant-based meat alternatives could eventually account for 15% of sales of all meat products. In the U.S., this would mean that the total addressable market is $30 billion, with further growth opportunities internationally as consumers look to alternatives in order to reduce their meat consumption.
The company is investing in Gardein’s product quality, and is set to launch an improved burger. It is also developing hot dog and sausage alternatives, while seeking to differentiate its products through unique packaging in order to win a larger slice of what is forecast to be a rapidly expanding market.
Risks
The company’s performance in the most recent quarter was disappointing. It missed previous guidance, with total sales of $2.61 billion versus expectations of $2.66 billion. Earnings per share of 36 were below guidance of 41 cents. The company’s performance was negatively impacted by heightened competition, with many of its rivals investing in price in order to grab market share. This strategy may continue in the short run. It could have a detrimental impact on Conagra’s sales and profitability, as well as investor sentiment.
In the long run, deep discounting by peers is unlikely to be sustainable. In addition, Conagra suffered from several exceptional events during the most recent quarter that negatively impacted on its financial performance. For example, some of its brands were affected by isolated production challenges. Its decision to rationalize its portfolio of brands is also expected to weigh on sales in the near term, but this is forecast to be offset by growth in other brands that receive higher investment in future.
Outlook
The growth potential of the alternative meat product segment could stimulate the company’s financial prospects, alongside further synergies from the Pinnacle acquisition. With continued product innovation, Conagra could differentiate itself from peers during what is a highly competitive period within many of its product segments.
In the next fiscal year, the business is expected to report a rise in earnings per share of 5%. Since it trades on a forward price-earnings ratio of 12.3, it seems to offer good value for money.
Having underperformed the S&P 500 by 35% in the last year, the stock appears to have investment appeal.
Disclosure: the author has no position in any stocks mentioned.
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