Why This Consumer Staples Stock is a Smart Buy Despite Headwinds

July 12, 2024 at 07:05 AM EDT

woman shopping in grocery store

Conagra Brands (NYSE: CAG) is a North American food industry leader and is considered part of the consumer staples sector. Conagra Brands’ earnings report for the fourth quarter of 2024 shows evidence of a company that continues to navigate a challenging and shifting consumer landscape.

Conagra Brands Q4 and Fiscal Year 2024 Financial Performance

Conagra Brands’ financial results for the fourth quarter of 2024 present a mixed bag of financial metrics. The company’s organic net sales declined 2.4% year-over-year to $2.9 billion. This decrease was driven by a 1.8% volume decline, partially offset by a 0.6% price/mix increase attributable to strategic brand investments and pricing actions taken throughout the year. Despite the challenging environment, Conagra reported a full-year adjusted gross margin expansion of 58 basis points and an adjusted operating margin expansion of 34 basis points over fiscal year 2023 (FY2023).

For the full fiscal year 2024, organic net sales were down 2.1%, reaching $12 billion. However, the company demonstrated resilience, with adjusted gross profit and adjusted operating profit improving by 0.3% year over year. This performance can be attributed to Conagra's persistent focus on supply chain productivity, which helped offset inflationary pressures and supported its brand-building initiatives.

Looking ahead to fiscal year 2025, Conagra has adopted a cautiously optimistic outlook. The company anticipates organic net sales growth in the range of -1.5% to flat compared to FY2024. Adjusted operating margin is projected to fall between 15.6% and 15.8%, and adjusted earnings per share are expected to be in the range of $2.60 to $2.65. These projections reflect Conagra's anticipation of a gradual easing of macroeconomic headwinds and continued adaptation by consumers to new pricing realities.

Evaluating Investor Sentiment Surrounding Conagra Brands

Conagra’s analyst community has placed a "Hold" consensus rating on Conagra’s stock, with an average price target of $32.38, representing a potential upside from its current price. This cautious stance suggests that while analysts recognize Conagra's ability to navigate challenges, they await clearer signs of a sustained turnaround before becoming more bullish.

Recent insider activity reveals a trend toward selling, with executives offloading nearly $500 thousand worth of shares during the last quarter. This trend, while not necessarily indicative of negative sentiment, warrants attention from investors as it could suggest a lack of confidence in near-term stock price appreciation. However, hedge funds and institutional investors continue to hold a significant 83.75% stake in the company, indicating continued interest from larger market players.

Conagra's Strategic Focus

Conagra's strategy hinges on a two-pronged approach: bolstering its position in high-growth categories like frozen and snacks while simultaneously optimizing its supply chain to enhance profitability. The company's decision to prioritize the frozen and snacking categories is driven by evolving consumer preferences towards convenient, healthier meal and snack options. Conagra's success in these categories is evident in the strong performance of brands like Birds Eye, Healthy Choice, and Slim Jim.

Conagra's commitment to cost-saving initiatives and supply chain productivity cannot be understated. The company has successfully achieved its long-term target of 4% cost savings as a percentage of the cost of goods sold (COGS), contributing to margin expansion despite inflationary pressures. Conagra aims to maintain this momentum with another $1 billion in cost savings projected by the end of FY2025.

Innovation remains a cornerstone of Conagra's growth strategy, with new product launches designed to capitalize on evolving consumer preferences. Recent successful launches include culinary-inspired additions to the Birds Eye line, Banquet Mega chicken filets, and the introduction of Wendy's Chili to grocery stores nationwide.

Conagra's Potential Risks in a Dynamic Environment

Despite Conagra's sound strategy and operational efficiency, certain risks warrant consideration. Continued economic uncertainty, characterized by inflation and evolving consumer spending habits, could impact the company's volume growth. While Conagra has demonstrated an ability to navigate these challenges through strategic pricing actions and cost management, the macroeconomic environment remains a key variable.

The competitive landscape within the food industry also poses a constant challenge. Private label brands and aggressive pricing strategies from competitors require Conagra to remain agile and innovative to defend its market share. Furthermore, the risk of supply chain disruptions continues to loom large. Like many companies in the sector, Conagra remains vulnerable to potential disruptions, which could impact production and distribution.

Weighing the Evidence for Investors

Conagra Brands' Q4 FY2024 earnings report and FY2025 guidance paint a picture of a company demonstrating resilience in a challenging environment. Conagra's strategic focus on high-growth categories, cost optimization, and innovation positions it well for future growth. However, investors should remain mindful of potential risks from economic volatility, competitive pressures, and supply chain vulnerabilities. While the current market sentiment leans towards caution, Conagra's ability to consistently execute its strategic initiatives, as evidenced by its recent performance, might present a compelling opportunity for investors seeking exposure to the consumer staples sector.

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