Expanding In Permissible Snacking And Frozen Foods Will Engage Consumers

Key Takeaways

• Expanding in the permissible snacking and frozen food markets could drive revenue growth by aligning with consumer trends.
  
• Divesting slower-growth assets and focusing on product innovation may improve long-term margins and brand strength.
  
• Increased promotion spending, high input costs, and competitive pressures may impact margins and growth, while strategic divestitures could affect earnings stability.

Catalysts

Operates as a consumer packaged goods food company primarily in the United States.

• Conagra Brands is focusing on expanding its presence in the growing permissible snacking market, particularly protein and fiber-rich snacks, which is expected to drive future revenue growth.
  
• The company's strategic focus on frozen foods aligns with a consumer shift back to convenience, which could enhance revenue growth and potentially improve net margins through scale efficiencies.
  
• Conagra's plan to reshape the portfolio by divesting slower-growth assets and acquiring faster-growing businesses may position it for better long-term revenue and margin improvements.
  
• Investments in tailored promotions with strong return on investment are anticipated to increase product volumes, potentially driving revenue growth and improving gross margins through better absorption.
  
• Product innovation rather than traditional advertising is emphasized as a driver of brand strength, which may support revenue growth by engaging consumers and maintaining category leadership.

Assumptions

• Analysts are assuming Conagra Brands's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 10.5% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $2.77) by about December 2027, up from $494.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $995 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2027 earnings, down from 26.9x today. This future PE is lower than the current PE for the US Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.93%, as per the Simply Wall St company report.

Risks

• Consumer challenges and continued value-seeking behavior may lead to increased promotion spending, impacting net margins by requiring price concessions to maintain market share.
  
• High input cost inflation, particularly in beef and sweeteners, could compress gross margins if the company is unable to pass these costs fully onto consumers.
  
• Softness in the foodservice segment and potential cyclical challenges in convenience store traffic may put downward pressure on revenue growth.
  
• The company's strategy of divesting slower-growth assets and inorganic growth through bolt-on acquisitions could result in near-term earnings dilution, affecting earnings stability.
  
• Ongoing competitive pressures in key categories like meat snacks and frozen foods necessitate continuous innovation and investment, which could burden operating margins if top-line growth does not meet expectations.

Valuation

• The analysts have a consensus price target of $30.66 for Conagra Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.2 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $27.88, the analyst's price target of $30.66 is 9.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.