Focus On Healthy Snacks And Innovation Will Drive Revenue And Earnings Growth

Key Takeaways

• Strategic investments in marketing and innovation in frozen and snacks segments drive revenue growth by aligning with consumer trends for convenience and health.
  
• Absorbing inflation impacts instead of raising prices sustains consumer demand, while improved cash flow enhances financial stability for future growth.
  
• Consumer shifts, inflation, and FX pressures threaten Conagra's profitability and growth, risking margins and financial stability if not addressed with strategic pricing and product alignment.

Catalysts

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

• The company's strategy to invest in marketing and innovation, particularly in the frozen and snacks segments, is yielding positive results and is expected to continue driving revenue growth as these investments are meant to nudge consumers back to those convenient meal options they seek.
  
• Conagra Brands is focused on capturing consumer interest in high-protein and healthy snacks, aligning with current market trends and leveraging this positioning to potentially increase revenue in the snacking category.
  
• Plans to maintain top-line momentum by absorbing some short-term inflation impacts instead of raising prices may sustain consumer demand and market share, positively affecting long-term earnings potential despite near-term margin pressures.
  
• The company’s efforts to improve free cash flow and focus on reducing leverage is key, indicating that improved cash flow conversion contributes to financial stability and could support future earnings growth and investment capacity.
  
• Conagra’s focus on highly effective trade promotions, coupled with strategic innovation investments, aims to enhance operating margins and support revenue growth over time.

Conagra Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Conagra Brands's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $2.75) by about January 2028, up from $492.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $968 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 26.9x today. This future PE is lower than the current PE for the US Food industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Conagra Brands Future Earnings Per Share Growth

Risks

• Incremental inflation, particularly in areas like cocoa, sweeteners, and proteins, has pressured Conagra’s earnings, and persistent high costs could adversely affect net margins and profitability if not offset by pricing actions.
  
• Foreign exchange (FX) fluctuations are contributing to EPS pressure, indicating a risk to revenue and profitability due to global economic conditions.
  
• Increased leverage due to lowered profit expectations suggests heightened financial risk, which could impact earnings and financial stability if profits do not recover as anticipated.
  
• The decision to not immediately offset higher costs with pricing actions due to expected cost declines reflects a risk of continued margin compression, potentially impacting net earnings if inflationary pressures persist longer than expected.
  
• Consumer behavior shifts towards value-seeking or healthier options, as seen in categories like frozen single-serve meals, pose a risk to revenue growth if Conagra’s products fail to align quickly with changing consumer preferences.

Valuation

• The analysts have a consensus price target of $29.59 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 $33.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.2 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $27.75, the analyst's price target of $29.59 is 6.2% 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.