Navigating Challenges With Calculated Investments And Quality Focus To Propel Growth In The Frozen Sector

Key Takeaways

• Strategic focus on nudging volumes back to positive growth without deep discounting, aiming for long-term revenue and earnings improvement.
  
• Investments in advertising and innovation, particularly in the Frozen sector, indicate potential for further market share expansion and revenue growth.
  
• Operational and market risks, including slower consumer price adaptation and competitive pressures, could significantly affect margins, earnings, and sales growth.

Catalysts

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

• The company anticipates a gradual transition to normal operations as consumers adjust their reference prices, indicating a strategic focus on nudging volumes back to positive growth, which is expected to positively impact future revenue.
  
• Investments in advertising, merchandising, and innovation, particularly in the Frozen sector, have started to yield positive volume growth, suggesting further revenue growth and market share expansion in key business segments.
  
• The approach of avoiding deep discounting while focusing on quality displays and frequency of merchandising in the Frozen category demonstrates a sustainable method to drive sales without eroding net margins significantly.
  
• Planned investments in Grocery to support certain categories in fiscal '25 are expected to enhance volumes and improve performance in that segment, likely contributing to overall company revenue and market penetration.
  
• The company's guidance for fiscal '25 embeds some conservatism around consumer buying behavior and includes flexibility for continued investment behind volume growth, aiming for long-term business health, which may positively impact earnings through managed expenses and targeted growth initiatives.

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 2.9% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $2.81) by about September 2027, up from $347.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $994 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2027 earnings, down from 45.2x today. This future PE is lower than the current PE for the US Food industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The gradual transition to a more normal operating environment and the expectation for consumers to adjust their reference prices imply a risk if this adjustment takes longer or requires more investment than anticipated, which could pressure margins and earnings.
  
• The need for additional investments to nudge volumes back toward positive territory indicates a potential for higher operational costs, potentially impacting net margins if the volume growth doesn’t offset these costs sufficiently.
  
• Competitive pressures in the Frozen segment, although currently offset by targeted investments yielding positive volume growth, represent a risk if competitors escalate promotional activities or introduce innovations, which could affect market share and revenues.
  
• The cautious outlook and reliance on volumes to accelerate, especially amidst a consumer adaptation that has been slower than expected, presents a risk to achieving forecasted sales and earnings growth, hinting at potential volatility in revenue and earnings performance.
  
• Supply chain issues in Canada affecting the International business segment signal operational risks that could lead to lower sales growth or additional costs in efforts to resolve these issues, potentially impacting net margins and earnings in specific markets.

Valuation

• The analysts have a consensus price target of $30.61 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 $27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.3 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 5.8%.
• Given the current share price of $32.74, the analyst's price target of $30.61 is 6.9% lower. 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.