Conagra Brands Faces Tough Comps In Q4
Shares of Conagra Brands (NYSE: CAG
) are holding steady in pre-market action following the release of FQ3/CQ1 results. The company reports a solid quarter and gave updated guidance that takes a certain point of view to fully appreciate. The guidance is calling for a 10% to 12% decline in YOY revenue that is slightly more than the analysts were expecting. This obvious weakness, however, is offset by the fact Q4 revenue will accelerate from the Q3 period and continue to accelerate
in F2022. You see, Conagra is facing a tough comp in Q4, a comp against the calendar 2020 Q2 period which was the peak of the shutdowns and pantry-loading craze.
Conagra Beats On The Top And Bottom Line
Conagra had a great quarter in Q3 despite a -1.2% impact on revenue from recent divestitures. The company logged $2.77 billion in net consolidated revenue or up 8.5% and 180 basis points better than analysts' consensus. Gains were driven by strong organic results driven by a combination of volume and mix.
Organic sales increased by 9.7% on a 6.1% increase in volume and 3.6% impact from favorable price/mix. On a segment basis, retail outperformed F&B with Grocery up 10.%, Refrigerated/Freezer up11.7%, International up 9.0% and foodservice down -17%. The company says it is still seeing weakness in the foodservice segments but we think this is going to change soon and quickly. Not only is the summer outdoor-dining season upon us but vaccine use is spreading as well.
Company margins were widened as well. Gross margins widened by 58 basis points and operating margins by nearly 200 due to favorable price/mix, volume leverage, synergies with the Pinnacle Foods acquisition, and decreased SG&A. SG&A is down primarily from reduced ad-spend which we see rising again later in the year. The wider margins are seen in the bottom-line results as well. The GAAP $0.58 is up 31% YOY and beat by a penny while the adjusted $0.59 is up 25% YOY and also beat by a penny.
Conagra Steady After Mixed Guidance
Conagra is facing a tough YOY comp in the Q4 period but that is something to be overlooked. The trend since then is steadily rising revenue
that is expected to rise again in Q4 and continue rising in F2022. The F2022 guidance is calling for a sustained 1-2% increase in organic sales coupled with operating margin expansion to 18-19% and earnings of $2.63 to $2.72. This compares to previous guidance of $2.66 to $2.77 and a consensus of $2.60. The $2.60 consensus has been incredibly steady
over the last year with barely a ripple of movement despite the impact of COVID-19 trends.
The Technical Outlook: Conagra Is Range-Bound
Shares of Conagra are edging higher in pre-market trading but remain range-bound nevertheless. The top of the range is near $39 and we do not expect it will be broken soon without an additional catalyst. In the meantime, we view this stock as a cautious buy or hold for those already holding the stock due to its safe 3.0% dividend yield
. At current levels, the payment is only 42% of earnings and the balance sheet is in decent shape and getting stronger quarter by quarter. Evidence of this is the slow erosion of debt, share repurchases totaling $298 million in Q3, and the chunky 33% dividend increase issued at the beginning of the fiscal year.
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