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Can Conagra (CAG) Q4 Earnings Grow Amid Rising Input Costs?

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Conagra Brands, Inc. (CAG - Free Report) is slated to release fourth-quarter fiscal 2018 results on Jun 28. This leading branded food company in North America delivered an average positive earnings surprise of 6.7% in the trailing four quarters. Let’s see what’s in store for Conagra this time around.

Conagra Brands Inc. Price and EPS Surprise

Conagra Brands Inc. Price and EPS Surprise | Conagra Brands Inc. Quote


Value-Over-Volume Strategy to Drive Sales

Conagra is likely to continue gaining from its value-over-volume strategy, which is aimed at driving the top line. Under this regime, Conagra ensures that its robust volume performance is not driven by price discounts but by stronger innovation, as well as new merchandising, distribution and consumer trail-related investments.

For instance, new investments to strengthen frozen business will likely boost sales of Refrigerated & Frozen segment, going forward. On the other hand, brand renovation initiatives, executed to reinforce snacks business, would likely aid in improving Grocery & Snacks segment’s near-term sales. Moreover, the company believes favorable foreign currency translation impact will bolster its revenues in the quarters ahead. The Zacks Consensus Estimate for sales of Grocery & Snacks and Refrigerated & Frozen segments are pegged at $789 million and $671 million, compared to the year-ago period tally of $749 million and $640 million, respectively.

We also expect acquisitions to keep benefiting Conagra’s sales. Incidentally, buyouts of brands like Angie’s, Sandwich Bros, and Duke’s and Bigs fueled third-quarter fiscal 2018 sales growth by 240 basis points. We expect these factors to augment Conagra’s fourth-quarter fiscal 2018 top line, thereby continuing the year-over-year growth trend.

Cost Inflation Remains a Worry

However, Conagra’s gross margin remained under pressure in the fiscal third quarter, due to increased cost of sales (mainly above the line marketing investments) and input cost inflation (of 3.7%). Input cost inflation mainly stemmed from higher packaging and transportation expenses.

Though SG&A expenses and A&P costs reduced year over year, gross margin contraction more than offset these factors and led to lower adjusted operating margin. Unfortunately, input cost inflation is likely to remain a hurdle in the quarter to be reported. Nevertheless, focus on innovations and efforts to boost top line should help offset these hurdles and cushion the bottom line, which is also likely to gain from lower tax rates.

Q4 Estimates in Numbers

Analysts polled by Zacks expect total revenues of $1,939 million, up more than 4% from the year-ago period. The current consensus mark for earnings is pegged at 43 cents, which shows a 16.2% jump from the year-ago period. The estimate remained unchanged in the past 30 days.

What the Zacks Model Unveils

However, our proven model doesn’t show that Conagra is likely to beat bottom-line estimates this quarter.  For this to happen, the stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Conagra has an Earnings ESP of +0.39%, the company carries a Zacks Rank #4 (Sell). We caution against sell-rated stocks going into earnings announcement.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post earnings beat:

Helen of Troy Limited (HELE - Free Report) has an Earnings ESP of +3.57% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fastenal Company (FAST - Free Report) , a Zacks #3 Ranked stock, has an Earnings ESP of +1.32%.

Pepsico, Inc. (PEP - Free Report) , a Zacks #3 Ranked company, has an Earnings ESP of +0.15%.

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