Conagra Brands, Inc. (CAG - Free Report) is gaining momentum from its efforts to refine portfolio along with a solid focus on frozen and snacks businesses, among other initiatives. These endeavors have helped the company stay in investors’ good books despite concerns related to soft Foodservice sales and input cost inflation.
Markedly, this Zacks Rank #3 (Hold) stock has soared close to 35% in a year, outpacing the industry’s growth of 16%. Let’s delve deeper.
What’s Driving Conagra’s Growth?
Conagra is focused on reshaping portfolio by acquiring high-margin businesses and divesting the less profitable ones. The company’s latest development on this front includes the acquisition of Pinnacle Foods. The combination of the companies is appropriate, given the increasing demand for frozen foods and snacks. In fact, the consolidation of these food companies has created a robust portfolio of leading, iconic and on-trend brands.
Notably, Pinnacle Foods’ buyout drove Conagra’s top line in first-quarter fiscal 2020 and is likely to continue boosting its performance in the forthcoming periods. Previously, the company took over Angie's Artisan Treats, which is strengthening its snacking business. Also, the Sandwich Bros. buyout has been a valuable inclusion in Conagra’s frozen business.
We believe that the company’s acquisitions go well with its efforts to focus on frozen and snacks categories. Speaking of the frozen business, the company has several innovation lined up in this category. It is also on track with innovation in the snacks business, which includes meat snacks with bold flavors and optimized packaging. Such efforts are likely to yield results in the forthcoming periods.
On the flip side, the company exited private-label brands and non-key businesses, including the Wesson oil business, Gelit, the Trenton production facility and the Canadian Del Monte business. Also, in 2016, Conagra executed Lamb Weston’s (LW - Free Report) spin-off. Additionally, the company inked a deal to divest its DSD snacks business, which is expected to close before the end of the calendar year 2019. These endeavors are expected to continue aiding Conagra’s transformation into a pure-play branded food company.
Can It Overcome the Hurdles?
The Foodservice segment has been witnessing soft sales for a while now. Although net sales at this segment grew 6.3% year over year in the first quarter of fiscal 2020, it was accountable to Pinnacle Foods’ contribution. On an organic basis, sales declined 3.2% in the reported quarter, with volumes down 6.4%. The company’s value-over-volume strategy has been denting sales of this segment to an extent. This apart, escalating input costs, which affected the company’s adjusted gross margin in the first quarter of fiscal 2020, are a threat.
Although the persistence of the aforementioned obstacles is a worry, we expect Conagra to tide over these with its solid strategies.
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