Deutsche Bank Remains 'Cautious' On ConAgra Foods

Deutsche Bank remains "cautious" on
ConAgra Foods IncCAG
's margin expansion strategies, especially "around the long-term ability of some of the company's brands to shift away from a value positioning."

Strategies

The company's CEO Sean Connolly is still betting on pricing discipline to build a higher-quality volume base. ConAgra believes effective pricing and trade promotional activity shall pave way for additional opportunities to expand margins.

"While we see the logic in this strategy, we maintain a cautious view on whether ConAgra can successfully shift the positioning of its brands away from competing on price and towards quality and other value-added characteristics," analyst Mario Contreras wrote in a note.

Related Link: ConAgra Foods' Q4 Sales Miss, Plans To Separate

"Thus, it remains to be seen if higher margins can offset volume declines from discount-related promotional activity (particularly Banquet)," Contreras added.

Earnings And Expectations

ConAgra reported fourth quarter operating EPS of $0.52 versus Deutsche Bank's $0.53 estimate and $0.52 consensus. Sales came in at $2.83 billion versus Deutsche Bank's $2.96 billion estimate.

The company did not provide F2017 guidance in light of the pending split of ConAgra Foods into ConAgra Brands and Lamb Weston, which is expected this fall. "However, CFO Gehring indicated the first quarter is expected to up mid-teens to high-teens off of a prior year base of $0.41," which implies first quarter EPS of $0.47–$0.49 and compares to Deutsche Bank's updated EPS estimate of $0.47 (down from prior $0.50).

The analyst raised fiscal 2017 EPS estimate to $2.39 from $2.35, while trimming revenue view to $11.689 billion from $11.837 billion.

"Meanwhile there are many outstanding LT questions around goals and capital structure following the planned Lamb Weston spin. As such, we believe current valuation (22x P/E) appropriately reflects short and long-term challenges vs. opportunity," Contreras said.

Contreras maintains a Hold rating on ConAgra Foods, with a price target of $48.

Shares of ConAgra Foods closed Friday's regular trading session at $48.39.

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Posted In: Analyst ColorEarningsLong IdeasNewsPrice TargetReiterationAnalyst RatingsTrading IdeasDeutsche BankMarion ContrerasSean Connolly
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