Conagra Brands

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Conagra Brands is a North American food company that produces and sells branded, shelf-stable, frozen, and refrigerated foods through various retail channels.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Conagra Brands operates in the intensely competitive food industry, where brand power, cost control, and supply chain efficiency are vital.

Business Overview:

Conagra Brands (CAG) is a packaged food company that manufactures and markets branded food products for sale primarily in the United States. The company’s operations are structured into four main segments:

  1. Grocery & Snacks: Includes branded, shelf-stable products such as ready-to-eat meals, sauces, condiments, snacks, and side dishes. This segment is primarily focused on sales in grocery stores and supermarkets.
  2. Refrigerated & Frozen: Includes branded, refrigerated and frozen meals and entrées, and frozen single-ingredient products. This segment focuses on frozen food and other refrigerated product sales through a wide variety of retail outlets.
  3. International: The International segment includes branded food products sold in various temperature states in several countries outside the U.S., and primarily serves grocery, food service, and warehouse-club customers.
  4. Foodservice: This segment provides branded and customized food products to restaurants, foodservice distributors, and other commercial customers, and includes both branded and private-label offerings.

The company operates in a highly competitive landscape with multiple large food manufacturers and private-label competitors who could easily compete and steal market share, making it harder for companies in the packaged food industry to generate economic moats. Conagra has been trying to improve its innovation rate to be more competitive. Their long-term strategy is to focus on growing their business via innovative new products, streamlining their brand and portfolio, increasing productivity through automation and efficiency, and acquiring brands for further growth. They are also focusing on reducing their debt, and divesting some less profitable businesses to generate more cash. They have been trying to maintain prices in the face of rising inflation and supply chain issues. They have also been working to improve customer service and supply chain management, including addressing logistics challenges.

  • Shift in Consumer Preferences: Consumers are increasingly opting for healthier, organic, and minimally processed foods. Conagra needs to be fast in adapting to these tastes.
  • Private Label Growth: Private-label brands continue to gain market share, putting pressure on the pricing of branded products.
  • Inflationary Pressures: Higher costs for ingredients and fuel may compress margins unless companies are able to pass the cost through in the form of price increases.
  • E-Commerce Growth: The rise of online grocery sales has introduced new competition in both traditional grocery retailers and direct-to-consumer brands.
  • Supply Chain Volatility: Disruptions in the global supply chain may lead to increased costs and inventory challenges.
  • Increased focus on ESG (Environmental, Social, and Governance): Investors are paying increasing attention to companies’ sustainability and corporate responsibility efforts.
  • Competition with fast-growing disruptors: The competitive landscape in packaged goods has seen many disruptors, whose business models are focused on efficiency and the customer. These new brands are forcing big legacy companies to adapt quickly.

Financials:

The company’s most recent earnings report for the 3rd Quarter of 2023 shows a mixed performance.

  • Net sales of $3.1 billion was slightly above estimates, but organic sales declined by 0.8%, due to weaker demand.
  • Adjusted earnings per share was $0.67 which was a great performance compared to previous quarters and estimates.
  • Adjusted gross margin was 29.9%, lower by 39 basis points compared to a year ago, which means that their cost-cutting measures weren’t enough to offset the rising cost of production.
  • Price elasticity of demand seemed to be less than expected and they did not have the sales numbers to justify the price hikes.
  • Supply chain seems to be normalizing, helping with product availability.
  • For fiscal year 2024, management is projecting a 1% - 2% decline in organic sales.

The company’s financials show some interesting points:

  • Revenue Concentration: Most of the company’s revenue is generated by the Grocery and Snacks segment in the US, meaning that is where most of the company’s business and brand lies.
  • International Markets: Conagra has a significant international presence, but they have to contend with international competitors and foreign exchange rates, which can be unstable and affect results.
  • Margins: Operating margins are typically around 12-13%, which means that there is good cost-discipline and pricing power. However, these margins tend to fluctuate due to competition, input costs, and pricing decisions.
  • Profitability: In the last few years the profitability of Conagra has suffered. As a result the ROIC has declined significantly, and the company has not been creating substantial value. However, a recent pick up shows that things are starting to turn around with more focus on the long-term and innovation.
  • Debt: The company has relatively high debt, with long-term debt hovering above 8 billion dollars. This debt may affect its future growth and profitability.
  • Cash Flow: Free cash flow has improved to more than 1 billion per year, meaning the company has ample capital to invest in growth and debt reduction and also distribute to shareholders.
  • Acquisitions and Divestitures: The company has actively been selling businesses they deem are not valuable while acquiring others for growth, which can be risky and add to overall debt.

It is important to note that management is guiding toward improvements, though investors need to confirm that these improvements are sustainable.

Moat Analysis:

Based on the analysis above, we would rate Conagra Brands’ moat as a 2 out of 5, with the following justification:

  1. Brand Strength (Moderate): While the company does possess some well known brands like Birds Eye, Healthy Choice and Slim Jim, there is not a huge power of the brand to make customers choose Conagra. Consumers have lots of choices when it comes to products like food. This is unlike some other moats like network effects that have a natural monopoly. Thus, their brands do not give pricing power or customer captivity. The brand advantage may be sustainable, but not enough to make it a ‘wide’ moat.
  2. Switching Costs (Low): The switching costs for the end customer is low. Consumers can easily try different brands with similar products without great difficulty. Therefore, there is no meaningful moat with switching cost advantage.
  3. Cost Advantages (Low): Conagra may have some cost advantages as they have a large distribution network. However, in the face of competition from other large food companies, these advantages are not as significant. And smaller and medium sized food companies are also growing with higher efficiencies and more focus on customer tastes and products. Therefore, this is also not a significant moat advantage for Conagra.
  4. Unique Resources (Low): The company doesn’t have any significant unique resources to create defensible advantages. Their processes are mostly similar to other competitors. The ingredients and formulation of their foods are widely known and replicated. And therefore, this isn’t a basis for a moat.
  5. Scale: They have a scale-based advantage in distribution, and while scale can be a moat, in this case, it is not a very durable competitive advantage. Most other competitors in this field have similar scale, and those smaller competitors are making up for their lack of scale with their increased flexibility and customer centricity.

In summary, Conagra Brands exhibits a relatively low or limited moat because of competitive pressures in the industry. Brand recognition does not give significant pricing power, they don’t have switching costs, and there isn’t anything unique or rare that they own. The size and distribution advantage they have is usually matched or surpassed by other large competitors or low cost competitors. The lack of structural competitive advantages does not create enough barriers for competition, meaning the company’s earnings and ROIC could be under continuous pressure.

Risks to Moat and Resilience:

  1. Changing Consumer Preferences: If Conagra fails to quickly adapt to changing consumer tastes toward healthier products, this will negatively impact their profits and market share.
  2. Pricing Pressure: Competitors who are more efficient and leaner will be able to offer more products at cheaper prices and compete with price. Due to increasing competition, they will also have to make price concessions which can reduce the margin that companies generate.
  3. Competition: The industry is highly competitive, and new entrants can pose a serious threat. There are some signs that new entrants like smaller, niche brands, and private-label brands are becoming more competitive, stealing market share.
  4. Supply Chain Disruptions: With increasing volatility in the global supply chain, the business is exposed to risks related to shortages in important ingredients.
  5. Acquisition Risk: Conagra uses acquisitions to grow, and if they fail, could have to take write-downs that affect their bottom line or lower their return on invested capital.
  6. Loss of contracts or distribution agreements: Conagra does not directly reach consumers. Changes in their relationships or contracts with distributors and wholesalers can damage the business.
  7. Global Macroeconomic events: Global slowdowns in the economy will affect profitability, sales, and consumer behavior.
  8. Management decisions: Bad decisions by the management could affect the company negatively and destroy the company’s economic value and moat.

Conagra’s business resilience, however, has shown resilience due to the large brand power they have and the vast scale of their business. They are also adapting and changing to fit the changing needs of the market and consumer. The business has also shown a relatively resilient financial position due to consistent revenue. However, due to the increased debt in the past, they are vulnerable to market fluctuations and increases in interest rates, which can make them less flexible to invest in business and growth.

Understandability: 2/5

The company is easy to understand at a high level, as most people are familiar with the different products that they sell. However, their financials are more complicated because the company operates on various different business segments and geographies, and the influence of acquisitions and divestitures make it complex. Also, their performance in the past has been inconsistent, making it difficult to model future performance. The company is not a straightforward business to analyze and requires deep analysis into their strategy, competitive landscape, and financial performance.

Balance Sheet Health: 3 / 5

Conagra Brands has a moderate balance sheet, though they are at a higher debt than their peers:

  • Debt: They have a significant amount of long-term debt of over $8 billion. It has increased with acquisitions. This can increase their risk of bankruptcy and reduce flexibility in the future.
  • Liquidity: The company has a significant amount of cash. They have also maintained a good line of credit and have a good cash conversion cycle.
  • Debt to Equity Ratio: The company has a relatively high debt-to-equity ratio that is close to 1.5, meaning they rely significantly on borrowing instead of raising funds from stock sales. This makes them susceptible to interest rate hikes.
  • Goodwill: The goodwill levels in the company’s balance sheet is substantial which may be a cause of concern, even though there have not been a high amount of write-downs recently.

Overall, the balance sheet is not in any imminent danger but is also not at the level of robustness of the best companies in the market. They need to be careful of not making high debt or bad acquisition decisions.