Conagra Brands

On April 13, Conagra announced that John Brase will replace Sean Connolly as president and CEO effective June 1. There was no previous mention of a process to replace Connolly even as recently as the company's first-quarter earnings release on April 1.

Why it matters: Conagra's stock price has declined 61% over the past five years, severely underperforming the roughly flat performance of the Morningstar US Consumer Packaged Goods Index. So, the company's decision for a new CEO makes sense even if sudden. Brase brings significant experience, most recently as president and chief operating officer of no-moat Smucker and previously in various leadership positions at wide-moat Procter & Gamble. We think he's a suitable choice but don't see a lot of quick fixes available, either. Packaged food companies have struggled with organic growth, but Conagra had bucked the trend. However, we think this stemmed from its decision to not pass on all cost increases, which has weighed on operating margins. We don’t think it has pricing power to restore them quickly.

The bottom line: As previously announced, we will discontinue coverage of no-moat Conagra on or about April 20. Based on fiscal third-quarter earnings announced on April 1, we would've expected to reduce our $23 fair value estimate by a mid- to high-single-digit percentage. Our Standard Capital Allocation Rating is unaffected, which is based on its sound balance sheet, fair investment track record, and mixed shareholder distributions. We would have revisited our rating if Conagra improved its competitive positioning or brand strength under Brase. Even though shares look undervalued, we do not see a quick turnaround. We expect the operating margin to improve to about 13.5% by fiscal 2030 (from 10.6% in the third quarter), short of its target in the mid to high teens.

After reviewing Conagra's fiscal second-quarter 2026 results, we've trimmed our fair value estimate to $23 per share from $25. The cut stems from lowering our fiscal 2026 organic growth rate by 150 basis points to negative 1.7% and adjusted operating margin by 10 basis points to 11.2%. The effect on our valuation is magnified by the slow long-term growth and margin recovery due to its lack of a moat.

Conagra's fiscal second-quarter organic net sales declined 3% year over year, driven entirely by lower volumes. Negative operating leverage and cost inflation weighed on profitability as the adjusted operating margin contracted 4 percentage points to 11.3%.

Our fair value estimate implies 13 times adjusted price/earnings and 10 times enterprise value/adjusted EBITDA off our fiscal 2027 estimates, higher than historical averages given a challenging near-term outlook.

For fiscal 2026, we forecast an organic decline of approximately 170 basis points, below management's guidance of negative 1% to positive 1%. We expect the company's price investments to drive volume growth will underdeliver. After 2026, we forecast organic revenue growth to gradually improve to less than 2% per year, as volumes recover and price increases return to a normalized, sub-inflation rate pace, reflecting Conagra's limited pricing power. Our view seems to be similarly implied by management guidance of low-single-digit long-term sales growth.

Over the next five years, for its refrigerated and frozen, grocery and snacks, and international segments, we forecast average annual organic revenue growth of about 0.9%, 0.8%, and 1.1% per year, respectively, mostly due to volume growth. These outlooks are based on expectations for intensifying competition, Conagra’s limited snack portfolio mostly in meat and popcorn, and the need to invest in adapting products to local tastes, respectively. Conagra’s low product spending only compounds these issues on our forecast. We forecast organic growth of 0.9% for foodservice, as we think Conagra’s most popular products, like frozen ready meals and popcorn, aren’t particularly appealing to this channel.

At midcycle, we forecast an adjusted operating margin (as defined by the company) of 13.5%. We expect the margin to decline significantly in fiscal 2026 to 11.2%, in line with management's guidance of 11%-11.5%, as the company prioritizes volume growth over profitability. Given the lack of pricing power, we believe it'll take some time to restore margins; thus, our mid-cycle margin isn't far from the fiscal 2025 mark of 14.1%.

We forecast less than 3% of sales for research and development and marketing, well below the roughly 5% spent by most other food producers, and not enough to capitalize on consumer trends more effectively than its peers.

We incorporate one ESG risk based on the social effect of its products within our forecast. We think changes in consumer health-related preferences are more than likely, especially in the US, where Conagra generates most of its revenue. This leads to lower growth for products like frozen foods as consumers pivot toward fresher alternatives.

We also note four additional ESG risks, which are captured in our Uncertainty Rating. First, as a food producer, safety and recalls are a constant risk. However, we think companies like Conagra can focus on production to minimize the valuation effect of this risk, and consumer memory tends to be very short if mistakes aren’t repeated. As such, we forecast a probability of 10% to 24% and materiality of less than 10%.

Additionally, given the energy and water needed to produce food, Conagra faces regulation risk around carbon emissions and resource use, respectively. Governments could impose taxes or fees to capture the company’s environmental effects, which we estimate at a probability of 10% to 24%. However, as we’d expect any costs to affect all competitors equally, we’d expect most of it to be passed onto end customers. As such, we estimate materiality of less than 10%.

Lastly, given the large workforce necessary for Conagra’s operations, human capital risk is present. We estimate the probability of human capital risk manifesting at less than 10% against materiality of 10% to 24% given the large workforce.

We don’t think Conagra has an economic moat. For food producers, brand intangible assets and cost advantage are the typical sources of a durable competitive advantage. We think Conagra’s brands lack sufficient leadership across several product categories to amass an entrenched standing with retail partners. Additionally, we do not see evidence of a cost advantage, as direct operating margins lag the median for food producers.

Quantitatively, returns on invested capital don’t evidence a moat. Following the 2018 acquisition of Pinnacle Foods, returns on invested capital, including goodwill, averaged in the mid-single-digit range from fiscal 2019-25. We forecast returns of less than 6% on average over the next five years, below our estimate for its cost of capital of roughly 7%, evidence that Conagra lacks a competitive edge.

Brand intangibles are most often observed through pricing power, dominant market share, and/or entrenched retailer/restaurant relationships.

Frozen food, including vegetables and ready meals, is Conagra’s single most important product category at more than a third of sales. In US frozen vegetables, its Birds Eye brand holds the largest market share of 26%, according to Euromonitor. But we see a few challenges. First, since 2018, it has lost 330 basis points of market share, while number two-brand, Green Giant, and private label have lost 130 and gained 600 basis points, respectively. Second, as evidenced by private-label’s gains, we think frozen vegetables are largely a commodity product, unlike more value-added or processed foods. Lastly, frozen vegetables compete against both shelf-stable and fresh alternatives, with the latter benefiting from consumer trends toward fresher food. Together, these headwinds reduce our confidence in Conagra’s competitive advantage in this category.

Although not commoditized, frozen ready meals face their own challenges in a crowded market filled with diverse products. This leads to fragmentation, making it difficult for any one competitor to emerge as dominant and requiring constant investment to stay current. Conagra’s top brand in the category, Marie Callender's, sits in fourth place by market share at 4.6%−a little more than half of Nestle’s Stouffers brand’s share. Other brands, including Healthy Choice (number seven), Banquet (number nine), and Birds Eye (number 13), give Conagra the second-largest company share at 15%, but this is insufficient to form a competitive advantage.

Snacks, shelf stable ready meals, and dessert mixes round out Conagra’s other larger product categories. In snacks and dessert mixes, we think Conagra has some brands with decent share, but it falls well behind category leaders. After selling the number-two positioned Chef Boyardee, Conagra has less than 10% share in shelf-stable ready meals, insufficient mass to support a moat.

Our no-moat rating is further supported by our view that Conagra underspends on research and development and advertising. Its 0.5% of sales on research and development and 2.3% of sales on advertising falls far short of the average 0.8% and 4.6% spent by consumer and packaged food peers, respectively. While the company claims that more efficient research and development and advertising allow it to generate a higher return on a smaller investment, we’re skeptical. We think fewer “shots on goal” challenges Conagra’s ability to effectively respond to evolving consumer trends in a timely fashion as well as to ensure its products stand out on a crowded shelf. The declining market share of many of its brands lends credence to our stance.

We also don’t see evidence of a cost advantage. Cost advantages from economies of scale are difficult without significant mass, particularly in a similar set of categories, which we don’t think Conagra has at its size. Economies of scope are possible for consumer-packaged food companies if we see efficiencies in distribution. However, we don’t think that’s the case for Conagra, particularly as heavy exposure to frozen food adds shipping complexities. Additionally, our forecast for Conagra’s direct operating margin on average over the next five years of less than 19% falls short of the industry median in the mid-20% range.

Conagra’s premiumization of its product portfolio has led to growing price per unit, which could help drive higher margins than we expect.

More than half of Conagra's sales come from higher growth categories of frozen foods and snacks, which could buoy sales in excess of our expectations.

Hedging, price increases, and cost management could help Conagra to recover margin in the face of input cost inflation better than we forecast.

Conagra invests less in marketing and innovation than its peers while competing in very competitive categories like frozen ready meals. It’ll be hard to keep up without enough investment.

Conagra's decision to sacrifice operating margin to drive volume growth could make it hard for the company to restore profitability to historic levels given its lack of pricing power.

Between brands with lagging market share and significant competition from private label, Conagra has limited pricing power.