To The Moon

$ConAgra(CAG)$

Conagra Brands’ latest results and guidance mark a clear strategic pivot: regain unit momentum now—even if it means wearing thinner margins for a while. Management is leaning harder into promotions, value pack architecture, and category rebuilds to put cases back on trucks, at a time when cost pressures (from protein to packaging and tariffs) and a value-hungry consumer leave little room to push price. That “volume-first” posture showed up in fiscal Q4 (ended May 2025) and in the fiscal 2026 outlook, where the company effectively told investors to expect slower profit recovery as it rebuilds demand and share. The market’s reaction was swift: shares slid to multi-year lows after a modest miss and a guidance reset well below consensus, alongside fresh analyst downgrades.

Performance Overview and Market Feedback

Quarter in brief. Fiscal Q4 adjusted EPS came in at $0.56 on revenue of $2.78 billion, modestly under consensus ($0.58 and $2.83 billion). Reported operating margin improved on lapping prior-year charges, but the adjusted operating margin contracted year on year, reflecting heavier promo, category rebuild costs, and lingering inflation. Shares fell as the shortfall converged with a guidance reset.

Why the heat from Wall Street? Sell-side and financial media framed the print as a “volume over margins” reset. Bank of America cut the stock to Underperform and moved its target to $20, citing “protein-flation” and the risk that rising meat costs in FY26 outpace pricing and productivity gains—particularly in single-serve frozen meals. Barron’s highlighted tariff headwinds that could lift cost of goods sold by ~3% annually under current assumptions. That narrative—rising costs, thin elasticity headroom, and guided EPS below prior models—pulled the stock toward 13-year lows.

Investor sentiment today. The tape reflects capitulation: CAG trades at a high-single-digit trailing P/E and low-teens forward multiple on the reset EPS, with EV/EBITDA in the high-single-digits—well below many packaged food peers. Yet the dividend headline yield screens conspicuously high, reinforcing the “value with questions” setup.

Current Fundamentals and Cash Flow

Revenue mix and brands. Conagra’s portfolio—frozen (e.g., Healthy Choice, Marie Callender’s), snacks (e.g., Slim Jim), center store staples (e.g., Hunt’s, Orville Redenbacher’s)—remains broad, but frozen and snacks are the strategic center of gravity. Management continues to invest in innovation and packaging formats to trade shoppers into value while sustaining category penetration—classic price-pack architecture work. That supports unit recovery as U.S. consumers “downshift” to value tiers.

Cash generation. For FY26, Conagra guided to roughly 90% free cash flow conversion, capex ≈ $450 million, and interest expense ≈ $400 million. With equity earnings from Ardent Mills around $200 million and a normalized tax rate ~23%, internal funding of the dividend and reinvestment plan looks achievable provided working capital stays tidy and cost inflation doesn’t outrun productivity. Net leverage near 3.85x is elevated for staples but manageable if EBITDA stabilizes.

Dividend. The board maintained the quarterly dividend at $0.35 per share (annualized $1.40). At recent prices, that implies a 7%–7.5% forward yield—appealing but under greater scrutiny given the EPS reset. Conagra has paid consecutive quarterly dividends since 1976, a record management appears keen to defend; nonetheless, a volume-first year with lower margins tightens coverage, making cash conversion and working capital discipline critical in FY26.

A Strategy Shift That Puts the Cartons Before the Margins

In consumer staples, pendulums swing: after two years of price-led growth and mix optimization, Conagra is now prioritizing case volumes and shelf velocity. Management’s fiscal 2026 algorithm calls for organic sales growth of –1% to +1%, an adjusted operating margin of ~11.0%–11.5%, and EPS of $1.70–$1.85 (including a 53rd week adding about $0.05)—all below where the Street hoped to be. The company also flagged ~90% free cash flow conversion, capex around $450 million, equity earnings (largely Ardent Mills) around $200 million, and net leverage near 3.85x. Translation: cash discipline remains, but profit expansion will pause while Conagra reinvests in demand.

This recalibration is partly defensive, partly opportunistic. Defensive, because higher input costs (notably proteins), a tougher tariff backdrop on tinplate and certain imports, and sticky elasticities limit further price realization. Opportunistic, because frozen entrées, snacks and private-label-pressured categories often respond quickly to sharper price points and better promo mechanics. The result is a deliberately slower margin rebuild—by design.

Financial Highlights and Valuation

Margins at an inflection. FY26 adjusted operating margin is guided to ~11.0%–11.5% vs. the prior year’s adjusted base above that range—confirming an intentional step-down as promotions, pack sizes, and trade spending are dialed up. Management is signaling that a healthier velocity base will set the stage for more durable mix and productivity gains in FY27 and beyond. But the Street wanted earlier margin repair.

Earnings power. Using the EPS guide of $1.70–$1.85 (with ~$0.05 of 53rd-week benefit), the forward P/E ranges roughly in the low-teens at recent prices. On enterprise metrics, EV/EBITDA sits around the high-single-digits, a discount to many large-cap food peers that still carry low-teens multiples. That discount fairly reflects near-term uncertainty on costs, tariffs, and elasticity, but it also embeds optionality if volumes recover faster than modeled.

Balance sheet and credit. With net leverage targeted around 3.85x and interest expense of about $400 million, capital allocation is essentially pre-committed in FY26: fund reinvestment, protect the dividend, and refrain from aggressive buybacks. Any upside to equity earnings from Ardent Mills, cost-saves that outrun input inflation, or tariff mitigation could widen headroom.

Comparative value. Several independent data sets peg CAG’s trailing P/E around ~8x and forward around ~11x. EV/EBITDA sits near ~8–9x; P/FCF in the high-single-digits to low-double-digits depending on working capital. That’s a materially compressed setup versus the five-year history. For long-duration, income-oriented investors, the question is whether FY26 marks the trough of earnings power.

What’s Driving the Sell-Off?

1) A miss plus a guidance reset. Q4’s slight miss on both EPS and revenue would normally be digestible. But pairing it with an EPS guide ~20%–30% below prior Street models amplified the reaction, especially coming after months of cautious consumption data in center-store categories.

2) Input and tariff headwinds. Analysts called out rising protein costs and the potential for tariffs on tinplate and select imports to add an estimated ~3% to annual COGS under current assumptions. Even with productivity and sourcing shifts, the math is difficult to fully offset in the near term without re-accelerating price—something management appears reluctant to do while repairing elasticities.

3) Downgrades and technicals. High-profile downgrades (BofA to Underperform, others moving to Sell/Hold) and technical breakdowns (death crosses, multi-year lows) reinforced negative momentum and risk-off positioning among generalists. For staples, multiple compression can be slow to unwind absent a clean catalyst.

4) Dividend sustainability questions (perception vs. reality). A 7%+ yield attracts attention—both good and bad. While the company affirmed the payout, the lowered EPS base naturally raises the payout ratio and narrows cushion for shocks. That said, cash conversion guidance and long streak continuity argue management intends to defend the dividend; investors will track this closely each quarter.

Fundamental and Technical Read-Through

Elasticities and brand math. In frozen and snacks, demand tends to respond to promos and value-oriented pack sizes; recapturing units can come quickly, particularly as private label trade-down peaks. The cost is near-term margin. If velocity improvements hold for two to three quarters, mix upgrades and productivity can gradually refill the margin bucket. Conagra’s guidance effectively bakes in the cost of that journey.

Working capital and FCF. The 90% FCF conversion target is a lynchpin. With capex at ~$450 million and interest ~$400 million, maintaining strong working capital turns and finishing the year with healthy inventories will be crucial to covering the dividend and planting seeds for FY27. Equity earnings from Ardent Mills provide a helpful offset—management guided to ~$200 million.

Chart view. The stock has carved out new cycle lows amid successive estimate cuts and downgrades. From a purely technical perspective, stabilization typically requires a catalyst (e.g., an early sign that promos drive sustained share gains without incremental gross margin leakage, or a tangible tariff cost mitigation update). Until then, value investors will scale in; fast money will likely wait for estimate momentum to inflect.

Why the Stock Fell

• Earnings/guidance disappointment: Q4 miss coupled with FY26 EPS and margin guide below consensus.

• Cost pressures: Rising protein costs and tariff assumptions enlarging COGS with limited pricing headroom.

• Analyst downgrades: BofA moved to Underperform with a $20 target; others trimmed targets—reinforcing negative sentiment.

• Dividend skepticism: A >7% yield is attractive but invites concerns about coverage while margins compress.

Valuation Framework and Scenarios

Base case (company-like). Assume FY26 EPS at midpoint ($1.78) on ~11.25% adj. op margin, flattish organic sales, and tariff/commodity headwinds netted against productivity. Apply 11x forward P/E (a discount to staples peers while the story resets) → ~$19.6 fair value—roughly the tape. EV/EBITDA at ~8.5x also triangulates to similar equity value if net debt/EBITDA lands near the guided leverage.

Upside case (faster velocity payback). If promo elasticity is favorable and mix upgrades begin by 2H FY26, EPS could track to the high end ($1.85) with incremental operating leverage in FY27. On a re-rating to ~12.5x forward P/E, fair value drifts into the low-$20s. Dividend yield compresses toward ~6% as price recovers.

Downside case (costs outrun productivity). If protein/tariff inflation bites harder or elasticities disappoint, EPS could shade toward the low end ($1.70) or below, inviting a test of $17–$18 on 10x–10.5x. Dividend risk would rise if FCF conversion misses plan.

Investment Merits vs. Risks

Merits

• Compelling yield with a long dividend record; board reaffirmed the $0.35 quarterly payout.

• Category positioning in frozen and snacks that historically respond to value-led playbooks.

• Cash discipline with explicit FCF, capex, and leverage guardrails for FY26.

Risks

• Cost inflation and tariffs may exceed mitigation plans, pressuring gross margin longer.

• Elasticity risk if heavier promos fail to drive sustained share/velocity gains.

• Dividend perception risk if coverage narrows and working capital turns disappoint.

Verdict and Entry Price Zone

Verdict: Cautious Accumulate (Income-tilted). Conagra is intentionally trading near-term operating margin for unit momentum. That choice is strategically reasonable for categories where value signs move the needle—but it defers the profit recovery investors hoped to see in FY26. At ~8x trailing and ~11x forward earnings with a 7%+ yield, CAG is priced for skepticism and offers asymmetric upside if volume recapture shows up by mid-year and the cost line behaves. For total-return generalists, patience is warranted until there’s proof that promos are translating into durable velocity without a second margin step-down.

Entry zone: $18–$20 for initial scaling aligns with ~10x–11x FY26 EPS and a 7%–7.7% forward yield; add toward $17 on disorderly tape if fundamentals are intact. Conversely, a clean break back above ~$21 on improving scanner data and gross margin stabilization would justify moving from “cautious accumulate” to “core hold.” Position sizing should respect leverage (~3.85x guided) and headline risk around tariffs and proteins.

Conclusion: Rebuilding the Base

Conagra is resetting the chessboard: put cases and shoppers first, then rebuild margins off a sturdier velocity base. Investors dislike resets, and this one came with plenty of macro friction—protein costs, tariffs, a value-conscious consumer, and lean pricing headroom. The dividend provides carry while you wait, but coverage will be watched hawkishly in a year of lower earnings. The crux for FY26 is execution: do promos and value packs bring back sustainable volume without further eroding unit economics? If the answer trends “yes” by the March–May 2026 window, the stock’s compressed multiple leaves room for re-rating. If not, the value trap debate will linger.

For now, Conagra is a yield-forward, execution-sensitive story. The company has drawn a clear map—modest sales, lower margins, strong cash conversion, and guardrails on spend. Follow the mile markers each quarter: scanner share in frozen and snacks, gross margin cadence vs. commodity/tariff flow-through, working capital turns, and dividend coverage. Those datapoints—not the headline yield alone—will tell you when this volume-first pivot is paying off.