Worries of ‘creeping’ inflation lead two analysts to drop their buy ratings on Conagra stock



Shares of Conagra Brands Inc. took another hit on Wednesday, after two Wall Street analysts dropped bullish calls following the packaged food company’s warning that a “substantial increase” in inflation over the past three months would cost over $ 250 million. out of profit this year.

The stock had fallen 2.0% to an intraday low of $ 33.30, before cutting losses to close 0.3% to a six-month low.

Tuesday, the CAG action,
plunged 5.4% after the company, whose brands include Slim Jim, Duncan Hines, Birds Eye, Vlasic and Healthy Choice, reported better-than-expected financial results for the fourth quarter but warned of a shortfall over a full year while inflation is expected to increase in profits.

Stifel Nicolaus analyst Christopher Growe downgraded Conagra’s rating to hold on Wednesday, having been bought since at least late 2017, while lowering his share price target to $ 35 from $ 39.

“[W]We see stocks remaining in a holding model as the company executes its pricing initiatives and suffers the pricing lag from soaring inflation, ”Growe wrote in a note to clients.

Conagra CFO David Marberger said on the post-earnings conference call with analysts that the company’s inflation assumption rose to 6% in April 2021, from 3% two years earlier.

“And as you all know, inflation has continued to rise sharply since April,” Marberger said, according to a FactSet transcript. “We now expect inflation for fiscal 2022 to be around 9%. “

He said the increase in inflation expectations from just three months ago equates to about $ 255 million in additional costs for the coming year.

Do not miss: Eggs and Pancakes for Dinner: How a Family of Seven Cope with American Food Inflation.

Shares of Conagra are down 6.5% year-to-date, while exchange-traded fund SPDR Consumer Staples Select Sector XLP,
+ 0.89%
gained 4.7% and the S&P 500 SPX index,
+ 0.12%
increased by 16.5%.

FactSet, MarketWatch

The worrying inflation outlook comes as the latest government data showed the wholesale and retail price indexes were rising in June at the fastest rates in more than a decade. At the same time, Federal Reserve Chairman Jerome Powell continued to argue that inflation should be transient and should start to moderate in the coming months. See the Economic Report and The Fed columns.

Read also: “I’m worried about inflation,” says Larry Fink of BlackRock – warns it’s unlikely “to be transient”.

Conagra Managing Director Sean Connolly said that while the company has “tried” to offset the sharp rise in inflation by implementing price increases, “mechanically there is a real lag effect. “between when pricing actions can mitigate the negative impact of rising costs. .

“This time lag is expected to be particularly impactful in the first half of the year and, more specifically, the first quarter,” Connolly said. “The resulting pressure on our margins in the first half of the year has an impact on our annual result. “

Bank of America’s Bryan Spillane downgraded his stock rating to neutral from buy and lowered his price target to $ 36 from $ 44.

He said that the next fiscal year 2022 (FY22) will be a “year of transition” for Conagra as the company takes steps to fight inflation and faces difficult comparisons with the strong volume growth of the year. previous, which was spurred by the COVID-19 pandemic induced eating patterns at home.

“Management is cautiously managing the situation by maintaining pressure on the consumer (marketing and new products),” writes Spillane. “However, with the inflation-linked earnings spread this year, we see the stock sticking to a range until the market has a better idea of ​​the outlook for sales and earnings growth for the company. exercise 23. “



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