ConAgra Foods, Inc. :CAG-US: Earnings Analysis: Q1, 2017 By the Numbers : September 30, 2016

ConAgra Foods, Inc. reports financial results for the quarter ended August 31, 2016.

We analyze the earnings along side the following peers of ConAgra Foods, Inc. – General Mills, Inc., J. M. Smucker Company and PepsiCo, Inc. (GIS-US, SJM-US and PEP-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 2,667.50 million, Net Earnings of USD 184.70 million.
  • Gross margins widened from 25.55% to 27.15% compared to the same period last year, operating (EBITDA) margins now 20.07% from 14.88%.
  • Year-on-year change in operating cash flow of 387.87% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-08-31 2015-11-30 2016-02-29 2016-05-31 2016-08-31
Relevant Numbers (Quarterly)
Revenues (mil) 2793.8 3092.7 2924.1 2827.5 2667.5
Revenue Growth (%YOY) -24.51 -25.48 -24.57 -31.12 -4.52
Earnings (mil) 165.1 160.9 182.4 -28.4 184.7
Earnings Growth (%YOY) 52.03 696.53 119.12 -113.88 11.87
Net Margin (%) 5.91 5.2 6.24 -1 6.92
EPS -2.68 0.35 0.46 0.27 0.42
Return on Equity (%) 16.4 18.5 20.13 -3.02 19.46
Return on Assets (%) 3.96 4.04 5 -0.85 5.63

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Market Share Versus Profits

Revenues History
Earnings History

CAG-US‘s change in revenue this period compared to the same period last year of -4.52% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CAG-US is holding onto its market share. Also, for comparison purposes, revenues changed by -5.66% and earnings by 750.35% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 25.55% to 27.15% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 14.88% to 20.07% compared to the same period last year. For comparison, gross margins were 27.72% and EBITDA margins were 6.03% in the last reporting period.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CAG-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 35.59, compared to last year’s level of 3.46 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

CAG-US‘s change in operating cash flow of 387.87% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 11.60% to 16.59% and (2) one-time items. The company’s pretax margins are now 14.38% compared to 7.70% for the same period last year.

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

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Company Profile

ConAgra Foods, Inc. engages in the manufacture and sale of processed and packaged foods. It operates through the Consumer Foods and Commercial Foods segments. The Consumer Foods segment includes branded food sold in various retail channels primarily in North America. The Commercial Foods segment comprises commercially branded and private label food and ingredients, which are sold primarily to commercial, foodservice, restaurant, food manufacturing, and industrial customers. The company was founded by Alva Kinney and Frank Little in 1919 and is headquartered in Omaha, NE.

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