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The Ratings Game: Worries of ‘rampant’ inflation leads two analysts to abandon their buy ratings on Conagra’s stock

Shares of Conagra Brands Inc. took another hit Wednesday, after two Wall Street analysts abandoned their bullish calls in the wake of the packaged foods company’s warning that a ‘substantial increase’ in inflation in the past three months will take a more than $250 million bite out of profit this year.

The stock had dropped as much as 2.0% to an intraday low of $33.30, before paring losses to close down 0.3% at a six-month low.

On Tuesday, the stock
CAG,
-0.26%

dove 5.4% after the company, which brands include Slim Jim, Duncan Hines, Birds Eye, Vlasic and Healthy Choice, reported better-than-expected fiscal fourth-quarter results but warned of a full-year profit shortfall as inflation is expected to eat into profits.

Stifel Nicolaus analyst Christopher Growe downgraded Conagra to hold on Wednesday, after being at buy since at least late-2017, while cutting his stock price target to $35 from $39.

“[W]e see the shares remaining in a holding pattern as the company executes its pricing initiatives and experiences the lag in pricing in relation to rampant inflation,” Growe wrote in a note to clients.

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

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

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

Don’t miss: Eggs and pancakes for dinner: How one family of seven is coping with America’s food inflation.

Conagra’s stock has lost 6.5% year to date, while the SPDR Consumer Staples Select Sector exchange-traded fund
XLP,
+0.89%

has gained 4.7% and the S&P 500 index
SPX,
+0.12%

has advanced 16.5%.

FactSet, MarketWatch

The ominous inflation outlook comes as the latest government data showed both wholesale and retail price indexes rising in June at the fastest rates in more than a decade. At the same time, Federal Reserve Chairman Jerome Powell continued to push his view that inflation should be transitory, is likely to start moderating in the coming months. See the Economic Report and The Fed columns.

Also read: ‘I worry about inflation,’ says BlackRock’s Larry Fink — warns it’s unlikely ‘to be transitory.’

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

“This timing mismatch is expected to be particularly impactful in H1 and, more specifically, in Q1,” Connolly said. “The resulting pressure on our first-half margins impact our full-year profit.”

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

He said the coming fiscal year 2022 (FY22) will be a “transition year” for Conagra, as the company takes actions to combat inflation and faces difficult comparisons with strong year-ago volume growth, which was boosted by COVID-19 pandemic-induced eat-at-home trends.

“Management is prudently managing the situation by maintaining its pressure on the consumer (marketing and new products),” Spillane wrote. “However, with the inflation-related earnings gap this year, we see the stock being range bound until the market gets a better sense on sales and earnings growth prospects for FY23.”

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