Conagra Could See 15% Upside In The Next 12 Months

Deutsche Bank sees 15 percent upside in shares of Conagra Brands Inc (NYSE: CAG), driven by opportunities in margin expansion and top-line growth restructuring potential.

The brokerage initiated coverage of 13 U.S.-based food companies with 6 Buy-rated names and 7 holds.

Analyst Mario Contreras started coverage of Conagra with a Buy rating and $46 price target.

“What differentiates Conagra, however, from many of its peers is that the company already posts one of the lowest SG&A expense ratios of the industry (behind PF, TWNK, and KHC),” Contreras wrote in a note.

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If one includes the expected $200 million in SG&A cost savings, it leaves more room for upside to top-line operating leverage and gross margin expansion.

Further, Conagra has the potential to boost its free cash flow even further, and become a more aggressive acquirer if it executes on revenue management by focusing on more profitable and larger brands.

Following are the positives and negatives for Conagra in the eye of Deutsche Bank:

Positives:

“Strong FCF to repurchase shares and/or acquire.”

“Potential for cost savings plus revenue management strategy to lead to improved margin base and even better FCF generation.”

“Fragmented branded portfolio leaves upside with proper management.”

“Clean balance sheet increases strategy optionality, akin to what we saw at Hillshire Brands.”

“NOLs from Private Brands provide flexibility in brand divestment given less tax leakage.”

Negatives:

“Back-half of FY’17 remains choppy given further volume pressure across the branded portfolio.”

“Reinvestment needs prove higher than expected originally and lowers margin upside potential.”

"M&A activity proves less than desirable.”