ConAgra Brands, Inc. (NYSE: CAG) is expected to report earnings on Thursday, September 28th before the market opens. The company's shares last traded at $33.29 as of mid-day Monday, down 22% over the last year and down 10% since Q4'17 earnings were reported on June 29th.
ConAgra Brands` results have been mixed of late as illustrated in the table below. Although the company has missed its top-line estimate seven of the last eleven quarters, reported EBITDA has positively surprised investors nine of the last eleven quarters. When management reports an EBITDA beat, the stock has increased 3.1% on average immediately following the announcement. However, shares have fallen 5.6% on average when management reports a disappointing EBITDA figure.
We highlight below what investors should be looking for prior to the earnings report on Thursday.
Investors Focusing on EBITDA
EBITDA is defined as Earnings before Interest, Taxes, Depreciation and Amortization. It is a commonly used metric in valuation as a proxy for operating profitability because it provides a clearer picture of overall profitability, especially when benchmarking against comparable companies. This is because it ignores non-operating costs that can be affected by certain items such as a company’s financing decisions or political jurisdictions.
The company's adjusted EBITDA stands at $1,193 million as of fiscal year ending May 2017. This is only 0.3% higher than the $1,190 million achieved in fiscal year May 2012. ConAgra Brands' EBITDA growth has been highly volatile ranging from -43.0% to 74.6% over the last five fiscal years. The company's EBITDA margin has also been volatile ranging from 7.9% to 15.2% over the same period.
On a quarterly basis, ConAgra Brands' EBITDA growth and margin have also been highly volatile over the previous twelve quarters.
Going forward, analysts forecast that ConAgra Brands' EBITDA will reach $1,761 million by fiscal year 2022 representing a five-year CAGR of 8.1%. This is well above what the company has been able to achieve historically.
Wall Street analysts are also forecasting that EBITDA margins will reach 21.7% by fiscal year 2022, a sizable increase from its current EBITDA margin of 15.2%.
What Bullish Investors Point To
A company's EBITDA multiple is calculated by dividing its Enterprise Value by EBITDA and is often used to benchmark the fair market value of a company. Its key benefit over the P/E multiple is that it's capital structure-neutral, and, therefore, better at comparing companies with different levels of debt.
Analysts covering the stock often compare the company to a peer group that includes Campbell Soup (NYSE: CPB), Kellogg (NYSE: K), Hershey (NYSE: HSY) and McCormick & Company, (NYSE: MKC). ConAgra's market valuation looks attractive relative to these peers.
The company's P/E multiple of 21.6x is below all of its comparable public companies: CPB (28.0x), K (27.9x), HSY (33.6x) and MKC (26.3x). Additionally, its EBITDA multiple of 13.9x is below K (16.1x), HSY (18.2x) and MKC (18.0x) and only slightly above CPB (13.5x).
Furthermore, Wall Street analysts see higher upside potential in ConAgra Brands shares compared to its peers. The consensus 12-month price target is the average of each individual sell-side Wall Street analyst. The consensus analyst upside or downside equals the percentage difference between the price target and the current stock price. The calculation is simply
Upside = (Analyst Price Target / Stock Price) - 1.
The company's consensus analyst upside of 22.3% is above all of its selected comparable public companies: CPB (11.3%), K (17.8%), HSY (5.1%) and MKC (5.7%).
What Bearish Investors Point To
EBITDA margin measures the portion of revenue a company converts to earnings. It is a strong measure of a company's pricing power and capital efficiency. All else equal, companies with higher EBITDA margins command higher valuation multiples. This may help explain why ConAgra Brands' valuation multiples trade at a discount to its peers.
The company's EBITDA margin of 15.2% is above only above K (14.3%) and below CPB (15.6%), HSY (18.5%) and MKC (17.1%). What's more, ConAgra Brands projected performance is mediocre relative to this same peer group.
Projected 5-year EBITDA CAGR is the average annual growth rate of EBITDA over a five year period. It's calculated as follows:
5yr CAGR = [ EBITDA FY+5 / EBITDA FY ] ^ (1/5 years) - 1. The chart below plots the five year EBITDA compounded annual growth rate for ConAgra Brands and its peers.
The company's projected 5-year EBITDA CAGR of 8.1% is right in the middle of the pack relative to its comparable companies. Bearish investors argue that ConAgra Brands' valuation multiples should trade at a discount as a result of its mediocre growth forecast and weak margins.
Bearish investors also highlight Campbell Soup's disappointing earnings report on August 31st where the stock dropped nearly 10%. Its CEO Denise Morrison said on the earnings call that "several variables are at play including value players expanding their presence in the U.S., the growth of store brands and the explosion of e-commerce and meal delivery services disrupting the market... We expect conditions to remain hyper-competitive for the foreseeable future."
Value investors holding a position in ConAgra Brands' shares should consider the above fundamentals prior to the company reporting earnings on Thursday.
Note this is not a buy or sell recommendation on any company mentioned.
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