Uncategorized
Conagra Brands should continue tightening to General Mills
admin | March 22, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Based on the solid results of both credits and the momentum behind the integration of their acquisitions coupled with a firm focus on deleveraging, there is value in Conagra relative to General Mills debt. Conagra spreads have moved tighter recently but there is room for further spread compression relative to General Mills, particularly in the long end of the curve.
General Mills (GIS – Baa2/BBB/BBB)
GIS’ fiscal 3Q sales and earnings per share (EPS) came in ahead of Street estimates. Sales of $4.2 billion beat estimates of $4.19 billion while EPS of $0.83 came in ahead of consensus of $0.69. Organic sales were up 1%, largely reflecting price increases which were partially offset by lower volumes. GIS witnessed organic growth across all geographies except Europe and Australia. In fact, Europe and Australia saw the largest volume decline, down 4%, which could not be offset by an increase of 2% in price/mix. Adjusted gross margin was up 170 bp year-over-year to 34.2% reflecting cost savings, price realization and the addition of Blue Buffalo. Adjusted operating profit margin was up 230 bp to 17.4%
Looking forward, the company expects Blue Buffalo’s results to meaningfully pick up in the fourth quarter as they double distribution and increase product assortment in the mass channel. Accelerated synergies, cost initiatives and pricing actions taken earlier this year should also benefit profit margins. Given the expected improvement in the pet segment for 4Q and year to date performance, management revised full year EPS and free cash flow conversion upwards. Adjusted EPS will now be flat to up 1% versus previous guidance of flat to down 3%. Free cash flow conversion is now expected to be at least 105% of adjusted earnings versus original guidance of 95%. Management has repaid roughly $800 million of total debt since the close of the Blue Buffalo acquisition, so that General Mills ended the quarter with estimated leverage of roughly 4.3x.
Conagra Brands (CAG – Baa3/BBB-/BBB-)
While overall sales for CAG came in a bit shy of estimates, $2.71 billion versus estimates of $2.75 billion, the company posted solid organic growth of 1.9%. Organic sales growth was driven by strong performance in frozen as well as snacks, up 4.9% and 8.2%, respectively, which more than offset declines in refrigerated and grocery, down 5.1% and 0.1%, respectively. Integration of Pinnacle is on track and management is focused on addressing executional challenges at Pinnacle’s top three brands: Birds Eye, Duncan Hines and Wish-Bone. Management remains confident that they can exceed their $215 million cost synergy target by fiscal 2022, as achieved cost synergies are pacing ahead of expectations. CAG had targeted $20 million of cost synergies in fiscal 2019 and now expects to come in above that level.
CAG completed the sale of the Wesson business during the quarter, and updated full year guidance to reflect the sale. Organic net sales guidance went from a range of 1%-2%, to approximately 1%. Management noted that the updated organic sales guidance removes Wesson for the entire year, not just for the last quarter. CAG remains committed to a solid investment grade rating and has repaid $685 million of debt since the close of the Pinnacle acquisition. The leverage estimate stands at 4.9x currently. Management is still targeting leverage of 3.5x and expects to achieve that target by fiscal year end 2021. CAG has been paying down its term loans and has reduced the balance from $1.3 billion to $600 million.
Relative Value
Based on the solid results of both credits and the momentum behind the integration of their acquisitions coupled with a firm focus on deleveraging, there is value in CAG relative to GIS. CAG had a significant move tighter yesterday (roughly 15-20 bp) but there is room for further spread compression relative to GIS. Currently the curve between CAG and GIS is steepest in the 30-year bonds, with a trading differential of nearly 70 bp. In the 10-year part of the curve, the trading differential is roughly 56 bp. CAG spreads could tighten another 10-15 bp based on expectations for better growth in fiscal 2020 and further deleveraging.
admin
john.killian@santander.us
1 (646) 776-7714
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
