EUR 850.00 For Business Accounts Only

Morningstar | Conagra's acquisition of Pinnacle Foods to bolster its brand set, but category challenges persist.

We posit that Conagra's portfolio of brands spanning the meal (Banquet, Marie Callender’s), enhancer (Hunt’s, Reddi-wip), and snack (Slim Jim, Orville Redenbacher’s) categories has helped it develop a competitive edge. Over the past few years, the firm has focused its portfolio on branded fare, including divesting its private-label and commercial operations, but we contend that categorywide headwinds and heightening competition in the center of the store could eat into its brand intangible asset over time. In this vein, we suspect Conagra’s operating margins have fallen short of the high teens and above rate enjoyed by many of its packaged-food peers due to its limited pricing power, reflecting the fact that many of its brands aren't category leaders (like Banquet, which we estimate has less than half the share of Nestle’s Stouffer’s). Further, Conagra’s recent efforts to take pricing and limit discounting reflect the challenges inherent to premiumizing offerings in this category; volumes in the refrigerated and frozen segment fell at a high-single-digit clip in 2016 and 2017, at a time when price/mix averaged 250 basis points of improvement.We think the acquisition of Pinnacle Foods should shore up Conagra's brand set, as the combined entity will hold the number-two spot in the domestic frozen food aisle, but don't expect it to materially enhance its competitive edge. We maintain the difficulties in creating differentiated products, declining center-store traffic, and competitive pressures have led to challenging category dynamics that could prove difficult to overcome. Still, we appreciate that Pinnacle has made substantial progress in revitalizing its mix, allowing for share gains despite these broader headwinds. As such, we think the combined entity will be able to post low-single digit sales growth longer term. Conagra is targeting $215 million in cost synergies from this deal (about 7% of Pinnacle's sales) by fiscal 2022, which we find achievable. These savings should provide the firm the flexibility to reinforce its brand-related investments, allowing it to develop and promote more modern offerings that better align with evolving consumer tastes.