How Will the Sale of 51.8% Interest in Agro Tech Foods Aid CAG Stock?

Conagra Brands, Inc. CAG remains focused on transforming into a branded, pure-play consumer packaged goods food organization. The company looks forward to enlarging its food businesses, buoyed by innovation and organic growth, along with expansion into adjacent categories, comprising acquisitions. It has also been making divestitures to boost its overall portfolio.

In the latest development, the company revealed that it has concluded its earlier announced transaction regarding the divestiture of its 51.8% ownership stake in Agro Tech Foods Limited.

The Latest Divestiture to Boost CAG's Portfolio

Management informed that all the conditions for the sale (by one of its subsidiaries) of its 51.8% interest in Agro Tech Foods, which is an Indian-based food company, have been fulfilled. CAG intended to sell this stake in the second quarter of fiscal 2024.

The completion highlights an important strategic move to redesign Conagra's portfolio in a bid to enrich shareholders' value. This is a majority-owned subsidiary consolidated within the company's International segment. Post the sale, Agro Tech Foods' results will no longer be consolidated in CAG's financial statements.

Conagra's Other Strategic Moves

Prudent innovations have been helping the company to modernize its portfolio and meet consumers' changing needs. It maintains its focus on investing in innovation, considering it the primary asset in its strategic approach and essential for enhancing its brands and fostering sustainable growth.

The company's actions, focused on re-engaging consumers with existing products and introducing them to new innovations, give it confidence in driving momentum through multifaceted brand-building investments. Conagra has been making advertising investments in major brands like Birds Eye and Healthy Choice, showcasing its commitment to building and promoting through innovative campaigns.

Conagra has been experiencing solid momentum in the International business. Segment net sales increased 6.4% year over year in fourth-quarter fiscal 2024, reflecting higher organic net sales and positive currency effects. Organic sales growth was driven by volumes, which rose 4.1% due to strength in Mexico and the global export business. The Mexico business has been witnessing volume growth for the past few quarters now. The continuation of these trends will continue to bolster the  International unit.

Conagra has been seeing market share gains in the key frozen and snacks categories.  The strength of the frozen category reflects the forte of its brands and the effective execution of the Conagra Way playbook. Conagra has made several investments in the innovation of key brands of the frozen business, which are yielding a favorable response. It has been seeing unit share gains in frozen sides, frozen single-serve meals and frozen vegetables.

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Challenges CAG is Facing Now

Despite the positives, Conagra is not immune to the operating challenges. The company has been witnessing tough industry trends, including a slowdown in consumption. During the fiscal fourth quarter, volumes dropped 1.8% year over year due to the continuation of the industry-wide slowdown in consumption and the recent changes in consumer behavior. Industry-wide macroeconomic challenges have adversely impacted consumer purchasing patterns.

The company has also been struggling with cost inflation for a while now, though the trend has been moderating of late. In the fiscal fourth quarter, the adjusted gross margin was partly hurt by the inflated cost of goods sold, soft organic sales and adverse operating leverage. The company anticipates cost of goods sold inflation to continue in the next fiscal year.

CAG's Foodservice unit has been under pressure due to sluggish consumption trends, reflecting broader industry challenges. The segment's organic sales declined 3.9% year over year in the fiscal fourth quarter. The persistence of this trend remains a concern as the segment continues to navigate a tough operating environment with ongoing pressures on consumer demand and dining-out behavior.

What's Next for CAG's Investors?

Despite the operating challenges, this Zacks Rank #4 (Sell) company's shares have been performing well on the bourses. CAG stock has gained 8.2% over the past three months compared with the industry's 3.1% growth.

The company has also been making prudent moves to tackle the operating challenges. Potential investors should weigh these hurdles carefully, as volatile consumer behavior and cost inflation cannot be ignored. However, the latest divestiture should help maintain the stock's solid performance in the near term.

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