Why Conagra Brands (CAG) Faces Prolonged Underperformance Amid Volume Declines and Margin Pressures

Conagra Brands (CAG) has long been a staple of the packaged food sector, but its recent performance underscores a troubling trajectory of strategic underperformance. Despite a valuation that appears attractive on the surface, the company's persistent volume declines, margin pressures, and weak competitive positioning paint a picture of prolonged risk. This analysis examines why CAG remains a sell, even as it trades at a discount to both the S&P 500 and its industry peers.

Volume Declines and Margin Erosion: A Structural Challenge

Conagra's core frozen food segment has faced declining unit sales for eight consecutive quarters as of Q3 2025. While the company has offset some of these volume losses through aggressive price hikes, the underlying demand weakness persists. For Q3 2025, Conagra reported earnings per share of $0.51, missing analyst estimates by 5.6%, and revenue of $2.84 billion, 2.7% below expectations. These results reflect a broader struggle to maintain pricing power amid soft consumer demand and rising input costs.

Operating margins have contracted significantly, falling to 15.31% in Q3 2025 from 19.82% in the same period of 2024. Inflationary pressures, supply chain disruptions, and inventory management challenges have compounded these issues. While Conagra has made strides in debt reduction-paying down $500 million over the past 12 months-the company's ability to reinvest in growth or defend market share remains constrained.

Sector-Wide Pressures and Competitive Disadvantages

The Zacks Food-Miscellaneous industry, which includes Conagra, operates in a highly competitive environment marked by stagnant consumer spending and rising private-label competition. Companies in this sector are grappling with elevated input and labor costs, forcing a focus on cost discipline and productivity gains. Conagra's strategic initiatives, such as the integration of Fatty Smoked Meat Sticks and a push into protein-centric snacks, have yielded modest gains (e.g., a 4% increase in snack volumes). However, these efforts pale in comparison to the innovation and portfolio modernization seen at peers like The J.M. Smucker Company (SJM) and Lamb Weston Holdings (LW).

Moreover, the industry's weak Zacks Industry Rank of #185-placing it in the bottom 23% of over 250 industries-highlights deteriorating analyst confidence and earnings momentum. Conagra's inability to reverse its volume declines or differentiate its offerings in a crowded market exacerbates its vulnerability to sector-wide headwinds.

Valuation: A Misleading Discount

Conagra's forward price-to-earnings (P/E) ratio ranges from 8x to 9.1x, significantly lower than the Zacks Food-Miscellaneous industry's 15.97x and the S&P 500's 21.37x according to Zacks data. On the surface, this appears undervalued. However, such a discount reflects market skepticism about Conagra's ability to sustain profitability. The company's declining returns on capital and forecasted revenue declines suggest that its low valuation may be justified. Unlike the S&P 500, which benefits from broader economic growth and diversification, Conagra's exposure to a stagnant sector and its own operational challenges make its valuation a warning sign rather than an opportunity.

Strategic Risks and the Case for a Sell Position

The combination of structural volume declines, margin erosion, and weak competitive dynamics positions Conagra for prolonged underperformance. While the company has demonstrated resilience in managing cash flow-posting a 125% free cash flow conversion rate in Q3 2025)-this alone cannot offset its strategic shortcomings. The food industry's shift toward health-conscious and premium products demands sustained innovation, a domain where Conagra lags.

Investors should also consider the risks of holding a stock with a forward P/E that appears cheap but is tethered to a sector with a weak industry rank and declining earnings momentum. Conagra's recent earnings misses and guidance revisions further erode confidence in its ability to navigate macroeconomic and competitive pressures.

Conclusion

Conagra Brands' valuation discount may tempt value investors, but the company's operational and strategic challenges render this discount a red flag rather than a bargain. With frozen food volumes declining, margins contracting, and sector dynamics deteriorating, CAG remains a sell. Until the company can demonstrate a clear path to reversing these trends-through innovation, cost discipline, or market share gains-its underperformance is likely to persist.