Conagra Brands: A Contrarian's Play on Margin Turnaround and Premium Growth

Conagra Brands (CAG) is set to report its Q4 2025 earnings on July 10, with analysts anticipating a year-over-year decline in both revenue and earnings. While the near-term outlook is clouded by margin pressures and macroeconomic headwinds, the company's strategic pivot toward premium snacks—epitomized by its acquisition of Fatty Smoked Meat Sticks—and its undervalued status relative to peers suggest a compelling contrarian opportunity. The question for investors is whether the short-term pain justifies a long-term bet on margin stabilization and structural growth.

The Near-Term Challenges: A Story of Margin Pressure and Skepticism

The consensus estimates for Q4 2025 are stark:
- EPS is projected to fall 3.3% to $0.59, with full-year EPS declining 12.7% to $2.33.
- Revenue is expected to drop 1.8% to $2.9 billion, as full-year sales fall 3% to $11.7 billion.

The root causes are well-documented: elevated input costs (particularly proteins and sweeteners), supply chain disruptions, and a sluggish recovery in the Foodservice segment. Gross margins have contracted by 170 basis points year-over-year, while rising SG&A expenses—driven by advertising spend—have further squeezed profitability.

Market skepticism is reflected in Conagra's Zacks #5 “Strong Sell” rating and its Earnings ESP of -1.37%, which suggests analysts anticipate a miss even below lowered expectations. The stock has underperformed the S&P 500 by 20% year-to-date, pricing in significant pessimism.

The Contrarian's Case: Margin Stabilization and Premium Growth

The path to recovery hinges on two critical areas:

1. The Rise of Premium Snacks: Fatty Smoked Meat Sticks as a Catalyst

Conagra's acquisition of Fatty Smoked Meat Sticks in August 啐2024—valued at $300 million—targets the fast-growing meat-snack category, which is expanding at 8% annually. Fatty's premium positioning (real meat, no artificial additives, hickory-smoked flavors) aligns with consumer demand for “better-for-you” snacks, a segment where Conagra already holds a 50% share in single-serve frozen meals.

The goal is clear: $100 million in 2025 sales for Fatty, which could drive 5-7% annual growth in the snacks segment. This is critical because snacks carry 200+ basis points higher margins than staples. Fatty's 40% gross margins—far exceeding Conagra's average—could help offset broader margin pressures.

2. Cost Discipline and Portfolio Restructuring

Conagra is streamlining its portfolio to focus on high-margin businesses:
- Divesting non-core assets: Including its Indian subsidiary Agro Tech Foods and the Chef Boyardee/Van de Kamp brands.
- $1 billion cumulative cost savings by 2025: With $350 million targeted for FY2025 alone.

These moves aim to stabilize adjusted operating margins, which are projected to improve sequentially to 14.4% for FY2025, from 14.2% in Q1.

Valuation: A Discounted Play with Peer Comparisons

Conagra's valuation metrics are starkly lower than peers like Mondelez (MDLZ) and Hershey (HSY):

Metric	Conagra (CAG)	Mondelez (MDLZ)	Hershey (HSY)
P/E Ratio	9.5x (vs. 18.7x for MDLZ)	18.7x	~22x (est.)
EV/EBITDA (LTM)	9.0x	~10.5x	N/A
Dividend Yield	4.65%	1.6%	1.2%

Conagra's 39% undervaluation (per Zacks' intrinsic value analysis) suggests the market has overreacted to short-term headwinds. While peers like Mondelez trade at premiums due to scale and brand resilience, Conagra's lower valuation could reward investors if margin stabilization and premium growth materialize.

Investment Thesis: A Contrarian's Opportunity

Bull Case:
- Fatty meets its $100 million sales target, driving margin expansion.
- Cost savings and portfolio streamlining stabilize EBITDA margins.
- The stock's 4.65% dividend yield acts as a safety net.

Bear Case:
- Fatty's sales underperform, and margin pressures persist.
- Input cost inflation (now projected at 3.2% for 2025) rises again.
- Credit metrics (net leverage at 3.2x by year-end) fail to meet targets.

Key Catalysts to Watch in Q4:
1. Fatty's sales growth: Does it hit its target?
2. Margin trends: Gross and operating margins must show sequential improvement.
3. Guidance for 2026: Will management provide clarity on cost discipline and premium growth?

Conclusion: A Buy for the Patient Investor

Conagra's Q4 2025 earnings will likely confirm near-term struggles, but the stock's discounted valuation, dividend yield, and strategic bets on premium snacks make it a compelling contrarian opportunity. If Fatty's sales trajectory and margin stabilization efforts deliver, CAG could rebound sharply. Investors with a 12-18 month horizon should consider accumulating shares at current levels, especially if the earnings report beats lowered expectations. However, short-term volatility—driven by macroeconomic uncertainty and sector-specific risks—remains a hurdle.

As always, the contrarian's edge lies in recognizing when pessimism has already priced in the worst-case scenario. For Conagra, that moment may be now.