Conagra's Margin Recovery Play: Is Now the Time to Bet on a Turnaround?

Conagra Brands (CAG) has long been a bellwether of the packaged food industry, but its recent struggles with inflation, supply chain bottlenecks, and margin compression have left investors questioning its ability to recover. The company's Q2 2025 results—marked by a miss on revenue and EPS—highlighted these challenges, with shares plunging 7.7% pre-market. Yet, management has laid out an aggressive plan to stabilize margins and reignite growth by fiscal 2027. The question now is: Can Conagra's turnaround strategy succeed, and is the stock undervalued enough to justify a long-term bet?

The Margin Pressure Problem: Inflation and Supply Chain Woes

Conagra's margin struggles are no secret. In fiscal 2026, it faces 7% total inflation, driven by soaring costs in animal proteins (beef, chicken, pork, turkey, and eggs), which account for 20% of material expenses, plus tariffs adding another 3%. Supply chain disruptions—such as delays in warehousing and logistics—have further squeezed profitability. In Q2 2025, adjusted gross margin dropped 52 basis points to 26.4%, while operating margins are projected to shrink to 11-11.5% in fiscal 2026.

The company's decision to prioritize volume growth over margin preservation has exacerbated short-term pain. CEO Sean Connolly argues that “relentless pricing” harms brand equity, but this strategy has led to a net sales outlook of -1% to +1% for fiscal 2026. The adjusted operating margin is expected to hit just 14.8%, down from 15.3% in fiscal 2025.

The Turnaround Play: Strategies to Expand Margins

Despite the headwinds, Conagra has launched a multi-pronged offensive to stabilize margins:

1. Productivity Gains: A 5% annual target via cost-cutting in manufacturing, logistics, and procurement. This includes a new chicken plant to reduce reliance on third-party suppliers and a 16% increase in capital expenditures for supply chain resilience.
2. Selective Pricing: While avoiding “reckless” price hikes, the company is raising prices in specific categories, such as canned goods, where tariff-driven costs are most acute.
3. AI-Driven Efficiency: Investments in artificial intelligence to optimize inventory, reduce waste, and streamline distribution networks.
4. Debt Reduction: Aiming to slash net debt by $700 million in fiscal 2026, using proceeds from divested brands like Chef and Fish. This should lower the net leverage ratio to 3.4x, preserving its investment-grade credit rating.

By fiscal 2027, management forecasts margin expansion as inflation eases and productivity gains compound. The target operating margin is expected to rebound to 16-17%, aligning with historical averages.

Valuation: Is the Stock Undervalued Now?

Conagra's current valuation suggests the market is skeptical of its turnaround. As of July 2025:
- Enterprise Value/EBITDA (EV/EBITDA): 8.3x, below its five-year average of 10.2x.
- Price-to-Book (P/B): 1.1x, indicating the stock trades near asset value.
- Forward P/E: 12.4x, which is 20% below the industry average of 15.5x.

The average analyst price target of $22.96 implies an 11% upside from current levels, while bulls like Barclays see $26—a 26% premium. However, risks remain: if inflation persists beyond fiscal 2026, or if supply chain issues linger, margins could stay compressed, pressuring the stock further.

Analysts and the Market Outlook

Analysts are split. The consensus Hold rating reflects cautious optimism:
- Bulls cite undervalued metrics and the $26 price target (Barclays), emphasizing Conagra's strong net margin of 5.1% (outperforming peers like Campbell's) and dividend yield of 3.5%.
- Bears (e.g., Goldman Sachs) argue that the high debt-to-equity ratio (0.93) and weak volume growth in key categories like frozen foods could limit recovery.

Risks to Consider

• Inflation Persistence: Animal protein costs could remain elevated if global supply chains remain disrupted.
• Competitive Pressures: Private-label brands and value-oriented shoppers could erode market share.
• Debt Management: While deleveraging is underway, profit pressures may strain liquidity if sales miss targets.

Conclusion and Investment Recommendation

Conagra's turnaround hinges on execution: If productivity improvements and supply chain investments deliver the promised 5% annual savings, margins could rebound by 2027. At current valuations, the stock offers a margin of safety—especially for long-term investors willing to endure near-term volatility.

Investment Thesis:
- Bull Case: Margins expand to 17% by 2027, driving EPS to $3.00+. The stock could hit $26-$28, a 35-40% return.
- Bear Case: Inflation stays stubborn; margins stagnate at 14-15%. The stock drifts lower, testing $18-$20.

Recommendation: Hold with a cautiously bullish bias. Investors should consider a gradual position-building strategy, targeting dips below $19. The 2027 margin target is ambitious but plausible if macro conditions stabilize. For now, Conagra's valuation and dividend yield make it a defensive play in a volatile consumer staples sector.

Stay tuned to Q3 2025 results and any signs of margin stabilization—the next critical test for this turnaround story.