It has to be a strange day in the stock market when the top large-cap stock rising on earnings is a food company. Conagra Brands Inc. (NYSE: CAG) was surging after the food giant beat its earnings estimates. Its adjusted earnings per share of $0.63 topped consensus estimates of $0.57, and revenues of $2.82 billion also managed to exceed expectations. The company’s second-quarter net sales increased 18.3%, while its organic net sales increased 1.6% after seeing positive organic net sales growth in each reporting segment.

What is hard to fathom here is that this appears to be the largest single-day gain in about four decades.

Conagra’s acquisition of Pinnacle Foods appears to have added to the synergies between the two companies since the 2018 acquisition, and the company’s synergies guidance of $285 million per year went up to $305 million per year by the end of 2022. New sales growth was projected to be 12.4% to 12.9% for 2020, with organic sales growth of about 1.0% to 1.5% next year.

The company may be adjusting its spending post-Pinnacle. Selling, general and administrative expenses (includes advertising and promotional) fell by 24.1% to $370 million in the quarter. Conagra’s adjusted SG&A (excluding ads and promos) rose by 19.6% to $260 million, which was said to be primarily due to additional Pinnacle-related expenses.

The guidance for 2020 went down one cent to $2.07 to $2.17 per share (from a prior $2.08 to $2.18 range), but it has completed the divestiture of its DSD snacks business and has already completed the sale of its peanut butter manufacturing facility in Streator, Illinois. For that one cent per share change in guidance, Conagra had entered into a definitive agreement to divest its Lender’s bagel business after the end of the reported quarter.

What may have happened is analysts just did not adequately factor in or plan for the merger. Sometimes the analyst community overshoots on synergies and combined sales in multiyear forecasts, but it appears that the investing community undershot here.

Conagra’s roughly 488 million average diluted shares at quarter-end was up by 67 million shares from a year earlier in connection with its buyout of Pinnacle. At the same time, net income increased 98.0% to $261 million on a net basis but rose by 8.3% to $306 million on an adjusted basis. Conagra noted that its gain in adjusted net income was attributable to the addition of Pinnacle’s operating profit, followed by the benefits of cost synergies and by a rise in organic net sales, while the decrease in adjusted earnings per share was primarily driven by the higher diluted shares outstanding.

Again, it is very difficult for analysts and investors to hit a bullseye when it comes to targeting companies going through mergers or divestitures. Included in the $0.53 diluted EPS (not adjusted, but rounded on after-tax basis) from continuing operations for the second quarter were the following items (with “approximately” and “per diluted share” removed from each item):

• $0.06 of net expense related to restructuring
• $0.05 of net expense related to an impairment of the Lender’s business, which is now classified as an asset held for sale
• $0.02 of net benefit related to a contract settlement gain
• $0.01 of net expense related to environmental matters
• $0.01 of net tax benefit related to unusual tax items
• $0.01 of negative impact due to rounding

The adjustments added up to even more per share for the $0.32 diluted earnings back in 2019. Sean Connolly, president and CEO of Conagra, said:

Our second quarter results reflect solid execution in applying the Conagra Way playbook across our portfolio. We maintained our strong momentum in frozen and snacks. We also made good progress on our large grocery brands, Hunt’s and Chef Boyardee, both of which made sequential improvements. We also continued to make very good progress on the Pinnacle integration, and we remain squarely on-track with our plans to improve key Pinnacle brands… Our expectation for fiscal 2020 remains that first-half investments will result in strong second-half performance. The second-half is when we expect to see the greatest impact from new frozen and snacks innovation, continued smart promotional support in key grocery brands, the ongoing implementation of our Pinnacle action plan, and synergy capture.

Shares of Conagra Brands were last seen up 18.7% at $34.50 midday Thursday. It had already seen 16.4 million shares shortly before noon, and that’s a four-times volume spike. Conagra’s consensus analyst target price from Refinitiv was $31.47 ahead of the report, and its shares hit a new yearly high of $34.73. It seems almost impossible to imagine that this was a $22 stock just a year ago.

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