General Mills upped its forecast for annual earnings today (19 December) after an increase in half-year profits. However, the US food giant’s outlook was cautious and some on Wall Street were unsure about the company’s immediate prospects.
Jonathan Feeney, analyst at Janney Montgomery Scott
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General Mills reported 2Q13 EPS of $0.86 compared to consensus $0.79 and our $0.80 estimate. Net sales increased 5.6% versus our +5.2% estimate. While year-to-date free cash flow realisation of 102% (vs. 95% in 1H12) has been excellent, we note that Q2 volume (flat year-on-year) and ad spend (lower year-on-year, -1% in US Retail) trends undermine visibility. We currently project FY13 free cash flow to end up around 115% of net income. Despite the company’s leading shares positions in attractive categories, we see continued risk to numbers, as it is unclear that the causes of the prolonged volume softness have been addressed, particularly noting the recent deceleration in relative ad spend.
Sanford Bernstein analyst Alexia Howard
At present, the company seems to be hitting its bottom line financial guidance solidly. However, organic sales growth remains sluggish, mainly due to competitive dynamics in US cereals and yogurt. Since these are the two largest categories in the US, it will be important for the company to stabilise and begin to reverse these trends based on strong innovation early in 2013 without triggering further price actions by competitors. We see more risk here than for other companies that are facing less intense competitive pressures. We continue to rate General Mills market-perform with a target price of $38.
Chris Growe, analyst at Stifel Nicolaus
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By GlobalDataThe company increased its EPS guidance to a range of $2.65 – $2.67 from $2.65, not fully reflecting this quarter’s earnings beat. This guidance considers higher rates of inflation, a potential Venezuela currency devaluation, and a higher tax rate. Overall sales grew 6% in 2Q13 which was predicated on a significant lift from international, in part due to acquisitions, alongside positive sales growth at US Retail and a slight decline at Bakeries and Foodservice. Notably, US Retail posted positive volume growth for the first time in seven quarters. US Retail profits were the much stronger than we expected, up over 9%. International profits included a $17 million transition expense for Yoplait Canada and would have grown 14% vs. the +1% reported. We continue with our Buy rating and target price of $43 (under review) which we derive by applying a 15X multiple to our 2013 EPS estimate. We believe the company does not warrant its current discount to its large cap peers based on our view of the future growth prospects in place.
Barclays Capital analyst Andrew Lazar
Organic sales rose 2% year-on-year in the quarter versus our forecast of a 3% increase, we estimate on flat volume and +2 pricing. On a segment basis, US retail volume rose 2% a bit better than our forecast though against a -7% result last year, while price was flat. Interestingly, sales of snacks and meals recorded gains, while yoghurt, cereal and baking were still down year-on-year. US retail EBIT rose 9%, well above our estimate and consensus, though part of the upside likely comes from lower (-1%) advertising spend in the quarter. Bakery and foodservice EBIT was also well above our estimate due to lower grain costs, while EBIT in international was below our forecast, though primarily due to the inclusion of a $17m investment to transition Yoplait Canada.
Despite the $0.08 beat, GIS raised its FY13 EPS guidance from a point estimate of $2.65 to a range of $2.65-$2.67 – which implies lower EPS in fiscal 2H than Consensus currently expects. While we believe investors could well take issue with the makeup of the EPS result, given Yogurt and Cereal are still weak, and advertising was again lower YOY, we’d note that expectations were already fairly subdued (given weak scanner data) and visibility to the full year is now enhanced.
Morningstar analyst Erin Lash
The packaged food firm raised its full-year adjusted earnings per share guidance to a range of $2.65-$2.67 (from approximately $2.65 previously) but numerous headwinds loom in the back half of its fiscal year. Management called out elevated commodity cost pressures, increased taxes, and a potential devaluation in Venezuela as likely challenges over the next six months. We continue to believe that with a strong brand portfolio and an extensive global distribution platform, the company should ultimately withstand current pressures.
Despite the pressures created by raw material inflation, which management now anticipates will come in near the high end of a 2%-3% full-year target in light of recent drought conditions in the United States and abroad, even though it is 90% hedged for the full year, General Mills posted profit improvement. The adjusted gross margin ticked up 20 basis points to 36.7% and the adjusted operating margin expanded 50 basis points to 18.1%. However, we expect that General Mills’ stringent focus on cost management and increased scale in developing markets should enable it to manage through these challenges and expand margins to nearly 18% by fiscal 2017, up from an adjusted margin of 16.7% in fiscal 2012 and in line with fiscal 2011.
Management again commented this quarter that total marketing spending (which was down 3% from the prior-year period) was weighed toward in-store promotional support. While we understand that this spending is essential as it brings a rash of new products to market, we were hoping that this trend would reverse during the quarter. From our perspective, promotional spending is not a sustainable or profitable long-term strategy, and we’d prefer to see General Mills invest behind the advertising support of its brands.
