“General Mills meanwhile, first quarter profit jumping more than half versus a year ago. Way ahead of expectations thanks to lower commodity costs and higher sales of Cheerios, Pillsbury cookie dough, et cetera… Boosted the full year forecast above the prior range and shares jumping quite a bit this morning.” — FBN’s Money for Breakfast 9/23/2009
General Mills (GIS) impressed the Street this morning with the home run of earnings reports, the beat and raise. Shares are surging more than 5%, as the packaged food giant was able to raise net income by 51% in the first quarter. EPS came in at $1.28 which beat consensus estimates by about $.25. The increased earnings were due not to huge sales gains, but rather improved margins from decreased commodity costs and other cost cutting measures.
Management emphasized continued strong consumer demand as General Mills was largely able to fend off private label products. Sales were just a little better than flat, but the company did raise its full year earnings projections by 20 cents to $4.40 to $4.45, which is again well ahead of consensus estimates of $4.26. General Mills has managed the recession with skill and clearly positioned itself to weather the storm, and they have beaten estimates in all but one report for the last to years. They have not raised prices in most of their product lines, but shrinking costs allowed gross margin to expand to 41.5% from 34.1%. Consumers are certainly staying home to eat more often (cereal makes a great cheap dinner), but in general they have not been tempted to trade-down from General Mills products to the often cheaper store brand, especially in regards to the all important cereal products.
At Ockham, we continue to believe that there is value in a stock like General Mills and we currently have an Undervalued rating on the stock. Although the company has not showed impressive sales gains, they are getting much better bang for each dollar of sales. Even still the stock looks attractive compared to historical price-to-sales per share valuation ranges. Over the past ten years, GIS has normally traded for between 1.7x and 2.2x sales, but the current ratio is only 1.36x. Furthermore, on price-to-cash earnings basis this stock also looks attractive. Historically, it has ranged between 13.6x and 17.5x, but the current figure shows the market awards GIS only 11.2x cash earnings. For these reasons, we think that even within spitting distance of an all time high, General Mills has further appreciation potential and could justifiably trade in the mid-$70’s.