“Down 112 points on the Dow Jones and only one making the 52-week high list, General Mills.” — CNBC’s Power Lunch 12/17/2009

General Mills (GIS) reported second quarter results that easily exceeded analysts’ expectations thanks in large part to declining commodity costs.  The packaged foods maker, known best for their cereals and Progresso soups, reported earnings of $1.54 per share excluding one-time items.  Analysts had projected earnings of $1.43.  Sales came in as expected at $4.08 billion, so it was improved margins that spurred the better earnings.  Lower commodity costs boosted gross margin by 4.1% in the quarter to an impressive 41.2%.  The company also benefited from better sales in high margin products such as Cheerios in the quarter.

The improved operating performance in the first half as well as “business momentum” prompted General Mills to lift guidance for the rest of the year as well.  Management guided forGIS EPS of $4.52 to $4.57 for fiscal 2010 which ends in May.  This pushes guidance above consensus analysts’ view of 2010 earnings of $4.50. 

On the very successful quarterly numbers, General Mills hit new yearly high prices during Thursday trading at nearly $70 per share, and based on our methodology may be headed even higher.  The stock is currently trading below its historically normal range of price-to-sales and price-to-cash earnings, and those fundamentals are trending higher.  Earnings have benefited from easing in commodity costs and any incremental gains in sales will really boost the bottom line.  That is one reason that General Mills has boosted its advertising budget by 37 percent in the quarter in an effort to drive growth higher.  More consumers are eating at home these days, so GIS hopes to steer more purchases towards their products.  The improved margin also gives General Mills more flexibility for promotions and discounts to build brand loyalty.

We continue to rate GIS as Undervalued despite the stock hitting new highs for the year.  According to our methodology, this stock should continue higher, possibly into the $80’s before too long.  General Mills continues to execute well and clearly this stock is headed in the right direction.

General Mills Churns Out Impressive Profits