General Mills (GIS) Up 3.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for General Mills (GIS). Shares have added about 3.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is General Mills due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

General Mills Beats on Q3 Earnings & Sales, Updates View

General Mills reported third-quarter fiscal 2019 results. The company’s adjusted earnings per share of 83 cents advanced 6% year over year on a constant-currency (cc) basis. The bottom line beat the Zacks Consensus Estimate of 69 cents. The reported earnings were fueled by an increase in adjusted operating profit, which was somewhat offset by escalated interest costs, effective tax rate and average shares outstanding.

Net sales of $4,198.3 million improved 8% year over year, mainly backed by gains from Blue Buffalo. At cc, the top line rose 10% from the prior-year quarter. Also, organic sales inched up 1% from the year-ago quarter, driven by positive net price realization and mix, somewhat offset by lower volumes. The top line surpassed the Zacks Consensus Estimate of $4,177 million.

Adjusted gross margin expanded 170 basis points (bps) to 34.2%, owing to cost savings and gains from mix, net price realization and Blue Buffalo. However, these upsides were countered by higher input costs.

Adjusted operating profit of $730 depicted 25% year-over-year growth at cc, driven by improved sales and adjusted gross margin. Adjusted operating margin increased 230 bps to 17.4%.

Segmental Performance

North America Retail: Revenues in the segment came in at $2,518.6 million, flat year over year. The company witnessed growth in U.S. Cereal and U.S. Meals & Baking operating units. However, this upside was mitigated by sluggishness in Canada, U.S. Snacks and U.S. Yogurt. Organic sales in the segment recorded modest growth.

Convenience Stores & Foodservice: Revenues edged up 3% year over year to $472.5 million. Growth in Focus 6 platforms including frozen meals, baked goods, snacks and yogurt had a positive effect on the segment’s results. However, the upside was countered by weakness in bakery flour. Organically, sales rose 3% from the year-ago period.

Europe & Australia: On a year-over-year basis, the segment’s revenues declined 8% to $432.7 million due to unfavorable currency impacts. Further, sales declined 2% year over year on an organic basis. Lower sales for Yoplait yogurt and an unfavorable impact of a persistent challenging retail landscape in France led to the downside. However, the decline was somewhat offset by double-digit growth in snack bars and Haagen-Dazs ice cream.

Asia & Latin America: Revenues declined almost 2% from a year ago to $427.7 million due to unfavorable currency movements, and headwinds from the sale of La Saltena fresh pasta and refrigerated dough business in Argentina. However, sales rose 7% on an organic basis. Pillsbury, Nature Valley snack bars, Haagen-Dazs ice cream and Wanchai Ferry frozen dumplings were some of the products that performed well in the segment.

Pet Segment: Revenues came in at $346.8 million. Sales in the segment grew 4% year over year on a pro-forma basis, thanks to growth in Food, Drug, and Mass (FDM) and e-commerce channels. The growth was partly offset by declines in the Pet Specialty channel.

Other Financial Aspects

The company ended the quarter with cash and cash equivalents of $547.1 million, a long-term debt of $11,642.6 million, and total shareholder equity of $6,930.4 million.

General Mills generated $2,027.6 million as net cash from operating activities in the first nine months of the fiscal year. During this period, the company made capital investments worth $368 million.

General Mills paid dividends of roughly $884 million on a year-to-date basis.

Other Developments

Constant-currency sales from joint ventures of Cereal Partners Worldwide inched up 2% in the third quarter, while the same fell 5% from the prior-year period at Haagen-Dazs Japan.

Fiscal 2019 Guidance

Management anticipates Blue Buffalo's sales and segment operating profit to grow at a significant pace in the fourth quarter, thanks to distribution expansion in the FDM channel. Quarterly results from base business are likely to be hurt by year-over-year comparison, including robust quarterly performance of the last fiscal year. The company is currently focused on Consumer First strategy, cost-reduction initiatives and focus on global growth to boost sales momentum.

Driven by year-to-date performance and fourth-quarter projections, General Mills revised its guidance for fiscal 2019. Management now expects organic sales to come toward the lower end of its previous guided range of flat to up 1%. Net sales are also projected to come toward the lower end of 9-10% growth on cc basis, including the impact of Blue Buffalo’s buyout. Currency translations are expected to weigh on net sales by 1-2 percentage points.

Adjusted operating profit (on cc basis) is expected near the upper end of its earlier projected range of 6-9% growth compared with $2.6 billion recorded in fiscal 2018. The company envisions adjusted earnings per share (on cc basis) growth in the range of flat to up 1% from the fiscal 2018 figure of $3.11. Earlier, it anticipated adjusted earnings per share (on cc basis) growth in the range of 3% decline to flat.

It estimates free cash flow conversion of minimum 105% of adjusted after-tax earnings, higher than the earlier expectation of at least 95%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.5% due to these changes.

VGM Scores

At this time, General Mills has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, General Mills has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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