Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of General Mills (NYSE:GIS) were hardly reacting to the release of its first-quarter earnings report, as the results were pretty much in line with consensus estimates.

An investor does not invest in the company for short-term run-ups, but instead General Mills is a perfect addition to any long-term dividend-oriented investment portfolio.

First-Quarter Results

General Mills generated first-quarter revenues of $4.37 billion, up 8% on the year before, and ahead of consensus estimates of $4.30 billion.

Net earnings fell by 16.3% to $459 million, as diluted earnings totaled $0.70 per share. Last year's earnings included a $0.16 per share headwind, as General Mills had a $82 million benefit from the mark-to-market valuations of commodity positions, and a one-time tax benefit.

Adjusted earnings per share came in at $0.70 per share as well, being up 6% from last year's adjusted earnings of $0.66 per share. Earnings were in line with consensus estimates. CEO and Chairman Ken Powell commented on the start of the new year

In particular, our net sales growth in the quarter reflects a healthy mix of gains from established brands, strong introductory shipments for new products, and contributions from new businesses added to our portfolio. These first-quarter results have us on track to achieve the key financial targets we've set for fiscal 2014.

Looking Into The Results..

Revenue growth was entirely driven by volume growth of 8%, which on its turn has been driven by acquisitions. Increased prices and a changed selling mix added 1 percent point in revenues, while adverse foreign currency moves shaved off 1 percent point.

U.S. retail revenues rose by 3.6% to $2.58 billion, as operating earnings rose by 6.4% to $611.9 million. Already fat operating margins inched up another 60 basis points to 23.7% of total sales, driven by the success of its premium brands. The company's focus areas, which includes snacks, natural and organic baking, cereals and yogurts all performed well.

International revenues were up by 21.7% to $1.32 billion. Operating profits stagnated around $125.6 million, which resulted in a 210 basis point compression in operating margins to 9.5%. Growth was driven by acquisitions, as will be discussed later. The acquired businesses had lower gross margins, which explains the margin compression to a large extent.

Convenience stores reported a 0.8% fall in revenues, totaling $467.8 million. Operating earnings rose by 9.5% to $74.1 million as margins rose by 140 basis point to 15.8% of sales.

..And Ahead Towards 2014

General Mills sees sales and earnings growth in 2014 being consistent with the long-term business model. So most likely, sales will increase in their mid-single digits.

Adjusted diluted earnings per share are seen between $2.87 and $2.90 per share.

Valuation

General Mills ended its first quarter with $758.9 million in cash and equivalents. The company operates with $8.25 billion in total debt, for a net debt position of around $7.5 billion.

At this pace, annual revenues could come in between $18 and $19 billion. Adjusted earnings could approach the $2 billion mark.

Trading around $49.50 per share, the market values General Mills around $32 billion. As such operations, excluding debt, are valued around 1.7 times annual revenues and 16 times annual earnings.

Investors are lured into General Mill's stock as it pays out a quarterly dividend of $0.38 per share, for an annual dividend yield of 3.1%.

Some Historical Perspective

General Mills has created a lot of value for its shareholders in recent years. Shares have steadily doubled, increasing from levels around $25 per share in 2004, to recent all-time highs around $53 per share. As a matter of fact, shares have returned some 23% already this year.

Between the fiscal year of 2010 and 2013, General Mills has increased its annual revenues by a cumulative 21% to $17.8 billion. Net earnings rose by a similar percentage to $1.85 billion, as modest share repurchases have reduced the shareholder base by a few percent.

Investment Thesis

General Mills is showing some healthy growth, driven by modest acquisitions as well as genuine growth induced by new product introductions.

The company has introduced products with a focus on health and wellness including Yoplait Greek yogurt, Soft-baked Oatmeal Squares, Honey Nut Cheerios Medley Crunch cereal, and gluten free Pillsbury dough products.

Small acquisitions, such as that of Yoki Alimentos in Brazil and Yoplait in Canada has added some 5% to revenue growth over the past quarter. These additions spurred international sales growth to 22% over the past quarter. General Mills paid some $857 million for Yoki back in May of 2012, establishing a base in South America.

Note that the year-on-year decline in corn prices does create some headwinds for General Mills. Yet the company still sees annual cost inflation as the prices of other commodities have increased by on average some 3%, driven by higher diary prices, among others.

Overall, General Mills is a great company with a great history of building the business and in the meantime creating significant shareholder value. After witnessing year-to-date returns of some 23% shares have lost a great deal of appeal, at least for the short to medium term.

That being said, investors should invest in General Mills for the long term. Trading around 16 times earnings, the valuation seems fair. The solid organic revenue growth, strong margins and appealing dividend yield are all reasons to hold on to the stock. Note that the company is well-positioned as it is a relative early adopter of healthiness and organic foods, and has relatively well-diversified operations.

General Mills is a great addition to any "very" long-term dividend portfolio, paying out 3.1% at the moment. Don't expect great short-term returns, but if management continues at this pace, shareholders should expect fair long-term returns.

The company has an excellent track-record to create long-term value.

Source: General Mills - Solid Dividends Drive Long-Term Value Creation