Investors in General Mills (GIS) hardly reacted on the back of a slightly disappointing second quarter earnings report, as the company maintained its full year earnings outlook.
General Mills is not a stock suited for short term trading, but continues to be a nice addition to a long term, dividend-oriented investment portfolio.
Second Quarter Results
Last week, General Mills released its results for the second quarter of the fiscal year of 2014. Important to notice in these results is that Thanksgiving was not included in this year's second quarter, while it was in included in last year's results.
Total revenues came in at $4.88 billion, essentially unchanged compared to last year. Revenues fell slightly short compared to consensus estimates at $4.95 billion.
Despite the flattish revenues, the company did manage to squeeze out a bit of earnings growth, with earnings attributable to shareholders increasing by 1.5% to $549.9 million.
On the back of share repurchases, earnings per share growth was quicker, with earnings increasing two pennies to $0.84 per share. Adjusted non-GAAP earnings came in two cents higher. Analysts were looking for earnings of $0.88 per share.
CEO and Chairman Ken Powell commented on the developments, "The second quarter was a difficult comparison to strong prior-year sales and earnings results for our businesses. In addition, the period included the highest quarterly input cost inflation we expect to see this fiscal year, and food and beverage industry sales in the U.S. and other developed markets slowed a bit during the quarter. Even so, our bottom-line results through the first half of the year are broadly consistent with our plans."
Looking Into The Results..
Reported flat revenue growth was aided by prices and the mix which added 1% to revenues, offset by foreign currency headwinds shaving off a similar percentage in reported revenues.
The company did manage to boost margins a bit. Gross margins rose by 40 basis points to 36.1% of total sales on favorable commodity price movements. At the same time, the company managed to reduce selling, general & administrative costs by 40 basis points to 18.7% of total revenues.
US retail sales fell by a percent point to $2.97 billion, making up the majority of reported revenues. Revenues were under pressure on lower volumes. The international activities continue to be appealing in terms of growth, reporting net 2% revenue growth to $1.40 billion. Revenues were driven by solid pricing and volume growth, offset by 3% currency headwinds.
The convenience stores and foodservice reported revenues of $507 million, down 2% compared to last year due to pressure on the mix and pricing.
..And Looking Ahead
Earnings growth for the second half of the fiscal year is expected to accelerate from the first half. The innovation and marketing plans include many new products introduction in the second half, while input-cost inflation will further ease. The company furthermore notes that comparables will be easier in the second half of the year.
Adjusted full year earnings per share are still seen between $2.87 and $2.90 per share, yet currency headwinds will be a bigger headwind than previously anticipated.
General Mills ended the quarter with $774.2 million in cash and equivalents. Total debt stands at $8.64 billion, for a net debt position of $7.87 billion.
Revenues for the first six months of the year came in at $9.25 billion, up 3.5% on the year before. Reported earnings fell by 7.5% to $1.01 billion.
At this pace annual revenues are seen around $18 billion, with earnings seen around $1.9-$2 billion. Trading around $49 per share, the market values the company at $30.5 billion. This values equity of the firm at 1.7 times annual revenues and 15-16 times annual earnings.
The quarterly dividend of $0.38 per share provides investors with an annual dividend yield of 3.1%.
Some Historical Perspective
Long term investors in General Mills have seen great long term returns, partially driven by 2013's momentum. Shares have steadily risen from levels around $25 in 2007 to highs of $40 in 2012. Following solid momentum this year, shares currently trade at $49 per share, for year to date returns of 22%. During the summer, shares peaked at $53 per share.
Between 2010 and the fiscal year of 2014, General Mills is expected to increase its annual revenues by nearly a quarter to levels above $18 billion. Earnings growth has been solid as well, with earnings approaching the $2 billion mark. Modest share repurchases added to earnings per share growth.
General Mills was not really happy with the second quarter performance, citing input cost inflation at the highest level expected for this fiscal year. On top of that was the slower growth in the food and beverage industry in the US and other developed markets, as well as adverse currency moves. Cheaper private labels continue to gain ground at the same time around the world, with consumers saving on food expenditures.
Back in September, I last took a look at the prospects for General Mills. I concluded that acquisitions and genuine growth driven by product innovations were aiding revenue growth. Now, slower growth and adverse foreign currency movements are limiting reported revenue growth. Some of the introductions are the Yoplait Greek yogurts, oatmeal squares and gluten free Pillsbury dough products.
Last year, General Mills already announced the $857 million acquisition of Yoki Alimentos, but as the company has been consolidated in the result for over a year now, revenues are no longer showing a big jump. Yet the company continues to boost cash flows to shareholders. The dividend yield of 3.1% represents a roughly 50% payout ratio which is quite high. Yet investors receive even greater implicit payments through share repurchases. In the first half of the fiscal 2014, the company repurchased $864 million worth of shares, at a rate of $1.7 billion per year, or 5.6% of the current market capitalization.
While combined payouts in terms of dividends and repurchases approach 9%, this is not sustainable as these cash flows exceed earnings by a comfortable margin, adding to the debt position.
While these payouts are great at the moment, and fuel momentum to some degree, the company is increasing its debt position. While the valuation is still justifiable, the strong capital growth prospects have diminished as investors more have to look for current yield in terms of dividends for their returns going forwards. At the same time, General Mills has been an adopter of healthy and organic foods, on top of its diversified operations, warranting some sort of a premium valuation.
Don't expect great short-term returns, but if management continues at this pace, shareholders should expect fair long-term returns.