General Mills Versus Kellogg: Finding The Breakfast Producer Of Champions

| About: General Mills, (GIS)
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General Mills (NYSE:GIS) and Kellogg Co. (NYSE:K) are two of the most well-known processors of breakfast foods worldwide. Both have an impressive lineup of cereals and snacks. People grow up with these cereals, and associate the brands with fond memories from their childhood. However, key fundamentals and growth rates show there is only one breakfast (producer) of champions.

Key Fundamentals: General Mills has a net free cash flow of $1.48 compared to Kellogg's $1.08. Net profit margins are 1% higher for GIS and their debt is significantly lower. Kellogg has a higher return on total capital at 21% compared to 14.5% for General Mills. Analysts expect GIS dividend to grow 24% over the next 5 years against 20% for K.

Growth Rates: General Mills' growth rates outrank Kellogg's by a sizeable margin.

5 Year Compound Annual Growth Rates General Mills Kellogg
Dividends 10.8% 8.0%
Revenue 5.0% 3.9%
Earnings / Share 13.2% 6.1%
Total Return 7.7% 1.6%

These numbers paint a clear picture of the growth we can expect from these companies in the future. Particularly important to income investors is the significant increases in dividends from GIS over K. Earnings are more than double for General Mills and the total return speaks for itself.

NEWS: Kellogg's international operations included 33% of sales as opposed to General Mills' 19%. This is hurting Kellogg particularly in Europe where sales declined substantially last quarter, and currency issues further affected the bottom line. General Mills has a more balanced exposure oversees and this will help it stay afloat amid increasing turmoil in that region.

Kellogg acquired Pringles to increase its share in the snack business. This acquisition has potential, but it is unclear whether Kellogg had the necessary cash for this big purchase. While unlikely, if Pringles has difficulty bringing in revenue, Kellogg will face increasing pressure from their already heavy debt load.

Risks: General Mills has been struggling with commodity costs. Heavily exposed to wheat, if wheat futures continue to rise this will increase GIS's operating expenses, lowering their net profit margins. Also, their Yoplait yogurt business has been struggling due to skyrocketing sales of Greek yogurts. While these risks are significant, they also provide patient investors with a window of opportunity to get on board.

Pricing: General Mills has steadily risen over the last ten years. There have not been many opportunities for investors to get in at a steep discount.

General Mills Weekly Chart 6/13/12
(Click to enlarge)

A difficult summer may cause wheat futures to rise, bringing GIS to around the $35 price range. For investors not expecting to pick absolute bottoms, this would be an ideal price to start a position.

Looking at the Kellogg chart the stock price stability is not seen.

Kellogg Weekly Chart 6/13/12
(Click to enlarge)

Conclusion: General Mills outperforms Kellogg in several areas, particularly compound growth rates. For investors focused on retirement and dividend growth, General Mills stands out among food processors as a safe, steady, income generating position.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GIS over the next 72 hours.