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Has Your Portfolio Had its Wheaties

|Includes: General Mills, Inc. (GIS)
The makers of “The Breakfast of Champions” have recently become the Champions of Breakfast. General Mills reported earnings of $1.25 per share on September 23rd that blew out analyst expectations of $1.02. Part of the beat was the 11% decrease in the costs of sales, which is attributed to lower commodity costs. But unlike the majority of earnings reports lately, there was a quarterly increase in the top line of around 1% and a yearly increase of 21%.
The U.S. Sales division was the main contributor to the top line increase with a 5.8% increase in sales that was led by demand in Multi-Grain Cheerios, Totino’s Pizza Rolls and Fiber One snack bars. There was an increase in 6 out of the 7 divisions with the largest coming from Pillsbury at 12%. This demand increase shows diversity in their product line which will be very beneficial with the increase in competition from Post and Kellogg Co. in the Breakfast Cereal market.
General Mills increased their advertising and media spending by 16% in the most recent quarter and with the 21% increase in operating profits, they plan to bump it up quite a bit more over the next 12 months.
A large focus for General Mills has been their yogurt division which was up 4% in the recent quarter. They have increased advertising in Yoplait, General Mills yogurt brand, and also introduced a new weight management ad that targets Hispanic consumers. According to COO Ian R. Friendly the “U.S. yogurt market is young… and we see lots of opportunity to drive growth.”
Things were not totally sunny for General Mills. This quarter’s dark cloud is coming from international sales, which was down 4%, mainly due to an unfavorable currency exchange. Sales in Europe were off 12% driven mainly by the currency exchange, but were partially offset by the performance of Nature Valley in the U.K. and by France’s new found love for south of the border food with a good performance coming from Old El Paso.
Looking forward for General Mills is even better than hindsight. This is a company in which management has been not only effective in implementing cost cutting measures, but has also managed to have a diversified increase in sales in a very tough market. Even after all the great things I have told you above, there is even more good news. 2010 full year earnings were revised at $4.40 to $4.45, up from the previous estimate of $4.20 to $4.25 with the main risk to this being in commodity cost. With a current P/E at 14.89 and an estimated fair P/E ranging from 16-17, there is plenty of room to grow. With all of these combined factors, GIS should allow you to see a Green Giant in your portfolio returns.

Disclosure: Long GIS