Earnings Preview: General Mills Inc.

General Mills Inc. (GIS) is scheduled to report its third-quarter 2011 financial results on Wednesday, March 23, 2011. Currently, the Zacks Consensus Estimate is 56 cents per share and revenue is expected to be $3,708 million for the reported quarter.

Second-Quarter 2011, a Synopsis

General Mills’ adjusted earnings decreased 1.3% in the second quarter 2011 to 76 cents a share compared with 77 cents in the year-ago period. The quarterly EPS was also below the Zacks Consensus Estimate of 78 cents by 2.6%. Profits were impacted by higher commodity costs and higher levels of price promotion.

Total revenue for the quarter grew only marginally by 1% year over year to $4.07 billion. The quarter experienced volume growth, which was partially offset by reduced price realization and unfavorable mix. Revenues were also below the Zacks Consensus Estimate of $4.11 billion.

While revenue for the U.S. Retail segment were almost flat year-over-year declining negligibly by 0.3% to $2.85 million in the quarter, revenue at the International segment and the Bakeries and Foodservice segment grew marginally by 4.0% and 3.0% respectively.

Management Guided

At its last earnings conference call, Management reiterated its fiscal 2011 earnings in the range of $2.46 – $2.48 a share. Excluding mark-to-market effects and the tax charge related to health care legislation, the fiscal 2011 earnings guidance reflects an annual growth of 7% – 8%.

Third-Quarter 2011 Zacks Consensus

Analysts covered by Zacks expect General Mills to post third-quarter 2011 earnings of 56 cents a share. The current Zacks Consensus Estimate represents a year-over-year growth of 14.3% and ranges from a low of 54 cents to a high of 58 cents.

The current estimate did not change over the last 30 days even though 4 out of 19 analysts downgraded their estimates.

Mixed Earnings Surprise History

With respect to earnings surprises, General Mills has outpaced the Zacks Consensus Estimate by an average 1.10% over the last four quarters, ranging from negative 2.56% to 4.26%.

Our Recommendation

General Mills outlined its five-year growth plan of achieving a compounded annual growth rate (CAGR) of 8% in earnings per share, driven by a 4% CAGR in revenue and 5% in segment operating profit, compared with the fiscal 2010 levels. Moreover, through holistic Margin Management (HMM) program the company manages costs and abates inflation, thus improving margins and gaining over its peers. Currently the company anticipates $1 billion of cost saving from HMM program over the next three years and $4 billion over the next 10 years. However, company faces intense competition from its rivals, such as Kraft Foods Inc., Unilever, Tyson Foods Inc. Consequently, the company is under severe stress to maintain profitability and increase market share. Again, recent consciousness related to low carbohydrate diets has slowed sales in several product categories, especially in the Bakeries and Foodservice segment.

General Mills, which faces stiff competition from Kellogg (K) and Seneca Foods Corp. (SENEA), currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, with a short-term Hold rating.

GENL MILLS (GIS): Free Stock Analysis Report

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