General Mills (GIS) Up 1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for General Mills (GIS). Shares have added about 1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is General Mills due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

General Mills Q2 Earnings & Sales Beat Estimates

General Mills released second-quarter fiscal 2020 results, wherein adjusted earnings per share of 95 cents increased 11% year over year on a constant-currency (cc) basis. The bottom line beat the Zacks Consensus Estimate of 88 cents. The upside was fueled by reduced adjusted effective tax rate and net interest expenses as well as higher adjusted operating profit and non-service benefit plan income. These were somewhat offset by greater average shares outstanding.

Net sales of $4,420.8 million were flat year over year but beat the Zacks Consensus Estimate of $4,413 million. Organic sales climbed 1%, courtesy of strength in the Pet segment. Further, organic volumes grew 1%, while net price realization and mix were flat.

Adjusted gross margin expanded 80 basis points (bps) to 35.3% on the back of HMM savings and manufacturing leverage. Results were somewhat hurt by inflated input costs.

Adjusted operating profit came in at $813 million. The metric rose 7% at cc, courtesy of improved gross margin and reduced consumer promotional costs, partly negated by elevated media costs. Adjusted operating margin expanded 110 bps to 18.4%.

Segmental Performance

North America Retail: Revenues in the segment came in at $2,676 million, which was flat year over year. Organic net sales were also in line with the year-ago quarter’s level. Weakness in U.S. Snacks, U.S. Meals & Baking and U.S. Yogurt categories were offset by strength in U.S. Cereal. Sales in Canada were also flat year over year.

Convenience Stores & Foodservice: Revenues were in line with the year-ago period at $513.5 million, owing to growth in the Focus 6 platforms such as cereal, frozen baked goods and yogurt. This was countered by adverse index pricing of bakery flour and weakness in other non-Focus 6 products. Organically, sales were flat year over year.

Europe & Australia: The segment’s revenues declined 5% to $432.9 million due to unfavorable currency rates. Further, sales declined 1% year over year on an organic basis.

Asia & Latin America: Revenues declined 5% from the year-ago quarter to $409.6 million. The downside was caused by adverse impacts of divestitures in fiscal 2019 and currency headwinds. Sales rose 1% on an organic basis, thanks to improvements in Latin America and China, countered by softness in India.

Pet Segment: Revenues came in at $388.7 million, up 16% year over year on the back of volume growth as well as favorable net price realization and mix impacts.

Other Financial Aspects

The company ended the quarter with cash and cash equivalents of $560.2 million, long-term debt of $10,953.1 million and total shareholder equity of $7,712.3 million.

General Mills generated $1,456.6 million as net cash from operating activities in the first half of fiscal 2020. During the same time frame, the company made capital investments worth $158 million and paid dividends of $596 million.

Fiscal 2020 Guidance

Management expects organic sales to improve 1-2%. Moreover, net sales are expected to rise 1 percentage point, considering the impact from divestitures, currency translations and contributions from the 53rd week in fiscal 2020.

Adjusted operating profit (at cc) is expected to improve 2-4% from $2.86 billion in fiscal 2019. Also, the company envisions adjusted earnings per share (EPS) growth (at cc) of 3-5%. Currency translation impacts are expected to remain irrelevant on adjusted operating profit and the bottom line.

The company now estimates free cash flow conversion of minimum 105% of adjusted after-tax earnings.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, General Mills has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, General Mills has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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