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General Mills Continues Strong

Posted: Dec 23, 2009 08:25 AM by Greg Sushinsky

Tickers in this Article: CBY, CPB, GIS, K, KFT, RAH

Cereal maker General Mills (NYSE:GIS), driven by strong demand for its cereals and packaged food lines, posted strong second quarter earnings with a substantial profit increase. The company, which is best known as the maker of Cheerios and other well known cereals, racked up $565.5 million in net income in 2010's second quarter, compared to $378 million for Q2 in 2009. Diluted earnings per share rose from $1.09-1.66 from the same quarter a year ago. Even with charges excluded, the year-over-year comparison of the quarters was $1.54 for this year's Q2 vs. $1.36 for last year's. Revenues slightly increased to $4.08 billion for the quarter from $4.01 billion in last year's same quarter. The strong second quarter performance reinforced the company's strong showing for the first six-months of 2010.

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Recession Food or just Good Business?
In some commentaries about the General Mills' earnings, it was pointed out that, with the hard times in the recession, cheaper food such as cereal has become ubiquitous at meals, including dinner for some. While the serious social problems with families in financial trouble and the food banks' extensive use of cereal products was cited, the brother-can-you-spare-some-Cheerios? interpretations argued that financially strapped consumers have traded down to cereal for dinner.

While the versatility of cereals was acknowledged by Ken Powell, Chairman of General Mills, he seemed reluctant to accept this interpretation and instead focused on the nutritional versatility of the cereals, as well as lower commodity prices and the strength of the brands for the company's success. Other food companies, such as Campbell's Soup (NYSE:CPB) featuring less expensive packaged foods have noted consumers trading down, but there has been no stampede to serve only soup for dinner, as margins and cost-management, not sales, has been the driving force for earnings. (Learn more about defensive stocks, see: Guard Your Portfolio With Defensive Stocks.)

Other Cereal Makers
Kellogg's (NYSE:K), General Mills' latest rival, is also doing well, and was cited as a stock to buy recently by a money manager interested in getting ahead of inflation. Kellogg's, like General Mills, has also moved to reduce the sugar content in some of its cereals for health reasons, something which may be met with more enthusiasm - by parents rather than kids. But another cereal maker, Ralcorp (NYSE: RAH), which has the Post brands, has had a tougher time recently, due to poor performance of its private label products, though its stock repurchase plan may give it a boost.

Other Food Packagers
While General Mills and Kellogg have found the cereal sweet spot and both operations are running along smoothly, giant food maker Kraft (NYSE:KFT) is entangled with what has to be the messiest takeover deal of the year, with its attempt to subdue Cadbury (NYSE:CBY). The Kraft-Cadbury throw down doesn't look like it's going to be resolved any time soon.

The General Mills Advantage
Recession aside, General Mills, and Kellogg, too, are strong fundamental companies that continue to execute their businesses successfully, regardless of recession, recovery or good times. General Mills increased its dividend during the recession, and recently announced an increase again. The company and its predecessor company have paid dividends for over 100 years. Kraft, by contrast, lowered its dividend during the recession.

General Mills stresses the continuing strength of concentrating on delivering net sales growth, operating profits and shareholder returns. That's really unexciting, mundane stuff to talk about, but it's exciting when they deliver, which they historically do. From all accounts, it looks like General Mills should continue to do so. General Mills stock is a better grower than you might expect. Bought at a good price, it is a classic fundamental long-term winner.

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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