I haven't felt all that adamantly positive or negative about General Mills (NYSE:GIS) for a while now. While the company has some definite positives in its favor (a history of innovation and good international growth potential), it is also struggling with weak volumes and share loss in key categories. With the price close to fair value and an uncertain retail strategy in the United States, I'd still just as soon own other stocks in the consumer staples area.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Another Good News, Bad News Type of Quarter
General Mills certainly did some good things this quarter, but once again there are some dark clouds on the horizon that can't (or shouldn't) be ignored.

Revenue rose almost 6% this quarter, with organic growth of around 2% on flat volume. U.S. retail sales rose about 2%, with all of that from volume. International sales were up a strong 19%, and I'd estimate that organic sales were up in the mid- to high-single digits. Last and least, the company's bakeries and food service business saw a 1% revenue decline.

Gross margin was surprisingly soft, up only a fraction of a point from last year and more than half a point below analyst expectations on grain costs and dilution from the Yoki deal. Operating income was up 9.8%, though, and the operating margin of 19.6% was more than a half-point better than expected due in part to reallocating spending from advertising to merchandising.

SEE: Analyzing Operating Margins

Share Data in the U.S. Is a Little Worrisome
Including Nielsen data in the due diligence process for food companies can be helpful in terms of telling you where market shares are heading, but it's worth noting that the correlations between that data and near-term financial (or stock) performance are not always as high as you might think.

To that end, General Mills' quarter was decent, even though the share data hasn't been looking so strong. The company seems to be losing some share to Kellogg (NYSE:K) in cereals and Campbell Soup (NYSE:CPB) might be regaining a little momentum in its namesake category. Kraft Foods (Nasdaq:KRFT) seems to be grabbing some share from General Mills' Hamburger Helper business, and while the yogurt business seems to have stabilized for now, it has stabilized at a pretty unimpressive level.

It's also worth noting that all of General Mills' merchandising and promotional efforts have still just resulted in flattish volume and modest price leverage. I don't want to overstate this, nor do I want to suggest that other packaged food companies like Kellogg, Kraft Foods or Campbell Soup are reporting great organic growth trends. Nevertheless, I think it's worth noting that there's just not that much momentum in the U.S. retail business, or at least it's not immediately apparent.

Sounds Like Business Conditions Are Still Challenging
I'd say that General Mills' management was basically positive but cautious on the call. Even though a lot of the company's commodity inputs are under control, it sounds like the gross margin could still be under some pressure for a couple of quarters. At the same time, the company pointed to a lot of uncertainty in the market - a little disappointing when you consider that the argument for consumer staples companies like General Mills is that they usually experience less economic volatility than other sectors.

SEE: A Guide To Investing In Consumer Staples

The Bottom Line
With most packaged foods companies struggling to break free of the one-to-one elasticity of price and volume, I'm not all that excited about very many stocks in this sector. Kellogg and Nestle (OTC:NSRGY) are perennial favorites for me, but neither are so cheap as to be must-buys. Likewise, I'm not that impressed with the valuation on beverage and snack companies like Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP), and most of the beer and spirits companies carry healthy valuations as well.

For General Mills, I continue to believe that mid-single digit free cash flow growth is a reasonable expectation for the future, as good growth opportunities in foreign markets offset the slower growth and increasing private label penetration in North America. All in all, that works out to a fair value in the low-to-mid $40s, which isn't terrible (especially with a dividend yield in excess of 3%) but also isn't terribly compelling at today's price.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  2. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  3. Investing

    Where to Ride Out the Volatility

    The one word that characterizes financial markets today: volatile. Take a look at these three considerations.
  4. Stock Analysis

    From Shampoo to Soup, Unilever Has it Covered (UL)

    Open your fridge, your pantry, your bathroom cabinet and you'll find the Unilever logo. Here's how the company got so enormous.
  5. Stock Analysis

    JNJ vs. PG: Which is the Better Bet Right Now?

    These two stocks are long-term powerhouses, but one has the edge over the other right now.
  6. Economics

    3 Charts All Investors Should See

    Given the abysmal start to the year, the defining question is whether this is another painful but temporary correction, or the start of a bear market.
  7. Fundamental Analysis

    Consumer Discretionary Vs. Consumer Staples in 2016

    Learn why understanding the seasonal tendencies of consumer discretionary and consumer staple sectors will help improve investors' portfolio performance.
  8. Stock Analysis

    3 Consumer Stocks for Income Seekers in 2016 (AAPL, CALM)

    Learn about the current environment facing consumer stocks and where to search for yield and capital gains within the consumer sector for 2016.
  9. Economics

    Has IKEA Reached 'Peak Curtains?'

    An IKEA executive made a comment that would have rankled investors (were IKEA not privately held). Here's what he (probably) really meant.
  10. Stock Analysis

    Should You Steer Clear of GoPro (GPRO)?

    Is the GoPro growth story over or is there still gas in the tank?
  1. What happens if a company's earnings fall short of estimates?

    Companies try very hard to not miss their earnings estimates, but it does happen from time to time. These missed earnings ... Read Full Answer >>
  2. How can I access a company's earnings report?

    One of the most important tools in the arsenal of the fundamental investor is the company earnings report. The earnings report ... Read Full Answer >>
  3. What is the difference between earnings and income?

    The differences between earnings and income change depending on the context. Technically speaking, personal earnings are ... Read Full Answer >>
  4. How does a share premium account appear on a balance sheet?

    A share premium account shows up in the shareholders’ equity portion of the balance sheet. The share premium account represents ... Read Full Answer >>
  5. How do I use a rollercoaster swap?

    A rollercoaster swap is the name for a swap (the exchange of one security for another) with a notional principal that differs ... Read Full Answer >>
  6. What are defensive stocks?

    The term defensive stocks is synonymous to non-cyclical stocks, or companies whose business performance and sales are not ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center