The investment theme in nearly every recession is to buy companies that sell stuff people can't live without. As a leading consumer brands competitor, General Mills (NYSE:GIS) easily falls into that category. Generally speaking, most blue-chip consumer brand behemoths are safe plays. However, not all are created equal. Selecting the top performer can translate into greater return on investment in the long run.
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Investors warmly welcomed General Mills' first quarter earnings earlier this week by sending shares higher. But a recent downgrade by Goldman Sachs draws the question, does the company possess the same long term growth potential as its closest rivals? (For more on analyst expectations, be sure to read Analyst Recommendations: Do Sell Ratings Exist?)

Assessing the Quarter
The first-quarter results don't accurately reflect the company's year-over-year performance. Sales seemed mediocre, rising just 1%. But this is because of very strong sales last year achieved through increasing prices. In 2008, consumer good companies across the board raised prices to fight off dramatic inflationary pressures caused by the commodity boom. Price increases were heavily used to ward off severe margin contraction.

Which leads to the next point; the drastic margin improvement was not so impressive. Sure, the cost of goods sold fell 10.6% and resulted in a gross margin of 41.5%, up from 34.1% last year. But that's only because of the combination of a commodity bust and the sustaining the higher prices implemented last year. In other words, prices remained high from last year's initiatives while input costs dropped.

To sum up the first quarter, the results were not noteworthy - particularly because the comparisons are difficult, due to different strategic moves taken as the economy shifted from inflationary bubble to recession.

Staying Neutral
On an overall basis, Goldman Sachs' newly established neutral position on the stock looks good. General Mills boasts a globally-renowned name, and its extensive portfolio of brands have proven very successful in retail outlets. The company is a stable and safe investment. Yet, as Goldman noted, the company is lacking in an area that's a driving force of future sales: emerging markets.

Rivals Kraft (NYSE:KFT), Proctor & Gamble (NYSE:PG) and Heinz (NYSE:HNZ) have a much stronger foothold in underdeveloped nations. In the U.S., domestic growth, for the most part, must be achieved via stealing market share from rivals based on price and innovation. However, in emerging markets like China, the rapidly-growing middle class is transitioning from mom and pop markets to larger hypermarket shopping where global brands line the shelves. Grabbing market share in emerging markets is easier right now, as demand for global consumer goods are growing alongside increasing incomes. By not capitalizing on this growth, General Mills may find itself falling behind its competition.

The Longer-Term Picture
It's refreshing to know that management is reinvesting some of its 2010 earnings into a consumer marketing program. General Mills sees opportunity to capitalize on the "trading down" trend that's sweeping America, as price-conscious consumers turn to home cooked meals in order to save money.

The Bottom Line
Companies that have the capital to invest in brand building like this during recessions are better able to position themselves for the future. By generating 22% more net operating cash flow this past quarter, General Mills has adequate cash to expend. However, the "trading down" trend could likely reverse itself as the U.S. economy emerges from the recession. From a long term buy and hold standpoint, I'd prefer to see a more concentrated effort to overseas development before considering a position.

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