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.
IN PICTURES: 8 Tips For Starting Your Own Business

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!