Tasty Return Potential From General Mills

By Ryan C. Fuhrmann | December 26, 2011 AAA

Packaged food firm General Mills (NYSE:GIS) continued to see its near-term profits dented by higher food and raw material costs, but a major acquisition helped boost the reported top line significantly. Looking out over the long haul, the firm offers investors very respectable annual return potential and solid downside protection.

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Second Quarter Recap
Net sales advanced 13.7% to $4.6 billion. Of that increase, 8% stemmed from the purchase of a controlling interest of 51% in Yoplait, a leading French yogurt brand sold throughout the world. Organically, modest price and volume growth boosted the top line, as did a 1% increase from positive currency fluctuations on international sales. Geographically, the U.S. retail segment grew 3% to $2.9 billion, or 63% of total sales. The international segment reported 55% growth to $1.2 billion, most of which was due to the Yoplait purchase. Bakery and food service, which sells to convenience stores and supermarket bakeries such as Casey's General Stores (Nasdaq:CASY) and The Kroger Co. (NYSE:KR), reported an 11.7% sales increase to $522.2 million.

Higher sales costs lowered reported operating profit by 12.9% to $716.9 million while higher income taxes contributed to a 27.5% drop in net income to $444.8 million, or $0.67 in earnings per diluted share. Backing out Yoplait integration costs and tax-related adjustments, management estimated earnings were flat at $0.76, compared to last year's second quarter. (To know more about income statements, read Understanding The Income Statement.)

Outlook
General Mills has an outstanding goal to boost annual sales in the low single digits, operating profits in the mid single digits, and earnings in the high single digits. It also aims for steady improvements in return on invested capital.

For the full year, analysts currently project 12.3% sales growth and total sales of $16.7 billion. Company management anticipates earnings between $2.59 and $2.62 per share, as well as "high single-digit to low double-digit growth in adjusted diluted earnings per share," which excludes restructuring and other charges not deemed to be part of General Mills' continuing operations.

The Bottom Line
General Mills currently trades at a forward P/E of 14.3. Rival Kraft Food (NYSE:KFT) trades at a forward earnings multiple of 14.9 while Kellogg (NYSE:K) trades at 15.6. Given the expectations for high single-digit profit growth over the long haul, which General Mills has been able to deliver on over the past decade, the multiple reflects decent growth expectations and profit predictability given food is relatively recession resistant. Combined with a current dividend yield of 3%, and investors can reasonably expect low double-digit annual shareholder gains for roughly the next five to 10 years. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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