General Mills Is No Longer Stale
Now, I've never discounted that General Mills, which has a strong history of innovation and "outside the box thinking," would overcome this rough patch. The problem, though, has been the stock, which is up close to 30% year to date, and (in my opinion) is now slightly above its fair-market value.
However, despite the sluggishness that has overtaken the entire sector, management has always maintained a consistent long-term growth plan. And following the release of the company's fiscal 2014 outlook, which was provided at the Morgan Stanley Global Consumer Conference two weeks ago, General Mills, expensive or not, has suddenly become more digestible.
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As with rival Kellogg and to a lesser extent Post Holdings
I believe going forward, the company's gross margin, as well as that of its rivals, will be the key differentiator in identifying value. In the most recent quarter, although revenue was up 8% year over year, which beat consensus estimates, the fact that earnings fell more than 16% highlighted struggles in operational efficiency, pricing pressure, or a combination of both.
And it certainly didn't escape me that, as impressive as the first quarter's 8% volume growth, this was driven mostly by acquisitions. Essentially, very little of that growth was of the "organic" variety, which measures a company's operational performance using only internal resources and excluding such events as mergers and acquisitions. Accordingly, I felt the stock would be stale for the foreseeable future. The Street had other ideas.
In fairness, though, General Mills was not alone in doing deals. This has also been the growth model for ConAgra, Campbell Soup, Nestle
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With management calling for a strong improvement in adjusted gross margin for fiscal 2014, along with mid-single-digit growth in segment operating profit, General Mills is rewarding investors for their confidence. Equally impressive is that management is confident that it can grow operating margin in each of the three business segments, which includes U.S. Retail, Bakeries and Foodservice and International.