In a recent analyst conference, General Mills (NYSE:GIS) has reaffirmed its earnings guidance for the current fiscal year. The company will report its next quarterly results on March 19 in which its earnings could come under additional pressure due to two new developments. The company could witness an increase in input costs coming from a lack of genetically modified ingredients and the increasing futures of oat prices.
The company has struggled with growth recently but it has outperformed its competitors. General Mills generates solid free cash flow and therefore, has been able to aggressively grow its dividend over the years. The company offers an attractive yield of 3%, which is above the industry’s average of 2.22%.
General Mills has reaffirmed its fiscal 2014 guidance. The company is expecting earnings of between $2.87 and $2.90 per share. The company, however, has warned investors that the Venezuelan currency devaluation could have an adverse impact on its profits. In that case, the company has forecast that it would meet the low end of its guidance.
- Warning! GuruFocus has detected 10 Warning Signs with GIS. Click here to check it out.
- GIS 15-Year Financial Data
- The intrinsic value of GIS
- Peter Lynch Chart of GIS
No Genetically Modified Ingredients
The company has responded to the criticism related to its use of genetically modified ingredients in its cereal by opting to remove such ingredients. The business, however, has failed to win over its critics. Investors should note that this decision could lead to an increase in the price of its cereals.
Last month, the company declared that it has stopped using genetically modified ingredients in Cheerios and would inform consumers about it through labels on the breakfast cereal. The decision came after months of intensive campaigning by activist group Green America lobbying against the use of genetically modified ingredients. The company, however, has stated that its decision was taken in light of the customers’ demand, as opposed to pressure from Green America.
This decision could turn out to be an expensive one as the company can no longer use the cheaper bioengineered ingredients. This could lead to an increase in prices for genetically modified-ingredients-free products. It remains to be seen how other food companies are going to respond, such as Kellogg (NYSE:K) or Monsanto (NYSE:MON).
Increasing Oat Prices
In the meantime, the oat futures have been continuously increasing due to the supply issues in Canada which is creating problems in the U.S. The contract for the month of March is at its highest levels in more than four years. Extreme weather conditions have created havoc for Canada’s railroads that are now running shorter trains. This has significantly slowed the movement of commodities, such as crude oil and oat, outside of Canada. Canada is the world’s biggest exporter of oat.
This could create some problems for companies like General Mills and Kellogg who could witness an increase in their input costs for the first six months of 2014. This could drag the companies’ earnings in the coming quarters.
In its previous quarterly results released earlier in December, General Mills reported no change in its net sales from last year of $4.87 billion. This was below the market’s expectations of $4.94 billion. However, the company reported a 1.5% increase in earnings to $549.9 million, or $0.84 per share. This increase came despite the increase in input costs and was partly attributed to its acquisition of foreign businesses. This translated into adjusted earnings of $0.83 per share, which was also below analysts’ estimates of $0.88 per share.
In short, General Mills missed both top and bottom line estimates. On the other hand, in its quarterly results announced earlier this month, Kellogg has managed to beat the market’s earnings estimates by posting income of $0.83 per share. Its revenues, however, came in at $3.5 billion, which missed the market’s consensus by $20 million. The company has been struggling with its cereal sales. Kellogg will continue to remain under pressure throughout 2014. The management has forecast a possible decline in sales in the current quarter.
The quarterly earnings of both companies clearly show that the top and bottom line growth in this sector has stalled. A long term comparison, however, reveals that General Mills has outperformed Kellogg. Between 2011 and 2013, General Mills has grown its revenues and income by $2.9 billion and $57 million, respectively. In the same period, Kellogg’s revenues increased by $1.7 billion while its net income dropped by $274 million. Similarly, in the corresponding period, General Mills generated $1.4 billion of free cash flows while Kellogg could only manage $137 million.
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.