Shareholders of General Mills will be listening to investor day presentations on Wednesday for answers to: how its acquisition of dog-food company Blue Buffalo Pet Products, Inc. is progressing; what measures it's taking on cost containment; how its yogurt division is doing against formidable competitors; whether and when its dividend might be raised; and whether it can maintain a healthy cash flow.
That's what David A. Katz, the founder of the $790 million value investment firm Matrix Asset Advisors Inc., said his company will be looking for, when he spoke with TheStreet on Tuesday, July 10.
The maker of Cheerios, Yoplait yogurt and Progresso soup is a mixed bag for investors. It's battling flat organic sales growth, lower earnings per share growth, muted guidance, and a depressed stock, down more than 25% year to date. Shares closed up slightly on Tuesday, at $44.69.
Here's what to look for on Wednesday:
- In April, General Mills bought the high-end natural pet food company Blue Buffalo for $8 billion, which was considered pricey by some. The company financed the transaction with a combination of $6 billion in long-term debt, $1 billion in equity, and cash on hand. General Mills executed the equity financing by issuing 22.7 million shares of common stock on March 27, 2018. Wall Street is in a wait-and-see mode on how the deal plays out for the company, said Katz, who added: "We'd like to know why they have confidence in the acquisition and how the product is being distributed."
- The rising costs of freight, an industry-wide problem, have left the company flatfooted. In March, the company lowered its fiscal year 2018 segment operating profit outlook by about $150 million or 5%, partly driven by freight costs. Company observers have faulted CEO Jeffrey L. Harmening, who joined the company in June 2017, for failing to act with urgency to fix the issue and others.
- Faced with stiff competition from relative newcomer Chobani and veteran Danone SA, General Mills introduced YQ yogurt last month, which features lower levels of sweeteners than its older Yoplait offerings. For Katz the question is: does it [General Mills' yogurt division] have legs?
- Cash flow was up 18% between fiscal year 2017 and 2018, $2.2 billion vs. $2.8 billion. Free cash flow was up 28% (non-GAAP measure), or $2.2 billion.
The combination of General Mills' recent challenges and consolidation in the packaged foods industry all suggest an activist hedge fund could target the business and put it in play, according to Katz. "We do think the industry needs consolidation and General Mills would be a prime target," said Katz.
Deal activity in the space has been on the rise. Most recently, ConAgra Brands Inc. (CAG - Get Report) closed a deal on June 27 to purchase Pinnacle Foods Inc. (PF) for more than $8 billion in cash and stock. Hershey bought Amplify Snack Brands Inc. for $1.6 billion in January. In April, J.M. Smucker Co. (SJM - Get Report) bid to buy Ainsworth Pet Nutrition, LLC, for $1.7 billion, after an estimated tax benefit of $200 million.
Unlike its competitors, such as Campbell Soup Co. (CSC) , Hershey's Co . (HSY - Get Report) and Kellogg Co. (K - Get Report) , General Mills is unencumbered by either trusts or family ownership, said Katz.
Alexia Howard, an analyst at Bernstein, gave the consumer-packaged goods company an underperform after its latest earnings report last month. "Overall it appears that the company continues to pedal hard on cost-cutting, while boosting price/mix overseas to expand margins: yet even with an easy comparison on segment earnings before interest and tax (down about 6% in fiscal year '18), the company still expects further underlying declines in earnings before interest and tax this year," she wrote.
PiperJaffray's Michael S. Lavery noted that the company's guidance for sales and earnings growth was at the low end of its ranges. "We model flat organic sales growth (guidance: flat to +1%) and an organic earnings before interest and tax of about 5%, a bit over what we expected, but also with some higher than expected cost savings; net cost headwinds are roughly in line with our expectations, though further freight cost pressures may be a wild card," wrote Lavery in a note June 27.