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Is It Safe? Slow Growth for General Mills

Earnings growth at General Mills is expected to slow as higher commodity prices and a stronger dollar cut into profits.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Food seems like a


industry, especially if you sell wallet-friendly products like Cheerios and Hamburger Helper. But even

General Mills

(GIS) - Get General Mills, Inc. Report

is getting burned by the struggling



After increasing per-share earnings by 16% a year, on average, for the past three years, analysts expect growth at General Mills to slow to 11% in its current fiscal year, which ends this month. Next fiscal year, the


is expected to boost earnings by 6.7%.

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General Mills is feeling the pain of rising commodity prices and a strengthening dollar, which is hurting profits from international sales. Those trends are expected to continue this year, according to futures and analysts. The stock is rated "buy" with a grade of B-minus, but it could easily become a "hold"-level stock, suggesting limited gains for shareholders.

International sales accounted for 18% of General Mills' revenue in the most recent quarter. When other currencies are stronger than the dollar, the value of the company's foreign sales rises. In past years, the weak dollar helped push earnings up as much as 21%. But renewed strength in the greenback's recent has muted overseas earnings in recent months.

Higher prices on key ingredients might add to its woes. Futures contracts for May 2010 delivery of corn, wheat and oats are 12% to 20% higher than current quotes.

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General Mills uses futures, swaps and forward currency contracts to hedge against shifts in interest rates, commodity prices and foreign exchange rates. The contracts usually don't extend more than 12 months in advance, which shields the company from short-term swings but doesn't protect it from long-term trends.

During the first nine months of the company's current fiscal year, earnings slipped to $2.73 a share from $3.19 a year earlier. They dropped to 85 cents in the most recent quarter from $1.23 a year earlier.

"They really knocked the cover off the ball a year ago," says analyst Jack Russo of

Edward Jones

. He expects the company to feel pressure from commodity prices and foreign exchange rates for the remainder of this calendar year, part of General Mills' 2010 fiscal year.

Shares of General Mills have fallen 14% this year, lagging behind those of rivals

Kraft Foods




(K) - Get Kellogg Company Report

. Investors, optimistic that the recession might end soon, have been gravitating toward riskier companies such as

Sprint Nextel

(S) - Get SentinelOne, Inc. Class A Report



(F) - Get Ford Motor Company Report

, which are among the biggest gainers in the

S&P 500

index this year.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.