General Mills Can Still Satisfy (Earnings Preview)

NEW YORK (TheStreet) -- Investing in packaged-food stocks has become a stale idea thanks to weak volumes and slumping margins.

Take General Mills (GIS) It has fed investors' appetite for years with products including Cheerios cereal but the stock has been stuck in the box. Shares closed Monday at $50.43 but are up 1.8% on the year to date.

Last week, General Mills warned investors third-quarter earnings per share (which ran through February) would be in the range of 61 cents to 62 cents per share. This represents a year-over-year decline of 4% and is 10% below Street estimates.

The company, which will report earnings Wednesday, also said revenue for the quarter will reflect about a 1% drop in volume. During the announcement, management described the decline as "consistent with recent food industry trends in developed markets."

When the company reported weaker sales in the December quarter, management made similar references to overall industry weakness.

In the December quarter, revenue was flat despite slightly better prices contributing to a 1% increase. But this was offset by foreign currency headwinds. Investors should expect a similar currency impact for this quarter.

But there is good news: Management figured out ways to boost margins. This has been and continues to be a priority. Gross margins rose by 40 basis points to 36.1% of total revenue. Likewise, the company cut capital expenses in (general & administrative) by 40 basis points to 18.7% of total revenue.

This means that even amid periods of sluggishness, management has never lost focus of the core business. With the likes of Kellogg (K) and Post Holdings (POST) expanding into new product categories, it's impressive that General Mills still found ways to grow margins and make efficiency improvements.

What's more, management expected to grow operating margin in each of the company's three business segments, which includes U.S. Retail, Bakeries and Foodservice International.

Of the three segments, the question mark continues to be with U.S. retail operations. Sales declined in 1% December to $2.97 billion, making up the majority of reported revenue. But revenue have been under pressure due to low volumes.

It is encouraging that international sales remain a steady source of growth, about 2% revenue growth to $1.40 billion. Revenue were driven by solid pricing and volume growth. Here again, the slightly better results last quarter were offset by an impact of 3% in currency adjustments.

So for this and other reasons, management remains optimistic the company can achieve its long-term growth plan. Along with mid-single-digit growth in segment operating profit, management expects strong improvement in adjusted gross margin for fiscal 2014.

Meanwhile, the company said it expects to post double-digit growth in adjusted per-share earnings for the fiscal fourth quarter. The company added the expected rate of input cost growth, the quarterly tax rate and the average number of the company's shares outstanding will be "well below" levels in the same period in the previous year.

With shares trading around $50, I don't see anything that should prevent General Mills from reaching $60 per share some time in the second half of the year. Given the strong growth momentum the company enjoys in international markets, this should benefit the company's cash flow and its ability to increase the dividends and continue its share buyback plan.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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