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General Mills: A Compelling Investment Opportunity

 December 26, 2012 04:30 PM

(By Mani) General Mills, Inc. (NYSE: GIS) remains a compelling investment opportunity as it overcomes several key issues in the back half of the year, including potentially higher commodity input costs, continued softness in Yoplait, and a potential Venezuelan currency devaluation.

The company's quarterly US Retail sales exceeded expectations and should maintain momentum throughout the year, reflecting normalized merchandising levels, a strong pipeline of new product innovation (e.g., Honey Nut Cheerios Medley Crunch), continued distribution gains and volume growth for the first time in six quarters.

In addition, the company continues to drive strong growth across international markets owing to its portfolio mix, geographic expansion, and relatively low penetration while its long-term global growth profile should benefit from recent acquisitions.

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"GIS hedging (i.e., 90% covered for F2013) and relatively low exposure to grains (5%-10% of inputs) should limit inflation to the high end of its expectations," BMO Capital Markets analyst Kenneth Zaslow wrote in a note to clients.

General Mills' second-quarter profit rose to $541.6 million or 82 cents per share from $444.8 million or 67 cents per share in the year-ago period. Excluding items, it earned 86 cents per share, topping consensus view of 79 cents per share for the quarter. Net sales for the quarter grew 6 percent to $4.88 billion and matched analysts' consensus revenue estimate of $4.88 billion.

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Gross margin increased 120 basis points from last year to 35.7 percent while operating margin grew 150 basis points to 17 percent.

Looking ahead to fiscal 2013, General Mills raised its adjusted earnings per share view to a range of $2.65 to $2.67. Earlier, the company forecast adjusted earnings for the year in a range of about $2.65 per share. Analysts currently expect the company to earn $2.68 per share for fiscal 2013.

General Mills anticipates supply chain inflation for the year will be at the high end of its previously forecast range of 2 to 3 percent range, with the past summer's drought expected to increase second-half inflation rates modestly.

Further, the company sees mid-single-digit sales growth and mid- single-digit operating profit growth.

The company's second-half outlook assumes a higher tax rate than in the first half, reflecting the timing of tax expense for the year. The company also is anticipating possible currency devaluation in Venezuela during the second half of the fiscal year.

"As we move into the second half, the global operating environment remains challenging," Chief Executive Officer Ken Powell said. "We are working to build on our good performance year-to-date. We're launching a promising slate of new products in our core U.S. market. And we have strong levels of advertising and in-store merchandising planned to support new and existing products in markets worldwide."

Beginning in January, the Minneapolis, Minnesota-based General Mills would launch dozens of new products across its portfolio to meet consumer needs and drive growth for the company.

"We are committed to driving innovation across all of the categories in which we compete, and are excited about the strong number of differentiated new products we'll be launching in the back half of our fiscal 2013," said Ian Friendly, executive vice president and chief operating officer of U.S. Retail. "Across all of U.S. Retail, we will launch 100 new products in our fiscal 2013.

In recent years, the company has focused on bigger, unique new product launches with the goal of better addressing unmet consumer needs, bringing more new consumers to its brands, and driving more profitability for the company.

Beginning in January, the company will launch dozens of new products across its portfolio to meet consumer needs and drive growth for the company. These include Green Giant Veggie Chips, Totino's Pizzeria Rolls or GoGurt Twisted, Honey Nut Cheerios Medley Crunch, Peanut Butter Toast Crunch or Yoplait Greek 100 Tropical Fruit and Lemon flavors.

General Mills products launching in its U.S. Retail and Bakeries and Foodservice channels in January through May of 2013 include Honey Nut Cheerios Medley Crunch, Fiber One 80 Calories Chocolate, Peanut Butter Toast Crunch, Fiber One Protein bars in Caramel Nut and Coconut Almond flavors.

The upcoming product launches in General Mills' International division include Sweet and Nutty bars in the UK in Peanut and Almond flavors; New Yoplait and Liberté yogurts in Canada; New varieties of Calin yogurt in France.

General Mills is one of the world's leading food companies, operating in more than 100 countries. Its brands include Cheerios, Fiber One, Häagen-Dazs, Nature Valley, Yoplait, Betty Crocker, Pillsbury, Green Giant, Old El Paso, and Wanchai Ferry. General Mills had fiscal 2012 worldwide sales of $16.7 billion.



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