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On Jul 19, we reiterated our Neutral recommendation on General Mills. While the consumer food giant reported mixed fourth-quarter fiscal 2013 results, its outlook for fiscal 2014 sounds optimistic.

Why the Neutral Recommendation?

Overall, we are encouraged by the company’s strong market share position in some leading food categories, its growing international presence, strategic acquisitions, focus on innovation and brand support and cost saving initiatives.

On Jun 26, 2013, General Mills announced mixed fiscal fourth-quarter results. Adjusted earnings declined 11.7% year on year to 53 cents per share and lagged the Zacks Consensus Estimate of 54 cents per share by 1.9%. The year-over-year decline in earnings was due to higher input and advertising costs, and increased spending to support in-store merchandising activity and a higher tax rate.

Though the company delivered decent revenue growth, margins were slightly weak in the quarter. Revenues grew 8.5% benefitting mostly from the recent acquisitions. Operating margins, however, declined due to higher advertising and pension costs. Estimates mostly moved downward following the mixed fourth-quarter results.

Despite the fourth-quarter miss, management gave quite an optimistic outlook for fiscal 2014. Growth in fiscal 2014 is expected to be driven by strong innovation, increased brand support, modest cost inflation, increased contribution from the recent Yoki and Yoplait acquisitions and aggressive cost savings.

However, General Mills’ two most important categories – cereals and yogurt – are showing sluggish results. The U.S. yogurt business remains challenging as increased sales prices in response to dairy cost inflation is reducing the competitiveness of its products. In fiscal 2013, yogurt sales declined 5%, missing management’s expectation to witness growth. The core cereals business also declined 2% in fiscal 2013 due to weak category growth. Though management is taking steps to re-invigorate these priority businesses in fiscal 2014 through innovation and increased promotional support for new products, we prefer to wait until we see a substantial rebound.

Other Stocks to Consider

General Mills carries a Zacks Rank #3 (Hold). Other stocks in the food industry that are currently performing well and have a bright outlook include Flower Foods Inc. (FLO - Snapshot Report), Campbell Soup Company (CPB - Analyst Report) and B&G Foods Inc. (BGS - Snapshot Report). While BGS carries a Zacks Rank #1 (Strong Buy), CPB and FLO carry a Zacks Rank #2 (Buy).

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