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On Jan 29, we maintained our Neutral recommendation on General Mills, Inc. (GIS - Analyst Report) despite poor second-quarter fiscal 2014 results, as we have faith in the company’s long-term fundamentals.

Why a Neutral Recommendation?

On Dec 18, General Mills reported dismal second-quarter fiscal 2014 results missing the Zacks Consensus Estimate for both revenues and earnings due to lower sales in the U.S. retail business and high input costs during the quarter. Earnings of 83 cents per share declined 3.5% but revenues were flat with the year-ago levels.

Though management maintained its fiscal 2014 earnings outlook, it warned that higher-than-expected currency headwinds could result in earnings coming in at the lower end of the guided range.

Estimates were largely revised downwards in response to the poor results. The Zacks Consensus Estimate for 2014 declined 1% and that for 2015 declined 1.6% over the last 60 days.

Despite the near-term weakness, we have faith in General Mills’ long-term fundamentals. We are encouraged by the company’s strong market share position in some leading food categories, growing international presence, strategic acquisitions and generous cash returns.

However, its two most important categories — cereals and yogurt — have been sluggish. Though the company is making an effort to re-invigorate growth in these categories, we prefer to wait for a substantial improvement.

Moreover, though earnings are expected to accelerate in the second half due to strong new product launches, lower input cost inflation and easing year-ago comparisons, we remain cautious.

Other Stocks to Consider

General Mills carries a Zacks Rank #4 (Sell) due to weak second-quarter results. Other better-ranked food stocks include J&J Snack Foods Corp. (JJSF - Snapshot Report), Post Holdings, Inc. (POST - Snapshot Report) and Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report). While Green Mountain and Post Holdings carry a Zacks Rank #1 (Strong Buy), J&J Snack Foods carries a Zacks Rank #2 (Buy).

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