General Mills Inc. (GIS - Analyst Report) is set to report third-quarter fiscal 2014 results on Mar 19, before the market opens. Last quarter, it delivered a negative earnings surprise of 5.68%. Let’s see how things are shaping up for this announcement.
Factors to Consider this Quarter
General Mills had a tough first half due to margin pressure from higher input costs. Moreover, two of its most important categories — cereals and yogurt — have been sluggish. However, management expects earnings to accelerate in the second half due to strong product launches, lower input cost inflation and easing year-ago comparisons.
Management expects volumes to be better in the third quarter than second gaining from the inclusion of Thanksgiving holiday sales. Commodity cost inflation is expected to be lower in the second half than in the first.
However, the softness seen in the U.S. food industry in the second quarter is not expected to improve much in the second half. Moreover, the currency headwinds are expected to persist in the second half. Though earnings per share are expected to grow in a double-digit range in the second half, growth is expected to be stronger in the fourth quarter. Segment operating profit is expected to grow in high single digits in the second half.
Another company that is under pressure due to its cereals business is Kellogg Company (K - Analyst Report). Kellogg’s mainstay U.S. cereal business, accounting for 40–45% of sales, performed poorly in 2012 and 2013 due to sluggish category growth. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread, and peanut butter is hurting category growth.
Our proven model does not conclusively show that General Mills is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is -3.13%.
Zacks Rank: General Mills’ Zacks Rank #3 (Hold) when combined with a negative ESP lowers the predictive power of ESP.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Coca-Cola Enterprises, Inc. (CCE - Analyst Report), with Earnings ESP of +4.55% and a Zacks Rank #2 (Buy).
Dr Pepper Snapple Group, Inc. (DPS - Analyst Report), with Earnings ESP of +1.70% and a Zacks Rank #2.