Earnings Preview: General Mills

Consumer food giant, General Mills Inc. (GIS - Analyst Report) is all set to unveil its fourth quarter and full year 2012 results on June 27, 2012, before the start of trading. The Zacks Consensus Estimate for the fourth quarter is 58 cents (estimated year-over-year improvement of 11.5%) on revenues of $4.12 billion (year-over-year increase of 13.4%).

The Zacks Consensus Estimate for full year 2012 is $2.54 (estimated year-over-year improvement of 2.4%) on revenues of $16.71 billion (year-over-year increase of 12.3%).

Third Quarter 2012 Recap

General Mills’ third-quarter 2012 earnings of 55 cents per share missed the Zacks Consensus Estimate as well as the year-ago results by a penny. Solid top-line growth was offset by significant input cost pressures and lower volumes in the U.S. retail segment to pull down margins.

Total revenue for the reported quarter increased 13% year over year to $4.12 billion, driven by strong net price realization and benefits from the July 2011 acquisition of interest in Yoplait entities. Revenues marginally exceeded the Zacks Consensus Estimate of $4.10 billion.

Agreement of Estimate Revisions

There has been no estimate revision for the current quarter or fiscal year, either over the last 7 or 30 days. However, for fiscal 2013, 1 of 18 estimates has moved down over the past 7 days. None of the estimates has been revised upwards. Over the last 30 days, 2 estimates have gone down for fiscal 2013.

The food industry is currently suffering from rising input costs and volume growth concerns which are offsetting benefits from increased pricing. Though the analysts expect top-line growth to remain healthy, rising costs could undo most of the gains, imposing pressure on earnings.

Magnitude of Estimate Revisions

Given the limited estimate revisions, the consensus estimate for the fourth quarter of fiscal 2012 has remained static over the last 7 as well as 30 days at 58 cents. Similarly, the consensus earnings estimate has remained constant at $2.54 over the last 7 as well as 30 days for fiscal 2012. However, for fiscal 2013, the estimate has gone down by a penny over the last 30 days from $2.76 to $2.75.

Surprise History

General Mills has surpassed earnings estimates in only one of the last four quarters while meeting the consensus in one and missing in two. It recorded a maximum positive surprise of 3.23% in the first quarter of fiscal 2012. On an average, the earnings surprise was a negative 0.79% in the trailing four quarters.

Our Recommendation

We currently have a Neutral recommendation on General Mills. However, the stock carries a Zacks #4 Rank (a short-term ‘Sell’ rating).

We are encouraged by the company’s strong brand positioning. Further, the company’s continuous effort to introduce new products in fast growing food categories can drive its long-term growth. We also like the performance of the company’s International segment. It is doing well and is on track to generate consistent revenue and profit growth. However, we prefer to remain on the sidelines until the U.S. retail volumes improve, margin pressures due to input cost headwinds subside and the macroeconomic environment recovers. This also explains the short-term Sell rating on the stock.