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HOT RESEARCH

General Mills Can’t Catch a Breakfast The first-quarter decline in operating profit even exceeded internal expectations.

Sept. 22, 2017 7:53 a.m. ET

General Mills (GIS: NYSE) By Credit Suisse ($52.04, Sept. 20, 2017)

We are lowering our earnings-per-share estimates on General Mills for 2018 to $3.06 (from $3.09) and for 2019 to $3.15 (from $3.19).

General Mills’ (ticker: GIS) adjusted first-quarter EPS of 71 cents missed our estimate of 74 cents even though we lowered it after the Sept. 7 presentation to investors below consensus at 76 cents. Management described the 4% organic sales decline as in-line with internal expectations, attributing the 230 basis-points decline in gross margin to the timing of trade promotion accruals, and pointed to improving trends in measured retail sales trends in Nielsen (down 2% in August and improving further in September).

However it also admitted that the 14% decline in operating profit exceeded internal expectations and that declines in yogurt (down 22% in Retail) started to spill over into Foodservice. While some of the sharp drop in the stock today might just be from miscommunication with investors at a conference two weeks ago, we continue to put this stock and most of the other Big Food names in the “do not touch” category due to our concerns about structural headwinds.

Continued emphasis on pricing raises concerns. Management said it will maintain its higher price-realization strategy despite its persistently weak volume trends. For example, management pointed to 2% higher retail prices (excluding yogurt) as measured by Nielsen. But if pricing is to remain so high, then who captures the value from the company reinvestment in trade spending? The grocer? And why wouldn’t higher prices exacerbate General Mills’ volume declines in big categories such as cereal, yogurt, dough and soup as consumers get more access to lower- priced private-label options and continue to shift their shopping habits away from the center-of-the-store?

Our 12-month target price of $53 is based on a 16.4 times price/earnings multiple against our forward-12-months EPS estimate of $3.23, at a 9% discount to its five-year historical average multiple of 17.8 times. We think the current discount remains justified due to the company’s exposure to declining categories, pricing pressure from customers, and the need for reinvestment in the coming years to stabilize sales declines.

-- Robert Moskow

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The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Some of the reports’ issuers have provided, or hope to provide, investment- banking or other services to the companies being analyzed. Share prices at the time the report was issued and the date of the report are in parentheses.

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