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General Mills Earnings: Will Low Growth Hurt GIS Stock?

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General Mills (GIS) is set to announce its fiscal 2020 second-quarter earnings before markets open on December 18. We expect General Mills’ revenue to continue to disappoint in the second quarter, and for its adjusted EPS growth to show steep sequential deceleration.

We believe lower volumes in its Convenience Stores & Foodservice segment will continue to hurt its performance. Meanwhile, challenges in Europe could affect its volumes, and in turn, its sales. In its North America Retail segment (its largest division by revenue), sales could stay muted, with soft volumes offsetting higher pricing.

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We expect General Mills’ bottom line to continue to improve YoY (year-over-year). However, its EPS growth could be slow and decelerate sequentially. Soft organic sales growth, higher tax, and an increase in outstanding shares could drag down its bottom line, while margin expansion and a YoY decline in interest expenses could cushion it.

General Mills’ earnings: What Wall Street expects

Analysts expect General Mills to post revenue of $4.43 billion in the second quarter. Their average estimate indicates growth of a mere 0.4% YoY. Currency rates and lower volumes could continue to hurt General Mills’ top line. However, higher pricing could drive its revenue in the second quarter. Meanwhile, Wall Street expects General Mills to post adjusted EPS of $0.88, implying YoY growth of 3.5%.

In comparison, J.M. Smucker (SJM) missed analysts’ sales expectation in the second quarter, dragged down by lower pricing and adverse currency rates. Its volumes were roughly flat YoY. However, a lower adjusted effective tax rate helped SJM beat analysts’ bottom-line forecast.

Meanwhile, Campbell Soup’s (CPB) top line missed analysts’ estimate during its last reported quarter. Lower organic sales due to a volume decline in the Meals & Beverages segment dragged it down. However, its adjusted EPS came ahead of Wall Street’s expectation.

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General Mills’ recent performance

General Mills’ financial performance also failed to impress in the previous quarter. In the first quarter, General Mills’ top line fell 2.2% YoY. Its volumes were weak, more than offsetting benefits from higher pricing. Its organic sales decreased by 1%, reflecting a 4% decline in volumes. Pricing rose by 3%.

Despite the weak sales, General Mills’ adjusted EPS came ahead of Wall Street’s average estimate due to margin expansion and lower interest expenses. The company’s adjusted gross and operating margins expanded by 160 and 130 basis points, respectively. General Mills has exceeded analysts’ EPS estimates in the last eight quarters.

GIS stock performance

General Mills stock has outperformed the benchmark index this year, and is up 32.5% year-to-date. Most analysts had a neutral outlook on GIS stock before the company’s second-quarter earnings release. Their average target price implies an upside of about 6%. Recently, Deutsche Bank resumed its coverage of General Mills stock with a “buy” rating and a target price of $61.

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