03-20-2019, 10:34 AM
Another excellent post from SeeksQuality (aka Ted Fischer), this time about General Mills.
Solid earnings, a beat-and-raise...
That said, I'm less thrilled with the report than the headline would suggest. Looking at their segments, NA Retail is down in volume, flat in sales. Convenience/Foodservice is down in volume, up 3% in sales. Europe & Australia is down in volume and down in sales, even before forex. Asia and Latin America is up 2% in volume and 4% in price/mix, but that is wholly offset by forex. Overall? Decent improvement in price/mix, but the sole driver of volume growth is the Blue Buffalo acquisition (still less than a year old, so no YOY comparisons there). Growth is growth, perhaps, but they clearly still have operating challenges in 90% of their business.
Profit is in much better shape, likely the result of the aforementioned price increases as well as cost cutting efforts. NA and Foodservice profits are up 12% and 15% respectively, and overall operating profits are up 27% (again boosted by the acquisition). Their nine-month results show 13% YOY profit growth, with NA/Foodservice in the upper single digits, even before the impact of the acquisition.
So....
* Continuing volume challenges. This is a mature business in a mature industry, with few growth opportunities in the US. They may still have some international growth opportunities, but pulling profits out of those is a bit more challenging. The Blue Buffalo acquisition was important to them because it is a growth opportunity in their core market.
* Improved margins and operating results. You can't sell stuff if people aren't buying, but at least you can work on margins. This is a sign of good management. One of my biggest concerns with SJM and KHC has been their inability to show any kind of pricing power. There is a huge difference between flat revenues and improving margins vs. flat revenues and declining margins. Commodity prices have been generally trending up, but it appears that GIS is navigating this challenge better than its peers.
* Expectation that BLUE will accelerate volume in the fourth (current) quarter, as their previously announced initiatives take hold. This was a big piece of the jump on their last earnings report, and should continue to drive the share price higher. Though, of course, the coming quarter will be a "show me" earnings report. Trust management (which has done pretty well with this recently) to deliver on their promises.
* Cash flow (9 month basis) of $2B easily supports the dividend of $900M, with the balance mostly going towards debt. The LT debt has come down $1153M over the last nine months, however "notes payable" has increased by $430M. (Their current ratio is not pretty...) Thus the net debt repayment is in the vicinity of $250M per quarter vs. LT debt of $11.6B. Their debt situation is firming, but they do not at this time have enough cash flow to pay down the debt rapidly. Nor are they showing the kind of top-line improvement that would be necessary to repair the debt ratios through growth.
Conclusion: I would expect the PE rebound to continue on the basis of this solid earnings report. Management is executing well and the immediate danger is passing. That said, they will continue to labor under a heavy debt burden for some years to come, and the YOY impact of the Blue Buffalo acquisition will disappear in the September reporting. I do not expect the dividend to be increased in the next year, and in fact would treat that as a strong sell signal if management were to attempt such a foolish increase. (They need their cash to grow the business and work down the debt.) I see fair value in the $52-$57 range and would consider exiting my own position there -- since the credit quality and limited growth are not a great fit for my personal goals, despite the sweet dividend.
Solid earnings, a beat-and-raise...
That said, I'm less thrilled with the report than the headline would suggest. Looking at their segments, NA Retail is down in volume, flat in sales. Convenience/Foodservice is down in volume, up 3% in sales. Europe & Australia is down in volume and down in sales, even before forex. Asia and Latin America is up 2% in volume and 4% in price/mix, but that is wholly offset by forex. Overall? Decent improvement in price/mix, but the sole driver of volume growth is the Blue Buffalo acquisition (still less than a year old, so no YOY comparisons there). Growth is growth, perhaps, but they clearly still have operating challenges in 90% of their business.
Profit is in much better shape, likely the result of the aforementioned price increases as well as cost cutting efforts. NA and Foodservice profits are up 12% and 15% respectively, and overall operating profits are up 27% (again boosted by the acquisition). Their nine-month results show 13% YOY profit growth, with NA/Foodservice in the upper single digits, even before the impact of the acquisition.
So....
* Continuing volume challenges. This is a mature business in a mature industry, with few growth opportunities in the US. They may still have some international growth opportunities, but pulling profits out of those is a bit more challenging. The Blue Buffalo acquisition was important to them because it is a growth opportunity in their core market.
* Improved margins and operating results. You can't sell stuff if people aren't buying, but at least you can work on margins. This is a sign of good management. One of my biggest concerns with SJM and KHC has been their inability to show any kind of pricing power. There is a huge difference between flat revenues and improving margins vs. flat revenues and declining margins. Commodity prices have been generally trending up, but it appears that GIS is navigating this challenge better than its peers.
* Expectation that BLUE will accelerate volume in the fourth (current) quarter, as their previously announced initiatives take hold. This was a big piece of the jump on their last earnings report, and should continue to drive the share price higher. Though, of course, the coming quarter will be a "show me" earnings report. Trust management (which has done pretty well with this recently) to deliver on their promises.
* Cash flow (9 month basis) of $2B easily supports the dividend of $900M, with the balance mostly going towards debt. The LT debt has come down $1153M over the last nine months, however "notes payable" has increased by $430M. (Their current ratio is not pretty...) Thus the net debt repayment is in the vicinity of $250M per quarter vs. LT debt of $11.6B. Their debt situation is firming, but they do not at this time have enough cash flow to pay down the debt rapidly. Nor are they showing the kind of top-line improvement that would be necessary to repair the debt ratios through growth.
Conclusion: I would expect the PE rebound to continue on the basis of this solid earnings report. Management is executing well and the immediate danger is passing. That said, they will continue to labor under a heavy debt burden for some years to come, and the YOY impact of the Blue Buffalo acquisition will disappear in the September reporting. I do not expect the dividend to be increased in the next year, and in fact would treat that as a strong sell signal if management were to attempt such a foolish increase. (They need their cash to grow the business and work down the debt.) I see fair value in the $52-$57 range and would consider exiting my own position there -- since the credit quality and limited growth are not a great fit for my personal goals, despite the sweet dividend.