Getting Better but Still Not Grrreat
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I made the mistake for years ignoring two particular companies, because I figured they were just too boring to keep up with. However, I have realized that in an uncertain stock market, boring can sometimes be exciting. The two companies I'm referring to are General Mills (NYSE: GIS) and Kellogg (NYSE: K). When most people think of these two companies, the first thing that pops in their mind is cereal. However, with recent acquisitions each company has diversified into other areas that improve their growth potential. With General Mills reporting earnings recently, investors get a chance to see what's going on behind-the-scenes at this food giant. What I found out was while the company has improved its operations and growth potential, is they still appear to lag their primary competitor.
General Mills owns brands such as Chex, Nature Valley, Green Giant, Yoplait, Cheerios, and many others. In fact, their acquisition of Yoplait added significantly to international results. The company reported sales up 5% and adjusted EPS up just over 3%. What was really impressive was the company's pound volume increased 9%. In addition, General Mills launched more than 100 new products worldwide during the first quarter of their fiscal 2013 year. Since the company reports in three different segments, let's quickly take a look at how each one performed.
The company's U.S. segment showed disappointing results with sales down 1%, volume down 2%, and operating profit down 2%. International results were more encouraging, with segment sales up 36% driven primarily by the Yoplait International acquisition. Organic sales were decent with pound volume up 2%. However, the company faced major challenges with both sales mix and foreign-currency dragging down results. With all these moving pieces, the Yoplait acquisition was the clear driver and helped improve profits by 56% year over year. The company's Bakeries and Food Service segment showed sales down 2%, though volume was up 2%. Through expense management, General Mills was able to offset a negative sales mix to increase operating profit by 10%. Looking at the company's financial statements we see decent results here as well.
General Mills reported operating cash flow up 11%, and free cash flow was nearly $350 million. This free cash flow was enough to cover their dividend with a 62.64% free cash flow payout ratio. The company also repurchased 7 million shares at an average price of $38.86. General Mills also improved its balance sheet with cash up over $1 billion, and long-term debt down over $400 million. Since it looks like most everything General Mills is doing is producing positive results, why would I suggest that Kellogg might be a better deal?
There are a few primary differences between General Mills and Kellogg at the current time. First, is the direction of revenue growth at each company. Analysts expect revenue growth at General Mills to decelerate, from 5.6% this year to 4.7% next year. Where Kellogg is concerned, analysts generally expect revenue growth to accelerate, from 6.3% this year to about 8% next year. One of the primary growth drivers at Kellogg is their Pringles acquisition. General Mills had the Yoplait acquisition add significant earnings and revenue to their international division in the current quarter. Pringles should be a continued growth driver for Kellogg both domestically and internationally in the future. Many people would wonder, why would Pringles be such a big deal for Kellogg? The simple answer is, Kellogg knows how to maintain and expand a brand like no one else. The company's Pop Tarts business has been around for many years, and yet is still expanding. Through new flavors and different package sizes, the company saw significant growth in this business even in the most recent quarter. If Kellogg can duplicate the success with the Pringles brand, the company will add a new avenue for growth in the future. A second reason investors might favor Kellogg is, the companies dividend yield and payout ratio relative to General Mills. While both companies yield better than 3%, Kellogg comes in at close to 3.5% while General Mills is closer to 3.3%. While this might not sound like a big deal, Kellogg also has the lower free cash flow payout ratio at about 58% in the last six months, versus General Mills payout ratio of 62.64%. Though analyst expect both companies to grow earnings per-share at about the same amount, this seems somewhat unrealistic considering the same analyst revenue projections.
With analysts generally predicting General Mills revenue growth to slow down, and Kellogg's revenue growth to speed up, it doesn't make sense that both companies would grow earnings at the same amount. Given this backdrop, it seems likely that Kellogg's greater revenue growth should lead to greater earnings-per-share growth. If Kellogg grows earnings-per-share at a faster rate, their slightly more attractive dividend yield, and similar valuation to General Mills would be the reason to favor the company. The fact that Kellogg has a lower free cash flow payout ratio, also argues that the company's dividend growth should exceed General Mills. With a higher current yield, better earnings growth, and faster dividend growth that is a grrrreat combination.
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