Goldman Cuts General Mills (GIS) to Sell; Lack of Innovation to Hit Key Cereal Segment

January 11, 2013 12:06 PM EST
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General Mills (NYSE: GIS) is seeing some pressure today after Goldman Sachs slapped a Sell rating on the stock, cutting its 12-month price target from $42 down to $40.

As reported earlier, Goldman thinks General Mills has a product-cycle issue with its U.S. retail portfolio that appears overextended. The U.S. portfolio is comprised 23 percent by cereal, 20 percent by Meals, 18 percent by Pillsbury, 14 percent from yogurt, 15 percent from Snacks, and the rest is miscellaneous. U.S. accounts for about three-quarters of General Mills profits.

Goldman notes that velocity of losses is roughly double that of distribution gains. That said, the firm suspects that another manufacturer or retailer-led pruning is inevitable. Specifically, non-Greek yogurt and the cereal portfolio -- its largest and most-profitable asset -- might be at risk as further market shares are likely.

"The firm has been able to partially offset this year’s sales shortfall with curtailed advertising investment," Goldman noted. "Despite adding new businesses to the firm in the form of acquisitions, General Mills’ advertising spend is expected to contract this year. The last time it cut advertising (FY11) it followed by reloading its spend the following year." A similar outcome might happen in FY14 as market challenges continue.

In cereal, Goldman sees challenges with Cheerios. Brands like Chocolate Cheerios, Cinnamon Burst Cheerios, Peanut Butter Cheerios, and Dolce de Leche Cheerios have all seen a downward trend, and Goldman doesn't think the upcoming introduction of Honey Nut Cheerios Medley Crunch will be enough to stem the trend.

On yogurt, Goldman was surprised that even the loss of distribution points and introduction of higher-priced competition in the Greek segment hasn't been able to alter General Mills' fate. Looking ahead, easier comps in the non-Greek category will help abate some of the trend, though it doesn't necessarily mean an overall recovery for General Mills.

For FY13, Goldman is looking for General Mills to report EPS of $2.70 and revs of $17.71 billion. For FY14, the firm sees EPS of $2.84 and revs of $18.25 billion. The price target is about 14.1 times FY14 EPS expectations.

Shares of General Mills are down 2.4 percent Friday.

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