General Mills Offers Defensive Growth Prospects

General Mills $GIS is an interesting defensive stock that appears attractive because it offers a few key plus points. I’ve listed a few of them in bullet form below

• Defensive end markets of food and yogurt
• Good exposure to lowering commodity prices
• Strong dividend yield currently around 3%

So is General Mills an attractive stock to buy?

General Mills is ubiquitous name in the US Households through its cereal brands, healthy snacks, ready-made meals (Pillsbury etc), Haagen-Dazs ice cream and Yogurt (Yoplait) offerings. The last of which is growing quicker than the other products and, accordingly, the co is busying acquiring the international business of Yoplait. Next year will be about General Mills increasing pricing in order to benefit from the retention of market share that they fought for (via promotions, discounts etc) in previous years. However, the co is predicting that media spending will track sales growth so the management are unlikely to generate any operating efficiencies there.

This type of stock will always appeal to fund managers and investors because it provides good income and helps balance risk in a long only portfolio. I like the potential for future margin expansion coming from exposure to commodity prices coupled with its defensive nature. Indeed, over the last five years General Mills has grown operating profit every year (CAGR of 7% over the period) and EPS every year (CAGR of 12% over the period).

General Mills Q4 and Full Year Results

General Mills recently gave results and they were pretty good, however the outlook was weaker than the company had previously forecast. The good news is that the market had largely priced this in because the main cause is commodity price inflation. All of which suggests that if these prices continue to moderate-in line with the tightening attempts in many emerging markets-that General Mills could see some ‘upside surprise’ to gross margins. I’ve outlined historical cost inflation and gross margins for General Mills below

General Mills Estimates(%)	2007	2008	2009	2010	2011	2012
Input Cost Inflation	4	7	9	-3	4	10 to 11
Gross Margins	35.9	35.1	36.4	39.7	39.4	Lower

It is easy to see the inverse relationship between gross margins and input cost pressures. Moreover, this year’s cost inflation push is even more pervasive because commodities are up across the board and from relatively weaker comparables. In fact, the company is predicting lower gross margins as well as a low adjusted EPS growth of only 5% for next year.

Delving deeper into the results reveals that US retail sales were down 2% but international sales (constant currency) were up 16% respectively. This should provide little succour to shareholders because US retail sales still make up over 76% of segmental operating profits but international is only 10.7%. US retail sales were down but this is largely due to less price discounting and promotions. Accordingly, overall, full year operating margins expanded from 15.1% in 2010 to 16.6% in 2011.

General Mills Evaluation

Listening to the conference call, the management are predicting a tough time in 2012 and, gross margins are seen as being lower. Similarly, the forecast adjusted EPS growth of 5% (261c from 248c) is not particularly attractive. However, I think the co could beat this guidance with lower commodity costs; however, my concerns are with the stock’s evaluation and sales growth.

At $37.26 General Mills has a market cap of $23.81bn and an EV of $30.17bn which, in my opinion, is a bit rich for a company which has generated $878m in free cash flow. In addition, the co is forecasting $670m in capital spending next year against $649m in 2011. Given that EPS is predicted to rise by 5% only, then this suggests that next year’s free cash flow generation could be similar to this year’s. A forward PE of (37.26/2.61)=14.3x and FCF/EV of around 3.2% is not particularly exciting for a company with low single digit sales and EPS growth.

In addition, the free cash flow barely covers the dividend which suggests that long term dividend growth will be tough for General Mills. I think there are better ways to play a correction in commodity prices. The bulk of General Mills products are hardly high growth so whilst it is a fine investment for investment managers looking to park cash in a defensive manner, it will not attract GARP focused investors. I took a pass.

Tupperware Still Looks Cheap Despite the Rise

Tupperware Driven by Emerging Markets

Emerging Markets play Tupperware gave great results and, the stock is up handsomely but I think they are still cheap. The company was first featured in an in depth article here

 I will refer to this article in making this update.

Initially, looking at the headline results

• Q4 Revenue of $655m vs. $643.8m estimates
• Q4 Adj diluted EPS of 138c vs. 128c estimates

Guidance

• Q1 Adj diluted EPS of 81-86c vs. 84c estimates
• Full Year Adj diluted EPS of 423-433c vs. 416c estimates

Tupperware Results Show a Two Speed Situation

The key points to note about these results are

• Emerging market growth is very strong
• Established markets growth is showing consolidated decline
• Beauty North America has been restructured successfully
• Beauty International showing strong growth
• Gross margins steady despite sales shifts
• Very strong cash flow generation

As noted in the previous article, the largest single segment is Europe which is demonstrating consolidated declines. For the quarter, Europe segmental profit was down to $57.9m from $62.7m. However, this story is somewhat mixed because South Africa and Turkey are both included in this region. They reported 31% and 39% local sales growth respectively.

The decline in established markets cannot be hidden

(In millions except per share data)
	13 Weeks Ended Dec 25, 2010						13 Weeks Ended Dec 26, 2009
	Reported		Adj's		Excl Adj's		Reported		Adj's		Excl Adj's
Segment profit
Europe	$    57.8		$   0.1		$     57.9		$    62.6		$    0.1		$     62.7
Asia Pacific	34.4		0.2		34.6		28.3		0.3		28.6
TW North America	13.9		-		13.9		13.5		-		13.5
Beauty North America	19.5		0.4		19.9		15.4		0.5		15.9
Beauty Other	14.6		0.3		14.9		7.5		0.4		7.9
	140.2		1.0		141.2		127.3		1.3		128.6

Asia reported stellar growth and is off setting weakness in Europe. Within Asia, India and Indonesia reported particularly strong growth.

Tupperware North America reported good sales growth and the business was restructured in Mexico, producing better marginal returns.

Similarly, Beauty North America has seen restructuring lead to strongly increased profitability, even though sales the quarter were only up 1% locally from last year. Beauty International reported sales up 16% in local currency and segmental profit up 95%

Tupperware Still a Stock to Buy?

I will reduce due to position weighting but I still think there is good growth in the stock price. Tupperware’s emerging markets business (56% of sales) went up by 15% in local currency, whilst established markets were down 2%. These numbers tell you most of what you need to know about this business. There is a structural shift happening in Tupperware’s revenues and profitability.

Whilst established markets are in decline, Tupperware has demonstrated that they have a relatively recession proof business model. This is particularly interesting for a hedged portfolio because Tupperware will outperform if a ‘double dip’ happens, however they still offer growth potential if the global economy continues to improve.

Moreover, they convert cash very well and have generated $246m in free cash flow for 2010. This puts them on a FCF/EV evaluation of 7.64% This is cheap for a business set to grow revenues at 6-8% and EPS at 18%

In addition, Tupperware is making all the right noises about increasing dividends in line with earnings growth and making share buybacks. There is more room to run here.

If you like this article than why not add a twitter feed from 'EarningsView' by clicking on the 'birdie' link on the left border of this blog.  Alternatively, add us on facebook at 'Earnings View', whereby articles will be automatically linked.

F5 Networks Growth Looks Solid

F5 Networks gave earning results and it was promptly met by a 20%+ sell off. I suspect that this stock price fall is more to do with valuations than anything fundamentally wrong. This is not another Cree! Firstly, I want look at the headline numbers.

In Q1 to December 31, F5 Networks reported revenues of $268.9m and non-GAAP EPS of 88cents per diluted share. This was against consensus forecasts of $270.6m and 83cents.

For Q2 they guided towards revenues of $275-280m and non-GAAP EPS of 84-86cents. The market had estimates $281.1m and 85cents.  

Moreover, the mid point of their revenue guidance ($277m) represents a 34.6% rise on Q2 2009.So a 20% sell off, because they are guiding for revenues to be light by $3.6m?  

F5 Networks Was Ripe for a Sell Off?

I think what we are seeing here is a reaction to the sharp move upwards we have seen in the stock. When stocks are priced to perfection, any slight sign of weakness will seem them punished. I’ve held this before and, got out a lot before it had a $140 handle. As to the conference call, the Co mentioned a bit of weakness in late October but then, claimed that it had normalised in Nov-Dec.


Frankly, I'm not surprised that the guidance didn't trump estimates. Analysts are forever stuck in a game of 'join the dots' which always leads them to over shoot at a cyclical peak. They follow the stock price, adjust estimates accordingly, then move it downwards when the price falls. Analyst are eternally trying to make a name for themselves by appearing bullish about a stock doing well. The key to investing is to price stocks out yourself and to do it based on fundamentals, not on how an analyst can best fit his estimates to the current stock price.




F5 Networks Evaluation


Now to the fundamentals, considering that 2010 was a year of economic recovery (albeit tepid) we can expect some slowing of the rate of growth in the economy in 2011. However, this does not necessarily translate across all industries. In the case of network application technology, I don't think we will see much correction.


Indeed, F5 are guiding towards a 36.4% growth in revenues for the next quarter vs. Q2 last year. Similarly, they have just generated $97.6m in free cash flow for the quarter. For the trailing year, free cash flow it is $328.6m. This is not the 'dot com' bubble. These companies are generating real earnings and cash flows and, based on 'old economy' metrics their prospects look good.


A quick look at revenues and gross margins...

	Dec 31 2009	Mar 31 2010	Jun 30 2010	Sep 30 2010	Dec 31 2010	Mar 31 2011E
Revenue (m)	191.1	206.1	230.5	254.3	268.9	275-280
Sequential Growth %		7.8	11.8	10.3	5.7	2.3-4.1
Gross Margin %	79.5	79.9	80.7	81.6	81.8	82

 ...demonstrates the slowing sequential revenue growth. Note that the midpoint guidance of 3.2% sequential for next quarter equates to 13.4% annually.


I tend to be conservative with these issues and for this type of situation I would want to buy it on a current FCF/EV of around 3.5% with a view to upgrading when/if they confirm a stabilising in sequential growth rate.  This would give a current price of $110. Well worth monitoring.