An Old Dog With New Tricks: General Mills Enhances Earnings Visibility

• The share price of General Mills, Inc. GIS has risen by a little over two percent, year to date.
• Matthew Grainger of Morgan Stanley has upgraded the rating on General Mills from Underweight to Equal-Weight, while raising the price target from $53 to $56.
• Despite concerns regarding the topline, Grainger believes that the management’s willingness to manage costs more aggressively would drive improved EPS visibility in FY2016.

According to the Morgan Stanley report, General Mills has “become increasingly proactive in responding to industry cost/margin pressures,” with the company having initiated three restructuring programs, which are likely to generate annual cost savings of $400 million by FY2017.

In addition, Grainger expects the cost savings programs to help the company generate incremental savings of $220 million in FY2015, a significant increase from the $75 million in savings in FY2015.

“These savings should both facilitate necessary reinvestment and provide flexibility for Mills to reach its guidance of mid single-digit constant-currency EPS growth,” Grainger stated, while mentioning that the company’s FY2016 EPS guidance now appears achievable.

Although the company’s sales growth in 2016 is expected to benefit from easier comps, Grainger expressed concern regarding General Mills being able to deliver consistent +LSD growth, given the continuing weakness in the company’s core US categories, sluggish sales momentum and its key international markets facing macro pressures.