Morgan Stanley Believes Cost Management Will Drive EPS Growth Going Forward

General Mills, Inc. GIS guided to solid margin expansion through FY18. Morgan Stanley’s Matthew Grainger said in a report, however, that while the guidance was encouraging, the concern was around the company relying on reduced reinvestment to boost margins, while it continued to struggle with topline growth.

The stock’s relative valuation “adequately captures these conflicting factors,” analyst Matthew Grainger stated. He maintained an Equal-Weight rating on the company, with a price target of $63.

4Q Results

General Mills reported its EPS at $0.66, beating the consensus estimate by $0.06, driven mainly by tax favorability. Organic sales growth once again was short of the company's long-term target of low-single-digit growth.

“As expected, a ~130 bps decline in gross margin combined with heightened media expenses resulted in an ~210 bps decline in operating margins,” Grainger wrote.

Margin Guidance

General Mills guidance reflected ~150 bps of margin expansion in FY17, versus ~90 bps in FY16. This is despite the fact that the guidance included only $150mn in incremental savings in FY17, almost 50 percent of the $275mn figure in FY16 as well as moderately lower HMM and similar input cost inflation.

“The F17 algorithm suggests more targeted reinvestment, an approach that GIS has employed with limited success given a historical ~60% correlation between YoY changes to media expenses and US Retail sales growth,” the analyst added.