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General Mills Bluechip Consumer Products Outperform
Yes General Mills (NYSE: GIS) first fiscal quarter results foreshadow results in the consumer staples sector as we believe Federal Express (NYSE: FDX) and Lennar (NYSE: LEN) foreshadowing results for the entire market, the Consumer Staples sector is where you want to be for the third quarter and fourth quarter earnings season in general. Not only was the company able to generate growth well above consensus, but it also beat its bottom line. Although inflationary pressures were present, they did not affect the bottom line as deeply as expected and led the company to raise its forecast. Federal Express and Lennar both lowered their forecasts. Speaking from the perspective of dividend growth investing, we prefer companies that beat the consensus on top and bottom out and trending upward over those that are not.
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General Mills defies expectations
General Mills had a strong first fiscal quarter and a quarter that shows tailwinds continue to blow in the consumer staples sector. While the rebound in the restaurant and foodservice sector may not be as strong as expected and stay-at-home trends subside, the net result is sales above consensus estimates.
General Mills reported consolidated net sales of $ 4.54 billion, beating the consensus by a quarter of a billion dollars or 560 basis points. On an organic basis, sales are up 2% against the -4.5% decline expected by analysts. The company says the revenue strength is due to a combination of price, mix and volume that we see persist into the current quarter, if not until the end of the year. On a sector basis, the company reported notable increases of 25% and 23% in sales of pet food and sales to convenience and food establishments.
Going down to the profitability portion of the report, General Mills experienced a 150 basis point contraction in gross margin. The adjusted gross margin stood at 34.7% from 36.2% the previous year, but exceeded the consensus estimate by 50 basis points. The company claims that higher input costs and higher supply chain costs were offset by the same price, mix and volume gains that led to the superior results. On the earnings side, GAAP EPS of $ 1.02 beat the consensus of $ 0.15 while Adjusted EPS of $ 0.99 was down by a dime.
As for the forecast, the company says it expects both revenue and profit to be at the high end of the previously stated range. This places revenue growth for fiscal 2022 in a range of -1% and we believe this is a conservative estimate.
General Mills High Yield is a buy
General Mills shares are returning around 3.5%, with the stock trading around 15 times its consensus earnings estimate. This makes it one of the most profitable and highly valued consumer staples in the market and it also comes with a positive outlook for dividend growth. Overall, the company has only increased its dividend and is positioned for the second consecutive increase this year. While we don’t expect a significant increase, we do expect General Mills to increase their payout with the next declaration which must be made at any time.
The technical outlook: General Mills reverses in a range
Price action at General Mills has been choppy and volatile in a trading range over the past year. That said, it looks like the price action is reversing in this range and could rise over the next few weeks and months. The Q1 report and forecast update has price action up over 2.5% and not only confirming support but above the near-term moving average. With price movement above the short term moving average, we would expect an uptrend in the short to medium term. Our first target is near the $ 64 level, which would be good for a gain of almost 8%. This compares to Marketbeat.com’s consensus price target of $ 63.38 and the high price target of $ 73.