Food seems like a recession-proof industry, especially if you sell wallet-friendly products like Cheerios and Hamburger Helper. But even General Mills is getting burned by the struggling economy.
After increasing per-share earnings by 16 per cent a year, on average, since 2005, analysts expect growth at General Mills to slow to 4.9 per cent in its current fiscal year, which ends this month.
The company is expected to recover slightly next fiscal year and boost earnings by 6.7 per cent. General Mills is feeling the pain of rising commodity prices and a strengthening dollar, which is hurting profits from international sales.
Those trends are expected to continue this year, according to futures and analysts. The stock is rated "buy" with a grade of B-minus, but it could easily become a "hold"-level stock, suggesting limited gains for shareholders.
International sales accounted for 18 per cent of General Mills' revenue in the most recent quarter. When other currencies are stronger than the dollar, the value of the company's foreign sales rises. In past years, the weak dollar helped push earnings up as much as 21 per cent.
If the dollar keeps its gains against other currencies, it could shrink the company's revenue. Higher prices on key ingredients might add to its woes. Futures contracts for May 2010 delivery of corn, wheat and oats are 12 per cent to 20 per cent higher than current rates.
General Mills uses futures, swaps and forward currency contracts to hedge against shifts in interest rates, commodity prices and foreign exchange rates. The contracts usually don't extend more than 12 months in advance, which shields the company from short-term swings but doesn't protect it from long-term trends.
During the first nine months of the company's current fiscal year, earnings slipped to $2.73 (U.S.) a share from $3.19 a year earlier. They dropped to 85 cents in the most recent quarter from $1.23 a year earlier.
"They really knocked the cover off the ball a year ago," says analyst Jack Russo of Edward Jones. He expects the company to feel pressure from commodity prices and foreign exchange rates for the remainder of this calendar year, part of General Mills' 2010 fiscal year.
Shares of General Mills have fallen 14 per cent this year, lagging behind those of rivals Kraft Foods and Kellogg . Investors, optimistic that the recession might end soon, have been gravitating toward riskier companies such as Sprint Nextel and Ford , which are among the biggest gainers in the S&P 500 index this year.
Richard Widows is an analyst with TSC Ratings, which provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.