Fool on the Street: General Mills Goes Holistic

At The Motley Fool, we believe investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."

Are food stocks hot? With last week's announcement of Berkshire Hathaway (NYSE: BRK-A) taking a sizable position in Kraft Foods (NYSE: KFT), the segment is heating up.

But is Kraft the only great play in the food biz? Has Warren Buffett taken his position and left only table scraps for the rest of us? Last week, General Mills (NYSE: GIS) threw its hat in the ring by increasing earnings guidance for 2008 and beyond, and presented its reason for optimism to a group of analysts at the 2008 Consumer Analyst Group conference in New York. Listen in to learn how General Mills has gone holistic.

A different company
Back in the 1970s, when conglomerates were in fashion, General Mills was in a host of businesses, from restaurants (Red Lobster and Olive Garden), to toys (Kenner Products and Parker Brothers), to fashion apparel (Izod and Foot Joy).

But no more. In the late 1980s and early 1990s, the company spun off these segments to concentrate exclusively on the food business. In 2000, the company cemented its place as a major food player with the acquisition of Pillsbury, combining its strength in grain-based food products like cereal with Pillsbury's dominant position in refrigerated dough.

Holistic sales growth
The company describes its strategy to grow sales and earnings as holistic -- meaning they intend to focus on extending successful brands into long-term demographic growth trends. I know this sounds like a mouthful, but a few examples will clarify:

• Aging baby boomers with increased interest in health and wellness make up an enormous market segment. Accordingly, General Mills has scored some wins within this demographic by extending the Yoplait brand into Yo-Plus, which has additional ingredients to improve digestive health. Also popular with the older population is the Fiber One brand, recently extended from cereal into healthy snack bars, yogurt, and baking products. Sales across the Fiber One franchise are up 36% fiscal year to date.
• The company has also had success making core brands more attractive to multicultural consumers, another fast-growing demographic. The company publishes a Que Rica Vida ("rich, wonderful life") magazine that offers Hispanic mothers advice about nutrition, and to advertise targeted products such as La Lechera Flakes and Dora the Explorer cereal.
• General Mills has experienced its strongest growth abroad. Sales are up 20% in the first half of fiscal 2008, and segment operating profits have skyrocketed 32%. International sales now represent 25% of the total. Leading the way internationally is the Haagen-Dazs brand, although General Mills is expanding in Latin America with Old El Paso, and in China with the Wanchai Ferry brand of frozen dim sum products.  

More aggressive earnings targets
Granted, the consumer staples industry isn't famous for high-flying returns, but management's 2005 goal of 3% annual sales growth through 2010 wasn't too alluring. However, with sales outpacing that figure in the last two years, management now anticipates reaching $14 billion in sales by 2010, representing 4% to 5% annual growth. It's still not on par with saucy double-digit sales gains recently at Heinz (NYSE: HNZ), but it is a meaningful improvement.

The improved sales guidance is expected to fall to the bottom line, and the company is setting aggressive profit growth targets. Anticipating earnings per share of more than $4.05 in 2010, profitability should increase 8% to 9% annually, given that 2007's earnings per share clocked in at $3.17. A combination of cost controls, growing market share in higher-margin products, and continued use of cash flow to fund share repurchases are driving earnings-per-share growth.

How tasty is this investment?
As a conservatively run company, I wouldn't expect management to raise guidance without being certain they can achieve their new goals. The high-single-digit EPS growth combined with a 2.7% dividend yield mean this stock makes the cut as a safe play in an economic downturn.

But it's not enough to light my fire. At least not when Foolish investors can choose other consumer products companies expected to deliver double-digit earnings growth rates, including Procter & Gamble (NYSE: PG), Pepsi (NYSE: PEP), and Colgate-Palmolive (NYSE: CL).

Holistic is good, holistic is healthy, and General Mills is headed in the right direction. But this week's hullabaloo over higher sales and earnings, while useful guidance to analysts, leaves me thinking that Buffett's choice of Kraft remains the most mouthwatering investment in the industry.

Related Foolishness:

• General Mills recently reported a satisfying quarter.
• Colgate-Palmolive ended the year with a winner.
• Pepsi made a respectable showing.
• Procter & Gamble is nothing if not predictable.