Following the previous quarter's results, investors fled General Mills (NYSE: GIS ) shares, on concerns that resurgent consumers would forgo the company's packaged foods in favor of dining out. I argued against that premise, and shares subsequently reached new highs. This time, however, the market's distaste for General Mills may be well-founded -- management's fiscal 2011 forecast suggests that the stock's valuation may now be stretched.
We'll dig into that point, but let's first review the company's fourth quarter of fiscal 2010 and its full-year performance. Along the way, keep in mind that an extra week in last year's Q4 makes for somewhat sloppy comparisons.
On a reported basis, fourth-quarter sales slipped 2% to $3.6 billion. But excluding that extra week, sales gained 4%, with company's largest segment, U.S. Retail, posting 5% growth. Meanwhile, reported quarterly earnings per share of $0.31 were a decline of 42%.
Whew! Did someone not eat their Wheaties?
Not quite. Excluding the effects of adjustments on commodity positions and a charge related to health-care reform, EPS fell a lesser 5%. Furthermore, if we account for the extra week, EPS rose slightly. And if we want to be really generous and ignore a debt-refinancing charge (while such an expense is a genuine cost of operating the core business), EPS advanced more than 15%. OK, that's not so bad overall.
For the fiscal year, net sales inched up by 1%, to $14.8 billion. Product divestitures and the pesky extra week detracted three percentage points from sales growth. Reported EPS of $2.24 represented 18% growth. Volume, however, was flat.
Again, nothing to be ashamed of here. Plus, management just recently increased the dividend by a whopping 17%, to an annualized rate of $1.12 per share. That beats out recent single-digit increases by Coca-Cola (NYSE: KO ) , PepsiCo (NYSE: PEP ) , Philip Morris International (NYSE: PM ) , and the planned 8% boost by close competitor Kellogg (NYSE: K ) . Based on the current share price, shareholders are looking at a 3%-plus yield.
Now, let's get to management's fiscal 2011 outlook. Two key headwinds are expected to impact the bottom line: input cost inflation of 4%-5% versus deflation in the recently completed year, and a rise in noncash pension expenses, owing to a decline in bond yields. All told, management is forecasting EPS of $2.46 to $2.48, excluding mark-to-market effects. On a comparable basis, that represents 7%-8% year-over-year growth, which is down from the double-digit growth in earnings-from-continuing-operations that General Mills has chalked up on a one- and three-year basis. Furthermore, based on today's share price and the midpoint of guidance, the stock is trading at a current fiscal-year P/E of 14.4, or nearly double the estimated growth rate.
Look, I'm a big fan of General Mills the company, but I can't belly up to the pantry at that valuation. Shares in the low $30s would be much more appetizing.