General Mills and Kellogg Face GMO Challenge

General Mills and Kellogg should be given serious consideration as long-term investments despite the GMO boycott campaigns facing the cereal makers.

Jan 18, 2014 at 7:00AM

The food production sector can be a healthy investment choice for investors provided they pick and choose their spots. General Mills (NYSE:GIS) and Kellogg (NYSE:K) should be given serious consideration as long-term investments despite the genetically modified organisms boycott campaigns facing the cereal makers.

As has been widely reported, the use of GMOs by food-production companies is a hot-button issue. While GMOs can enhance harvest yields in an array of crops utilized in food production, there is growing concern about the potential environmental and public health consequences of genetically modified foods.

Many packaged goods -- especially cereals -- contain corn and corn byproducts, soy, and sugar beets that are grown from genetically modified crops. While General Mills and Kellogg have defended the use and safety of these crops, the cereal makers will need to respond to these growing concerns.

General Mills says no to GMOs in Cheerios
General Mills recently announced that its original Cheerios cereal will no longer be made with genetically modified corn starch and corn syrup. The shift is designed to satisfy the demands of consumers who have been pressuring General Mills to label foods when GMOs are used or eliminate them altogether. This is probably a wise move given the company's history of being ecologically friendly.

Ultimately the value beyond being "green" is found in the bottom line. In General Mills' last quarterly report for the period ending Nov. 24, the company announced net sales of approximately $4.9 billion while diluted earnings per share were $0.84, a gain of 2% compared to the same period in the prior year.

General Mills also reaffirmed its guidance for fiscal 2014. The company anticipates adjusted diluted EPS of between $2.87 and $2.90. However, management acknowledged earnings this year may also face headwinds from fluctuations in the currency markets.

The cereal maker's share price is presently hovering at $49, a bit off the 52-week high of $53 and change. Furthermore, the forward price-to-earnings ratio of 15.7 is lower than the current mark of 18.2, which could mean share price pressure in the short term.

That said, General Mills has a long history of paying dividends, and the company intends to continue introducing new products that management believes will support long-term earnings growth.

Kellogg has more snap, crackle, and pop to come
Kellogg is the largest cereal maker in the world. So the GMO controversy is one to which the company must respond as well.

For the third quarter of 2013, the leading cereal maker reported net sales of $3.7 billion -- matching the sales numbers posted in the third quarter of 2012. Introducing new products and answering to consumers' health concerns will be needed to boost sales going forward.

Moreover, Kellogg's net earnings for the period were $326 million, which translates to $0.90 per diluted share -- a slight increase of a penny from the third quarter of 2012. The company, however, noted that the earnings figures also included costs associated with its acquisition and integration of Pringles (about $0.02 per share) as well as other new initiatives.

And like many other food producers, the company is modifying its cereal brands to make them more appealing to health-conscious cereal lovers.

In fact, the company made a leap into the gluten-free arena when it introduced gluten-free Rice Krispies without sacrificing the snap, crackle, and pop. Another favorite item of health-conscious consumers is the company's Kashi cereals, which are made with a combination of whole wheat and rice grains. This line now features 11 non-GMO cereals.

Ultimately, these and other product modifications and innovations will support long-term sales growth. To satisfy consumer demands regarding the use of GMOs, the company will continue modifying cereal formulas where it can to eliminate the use of corn-based flavors, starches, and sugar beets that come from GMO crops. And the company's long history of solid sales figures should provide Kellogg with sufficient resources to do so without adversely affecting its profits.

Final thoughts for cereal lovers
General Mills and Kellogg have a long history of providing cereal products to their consumers. And while there are challenges ahead across the global village in connection with the GMO controversy, both General Mills and Kellogg will continue to meet consumer demands by introducing new products. Producing cereals in ways that are environmentally sound will benefit these companies as well as consumers and shareholders in the long run.

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