What happened
Shares of food giant General Mills, Inc. (GIS 0.56%) dropped 10.9% in March, according to data provided by S&P Global Market Intelligence, after reporting worse than expected profits in the fiscal third quarter of 2018. Costs that are largely out of General Mills' hands drove the weaker than expected results, but that isn't much consolation for investors right now.
So what
Third-quarter results announced March 21, 2018, showed a 2% increase in sales to $3.88 billion and a 9% increase in operating profit to $593 million. Net income was also up 163% to $941 million, or $1.62 per share, primarily because of the Tax Cuts and Jobs Act passed in December.
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While results seem positive on the surface, they didn't hit management's own expectations. In the second-quarter earnings release, management said operating profit was expected to be up double digits in the second half of the year, hopefully offsetting an 11% decline in operating profit in the first half of the year. That led to a reduction in operating profit guidance from flat to up 1% to new expectations of a 5% to 6% decline in operating profit for the fiscal year.
Now what
If you dig into the numbers, General Mills is doing well on the top line, growing sales organically at 1% in the fiscal third quarter, which isn't bad in a competitive food environment. But the company faced headwinds like rising raw material costs and higher shipping costs that hurt operating profit more than expected. These costs may be out of management's control, but that doesn't mean it didn't cause the stock to slide last month.
Long term, I would worry more about General Mills' top line than the ups and downs of commodity prices to its bottom line. If the company can maintain organic growth, bolstered by the recently announced acquisition of Blue Buffalo Pet Products, it should be a solid stock long term, and stock volatility from commodity prices is just part of the food business today.
