Who would have thought Cheerios could be more profitable than investment banking?
Smothered beneath the big news yesterday, when the overall market plunged by more than 4%, General Mills
You probably didn't hear that the cereal company's stock gained nearly 2% on news of its first-quarter earnings report. Of course, if you didn't hear the good news, you also didn't hear that although net sales grew by 14%, earnings dropped by 3.6% as hefty costs weighed on the bottom line. The gross margin dropped by 100 basis points, too, as the cost of goods sold exploded by 20.3%.
This isn't the first time we've heard about commodity prices pinching margins. And those prices aren't expected to dwindle anytime soon: Management is projecting cost inflation of 9% for the year. Still, General Mills has consistently increased its prices to keep up with rising input costs, and since demand hasn't faltered yet, the company will probably keep doing so. Implementing optimal price and mix levels should result in mid-single-digit sales increases for the year.
In fact, management is so optimistic about its ability to raise prices alongside rising costs, it raised the company's guidance to a range of $3.81 to $3.85 per share for the year. Those figures leave investors paying roughly 18.5 times this year's expected earnings. That might appear pricy in today's beaten-down market, but the company thinks otherwise. It has plowed more than $500 million into repurchasing shares, in a clear indication that General Mills might just be sitting at an attractive price.
As the unstable economy continues to wobble, General Mills and its rivals, such as Heinz
Of course, it's important to pick your foodies wisely. Some producers, such as ConAgra
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Fool contributor Colleen Paulson holds no positions in any of the stocks mentioned in this article and isn't surprised that people turn to Haagen-Dazs when the economy tanks. The Fool's disclosure policy opts for pizza rolls when times are tough.