This is the third in a series of commentaries that will take a look at five companies whose names begin with the word "General." We recognize some of them as household names and as global conglomerates with operations (just like our military) throughout the world. In earlier commentaries, I reviewed General Electric Company and General Dynamics Corporation. Next up is General Mills
These corporate leaders have few similarities other than company names that start with the same word: general. The word evokes leadership; historically we have had both great and mediocre generals leading the fight, and so it is with these five companies.
Earnings quality is reflected in the financial statements
The Motley Fool offers two databases -- EQ Scan and EQ Score -- that are used to uncover cash flow and revenue recognition issues. Smart financial officers can use several techniques to manipulate financial results, and manipulation of any of the three financial statements usually affects the other two. GAAP rules are complex and require the interpretation of experts (i.e., CPAs). But, a critical eye on these statements can often uncover mistakes or trends that could be important for investors to understand before the battle has been lost.
When I review a company for earning quality, I assign an index rank to the company from one (the lowest quality ranking) to five (the highest quality), as well as an associated numerical score. Just like in the military, a company can earn a "5-Star" rank or a "1-Star" rank. Different companies with the same index rank can have different numerical scores. As the company's financial status changes over time, I adjust its rank and score. I look for trends that affect earning quality.
General Mills gets 3 stars
General Mills is an American Fortune 500 corporation, founded in 1856 and headquartered in Golden Valley, Minn., and is primarily concerned with food products. Aside from its impressive basket of cereal brands, including Cheerios, Kix, Lucky Charms, Chex, Total, Fiber One, and Wheaties, GIS markets many other category leaders around the world, such as Betty Crocker, Yoplait, Progresso, Pillsbury, Green Giant, Old El Paso, Haagen-Dazs, and Nature Valley, among others.
GIS competes with an eclectic mixture of household names such as Kraft Foods, Ralcorp, Kellogg Company, Dean Foods, Coca-Cola Company, and PepsiCo.
GIS and Sun Tzu: Both are generals skilled in the art of war and military strategy
Incredibly, according to a commentary published last week in the current issue of the journal Nature by researchers at the University of California, San Francisco, sugar and other sweeteners are, in fact, so toxic to the human body that they should be regulated as strictly as alcohol by governments worldwide. Aside from the "Big Brother Is Watching" metaphor at play here, as well as the real potential for increased government intervention, there are volumes of data linking sugar consumption to obesity and diabetes, among many other diseases and illnesses. Just like the ancient Chinese general Sun Tzu, recognized as the author of The Art of War, GIS will surely need its best strategists to navigate the uncharted waters in a world more focused than ever on dietary health issues. GIS's performance worldwide relative to providing consumers with products that are nutritious, tasty, and healthful should be reflected in the company's financials. So, how has GIS been conducting its war games?
2011 % Change Quarter Over Quarter
2011 % Change Year Over Year
|Cost of Goods Sold||26%||25%|
|Free Cash Flow||55%||174%|
Data from GIS's financial statements as of Nov. 27, 2011.
GIS has increased revenue year over year but higher input costs have pushed up cost of goods sold by an unhealthy 25% year over year, thereby pressuring its gross margin, operating, and net income margins. GIS's balance sheet shows a bloated accounts payable change of 33% year over year, meaning GIS is keeping cash on the table longer. Accounts receivables has also mushroomed 16% year over year. These tactics help explain why free cash flow has increased markedly while working capital plummeted a whopping -496% year over year.
Per Share Data
|Earnings Per Share||$2.35||$2.40|
|Book Value Per Share||$10.20||$8.81|
|Tangible BV Per Share||($9.82)||($7.43)|
Source: S&P Capital IQ
It is so (probably not) good
GIS recently acquired Yoplait yogurt, and international sales thus far have been sweet. As Yoplait's slogan -- "It is so good" -- suggests, international sales have been positive, but they are overshadowed by anemic U.S. results, brought on by higher commodity prices (e.g., sugar, wheat, corn, rice, barley) that show up as increased raw materials costs. As the collected per-share data above suggest, GIS will have a tough row to hoe going forward unless it can plow these increased costs into higher unit prices.
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