General Mills (GIS +1.48%) reported its second-quarter results for fiscal 2014 before the market opened on Dec. 18. The results disappointed Wall Street and the stock declined over 2.4% at the open. It rebounded after the first few hours of trading, but there is still quite a bit of negativity surrounding the company which could result in analyst downgrades. Let's take a look and see if this weakness is a buying opportunity or if we should put General Mills in the penalty box until its next report is released.
The food giant
General Mills is the company behind some of the world's most popular brands, including Betty Crocker, Pillsbury, Haagen-Dazs, Green Giant, Progresso, Yoplait, Cheerios, and numerous others. It provides products to the U.S. and international retail segments, as well as to food service providers and convenience stores. Currently, General Mills' products are available in more than 100 countries, and the company has offices and manufacturing facilities in more than 30 of them.
The results
On Wednesday before the market opened, General Mills reported earnings that missed analyst estimates. Here is an overview of the report:
| Metric | Reported | Expected |
| Earnings Per Share | $0.83 | $0.89 |
| Revenue | $4.88 billion | $4.96 billion |
Earnings per share declined 3.5% and revenue remained unchanged year-over-year at $4.88 billion. International retail was the only segment to report year-over-year sales growth, with a 2% increase. The other two segments were negative; U.S. retail sales declined 1%, and convenience store and food-service sales fell 2%. CEO Ken Powell stated, "The second quarter was a difficult comparison to strong prior-year sales and earnings results for our businesses." I do not like it when a company uses a strong quarter as an excuse for poor performance the following year, but I believe Mr. Powell's team can turn it around.
Easing the pain
The earnings and revenue results were not easy to digest, but the company's outlook helped relieve some of the discomfort. Ken Powell stated, "As we enter the second half of fiscal 2014, we expect our earnings growth to accelerate from first-half levels." This is what we needed to hear and it helped calm investors' stomachs. The company reaffirmed its full-year outlook and it expects earnings per share to be between $2.87-$2.90; this would represent growth of 6.7%-7.8% from fiscal 2013. With the guidance reaffirmed, I believe the stock could turn around and march higher after the next quarterly report if it can deliver.
Slower growth in the industry
General Mills and Kellogg (K +0.00%), its largest competitor, have both reported slower growth over the last few quarters. Here is what each company achieved in its most recent quarter:
| Metric | General Mills | Kellogg |
| Earnings Growth | (3.5%) | 6.7% |
| Revenue Growth | 0% | 0% |
| Gross Margin Growth/(Decline) | 40 basis points | (39 basis points) |
In last year's report, General Mills reported earnings growth of 13.16% and revenue growth of 5.58% as its gross margin expanded 120 basis points to 35.7%. Kellogg reported that a year ago, its earnings increased by 2.5% and its revenue rose by 12.3% as its gross margin declined 200 basis points to 38.76%. Growth has clearly slowed in the processed and packaged goods industry, but both companies still generate ample free cash flow to continue paying their 3%+ dividends. I believe General Mills and Kellogg are worth holding if you already own them, because both will continue paying dividends and initiating share repurchases to return value to their shareholders; however, I would not initiate a new position in either one today.
The Foolish bottom line
General Mills is a great American company that has been building wealth for its investors for over a century. However, its growth has slowed quite a bit as of late, which shows in its second-quarter results. I believe there is more downside to come in this industry, so I would avoid General Mills and Kellogg for the next few trading days at least. This is a great situation where you can pick a price that would be too cheap to resist and pull the trigger if that level is reached.
