General Mills (GIS +0.57%) and Kellogg (K +0.00%) are two of the largest food product manufacturers in the world. Each company has reported earnings over the last 6 weeks, with one missing estimates and the other surpassing them. Let's take a look at each report and other information to determine which is the better investment opportunity today.
The companies
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, with offices and manufacturing facilities in more than 30 of them.
Kellogg is the company behind brands such as Kellogg's, Keebler, Special K, Pringles, Frosted Flakes, Pop Tarts, and many more. Kellogg describes itself as the world's leading cereal company, second largest producer of cookies and crackers, a leading producer of savory snacks, and a leading North American frozen foods company. Today, Kellogg operates facilities in 18 countries and has products available in more than 180.
The results
General Mills
On Dec. 18, General Mills reported second-quarter results for fiscal 2014, missing estimates on both the top and bottom lines. Here's 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, as the company's gross margin decline 100 basis points to 35.7%. International retail was the only segment to report year-over-year sales growth, with a 2% increase; the two other segments were negative, as U.S. retail sales declined 1% and convenience stores and foodservice 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 when companies use strong quarters as an excuse for poor performance the following year, but I believe Mr. Powell's team can turn it around.
Kellogg's
On Nov. 4, Kellogg reported third-quarter earnings for fiscal 2013. The results exceeded analyst estimates and looked like this:
| Metric | Reported | Expected |
| Earnings Per Share | $0.95 | $0.89 |
| Revenue | $3.72 billion | $3.71 billion |
Earnings per share increased 6.7% and revenue declined 0.1% year-over-year, as Kellogg's gross margin declined 39 basis points to 39.02%. North American sales decreased by 1.3%, as sales of morning foods, snacks, and "others" saw declines and only the specialty foods segment reported growth. Internationally, sales in Europe and Latin America grew 6.4% and 3.4% respectively, while sales in the Asian Pacific declined 9.6%. Overall, it was not a great quarter for Kellogg compared to 2012, but it did exceed analyst estimates, so it can be considered somewhat of a success.
Updated outlook
In each quarterly report, the companies also provided updates on its full-year expectations. General Mills reaffirmed its full-year outlook and Kellogg narrowed its outlook to the lower-end of its previously provided estimates. Here's the updated expectations:
General Mills
General Mills' 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 helped calm investors' stomachs. The company reaffirmed its full-year outlook and expects earnings per share to be between $2.87-$2.90; this would represent a 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.
Kellogg
For the full-year, Kellogg announced that is expects earnings to come in at the low-end of its previously estimated range of $3.75-$3.84. This is not what investors enjoy hearing, but at least the forecast was not dropped below $3.75. Net sales are expected to grow 4%-5%, which is lower than the previously guided 5% growth. These lower estimates are due to weaker-than-expected sales in most categories to-date and it does not seem like the weakness will subside in the fourth quarter. Kellogg's yearly growth will likely be lower than General Mills', but not by much, showing that it is an industrywide slowdown and not an operational issue.
And the winner is...
When factoring in the product mixes, recent earnings, and updated outlook, the winner of this matchup is General Mills. Even though it trades 6.29% below its 52-week high and Kellogg trades 10.96% below its, I believe General Mills has the most upside potential over the next year. Its bountiful 3.07% dividend will add to those gains and will probably even see an increase in the coming quarters. Kellogg still makes for a great investment opportunity today, but General Mills was more confident in its expectations for the next two quarters.
The Foolish bottom line
General Mills and Kellogg are two very well-run American titans who have been experiencing slowed sales this year. Each company pays a dividend of 3.05% or higher and these dividends have been growing for the last several years. Both companies would make great investments today, but General Mills is my favorite of the two at current levels. There may be further weakness in the stocks, so choose your desired price point wisely and initiate a position if it falls to that level.
