GIS - No Need to Chase

What we liked in the quarter:

  • Obviously, beating consensus on both revenue and EPS is better than the alternative
  • EBIT margin did improve slightly in the quarter, even if we aren’t fans of what drove it (see below)
  • Continued sequential improvement in constant currency organic sales growth - +2.6% (versus +5.2% in the lapping quarter).  Last quarter, +1.9% versus +5.4% comparable
  • Strong FCF generation, $2.61 per share in FCF for the nine months of fiscal 2013
  • Share losses in cereal moderated (-0.7 pts in 1H, -0.5 pts in Q3)
  • Yoplait’s growth in the Greek yogurt segment outpaced the category (+137% vs. +49%), against a very low base, of course
  • Progresso growth outpaced the soup category (+7% YTD vs. +5%)

What we didn’t like:

  • Beat consensus by $0.07 in the quarter and took up full year guidance (one quarter remaining) by $0.01 at the low and high end
  • Guided Q4 below consensus – implied guidance of $0.51 for the quarter versus consensus of $0.59 (“EPS expected to be below year-ago - $0.60”)
  • Tax rate ($0.01 per share) and lower interest expense ($0.01 per share) flattered the quarter
  • “Advertising and media expense was 6 percent below strong year-ago levels” – drove some of the decline in SG&A which was the offset to…
  • …lower gross margins in the quarter (53 bps)
  • Yoplait sales growth in the quarter was still negative, despite easy year over year comparisons
  • Big G sales growth was still negative in the quarter

Our inclination here is not to chase this name up, and to be prepared to fade today’s move.  Even if the company is being conservative with its Q4 guidance ($0.54 internally?), consensus still needs to come down by 10% for the quarter.  Valuation isn’t heroic, with GIS trading at 16.9x calendar ’13 versus the group at 20.9x (large cap multiple is 17.0x), but despite the sequential improvement in constant currency organic sales trends mentioned above, GIS is still facing challenges across cereal and yogurt, two key drivers of top line and EBIT.

 

-Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more