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.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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