CAG, MKC, GIS – One of these Things is not like the Others

We don’t generally review quarters, but we do like to try and provide context for investors and we think it is important to put CAG into context with the two prior earnings releases in the packaged food sector.



GIS (March 20th) – Beat consensus by $0.07, raised full year guidance by $0.01 at the high and low end (1 quarter remaining).  Implied Q4 guidance is $0.51 per share vs. consensus of $0.59 ($0.08 below).  The company reduced advertising and media spending by 6% in its U.S. retail segment, offsetting some of the weakness on the gross margin line.

 

MKC (April 2) – Beat consensus by $0.01 (recall that the company had previously guided down this quarter), but lowered Q2 by $0.05 versus consensus.  The company maintained full-year guidance (had already guided down significantly back in the December quarter).

 

“While brand marketing support was $4 million lower in the first quarter of 2013, the company spent an additional $3 million for increased price promotions and paid allowances to gain distribution for new items” (emphasis added)

 

CAG (April 3) – Missed consensus by $0.01 ($0.55 versus $0.56), top line was weaker than expected due to a 3% decline in organic volume (troubling), but the company did see the benefit of 3% price/mix.  Importantly, the company increased marketing investment in its base business by 33% year over year (about $0.03 per share in EPS).  CAG maintained full year guidance of approximately $2.15 (one quarter remaining).

 

To be clear, we are in no way suggesting that EPS and revenue don’t matter.  However, quality matters as well and we view CAG’s EPS miss as a high quality problem in that it represents an investment in the business for the longer-term.

 

Bottom line for us is that this quarter doesn’t prompt any changes in either our estimates or our thinking on the name and we continue to see CAG as the best combination of value and “story” in the packaged food space.

-Rob

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst