General Mills Inc. GIS is set to report second-quarter fiscal 2016 results on Dec 17, before the market opens. Last quarter, the company delivered a positive earnings surprise of 14.49%.
In fact, the processed food manufacturer has surpassed the Zacks Consensus Estimate in the four trailing quarters bringing the average surprise to 7.47%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Sales and profits in General Mills’ U.S. Retail segment, accounting for 60% of its sales, have been soft due to weak food industry trends amid the changing consumer food preferences. General Mills, like many other U.S. food producers, has been struggling due to the shift in consumer preference toward natural and organic food.
Management is trying to turn the struggling U.S. Retail business around through increased investments in cereals to foster growth, improve the performance of better-for-you snacking and drive solid growth in the natural/organic portfolio. To cater to the evolving consumer tastes in fiscal 2016, the company is investing in consumer-focused innovation and marketing and accelerating distribution of its natural and organic brands to boost sales. Management’s innovation, renovation and marketing efforts slightly improved the trends in this segment, especially yogurt and cereals, over the past three quarters.
Though we expect these trends to continue in the second quarter, a material improvement will take time.
Nevertheless, significant restructuring savings may support steady bottom-line performance in fiscal 2016. General Mills is currently pursuing many multi-year restructuring initiatives focused at improving operational efficiency to generate cost savings and support its key growth strategies.
Earnings Whispers
Our proven model does not conclusively show that General Mills is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is -2.42% as the Most Accurate estimate stands at 80 cents while the Zacks Consensus Estimate is pegged higher at 82 cents.
Zacks Rank:General Mills’ Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some food stocks that have both a positive Earnings ESP and a favorable Zacks Rank:
Campbell Soup Company CPB, with an Earnings ESP of +1.37% and a Zacks Rank #1.
ConAgra Foods, Inc. CAG, with an Earnings ESP of +3.39% and a Zacks Rank #2.
SunOpta Inc. STKL, with an Earnings ESP of +83.33% and a Zacks Rank #3.
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