General Mills Inc. ( GIS ) is set to report fourth-quarter and fiscal 2014 results on Jun 25, before the market opens.
Last quarter, it delivered a negative earnings surprise of 1.59%. In fact, General Mills has posted negative surprises in three of the past four quarters. Let's see how things are shaping up for this announcement.
Factors to Consider this Quarter
In the fourth quarter, management expects lower input cost inflation combined with cost savings to boost gross margins. Moreover, tax rate and shares outstanding are expected to be below the year-ago quarter level in the fourth quarter.
Thus, lower input costs and taxes coupled with decreased share count are expected to lead to double-digit growth in adjusted earnings per share.
However, General Mills' top line has been soft in the last few quarters due to sluggishness in its two most important categories - cereals and yogurt. We believe the trend will continue in the fourth quarter as well.
General Mills'U.S. yogurt business remains challenging as increased sales prices in response to dairy cost inflation is making the products less competitive. Though the business showed improving trends in the first half of fiscal 2014, it declined again in the third quarter due to weak category trends.
Moreover, the core cereals business is not doing too well due to weak category growth resulting from insufficient advertising by the cereal companies. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread and peanut butter is hurting category growth.
Additionally, the slowdown in the U.S. food industry trends and currency headwinds are expected to create macro pressures on the top line.
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, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.00%.
Zacks Rank: General Mills' Zacks Rank #3 (Hold) when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
The Hain Celestial Group Inc. ( HAIN ), with Earnings ESP of +1.12% and a Zacks Rank #2 (Buy).
Campbell Soup Company ( CPB ), with Earnings ESP of +2.04% and a Zacks Rank #3.
The Hershey Company ( HSY ), with Earnings ESP of +5.33% and a Zacks Rank #3.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.