As a child of the late ’70s/early ’80s, I grew up with Saturday morning cartoons and General Mills Inc. (GIS) cereal. My sister and I would dump milk on bowls of Trix, Cocoa Puffs and Lucky Charms, after digging through the boxes for the toys inside, of course.
This Generation X morning pastime has died off in recent years, however, with cereal-killers like Greek yogurt and breakfast sandwiches eating into cereal sales and taking a toll on GIS stock.
The health-conscious movement has hit sugary cereals especially hard, with consumers opting for more whole grains and less artificial flavorings and sweeteners.
For its part, General Mills had to make a move, and during the past several quarters, the company has reformulated many of its popular brands to weed out artificial additives and replace them with natural ingredients and whole grains. And investors will be looking to this week’s quarterly earnings report as an indicator for GIS stock’s future.
What the Analysts Expect from General Mills
The ship is far from righted, though, as analysts expect an 11.4% year-over-year decline in earnings to 62 cents per share and a 6% decline in revenue to $4.09 billion. That said, GIS has seen some fruits from its labors. At an industry event last month, Nielsen reported that cereal sales were up 1% in December and January — a marked improvement over the 6% decline posted in November.
It would seem that some analysts are keying off this hint at a turnaround. According to data from EarningsWhisper.com, General Mills whisper number arrives at 64 cents per share, fully two cents better than the consensus. But the bullish sentiment ends there.
Taking a broader look at the brokerage community, Thomson/First Call data reveals that 15 of the 19 analysts following GIS stock rate it a hold or worse, compared to just four buy ratings. Furthermore, the 12-month consensus price target of $58.90 represents nearly a 5% discount to Friday’s close at $61.79. There is room for improvement here, however, if General Mills signals its turnaround efforts are having an effect.
Turning to the options pits, we find some trepidation among near-term GIS options activity. Specifically, the April/May put-call open interest ratio comes in at a rather bullish reading of 0.57, with calls nearly doubling puts among near-term options. However, the April ratio rises sharply to 0.94, with puts gaining favor among options most affected by this week’s quarterly report.
Click to Enlarge Overall, April implieds are pricing in a potential post-earnings move of about 2.3% move for GIS stock. This places the upper bound at $63.20, while the lower bound lies at $60.40.
A break above short-term resistance at $62 would put GIS stock in all-time high territory, while a pullback to the $60 region leaves the shares just above technical support, though any follow through selling could see the share reenter a trading range between $55 and $60.
2 Trades for GIS Stock
Call Spread: Those traders hoping to find a prize inside General Mills third-quarter report may want to consider an April $62.50/$65 bull call spread. At last check, this spread was offered at 51 cents, or $51 per pair of contracts. Breakeven lies at $63.01, while a maximum profit of $1.99, or $199 per pair of contracts, is possible if GIS closes at or above $65 when April options expire.
Put Sell: On the other hand, traders looking for a more conservative play ahead of General Mills earnings report might consider an April $57.50 put sell position. At last check, this put was bid at 23 cents, or $23 per contract. As usual, traders keep the initial premium received as long as GIS stock closes at or above $57.50 when April options expire. The downside is that should General Mills stock trade below $57.50 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $57.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
