The Best Part Of General Mills' Earnings Release Was The Guidance

General Mills, Inc. (NYSE: GIS) reported disappointing 4Q results, but better-than-expected FY17 and FY18 guidance. Credit Suisse’s Jason English maintained a Sell rating on the company, while raising the price target from $58 to $60. The analyst commented that the margin expansion goal seemed aggressive and recommended selling the shares “since history does not lend credibility.”

Although General Mills reported its 4Q results better than consensus, the beat was on account of a calendar shift, ad cuts and tax. However, the company’s FY17 and FY18 guidance reflected +300bps EBIT margin expansion over the two years.

What History Tells Us

Although industry peers have exhibited significant margin expansion, history suggests that General Mills may struggle to accomplishing this.

“Evidence of successful productivity at GIS from past initiatives is absent from results and we believe the entirety of margin expansion over the past four years can be attributed to recent input cost deflation and ad spend cuts,” analyst Jason English pointed out. He added that confidence had been further dampened by the company’s failure to achieve its last multi-year goal.

Related Link: General Mills Makes New All-Time High Following Q4 Report

“Our past analysis of its Trade Budget Optimization (TBO) opportunity bolsters our confidence that some success can be found on that front and we are encouraged by the philosophical shift away from chasing unattainable sales goals by management, but we discount the likelihood of success on other fronts despite the wrapping of the initiatives under a buzzworthy Portfolio Segmentation banner,” the analyst wrote.

The EPS estimates for FY17 and FY18 have been raised from $2.95 to $3.01 and from $3.07 to $3.14, respectively, mostly reflecting higher cuts in ad spend and modest TBO benefits.