19 March 2020

General Mills Just Baked Up a Storm

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What’s happening: Amid downward estimate revisions by companies of all sizes, General Mills surprised the market by raising its earnings guidance for fiscal 2020 after reporting mixed results for its third quarter on Wednesday.

What happened: Investors were quick to forgive General Mills for reporting a meaningful decline in earnings and its sales short of expectations. Instead, the focus was on the Minneapolis-based company’s upbeat earnings for the third quarter and the upward revision to its annual guidance.

Details: The coronavirus outbreak helped General Mills lift its earnings outlook. Customers have been stockpiling everything, from the company’s cereals to its dog food, with the spread of COVID-19 in the US. Despite this scurry, General Mills kept its sales outlook unchanged due to uncertainty in the current situation.

For the third quarter,

  • General Mills reported adjusted earnings of 77 cents per share, representing a 6% decline versus the same quarter last year. Despite the decline, the figure came in ahead of the consensus estimate of 76 cents per share.
  • Sales came in flat at $4.18 billion, missing the consensus expectations of $4.21 billion.
  • Adjusted gross margin shrank 30 basis points in the quarter due to higher input costs.

The company now projects constant-currency adjusted operating profit growth of 4%-6%, versus its earlier range of 2%-4%.

Why it matters: General Mills experienced the same situation in China just a month back and was already preparing for a coronavirus outbreak in other markets. The company’s sales of Wanchai Ferry frozen dumplings had spiked in China, when the lockdown was first enforced.

The maker of Cheerios and Old El Paso taco shells is now witnessing a surge in orders from US retailers. The company is running its plants at full capacity and its executives are in closer contact with retailers across various countries. General Mills has staffed a 24/7 operation, known as “control tower,” where workers are regularly checking across its business verticals to estimate demand levels and match them with its supplies.

Management said that customer demand patterns were changing every week. Last week, there was a massive spike in the sales of cereal, soup and baking flour. Sales this week have grown across all its categories. This change reflects restaurants being closed and people refraining from ordering delivery.

How the shares have performed so far: Shares of General Mills dipped more than 7% immediately after the release of quarterly results. The stock soon cut back most of its losses and settled only 3% lower when markets closed yesterday. The company’s shares have climbed 9% over the last five trading days, even as the US stock markets suffered a strong sell off and had to pause trading to curb the freefall.

What to watch: The latest quarterly results include the impact from the spread of coronavirus in China, a region that contributes around 4% of General Mills’ overall sales. The outbreak in the US could have a bigger impact on the company’s business, with North America accounting for around 60% of its total sales. Investors will be looking out for news of the virus spreading in the US.

The Markets Today

     

US stocks will be in focus today, with the market crash worsening on Wednesday. For the fourth time this month, trading in the US stock markets had to be halted amid a rapid and steep decline.

Context: US stocks nosedived shortly after trading opened on Wednesday. The S&P 500 plummeted 7%, triggering the circuit breaker yet again, which paused trading for 15 minutes. The Dow tumbled to new correction lows and has lost more than 25% so far this month.

Details: The US stock market downtrend continued on Wednesday, with confirmed coronavirus cases exceeding 200,000 globally. News of companies gradually closing out their businesses sparked fear among investors. Auto leaders including Ford, General Motors and Fiat Chrysler are planning to close their manufacturing facilities in the country in response to the coronavirus crisis. Shares of auto manufacturers tumbled yesterday, with the stocks of the three majors dropping by 15%.

On a positive note, some stocks like consumer staples from coronavirus-induced panic shopping. Walmart’s shares reached a new high on Wednesday, with consumers stocking up on food and cleaning products.

The NYSE (New York Stock Exchange) announced plans to temporarily shut its trading floor from March 23 and use electronic trading alone. The decision was taken after two persons tested positive for COVID-19 at the exchange.

The Dow plunged over 1,300 points to settle at 19,898 on Wednesday, while the S&P 500 fell 5.18% to 2,398. The Nasdaq 100 dipped 4.7% to close at 6,989.84.

Coronavirus cases in the US have exceeded 9,000 with around 150 deaths. Meanwhile, Italy has confirmed more than 35,000 COVID-19 cases and its death toll stands at around 2,900. In total, there are over 219,000 cases worldwide.

What to watch: The European Central Bank (ECB) has announced a €750 billion stimulus plan to provide some relief to markets. US stock futures remained highly volatile this morning, with traders responding to every new announcement. The market will keep a close eye on the major indices today, expecting these to oscillate between gains and losses, as experienced so far with US stock futures.

Investors also await reports from the US on initial jobless claims, current account, Philadelphia Fed manufacturing index and CB leading index. Initial jobless claims, which fell 4,000 to 211,000 last week, are expected to increase to 220,000. Analysts are expecting the current account deficit to narrow to $109 billion in the fourth quarter, from a reading of $124.1 billion in the previous quarter. The Philadelphia Fed manufacturing index is expected to fall to 10 in March, from February’s reading of 36.7.

Other Markets: European indices were trading higher at 9:00am GMT, with the FTSE 100, German 30 and French 40 up by 0.1%, 0.4% and 2.5%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

South Africa’s building permits and interest rate decision, Canada’s new housing price index and ADP employment change, Argentina’s consumer confidence as well as the change in America’s natural gas inventories.

 

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