General Mills rates a `hold'

Your Money

January 14, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

How does the future look for my shares of General Mills Inc.? It has so many popular brands I would think it would do even better than it has.

- R.L., via the Internet

As one of North America's largest packaged-food companies, it is indeed a company of champions: Wheaties, Cheerios, Betty Crocker, Pillsbury, Gold Medal, Hamburger Helper, Progresso and Yoplait.

It is constantly introducing products, benefiting lately from new Fruity Cheerios and Caribou Coffee granola bars. Eighty new products will be launched in its current fiscal year, among them low-sugar Disney-branded cereals and Nature Valley cereals.

Making its products more healthful has been an emphasis in recent years.

General Mills shares (GIS) rose 17 percent in 2006, slipped 1 percent in 2005 and gained 10 percent in 2004. Earnings increased 4 percent in its most recent quarter.

The quarterly dividend was increased to 37 cents a share from 35 cents. Having reduced its debt load considerably, its board also has authorized buying back up to 75 million shares of its stock.

But that doesn't mean it can never fall from the winner's stand.

Aside from competing with archrival Kellogg Co., General Mills faces lower-priced private-label products that are gaining in popularity and quality. The aggressive move by Wal-Mart Stores into the grocery business has increased the consolidation and price competition in that industry.

With U.S. sales representing 85 percent of General Mills' annual revenue, it may need to pay considerably to buy regional brands to expand significantly overseas.

Those opposing dynamics result in a consensus "hold" rating among analysts for General Mills stock, according to Thomson Financial, consisting of five "strong buys," three "buys," 11 "holds" and two "under performs."

Though the company has become more efficient, traditional industrywide concerns of higher costs for commodities, packaging and distribution remain. Chairman and chief executive Stephen Sanger expects the cost of food ingredients to keep rising in the second half of this fiscal year. New products also mean added marketing costs.

Sanger, who has headed the company for more than a decade, has overseen the difficult acquisition of Pillsbury in 2001 and delivered on promises to make the company's performance more reliable.

Earnings are expected to rise 3 percent in its fiscal year ending in May and 10 percent in fiscal 2008. The projected five-year annualized growth rate is 8 percent.

Please give me your opinion of Brandywine Fund, which is in my retirement account.

-K.R., via the Internet

You know how some investors just don't have it in their hearts to let stocks go? Well, that's not the case with this high-energy fund.

It goes boldly wherever it sees growth opportunities and often has 200 percent portfolio turnover in a given year.

That strategy has done splendidly long term, though recent results have been so-so. Because it trades quickly, it generates a lot of short-term capital gains and fits best in a tax-sheltered account.

The $4.2 billion Brandywine Fund (BRWIX) gained 8 percent over the past 12 months to rank in the upper half of mid-cap growth funds. Its three-year annualized return of 12 percent puts it in the top third of its peers.

Portfolio manager William D'Alonzo has been in charge since late 1985. He and fund family founder Foster Friess are heavily invested in Brandywine funds. D'Alonzo also runs the large-cap Brandywine Blue Fund and the mid-cap Brandywine Advisors Fund. Because the fund invests on company-by-company considerations, its portfolio can become heavily weighted in a few sectors.

Health care, industrial materials and technology hardware are its largest concentrations. Top holdings recently were Hewlett-Packard, Fisher Scientific International, Kohl's, Precision Castparts, Weatherford International, TJX, Comcast, Baker Hughes, Best Buy and Harris.

This "no-load" (no sales charge) fund requires a $10,000 minimum initial investment and has an annual expense ratio of 1.08 percent.

What do they mean by the expensing of options, and why are companies unhappy about doing this? Is it a problem at some companies more than others?

-V.J., via the Internet

For years, companies used stock options to compensate employees and encourage them to stay with the firm. Financial regulatory bodies and most U.S. businesses had considered such options non-operating expenses, not to be included in profit and loss reporting.

Because they weren't salary or bonuses on their balance sheets, many firms granted options worth tens of millions of dollars. Technology firms were especially aggressive, and new rules have crimped their profits.

"After exhaustive deliberation and debate, the Financial Accounting Standards Board and Securities and Exchange Commission determined stock options are indeed compensation and should be treated like every other form of compensation as operating expenses," said Scott Kessler, head of technology equity research at Standard & Poor's Corp.

With this accounting standard in effect for 2006 results, comparisons with 2005 have been difficult for some firms, especially those in Silicon Valley, the epicenter of stock options.

"The biggest reason for the change is that it reflects financial reality and needed to be made for that reason," Kessler said.

yourmoney@tribune.com

Andrew Leckey writes for Tribune Media Services.

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