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General Mills vs. Kellogg
Dueling Fools

By Selena Maranjian (TMF Selena) and Rick Munarriz (TMF Edible)
September 12, 2003

If it's true that breakfast is the most important meal of the day, then General Mills (NYSE: GIS) and Kellogg (NYSE: K) must be pretty important companies. After all, they dominate the ready-to-eat cereal shelves as they command 32% and 33% of the market, respectively. And that's not all when you consider the many other popular brands that these two food conglomerates are putting out once you start thinking outside of the cereal box.

But which company will provide the better investment? Not all Fools agree. Selena Maranjian (TMF Selena) thinks she sees major gains in General Mills while Rick Munarriz (TMF Edible) says that you better L'eggo his Kellogg. So have your milk carton at the ready as these two Fools whip out their cereal spoons. It's a cereal thriller!

General Mills
By Selena Maranjian (

I confess: I admire General Mills not solely because of its financial performance and growth prospects as a stock. In addition to those things, I'm also simply a fan -- of Lucky Charms. Magically delicious, they've been a part of my breakfast routine for more years than I care to reveal.

But back to business. Permit me to introduce you to a company you should know a little better.

The company
Based in Minneapolis, Minn., General Mills traces its roots all the way back to 1866. Today it's a food giant, raking in some $11.5 billion annually in sales. It's perhaps best known for its "Big G" cereals, which feature Lucky Charms, Cheerios, Chex, Total, and Wheaties. (Here's a full, and impressive list of the firm's cereal offerings.) Other company brand names include Hamburger Helper, Betty Crocker, Old El Paso, Progresso, Green Giant, Lloyd's, Pillsbury, Totino's, Hungry Jack, Bisquick, Gold Medal, Pop Secret, Nature Valley, Yoplait, Haagen-Dazs, and more.

There's much more, too. It's involved in 8th Continent, a soy products joint venture with DuPont (NYSE: DD), and in a joint venture with Nestle (OTCBB: NSRGY) to develop cereal brands globally. Its joint venture with PepsiCo (NYSE: PEP), Snack Ventures Europe, is Europe's top snack company. General Mills also has a Bakeries and Foodservice division, distributing baked goods and mixes to foodservice operators, cafeterias, restaurants and convenience stores.

The numbers
Between May, 1997 and May, 2002, General Mills's average annual return to shareholders, including dividends, was a strong 10%. That's during a period when much of the market surged and then swooned.

The company's 2001 acquisition of Pillsbury caused a major hiccup in operations. Fortunately, it appears to have been a short-term hit, which may pay off richly in the long-term. The acquisition, which nearly doubled the company's sales and employees, adds new products and brand names to General Mills and also enhances the company's international position and its food service operations.

In 2002, management expected to get back on track pronto, stating that they were shooting for 50% improvement in earnings per share (EPS) in fiscal 2003, over fiscal 2002. Instead, they delivered 81% improvement in EPS and a 32% increase in sales. Cash flow from continuing operations rocketed ahead 78%. (Learn more in the company's 2003 Annual Report, in .pdf, or Acrobat, format.)

The future
I think the future is bright for General Mills, partly due to its management. Here's a snippet from management's letter to shareholders in the firm's 2003 annual report: "But while [Pillsbury] integration progress met or exceeded our objectives, our unit volume and earnings performance during the integration period did not.... Our domestic retail shipments were down 3 percent in the second half on a comparable basis (as if we had owned Pillsbury in the prior year, too)."

I like the candidness of comments like these -- it feels like the company is talking straight to shareholders. I also like the effort made to help the reader understand business jargon, such as when they explain what they mean by comparable sales.

In 2003, management laid out goals for the three-year period through 2006, against which investors can eventually hold it accountable. These include increasing net sales by 5% to 6% annually, increasing earnings per share by 11% annually, boosting cash flow from operations, and paying down debt.

Watch for this company to offer tastier and tastier financial results in the future. (And try a box of Lucky Charms sometime, if you haven't done so recently.) In the meantime, the stock sports a respectable dividend yield of about 2.3%, and its dividends are pretty reliable -- they've been paid without interruption for 105 years!

By Rick Munarriz (

Kellogg shares? They're grrrrreeeaaat! But don't take Tony the Tiger's word for it. Check your cupboard. Beyond the flagship line of excellent breakfast cereals, if you're stocking Pop-Tarts, Keebler cookies and Nutri-Grain bars, or Cheez-It crackers, then you're part of the Kellogg consumption family. Crack open a fridge and if Eggo waffles or Morningstar Farms' healthier fare are resting invitingly on your refrigerator or freezer shelves, there's just no way around it: You're smitten by Kellogg's handiwork.

With $8.3 billion in sales last year, the company has made breakfasts big business. So is Special K just another popular cereal in the company's vast product line or is it also fitting praise for the company's ticker symbol?

Putting the "battle" in its Battle Creek, Michigan, homestead, Kellogg has had no problem maintaining its market share leadership in the cereal war. Back in July the company posted an analyst-thumping 17% gain in second-quarter profits. While a weak dollar has helped prop up earnings for many exporters -- and, yes, Kellogg is a global powerhouse -- the company's internal growth was still impressive. In a sleepy, yet seemingly recession-proof industry, Kellogg's 3.5% top line growth before the favorable impact of currency translations is commendable.

One thing that has bogged down the sector in the past is discounting. From generics flooding the market to rivals willing to provide promotional savings, it's not always easy filling that breakfast bowl in the morning. That's why Kellogg is making some pretty nifty moves to improve its market position without sacrificing its margins.

Sure, you can pick up that marked-down Corn Flakes knock-off for two bucks, but folks have had no problem ponying up twice that much for a relatively small box of Special K Red Berries.

From its recent rollout of Disney (NYSE: DIS)-branded cereals to its new line of Frosted Flakes and Froot Loops cereal bars and Nutri-Grain chewy granola products, Kellogg is making its wares even more distinctive and worthy of their price premiums.

What's on tap is also incrementally exciting as the company is introducing Eggo-branded syrups and Krave energy bars for nutritiously conscious chocoholics. The 2001 acquisition of Keebler also finds the company with a dash of Keebler magic as its snack products make Kellogg a round-the-clock munching experience.

Yes, the maker of Rice Krispies has plenty of Snap and Crackle but what will "Pop" the stock higher?

Earlier this month, Kellogg reaffirmed its full-year profit target. Looking to earn between $1.88 and $1.90 a share this year has the company's stock trading at less than 18 times 2003 earnings. That's at the low-end of the company's historical P/E multiple over the past decade.

Income-minded investors will appreciate the stock's generous 3% dividend. With Wall Street valuing the company at just 16 times its projections for next year, the downside appears fairly limited if the company continues to move in the right direction.

If you check the stock's chart over the past three years, you will see a steady uptrend. I'm guessing that many of your own investments haven't treated you as kindly on this side of the millennium.

While milk-drenched cereals may go limp, shares of Kellogg look crisp for the long haul. With its core of well-known products and exciting new lines that afford the company the luxury of an industry rarity -- double-digit growth in its marketing budget this year -- is it any wonder why Kellogg is the Apple Jack of my eye?

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