A Large-cap Stock with a Surprise

— Ahead of the Street Column, by Mitchell Clark, B. Comm.

One large-cap company just reported its financial results and the numbers beat consensus Street estimates. Like I wrote previously about the upcoming earnings season, this company reported very modest top-line growth, but its earnings came through surprisingly strong.

General Mills, Inc. (NYSE/GIS) is a very well-known food manufacturing company that makes some of the everyday brands we all know: “Cheerios,” “Pillsbury,” “Nature Valley,” “Green Giant” and “Yoplait.”

Usually when large-cap companies report their earnings, the kind of earnings that Wall Street analysts use for their expectations are called adjusted earnings. Typically, adjusted earnings leave out one-time items that don’t reflect a business’ usual operations on an ongoing basis. General Mills beat the Street with better-than-expected adjusted earnings and also guided its 2010 earnings above current expectations.

In its latest quarter ended May 31, 2009, the company reported that its total sales grew five percent over the comparable quarter to about $3.65 billion. This was just slightly short of consensus estimates. Earnings, however, surprised the marketplace by coming in at 358.8 million dollars, or $1.07 per share, up substantially from earnings of 185.2 million dollars, or $0.53 per share, in the same quarter last year. According to General Mills, it’s been controlling costs while investing in new marketing campaigns trying to convince customers not to be tempted to try cheaper, in-store brands because of the recession. It seems that this strategy is working, because any growth in this latest quarter for such a large-cap company is a real accomplishment.

I think the General Mills story will be very common this upcoming earnings season. The story will be very modest sales growth, but surprisingly strong earnings.

For some years now, most corporations have become extremely lean in their operations. You can thank just-in-time inventory management, outsourcing, and part-time employment for this. And, in any manufacturing or production plant, it’s become very easy to lay off and hire new employees as business conditions change. So, when a recession hits, a lot of companies are already well-positioned to ride out the storm.

My prediction is that we’ll see the strongest outperformance in the technology sector, particularly in large-cap companies. It will be very interesting to see what companies like Oracle and Cisco Systems have to say in their earnings reports, especially their forecasts for the future. In the last month, a dozen Street analysts raised their earnings expectations on Oracle, for the upcoming quarter and the full year.