Redeploying Assets
After you have received this Alert, I am going to sell out of the General Mills (GIS) position this morning at $37.12 and lock in the 8% gain that I have on the trade. It's a great company in a challenging industry, as measured by Kellogg's (K) disappointing results this morning (North American cereal volumes fell 6%, international sales declined 6%, and Europe was down 10%) as price competition remains challenging.
General Mills is much better positioned than Kellogg, and I like the emphasis on holistic margin management throughout the organization. But the combination of tough macro environment, a picky, price-focused consumer and high raw-material costs makes me want to lock in the gains that I have in General Mills and revisit it again if it gets back to the low $30s, which is where I initially bought the stock.
I am also going to sell 800 shares of Teva (TEVA) at $50.38 after listening to the call. The quarter was impressive on gross margin expansion and the earnings beat, but investors will not be convinced that the company can continue to deliver such strong margin results going forward into a slower-than-expected year for generic launches. Guidance was not raised -- likely a matter of conservatism -- but at this juncture I like Medco (MHS) better, particularly after its very strong quarter.
I'll use some of the cash to buy 300 shares of Marathon Oil (MRO) on the 5% decline today, at $33.71, even though its conference call isn't until 2 p.m. The 5% drop is very unusual for such a high-quality company, and I believe the turnaround story remains intact. Part of the problem is that expectations were high headed into the print, and "whisper numbers" on earnings and production got out of hand. But Marathon is a story about restructuring away from noncore refining/marketing assets and redeploying the money into the faster-growing area of exploration and production. It's also a story of cash-flow improvement as the company spends less on maintenance capex for its refineries and uses the cash for debt reduction, share repurchase and overall growth development.
In the quarter, Marathon's exploration-and-production results were strong, up 8%, with segment income at $854 million vs. $687 million, and refining and marketing fared better than I thought at $285 million income vs. $158 million a year ago. The disappointment lies in the softer production results from its new project in the Gulf of Mexico, the Droshky project, even though this project is still in very early stages. Despite Droshky, management reiterated production guidance of 4% from 2008-2011 and 5% in 2011-2012 (which was actually better than I expected). The growth will come from projects that are under way in the Bakken Shale, Canadian oil sands and its first deepwater exposure in Angola. So I'll listen to the call, but the decline today is too attractive, especially since I trimmed earlier in the week above $35.
I am also going to add 300 shares to American Express (AXP) at $41.91, because I believe it's a better story than MasterCard (MA) , which reported strong results, and the stock is cheaper. I'll also continue to add to Alcoa (AA) and NovaGold (NG) with 500 shares of each at these prices: $13.11 and $11.80.
After my trades, I will be out of GIS; own 1,000 shares of TEVA, or 1.65% of the portfolio; own 2,900 shares of MRO, or 3.18%; own 1,800 shares of AXP, or 2.43%; own 3,500 shares of AA, or 1.47%; and own 3,800 shares of NG, or 1.44%.
Regards,
Jim Cramer, Stephanie Link, and the Research Team
DISCLOSURE: At the time of publication, Cramer was long GIS, TEVA, MHS, MRO, AXP, AA and NG.
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