General Mills Thursday forecast better-than-expected first-quarter earnings and sales, helped by a 5 percent gain in its "Big G" cereals, which include Cheerios, Wheaties and Lucky Charms.
Shares rose 2.8 percent following the announcement. In a statement, the food maker said it had benefited from shipments of new cereals and a move to reduce the size of its cereal packages, allowing it to charge more per ounce.
General Mills, whose other products include Pillsbury dough and Progresso soup, expects to earn 81 cents a share for the quarter ended Aug. 26, it said, including restructuring costs of $13 million before taxes.
Wall Street analysts, on average, had been expecting earnings of 76 cents a share, according to Reuters Estimates.
The Minneapolis-based company also said sales for the quarter are expected to exceed its long-term target of low single-digit growth.
UBS analyst David Palmer upgraded General Mills' shares to "buy" from "neutral" following the announcement, calling the company's outlook conservative. He added that the "right-size, right-price" cereal packaging and pricing initiative appeared to be gaining better traction than many expected.
"Consensus is too negative on its progress," Palmer wrote.
General Mills shares were up $1.57, or 2.8 percent, at $57.82 in midday trade. The stock trades at about 15 times analysts average earnings estimate for next year, compared with a multiple of 18 for rival Kellogg.
JP Morgan analyst Pablo Zuanic said, however, that investors should "not chase the stock" as much of the earnings outperformance was due to a buyback of 20 million shares during the quarter.
"We believe (General Mills) has had to aggressively promote its cereal line to clear the larger boxes that are being replaced by smaller ones, hurting margins in the process, and it remains unclear how long it may take for those promotions to be phased out," Zuanic, who has an "underweight" rating on the company's shares, said in a client note.
Also on Thursday, General Mills affirmed its full-year earnings forecast of $3.39 to $3.43 a share. Analysts, on average, expect full-year earnings of $3.44 a share, according to Reuters Estimates.