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No Need To Chase General Mills
There are certainly some good things going on at General Mills (NYSE:GIS). The company is seeing growth again in the majority of its businesses and the company enjoys strong brands (and the better margins those brands bring). All of that said, though, investors should not overlook how much General Mills has benefited from competitor missteps and the extent to which the current stock price already bakes in a lot of this company's quality.
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Iffy First Quarter Results
While General Mills reported 9% headline growth, overall performance was not so exceptional. Organic revenue growth was more on the order of 2%, though there was reported growth in most of the company's categories. International revenue jumped about 30%, getting a big boost from the Yoplait acquisition.
Like most food companies, General Mills is also absorbing a lot of margin pressure from cost inflation and promotional spending. Gross margin slid 250 basis points, EBITDA fell 12% and reported operating income fell about 16% (while segment operating profit fell about 3%).
All in all, while General Mills seemed to get a pretty warm reception from the market for its first quarter earnings, results were demonstrably all that much better than ConAgra (NYSE:CAG) - a company frequently criticized for its poor financial performance.
Real Growth or the Beneficiary of Mistakes?
Investors thinking about General Mills stock should not overlook the possibility that a lot of the company's success has been a byproduct of other companies' missteps. The cereal category is coming back to life, and Post could be a more formidable competitor once it is free of Ralcorp (NYSE:RAH). Given that Kellogg (NYSE:K) is already more than enough of a headache for General Mills, that's not good news. What's more, it would not be surprising to see a major food company take a run at Post (boxed cereal is one of the most attractive grocery categories) - Nestle (Nasdaq:NSRGY) has an international joint venture with General Mills in cereals but might see enough promise in Post to do a deal anyway.
Elsewhere, General Mills has been benefiting from the mistakes of Campbell (NYSE:CPB) in soups. With Campbell now under new management and under pressure of its own to perform better, can General Mills continue to gain share here? Likewise, ConAgra may not always be a weak sister (though it holds only a small part of the market) and private label competition may get fiercer with the weak economy.
Is the Worst Over For Inflation?
Commentary from General Mills management after the quarter would seem to suggest that maybe the worst is over for now in input cost inflation. That would be a welcome change of pace, but the markets are likely to stay skeptical. Moreover, investors may want to give some thought to just how that input cost inflation may ease. If General Mills sees energy and packaging costs ease off, that could be a result of overall weaker economic conditions and whatever they gain on costs may be at risk from even more-stressed consumers at the store. Likewise, General Mills is still at risk if other branded food companies like Heinz (NYSE:NHZ) or Kraft (NYSE:KFT) decide to try absorb worse margins and grab share with price.
The Bottom Line
General Mills is not expensive relative to its past multiples, nor all that expensive on an industry-wide basis. Likewise, food companies are certainly go-to ideas when the markets and economic outlook are not strong. All of that said, General Mills' near-term growth outlook is not all that great and it is hard to argue for buying General Mills over the likes of Kellogg or Nestle right now. (For additional reading, also check out Evaluating Grocery Store Stocks.)
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Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Iffy First Quarter Results
While General Mills reported 9% headline growth, overall performance was not so exceptional. Organic revenue growth was more on the order of 2%, though there was reported growth in most of the company's categories. International revenue jumped about 30%, getting a big boost from the Yoplait acquisition.
Like most food companies, General Mills is also absorbing a lot of margin pressure from cost inflation and promotional spending. Gross margin slid 250 basis points, EBITDA fell 12% and reported operating income fell about 16% (while segment operating profit fell about 3%).
All in all, while General Mills seemed to get a pretty warm reception from the market for its first quarter earnings, results were demonstrably all that much better than ConAgra (NYSE:CAG) - a company frequently criticized for its poor financial performance.
Investors thinking about General Mills stock should not overlook the possibility that a lot of the company's success has been a byproduct of other companies' missteps. The cereal category is coming back to life, and Post could be a more formidable competitor once it is free of Ralcorp (NYSE:RAH). Given that Kellogg (NYSE:K) is already more than enough of a headache for General Mills, that's not good news. What's more, it would not be surprising to see a major food company take a run at Post (boxed cereal is one of the most attractive grocery categories) - Nestle (Nasdaq:NSRGY) has an international joint venture with General Mills in cereals but might see enough promise in Post to do a deal anyway.
Elsewhere, General Mills has been benefiting from the mistakes of Campbell (NYSE:CPB) in soups. With Campbell now under new management and under pressure of its own to perform better, can General Mills continue to gain share here? Likewise, ConAgra may not always be a weak sister (though it holds only a small part of the market) and private label competition may get fiercer with the weak economy.
Is the Worst Over For Inflation?
Commentary from General Mills management after the quarter would seem to suggest that maybe the worst is over for now in input cost inflation. That would be a welcome change of pace, but the markets are likely to stay skeptical. Moreover, investors may want to give some thought to just how that input cost inflation may ease. If General Mills sees energy and packaging costs ease off, that could be a result of overall weaker economic conditions and whatever they gain on costs may be at risk from even more-stressed consumers at the store. Likewise, General Mills is still at risk if other branded food companies like Heinz (NYSE:NHZ) or Kraft (NYSE:KFT) decide to try absorb worse margins and grab share with price.
The Bottom Line
General Mills is not expensive relative to its past multiples, nor all that expensive on an industry-wide basis. Likewise, food companies are certainly go-to ideas when the markets and economic outlook are not strong. All of that said, General Mills' near-term growth outlook is not all that great and it is hard to argue for buying General Mills over the likes of Kellogg or Nestle right now. (For additional reading, also check out Evaluating Grocery Store Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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