GIS - General Mills: A Decent Year But Seems Overpriced

2023-06-12 07:08:22 ET

Summary

• General Mills had a decent year with its share price up more than 20% over the last 12 months.
• Analysts are decidedly neutral on General Mills.
• On certain price metrics, it seems overpriced.
• Inflation and reduced crop production in 2023 could be a problem.

General Mills, Inc. ( GIS ) is one of the largest food manufacturers in the world behind only Nestle ( OTCPK:NSRGY ) and The Hershey Co. ( HSY ).

GIS's total return (including dividends) for the last 12 months has outperformed the S&P 500 ( SPY ), Nestle, and Hershey with GIS up 24%, SPY up 9%, Nestle up 9%, and Hershey up 24%.

In addition to its most famous brands Cheerios, Wheaties, and Raisin Bran, GIS is constantly bringing out new products to expand its product line.

The question for investors at this point in time is, does GIS represent a reasonable potential investment return, including dividends, or should investors be on the lookout for better investment performance going forward?

In this article, we will look at GIS's prospects for the next year to try and determine the price direction out to 2024 as compared to the last year.

GIS Stock Key Metrics

Let's look at GIS's financial metrics, comparing the latest TTM (Trailing Twelve Months) with the previous year. As might be guessed, there are many similar comparisons.

I use the financial metrics to discover what I consider to be positive investment numbers (yellow boxes) and compare them with any negative investment numbers (orange).

One quick look at the financial metrics table above comparing 2022 to 2023 shows that GIS has similar numbers for both years.

GIS's price (Line 1) went up 21% over the last 12 months as compared to an increase in Revenue (Line 2) of 7%. Gross Margin (Line 4) is also virtually identical 6.6% to 6.2%. This would indicate no improvement in operational efficiency from one year to the next.

The PE Ratio (Line 11) has expanded from 14.1x to 17.5x an increase of 24% on an increase in revenue of only 7%. This could imply GIS is slightly overvalued.

Net Debt (Line 12) has fallen by 26% indicating a substantial amount of debt was paid off.

Lower debt makes the Debt/EBITDA ratio (Line 14) 2x indicating that the balance sheet is in even better shape now than it was last year.

However, looking at FCF (Free Cash Flow) on Line 15 no change. That bumped the Price to FCF (Line 16) up by 17%.

So General Mills had reasonable results over the last 12 months although those results did expand its PE Ratio and FCF ratio indicating GIS may be slightly overvalued when compared to last year.

What Do Analysts Think?

Wall Street and Seeking Alpha analysts are decidedly neutral about GIS with 5 Buys and 5 Sells. Also, note the large number of Holds relative to Buys and Sells.

The quant rating has been very consistent in the last year with a Hold rating for the entire twelve-month period.

All in all, GIS appears to have a rather blah rating from everyone.

MarketWatch analysts also have a Hold rating across the board.

So based on the above ratings General Mills seems to be a Hold.

How Does General Mills' Price Compare To Other Food Manufacturers?

A legitimate question when looking at any stock is to compare its performance with other stocks in the same market sector. If we look at GIS's performance over the last year and compare it to other large market-value stocks in the food sector, we can see GIS has performed well with a total return (including dividends) of 24%.

In the following chart, we can see that GIS has outperformed the other major food manufacturers Nestle, Hershey, and Kraft Heinz ( KHC ).

This would imply the food industry, in general, is moving along with the market and GIS has been one of the best performers. Questions concerning inflation certainly have to have had an effect on food companies as prices on certain items soar.

Also, the University of Illinois report showed some concern about lower cereal crop production this year as drought, excessive rains, and war in Ukraine may reduce the harvest significantly. If so, prices will certainly rise forcing GIS to raise prices.

General Mills' Dividend Record Is Stellar

GIS has paid a dividend for 21 consecutive years.

However, General Mills has raised its dividend by only 10% over the last five years from $.49 quarterly to $.54. It seems very likely that the dividend will be increased by a similar amount over the next five years.

General Mills has also bought back approximately 9% of its shares over the last 10 years.

Is GIS Stock A Buy, Sell, or Hold?

Obviously, there are risks with a GIS investment. Besides the day-to-day competitive risks, there are inflation and recession risks. Also one would have to take into account its relatively inflated PE and FCF ratios compared to last year. In other words, is GIS leaning over its skis a bit right now?

But the outstanding record of dividend payments ameliorates some of that risk for long-term investors. And note that GIS is down almost 10% in the last month alone and break even on a YTD basis.

I see little in the way of catalysts that would drive GIS's price higher.

One other negative point is GIS's Price to Sales ratio is near an all-time high for the last 10 years.

This might imply that GIS is overpriced compared to historical data and would be another reason to hold off on any investment in General Mills.

Ditto for the Price to FCF ratio which is also high compared to the 10 previous years.

General Mills is at best a Hold.

For further details see: