GIS - General Mills: Worth Monitoring For Its Strict Implementation Of Its Accelerate Strategy

Summary

• General Mills posted a slowing Y/Y growth trend, which snowballed to its operating income.
• This puts its premium valuation into question. As a result, I believe GIS remains unappealing at this time.
• The strict implementation of its Accelerate Strategy, on the other hand, makes GIS' long-term view appealing.
• Especially given management's unwavering commitment to enhancing shareholder value.

General Mills ( GIS ) is well-known for manufacturing and marketing a diverse range of consumer brands across the world. One of those is Cheerios, followed by Nature Valley, Betty Crocker, and Häagen-Dazs. GIS successfully protected its brand name by voluntarily recalling a specific batch of ice cream from the market, resulting in a $24 million inventory impairment. Furthermore, GIS continues to grow through acquisitions while strictly adopting its Accelerate Strategy, in which the company divests its slow-growth businesses. This increases the company's competitiveness, and as a matter of fact, management has raised its forecast for FY '23. However, in terms of valuation, this Q2 '23 GIS had a lower net margin than its comparable quarter last year, putting its present premium into question.

Q2 '23 Overview

GIS finished Q2 '23 with $5,220.7 million in revenue, up 3.92% from $5,024.0 million in Q2 '22. Looking at its YoY growth trend, as shown in the image below, we can see that GIS is still experiencing declining growth.

According to the management, this is because of temporary headwinds, as quoted below.

Organic net sales were up 11%, reflecting 17 points of positive organic price/mix, partially offset by a 6% decline in organic pound volume. Foreign exchange reduced net sales by one point, and the net impact of acquisitions and divestitures was a five-point headwind to second-quarter net sales. Source: Q2 '23 Earnings Call transcript

This resulted in a slowing total operating income GAAP of $799.8 million, down from $800.1 million in Q2 '22. This is due to temporary headwinds from higher input costs and lower volume, specifically in its Pet segment, according to management. Furthermore, given its current dividend yield of 2.62%, which is lower than its five-year average of 3.54% , I believe there is less need to scale in aggressively at today's level.

Relative Valuation

Conagra Brands, Inc. (NYSE: CAG ), Kellogg Company (NYSE: K ), The Hershey Company (NYSE: HSY ), The Kraft Heinz Company (NASDAQ: KHC ), Mondelez International, Inc. (NASDAQ: MDLZ )

As previously stated, they are divesting businesses with little growth potential as part of their Accelerate Strategy. One thing I appreciate about this is that they are really profiting from these divestitures, recording a gain of $194.1 million in FY '22 and another $430.9 million in H2 '23. This transaction is a non-recurring transaction which enhances its trailing net income.

Excluding non-recurring transactions, we can see that trends are falling, which supports its higher forward P/E of 19.48x than its trailing P/E, as shown in the image above. Despite this, it remains undervalued compared to its peers' average forward P/E of 22.12x. Furthermore, GIS has improved operating income, and analysts anticipate a more attractive forward EV/EBITDA of 15.23x than its trailing EV/EBITDA, although it remains higher than the peer average.

We can arrive at an average fair price of $83.9 by using analysts' EPS estimate of $4.14 and expected EBITDA of $3,928.2 million in FY '23, at an implied P/E of 22.12x, EV/EBITDA of 15.03x, and a discount rate of 8%. This suggests no margin of safety, making it less attractive at its current levels.

Ripe For A Correction

GIS, the price appears to be overextended right now, following its bullish breakthrough of the $73 level in June last year. Actually, as seen in the chart above, GIS has the ability to print a bearish crossover from its MACD. If this occurs, we may regard its $73 level as potential support. At this hypothetical lower level, we can get GIS at a better price, resulting in a higher dividend yield than the present 2.62% .

Benefits From Acceleration Strategy

In addition to its Accelerate Strategy, GIS focuses on sustainability and corporate social responsibility, such as the activities below that aim to ensure food security.

We work with food banks in more than 40 countries to expand food security and build long-term resilience for the future. One example is Feeding America. General Mills was a founding member of this U.S. hunger-relief organization more than 40 years ago.

More recently, we supported the creation of Feeding America's MealConnect, a solution for the nation's charitable food system that allows member food banks to coordinate and receive donations from their local food businesses and grocers. Source: Q2 '23 Earnings Call transcript

In fact, they have been selected to the Dow Jones Sustainability World Index and the Dow Jones North America Index for the fifth consecutive year . In addition to continuing to invest in the planet, the company is also investing to strengthen its competitiveness. One of them is their investment in digital, as quoted below.

Our Media investment was up double digits in Q2, and we expect it to be up double digits for the full year behind compelling campaigns that are increasingly leveraging our digital capabilities to reach consumers everywhere they interact with our brands. Source: Q2 '23 Earnings Call transcript

Furthermore, despite today's macroeconomic difficulties, management maintains that it will continue to expand its core manufacturing capabilities, as quoted below.

Additionally, we plan to increase our investment in growth capital by more than 50% in Fiscal '23. This includes investments to increase internal manufacturing capacity on key platforms where we see sustained growth into the future, such as pet food, Mexican food, hot snacks, fruit snacks, and cereal. Source: Q2 '23 Earnings Call transcript

Considering these factors, it is not surprising that management upgrades its FY '23 projection, as seen in the image below.

In addition, GIS acquired TNT Crust , a manufacturer of premium frozen pizza crusts for regional and national pizza franchises, for $253.0 million in June 2022. According to management, the TNT crust has experienced strong double-digit growth over the previous four years and had net sales of around $100 million in FY '21 . Despite the recent sale of their Helper and Suddenly Salad business in North America for approximately $610 million, management predicts continued top-line growth, as shown in the image above.

On top of this, management expected a continued improvement on its adjusted operating profit, despite the temporary headwinds on its PET segment as shown in the image above.

Final Key Takeaway

Despite its current sluggish growth pattern and premium valuation as of this writing, GIS continues to restructure its portfolio in order to achieve greater growth. The company continues to be liquid, with an improving debt-to-equity ratio of 1.16x, better than its 5-year average of 1.77x. This is actually due to declining total debt amounting to $11,740.2 million, improving as well its interest coverage ratio to 8.86x, better than its 5-year average of 6.94x.

Overall, GIS continues to aggressively buy back its shares at today's level; in fact, they repurchased approximately 5.2 million shares this quarter at an aggregate amount of $400.5 million. On top of this, they are also ramping up their manufacturing capabilities, making GIS' long-term growth potential attractive. However, uncertainty stemming from its slowing growth numbers and interruption in sales volume will weigh heavier on its short-term outlook, making it unattractive as of this writing.

Thank you for reading and good luck!

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