2023-11-02 07:47:48 ET
Summary
- General Mills rated neutral/hold today, in line with the consensus from analysts and the quant system.
- Positive points include a 3.6% dividend yield with 3-year dividend growth, a cheap share price relative to the moving average, and a positive company sales outlook.
- Headwinds include poor market momentum vs the S&P500 index, YoY earnings declines, and mediocre growth among large peers.
- A risk discussed was growing debt along with growing interest expenses.
Research Note Summary
In today's note I will be covering the company behind many of the grocery brands some of us grew up with for decades and that have become a household name, not to mention a common theme in TV ads of the 1980s and 1990s.
General Mills ( GIS ) is one of those iconic brands that has been around for decades, but the question in this note is whether it presents a value-buying opportunity if I was to add it to my portfolio?
From my review, I decided to be neutral on this stock, giving it a hold rating today.
The positives driving this decision are a 3.6% dividend yield with solid dividend growth, undervaluation, and cheap share price.
Negatives offsetting it were weak YoY earnings results, lackluster growth vs peers, and lack of market momentum compared to the S&P500 index.
A key risk discussed further was the growth in the company's debt and interest costs.
Methodology Used
My WholeScore Rating methodology looks at this stock holistically across multiple categories including key risks, and assigns a rating score. I exclusively cover stocks and foreign ADRs that are dividend-paying and trade on major US exchanges only (NYSE, Nasdaq).
Some of the data comes from the most recent FY24 Q1 results from Sept. 20th, while the forward-looking sentiment relates to the upcoming FY24 Q2 earnings results expected on Dec. 19th.
Growth vs Industry Peers
The nature of the packaged foods and meats segment is a capital-intensive industry requiring food product manufacturing facilities, an efficient supply-chain, and dependent on inventory moving off of store shelves so that new inventory can be replenished.
If you are like me and worked a seasonal supermarket job in much younger days, you may remember the constant pressure to keep the shelves looking "full", and new product coming in with the next truck. Not to mention, the constant "sales" these supermarkets have to try and get that inventory out the door faster.
The plus for this segment is that it produces an essential product.. food!
In the table below, I did a comparison among 8 very large, mostly US-based stocks trading on the major exchanges and whose brands have graced supermarket shelves for years, everything from cereal and chocolate bars to jelly and ketchup, among other things.
From the table, we can see that this peer group had an avg. YoY revenue growth of 9.68%, and General Mills came in below average at 5.79%, so it missed my goal of beating the average by 5%.
It is not to say that it did not generate growth, it did, but in comparison to its larger sector it was a modest growth at best. Consider that its peer Post Holdings (POST), and probably main competitor in the cereal aisle, saw a 17.7% YoY revenue growth.
However, I should give credit to General Mills for achieving a positive direction with top-line revenue.
For example, its FY24Q1 numbers saw sales growth across several of its brands in the North America market:
In addition, as a diversified global company it saw sales growth in non-US regions as well:
Financial Statements
Now, to dive into the financial statements of this company and what story they tell. I will be using data from the income statement , balance sheet , and cash flow statement , as they are fundamental accounting statements in every business.
The story it tells is that revenue growth has improved by almost 4% when comparing the most recent reported fiscal quarter with the same one a year ago. However, it did not quite meet my goal of a 5% YoY growth. So, nice positive revenue growth but not anything really great.
Further, I am concerned about the nearly 18% YoY decline in net income, which also missed my goal. This points to perhaps a higher cost situation in the last quarter.
Cashflow per share also saw a YoY decline of 20%, and positive equity did too, declining by almost 3%.
Some factors impacting costs, according to the company, included the following. I will discuss interest expenses and their impact in the section on key risks.
The following items are what the company said had an impact on its cash flow, and it seems a lot of it has to do with returning capital back to shareholders via dividends and share buybacks:
Dividends
As a cashflow-oriented investor, what I look for in my portfolio is stocks that pay steady quarterly dividends, but also that the dividend yield can beat its industry average, and that the dividends grow over 3 years. This is a sign, in my opinion, of a well-capitalized company that can afford to return capital back to shareholders.
In the case of General Mills, we can see that when comparing its Oct2023 dividend with that of Oct2020, it has grown 15.7% in 3 years, beating my target goal.
In addition, the yield of 3.6% is above average, beating the sector by 27.4%, and beating my own goal.
When correlating to the share price chart, which I will discuss briefly in the next section, you can see that the share price has dipped a lot since July, likely causing the dividend yield to also go up.
I will go ahead and add this stock to my "dividend quick picks" of November since it is clearly a nice dividend income play, with above average yield and dividend growth.
Share Price vs Moving Average
My portfolio strategy calls for finding crossovers below the long-term moving average and spotting dip-buying opportunities.
In the chart below, which tracks the share price vs the 200-day simple moving average (orange line), we can see that the share price took a nose dive below the average back in the summer and kept diving since then.
I think that this puts the share price in a nice dip-buying range without the risk of being a value trap, since I think the recent quarterly results and earnings declines by now have already been priced in.
My table below shows the current price as of this article writing is 14.9% below the 200 day average, so it fits my goal of a buying price.
Now, just because it is a dip-buying opportunity in terms of its price does not make the overall stock a "buy" rating, as it depends on all of the holistic factors we discuss in today's note.
However, consider that its May high was around $90 and now it is trading in the $65 range. I am not sure that it will necessarily fall all that much more than this, particularly since the company has positive outlooks for the rest of fiscal 24.
Performance vs S&P500 Index
Next, let's briefly talk about the market momentum of this stock. The reason I include this category is because it is a good comparison to the S&P500 index, an index that I notice is commonly tracked by analysts, investors, and the financial press.
Unfortunately, General Mills saw a 1 year price performance of negative -20.03%, which was over 341% lower than the S&P500 index performance in that same period.
Not only did it miss my goal here, but also shows malaise in terms of momentum for this stock, and it seems to have been dropping since May. Around time, the quarter ending in May also saw a 25% YoY decline in net income/profitability. The quarter ending in August also saw a YoY profitability drop. So, possibly a correlation.
I think going forward the company will really have to impress in the next quarterly results coming out in December, particularly coming in stronger on top-line revenue but more importantly beating on net income.
In comparison, one of its peers Mondelez Intl ( MDLZ ) has actually outperformed the S&P index for a better part of the year and now is within close range of it. It also saw a YoY growth in net income for both quarter ending March and June as well. So, I can see why it would have stronger market momentum.
On a positive note, in the most recent earnings release in September the company did have a positive outlook for the rest of this fiscal year, both for sales as well as profitability, so I am hopeful we can see this materialize in the next earnings results. As mentioned briefly earlier, they are selling food products and not luxury vacations or Rolex watches, so think about the fact that millions of consumers make a daily trip to the supermarket to get food, or get it delivered, and in my opinion the majority of consumers buy the brand not the product... so what favors this company is its longstanding market positioning with memorable food brands consumers know and trust.
Valuation and ROE
When it comes to valuation , the picture is somewhat better.
You can see from my table, with data sourced from Seeking Alpha , that the forward price to earnings ratio of 14.48 is well below the sector average and appears undervalued . The price to book ratio of 3.53 appears quite overvalued however in relation to the sector.
The return on equity of 23.4% is over 98% above the sector average, so it beat my goal by a lot.
The forward P/E seems valued correctly in my opinion since both the "earnings" side of that ratio has fallen but also the "price" side.
In terms of the P/B, it is evident that the price side is not driving it but the drop in equity, or book value. I already demonstrated earlier that the company saw a nearly 3% equity drop in the recent quarter.
This also could be impacting the "ROE", showing an exceptionally above average return since the equity itself has been on a downward trend since Aug. 2022.
Key Risks
A key risk identified that should be mentioned is the growing long-term debt load of this company, which as leaped 24% in comparison between Aug 2023 and Aug 2022. Though it is understandable that capital-intensive industries like this with massive overhead will likely need debt, what I am looking for is trends over a 1 year period, in terms of whether that debt goes down or keeps going up.
In looking at the last year's balance sheet, debt has generally been on an upward trend.
This seems to correlate with a rise in the interest expenses on the income statement. The company saw a 33% rise in interest costs when comparing Aug 2023 with Aug 2022.
In the current high interest rate environment, I would say that it does not favor companies like this who are heavily debt-ridden, particularly if they have to issue new corporate debt at current rates. The latest Fed meeting on Nov. 1st resulted in the fed funds rate remaining the same, according to CNBC , so no sign yet of rates falling.
By comparison, its peer Kraft Heinz ( KHC ) seems to have a much better debt risk profile, with a downward trend in both long-term debt as well as interest expenses:
With that said, my table below determined that both the risk impact and risk probability for General Mills are high, giving it a high risk score. I had to reduce a point on this stock for that reason with a -1 point to its WholeScore.
WholeScore Rating
In today's note this stock got a WholeScore of 4, earning a hold / neutral rating from me.
Interestingly, my rating got the exact same outcome as the consensus from SA analysts, Wall Street, and the SA quant system, who all gave this stock a "Hold":
My Forward-Looking Sentiment
As a consumer, I can admit to picking General Mills brands many times over the store brand, though not always. I don't see them going away anytime soon, or their brands. It is not an overnight Silicon Valley startup, but a company decades in the making with a strong existing market position.
As an investor, however, I am on the cautious and neutral side, holistically not seeing a buy opportunity despite the cheap share price, and for that reason too cheap to sell off as well.
For that reason, I will call it a "dividend quick pick" and consider it a dividend income generator, with a nice 3.6% yield.
Looking forward, I expect continued top-line growth in the next round of results in December, combined with continued struggles over debt costs.
Much like their cereal boxes when we were in grade school, I am waiting to find a "secret prize" at the bottom of the box.. in this case in the form of a huge earnings beat in the next quarter!
For further details see:
Hold On To General Mills To Get A Healthy Dividend Yield For Breakfast