- General Mills has excellent prospects for further international growth in Europe, Asia, Canada and Latin America.
- Its double-digit total yield and its growth potential make it a rare value play in today's almost fully valued market.
- Nevertheless, investors should closely monitor the efficiency of the share buyback program as the company spent $1 B last year with almost no reduction in the share count.
General Mills (NYSE:GIS) is a producer and marketer of a great variety of consumer foods. Although the company is very popular across consumers in 130 countries, its stock is rather quiet. In this article, I will describe some positive and negative features of the company, most of which have hardly been mentioned.
First of all, now that the market is at its all-time high and most companies struggle only to maintain their earnings, General Mills is a rare case with ample room for future growth in international markets. Its sales from abroad comprise 34% of its total revenue, with the figure expected to rise further as the US market is remaining stagnant while there are significant growth prospects abroad. In the last 12 months, international sales grew 18% (Europe: +4%, Asia Pacific: +10%, Canada: +15%, Latin America: +87% largely thanks to an acquisition, about 20% growth expected this year).
The market of cereals, which represents 21% of the total international sales of General Mills, has globally grown 16% in the last 5 years and is expected to grow 29% in the next 5 years, from $28B to $36 B. Given that the total revenue of General Mills is almost $18 B, one can conclude that there is ample growth potential from this product category. More specifically, if the company maintains its current market share, the above global growth of cereals will enhance the revenue of the company by 9%.
A similar projection can be made for the yogurt and premium ice-cream, which comprise 22% and 14% of total international sales, respectively. In China alone, the market of yogurt has doubled in the last 5 years and is expected to more than double in the next 5 years, from $8 B to $17 B. The company is currently constructing its own yogurt plant in China, which seems very promising. Given the 5-year compounded growth 17% of the company in China and the expected double-digit growth (on constant currency) this year, the future of the company seems great in China. If the company manages to capture just 10% of the incremental volume in the Chinese market, it will enhance its total sales (including US) by 5%. Finally, the company has projected that its sales in Latin America will exceed $1B this year, thus contributing to a 1% increase of its total sales.
Apart from the future prospects of the company, its past performance has been exceptional. To be sure, the company has completed 115 years with no dividend cut or reduction. In the last 9 years, the company has doubled its earnings per share (EPS) and currently distributes a 3.3% dividend (it was raised by 8% yesterday).
Another great feature of this stock is its very low volatility, which comes with a pronounced outperformance during corrections and bear markets. To be sure, during the extreme bear market of 2008, in which S&P lost 56% of its value, General Mills declined by just 32%. Of course, its defensive nature has caused the stock to underperform during the breathless 5-year bull market (100% vs. 150% of S&P) but, given its growth prospects, I expect the stock to significantly outperform the S&P in good and in bad times.
Although a few of the above facts may have been mentioned elsewhere, there is hardly ever a negative critic on the company. However, investors should be aware of the negative aspects as well. First of all, there is very intense competition in the market. To be sure, while the company has been enhancing its advertising expenses, the growth in the US has stumbled. Moreover, the company has launched 100 new products in fiscal 2014, although this figure may prove the flexibility and the efficiency of the company, it also underscores the extent of the competition. Overall, competition is stifling in the US but fortunately, the company has a great management to respond and also has ample space to grow abroad. Nevertheless, one should not forget that the operating margin abroad is about half of that in the US market.
The most negative piece of news that has not attracted any attention is the fact that the company spent $1 B in share repurchases in fiscal 2013 but reduced the number of diluted shares by only 0.15%, from 667 M to 666 M. Given that the average stock price in fiscal 2013 was about $44, the company should have repurchased about 23 M shares instead of 1 M shares. Therefore, $1 B or 55% of the net income of the company was wasted as a bonus to the management via stock options. In a highly competitive environment (US) and with many expansion possibilities around the globe, wasting more than half of a year's profit is at least unacceptable.
Finally, another somewhat weak point of the company is its balance sheet. Although the situation has markedly improved from the deficit of $1 B of current assets vs. current liabilities two quarters ago, the current assets are still lower than the current liabilities by $115 M. Of course this does not mean that the company will face any financial problems but it somewhat restricts the management from raising much additional debt to achieve its goals or initiating an aggressive share buyback program.
To sum up, General Mills represents a great value play with a current P/E=17 in today's almost fully valued market, as it has great management that can utilize the ample space in foreign markets to achieve substantial growth. As the management has repeated, its goal is to achieve low-single digit growth in sales and high single-digit growth in EPS. With the addition of the dividend, the total growth turns out to be double digit, which is not very common at this phase of the economic cycle. Nevertheless, shareholders should keep an eye on the efficiency of share repurchases to make sure that the earnings of the company are properly used.