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Summary

  • Wal-Mart's new stores will need more products from General Mills so these new stores will boost company revenues in the U.S. market.
  • Emerging markets will be the driver for the future growth of the company and the new yogurt plant will further increase the company’s presence in China.
  • I believe that there is a lot of potential in the stock and at the current price of $51 the stock seems to be undervalued.

General Mills (NYSE:GIS) is a leading global manufacturer and marketer of branded consumer foods sold through retail stores. The company manufactures products in 16 countries and markets them in more than 100 countries.

I'm trying to conclude whether or not the stock price of $51 is a good entry point for investors to take part in the company's future growth and earnings.

Recent Results

U.S. retail sales for the third quarter were $2.61 billion compared to $2.66 billion in the same quarter the previous year. Sales decreased primarily due to low volume growth and rough winter weather during the quarter.

International sales were $1.32 billion compared to $1.29 billion in the same quarter the previous year. International sales increased due to better price realization and favorable product mix in emerging markets.

Third quarter results missed Wall Street's expectations but the company still maintained its forecast for strong double-digit growth in its adjusted earnings per share for the fourth quarter because the company is expecting strong revenue streams from emerging markets.

Wal-Mart and General Mills:

Wal-Mart was a major buyer of the company's various products during fiscal year 2013 as Wal-Mart and its affiliates accounted for 21% of the company's total net sales. The company's U.S. net sales for the third quarter declined by 2% due to an unfavorable mix of products and the fact that Wal-Mart is also underperforming. I believe that these two companies are strongly interlinked to the company's future growth. Wal-Mart announced that it is going to open 270 to 300 new small stores during the fiscal year to boost revenues. So now, Wal-Mart needs more products from General Mills to cope with the increased demand for goods for the new stores. GIS also introduced 50 new products in this fiscal year that will drive more demand for the company's new products in new stores. Moreover, Wal-Mart is also going to open approximately 115 new supercenters this year. All of these initiatives by Wal-Mart will favorably impact the company's revenues and income as Wal-Mart is a major buyer of the company products.

Future Demand of Yogurt:

General Mills has started to build its new yogurt plant in China. The company is expecting strong demand from China and considers the Chinese market an important part of the company's future growth. Category sales have doubled in the last five years to $8 billion and are expected to more than double again in the next five years. The dairy product market in China is set to grow at a CAGR of 11.87% during the 2012-2016 periods. China is one of the most populated countries in the world and rising income levels in China will increase the demand for dairy products.

India's yogurt business may reach $2 billion by 2015 as the demand for healthy eating is encouraged in India and higher disposable incomes will make it easy for people to buy packaged yogurt, Greek yogurt and fruit flavored yogurt. The branded yogurt market in India has huge potential. Furthermore, the global yogurt market will reach $67 billion by 2015 driven by growing demand for healthy products. General Mills will boost its revenues because the company's main focus is to capture these growing emerging markets in the Asia Pacific region.

Breakfast Cereals:

Cereal is one of the company's major products and represented 16% of total revenue in 2013. The global breakfast cereals market was worth $32.5 billion in 2012 and going forward it is expected to grow at a CAGR of 4% over the next several years, eventually reaching $43.2 billion in 2019. The decline in the cereal market of North America has forced companies to move their presence to emerging markets where income levels are increasing at a rapid pace. By 2019, the Asia Pacific region is expected to have approximately 13% of the total breakfast cereal market while North America and Europe are expected to lose their market shares.

Research suggests that breakfast cereal sales in China will double by 2016 from the $730 million recorded in 2012. Nestle has a 28% market share in the Chinese market. Nestle has been adept at appealing to different consumers teaming up with General Mills to bring child-focused brands to target the younger generation. I believe that the Chinese market will boost the company's revenues in the coming years.

Conclusion:

Wal-Mart and General Mills have a long-standing relationship and I believe these new stores will boost company sales in the U.S. where the company is currently facing some problems. Emerging markets are key for the company and I believe that China and India will drive the company's future growth. At $51 the stock has upside potential as indicated by its multiples. GIS is trading at a P/E of 18.85 compared to the industry average of 24. This shows that the stock is trading at a discount of 21% compared to the average industry P/E. Furthermore, the PEG is important and a more reliable measure to consider whether or not the market truly represents the value of the stock. The company's PEG is 2.41 compared to the industry average of 5.29, which further confirms that the stock has upside potential. At $51 the stock has a nice dividend yield of 3.23 and is a strong addition to an investor's portfolio. I recommend a strong buy rating.

Source: Wal-Mart Driving Growth For General Mills