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General Mills (NYSE:GIS) is a leading global manufacturer and marketer of branded consumer food, including breakfast cereals, banking items, snack food, ice cream etc. Some of its brands are Cheerios, Pillsbury, Haagen-Dazs and Yoplait.

I added GIS to my investment pipeline after reading a Morningstar article on “Two Stellar Consumer Firms.”

GIS has been trading between $36.5 and $37.5 over the last month. Please refer to the stock review explained post if you have questions on what I look for in this analysis. Click on this annotated Surfmark if you want to see the source data for this stock review.

1- Business Performance Risk (+/=) and intrinsic stock returns (=)

Metric

Status

FCF / Sales

Last twelve months: 9.6% in line with historical performance over the last 10 years.

ROE

LTM: 30%, better than the average over the last 5 years of 23%

ROA

LTM: 8.7% above average over the last 5 years of 7.0%

Revenue Growth

While growth has been slow over the last 5 years, the company has a 5%+ growth rate over the last 5 years and has never experienced a negative year.

Cash distribution to shareholders

Dividend yield of 2.8% on a payout of 40-45%.

Stock repurchase: GIS repurchased 17% of its shares over the last 5 years.

GIS business performance appears to be quite attractive with strong FCF generation, ROE, growth and cash distribution to shareholders. The only negative for an investor could be GIS’ ROA, which is below my stated preference.

In terms of intrinsic stock returns, an investor could receive the following:

- 2.8% dividend yield on a 45% payout ratio

- 5.0% growth, which using a ROE of 30%, would consume 15%-20% of earnings

- The rest (40%) of the earnings could be used for share buybacks which – using an earnings yield of 6.2% - could reach another 2.5%

Overall intrinsic stock returns could reach slightly over 10%

2- Balance Sheet Risk (-)

Metric

Status

LT Debt / Equity

1.13x. Higher than my personal limit of 1.0x.

Current Ratio

1.0x, which is higher than GIS' previous position and seems acceptable given the industry.

While the current ratio seems fine, the debt levels are too high for my taste.

3- Valuation Risk (-)

Metric

Status

Cash Return

4.7%

Price to earnings ratio

16.1x higher than the overall market at 14.7x and in line with the company’s average over the last 5 years of 16.5x.

GIS' valuation is too high for me: with a P/E of 16+ and a cash return of~5% an investor is paying a high price for a company that is stable and while growing a bit, will not be a fast grower in the coming years. At this valuation, I don’t think a value investor would have any margin of safety.

Conclusion

While GIS has a good overall business performance the company is too leveraged for my taste and an investor would be paying a high price for the stock. I will pass for now and would be willing to reconsider GIS if the stock were to come down to ~$31-$32.

Disclosure: No position

Source: General Mills: Good Business, High Price