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General Mills Inc. (GIS) reports preliminary financial results for the quarter ended 2012-08-31.

General Mills Inc. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. CapitalCube's analysis is based on the company's performance over the last twelve months (unless stated otherwise).

General Mills' analysis versus peers uses the following peer-set: Kraft Foods Inc. (KFT), Kellogg Co. (NYSE:K), ConAgra Foods Inc. (NYSE:CAG), J.M. Smucker Co. (NYSE:SJM), Ralcorp Holdings Inc. (NYSE:RAH), Hain Celestial Group Inc. (NASDAQ:HAIN), TreeHouse Foods Inc. (NYSE:THS), Standard Foods Corp. (1227-TW) and Pioneer Food Group Ltd. (NYSE:PFG). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million)2012-08-312012-05-312012-02-292011-11-302011-08-31
Revenues4,051.04,066.44,120.14,623.83,847.6
Revenue Growth %(0.4)(1.3)(10.9)20.25.9
Net Income548.9325.4391.5444.8405.6
Net Income Growth %68.7(16.9)(12.0)9.726.7
Net Margin %13.58.09.59.610.5
ROE % (Annualized)33.619.523.227.225.2
ROA % (Annualized)10.06.17.38.28.0

Valuation Drivers

General Mills' current Price/Book of 3.8 is about median in its peer group. We classify General Mills Inc. as Harvesting because of the market's low expectations of growth (PE of 15.3 compared to peer median of 20.0) despite its relatively high returns (ROE of 26.0% compared to the peer median ROE of 9.9%).

The company attempts to achieve high profit margins (currently 10.1% vs. peer median of 6.7%) through differentiated products. It currently operates with peer median asset turns of 0.8x. General Mills Inc.'s net margin is similar to its four-year average net margin of 10.0%.

Economic Moat

General Mills' revenues have changed in-line with its peers (year-on-year change in revenues is 11.9%) but its earnings have lagged (annual reported earnings have changed by -12.8% compared to the peer median of 1.3%), implying that the company has less control over its costs relative to its peers. GIS is currently converting every 1% of change in revenue into -1.1% change in annual reported earnings.

General Mills' return on assets is above its peer median both in the current period (7.7% vs. peer median 5.2%) and also over the past five years (8.0% vs. peer median 5.5%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's comparatively healthy gross margin of 40.3% versus peer median of 32.4% suggests that it has a differentiated strategy with pricing advantages. Further, General Mills Inc.'s bottom-line operating performance is better than peer median (pre-tax margins of 14.0% compared to peer median 9.3%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

General Mills' revenues have grown more slowly than the peer median over the last few years (4.3% vs. 7.7% respectively for the past three years) and the stock price's relatively low PE ratio of 15.3 implies relatively low future growth as well. Overall, we view the company's growth expectations as substandard relative to its peers.

General Mills' annualized rate of change in capital of 4.2% over the past three years is less than its peer median of 5.4%. This investment has generated a better than peer median return on capital of 12.9% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.

Earnings Quality

General Mills has reported relatively strong net income margin for the last twelve months (10.1% vs. peer median of 6.7%). This margin performance combined with relatively high accruals (4.4% vs. peer median of 3.5%) suggests possible conservative accounting and an understatement of its reported net income.

General Mills' accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

General Mills, Inc. is a manufacturer and marketer of branded consumer foods sold through retail stores. It also supplies branded and unbranded food products to the foodservice and commercial baking industries. General Mills operates through three reportable business segments: U.S. Retail, International and Bakeries & Foodservice. The U.S. Retail segment reflects business with a wide variety of grocery stores, mass merchandisers, membership stores, natural food chains, and drug, dollar and discount chains operating throughout the United States. The International segment consists of retail and foodservice businesses outside of the United States. This segment also exports manufactured products mainly to Caribbean and Latin American markets, as well as to its international joint ventures. The Bakeries & Foodservice segment sells and markets its products to distributors and operators, including foodservice, convenience stores, vending, and supermarket bakeries. The company was founded by Cadwallader C. Washburn in 1866 and is headquartered in Minneapolis, MN.

Disclaimer

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Source: Earnings Analysis For General Mills