Every player in an industry has its own rules and strategies to follow in order to make them superior among the competitors. General Mills, Inc. (NYSE:GIS) is the second largest cereal producer, but the company needs to be very clever when it comes to the price cuts and promotions in order to maintain its market share. GIS has maintained its reputation by inclining itself towards the innovation of consumers directed needs and effective utilization of its resources to achieve operational efficiency.
Recent Performance overview
Source: SEC Filings
GIS has diversified itself into various products, but cereal contributes a major chunk of the total revenue. Thus, any changes in the market conditions will affect the bottom line growth in the same manner. The above table shows that GIS's top line growth has shown a fall of 6% incorporating the currency devaluation effects. The fall in demand for the cereals was due to high priced dairy products making it harder for the consumers to go for dairy ingredients in their meals.
Moving towards the cost structure, the selling and administrative expenses relative to sales have shown a 0.6% decrease from the FY13 to FY14. This reduction in the expenses further translated into an increase in the net earnings by an equivalent amount as the decrease in the relative expenses.
The company has shown an increasing trend in the operating margin from FY13 to FY14, due to a fall in the selling and administrative expenses by 2.2%.
Annie's Inc. (NYSE:BNNY) is an organic food company as it sells its products made up of natural and organic ingredients. It has a diversified range of more than 145 products through an approximate of 35000 retail stores located in United States and Canada. Its products are mostly attractive to health conscious consumers who are not much fond of artificial flavors.
In order to diversify, GIS announced the takeover of Annie's, Inc. The company agreed to buy BNNY for a share price of $46 with an all cash settled payment of $820 million. Jeff Harmening, the Chief Operating Officer of GIS commented that:
Annie's competes in a number of attractive food categories, with particular strength in convenient meals and snacks-two of General Mills' priority platforms.
If we look at the bigger picture, we can analyze that although there would be a reduction of cash by the company, GIS would be able to expand its portfolio in a desired manner. As of the fact that people are getting health conscious nowadays, this would trail all the way to increasing demands of organic products and might be a beneficial sight for the company to grow in relative terms.
Impact on Balance Sheet
GIS has a total debt of $7674.1 million and an equity portion of $7005.4 million, indicating a financial leverage of 150.27%, which is pretty much higher than that of the industry level i.e. 83.04%. This shows that the company has been financing its operations by raising a lot of debt.
On the contrary, BNNY has been financing its operations through shareholder's equity and not by borrowings. This would ultimately have a positive effect on the acquirer's financials, as it would improve its leverage position.
GIS has a return on equity of 26.26%, whereas the industry's value is 11.84% lower, indicating a higher net income generated by the company for its shareholders.
Moreover, this acquisition would enhance the credit worthiness of the company and would make it easier for the company to raise additional debt in the future.
GIS has a current ratio of 0.81, implying that it has been facing problems in satisfying its short-term obligations. The company is not operating on its efficient level and is not able to generate proportionate current assets to pay off its current liabilities. However, GIS has been taking certain actions which might improve the financials of the company in the near future.
The company has a price to earnings ratio of 18.26%, which is 6.21% lower as compared to that of the industry. This implies that GIS is undervalued and would be a beneficial investment for the long-term investors.
Cash Flows generated
The above table highlights the fact that General Mill's ability to convert net income into cash flows has decreased by 18.25% from 157.7% in FY13 to 139.3% in FY14. Although it has shown a decline in its value, it is still converting income into cash flows to operations at a rate higher than 100%, which is a positive sign for the company.
Moving forward, the investors are being paid a dividend yield of 3.36%, which is quite higher than that of the industry's value.
Analyzing the current financials of General Mills, it is anticipated that the company is expected to form some favorable conditions for the investors to put money in.
The diversification of their projects is going to cause the sales level to increase, projecting an upward trend in their net earnings in the coming years. Although General Mills is considered to be a value stock and having reached its maturity stage the growth rates in the top line or bottom line would not be as significant, the company is doing to its utmost to maintain the high respect that it has earned in the eyes of investor over the years.
The company has been undertaking certain actions in order to arrive at a better-leveraged position. The acquisition of Annie brought along equity with no debt. General Mills was able to put forward a lower amount of leverage in its structure.
The acquisition diversified the company's revenue generation base further by reducing its dependency over the existing streamline of the products.
General Mills has been paying off an honorable amount of dividends to its shareholders, creating a positive image in eyes of the investors. Incorporating all of these factors, I believe General Mills is a safer option to invest in.
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