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General Mills Looks Like A Reasonable Value Play

Aug. 07, 2018 11:23 AM ETGeneral Mills, Inc. (GIS)17 Comments
Daniel Seens, CFA profile picture
Daniel Seens, CFA


  • The company maintains a strong and sustainable competitive advantage.
  • A recent pullback in the company’s stock price is offering investors a purchase bargain.
  • We're forecasting an 11.5% compound annual rate of return over a five-year investment horizon.

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While it is clear that the global cereal market will likely continue to suffer from declining demand, General Mills (NYSE:GIS) has an incredible cereal and non-cereal brand portfolio with definite product sustainability and tremendous cash generating power. Given softness in the company's stock price over the last year and valuation targets set on the stock, we think it's a good time to take a position in the company, provided our estimates prove accurate and you have a 1-2 year investment horizon.


As is the case with most consumer packaged food manufacturers, changing consumer tastes over the last 5 years has led us to make some portfolio changes as it relates to some of our long-term holdings in the food and beverages industries. Traditional breakfast cereals have been experiencing declining demand; today's customers are seeking healthier alternatives and unique convenient food offerings. But because of its tremendous brand power and more diverse product lines than some of its competitors (i.e., Kellogg (K)), we decided to keep General Mills in our portfolio and cut our position in Kellogg.

General Mills is the second-largest producer of breakfast cereals in the U.S. and the fourth-largest food manufacturer in the world. The company's sales are derived from three major distribution channels: north american retail (about 65 percent of revenues), international sales (about 23 percent), and convenience store sales (about 12 percent of revenues).

The company's most recognizable cereal brands include Cheerios, Wheaties, Lucky Charms, Total, and Chex. The company also owns Pillsbury, Betty Crocker, Bisquick, Progresso, Green Giant, Hamburger Helper; Pop Secret, Bugles, Nature Valley, Yoplait, and Häagen-Daz. Wow, talk about an

This article was written by

Daniel Seens, CFA profile picture
Daniel Seens is the founder and managing director of SEENSCO, an investment research firm located in Ottawa, Ontario. SEENSCO prepares monthly and quarterly stock valuation guides based on the methodologies of some of the world’s top investors and builds price forecasts and ratings covering Canadian and American listed companies.

Analyst’s Disclosure: I am/we are long GIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

Only started looking at the company just now. It definitely appears undervalued. My problem with it is that while it does have some strong brands (e.g. Cheerios and Nature's Valley), they're densely concentrated in a few sectors, e.g. cereals or things similar like granola. This is at least when compared to companies like Mondelez or PepsiCo.

That's not such a deal-breaker but also I'm not sure how big the world will be on cereals in the future. Cheerios is great. I agree, but Quaker Oats ain't half bad either.

Good company with a long history. I don't think I'd buy it for the above and since it doesn't fit my portfolio, but it's probably not a bad bet right now. They have some strong brands. You could do a lot worse.
KMR holder profile picture

Why do you believe that it is definitely undervalued. It has only been a few months since management sold $1 billion of stock in a secondary public offering. The price paid by the public was $44, and after selling costs all the company received was about $42.50 a share. Why was the company so generous in selling its shares to the public if they were worth the current market price?
Not to nitpick semantics here but I said "it definitely appears [or at least LOOKS] undervalued", i.e. I can say for certain that it looks that way to me, but valuating companies is subject so for someone else that person may think it's worth less. I'm looking at its earnings relative to its price, compared to its competitors. The industry has been beat up a lot, so that's another sign that people have been fleeing the sector rather than judging the companies in it completely fairly.

You mention that the company sold its shares for a low price. This does not change the revenues of the company. If management sold the stock for pennies, then that would not change the fact that they are selling the shares for a very cheap price relative to the revenues the company can support. The logical extreme is that they give some shares away for free; I know I'd take those shares in a heartbeat since I get dividends for nothing.
KMR holder profile picture
Maybe if the company had not almost doubled their debt in the past year, or if they hadn't been paying more than $55 a share to buy back stock over the past two years, the price they received for the newly issued stock would not have been so significant in my valuation of the company.

Their sales on the core business have not been growing much lately and I believe those who paid $44 a share recently have been paying a very full price with all the new debt on the books.

Rather than going into more debate here, consider reading a blog I published not to long ago.

Why is GIS CEO pay up Y/Y nearly 100% for lackluster performance?
BA Man profile picture
In my experience the time to be buying is when the general consensus is negative, like now. That’s when a little bit of good news can make a big difference. It appears to me that GIS is in the somewhat rare position of making it possible to buy an above average company at a below average valuation, with a dividend yield that makes the wait for the reversion to the mean worthwhile.
Long GIS and willing to be a buyer on future dips.
KMR holder profile picture
BA Man,

It is certainly true that it is often better to buy a company when the consensus is negative. In the case of General Mills, while the consensus may be negative today, the fact that you still consider it an above average company, makes me believe that there are also many other investors who
don't feel so negatively about the company, which means that the consensus is not yet as negative as it could be.

The General Mills of August of 2018 did not exist in August of 2017 and it isn't anything like the General Mills of 2012 when I bought my shares back in 2012 for $38. How does a reasonable investor determine the mean price of such different businesses. I would suggest that the purchase of Blue Buffalo has created an entirely different company with the same management that it had before that action. The mean price of that new company is lower than $45.

One needs to determine if the price of the shares are cheap today, compared to the value of the business as it is today. I believe that the true value today is much closer to the $42.50 price the company netted with their recent sale of $1 billion in shares after bankers commissions, than it is to the current stock price.

The costs and benefits of the recent purchase of Blue Buffalo will be worked out in the future. It remains to be seen if it is going to raise the value of GIS.
Not happy with BUFF,Oui, or Annie's. Holding,but not pleased about it.
Isn't Annie's a little bit insulated from the whole millennial shift to healthier foods thing compared to other GIS brands as it's marketed as a "healthier alternative"? Curious what you don't like about it that I might be missing in my analysis.
zach,when my 2 great nephews were smaller,my nieces gave them Annie's ravioli & mac & cheese. It was Godawful. They finally gave up as the kids wouldn't eat it. BUFF they WAY overpaid for & rumors are circulating that it has sickened pets.
KMR holder profile picture
Author, I've got to disagree with you, the recent stock sale by the company was only able to raise $44 before around 3% selling expenses. The offering banks didn't exercise their option to buy any shares at that price, so I don't believe they felt it worth $44 a share.

I believe the net received by the company, around $42.50 is the high end of what the business is worth today with the current management and board running the show here.

Using a long term average P/E to value this business isn't reasonable. The price of GIS had been greatly inflated over the last 10 years due to the premium people were willing to pay to capture its growing above average dividends. The dividends were not justified based on the low or no growth of sales and earnings of the business.

As for the dividend yield. A dividend is a business expense, not something that raises the value of a company. When investors realize that they will not pay such a premium for the shares in the coming years.
I belive the downside risk is very low at this point. This is what I prefer over trying to make a killing, which we know is pure luck without some "information".
KMR holder profile picture

Downside may be low. But I will wait for a confirmed bottom below $44 which I believe may occur within the next three months. I don't believe there is any reason for me to buy yet.

In the meantime, I believe that I have better places for my money. My Vanguard Federal Moneyfund is paying 1.90%. OCSL is paying 6.70% and is trading below its NAV of $5.95.
josephaoppenheim profile picture
GIS is 5.6% and K is 2.9% of my DGI portfolio.

I recently added some GIS at 41.5 and will only add more if it drops back to 42. I won’t add to, or sell my K, since my cost is just 61, and it remains a buyout candidate.
Boilermaker_KK profile picture
Presently not interested in either GIS or GM. Personally, I’m prepared to wait for some debt reduction and confirmation regarding how great the BB acquisition is/was. Sub $40 will consider. $38 likely to initiate. Then again, depends where the markets move and how they integrate and capture BB value since they paid a very stretched value for it. Good luck and stay balanced.
You have put GM instead of GIS for ticker before overview. Just wanted to let you know. Great article!
gobraves39401 profile picture
Great article! Long GIS!
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