Hold Up Before Digging Into General Mills

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About: General Mills, Inc. (GIS)
by: Joseph Heglin
Summary

General Mills has posted over a 25% rally since the writing of my last article during December lows.

The stock has been one of the top performers over this span with competitors such as Kraft, Kellogg, and Kroger struggling to sustain rallies.

Upcoming earnings March 20th will provide a nice indicator whether the stock can break through the $47 resistance point or falter back down like many of their peers.

With a 4.2% dividend and a diverse best of breed portfolio, I believe the stock is a hold going into earnings at a relatively valued price.

General Mills' Stock Has Been A Little Too Sweet

Back in December, I wrote an article recommending waiting for earnings before taking another bite of General Mills (GIS). Since earnings back in December, the stock has soared over 25%, a substantial amount for a normally low volatility consumer staple. GIS has beaten out nearly every competitor over this span as a number of names such as Kraft Heinz (KHC) and Kellogg (K) have taken hits. This bullish run could very well continue, although the downside is beginning to outweigh the upside. When looking at General Mills, compared to competitors, the stock appears to be relatively valued, with P/E and EV/EBITDA ratios both trading right along with peers (Figure 2). This points towards possible stagnation in share price growth, while risks such as dividend cuts like we recently saw at Kraft still weigh upon the stock. General Mills has still established themselves as a best of breed consumer staple name and offers more diversification than many other well-known names, with the addition of Blue Buffalo to their portfolio. With a potential slowdown expected in the coming years, it may be smart to hold GIS and continue to rake in the hefty 4.2% annual dividend yield.

Image result for general mills sugar cereal

(Figure 1) General Mills Has Established Itself As A Best Of Breed By Including Both Low-Cost Sugary Options Along With Healthier Choices

Since the writing of my last article, the sentiment towards General Mills stock has shifted to a much more positive stance. As more and more names in the consumer staple industry such as Kroger (KR) take hits, General Mills continues to keep their head above the water. It is not so much what has changed that makes this stock a stronghold but what has remained consistent. Operations continue to deliver when competitors falter, and that is the type of company that you want to remain invested in the long term. Moving forward, I see the company continuing to not deliver stellar numbers but bring in consistency not found many places else. Heading into earnings, I think the most important thing to watch is the continuation of this consistency discussed. As long as GIS upholds its hefty dividend, delivers at least in line with $0.69 consensus EPS forecast for the quarter, and does not release any substantial declines in future expectations, I think General Mills is one of the better places to invest in what has been a fairly volatile market so far this year. The stock has done well even when peers have not, and I see this as a very promising sign heading into earnings.

General Valuation

Chart Data by YCharts

(Figure 2) General Mills Trades At What Looks To Be A Generally Fair Valuation Compared To Top Peers

GIS is expected to release earnings March 20th, and the company will hopefully avoid a similar debacle to the ~20% Kraft took a couple of weeks ago. General Mills has adjusted to consumers demands for healthier products much better than competitors with commitments to advance organic ingredients in the future. As younger generations stray further from unhealthy foods towards more organic whole foods, GIS will need to continue to add to their diverse portfolio of name brands. Management maintains confidence going into 2019 and will continue to pursue "its Consumer First strategy and executing against its three key global growth priorities to drive consistent topline growth: 1) competing effectively through strong innovation, effective consumer marketing, and excellent in-store execution; 2) accelerating growth on its four differential growth platforms including Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and its portfolio of natural and organic food brands; and 3) reshaping its portfolio through growth-enhancing acquisitions and divestitures, including the acquisition of Blue Buffalo, the leading brand in the fast-growing wholesome natural pet food category in the U.S. By combining consistent topline growth, margin expansion, and disciplined cash conversion and cash returns, General Mills expects to generate top-tier total shareholder returns over the long term (Figure 3)."

(Figure 3) Management Continues To Push Core Products As Well As Integrating Newer Investments Such As Blue Buffalo Pet Food Products

With a growing multi-billion-dollar annual revenue serving as a solid base, the company presents a stable investment in what has been a volatile quarter thus far, though, at the current prices, an entry would present more risk than reward. Wall Street Analysts currently value the stock around an average price target of $46, so it may pay to wait for a better entry point. Trading at a 0.93 Beta General Mills offers a safer investment than most of the broader market, so factoring in the 4.2% dividend, I see no reason not to hold for the foreseeable future. Following earnings, I see the stock continuing their consistent clip of increasing revenues by approximately 5% per year with the help from the Blue Buffalo Addition, making it one of the strongest names in the consumer staples division.

Risks

When assessing risks of investment, one of the first things that jumps out with GIS is their $15.3 billion in debt, with nearly $3.1 billion of that being short-term debt. This number may not be an issue now with revenue growing at a nearly 5% annual rate, but is definitely a figure to keep an eye on going forward as it could easily lead to dividend cuts down the road if the broader economy slows.

The number of insider shares sold has been nearly double that of shares bought in the last month, possibly signaling the rally may be near a peak (Figure 4). When looking at the charts of General Mills the past month, the stock looks to have hit an area of resistance around the $47 mark, and I do not see much movement above this price unless management delivers solid earnings later this March.

(Figure 4) Nearly 8,000 GIS Shares Have Been Sold By Insiders Since The Start Of The Rally In January

Investor's Takeaway

Following an over 25% rally since January, General Mills stock has been a little too sweet. It will take a strong earnings beat to keep this rally alive. General Mills has beat on 4 straight earnings going into the expected March 20th call. The company has established itself as best of the breed of the consumer staples beating out almost every competitor of late and, therefore, has earned a hold rating with their hefty 4.2% dividend, in my opinion. March 20th earnings before the market opens will be a nice indicator whether or not the stock can break through the $47 resistance mark and continue the rally, or if it could fall back down near December lows. (Figure 5) A V-Shaped Pattern Has Formed In GIS's Chart And Only Earnings Will Tell If This Stock Can Breakthrough

Going forward, I believe General Mills has clearly established itself as the best investment in the consumer staples industry. The stock has more potential for growth than competitors as they grow both their health food and pet food divisions. The stock does appear relatively valued at its current point, but with everything General Mills has going for them over companies that are just beginning to undergo headwinds, such as Kraft and Kroger, it may be a powerful play towards safety in a volatile market for any dividend loving investor.

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.