It has been six months since I wrote my last article on General Mills (GIS). Back then, substantially improved fundamentals only timidly supported by post-earnings bullishness suggested to me that a bottom was within sight: "both sales and margins seem ready to slowly head up once again - and so does the stock, in my opinion."
Ahead of the company's fiscal 4Q19 earnings report, expected to be released later in June, it is now time to assess whether the stock's 35% YTD run still has legs.
Regarding the results of the quarter, revenues are expected to land at $4.24 billion for a YOY improvement of over 9%, representing the best growth rate in recent memory. Of course, the main driver of the top-line strength should be the acquisition of Blue Buffalo, which turned one-year old in April 2019.
In fact, I expect the pet food business to provide significant revenue support in fiscal 4Q19. As a reminder, the management team projected that "pro forma pet segment net sales growth [would] accelerate rapidly in the fourth quarter as the company doubles distribution and increases the BLUE product assortment in FDM channels."
I am modeling about a nine percentage point sales lift from pet food-related inorganic growth in the quarter, with organic growth not quite reaching the 1% mark. Capping the top line is likely to be reduced volume, a trend that has persisted for a few quarters and seems aligned with the general state of the packaged foods industry. However, I expected pricing and mix to more than offset the headwinds.
Source: D.M. Martins Research, using data from company reports
More interesting to observe (and harder to predict) will be profitability. As the summarized P&L above illustrates, I am betting on margins contracting a bit YOY, but not by much. Supporting them are synergies and gains of scale, now that Blue Buffalo should have been fully integrated and cost-saving initiatives should continue to take hold.
As a result of my slight optimism, I project adjusted EPS of $0.81 to land a nickel above consensus. However, my estimate materializing will highly depend on how well General Mills is able to (1) capture pricing strength and (2) manage its operating expenses.
On the stock
While GIS is no longer the bargain that it was a mere six months ago, trading at a current-year earnings ratio below 12x and dividend yield of 5% in December 2018, I still see the stock attractively priced at current levels. Gone is the overhang of fast declining revenues and contracting margins. Supported by momentum and a perception of "safe haven" amid broader market concerns (e.g. trade wars, higher interest rates, possible end of the decade-long bull market), this name continues to look like a buy to me.
It is hard to make a high-conviction, short-term bullish case on the stock ahead of earnings. Aside from the results of the most recent quarter, General Mills' disclosure of its guidance for fiscal 2020 (whether it beats or lags current expectations) could be the key determining factor in how shares might trade over the next few weeks.
But from a longer-term perspective, GIS continues to be one of my favorite defensive stocks, now benefiting from more stable fundamentals and better growth prospects.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.