General Mills: Breakfast Buy

08/03/2016 8:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Despite sky-high valuations, it looks like the market will go higher, asserts Jack Adamo, growth and income expert and editor of Insiders Plus.

All the cheap money created by the Fed is going into financial assets rather than the pockets of those on Main Street.

It only needs another 6% to reach full bubble status, that is, two standard deviations above the historical P/E's central trend. With the way the Fed is going, who knows? We may shoot for three standard deviations.

Meanwhile, General Mills (GIS) reported full-year earnings. As is the case with virtually all the big international companies, results were negatively impacted by foreign exchange.

In addition, GIS's earnings were further impacted by the Green Giant divestiture and the comparison to a 53rd week in the prior fiscal year.

Still, pre-tax earnings rose 36%, helped by lower cost-of-goods-sold, Selling, general & administrative expenses, the sale of Green Giant and noticeably smaller write-offs.

Diluted EPS came in 40.6% higher and the payout ratio fell to a comfortable 64.3% on the dividend, which is 6.6% higher than last year. Cash flow and the balance sheet also look very good.

On the marketing front, General Mills is embracing changing consumer preferences. One way it's showing that is by removing artificial colors and flavors from its cereal lines. 75% of its cereals already met this standard by January.

Consumers are responding favorably, seven revamped varieties posted 8% sales growth in the back half of the year compared to a 6% decline in 2015.

My only reservation about the earnings report was one that seemed to be shared by some of the analysts on the conference call, that is, the company's optimism for the full year seemed out of proportion to the general retail environment.

Still, that's been the song throughout all conference calls. At least in the case of General Mills, cost reductions seem to be going as planned and new products are getting traction. A little help from exchange rates might do the trick.

In any case, I'm more optimistic about this company than I am for the market. Buy General Mills on pullbacks below $66.50.

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By Jack Adamo, Editor of Insiders Plus

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