General Mills, Inc. (GIS) is a leader in a highly competitive and rapidly changing industry. It holds 30% of U.S. market share in cereals; 18% in yogurt; 50% in baking mixes and 40% in grain snacks, observes Jack Adamo, editor of Insiders Plus.
Some of its well-known brands include Betty Crocker, Bisquick, Gold Medal Flour, Pillsbury, Cheerios, Chex, Total, Trix, Wheaties, Green Giant, Progresso and Häagen-Dazs. In the healthy-eating category it owns Good Earth, Fiber One, Nature Valley and Yoplait Yogurt.
The company earned $3.11 this fiscal year which ended last week. This was just slightly higher than last year despite a much lower tax rate this year. Interest expense from the major acquisition of Blue Buffalo, a natural pet food company, hit the bottom line.
General Mills is committed to keeping up with the changing tastes of the more health-conscious consumer. Its last acquisition, Annie -- a purveyor of natural foods -- in 2014 was deemed too pricey by analysts, but the brand has done well and now makes up 15% of sales.
This purchase is not without risk. Despite its long, successful history, competition is fierce in its industry, as all the players try to entice the new consumer and gain market share.
General Mills has been undertaking cost control and efficiency initiatives for several years and has made progress in many areas, but its struggle to keep in step with consumer trends, and a steep increase in transportation costs (for the whole industry) have left the bottom line pretty flat.
The stock has fallen from its high of $67 in 2016 to just over $44 today. With the market so focused on the big-tech growth stories at any price, investors don't have patience for companies in transition.
Transportation costs should start coming down later this year. As I mentioned earlier, profitable trends inevitably attract more competition. The order book for trucks has skyrocketed in the last few months.
When that supply comes on line, transportation costs will come down rapidly, increasing profits for the whole industry, and many others for which transportation costs make up a significant part of expenses.
Also on the company's side is that, although international sales are growing, they made up just 29% of sales this year, so the strong dollar won't be as much of an impediment to earnings as it is for many companies. The S&P 500 roster makes about 50% of its sales outside of our borders.
The stock is reasonably priced at 14-times earnings, but no growth in EPS is expected this year while debt is paid down and integration of the acquisition uses cash before saving it later years. Most analysts have HOLD ratings on the stock with price targets near where the stock is today. There are a few optimistic exceptions, but not many.
My feeling is that the company pays a 4.4% dividend with a payout ratio of just 54%, which leaves plenty of room for growth, debt reduction and dividend increases. With sentiment so negative now, it should not take much in the way of positive developments to give the stock a nice boost.
We have bought and sold General Mills three times in recent years and have done well with it. We made 19.7% in 13 months; 62.1% in 4 years and 1 month, and lost just 0.3% in 5 months. I hope to enhance that track record starting today.
Given the current climate and my dour view of the economy in coming years, I will keep this stock on a short leash. We are not going to allow any significant drawdowns if the stock seems that it wants disappoint us. But for now, I feel moderately optimistic about the risk-to-reward ratio here. We are taking a position in our High Income Portfolio.
