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General Mills Serves up Iconic Brands

11/29/2019 5:00 am EST

Focus: CONSUMER

Hilary Kramer

Editor, GameChangers

When you think of General Mills (GIS), the first thought that may come to mind is iconic cereal brands like Cheerios, Wheaties and Chex, or baking brands such as Gold Medal Flour or Betty Crocker, notes growth stock expert Hilary Kramer, editor of Value Authority.

However, these brands make up less than 25% of General Mills’ sales. In reality, General Mills is a broadly diversified food company that controls other brands like Old El Paso Mexican Foods, Yoplait, Colombo Yogurt and Häagen-Dazs ice cream.

Through recent acquisitions, GIS also owns growth brands such the Annie’s line of organic products and Blue Buffalo pet food, which marked the company’s entry into pet foods.

I like GIS right now because, like most food stocks, it has a very depressed valuation due to the ongoing challenges facing the food industry such as changing consumer tastes towards healthier eating options and emerging new brands.

However, aided by its broad portfolio and marketing strength, the company’s unit volumes have been flat on an organic basis for the past two fiscal years. Earnings per share have improved from $2.77 to $3.22 due to well-controlled expenses and a lower tax rate due to the 2017 tax law.

In the latest quarter, the company held or gained shares in five out of its 10 largest brands and its critical North American retail segment showed signs of improving. Furthermore, the company continued to enjoy strong growth in Blue Buffalo.

The company sells for 15.6X EPS estimates for the fiscal estimates for the current fiscal year and offers a dividend yield of 3.7%. While food companies like General Mills sell at a discount to other consumer non-durable stocks such as personal care companies, I believe that the difference is just too great.

General Mills offers a solid value proposition here, with an attractive valuation and strong free cash flow generation that the company can use to reduce debt or make further acquisitions. I believe the stock can do well in practically any economic environment.

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