Is General Mills a Safe Investment?

With shares of General Mills (NYSE:GIS) trading around $52, is GIS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

General Mills supplies branded and unbranded food products to the food service and commercial baking industries. The company’s products include ready-to-eat cereals, refrigerated yogurt, ready-to-serve soups, dry dinners, shelf stable and frozen vegetables, ice creams and frozen desserts, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grains, fruit and savory snacks, and various organic products, including granola bars, cereals, and soups. General Mills, Inc. sells its products directly, as well as through broker and distribution arrangements to grocery stores, mass merchandisers, membership stores, natural food chains, commercial and noncommercial food service distributors and operators, restaurants, and convenience stores, as well as to drug, dollar, and discount chains.

General Mills today reported results for the fourth-quarter and full fiscal year ended May 25, 2014. General Mills Chair and Chief Executive Officer Ken Powell said, “Our plans for 2014 called for sales and earnings growth consistent with our long-term business model, along with increased cash returns to shareholders. We made good progress building our worldwide food businesses, and we returned more than $2.7 billion in cash to shareholders through a 17 percent dividend increase and significant share repurchase activity. But our sales and operating profit results were disappointing. In the fourth-quarter, promotional spending in developed markets was less effective than we planned and input cost inflation was a bit above our forecast. Net sales and adjusted gross margin fell short of our targets.”

Fourth-quarter net sales declined 3 percent to $4.3 billion. Lower pound volume subtracted 2 points of net sales growth, while net price realization and mix added 1 point. Foreign currency exchange reduced net sales growth by 2 points in the quarter. Adjusted gross margin was 10 basis points below the year-ago level. Adjusted segment operating profit of $733 million essentially matched year-ago results. Net earnings attributable to General Mills totaled $405 million and diluted EPS totaled 65 cents. These results include a 6-cent per share gain on the sale of several Idaho grain elevators and a 9-cent per share charge associated with Venezuelan currency devaluation. Adjusted diluted EPS, which excludes these and certain other items affecting comparability, totaled 67 cents for the fourth quarter, up 24 percent from 54 cents a year earlier.

T = Technicals on the Stock Chart Are Mixed

General Mills stock has been surging higher over the past couple of years. However, the stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, General Mills is trading between its rising key averages which signal neutral price action in the near-term.

GIS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of General Mills options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

General Mills options

16.25%

43%

40%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Average

Average

August Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on General Mills stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for General Mills look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

18.18%

6.67%

2.44%

-14.63%

Revenue Growth (Y-O-Y)

-2.88%

-1.22%

-0.12%

7.95%

Earnings Reaction

-3.02%*

0.05%

0.30%

0.74%

General Mills has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been disappointed with General Mills recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has General Mills stock done relative to its peers, Post Holdings (NYSE:POST), Kellogg (NYSE:K), PepsiCo. (NYSE:PEP), and sector?

General Mills

Post Holdings

Kellogg

PepsiCo.

Sector

Year-to-Date Return

4.23%

1.08%

6.37%

6.74%

5.60%

General Mills has been an average performer, year-to-date.

Conclusion

General Mills produces and markets branded consumer foods in the United States and internationally. The company today reported results for the fourth-quarter and full fiscal year ended May 25, 2014. The stock has been surging higher over the past couple of years, but is currently pulling back. Over the past four quarters, earnings have been increasing while revenue figures have been decreasing, which has left investors disappointed with recent earnings announcements. Relative to its peers and sector, General Mills has been an average performer year-to-date. WAIT AND SEE what General Mills does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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