Is General Mills Still a Safe Investment?

With shares of General Mills (NYSE:GIS) trading at around $49.01, 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:

C = Catalyst for the Stock’s Movement

In this environment, it’s important to find the right defensive plays. While no one knows exactly what the best defensive plays will be heading forward, stock performance history, management, and industry trends can provide clues.

The reason defensive plays are so important is because the stock market wouldn’t be acting as strong as it is now without Federal Reserve assistance. Even if the eternal optimists are correct that this is a real economic recovery, the stock market still wouldn’t be as high as it is today without outside assistance. Some might argue that stocks aren’t expensive. For example, Jim Cramer and James Altucher have recently provided examples, including Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NASDAQ:ORCL) trading at 15 times earnings, and Apple Inc. (NASDAQ:AAPL) trading at just 10 times earnings. This is accurate information. However, they failed to mention that some modern technology stocks are through the roof, including Netflix (NASDAQ:NFLX) trading at 588 times earnings, Facebook (NASDAQ:FB) trading at 1,867 times earnings, and Amazon.com Inc. (NASDAQ:AMZN) trading at 75 times forward earnings. It should also be noted that technology insiders are selling their shares at rapid rates. However, this isn’t about technology. This was just an example. For example, weakness at FedEx Corporation (NYSE:FDX) and Caterpillar Inc. (NYSE:CAT) are better indicators of what’s going on in the real economy.  The overall point is that the market is well overheated, and that it’s imperative to stay in defensive names that pay generous dividends. The tricky part is that not all defensive names will be safe. Is General Mills safe?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Here are some positives for General Mills:

  • Increased dividend 65 percent over the past five years
  • Consistent annual revenue growth
  • Beat Q3 expectations
  • Decreased advertising costs
  • Made strategic acquisitions to fuel growth
  • Strong sales in the United States

The stock also held up relatively well during the financial crisis of 2008/2009, especially considering the generous dividend yield. In addition to that, General Mills has shown exceptional long-term performance, and it has outperformed Kellogg Company (NYSE:K) and ConAgra Foods (NYSE:CAG) all-time. Yet another positive point is that General Mills currently yields 3.10 percent whereas Kellogg yields 2.80 percent and ConAgra yields 2.90 percent.

The biggest headwinds for General Mills are increased competition, commodity prices, and expected cost increases. However, General Mills has seen stiffer headwinds in the past.

Now let’s take a look at some comparative numbers. The chart below compares basic fundamentals for General Mills, Kellogg, and ConAgra. General Mills has a market cap of $31.80 billion, Kellogg has a market cap of $23.23 billion, and ConAgra has a market cap of $14.51 billion.

GIS

K

CAG

Trailing   P/E

17.96

23.98

29.22

Forward   P/E

16.74

15.39

14.09

Profit   Margin

10.41%

6.77%

3.48%

ROE

22.14%

44.93%

9.87%

Operating   Cash Flow

 $2.89 Billion

 $1.76 Billion

 $1.05 Billion

Dividend   Yield

3.10%

2.80%

2.90%

Short   Position

2.20%

1.90%

1.50%

 

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Let’s take a look at some more important numbers prior to forming an opinion on General Mills…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for General Mills is close to the industry average of 0.80. It’s also much stronger than the debt-to-equity ratios for Kellogg and ConAgra.

Debt-To-Equity

Cash

Long-Term Debt

GIS

0.95

$751.20 Million

$8.06 Billion

K

3.19

$281.00 Million

$7.90 Billion

CAG

2.08

$723.80 Million

$10.68 Billion

 

T = Technicals Are Strong  

General Mills has outperformed its peers year-to-date. This is in addition to offering the highest yield.

1 Month

Year-To-Date

1 Year

3 Year

GIS

6.67%

23.08%

30.51%

53.01%

K

3.60%

15.34%

24.16%

32.56%

CAG

0.65%

19.30%

38.34%

54.48%

 

At $49.01, General Mills is trading above all its averages.

50-Day   SMA

45.87

100-Day   SMA

43.43

200-Day   SMA

41.29

 

E = Earnings Have Been Steady             

General Mills isn’t a high-growth company. It’s a consumer goods company that delivers slow and steady gains. Profits might fluctuate a little, but that isn’t reason for concern. Revenue has consistently improved on an annual basis, which is a good sign.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

13.65

14.56

14.64

14.88

16.66

Diluted   EPS ($)

1.85

N/A

2.24

2.70

2.35

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, revenue and earnings have declined on a sequential basis. This is a negative, but annual numbers are a much better indicator of a company’s big-picture situation.

2/2012

5/2012

8/2012

11/2012

2/2013

Revenue   ($)in   billions

4.12

4.07

4.05

4.88

4.43

Diluted   EPS ($)

0.58

0.49

0.82

0.82

0.60

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Processed & Packaged Foods has been a solid industry throughout the years. Many investors have seen it as a decent place to hide during difficult times. One of the biggest concerns for the industry at the moment is weak volumes due to consumers being more selective. Generic brands could be the biggest threat if the consumer continues to weaken. This is a big reason why the industry isn’t bulletproof.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

If the market continues to move higher, then General Mills is highly likely to continue its ascent. If the market falls, then the stock will suffer, but it should hold up better than most stocks, and the yield will help. Rewards currently outweigh risks.

General Mills is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

More Articles About:   ,  

More from The Cheat Sheet