Is General Mills a Good Portfolio Play?

With shares of General Mills (NYSE:GIS) trading around $49, 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 companys 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 said it will no longer use genetically modified organisms to make its signature breakfast cereal, Cheerios, because of consumer demands. The company made the announcement in a blog post Thursday saying it would no longer source genetically modified corn and sugar to make the breakfast cereal rings. It said whole grain oats, the chief ingredient, was never available in genetically modified varietals. “Why change anything at all? It’s simple. We did it because we think consumers may embrace it,” Tom Forsythe, vice president of global communications for General Mills, said in the blog post.

T = Technicals on the Stock Chart Are Mixed

General Mills stock has been surging higher in the past couple of years. However, the stock is currently pulling back and may need time to stabilize before heading higher. 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 below its rising key averages, which signal neutral to bearish 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

16.66%

20%

18%

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

Put IV Skew

Call IV Skew

February Options

Steep

Average

March Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bearish 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’s 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

2.44%

-14.63%

12.24%

3.45%

Revenue Growth (Y-O-Y)

-0.12%

7.95%

8.48%

7.55%

Earnings Reaction

0.30%

0.74%

-0.47%

2.56%

General Mills has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about General Mills’s recent earnings announcements.

P = Weak 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

-1.68%

0.16%

-0.90%

-0.70%

-1.78%

General Mills has been a poor relative performer, year-to-date.

Conclusion

General Mills produces and markets branded consumer foods in the United States and internationally. The company said it will no longer use genetically modified organisms to make its signature breakfast cereal, Cheerios, because of consumer demands. 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 mixed while revenue figures have been increasing, which has produced conflicting feelings among investors. Relative to its peers and sector, General Mills has been a poor relative performer year-to-date. WAIT AND SEE what General Mills does this quarter.

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