Contents

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This is an introduction to my General Mills (GIS) stock analysis which is based on Q3 2018 results and the relatively recent ~$8B acquisition of Blue Buffalo Pet Products which is part of GIS's transformation.

Summary

  • GIS’s revenue has been on the decline for the last few years due to changing consumer preferences.
  • High growth Blue Buffalo Pet Products was recently acquired as management endeavors to offset the decline in other areas of the business.
  • The $8B purchase price for Blue Buffalo which reported $0.319B in adjusted EBITDA in FY2017 means GIS is paying up front for 25 years worth of profit. This deal is among the most expensive ever in the packaged-food space.
  • GIS’s long-term debt credit rating was recently downgraded two notches by Moody’s. Moody’s and S&P Global now rate GIS at the mid-point of the lower medium grade on the credit ratings scale.
  • Management is clearly cognizant of the investment community’s concern about elevated debt levels and has suspended any share repurchases until net debt to EBITDA is reduced from ~4.2x to ~3.5x by the end of FY2020.
  • Some investors will be enticed by the ~4.6% dividend yield. I don’t chase yield and given that long-term consumer trends are not in GIS’s favor, I will pass on investing in GIS.

Introduction

Companies in the Consumer Staples sector are typically viewed as a safe haven during periods of market volatility (refer to VIX which is a measure of volatility) or economic downturn. They have, however, fared poorly recently; this is now the worst-performing group YTD. The reasoning for this is concern about increased competition and tight margins as well as good global economic growth which tend to dampen enthusiasm for the staples sector.

In the event of heightened political and geopolitical tensions, stocks in this sector could see a boost in their valuations. In addition, investors are faced with continued uncertainty over the pace at which the Federal Reserve will raise short-term interest rates. It would, therefore, be prudent to have a market-weight position in the staples sector so as to provide some stability to your investment portfolio.

Given the above, I have recently reviewed Church & Dwight (NYSE: CHD) and Procter & Gamble (NYSE: PG) to determine which may be appropriate investments in this space.

In today’s article I take a look at General Mills (NYSE: GIS). I have chosen to analyze this company as I was recently asked for my opinion since GIS has pulled back from ~$60 toward the end of January 2018; it actually traded above $70 in June 2016.

Business Overview

GIS is a leading global manufacturer and marketer of branded consumer foods sold through retail stores. It is also a leading supplier of branded and unbranded food products to the North American foodservice and commercial baking industries.

GIS manufactures its products in 13 countries and markets them in more than 100 countries. It also has a 50% interest in two strategic joint ventures that manufacture and market food products sold in more than 130 countries worldwide.

Further details can be found in Part 1 – Item 1 in the 2017 10-K.

A list of GIS’s brands in various categories can be found here.

While GIS prides itself on its brands being known for quality, many consumers who read the ingredients in several of GIS’s products will undoubtedly question the ‘quality’ claim.

GIS has considerable exposure to the center aisles of the grocery stores, an area which has faced declining traffic the past several years as consumers increasingly shop for fresher alternatives in the perimeter. An example of this is borne out by GIS’s cereal sales which have been declining ~3% the past 3 years.

Large food manufacturers such as GIS must also contend with mounting pressure from niche players which are often more attuned to evolving consumer preferences. In fact, GIS’s market share in yogurt has dropped to below 20% from above 25% in 2010! This partly reflects GIS’s slow response to trends like Greek yogurt that nimble upstarts foresaw.

Please click here to read my GIS stock analysis.

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