General Mills Has Profit-Growth Recipe

11/9/2009


  Recent Price
$65
  Dividend
$1.88
  Yield

2.9%

  P/E Ratio
15
  Shares (millions)
336
  Long-Term Debt as % of Capital
51%
  52-Week Price Range
$69.00 - $46.37

General Mills ($65; GIS) is known for such popular brands as Cheerios cereal, Haagen-Dazs ice cream, Hamburger Helper meals, and Betty Crocker baking mixes. With a sales base relatively insensitive to economic cycles, General Mills managed 5% revenue growth in the 12 months ended August. That modest top-line growth, along with aggressive cost cuts, keyed 17% growth in per-share profits.

During the recession, General Mills saw solid demand for its staples — breakfast cereals, soups, and packaged meals — as more people took to eating at home. Although its brands face stiff competition from private-label goods distributed by Wal-Mart Stores ($50; WMT) and other retailers, General Mills gained market share in some categories during the recession. General Mills is a Buy and a Long-Term Buy.

Business breakdown

A pantry of recognizable brands — Green Giant vegetables, Progresso soups, Lucky Charms cereal, and Yoplait and Colombo yogurt — comprises General Mills’ primary business, U.S. retail. The unit (69% of 12-month sales, 84% of operating profit) managed 9% revenue growth and 15% operating-income growth in the 12 months ended August.

The bakeries and foodservice segment (13%, 7%) sells to distributors, convenience stores, restaurants, and cafeterias. Although revenue declined 6% in the 12-month period, General Mills cut costs drastically, wringing out 30% higher operating profits.

General Mills derives most of its sales in the U.S., and international markets represent an opportunity for growth. The company is looking to push further into emerging markets where it already holds a presence, such as China, Brazil, and India. The international segment (17%, 9%) posted 3% lower sales and 9% lower operating profit in the 12-month period.

In the coming year, management anticipates a 4% to 5% rise in raw-material and energy costs. General Mills has largely resisted price increases, preferring instead to control costs by discontinuing less-popular flavors of certain brands. That strategy extends to General Mills selling off lower-margin, lower-growth businesses, such as frozen dough and microwave popcorn. The company has also improved the efficiency of its production plants and reduced its truck fleet’s fuel use by adjusting shipping patterns.

Conclusion

As the U.S. pulls itself out of a recession, General Mills remains in a solid position. Wall Street expects 1% higher sales and per-share-profit growth of 13% for fiscal 2010 ending May. Taking a longer view, General Mills seems capable of growing per-share profits at an 8% to 10% clip over the next five years. At 15 times trailing earnings, the shares trade at a 7% discount to the three-year average. The stock trades 5% above the average P/E ratio for packaged-food companies in the S&P 500 Index, a premium justified by General Mills’ superior growth profile.

General Mills yields 2.9%. The dividend has risen at an annualized rate of more than 22% over the last five years yet still represents less than 42% of estimated fiscal 2010 earnings. The dividend seems likely to continue rising in coming years. Investors can obtain an annual report for General Mills at 1 General Mills Blvd., Minneapolis, MN 55426; (800) 248-73100; www.generalmills.com.

GENERAL MILLS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Aug '09 $1.28 vs. $0.96 + 1% $60.64 -

$50.91

15 - 13
May '09 0.87 vs. 0.73 + 5% 54.34 - 46.37 14 - 12
Feb '09 0.79 vs. 0.87 + 4% 65.31 - 52.10 17 - 13
Nov '08 1.36 vs.

1.11

+ 8% 72.01 - 56.00 20 - 15
           
Year
(May)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $14.69 $3.98 $1.72 $72.01
-
$46.37 18 - 12
2008 $13.65 $3.52 $1.57 63.55
-
51.00 18 - 14
2007 $12.44 $3.18 $1.44 61.31
-
49.27 19 - 15
2006 $11.64 $2.90 $1.34 52.16
-
44.67 18 - 15
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
86 91 62 84 57 47 62

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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