Why General Mills Could Deliver a Successful Stock Price Recovery
- By Robert Stephens, CFA
Investing in an underperforming stock can be a risky move. In the case of General Mills Inc. (GIS), though, the strategy being employed could generate improving financial performance over the long run.
It is focused on delivering greater innovation in a range of product lines. Alongside cost reductions and growth in e-commerce operations, this could boost the performance of the company. The acquisition of Blue Buffalo may also provide a catalyst for sales growth despite what appears to be a generous valuation.
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The intrinsic value of GIS
Given the company's fourth-quarter results showed an improved revenue performance and an increase in adjusted earnings per share of 7%, the stock could prove to be a sound turnaround opportunity.
Growth potential
In the last year, General Mills' stock price has fallen 14%. That's a significant underperformance compared to the S&P 500, which has gained 17% over the same period.
One potential catalyst for General Mills is its continued innovation. It has introduced new products such as Yoplait Oui and Mix-Ins in the yogurt segment, while adding new unicorn marshmallows to its Lucky Charms cereal. These changes helped to increase consumer interest in the company's products, boosting organic sales by 1% in the fourth quarter.
New product launches are planned in the current fiscal year, and will be complemented by targeted investment. This includes new marketing campaigns in a number of product categories, while a focus on changing consumer tastes may also boost the company's overall sales growth. An example of this is a new platform in the U.S., which offers consumers a higher protein and lower sugar yogurt.
A renewed focus on international markets may also provide long-term growth for the business. It is accelerating growth plans for Haagen-Dazs and snack bars in Asia, while new gluten-free tortillas in Europe and Australia could positively impact the company's sales performance as consumer tastes change.
Changing business
The growth potential of e-commerce could have a significant impact on the company's financial performance. Its e-commerce sales increased by 50% in the most recent fiscal year, which suggests it is capitalizing on the trend of consumers moving from brick-and-mortar stores towards online ordering. With customers spending more online per basket than in-store per basket, a shift toward online could catalyze overall sales growth.
Cost control may also have a positive impact on General Mills' stock price in the long run. It has been successful at improving efficiency through its Holistic Margin Management (HMM) program, with it reaching a goal of realizing $700 million in annual savings versus a fiscal 2015 base. The company is now targeting cost of goods sold savings of around $450 million. It is expected to see increased benefits from strategic revenue management and administrative cost savings actions. A new global sourcing initiative and the streamlining of its North American operations may also aid inventory management and reduce inefficiencies.
Possible risk
A possible threat to the near-term outlook for the company is the acquisition of the Blue Buffalo pet foods business. It was purchased in April for a total consideration of $8 billion. The deal equated to 25 times adjusted earnings before interest, taxes, depreciation and amortization. This suggests the valuation placed on the company may have been excessive and that the payback period could be relatively long. Debt of over $6 billion was required to complete the acquisition. This could mean a large proportion of Blue Buffalo's profit is used to service the interest from the company's debt.
Blue Buffalo, though, is delivering impressive levels of growth. The pet foods sector is one of the few areas within the food business arena that is generating solid growth. The company has recorded 12% revenue growth on an annualized basis over the last three years. Its online operations and expansion into the food, drug and mass (FDM) retail channel could act as a further catalyst on its financial performance over the medium term. Alongside the logistical support that will be provided by General Mills, this could make the acquisition a success.
Verdict
The financial performance of General Mills could be boosted by further innovation. This has already had a positive impact on its recent performance, while cost management and e-commerce growth could also improve its future prospects. Although the Blue Buffalo acquisition was expensive and means the company's debt levels have increased, it could deliver strong growth when combined with the logistical capabilities of the acquirer. Therefore, having underperformed the S&P 500 in the last year, the company appears to have turnaround potential.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with GIS. Click here to check it out.
The intrinsic value of GIS
