General Mills Looks Tempting, but Investors Should Not Bite

 | Jun 27, 2017 | 12:00 PM EDT
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Packaged foods giant General Mills (GIS) reports its fourth quarter fiscal 2017 results on Wednesday June 28. With the stock down so much, is it time to take a bite out of General Mills?

Shares of General Mills have been crushed. In the last 12 months, the stock is down 15%. Last year I said the stock didn't look very appetizing. Everything was going wrong for General Mills.

Weak demand for yogurt and soup took a toll. Americans even stopped eating their vegetables. The Green Giant frozen vegetable business was down. The ready-to-eat meals segment was down, the cereal business was soggy and at the July 2016 analyst meeting the company admitted it would not be able to deliver any revenue growth.

General Mills has had a very difficult time keeping up with changing food tastes, despite the company's aggressive push into organic and healthy foods.

On the third-quarter conference call, management reaffirmed their full year fiscal 2017 outlook. The company expects organic net sales to decline 4% and on a constant currency basis total operating profit growth is expected to be in a range of down 1% to up 1%. Because of the company's restructuring efforts, adjusted operating margin is expected to be up 120 basis points to 18%. Free cash flow is projected to be up in the mid single digits.

For the full year, management thinks adjusted earnings per share will increase between 5% and 7% from the $2.92 earned last year. Analysts are looking for full year earnings of $3.05 on $15.57 billion in revenue. Because of the difficult environment for consumer product companies, revenue should be down 6% this year and flat (hopefully) next year.

At the CAGNY Conference in February, the company touted its progress on adjusted operating margin, free cash flow growth and cash returns to shareholders, but investors are clearly looking for top line growth. The company will hold an analyst day on July 12.

General Mills believes it can reinvigorate its cereal business by focusing on wellness and taste. General Mills is continuing to roll out gluten-free cereals, products with no artificial flavors or colors, and an entire line-up of whole grains.

Besides cereal, the company is trying to bring back yogurt sales, which have been hurt by increasing competition and lower pricing. In February, the company estimated U.S. retail sales of yogurt declined 3% year to date, but General Mill's yogurt sales would be off 18%. Light and Greek yogurt are driving the declines. The only way to slow the slide is through product innovation, improved value and new package design. The company has also launched yogurt dippers, custard and new yogurt beverages.

While the yogurt business is on its knees, sales in China have slowed. In fact, Chinese sales have been terrible since fiscal 2014, mostly due to a slowdown in Haagen-Dazs ice cream sales. Like yogurt, Haagen-Dazs is redesigning its packaging, launching a new ad campaign and focusing on impulse purchases of ice cream, instead of the take-home market. Impulse purchases of ice cream are estimated to grow by 7% between 2016 and 2021, while take-home is only expected to grow 5% during the same period.

Even with the stock down as much as it is, it's hard to like General Mills. Historically, large-cap packaged food companies trade between 16 and 18 times forward estimates. With the consensus at $3.20 for next year, the stock is trading in the middle of the range. I would stay on the sidelines until General Mills can find more top line growth. I'm not taking a bite out of these shares.

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