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By Sonia Vora | 02-05-2018 02:00 PM

Our Confidence in Undervalued General Mills Is Growing

We upgraded the firm's economic moat rating to wide from narrow due to the durability of its brand and favorable cost structure.

Sonia Vora: We recently upgraded our economic moat rating for General Mills to wide from narrow to reflect our greater confidence in the durability of its brand-intangible assets and favorable cost structure. 

The firm's portfolio includes several well-known brands, like Cheerios and Yoplait, which have bolstered its relationships with retailers that depend on leading brands to drive store traffic and inventory turnover. While these categories remain competitive, we believe retailers' aversion to out-of-stocks has benefited established manufacturers. We think these relationships have helped General Mills to maintain valuable shelf space for its offerings, even in areas like yogurt, where its share has been challenged. We also think General Mills has shown modest pricing power, as price and mix have averaged more than a 2% contribution to sales over the past decade, driving nearly 60% of organic growth. From our vantage point, this further suggests evidence of a brand-intangible asset.

We also maintain General Mills has a cost advantage stemming from economies of scale. We posit the firm's broad domestic manufacturing and distribution network allows it to enjoy lower unit and distribution costs as well as greater supply chain efficiency than smaller peers. We also think the firm’s scale allows it to exercise some degree of bargaining power over distributors and retailers, as retailer fees can often act as a barrier to entry. Further, General Mills' scale allows the firm to better leverage investments in advertising and research and development than smaller peers, which has reinforced its brand-intangible assets.

We think General Mills' shares are undervalued, trading at more than a 10% discount to our $61 fair value estimate. When combined with its attractive dividend yield, we think this could offer an attractive entry point for investors to build a position in this wide-moat name.

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