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Stock Analyst Update

Can General Mills' Top-Line Gains Persist?

The wide-moat firm's cost savings initiatives should fuel further bottom-line gains over the next several years.

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We were pleased to see wide-moat  General Mills(GIS) top-line return to growth in the second quarter, with organic net sales up 1% over last year, driven entirely by price/mix. While its operating margin contracted 130 basis points to 17.4%, we maintain that the firm’s cost savings initiatives should fuel further bottom-line gains over the next several years. Moreover, management cited a 7% uptick in advertising and media expense during the quarter as a drag on profitability. We support this brand spending, given our contention that consistent investments in both advertising and research and development (which we expect to average upward of 6% of sales over our forecast period, versus 5.4% in fiscal 2017) will support the firm’s leading competitive edge, as it continues to develop and promote new products that better align with evolving consumer tastes. We plan to maintain our $61 fair value estimate and are reiterating our longer-term outlook that calls for low-single-digit sales growth and operating margin averaging around 19% over the next five years. Shares are currently trading at a mid-single-digit discount to our valuation, which could provide a favorable risk/reward opportunity for investors, especially given the firm’s above 3% dividend yield.

The convenience store and foodservice segment was a key driver of organic growth, with sales up 5% (60% of which was driven by volume), reflecting General Mills’ leading position in the foodservice category (where it has the top share in cereal, yogurt, and K-12 frozen meals). While organic growth remained flat in the North America retail segment, we expect the firm’s long-standing retail relationships will allow it to secure prime shelf space for new products, like Chocolate Peanut Butter Cheerios and Oui by Yoplait, even as the center of the store remains challenged. Moreover, we were pleased to see new offerings drive mid-single-digit growth in the domestic cereal (17% of sales) and snack (21% of sales) categories.

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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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