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.
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.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.