Skip to Content
Stock Analyst Update

General Mills Buys A Growth Opportunity

With the purchase of narrow-moat Blue Buffalo, wide-moat General Mills is hoping to prop up sales, as top-line growth across the packaged foods landscape remains elusive.

Mentioned: ,

Wide-moat  General Mills (GIS) announced it will buy narrow-moat  Blue Buffalo (BUFF), a natural pet food brand, for $8 billion, or $40 per share. We may slightly tick up our $61 fair value estimate for General Mills, and we have raised our valuation of Blue Buffalo to $39 per share from $28.50 to reflecting the discounted value of the offer, assuming a late May close. This implies an adjusted EBITDA multiple of around 22 times, including synergies, which we view as fair, given that Blue Buffalo boasts higher growth (compound annual sales growth of 12% over the past three years versus mid-single-digit declines at General Mills) and margins (operating margins in the mid-20s versus General Mills’ high teens). The transaction has already been approved by both boards; because Invus and the Bishop family control more than 50% of Blue Buffalo’s outstanding shares, additional shareholder approval won't be required to close. With the mid-single-digit decrease in shares following the announcement, we think General Mills is a touch undervalued.

The deal strikes us as strategically sound, as it stands to improve General Mills’ growth trajectory without compromising its ongoing efforts to enhance its bottom line. We expected the firm to look for inorganic growth opportunities, particularly in the natural and organic aisle, to prop up sales as top-line growth across the packaged foods landscape has remained elusive. While General Mills enjoys leading share in several domestic food categories, we’ve viewed its exposure to center store (which has faced declining traffic over the past several years as consumers opt for fresher alternatives in the perimeter) as a persistent headwind. As evidence, its cereal sales have averaged 3% declines the past three years, in line with the low- to mid-single-digit declines of the category, despite the company's 30% market share, with three of the top five brands in the U.S.

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:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

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.