Stock Analyst Update

General Mills Results Encouraging, Shares Undervalued

Sonia Vora

We’re encouraged by wide-moat  General Mills' (GIS) second-quarter results, which included 5% sales growth (a 1% decline on an organic basis) and a 2% improvement in organic price/mix. Year to date, price/mix has contributed around 2 points of sales growth, standing above the 1% contribution in fiscal 2018 and our roughly 1% full-year expectation, as the firm bolsters innovation across its categories. This supports our contention that consumer goods companies can leverage pricing to help offset broader secular declines in their categories, so long as they are able to bring new, value-added products to market (justifying a price premium) and ensure their portfolio of brands continues to resonate with evolving consumer preferences. This improvement in pricing, coupled with the firm's ongoing cost-saving initiatives, also had a favorable impact on profitability, with adjusted operating margin increasing 40 basis points to 17.3% despite input cost inflation. Year to date, this metric is tracking at 16.5%, in line with our full-year outlook.

We plan to adjust our near-term outlook to incorporate modest foreign exchange headwinds and a slightly higher degree of volume degradation in the North America retail segment, which should be largely offset by a stronger contribution from price/mix. We expect these revisions will shave about a dollar off our $58 fair value estimate. However, we're holding the line on our longer-term outlook for low-single-digit pro forma sales growth (with a 1% average contribution from price/mix) and gross margin in the mid-30s. Even with the mid-single-digit percentage uptick in the share price after the earnings release, we continue to think the name offers an attractive entry point.

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