Company Reports

Through continued research, development, and marketing, we expect General Mills’ portfolio of strong brands to maintain an intangible edge. This investment helps products sell well, driving traffic that entrenches the company's relationships with retailers. In many categories, General Mills has not only the top brand but also several leading brands that together create a dominant companywide share. For example, top brand Cheerios holds about 12% of the ready-to-eat cereal market, contributing to the company’s leading one-third market share, according to Euromonitor.

Narrow-moat General Mills reported fiscal third-quarter organic sales declined 1%, reflecting a potential positive turning point in the consumer environment. Profitability remained healthy, too, with adjusted operating margins up 220 basis points over the prior-year quarter to 17.9%. Management maintained fiscal 2024 guidance for organic sales growth of flat to down 1%, as well as 4%-5% growth for both adjusted operating profit and adjusted EPS. We expect to increase our $77 fair value estimate by a low-single-digit percentage, mostly due to the time value of money.

Through continued research, development, and marketing, we expect General Mills’ portfolio of strong brands to maintain an intangible edge. This investment helps products sell well, driving traffic that entrenches the company's relationships with retailers. In many categories, General Mills has not only the top brand but also several leading brands that together create a dominant companywide share. For example, top brand Cheerios holds about 12% of the ready-to-eat cereal market, contributing to the company’s leading one-third market share, according to Euromonitor.

Narrow-moat General Mills’ sales fell 2% in its (November-ended) fiscal 2024 second quarter, but cost management protected operating margins. The company expects more of the same for the rest of the fiscal year. As such, it cut full-year guidance for sales growth to negative 1% to flat, compared with up 3%-4%, and narrowed its adjusted operating growth and adjusted diluted EPS growth guidance to 4%-5% for both, cutting 1 percentage point off the top end. Our prior forecasts called for top-line growth of 3% and adjusting operating profit growth of 6%. We expect to cut our fair value estimate of $80 per share by a low-single-digit percentage amid continued consumer challenges, roughly in line with the intraday decline of about 3%.

After updating our forecasts for slightly higher sales growth and operating margin, we have raised our fair value estimate for General Mills to $80 per share from $78. Shares look undervalued as we think the market is overweighting the near-term volume challenges and the longer-term secular decline of cereal. As the rapid price increases of the recent past slow, we think consumers will return to more normalized buying patterns. Moreover, even as cereal consumption continues to slowly decline, we see General Mills continuing to hold a dominant share.

Through continued research, development, and marketing, we expect General Mills’ portfolio of strong brands to warrant an intangibles edge. That investment helps products sell well, driving traffic that entrenches its relationships with retailers. In many categories, it not only holds the top brand, but also several leading brands that together create a dominant companywide share. For example, within ready-to-eat cereals, top brand Cheerios holds about 12% of the market, contributing to the company’s leading one-third market share, according to Euromonitor.

Shares were roughly flat intraday, as the market reacted to few surprises in General Mills’ first fiscal quarter results. We anticipate making a low- to mid-single-digit increase to our fair value estimate of $78 per share for the time value of money and as we revisit some of our assumptions. Even before making the change, we see shares as undervalued. Over the last three months, shares have fallen almost 20%, lagging the Morningstar US Market Index’s 1% increase by a wide margin. We think the market is now overextending recent volume declines as longer-term weakness. But narrow-moat General Mills’ portfolio of strong brands should deliver improved financial performance as the macroeconomic environment stabilizes.

While the market dogged General Mills after its fourth-quarter print—shares slipped 5%—we don’t see any material change to our $78 fair value estimate, rendering shares fairly valued. Organic sales popped 5% in the quarter, as an 11% hike in prices offset a 6% downdraft in volumes. However, management suggested the consumer has been resilient, despite confronting higher prices at the shelf. Rather, the firm attributed a portion of the volume decline to a reduction in retailer inventories (a 3-point headwind in the quarter). Although competitors haven’t highlighted such angst yet, we don’t posit these actions are unique to General Mills and anticipate such musings will gain more airplay over the coming weeks. And to counter this pressure and support its brands and retail standing (factors that underpin its narrow moat), we don’t think the firm intends to back down from prudently spending behind consumer-valued innovation and marketing (up double digits in the quarter); we forecast it will expend nearly 6% of sales on average annually ($1.3 billion) toward such efforts.

General Mills has earned a narrow moat for its preferred status with retailers, strong brand equities, and cost edge. The firm is the U.S. market leader in cereal, dessert mixes, refrigerated dough, snack bars, and natural pet food and is number two in soup. It has historically gained or maintained share in its global platforms, even as its brands command price premiums. These strong brands have resulted in solid relationships with retail partners that are complemented by a scale-based cost advantage; in our view, this pricing power will allow the firm to weather inflationary headwinds.

We plan to raise our $75 fair value estimate for narrow-moat General Mills by a low-single-digit percentage after incorporating strong third-quarter performance and a modest lift to our fiscal 2023 outlook. General Mills’ astute pricing power, which underpins its narrow moat, was on full display as organic net sales jumped 16% (price/mix up 16%, volumes flat), edging our 9% preprint estimate. Mix benefits, coupled with progress in cost-savings initiatives, eased the blow from a midteens rise in input costs, benefiting adjusted gross and operating margins by 240 and 80 basis points, respectively, to 33.8% and 15.7%.

Even amid inflation, supply chain disruptions, and a weak economic backdrop, General Mills raised its fiscal 2023 guidance on both the top (10%, from 8%-9%) and bottom (7%-8%, from 4%-6%) lines. We will likely edge up our outlook (8% and 6%, respectively, preprint) into the revised ranges when the firm divulges third-quarter performance in late March. However, we don't surmise such moves will alter our $75 fair value estimate much. Shares popped at a mid-single-digit percentage clip on the news, leaving the stock a touch above our intrinsic valuation. As such, we'd suggest investors await a more attractive entry point.

General Mills has earned a narrow moat for its preferred status with retailers, strong brand equities, and cost edge. The firm is the market leader in cereal, dessert mixes, refrigerated dough, and natural pet food and is number two in snack bars and soup. The firm has historically gained or maintained share in its global platforms, even as its brands command price premiums. These strong brands have resulted in solid relationships with retail partners that are complemented by a scale-based cost advantage; in our view, this pricing power will allow the firm to weather inflationary headwinds.

We plan to raise our $73 fair value estimate for narrow-moat General Mills by a low-single-digit percentage after digesting solid second-quarter performance. Organic net sales popped 11% (price/mix up 17%, volume down 6%), surpassing our 7% forecast. While volume contracted, we view the pullback as tempered relative to the pronounced uptick in price (indicative of the pricing power stemming from its intangible assets). Favorable pricing and cost saves preserved profits, boosting adjusted gross and operating margins 100 basis points (to 33.2%) and 60 basis points (to 16.9%), respectively. As a result of these stout marks, management lifted its fiscal 2023 organic net sales growth to 8%-9% (from 6%-7%) and adjusted EPS growth to 4%-6% (2%-5%). This is north of our 5% and 3% preprint estimates, and we intend to move our forecast toward the revised ranges. While inflation seems likely to persist (with General Mills calling for 14%-15% cost increases this year), we surmise investments in innovation, marketing (anticipated to increase double-digits in the second half), and stepped-up capacity should afford the firm the ability to resonate with cash-constrained consumers.

We think General Mills’ strong brands (a factor that underpins its narrow moat) are helping to strengthen its elasticities as well as the firm’s minimal exposure to categories with a heavy private-label tilt (less than 30% of sales by our estimate). General Mills reported 10% organic sales growth in its fiscal first quarter (price/mix up 15%, volumes down 5%), topping our 9% forecast. We think the firm is also benefiting from consumers switching to at-home food consumption to help combat inflation, per management commentary and restaurant traffic data, which has softened in recent months.

As at-home food consumption remains elevated during the pandemic, consumers are finding favor with General Mills' offerings, as shown by increases in household penetration and repeat purchase rates in most categories. Even so, we expect this lift will largely be temporary, with consumers gradually returning to activities outside of the home, returning away-from-home food expenditures to half, as it was prior to the pandemic. But we do expect a lasting benefit for General Mills' pet food business, given the high-single-digit increase in pet adoptions during the crisis.

Heading into General Mills’ fiscal fourth-quarter report, we expected to see the firm’s sales volumes begin to suffer as consumers shifted from its generally higher-priced fare to value brands and private label, given steep inflation. While consumers are migrating to private brands, this is being offset by a shift from restaurants to at-home eating, and General Mills’ volumes have remained rather resilient. Fiscal 2022 sales increased 6% organically (price/mix up 7% and volumes down 1%), in line with our estimate. Another wave of price increases should increase our fiscal 2023 sales forecast from our 1% preprint estimate to be more in line with newly issued guidance of 4%-5% growth, driving a mid-single-digit expected increase in our $70 fair value estimate. With the stock up 6% on the report, shares remain fairly valued.

As at-home food consumption remains elevated during the pandemic, consumers are finding favor with General Mills' offerings, as shown by increases in household penetration and repeat purchase rates in most categories. Even so, we expect this lift will largely be temporary, with consumers gradually returning to activities outside of the home, returning away-from-home food expenditures to half, as it was prior to the pandemic. But we do expect a lasting benefit for General Mills' pet food business, given the high-single-digit increase in pet adoptions during the crisis.

At its second annual investor meeting focused on environmental, social, and governance (ESG) issues, narrow-moat General Mills discussed its progress toward its ESG goals, which are focused on four issues imperative to its business: regenerating the planet, protecting its people, strengthening the communities in which it operates, and improving food security. While these initiatives should undoubtedly benefit society, as investors, we must address how they should impact valuation. Despite the required costs, we view these efforts as crucial for the long-term health of the business and a prudent use of company resources. General Mills relies heavily on agricultural commodities, and its investments in regenerative agriculture (which improves soil health, reduces erosion, and slows global warming) should help ensure it has access to affordable ingredients for years to come. Further, many of its initiatives should result in cost savings, such as optimizing logistics, reducing packaging, switching to renewable energy, and moving to zero waste. We expect other required investments to be offset with savings identified via its holistic margin management program and strategic revenue management.

Our main takeaway from General Mills’ February-ended fiscal third-quarter report is that the firm continues to navigate a challenging environment well. Ingredient shortages for its dough, pizza, and hot snacks product lines caused the company’s on-shelf availability of these items to fall to 75% during the quarter, although this has since improved to 85%. Putting this into context, the shortages caused General Mills’ total U.S. retail on-shelf availability to fall into the low-90s from over 95% previously. Despite this, General Mills is gaining or maintaining market share in two thirds of its priority businesses, and management modestly increased fiscal 2022 organic sales growth guidance to 5%, up from 4%-5% previously, and its initial call for a 1%-3% drop in organic sales at the start of the fiscal year. We expect a modest bump to our $67 fair value estimate, given a slight increase in our fiscal 2022 organic sales estimate and the reversal of our prior assumption that the U.S. corporate tax rate would increase in 2022, leaving shares fully valued.

As at-home food consumption remains elevated during the pandemic, consumers are finding favor with General Mills' offerings, as shown by increases in household penetration and repeat purchase rates in most categories. Even so, we expect this lift will largely be temporary, with consumers gradually returning to activities outside of the home, returning away-from-home food expenditures to half, as it was prior to the pandemic. But we do expect a lasting benefit for General Mills' pet food business, given the high-single-digit increase in pet adoptions during the crisis.