General Mills: Shares Look Undervalued as Market Price Underappreciates Portfolio of Strong Brands

After updating our forecasts for slightly higher sales growth and operating margin, we have raised our fair value estimate for General Mills GIS 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.

Our fair value estimate implies an 18 times 2024 adjusted EPS multiple and a 13 times enterprise value/2024 adjusted EBITDA multiple. We forecast sales to grow about 3% in 2024, as the tail-end of inflation-related price increases offset the resulting volume declines. This is on the lower end of management guidance of 3% to 4% for the year. We forecast an adjusted operating margin of nearly 18%, up about 60 basis points from higher prices.

Longer-term, we forecast about 2.3% per year top-line growth and adjusted operating margins of 19%, slightly above historical ranges of roughly 16% to 18%, reflecting normalizing volumes, price increases, moderating input cost inflation, and a renewed focus on efficiency.

We maintain General Mills’ narrow economic moat rating. We think its plethora of leading brands across several product categories makes it a valued partner for retailers. Additionally, we see evidence of a secondary moat source through a cost advantage, mostly from leverage across distribution.

We’ve also raised our Capital Allocation Rating to Exemplary, mostly due to our updated view of its appropriate shareholder distributions, combined with its sound balance sheet and fair investment track record. We view General Mills’ timely share repurchases and consistent dividend positively, especially when it paused buybacks and increases, respectively, when leverage spiked after major acquisitions.