GIS with Nobias technology: Can General Mills Overcome Inflationary Headwinds?
General Mills (GIS), a company famous for dominating the center aisles of the grocery store with its large portfolio of well known brands in the cereal, baking products, snacks, vegetables, and pet food categories, recently reported its fiscal 2022 second quarter earnings and the results disappointed Wall Street. Because of this, GIS shares fell 2.45% this week and now sit at $65.99 which is approximately 5.3% below its recent 52-week high of $69.68.
The primary issue during the company’s recent quarter wasn’t sales volumes, but instead, supply chain bottlenecks and inflationary headwinds that hurt margins and caused the company to miss Wall Street’s consensus earnings estimate.
It wasn’t long ago that GIS appeared to be confident about its place in the post-pandemic operating environment. In September, Demitrios Kalogeropoulos, a Nobias 4-star rated author published an article at The Motley Fool which highlighted his bullish outlook on the stock after analyzing a company presentation.
Kalogeropoulos said, “General Mills (NYSE:GIS) is back to growing again. Just one quarter after announcing a sales slump, compared to a pantry-stocking period a year ago, the cereal and snack-food giant said that revenue is now rising.”
During the September presentation, Kalogeropoulos noted that GIS management saw inflationary hurdles ahead of them; however, he wrote, “CEO Jeff Harmening and his team see faster growth and accelerating profit gains overall, thanks to fundamental changes in demand and in General Mills' portfolio.”
GIS Dec 2021
Looking at trailing data prior to the Q2 results Kalogeropoulos said, “Global organic revenue is rising at a 6% annual pace over the past two years, thanks to a mix of rising prices and increased volumes. The company held or extended its market share in most of its core categories, too, including cereal and pet food.” He highlighted the fact that the company had proven itself capable of dealing with supply chain/inflationary concerns throughout the pandemic thus far, saying, “Gross profitability declined, thanks mainly to soaring input costs. General Mills offset that slump with cost cuts, though, so that adjusted operating margin is still higher today (at 18% of sales) than it was before the pandemic struck (17% of sales).”
Kalogeropoulos put a spotlight on the company’s pet food business, driven by the Blue Buffalo brand that General Mills acquired in 2018, writing, “Consumers are increasingly reaching for premium dog food and treats, helping the pet segment notch a 20% annual profit increase since 2019.”
General Mills’ management teams continued to make moves with regard to repositioning its portfolio so that it can take advantage of new consumer trends. Kalogeropoulos said that GIS recently sold its European Yoplait business and added new brands to its fast growing pet food segment. Overall, he said, “Sales should now barely decline compared to 2020's surge, executives said. Profits will be at the high end of their previous forecast, too.”
According to Kalogeropoulos, General Mills’ management believes that we’ve entered into a “new normal” period, with regard to consumer trends in a post-pandemic world. General Mills believes that the eating/cooking at home trends that developed in 2020 are here to stay.
Kalogeropoulos looks to be buying into this notion as well, concluding his piece by saying that General Mills “appears to be on a faster, more profitable growth path, which should reward patient shareholders over the long term.” And, as Vidhi Choudhary, a Nobias 4-star rated analyst, pointed out in early October, Kalogeropoulos wasn’t the only analyst who was bullish on GIS’s outlook.
Choudhary published an article at The Street on October 1st which highlighted Citi Group’s bullish analyst note which came on the heels of the same investor presentation that Kalogeropoulos was focused on. Choudhary wrote, “The iconic maker of Cheerios had "underperformed the market ... but demonstrated stronger execution than many of its peers in recent months," wrote Citi analysts Wendy Nicholson and Abigail Lake in a note published Friday.” She continued, saying, “Citi added that General Mills delivered much better-than-expected fiscal-first-quarter results, and the market barely noticed.”
The Citi analysts didn’t appear to be concerned about inflationary headwinds. Choudhary quoted Nicholson and Lake who said, "We expect that [General Mills] should continue to improve upon its market-share gains while raising prices to offset inflation.”
Choudhary’s article points out that Citi raised its price target for GIS shares from $63/share to $70/share after the stock’s impressive Q1 results. But, sentiment may be shifting after the recent Q2 numbers came in this week.
Nathan Parsh, a Nobias 4-star ratted author published an article at Yahoo Finance breaking down the results. Parsh noted that GIS’s Q2 results were mixed, with the company beating Wall Street’s expectations on the top-line but missing bottom-line numbers. He said, “On a two-year stack basis, results were better as the company has managed to secure repeat customers. The company managed to pass along some of the higher costs from inflationary pressures in the business, but it wasn't enough, as operating profit still declined from the prior year.”
With regard to GIS’s Q2 fundamentals, Parsh wrote, “General Mills reported fiscal second-quarter 2022 results on Dec. 21. Revenue grew 6.4% year-over-year to just over $5 billion, beating Wall Street analysts' estimates by $163 million. However, adjusted earnings per share of 99 cents compared unfavorably to $1.06 in the prior-year quarter and was 6 cents less than expected.”
He continued, “Organic growth improved 5% for the quarter. Pricing and mix contributed to growth as volumes were flat. Adjusted operating profit was lower by 6%. General Mills was able to raise prices by 7%, but this was more than offset because, despite what headlines might have you believe, inflation has actually been much higher than 7%.”
GIS’s Pet segment was still a shining star for the company. Parsh said, “The Pet segment grew 14% as both cat and dog foods improved double-digits. The companys Nudges, True Chews and Top Chews brands combined for 22% growth year-over-year.” Overall, however, he said, “The adjusted gross margin fell 330 basis points to 32.2% and the operating margin contracted 200 basis points due to supply chain constraints and inflationary pressures.”
Parsh touched upon the same bullish point as Kalogeropoulos, noting that the company appears to be holding onto the market share it gained during 2020 when the COVID-19 pandemic caused consumer behavior to shift. He wrote, “Pre-pandemic market share of the U.S. was 55%, which improved to 65% during the past fiscal year. That number dropped just slightly to 62% for the first half of fiscal year 2022. General Mills now holds a higher percentage of market share than it did before the pandemic as the company has held onto many of the customers that it gained last year.” And it appears that management remains confident in its ability to execute in the “new normal” environment that Kalogeropoulos discussed earlier.
Parsh highlighted the company’s updated 2022 fiscal year guidance, which calls for “Organic revenue is now expected to grow 4% to 5%, compared to the previous estimate of -1% to 3%. Adjusted earnings per share are now projected to range from -2% to 1%, a tiny improvement from the previous range of -2% to 0%.” At this point in time, it’s difficult to tell whether or not GIS’s sales volume growth will overcome the negative pressures that inflation puts on its margins (due to the unpredictable nature of the pandemic and how new variants, such as Omicron, will impact the global supply chain). And with that in mind, Parsh concluded his piece with a cautious outlook. He wrote, “The company will likely maintain a consistent business and safe dividend for many years to come.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
“However,” he continued, “I am personally inclined to wait to see what inflation looks like in the coming months before adding to my position in the name. If inflation looks like it is subsiding or at least not surging higher, then General Mills can benefit from lower input costs and higher pricing. I am not likely to begin selling the stock any time soon because of its market leadership and its stellar dividend history, but it seems like the company isn't quite able to keep up with inflation. If inflation continues rising out of control, then I think General Mills is more of a hold at the moment.”
When looking at the aggregate opinion of the credible authors tracked by the Nobias algorithm, it appears that the vast majority of individuals remain bullish on GIS shares. Right now, 85% of the opinions that we’ve seen published regarding this company are “Bullish”. And, looking at the opinions posted by 4 and 5-star rated Wall Street analysts, we see that the average price target being placed on GIS shares right now is $72.00.
Today, GIS trades for $65.99, which means that this average price target points towards upside potential of 9.1%. With this in mind, it appears that the Nobias community of credible authors believes that General Mills has what it takes to overcome inflationary headwinds in the short-term, meaning that the recent post-earnings dip that GIS shares have experienced may represent an attractive buying opportunity.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long GIS. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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