Wednesday, 1 July 2015

General Mills - ongoing 'cereal' dullness?

It was in late-ish 2014 that I last wrote about General Mills (link here) and I ended up not particularly impressed despite efforts by the company to try to convince that cereal sales were not structurally shabby...

...and concluded that: 

'For me - and just because of the brands - I would pay around x12 EV/ebit which brings us to an interesting level below US$47 which is funnily enough around the level of the 2014 YTD low.  That's the level to be flagged otherwise even for dividend hunters I would look elsewhere'.  

Did we get an opportunity at that level?  Actually, no.  In fact investors have achieved a 10%+ return since then.  

So did I miss anything with General Mills?  Looking at today's results...there are good and bad parts with the results: 

Any results appraisal that starts with 'mixed performance' is not going to be stunning (and 'consumer-first efforts') is just another way of saying there's a bit of pricing pressure (generally)...

...and so unsurprisingly the key sales/operating profits lines were somewhat dull, although some cost cutting helped push the EPS line to a low single digit level: 

So an easy case of a dull growing big consumer staple at a big multiple because it has lots of brands that people know and hence is 'safe'?  Well...maybe not.  Ignoring the exogenous determined FX impact line I actually was quite impressed with the volume and price/mix progression in Q4.

Similarly individual product divisional progress was across-the-board sequentially better:

Undoubtedly some product evolutions have helped but also I believe the continued growth of the convenience channel (wholly consistent with the strong performance of 'snacks') was a contributor here.  Note too the performance of the international business on a constant FX basis: that augers well and again reflects product evolution plus the continued positive bedding down of the cereals jv with Nestle.  

Dividend progression / continued share buybacks also helped with the investment story.  With the dividend yield pushing 3% and adding back the share repurchases gives a total proportional return to shareholders of around 5%.  Not too shabby.

So was I a bit too conservative regarding General Mills?  Well let's not forget that their fiscal 2016 guidance remains a low single digit operating profits guidance.  So even adjusting for probably a more favourable FX environment too my prospective EV/ebit value for their fiscal 2016 is still in the x13s.  That does not feel cheap - even with the shareholder remuneration.  

Admittedly waiting for c. US$47 is a touch too conservative now but around US$50 is the first time I will be looking at General Mills' stock as a potential long - and above US$60 as a potential short (to join my positions in Kelloggs and Campbell Soup).  

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