E How I'm Playing General Mills Using Options

Introduction

Thanks to their predictable cash flows (as they are less prone to economic shocks) and shareholder-friendly policy, consumer staples stocks are one of the most perfect income sources to allocate defensive money to. Nevertheless, these unsexy stocks have been beaten down recently due to fears of rising interest rates which will eventually affect their cash flows. The biggest question investors should ask themselves is how they want to play these stocks. In this article, I'll take a closer look at General Mills' fundamentals and technicals and how I plan on getting into shares using options. You can find more information about my favorite option strategy on my website right here (where I share my real portfolios).

General Mills' Fundamentals

Through M&A, General Mills' revenues have surged over the past several years. However, these movements came hand in hand with a massive debt burden. Adding the difficult industry circumstances, General Mills' share price has suffered huge losses over the past several months as investors doubt the sustainability of its profits margins. In its latest financial results, the company reported a negative organic growth rate, however, margins surpassed my expectations with a YoY improvement of 0.4%. Much to my surprise, General Mills made progress in downsizing its long term-debt from $12.6B to $12.2B, which is definitely good to notice. Nonetheless, investors remain clearly bored with General Mills' debt pile. So first we need to assess whether its free cash flow is able to deal with today's inflated balance sheet. Using the metric FCF/interest costs should give us more colour on this matter.

Financial Year

FCF

Interest Costs

FCF/Interest Costs

FY 2014

$1.9B

$307M

6.2x

FY 2015

$1.8B

$319M

5.6x

FY 2016

$2.0B

$301M

6.6x

FY 2017

$1.6B

$302M

5.3x

FY 2018

$2.2B

$399M

5.5x

FY 2019 (f)

$2.1B

$425M

5.0x

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Disclosure: None.

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Comments

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Alpha Stockman 1 month ago Member's comment

Yes, I would certainly say $GM has had a bad year.