Cheerios To Haagen-Dazs: Value In The Food Aisle

pile of apples in basket beside jars

Helped by its broad product line, General Mills (GIS) has realized consistent results in recent years while many other food companies have struggled with changing consumer tastes and the introduction of many specialty brands.

General Mills’ product line is well-diversified, with the company owning iconic brands, including Cheerios, Betty Crocker, Blue Buffalo Pet Food, Haagen-Dazs, Nature Valley, Yoplait, Old El Paso and Pillsbury.

The stock is attractive at 15.6X forward earnings per share (EPS) estimates, with a dividend yield of 3.6%. The yield on the dividend is especially attractive when you consider General Mills recently offered 30-year bonds at a rate of only 3.0%. With the company likely to raise its dividend annually, the stock seems cheaply priced compared to the company’s bonds.

The current year has been exceptionally strong due to the pandemic, which has led to more at-home eating. Through the first six months of fiscal 2021, sales have increased 8% and EPS gained 21%. Yet, the pandemic-driven strong results will lead to difficult comparisons by the fourth quarter.

However, given less promotional activity in the industry, and the strength the company is seeing in the pet business, which is not impacted by COVID-19, I believe expectations for only a 1% gain in sales and a 4% increase in EPS to $3.76 for the entire fiscal year may prove to be too conservative.

I think the uncertainty about how the company will do when comparisons become difficult is holding back the stock now, along with money managers’ preference for more aggressive names. However, I believe the company can still earn at least $3.65 per share after the pandemic.

Normalized volume gains of 1% to 2% post-COVID-19 could be enhanced by the potential of food inflation, given the U.S. government’s determination to help those hurt by COVID-19 through high levels of stimulus. Therefore, longer-term mid-single-digit EPS growth is possible.

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