Is General Mills a Good Defensive Stock to Own?

General Mills, Inc. (GIS) in Minneapolis, Minn., manufactures and markets branded consumer foods worldwide. The company operates in five segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. The stock has gained a mere 2.6% in price over the past year and 6.7% year-to-date to close yesterday’s trading session at $62.49. GIS’ momentum has been relatively weak.

However, the company "underperformed the market...but demonstrated stronger execution than many of its peers in recent months," according to Citi analysts Wendy Nicholson and Abigail Lake. The investment firm also raised its price target on the stock. GIS delivered better-than-expected financials in its last reported quarter, and Citi analysts expect the stock to “continue to improve upon its market-share gains while raising prices to offset inflation.”

Current rising inflation is in-part due to supply chain disruptions at a time when demand is rebounding driven by the economic recovery. So conditions bode well for consumer defensive stocks. Global food prices shot up nearly 33% year-over-year in September 2021 and more than 3% since July, reaching their highest levels since 2011. GIS should gain substantially from the rising food prices. Furthermore, because consumer defensives perform relatively better in inflationary conditions, GIS stock should attract significant investor attention.

Here’s what we think could shape GIS’ performance in the near term:

Weak Bottom-Line

GIS’ net sales increased 4% year-over-year to $4.54 billion in its fiscal first quarter, ended August 29. However, its operating profit declined 1% from its year-ago value to $844.30 million. Its net earnings attributable to the company decreased 2% year-over-year to $627 million. The company’s EPS also declined 1% year-over-year to $1.02. In addition, its cash and cash equivalents balance stood at $754 million, down 58% from the same period last year.

Mixed Valuation

In terms of forward non-GAAP PEG, GIS is currently trading at 3.14x, which is 18.2% higher than the 2.66x industry average. Also, its 2.77 forward EV/Sales ratio is 39.1% higher than the 1.99 industry average.

However, GIS’ forward P/E is 24.3% lower than the 21.81 industry average, and its trailing-12-months EV/EBIT is 16.5% lower than the 17.34 industry average.

Analysts Expectations Reflect Uncertainty

A $1.04 consensus EPS estimate for the current quarter, ending November 2021, indicates a 1.9% decline from the same period last year. However, its EPS is expected to grow 4.9% in the next quarter and 3.4% in the next year. Analysts expect the company’s revenues to come in at $18.25 billion in the current year, indicating a marginal rise of 0.7% year-over-year. Its revenue is expected to increase 0.8% in the following year.

Of nine analysts that rated GIS, three rated it Buy, five rated it Hold, while one rated it Sell. The 12-month median price target of $64.89 indicates a 3.8% potential upside from its last closing price.

POWR Ratings Reflect Uncertain Prospects

GIS has an overall C rating, translating to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a C grade for Value, which is consistent with its mixed valuation.

GIS also has a C grade for Sentiment. Mixed analyst sentiment about the stock justifies this grade.

Of the 83 stocks in the Food Makers industry, GIS is ranked #29.

Beyond what I have stated above, one can also view GIS’ grades for Quality, Growth, Momentum, and Stability here.

View the top-rated stocks in the Food Makers industry here.

Bottom-Line

As a defensive stock, GIS should attract significant investor attention amid the current inflationary period. However, considering mixed analyst sentiment about the stock and the company’s weak bottom-line, it looks less attractive than its peers now. So, we think it could be wise to wait for its fundamentals to improve before investing in the stock.

How Does General Mills, Inc. (GIS) Stack Up Against its Peers?

While GIS has an overall POWR Rating of C, one  might want to consider taking a look at its industry peers, Industrias Bachoco, S.A.B. de C.V. (IBA), Sanderson Farms, Inc. (SAFM), and Lifeway Foods, Inc. (LWAY), which have an A (Strong Buy) rating.

GIS shares fell $0.16 (-0.26%) in premarket trading Friday. Year-to-date, GIS has gained 9.92%, versus a 22.51% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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