Economic reports this morning, in particular global factory orders and January housing sales and inventory both seem to be reigniting concerns about global and domestic economic activity. The market is also paying attention on the trade front, as negotiations between the U.S. and China by all accounts progress at a slow, but steady pace. The market has given back most of its gains from the week so far, but to this point the S&P 500 remains almost 11.5% higher year to date. Even so, when investors start to get nervous about the economy, stocks in the Consumer Staples sector can often help to moderate some of the broad market’s downside risk.
I like to use this sector as a “defensive” source for investing opportunities because no matter what kind of economic conditions we’re in, stocks that fit this category tend to perform pretty well. They make products, or provide services that consumers need all the time. Food stocks, including producers, processors, and distributors fit very nicely into this profile.
General Mills Inc (GIS) is a leading stock in the Food Products industry of the Consumer Staples sector. It’s a stock that has increased about 20% since the beginning of the year, but remains significantly below its 52-week high, and remains in a long-term downward trend that dates all the way back to late 2016. The market has beat the stock down amid declining volume over the last couple of years that appears to be in position to move back into positive territory in the year ahead. Last year, the company acquired Blue Buffalo Pet Products, bringing $1.3 billion in sales from that brand into its portfolio mix. That move has been, and is expected to continue to be accretive not only to their sales, but also to earnings growth. Along with the stock’s extended declines from highs above $72, the stock offers an interesting value opportunity right now.
Fundamental and Value Profile
General Mills, Inc., is a manufacturer and marketer of branded consumer foods and pet food products sold through retail stores. The Company is a supplier of branded and unbranded consumer food products to the North American foodservice and commercial baking industries. It also provides pet food products through its subsidiary Blue Buffalo Pet Products Inc. The Company has four segments: U.S. Retail, International, Pet operating, and Convenience Stores and Foodservice. The Company offers a range of food products with a focus on categories, including ready-to-eat cereal; convenient meals, including meal kits, ethnic meals, pizza, soup, side dish mixes, frozen breakfast and frozen entrees; snacks, including grain, nutrition bars and frozen hot snacks; yogurt, and super-premium ice cream. The Company’s other product categories include baking mixes and ingredients, and refrigerated and frozen dough. It also provides food products for dogs and cats. GIS’s current market cap is $28.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased about 3.5%, while revenues were about 5% higher. In the last quarter, earnings and sales improved significantly; earnings growth was almost 20% higher, and sales increased about 7.75%. The company operates with a healthy margin profile; over the last twelve months, Net Income during that period was 12.4% of Revenues. The picture narrowed somewhat in the last quarter, at 7.78% of Revenues, but remains generally favorable.
Free Cash Flow: GIS’s free cash flow is more than $2 billion, which is pretty healthy, and translates to a Free Cash Flow Yield of 7.37%.
Dividend Yield: GIS’s dividend is $1.96 per share, which translates to an annual yield of about 4.16% at the stock’s current price.
Debt to Equity: GIS has a debt/equity ratio of 1.75. This is a high number, and is indicative in part of the debt the company assumed to complete the Blue Buffalo Pet Foods acquisition. Their balance sheet shows more than $532.7 million in cash and liquid assets in the last quarter against $12.2 million of long-term debt. The company’s margin profile indicates that they should have no problem servicing their debt.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GIS is $11.70 per share. That translates to a Price/Book ratio of 4.01, which is high compared to the Price/Book levels I usually look for. However, the stock’s historical Price/Book ratio is 6.8, which puts a long-term target price around $79 per share and above its 2016 highs. The stock is currently trading at a discount of nearly 41% from that price, which is even more impressive considering the fact the stock has already rallied more than 20% since the beginning of the year.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last two years. The diagonal red line traces the stock’s downward trend over that period; it also acts as the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s rally from the bottom of the trend has been impressive, and has pushed the stock above the 38.2% retracement line. It remains just a bit below the stock’s most immediate resistance around $47.50 per share; a break above that point could give the stock room to keep pushing as high as about $52 in the near term, at the resistance shown by the 61.8% retracement line. The 38.2% retracement point should also serves as support for the stock now to bolster it against short-term drops in price.
Near-term Keys: If you’re looking for a short-term, bullish trade, look for a break above resistance to $48 as a good signal to buy the stock or to work with call options. If the stock shows weakness, and pushes below $46 support at the 38.2% retracement level, consider shorting the stock or working with put options. I think the stock’s overall fundamental strength, strategic moves to bolster its bottom line and diversify its product portfolio translate to an impressive long-term opportunity to buy the stock now at a very nice price.