The Food Products industry in the Consumer Staples sector is an area of the market that doesn’t get much buzz from market media types because it isn’t very sexy. Despite that fact, it is one of very few segments of the market that saw consumer-driven improvements in demand during the pandemic in a trend that many analysts and economists suggest predict will see quite a bit of “stickiness” – meaning that what may have initially been a natural reaction to extreme conditions is likely to constitute a long-term change in consumer behavior. That’s positive news for the industry and for conservative investors looking for practical choices to think about positioning themselves defensively.
“Stickiness” means that the longer consumers rely on cooking and eating at home, the more likely that behavior is to become ingrained. That doesn’t mean we as consumers don’t appreciate the opportunity to go out and enjoy the socialization associated with restaurants, theaters, and so on. Even so, I think food-at-home is something that will stick as a natural behavior for fiscally conservative families, even as many of the restrictions that prompted this trend have been lifted and we can begin enjoying social gatherings and other activities.
Another interesting layer of the stay-at-home trend relates to pets. Pet food is a highly competitive segment of the Food Products industry, but something that analysts like to see as part of a diversified company portfolio. A secondary increase in demand in pet food is likely to see very healthy stickiness because of increased pet purchases and adoptions in the last year. Makes sense, doesn’t it? Being forced to stay at home, which earlier this year included having parents with young children begin schooling at home, means that the emotional support offered by a cuddly puppy or kitty becomes more compelling. That means that the Food Products companies that have pet food and pet products as part of their business portfolio have a useful second leg to keep revenues healthy on a long-term basis.
While Consumer Staples stocks aren’t immune from market momentum, and can certainly turn lower with the rest of the market, they also typically display lower volatility characteristics than the most buzz-worthy stocks. That’s why this industry has always made a lot of sense to me as a way to add a conservative, defensive-oriented element to my portfolio. General Mills, Inc. (GIS) is a stock that I’ve followed for quite some time, and even used on a few different occasions over the last couple of years in my value-based, income-oriented investments. Its usefulness as a defensive position was proven out in 2020, as the stock dropped only about -10% during the initial broad market push to bear market levels, but then pushed more than 22% above its pre-pandemic highs by the beginning of August. After dropping back down to a low at around $55 to start 2021, the stock rebounded strongly, hitting a bullish peak at around $64 in May before dropping back in June. The stock appears to be setting up for a new rebound at around $60, which means that along with its strong fundamental profile, its short-term pattern could be providing an interesting opportunity to take advantage of market momentum; does it also still offer an interesting value proposition? Let’s find out.
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 $36.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -17.27%, while revenues were almost -10% lower. In the last quarter, earnings were nearly 11% higher, while sales were flat, but positive at 0.08%. GIS operates with a healthy margin profile that has narrowed in the last few months; over the last year, Net Income was 12.91% of Revenues, and weakened in the last quarter to 9.21%.
Free Cash Flow: GIS’s free cash flow is generally healthy, at almost $2.45 billion, and translates to a Free Cash Flow Yield of 6.71%. This marks a declined from the quarter prior, when Free Cash Flow was $3.19 billion. The fade in Free Cash Flow, along with weakening Net Income serves as a red flag that bears watching in the quarters ahead.
Dividend Yield: GIS’s dividend is $2.04 per share, and translates to an annual yield of about 3.39% at the stock’s current price. It is also worth noting the company increased their dividend in 2020 – a rarity in the market last year – from $1.96 per share.
Debt to Equity: GIS has a debt/equity ratio of 1.0. High debt/equity is pretty typical of stocks in the Food Products industry, and in this case GIS’ ratio is indicative in part of the debt the company assumed to complete the acquisition of Blue Buffalo Pet Foods in 2018. Their balance sheet shows liquidity, which had weakened through most of 2019, but improved through most of 2020 and the first part of this year has also faded; in the last quarter, cash and liquid assets were a little over $1.5 billion. This number was about $532.7 million at the beginning of 2019 and $626 million in February 2020 before the pandemic began, but rose to $2.75 billion in the first quarter of 2021. They also currently have almost $9.8 billion of long-term debt. The company’s margin profile indicates that they should have no problem servicing their debt; but weakening Net Income, along with declining Free Cash Flow and deteriorating liquidity should not be ignored as warning signs.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $62.50 per share. That suggests GIS offers limited upside, with a practical bargain price for the stock at around $50 per share.
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 year. The red diagonal line marks the stock’s downward trend from an August 2020 peak at around $66 to its January low at around $54. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock rallied from January to early June of this year to peak at around $64 before dropping back through the rest of June to a low at around $59, near the 38.2% retracement line and marking current support. The stock rallied to a short-term peak at around $60.50 last week before dropping back again, marking immediate resistance at that peak. A push above $60.50 could have upside to between $61.50 and $62.50 depending on the strength of short-term bullish momentum, while a drop below $58.50 could see the stock fall to about $56.50 before finding next support.
Near-term Keys: If you’re looking for a short-term, bullish trade, you could use a bounce off of support anywhere between the stock’s current price and $59 as an opportunity to buy the stock or work with call options, using $62.50 as an initial, useful profit target, and $65 from there if bullish momentum accelerates. A drop below $58.50, on the other hand could offer an interesting signal to consider shorting the stock or buying put options, with a useful target price in the $56.50 range on a bearish trade. From a fundamental, value-oriented perspective, GIS offers a generally healthy balance sheet and interesting dividend; but declines in critical operating metrics – Net Income, Free Cash Flow, and available Cash – are significant enough red flags to agree with the idea that the stock offers a better value proposition at a lower price, and it’s a smart idea to wait to see if the stock approaches that level or if the fundamentals improve in quarters ahead.