The Food Products industry in the Consumer Staples sector is an area of the market that tends to get overlooked because, let’s face it, it just isn’t very sexy. Even so, it is one of very few segments of the market that saw consumer-driven improvements in demand in 2020, especially in the early stages of the pandemic. That gave a lot of companies in the industry a lot of strength versus stocks in trendier industries. It is also a trend that since then has seen a lot of analysts and economists argue about its “stickiness” – meaning that what may have initially been a natural reaction to extreme conditions could constitute a long-term change in consumer behavior.
“Stickiness” in this case 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, and that I think could be reinforced even more the longer the pandemic persists. Despite that positive forecast, among the headwinds the Food Products industry, like most other areas of the economy has encountered this year, however, are supply chain issues that have included limited labor to return to full capacity. These have led to cost increases that have seen their way to consumer prices, and so could limit growth through the rest of the year and into 2022.
Another interesting layer of the stay-at-home trend for Food Products 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 since 2020. Makes sense, doesn’t it? Being forced to stay at home, which has also 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.
One of the reasons I gravitate to Food Products, and the Consumer Staples sectors in general is that while these stocks aren’t immune from market momentum, they also typically display lower volatility characteristics than the most buzz-worthy stocks. That notion has generally held true for most of the last two years; but this last month has seen that idea turned on its head. Data showing big surges in infections attributed to the omicron variant after Thanksgiving, and its arrival in the U.S. spurred the market to turn lower off of its latest highs, and post-Christmas data includes airline delays and flight cancellations primarily due to rising infection rates. That broad, bearish turn prompted a lot of investors to “flock to safety” by jumping back onboard a lot of stocks in the Consumer Staples sector.
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 of last year. 2021 saw a mostly positive, but unremarkable increase, from a January low at around $54 to a pre-Thanksgiving high at around $69.50. The broad market’s bearish turn in late November translated to a big push higher for GIS, peaking a week before Christmas at around $70. The stock dropped sharply off of that peak to find new support at around $64, and is a couple of dollars higher as of this writing, setting up what looks like a good technical, bullish set up for a new trading opportunity. GIS is also a company with a generally solid fundamental profile – but is it good enough to suggest the stock could be a good value at its current price? 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 $39.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -6.6%, while revenues were 6.45% higher. In the last quarter, earnings growth was flat, at exactly 0%, while sales increase by 10.66%. GIS operates with a healthy, stable margin profile; over the last year, Net Income was 12.02% of Revenues, and decreased only slightly in the last quarter to 11.89%.
Free Cash Flow: GIS’s free cash flow is generally healthy, at a little more than $2.5 billion, and translates to a Free Cash Flow Yield of 8.21%. This marks an increase from the quarter prior, when Free Cash Flow was $2.25 billion, and $3.19 billion a year ago. The fade in Free Cash Flow over the year is a red flag, but the improvement in the last quarter could be a sign that things are improving.
Dividend Yield: GIS’s dividend is $2.04 per share, and translates to an annual yield of about 3.09% at the stock’s current price. It is also worth noting that 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 1.12. 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 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. It is also worth pointing out that a quarter ago, cash and liquid assets were only $710 million – so the improvement in the last three months is a positive sign. They also currently have almost $10.9 billion 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 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 $59 per share. That suggests GIS is overvalued by -10%, with a practical bargain price for the stock at around $47 per share. It should also be noted that a quarter ago, this same analysis yielded a Fair Value target of $57 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 upward trend from a January low at around $54 to its high earlier this month at nearly $70. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has broken out of its normal, relatively predictable range and volatility this month, surging from about $63.50 at the start of the month to its 52-week high and immediate resistance at about $70, and then falling to current support at around $64. The stock has bounced off of support in the last few trading days, with about $4 of room to immediate resistance. A drop below $64 should find next support at around $61.50, which is right around the 50% retracement line.
Near-term Keys: If you’re looking for a short-term, bullish trade, you could use the stock’s current bounce off of support as an opportunity to buy the stock or work with call options, using $69 to $70 as a useful profit target. A drop below $64, on the other hand could work as a signal to consider shorting the stock or buying put options, with a useful, conservative target price in the $61.50 range on a bearish trade. From a fundamental, value-oriented perspective, GIS offers a generally solid profile and interesting dividend; but while Free Cash Flow and Cash have improved in the last quarter, their declines over the past year, along with the fact the stock is clearly overvalued are more than sufficient reasons to put GIS aside for now and check again in a quarter or so..