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 through the worst of the pandemic and into 2021. That gave a lot of companies in the industry a lot of strength versus stocks in trendier industries. Eating at home 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. I think that one of the things that is likely to encourage this behavior is the reality of inflation and the impact of rising consumer prices on a typical family budget. More and more analysts and economists that I have been following are forecasting continued economic struggle this year, driven by cost increases that have prompted just the first of multiple expected interest rate increases last month. As those rising costs put the pinch on discretionary income, I think families will be forced to focus their budgets on brands in the Food Products industry that emphasize value.
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 owing to reported increases in new pet adoptions over the last two years that have continued until now. Makes sense, doesn’t it? Being forced to stay at home, which has 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. In 2022, this idea has been reinforced by the way most stocks in the industry have weathered high uncertainty driven by everything from long-term COVID questions to Russia’s invasion of Ukraine, to the supply issues I already mentioned. While the broad market finds itself in deep correction territory, some Food Products stocks have not only been stable, but seen material increases in price.
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 last month in particular has seen the stock rise from about $62 to $74 per share about a week ago. GIS is also a company with a generally solid fundamental profile; what does the stock’s more than 15% increase in the last month say about its current 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 $43.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 2.44%, while revenues were flat, but slightly higher, by 0.39%. In the last quarter, earnings fell -15.15%%, while sales declined by -9.68%. GIS operates with a healthy, stable margin profile that doesn’t match the company’s earnings pattern; over the last year, Net Income was 12.36% of Revenues, and strengthened in the last quarter to 14.55%.
Free Cash Flow: GIS’s free cash flow is generally healthy, at a little less than $2.5 billion, and translates to a Free Cash Flow Yield of 5.75%. This marks a slight decrease from the quarter prior, when Free Cash Flow was a little over $2.5 billion. The fade in Free Cash Flow over the quarter is somewhat of a concern, but when you consider that a year ago Free Cash Flow was about $2.44 billion, the number has been mostly stable with some variation during a year where input costs have been far more volatile. I take that as a net positive sign.
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 at the time – from $1.96 per share. GIS is also one of a very select number of companies, having paid an uninterrupted dividend for 122 years. Think about that for a moment; this is a company that has prioritized returning value to its shareholders via dividend payout, and maintained that discipline for more than a century, across two world wars, and multiple global financial crises including the Great Depression and (more recently) the Great Recession of 2008.
Debt to Equity: GIS has a debt/equity ratio of 1.09. 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 2021 has also faded; in the last quarter, cash and liquid assets were a little over $844 million. 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 and was $1 billion two quarters ago. 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 $55 per share. That suggests GIS is overvalued by -23%, with a practical bargain price for the stock at around $44 per share. It should also be noted that at the end of 2021, this same analysis yielded a Fair Value target of $59 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 September 2021 low at around $56.50 to its high about a week ago at nearly $74. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock is retracing off of that $74 high, marking immediate resistance at that level, with current support expected at around $70 based on the stock’s January peak around that level. A push above $74 should see about $4 of upside based on the distance between current support and immediate resistance, while a drop below $70 should find next support at around $67 where the 38.2% retracement line rests.
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 $74 as a useful profit target and additional upside to $78 if buying activity increases. A drop below $70, 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 $67 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 has been stable, declines in liquidity 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.