After Earnings, Is General Mills Inc. Stock a Buy?

Shares of packaged foods giant General Mills (NYSE: GIS) recently surged to all-time highs after reporting mixed third-quarter earnings on March 23. Year over year sales fell 8% to $4 billion during the quarter, missing expectations by $80 million. Adjusted, diluted earnings fell 7% to $0.65 per share, which nonetheless beat estimates by $0.03.

Is General Mills' rally justified by those seemingly tepid numbers? Let's take a closer look at its growth and valuations to decide.

General Mills' Cheerios brand. Image source: Pixabay.

A strong dollar isn't an excuseMany multinational consumer staple companies have recently blamed sliding sales on the strong dollar. General Mills did the same last quarter, but its sales and earnings still respectively fell 4% and 6% on a constant currency basis. However, General Mills attributes three percentage points of that decline, on a reported basis, to its sale of its Green Giant vegetable business to B&G Foods . Rival Kellogg's posted an11% sales decline last quarter, but sales actually rose 4% on a constant currency basis.

General Mills' U.S. retail sales fell 7%, year over year, to $2.48 billion. Although the company claimed that domestic demand for gluten-free cereals, Yoplait yogurt, Nature Valley grain snacks, Annie's organic products, and Totino's hot snacks was robust, it didn't offset a multi-year decline in traditional cereal sales anda market shift among Millennials away from packaged foods. Overseas revenue fell 13% to $1.07 billion, but it remained nearly flat year over year on a constant currency basis. Strong performers included Haagen-Dazs ice cream and Old El Paso Mexican products in Europe, Nature Valley snacks in Canada, Fire One snacks in Mexico, and Betty Crocker snacks in Asia, but the Green Giant divestiture reduced its overseas sales growth by two percentage points.

General Mills' Hagen-Dazs brand. Image source: Pixabay.

The good news is that General Mills' adjusted operating profit margin expanded for its fifth consecutive quarter to 14.6% thanks to better cost controls, although total operating profit across all segments still dipped 3% to $679 million. By comparison, Kellogg's reported an operating loss last quarter, mainly due to the impact of pension plan obligations.

Expectations, valuations, and dividends...General Mills currently trades at about 26 times earnings -- which is lower than Kellogg's P/E of 44 and the industry average of 28, but higher than the S&P 500's ratio of 22.5. Analysts currently expect General Mills to grow its annual earnings by 5.4% over the next five years, which gives it a 5-year PEG ratio of 4. During that period, they expect Kellogg's annual earnings to rise 4.5%, giving it a 5-year PEG ratio of 4.5. Neither General Mills nor Kellogg's PEG ratios fall below the threshold of 1, which is considered "undervalued," but General Mills can be considered a fundamentally cheaper stock.

Many investors often buy General Mills, Kellogg's, or other big consumer staple stocks for their dividends. General Mills currently pays a forward annual yield of 3%, which is higher than Kellogg's 2.7% yield and the S&P 500's current average yield of 2.1%. Both companies have raised their dividends annually for over a decade.

During the first nine months of the year, General Mills spent $602 million of its free cash flow on buybacks and$795 million on dividends. For the full year, it intends to return "at least 90%" of its FCF to shareholders in the same way. That strategy of keeping capex low, supporting earnings with buybacks, and paying a steady stream of income to investors is a classic one for blue-chip consumer staples companies, but it's unlikely to spur explosive price growth.

Should you buy General Mills?General Mills isn't a risky stock to own, but I believe there are better blue-chip stocks out there that offer stability and income in a volatile market. It might be a better bet than Kellogg's, but I dislike that it trades at a premium to the market and remains heavily exposed to currency headwinds and a tectonic shift in consumer tastes.

General Mills has tried to resolve these issues by introducing healthier versions of its core brands and buying up new organic players, but it could take a long time before it posts sustainable sales growth again.

The article After Earnings, Is General Mills Inc. Stock a Buy? originally appeared on Fool.com.

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