Headwinds Reduce General Mills’ Moat to Narrow; We View Shares as Fairly Valued
by Rebecca Scheuneman, CFA | Morningstar Research Services LLC | 07-15-19
We are lowering our moat rating for General Mills to narrow from wide, given our reduced conviction that the firm can report economic profits for the next 20 years in the face of secular headwinds related to evolving consumer nutritional preferences. Consumers have been eschewing processed fare in favor of fresh items found on the store’s periphery, which has slowed the firm’s category growth. However, we are confident that General Mills still has a competitive edge, as its brands remain dominant in their categories and command pricing power. We believe the firm is the leader in categories representing about a third of total food spending, which makes it a valued partner for food retailers, another aspect of its competitive edge. We also think the firm has a cost advantage, evidenced by superior margins and scale-based benefits.
We are lowering our fair value estimate to $53 per share from $57 to reflect our assumption of slightly lower volume growth and higher selling, general, and administrative expenses. With our revision to a narrow moat rating, we’ve reduced the time over which the firm is expected to earn economic profits from 20 years to 15 years. Given continued secular headwinds in the firm’s categories, we’ve lowered our long-term volume forecast to 1.2% from 1.5%. We maintain our 1.1% price/mix estimate, resulting in average organic revenue growth that falls to 2.3% from 2.6%. We’re increasing our average SG&A expectation to 7.9% of revenue from 7.1%, as we think most cost-saving opportunities are now behind the firm, although we still expect gradual improvements in the coming years due to its ability to leverage sales. As the pet and international businesses scale, we expect consolidated operating margins to improve from 2019’s 16.9% to 17.8% on average over our explicit forecast, although this is slightly lower than our previous 18.2% estimate. With the shares trading near our fair value estimate, we recommend investors await a better entry point.
Net sales declined 2 percent to $4.0 billion. Organic net sales were down 1 percent, reflecting lower organic volume, partially offset by positive organic net price realization and mix across all operating segments.
Gross margin increased 190 basis points to 34.7 percent of net sales. Adjusted gross margin of 35.2 percent was 160 basis points above the prior year result that included a one-time purchase accounting inventory adjustment related to the Blue Buffalo acquisition.
Operating profit totaled $662 million, up 10 percent from last year. Operating profit margin of 16.5 percent increased 180 basis points. Constant-currency adjusted operating profit increased 7 percent, driven by the purchase accounting impact in the prior year. Adjusted operating profit margin increased 130 basis points to 17.0 percent.
Net earnings attributable to General Mills totaled $521 million, up 33 percent from a year ago, primarily reflecting higher operating profit, a lower effective tax rate, and lower net interest expense.
Diluted EPS of $0.85 increased 31 percent from the prior year. Adjusted diluted EPS totaled $0.79 in the first quarter, up 13 percent from the prior year in constant currency, driven primarily by higher adjusted operating profit, lower net interest expense, a lower adjusted effective tax rate, and higher non-service benefit plan income, partially offset by higher average diluted shares outstanding.
Fiscal 2020 Outlook
General Mills reaffirmed its key full-year fiscal 2020 targets:
Organic net sales are expected to increase 1 to 2 percent. The combination of currency translation, the impact of divestitures executed in fiscal 2019, and contributions from the 53rd week in fiscal 2020 are now expected to increase reported net sales by approximately 1 percentage point.
Constant-currency adjusted operating profit is expected to increase 2 to 4 percent from the base of $2.86 billion reported in fiscal 2019.
Constant-currency adjusted diluted EPS are expected to increase 3 to 5 percent from the base of $3.22 earned in fiscal 2019.
The company expects free cash flow conversion of at least 95 percent of adjusted after-tax earnings.
Currency translation is expected to have an immaterial impact on fiscal 2020 adjusted operating profit and adjusted diluted EPS.
Net sales of $4.4 billion were flat to last year; organic net sales¹ increased 1 percent
Operating profit of $811 million increased 48 percent; constant-currency adjusted operating profit increased 7 percent
Diluted earnings per share (EPS) totaled $0.95, up 67 percent from the prior year; adjusted diluted EPS of $0.95 increased 11 percent in constant currency
Fiscal 2020 Outlook
General Mills reaffirmed its full-year fiscal 2020 targets for sales, profit, and EPS, and raised its target for free cash flow conversion:
Organic net sales are expected to increase 1 to 2 percent.
Constant-currency adjusted operating profit is expected to increase 2 to 4 percent from the base of $2.86 billion reported in fiscal 2019.
Constant-currency adjusted diluted EPS are expected to increase 3 to 5 percent from the base of $3.22 earned in fiscal 2019.
The company now expects free cash flow conversion of at least 105 percent of adjusted after-tax earnings.
Currency translation is expected to have an immaterial impact on fiscal 2020 adjusted operating profit and adjusted diluted EPS.
Net sales of $4.2 billion were flat to last year; organic net sales were also flat. Through nine months, net sales were down 1 percent and organic net sales were flat to last year.
Operating profit of $651 million essentially matched year-ago results; constant-currency adjusted operating profit was down 8 percent, including a strong increase in media investment. Through nine months, operating profit was up 18 percent and constant-currency adjusted operating profit increased 2 percent.
Diluted earnings per share (EPS) of $0.74 were flat to last year; adjusted diluted EPS of $0.77 were down 6 percent in constant currency. Through nine months, diluted EPS were up 30 percent and constant-currency adjusted diluted EPS increased 5 percent.
Full-year fiscal 2020 targets
Organic net sales are still expected to increase 1 to 2 percent.
Constant-currency adjusted operating profit is now expected to increase 4 to 6 percent from the base of $2.86 billion reported in fiscal 2019.
Constant-currency adjusted diluted EPS are now expected to increase 6 to 8 percent from the base of $3.22 earned in fiscal 2019.
The company continues to expect free cash flow conversion of at least 105 percent of adjusted after-tax earnings.
GIS cotizando a 68,68$ y me las quieren “canjear” por 65,50$ (¡qué listos!)
Me contesto a mí mismo
La propia Wikipedida pone “The practice is frequently associated with a company called TRC Capital, a private firm founded by a Canadian securities lawyer.”
Qué bien le están sentando los resultados a GIS. Está subiendo hoy +7%.
Net sales increased 4 percent to $4.7 billion; organic net sales1 were up 10 percent.
Diluted earnings per share (EPS) of $1.35 increased 32 percent from the prior year; adjusted diluted EPS of $1.11 was up 13 percent in constant currency
