General Mills Retreats To Buy Zone Ahead Of Earnings

Key Points

• General Mills expects 8% to 9% growth in the 2nd half. 
• The analysts have set the bar high for Q1 but outperformance is a possibility. 
• The dividend is reliable and may grow in 2023. 

General Mills NYSE: GIS advanced to a new all-time high following the FQ2 earnings release but has since retreated to retest support. The set-up has the market trading at the 150-day EMA and ready to fire another trend-following signal. The catalyst for this move could be the Q3 earnings due out later this week. The analysts expect big things from this company in 2023, and outperformance is possible. The company exhibits robust brand appeal and pricing power, which led to an increase in guidance last quarter. Assuming momentum is still building, the 2nd half could easily outpace the company’s expectations. 

"Amid ongoing volatility in the operating environment, we remain focused on driving our Accelerate strategy by investing in brand building and innovation, strengthening our capabilities, and continuing to reshape our portfolio. With strong first-half results and positive momentum on our business, we are increasing our full-year outlook for organic net sales, adjusted operating profit, and adjusted diluted EPS growth,” said CEO Jeff Harmening in the Q2 report. 

Analysts Support General Mills, Could Drive It Higher 

The analyst's activity in General Mills is mixed but also supportive of the stock. There have been a few price target reductions over the past month or 2, and the latest just came out from Deutsche Bank. Deutsche Bank issued a major revamp of its outlook for the Consumer Staples sector and lowered its price target for General Mills by $4 to $84. This is negative for the price, but it is above the consensus and trending higher compared to last year, last quarter, and last month. The consensus rating is also moving lower and is pegged at firm Hold, but this too may change given positive results and outlook. 

The company upped its guidance for the year to organic revenue growth of 8% to 9%. The analysts upped their targets for Q1 to a range of 9% on the top line and for margin improvement to drive 9.5% growth on the bottom line. Growth is expected to accelerate again in Q4, so there is an expectation for solid guidance as well. That may be a problem should guidance not keep up with the current outlook. 

General Mills Has Attractive Value/Yield Combination

General Mills isn’t a value relative to the broad market, and it is middling compared to its peers, but you get a lot for that 19X earnings multiple that you pay. The company is a solid dividend payer with some expectations for a distribution increase in 2023. The company is not a regular distribution grower but has increased in the past, and the business is doing well enough to support one. The payout ratio is manageable at 45%, and the balance sheet is healthy. The cash balance was down at the last report but still healthy, as was debt coverage. Debt coverage is running near 8X, which is well above safe levels. If the company were to make a distribution increase, the next declaration is a likely time for it to come. 

The chart is favorable, but there is a risk. The analysts have set the bar high, arguably because of the guidance, and there is a chance for a miss or weak guidance. Absent those events, price action is set to move higher from this level which would be a trend-following signal. The next hurdle for price action will be near the $84 level. A move above that should get the market up to an all-time high. A new all-time high could be around the corner if the company shows additional momentum in the results.