General Mills Retreats To More Attractive Territory

Key Points

• General Mills is down following strong Q2 results and guidance.
• The market is offering a textbook entry point but it is not one without risks. 
• The guidance for the back half of F23 is better than expected and should support share prices. 

General Mills NYSE: GIS has been advancing on solid performance driven by its Accelerate strategy. The strategy is focused on brand innovation, portfolio strength and operational capabilities, and it is paying off. The FQ2/CQ4 results prove that not only is the company able to grow in adverse conditions, but it is also proving to have some resistance to inflation. 

The takeaway for investors is that share prices are down more than 3.0% in the wake of the news and have the market trading at the short-term moving average. Technically, this is a textbook entry point into the market, but not without risks. The stock could fall further if the market fails to confirm support at this level. On the other hand, if the market follows through on the signals it has been giving and confirms support, this stock should see a new high reasonably soon.

General Mills Is Winning The War Against Inflation 

General Mills, at least, is making some headway with inflation, even if the FOMC isn’t. The Q2 revenue came in at $5.22 billion and is up 4.0% versus last year, with strength carrying through to the bottom line. The gain was driven by pricing increases that were only partially offset by lower volumes. On an organic basis, the company reported an 11% gain in business offset by a 5% headwind from divestiture and a 1% headwind from currency conversion. 

On a segment basis, 3 of the four operating segments saw their volumes decline, led by the International divisions. However, international sales were heavily impacted by divestiture and offset by a significant 18% price increase. As a result, the North American Foodservice segment is the only one to see volume growth.

It is no surprise that the food service industry is recovering from its pandemic woes and has only recently surpassed its pre-pandemic business levels. It should be noted that North American Foodservice also posted the most substantial gains in pricing, so it should be a driver of strength in the coming year. 

The margin news is mixed but ultimately bullish for share prices. The gross margin expanded by 20 and 100 basis points on a GAAP and adjusted basis but was offset by higher SG&A expenses that left the operating margin down slightly. The takeaway is that operating profit is flat on a YOY basis, and both the GAAP and adjusted EPS are up YOY with the aid of share repurchases. On the bottom line, GAAP EPS is up 4%, and adjusted EPS is up 12%, surpassing the Marketbeat.com consensus estimates. 

General Mills Guides The Market Higher 

General Mills reported some mixed news with the guidance, but the takeaway here is all bullish. The company reported a 200 basis point increase in the direction for full-year revenue, which has the new low-end range above the previous high. The new low end is now 8% compared to the last 6-7%, and the consensus is near 7%, but the earnings guidance is not quite as strong.

The company is expecting adjusted EPS in the range of up 4-6% versus the previous 2-5%, which shows some top-end pressure compared to the revenue. However, the salient point is that revenue and earnings are growing and will continue to support the company’s capital plans which include share repurchases and dividend increases. 

General Mills is a higher-valued consumer staple, trading nearly 20X its earnings. Still, it pays 2.5% in yield, has a track record for distribution growth, and share repurchases added another 175 basis points to that in the first half of the fiscal year. Turning to the chart, this up-trending market is down at $84, offering the lowest price in over a month.