General Mills: An investment for all economic environments.
Opdateret: 15. aug.
General Mills is a company that has historically thrived in most economic environments. General Mills has also invested in regenerative agriculture, which is something that is spoken about too little. Regenerative agriculture is a way to address the issue of carbon in the atmosphere. Combining profits with helping the environment is something most people would like. Is now the time to buy General Mills?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in General Mills or in any of their direct competitors. If you want to copy the portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal stake in General Mills. However, I do like companies that invest in regenerative agriculture. If you want to buy shares in General Mills, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.
General Mills is an American company that can trace its history back to the Minneapolis Milling Company, which was incorporated in 1856. Hence, it is an old company with a rich history. They are now a global manufacturer and marketer of branded consumer foods, with over 100 brands available in 100 countries across six continents. They also have a 50% stake in two strategic joint ventures that produce and distribute food products sold in 120 countries. One joint venture is with Nestlé to sell ready-to-eat cereal in markets outside of the United States, and the other is with Häagen-Dazs Japan, which sells super-premium ice cream in Japan. General Mills has four operating segments, including North America Retail. General Mills has four operating segments, including North America Retail. International, Pet, and North America Foodservice, which sums up the different businesses that General Mills operates in. General Mills may not be a familiar name to you, but you are likely familiar with some of their brands. They own several well-known brands, including Häagen-Dazs, Cheerios, Pillsbury, Betty Crocker, Blue Buffalo, Old El Paso, Yoplait, Nature Valley, and Totino's, which are all valued at over 1 billion dollars each. These brands are what give General Mills a brand moat.
Their CEO is Jeffrey L. Harmening. He first joined General Mills in 1994 and has held various positions until he became the CEO in 2017. He has a bachelor's degree from DePauw University and an MBA from Harvard University. Besides being the CEO and a member of the board of directors at General Mills, he also serves on the boards of The Toro Company and the Consumer Brands Association, where he holds the position of chairman of the board. He is known for his focus on natural and organic foods. Since becoming the CEO, General Mills has become the third-largest producer of natural and organic food in the United States. Jeffrey Harmening believes that there are three characteristics of a good leader: authenticity, clarity, and teamwork, which are all words that describe him as a leader. It seems that the employees appreciate these characteristics as well. Jeffrey Harmening has received an employee rating of 80 at Comparably, which puts him in the top 5% of CEOs in companies of similar size. I believe that Jeffrey Harmening's extensive industry experience, his emphasis on natural and organic food, and his high employee rating make him the ideal candidate for the job. I am confident that he can effectively lead General Mills and achieve positive outcomes.
I believe that General Mills has a strong brand moat. I feel confident in the management as well. Now let us investigate the numbers to see if General Mills lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% in each year. General Mills has consistently achieved a return on invested capital (ROIC) of approximately 10% over the past decade. In some years, they have been slightly below 10% and in other years slightly above 10%. One thing worth noting is that General Mills has consistently achieved a Return on Invested Capital (ROIC) above 10% since fiscal year 2021. It is also worth mentioning that General Mills has previously operated with higher debt. This means that if you look at the ROE numbers, they are significantly better than the ROIC. All in all, the return on invested capital (ROIC) is acceptable. It is encouraging to note that the ROIC has remained above 10% for the past three years. Hopefully, it is a trend that continues.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. It is curious to see that General Mills was unable to increase their equity from 2014 to 2017 (fiscal years). Since Jeffrey Harmening became the CEO, General Mills has consistently increased their equity year over year. Until a challenging fiscal year 2023, where equity decreased slightly. It is impressive to see the numbers that General Mills has produced from 2018 and beyond.
Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield is the amount of free cash flow per share that a company is expected to earn in relation to its market value per share. These numbers indicate that General Mills is a stable company that consistently generates positive free cash flow year after year. Levered free cash flow margin is at an acceptable level. However, the free cash flow yield is lower in fiscal 2023 compared to the previous four years. However, there is an explanation for that, which I will go through later in the analysis.
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Doing the calculation on General Mills, I can see that General Mills has 3,84 years of earnings in debt. It is higher than what I would prefer, but not alarming. It is also worth noting that this is the second lowest debt-to-earnings ratio they have had since 2013.
Based on my findings thus far, I believe that General Mills is a reputable company. However, no investment is without risk, and General Mills also has its share of risks. One risk is macroeconomics. General Mills is facing higher costs across all inputs, such as ingredients, packaging, manufacturing labor, transportation, and warehousing. General Mills will be able to pass on some of these additional costs to their customers, but there will always be a delay. The higher costs affected the free cash flow in fiscal 2023, resulting in a decline in the actual free cash flow, levered free cash flow margin, and free cash flow yield. Competition. In their annual report, General Mills describes the markets in which they operate as highly competitive. Especially private labels could potentially capture market share from General Mills, particularly if we experience prolonged economic headwinds. Consumers may need to choose the more affordable alternative if they have limited funds to spend on food. One big customer. While General Mills has many different customers among grocery stores, there is one customer they cannot afford to lose, and that is Walmart. Walmart accounted for 20% of General Mills' consolidated net sales in fiscal 2023 and 28% of net sales in their North America Retail segment. Hence, General Mills is dependent on Walmart. Although there is no indication that they will lose Walmart as a customer, it is a risk that should be kept in mind.
There are also reasons to invest in General Mills. They should perform well during a recession. While the United States is not currently in a recession, it is a possibility that could occur in the near future. Hence, it is worth looking at companies that are likely to perform well during periods of recession. Historically, General Mills has outperformed the broader market during periods of low consumer confidence. It happened in 2001-2003, 2007-2010, and 2011-2013. While history doesn't necessarily repeat itself, it often rhymes, and General Mills could be outperforming the market as it has done in the past. One reason is that people choose to eat at home more often than eating out during economic headwinds, which means they tend to buy more General Mills products. The Accelerating Strategy. General Mills revealed its Accelerating Strategy in 2021. It should enhance the company's ability to drive profitable growth through various drivers, such as reshaping their portfolio. They have already turned over 20% of their portfolio. Other drivers are improving the efficiency of the supply chain, which should lead to cost savings and fuel the growth of local gem brands that have attractive growth potential in local markets. These drivers should deliver value through increased net sales, expanded margins, efficient cash conversion, and enhanced cash return to shareholders. General Mills seems to be off to a good start as their return on invested capital (ROIC) and equity have been higher since 2021 compared to previous years. Good Rewards Loyalty Program. General Mills launched their loyalty program called Good Rewards in June 2022 and already has more than 2 million subscribers. The loyalty program will give General Mills the opportunity to grow their first-party data on their customers, which will enable them to deliver deeper personalization and increase brand awareness to their customers. This, in turn, should result in more sales. Studies indicate that customers who are part of a loyalty program tend to spend up to 20% more money than customers who are not members. Hence, it could be another way for General Mills to increase their sales.
A litle word on regenerative agriculture. General Mills is investing in regenerative agriculture. While this may not necessarily have a significant impact on the balance sheet, it could attract the attention of ESG funds and individual investors. General Mills has so far enrolled more than 200.000 acres in their regenerative agriculture program and expects to reach 1 million acres by the end of 2030. Hence, even if it doesn't attract more investors, the fact that General Mills is investing in regenerative agriculture should make any investor in General Mills feel good.
All right, we have gone through the numbers, potential and risk regarding General Mills, and now it is time for us to calculate a price for General Mills. To calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 4,31 which is from fiscal year 2023. I chose an estimated future EPS growth rate of 7% (management expects mid to high single-digit EPS growth), an estimated future PE of 14 (which is double the growth rate, as the historical PE for General Mills has been higher), and we already have a minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $29,34. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy General Mills at a price of $14,67 (or lower, of course) if we use the Margin of Safety price.
Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 2.779. The capital expenditures were 670. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a general guideline, you can expect 70% of the capital expenditures to be allocated for maintenance. This means that we will use 469 for our future calculations. The tax provision was 612. We have 586,6 outstanding shares. Hence, the calculation will be as follows: (2.779 - 469 + 612) / 586,6 x 10 = $49,81 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". With General Mills' Free Cash Flow Per Share at 3,56 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $39,08.
I believe that General Mills is an intriguing company that has the potential to thrive in any economic climate, as people will always have a need for food. Furthermore, they have a strong brand moat, which is demonstrated by their ability to pass inflation costs onto their customers. I am also confident in the management's ability to lead the company moving forward. There are some short-term headwinds, such as higher input prices. Passing these increased costs onto customers will be delayed, which will negatively impact free cash flow if it persists. Furthermore, if the economic environment worsens, we might see customers opting for the more affordable private label products instead of the pricier products offered by General Mills. Nonetheless, history has shown that General Mills performs well during economic downturns, and I'm curious to see how they will enhance their loyalty program, which could serve as another positive catalyst. I also really like that they focus on regenerative agriculture even though it may not necessarily show up in the balance sheet. I would feel good about adding General Mills to the portfolio if it reaches the Ten Cap price of $49,81.
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