General Mills: An investment for all economic environments.
Opdateret: 7. dec. 2022
General Mills is a company that could thrive in most economic environments, which is why General Mills has significantly outperformed the market in 2022. Besides performing well, General Mills has also invested in regenerative agriculture, which something that is spoken too little about, as regenerative agriculture is a way to deal with 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 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 want to see which stocks I hold, you can read how to do so here. I have no skin in the game when it comes to General Mills. However, I do like companies that are investing in regenerative agriculture. Nonetheless, I will keep this analysis unbiased as always.
General Mills in an American company that can trace its history back to the Minneapolis Milling Company that was incorporated in 1856. Hence, it is an old company with a vast history. They are now a global manufacturer and marketer of branded consumer foods with more than 100 brands in 100 countries across six continents. They also have 50 % interest in two strategic joint ventures that manufacturer and market food products that are sold in 120 countries. One joint venture is with Nestlé to sell ready-to-eat cereal in markets outside of United States and the other is with Häagen-Dazs Japan that sell super-premium ice-cream in Japan. General Mills has four operating segments: North America Retail. International, Pet, and North America Foodservice, which sums up the different businesses that General Mills operates in. While you may not know General Mills, you will probably know some of their brands, as they own 9-billion-dollar brands in Häagen-Dazs, Cheerios, Pillsbury, Betty Crocker, Blue Buffalo, Old El Paso, Yoplait, Nature Valley, and Totino's. These brands are what gives 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 member of the board of directors at General Mills, he also serves on the boards at The Toro Company and in the Consumer Brands Association where he is the chairman of the board. He is known for focusing on natural and organic foods, and since he became the CEO, General Mills has grown to be the third largest maker 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 describes him as a leader. It seems like the employees like these characteristics as well, as Jeffrey Harmening scores an employee rating of 80 at comparably, which places him in the top 5 % of CEOs in similar sized companies. I believe that the combination of Jeffrey Harmening's vast experience in the industry, his focus on natural and organic food, and his high employee rating means that he is the right person for job, and I'm confident he can lead General Mills moving forward with good results.
I believe that General Mills has a 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 investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. General Mills has delivered just around 10 % ROIC in all years the last 10 years. In some years they have been slightly under 10 % and in other years slightly above 10 %. All in all, I see the numbers as acceptable. It is also worth mention that General Mills has previously operating with a higher debt, meaning that if you look at the ROE numbers are significantly better than the ROIC. Nonetheless, the ROIC is acceptable but not impressive.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. It is curious to see that General Mills couldn't grow their equity for the period from 2014 to 2017 (fiscal years). However, since Jeffrey Harmening become the CEO, General Mills has increased their equity year over year in each year. It is nice to see numbers like the numbers that General Mills has produced from 2018 and moving forward.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditure. These numbers show that General Mills is a solid company that deliver a nice positive free cash flow year over year. However, it should be mentioned that the free cash flow yield in fiscal 2022 is the lowest since 2017, as General Mills only delivered a free cash flow yield of 5,9 % in 2022 compared to 8,3 % in 2021, 6,5 % in 2020, and 7,2 % in 2019. There is an explanation for that, which I will go through later in the analysis, but I would like to see free cash flow yield increase in 2023.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation on General Mills, I can see that General Mills has 3,37 years earnings in debt. It is higher than what I would like but not alarming. It is also worth noticing that it is the lowest debt to earnings they have had since 2013.
Based on my findings so far, I believe that General Mills is a good company. However, no investments are without risk and General Mills has some risks as well. One risk is macroeconomics. General Mills is facing higher costs across all inputs like ingredients, packaging, manufacturing labor, transportation, and warehousing. General Mills will be able to push some of these extra costs to their customers, but it will always be with a delay. The higher costs are what affected the free cash flow in fiscal 2022, where we saw the yield decline. Competition. In their annual report, General Mills describe the markets that they operate in as highly competitive. Especially private labels could be something that would take market shares from General Mills, if we see economic headwinds for a longer time. Consumers may need to choose the cheaper alternative if they have less 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 2022 and 28 % of net sales in their North America Retail segment. Hence, General Mills is dependent on Walmart, and while nothing indicates that they will lose them as a customer, it is a risk to bear in mind.
There are also reasons to invest in General Mills. Should perform well during a recession. We are technically in a recession in the United States. Hence, it is worth looking at companies that should perform well during recessionary periods. Historically, General Mills has outperformed the broader market during low consumer confidence. It happened in 2001-2003, in 2007-2010, and in 2011-2013. While history doesn't necessarily repeat itself, it often rhymes, and General Mills could be outperforming the market as it has previously. One reason is that people choose to eat at home more often that out during economic headwinds, which means they tend buy more General Mills products. Passing inflation to customers. The great investor Guy Spier has mentioned that Coca-Cola would be a good investment because they could pass on inflation to their customers. It seems like General Mills can do so as well because of their strong brand moat. In the last quarter General Mills delivered higher margins year over year, despite inflation roaring. Gross profit margin increased from 34,7 % to 34,9 %, while operating margin increased from 18,0 % to 18,7 %. It shows that General Mills successfully can pass the inflation to their customers. Good Rewards loyalty program. General Mills launched their loyalty program called Good Rewards some months ago, and already have 700.000 subscribers. The loyalty program will give General Mills the opportunity to grow their first part data on their customers, which will enable them to deliver deeper personalization and rise brand awareness to their customers, which in return should result in more sales. Studies indicate that customers that part of a loyalty program tend to spend up to 20 % more money than customers that are not members Hence, it could be another way for General Mills to increase their sales.
A little word in regenerative agriculture. General Mills is investing in regenerative agriculture and while this may not necessarily be something that we will see make a big impact in the balance sheet, it is something that could interest ESG funds and individual investors. General Mills has so far enrolled 225.000 acres in their regenerative agriculture program in their key supply sheds and expect to reach 350.000 acres by the end of this fiscal year. Hence, even if it doesn't attract more investors that General Mills is investing in regenerative agriculture, it 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 4,42 which is the one from 2021. I chose an Estimated future EPS growth rate of 7 (which is lower than the average in the last 5 years), Estimated future PE 14 (which the double of the growth rate, as the historically PE for General Mills has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $30,09, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy General Mills at price of $15,05 (or lower obviously), 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 3.316,1 The Capital Expenditures was 568,7. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 398,09 in our further calculations. The Tax Provision was 586,3. We have 594,3 outstanding shares. Hence, the calculation will be like this: (3.316,1 - 398,09 + 586,3) / 594,3 x 10 = $58,97 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 4,56 and a growth rate of 7 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $50,06.
I believe that General Mills is an interesting company that will be able to perform in any economic environment, as people will still need to eat. Furthermore, they have a strong brand moat, which is shown in how they can pass inflation to their customers. I'm also confident in the management being able to lead the company moving forward. There are some short-term headwinds like higher input prices and passing these higher prices to their customers will come with a delay, meaning it will hurt free cash flow if it continues. Furthermore, if the economic environment gets worse, we might see customers choose the cheaper private label product over the more expensive products from General Mills. Nonetheless, history has shown that General Mills perform well during economic downswings, and I'm curious to see how they will grow their loyalty program, which could be 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 will feel good by adding General Mills to the portfolio if it reaches the PAYBACK TIME price as $50,06, as I would get it at a 50 % discount on two out of three calculations.
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