General Mills Inc. (GIS) reports preliminary financial results for the quarter ended 2012-08-31.
General Mills Inc.’s analysis versus peers uses the following peer-set: Kraft Foods Inc (NASDAQ:KFT), Kellogg Company (NYSE:K), ConAgra Foods, Inc. (NYSE:CAG), The J.M. Smucker Company (NYSE:SJM), Ralcorp Holdings, Inc. (NYSE:RAH), The Hain Celestial Group, Inc. (NASDAQ:HAIN), TreeHouse Foods Inc. (NYSE:THS), Standard Food Corporation (TPE:1227) and Pioneer Food Group Ltd. (PFG). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-08-31 | 2012-05-31 | 2012-02-29 | 2011-11-30 | 2011-08-31 |
|---|---|---|---|---|---|
| Revenues | 4,051.0 | 4,066.4 | 4,120.1 | 4,623.8 | 3,847.6 |
| Revenue Growth % | (0.4) | (1.3) | (10.9) | 20.2 | 5.9 |
| Net Income | 548.9 | 325.4 | 391.5 | 444.8 | 405.6 |
| Net Income Growth % | 68.7 | (16.9) | (12.0) | 9.7 | 26.7 |
| Net Margin % | 13.5 | 8.0 | 9.5 | 9.6 | 10.5 |
| ROE % (Annualized) | 33.6 | 19.5 | 23.2 | 27.2 | 25.2 |
| ROA % (Annualized) | 10.0 | 6.1 | 7.3 | 8.2 | 8.0 |
Valuation Drivers
General Mills Inc.’s (NYSE:GIS) current Price/Book of 3.8 is about median in its peer group. We classify GIS-US as Harvesting because of the market’s low expectations of growth (PE of 15.3 compared to peer median of 20.0) despite its relatively high returns (ROE of 26.0% compared to the peer median ROE of 9.9%).
The company attempts to achieve high profit margins (currently 10.1% vs. peer median of 6.7%) through differentiated products. It currently operates with peer median asset turns of 0.8x. GIS-US’s net margin is similar to its four-year average net margin of 10.0%.
Economic Moat
GIS-US’s revenues have changed in-line with its peers (year-on-year change in revenues is 11.9%) but its earnings have lagged (annual reported earnings have changed by -12.8% compared to the peer median of 1.3%), implying that the company has less control over its costs relative to its peers. GIS-US is currently converting every 1% of change in revenue into -1.1% change in annual reported earnings.
GIS-US’s return on assets is above its peer median both in the current period (7.7% vs. peer median 5.2%) and also over the past five years (8.0% vs. peer median 5.5%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s comparatively healthy gross margin of 40.3% versus peer median of 32.4% suggests that it has a differentiated strategy with pricing advantages. Further, GIS-US’s bottom-line operating performance is better than peer median (pre-tax margins of 14.0% compared to peer median 9.3%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
GIS-US’s revenues have grown more slowly than the peer median over the last few years (4.3% vs. 7.7% respectively for the past three years) and the stock price’s relatively low PE ratio of 15.3 implies relatively low future growth as well. Overall, we view the company’s growth expectations as substandard relative to its peers.
GIS-US’s annualized rate of change in capital of 4.2% over the past three years is less than its peer median of 5.4%. This investment has generated a better than peer median return on capital of 12.9% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.
Earnings Quality
GIS-US has reported relatively strong net income margin for the last twelve months (10.1% vs. peer median of 6.7%). This margin performance combined with relatively high accruals (4.4% vs. peer median of 3.5%) suggests possible conservative accounting and an understatement of its reported net income.
GIS-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.
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