Portfolio Review: General Mills

I made my investment in General Mills (GIS) in late November 2013 and paid $50 per share. The shares have not moved significantly since then and I believe the original thesis for the investment holds, but given that I have not written about it yet, I want to take this opportunity to describe it in more detail.

Company: General Mills (GIS)

Investment Thesis: General Mills is (1) a market leading in several strong food categories. (2) It is well positioned to grow internationally. (3) It’s current valuation is attractive given its growth potential.

(1) Market leader in good categories: General Mills is the owner of several markee brands including: Cheerio’s, Nature Valley, Yoplait, Progresso, Pillsbury and Old El Paso.

Cereal: Ready to eat cereal is the Company’s biggest segment, representing $3.9bn of worldwide net sales, and it is a good one. Cereal is the #1 food eaten for breakfast at home (28%; the next is fruit at 14%) and most people eat breakfast at home (80%) (Source: 2014 Investor day presentation, The NPD Group’s national eating trends). Moreover, it is a sector where brands really matter, and General Mills owns many leading brands.

Yogurt: Greek yogurt changed the landscape in this category and this hurt Yoplait’s overall leading positioned. General Mills may have been ‘late to the party’, but they have added a full range of Greek yogurt offerings and are getting good traction. They have now captured 10% market share of the Greek yogurt market. There are also good signs that the decline in original style yogurt has now stopped and that business should be stable to growing going forward. Yogurt in general is a great product–people who consume it tend to do so regularly.

Better-for-you snacks: This has been an area where most food companies have been struggling to meet consumer’s rapidly changing tastes. Seems like there is a new health craze every day, and it is hard to keep up. General Mills has a good set of products and a fairly methodical approach. They have been successful with a few key brands including Larabar and Nature Valley. These products represent a significant portion of the Company’s snacks business, which is encouraging.

(2) International  growth potential: The Company generated $6.6bn of net sales outside the US in 2014 (35% of sales). $5.4 billion in their direct international segment (excluding JVs) broken out below:

 

International Sales Breakdown (Source: 2014 AR)
International Sales Breakdown (Source: 2014 AR)

This has grown significantly over the last few years, although 2014 represented a year of slow growth:

International Sales and Operating Profits over time (Source: 2014 Investor Day Presentation)
International Sales and Operating Profits over time (Source: 2014 Investor Day Presentation)

 

(3) Valuation: A 3.1% dividend yield is a great place to start. I like investing in companies for the long term, but I am also susceptible to feeling like I am “wasting my time” with capital tied up in a company whose valuation is not going anywhere. A decent dividend yield pays you to wait, which I see as a plus for many reasons: It rewards shareholders who are patient, it encourages shareholders to be patient (not the same thing!) and it signals a real commitment from the company to deliver value to shareholders over time.

Given the Company trades at a premium to the market, and therefore needs to grow into its valuation, it is helpful to be rewarded for this patience. I think it is helpful to think about the eventual likely prospect that a company like General Mills will trade for 15x (the long term market average) and be crisp about what we need to believe will be the development of the business that would earn a satisfactory return under this scenario.

GIS BoE Math

 

The numbers above certainly do not make my sock go up and down. I am left thinking that this kind of return is all you can expect in this kind of market (after all, this represents 2 times what a government bond would yield!). Nevertheless, there is not much point in putting capital at risk if the prospects for a decent return are limited. Will the Company grow faster? perhaps the market believes this kind of ‘safe bet’ will trade at a premium forever, but that kind of thinking relies too much on ‘greater fool theory’ for my taste.

Conclusion: Having reviewed the investment thesis for the Company has been helpful, but I am still on the fence about what to do. General Mills is a very nice company, with a great product portfolio and good prospects going forward, but the valuation is high. There is some reason to be optimistic, but not overly so. In many ways, I see this investment as a bit of a hedge–a company that is well positioned in the even of a bear market–but given a relatively high valuation, I question whether that is the case.  For the time being, I will hold on to the shares until I find a more compelling investment in the food space.

 

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