Key points
- General Mills had a solid quarter, outperforming forecasts, expanding margins and guiding cautiously.
- Capital returns are strong and growing, with a return to revenue growth on the way.
- The stock price confirmed a reversal after the release, indicating that higher prices are on the way.
- 5 stocks we prefer to those of General Mills
General Mills NYSE:GIS Stocks suffered a hasty retreat in 2023 as spiking inflation, growth and margin concerns weakened the market, but a full reversal is now in play. The company’s third-quarter results are better than expected, highlighting the deep value, high-return opportunities it presents. General Mills trades at a discount to its consumer staples peers and the broader market and pays a growing distribution with an above-average yield.
The technical action suggests a move 7.50 to 1,200 basis points above the critical resistance point, placing the target in a range of $76 to $78 without the impact of a price multiple expansion. If the market follows the anticipated move, this stock could easily surpass the technical targets and resume the trend. In this scenario, the General Mills stock price could rise through the end of the year to repeat the all-time high, with a gain of nearly 30%.
General Mills will soon return to growth
General Mills had a solid quarter, beating expectations and leading to flat results this year. The bottom line is that business contraction is bottoming out and that the turn to growth is within reach. This breakthrough won’t happen until 2025, but that period will begin soon, in the middle of the 2024 calendar year, and indications may be cautious.
Third-quarter revenue fell 1% year-over-year, but is strong at $5.1 billion, 260 basis points above Marketbeat.com’s consensus estimate and 7% higher than two years does. The strength is determined by a slight improvement in the price/mix ratio offset by the decline in volumes. Segmentally, all segments except North American Food Services experienced low single-digit contraction. NAFS grew 1%.
Revenue strength is good and margin news is better. The company’s Accelerate strategy is gaining traction and has significantly improved gross and operating margins on a GAAP and adjusted basis. Adjusted gross margin increased 20 basis points, which isn’t much but is compounded by a 370 basis point improvement in adjusted operating margin. Operating income grew 14% and net income 21%, leaving adjusted earnings up 20% despite the year-over-year decline and 1,100 basis points higher than consensus.
The guidance was reaffirmed, setting the target of a fixed revenue growth of between -1% and 0% and a revenue increase of between 4% and 5%. The ratio compared to last year is weak at this level, setting the bar low. Given the strengths observed in the first quarter, the guidance is likely cautious and easily exceeded.
General Mills’ capital returns grow and generate value
General Mills’ capital returns are robust and generate value for shareholders. The 3.45% yield is the tip of the iceberg, including distribution growth, share repurchases and share repurchase growth. Repurchases increased 33% this year on a year-over-year basis and reduced the count by 3%. The dividend is reliably 52% of earnings and share buybacks can continue despite the use of debt.
Capital utilization has exceeded cash from operations on an annual basis, but the balance sheet is in good shape and no red flags have been raised. Cash balance is declining and debt is rising, but leverage remains low at 1.16X, with growth back in play. The consensus of twenty analysts expects the company to grow revenue and expand margin in F2025 and F2026.
General Mills stock price is in reversal and may go higher
The technical outlook for the General MIlls stock price is favorable as the market has formed a double bottom reversal pattern for the past two quarters and confirmed the reversal prior to the earnings release. The market has broken above the pattern’s baseline, putting targets near $76.50 in play. Since the market is returning to the trend, it should be able to sustain support at this level. In this scenario, the market could return to all-time highs by the end of the year or early 2025. Otherwise, GIS stock could be limited to the $75 level and become range-bound for the foreseeable future.
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