General Mills: Stock of the Week

Why we’re raising the fair value for this cereal maker.

Andrew Willis 24 April, 2023 | 4:32AM
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Andrew Willis: Consumer staples aren’t always moat-worthy businesses, but with General Mills (GIS), we’re far from the founding flour mills of the 1800s.

From Cheerios to Lucky Charms, Pillsbury, and Haagen-Dazs, General Mills has earned itself a narrow moat with strong brands. Not to mention a cost edge and strong relationships developed over decades. Senior equity analyst Erin Lash says the firm is able to secure valuable shelf space – and it’s looking to make the most of that opportunity.

General Mills has made dramatic cuts to the time it takes to bring a new product to market – from years to months. Consumers are moving away from processed fare and General Mills is pivoting and reformulating your favourite age-old brands with simple ingredients and the elimination of artificial colours and flavours.

We do believe investors in the consumer staples space should keep in mind that high-margin organic products are great, but don’t guarantee a moat. There are other ingredients in a recipe for a competitive advantage which include research and maintained customer awareness of compelling product benefits.

A great product to educate on benefits is the food we give our beloved pets – take Blue Buffalo for example. That’s a lasting bond with consumers and likely a point of pride for General Mills since they’re number one in pet food now.

For Morningstar, I’m Andrew Willis.

 

bulls Bulls Say

  • General Mills’ pet food business should benefit from the high-single-digit increase in pet adoptions during the pandemic. Its BLUE brand had been growing rapidly, as on-trend innovations are resonating with consumers.
  • The firm is modernizing its brand-building capabilities, with shortened lead times for new product launches and advertising budgets that are shifting to digital formats where consumers are spending more time.
  • General Mills' well-developed Strategic Revenue Management and Holistic Margin Management programs should help the firm offset steep cost inflation.

bears Bears Say

  • Consumers are increasingly health-conscious, moving away from General Mills' categories (both its conventional fare and its high-sugar, high-carbohydrate organic offerings), which resulted in flat organic sales the five years preceding the pandemic.
  • The firm has been increasingly reliant on acquisitions for growth, which adds integration risk and is generally costly, as evidenced by diluting ROICs including goodwill.
  • E-commerce and an increase in digital marketing have lowered competitive barriers to entry for categories General Mills plays in.

 

Editor's Note: All images are courtesy of Unsplash.com and AP Images. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
General Mills Inc70.63 USD-1.12Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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