Does General Mills Have Room to Move Higher?

General Mills beat earnings expectations and raised guidance. Can it keep rising?
By Chris Laudani ,

Last Wednesday, General Mills (GIS) - Get Report beat fourth-quarter earnings expectations and revenue, and raised guidance for next year. Can it keep leading, though?

Management raised fiscal 2017 guidance and raised the dividend. The stock hit an all-time high on the news. General Mills is up almost 27% year to date. The company will try to keep the momentum going at its annual analyst meeting next Wednesday.

General Mills reported fourth-quarter sales of $3.9 billion, down 9% and profits of $654 million, down 18%. Fully diluted earnings per share fell 12% to 66 cents. For fiscal 2016, revenue fell 6% to $16.56 billion. Profits fell 1% to $3.0 billion and adjusted diluted earnings per share were up 2% to $2.92.

Despite the fact that earnings and revenue declined, investors liked the company's newfound focus on driving profitable volume growth. General Mills hasn't reported organic growth in two years, so management's new focus on profitable volume growth at its "foundation brands" and revenue growth of its "growth brands" is welcome news.

Investors also like the company's strategy of delivering more healthy food options, like foods with no high fructose corn syrup and no artificial colors or flavors. Gluten-free Cheerios retail sales were up 5% in the second half of the year as compared to down 8% for all of last year. Nature Valley Bars' retail sales rise 1% in the first half and 4% in the second half of they year. Natural and organic sales rose to $750 million in 2016.

Management sees earnings in fiscal 2017 growing 6% to $3.10 per share and revenue flat to 2% lower. While guidance was better than expected, investors were especially excited by the company's operating margin guidance. Operating profit margin is expected to increase by 150 basis points in 2017. The company now expects an operating profit margin of 20% by fiscal 2018, an increase of 400 basis points over 2015 levels.

General Mills also increased its estimate of annualized cost savings to $600 million by 2018, up from the previous target of $500 million. Management has vowed to reduce complexity, improve efficiency and drive profitable sales volume.

The board of directors increased the quarterly dividend 4% to 48 cents from 46 cents, the eighth such increase since 2010.

Cost-cutting and efforts to improve profitable sales are great, but General Mills lacks revenue growth. Revenue declined 1.6% in 2015 and 6.1% in 2016, and sales are projected to be down again in 2017. You have to go out to 2019 to find any top-line growth.

At $72, the stock has priced in a lot of good news. The shares are trading at 23 times fiscal 2017 estimates of $3.10 and 21 times 2018 estimates of $3.45. That's a pretty full valuation for a company that has no revenue growth, don't you think?

At this valuation, I don't think General Mills can keep leading the charge higher.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...