Value Trap: Why General Mills' Stock May Fall Even More

NEW YORK (TheStreet) -- Although General Mills' (GIS) shares have fallen 6% during the past two weeks, they still aren't cheap and investors should be patient and wait for revenue growth and higher margins before buying the stock.

The shares, which closed Monday at $51.63, are up 1.4% for the year, compared with a 7% gain for the Standard & Poor's 500 Index. The stock was trading Tuesday morning at $50.45, down 18 cents.

The stock trades at 18 times this year's estimated earnings, four points below the industry average. Its price-to-sales ratio, however, which is the ratio between a company's revenue and market capitalization, is 1.7, compared with the industry average of 1.04, according to Yahoo Finance.

Earlier this month, General Mills reported that its profit for its fiscal first quarter ended on Aug. 24 fell 25% and revenue declined 2.4%. Its gross margin fell to 33.7% from 36.9% a year earlier.

The company, which is known for its Cheerios, Bisquick and Yoplait yogurt, is suffering from weak demand for branded packaged food and cereal.

Other companies in the packaged-food industry may be better deals. Kellogg (K) trades at 1.52 times sales and had a gross margin of 38% in its second quarter. Mondelez (MDLZ) , the maker of such snacks as Oreos cookies and Ritz crackers, trades at 16 times estimated earnings.

General Mills is aiming to cut its annual costs by $100 million by fiscal 2017, and earlier this month, it announced it agreed to buy Annie's Inc. (BMMM) , an organic-food company, for $820 million, to broaden its product offering. The deal was expensive, though, at a 37% premium to Annie's market price before the transaction was announced.

For now, investors are better off waiting to see if General Mills' initiatives pan out. 

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


TheStreet Ratings team rates GENERAL MILLS INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate GENERAL MILLS INC (GIS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its notable return on equity, expanding profit margins and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: GIS Ratings Report

More from Opinion

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

It's Dumb to Think There Aren't Already Monopolies in Big Tech

It's Dumb to Think There Aren't Already Monopolies in Big Tech

Google's EU Battles Are Hardly a Reason to Panic

Google's EU Battles Are Hardly a Reason to Panic