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.

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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. 

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