Maybe Yoplait is recession proof — at least overseas.
And that’s a nice change of pace. Most companies with international sales exposure are a having a tough time of it these days. Just look at FedEx (NYSE:FDX), which cut its earnings outlook this week because of slower global growth.
But General Mills is diving headlong into international waters, and that expansion goosed results even as U.S. operations retreated. The food giant saw benefits from its acquisition of Yoplait International, Yoplait Ireland and India’s Parampara Foods, among other moves.
Earnings per share eclipsed analysts’ average estimate by an impressive 4 cents a share even as revenue came up a bit light. This was all thanks to GIS selling more goods in absolute terms and at fatter margins.
“Results for the first quarter were broadly consistent with our plans, and included sequential improvement in our volume and gross margin trends from the fourth quarter of 2012,” Chief Executive Officer Ken Powell said in a statement.
Total sales rose just just over 5% to just over $4 billion, but international sales jumped 27% to $1 billion. Heck, the acquisition of Yoplait International led European sales to jump 51%.
Sure, the U.S. still accounts for three-quarters of General Mills business, but it’s beating estimates and maintaining its guidance partly because of Europe — at least for now.
So, should you buy GIS? To help decide, let’s look at the pros and cons:
Dividend Machine. General Mills and its predecessor companies have paid uninterrupted, never-reduced dividends for more than a century. It’s a payout you can bank on. The yield on the dividend currently stands at 3.4%. I mean, GIS is practically a bond. Sure, the stock is up only 5% over the last year — but add in the dividends and the total return comes to more than 8%.
Defense. Yes, GIS trails the broader market by both price and total return year-to-date and for the last 52 weeks. But over three-, five- and 10-year periods? It’s crushed the S&P 500 — all while having almost no correlation to the broader market. Indeed, with a beta of less than 0.2, GIS is almost — almost — that ever-elusive uncorrelated asset.
Valuation. While not necessarily a screaming, bargain-busting buy, GIS shares do sport favorable valuations. The forward price-to-earnings ratio (P/E) of 13.9 offers a 7% discount to its own five-year average, according to data from Thomson Reuters Stock Reports. The trailing P/E of 17 is more than 30% below its own five-year average. If nothing else, the stock doesn’t appear overpriced.
Price Laggard. Yes, the valuation looks favorable, but that because for all the good GIS’ total return has done for long-term holders, it’s been a dud in 2012. The stock is essentially flat for the year-to-date, lagging the S&P 500 by about 15 percentage points. And, according to Thomson Reuters data, it’s not likely to generate any momentum soon given the technicals: weak relative strength going into a seasonally tough period for shares.
Yoplait. GIS is betting big on the yogurt brand, which accounts for 15% of sales in the company’s core U.S. market. True, the acquisition of the international Yoplait businesses boosted results in the most recent quarter, but that also sets up tougher comparisons in next year’s quarter. Back at home, GIS has made boosting Yoplait sales a big part of its restructuring plan, but it faces stiff competition, especially with the company’s big push into Greek-style yogurt.
U.S. Weakness. GIS was smart to invest in overseas acquisitions, but then again, it may have had no choice. Tepid economic growth at home and competition from generics and store brands have been hard on General Mills’ domestic volumes and margins. Yes, they showed improvement in the most recent quarter and the company affirmed its outlook, but the macro environment isn’t going to let up anytime soon. Keeping up that sequential improvement is doable, but it’s not a slam dunk.
If you’re looking for price appreciation, well, it’s hard to see the market lighting a fire under GIS soon. But then again, it’s hard to see the bottom falling out on the stock, either.
That makes it an equity income buy. GIS is a bond in drag, and in today’s no-interest-rate environment, that’s a good thing. Grab that 3.4% yield and hold on.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.