Will General Mills Hop to Growth With BNNY?

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Annie’s (BNNY) leaped nearly 40% to 2014 highs Tuesday on news that the organic foods and snacks company will be acquired by General Mills (GIS).

General Mills GIS stockGIS is dipping into its cash coffers for the deal, paying some $820 million for Annie’s — a 37% premium to the stock’s closing price on Monday — via available credit.

Investors in BNNY stock are clear winners. General Mills bought in at 42 times next year’s earnings, and helped turn around an investment that had shed more than 20% of its value in 2014 amid a perfect storm of organic wheat inflation, lower inventories at a key distributor and rising expenses.

For dividend stock General Mills, it’s a neat tuck-in acquisition that will fit well into its natural- and organic-products portfolio. However, GIS shareholders still might be asking themselves whether adding the Annie’s brand will give General Mills the growth it desires, and whether the premium was the best use of capital for the company.

Giving it a close look, I think the answer to both those questions is “yes.”

Reasons for the Deal

Annie’s should have been a star, operating in the organic and natural foods business — a market segment that is increasingly taking up shelf space in grocery aisles as healthy living gains traction. But ever since its 2012 initial public offering, BNNY has failed to live up to the hype, instead falling victim to a host of external and internal pressures that gave the bears bragging rights for a large chunk of the past two-plus years.

Meanwhile, General Mills has been moving toward lifting its health-food profile, evidenced by the company’s recent decision to remove GMOs from its Cheerios cereal. But the consumer-foods giant has been struggling to grow, illustrated by fiscal 2014’s meager 1% net sales growth and a 2% decline in operating profit.

By coming together, Annie’s gets a chance to reach its full potential, while General Mills raises its organic foods cred.

GIS Dividend

General Mills falls short of being grouped among the dividend aristocrats, but its payout history is nothing to sneeze at. GIS stock has paid uninterrupted dividends for more than a century, having raised its distribution annually over the past decade.

Last fiscal year, General Mills returned $2.7 billion to shareholders via dividends and share buybacks, including a 17% hike in its quarterly dividend that puts its yield just above 3.1%. Moreover, General Mills expects to shrink its share count by at least 3% in 2015. That’s powered by impressive free cash flow that has hovered around the $2 billion mark for each of the past three years.

With a payout ratio of about 58%, GIS could focus on increasing its dividend and share buybacks further, especially considering it has turned to debt to finance share buybacks in the past.

Instead, it seems to be betting that BNNY will provide the growth General Mills needs to improve its fundamentals and ultimately boost its stock price.

For all its dividend and share buyback glory, capital appreciation in GIS stock hasn’t been much to write home about. Over the past three years, General Mills has appreciated some 35% — 3 percentage points less than the S&P 500.

What BNNY Brings to the Table

It’s no doubt that Annie’s has failed to live up to the hype for investors, but consumers at least view the bunny in a positive light, evidenced by the 19% increase in fiscal 2014 revenue to $204.1 million versus $169.4 million in fiscal 2013.

And in acquiring BNNY, General Mills at least is inheriting a solid balance sheet. Annie’s doesn’t have debt and in fiscal 2014 nearly doubled its net cash from operations to $17.2 million.

It’s just that growth hasn’t translated to the bottom line, evidenced by the fiscal first quarter’s net loss of 7 cents per share.

Meanwhile, BNNY is projecting 18% to 20% net sales growth for fiscal 2015. For comparison, competitor Hain Celestial (HAIN) is calling for a more aggressive 27% to 30% net sales growth in fiscal 2015 on top of a 24% jump in fiscal 2014.

GIS and BNNY actually share vulnerability in each one’s dependence on a single customer for sales — an approach that has hurt BNNY in particular. For instance, an inventory reduction by key distributor United Natural Foods (UNFI) cost Annie’s as much as 4% in revenue in fiscal 2014, according to Barron’s. Meanwhile, Walmart (WMT) in fiscal 2014 represented more than a fifth of General Mills’ consolidated net sales.

Lastly, costs have been on the rise, illustrated by the 360-basis-point increase in Annie’s SG&A expenses to 32.3% of sales in the fiscal first quarter. However, if managed with greater efficiency, BNNY should provide the type of growth GIS is looking for.

Conclusion

It’s too soon to tell whether General Mills and Annie’s are a match made in heaven, but the combination doesn’t appear to be a recipe for disaster, either. Each one possesses a strength that the other is lacking.

For General Mills, it extends its reach into the increasingly relevant organics space, while Annie’s gains the scale and efficiency necessary to make it a more profitable division.

All told, BNNY brings to General Mills at least the potential for more capital appreciation, which makes GIS even more appealing than just a vanilla dividend play.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/general-mills-gis-stock-bnny/.

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