The Food Biz Has Left General Mills Behind

There are certain companies that have been around forever, that steadfastly produce their products, make money, generate cash flow and chug along just fine. The best of these become Peter Lynch stalwarts. Others become moribund, yet stockholders have held on to them for so long that they don’t pay attention to the fact that the stock is way overpriced and they aren’t getting the growth they once did.

Such is the case with General Mills (NYSE:GIS). The 84-year-old company is a purveyor of numerous popular brands. But he food business is only getting more competitive, and once-ubiquitous brand names aren’t as compelling as they once were. This is just one of several problems facing General Mills.

Take the Bisquick and Pillsbury brands. There are folks who will always buy them because they always have. The problem is that, until recently, these brands never had to deal with all the new organic companies that produce all kinds of competing baking products.

Offerings of baking products, even outside those offered by Whole Food Market (NYSE:WFM), have skyrocketed. It’s tough to stand up against that kind of competition when all you are is a little dough boy.

It isn’t just baking products, either. Every arena General Mills operates in faces the same threats. Just take a walk through Whole Foods or even your local Safeway (NYSE:SWY). The shelves are packed with stuff that has been gradually pushing General Mills products off those same shelves. The company’s products, in comparison, are boring.

You can only rely on a venerable brand for so long. I think of General Mills as the Pac-Man of food world — and the food world has become Microsoft’s (NASDAQ:MSFT) Xbox 360 with Kinect.

Financially, General Mills is doing fine. It has $485 million in cash and $6.2 billion in serviceable debt. It generated $1.3 billion in TTM free cash flow and paid out about $800 million of that for its 3.1% dividend. That’s about the level of dividend necessary to offset inflation, and if General Mills were fairly priced, I could see endorsing it as a way to stash cash for retirement.

The problem is that the company is growing at only 2.5% this year, 9% next year, and slated to grow at 7.4% annualized thereafter. Even if you attach the 3.1% dividend to give it an 11x P-E, General Mills’s fair value is $27. Yet the stock trades at $39 — way too pricey for me. I suggest selling.

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

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