So far this year, shareholders of General Mills (NYSE:GIS) should be quite happy. The stock price is up about 8.2%. And the company has had a solid record of nice gains — the average annual return for the past five years is 11%.
Last week, General Mills gave an upbeat investor presentation and reaffirmed its guidance for fiscal 2011.
Things look promising. But of course, there are always risk factors. Here’s a look at the stock’s pros and cons:
Pros
Broad brands. General Mills has products across categories like cereals, soups, desserts and snacks. Some of the brands include Cheerios, Trix, Pillsbury, Betty Crocker and Nature Valley.
For the most part, they are premium brands and tend to have pricing power.
Innovation. A key competitive advantage is General Mills’ focus on new products and packaging. As a result, the company is a heavy spender on research & development. Last year, these expenditures amounted to $218 million.
A big focus has been on healthier food items. No doubt, this should help to boost long-term growth.
Acquisitions. General Mills knows how to engage in effective deal-making. For example, the company recently purchased a majority stake in Yoplait. It is the No.2 brand in the global yogurt market.
Cons
Margin pressure. The retail industry has been consolidating over the years. The result is that the landscape is dominated by giant companies like Wal-Mart (NYSE:WMT), Kroger (NYSE:KR) and Costco (Nasdaq:COST). In other words, General Mills may have less negotiating leverage.
At the same time, there has been a notable increase in raw materials costs, especially with energy and dairy. While General Mills has been effective with its sourcing, it’s not easy to contain the inflation. Besides, there are limits to how much the company can raise prices.
Economy. The U.S. economy has hit a “soft patch” and unemployment remains persistently high. What’s more, it also looks like Europe is slowing down and even Asia.
In light of all this, there is likely to be lower consumer spending. If anything, there may be a shift to lower-priced items and move away from premium brands.
Valuation. The shares of General Mills are somewhat pricey, coming to about 15 times earnings and nearly 10 times cash flow. The recent rally may make it more difficult for there to be more upside for investors.
Verdict
Even though the stock price isn’t cheap, General Mills offers much for investors. The company is likely to continue to grow for some time. Keep in mind that it has a strong footprint in China as well as Eastern Europe. Plus, it has a focus on innovation, which should provide some strength.
General Mills also has a competitive dividend, which comes to 3%.
When looking at these factors, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
