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Proprietary Data Insights Financial Pros’ Top Packaged Food Searches in the Last Month
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Financial Pros: Top 5 Packaged Food Stocks |
Consumer staple stocks haven’t had it easy lately. Lower sales and a softer outlook sent relatively quiet stocks plunging +20% in weeks. As interest by big money players surged, we began to look deeper into the category for investable opportunities. Top of the list is General Mills (GIS), the maker of Cheerios and Hagen Daas ice cream. While it’s not the cheapest stock amongst its peers, we feel it balances growth and profitability better than the others. General Mills’ Business For over 150 years, General Mills has been making well-known consumer food products. Today, their footprint extends to institutional foodservice such as schools and hospitals, as well as international customers.
Source: General Mills Q4 2022 Financial Presentation General Mills operates through three revenue reporting segments:
Like most of the consumer food stocks, shares of General Mills took a hit, dropping almost 30% since April. While management sees inflation moderating and supply chains improving, the high multiples once garnered by consumer staple stocks contracted as interest rates rose. Sales growth is slowing in at-home consumption and pet, while away-from-home traffic is up modestly. The company plans to focus Capex on cost savings and capacity-constrained platforms, driving as much waste from their systems as possible. Financials
Source: Stock Analysis General Mills may not grow sales at double-digits. But for a mature company, it delivers consistent single-digit gains. Plus, it’s done a decent job maintaining margins despite inflationary pressures. However, as management highlighted, they could do more to improve operating margins. Free-cash-flow margin has dropped in recent years, a combination of slightly higher Capex and lower operating margins. However, we expect those to improve in the coming quarters as supply chains normalize and cost-savings initiatives take root. Debt is fairly low at just $12 billion, allowing the company to pay an almost 4% dividend and buy back $1.4 billion in stock last year. Valuation
Source: Seeking Alpha As we mentioned earlier, General Mills isn’t the cheapest of its peers. Kraft Heinz (KHC) and Kellanova (K), formerly Kelloggs’, trade at lower price-to-earnings and cash ratios. Plus, both forecast dismal revenue growth this year. Hershey’s (HSY) certainly is the most expensive. However, you’ll soon see it’s growth and margins support this valuation. Growth
Source: Seeking Alpha Most packaged foods companies forecast low single-digit revenue growth in 2023, Hershey’s being the exception. In Kelloggs’ case, they expect sales actually to decline YoY. We liked General Mills’ average revenue growth over the last three and five years relative to its peers. And while free-cash-flow declined over the last few years, it turns out General Mills saw the smallest decline. Profitability
Source: Seeking Alpha Despite inflationary pressures, General Mills margins outperform its peers in most cases. Kraft has better EBIT margins. But it pays nearly 1% of revenues more than General Mills in interest, a problem that will only grow as interest rates remain elevated. Our Opinion 8/10 General Mills is a well-run company that generates enormous amounts of cash. Its consistent operations mean you won’t have to worry about receiving that 4% dividend payment. And while it’s not the best in any one category, we feel it balances growth, valuation, and cash flow better than its peers. |
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