General Mills (NYSE:GIS) reported its fiscal 2007 second-quarter results today. With its improvements in operations, the packaged-food conglomerate shows it still knows a thing or two about grinding its stock higher. And with the setbacks from the Pillsbury acquisition and the recent low-carb diet fad both fading into memory, this Fool thinks General Mills can grind itself even higher.

In the quarter, there was strength across the board. Total revenues were up 5% to $3.47 billion from second-quarter 2006 on both increased volume and a better pricing environment. The international operating segment had the strongest growth at 15%, even with the 3% favorable impact from currency exchange rates. A key improvement was the 40 basis point expansion in gross margins. Although net income increased only 4% due to higher interest expenses and the addition of stock option expenses, diluted earnings per share grew 11% from $0.97 per diluted share to $1.08 per diluted share.

The accelerated earnings-per-share growth was driven by the company's repurchase of 2.9 million shares (at an average cost of $53) during the quarter. Although I think General Mills' total debt levels are still high at $6.7 billion, any time a company can buy back shares that are arguably undervalued, is a good use of capital.

Which raises the question: Is General Mills undervalued? The company has had it rough lately. Besides competition from rival Kellogg (NYSE:K), it faces increased buying pressure from companies like Wal-Mart (NYSE:WMT) and loss of pricing power due to increased strength of substitutes -- private label brands from grocery chains such as Kroger (NYSE:KR). Saying that, I still believe the company -- even if growing slowly -- is still very profitable and is potentially undervalued.

Using the following inputs in a two-stage discounted cash flow calculation:

Discount Rate

10%

Free Cash Flow (millions)

$1,300

10 year FCF growth

5%

Terminal FCF growth

3%

Share Count (millions)

343

Intrinsic Value

$65


I think General Mills is conservatively priced under $60 and could easily be worth $65. Consider that at an estimated $1.3 billion in annual free cash flow, or $3.79 per share, General Mills has a free cash flow yield of 6.5% -- not shabby. And with the company's strong profit margins, the company historically has easily earned more than its cost of capital. Finally, for those who like to get paid, management's increase in the company's dividend payment gives the stock a current 2.5% dividend yield -- also not shabby.

Slow-growing companies won't make anyone rich quick and aren't for everyone, but I think you could do worse. But, just as I would be disappointed if I was ready to enjoy some chocolatey Cocoa Puffs and learned I had gotten Fiber One instead, I urge you to do your own due diligence before buying anything. But if you are in the market for an income-oriented blue chip, General Mills might be one for your radar screen.

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Fool contributor Matthew Crews welcomes your feedback -- really! He has bought stock in General Mills for a family member but does not own it directly or have a financial position in any of the other companies mentioned. The Motley Fool has a disclosure policy .