Has General Mills Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if General Mills (NYSE: GIS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at General Mills.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

5.8%

Fail

 

1-year revenue growth > 12%

8.7%

Fail

Margins

Gross margin > 35%

37.3%

Pass

 

Net margin > 15%

10.6%

Fail

Balance sheet

Debt to equity < 50%

100.2%

Fail

 

Current ratio > 1.3

0.80

Fail

Opportunities

Return on equity > 15%

22.7%

Pass

Valuation

Normalized P/E < 20

18.72

Pass

Dividends

Current yield > 2%

2.8%

Pass

 

5-year dividend growth > 10%

10.8%

Pass

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at General Mills last year, the company has kept its five-point score for the third year in a row. The stock has done quite well, though, rising more than 20% over the past year.

General Mills is a stalwart in the food industry. Although it's most famous for its breakfast cereals, the company has a wide array of offerings, including Yoplait yogurt, Progresso soups, and Totino's pizza.

Yet, General Mills and other premium food brands are under attack from private-label brands, which offer cheaper prices. Already, ConAgra's  buyout of Ralcorp has boosted its presence in the private label arena. More importantly, grocery store chains see private-label brands as a way to boost margins, with SUPERVALU adding substantial presence in the area to try to keep its profits up. Even Whole Foods has added private-label brands, leveraging its own brand to sell premium products.

In response, General Mills is trying to modernize its lineups in order to keep up with the competition and keep its business exciting. Both General Mills and Kellogg have recently come up with competing breakfast shake products, with General Mills testing its BFast brand to go up against Kellogg's Breakfast To Go.

One reason General Mills' stock has risen is the interest in the food industry after Heinz received an acquisition bid. Investors clearly hope that General Mills might join the consolidation party, but further moves seem unlikely given current valuations.

For General Mills to improve, it needs to work on cleaning up its balance sheet. With solid dividends, General Mills would look even more attractive if it reduced its debt and thereby got a little closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Food is a tough business, but Whole Foods has revolutionized the industry with its organic offerings at its stores. In the Fool's premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.

Click here to add General Mills to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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Related Tickers

8/19/2014 4:00 PM
GIS $53.23 Up +0.24 +0.45%
General Mills, Inc… CAPS Rating: ****

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