Is This General Ready to Lead?

Peter Lynch once famously declared "buy what you know." We at Motley Fool find that is a great way to begin a search to find new investing opportunities. I am a self-admitted Honey Nut Cheerios fanatic; however, I feel General Mills (GIS -0.71%) has more up its sleeve and deserves a place on your watchlist.

More than just Os
The American public's seemingly insatiable desire for lean protein in an "on-the-go" form will help General Mills going forward. They have a strong brand with the controlling acquisition of Yoplait, but have yet to parlay that brand recognition to rival Groupe Danone's (DANOY 0.06%) Dannon brand, and privately held Chobani's lock on the "Greek Yogurt Craze." I'd encourage management to make this a priority; matter of fact, I'd consider this a microcosm of management's execution effectiveness. I'm willing to give this some time to materialize, because the company has executed so well over the last couple of years from both an operations and capital allocation standpoint.

General operations
General Mills reported a 2% increase in total segment operating profit in last year's annual report through a combination of cost-cutting and "favorable product mix;" i.e., they sold higher margin goods. This is what management stated they were going to do when they instituted their Holistic Margin Management (HMM) program. Also, General Mills recently issued guidance affirming their full-year's EPS estimate. In short, management has done what it said it will do.

Captain capital allocation
General Mills' management has made bold moves with capital allocation. First, they have increased their dividend by nearly 9% last year, now yielding around 2.7%. And, of course, it purchased a 51% interest in Yoplait to bolster its second largest global category -- the one with the highest projected five-year growth rate. However, I'd like to hear a stronger commitment to a share repurchase program considering the average diluted share count increased by 2 million last fiscal year. With that being said, a nascent repurchasing program has started, with 745 million shares repurchased over the last 12 months.

Foreign strategy
Danone is an interesting paradox; it is much more of a pure play on the "Greek Yogurt Craze" with a larger percentage of its revenues coming from its Fresh Dairy Products business line. However, this is also a double-edged sword, as this product may be nearing saturation in U.S. markets, with increasing competition and new entrants. Also of note is foreign strategy: General Mills currently looks at foreign markets as strategic growth opportunities and it shows -- most of last year's revenue growth was due to international growth. Danone, a French company, derives a larger percentage of their revenue from international operations. Many of these countries are in the slumping eurozone that has an unemployment rate of 12.2% as of this writing. Danone may still have some U.S. growth with their Activia Greek launch, but I worry about cannibalization from regular Activia, considering this is a highly segmented brand.

But what do the numbers say?
The important question is, has this been priced into the stock?

The following metrics show that General Mills is still presenting value against its most noted rival and within the industry. General Mills currently has a lower P/E ratio than Kellogg and the industry. In addition, it has a higher five-year projected growth rate, leading to lower PEG ratios (explained here) than Kellogg, and within the industry. Finally, it pays the largest dividend yield to compensate you for your time. With that being said, the industry overall is a bit pricey now; however, if you're looking for value within the industry, keep an eye on this company.

Report for duty!
General Mills has stable and consistent management with a potential catalyst in its Greek yogurt product. Going into earnings on June 26, I recommend you add this company to your watchlist, read the next annual report, and listen to the earnings call. I'll be on the lookout for any positive signs from Yoplait Greek, international growth numbers, and EPS/dividend guidance. I feel that if management continues its commitment to the share repurchase program, and continues to execute, this General is ready to lead.