Is General Mills Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does General Mills (NYSE: GIS  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell General Mills' story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at General Mills' key statistics:

GIS Total Return Price Chart

GIS Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

21.4%

Fail

Improving profit margin

(0.2%)

Fail

Free cash flow growth > Net income growth

51% vs. 21.2%

Pass

Improving EPS

25.1%

Pass

Stock growth (+ 15%) < EPS growth

60.1% vs. 25.1%

Fail

Source: YCharts.
*Period begins at end of Q2 (May) 2010.

GIS Return on Equity Chart

GIS Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

2.6%

Pass

Declining debt to equity

0.4%

Fail

Dividend growth > 25%

35.7%

Pass

Free cash flow payout ratio < 50%

37.5%

Pass

Source: YCharts.
*Period begins at end of Q2 (May) 2010.

How we got here and where we're going
General Mills turns in a respectable, if not superlative performance, earning five out of nine possible passing grades. One of those falling grades only happened because debt-to-equity has barely ticked up -- a small decline over the next year will be enough for another passing grade. In addition to this, underwhelming revenue growth and declining profit margins over the last 12 months has certainly cost General Mills. How might General Mills push its revenue even higher over the next few quarters? Let's dig a little deeper to find out.

New gluten-free offerings and reduced-sugar cereals from this grain-heavy food purveyor have hit the grocery store shelves in the U.S., including some 300 products that have removed wheat as an ingredient. That's a rather remarkable commitment to what remains a niche market in the food industry. On the other hand, General Mills' Yoplait brand, which currently holds 24% of the U.S. market, recently saw a 5% decline in sales year over year. Another General Mills yogurt lineup is expected to launch this month, and projections anticipate more than $140 million in revenue for its first year on the market. However, that could simply be treading water by replacing one out-of-favor product with a newer and more faddish one.

General Mills' management seems optimistic going forward. The company's focus is on new product launches rather than organic growth, with more than 200 new products planned for launch this year. General Mills will launch Hershey's Cookies & Creme cereal, as well as two varieties of Nature Valley granola cereal -- talk about going after opposite ends of the taste spectrum. It also plans to expand the distribution of its BFast breakfast shake. In addition, General Mills has partnered with Nestle to increase its sales outside the U.S. by leveraging Nestle's expertise in emerging markets. This joint venture is focused on building the cereal market in more than 130 countries. Today, one-third of total sales come from outside the U.S., compared with only 25% five years ago. That's a nice start, but that ratio could keep rising.

General Mills has a long history of providing shareholders with steady profits and strong dividends. The company has paid uninterrupted dividends for 114 years in a row and provides a solid 3% yield to the new investors at recent prices. Over the past five years, General Mills dividends grew at 11% compound rate, while total return to shareholders from stock price appreciation and dividends has compounded at 14% per year. It might not have a perfect score, but General Mills certainly has a long-term appeal for patient investors.

Putting the pieces together
Today, General Mills has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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