What happened
Shares of General Mills (GIS -0.77%) were down 5% Wednesday morning after the consumer staples giant was downgraded to a sell by Goldman Sachs due to growth concerns.
So what
Packaged food companies have been under pressure for some time now, but General Mills has been attempting to adapt to changing consumer trends by diversifying into pet products and more ready-made food items. The company, which has a range of cereal brands as well as Haagen-Dazs, Progresso soup, Yoplait yogurt, Pillsbury, and Betty Crocker, last year made a big bet on pet food when it spent $8 billion to buy Blue Buffalo.
For now, at least, combining the cereal giant with a leading pet food brand has led to lots of smiling faces. Image source: Getty Images.
Goldman Sachs analyst Jason English in a note said that although General Mills has enjoyed a period of outperformance thanks to improvements to its core business and the impact of the Blue Buffalo buy, the company is now entering a new chapter that is likely to be fraught with "mounting deceleration."
Although management's efforts to streamline operations are still having the desired effect, and the risk to estimates appears to be at least two quarters away, English notes the stock is trading at a multiple near its multiyear high, so additional upside appears likely to be limited.
English downgraded the shares to sell from neutral. His price target is $41, nearly 15% below the stock's current price.
Now what
As English admits, General Mills' issues, if they materialize, are still out on the horizon. The company's outlook for the current quarter remains strong. In remarks made at an investor conference on May 29, General Mills said it expects fiscal fourth-quarter pet revenue to be up 38% on a pro forma basis and segment operating profit to be up 82%. For the full fiscal year, the company expects pet segment net sales to be up 11%.
For now, at least, General Mills' portfolio changes appear to be working. Time will tell how long the positive momentum can continue.
