Can General Mills Find a Healthy Recipe for Growth?

Like finicky children, American consumers are getting more and more picky about what they eat. And while that's in many ways good for their health, it's not so great for the health of companies whose legacy brands don't fit with their evolving ideas about what their diets should look like. In particular, it's been a tough road for packaged-foods giants like General Mills (GIS 1.06%), which delivered disappointing quarterly revenue numbers Wednesday, citing weakness in U.S. snack sales.

In this segment of the Market Foolery podcast, host Mac Greer and senior analyst Ron Gross discuss how the company's various product lines are doing (cereal sales are actually holding steady), which brands the company is focusing on, where it could find growth, its diversification efforts, General Mills' longer-term stock price performance, and the current investment thesis for the company.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 26, 2019.

Mac Greer: Let's begin with a rough day for General Mills. Shares down around 5% at the time of our taping on earnings. Ron, disappointing revenue. Weakness in their U.S. snacks business. Now, a lot of us, when we think General Mills, we think cereal. Cereal sales, in line with last year, hanging in there. But they're not just cereal. They've got a number of brands, everything from Haagen Daz to Yoplait to pet food. But they're running into this trend of consumers eating healthier. Tough go.

Ron Gross: You got it! It's interesting, actually, even with today's drop, the stock was up 26% on the year. I would not have guessed that if you'd asked me to predict how the stock has done this year. That was surprising to me. But you nailed it. It's everyone's growing preference for healthier breakfast and snacking options. It's hit all the companies. Kellogg, Mondelez, Kraft Heinz, it doesn't matter who you are. Certainly, General Mills is not immune to that. Organic net sales, that's important, in North America fell 2%.

Greer: That sounds healthy, though. [laughs]

Gross: [laughs] It's organic. But importantly, because of their attempt to diversify, specifically the Blue Buffalo pet food company they bought last year, total sales were actually up 7% and they saw a 30% increase in the Blue Buffalo pet business. Diversifying is working, but obviously, they want to grow some of their brands, continue with some of their healthier brands. A focus on Haagen Daz, interestingly. Not so healthy; Old El Paso Mexican; their portfolio of natural and organic foods, and their snack bars, they're trying to focus on growing those businesses.

Greer: I think the question that everyone wants to know is, where does this leave Bugles? I love Bugles!

Gross: My pantry, hopefully.

Greer: You know Bugles?

Gross: I love Bugles! Have you ever had caramel Bugles?

Greer: I don't think so! But when I was a kid, it was one of the most satisfying things to buy the bag of Bugles, and then you pretend that they are, in fact, Bugles.

Gross: You had a lonely childhood. You needed a hobby, clearly! That was just salt in a bag, which is why they were so good. Crunchy salt in a bag.

Greer: This is true. Shockingly, not doing as well today with the health conscious consumer. Let's talk a bit more about the stock. As you mentioned, the stock's had a great last year, beaten the market, but it's lost to the market over the last five years. Shares now trading below where they were five years ago. Fun fact, still outperforming Kellogg.

Gross: Woof.

Greer: Woof, woof, woof. What's the bull case for General Mills?

Gross: The bull case, I think, is that they're going to continue to diversify through acquisitions. But that's dicey. That bull case also has a bear case right around the corner. It's tough to do acquisitions correctly. You want to make sure you pay the right price, you want to make sure you go into the correct areas. Part of the strength of General Mills over the last bunch of months was the result of the diversification strategy, Blue Buffalo being one that investors seemed to be excited about. But it's tough. The stocks are trading around 16X, not just General Mills, but a lot of these companies, and there's a reason for that. The reason is, there's a lot of uncertainty going forward, and we're going to probably still see weakness for some time until they get their product portfolio straightened out.

Greer: OK, Ron, as we wrap up here, looking back on your cereals -- they don't have to be General Mills, they can be Kellogg or anything -- how about some favorite cereals?

Gross: By far, Cap'n -- wait, not Cap'n Crunch. Cap'n Crunch is one of my favorites.

Greer: With Crunch Berries?

Gross: No. Without Crunch Berries, actually. But, Fruity Pebbles are just unbelievable!

Greer: Really?

Gross: Yes. I love Fruity Pebbles!

Greer: I always thought they were overrated. Was it the Flintstones marketing?

Gross: No! It made the milk fruity. Fruity-ish. And if you let them get a little soggy... oh, my God, I might have to have them today!

Greer: OK, let me hit you with some of my favorites, and tell me how you come down. Apple Jacks.

Gross: Boring, but my wife loves them.

Greer: Really?

Gross: Yes.

Greer: Fruit Loops.

Gross: It's like a Fruity Pebbles cousin.

Greer: Count Chocula.

Gross: Too chocolatey for me.

Greer: Too chocolatey, are you kidding? OK, here's one of my favorites. This was a sleeper. Frosted Mini Wheats.

Gross: I have it written down right here on my paper so I wouldn't forget to mention it.

Greer: Is that true?

Gross: If you let them get a little bit soggy, fantastic! And you feel like you're eating wheat, so how bad could it be?

Greer: Oh, my gosh! And, one of my truly favorites -- I had probably a seven-year relationship, a monogamous relationship with this cereal --

Gross: Here goes the thing about you needing a hobby.

Greer: Are you ready?

Gross: Yeah.

Greer: Golden Grahams.

Gross: Golden Grahams are good, for sure!

Greer: They're magical!

Gross: It's a shame that cereal has gone the way of the dodo bird because it's delicious. Obviously, it's unhealthy, and that's why. But even granola is delicious in milk. Everything is good!

Greer: I'll hit you with three overrated cereals, and you tell me if you agree. Ready?

Gross: Yeah.

Greer: Wheaties.

Gross: God, yes! They're terrible!

Greer: Rice Krispies.

Gross: They do snap, crackle, and pop, but that's the only fun part of it.

Greer: Yeah, after that, it's like, OK. Then, Cheerios.

Gross: Oh, my God, like eating cardboard. HoneyNut Cheerios are OK.

Greer: One more name I wrote down --

Gross: You don't get this on the other shows.

Greer: -- the phrase I have written by it is "I'm not dead yet." Grape Nuts. When I was a kid, I always associated Grape Nuts with being older. Now that I'm older, I still associate Grape Nuts with being older.

Gross: [laughs] You have to be like 80 to enjoy a bowl of Grape Nuts.

Greer: Exactly. I've got a few more years, but I'm looking forward to it!