General Mills' (GIS -0.85%) stock price dipped 5% on Dec. 20 after it posted its latest earnings report. For the second quarter of fiscal 2023, which ended on Nov. 27, the packaged food maker's revenue rose 4% year over year to $5.22 billion, exceeding analysts' estimates by $30 million, as its organic sales increased 11%. Its adjusted EPS grew 12% in constant currency terms to $1.10 and cleared the consensus forecast by four cents.
General Mills' headline numbers were solid, but its stock might have been due for a breather after rallying more than 20% this year and hitting its all-time high of $87.55 on Dec. 8. Like many other blue-chip consumer staples stalwarts, General Mills outperformed the market because it was considered a safe haven play against inflation, rising interest rates, and other macroeconomic headwinds. But will it continue to outperform the market over the next 12 months?
How did General Mills withstand the market sell-off?
General Mills sells over a hundred brands of packaged foods, including Cheerios, Yoplait, Häagen-Dazs, and Green Giant. It also sells premium pet food products through its Blue Buffalo subsidiary. The company has withstood more than a dozen recessions and paid uninterrupted dividends every year since its founding and public debut in 1928.
General Mills generates such consistent growth because it's well-diversified and it repeatedly refreshes its portfolio by buying smaller brands, divesting its weaker brands, and updating its classic brands with new variations. It also counters inflation by adjusting its serving sizes and raising its prices.
The market's demand for consumer staples also generally remains resilient throughout uncertain times, as we've seen over the past three years. In fiscal 2020, which ended in May of the calendar year, General Mills' organic sales and constant-currency-adjusted EPS increased 4% and 12%, respectively, as the pandemic drove more shoppers to stock up on packaged foods. Its gross margin also expanded 70 basis points to 34.8%.
In fiscal 2021, General Mills' organic sales and constant-currency-adjusted EPS both rose 4% as its gross margin expanded to 35.6%. That momentum continued in fiscal 2022, even after it lapped the pandemic, as its organic sales rose 6% and its constant-currency-adjusted EPS grew 4%. However, its gross margin slipped to 33% amid inflationary headwinds and higher supply chain costs, and it only partly offset that pressure with price hikes and cost-cutting measures.
What will happen to General Mills this year?
At the beginning of fiscal 2023, General Mills expected its organic sales to rise 6%-7% for the full year as its adjusted EPS improved 2%-5% on a constant currency basis. But in its second-quarter report, it predicted its organic sales would grow 8%-9% as its adjusted EPS increased 4%-6% in constant currency terms.
During the second-quarter conference call, CEO Jeff Harmening attributed that higher guidance to the "positive momentum" generated by its price hikes and cost-cutting measures. He also noted General Mills was "holding or gaining share" across its core product categories, and that its adjusted gross margin expanded year over year in the first half of fiscal 2023.
Additionally, CFO Kofi Bruce predicted the company would experience "profit growth and profit margin improvement" in the second half of the year as its supply chain costs receded. In other words, General Mills should easily ride out the current inflationary headwinds -- just as it did with every other major spike in inflation over the past nine decades.
General Mills didn't provide any clear guidance beyond fiscal 2023, but it plans to focus on boosting its gross margins back to pre-pandemic levels. Assuming the inflationary headwinds wane in fiscal 2024, investors can probably expect the company to generate mid-single-digit revenue and earnings growth again.
But where will General Mills' stock be in a year?
General Mills' future looks bright, but its valuations could limit its upside potential. At 21 times forward earnings, it looks a bit pricier than comparable companies like Kraft Heinz (KHC -0.19%) and Conagra (CAG 0.09%), which both trade at about 15 times forward earnings.
General Mills' forward dividend yield of 2.5% is also significantly lower than the 10-year Treasury's yield of 3.7%, which could limit its appeal among conservative income investors. Kraft and Conagra also pay higher forward dividend yields of 4% and 3.5%, respectively. Furthermore, General Mills is the type of stock that rallies during bear markets but stalls out during bull markets. If the bear market finally ends in 2023, its shares could stagnate as investors rotate toward growth stocks again.
Based on all these facts, I believe General Mills will merely hold steady over the next 12 months instead of replicating its impressive gains from 2022. It's still a sound investment, but investors should curb their near-term expectations.