A few weeks back, I made the argument for why General Mills (GIS +2.41%) stock offers investors a pretty compelling bargain -- based on the stock's valuation, and relative to a couple of its larger rivals. Whether you value the stock on its GAAP earnings, its actual free cash flow ("cash profit"), or even on the size of its dividend yield, General Mills stock is cheaper, and pays you better, than do the stocks of either Kellogg (K +0.00%) or ConAgra Foods (CAG +4.33%).
Today, let's look at why that might be, and whether the stock's likely to always remain a "bargain," or whether it just might outperform. We'll begin with a couple of predictions from Wall Street's best and brightest analysts ... and then I'll give you a prediction of my own.
Prediction No. 1: Steady-as-she-goes sales
One reason the Street may not be willing to pay much for a share of General Mills stock is the belief that General Mills is losing ground to its rivals.
General Mills today is a considerably bigger business than either Kellogg or ConAgra, but over the next few years, analysts expect this to change. Crystal balls are notoriously hard to read, but the Street thinks we'll gradually see Kellogg close the gap with General Mills, while ConAgra could overtake it as early as 2015.
Prediction No. 2: Boring earnings
A corollary to this trend -- if this is indeed how things play out for General Mills stock, is that analysts think there's more potential for the faster revenue growers to grow earnings as well. Let's take a look now at how analysts see this trend working.
One important point here is that the Street expects to see pretty sizable jumps in earnings in the very near future for both ConAgra and, to a lesser extent, for Kellogg. General Mills, in contrast, should keep plodding along at about an 8% annual growth rate -- much as it's done for the past five years.
To short-term traders impatient to find the "next big thing," this suggests there's more potential to be found in ConAgra (and Kellogg) than in General Mills stock.
Prediction No. 3: Slow and steady wins the race. Sprinters risk sprains.
And now it's time for that prediction I promised you. Investors are gambling pretty heavily on seeing everything go as planned at Kellogg and ConAgra. They're paying earnings multiples well into the 20s for both stocks. But to be blunt, since neither of these stocks is expected to grow its earnings at anything approaching a 20% clip over the next five years, I expect these investors will be disappointed.
Not so with General Mills stock. Although I admit here, too, to some hesitation about the valuation, the fact remains that of the three big cereal companies we've looked at today, General Mills costs the least, and pays the most in dividends. It has the lowest expectations to meet for Wall Street, and if you're interested in investing in the cereal makers, I think General Mills is the stock with the least risk.
