Eighteen months ago (and change), I told you that "right now, today, General Mills (NYSE:GIS) stock offers one of the best values available in the packaged cereals industry." But times change -- and so do stock valuations. As we'll see below, General Mills stock has over the past few months morphed from a "buy" into a "sell," even as ", as we shall soon see"? Recommend more of a transition here its rival, ConAgra Foods (NYSE:CAG), has begun looking more like a "buy." Why?
General Mills is no longer cheap
Since I last wrote about General Mills as a "good buy" for your portfolio, the stock has risen a respectable 7% in price -- and paid out close to 5% more of its share price in the form of shareholder dividends. All things considered, those are pretty decent results, and up until about early summer this year, were better than the broader market had produced. .
At the same time, however, certain things have happened at General Mills which make the stock look significantly less likely to post superior returns going forward. Chief among them is the fact that the stock is no longer "cheap." To see why not, let's start out by comparing the company to its two chief rivals in cereal: Kellogg (NYSE:K) and ConAgra (which now owns cereal maker Ralcorp).
As you can see, already General Mills has ceded the title of "cheapest P/E" to rival Kellogg. At a price-to-earnings ratio of 19.4, General Mills stock now costs 45% more than does Kellogg, at 13.3 times earnings. More important than the stocks' P/E ratios, however, is how they're performing in the actual production of cash -- free cash flow. And here, it's the contest between General Mills and ConAgra that interests us most.
Currently, you see, General Mills generates respectable free cash flow of $1.8 billion -- pretty much in line with its GAAP "earnings" of a bit more than $1.7 billion. ConAgra, in contrast, while sporting an apparently pricey P/E ratio of 53.7, churned out nearly $1.1 billion in positive free cash flow over the past 12 months. According to S&P Capital IQ data, that's about 68% better than ConAgra's reported net income.
As a result, when applied to its much smaller market capitalization, we find shares of ConAgra selling today for just 13.3 times free cash flow -- versus a price-to-free-cash-flow ratio of 17.6 for General Mills. And so, while it may look more expensive, ConAgra is actually cheaper to own than General Mills stock.
General Mills has a poor record of sales growth
A second reason to be leery of buying General Mills stock is what General Mills has itself been buying. I'm referring to the company's ill-advised decision to sink $820 million into an acquisition of organic foods producer Annie's (NYSE:BNNY) earlier this year.
Unlike General Mills, which generally reports stronger free cash flow than its GAAP earnings would imply, Annie's has been a historically weak free-cash-flow producer. Over the past 12 months, for example, the company reported earnings $11.9 million in "profits" -- but actually generated positive free cash flow of only $3.2 million.
So, why did General Mills decide to spend close to a billion dollars acquiring Annie's? Probably because over the past five years, General Mills' sales have stagnated to the point that they now look like this:
Unable to generate strong organic growth on its own, General Mills appears to have decided to go out and buy itself a literal "organic" foods company in hopes of boosting its growth rate. Problem is, because Annie's is such a weak cash producer, it may end up benefiting General Mills less than hoped -- in addition to costing shareholders that upfront investment of $820 million.
Meanwhile, ConAgra continues to produce respectable rates of sales growth, in addition to very respectable free-cash-flow numbers.
General Mills no longer pays you best
Speaking of cash: Perhaps the most important point for investors is that out of the three big cereal concerns discussed above, General Mills is no longer the one generating the most cash from its business. These days, ConAgra gives you much better bang for your buck.
Measured by dividing a firm's market capitalization (the price you pay for General Mills stock) into its free cash flow (the money your investment generates for you), General Mills now offers investors only the second-best "free-cash-flow yield" of the three firms named. For every dollar you invest in a share of General Mills stock today, you can expect the firm to generate nearly only 5.4 cents worth of real, cash profits on your investment. That's one-and-a-half fewer pennies than it was making 18 months ago.
In contrast, ConAgra's cash-creation machine has shifted into high gear, and the company now generates an industry-leading 7.3 cents worth of free cash flow for every dollar you invest in it. That's money ConAgra may ultimately use to pay you bigger dividends (it already pays a 2.9% dividend), to buy back shares (increasing the size of your stake in the company for every share it takes off the table), or to reinvest in its business and maintain its lead over rivals.
Any way you look at it, though, ConAgra's greater ability to generate cash makes the stock a better investment than General Mills stock is today.
Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.