General Mills Stock: Top Consumer Staples Compounder (NYSE:GIS)

When it comes to classifying similar types of opportunities in stocks, there are a number of common ‘genres’ that investors will often refer back to when trying to describe an opportunity set. Common genres include buckets like Special Situations, Turnaround Stories, Commodity Plays, and other things in that vein.

For example, Commodity Plays are often companies that have heavy price exposure to commodities, either on the expense side, or the finished product side, and thus often trade in tandem with those underlying prices. Gold miners, like Newmont (NEM) have relatively fixed costs of mining, but they sell what they produce on the open market, and thus their profitability is largely determined by the price of gold at any one time.

Each of these genres of opportunity can yield great results to investors if they know what they are doing, but our absolute favorite genre of opportunity could be best classified as a ‘compounder’ – companies that consistently compound capital at a higher-than-average rate within the business.

Whether it’s a financial services company with a competitive advantage, or a high-moat defense contractor that the U.S. government simply can’t do without, some companies possess certain traits that set them up for excellent, long-term buy-and-hold style returns.

Today, we’ll be taking a look at one of these companies – General Mills (NYSE:GIS).

Upon first glance, this consumer staples & food products giant first appears unexciting, but with solid revenue and earnings trends, excellent capital allocation within the business, and an attractive price, we think the ingredients are there for GIS shareholders to outperform the market, with a consequently small amount of risk.

Sound good? Let’s jump in.

What Is A Compounder?

When it comes to identifying companies that could be excellent long term buy-and-hold type opportunities, we look for a few things:

1. A Strong Demand Profile For Shares
2. A Tight Supply Profile For Shares
3. A Decent Price

Many investors have tried to quantify the ingredients to a compounder over the years by looking at different metrics and inputs, including management quality, competitive moat, ROTCE, and more.

However, here at PropNotes, we have a different approach – focus on the capital appreciation.

If you want to outperform the market, then you need to have buyers and sellers in the market agreeing, year after year, that the value of shares is higher than it was before.

This sounds simple, but many analyses of compounders remain in the realm of the theoretical, looking at factors that may or may not tangibly impact the stock.

For us, it’s all about supply and demand.

And, there’s no simpler way to break this down than by looking at the demand for shares – which includes revenue and earnings quality – along with the supply of shares – which means taking a look at trends in diluted share count.

By combining these two proxies for supply and demand, one can glean a lot of information about whether or not a company has the ingredients to boost share prices, tangibly, year after year.

Why General Mills Is A Compounder

In short, GIS is a compounder because the company has done a good job at boosting revenues consistently, boosting profits consistently, and buying back shares, all at the same time.

We believe that these dynamics will lead to continued outperformance in the stock.

On the demand side, Revenue has climbed consistently since 2018, growing from ~$15 billion to $20 billion in just 6 years:

This represents growth of roughly ~33%, which is a CAGR of around 4.9%. This may seem a little low, but it’s important to remember that GIS is not a high-growth technology company, it’s a consumer staples food product company.

This growth has been fueled by an increase in investment in GIS’s popular brands, general goods inflation, and a stronger environment for at-home eating.

On the earnings side, net income has been a bit choppier, but relatively robust, growing from $1.7 billion in 2018 to $2.5 billion today:

This CAGR is a bit faster, at ~6.6%, which is solid, given the naturally saturated market niche that GIS competes within.

This earnings growth has largely been driven by supply chain efficiencies, solid branded pricing dynamics, and lower SG&A over time:

On the supply front, management has been buying back shares at an increasingly frenetic pace, which has led to the diluted share count dropping from ~620 million in 2020, to ~570 million now:

This represents a 7.5% reduction in outstanding shares in only a little more than 3 years, which is an impressive way to give current shareholders a larger stake in the business over time.

Add these up, and you’ve got a solid overall supply and demand picture – with the scope and productivity of the business increasing over time, in combination with the supply of shares shrinking over time.

It’s a powerful engine for potential returns.

General Mills Valuation

But is the stock trading at an attractive price?

All of this would mean scant little if the entry valuation right now was too expensive.

Thankfully, GIS is trading at a historically attractive price- around 2x sales and 16x earnings:

As you can see on the historical chart above, each of these multiples are on the lower end of their respective linear regression standard deviation bands, trading firmly within the ‘red’ zone. This indicates that the current multiple is below long-term averages & trends.

Nominally, this means that now seems like a decent time to enter the stock, given the aforementioned supply & demand situation.

Additionally, from a valuation standpoint, the stock appears reasonably valued, trading close to, and below in some cases, other food product companies of similar size on the market:

This all adds up to an entry multiple that we feel comfortable paying for, especially in an otherwise expensive-looking market.

General Mills Risks

There are a couple of risks associated with buying GIS.

First, as a producer, GIS is sensitive to supply chain inflation, which could, if it gets out of hand, destroy the solid economics of GIS’s business model.

Additionally, the company is competitive in a number of food, snack, and pet food markets, but losing share, shelf space, or competitive edge over time would hurt the potential demand for shares.

Finally, there are a number of macro concerns that could injure GIS over the medium term, like a larger consumer shift away from GIS’s largely grain-based food products, or an increase in climate change that renders input costs unmanageable.

We think that GIS is well insulated from these risks, but they’re worth pointing out.

Summary

While there are risks around pricing, inflation, and the consumer, the company has continued to execute through a difficult period that included Covid, inflation, and rapid changes in consumer health. With a clearer economic outlook, an improving consumer, and a strong, profitable offering, we expect that GIS will continue to grow its business apace for the next several years, and potentially well into the long-term.

Tactically, with strong demand trends for shares, disciplined capital allocation from management, and the stock trading at a reasonable price, it’s hard to label this consumer goods giant as anything other than a ‘Buy’.

Cheers!