3 Takeouts from the Sparkling Neighborhood of General Mills
General Mills (NYSE: SIG) got a big boost from the COVID-19 pandemic on track to post a second consecutive quarter of double-digit sales growth and increased profits last week. But the packaged food giant (owner of successful franchises like Cheerios and Pillsbury) also capitalized on this positive sales environment in a way the competition couldn’t match.
Judging by its market share gains over the past six months, investors might want to reconsider their judgments about the growth potential of this consumer staple giant. General Mills is on track to be a much stronger business even after the pandemic threat subsides.
Let’s take a look at three big reasons.
1. Big brands outperform
Like expected, organic sales growth slowed from the dizzying pace of expansion of 16% the company had set during the peak time spent at home in the previous quarter. But General Mills still increased organic revenue by 10%, even as restaurants reopened in July and August.
Even better, the company believes it has gained market share in most of its biggest product niches and in several geographies. In the core US segment, this includes a dominant performance for in-home baking and desserts, ready meals and soups, and heated snacks.
General Mills also hasn’t had to sacrifice profitability to bring its brands into millions of new homes since the start of the year. Adjusted gross and operating profit margins both increased this quarter, resulting in a 27% increase in adjusted earnings per share.
2. Reinvest in the business
General Mills tell investors to prepare for higher costs in the next three quarters, which will keep profitability stable this fiscal year compared to last year. These investments include major upgrades to its manufacturing line and marketing support, as well as higher input costs that will impact the entire industry.
|Adjusted operating income||22%|
|Adjusted earnings per share||27%|
In other words, General Mills is using most of its excess resources to build market share in attractive areas through consumer food and pet food industries. “In an uncertain environment,” CEO Jeff Harmening said in a press release, “our job is to stay focused on what we can control.”
But he predicted the company is “positioned to compete and win in our categories this year, regardless of the level of demand.”
3. Capital Plans
General Mills confirmed its bullish outlook by increasing the dividend by 4%. This new installment will begin to boost returns for investors in early November.
But that could just be the start of a significant increase in capital returns now that the company has reduced its debt-to-equity ratio to three times adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), compared to more than four times immediately after its takeover of pet food company Blue Buffalo.
This flexibility should allow General Mills to make equally aggressive growth bets over the next year. If management can allocate this capital efficiently, as it has done with Blue Buffalo, then investors could see significant gains by holding this stock long after the pandemic stops increasing demand for food at home.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.