Is General Mills, Inc. (GIS) a Good Stock to Buy?

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General Mills, Inc. (NYSE:GIS) is often offered as a classic consumer staples stock, and in fact the stock price bears essentially no relationship with the broader market in statistical terms going by the beta of 0.03. Normally, then, General Mills would be expected to have underperformed the market in the last year- a time when the S&P 500 has risen 16%. However, the stock currently stands 27% higher than its levels a year ago.

We think that this is in part due to increased interest in safe investments- we’ve seen that General Mills, Inc. (NYSE:GIS) is more or less unaffected by the broader economy, and the packaged foods company pays a dividend yield of 3.1% to boot. Revenue increased by 8% in the third quarter of the company’s fiscal year (which ended in late February) versus a year earlier, though costs also rose to the point where pretax income declined; earnings were slightly higher on a mix of items including lower income taxes and earnings from joint ventures. For the first nine months of the fiscal year as a whole, however, General Mills recorded very strong numbers with net income rising 20% compared to the same period in the previous fiscal year.

The market is pricing in some continued earnings growth, and as a result General Mills, Inc. (NYSE:GIS) trades at 18 times trailing earnings. This suggests a higher growth rate than we’d normally expect for the company, and Wall Street analysts are expecting only small improvements in earnings over the next couple years. So while recent performance has been strong it seems quite possible that investors should not count on much growth going forward.

Mario Gabelli

We track quarterly 13F filings from hedge funds and other notable investors as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks generate an average excess return of 18 percentage points per year) and can use our database to see which top investors owned General Mills as of the beginning of 2013. We can see that billionaire Mario Gabelli’s GAMCO Investors had 2.9 million shares in its portfolio at the end of December (find Gabelli’s favorite stocks). Diamond Hill Capital, managed by Ric Dillon, reported a position of 3.7 million shares (see more stocks Diamond Hill owns).

The closest peers for General Mills include Kellogg Company (NYSE:K) and Mondelez International Inc (NASDAQ:MDLZ). Mondelez is priced right in line with General Mills, Inc. (NYSE:GIS), at trailing and forward P/Es of 18 and 17 respectively. The company, which resulted from the breakup of Kraft Foods, could potentially realize efficiencies from its spinout and increase its earnings through that channel; there has also been some very early speculation about an acquisition by soda and snack foods company Pepsico. Kellogg Company (NYSE:K) is priced at a premium to these peers in terms of trailing earnings- its P/E on that basis is 24- though that company recorded strong top-line growth in the fourth quarter of 2012 compared to Q4 2011, and it is currently valued at 15 times forward earnings estimates.

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