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Is General Mills, Inc. (GIS) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does General Mills, Inc. (NYSE:GIS) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell General Mills, Inc. (NYSE:GIS)’ story, and we’ll be grading the quality of that story in several ways:

1). Growth: are profits, margins, and free cash flow all increasing?
2). Valuation: is share price growing in line with earnings per share?
3). Opportunities: is return on equity increasing while debt to equity declines?
4). Dividends
: are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s look at General Mills, Inc. (NYSE:GIS)’ key statistics:

GIS Total Return Price Chart

GIS Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 21.4% Fail
Improving profit margin (0.2%) Fail
Free cash flow growth > Net income growth 51% vs. 21.2% Pass
Improving EPS 25.1% Pass
Stock growth (+ 15%) < EPS growth 60.1% vs. 25.1% Fail

Source: YCharts.
*Period begins at end of Q2 (May) 2010.

GIS Return on Equity Chart

GIS Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 2.6% Pass
Declining debt to equity 0.4% Fail
Dividend growth > 25% 35.7% Pass
Free cash flow payout ratio < 50% 37.5% Pass

Source: YCharts.
*Period begins at end of Q2 (May) 2010.

How we got here and where we’re going

General Mills, Inc. (NYSE:GIS) turns in a respectable, if not superlative performance, earning five out of nine possible passing grades. One of those falling grades only happened because debt-to-equity has barely ticked up — a small decline over the next year will be enough for another passing grade. In addition to this, underwhelming revenue growth and declining profit margins over the last 12 months has certainly cost General Mills. How might General Mills push its revenue even higher over the next few quarters? Let’s dig a little deeper to find out.

New gluten-free offerings and reduced-sugar cereals from this grain-heavy food purveyor have hit the grocery store shelves in the U.S., including some 300 products that have removed wheat as an ingredient. That’s a rather remarkable commitment to what remains a niche market in the food industry. On the other hand, General Mills, Inc. (NYSE:GIS)’ Yoplait brand, which currently holds 24% of the U.S. market, recently saw a 5% decline in sales year over year. Another General Mills yogurt lineup is expected to launch this month, and projections anticipate more than $140 million in revenue for its first year on the market. However, that could simply be treading water by replacing one out-of-favor product with a newer and more faddish one.

General Mills’ management seems optimistic going forward. The company’s focus is on new product launches rather than organic growth, with more than 200 new products planned for launch this year. General Mills will launch Hershey’s Cookies & Creme cereal, as well as two varieties of Nature Valley granola cereal — talk about going after opposite ends of the taste spectrum. It also plans to expand the distribution of its BFast breakfast shake. In addition, General Mills has partnered with Nestle to increase its sales outside the U.S. by leveraging Nestle’s expertise in emerging markets. This joint venture is focused on building the cereal market in more than 130 countries. Today, one-third of total sales come from outside the U.S., compared with only 25% five years ago. That’s a nice start, but that ratio could keep rising.

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