Is General Mills, Inc. (GIS) Overvalued? Consider This Stock Instead

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If you are looking to track the broader market, food marketers are often a good way to go. However, some have such weak growth prospects that an investment will cause you to underperform in an economy experiencing an upswing. Below, I consider several marketers to buy.

Sleepy General Mills Delivers in Turbulent EnvironmentWhy You Should Not Invest in General Mills, Inc. (NYSE:GIS)

General Mills is forecast 6% y-o-y sales growth this fiscal year. While shares are near their 52-week high after a relentless rise, the bull rally appears a bit overdone. My opinion is based on the fact that the 6% growth represents deceleration compared to the 8.2% rate that was achieved over the past five years.

For the FY 2013, analysts expect revenues to climb by just 4.5%. Unfortunately, the dividend yield of 3.2% and PE multiple of 15.6x are not compelling enough to expect outperformance. The stock is trading at its 5-year average PE multiple, so there is no reason to believe it is discounted, especially since growth is decelerating. And, of course, 4.5% growth plus 3.2% puts the total return at 7.7%--not strong enough, in my view, to risk taxable turnover in an active investment.

With that said, there is limited risk and there could be some positive surprises in store given weak growth. Dividends have increased (by 10% recently), and the stock has a shockingly low beta of 0.15, which indicates that volatility is 85% less than that of the broader market. Goldman Sachs, however, is not optimistic about General Mills' new cereal lineup--a view the company certainly did not want shareholders to hear in light of the report that its cold cereal category declined by 3%. Therefore, a lot hinges on the success of Yoplait and the related yogurt category, which General Mills spent $1.2 billion growing through acquisitions.

ConAgra Foods, Inc. (NYSE:CAG) : Growth Through Acquisitions

ConAgra Foods, Inc. (NYSE:CAG)' decision to acquire Ralcorp Holdings for $6.8 billion represented an aggressive expansion into private labels. When the deal closes, ConAgra will be one of the biggest packaged food makers with $18 billion in yearly sales and employees numbering over 36,000. This acquisition will give ConAgra access to more private labels, increase sales by $4.5 billion, and will reduce the capex of the company as a percent of sales.

S&P believes CAG overpaid for Ralcorp Holdings at the same time that the integration signaled the firm's willingness to expand operations and sales. The rating agency lowered the company to BBB-, on the brink of "junk status." The recent receipt of a no-action letter from Canadian regulators further indicates that the company won't have to make major concessions to proceed with the transaction. At the same time, the firm is looking to continue its strategy of bolt-on acquisitions in the private label space.

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