General Mills: post-pandemic slump

There are four categories of stocks when it comes to the pandemic:

  1. Stocks that got crushed but will likely bounce back (airlines, travel);
  2. Stocks that got crushed but won’t have the opportunity to bounce back (retailers that went bankrupt);
  3. Stocks that did well because of the pandemic and will continue to do well (anything remote work or edelivery); and
  4. Stock that did well because of the pandemic but will revert to the prior trajectory (PPE suppliers).

I think General Mills ($GIS) will fall into the fourth category for two reasons post-pandemic:

  1. People who can’t cook, who make up a large portion of General Mills’s customers, will start eating more outside the house; and
  2. Higher grain prices will squeeze their margins in the short term.

As the chart below shows, the market appears to be coming around to that reality.

I think General Mills’s price can easily trade back down to its 2019 range if not its 2018 range.

Can’t cook? General Mills has a pre-packaged box for you

No offense to people who use General Mills’s products as a go-to side dish or even main dish. The products are easy to make and work for someone who is either in a rush to get a meal on the table or whose culinary expertise extends only to following four simple steps on the back of a box. And it’s one thing to eat a bowl of cereal for lunch or dinner after being on endless Zoom meetings, but it’s these people who will go back to restaurants and eat out more once they have more freedom of movement or they go back to the office.

Combine this reversion to pre-pandemic consumption trends with the continued hyper-competition for shelf space on grocery store shelves and General Mills’s growth trends over the past year is going to come under pressure.

High Grain Prices =/= Higher Profitability

Every manufacturer can eventually pass along higher input costs. If they can’t, they go out of business. Consumer staples companies have decades of experience passing along higher prices to consumers, but the delay in those price increases is what causes short-term pressure on profitability. And with grain prices being up anywhere from 23 to 57 percent over the past year, with most of the increase occurring in just the past 6 months, General Mills is feeling the pressure on input costs.

However, just remember that a box of Kellogg’s Shredded Wheat cereal cost 18 cents in 1957 (and was still overpriced based on taste alone).

But General Mills is reasonably valued!(?)

It’s true, on a TTM basis the Company’s price to earnings is 14x with a dividend yield of 3.7 percent compared to the consumer staples sector’s average price to earnings of 26x. General Mills is a consumer staple company with a long history of success, steadily rising dividends, and a bevy of well-known products. On the surface it seems like something a value investor would want to buy, not short.

But it is growth that ultimately rewards an investor. And in the current market environment General Mills is probably going to be hard up for growth. So the better bet is to trade the short side until we get past the post-pandemic adjustment, they’ve been able to pass along the higher grain costs, and their marketing department figures out what new products to introduce in order to keep up with shifting consumer preferences.

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