General Mills (GIS) CEO Jeff Harmening and CFO Kofi Bruce made a presentation at the Feb. 21 CAGNY 2023 Conference in Florida. As part of its presentation, the company raised its 2023 guidance for organic sales and adjusted earnings per share. Its shares jumped more than 4% on the news.
Not too long ago, the company's business seemed in dire straits. Then, as part of its “Accelerate” strategy, it announced in June 2021 that it would lay off 1,400 jobs worldwide.
“I know this isn’t easy and that there are real world personal impacts in us making this shift. And last week was especially hard as we shared that reshaping our organization meant that many of our colleagues will be leaving General Mills,” FoodDive reported the CEO’s comments in the company memo to employees regarding the layoffs.
It’s never easy to do layoffs, and often they don’t deliver the necessary returns to be worthwhile, but the company’s Accelerate strategy appears to be succeeding.
For several reasons, General Mills stock is a buy.
The Pet Food ROI Is High
General Mills paid $8 billion (including the assumption of debt) for Blue Buffalo in April 2018. This gave the company a Pet platform to grow this new operating segment. In 2021, it acquired Tyson Foods' (TSN) pet treats business for $1.2 billion. So it’s growing in a big way.
“Since our acquisition of Blue Buffalo nearly five years ago, we have driven strong growth on our pet food business,” Harmening said at CAGNY 2023, according to PetFoodIndustry.com. “We've increased our distribution in the US by four times. And we more than doubled our household penetration helping contribute to compound annual net sales growth of 15%.”
At the time of the acquisition, some industry insiders felt General Mills overpaid for Blue Buffalo. Guardian Pet Food CEO Jim Galovski reasoned in an excellent LinkedIn post at the time that General Mills paid 6.3x sales compared to the industry average of 3.5x.
“It seems like General Mills has overpaid, significantly,” Galovski wrote.
Naturally, as a competitor, he wasn’t very complimentary about the future direction of General Mills in terms of pet food quality. After all, the company’s DNA is that of a processed foods manufacturer. But I'm a big-time pet owner, so his concerns are understandable.
The Pet Food Segment Is Just Getting Going
However, if you are a General Mills shareholder, the purchase will be a key driver of projected 2023 organic sales growth of 10%.
As the company’s CAGNY 2023 presentation pointed out, Blue Buffalo’s U.S. household penetration went from 8% in 2017 before the acquisition to 18% in 2022. Over the past four fiscal years, Blue Buffalo’s revenues have had a compound annual growth rate of 15%, growing from $1.3 billion in 2017 to $2.3 billion in fiscal 2022.
In November, Mars Petcare acquired Champion Petfoods, a Canadian company making premium pet food brands Acana and Orijen. At one point, estimates put Champion’s asking price at $2 billion. Based on the 2021 estimated revenue of $200 million, Mars could have paid as much as 9-10x sales, but we’ll never know because Mars remains a very secretive private company.
Assuming General Mills could get anywhere near 10x sales, its acquisition of Blue Buffalo's has already been paid for and then some.
And, let’s not forget that it still only has 18% household penetration in the U.S. If it continues to grow this penetration by 18% a year over the next five, it will be over 40% by the end of 2027. Its revenues will easily be $5 billion.
It’s been a homerun acquisition, in my opinion.
The Rest of the Business
General Mills reported its Q2 2023 results in December. In the top line, its net sales increased 4% to $5.2 billion, with organic net sales up 11% year-over-year. Of those sales, its North America Retail segment accounted for 65%, up 11% to $3.37 billion.
In terms of overall operating profits, they grew 10% to $1.02 billion, with North America Retail accounting for 82%. Although the ongoing promise of its Pet segment is significant, North America Retail has eight of the company’s nine billion-dollar brands (Blue Buffalo is the exception).
As North America Retail goes, so goes General Mills. As long as this segment grows organic net sales, the future will take care of itself.
Who will be the 10th brand with more than a billion dollars in sales? I’m sure we’ll find out in the next few years. But, for now, the entire General Mills business appears to be firing on all cylinders.
With a trailing 12-month free cash flow of $2.45 billion, its current free cash flow yield is 5.2%. An FCF yield of 4-8% is reasonably priced growth. Further, its total debt of $11.74 billion is a reasonable 25% of its market cap, suggesting its financial house is in better shape than it’s been in years.
The Accelerate strategy is working. Patient investors will be rewarded with market-beating performance in the future. In the meantime, it’s got an attractive 2.7% dividend yield, so you get paid while you wait.
Woof woof.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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