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General Mills (GIS 0.15%) stock fell 4.58% on Dec. 20 after the cereal, snack-food, and pet-food manufacturer reported its results for the second quarter of fiscal 2023. It was a sizable drop for a defensive stock during a particularly calm day for the major stock market indices.
Were General Mills’ results that bad? Not really, but the sellers certainly had discouraging data points to cite. These were, as you may have guessed, primarily driven by this year’s super-sticky inflation.
Must share prices fall as cereal prices rise, though? Don’t underestimate General Mills’ all-weather appeal as a surprisingly adaptive breakfast-fare consumer could give this company and its stakeholders a margin (literally) of safety.
Investors weren’t entirely irrational in reacting negatively to General Mills’ quarterly results, but the company’s top- and bottom-line growth are incontrovertible. Impressively, General Mills posted $5.22 billion in second-quarter fiscal year 2023 net sales, up roughly 4% year over year and $30 million better than the $5.19 billion analysts had expected.
Moreover, the company’s adjusted earnings of $1.10 per share showed an 11% year-over-year improvement while beating Wall Street’s consensus estimate of $1.07 per share.
In other words, General Mills was perfectly capable of selling Cheerios and other goodies and of profiting from those sales, even while the inflation monster reared its ugly head this year.
Not only did General Mills deliver forecast-beating data points, but the company served up some tasty forward guidance for fiscal 2023. Specifically, General Mills raised its anticipated full-year range for organic net sales growth from 6% to 7% up to 8% to 9%. On top of that, the company anticipates 4% to 6% adjusted EPS growth on a constant-currency basis versus the prior estimate of 2% to 5% growth.
To justify its optimism, General Mills says it “expects to generate stronger organic net sales growth through better volume performance and improved price/mix.”
None of these figures are jaw-dropping, but investors don’t typically view General Mills as a hypergrowth business. It’s more of a steady company that rewards patient shareholders — and General Mills’ 2.48% dividend yield should keep long-term investors in the fold for a while.
Given General Mills’ perfectly adequate quarterly results and forward guidance, why would sensible investors dump their shares post-earnings? The company mentions supply chain disruptions in its press release but uses “inflation” or “inflationary” half a dozen times, so this should provide a clue as to what some people are so afraid of.
Here’s the pain point that, most likely, shook some investors out of the trade: General Mills expects its input cost inflation to stay elevated at 14% to 15% of the total cost of goods sold in FY 2023. It’s highly probable that, sooner or later, the company will have to pass its input costs on to the consumers. That’s a hard pill to swallow, as already-high inflation likely contributed to quarterly net sales volume growth contraction in General Mills’ North America Retail, Pet, and International segments.
Jeremy Bowman’s conclusion that “consumers may be trading down to lower-priced alternatives or are balking at the company’s price hikes” rings true, though investors can choose to adopt a glass-half-full perspective here.
As Bowman points out, despite this year’s high CPI (which seems to have peaked in July), General Mills’ adjusted gross margin still increased a full percentage point to 33.2% “as the company was able to pass along higher prices.” On top of that, the company managed to raise its adjusted operating margin by 60 basis points to 16.9% — not too shabby if consumers were actually “balking” at high cereal prices.
Thus, General Mills’ customers are either loyal to the brand, aware that cereal manufacturers are generally raising their prices, or both. Whether they’ll tolerate more price hikes in 2023 remains to be seen, but it’s not inconceivable that General Mills is guiding high for future cost-input increases in order to deliver some relief if the outcome isn’t as dire as feared.
While the future of food prices remains a known unknown, General Mills stock should continue to pay a decent yield to investors who are willing to wager that inflation has, indeed, peaked. As for the post-earnings share-price drop, it did seem overstated in light of General Mills’ favorable quarterly results and fairly upbeat full-year outlook.
Perhaps, then, the market’s downbeat response ought to be viewed as an opportunity rather than a problem. Anyone fearing an imminent recession but looking to stay in the financial market should consider General Mills stock for its ultra-low five-year monthly beta of 0.32 and for its reasonable price-to-earnings ratio of 17.89.
Besides, after gaining 26% year to date while so many other stocks have lost value, General Mills stock needed an excuse to pull back. Short-term traders, rational or otherwise, took inflation fear as an excuse and ran with it, unwittingly giving the gift of a favorable reward-to-risk profile with General Mills stock.
David Moadel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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