Blue Buffalo Integration And Supply Chain Digitization Will Enhance Margins And Accelerate Earnings

Key Takeaways

• Strategic investments in brand building and product enhancements aim to accelerate sales growth and improve market share, boosting future revenue.
  
• Internalizing production and supply chain digitization are expected to enhance operating margins and contribute to earnings growth.
  
• Value-seeking consumer behavior and rising ingredient costs are pressuring General Mills' profit margins, amid macroeconomic challenges and regulatory adaptations.

Catalysts

Manufactures and markets branded consumer foods worldwide.

• General Mills is focusing on accelerating organic sales and volume growth by investing in product renovations, brand building, and promotional support to improve market share, which could positively impact future revenue growth.
  
• The company is addressing significant value-seeking consumer behavior by enhancing its product offerings' value, including ingredient superiority in pet food and campaigns in U.S. cereal businesses, potentially leading to improved net margins through increased consumer preference.
  
• Investments in targeted price adjustments, such as those in the U.S. refrigerated dough and Totino's businesses, are expected to drive volume growth and market share, positively affecting future earnings.
  
• The company is leveraging digitization in its supply chain to increase efficiency and productivity, aiming for a 5% HMM (Holistic Margin Management), which could lead to improved operating margins over time.
  
• General Mills' ongoing efforts to internalize production processes, particularly in the pet food segment with Blue Buffalo, are expected to enhance operating margins and contribute positively to earnings growth.

General Mills Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Mills's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $5.05) by about December 2027, up from $2.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2027 earnings, up from 15.2x today. This future PE is lower than the current PE for the US Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

General Mills Future Earnings Per Share Growth

Risks

• General Mills is observing prolonged value-seeking behavior from consumers, leading to a need for increased investments in product renovation and advertising, which could pressure profit margins.
  
• The company is facing ingredient cost pressures, particularly for packaging, dairy, cocoa, and fats and oils, which could affect their cost of goods sold and ultimately impact gross margins.
  
• Earnings outlook is impacted by significant investments to meet consumer demands, posing a risk to operating profit trajectory in the short term as margins are temporarily pressured.
  
• General Mills is experiencing a challenging macroeconomic environment in China, with double-digit declines in their Häagen-Dazs store business potentially affecting overall International segment revenue growth.
  
• Increasing competition and evolving regulations may require continuous adaptation, which could lead to higher expenditure and operational complexity, impacting net margins and profitability.

Valuation

• The analysts have a consensus price target of $73.81 for General Mills based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $84.0, and the most bearish reporting a price target of just $67.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $20.0 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $65.93, the analyst's price target of $73.81 is 10.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.