Transformative Portfolio Strategy And AI-led Innovation To Boost Growth And Profitability

Key Takeaways

• Divesting the lower-margin yogurt business will improve growth and profitability by enhancing the margin structure.
  
• Strategic investments in premium categories and digital infrastructure drive revenue growth and cost savings, boosting operational efficiencies and earnings.
  
• Economic headwinds, increased costs, and strategic divestitures may pressure General Mills' earnings and revenue growth.

Catalysts

Manufactures and markets branded consumer foods worldwide.

• General Mills' focus on reshaping its portfolio by divesting the lower-margin North America Yogurt business is expected to enhance its overall growth profile and margin structure, potentially increasing net margins and profitability.
  
• The company's Accelerate strategy, which includes entering the premium pet foods category and enhancing its away-from-home portfolio, should drive incremental revenue growth as these sectors typically offer higher growth opportunities.
  
• The digital infrastructure and AI implementation for supply chain management are anticipated to lead to significant HMM cost savings, optimizing operational efficiencies and positively impacting net margins and earnings.
  
• General Mills' strategic investment in leading food brands and innovation, such as new product launches and brand communication campaigns, aims to accelerate organic net sales growth, thereby boosting revenue.
  
• The company's disciplined approach to capital allocation, including potential share repurchases funded by the yogurt divestiture proceeds, may enhance earnings per share (EPS) by reducing the share count and distributing excess cash to shareholders.

Assumptions

• Analysts are assuming General Mills's revenue will decrease by 0.4% 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 $5.06) by about November 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 17.5x on those 2027 earnings, up from 14.8x today. This future PE is lower than the current PE for the US Food industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 1.52% 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.

Risks

• The proposed divestiture of the North America Yogurt business is expected to be approximately 3% dilutive to adjusted earnings per share in the first 12 months after the close, which could negatively impact earnings.
  
• Continued economic headwinds and significant reductions in traffic in key markets like China could impede revenue growth, particularly in the Häagen-Dazs segment.
  
• Input cost inflation remains somewhat elevated versus historic averages, potentially pressuring net margins.
  
• Unfavorable price/mix and higher SG&A expenses, including increased media investment, impacted adjusted operating profit negatively, suggesting pressures on net margins and earnings.
  
• Resetting incentive compensation to a normalized level is expected to cause a headwind to adjusted operating profit, impacting earnings.

Valuation

• The analysts have a consensus price target of $74.76 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 17.5x, assuming you use a discount rate of 5.9%.
• Given the current share price of $64.26, the analyst's price target of $74.76 is 14.0% 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.