General Mills Stock Rises 12% in 3 Months: Is It Time to Hold or Exit?
General Mills, Inc. GIS has seen its shares gain 12.2% in the past three months compared with the industry’s 7.3% growth. The branded consumer foods company has also surpassed the broader Zacks Consumer Staples sector and the S&P 500’s respective growth of 7.6% and 0.4%. However, not all that glitters is gold.
Although General Mills has outpaced the industry and market at large, this momentum masks underlying headwinds that could weigh on its performance. The company is grappling with an increasingly tough operating environment, marked by persistent inflationary pressures and rising costs.
Investors should carefully assess whether General Mills can sustain its growth momentum or if these headwinds could eventually slow down its progress. Let’s find out.
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What’s Turning Things Sour for GIS?
Like many other food companies, General Mills has been navigating a challenging operating environment. As it heads into fiscal 2025, the company expects these challenges to persist, due to ongoing macroeconomic uncertainty. This uncertainty is likely to push consumers toward value-oriented options, impacting both the types of products they purchase and the retail channels they frequent.
In response, General Mills is prioritizing the need to offer brands that strike a balance between great taste, health benefits, convenience and trust, all at competitive prices. This strategy aims to keep its products as top consumer choices. However, as economic conditions continue to influence spending behavior, the company anticipates growth in its key categories to fall short of its long-term targets in fiscal 2025.
General Mills is also contending with mounting margin pressures due to rising production costs. In the fourth quarter of fiscal 2024, its adjusted gross margin narrowed 10 basis points (bps) to 34.9%. This was due to input cost inflation, supply-chain deleverage and adverse net price realization and mix, somewhat attributed to HMM cost savings and reduced other supply-chain costs. Lower adjusted gross profit also weighed on the company’s adjusted operating profit, which fell 10% at constant currency (cc) in the fourth quarter despite reduced SG&A costs. Further, the adjusted operating profit margin contracted 70 bps to 17%.
In its fourth-quarter earnings call, General Mills stated that the rate of inflation for goods and services in the United States and many other countries remains above historical levels, despite recent moderation. Inflation is expected to impact its input costs in fiscal 2025. The company expects input cost inflation to be in the band of 3-4% of the cost of goods sold in fiscal 2025, with labor being the primary driver affecting sourcing, manufacturing and logistics expenses.
General Mills also plans to ramp up its brand-building investments to support its growth strategies. However, these efforts, along with rising net interest expenses, are expected to put further pressure on its margins and bottom line.
What to Expect From GIS in FY25?
In fiscal 2025, the adjusted operating profit growth at cc is anticipated between a decline of 2% and flat. Management anticipates adjusted earnings per share (EPS) growth to be between down 1% and an increase of 1% at cc. The company expects first-quarter fiscal 2025 results to fall short of the full-year growth expectations. This is likely to stem from a considerable increase in brand-building investments as well as tough comparisons with strong organic net sales growth and adjusted gross margin performance in the year-ago period.
Reflecting the negative sentiment around General Mills, the Zacks Consensus Estimate for EPS has seen downward revisions. Over the past 60 days, analysts have lowered their estimates for both the current quarter and fiscal year by a penny to $1.05 per share and $4.49, respectively. These estimates indicate year-over-year declines of 3.7% and 0.7%, respectively.
Has the Recent Jump in Stock Price Made GIS Expensive?
General Mills’ current market valuation is stretched compared with its industry peers like Conagra Brands CAG, Campbell Soup CPB and J.M. Smucker SJM. Its forward 12-month price-to-sales (P/S) ratio is 2.09, more than the industry average of 1.48. This higher ratio implies that investors are potentially paying a premium for General Mills’ stock relative to its anticipated sales performance. Furthermore, a Value Score of C adds to the concern, highlighting that the stock might be overvalued based on its current financial metrics.
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Investor Playbook for General Mills’ Stock
While the company’s strong brand portfolio and its Accelerate strategy offer support, the difficult operating environment and mounting cost challenges remain significant concerns. Given these factors and a stretched valuation, investors should tread carefully as General Mills’ recent momentum may not be sustainable, thereby making it a less attractive option in the current market. The company currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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General Mills, Inc. (GIS) : Free Stock Analysis Report
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