Morningstar | Headwinds Reduce General Mills' Moat to Narrow; We View Shares as Fairly Valued
We are lowering our moat rating for General Mills to narrow from wide, given our reduced conviction that the firm can report economic profits for the next 20 years in the face of secular headwinds related to evolving consumer nutritional preferences. Consumers have been eschewing processed fare in favor of fresh items found on the store’s periphery, which has slowed the firm’s category growth. However, we are confident that General Mills still has a competitive edge, as its brands remain dominant in their categories and command pricing power. We believe the firm is the leader in categories representing about a third of total food spending, which makes it a valued partner for food retailers, another aspect of its competitive edge. We also think the firm has a cost advantage, evidenced by superior margins and scale-based benefits.We are lowering our fair value estimate to $53 per share from $57 to reflect our assumption of slightly lower volume growth and higher selling, general, and administrative expenses. With our revision to a narrow moat rating, we’ve reduced the time over which the firm is expected to earn economic profits from 20 years to 15 years. Given continued secular headwinds in the firm’s categories, we’ve lowered our long-term volume forecast to 1.2% from 1.5%. We maintain our 1.1% price/mix estimate, resulting in average organic revenue growth that falls to 2.3% from 2.6%. We’re increasing our average SG&A expectation to 7.9% of revenue from 7.1%, as we think most cost-saving opportunities are now behind the firm, although we still expect gradual improvements in the coming years due to its ability to leverage sales. As the pet and international businesses scale, we expect consolidated operating margins to improve from 2019’s 16.9% to 17.8% on average over our explicit forecast, although this is slightly lower than our previous 18.2% estimate. With the shares trading near our fair value estimate, we recommend investors await a better entry point.
General Mills manufactures and markets branded consumer foods. The company's segments are: North America Retail, which provides cereals, refrigerated yogurt, soup, meal kits, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks, and organic products, among others; Convenience Stores and Foodservice, which provides snacks, yogurt, frozen meals and frozen dough products, and baking mixes, among others; Europe and Australia, which includes retail and foodservice businesses in the Europe and Australia region; Asia and Latin America, which consists of retail and foodservice businesses in the Asia and South America regions; and Pets, which includes pet food products.
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