3 Reasons Beaten-Down General Mills May Rally

Minneapolis-based packaged food giant General Mills Inc. (GIS) has seen its shares fall more than 23% year-to-date (YTD), far underperforming the broader S&P 500 index, which slipped 2.6% over the same period. Last month, the consumer stock suffered its worst day in nearly 10 years on earnings results that ignited fears over rising input costs and the value of its multi-billion-dollar acquisition of pet food maker Blue Buffalo Pets Products Inc. 

As investors remain disappointed with the progress of General Mills' turnaround strategy, analysts at Wells Fargo argue that too much negativity and bad news has been priced into shares. (See also: General Mills Reacts to Inflation in Food Industry.)

Over recent years, the manufacturer and marketer of branded consumer foods has struggled to meet changing consumer preferences, as more shoppers go online for purchases and turn away from the center aisles in exchange for healthier and ready-made options. Over the past five years, overall cereal sales in the U.S. declined 11% to around $9 billion in 2017, according to consumer research firm Mintel. 

Recovery Plan, Blue Buffalo Acquisition Position GIS for Rebound

Despite challenges, Wells Fargo's John Baumgartner reiterated an outperform rating on GIS shares and a $51 price target, reflecting a 12% upside from Friday's close at $45.47. After spending two days on the road with the GIS CEO Jeff Harmening, the analyst highlighted three growth drivers for the food maker. First, Baumgartner indicated that revenue recovery "is real and should not be overlooked." General Mills has touted a swing back to modest growth in organic net sales over the past two quarters, despite the fact that organic net sales for the full fiscal year is still expected to come in flat. 

Further, the Wells analysts suggests that margin disappointment is addressable. While investors were disappointed with guidance on fiscal full-year operating profit, expected to come in flat to 1% for the period, down from a previous estimate of 3% to 4%, the maker of Yoplait and Progresso food brands has vowed to cut costs and lift prices on some of its products. 

Lastly, the analyst highlighted General Mills' "detailed and substantive" operating plan for pet food maker Blue Buffalo, applauding the company's "well-though out acquisition." Overall, Baumgartner expects GIS stock to rebound as investor sentiment continues to improve. 

While big brands have attempted to go healthy as their main strategy to win back consumers, a recent story in The Wall Street Journal suggests that they may also be turning back to sugar. General Mills, which came out with a higher-protein version of Cheerios and removed genetically modified ingredients from its original Cheerios in 2014, recently launched a sugar-loaded Lucky Charms Frosted Flakes. The firm's recent mega-deal with Blue Buffalo reflects its larger initiative to diversify away from waning businesses and into innovative new growth segments. (See also: General Mills Buys Blue Buffalo Pet Prods. for $8B.)