General Mills Inc. (NYSE: GIS ) stock sold off by nearly 6 percent on Wednesday after the company reported fiscal first-quarter earnings and revenue misses. General Mills' disappointing quarter sent the stock tumbling to its lowest level in more than two years, but Citi Research analyst David Driscoll says General Mills is getting unfairly punished .
Package food rivals J.M. Smucker Co. ( SJM ) and B&G Foods ( BGS ) experienced similar sell-offs after their own disappointing earnings reports, but Driscoll says General Mills’ business is in a much better position.
“The decline in GIS shares comes as SJM and BGS also saw significant share declines on their latest earnings reports, although in contrast, both of those companies cut revenue and EPS guidance, whereas GIS maintained the full-year [guidance] and cited evidence that revenue trends are improving,” Driscoll says.
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With the stock down 15.8 percent year-to-date, a forward price-to-earnings ratio of just 16.1 and a generous 3.77 percent dividend yield, Driscoll says General Mills offers long-term investors a compelling value at its current price.
That 16.1 forward PE represents roughly a 9.5 percent valuation discount to General Mills’ five-year average forward PE of 17.8. However, Credit Suisse analyst Robert Moskow says there is good reason for the discount .
General Mills’ North American business declined 5 percent in the first quarter, weighed down by poor performance in the company’s core yogurt business and a 7 percent drop in net cereal sales.
“We think the current discount remains justified due to the company’s exposure to declining categories, pricing pressure from customers, and the need for reinvestment in the coming years to stabilize sales declines,” Moskow says.
“We continue to put this stock and most of the other Big Food names in the ‘do not touch’ category due to our concerns about structural headwinds.”
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Citi has a “buy” rating on General Mills stock, and Credit Suisse maintains a “neutral” rating.
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