Over the last six months, General Mills’s shares have sunk to $32.64, producing a disappointing 7.5% loss - a stark contrast to the S&P 500’s 7.7% gain. This might have investors contemplating their next move.
Is now the time to buy General Mills, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think General Mills Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in General Mills. Here are three reasons why GIS doesn’t excite us, plus one stock we’d rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
General Mills’s average quarterly sales volumes have shrunk by 4.9% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect General Mills’s revenue to drop by 3.9%, close to its 3.4% annualized declines for the past three years. This projection is underwhelming and indicates its newer products will not accelerate its top-line performance yet.
3. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, General Mills’s operating margin decreased by 23 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see General Mills become more profitable in the future. Its operating margin for the trailing 12 months was negative 1.1%.
Final Judgment
General Mills doesn’t pass our quality test. Following the recent decline, the stock trades at 10.7× forward P/E (or $32.64 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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