Reinvestment And Yoplait Closure Will Delay Margin Recovery

Key Takeaways

• General Mills’ increased investment and reinvestment strategy may delay improvements in net margins and earnings in the short term.
  
• Challenges like the potential Yoplait closure and changing consumer behavior could suppress revenue growth and impact future earnings projections.
  
• General Mills' focus on strategic reinvestment, targeted marketing, and innovation aims to enhance competitiveness and drive future revenue and earnings growth.

Catalysts

Manufactures and markets branded consumer foods worldwide.

• General Mills plans a sizable step-up in investment for fiscal '26, including at least 5% through Holistic Margin Management (HMM) savings and $100 million in additional cost savings. However, reinvestment of these savings into pricing, innovation, in-store activity, and media could delay improvements in net margins and overall earnings in the short term.
  
• The company faces a challenging consumer environment, with low consumer confidence leading to increased value-seeking behavior. Even as General Mills invests in competitive pricing and marketing to address this, the shift in consumer behavior may suppress revenue growth in the near term.
  
• General Mills expects a significant headwind from the potential closure of the Yoplait business, equivalent to a 5-point hit on profit. This anticipated drop in profit could affect future earnings projections and contribute to a perception of overvaluation.
  
• Continued investment will be necessary to make pricing adjustments for snacks and to improve competitiveness across various brands. Such investments may not immediately boost earnings, as achieving the right pricing balance will take time, potentially affecting revenue and net margins.
  
• General Mills' strategy of fewer, but bigger innovations in fiscal '26 involves focusing on a smaller number of larger innovations. While this may benefit future revenue growth, the time required to develop and execute such innovations means immediate impacts on earnings might be limited.

General Mills Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Mills's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.7% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $4.02) by about September 2028, down from $2.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the US Food industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 2.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

General Mills Future Earnings Per Share Growth

Risks

• General Mills plans to reinvest savings from cost efficiencies and the 53rd week of fiscal year into marketing and innovation, potentially improving competitiveness and driving revenue growth.
  
• The company has identified several billion-dollar brands, like Blue Buffalo and Pillsbury, where refined pricing strategies and enhanced marketing have significantly improved performance, which could contribute positively to their overall earnings.
  
• Innovation and new product launches are being prioritized, with an emphasis on fewer, but bigger high-impact innovations, which might boost sales and revenue.
  
• The snack bars and cereal categories are expected to recover, with increased media expenditure and promotional activities in the upcoming quarters, which could enhance volume growth and profit margins.
  
• Despite current challenges, General Mills believes enhanced marketing on their core products and new innovations will significantly improve their market share and volume competitiveness, potentially leading to stronger revenue and earnings in the future.

Valuation

• The analysts have a consensus price target of $54.8 for General Mills based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $63.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $19.0 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $49.75, the analyst price target of $54.8 is 9.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.