General Mills, Inc. (GIS) in Minneapolis, Minn., and The Kellogg Company (K), which is headquartered in Battle Creek, Mich., are two prominent players in the packaged food industry. GIS manufactures and markets branded consumer foods worldwide. It also supplies branded and unbranded food products to the foodservice and commercial baking industries and manufactures and markets pet food products. In comparison, K manufactures and markets ready-to-eat cereal, frozen, and convenience foods. Both companies sell their products to retailers through direct sales forces, brokers, and distributors.
Rising consumer spending and at-home cooking activities are incentivizing food companies to offer packaged and ready-to-cook food, meat, and snacks with prolonged shelf life. Also, rapid digitalization and analysis of changing consumer tastes have enabled companies to introduce new products by partnering with other industry leaders and enhance efficiency in their operations. The global packaged food market is expected to grow at 5.2% CAGR to $3.41 trillion by 2030. This should enable food companies to overcome rising input costs and benefit from the rising investor optimism.
While K’s shares have gained 1.7% in price year-to-date, GIS has surged 12.4%. GIS is a clear winner with 11.7% gains versus K’s 2.4% returns over the past year. But which of these stocks is a better pick now? Let us find out.
On November 30, GIS sold its 51% controlling interest in its franchise yogurt brand Yoplait’s operations in Europe to its other parent company, Sodiaal S.A., France’s leading dairy cooperative. In exchange, GIS acquired full ownership of Yoplait’s business in Canada from Sodiaal. With this divestiture, GIS will now operate with a reduced royalty rate for the use of the Yoplait and Liberté brands in the U.S. and Canada.
On December 8, the donut-inspired lineup of K’s Pop-Tarts brand released two new flavors: Boston Creme Donuts and Apple Fritters. Available at the end of December 2021, the company expects these two American Classics to witness high demand in the coming months.
Recent Financial Results
For its fiscal third quarter, ended November 28, 2021, GIS’ net sales increased 6.5% year-over-year to $5.02 billion. The company’s adjusted gross profit came in at $1.62 billion for the quarter, down 3.3% from the prior-year period. Its adjusted operating profit was $821.30 million, indicating a 5.1% decline from the year-ago period. GIS’ adjusted net earnings were $609.40 million, representing a 6.3% year-over-year decline. And its adjusted EPS decreased 6.6% year-over-year to $0.99. The company had $1.02 billion in cash and equivalents as of November 28, 2021.
K’s net sales for its fiscal third quarter, ended October 2, 2021, increased 5.6% year-over-year to $3.62 billion. The company’s adjusted gross profit came in at $1.17 billion, representing a 1.9% year-over-year decline. Its adjusted operating profit was $449 million, indicating a 12.3% rise from the prior-year period. K’s net income came in at $305 million, down 13.4% from the year-ago period. And its adjusted EPS increased 19.8% year-over-year to $1.09. The company had $440 million in cash and cash equivalents as of October 2, 2021.
Past and Expected Financial Performance
GIS’ revenue and total assets have grown at CAGRs of 4.6% and 2.3%, respectively, over the past three years.
GIS’ EPS is expected to fall marginally year-over-year in the current year but rise 4.2% next year. The company’s revenue is expected to increase 3.8% year-over-year in the current year and marginally next year. However, analysts expect the company’s EPS to increase at a 4.6% rate per annum over the next five years.
In comparison, K’s revenue and EBIT have increased at CAGRs of 2% and 0.5%, respectively, over the past three years.
Analysts expect K’s EPS to rise 3.8% year-over-year in the current year and 0.5% next year. Its revenue is expected to grow 2.6% year-over-year in the current year and 1.7% next year. And the company’s EPS is expected to improve at a 3.2% rate per annum over the next five years.
In terms of non-GAAP P/E, GIS is currently trading at 17.76x, which is 14.9% higher than K’s 15.46x. And in terms of forward EV/Sales, K’s 2.10x compares with GIS’ 2.78x.
GIS’ trailing-12-month revenue is almost 1.3 times K’s. However, K is more profitable, with a 6% levered free cash flow versus GIS’ 4.9%.
Furthermore, K’s ROE and ROTC of 33.4% and 9.5%, respectively, compare favorably with GIS’ 22.7% and 9.1%.
While K has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, GIS has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both K and GIS have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. GIS’ 9.1% trailing-12-month return on total capital is 33.3% higher than the 6.8% industry average. K has a 9.5% trailing-12-month return on total capital, which is 39.3% higher than the 6.8% industry average.
K has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. K has a 16.50 forward EV/EBIT ratio, which is 1.3% lower than the 16.72x industry average. And GIS’ C grade for Value reflects its slightly higher-than-industry valuations. GIS’ 16.87 forward EV/EBIT multiple is 0.9% higher than the 16.72x industry average.
Of the 83 stocks in the C-rated Food Makers industry, GIS is ranked #29, while K is ranked #16.
Beyond what we have stated above, our POWR Ratings system has also rated K and GIS for Growth, Stability, Sentiment, and Momentum. Get all K ratings here. Also, click here to see the additional POWR Ratings for GIS.
Despite the macroeconomic headwinds due to high inflation and supply chain disruptions, the packaged food industry should benefit from the rising consumer spending this festive season. However, relatively lower valuations and higher profit margins make K a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.
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GIS shares were trading at $67.16 per share on Wednesday afternoon, up $0.27 (+0.40%). Year-to-date, GIS has gained 18.14%, versus a 29.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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