Investors should watch valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investors’ willingness to pay.
Investors can use a variety of multiples to assess the valuation of a stock. For this analysis, we chose the PE (price-to-earnings) ratio due to General Mills’s (GIS) high earnings visibility. The forward PE ratio is calculated by dividing the current stock price by the EPS (earnings per share) forecast for the next 12 months.
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General Mills’s (GIS) management lowered the company’s sales and EPS guidance for fiscal 2017. The company’s lower-than-expected fiscal 2Q17 earnings led to a fall in its stock price and PE multiple.
On March 15, 2017, the company was trading at a PE multiple of 18.8x. Its PE multiple was 19.3x before the company announced its fiscal 2Q17 earnings. On March 15, General Mills’s peers Kellogg (K), B&G Foods (BGS), and Pinnacle Foods (PF) were trading at PE multiples of 18.6x, 18.9x, and 22.5x, respectively.
With the goal of improving sales, General Mills (GIS) has focused on implementing menu innovations, improving its products’ quality by removing artificial ingredients, and updating its packaging. If these initiatives fail to generate the expected sales growth, the increase in expenses could put pressure on its margins and earnings.
Analysts expect General Mills to post EPS growth of 9.9% in the next four quarters. If the company’s results are lower than expected, the stock could face selling pressure, which could lower its PE multiples.
You can mitigate company-specific risks by considering the Consumer Staples Select Sector SPDR ETF (XLP). XLP invests more than 18.2% of its holdings in food and beverage companies like General Mills, Kraft Heinz (KHC), and Tyson Foods (TSN).
In the final part of this series, we’ll look at analysts’ recommendations and price targets for General Mills for the next 12 months.