Strong EPS guidance to support stock
General Mills’ impressive third-quarter performance is expected to drive its stock higher. Also, management raised the earnings outlook, which should further support its stock. General Mills expects its adjusted EPS to stay flat or increase by 1% in fiscal 2019. Earlier, management expected its bottom line to remain flat or decline by 3% on a YoY basis.
General Mills’ organic sales face tough YoY comparisons in the fourth quarter. Given the pressure on its base business in the fourth quarter, management expects its organic sales growth to be at the low end of the earlier guidance of flat to a 1% increase. Meanwhile, the net sales growth rate is projected to be at the lower end of its earlier growth outlook of 9% to 10%. The expected growth rate includes a significant contribution from its Blue Buffalo acquisition.
Valuation a concern
General Mills stock trades at a forward PE multiple of 14.8x, which seems unattractive given the projected growth rate of 5.5% in its EPS in fiscal 2020. Also, General Mills’ top line growth rate is expected to decelerate significantly in fiscal 2020 as the company will annualize its Blue Buffalo acquisition and faces tough comps.
We remain impressed with the company’s strong financial performance both on the sales and margins front. However, high valuation with an anticipated deceleration in growth rate, challenges in the base business, and continued inflation in input costs make us skeptical.