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Is General Mills Stock a Good Buy amid COVID-19?

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General Mills (NYSE:GIS) is one of the consumer staples companies that has seen higher demand for products amid the COVID-19 pandemic. On May 11, the stock rose 1.8% when the company raised its outlook for fiscal 2020. The stock rose by 2.8% on Tuesday.

General Mills has seen a spike in the demand for packaged food products amid the lockdown. Customers have been staying home to curb the coronavirus. However, like several other food and beverage companies, General Mills faced a significant decline in the away-from-home demand for its products. Since the outbreak started, restaurants and other off-premise channels have been closed temporarily. However, the away-from-home channel only represents 15% of General Mills’ worldwide net sales, while at-home consumption accounts for 85%.

General Mills has an extensive product portfolio that includes snack bars, ice cream, cereals, yogurt, and pet food. Some of the popular brands that the company owns include Cheerios, Häagen-Dazs, Nature Valley, and Yoplait.

Updated outlook

Following higher-than-expected at-home demand for food products in March and April, General Mills expects its fiscal fourth-quarter organic net sales to increase by double digits year-over-year. The company’s fourth quarter of fiscal 2020 ended on May 31. General Mills issued its strong growth guidance despite stockpiling trends moderating in May. The company’s sales guidance is based on strong growth in its North America Retail and Pet businesses.

Also, General Mills expects its fourth-quarter adjusted operating profit (constant currency basis) to grow at a faster rate than its organic sales. The adjusted operating profit will likely benefit from operating leverage due to strong sales, partially offset by COVID-19 related costs.

Based on the strong outlook for the fourth quarter, General Mills expects to beat its previous fiscal 2020 organic net sales growth guidance range of 1%–2%. The company also expects to surpass its constant currency adjusted operating profit growth outlook of 4%–6% and its adjusted EPS growth forecast range of 6%–8%.

In March, General Mills reported its results for the third quarter of fiscal 2020, which ended on February 23. The company’s third-quarter sales were flat YoY at $4.18 billion. Lower sales from other businesses offset the strength in the company’s Pet business. In the third quarter, the adjusted EPS declined 7.2% YoY to $0.77.

Is General Mills stock a good buy for investors?

So far, General Mills stock has risen 16.7% in 2020. The stock has outperformed Campbell Soup (NYSE:CPB), which has risen by 6.0% YTD (year-to-date) as of May 11. Meanwhile, Kraft Heinz (NASDAQ:KHC) and Kellogg (NYSE:K) have fallen by 8.5% and 8.1% YTD, respectively. Meanwhile, the S&P 500 has fallen by 11.2% YTD.

Generally, investors look at defensive stocks during challenging economic conditions. Given the uncertainty associated with COVID-19, investors can expect customers to cut down their discretionary spending. However, they will continue to spend on food and essential items. The demand for packaged foods will continue to be strong with stay-at-home restrictions in place.

Even if the lockdown eases, customers might prefer to eat at home due to COVID-19 fears. General Mills will likely benefit from the demand for at-home food consumption.

With a dividend yield of 3.1%, General Mills is an attractive stock for income investors. In recent years, the company struggled due to increased competition from private labels. Also, consumers started to prefer fresh and organic food. To strengthen the product portfolio, General Mills acquired premium pet food maker Blue Buffalo for $8 billion in 2018. The acquisition increased the company’s debt load. At the end of the fiscal third quarter, the company had long-term debt of $11.6 billion. In the first nine months of fiscal 2020, General Mills used its strong free cash flow to bring down its debt by $862 million.

The company can meet the COVID-19 demand without significant supply chain disruption. General Mills trades at a forward PE ratio of 18.1x. The current valuation looks a little expensive based on the EPS growth expectations. However, continued demand for the company’s products makes the stock a good “buy” amid the current crisis.

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