Sombre Fundamentals Suggest General Mills Stock (GIS) is Stuck in a Value Trap

Business Insider

20 hours ago

Not so long ago, General Mills (GIS) stock was synonymous with safety, defensiveness, and stability. The company consistently delivered results in line with market expectations, rewarding shareholders with a generous and growing dividend.
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The snacking category, once an exception among packaged food groups, seemed immune to changing eating habits and the rise of private-label brands. But things have taken a turn for the worse. Cereal and snack bar consumption has declined sharply due to growing structural headwinds, resulting in a contraction of General Mills' business.
What remains solid, however, is the company's ability to generate value for shareholders above its cost of capital, which in theory still makes General Mills a defensive stock. Valuations at current levels also look attractive, offering some margin of safety.
The problem is that the sustainability of these strengths is in question. When secular headwinds are at play, it doesn't matter much if fundamentals suggest a cushion or if valuations appear cheap—the stock is likely to continue drifting downward over time. That said, I see this as a potential value trap for investors hoping to be heroes with General Mills stock. For that reason, I hold a neutral view on GIS.
General Mills Faces Secular Headwinds
U.S. consumers have been gradually changing their eating habits—and that's not just an opinion, it's a fact. The packaged foods sector has seen a decline in demand for snacks in recent years. A big part of this comes from the rapid rise in GLP-1 weight loss drugs and a new generation that's increasingly avoiding 'bad foods' in favor of a healthier lifestyle.
Recent 2024 data shows that around 12% of American adults report having used a GLP-1 drug, with 6% currently using one. Some studies suggest that GLP-1 users significantly reduce their grocery store purchases by 6%, with a 11% drop in snack sales in the six months following adoption.
This shift is already reflected in the financial results of packaged food companies, such as General Mills. Over the past three years, General Mills' revenue has grown at a CAGR of just 1.8%. While operating margins improved at a 4.9% compound annual growth rate (CAGR), free cash flow declined at an 8.7% CAGR, which is a concerning trend.
In addition to these broad changes in consumer behavior, General Mills has been facing weak U.S. consumption trends due to market share losses in key categories, particularly to private-label brands from retailers such as Costco (COST) and Walmart (WMT).
In its most recent earnings report, net sales totaled $4.8 billion, a 5% decline year over year, and fell short of analyst expectations. North American retail sales declined 7%, with a 6% drop in sales volume. Alongside softer demand, temporary pressures also played a role, including lower volumes in snacks and dry pet food. The pet segment declined 3% year over year, while international sales fell 4%, primarily due to foreign exchange headwinds and weaker results in key markets such as China and Brazil.
As a result, General Mills revised its guidance for fiscal year 2025. The company now expects organic net sales to decline between 1.5% and 2%, compared to a previous forecast of flat to slightly positive growth (up to 1%).
Generating Value Even as Growth Slows
While General Mills' stock performance may appear underwhelming—hovering near the same levels it traded at over a decade ago—there are still compelling elements to its investment case.
Despite a growth narrative that appears not just stalled but potentially in decline, the company continues to deliver strong returns on invested capital (ROIC). Over the past twelve months, General Mills generated $2.93 billion in NOPAT against $22.9 billion in invested capital, resulting in an ROIC of 12.8%.
That figure aligns well with industry peers like Nestlé (NSRGY), Mondelez (MDLZ), and Kellogg's (KLG), and it comfortably exceeds the company's estimated cost of capital, highlighting efficient capital deployment even in a slow-growth environment.
Assuming a cost of equity of 7.5% (given GIS's low beta and 10-year Treasury yields around 4.5%), and a 30% debt weighting, General Mills' weighted average cost of capital (WACC) would land around 6.8%. In other words, despite the recent headwinds, the company continues to create value for shareholders and allocate capital efficiently. That shows up in its dividend policy as well.
General Mills currently offers a dividend yield of 4.4%, which is almost on par with the risk-free rate, all while maintaining a payout ratio of just 53%.
Attractive Price, Questionable Road Ahead
Beyond General Mills' ability to generate returns above its cost of capital, the stock also appears attractively priced based on valuation. One particularly useful—and often underappreciated—metric for evaluating mature, capital-intensive companies like those in the consumer packaged goods sector is earnings yield, calculated as operating income divided by enterprise value.
Over the past twelve months, General Mills reported $3.6 billion in operating income (EBIT) against an enterprise value of $43.5 billion, resulting in an earnings yield of 8.4%. Compared to a weighted average cost of capital (WACC) of 6.8%, this positive spread suggests the company is generating real value for shareholders—a potentially encouraging sign for long-term investors.
However, the reliability of earnings yield as a valuation signal rests on the assumption that earnings will remain stable or improve. In General Mills' case, that assumption is under strain. The company recently lowered its fiscal 2025 guidance, now forecasting a 7% to 8% decline in adjusted operating profit, nearly twice the size of its earlier projections.
In short, while the current valuation offers a degree of margin of safety, the growing uncertainty around future profitability raises meaningful concerns and tempers a more bullish outlook.
Is General Mills a Good Stock to Buy?
Analyst sentiment on General Mills (GIS) remains mixed. Of the 13 analysts covering the stock, only one holds a bullish rating, ten are neutral, and one is bearish. The consensus stock price target for GIS stock is $57.67, representing an upside of approximately 6.7% over the coming year.
GIS Walks Fine Line Between Value and Trap
General Mills checks many of the boxes for a classic value investment, consistently generating returns above its cost of capital while trading at what appears to be an attractive valuation.
However, the company is contending with mounting structural headwinds—including evolving consumer eating habits, the rise of GLP-1 drugs, shifting retail dynamics, and increased competition from private-label brands. These challenges cast doubt on the long-term sustainability of its value creation, despite current metrics remaining solid.
Given these concerns, General Mills currently leans more toward a value trap than a compelling value opportunity.