General Mills (NYSE:) is a major global producer of packaged foods. The past decade has not been a good one for GIS investors or the wider industry. Over the course of 10 years, GIS and the Packaged Foods industry group have delivered total returns that are less than half that of the US stock market as a whole. The past five years have been significantly worse, with negative total returns over a period when the US stock market has returned nearly 17.5% a year. A significant portion of the underperformance is due to investors' overall preference for growth over value stocks over the past decade, but GIS has seen strong growth in revenue and earnings over the same period. Morningstar
General Mills' price rise is also limited by the increasing proportion of money invested in index funds. GIS is part of the Russell 1000 and has a beta (relative to the S&P 500) of about 0.4. As the S&P 500 rises, GIS will have decreasing weight in the major market cap-weighted indices relative to stocks with higher beta values.
GIS has a dividend yield of 3.39% and a P/E of 15.96. GIS's 5-year EPS growth rate is 6.34% per annum and its 5-year dividend growth rate is 2.3%. The Gordon Growth Model (GGM) suggests that a reasonable return expectation is the highest. sum of the current yield and the expected dividend growth rate, which results in 5.7% for GIS if we use the lagging 5-year dividend growth rate as the expected value.
Consensus Annual EPS Expectations for GIS
Source: eTrade
The near-term outlook for General Mills' revenue and revenue growth is poor. The overall earnings outlook for GIS is a 1.6% decline in earnings in FY 2022 and that FY 2023 EPS will be 2.1% higher than in 2021.
To formulate a vision of GIS, I trust on two types of consensus views. The first is the well-known Wall Street analyst consensus assessment and the 12-month price target. The second is the market implied outlook derived from option prices.
Option prices represent traders' aggregate outlook on the probability that a stock's price will rise above (call option) or below (put option) a certain level (the strike price) between today and the option's expiration date. By analyzing options on GIS with a range of strike prices and a common expiration date, it is possible to calculate probabilistic forecasts for price returns that reconcile option prices. consensus implied by all buyers and sellers of puts and calls on GIS. For those unfamiliar with market-implied outlook, I've written an overview post with examples and links to the relevant financial literature. I have also written a significant number of analyzes using this approach.
Wall Street Consensus Outlook
eTrade's version of the Wall Street consensus is an aggregation of the ratings and 12-month price targets of 6 ranked analysts who have published their views in the last 90 days. The consensus rating is neutral and the 12-month price target is 3.96% above the current price. There is significant spread across analysts' price targets, ranging from a low that is 11.4% below the current price to a high that is 15.3% above the current price.
GIS: Wall St. Consensus Assessment and 12-Month Price Targets
Source: eTrade
Investing.com's consensus outlook for Wall Street combines the views of 18 individual analysts . The consensus rating is neutral and the consensus price target for 12 months is 5.93% above the current price. Wall Street consensus price target for 12 months predicts price increase of 4%-5.9% in the coming year. If we add up the dividend yield of 3.4%, the consensus for the expected total return is 7.4% – 9.3%. .
Market-Implied Outlook
I analyzed call and put options with a range of strike prices, all expiring on January 21, 2022, to generate the market-implied outlook for the next 4.9 months, the period between today and the expiration date. I chose this expiration date to provide an outlook through the end of 2021 and because options expiring in January are typically liquid. return, with probability on the vertical axis and return on the horizontal axis.
GIS: Market Implied Opportunity, Price Return, Today-Jan. 21, 2022
Source: Author's calculations using options quotes from eTrade
The market implied outlook is generally symmetrical, although there is a notable tilt in probabilities to positive price returns preferable to the next 5 months or so. The peak probability corresponds to a price return of 5.6% over this period. Investors can expect about $1.02 in dividends over this period, bringing the 5-month total return outlook to 7.3%. . Expected volatility is low for an individual stock, as expected given the low beta for GIS. of the market-implied outlook for which I rotate the negative yield side of the distribution about the vertical axis (below). 21, 2022
Source: Author's calculations using option quotes from eTrade
Note on the chart above: The negative return side of the distribution is rotated about the vertical axis.
]
The probability of positive returns over the next 5 months is consistently higher than for negative returns of comparable size in the range of -15% to 15% (0% to 15% in the chart above). The probability of large negative returns is greater than for large positive returns of the same magnitude (15% and above on the horizontal axis of the chart above). outlook. With a stock like GIS, investors have an increased chance of a positive return in exchange for the chance of major negative surprises. probable results in general is a bullish outlook for the next 5 months. grow.
Wall Street's consensus outlook is neutral, with a 12-month expected price increase in the range of 4%-6%, for an expected total return of 7.4%-9.3%. The market implied outlook for early 2022 is bullish, with an increased chance of positive price returns. The annualized volatility derived from the market implied outlook is 21%. To make a stock attractive, I want to see a 12-month expected return for an individual stock that is at least half the expected volatility (e.g. 10.5% or higher expected total return for GIS), and GIS meets not quite up to that criterion.
The bullish market implied outlook suggests GIS has a good chance of gaining ground by the end of the year and early 2022, but the neutral analyst ratings and low earnings and dividend growth rates are worrying.
My overall rating on GIS is neutral.
