A Defensive Stock in Troubled Times
Volatility makes a lot of people nervous, especially when the stock market is headed in the wrong direction. With the impending vote in Congress for the rescue package, financial markets may swing wildly as the legislative wheels grind forward. Instead of touting stocks that may benefit from the passage of such a relief bill, we thought that longer term investors would be interested in a defensive stock that has greatly outperformed the major indexes. That company is General Mills (GIS), one of the largest producers of packaged foods in the world. GIS has experienced a nice run-up as the broad market has fallen hard and even though we rate GIS Fairly Valued, the stock could make a nice hedge for long term, value investors.
Ockham Research is dedicated to efficiency and simplicity in investing, and we believe that investing is not rocket science. It is not hard to understand why this stock is a great play in a bad market. The stock has a beta coefficient of only .15, which means that in general it is considerably less volatile than the market as a whole. As you probably know, the S&P 500 is down nearly 30% from its all time high of about a year ago; however, GIS is up more than 20% over that time. Management was able to sustain this success even as input prices were being propelled skyward. Combine that performance with a dividend yield of 2.5% and strong earnings growth (fiscal 1Q beat earnings estimates by 10%) and this stock looks ideal for those investors trying to lower the volatility within their portfolio.
Consumers are going out to eat less these days and General Mills has been a major beneficiary of this trend. Strong brands such as Cheerios, Progresso, Hamburger Helper, Pillsbury and Yoplait are propelling sales that were 13.8% better than estimates of $3.5 billion for the most recent quarter. Although 68% of GIS sales are domestic, it is beginning to grow international sales in Latin America, Asia, Canada and particularly Europe. Economies throughout the world are struggling and recovery times will vary, but we think it reasonable to expect the general global weakness could help General Mills continue its strong sales.
Now, we are not saying that this stock is undervalued, at least not by our methodology, and we have a rationally expected price of $69. But if you are about ready to say “uncle” in this bear market perhaps GIS could be a risk management tool because of its secure and rising dividend, solid management, strong sales growth, and potential for price appreciation.
Ockham Research Staff @ October 2, 2008
Good analysis for GIS and a stock that I own and like very much.
Any company that is able to pass along costs to consumers while sustaining demand is a great business to own in this environment.
Keep up the great work!
General Mills. Thanks i will go to your web site and find out more on your fundamentals.
Safe Value Stocks are the ones to always look at.
Thanks I like your insights.