The Analysts Hike Their Price Targets For General Mills
General Mills (NYSE: GIS) sparked a round of semi-bullish activity in the analysts despite a very mixed report. The company is experiencing better-than-expected revenue growth and is guiding the rest of the year higher but there are some concerns to be aware of. The primary concern is inflation. Inflation is cutting into the bottom line and forcing aggressive price increases that are, ultimately, the reason why revenue is growing. These trends should support growth in the near to mid-term but the risk of margin erosion remains.
Morgan Stanley analysts Pamela Kaufman cited that very factor when she maintained the Underweight rating and raised the price target. Her price target is now $56 compared to the $65.67 Pricetargets.com consensus rating, a target that implies a double-digit decline for the stock. The Pricetargets.com consensus price target, however, implies the stock is fairly valued at current levels and this target has been moving higher over the past 90 and 30 days.
At least 5 sell-side analysts came out with commentary in the wake of the Q3 results and all maintained what amounts to a strong Hold rating. The key takeaways are that 3 of the 5 raised their price targets, 1 initiated the stock at hold with a price target in line with the consensus, and one maintained with a similar price target. The high price target of $74 was set shortly before the earnings release.
Revenue Up, Earnings Down At General Mills
General Mills had a great quarter in which revenue of $5.02 billion grew 6.4% versus last year and beat the consensus estimate by 330 basis points. General Mills also had a horrible quarter in which price increases failed to keep up with rising costs and resulted in lower earnings YOY. The company reported a 7% increase in price/mix offset by a 1% decline in volume and prices are being raised again. On a segment basis, pet sales and convenience items led with double-digit gains while North America and Latin American grew low single-digits on a high-single-digit increase in pricing and European sales declined.
Moving down to the margin, the company experienced contraction at both the gross and operating levels with gross margin contracting 400 basis points GAAP and operating margin about 350 basis points. The adjusted margins are slightly better but still down from last year leaving the GAAP and adjusted EPS shy of consensus. The GAAP $0.97 is down more than a dime from last year and missed by $0.07 while the adjusted EPS of $0.99 is down $0.07 from last year and missed by $0.06.
The worst part is the guidance, however, as the company is upping its revenue forecast while lowering its margin outlook. The company is expecting organic revenue to grow 4% to 5% in F22 versus the previous down 3% to 1% with EPS growth in the range of down 2% to up 1%.
The Technical Outlook: General Mills Tests Support
General Mills spiked up to a 5-year high in the days leading up to the Q3 report and have since fallen back to support. The good news is that support is holding at the 30-day moving average and confirming the uptrend. We expect to see shares of General Mills trend back up to retest the recent highs near $69 and possibly move higher. Longer-term, a move up to the all-time high or to a new all-time high depends on revenue growth, inflation, margin, and earnings.
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