Gen­eral Mills could be poised for a turn­around

The Oklahoman (Sunday) - - BUSINESS -

Dear Mr. Berko: My stock­bro­ker had me buy 300 shares of Gen­eral Mills in the sum­mer of 2016, for which I paid $71 a share. In the past 12 months, I've had a 29-point loss. I never thought that a blue chip com­pany such as Gen­eral Mills could fall by 40 per­cent in a year. My new bro­ker wants me to buy 300 more shares of Gen­eral Mills and sell my first pur­chase 31 days later for a tax loss. He says the com­pany is in a turn­around, and he thinks the stock could rise to the $60s in 18 months. What do you think? While talk­ing to my dad about Gen­eral Mills, he told me that he thinks he re­mem­bers when the com­pany built sub­marines for the U.S. Navy and that Betty Crocker was a real per­son.

LW, Beth­le­hem, Pa.

Dear LW: Your dad's half right. Betty Crocker was not a real per­son. She was cre­ated for an ad­ver­tis­ing cam­paign by the Wash­burn Crosby Co., a flour milling com­pany that ended up be­com­ing part of Gen­eral Mills in 1928. Gen­eral Mills is based in Golden Val­ley, Min­nesota, a sub­urb of Min­neapo­lis.

There's a lot about Gen­eral Mills (GIS$42) that most peo­ple don't know. Who would be­lieve a com­pany that makes Chee­rios and Wheaties also has the abil­ity to build sub­marines? Yep, in 1964, GIS' electronics di­vi­sion built a manned deep-ocean re­search sub­mersible, named Alvin (DSV-2), for the Navy. The sub­mersible, which can carry two sci­en­tists and a pi­lot, has made about 4,500 dives. It is used to ob­serve deep-sea crea­tures and even has ex­plored the wreck­age of the Ti­tanic.

GIS' aero­nau­ti­cal di­vi­sion de­vel­oped high­alti­tude bal­loons (called Sky­hooks) for the Navy.

In 1980, GIS owned Red Lob­ster, and a few years later, it founded Olive Gar­den plus an­other themed restau­rant called China Coast. At one time, GIS also owned Tal­bots and Ed­die Bauer and was the par­ent com­pany of Parker Broth­ers (mak­ers of Mo­nop­oly) and owned Play-Doh.

Be­tween 1941 and 1961, GIS spon­sored the "Lone Ranger" ra­dio show, and in 1959, GIS spon­sored "The Ad­ven­tures of Rocky and Bull­win­kle and Friends." It also spon­sored the ABC Western "The Life and Leg­end of Wy­att Earp," star­ring Hugh O'Brian.

All this be­gan with Gold Medal flour. GIS com­prises To­tal, Lucky Charms, Fiber One, Trix, Kix, Pills­bury, Yo­plait, Na­ture Val­ley, Old El Paso, Bisquick, Haa­gen-Dazs plus soups, pas­tas, veg­eta­bles, piz­zas, spices and oo­dles of snacks.

How­ever, earn­ings will take a hit from ris­ing freight costs and from higher-than-ex­pected in­fla­tion in com­mod­ity prices. This $15.6 bil­lion-rev­enue com­pany has been strug­gling with lower yo­gurt rev­enues, lack­lus­ter ce­real sales, weaker over­seas op­er­a­tions and ex­cess ca­pac­ity in Asia and Latin Amer­ica. Man­age­ment is ad­dress­ing these prob­lems and has closed fa­cil­i­ties in New Jer­sey, Brazil and China.

GIS sold its Mar­tel, Ohio, bak­ery, closed its pasta plant in Aus­tralia and shut­tered its huge Venezuela fa­cil­ity. Mean­while, GIS' fo­cus on brand build­ing and new prod­uct devel­op­ment with ap­pro­pri­ate lev­els of in­vest­ment is be­gin­ning to pay off. These and other man­age­ment plans should im­prove net profit mar­gins from 11.8 per­cent to 13.4 per­cent in the com­ing two years.

Man­age­ment projects low, sin­gle-digit growth in its bot­tom line for 2018, lower than most of its peers, such as Kel­logg's, ConA­gra, Her­shey and Mon­delez. And rev­enues will most likely be un­changed this year. How­ever, earn­ings should in­crease by 4 per­cent, to $3.20 a share, and the div­i­dend should rise from $1.96 to $2.

Wall Street re­mains skep­ti­cal; only two of the 21 an­a­lysts watch­ing the stock have "buy" rec­om­men­da­tions.

How­ever, your new bro­ker and I agree. He has given you out­stand­ing ad­vice. I think that GIS will com­plete its turn­around by 2021. And it could trade be­tween the high $50s and low $60s while you earn a 4.5 per­cent div­i­dend.

Some be­lieve that its cur­rent price-earn­ings ra­tio, 14-to-1, is too low com­pared with its cat­e­gory. Other com­pa­nies in the food pro­cess­ing in­dus­try tend to have a P/E of about 21-to-1. But that could be con­sid­ered bullish.

I like the stock. I like Gen­eral Mills' prod­ucts. And I like the hol­i­day gift boxes that are part of share­hold­ers' De­cem­ber tra­di­tions. Later this year, per­haps in Septem­ber or Oc­to­ber, call GIS at 888-496-7809 and ask for the de­light­ful gift box, which will cost you $19.

Please ad­dress your fi­nan­cial ques­tions to Mal­colm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ ya­hoo.com.

Mal­colm Berko mjberko@ ya­hoo.com

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