General Mills Raises FY23 Guidance After Burying Pet Issues

Even amid inflation, supply chain disruptions, and a weak economic backdrop, General Mills GIS raised its fiscal 2023 guidance on both the top (10%, from 8%-9%) and bottom (7%-8%, from 4%-6%) lines. We will likely edge up our outlook (8% and 6%, respectively, preprint) into the revised ranges when the firm divulges third-quarter performance in late March. However, we don’t surmise such moves will alter our $75 fair value estimate much. Shares popped at a mid-single-digit percentage clip on the news, leaving the stock a touch above our intrinsic valuation. As such, we’d suggest investors await a more attractive entry point.

The source of outperformance appears to reflect a jolt in its pet arm, which was a laggard in the second quarter, as sales held flat on an organic basis. We’d viewed the challenges as transitory, stemming from a reduction in retailer inventory and capacity constraints, and continue to surmise the tailwinds from increased adoption of pets during the pandemic will buoy demand for Blue Buffalo’s premium fare over an extended horizon. This is encompassed in our high-single-digit percentage segment sales growth forecast over the next 10 years, healthily ahead of the low-single-digit marks that tend to emanate from the domestic packaged food arena.

Importantly, we don’t think the firm intends to waver on its commitment to invest in consumer-valued innovation and marketing, which we peg at just shy of 6% of sales, equating to $1.2 billion on an annual basis. Further, we anticipate that General Mills is prudently whetted to beefing up its capacity in areas where demand is outstripping supply (with capital expenditures holding around 3.5%-4% of sales). From our vantage point, these investments are an astute means to support the intangible assets that underpin its narrow economic moat. When taken together, we see little to warrant altering our long-term forecast for 2% annual organic sales growth and high-teens operating margins.