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Berko: General Mills is an investment-worthy company

By Malcolm Berko
Published: May 12, 2018, 6:03am

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.

— L.W., Bethlehem, Pa.

Dear L.W.: 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 headquartered in Golden Valley, Minn., 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 high-altitude 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.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.