Over the past six months, General Mills’s shares (currently trading at $45.45) have posted a disappointing 8.9% loss, well below the S&P 500’s 6.7% gain. This might have investors contemplating their next move.
Is now the time to buy General Mills, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think General Mills Will Underperform?
Even with the cheaper entry price, we're swiping left on General Mills for now. Here are three reasons you should be careful with GIS and a stock we'd rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
General Mills’s average quarterly sales volumes have shrunk by 3% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect General Mills’s revenue to drop by 2.2%, close to This projection doesn't excite us and suggests its newer products will not accelerate its top-line performance yet.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, General Mills’s margin dropped by 4.6 percentage points over the last year. This decrease warrants extra caution because General Mills failed to grow its revenue organically. Its cash profitability could decay further if it tries to reignite growth through investments.
Final Judgment
General Mills doesn’t pass our quality test. After the recent drawdown, the stock trades at 12.9× forward P/E (or $45.45 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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