General Mills Stock: Underrated Company, Good Long-Term Buy (NYSE:GIS)

I’ll keep this brief: I believe General Mills, Inc. (GIS) is an underrated company with strong fundamentals. The company consistently pays substantial, growing dividends and generates billions in free cash flow (FCF) each year, showing a solid upward trend. Currently, GIS is trading at lower P/E and EV/EBITDA ratios compared to many of its peers, and it has a business model built on recession-resistant revenue streams. After all, even in tough economic times, food is one of the last things people cut back on—especially when it comes to products as addictive as those from General Mills. Speaking as a former Lucky Charms addict, I can attest to that! This is evidenced by resilience in GIS’s performance during tough times brought by the 2008 Recession and the 2020 COVID Recession. Despite these strengths, GIS often flies under the radar as an investment, and current analyst sentiment appears mixed. Despite strong but relatively lackluster results during FY 2024, I believe the long-term prospects for this company are very robust. My discounted cash flow (DCF) model, comparable companies (comps) analysis, and dividend discount model (DDM) all indicate that GIS is significantly undervalued, even under the most pessimistic scenarios. Most notably, my DDM suggests that GIS would still be slightly undervalued even if it didn’t increase its quarterly dividend for the next five years—a scenario that seems very unlikely given that it raised it in 4 of the last 5 years. Overall, GIS is an underrated company that, I believe, is a strong long-term buy. Don’t get me wrong, I don’t expect the stock to skyrocket within the next couple of months or anything like that, but I think the stock should appreciate by a solid amount in the long-term, and even if it doesn’t, at least you’re getting a nice dividend in the meantime.

Company Overview & Qualitative Analysis

Does General Mills, Inc. (NYSE: GIS) even need an introduction? In the global food industry, GIS is a giant holding a commanding presence with a portfolio that exceeds 100 strong under the company’s house of brands—Cheerios, Häagen-Dazs, Pillsbury, Blue Buffalo. Think of your go-to snacks and, in all probability, whether it be grain and fruit snacks, ready-to-eat cereals, or ice cream, they come from GIS. Its four primary operating segments are North America Retail, International, Pet, and North America Foodservice.

A key strength of GIS is the high level of brand loyalty built over the years for its brands. So much have these brands become a part and parcel of people’s everyday lives that it has provided a massive competitive edge to GIS over other market players. The company has been able to tap into all facets of consumer needs, from health-conscious shoppers looking for whole-grain cereals to pet owners wanting premium nutrition for their pets. This has helped them hold ground against constant competition from heavyweights like Kellogg, Nestlé, Mondelez International, and PepsiCo.

Innovation has always been at the heart of GIS’s strategy. The company invests heavily in research and development to stay ahead of consumer trends, particularly in health and wellness. For instance, GIS has been proactive in offering products that align with the rising demand for natural and organic foods, with the company claiming to be the largest provider of natural and organic packaged foods in the U.S. GIS is also making strides in areas like regenerative agriculture and reducing greenhouse gas emissions, efforts that resonate with consumers increasingly concerned about environmental issues.

However, GIS isn’t without its challenges. One of the biggest hurdles is its heavy dependence on developed markets like North America and Europe. These markets are stable but also saturated, which limits growth potential. Additionally, GIS has been slower than some of its rivals in embracing digital technologies, particularly in areas like e-commerce and digital marketing. Moreover, operating in a highly regulated industry means that GIS must navigate stringent food safety standards and labeling requirements, both at home and abroad, adding complexity and cost to its operations. GIS’s relatively limited presence in emerging markets presents both a challenge and an opportunity. While the company has a stronghold in developed regions, expanding its footprint in high-growth areas like Asia, Africa, and Latin America could open new avenues for growth.

Financials

GIS has consistently demonstrated strong financial performance, showing resilience and growth even in challenging economic environments. Between 2017 and 2024, the company’s revenues have increased almost every year, rising from around $15.62B in 2017 to approximately $19.86B in 2024. While it’s true that revenue slightly dipped from $20.09B in 2023 to $19.86B in 2024, marking the first decline since 2017, this is a minor setback in the broader context of continuous growth. Net income has also followed a generally positive trend. In 2019, GIS reported a net income of about $1.75B, which grew to $2.18B in 2020 and then to $2.34B in 2021. By 2022, net income had increased to $2.71B, though it slightly decreased to $2.59B in 2023 and $2.50B in 2024. EBITDA has been on a general upward trend as well. From $3.14B in 2019, EBITDA increased to $3.55B in 2020, $3.75B in 2021, $4.05B in 2022, slightly leveling off at around $3.98B in both 2023 and 2024. It’s important to note that for the sake of brevity, I’ve only been listing the most recent five years, but if you take a closer look at GIS’s financials over a longer period, you’ll see that this upward trend has been ongoing for dozens of years. While net income, revenue, and EBITDA did experience slight declines in 2024, which likely contributed to the drop in stock price from $68 to $63 following the June 2024 earnings report (though it has since recovered to over $70), these dips are minor when you consider the bigger picture. Similar modest declines in other individual years have occurred but have ultimately been inconsequential when viewed within the context of GIS’s overall long-term financial trajectory. GIS has also consistently outperformed expectations, especially regarding EPS. According to Seeking Alpha, GIS has beaten EPS expectations in 18 of the last 20 quarters and exceeded revenue expectations in 13 of those quarters. That said, there are a couple of areas that warrant attention. Over the past few years, the company’s total debt has pretty much stagnated around $12B-$13B. But cash on hand has decreased from $1.68B in 2020 to $418M in 2024. Capital expenditures (capex) have increased from $530.8M in 2020 to $774.1M in 2024. However, I believe these issues are relatively minor when viewed in the context of GIS’s overall financial health, especially since the company’s free cash flow (FCF) remains strong and has been on a general upward trend. GIS generated approximately $2.66B in FCF in 2024, $2.87B in 2023, $2.71B in 2022, $2.34B in 2021, and $3.56B in 2020. As my discounted cash flow (DCF) model later on in this article will demonstrate, a company consistently generating FCFs at this level should be trading at a far higher price than GIS’s current market price of $70.38.

One of GIS’s most underrated strengths is its resilience during economic downturns. As I mentioned earlier, even in tough times, food is perhaps the last thing people cut back on—especially when it comes to products as popular and addictive as those from General Mills. This resilience is clearly reflected in its financials during the 2008 Recession. From 2006 to 2009, GIS’s net sales consistently grew from approximately $11.71B to $12.44B, $13.65B, and ultimately $14.69B. Similarly, net earnings increased steadily from about $1.09B to $1.14B, $1.29B, and finally $1.30B over the same period. Even more impressive is how the company’s stock price remained relatively stable during the 2007-2009 period, staying in the mid-20s to low 30s—a remarkable feat compared to the broader market’s performance. Similarly, during the early stages of the COVID-19 crisis, GIS’s stock price jumped from the low 50s to the low 60s. GIS saw significant increases in both revenue and net income from 2019 to 2020. Of course, it’s no surprise that GIS would be one of the few companies to benefit during such an event.

Overall, GIS is one of the rare companies that not only withstands but often thrives during economic downturns and crises, making it a strong contender for long-term investment.

Valuation

Let’s start with my discounted cash flow (DCF) model. In constructing this model, I tried being unusually pessimistic. I calculated GIS’s beta at approximately 0.307 (5-year daily). To further temper the results, I assumed a market risk premium (MRP) of 6.99%, which is higher than the average MRP of 5.5% as of 2024 (according to Statista). For the risk-free rate, I used the US 10-Year Treasury Rate on 8/22/2024 of 3.86%, resulting in a cost of equity of 6.01%. For GIS’s cost of debt, I derived it by dividing their FY 2024 interest expense by their FY 2024 total debt and adjusting for a tax rate of 21%, which gave me a cost of debt of 3.02%. By weighting the cost of debt and equity appropriately, I arrived at a WACC of 5.25%, which is consistent with various estimates available online. For context, GuruFocus estimates GIS’s WACC at 3.27%, ValueInvesting.io provides a range of 5.2% to 7.6% (with an average of 6.4%), FMP at 4.21%, and Alpha Spread at 6.42%. To project EBIT, D&A, Capex, and changes in NWC, I utilized historical data from 2010 onward and employed Prophet, a forecasting tool developed by Facebook’s data scientists. For taxes, I assumed an annual tax expense of 21% of EBIT, which is higher than what they’ve actually paid (for example, their income tax expense was ~17.3% of their EBIT in FY 2024), in line with my effort to be more cautious in my assumptions. These projections yielded estimated FCFs of roughly $2.7B, $2.8B, $2.9B, $3.1B, and $3.0B for 2025 through 2029, which align closely with GIS’s current FCF trajectory. My model assumes a perpetual growth rate of 3%, the typical figure used in DCF model. Normally, DCF models calculate the terminal value by taking the final year’s forecast, increasing it by the perpetual growth rate, and dividing this by the difference between the WACC and the perpetual growth rate. But instead of using the last year’s forecast (~$3.0B), I used the average of the 5 FCF forecasts (~$2.9B), further skewing the results against GIS. Despite all these pessimistic assumptions, my model still indicates that GIS is significantly undervalued, with an intrinsic share value of $184.39—implying a substantial +160% upside compared to the current market price of $70.83.

If you’re concerned about the results being skewed by seemingly arbitrary assumptions like WACC and perpetual growth rate, my sensitivity analysis below demonstrates that GIS would remain undervalued across most WACC-perpetual growth rate combinations within the realm of possibility. Although I tested WACCs from 5% to 15% in 0.5% increments, I believe any WACC above 9.0% can be disregarded. The absolute highest WACC estimate I could find online for GIS is 7.6% (the high-end of ValueInvesting.io’s WACC range for GIS). And even the highest cost of equity estimate I found online was just 8.8% (the high-end of ValueInvesting.io’s cost of equity range for GIS).

And keep in mind that many sources estimate GIS’s WACC to be under 5%. Additionally, perpetual growth rates typically range between 2% and 4%, and anything outside this range is likely irrelevant. In the table below, I placed a box around values for WACCs between 5% and 9% and perpetual growth rates of 2% to 4% as the “realm of possibility.” This range clearly shows GIS would be undervalued in most scenarios. Given that the absolute highest WACC estimate I found was 7.6%, not 9%, it would also be reasonable to ignore WACCs above 7.5%. GIS remains undervalued in almost every WACC-perpetual growth rate combination within the 5% to 7.5% and 2% to 4% ranges (except for a 7.5% WACC paired with a 2% perpetual growth rate).

Please note that values below GIS’s current market price at the time of writing of $70.83 are highlighted in red, while those above this figure are highlighted in green.

Next, let’s dive into my comparable companies (“comps”) analysis. For this model, I used the companies listed as GIS’s peers according to Capital IQ: KGC, K, MDLZ, CAG, HSY, CPB, LW, HRL, MKC, and CL. Based on the median and mean EV/EBITDA ratios of GIS and its peers, GIS’s implied share price would be $89.06 and $86.65, respectively—both significantly higher than the current market price of $70.83 at the time of writing. Similarly, using the median and mean P/E ratios of GIS and its peers, the implied share price would be $102.25 and $110.66, respectively, further indicating substantial upside.

For the price-to-book (P/B) ratios, I chose to exclude CL’s outlier P/B ratio of 694.73x. Without CL, the median and mean P/B ratios suggest GIS’s implied share price would be $66.47 and $73.74, respectively, with the former indicating a slight downside and the latter showing a modest upside. For those curious, including CL would result in an implied share price of $67.52 using the median P/B ratio and a wildly exaggerated $1,133.25 using the mean P/B ratio. Overall, my comps analysis suggests that GIS is significantly undervalued when considering EV/EBITDA and P/E, while appearing roughly fairly valued when using P/B.

Sources: Market cap values were obtained from Refinitiv, while Capital IQ provided the cash and total debt figures used to calculate each enterprise value, as well as all of the EBITDA, net income, and book value figures. Please note that the EBITDA and net income values are for the trailing twelve months (TTM), while the book value figures are from the most recent quarter (MRQ).

Next, let’s take a look at my dividend discount model (DDM). I believe that GIS’s strong and steadily growing dividend yield is one of its most compelling features. In DDM models, the cost of equity is used as the discount rate rather than the WACC. Over the past few years, GIS has consistently increased its dividend payments. For instance, in Q3 2024, they raised their quarterly dividend from $0.59 to $0.60 (+$0.01); in Q3 2023, from $0.54 to $0.59 (+$0.05); in Q3 2022, from $0.51 to $0.54 (+$0.03); and although the dividend held steady at $0.51 throughout 2021, it was increased from $0.49 to $0.51 (+$0.02) in Q4 2020.

In my first DDM model below, I’ve assumed that GIS will continue this trend by increasing its quarterly dividend by $0.02 in Q3 of each of the next 5 years, which seems reasonable given their history. For the terminal value, I used a perpetual annual growth rate of 3%, a standard assumption in DDM and DCF models. With these inputs, my model suggests an intrinsic share value of $83.43, implying a solid $12.60 (+18%) upside from the current price of $70.83.

Please note that the PV of the dividend payments was calculated using Excel’s XNPV function to accurately account for the timing of quarterly dividend payments with an annual discount rate. Similarly, the terminal value was calculated based on the annual dividend for the final forecasted year ($2.80), not the quarterly dividend ($0.70).

What’s even more noteworthy is how the DDM model performs in a worst-case scenario. Considering GIS has raised its dividend in 4 of the last 5 years, it’s highly unlikely they wouldn’t do so at least once over the next 5 years. However, in my more pessimistic model below, I’ve assumed that the quarterly dividend stays flat at $0.60 for the entire period. The terminal value is still calculated with a 3% perpetual growth rate. Under these assumptions, the model indicates an intrinsic share price of $72.37. Even in this absolute worst-case scenario, GIS still appears slightly undervalued compared to its current price.

Overall, even under the most pessimistic assumptions, GIS appears undervalued according to a variety of different valuation methods.

The Main Downside

Despite all the positives I’ve highlighted, there is one major downside: the current stock price of GIS is definitely not a bargain when viewed in the context of its overall trading history. At $70.83, the share price is hovering close to its 52-week high of $74.45. The stock reached an all-time high of $90.89 on May 15, 2023. While I feel that the intrinsic value of GIS is way higher than the current price, I highly doubt the stock will rise beyond $90 in the near future. The short-term view from analysts is also more cautious. The average short-term price target from the latest 18 analysts, according to Zacks, is $68.18, with targets ranging between $62 on the low end and $76 on the high end.

My perspective may be relatively more optimistic in relation to the vast majority of others, and the consensus among the analysts seems mixed. While the most recent 2 analyst ratings are Strong Buys, of the 19 total analysts, only 4 rate it as a Strong Buy, while the other 15 rate it as a Hold. But keep in mind that this mixed sentiment reflects the stock’s short-term potential. Like I’ve mentioned before, I’m not expecting GIS to surge in the short term. But I do believe that the stock is fundamentally undervalued. While it might take time for the market to realize this, I anticipate that GIS’s price will appreciate significantly in the long term. It may not be the strongest short-term buy, but for investors with a long-term perspective, I believe that GIS stands out as one of the best opportunities available.

Conclusion

To sum it all up, I really do believe that GIS is an underrated gem for long-term investors. Yes, the stock’s current price isn’t a bargain, hovering near its 52-week high and not far from its all-time peak. However, I see this as a minor issue in the grand scheme of things. The company’s strong fundamentals, consistent dividend growth, and solid FCF generation make it very appealing. Even though the stock might not soar in the short term—something that’s reflected in the mixed analyst sentiment—I’m confident that GIS is fundamentally undervalued. My models, whether DCF, comps, or DDM, all point to the same conclusion: GIS is undervalued and there is significant upside. Although it may take time for the market to realize this, I believe patient investors will be rewarded. And even if the stock doesn’t rocket higher in the near future, at least you’re still getting a pretty nice and reliable dividend.