Accumulation has surged since June and is now testing the 2020 peak, signaling hidden buying pressure.
General Mills Inc. (GIS) is trading higher by more than 3% on Wednesday after beating fiscal Q1 2022 estimates and targeting the high end of prior guidance. The food giant posted a profit of $0.99 per-share, $0.10 better than expectations, while revenue rose a modest 4% year-over-year to $4.54 billion, nearly $250 million higher than consensus. The company now expects to report a small contraction in organic net sales due to stronger-than expected first quarter performance.
Another Pandemic Hangover
Food producers booked windfall sales in the first half of 2020 as pandemic lockdowns encouraged consumers to load up on staples and household goods. They have failed to match those metrics so far in 2021, generating a fair share of selling pressure, but are slowly approaching long-term equilibrium. However, inflation and supply constraints are now major headwinds, with limited raw materials forcing producers to pass costs onto supermarkets and consumers.
Morgan Stanley analyst Pamela Kaufman downgraded the stock ahead of the news, noting that “we are cautious on GIS as: 1) organic sales growth should trail peers due to its relatively weaker end markets, including cereal (~20% of NA sales, -1.5% 10-year CAGR), and yogurt (9% of sales; +0.5% CAGR); while Pet is only 10% of sales; 2) market share losses (-45 bps YTD); and 3) downside to consensus 2022E forecasts for 25 bps/35 bps of gross/operating margin compression (vs. MSe -96 bps/-82 bps) given operating deleverage and rising inflation”.Wall Street and Technical Outlook
Wall Street consensus is mixed, with a ‘Hold’ rating based upon 3 ‘Buy’, 2 ‘Overweight’, 13 ‘Hold’, 1 ‘Underweight’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $50 to a Street-high $71 while the stock will open Wednesday’s session about $5 below the median $64 target. The four-year high posted in August 2020 matches this target, potentially supporting a slow but steady advance. General Mills pays a hefty 3.47% forward dividend yield.
General Mills stalled within eight points of 2016’s all-time high in the 70s in August 2020, entering a decline that found support in the low 50s at the start of 2021. The stock has carved a lower high and higher low since that time while long-term relative strength readings yield mixed messages. However, accumulation has surged since June and is now testing the 2020 peak, signaling hidden buying pressure that could support an eventual test at resistance in the mid-60s.