General Mills: Past Pillsbury

For General Mills shareholders, Pillsbury has been less than popping-fresh good. Since the Minneapolis packaged-food maker acquired its rival in 2001, Pillsbury has caused Mills' once-predictable earnings to become erratic, says Merrill Lynch analyst Leonard Teitelbaum. Worse still, sales growth at Pillsbury has lagged the company's other divisions. For the nine months ended February 27 -- the most recent financial figures available -- net sales at Pillsbury USA declined 2%, while sales rose at the company's five other divisions.

Yet, Teitelbaum thinks Mills has smoothed out the wrinkles caused by bringing Pillsbury into the fold. The company has reduced the debt it incurred to pay for the acquisition and can use the cash saved on debt service to increase dividends and buy back shares. "Mills is back on track," he says.

General Mills gained its celebrity at the breakfast table. Cheerios, Lucky Charms, Trix and Wheaties are among its most well-known brands. But the cereal division has been hurt recently by increased cost of grain, and other company products have become bigger stars. The Yoplait yogurt division has been a standout, with sales growing 15% from the year-earlier period over the past nine months. Mills also owns Betty Crocker, Bisquick and Old El Paso brands.

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Advertising will be a key to the company's growth. Mills executives expect to produce earnings growth of 5.5% for the fiscal year ending May 2007. The company needs consumers to buy new products at higher prices to push growth beyond that figure, Teitelbaum says. A strong advertising campaign increases that possibility. "We feel this is the lynchpin to the story," he says. Teitelbaum forecasts that Mills will increase advertising by 8% over the next 12 months.

The stock (symbol GIS) has traded in a fairly narrow range between $43 and $54 over the past three years. Recently at $52, it sells at 16 times the $3.16 a share Teitelbaum estimates the company will earn in the next 12 months. Teitelbaum, who last week upgraded General Mills to buy from neutral, says the shares sell at a lower price-to-earnings ratio than do other packaged food companies. Assuming that the company can steadily increase dividends and repurchase shares, he thinks the stock is worth $57.