This $26 Billion Stock Has a Beta of Zero
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Well, we guess that people buy Cheerios no matter what. General Mills (NYSE: GIS) has so little exposure to the broader economy that statistically there is no relationship between movements in its stock price and the fluctuations of the market indices. As such, it is a good pick for any investors who worry about a bear market or merely want to offset a portfolio that carries quite a bit of market risk; conversely, of course, the stock doesn’t necessarily provide an upside during bull markets. In fact, the stock is down 2% year to date against a rising S&P 500 (though investors have picked up dividends: the dividend yield is 3.3%).
General Mills is best known for its cereal products, but as with any large packaged food company it owns a number of types of brands; particular examples here include Pillsbury, Yoplait, and Betty Crocker. The first quarter of General Mills’ fiscal year ended in August (the company has a fiscal year ending in May). The 10-Q shows 5% higher sales than in the same period a year earlier; costs grew, but at a slower rate (cost of goods sold, for example, was essentially unchanged), leaving earnings an impressive 35% higher. General Mills also reported that its dividend payments had been matched by a slightly higher amount of cash used on share repurchases. At its current market capitalization, General Mills carries a trailing P/E of 15. Wall Street analysts expect little growth in earnings: even taking into account the effects of further repurchases, the company trades at only 14 times earnings estimates for the fiscal year ending in May 2014.
Ric Dillon’s Diamond Hill Capital increased its stake in General Mills by 6% during the second quarter of 2012, and reported a total of 3.9 million shares in its portfolio at the end of June (see more stock picks from Diamond Hill Capital). Renaissance Technologies, founded by billionaire Jim Simons, nearly doubled its own stake in the company to a total of 1.1 million shares (research Renaissance Technologies' favorite stocks).
Kellogg Company (NYSE: K) is General Mills’ closest peer. It is another good defensive stock with a dividend yield above 3% and a low- though not zero- beta. Its revenue was up 12% in the third quarter versus a year earlier, but the company was only able to convert this into a small increase in net income. It has very small premiums to General Mills in terms of a P/E multiple, and so the two companies seem about fairly priced in relative terms.
We can also compare General Mills to Ralcorp Holdings (NYSE: RAH), Campbell Soup (NYSE: CPB), and The J.M. Smucker Company (NYSE: SJM). Campbell is the cheapest of these companies on a forward basis: it trades at 13 times the expected earnings from its fiscal year ending in July 2014. The trailing P/E is even with General Mills’, and the company also delivered good earnings last quarter (read our analysis of Campbell). Ralcorp and Smucker also have forward P/Es in the teens. Smucker has been struggling on the earnings front recently, failing to convert good top-line numbers into shareholder value; Ralcorp’s most recent quarterly report saw modest increases in both revenue and earnings, though it is more of a mid-cap company. We think that the other three companies we’ve discussed are more appealing.
General Mills, Campbell, and Kellogg all look like potential value stocks and have all seen at least small earnings growth recently. They are large consumer staple names, and while we wouldn’t call any of them a screaming buy they do look cheap enough to be worth considering.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.