Earnings

Comparing General Mills, Inc. (GIS) and Kellogg Company (K)

General Mills, Inc. (NYSE:GIS) shares are down more than -14.25% this year and recently decreased -0.58% or -$0.31 to settle at $52.97. Kellogg Company (NYSE:K), on the other hand, is down -13.50% year to date as of 11/13/2017. It currently trades at $63.76 and has returned 5.91% during the past week.

General Mills, Inc. (NYSE:GIS) and Kellogg Company (NYSE:K) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect GIS to grow earnings at a 5.99% annual rate over the next 5 years. Comparatively, K is expected to grow at a 6.39% annual rate. All else equal, K’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 16.15% for Kellogg Company (K). GIS’s ROI is 13.80% while K has a ROI of 12.00%. The interpretation is that GIS’s business generates a higher return on investment than K’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. GIS’s free cash flow (“FCF”) per share for the trailing twelve months was +0.32. Comparatively, K’s free cash flow per share was +0.50. On a percent-of-sales basis, GIS’s free cash flow was 1.16% while K converted 1.33% of its revenues into cash flow. This means that, for a given level of sales, K is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. GIS has a current ratio of 0.70 compared to 0.70 for K. This means that GIS can more easily cover its most immediate liabilities over the next twelve months. GIS’s debt-to-equity ratio is 2.58 versus a D/E of 4.25 for K. K is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

GIS trades at a forward P/E of 16.47, a P/B of 7.82, and a P/S of 1.97, compared to a forward P/E of 14.98, a P/B of 11.41, and a P/S of 1.72 for K. GIS is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. GIS is currently priced at a -2.29% to its one-year price target of 54.21. Comparatively, K is -9.13% relative to its price target of 70.17. This suggests that K is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.10 for GIS and 3.00 for K, which implies that analysts are more bullish on the outlook for GIS.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. GIS has a beta of 0.63 and K’s beta is 0.51. K’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.GIS has a short ratio of 7.21 compared to a short interest of 8.77 for K. This implies that the market is currently less bearish on the outlook for GIS.

Summary

Kellogg Company (NYSE:K) beats General Mills, Inc. (NYSE:GIS) on a total of 8 of the 14 factors compared between the two stocks. K is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, K is the cheaper of the two stocks on an earnings and sales basis, K is more undervalued relative to its price target. Finally, HCC has better sentiment signals based on short interest.

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