By Michael Elkins
UBS upgraded General Mills Inc (NYSE:GIS) to a Buy rating (From Neutral) and raised the price target on the stock to $88.00 (From $85.00) as analysts see a meaningful opportunity for GIS' international margin to rebound. As the company laps the ice cream recall, EBIT growth is expected to spike 5% on a consolidated basis in both FY24 and FY25. Overlay General Mills' improved B/S and consistent FCF generation, analysts expect the company to accelerate share repurchases in the years ahead.
However, there is growing concern among investors that that additional pet food supply will put downward pressure on pricing power, potentially rebasing margins. The analysts believe that this bear narrative is overdone, as the premium segments of other categories, such as coffee and beer, have 50%-75% share compared to dog food at only 33%. Also, UBS estimates ~1M households trade up to premium dog food each year. Finally, not all the incremental capacity coming online is for premium dog food. Therefore, UBS believes the incremental premium dog food supply will likely be absorbed by the demand.
The analysts wrote in a note, “we believe there is upside risk to the Street's FY23 estimates. Our sales, GM, and EPS forecasts are all above the Street's this year. Our confidence is driven by GIS's accelerating sales momentum in Nielsen-measured channels, on the back of strong price increases in NA retail. In fact, GIS's sales growth in Nielsen is higher than for any other large-cap packaged food company in our coverage, on both a 12- and 52-week basis. Moreover, we have confidence that GIS's Pet segment will return to +DD growth (in line with company guidance) as early as 3Q.”
Shares of GIS are up 1.02% in pre-market trading on Friday.