After 26% Dip, General Mills Finds A Sell-Side Friend In Susquehanna

General Mills, Inc. GIS saw its worst single trading day in nearly 10 years Wednesday after reporting its fiscal third-quarter results — and is now trading at a compelling valuation, according to Susquehanna Financial Group. 

The Analyst

Susquehanna's Pablo Zuanic upgraded General Mills' stock rating from Neutral to Positive with a price target lifted from $51 to $53.

The Thesis

Investors have valid reason to be concerned after General Mills' Q3 print, Zuanic said in a note.

The cereal maker said it didn't have the proper systems in place to predict a gross margin impact from the "dynamic cost environment," the analyst said. On top of that, investors' "apparent displeasure" with the "seemingly steep" Blue Buffalo acquisition also contributed to the stock's 26-percent decline over the past three months, he said. 

General Mills' food portfolio is still attractive, the analyst Zuanic said. The company's acquisition of pet food maker Blue Buffalo acquisition was misinterpreted by investors, he said, and "makes sense" in the long run, as the segment could account for 10 to 12 percent of total EBIT in a few years and boast an EBIT margin of 30 percent in fiscal 2020 versus 24 percent in 2017.

From a valuation standpoint, General Mills is trading at a "compelling" 8.3-percent free cash flow yield and offers investors a 4.4-percent dividend yield, according to Susquehanna. 

Price Action

Shares of General Mills were trading higher by nearly 1 percent midday Friday. 

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