GIS Rises Today, But Is Still Off 52 Week High.

General Mills (GIS) stock climbed 0.2 % this morning. According to our metrics, the company seems fairly valued at today's prices. In the below analysis, we will put General Mills's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.

General Mills, Inc. manufactures and markets branded consumer foods worldwide. The large-cap Consumer Staples company is based in Minneapolis, United States and has 34,000 full time employees.

GIS's P/E Ratio Is Comparable to its Sector Average

Compared to the Consumer Staples sector's average of 24.36, General Mills has a trailing twelve month price to earnings (P/E) ratio of 16.7 and an expected P/E ratio of 15.1. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($4.31) or forward earnings per share ($4.75).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since General Mills's P/E ratio is near its sector average of 24.36, we can deduce that the market is fairly valuing the company's earnings.

General Mills Is Overvalued in Terms of Expected Growth

General Mills's PEG ratio is 2.02. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in General Mills's case, it tells us the company is overvalued.

GIS Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For General Mills, the P/B value is 4.03 while the average for the Consumer Staples sector is 4.29.

Investors Stand to Gain from GIS's Cash Flows

General Mills has strong cash flows. With a coefficient of variability of 18.1% and an average growth rate of -10.2%, the company is effectively turning its revenue into cash. We calculate General Mills's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a 10.6% rate, versus -6.8% for operating expenses:

General Mills's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing General Mills's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

General Mills's Gross Margins

General Mills's Operating Margins

General Mills's cost of revenue is growing at a rate of 4.2% in contrast to 2.7% for operating expenses. Sales revenues, on the other hand, have experienced a 3.3% growth rate. As a result, the average gross margins growth is -1.6 and the average operating margins growth rate is -2.7, with coefficients of variability of 3.8% and 8.3% respectively.

We See Mixed Market Signals Regarding GIS

General Mills has an average rating of hold and target prices ranging from $91.0 to $69.0. At its current price of $71.82, the company is trading -11.78% away from its target price of $81.41. 2.5% of the company's shares are linked to short positions, and 79.1% of the shares are owned by institutional investors.