Updated: May 24, 2013 6:19AM
Dear Mr. Berko: What is your opinion of General Mills? The stock has moved up 20 percent since Warren Buffett took over Heinz. Do you think Buffett also will make a play for General Mills? Do you think another player will take over the stock? I’ll buy 500 shares if you think there’s a good chance that it is a takeover target. What do you think a good takeover price would be if it were to happen?
— TJ, Jonesboro, Ark.
Dear TJ: If General Mills were to be bought out, I think a good takeover price would be about $185 to $235 a share. And I’m certain as can be that most shareholders would welcome that price.
General Mills (GIS-$49.12) is Betty Crocker, Bisquick, Cheerios, Gold Medal flour, Green Giant, Haagen-Dazs, Hamburger Helper, Nature Valley, Pillsbury, Progresso, Wheaties, Yoplait and other delectable, devilishly delightful consumables that put $16.5 billion of revenue on the 2012 income statement. As an investment, this company is a no-brainer. The CEO makes only $2.9 million; the CFO makes $1.3 million; and those in management appear infinitely more interested in growing their company than they do in growing their egos. GIS is a clean company, an American icon that produces good products, and those products produce solid long-term results for shareholders. The company has a clean balance sheet, a fine income statement and good valuation ratios. In the past decade, GIS steadily has improved revenues from $7.8 billion to $16.6 billion, grown earnings from 85 cents to $2.51 a share and increased the dividend from 55 cents to $1.22, and its book value has gone from $4.87 to $9.95. This growth was planned and orderly, and it was aided by uncommonly solid product development with high-level, sophisticated market research. This year, GIS will introduce almost 100 new products, and their debuts are quite likely to be enormously successful. In the coming four years, revenues should top $21 billion; earnings could grow to $3.65 a share; net profit margins may exceed 11.5 percent; and the dividend could rise to $1.70.
For investors who believe the current “rah-rah, go-go” market is too volatile and prefer investment dependability in their long-term plans, GIS could be an excellent selection. As investors realize that market volatility can be counterproductive, that today’s risks are too difficult to manage and that results are temporary, GIS will come to be a more attractive investment.
Though I like the stock and think it could trade in the $80s in the coming five to six years, I feel the current $49 price tag is too high. I believe $41 to $43 is a fair entry point for long-term investors.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.