Editor's note: Trouble is brewing for this historic blue-chip stock. Today, in an essay from our corporate affiliate Altimetry, Director of Research Rob Spivey dives into why this venerable company is failing to grow... and reveals why it's a potential trap for investors.

After more than 90 years in business, General Mills (GIS) probably thought it had seen it all...

Until the 2021 supply-chain delays came along.

The company is one of the world's largest food producers. You've almost certainly bought its products, which include everything from Cheerios to Yoplait yogurt and even Blue Buffalo dog food.

But last year, you'd have been hard-pressed to find one of its most popular brands in stores – Totino's pizza rolls.

Pizza rolls might seem like a simple snack, but they're surprisingly complex. In fact, they require 21 ingredients. So when supply-chain shortages made many of those ingredients scarce, General Mills had to get creative.

The story of how it tackled this problem shows how innovative this company is – yet, as we'll see, this business faces more problems than its 2021 woes...

Rather than sit by and miss out on millions of dollars in sales, General Mills got to work to find a new solution (and a new pizza roll).

The company put together a team of scientists and supply-chain experts to determine what substitute ingredients would work in a pinch when the originals were hard to find.

It's tougher than it sounds. Changing ingredients can also change everything from shelf life to nutrition content. But their efforts were a resounding success... General Mills now has 25 different ways to make the same pizza rolls.

Today, you wouldn't even know that there were any problems to begin with.

General Mills set itself apart from the competition by expertly navigating this hurdle...

But while its solution was clever, its profitability leaves something to be desired.

The company has historically produced an as-reported return on assets ("ROA") below 10%. That number has hovered within the 6% to 7% range since 2018. These are markedly pedestrian returns.

Of course, at Altimetry, we know better than to take the as-reported numbers at face value. That's why we use Uniform Accounting. It's a method that helps us look under the surface... and filter out the distortions that plague traditional accounting.

But while General Mills' Uniform ROA is significantly higher than its reported numbers, it has also stagnated.

As you can see in the following chart, Uniform ROA spiked to 25% in 2018 – and stayed there. All of General Mills' efforts through fiscal year 2022 (which ended in May) have only kept returns in place. Take a look...

This isn't getting any better, either. Our Altimeter tool – which provides easily digestible grades to rank stocks on their real financials – allows us to understand market expectations at a glance.

The Altimeter gives General Mills a "C" for Earnings Expectations. That tells us the company's returns will remain stagnant compared to expectations.

Even worse, the market has no idea.

As-reported metrics make it look like General Mills trades for a 19 times price-to-earnings (P/E) ratio... below the 20 times market average. In reality, its Uniform P/E ratio is 26 times.

This overvalued business gets a "D" Valuations grade in the Altimeter. Take a look...

General Mills' approach to supply-chain problems was impressive. But after nine decades in business, this consumer-staples giant is out of runway. And any negative surprises could weigh on the stock... making this an investment that's not worth the risk.

Regards,

Rob Spivey

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