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It's been a rough year for shareholders of packaged food company General Mills (NYSE: GIS) and LCD display manufacturer LG Display (NYSE: LPL). Both stocks have tumbled, with General Mills down 24% and LG Display down 37% year to date.
Both companies are facing some serious problems, but I think the pessimism that has been building around these two stocks may present an opportunity. I don't own either one yet, but I'm putting both on my watchlist. Here's why.
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General Mills
Packaged food stocks like General Mills have taken a beating over the past couple of years. A combination of aging brands, a consumer shift toward online retail and natural foods, and declining sales in key categories has put pressure on the entire industry. In General Mills' fiscal 2018, U.S. yogurt sales tumbled 12%, while cereal sales were roughly flat. Overall, organic net sales fell by 1% compared to 2017.
Brands that worked in the past, like Yoplait, simply aren't working anymore. Consumer tastes are changing, and General Mills needs to change with them. Shares of General Mills have tumbled 38% since peaking in mid-2016. With the company expecting flattish organic sales and an adjusted earnings decline in fiscal 2019, the stock may not recover anytime soon.
I dofn't think General Mills is in quite the dire straits that the stock's performance suggests. Some of its brands may be beyond saving, but others have solid growth potential. Haagen-Dazs is one of the company's growth platforms, along with snack bars, Old El Paso, and its collection of natural and organic brands. General Mills owns Annie's, EPIC, Muir Glen, Larabar, and a handful of other brands that are more in tune with current consumer preferences.
General Mills plans to divest some of its weaker brands, equivalent to roughly 5% of annual sales. The company is also aiming to grow Blue Buffalo, the pet products company it acquired earlier this year, at a double-digit rate. Blue Buffalo recorded $1.275 billion of sales in 2017, so the brand is capable of driving meaningful growth for General Mills.
General Mills expects to generate between $3.02 and $3.11 in adjusted earnings per share in fiscal 2019, putting the price-to-earnings ratio just shy of 15. That's not quite cheap enough for me to want to jump in, especially considering the challenges the company is facing. Debt is also a problem: General Mills now has $12.7 billion of long-term debt following the $8 billion deal for Blue Buffalo. That makes the company a lot more fragile, especially during a recession.