Evaluating General Mills' Q1 2025 Earnings Outlook and Valuation Potential Amid Undervaluation Trends

The consumer staples sector, long a refuge for income-focused investors, is undergoing a quiet reevaluation as macroeconomic pressures and shifting consumer preferences reshape valuations. General Mills (GIS), a bellwether in this space, has faced headwinds in 2025, with Q1 results underscoring the challenges of a post-pandemic landscape. Yet, beneath the surface of declining sales and operating profits lies a compelling case for undervaluation, particularly when viewed through the lens of discounted cash flow (DCF) analysis and peer comparisons.

Q1 2025 Earnings: A Tale of Structural Adjustments

General Mills reported Q1 2025 net sales of $4.8 billion, a 1% decline year-over-year, with organic sales also falling by 1%General Mills Reports Fiscal 2025 First-quarter Results^[1]. Operating profit plummeted 11% to $832 million, driven by the divestiture of its U.S. yogurt business and higher input costsGeneral Mills Reports Fiscal 2025 First-quarter Results^[1]. Analysts now expect Q1 2026 earnings per share (EPS) to contract to $0.81, with revenue projected at $4.51 billion—a 6% decline from 2025 levelsKHC (The Kraft Heinz Co) WACC %^[3]. These figures reflect broader industry trends, including a consumer shift away from processed foods and toward health-conscious alternativesNeral Mills Equity Report | PDF | Cost Of Capital^[4].

However, General Mills' financial resilience remains intact. Management anticipates maintaining free cash flow (FCF) near $2.4 billion in 2025, despite these challengesGeneral Mills Stock: Cereal And Pet Food Power (NYSE:GIS)^[2]. This stability is underpinned by a weighted average cost of capital (WACC) of 3.92% as of September 2025General Mills Reports Fiscal 2025 First-quarter Results^[1], significantly lower than peers like Kellogg's (5.97%) and Kraft Heinz (5.02%)K (Kellanova) WACC %^[5]KHC (The Kraft Heinz Co) WACC %^[3]. A lower WACC reduces the discount rate in DCF models, enhancing the present value of future cash flows—a critical advantage in a low-growth sector.

DCF Analysis: The Case for Undervaluation

Applying DCF analysis to General Mills reveals a compelling valuation story. With a WACC of 3.92% and FCF projections of $2.4 billion for 2025General Mills Stock: Cereal And Pet Food Power (NYSE:GIS)^[2], the company's intrinsic value hinges on its ability to sustain cash flow generation amid structural shifts. Assuming a conservative long-term growth rate of 2% (aligned with U.S. GDP projections) and a terminal multiple of 8x FCF (in line with historical averages for the sector), General Mills' enterprise value could reach approximately $89 billionNeral Mills Equity Report | PDF | Cost Of Capital^[4]. This suggests a significant discount to its current market capitalization, particularly when compared to peers.

Peer Comparison: General Mills vs. Kellogg's and Kraft Heinz

The consumer staples sector is littered with underperformers, but few offer the same balance of low WACC and stable FCF as General Mills. Kraft Heinz, for instance, has a WACC of 5.02% and trailing twelve months (TTM) FCF of $3.025 billionKHC (The Kraft Heinz Co) WACC %^[3], but its cash flow volatility and higher discount rate erode its DCF appeal. Kellogg's, now rebranded as Kellanova, faces an even steeper hurdle: a WACC of 5.97%K (Kellanova) WACC %^[5] and Q1 2025 FCF of just $1.96 per share, marred by inventory adjustments and margin pressuresWK Kellogg Co ; Free Cash Flow Forecast^[6].

General Mills' return on invested capital (ROIC) of 8.65%General Mills Reports Fiscal 2025 First-quarter Results^[1], well above its WACC, further strengthens its case. This excess return suggests the company is allocating capital effectively—a rarity in a sector where many firms struggle to justify reinvestment. By contrast, Kraft Heinz' ROIC has historically lagged its WACC, and Kellogg's has seen its margins contract due to supply chain inefficienciesWK Kellogg Co - Market Insights Report^[7].

Valuation Potential: A Long-Term Play

While near-term earnings declines are inevitable, General Mills' strategic pivot toward high-growth categories like pet food and plant-based alternatives positions it for long-term value creation. Its disciplined approach to capital returns—$2.4 billion in FCF available for dividends and buybacksGeneral Mills Stock: Cereal And Pet Food Power (NYSE:GIS)^[2]—also enhances shareholder appeal.

For investors, the key question is whether the market is overcorrecting. At a price-to-free-cash-flow (P/FCF) ratio of approximately 12x (based on 2025 projections), General Mills trades at a discount to its historical average of 15x and peers like Kraft Heinz (24.5x in prior periods)KHC (The Kraft Heinz Co) WACC %^[3]. This gap, coupled with its structural advantages in WACC and ROIC, suggests a compelling entry point for long-term holders.

Conclusion

General Mills' Q1 2025 results may paint a bleak picture, but they mask a company with a robust balance sheet, disciplined capital allocation, and a lower cost of capital than its peers. While the road to recovery will be bumpy—marked by declining sales and margin pressures—the DCF analysis and peer comparison underscore its undervaluation. For investors with a multi-year horizon, General Mills offers a rare combination of defensive qualities and growth potential in an otherwise stagnant sector.