General Mills continues to increase sales and profits in a tough environment as the stock rewards investors. By Thomas M. Anderson, Contributing Editor July 22, 2008 People eat regardless of what the economy does. Yes, escalating commodity prices squeeze food producers. But those with well-known brands have been able to maintain earnings and sales growth despite an economic slowdown. General Mills (symbol GIS) is a prime example. The maker of Betty Crocker, Hamburger Helper and Pillsbury products has managed to keep its businesses cooking as others wilt. Pricing power is the key ingredient of Mills' strategy to minimize commodity-price inflation. The company can boost prices on its products, such as Cheerios, because customers are willing to pay more for them than they will for boxes of Brand X. Even as Mills hiked prices on many of its goods, the total number of products sold climbed 3% in the last quarter. "Recent price increases have not dampened consumer demand," says BMO Capital Markets analyst Kenneth Zaslow. Mills has some protection from the effect of hard-pressed consumers' buying generic products. Known in the industry as private label, generic products threaten brand-name food producers in economic slowdowns, when consumers tend to skimp on food purchases to save money. But Mills is insulated from some of that trading down because of the strength of its brands. "In most categories, Mills has either the number-one or number-two product," says Stifel Nicolaus analyst Chris Growe. Plus, the company focuses on healthy packaged foods and high-quality products the generic-food companies can't easily replicate. That makes Mills less prone to private-label substitution. (Just try to find a carton of store-brand ice cream that tastes as good as a pint of Häagen-Dazs, which Mills owns. The company licenses the brand to Nestlé to use in the U.S. and Canada.) Advertisement The numbers bear that out. In its most recent quarter, Mills increased its market share by 0.9% across its major categories, compared with a 0.3% bump in market share for private-label products, Zaslow says. New products will help the company continue to generate more sales. It plans to launch 300 products in the 2009 fiscal year, which ends May 2009. Zaslow points to a track record of innovation, such as Fiber One Bars, Oat Clusters Cheerio Crunch and Yo-Plus enriched yogurt, which shows the company can pull off an ambitious expansion. Growe says two products -- Progresso Light Soups and Fiber One toaster pastries (they're like Pop-Tarts for adults) -- give the company a large opportunity to increase sales in fiscal 2009. And unlike many of its rivals, Mills has some room to lift prices more. Growe says Mills has not raised its prices as much as competitors because it used gains from cost-cutting to maintain its profitability. "So if Mills is able to price aggressively and capture the cost savings coming through, the company will have a nice margin story to tell in 2009," he says. Advertisement The company has posted impressive gains in a dismal market. For fiscal 2008, which ended May 25, sales grew 10%, to $13.7 billion, and earnings rose 13%, to $1.3 billion-the first double-digit advance in sales since Mills bought Pillsbury in 2001, says Value Line analyst Robert Greene. Mills stock has been on a tear, too. Shares, which closed at an all-time high of $64.91 on July 22, have gained 14% so far this year. Shares trade for 17 times the $3.84 analysts expect the company to earn in the 2009 fiscal year. Growe says Mills stock deserves to sell at a higher price-earnings ratio because of its sales and earnings growth. He rates the stock a "buy" and has a 12-month target price of $69. Zaslow calls the stock his "favorite idea in the U.S. packaged-food industry," gives it a "buy" rating and has a target price of $71.