INVESTMENT SUMMARY
Figure 1: General Mills stock performance
We issue a HOLD recommendation for General Mills common stocks with a price target
of $85.50 or a 3% upside in 2023. Our analysis utilized a discounted cash flow model
(DCF), Relative Valuation, and a Dividend Discount Model (DDM) to arrive at the
intrinsic value. Our inputs are based upon the following catalysts (1) General Mill's
significant pricing power, (2) new avenues of growth, (3) Hard to resolve weakness in the
international segment, and (4) Lack of clear catalysts to support any significant multiple
expansion.
SIGNIFICANT PRICING POWER & EFFICIENCY TO DRIVE VALUE
Figure 2: General Mills performance vs S&P 500
and peers
General Mills has proved to be one of the few players in food manufacturing that is able
to pass on commodity price inflation to the consumers. In 2023, we expect General Mills'
strong portfolio of ready-to-eat cereal, convenient meals, pet food and many other brands
that are leaders in their respective categories to continue to perform. From what we observed
in 2022, our team believe the consumer demand is less elastics for GIS's product as revenue
continue to be resilient and gross margin contracted 2% despite management reporting an
8% increase in input cost. In the near term, we expect to see some improvements in the
North American retail segment and Pet Foods segment. For North American
retail, our analysis suggests that the company will see some margin expansion due
to a decrease in the prices of agricultural commodities and ease in supply
chain issues. The pet food segments will still be the crown jewel of General
Mills, we expect to see revenue expansion driven by the purchase of Tyson's pet
food business under the brand Nudge and True Chew to round out General Mill's
pet offerings. Additionally, we believe that General Mills' Holistic Margin
Management program (HMM) that identifies inefficiency in the company processes
and retool to generate savings will continue to be a key piece in differentiating the
company from its' peers.
INNOVATION & PETS TO DRIVE SUSTAINABLE TOP LINE GROWTH
For a company of General Mill's size, there are two major forces that will drive growth for the
next three to five years. The first avenue of growth is technology. For the next fiscal
year, General Mills will continue to move closer to being a true omni-channel food
marketer, a massive improvement over the current model of selling mainly to stores. We
expect to see roll out of more customer engagement platforms, bespoke recommendation
to consumers and more direct to consumer (DTC) offering to fill out the gap that allowed
for the existence of independent DTC brands like Magic Spoon and Rx Bar. The pet
business will continue to grow at a double digit rate despite limitations being placed on
General Mills due to third party manufacturers being affected by supply chain. This growth
in the pet business will be driven by an increase in pet ownership as consumers and
businesses alike recognize that working from home will be a permanent fixture of society. In
the coming year, we believe that a larger percentage of General Mills' pet revenue will be
from customers who purchase Blue Buffalo branded pet foods, Nudge Treats, and True
Chew directly from GIS that are paying for subscription plans to ship directly from
General Mills' distribution centers to homes in the US.
BLEAK INTERNATIONAL OUTLOOK, TOO RICH VALUATION
We think there are two factors that are negatively affecting General Mill's
international business. The first is the dollar strength, as the dollar become stronger even
against the Euro and the Pounds, it will eventually reach a points where it is not justifiable to
pay a premium for General Mills branded product vs local alternatives. The second
factor is General Mill's exposure in countries where its products are considered luxuries.
Local customers are much more likely to reduce spending on General Mill's product
or eliminate such spending altogether. Additionally, we believe that General Mills' out
performance over both the S&P 500 and similar companies already priced in all the positive
outlook for the company. We believe that it would be difficult for GIS to generate
performance that will surprise to the upside. Our HOLD recommendation is reflective our
belief in General Mills as an organization to generate shareholder value in line with
expectation, but not much more.
1
BUSINESS DESCRIPTION
General Mill is the leading global manufacturer and marketer of branded food
with more than 100 brands in 100 countries. The company offer a variety of human and
pet food that aim to provide great taste, nutrition and value or customers around
the world. General Mills' business is focused on: snack, ready-to-eat cereal,
convenient meals, pet food and others. While the majority of the company's sales come
from North America, the company is working to extend its' presence across the five
continents.
Figure 3: Business segment (percentage)
BUSINESS SEGMENTS
60% of the company's sales comes from the North American Retail segment while
the international segments accounts for 15% of sales. North American Retail consists of a
wide range of customers from grocery stores, mass merchandisers, membership
stores to e commerce grocery providers. International Segment's customer based are
retailers and food service businesses outside the US. The company's international
offering includes frozen desserts, snacks, baking mixes, and vegetables through it's
Green Giant subsidiary. General Mills' Pet segment and North American food service
combine for approximately 20% of sales.
INTERNATIONAL EXPOSURE
Figure 4: Revenue by Geography
General Mills market their product and services in more than 100 countries in North
America, Latin America, Europe, the Middle East, Asia, and Australia. The US market
takes up more than 75% of sales. The company operates 45 production facilities with 25
in the US, 4 in China, 1 in Asia/Middle East/Africa, 2 in Canada, 5 in Europe/Australia,
and 6 Latin America and Mexico. In addition to the consolidated business, General Mills
engage in strategic joint ventures with Cereal Partners Worldwide (CPW) and
Haagen-Dazs Japan (HDJ) that contribute over $2 billion in sales in 2022.
COMPANY STRATEGY
General Mills is the market leader in cereal, dessert mixes, refrigerated dough, and natural
pet food and is number two in snack bars and soup. The company maintains a strong
relationship with vendors as well as retail partners. As General Mills' brands continue to
be the market leaders, they command a price premium versus their direct competition. The
company's strong market position coupled with a major cost advantage when it due to
economies of scale ensures that General Mills will not suffer much margin pressure
stemming from inflation.
RECONFIGURATION OF MARKETING
Figure 5: SWOT Analysis
In 2021, General Mills launched its Accelerate strategy with the aim to completely
overhaul the company's marketing effort and innovation processes. According to the
company's material, the new marketing strategy is centered around Boldly Building Brands
that market the company as a purpose driven organization that understand the
customer's needs and answer their wishes with bold innovation. One example of the
strategy at work is the increase of sustainability focused marketing that has been a
great source of growth for companies like General Mills. The new strategy is also
spearheaded by a newly reinvented marketing playbook that focuses on delivering the
company's message through digital means. To further strengthen the company' strategy,
General Mills utilize its data capabilities via the Box Tops program and brand websites. At
the start of the strategy, the firm announce that General Mills will divest from 5% of
sale and acquire businesses that strengthen the company's five global platform (cereal,
pet, ice cream, snack bars, Mexican) while trying to improve market positioning globally.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
Figure 6: Anti food waste initiative
General Mills, Inc happens to be one of the few U.S companies to spot in the “A” list for
sustainability. They take their concerns towards making the planet a better place very
seriously. For that, this food company intend to collaborate with farmers, organizations and
communities to make change across the entire system, and inspiring others to do the same.
ENVIROMENT
Operating as a global food company, General Mills has a multifaceted approach to
sustainability. Focusing on these main areas: GHG emissions, energy use, water withdrawal
and waste reduction. According to General Mills’ sustainability report, in 2021, their GHG
emissions footprint increased 2% compared to than 2020. This reflects business growth
during the year as General Mills increased production to make food the world needed during
the pandemic and company-wide net sales increased 3%.
2
By recognizing the need to accelerate the company’s progress in reducing emissions, General
Mills is working to advance their internal carbon focus from footprint accounting
to decarbonization strategies and execution. Including that, they also believe by the year
2030, there will be progress in reductions in sourcing 100% renewable electricity
for global operations, water stewardship plans for the most-at-risk watersheds by 2025,
and achieve 100% recyclable packaging.
Figure 7: Gender Diversity
SOCIAL
In the face of COVID-19 pandemic, General Mills pledges to create a seat at the table for all
employees by fostering a safe, inclusive, and rewarding workplace, and seeks to make a
positive impact with its people and its communities. So, in 2021 the General Mills took some
extra steps to provide their employees the safest workplace with look after at their health and
mental well-being. 86% of General Mills employees say that the company is a great place to
work, up from 6% in 2019.
Figure 8: Work Philosophy
Since the 1970s, General Mills have been hiring female positions and encouraging women
empowerment in the workplace ever since. It clearly indicates how General Mills
maintaining equality between men and women in terms salaries and managerial positions.
Also, they believe it is very important to acquire talent for leadership roles from all over the
world that’s why there’s a wide racial diversity in their workforce. Additionally, General
Mills has launched an Allyship Program to take intentional action, like listening, learning
and uplifting individuals and communities who have been marginalized or overlooked in
2019.
GOVERNANCE
Figure 9: Mental Health Program
GOVERNANCE
Board of Directors: General Mills’ BoD has twelve members possessing knowledge and
experience from various relevant fields strengthening the company’s position for future
challenges and opportunities. 42% of the board members are women, a gender ratio which we
think can be improved in the upcoming years.
Remuneration: Remuneration is regulated by an internal policy which dictates the fixed and
variable components. The average General Mills salary ranges from approximately $32,926
per year for Receptionist to $174,600 per year for Senior Research Manager. Average General
Mills hourly pay ranges from approximately $10.50 per hour for Packer/Shipper to $35.70 per
hour for Electrical Technician. We consider the fact that General Mills publishes annual
remuneration reports as positive and employees tend to have a satisfaction.
Figure 10: Board of Directors
3
INDUSTRY OVERVIEWAND COMPETITIVEPOSITIONING
The food manufacturing industry faces several trends coming into 2023. Factors like (1)
Increase in input costs, (2) Changing competitive dynamics and (3) New market opportunities
will determine what companies will take leadership in the near future
INDUSTRY DRIVERS COMINGS INTO 2023
Figure 11: Increase in cost for food producers
We expect to see inflation to sustain and supply chain issues to ease in 2023. Beyond the
macroeconomic factors, consumers tastes as well as their buying patterns are rapidly changing.
Finally, legacy food manufacturers' market share are facing pressure from retailers who are
introducing their own lines of product with varying degree of success.
Food manufacturers facing strong pressure from the increase in commodity prices: From
2020, Producer Price Index: Food industry increased 1.25%. This increase is mainly driven the
increase in spot price for commodities like corn and wheat. From January 2021, agricultural
commodities exhibited two surge in prices, once in late 2021 due to supply chain issues and
and once in early 2022 due to the sudden war in Ukraine. Our team expect this dynamic is will
take some times to subside as there are still uncertainties in Eastern Europe concerning the war
and in China with recent news of COVID-19 surges.
Transportation prices will ease: Consumer packaged goods companies are large
major customers of freight, rails, and shipping containers. During the pandemic, shippers
greatly increased supply to compensate for the lack of transportation available. As a
Figure 12: Transportation Industry Business cycle result, freight capacity increased 20% within a short period between the start of pandemic
and early 2022. The freight market reached the point of oversupply where there are too
many trucks and not enough demand for freight. According to data from Freightwave, spot
freight prices decreased 50% versus October 2021. In an article posted by C.H
Robinson, the company forecasted freight volume to decreased about 4% YoY under the
shadow of the coming recession.
The consumers might put off snacks, or go to someone else: US consumers are facing the
possibility of one of the worse recessions in decades. Since January 2020, the cost of living
measured by PCE increased 20 percent. According to data from the National Association of
Realtor, housing is much less affordable versus pandemic. Oil prices, while well off the highs
of 110s during June 2022, still 50% higher than pre-pandemic levels. The consumers are
dealing with an environment where their fixed cost are still elevated with no end in sight and
their net worths are decreasing because due to weakness in the stock market. The combination
of these factors will result in the consumers reducing their spending on items that are nonessential (snacks, ice-creams...) and lean more toward the staples or alternatives from the
traditional name brands.
Figure 13: Decrease in transportation costs
Private labels / DTC players are competing harder for market share: A looming recession
will likely lead to consumers trying to save more on their grocery bills, especially on nonessessial items. Brands like Good & Gather by Target, Great Value by Walmart, and Kirkland
by Costco are some of the more notable players from the retailer side. Traditional CPG
companies are also facing competition from young, scrappy Direct to Consumer companies
like Magic Spoon.
OPPORTUNITIES FOR TRADITONAL CPG COMPANIES
Figure 14: The state of the consumers
Ommi channel distribution will allow for better market penetration and
customer retention: A survey done by McKinsey & Co. (appendix) reported that over
70 percent of consumers are adopting some form of Online shopping for their consumer
packaged goods products. Three areas that CPG need to focus on are: Superior crosschannel shopping experience in store and online, tailor/targeted customer engagement, and
rich platforms that will intergrate with customer's lifestyle.
Direct-to-consumers (DTC) is the name of the game: With the emergence of DTC
brands like Dollar Shave Club, Smile Direct Club, Warby Parker, and many others, the key to
success in the CPG space is not only dependents on the breadth of distribution network,
but also the speed at which companies bring products to the consumers.
For some manufacturers, pet is the answer: The pandemic has spurred unprecedented
growth in the pet care space. In 2020, the size of the pet market is estimated to be $207 billion.
This market is expected to grow to $325 billion from 2020 to 2028 for a CAGR of 5.6%. To
further entice manufacturers, 40% of pet food sales are through online channels with 21% of
online sales are repeat sales from subscription plans or some form of autoship plans. Packaged
food manufacturers can capture the opportunity coming from the pet market by introducing
products and services that cater to the needs of pet owners.
4
COMPETITIVE POSITIONING
Figure 15: Some notable brands
Figure 16: Good Reward Loyalty Program
Strong portfolio of brands: General Mills owns some of the most valuable brands in
the packaged foods market. In the cereal category, General Mills owns three of the top five
brands in the US and has 30% domestic market share. The company generally do not have a
hard time increasing price on these products slightly. In the most recent report, the
company is either growing or maintaining market share in key categories. This is reflective of
the General Mill's pricing power in the mist of high inflation.
They are now in your pocket: General Mill's customer base remain some of the biggest in all
companies. Consumers can find GIS's products at grocery stores, membership stores,
drug stores, e-commerce retailers and many others. In July 2022, the company introduced
a new brand loyalty program called Good Reward. Using the platform, customers can earn
loyalty points by scanning any receipts with General Mills products and get access to deals
on more than 45+ General Mill's brand. Good Reward allow GIS to stay in the loop on each
individual consumer's preference and leverage the data to improve engagement with new
and existing General Mill's customers.
Unparalleled economies of scale: Stemming from its large and expansive operations.
The company's extensive distribution network ensure that General Mills can produce at a lower
unit cost than its competitor. This scale also assist in bringing new product to market as
General Mill's scale means that the company would not have issue meeting customer
demand if a produce become a hit in the grocery store aisles. Scale also prove useful in
negotiating with distributors and retailers to have priority on shipping and shelf-space.
Figure 17: Porter's Five Forces
New competitors are going straight to the consumers: In the past half-decade,
the emergence of Direct to Consumer (DTC) brands captured the attention of the customers.
Some big DTC players like Magic Spoon and RxBar became strong players seemingly
overnight using grass root advertising campaigns via influencer and social media instead of the
tradition channels. Legacy brands like General Mills have difficulty finding a foothold in a
new market where the desired new batch of customer often try to steer clear of big corporations
altogether. In recent years, General Mills is attempting to leverage the same tactics. Instead
of trying to compete directly with DTC players with the core products, General Mills is
leveraging its current expertise in manufacturing coupled with savvy uses of existing ecommerce platform to introduce new brands with enterprise-level infrastructure much
quicker than smaller DTC competitors. More details will be provided in the appendix.
Additionally, General Mills is making effort to revamp their branding building effort through
purpose-driven marketing AKA attaching a cause to their products as well as spending more
of their estimated $100 million advertising budget on non-traditional marketing channels.
Figure 18: Change in shopping habits
Figure 19: General Mill's 'Save the Bees' campaign
& Nature Valley recyclable wrapper
KEY TO SUCCESS: SUSTAINABILITY IS IN FASHION
Sustainability has been a buzzword for over a decade for consumer packaged good
companies. In a recent studies by NYU Stern Center for Sustainable Business, the
organization reported that while sustainable products represent just 17% of total CPG sales,
they drove one third of CPG revenue growth in the past year. Even more interesting,
sustainability marketed products grow 2.7 times faster in their categories than conventionally
marketed products. As millennial (aged 25 to 41) are much more likely to be heads of
households in 2022, their shopping habits that focuses on moral alignment coupled with
heavy adoption of technology will dominate grocery for years to come. General Mills is
one of the companies spearheading this trend with sustainability marketing that are
placed directly on their products. Another example is 2021, General Mill introduced
recyclable wrapper for all Nature Valley cereal bars.
5
KEY TO SUCCESS: ECOMMERCE ADOPTION ACCELERATE BY 5 YEARS
The reason acceleration of grocery e-commerce penetration has underscored the need for CPG
companies to be more adaptable if they want to attract and retain customers. Covid-19
accelerated the presence of e-commerce in grocery by more than five years, increasing demand
and capacity requirements through 2023 by as much as 2x compared with pre pandemic levels,
with grocery e-commerce's penetration expected to be 1.7x higher than before. While ecommerce and data isn't fully integrated across the organization, General Mills is working on
creating unified consumer profiles to better understand their behavior.
FINANCIAL ANALYSIS
Figure 20: Key Financial Figures
Figure 21: Revenue projections
Figure 22: EBIT margin %
TRANSFORMATION OF THE BUSINESS TO DRIVE REVENUE GROWTH
General Mills continues to see an increase on net sales looking back 5 years, growing at
a CAGR of 4% from 2018 to 2022 on stable margins despite a global pandemic. From
2019 to 2020, General Mill's revenue growth did not slow down despite massive pressure
coming from economic shut downs. Coming in 2022, General Mills has been able to
strategically adjust their pricing structure due to the current macroeconomic trends as
inflation has affected all businesses and costs internationally. Looking forward into 2025, we
estimated a low down in growth down to 2% in 2023 with the main driver being the slow
down in revenue growth for North American retail the as the dynamic between price/mix
and volume growth become more challenging due to the slow down in economic
activities. In the same year, we expect international sales to shrink by 2% due more
challenging environment caused by the dollar holding its strength versus other foreign
currencies and the global economic slowdown to be more severe outside the United States,
especially in Central and South America, which are two major regions where General Mills
does business. We project the Pet segment to be the bright spot for General Mill's, still
growing at 10% in 2023 driven by the growth in Blue Buffalo, Nudge, and True Chew.
North American Food Service revenue growth is driven by the same sets of drivers as North
American Retail, we project a growth rate of 2% for 2023. Beyond 2023, we anticipate
that the weaknesses in the economy will subside. Our team project that the revenue growth
NA Retail, Pet, International and NA Food Service will be 7%, 12%, 3%, and 7%
respectively. As a result, revenue will increase from $18 billion in 2022 to $22 billion in
2025, representative of a 4% CAGR.
STILL DRIVING STRONG MARGINS DESPITE INCREASE IN INPUT COST
Despite projecting a slow down in revenue growth, we project margins to deliver
above expectation for General Mills due to the success of recent implementations of ommichannel and e-commerce being a larger part of General Mill's revenue. Our team
expect strong customer engagement via social media and influencer marketing driving the
conversation to General Mill's purpose driven marketing campaign that launched in mid-2020.
We also expect promotion activities to tame versus previous season as the economy is
heading toward a recessionary period. Therefore, there would be less pressure on General
Mill's to offer discounts that directly eats away gross margin. As a result of these improvements
happening throughout.
6
Figure 23: Superior profitability to peers
The entire organization, we are projecting gross revenue to shrink only 2%
YoY despite company management reporting that input costs could increase by 14% as a
result of favorable price/mix dynamics along with customer purchasing through more
profitable channels like DTC or through subscription plans especially for the pet
business. For the company's operating margin, we anticipate that Holistic Margin
Management (HMM) will continue to play a key part in keeping General Mill's margin
similar to previous years. We expect a slight decrease in margin as General Mills is
shifting to creating a more holistic strategy, with end-use cases defined early on.
Every aspect from raw data acquisition to implementation of the data will likely add
to SG&A in early 2023. We believe that by 2024 and 2025, we can see healthy
operating margin expansion due to the long-term saving drivens by better integration between
the company's data capabilities and its core business.
CONSISTENT EARNER THAT WILL PAY GREAT DIVIDEND
Figure 24 :BBB Spot Rate
General Mill's profitability is consistent to that of one of the top firms in the
industry. The ROA is the most stable and consistent ratio over the past 5 years, with a
slight positive trend. Significantly higher than industry averages sitting at 7.81% vs 6% for
peer median ROE, on the other hand, has dropped off by a relatively large margin, with a
decrease of -13.69 to 27.13. Despite the significant drop off, the current ROE still
remains very high for the industry, which averages at around 7.4 return on equity. GIS
has been paying around 50% of their net earnings out as dividend, we expect the payout
ratio to increase as an increase interest rate would cause some capital projects to be
more expensive than before, thus justifying giving back capital to shareholders.
CAPITAL RAISING WILL NOT BE AN ISSUE, BE IT MORE EXPENSIVE
Our team expect that General Mills will need to spend $200 million more on Cap-ex per year to
build out the infrastructure to fully integrate the company in-house data capabilities with
with the distribution network to ensure speed of delivery on par with competition like
Amazon Prime and Walmart Plus. We expect outsourcing to add $100 million in SG&A cost
per year along with the previous stated amount of Cap-ex. We also added approximately
50 bps to General Mill interest expense since the company would most likely use debt to
fund these large capital projects. Given the company BBB credit rating (S&P Global), we do
not any issue in accessing the capital market.
Figure 25: Reduction in Yogurt sales
STREAMLINING PRODUCT OFFERING IS STILL A WORK IN PROGRESS
We expect General Mill's to continue to streamline its product offering to be more
aligned with the new strategy. One key product line that we expect the company to divest from
is the Yogurt business as it has been losing market share and loss in revenue at CAGR of
-7% over the last 5 fiscal year. Additionally, there would a slight margin pressure coming
from a recent global recall of Haagen-Dazs ice creams due to a potential exposure to
ethylene oxide in the company's product. Certain regions around the world have listed the
substance as cannot be used in food product. Our team projected slight increase in SG&A in
relation to any potential increase in administrative costs coming from this recall.
Figure 26: International market projection
INTERNATIONAL WILL CONTINUE TO BE A SORE SPOT
Despite strength shown in North America and Pet, the results for the international segment
for General Mills continue to be a sore spot. Sales are down in all regions outside
North American as the dollar continue to strengthen and inflation taking away the spending
power especially when Europe fuel and heating oil prices doubled from 2021. In Asia, the
biggest economic player China has been seesawing between total COVID shutdowns and
government crack down on the financial market. China's GDP growth slowed down to
3.6% in 2022 and look to be growing at a rate of 4% in 2023, much slower than the preCOVID growth rate of 7%. Our view is pessimistic for international growth since
General Mill's products are considered luxuries items. As the economy slows down,
spendings on relatively more expensive cereals and snack will decrease drastically. We
project both growth rate and margin to decrease for the international segment
7
VALUATION
Figure 27: WACC inputs
We affirm our HOLD recommendation for GIS with a price target of $85.70 We issue a
HOLD recommendation for General Mills common stocks with a price target of $85.50 or a
3% upside in 2023. Our analysis utilized a discounted cash flow model (DCF), Relative
Valuation, and a Dividend Discount Model (DDM) to arrive at the intrinsic value.
DIVIDEND DISCOUNT MODEL
Our dividend discount model projects three years into the future with dividend with the
terminal value growth rate of 2.3% for the year 2025. Our dividend discount model resulted
in a price target of $87.54. This valuation method takes into account that the company will
most likely not increase their dividend payout rate in the mist of a recession and focus their
capital on growing the data platform to maturity
DISCOUNTED CASH FLOW MODEL
Figure 28 : Scenario Analysis
We conducted a DCF valuation based on our projection of Free Cash Flow and two method
of calculating Terminal Value. The first method we employed was a valuation model based
on Price to Cash Flow, we selected a P/CF multiple of 16x, which is 2x lower than the
current multiple for the company. The second method we chose was a valuation model based
on EV to EBITDA, we selected an EV to EBITDA multiple of 13.5x, which is 1.5x
lower than the current multiple for the company. Our reduction of multiple for GIS is
reflective of our view that the economic environment coming into 2023 will cause
overall market valuation to decrease due to the a reduction in economic activities and
increased interest rates.
SCENARIO ANALYSIS
We built three scenarios into our model with with various assumptions regarding segment
revenue growth rate, margins and interest rate paths. For Scenario (1):
Sustained global recession we will see the revenue to contract for all segments except for
pets, which is still driven by growth in pet adoptions and the expansion of product
offering; operating margin to contract 300 bps across the board reflective of General
Mills not being able to pass on cost through prices; risk free rate in this scenario will
expand 150 bps to 5% if the rate of inflation continue to increase. Scenario (2) is our base
scenario with a slight contraction on revenue growth in 2023 followed by an acceleration
going into 2024 and 2025; we use the spot 10 year yield for our interest rate input for this
scenario. Scenario (3) is our bull case which involve an acceleration in revenue growth
revenue growth for all segment as the economy performs better than expected due to a
slow down in inflation; we also modeled a 50 bps reduction in the risk free rate. Our overall
price recommendation is based on the likely hood of each economic scenario. We expect the
probability for Scenario 1, 2 , and 3 are 40%, 40% and 10% respectively. Below is a
summary of our assumption and resulting outputs.
Figure 29: Scenario Analysis
8
RELATIVE VALUATION: MULTIPLES TO SOFTEN COMING TO A RECESSION
To finalize our valuation of General Mills we conducted a relative valuation analysis of the
company to gauge if the current price of the company is overvalued for undervalued versus
other firms in the industry. When compared to firms similar to General Mill's size, we
observed that GIS is either number one or a close second. We find that EV/EBITDA multiple
is the most appropriate for GIS given its capital intensive nature. Our valuation range goes
from $50 to $100 dollar using industry multiple as a benchmark. We believe that General
Mill's is currently at fair value according to our DCF and DDM model as well as market
multiples. Due to the challenging environment coming in 2023, we believe there would not be
many catalyst for General Mills to gave multiple expandtion
Figure 30: Football field price projection
Figure 31: Relative valuation
INVESTMENT RISKS
Figure 32: Risk matrix
We identify the top three investment risks for General Mills to be business risk, regulations,
and operating risks. The rapidly changing consumer environment exposes General Mills to
additional risks such as Economic downturns that could limit consumer demand for GIS's
products. These threats have the potential to harm General Mills profitability and reduce
investment returns, there is one high probability- high impact risk. There is a strengthening in
the U.S. dollar relative to other currencies in the countries in which we operate that is
negatively affecting our reported results of operations and financial results.
OPERATIONAL RISKS
High probability, High Impact Supply Chain Disruption: We believe that investors may
face the risk that General Mills fails to sell their products due to disruption in its supply chain.
The shortage of supply chain workers due to Illness, travel restrictions, absenteeism, or other
workforce disruptions could negatively affect their supply chain, manufacturing, distribution, or
other business processes.
Competition: General Mills is susceptible to large competitors seeking an advantage through
pricing or promotion changes. If the competitor seek to compete through pricing during a weak
economy that force GIS to follow, the company margin could be at risk
Major recall: Possible concerns with the safety and quality of GIS's products could cause
consumers to avoid certain products or ingredients which puts the company at a loss of sales.
Currently, Haagen Dazs is recalling a large amount of its ice cream. Our team believe that this
risk is very real.
POLITICAL RISK: REGULATION
Low Probability, Moderate Impact:
Proposed regulation of updating the dietary guidelines for a food to be labeled “healthy”
impacting the way, General Mills is able to sell certain products. This legislation could increase
our cost of doing business or restrict our actions, causing our results of operations to be
adversely affected. Out team do not see this risk to be the most important for General Mills.
However, shifting political wind could cause rapid change in General Mill's political
environment, especially oversea.
BUSINESS RISK
Moderate Probability, High Impact: General Mills will use advanced cloud computing, data
analytics, and artificial intelligence (AI) to unlock new value and redefine the future of
consumer brand relationships in the industry. Their business operations could be disrupted if
their information technology systems fail to perform adequately or are breached. Any
interruption of our information technology systems could have operational, reputational, legal,
and financial impacts that may have a material adverse effect on our business.
9
Appendix I: Three statement model
10
Appendix II: Discounted Cash Flow Model
Appendix III: Dividend Discount Model
11
Appendix IV: SWOT Analysis
Strengths
• General Mills has been a household food product name
for decades and is paired together with the idea of
quality and trustworthiness in the industry.
Weaknesses
• Business focus is narrow and General Mills had not
been historically successful in branching out from their
core products.
• Historically high attrition rate for employees in the
industry.
Opportunity
• Recent acquisitions of popular pet food product brands
can help General Mills break out further from their
main product core.
• Expanding online presence and sales growth through
investments into the business on the internet and invest
in new and different side projects.
Threats
• Continued inflation issues causing a rise of raw
materials and overall costs of goods will need to be
addressed to make sure company is remaining both
competitive on price and margin.
Appendix IV: Porter's Five Force Analysis
12
Appendix VI: Excecutive Management
Appendix VI: Comp Sheet
13