UNIVERSITY OF OREGON
INVESTMENT GROUP
October 17, 2008
Consumer Goods
GENERAL MILLS (GIS)
BUY
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
21.50 billion
64.42
1.72
2.70%
Valuation (per share)
DCF Analysis
Comparables Analysis
Current Price
$91.93
$52.22
$63.24
51.00 – 72.01
GIS/NYSE
0.62
333.7 million
3,534,360
Summary Financials
Revenue
Income
2008 Actual
$13,652.1 million
$1,294.7 million
BUSINESS OVERVIEW
General Mills had its start in two flour mills that processed grains in the 1860s. The company revolutionized the milling
industry by producing enhanced flour. Brand strength and iconic trademarks have allowed General Mills to be one of the
most recognizable household names. From cereals to yogurt to ice cream, General Mills has excelled at manufacturing and
marketing a diversified product line. At the turn of the millennium, General Mills focused greatly on international expansion
and is currently experiencing accelerated growth in European countries. The company generated $13,652.1 million in revenue
in 2008 and expects to continue growing at about the same rate in fiscal year 2009. In this report I recommend a buy based on
qualitative factors that give the company a positive outlook and through quantitative analysis of the DCF and comparable
analyses.
Covering Analyst: Richard Reynolds
Email: rreynol4@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member
students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG
may have clerked, interned or held various employment positions with firms held in UOIG’s porfolio. In addition, members of UOIG
may attempt to obtain employment positions with firms held in UOIG’s portfolio.
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PRINCIPAL PRODUCTS
General Mills has a variety of products that include cereals, refrigerated yogurts, frozen pastries, and grain foods. The
company generates revenues from a commodity-based product line. Thus, it is important for the company to have a large
volume of sales to create strong revenues throughout the year. The product line is always expanding either by developing new
products or by reinventing current products to fit consumer needs.
Popularity of different product lines differs from various regions in the world. While the United States has the most sales in
breakfast cereals, yogurts, instant soups, and frozen dough products (i.e. pizza, frozen waffles), in other countries, grain snacks
and super-premium ice creams have sold best.
Almost every product is licensed by General Mills and thus the company has full rights to their trademarks and the
promotional mediums (such as the cereal mascots) that are linked with various products. Some of the various trademarks are
as follows:
Cereals: Cheerios, Wheaties, Lucky Charms, Chex, Kix, Cocoa Puffs, Cookie Crisp, and Cinnamon Toast Crunch
Yogurt: Yoplait, Trix, Yoplait Kids, Go-GURT, Yo-Plus, and Colombo
Dough Products: Pillsbury, Golden Layers, Toaster Strudel, Forno de Minas, Wanchai Ferry, Frescarini
Dinner Products: Betty Crocker, Hamburger Helper, Tuna Helper, Old El Paso, Green Giant, and Potato Buds
Grain Snacks: Nature Valley, Fiber One, Fruit Roll-Ups, Fruit By The Foot, Chex Mix, Gardetto’s and Bugles
Dessert Mixes: Betty Crocker, SuperMoist, Warm Delights, Bisquick, Gold Medal, and Creamy Deluxe
Frozen Pizza: Totino’s Jeno’s Pizza Rolls, Pillsbury Pizza Pops, and Pillsbury Pizza Minis
Others: Progresso, Haagen-Dazs, Pop-Secret, Cascadian Farm, and Muir Glen
In addition to trademarks through General Mills’ base product line, the company has invested in joint trademarks with other
companies as well. Examples of this include the TV character Dora the Explorer to use as a mascot “endorsement” for
products such as breakfast cereals. Some companies allow their trademarks to be used in such ways as to create entirely new
products such as Reese’s Puffs cereal. The use of joint trademarks has allows both companies to enjoy profits from other
industries that may not be related to the company’s current industry. As with the Reese’s Puffs cereal, General Mills excels at
creation of Breakfast Cereals while M&M/Mars excels at the creation of candy snacks.
Lastly, General Mills leases out their own trademarks to other companies to generate joint ventures with such companies.
This method of revenue generation is found on the income statement under joint ventures. The company has licensed out
some of their trademarks including the Green Giant, and the Pillsbury Doughboy to other companies such as Nestle and J.M.
Smucker Company. Since profits are generated by the borrower, General Mills receives after-tax royalties from the company
leasing the use of the trademark. Fiscal year 2008 saw $110.8 million in joint revenue profits, up 52.4% from the previous
year.
PRODUCT SALES
Retail Growth
General Mills has seen rising growth rates in international markets as well as American markets. From 2007 to 2008, General
Mills saw a 6.83% growth rate in the United States, a 20.50% growth internationally, and a 10.64% growth through
foodservice and catering operations. Overall, there was a 9.73% growth in revenues from 2007 to 2008. This growth rate can
be attributed to the increasing market share General Mills is obtaining overseas. (See detailed sales figures in Appendix F.)
Important to the business is the retailers who are the direct sellers of goods General Mills produces. General Mills acts as a
manufacturer, not a retailer. Thus, it is important for the company to have strong relations with the supermarkets and stores
that sell its goods. While General Mills does the marketing for its products through television ads and promotional coupons, it
is the retailers’ responsibility to make sure items are displayed according to General Mills’ specifications. Larger retailers are
generally “audited” by a vendor representative who inspects displays and product orientation to confirm correct placement
and storage of General Mills’ products.
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Segment Growth
General Mills not only analyzes its overall growth but
also the growth and decline in its segmented product
lines. The company does individual analyses on both
US and international markets. Highest product
percentage growth has been seen in the snacks
segment. From 2007 to 2008, General Mills’ snack
segment has grown 12.3%. Smallest growth was
observed in the Big G category which includes the
breakfast cereals General Mills produces. Growth for
Big G products from 2007 to 2008 was 4.9%.
However, growth in this segment was up from
previous year (fiscal 2006 to 2008 saw only 1.6%
growth in the Big G category). This was due to the
introduction of another brand of Cheerios and
introduction of new Fiber One cereals. Small Planet
Foods actually saw a negative growth mainly due to the higher prices of products in this category (a category that contains
some super-quality foods). This can be attributed to the downturn in the national economy which in turn has caused US
citizens to budget more.
As for international growth, sales have seen the most
increase in sales performance for the Old El Paso and
Haagen-Dazs brands.
These two brands have
dominated the European markets and have become
key players in both the Mexican cuisine and ice cream
industries. Sales growth in Canada can be mostly
attributed to more favorable exchange rates. Actual
volume sales in Canada grew only marginally
compared to American sales. Asian markets saw a
25% growth mainly due to double digit sales growth
of Haagen-Dazs in the region as well as high growth
in Wanchai Ferry brand dumplings in China. Lastly,
sales growth in Latin America and South Africa was due to introduction of Diablitos brands in Venezuela and pricing
adjustments made to current products sold in these regions.
RECENT NEWS
10/13/2008 – Cheerios to Promote Reading
For the last seven years, Cheerios has helped children by encouraging them to read through its book giveaway during the
October 13th – October 19th “Give a Child a Book Week”. General Mills plans to give away over five million books to
promote reading. The company is working in conjunction with the nonprofit called First Book, a company that strives to aid
in the development of children learning to read. Five books have been selected to be included in Cheerios boxes. These
books include Duck for President, Monkey and Me, and Diego’s Wolf Pup Rescue. – Business Wire
10/8/2008 – MSG Cut from Progresso Soup Recipe
The chemical monosodium glutamate has been removed from the Progresso Soup recipe due to attacks from Campbell’s new
Select Harvest product line which criticized Progresso’s use of MSG in their soups. It is likely that this change will help
maintain General Mills’ market share in the canned soup industry as people grow more conscious of food ingredients and
negative side effects MSG has on the body. – Associated Press
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9/23/2008 – General Mills Named Top Company for Working Mothers
Working Mother Magazine has named General Mills again for the 13th year as the top company for working mothers. This is
due to pay, flexibility, child care, as well as yoga classes for post-natal mothers, and a fitness center on campus. – St. Paul
Business Journal
9/22/2008 – New Products and Good Margins Drove 2008 Profits
The continual development of new products and maintaining strong margins has been the business model of General Mills in
2008 and it plans to continue this model to maintain healthy growth during fiscal 2009. Fiscal year 2008 brought forth a 24%
increase in stock price due to the company’s strong business model. Additionally, sales were driven by additional sales venues.
Dollar stores helped drive up sales by providing a new point of sale to more economical shoppers. – St. Paul Business Journal
8/13/2008 – General Mills to Sell Pop Secret to Diamond Foods
General Mills gave confirmation that it plans to sell its popcorn brand Pop Secret to Diamond Foods and expects to receive
$160 million proceeds after transaction fees. Pop Secret is currently considered the #2 product in the $900 million US
microwave popcorn category. The transaction should occur in fall of the 2009 fiscal year. – Business Wire
INDUSTRY
Industry Overview
General Mills along with other companies in the non-durable food items industry are prone to certain factors that affect their
profitability. The biggest input cost for this industry is the cost of raw materials. All food items must derive from some kind
of organic matter which is either taken straight from agricultural venues or created by chemical processes in labs. Depending
on the food being sold, there may be more processes needed to create the food item for sale. For example, a frozen dinner
would take more processing power than an all-natural granola bar. Since late-stage foods take more processing power, they
are generally sold at a higher price.
Suppliers and retailers are both important players in this industry. Not only do food manufacturers have to consider the cost
of raw materials, but they must also consider a price point for both wholesale and retail. Pricing is crucial to the success of a
food item. Generally, items are placed strategically in grocery stores. Thus, a customer who is not brand loyal will tend to
either buy based on economical value or quality with almost no thought process in the grocery store. Ergo, it is the goal of
manufacturers to create brand loyalty so that customers do not consider alternative items when shopping.
While the end-user may be people who buy the goods for personal consumption, the actual customer of General Mills and
other food manufacturers are the retail stores and wholesalers. One of the largest retailers for this industry is Wal-Mart. In
the 2008 fiscal year, Wal-Mart accounted for 27% of all sales in the US segment for General Mills. The majority of customers
in this industry are venues such as supermarkets and discount stores. However, another portion of the customer base includes
bakeries and convenience stores.
Industry Growth
While new products are constantly be produced or reinvented by manufacturers, there has been a shift towards consolidation
that will likely continue in the future. One driver of industry growth is grocery retailer industry growth. Without venues to
sell products in, the non-durable food items cannot reach the end-user. As retailers continue to expand to European, Asian
and Latin American nations, it is likely that the food manufacturers will continue to experience growth as well.
S.W.O.T. ANALYSIS
Strengths
One of the largest strengths behind the success of General Mills is brand loyalty. General Mills has been able to market their
products in such a way that end-user customers have created a psychological “no alternatives” mentality when shopping. The
brands that have become staple consumer foods are Cheerios, Chex, Yoplait Yogurt, Pillsbury, and Betty Crocker. In addition
to brand loyalty strength, General Mills has a high awareness factor for their products. Their brands such as Cheerios and
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Pillsbury have become almost iconic in households. Even if a customer is not brand loyal and shops through impulse buying,
the brand awareness itself may play a role in which item the customer chooses. Familiarity with brands is due to the marketing
strength General Mills has.
Weaknesses
The only weakness General Mills faces is the slow reaction time the company has generally had when faced with a changing
industry trend. For example in the previously stated MSG case (found in the Recent News section), General Mills took a
reactive position rather than a proactive one when faced with consumer trends. As end-users continue to become more health
conscious and environmentally aware, it will be important for General Mills to assess its position when confronted with such
issues and determine what kind of proactive strategy to take.
Opportunities
Joint ventures have been and will continue to generate opportunities for General Mills. Although joint ventures accounted for
less than 1% of total revenues in 2008, the company has taken up this opportunity and sales growth through this revenue
generating strategy has rapidly increased. General Mills currently works in conjunction with Cereal Partners Worldwide and
Nestle to create joint venture opportunities. By expanding this method of selling products or promoting their brands, General
Mills can continue to see sales growth in the future.
Threats
Although it may seem as if the food manufacturing industry will always thrive due to the obvious human need of food, many
threats plague the food manufacturing industry. Reduction of population growth is one of the most important unavoidable
threats facing the food manufacturing industry. Demand for food is dependent on the growth of national and global
population. If population slows in growth or mortality rates increase, then the food manufacturing industry simply cannot
grow due to current levels of saturation, especially in the US market.
Consumer trends contribute to threats that face General Mills. Often times, fads or trends cause food manufacturers to take
reactive response to such changes in the market. Reduction in demand for one product or an increased demand in a specialty
product may cause a food manufacturer to have a difficult time adjusting their inventory levels based on dependence of
suppliers and streamline processing capacity.
Safety of food items is very important in the food manufacturing industry. Not only does food get inspected by agencies such
as the FDA, but batches of food must adhere to quality control guidelines set forth by General Mills. A recall of food items
based on the questionability of safety can be very costly for General Mills.
PORTER’S 5 FORCES ANALYSIS
Supplier Power - Medium
Raw materials used in food processing are usually bought from farms. While various suppliers exist in bountiful quantity,
General Mills must consider overall customer demand and raw material pricing when choosing which farms to buy from.
Often, contractual agreements are made based on expected harvest of a farm which is then adjusted to meet an actual budget
at the time of the harvest. Competition for raw materials exists in the food manufacturing industry which in turn causes the
supplier to have more pricing power.
Additionally, packaging materials for foods is important to consider as part of raw materials. These suppliers are a necessity
for all food manufacturers and their role in the industry is vital to operations. Thus, even though a lack in supply of materials
such as corrugated boxes and cartons is less likely, these suppliers still have some pricing power due to their specialized
services.
Barriers to Entry – Very High
The food manufacturing industry is one of the most completive industries. Brand loyalty is one of the most powerful drivers
for obtaining revenues. Thus, new entrants to the market may have a hard time growing enough awareness and brand loyalty
in the market. Additionally, if a new entrant cannot create brand loyal customers on a rapid basis, the costs of maintaining
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their business will likely drive the new company to bankruptcy or the possibility of being bought out by a larger company. The
only real threats to current companies in the market are new entrants that offer specialty goods. It is difficult and costly for
large food manufacturers to create large varieties of specialty goods. Thus, new entrants who specialize in these types of
goods may have a better chance penetrating the market.
Buyer Power - High
While suppliers have some power due to the amount of demand for goods they offer, the buyers of these raw materials are not
completely powerless when establishing a buying price. Farms may be able to negotiate contracts with buyers that preset a
price. However, a large amount of suppliers sell their goods as lots and if they require too high of a price, the manufacturers
can choose to find other suppliers. The only way a farmer generates income is through the sale of his or her harvest. Thus,
they are dependent on the food manufacturers to maintain a living. While they may be able to barter with large manufacturers,
ultimately it is the buyer who has the pricing power when purchasing agricultural goods. One should assume that if a farmer
does not sell his or her harvest, they forego all potential profit from that harvest as their harvest is perishable.
Threat of Substitutes – Very High
Substitute goods are always a looming threat in the food manufacturing industry. For a mid priced company like General
Mills, if the economy turns sour, then consumers will likely purchase more generic brands. If the economy grows stronger,
people may choose more expensive brands or decide to go out to restaurants instead. Substitutes are unavoidable in this
industry, but General Mills can rely on brand loyalty and awareness to help deter consumers from choosing alternate brands.
Degree of Rivalry – High
The amount of competition in the food manufacturing industry results in rivalries amongst companies. This is mostly due to
the threat of substitutes, but it also expands into suppliers as well as retailers. One characteristic that defines the industry is
the constant concentration found in the industry. Brand acquisitions such as General Mills’ recent sale of Pop Secret have led
to higher concentration in the industry. Smaller companies are often bought out by larger ones or even conglomerates.
Mergers are common within the industry and small cap companies are generally acquired by larger ones.
CATALYSTS
Upside
Increased supplier production and lower cost of raw materials
Increased economic welfare of developing nations
Foresight of market trends resulting in higher sales forecasts
Higher brand awareness resulting in brand loyalty
Economic stability in the United States and other major international customers
Downside
Economic downturn resulting in customers choosing generic brands
Catastrophes that reduce overall supply of raw materials and thus increase input costs
Higher fuel costs which increase transportation costs of raw materials and finished goods
COMPARABLES ANALYSIS
I used four comparable companies based on similar debt structure as well as vulnerability to similar risk and economic factors.
The four companies used were: Kraft Foods, Heinz, Sara Lee Corp., and Del Monte. I used three metrics to measure implied
price, these included EV/EBITDA (50% weighting), EV/Revenue (20% weighting), and EV/OCF (30% weighting). The
implied price from the comparables analysis was $55.01 per share. This translates into the stock being 14.61% overvalued.
Companies were weighted based on their similarity to General Mills based upon the metrics used. Sara Lee and Del Monte
experienced losses in their trailing-twelve month’s income which caused them to be less weighted than Kraft Foods and
Heinz.
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Kraft Foods – KFT (50%)
Kraft Foods was created by James L. Kraft whose roots were in wholesale cheese sales in 1903. The company’s origins were
set in Chicago, Illinois and it opened its first plant in 1914. Currently, Kraft owns rights to large brands such as Ritz, Kraft
Macaroni and Cheese, Oscar Meyer, Philadelphia Cream Cheese, Nabisco, and Oreo. Kraft employees over 103,000 and
distributes products worldwide to over 150 countries. The company generated $40,998 million in 2008 and has a current price
of $27.91.
Heinz – HNZ (25%)
Heinz is a leader in the ketchup industry bottling over 650 million bottles of ketchup annually. The company was started by a
man named Henry John Heinz and is currently headquartered in Pittsburgh, Pennsylvania. Heinz focuses on 15 Power Brands
which account for over 70% of their sales in 200 countries worldwide. If one were to calculate how much ketchup they sale, it
is equivalent to about two single-size packets of ketchup for every person in the world. Last year, the company generated
$10,406 million in revenue and has a current price of $44.57.
Sara Lee Corp. – SLE (15%)
Sara Lee has its origins through a man named Nathan Cummings’ who purchased a small coffee distributor in Baltimore in
1939. The company went public in 1946 and later acquired Kitchens of Sara Lee in 1956. Sara Lee is a large food
manufacturer that has created brands such as Hillshire Farm, Jimmy Dean, Kiwi, and Sanex. In fiscal year 2008, Sara Lee
Corp. generated $13,212 million in revenue and has a current price of $11.24
Del Monte – DLM (10%)
Del Monte originated in 1886 and became publicly traded as Del Monte Foods in 1916 in San Francisco, California.
Currently, the company is struggling against their retailers’ alleged use of a cartel between 2000 and 2002. The retailers Dole
Food Co. and Weichert are being fined $62.7 million and $20.2 million, respectively. However, as one of the largest produce
vendors in the world, Del Monte excels at delivering fresh food to consumers. Last year the company generated $3709.5
million in revenues and is currently trading at a price of $6.15 per share.
DISCOUNTED CASH FLOW ANALYSIS
DCF Synopsis
The Discounted Cash Flows statement used projections based on future revenue growth and percentage of sales. Each line
item has been projected out ten years and reflects the most reasonable estimate of growth in future years based on
assumptions made in the following explanations. The DCF has been created to show conservative growth estimates to display
a more accurate presentation of possible risks that may act as barriers to the company in the future. The price implied by the
DCF was $133.38, and undervaluation of 107.05%.
Beta
The final beta calculated was 0.62 through use of a Hamada formula. This seems reasonable in a market that is influenced by
overall markets but at the same time maintains a strong position due to the commodity products it serves. Comparable
companies generally have a beta ranging between 0.3 and 0.9. The companies used for comparison to derive this beta can be
found in Appendix D.
Revenue
Many factors contribute to expectations of future revenue. First of all future expectations of growth are comprised of
international expansion as well as maintaining sales volumes in the United States. Sales volumes in the United States have
been fairly consistent with small growth due to product saturation in the markets. Pricing strategies have been able to increase
revenues, but the rise in prices originated from higher input costs associated with raw materials. General Mills expects to
maintain single-digit growth in the future.
Sales in the United States grew 6.8% from 2007 to 2008 and 20.5% overseas in the same year. This resulted in a 9.73% sales
growth from previous year. With continual growth in international markets, the company will likely experience relatively
consistent growth in future years. However, as General Mills expands its business, it will also continue to saturate markets
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which in turn will cause the company to experience diminishing growth in long-term projections. Thus, it is likely the
company will experience about 6-7% growth in the next five years which will then diminish to 3% by the tenth project year.
Cost of Goods Sold
COGS have remained consistent over the last few years due to gross margins remaining relatively consistent. General Mills
takes a pricing strategy that increases price in direct relation to input costs. Thus, when prices of COGS go up, sales prices
will rise as well. Future expectations are that COGS will increase as a percentage of sales due mainly to international
expansion. Most raw materials are bought in North America, so transporting these materials to international markets is fairly
costly and would increase future COGS as expansion continues. Therefore, while historical COGS have been about 61%,
future COGS will likely rise to 66% of revenue because of this international sales growth.
Depreciation and Amortization
International growth will be a large factor effecting increase in depreciation in future years. General Mills is speculating
opening additional plants in Europe and a plant in Asia in the next five years. Since the company uses an accelerated
depreciation approach to depreciating assets, then they will likely have higher accumulated depreciation in the next five years.
Thus, with opening of new plants internationally, General Mills will likely experience a spike in depreciation within the next
five years followed by stabilization of depreciation that will return to its current percentage of sales.
Research and Development
In past years, research and development has been consistent due to General Mills mostly operating in the United States and
Canada. However, international expansion will cause the company to increase research and development costs to meet
different cultural food needs, especially in Asian countries. Thus, I expect a slight increase in growth of research and
development costs due to international expansion and the need for products that align with cultural culinary norms.
Effective Tax Rate
Tax rates should remain fairly consistent in future years. However, international expansion (and the current presidential
election) may raise the tax rate slightly in the future. I expect terminal tax rates to be around 35.30%.
After-Tax Income from Joint Ventures
Joint ventures have played an increasing role in General Mills’ profitability. There are currently many opportunities to leverage
brand image by expanding joint venture operations. General Mills has successfully used their Green Giant character in
Europe in conjunction with other products created by companies such as Nestle. General Mills expects continually high
growth in this revenue division in the following years as they believe there are many opportunities, especially in the European
markets, where brand image can be leveraged in joint ventures to generate additional profits. There will likely be high doubledigit growth in the next few years followed by a sharp decline due to limited opportunities to create additional joint venture
operations in long-term projections.
Capital Expenditures
As previously stated in Depreciation and Amortization, there will be capacity growth in the next few years due to plans to
build plants in Europe and Asia. Although purchase prices have not been established yet, the DCF has been adjusted for
expected increases as a percentage of sales for capital expenditures. Thus, capital expenditures should increase as a percentage
of revenue by about 0.5% in the long term due to buyouts of factories in Europe and Asia, installation of fixtures and
machinery, and maintenance. The reason why the increase is not more than 0.5% is because General Mills actually plans to
sell some factories in the United States and Canada due to increased automation processes and obtaining salvage value funds
from current machinery.
RECOMMENDATION
General Mills is a company that has had strong growth in international markets and continues to thrive in domestic markets.
The company has built a positive image by effectively promoting its brands to end-users. Iconic images such as the Pillsbury
Doughboy have allowed General Mills to become a household name in the Consumer Goods Industry. Continual expansion
and growth through joint ventures will contribute to the future profitability of the company. Although my comparables
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analysis shows overvaluation of 17.42%, this only shows a
snapshot of comparisons in this currently unstable market.
Thus, the weighting of my comparables analysis was only
30% of total valuation. My DCF portrays a possible future
for General Mills and shows that the company will remain
competitive in the industry. The DCF calculated shows a
45.37% undervaluation of the company. I gave the DCF a
70% weighting as it shows expected future growth.
Prices
DCF Implied Price
Comparable Implied Price
Weighted Implied Price
Current Price
Undervalued
$
$
$
$
Weight
91.93 70%
52.22 30%
80.02 100%
63.24
26.53%
I recommend a BUY for General Mills in all portfolios due to my evaluation that the company is 26.53% undervalued. It
should also be noted that return through dividends had a 2.70% yield last year (issuance date of dividends this year is on
November 3rd). Therefore, it is with confidence that I recommend the University of Oregon Investment Group to take
holdings in General Mills (GIS).
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APPENDIX A – COMPARABLES ANALYSIS
Weight
Current Price
Beta
Market Cap
Shares Outstanding
Long-term Debt
Enterprise Value
Revenue (ttm)
EBITDA (ttm)
Net Income (ttm)
Operating Cash Flows
Preferred Stock
Multiples
EV/EBITDA
EV/Revenue
EV/Operating Cash Flows
$
$
$
$
$
$
$
$
$
General Mills
0%
63.24
0.62
21,084,216,000
333,400,000
4,465,000,000
25,549,216,000
14,077,400,000
2,649,880,000
1,284,300,000
2,027,680,000
General Mills
9.6417
1.8149
12.6002
$
$
$
$
$
$
$
$
$
Kraft Foods
50%
26.37
0.33
40,032,641,208
1,518,113,053
19,348,000,000
59,380,641,208
40,998,000,000
5,741,000,000
2,521,000,000
4,593,000,000
-
Heinz
25%
$
41.76
0.51
13,042,049,147
312,309,606
5,106,636,000
18,148,685,147
10,405,701,000
2,566,378,000
868,595,000
2,175,831,000
-
$
$
$
$
$
$
$
$
Kraft Foods
10.3433
1.4484
12.9285
Heinz
7.0717
1.7441
8.3410
$
$
$
$
$
$
$
$
$
Sara Lee Corp.
15%
10.25
0.91
7,239,647,775
706,307,100
2,340,000,000
9,579,647,775
13,212,000,000
872,000,000
(79,000,000)
671,000,000
Sara Lee Corp.
10.9858
0.7251
14.2767
Del Monte
10%
$
$
$
$
$
$
$
$
$
5.87
0.93
1,159,613,687
197,549,180
1,843,100,000
3,002,713,687
3,709,500,000
430,100,000
119,500,000
369,300,000
Del Monte
6.9814
0.8095
8.1308
$
$
$
$
$
$
$
$
$
Weighted Average
100%
21.06
0.52
24,478,741,425
962,834,911
11,485,969,000
35,964,710,425
25,453,175,250
3,685,904,500
1,477,748,750
2,978,037,750
Weighted Average
9.2856
1.3499
11.5041
Summary of Comparables Analysis
Multiples
EV/EBITDA
EV/Revenue
EV/Operating Cash Flows
$
$
$
$
$
Implied Value
60.41 50%
43.61 20%
44.32 30%
52.22 Implied Price
63.24 Current Price
17.42% Overvalued
10
General Mills
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX B – DCF ANALYSIS
in Millions
Revenue
% growth
Cost of Goods Sold
% of Revenue
1
Depreciation and Amortization
% of Revenue
Gross Profit
Gross Margin
SG&A
% of Revenue
2
Research and Development
% of Revenue
Restructuring Costs
% of Revenue
Operating Income (EBIT)
Operating Margin
Interest Expense
% of Revenue
Subsidiary and Capitalized Interest
% of Revenue
Income Before Taxes
% of Revenue
Income Tax Expense
Effective Tax Rate
Taxed Income from Joint Ventures
% growth
Net Income
% of Revenue
Add Back: Depreciation
Add Back: Interest Expense
Cash Flow from Operations
% of Revenue
Current Assets
% of Revenue
Current Liabilities
% of Revenue
Net Working Capital
% of Revenue
Change in NWC
Capital Expenditures
% of Revenue
Free Cash Flow
Discounted Cash Flows
$
$
$
$
$
$
2006
11,711.3
3.57%
7,121
60.8%
424
3.62%
4,166.5
39.20%
1,999
17.07%
178
1.52%
29.8
0.3%
1,959.0
16.73%
367
3.13%
32.6
0.3%
1,559.4
13.32%
538.3
34.52%
69.2
-27.08%
1,090.3
9.31%
424
240
1,755
14.98%
3,041
25.97%
6,138
52.41%
$
$
$
$
$
(3,097)
-26.44%
(1,968)
360
3.07%
3,363 $
2007
12,441.5
6.24%
7,537
60.6%
418
3.36%
4,486.4
39.42%
2,198
17.67%
191
1.54%
39.3
0.3%
2,058.0
16.54%
397
3.19%
29.9
0.2%
1,631.3
13.11%
560.1
34.33%
72.7
5.06%
1,143.9
9.19%
418
261
1,822
14.65%
3,054
24.54%
5,845
46.98%
$
$
$
$
$
(2,791)
-22.44%
306
460
3.70%
1,056 $
2008
13,652.1
9.73%
8,319.1
60.94%
459.2
3.364%
4,873.8
39.06%
2,420.3
17.73%
204.7
1.50%
21.0
0.15%
2,227.8
16.32%
432.0
3.16%
(10.3)
-0.1%
1,806.1
13.23%
622.2
34.45%
110.8
52.41%
1,294.7
9.48%
459.2
283.2
2,037.1
14.92%
3,620.0
26.52%
4,856.3
35.57%
$
$
$
$
$
(1,236.3)
-9.06%
1,555.1
522.0
3.82%
(40.0) $
2009 Q1
3,497.3
13.84%
2,194.0
62.73%
111.6
3.191%
1,191.7
37.27%
668.4
19.11%
50.7
1.45%
2.7
0.08%
469.9
13.44%
94.5
2.70%
(5.5)
-0.2%
380.9
10.89%
133.2
34.97%
30.8
37.50%
278.5
7.96%
111.6
61.5
451.5
12.91%
3,326.2
$
$
$
$
$
4,465.0
(1,138.8)
-32.56%
97.5
128.6
3.68%
225.4 $
$
2009 Q234 E
11,200.0
5.59%
7,168.0
64.00%
380.8
3.400%
3,651.2
36.00%
1,904.0
17.00%
179.2
1.60%
11.2
0.10%
1,556.8
13.90%
336.0
3.00%
(11.2)
-0.1%
1,232.0
11.00%
426.3
34.60%
121.6
37.50%
927.3
8.28%
380.8
219.7
1,527.8
13.64%
3,900.0
$
$
$
$
$
4,475.0
(575.0)
-5.13%
563.8
421.0
3.26%
543.0 $
515.0
1
Depreciation and amortization has been calculated once out of COGS, this is because 95% of depreciation derives from COGS
2
Research and Development has been calculated out of SG&A
2009E
14,697.3
7.65%
9,362.0
63.70%
492.4
3.350%
4,842.9
36.30%
2,572.4
17.50%
229.9
1.56%
13.9
0.09%
2,026.7
13.79%
430.5
2.93%
(16.7)
-0.1%
1,612.9
10.97%
559.5
34.69%
152.4
37.50%
1,205.8
8.20%
492.4
281.2
1,979.3
13.47%
3,900.0
26.54%
4,475.0
30.45%
$
$
$
$
$
(575.0)
-3.91%
661.3
549.6
3.74%
768.4 $
$
2010E
15,726.1
7.00%
10,064.7
64.00%
566.1
3.600%
5,095.3
36.00%
2,752.1
17.50%
251.6
1.60%
31.5
0.20%
2,060.1
13.10%
471.8
3.00%
15.7
0.1%
1,572.6
10.00%
550.4
35.00%
202.6
33.00%
1,224.8
7.79%
566.1
306.7
2,097.6
13.34%
4,088.8
26.00%
4,403.3
28.00%
$
$
$
$
$
(314.5)
-2.00%
260.5
597.6
3.80%
1,239.6 $
1,095.4 $
2011E
16,826.9
7.00%
10,937.5
65.00%
656.3
3.900%
5,233.2
35.00%
2,860.6
17.00%
286.1
1.70%
33.7
0.20%
2,052.9
12.20%
521.6
3.10%
16.8
0.1%
1,514.4
9.00%
530.0
35.00%
263.4
30.00%
1,247.8
7.42%
656.3
339.1
2,243.1
13.33%
4,408.7
26.20%
4,543.3
27.00%
$
$
$
$
$
(134.6)
-0.80%
179.9
673.1
4.00%
1,390.1 $
1,144.6 $
2012E
17,836.6
6.00%
11,593.8
65.00%
695.6
3.900%
5,547.2
35.00%
3,032.2
17.00%
303.2
1.70%
35.7
0.20%
2,176.1
12.20%
552.9
3.10%
17.8
0.1%
1,605.3
9.00%
561.9
35.00%
321.4
22.00%
1,364.8
7.65%
695.6
359.4
2,419.8
13.57%
4,691.0
26.30%
4,815.9
27.00%
$
$
$
$
$
(124.9)
-0.70%
9.8
749.1
4.20%
1,660.9 $
1,274.3 $
2013E
18,906.7
6.00%
12,289.4
65.00%
718.5
3.800%
5,898.9
35.00%
3,214.1
17.00%
340.3
1.80%
37.8
0.20%
2,306.6
12.20%
586.1
3.10%
18.9
0.1%
1,701.6
9.00%
597.3
35.10%
369.6
15.00%
1,473.9
7.80%
718.5
380.4
2,572.8
13.61%
4,991.4
26.40%
5,010.3
26.50%
$
$
$
$
$
(18.9)
-0.10%
105.9
794.1
4.20%
1,672.7 $
1,195.8 $
2014E
19,852.1
5.00%
12,903.9
65.00%
754.4
3.800%
6,193.9
35.00%
3,335.2
16.80%
357.3
1.80%
39.7
0.20%
2,461.7
12.40%
615.4
3.10%
19.9
0.1%
1,826.4
9.20%
641.1
35.10%
402.8
9.00%
1,588.2
8.00%
754.4
399.4
2,741.9
13.81%
5,241.0
26.40%
5,260.8
26.50%
$
$
$
$
$
(19.9)
-0.10%
(0.9)
833.8
4.20%
1,909.1 $
1,271.7 $
2015E
20,844.7
5.00%
13,549.0
65.00%
750.4
3.600%
6,545.2
35.00%
3,501.9
16.80%
375.2
1.80%
41.7
0.20%
2,626.4
12.60%
667.0
3.20%
20.8
0.1%
1,938.6
9.30%
682.4
35.20%
431.0
7.00%
1,687.2
8.09%
750.4
432.2
2,869.9
13.77%
5,523.8
26.50%
5,419.6
26.00%
$
$
$
$
$
104.2
0.50%
124.1
896.3
4.30%
1,849.5 $
1,148.0 $
2016E
21,678.5
4.00%
14,307.8
66.00%
780.4
3.600%
6,590.3
34.00%
3,620.3
16.70%
411.9
1.90%
43.4
0.20%
2,514.7
11.60%
693.7
3.20%
21.7
0.1%
1,799.3
8.30%
633.4
35.20%
452.6
5.00%
1,618.5
7.47%
780.4
449.5
2,848.5
13.14%
5,744.8
26.50%
5,636.4
26.00%
$
$
$
$
$
108.4
0.50%
4.2
932.2
4.30%
1,912.1 $
1,105.9 $
2017E
22,545.6
4.00%
14,880.1
66.00%
789.1
3.500%
6,876.4
34.00%
3,765.1
16.70%
428.4
1.90%
45.1
0.20%
2,637.8
11.70%
721.5
3.20%
22.5
0.1%
1,893.8
8.40%
666.6
35.20%
470.7
4.00%
1,697.9
7.53%
789.1
467.5
2,954.5
13.10%
5,974.6
26.50%
5,749.1
25.50%
$
$
$
$
$
225.5
1.00%
117.1
969.5
4.30%
1,868.0 $
1,006.7 $
2018E
23,222.0
3.00%
15,326.5
66.00%
812.8
3.500%
7,082.7
34.00%
3,878.1
16.70%
441.2
1.90%
46.4
0.20%
2,717.0
11.70%
743.1
3.20%
23.2
0.1%
1,950.6
8.40%
688.6
35.30%
484.8
3.00%
1,746.9
7.52%
812.8
480.8
3,040.4
13.09%
6,153.8
26.50%
5,921.6
25.50%
232.2
1.00%
6.8
998.5
4.30%
2,035.1
1,021.9
APPENDIX C – DCF ASSUMPTIONS AND ANALYSIS
Sales Growth
Sales growth is expected to maintain a healthy
trend with future expectations to remain in
single digit sales growth. Most growth by
price should be seen in the United States while
sales growth by volume will be experienced
internationally. Growth of first quarter is up
13.84% from last year due to increased ice
cream sales of Haagen-Dazs in European
markets as well as pricing increases.
Assumptions (in millions except prices)
Tax Rate
35.30%
10 Year Treasury
3.72%
Cost of Debt
5.95%
Return on Equity (CAPM)
8.06%
Beta
0.62
Market Risk Premium
7.00%
WACC
7.32%
% Equity
% Debt
82.54%
17.46%
Terminal Growth Rate
Terminal Value
PV Terminal
PV Free Cash Flow
Long Term Debt
Firm Value
Implied Price
Current Price
Equity Value
Shares Outstanding
Undervalued
$
$
$
$
$
$
$
$
3.00%
48,516
24,362
10,780
4,465
35,142
91.93
63.24
30,677
333.7
45.37%
11
General Mills
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX D – BETA CALCULATION
Hamada Formula Computations
K
CAG
HNZ
THS
SLE
CPB
DLM
Beta
0.33
0.68
0.51
0.44
0.91
0.33
0.93
D/E Ratio
3.79
1.41
4.29
1.24
2.74
3.90
2.10
SE
0.14
0.20
0.14
0.41
0.16
0.15
0.21
Weight
10.0%
15.0%
10.0%
10.0%
25.0%
7.5%
22.5%
Mean
Median
0.69
0.51
2.59
2.74
0.20
0.16
100%
100%
Pure Business Beta
Sample D/E
Unlevered Busienss Beta
GIS D/E
GIS Beta
0.691
2.594
0.258
2.119
0.307
GIS Hamada Beta
Hamada Formula
0.26((1+(1-0.35)2.119))
0.62
APPENDIX E – BETA SENSITIVITY ANALYSIS
Beta
Standard Error
WACC at Company Beta
Error
(-3σ)
(-2.5σ)
(-2σ)
(-1.5σ)
(-1σ)
(-0.5σ)
0
0.5σ
1σ
1.5σ
2σ
2.5σ
3σ
Beta
0.024
0.123
0.223
0.322
0.421
0.521
0.620
0.719
0.819
0.918
1.017
1.117
1.216
0.62
0.20
7.32%
$
$
$
$
$
$
$
$
$
$
$
$
$
Price
519.81
306.92
214.93
163.64
130.94
108.28
91.65
78.93
68.89
60.77
54.06
48.43
43.63
12
General Mills
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX F – ADDITIONAL INFORMATION
Sales Distribution
APPENDIX E – SOURCES
Yahoo Finance
Wall Street Journal
Business Wire
St. Paul Business Journal
Associated Press
Factset
Motley Fool
Business Week
S&P NetAdvantage
General Mills Investor Relations Website
Kraft Investor Relations Website
Heinz Investor Relations Website
Sara Lee Corp. Investor Relations Website
Del Monte Investor Relations Website
13