General Mills Valuation
As at April 1, 2005
Group 8:
Brittany Burgess (brittraider02@yahoo.com)
Tike Davis (tike.f.davis@ttu.edu)
Ryan Macdonald (TRUMAC005@aol.com)
Jim Vineyard (jim.e.vineyard@ttu.edu)
Jared Wright (jared@jaredwright.net)
Table of Contents
Executive Summary
3-5
I. Business and Industry Analysis
5-11
II. Accounting Analysis
11-19
III. Ratio Analysis & Forecast Financials
19-35
IV. Valuation Analysis
36-44
Appendix
45-52
References
52
Group Allocation
53
2
Brittany Burgess, Tike Davis, Ryan Macdonald, Jim Vineyard, Jared Wright
General Mills
Investment Recommendation: HOLD
GIS
52week price range
Revenue (2004)
Market Cap.
NYSE
Shares Outstanding
Dividend Yield
3-month AVG daily trading volume
Date of Valuation: April 1, 2005
2004A
2005E
2006E
2007E
49.07 EPS Forecasts
$43.01-$53.89 FYE 25-May
$1.06 B
EPS
$2.81
$3.50
$3.76
$4.08
$18.14B
Valuation Ratio Comparison
375,000,000 Trailing P/E
17.86
Forward P/E
15.73
2.50% Forward PEG
1.82
1,797,227 M/B
3.42
Book value per share
ROE
ROS
Est. 5 year EPS growth rate
Cost of Capital Estimates
Ke estimated
5-year Beta
3-year Beta
2-year Beta
Published Beta
Kd
WACC
$14.34
20.40%
9.50%
15.00%
Beta
Ke
0.006
0.118
0.259
0.004
3.43%
3.47%
8.00%
3.23%
3.56%
3.98%
Valuation Estimates
Actual Current Price (4-1-05)
48.65
Ratio Based Valuation
Trailing P/E
Forward P/E
Forward PEG
M/B
Ford Epic Valuation
50.19
44.2
26.73
49.05
55.73
Intrinsic Valuations
Discounted Divdends
Free Cash Flow
Residual Income
Abnormal Earnings
37.85
48.99
55.26
59.49
3
Executive Summary
General Mills is a very reputable company within the processed foods industry. The company has been in
the industry for around 100 years and they began their journey with successful flour mills near the Mississippi
River.
While performing the accounting analysis of General Mills, very few problems existed. General Mills has
had some very challenging years recently and there have been both positive and negative effects. The attacks of
9/11, the purchase of Pillsbury, and the technology boom all occurred within the time span of 2000-2004, which
were the years we used to value the company. The financials for 2001 were most affected; however, we were
able to see trends by looking to the past and future.
Overall, General Mills’ accounting strategy is one of conservatism. They tend to focus on activities that
will result in successes instead of huge failures. By taking the safe road, General Mills has not had problems
with red flags in their financials. The company did not have any potential red flags that jumped out. The
managers are more focused on the success of the company as a whole instead of their individual successes.
Therefore, General Mills has positive accounting practices that have helped them to become such a reputable
company.
In calculating the ratios and forecast financials for General Mills, trends were somewhat difficult to find
because of certain worldly occurrences, as mentioned above. When forecasting out the financial statements, we
found the growth rate of General Mills to be around 8%. This growth rate seems to be fairly low for a company
as prosperous as General Mills; however, taking the conservative route, we did not want to create inflated
numbers that would likely be unrealistic for valuation.
Once we had the ratios calculated, we found trends and used them to forecast out the balance sheet,
income statement and statement of cash flows. We forecast out ten years, which would bring us to 2014. Being
4
so far in the future, it is reasonable to assume that our forecasts are imperfect; on the other hand, it would be
nearly impossible to have a perfect view of the future.
Once we had a clear view of our forecast financials, we were then able to use 5 different models to value
General Mills. These models were the method of comparables, discounted dividends model, discounted free cash
flows model, abnormal earnings growth model, and residual income model. Each model tries to look at different
financials for the company to come up with a reasonable stock price that can be compared to the markets’
perspective.
I. Business and Industry Analysis
General Mills has a wide array of products that are offered at competitive prices around the world. From
their well-known breakfast cereals which include Cheerios, Wheaties, and Lucky Charms to their successful
baking products such as Gold Medal Flour the General Mills name is synonymous with quality. General Mills
has grown substantially throughout the years due in large part to the company’s popular brand names, this
however is only part of the reason this company has been so successful. The purchase of Pillsbury in 2001
proved that this company is not content with their success in the past but instead is very much focused on the
future. General Mills holds top market position in almost every segment they are involved in. This is a critical
point to consider when assessing the industry they compete in. The packaged food industry is highly
concentrated with major players dominating the market. Kellogg and Kraft are the two main competitors to the
company.
5
General Mills from their inception over 100 years ago has revolutionized the industry. They were the first
to use flour mills which in essence started the packed food industry and jump started the market. From mills to
Nerf balls General Mills has always been an innovative leader in the industry providing a benchmark to which all
others are judged.
The Five Forces Model
Competitive Force 1: Rivalry Among Existing Firms
General Mills is a company that specializes in consumer foods. The wide array of products offered by
General Mills includes everything from meals to food services. With such a large segment of the market, the
company is well diversified within the consumer foods industry. Major competitors include Kraft and Groupe
Danone. The packaged foods industry is dominated by the major players at the top, thus moderate to low
competition exists.
Switching costs are relatively high in this market derived from the fact that most consumers purchase
foods they are familiar with and are accustomed to buying. Commonly known as brand loyalty, this type of
behavior produces low competition between rival companies. This is true in cases where substitute products are
priced in proximity to one another.
In order to truly compete on the level the top five companies compete on, a new entry to the industry
would have to have a large amount of capital and a well thought out marketing scheme. In the food industry,
there are entry barriers, like brand loyalty, that makes it hard for start up companies to gain a significant market
share. Existing firms have reinvented themselves time and again to meet the constantly changing consumer
market. One way General Mills has managed to stay on top of segments such as the dry cereal market, is by
introducing new products backed by the General Mills name.
6
Competitive Force 2: Threat of New Entrants
General Mills, Inc. covers a wide span of the food processing industry in that its products are sold in the
following areas:
•
U.S. Retail (Cheerios, Pillsbury, Hamburger Helper, etc.)
•
Bakeries and Food Service (Convenience Stores, Vending Machines, etc.)
•
International (China, Australia, etc.)
•
Joint Ventures (Haagen Dazs of Japan, PepsiCo of Europe, etc.)
In dealing with the numerous areas above, General Mills has an advantage over new entrants through economies
of scale. Their large variety of products and areas in which they are sold allows for a cost advantage over others.
A new company entering the industry would face challenges of making the relationships with companies both
here and in the U.S. to accomplish the success of General Mills.
In addition to establishing these relationships, General Mills has gained a first mover advantage over a
large portion of the food processing industry. According to finance.yahoo.com, General Mills ranks fifth in the
industry for their market capitalization. By entering the industry early, General Mills has enabled them to rank
with the top competitors of the industry. New entrants would have to start from scratch and may have to eat the
costs of making their way to the top before success would become a reality.
7
Overall, General Mills has a low degree for threat of new entrants for the reasons detailed above. Having
been in the industry since the 1860s with their flour mills on the Mississippi River, General Mills is very
experienced and diversified over the entire world. Also, the apparent success of General Mills still remains
below some other top competitors, such as Groupe Danone and Kellogg Co. New entrants would need a strong
variety of products with ambition to be involved in communities world-wide, and in many different sectors of the
food processing industry.
Competitive Force 3: Threat of Substitute Products
Due to the nature of the consumer foods industry, threat of substitute products is relatively high across the
board. In virtually every industry segment where General Mills does business, it is possible to find very similar
products competing on cost. For example, in the cereals segment a popular product like Lucky Charms may lose
market share to a virtually identical cereal in a large bag that is marketed to the frugal consumer. These bargain
brands focus on imitating popular brands and can offer their products at a lower cost by avoiding marketing and
research and development costs which might be incurred by an industry leader who has a valuable brand image at
stake. Similarly a can of Jolly Green Giant green beans will suffer from fierce competition with grocery store
brands like Great Value which can offer an identical product at less cost. In times of economic prosperity this
threat may be greatly diminished, however in times of depression or recession the buyer becomes more and more
willing to switch in order to save money which is likely very limited.
General Mills has chosen to combat this threat with a constant focus on product differentiation. With a
popular product such as Lucky Charms, a large amount of resources are committed to marketing and research and
development. For example, millions of dollars a year are spent on television advertising on children’s networks
8
in order to increase brand visibility among the demographic most likely to find colored marshmallows appealing.
To compound this effect, the cereal often comes packaged with a toy licensed from a movie or television show
which may be popular to children such as Spongebob, Square-pants, or Shrek. To insure that children do not
soon become bored with Lucky Charms, the R&D department is constantly coming up with new marshmallows
of different shapes and colors. The newest is a white marshmallow that reveals colored shapes when it is in milk.
Though the threat of substitute products is high in the industry, General Mills has established a strong
foothold with constant product innovation. They realize that a consumer is less likely to switch brands to save a
buck because often that extra dollar is well-spent on the comfort of knowing that Little Bobby won’t be making a
scene in the checkout lane in protest to the cereal that does not come with a Shrek sticker.
Competitive Force 4: Bargaining Power of Buyers
When it comes to the bargaining power of buyers, their overall effect on General Mills is relatively high.
The two factors that determine the power of buyers include price sensitivity and relative bargaining power. Since
most of the products that General Mills makes are undifferentiated, buyers are generally more price sensitive.
Take cereal for example, if General Mills increases the price on a box of Total, then buyers will generally find a
complimentary priced replacement, or the store brand cereal. Relative bargaining power is another factor that
determines the power of buyers. Since General Mills is a big food company with many products, they cannot
change their suppliers too much because the food would not taste the same. Also, when it comes to food
manufacturers, they sell to stores, who in turn, sell to us. If the consumers, you and I, decide not to buy the
product, then it would affect both the grocery store and General Mills. Thus, the consumers have high bargaining
power over General Mills.
Competitive Force 5: Bargaining Power of Suppliers
9
Most of General Mills’ raw materials are commodities, so they have virtually an unlimited number of
suppliers. Since they have so many suppliers the suppliers must compete very strongly among themselves for
General Mills’ business. In effect the suppliers have little or no bargaining power. These raw materials consist
of: cereal grains, sugar, dairy products, vegetables, meats, fruits, other agricultural products, vegetable oils,
plastic and paper packaging materials, operating supplies and energy. Most of these materials are purchased on
the open market, except for a few long-term fixed price contracts. The company seems confident that they will be
able to purchase all of the needed ingredients and packaging materials. Whenever possible advance purchases of
important items are made to make sure operations will be able to continue. General Mills has high quality
standards for their materials, but like to keep cost as low as possible.
The company hedges risk in increasing commodity prices through the use of futures, options, and forward
cash contracts. They do this to limit risk in extreme price movements on the commodities that they use and not
to speculate market movements. They try to buy their materials at a price that allows a targeted profit margin.
To aid in the reduction of Maverick buying General Mills has acquired and implemented a purchasing
system called Purchasing Net-SQL. With this system about 60% of their orders are routed directly to their
suppliers who have set up a contract with their purchasing department. This new system has helped reduce
procurement cost by 4-8 %.
Competitive Strategy Analysis
General Mills’ main strategy for creating a competitive advantage is through a differentiated position.
However, by owning their own mills, a form of cutting costs, General Mills holds a partial cost leadership
position to increase their competitive advantage. In addition, for additional cost cutting, General Mills shares
truck routes with Fort James Corporation, a paper towel and Dixie cup manufacturer. As a result, General Mills
saved $800,000 in the first year of this partnership.
10
General Mills has a strong differentiated position especially when it comes to their investment in brand
image. Over time, the company has made a strong name through high quality products, wide variety, and
superior customer service. They have also been very involved with the communities of their customers through
the General Mills Foundation and the development of their radio station to advertise their products further.
General Mills has placed tracking devices in their trucks to allow customers access to the location of the delivery
trucks; therefore boosting their ability to have excellent customer service.
General Mills facilitates the best possible relationships with every stakeholder in order to make their
strategy work in a positive way. It is their belief that through these strong relationships a common bond is fused
that drives the company forward. The covenant with General Mill’s suppliers as well as their customers saves the
firm cost that is passed on to the consumer. So in essence they save money and gain market share at the same
time. This strategy is the reason behind General Mill’s strong consumer and customer image.
II. Accounting Analysis
Sales Manipulation Diagnostics
Net Sales /
Cash from
Sales
Net Sales /
Net
Accounts
Receivable
Net Sales /
Inventory
2004
2003
2002
2001
2000
1.22
1.23
1.27
1.27
1.24
10.96
10.72
7.87
8.21
10.33
10.41
9.71
7.53
10.50
10.13
11
Core Expense Manipulation Diagnostics
Declining
Asset
Turnover
Changes in
CFFO / OI
Changes in
CFFO /
NOA
Total
Accruals /
Change in
Sales
Other
Employment
Expenses /
SG&A
2004
2003
2002
2001
2000
.60
.58
.48
1.07
1.13
(.038)
.163
.054
.006
.005
(.009)
.039
.011
.003
.003
N/A
N/A
N/A
.913
.729
Step 1: Key Accounting Policies:
General Mills is first and foremost a producer of quality packaged foods, which is exactly what the
company prides itself on. Being such a company presents challenges as well as many benefits. Research and
development, in addition to marketing schemes are the key success factors for General Mills when it comes to
accounting policies. It is these areas that the company gains a distinct advantage in the market.
Research and development expenditures are charged to the year incurred. This is also true for advertising
cost. This style of recognition is the same as the top competitors in the industry. All accounting procedures are
in accordance with GAAP.
12
Research and Development is critical and the most successful segment for this company. Be it not for the
success in this department along with the advertising department General Mills would not be able to accomplish
its competitive strategy. General Mills must constantly reinvent itself to keep up with ever changing consumer
demands. Loyal customers will continue to consume familiar products; however it is important to gain those
consumer segments that are not so familiar with the brand. It is for these discussed reasons why the accounting
policies are so important.
Revenue recognition is another key accounting policy that should be explored. Sales are recognized upon
shipment to customers. Certain coupons and promotions sales are also recognized upon discretion. Sales on
accounts are much higher than cash accounts. This is due in large part to the many contracts and purchases the
company has with retailing customers. This fact is key to note since most investors are cautious of an overrepresented receivables number.
Step 2: Assess Accounting Flexibility
The key accounting policies that may require significant management estimates and judgment include:
Accounting for trade and consumer promotion activities, asset impairments, income taxes, and pension and
postretirement liabilities. There are a few other areas of flexibility that might raise a little concern and will be
discussed at the end of this step.
Trade and Consumer Promotion Activities
General Mills reports sales net of certain coupon and trade promotion cost. These costs may include
payments to customers for performing certain advertising activities and setting up in-store displays. Some other
merchandising activities the customers receive payments for are discounts to the list price to lower the retail shelf
price and payment to gain shelve space for new products. At the beginning of the year promotional funds for the
retail businesses are paid out to customers over the year based on performance. Most of the year end liabilities
13
associated with these promotion activities are resolved the following fiscal year to help reduce long term
estimates and insure accuracy. This policy ensures a more timely and sufficient expense recognition.
Asset Impairments
General Mills is required to evaluate all long term assets for impairment and write down the assets that are
determined to be impaired, this includes goodwill. Management is required to make judgments concerning the
fair values of these assets. They are also required to estimate future cash flows associated with the assets in this
process. This area has a lot of flexibility that is left up to the management’s judgment. The company’s
evaluations of such assets show them to be worth significantly more than their stated book value. This leads the
company to believe that risk of unrecognized impairment to be very low.
Income Taxes
The management’s judgment is also required to resolve any tax issues related to the company’s income
tax expense. In the past their assessments in the resolution of tax issues have been convincingly accurate.
Current tax issues are similar in size and substance to the past issues.
Pension Accounting
There is estimation of several critical factors required in the accounting for pension and postretirement
liabilities. The two main assumptions that determine this income are the expected return on plan assets and the
discount rate. General Mills’ assumption on the discount rate is based upon the interest rate for long-term highquality corporate bonds. This discount rate is also used to determine pension and postretirement expense or
income for the following fiscal year. They determine the expected return on plan assets by their asset allocation,
estimate of future long-term returns by asset class, and historical long-term investment performance.
Other areas of flexibility
14
A few other areas with a small amount of flexibility include their depreciation methods, inventory,
intangible assets, research and development and Advertising costs. General Mills depreciates assets over their
useful lives. They generally use the straight-line method. Sometimes they use accelerated depreciation to receive
the tax benefits from this method. Overall their depreciation methods seem normal and up to standards. Inventory
is generally valued using the LIFO method, but FIFO is used in foreign operations. In 2001 the company adopted
the (SFAS) No 142, which eliminates amortization of intangible assets will indefinite lives, and now requires that
they be tested annually for impairment. During these impairment test managers must make estimates of their fair
value and expected future cash flows. All R and D expenses are charged against earning in the year that they are
incurred. Advertising costs are recognized the first time the advertising takes place. This is in accordance with
GAAP, and shows little room for management to have flexibility with these numbers.
Step 3: Evaluate Accounting Strategy
General Mills’ accounting strategy is comparable to its competitors in the food processing industry such
as Kraft Foods, Inc. and Kellogg Co. All of these companies abide by the generally accepted accounting
principles; however, estimates and assumptions are required to prepare financials and some variations may exist
when they are compared to the actual numbers.
The main similarities between General Mills and their competitors is their focus on providing an
innovative product that will establish brand equity. General Mills is continually increasing their research and
development to allow for products that meet the changing needs and preferences of their customer base.
Advertising and marketing is a popular brand-building strategy in the food processing industry. General Mills
uses their marketing to sustain leading share positions in all global markets.
The overall business goal of General Mills is to create superior returns for their shareholders for the longterm. Achievement of high returns has been possible because of the consistent growth in sales as seen in the
15
annual reports generated by the company and through the overall positive results from the sales manipulation
diagnostics.
General Mills has made many changes to its accounting policies, especially within the years of 2002 and
2003. The following are just a few of the changes that had an impact on the consolidated financial statements
and strategic decision making for General Mills. The first change made in 2002 was the adoption of Statement of
Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” The statement requires all derivatives to be rounded at fair value on the balance sheet and establishes
new accounting rules for hedging. The results of this change were not terribly significant, but the effect on
diluted earnings per share was a negative $100,000. The fact that the derivatives were now rounded could be an
area of concern because eventually the numbers will be further and further away from accurate.
In dealing with goodwill and intangibles, General Mills adopted SFAS No. 142, “Goodwill and Intangible
Assets.” The statements removed the need for amortization of goodwill. The goodwill will now be tested
annually for impairment, but these tests did not require any adjustments of the goodwill carrying values. By not
amortizing goodwill, the end result could be overstated; however, General Mills stated that the goodwill carrying
values were unchanged. The decision to remove amortization was wise in that they removed a non-value added
activity.
Another change in accounting principles was the adoption of the Financial Accounting Standards Board’s
Emerging Issues Task Force (EITF) Issue 01-09, “Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor’s Products.” The EITF issue requires recording certain coupon and trade
promotion expenses as reductions of revenues. Net earnings were not affected in result, but selling, general, and
administrative expenses were adjusted. Recording the coupon and trade promotion expenses as reductions of
revenues will help General Mills in the long-run because their final net income will clearly reflect detailed
16
activities that exist within the company. Although many other changes to the accounting principles were made in
2002 and 2003, the previous details a few that impact the strategic decisions made by General Mills managers.
One accounting activity that General Mills acts upon deals with the recording of its pension expense.
Normally, pension expense is as stated, an expense. In the case of General Mills, pension expense is used to
generate income for the company. The results of this action could be viewed as structuring the financials on the
part of management in that they are trying to boost their net income. The main problem with their reporting of
pension expense and postretirement benefits is that they base their numbers on that of estimated expected returns
and discount rates. Large under- or over-estimation could pose greater issues for the company.
Overall, General Mills strategic position is differentiation in that they focus on product innovation and
customer satisfaction. They have achieved a strong strategic position through their increased research and
development and their focus on the customer when marketing and advertising. Looking at the continual increase
in sales over the past 5 years, General Mills seems to have a positive outlook ahead.
Step 4: Evaluate the Quality of Disclosure
The degree and quality of disclosure beyond GAAP is an important part when evaluating a firm’s quality
and success. General Mills has acknowledged the amount of disclosure found in letters to shareholders, The
Corporate Governance Principles and Director Independences, and 10-K reports.
General Mills annual reports and letters to Stakeholders in annual reports provide information regarding
company business models and the economic environment. It also describes future plans and estimates. General
Mills also provides information regarding the increases in net sales and net earnings. General Mills provides
access to company performance for investors as well as the general public.
The Corporate Governance Principles and Director Independences provides information for investors and
the public to evaluate and understand changes General Mills has in performance and operations, responsibilities,
17
and answers to why they make certain decisions. It also provides an overview of the company’s earnings as well
as fluctuations in performance. The Corporate Governance Principles and Director Independence also analyzes
performance and changes in financial resources and liquidity.
General Mill’s 10-k reports provide information about the company’s disclosure procedures. The 10-K
reported that under the supervision and with the participation of the company’s management, including the CEO
and CFO, has evaluated the effectiveness and design of the company’s disclosure control and procedures. The
CEO and CFO concluded that the company’s disclosure controls and procedures were effective as of May 30,
2004 to ensure that information required by the company reports was processed, summarized, and reported within
time periods specified by the SEC rules and forms. There were no changes in the company’s internal control
over financial reporting during the fiscal fourth quarter ending May 30, 2004 that have affected the company’s
internal control over the financial reporting.
General Mills provides the public with valuable information outside the GAAP regulations. This allows
investors and the public to see what is really going on with the company and also builds trust with buyers.
Step 5: Identify Potential Red Flags
As far as potential red flags, we feel that General Mills’ accounting practices are consistent with GAAP
and the manager’s are not trying to make changes to benefit themselves.
Overall, General Mills seems to take a conservative route when computing their financials to prevent any
outrageous differences that may cause concern to outsiders. The company has had its share of ups and downs
with the 9/11 attacks and their big purchase of Pillsbury all in 2001. Through it all, General Mills has been able
to succeed in keeping business running smoothly.
III. Ratio Analysis and Forecast Financials
18
In order to analyze General Mills overall performance, we have taken the financial statements from the
2004 10-K and computed the basic 14 ratios to assist in forecasting. The basic 14 ratios were also calculated for
Kraft and Kellogg, industry competitors, which allows for an industry average to benchmark General Mills’
performance in the industry.
The ratio analysis given also will provide much needed information to the investor on a more intimate
base. The numbers will show where General Mills’ weaknesses are and also point out the strengths of the
company. The investor will have the ability to choose which ratio is more critical compared to what the rest of
the industry is doing. This type of knowledge is extremely useful when trying to make the investing decisions
between companies within the same industry.
Liquidity Ratios:
19
Current Ratio
3.000
2.500
2.000
General Mills
Kellogg
Kraft
Industry Average
1.500
1.000
0.500
0.000
2000
2001
2002
2003
2004
Prior to 2002, General Mills seems to be fairly consistent with Kraft and Kellogg; however, Genearl Mills
is below the industry average. From 2002 to the present, General Mills’ current ratio seems to be increasing at a
steady pace; therefore, they are beginning to improve and become more comparable with their competitors.
20
Quick Asset Ratio
0.800
0.700
0.600
0.500
General Mills
Kellogg
Kraft
Industry Average
0.400
0.300
0.200
0.100
0.000
2000
2001
2002
2003
2004
General Mills’ quick asset ratio has continually improved from 2000 to the present. When compared to
its competitors and the industry average, its movement is inconsistent. General Mills comes out on top going into
the future and appear to have the possibility for more improvement.
21
A/R Turnover
16.000
14.000
12.000
10.000
General Mills
Kellogg
Kraft
Industry Average
8.000
6.000
4.000
2.000
0.000
2000
2001
2002
2003
2004
General Mills’ accounts receivable turnover was much higher than its competitors and the industry
average in 2000; however, from 2001 to the present, General Mills has leveled out and become more comparable
with that of the industry.
22
Inventory Turnover
9.000
8.000
7.000
6.000
General Mills
Kellogg
Kraft
Industry Average
5.000
4.000
3.000
2.000
1.000
0.000
2000
2001
2002
2003
2004
General Mills’ inventory turnover is a bit lower than that of its competitors and the industry average.
Going towards the future, their inventory turnover seems to be improving at a fairly constant rate.
23
Working Capital Turnover
140.000
120.000
100.000
80.000
60.000
General Mills
Kellogg
Kraft
Industry Average
40.000
20.000
0.000
2000
2001
2002
2003
2004
(20.000)
(40.000)
(60.000)
(80.000)
General Mills has struggled with their working capital turnover in recent years; however, from 2003 to the
present, it appears that General Mills is improving fairly quickly. Others in the industry have had a much higher
working capital turnover making it difficult to compare with General Mills.
Liquidity Summary:
Overall, General Mills shows positive growth throughout the varying liquidity ratios. In regards to the
outstanding receivables they are collecting in less duration of time. This is a critical number since a large
percentage of sales are on credit. The company has become much more liquid in recent years and therefore more
able to pay back lenders. Both the current ratio and quick ratio have shown signs of increasing. The numbers
however are still lower than lenders would like to see. Accounts receivable turnover has leveled off since early
extremes in 2000. Being in the packaged food industry, General Mills shows a lot of inventory which is common
in the industry. The working capital ratio has been in the red for the past four years, but showed much growth
24
last year. The recent trend has been largely blamed on the fact that sales increased by a greater rate than did
working capital. This has effectively been changed in the past year allowing for further growth in this segment as
well as increasing the overall liquidity of the company.
Profitability Ratios
Gross Profit Margin
20.000%
18.000%
16.000%
14.000%
12.000%
General Mills
Kellogg
Kraft
Industry Average
10.000%
8.000%
6.000%
4.000%
2.000%
0.000%
2000
2001
2002
2003
2004
The gross profit margin for General Mills is not consistent with that of the industry average; therefore, it
is difficult to use the industry as a benchmark. After a sharp decline between 2001 and 2002, possibly from the
911 attacks, General Mills has been improving and have the potential for more improvement in the future.
25
Operating Expense Ratio
50.000%
45.000%
40.000%
35.000%
30.000%
General Mills
Kellogg
Kraft
Industry Average
25.000%
20.000%
15.000%
10.000%
5.000%
0.000%
2000
2001
2002
2003
2004
Excluding the data prior to 2001, General Mills’ operating expense ratio has been rather consistent with
that of its competitors and the industry average. Going into the future, General Mills will see improvement in
that their operating expenses are declining at a steady pace.
26
Net Profit Margin
14.000%
12.000%
10.000%
8.000%
General Mills
Kellogg
Kraft
Industry Average
6.000%
4.000%
2.000%
0.000%
2000
2001
2002
2003
2004
Once again, General Mills’ data does not coincide with that of its competitors as seen in the net profit
margin chart above. General Mills has seen both increasing and decreasing net profit margins over the past 5
years. Going into the future, it appears that General Mills is beginning to improve and will see higher net profits.
27
Asset Turnover
160.000%
140.000%
120.000%
100.000%
General Mills
Kellogg
Kraft
Industry Average
80.000%
60.000%
40.000%
20.000%
0.000%
2000
2001
2002
2003
2004
The asset turnover for General Mills seems to be consistent with others in the industry in that since 2000
it has gradually declined and begun to recover as of 2002. General Mills’ decline stage was more rapid that the
others and their improvement from 2002 on seems to be much slower. Their asset turnover appears to be leveling
out at about 60%.
28
Return on Assets
16.000%
14.000%
12.000%
10.000%
General Mills
Kellogg
Kraft
Industry Average
8.000%
6.000%
4.000%
2.000%
0.000%
2000
2001
2002
2003
2004
General Mills began in 2000 with a much higher return on assets, which made them better off than others
in the industry at the time. Consequently, once 2001 arrived, General Mills took a plunge and significantly
dropped their return on assets. Currently, their return on assets has been improving at a moderately increasing
rate.
29
Return on Equity
1400.000%
1200.000%
1000.000%
800.000%
General Mills
Kellogg
Kraft
Industry Average
600.000%
400.000%
200.000%
0.000%
2000
2001
2002
2003
2004
-200.000%
-400.000%
It is apparent from the chart that General Mills had very odd activity during the time period of 2000-2002
when compared to others in the industry. The reason being, during that time, General Mills had negative
common stock and treasury on their balance sheet and had recently purchased Pillsbury. After 2002, General
Mills returned to its normal operations and became more comparable with others in the industry.
Profitability Summary:
The Profitability Ratios for General Mills have had quite a few drastic changes over the past 5 years. The
gross profit ratio started to climb from 2000-2001, but fell dramatically after that to 9%. This ratio has since
shown a steady increase and looks promising in the future. We were able to establish a trend from the last three
periods and think that our forecasted numbers will reflect this in a positive way. The net profit margin depends
directly on the gross profit margin so therefore has been moving the same way as the gross profit margin in the
last 5 periods. The operating expense ratio has shown a decrease over the last few periods, which means that the
30
company is becoming more efficient. Asset turnover has been moving in a negative direction. It started off
good, but has been declining a lot over the past few periods. This means that there was a decrease in sales or the
company bought new assets that are taking time to increase sales. Return on assets declined dramatically in
2002. This number coincides with the asset turnover decrease. This shows that the company must have bought
new assets in the previous year. The new assets are starting to produce profits because the ratio has been
increasing the last 3 periods. The return on equity for the years 2000-2001 was too volatile to establish a trend.
The following 3 years seemed to level off and show an increasing pattern.
31
Capital Structure Ratios
Debt to Equity Ratio
120.000
100.000
80.000
60.000
General Mills
Kellogg
Kraft
Industry Average
40.000
20.000
0.000
2000
2001
2002
2003
2004
(20.000)
(40.000)
As seen in the discussion about return on equity, General Mills faced negative common stock and
treasuries once they purchased Pillsbury. The chart is very similar when compared to others in the industry in
that once the drastic equity numbers from 2000-2001 returned to normal, General Mills was once again more
comparable to the rest.
Explanation of Competitors Ratios
Kellogg’s Evaluation:
Kellogg’s looks to a profitable company overall, but some of the ratios tell different story. The liquidity
ratios are getting better as the years go on. All the ratios remained pretty constant from 2000-2003, with some
32
fluctuation; however, the A/R turnover had a big increase from 2000-2003. Working capital turnover also had
huge increases and decreases throughout the years.
Kellogg’s profitability ratios are constant and some actually decreasing from 2000-2003. It looks as
though they stay busy manufacturing products, but it is not paying off as much as it should. In other words, the
more they do, the more they lose. They’re gross profit margin and net profit margin are both lower in 2003 than
in 2000. This raises concern, because a company cannot profit if the numbers are not increasing.
The capital has the earnings eaten up by interest. There is little improvement on the debt to equity ratio,
but the times interest earned have a huge decrease. It looks like Kellogg’s has a hard time paying off interest.
The liquidity for Kellogg’s is favorable, but the profitability and capital paint a different picture. In the
near future, Kellogg’s needs to make some drastic changes or they will be in a world of hurt.
Kraft Foods Inc. Ratio Explanation
Kraft Foods Inc. is General Mills’ biggest competitor. Kraft has a market cap of 57 billion, and revenues
of 32.5 billion, which is three times as much as General Mills. The liquidity ratios for Kraft had some variability
that makes it difficult to predict some of the ratios. Kraft has a predicted current ratio of 1.01. This ratio has been
fairly constant for the last four years so it probably won’t be much different in the years to come. Accounts
receivable turnover is increasing. This suggests that in the last few years Kraft has been collecting their
receivables more quickly. Inventory turnover has also been increasing a little. The working capital turnover ratio
has also been increasing the last four years. This number could prove very difficult to predict because the last
four ratios are very different. They range from -52 to 118.
All of the profitability ratios seem pretty standard and do not show that much change over the past four
periods. I am confident in forecasting any of these ratios because they either show a constant pattern or do not
change much from year to year. The Gross profit margin has increased slightly to .17. Asset turnover has been the
33
same for the last three years at .52. Return on assets has increased from .04 to .06 and return on equity has
decreased from .14 to .12.
In 2000 Kraft had a debt to equity ratio of 2.71. This ratio decreased dramatically in 2001 to 1.38 and has
been slowly decreasing over the next two periods. Kraft must have borrowed some money to expand their
operations. This dramatic decrease in this ratio makes Kraft stock much more risky to its stock holders. Their
sustainable growth rate varied from 7 to 10 percent and we predict to be about 8 percent in the future.
Financial Statement Forecasting Methodology
In selecting forecasting methods for the income statement, we looked for trends either as a fairly constant
percentage of sales or as a fairly constant growth year-to-year. As it turns out, with year 2000 information
excluded, all of our income statement items could reasonably and accurately be forecasted as a percentage of total
sales. This is because General Mills is such a large company that it is fairly difficult for them to change their
numbers drastically from year to year. Many items were forecasted using total sales and ratios from our previous
ratio analysis. For income tax expense we used 35%, standard to the tax bracket that General Mills is in.
Because this number is constant it would not be practical to base income tax on anything other than EBIT. Minor
items such as exit and restructuring cost were variable yet they remained a very small portion of our total income
so they were estimated as a small percentage of sales based on their averages. The only real difficulty came in
predicting a reasonable sales growth estimate for the next ten years. Due to the high variability of sales growth in
recent years, the projected sales growth would average around 25%. We determined our sustainable growth rate
to be only 12% and found the industry average for the long run to be around 8%. We decided to use 8% for our
projections as it was the most conservative of the three.
Because General Mills is a large company in a mature industry, we see less need to issue shares of stock
to finance the company. In light of this fact we have chosen to use a 5% growth rate for the average number of
34
shares of common stock outstanding. With these estimates in place, we can see that EPS grows favorably in the
years down the road.
Again, because of the size of General Mills, the balance sheet forecasts were calculated from totals of
assets, liabilities, or equity. We used an average of the debt to equity ratio in a function with total assets to insure
that the balance sheet was both balanced and accurate. The rationale behind this says that the company is too
large to possibly make any radical or drastic changes to its capital structure. The only thing that could possibly
influence this is an unexpected event that might force the company into bankruptcy. While we do not expect
something like this to ever occur, it is worth noting that financial catastrophes are not impossible. We have seen
many examples in recent years such as Enron, WorldCom, and the dot com bust. The stock market decline of
2001 forced many companies close to the edge of bankruptcy and environmental risks like these must be taken
into account.
To calculate the forecast cash flows, we first began with what we could calculate form the other financial
statements and the ratios which we had already assumed. To calculate operating cash flow, we then filled in the
gaps with reasonable estimates based on changes in different components of working capital. To calculate the
investing cash flows, we did the same only with respect to changes in long term assets and liabilities instead. To
calculate financing cash flows we began with dividends and filled in the blanks using estimated payments and
issuance of debt as well as estimates of common stock issuing and buyback. We used these estimates to reconcile
all of the categories of cash flows with the net change we had already calculated from the change in cash and
cash equivalents in our future projections.
35
IV. Valuation
Introduction
The purpose of this section is to value General Mills and come up with a stock price that has been derived
from our forecast financials in the previous section. Once we imply five different models, detailed below, we
will find this stock price. Looking at the market’s current stock price of $49.23 for General Mills, we can then
determine whether or not the market price is fairly-valued, over-valued, or under-valued.
Valuation Section
The following spreadsheets use five different valuation models to help determine the accuracy of the
market’s stock price given for General Mills. The models that will be used are as follows:
•
Method of Comparables
•
Discounted Dividends
•
Discounted Free Cash Flows
•
Abnormal Earnings Growth
•
Discounted Residual Income
For each of the methods we were to estimate a cost of debt (Kd) and cost of equity (Ke). With these numbers,
we are able to calculate the weighted average cost of capital (WACC), which will be included in the model
for Discounted Free Cash Flows.
Price
Conclusion
$37.85
Slightly over-valued
Method of Comparables
Discounted Dividends
36
Discounted Free Cash
$48.99
Fairly-valued
$59.49
Slightly under-valued
$55.26 / $44.88
Slightly under-valued/
Flows
Abnormal Earnings
Growth
Discounted Residual
slightly over-valued
Income / Long-run
Residual Income
Perpetuity
Method of Comparables
General
Mills
Kraft
Kellogg
Groupe
Danone
Industry
Average
Value
Trailing P/E
Forward P/E
EPS
DPS/PPS
Market to
Book
17.85
15.71
2.75
.546
3.39
Price
Earnings
Growth
1.79
18.94
20.06
58.17
15.22
16.67
14.98
1.65
2.14
.33
.519
.780
.215
1.71
7.85
4.05
2.24
2.13
1.72
19.50
15.95
.65
4.78
2.19
53.63
43.89
50.25
54.89
47.22
Using the Method of Comparables, General Mills is not included in the calculation of the industry average
since they are the company we are valuing. In addition, Groupe Danone is in the same food processing industry
with General Mills; however, their ratios are very different so they will be considered outliers for this discussion.
37
When comparing General Mills to the industry average, they seem to be under-valued when looking at the
trailing p/e value. However, the forward p/e value gives a fairly-valued price for General Mills. Overall this
method seems fairly accurate with the results we will see in the following models in that General Mills is slightly
undervalued in the market.
Cost of Debt Estimation
After assessing the cost of debt we conclude that the cost of debt is 3.43 %. This number is the weighted
average of the current and non-current liabilities. The non current debt was weighted at 78.63 % of the total debt.
We derived this number from adding our long term debt, deferred income tax, and other liabilities. The current
liabilities portion of the debt came out to be 21.37%; it was derived from accounts payable, the current portion of
long term debt, notes payable, and all other current liabilities. The weighted average coat for non-current
liabilities as-well as current debt is taken from each portions percentage of total liabilities multiplied by their
corresponding interest rate. The 10-K report provides the means necessary to find interest rates as-well maturity
on notes payable. Once we conclude which notes are short term and which are long term we place them in their
corresponding categories.
During our analysis of the cost of debt we applied individual interest rates for each category of liabilities.
We concluded that there should not be any interest charged on accounts payable because short term interest rates
are so low, there is no incentive for companies to pay off accounts early. This interest could also be included in
the sales price paid for the goods. The rate used on the current portion of long-term debt is 4.48%, which is
simply the weighted rate on long-term debt. We used this rate because this portion of the debt will mature within
one year, so it would not be feasible to assume a higher rate. The notes payable and other current liabilities rate
we used was 2.61%. This number is the weighted average rate on our short-term liabilities; it was computed by
doing a weighted average of the company’s short-term liabilities and the rate on each liability given in the 10-K.
38
The interest rates used on the non-current debt were computed in the same way as current debt. The rate
for long-term debt is 4.48% (the same number used above), which is simply the weighted average of long-term
debt. Deferred taxes are not considered liabilities due to volatile tax laws.
Cost of Equity Estimation
To calculate the cost of equity you first need to find the beta estimate for the firm. This number is simply
the regression of the firm’s average return and the market premium. The firm’s average returns are based on
monthly return from March 2000 to February 2005 the same is true for the S & P returns. The risk premium is
the S&P average monthly return subtracted by the average monthly risk free rate. Plug these numbers into the
CAPM equation to get the estimated cost of equity. The estimated cost of equity is lower than the cost of debt.
This doesn’t hold to financial principle due to the lower than average returns from the tech bubble. So in-order to
get a better estimate of beta we use the same equation as before but instead re- calculate using data starting from
January 2003. The final result of our cost of equity is 3.56 %.
12.901/18.448 = 69.9 % percentage of debt
5.248/18.448 = 30.1 % percentage of equity
WACC = [69.9 (.0343)] + 30.1(.0356) = 3.47%
Although the above discussion using CAPM to estimate the cost of equity may seem accurate, once the
following models were used to estimate the value of General Mills’ stock price, the accuracy of the above
procedure proved to be much less. We instead took the actual numbers from 2003 and backed into the percentage
for the cost of capital and found the implied Ke to be 8%. This 8% allowed us to see where the current stock
price of $49.23 for General Mills was derived. In addition, our WACC will be modified because of this change
in the Ke (WACC = [69.9(.0343)] + 30.1(.08) = 4.81%); however, for our purposes we will use our first
39
calculation of WACC, 3.47%, because when used in the Discounted Free Cash Flows Model, a price close to the
market can be derived.
Cost Estimations for Intrinsic Valuations
Implied
Direct
WACC (Before Tax)
4.81%
3.47%
Ke
8.00%
3.56%
Kd
3.43%
3.43%
40
General Mills’ Beta Estimates
Beta
.004
.0058
.1176
Published Beta
5-year Beta
3-year Beta
2-year Beta
*Note: All values in blue throughout the models represent the estimated stock price for General Mills as at April
1, 2005.
Discounted Dividends Model
Sensitivity Analysis
Ke
0.06
0.07
0.08
0.09
0.1
0
G
0.02
0.04
0.06
$48.88
$42.61
$37.85
$34.11
$31.08
$61.40
$50.51
$43.16
$37.84
$33.79
$98.93
$68.95
$53.79
$44.56
$38.32
161.16
85.66
$60.24
$47.36
Ke = Cost of Equity
G = Dividend Growth Rate
The Discounted Dividends Model has the least explanatory power out of all the models used. The actual
share price for General Mills is currently $49.23. When using our estimated Ke of 8% and assuming a growth
rate of 0, the stock price is only $37.85. The current market stock price would be over-valued if the discounted
dividends model holds true. The sensitivity analysis above allows us to see that small changes in the Ke and
growth rates used do not have major effects on the stock price derived.
41
Discounted Free Cash Flows Model
Sensitivity Analysis
g
WACC(bt)
0.01
0.02
0.0347
0.04
0.05
0
0.02
0.03
0.04
$301.15
$123.97
$48.99
$35.49
$17.84
$151.24
$97.76
$48.31
$528.71
$222.30
$86.39
$200.65
Out of all the models, the Discounted Free Cash Flows Model was the most difficult to derive a stock
price that would be close to the market. We used a WACC (bt) of 3.47% to allow for better results. This model
did however provide the best valuation of General Mills in that its estimated stock price was $48.99 compared to
the market of $49.23. In this case, the market would be considered fairly valued since the difference is minimal.
The main limitation of this model is that the sensitivity analysis shows varied results when there are slight
changes in the WACC (bt) and the growth rate.
Abnormal Earnings Growth Model
Sensitivity Analysis
Ke
0.06
0.07
0.08
0.09
0.1
0
G
0.02
$82.96
$69.50
$59.49
$51.78
$45.68
$124.44
$97.30
$79.33
$66.58
$57.09
0.04
0.06
$248.87
$162.17
486.5
$118.99 237.98
$93.21 $155.35
$76.13 $114.19
Ke = Cost of Equity
G = Growth Rate
42
The Abnormal Earnings Growth Model provides similar results as the Discounted Residual Income
Model as seen below. We used the implied Ke of 8.00% to provide results closest to the actual stock market
price that is currently listed for General Mills. One limitation to this model is the higher sensitivity of the stock
price to changes in the Ke and growth rates. As the growth rate increases, the stock prices become much higher
than when assuming no growth and using our chosen Ke of 8.00%. The best price for this model is $59.49 which
would make the market price of $49.23 undervalued.
Discounted Residual Income Model
Sensitivity Analysis
G
Ke
0.06
0.07
0.08
0.09
0.10
0
0.02
0.04
0.06
$68.16
$60.67
$55.26
$51.21
$48.11
$86.12
$72.02
$62.89
$56.58
$52.01
$140.03
$98.50
$78.14
$66.23
$58.51
$230.90
$123.91
$88.75
$71.50
Ke = Cost of Equity
G= Growth Rate
The Discounted Residual Income Model provides a stock price that is the most accurate when compared
with the current market price of $49.23. Using our estimated Ke of 8% and assuming no growth, the stock price
for General Mills comes out to be $55.26. Although the market is under-valued with the price derived in this
model, there is little difference between the numbers so the stock price could also be considered fairly valued.
The stock price derived in the Abnormal Earnings Growth Model is very close to the one derived with the
Discounted Residual Income Model as it should be. Looking at the sensitivity analysis chart above, the stock
43
prices do not have extreme reactions to changes in the cost of equity or the growth rate unless the two numbers
become very close.
Summary of Overall Results
Overall, the models used above appear to be fairly accurate with the market’s current valuation of General
Mills. The most common occurrence was the market’s stock price is fairly valued compared to our estimated
valuations. One the other hand, the Discounted Dividends model portrayed the market as overvalued while the
Abnormal Earnings Growth Model found it to be undervalued.
Some limitations that caused these slight differences would be our methods for calculating the WACC,
Ke, and Kd. CAPM was originally used but did not provide a good estimation of Ke so we found a better fit by
looking into General Mill’s past. In addition, the models were affected by our forecast financial statements from
the previous section. The growth rates that we chose for different line items on each statement had effects on the
resulting stock prices. By forecasting into the unknown future, our valuation can not be 100% accurate. In
conclusion, using all the techniques throughout this process we have found that General Mills is fairly valued.
44
Appendix
Basic 14 Ratios
2000
0.47
0.23
13.38
27.27
5.28
69.07
-5.00
2001
0.64
0.36
8.21
44.47
5.47
66.68
-6.80
Actual Ratios
2002
0.60
0.39
7.87
46.38
4.42
82.60
-3.44
2003
0.92
0.56
10.72
34.05
5.65
64.65
-39.65
2004
1.17
0.70
10.96
33.30
6.19
58.93
24.17
2005
1.2
0.70
10.00
36.50
5.65
64.60
20.57
2006
1.23
0.75
10.00
36.50
5.65
64.60
18.34
2007
1.26
0.80
10.00
36.50
5.65
64.60
16.62
2008
1.29
0.85
10.00
36.50
5.65
64.60
15.25
2009
1.32
0.90
10.00
36.50
5.65
64.60
14.14
2010
1.35
0.92
10.00
36.50
5.65
64.60
13.22
2011
1.38
0.95
10.00
36.50
5.65
64.60
12.45
2012
1.41
0.97
10.00
36.50
5.65
64.60
11.79
2013
1.44
1.00
10.00
36.50
5.65
64.60
11.22
2014
1.47
1.20
10.00
36.50
5.65
64.60
10.72
59.74%
43.34%
9.17%
1.46
13.43%
-212.74%
47.87%
25.56%
12.20%
1.07
13.06%
1278.85%
41.35%
26.04%
5.76%
0.48
2.77%
12.81%
41.85%
23.53%
8.73%
0.58
5.03%
21.96%
40.52%
22.07%
9.53%
0.60
5.72%
20.10%
46.33%
24.30%
11.51%
0.60
6.91%
22.10%
46.80%
23.98%
12.04%
0.60
7.23%
22.76%
47.27%
23.47%
12.71%
0.60
7.62%
23.63%
47.74%
23.46%
13.05%
0.60
7.83%
23.87%
48.21%
23.80%
13.15%
0.60
7.89%
23.67%
48.68%
23.68%
13.56%
0.60
8.14%
24.00%
49.15%
23.60%
13.95%
0.60
8.37%
24.28%
49.62%
23.63%
14.27%
0.60
8.56%
24.40%
50.09%
23.68%
14.59%
0.60
8.75%
24.50%
50.56%
23.65%
14.91%
0.60
8.95%
24.60%
-16.837
6.234
1.746
96.904
4.845
2.112
3.582
1.603
3.681
3.294
2.406
15.533
2.458
2.970
6.270
2.200
3.696
7.208
2.150
3.903
7.520
2.100
4.158
7.904
2.050
4.307
8.128
2.000
4.379
8.237
1.950
4.560
8.510
1.900
4.735
8.774
1.850
4.889
9.007
1.800
5.046
9.244
1.750
5.226
9.516
0.535
-0.988
0.469
6.788
-0.187
4.590
79.527
4.09%
0.782
0.028
0.459
3.831
95.282
3.25%
0.443
0.122
0.322
4.688
77.852
3.98%
0.450
0.111
0.054
5.750
63.476
3.94%
0.470
0.120
0.080
5.000
73.000
4.00%
0.490
0.120
0.080
5.000
73.000
4.00%
0.510
0.120
0.080
5.000
73.000
4.00%
0.530
0.120
0.080
5.000
73.000
4.00%
0.550
0.120
0.080
5.000
73.000
4.00%
0.570
0.120
0.080
5.000
73.000
4.00%
0.590
0.120
0.080
5.000
73.000
4.00%
0.610
0.120
0.080
5.000
73.000
4.00%
0.530
0.120
0.080
5.000
73.000
4.00%
0.650
0.120
0.080
5.000
73.000
4.00%
Liquidity Analysis
Current Ratio
Quick Asset Ratio
Accounts Receiveable Turnover
Days Supply of Receivables
Inventory Turnover
Days Supply of Inventory
Working Capital Turnover
Profitability Analysis
Gross Profit Margin
Operating Expense Ratio
Net profit margin
Asset Turnover
Return on Assets
Return on Equity
Capital Structure Analysis
Debt to Equity Ratio
Times Interest Earned
Debt Service Margin
Extra Relevant Ratios
Dividend Payout Ratio
Sustainable Growth Rate (SGR)
Forecast Sales Growth
Accounts Payable Turnover
Days' Payables
Int % of Liabilities
4.205
86.798
3.12%
45
Benchmark Analysis Ratios
Current Ratio
2000
2001
2002
2003
2004
General Mills
Kellogg
Kraft
Industry Average
0.470
0.651
0.940
0.687
0.640
0.862
0.790
0.764
0.600
0.585
1.040
0.742
0.920
0.650
1.030
2.600
1.170
Quick Asset Ratio
2000
2001
2002
2003
2004
General Mills
Kellogg
Kraft
Industry Average
0.230
0.358
0.450
0.346
0.360
0.450
0.370
0.393
0.390
0.279
0.460
0.376
0.560
0.324
0.490
0.458
0.700
2000
2001
2002
2003
2004
13.380
8.882
7.090
9.784
8.210
9.902
9.340
8.484
7.870
11.207
9.540
9.539
10.720
11.674
9.200
10.531
10.960
2000
2001
2002
2003
2004
5.280
7.665
4.590
5.845
5.470
7.331
5.810
6.204
4.420
7.575
5.240
5.745
5.650
7.539
5.630
6.273
6.190
2000
2001
2002
2003
2004
(5.000)
(7.040)
(52.330)
(21.457)
(6.800)
(24.700)
(15.640)
(15.713)
(3.440)
(6.640)
103.560
31.160
(39.650)
(9.100)
117.910
23.053
24.170
2000
2001
2002
2003
2004
14.134%
14.300%
15.000%
14.478%
18.312%
10.500%
12.000%
13.604%
8.391%
13.800%
18.000%
13.397%
12.526%
13.300%
17.000%
14.275%
13.631%
2000
2001
2002
2003
2004
43.338%
26.400%
20.000%
29.913%
25.560%
28.300%
20.000%
24.620%
26.041%
26.800%
19.000%
23.947%
23.529%
26.900%
20.000%
23.476%
22.069%
A/R Turnover
General Mills
Kellogg
Kraft
Industry Average
Inventory Turnover
General Mills
Kellogg
Kraft
Industry Average
Working Capital Turnover
General Mills
Kellogg
Kraft
Industry Average
Gross Profit Margin
General Mills
Kellogg
Kraft
Industry Average
Operating Expense Ratio
General Mills
Kellogg
Kraft
Industry Average
46
Net Profit Margin
2000
2001
2002
2003
2004
General Mills
Kellogg
Kraft
Industry Average
9.170%
9.700%
9.000%
9.290%
12.202%
6.300%
6.000%
8.167%
5.762%
8.700%
11.000%
8.487%
8.728%
8.900%
11.000%
9.543%
9.530%
Asset Turnover
2000
2001
2002
2003
2004
General Mills
Kellogg
Kraft
Industry Average
146.494%
124.600%
44.000%
105.031%
107.052%
72.800%
52.000%
77.284%
48.059%
81.300%
52.000%
36.063%
57.640%
86.100%
52.000%
65.247%
60.007%
2000
2001
2002
2003
2004
General Mills
Kellogg
Kraft
Industry Average
13.433%
12.000%
4.000%
9.811%
13.062%
4.600%
3.000%
6.887%
2.769%
7.100%
6.000%
5.290%
5.031%
7.700%
6.000%
6.244%
5.719%
Return on Equity
2000
2001
2002
2003
2004
21.964%
54.500%
12.000%
29.488%
20.103%
50.000%
Return on Assets
General Mills
Kellogg
Kraft
Industry Average
Debt to Equity Ratio
General Mills
Kellogg
Kraft
Industry Average
-212.742% 1278.846% 12.808%
65.500%
54.300% 80.500%
14.000%
8.000%
13.000%
-44.404% 447.049% 35.436%
2000
2001
2002
2003
2004
(16.837)
4.444
2.710
(3.228)
96.904
10.897
1.380
36.394
3.582
10.417
1.210
5.070
3.294
6.089
1.080
3.488
2.458
3.750
47
Statement of Cash Flows
48
Balance Sheet
49
Income Statement
50
Ford Epic Valuation
Industry name (IND):
Latest Price (PRI)
Ticker Symbol (TKR)
Cusip Number (CSP)
Industry Code (IND)
Industry Group (ING)
SIC Code (SIC)
Unique ID (UID)
Proprietary Evaluations
Quality Rating (QTY)
Growth Persistence (GRP)
Proj. Growth Rate (GRO)
Int Rate of Return (ROI)
Intrinsic Value (VAL)
Price/Value Ratio (PVA)
P/V Ratio/5yr Avg (PVH)
P/V Rel to Market (PVR)
Earnings Trend (SED)
Rel Earnings Trend (SDR)
Comp PVA and SED (COM)
Shr Buyback/Issuance (SHB)
Stock Split Cur Month (SPM)
Stock Split 6 Months (SPH)
Sales Mom Percentile (SMO)
Earn Mom Percentile (EMO)
Price Momentum (PRM)
Price Mom Percentile (PMO)
Operating EPS Yield (OEY)
Value/Mom Percentile (VMO)
Stock Valuation Data
Current P/E Ratio (PEC)
Normal P/E Ratio (PER)
Norm P/E / 5yr Avg (PEH)
Norm P/E / Growth (PEG)
Price/Cash Flow (PCF)
Price/Book Value (PBK)
Price/Sales Ratio (PSS)
Earnings and Cash Flow
Current 12-month EPS (ECU)
Normal 12-month EPS (ENO)
Current/Normal EPS (CNE)
EPS, Cur Fiscal Yr (EFY)
Cash Flow per Share (CFL)
Earnings Variability (EDV)
12m Op EPS 3 Qtrs Ago (EQ1)
12m Op EPS 2 Qtrs Ago (EQ2)
12m Op EPS 1 Qtr Ago (EQ3)
Latest 12m Op EPS (EQ4)
Est 12m opEPS Cur Qtr (EQ5)
Qtr Op EPS 6 Qtrs Ago (QE1)
Qtr Op EPS 5 Qtrs Ago (QE2)
Qtr Op EPS 4 Qtrs Ago (QE3)
Qtr Op EPS 3 Qtrs Ago (QE4)
Qtr Op EPS 2 Qtrs Ago (QE5)
Qtr Op EPS 1 Qtr Ago (QE6)
Latest Qtrly Op EPS (QE7)
Est qtr opEPS Cur Qtr (QE8)
Year/Month Latest EPS (MFQ)
Date Last EPS Update (EUP)
Packaged Food
51.89
GIS
370334104
25
2
2043
2056
B+
C
9
7.7
55.73
0.93
0.87
0.71
11
0.2
0.91
-2.6
1
1
36
61
-30.8
19
5.7
70
18.6
20
1.04
2.22
13.5
3.71
1.71
2.79
2.6
1.07
2.75
3.84
12
2.75
2.85
2.78
2.91
2.97
0.64
0.62
0.85
0.64
0.74
0.55
0.98
0.7
200411
20041221
Dividend Data
Current Annual Div (DIV)
Dividend Payout Ratio (DPR)
Dividend Yield in % (YLD)
Total Return Estimate (RET)
1.24
0.48
2.4
11.4
Historical Data
1-qtr Op EPS Growth (HEQ)
1-yr Op EPS Growth (HEY)
3-yr Op EPS Growth (EG3)
5-yr Op EPS Growth (EG5)
5-yr Cur EPS Growth (HEG)
1-qtr Sales Growth (HSQ)
1-yr Sales Growth (HSY)
3-yr Sales Growth (SG3)
5-yr Sales Growth (HSG)
1-qtr Dividend Growth (HDQ)
1-yr Dividend Growth (HDY)
3-yr Dividend Growth (DG3)
5-yr Dividend Growth (HDG)
5-yr High P/E Ratio (HPE)
5-yr Avg P/E Ratio (APE)
5-yr Low P/E Ratio (LPE)
5-yr Avg P/V Ratio (HPV)
15.3
6.2
16.7
7.8
5.8
3.5
4.4
18.4
13.3
0
12.7
3.3
1.3
23.6
19.1
16.1
1.07
Sales, Cap, Ownership
12m sales 4 qtrs ago (SQ1)
12m sales 3 qtrs ago (SQ2)
12m sales 2 qtrs ago (SQ3)
12m sales 1 qtr ago (SQ4)
12m sales latest qtr (SQ5)
Qtr sales 7 qtrs ago (QS1)
Qtr sales 6 qtrs ago (QS2)
Qtr sales 5 qtrs ago (QS3)
Qtr sales 4 qtrs ago (QS4)
Qtr sales 3 qtrs ago (QS5)
Qtr sales 2 qtrs ago (QS6)
Qtr sales 1 qtr ago (QS7)
Qtr sales latest qtr (QS8)
Annual FY Sales (mil) (SAL)
Common Shrs Out (mil) (SHR)
Shrs Held by Inst (%) (FND)
Market Capital (mil) (CAP)
Current Book Value (BKV)
Pfd Equity (% assets) (PEQ)
Common Equity (% ass) (CEQ)
LT Debt (% assets) (LTD)
Other Debt (% ass) (ODL)
Total Assets (mil) (ASS)
Year/Month Latest FY (MFY)
FY Earnings, Current (TCE)
FY Earnings, Normal (TNE)
Debt Ratios
Current Ratio (CCR)
LT Debt/Equity Ratio (DEQ)
Tot Debt/Asset Ratio (DAS)
51
10769
10827
11070
11137
11245
2645
2546
2518
3060
2703
2789
2585
3168
11070
365.1
60
18945
13.98
0
28.5
40.2
31.3
18448
200405
1038.3
982.9
1.2
1.41
0.72
Company Performance
Net Profit Marg, Cur (CPS)
Net Profit Marg, Nor (NPS)
Return on Assets, Cur (RAC)
Return on Assets, Nor (ROA)
Return on Equity, Cur (REC)
Return on Equity, Nor (ROE)
Reinv on Equity, Cur (PLC)
Reinv on Equity, Nor (PLB)
Share Price History
Latest Price (PRI)
Price, 1 Month Ago (PRO)
52-Week High Price (H52)
52-Week Low Price (L52)
50 Day Moving Avg (FMA)
200 Day Moving Avg (TMA)
Price Gain - 1 Day (PG1)
Price Gain - 1 Week (PGW)
Price Gain Mo-to-Date (PGM)
Price Gain - Cur Mo (PGN)
Price Gain - 3 Month (PGQ)
Price Gain - 6 Month (PGH)
Price Gain - 12 Month (PGY)
Price Gain - YTD (PGD)
Price Gain - 3 Year (PG3)
5-yr Pri Gain (%/yr) (PGF)
5-yr Tot Rtrn (%/yr) (REF)
Adjusted Beta (BET)
Unadjusted Beta (BTA)
Alpha (ALP)
1 Mo Avg Daily Volume (AVL)
3 Mo Avg Daily Volume (VOL)
Daily Vol % of 3mo Av (DVP)
Indicators
Change Indicator (CHI)
Screening Indicator (VEI)
Foreign Co Indicator (FNI)
Options Indicator (OPI)
Exchange Indicator (EXI)
Average Indicator (AVI)
S&P MidCap Indicator (MCI)
S&P SmallCap Ind (SCI)
Ford 1000 Indicator (FII)
Ford 2000 Indicator (F2I)
NASDAQ 100 Indicator (NQI)
Ford Basic/Diluted In (FDI)
FY Estimate Indicator (YEI)
First Call Data
No of Cur Estimates (EST)
Cur Yr Mean Estimate (FY1)
Next Yr Mean Estimate (FY2)
Sec Growth Median (LTG)
Std Dev Cur Year (SD1)
1 Mo Chg Current Year (MC1)
1 Mo Chg Next Year (MC2)
Cur Qtr Mean Est (QTR)
Yr/Mo of Cur Yr End (FYE)
Yr/Mo of Cur Qtr End (FQE)
Yr/Mo of Latest SUE (SUQ)
9.4
8.9
5.6
5.3
20
18.6
11.1
9.7
51.89
49.22
52.35
43.3
48.29
46.58
0.1
0.1
4.4
5.4
19.6
13.9
13.5
4.4
7.1
6.8
9.6
0.36
0.06
0.74
23215
19590
1.3
1
N
S
0
0
1
0
0
DI
0
14
2.91
3.13
8
0.02
0
0.6
0.7
200505
200502
200411
B/S in $ Mil
FY Balance Sheet Data
Balance Sheet Date (BSD)
200405
Cash & Cash Equiv (CSH)
Short-Term Investment (STI)
Net Receivables (RCV)
Inventory (INV)
Current Assets (TCA)
Property Plant & Equ (PPE)
Goodwill (GWL)
Intangible Assets (ITA)
Total Assets (TAS)
Accounts Payable (PAY)
Sht trm & cur LTD (STD)
Current Liabilities (TCL)
Long-Term Debt (LDT)
Total Liabilities (TLI)
Preferred Stock (PFD)
Retained Earnings (RTE)
Common Stock Equity (CSE)
Shares Outstanding (BSO)
Qtrly Balance Sheet Data
Balance Sheet Date (BSDQ)
200411
751
0
1179
1063
3215
3111
6684
3641
18448
2393
233
2757
7410
13200
0
3722
5248
379
Cash & Cash Equiv (CSHQ)
Short-Term Investment (STIQ)
Net Receivables (RCVQ)
Inventory (INVQ)
Current Assets (TCAQ)
Property Plant & Equ (PPEQ)
Goodwill (GWLQ)
Intangible Assets (ITAQ)
Total Assets (TASQ)
Accounts Payable (PAYQ)
Sht trm & cur LTD (STDQ)
Current Liabilities (TCLQ)
Long-Term Debt (LDTQ)
Total Liabilities (TLIQ)
Preferred Stock (PFDQ)
Retained Earnings (RTEQ)
Common Stock Equity (CSEQ)
Shares Outstanding (BSOQ)
561
0
1333
1233
3307
3055
6725
3637
18649
1479
19
2355
7429
13666
0
4041
4983
364
200405
Qtrly Income Statement Data
Income Statement Date (ISDQ)
200411
Total Revenue (REVQ)
Gross Profit (GPRQ)
SG&A Expense (SGAQ)
R&D Expense (RNDQ)
Operating Income (OINQ)
3168
1279
637
N/A
639
I/S in $ Mil
FY Income Statement Data
Income Statement Date (ISD)
Total Revenue (REV)
Gross Profit (GPR)
SG&A Expense (SGA)
R&D Expense (RND)
Operating Income (OIN)
EBITDA (EDA)
EBIT (EBT)
Interest Expense (IEX)
Pretax Income (IBT)
Income Tax Expense (ITE)
Net Inc From Cont Op (NCO)
Net Income (NET)
11070
4486
2443
N/A
2017
2395
1996
487
1509
528
1055
1055
EBIT (EBTQ)
Interest Expense (IEXQ)
Pretax Income (IBTQ)
Income Tax Expense (ITEQ)
Net Inc From Cont Op (NCOQ)
Net Income (NETQ)
399
1461
628
-470
-943
48
Qtrly Cash Flow Data
Depreciation & Amort (DEPQ)
Cash Flows from Oper (COAQ)
Capital Expenditures (CEXQ)
Cash Flows from Inves (CFIQ)
Cash Flows from Finan (CFAQ)
Chg in Cash & Cash Eq (CCCQ)
639
125
514
171
393
367
C/F in $ Mil
FY Cash Flow Data
Depreciation & Amort (DEP)
Cash Flows from Oper (COA)
Capital Expenditures (CEX)
Cash Flows from Inves (CFI)
Cash Flows from Finan (CFA)
Chg in Cash & Cash Eq (CCC)
References:
http://www.generalmills.com
http://edgarscan.pwcglobal.com
http://finance.yahoo.com
52
113
484
82
-78
-325
81
DuPont / Other Ratios
EBIT Margin (EBM)
Asset Turnover (ATO)
EBIT ROA (ERA)
Interest Burden (INB)
Pretax ROA (PRA)
Financial Leverage (FNL)
Pretax ROE (PRE)
Tax Rate (TAX)
Tax Retention Rate (TRR)
Inventory Turnover (ITO)
Acid Test Ratio (ATR)
Times Interest Earned (TIE)
Gross Margin (GRM)
R&D as % of Sales (RDS)
18
0.6
10.8
2.64
8.2
3.52
28.8
35
65
10.41
0.78
4.1
40.5
N/A
Marking Guideline for FIN 3321 Valuation Project
Group Mark Allocation Form
Please submit this form with your final written report. You (your group) needs to complete all of the detail
below. For the allocations to be accepted, it is necessary that all group members sign off in unanimous
agreement. Also make sure that each signature is dated. Finally, as per the instructions provided in lecture,
verify that the group allocations sum to 100%. If your group cannot come to agreement regarding the allocation
then you will enter into binding arbitration based on my decision/ruling.
Percent Grade
Group Member Signature
1.____________________
(Signature Here)
ID Number
Date
Allocation___
_________
____
_______
_________
____
_______
_________
____
_______
_________
____
_______
_________
____
_______
____________________
Printed Name Here
2.____________________
(Signature Here)
____________________
Printed Name Here
3.____________________
(Signature Here)
____________________
Printed Name Here
4.____________________
(Signature Here)
____________________
Printed Name Here
5.____________________
(Signature Here)
____________________
Printed Name Here
TOTAL:
100%
Group Name________________
DAY_______
TIME______
53
GROUP #_______