Featured Company | UNDERVALUED
Building on a History of Flour Power
General Mills, Inc.
General Mills, Inc. (ticker: GIS), markets many of the world’s
most iconic food brands. The company started out as a flourmilling business but today is one of the world’s largest food
companies, producing and distributing packaged goods in a
broad range of categories.
C
States and Europe. The strategy recently resulted in a pair
of major overseas acquisitions — France’s Yoplait yogurts
and Brazil’s Yoki packaged foods.
A notable feature for potential investors is the company’s hefty dividend. In mid-2011 General Mills increased
the payout to $0.305 a quarter, up 8.9 percent from $0.28. It was the seventh dividend
increase in 12 years. The company has paid
a cash dividend every year since 1898.
The healthy dividend was among factors
that members of the Editorial Advisory and
Securities Review Committee cited in choosing General Mills as the Undervalued Company. They also remarked that its margins —
and share price — may benefit should commodity prices fall further in coming quarters.
ruise the aisles of any grocery store
and you’ll see many of the company’s brand names: Bisquick and
Betty Crocker baking products, Pillsbury
dough, Green Giant vegetables, Nature Valley
snacks, Progresso soups, Hamburger Helper
dry dinner mixes. On the cereal shelves
you’ll find Chex, Cheerios, Lucky Charms
and Wheaties. These brands are but a small
fraction of the total held by the Minneapolisbased corporation.
The brand loyalty of its customers has
Corporate Picture
always been one of the company’s main
U.S. Retail, the company’s largest segment,
strengths. General Mills sales results have
generated $10.2 billion in net sales for fiscal
undergone pressure in recent quarters, how2011 (ended May 29, 2011). The unit acBreakfast Giants. General
ever. Prices for feedstock commodities such
counted for 68.3 percent of the company’s
Mills sells its Cheerios cereal
as corn, wheat and soy spiked last year as
total net sales. The domestic retail segment
in Europe as part of its joint
bad weather reduced U.S. crop yields. The
distributes brand-name cereals, snacks, soups,
venture with Néstle.
price of a bushel of corn, for example,
refrigerated yogurt, organic products, dry
peaked at almost $8 in mid-2011. At the same time, strong dinner mixes, canned and frozen vegetables, baking prodoverseas demand — think China — added to the price ucts and frozen and refrigerated dough.
pressure. Kendall J. Powell, chief executive of General Mills,
Bakeries and Foodservice produced $1.8 billion in net
said in a conference call earlier this year that the sales, 12.4 percent of the total. The unit markets to bakcommodity-cost inflation has been the highest seen in eries, food distributors, convenience stores, cafeterias and
30 years.
restaurant chains.
Commodity prices have eased this year. Harvested
International accounted for $2.9 billion in net sales,
crops can take months to move from the field to the pack- 19.3 percent of the total. The unit’s sales consist of retail
age on the shelf, however; a box of food purchased today products produced in the United States for export. Key marmay contain grain harvested in 2011 at peak prices. Any kets are the Caribbean and Latin America.The company addirelief from higher retail prices therefore isn’t likely for con- tionally has a strong presence in Canada, Europe and China.
sumers until late this year.
The segment markets General Mills products to the interLike other food giants, General Mills has had limited abil- national joint ventures in which the company participates.
ity to compensate by raising prices. Consumers beset by For example, General Mills has a 50 percent equity interest in
financial pressures over the past five years have increasingly Cereal Partners Worldwide, its partnership with Nestlé. The
turned to private label packaged foods rather than pay a pre- company holds a 50 percent stake in Haagen-Dazs Japan,
mium for familiar but higher-priced brand names. Recent which markets ice cream products and frozen novelties.
price increases for several leading General Mills brands were
General Mills traces its beginnings to 1866 when
counterbalanced by decreases in sales volumes.
Cadwallader Washburn launched the Minneapolis Milling
Measures the company is taking to control costs Company. The business grew into one of the country’s
include a companywide restructuring announced in May. largest flour producers. In 1908 the company obtained a
Management said it would reduce the size of its workforce listing on the New York Stock Exchange.
and make unspecified organizational changes.
In 2001 General Mills engineered a coup when it
The company’s placing more emphasis on emerging acquired the Pillsbury brand, paying parent company
markets promising stronger growth than in the United Diageo PLC $10.5 billion. Following an antitrust review,
August 2012 | BetterInvesting |
27
UNDERVALUED | Featured Company
General Mills, Inc.
2011
(ended 5/29/11)
2010
%
(ended 5/30/10) change
FY 2012
Q3
FY 2011
Q3
$4.1 billion
$3.6 billion
%
FY 2012
change year to date
FY 2011
year to date
%
change
Net revenues
$14.9 billion
$14.8 billion
0.6%
13.0%
$12.6 billion
$11.2 billion
12.0%
Net income*
$1.8 billion
$1.5 billion
17.3% $391.5 million $392.1 million (0.2%)
$1.2 billion
$1.5 billion
(15.9%)
Diluted EPS*
$2.70
$2.24
20.5%
$0.58
$0.59
(1.7%)
$1.86
$2.21
(15.8%)
Dividends
$1.12
$0.96
16.7%
$0.31
$0.28
8.9%
$0.92
$0.84
7.7%
Stock exchange
Ticker symbol
Price at time of selection
Past year’s price range
Recent market price
Market capitalization
NYSE Value Line long-term earnings growth estimate
GIS Consensus long-term earnings growth estimate (19 analysts)
8.0%
7.2%
$38.28 2012 consensus EPS estimate (ended May 2012)
$2.54
$34.64 – $41.06 2013 consensus EPS estimate (ending May 2013)
$2.75
$37.90 Recent price-earnings ratio
16.2x
$24.5 billion
* Excluding nonrecurring and special items.
** The P/E ratio is based on diluted EPS of $2.34 for the four quarters ended Feb. 26.
Sources: Morningstar, Yahoo! Finance, Value Line and company reports
General Mills sold several brands and
obtained regulatory approval from the
Federal Trade Commission.
The acquisition brought the two
businesses full circle. Pillsbury and
the General Mills predecessor company were rivals in the beginning, but
in 1869 they banded together to develop better flour-producing technology.
Their efforts made Minneapolis the
country’s flour-milling center.
Morningstar names Kraft Foods
(KFT), Kellogg (K) and Campbell Soup
(CPB) as competitors. Yahoo! Finance
lists as direct competitors Kellogg,
Seneca Foods (SENEA) and French
firm Danone (DANOY).
Recent Developments
General Mills has launched a restructuring program to bring down its costs
in the face of higher commodity prices.
Management announced in May that it
would lay off about 850 workers, half
in the company’s headquarters city.
The displaced workers are about 2.4
percent of the 35,000 General Mills
recently reported employing.
As part of its growing focus on
international sales, General Mills obtained a controlling interest in Yoplait
in July 2011. In a transaction valued at
$1.2 billion, the company acquired 51
percent of Yoplait from PAI Partners
and Sodiaal, a leading French dairy
cooperative.
28
| BetterInvesting | August 2012
General Mills has sold Yoplait yogurt
in the United States under license for
decades. Through its controlling interest in the joint venture, General Mills
gained a presence in growing overseas
markets for Yoplait products.
A shift in domestic consumer tastes
has created a difficult competitive environment for yogurt producers. Demand
for Greek-style yogurt has exploded.
But General Mills reportedly was late
in developing its entry in the competition and has struggled to gain market
share.
A March analyst report published
by Argus stated that Greek yogurt is a
$1.2 billion retail category in the
United States and represents about
33 percent of the domestic market for
yogurt products. Sales in 2011 were
almost double levels reported the year
before. Yoplait yogurts represent an
estimated 6 percent of the domestic
market, Argus reported. The biggest
brand is Chobani, with an estimated
54 percent share.
This year General Mills engineered
another large overseas acquisition.
The company announced in May that
it will purchase Yoki Alimentos. The
family-owned Brazilian business produces soups, seasonings and other
packaged foods. In 2011 Yoki generated about $540 million in sales.
General Mills will pay about $860
million and assume nearly $100 mil-
lion in debt. Management reported
the acquisition will more than double
the company’s Latin American sales to
nearly $1 billion a year.
Final Notes
The goal for an Undervalued Stock is
a 20 percent increase in investment
value (market price appreciation plus
dividends) within 18 months. BetterInvesting Magazine is profiling General Mills for educational purposes
only. No investment recommendation
is intended.
BetterInvesting Magazine hasn’t
featured General Mills previously. The
company ranked No. 92 in the Top 200
survey of investment club holdings for
2011 (see the April 2012 issue). An
estimated 161 clubs owned shares.
The company sponsors a dividend
reinvestment and direct stock purchase plan. The board approved a
2-for-1 stock split in 2010.
Internet links to background on
General Mills and its industry can be
found in the online version of this
article at the BetterInvesting website.
The magazine also will post the Value
Line and Morningstar analyst reports.
To request more information, contact
Investor Relations, General Mills, Inc.,
No. 1 General Mills Boulevard, Minneapolis, MN 55426-1347.
— Reporting by contributor Kevin Lamiman