UNIVERSITY OF OREGON
INVESTMENT GROUP
May 21st, 2010
Consumer Goods
General Mills, Inc (GIS)
RECOMMENDATION: HOLD
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
DCF Analysis
Comparables Analysis
Current Price
Target Price
50.67 – 74.20
GIS/NYSE
.51
339.1M
2,568,540
24,530.7M
73.91 (5/17/10)
1.96
2.7%
$94.8
$70.26
$73.91
$80.08
Summary Financials
Revenue
Net Income
Operating Cash Flow
BUSINESS OVERVIEW
LTM (In Millions)
14,691 (2009) 11226.1
(Q1-Q3A)
1143.9 (2009)
1840.18(2009)
General Mills, Inc. was incorporated by James Ford Bell who led a mega-merger of several regional
milling companies in order to create what is nowknown as General Mills Inc. After World War II there was
rapid expansion in General Mill’s as they established a popular line of appliances along with creating the first
BettyCrocker hardcover cookbook. The company generated $14,691 million in revenue in 2009 and expects
to continue growing into the future. Today General Mills is the world’s sixth-largest food company and are
Covering Analyst: Joel Minugh
Email: Analyst: Minugh@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 portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
General Mills Inc.
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continuing to grow. They market in more than 100 countries, which include offices or manufacturing
facilities in more than 30 countries.
The company breaks down their revenue segments into three categories which include, U.S retail,
International, along with Bakeries & Foodservice. There largest segment U.S retail consist of 68% while
their International growing at 20 % and the Bakeries and Foodservice at 12%. To generate their revenue
they rely on a set number of principle products that include ready-to-eat cereals, refrigerated yogurt, readyto-server soup, dry dinners, their big G cereal line and much more. The average number of breakfast meals
per person has been steadily increasing throughout the years and can be shown in the graph below. Their
primary customers consist of grocery stores, supermarkets and convenience stores, export, food service
providers (66.3, 19.7, 8.9, and 5.1% respectively)
There sales are broken down into different categories and can be shown in the graph belowwhich gives a
nice representation of what percent of their revenues come from what segment of the food industry. During
the fiscal year of 2009 Wal-Mart stores accounted for 21 percent of their net sales. Almost every product is
licensed by General Mills and because of this it has full rights to their trademarks and promotional
mediums. It provides great products and “On average. U.S shoppers place at least one General Mills
product into their shopping cart each time they visit the grocery store”.
BUSINESS AND GROWTH STRATEGIES
The food categories that General Mills, Inc. partakes in are highly competitive; their main competitors have
substantial financials along with a large marketing budget and other resources. Not only are they competing
with the competitors in the market but also having to divide their market share with generic products
produced by grocery wholesalers. To grow in the market segment General Mills, Inc. plans to increase their
media spending in order to have stronger brand recognition with their products. They plan to focus their
marketing on baby boomers, kids, and multi-cultural consumers for potential market growth in the future.
They have also realized recently that while Cheerios was thought to have generated all of growth possible
from the brand name, with the new introduction “Banana Nut Cheerios” shows us the tremendous growth
possibilities for introduction of new cereals spin-offs. They also plan to grow through the multiple joint
ventures they participate in. They have a 50 percent equity interest in CPW, which manufactures ready-to2
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eat cereal products in more than 130 countries. CPW sales were up 5% in the third quarter of the 2010 fiscal
year. They also have 50 percent equity interest in Haagen-Dazs Japan, Inc. which distributes, markets,
Haagen-Dazs ice cream products. The sales for Haagen-Dazs were down 8% on a constant-currency basis.
Along with join ventures and increased marketing spending to a specific target market, General Mills plans
to expand internationally to fuel their growth. They are going to achieve this by increasing their promotion
and offering more products to the 100 countries they sell their products in currently. They had a segment
growth of 20.5% and are continuing to push internationally and gain recognition in other countries. In 2008
General Mills has also undertaken several key joint venture partnerships, most notably, with French food
giant Nestle SA.
MANAGEMENT AND EMPLOYEE RELATIONS
As of May 31st, 2009, General Mills had approximately 30,000 full- and part-time
employees. As for the man behind the box, Chief Executive Officer Ken Powell
beat out Apple’s Steve jobs as the most popular boss in America. Glassdoor, a Web
site where employees post salary information along with reviews about the company
and bosses, just released the latest ratings of the CEOs. When employees of
General Mills were asked “Do you approve of the way this person is handling the
job of leading this company?” one hundred percent of General Mills employees
answered “yes”. Ken Powell offers great leadership and strong goals for General
Mills in the future. He is an important part of the company and has no plans of
leaving anytime soon.
PORTFOLIO HISTORY
Ø Svigals’s Portfolio: Purchased 50 shares on 10/20/2008 at a total cost basis of 3221.00. Since the
purchase as of 5/6/2010 GIS has returned a 10.07% with a holding make up of 3.86% of the total
portfolio.
Ø Tall Firs Portfolio: Purchased 225 shares on 10/24/08 at 65.17 with total basis cost of 14,675.25.
Since the purchase it has returned 12.71%.
RECENT NEWS
•
“MINNEAPOLIS, May 03, 2010 (BUSINESS WIRE) --General Mills, Inc. (NYSE: GIS) Board of
Directors today declared a two-for-one split of General Mills common stock. The split will be
affected in the form of a 100 percent stock dividend. Shareholders of record at the close of business
on May 28, 2010, will receive one additional share of General Mills stock for each share then owned.
These additional shares will be distributed beginning June 8, 2010.” – Generalmills.com
The chairman and Chief Executive Officer Ken Powell stated this was a decision by the board as they
recognize they have a strong and long term equity-market performance and promising growth prospect.
It also reflects that they have a commitment to maintain a market price range that is attractive to
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individual investors. The stock has split several times since incorporated in 1928, there most recent twofor-one spilt occurred on November 8, 1999.
•
“MINNEAPOLIS,Apr 13, 2010 (BUSINESS WIRE) – General Mills today announced that it has
commenced a modified "Dutch Auction" cash tender offer for up to $250 million aggregate
principal amount of its 6.000% Notes due 2012 and 5.650% Notes due 2012.” –Marketwatch.com
With the recent change of debt and GIS issuing more debt, the cost of debt has changed compared to
what has been stated on their most recent 10Q. This change had minimal effects on the overall intrinsic
price of GIS.
•
MINNEAPOLIS, Mar 24, 2010 (BUSINESS WIRE) -- General Mills (NYSE: GIS) today reported
financial results for the third quarter of fiscal 2010. Net sales for the 13 weeks ended February 28,
2010, grew 3 percent to $3.63 billion. Foreign currency translation contributed 1 point of net sales
growth. Pound volume matched year-ago levels, despite the loss of 1 point of growth from divested
products. Gross margin expanded, reflecting favorable mix, strong supply chain productivity, and
commodity costs that were belowyear-ago levels for the period.
The increase of quarter three results were greatly due to factors that are out of the hands of the
company GIS. Their gains really came from the foreign currency translation, and also with the gross
margin increasing due to the decrease in commodity costs that were below year-ago levels for the
period. Commodities have been increasingly volatile within the past couple of years and this strongly
correlates with the COGS for GIS.
INDUSTRY ANALYSIS
The industry that General Mills competes in is comprised mostly of providing ready-to-eat cereals which
happens to be a large part of the revenue generated by General Mills. The cereal industry acquires raw
materials such as corn, flour, sugar, and various other rawmaterials. The industry itself is expected to have a
GDP growth rate of 2.8% until 2015. The market share for cereal products is mostly a monopoly controlled
by the top four companies in the market segment. General Mills currently accounts for 31.2% of the
revenue while Kellogg Company is generating 34.2%
and with the top 4 players account for 87% of the
industries revenue. The cereal market generates high
profit margins but is subject to volatile commodity
prices which can often make it difficult to project
future margins. A positive side to the market is that it
has continued to grow through the current state of
the economic downfall. The ready-to-eat cereal
comprises of the largest portion of the market and it
includes cold cereals. The total share of the market
has been decreasing in recent years due to new
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product introductions. Also consumers are switching to a faster paced world and need something that is “on
the go”. Hot cereals such as oatmeal and porridge, which are a more traditional type of cereal, have lost
market share to such items as muffins, cereal bars, and other supplemental goods to cereal. Cereal bars show
great potential growth for the future as consumers are switching to a faster alternative to ready-to-eat
cereals. The cereal market is expected to remain resident during the economic recession, which could help
the growth of the cereal market as consumers are looking for a cheap meal that offers nutrients and are easy
to serve. The cereal market is subject to multiple changes which can be transferred to the companies and
create pressure for change. In order to thrive in the cereal market you will have to be able to adapt to
change, whether this is consumer presences or change in raw materials. Another key factor to success is to
be able to differentiate yourself in the cereal market and maintaining a good market share within the
industry. Also they have potential to generate more profits with economics of scale as they might be able to
purchase raw materials in large quantities therefore lowering their COGS. Below you can see how the cereal
market is broken down into and the percent of the market each subcategory has. Along with this you see the
recent net sales growth of the Big G cereals and expected growth in 2010.
For General Mills to remain competitive in this field they are going to have to maintain a
competitive advantage and respond to consumers wants quickly. The cereal segment of its business, dubbed
“Big G Cereals” is the most significant part of their revenue and generates 22% of North American retail
sales in 2008.
Commodity Prices
Commodity prices play a large role their Cost of Goods Sold and since the market has been so volatile in the
past couple of years I thought it was important to include future projections of commodity prices because
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of howmuch they influence GIS cost of revenue. The primary inputs that are used are wheat, sugar, and
corn. Belowyou can see the expected forecast for each of the commodities. Although I’m not going to be
projecting commodities I thought it was important to showthe future projections of the main three
commodities used in the COGS for GIS, also to showwhat the growth has been in the past.
Wheat
Revenue
$11,400 Million
Number of Enterprises
43
Forecast Revenue Growth to 2015
1.9%
Forecast GDP Growth to 2015
2.8%
Recent Employment Growth
3.3%
Average Wages per Employee
$59,700
Average Profit Margin
11.3%
Average Revenue of Enterprise
$265,118,605
Imports Share of Domestic Demand
4.6%
Exports Share of Revenue
4.0%
Corn
Revenue
$50,724 Million
Number of Enterprises
127,156
Forecast Revenue Growth to 2016
2.7%
Forecast GDP Growth to 2016
3.0%
Recent Employment Growth
1.8%
Average Wages per Employee
$10,748
Average Profit Margin
19.7%
Average Revenue of Enterprise
$398,913
Imports Share of Domestic Demand
0.6%
Exports Share of Revenue
16.3%
Sugar
Revenue
Number of Enterprises
Forecast Revenue Growth to 2016
Forecast GDP Growth to 2016
Recent Employment Growth
Average Wages per Employee
Average Profit Margin
Average Revenue of Enterprise
Imports Share of Domestic Demand
Exports Share of Revenue
$6,997 Million
41
-2.5%
3.0%
-1.7%
$45,107
17.2%
$170,658,537
18.7%
3.7%
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General Mills Inc.
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S.W.O.T. ANALYSIS
Strengths
•
•
•
•
•
•
•
Company is expanding internationally.
Have strong brand recognition and loyalty, also effective marketing.
Legal proceedings are pending but seem to have never had an effect on the financial position of the
company.
Strong third quarter results, with profits up 15%.
Demand for their products is evenly balanced throughout the year.
The SG&A expense increase has shown a profitable margin with the revenues retuned by marketing.
Great management and dedicated employees trying to create a better company for the future.
Weaknesses
•
•
•
•
•
•
•
•
Subject to various risk and uncertainties, such as food categories.
Slowreaction time when faced with a changing industry.
Affected by changes in disposable income as consumers can downgrade to generic supplements.
Unavoidable risk such as natural disasters that could cause a supply shock in rawmaterials needed
for making the company’s products.
Subject to international risk and currency exchange rates.
If competitors decrease their pricing or increase promotional spending they are inclined to do the
same.
Price changes in commodities such as rawmaterials can hurt their margins.
Economic downturns could cause consumers to increased purchases in generic goods.
Opportunities
•
•
•
Gaining a stronger international market share, and therefore increasing their revenues.
Marketing to baby boomers, kids, as they are the largest population in the U.S.
Using their marketing (SG&A) to generate more revenues and create more brand recognition.
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•
•
•
Generating newcereals such as “Banana nut Cheerios” to better the Big G brands.
Joint ventures in the international segment to become more established.
Bakeries and food service.
Threats
•
•
•
•
•
Volatility in the rawgoods market.
Increasing concern for public health cause consumers to avoid certain ingredients.
Potential competition to come into the market segment and take away from the market share.
Subject to food safety regulations, such as inspecting by the FDA, and potential food recall.
If population growth slows demand for products will fall.
PORTER S 5 FORCES ANALYSIS
Supplier Power:
Raw materials used in the production of General Mills Inc. products are usually purchased from farms.
While General Mills offers a wide variety of products, cereal accounted for a large portion of their revenues
in the past years. Though there are numerous suppliers to get their raw materials from, General Mills must
consider the consumer when deciding where to buy the raw materials from. General Mills Inc. often
operates by having contracted agreements of raw materials such as corn, sugar, wheat, grain on expectations
of future prices. Although there are many suppliers in the food manufacturing industry there is also a lot of
competition allowing the supplier to raise prices as demand increases.
Barriers of Entry:
The food manufacturing industry is a very competitive industry, and while there are many companies
producing new products it is the loyalty that large companies such as General Mills accounts for when
maintaining market sustainability. The brand loyalty that large companies such as Kellogg’s, Post, Kraft, and
other companies have established makes it hard for new entrants to gain a market share within the industry.
Along with brand loyalty large companies rely are their large marketing budgets to allow them to
aggressively promote their products. As for specialty goods, General Mills has a harder time gaining a
market share as smaller companies can capitalize in the niche markets.
Buying Power:
While suppliers have some power in the price that they set on to the companies purchasing their product,
the buyers are also able to manipulate the price of commodities in their favor. Often contracts are
negotiated in order to create a lower price for the raw materials. With the increase of volatility in the market
in the raw materials market, if General Mills can capitalize on low prices and negotiate contracts they can
often save a lot of money in the future and reduce their COGS to increase their margins. Also with famers
needing to sell their product before the raw material goes bad this can put pressure on them to create
attractive prices for buyers.
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Threat of Substitution:
There are always going to be substitutes in the food market, but it is General Mills ability to adapt and create
the product that the consumers want that will allow them to thrive as a company. There are a lot of
substitutes for breakfast but often they can be time consuming or expensive, and with the average number
of breakfasts eaten by people increasing we can only assume that their revenues will continue to rise.
General Mills will rely on their brand loyalty to make sure substitutions have a minimal effect on their
market share.
Degree of Rivalry:
As stated there are many competitors in the food manufacturing market, but it is their brand loyalty and
more recently aggressive marketing strategies that will allow them to continue to grow. Also we can see
from the cereal market it is the top 4 manufactures that have a monopoly on the market. This allows them
to purchase smaller companies that have entered the market and are profitable, thereby growing their
company.
COMPARABLES ANALYSIS
The companies I chose to use in my comparable analysis were those that share the share similar business
risks. Kellogg Company (K), Kraft (KFT), Ralcorp Holdings Inc. (RAH), Campbell Soup Company
Common St (CPB) are four publicly traded companies that compete for the same market share General
Mills Inc. does. All four of these companies offer similar products and have comparable growth strategies
for the future. They all have similar Debt to Equity Ratios (excluding KFT), and respectively have the same
betas (excluding RAH). They also have similar international growth goals as well as manufacturing in other
countries. With Kellogg’s and Kraft being more comparable they were weighted higher because of the
outstanding number of comparable evaluations related to General Mills.
Kellogg Company (K) Weight 30%
Kellogg Company, founded in 1906 and incorporated in Delaware in
1922, and its subsidiaries are engaged in the manufacutre and
marketing of ready-to-eat cereal and convenience foods. It has many
products that include ready-to-eat cereal, cookies, fruit snacks, cereal
bars, toaster pastries and much more. It sells its products mainly to the North America but is still expading
overseas where it is now in Euroupe, Latin America, and the Asia Pacific. It manufactures in 18 countries
and marketed in more than 180 countries. They face a lot of the same risk that General Mills does such as
volitility in commodities along with consumption by consumers.
Kraft Foods Inc. (KFT) Weight 30%
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Kraft Food Inc. together with its subsidaries, manufactures and markets snacks, confectinery, and quick
meal products worldwide. Kraft Foods is the world’s second largest food company, with revenues of 40.4
billions and EBIT of 4.3 billion in 2009. It was incoporated in 2000 in the Commonwealth of Virginia. They
currently have 97,000 employees worldwide. As of Decemeber 31st, 2009, they had operations in more than
70 countires and currently sell their products in 160 countires. Since Kraft Foods Inc. is a holding company,
their principle source of funds come from its subsidiaries. There main brands span over five consumer
sectors, snacks, beverages, cheese, grocery, convenint meals.
Ralcorp Holdings, Inc. (RAH) Weight 15%
Ralcorp holdings is primarily engaged in manufacturing, distributing and
marketing Post branded cereals and a wide variety of store brand food
products in the grocery store, mass merchandise, and foodservice segments.
There principle products include everything from ready-to-eat cereals and
hot cereals, nutritional cereal bars, store brand cookies, frozen griddle
products, and other types of baked goods. Their main strategy as a business
is to grow through increased sales of existing products and new products
through acquisitions of other companies. Since 1997 they have acquired 27
other companies. They acquired Post foods through Kraft Foods Inc. They have a hand in a lot of every
segment of store brand food products, everything from sauces to dressings, jellies to cereals. It sells all these
products through a broker market, internal sales staff, and also independent sales agency.
Campbell Soup Company (CPB) Weight 25%
Campbell Soup Company, together with its consolidated subsidiaries, is a
manufacturer of branded convenience food products. Campbell Soup
company was founded in 18699 and it’s headquarter is located in Camden,
New Jersey. It is looking to expand its icon bands within simple meals, baked snacks and healthy beverages.
It operates through four segments which consist of U.S soup, sauces, beverages, and baking and snacking. It
also offers a lot of its products in Europe, Mexico, Latin America, Asia Pacific, and Canada. It markets its
products directly as well as through broker and distributors. Its consumers are mass merchandisers, food
chains, retail and drug stores, and non-commercial establishments.
I weighted Campbell’s Soup Company and Ralcorp Holdings, Inc. slightly different for certain reasons. I felt
that Kraft and Kellogg’s Company were great comparable companies as they offered the same growth
strategies both here in the U.S and internationally. They were both relative in size and when it came to the
cereal production in the U.S the ranks (as followed) Kellogg Company, General Mills, Inc. and Kraft Foods
Inc. were all at the top and controlled 79% of the market. They also are the same in debt (especially Kellogg
Company) which allowed them to have the same risk for the future. As for Ralcorp Holdings, Inc. while
they operate in the same market segment, their growth strategies both domestically and internationally were
not on the same scale that General Mills, Kraft, and Kellogg’s were going for. They also have a lot smaller
market cap and revenues compared to the other companies along with a lot smaller beta. Campbell soup has
a lot of the same growth strategies’ along with beta and so forth.
Valuation Multiples
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The following valuation multiples were equally weighted at 33% and were used to calculated the implied
price for General Mills Inc.
EV/EBITDA: A way of calculation the firm’s potential taking into account debt, while also excluding
depreciation schedules.
EV/Revenue: A way of evaluating the efficiency of the business size can generate revenues excluding
financial leverage.
EV/OCF: A way of calculation the firm’s efficiency of generating cash flows plus non-cash expenses given
relative enterprise value size.
DISCOUNTED CASH FLOW ANALYSIS
Revenue Projections: The percent of sales method was used for my revenue projection analysis. There
revenues are broken down into three segments first being U.S Retail (68.42%), International (17.64%), and
Bakeries and Foodservice (13.94%). The U.S retail has stayed constant with their percentage of sales, but the
Bakeries and Foodservice has been slowly started to decline in the past couple of years. The international
segment has started to grow significantly in the past couple of years and with new joint ventures along with
expanding distributions to other countries I’m expecting a strong segment growth within the international
segment. Bakeries and Foodservice segment is expected to show negative growth this year and had very
poor 3rd quarter results in 2009 when in comparison to 2008. General Mills has begun to show great interest
in the international segment and this is where I expect them to grow in the future. Management expects
their international segment to grow in the next few years, while their U.S retail segment should grow with
the increase of marketing.
COGS: With the increasing prices of wheat, corn, and sugar along with other commodity prices it is difficult
to project the future cost of goods sold. However the rising prices of commodities of the raw materials that
General Mills uses as inputs is supposed to rise steadily until the year 2012, which I then ran constant to
perpetuity. To try to project commodities for the future would be to hard but within the next three years I
thought it was reasonable to show the steadily increase to previous COGS that were averaged from the
previous 5 years.
Sales, General & Administrative Expenses: With the increase in marketing spending to boost brand
awareness and create promotion with their products we can expect their SG&A expenses as a percent of
revenue to increase going forward. In the third quarter their media spending rose by 33% in comparison to
the 2009 fiscal year third quarter. Overall the total SG&A expense has increased by 21% which as stated in
the most recent third quarter conference has had a direct correlation to their total revenue sales. As stated in
their most recent conference calls this increase in media spending is supposed to go out a couple of years
and steadily decrease because as the consumers gain recognition about their products the need for marketing
will decrease. Their brand loyalty will take over therefore allowing them to reduce their marketing expenses.
Current Assets: When looking at their current assets I took a percentage of revenue forecast as there were
no indications for their Current Assets to increase or decrease. I used 26.17% moving into perpetuity
because after backtracking to past 10k’s there was no reason not to use a percentage of revenue.
Current Liabilities: Moving forward, I used a percentage of revenue of 24.38% going to perpetuity. While
they do have a large amount of notes payable maturing in 2012 it seems that with constant reissuing of debt
and no future plans to retire any of debt there is no reason for them to change the current liabilities.
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Tax Rate: General Mills, Inc. as of 2009 had a tax rate of 37.30%, this was due to the effect of the 2009 U.S
appellate court decision that reversed a 2008 U.S district court decision. In 2008 they recorded an income
tax benefit of $31 million as a result of a favorable U.S district court decision of an uncertain tax matter. In
2009 this was reversed in the U.S court of Appeals therefore resulting in an increase in the tax rate of 2009.
Therefore considering 2009 an unrealistic tax rate going into the future using 35% going forward was a
more reasonable tax rate.
Depreciation: Depreciation has remained constant throughout the last 5 years and using an average of the
last 3 years to come to a 3.15% percentage of revenue was an accurate representation going into the future.
Beta: I decided to run a 5 year regression against the S&P 500. Running the regression came up with a beta
of .26 which seemed to be an inaccurate representation of how volatile General Mills Inc. was. So I decided
to run a Hamada which was unlevered to reflect the true beta of GIS. By running the Hamada I was able to
reach an industry average beta then unlevered it based on the average D/E of the industry, then re-levered it
to GIS target debt/equity ratio to reach a more realistic beta of General Mills.
COST OF DEBT: There old cost of debt before the news release of April 27th, 2010 was at 5.650% with the
notes due in 2012. With the new issue of debt at the same date of 2012, and with an aggregate principle
amount of 6% I decided to average the two to come to my cost of debt, which came to a 5.83%.
RECOMMENDATION
I’m recommending a hold in all portfolios because GIS has not reached its implied price, and still have a lot
of growth potential for us in the future. With the growth strategies discussed earlier and the future growth
internationally we can see that GIS has good goals for the future. Also with the steady increase of demand
within the segments they operate in, along with being successful in the economic downturn and maintaining
steady growth, GIS is a good company to maintain within all of our portfolios.
DCF Price
Comparables Price
True Price
94.80 40.00%
70.26 60.00%
80.08
12
(In Millions)
Weight
Price (5/17/10)
Shares Outstanding
Market Cap
Total Debt (MRQ) (Long term debt)
Debt Ratio
Cash (MRQ)
Diluted Shares
Enterprise Value
Revenue (TTM)
EBITDA (TTM)
OCF (TTM)
Beta
Valuation Multiples
Ev/Rev
Ev/EBITDA
Ev/OCF
APPENDIX 1 COMPARABLES ANALYSIS
General Mills Inc.
K (30%)
0.30
55.58
379.60
21098.17
3898.00
0.18
334.00
384.00
24662.17
12724.00
2455.00
1783.75
0.50
1.94
10.05
13.83
73.91
331.90
24530.73
5671.60
0.23
691.30
343.50
29511.03
14763.50
3078.00
2211.84
0.51
2.00
9.59
13.34
GIS
1.71
11.62
15.23
KFT (30%)
0.30
30.55
1478.00
45152.90
29496.00
0.65
2101.00
1483.00
72547.90
42308.00
6242.00
4763.05
0.66
1.31
8.82
9.56
RAH (15%)
0.15
61.16
61.33
3750.94
1521.70
0.41
136.90
56.60
5135.74
3915.60
582.20
537.02
0.16
1.88
8.51
13.32
1.76
9.95
13.48
CPB (25%) Average
0.25
1.00
35.67
340.30
12138.50
2250.00
0.19
113.00
346.00
14275.50
7586.00
1677.43
1071.50
0.40
h t t p : //uo i g. uo r e go n . e du
university of oregon investment group
Implied Price
61.28
74.67
74.84
Implied Price
Current Price
Overvalued
13
Weight
33.00%
33.00%
33.00%
$70.26
$73.37
-4.23%
In Millions of Dollars
Net Sales
% of Growth
Cost of Sales
% Revenue
Gross Profit
Gross Margin
S,G, & A
% Revenue
Restructuring, impairment, and other exit costs
% Revenue
Operating Profit
% Revenue
Interest Expense, net
% Revenue
Income Taxes
% Revenue
After-tax earnings from joint ventures
% Revenue
Net Earnings
Add: Interest Expense (after tax)
Tax Rate
Add: Depreciation & Amortization
% Revenue
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change In Net Working Capital
Cap Expenditures
% of Revenue
Free Cash Flow
PV of FCF
460.20
3.70%
1,381.56
7,955.10
63.94%
4,486.40
36.06%
2,389.30
19.20%
39.30
0.32%
2057.8 $
16.54%
426.50
3.43%
560.10
4.50%
72.70
0.58%
1,143.90
280.06
34.33%
417.80
3.36%
1,841.76
14.80%
3,053.70
24.54%
4111.1
33.04%
-1,057.40
2007
12,441.50
2008
13,652.10
9.73%
8,778.30
64.30%
4,873.80
35.70%
2,625.00
19.23%
21.00
0.15%
2,227.80 $
16.32%
421.70
3.09%
622.20
4.56%
110.80
0.81%
1,294.70
276.42
34.45%
459.20
3.36%
2,030.32
14.87%
3,620.00
26.52%
2647.5
19.39%
972.50
7.12%
2,029.90
522.00
3.82%
(521.58)
2012
15,856.88
2013
16,390.84
2014
16,901.45
2015
17,387.43
2016
17,892.46
2017
18,412.70
2018
18,948.64
2019
19,500.77
2020
20,069.59
14
1.74%
2.70%
3.30%
3.37%
3.12%
2.88%
2.90%
2.91%
2.91%
2.91%
2.92%
8,967.66
9,517.21 9,989.84 10,539.31 10,867.64 11,180.12 11,504.85 11,839.37 12,183.98 12,538.99 12,904.74
60.00%
62.00%
63.00%
64.30%
64.30%
64.30%
64.30%
64.30%
64.30%
64.30%
64.30%
5,978.44
5,833.13 5,867.05 5,851.53
6,033.82 6,207.31
6,387.61
6,573.34
6,764.67
6,961.77 7,164.84
40.00%
38.00%
37.00%
35.70%
35.70%
35.70%
35.70%
35.70%
35.70%
35.70%
35.70%
3,437.60
3,530.58 3,488.51 3,442.08
3,549.31 3,651.36
3,757.42
3,866.67
3,979.21
4,095.16 4,214.61
23%
23%
22%
21%
21%
21%
21%
21%
21%
21%
21%
44.84
46.05
47.57
49.17
50.70
52.16
53.68
55.24
56.85
58.50
60.21
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
2,496.00 $ 2,256.50 $ 2,330.96 $ 2,360.28 $ 2,433.81 $ 2,503.79 $ 2,576.51 $ 2,651.43 $ 2,728.60 $ 2,808.11 $ 2,890.02
17%
15%
15%
14%
14%
14%
14%
14%
14%
14%
14%
461.83
474.33
489.98
506.48
522.25
537.27
552.88
568.95
585.51
602.57
620.15
3.09%
3.09%
3.09%
3.09%
3.09%
3.09%
3.09%
3.09%
3.09%
3.09%
3.09%
729.37
749.10
773.82
799.87
824.79
848.51
873.15
898.54
924.69
951.64
979.40
4.88%
4.88%
4.88%
4.88%
4.88%
4.88%
4.88%
4.88%
4.88%
4.88%
4.88%
104.62
107.45
111.00
114.74
118.31
121.71
125.25
128.89
132.64
136.51
140.49
0.70%
0.70%
0.70%
0.70%
0.70%
0.70%
0.70%
0.70%
0.70%
0.70%
0.70%
1,409.42
1,140.53 1,178.17 1,168.67
1,205.07 1,239.72
1,275.73
1,312.83
1,351.04
1,390.40 1,430.96
300.19
308.31
318.49
329.21
339.47
349.23
359.37
369.82
380.58
391.67
403.10
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
35.00%
502.19
515.77
532.79
550.73
567.89
584.22
601.19
618.67
636.67
655.23
674.34
3.36%
3.36%
3.36%
3.36%
3.36%
3.36%
3.36%
3.36%
3.36%
3.36%
3.36%
2,211.80
1,964.61 2,029.44 2,048.61
2,112.43 1,912.62
2,236.29
2,301.31
2,368.30
2,437.30 2,508.40
14.80%
12.80%
12.80%
12.50%
12.50%
11.00%
12.50%
12.50%
12.50%
12.50%
12.50%
3,911.29
4,017.08 4,149.63 4,289.37
4,422.99 4,550.17
4,682.33
4,818.48
4,958.73
5,103.21 5,252.07
26.17%
26.17%
26.17%
26.17%
26.17%
26.17%
26.17%
26.17%
26.17%
26.17%
26.17%
3467.50
3561.28
3678.80
3802.68
3921.14
4033.88
4151.05
4271.75
4396.08
4524.18
4656.14
23.20%
23.20%
23.20%
23.20%
23.20%
23.20%
23.20%
23.20%
23.20%
23.20%
23.20%
443.79
455.80
470.84
486.69
501.85
516.29
531.28
546.73
562.64
579.04
595.93
2.97%
2.97%
2.97%
2.97%
2.97%
2.97%
2.97%
2.97%
2.97%
2.97%
2.97%
6.39
12.00
15.04
15.85
15.16
14.43
15.00
15.45
15.91
16.39
16.89
567.95
583.31
602.56
622.85
642.26
660.72
679.91
699.68
720.05
741.03
762.64
3.80%
3.80%
3.80%
3.80%
3.80%
3.80%
3.80%
3.80%
3.80%
3.80%
3.80%
1,637.45
1,369.30 1,411.84 1,409.90
1,455.01 1,237.46
1,541.38
1,586.18
1,632.33
1,679.88 1,728.86
1,266.21 1,226.31 1,150.29
1,115.04
890.76
1,042.19
1,007.38
973.77
941.31
909.95
2011
15,350.34
2010
14,946.10
h t t p : //uo i g. uo r e go n . e du
university of oregon investment group
2009 2010 Q1-Q3A 2010 Q4E
14,691.00
11,226.10
3,720.00
7.61%
9,457.80
6,643.80
2,323.86
64.38%
59.18%
62.47%
5,233.20
4,582.30
1,396.14
35.62%
40.82%
37.53%
2,953.90
2,417.70
1,019.90
20.11%
21.54%
27.42%
41.60
30.40
14.44
0.28%
0.27%
0.39%
2,322.60 $ 2,134.20 $ 361.80 $
15.81%
19.01%
9.73%
390.00
274.60
187.23
2.65%
2.45%
5.03%
720.40
622.70
106.67
4.90%
5.55%
2.87%
91.90
86.40
18.22
0.63%
0.77%
0.49%
1,304.10
1,323.30
86.12
244.62
177.58
122.62
37.28%
35.33%
35.00%
453.60
340.30
161.89
3.09%
2,002.32
1,841.18
370.62
13.63%
16.40%
9.96%
3,534.90
3,677.10
3,911.29
24.06%
3097.5
2986.1
3467.50
21.08%
437.40
691.00
443.79
2.98%
(535.10)
562.60
418.90
149.05
3.83%
3.73%
3.80%
1,974.82
1,422.28
215.18
211.83
APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS
General Mills Inc.
General Mills Inc.
university of oregon investment group
h t t p : //uo i g. uo r e go n . e du
APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Tax Rate
35.00%
Risk Free Rate (10 Year Bond) 3.47%
Market Risk Premium
7%
Beta
0.51
Cost of Equity (CAPM)
7.06%
% of Equity
81.74%
Cost of Debt
5.83%
% of Debt
18.26%
WACC
6.46%
Terminal Growth Rate
Net Present Value of FCFs
Terminal Value
PV of Terminal Value
Firm Value
Long Term Debt
Equity Value
Shares Outstanding (diluted)
Implied Share Price
Current Share Price (5/11/2010)
3.00%
10,735.04
51,437.57
27,500.30
38,235.34
5,671.60
32,563.74
343.50
94.80
73.91
APPENDIX 4 BETA SENSITIVITY ANALYSIS /HAMADA
Company
Beta
D/E Ratio
Standard Error
Weight
Kellogg Co. (K)
0.50
0.19
0.11
25.00%
Ralcorp Holdings, Inc. (RAH)
0.16
0.37
0.20
15.00%
Kraft Foods, Inc. (KFT)
0.66
0.66
0.15
15.00%
Campbell Soup Co. (CPB)
0.40
0.18
0.13
15.00%
H.J Heinz Company (HNZ)
0.64
0.32
0.10
15.00%
Sara Lee Corp. (SLE)
0.89
0.27
0.12
15.00%
Mean
0.54
0.32
0.13
Median
0.57
0.29
0.13
Pure Business Beta
0.54
Sample D/E
0.32
Unlevered Business Beta
0.45
GIS D/E
0.23
GIS Beta
0.51
15
General Mills Inc.
university of oregon investment group
h t t p : //uo i g. uo r e go n . e du
Beta Standard Error (.13)
0.71
1.5
0.64
1
0.58
0.5
0.51
0
0.45
-0.05
0.38
-1
0.32
-1.5
Implied Price Under (Over) Valued
$
67.88
-8.16%
$
75.39
2.00%
$
84.36
14.14%
$
94.80
28.26%
$
108.81
47.22%
$
126.07
70.57%
$
148.84
101.38%
REVENUE PROJECTIONS
In Millions
2007A
2008A
2009A
2010 Q1-Q3A 2010 Q4 2010 A+E 2011E
2012E
2013E
2014E
2015E
2016E
2017E
Net Sales
12,441.50 13,652.10 14,691.00
11,226.10 3,720.00 14,946.10 15350.339 15856.88117 16390.84173 16901.45464 17387.43164 17892.46077 18412.70492
% Growth
9.73%
7.61%
NA
NA
1.74%
2.70%
3.30%
3.37%
3.12%
2.88%
2.90%
2.91%
U.S Retail
8,491.30 9,072.00 10,052.10
7,885.30 2,536.00 10,421.30 10733.939 11055.95717 11387.63589 11683.71442 11987.49099 12299.16576 12618.94407
% Segment Growth
6.84%
10.80%
NA
NA
3.67%
3.00%
3.00%
3.00%
2.60%
2.60%
2.60%
2.60%
% Sales
68.25%
66.45%
68.42%
70.24% 68.17%
69.73%
69.93%
69.72%
69.48%
69.13%
68.94%
68.74%
68.53%
International
2123.4
2558.8
2591.4
2029.7
741
2670
2883.6
3085.452 3270.57912 3450.460972 3588.47941 3732.018587 3881.29933
% Segment Growth
20.50%
1.27%
NA
NA
3.03%
8.00%
7.00%
6.00%
5.50%
4.00%
4.00%
4.00%
% Sales
17.07%
18.74%
17.64%
18.08% 19.92%
17.86%
18.79%
19.46%
19.95%
20.42%
20.64%
20.86%
21.08%
Bakeries and Foodservice
1826.8
2021.3
2047.8
1311.1
443
1805
1732.8
1715.472 1732.62672 1767.279254 1811.461236 1861.27642 1912.461521
% Segment Growth
10.65%
1.31%
NA
NA
-11.86%
-4.00%
-1.00%
1.00%
2.00%
2.50%
2.75%
2.75%
% Sales
14.68%
14.81%
13.94%
11.68% 11.91%
12.08%
11.29%
10.82%
10.57%
10.46%
10.42%
10.40%
10.39%
2018E
2019E
2020E
18948.64213 19500.76613 20069.58687
2.91%
2.91%
2.92%
12947.03661 13283.65957 13629.03472
2.60%
2.60%
2.60%
68.33%
68.12%
67.91%
4036.551304 4198.013356 4365.93389
4.00%
4.00%
4.00%
21.30%
21.53%
21.75%
1965.054213 2019.093204 2074.618267
2.75%
2.75%
2.75%
10.37%
10.35%
10.34%
16
General Mills Inc.
university of oregon investment group
h t t p : //uo i g. uo r e go n . e du
APPENDIX 6 SOURCES
•
•
•
•
•
•
•
•
•
•
•
•
GIS 10k (2009)
Yahoo! Finance
Google Finance
FACTSET
IBIS World
Generalmills.com
Census.gov
Respected Comparable Companies 10k’s
Kellogg’s.com
Campbellsoup.com
Kraftfoodscompany.com
Ralcorp.com
17