General Mills (NYSE: GIS)
Ruonan Ding
Meiling Liu
Jinglin Pan
Prateek Sharma
Date: 30-Nov-2010
Agenda
 Industry Analysis
 Company Analysis
 SWOT
 Financial Analysis
 DCF Model
 Comparable
 Recommendations
Industry Overview
 Food Processing Industry
 Annual production estimated at around $1tn (2004)
 Key drivers
 Population growth rate
 Per capita disposable income
 Price of grains/ raw materials
 Health consciousness
Source: U.S. Department of Commerce Industry Report Food Manufacturing NAICS 311 (2008)
www.trade.gov/td/ocg/report08_processedfoods.pdf
Porters Five Forces
 SUPPLIER POWER – MEDIUM
- Most suppliers i.e. agricultural/meat producers enter into
long-term contracts with companies
 BARRIERS TO ENTRY – HIGH
- High Capital Expenditure
- Difficult to replace existing brands (Brand Loyalty)
- Access to distribution channels
Porters Forces Contd.
 THREAT OF SUBSTITUTES – LOW
- Substitutes to processed foods are fresh foods or eating-out. Time
constraint or money constraint
 BUYER POWER- HIGH
- Most buyers ( Wal-Mart etc.) make up a large percentage of sales
 RIVALRY- HIGH
- Firms compete on innovation, product differentiation and marketing/
advertising
- Compete not only among themselves but also with private labels
Competitor- Kraft Foods Inc.
 Kraft Foods Inc. is the largest food and beverage company in
North America and the second largest in the world.
 In 2007, Kraft discontinued the cereal production divesture. It
only competes in snack segment with GIS.
 Following its January 2010 acquisition of Cadbury, Kraft has had
strong quarterly earnings, both in revenue and operating profit
across all candy and snack segments.
Competitor- Kellogg
 The Kellogg Company, headquartered in Michigan,
manufactures and markets ready to eat cereal and
convenience foods.
 Kellogg holds 34.2% of the cereal market in the U.S.
 Kellogg’s has managed to consistently post increases in sales
revenue and net profits since 2005.
Competitor- PepsiCo
 PepsiCo Americas Food is the division most applicable to this
industry. Within this division, is Quaker Foods North
America (QFNA).
 QFNA holds about 8.0% of cereal market in the U.S.
 QFNA operates four manufacturing plants in the United
States. QFNA grew at an annual rate of 2.2% in the five years
to 2010
The Company
Overview
 General Mills is a global food manufacturer and
marketer of consumer foods sold through retail stores.
They are also a supplier of food products to the food
service and commercial baking industries
 Manufactures its products in 15 countries and markets them in
more than 100 countries
 Their brands include Cheerio's,Yoplait, Nature Valley, Betty
Crocker, Pillsbury, Green Giant, Old El Paso, Progresso,
Cascadian Farm, Muir Glen and more
The Company
Profile
 Headquarters in Minneapolis, MN
 Global workforce of 33,000
 FY2010 Net Sales: $14.8 Billion
 Primary Customers
 Grocery Stores, mass merchandisers, membership stores, natural food chains,
drug, dollar and discount chains, commercial and non-commercial food service
distributors and operators, restaurants and convenience stores
The Company Brand Portfolio
 Major Product Categories
 Ready-to-eat cereal, yogurt, super-premium ice cream, ready-to-serve soup, dry
dinners, shelf stable and frozen vegetables, refrigerated and frozen dough
products, dessert and baking mixes, flour, frozen pizza and pizza snacks, grain,
fruit and savory snacks, and a wide variety of organic products like soup granola
bars and cereal.
The Company
Sales Segments
 Their sales can be categorized into 4 segments: U.S Retail
 $10.3 Billion business
 International
 $2.7 Billion business
 Wholly-owned companies
 Joint-ventures
o Cereal Partners Worldwide (CPW): 50-50 partnership with Nestle that markets
breakfast cereals in 130 countries outside of U.S
o Haagen-Dazs Japan: Operates their ice cream business in Japan
 Bakeries & Foodservice
 $1.8 Billion business
Source: General Mills Inc. Corporate Brochure 2010
http://www.generalmills.com/~/media/Files/CorporateBrochure_090110_LowRez.ashx
The Company
Sales Breakdown
Source: General Mills Inc, Annual Report 2010
http://generalmills.com/~/media/Files/annual_report_2010.ashx
The Company
Growth Model
 5 Key Business Drivers:
 Innovation
 Brand Building
 Customer Growth
 International Expansion
 Margin Expansion
 Executed through:
 Holistic Margin Management
(HMM)
 Cost cutting measure which ranges
from consolidating purchases to give
them more bargaining power to
change of packaging for more
efficient loading and unloading
 Increased media and
multicultural advertising
 Recognizes the growing Hispanic
population and the sales potential
 R&D and Product innovations
 New products like chocolate and
multigrain varieties of Cheerio's
The Company
Growth Opportunities
 Economic conditions favoring At-home Meals
 Aligning products with growing US consumer groups
 Baby boomers, millenials, and multicultural population
 Emerging market expansion
 Expanding operations in China, Brazil, India
The Company
The Future
 Increase CapEx to ~$700 million in FY2011
 Increase manufacturing capacity for cereals and Yoplait yogurt
 Expand International production capacity for Wanchai and
Haagen Daz products
 Continue HMM throughout supply chain
 Targeting $1 Billion in savings through HMM in the next 3 years
 Expects increase in energy and commodity prices
 Makes use of hedging instruments to manage the fluctuation in
input costs
 Expects cost savings from HMM to offset rising COGS
 Share repurchase program
 Reduce outstanding shares by 2% every year
Recent Events
 PAI is selling its 50% stake in Yoplait and GIS is the front
runner
 GIS has had franchise agreements with Yoplait since 1977 which is one
of their top businesses
 General Mills buys Mountain High Yogurt
 Faces the risk of losing Yoplait because French Dairy Sodima (50%
owner of Yoplait) wants to severe their licensing by 2012
 Rising food costs are pressuring food makers and retailers to
pass on the costs to consumers
 GIS expects input costs to rise 4%-5% in FY2011
 Recently raised prices on some cereal brands and baking products
The Company
Management Assessment
 Regular dividends without reduction for 112 years
 Dividend rate has been growing
at 9% compound rate over past
4 years
• Strength in efficiency and productivity
– HMM discipline helps to keep COGS down even in times of
inflation
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
F2006
F2007
F2008
F2009
Input Cost Inflation
F2010
F2011
Gross Margin
*Figures from General Mills Inc. 10-K FY 2010
Source: (1) General Mills Inc, Corporate Fact Sheet
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjA4NzN8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
SWOT Analysis
 Strength:
 Strong brand equity on key brands
 Growing international operations
 Product development skills
 Innovators
 Brand management skills
 Weakness:
 Dependent on the US market for revenue
 Rising SG&A expenses
SWOT Analysis
 Opportunities:
 Growing health consciousness
 Higher penetration with smaller retailer customers in the U.S.
 Rising demand for cereals
 Threats:
 Commodity price increases
 Competitive market
 Private label growth
STOCK PRICE CHART
Source: Yahoo Finance
Key Ratios
For the Fiscal Period Ending
Profitability
Return on Assets %
Return on Equity %
Margin Analysis
Gross Margin %
EBITDA Margin %
EBITA Margin %
Asset Turnover
Accounts Receivable Turnover
Inventory Turnover
Short Term Liquidity
Quick Ratio
12 months
May-28-2006
12 months
May-27-2007
12 months
May-25-2008
12 months
May-31-2009
12 months
May-30-2010
6.9%
19.0%
7.2%
20.6%
7.6%
22.4%
7.6%
22.9%
9.3%
28.9%
35.6%
20.6%
17.0%
36.1%
20.2%
16.9%
35.8%
20.0%
16.6%
35.6%
18.3%
15.2%
39.7%
20.9%
17.8%
13.0x
7.2x
13.3x
7.1x
13.4x
6.9x
14.4x
7.0x
14.8x
6.6x
0.3x
0.3x
0.4x
0.5x
0.5x
Source: Capital IQ Company Financials
DuPont Analysis
Discount Rate
Weighted Average Cost of Capital
Adjusted
Rate of Return on Equity
22.80%
19.50%
5.58%
4.50%
Equity/Total capital
48.17%
50.77%
Debt/ Total Capital
51.83%
49.2%
12.86%
11.34%
Rate of Return on Debt
WACC
2010
Return on average total capital ◊
Return on Equity %
◦
2009
2008
2007
2006
13.80% 12.30% 11.70% 11.00% 10.40%
28.95% 22.91% 22.45% 20.63% 19.05%
Source: ◊ General Mills Inc. 10-K ; ◦ Capital IQ Company Financials
Discounted Cash Flows
Sensitivity Chart
Terminal Growth Rate
Discount Rate
####
10.00%
11.00%
11.34%
11.50%
12.00%
2%
40.44
34.29
32.51
31.71
29.39
2.50%
42.82
36.06
34.12
33.25
30.74
3%
45.55
38.06
35.93
34.98
32.25
3.50%
48.70
40.32
37.97
36.92
33.93
4%
52.37
42.90
40.28
39.12
35.82
Comparable Analysis
Estimated Value Per Share Based on Multiples
Trailing P/E
P/S
P/EBITDA
Minimum
$22.10
$9.96
$32.45
Median
$23.90
$32.05
$36.05
Maximum
$26.18
$46.13
$36.41
Average
$24.06
$29.88
$34.96
Price Per
Share
Low
$21.50
Median
$30.67
High
$36.24
Mean
$29.63
*Figures of comparables obtained from competing firms previously mentioned, and data is obtained from
Capital IQ.
Recommendation Basis
 Current Price: $35.45 (Nov-29-2010)
 DCF Valuation: $26.17 (Negative)
$35.93 (Base)
$41.29 (Positive)
 Relative Valuation: $21.50 - $36.24
 On Watch-List Since Dec 2009
- Underperformed both DJIA and S&P 500
- Underperformed relative to peers
Recommendation
 We DO NOT recommend investing at this time
 Keep in watch list. Look for other companies within the
sector that match our investment policy
 It’s a good company but not a great stock.