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)
[Link]/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

[Link]
The Company
Sales Breakdown

Source: General Mills Inc, Annual Report 2010

[Link]
The Company
Growth Model
 5 Key Business Drivers:  Executed through:
 Innovation  Holistic Margin Management
(HMM)
 Brand Building
 Cost cutting measure which ranges
 Customer Growth from consolidating purchases to give
them more bargaining power to
 International Expansion change of packaging for more
 Margin Expansion 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
50.0%
inflation 40.0%

30.0%

20.0%

10.0%

0.0%
F2006 F2007 F2008 F2009 F2010 F2011
-10.0%
Input Cost Inflation Gross Margin
*Figures from General Mills Inc. 10-K FY 2010
Source: (1) General Mills Inc, Corporate Fact Sheet
[Link]
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 12 months 12 months 12 months 12 months 12 months
May-28-2006 May-27-2007 May-25-2008 May-31-2009 May-30-2010
Profitability
Return on Assets % 6.9% 7.2% 7.6% 7.6% 9.3%
Return on Equity % 19.0% 20.6% 22.4% 22.9% 28.9%
Margin Analysis
Gross Margin % 35.6% 36.1% 35.8% 35.6% 39.7%
EBITDA Margin % 20.6% 20.2% 20.0% 18.3% 20.9%
EBITA Margin % 17.0% 16.9% 16.6% 15.2% 17.8%
Asset Turnover
Accounts Receivable Turnover 13.0x 13.3x 13.4x 14.4x 14.8x
Inventory Turnover 7.2x 7.1x 6.9x 7.0x 6.6x
Short Term Liquidity
Quick Ratio 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%

Rate of Return on Debt 5.58% 4.50%
Equity/Total capital 48.17% 50.77%
Debt/ Total Capital 51.83% 49.2%
WACC 12.86% 11.34%

2010 2009 2008 2007 2006

Return on average total capital ◊ 13.80% 12.30% 11.70% 11.00% 10.40%

Return on Equity % ◦ 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

Discount Rate

#### 10.00% 11.00% 11.34% 11.50% 12.00%

Terminal Growth Rate

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.