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Ruonan DingMeiling LiuJinglin PanPrateek Sharma
General Mills (NYSE: GIS)
Date: 30-Nov-2010
AgendaIndustry AnalysisCompany AnalysisSWOTFinancial AnalysisDCF ModelComparableRecommendations
Industry OverviewFood Processing Industry
Annual production estimated at around $1tn (2004)
Key drivers Population growth ratePer capita disposable incomePrice of grains/ raw materialsHealth consciousness
Source: U.S. Department of Commerce Industry Report Food Manufacturing NAICS 311 (2008)www.trade.gov/td/ocg/report08_processedfoods.pdf
Porters Five ForcesSUPPLIER 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- KelloggThe 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- PepsiCoPepsiCo 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 CompanyOverview
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 industriesManufactures its products in 15 countries and
markets them in more than 100 countriesTheir brands include Cheerio's, Yoplait, Nature
Valley, Betty Crocker, Pillsbury, Green Giant, Old El Paso, Progresso, Cascadian Farm, Muir Glen and more
The CompanyProfile
Headquarters in Minneapolis, MNGlobal workforce of 33,000FY2010 Net Sales: $14.8 BillionPrimary 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 PortfolioMajor 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 CompanySales Segments
Their sales can be categorized into 4 segments:-U.S Retail
$10.3 Billion businessInternational
$2.7 Billion businessWholly-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 2010http://www.generalmills.com/~/media/Files/CorporateBrochure_090110_LowRez.ashx
The CompanySales Breakdown
Source: General Mills Inc, Annual Report 2010http://generalmills.com/~/media/Files/annual_report_2010.ashx
The CompanyGrowth Model
5 Key Business Drivers:InnovationBrand BuildingCustomer GrowthInternational ExpansionMargin 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 CompanyGrowth Opportunities
Economic conditions favoring At-home Meals
Aligning products with growing US consumer groupsBaby boomers, millenials, and multicultural
populationEmerging market expansion
Expanding operations in China, Brazil, India
The CompanyThe Future
Increase CapEx to ~$700 million in FY2011Increase manufacturing capacity for cereals and
Yoplait yogurt Expand International production capacity for
Wanchai and Haagen Daz productsContinue HMM throughout supply chain
Targeting $1 Billion in savings through HMM in the next 3 years
Expects increase in energy and commodity pricesMakes use of hedging instruments to manage the
fluctuation in input costsExpects cost savings from HMM to offset rising
COGSShare repurchase program
Reduce outstanding shares by 2% every year
Recent EventsPAI 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 businessesGeneral 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 consumersGIS expects input costs to rise 4%-5% in FY2011Recently raised prices on some cereal brands and
baking products
The CompanyManagement 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
Source: (1) General Mills Inc, Corporate Fact Sheethttp://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjA4NzN8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
*Figures from General Mills Inc. 10-K FY 2010
SWOT AnalysisStrength:
Strong brand equity on key brandsGrowing international operationsProduct development skillsInnovatorsBrand management skills
Weakness:Dependent on the US market for revenueRising SG&A expenses
SWOT AnalysisOpportunities:
Growing health consciousnessHigher penetration with smaller retailer
customers in the U.S.Rising demand for cereals
Threats:Commodity price increasesCompetitive marketPrivate label growth
STOCK PRICE CHART
Source: Yahoo Finance
Key Ratios
For the Fiscal Period Ending 12 monthsMay-28-2006
12 monthsMay-27-2007
12 monthsMay-25-2008
12 monthsMay-31-2009
12 monthsMay-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 6.6xShort Term Liquidity Quick Ratio 0.3x 0.3x 0.4x 0.5x 0.5x
Source: Capital IQ Company Financials
DuPont Analysis
Discount Rate
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
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%
Discounted Cash Flows
Sensitivity Chart
Comparable AnalysisEstimated 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 BasisCurrent Price: $35.45 (Nov-29-2010)DCF Valuation: $26.17 (Negative)
$35.93 (Base) $41.29 (Positive)
Relative Valuation: $21.50 - $36.24On Watch-List Since Dec 2009
- Underperformed both DJIA and S&P 500- Underperformed relative to peers
RecommendationWe DO NOT recommend investing at this
timeKeep 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.