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Is General Mills A Good Value?

|Includes:General Mills, Inc. (GIS)

Current Price: ~ $39/share
Projected Yield: ~ 3.38%

With operations that began more than 150 years ago, General Mills is now a leading global manufacturer and marketer of branded consumer foods, such as ready-to-eat breakfast cereals, refrigerated dough and other baking items, snack foods, ice cream, and yogurt. Its portfolio of well-known brands includes Cheerios, Betty Crocker, Pillsbury, Haagen-Dazs, and Yoplait. International sales account for about 20% of the firm's consolidated revenue. .

Estimated WACC for the firm today is 3.01% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2003 920
2004 833
2005 1297
2006 1411
2007 1305
2008 1208
2009 1266
2010 1531
2011 878
2012 1726

Average Annual Growth FCF: ~ 13%

CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 7.50% per year

Internal Growth Rate: ~ 4%

Sustainable Growth Rate: ~ 13%

Scenario 1

Average FCF (2012, 2011, 2010) is $1378 million

  • Start at $1378 million FCF
  • Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1378
1 1474
2 1578
3 1688
4 1806
5 1933
Terminal Value 68753

The firm's future free cash flows, discounted at a WACC of 3.01%, give a present value for the entire firm (Debt + Equity) of $67018 million. If the firm's fair value of debt is estimated at $7665 million, then the fair value of the firm's equity could be $59353 million. $59353 million / 649 million outstanding shares is approximately $91 per share and a 20% margin of safety is $73/share.

Scenario 2
All else being equal,

  • Discount the firm's future FCFs at 6.00%:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1378
1 1474
2 1578
3 1688
4 1806
5 1933
Terminal Value 34467
  • Present Value of the entire firm (Debt + Equity): $32843 million
  • Value of Equity: $25178 million or $39/share
  • 20% margin of safety is $31/share

Scenario 3
All else being equal,

  • Assume a 5-year growth rate in FCF of 2.50% per year, then 0% growth in FCF per year forever
  • Discount the firm's future FCFs at 4.00%:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1378
1 1412
2 1448
3 1484
4 1521
5 1559
Terminal Value 39951
  • Present Value of the entire firm (Debt + Equity): $39435 million
  • Value of Equity: $31770 million or $49/share
  • 20% margin of safety is $39/share

Sources

Morningstar.com

Yahoo! Finance

General Mills Inc.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: GIS