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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Is General Mills A Good Value? 0 comments
    Jul 6, 2012 7:12 PM | about stocks: 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
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