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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

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general mills nyse gis

General Mills (NYSE: GIS)

Ruonan Ding

MeilingLiu

Jinglin Pan

Prateek Sharma

Date: 30-Nov-2010

agenda
Agenda
  • Industry Analysis
  • Company Analysis
  • SWOT
  • Financial Analysis
  • DCF Model
  • Comparable
  • Recommendations
industry overview
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
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
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
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
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
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
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 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
The CompanyProfile
  • 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
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
The CompanySales 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
          • Cereal Partners Worldwide (CPW): 50-50 partnership with Nestle that markets breakfast cereals in 130 countries outside of U.S
          • 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
The CompanySales Breakdown

Source: General Mills Inc, Annual Report 2010

http://generalmills.com/~/media/Files/annual_report_2010.ashx

the company growth model
The CompanyGrowth 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
The CompanyGrowth 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
The CompanyThe 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
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
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

*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
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 analysis20
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
STOCK PRICE CHART

Source: Yahoo Finance

key ratios
Key Ratios

Source: Capital IQ Company Financials

discount rate
Discount Rate

Source: ◊ General Mills Inc. 10-K ; ◦ Capital IQ Company Financials

comparable analysis
Comparable Analysis

*Figures of comparables obtained from competing firms previously mentioned, and data is obtained from Capital IQ.

recommendation basis
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
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.