General Mills Inc: Is $GIS a Good Value?

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.