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.