general mills valuation - mark e. moore

General Mills Valuation

As at April 1, 2005

Group 8:

Brittany Burgess ([email protected])

Tike Davis ([email protected])

Ryan Macdonald ([email protected])

Jim Vineyard ([email protected])

Jared Wright ([email protected])

mailto:[email protected]





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http://www.generalmills.com/corporate/brands/brand.aspx?catID=81


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Table of Contents

Executive Summary 3-5

I. Business and Industry Analysis 5-11

II. Accounting Analysis 11-19

III. Ratio Analysis & Forecast Financials 19-35

IV. Valuation Analysis 36-44

Appendix 45-52

References 52

Group Allocation 53

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2004A 2005E 2006E 2007EGIS NYSE 49.07 EPS Forecasts52week price range $43.01-$53.89 FYE 25-MayRevenue (2004) $1.06 B EPS $2.81 $3.50 $3.76 $4.08Market Cap. $18.14B

Valuation Ratio ComparisonShares Outstanding 375,000,000 Trailing P/E 17.86

Forward P/E 15.73Dividend Yield 2.50% Forward PEG 1.823-month AVG daily trading volume 1,797,227 M/B 3.42

Book value per share $14.34 Valuation EstimatesROE 20.40% Actual Current Price (4-1-05) 48.65ROS 9.50%Est. 5 year EPS growth rate 15.00% Ratio Based Valuation

Trailing P/E 50.19Cost of Capital Estimates Beta Ke Forward P/E 44.2Ke estimated 8.00% Forward PEG 26.735-year Beta 0.006 3.23% M/B 49.053-year Beta 0.118 3.56% Ford Epic Valuation 55.732-year Beta 0.259 3.98%Published Beta 0.004 Intrinsic Valuations

Discounted Divdends 37.85Kd 3.43% Free Cash Flow 48.99WACC 3.47% Residual Income 55.26

Abnormal Earnings 59.49

General MillsBrittany Burgess, Tike Davis, Ryan Macdonald, Jim Vineyard, Jared Wright

Investment Recommendation: HOLD Date of Valuation: April 1, 2005

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Executive Summary

General Mills is a very reputable company within the processed foods industry. The company has been in

the industry for around 100 years and they began their journey with successful flour mills near the Mississippi

River.

While performing the accounting analysis of General Mills, very few problems existed. General Mills has

had some very challenging years recently and there have been both positive and negative effects. The attacks of

9/11, the purchase of Pillsbury, and the technology boom all occurred within the time span of 2000-2004, which

were the years we used to value the company. The financials for 2001 were most affected; however, we were

able to see trends by looking to the past and future.

Overall, General Mills’ accounting strategy is one of conservatism. They tend to focus on activities that

will result in successes instead of huge failures. By taking the safe road, General Mills has not had problems

with red flags in their financials. The company did not have any potential red flags that jumped out. The

managers are more focused on the success of the company as a whole instead of their individual successes.

Therefore, General Mills has positive accounting practices that have helped them to become such a reputable

company.

In calculating the ratios and forecast financials for General Mills, trends were somewhat difficult to find

because of certain worldly occurrences, as mentioned above. When forecasting out the financial statements, we

found the growth rate of General Mills to be around 8%. This growth rate seems to be fairly low for a company

as prosperous as General Mills; however, taking the conservative route, we did not want to create inflated

numbers that would likely be unrealistic for valuation.

Once we had the ratios calculated, we found trends and used them to forecast out the balance sheet,

income statement and statement of cash flows. We forecast out ten years, which would bring us to 2014. Being

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so far in the future, it is reasonable to assume that our forecasts are imperfect; on the other hand, it would be

nearly impossible to have a perfect view of the future.

Once we had a clear view of our forecast financials, we were then able to use 5 different models to value

General Mills. These models were the method of comparables, discounted dividends model, discounted free cash

flows model, abnormal earnings growth model, and residual income model. Each model tries to look at different

financials for the company to come up with a reasonable stock price that can be compared to the markets’

perspective.

I. Business and Industry Analysis

General Mills has a wide array of products that are offered at competitive prices around the world. From

their well-known breakfast cereals which include Cheerios, Wheaties, and Lucky Charms to their successful

baking products such as Gold Medal Flour the General Mills name is synonymous with quality. General Mills

has grown substantially throughout the years due in large part to the company’s popular brand names, this

however is only part of the reason this company has been so successful. The purchase of Pillsbury in 2001

proved that this company is not content with their success in the past but instead is very much focused on the

future. General Mills holds top market position in almost every segment they are involved in. This is a critical

point to consider when assessing the industry they compete in. The packaged food industry is highly

concentrated with major players dominating the market. Kellogg and Kraft are the two main competitors to the

company.

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General Mills from their inception over 100 years ago has revolutionized the industry. They were the first

to use flour mills which in essence started the packed food industry and jump started the market. From mills to

Nerf balls General Mills has always been an innovative leader in the industry providing a benchmark to which all

others are judged.

The Five Forces Model

Competitive Force 1: Rivalry Among Existing Firms

General Mills is a company that specializes in consumer foods. The wide array of products offered by

General Mills includes everything from meals to food services. With such a large segment of the market, the

company is well diversified within the consumer foods industry. Major competitors include Kraft and Groupe

Danone. The packaged foods industry is dominated by the major players at the top, thus moderate to low

competition exists.

Switching costs are relatively high in this market derived from the fact that most consumers purchase

foods they are familiar with and are accustomed to buying. Commonly known as brand loyalty, this type of

behavior produces low competition between rival companies. This is true in cases where substitute products are

priced in proximity to one another.

In order to truly compete on the level the top five companies compete on, a new entry to the industry

would have to have a large amount of capital and a well thought out marketing scheme. In the food industry,

there are entry barriers, like brand loyalty, that makes it hard for start up companies to gain a significant market

share. Existing firms have reinvented themselves time and again to meet the constantly changing consumer

market. One way General Mills has managed to stay on top of segments such as the dry cereal market, is by

introducing new products backed by the General Mills name.

http://www.kraftfoods.com/kf

http://www.kraftfoods.com/kf

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Competitive Force 2: Threat of New Entrants

General Mills, Inc. covers a wide span of the food processing industry in that its products are sold in the

following areas:

• U.S. Retail (Cheerios, Pillsbury, Hamburger Helper, etc.)

• Bakeries and Food Service (Convenience Stores, Vending Machines, etc.)

• International (China, Australia, etc.)

• Joint Ventures (Haagen Dazs of Japan, PepsiCo of Europe, etc.)

In dealing with the numerous areas above, General Mills has an advantage over new entrants through economies

of scale. Their large variety of products and areas in which they are sold allows for a cost advantage over others.

A new company entering the industry would face challenges of making the relationships with companies both

here and in the U.S. to accomplish the success of General Mills.

In addition to establishing these relationships, General Mills has gained a first mover advantage over a

large portion of the food processing industry. According to finance.yahoo.com, General Mills ranks fifth in the

industry for their market capitalization. By entering the industry early, General Mills has enabled them to rank

with the top competitors of the industry. New entrants would have to start from scratch and may have to eat the

costs of making their way to the top before success would become a reality.







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Overall, General Mills has a low degree for threat of new entrants for the reasons detailed above. Having

been in the industry since the 1860s with their flour mills on the Mississippi River, General Mills is very

experienced and diversified over the entire world. Also, the apparent success of General Mills still remains

below some other top competitors, such as Groupe Danone and Kellogg Co. New entrants would need a strong

variety of products with ambition to be involved in communities world-wide, and in many different sectors of the

food processing industry.

Competitive Force 3: Threat of Substitute Products

Due to the nature of the consumer foods industry, threat of substitute products is relatively high across the

board. In virtually every industry segment where General Mills does business, it is possible to find very similar

products competing on cost. For example, in the cereals segment a popular product like Lucky Charms may lose

market share to a virtually identical cereal in a large bag that is marketed to the frugal consumer. These bargain

brands focus on imitating popular brands and can offer their products at a lower cost by avoiding marketing and

research and development costs which might be incurred by an industry leader who has a valuable brand image at

stake. Similarly a can of Jolly Green Giant green beans will suffer from fierce competition with grocery store

brands like Great Value which can offer an identical product at less cost. In times of economic prosperity this

threat may be greatly diminished, however in times of depression or recession the buyer becomes more and more

willing to switch in order to save money which is likely very limited.

General Mills has chosen to combat this threat with a constant focus on product differentiation. With a

popular product such as Lucky Charms, a large amount of resources are committed to marketing and research and

development. For example, millions of dollars a year are spent on television advertising on children’s networks

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in order to increase brand visibility among the demographic most likely to find colored marshmallows appealing.

To compound this effect, the cereal often comes packaged with a toy licensed from a movie or television show

which may be popular to children such as Spongebob, Square-pants, or Shrek. To insure that children do not

soon become bored with Lucky Charms, the R&D department is constantly coming up with new marshmallows

of different shapes and colors. The newest is a white marshmallow that reveals colored shapes when it is in milk.

Though the threat of substitute products is high in the industry, General Mills has established a strong

foothold with constant product innovation. They realize that a consumer is less likely to switch brands to save a

buck because often that extra dollar is well-spent on the comfort of knowing that Little Bobby won’t be making a

scene in the checkout lane in protest to the cereal that does not come with a Shrek sticker.

Competitive Force 4: Bargaining Power of Buyers

When it comes to the bargaining power of buyers, their overall effect on General Mills is relatively high.

The two factors that determine the power of buyers include price sensitivity and relative bargaining power. Since

most of the products that General Mills makes are undifferentiated, buyers are generally more price sensitive.

Take cereal for example, if General Mills increases the price on a box of Total, then buyers will generally find a

complimentary priced replacement, or the store brand cereal. Relative bargaining power is another factor that

determines the power of buyers. Since General Mills is a big food company with many products, they cannot

change their suppliers too much because the food would not taste the same. Also, when it comes to food

manufacturers, they sell to stores, who in turn, sell to us. If the consumers, you and I, decide not to buy the

product, then it would affect both the grocery store and General Mills. Thus, the consumers have high bargaining

power over General Mills.

Competitive Force 5: Bargaining Power of Suppliers

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Most of General Mills’ raw materials are commodities, so they have virtually an unlimited number of

suppliers. Since they have so many suppliers the suppliers must compete very strongly among themselves for

General Mills’ business. In effect the suppliers have little or no bargaining power. These raw materials consist

of: cereal grains, sugar, dairy products, vegetables, meats, fruits, other agricultural products, vegetable oils,

plastic and paper packaging materials, operating supplies and energy. Most of these materials are purchased on

the open market, except for a few long-term fixed price contracts. The company seems confident that they will be

able to purchase all of the needed ingredients and packaging materials. Whenever possible advance purchases of

important items are made to make sure operations will be able to continue. General Mills has high quality

standards for their materials, but like to keep cost as low as possible.

The company hedges risk in increasing commodity prices through the use of futures, options, and forward

cash contracts. They do this to limit risk in extreme price movements on the commodities that they use and not

to speculate market movements. They try to buy their materials at a price that allows a targeted profit margin.

To aid in the reduction of Maverick buying General Mills has acquired and implemented a purchasing

system called Purchasing Net-SQL. With this system about 60% of their orders are routed directly to their

suppliers who have set up a contract with their purchasing department. This new system has helped reduce

procurement cost by 4-8 %.

Competitive Strategy Analysis

General Mills’ main strategy for creating a competitive advantage is through a differentiated position.

However, by owning their own mills, a form of cutting costs, General Mills holds a partial cost leadership

position to increase their competitive advantage. In addition, for additional cost cutting, General Mills shares

truck routes with Fort James Corporation, a paper towel and Dixie cup manufacturer. As a result, General Mills

saved $800,000 in the first year of this partnership.

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General Mills has a strong differentiated position especially when it comes to their investment in brand

image. Over time, the company has made a strong name through high quality products, wide variety, and

superior customer service. They have also been very involved with the communities of their customers through

the General Mills Foundation and the development of their radio station to advertise their products further.

General Mills has placed tracking devices in their trucks to allow customers access to the location of the delivery

trucks; therefore boosting their ability to have excellent customer service.

General Mills facilitates the best possible relationships with every stakeholder in order to make their

strategy work in a positive way. It is their belief that through these strong relationships a common bond is fused

that drives the company forward. The covenant with General Mill’s suppliers as well as their customers saves the

firm cost that is passed on to the consumer. So in essence they save money and gain market share at the same

time. This strategy is the reason behind General Mill’s strong consumer and customer image.

II. Accounting Analysis

Sales Manipulation Diagnostics

2004 2003 2002 2001 2000

Net Sales / Cash from

Sales

1.22

1.23

1.27

1.27

1.24

Net Sales / Net

Accounts Receivable

10.96

10.72

7.87

8.21

10.33

Net Sales / Inventory

10.41

9.71

7.53

10.50

10.13

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Core Expense Manipulation Diagnostics 2004 2003 2002 2001 2000

Declining Asset

Turnover

.60

.58

.48

1.07

1.13

Changes in CFFO / OI

(.038)

.163

.054

.006

.005

Changes in CFFO /

NOA

(.009)

.039

.011

.003

.003

Total Accruals / Change in

Sales

N/A

N/A

N/A

.913

.729

Other Employment

Expenses / SG&A

Step 1: Key Accounting Policies:

General Mills is first and foremost a producer of quality packaged foods, which is exactly what the

company prides itself on. Being such a company presents challenges as well as many benefits. Research and

development, in addition to marketing schemes are the key success factors for General Mills when it comes to

accounting policies. It is these areas that the company gains a distinct advantage in the market.

Research and development expenditures are charged to the year incurred. This is also true for advertising

cost. This style of recognition is the same as the top competitors in the industry. All accounting procedures are

in accordance with GAAP.

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Research and Development is critical and the most successful segment for this company. Be it not for the

success in this department along with the advertising department General Mills would not be able to accomplish

its competitive strategy. General Mills must constantly reinvent itself to keep up with ever changing consumer

demands. Loyal customers will continue to consume familiar products; however it is important to gain those

consumer segments that are not so familiar with the brand. It is for these discussed reasons why the accounting

policies are so important.

Revenue recognition is another key accounting policy that should be explored. Sales are recognized upon

shipment to customers. Certain coupons and promotions sales are also recognized upon discretion. Sales on

accounts are much higher than cash accounts. This is due in large part to the many contracts and purchases the

company has with retailing customers. This fact is key to note since most investors are cautious of an over-

represented receivables number.

Step 2: Assess Accounting Flexibility

The key accounting policies that may require significant management estimates and judgment include:

Accounting for trade and consumer promotion activities, asset impairments, income taxes, and pension and

postretirement liabilities. There are a few other areas of flexibility that might raise a little concern and will be

discussed at the end of this step.

Trade and Consumer Promotion Activities

General Mills reports sales net of certain coupon and trade promotion cost. These costs may include

payments to customers for performing certain advertising activities and setting up in-store displays. Some other

merchandising activities the customers receive payments for are discounts to the list price to lower the retail shelf

price and payment to gain shelve space for new products. At the beginning of the year promotional funds for the

retail businesses are paid out to customers over the year based on performance. Most of the year end liabilities

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associated with these promotion activities are resolved the following fiscal year to help reduce long term

estimates and insure accuracy. This policy ensures a more timely and sufficient expense recognition.

Asset Impairments

General Mills is required to evaluate all long term assets for impairment and write down the assets that are

determined to be impaired, this includes goodwill. Management is required to make judgments concerning the

fair values of these assets. They are also required to estimate future cash flows associated with the assets in this

process. This area has a lot of flexibility that is left up to the management’s judgment. The company’s

evaluations of such assets show them to be worth significantly more than their stated book value. This leads the

company to believe that risk of unrecognized impairment to be very low.

Income Taxes

The management’s judgment is also required to resolve any tax issues related to the company’s income

tax expense. In the past their assessments in the resolution of tax issues have been convincingly accurate.

Current tax issues are similar in size and substance to the past issues.

Pension Accounting

There is estimation of several critical factors required in the accounting for pension and postretirement

liabilities. The two main assumptions that determine this income are the expected return on plan assets and the

discount rate. General Mills’ assumption on the discount rate is based upon the interest rate for long-term high-

quality corporate bonds. This discount rate is also used to determine pension and postretirement expense or

income for the following fiscal year. They determine the expected return on plan assets by their asset allocation,

estimate of future long-term returns by asset class, and historical long-term investment performance.

Other areas of flexibility

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A few other areas with a small amount of flexibility include their depreciation methods, inventory,

intangible assets, research and development and Advertising costs. General Mills depreciates assets over their

useful lives. They generally use the straight-line method. Sometimes they use accelerated depreciation to receive

the tax benefits from this method. Overall their depreciation methods seem normal and up to standards. Inventory

is generally valued using the LIFO method, but FIFO is used in foreign operations. In 2001 the company adopted

the (SFAS) No 142, which eliminates amortization of intangible assets will indefinite lives, and now requires that

they be tested annually for impairment. During these impairment test managers must make estimates of their fair

value and expected future cash flows. All R and D expenses are charged against earning in the year that they are

incurred. Advertising costs are recognized the first time the advertising takes place. This is in accordance with

GAAP, and shows little room for management to have flexibility with these numbers.

Step 3: Evaluate Accounting Strategy

General Mills’ accounting strategy is comparable to its competitors in the food processing industry such

as Kraft Foods, Inc. and Kellogg Co. All of these companies abide by the generally accepted accounting

principles; however, estimates and assumptions are required to prepare financials and some variations may exist

when they are compared to the actual numbers.

The main similarities between General Mills and their competitors is their focus on providing an

innovative product that will establish brand equity. General Mills is continually increasing their research and

development to allow for products that meet the changing needs and preferences of their customer base.

Advertising and marketing is a popular brand-building strategy in the food processing industry. General Mills

uses their marketing to sustain leading share positions in all global markets.

The overall business goal of General Mills is to create superior returns for their shareholders for the long-

term. Achievement of high returns has been possible because of the consistent growth in sales as seen in the

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annual reports generated by the company and through the overall positive results from the sales manipulation

diagnostics.

General Mills has made many changes to its accounting policies, especially within the years of 2002 and

2003. The following are just a few of the changes that had an impact on the consolidated financial statements

and strategic decision making for General Mills. The first change made in 2002 was the adoption of Statement of

Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging

Activities.” The statement requires all derivatives to be rounded at fair value on the balance sheet and establishes

new accounting rules for hedging. The results of this change were not terribly significant, but the effect on

diluted earnings per share was a negative $100,000. The fact that the derivatives were now rounded could be an

area of concern because eventually the numbers will be further and further away from accurate.

In dealing with goodwill and intangibles, General Mills adopted SFAS No. 142, “Goodwill and Intangible

Assets.” The statements removed the need for amortization of goodwill. The goodwill will now be tested

annually for impairment, but these tests did not require any adjustments of the goodwill carrying values. By not

amortizing goodwill, the end result could be overstated; however, General Mills stated that the goodwill carrying

values were unchanged. The decision to remove amortization was wise in that they removed a non-value added

activity.

Another change in accounting principles was the adoption of the Financial Accounting Standards Board’s

Emerging Issues Task Force (EITF) Issue 01-09, “Accounting for Consideration Given by a Vendor to a

Customer or a Reseller of the Vendor’s Products.” The EITF issue requires recording certain coupon and trade

promotion expenses as reductions of revenues. Net earnings were not affected in result, but selling, general, and

administrative expenses were adjusted. Recording the coupon and trade promotion expenses as reductions of

revenues will help General Mills in the long-run because their final net income will clearly reflect detailed

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activities that exist within the company. Although many other changes to the accounting principles were made in

2002 and 2003, the previous details a few that impact the strategic decisions made by General Mills managers.

One accounting activity that General Mills acts upon deals with the recording of its pension expense.

Normally, pension expense is as stated, an expense. In the case of General Mills, pension expense is used to

generate income for the company. The results of this action could be viewed as structuring the financials on the

part of management in that they are trying to boost their net income. The main problem with their reporting of

pension expense and postretirement benefits is that they base their numbers on that of estimated expected returns

and discount rates. Large under- or over-estimation could pose greater issues for the company.

Overall, General Mills strategic position is differentiation in that they focus on product innovation and

customer satisfaction. They have achieved a strong strategic position through their increased research and

development and their focus on the customer when marketing and advertising. Looking at the continual increase

in sales over the past 5 years, General Mills seems to have a positive outlook ahead.

Step 4: Evaluate the Quality of Disclosure

The degree and quality of disclosure beyond GAAP is an important part when evaluating a firm’s quality

and success. General Mills has acknowledged the amount of disclosure found in letters to shareholders, The

Corporate Governance Principles and Director Independences, and 10-K reports.

General Mills annual reports and letters to Stakeholders in annual reports provide information regarding

company business models and the economic environment. It also describes future plans and estimates. General

Mills also provides information regarding the increases in net sales and net earnings. General Mills provides

access to company performance for investors as well as the general public.

The Corporate Governance Principles and Director Independences provides information for investors and

the public to evaluate and understand changes General Mills has in performance and operations, responsibilities,

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and answers to why they make certain decisions. It also provides an overview of the company’s earnings as well

as fluctuations in performance. The Corporate Governance Principles and Director Independence also analyzes

performance and changes in financial resources and liquidity.

General Mill’s 10-k reports provide information about the company’s disclosure procedures. The 10-K

reported that under the supervision and with the participation of the company’s management, including the CEO

and CFO, has evaluated the effectiveness and design of the company’s disclosure control and procedures. The

CEO and CFO concluded that the company’s disclosure controls and procedures were effective as of May 30,

2004 to ensure that information required by the company reports was processed, summarized, and reported within

time periods specified by the SEC rules and forms. There were no changes in the company’s internal control

over financial reporting during the fiscal fourth quarter ending May 30, 2004 that have affected the company’s

internal control over the financial reporting.

General Mills provides the public with valuable information outside the GAAP regulations. This allows

investors and the public to see what is really going on with the company and also builds trust with buyers.

Step 5: Identify Potential Red Flags

As far as potential red flags, we feel that General Mills’ accounting practices are consistent with GAAP

and the manager’s are not trying to make changes to benefit themselves.

Overall, General Mills seems to take a conservative route when computing their financials to prevent any

outrageous differences that may cause concern to outsiders. The company has had its share of ups and downs

with the 9/11 attacks and their big purchase of Pillsbury all in 2001. Through it all, General Mills has been able

to succeed in keeping business running smoothly.

III. Ratio Analysis and Forecast Financials

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In order to analyze General Mills overall performance, we have taken the financial statements from the

2004 10-K and computed the basic 14 ratios to assist in forecasting. The basic 14 ratios were also calculated for

Kraft and Kellogg, industry competitors, which allows for an industry average to benchmark General Mills’

performance in the industry.

The ratio analysis given also will provide much needed information to the investor on a more intimate

base. The numbers will show where General Mills’ weaknesses are and also point out the strengths of the

company. The investor will have the ability to choose which ratio is more critical compared to what the rest of

the industry is doing. This type of knowledge is extremely useful when trying to make the investing decisions

between companies within the same industry.

Liquidity Ratios:

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Current Ratio

0.000

0.500

1.000

1.500

2.000

2.500

3.000

2000 2001 2002 2003 2004

General MillsKelloggKraftIndustry Average

Prior to 2002, General Mills seems to be fairly consistent with Kraft and Kellogg; however, Genearl Mills

is below the industry average. From 2002 to the present, General Mills’ current ratio seems to be increasing at a

steady pace; therefore, they are beginning to improve and become more comparable with their competitors.

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Quick Asset Ratio

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

2000 2001 2002 2003 2004


General Mills’ quick asset ratio has continually improved from 2000 to the present. When compared to

its competitors and the industry average, its movement is inconsistent. General Mills comes out on top going into

the future and appear to have the possibility for more improvement.

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A/R Turnover

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

2000 2001 2002 2003 2004


General Mills’ accounts receivable turnover was much higher than its competitors and the industry

average in 2000; however, from 2001 to the present, General Mills has leveled out and become more comparable

with that of the industry.

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Inventory Turnover

0.000

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

2000 2001 2002 2003 2004


General Mills’ inventory turnover is a bit lower than that of its competitors and the industry average.

Going towards the future, their inventory turnover seems to be improving at a fairly constant rate.

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Working Capital Turnover

(80.000)

(60.000)

(40.000)

(20.000)

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

2000 2001 2002 2003 2004


General Mills has struggled with their working capital turnover in recent years; however, from 2003 to the

present, it appears that General Mills is improving fairly quickly. Others in the industry have had a much higher

working capital turnover making it difficult to compare with General Mills.

Liquidity Summary:

Overall, General Mills shows positive growth throughout the varying liquidity ratios. In regards to the

outstanding receivables they are collecting in less duration of time. This is a critical number since a large

percentage of sales are on credit. The company has become much more liquid in recent years and therefore more

able to pay back lenders. Both the current ratio and quick ratio have shown signs of increasing. The numbers

however are still lower than lenders would like to see. Accounts receivable turnover has leveled off since early

extremes in 2000. Being in the packaged food industry, General Mills shows a lot of inventory which is common

in the industry. The working capital ratio has been in the red for the past four years, but showed much growth

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last year. The recent trend has been largely blamed on the fact that sales increased by a greater rate than did

working capital. This has effectively been changed in the past year allowing for further growth in this segment as

well as increasing the overall liquidity of the company.

Profitability Ratios

Gross Profit Margin

0.000%

2.000%

4.000%

6.000%

8.000%

10.000%

12.000%

14.000%

16.000%

18.000%

20.000%

2000 2001 2002 2003 2004


The gross profit margin for General Mills is not consistent with that of the industry average; therefore, it

is difficult to use the industry as a benchmark. After a sharp decline between 2001 and 2002, possibly from the

911 attacks, General Mills has been improving and have the potential for more improvement in the future.

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Operating Expense Ratio

0.000%

5.000%

10.000%

15.000%

20.000%

25.000%

30.000%

35.000%

40.000%

45.000%

50.000%

2000 2001 2002 2003 2004


Excluding the data prior to 2001, General Mills’ operating expense ratio has been rather consistent with

that of its competitors and the industry average. Going into the future, General Mills will see improvement in

that their operating expenses are declining at a steady pace.

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Net Profit Margin

0.000%

2.000%

4.000%

6.000%

8.000%

10.000%

12.000%

14.000%

2000 2001 2002 2003 2004


Once again, General Mills’ data does not coincide with that of its competitors as seen in the net profit

margin chart above. General Mills has seen both increasing and decreasing net profit margins over the past 5

years. Going into the future, it appears that General Mills is beginning to improve and will see higher net profits.

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Asset Turnover

0.000%

20.000%

40.000%

60.000%

80.000%

100.000%

120.000%

140.000%

160.000%

2000 2001 2002 2003 2004


The asset turnover for General Mills seems to be consistent with others in the industry in that since 2000

it has gradually declined and begun to recover as of 2002. General Mills’ decline stage was more rapid that the

others and their improvement from 2002 on seems to be much slower. Their asset turnover appears to be leveling

out at about 60%.

29

Return on Assets

0.000%

2.000%

4.000%

6.000%

8.000%

10.000%

12.000%

14.000%

16.000%

2000 2001 2002 2003 2004


General Mills began in 2000 with a much higher return on assets, which made them better off than others

in the industry at the time. Consequently, once 2001 arrived, General Mills took a plunge and significantly

dropped their return on assets. Currently, their return on assets has been improving at a moderately increasing

rate.

30

Return on Equity

-400.000%

-200.000%

0.000%

200.000%

400.000%

600.000%

800.000%

1000.000%

1200.000%

1400.000%

2000 2001 2002 2003 2004


It is apparent from the chart that General Mills had very odd activity during the time period of 2000-2002

when compared to others in the industry. The reason being, during that time, General Mills had negative

common stock and treasury on their balance sheet and had recently purchased Pillsbury. After 2002, General

Mills returned to its normal operations and became more comparable with others in the industry.

Profitability Summary:

The Profitability Ratios for General Mills have had quite a few drastic changes over the past 5 years. The

gross profit ratio started to climb from 2000-2001, but fell dramatically after that to 9%. This ratio has since

shown a steady increase and looks promising in the future. We were able to establish a trend from the last three

periods and think that our forecasted numbers will reflect this in a positive way. The net profit margin depends

directly on the gross profit margin so therefore has been moving the same way as the gross profit margin in the

last 5 periods. The operating expense ratio has shown a decrease over the last few periods, which means that the

31

company is becoming more efficient. Asset turnover has been moving in a negative direction. It started off

good, but has been declining a lot over the past few periods. This means that there was a decrease in sales or the

company bought new assets that are taking time to increase sales. Return on assets declined dramatically in

2002. This number coincides with the asset turnover decrease. This shows that the company must have bought

new assets in the previous year. The new assets are starting to produce profits because the ratio has been

increasing the last 3 periods. The return on equity for the years 2000-2001 was too volatile to establish a trend.

The following 3 years seemed to level off and show an increasing pattern.

32

Capital Structure Ratios

Debt to Equity Ratio

(40.000)

(20.000)

0.000

20.000

40.000

60.000

80.000

100.000

120.000

2000 2001 2002 2003 2004


As seen in the discussion about return on equity, General Mills faced negative common stock and

treasuries once they purchased Pillsbury. The chart is very similar when compared to others in the industry in

that once the drastic equity numbers from 2000-2001 returned to normal, General Mills was once again more

comparable to the rest.

Explanation of Competitors Ratios

Kellogg’s Evaluation:

Kellogg’s looks to a profitable company overall, but some of the ratios tell different story. The liquidity

ratios are getting better as the years go on. All the ratios remained pretty constant from 2000-2003, with some

33

fluctuation; however, the A/R turnover had a big increase from 2000-2003. Working capital turnover also had

huge increases and decreases throughout the years.

Kellogg’s profitability ratios are constant and some actually decreasing from 2000-2003. It looks as

though they stay busy manufacturing products, but it is not paying off as much as it should. In other words, the

more they do, the more they lose. They’re gross profit margin and net profit margin are both lower in 2003 than

in 2000. This raises concern, because a company cannot profit if the numbers are not increasing.

The capital has the earnings eaten up by interest. There is little improvement on the debt to equity ratio,

but the times interest earned have a huge decrease. It looks like Kellogg’s has a hard time paying off interest.

The liquidity for Kellogg’s is favorable, but the profitability and capital paint a different picture. In the

near future, Kellogg’s needs to make some drastic changes or they will be in a world of hurt.

Kraft Foods Inc. Ratio Explanation Kraft Foods Inc. is General Mills’ biggest competitor. Kraft has a market cap of 57 billion, and revenues

of 32.5 billion, which is three times as much as General Mills. The liquidity ratios for Kraft had some variability

that makes it difficult to predict some of the ratios. Kraft has a predicted current ratio of 1.01. This ratio has been

fairly constant for the last four years so it probably won’t be much different in the years to come. Accounts

receivable turnover is increasing. This suggests that in the last few years Kraft has been collecting their

receivables more quickly. Inventory turnover has also been increasing a little. The working capital turnover ratio

has also been increasing the last four years. This number could prove very difficult to predict because the last

four ratios are very different. They range from -52 to 118.

All of the profitability ratios seem pretty standard and do not show that much change over the past four

periods. I am confident in forecasting any of these ratios because they either show a constant pattern or do not

change much from year to year. The Gross profit margin has increased slightly to .17. Asset turnover has been the

34

same for the last three years at .52. Return on assets has increased from .04 to .06 and return on equity has

decreased from .14 to .12.

In 2000 Kraft had a debt to equity ratio of 2.71. This ratio decreased dramatically in 2001 to 1.38 and has

been slowly decreasing over the next two periods. Kraft must have borrowed some money to expand their

operations. This dramatic decrease in this ratio makes Kraft stock much more risky to its stock holders. Their

sustainable growth rate varied from 7 to 10 percent and we predict to be about 8 percent in the future.

Financial Statement Forecasting Methodology

In selecting forecasting methods for the income statement, we looked for trends either as a fairly constant

percentage of sales or as a fairly constant growth year-to-year. As it turns out, with year 2000 information

excluded, all of our income statement items could reasonably and accurately be forecasted as a percentage of total

sales. This is because General Mills is such a large company that it is fairly difficult for them to change their

numbers drastically from year to year. Many items were forecasted using total sales and ratios from our previous

ratio analysis. For income tax expense we used 35%, standard to the tax bracket that General Mills is in.

Because this number is constant it would not be practical to base income tax on anything other than EBIT. Minor

items such as exit and restructuring cost were variable yet they remained a very small portion of our total income

so they were estimated as a small percentage of sales based on their averages. The only real difficulty came in

predicting a reasonable sales growth estimate for the next ten years. Due to the high variability of sales growth in

recent years, the projected sales growth would average around 25%. We determined our sustainable growth rate

to be only 12% and found the industry average for the long run to be around 8%. We decided to use 8% for our

projections as it was the most conservative of the three.

Because General Mills is a large company in a mature industry, we see less need to issue shares of stock

to finance the company. In light of this fact we have chosen to use a 5% growth rate for the average number of

35

shares of common stock outstanding. With these estimates in place, we can see that EPS grows favorably in the

years down the road.

Again, because of the size of General Mills, the balance sheet forecasts were calculated from totals of

assets, liabilities, or equity. We used an average of the debt to equity ratio in a function with total assets to insure

that the balance sheet was both balanced and accurate. The rationale behind this says that the company is too

large to possibly make any radical or drastic changes to its capital structure. The only thing that could possibly

influence this is an unexpected event that might force the company into bankruptcy. While we do not expect

something like this to ever occur, it is worth noting that financial catastrophes are not impossible. We have seen

many examples in recent years such as Enron, WorldCom, and the dot com bust. The stock market decline of

2001 forced many companies close to the edge of bankruptcy and environmental risks like these must be taken

into account.

To calculate the forecast cash flows, we first began with what we could calculate form the other financial

statements and the ratios which we had already assumed. To calculate operating cash flow, we then filled in the

gaps with reasonable estimates based on changes in different components of working capital. To calculate the

investing cash flows, we did the same only with respect to changes in long term assets and liabilities instead. To

calculate financing cash flows we began with dividends and filled in the blanks using estimated payments and

issuance of debt as well as estimates of common stock issuing and buyback. We used these estimates to reconcile

all of the categories of cash flows with the net change we had already calculated from the change in cash and

cash equivalents in our future projections.

36

IV. Valuation

Introduction

The purpose of this section is to value General Mills and come up with a stock price that has been derived

from our forecast financials in the previous section. Once we imply five different models, detailed below, we

will find this stock price. Looking at the market’s current stock price of $49.23 for General Mills, we can then

determine whether or not the market price is fairly-valued, over-valued, or under-valued.

Valuation Section

The following spreadsheets use five different valuation models to help determine the accuracy of the

market’s stock price given for General Mills. The models that will be used are as follows:

• Method of Comparables

• Discounted Dividends

• Discounted Free Cash Flows

• Abnormal Earnings Growth

• Discounted Residual Income

For each of the methods we were to estimate a cost of debt (Kd) and cost of equity (Ke). With these numbers,

we are able to calculate the weighted average cost of capital (WACC), which will be included in the model

for Discounted Free Cash Flows.

Price Conclusion

Method of Comparables

Discounted Dividends $37.85 Slightly over-valued

37

Discounted Free Cash

Flows

$48.99 Fairly-valued

Abnormal Earnings

Growth

$59.49 Slightly under-valued

Discounted Residual

Income / Long-run

Residual Income

Perpetuity

$55.26 / $44.88

Slightly under-valued/

slightly over-valued

Method of Comparables

Trailing P/E Forward P/E EPS DPS/PPS Market to Book

Price Earnings Growth

General Mills

17.85 15.71 2.75 .546 3.39 1.79

Kraft 18.94 15.22 1.65 .519 1.71 2.24 Kellogg 20.06 16.67 2.14 .780 7.85 2.13 Groupe Danone

58.17 14.98 .33 .215 4.05 1.72

Industry Average

19.50 15.95 .65 4.78 2.19

Value 53.63 43.89 50.25 54.89 47.22

Using the Method of Comparables, General Mills is not included in the calculation of the industry average

since they are the company we are valuing. In addition, Groupe Danone is in the same food processing industry

with General Mills; however, their ratios are very different so they will be considered outliers for this discussion.

38

When comparing General Mills to the industry average, they seem to be under-valued when looking at the

trailing p/e value. However, the forward p/e value gives a fairly-valued price for General Mills. Overall this

method seems fairly accurate with the results we will see in the following models in that General Mills is slightly

undervalued in the market.

Cost of Debt Estimation

After assessing the cost of debt we conclude that the cost of debt is 3.43 %. This number is the weighted

average of the current and non-current liabilities. The non current debt was weighted at 78.63 % of the total debt.

We derived this number from adding our long term debt, deferred income tax, and other liabilities. The current

liabilities portion of the debt came out to be 21.37%; it was derived from accounts payable, the current portion of

long term debt, notes payable, and all other current liabilities. The weighted average coat for non-current

liabilities as-well as current debt is taken from each portions percentage of total liabilities multiplied by their

corresponding interest rate. The 10-K report provides the means necessary to find interest rates as-well maturity

on notes payable. Once we conclude which notes are short term and which are long term we place them in their

corresponding categories.

During our analysis of the cost of debt we applied individual interest rates for each category of liabilities.

We concluded that there should not be any interest charged on accounts payable because short term interest rates

are so low, there is no incentive for companies to pay off accounts early. This interest could also be included in

the sales price paid for the goods. The rate used on the current portion of long-term debt is 4.48%, which is

simply the weighted rate on long-term debt. We used this rate because this portion of the debt will mature within

one year, so it would not be feasible to assume a higher rate. The notes payable and other current liabilities rate

we used was 2.61%. This number is the weighted average rate on our short-term liabilities; it was computed by

doing a weighted average of the company’s short-term liabilities and the rate on each liability given in the 10-K.

39

The interest rates used on the non-current debt were computed in the same way as current debt. The rate

for long-term debt is 4.48% (the same number used above), which is simply the weighted average of long-term

debt. Deferred taxes are not considered liabilities due to volatile tax laws.

Cost of Equity Estimation

To calculate the cost of equity you first need to find the beta estimate for the firm. This number is simply

the regression of the firm’s average return and the market premium. The firm’s average returns are based on

monthly return from March 2000 to February 2005 the same is true for the S & P returns. The risk premium is

the S&P average monthly return subtracted by the average monthly risk free rate. Plug these numbers into the

CAPM equation to get the estimated cost of equity. The estimated cost of equity is lower than the cost of debt.

This doesn’t hold to financial principle due to the lower than average returns from the tech bubble. So in-order to

get a better estimate of beta we use the same equation as before but instead re- calculate using data starting from

January 2003. The final result of our cost of equity is 3.56 %.

12.901/18.448 = 69.9 % percentage of debt

5.248/18.448 = 30.1 % percentage of equity

WACC = [69.9 (.0343)] + 30.1(.0356) = 3.47%

Although the above discussion using CAPM to estimate the cost of equity may seem accurate, once the

following models were used to estimate the value of General Mills’ stock price, the accuracy of the above

procedure proved to be much less. We instead took the actual numbers from 2003 and backed into the percentage

for the cost of capital and found the implied Ke to be 8%. This 8% allowed us to see where the current stock

price of $49.23 for General Mills was derived. In addition, our WACC will be modified because of this change

in the Ke (WACC = [69.9(.0343)] + 30.1(.08) = 4.81%); however, for our purposes we will use our first

40

calculation of WACC, 3.47%, because when used in the Discounted Free Cash Flows Model, a price close to the

market can be derived.

Cost Estimations for Intrinsic Valuations

Implied Direct

WACC (Before Tax) 4.81% 3.47%

Ke 8.00% 3.56%

Kd 3.43% 3.43%

41

General Mills’ Beta Estimates Beta Published Beta .004 5-year Beta .0058 3-year Beta .1176 2-year Beta *Note: All values in blue throughout the models represent the estimated stock price for General Mills as at April 1, 2005. Discounted Dividends Model

Sensitivity Analysis G 0 0.02 0.04 0.06

Ke 0.06 $48.88 $61.40 $98.93 0.07 $42.61 $50.51 $68.95 161.16 0.08 $37.85 $43.16 $53.79 85.66 0.09 $34.11 $37.84 $44.56 $60.24 0.1 $31.08 $33.79 $38.32 $47.36 Ke = Cost of Equity

G = Dividend Growth Rate

The Discounted Dividends Model has the least explanatory power out of all the models used. The actual

share price for General Mills is currently $49.23. When using our estimated Ke of 8% and assuming a growth

rate of 0, the stock price is only $37.85. The current market stock price would be over-valued if the discounted

dividends model holds true. The sensitivity analysis above allows us to see that small changes in the Ke and

growth rates used do not have major effects on the stock price derived.

42

Discounted Free Cash Flows Model Sensitivity Analysis g 0 0.02 0.03 0.04 WACC(bt) 0.01 $301.15

0.02 $123.97 0.0347 $48.99 $151.24 $528.71 0.04 $35.49 $97.76 $222.30 0.05 $17.84 $48.31 $86.39 $200.65

Out of all the models, the Discounted Free Cash Flows Model was the most difficult to derive a stock

price that would be close to the market. We used a WACC (bt) of 3.47% to allow for better results. This model

did however provide the best valuation of General Mills in that its estimated stock price was $48.99 compared to

the market of $49.23. In this case, the market would be considered fairly valued since the difference is minimal.

The main limitation of this model is that the sensitivity analysis shows varied results when there are slight

changes in the WACC (bt) and the growth rate.

Abnormal Earnings Growth Model Sensitivity Analysis G 0 0.02 0.04 0.06

Ke 0.06 $82.96 $124.44 $248.87 0.07 $69.50 $97.30 $162.17 486.5 0.08 $59.49 $79.33 $118.99 237.98 0.09 $51.78 $66.58 $93.21 $155.35 0.1 $45.68 $57.09 $76.13 $114.19 Ke = Cost of Equity

G = Growth Rate

43

The Abnormal Earnings Growth Model provides similar results as the Discounted Residual Income

Model as seen below. We used the implied Ke of 8.00% to provide results closest to the actual stock market

price that is currently listed for General Mills. One limitation to this model is the higher sensitivity of the stock

price to changes in the Ke and growth rates. As the growth rate increases, the stock prices become much higher

than when assuming no growth and using our chosen Ke of 8.00%. The best price for this model is $59.49 which

would make the market price of $49.23 undervalued.

Discounted Residual Income Model

Sensitivity Analysis G 0 0.02 0.04 0.06

Ke 0.06 $68.16 $86.12 $140.03 0.07 $60.67 $72.02 $98.50 $230.90 0.08 $55.26 $62.89 $78.14 $123.91 0.09 $51.21 $56.58 $66.23 $88.75 0.10 $48.11 $52.01 $58.51 $71.50 Ke = Cost of Equity

G= Growth Rate

The Discounted Residual Income Model provides a stock price that is the most accurate when compared

with the current market price of $49.23. Using our estimated Ke of 8% and assuming no growth, the stock price

for General Mills comes out to be $55.26. Although the market is under-valued with the price derived in this

model, there is little difference between the numbers so the stock price could also be considered fairly valued.

The stock price derived in the Abnormal Earnings Growth Model is very close to the one derived with the

Discounted Residual Income Model as it should be. Looking at the sensitivity analysis chart above, the stock

44

prices do not have extreme reactions to changes in the cost of equity or the growth rate unless the two numbers

become very close.

Summary of Overall Results

Overall, the models used above appear to be fairly accurate with the market’s current valuation of General

Mills. The most common occurrence was the market’s stock price is fairly valued compared to our estimated

valuations. One the other hand, the Discounted Dividends model portrayed the market as overvalued while the

Abnormal Earnings Growth Model found it to be undervalued.

Some limitations that caused these slight differences would be our methods for calculating the WACC,

Ke, and Kd. CAPM was originally used but did not provide a good estimation of Ke so we found a better fit by

looking into General Mill’s past. In addition, the models were affected by our forecast financial statements from

the previous section. The growth rates that we chose for different line items on each statement had effects on the

resulting stock prices. By forecasting into the unknown future, our valuation can not be 100% accurate. In

conclusion, using all the techniques throughout this process we have found that General Mills is fairly valued.

45

Appendix

Basic 14 Ratios

Liquidity Analysis 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Current Ratio 0.47 0.64 0.60 0.92 1.17 1.2 1.23 1.26 1.29 1.32 1.35 1.38 1.41 1.44 1.47Quick Asset Ratio 0.23 0.36 0.39 0.56 0.70 0.70 0.75 0.80 0.85 0.90 0.92 0.95 0.97 1.00 1.20Accounts Receiveable Turnover 13.38 8.21 7.87 10.72 10.96 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00Days Supply of Receivables 27.27 44.47 46.38 34.05 33.30 36.50 36.50 36.50 36.50 36.50 36.50 36.50 36.50 36.50 36.50Inventory Turnover 5.28 5.47 4.42 5.65 6.19 5.65 5.65 5.65 5.65 5.65 5.65 5.65 5.65 5.65 5.65Days Supply of Inventory 69.07 66.68 82.60 64.65 58.93 64.60 64.60 64.60 64.60 64.60 64.60 64.60 64.60 64.60 64.60Working Capital Turnover -5.00 -6.80 -3.44 -39.65 24.17 20.57 18.34 16.62 15.25 14.14 13.22 12.45 11.79 11.22 10.72

Profitability AnalysisGross Profit Margin 59.74% 47.87% 41.35% 41.85% 40.52% 46.33% 46.80% 47.27% 47.74% 48.21% 48.68% 49.15% 49.62% 50.09% 50.56%Operating Expense Ratio 43.34% 25.56% 26.04% 23.53% 22.07% 24.30% 23.98% 23.47% 23.46% 23.80% 23.68% 23.60% 23.63% 23.68% 23.65%Net profit margin 9.17% 12.20% 5.76% 8.73% 9.53% 11.51% 12.04% 12.71% 13.05% 13.15% 13.56% 13.95% 14.27% 14.59% 14.91%Asset Turnover 1.46 1.07 0.48 0.58 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60Return on Assets 13.43% 13.06% 2.77% 5.03% 5.72% 6.91% 7.23% 7.62% 7.83% 7.89% 8.14% 8.37% 8.56% 8.75% 8.95%Return on Equity -212.74% 1278.85% 12.81% 21.96% 20.10% 22.10% 22.76% 23.63% 23.87% 23.67% 24.00% 24.28% 24.40% 24.50% 24.60%

Capital Structure AnalysisDebt to Equity Ratio -16.837 96.904 3.582 3.294 2.458 2.200 2.150 2.100 2.050 2.000 1.950 1.900 1.850 1.800 1.750Times Interest Earned 6.234 4.845 1.603 2.406 2.970 3.696 3.903 4.158 4.307 4.379 4.560 4.735 4.889 5.046 5.226Debt Service Margin 1.746 2.112 3.681 15.533 6.270 7.208 7.520 7.904 8.128 8.237 8.510 8.774 9.007 9.244 9.516

Extra Relevant RatiosDividend Payout Ratio 0.535 0.469 0.782 0.443 0.450 0.470 0.490 0.510 0.530 0.550 0.570 0.590 0.610 0.530 0.650Sustainable Growth Rate (SGR) -0.988 6.788 0.028 0.122 0.111 0.120 0.120 0.120 0.120 0.120 0.120 0.120 0.120 0.120 0.120Forecast Sales Growth - -0.187 0.459 0.322 0.054 0.080 0.080 0.080 0.080 0.080 0.080 0.080 0.080 0.080 0.080Accounts Payable Turnover 4.205 4.590 3.831 4.688 5.750 5.000 5.000 5.000 5.000 5.000 5.000 5.000 5.000 5.000 5.000Days' Payables 86.798 79.527 95.282 77.852 63.476 73.000 73.000 73.000 73.000 73.000 73.000 73.000 73.000 73.000 73.000Int % of Liabilities 3.12% 4.09% 3.25% 3.98% 3.94% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Actual Ratios

46

Benchmark Analysis Ratios

Current Ratio 2000 2001 2002 2003 2004

General Mills 0.470 0.640 0.600 0.920 1.170Kellogg 0.651 0.862 0.585 0.650Kraft 0.940 0.790 1.040 1.030Industry Average 0.687 0.764 0.742 2.600

Quick Asset Ratio 2000 2001 2002 2003 2004


A/R Turnover 2000 2001 2002 2003 2004


Inventory Turnover 2000 2001 2002 2003 2004


Working Capital Turnover 2000 2001 2002 2003 2004

General Mills (5.000) (6.800) (3.440) (39.650) 24.170Kellogg (7.040) (24.700) (6.640) (9.100)Kraft (52.330) (15.640) 103.560 117.910Industry Average (21.457) (15.713) 31.160 23.053

Gross Profit Margin 2000 2001 2002 2003 2004

General Mills 14.134% 18.312% 8.391% 12.526% 13.631%Kellogg 14.300% 10.500% 13.800% 13.300%Kraft 15.000% 12.000% 18.000% 17.000%Industry Average 14.478% 13.604% 13.397% 14.275%

Operating Expense Ratio 2000 2001 2002 2003 2004


47

Net Profit Margin 2000 2001 2002 2003 2004


Asset Turnover 2000 2001 2002 2003 2004


Return on Assets 2000 2001 2002 2003 2004


Return on Equity 2000 2001 2002 2003 2004

General Mills -212.742% 1278.846% 12.808% 21.964% 20.103%Kellogg 65.500% 54.300% 80.500% 54.500% 50.000%Kraft 14.000% 8.000% 13.000% 12.000%Industry Average -44.404% 447.049% 35.436% 29.488%

Debt to Equity Ratio 2000 2001 2002 2003 2004

General Mills (16.837) 96.904 3.582 3.294 2.458Kellogg 4.444 10.897 10.417 6.089 3.750Kraft 2.710 1.380 1.210 1.080Industry Average (3.228) 36.394 5.070 3.488

48

Statement of Cash Flows

49

Balance Sheet

50

Income Statement

51

Ford Epic Valuation

Industry name (IND): Packaged Food

Latest Price (PRI) 51.89 Dividend Data Company PerformanceTicker Symbol (TKR) GIS Current Annual Div (DIV) 1.24 Net Profit Marg, Cur (CPS) 9.4Cusip Number (CSP) 370334104 Dividend Payout Ratio (DPR) 0.48 Net Profit Marg, Nor (NPS) 8.9Industry Code (IND) 25 Dividend Yield in % (YLD) 2.4 Return on Assets, Cur (RAC) 5.6Industry Group (ING) 2 Total Return Estimate (RET) 11.4 Return on Assets, Nor (ROA) 5.3SIC Code (SIC) 2043 Return on Equity, Cur (REC) 20Unique ID (UID) 2056 Historical Data Return on Equity, Nor (ROE) 18.6

1-qtr Op EPS Growth (HEQ) 15.3 Reinv on Equity, Cur (PLC) 11.1Proprietary Evaluations 1-yr Op EPS Growth (HEY) 6.2 Reinv on Equity, Nor (PLB) 9.7Quality Rating (QTY) B+ 3-yr Op EPS Growth (EG3) 16.7Growth Persistence (GRP) C 5-yr Op EPS Growth (EG5) 7.8 Share Price HistoryProj. Growth Rate (GRO) 9 5-yr Cur EPS Growth (HEG) 5.8 Latest Price (PRI) 51.89Int Rate of Return (ROI) 7.7 1-qtr Sales Growth (HSQ) 3.5 Price, 1 Month Ago (PRO) 49.22Intrinsic Value (VAL) 55.73 1-yr Sales Growth (HSY) 4.4 52-Week High Price (H52) 52.35Price/Value Ratio (PVA) 0.93 3-yr Sales Growth (SG3) 18.4 52-Week Low Price (L52) 43.3P/V Ratio/5yr Avg (PVH) 0.87 5-yr Sales Growth (HSG) 13.3 50 Day Moving Avg (FMA) 48.29P/V Rel to Market (PVR) 0.71 1-qtr Dividend Growth (HDQ) 0 200 Day Moving Avg (TMA) 46.58Earnings Trend (SED) 11 1-yr Dividend Growth (HDY) 12.7 Price Gain - 1 Day (PG1) 0.1Rel Earnings Trend (SDR) 0.2 3-yr Dividend Growth (DG3) 3.3 Price Gain - 1 Week (PGW) 0.1Comp PVA and SED (COM) 0.91 5-yr Dividend Growth (HDG) 1.3 Price Gain Mo-to-Date (PGM) 4.4Shr Buyback/Issuance (SHB) -2.6 5-yr High P/E Ratio (HPE) 23.6 Price Gain - Cur Mo (PGN) 5.4Stock Split Cur Month (SPM) 1 5-yr Avg P/E Ratio (APE) 19.1 Price Gain - 3 Month (PGQ) 19.6Stock Split 6 Months (SPH) 1 5-yr Low P/E Ratio (LPE) 16.1 Price Gain - 6 Month (PGH) 13.9Sales Mom Percentile (SMO) 36 5-yr Avg P/V Ratio (HPV) 1.07 Price Gain - 12 Month (PGY) 13.5Earn Mom Percentile (EMO) 61 Price Gain - YTD (PGD) 4.4Price Momentum (PRM) -30.8 Sales, Cap, Ownership Price Gain - 3 Year (PG3) 7.1Price Mom Percentile (PMO) 19 12m sales 4 qtrs ago (SQ1) 10769 5-yr Pri Gain (%/yr) (PGF) 6.8Operating EPS Yield (OEY) 5.7 12m sales 3 qtrs ago (SQ2) 10827 5-yr Tot Rtrn (%/yr) (REF) 9.6Value/Mom Percentile (VMO) 70 12m sales 2 qtrs ago (SQ3) 11070 Adjusted Beta (BET) 0.36

12m sales 1 qtr ago (SQ4) 11137 Unadjusted Beta (BTA) 0.06Stock Valuation Data 12m sales latest qtr (SQ5) 11245 Alpha (ALP) 0.74Current P/E Ratio (PEC) 18.6 Qtr sales 7 qtrs ago (QS1) 2645 1 Mo Avg Daily Volume (AVL) 23215Normal P/E Ratio (PER) 20 Qtr sales 6 qtrs ago (QS2) 2546 3 Mo Avg Daily Volume (VOL) 19590Norm P/E / 5yr Avg (PEH) 1.04 Qtr sales 5 qtrs ago (QS3) 2518 Daily Vol % of 3mo Av (DVP) 1.3Norm P/E / Growth (PEG) 2.22 Qtr sales 4 qtrs ago (QS4) 3060Price/Cash Flow (PCF) 13.5 Qtr sales 3 qtrs ago (QS5) 2703 IndicatorsPrice/Book Value (PBK) 3.71 Qtr sales 2 qtrs ago (QS6) 2789 Change Indicator (CHI)Price/Sales Ratio (PSS) 1.71 Qtr sales 1 qtr ago (QS7) 2585 Screening Indicator (VEI)

Qtr sales latest qtr (QS8) 3168 Foreign Co Indicator (FNI)Earnings and Cash Flow Annual FY Sales (mil) (SAL) 11070 Options Indicator (OPI) 1Current 12-month EPS (ECU) 2.79 Common Shrs Out (mil) (SHR) 365.1 Exchange Indicator (EXI) NNormal 12-month EPS (ENO) 2.6 Shrs Held by Inst (%) (FND) 60 Average Indicator (AVI) SCurrent/Normal EPS (CNE) 1.07 Market Capital (mil) (CAP) 18945 S&P MidCap Indicator (MCI) 0EPS, Cur Fiscal Yr (EFY) 2.75 Current Book Value (BKV) 13.98 S&P SmallCap Ind (SCI) 0Cash Flow per Share (CFL) 3.84 Pfd Equity (% assets) (PEQ) 0 Ford 1000 Indicator (FII) 1Earnings Variability (EDV) 12 Common Equity (% ass) (CEQ) 28.5 Ford 2000 Indicator (F2I) 012m Op EPS 3 Qtrs Ago (EQ1) 2.75 LT Debt (% assets) (LTD) 40.2 NASDAQ 100 Indicator (NQI) 012m Op EPS 2 Qtrs Ago (EQ2) 2.85 Other Debt (% ass) (ODL) 31.3 Ford Basic/Diluted In (FDI) DI12m Op EPS 1 Qtr Ago (EQ3) 2.78 Total Assets (mil) (ASS) 18448 FY Estimate Indicator (YEI) 0Latest 12m Op EPS (EQ4) 2.91 Year/Month Latest FY (MFY) 200405Est 12m opEPS Cur Qtr (EQ5) 2.97 FY Earnings, Current (TCE) 1038.3 First Call DataQtr Op EPS 6 Qtrs Ago (QE1) 0.64 FY Earnings, Normal (TNE) 982.9 No of Cur Estimates (EST) 14Qtr Op EPS 5 Qtrs Ago (QE2) 0.62 Cur Yr Mean Estimate (FY1) 2.91Qtr Op EPS 4 Qtrs Ago (QE3) 0.85 Debt Ratios Next Yr Mean Estimate (FY2) 3.13Qtr Op EPS 3 Qtrs Ago (QE4) 0.64 Current Ratio (CCR) 1.2 Sec Growth Median (LTG) 8Qtr Op EPS 2 Qtrs Ago (QE5) 0.74 LT Debt/Equity Ratio (DEQ) 1.41 Std Dev Cur Year (SD1) 0.02Qtr Op EPS 1 Qtr Ago (QE6) 0.55 Tot Debt/Asset Ratio (DAS) 0.72 1 Mo Chg Current Year (MC1) 0Latest Qtrly Op EPS (QE7) 0.98 1 Mo Chg Next Year (MC2) 0.6Est qtr opEPS Cur Qtr (QE8) 0.7 Cur Qtr Mean Est (QTR) 0.7Year/Month Latest EPS (MFQ) 200411 Yr/Mo of Cur Yr End (FYE) 200505Date Last EPS Update (EUP) 20041221 Yr/Mo of Cur Qtr End (FQE) 200502

Yr/Mo of Latest SUE (SUQ) 200411

52

B/S in $ Mil

FY Balance Sheet Data Qtrly Balance Sheet Data DuPont / Other RatiosBalance Sheet Date (BSD) 200405 Balance Sheet Date (BSDQ) 200411 EBIT Margin (EBM) 18

Asset Turnover (ATO) 0.6Cash & Cash Equiv (CSH) 751 Cash & Cash Equiv (CSHQ) 561 EBIT ROA (ERA) 10.8Short-Term Investment (STI) 0 Short-Term Investment (STIQ) 0 Interest Burden (INB) 2.64Net Receivables (RCV) 1179 Net Receivables (RCVQ) 1333 Pretax ROA (PRA) 8.2Inventory (INV) 1063 Inventory (INVQ) 1233 Financial Leverage (FNL) 3.52Current Assets (TCA) 3215 Current Assets (TCAQ) 3307 Pretax ROE (PRE) 28.8Property Plant & Equ (PPE) 3111 Property Plant & Equ (PPEQ) 3055 Tax Rate (TAX) 35Goodwill (GWL) 6684 Goodwill (GWLQ) 6725 Tax Retention Rate (TRR) 65Intangible Assets (ITA) 3641 Intangible Assets (ITAQ) 3637 Inventory Turnover (ITO) 10.41Total Assets (TAS) 18448 Total Assets (TASQ) 18649 Acid Test Ratio (ATR) 0.78Accounts Payable (PAY) 2393 Accounts Payable (PAYQ) 1479 Times Interest Earned (TIE) 4.1Sht trm & cur LTD (STD) 233 Sht trm & cur LTD (STDQ) 19 Gross Margin (GRM) 40.5Current Liabilities (TCL) 2757 Current Liabilities (TCLQ) 2355 R&D as % of Sales (RDS) N/ALong-Term Debt (LDT) 7410 Long-Term Debt (LDTQ) 7429Total Liabilities (TLI) 13200 Total Liabilities (TLIQ) 13666Preferred Stock (PFD) 0 Preferred Stock (PFDQ) 0Retained Earnings (RTE) 3722 Retained Earnings (RTEQ) 4041Common Stock Equity (CSE) 5248 Common Stock Equity (CSEQ) 4983Shares Outstanding (BSO) 379 Shares Outstanding (BSOQ) 364

I/S in $ Mil

FY Income Statement Data Qtrly Income Statement DataIncome Statement Date (ISD) 200405 Income Statement Date (ISDQ) 200411

Total Revenue (REV) 11070 Total Revenue (REVQ) 3168Gross Profit (GPR) 4486 Gross Profit (GPRQ) 1279SG&A Expense (SGA) 2443 SG&A Expense (SGAQ) 637R&D Expense (RND) N/A R&D Expense (RNDQ) N/AOperating Income (OIN) 2017 Operating Income (OINQ) 639EBITDA (EDA) 2395EBIT (EBT) 1996 EBIT (EBTQ) 639Interest Expense (IEX) 487 Interest Expense (IEXQ) 125Pretax Income (IBT) 1509 Pretax Income (IBTQ) 514Income Tax Expense (ITE) 528 Income Tax Expense (ITEQ) 171Net Inc From Cont Op (NCO) 1055 Net Inc From Cont Op (NCOQ) 393Net Income (NET) 1055 Net Income (NETQ) 367

C/F in $ Mil

FY Cash Flow Data Qtrly Cash Flow DataDepreciation & Amort (DEP) 399 Depreciation & Amort (DEPQ) 113Cash Flows from Oper (COA) 1461 Cash Flows from Oper (COAQ) 484Capital Expenditures (CEX) 628 Capital Expenditures (CEXQ) 82Cash Flows from Inves (CFI) -470 Cash Flows from Inves (CFIQ) -78Cash Flows from Finan (CFA) -943 Cash Flows from Finan (CFAQ) -325Chg in Cash & Cash Eq (CCC) 48 Chg in Cash & Cash Eq (CCCQ) 81

References: http://www.generalmills.com http://edgarscan.pwcglobal.com http://finance.yahoo.com

http://www.generalmills.com/

http://edgarscan.pwcglobal.com/

http://finance.yahoo.com/

53

Marking Guideline for FIN 3321 Valuation Project

Group Mark Allocation Form Please submit this form with your final written report. You (your group) needs to complete all of the detail below. For the allocations to be accepted, it is necessary that all group members sign off in unanimous agreement. Also make sure that each signature is dated. Finally, as per the instructions provided in lecture, verify that the group allocations sum to 100%. If your group cannot come to agreement regarding the allocation then you will enter into binding arbitration based on my decision/ruling.

Percent Grade

Group Member Signature ID Number Date Allocation___ 1.____________________ _________ ____ _______

(Signature Here) ____________________ Printed Name Here 2.____________________ _________ ____ _______




(Signature Here) ____________________ Printed Name Here TOTAL: 100% Group Name________________ DAY_______ TIME______ GROUP #_______

general mills valuation - mark e. moore

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