General Mills (NYSE:GIS), our company, is a global consumer foods company. We develop distinctive value-added food products and market with our unique brand names. We work continuously to improve our established products and to create new products that meet our customers’ potential needs and preferences. Our company has $14.88 billion in sales last year. Our sales has grown substantially throughout the years due in large part to our popular brand names, this however is only part of the reason that we has been so successful. We markets global brands such as Green Giant, Old El Paso, Häagen-Dazs, Yoplait, Cheerios, Betty Crocker, Bisquick, Progresso and many others with competitive prices.
The average U.S. shopper purchases at least one of our products every time they visit the grocery store. In this business model for our company, we include the important inputs and assumptions for the Balance Sheet (historical and future data), Income statements and other estimated model – WACC, Terminal Value, Enterprise Value, Stock Price, etc. After estimating enterprise values in the future, we can find that our company is undervalued. Stock holders are supposed to add holdings of shares and gain more equity.
Analysis of the Model
All the statistics used in this model can be found in Google Finance, Yahoo Finance and Bloomberg. In calculating the ratios and forecast financials for our company, some trends are difficult to estimate because the data online is not all included. Once we had the ratios calculated, we can find trends and used them to forecast out the balance sheet, Income statement and cash flow statement for the next five years, which would bring us to 2016. Revenue Growth – According to the Sheet FSM-Input, we can find the percent growth % for the last four years are 9.73%, 7.61%, 0.72%, 0.57%. Because it changes a lot in the five years and the rate in recent two years is really low.
We use the average growth rate for the next five years. So we are forecasting settling into annual growth of 4.66%, more in line with long-term general growth trends. COGS – In the same sheet, the gross margin from 2007 to 2011 is 39.39%, 39.05%, 38.73%, 42.77%, and 43.21%, in line with analyst forecasts which are also in line with company guidance. These margins are increased from the estimates. We also use the average data for the next five years. SGA – Increase in SGA to 21.44% of revenue for 2011 is under a trend of increasing from 19.21% these five years. We generally forecast a decrease to 20.38% (average) for 2012 and thereafter. It should be a slower revenue growth in the long term, so as for SGA. Tax Rate – Average Income tax rate is 33.8% for the next five years, which between 29.62% to 37% in the last five years.
CapEx – Accord the increasing trend of the last five years for CapEx of revenue, we give the assumption that it will increase by 0.5% each year in the next five years. As most of the data are close to this level, we think this assumption appears justifiable. Cost of Debt, Cost of Equity – we used the data of year 2011 to estimate the future value – for the value of WACC. All the data are collected from Bloomberg. Also, the cost of equity can be calculated by CAPM, as the risk-free rate plus the Market Risk Premium multiplied by Beta.
Beta – calculated by running a regression comparing yearly returns of GIS for the last five years, and modified with the information from Bloomberg. Risk free Rate – calculated as the average yield on the 10 – year Treasury rate over the last six months. In addition, the interest rate for cash and short term debt is almost zero here. Growth rate – we used the dividend growth rate here, as the dividend for last four years as follows: 1.29, 1.22, 1.12, and 0.96. We calculate the increase rate and select the minimum one 1.66%. It is used for the current Terminal Value and the following estimation of equity value.
From the Balance Sheet and the Ratio analysis, we can calculate the capital structure of our company. And the above is the result of current value.
Our WACC is almost constantly these years – around 5.50% — via from 5.04% to 5.82%. We also use the scenario analysis for how the WACC and growth rate affect enterprise value and equity value. The full report shows all the forecasting data for 2012 – 2016, it clearly estimate the financial trend of our company (attachment). For the data used in this model, some of them are current data, the other are historical or most recently or average number. It only depends on actually situation – for which method is much more realistic.
The current enterprise value is $41,335 million and the equity value is $34,455 million. According to yahoo finance, the shares outstanding of our company are 647.31 million, so we can calculate the stock price for next year is $53.23. It will increase in following years. Also, the WACC of our company is always around 5.5%, we can use Monte Carlo Simulation to run the estimation of Equity value by changing WACC, growth rate and COGS/Revenue each year. The random calculation displays as the full report in attachment. The most important thing is that, according to our estimation, the next five-year we will get additional funds needed increasingly with no surplus funds; which means, our assets increase faster than our liabilities.
Therefore, our company goes well in the short term future based on this model. In conclusion, General Mills Inc. is undervalued currently, it is recommended for customers to add holding of stock shares. Overall, our company has a long history of impressive performance and has returned significant value to its shareholders. While we operate in a mature industry with limited growth potential, we have a proven ability to seek out new opportunities and continue to grow revenue year after year. We should do our best to let us continuous be one of the world’s most respected packaged food producers.
Market Watch. General Mills Inc. Company Profie (2012). Retrieved from: http://www.marketwatch.com/investing/stock/gis/profile
General Mills Inc. (GIS) Annual and other reports. (2012). Retrieved from: http://phx.corporate-ir.net/phoenix.zhtml?c=74271&p=quarterlyearnings
General Mills Inc. (GIS). Key Statistics. (2012). Retrieved from: http://finance.yahoo.com/q/ks?s=GIS+Key+Statistics
General Mills Inc. (GIS) Current key data. (2012). Retrieved from: http://www.google.com/finance?q=gis
Historical Data from Bloomberg.