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General Mills (GIS) Valuation Analysis
Posted by: Fast Weekly (IP Logged)
Date: August 26, 2013 09:33PM

General Mills (GIS) products are found in nearly every kitchen in America. The Minneapolis, Minn., behemoth manufactures and markets soups, cereals, ice cream, frozen pizzas and baking mixes. I am always looking for consistent and efficient companies that are able to compound capital over time. What drew my eye to General Mills was its consistently high return on equity (ROE), which is one of my favorite metrics. See the data below.

Year ROE

2005 21.8

2006 18.9

2007 21.5

2008 20.8

2009 25.2

2010 28.3

2011 28.3

2012 24.4

I would certainly say the last nine years' results qualify as consistent. General Mills has a reasonable debt load for the industry and a good deal of cash on hand. It currently pays a dividend of 3.1% and has a dividend payout ratio of less than 50%. The best part about dividends from high quality companies is they tend to rise over time. In the case of General Mills, the dividend has more than doubled over the last 10 years.

So General Mills looks like the type of company we like to invest in, but what is our best guess of the intrinsic value? Below is my estimate of the present value of General Mills future EPS, based on the historical increase in EPS, discounted at a rate of 5%.



I always like to buy great companies at a discount of 33%, so I would be a buyer of GIS somewhere below $43.65 per share. Remember, the margin of safety we're seeking requires a good purchase price. The valuation method we've used requires a fair number of assumptions and therefore I buy at a large discount. Below are a few ratings and one year price targets for General Mills.

Ford Equity Research (8/23/13) rated a HOLD

Jaywalk Consensus (8/25/13) rated a 2.53, between Hold (3) and Buy (2)

Credit Suisse (7/10/2013) rated a NEUTRAL, with a one-year price target of $50.00

S&P Capital IQ (8/17/13) rated a BUY, with a one-year price target of $53.00 and fair value $45.10

Disclosure: I do not own GIS

Bryan is the author of The Fast Letter, an informational news letter about current values to be found in the equity markets. It can be found at fastletter.blogspot.com


Stocks Discussed: GIS, K, POST,
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