Food Processing Stocks

General Mills Inc Valuation – January 2017 $GIS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how General Mills Inc (GIS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): General Mills, Inc. is a manufacturer and marketer of branded consumer foods sold through retail stores. The Company is a supplier of branded and unbranded food products to the North American foodservice and commercial baking industries. The Company has three segments: U.S. Retail, International, and Convenience Stores and Foodservice. Its products are marketed under various brands, which include Annie’s and Betty Crocker. The Company’s U.S. Retail segment reflects business with a range of grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, and e-commerce grocery providers operating throughout the United States. The International segment consists of retail and foodservice businesses outside of the United States. The Convenience Stores and Foodservice segment’s product categories include ready-to-eat cereals, snacks, refrigerated yogurt, frozen meals, unbaked and fully baked frozen dough products, and baking mixes.

GIS Chart

GIS data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of GIS – January 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

 

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $35,317,230,637 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.66 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 25.77% Fail
6. Moderate PEmg Ratio PEmg < 20 23.23 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 8.76 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.66 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -3.07 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $2.63
MG Growth Estimate 0.64%
MG Value $25.71
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $38.13
MG Value based on 0% Growth $22.35
Market Implied Growth Rate 7.37%
Current Price $61.08
% of Intrinsic Value 237.61%

General Mills, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.52 in 2013 to an estimated $2.63 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.37% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into General Mills, Inc. revealed the company was trading above its Graham Number of $21.31. The company pays a dividend of $1.86 per share, for a yield of 3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 23.23, which was below the industry average of 24.74, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-22.19.

General Mills, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$22.19
Graham Number $21.31
PEmg 23.23
Current Ratio 0.66
PB Ratio 8.76
Current Dividend $1.86
Dividend Yield 3.05%
Number of Consecutive Years of Dividend Growth 13

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Useful Links:

 

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Most Recent Balance Sheet Figures

Balance Sheet Information 11/1/2016
Total Current Assets $4,111,500,000
Total Current Liabilities $6,244,400,000
Long-Term Debt $6,542,000,000
Total Assets $21,602,100,000
Intangible Assets $13,166,500,000
Total Liabilities $17,421,500,000
Shares Outstanding (Diluted Average) 599,700,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.80
May2016 $2.77
May2015 $1.97
May2014 $2.83
May2013 $2.79
May2012 $2.35
May2011 $2.70
May2010 $2.24
May2009 $1.90
May2008 $1.86
May2007 $1.59
May2006 $1.45
May2005 $1.54
May2004 $1.30
May2003 $1.22
May2002 $0.67
May2001 $1.14
May2000 $1.00
May1999 $0.85
May1998 $0.65
May1997 $0.69

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.63
May2016 $2.54
May2015 $2.46
May2014 $2.67
May2013 $2.52
May2012 $2.33
May2011 $2.23
May2010 $1.93
May2009 $1.74
May2008 $1.62
May2007 $1.48
May2006 $1.36
May2005 $1.27
May2004 $1.11
May2003 $1.00
May2002 $0.88
May2001 $0.95

Recommended Reading:

Other ModernGraham posts about the company

27 Companies in the Spotlight This Week – 4/4/15
General Mills Inc. Annual Valuation – 2015 $GIS
14 Companies in the Spotlight This Week – 4/12/14
General Mills (GIS) Annual Valuation – 2014

Other ModernGraham posts about related companies

Coca-Cola European Partners PLC Valuation – January 2017 $CCE
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Conagra Brands Inc Valuation – December 2016 $CAG
Seneca Foods Corp Valuation – Initial Coverage $SENEA
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Best Stocks to Invest In: the Food Processing Industry – August 2016
B&G Foods Inc Valuation – August 2016 $BGS
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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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