[VIDEO] General Mills is Stable but is it Worth it?


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by Dan Myers

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General Mills (GIS) is a company that is near and dear to everyone’s heart. If you eat cereal, you have most likely eaten one of their brands.

General Mills has a great business, but I go through a surprising point from the annual statement which affects the ultimate growth rate when valuing the company.

When you look at General Mills and the overall picture of the company, it looks a lot like Heinz. Towards the end of the video I also provide some comments about Buffett and his purchase of Heinz and whether he paid a fair price or not.

More specifically, in this session you’ll find out about:

  • General Mills business model
  • A run down of the financial statements and how to interpret it for investments
  • Why General Mills has a bad quick and current ratio
  • Why debt is not always bad
  • Whether goodwill is a red flag
  • DCF valuation of General Mills
  • Why General Mills looks overvalued
  • Whether Buffett overpaid for Heinz

Watch the Video on General Mills

If you are reading from email, you likely will not see the embedded video, so here are links to take you to each one.

Part 1 | Part 2 | Part 3

Enjoy.

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5 responses to “[VIDEO] General Mills is Stable but is it Worth it?”

  1. Carlos Soriano says:

    Dear Dan,
    Thanks for this sound analysis.
    I am using more moderate growth and discount rate assumptions (2% – 7% respectively) but getting similar conclusions.
    Finally,
    mathematically, when you adjust the terminal growth rate and the
    discount rate don’t you think it’s a flaw to say that the g >
    discount rate? I might be missing something.
    Thanks again.
    Carlos

  2. This is a reply from Dan. He is unable to post from his computer.
    ————————
    This is an excellent question. The question seems to be “can we ever have a growth rate above our required rate of return?”

    I look at the growth rate and the discount rate as two mutually exclusive variables. Growth is a guess on where we are going and the discount rate is a gauge of how confident I am that my projections are accurate. The more certain you are about where you think something is going, the lower discount rate you need. I can be very certain that a company is going to grow.

    Let’s use argumentum ad absurdum to illustrate this. Say God himself comes to you and says he needs capital to build a Laundromat. He guarantees that the business will grow by 10% a year every year for 20 years and then he’ll buy you out for 10x free cash flow.

    We have a guarantee from God on the numbers. What would your discount rate be? Would it be greater than 10%? No way. I would suggest it is below US Treasuries. In this case, the growth rate is much higher than the discount rate.

    Now that we’ve done the absurd, the rest becomes a matter of degree. How much do you trust the projections. The more confident you are in your growth projections the lower you discount rate.

    The discount rate is what you require to buy into the projections. I see no reason why you can’t have growth rates higher than your discount rate.

    Now with that being said, as the growth rate gets higher my confidence in the projections goes down. You can place a lot more trust in low growth rates because past performance proves that larger portion of the future FCF is possible. As the projections get higher, your confidence should be lower and thus the discount rate get higher.

    You can argue in a specific case that the discount rate should not be less than the growth rate, but to say it can never happen I think would be folly. You would end up buying all low growth companies in this case because to buy a high growth company would require a high discount rate.

    I appreciate the question and it did get me thinking. Take care.

  3. Carlos Soriano says:

    Many thanks. I appreciate the answer.
    Within the food industry, I recommend the users in this blog to take a look at Campofrio Food Group, which is now at ~ all time low.
    I will be happy to share my conclusions with you once I have finalized the analysis. Take care

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