The Power of a Brand

When Warren Buffett began practicing Benjamin Graham's style of value investing, he didn't give much thought to brands or business quality. Graham's net-net strategy (stocks selling for less than net current assets) inherently provided the margin of safety that value investors require.

It was only when Charlie Munger introduced Buffett to the idea of the power of brands that Buffett tweaked his style. One of Buffett's well-known successes with the investment shift was See's Candies. To understand the power of See's brand, Buffett once explained:

"If you give your girlfriend See's Candy and she kisses you, we've got you for life."

Later, Buffett recognized a similar brand loyalty from The Coca-Cola Co (NYSE:KO) customer:

"If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done."

That degree of brand power is rare, of course. Still, searching for solid brands at an attractive stock price was how Buffett evolved as a value investor.

Today's value investors might consider consumer packaged foods leader General Mills, Inc. (NYSE:GIS). General Mills offers a portfolio of well-known brands and finbox.io valuation models show nearly 30 percent upside.

The General Mills Business Model

^{Source: General Mills 2017 Annual Report}

Latest Quarterly Results, "Moat" Analysis, and Growth Outlook

Third-Quarter Results

Management cited increases in freight and commodity costs as weighing on its adjusted diluted EPS of $0.79 (an 8 percent increase in constant currency). To help offset these costs, strategic initiatives include increasing freight carriers and alternative transportation as well as optimizing the distribution network and its administrative structure.

The General Mills "Moat"

Sources of Growth

Estimating Generals Mills' Intrinsic Value

While Buffett moved on from Graham's net-net strategy to buying quality brands, he still required his investments to trade at a reasonable discount, or margin of safety. Buffett held over this principle to provide protection against unfavorable business developments.

So does General Mills offer much in the way of a margin of safety? It sure looks like it. Wall Street analysts expect low single-digit revenue growth to ramp up into the high-single digits with steady EBITDA margin expansion:

^{Source: General Mills 5-Year DCF Model, finbox.io}

Incorporating these projections across nine finbox.io valuation models generates an average fair value of $53.53 per share. That estimate implies nearly 30 percent upside to current trading levels:

^{Source: finbox.io}

That's more upside compared to General Mills' direct peers and its dividend yield also compares favorably:

Risks:

Greater-than-expected weakness in the center store could weigh on General Mills' top line. Volatile commodity costs and increased competition from incumbents and smaller players also pose risks. The Blue Buffalo integration and capturing the targeted $50M in synergies could also prove challenging.

General Mills Conclusion:

With a portfolio of leading brands and a recent acquisition of another, General Mills offers the high-quality brands that value investors seek out. Though customers have prioritized perimeter store offerings of late, brand reinvestment and new product development look to support the top line. With a 4.7 percent dividend yield and 30 percent upside, it's time value investors give General Mills another look.

^{Photo Credit: General Mills 2017 Annual Report}

Author: Andy Pai

Expertise: financial modeling, mergers & acquisitions

Andy is also a founder at finbox.io, where he's focused on building tools that make it faster and easier for investors to do investment research. Andy's background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights:

• Sears Holdings Corp.'s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores.
• Cerberus Capital Management's $3.3 bn acquisition of SUPERVALU Inc.'s New Albertsons, Inc. assets.

Andy can be reached at [email protected].

^{As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.}