Drip Portfolio Report
Tuesday, November 25, 1997
by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 25, 1997) -- Before we look at General Mills (NYSE: GIS), two quick things:

1. Intel (NYSE: INTC) announced that it is restructuring its business. The personal computer industry is rapidly splitting into segments, and Intel is going to focus itself (in four divisions) on those segments. Sounds logical. The four new business groups at Intel are the consumer products group, the business platform group, the small business and networking group, and the digital imaging and video division.

Consumer products will constitute desktop PCs, television set-top devices, and automobile computers. The business platform group focuses on all business computers including PCs, Net PCs, network computers, workstations and data security. This division should be the biggest moneymaker. The other two divisions are self-explanatory. It sounds like good news for Intel, and it also reminds people that the company does much more than just "make those dang chip things, you know, those little fancy things."

2. The columns written on Friday and Monday were meant to show some of the thinking behind the Drip Port, and to essentially present three different ideas about investing -- all of which are very valid. They are:

a.) Over-analysis can ruin an otherwise patient investor and keep him or her from buying the best companies due to price (like Disney or Coca-Cola). So, in DRIPs, the idea is to buy the best companies and managements and let dollar cost averaging work for you.

b.) If you have great companies in which to invest at fair prices, do that investing while you can, and then move to invest in other great companies that are at fair prices as well, as they come about. This takes more diligence and watching, but smart capital allocation helps make for market-beating investing.

c.) Invest automatically in all of your favorite, large, leading companies each month. Over the long term they will all work to your advantage if they're all great, growing companies. The key is that you're saving and investing the money in leading companies regularly, for decades.

The Drip Port, believe or not, is going to employ all three approaches to varying degrees. We feel that we're using the second approach right now more than any other.


We'll now continue with our overview of food and beverage stocks to find another investment. Today's contestant is General Mills. It makes large mills. Generally. Or maybe not.

Description: Founded in 1866 (so the company is three years older than Campbell Soup), General Mills is the number-two cereal seller in the world behind Kellogg (NYSE: K). (It hurts to be number two -- should we end our overview right here?) General Mills does sell the most popular cereal in the country, though. Can you guess what it is? No, not Frankenberry. It's Cheerios. General Mills also sells desserts, baking and flour mixes, snacks, and beverages.

Major brands: Being number two in cereal, the company sells a lot of them, including Cheerios (deja vu), Cinnamon Toast Crunch, Chex, Cocoa Puffs, Cookie Crisp, Kix ("Kids love Kix for what Kix has got, moms love Kix for what Kix is not"), Lucky Charms ("Frosted Lucky Charms, they're magically delicious!"), Raisin Nut Bran, Reese's Peanut Butter Puffs ("Hey, you got your chocolate in my peanut butter;" "And you got your peanut butter in my..." all right, I'll stop. That's not the cereal's tag line anyway.) General Mills also sells Total and Wheaties.

The company also sells Betty Crocker, Bisquick, Bugle food snacks, Pop Secret popcorn, Nature Value granola bars, Fruit Roll-Ups, yogurt and more. "If you eat, you've eaten something from General Mills." (The copyright on that slogan belongs to Jeff Fischer. Not the Fool, not General Mills).

Core moneymaker: A bulk of the company's $5.6 billion in fiscal '97 sales predictably came from cereal. Earnings were down that year due to price cuts. North American sales were 96% of total sales with only 4% international, though the company does have overseas joint ventures with Nestle, PepsiCo, and CPC International.

Financials: Because this is an overview, we'll again only look at a few key things: how is the company priced relative to sales, earnings per share, and the expected growth rate (valuation); what are the current operating and net margins (margins); how much long-term debt does the company have (leverage); and what does management do with the cash that it generates (capital allocation).

Valuation and Growth: At a recent stock price of $74 1/2, General Mills has an $11.7 billion market cap, so the company trades at two times trailing sales of $5.7 billion.

The company recently had $12 million in cash and $1.5 billion in long-term debt. Any acquiring company would consider the cash and debt in its valuation, so we subtract the cash and add the debt to the market cap to get a more accurate value for the company -- the enterprise value. The enterprise value of General Mills is closer to $13.2 billion, and that value in relation to sales is 2.3 ($13.2 billion / $5.7 billion sales).

On the income side, General Mills trades at 24.5 times trailing earnings of $3.04 per share. The company is expected to grow earnings per share 9% annually for the next five years or so, and the stock trades at 22.7 times fiscal 1998 earnings estimates (the year ends in May), and 20.4 times fiscal 1999 estimates.

Margins Reviewed: Operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It indicates how efficient management is at running the business "operations" -- hence, operating margins.

For the last twelve months, General Mills had $5.7 billion in sales and $879 million in operating income. Dividing $879 million by $5,700 million (or $5.7 billion) results in average operating margins of 15.4%. (Campbell has averaged 18.6% operating margins, the same as Anheuser Busch (NYSE: BUD), while Coca-Cola's (NYSE: KO) are 27%.) Net profit margins have averaged 8.4% the past year, ranging from 5% to 10%. This is the lowest of the three companies that we considered and kept on our food and beverage list last week.

Leverage reviewed: Long-term debt divided by revenue is one of the most useful ways to think about debt. With $1.5 billion in long-term debt and $5.7 billion in sales, we have a 26.3% debt-to-sales ratio. This is the weakest of the group, so far.

Capital allocation: Management pays a healthy 2.8% dividend. The company primarily needs to invest in its brand name, more international ventures, and marketing of new brands that roll out frequently. If product prices are sensitive (as they are), the company needs to make up for it in volume. (It's worth noting that General Mills recently raised prices nearly 3%, the first increase in three years). The company also has some old and inefficient production plants and recently announced a restructuring that will close some of them. It needs to invest in improving its operating margins through better production, and in continued market saturation of it brand name in order to keep and grow mind share and market share.

The Snapshot for The "Almost" Cereal King:

Ticker: GIS
Recent Price: $74.50

Trailing 12-month sales: $5.7 billion
Trailing 12-month oper. earnings: $879 million
Trailing 12-month EPS: $3.04

Fiscal '98 EPS estimates: $3.28 (year ends in May)
Fiscal '99 EPS estimates: $3.65

Enterprise value to sales: 2.3
Current P/E: 24.5
P/E on 1998 EPS: 22.7
P/E on 1999 EPS: 20.4
Long-term expected growth rate: 9%
Yield: 2.80%

Conclusion: The stock trades at a typical premium to the earnings growth rate of a leading "defensive" food company. (Defensive in that food always need to be bought in any type of economy, so food is seen as an economy-defensive investment, and the stocks of leading food companies trade higher accordingly.)

Even with the dividend payment, after this overview we're more interested in the businesses of the other companies that we've already considered. With substantial debt and the need to restructure and close old plants, the company has plenty on its plate. You can't top the General Mills brand name, and some of the company's products are first in their class, but primarily selling cereal (the cost of which has not even risen with inflation the past four years plus) makes earnings power weaker. Also, expensive brand-name cereal does not always need to be bought in a slow economy, of course. In fact, it's one of the easier sacrifices to make.

Tomorrow, the day before Thanksgiving, we'll be taking the day off. (No, of course not! I'm just kidding.) We'll continue down our list and look at, whoa, the number ONE cereal guy, Kellogg (NYSE: K).

See you in the DRIP folders on the Fool's new Web message boards, and on AOL's boards.

Fool on!


Have You Given? The Fool Charity Fund


Stock   Close    Change
INTC  $78 1/8   -2 1/8
JNJ   $64 1/8  -13/16
              Day    Month   Year    History
Drip        (1.00%)(2.47%)  (11.14%) (11.14%)
S&P 500      0.44%   3.96%   28.36%   (0.05%)
Nasdaq       0.13%  (0.29%)  23.08%   (0.30%)    

Last Rec'd   Total #   Security   In At   Current
11/03/97      4.835     INTC    $81.623   $76.438
11/14/97      1.000     JNJ     $62.125   $64.000

Last Rec'd  Total#  Security  In At    Value   Change
11/03/97    4.835     INTC    $394.69  $369.61 ($25.08)
11/14/97    1.000     JNJ      $62.13   $64.00   $1.88    

Base:   $900.00
Cash:   $389.75**
Total:  $823.36

GOAL: The portfolio began with $500 on July 28, 1997, 
adds $100 on the 15th of every month, and the goal 
is to grow the port to $150,000 by August of the year 2017. 

**Transactions in progress:
11/24/97: $100 sent to purchase more Intel.

The Drip Portfolio has been divided into 
37.063 shares with an average purchase
price of $24.283 per share.