Kurt Brown René Hegglin Shengbo Mao Consumer Staples Sector Presentation THE STOCK MARKET

Agenda Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Q&A 9/15/20152Consumer Staples Sector Presentation

Basics Consumer Staples - the industries that manufacture and sell food/beverages, tobacco, prescription drugs and household products (Investopedia) Outperform the market in bear markets and underperform in bull markets Not an exciting sector – Stable returns – Diversification benefits – low beta 9/15/20153Consumer Staples Sector Presentation

Size and Composition

S&P 500 Sectors Consumer staples are currently 11.7% of the S&P 500 9/15/20155Consumer Staples Sector Presentation

Largest Consumer Staples Companies RankCompanyMarket Capitalization ( )% of Sector 1Wal-Mart Stores, Inc.$194.7 billion15.8% 2Proctor & Gamble Co.$169.7 billion13.8% 3Coca-Cola Co.$125.3 billion10.2% 4PepsiCo, Inc.$96.0 billion7.8% 5Philip Morris International, Inc.$95.7 billion7.8% 6CVS Caremark Corp.$54.5 billion4.4% 7Kraft Foods, Inc.$40.0 billion3.2% 8Colgate-Palmolive Co.$39.6 billion3.2% 9Walgreen Co.$39.2 billion3.2% 10Altria Group, Inc.$37.7 billion3.0% 27Safeway, Inc.$9.1 billion0.7% The three largest companies account for nearly 40% of the consumer staples market cap. 9/15/20156Consumer Staples Sector Presentation

Sector Performance QTD ReturnYTD Return2008 Return S&P %19.5%(38.5%) Energy7.9%14.3%(35.9%) Materials1.9%38.4%(47.0%) Industrials0.6%12.6%(41.5%) Consumer Discretionary2.6%31.1%(34.7%) Consumer Staples2.0%8.9%(17.8%) Health Care0.0%7.8%(24.5%) Financials0.9%20.3%(56.9%) Information Technology3.2%49.5%(43.7%) Telecom Services(4.8%)(7.7%)(33.6%) Utilities0.4%1.1%(31.5%) 9/15/20157Consumer Staples Sector Presentation

Outperforming in bear markets 9/15/2015Consumer Staples Sector Presentation8

Underperforming in bullish markets 9/15/2015Consumer Staples Sector Presentation9

Relative Performance 9/15/2015Consumer Staples Sector Presentation10

Industry% of SectorYTD ReturnCompany Agriculture Products1.7%4.0%Archer-Daniels Midland Brewers0.7%2.1%Molson Coors Brewing Distillers & Vintners0.8%(1.9%)Constellation Brands Drug Retail8.5%43.2%CVS Caremark Food Distributors1.4%18.3%Sysco Food Retail3.1%8.1%Kroger Household Products21.5%(1.9%)Proctor & Gamble HyperMarkets/SuperCenters12.2%(5.6%)Wal-Mart Stores Packaged Foods & Meats12.4%9.7%Kraft Personal Products1.7%39.1%Avon Products Soft Drinks21.9%21.0%Coca-Cola Tobacco14.2%19.8%Philip Morris There are currently 41 companies in the consumer staples sector. Consumer Staples Industries 9/15/201511Consumer Staples Sector Presentation

Business Analysis

9/15/2015Consumer Staples Sector Presentation13 Life Cycle

9/15/2015Consumer Staples Sector Presentation14 Stable inelastic demand based on consumer needs(less sensitive to economic cycles) Defensive (non-cyclical) – Hedge against economic downturn

9/15/2015Consumer Staples Sector Presentation15 Industry Characteristics High barriers to entry – Dominated by large, well-established companies – Tremendous capital requirements – Takes a long time to reach EOS – Hard to build wide distribution networks High buyer power – Not well differentiated product – Low switching cost

9/15/2015Consumer Staples Sector Presentation16 Low supplier power – Long-term contracting/agreements common – Companies such as Wal-Mart have huge bargaining power High threat of substitution – Multiple brands competing in same segment Intensive competition – Consumers are price sensitive (despite brand loyalty) with undifferentiated products

9/15/2015Consumer Staples Sector Presentation17 Growth Opportunities Sector relying on international expansion to spur growth. Branding is the key - powerful brand names command significant price premiums to similar generic labels

Economic Analysis

9/15/2015Consumer Staples Sector Presentation19 Possible External Factors Exchange Rates (Strength of dollar) Commodity Prices GDP growth CPI and Inflation Unemployment Rate Trade Balance Others Factors?

9/15/2015Consumer Staples Sector Presentation20 Model Basis Variables regarded do not fulfill Gauss-Markov requirements to compute a Multiple Regression, but a Probit model allows a rough estimate Research question: Under which circumstances (changes in economic variables) does the consumer staples sector outperform the S&P500? Variables regarded include: Consumer Price Index, Producer Price Index, M2 Money Supply, Spread of 10year-2year Treasury Bill rate, Real GDP growth rate, Consumer Confidence, Unemployment Rate, Savings Rate, Trade Weighted Dollar Value, Trade Balance

Probit Model 9/15/2015Consumer Staples Sector Presentation21

Probit Model Output Call: glm(formula = dummy ~ cpi + ppi + m2_money + I(rf_10 - rf_2) + gdp_growth + cons_conf + unemp + saving_rate + dollar + trade_bal, family = binomial(link = "probit")) Coefficients: Estimate Std. Error z value Pr(>|z|) (Intercept) cpi * ppi m2_money I(rf_10 - rf_2) gdp_growth cons_conf unemp saving_rate * dollar trade_bal Signif. codes: 0 ‘***’ ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 9/15/2015Consumer Staples Sector Presentation22

Financial Analysis

Revenue Consumer Staples 9/15/2015Consumer Staples Sector Presentation24

EBITDA Margins 9/15/2015Consumer Staples Sector Presentation25

Return On Equity 9/15/2015Consumer Staples Sector Presentation26

Valuation

Absolute Ratios Price/Sales Price/Book 9/15/201528Consumer Staples Sector Presentation

Relative to S&P 500 Price/Sales Price/Book 9/15/201529Consumer Staples Sector Presentation

Valuation by Industry IndustryP/E Change from Median Agriculture Products(22%) Brewers(25%) Distillers & Vintners(24%) Drug Retail(35%) Food Distributors(26%) Food Retail(13%) Household Products(28%) HyperMarkets/SuperCenters(13%) Packaged Foods & Meats(24%) Personal Products(19%) Soft Drinks(23%) Tobacco4% These percentages were similar across other ratios like P/S, P/B and P/CF 9/15/201530Consumer Staples Sector Presentation

Recommendation

SIM Portfolio SectorS&P 500 WeightSIM Weight+/- Consumer Discretionary9.11%7.72%-1.39% Consumer Staples11.54%11.48%-0.06% Energy11.70%12.00%0.29% Financials15.23%6.65%-8.57% Health Care13.11% -0.01% Industrials10.26%12.91%2.64% Information Technology18.65%21.73%3.08% Materials3.50%4.99%1.48% Telecom Services3.17%3.70%0.53% Utilities3.72%3.30%-0.42% Values based off of September 30, 2009 report 9/15/201532Consumer Staples Sector Presentation

Recommendation Increase weight of consumer staples by 26 basis points – Slow economic recovery – The market has recovered too much too quickly Will see a small correction fairly soon – Exposure to international growth 9/15/201533Consumer Staples Sector Presentation

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