Consumer Staples: Stock Recommendations Robert Blake Jason Ebbing Rica Rahardjo

Agenda Recap of Sector Overview Recommendations Summary Questions

Where we left off… Mature slow growth defensive sector  Offers protection during economic downturns International markets key to growth Sector weights as of July 27th  S&P500: 9.36%  SIM: 7.78% (Underweight 158 bp) Recommended to further underweight by 50bp  Valuation indicates sector is not cheap  Sector faced with constricting margins  Believe economy will continue to grow  Opportunity to invest in higher growth sectors

Current Sector Holdings Company Ticker Symbol SIM SharesSIM % Current PriceValue Altria Group Inc.MO13, ,312 Anheuser-BuschBUD13, ,775 Colgate-Palmolive Co.CL4, ,405 Total Sector7.781,878,492 Company Ticker Symbol SIM SharesSIM % Current PriceValueAction Altria Group Inc.MO13, ,312None Anheuser-BuschBUD6, ,955Sell 137bp Colgate-Palmolive Co.CL7, ,755Buy 85bp Total Sector7.261,753,022 Return 52bp Proposed Sector Holdings

Recommendation #1: Reduce Anheuser-Busch Holdings

Anheuser-Busch Largest brewer in North America  48.8% market share Segments  U.S. Beer  International Beer  Packaging  Entertainment Growth opportunities  International expansion  Strategic investment in other beverage producers  Distribution agreements  Rumored merger with InBev

A-B Business Analysis Pros Strong brand  Successfully implemented pricing increases Massive distribution channel  Being leveraged to diversify product mix Strategic investments contributing to growth  Grupo Modelo generating much of BUD’s recent growth Consistent cash flows  Dividend yield of 2.70%  History of and planned stock buybacks which should boost stock price Cons North American growth flat  Accounts for majority of revenues Weakness in core brands Margins under pressure  Commodity, labor, marketing, and distribution costs increasing Expansion and diversification strategy is a wildcard  Growth so far has largely been just enough to offset declines in core brands

A-B Financial Analysis MultipleHighLowMeanCurrent Target Multiple Target/share valuePrice Price/Forward EPS Price/Sales Price/Book Price/EBITDA Price/Cash Flow Average51.05 Undervalued based on 5-year historical absolute multiples Average of target prices: $51.05  Yields a 4.9% upside from closing price of $48.65 on July 27 th Relative valuations imply that BUD is slightly undervalued

A-B Valuation & Technicals DCF model implies a value of $50.70/share  4.2% upside from July 27 th closing price Technical Analysis  Resistance around $55/share  50 Day Moving average - bearish  200 Day Moving average - bullish  Chart trending down - bearish

Anheuser-Busch Summary Lack of organic growth is cause for concern International growth slow in materializing Concerned BUD will need to make sizeable unplanned investments in marketing and expansion Valuation, performance, and market sentiment imply limited upside gains in the near term Recommend selling 137bp (50% of holding) Diversification and international endeavors could be catalysts for higher valuations Re-evaluate remaining position in 3 months

Recommendation #2: Increase Colgate-Palmolive Holdings

Colgate-Palmolive Large, mature consumer products company Segments  Oral, Personal, and Home Care  Pet Nutrition Growth Opportunities  International expansion  Possible merger talks with Unilever  Undergoing restructuring plan which includes increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets.

C-P Business Analysis Pros Strong brand recognition  Market leader in 53 of the 71 largest toothpaste markets worldwide Growth in foreign markets  Currently, 75% of sales are from international operations and growing Benefit of weak dollar  Makes goods cheaper to foreign buyers and increases earnings when translated back to dollars Benefits of restructuring  In the second quarter, earnings skyrocketed 49% to $0.76 per share. Excluding restructuring costs, Colgate earned $0.84 a share, compared to $0.72 a year ago.

C-P Business Analysis Cons Modest growth domestically  2 nd quarter sales increase over previous year: North America : 3.5%Europe/South Pacific : 17.0% Latin America: 16.0%Asia/Africa : 15.5% Pet food recall/counterfeit toothpaste hurting brand  Colgate has been proactive in restoring trust in brand Rising commodity prices/energy prices reduces net margin

Colgate (CL) Valuation  DCF model implies a value of $80.47/share 17.5% upside from July 27th closing price of $ % Dividend Yield  Price steadily increasing along the trend line

CL Financial Analysis Stock Valuation Absolute ValuationHighLowMeanCurrent#Your Target Multiple *Your Target E, S, B, etc/Share Your Target Price (F x G) A.B.C.D.E.F.G.H. P/Forward E P/S P/B P/EBITDA P/CF Average$73.70 Moderately undervalued based on 10-year historical absolute multiple measurements Average of target prices based on multiples: $ % upside from closing price of $68.45 on July 27th

Colgate Summary Generating higher earnings through restructuring plan Excellent international growth Market leader in their key segment (toothpaste) DCF target price: 80.47, 17.5% upside. Recommend buying 85 basis points (61.2% increase in current holdings)

Recommendation Summary Anheuser-Busch is fairly valued  Lacking a catalyst upside is currently limited  Sell 137bp now and re-evaluate position as information about diversification strategy is available Colgate offers an attractive upside  Company restructuring should boost growth  International exposure and weak dollar create a favorable environment for CL  Accumulate an additional 85bp Return 52bp for investment in other sectors

Questions

BACKUP SLIDES

A-B Absolute Valuation Charts

A-B Relative Valuation Charts

A-B Technical Chart

CL Relative Valuation Chart