Consumer Staples Sector Presentation Des Dudaney Erica Elsasser Neil Hertenstein Mun Ye See Tho April 27 th, 2010
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition 1.Size and Composition 2.Business Analysis 3.Economic Analysis 4.Financial Analysis 5.Valuation Analysis 6.Recommendations Table of Contents
Size & Composition
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Market Capitalization S&P 500 = $10,768,340 million Consumer Staples = $1,185,205 million CS Sector accounts for 11.01% of S&P500 CS Sector accounts for 11.77% of SIM portfolio Size & Composition
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Sector Industries Agricultural Products Brewers Distillers & Vintners Drug Retail Food Distributors Food Retail Household Products Hyper Markets & Super Centers Packaged Foods & Meats Personal Products Soft Drinks Tobacco Size & Composition
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Top Companies in Sector Total Market Cap of these 5 companies is 60% of sector Size & Composition
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition CS Sector vs. SP500 YTD ---- Staples ---- S&P Size & Composition
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition CS Sector vs. Other Sectors YTD 1 st : Industrials = 15.52% 2 nd : Consumer Discretionary = 15.07% 3 rd : Financials = 13.49% 4 th : Info Tech = 5.07% 5 th : Consumer Staples = 4.74% 6 th : Materials = 3.52% 7 th : Energy = 3.33% 8 th : Health Care = 1.28% 9 th : Utilities = -4.12% 10 th : Telecom = -6.41% Size & Composition
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition QTD Performance SP500 = 1.94% 1 st : Cons Disc = 4.56% 2 nd : Info Tech = 3.35% 3 rd : Energy = 3.24% 4 th : Industrials = 2.73% 5 th : Financials = 2.41% 6 th : Materials = 1.09% 7 th : Utilities =.51% 8 th : Cons Stap = -.28% 9 th : Telecom = -.8% 10 th : Health Care = -1.57% Size & Composition
Business Analysis
Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Life Cycle Domestic International Business Analysis
Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Sector Overview Defensive Sector Stable returns and non-cyclical Performs well in recessionary environment and not as well in expansionary environment (relative to other sectors) Inelastic demand Consumer needs drive the sector Consumers will need food and personal products regardless of economic situation Business Analysis
Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Sector Characteristics Consumer Power Drives low margins Substitution is major threat Differentiation is relatively insignificant High Barriers of Entry Very saturated market Hard to get market share from strong, mature companies Extensive capital is required Business Analysis
Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Sector Characteristics Intensive Competition Consumers are very price sensitive regardless of brand names External Factors Commodity prices Climatic environment Regulatory environment, both domestically and abroad Business Analysis
Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Future Opportunities International expansion is primary growth opportunity Wal-Mart – India provides great expansion opportunity Brand differentiation Hard to achieve, but better chance in personal product line – Tide detergent vs. Great Value detergent Business Analysis
Economic Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition 10-Year Strong Correlation Coefficients Economic Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition 10-Year Modest Correlation Coefficients Economic Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition 10-Year Weak Correlation Coefficients Economic Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Overall Economic Indication -Trade balance with China could cause increases in price of staples -Case-Schiller Index indicates a possible increase -The effect of the trade weighted dollar indicates a potential increase in prices -Weakening Euro indicates a possible decrease in prices -Growth of CPI Gas and Electricity indicate growth potential -Public Construction of Highways/Non-residential construction decline indicate a potential negative effect Economic Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Overall Economic Indication (Continued) -Many factors indicate a decrease: -Consumer confidence indicates a decrease -Real consumer spending indicates a decrease -Disposable income indicates a decrease -Labor force participation indicates a decrease -30-Yr bond rates indicate a decrease -Economic factors that are not correlated to staples (without lead or lag time): -Consumer spending, CPI, GDP, (un)employment, federal funds rate Economic Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples vs. S&P 500 Economic Analysis ---- Staples ---- S&P
Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Sector – Revenue per share Although Revenue per share is growing, the growth rate is decreasing. Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition S&P 500 – Revenue per share Growth rate has been declining. Revenue per share decreased in the previous year. Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm-e ndations Size & Composition Consumer Staples - EPS Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm-e ndations Size & Composition S&P EPS EPS is improving. EPS growth rate has two low peak around 2001 and Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Sector - EBITDA Relative to the S&P 500, decreased in the previous year. Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Sector - ROE Decreased in the previous year, relative to the S&P 500. Has been declining from Increasing gradually since 2008 Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Sector – Net Profit Margin Relative to the S&P 500, it increased between Financial Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Financial Analysis Summary Revenue per share is to increase, but growth rate is to continue to decrease. EPS is to continue to increase gradually, but growth rate is to decrease. EBITDA is to improve but relative to the S&P 500, it is to continue to decrease. ROE is to improve slightly but relative to the S&P 500, it is to continue to decrease. Net Profit Margin is to improve slightly but relative to the S&P 500, it is to continue to decrease. Financial Analysis
Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Sector Valuation Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple by Industry: Trailing P/E Lowest Current Trailing P/E – Brewers at 11.6x Highest Current Trailing P/E – Personal Products at 23.2x Current sector and industry Trailing P/E levels are lower than their medians except for Tobacco Current Trailing P/E of Food Distributors, Hypermarkets, Distillers & Vintners, Softdrinks and Personal Products are higher than the sector. Current Trailing P/E cheap relative to the S&P 500 except for Personal Products at 1.3. Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple by Industry: Forward P/E Lowest Current Forward P/E – Agricultural products at 9.6x Highest Current Forward P/E – Personal Products at 18.6x Current sector and industry Forward P/E levels are lower than their medians except for Tobacco Current Forward P/E of Drug Retailers, Brewers, Agricultural Products and Tobacco are lower than the sector. Current Forward P/E are higher relative to the S&P 500 except for Personal Products. Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple by Industry: Price-to-Book Lowest Current Price-to-Book– Brewers and Agricultural products at 1.2x Highest Current Price-to-Book – Tobacco at 11.9x Current sector and industry Price-to-Book levels are lower than their medians except for Tobacco c Current Price-to-Book of Softdrinks, Tobacco and Personal Products are higher than the sector. Current Price-to-Book are higher relative to the S&P 500 except for Drug Retail, Brewers and Agricultural Products. Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple by Industry: Price-to-Sales Lowest Current Price-to-Sales– Food Retail at 0.2x Highest Current Price-to-Sales – Tobacco at 2.7x Current sector and industry Price-to-Sales levels are lower than their medians except for Brewers and Tobacco Current Price-to-Sales of Brewers, Soft Drinks Tobacco and Household Products are much higher than the sector. Current Price-to-Sales levels are mixed relative to the S&P 500. Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple by Industry: Price-to-Cashflow Lowest Current Price-to-Cashflow– Food Retail at 5.7x Highest Current Price-to- Price-to-Cashflow– Personal Products at 16.1x Current sector and industry Price-to-Cashflow levels are lower than their medians except for Tobacco. Current Price-to-Cashflow of Food Distributors, Soft Drinks and Tobacco are much higher than the sector. Current Price-to-Cashflow levels are generally higher relative to the S&P 500. Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple Company Valuation Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple Company Valuation Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staple Company Valuation NameTrailing P/EForward P/EPrice to BookPrice to Sales Price to Cashflow Tobacco Altria Group Inc Lorillard Inc NM Philip Morris International Inc Reynolds American Inc Tobacco Valuation Household Products Clorox Co Colgate-Palmolive Co Kimberly-Clark Corp Procter & Gamble Co/The Household Products Valuation Personal Products Avon Products Inc Estee Lauder Cos Inc/The Personal Products Valuation Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Valuation Trends Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Valuation Trends Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Valuation Trends Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Five-Year Technical Chart Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Six-Month Technical Chart Valuation Analysis
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Consumer Staples Valuation Analysis Summary Industry valuations within the sector vary widely. Company valuations in some industries can vary widely. Most industry current valuations are lower than the long-term historical medians except for the Tobacco Industry. The valuation ratios are trending upward from the lows of The upward trend should continue as the economy continue to improve. The S&P 500 Consumer Staples index looks like it is moving towards the bottom of the band. Relative Strength Index of the sector is between Valuation Analysis
Recommendations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Recommendation Underweight consumer staples by 31 basis points under the S&P Sell 107 basis points to bring staples to 10.7% of SIM portfolio Why? Returns will be lower than that of the S&P if market trends continue Gap between returns of S&P 500 and returns of sector will widen as the economy continues to expand Market expectations are rising By underweighting our sector, we will be able to overweight cyclical sectors that will outperform the S&P Risks: W recession Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition 1 Year Industry Returns Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition 2 Year Industry Returns Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Brewers Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Personal Products Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Hypermarkets Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition Agriculture Products Recomm- endations
Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm- endations Size & Composition S&P Industry Weights Recomm- endations
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