1. Sector Presentation: Consumer Discretionary
Martin Perrier
June 27, 2013

2. Agenda Sector Overview Business Analysis Economic Analysis
9/17/2018
Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Conclusion
Martin Perrier

3. 9/17/2018
Martin Perrier
Sector Overview

4. Consumer Discretionary: Definition
Companies selling non-essential goods and services from various industries:
Retailing
Media
Consumer Services
Consumer Durables & Apparel
Automobiles & Components
Very cyclical sector, performing much better in a thriving economy (unlike Consumer Staples).
9/17/2018
Martin Perrier

5. Largest companies Company Market Cap Toyota Motor Corporation (ADR)
186.97B
The Walt Disney Company
113.84B
The Home Depot, Inc.
110.54B
Comcast Corporation
105.84B
McDonald's Corporation
99.09B
News Corp
84.82B
Honda Motor Co Ltd (ADR)
65.62B
Ford Motor Company
60.11B
NIKE, Inc.
55.27B
9/17/2018
Martin Perrier

6. Sector size Market Cap of $3.5T 82 constituents
9/17/2018
Martin Perrier
Key element: Sector overweighted in the SIM portfolio by 0.86%

7. Sector performance Key element: Outperforming the S&P 9/17/2018
Martin Perrier

8. Sector performance Key element:
9/17/2018
Martin Perrier
Key element:
Systematically outperforming the benchmark over the past five years (higher gains, lower losses).
Only 2nd to Financials as best performing sector (ttm).

9. 9/17/2018
Martin Perrier
Business Analysis

10. Life cycle Key elements: Maturity/stabilization in developed countries
9/17/2018
Developed countries
Developing countries
Martin Perrier
Key elements:
Maturity/stabilization in developed countries
Growth phase in developing countries

11. Business Cycle Key elements:
9/17/2018
Martin Perrier
Key elements:
Sector performing better at an early phase of the business cycle

12. Michael Porter’s 5 forces
Strategic force
Strength
Explanation
Power of buyers
High
+ ‘Discretionary’ goods for consumers
+ Supply levels based mainly on forecasts
+ No obligation toward any brand, product or service (low switching costs)
Power of suppliers
Medium
+ Depends on industry, but typically multiple vendors with low pricing power
+ High raw material costs (oil, materials…)
- Labor costs still low, globally
- Online activities skipping the middle man
Threat of substitutes
+ Immense base of available substitutes
+ Discretionary goods and services with low switching costs
+ Desire for innovation and low prices, negligence toward loyalty
Intensity of rivalry
+ Intense competition among established players due to low switching costs, easy access to price comparisons (online, etc…)
+ Mature customer base (except for emerging markets)
+ Fast low-cost copycat over any innovative product or service
Threat of new entrants
Low
- Economies of scale provide significant advantages
- Many established brands control market
9/17/2018
Martin Perrier

13. 9/17/2018
Martin Perrier
Economic Analysis

14. Economic comparisons Key elements:
9/17/2018
Martin Perrier
Key elements:
Evolution somewhat correlated with the three indexes
Much faster growth of the sector over the past 6 to 12 months

15. Economic comparisons
9/17/2018
Martin Perrier

16. Economic Analysis Key elements: Hypothesis:
Performance of the sector somewhat correlated to the related economic data analyzed over the past 10 years
Last 6 to 12 month performance does not follow the pattern (but the phenomenon is identical for all comparisons)
Similar curve for the benchmark but slightly below
Hypothesis:
The sector performance is finally not correlated to the previously mentioned data (hard to believe)
The sector is overvalued (market too optimistic)
The market is rightfully optimistic (ideal phase of business cycle)
9/17/2018
Martin Perrier

17. 9/17/2018
Martin Perrier
Financial Analysis

18. Revenues per share
9/17/2018
Martin Perrier
Obvious Cyclicality. Upward trend likely to continue for a while.

19. Revenues per share
9/17/2018
Martin Perrier

20. Net profit margin (absolute and relative to S&P)
9/17/2018
Martin Perrier
Sector’s net profit margin historically below the benchmark’s, but currently at an all-time high (6.4% and 0.7 relatively to the S&P)

21. Earnings per Share (EPS) (Absolute $ and y-to-y growth)
9/17/2018
Martin Perrier
Key element: EPS growth in line with historic median (10%) for 2012…

22. Earnings per share (EPS)
9/17/2018
Martin Perrier
…but increasing to 17% in 2014 (estimate).

23. Cash flow to earnings
9/17/2018
Martin Perrier
Key element: a stable CF/E ratio over 1 means that earnings and cash flow grow at the same rate, which is a guarantee of sound earnings

24. Return On Equity (ROE) Key elements: Increasing ROE (20.3%)
9/17/2018
Martin Perrier
Key elements:
Increasing ROE (20.3%)
Sector’s ROE higher than S&P’s since 2011

25. 9/17/2018
Martin Perrier
Valuation analysis

26. Multiple valuation (10 years)
Absolute Basis
High
Low
Median
Current
P/Trailing E
53.7
13.9
20.0
19.7
P/Forward E
44.1
13.0
17.4
17.3
P/B
4.0
1.5
2.5
3.9
P/S
1.3
0.4
0.9
P/CF
11.9
5.7
9.1
9/17/2018
Relative to SP500
High
Low
Median
Current
P/Trailing E
3.9
1.1
1.2
1.3
P/Forward E
3.0
1.0
P/B
1.7
0.7
1.6
P/S
0.9
0.5
0.6
P/CF
Martin Perrier
Key elements:
Current multiples slightly higher than historic medians
Trading at a premium relatively to the benchmark

27. Sector relative to S&P 500 Price to CF = 1.1 Price to Book 1.6
9/17/2018
Price to CF = 1.1
Price to Book 1.6
Martin Perrier
Key elements:
Previously at a discount but recently at a premium
Likely correlation with the early phase of the business cycle

28. Sector relative to S&P 500 Price to sales = 0.9 Trailing P/E =1.3
9/17/2018
Price to sales = 0.9
Trailing P/E =1.3
Martin Perrier
Key elements:
Price to sales getting closer to 1 (relative to S&P)
Sector overall at a premium (unlike historic data), risk of overvaluation

29. Variations among industries
Industry
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Cable & satellite
(Relative to Sector)
1.0 .9 .1
1.2 .5
Comcast (relative to ind.)
1.1 .6
0.9
Cablevision (relative to ind.)
.89
.83
n/a .4 .8
9/17/2018
Industry
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Retail Apparel
(Relative to Sector)
1.0
1.6
1.1
A&F (relative to ind.) .8 .3 .7 .6
Urban Outfitters (relative to ind.)
1.3
1.2
1.7
Martin Perrier

30. Variations among industries
Industry
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Department Stores
(Relative to Sector) .8 .9 .7 .4
Macy’s (relative to ind.)
1.1
1.3
Nordstroms (relative to ind.)
1.0
1.8
1.2
9/17/2018
Industry
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Automobile Manufacturers
(Relative to Sector) .5 .6
0.7 .3 .7
GM (relative to ind.)
1.0 .9
Ford (relative to ind.)
1.4
Martin Perrier

31. Automobiles relative to sector
Trailing P/E: extreme volatility
9/17/2018
Martin Perrier

32. Relative valuation Key elements:
Some significant variations of industries compared to sector showing a certain volatility (automobiles manufacturers) but industries generally in-line with the sector
Upward trend of all multiples relatively to the S&P, due to the end of recession
Trend likely to continue for a while before next expansion phase
9/17/2018
Martin Perrier

33. 9/17/2018
Martin Perrier
Conclusion

34. Recommendation: sector
Sector currently overweighted in the SIM portfolio (85 basis points)
Outperforming the S&P for the past 5 years
Upward trend, likely to continue with the recovery of the economy
Positive financial indicators (all-time high net profit margin, increasing EPS, sound cash flow ratios…)
However, the recovery phase also means the end of the sector’s ideal phase on the market. There is also a risk of overvaluation.
Recommend a HOLD with a SIM weight slightly above the weight in S&P 500.
9/17/2018
Martin Perrier

35. Recommendation: industries
Focus on Cable&Satellite (SIM positions on Comcast and DirecTV)
Be careful with automobiles manufacturing industry, extremely volatile (SIM positions on Ford)
Other SIM positions on the sector: Starbucks, Dollar General
9/17/2018
5-year price evolution of the two industries:
Automobiles Manufacturers Cable & Satellite
Martin Perrier

36. 9/17/2018
Thank you!
Martin Perrier