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Consumer Staples (SP-30) Ryan Chestnut Brian Cully Sabina Curovac Orla Costello
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Consumer Staples Agenda ■ Sector Overview ■ Business Analysis ■ Economic Forecasts ■ Financial Analysis ■ Sector Valuation ■ Recommendation
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Consumer Staples Market Capitalization ■ Consumer Staples Sector = $924,124 million ■ S&P 500 = $7,192,455 million ■ Consumer Staples accounts for 12.85% of the S&P 500 ■ Consumer Staples accounts for 14.22% of the assets in SIM Portfolio. DescGICS®NCMKTCAPQTDYTD S&P 500 5007192455-8.57% Energy10391014055-3.16% Materials1529218994-7.24% Industrials2059763552-12.66% Consumer Discretionary2580589017-10.64% Consumer Staples3040924124-7.67% Health Care35541146392-1.30% Financials4081770678-26.55% Information Technology45751166403-3.08% Telecommunications Services509267760-11.06% Utilities5534331480-0.83% Source: standardandpoors.com
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Consumer Staples Consumer Staples vs. S&P 500 YTD
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Consumer Staples Industries Within Consumer Staples Sector Source: standardandpoors.com
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Consumer Staples Companies With Consumer Staples Sector Source: standardandpoors.com
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Consumer Staples Sector Overview ■ In theory, demand for consumer staples is steady or increases during economic downturn ■ Defensive sector of mature companies Historical correlation with S&P is 0.64 Stock price stability in downturns, but slow and steady growth in upswings ■ Low price elasticity of demand Importance of differentiation
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Consumer Staples Industry Characteristics ■ High Barriers to Entry Very high capital requirements Mature companies Strong brands put downward pressure on margins Threat of substitution International presence Remaining growth opportunities
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Consumer Staples Business Opportunities ■ Reduce (commodity) costs Hedge costs, merge or partner, create economies of scale ■ Reduce finished good prices to wholesalers Price differentiation important in slowdowns ■ Differentiate products “Superior” products can control prices Importance of branding Significant substitution threat
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Consumer Staples External Factors ■ Regulatory and legal issues ■ Foreign exchange prices Implications of weakness in the dollar ■ Aging domestic population, but global growth ■ Commodity prices ■ State of the economy ■ Environmental Factors
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Consumer Staples Economic Analysis – Main Economic Indicators
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Consumer Staples Economic Analysis (cont.) Source: Bloomberg Composite
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Consumer Staples Economic Analysis (cont.) Source: Bloomberg Composite
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Consumer Staples Economic Analysis (cont.) Source: Bespoke Investment Group
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Consumer Staples Foreign Currency Exchange
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Consumer Staples Foreign Currency Exchange (cont.) Consumer Staples
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Sector Sales Analysis ■ Sales Growth Current growth below 10-year average Current growth close to low of 5.8% experienced in early 2002 Downward trend since end of 2006, continues out to 12/31/2008 ■ Largest Companies in Sector Proctor & Gamble Currently at 5.5%, below 10 yr. average of 8.1% Downward trend since mid-2006 Wal-Mart Currently at 9%, below 10-yr. average of 11.7% Downward trend since beginning of 2007, with low (8.6%) occurring 1/31/08
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Consumer Staples Sector Earnings Analysis ■ Earnings Growth Very low relative to 10-year average EPS growth currently at 10 year low Large drop in EPS growth since 9/30/2007 ■ Largest Companies in Sector Proctor & Gamble Current growth at 12.1%, above 10-yr. average of 11.1% Growth falling since mid-2008; Lowest EPS growth (-1%) occurred in 2001 Wal-Mart Current growth at 11.4%, just under 10-yr. average of 12.5% EPS growth from mid-2007 to mid-2008, slight drop since
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Consumer Staples Sector Sales and Earnings Growth
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Consumer Staples Index Sales and Earnings Growth ■ Sales Growth Current growth right below 10-year average 7.6% compared to mean of 8% Downward trend since 9/30/2008 ■ Earnings Growth Current EPS growth negative, extremely low -16.7% compared to mean of 13.4% Currently near 10-year low of -17.3%, which occurred in the beginning of 2002 EPS growth plummeting since end of 2006
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Consumer Staples Index Sales and Earnings Growth Consumer Staples
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Comparison of Sales and Earnings
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Consumer Staples Margin Growth Analysis ■ YTY net profit margin growth for both at 10-year low Consumer Staples: -5% S&P 500: -22.8% ■ Downward trend in Consumer Staples starting in early 2006 ■ S&P 500 plummeting roughly one year later
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Consumer Staples Comparative Margin Growth
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Consumer Staples Consumer Staples has seen relatively constant margins but decreasing ROE from 2000-2007 S&P 500 has more volatile margins throughout the period and increasing ROE EBITDA range from 16.55% to 23.5%; EBIT range from 10.86% to 17.98% Comparative Income Statement Ratios
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Consumer Staples Free Cash Flow & Dividends ■ Free cash flow increasing from 2004-2007 ■ Dividends increasing Free cash flow after dividends decreasing most years Dividend yield increasing, currently at 10-year high
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Consumer Staples Sector Valuation Consumer Staples
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Sector Valuation (cont.) Consumer Staples
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Sector Valuation (cont.) Consumer Staples Historical Correlation with the S&P 500 is 0.64
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Consumer Staples Sector Valuation (cont.) Consumer Staples
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Recommendation ■ Keep current allocation, sector overweight relative to the S&P 500 by 175 basis points ■ Possibility of another market downturn followed by low volatility around the 8000 point mark ■ Higher return for the sector vs. the market in the next 3-4 months ■ We see the market having flat returns, and the consumer stables sector outperforming by 200-300 basis points ■ Attractive industries: Tobacco, Brewers Consumer Staples
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References ■ Bloomberg ■ Hoovers ■ Investopedia ■ Standard &Poor’s (www.standardandpoors.com) ■ StockVal ■ Value Line ■ Yahoo Finance (finance. yahoo.com) ■ Bespoke Investment Group ( http://bespokeinvest.com)
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Consumer Staples ■ Commodity Prices Supplemental Information Consumer Staples
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Supplemental Information Consumer Staples
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■ Future Earnings Estimates Consumer Staples Supplemental Information EPS200920102011 Mean2.842.983.28 High2.973.193.49 Low2.752.793.09 Number of Est13146 Number Up111 Number Down783
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