1. Consumer Staples Sector Clay Daney Subrahmanyam Darbha Summer 2013

2. Agenda Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis

3. Sector Overview Consumer Staples Sector (S5CONS) o Manufacturers of essential products such as food, beverages, tobacco, and household items o People are unable or unwilling to cut consumer staples out of their budget regardless of their financial situation. o Non-cyclical Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis

4. Industry Classifications TickerNameLast Price Market Cap Food & Staples Retailing (8 members) WMTWal-Mart Stores Inc$73.56 $243B CVSCVS Caremark Corp$57.52 $72B COSTCostco Wholesale Corp$108.08$48B Food Beverage & Tobacco (26 members) KOCoca-Cola Co/The$39.41$179B PMPhilip Morris International Inc$87.66$147B PEPPepsiCo Inc$79.62$125B Household & Personal Products (6 members) PGProcter & Gamble Co/The$75.95$212B CLColgate-Palmolive Co$56.13 $54B KMBKimberly-Clark Corp$94.35$37B Data as of:Mar 28 2013

5. The Key Players CompanyTickerLast Price (6-20-13)Market Cap Wal-Mart Stores IncWMT$73.56 $243B Procter & Gamble Co/ThePG$75.95 $212B Coca-Cola Co/TheKO$39.41$179B Philip Morris International IncPM$87.66$147B PepsiCo IncPEP$79.62$125B CVS Caremark CorpCVS$57.52$72B Altria Group IncMO$34.72$71B Colgate-Palmolive CoCL$56.13$54B Mondelez International IncMDLZ$28.68$43B Costco Wholesale CorpCOST$108.08$48B Walgreen CoWAG$48.93$47B

6. Data as of:May 13 2013 S&P 500SIM The Consumer Staples Sector The SIM portfolio is overweight consumer staples by 189 bps

7. QTD / YTD Performance PerformanceQTDYTD Consumer Staples2.67%16.81% S&P 5004.45%14.92% Data as of:Mar 28 2013

8. QTD Performance Data as of:Mar 28 2013

9. YTD Performance Data as of:Mar 28 2013

10. Business Analysis

11. Stock Market Cycles “Cyclical”cycles = 4 years “Secular” cycles = 30 years 2011 - beginning of a cyclical bull market. 2013 - tail end of cyclical bull market

12. Business Analysis: Supply & Demand Dynamics Low price elasticity of demand Low beta Low correlation to overall market Producers grow by: o Reducing costs o Reducing prices o Differentiating products Q: Why invest in staples? A: Slow and steady long term growth Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis

13. The user and geography Consumer Staples are essential products for consumers (domestic and foreign). People are unable or unwilling to cut consumer staples out of their budget regardless of their financial situation.

14. Porter’s Five Forces ForceCharacteristicsThreat level Competition-Low prices -Standardized products High New Entrants-Economies of Scale (high) -Barriers to entry (high) -Large Companies market share (high) Low Customer power-Price sensitivity (high) -Brand loyalty (low) -Best Value seekers (high) High Supplier power-Need for Low Input costs (high) -Raw material inexpensive Moderate Substitutes-Value products (low end prices) -Necessity products (fewer substitutes) High

15. Predictability and steadiness - helps match supply and demand closely Economies of scale - can be achieved relatively faster Non cyclical nature of the sector - steady growth with regular dividends throughout economic and business cycles Overall, the sector is well positioned for better profitability & pricing Economic Analysis: Profitability & Pricing Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis

16. Financial Analysis Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis

17. Correlation - Consumer Staples & Other SPX500 sectors ’09 -’12 S5CONSS5CONDS5HLTHS5FINLS5UTILS5ENRSS5INFTS5INDUS5TELSS5MATRSPX500 S5CONS1.00 S5COND0.981.00 S5HLTH0.980.951.00 S5FINL0.610.680.631.00 S5UTIL0.960.930.930.501.00 S5ENRS0.860.890.850.650.821.00 S5INFT0.960.980.940.730.910.871.00 S5INDU0.910.950.890.800.850.930.941.00 S5TELS0.930.910.910.500.910.830.860.831.00 S5MATR0.840.900.820.830.780.920.910.970.761.00 SPX5000.960.980.950.770.900.920.980.980.880.941.00 Weighted Moving Average of Price

18. Regression - Consumer Staples & Other SPX500 sectors ‘09-’12 Source | SS df MS Number of obs = 209 Source | SS df MS Number of obs = 209 -------------+------------------------------ F( 10, 198) =10983.87 Model | 378539.277 10 37853.9277 Prob > F = 0.0000 Model | 378539.277 10 37853.9277 Prob > F = 0.0000 Residual | 682.371554 198 3.44632098 R-squared = 0.9982 Residual | 682.371554 198 3.44632098 R-squared = 0.9982 -------------+------------------------------ Adj R-squared = 0.9981 Total | 379221.649 208 1823.181 Root MSE = 1.8564 Total | 379221.649 208 1823.181 Root MSE = 1.8564 ------------------------------------------------------------------------------ s5cons | Coef. Std. Err. t P>|t| [95% Conf. Interval] s5cons | Coef. Std. Err. t P>|t| [95% Conf. Interval]-------------+---------------------------------------------------------------- s5cond | -.5593398.0628114 -8.91 0.000 -.6832049 -.4354747 s5cond | -.5593398.0628114 -8.91 0.000 -.6832049 -.4354747 s5hlth | -.758003.0577293 -13.13 0.000 -.8718461 -.6441598 s5hlth | -.758003.0577293 -13.13 0.000 -.8718461 -.6441598 s5finl | -1.48988.0899044 -16.57 0.000 -1.667173 -1.312586 s5finl | -1.48988.0899044 -16.57 0.000 -1.667173 -1.312586 s5util |.0567482.0491653 1.15 0.250 -.0402066.1537031 s5util |.0567482.0491653 1.15 0.250 -.0402066.1537031 s5enrs | -.5348346.032419 -16.50 0.000 -.5987654 -.4709039 s5enrs | -.5348346.032419 -16.50 0.000 -.5987654 -.4709039 s5inft | -1.176365.0686285 -17.14 0.000 -1.311702 -1.041028 s5inft | -1.176365.0686285 -17.14 0.000 -1.311702 -1.041028 s5indu | -1.205989.066378 -18.17 0.000 -1.336888 -1.075091 s5indu | -1.205989.066378 -18.17 0.000 -1.336888 -1.075091 s5tels | -.7536217.0552162 -13.65 0.000 -.862509 -.6447344 s5tels | -.7536217.0552162 -13.65 0.000 -.862509 -.6447344 s5matr | -.2879355.0292043 -9.86 0.000 -.3455269 -.2303441 s5matr | -.2879355.0292043 -9.86 0.000 -.3455269 -.2303441 spx | 1.883624.1096506 17.18 0.000 1.667391 2.099857 spx | 1.883624.1096506 17.18 0.000 1.667391 2.099857 _cons | -34.93129 4.583659 -7.62 0.000 -43.97035 -25.89224 _cons | -34.93129 4.583659 -7.62 0.000 -43.97035 -25.89224------------------------------------------------------------------------------ Weighted Moving Average of Price

19. Reg., Corr., Ratio - Consumer Staples on SPX500 (past 5 yrs.)

20. Reg., Corr., Ratio - Consumer Staples on SPX500 (past 1 yr.)

21. Spread Analysis (5yrs.)

22. Spread Analysis (1yr.)

23. Total Returns (monthly) - Consumer Staples (past 5 yrs.)

24. Total Returns (monthly) - Consumer Staples vs. SPX500 (5 yrs.)

25. Interpretation of Valuation Metrics In general, Ratios/Margins are interpreted relative to other similar companies, Industry averages. Stability of these ratios over time is an important indicator of risk or other appropriate parameters. Eg. Profitability Ratios o Gross Profit Margin – relative cost to price standing o Operating Profit Margin – measure of profitability (creditworthiness) o Cash Flow to Sales – measure of productivity and creditworthiness o Return on Assets – measure of amount of income generated per total assets

26. Key highlights - valuation metrics & fundamentals Field CY 2014 CY 2013 Current CY 2012 CY 2011 CY 2010 CY 2009 CY 2008 CY 2007 Valuation Metrics P/E15.9517.5518.2816.0216.1715.5714.8814.1819.51 P/B4.044.254.473.823.713.423.313.363.99 EV/Sales1.271.331.351.221.241.211.141.041.4 EV/EBIT14.0812.6712.5812.1811.4310.9314.25 EV/EBITDA10.0410.7511.5510.3710.389.999.348.9611.58 Dividend Yield 2.982.952.873.232.93.182.93.012.34 Fundamentals Gross Margin 29.5229.6130.0830.9730.6329.7430.48 Op. Margin 9.59.559.579.89.919.479.74 Profit Margin 6.236.226.066.56.215.66.35 ROA10.369.818.348.248.399.589.359.449.16 ROE24.7924.2623.3722.8422.0224.2323.3522.6421.24 Periodicity: Annual; Currency: USD; Units: Billion

27. Key highlights - Leverage & Liquidity FieldCY2014 CY 2013 Current CY 2012 CY 2011 CY 2010 CY 2009 CY 2008 CY 2007 CY2006 Current Ratio 1.131.131.151.151.221.091.041.04 Net Debt to EBITDA 1.341.431.541.511.511.551.311.511.51.3 Total Debt To EV 0.180.190.190.20.180.210.160.14 Total Debt to Total Equity 87.6284.382.9178.5368.4282.9871.3663.12 Total Debt to Total Assets 31.3130.3829.9929.4227.2230.3627.9924.84 Periodicity: Annual; Currency: USD; Units: Billion

28. Fundamentals - Income Statement FieldCY2014 CY 2013 Current CY 2012 CY 2011 CY 2010 CY 2009 CY 2008 CY 2007 CY2006 Income & Expenses per Share Sales383.76367.23361.73348.87330.89297.51281.46288.18247.82211.38 Gross Margin % 32.7232.6629.5229.6130.0830.9730.6329.7430.4831.19 EBIT34.633.5832.4729.5428.127.4524.2720.52 Margin % 9.59.559.579.89.919.479.749.72 EBITDA48.545.3142.1541.0439.3836.0134.3533.4929.8825.56 11.6511.7611.912.112.2111.6212.0612.09 R&D Expense 1.751.711.561.551.611.761.491.41 Earnings26.4324.0123.0522.5120.7519.518.4317.415.3613.14 Earnings before XO 21.7821.1519.7518.8816.8114.4615.4313.05 Diluted Earnings from Cont. Ops 23.0522.5120.7519.518.4317.415.3613.14 Earnings, +ve 26.4324.0123.0522.5120.7519.518.4317.4415.3613.21 Periodicity: Annual; Currency: USD; Units: Billion

29. Fundamentals - Balance Sheet FieldCY2014 CY 2013 Current CY 2012 CY 2011 CY 2010 CY 2009 CY 2008 CY 2007 CY2006 Assets per Share Cash & Equivalents 19.9419.3716.3415.2312.9411.418.638.03 Current Assets 83.2182.5982.5371.663.5162.655749.62 Goodwill63.1161.6259.1456.2850.0547.7846.1831.6 Total Assets 273.43268.2261.81240.51212.73203.6193.93166.66 Liabilities & Equity per Share Current Liabilities 73.9473.0771.5962.552.1657.4655.0147.63 Total Debt 85.6281.4778.5170.7557.961.8254.2841.39 Total Liabilities 175.72171.55167.11150.41128.11129.18117.87101.09 Retained Earnings 36.0735.2136.2335.1734.725.1130.4932.68 Book Value 104.2499.1794.2994.4390.488.7782.8973.3475.0564.38 Tang Book Value -7.76-7.36-5.68-2.815.050.554.9917.22 Total Equity 97.7296.6494.790.0984.6274.5176.0665.58

30. Fundamentals - Cash Flow FieldCY2014 CY 2013 Current CY 2012 CY 2011 CY 2010 CY 2009 CY 2008 CY 2007 CY2006 Cash Flow Items per Share Cash From Operations 34.9131.7532.0631.2426.6825.6526.9823.6720.0118.82 Cash Flow From Investing -14.41-14.46-8.44-11.84-10.6-9.78-12.99-7.78 Cash From Financing -14.76-14.61-18.23-12.51-14.98-12.34-6.61-12.15 CapEx-10.47-10.15-9.75-9.49-9.84-8.55-8.63-9.44-8.95-7.81 Free Cash Flow 24.4421.6222.4121.821717.2118.3714.311.1311.03 Dividends12.5712.4312.0911.649.739.647.947.4275.87 Dividends, Gross 12.0911.649.739.647.947.4275.87 Dividends, Net 12.0911.649.739.647.947.4275.87 Reference Items FCF Yield 5.326.055.075.676.75.83.714.11 Dividend Yield 2.982.952.873.232.93.182.93.012.342.19 Periodicity: Annual; Currency: USD; Units: Billion

31. Financial Analysis: Margins

32. Operating Profit Margins

33. Gross Margins

34. T12M EBITDA Margins

35. Profit Margins

36. Financial Analysis: Earnings

37. Earnings per Share

38. Financial Analysis: Price Ratios

39. Price/FCF

40. Price/Earnings

41. Price/Book

42. Price/Sales

43. Current EV/T12M EBITDA

44. Financial Analysis: Equity Returns

45. Return on Assets

46. Return on Equity

47. Return on Capital

48. Financial Analysis: Income Statement

49. Revenues

50. Operating Profit Margins T12M

51. Valuation Analysis Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis

52. Sector Valuation - Absolute Absolute BasisMedianCurrent P/Trailing E18.0020.10 P/Forward E17.1017.60 P/B4.004.50 P/S1.001.10 P/CF12.6014.10 Relative Valuation Relative to SP500MedianCurrent P/Trailing E1.101.30 P/Forward E1.101.20 P/B1.601.80 P/S0.70 P/CF1.30 Sector is expensive relative to history Sector is expensive relative to S&P 500

53. Valuation Analysis Absolute Basis S&P 500 Consumer Staples WMT.ICVS.IKO.IPM.IPG.I Super centers Retail - Drugs Soft Drinks TobaccoHousehold Products P/Trailing E 15.119.016.616.420.919.5019.40 P/Forward E 14.416.615.313.917.914.9018.40 P/B2.34.23.52.15.5047.504.40 P/S1.41.00.400.602.403.502.40 P/CF1013.410.911.4014.6014.8015.0 Relative Valuation – Industries/Companies Valuation varies widely amongst industries and companies within the sector

54. Valuation Analysis

55. Recommendation The SIM portfolio should maintain its overweight to the Consumer Staples sector. o We recommend increasing the overweight from 189 bps to 250 bps. o We recommend trimming the portfolio’s exposure to financials and allocating those funds to consumer staples Rationale o The markets have run up significantly over the past 3 years. o When the current cyclical bull market turns, consumer staples will outperform other sectors with more cyclical exposure. o Earnings are more predictable than cyclical sectors o This makes consumer staples more attractive in the event of a market pullback.

56. Q & A

57. Appendix

58. Spread Analysis (5yrs.)