consumer staples sector presentation des dudaney erica elsasser neil hertenstein mun ye see tho...

Consumer StaplesSector Presentation

Des DudaneyErica ElsasserNeil HertensteinMun Ye See Tho

April 27th, 2010

Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomm-endationsSize & Composition

1. Size and Composition2. Business Analysis3. Economic Analysis4. Financial Analysis5. Valuation Analysis6. Recommendations

Table of Contents

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

Energy11.03%

Materials3.46%

Industrials10.59%

Con Disc10.30%

Con Stap11.01%Health Care

11.74%

Financials16.60%

Info Tech19.14%

Telecom2.73%

Utilities3.41%

S&P 500 Energy10.10%

Materials1.80%

Industrials13.03%

Con Disc9.53%

Con Stap11.77%

Health Care

15.27%

Financials11.93%

Info Tech19.87%

Telecom3.62%

Utilities1.88% Cash

1.14%Dividends

0.06%

SIM Portfolio


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

TobaccoSize & Composition


Top Companies in Sector

203.4

182.55

126.71

103.8395.44

0

50

100

150

200

250

Wal-Mart Proctor&Gamble Coca Cola Pepsi Phillip Morris

Total Market Cap of these 5 companies is 60% of sector

Size & Composition


CS Sector vs. SP500 YTD

---- Staples---- S&P

Size & Composition


CS Sector vs. Other Sectors YTD1st: Industrials = 15.52%

2nd: Consumer Discretionary = 15.07%

3rd: Financials = 13.49%

4th: Info Tech = 5.07%

5th: Consumer Staples = 4.74%

6th: Materials = 3.52%

7th: Energy = 3.33%

8th: Health Care = 1.28%

9th: Utilities = -4.12%

10th: Telecom = -6.41%Size & Composition


QTD Performance

SP500 = 1.94%

1st: Cons Disc = 4.56%

2nd: Info Tech = 3.35%

3rd: Energy = 3.24%

4th: Industrials = 2.73%

5th: Financials = 2.41%

6th: Materials = 1.09%

7th: Utilities = .51%

8th: Cons Stap = -.28%

9th: Telecom = -.8%

10th: Health Care = -1.57%

Size & Composition

Business Analysis


Life Cycle

Domestic

Intern

ationa

l

Business Analysis


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


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


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


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


10-Year Strong Correlation Coefficients

Economic AnalysisEconomic Analysis

Economic Variable Sector ProjectionTrade Balance with China -0.81 Balance narrowsCPI: Gas & Electricity 0.79 Growth expectedDollars / Euro 0.78 Euro is weakeningPublic Construction: Highways 0.76 DecreasingTrade Weighted Dollar -0.75 Dollar is weakeningNon-Residential Construction 0.64 DecliningTrade Balance -0.64 WideningCase Shiller Index -0.59 Continue to fallLabor Force Participation -0.57 On the riseConsumer Bankruptcies -0.57 Going downInventory/Sales Ratio -0.56 Decreasing


10-Year Modest Correlation Coefficients


Economic Variable Sector Projection30-Year Bond Rates -0.46 ImprovingGDP Growth- Consumption -0.45 SteadyTrade Deficit -0.43 Further trade deficit expectedHousing Starts -0.42 SteadyReal Consumer Spending -0.41 RiseS&P 500 Price 0.39 RiseReal Disposable Income -0.38 RiseInterest Rate Spread -0.34 NarrowConsumer Confidence -0.32 Increase


10-Year Weak Correlation Coefficients


Economic Variable Sector ProjectionVelocity of Money -0.26 Slowly decliningYen per dollar -0.21 Dollar is weakening vs. YenConsumer Spending -0.19 RisingUnemployment 0.15 SteadyReal GDP -0.14 IncreasingConsumer Price Index 0.14 Steady with possible increaseNominal GDP -0.11 IncreasingEmployment -0.1 IncreaseFederal Funds Rate -0.07 Increasing steadily


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



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



Consumer Staples vs. S&P 500


---- Staples---- S&P

Financial Analysis


Consumer Staples Sector – Revenue per share

•Although Revenue per share is growing, the growth rate is decreasing.

Financial AnalysisFinancial Analysis


S&P 500 – Revenue per share

•Growth rate has been declining.

•Revenue per share decreased in the previous year.



Consumer Staples - EPS



S&P 500 - EPS

•EPS is improving.

•EPS growth rate has two low peak around 2001 and 2008.



Consumer Staples Sector - EBITDA

•Relative to the S&P 500, decreased in the previous year.



Consumer Staples Sector - ROE

•Decreased in the previous year, relative to the S&P 500.•Has been declining from 2001-2007•Increasing gradually since 2008



Consumer Staples Sector – Net Profit Margin

•Relative to the S&P 500, it increased between 2007-2009.



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.


Valuation Analysis


Consumer Staples Sector Valuation

Valuation AnalysisValuation Analysis


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.



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.



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 Tobaccoc

• 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.



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.



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.



Consumer Staple Company Valuation

NameTrailing

P/EForward

P/E

Price to

BookPrice to Sales

Price to Cashflow

Drug RetailCVS Caremark Corp 14.00 13.2 1.4 0.5 10.1Walgreen Co 16.30 14.8 2.4 0.5 11.2Drug Retail Industry Valuation 14.90 14.2 1.7 0.5 10.6

Food DistributorsSysco Corp 17.10 16.1 4.4 0.5 12.2

Food RetailKroger Co/The 13.80 13.5 3.1 0.2 5.8Safeway Inc 16.70 15 2.1 0.3 5.8SUPERVALU Inc 8.10 8.8 1.1 0.1 2.5Whole Foods Market Inc 39.50 30.8 3.2 0.8 15.5Food Retail Industry - Valuation 14.80 14.7 2.3 0.2 5.7

Hypermarkets & Super CentersCostco Wholesale Corp 22.70 19.8 2.5 0.4 13.6Wal-Mart Stores Inc 14.90 13.7 2.9 0.5 9.8Hypermarkets & Super Centers Industry Valuation16.00 14.6 2.6 0.3 10.4

BrewersMolson Coors Brewing Co 11.60 12.6 1.2 2.7 9

Distillers & VintnersBrown-Forman Corp 18.70 18.1 4.6 2.7 16.6Constellation Brands Inc 10.90 10.9 1.3 1.2 7.7Distillers & Vintners Industry Valuation 16.50 15.1 2.5 1.5 11.8




NameTrailing

P/EForward

P/E

Price to

Book

Price to

SalesPrice to

Cashflow

Soft DrinksCoca-Cola Co/The 17.00 15.5 5 4 14.5Coca-Cola Enterprises Inc 17.50 16 16 0.6 7.5Dr Pepper Snapple Group Inc 17.00 14.1 2.7 1.5 11.7PepsiCo Inc/NC 17.20 15.1 6.1 2.4 13.6Soft Drinks Industry Valuation 17.50 15.6 5.4 2.1 13.9

Agricultural ProductsArcher-Daniels-Midland Co 12.60 10.1 1.2 0.3 8.1

Packaged Foods & MeatsCampbell Soup Co 15.00 14.2 11.9 1.6 11.4ConAgra Foods Inc 14.30 13.5 2.2 0.9 10Dean Foods Co 10.20 10.6 2.2 0.3 5.4General Mills Inc 15.00 15 3.7 1.6 11.5Hershey Co/The 19.80 14.5 13.8 2 14.9HJ Heinz Co 16.60 15.6 8.1 1.4 12.5Hormel Foods Corp 14.60 14.9 2.4 0.8 10.9JM Smucker Co/The 14.40 15 1.4 1.6 10.7Kellogg Co 17.10 15.1 9.1 1.6 12.9Kraft Foods Inc 14.80 14.6 1.7 1.3 11.7McCormick & Co Inc/MD 16.40 15.4 4 1.6 12.5Mead Johnson Nutrition Co 23.70 22.3 NM 3.8 21Sara Lee Corp 14.20 13.1 3.4 0.8 8.4Tyson Foods Inc 20.70 13 1.6 0.3 8.8Packaged Foods & Meats Industry Valuation 15.80 15.2 2.8 0.9 11.5




Name Trailing P/E Forward P/E Price to Book Price to SalesPrice to

Cashflow Tobacco Altria Group Inc 11.90 11.20 10.50 1.80 11.00Lorillard Inc 13.90 12.50NM 2.30 13.40

Philip Morris International Inc 14.80 13.10 15.3 3.70 13.10Reynolds American Inc 11.80 11.40 2.5 1.90 10.70Tobacco Valuation 13.70 12.60 11.9 2.70 12.70 Household Products Clorox Co 15.50 14.70 60.30 1.60 11.70Colgate-Palmolive Co 19.20 17.40 14.10 2.70 16.50Kimberly-Clark Corp 12.50 12.60 4.60 1.30 9.10Procter & Gamble Co/The 15.20 16.80 2.70 2.40 12.10

Household Products Valuation 15.40 15.30 3.40 2.20 12.20 Personal Products Avon Products Inc 18.60 16.20 11.10 1.40 15.10Estee Lauder Cos Inc/The 27.70 23.60 6.90 1.80 18.20

Personal Products Valuation 23.20 18.60 9.00 1.40 16.10



Consumer Staples Valuation Trends



Consumer Staples Five-Year Technical Chart



Consumer Staples Six-Month Technical Chart



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 2009.

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 30-70.


Recommendations


Recommendation

Underweight consumer staples by 31 basis points under the S&PSell 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-endationsRecomm-endations


1 Year Industry Returns



2 Year Industry Returns



Brewers



Personal Products



Hypermarkets



Agriculture Products


Questions?

consumer staples sector presentation des dudaney erica elsasser neil hertenstein mun ye see tho...

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