Consumer Staples Presentation

Consumer Staples Presentation

August 4, 2009

Shane Connor

Josh Drushel

Jessica Kirwin

Agenda

Update of Sector Recommendation Stock Recommendations Summary Questions

Consumer Staples Recap

SIM Current Holdings – 11.65% S&P 500 – 11.81% Sector Characteristics– Stable demand – Defensive (non-cyclical)

International Growth could be a bonus Class approved 25 bps increase

Sector Holdings

Current Holdings

SIM – 11.65%

PepsiCo – 4.44%

Wal-Mart Stores Inc – 3.00%

Colgate Palmolive – 2.13%

Philip Morris Int’l – 2.09%

weights as of 7/31/09

Recommended Holdings

SIM – 11.90%

PepsiCo – 3.94%

Wal-Mart Stores Inc – 3.00%

Safeway – 2.88%

Philip Morris Int’l – 2.09%

Colgate-Palmolive (NYSE:CL)• Company Overview: CL has been manufacturing and

marketing consumer products worldwide since 1803.

It operates under two segments which are oral, personal,

and home care as well as pet nutrition.

• Recommendation: Sell 234 basis points

• Investment Thesis: CL is a very stable performer in both

good and bad economies, but due to the classes decision

that the economy is turning around we feel there are

much better opportunities that persist.

Industry: Personal and Household Products

Company Symbol Price /Earnings

Forward Price / Earnings

Price / Sales Dividend Yield

Industry Average 15.7 15.1 1.9 2.96%

Colgate-Palmolive CL 18 16.0 2.4 2.43%

Avon AVP 19.4 17.4 1.4 2.59%

Estee Lauder EL 19.9 24.1 .9 1.51%

Ecolab ECL 22.7 19.8 1.7 1.35%

Price TargetAbsolute Valuation

High Low Median Current # Your Target

Multiple

*Your Target E, S, B, etc/Share

Your Target Price

(F x G)

P/Forward E 21.9 13.7 19.1 16 17.68 4.12 72.84

P/S 3.2 1.9 2.6 2.4 2.53 32.62 82.53

P/B 48.8 13.9 23.4 20.5 26.65 2.73 72.87

P/EBITDA 16.5 8.83 11.83 10.46 11.9 5.65 67.23

P/CF 20.5 12.8 17.4 15.4 16.53 4.40 72.73

Average 73.64

DCF Discount Rate Terminal FCF Growth

CL 10% 3% 78.17

Final Price Target= 75% DCF PT + 25% Valuation PT= $77.03Closing price 8/4/09 = $72.21Implied Upside= Price Appreciation + Dividend Yield = 9.13%

Positives/Risks

• Positives

- Stable performer in all types of economies

- Potential for continued international growth

- Safe bet investment

• Risks - Recession may only be beginning internationally

- Continued loss of market share domestically

- Investing in CL and the economy completely turns around

Philip Morris Int’s (NYSE:PM)

Company Overview: PM is the leading international tobacco company with 7 of the world’s top 15 brands

Recommendation: Hold current position

Investment Thesis: PM is a stable performer

Industry: TobaccoCompany Symbol Price /

EarningsForward Price

/ EarningsPrice to Sales Price/Cash

Flow

Industry Average 13.1 12.6 2.7 11.4

Philip Morris Int’l PM 13.7 14.6 3.7 12.2

British American Tobacco BTI 13.4 12.5 2.9 -

Lorillard LO 12.9 12.3 2.7 12.5

Reynolds American RAI 9.0 9.6 1.5 8.1

As of 8/2/09

Price TargetAbsolute Valuation

High Low Median Current #Your Target

Multiple

*Your Target E,

S, B, etc/Share

Your Target Price

(F x G)P/Forward E 16.1 11.0 13.9 14.1 14.0 3.5 49.00

P/S 7.3 1.2 1.9 3.4 2.1 33.48 70.31P/B 14.6 7.2 8.4 14.6 12.0 3.01 36.12

P/EBITDA 11.98 2.87 9.4 8.8 9.2 5.0 46.00P/CF 117 8.8 64.5 11.5 11.0 3.83 42.13

Average 48.71DCF Discount

RateTerminal

FCF Growth

Price Target

PM 10% 3% 51.44

Final Price Target= 75% DCF PT + 25% Valuation PT= $50.76Implied Upside= Price Appreciation + Dividend Yield = 18.2%

Positives / Risks

• Positives– Lower litigation risk compared to U.S.

– Products sold in over 160 countries

– Prices of products increased to enhance profitability (2009)

– Free Cash Flow of $6.8 Billion in 2008

– Owns 7 of the world’s top 15 brands – including Marlboro the #1 Brand Worldwide

– Customers are addicted to its products

• Risks– Increased excise taxes in Europe

– Value of the dollar

– The potential of increased regulation abroad

PepsiCo (NYSE:PEP)

Company Overview: PepsiCo manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide

Recommendation: Sell 50 bpsInvestment Thesis: PepsiCo is a stable performer

that has a diversified product line and good international growth. I feel the company is currently undervalued.

Merger with PBG and PAS

• PepsiCo announced today merger agreements with The Pepsi Bottling Group Inc. and PepsiAmericas, Inc.

• Total cost will be 7.8 billion– Pepsi Bottling Group

• $36.50 / share or .6432 PepsiCo shares

– PepsiAmericas• 25.50 / share or .5022 PepsiCo shares

• Create annual pre-tax synergies of 300 million by 2015

Industry: BeveragesCompany Symbol Price /

EarningsForward

Price / Earnings

Price to Sales

Dividend Yield

Industry Current

20.2 19.3 2.4 2.12%

PepsiCo Inc PEP 15.5 14.8 2.1 3.17%Coca-Cola

CoKO 16.4 15.7 3.7 3.29%

Dr. Pepper Snapple Group

DPS N/A 14.1 1.1 N/A

Hansen Natural

HANS 15.1 13.6 2.6 N/A

Price TargetAbsolute Valuation

High Low Median Current #Your Target

Multiple

*Your Target E,

S, B, etc/Share

Your Target Price

(F x G)P/Forward

E22.7 13.1 19.8 14.8 17.5 $3.74 $65.45

P/S 3.5 1.8 3.1 2.1 2.5 $32.47 $81.71P/B 7.7 5.5 6.7 7.4 7.2 7.74 $55.71

P/EBITDA 14.72 8.55 12.61 9.2 10.5 6.22 $65.31P/CF 19.6 10.4 17.1 12.2 14.5 4.69 $68.00

Average $67.24DCF Current

PriceDiscount

RateTerminal

FCF Growth

Price Target

PEP $56.20 10% 3% $69.78

Final Price Target= 75% DCF PT + 25% Valuation PT= $69.15Implied Upside= Price Appreciation + Dividend Yield = 26.2%

Positives / Risks

• Positives– Frito-Lay brand – Acquisition of PBG and PAS– Continuing foreign investment– Low cost environment

• Risks– Merger integration issues– Continuing weak performance by Americas

Beverage segment– Private label growth– Possible sales tax on carbonated soda

beverages

Safeway (NYSE:SWY)Company Overview: Safeway is a food and drug retailer founded in 1915 and headquartered in California. They operate over 1,700 grocery stores in western and central U.S. as well as Canada and Mexico. They are the third largest grocery retailer.

Recommendation: Buy 288 basis points

Investment Thesis: We feel that Safeway is well positioned to benefit from a broad economic recovery. The company has an attractive FCF yield and is aggressively buying back shares.

Current Situation

• YTD :Safeway (-18.4%) vs. S&P 12.67%

Missed Analysts EPS est.

Lowered Guidance (2.10-2.30)

Lowered Guidance (1.70-1.90)

Positives

• Positives- Attractive Valuation

- Strong Free Cash Flow

- History of share repurchases

Numbers in millions

FY FY Q1 Q2

2007 2008 2009 2009

Diluted Shares 445 436 429 422

% change -2.02% -1.61% -1.63%# of shares repurchased 6.7 12.6 3.5 9.5

Average purchase price 33.57 28.45 18.40 19.63

Positives Cont.

• - More sensitive to economic recovery

Risks• Risks

-Unemployment continues to rise

Risk Cont.

-Food prices (disinflation)

-Margin compression

-Continuing same store sales declines

Industry: Retail FoodCompany Symbol Price /

EarningsForward

Price / Earnings

Price to Sales

P/CF

Industry 9.7 10.6 .2 4.3

Kroger KR 10.7 10.2 .2 5.0

Supervalu Inc. SVU N/A 6.8 .1 1.9

Wal-Mart WMT 14.5 13.8 .5 9.6

Safeway SWY 8.3 9.4 .2 4

Safeway Price TargetAbsolute Valuation

High Low Median Current #Your Target

Multiple

*Your Target E,

S, B, etc/Share

Your Target Price

(F x G)P/E (ttm) 21.1 8.3 15.6 9.4 11.5

P/Forward E

19 8 15 10.6 12 1.90 22.8

P/S .4 .2 .3 .2 .3 96.5 28.95P/B 2.8 1.1 2.2 1.1 1.5 17.21 25.81

P/EBITDA 6.43 2.68 4.92 2.98 3.75 6.35 23.81P/CF 9.2 3.8 6.5 4 5.5 4.73 26.03

Average 25.48Current Price

19.03

Implied Upside

34%

Final Price Target= Valuation PT + Risk Factor = 24.40Implied Upside= Price Appreciation + Dividend Yield = 30.3%

Thank You

• Questions?