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Consumer Discretionary Sector
February 2nd, 2010
Sekhar Achanta,Tongyu Zhou
Recommendation
• The Fund should underweight this sector when compared to S&P 500 index.
• The Fund should rebalance the sector by selling some retail sector stocks.
• We see 20% - 50% returns in some select industries in this sector.• Automobile and components• Internet & Catalog Retail
• Major positives for this sector is improvement is Consumer Confidence.
• Biggest risk - Unemployment.
• We recommend that the Fund should rebalance by selling 300 basis points of retail stocks in this sector and buy 300 basis points of automobile and components industry stocks and Internet and Catalog Retailing to keep the SIM weighting relative to the S&P500 at 6.99%.
S & P 500 Sector Weights (as of 1/27/2010)
Sector Current Index Weight
Current SIMWeight
Consumer Discretionary 10.15% 6.99%
Consumer Staples 10.49% 11.66%
Energy 10.88% 11.90%
Financials 14.91% 11.37%
Health Care 12.63% 14.30%
Industrials 10.83% 12.36%
Information Technology 19.41% 19.04%
Materials 3.85% 3.46%
Telecommunication Services 2.88% 3.27%
Utilities 3.95% 2.94%
Consumer Discretionary - Sector Details
• The Consumer Discretionary Sector encompasses industries that tend to be the most sensitive to economic cycles.
• Consumer Discretionary Sector manufacturing segment includes automotive, household durable goods, textiles & apparel and leisure equipment.
• The services segment includes hotels, restaurants and other leisure facilities, media production and services, and consumer retailing and services.
• Sector Size - The Market cap of the sector is $28.6 billion in the S & P 500 index.
• The Total Market Cap of the sector is $2 Trillion.
Consumer Discretionary - Industries• There are 33 sub-industry indices in this sector, with
Movies & Entertainment being the largest, at 15.2% of the sector's market value.
• Industries in this sector– Auto Components– Automobiles– Distributors – Diversified Consumer Services– Hotels, Restaurants and Leisure– Household Durables– Internet & Catalog Retail– Media– Multiline Retail– Specialty Retail– Textiles, Apparel & Luxury Goods
• Source: http://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=industries§or=25
Consumer Discretionary Sector- Top 10 holdings
Source: https://www.spdrs.com/product/fund.seam?ticker=XLY
Sector Performance YTD and QTD
Consumer Discretionary Sector And Economic Cycles
Source: http://seekingalpha.com/article/178437-sector-performance-and-the-economic-cycle
Fed Stimulus –Fed Funds Rate
US Real GDP Growth
US Unemployment Numbers
Personal Savings Rate
Disposable Income
Consumer Confidence Index
Change In Consumption
Real Consumer Spending
Consumer Spending: Ex-Housing, Bills and Auto
Retail Sales
Consumer Discretionary –Same Store Sales
Correlation Coefficient R Consumer Spending Vs. Consumer Confidence
Correlation Coefficient R Consumer Spending Vs. Employment Rate
Correlation Coefficient R Consumer Spending Vs. Unemployment Rate
Correlation Coefficient R Consumer Spending Vs. CD Sector Performance
Consumer Discretionary Sector Revenues
Consumer Discretionary Sector Earnings Growth Rates
Consumer Discretionary Industries – Revenues and Earnings Growth Rates
Industry Revenue Growth (5 Year) Earnings Growth(5 Year)
Auto Components (-25)% 40%
Automobiles (-13)% n/a
Distributors 5% 4%
Diversified Consumer Services n/a n/a
Hotels, Restaurants and Leisure 15% 8%
Household Durables 4% 2%
Internet & Catalog Retail 18% 27%
Media 9% 8%
Multiline Retail 5% 2%
Specialty Retail 6% 4%
Textiles, Apparel & Luxury Goods 0% (-2%)
Consumer Discretionary Top 10 Companies – Revenues, Earnings, Margins and FCF
Companies Revenue (5 Year)
Earnings (5 Year)
Margins Free Cash Flow
McDonald's Corp. 3% 19% 33.6% 1.14%
Walt Disney Co. 4% 13% 10.6% 0.58%
Home Depot Inc. (-3%) (-9%) 14.6% 0.40%
Comcast Corp 14% 29% 8% 0.82%
Amazon.com 29% 26% 28.8% 0.94%
Target Corp. 7% 5% 15.1% 1.9%
Ford Motor Company n/a n/a n/a n/a
Time Warner Inc. n/a 4% 7% 2.94%
Lowe's Cos. 5% (-3%) 9.3% 0.03%
DIRECTV Group Inc. 13% 48% 24.4% 1.16%
Consumer Discretionary Earnings
Consumer Discretionary Sector Margins- Relative to S&P 500
Consumer Discretionary Sector- FCF Generation Compared to S&P
Consumer Discretionary Sector – ROE
Valuation Analysis - Sector Valuation
Absolute Basis High Low Median Current
P/Trailing E 53.7 17.2 21.0 35.1
P/Forward E 44.1 15.9 19.3 16.1
P/B 4.7 1.5 2.4 2.4
P/S 1.0 0.4 0.9 0.8
P/CF 14.3 5.7 9.2 8.8
Relative to SP500
High Low Median Current
P/Trailing E 3.9 0.69 1.2 1.9
P/Forward E 3.0 0.75 1.1 1.2
P/B 1.1 0.7 0.8 1.1
P/S .7 .4 .6 .7
P/CF 1 .7 .8 .9
P/B Relative to S&P 500
P/S Relative to S&P 500
P/CF Relative to S&P 500
Forward P/E Relative to S&P 500
Recommendation
• The Fund should underweight this sector when compared to S&P 500 index.
• The Fund should rebalance the sector by selling some retail sector stocks.
• We see 20% - 50% returns in some select industries in this sector.• Automobile and components• Internet & Catalog Retail
• Major positives for this sector is improvement is Consumer Confidence.
• Biggest risk - Unemployment.
• We recommend that the Fund should rebalance by selling 300 basis points of retail stocks in this sector and buy 300 basis points of automobile and components industry stocks and Internet and Catalog Retailing to keep the SIM weighting relative to the S&P500 at 6.99%.
Questions