Consumer Discretionary Stock Presentation

Shahyan Ahmad, Shantanu Basu, Jake Beham, Blaine Bosley

May 13th, 2008 – FIN 724/824

Agenda

• Sector Presentation Review

• Group Stock Recommendation

• Business Analysis of Stocks

• Financial Analysis

• Valuation Measures

• Additional Analysis

• Recommendation Recap

Current SIM Holdings Review

Current SIM Holdings Review

SIM Portfolio 4-30-2008

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Consu

mer

Disc

retio

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Consu

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Sta

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Energ

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Finan

cials

Health

Car

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Indu

stria

ls

Info

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ion

Tech

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gy

Mat

eria

ls

Tele

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n Ser

vices

Utilitie

sCas

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0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

S&P 500 Weight

SIM Weight

ANF45%

BBY36%

LTD19%

Sector Presentation Review

• The class agreed with us to buy more – Increase the weighting of the consumer discretionary

sector to approximately 9.67% (1% overweight)

Sector Conditions Review

• Economic stimulus package is in effect• Returns to date are -0.81% but trending upwards• Numerous buying opportunities

• Sector is cyclical in nature• Slowing of Fed rate cuts• Price ratios show that SP-25 is cheap compared to

the S&P 500• Consensus growth rate 1.1% higher than S&P 500

• SECTOR VALUATION:

Undervalued with growth potential

Current Positions in Portfolio

Company SharesCurrentPrice*

Market Value

SIM Weight

Dividend Yield

Abercrombie & Fitch

13,500 $75.03 $1,012,905 4.01% 1.00%

Best Buy 19,000 $43.67  $829,730 3.28% 1.20%

Limited Brands

23,400 $18.80  $439,920 1.74% 3.30%

* Prices as of close of business on 5/12/08

Potential Buying Opportunities

CompanyCurrent Price*

Target Price

UpsideDividend

Yield

Best Buy  $43.67 $59.00  35.1%  1.20%

Comcast $22.04  $24.21  9.9% 1.10%

Limited Brands  $18.80 $21.93   16.6% 3.30%

Sears Holdings $94.69  $105.91  11.8%  N/A

Abercrombie $75.03 $91.89 22.5% 1.00%

Whirlpool $74.77 $100.32 34.2% 2.40%

* Prices as of close of business on 5/12/08

• BUY – 10,000 shares of Whirlpool Corp. (WHR)– Add 3,000 shares of Best Buy (BBY) for a total of

22,000 shares

• SELL – All of our 23,400 shares of Limited (LTD)– 4,000 shares of Abercrombie (ANF) to arrive at 9,500

shares

Group Stock Recommendations

Consumer Discretionary Holdings

Current Proposed

ANF29%

BBY40%

LTD0%

WHR31%

ANF45%

BBY36%

LTD19%

WHR0%

Business Analysis: WHR

• Consumer goods industry

• Manufacturer and marketer of home appliances

• Brands: Whirlpool, Maytag, KitchenAid, Jenn-Air, Roper, and many others

• Market Cap: $5.44B• Headquartered in

Benton Harbor, MI

Business Analysis: WHR

• Why it is undervalued– Cyclical stock – poor economy (industry sales down 9%)– Housing market woes – fewer big box items purchased– Missed earnings by 35 cents a share

• Why it will bounce back– Economic stimulus checks– Weak dollar (international sales of US manufactured goods)

• 40% of its sales are international

• Has manufacturing facilities in the US, one in Marion OH

– It has dammed it’s market share losses to GE of last year– Appears to be in the trough rather than on the way down

Business Analysis: BBY

• Best Buy is a retailer of consumer electronics, personal computers, appliances, entertainment software and related services.

• Consumer Electronics is the most important line of business

• The appliances division continues to have a sluggish growth in business

• Primary competitors for Best Buy are Dell, Circuit City, and Wal-Mart

Business Analysis: BBY

• Key Performance Drivers– Addition of 87 new Best Buy and Future Shop stores

during fiscal 2007. The trend is expected to continue.– Focus on expanding geographical reach and customer

base by strengthening its position in current markets and exploring new markets

– Acquiring targets which are suitable in terms of synergies (Pacific Sales Kitchen and Bath Centres in Fiscal 2007). Trend is expected to continue.

– Focus on customer centric approach.

•  

Business Analysis: ANF

• ANF has 20+% upside (less than WHR or BBY)• LTD is up ~6.8% over the past week• Reducing exposure to apparel retail

– Retail is currently ~74% of our holding– Less bullish on retail than other areas of the

consumer discretionary segment– Proposed holding is much better diversified

Return Relative to S&P 500 v. Federal Funds Rate

• WHR returns have a low correlation to Fed Funds Rate

• Disposable income is a better measure

Return Relative to S&P 500 v. Disposable Income

• A positive lag correlation is noticeable

• With the announcement of Tax Rebates leading to higher disposable income we expect an upswing

Financial Analysis - WHR

• DuPont Analysis:

Whirlpool 05 Whirlpool 06 Whirlpool 07Profit Margin 3.31% 2.70% 3.19%Asset Turnover 1.74 1.63 1.40Return on Assets 5.77% 4.41% 4.47%Leverage Multiplier 4.90 4.41 3.86Return on Equity 28.29% 19.45% 17.24%

Earnings Est. v. Consensus - WHR

Earnings Estimates Net Income Shares EPS Consensus EPS2008 633 78.3 8.08 7.112009 732 76.7 9.54 8.712010 876 91.5 9.57 10.32

Revenue & Income Growth - WHR

2005 2006 2007Revenue 14,317 18,080 19,408 % Growth N/A 26.28% 7.35%Income 474 489 620 % Growth N/A 3.16% 26.79%

2008E 2009E 2010E Revenue 21,349 23,911 27,497 % Growth 10.00% 12.00% 15.00%Income 633 732 876 % Growth 2.10% 15.64% 19.67%

DCF Analysis- WHRDCF Valuation5/11/2008Ticker: WHR Terminal Discount Rate = 10.5%

Terminal FCF Growth = 5.0%

Forecast TerminalYear 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Value

Revenue 21,349 23,911 27,497 31,072 34,490 37,594 40,225 42,237 44,349 46,566 48,894 % Growth 12.00% 15.00% 13.00% 11.00% 9.00% 7.00% 5.00% 5.00% 5.00% 5.00%

Operating Income 1,067 1,196 1,375 1,554 1,724 1,504 1,609 1,267 1,330 1,397 1,467 Operating Margin 5.00% 5.00% 5.00% 5.00% 5.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00%

Interest - net (266) (270) (270) (270) (270) (270) (270) (270) (270) (270) (270) Interest % of Sales -1.25% -1.13% -0.98% -0.87% -0.78% -0.72% -0.67% -0.64% -0.61% -0.58% -0.55%

Taxes 158 183 219 456 499 443 470 384 400 417 434 Tax Rate 38.5% 38.5% 38.5% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Net Income 633 732 876 1,368 1,496 1,330 1,409 1,153 1,200 1,250 1,303 % Growth 16% 20% 56% 9% -11% 6% -18% 4% 4% 4%

Add Depreciation/Amort 640 717 825 621 690 752 402 422 443 466 489 % of Sales 3.00% 2.00% 2.00% 2.00% 2.00% 2.00% 1.00% 1.00% 1.00% 1.00% 1.00%Plus/(minus) Changes WC 200 200 200 (311) (345) (376) (402) (422) (443) (466) (489) % of Sales 0.94% 0.84% 0.73% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00%Subtract Cap Ex (427) (359) (275) (311) (345) (376) 0 422 887 1,397 1,467 Capex % of sales -2.00% -1.50% -1.00% -1.00% -1.00% -1.00% 0.00% 1.00% 2.00% 3.00% 3.00%

Free Cash Flow 1,901 2,008 2,176 1,989 2,186 2,082 1,409 730 313 (147) (164) YOY growth 6% 8% -9% 10% -5% -32% -48% -57% -147% 12%

Terminal (3,134.9) Terminal Value (3,135) P/E (2.4) NPV of free cash flows 8,962 112% EV/EBITDA (0.64) NPV of terminal value (946) -12% Free Cash Yield 5.24%Projected Equity Value 8,016 Free Cash Flow Yield 23.71%

Shares Outstanding 79.9

Current Price 74.00$

Implied equity value/share 100.32$

Upside/(Downside) to DCF 35.57%

Multiples Valuation - WHR

Absolute Valuation High Low Mean Current#Your Target

Multiple*Your Target

/Share

Your Target Price

P/Forward E 15.9 6.8 10.9 9.7 12 8.09 $97.08

P/S 0.58 0.25 0.39 0.29 0.39 273.00 $106.47

P/B 5.2 1.4 2.7 1.4 2 51.74 $103.47

P/EBITDA 12.1 2 4.4 3.5 4.6 20.69 $95.19

P/CF 9 3.2 5.8 4.6 6 15.75 $94.47

P/E/G ratio 2.8 0.5 1.1 0.8 1.1 90.54 $99.59

ROE 50.6 15.2 23.4 16.9 23.4 4.29 $100.29

Stock vs. Sector Valuation

High Low Mean Current

P/Forward E 0.75 0.23 0.51 0.57

P/S 0.53 0.23 0.39 0.37

P/B 2.39 0.36 0.92 0.56

P/EBITDA 2.01 0.29 0.54 0.54

P/CF 0.91 0.3 0.56 0.53

P/E/G ratio 2.4 0.43 0.85 0.61

ROE 4.59 0.95 1.73 1.17

Valuation Analysis: WHR

• The current price related ratios are all below the mean estimates

• With a mean revenue growth of 12% for the coming three years and a mean consensus EPS of around 9 we see a buy opportunity in WHR

Valuation Analysis: WHR

• In line with the previous slide the current price related ratios are all below the mean estimates

• Although ROE is dropping there is potential to reach the mean estimate relative to the sector

WHR Relative to Sector

• Performance of WHR in terms of price ratios are in line with sector performance

WHR Relative to S&P 500

• Historical ratios of WHR ratios are impressive when compared with S&P 500

WHR Valuation Summary

• Lower Price related ratios relative to the mean presents a good buying opportunity

• Tax rebates should boost the sales

• Recession could be an area of concern

• We project a top line growth of 12%

• EPS for the coming three years is projected at around 9.5

Price and Earnings - WHR

• Hit recently• Cyclical nature• Earnings

expected to increase steadily

• Whirlpool GRE: 13.0%

• S&P 500 GRE: 12.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

WHIRLPOOL CORPORATION (WHR)PRICE 72.43 DATE 05-09-2008PRICE 72.43 DATE 05-09-2008StockVal®

3232

3636

4040

4444

5050

5656

6262

6868

7676

8484

9494

106106

118

130

146

The Ohio State UniversityFisher College of Business

Price Change % Diff SP5

1-Day 0.84 1.51

1-Week -4.19 -2.38

4-Weeks -12.45 -16.61

QTD -16.54 -21.49

YTD -11.27 -5.82

2007 -1.67 -5.20

2006 -0.88 -14.50

2005 21.02 18.02 FYE Dec 2007 EPS 8.53

First Call Data 2008 2009 2010

Mean Estimate 7.11 8.71 10.32Change -17% +22% +19%

High 7.48 9.50 11.66

Low 6.75 7.25 9.40

Total 6 6 3

# Up 0 1 1

# Down 7 6 1

House Estimate

PE Ratio 10.2 8.3 7.0

Revenues ($Mil) 19,633

Market Value ($Mil) 5,505

Shares Out (Mil) 76.0

Volume 60-Day Avg (Th) 1,654

Volume 60-Day Avg ($M) 119.8

Dividend Estimate 1.72

Payout Ratio 24%

Retention Rate 76%

Dividend Yield 2.37%

Data Page # 1

Price and Earnings - BBY

• Stimulus checks

• Forecast strong growth in second half of year

• Best Buy GRE: 15.0%

• S&P 500 GRE: 12.0%

Price Momentum - WHR

• Very oversold

• Will have positive momentum once trades are made in June

Technical Analysis - WHR

• Approaching key pivot point

• Should get good support

• Potential double bottom pattern leads to support recovery

Summary

• BUY – 10,000 shares of Whirlpool Corp. (WHR)– Add 3,000 shares of Best Buy (BBY) for a total of

22,000 shares

• SELL – All of our 23,400 shares of Limited (LTD)– 4,000 shares of Abercrombie (ANF) to arrive at 9,500

shares

Reasons to Buy WHR and BBY• Cyclical in nature

• Solid business model

• Sustainable revenue and earnings growth with favorable upside potential

• Economic stimulus package

• Large international exposure

Price Targets

Whirlpool:• Target Price:

– $100.32• Current Price (5/12/08):

– $74.77• Upside Potential:

– 34.17%• 52 Week Range:

– $67.19-118.00

Best Buy:• Target Price:

– $59.00• Current Price (5/12/08):

– $43.67• Upside Potential:

– 35.10%• 52 Week Range:

– $38.75-53.90

Consumer Discretionary Stock Presentation

Questions & Discussion