Consumer Staples Company Presentation Des Dudaney Erica Elsasser Neil Hertenstein Mun Yi Se Tho May 18 th, 2010

Consumer Staples Company Presentation

Des DudaneyErica ElsasserNeil HertensteinMun Yi Se Tho

May 18th, 2010

Company Comparison PepsiCo Analysis P&G Analysis Recomm-endationsSector Summary

1. Sector Summary2. Company Comparison3. PepsiCo Analysis4. P & G Analysis5. Recommendation

Table of Contents


Recommendation

Sell 67 BP of Pepsi

Sell 40 BP of P&G

Hold Philip Morris & Wal-Mart

Recomm-endations

Sector Summary


SIM Portfolio

Sector S&P 500 Weight SIM Weight +/-

Consumer Discretionary 10.55% 10.44% -0.11%

Consumer Staples 10.91% 11.71% 0.80%

Energy 11.18% 9.76% -1.43%

Financials 16.47% 11.41% -5.07%

Health Care 11.55% 14.63% 3.07%

Industrials 10.76% 13.10% 2.34%

Information Technology 18.91% 20.18% 1.27%

Materials 3.45% 1.64% -1.82%

Telecommunication 2.73% 3.70% 0.98%

Utilities 3.48% 2.10% -1.38%

* Weights as of 4/30/2010Sector Summary


CS Sector Recap

Decrease weight of Consumer Staples by 107 basis points Provides a 27 bp underweighting

Defensive sector and lower returns in economic growth

Allows more cyclical sectors to experience higher gains

Sector Summary


Sector Holdings

Current Holdings

SIM – 11.71% PepsiCo………………2.90% Wal-Mart Stores Inc…2.78% Philip Morris Int’l……..2.96% Procter & Gamble……3.07%

* Weights as of 4/30/2010

Recommended Holdings

SIM – 10.64% PepsiCo……………….2.23% Wal-Mart Stores Inc….2.78% Philip Morris Int’l……...2.96% Procter & Gamble…….2.67%

Sector Summary


Target Prices

04/19/23 8

Company Current Price Target Price Dividend Upside Potential

Philip Morris $46.25 $57 4.9% 28.1%

Procter & Gamble $63.38 $72 3.1% 16.7%

Wal-Mart $52.73 $62 2.3% 17.6%

PepsiCo $66.75 $74 2.7% 13.6%

Prices as of 5/13/2010

Sector Summary


Target Prices of Sector Stocks in S&P

Company Price Consensus UpsideAVP 28.10$ 37.69$ 34.13%ADM 27.12$ 35.75$ 31.82%DF 9.74$ 12.11$ 24.33%TSN 17.61$ 21.73$ 23.40%PM 46.21$ 56.32$ 21.88%WMT 52.69$ 62.61$ 18.83%WAG 35.65$ 41.64$ 16.80%CVS 35.76$ 41.71$ 16.64%KO 53.35$ 61.80$ 15.84%TAP 42.78$ 49.25$ 15.12%SVU 13.65$ 15.62$ 14.43%SJM 58.16$ 66.55$ 14.43%CCE 26.35$ 29.90$ 13.47%COST 58.25$ 65.18$ 11.90%KR 22.10$ 24.68$ 11.67%CAG 24.42$ 27.25$ 11.59%PG 63.39$ 70.21$ 10.76%EL 61.52$ 68.06$ 10.63%PEP 66.70$ 73.43$ 10.09%KFT 30.59$ 33.65$ 10.00%

LO 80.22$ 88.00$ 9.70%MO 21.71$ 23.44$ 7.97%SWY 23.62$ 25.36$ 7.37%CL 83.66$ 89.75$ 7.28%SYY 30.26$ 32.43$ 7.17%MJN 51.01$ 54.63$ 7.10%GIS 73.75$ 78.69$ 6.70%MKC 39.55$ 42.18$ 6.65%KMB 62.15$ 66.08$ 6.32%K 55.51$ 58.65$ 5.66%RAI 54.08$ 57.06$ 5.51%DPS 38.00$ 40.00$ 5.26%CLX 64.85$ 68.17$ 5.12%HNZ 46.65$ 49.03$ 5.10%CPB 35.58$ 36.50$ 2.59%HRL 41.37$ 42.27$ 2.18%BFB 57.34$ 58.56$ 2.13%WFMI 40.66$ 41.51$ 2.09%STZ 17.79$ 18.10$ 1.74%HSY 47.96$ 47.32$ -1.33%SLE 14.86$ 13.94$ -6.19%

Sector Summary

Company Information


Philip Morris - Hold

Philip Morris International Inc. (PM) is the leading international tobacco company.

Spin-off from Altria(MO) in 2008.

PM owns seven of the world’s top 15 brands

Brand portfolio includes Marlboro, the number one cigarette brand worldwide.

Products sold in approximately 160 countries.

As of 2008, the company held an estimated 15.6% share of the total international cigarette market outside of the U.S.

Company Comparison


Wal-Mart Stores - Hold

Wal-Mart Stores, Inc. operates various formats of retail stores and restaurants, including combination discount and grocery stores, supercenters, Sams Clubs, hypermarkets, cash-n-�carry stores, department stores, and general merchandise stores

Attractive Valuation Big move to online – sales, ad campaign etc. Improved merchandising capabilities, capital efficiency, inventory

management Very non-cyclical

Company Comparison


PepsiCo

PepsiCo, Inc., founded in 1898, manufactures, markets, and sells numerous foods, snacks, and carbonated and non-carbonated beverages worldwide.

Market capitalization of $106.55 billion.

PepsiCo owns hundreds of brands around the world, but the most recognizable include:

Company Comparison


Procter & Gamble

The Procter & Gamble Company (P&G), founded in 1837, engages in the manufacture and sale of consumer goods worldwide.

The company operates in 3 global business units: Beauty

Health and Well-Being

Household Care

Products are sold in over 180 countries worldwide

Company Comparison

PepsiCo Analysis


•EPS is expected to increase, but remain significantly lower than before.

EPS Growth %

PepsiCo Analysis


•ROE has been on a slight upward trend, but is expected to decrease.

ROE Relative to S&P 500

PepsiCo Analysis


•EBITDA Margin is expected to decrease.

EBITDA Relative to S&P 500

PepsiCo Analysis


•Net profit margin is lower than Coca-Cola’s.

Profit Margin Relative to KO

PepsiCo Analysis


Cash Flow per share

PepsiCo Analysis


Technical Analysis


Discounted Cash Flow

PepsiCo Analysis


Sensitivity Analysis

PepsiCo Analysis


Target Price

PepsiCo Analysis


PepsiCo Recommendation

Benefits

• Global leadership in the snack business – Expand snack business in developing and emerging

markets

• Taking advantage of the coincidence of consumption in snacks and beverages

• Purchase of PBG and PAS bottlers

• Focus on health and wellness– Expand the “Good for You” portfolio– Continue to make core snacks healthier through

innovations in heart-healthy oil, sodium reduction and the additions of whole grains, nuts and seeds.

Risks

• Failure to realize US bottler integration/synergies

• Currency Volatility – 48% of PepsiCo revenue is from operations outside the US. Largest operations are in North America (US, Canada, Mexico) and UK

Recommendation: Sell 67 bps

Current Price: 66.75

Target Price: 74.00

Implied Upside: 13.6%

PepsiCo Analysis

Procter & Gamble Analysis


•EPS growth is expected to remain negative.

EPS Growth %

P&G Analysis


•ROE is at low levels of the decade.

ROE %

P&G Analysis


•EBITDA margin is below JNJ.

EBITA Margin Relative to JNJ

P&G Analysis


•Net Profit Margin has low growth rate and is expected to remain so.

Net Profit Margin %

P&G Analysis


Technical Analysis


Absolute Valuation

Valuation High Low Median CurrentP/Forward E 23.9 11.1 20.7 15.2P/S 22.2 12.6 18.8 16.8P/B 9.3 2.3 3.1 2.7P/EBITDA 3.1 1.8 2.6 2.4P/CF 18.4 9 16.7 12.1

P&G Analysis


Relative Valuation to S&P 500

Relative to S&P 500 High Low Median CurrentP/Trailing E 1.5 0.75 1.3 0.81P/Forward E 1.3 1 1.1 1.1P/B 3.2 1 1.3 1.2P/S 3.2 2.1 2.8 2.8P/CF 1.4 1 1.2 1

P&G Analysis


Relative Valuation to Industry

Relative to Industry High Low Median CurrentP/Trailing E 1.1 0.83 1 0.99P/Forward E 1.1 0.96 1 1.1P/B 1.2 0.3 0.8 0.8P/S 1.2 0.9 1.1 1.1P/CF 1.2 0.9 1 1

P&G Analysis


78.6

70.41

66.025

65.975

79.8

65 70 75 80

1

P/CF

P/EBITDA

P/B

P/S

P/Forward E

72.162

Price Target

P&G Analysis


Terminal Discount Rate = 9.5%Terminal FCF Growth = 4.0%

Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020ERevenue 77,798 79,138 83,743 87,930 92,151 96,482 100,824 105,260 109,681 114,178 118,745 % Growth 1.7% 5.8% 5.0% 4.8% 4.7% 4.5% 4.4% 4.2% 4.1% 4.0%

Earnings Before Taxes 15,395 14,764 15,324 17,146 17,969 18,814 19,661 20,526 21,388 22,265 23,155 Earnings Margin 19.8% 18.7% 18.3% 19.5% 19.5% 19.5% 19.5% 19.5% 19.5% 19.5% 19.5%

Taxes 4,157 4,060 4,291 4,715 4,942 5,174 5,407 5,645 5,882 6,123 6,368 Tax Rate 27.0% 27.5% 28.0% 27.5% 27.5% 27.5% 27.5% 27.5% 27.5% 27.5% 27.5%

Earnings from Discontinued 2,000 2,000 2,000 1,759 1,843 1,930 2,016 2,105 2,194 2,284 2,375 Interest % of Sales 2.6% 2.5% 2.4% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Net Income 13,436 13,239 12,704 14,190 14,871 15,570 16,270 16,986 17,700 18,425 19,162 % Growth -1.5% -4.0% 11.7% 4.8% 4.7% 4.5% 4.4% 4.2% 4.1% 4.0%

Add Depreciation/Amort 3,112 3,166 3,350 3,517 3,686 3,859 4,033 4,210 4,387 4,567 4,750 % of Sales 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Plus/(minus) Changes WC (2,179) (108) (373) (879) (922) (965) (1,008) (1,053) (1,097) (1,142) (1,187) % of Sales -2.8% -0.1% -0.4% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%

Subtract Cap Ex 3,112 3,166 3,350 3,517 3,686 3,859 4,033 4,210 4,387 4,567 4,750 Capex % of sales 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Free Cash Flow 11,257 13,130 12,331 13,310 13,949 14,605 15,262 15,934 16,603 17,284 17,975 % Growth 16.6% -6.1% 7.9% 4.8% 4.7% 4.5% 4.4% 4.2% 4.1% 4.0%

NPV of Cash Flows 91,612 40%NPV of terminal value 137,151 60% Terminal Value 339,891

Projected Equity Value 228,763 100%Free Cash Flow Yield 5.59% Free Cash Yield 5.29%

Current P/E 15.0 15.2 15.9 Terminal P/E 17.7 Projected P/E 17.0 17.3 18.0 Current EV/EBITDA 11.0 11.4 10.9 Terminal EV/EBITDA 12.3 Projected EV/EBITDA 12.5 12.9 12.4

Shares Outstanding 3,179 Current Price 63.38$ Implied equity value/share 71.97$ Upside/(Downside) to DCF 13.6%

Discounted Cash Flow Model

P&G Analysis


Sensitivity Analysis

Discount Rate

Growth Rate

Target Price

Upside

9.00 3.50 74.46 17.48%9.00 3.75 76.21 20.24%9.00 4.00 79.19 24.94%9.00 4.25 81.93 29.27%9.00 4.50 84.98 34.08%9.25 3.50 71.18 12.31%9.25 3.75 73.20 15.49%9.25 4.00 75.41 18.98%9.25 4.25 77.84 22.81%9.25 4.50 80.52 27.04%9.50 3.50 68.19 7.59%9.50 3.75 70.00 10.44%9.50 4.00 71.97 13.55%9.50 4.25 74.14 16.98%9.50 4.50 76.52 20.73%9.75 3.50 63.43 0.08%9.75 3.75 67.06 5.81%9.75 4.00 68.83 8.60%9.75 4.25 70.77 11.66%9.75 4.50 72.89 15.00%

P&G Analysis


Procter & Gamble Recommendation

Recommendation: Sell 40 bps

Current Price: $63.38

Target Price: $72.00Ratios $72.16

DCF $71.97

Implied Upside: 13.6%

Dividend yield: 3.1%

Implied Upside w/ Dividend: 16.7% P&G Analysis

Company Comparison PepsiCo Analysis P&G Analysis Recomm-endationsSector Summary P&G Analysis

Benefits

• International initiative

• Product Expansion

• Product leadership

• Increased Advertising

• Very defensive

• Consistent dividends

Procter & Gamble Risks and Benefits

Risks

• Currency Volatility

• Pampers Lawsuit

• Changes in consumer spending

• Lower upside relative to other consumer staple companies

Recommendations


Stock Recommendation

Sell 107 bp Sell 67 bp of Pepsi

Sell 40 bp of Procter & Gamble

Limited potential upside in both stocks

Hold Wal-Mart and Philip Morris due to high upside

Sale of 107 bp in our sector will allow other sectors to utilize it to gain better returns for the portfolio

Risks Sale of 107 bp will leave the portfolio less defensive should the

economy decline again

Recomm-endations

Questions?

Documents

Consumer Staples Company Presentation Des Dudaney Erica Elsasser Neil Hertenstein Mun Yi Se Tho May 18 th, 2010