Consumer Staples (SP-30)

Consumer Staples (SP-30)Ryan ChestnutBrian CullySabina CurovacOrla Costello

AgendaSector OverviewBusiness AnalysisEconomic ForecastsFinancial AnalysisSector ValuationRecommendation

*Consumer Staples

Market CapitalizationConsumer Staples Sector = $924,124 millionS&P 500 = $7,192,455 millionConsumer Staples accounts for 12.85% of the S&P 500Consumer Staples accounts for 14.22% of the assets in SIM Portfolio.Source: standardandpoors.com

DescGICSNCMKTCAPQTDYTDS&P 5005007192455-8.57%-8.57%Energy10391014055-3.16%-3.16%Materials1529218994-7.24%-7.24%Industrials2059763552-12.66%-12.66%Consumer Discretionary2580589017-10.64%-10.64%Consumer Staples3040924124-7.67%-7.67%Health Care35541146392-1.30%-1.30%Financials4081770678-26.55%-26.55%Information Technology45751166403-3.08%-3.08%Telecommunications Services509267760-11.06%-11.06%Utilities5534331480-0.83%-0.83%

Consumer Staples vs. S&P 500 YTD

*Consumer Staples

Consumer StaplesIndustries Within Consumer Staples SectorSource: standardandpoors.com

Consumer Staples

Consumer StaplesCompanies With Consumer Staples SectorSource: standardandpoors.com

Consumer Staples

Consumer StaplesSector OverviewIn theory, demand for consumer staples is steady or increases during economic downturnDefensive sector of mature companiesHistorical correlation with S&P is 0.64Stock price stability in downturns, but slow and steady growth in upswingsLow price elasticity of demandImportance of differentiation

Consumer Staples

Consumer StaplesIndustry CharacteristicsHigh Barriers to EntryVery high capital requirementsMature companiesStrong brands put downward pressure on marginsThreat of substitutionInternational presenceRemaining growth opportunities

Consumer Staples

Consumer StaplesBusiness OpportunitiesReduce (commodity) costs Hedge costs, merge or partner, create economies of scaleReduce finished good prices to wholesalersPrice differentiation important in slowdownsDifferentiate productsSuperior products can control pricesImportance of brandingSignificant substitution threat

Consumer Staples

Consumer StaplesExternal FactorsRegulatory and legal issuesForeign exchange pricesImplications of weakness in the dollar Aging domestic population, but global growthCommodity pricesState of the economyEnvironmental Factors

Consumer Staples

Economic Analysis Main Economic Indicators

Chart1

-0.2

0.9

2.8

-0.5

-3.8

-3

-0.8

1.1

2

Change in Real GDP

Percent

Change in Real GDP (source: Bloomberg Composite)

Sheet1

Actual / Forecasts

IndicatorQ4 07Q1 08Q2 08Q3 08Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10

Economic Activity

Real GDP (qoq % saar)-0.20.92.8-0.5-3.8-3-0.81.12--

CPI (yoy %)3.974.14.375.31.63-0.3-1.2-1.71.25--

Core PCE (yoy %)2.12.22.32.31.81.61.41.21.2--

Unemployment (%)4.84.935.376.076.877.588.258.4--

External Balance

Curr. Acct. (% of GDP)-5.21-5.02-4.87-4.84-3.9-3.2-3.2-3.1-2.9--

Fiscal Balance

Budget (% of GDP)-1.3-1.5-2.2-3-4.4-6-5.6-6.1-6.2--

Interest Rates

Central Bank Rate (%)4.252.25220.250.250.250.250.250.75

3-Month Rate (%)4.72.692.784.051.431.281.141.141.271.61

2-Year Note (%)3.051.592.621.960.770.780.881.091.351.85

10-Year Note (%)4.033.413.973.832.212.392.532.793.073.39

Exchange Rates

EURUSD1.461.581.581.411.41.31.281.31.35--

CountriesAustraliaBelgiumCanadaChinaGermanyFranceUnited KingdomItalyJapanNetherlandsSwedenSingaporeUnited StatesHong KongReal GDPNominal GDPUnemploymentCentralGDP

YoYYoYSABank RateDeflator

1.9% 9/0810.4% 9/084.5%12/084.2500%12/08110.4 9/08

1.2% 9/083.0% 9/087.10%12/082.00% 1/09104.7 9/08

-0.8%11/086.30% 9/086.60%12/081.000% 1/09123.00 9/08

6.8%12/0818.1% 9/08N.A.5.3100% 1/09N.A.

0.8% 9/082.6% 9/087.8% 1/092.00% 1/09109.8 9/08

0.6% 9/082.6% 9/087.3% 9/082.00% 1/090.000 9/08

-1.8%12/082.3% 9/086.10%11/081.500% 1/09113.4 9/08

-0.9% 9/082.0% 9/086.67% 9/082.00% 1/09121.2 3/08

-0.5% 9/08-2.1% 9/084.4%12/080.100% 1/0988.9 9/08

1.8% 9/084.7% 9/083.90%12/082.00% 1/09122.4 9/08

0.3% 9/083.70% 9/085.61% 9/042.00% 1/09N.A.

-3.7%12/081.7% 9/082.6%12/080.13% 1/09109.0 9/08

-0.2%12/081.7%12/087.2%12/080.250% 1/09123.012/08

1.7% 9/083.8% 9/084.1%12/080.5000% 1/09104.3 9/08

ItemRange1Range2

Raw BETA1.3721.261

ALPHA(Intercept)-0.012-0.009

R^2(Correlation^2)0.9610.927

Std Dev Of Error0.1070.066

Std Error Of ALPHA0.0110.007

Std Error Of BETA0.0280.035

Number Of Points103103

Sheet2

IndicatorChange in Real GDP

Q4 07-0.2

Q1 080.9

Q2 082.8

Q3 08-0.5

Q4 08-3.8

Q1 09-3

Q2 09-0.8

Q3 091.1

Q4 092

Sheet2

Change in Real GDP

Percent


Sheet3

Economic Analysis (cont.)Source: Bloomberg Composite

*Consumer Staples

Chart1

4.8

4.93

5.37

6.07

6.87

7.5

8

8.25

8.4

Unemployment (%)

Unemployment (%)

Final

The Ohio State University

Fisher College of BusinessEqy_Ind_DPS_Annual_NetPX TO BOOK RATIOSECURITY_NAME

Student Investment Management PortfolioEqy_SH_OUTPE_RATIO

Portfolio Appraisal RecordEqy BetaLAST PRICE

January 30, 200901/30/09EQY_DVD_YLD_12M_NETEqy Dvd Sh Ind Net

QuantitySecurityTickerGIC SectorUnit CostTotal CostMarket PriceMarket ValueUnrealized Gain/(Loss)Unit IncomeEst. Ann. Income%age AssetsEq shares outMarket Cap (In Millions $)BetaBeta%age EquityWtd. Mkt. CapP/EWtd. Avg. P/EP/BVWtd. Avg. P/BVDiv YieldAvg Div YieldBloomberg codes

COMMON STOCKS

16,900Abercrombie & Fitch Co.ANFCons Discr73.08$1,235,054.1517.85$301,665.00($933,389)0.70$11,830.02.13%87.0531,553.91.450.030862.19%34.063.84700.08430.86290.01893.92160.0860Consumer DiscretionaryCons DiscrANF equity

9,600Colgate-Palmolive Co.CLCons Staples66.48$638,220.9265.04$624,384.00($13,837)1.60$15,360.04.41%504.71532,826.70.750.033194.54%1,489.3416.80620.762517.03400.77282.46000.1116Consumer StaplesCons StaplesCL equity

13,500Pepsico Inc.PEPCons Staples70.67$953,992.3550.23$678,105.00($275,887)1.70$22,950.04.79%1,553.12178,013.30.690.033134.93%3,843.9713.91410.68564.88460.24073.28490.1619Consumer StaplesCons StaplesPEP equity

10,000Philip Morris Int'lPMCons Staples42.86$428,604.0037.15$371,500.00($57,104)2.16$21,600.02.62%2,023.03475,155.71.670.043802.70%2,028.7811.55000.31186.47290.17474.14540.1119Consumer StaplesCons StaplesPM equity

34,000Sara Lee CorpSLECons Staples14.15$481,098.6410.03$341,020.00($140,079)0.44$14,960.02.41%706.9167,090.41.020.024532.48%175.709.05230.22432.59440.06434.23730.1050Consumer StaplesCons StaplesSLE equity

28TOTAL$21,426,678.88$13,762,126.10($7,664,553)$404,082.797.15%1.0044100.00%60,733.9210.633.082.66%

CASH AND EQUIVALENTS

SSGA FDS U S Govt MMF$414,009.94$403,654.742.47%$9,962.22.85%34.06

ACCRUALS0.00%Portolio Weight - Consumer Staples

Dividend Accruals2.13%As Percemtage of Assets

TOTAL PORTFOLIO

Cash and Common Stocks$21,840,688.82$14,165,780.84$414,044.9100.00%0.00%

AGGREGATE PORTFOLIO METRICS

Average P/E10.63

Average P/BV3.08

Avg. Mkt. Cap. (in $ mln.)60,733.92

Portfolio Beta1.00

Dividend Yield2.66%

0.00%

ENTER Month-end DATE HERE

Sector Weight

MTDTrailing 3MOCalendar YTDFiscal YTDTrailing 12MO3YR5YR10YRInception

S&P 500-8.43%-14.09%-8.43%-34.51%-38.63%-11.78%-4.24%-2.65%7.17%

SIM (Gross of fees)-6.43%-13.38%-6.43%-37.95%-42.87%-11.39%-3.74%-1.11%6.27%

SIM (Net of fees)-6.43%-13.49%-6.43%-38.10%-38.10%-11.83%-4.22%-1.61%5.75%

+ Net Outperformance/ - (Net Underperformance)2.00%0.60%2.00%-3.60%0.53%-0.05%0.02%1.04%-1.42%

S&P 500 WeightSIM Weight+/-1-Jul1-Aug1-Sep1-Oct1-Nov1-Dec1-Jan1-Feb1-Mar1-Apr1-May1-Jun1-Jul

Consumer Discretionary8.19%9.67%1.48%S&P 500 TR1936.42338.24

Consumer Staples12.85%14.22%1.37%

Energy14.09%8.05%-6.05%20.75%

Financials10.72%9.59%-1.13%

Health Care15.94%21.50%5.56%

Industrials10.62%8.27%-2.35%

Information Technology16.22%18.97%2.75%

Materials3.04%1.79%-1.25%

Telecommunication Services3.72%2.19%-1.53%

Utilities4.61%2.89%-1.72%

Cash0.00%2.85%2.85%

100.00%100.00%0.00%

Top Ten Holding by Market Value

TickerTotal

JNJ$1,021,113

HPQ$830,525

PEP$678,105

MSFT$627,570

BRK/A$626,514

CL$624,384

BBY$683,688

COP$584,619

CAH$711,585

LLY$729,036

Grand Total$7,117,139

MBD03E65223.bin

Economic Analysis (cont.)Source: Bloomberg Composite

*Consumer Staples

Chart2

3.97

4.1

4.37

5.3

1.63

-0.3

-1.2

-1.7

1.25

CPI (yoy %)

Sheet1

Actual / Forecasts

IndicatorQ4 07Q1 08Q2 08Q3 08Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10

Economic Activity

Real GDP (qoq % saar)-0.20.92.8-0.5-3.8-3-0.81.12--

CPI (yoy %)3.974.14.375.31.63-0.3-1.2-1.71.25--

Core PCE (yoy %)2.12.22.32.31.81.61.41.21.2--

Unemployment (%)4.84.935.376.076.877.588.258.4--

External Balance

Curr. Acct. (% of GDP)-5.21-5.02-4.87-4.84-3.9-3.2-3.2-3.1-2.9--

Fiscal Balance

Budget (% of GDP)-1.3-1.5-2.2-3-4.4-6-5.6-6.1-6.2--

Interest Rates

Central Bank Rate (%)4.252.25220.250.250.250.250.250.75

3-Month Rate (%)4.72.692.784.051.431.281.141.141.271.61

2-Year Note (%)3.051.592.621.960.770.780.881.091.351.85

10-Year Note (%)4.033.413.973.832.212.392.532.793.073.39

Exchange Rates

EURUSD1.461.581.581.411.41.31.281.31.35--

CountriesAustraliaBelgiumCanadaChinaGermanyFranceUnited KingdomItalyJapanNetherlandsSwedenSingaporeUnited StatesHong KongReal GDPNominal GDPUnemploymentCentralGDP

YoYYoYSABank RateDeflator

1.9% 9/0810.4% 9/084.5%12/084.2500%12/08110.4 9/08

1.2% 9/083.0% 9/087.10%12/082.00% 1/09104.7 9/08

-0.8%11/086.30% 9/086.60%12/081.000% 1/09123.00 9/08

6.8%12/0818.1% 9/08N.A.5.3100% 1/09N.A.

0.8% 9/082.6% 9/087.8% 1/092.00% 1/09109.8 9/08

0.6% 9/082.6% 9/087.3% 9/082.00% 1/090.000 9/08

-1.8%12/082.3% 9/086.10%11/081.500% 1/09113.4 9/08

-0.9% 9/082.0% 9/086.67% 9/082.00% 1/09121.2 3/08

-0.5% 9/08-2.1% 9/084.4%12/080.100% 1/0988.9 9/08

1.8% 9/084.7% 9/083.90%12/082.00% 1/09122.4 9/08

0.3% 9/083.70% 9/085.61% 9/042.00% 1/09N.A.

-3.7%12/081.7% 9/082.6%12/080.13% 1/09109.0 9/08

-0.2%12/081.7%12/087.2%12/080.250% 1/09123.012/08

1.7% 9/083.8% 9/084.1%12/080.5000% 1/09104.3 9/08

ItemRange1Range2

Raw BETA1.3721.261

ALPHA(Intercept)-0.012-0.009

R^2(Correlation^2)0.9610.927

Std Dev Of Error0.1070.066

Std Error Of ALPHA0.0110.007

Std Error Of BETA0.0280.035

Number Of Points103103

Sheet2

IndicatorChange in Real GDP

Q4 07-0.2

Q1 080.9

Q2 082.8

Q3 08-0.5

Q4 08-3.8

Q1 09-3

Q2 09-0.8

Q3 091.1

Q4 092

IndicatorUnemployment (%)CPI (yoy %)

Q4 074.83.973.973.973.973.973.97

Q1 084.934.14.14.14.14.14.1

Q2 085.374.374.374.374.374.374.37

Q3 086.075.35.35.35.35.35.3

Q4 086.871.631.631.631.631.631.63

Q1 097.5-0.3-0.3-0.3-0.3-0.3-0.3

Q2 098-1.2-1.2-1.2-1.2-1.2-1.2

Q3 098.25-1.7-1.7-1.7-1.7-1.7-1.7

Q4 098.41.251.251.251.251.251.25

Sheet2

0

0

0

0

0

0

0

0

0

Change in Real GDP

Percent


Sheet3

0

0

0

0

0

0

0

0

0

Unemployment (%)

0

0

0

0

0

0

0

0

0

CPI (yoy %)

Economic Analysis (cont.)Source: Bespoke Investment Group

*Consumer Staples

Foreign Currency Exchange

Foreign Currency Exchange (cont.)Consumer Staples

Consumer Staples

Consumer StaplesSector Sales AnalysisSales GrowthCurrent growth below 10-year averageCurrent growth close to low of 5.8% experienced in early 2002 Downward trend since end of 2006, continues out to 12/31/2008Largest Companies in SectorProctor & Gamble Currently at 5.5%, below 10 yr. average of 8.1%Downward trend since mid-2006Wal-MartCurrently at 9%, below 10-yr. average of 11.7%Downward trend since beginning of 2007, with low (8.6%) occurring 1/31/08

*Consumer Staples

Consumer StaplesSector Earnings AnalysisEarnings GrowthVery low relative to 10-year averageEPS growth currently at 10 year lowLarge drop in EPS growth since 9/30/2007Largest Companies in SectorProctor & GambleCurrent growth at 12.1%, above 10-yr. average of 11.1%Growth falling since mid-2008; Lowest EPS growth (-1%) occurred in 2001Wal-MartCurrent growth at 11.4%, just under 10-yr. average of 12.5%EPS growth from mid-2007 to mid-2008, slight drop since

*Consumer Staples

Consumer StaplesSector Sales and Earnings Growth

*Consumer Staples

Consumer StaplesIndex Sales and Earnings GrowthSales GrowthCurrent growth right below 10-year average7.6% compared to mean of 8% Downward trend since 9/30/2008Earnings GrowthCurrent EPS growth negative, extremely low-16.7% compared to mean of 13.4%Currently near 10-year low of -17.3%, which occurred in the beginning of 2002EPS growth plummeting since end of 2006

*Consumer Staples

Index Sales and Earnings GrowthConsumer Staples

*Consumer Staples

Consumer StaplesComparison of Sales and Earnings

*Consumer Staples

Consumer StaplesMargin Growth AnalysisYTY net profit margin growth for both at 10-year lowConsumer Staples: -5%S&P 500: -22.8%Downward trend in Consumer Staples starting in early 2006S&P 500 plummeting roughly one year later

*Consumer Staples

Consumer StaplesComparative Margin Growth

*Consumer Staples

Consumer StaplesConsumer Staples has seen relatively constant margins but decreasing ROE from 2000-2007

S&P 500 has more volatile margins throughout the period and increasing ROEEBITDA range from 16.55% to 23.5%; EBIT range from 10.86% to 17.98%Comparative Income Statement Ratios

*Consumer Staples

Consumer StaplesFree Cash Flow & DividendsFree cash flow increasing from 2004-2007Dividends increasingFree cash flow after dividends decreasing most yearsDividend yield increasing, currently at 10-year high

*Consumer Staples

Sector ValuationConsumer Staples

Consumer Staples

Sector Valuation (cont.)Consumer Staples

Consumer Staples

Sector Valuation (cont.)Consumer StaplesHistorical Correlation with the S&P 500 is 0.64

Consumer Staples

Sector Valuation (cont.)Consumer Staples

Consumer Staples

RecommendationKeep current allocation, sector overweight relative to the S&P 500 by 175 basis pointsPossibility of another market downturn followed by low volatility around the 8000 point markHigher return for the sector vs. the market in the next 3-4 monthsWe see the market having flat returns, and the consumer stables sector outperforming by 200-300 basis pointsAttractive industries: Tobacco, BrewersConsumer Staples

Consumer Staples

ReferencesBloombergHoovers InvestopediaStandard &Poors (www.standardandpoors.com)StockValValue LineYahoo Finance (finance. yahoo.com)Bespoke Investment Group (http://bespokeinvest.com)

*Consumer Staples

Commodity PricesSupplemental InformationConsumer Staples

*Consumer Staples

Supplemental InformationConsumer Staples

*Consumer Staples

Future Earnings EstimatesConsumer StaplesSupplemental Information

EPS200920102011Mean2.842.983.28High2.973.193.49Low2.752.793.09Number of Est13146Number Up111Number Down783

*Consumer Staples

*For both the S&P 500 and the Consumer Staples sector, revenue growth and earnings growth hit lows in early 2002. Only EPS growth for the consumer staples sector has fallen below these numbers as of 12/31/08. The highest sales experienced in Consumer Staples occurred in early 2007, when during this period the S&P 500 had the lowest sales in over 5 years.

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Documents

Consumer Staples (SP-30)