Consumer Staples:Stock Recommendations

Robert BlakeJason EbbingRica Rahardjo

Agenda Recap of Sector Overview Recommendations Summary Questions

Where we left off… Mature slow growth defensive sector

Offers protection during economic downturns International markets key to growth Sector weights as of July 27th

S&P500: 9.36% SIM: 7.78% (Underweight 158 bp)

Recommended to further underweight by 50bp Valuation indicates sector is not cheap Sector faced with constricting margins Believe economy will continue to grow Opportunity to invest in higher growth sectors

Current Sector Holdings

Consumer Staples Holdings

BUD19%

CL31%

MO50%

CompanyTicker

SymbolSIM

Shares SIM %Current

Price Value

Altria Group Inc. MO 13,600 3.67 65.17 886,312

Anheuser-Busch BUD 13,500 2.72 48.65 656,775

Colgate-Palmolive Co. CL 4,900 1.39 68.45 335,405

Total Sector 7.781,878,49

2

CompanyTicker

SymbolSIM

Shares SIM %Current

Price Value Action

Altria Group Inc. MO 13,600 3.67 65.17 886,312 None

Anheuser-Busch BUD 6,700 1.35 48.65 325,955 Sell 137bp

Colgate-Palmolive Co. CL 7,900 2.24 68.45 540,755 Buy 85bp

Total Sector 7.26 1,753,022Return

52bp

Proposed Sector Holdings

Consumer Staples Holdings

BUD35%

CL18%

MO47%

Recommendation #1:

Reduce Anheuser-Busch Holdings

Anheuser-Busch Largest brewer in North America

48.8% market share Segments

U.S. Beer International Beer Packaging Entertainment

Growth opportunities International expansion Strategic investment in other beverage producers Distribution agreements Rumored merger with InBev

A-B Business AnalysisPros Strong brand

Successfully implemented pricing increases Massive distribution channel

Being leveraged to diversify product mix Strategic investments contributing to growth

Grupo Modelo generating much of BUD’s recent growth Consistent cash flows

Dividend yield of 2.70% History of and planned stock buybacks which should boost stock price

Cons North American growth flat

Accounts for majority of revenues Weakness in core brands Margins under pressure

Commodity, labor, marketing, and distribution costs increasing Expansion and diversification strategy is a wildcard

Growth so far has largely been just enough to offset declines in core brands

A-B Financial AnalysisMultiple High Low Mean Current

Target Multiple

Target/share value Price

Price/Forward EPS 22.7 16.0 18.9 16.4 17.8 2.67 47.53

Price/Sales 3.6 2.1 2.7 2.3 2.5 21.31 53.28

Price/Book 17.3 8.3 12.4 9.5 10.0 5.12 51.20

Price/EBITDA 12.7 8.3 10.1 10.0 10.5 4.87 51.14

Price/Cash Flow 17.8 10.9 13.4 12.5 13.4 3.89 52.13

Average 51.05

Undervalued based on 5-year historical absolute multiples Average of target prices: $51.05

Yields a 4.9% upside from closing price of $48.65 on July 27th

Relative valuations imply that BUD is slightly undervalued

A-B Valuation & Technicals

DCF model implies a value of $50.70/share 4.2% upside from July 27th closing price

Technical Analysis Resistance around $55/share 50 Day Moving average - bearish 200 Day Moving average - bullish Chart trending down - bearish

Anheuser-Busch Summary Lack of organic growth is cause for concern International growth slow in materializing Concerned BUD will need to make sizeable

unplanned investments in marketing and expansion Valuation, performance, and market sentiment

imply limited upside gains in the near term Recommend selling 137bp (50% of holding) Diversification and international endeavors could be

catalysts for higher valuations Re-evaluate remaining position in 3 months

Recommendation #2:

Increase Colgate-Palmolive Holdings

Colgate-Palmolive Large, mature consumer products company Segments

Oral, Personal, and Home Care Pet Nutrition

Growth Opportunities International expansion Possible merger talks with Unilever Undergoing restructuring plan which includes

increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets.

C-P Business AnalysisPros Strong brand recognition

Market leader in 53 of the 71 largest toothpaste markets worldwide

Growth in foreign markets Currently, 75% of sales are from international operations and

growing Benefit of weak dollar

Makes goods cheaper to foreign buyers and increases earnings when translated back to dollars

Benefits of restructuring In the second quarter, earnings skyrocketed 49% to $0.76 per

share. Excluding restructuring costs, Colgate earned $0.84 a share, compared to $0.72 a year ago.

C-P Business AnalysisCons Modest growth domestically

2nd quarter sales increase over previous year:North America : 3.5% Europe/South Pacific : 17.0%Latin America: 16.0% Asia/Africa : 15.5%

Pet food recall/counterfeit toothpaste hurting brand Colgate has been proactive in restoring trust in brand

Rising commodity prices/energy prices reduces net margin

Colgate (CL) Valuation

DCF model implies a value of $80.47/share•17.5% upside from July 27th closing price of $68.45•2.1% Dividend Yield

Price steadily increasing along the trend line

CL Financial AnalysisStock Valuation

Absolute Valuation High Low Mean Current #Your Target Multiple

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

Your Target Price

(F x G)

A. B. C. D. E. F. G. H.

P/Forward E 36.7 17.3 24 19.2 24 3.13 75.12

P/S 4.72 2.31 3.25 2.99 3.25 23.89 77.64

P/B 100 9.3 24 26.4 24 3.04 72.99

P/EBITDA 26.1 9.8 14.8 14.3 14.8 4.77 70.60

P/CF 32.4 14.9 20.7 19 20.7 3.59 72.16

Average $73.70

•Moderately undervalued based on 10-year historical absolute multiple measurements•Average of target prices based on multiples: $73.70

•7.6% upside from closing price of $68.45 on July 27th

Colgate Summary Generating higher earnings through

restructuring plan Excellent international growth Market leader in their key segment

(toothpaste) DCF target price: 80.47, 17.5% upside. Recommend buying 85 basis points

(61.2% increase in current holdings)

Recommendation Summary Anheuser-Busch is fairly valued

Lacking a catalyst upside is currently limited Sell 137bp now and re-evaluate position as

information about diversification strategy is available

Colgate offers an attractive upside Company restructuring should boost growth International exposure and weak dollar create a

favorable environment for CL Accumulate an additional 85bp

Return 52bp for investment in other sectors

Questions

BACKUP SLIDES

A-B Absolute Valuation Charts

A-B Absolute Valuation Charts

A-B Relative Valuation Charts

A-B Relative Valuation Charts

A-B Technical Chart

CL Relative Valuation Chart

CL Relative Valuation Chart