Kurt BrownRené HegglinShengbo Mao

Consumer StaplesSector Presentation

THE STOCK MARKET

Agenda

• Size and Composition• Business Analysis• Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation• Q&A

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Basics

• Consumer Staples - the industries that manufactureand sell food/beverages, tobacco, prescriptiondrugs and household products (Investopedia)

• Outperform the market in bear markets and underperform in bull markets

• Not an exciting sector– Stable returns– Diversification benefits – low beta

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Size and Composition

S&P 500 Sectors

Consumer staples are currently 11.7% of the S&P 500

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Largest Consumer Staples CompaniesRank Company Market Capitalization (10-23-09) % of Sector

1 Wal-Mart Stores, Inc. $194.7 billion 15.8%

2 Proctor & Gamble Co. $169.7 billion 13.8%

3 Coca-Cola Co. $125.3 billion 10.2%

4 PepsiCo, Inc. $96.0 billion 7.8%

5 Philip Morris International, Inc. $95.7 billion 7.8%6 CVS Caremark Corp. $54.5 billion 4.4%

7 Kraft Foods, Inc. $40.0 billion 3.2%

8 Colgate-Palmolive Co. $39.6 billion 3.2%

9 Walgreen Co. $39.2 billion 3.2%

10 Altria Group, Inc. $37.7 billion 3.0%

27 Safeway, Inc. $9.1 billion 0.7%

The three largest companies account for nearly 40% of the consumer staples market cap.

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Sector PerformanceQTD Return YTD Return 2008 Return

S&P 500 2.1% 19.5% (38.5%)Energy 7.9% 14.3% (35.9%)

Materials 1.9% 38.4% (47.0%)

Industrials 0.6% 12.6% (41.5%)

Consumer Discretionary 2.6% 31.1% (34.7%)

Consumer Staples 2.0% 8.9% (17.8%)Health Care 0.0% 7.8% (24.5%)

Financials 0.9% 20.3% (56.9%)

Information Technology 3.2% 49.5% (43.7%)

Telecom Services (4.8%) (7.7%) (33.6%)

Utilities 0.4% 1.1% (31.5%)

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Outperforming in bear markets

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Underperforming in bullish markets

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Relative Performance

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Industry % of Sector YTD Return Company

Agriculture Products 1.7% 4.0% Archer-Daniels Midland

Brewers 0.7% 2.1% Molson Coors Brewing

Distillers & Vintners 0.8% (1.9%) Constellation Brands

Drug Retail 8.5% 43.2% CVS Caremark

Food Distributors 1.4% 18.3% Sysco

Food Retail 3.1% 8.1% Kroger

Household Products 21.5% (1.9%) Proctor & Gamble

HyperMarkets/SuperCenters 12.2% (5.6%) Wal-Mart Stores

Packaged Foods & Meats 12.4% 9.7% Kraft

Personal Products 1.7% 39.1% Avon Products

Soft Drinks 21.9% 21.0% Coca-Cola

Tobacco 14.2% 19.8% Philip Morris

There are currently 41 companies in the consumer staples sector.

Consumer Staples Industries

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Business Analysis

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Life Cycle

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• Stable inelastic demand based on consumer needs(less sensitive to economic cycles)

• Defensive (non-cyclical)– Hedge against economic downturn

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Industry Characteristics• High barriers to entry– Dominated by large, well-established companies – Tremendous capital requirements– Takes a long time to reach EOS– Hard to build wide distribution networks

• High buyer power – Not well differentiated product – Low switching cost

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• Low supplier power– Long-term contracting/agreements common– Companies such as Wal-Mart have huge bargaining

power• High threat of substitution– Multiple brands competing in same segment

• Intensive competition– Consumers are price sensitive (despite brand

loyalty) with undifferentiated products

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Growth Opportunities

• Sector relying on international expansion to spur growth.

• Branding is the key - powerful brand names command significant price premiums to similar generic labels

Economic Analysis

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Possible External Factors• Exchange Rates (Strength of dollar)• Commodity Prices• GDP growth• CPI and Inflation• Unemployment Rate• Trade Balance• Others Factors?

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Model Basis• Variables regarded do not fulfill Gauss-Markov

requirements to compute a Multiple Regression, but a Probit model allows a rough estimate

• Research question: Under which circumstances (changes in economic variables) does the consumer staples sector outperform the S&P500?

• Variables regarded include: Consumer Price Index, Producer Price Index, M2 Money Supply, Spread of 10year-2year Treasury Bill rate, Real GDP growth rate, Consumer Confidence, Unemployment Rate, Savings Rate, Trade Weighted Dollar Value, Trade Balance

Probit Model

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balancetrade

dollar

ratesaving

unemp

confcons

gdp

rf

moneym

ppi

cpi

X

XXY

Y

growth

yearyearSpread

_

,

,_

,

,_

,

,

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,

,

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500 P&S soutperform St. Cons. if ,1

210

Probit Model OutputCall:

glm(formula = dummy ~ cpi + ppi + m2_money + I(rf_10 - rf_2) + gdp_growth + cons_conf + unemp + saving_rate + dollar + trade_bal, family = binomial(link = "probit"))

Coefficients:

Estimate Std. Error z value Pr(>|z|)

(Intercept) -5.6533276 4.7638175 -1.187 0.2353

cpi 0.7946791 0.3573893 2.224 0.0262 *

ppi -0.2416636 0.1498299 -1.613 0.1068

m2_money 0.1433757 0.1352248 1.060 0.2890

I(rf_10 - rf_2) 0.0438816 0.2642102 0.166 0.8681

gdp_growth -0.0477027 0.0749970 -0.636 0.5247

cons_conf 0.0036570 0.0188761 0.194 0.8464

unemp -0.1792947 0.3523537 -0.509 0.6109

saving_rate 0.3702471 0.1744287 2.123 0.0338 *

dollar 2.8677897 1.5581677 1.840 0.0657 .

trade_bal 0.0005463 0.0020099 0.272 0.7858

---

Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

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Financial Analysis

Revenue Consumer Staples

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EBITDA Margins

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Return On Equity

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Valuation

Absolute Ratios

Price/Sales

Price/Book

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Relative to S&P 500

Price/Sales

Price/Book

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Valuation by IndustryIndustry P/E Change from Median

Agriculture Products (22%)

Brewers (25%)

Distillers & Vintners (24%)

Drug Retail (35%)

Food Distributors (26%)

Food Retail (13%)

Household Products (28%)

HyperMarkets/SuperCenters (13%)

Packaged Foods & Meats (24%)

Personal Products (19%)

Soft Drinks (23%)

Tobacco 4%

These percentages were similar across other ratios like P/S, P/B and P/CF

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Recommendation

SIM PortfolioSector S&P 500 Weight SIM Weight +/-

Consumer Discretionary 9.11% 7.72% -1.39%

Consumer Staples 11.54% 11.48% -0.06%

Energy 11.70% 12.00% 0.29%

Financials 15.23% 6.65% -8.57%

Health Care 13.11% 13.11% -0.01%

Industrials 10.26% 12.91% 2.64%

Information Technology 18.65% 21.73% 3.08%

Materials 3.50% 4.99% 1.48%

Telecom Services 3.17% 3.70% 0.53%

Utilities 3.72% 3.30% -0.42%

Values based off of September 30, 2009 report

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Recommendation

• Increase weight of consumer staples by 26 basis points– Slow economic recovery– The market has recovered too much too quickly• Will see a small correction fairly soon

– Exposure to international growth

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What questions do you have?