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Sector Outlook: Consumer Staples Robert Blake Jason Ebbing Rica Rahardjo

Sector Outlook: Consumer Staples

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Sector Outlook: Consumer Staples. Robert Blake Jason Ebbing Rica Rahardjo. Agenda. Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions. Consumer Staples Sector (SP-30). Ranked 7 out of 10 by market cap - PowerPoint PPT Presentation

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Page 1: Sector Outlook: Consumer Staples

Sector Outlook:Consumer Staples

Robert BlakeJason EbbingRica Rahardjo

Page 2: Sector Outlook: Consumer Staples

Agenda

Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions

Page 3: Sector Outlook: Consumer Staples

Consumer Staples Sector (SP-30)

•Ranked 7 out of 10 by market cap

•Consumer Staples lagging S&P500 by 1.06% QTD and 3.44% YTDS&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 07/13/2007.

Number of Companies Market Cap

% of S&P500 QTD YTD

S&P 500 500 13,811,796 100.00% 3.27% 9.46%

Financials 92 2,859,130 20.70% 1.64% -0.39%

Information Technology 74 2,180,981 15.79% 4.61% 13.99%

Health Care 53 1,601,217 11.59% 2.09% 7.42%

Industrials 53 1,548,298 11.21% 4.24% 14.54%

Energy 32 1,546,234 11.20% 7.31% 24.79%

Consumer Discretionary 88 1,382,362 10.01% 2.01% 4.47%

Consumer Staples 39 1,268,144 9.18% 2.21% 6.02%

Telecommunications Services 9 498,688 3.61% -0.45% 13.06%

Utilities 32 485,055 3.51% 3.37% 10.85%

Materials 28 441,686 3.20% 6.14% 22.57%

Page 4: Sector Outlook: Consumer Staples

Industry Makeup of SP-30

S&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 07/13/2007.

Price Change (%)

% of Sector

13 weeks YTD 5-Year

Beta (5 Year)

Consumer Staples 100% 2.4 6.0 5.5 0.5

Agriculture Products 1.88 (3.7) 14.5 25.6 0.7

Brewers 3.39 (2.5) 4.8 0.2 0.3

Distillers & Vintners 0.81 11.2 (4.5) 12.1 0.3

Drug Retail 7.99 1.2 7.0 10.0 0.7

Food Distributors 1.60 (3.0) (10.6) 4.7 0.7

Food Retail 4.08 1.5 13.3 2.6 0.9

Household Products 21.48 (1.0) (1.5) 6.2 0.3

Hypermarkets & Super Centers 11.61 5.9 8.6 NA NA

Packaged Foods & Meats 14.00 4.5 8.3 6.8 0.4

Personal Products 1.79 0.6 17.7 17.9 0.3

Soft Drinks 17.91 5.6 8.9 4.7 0.7

Tobacco 13.44 2.4 9.5 15.5 0.8

Page 5: Sector Outlook: Consumer Staples

Consumer Staples – Household NamesRank Symbol Company

Market Cap (Billions)

21SWY Safeway Inc. 15.73

22HNZ Heinz (H.J.) 15.23

23CPB Campbell Soup 15.21

24CAG ConAgra Foods Inc. 13.33

25SLE Sara Lee Corp. 12.7

26CCE Coca-Cola Enterprises 11.71

27HSY The Hershey Company 11.68

28SVU Supervalu Inc. 9.99

29CLX Clorox Co. 9.55

30 EL Estee Lauder Cos. 9.11

31BF.B Brown-Forman Corp. 8.94

32TSN Tyson Foods 8.51

33UST UST Inc. 8.4

34TAP

Molson Coors Brewing Company 8.3

35PBG Pepsi Bottling Group 8.16

36WFMI Whole Foods Market 5.73

37STZ Constellation Brands 5.05

38MKC McCormick & Co. 4.82

39 DF Dean Foods 4.11

Rank Symbol CompanyMarket Cap (Billions)

1 WMT Wal-Mart Stores 201.95

2 PG Procter & Gamble 197.31

3 MO Altria Group Inc. 150.8

4 KO Coca Cola Co. 122.68

5 PEP PepsiCo Inc. 108.89

6 KFT Kraft Foods Inc-A 57.57

7 CVS CVS Caremark Corp. 56.87

8 WAG Walgreen Co. 44.91

9 BUD Anheuser-Busch 38.61

10 CL Colgate-Palmolive 35.01

11 KMB Kimberly-Clark 30.57

12 COST Costco Co. 27.58

13 ADM Archer-Daniels-Midland 23.91

14 K Kellogg Co. 20.77

15 GIS General Mills 20.50

16 KR Kroger Co. 20.44

17 SYY Sysco Corp. 20.31

18 RAI Reynolds American Inc. 19.46

19 AVP Avon Products 17.15

20 WWY Wrigley (Wm) Jr. 15.77

Page 6: Sector Outlook: Consumer Staples

S&P500 vs. SIM Portfolio

Consumer Staples S&P500: 9.18% SIM: 7.72%

SIM underweight 146 bp In recent quarters SIM has typically been underweight more

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Cons Discr

Con Staples

Energy

Utilities

Info Tech

Telecom

Industrials

Materials

Financials

Health Care

% of Total Portfolio

S&P

SIM

Page 7: Sector Outlook: Consumer Staples

Historical Sector Performance

•Sustained growth trend over last 4 years (red line)

•Currently locked in a narrow trading range with support at $48 and resistance around $50.50 (orange band)

Page 8: Sector Outlook: Consumer Staples

Performance Relative to S&P500

Page 9: Sector Outlook: Consumer Staples

Agenda

Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions

Page 10: Sector Outlook: Consumer Staples

Sector Factors Defensive (non-cyclical)

Consistent returns irregardless of economic conditions

Good dividend yieldsGenerally lags market during periods of growth

Composed of stable, slow growth multinational companiesWal-MartProctor and Gamble

Necessities consumers use on a daily basis

Page 11: Sector Outlook: Consumer Staples

Sector Status

Page 12: Sector Outlook: Consumer Staples

Sector Demand

Relative inelastic demand for products Steady demand in US Sector relying on international expansion

to spur growth Branding important to differentiate an

undifferentiated product

Page 13: Sector Outlook: Consumer Staples

Sector Characteristics High barriers to entry

Dominated by large, well-established companies

High capital requirements to enter sector

Mature industry with strong brand identities

Difficult to create wide distribution network

High buyer power

Undifferentiated product equates to low switching cost

Page 14: Sector Outlook: Consumer Staples

Sector Characteristics (Cont.) Low Supplier Power

Long-term contracting/agreements common High threat of substitution

Multiple brands competing in same product line High threat of competition

Consumers are price sensitive (despite brand loyalty) with undifferentiated products

Page 15: Sector Outlook: Consumer Staples

Agenda

Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions

Page 16: Sector Outlook: Consumer Staples

Economic AnalysisDEMAND:

GDP growth (+)Population growth – especially growth in

middle class of developing nations (+)Unemployment rate (+)Consumer Price Index (-)Personal Income (+)

Page 17: Sector Outlook: Consumer Staples

Economic Analysis (cont.) SUPPLY:

Energy Prices – increase cost of operations (-)Commodity Prices – increase price of inputs (-)Foreign Exchange Rates – reduces profits from

international operation (+/-) Inflation – increase input costs (commodities,

labor, raw materials) (-)

(Increasing supply costs reduces profit margins when demand is stable)

Page 18: Sector Outlook: Consumer Staples

Commodity Price Impact

Page 19: Sector Outlook: Consumer Staples

Agenda

Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions

Page 20: Sector Outlook: Consumer Staples

Financial Analysis

•% Revenue growth is currently above average and trending down

•Year over year net profit margins changes are negative.

% Net Profit Margin is currently decreasing

•Growth rate is decreasing

•Dividend Yield is stable

Page 21: Sector Outlook: Consumer Staples

Wal Mart (WMT)Industry: Hypermarkets & Super Centers

Page 22: Sector Outlook: Consumer Staples

Procter and Gamble Co. (PG)Industry: Personal and Household Products

Page 23: Sector Outlook: Consumer Staples

ALTRIA (MO) Industry: Tobacco

Page 24: Sector Outlook: Consumer Staples

Income Statement AnalysisSP30 and S&P 500

•Gross Profit margins have decreased slightly

•Net Profit Margin also continues to decline year over year

•Gross Profit Margins are increasing slightly

•Net Profit Margin is significantly higher than SP30

Page 25: Sector Outlook: Consumer Staples

Cash Flow Analysis – SP30

User of Cash Flow !!

Page 26: Sector Outlook: Consumer Staples

Agenda

Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions

Page 27: Sector Outlook: Consumer Staples

Absolute Valuation – SP30

On an absolute basis sector looks slightly undervalued.

Page 28: Sector Outlook: Consumer Staples

Absolute Valuation - SP5A

On an absolute basis S&P500 appears fairly valued.

Page 29: Sector Outlook: Consumer Staples

SP30 Relative Valuation

On a relative basis SP30 appears fairly valued.

Page 30: Sector Outlook: Consumer Staples

Agenda

Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions

Page 31: Sector Outlook: Consumer Staples

Recommendations

Defensive Sector – outperforms S&P 500 when economy is poor. We believe the economy will continue to fair well in the near term

Consumer staples will continue to underperform relative to the S&P500 Growth rate is decreasing and net profit margins have declined

each year since 2000. Recommend underweighting of sector by 50 basis points

now, with possible further underweighting in the future based on economic indicators (GDP growth, unemployment, inflation)

Page 32: Sector Outlook: Consumer Staples

Questions