Consumer Staples
Presentation
August 4, 2009
Shane Connor
Josh Drushel
Jessica Kirwin
Agenda




Update of Sector Recommendation
Stock Recommendations
Summary
Questions
Consumer Staples Recap
 SIM Current Holdings – 11.65%
 S&P 500 – 11.81%
 Sector Characteristics
– Stable demand
– Defensive (non-cyclical)
 International Growth could be a bonus
 Class approved 25 bps increase
Sector Holdings
Current Holdings
SIM – 11.65%
Recommended Holdings
SIM – 11.90%
 PepsiCo – 4.44%
 PepsiCo – 3.94%
 Wal-Mart Stores Inc – 3.00%
 Wal-Mart Stores Inc – 3.00%
 Colgate Palmolive – 2.13%
 Safeway – 2.88%
 Philip Morris Int’l – 2.09%
 Philip Morris Int’l – 2.09%
 weights as of 7/31/09
Colgate-Palmolive (NYSE:CL)
• Company Overview: CL has been manufacturing and
marketing consumer products worldwide since 1803.
It operates under two segments which are oral, personal,
and home care as well as pet nutrition.
• Recommendation: Sell 234 basis points
• Investment Thesis: CL is a very stable performer in both
good and bad economies, but due to the classes decision
that the economy is turning around we feel there are
much better opportunities that persist.
Industry: Personal and Household Products
Company
Symbol
Forward Price /
Earnings
Price / Sales
15.7
15.1
1.9
2.96%
CL
18
16.0
2.4
2.43%
AVP
19.4
17.4
1.4
2.59%
EL
19.9
24.1
.9
1.51%
ECL
22.7
19.8
1.7
1.35%
Industry Average
Colgate-Palmolive
Avon
Estee Lauder
Ecolab
Price /
Earnings
Dividend
Yield
Price Target
Absolute
Valuation
High
Low
Median
Current
# Your
Target
Multiple
*Your Target
E, S, B,
etc/Share
Your Target
Price
(F x G)
P/Forward E
21.9
13.7
19.1
16
17.68
4.12
72.84
P/S
3.2
1.9
2.6
2.4
2.53
32.62
82.53
P/B
48.8
13.9
23.4
20.5
26.65
2.73
72.87
P/EBITDA
16.5
8.83
11.83
10.46
11.9
5.65
67.23
P/CF
20.5
12.8
17.4
15.4
16.53
4.40
72.73
Average
73.64
DCF
Discount Rate
CL
10%
Terminal FCF
Growth
3%
Final Price Target= 75% DCF PT + 25% Valuation PT= $77.03
Closing price 8/4/09 = $72.21
Implied Upside= Price Appreciation + Dividend Yield = 9.13%
78.17
Positives/Risks
• Positives
- Stable performer in all types of economies
- Potential for continued international growth
- Safe bet investment
• Risks
- Recession may only be beginning internationally
- Continued loss of market share domestically
- Investing in CL and the economy completely turns around
Philip Morris Int’s (NYSE:PM)
Company Overview: PM is the leading
international tobacco company with 7 of the
world’s top 15 brands
Recommendation: Hold current position
Investment Thesis: PM is a stable performer
Industry: Tobacco
Company
Symbol
Industry Average
Price /
Earnings
Forward
Price /
Earnings
Price to Sales
Price/Cash
Flow
13.1
12.6
2.7
11.4
Philip Morris Int’l
PM
13.7
14.6
3.7
12.2
British American Tobacco
BTI
13.4
12.5
2.9
-
Lorillard
LO
12.9
12.3
2.7
12.5
Reynolds American
RAI
9.0
9.6
1.5
8.1
As of 8/2/09
Price Target
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
P/Forward E
16.1
11.0
13.9
14.1
P/S
P/B
P/EBITDA
P/CF
Average
DCF
7.3
14.6
11.98
117
1.2
7.2
2.87
8.8
1.9
8.4
9.4
64.5
PM
14.0
*Your
Target E,
S, B,
etc/Share
3.5
Your
Target
Price
(F x G)
49.00
3.4
14.6
8.8
11.5
2.1
12.0
9.2
11.0
33.48
3.01
5.0
3.83
Discount
Rate
Terminal
FCF
Growth
3%
70.31
36.12
46.00
42.13
48.71
Price Target
10%
51.44
Final Price Target= 75% DCF PT + 25% Valuation PT= $50.76
Implied Upside= Price Appreciation + Dividend Yield = 18.2%
Positives / Risks
• Positives
–
–
–
–
–
Lower litigation risk compared to U.S.
Products sold in over 160 countries
Prices of products increased to enhance profitability (2009)
Free Cash Flow of $6.8 Billion in 2008
Owns 7 of the world’s top 15 brands – including Marlboro the #1 Brand
Worldwide
– Customers are addicted to its products
• Risks
– Increased excise taxes in Europe
– Value of the dollar
– The potential of increased regulation abroad
PepsiCo (NYSE:PEP)
Company Overview: PepsiCo manufactures,
markets, and sells various snacks, carbonated
and non-carbonated beverages, and foods
worldwide
Recommendation: Sell 50 bps
Investment Thesis: PepsiCo is a stable performer
that has a diversified product line and good
international growth. I feel the company is
currently undervalued.
Merger with PBG and PAS
• PepsiCo announced today merger agreements with The
Pepsi Bottling Group Inc. and PepsiAmericas, Inc.
• Total cost will be 7.8 billion
– Pepsi Bottling Group
• $36.50 / share or .6432 PepsiCo shares
– PepsiAmericas
• 25.50 / share or .5022 PepsiCo shares
• Create annual pre-tax synergies of 300 million by 2015
Industry: Beverages
Company
Industry
Current
PepsiCo Inc
Coca-Cola
Co
Dr. Pepper
Snapple
Group
Hansen
Natural
Symbol
Price /
Earnings
Price to
Sales
Dividend
Yield
20.2
Forward
Price /
Earnings
19.3
2.4
2.12%
PEP
KO
15.5
16.4
14.8
15.7
2.1
3.7
3.17%
3.29%
DPS
N/A
14.1
1.1
N/A
HANS
15.1
13.6
2.6
N/A
Price Target
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
P/Forward
E
P/S
P/B
P/EBITDA
P/CF
Average
DCF
22.7
13.1
19.8
14.8
3.5
7.7
14.72
19.6
1.8
5.5
8.55
10.4
3.1
6.7
12.61
17.1
PEP
17.5
*Your
Target E,
S, B,
etc/Share
$3.74
Your
Target
Price
(F x G)
$65.45
2.1
7.4
9.2
12.2
2.5
7.2
10.5
14.5
$32.47
7.74
6.22
4.69
Current
Price
Discount
Rate
$56.20
10%
Terminal
FCF
Growth
3%
$81.71
$55.71
$65.31
$68.00
$67.24
Price Target
$69.78
Final Price Target= 75% DCF PT + 25% Valuation PT= $69.15
Implied Upside= Price Appreciation + Dividend Yield = 26.2%
Positives / Risks
• Positives
– Frito-Lay brand
– Acquisition of PBG and PAS
– Continuing foreign investment
– Low cost environment
• Risks
– Merger integration issues
– Continuing weak performance by Americas
Beverage segment
– Private label growth
– Possible sales tax on carbonated soda
beverages
Safeway (NYSE:SWY)
Company Overview: Safeway is a food and drug retailer
founded in 1915 and headquartered in California. They
operate over 1,700 grocery stores in western and central
U.S. as well as Canada and Mexico. They are the third
largest grocery retailer.
Recommendation: Buy 288 basis points
Investment Thesis: We feel that Safeway is well positioned to
benefit from a broad economic recovery. The company has
an attractive FCF yield and is aggressively buying back
shares.
Current Situation
• YTD :Safeway (-18.4%) vs. S&P 12.67%
Missed Analysts
EPS est.
Lowered
Guidance (2.102.30)
Lowered
Guidance
(1.70-1.90)
Positives
• Positives
- Attractive Valuation
- Strong Free Cash Flow
- History of share repurchases
Numbers in
millions
Diluted Shares
% change
# of shares
repurchased
Average purchase
price
FY
2007
FY
2008
Q1
2009
Q2
2009
445
-2.02%
436
-1.61%
429
-1.63%
422
6.7
12.6
3.5
9.5
33.57
28.45
18.40
19.63
Positives Cont.
• - More sensitive to economic recovery
Risks
• Risks
-Unemployment continues to rise
Risk Cont.
-Food prices (disinflation)
-Margin compression
-Continuing same store sales declines
Industry: Retail Food
Company
Symbol
Industry
Price /
Earnings
Forward
Price /
Earnings
Price to
Sales
P/CF
9.7
10.6
.2
4.3
Kroger
KR
10.7
10.2
.2
5.0
Supervalu Inc.
SVU
N/A
6.8
.1
1.9
Wal-Mart
WMT
14.5
13.8
.5
9.6
Safeway
SWY
8.3
9.4
.2
4
Safeway Price Target
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
*Your
Target E,
S, B,
etc/Share
Your
Target
Price
(F x G)
P/E (ttm)
21.1
8.3
15.6
9.4
11.5
P/Forward
E
P/S
P/B
P/EBITDA
P/CF
Average
Current
Price
Implied
Upside
19
8
15
10.6
12
1.90
22.8
.4
2.8
6.43
9.2
.2
1.1
2.68
3.8
.3
2.2
4.92
6.5
.2
1.1
2.98
4
.3
1.5
3.75
5.5
96.5
17.21
6.35
4.73
28.95
25.81
23.81
26.03
25.48
19.03
34%
Final Price Target= Valuation PT + Risk Factor = 24.40
Implied Upside= Price Appreciation + Dividend Yield = 30.3%
Thank You
• Questions?