Consumer Staples (SP-30)
Ryan Chestnut
Brian Cully
Sabina Curovac
Orla Costello
Agenda
■ Sector Overview
■ Business Analysis
■ Economic Forecasts
■ Financial Analysis
■ Sector Valuation
■ Recommendation
Consumer Staples
Market Capitalization
■ Consumer Staples Sector = $924,124 million
■ S&P 500 = $7,192,455 million
■ Consumer Staples accounts for 12.85% of the S&P 500
■ Consumer Staples accounts for 14.22% of the assets in SIM
Portfolio.
Desc
S&P 500
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunications Services
Utilities
GICS®
10
15
20
25
30
35
40
45
50
55
NC
500
39
29
59
80
40
54
81
75
9
34
MKTCAP
7192455
1014055
218994
763552
589017
924124
1146392
770678
1166403
267760
331480
QTD
-8.57%
-3.16%
-7.24%
-12.66%
-10.64%
-7.67%
-1.30%
-26.55%
-3.08%
-11.06%
-0.83%
YTD
-8.57%
-3.16%
-7.24%
-12.66%
-10.64%
-7.67%
-1.30%
-26.55%
-3.08%
-11.06%
-0.83%
Source: standardandpoors.com
Consumer Staples
Consumer Staples vs. S&P 500 YTD
Consumer Staples
Industries Within Consumer Staples Sector
Industry
Agricultural Products
Brewers
Distillers & Vintners
Drug Retail
Food Distributors
Food Retail
Household Products
HyperMarkets & Super Centers
Packaged Foods & Meats
Personal Products
Soft Drinks
Tobacco
Index Value
473.25
465.41
130.26
385.97
267.33
87.57
322.16
86.62
217.66
224.88
194.81
346.87
% of Sector
1.9
0.65
0.79
7.11
1.45
3.14
24.22
13.5
13.61
1.27
18.76
13.6
Jan.
-5
-17.7
-10.3
0.1
-2.8
-8.9
-10
-15.7
1.8
-15
-6.9
-7.2
3 Mos.
32.1
4
5.6
-5
-14.9
-8
-13.3
-16.5
-8.2
-20.3
-8
-13.8
YTD
-5
-17.7
-10.3
0.1
-2.8
-8.9
-10
-15.7
1.8
-15
-6.9
-7.2
2008 5-yr Beta
-37.9
0.05
40
0.4
-21.9
1.1
-30.7
0.7
-26.5
0.9
-30.2
0.8
-16.1
0.5
8.7
0.4
-15.1
0.5
-36.9
1.3
-28.7
0.6
-22.1
0.6
5-yr Std. Dev.
35.3
18.3
22.9
17.2
20.1
17.6
13.6
15.8
12.1
25.9
14.9
17
Source: standardandpoors.com
Consumer Staples
Companies With Consumer Staples Sector
Symbol
MO
ADM
AVP
BF.B
CPB
CLX
KO
CCE
CL
CAG
STZ
COST
CVS
DF
DPS
EL
GIS
HNZ
K
KMB
Company
Altria Group Inc.
Archer-Daniels-Midland
Avon Products
Brown-Forman Corp.
Campbell Soup
Clorox Co.
Coca Cola Co.
Coca-Cola Enterprises
Colgate-Palmolive
ConAgra Foods Inc.
Constellation Brands
Costco Co.
CVS Caremark Corp.
Dean Foods
Dr Pepper Snapple Group Inc
Estee Lauder Cos.
General Mills
Heinz (H.J.)
Kellogg Co.
Kimberly-Clark
Country
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
Price
16.54
27.38
20.45
45.41
30.37
50.15
42.72
11.23
65.04
17.1
14.52
45.03
26.88
19.34
16.45
26.25
59.15
36.5
43.69
51.47
Symbol
KFT
KR
LO
MKC
TAP
PBG
PEP
PM
PG
RAI
SWY
SLE
SJM
SVU
SYY
HSY
TSN
WMT
WAG
WFMI
Company
Kraft Foods Inc-A
Kroger Co.
Lorillard Inc.
McCormick & Co.
Molson Coors Brewing Company
Pepsi Bottling Group
PepsiCo Inc.
Philip Morris Intl.
Procter & Gamble
Reynolds American Inc.
Safeway Inc.
Sara Lee Corp.
Smucker (J.M.) (New)
Supervalu Inc.
Sysco Corp.
The Hershey Company
Tyson Foods
Wal-Mart Stores
Walgreen Co.
Whole Foods Market
Country
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
Price
28.05
22.5
59.46
32.04
40.27
19.29
50.23
37.15
54.5
38.18
21.43
10.03
45.15
17.54
22.29
37.28
8.85
47.12
27.41
10.25
Source: standardandpoors.com
Consumer Staples
Sector Overview
■ In theory, demand for consumer staples is
steady or increases during economic
downturn
■ Defensive sector of mature companies


Historical correlation with S&P is 0.64
Stock price stability in downturns, but slow and
steady growth in upswings
■ Low price elasticity of demand

Importance of differentiation
Consumer Staples
Industry Characteristics
■ High Barriers to Entry


Very high capital requirements
Mature companies
Strong brands put downward pressure on margins
 Threat of substitution


International presence

Remaining growth opportunities
Consumer Staples
Business Opportunities
■ Reduce (commodity) costs

Hedge costs, merge or partner, create economies
of scale
■ Reduce finished good prices to wholesalers

Price differentiation important in slowdowns
■ Differentiate products



“Superior” products can control prices
Importance of branding
Significant substitution threat
Consumer Staples
External Factors
■ Regulatory and legal issues
■ Foreign exchange prices

Implications of weakness in the dollar
■ Aging domestic population, but global growth
■ Commodity prices
■ State of the economy
■ Environmental Factors
Consumer Staples
Economic Analysis – Main Economic Indicators
Percent
Change in Real GDP (source: Bloomberg Composite)
4
3
2
1
0
-1
-2
-3
-4
-5
Change in Real GDP
Q4
07
Q1
08
Q2
08
Q3
08
Q4
08
Q1
09
Q2
09
Q3
09
Q4
09
Change in Real -0.2
GDP
0.9
2.8
-0.5 -3.8
-3
-0.8
1.1
2
Consumer Staples
Economic Analysis (cont.)
Unemployment (%)
10
8
6
Unemployment (%)
4
2
0
Unemployment (%)
Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09
4.8
4.93
5.37
•Source: Bloomberg Composite
6.07
6.87
7.5
8
8.25
8.4
Consumer Staples
Economic Analysis (cont.)
CPI (yoy %)
6
4
2
CPI (yoy %)
0
-2
-4
Q4
07
Q1
08
Q2
08
Q3
08
Q4
08
Q1
09
Q2
09
Q3
09
Q4
09
CPI (yoy %) 3.97 4.1 4.37 5.3 1.63 -0.3 -1.2 -1.7 1.25
•Source: Bloomberg Composite
Consumer Staples
Economic Analysis (cont.)
•Source: Bespoke Investment Group
Consumer Staples
Foreign Currency Exchange
Consumer Staples
Foreign Currency Exchange (cont.)
Consumer Staples
Sector Sales Analysis
■ Sales Growth
 Current growth below 10-year average


Current growth close to low of 5.8% experienced in early 2002
Downward trend since end of 2006, continues out
to 12/31/2008
■ Largest Companies in Sector
 Proctor & Gamble



Currently at 5.5%, below 10 yr. average of 8.1%
Downward trend since mid-2006
Wal-Mart


Currently 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
Sector Earnings Analysis
■ Earnings Growth
 Very low relative to 10-year average


EPS growth currently at 10 year low
Large drop in EPS growth since 9/30/2007
■ Largest Companies in Sector
 Proctor & Gamble



Current growth at 12.1%, above 10-yr. average of 11.1%
Growth falling since mid-2008; Lowest EPS growth (-1%) occurred
in 2001
Wal-Mart


Current 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
Sector Sales and Earnings Growth
S&P CONS. STAPLES SECTOR COMP ADJ M-Wtd (SP-30) Price 37.01 StockVal®
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
20042004 2005 20052006 2006
2007
2007
2008
2008
2009
2009
2010
2011
2010
14
13
12
HI
LO
ME
CU
11
10
9
13.6
5.8
7.2
5.9
8
7
6
03-31-1999
12-31-2008
5
REVENUES YTY % CHANGE
18
16
14
HI
LO
ME
CU
12
10
8
16.9
1.1
9.6
1.1
6
4
2
03-31-1999
12-31-2008
0
EARNINGS-PER-SHARE YTY % CHANGE
Consumer Staples
Index Sales and Earnings Growth
■ Sales Growth
 Current growth right below 10-year average


7.6% compared to mean of 8%
Downward trend since 9/30/2008
■ Earnings Growth
 Current 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 2002


EPS growth plummeting since end of 2006
Consumer Staples
Index Sales and Earnings Growth
StockVal®
S&P 500 COMPOSITE ADJUSTED M-Wtd (SP5A) Price 26.41
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
14
12
10
HI
LO
ME
CU
8
6
4
12.7
-3.4
8.0
7.6
2
0
-2
03-31-1999
12-31-2008
-4
REVENUES YTY % CHANGE
25
20
15
HI
LO
ME
CU
10
5
0
24.3
-17.3
13.4
-16.7
-5
-10
-15
03-31-1999
12-31-2008
-20
EARNINGS-PER-SHARE YTY % CHANGE
Consumer Staples
Comparison of Sales and Earnings
S&P CONS. STAPLES SECTOR COMP ADJ M-Wtd (SP-30)
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
20042004 2005 20052006
2006
2007
Price 37.01 StockVal®
2007
2008
2008
2009
2009
2010
2011
2010
14
13
12
HI
LO
ME
CU
11
10
9
13.6
5.8
7.2
5.9
8
7
6
03-31-1999
12-31-2008
5
REVENUES
YTY % CHANGE
18
16
14
HI
LO
ME
CU
12
10
8
16.9
1.1
9.6
1.1
6
4
2
03-31-1999
12-31-2008
0
EARNINGS-PER-SHARE
YTY % CHANGE
S&P 500 COMPOSITE ADJUSTED M-Wtd (SP5A)
1999
2000
2001
2002
2003
2004
2005
StockVal®
Price 26.41
2006
2007
2008
2009
2010
2011
14
12
10
HI
LO
ME
CU
8
6
4
12.7
-3.4
8.0
7.6
2
0
-2
03-31-1999
12-31-2008
-4
REVENUES
YTY % CHANGE
25
20
15
HI
LO
ME
CU
10
5
0
24.3
-17.3
13.4
-16.7
-5
-10
-15
03-31-1999
12-31-2008
-20
EARNINGS-PER-SHARE
YTY % CHANGE
Consumer Staples
Margin Growth Analysis
■ YTY net profit margin growth for both at
10-year low


Consumer Staples: -5%
S&P 500: -22.8%
■ Downward trend in Consumer Staples starting
in early 2006
■ S&P 500 plummeting roughly one year later
Consumer Staples
Comparative Margin Growth
S&P CONS. STAPLES SECTOR COMP ADJ M-Wtd (SP-30)
1999
2000
2001
2002
2003
2004
2005
2006
Price 37.01
2007
2008
StockVal®
2009
2010
7
6
5
4
3
2
HI
LO
ME
CU
1
6.4
-5.0
0.4
-5.0
0
-1
-2
-3
-4
-5
03-31-1999
12-31-2008
-6
NET PROFIT MARGIN ADJUSTED %
YTY % CHANGE
S&P 500 COMPOSITE ADJUSTED M-Wtd (SP5A)
1999
2000
2001
2002
2003
2004
2005
Price 26.41
2006
2007
StockVal®
2008
2009
2010
12
10
8
6
4
2
0
HI
LO
ME
CU
-2
-4
11.5
-22.8
2.7
-22.8
-6
-8
-10
-12
-14
-16
-18
03-31-1999
12-31-2008
-20
NET PROFIT MARGIN ADJUSTED %
YTY % CHANGE
Consumer Staples
Comparative Income Statement Ratios
Income Statement Ratios
As
Reported Financials
S&P CONS. STAPLES SECTOR COMP ADJ (SP-30)
M-Wtd
Company Filings
FYE Dec
StockVal ®
2007
2006
2005
2004
2003
2002
2001
2000
Gross Profit Margin (%)
29.03
29.63
29.47
29.54
29.57
29.54
29.38
29.46
Operating Profit Margin EBITDA (%)
11.45
11.29
11.63
11.04
10.59
11.48
11.63
11.54
9.25
9.03
9.41
8.71
8.20
9.08
8.78
8.82
Pre-Tax Profit Margin (%)
11.81
11.80
12.22
11.92
11.29
11.79
10.99
10.47
Tax Rate (%)
30.46
31.07
31.67
34.62
35.55
34.95
34.88
35.24
5.74
5.74
5.87
5.42
5.53
5.54
5.58
5.60
Return on Avg Common Equity (%)
61.88
24.87
27.80
29.58
47.02
32.79
32.53
39.95
Return on Average Total Equity (%)
20.65
21.47
23.14
22.34
23.73
24.06
25.18
28.56
Return on Average Capital (%)
13.51
13.89
14.61
13.59
13.57
13.38
14.29
16.16
Return on Average Assets (%)
8.20
8.26
8.61
8.25
8.41
8.34
8.64
9.40
Times Interest Earned
8.96
8.71
9.49
9.12
7.79
7.65
5.95
6.40
Operating Profit Margin EBIT (%)
Net Profit Margin Adjusted (%)
•Consumer Staples has seen relatively constant margins but decreasing ROE from 2000-2007
Income Statement Ratios
As Reported Financials
S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
Company Filings
FYE Dec
StockVal ®
2007
2006
2005
2004
2003
2002
2001
2000
Gross Profit Margin (%)
33.44
33.61
33.00
32.63
31.96
31.90
31.34
32.55
Operating Profit Margin EBITDA (%)
21.39
22.28
20.43
19.34
18.54
16.55
18.75
23.54
Operating Profit Margin EBIT (%)
16.94
17.98
16.13
14.44
13.10
10.86
12.18
17.73
Pre-Tax Profit Margin (%)
15.14
16.54
17.05
-18.23
11.00
6.94
8.78
18.15
Tax Rate (%)
28.29
28.59
29.59
29.62
29.76
27.79
32.25
35.72
8.80
9.19
8.74
8.43
7.52
7.16
7.82
8.66
Return on Avg Common Equity (%)
23.68
19.96
25.16
19.49
19.46
17.91
20.34
24.69
Return on Average Total Equity (%)
17.44
17.74
16.90
16.59
15.19
14.04
15.78
19.91
Return on Average Capital (%)
9.27
9.72
9.13
8.72
7.78
7.29
8.45
10.68
Return on Average Assets (%)
3.39
3.54
3.32
3.22
2.88
2.71
3.12
3.78
Times Interest Earned
2.96
3.45
3.94
4.39
3.88
2.73
2.25
2.95
Net Profit Margin Adjusted (%)
•S&P 500 has more volatile margins throughout the period and increasing ROE
•EBITDA range from 16.55% to 23.5%; EBIT range from 10.86% to 17.98%
Consumer Staples
Free Cash Flow & Dividends
Cash Flow Analysis
Reported Financials
S&P CONS. STAPLES SECTOR COMP ADJ (SP-30)AsM-Wtd
Company Filings
FYE Dec
StockVal ®
2007
% Chg
2006
% Chg
2005
% Chg
2004
% Chg
2003
Net Cash From Operations
6502.8
4
6241.3
16
5398.6
6
5072.3
2
4983.2
Capital Expenditures
2975.0
6
2818.5
20
2353.6
6
2225.6
7
2073.8
3527.8
3
3422.8
12
3045.0
7
2846.7
-2
2909.4
Dividends Common ($ Mil)
2133.5
13
1896.1
17
1618.3
38
1172.4
17
998.8
Free Cash Flow After Dividends
1394.3
-9
1526.7
7
1426.8
-15
1674.3
-12
1910.6
4837.9
8
4464.5
12
3993.7
20
3325.9
19
2797.4
-67.4
14
-78.1
61.4
-85
414.2
11
4397.1
12
3915.6
16
3387.2
5
3211.6
1862.6
7
1732.7
17
1484.4
2
1456.0
5
1386.0
6733.0
10
6129.8
14
5400.0
11
4843.3
5
4597.6
2975.0
6
2818.5
20
2353.6
6
2225.6
7
2073.8
4
2523.8
FREE CASH FLOW
Free Cash Flow
ADJUSTED CASH FLOW
Net Income Reported ($ Mil)
■ Free cash flow increasing from 2004-2007
Accounting Adjustment
32.4
Net Income Adjusted
4870.3
■ Dividends increasing
Depreciation & Amortization
Cash Flow Adjusted
Capital Expenditures
3758.0 dividends
13
3311.3
9
3046.4
16
2617.7
Free cash flow after
decreasing
most years
Dividends Common ($ Mil)
2133.5
13
1896.1
17
1618.3
38
1172.4
Free Cash Flow Adjusted After Divs
1624.5
15
1415.2
-1
1428.1
-1

Dividend yield increasing, currently at 10-year high 1445.3
Free Cash
Flow Adjusted
17
998.8
-5
1525.0
CASH FLOW STATEMENT SUMMARY
®
S&P CONS. STAPLES SECTOR
COMP
ADJ M-Wtd
(SP-30)6 Price
37.012 StockVal
6502.8
4
6241.3
16
5398.6
5072.3
4983.2
Net Cash From Operations
1999
2000
2001
2002
Net
3.3Cash From Investing
-4014.1
Net Cash From Financing
3.0
Other Cash Flows
2.7
Change In Cash & Equiv
2003
2004
-30
-3095.2
-2564.7
21
89.8
-15
13.9
9
2005
2006
2007
2008
-18
-2613.8
15
-3057.5
-3239.4
-20
-2693.8
-40
106.1
195
35.9
-61
12.8
-90
126.9
-31
2.4
2.1
2009
-54
-1990.9
-1922.2
21
-2420.5
92.0
-12
104.3
184.6
-73
676.2
HI
LO
ME
CU
2010
3.2
1.0
1.6
3.2
1.8
1.5
1.2
02-05-1999
02-06-2009
0.9
DIVIDEND YIELD %
154
144
134
124
116
Consumer Staples
HI
LO
52.4
-19.4
Sector Valuation
Consumer Staples
Sector Valuation (cont.)
Consumer Staples
Sector Valuation (cont.)
•Historical Correlation with the S&P 500 is 0.64
Consumer Staples
Sector Valuation (cont.)
Consumer Staples
Recommendation
■ Keep current allocation, sector overweight relative to the S&P
■
■
■
■
500 by 175 basis points
Possibility of another market downturn followed by low
volatility around the 8000 point mark
Higher return for the sector vs. the market in the next 3-4
months
We see the market having flat returns, and the consumer
stables sector outperforming by 200-300 basis points
Attractive industries: Tobacco, Brewers
Consumer Staples
References
■ Bloomberg
■ Hoovers
■ Investopedia
■ Standard &Poor’s (www.standardandpoors.com)
■ StockVal
■ Value Line
■ Yahoo Finance (finance. yahoo.com)
■ Bespoke Investment Group (http://bespokeinvest.com)
Consumer Staples
Supplemental Information
■ Commodity Prices
StockVal®
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
790
HI
LO
ME
CU
GR
620
480
380
787.00
187.25
232.50
377.25
5.6%
290
230
02-05-1999
02-06-2009
180
CORN (CENTS PER BU) NF
84
HI
LO
ME
CU
GR
68
60
48
82.11
28.86
53.87
49.86
-1.7%
40
02-05-1999
02-06-2009
32
28
COTTON (CENTS PER LB) NF
1200
HI 1191.50
LO 235.75
ME 330.50
CU 557.00
GR
7.5%
900
700
500
400
300
02-05-1999
02-06-2009
200
WHEAT (CENTS PER BU) NF
Consumer Staples
Supplemental Information
S&P CONS. STAPLES SECTOR COMP ADJ M-Wtd (SP-30) Price 37.01 StockVal®
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
30
28
HI
LO
ME
CU
26
24
28.6
19.5
23.2
22.1
22
20
03-31-1999
12-31-2008
18
RETURN ON EQUITY %
160
140
130
HI
LO
CU
GR
110
52.4
-19.4
14.8
1.4%
100
90
02-05-1999
02-06-2009
80
TOTAL RETURN %
14
13
HI
LO
ME
CU
12
11
10
13.76
9.79
10.87
9.79
02-05-1999
02-06-2009
9
GROWTH RATE ESTIMATE
Consumer Staples
Supplemental Information
■ Future Earnings Estimates
EPS
Mean
High
Low
Number of Est
Number Up
Number Down
2009
2.84
2.97
2.75
13
1
7
2010
2.98
3.19
2.79
14
1
8
2011
3.28
3.49
3.09
6
1
3
First Call FY1 & FY2 Revision Trend
StockVal®
S&P CONS. STAPLES SECTOR COMP ADJ M-Wtd (SP-30)
FY1 DEC 2009
CURRENT EST 2.84 DOWN 9.84% FROM FEB 2008
4%
0%
3.15
3.16
-4%
2.95
-8%
2.95
2.95
2.93
2.96
2.96
2.94
2.92
2.91
2.88
2.84
-12%
-0%
2/08
3/08
3.52
3.52
4/08
5/08
6/08
7/08
8/08
9/08
10/08
11/08
12/08
1/09
LAST
FY2 DEC 2010
CURRENT EST 2.98 DOWN 15.34% FROM FEB 2008
-4%
3.27
-8%
3.28
3.27
3.25
3.25
3.24
3.19
-12%
3.12
3.09
3.05
-16%
2.98
2/08
3/08
4/08
5/08
6/08
7/08
8/08
9/08
10/08
11/08
12/08
1/09
LAST
Consumer Staples