CONSUMER
DISCRETIONARY
Mike Anderson & Bingqian Lu
Game plan
Overview
¨  Analysis
¨
¤  Business
¤  Economic
¤  Financial
¤  Valuation
¨
Recommendation
Overview
Definition
Size
Industries
Key companies
Performance
Definition
¨
¨
¨
A sector of the economy that consists of businesses
that sells nonessential goods and services.
Companies in this sector include retailers, media
companies, consumer services companies, consumer
durables and apparel companies, and automobiles
and components companies.
Very cyclical, depends on macroeconomics condition
Size
S&P 500
SIM Portfoilo
Energy
0.03%
Industrials
10%
IT
20%
Cons
Staples
10%
Cons Discret
13%
Utilities
3% Telecom
2%
Health Care
14%
Materials
3%
Materials
3%
Industrials
10%
Telecom
3%
Cons Discretionary 2.398T 12.54% Con
Staples
9%
Financials
17%
Financials
16%
Healthcare
15%
Cons Discr
13%
Energy
8%
Info Tech
20%
Utilities
3%
Industries in Sector
Industries Number of Companies % in Con Dis Media 1070 15% Retailing 1327 19% Consumer Services 1148 17% Consumer Durables& Apparel 2248 32% Automobile& Components 863 12% Total 6956 100% Key Companies
Top 10 companies in Con Dis
Market Cap
% of Sector
Amazon.com Inc
200.206B 8.4% Walt Disney Co
186.559B 7.8% Comcast Corp
146.269B 6.1% Home Depot Inc
143.667B 6.0% McDonald's Corp
91.116B 3.8% Nike Inc
89.225B 3.7% Starbucks Corp
78.973B 3.3% Twenty-frist Century Fox, Inc
67.185B 2.8% Lowe's Cos Inc
64.383B 2.7% Time Warner Inc
50.527B 2.1% Performance (Quarterly 10Y)
Securities
Con Dis
SPX
Price Change
121.66%
64.94%
Total Return
154.45%
99.33%
Difference
55.12%
Business Analysis
Business cycle
Economic influences
Porter’s Five Forces
Business Cycle
Economic influences
¨
Positives:
¤
¤
¤
¤
¤
¨
Consumer confidence
Unemployment / improving job market / wage growth
Expansion period
Low supply Accommodative monetary policy Negatives:
¤
¤
¤
¤
Tight credit standards Soft spot in housing recovery Fierce retail competition Sooner-than-expected Fed rate hikes
Porter’s Five Forces
STRATEGIC FORCE
IMPACT
JUSTIFICATION
Threat of new entrants
Medium
Capital requirements can be significant,
economies of scale and distribution challenges
Threat of substitutes
Medium
Industry dependent
Bargaining power of buyers
High
Discretionary by nature, price sensitive, low
switching costs, substitutes, low loyalty
Bargaining power of suppliers
Medium
Industry dependent, varies with material
availability
Intensity of competitive rivalry
High
Incremental competitive advantages, significant
advertising
Economic Analysis
Economic outlook
Primary economic affective factors
Charts
Regression analysis
Economic Outlook
Jobs market continues to improve
¨  Household wealth surges, supporting
consumer spending
¨  Inflation has plunged
¨
Economic factors that affect spending
Employment
¨  Wages
¨  Prices/inflation
¨  Interest rates
¨  Consumer confidence
¨
Unemployment Rate (SA)
Wages (hourly earnings)
CPI
Fed Funds Target Rate
Consumer Confidence (Conf. Board)
Consumer Sentiment (TUN)
U.S. GDP
Disposable Personal Income (Nom)
Consumer Staples vs. Discretionary
CPI (less food & energy)
Personal Consumption Expenditures
Retail Inventories
Financial analysis
Sales growth
Growth margins
Profit margins
Operating margins
ROE
Sales growth rate(vs S&P 500)
20.00%
15.96%
15.00%
10.61%
10.00%
5.00%
10.13%
7.56%
8.00%
6.15%
2.54%
8.34%
6.52%
6.04%
4.33%
6.22%
8.49%
4.05%
4.40%
2.52%
-0.07%
3.31%
4.14%
2013
2014
0.00%
2004
-5.00%
-10.00%
2005
2006
2007
2008
2009
2010
-2.20%
-9.03%
-15.00%
-18.10%
-20.00%
S5COND
S&P 500
2011
2012
1.46%
-0.30%
2015
Sale growth rate (Industry)
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
2013
2014
2015
Media
-10.0%
Retailing
-20.0%
Consumer Services
-30.0%
Consumer Durables& Apparel
-40.0%
Autombile& Components
-50.0%
-60.0%
-70.0%
Sale growth rate table Media Retailing Consumer Services Consumer Durables& Apparel Autombile& Components 2007 2008 2009 2010 2011 2012 2013 2014 2015 18.0% 6.2% 2.7% 5.0% 14.1% 13.6% 12.0% 10.9% 1.4% 4.5% 2.3% -­‐4.6% 2.3% 7.2% 6.1% 8.1% 7.8% 3.3% 13.7% 6.7% -­‐1.8% 3.4% 9.0% 6.0% 2.8% 3.7% -­‐0.3% -­‐8.0% -­‐18.7% 20.0% -­‐3.4% 12.6% 2.8% 5.5% 8.2% 0.4% -­‐2.5% -­‐19.3% -­‐65.9% -­‐4.5% -­‐3.9% 1.8% -­‐27.8% 5.1% -­‐1.3% Sales growth rate (key firms)
50.00%
45.00%
40.00%
35.00%
Amazon
30.00%
Walt Disney
25.00%
Comcast
20.00%
Home Depot
McDonald
15.00%
S5COND
10.00%
S&P500
5.00%
0.00%
2010
-5.00%
-10.00%
2011
2012
2013
2014
Growth Margin
Growth Margin
40%
35%
31%
30%
30%
25%
20%
27%
32%
33%
32%
32%
32%
33%
33%
34%
0%
0%
1%
2%
2009
2010
2011
2012
32%
33%
33%
32%
33%
34%
0%
1%
1%
2013
2014
2015 current
26%
15%
10%
5%
0%
-5%
-4%
2007
-5%
2008
-10%
S5COND
SPX
under/over
Gross Margin 2007 2008 2009 2010 2011 2012 2013 2014 2015 current S5COND
27% 26% 32% 33% 33% 34% 32% 33% 34% SPX
31% 30% 32% 33% 32% 32% 32% 33% 33% -­‐4% -­‐5% 0% 0% 1% 2% 0% 1% 1% Under/Over
Profit Margin
Profit Margin
12%
10%
8%
9%
9%
7%
8%
6%
2%
4%
9%
7%
7%
7%
7%
2012
2013
2014
2015 current
-3%
-2%
-2%
4%
2%
0%
9%
6%
6%
-2%
10%
8%
1%
2007
-4%
2008
2009
2010
-2%
-2%
-4%
2011
-1%
-2%
-6%
-8%
-6%
-6%
S5COND
SPX
Under/Over
Profit Margin 2007 2008 2009 2010 2011 2012 2013 2014 2015 current S5COND SPX Under/Over 1% 7% -­‐6% -­‐4% 2% -­‐6% 4% 6% -­‐2% 6% 9% -­‐2% 8% 9% -­‐1% 7% 8% -­‐2% 7% 10% -­‐3% 7% 9% -­‐2% 7% 9% -­‐2% Operation Margin
Operation Margin
15%
13%
13%
12%
10%
11%
13%
11%
11%
8%
9%
7%
11%
14%
14%
13%
10%
10%
8%
7%
5%
S5COND
SPX
4%
Under/Over
3%
1%
-1%
2007
2008
-3%
-5%
-5%
2009
-1%
2010
-2%
2011
2012
-2%
-2%
-4%
2013
2014
2015 current
-3%
-3%
-2%
OperaKon Margin 2007 2008 2009 2010 2011 2012 2013 2014 2015 current S5COND SPX 7% 12% -­‐5% 4% 8% -­‐4% 8% 10% -­‐1% 11% 13% -­‐2% 11% 14% -­‐2% 11% 13% -­‐2% 10% 14% -­‐3% 10% 13% -­‐3% 11% Under/Over 13% -­‐2% ROE
ROE
22%
25%
20%
15%
17%
14%
14%
10%
5%
3%
11%
4%
7%
14%
22%
22%
22%
15%
14%
14%
8%
8%
2014
2015 current
6%
6%
2012
2013
3%
1%
0%
-5%
15%
12%
20%
2007
-10%
2008
-10%
-15%
-15%
-19%
2009
2010
2011
-20%
S5COND
ROE S5COND SPX Under/Over 2007 3% 14% -­‐10% 2008 -­‐15% 4% -­‐19% 2009 12% 11% 1% 2010 17% 14% 3% SPX
2011 22% 15% 7% Under/Over
2012 20% 14% 6% 2013 22% 15% 6% 2014 22% 14% 8% 2015 current 22% 14% 8% Valuation
Multiple Valuations
Ratios
Multiple Valuation
Absolute Basis High Low Median Current P/E 432.5804 13.619 23.751 22.16 P/B 5.0966 1.5196 3.0205 5.1 P/S 1.5089 0.417 0.9985 1.55 P/EBITDA 11.0649 3.9262 7.5863 10.58 RelaKve to SP500 High Low Median Current P/E 25.6153 0.9389 1.5498 1.1726 P/B 1.7572 0.775 1.2593 1.7306 P/S 0.8985 0.5094 0.7353 0.7969 P/EBITDA 1.2397 0.8779 1.041 1.0258 S5COND VS SPX
P/E
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
P/CF
20.00
18.00
16.00
14.00
12.00
10.00
8.00
S5COND 6.00
4.00
2.00
SPX
0.00
P/B
SPX
P/S
6.00
5.00
4.00
3.00
2.00
S5COND
1.00
SPX
0.00
S5COND
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
S5COND
SPX
Industry relative to S5COND
P/E
P/CF
8.00
2.00
1.50
1.00
0.50
0.00
6.00
4.00
2.00
2007
0.00
2007
2008
2009
2010
2011
2012
2013
2014 2015
Current
2008
2009
2010
2012
2013
2014
2015
Current
Media
Retailing
Consumer Durables& Apparel
Media
Retailing
Consumer Services
Consumer Services
Consumer Durables& Apparel
Autombile& Components
Autombile& Components
2011
P/S
P/B
4.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
3.00
2.00
1.00
0.00
2007
2008
2009
2010
2011
2012
2013
2014
2015
Current
Media
Retailing
Consumer Services
Consumer Durables& Apparel
Autombile& Components
2007
2008
2009
2010
2011
2012
2013
2014
2015
Current
Media
Retailing
Consumer Services
Consumer Durables& Apparel
Autombile& Components
Recommendations
¨
SIM portfolio should slightly overweight the sector
¤  Economic
outlook favors discretionary spending
¤  P/E ratios of current holdings are historically low
¨
Pay-off vs. Risks
¤  Economic
expansion vs. contraction timeline
¤  Effects of fiscal policy
Questions?
Sources
¨
Slide 4 – Investopedia.com
¨
Slide 11 - https://www.fidelity.com/viewpoints/investing-ideas/business-cycle-investing
¨
Slide 12 - https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_business_cycle.jhtml?tab=sibusiness,
http://seekingalpha.com/article/3195756-the-top-consumer-discretionary-investment-opportunities,
http://www.schwab.com/public/schwab/nn/articles/Consumer-discretionary-sector
¨
Slide 15- investopedia.com/ask/answers/042815/which-economic-factors-most-affect-demand-consumer-goods.asp
¨
Slide 16 - STRS Ohio Economics presentation, 10 June, 2015.