Scott.Helkowski
Yanjun Gu
Yiqin Gao
Overview
 Primarily food, beverages (including alcoholic
beverages), tobacco, retailing and household items.
 The staples sector has historically exhibited a beta of
.52 and a correlation of .62. A typical reason to own
this sector is due to its low correlation to the S&P 500.
 Demand for these products are less impacted by
economic downturns.
 In fact, some items such as alcohol and tobacco increase
during economic downturns.
 Discount stores may see increased sales.
Sector Overview
 Inception Date
11-September-1989
 Number of Companies 40
As of 12/31/13:
 Largest Market Cap
254.62B
 Smallest Market Cap
7.469B
 Mean Market Cap
45.722B
 Median Market Cap
21.257B
Sector Returns
 Through 2/28/14
 Month (Feb.)
3.57%
 QTD
(1.75%)
 YTD
(1.75%)
1 year
3 year
5 year
13.56%
15.75%
19.02%
Top 10 S & P Consumer Staples By Weight
Company
Proctor & Gamble
Coca-Cola, Co.
Phillip Morris International
Wal-Mart Stores
PepsiCo, Inc.
CVS Caremark, Corp.
Altria Group, Inc.
Mondelez International
Colgate Palmolive Co.
Costco Wholesale Corp.
Stock Symbol
PG
KO
PM
WMT
PEP
CVS
MO
MDLZ
CL
COST
Market Cap. (Billions) (2/28/14)
213.28
168.31
128.26
241.71
121.9
86.48
72.26
59.68
57.74
51.36
SIM Holdings By Sector
Sector
S&P 500 Weight SIM Weight
Consumer Discretionary
12.29%
Consumer Staples
9.59%
Energy
9.98%
Financials
16.15%
Health Care
13.47%
Industrials
10.83%
Information Technology
18.82%
Materials
3.46%
Telecommunication
2.29%
Utilities
3.12%
Cash
Over/Underweight
13.24%
0.95%
9.47%
-0.12%
8.91%
-1.07%
15.83%
-0.32%
14.04%
0.57%
8.69%
-2.14%
20.30%
1.48%
3.05%
-0.41%
1.20%
-1.09%
3.43%
0.31%
1.78%
1.78%
Business Cycle
Source: Industry Sector Preferences by Richard W. Miller, Ph.D.(Jan. 05).
Turner’s Six Business Cycle Stages
Product Life Cycle
Conclusion
 Most Consumer Staples are in the mature phase for the
domestic market.
 Growth opportunities, where available, are primarily in
international markets.
Porter’s Five Forces
Industry Structure is a function of:
Buyer Power
Threat of New
Entrants
Threat of
Substitutes
Supplier
Power
Degree of
Rivalry
Porter’s 5 Forces Analysis
 Bargaining Power of Buyers – Low
 Consumers expect stores to carry these products.
 These products drive consumer traffic for stores and are
necessary for profitability.
 Bargaining Power of Suppliers – Low
 In many cases there are multiple suppliers.
 Can be sourced globally
 Threat of New Entrants – Low
 Very well known brands are a high barrier to entry.
 Established access to market though supplier networks.
Porter’s 5 Forces Analysis
 Threat of Substitute Products – Low
 Typically few substitutes available.
 Demand is fairly consistent over time.
 Rivalry – High to Very High
 Typically only a few major competitors in each product
line.
 Coke v. Pepsi.
Driving Factors
 Consumers:
 Companies:
1. Consumer Price Index
1. Financing cost: treasury
2. Consumer Confidence
bill and bond rate
2. Production cost:
gasoline, electricity
3. Import/export: foreign
exchange rate
(USD/RMB)
Index
3. Disposable Income
4. Unemployment rate
 Market:
 S&P 500 Index
Vs Unemployment
0.05
0
-0.05
-0.1
0.4
Vs Consumer Confidence Index
0.2
0
-0.2
-0.4
0.06
0.04
V.S. Consumer Price Index
0.02
0
-0.02
-0.04
-0.06
0.15
0.1
0.05
0
-0.05
-0.1
-0.15
Vs Gasoline Price
Con. Stpl.
0.08
0.03
-0.02
-0.07
-0.12
S&P 500
From 1994 - 2014
SUMMARY OUTPUT
Total
Multiple R
R Square
Adjusted R Square
Standard Deviation
Coefficient
1994-2014
Before Crisis After Crisis
0.619694
0.502762
0.861343
0.384021
0.25277
0.741912
0.381411
0.24801
0.738002
0.025057
0.028757
0.015497
0.51
0.49
0.55
Before
Financial
Crisis
During
After
Raw Beta
0.5194
0.4967
0.5741
0.4834
Correlation
0.6198
0.5028
0.9090
0.7075
Debt/Capital
1.4
1.2
1
WMT
PG
KO
0.8
PM
PEP
0.6
CVS
CS Industry
0.4
S&P CS Sector
0.2
0
2010
2011
2012
2013
2014
Interest Coverage
30
25
WMT
20
PG
KO
PM
15
PEP
CVS
10
CS Industry
S&P CS Sector
5
0
2010
2011
2012
2013
2014
Asset Turnover
2.5
2
WMT
PG
1.5
KO
PM
PEP
1
CVS
CS Industry
S&P CS Sector
0.5
0
2010
2011
2012
2013
2014
A/R Turnover
80
70
60
WMT
PG
50
KO
PM
40
PEP
CVS
30
CS Industry
20
S&P CS Sector
10
0
2010
2011
2012
2013
2014
Growth: Sector vs Whole
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Net income
Sales
Net income
1 yr
Sales
3 yr
S&P 500 Index
S&P CS Sector
Warning!
Growth Benchmark
8.0%
7.1%
7.0%
6.0%
6.4%
5.4%
5.0%
4.0%
4.5%
3.7%
2.8%
3.0%
1.8%
2.0%
2.1%
1.0%
0.0%
3 year
Revenue
1 year
Asset
Inventory
Receivables
Management Efficiency: ROE
S&P 500 Index
S&P CS Sector
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2010
2011
2012
2013
2014
Management Efficiency: ROA
S&P 500 Index
S&P CS Sector
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2010
2011
2012
2013
2014
Profitability: Net Margin
S&P 500 Index
S&P CS Sector
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2010
2011
2012
2013
2014
DuPont Analysis
ROE
=
Profit Margin (Profit/Sales)
* Total Asset Turnover (Sales/Assets)
* Equity Multiplier (Assets/Equity)
ASSET/EQUITY
S&P 500 Index
S&P CS Sector
600.00%
500.00%
400.00%
300.00%
200.00%
100.00%
0.00%
2010
2011
2012
2013
2014
 Highly competitive:
 Differentiated value
 Healthier consumer taste:
 lower calorie beverages and non-carbonated beverages
 electronic cigarettes
Moves toward historic average
 Absolute Basis
S5CONS-Abs
Trailing P/E
P/B
P/CF
P/S
Dividend Yield
High
Median
17.08
3.86
12.59
1.09
2.78
20.32
4.44
15.02
1.27
3.23
25.00
High
Median
1.12
1.56
0.89
0.76
1.03
1.07
1.63
1.28
0.78
1.31
Absolute Basis
20.00
15.00
High
Low
10.00
Current
5.00
Trailing P/E
P/B
P/CF
P/S
Current
18.18
4.31
13.88
1.19
2.70
Forward
17.38
4.17
13.77
1.16
2.86
Low end is higher than High end  Very defensive
 Relative to S&P500
S5CONS-Rlt
Trailing P/E
P/B
P/CF
P/S
Dividend Yield
Low
14.19
3.31
10.05
0.86
2.19
Dividend Yield
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
Low
1.11
1.66
1.72
0.95
1.24
Current
1.07
1.68
1.56
0.72
1.38
Forward
1.11
1.73
1.21
0.73
1.36
Relative to S&P 500
High
Low
Current
Trailing P/E
P/B
P/CF
P/S
Dividend Yield
Valuation Analysis
Outperformed in 2013, now
returning to below S&P
Co-moves with S&P, returning to
Historic Average
Trailing P/E
P/B
P/CF
P/S
Dividend Yield
S&P
15.96
2.37
9.83
1.39
2.12
Consumer Staple
17.08
3.86
12.59
1.09
2.78
Food
17.20
1.74
18.06
1.33
2.30
40.00
35.00
30.00
Trailing P/E
25.00
P/B
20.00
P/CF
15.00
P/S
10.00
Dividend Yield
5.00
S&P
Consumer
Staple
Food
Food Retail
Mass Merchants
21.35
2.80
39.31
0.60
1.39
Mass Merchants has higher ratio
Industry Comparison
45.00
Food Retail
14.02
1.88
19.29
0.30
1.95
Mass
Merchants
 The SIM portfolio should continue to reduce the weight of
the Consumer Staples sector.
 We recommend decrease the weight.
 We recommend allocating those funds to other industries such as health
care.
 Rationale
 The sector is comprised of very defensive stocks, whose beta has been
decreasing.
 Given the positive market outlook, consumer staple will underperform
compared to other sectors with more cyclical exposure.
 After the market boom in 2013, multiples are returning to historic average
level.