Consumer Staples
Scott
Yanjun
Yiqin
Lorillard
Best Known For Newport Brand of Cigarettes.
Newport represents 85.7% of corporate sales.
Newport is the leading menthol cigarette.
Lorillard Financial Performance
Company Data
Price ($)
Date of Price
52-wk Range
Market Cap
Shares O/S (mil)
Beta
Dividend Yield
P/E (ttm)
EPS (ttm)
$53.35
March 28, 2014
$40.01 - $56.85
$19.3B
362.2
0.4
4.61%
16.85
3.166
Stock Price
Investment Thesis
•
•
•
•
Currently Trading Near its High P/E Ratio
Smoking Rates Consistently Declining
World Tobacco Prices Increasing
High Taxation Per Pack of Cigarettes Sold.
Profit Drivers
Lorillard Per Share Data
2013
2012
2011
2010
2009
2008
Tangible Bk. Val.
-6.17
NM
-3.82
NM
0.19
1.25
Cash Flow
3.29
2.92
2.76
2.34
1.98
1.78
Earnings
3.18
2.81
2.66
2.26
1.92
1.72
Dividends
2.20
2.07
1.74
1.42
1.28
0.92
Payout Ratio
69%
NM
65%
63%
67%
53%
Prices - High
53.27
47.02
40.00
29.90
27.25
29.74
- Low
37.84
35.61
24.13
23.41
17.50
17.77
P/E Ratio - High
17.00
17.00
15.00
13.20
14.00
17.00
- Low
12.00
13.00
9.10
10.40
9.00
10.00
Competition
Direct Competitor Comparison
Market Cap:
Employees:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Operating Margin (ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
MO
73.80B
9,000
-0.01
17.66B
0.59
8.57B
0.47
4.52B
2.26
16.42
1.96
4.19
LO
19.32B
2,900
0.04
6.97B
0.55
2.25B
0.44
1.18B
3.15
16.94
1.41
3.87
RAI
28.47B
5,200
-0.02
8.24B
0.55
3.41B
0.40
1.72B
3.14
16.89
2.11
3.46
Industry
28.47B
5.20K
0.06
8.24B
0.55
3.41B
0.37
N/A
3.14
16.89
2.11
4.09
Implied Valuation
Recommendation
• SIM Does Not Currently own the Stock.
• No reason to Buy at this time.
Conclusion: Hold/Not Purchase
Target:56
CVS Caremark Corp
A. Company Overview
A. Retail Pharmacy
B. Pharmacy Business
C. Corporate Segment
B. Recent News
A. Tobacco Exit
B. Earnings Report
C. Valuation
A. Key Drivers
A. Health Care Reform
B. Pricing Competition
C. Consumer Spending
A. DCF
B. Multiple Valuation
Health Care Reform
Pricing Competition
 Pharmacies and drug stores face increasing competition in 2014 from
mass merchandisers
 Private health insurance coverage usually can lower the price of
pharmaceutical products and exerts downward pricing pressure through
managed care organizations.
Consumer Spending
In 2014, per capita disposable income is expected to increase at a
slower pace, representing a potential hurdle for the industry
Recent News-Contract Renewal
 The most important event for the company recently is the its
three-year contract to provide integrated pharmacy services to
over five million federal employees, retirees, and dependents.
 The announcement pushed the stock price to $75, the highest
price throughout its history mainly

It helped reduce the concern of aggressive pricing behavior in
retail segment and provided further evidence of the strength of
CVS' integrated PBM/retail model.
Recent News-Earnings Report
 EPS for 4Q13 is $1.12, representing $0.01 above consensus.
 The FY2013 net revenue increased by 3% compared to 2012, and
the gross margin has increased by 50bps.
 On the PBM side, the company has strong health plan
relationships as management cited a footprint spanning 25 states
covering 70% of the eligible exchange population and a leading
presence in Medicaid managed care.
Valuation-Growth Forecast
Valuation-DCF
Valuation-Sensitivity
Valuation-Multiples
Conclusion: SELL;
Target:69.55(-); -75~80 bps
A. Company Overview
A.
B.
C.
D.
E.
F.
Eurasia & Africa
Europe
Latin America
North America
Pacific
Bottling Investment
B. Financial Highlights
A. Segment growth
B. Operating margin
C. Recent News
A.
B.
C.
D.
Brazil & China investment
Domestic health issue
Electric fleet
Overcompensated CEO?
Valuation
KO
DPS
NSRGY
Market Cap:
169.23B
10.61B
240.05B
126.18B
278.81B
Employees:
130,600
19,000
333,000
274,000
274.00K
-0.04
46.85B
0.61
13.10B
0.24
-0.01
6.00B
0.58
1.32B
0.18
0
98.97B
0.48
18.55B
0.16
0.01
66.42B
0.53
12.34B
0.15
0.14
66.42B
0.53
12.34B
0.13
Net Income (ttm):
8.58B
624.00M
10.73B
6.73B
N/A
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
1.9
20.22
2.88
3.64
3.05
17.63
2.28
1.79
3.35
22.44
5.22
2.42
4.32
19.18
2.43
1.91
4.32
24.11
2.63
1.91
25.90%
27.39%
16.47%
29.01%
24.00%
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Operating Margin (ttm):
Return on Equity (ttm):
PEP Industry
Investment Thesis
• Strong fundamentals
• World Cup Speculation
• Dividend Parachute
Growth Contribution
Volume1
Price,
Structural Product &
Currency
Changes Geographic Fluctuations
Mix
Total
Consolidated
2%
(3%)
1%
(2%)
(2%)
Eurasia & Africa
7%
—%
2%
(7%)
2%
Europe
(1)
—
5
—
4%
Latin America
1
(1)
10
(8)
4%
North America
—
(1)
1
—
—
Pacific
5
(2)
(4)
(6)
(5%)
Bottling Investments
4
(18)
1
(1)
(14%)
Revenue vs. Income
% of
total
Operating
margin
100%
21.80%
2,763
6
39.3
1,087
11
4,645
10
61.5
2,859
28
4,748
10
61.3
2,908
28
21,574
46
11.3
2,432
24
5,372
11
46.1
2,478
24
7,598
16
1.5
115
1
Revenue
Consolidated
Eurasia & Africa
Europe
Latin America
North America
Pacific
Bottling
$
46,854
Income
$
10,228
% of
total
100%
Incremental
• Cost saving initiatives:
• 300 – 450 million annually as planned; 150 -200 as estimated
Worst
Cost Saving
Best guess Best
100
200
350
• FY2014 revenue:
Worst
Best guess Best
Consolidated
-0.9%
2.1%
3.7%
Eurasia & Africa
-0.1%
4.7%
2.3%
Europe
-1.1%
0.9%
1.9%
Latin America
2.1%
4.6%
6.1%
North America
-2.8%
-0.8%
0.7%
Pacific
-2.1%
0.9%
3.9%
Bottling Investments
-2.2%
0.7%
2.7%
Analyst: Yanjun Gu
2014/3/29
Year
Revenue
% Grow th
Operating Income
Operating Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
Terminal Discount Rate =
Terminal FCF Growth =
2014E
47,838
2.1%
10,811
22.6%
96
0.20%
2,972
24.8%
7,935
% Grow th
2015E
49,058
2.6%
10,842
22.1%
98
0.20%
3,033
24.6%
7,907
2016E
50,530
3.0%
11,521
2017E
52,045
3.0%
11,970
2018E
53,607
3.0%
12,330
8.5%
3.0%
2019E
55,215
3.0%
12,699
2020E
56,871
3.0%
13,080
2021E
58,578
3.0%
13,473
2022E
60,335
3.0%
13,877
2023E
62,145
3.0%
14,293
2024E
64,009
3.0%
14,722
22.8%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
101
104
107
110
114
117
121
124
128
0.20%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
3,020
24.6%
8,602
2,964
24.6%
9,110
3,053
24.6%
9,384
3,145
24.6%
9,665
3,239
24.6%
9,955
3,336
24.6%
10,254
3,436
24.6%
10,561
3,540
24.6%
10,878
3,646
24.6%
11,204
-0.4%
8.8%
5.9%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
2,033
2,109
2,163
2,228
2,294
2,363
2,434
2,507
2,582
2,660
2,740
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
241
241
263
208
214
221
227
234
241
249
256
0.5%
0.5%
0.5%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
Subtract Cap Ex
1,914
1,914
1,766
1,301
643
497
398
293
241
249
256
Capex % of sales
4.0%
3.9%
3.5%
2.5%
1.2%
0.9%
0.7%
0.5%
0.4%
0.4%
0.4%
8,344
9,262
10,245
11,249
11,752
12,218
12,702
13,144
13,538
13,944
0.6%
11.0%
10.6%
9.8%
4.5%
4.0%
4.0%
3.5%
3.0%
3.0%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Free Cash Flow
8,296
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
73,684
115,496
189,179
4.84%
39%
61%
100%
Current Price $ 38.66
Implied equity value/share $ 42.67
Upside/(Downside) to DCF
10.4%
Best Guess
Stage I
Worst
Best
Guess
Ideal
Price
40.74
42.67
43.71
Stage II Worst
Best
Guess
Ideal
Price
41.00
43.17
44.59
+%
6.5%
12.1%
15.8%
Stage I:
adjust revenue growth
Stage II:
Factor in cost saving
Sensitivity
$ 43.17
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
1.50%
43.81
40.07
36.91
34.20
31.85
29.80
27.99
2.00%
48.06
43.60
39.88
36.73
34.04
31.70
29.66
2.50%
53.26
47.82
43.38
39.68
36.55
33.87
31.55
3.00%
59.75
52.99
47.59
43.17
39.49
36.38
33.71
3.50%
68.10
59.45
52.73
47.36
42.96
39.30
36.20
4.00%
79.23
67.76
59.16
52.48
47.13
42.76
39.11
4.50%
94.82
78.84
67.43
58.87
52.22
46.90
42.55
World Cup
14.3%
18.2%
?
Dividend Policy
• Paid increasing dividends for 52 consecutive years
• Coca-Cola has a Dividend yield of 3.16% with
increasing dividends for 25+ years
Conclusion: BUY;
Target 43.17( +12.1%); + 150 bps
Recommendation
 Not doing anything about Lorillard and Phillip Morris.
 Sell CVS 75 to 80 bps, and use the proceeds to buy KO for 150 bps.
Ticker
LO
PM
KO
PEP
CVS
CPB
Current Target
Price
Price
53
83
38
84
74
44
56
85
43
78
70
33
Return
/Loss
6%
2%
12%
-7%
-5%
-25%
Current Recommendation New
Weight
Weight
0%
0%
0%
0%
5.1%
0%
HOLD
HOLD
BUY
HOLD
Sell
Hold
0%
0%
1.4%
0%
4.3%
0%