Sector Presentation:
Consumer
Discretionary
Martin Perrier
June 27, 2013
I.
II.
III.
IV.
V.
VI.
Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Conclusion
Martin Perrier
5/28/2016
AGENDA
2
I.
SECTOR OVERVIEW
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Martin Perrier
5/28/2016
• Companies selling non-essential goods and services from
various industries:
Retailing
Media
Consumer Services
Consumer Durables & Apparel
Automobiles & Components
Martin Perrier
•
•
•
•
•
5/28/2016
Consumer Discretionary:
Definition
• Very cyclical sector, performing much better in a thriving
economy (unlike Consumer Staples).
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Largest companies
Toyota Motor Corporation (ADR)
186.97B
The Walt Disney Company
113.84B
The Home Depot, Inc.
110.54B
Comcast Corporation
105.84B
McDonald's Corporation
99.09B
News Corp
84.82B
Honda Motor Co Ltd (ADR)
65.62B
Ford Motor Company
60.11B
NIKE, Inc.
55.27B
5/28/2016
Market Cap
Martin Perrier
Company
5
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Sector size
Market Cap of $3.5T
82 constituents
Weight in S&P
Weight in SIM portfolio
Financials
Health Care
2.80%
3.30%
17.80%
3.30%
1.71%
16.60%
Energy
Consumer Staples
10.20%
12.80%
10.50%
2.00%
Consumer Discretionary
12.10%
14.14%
Industrials
Utilities
10.60%
7.88%
17.38%
3.97%
Martin Perrier
5/28/2016
Information Technology
12.20%
13.57%
14.18%
Materials
12.96%
Telecommunication
Services
 Key element: Sector overweighted in the SIM portfolio by 0.86%
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
6
Conclusion
Key element:
 Outperforming the
S&P
Martin Perrier
5/28/2016
Sector performance
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Martin Perrier
5/28/2016
Sector performance
 Key element:
 Systematically outperforming the benchmark over the past five years (higher
gains, lower losses).
 Only 2nd to Financials as best performing sector (ttm).
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
II.
BUSINESS ANALYSIS
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Martin Perrier
5/28/2016
5/28/2016
Life cycle
Developed countries
Martin Perrier
Developing countries
Key elements:
 Maturity/stabilization in developed countries
 Growth phase in developing countries
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
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Valuation
Analysis
Conclusion
Martin Perrier
5/28/2016
Business Cycle
Key elements:
 Sector performing better at an early phase of the business cycle
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
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Michael Porter’s 5 forces
Power of suppliers
High
Medium
Explanation
+ ‘Discretionary’ goods for consumers
+ Supply levels based mainly on forecasts
+ No obligation toward any brand, product or service (low switching costs)
+ Depends on industry, but typically multiple vendors with low pricing power
+ High raw material costs (oil, materials…)
- Labor costs still low, globally
- Online activities skipping the middle man
High
+ Immense base of available substitutes
+ Discretionary goods and services with low switching costs
+ Desire for innovation and low prices, negligence toward loyalty
Intensity of rivalry
High
+ Intense competition among established players due to low switching costs,
easy access to price comparisons (online, etc…)
+ Mature customer base (except for emerging markets)
+ Fast low-cost copycat over any innovative product or service
Threat of new
entrants
Low
- Economies of scale provide significant advantages
- Many established brands control market
Threat of substitutes
5/28/2016
Power of buyers
Strength
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Strategic force
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
5/28/2016
Martin Perrier
III. ECONOMIC ANALYSIS
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Martin Perrier
5/28/2016
Economic comparisons
 Key elements:
 Evolution somewhat correlated
with the three indexes
 Much faster growth of the sector
over the past 6 to 12 months
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Martin Perrier
5/28/2016
Economic comparisons
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Economic Analysis
Martin Perrier
 Performance of the sector somewhat correlated to the related
economic data analyzed over the past 10 years
 Last 6 to 12 month performance does not follow the pattern (but
the phenomenon is identical for all comparisons)
 Similar curve for the benchmark but slightly below
5/28/2016
Key elements:
Hypothesis:
1.
2.
3.
Sector
Overview
The sector performance is finally not correlated to the previously
mentioned data (hard to believe)
The sector is overvalued (market too optimistic)
The market is rightfully optimistic (ideal phase of business cycle)
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
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5/28/2016
Martin Perrier
IV. FINANCIAL ANALYSIS
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Martin Perrier
5/28/2016
Revenues per share
• Obvious Cyclicality. Upward trend likely to continue for a while.
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
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Martin Perrier
5/28/2016
Revenues per share
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Net profit margin
Martin Perrier
5/28/2016
(absolute and relative to S&P)
 Sector’s net profit margin historically below the benchmark’s, but
currently at an all-time high (6.4% and 0.7 relatively to the S&P)
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
20
Earnings per Share (EPS)
Martin Perrier
5/28/2016
(Absolute $ and y-to-y growth)
 Key element: EPS growth in line with historic median (10%) for
2012…
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
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Martin Perrier
5/28/2016
Earnings per share (EPS)
…but increasing to 17% in 2014 (estimate).
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Martin Perrier
5/28/2016
Cash flow to earnings
 Key element: a stable CF/E ratio over 1 means that earnings and cash
flow grow at the same rate, which is a guarantee of sound earnings
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
23
Martin Perrier
5/28/2016
Return On Equity (ROE)
 Key elements:
 Increasing ROE (20.3%)
 Sector’s ROE higher than S&P’s since 2011
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
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Valuation
Analysis
Conclusion
V.
VALUATION ANALYSIS
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Martin Perrier
5/28/2016
High
Low
Median
Current
P/Trailing E
53.7
13.9
20.0
19.7
P/Forward E
44.1
13.0
17.4
17.3
P/B
4.0
1.5
2.5
3.9
P/S
1.3
0.4
0.9
1.3
P/CF
11.9
5.7
9.1
11.9
Relative to SP500
High
Low
Median
Current
P/Trailing E
3.9
1.1
1.2
1.3
P/Forward E
3.0
1.0
1.2
1.2
P/B
1.7
0.7
1.0
1.6
P/S
0.9
0.5
0.6
0.9
P/CF
1.2
0.7
0.9
1.2
Martin Perrier
Absolute Basis
5/28/2016
Multiple valuation (10 years)
 Key elements:
 Current multiples slightly higher than historic medians
 Trading at a premium relatively to the benchmark
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
26
Conclusion
5/28/2016
Sector relative to S&P 500
Martin Perrier
• Price to CF = 1.1
• Price to Book 1.6
Key elements:
 Previously at a discount but recently at a premium
 Likely correlation with the early phase of the business cycle
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
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Conclusion
5/28/2016
Sector relative to S&P 500
Martin Perrier
• Price to sales = 0.9
• Trailing P/E =1.3
Key elements:
 Price to sales getting closer to 1 (relative to S&P)
 Sector overall at a premium (unlike historic data), risk of overvaluation
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
28
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Cable & satellite
(Relative to Sector)
Comcast (relative to ind.)
1.0
.9
.1
1.2
.5
1.1
1.1
.6
1.1
0.9
Cablevision (relative to ind.)
.89
.83
n/a
.4
.8
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Retail Apparel
(Relative to Sector)
A&F (relative to ind.)
1.0
1.0
1.6
1.0
1.1
.8
.8
.3
.7
.6
Urban Outfitters (relative to
ind.)
1.3
1.2
.6
1.7
1.2
Industry
Martin Perrier
Industry
5/28/2016
Variations among industries
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Department Stores
(Relative to Sector)
Macy’s (relative to ind.)
.8
.9
.7
.4
.7
.8
.8
1.1
1.3
.9
Nordstroms (relative to ind.)
1.0
1.0
1.8
1.8
1.2
P/E Trailing
P/E Forward
P/B
P/S
P/CF
Industry
Automobile Manufacturers
(Relative to Sector)
GM (relative to ind.)
.5
.6
0.7
.3
.7
1.0
.9
.6
.7
.6
Ford (relative to ind.)
1.0
1.0
1.4
1.0
1.4
Martin Perrier
Industry
5/28/2016
Variations among industries
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Automobiles relative to sector
Martin Perrier
5/28/2016
• Trailing P/E: extreme volatility
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
Relative valuation
Martin Perrier
 Some significant variations of industries compared to sector
showing a certain volatility (automobiles manufacturers) but
industries generally in-line with the sector
 Upward trend of all multiples relatively to the S&P, due to the end
of recession
 Trend likely to continue for a while before next expansion phase
5/28/2016
Key elements:
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
VI. CONCLUSION
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Martin Perrier
5/28/2016
Sector currently overweighted in the SIM portfolio (85 basis points)
Outperforming the S&P for the past 5 years
Upward trend, likely to continue with the recovery of the economy
Positive financial indicators (all-time high net profit margin,
increasing EPS, sound cash flow ratios…)
• However, the recovery phase also means the end of the sector’s
ideal phase on the market. There is also a risk of overvaluation.
Martin Perrier
•
•
•
•
5/28/2016
Recommendation: sector
Recommend a HOLD with a SIM weight slightly above the weight in
S&P 500.
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
5-year price evolution of the two industries:
Automobiles Manufacturers
Cable & Satellite
Martin Perrier
• Focus on Cable&Satellite (SIM positions on Comcast and DirecTV)
• Be careful with automobiles manufacturing industry, extremely
volatile (SIM positions on Ford)
• Other SIM positions on the sector: Starbucks, Dollar General
5/28/2016
Recommendation: industries
35
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion
5/28/2016
Martin Perrier
Thank you!
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Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Conclusion