CONSUMER GOODS DISCRETIONARY Saif Almashghouni Xuyi Chen Megan Weidrick 1. SECTOR REVIEW 2. BUSINESS ANALYSIS 3. ECONOMIC ANALYSIS 4. FINANCIAL ANALYSIS 5. VALUATION ANALYSIS GAME PLAN SECTOR BREAKDOWN S&P 500 S&P 500: 10.94% SIM portfolio is underweight by ~ 3.15% SIM SIM: 7.79% INDUSTRIES IN SECTOR & SIM Automobile Manufacturers Cable & Satellite Hotels, Restaurants, & Leisure Housewares Durables Internet & Catalog Retail Media Multiline Retail Restaurants Textiles, Apparel, & Luxur y Goods Automobile Manufacturers Cable & Satellite Retail LARGEST COMPANIES IN SECTOR McDonald's MCD Home Depot HD Comcast CMCSA Walt Disney DIS Amazon.com AMZN Starbucks SBUX Ford Motor F News Corp NWSA Lowe's LOW Other SIM COMPANIES Directv DT V - 9,400 shares SIM COMPANIES Express Inc. EXPR – 12,000 shares SIM COMPANIES General Motors GM – 21,500 shares SECTOR PERFORMANCE – S&P SECTOR PERFORMANCE - SIM Consumer Discretionary: 17.62% increase Y TD How is SIMS’s consumer discretionary sector performing compared to S&P? 1/3/2012 4/25/2012 YTD YTD% DTV $43.60 $47.60 + $4.00 + 9% EXPR $20.24 $23.44 + $3.20 + 16% GM $20.83 $22.89 + $2.06 + 10% SIM Consumer Discretionary: average 12% increase Y TD, underperforming SECTOR REVIEW SIM consumer discretionary sector is 3.15% underweight compared to S&P 500 SIM consumer discretionary sector is underperforming by 5%+ compared to S&P 500 What do we see for future of consumer discretionar y and what implications for SIM? 1. SECTOR REVIEW 2. BUSINESS ANALYSIS 3. ECONOMIC ANALYSIS 4. FINANCIAL ANALYSIS 5. VALUATION ANALYSIS GAME PLAN BUSINESS ANALYSIS Economic Cycle Early expansion Market Cycle Transition from Market Bottom to Bull Market Slow growth Business Cycle Mature industry Many players Brand power New entrants are short-lived MORNING STAR® Y TD SECTOR LEADERS: 1. TECH 19.60% 2. CONSUMER – C YC L I C A L 17. 6 2 % 3. FINANCIAL S E RV I C E S 15.25% BUSINESS ANALYSIS - DEMAND Demand for Consumer Discretionary Goods/Services: Demand-side story, supply -side will always make discretionar y goods/services available if demand is there ‘Consumer Discretionary’ = sector of economy that consists of businesses that sell NONESSENTIAL goods and services Sector most sensitive to economic cycles, goods are NONESSENTIAL and are the first to be cut when economy lags; highly cyclical Sector hurt in midst of recession, but making stronger returns now. Sector making come back, higher performance than S&P since January 2010. Expect high performance to persist, given – Further recovery of domestic market, consumer confidence Foreign expansion, new markets Worry of European demand lagging still Asian demand staying strong Technology advancements Online retail popularity BUSINESS ANALYSIS - SUPPLY Extra capacity in many industries and companies, scaled back during recession and ready for demand to pick back up Labor waiting in domestic and foreign market for demand to pick back up BUSINESS ANALYSIS - PRICE Currently prices of consumer discretionary have been severely cut through discounts, etc. Consumerism picking up now but most likely won’t see premiums like before recession. During the recession, companies became lean and shed a lot of extra resources. Could offset the lower premium level. Also, companies focusing on foreign markets will continue, which offers greatest growth opportunities. Companies starting to segment products and learn which markets relate to which product better. Sector not concentrated. Many different categories that consumers purchase in with disposable income. PORTER’S 5 FORCES Barriers to Entry – Moderate Supplier Power – Low to Moderate Rivalry – High Buyer Power – Moderate to High High capital costs but not insurmountable Easy to get consumers to pay money for things, harder given economic downturn Intense rivalry because of downturn Price wars lately, heavy discounts Substitutes – High When consumers have extra money, they can pay off debt, save, or spend Substitutes of saving or paying off debt have attracted consumers recently Inputs becoming more expensive, natural resources and fuel costly Globalization eroding Consumers hold a lot of power in economic downturns Want to hold onto money, not burning hole in pocket 1. SECTOR REVIEW 2. BUSINESS ANALYSIS 3. ECONOMIC ANALYSIS 4. FINANCIAL ANALYSIS 5. VALUATION ANALYSIS GAME PLAN Real GDP Disposable Income Consumer Confidence Consumer Spending Employment Retail Sales LEADING ECONOMIC INDICATORS REAL GDP DISPOSABLE INCOME CONSUMER CONFIDENCE CONSUMER SPENDING EMPLOYMENT RETAIL SALES 1. SECTOR REVIEW 2. BUSINESS ANALYSIS 3. ECONOMIC ANALYSIS 4. FINANCIAL ANALYSIS 5. VALUATION ANALYSIS GAME PLAN REVENUE GROWTH EPS GROWTH NET PROFIT MARGINS ROE SECTOR PERFORMANCE NET PROFIT MARGIN - INDUSTRY Net Profit Margin 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Automobiles Cable & Satellite Hotels Restaurants Household Internet & restaurants Durables Catalog retail and Leisure media multiline retail textiles apparel and luxury goods ROE - INDUSTRY ROE 40% 35% 30% 25% 20% 15% 10% 5% 0% Automobiles Cable & Satellite Hotels Restaurants restaurants and Leisure Household Internet & Durables Catalog retail media multiline retail textiles apparel and luxury goods 1. SECTOR REVIEW 2. BUSINESS ANALYSIS 3. ECONOMIC ANALYSIS 4. FINANCIAL ANALYSIS 5. VALUATION ANALYSIS GAME PLAN SECTOR VALUATION Absolute Basis P/Trailing E P/Forward E P/B P/S P/CF High 53.7 44.1 3.3 1.1 10.5 Low 13.9 13.0 1.5 0.4 5.7 Median 20.4 18.0 2.4 0.9 9.1 Current 17.4 16.1 3.3 1.1 10.3 Relative to SP500 P/Trailing E P/Forward E P/B P/S P/CF High Low Median Current 3.9 3.0 1.5 0.9 1.1 1.0 1.0 0.7 0.5 0.7 1.2 1.1 0.9 0.6 0.9 1.3 1.2 1.5 0.9 1.1 AUTOMOBILE MANUFACTURERS - MAJOR Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 0.81 0.27 0.42 0.44 P/E Forward 17.9 0.46 0.58 0.58 P/B 4.2 0.5 0.6 1.3 P/S 0.3 0.0 0.1 0.3 P/CF 0.5 0.1 0.3 0.4 CABLE & SATELLITE Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 2.2 0.8 1.3 1.3 P/E Forward 1.6 0.81 1.0 1.0 P/B 1.4 0.7 0.9 1.4 P/S 1.5 1.0 1.2 1.1 P/CF 0.8 0.5 0.6 0.5 HOTELS, RESTAURANTS, & LEISURE Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 2.6 0.58 1.7 1.6 P/E Forward 2.6 0.93 1.9 1.4 P/B 3.1 0.5 2.1 2.4 P/S 2.1 0.9 1.7 1.7 P/CF 2.3 0.6 1.3 1.3 HOUSEWARES DURABLES Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 1.4 0.52 0.94 1.2 P/E Forward 1.1 0.7 0.93 0.81 P/B 1.3 0.5 0.8 1.3 P/S 1.2 0.5 0.8 1.0 P/CF 1.2 0.6 0.9 0.9 INTERNET & CATALOG RETAIL Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 4.4 1.5 3.1 4.3 P/E Forward 4.0 1.9 2.6 4.0 P/B 6.3 1.0 3.4 4.6 P/S 2.1 0.7 1.4 1.7 P/CF 3.7 1.7 2.7 2.9 MEDIA Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 1.3 0.67 0.98 1.1 P/E Forward 1.3 0.68 0.97 0.98 P/B 0.8 0.4 0.6 0.8 P/S 1.3 0.9 1.2 1.3 P/CF 1.2 0.4 0.7 1.2 MULTILINE RETAIL Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 1.1 0.5 0.8 0.9 P/E Forward 1.8 0.81 1.0 1.1 P/B 1.1 0.5 0.8 1.1 P/S 0.5 0.2 0.3 0.3 P/CF 1.1 0.5 0.8 0.9 RESTAURANTS Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 1.7 0.88 1.3 1.7 P/E Forward 1.6 0.86 1.2 1.5 P/B 3.8 1.7 2.9 3.6 P/S 2.6 1.4 1.9 2.5 P/CF 1.9 1.0 1.3 1.8 TEXTILES, APPAREL, & LUXURY GOODS Relative to S&P Monthly High Monthly Low Median Current P/E Trailing 1.7 0.67 1.0 1.6 P/E Forward 1.5 0.73 1.1 1.5 P/B 2.7 0.8 1.4 2.3 P/S 1.9 0.7 1.2 1.8 P/CF 2.1 0.9 1.3 2.0 RECOMMENDATIONS Given our current position of being underweight and underperforming, changes…. Overweight portfolio compared to S&P 500 Switch up sectors Like: Cable and Internet Retail Apparel Restaurants