Company Presentation:
Consumer Staples
Bennett Cross, Ryan Darner, Feng Dong, Yichao Wang
Agenda
• Sector Overview
• Company Analysis
•
•
•
•
Wal-Mart Stores, Inc
Philip Morris International, Inc
Pepsico, Inc
CVS Caremark Corporation
• Recommendation
Consumer Staples
Sector Overview
• Manufacturers and distributors of food, beverages
and tobacco
• Producers of non-durable household goods and
personal products
• Food & drug retail companies
• Consumer supercenters
Sector Overview
• Comprises companies whose businesses are less
sensitive to economic cycles
• Defensive stocks
• Buy – if economy declining
• Sell – if economy improving
• Typically pay high dividends
Sector Overview
Total Return
11.88%
5.86%
Consumer
Staples
S&P 500
0.30%
QTD
-0.63%
YTD
S&P 500 vs. SIM Portfolio
S&P 500 Allocation
Telecom Svc
2.91%
SIM Portfolio Allocation
Telecom Svc
1.02%
Utilities 3.50%
Materials
3.45%
Utilities 3.47%
Materials
3.93%
Consumer
Discretionary
10.04%
Consumer
Discretionary
11.22%
Consumer
Staples
10.85%
Information
Technology
20.29%
Consumer
Staples 10.95%
Information
Technology
21.91%
Energy 10.42%
Energy
11.22%
Industrials
7.37%
Industrials
10.51%
Health Care
11.39%
Financials
14.68%
Financials
13.36%
Health Care
13.61%
Sector Recommendation
• Sell 60 basis points
• SIM Portfolio is currently 10bps overweight in
Consumer Staples sector relative to S&P 500
• Move to 50 bps underweight
• Reasons
• Consumer staples sector dramatically underperformed
the S&P 500 during 1Q
• Belief that economy will continue to recover 2Q and
remainder of the year
Stock Recommendation
Recommended
Current
Wal-Mart
WalMart
29%
Phillip
33%
CVS
38%
sell 140 bps
CVS
hold
Pepsi
buy 140 bps
Phillip Morris sell 60 bps
Phillip
29%
Pepsi
14%
Wal-Mart
17%
CVS
40%
Wal-Mart Stores Inc.
Company Overview
 Fourth largest in consumer staple sector
 $212.82B Market Cap
 $259.33B Enterprise Value
 ROE = 23.49%
 ROA = 8.82%
Company Segments
Wal-Mart U.S.
• $264,186 million revenue
• 2.58% growth rate
Wal-Mart International
• $125,873 million revenue
• 8.76% growth rate
Sam’s Club
• $53,795 million revenue
• 4.98% growth rate
Sam's Club
7%
Wal-Mart
International
43%
Walmart U.S.
50%
Global Market
UK
541
CANADA
333
CHINA
370
US
4,479
MEXICO
2,088
CHILE
316
AFRICA
347
INDIA
15
JAPAN
491
BRAZIL
512
AGENTINA
88
STORES WORLDWIDE
10,130
Stock Performance
• One Year Range: $48.31 - $ 62.63
DCF Valuation
Terminal Discount Rate
9.5%
Terminal FCF Growth
2.3%
NPV of Cash Flows $96,625 million
NPV of terminal value $120,068 million
Projected Equity Value $216,693 million
Shares Outstanding 3,474 million
Implied equity value/share $62.38
Multiples Valuation
High Low
P/Forward E 34.6 11.2
P/S
1.4
0.4
P/B
7.8
2.7
P/EBITDA 18.01 5.68
P/CF
27.5 7.9
Median Current Target Multiple
15.5
12.9
14
0.6
0.5
0.5
3.5
3
3
8.13
6.39
7.5
12
9.1
11
Target Price
70
68
66
63.75
60.5
75
73
Industry Target Multiple Target Price 71
COST
TGT
P/Forward E
20.1
12.9
13.9
15
75
69
P/S
0.4
0.5
0.3
0.5
68
67
P/B
2.9
2.3
3
3.1
68.2
P/EBITDA
10.58
4.9
4.22
7
59.5
P/CF
15
7.2
10.1
12
66
65
63
61
59
57
55
Historical
Peer Companies
Risks & Opportunities
Risks
• International Market
faces challenge after
Mexico bribe
• Fast economic recovery
will bring revenue away
from Wal-Mart
• Rise of strong
competitors such as
Amazon and EBay
Opportunities
• Growth of developing
countries
• Globalized supply chain
Recommendation
• DCF = $62.38/share
• Multiple Valuation = $59.5/share - $70/share
• Current Price = 62.43
• Sell 140 bps, but still keep around 60% for defense
and diversification purpose
Philip Morris
International, Inc.
Company Description
• A U.S.-based international cigarette and tobacco
company, strictly operating outside the U.S.
• Diversified brand portfolio with the leading brand
Marlboro
• 28.1% share of international cigarette market excluding
the U.S. and People’s Republic of China
Stock Performance
High Shareholder Return
Dividend
Available Cash
2008-2011
$3.08
Share
Repurchase:
+20.3%
+10.3%
$1.84
+17.4% +7.4%
21.4 Billion
Dividend:
Acquisition:
16.8billion
2.3 billion
Cash
Available
2008
Aug-08
Sep-09
Sep-10
2011
Business Segment
2011 Cigarette Shipment Volume
2011 Operating Income
EU
11%
7.30%
23.10%
EEMA
33.50%
35.50%
ASIA
34.20%
31.70%
LATIN AMERICA &
CANADA
23.70%
Asia: Major Value Driver
• Larger population base with rapid growth rate
• Relatively stable economic condition
• Loose regulation
350000
313,282
Cigarette Volume
• Outlook:
• Organic volume growth
300000
Operating income
6000
5000
4,836
250000
4000
200000
3000
150000
2000
100000
1000
50000
0
0
2008
2009
2010
2011
EU: High Uncertainty
• Declining demand
• Current down trading
• Highly regulated market
250000
Cigarette Volume
Operating income
240000
4,560
230000
4800
4700
4600
4500
220000
4400
4300
210000
211,493
200000
4200
4100
190000
4000
2008
2009
2010
2011
• Outlook:
• Short run: Declining demand
• Long run: Declining demand, partially offsetting by price gain
Regulation & Excise Taxes
•
•
•
•
•
Full and partial bans on smoking in public places
Retail display bans
Increase in minimum age to purchase
Pictorial health warnings
Continuous increase in Excise Taxes, partially offset by
pricing power
Risk & Opportunities
Risks
• Governmental excise tax
increases, additional
regulation
• Falling demand & uncertain
economy in EU, where
Philip Morris generates
30% of its revenue
• Performance hindered by a
strengthening of the U.S.
dollar.
Opportunities
• Addictive products
enabling the firm to
possess meaningful pricing
power
• With a focus on premium
products, the firm has
benefiting from consumers’
desires to trade up.
• Growing in markets such as
India, through population
growth and market share
gains.
DCF Valuation
NET REVENUE FY 2014
FY 2013
FY 2012
FY 2011
FY 2010
FY 2009
EU
-3.00%
-2.50%
-5.00%
6.12%
-1.75%
-5.67%
EEMEA
2.00%
3.00%
4.00%
9.57%
14.88%
-6.43%
Asia
18.00%
23.00%
28.00%
28.59%
22.73%
1.56%
Latin America &
Canada
12.00%
13.00%
14.00%
12.19%
17.21%
14.46%
Terminal Growth
Rate
Discount Rate
2.75%
9.25%
Price from DCF：$90.61
Sensitivity Analysis
Terminal Growth Rate
Discount Rate
$90.61
8.50%
8.75%
9.00%
9.25%
9.50%
9.75%
10.00%
10.25%
2.00%
96.211
92.515
89.085
85.894
82.918
80.135
77.528
75.081
2.25%
98.187
94.297
90.696
87.355
84.245
81.345
78.633
76.091
2.50%
100.327
96.221
92.431
88.924
85.668
82.638
79.811
77.167
2.75%
102.654
98.305
94.305
90.613
87.196
84.023
81.070
78.315
3.00%
105.192
100.571
96.334
92.438
88.841
85.511
82.420
79.542
3.25%
107.972
103.042
98.541
94.414
90.618
87.114
83.869
80.856
Multiples Valuation
Relative
to
Industry
High Low Median
Current
Relative
to
S&P 500
High
Low
Median
Current
P/Trailing E
1.4
0.8
1
1.3
P/Forward E
1.2
0.78
1
1.2
P/Trailing E
1.2
1
1.1
1.1
P/Forward E
1.1
0.99
1.1
1
P/B
4.7
0.8
1.8
NM
P/B
28.4
2.7
7.7
NM
P/S
1.3
0.5
0.6
1.3
P/S
3.8
1.2
1.5
3.8
P/CF
1.2
1
1.1
1
P/CF
1.8
1.1
1.5
1.7
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target
/Share
Target
Price
P/ForwardE
16.7
11
13.7
16.6
17.4
5.39
93.8
P/S
4.8
1.1
1.6
4.8
1.9
48.46
92.1
P/EBITDA
11.79
6.24
9.48
10.92
10
9
90
P/CF
16.9
8.8
13.1
16
14.5
6
87
Final Price & Recommendation
Target Price
Weight
P/Forward E
93.8
8%
P/S
92.1
8%
P/EBITDA
90
8%
P/CF
87
8%
DCF
90.61
68%
Final Price
Current Price: $84.74
7.0% upside
Sell 60 bps
90.65
Pepsico, Inc
Recommendation: Buy 140 basis points
Business Overview
Business Overview
• Pepsico is the 2nd largest food and beverage producer in
the world
• Largest producer in the North American region
• 19 Product lines
Segment
2011 Net
Sales
2012 Est.
Net Sales
2014 Est.
Net Sales
Americas Foods
$23,134
$23,597
$25,520
Americas Beverages
$22,418
$22,866
$24,730
Europe
$13,560
$13,831
$14,958
Asia, Middle East, Africa
$7,392
$8,501
$11,833
Total
$66,504
$68,795
$77,041
Stock Performance – 1 year
Stock Performance – 5 years
Multiples Valuation
Multiples Valuation
Average Target Price: $88.88
DCF Valuation
DCF Valuation
Target Price
Valuation
Weight
Amount
Discounted Cash Flow
.4
$56.75
Ratio Analysis
.6
$88.88
Target Price
Current Price: $67.98
Downside Risk: -16.5%
Upside Potential: 30.7%
Margin of Safety on Target Price: 11.8%
Recommendation: Buy 140 bps
$75.98
Risks & Opportunities
Risks
• Shift towards “healthier”
snacks could hurt FritoLay segment.
• Continued growth in
non-CSD segment (juice,
tea, etc.)
• Low adoption rates in
expansion territories
Opportunities
• Success in current foreign
expansion efforts.
• Split from Frito-Lay
segment.
• Successful response to
current domestic marketing
efforts
CVS Caremark Corp.
Company Overview
• Largest pharmacy health care provider in the United
States
• Retail Pharmacy Segment
• Sells prescription drugs, over-the-counter drugs, general
merchandise
• MinuteClinic health care clinics
• Pharmacy Benefit Management (PBM)
• plan design and administration
• formulary management
• mail order pharmacy services
Key Business Drivers
• Large network of retail pharmacies
• 7,200 pharmacy locations
• ~ 75% of the U.S. population lives within 3 miles
• Large pharmacy benefit network
• Plan members have access to 64,000 retail pharmacies
• Mail order pharmacy services
• Prescriptions filled through mail service has increased for 3 of
past 4 years
• Lower cost to fill prescriptions
Stock Performance
DCF Valuation
NET REVENUE
2014E
2013E
2012E
2011A
2010A
2009A
Pharmacy
Services
$81,067
$77,206
$70,757
$58,874
$47,145
$50,551
% growth
5.0%
9.1%
20.2%
24.9%
-6.7%
15.5%
Retail Pharmacy
$74,995
$71,423
$66,751
$59,599
$57,345
$55,355
% growth
5.0%
7.0%
12.0%
3.9%
3.6%
13.0%
Terminal Growth
Rate
Discount Rate
3.0%
8.75%
Current
Price
Implied
Value
Upside to
DCF
$44.43
$50.70
14.1%
Multiples Valuation
Relative
to
Industry
High Low Median
Current
Relative
to
S&P 500
High
Low
Median
Current
P/Trailing E
1.1
.55
.89
1.1
P/Trailing E
1.5
.66
1.0
1.2
P/Forward E
1.0
.59
.89
1.0
P/Forward E
1.4
.71
.97
.99
P/B
.9
.5
.8
.9
P/B
1.2
.5
.8
.7
P/S
1.1
.5
.8
1.1
P/S
.6
.3
.4
.4
P/CF
1.1
.6
.9
1.1
P/CF
1.7
.8
1.2
1.2
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target
Price
P/Forward E
22.0
9.6
16.0
13.4
16.5
$58.68
P/S
0.8
0.4
0.6
0.5
0.6
$55.13
P/B
3.7
1.0
2.3
1.0
1.5
$42.37
P/EBITDA
12.63
4.88
7.90
7.00
8.00
$61.67
P/CF
18.3
7.3
12.3
10.9
12.5
$61.68
Final Price & Recommendation
Target Price
Weight
Multiples Valuation
$51.40
20%
DCF Valuation
$50.43
80%
Price Target
$50.62
Current Price
$44.88
Upside to Valuation
12.8%
Recommendation: HOLD
Risks & Opportunities
Risks
• Increasing market share of
lower priced generic drugs
• Potential slowdown in frontend sales due to a weak
economic environment
• Possibility of lower
reimbursements by Medicaid
and Medicare
Opportunities
• Walgreens leaving Express
Scripts pharmacy network
• Increasing use of mail order
pharmacy services
• Increase in prescription drug
sales
• Aging population
• Expansion of health care
coverage
• Growth of MinuteClinic health
care clinics
Final Recommendation
Wal-Mart
sell 140 bps
CVS
hold
Pepsi
buy 140 bps
Phillip Morris
sell 60 bps
Questions?