CONSUMER DISCRETIONARY Sector Analysis A REPORT BY: ADAM ASHBROOK & ROBERT AURAND
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CONSUMER DISCRETIONARY A REPORT BY: ADAM ASHBROOK & ROBERT AURAND Sector Analysis Consumer Discretionary – Overview Encompasses industries that are most sensitive to economic cycles Broken into two main segments Manufacturing Automotive, household durable goods, textiles & apparel, and leisure equipment Service Hotels, restaurants & leisure activities, media production and services, and consumer retailing and services Introduction Business Overview Economic Financial Valuation Conclusion Sector Performance Source: Fidelity.com Introduction Business Overview Economic Financial Valuation Conclusion Sector Weights – S&P vs. SIM S&P Weight 2.73% 3.73% 3.57% 3.53% 3.40% Consumer Staples 14.11% 19.60% 11.92% 10.95% 3.34% Energy 10.87% 11.69% SIM Weight Financials 10.83% 7.46% 11.98% Consumer Discretionary 21.22% 11.13% Health Care 9.78% Industrials 13.19% 7.46% Information Technology Materials Telecommunication Services Utilities Introduction Business Overview Economic Financial Valuation Conclusion Sector Comparisons Introduction Business Overview Economic Financial Valuation Conclusion External Business Analysis Supply Conditions Sector Rotation Across Economic Cycles Excess supply Predictive, not responsive Mature life cycle High input costs Rising commodity prices Demand Conditions Highly cyclical Sales driven by disposable income Growth opportunities available in emerging markets Period of economic expansion Decreasing unemployment Introduction Business Overview Source: us.ishares.com Economic Financial Valuation Conclusion External Business Analysis – Porter’s 5 Forces Force Analysis Buyer Power High Supplier Power Varies Reasoning • ‘Discretionary’ goods for consumers • Supply levels pegged to forecasts • Dependent on industry, but typically multiple vendors with low pricing power • High raw material costs passed to manufacturers High • Diverse product offerings with many substitutes available • Price sensitive customers • Sales often driven by differentiation Competition High • Intense among established players • Few opportunities for new customers except emerging markets • Hard to capture market share Barriers to Entry High • Economies of scale provide significant advantages • Many established brands control market Substitutes Introduction Business Overview Economic Financial Valuation Conclusion Confidence: Expected Conditions Introduction Business Overview Economic Financial Valuation Conclusion Confidence: Expected Conditions – Lead Introduction Business Overview Economic Financial Valuation Conclusion Consumer Confidence Introduction Business Overview Economic Financial Valuation Conclusion Disposable Income Introduction Business Overview Economic Financial Valuation Conclusion Nominal GDP Introduction Business Overview Economic Financial Valuation Conclusion Nominal GDP - Lead Introduction Business Overview Economic Financial Valuation Conclusion Consumer Spending Introduction Business Overview Economic Financial Valuation Conclusion Employment Introduction Business Overview Economic Financial Valuation Conclusion ISM Employment Index Introduction Business Overview Economic Financial Valuation Conclusion ISM Employment Index - Lead Introduction Business Overview Economic Financial Valuation Conclusion Net Profit Margin - Absolute Introduction Business Overview Economic Financial Valuation Conclusion ROE - Absolute Introduction Business Overview Economic Financial Valuation Conclusion Net Profit Margin – Relative (S&P 500) Introduction Business Overview Economic Financial Valuation Conclusion ROE – Relative (S&P 500) Introduction Business Overview Economic Financial Valuation Conclusion Sector Performance Introduction Business Overview Economic Financial Valuation Conclusion Net Profit Margin – Industry 16.0% 14.1% 14.0% 12.0% 10.7% 10.0% 9.2% 8.0% 8.0% 6.0% 6.2% 5.7% 4.2% 4.0% 2.8% 2.0% 0.0% Auto Manufacturers Introduction Cable & Satellite Business Overview Casino & Gaming Department Movies & Restaurants Stores Entertainment Economic Financial Retail Apparel Valuation Retail Internet Conclusion ROE – Industry 45.0% 40.0% 38.4% 33.7% 35.0% 30.0% 25.0% 23.2% 20.6% 20.0% 16.7% 14.6% 15.0% 11.8% 10.0% 7.2% 5.0% 0.0% Auto Manufacturers Introduction Cable & Satellite Business Overview Casino & Gaming Department Movies & Restaurants Stores Entertainment Economic Financial Retail Apparel Valuation Retail Internet Conclusion Sector Valuation Absolute Basis High Low Median Current P/Trailing E 53.7 13.9 20.5 16.5 P/Forward E 44.1 13.0 18.2 15.2 P/B 3.2 1.5 2.4 3.0 P/S 1.1 .4 .9 1.0 P/CF 12.8 5.7 9.1 9.6 Relative to SP500 High Low Median Current P/Trailing E 3.9 1.0 1.2 1.3 P/Forward E 3.0 1.0 1.1 1.2 P/B 1.4 .7 .9 1.4 P/S .9 .5 .6 .9 P/CF 1.1 .7 .9 1.1 Financial Valuation Introduction Business Overview Economic Conclusion Automobile Manufactures Industry Automobile Manufacturers (Relative to Sector) Select Companies (Relative to Industry) General Motors Ford Introduction Ticker GM F Business Overview P/E Trailing P/E Forward .4 .6 3.0 .3 .4 1.0 1.1 .8 1.0 .1 1.0 .8 1.0 1.4 1.0 Economic Financial P/B P/S Valuation P/CF Conclusion Cable & Satellite Industry Cable and Satellite (Relative to Sector) Select Companies (Relative to Industry) Comcast Cablevision Introduction Ticker CMCSA CVC Business Overview P/E Trailing P/E Forward 1.0 .9 .9 1.3 .6 1.1 .69 1.1 1.0 .6 n/a 1.1 .4 1.1 .5 Economic Financial P/B P/S Valuation P/CF Conclusion Casino & Gaming Industry Ticker Casino & Gaming (Relative to Sector) Select Companies (Relative to Industry) International Game Technologies Wynn Resorts Introduction P/E Trailing P/E Forward 1.2 1.2 1.5 1.8 1.2 IGT .83 .82 .7 1.2 .8 WYNN .98 1.1 1.3 1.4 1.1 Business Overview Economic Financial P/B P/S Valuation P/CF Conclusion Department Stores Industry Department Stores (Relative to Sector) Select Companies (Relative to Industry) Macys Nordstroms Introduction Ticker M JWN Business Overview P/E Trailing P/E Forward .9 .9 .6 .4 .7 .89 1.1 .9 1.1 1.3 2.2 1.4 2.5 .9 1.3 Economic Financial P/B P/S Valuation P/CF Conclusion Movies & Entertainment Industry Movies & Ent. (Relative to Sector) Select Companies (Relative to Industry) Disney Viacom Introduction Ticker DIS VIAB Business Overview P/E Trailing P/E Forward .9 .8 .6 1.5 1.0 1.1 .85 1.1 .8 1.1 1.6 1.1 1.1 1.1 1.1 Economic Financial P/B P/S Valuation P/CF Conclusion Restaurants Industry Restaurants (Relative to Sector) Select Companies (Relative to Industry) McDonalds Darden Restaurants Introduction Ticker MCD DRI Business Overview P/E Trailing 1.3 P/E Forward 1.3 P/B 2.5 3.0 1.6 .86 .67 .9 .6 .9 .4 1.2 .3 .9 .5 Economic Financial P/S Valuation P/CF Conclusion Retail - Apparel Industry Retail – Apparel (Relative to Sector) Select Companies (Relative to Industry) Abercrombie & Fitch Urban Outfitters Introduction Ticker P/E Trailing 1.0 P/E Forward 1.0 P/B 1.4 1.0 1.2 ANF .91 .8 .4 .8 .6 URBN 1.2 1.2 .6 1.5 1.1 Business Overview Economic Financial P/S Valuation P/CF Conclusion Retail - Internet Industry Retail – Internet (Relative to Sector) Select Companies (Relative to Industry) Netflix Amazon.com Introduction Ticker NFLX AMZN Business Overview P/E Trailing 2.8 P/E Forward 2.9 P/B 2.9 1.9 2.2 .63 2.9 n/a 3.1 2.2 1.2 1.1 .9 .3 2.2 Economic Financial P/S Valuation P/CF Conclusion Recommendations Sector is currently underweight relative to S&P 500 We place BUY rating on Consumer Discretionary sector and recommend moving portfolio holdings in line to overweight Introduction Business Overview Economic Financial Valuation Conclusion Recommendations Positives Improving economic data Uncertainty in economy Jobs, income High gas prices Undervalued sector European debt crisis Risk Factors Persisting high unemployment Source: WSJ Introduction Business Overview Economic Financial Valuation Conclusion Recommendations Overweight Underweight Auto Manufacturers Cable and Satellite Restaurants Retail - Internet Introduction Business Overview Economic Casino Gambling Department Stores Movies & Entertainment Financial Valuation Conclusion Questions? Introduction Business Overview Economic Financial Valuation Conclusion
