Stock Recommendation
Consumer Staples
Winter 2012
Dave Allen
Matt Cleverly
Chenyang Feng
Agenda





Sector Recommendation
CVS Analysis
Phillip Morris Analysis
Walmart Analysis
Recommendations
Sector Overview

Companies that provide products or services that are
essential

Manufacturers and distributors of food, beverages,
tobacco, drug retailing and producers of non-durable
household goods

Shampoo, Tobacco, Pharmacies
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Trading Strategy

Tend to perform regardless of economic fluctuation

Typically referred to as defensive stocks

Pay higher dividends than average

In general, hold this sector as the economy declines and sell this
sector as the economy strengthens to take advantage of higher
growth areas in times of recovery, i.e.. Consumer Discretionary
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Economic Life-Cycle Analysis
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Looking Back 5 years, Consumer Staples
Has Held Relatively Flat vs. S&P
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Auto Market Recovered Well, Forecasted to Grow
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Housing Starts Lowest In 50 Years, Can’t Get Worse, Right?
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Unemployment Fell to 8.3% With The Creation of 243K Jobs
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Industry Breakdown



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







Agricultural Products
Brewers
Distillers & Vintners
Drug Retail
Food Distributors
Food Retail
Household Products
Hyper Markets & Super Centers
Packaged Foods & Meats
Personal Products
Soft Drinks
Tobacco
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Current Holdings - Overweight 111 BP
S&P 500
Utilities
3%
Tcomm Services
3%
SIM
Utilities
Consumer
3%
Tcomm Services Discretionary
8%
4%
Consumer
Discretionary
11%
Materials
3%
Consumer Staples
11%
Materials
4%
Information
Technology
19%
Information
Technology
22%
Energy
12%
Industrials
11%
Health Care
12%
Sector
Overview
Consumer Staples
12%
Energy
11%
Industrials
10%
Financials
14%
Financials
13%
Health Care
14%
CVS
Phillip Morris
Walmart
Recommendation
Previous Recommendation
Based on Goal Of Beating the S&P

We recommend to Sell 111 basis points (to get in line w / S&P)

Economic drivers are indicating neutral to favorable news





Consumer credit is strengthening
Auto’s are up
Housing can’t get worse
Unemployment is improving
However, it could be recommended that based on economic uncertainty that a hold
position in this sector be suggested.
Source: Business Insider : http://www.businessinsider.com/4-words-that-describe-this-economic-recovery-2012-2
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Stock Recommendation

Decrease weight from 11.1%  10.9% (in line with S&P)

Sell 211 BPs in Walmart

Buy 100 BPs in CVS
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark

Provides pharmacy health care services in the United States


7,200 Retail Stores generating $100+ Billion in Revenue
Two Main Segments:
 Pharmacy Benefit Management (PBM)






Mail order pharmacy service
Plan design and administration
Claims processing
Employers, Insurance Co., Unions, Govt. Entities
Generate Revenue by contracting to provide drug coverage to employees
through health plans
(in Millions)
PBM
Retail
Retail Pharmacy Segment
 Prescription & OTC drugs
 General merchandise
 Minute Clinics
Sector
Overview
CVS
Phillip Morris
Net Revenues
$
47,780 $
45%
Gross Profit
$
3,353 $
16%
Operating Profit
$
2,389 $
34%
Walmart
57,345 $
Total
105,125
55%
17,039 $
20,392
84%
4,537 $
66%
Recommendation
6,926
CVS Caremark… Why Invest?

Boomers Are Aging


Prescription Drugs Are Moving Towards Generics


Increase in medication
This means higher profitability for CVS Caremark!
Top competitor Walgreens has lost a major contract

CVS can capitalize on this situation to gain share
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark… Why Invest?
Elderly Population Growth Rate Doubles in 2010

Source: CVS 10K
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark… Why Invest?
$96.2 Billion in Brand Names Will Be Available in Generics By 2015
CVS receives higher
levels of reimbursement
from groups like
Medicare on generics
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark… Why Invest?
“Express Scripts Says Moving On Without Walgreen” - Reuters 2.23.2012

Express Scripts is a PBM that has worked together with Walgreen, similar
relationship between Caremark and CVS

Walgreen has demanded a premium to the market based on “differentiated
advantages” that Express Scripts can’t see

Walgreen has refused to fill prescriptions in the Express network


Led to Citigroup Price Target Drop in WAG from $35 to $28 in Feb 2012
Significant opportunity to capture market share

CVS Retention is 98%
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark… Why Invest?
“Express Scripts Says Moving On Without Walgreen” - Reuters 2.23.2012
Could Lead To EBITDA Growth of 5%!!
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark
Current Price - $44.40 Target - $51.68 UPSIDE of 16.4%
DCF In Line With
Market Expectations
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark
Current Metrics In Line With Median
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Sector
Overview
High
Low
1.0
1.1
0.9
0.6
18.3
High
1.5
1.4
1.2
0.6
18.3
CVS
Median
0.5
0.5
0.5
0.3
7.3
Low
Current
0.9
0.8
0.8
0.4
12.3
Median
0.7
0.7
0.5
0.3
7.3
Phillip Morris
1.0
1.1
0.9
0.4
10.8
Not necessarily
a value buy, but
that is ok
Current
1.0
1.0
0.8
0.4
12.3
1.2
1.1
0.7
0.4
10.8
Walmart
Recommendation
CVS Caremark
17 of 20 Analysts Recommend Strong Buy / Buy
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
CVS Caremark - Summary

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Boomers Are Aging = Volume
Prescription Drugs Moving Toward Generic = Margin
Walgreen is struggling = Increase in Share
Financials look somewhat attractive
Recommend a buy of 100 BPs
Current - 4.26%
Revised - 5.26%
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris International




Largest publicly traded tobacco company
Manufactures and sells cigarettes and other
tobacco products around the world
Operates outside of the U.S.
Spun off from Altria in 2008
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris International

Presence in

European Union



Eastern Europe, Middle East, and Africa
Asia


Have seen sales slowing and even becoming negative
Largest growing segment of operation
Latin America & Canada
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris

SIM Weight = 3.49%



Overall Gain = 22.24%
Market Cap = 148.23 B
Div. Yield = 3.70%
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris International
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris International
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris International
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris International


Multiples Valuation is inefficient due to lack of
historical data
The valuation ratios are expanding over time
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris

Recommendation = Hold at current weight

Valuation was very conservative





Lack of historical data
Most recent earnings; beat expectations
More potential upside
Has performed well for the SIM
Provides stable return and income
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Phillip Morris

Recommendation = Hold at current weight

Valuation was very conservative





Lack of historical data
Most recent earnings; beat expectations
More potential upside
Has performed well for the SIM
Provides stable return and income
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- Company overview


“Save money, live better”
Consists of three segments





Wal-mart U.S.
Wal-mart International
Sam’s Club
Market Cap-$200.48 billion on 2/24/2012
SIM holding- 4.59% second largest holding
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- Operational overview (FY 2012_Q4)
Walmart U.S.Sales up 2.4%
Op income up 1.4%
Walmart InternationalSales up 13.1%
Op income up 15.2%
Sam’s ClubSales up 6.8%
Op income up 7.6%
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- Sales growth trend by segment
25.0%
Sales growth rate
begins to decline after it
reached its recent peak.
20.0%
15.0%
U.S. Sales (chg %)
International Sales (chg
%)
10.0%
Sam's Club Sales (chg
%)
5.0%
0.0%
-5.0%
FY 2011&2012
U.S. Sales (chg %)
International Sales (chg %)
Sam's Club Sales (chg %)
Sector
Overview
CVS
2011Q1
1.1%
21.4%
4.6%
2011Q2
0.0%
11.0%
2.2%
2011Q3
-0.1%
9.3%
2.7%
Phillip Morris
2011Q4
-0.5%
8.9%
4.4%
2012Q1
0.6%
11.5%
9.4%
Walmart
2012Q2
0.4%
16.2%
9.5%
2012Q3
2.7%
20.3%
9.5%
Recommendation
2012Q4
2.4%
13.1%
6.8%
Walmart- Stock performance
The similar trend
shown in the stock
performance partly
due to the declining
sales growth rate.
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- Valuation relative to S&P 500
Both trailing and forward PE are above its historical average.
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- Valuation
Take the average:
(57.92+60.89+66.93+67.27+66.96)/5=$63.99
Current price
$58.75
Target price
$63.99
Upside
10.9%
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- DCF Valuation
DCF assumptions:
Terminal discount rate: 11%
Terminal Growth: 3.0%
Current price
$58.75
Implied price
$62.38
Upside
6.2%
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Walmart- Recommendations
•Declining sales growth rate
•Weak stock performance started after its recent
peak
•Target price 10.9% over current price
•DCF implied price 6.2% over current price
•Current portfolio holding: 4.59% (2nd highest)
Thus, we recommend to sell 211 BPs of Walmart.
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Proctor & Gamble

Global leader in consumer packaged goods

Sell in 180 Countries world wide under 2 product lines


Household Care
Beauty and Grooming
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
PG - Current Price$67.16, Target $72.15 or 7.4% Upside
PG
Analyst: Dave Allen
Date: 2.26.2012
Terminal Discount Rate =
Terminal FCF Growth =
Year
2010A
Revenue
2011E
78,940
% Grow th
82,560
4.6%
Operating Income
16,008
Operating Margin
20.3%
Interest and Other
Interest % of Sales
Taxes
19.0%
2.0%
18,796
21.5%
89,366
2.0%
19,395
21.7%
90,706
1.5%
19,913
22.0%
92,067
1.5%
20,442
22.2%
2018E
2019E
92,987
93,452
1.0%
20,879
0.5%
21,217
22.5%
22.7%
-
-
-
-
-
-
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
3,392
21.5%
11,797
1,453
3,798
23.8%
12,162
3.1%
1,482
3,874
23.8%
12,406
2.0%
1,511
4,473
23.8%
14,323
15.5%
1,542
4,616
23.8%
14,780
3.2%
1,572
4,739
23.8%
15,174
2.7%
1,596
4,865
23.8%
15,577
2.7%
1,620
4,969
5,049
23.8%
15,910
23.8%
16,168
2.1%
1,636
1.6%
1,644
23.8%
16,346
1.1%
1,644
1.8%
1.8%
1.8%
1.8%
1.8%
1.8%
1.8%
1.8%
1.8%
1.8%
347
(545)
(249)
(259)
(269)
(280)
(289)
(297)
(303)
(306)
(306)
-0.33%
-0.30%
-0.30%
-0.31%
-0.31%
-0.32%
-0.32%
-0.33%
-0.33%
205
213
222
231
238
245
250
252
Capex % of sales
0.2%
14,292
% Grow th
Sector
Overview
5,105
1.8%
197
Current Price
Implied equity value/share
Upside/(Downside) to DCF
23.0%
-
-0.66%
0.238%
12,507
-12.5%
93,459
104,910
198,369
7.59%
14.8
15.6
11.1
11.7
Shares Outstanding
21,450
0.0%
180
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
0.0%
-
0.44%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
93,452
0.0%
Subtract Cap Ex
Free Cash Flow
2020E
-
1,389
% of Sales
16,280
87,613
2017E
0.0%
-7.4%
Plus/(minus) Changes WC
19.0%
2.0%
2016E
-
% Grow th
% of Sales
15,961
85,895
2015E
0.0%
12,736
Add Depreciation/Amort
2.0%
2014E
-
25.6%
Net Income
19.1%
84,211
2013E
0.0%
4,101
Tax Rate
15,804
2012E
9.8%
3.0%
0.243%
13,191
5.5%
0.248%
13,445
1.9%
0.253%
15,373
14.3%
0.258%
15,841
3.0%
0.262%
16,244
2.5%
47%
53%
100%
0.266%
16,655
2.5%
0.269%
16,993
0.270%
17,253
2.0%
1.5%
Terminal Value
Free Cash Yield
16.0
16.8
11.2
11.8
15.5
16.3
11.1
11.7
252
0.270%
17,431
1.0%
265,989
6.55%
Terminal P/E
16.3
Terminal EV/EBITDA
11.7
2,804
$
$
CVS
67.16
70.74
5.3%
Phillip Morris
Walmart
Recommendation
PG - Our valuation in line with Analysts
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
PG - Recommendation to not buy

Limited growth opportunity, more of defensive
position, in line with segment.

Earnings growth has decelerated.

P/E multiple is close to the average.

P/S multiple is slightly higher than the average.
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Final Recommendation

Sector Sell of 111 BPs




Buy 100 BPs
Hold
Sell 211 BPs
CVS
Phillip Morris
WM
SIM will now be flat to S&P in Consumer Staples
Sector
Overview
CVS
Phillip Morris
Walmart
Recommendation
Questions / Feedback: