CONSUMER DISCRETIONARY
AUTUMN 2011
PHIL ALEXANDER
AMMON BOWEN
AURELIO CARRILLO
SHAWN COCHRAN
FORMAT
Overview
•
Overview
•
Business Analysis
•
Economic Analysis
•
Financial Analysis
•
Valuation Analysis
•
Recommendation
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
OVERVIEW
What Does Consumer Discretionary Mean?
“A sector of the economy that consists of businesses that sell nonessential goods
and services. Companies in this sector include retailers, media companies,
consumer services companies, consumer durables and apparel companies, and
automobiles and components companies.”
Who are the BIG players in this sector?
Toyota Motor Corporation
McDonalds
Amazon
Source: investopedia.com
Source: financialadvisory.com
CONSUMER DISCRETIONARY INFORMATION
SIM Portfolio
S&P 500 Weight by Sector
Telecom Svc
3%
Utilities
4%
Energy
12%
Info Tech
19%
Financials
14%
Materials Utilities
3%
3%
Health
Care
11%
Materials
4%
Info Tech
25%
Industrials
11%
Cons Disc
11%
Cons Staples
11%
Health Care
12%
Industrials
3%
Cons Staples
21%
Financials
11%
Energy
13%
Consumer
Discrectionary
9%
BUSINESS ANALYSIS
Demand for the consumer discretionary is cyclical. This sector relies on consumers to
spend part of their disposable income (after necessities) on their products.
Typically an upswing in the economy provides a boost to this sector.
Business life cycle is Expansion/Mature. Periods of new growth in some industry's
and other industry's in mature phase where year over year sales and profits tend
to be stable, however competition remains fierce. Challenge: Businesses in the
mature phase may need to search for new opportunities and ventures to sustain
cash flow.
Source: financialadvisory.com
winonanationalbank.com
BUSINESS ANALYSIS
Excess supply capacity within this sector due to low demand and other cyclical
factors.
Investors can enter this sector during periods of recovery to take advantage of excess
supply. The question is when does recovery start?
SIM Holdings
•
Bestbuy BBY 2.10%
•
Comcast 3.54%
•
General Motors 3.37%
EXTERNAL BUSINESS ANALYSIS
Barriers to
Entry - HIGH
• Economies of scale provide advantage
• Strong entrenched brands
Competition HIGH
• Many competitors
• Difficult to add new customers
• Difficult to gain market share
Substitutes HIGH
Buyer Power HIGH
Supplier Power
- Varies
• Price sensitive consumers
• Businesses need to differentiate
• Ease of price /benefit comparison
• Demand fluctuates with discretionary income
• Varies by industry
• Typically low power driven by commodity
BUSINESS ANALYSIS - OVERVIEW
GDP-PACE OF RECOVERY SOFTENS AS CONSUMPTION MODERATES
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
DISPOSABLE INCOME GROWTH STALLS AS INFLATION BITES
DEBT CEILING CRISIS SENDS CONFIDENCE OFF OF A CLIFF
CONSUMERS SUPPORT / FORCED INTO THE RECOVERY.
RECOVERY STILL GRADUAL. EXPECTED TO PICK UP PACE.
NET PROFIT MARGIN- ABSOLUTE
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
NET PROFIT MARGIN- RELATIVE TO S&P 500
RETURN ON EQUITY- ABSOLUTE
RETURN ON EQUITY- RELATIVE TO S&P 500
REVENUE
NET PROFIT MARGIN BY INDUSTRY
Net Profit Margin
16.00%
14.30%
14.00%
12.00%
10.00%
10.40%
8.70%
8.50%
8.70%
8.00%
6.30%
6.00%
4.00%
2.00%
0.00%
4.90%
2.80%
2.70%
4.30%
ROE BY INDUSTRY
ROE
40.00%
36.60%
35.00%
33.00%
30.00%
23.80%
25.00%
19.30%
20.00%
16.20%
15.00%
10.00%
5.00%
0.00%
17.40%
14.70%
14.20%
11.30%
7.20%
FINANCIAL SUMMARY
Net Profit Margin
 Currently at a 10-year high in absolute terms & relative to S&P 500
Return on Equity
 Close to 10-year high in absolute terms & relative to S&P 500
Revenues
 Slightly higher than 10-year median
Strongest industries by Net Profit Margin
 Restaurants
 Movies & Entertainment
Strongest industries by Return on Equity
 Restaurants
 Retail: Apparel
CONSUMER DISCRETIONARY
KEY VALUATION RATIOS
High
Low
Median
Current
Trailing P/E
53.7
13.9
20.6
15.9
Forward P/E
44.1
13
18.5
14.8
Price/Sales
3.5
1.5
2.4
2.9
Price/Book
1.1
.4
.9
1
Price/Cash
Flow
12.8
5.7
9.1
9.6
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
CONSUMER DISCRETIONARY VS. S&P 500
High
Low
Median
Current
Trailing P/E
3.9
1.1
1.2
1.2
Forward P/E
3.0
.96
1.1
1.2
Price/Sales
1.4
.7
.9
1.4
Price/Book
.9
.5
.6
.9
Price/Cash Flow
1.1
.7
.9
1.1
AUTOMOTIVE MANUFACTURING INDUSTRY VS. S & P
500
High
Low
Median
Current
Trailing P/E
16.4
.27
.46
.32
Forward P/E
17.9
.40
.66
.57
Price/Sales
4.5
.2
.5
4.5
Price/Book
.3
0
.1
.3
Price/Cash Flow
.5
.1
.1
.4
ELECTRONIC RETAIL VS. S & P 500
High
Low
Median
Current
Trailing P/E
1.8
.57
1.1
.62
Forward P/E
4.0
.58
1
.61
Price/Sales
1.7
.7
1.2
.7
Price/Book
.6
.2
.4
.2
Price/Cash Flow
1.6
.5
1.1
.6
CASINOS & GAMING VS. S & P 500
High
Low
Median
Current
Trailing P/E
2.6
.58
1.3
1.9
Forward P/E
2.6
.57
1.3
1.5
Price/Sales
3.1
.5
1.5
2.4
Price/Book
2.1
.6
1.6
1.8
Price/Cash Flow
2.3
.6
1.3
1.5
CABLE & SATELLITE VS. S & P 500
High
Low
Median
Current
Trailing P/E
10.1
.80
1.6
1.3
Forward P/E
1.6
.81
1.1
1.1
Price/Sales
1.3
.7
.9
1.3
Price/Book
1.8
1.0
1.3
1.2
Price/Cash Flow
.8
.5
.6
.6
SECTOR VALUE
PRICE TO BOOK VALUE
CONSUMER DISCRETIONARY
VALUATION SUMMARY
•
Currently you can see the P/E Ratios are
trending under the 10 year medians.
•
Highly Correlated to the uncertainty
surrounding the Global Economy, slow
job growth, and stagnant unemployment.
•
Improved consumer sentiment would
drive the valuation of this sector, which is
depends on the resolution of the topics
mentioned above.
•
Recommendation: Hold
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation