Buckeye Funds
Consumer Staples Market Update
Ryan Daulton
Miheer Desai
Kurt Elsasser
Agenda
Buckeye Funds
•
•
•
•
Sector Overview
Economic Analysis
Financial Analysis
Conclusion & Recommendation
Consumer Staples
2
Investment Thesis Preview
Buckeye Funds
• Our thoughts:
 Sector has outperformed the broader market QTD
 Staples are trading above relative historical trends
 Economy is slightly stronger than market is baking in
 Recommend a 50bps decrease to overall position given belief
that sector will underperform over the next year
Consumer Staples
3
Consumer Staples Industry
Buckeye Funds
• Noncyclical in nature with relatively low volatility and higher
dividends
• Steady demand creates a “safe-haven” investment class
– Sub-industries can outperform during downtrends
• Private label foods, Tobacco, Liquor
• Revenue: High competition driven by product differentiation and
marketing
• Expenses: Profitability driven by commodity markets and inflation
Consumer Staples
4
Inflation Affects Sub-Sectors
Uniquely
Buckeye Funds
Consumer Staples
5
Measurable Correlation between
Manufacturers & Inflation
Buckeye Funds
Consumer Staples
6
Downstream Staples Possess
Buyer Power
Buckeye Funds
Consumer Staples
7
Consumer Staples Breakdown
Buckeye Funds
• Subsectors in the Consumer Staples Sector & QTD Returns
Drug Retail
8.29%
Brewers
(1.87%)
Packaged Foods & Meats
3.86%
Consumer Staples
Food Distributors
Food Retail
Hypermarkets & Supercenters
Distillers & Vintners
Soft Drinks
Agricultural Products
7.01%
10.08%
Tobacco
7.74%
7.17%
0.26%
Household Products
(0.55%)
8.32%
17.09%
Personal Products
15.99%
8
Holding Comparison
Buckeye Funds
S&P 500
Materials
3.6%
Utilities
3.6%
Telecom
3.0%
Other
4.1%
Industrials
10.6%
Financials
14.2%
Health Care
11.4%
Consumer Staples
Materials
3.3%
Utilities
2.6%
Telecom
4.1%
Info Technology
19.6%
Consumer
Discretionary
10.6%
Consumer Staples
10.9%
Buckeye Funds
Energy
12.5%
Consumer
Discretionary
8.7%
Info Technology
21.7%
Industrials
9.1%
Energy
12.4%
Financials
10.1%
Health Care
11.8%
Consumer Staples
12.2%
9
Consumer Staples Breakdown
Buckeye Funds
Sector Returns
Sector
Utilities
MTD
QTD
0.80%
11.84%
-0.20%
6.24%
Consumer Staples
0.29%
5.68%
Info Technology
0.64%
4.87%
Consumer Discretionary
0.15%
4.40%
Energy
2.13%
4.37%
Telecommunications
1.27%
-2.33%
Industrials
1.11%
-3.37%
Materials
1.66%
-7.93%
Financials
-0.21%
-15.64%
Health Care
• Market expects “Early Recession” or “Bear Market”, we disagree
Consumer Staples
10
15-Year Market Correlation
Buckeye Funds
1600
1500
1400
Industry
r = .47
r
Consumer Staples
0.47
1300
Energy
0.49
1200
Telecommunications
0.50
1100
Materials
0.53
Financials
0.60
Info Technology
0.71
900
Utilities
0.78
800
Health Care
0.81
Industrials
0.88
Consumer Discretionary
0.88
1000
700
600
500
Nov. 1997
Nov. 1999
Nov. 2001
Nov. 2003
S&P 500
Consumer Staples
Nov. 2005
Nov. 2007
Nov. 2009
Nov. 2011
Consumer Staples
11
Nominal GDP & Consumer Staples
Buckeye Funds
Consumer Staples
12
Counterintuitive, but in Accordance
with Nature of the Sector
Buckeye Funds
Consumer Staples
13
Increased Capital Spending Points
to Improving Economy
Buckeye Funds
•
Capital spending is
a leading
economic indicator
•
Time to reduce
exposure to the
Consumer Staples
Consumer Staples
14
Capacity Utilizations Rising is a
Good Sign for the Economy
Buckeye Funds
•
Bad sign for the
Consumer Staples
sector
Consumer Staples
15
Wages
Buckeye Funds
•
Eventual wage
increase will
hurt consumer
staples
Consumer Staples
16
Dollar Depreciation
Buckeye Funds
Consumer Staples
17
Unsustainable Outperformance?
Buckeye Funds
•
More than 3 years of
outperformance over S&P
is not sustainable,
considering historical
trends
Consumer Staples
18
Sector Financial Analysis
Buckeye Funds
Revenue
Consumer Staples
Earnings
19
Absolute Valuation
Buckeye Funds
Absolute Basis
High
Low
Median
Current
P/Trailing E
23.4
12.2
18.6
15.8
P/Forward E
20.9
12.1
17.7
14.6
P/B
7.8
2.6
4.7
3.3
P/S
1.5
.6
1.0
.9
P/CF
16.9
8.6
13.1
11.6
•In absolute terms this sector appears to be undervalued. We feel it is more
relevant to compare to S&P 500
Consumer Staples
20
Valuation Relative to S&P 500
Buckeye Funds
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.3
.83
1.1
1.2
P/Forward E
1.3
.82
1.1
1.2
P/B
2.7
1.4
1.7
1.6
P/S
1.1
.6
.7
.7
P/CF
1.5
1.0
1.2
1.3
•Relative to the S&P, consumer staples is more inline or if anything slightly
overpriced compared to 10 year norms
Consumer Staples
21
Forward P/E Relative to S&P 500
Buckeye Funds
Consumer Staples
22
Trailing 12 months P/E
Buckeye Funds
Trailing P/E Relative to S&P 500
Sector
Telecommunications
Current Premium
0.9x
1.3x
140%
Energy
0.8x
1.0x
126%
Utilities
1.1x
1.2x
124%
Consumer Staples
0.9x
1.1x
Consumer Discretionary
1.2x
1.2x
100%
Industrials
1.1x
1.1x
100%
Materials
1.1x
1.1x
100%
Financials
0.8x
0.7x
93%
Health Care
1.1x
1.3x
0.9x
1.0x
83%
Info Technology
Consumer Staples
Median
109%
77%
23
Overall Valuation of Sector
Buckeye Funds
• Absolute values suggest underpricing of Consumer Staples
• Values relative to the S&P 500 paint a different picture
– Trailing P/E, Forward P/E, and P/CF relative to S&P are all above
10 year norms
Consumer Staples
24
Conclusion
Buckeye Funds
• Reduce holdings in SIM portfolio by 50 basis points
– Investment in Consumer Staples sector will remain 70 bps
overweight to S&P
– Maintain a significant hold on stable companies
• This is due to two reasons:
– Though situation in US is improving, considerable uncertainty
still remains; therefore, we remain overweight
– We reduce overweight basis due to greater potential in other
sectors and belief that economy will slowly improve
Consumer Staples
25
Berkshire Reduces Exposure to
Consumer Staples
Buckeye Funds
•
“Historically he has preferred consumer products and banking to industrial companies. But
the market changes, so the names he comes up with changes”
•
Berkshire’s holdings of banks, insurance and finance stocks advanced 2.7 percent to $16
billion on a cost basis in the three months ended Sept. 30, while consumer products shares
fell 5 percent to $12.6 billion
Bloomberg, 7th November
Consumer Staples
26
Questions and Voting
Buckeye Funds
• Do you dare defy the Oracle of Omaha?
Consumer Staples
27