Buckeye Funds
Consumer Staples Stock Recommendations
Ryan Daulton
Miheer Desai
Kurt Elsasser
Agenda
Buckeye Funds
•
•
•
•
•
Overview & Holding Summary
Current Positions
New ideas
Recommendations
Conclusion
Consumer Staples
2
Current Holdings
Buckeye Funds
Purchase Price
Market Value
Increase/(Decrease)
% Portfolio
CVS
$28.77
$333,751
36.4%
3.9%
PM
$68.07
$419,220
5.2%
3.9%
WMT
$51.21
$493,464
15.6%
4.5%
Consumer Staples
3
Holdings - Decrease 50 Bps
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%
4
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%
5
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
6
Buckeye Funds
Current Holdings
Consumer Staples
7
Procter & Gamble
Buckeye Funds
Overview
• P&G’s business is focused on providing branded products of what it
considers superior quality and value to improve the lives of the
world's consumers.
• Six reportable business segments
• Beauty - 23% of net income from continuing operations
• Grooming (14%)
• Health Care (15%)
• Snacks and Pet Care (2%);
• Fabric Care and Home Care (26%)
• Baby Care and Family Care (17%)
Consumer Staples
8
Pros vs. Cons
Buckeye Funds
Pros
• Very large, well
established, and
diversified business
• Large international
market share
• Defensive stock with
fairly consistent
dividends
Consumer Staples
Cons
• Difficult to maintain
growth ($85 Billion in
revenues)
• Outperforms market in
weak times,
underperforms during
following recovery
• Rising commodity prices
9
Procter & Gamble
Buckeye Funds
Year
Revenue
2012E
86,748
% Grow th
Operating Income
15,432
Operating Margin
17.8%
Interest and Other
Interest % of Sales
Taxes
16,309
17.9%
0.1%
11,474
4,101
25.0%
12,302
7.2%
Add Depreciation/Amort
2,863
% of Sales
Plus/(minus) Changes WC
4,348
3.9%
10,596
% Grow th
3.9%
11,712
10.5%
87,858
119,408
207,267
5.72%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
16.1
18.1
13.8
15.0
3,002
•
•
DCF implied value $69.05
Average Multiples Valuation
$73.29
•
•
•
Overall Price Target: $71.17
Upside: 15.4%
Recommendation: Do not Buy
6.0%
3,344
3.5%
-0.6%
Current Price $61.66
Discount rate 9.5%
Terminal Growth Rate 3.5%
25.0%
(618)
3,547
•
•
•
13,044
(563)
Capex % of sales
$
$
(84)
-0.1%
(1,308)
-1.5%
Shares Outstanding
18.3%
3.2%
3,340
Free Cash Flow
2,910
17,477
3.3%
% of Sales
Subtract Cap Ex
Current Price
Implied equity value/share
Upside/(Downside) to DCF
5.1%
-0.2%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
4.8%
93
25.0%
Net Income
2014E
95,541
(134)
3,825
Tax Rate
2013E
90,945
-0.6%
3,822
4.0%
12,506
6.8%
42%
58%
100%
15.0
16.8
13.1
14.3
14.2
15.9
12.1
13.2
61.66
69.05
12.0%
Consumer Staples
10
Phillip Morris International Inc.
Buckeye Funds
Overview
• Largest publicly traded
manufacturer and marketer
of tobacco products in the
world
• International presence in
Europe, Middle East, Africa
and Latin American
– Positioning in emerging
markets
Consumer Staples
• Popular brands include
Marlboro, Merit and
Parliament
• Current Price $72.07
• High Dividend Yield of 4.27%
• Market Cap $124.4 B
• 2010
– Revenues $27.21 B
– Earnings $7.259 B
11
Phillip Morris International Inc.
Buckeye Funds
Key Drivers
• Focus on emerging markets like China, India, and Vietnam
• High Dividends
• Operations outside the U.S.
• High brand loyalty
Consumer Staples
12
Phillip Morris International Inc.
Buckeye Funds
Risks
•
•
•
•
Tight Regulations
Increase in Excise taxes in developed countries
Possible rise in Tobacco leaf price
Lawsuits
Consumer Staples
13
Phillip Morris International Inc.
Buckeye Funds
Multiples
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
Median
Current
B.
17.9
4.2
57.1
11.79
15.9
C.
9.9
1.1
5.8
6.24
8.8
D.
14.8
1.6
15.9
9.27
13.1
E.
15.8
4.2
34.4
9.60
14.0
• Do not want to rely too much on
this because there is only about 34 years of data
Relative to S&P
500
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.3
1.2
25.9
3.7
1.7
.8
.78
2.7
1.2
1.1
.92
1.0
7.7
1.5
1.5
1.3
1.2
17.3
3.7
1.
Consumer Staples
14
Phillip Morris International Inc.
Buckeye Funds
• DCF implied value $79.84
• Overall Target Price of $81.34
• 75% weight on DCF
• 25% on Multiples
• Upside of 12.9%
• Recommendation: Sell 50 BP
Consumer Staples
15
CVS Caremark
Overview
•
Largest pharmacy health care
provider in the U.S.
Buckeye Funds
1600
$38.48
1400
1216
•
•
•
•
Operates:
– 7200 retail stores
– Health clinics “Minute Clinic”
– Online Pharmacy
Operate two business segments:
– Pharmacy Services
– Retail Pharmacy
2010 Sales: $96,413 million
2010 EBIT: $6,165 million
1200
1000
CVS
800
600
1/2/2008
S&P
6/2/2008 11/2/2008 4/2/2009
Ticker
Sub-Industry
Stock Price
Purchased
Gain / (Loss)
Market Cap (MM)
Debt
EBITDA
Enterprise Value
Beta
Dividend Yield
Consumer Staples
9/2/2009
2/2/2010
7/2/2010 12/2/2010 5/2/2011 10/2/2011
CVS
Drug Reta i l
$38.15
$28.77
32.6%
$50,106
$10,768
1.3 x
$59,167
0.81
1.3%
16
CVS Caremark
Retail Pharmacy
Buckeye Funds
• Sells prescription drugs, over-the-counter drugs, and branded and
private label merchandise through more than 7,200 retail locations
• Operate 560 retail health care clinics, “Minute Clinic”
• Operate in 92 of the top 100 U.S. drugstore markets
Operating Performance
Revenue
% Total Sales
Gross Profit
Margin
EBIT
Margin
% Total EBIT
Consumer Staples
2008
$48,990
2009
$55,355
2010
$57,345
52.8%
52.0%
54.5%
14,741
16,593
17,039
30.1%
30.0%
29.7%
3,753
4,159
4,537
7.7%
57.7%
7.5%
59.2%
7.9%
65.5%
17
CVS Caremark
Pharmacy Services
Buckeye Funds
• Acts as a partner to HMO’s, health insurance providers, employee
drug plan sponsors, and union sponsored health plans
• Provides pharmaceutical solutions that enhance clinical outcomes
and reduce healthcare costs
– Organizing pharmacy networks and combining the claims process
– Mail service pharmacies
– Design cost effective formularies
and drug plans
– Pool purchasing power
– E-Prescribing
Operating Performance
Revenue
% Total Sales
Gross Profit
Margin
EBIT
Margin
% Total EBIT
Consumer Staples
2008
$43,769
2009
$51,065
2010
$47,780
47.2%
48.0%
45.5%
3,550
3,835
3,353
8.1%
7.5%
7.0%
2,755
2,866
2,389
6.3%
42.3%
5.6%
40.8%
5.0%
34.5%
18
CVS Caremark
Discounted Cash Flow
Year
2011E
Revenue
107,927
% Grow th
Operating Income
Operating Margin
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
6,303
5.8%
3,472
Current Price
Implied equity value/share
Upside/(Downside) to DCF
•
6,838
5.9%
3,778
8.8%
1,630
1,848
7,043
5.9%
3,891
3.0%
1.7%
(395)
-0.6%
-0.8%
-0.3%
2.1%
2,125
2,230
25,447
28,210
$53,656
4.24%
47%
53%
100%
4.9%
$38.16
$40.85
7.0%
9.5%
10.0%
Long Term
Growth
Rate
3.5%
$46.40
$42.69
$39.55
3.0%
44.12
40.85
38.04
2.5%
42.20
39.26
36.73
1,963
1.6%
2.2%
9.0%
3.0%
(970)
2,425
#####
118,957
1.5%
2,374
WACC
2013E
(602)
% Grow th
NPV of Cash Flows
NPV of Terminal Value
Projected Equity Value
Free Cash Flow Yield
115,492
7.0%
% Grow th
Add Depreciation/Amort
2012E
Buckeye Funds
2,379
2.0%
3,080
38.1%
Implied P/E
18.8 x
17.3 x
15.9 x
17.2 x
15.8 x
14.7 x
15.8 x
14.6 x
13.7 x
% Upside
21.6%
11.9%
3.7%
15.6%
7.0%
-0.3%
10.6%
2.9%
-3.8%
WACC = 9.5%, LTGR = 3%, Long Term Leverage = ~1.0x EBITDA
Consumer Staples
19
CVS Caremark
Upside Drivers
Buckeye Funds
 Starting in 2012 Walgreen has refused to be included in PBM
competitor Express Scripts’ pharmacy-provider network
-
WAG expected to lose $5.3bn in revenue, CVS can expect some of that
revenue1
Express Scripts becoming less competitive in PBM business, CVS 98%
retention rate2
 Large number of brand name prescription patents expiring
 Commanding mail pharmacy position post Caremark acquisition
-
56% of new drug therapy patients prefer mail pharmacies3
 Maintenance Choice will continue to drive market share gains
(1) Walgreens disclosure (2) CVS Q3 Investor Presentation (3) Pembroke Consulting, Drugchannels.net
Consumer Staples
20
CVS Caremark
Multiples Valuation
Buckeye Funds
2012 Pharmacy Services Revenue Growth
2012 Pharmacy
Services
EBIT Margin
$3.23
4.25%
4.00%
3.75%
3.50%
3.25%
8.0%
3.29
$3.21
3.13
3.05
2.97
9.0%
3.30
3.22
3.14
3.06
2.98
10.0%
3.31
$3.23
3.15
3.07
2.98
11.0%
3.32
3.24
3.16
3.07
2.99
12.0%
3.33
3.25
3.16
3.08
3.00
2012 Expected EPS
Forward
P/E
Valuation
LT Median 17.9 x
15.9 x
13.9 x
Current 11.9 x
$3.19
57.06
50.68
44.30
37.92
$3.21
57.42
51.00
44.58
$38.16
$3.23
$57.78
$51.32
$44.86
38.40
$3.25
58.14
51.64
45.14
38.64
No Multiple Growth: 2013E EPS $3.45 * 11.9 x = $41.06 [7.6% Gain]
Consumer Staples
21
CVS Caremark
Recommendation
Buckeye Funds
• 52- Week Price Target: $45.00
• Current Trading Price: $38.16
Upside: 17.9%
• Maintain current weight: 3.87%
Consumer Staples
22
Wal-mart Stores, Inc.
Overview
Buckeye Funds
• World’s largest corporation by revenue
• Segmental revenues ($ mn)
Competitors
• Warehouse Clubs (Costco, BJ’s)
• Retail food (Kroger, Supervalu)
• General merchandise (Dollar General, Family Dollar)
• Internet retail (Amazon)
• Catalog sales
Consumer Staples
23
Wal-mart Stores, Inc.
Buckeye Funds
Two phases of Wal-mart
Consumer Staples
24
Key events and Drivers
Buckeye Funds
• Quarterly ‘Comp’ sales increase, breaking two year declining trend
• Buybacks ($15 bn * 2) have boosted per share numbers
• However, total profits have declined for Q3
• Goal of leveraging expenses
• Dividend yield at an all time high of 2.55%
Consumer Staples
25
Wal-mart Stores, Inc.
Valuation
•
•
•
•
Buckeye Funds
Current stock price: 56.7
DCF Implied equity value: 68.6
Discount rate: 9.5%
Terminal growth: 4%
• Average multiples valuation: 64.7
• Weighted average target price: 66.6
• Upside to current price: 17.7%
• Current portfolio holding: 4.53% (highest)
• Recommendation: HOLD
Consumer Staples
26
Conclusion
Buckeye Funds
Keep current stocks
• Maintain Weight in Wal-Mart and CVS
• 50 point BP reduction in Phillip Morris International
Consumer Staples
27