Consumer Discretionary
Nameer Chaudry
Nick Cherry
Kelsey Palmer
Summer 2011
Outline
 Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Final Recommendation: Underweight
Overview
Business
Economic
Financial
Valuation
Conclusion
Business Analysis
About Consumer Discretionary
 The
h consumer ddiscretionary sector is made
d up off companies
that sell non-essential goods and services to consumers
 Highly cyclical – Made up of industries most sensitive to
economic factors
 Less discretionaryy income leads to p
poor performances
p
 Timing strategy
 Investors can enter into this sector during recessionary periods to
profit from ensuing recovery
Overview
Business
Economic
Financial
Valuation
Conclusion
Weights
g
S&P Weight
Consumer Discretionary
SIM Weight
Consumer Staples
p
3.09%
3.38% 10.65%
3.66%
Energy
Financials
3.29%
3.10%
5.98%
0.06%
10.27
10.18
%
%
2.38%
Health Care
17.79%
10.64%
12.68%
11.26%
11.71%
15.13%
Industrials
10.33
%
21.40
%
Info Tech
Materials
Telecommunication
9.90%
Utilities
9.74%
13.36
%
Cash
Dividends Receivable
Overview
Business
Economic
Financial
Valuation
Conclusion
Stocks in SIM Portfolio
 As of 6/30/2011
 Comcast: 3.57% of SIM assets
 Best Buy: 2.90%
 GM: 3.71%
 Considering Las Vegas Sands
Overview
Business
Economic
Financial
Valuation
Conclusion
Industry Breakdown
1200
Market Cap (B
Billions)
1000
800
600
400
200
0
Auto Mfg
Overview
Media
Business
Casino and Gaming
Economic
Movies and
Entertainment
Internet and Catalog
Retail
Financial
Diversified Consumer Hotels Restaurants and
Services
Leisure
Valuation
Conclusion
Largest Companies
10 Largest Companies in Sector by Market Cap
120
Maarket Cap (Billionss)
100
80
60
40
20
0
Amazon.com
Overview
Walt Disney
Comecast
Business
McDonald's
Ford Motor Co. General Motors Home Depot
Co.
Economic
Financial
Ebay, inc.
Valuation
Time Warner,
inc.
Nike, inc.
Conclusion
Business Analysis
High correlation with S&P
500 (cyclical)
Marketing timing strategy
– Upside out of recession
S t B
Sector
Beta
t = 11.19
19
Lower household
L
h
h ld
disposable income
generally leads to poor
performance in the
consumer discretionary
di ti
sector
Overview
Business
Economic
Financial
Valuation
Conclusion
Business Analysis
Supply
pp y Conditions
Demand Conditions
 Forecasted in advance
 Demand driven business
 Mature Life Cycle
cycle
 Elastic
 Competitive advantage
required for superior
performance
 Higher input costs
 Rise in p
price of
commodities and raw
materials
Overview
Business
Economic
 Higher input costs raising
prices and putting
downward pressure on
demand
 High Unemployment
 Less disposable income
Financial
Valuation
Conclusion
Business Analysis
 Bargaining Power Supplier
 Bargaining Power
Customers
 Threat of New Entrants
 Threat of Substitute
Products
 Rivalry within Industry
Overview
Business
Economic
Financial
Valuation
Conclusion
Business Analysis
y
Force
Analysis
Buyer Power
Unfavorable
f
bl
Supplier
pp Power
Push
Substitutes
Unfavorable
Barriers to Entry
Favorable
Competition
Unfavorable
Overview
Business
Economic
Reason
• High
Hi h level
l l off bbuyer power – ‘discretionary’
‘di
i
’
• Success determined by customer demand
• Inventory forecasted based on demand
•In general multiple vendors – Low pricing power
• Higher
h input costs ddue to rising commodity
d prices weighing
h on
profit margins
• Lots of diversity with many substitutes
• Price sensitive customers
• Innovation to achieve competitive advantage essential
• High Capital expenditures to enter
• Advantages from economies of scale
•Strong Brand Names
• Intense competition – established brands
• Difficult to gain market share
• Companies looking to emerging markets
Financial
Valuation
Conclusion
Business Summary
 Uncertain business climate
 Porter’s 5 Forces: generally unfavorable
 Tough industry
 Sell
ll
Overview
Business
Economic
Financial
Valuation
Conclusion
Economics: GDP
Overview
Business
Economic
Financial
Valuation
Conclusion
Economics: Disposable Income
Overview
Business
Economic
Financial
Valuation
Conclusion
Economics: Unemployment
p y
Overview
Business
Economic
Financial
Valuation
Conclusion
Economics: Consumer Confidence
Overview
Business
Economic
Financial
Valuation
Conclusion
Economics: Consumer Spending
Overview
Business
Economic
Financial
Valuation
Conclusion
Economic Expectations
Overview
Business
Economic
Financial
Valuation
Conclusion
Economic Indicators
 “Consumers currently gloomiest since early 2009”
 Could dramatically decrease spending
 Unemployment, high oil prices, debt ceiling/fiscal future of
U.S.,
U
S Eurozone debt,
debt likely tax increase & entitlement cuts in
future
 Q2 real GDP growth estimate: less than 2%
 2011 GDP growth estimate: +2.3%
 2012 GDP growth estimate: +3%
 Inflation expectations down
Overview
Business
Economic
Financial
Valuation
Conclusion
Economics Summary
 Sector has broken away from trends
 Uncertainty
 Spending growth unmoored from sentiment since early 2010
P
Pessimism
i i ≠ cutting
i bbackk on spending
di
 Some restraint
 Sell
Overview
Business
Economic
Financial
Valuation
Conclusion
Financial Analysis:
y
Revenue
Overview
Business
Economic
Financial
Valuation
Conclusion
Financial Analysis: Net Profit Margin
Absolute
Relative to S&P
Overview
Business
Economic
Financial
Valuation
Conclusion
Financial Analysis: ROE
Absolute
Relative to S&P
Overview
Business
Economic
Financial
Valuation
Conclusion
Financial Analysis: Earnings
Absolute
Relative to S&P
Overview
Business
Economic
Financial
Valuation
Conclusion
Net Profit Margin by Industry
Using median
values over 10
years
Overview
16
14
12
10
8
6
4
2
0
14.2%
8.7%
10.4%
7.5%
6 3%
6.3%
2.8%
0.3%
Business
Economic
Financial
Valuation
Conclusion
ROE byy Industryy
40
35
30
25
20
155
10
5
0
Using median
values
l over 10
years
Overview
Business
35.1%
30.1%
15.2% 16.8%
7.2%
Economic
Financial
17.9%
11 2%
11.2%
Valuation
Conclusion
Financial Summary
 Revenues increasing
 Margins leveling
 Returns steady/decreasing
 Earnings steady/decreasing
 Hold
Overview
Business
Economic
Financial
Valuation
Conclusion
Consumer Discretionary Valuation Ratios
a
g P/E
/
Trailing
High
53.7
53
Low
14.7
Median
20.8
08
Current
16.6
66
Forward P/E
44.1
13.3
18.6
15.4
Price/Sales
1.1
0.4
0.9
1.1
Price/Book
3.8
1.5
2.4
3.1
13.8
5.7
9.1
10.3
Price/Cash Flow
Overview
Business
Economic
Financial
Valuation
Conclusion
Consumer Discretionary Sector vs S&P 500
High
3.9
Low
1
Median
1.2
Current
1.2
3
0.96
1
1
Price/Sales
0.8
0.5
0.6
0.8
Price/Book
1.4
0.7
0.9
1.4
Price/Cash Flow
1.1
0.7
0.9
1.1
Trailing P/E
Forward P/E
Overview
Business
Economic
Financial
Valuation
Conclusion
Automobiles vs S&P 500
Trailing P/E
High
16.4
Low
0.28
Median
0.47
Current
0.3
Forward P/E
17.9
0.4
0.69
0.52
Price/Sales
0.3
0
0.1
0.3
Price/Book
1.6
0.2
0.5
NM
Price/Cash Flow
05
0.5
01
0.1
01
0.1
04
0.4
Overview
Business
Economic
Financial
Valuation
Conclusion
Retail Computers and Electronics vs S&P 500
High
1.8
Low
0.57
Median
1.1
Current
0.6
4
0.59
1
0.6
Price/Sales
0.6
0.2
0.4
0.2
Price/Book
1.7
0.7
1.2
0.7
Price/Cash
Flow
1.6
0.5
1.1
0.5
Economic
Financial
Trailing P/E
Forward P/E
Overview
Business
Valuation
Conclusion
C i andd G
Casinos
Gambling
bli vs S&P 500
High
2.6
Low
0.83
Median
1.3
Current
2.6
Forward P/E
2.6
0.57
1.3
2.1
Price/Sales
2.2
0.6
1.2
2.2
Price/Book
3.1
0.5
1.5
2.5
Price/Cash Flow
2.3
0.6
1.2
1.9
Trailing P/E
Overview
Business
Economic
Financial
Valuation
Conclusion
Movies and Entertainment vs S&P 500
High
3.9
Low
0.67
Median
1.2
Current
1.1
Forward P/E
2.2
0.68
1.2
0.96
Price/Sales
2.3
0.9
1.3
1.3
Price/Book
1.1
0.2
0.5
0.8
Price/Cash Flow
26
2.6
04
0.4
1
09
0.9
Trailing P/E
Overview
Business
Economic
Financial
Valuation
Conclusion
Cable and Satellite vs S&P 500
High
10
Low
08
0.8
Median
16
1.6
Current
13
1.3
Forward P/E
1.6
0.81
1.1
1.1
Price/Sales
18
1.8
1
13
1.3
13
1.3
Price/Book
1.3
0.7
0.9
1.2
Price/Cash Flow
08
0.8
05
0.5
06
0.6
07
0.7
Trailing P/E
Overview
Business
Economic
Financial
Valuation
Conclusion
Restaurants vs S&P 500
High
15
1.5
Low
0 73
0.73
Median
12
1.2
Current
14
1.4
Forward P/E
1.4
0.74
1.1
1.4
Price/Sales
23
2.3
1
14
1.4
22
2.2
Price/Book
3.4
1
1.6
3.4
Price/Cash Flow
16
1.6
07
0.7
12
1.2
16
1.6
Trailing P/E
Overview
Business
Economic
Financial
Valuation
Conclusion
Retail Apparel vs S&P 500
High
1.5
Low
0.7
Median
0.99
Current
1.2
Forward P/E
1.5
0.66
0.98
1.1
Price/Sales
0.8
0.4
0.6
0.8
Price/Book
1.9
1
1.4
1.8
Price/Cash Flow
1.3
0.6
1
1.2
Trailing P/E
Overview
Business
Economic
Financial
Valuation
Conclusion
Sector Value
Overview
Business
Economic
Financial
Valuation
Conclusion
Valuation Summary
 Most ratios are close to median
 Expect earnings to stay steady
 Hold
Overview
Business
Economic
Financial
Valuation
Conclusion
Conclusion and Recommendation
 Summary
Analysis
Conclusion
Decision
Business
Uncertainty, tough
industry
Sell
Economic
Lots of uncertainty,
breaking from trends
Sell
Financial
Improving leveling
Improving,
Hold
Valuation
Most ratios near
median
Hold
 We
W recommendd increasing underweight
d
h to .75%
75%
 Currently at 0.47% underweight
Overview
Business
Economic
Financial
Valuation
Conclusion