Consumer Staples
Sector Presentation
Zack Ajzenman
Daniel Krasen
Xuan Li
5/10/2011
S&P500 Breakdown
3.0%
3.6%
3.3%
18.1%
10.7%
Telecom
Materials
Utilities
Cons Disc
11.2%
Cons Staples
10.6%
Energy
Financials
Healthcare
Industrials
Info Tech
11.5%
12.6%
15.5%
Returns Compared to S&P
S&P500
Energy
Materials
Industrials
Con Disc
Cons Staples
Healthcare
Finacnials
Info Tech
Telecom
Utilities
YTD
7.1%
11.9%
2.7%
9.1%
7.8%
7.3%
12.5%
1.7%
5.4%
5.3%
6.0%
QTD
1.6%
-3.7%
-1.3%
0.8%
3.3%
5.5%
7.1%
-1.0%
2.1%
1.8%
4.3%
Size of Sector
 S&P500 market cap: 12,077.9 B
 Consumer Staples market cap: 1,299.5 B
 10.6% of S&P500
 8.16% in the SIM portfolio
 Underweight 2.25%
Sector Industries












Agricultural Products
Brewers
Distillers & Vintners
Drug Retail - CVS
Food Distributors
Food Retail
Household Products
Hyper Markets & Super Centers - Walmart
Packaged Foods & Meats
Personal Products
Soft Drinks
Tobacco – Philip Morris (not included in SIM portfolio)
Phase of Life Cycle
DOMESTIC
 Mature
 Most have medium/large
market caps (74.9%)
 Those that don’t often
consolidate or risk
takeover
 Many companies have
cheap P/E ratios
 Implying room for growth
ABROAD
 Expansion into new
markets prevalent
Economic Implications
DOMESTIC
ABROAD
 Defensive, stable, recession
 Continued development of
resistant
 Slow job recovery won’t
hinder sector as compared
to others
 Uncertainties will effect
disposable spending rate
 Force to revert to staples
emerging economies
 Demand for such product
offerings will continue to
grow
External Factors
 Input costs
 Pricing competition
 Economic recovery
 How income is spent
 Unemployment
 Current rate seems to be beneficial to sector
 Supply & Demand
 Recessionary v. post-recessionary periods
 Inflation
 FX
User and Geography
 Offers everyday product
 Covers all of U.S.
needs to entire population
 Wary of expansion
 Non-durable household
 Cannibalizing effect
goods
 Food/beverages
 Tobacco
 Prescription drugs
 Continues to expand
internationally
5 Forces
Model
SCENARIO
RELEVANCY
ANALYSIS
Power of Customers
High
•Loud voice
•Dictate preference based
on value
Power of Suppliers
Moderate
•Forced to compete based
on demand of low input
costs
Threat of New Entrants
Low
•High barriers to entry
•Large economies of scale
achieved
•Little market share
exposed
Competitive Rivalry within
Industry
High
•Low prices
Threat of Substitutes
Low
•Seen as ‘value’ products
Sector Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing E
24.7
12.2
18.8
16.5
P/Forward E
25.6
12.1
17.9
15.1
P/B
7.8
2.6
5.0
3.6
P/S
1.5
0.6
1.0
0.9
P/CF
16.9
8.6
13.3
12.0
Currently selling at ratios that are on lower side of 10-yr valuations
Similar valuations seen at an industry-wide level
Sector Valuation
Relative to
SP500
High
Low
Median
Current
P/Trailing E
1.2
.83
1.1
1.1
P/Forward E
1.3
.82
1.1
1.1
P/B
2.7
1.4
1.7
1.5
P/S
1.1
0.6
0.8
0.7
P/CF
1.5
1.0
1.2
1.2
Relative to SP500 valuations are currently in line with median values
03/01/2011
10/01/2010
05/01/2010
12/01/2009
07/01/2009
02/01/2009
09/01/2008
04/01/2008
11/01/2007
06/01/2007
01/01/2007
08/01/2006
03/01/2006
10/01/2005
05/01/2005
12/01/2004
07/01/2004
02/01/2004
09/01/2003
04/01/2003
11/01/2002
06/01/2002
01/01/2002
08/01/2001
03/01/2001
Economic Analysis
350.00
8.0
330.00
6.0
310.00
4.0
290.00
2.0
270.00
0.0
250.00
-2.0
230.00
-4.0
210.00
-6.0
190.00
-8.0
R = .01
Consumer Staples
Real GDP
Decreasing Margins
 Cost is passed onto consumer
 P&G announces increase in price of diapers, toilet paper and
paper towels
 Tobacco industry has had increased taxes for the past 5 years
 Increased price of tobacco, no volume decreases
 Demand is very inelastic for consumer staples; decreased
margins does not necessarily mean lower profits
03/01/2001
08/01/2001
01/01/2002
06/01/2002
11/01/2002
04/01/2003
09/01/2003
02/01/2004
07/01/2004
12/01/2004
05/01/2005
10/01/2005
03/01/2006
08/01/2006
01/01/2007
06/01/2007
11/01/2007
04/01/2008
09/01/2008
02/01/2009
07/01/2009
12/01/2009
05/01/2010
10/01/2010
03/01/2011
Oil Prices
350
140
330
120
310
100
290
80
270
R= .87
250
60
230
40
210
20
190
0
Consumer Staples
Crude Oil Price
Financial Analysis
Dividend Payout by Sector
Industry
Dividend Payout
Consumer Staples
2.75%
Consumer
Discretionary
1.29%
Financials
1.03%
Information Tech.
0.86%
Industrials
1.86%
Energy
1.64%
Materials
1.60%
Telecom.
3.66%
Utilities
4.09%
Health Care
1.94%
 Consumer Staples provides
strong dividend compared
to market.
 Provides certain return in
downward/volatile market
Dividend Yield Rate of Growth
Compared to Market
-Overall, dividend yield is trending upward compared to S&P
-Reason: Most Non-Consumer Staples companies offered higher than average dividend during
recession, while Consumer Staples sector stayed relatively constant
04/01/2011
02/01/2011
12/01/2010
10/01/2010
08/01/2010
06/01/2010
04/01/2010
02/01/2010
12/01/2009
10/01/2009
08/01/2009
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
%
Dividend Payout by Industry
Industry Div. Yield
7.0000
6.0000
Tobacco
5.0000
Brewers
4.0000
Ag. Product
Distill &Vint.
Food Distri.
3.0000
Food Retail
House. Prod.
2.0000
Hypermarket
Pack. Food
1.0000
Pers. Product
Retail Drugs
0.0000
Soft Drinks
04/01/2011
02/01/2011
12/01/2010
10/01/2010
08/01/2010
06/01/2010
04/01/2010
02/01/2010
12/01/2009
10/01/2009
08/01/2009
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
Trending Up
3.0000
2.5000
2.0000
1.5000
Brewers
Hypermarket
1.0000
Retail Drugs
0.5000
0.0000
04/01/2011
02/01/2011
12/01/2010
10/01/2010
08/01/2010
06/01/2010
04/01/2010
02/01/2010
12/01/2009
10/01/2009
08/01/2009
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
Trending Down
7.0000
6.0000
5.0000
4.0000
Tobacco
Ag. Product
3.0000
Distill &Vint.
Food Retail
2.0000
Pack. Food
Pers. Product
1.0000
0.0000
04/01/2011
02/01/2011
12/01/2010
10/01/2010
08/01/2010
06/01/2010
04/01/2010
02/01/2010
12/01/2009
10/01/2009
08/01/2009
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
Our Holdings + Tobacco
7.0000
6.0000
5.0000
4.0000
3.0000
Tobacco
Hypermarket
Retail Drugs
2.0000
1.0000
0.0000
Dividend vs. Growth
 Highlights
 Tobacco (PM) Focus on high div, very low RE
 Hypermarket (WMT) Lower, steadily increasing div.
 Retail Drugs (CVS) Lowest industry div. yield
Strategy?
ROE
Sector
ROE
Median
+/- Med.
(10 yr.)
Con. Staples 22.8%
24.2%
-1.4%
Con.
Discretion
11.9%
18.9%
+7.0%
Industrials
17.7%
17.3%
+0.4%
Info.Tech.
26.8%
18.7%
+8.1%
Materials
18.1%
16.0%
+2.1%
Financials
8.9%
15.3%
-6.4%
Energy
16.2%
20.3%
-4.1%
Telecom.
11.3%
13.4%
-2.1%
Utilities
12.2%
12.8%
-0.6%
22.5
+1.6%
Health Care 24.1
 Return on Equity is
generally higher for
Consumer Staples Sector
 Outperforms relative to
market during recession
 Lately, downward trending
ROE- Consumer Staples to S&P
•Consumer Staples
ROE is trending
downward compared
to S&P
•Has been seen as less
than attractive sector in
past few years
•Being under
purchased?
06/01/2001
01/01/2002
08/01/2002
03/01/2003
10/01/2003
05/01/2004
12/01/2004
07/01/2005
02/01/2006
09/01/2006
04/01/2007
11/01/2007
06/01/2008
01/01/2009
08/01/2009
03/01/2010
10/01/2010
Sales
Revenue
Revenue Growth
1200.0000
 Growth has been less
1000.0000
800.0000
600.0000
Con. Stap.
400.0000
SP 500
200.0000
0.0000
volatile during last 10
yrs.
 Similar overall growth
rate
Net Profit Margin
Net Profit Margin S&P vs. Con Staples
10.0000
9.0000
8.0000
Profit Margin
7.0000
6.0000
5.0000
4.0000
3.0000
2.0000
1.0000
0.0000
SP500
Con. Stap.
Margin Decline
 Increased popularity of generic products
 Trend to continue with increased commodity prices
 Margins didn’t fall during the recession, but didn’t gain after.
 Have lagged S&P for 8 straight years
 As mentioned earlier, margin decline not necessarily mean
profit decline
Margin Analysis
Net Profit Margin by Industry
25.0000
20.0000
Ag. Product
Brewers
Distiller
Food Distributors
15.0000
% Margin
Household Products
Hypermarket
Packaged Foods
10.0000
Personal Products
Retail Drugs
Retail Food
5.0000
Soft Drinks
Tobacco
0.0000
01/01/2006
01/01/2007
01/01/2008
01/01/2009
01/01/2010
Margin Growth
 Best looking Industries (Margins Growth)
 Distillers & Vintners
 Brown-Forman Corp. (BF-B)
 Soft Drinks
Recommendations
 Consumer Staples Sector is currently 2.25% underweight
 Gains
 Certainty in returns
 High Dividend
 Inelastic Demand
 Risks
 Government Interference (Health Care, Tobacco)
 Underweight Hypermarket Industry
 Maintain weight in Retail-Drugs
 Recommendations
 BUY Philip Morris International (PM)
 Raise current weight by 100 basis points