Consumer Discretionary
Finance 724/824
Winter 2011
Nicolas Derrian
Sam Adams
Amir Ahmed
Jiwoong Kim
Agenda
•
•
•
•
•
•
•
Introduction of members and stocks
Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Sector Composition
S&P 500 WEIGHT
Utilities 2.32%
Telecom Services 2.92%
Utilities 3.26%
Consumer
Discretionary
10.30%
Materials 3.65%
Cash 2.68%
Dividend Receivables 0.50%
Telecom Services 4.30%
Consumer
Discretionary
9.31%
* Cash/Dividends 0%
Materials 3.23%
Consumer
Staples
10.21%
Info Tech
18.97%
SIM WEIGHT
Consumer
Staples
9.04%
Info Tech
21.51%
Energy
11.54%
Energy
12.70%
Financials
11.74%
Industrials
11.15%
Health Care
10.70%
Financials
16.13%
Industrials
11.08%
Health Care
13.19%
Sector Overview
Industries (32 total)
Auto Mftrs
Restaurants
Retail x 5
Homebuilding
Consumer Elec Dept Stores
Movies/Entr
Home Furn
Footware
Hotels
10 Largest by Market Cap.
1. Amazon
$79.57B
2. McDonalds
$77.6B
3. Disney
$77.52
4. Comcast
$66.07
5. Home Depot
$59.98
6. Ford
$55.94B
7. News Corp
$43.55B
8. Nike
$41.39B
9. Time Warner
$39.68B
10. Target
$38.8B
*sector up 2.3% QTD
Business Analysis
•
•
Mature and Cyclical
DEMAND:
– Positive correlation to US and especially international economies
• International sales increasing
• Slow expected domestic growth
– Seasonal
– Most influential metrics: Employment, Oil
•
SUPPLY:
– Forecast in advance, with little room to meet a rise in demand
– Inventories are key factors to control
Porter’s Five Forces
– Barriers to Entry:
• High- need lots of $ and many established
players
– Supplier Power:
•
Moderate- depends on the industry
– Buyer Power:
•
High- ‘discretionary’ so people buy when
they want to, linked to metrics
– Substitutes:
• High- many of the same products
– Competition:
• High- many established players
Economics – Disposable Inc.
Disposable Income:
•Measure of income over
and above income needed
to provide necessary
purchase (food, shelter,
etc.)
[Measure - %YoY change]
Takeaway:
•Generally ~4.5%
•Movement from this
benchmark generates
movement in Con.Disc.
Economics – Consumer Spend.
Consumer Spending
•Spending %YoY, doesn’t
account for inflation
Takeaway:
•Comparison to last year’s
spending is relatively
accurate predictor
•Surprisingly more
predictive than disposable
income
Economics- Employment
Employment:
•Measure of change in
employment as % from one
year ago
[Measure - %YoY change]
Takeaway:
•Quite predictable with
regards to trends and
somewhat effective at
adjusting for magnitude
Economics – Exp. Conditions
Confidence
(Expected Cond.):
•Belief in the future
conditions of the economy
[Measure - Index]
Takeaway:
•Using one-month lead
time, would have thought it
would be much more
predictive
Economic Conclusions
• Consumer spending forecast:
– Increasing for three months straight
– Difficult to predict long-term
– Trend points towards increase
• Unemployment consensus forecast:
–
–
–
–
Now
: 9.0%
2011 : 9.3% (+3.3%) Mild decrease
2012 : 8.6% (-7.5%) Strong increase
Wait to buy, but good long term buy
Financial Analysis -Revenues
High:
Low:
Median:
Current:
353.4
247.7
291.7
294.6
Financial Analysis - Revenues
Financial Analysis
EPS vs. S&P500
High:
Low:
Current:
305.5
-49.4
134.1
Financial Analysis
Net Profit Margin vs. S&P500
High:
Low:
Median:
Current:
0.7
0.3
0.5
0.7
Financial Analysis
ROE vs. S&P500
High:
Low:
Median:
Current:
1.2
0.6
0.7
1.2
Financial Analysis
Absolute
•EPS growth
•Net profit margins
•Return on Equity
Valuation Analysis-Sector
Trailing P/E-Absolute
Trailing P/E – S&P500
Forward P/E-Absolute
Forward P/E-S&P 500
Price/Book-Absolute
Price/Book-Absolute
Price/Book-S&P 500
Valuation Analysis-Sector
Price/Shares-Absolute
Price/Shares-S&P 500
Price/Shares-Absolute
Price/Cash Flow-Absolute
Price/Cash Flow-S&P 500
Valuation Analysis-Current vs. Median
1.0
Sector/S&P500
Sector/Absolute
0.5
0.0
0.4
-1.0
0.3
P Trailing/E P/Forward E
P/B
P/S
P/CF
0.2
-2.0
Over/Underweight
0.1
-3.0
0.0
-4.0
-0.1
-5.0
-0.2
5.0
Over/Underweight
CATV Industry/Absolute
0.5
P/Trailing E P/Forward E
P/B
P/S
P/CF
CATV Industry/S&P500
0.0
P/Trailing E P/Forward E
P/B
P/S
P/CF
0.0
-5.0
P/Trailing E P/Forward E
Over/Underweight
-10.0
-0.5
-15.0
-1.0
P/B
P/S
P/CF
Over/Underweight
Valuation Analysis-Current
3.0
General Entertainment/Absolute
Over/Underweight
2.0
0.5
vs. Median
General Entertainment/S&P500
Over/Underwe…
0.4
0.3
0.2
1.0
0.1
0.0
0.0
P/Trailing E P/Forward E
P/B
P/S
P/CF
-1.0
-0.1
Auto Manufacturers/Absolute
2.0
1.2
1.0
1
0.0
0.8
P/Trailing E
P/Forward E
P/S
P/CF
0.6
Over/Underweight
0.4
-3.0
0.2
-4.0
0
-5.0
P/S
P/CF
Auto Manufacturers/S&P500
1.4
-2.0
P/B
-0.2
3.0
-1.0
P/Trailing E P/Forward E
Over/Underweight
P/Trailing E
P/Forward E
P/S
P/CF
Valuation Analysis-Current
10.0
Retail(Computer-Electronics)/Absolute
0.0
P/B
P/S
P/CF
-0.2
0.0
-5.0
Retail(Computer-Electronics)/S&P500
P/Trailing E P/Forward E
5.0
vs. Median
P/Trailing E P/Forward E
P/B
P/S
P/CF
-0.4
-10.0
Over/Underweight
-15.0
-0.6
Over/Underweight
Summary & Recommendation
• Summary
Analysis
Conclusions
View
Business
Wait for economy to turn around, not soon
Hold
Economic
Short-term is weak, long-term is strong
Hold
Financial
Currently overvalued
Sell
Valuation
Slightly overvalued
Sell
• We recommend holding because already
underweighted in SIM portfolio
– Tactical opportunities exist
* Currently Consumer Discretionary weight : 9.31% in SIM portfolio(10.30% in S&P)
What Questions do you have?