Consumer Staples Sector Presentation •Ickdon Choe •Steven A. Benvin •Andrew Brickner •Gregory Adkins Presentation Agenda • • • • • • Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Overview S&P 500 Sector Breakdown Size of the Sector • S&P 500: $12,086,550.27 (Millions) • Consumer Staples: $1,220,168.12 • Accounts for 10.10% of the S&P 500 SIM Portfolio: • Consumer Staples accounts for 9.04% • Underweight by 106 Basis Points Size of the Sector 7th Largest in SIM Portfolio Performance vs. S&P500 Index Name Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecom Svc Utilities S&P 500 Adjusted Market Cap ( Index Level $Million) 1,505,655.62 442,278.74 1,362,037.17 1,282,774.15 1,220,168.12 1,278,235.59 1,964,286.53 2,294,413.61 353,351.45 383,349.29 12,086,550.27 Performance 1 Day 551.07 -0.04% 247.83 0.46% 327.78 0.71% 312.34 0.95% 304.79 0.51% 373.78 0.05% 229.9 1.39% 435.9 0.33% 128.13 0.67% 162.09 -0.18% 1,329.15 0.55% MTD QTD YTD 1.33% 8.75% 8.75% 3.58% 3.43% 3.43% 4.43% 8.85% 8.85% 6.45% 5.68% 5.68% 2.19% 0.40% 0.40% 2.08% 2.47% 2.47% 4.17% 7.05% 7.05% 3.40% 7.75% 7.75% 3.51% -0.47% -0.47% 0.66% 1.73% 1.73% 3.35% 5.69% 5.69% Industry Sectors Sector Consumer Staples Industry Group Food & Staples Retailing Industry Sub-Industry Food & Staples Retailing Food, Beverage & Tobacco Beverages Drug Retail Food Distributors Food Retail Hypermarkets & Super Centers Brewers Distillers & Vintners Soft Drinks Agricultural Products Packaged Foods & Meats Tobacco Household Products Personal Products Food Products Household & Personal Products Tobacco Household Products Personal Products Largest S&P 500 Consumer Staples Companies • • • • • • • • Wal-Mart 195.27 B Proctor and Gamble 180.40 B Coca-Cola Company 145.93B Philip Morris International, Inc. 108.67B PepsiCo, Inc. PEP 101.32B CVS Caremark 44.52B The J. M. Smucker Company 7.49B Dean Foods Co. 1.79B Business Analysis Life Cycle • Domestically, in the mature stage of the life cycle • Internationally, still some room for growth due to faster growing emerging markets, specifically Asia and Latin American markets • Emerging markets are more cyclical Sector Traits • In general, Consumer Staples sector seems to perform better then or in line with the market • Food, beverage, household products and cosmetics companies create consumable products which are considered essential to daily life • Product demand is stable; growth is low, usually meet expectations • Defensive Sector • Mostly large, stable companies Sector Traits • Competition very intense, would be very difficult to enter the market, high capital requirements • Noncyclical nature of the demand • Staples tend to have a low price elasticity of demand: demand for these products does not change much as their prices go up or down • Recession resistant • Market is driven by very price sensitive consumers, brand loyal customers (Increase brand awareness) • Gives suppliers little room to increase prices or increase demand • Many substitute competitors • Dependent on the cost of production Economic Analysis Economic Factors • Industry is made up of companies that produce goods that are necessary for consumers – Means stock is defensive and doesn’t face swing in demands • Insensitive to economic cycles – Good during end of bull markets when investors become more defensive Relationships Between Economic Variables & Sector Economic Variable 10 Year Correlation Coefficient Capital Goods Exports R = 0.89 Crude Oil Price R = 0.85 Consumption: Alcohol R = 0.82 Sales: Restaurants R = 0.78 $ Per Euro R = 0.74 CPI R = 0.16 Disposable Income R = 0.05 Employment R = 0.05 S & P 500 EPS R = 0.00 30 Year Bond IR R = -0.38 Inventory/Sales R = -0.59 Canadian $/ US $ R = -0.84 Financial Analysis Earnings per Share • • • Median = $13.42 over past 10 yrs 5 yr EPS growth rate = 9% Future growth rate = 10% 100.0000 90.0000 80.0000 70.0000 EPS 60.0000 50.0000 S&P 500 40.0000 Cons. Stpls 30.0000 20.0000 10.0000 0.0000 2000 2001 2002 2003 2004 2005 Year 2006 2007 2008 2009 2010 Earnings per Share 350 300 250 DSTLR TBACO FOODD EPS 200 FOODR BEVGS 150 PKGFD AGPRD Pers. Products BRWRS 100 50 0 2000 2001 2002 2003 2004 2005 Year 2006 2007 2008 2009 2010 Earning per Share • • Companies we are reporting on Currently hold WMT, CVS, SJM 5 4.5 4 3.5 EPS 3 WMT 2.5 CVS SJM 2 DF 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 Year 2006 2007 2008 2009 2010 Revenue per Share • Median = $245.50 over past 10 yrs • 5 yr Revenue growth rate = 8% 1200.0000 1000.0000 RPS 800.0000 600.0000 S&P 500 Cons. Stpls 400.0000 200.0000 0.0000 2000 2001 2002 2003 2004 2005 Year 2006 2007 2008 2009 2010 Revenue per Share 2500 2000 hypmk RTDRG HSHLD HSHLD 1500 RPS BRWRS Pers. Products AGPRD PKGFD 1000 BEVGS FOODR FOODD TBACO 500 DSTLR 0 2000 2001 2002 2003 2004 2005 Year 2006 2007 2008 2009 2010 Cash Flow per Share • • Steadily climbing since 2003 Fed by increased earnings and share buybacks Price over Cash Flow • Median of 1.2 times the S&P Return on Equity • Well above, with a median 1.5 times the S&P Net Profit Margin • Median = 0.7 EBITDA Margin • Median = 0.6 Dividends • Significantly higher dividend yield than the S&P, and steadily rising • 5 yr Growth rate of 12%, 14% higher than the S&P Valuation Analysis Sector Valuation 10 Year Absolute Valuation 10 Year Relative Valuation SP500 40.0 3.0 35.0 2.5 30.0 2.0 25.0 20.0 1.5 15.0 1.0 10.0 0.5 5.0 P/Trailing E P/Forward E High Low P/B Median P/S Current P/CF P/Trailing E P/Forward E High Low P/B Median P/S Current P/CF Valuation across company (Absolute) Valuation across company (S&P500) Trailing P/E 45 40 35 30 25 20 15 10 5 0 Monthly High Monthly Low Median Current P/E Trend over last 10 years Recommendation • Two options: – Either stay where we are, about 100 basis points underweight compared to the S&P 500 – Add 100 basis points to be in line with the S&P 500 Thank you! 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