Consumer Discretionary
Jonathan Barkan
Chris Cameron
Yixiong Chen
Amanda Grant
November 2, 2010
Agenda
•
•
•
•
•
•
Sector Overview
Economic Analysis
Business Analysis
Financial Analysis
Valuation Analysis
Recommendation
Sector Overview
S&P 500 vs SIM
Telecommuni
cation
Services
3%
S&P 500 Weight
Utilities
4% Cash
0%
Materials
4%
SIM Weight
Dividends
Receivables
0%
Telecommunic
ation Services
4%
Consumer
Staples
11%
Information
Technology
19%
Cash
3%
Materials
4%
Consumer
Discretionary
10%
Utilities
2%
Dividends
Receivables
0%
Consumer
Discretionary
10%
Consumer
Staples
10%
Information
Technology
19%
Energy
11%
Energy
11%
Industrials
11%
Healthcare
12%
Financials
15%
Financials
12%
Industrials
13%
Healthcare
12%
As of September 30, 2010
Currently, Consumer Discretionary is 10.42% of the
S&P 500 and 10.14% of the SIM Portfolio.
Sector Overview
Consumer Discretionary
• Demand Characteristics
– In Maturity Phase
– Heavily influenced by both US and Foreign
Economies
• Reliance upon Discretionary Income
– External Factors that affect demand
• Energy prices
• Employment
– Discretionary Income
• Time of Year
Sector Overview
Consumer Discretionary
• Supply Characteristics
– Forecasted
– Externally Driven
• Development of new products
– Expansion
• New Markets
– Domestically and Abroad
– Branch Openings
Sector Breakdown
• 10.58% of S&P 500
• Industries include:
Sector Breakdown
Industry
Index Value
% of Sector
Cable & Satellite
111.11
9.84%
Home Improvement Retail
339.74
7.8%
Movies & Entertainment
145.26
13.88%
Restaurants
598.91
11.66%
Internet Retail
760.97
7.27%
Sector Breakdown
Sector Breakdown
Economic Analysis:
Consumer Spending vs. Consumer Discretionary
Economic Analysis:
Consumer Confidence vs. Consumer Discretionary
Economic Analysis:
Unemployment vs. Consumer Discretionary
Porters 5 Forces:
Entry Threshold For the Consumer Discretionary
• High capital expenditures in certain industries
– i.e Carnival Corporation and Royal Caribbean
Cruise Line
• Intense competition in certain industries
– i.e the restaurant section. Mom and pop
restaurants and McDonald are existing together.
Porters 5 Forces:
Numerous Substituting Products & Competition
• Some businesses offer similar products or
even homogenous products
– i.e Comcast / Time Warner
• For businesses such as Comcast, price seems
the most important factor to the business
Porter’s 5 Forces:
Intense Competition
• Competition is quite intense!
• There are numerous rivalries in each business
field
• Companies in this sector need to have high
competitive advantages in order to achieve
superior performance
Porter’s 5 Forces:
Suppliers Power & Buyer’s Power
• The Suppliers’ Power to this business sector is weak
with multiple vendors and distribution lines , except
the cruise line and cable satellite business
• Buyers’ Power is significant. Buyers’ power is highly
correlated to the following Economic indicators
1. Employment Rate
2. Personal Saving rate (negative related)
3. Consumer Spending Rate
4. Crude Oil Price
Financial Analysis – vs. S&P 500
Financial Analysis – vs. S&P 500
Financial Analysis – vs. S&P 500
Financial Analysis - Absolute
Revenue
EPS Growth yr. over yr.
Net Profit Margins (relative to S&P 500)
EPS Growth yr. over yr. (relative to S&P 500)
Financial Analysis
Industry
Ticker
Price
YTD Performance 5 Yr. Performance EPS - 5 Yr. Hist. Growth
Cable & Satellite
Comcast
CMCSA
Direct TV
DTV
$
20.62
$
43.85
21.8%
13.4%
27%
31.5%
210.2%
28%
7.8%
-23.0%
-13%
-8.2%
-28.5%
-10%
4.1%
53.3%
8%
-8.8%
42.0%
11%
Home Improvement Retail
Home Depot
Lowes
HD
LOW
$
31.18
$
21.46
Movies & Entertainment
Disney
Dreamworks
DIS
DWA
$
36.30
$
36.42
Restaurants
0.1%
31.7%
16%
MCD
$
28.98
$
78.46
15.44%
140.0%
18%
AMZN
$
163.12
21.3%
-1.3%
35%
Bob Evans
BOBE
McDonald's
Internet Retail
Amazon
Financial Analysis
25.00%
20.65%
18.34%
20.00%
15.00%
Profit Margin
10.54%
9.58%
10.00%
6.27%
5.00%
7.19%
6.47%
4.39% 3.87%
3.64%
0.00%
68.21%
70.00%
60.00%
47.42%
50.00%
40.00%
22.44%
30.00%
Return on Equity
20.00%
10.00%
0.00%
15.06%
8.30%
9.74%
11.14%11.37%
10.62%
0.00%
Valuation Analysis – vs. S&P 500
Valuation Analysis
Industry
Ticker
Cable & Satellite
P/E - Forward
P/B
P/S
P/CF
15.3
2.1
1.4
6.2
Comcast
CMCSA
14.6
1.3
1.53
5.8
Direct TV
DTV
15.9
13.6
1.64
8.8
14.6
2.0
.73
9.8
HD
15.2
2.5
0.77
10.7
LOW
13.8
1.5
0.62
8.5
14.3
1.6
1.46
8.1
DIS
15.8
1.9
1.8
12.2
DWA
15.5
2.6
4.24
9.4
17.2
6.5
2.59
13.7
Home Improvement Retail
Home Depot
Lowes
Movies & Entertainment
Disney
Dreamworks
Restaurants
Bob Evans
BOBE
13.2
1.4
0.51
5.7
McDonald's
MCD
15.8
5.9
3.46
14.1
41.1
10.8
2.28
43.6
Internet Retail
Amazon
AMZN
56.2
13.3
2.44
66.0
Netflix
NFLX
49.2
63.6
4.65
21.4
Valuation Analysis
60
56.2
Forward
Forward P/E
P/E
50
49.2
Sector – 15.3
40
30
20
14.6 15.9
15.2 13.8
15.8 15.5
13.2
15.8
10
0
66
70
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
P/S
Sector – .9
3.46
2.44
1.8
1.53 1.64
0.77 0.62
70
0.51
60
Price C/F
60
P/B
50
Sector – 43.6
50
Sector – 2.8
40
21.4
20
0
63.6
40
30
10
4.65
4.24
5.8
8.8
10.7 8.5
12.2 9.4
14.1
5.7
30
13.6
20
10
0
1.3
13.3
2.5 1.5
1.9 2.6
1.4
5.9
Recommendation: HOLD
• Short term upside towards holiday season
• Decreased consumer expenditures / higher
unemployment
• Risks: Recession stalls or double dip resulting
in negative EPS growth
Recommendation:
Industry Suggestion
• Overweight: Cable & Satellite
– Growth of internet access and subscribership
• Underweight: Home Building
– Lagging home sales, foreclosure glut