Consumer Staples
Stock Presentation
November 23, 2010
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•
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fisher.osu.edu
Bong C. Chon
Joseph M. Graziano
Nelson Ng
Presentation Agenda
• Recap of Outlook and Sector Recommendations
• Stock Recommendation
• CVS Caremark
• Wal-Mart Stores
• Procter & Gamble
• Summary
• Q&A
Consumer Staples Recap
SIM Consumer Staple Weight: 9.98%
S&P 500 Consumer Staple Weight: 11.15%
We currently underweight in Consumer Staples
by 117 bps
Recommendation:
• We recommend NO CHANGES in the
current weighting
Sector Holding
SIM: 9.98% (Oct 29,2010)
CVS Caremark:
Procter & Gamble:
Wal-Mart Stores:
4.37%
2.78%
2.83%
Buy/Sell Recommendation
CVS Caremark:
Procter & Gamble:
Wal-Mart Stores:
The J.M. Smucker Co:
Total
Current
Holding%
4.37%
2.78%
2.83%
0%
9.98%
Buy/(Sell)
0%
(1.00)%
0%
Recommended
Holding%
4.37%
1.78%
2.83%
1.00%
1.00%
0%
9.98%
Proctor & Gamble
Company Overview
– Multinational manufacturer and distributor of various household products.
– 3 main business segments
• Beauty and Grooming
CEEMEA
13%
• Household Care
• Healthy & Well-being
Asia
N. America
– Market Cap: $179 billion
15%
42%
Houehold Care
44%
Beauty and
Grooming
35%
Health and
Well-being
21%
Western Europe
21%
Latin America
9%
Proctor & Gamble – Dividend Analysis
• Annual dividend yield: $1.928 (3.01%)
• Payout ratio: 44.9%
Proctor & Gamble – Recent Results
Quarterly period ending 9/30/10
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Beat analysts’ estimate of $1.00 EPS and company’s guidance by 5%
2009 Q1 included earnings from P & G Pharmaceuticals
Company forecasts next quarter’s estimate between $1.05-$1.11
Market share in all regions increased versus last year
Organic sales increased 4% and volume increased 8%
All lines of business experienced growth, except for ‘snacks and pet care’
Net sales
COGS
Operating Income
Margins
Diluted EPS
2010
$ 20,122.00
$ 9,689.00
$ 10,433.00
52%
$
1.02
2009
$ 19,807.00
$ 9,398.00
$ 10,409.00
53%
$
1.06
Change
1.59%
3.10%
0.23%
-1.34%
-3.77%
Proctor & Gamble – Stock Performance
Proctor & Gamble – Valuation
Multiples
High
Low
Median
Target
E,S,B,etc./
Share
Target Price
# target
Multiple
Current
22.2
12.6
17.7
16
17
3.72 $
63.24
P/S
3.1
1.7
2.5
2.3
2.4
25.47 $
61.13
P/B
9.3
2.3
3
2.8
2.8
22.69 $
63.53
15.17
7.01
11.56
9.01
9.6
6.6 $
63.36
20
8.9
16.6
12.3
16.6
3.83 $
63.58
P/Forward E
P/EBITDA
P/CF
Average
$
62.97
Proctor & Gamble - DCF
• DCF assumptions
– 9% discount rate and 3.5% terminal FCF growth
– 4.66% average growth rate in revenue from 2009 to 2020E
– Operating margins 20.5% (avg.)
$140,000.00
NPV of Cash
Flows
75,660
$100,000.00
NPV of terminal
value
116,658
$80,000.00
Projected Equity
Value
192,318
$120,000.00
Revenue
$60,000.00
Net Income
Free Cash Flow
$40,000.00
$20,000.00
$-
Current Price
Implied equity
value/share
Upside/
(Downside) to
DCF
$
64.05
$
63.56
-0.8%
Proctor & Gamble – Sensitivity Analysis
Terminal discount rate
Terminal FCF growth
Price
Upside
9.50%
4.00%
$ 59.97
-6.37%
9.00%
4.00%
$ 66.02
3.07%
8.50%
4.00%
$ 73.41
14.61%
9.50%
3.50%
$ 56.80
-11.32%
9.00%
3.50%
$ 62.05
-3.12%
8.50%
3.50%
$ 68.36
6.73%
9.50%
3.00%
$ 54.12
-15.51%
9.00%
3.00%
$ 58.75
-8.28%
8.50%
3.00%
$ 64.23
0.28%
Proctor & Gamble - Conclusion
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Emphasis on organic growth
Oral care is relatively underpenetrated
Continue to lead product innovation
Market saturation
Target Price: $63.27 (potential downside of 1.22%)
Reduce SIM holdings from 2.78% to 1.78% of assets
Wal-Mart Stores
Company Overview
 Operate retail stores in various
formats worldwide
 Total Revenue: $408B (FY 2010)
 Dividend Yield: 2.2%
 More than 8,400 retail units
worldwide under 3 Operating
Segments:
• Wal-Mart U.S.: ~3700 units
• Wal-Mart Int’l: ~4110 units
• Sam’s Club: ~600 units
Market Capitalization:
 $195B
Sales by Segment
Wal-Mart Stores
Operational Review (FY 2011_Q3)
Wal-Mart U.S. (-)
 Net sales: $62B, down by 0.1% (-)
 Negative Comparable Store Sales for last 5
quarters (-)
 Op Inc: $4.4B, up by 1.9% (+)
Wal-Mart Int’l (++)
 Net sales: $27B, up by 9.3% (++)
 Op Inc: $1.2B, up by 13.5% (++)
Sam’s Club
 Net Sales increased by 2.6%
 Positive Comparable Store Sales (+)
 Op Inc: decreased by 7.1%, down by 7.1%
(-)
Wal-Mart Stores
Relative to
Recommendation: Hold
High
Low
Median Current
S&P 500
P/Trailing E
1.3
0.81
1
0.9
Current SIM Weight: 2.83%
Holding at a gain of 8.25%
P/Forward E
1.4
0.79
0.98
0.96
P/B
2.1
0.9
1.3
1.3
P/S
0.7
0.3
0.4
0.4
Current Price: $54.40
Target Price: $60
Implied Upside: 11%
P/CF
1.5
0.9
1.1
0.9
Wal-Mart Stores – Stock History
Wal-Mart Stores – Cul. Total Return vs S&P 500
Wal-Mart Stores – Valuation Multiples
A bs olut e
High
Low
Median
Current
V aluat ion
Target
Target
Target
Mult iple
V alue
P ric e
/ S hare
P/Forward E
17
11.7
14.7
12.8
13.8
3.98
54.92
P/S
0.7
0.5
0.6
0.5
0.55
114
62.70
P/B
4.2
2.7
3.2
2.8
3.0
17.69
53.07
P/EBITDA
9.67
6.02
7.64
6.44
7.0
8.86
62.02
P/CF
14.1
8.5
11.1
9.1
9.7
7.13
69.16
Average
Current Price
Target Price
Upside
$54.40
$60
10.3%
60.38
Wal-Mart Stores – DCF
• DCF Assumptions
– 10.0% discount rate
– 3.5% growth rate
– 4.2% average growth
rate b/w FY 2012 –
2021
– 6.1% average
operating margin
b/w 2012 - 2021
NPV of Cash Flows
($'M)
NPV of terminal
value ($'M)
133,162
Projected Equity
Value ($'M)
Current Price
$
223,097
54.40
$
60.18
Implied equity
value/share
Upside/ (Downside)
to DCF
89,935
10.6%
Wal-Mart Stores – DCF Sensitivity Analysis
Discount Rate
11.0%
10.5%
10.0%
9.5%
9.0%
11.0%
10.5%
10.0%
9.5%
9.0%
Teminal Rate
3.5%
3.5%
3.5%
3.5%
3.5%
4.0%
4.0%
4.0%
4.0%
4.0%
Target Price
51.55
55.55
60.18
65.59
72.00
53.73
58.17
63.36
69.51
76.90
Upside %
-5.2%
2.1%
10.6%
20.6%
32.4%
-1.2%
6.9%
16.5%
27.8%
41.4%
Wal-Mart Stores – Summary
Recommendation:
No Change in Current
Holding
Current Price: $54.4
Target Price: $60
Upside: 11%
Benefits:
• Largest retailer in the world (EOS)
• Growth in Int’l segment: 9.3% sales
increase for 3-mth ended Oct 31,2010
• Plan to conduct tests of smaller stores in
2011
• Lower-than-average labor costs to
undercut its competitors
Risks:
• 5 Straight quarters of negative
Comparable Store Sales in the US
• Threats from U.S. labor unions regarding
its low pay structure.
• Uncertainty wrt the consumer
environment
CVS Caremark Corp.
Company Overview
Operate pharmacy services
companies in the United States
 Total Revenue: $98.7B (2009)
 Dividend Yield: 1.2%
Operates in 2 Segments:
Revenue by Segment
• Pharmacy Services: 73 units
• Retail Pharmacy: 7,025 units
 Market Capitalization : $42.2B
48%
52%
Pharmacy Services
Retail Pharmacy
CVS Caremark Corp.
Q3 2010 - Notes
 Adj. EPS 65¢ per share
 Revenues decreased 3.1%
year over year to $23.9
billion primarily due to
Pharmacy Services
segment which recorded
an 8.5% decline in
revenues to $11.9 billion,
driven by the termination
of some large contracts
 Retail Pharmacy segment
revenue increased 4.1% to
$14.2 billion during the
quarter with a 2.5%
increase in total samestore sales.
CVS Caremark Corp.
Current SIM Weight: 4.37%
Holding at a gain of 4.72%
High
Low
Median
Current
P/Trailing E
1.6
0.60
1.0
0.75
P/Forward E
1.4
0.62
1.0
0.78
P/Book
1.5
0.50
0.9
0.50
P/Sales
0.7
0.30
0.4
0.40
P/CF
1.7
0.80
1.2
0.90
Relative to S&P
500
CVS Caremark Corp. – Stock History
52 Week: $26.84 - $37.72
CVS Caremark Corp. – 1 Year vs. S&P 500
CVS Caremark Corp. – Valuation Multiples
High
Low
Median
Current
Target
Multiple
Target /
Share
Target Price
29.8
9.6
17.4
11.2
13.5
2.69
$36.32
P/Sales
1.3
0.4
0.6
0.4
0.6
70.35
$42.21
P/Book
6.6
1.0
2.6
1.2
1.5
25.64
$38.46
15.66
4.88
8.74
5.47
6.5
5.63
$36.60
25.2
7.3
13.2
8.4
9.9
3.66
$36.12
Absolute
Valuation
P/Forward E
P/EBITDA
P/CF
CVS Caremark Corp. – 1 Year vs. S&P 500
CVS Caremark Corp. – DCF
• DCF Assumptions
– 9.5% discount rate
– 3.0% growth rate
– 3.9% average growth rate b/w 2011 – 2020
– 7.0% average operating margin b/w 2011 - 2020
CVS Caremark Corp. – DCF Sensitivity Analysis
Discount Rate
Terminal Rate
Price
Upside
11.0%
3.0%
$
29.58
-5%
10.5%
3.0%
$
31.85
3%
10.0%
3.0%
$
34.45
11%
9.5%
3.0%
$
37.47
21%
9.0%
3.0%
$
41.01
32%
11.0%
3.5%
$
30.78
-1%
10.5%
3.5%
$
33.28
7%
10.0%
3.5%
$
36.18
17%
9.5%
3.5%
$
39.57
28%
9.0%
3.5%
$
43.59
41%
CVS Caremark Corp. – Summary
Recommendation:
No Change in Current
Holding
Current Price: $31.03
Target Price: $37.00
Upside: 19%
Benefits:
• Largest pharmacy health care provider
in the United States
•Positive same-store growth
•Stock appears to be undervalued
•Late 2009 contract agreement with
Aetna
Risks:
• Issues maintaining margin
•Loss of large contracts in Pharmacy
Services segment
•Continued push of generic medications
•Health care reform?
The J. M. Smucker Company
Company Overview
Food product manufacturer
and marketer
 Total Revenue: $4.6B (2009)
 Dividend Yield: 2.6%
Market Capitalization: $7.5B
Brands Include:
Crisco
Dunkin’ Donuts
Folgers
Hungry Jack
Jif
Pillsbury
Smucker’s
The J.M. Smucker Company: I/S
I/S
4/30/2010
4/30/2009
4/30/2008
total revenue
4,605,289
3,757,933
2,524,774
COGS
2,818,599
2,506,504
1,742,610
gross profit
1,786,690
1,251,429
782,164
23%
49%
18%
38.80%
33.30%
30.98%
789,930
451,031
284,174
yearly revenue growth
gross margin
continued operating
income
diluted EPS
$
4.44
$
3.78
$
3.15
dividend per share
$
1.45
$
1.31
$
1.22
payout ratio
32.66%
34.66%
38.73%
J.M. Smucker – Segment Analysis
Segment
Profit Margin
Special markets
19%
U.S. retail
coffee
28.2%
U.S. retail
consumer
24.4%
U.S. retail coffee
37%
U.S. retail oils and
baking market
17%
U.S. retail oils 12.5%
and baking
U.S. retail consumer
27%
J.M. Smuckers – Coffee Segment
• Sales and profits grew in fiscal 2010 by 99% and 129% respectively
• U.S. Market – specialty coffee retail
– Starbucks: over 11,000 stores
• Almost 7,000 stores in 48 foreign countries
– Tim Horton: 587 stores
– Dunkin Donuts: 6566 stores (franchises)
• 2620 Foreign franchises in 30 foreign countries
The J. M. Smucker Company - Stock History
52 Week: $53.27 - $64.89
The J. M. Smucker Company – 1 Year vs. S&P 500
Q&A
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