Consumer Discretionary Sector
Joseph B. Albrecht
Holly P. Asel
Joshua B. Baker
Adam J. Burns
Vanessa Tambayong
BUS FIN 724/824
August 4, 2010
Agenda
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Sector Overview
Economic Analysis
Business Analysis
Financial Analysis
Valuation Analysis
Recommendation
Sector Overview
S&P 500 vs. SIM
As of 7/31/2010, Consumer Discretionary weight is 10.17% in SIM portfolio (10.20% in
S&P 500) – We are underweight by 3 bps.
Sector Overview
Consumer Discretionary
• Cyclical
¾Highly correlated to the market relative to
non-cyclical sectors (consumer staples and
energy)
• Positive outlook for the market Æ Invest in
consumer discretionary
¾If outlook is negative, this sector should be
underweight
Sector Overview
Industries & Top 10 Companies
Industries
Advertising
Educational Services Internet Retail
Apparel & Accessory
Home Related
Catalog Retail
Automobile
Hotel
Specialty Consumer Services
Consumer Electronics
Restaurants
Sector Overview
SIM Holding as of July 31, 2010
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Comcast
Best Buy
Ross Stores
Devry, Inc.
Sector is down 3.4%
¾BestBuy down 23%
¾Best Buy is largest component of cost basis at
31%
Economic Analysis
Consumer Confidence – 10 years
Economic Analysis
Consumer Spending – 10 years
Economic Analysis
Unemployment – 10 years
Economic Analysis
Home Price – 10 years
Economic Conditions
Future Uncertainty
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Regulation
Taxes
Change in control of Congress
European Instability
Growth in Foreign Markets
Business Analysis
Phase of Life Cycle & Business Cycle
• Phase of Life Cycle:
Consumer Discretionary is a mature
business with many competitive
companies. Sales tend to move in step
with economic growth. There is a positive
correlation with disposable income.
• Business Cycle:
The business cycle for consumer
discretionary is cyclical. The industry
performance is directly related to economic
performance of the US and foreign
countries.
Business Analysis
Influencing Factors
• Consumer discretionary effected all of the following:
• Consumer Spending
• Consumer Confidence
• Unemployment
• Housing
• Interest Rates
• Personal Savings Rate
• Consumer Price Index
• Disposable Income
• Consumer Default Rates
• Financial Obligations
Business Analysis
Porter’s Five Forces
Barriers to Entry:
High
Industry is very mature
The capital costs are high to
enter
Buyer Power:
High
Consumer demand, disposable
income, unemployment and
other previously mentioned
factors drive sale
Supplier Power:
Low to Moderate
Many different suppliers
available for commodity type
products but others are very
industry specific
Competition:
High
Mature industry & companies,
Established players in the
market, difficult to gain market
share
Substitution:
High
Similar products available leads
to commodity type business.
Companies must differentiate
themselves.
Business Analysis
Consumer Sentiment
• Even though the current economic climate doesn’t suggest it,
consumer discretionary continues to surprise with its
performance
• Consumer confidence tumbled in July to its lowest level in a
year.
• Consumer discretionary up 7.90% in the last month and
5.87% year to date
• More than 7 out of 10 Americans believe the economy is still
in a recession according to a recent Bloomberg
Businessweek poll.
• Unemployment rate is at 9.5% as of June 2010 although this
rate has dropped from where it was a year ago
• So trends seem to suggest the worst may be over and
economy is slowly picking up steam
Business Analysis
Snapshot
Financial Analysis
Revenue -Top Industries
Movies & Entertainment
Movies and
Entertainment
Restaurant
Cable & Satellite
Restaurant
Retail – Home
Improvement
Financial Analysis
Return on Equity – Top Industries
Movies & Entertainment
Movies and
Entertainment
Restaurant
Cable & Satellite
Restaurant
Retail – Home Improvement
Financial Analysis
Net Profit Margin Relative to S&P 500 – Top Industries
Movies & Entertainment
Movies and
Entertainment
Restaurant
Restaurant
Cable & Satellite
Retail – Home Improvement
Valuation Analysis
Consumer Discretionary vs. S&P 500 – 10 years
Valuation Analysis
Current vs. Median
Valuation Analysis
Current vs. Median
Valuation Analysis
Current vs. Median
Valuation Analysis
Technical Analysis
Recommendation
• Although current economic condition is not so good and
consumer confidence is low, we see this as an
opportunity to get “bargain” price for the stocks (as
shown on the valuation analysis graphs).
• Our financial analysis graphs show that we have hit the
bottom and start to come back up. We are optimistic
about the future.
• When the economy turns around, the Consumer
Discretionary sector will outperform S&P 500.
• Therefore, we recommend to overweight S&P 500 by
50bps to 100bps.