Consumer Staples:
Company Presentation
Nishanker Damodara
Panchanathan Arthaballe Chandrasekaran
Agenda




Recap of Outlook & Sector Recommendation
Stock Recommendations
Summary
Q&A
General Outlook
Consumer Staples Recap
 SIM Consumer Staples Weight: 12.11%
 S&P500 Consumer Staples Weight : 11.58%
 Our Recommendation (as of Feb 2):
• Increase weight of Consumer Staples sector by
30 basis points to 12.26%.
• Provides a defense against a market pullback.
• Class voted to keep weight constant at 11.96%.
Sector Holdings
Current Holdings
SIM – 12.11%
Recommended Holdings
SIM – 11.96%
 PepsiCo………………3.33%
 PepsiCo……………….2.83%
 Wal-Mart Stores Inc…2.88%
 Wal-Mart Stores Inc….2.88%
 Philip Morris Int’l……..2.69%
 Philip Morris Int’l……...3.04%
 Procter & Gamble……3.21%
 Procter & Gamble…….3.21%
 weights as of Feb. 2010
Allocation Within Sector
Recommended Allocation
Current Allocation
Pepsico Inc.
Philip Morris International Inc.
Procter & Gamble Co.
Wal-Mart Stores Inc.
 Sell 50 bp’s of PEP
Pepsico Inc.
Philip Morris International Inc.
Procter & Gamble Co.
Wal-Mart Stores Inc.
 Buy 35 bp’s of PM
24%
27%
27%
22%
24%
27%
24%
25%
Philip Morris International
•
•
•
•
Philip Morris International Inc. (PM) is
the leading international tobacco
company.
– Spin-off from Altria(MO) in 2008.
PM owns seven of the world’s top 15
brands
– Brand portfolio includes Marlboro,
the number one cigarette brand
worldwide.
Products sold in approximately 160
countries.
As of 2008, the company held an
estimated 15.6% share of the total
international cigarette market outside of
the U.S.
Philip Morris International (PM)
Analyst: Nish Damodara
3/1/2010
(millions)
Year
Terminal Discount Rate (TDR)=
Terminal FCF Growth (TCFG)=
9.0%
4.0%
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Revenue
% Growth
69,840
78,221
12.0%
86,825
11.0%
96,376
11.0%
103,122
7.0%
109,825
6.5%
116,415
6.0%
122,817
5.5%
128,958
5.0%
135,406
5.0%
142,176
5.0%
Operating Income
Operating Margin
10,839
15.5%
11,983
15.3%
12,607
14.5%
13,734
14.3%
14,437
14.0%
15,101
13.8%
15,716
13.5%
16,273
13.3%
16,765
13.0%
17,603
13.0%
18,483
13.0%
698
1.0%
782
1.0%
868
1.0%
964
1.0%
1,031
1.0%
1,098
1.0%
1,164
1.0%
1,228
1.0%
1,290
1.0%
1,354
1.0%
1,422
1.0%
3,042
30.0%
3,360
30.0%
3,522
30.0%
4,086
32.0%
4,323
32.3%
4,551
32.5%
4,766
32.8%
4,965
33.0%
5,107
33.0%
5,362
33.0%
5,630
33.0%
NCI in earnings
NCI % of Sales
237
3.3%
266
3.4%
295
3.6%
295
3.4%
309
3.4%
321
3.4%
333
3.4%
343
3.4%
353
3.4%
370
3.4%
389
3.4%
Net Income
% Growth
6,861
7,575
10.4%
7,922
4.6%
8,388
5.9%
8,774
4.6%
9,130
4.1%
9,453
3.5%
9,738
3.0%
10,016
2.9%
10,517
5.0%
11,042
5.0%
943
1.4%
(1,513)
-2.2%
1,257
1.8%
1,056
1.4%
(1,634)
-2.1%
1,408
1.8%
1,172
1.4%
(1,678)
-1.9%
1,563
1.8%
1,349
1.4%
(1,928)
-2.0%
1,735
1.8%
1,444
1.4%
(2,062)
-2.0%
1,856
1.8%
1,538
1.4%
(2,197)
-2.0%
1,977
1.8%
1,630
1.4%
(2,328)
-2.0%
2,095
1.8%
1,719
1.4%
(2,456)
-2.0%
2,211
1.8%
1,805
1.4%
(2,579)
-2.0%
2,321
1.8%
1,896
1.4%
(2,708)
-2.0%
2,437
1.8%
1,990
1.4%
(2,844)
-2.0%
2,559
1.8%
5,034
5,589
11.0%
5,853
4.7%
6,075
3.8%
6,299
3.7%
6,495
3.1%
6,659
2.5%
6,790
2.0%
6,921
1.9%
7,267
5.0%
7,630
5.0%
Terminal
Value
158,706
Free Cash
Yield
4.81%
Terminal P/E
14.4
Terminal
EV/EBITDA
8.4
Interest Expense
Interest % of Sales
Taxes
Tax Rate
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
41,156
38%
67,039
108,195
62%
100%
Free Cash Flow Yield
5.28%
Current P/E
Projected P/E
13.9
15.8
12.6
14.3
12.0
13.7
Current EV/EBITDA
Projected EV/EBITDA
9.3
10.4
8.4
9.4
7.9
8.9
Shares Outstanding
1,950
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
48.93
55
13.4%
Multiples
Multiples-Based Target Prices for PM
Absolute
Valuation
High Low Median Current
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
C.
16.1 11
7.3 1.2
15.4 7.2
12 6.5
117 8.8
D.
12.9
2.1
11.9
9.44
13.2
Target
Multiple
E.
12.8
3.7
14.8
9.61
13.1
F.
B.
C.
G.
14
1.5
12
9.5
13
British
High Low Median Current PM
American
Median
Tobacco
Absolute
A.
Target E, Your
S, B,
Target
etc/Share Price
(F x G)
H.
3.68
51.52
37.4
56.1
3.37
40.44
5.02
47.69
3.7
48.1
Comparison Opinion
D.
E.
B.
P/Forward E 15.4 6.8
P/S
4.1 0.2
P/B
N/M N/M
11.2
0.7
N/M
13.6
3.1
N/M
12.9
2.1
11.9
Undervalued
Overvalued
Undervalued
Overvalued
Not Meaningful Not Meaningful
P/EBITDA
P/CF
6.82
N/M
8.33
N/M
9.44
13.2
Overvalued
Overvalued
Not Meaningful Not Meaningful
31.6 1.8
N/M N/M
Current-toCurrent
Current-toMedian
•PM was only spun-off from Altria in 2008.
•Only two years worth of operating
results.
•Not enough information to establish
reliable historical averages.
•Given the fact that PM has not had
enough time to establish reliable
averages, we cannot assume a
reversion to the mean, so this analysis
is of limited value.
•Available data may be skewed
downward due to recent recession.
•Having said that, the available data, which
reflects operating results during the
downturn in 2008 and 2009, generally
supports the DCF price target.
PM Valuation
Recommendation: Buy 35 BP’s
•
Highlights:
–
Current Price: $48.93
Target Price: $55
Implied Upside: 13.4%
–
–
–
Sensitivity Analysis
–
TCFG
TDR
3.5
4.0
4.5
5.0
8.5
$
57
$
62
$
67
$
74
9
$
52
$
55
$
59
$
64
9.5
$
48
$
50
$
54
$
57
10
$
44
$
46
$
49
$
52
•
Defensive position in case our predicted
market correction occurs.
Offers a dividend yield of 4.70%.
Has consistently met or beat consensus
estimates and generally exhibits signs of
good management.
Recently approved a $12B buyback
intended to repurchase 13% of shares
outstanding.
Continues to grow market share
internationally.
Concerns:
–
–
–
Stronger dollar, especially relative to the
Euro.
Sustainability of product lines.
Government regulation.
PepsiCo (PEP)
• Company overview:
PepsiCo, Inc. manufactures,
markets, and sells various
foods, snacks, and
carbonated and noncarbonated beverages
worldwide.
• Market capitalization of
$99.41 billion.
• 18 brands that generate $1
billion or more each in
annual retail sales
PepsiCo (PEP)
PepsiCo
Terminal Discount Rate
Terminal FCF Growth Rate
Analyst: Panchanathan Arthaballe Chandrasekaran
10.0%
3.5%
Year
Revenue
% Growth
2009E
44,115
2010E
51,922
17.7%
2011E
55,325
6.6%
2012E
58,967
6.6%
2013E
62,741
6.4%
2014E
66,505
6.0%
2015E
70,363
5.8%
2016E
74,444
5.8%
2017E
78,464
5.4%
2018E
82,544
5.2%
2019E
86,506
4.8%
Operating Income
Margin
7,857
17.8%
9,156
17.6%
10,450
18.9%
11,470
19.5%
12,548
20.0%
13,634
20.5%
14,776
21.0%
15,633
21.0%
16,477
21.0%
17,334
21.0%
18,166
21.0%
Interest & Other
% of Sales
Taxes
Tax Rate
72
0.16%
2,141
27%
154
0.30%
2,793
30%
166
0.30%
3,185
30%
177
0.30%
3,494
30%
(157)
-0.25%
3,717
30%
(166)
-0.25%
4,040
30%
(176)
-0.25%
4,380
30%
(186)
-0.25%
4,634
30%
(196)
-0.25%
4,884
30%
(206)
-0.25%
5,138
30%
(216)
-0.25%
5,385
30%
Others
Net Income
% Growth
(30)
5,758
6,517
13.2%
7,431
14.0%
8,153
9.7%
8,674
6.4%
9,427
8.7%
10,220
8.4%
10,813
5.8%
11,397
5.4%
11,989
5.2%
12,565
4.8%
Depreciation & Amortization
% of Sales
Changes in Working Capital
% of Sales
Capital Expenditure
% of Sales
Free Cash Flows
1,765
4.00%
658
1.49%
1,765
4.00%
6,416
2,080
4.01%
410
0.79%
2,726
5.25%
6,281
-2.10%
2,217
4.01%
0.00%
3,319
6.00%
6,328
0.75%
2,362
4.01%
0.00%
3,538
6.00%
6,977
10.25%
2,510
4.0%
(314)
-0.50%
3,921
6.25%
6,949
-0.41%
2,660
4.0%
(333)
-0.50%
4,157
6.25%
7,598
9.35%
2,815
4.0%
(352)
-0.50%
4,398
6.25%
8,285
9.04%
2,978
4.0%
(372)
-0.50%
4,653
6.25%
8,766
5.80%
3,139
4.0%
(392)
-0.50%
4,904
6.25%
9,239
5.40%
3,302
4.0%
(413)
-0.50%
5,159
6.25%
9,720
5.20%
3,460
4.0%
(433)
-0.50%
5,407
6.25%
10,186
4.80%
48,724
62,533
111,257
6.72%
43.79%
56.21%
100.00%
Current P/E
Projected P/E
16.58
19.32
14.65
17.07
12.84
14.97
Current EV/EBITDA
Projected EV/EBITDA
10.36
12.00
8.87
10.27
7.87
9.11
Shares Oustanding
1,573
NPV of the Cash Flows
NPV of the Terminal Value
Projected Equity Value
Free Cash Flow Yield
Current Price
Implied Equity Price
Upside(Downside) to DCF
Debt
Cash
$
$
$
$
$
63.44
70.73
12%
7,434
3,254
Terminal Value
$
162,194
Free Cash Yield
6.28%
11.71
13.65
Terminal P/E
12.91
7.20
8.35
Terminal EV/EBIDTA
7.69
PepsiCo (PEP)
Sensitivity Analysis – Target Price for various Discount Rates & Terminal Growth Rates
Discount Rate
Terminal Rate
Target Price
Upside %
11%
3.50%
60.94
0%
10.50%
3.50%
65.48
8%
10%
3.50%
70.73
17%
9.50%
3.50%
76.85
27%
9%
3.50%
84.08
39%
11%
4%
63.35
4%
10.50%
4%
68.38
13%
10%
4%
74.25
22%
9.50%
4%
81.18
34%
9%
4%
89.5
47%
PepsiCo (PEP)
Target Price Based on Valuation Multiples
Absolute
Valuation
Median
P/Forward E
P/S
P/EBITDA
P/CF
Current
Target
Multiple
Target Price
19.3
15.1
17
4.18
71.06
3.0
2.3
2.6
28.05
72.93
12.37
9.89
11.1
6.32
70.15
16.8
13.1
15.1
4.78
72.18
Avg Price from Multiples
Price Target from DCF
$
$
70.80
70.73
Weighted Price Target
Current Price
$
$
70.80
63.44
Upside Potential
Target E, S,
etc/Share
12%
60%
40%
PepsiCo (PEP)
Recommendation: Sell 50 BP’S
Current Price: 63.44
Target Price: 71.00
Implied Upside: 11.6%
Valuation Multiples – Relative to
Industry
Median
Current
P/Trailing E
1.1
0.99
P/Forward E
1.0
0.99
P/B
1.1
1.1
P/S
1.3
1.1
P/CF
1.1
1.0
Benefits
•
•
•
•
•
Attractive valuation
Expanding rapidly in developing markets
Bottling acquisition to boost profits and
lower costs
18 brands each generating over $1 billion
in sales annually
Share buybacks
Risks
•
•
•
•
Long legal and regulatory processes to get
into new markets
Potential bottlenecks in realizing the bottling
acquisition benefits
Consumer Perception – health risk
Exchange Rate Volatility - The US Dollar
continue to decrease in value relative to
currencies of emerging markets
Summary & Questions
Recommended Holdings
SIM – 11.96%
 Sell 50 bp’s of PEP
 Buy 35 bp’s of PM
 PepsiCo……………….2.83%
 Wal-Mart Stores Inc….2.88%
 Philip Morris Int’l……...3.04%
 Procter & Gamble…….3.21%
• Questions?
Pepsico Inc.
Philip Morris International Inc.
Procter & Gamble Co.
Wal-Mart Stores Inc.
24%
27%
24%
25%
Procter & Gamble
Company Profile
P&G’s Household Brands
•
•
•
•
•
•
The Procter & Gamble Company (P&G), is focused
on providing branded consumer packaged goods.
The Company’s products are sold in over 180
countries worldwide primarily through mass
merchandisers, grocery stores, membership club
stores, and drug.
As of June 30, 2009, the Company was organized
into three Global Business Units: Beauty; Health
and Well-Being, and Household Care.
The Company had six business segments under
United States Generally Accepted Accounting
Principles (GAAP): Beauty; Grooming; Health Care;
Snacks and Pet Care; Fabric Care and Home Care,
and Baby Care and Family Care.
Sales to Wal-Mart Stores, Inc. and its affiliates
represent approximately 15% of its total revenue
during fiscal 2009. The Procter & Gamble
Company’s top 10 customers account for
approximately 30% of its total unit volume during
fiscal 2009.
•
•
•
•
•
•
•
•
•
•
Olay,
Gucci, Hugo Boss and Dolce &
Gabbana fragrances
Braun razors
Health and Well-Being
Prilosec OTC
Vicks
Pringles
Iams
Eukanuba
Household Care
Bounty paper towel
Charmin toilet tissue
P&G
• Current Price: $63.51 (as of 3/1/2010)
• 1 Yr Target Price: $69.76 (consensus)
– Implied Upside = 9.84%
• Dividend Yield: 2.80%
• Reasons to Hold
–
–
–
–
Mutually beneficial relationship with Walmart continues to
drive profit, especially as Walmart itself expands and
converts more and more stores to “Supercenters”.
Forecasted revenue growth is consistently positive.
Growing market share in emerging markets: “Developing
markets represent 32% of sales, up from about 20% at
the beginning of the decade, and have contributed 42% of
sales growth and 29% of profit growth.”
As non-cyclical as it gets!
Wal-Mart Stores (WMT)
• Current Price: $53.90 (as of 3/1/2010)
• 1 Yr Target Price: $61.04 (consensus)
– Implied Upside = 13.20%
• Dividend Yield: 2.00%
• Reasons to Hold
–
–
–
–
–
Attractive Valuation
Big move to online – sales, ad campaign etc.
Improved merchandising capabilities, capital efficiency,
inventory management
Global Sourcing – Deal with Li & Fung will help reduce
costs
As non-cyclical as it gets !
Company Overview:
Wal-Mart Stores, Inc.
operates various formats
of retail stores and
restaurants, including
combination discount and
grocery stores,
supercenters, Sam’s
Clubs, hypermarkets,
cash-n-carry stores,
department stores, and
general merchandise
stores.
Major Competitors:
Costco and Target
The Hobbled-Bull Market
•
What should be a robust recovery will be hampered by:
– 1) Record government deficits.
– 2) Potentially permanent drawback in consumer spending.
– 3) Limited credit and lending due to higher lending standards.
– 4) Higher taxation, especially the possible taxation of foreign profits.
– 5) Potential for inept government reform of sectors crucial to overall
economy- most notably the healthcare industry.