THE STOCK MARKET
Consumer Staples
Sector Presentation
Kurt Brown
René Hegglin
Shengbo Mao
Agenda
•
•
•
•
•
•
•
Size and Composition
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Q&A
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Consumer Staples Sector Presentation
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Basics
• Consumer Staples - the industries that manufacture
and sell food/beverages, tobacco, prescription
drugs and household products (Investopedia)
• Outperform the market in bear markets and
underperform in bull markets
• Not an exciting sector
– Stable returns
– Diversification benefits – low beta
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Consumer Staples Sector Presentation
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Size and Composition
S&P 500 Sectors
Consumer staples are currently 11.7% of the S&P 500
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Largest Consumer Staples Companies
Rank
Company
Market Capitalization (10-23-09)
% of Sector
1
Wal-Mart Stores, Inc.
$194.7 billion
15.8%
2
Proctor & Gamble Co.
$169.7 billion
13.8%
3
Coca-Cola Co.
$125.3 billion
10.2%
4
PepsiCo, Inc.
$96.0 billion
7.8%
5
Philip Morris International, Inc.
$95.7 billion
7.8%
6
CVS Caremark Corp.
$54.5 billion
4.4%
7
Kraft Foods, Inc.
$40.0 billion
3.2%
8
Colgate-Palmolive Co.
$39.6 billion
3.2%
9
Walgreen Co.
$39.2 billion
3.2%
10
Altria Group, Inc.
$37.7 billion
3.0%
27
Safeway, Inc.
$9.1 billion
0.7%
The three largest companies account for nearly 40% of the consumer staples market cap.
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Sector Performance
QTD Return
YTD Return
2008 Return
S&P 500
2.1%
19.5%
(38.5%)
Energy
7.9%
14.3%
(35.9%)
Materials
1.9%
38.4%
(47.0%)
Industrials
0.6%
12.6%
(41.5%)
Consumer Discretionary
2.6%
31.1%
(34.7%)
Consumer Staples
2.0%
8.9%
(17.8%)
Health Care
0.0%
7.8%
(24.5%)
Financials
0.9%
20.3%
(56.9%)
Information Technology
3.2%
49.5%
(43.7%)
(4.8%)
(7.7%)
(33.6%)
0.4%
1.1%
(31.5%)
Telecom Services
Utilities
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Consumer Staples Sector Presentation
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Outperforming in bear markets
Consumer Staples vs. S&P500 Oct 2008-Mar 2009
0
09/12/2008
10/12/2008
11/12/2008
12/12/2008
01/12/2009
02/12/2009
-5
-10
-15
-20
-25
-30
-35
-32
-40
-45
-42
-50
Consumer Staples
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S&P500
Consumer Staples Sector Presentation
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Consumer Staples
Consumer Staples Sector Presentation
10/20/2009
10/13/2009
10/06/2009
09/29/2009
09/22/2009
09/15/2009
09/08/2009
09/01/2009
08/25/2009
08/18/2009
08/11/2009
08/04/2009
07/28/2009
07/21/2009
07/14/2009
07/07/2009
06/30/2009
06/23/2009
06/16/2009
06/09/2009
06/02/2009
05/26/2009
05/19/2009
05/12/2009
05/05/2009
04/28/2009
04/21/2009
04/14/2009
04/07/2009
03/31/2009
03/24/2009
03/17/2009
03/10/2009
Underperforming in bullish markets
Consumer Staples vs. S&P500 since March 2009
60
50.2779
50
40
32.3803
30
20
10
0
S&P500
9
-5%
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Relative Performance
Consumer Staples Sector Presentation
07/01/2009
04/01/2009
01/01/2009
10/01/2008
07/01/2008
04/01/2008
01/01/2008
10/01/2007
07/01/2007
04/01/2007
01/01/2007
10/01/2006
07/01/2006
04/01/2006
01/01/2006
10/01/2005
07/01/2005
04/01/2005
01/01/2005
10/01/2004
07/01/2004
04/01/2004
01/01/2004
10/01/2003
07/01/2003
04/01/2003
01/01/2003
10/01/2002
07/01/2002
04/01/2002
01/01/2002
10/01/2001
07/01/2001
04/01/2001
01/01/2001
10/01/2000
07/01/2000
04/01/2000
01/01/2000
10/01/1999
Relative Performance
Relative Performance of Consumer Staples over S&P500 last 10
years
15%
10%
5%
0%
-10%
-15%
6 per. Mov. Avg. (Relative Performance)
10
Consumer Staples Industries
Industry
% of Sector
YTD Return
Company
Agriculture Products
1.7%
4.0%
Archer-Daniels Midland
Brewers
0.7%
2.1%
Molson Coors Brewing
Distillers & Vintners
0.8%
(1.9%)
Constellation Brands
Drug Retail
8.5%
43.2%
CVS Caremark
Food Distributors
1.4%
18.3%
Sysco
Food Retail
3.1%
8.1%
Kroger
Household Products
21.5%
(1.9%)
Proctor & Gamble
HyperMarkets/SuperCenters
12.2%
(5.6%)
Wal-Mart Stores
Packaged Foods & Meats
12.4%
9.7%
Kraft
Personal Products
1.7%
39.1%
Avon Products
Soft Drinks
21.9%
21.0%
Coca-Cola
Tobacco
14.2%
19.8%
Philip Morris
There are currently 41 companies in the consumer staples sector.
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Business Analysis
Life Cycle
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Consumer Staples Sector Presentation
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• Stable inelastic demand based on consumer
needs(less sensitive to economic cycles)
• Defensive (non-cyclical)
– Hedge against economic downturn
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Consumer Staples Sector Presentation
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Industry Characteristics
• High barriers to entry
– Dominated by large, well-established companies
– Tremendous capital requirements
– Takes a long time to reach EOS
– Hard to build wide distribution networks
• High buyer power
– Not well differentiated product
– Low switching cost
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Consumer Staples Sector Presentation
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• Low supplier power
– Long-term contracting/agreements common
– Companies such as Wal-Mart have huge bargaining
power
• High threat of substitution
– Multiple brands competing in same segment
• Intensive competition
– Consumers are price sensitive (despite brand
loyalty) with undifferentiated products
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Consumer Staples Sector Presentation
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Growth Opportunities
• Sector relying on international expansion to
spur growth.
• Branding is the key - powerful brand names
command significant price premiums to
similar generic labels
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Consumer Staples Sector Presentation
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Economic Analysis
Possible External Factors
•
•
•
•
•
•
•
Exchange Rates (Strength of dollar)
Commodity Prices
GDP growth
CPI and Inflation
Unemployment Rate
Trade Balance
Others Factors?
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Consumer Staples Sector Presentation
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Model Basis
• Variables regarded do not fulfill Gauss-Markov
requirements to compute a Multiple Regression, but a
Probit model allows a rough estimate
• Research question: Under which circumstances
(changes in economic variables) does the consumer
staples sector outperform the S&P500?
• Variables regarded include: Consumer Price Index,
Producer Price Index, M2 Money Supply, Spread of
10year-2year Treasury Bill rate, Real GDP growth rate,
Consumer Confidence, Unemployment Rate, Savings
Rate, Trade Weighted Dollar Value, Trade Balance
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Consumer Staples Sector Presentation
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Probit Model
Y  1, if Cons. St. outperform s S & P 500
PY  1 | X     X '  
cpi,

 ppi,



m2 _ money, 


rf
,
 Spread10 year  2 year 
 gdp

growth ,
X 

cons
_
conf
,


unemp,



saving _ rate, 
dollar ,



trade _ balance 
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Consumer Staples Sector Presentation
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Probit Model Output
Call:
glm(formula = dummy ~ cpi + ppi + m2_money + I(rf_10 - rf_2) + gdp_growth
+ cons_conf + unemp + saving_rate + dollar + trade_bal, family =
binomial(link = "probit"))
Coefficients:
Estimate Std. Error z value Pr(>|z|)
(Intercept)
-5.6533276 4.7638175 -1.187
0.2353
cpi
0.7946791 0.3573893
2.224
0.0262 *
ppi
-0.2416636 0.1498299 -1.613
0.1068
m2_money
0.1433757 0.1352248
1.060
0.2890
I(rf_10 - rf_2) 0.0438816 0.2642102
0.166
0.8681
gdp_growth
-0.0477027 0.0749970 -0.636
0.5247
cons_conf
0.0036570 0.0188761
0.194
0.8464
unemp
-0.1792947 0.3523537 -0.509
0.6109
saving_rate
0.3702471 0.1744287
2.123
0.0338 *
dollar
2.8677897 1.5581677
1.840
0.0657 .
trade_bal
0.0005463 0.0020099
0.272
0.7858
--Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
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Financial Analysis
Revenue Consumer Staples
6.0%
400
350
5.0%
300
4.0%
250
3.0%
200
150
2.0%
100
1.0%
50
Revenues Consumer Staples
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2009
2008
2008
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
0
2000
0.0%
Growth Rate
Consumer Staples Sector Presentation
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12/01/1999
03/01/2000
06/01/2000
09/01/2000
12/01/2000
03/01/2001
06/01/2001
09/01/2001
12/01/2001
03/01/2002
06/01/2002
09/01/2002
12/01/2002
03/01/2003
06/01/2003
09/01/2003
12/01/2003
03/01/2004
06/01/2004
09/01/2004
12/01/2004
03/01/2005
06/01/2005
09/01/2005
12/01/2005
03/01/2006
06/01/2006
09/01/2006
12/01/2006
03/01/2007
06/01/2007
09/01/2007
12/01/2007
03/01/2008
06/01/2008
09/01/2008
12/01/2008
03/01/2009
06/01/2009
09/01/2009
EBITDA Margins
16%
1.0
14%
0.9
0.8
12%
0.7
10%
0.6
8%
0.5
6%
0.4
4%
0.3
0.2
2%
0.1
0%
0.0
EBITDA Margin Consumer Staples Sector
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EBITDA Margin Relative to S&P 500
Consumer Staples Sector Presentation
25
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Return On Equity in Consumer Staples Sector
Consumer Staples Sector Presentation
08/01/2009
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
08/01/2000
04/01/2000
12/01/1999
Return On Equity
40%
2.50
35%
2.00
30%
25%
1.50
20%
15%
1.00
10%
0.50
5%
0%
0.00
ROE Relative to S&P500
26
Valuation
Absolute Ratios
Price/Sales
Price/Book
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Relative to S&P 500
Price/Sales
Price/Book
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Valuation by Industry
Industry
P/E Change from Median
Agriculture Products
(22%)
Brewers
(25%)
Distillers & Vintners
(24%)
Drug Retail
(35%)
Food Distributors
(26%)
Food Retail
(13%)
Household Products
(28%)
HyperMarkets/SuperCenters
(13%)
Packaged Foods & Meats
(24%)
Personal Products
(19%)
Soft Drinks
(23%)
Tobacco
4%
These percentages were similar across other ratios like P/S, P/B and P/CF
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Recommendation
SIM Portfolio
Sector
S&P 500 Weight
SIM Weight
+/-
Consumer Discretionary
9.11%
7.72%
-1.39%
Consumer Staples
11.54%
11.48%
-0.06%
Energy
11.70%
12.00%
0.29%
Financials
15.23%
6.65%
-8.57%
Health Care
13.11%
13.11%
-0.01%
Industrials
10.26%
12.91%
2.64%
Information Technology
18.65%
21.73%
3.08%
Materials
3.50%
4.99%
1.48%
Telecom Services
3.17%
3.70%
0.53%
Utilities
3.72%
3.30%
-0.42%
Values based off of September 30, 2009 report
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Recommendation
• Increase weight of consumer staples by 26
basis points
– Slow economic recovery
– The market has recovered too much too quickly
• Will see a small correction fairly soon
– Exposure to international growth
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What questions do you have?