Consumer Discretionary Sector
July 21, 2009
Joshua Anderson, Kunal Arora,
Branyan Booth, Joseph Chandraraj
Sector Overview - S&P 500 Composition
Sectors as % of S&P 500
100
20.00
% of S&P 500
% of S&P 500
14.00
15.00
60
40
20
0
12.00
10.00
10.00
5.008.00
0.006.00
4.00 Energy
Materials
Industrials
14.21
13.30
2.00
%
0.00
Cumulative
18.55
Information
18.55
Technology
Consumer Consumer
Discretionary Staples
12.46
Health Care
Financials
9.71
8.93
12.07
Consumer
32.76
70.59Energy
Health Care 46.06
Financials 58.52
Staples
Information Telecommuni
Technology
cation
4.12
Consumer
80.30
93.35
Industrials89.23
Discretionary
80
60
Cumulative %
100
80
20.00
16.00
Cumulative %
18.00
40
Utilities
20
3.18
0
3.47
Telecommuni
Utilities96.82 cation100.00 Materials
Services
%
18.55
14.21
13.30
12.46
12.07
9.71
8.93
4.12
3.47
3.18
Cumulative
18.55
32.76
46.06
58.52
70.59
80.30
89.23
93.35
96.82
100.00
Sector Overview – Top 10 Industries
Industries as % of Consumer Discretionary Sector
14.95%
Movies & Entertainment
13.42%
Restaurants
10.22%
Home Improvement Retail
9.39%
$688
billion
Cable & Satellite
4.84%
General Merchandise Stores
4.25%
Department Stores
4.12%
Internet Retail
3.53%
Apparel Retail
3.32%
Hotels, Resorts & Cruise Lines
2.84%
Footwear
0.00%
2.00%
4.00%
6.00%
8.00%
% of sector
10.00%
12.00%
14.00%
16.00%
Sector Overview – Top 10 Companies
Top 10 Sector Companies by Market Cap
McDonald's
$62,940
$41,610
Walt Disney
Home Depot
$38,360
Comcast
$38,230
Amazon.com
$33,350
Time Warner Inc
$28,660
Target
$28,440
$688
billion
$27,830
Lowe's Cos
Nike
$24,850
$23,660
DirecTV
$0
$10,000
$20,000
$30,000
$40,000
Market Cap ($M)
$50,000
$60,000
$70,000
Sector Overview – 5 Year Returns
S&P 500 Sector 5 Year Returns & 5 Yr Standard Deviations
35.00%
0.40
30.00%
0.30
25.00%
0.20
20.00%
0.10
15.00%
0.00
10.00%
-0.10
5.00%
-0.20
0.00%
-0.30
-5.00%
-0.40
-10.00%
-0.50
-15.00%
-0.60
-20.00%
-0.70
Energy
Utilities
Consumer
Staples
5yr Rtn
6.90%
2.60%
1.30%
-1.10%
-1.40%
-2.30%
-2.70%
-6.00%
-6.50%
-16.40%
5yr SD
23.30%
14.70%
10.70%
20.20%
21.50%
13.90%
17.10%
19.80%
19.80%
27.90%
0.30
0.18
0.12
-0.05
-0.07
-0.17
-0.16
-0.30
-0.33
-0.59
5yr Rtn/5yr SD
Information
Technology
Materials
Health Care
Telecom
Services
Consumer
Discretionary
Industrials
Financials
5 yr return / 5 yr stdev
5 yr return & 5 yr stdev (%)
Price Change (%)
Sector Overview - YTD & QTD Returns
S&P 500 Sector YTD & QTD Returns
Price Changes (%)
25.00%
20.00%
15.00%
%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
Inform ation
Technology
Materials
Consum er
Discretionary
Health Care
Consum er
Staples
Utilities
Energy
Financials
Telecom m un
ication
Services
Industrials
YTD Return
19.70%
6.06%
2.57%
-3.53%
-3.77%
-7.43%
-10.02%
-11.53%
-12.45%
-12.67%
QTD Return
-3.53%
-5.54%
-4.61%
-2.59%
-0.35%
-3.50%
-7.01%
-7.11%
-6.13%
-5.40%
Business Analysis – Porter’s 5 Forces
Barriers to Entry
High
-Mature
-Well established companies with strong
brand recognition
-High capital requirement
Competition
High
Must keep evolving to stay current and
keep/gain market share
Substitution
High
Consumers can trade up, down, sideways
Supplier Power
Varies
-Depending upon industry
-Many national & international sources for
commodities & raw materials
Buyer Power
High
Multiple brands
Economic Analysis - Disposable Income
• High correlation with
disposable income
• Sharp increase in 2003, peak
of 12% in early 2007
• Continuous drop since
second half of 2007
Economic Analysis - Consumer Spending
• High correlation with
consumer spending
• Sharp increase in 2003, peak
of 12% in early 2007
• Continuous drop since
second half of 2007
Economic Analysis – Personal Saving Rate
Personal Saving Rate
•Saving Rate = Disposable Income
– Consumer Spending
•Disposable Income
SAAR, %
Households Net Worth as a % of Disposable Personal Income
%
16
640
•Consumer Spending
•Saving Rate
•Saving Rate currently at 6.9% (15
year high) and projected to hit 10%
600
12
560
8
520
• Is there a change in consumer
behavior with home value going
down, consumer is more cognizant
of saving?
4
480
0
440
-4
400
70
75
80
85
90
95
00
Sources: Bureau of Economic Analysis, Federal Reserve Board
05
Economic Analysis - Unemployment Rate
• High negative correlation
with unemployment rate
• With unemployment
projected to hit double digits
by end of the year, consumer
discretionary sector will be
negatively affected
Economic Analysis - Home Sales
• R = 0.50 strong positive
correlation
• Leading indicator for the
overall economy
Financial Analysis – Net Profit Margin
Absolute Net Profit Margin
5.000%
4.500%
4.000%
3.500%
3.000%
2.500%
2.000%
1.500%
1.000%
0.500%
0.000%
12/01/1999
12/01/2000
12/01/2001
High
Low
Median
Current
12/01/2002
12/01/2003
12/01/2004
12/01/2005
12/01/2006
4.59%
1.04%
3.90%
1.04%
12/01/2007
12/01/2008
Financial Analysis – Net Profit Margin
Net Profit Margin Relative to S&P 500
0.6%
0.5%
0.4%
Net Profit Margin
Relative to S&P
500
High
0.6%
Low
0.2%
Median
0.5%
Current
0.2%
0.3%
0.2%
0.1%
0.0%
Financial Analysis – Top Industries
Net Profit Margin
Restaurants
Net Profit Margin Absolute
Movies & Entertainment
Net Profit Margin Absolute
15%
10.0%
12%
8.0%
9%
6.0%
6%
4.0%
2.0%
Movies &
Entertainment
3%
Restaurants
0%
0.0%
Restaurants
Net Profit Margin Relative to S&P 500
Movies & Entertainment
Net Profit Margin Relative to S&P 500
2.10%
1.50%
1.80%
1.20%
1.50%
0.90%
0.60%
0.30%
0.00%
1.20%
Movies &
Entertainment
0.90%
0.60%
0.30%
0.00%
Restaurants
Financial Analysis – Sector ROE
ROE - Absolute
ROE Relative to S&P 500
25%
1.2%
20%
1.0%
0.8%
15%
0.6%
10%
0.4%
5%
0.2%
0%
0.0%
Absolute ROE
High
Low
Median
Current
19.7%
6.6%
11.9%
6.6%
Relative ROE
High
Low
Median
Current
1.0%
0.5%
0.7%
0.5%
Financial Analysis - Major Companies
Revenue Growth
Revenue Year to Year %
Revenue Year to Year %
15%
12%
McDonald's
Walt Disney
10%
10%
8%
6%
5%
4%
2%
0%
0%
-2%
-5%
-4%
-6%
1999
2002
2005
2008
-10%
1999
Revenue Year to Year %
2002
2005
2008
Revenue Year to Year %
30%
150%
Home Depot
20%
120%
90%
10%
60%
0%
Comcast
30%
-10%
0%
-30%
-20%
1999
2002
2005
2008
1999
2002
2005
2008
Valuation Analysis - Sector P/CF
Valuation Analysis - Sector P/S
Valuation Analysis - Sector forward P/E
Valuation Analysis - Industry
Trailing P/E Forward P/E
CONSUMER ELECTRONICS
132.7
NA
RETAIL-INTERNET
37.5
37.5
CASINOS & GAMING
14.5
28.5
TIRES & RUBBER
NA
24.8
AUTO PARTS & EQUIP
16.1
22.8
HOME FURNISHINGS
22.5
21.3
SPECIALTY STORES
19.2
19
HOMEFURNISHING RETL
19.0
18.8
17.5 DEPARTMENT STORES
15.2
18.6
RETAIL-HOME IMPROVE
14.5
16.2
AUTOMOTIVE RETAIL
16.5
15.8
HOTEL/RESORT/CRUISE
9.5
15.6
EDUCATION SERVICES
19.0
15
RESTAURANTS
16.3
15
FOOTWEAR
13.7
14.7
Trailing P/E Forward P/E
HOUSEHOLD APPLIANCES
8.6
14.4
RETAIL-APPAREL
13.7
14
DISTRIBUTORS
12.2
13.9
MOTORCYCLE MFRS
6.2
13.6
GENERAL MERCHANDISE
14.2
13.2
APPAREL & ACCESSORY
11.6
13.1
PUBLISHING
8.2
13.1
CABLE & SATELLITE
14.7
12.8
LEISURE PRODUCTS
14.1
12.8
ADVERTISING
2.9
12.5
HOUSEWARES & SPECS
9.8
12.1
MOVIES & ENTMT
11.1
12
BROADCASTING
7.3
10.9
RETAIL-COMP/ELECTRN
10.7
10.7
SPECIAL CONSM SERV
11.8
10.1
Recommendation
Hold current underweight position of 146bps, why?
Hold current
underweight position
of 146bps
View
Reason
Business
Slightly Positive
Mature, Low growth but global
expansion can open new
opportunities
Economic
Negative
Disposable Income
Consumer Spending
Saving Rate
Unemployment
Financial
Negative
Revenue growth
Margins
Valuation
Negative
Over valued high P/E ratios
“S&P recommends underweighting the S&P 500 Consumer
Discretionary sector…” Standards & Poor’s 7/12/2009
Questions???