Consumer Discretionary Sector
Presentation
May 5, 2009
Diego Benavente, Matt Berkowitz,
Conrad Bowman, Julie McGrover
Agenda

Sector Overview

Business Analysis

Economic Analysis

Financial Analysis

Valuation Analysis

Recommendation
Sector in relation to S&P 500
Technology
18.83%
Consumer Discretionary
7th largest
9.94%
Energy
12.04%
Materials
3.25%
Telecommunications
3.55%
Consumer Staples
13.12%
Health Care
13.36%
Industrials
10.21%
Utilities
3.80%
Financials
0.00%
11.89%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
Sector Performance YTD & 10 Years
Technology
15.8%
Consumer Discretionary
14.3%
Energy
142%
Health Care
Energy
3.0%
Technology
Materials
3.0%
Industrials
115%
74%
59%
Telecommunications
1.2%
Utilities
25%
Consumer Staples
0.8%
Consumer Discretionary
23%
Health Care
0.6%
Financials
18%
Consumer Staples
18%
Materials
14%
Industrials
Utilities
-1.1%
-3.4%
Financials
-7.3%
-10%
Telecommunications
-5%
0%
5%
10%
TOTAL RETURN % CHG YTD
15%
20%
-50%
-2%
0%
50%
100%
TOTAL RETURN % CHG 10 yrs
150%
Top 10 Companies in Sector
% of Total
% of Total
DIRECTV
3.18%
NIKE
3.21%
TIME WARNER
3.30%
TARGET
3.93%
LOWE'S
3.99%
AMAZON.COM
WALT DISNEY
Other
54%
4.36%
5.14%
COMCAST
5.63%
HOME DEPOT
5.64%
MCDONALD'S
7.51%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
Top 10
46%
Business Analysis – Sector Composition
Industries within Consumer Discretionary Sector:
ADVERTISING
APPAREL & ACCESSORY
AUTO PARTS & EQUIP
AUTOMOBILE MFRS
AUTOMOTIVE RETAIL
BROADCASTING
CABLE & SATELLITE
CASINOS & GAMING
CONSUMER ELECTRONICS
DEPARTMENT STORES
DISTRIBUTORS
EDUCATION SERVICES
FOOTWEAR
GENERAL MERCHANDISE
HOMEBUILDING
HOMEFURNISHING RETL
HOTEL/RESORT/CRUISE
HOUSEHOLD APPLIANCES
HOUSEWARES & SPECS
source: Baseline
LEISURE PRODUCTS
MOTORCYCLE MFRS
MOVIES & ENTMT
PHOTOGRAPHIC PRODS
PUBLISHING
RESTAURANTS
RETAIL-APPAREL
RETAIL-COMP/ELECTRN
RETAIL-HOME IMPROVE
SPECIAL CONSM SERV
SPECIALTY STORES
TIRES & RUBBER
Top 5 - 12 Month Returns
Total Return % Change
Industry
CASINOS & GAMING
RESTAURANTS
SPECIALTY STORES
PUBLISHING
MOVIES & ENTMT
Bottom 5 - 12 Month Returns
Industry
Industry
EDUCATION SERVICES
RETAIL-INTERNET
HOMEFURNISHING RETL
BROADCASTING
AUTOMOTIVE RETAIL
1 mth 3 mths 6 mths 12 mths
7.7% 15.9% 15.0%
3.2%
20.4% 33.2% 32.3%
-4.2%
22.0% 54.5% 36.6%
-6.8%
15.3% 21.2%
4.8% -13.2%
35.2% 27.6% 21.9% -13.5%
5 yrs
27.5%
8.3%
-3.7%
-5.0%
7.8%
Includes
Intl Game Technology, Wynn Resorts Ltd
Darden Restaurants, McDonald's, Starbucks, Yum! Brands
Office Depot Inc, Staples, Tiffany & Co
Gannett Co, Meredith, McGraw-Hill, NY Times, Washington Post
Walt Disney, News Corporation, Time Warner, Viacom Inc
Total Return % Change
1 mth 3 mths 6 mths 12 mths 5 yrs
97.7% 19.9% -28.1% -79.6% -85.0%
14.4% -4.8% -20.2% -67.8% -78.0%
83.3% 24.0% -24.2% -65.8% -68.0%
30.0% -42.3% -45.1% -61.6% 41.4%
2.7% -30.6% -54.9% -37.0%
Apollo Group Inc
Amazon.com Inc, Expedia
Bed Bath & Beyond Inc
CBS Corp B
AutoNation Inc, AutoZone, O'Reilly Automotive
Business Analysis – 5 Forces
•
Barriers to Entry: High
– Many well established companies with strong brand recognition
•
Competition: High
– Companies have to keep evolving to stay current and keep/gain
market share
•
Substitution: High
– Consumers can trade up, down, sideways
•
Supplier Power: Varied depending on industry
•
Buyer Power: High
Business Analysis – Current Economic
Conditions
•
Positive Factors
– Consumers' cash savings continue
to expand and are now at a record
level
– More than 60% of homeowners
have more than 30% equity in their
homes
– Mortgage rates have declined
•
Negative Factors
– Margins in the retail space are
diminishing
– The unemployment rate continues to
move higher
– Savings rates in the United States have
been increasing.
– The recently passed stimulus
package includes some modest tax
cuts
– The credit card delinquency rate
continues to move higher.
– The recently launched Term Asset
Loan Program (TALF) aims to
loosen up consumer lending by
unfreezing the securitization market
– Revolving credit limits are being reduced
& credit standards remain tight.
– Tax refunds are 15% higher than at
the same time last year.
– Delinquency rates for prime mortgage
loans continue to rise
– Personal net worth has declined
Schwab Sector Views by Brad Sorensen
Economic Analysis
•Same Time Period
•Negatively Correlated
•Brent Crude Oil
•CPI
•Positively Correlated:
•S&P500 Price Index
•One Month Lag
Positively Correlated:
S&P500 Price Index
Retail Sales
•One Month Lead
•Negatively Correlated
•Brent Crude Oil Spot Price
•CPI
•Positively Correlated
•S&P500 Price Index
•3 Month Lag
Negatively Correlated:
Consumer Spending
Positively Correlated
Federal Funds Rate
Financial Analysis- Sector ROE
Return On Equity
25
20
15
?
10
5
0
1998
2000
2002
2004
2006
2008
2010
Return on Equity Relative to
S&P 500
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1998
2000
2002
2004
2006
2008
2010
Financial Analysis- Sector Profit Margin
Net Profit Margin
5.0
4.5
4.0
3.5
3.0
?
2.5
2.0
1.5
1.0
0.5
0.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Net Profit Margin Relative to S&P 500
0.6
0.5
0.4
?
0.3
0.2
0.1
0.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Financial Analysis- Industry Breakdown
Net Profit Margin
Net Profit Margin
7.00
12.00
6.00
10.00
5.00
8.00
4.00
3.00
Cable & Satellite
6.00
2.00
4.00
1.00
2.00
0.00
2002
-1.00
2004
2006
2008
0.00
1998
2010
Net Profit Margin Relative to
S&P 500
1.2000
1.0000
0.8000
0.6000
Cable & Satellite
0.4000
0.2000
0.0000
2002
-0.2000
2004
2006
2008
2010
Restaurants
2000
2002
2004
2006
2008
2010
Net Profit Margin Relative to
S&P 500
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1998
Restaurants
2000
2002
2004
2006
2008
2010
Financial Analysis- Industry Breakdown
Net Profit Margin
Net Profit Margin
7.0000
12.0000
6.0000
10.0000
5.0000
8.0000
4.0000
Retail-Home
Improvement
3.0000
2.0000
1.0000
2000
2002
2004
2006
2008
0.0000
1998 2000 2002 2004 2006 2008 2010
2010
Net Profit Margin Relative to
S&P 500
1.0000
0.9000
0.8000
0.7000
0.6000
0.5000
0.4000
0.3000
0.2000
0.1000
0.0000
1998
Movies &
Entertainment
4.0000
2.0000
0.0000
1998
6.0000
Net Profit Margin Relative to
S&P 500
1.4000
1.2000
1.0000
0.8000
Retail-Home
Improvement
Movies &
Enertainment
0.6000
0.4000
0.2000
2000
2002
2004
2006
2008
2010
0.0000
1998
2000
2002
2004
2006
2008
2010
Financial Analysis- Major Companies
Revenue Growth
Revenue Year to Year %
Revenue Year to Year %
160
20
140
18
16
120
14
100
12
80
Comcast
60
McDonald's
8
6
40
4
20
0
1990
10
2
1995
2000
2005
0
1990
2010
Revenue Year to Year %
1995
2000
2005
2010
Revenue Year to Year %
60
40
50
30
40
20
30
Disney
20
0
1990
10
0
1990
-10
10
-10
1995
2000
2005
2010
-20
Home Depot
1995
2000
2005
2010
Financial Analysis- Major Companies
Net Income Growth
Net Income Year to Year %
Net Income Year to Year %
200
100
80
100
60
0
1990
1995
2000
2005
40
2010
-100
Comcast
20
0
1990
-20
-200
-300
40
60
30
40
20
20
-100
2010
50
80
-80
2005
Net Income Year to Year %
100
-60
2000
-60
Net Income Year to Year %
-40
1995
-40
-400
0
-201990
McDonalds
10
Disney
1995
2000
2005
2010
0
-101990
-20
-30
-40
-50
Home Depot
1995
2000
2005
2010
Financial Analysis- Major Companies
Net Profit Margin
Net Profit Margin %
Net Profit Margin %
30
20
18
25
16
14
20
12
15
Comcast
10
10
McDonald's
8
6
4
5
2
0
1990
1995
2000
2005
0
1990
2010
1995
Net Profit Margin %
2000
2005
2010
Net Profit Margin %
14
8
12
7
10
6
8
5
Disney
6
4
Home Depot
3
4
2
2
0
1990
1
1995
2000
2005
2010
0
1990
1995
2000
2005
2010
Valuation Analysis
Price/Cash Flow
1.2
Price/CF relative to S&P 500
16
1.1
14
12
1.0
10
0.9
8
6
0.8
4
0.7
2
0
Apr-99 Sep-00 Jan-02 Jun-03 Oct-04 Mar-06 Jul-07 Nov-08
Price/Sales
0.6
Apr-99 Sep-00 Jan-02 Jun-03 Oct-04 Mar-06 Jul-07 Nov-08
1.2
1.2
1.0
Price/Sales relative to S&P
500
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
Apr-99
Jan-02
Oct-04
Jul-07
0.0
Apr-99 Sep-00 Jan-02 Jun-03 Oct-04 Mar-06 Jul-07 Nov-08
Valuation Analysis:
P/E
P/E Trailing
35
Frequency
30
+ 10 Cos with
negative
earnings (12%)
25
20
15
10
P/E FWD
Earnings
Latest 4 Qs
GENERAL MOTORS
-28.83
CENTEX
-15.66
KB HOME
-9.88
HORTON (D.R.)
-8.12
PULTE HOMES
-5.82
FORD MOTOR
-4.05
LENNAR CL A
-2.45
GOODYEAR TIRE
-1.28
EASTMAN KODAK
-0.94
OFFICE DEPOT
-0.60
Histogram
30
25
Frequency
Histogram
+ 11 Cos with
negative
earnings (14%)
Only 23 Cos are
expected to improve
their earnings in the
next 4Qs (28%)
20
15
10
5
5
0
0
<5
10
15
20
25
30
>30
<5
10
15
20
25
30
>30
Valuation Analysis:
EPS
$16
$14
EPS
$12
$10
$8
$6
$4
$2
$0
?
Valuation Analysis
2.00
80
2.00
3 Months Total Return
R² = 0.19
1.50
0.50
0.00
29.12 -0.50 0.0
30
1.00
Return (%)
1.00
6 Months Total Return
R² = 0.19
1.50
Return (%)
2.50
Price relative to S&P500
0.50
0.00
1.0
-1.00
2.0
3.0 -0.50
0.0
1.0
-1.00
Beta
2.0
3.0
Beta
-20
-70
0.90
0.60
10y
0.30
0.00
-0.30
0.0
12 Months Total Return
R² = 0.19
1.0
2.0
3.0
0.80
0.00
0.0
1.0
2.0
-0.80
-0.90
-1.20
5 Years Total Return
R² = 0.19
2.40
1.60
-0.60
-120
3.20
Return (%)
15y
-26.7039
Return (%)
20y
Beta
-1.60
Beta
3.0
Trailing P/E by Industry
CONSUMER ELECTRONICS
RETAIL-INTERNET
HOMEFURNISHING RETL
SPECIALTY STORES
EDUCATION SERVICES
AUTOMOTIVE RETAIL
HOME FURNISHINGS
RESTAURANTS
AUTO PARTS & EQUIP
DEPARTMENT STORES
GENERAL MERCHANDISE
CABLE & SATELLITE
RETAIL-HOME IMPROVE
LEISURE PRODUCTS
FOOTWEAR
CASINOS & GAMING
RETAIL-COMP/ELECTRN
DISTRIBUTORS
RETAIL-APPAREL
APPAREL & ACCESSORY
ADVERTISING
SPECIAL CONSM SERV
HOTEL/RESORT/CRUISE
HOUSEWARES & SPECS
MOVIES & ENTMT
HOUSEHOLD APPLIANCES
PUBLISHING
MOTORCYCLE MFRS
BROADCASTING
AUTOMOBILE MFRS
HOMEBUILDING
PHOTOGRAPHIC PRODS
TIRES & RUBBER
•Harman Int’l
•Amazon.com(54), Expedia (11)
•McDonalds
•Comcast
•Best Buy
•GameStop
•GM, Ford
•Centex, Horton, KB Home, Lennar, Pulte
•Eastman Kodak
•Goodyear
4.400177001
-10
0
10
20
30
40
50
60
70
80
90
100
110
Market cap vs Earnings
Industry
Mkt Cap Earnings
TIRES & RUBBER
0.3%
-1.5%
PHOTOGRAPHIC PRODS
0.1%
-1.2%
HOMEBUILDING
1.5%
-34.4%
AUTOMOBILE MFRS
2.3% -137.4%
BROADCASTING
0.6%
5.1%
MOTORCYCLE MFRS
0.7%
2.9%
PUBLISHING
2.1%
8.8%
HOUSEHOLD APPLIANCES
1.4%
5.7%
MOVIES & ENTMT
12.6% 52.8%
HOUSEWARES & SPECS
1.1%
4.2%
HOTEL/RESORT/CRUISE
3.9%
14.5%
SPECIAL CONSM SERV
0.7%
2.4%
ADVERTISING
1.6%
5.4%
APPAREL & ACCESSORY
2.5%
7.8%
RETAIL-APPAREL
3.6%
11.4%
DISTRIBUTORS
0.7%
2.0%
RETAIL-COMP/ELECTRN
2.9%
8.3%
CASINOS & GAMING
1.1%
3.1%
FOOTWEAR
3.2%
8.7%
LEISURE PRODUCTS
1.1%
3.0%
RETAIL-HOME IMPROVE
10.5% 26.5%
CABLE & SATELLITE
10.8% 27.4%
GENERAL MERCHANDISE
4.8%
12.1%
DEPARTMENT STORES
4.9%
12.2%
AUTO PARTS & EQUIP
1.4%
3.5%
RESTAURANTS
11.4% 26.8%
HOME FURNISHINGS
0.3%
0.6%
AUTOMOTIVE RETAIL
2.3%
4.8%
EDUCATION SERVICES
1.3%
2.6%
SPECIALTY STORES
2.4%
4.9%
HOMEFURNISHING RETL
1.0%
2.0%
RETAIL-INTERNET
4.9%
4.7%
CONSUMER ELECTRONICS 0.1%
0.0%
CnDisc Total
100%
100%
GM: $ -17.6 B
Ford: $ -11.6 B
INDUSTRY
ADVERTISING
APPAREL & ACCESSORY
AUTO PARTS & EQUIP
AUTOMOBILE MFRS
AUTOMOTIVE RETAIL
BROADCASTING
CABLE & SATELLITE
CASINOS & GAMING
CONSUMER ELECTRONICS
DEPARTMENT STORES
DISTRIBUTORS
EDUCATION SERVICES
FOOTWEAR
GENERAL MERCHANDISE
HOME FURNISHINGS
HOMEBUILDING
HOMEFURNISHING RETL
HOTEL/RESORT/CRUISE
HOUSEHOLD APPLIANCES
HOUSEWARES & SPECS
LEISURE PRODUCTS
MOTORCYCLE MFRS
MOVIES & ENTMT
PHOTOGRAPHIC PRODS
PUBLISHING
RESTAURANTS
RETAIL-APPAREL
RETAIL-COMP/ELECTRN
RETAIL-HOME IMPROVE
RETAIL-INTERNET
SPECIAL CONSM SERV
SPECIALTY STORES
TIRES & RUBBER
CnDisc Total
Mkt Cap # Cos
12,767
2
19,730
3
11,296
1
18,298
2
17,937
3
4,781
1
85,546
4
8,419
2
1,065
1
38,886
5
5,415
1
10,043
1
25,399
1
37,974
3
2,252
1
11,653
5
7,901
1
30,932
4
10,694
4
8,799
2
9,076
2
5,176
1
100,016
4
818
1
16,211
5
90,370
4
28,659
4
22,567
3
82,775
3
38,421
2
5,143
1
18,985
3
2,652
1
790,656
81
Per Share 2009
Earnings
P/E
Trailing
Fwd
Trailing
Fwd
1.46
1.24
11.13
13.03
3.14
2.75
11.84
13.53
1.25
0.79
15.21
24.06
-8.40
-6.42
-0.63
-0.82
2.76
3.01
17.62
16.14
1.60
0.77
4.40
9.14
1.32
1.32
14.68
14.66
1.58
0.68
12.75
29.78
0.17
-0.77
106.95
-23.61
2.01
1.06
15.04
28.62
2.73
2.39
12.44
14.21
3.49
4.36
18.04
14.44
3.80
3.61
13.81
14.53
2.63
2.38
14.79
16.35
0.88
0.65
16.31
22.09
-7.69
-1.79
-1.60
-6.87
1.65
1.58
18.44
19.25
2.31
1.57
10.01
14.80
4.47
2.63
8.87
15.03
2.08
1.47
9.88
14.05
1.28
1.47
14.24
12.41
2.68
1.33
8.27
16.66
1.79
1.37
8.91
11.68
-0.94
-0.51
-3.24
-5.98
2.52
0.83
8.67
26.40
2.33
2.51
15.89
14.70
1.58
1.25
11.87
14.95
2.52
2.53
12.73
12.69
1.72
1.30
14.68
19.41
1.39
1.40
38.68
38.30
1.51
1.47
10.03
10.30
0.94
0.85
18.22
20.08
-1.28
0.00
-8.58
0.00
37.2
33.4
P/E (w/o Auto Mfrs &
Homebuilders):
13.4  16.2
S&P500:
13.2  15.5
P/CF
P/CF (w/o Auto Mfrs
& Homebuilders):
0.85
Price/CF relative to S&P 500
1.2
1.1
1.0
0.9
0.8
0.7
0.6
Apr-99
Sep-00
Jan-02
Jun-03
Oct-04
Mar-06
Jul-07
Nov-08
Recommendation
1. Start by closing the
gap (-159 bps)
2. Overweight the
sector by at least
200 bps
Source: Fidelity.com