Consumer Discretionary
Sector Presentation
Arshan Ameen
Brian Beck
Josh Bernath
Ryan Calloway
Bryan Chard
February 10, 2009 – FIN 724/824
Agenda
•
•
•
•
•
•
Sector Composition
Business Analysis
Key Economic Drivers
Financial Analysis
Valuation Analysis
Recommendation
Sector Composition
Overview
• Consists of companies that compete for the
disposable income of consumers (you!)
• Industries include goods:
– Automotive, household durables, consumer
retailers
• And services:
– Hotels, restaurants, and media production
Sector Composition
Top 10 Industries in Sector (Market Value Weighted)
0.00%
Media
Specialty Retail
Hotels Restaurants & Leisure
Multiline Retail
Textiles, Apparel & Luxury Goods
Household Durables
Internet & Catalog Retail
Diversified Consumer Services
Auto Components
Automobiles
Leisure Equipment & Products
Distributors
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Sector Composition
Top 10 Companies in Sector (% of Sector Market Value)
0.00%
McDonald’s
Comcast
Walt Disney
Home Depot
Time Warner
Lowe’s
Target
News Coproration
Corporation
Nike
Amazon.com
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Sector Composition
Performance
• Sector market cap: $599
billion, 8.1% of S&P 500
• Year-to-date
performance: -9.1%
(S&P 500 -6.36%)
• Sector has
underperformed the S&P
500 over the past 10
years
Sector Returns vs. S&P 500 2 years
120
100
80
Consumer
Discretionary
60
40
20
0
S&P 500
Business Analysis
Overview
• Mature Phase of Life Cycle
• Cyclical performance tied to overall economy
–
–
–
–
Currently in a recession that started in December 2007
Average length of recession is 11 months
13 months and counting
Consumer Discretionary will not see any significant gains
until economy recovers
Business Analysis
Five Forces Model
• Bargaining Power of Customers
– Relatively high
– Customer demand drives
the supply of discretionary
goods
• Bargaining Power of Suppliers
– Relatively low
– Many products are similar
– Depends on industry
• Threat of Substitutes
– High
– Many discretionary goods
have similar competing
brands
• Barriers to Entry
– Typically high
– Most industries are
competitive
– Many mature industries
• Competitive Rivalry
– High
– Many companies offering
similarly attractive goods
Stimulus Package Impact
Where are the funds going?
Stimulus Package Impact
Timeline
• Direct Consumer Benefits:
– Refundable tax credits
– $500 for most
individuals
– $1,000 for most
working couples
• Indirect Consumer Benefits:
– Job creation
– Health insurance
assistance
Key Economic Drivers
Overview
•
•
•
•
Unemployment
Disposable Personal Income
Federal Funds Rate
Consumer Confidence
Key Economic Drivers
Unemployment
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 18.01 StockVal®
• Strong negative
correlation with
unemployment
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
45
36
27
18
• R = -0.58
9
• Unemployment
rate at 7.6% as of
January 2009,
highest since 1992
-9
HI
LO
ME
43.1
-36.0
2.4
0
-18
-27
02-05-1999
02-06-2009
-36
TOTAL RETURN % YTY % CHANGE (SMOOTHED)
42
36
• Sector returns are
suffering as
unemployment
soars
30
HI
LO
ME
CU
24
18
12
49.0
-11.4
-4.0
49.0
6
0
-6
02-28-1999
01-31-2009
-12
UNEMPLOYMENT RATE,SA (%) YTY % CHANGE (SMOOTHED)
Key Economic Drivers
Disposable Personal Income
• DPI is the amount of
income left over
after taxes and
normal expenses
(discretionary)
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 18.01 StockVal®
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003 20042004 2005 20052006 2006
2007
2007
2008
2008
2009
2009
2010
2011
2010
45
36
27
18
HI
LO
ME
9
43.1
-36.0
2.4
0
• Positively correlated
to the sector
returns, not as
strong as expected
• Obama’s stimulus
package could have
an effect on DPI
-9
-18
-27
02-05-1999
02-06-2009
-36
TOTAL RETURN % YTY % CHANGE (SMOOTHED)
6
5
4
HI
LO
ME
CU
3
5.7
-0.1
2.9
0.9
2
1
0
02-28-1999
12-31-2008
-1
DISPOSABLE PERSONAL INCOME-REAL,SAAR ($BIL) YTY % CHANGE (SMOOTHED)
Key Economic Drivers
Federal Funds Rate
• Federal Funds rate
and sector return are
inversely related
• As federal funds rate
increases the sector
returns begin to
decrease (approx. 1
year time lag)
• R = -0.35
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 18.01 StockVal®
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
45
36
27
18
HI
LO
ME
9
43.1
-36.0
2.4
0
-9
-18
-27
02-05-1999
02-06-2009
-36
TOTAL RETURN % YTY % CHANGE (SMOOTHED)
6.90
• Recently the Fed has
slashed rates in
hopes to stimulate
the struggling
economy
4.10
2.50
HI
6.86
LO
0.08
ME
3.51
CU
0.23
GR -26.1%
1.50
0.90
0.50
0.30
0.20
02-05-1999
02-06-2009
0.10
0.07
FEDERAL FUNDS RATE (%)
Key Economic Drivers
Consumer Confidence Index
• Strong positive
correlation with
sector returns
• R = 0.71
• As consumer
confidence
increases, so does
sector returns
• Consumer
confidence is at a
historic low of 37.7
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 18.01 StockVal®
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
45
36
27
18
HI
LO
ME
9
43.1
-36.0
2.4
0
-9
-18
-27
02-05-1999
02-06-2009
-36
TOTAL RETURN % YTY % CHANGE (SMOOTHED)
40
30
20
HI
LO
ME
CU
10
0
-10
34.0
-55.4
-0.2
-54.5
-20
-30
-40
02-28-1999
01-31-2009
-50
CONSUMER CONFIDENCE INDEX YTY % CHANGE (SMOOTHED)
Financial Analysis
Sector Sales Overview
• Sector revenues
increased
steadily until
2006 when they
seemed to plateau
• Recent recession
has caused
revenues to
decrease and
trend downward
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25)
61
StockVal®
56
DATE 02-06-2009
REVENUES ($BIL)
52
48
48
44
44
41
41
37
37
35
35
32
32
29
29
27
27
25
25
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
6%
FYE
Dec
4%
2%
5
38
4
37
4
32
4
26
5
31
5
32
5
30
5
32
NPM
TAX
Financial Analysis
Selected Metrics vs. S&P 500
S&P CONSUMER DIS. SECTOR COMP ADJ (SP-25) Price 17.94
• Sector is down when
compared to S&P 500
on Revenues,
Margins, and Growth
rate, and at the
bottom of all three 3
over the past 10 years
• Total Return seems to
be trending upward
relative to the market,
however
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003 20042004 2005 20052006 20062007
2007
2008
StockVal®
2008
2009
2009
2010
2011
2010
24
HI
LO
ME
CU
12
0
-12
25.6
-12.5
2.4
-12.5
03-31-1999
12-31-2008
-24
REVENUES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd YTY % CHANGE (SMOOTHED)
40
20
0
-20
-40
NET PROFIT MARGIN ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED YTY % CHANGE (SMOOTHED)
12
6
0
-6
-12
GROWTH RATE ESTIMATE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) YTY % CHANGE (SMOOTHED)
24
12
0
-12
-24
TOTAL RETURN RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd YTY % CHANGE (SMOOTHED)
HI
LO
ME
CU
22.3
-23.3
-2.2
-23.3
03-31-1999
12-31-2008
HI
LO
ME
CU
6.6
-9.0
-0.4
-8.9
02-05-1999
02-09-2009
HI
LO
ME
CU
19.2
-21.4
-0.7
-2.0
02-05-1999
02-09-2009
Financial Analysis
S&P 500 Overview
• The S&P 500 has
seen revenue growth
slow down over the
past quarter, and
earnings decrease
significantly over
the past 5 quarters
and expected to
continue into the
future
Financial Analysis
Sector Overview
• The sector has
seen steep
declines in
revenue and
earnings, and
momentum shows
that they will only
get worse
Financial Analysis
Walt Disney
• Disney’s
Revenues
dropped in Q4
2008 after several
consecutive
quarters of growth
• Disney’s EPS
dropped in Q3
2008, and got
worse in Q4 2008
Financial Analysis
Home Depot
• Both revenues
and earnings have
decreased
significantly for
Home Depot over
the past 8
quarters, and
signs point to
further drops in
the coming
months
Financial Analysis
Cash Flow
• Cash flows
generally increase
year after year, but
sector spends a
fair amount on
investing and
financing activities
Valuation Analysis
Consumer Discretionary Stand-Alone
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 17.55 StockVal®
2004
• Currently below 5year mean for every
metric
2005
2006
2007
• Movement in 2009
is trending down
2009
HI
LO
ME
CU
40
32
24
40.4
16.5
19.6
17.4
01-30-2004
02-03-2009
16
• 5-year lows for
every metric
occurred in Q4
2008
2008
PRICE / YEAR-FORWARD EARNINGS
HI
LO
ME
CU
8
9.4
4.5
7.5
5.1
6
01-30-2004
02-03-2009
4
PRICE / EBITDA
HI
LO
ME
CU
1.0
0.8
0.6
1.06
0.43
0.96
0.48
01-30-2004
02-03-2009
0.4
PRICE / SALES
HI
LO
ME
CU
10
8
6
11.6
5.5
10.2
6.2
01-30-2004
02-03-2009
4
PRICE / CASH FLOW ADJUSTED
Valuation Analysis
Consumer Discretionary vs. S&P 500
• Price/Yr. Fwd.
Earnings is above
5-year mean, but
well below trading
levels in late
2007/early 2008
• Price/EBITDA,
Sales & Adj. Cash
Flow are near their
5-year averages
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 17.55 StockVal®
2004
2005
2006
2007
2008
2009
2010
HI
LO
ME
CU
2.0
1.6
1.2
2.18
1.04
1.22
1.30
01-30-2004
02-03-2009
0.8
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
1.0
0.9
1.10
0.82
0.96
0.91
01-30-2004
02-03-2009
0.8
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
0.65
0.69
0.55
0.63
0.61
0.60
• 2009 movement is
trending down
01-30-2004
02-03-2009
0.55
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
HI
LO
ME
CU
0.9
0.95
0.76
0.85
0.84
0.8
01-30-2004
02-03-2009
0.7
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Price/Yr. Fwd. Earnings
Current
5 Yr. Mean
S&P 500 Current
Cons. Disc. Current
22.4x
17.7x
14.8x
EDUCATION &
EDUCATION
SERVICES
HOTEL &
GAMING
RETAIL DISCOUNT
14.3x
FAST FOOD
RESTAURANTS
13.7x
RETAIL LUXURY
13.4x
APPLIANCES
12.7x
BUILDING
MATERIALS
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
12.5x
RECREATION
12.3x
CABLE &
SATELLITE
10.9x
10.9x
RESTAURANTS
RETAIL APPAREL
10.2x
MOVIES &
ENTERTAINMENT
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Price/Book Value
Current
13.0x
5 Yr. Mean
12.7x
S&P 500 Current
Cons. Disc. Current
2.4x
1.6x
FAST FOOD
RESTAURANTS
EDUCATION &
EDUCATION
SERVICES
RETAIL DISCOUNT
CABLE &
SATELLITE
1.4x
RETAIL LUXURY
1.3x
APPLIANCES
1.3x
RESTAURANTS
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
1.2x
MOVIES &
ENTERTAINMENT
1.1x
HOTEL &
GAMING
1.1x
RETAIL APPAREL
0.6x
0.5x
BUILDING
MATERIALS
RECREATION
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Price/Adj. Cash Flow
Current
5 Yr. Mean
30.1x
S&P 500 Current
Cons. Disc. Current
10.7x
9.5x
6.7x
5.6x
5.2x
5.1x
4.8x
4.4x
4.4x
4.4x
3.0x
EDUCATION &
EDUCATION
SERVICES
FAST FOOD
RESTAURANTS
RETAIL DISCOUNT
MOVIES &
ENTERTAINMENT
HOTEL &
GAMING
RESTAURANTS
BUILDING
MATERIALS
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
APPLIANCES
RETAIL LUXURY
CABLE &
SATELLITE
RETAIL APPAREL
RECREATION
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Enterprise Value/EBITDA
Current
37.2x
5 Yr. Mean
S&P 500 Current
Cons. Disc. Current
18.7x
8.5x
7.0x
MOVIES &
EDUCATION &
ENTERTAINMENT EDUCATION
SERVICES
FAST FOOD
RESTAURANTS
RETAIL DISCOUNT
6.7x
RESTAURANTS
6.7x
HOTEL &
GAMING
6.2x
BUILDING
MATERIALS
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
5.7x
RECREATION
5.4x
CABLE &
SATELLITE
4.3x
APPLIANCES
3.5x
3.1x
RETAIL LUXURY
RETAIL APPAREL
Valuation Analysis
Summary
• Multiples have contracted during 2008 and into 2009, as a result of the recession
• Education, Discount Retail and Fast Food Restaurants are trading higher than other
industries
– Education is trading at a premium to its 5-year mean on several metrics  Overvalued
• Historical References:
– 1990-1991 Recession: Consumer discretionary valuations picked up after
experiencing 50% of the recession
– 2001 Recession: Consumer discretionary valuations picked up after experiencing 75%
of the recession
• What inning are we in? Most valuations hit 5-year lows in 2008, we are at least
through 50% (we hope)
• Sector Valuation Forecast:
– Multiples will contract into 2nd half of 2009, retesting Q4 2008 lows
– Valuations will begin to trend upwards in late 2009 and early 2010
Recommendation
• Current SIM portfolio weighting is 9.67% compared to S&P’s weight of 8.19% (1.48%
overweight)
• We recommend reducing the weight in the SIM portfolio by 198 bps to 7.69% (or 50 bps
underweight)
• Sector is cheap, and rightfully so, as it has underperformed the S&P 500 for the past 10
years
– Relative to market, we continue to expect lower returns for sector
• Limited positives for future:
– Oil prices stay at current level
• Risks surround the recession:
– Unemployment rises
– Lack of available credit continues, etc.
• Mood is undoubtedly bleak
• Overweight: Apparel Retail, Hotel & Gaming  Unprecedented lows
• Underweight: Education & Education Services  Unprecedented high
What questions do you have?
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Price/EBITDA
Current
5 Yr. Mean
S&P 500 Current
25.0x
Cons. Disc. Current
19.8x
7.4x
6.4x
4.8x
MOVIES &
EDUCATION &
ENTERTAINMENT EDUCATION
SERVICES
RETAIL DISCOUNT
FAST FOOD
RESTAURANTS
RESTAURANTS
3.5x
3.4x
APPLIANCES
RETAIL APPAREL
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
2.9x
2.9x
2.9x
2.7x
2.6x
HOTEL &
GAMING
BUILDING
MATERIALS
CABLE &
SATELLITE
RETAIL LUXURY
RECREATION
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Price/Sales
Current
5.7x
5 Yr. Mean
S&P 500 Current
Cons. Disc. Current
1.1x
0.9x
0.8x
0.6x
EDUCATION &
EDUCATION
SERVICES
FAST FOOD
RESTAURANTS
CABLE &
SATELLITE
MOVIES &
ENTERTAINMENT
HOTEL &
GAMING
0.5x
RETAIL DISCOUNT
0.5x
RETAIL LUXURY
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
0.4x
0.4x
0.4x
0.4x
0.3x
RECREATION
RESTAURANTS
APPLIANCES
RETAIL APPAREL
BUILDING
MATERIALS
Valuation Analysis
Industry Valuations vs. Sector vs. S&P 500
Industry Enterprise Value/Sales
Current
5 Yr. Mean
5.3x
S&P 500 Current
Cons. Disc. Current
1.6x
1.4x
1.4x
1.2x
1.0x
0.6x
MOVIES &
EDUCATION &
ENTERTAINMENT EDUCATION
SERVICES
FAST FOOD
RESTAURANTS
RETAIL DISCOUNT
RESTAURANTS
HOTEL &
GAMING
BUILDING
MATERIALS
Note: Industry breakdown excludes Auto Manufacturers and Homebuilders due to non-meaningful multiples
0.6x
RECREATION
0.6x
CABLE &
SATELLITE
0.5x
APPLIANCES
0.4x
RETAIL LUXURY
0.3x
RETAIL APPAREL
Valuation Analysis
Growth Rate Comparison
S&P CONSUMER DIS. SECTOR COMP ADJ M-Wtd (SP-25) Price 17.13 StockVal®
2004
2005
2006
2007
2008
2009
14.8
Current Consensus
Growth Rate of
Consumer
Discretionary Sector:
14.4
14.1
13.8
13.5
10.40%
13.2
HI
LO
ME
CU
12.9
12.6
Current Consensus
Growth Rate of S&P
500:
14.67
10.40
13.62
10.40
12.3
12.0
11.7
11.4
10.15%
11.1
10.8
10.5
01-30-2004
02-04-2009
10.2
GROWTH RATE ESTIMATE
Sector Performance
Sector vs. S&P 500 – 15 Years
Industry Performance
Education & Education Services vs. S&P 500 – 10 Years
Industry Performance
Apparel Retail vs. S&P 500 – 10 Years
Industry Performance
Hotel/Gaming vs. S&P 500 – 10 Years