Stock Presentation
Consumer Discretionary Sector
November 17th, 2009
Tiffany Arnett, Pinjalim Bora,
Sam Brickell
Sector Recommendation Recap
Short Term
Hold on to the
underweight position of
the sector in the SIM
portfolio. However,
reshuffle the underlying
composition.
Long Term
Depending on the positive
organic sales growth in the
3rd and the 4th quarter,
decide on increasing the
weight to that of S&P 500
Current Sector weights & Composition
Currently, Consumer discretionary is
underweight by 1.60%
Current Sector Composition
Security
Unit Cost Market Value Target Upside potential
Best Buy Co.
48.18
41.88 51.56
20%
Coach Inc.
28.27
35.56 36.23
2%
Comcast Corp.
16.44
15.43 21.93
40%
GameStop Corp.
25.32
23.69 36.12
49%
McDonalds Corp
54.64
63.58 65.9
4%
Security
Best Buy Co.
Coach Inc.
Comcast Corp.
GameStop Corp.
McDonalds Corp
DRI
Market Value
41.88
35.56
15.43
23.69
63.58
32.1
Target
51.56
36.23
21.93
36.12
65.9
39.81
Upside/downside
23%
2%
42%
52%
4%
24%
Stock Recommendation
Sell
Buy
Coach
DRI,
124 bps
MCD
GME,
128 bps
Coach & McDonald’s Corp
Business:
 McDonald’s: World’s largest fast-food restaurant chain
 Coach: High-end accessories retailer
Key Drivers:
 MCD: Global expansion, increasing menu variety and value to the customer
 COH: New designers to drive brand creativity
Risks:
 Both are in mature companies in competitive industries
Coach & McDonald’s Corp
Coach & McDonald’s Corp – Valuation Analysis
MCD
Absolute
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
21.6
19.5
5.3
3.8
15.8
14.2
13.6
2.5
1.8
9.6
17.2
16.1
3.7
2.6
12.6
17.6
16.0
5.2
3.8
13.5
COH Absolute High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
37.9
30.0
14.1
8.2
36.5
6.8
7.9
3.1
1.5
5.8
25.6
21.6
9.3
6.3
22.9
18.5
16.8
5.8
3.5
15.4
MCD Relative
to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
1.5
1.4
3.1
3.7
1.8
.82
0.81
0.8
1.2
0.9
1.1
1.1
1.2
1.8
1.3
0.97
0.93
2.3
3.4
1.3
COH Relative
to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
2.1
1.8
4.8
5.3
3.4
0.59
0.68
2.0
2.0
0.7
1.6
1.4
3.2
4.2
2.1
1.0
0.98
2.6
3.1
1.4
Coach & McDonald’s Corp – Valuation Analysis
COH
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
MCD
Median
Current
Median
Current
1.4
1.2
3.0
4.1
1.6
1.1
1.0
1.6
2.7
1.1
0.87
0.87
0.8
1.2
1.0
1.0
1.0
0.9
1.8
1.1
Why Sell Coach & McDonald’s Corp
McDonald's
COACH
40.0000
35.0000
30.0000
25.0000
20.0000
15.0000
10.0000
5.0000
0.0000
11/19/2007
70.0000
60.0000
50.0000
40.0000
30.0000
20.0000
10.0000
11/19/2008
0.0000
11/19/2007
11/19/2008
 Both are fairly valued
 Very little upside
 Can use past profits from these to invest in better opportunities
Darden Restaurants – Business Analysis
Business
 Owns restaurants in North America.
 Red Lobster (690 restaurants)
 Olive Garden (691 restaurants)
 Longhorn Steakhouse (321 restaurants)
 The Capital Grille (37 restaurants)
 Bahama Breeze (24 restaurants)
 Seasons 52 (8 restaurants)
 A small amount of franchising activity in other countries.
Darden Restaurants – Business Analysis
Key Drivers
 Same store sales (decreased 1.4%, compared to 5.6% for benchmark)
 New store openings (71 in 2009, 50-55 projected for 2010)
 Relative Success of expansion of newer concepts
- Bahama Breeze
- The Capital Grille
- Seasons 52
Darden Restaurants – Business Analysis
Risks
 Poor Sales (although not as dependent upon the state of the
economy as you might think)
- Poor sales could evolve out of many things though.
• Increased food costs (hedged somewhat by commodity contracts)
• Problems related to high level of indebtedness
- Ratio of Consolidated Earnings from Continuing Operations to
Fixed Charges is 4.2.
- If problems arise the solution is simply to slow down building of
new restaurants for a while.
Darden Restaurants – Financial Analysis
 ROE is currently 25.4%, which is above median of 19.9%.
 Operating Margin is currently 9.0%.
 Net Profit Margin is 5.5%.
 Current Ratio is 0.5.
 Percentage LT debt to total capital reached a high immediately after the
merger and has been decreasing at a steady rate ever since so they are being
effective at working off their debt from the merger.
Darden Restaurants – Valuation Analysis
o Price to Trailing Earnings is 11.4.
o Price to Forward Earning is 11.5.
o Price to Book is 2.7.
o Price to Cash Flow is 6.6.
 All of these are below the historical medians.
Darden Restaurants – Valuation Analysis
 Currently P/E is 11.4.
 Median for past 5 years is 17.0, and Median for past 15 years is 16.8.
 Currently below it’s historical median point relative to industry,
sector, and market.
 So ratios likely to expand going forward to return to usual levels.
Target Price
 $39.81, stock currently trades at about $32.10
- (24% discount)
Darden Restaurants – Valuation Analysis
Darden Restaurants – Recommendation
Buy 124 Basis Points of DRI.
Primary Catalysts
 Current P/E of 11.4
 Increase in sales likely to come from an improving economy and
improving consumer confidence.
 Less investor concern about their debt as they work to decrease it.
 Possible price floor from dividend yield (3.1% currently).
Primary Risks
 Possible liquidity problem due to the debt load.
 Change in consumer’s tastes.
GameStop Corporation (Ticker: GME)
Business

“World’s largest retailer of video game products and PC
entertainment software”

Sell new and used video game hardware, software and accessories
+ PC entertainment software and other merchandise.

As of August 1 2009, 6333 stores operating in US, Australia,
Canada and Europe

Also, operate www.gamestop.com as the ecommerce platform
and publish Game Informer - “industry’s largest multi-platform
video game magazine in the United States based on circulation”.
GameStop Corporation (Ticker: GME)
Key Drivers

Unique used game trading platform.

Change in sales mix towards used video game products; higher
margins.

Aggressive growth through acquisitions - Electronics
Boutique(2005), Micromania(2008)
GameStop Corporation (Ticker: GME)
Risks

Increasing gamer engagement by video game publishers.

Business model not sustainable in the long run.
•
High Correlation with economic indicators
• Consumer spending (R=0.92)
• Retail Sales (R=0.95)
• GDP ( R=0.72)
GameStop Corporation (Ticker: GME)
Vital Statistics
ROE
D/A
Current Ratio
Gross Profit
4Qs 10
17%
0.41
1.32
27%
Sales (% of total)
New video game hardware
New video game software
Used video game products
Other
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Jan-09
19%
0.50
1.16
26%
Q2 2009
17%
36%
32%
14%
Jan-08
18%
0.55
1.42
26%
Q2 2008
21%
39%
26%
14%
Jan-07
13%
0.62
1.32
28%
Jan-06
12%
0.58
1.26
28%
Jan-05
11%
0.38
1.35
28%
Gross Profit (% of total)
New video game hardware
New video game software
Used video game products
Other
Jan-04
11%
0.33
1.67
28%
Q2 2009
7%
21%
46%
34%
Relative to industry Retalive to S&P 500
Absolute
Median Current Median Current Median Current
1.1
0.81
1.1
0.59
19.5
10.8
1
0.74
1
0.54
17.1
9.3
0.7
0.6
1
0.7
2.3
1.6
1.4
1.3
0.5
0.4
0.7
0.5
1.1
0.9
1.2
0.7
13.1
7.6
Jan-03
19%
0.62
1.69
25%
Q2 2008
6%
21%
50%
33%
GameStop Corporation (Ticker: GME)
GameStop Corporation (Ticker: GME)
GameStop Corporation (Ticker: GME)
Valuation
Current Price
Intrinsic value
Upside/downside
FV
36.12
53%
23.59
High
51.50
118%
Low
32.76
39%
• Forecast slow but steady growth in profitability driven by growth in margins
over a 5 year period
• Also growth in Australia and Canada
“In a Q3 business update, GameStop (NYSE: GME) said it still sees Q3 EPS
of $0.27-$0.33…”. – www.streetInsider.com
GameStop Corporation (Ticker: GME)
Final Sector weights & Composition
Currently, Consumer discretionary is
underweight by 1.60%
Consumer Discretionary Sector
Presentation
Questions & Discussion
McDonalds Corporation (Ticker: MCD)
GameStop Corporation (Ticker: GME)
Income Statement of Comcast Corporation
(in millions, except share data)
Revenue
Cost of Sales
Gross Profit
Selling, general and administrative
EBITDA
Depreciation & Amortization
Operating income (EBIT)
Interest Expense (Income)
Debt Extinguishment expense
Earnings before taxes (EBT)
Tax rate
Income tax expense
Net Income
Weighted average shares outstanding
Basic
Diluted
EPS
Basic
Diluted
Revenue (Consensus)
EPS (Consensus)
FYE 2005 FYE 2006 FYE 2007 FYE 2008 FYE 2009 FYE 2010 FYE 2011 FYE 2012
$ 1,843 $ 3,092 $ 5,319 $ 7,094 $ 8,806 $ 9,070 $ 9,524 $ 10,285
6,536
5,280
3,847
2,220
1,334
2,270
1,814
1,471
872
509
1,445
1,182
1,021
599
373
825
632
450
273
136
145
130
110
66
37
680
501
340
206
99
62
57
54
38
48
73
25
0
2
13
6
926
743
662
639
441
261
181
99
37.2%
37.2%
37.2%
37.2%
34.6%
37.8%
37.0%
38.4%
344
276
246
238
153
99
67
38
582
467
416
402
288
162
114
61
109
116
116
125
150
158
158
165
163
168
163.2
167.7
163.2
167.7
163.2
167.7
0.56
0.53
0.99
0.91
1.08
1.03
1.82
1.75
2.46
2.39
2.55
2.48
2.86
2.78
3.56
3.47
2.52
2.87
9,042
9,536
GameStop Corporation (Ticker: GME)
Gamestop Corporation
Analyst: Pinjalim Bora
11/13/2009
Year
2010E
2011E
Revenue
9,070
9,524
% Grow th
EBT
EBT Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
Terminal Discount Rate =
Terminal FCF Growth =
12.0%
4.0%
2012E
2015E
10,285
2013E
11,005
2014E
11,666
12,366
2016E
13,108
2017E
13,763
2018E
14,451
2019E
15,029
5.0%
8.0%
7.0%
6.0%
6.0%
6.0%
5.0%
5.0%
4.0%
662
743
926
935
817
742
786
826
867
601
7.3%
7.8%
9.0%
8.5%
7.0%
6.0%
6.0%
6.0%
6.0%
4.0%
54
57
62
66
70
74
79
83
87
90
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
246
276
344
373
330
304
322
338
355
257
37.2%
37.2%
37.2%
37.2%
37.2%
37.2%
37.2%
37.2%
37.2%
37.2%
470
524
643
629
557
513
543
570
599
434
11.4%
22.8%
-2.2%
-11.5%
-7.9%
6.0%
5.0%
5.0%
-27.5%
181
190
206
220
233
247
262
275
289
301
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
45
67
103
110
117
124
131
138
145
150
0.5%
0.7%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Subtract Cap Ex
172
190
206
220
233
247
262
275
289
301
Capex % of sales
1.9%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
Free Cash Flow
525
% Grow th
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
% Grow th
591
746
739
673
636
674
708
743
584
12.5%
26.4%
-1.0%
-8.9%
-5.5%
6.0%
5.0%
5.0%
-21.4%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
3,610
2,446
6,056
13.27%
60%
40%
100%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
8.4
12.9
39.1
41.6
8.4
12.9
39.1
41.6
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
167.7
$ 23.59
$ 36.12
53.2%
7.5
11.6
35.4
37.6
Terminal Value
7,598
Free Cash Yield
7.69%
Terminal P/E
17.5
Terminal EV/EBITDA
40.6
Discount rate
GameStop Corporation (Ticker: GME)
$ 36.12
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
3.00%
43.05
40.46
38.18
36.17
34.38
32.76
Terminal
3.50%
44.67
41.81
39.32
37.13
35.20
33.47
Growth Rate
4.00%
4.50%
46.57
48.81
43.37
45.19
40.62
42.11
38.22
39.47
36.12
37.17
34.26
35.15
5.00%
51.50
47.34
43.86
40.91
38.37
36.15