Consumer Discretionary Sector
Stocks
February 23rd, 2010
Sekhar Achanta,Tongyu Zhou
S & P 500 Sector Weights (as of 2/21/2010)
Sector
Current Index
Weight
Current SIM
Weight
Consumer Staples
11.60%
11.66%
Energy
11.33%
11.90%
Financials
15.70%
11.37%
Health Care
12.65%
14.30%
Industrials
10.26%
12.36%
Information Technology
18.84%
19.04%
Materials
3.49%
3.46%
Telecommunication Services
2.84%
3.27%
Utilities
3.58%
2.94%
Sector Performance YTD and QTD (2/21/2010)
Sector Recommendation
• Buy 200 basis points of Consumer Discretionary
stocks.
• Current holdings are Best Buy, GameStop and
Comcast.
• Buy 100 basis points of Target Corporation
(TGT).
• Buy 50 basis points of Ross Stores (ROST).
• Buy 50 basis points of Royal Caribbean Cruises
(RCL).
Target Stores
• Target is an upscale discounter
• Provides high-quality, on-trend merchandise at attractive prices in
clean, spacious and guest-friendly stores.
• In addition, Target operates an online business, Target.com.
• 1740 Stores in 49 States (including 251 Super Target locations)
Target Earnings Growth Rates
Target EPS Growth Rates
Target Margins
Target Corporation Valuation Analysis
Relative to Industry High
Low
Median
Current
P/Trailing E
1.2
.58
.96
.95
P/Forward E
1.0
.56
.99
1.0
P/B
1.2
.6
1.0
1.0
P/S
1.2
.7
1.0
1.0
P/CF
1.3
.5
1.1
1.0
Relative to S&P 500 High
P/Trailing E
1.5
Low
.63
Median
1.1
Current
.95
P/Forward E
1.3
.63
1.0
1.0
P/B
1.7
.7
1.2
1.1
P/S
.7
.3
.5
.5
P/CF
1.5
.6
1.1
.9
Target Corporation Valuation Analysis
High
Low Median
27.8
11.9
17.8
P/S
1.1
.3
.8
.6
0.8
120.97
$96.77
P/B
5.8
1.6
3.5
2.4
3.5
21.13
$73.95
10.87
3.57
8.17
6.33
8.17
8.01
$65.44
17.0
5.5
12.6
9.3
12.6
5.45
$68.67
Absolute
Valuation
P/Forward E
P/EBITDA
P/CF
Current Target
Target E,S,B Target Price
Multiple /Share
14.6
20
$3.10
$62.00
Current Share Price : $50.73
Implied equity value/share : $66.92
Upside/(Downside) to DCF : 32.2%
Terminal Discount Rate:11.0%
Terminal FCF Growth: 5.0%
Ross Stores - Profile
•
•
•
•
Ross Stores, Fortune 500 company.
Second largest off-price retailer.
Revenues of $6.5 billion.
Ross Operates
– 904 Ross Stores and 52 DD’s discounts stores
– In 27 states and Guam
• Offers name brand and designer apparel, accessories,
footwear and home fashions at 20-60% discounts.
Ross Stores - Same Store Sales and Inventory
Measure
Period
% Change
$ Change
Sales
Four weeks ended
January 30, 2010
13% increase
$46 million
Sales
13 weeks ended
January 30, 2010
14% increase
$245 million
Sales
52 weeks ended
January 30, 2010
11% increase
$700 million
Inventory
13 weeks ended
January 30, 2010
11% decrease
Sales
52 weeks ended
January 30, 2010
1% decrease
Ross Stores - Stock Repurchase and Dividends
• Stock Repurchase
– Two-year 750 million dollar stock repurchase program.
– 13 percent of total market value.
• During fiscal 2009, Ross Stores repurchased
– 7.4 million shares
– 300 million dollars.
• Dividend
– Increased by 45 percent
– Current Dividend is 16 cents per share.
– Current dividend yield is 1.4%.
• Institutions own 97% of the shares.
• Debt to Total Capital is 12%.
Ross Stores - Forecasts
Measure
Period
Sales
Year over Year
Same Store Sales Year over Year
Diluted Shares
Year Over Year
% Change
5% increase
2% increase
5% decrease
Ross Stores Revenue Growth Rates
Ross Stores Earnings Growth Rates
Ross Stores Margins
Ross Stores Valuation Analysis
Relative to Industry High
Low
Median
Current
P/Trailing E
1.5
.31
.96
.87
P/Forward E
1.3
.31
.98
.88
P/B
2.1
.2
1.4
1.3
P/S
1.7
.3
1.1
1.1
P/CF
1.8
.3
1.3
1.1
Relative to S&P 500 High
P/Trailing E
1.4
Low
.28
Median
.96
Current
.80
P/Forward E
1.3
.27
.96
.83
P/B
3.1
1
1.6
1.2
P/S
1.0
.2
.6
.7
P/CF
1.6
.4
1.2
1.0
Ross Stores Valuation Analysis
Absolute
Valuation
High Low
P/Forward E
21.0
7.0
P/S
1.4
.5
.9
.8
.9
$74.09
$66.68
P/B
6.7
2.4
4.9
4.3
4.9
10.95
$53.65
11.59 3.92
8.90
7.51
8.9
6.27
$55.80
12.1
10.7
12.1
4.40
$53.24
P/EBITDA
P/CF
17.2
5.7
Median Current Target
Target
Target Price
Multiple E,S,B
/Share
15.2
12.1
15.2
$3.89
$59.12
Current Share Price : $47.1
Implied equity value/share : $87.75
Upside/(Downside) to DCF : 86.1%
Terminal Discount Rate = 12.0%
Terminal FCF Growth = 5.0%
Royal Caribbean Cruise – Profile
• Royal Caribbean Cruises is a cruise company operating 38 ships.
• The Company owns five cruise brands
– Royal Caribbean International,
– Celebrity Cruises,
– Pullmantur,
– Azamara Cruises,
– CDF Croisieres de France.
• Market Cap
$5.63 billion.
• Revenues
$6.5 billion.
• Net Income
$573 million
• Operating Margin
5.67%
• LT Debt to Total Capital
51%
Royal Caribbean Cruise - Revenues
Royal Caribbean Cruise - Earnings
Royal Caribbean Cruise - Margins
Royal Caribbean Cruise Valuation Analysis
Relative to Industry
High
Low
Median
Current
P/Trailing E
1.9
.36
.69
1.8
P/Forward E
1.7
.46
.73
.67
P/B
.8
.2
.5
.3
P/S
1.2
.5
.9
.9
P/CF
1.0
.2
.6
.7
High
1.8
Low
.2
Median
.83
Current
1.7
1.5
.33
.87
.99
P/B
.8
.1
.4
.3
P/S
1.7
.3
1.0
.8
P/CF
1.3
.2
.7
.7
Relative to S&P 500
P/Trailing E
P/Forward E
Royal Caribbean Cruise Valuation Analysis
Absolute
Valuation
P/Forward E
High
Low Median
Current Target
Target E,S,B Target Price
Multiple /Share
14.5
15.0
1.81
$27.15
37.7
4.0
14.2
P/S
3.1
.2
1.5
1.0
1.5
38.14
$57.21
P/B
2.9
.2
1.3
.8
1.3
32.87
$42.73
12.12
.9
5.63
5.4
5.63
4.87
$27.47
15.1
1.2
7.7
7.6
8
3.46
$27.68
P/EBITDA
P/CF
Current Share Price : $26.3
Implied equity value/share : $35.37
Upside/(Downside) to DCF : 34.5%
Terminal Discount Rate:12.0%
Terminal FCF Growth: 5.0%
Questions