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 Sector Overview Top 10 Industries $688 billion % of sector Industries as % of Consumer Discretionary Sector Sector Overview Top 10 Companies $688 billion Sector Overview 5 Year Returns Sector Overview - YTD & QTD Returns Business Analysis Porters 5 Forces Barriers to EntryHigh -Mature -Well established companies with strong brand recognition -High capital requirement CompetitionHigh Must keep evolving to stay current and keep/gain market share SubstitutionHighConsumers can trade up, down, sideways Supplier PowerVaries -Depending upon industry -Many national & international sources for commodities & raw materials Buyer PowerHighMultiple 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 Saving Rate = Disposable Income Consumer Spending Disposable Income Consumer Spending Saving Rate Saving Rate currently at 6.9% (15 year high) and projected to hit 10% Is there a change in consumer behavior with home value going down, consumer is more cognizant of saving? 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 High4.59% Low1.04% Median3.90% Current1.04% Financial Analysis Net Profit Margin Net Profit Margin Relative to S&P 500 High0.6% Low0.2% Median0.5% Current0.2% Financial Analysis Top Industries Net Profit Margin Financial Analysis Sector ROE Absolute ROE High19.7% Low6.6% Median11.9% Current6.6% Relative ROE High1.0% Low0.5% Median0.7% Current0.5% Financial Analysis - Major Companies Revenue Growth Valuation Analysis - Sector P/CF Valuation Analysis - Sector P/S Valuation Analysis - Sector forward P/E Valuation Analysis - Industry 17.5 Recommendation ViewReason BusinessSlightly PositiveMature, Low growth but global expansion can open new opportunities EconomicNegativeDisposable Income Consumer Spending Saving Rate Unemployment FinancialNegativeRevenue growth Margins ValuationNegativeOver valued high P/E ratios S&P recommends underweighting the S&P 500 Consumer Discretionary sector Standards & Poors 7/12/2009 Hold current underweight position of 146bps Hold current underweight position of 146bps, why? Questions???