Consumer Discretionary Sector

July 21, 2009

Joshua Anderson, Kunal Arora, Branyan Booth, Joseph Chandraraj

Sector Overview - S&P 500 Composition

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% 18.55 14.21 13.30 12.46 12.07 9.71 8.93 4.12 3.47 3.18

Cumulative 18.55 32.76 46.06 58.52 70.59 80.30 89.23 93.35 96.82 100.00

Energy Materials IndustrialsConsumer

DiscretionaryConsumer

StaplesHealth Care Financials

Information Technology

Telecommunication

Utilities

Information Technology Health Care Financials Consumer

Staples Energy Industrials Consumer Discretionary Utilities

Telecommunication

ServicesMaterials

% 18.55 14.21 13.30 12.46 12.07 9.71 8.93 4.12 3.47 3.18

Cumulative 18.55 32.76 46.06 58.52 70.59 80.30 89.23 93.35 96.82 100.00

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Sectors as % of S&P 500

Sector Overview – Top 10 Industries

$688 billion

2.84%

3.32%

3.53%

4.12%

4.25%

4.84%

9.39%

10.22%

13.42%

14.95%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%

Footwear

Hotels, Resorts & Cruise Lines

Apparel Retail

Internet Retail

Department Stores

General Merchandise Stores

Cable & Satellite

Home Improvement Retail

Restaurants

Movies & Entertainment

% of sector

Industries as % of Consumer Discretionary Sector

Sector Overview – Top 10 Companies

$688 billion

Top 10 Sector Companies by Market Cap

$23,660

$24,850

$27,830

$28,440

$28,660

$33,350

$38,230

$38,360

$41,610

$62,940

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000

DirecTV

Nike

Lowe's Cos

Target

Time Warner Inc

Amazon.com

Comcast

Home Depot

Walt Disney

McDonald's

Market Cap ($M)

Sector Overview – 5 Year Returns

S&P 500 Sector 5 Year Returns & 5 Yr Standard DeviationsPrice Change (%)

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5yr Rtn 6.90% 2.60% 1.30% -1.10% -1.40% -2.30% -2.70% -6.00% -6.50% -16.40%

5yr SD 23.30% 14.70% 10.70% 20.20% 21.50% 13.90% 17.10% 19.80% 19.80% 27.90%

5yr Rtn/5yr SD 0.30 0.18 0.12 -0.05 -0.07 -0.17 -0.16 -0.30 -0.33 -0.59

Energy UtilitiesConsumer

StaplesInformation Technology

Materials Health CareTelecom Services

Consumer Discretionary

Industrials Financials

Sector Overview - YTD & QTD Returns

S&P 500 Sector YTD & QTD ReturnsPrice Changes (%)

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YTD Return 19.70% 6.06% 2.57% -3.53% -3.77% -7.43% -10.02% -11.53% -12.45% -12.67%

QTD Return -3.53% -5.54% -4.61% -2.59% -0.35% -3.50% -7.01% -7.11% -6.13% -5.40%

Information Technology

MaterialsConsumer

DiscretionaryHealth Care

Consumer Staples

Utilities Energy FinancialsTelecommun

ication Services

Industrials

Business Analysis – Porter’s 5 Forces

Barriers to Entry High

-Mature-Well established companies with strong brand recognition-High capital requirement

Competition HighMust keep evolving to stay current and keep/gain market share

Substitution High Consumers can trade up, down, sideways

Supplier Power Varies-Depending upon industry-Many national & international sources for commodities & raw materials

Buyer Power High Multiple 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?

Personal Saving RateSAAR, %

Households Net Worth as a % of Disposable Personal Income%

0500959085807570Sources: Bureau of Economic Analysis, Federal Reserve Board

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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

High 4.59%Low 1.04%

Median 3.90%Current 1.04%

Financial Analysis – Net Profit Margin

Net Profit Margin Relative to S&P

500

High 0.6%

Low 0.2%

Median 0.5%

Current 0.2%

Financial Analysis – Top Industries Net Profit Margin

Financial Analysis – Sector ROE

Absolute ROEHigh 19.7%Low 6.6%

Median 11.9%Current 6.6%

Relative ROEHigh 1.0%Low 0.5%

Median 0.7%Current 0.5%

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

Trailing P/E Forward P/E Trailing P/E Forward P/ECONSUMER ELECTRONICS 132.7 NA HOUSEHOLD APPLIANCES 8.6 14.4RETAIL-INTERNET 37.5 37.5 RETAIL-APPAREL 13.7 14CASINOS & GAMING 14.5 28.5 DISTRIBUTORS 12.2 13.9TIRES & RUBBER NA 24.8 MOTORCYCLE MFRS 6.2 13.6AUTO PARTS & EQUIP 16.1 22.8 GENERAL MERCHANDISE 14.2 13.2HOME FURNISHINGS 22.5 21.3 APPAREL & ACCESSORY 11.6 13.1SPECIALTY STORES 19.2 19 PUBLISHING 8.2 13.1HOMEFURNISHING RETL 19.0 18.8 CABLE & SATELLITE 14.7 12.8DEPARTMENT STORES 15.2 18.6 LEISURE PRODUCTS 14.1 12.8RETAIL-HOME IMPROVE 14.5 16.2 ADVERTISING 2.9 12.5AUTOMOTIVE RETAIL 16.5 15.8 HOUSEWARES & SPECS 9.8 12.1HOTEL/RESORT/CRUISE 9.5 15.6 MOVIES & ENTMT 11.1 12EDUCATION SERVICES 19.0 15 BROADCASTING 7.3 10.9RESTAURANTS 16.3 15 RETAIL-COMP/ELECTRN 10.7 10.7FOOTWEAR 13.7 14.7 SPECIAL CONSM SERV 11.8 10.1

17.5

Recommendation

View Reason

Business Slightly Positive Mature, Low growth but global expansion can open new opportunities

Economic Negative Disposable Income Consumer SpendingSaving Rate Unemployment

Financial Negative Revenue growthMargins

Valuation Negative Over valued high P/E ratios

“S&P recommends underweighting the S&P 500 Consumer Discretionary sector…” Standards & Poor’s 7/12/2009

Hold current underweight position

of 146bps

Hold current underweight position of 146bps, why?

Questions???