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Consumer Staples (SP-30) Ryan Chestnut Brian Cully Sabina Curovac Orla Costello Slide 2 Consumer Staples Agenda Sector Overview Business Analysis Economic Forecasts Financial Analysis Sector Valuation Recommendation Slide 3 Consumer Staples Market Capitalization Consumer Staples Sector = $924,124 million S&P 500 = $7,192,455 million Consumer Staples accounts for 12.85% of the S&P 500 Consumer Staples accounts for 14.22% of the assets in SIM Portfolio. DescGICSNCMKTCAPQTDYTD S&P 500 5007192455-8.57% Energy10391014055-3.16% Materials1529218994-7.24% Industrials2059763552-12.66% Consumer Discretionary2580589017-10.64% Consumer Staples3040924124-7.67% Health Care35541146392-1.30% Financials4081770678-26.55% Information Technology45751166403-3.08% Telecommunications Services509267760-11.06% Utilities5534331480-0.83% Source: standardandpoors.com Slide 4 Consumer Staples Consumer Staples vs. S&P 500 YTD Slide 5 Consumer Staples Industries Within Consumer Staples Sector Source: standardandpoors.com Slide 6 Consumer Staples Companies With Consumer Staples Sector Source: standardandpoors.com Slide 7 Consumer Staples Sector Overview In theory, demand for consumer staples is steady or increases during economic downturn Defensive sector of mature companies Historical correlation with S&P is 0.64 Stock price stability in downturns, but slow and steady growth in upswings Low price elasticity of demand Importance of differentiation Slide 8 Consumer Staples Industry Characteristics High Barriers to Entry Very high capital requirements Mature companies Strong brands put downward pressure on margins Threat of substitution International presence Remaining growth opportunities Slide 9 Consumer Staples Business Opportunities Reduce (commodity) costs Hedge costs, merge or partner, create economies of scale Reduce finished good prices to wholesalers Price differentiation important in slowdowns Differentiate products Superior products can control prices Importance of branding Significant substitution threat Slide 10 Consumer Staples External Factors Regulatory and legal issues Foreign exchange prices Implications of weakness in the dollar Aging domestic population, but global growth Commodity prices State of the economy Environmental Factors Slide 11 Consumer Staples Economic Analysis Main Economic Indicators Slide 12 Consumer Staples Economic Analysis (cont.) Source: Bloomberg Composite Slide 13 Consumer Staples Economic Analysis (cont.) Source: Bloomberg Composite Slide 14 Consumer Staples Economic Analysis (cont.) Source: Bespoke Investment Group Slide 15 Consumer Staples Foreign Currency Exchange Slide 16 Consumer Staples Foreign Currency Exchange (cont.) Consumer Staples Slide 17 Sector Sales Analysis Sales Growth Current growth below 10-year average Current growth close to low of 5.8% experienced in early 2002 Downward trend since end of 2006, continues out to 12/31/2008 Largest Companies in Sector Proctor & Gamble Currently at 5.5%, below 10 yr. average of 8.1% Downward trend since mid-2006 Wal-Mart Currently at 9%, below 10-yr. average of 11.7% Downward trend since beginning of 2007, with low (8.6%) occurring 1/31/08 Slide 18 Consumer Staples Sector Earnings Analysis Earnings Growth Very low relative to 10-year average EPS growth currently at 10 year low Large drop in EPS growth since 9/30/2007 Largest Companies in Sector Proctor & Gamble Current growth at 12.1%, above 10-yr. average of 11.1% Growth falling since mid-2008; Lowest EPS growth (-1%) occurred in 2001 Wal-Mart Current growth at 11.4%, just under 10-yr. average of 12.5% EPS growth from mid-2007 to mid-2008, slight drop since Slide 19 Consumer Staples Sector Sales and Earnings Growth Slide 20 Consumer Staples Index Sales and Earnings Growth Sales Growth Current growth right below 10-year average 7.6% compared to mean of 8% Downward trend since 9/30/2008 Earnings Growth Current EPS growth negative, extremely low -16.7% compared to mean of 13.4% Currently near 10-year low of -17.3%, which occurred in the beginning of 2002 EPS growth plummeting since end of 2006 Slide 21 Consumer Staples Index Sales and Earnings Growth Consumer Staples Slide 22 Comparison of Sales and Earnings Slide 23 Consumer Staples Margin Growth Analysis YTY net profit margin growth for both at 10-year low Consumer Staples: -5% S&P 500: -22.8% Downward trend in Consumer Staples starting in early 2006 S&P 500 plummeting roughly one year later Slide 24 Consumer Staples Comparative Margin Growth Slide 25 Consumer Staples Consumer Staples has seen relatively constant margins but decreasing ROE from 2000-2007 S&P 500 has more volatile margins throughout the period and increasing ROE EBITDA range from 16.55% to 23.5%; EBIT range from 10.86% to 17.98% Comparative Income Statement Ratios Slide 26 Consumer Staples Free Cash Flow & Dividends Free cash flow increasing from 2004-2007 Dividends increasing Free cash flow after dividends decreasing most years Dividend yield increasing, currently at 10-year high Slide 27 Consumer Staples Sector Valuation Consumer Staples Slide 28 Sector Valuation (cont.) Consumer Staples Slide 29 Sector Valuation (cont.) Consumer Staples Historical Correlation with the S&P 500 is 0.64 Slide 30 Consumer Staples Sector Valuation (cont.) Consumer Staples Slide 31 Recommendation Keep current allocation, sector overweight relative to the S&P 500 by 175 basis points Possibility of another market downturn followed by low volatility around the 8000 point mark Higher return for the sector vs. the market in the next 3-4 months We see the market having flat returns, and the consumer stables sector outperforming by 200-300 basis points Attractive industries: Tobacco, Brewers Consumer Staples Slide 32 References Bloomberg Hoovers Investopedia Standard &Poors (www.standardandpoors.com) StockVal Value Line Yahoo Finance (finance. yahoo.com) Bespoke Investment Group ( http://bespokeinvest.com) Slide 33 Consumer Staples Commodity Prices Supplemental Information Consumer Staples Slide 34 Supplemental Information Consumer Staples Slide 35 Future Earnings Estimates Consumer Staples Supplemental Information EPS200920102011 Mean2.842.983.28 High2.973.193.49 Low2.752.793.09 Number of Est13146 Number Up111 Number Down783