Stock Presentation Consumer Discretionary Sector November 17 th, 2009 Tiffany Arnett, Pinjalim Bora,...

Stock PresentationConsumer Discretionary Sector

November 17th, 2009

Tiffany Arnett, Pinjalim Bora,Sam Brickell

Sector Recommendation Recap

Currently, Consumer discretionary is underweight by 1.60%

Current Sector weights & Composition

Current Sector Composition

Security Unit Cost Market Value Target Upside potentialBest 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 Unit Cost Market Value Target Upside potentialBest 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 Market Value Target Upside/downsideBest Buy Co. 41.88 51.56 23%Coach Inc. 35.56 36.23 2%Comcast Corp. 15.43 21.93 42%GameStop Corp. 23.69 36.12 52%McDonalds Corp 63.58 65.9 4%DRI 32.1 39.81 24%

Security Market Value Target Upside/downsideBest Buy Co. 41.88 51.56 23%Coach Inc. 35.56 36.23 2%Comcast Corp. 15.43 21.93 42%GameStop Corp. 23.69 36.12 52%McDonalds Corp 63.58 65.9 4%DRI 32.1 39.81 24%

Stock Recommendation

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

COH Absolute High Low Median Current

P/Trailing E 37.9 6.8 25.6 18.5P/Forward E 30.0 7.9 21.6 16.8P/B 14.1 3.1 9.3 5.8P/S 8.2 1.5 6.3 3.5P/CF 36.5 5.8 22.9 15.4

MCD Absolute

High Low Median Current


MCD Relative to S&P 500


P/Trailing E 1.5 .82 1.1 0.97P/Forward E 1.4 0.81 1.1 0.93P/B 3.1 0.8 1.2 2.3P/S 3.7 1.2 1.8 3.4P/CF 1.8 0.9 1.3 1.3

COH Relative to S&P 500



Coach & McDonald’s Corp – Valuation Analysis

COH MCD

Relative to Industry

Median Current Median Current


Coach & McDonald’s Corp – Valuation Analysis

Both are fairly valued Very little upside Can use past profits from these to invest in better opportunities

Why Sell Coach & McDonald’s Corp

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.


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


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.


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 – 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”.

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)


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)


Sales (% of total) Q2 2009 Q2 2008New video game hardware 17% 21%New video game software 36% 39%Used video game products 32% 26%Other 14% 14%

Sales (% of total) Q2 2009 Q2 2008New video game hardware 17% 21%New video game software 36% 39%Used video game products 32% 26%Other 14% 14%

Gross Profit (% of total) Q2 2009 Q2 2008New video game hardware 7% 6%New video game software 21% 21%Used video game products 46% 50%Other 34% 33%

Gross Profit (% of total) Q2 2009 Q2 2008New video game hardware 7% 6%New video game software 21% 21%Used video game products 46% 50%Other 34% 33%

Vital Statistics 4Qs 10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03ROE 17% 19% 18% 13% 12% 11% 11% 19%D/A 0.41 0.50 0.55 0.62 0.58 0.38 0.33 0.62 Current Ratio 1.32 1.16 1.42 1.32 1.26 1.35 1.67 1.69 Gross Profit 27% 26% 26% 28% 28% 28% 28% 25%

Vital Statistics 4Qs 10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03ROE 17% 19% 18% 13% 12% 11% 11% 19%D/A 0.41 0.50 0.55 0.62 0.58 0.38 0.33 0.62 Current Ratio 1.32 1.16 1.42 1.32 1.26 1.35 1.67 1.69 Gross Profit 27% 26% 26% 28% 28% 28% 28% 25%

Median Current Median Current Median CurrentP/Trailing E 1.1 0.81 1.1 0.59 19.5 10.8P/Forward E 1 0.74 1 0.54 17.1 9.3P/B 0.7 0.6 1 0.7 2.3 1.6P/S 1.4 1.3 0.5 0.4 0.7 0.5P/CF 1.1 0.9 1.2 0.7 13.1 7.6

Relative to industry Retalive to S&P 500 Absolute Median Current Median Current Median Current

P/Trailing E 1.1 0.81 1.1 0.59 19.5 10.8P/Forward E 1 0.74 1 0.54 17.1 9.3P/B 0.7 0.6 1 0.7 2.3 1.6P/S 1.4 1.3 0.5 0.4 0.7 0.5P/CF 1.1 0.9 1.2 0.7 13.1 7.6

Relative to industry Retalive to S&P 500 Absolute


• 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


Current Price 23.59 FV High Low

Intrinsic value 36.12 51.50 32.76 Upside/downside 53% 118% 39%

ValuationCurrent Price 23.59

FV High LowIntrinsic value 36.12 51.50 32.76 Upside/downside 53% 118% 39%

Valuation

Currently, Consumer discretionary is underweight by 1.60%

Final Sector weights & Composition

Consumer Discretionary Sector Presentation

Questions & Discussion

McDonalds Corporation (Ticker: MCD)


Income Statement of Comcast Corporation

(in millions, except share data) FYE 2005 FYE 2006 FYE 2007 FYE 2008 FYE 2009 FYE 2010 FYE 2011 FYE 2012 Revenue 1,843$ 3,092$ 5,319$ 7,094$ 8,806$ 9,070$ 9,524$ 10,285$ Cost of Sales 1,334 2,220 3,847 5,280 6,536 Gross Profit 509 872 1,471 1,814 2,270 Selling, general and administrative 373 599 1,021 1,182 1,445 EBITDA 136 273 450 632 825 Depreciation & Amortization 37 66 110 130 145 Operating income (EBIT) 99 206 340 501 680 Interest Expense (Income) 0 25 73 48 38 54 57 62 Debt Extinguishment expense - - 6 13 2 Earnings before taxes (EBT) 99 181 261 441 639 662 743 926 Tax rate 38.4% 37.0% 37.8% 34.6% 37.2% 37.2% 37.2% 37.2% Income tax expense 38 67 99 153 238 246 276 344

Net Income 61 114 162 288 402 416 467 582

Weighted average shares outstanding Basic 109 116 150 158 163 163.2 163.2 163.2 Diluted 116 125 158 165 168 167.7 167.7 167.7

EPS 0.56 0.99 1.08 1.82 2.46 2.55 2.86 3.56 Basic 0.53 0.91 1.03 1.75 2.39 2.48 2.78 3.47 Diluted

Revenue (Consensus) 2.52 2.87

EPS (Consensus) 9,042 9,536

GameStop Corporation (Ticker: GME)Gamestop Corporation

Analyst: Pinjalim Bora Terminal Discount Rate = 12.0%11/13/2009 Terminal FCF Growth = 4.0%

Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Revenue 9,070 9,524 10,285 11,005 11,666 12,366 13,108 13,763 14,451 15,029 % Grow th 5.0% 8.0% 7.0% 6.0% 6.0% 6.0% 5.0% 5.0% 4.0%

EBT 662 743 926 935 817 742 786 826 867 601 EBT Margin 7.3% 7.8% 9.0% 8.5% 7.0% 6.0% 6.0% 6.0% 6.0% 4.0%

Interest 54 57 62 66 70 74 79 83 87 90 Interest % of Sales 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%

Taxes 246 276 344 373 330 304 322 338 355 257 Tax Rate 37.2% 37.2% 37.2% 37.2% 37.2% 37.2% 37.2% 37.2% 37.2% 37.2%

Net Income 470 524 643 629 557 513 543 570 599 434 % Grow th 11.4% 22.8% -2.2% -11.5% -7.9% 6.0% 5.0% 5.0% -27.5%

Add Depreciation/Amort 181 190 206 220 233 247 262 275 289 301 % of Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Plus/(minus) Changes WC 45 67 103 110 117 124 131 138 145 150 % of Sales 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 525 591 746 739 673 636 674 708 743 584 % Grow th 12.5% 26.4% -1.0% -8.9% -5.5% 6.0% 5.0% 5.0% -21.4%

NPV of Cash Flows 3,610 60%NPV of terminal value 2,446 40% Terminal Value 7,598 Projected Equity Value 6,056 100%Free Cash Flow Yield 13.27% Free Cash Yield 7.69%

Current P/E 8.4 8.4 7.5 Terminal P/E 17.5 Projected P/E 12.9 12.9 11.6 Current EV/EBITDA 39.1 39.1 35.4 Terminal EV/EBITDA 40.6 Projected EV/EBITDA 41.6 41.6 37.6

Shares Outstanding 167.7

Current Price 23.59$ Implied equity value/share 36.12$ Upside/(Downside) to DCF 53.2%


36.12$ 3.00% 3.50% 4.00% 4.50% 5.00%10.00% 43.05 44.67 46.57 48.81 51.50 10.50% 40.46 41.81 43.37 45.19 47.34 11.00% 38.18 39.32 40.62 42.11 43.86 11.50% 36.17 37.13 38.22 39.47 40.91 12.00% 34.38 35.20 36.12 37.17 38.37 12.50% 32.76 33.47 34.26 35.15 36.15

Terminal Growth Rate

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Stock Presentation Consumer Discretionary Sector November 17 th, 2009 Tiffany Arnett, Pinjalim Bora,...

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