Xiaotao An Christian Bonner Shuyu Chen Micheal Deffet
Transcript of Xiaotao An Christian Bonner Shuyu Chen Micheal Deffet
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Xiaotao An
Christian Bonner
Shuyu Chen
Micheal Deffet
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Agenda Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
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Sector Overview
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Definition The Consumer Discretionary sector is made of
companies producing products and services that are not necessities:
Hotels, Restaurants & Leisure
Media
Consumer Durable & Apparel
Automobiles & Components
Retailing
The degree of spending the amount of consumption depends on individuals.
Very cyclical sector, which perform better in boom
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Largest Companies Company Name Exchange: Ticker Market Cap (mm)
Amazon.com Inc. NasdaqGS:AMZN 164,563.83
The Walt Disney Company
NYSE:DIS 140,532.65
Comcast Corporation NasdaqGS:CMCS.A 131,450.22
The Home Depot, Inc. NYSE:HD 114,038.22
McDonald's Corp. NYSE:MCD 95,642.30
Twenty-First Century Fox, Inc.
NasdaqGS:FOXA 74,966.57
priceline.com Incorporated
NasdaqGS:PCLN 70,573.68
Nike, Inc. NYSE:NKE 69,165.22
Ford Motor Co. NYSE:F 59,748.91
Time Warner Inc. NYSE:TWX 57,978.10
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Sector Breakdown S&P 500
12.29%
SIM
13.24%
Overweight:0.95%
12%
10%
10%
16%
14%
11%
19%
3%
2%
3%
ConsumerDiscretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
InformationTechnology
Materials
TelecommunicationServices
Utilities
13%
10%
9%
16%
14%
9%
20%
3% 1%
3%
2% 0%
ConsumerDiscretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
InformationTechnology
Materials
TelecommunicationServices
Utilities
Cash
Dividend Receivables
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Sector Performance
YTD: S&P 500 outperformed by 1%
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Sector Performance 1 Year: Con Dis outperformed by 8.42%
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Sector Performance
5 Year: Con Dis outperformed by 9.89%
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Sector Performance Annualized Returns Annualized Risk (Std Dev)
1 Year 3 Year 5 Year 1 Year 3 Year 5 Year
S&P 500 Con Dis
33.79 % 21.35 % 32.89 % 13.12 % 17.68 % 20.44 %
S&P 500 25.37 % 14.35 % 23.00 % 11.30 % 16.67 % 18.31 %
Index Level 1 Day MTD QTD YTD
S&P 500 Con Dis
680.88 0.34 % 6.24 % -0.04 % -0.04 %
S&P 500 3,347.38 0.28 % 4.57 % 0.96 % 0.96 %
The Correlation between S&P 500 and Con Dis is 0.945.
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Business Analysis
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Sector Performance
Overperforms: Early
Underperforms: Late & Recession
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Life Cycle & Business Cycle
The phase of this life cycle is mature in which the performance of the
sector is very dependent upon the amount of disposable income in the economy.
When the economy booms this sector booms with it as the consumer is more likely to spend.
The consumer discretionary sector is currently in the mid-cyclical phase. This phase is typically the longest phase of the business cycle.
It is characterized by a positive but moderate rate of growth than that experienced during the early-cycle phase.
Economic activity is inclusive, but not limited to momentum, strong credit growth, and the profitability is very healthy. We see growth in both inventories and sales.
The performance of this sector is also highly correlated with the economic performance of the United States and foreign countries.
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Influencing Factors
Outstanding debt
Unemployment Rates
Mortgage Market
Consumer Price Index
Consumer spending
Consumer confidence
Disposable Income
Consumer default rates
Financial obligations
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Porter’s Five Forces Barriers to Entry - Medium/High • Serious advantages for incumbents, leverage established networks for better deals • Huge start up costs in some industries, ex. automobile industry • New entrants can compete on smaller scale and in niche markets
Buyer Power - Very strong • All industries must compete with each other and leisure activities.
Supplier Power - Weak/Medium • Weak for industries that outsource overseas, ex. Apparel industry • Medium for industries with a strong union presence, ex. Automobile and Movie/TV • Manufacturing industries may have to deal with rising material costs
Substitutes – High • Many alternatives with like products. • One industry can be substituted for another
Competition – Medium/High • High for retailer, restaurant, and apparel industries. • Medium competition in industries dominated by fewer firms, ex. Automobile
industry
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Economic Analysis
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UM Consumer Confidence Sentiment
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US Disposable Personal Income
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Nominal GDP
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US Employment
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Regression Result SUMMARY OUTPUT
Regression Statistics
Multiple R 0.941953012
R Square 0.887275476
Adjusted R Square 0.866780108
Standard Error 28.64333922
Observations 40
ANOVA
df SS MS F Significance F
Regression 6 213108.76 35518.12666 43.29151246 2.95055E-14
Residual 33 27074.5491 820.4408819
Total 39 240183.3091
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -1024.964545 124.4594833 -8.235327017 1.64646E-09 -1278.179268 -771.7498224 -1278.179268 -771.7498224
CPI 0.126034343 5.361002318 0.023509474 0.981385467 -10.78100688 11.03307557 -10.78100688 11.03307557
Unemployment Rate -1.742408122 4.332814007 -0.402142377 0.690172194 -10.5575845 7.072768256 -10.5575845 7.072768256
UM consumer Confidence 4.7533154 0.826000099 5.754618441 1.98774E-06 3.072805563 6.433825236 3.072805563 6.433825236
personal Income 2.960431974 2.648987366 1.117571194 0.271820639 -2.428973346 8.349837294 -2.428973346 8.349837294
Nomimal GDP 0.064062608 0.004523137 14.16331315 1.40004E-15 0.054860216 0.073265 0.054860216 0.073265
Real GDP 1.738530904 2.643682888 0.657617036 0.515345472 -3.640082372 7.11714418 -3.640082372 7.11714418
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Revenue per share
2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
$286.83 $310.05 $330.24 $324.01 $264.51 $271.25 $298.58 $316.21 $369.64 $373.32
0
100
200
300
400
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Net profit margin (absolute)
2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
2.25% 3.89% 1.04% -3.77% 4.14% 6.21% 7.68% 6.52% 7.02% 6.96%
-6.00%
-3.00%
0.00%
3.00%
6.00%
9.00%
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Net profit margin (relative to S&P)
2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
0.27 0.41 0.15 -1.56 0.66 0.73 0.86 0.79 0.73 0.76
-2
-1.5
-1
-0.5
0
0.5
1
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Earnings per Share (EPS) 2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
11.78 14.67 14.74 4.04 12.94 17.3 23.27 21.28 25.28 25.3
0
5
10
15
20
25
30
Series1
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Return on Equity (ROE) 2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
5.98% 10.94% 3.1% -13.86% 11.95% 17.35% 22.40% 19.67% 21.93% 21.87%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
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Industry- Net Profit Margin Hotel, restaurants,
& leisure
media Retailing Automobiles &
components
Consumer durable
& apparel
10.66% 6.88% 4.35% 0.19% 5.39%
0
0.02
0.04
0.06
0.08
0.1
0.12
�Hotel,restaurants, &
leisure
�mediaRetailing
�Automobiles &components
�Consumerdurable &
apparel
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Industry- ROE Hotel, restaurants,
& leisure
media Retailing Automobiles &
components
Consumer durable
& apparel
22.25% 10.03% 17.96% -18.60% 13.00%
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
�Hotel,restaurants, &
leisure
�mediaRetailing
�Automobiles &components
�Consumerdurable &
apparel
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Industry- Revenue per share Hotel, restaurants,
& leisure
media Retailing Automobiles &
components
Consumer durable
& apparel
$224.00 $143.44 $605.13 $412.36 $162.73
0
200
400
600
800
�Hotel,restaurants, &
leisure
�mediaRetailing
�Automobiles& components
�Consumerdurable &
apparel
0
200
400
600
800
hotel,restaurants,and leisure
media
retailing
Automobiles&components
Consumerdurable &apparel
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Industry- Earnings per share Hotel, restaurants,
& leisure
media Retailing Automobiles &
components
Consumer durable
& apparel
$25.96 $13.87 $28.05 $1.68 $10.48
0
5
10
15
20
25
30
�Hotel,restaurants, &
leisure
�mediaRetailing
�Automobiles& components
�Consumerdurable &
apparel -60
-40
-20
0
20
40
60
hotel,restaurants,and leisure
media
retailing
Automobiles& components
Consumerdurable &apparel
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Sector- Free cash flow 2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
$5.14m $6.62m $15.43m $5.27m $8.35m $19.4m $20.45m $20.84m $23.12m $23.22m
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012 2013 Current
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Valuation Analysis
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Multiple Valuation (10 years) Absolute Basis High Low Median Current
P/E 41.91 13.26 18.17 20.83
P/S 1.43 0.52 0.98 1.41
P/B 4.37 2.30 2.60 4.34
P/CF 14.62 8.16 10.31 12.90
Relative to S&P500 High Low Median Current
P/E 2.71 1.00 1.22 1.21
P/S 0.89 0.51 0.77 0.84
P/B 1.69 0.84 1.26 1.66
P/CF 1.44 0.52 1.27 1.43
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Sector relative to S&P 500 P/E P/S
0
10
20
30
40
50
sector
s&P
0
0.5
1
1.5
2
sector
s&P
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Sector relative to S&P 500 P/B P/CF
0
1
2
3
4
5
sector
s&P
0
5
10
15
20
sector
s&P
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Industry multiples Industry PE PS PB PCF
Hotel, restaurants &
leisure (relative to
S&P)
1.17 1.62 2.38 1.46
Mc-Donald’s(relative
to sector)
0.82 2.40 1.36 1.03
Starbucks(relative to
sector)
0.73 2.47 2.52 1.28
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Hotel, restaurants & leisure (relative to S&P)
0
1
2
3
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
Cu
rren
t
P/S
Hotel,restaurants, &leisure
S&P
0
2
4
6
8
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
Cu
rren
t
P/B
Hotel,restaurants, &leisure
S&P
0
5
10
15
20
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
Cu
rren
t
P/CF
Hotel,restaurants, &leisure
S&P
0
5
10
15
20
25
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
Cu
rren
t
P/E
Hotel,restaurants, &leisure
S&P
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Industry multiples
Industry PE PS PB PCF
Retailing(relative to
S&P)
1.53 0.78 2.45 1.73
Amazon(relative to
sector)
30.77 1.57 3.93 2.35
The Home
Depot(relative to
sector)
1.05 1.05 2.12 1.17
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Retailing (relative to S&P)
0
5
10
15
20
25
30
P/E
Retailing
S&P
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
P/S
Retailing
S&P
0
5
10
15
20
P/B
Retailing S&P
0
5
10
15
20
P/CF
Retailing
S&P
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Industry multiples
Industry PE PS PB PCF
Consumer durable&
apparel(relative to
S&P)
1.20 1.10 1.47 2.38
Nike(relative to
sector)
1.28 1.88 1.41 1.99
VF(relative to sector) 1.05 1.59 0.98 1.34
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Consumer durable& apparel(relative to S&P)
0
10
20
30
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
Cu
rren
t
P/CF
Consumerdurable & apparel
S&P
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
P/B
Consumer durable& apparel
S&P
0
0.5
1
1.5
2
P/S
Consumerdurable &apparel
S&P
0
5
10
15
20
25
30
P/E
Consumer durable& apparel
S&P
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Industry multiples
Industry PE PS PB PCF
Automobile &
components (relative
to S&P)
0.74 0.30 0.92 0.74
Ford(relative to
sector)
0.41 0.29 0.52 0.39
GM(relative to
sector)
0.73 0.27 0.32 0.31
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Automobile & components (relative to S&P)
0
10
20
30
P/E
Automobile &components
S&P
0
0.5
1
1.5
2
P/S
Automobile &components
S&P
0
5
10
15
P/B
Automobile &components
S&P
0
2
4
6
8
P/CF
Automobile &components
S&P
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Industry multiples
Industry PE PS PB PCF
Media(relative to
S&P)
1.17 1.28 1.34 1.32
Comcast(relative to
sector)
1.00 1.49 0.61 0.74
CBS(relative to
sector)
1.06 1.89 0.92 1.68
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Media (relative to S&P)
0
5
10
15
20
25
P/E
Media
S&P
0
0.5
1
1.5
2
2.5
P/S
Media
S&P
0
0.5
1
1.5
2
2.5
3
3.5
4
P/B
Media
S&P
02468
1012141618
P/CF
Media
S&P
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Technical Analysis
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Recommendations
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SIM should overweight From 1 year and 5 years perspective, con dis sector
outperformed S&P 500
YTD for con dis is lower than that for S&P 500, because of the bad weather
However, MTD (February) is higher for con dis sector
In 2014, we have many major positives for the U.S. economy
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Major Positives Economic stabilization and improvement in Europe
U.S. housing market recovery
Stock repurchase will make EPS higher in this sector
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Major Risks
U.S. fiscal policy • Government shutdown in 2013 eroded the 4th quarter
economy
• The budget deal for fiscal year 2015 is a cause for concern in regards to consumer spending and confidence
U.S. monetary policy • Fed’s asset purchase program (Quantitative easing) will
have a significant influence on interest rate and finally influence consumer discretionary sector, a sensitive sector.
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Overweight Hotel, restaurants & leisure The net profit margin for hotel industry is highest
among industries
Hotel’s ROE and EPS is also higher than other industries
Hotel’s P/E, P/S, P/B and P/CF are all far higher than S&P 500
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Questions?