Consumer Discretionary

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Consumer Discretionary
Jordan Coughlin Mercedes Davis Daniel Jones Nick
Kleinhenz Keith Little Matt Rhenish Arik
Shteinhauz Stephanie Vince Tim Watson
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Consumer Discretionary

• Sector Background
• Key Drivers
• Financial Analysis
• Valuation
• Recommendation- Market Weight

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Background
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Background
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Background
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Background Summary

• Sector is 13.81 OF SP 500
• Sector performance is dominated by three
  sub-sectors General Merchandising, Retail,
  Movies and Entertainment
• 8 companies make up over 50 of the sector WMT,
  AOL, HD comprise 30 of the sector

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Key Drivers

• Consumer Spending
• Interest Rates

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Drivers- Consumer Spending

• 3.5 increase in Q1 02 down from 6 from Q4 01
• Current personal savings rate at 2 (up from 1.6
  Feb)
• Held up well throughout recession little pent up
  demand

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Drivers- Interest Rates

• Very strong inverse correlation between interest
  rates and sectors price (relative to SP 500)
• Low interest rates fuel mortgage refinancing,
  durable goods spending
• Low interest rates discourage saving, encourage
  spending
• Current rates are lowest in 30 years
• Analysts and consumers expect rate increase as
  soon as August

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Sector Price Relative to SP vs. Interest Rates
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Key Drivers Summary

• Spending Pent up demand usually leads out of
  recession
• Little pent up demand
• Interest Rates Declining rates fuel spending
• Rates expected to rise
• Implications for Sector?
• Negative

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Financial Analysis

• Sales Earnings
• Margins

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Financial AnalysisSales Earnings
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Financial AnalysisMargins
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Financial Analysis Summary

• Sales have continued to grow, driven by spending
• Have not translated into higher earnings
• Difficult economic conditions
• Price competition within industry cut margins
• Implications?
• Margins likely to improve
• Future spending remains uncertain

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Valuation

• Ratios
• Relative Valuation

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ValuationRatios
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Relative Valuation
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Relative Valuation, cont.

• Historically, strong correlation between Sectors
  price and earnings relative to the SPs.
• Recent divergence between sector earnings and
  price
• Expansionary Fed policy
• Strong consumer spending
• Expectations for growth
• Probably unsustainable

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Valuation Summary

• Ratios indicate sector overvalued
• Recent divergence between sector price and
  earnings is uncharacteristic and probably
  unsustainable
• Implications?
• Negative

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Summary

• Key Drivers
• Consumer spending uncertain, interest rates
  likely to rise.
• Financial Analysis
• Revenues strong, earnings margins weak. Margin
  improvement likely, spending uncertain.
• Valuation
• Ratios and relative charts indicate sector
  overvalued.

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Recommendation

• We recommend market weighting the Consumer
  Discretionary sector in the portfolio.
• SP Rating 3.6, slightly better than Hold
• Gruntal Suggests 17
• Goldman Sachs Suggests 13

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Questions???
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Cooper Tire

• 133 Return
• P/E 43.35 v. Industry P/E 33.4 v. Sector P/E 27.1
• 5 yr Capital Spending Growth Rate -10.2
• ROE 15.93 (1999), 13.93 (2000), 7.04 (2001)