CONSUMER SECTOR PRESENTATION 432002

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CONSUMER SECTOR PRESENTATION4/3/2002

• Brian Price John Wilson
• sector head associate
  sector head
• Arianne Obering Mary Whitehouse
• senior analyst research
  analyst

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PRESENTATION OUTLINE

• State of the Sector
• Valuation Models, the future of the investment
  fund (Wal-Mart example)
• Recommendation Sell GPS (Gap)
• Future opportunities in the sector

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STATE OF CONSUMER SECTOR
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(No Transcript)
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SECTOR PERFORMANCE 9/4/01-4/1/02

• ND Consumer 11.55
• IYK (consumer index) 7.64
• SP 500 -.34

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SECTOR BETA
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Sector Stock Weights

• 9/4/01

• 4/1/02

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VALUATIONS The Funds Future

• Applied Investment Management, aka AIM, is a
  senior and graduate level class for finance
  majors/MBA concentrators
• Like professional management funds, they run
  valuation models to come up with their dollar
  estimate of the price per share
• This makes decisions fairly simple if the
  stocks present share price is under the
  estimated value, buy, if above, sell.

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VALUATIONS, cont.

• The problem I have no clue how to run these
  valuation models
• The solution perhaps we could schedule either
  professor Reilly, Langley, or Malpass for a quick
  lecture on this, or bring in some senior AIM
  alumni for help

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VALUATION EXAMPLE

• Check out www.nd.edu/aim and click on AIM Alumni
  link (AIM XIII) to see valuations. Some
  valuations of interest include Wal-Mart,
  Caterpillar, Amgen, EMC, and Enron
• Valuation is, of course, not an exact science.
  The Enron valuation placed its value at 58.72.
• Based on the previous reports, the industry is
  prime for the taking and Enron has the financial
  strength and the expertise to operate in such
  high volume, low margin market. Technical
  analysis had a very bearish outlook on the stock,
  but the latest trough may well have been the
  bottom, as the stock has risen in the past few
  weeks. My estimated price is greater than 25 of
  the current price and thus is a strong buy.
  Frederick VonMering 10/15/01
• The Moral Dont listen to Grad Students. Only
  take valuations from undergrads who arent named
  Jason King.

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VALUATION TECHNIQUES

• WAL-MART
• Book Value Technique 61.38
• Dividend Discount 48.46
• Discounted Cash Flow 64.75
• DCF determined to be best for Wal-Mart, and
  since stock traded at 52.90, it was rated as a
  BUY. In this example, a very good call, and good
  valuation (todays price about 59.00)

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GAP, INC

• THE PROBLEMS AND THE SOLUTION

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GAP, INC.

• Banana Republic
• Gap
• Old Navy
• All three lost money in 2001Old Navy and Banana
  Republic lost less that Gap

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MARKETING PROBLEMS

• We changed too much, too quickly, in ways that
  werent consistent with our brands
• Gap stores became unfocused, trying to attract
  too many different customers
• Comments from Gaps CEO

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INVENTORY PROBLEMS

• Started in early 2000
• Show no signs of stopping
• Already discounting new Spring merchandise
• Customers do not like what they see so far from
  Gap this Spring

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THE EFFECT

• Loss of 0.01 per share in 2001
• Very small gain in Revenue (1.27)
• Worst performing year that I can find since 1985

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GAP, NOW . . .

• No PElost money in 2001
• Dividend growth rate is 2
• Industry avg. Div. growth rate is 5
• Credit downgraded to junk status
• Gap Debt/Equity is 67
• Limiteds Debt/Equity is 17
• Financially weak compared to industry

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GAP, FUTURE . . .

• Priced at 56 times 2002 est. EPS
• Priced at 29 times 2002 est. EPS
• Industry avg. PE is 21
• Note It is hard to predict Gaps earnings in
  future years, due to its cyclical nature

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GAP, INC.

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GAP, INC.
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GAP, INC.
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CONCLUSION

• Not a quick turnaround
• Already own Limited, which is a better company
  right now
• Sell all of our shares of GAP, INC

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Why Sell GPS Continued

• We want to increase our return in the
  short-term. GAP will more than likely increase
  over the next couple of years. However, for our
  purposes holding on to this stock while the
  company figures its way out of the web it has
  weaved is not wise. Instead, the money lost in
  GAP and the portfolio as a whole may produce
  better results by diversifying and investing in
  better opportunities. There are many stocks that
  we feel are strong companies with high growth
  potential, perhaps a bit more risk and/ or both
  short-term and long-term gains.

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Future Possibilities

• The Interpublic Group Company IPG
• Steak-n-Shake SNS
• Papa Johns Pizza PZZA
• Linens-n-Things LIN
• Limited (add to holdings) LTD
• Backyard Burgers BYB

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For next time..

• Please take some time to look into these stocks
  and we will make a presentation in the near
  future as to which we feel would be most
  beneficial to our sector. Bear in mind how
  heavily weighted we currently are in Wal-Mart,
  and how few stocks the consumer sector holds.

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In Closing
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• "99 of fund managers demonstrate no evidence of
  skill whatsoever."