Consumer Staples and Discretionary

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Consumer Staples and Discretionary

• Julie Berens
• Beth Blue
• Sanaata Brown
• Mike Becher
• Brian Creek
• Mick Kozlowski

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Presentation Agenda

• Differentiating Characteristics
• Staples Remain Under Weight
• Sector Size and Composition
• Business Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
• Discretionary Remain Over Weight
• Sector Size and Composition
• Business Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation

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Differentiating Characteristics(Staples Vs.
Discretionary)

• Staples
• Steady Growth with little fluctuation
• Defensive position during periods of constriction
• Does not increase as significantly in cyclical
  markets
• Discretionary
• Increases significantly as market fluctuates
• Good position during upward cyclical markets

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Sector Size and Composition(SP 500)
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Sector Size and Composition(SIM Portfolio)
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Sector Size and Composition(Staples)
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Sector Size and Composition(Staples)
of SP
of Sector
Company
Industry
2.7321
22.46
Wal-Mart
Food Retail
1.2736
11.02
PG
Household
.89430
8.176
Altria
Tobacco
.88640
7.229
Pepsico
Beverages
.4715
4.217
Anheuser
Beverages
.3614
3.184
Gillette
Personal
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Business Analysis(Staples)
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Demand(Staples)

• Mature life cycle
• Intense competition within industries
• More focus on improving and promoting current
  products than creating new ones
• Defensive business cycle
• Non-cyclical sectors are not subject to large
  fluctuations due to economic conditions
• Performs better during periods of low growth and
  low inflation

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External Factors (Staples)
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Profitability(Staples)

• Success is determined by specializing in the
  manufacturing and marketing of brand name
  consumer products.
• Profitability is mainly affected by commodity
  prices, energy prices and economic growth both in
  the US and abroad.
• Some companies are utilizing acquisition
  strategies, common with the major firms within
  the sector, to generate cash and create a global
  presence.

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Financial Analysis (Staples)
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Sector Comparison (Staples)
Average 22.77 16.07 2.33
1.43 3.88 14.49
19.78
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Desired Actual Current Assets Current
Liabilities Going Down Fluctuating Long-Term
Liabilities Going Down Going Up PPE Going
Down Going UP Common Stock Going Down Going
Up Accumulated Depreciation Going Up Going Up
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Desired Actual COGS Going Down Going
Up SGA Going UP Going Up EBIT Going Up Going
Up
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In Conclusion
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Everybodys Gotta Wipe!
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Valuation Analysis (Staples)
-Growth trending downward -Prices trending
downward over the long and short-term -Prices
projected to continue to trend downward
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Valuation Analysis (Staples)
-ROE and Net Profits have slowed due to
competition -Dividend continue to remain steady
indicating limited growth opportunities
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Valuation Analysis (Staples)
-Projected decrease in Earnings Growth over the
next years will further depress prices in this
sector
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Valuation Analysis (Staples)
-ROE and Net Profit margins leveling and trending
downward versus the SP -Dividend Yield high
relative to the SP while Growth remains lower
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Valuation Analysis (Staples)
-Projected decrease in Earnings Growth over the
next years will further depress prices in this
sector
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RecommendationStaples

• Underweight relative to the SP 500
• Major Positives- The economy is expected to trend
  upward, causing cyclical stocks to outperform
• Biggest Risk- Due to high unemployment rates and
  low wages, consumer staples may continue to be an
  out-performer
• Overweight- None
• Attractive Industries- Beverages, Tobacco, Food
  Retailing, Household Products

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Sector Size and Composition(SP 500)
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Sector Size and Composition(SIM Portfolio)
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Sector Size and Composition(Discretionary)
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Sector Size and Composition(Discretionary)
of SP
of Sector
Company
Industry
.8309
6.859
AOL
Media
.8193
8.032
Viacom
Media
.8002
7.762
Home Depot
Specialty Retail
.7499
2.527
Clear Channel
Media
.4665
4.062
Disney
Media
.4019
3.429
Lowes
Specialty Retail
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Business Analysis Demand

• Phase of Life Cycle Growth/Mature
• Business Cycle Highly Cyclical

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Price Earnings (Discretionary)
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External Factors (Discretionary)

• Federal Funds Rate

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External Factors (Discretionary)

• Fuel Prices

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External Factors (Discretionary)

• Employment

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Business Analysis Supply (Discretionary)
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Profitability and Pricing (Discretionary)

• Product Segmentation High threat for substitutes
• Ease of Entry Varies by industry
• Strength of Suppliers Varies by industry
• Competition High
• Strength of Customer HIGH!

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Revenues/Price Relative to SP 500
(Discretionary)
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Financial AnalysisConsumer Discretionary
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Relative Revenues/Dividend Change(Discretionary)
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Desired Actually
Is Current Assets Current Liabilities going
down going up Long-Term Liabilities going
down going up PPE going down going
up Depreciation going up going up
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Desired Actually Is COGS
going down pretty flat SGA going
up going up EBIT
going up going up Common Stock
going down pretty flat (down
for 02)
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SP5A
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Discretionary
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Media
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Multi-Line
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Valuation Analysis (Discretionary)
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Valuation Analysis (Discretionary)
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Relative Valuation Analysis (Discretionary)
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Relative Valuation Analysis (Discretionary)
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Valuation Analysis (Discretionary) Earnings
Estimates
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RecommendationDiscretionary

• Overweight relative to the SP 500
• Major Positives- The economy is expected to trend
  upward, causing cyclical stocks to outperform
• Biggest Risk- Due to high unemployment rates and
  low wages, non-cyclicals may continue to be an
  out-performer
• Overweight- Hotels/Leisure, Household Durables,
  Internet Catalog, Media, Multi Line Retail,
  Specialty Retail
• Underweight- Autos