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Consumer Staples (SP-30) Ryan Chestnut Brian Cully Sabina Curovac Orla Costello.

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Presentation on theme: "Consumer Staples (SP-30) Ryan Chestnut Brian Cully Sabina Curovac Orla Costello."— Presentation transcript:

1 Consumer Staples (SP-30) Ryan Chestnut Brian Cully Sabina Curovac Orla Costello

2 Consumer Staples Agenda ■ Sector Overview ■ Business Analysis ■ Economic Forecasts ■ Financial Analysis ■ Sector Valuation ■ Recommendation

3 Consumer Staples Market Capitalization ■ Consumer Staples Sector = $924,124 million ■ S&P 500 = $7,192,455 million ■ Consumer Staples accounts for 12.85% of the S&P 500 ■ Consumer Staples accounts for 14.22% of the assets in SIM Portfolio. DescGICS®NCMKTCAPQTDYTD S&P % Energy % Materials % Industrials % Consumer Discretionary % Consumer Staples % Health Care % Financials % Information Technology % Telecommunications Services % Utilities % Source: standardandpoors.com

4 Consumer Staples Consumer Staples vs. S&P 500 YTD

5 Consumer Staples Industries Within Consumer Staples Sector Source: standardandpoors.com

6 Consumer Staples Companies With Consumer Staples Sector Source: standardandpoors.com

7 Consumer Staples Sector Overview ■ In theory, demand for consumer staples is steady or increases during economic downturn ■ Defensive sector of mature companies  Historical correlation with S&P is 0.64  Stock price stability in downturns, but slow and steady growth in upswings ■ Low price elasticity of demand  Importance of differentiation

8 Consumer Staples Industry Characteristics ■ High Barriers to Entry  Very high capital requirements  Mature companies  Strong brands put downward pressure on margins  Threat of substitution  International presence  Remaining growth opportunities

9 Consumer Staples Business Opportunities ■ Reduce (commodity) costs  Hedge costs, merge or partner, create economies of scale ■ Reduce finished good prices to wholesalers  Price differentiation important in slowdowns ■ Differentiate products  “Superior” products can control prices  Importance of branding  Significant substitution threat

10 Consumer Staples External Factors ■ Regulatory and legal issues ■ Foreign exchange prices  Implications of weakness in the dollar ■ Aging domestic population, but global growth ■ Commodity prices ■ State of the economy ■ Environmental Factors

11 Consumer Staples Economic Analysis – Main Economic Indicators

12 Consumer Staples Economic Analysis (cont.) Source: Bloomberg Composite

13 Consumer Staples Economic Analysis (cont.) Source: Bloomberg Composite

14 Consumer Staples Economic Analysis (cont.) Source: Bespoke Investment Group

15 Consumer Staples Foreign Currency Exchange

16 Consumer Staples Foreign Currency Exchange (cont.) Consumer Staples

17 Sector Sales Analysis ■ Sales Growth  Current growth below 10-year average  Current growth close to low of 5.8% experienced in early 2002  Downward trend since end of 2006, continues out to 12/31/2008 ■ Largest Companies in Sector  Proctor & Gamble  Currently at 5.5%, below 10 yr. average of 8.1%  Downward trend since mid-2006  Wal-Mart  Currently at 9%, below 10-yr. average of 11.7%  Downward trend since beginning of 2007, with low (8.6%) occurring 1/31/08

18 Consumer Staples Sector Earnings Analysis ■ Earnings Growth  Very low relative to 10-year average  EPS growth currently at 10 year low  Large drop in EPS growth since 9/30/2007 ■ Largest Companies in Sector  Proctor & Gamble  Current growth at 12.1%, above 10-yr. average of 11.1%  Growth falling since mid-2008; Lowest EPS growth (-1%) occurred in 2001  Wal-Mart  Current growth at 11.4%, just under 10-yr. average of 12.5%  EPS growth from mid-2007 to mid-2008, slight drop since

19 Consumer Staples Sector Sales and Earnings Growth

20 Consumer Staples Index Sales and Earnings Growth ■ Sales Growth  Current growth right below 10-year average  7.6% compared to mean of 8%  Downward trend since 9/30/2008 ■ Earnings Growth  Current EPS growth negative, extremely low  -16.7% compared to mean of 13.4%  Currently near 10-year low of -17.3%, which occurred in the beginning of 2002  EPS growth plummeting since end of 2006

21 Consumer Staples Index Sales and Earnings Growth Consumer Staples

22 Comparison of Sales and Earnings

23 Consumer Staples Margin Growth Analysis ■ YTY net profit margin growth for both at 10-year low  Consumer Staples: -5%  S&P 500: -22.8% ■ Downward trend in Consumer Staples starting in early 2006 ■ S&P 500 plummeting roughly one year later

24 Consumer Staples Comparative Margin Growth

25 Consumer Staples Consumer Staples has seen relatively constant margins but decreasing ROE from S&P 500 has more volatile margins throughout the period and increasing ROE EBITDA range from 16.55% to 23.5%; EBIT range from 10.86% to 17.98% Comparative Income Statement Ratios

26 Consumer Staples Free Cash Flow & Dividends ■ Free cash flow increasing from ■ Dividends increasing  Free cash flow after dividends decreasing most years  Dividend yield increasing, currently at 10-year high

27 Consumer Staples Sector Valuation Consumer Staples

28 Sector Valuation (cont.) Consumer Staples

29 Sector Valuation (cont.) Consumer Staples Historical Correlation with the S&P 500 is 0.64

30 Consumer Staples Sector Valuation (cont.) Consumer Staples

31 Recommendation ■ Keep current allocation, sector overweight relative to the S&P 500 by 175 basis points ■ Possibility of another market downturn followed by low volatility around the 8000 point mark ■ Higher return for the sector vs. the market in the next 3-4 months ■ We see the market having flat returns, and the consumer stables sector outperforming by basis points ■ Attractive industries: Tobacco, Brewers Consumer Staples

32 References ■ Bloomberg ■ Hoovers ■ Investopedia ■ Standard &Poor’s (www.standardandpoors.com) ■ StockVal ■ Value Line ■ Yahoo Finance (finance. yahoo.com) ■ Bespoke Investment Group (

33 Consumer Staples ■ Commodity Prices Supplemental Information Consumer Staples

34 Supplemental Information Consumer Staples

35 ■ Future Earnings Estimates Consumer Staples Supplemental Information EPS Mean High Low Number of Est13146 Number Up111 Number Down783


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