Stock Recommendations: Consumer Staples

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Stock RecommendationsConsumer Staples

• Joe Gale
• Adam Giere
• Bitan Ghosh
• Iliana Filyanova

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Overview

• Sector Outlook Recap
• Stocks to sell
• Stocks to Buy
• Recommendations

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Sector Overview
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Portfolio Details
Underweight SP 4 bps
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Earnings Growth Analysis
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Valuation by P/E F12M
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Valuation by P/S
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Current Holdings

• Walmart 15,500 shares (282 bps)
• Total cost 739,350 Value 766,320
• Basis Points 282 bps
• Colgate-Palmolive 9,600 shares (287 bps)
• Total cost 638,208 Value 723,072
• Basis Points 287 bps
• Altria Group Inc. 13,600 shares (394 bps)
• Total cost 860,200 Value 992,800
• Basis Points 394 bps

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Altria

• On March 28th, Altria will spin off Phillip
  Morris International
• Philip Morris USA faces declining cigarette
  consumption, with cigarette shipment volume down
  3.6 percent in 2007
• U.S. lawmakers are considering a law to give the
  FDA the authority to restrict tobacco advertising
  
• The spin off will leave PM USA in a declining
  market with little prospects of growth

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• Phillip Morris International will operate in
  global markets with greater potential for growth
  because of less government regulation
• International unit will have the chance to
  unleash its marketing on nonsmoking women and
  children in poor, developing countries
• Maybe look to buy PM Intl. in future quarters?

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Current Cases
Whiteley Case

• Cases on Appeal
• Bullock Case
• Cannata  Grisham
• Craft Case
• Daniels Case
• Department of Justice (DOJ) Case
• Engle Case
• Hines Case

• Lukacs Case
• Marrone/Phillips Cases
• Rivera Case
• Rose Case
• Schwab Case
• Schwarz Case
• Scott Case
• Watson Case
• Williams-Branch Case

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Altria Current Valuation
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Altria Current Valuation

• Target price based on these multiples is around
  69 per share
• Based on the facts about the March 28th spin off,
  we believe that the actual target price will be
  lower
• Current profit to date 155,904

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SP-30 Picks

• PEPSI

• AVON

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Dean Foods

• Premature buy for SIM portfolio strategy
• Working on fundamentals for future gains
• Good reorganization
• Need to wait for market forces to get in line
• Recently beaten up
• Input and reorganization costs eating margins
• Too early to see much of a break in Class I Mover
  prices (skim milk)
• 2007 earnings release came in at .95 per share,
  vs. analyst estimates of 1.24, with weak
  forecast

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Pepsico, Inc (Ticker PEP)
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Reasons we like PepsiCo

• Healthy upside driven by international growth
• Strong beverage and snack volume growth
• Weak U.S. dollar should help top line when
  converts to US currency
• Not very economically sensitive
• Low Beta 0.75
• GRE11
• Performance through last recession
• EPS growth, Sales growth

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Last Recession
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Reasons we like Pepsico

• Innovative new product lines
• G2 to compete with Vitamin Water
• Pepsi Max, Gatorade Tiger, pipeline of products
• Great brand awareness and consumer preference
• Quaker, Frito-Lay, Sobe, Pepsi, Tropicana
• Strong 2007 performance despite difficult raw
  material input environment
• For the year, net revenue increased 12, reported
  operating profit and core division operating
  profit both grew 10 and core EPS grew 13 to
  3.38

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Reasons we like Avon

• Exposure to emerging markets and beauty category
• Ability to deliver solid earnings
• Benefits of direct selling model in a down
  economy
• Lower raw material risk
• Restructuring Cost Savings in 2008
• High Div Yield (2.04) Stock Repurchases

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AVP Restructuring Program

• Product Line Simplification Strategic Sourcing
  Initiatives
• Step I Accelerating the top line
• Step II Sustaining the top line while restoring
  margin growth
• Big cost savings 300M by 2009
• Reinvestment in key brands, advertisement, and
  representative value proposition
• Pull-back in performance (Q2 07)

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AVP Valuation
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Recommendations

• Buy PepsiCo (394 bps)
• Current Price 71.63 Target Price 82.43
• 15.08 upturn
• Buy Avon (0 bps)
• Current Price 39.17 Target Price 45.64
• 13.9 upturn
• Sell Altria (394 bps)
• Current Price 72.98 Target Price 69
• Current profit to date 155,904

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Risks and Catalysts

• Catalyst continued Fed rate cuts
• Consumer Staples does well in this recessive
  economy
• PepsiCo is highly diversified and has done well
  in recessions (Pepsi, Frito Lays, SoBe)
• Avon has performed well in recessions in the past
  (will diversify current portfolio)
• Risks
• Avon (economic downturn in Europe and Latin
  America, both prime markets)
• PepsiCo (competition with generic brands)

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Questions?