Consumer Staples Company Presentation

1
Consumer Staples Company Presentation

• Laura Fillman
• Mary Kanet

2
Outline

• Recommendation
• Sector Overview
• Anheuser-Busch Overview
• Procter Gamble Overview
• Altria Overview
• Walgreens Overview

3
Recommendation

• Under-weight Consumer Staples
• Economy is still trying to rebound from recession
• Consumer staples do not perform well coming out
  of recession
• Prices, earnings and net profit margins are
  trending downwards
• Estimate revisions and selling activity indicate
  skepticism about consumer staples future
  performance
• SP 500 at 9.47 as of 12/31/02
• Target weight of 9.12 in SIM Portfolio
• Under-weight the following stocks
• Procter Gamble to 1.75 from 2.15
• Altria to 1.48 from 3.07

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Sector Overview
5
Business Analysis

• Growth/Mature Life Cycle
• Defensive Business Cycle
• A lot of risk due to foreign exposure
• Low pricing power
• Increasing supply with demand

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Financial Analysis

• Increasing earnings but decreasing return on
  equity
• Price increases during recessions and decreases
  during expansions
• Revenues are decreasing and earnings are
  increasing

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Valuation Analysis

• Dividends, Dividend yield is higher than SP
  500 and trends toward remaining that way
• - Earnings, Earnings growth is not as high as SP
  500 and is slowing
• - P/E ratios are declining, it is a signal of bad
  things to come, not more value
• Overall, the total return is too low, and will be
  worse with a strengthening economy

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Consumer Staples Composition

• SIM Companies
• Procter Gamble, 2.15 (Household Products)
• Walgreens, 1.63 (Retail Drugs)
• Altria Group, Inc., 3.07 (Tobacco)
• Anheuser-Busch, 4.26 (Beverage - Alcoholic)

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Comparison of Industries

• Food and Drug Retailing The aging of the
  American population and momentum to reform the
  Medicare system bode well for this industry.
• Beverages Alcoholic beverage companies have
  implemented a round of price hikes and reduced
  discounting practices. This has improved these
  companies fundamentals.
• Food Products Industry has underperformed the
  first few weeks of 2003, with 70 of the
  companies seeing their shares trading lower. Most
  companies will be experiencing price increases
  that they will try to pass on to consumers.
• Tobacco Profit margins are tightening due to
  weak domestic economy, introduction of discount
  cigarettes, high state excise taxes and ongoing
  litigation problems.
• Household Products These companies are the
  plodding stalwarts. Theyre mature and
  unexciting but good defensive choices. Some
  market share battles.
• Personal Products Industry is impervious to
  most economic pressures. Small ticket items that
  lift people psychologically. Immune to moderate
  shifts in the economy.

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Anheuser-Busch
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Business Analysis

• Businesses
• Domestic and International Beer
• Packaging
• Theme Parks
• Main Products
• Budweiser
• Michelob
• Busch
• Natural Light

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Business Demand

• Anheuser-Busch's domestic beer shipments to
  wholesalers grew to an all-time high of 101.8
  million barrels in 2002 -- increasing 2.1 million
  barrels or 2.1 percent over 2001
• International growth has contributed to at least
  20 of A-Bs earnings over the past five years
• Demographics Growth of the 21 to 27 year old
  age group

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Business Supply and Pricing Power

• A-B rolled out Bacardi Silver 0 beginning March
  3, 2003
• Price increases in the 4th quarter of 2002
• Discount reductions
• Another price increase due in the beginning of
  2003
• A-B has a lot of pricing power

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Financial Analysis Cash Flows
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Financial DuPont Analysis
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Valuation Analysis Valuation
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Valuation Analysis Valuation
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Valuation Earnings
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Valuation Dividends
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Valuation Total Returns
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Valuation Summary

• Valuation
• Shows dip in comparison to SP 500, but in
  comparison to Consumer Staples it is performing
  well
• Earnings
• Earnings are on the increase and looking positive
• Dividends
• Dividends per share continue to increase and the
  dividend yield compared to the SP 500 is rising

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Recommendation

• Keep A-B at its current weight
• Over-weighted at 4.26
• Opportunities and Rewards
• Increasing volume and demand
• Increasing internal growth to meet demand
• Good pricing power
• Opportunities to expand in the alcoholic
  beverages industry

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Procter Gamble




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Business Analysis

• Businesses
• Detergents, Soaps
• Toiletries
• Foods
• Paper
• Industrial Products
• Main Brands
• Tide, Dawn, Bounty, Downy
• Crest, Always, Charmin
• Folgers, Pringles
• Cover Girl, Olay, Pantene, Herbal Essences,
  Clairol

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Business Demand

• Expected sales of 42,500 million in 2003,
  increase of 5.6 from 2002
• 50 of total sales come from abroad
• Gaining market share in diapers market even
  though it is already saturated

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Business Supply and Pricing Power

• Iams unit will begin offering pet insurance
• Acquired Clairol to transition more into health
  and beauty-care businesses
• Finished restructuring program
• Acquisitions will continue to account for a large
  part of growth

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Financial Analysis Cash Flows
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Financial DuPont Analysis
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Valuation Analysis Valuation
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Valuation Analysis Valuation
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Valuation Earnings
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Valuation Dividends
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Valuation Total Returns
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Valuation Summary

• - Valuation
• Compared to both the SP 500 and Consumer
  Staples, PG has reached its resistance level and
  appears to be on the decline
• - Earnings
• Earnings do not show as much potential for growth
  as other companies
• Dividends
• PG continues to provide dividends, but the yield
  compared to the SP 500 is decreasing

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Recommendation

• Underweight Procter Gamble from 2.15 to 1.75
• Too many risks and downsides
• Cost cutting
• Market share battles in a mature market
• Increasing foreign exposure
• Acquisitions instead of internal growth

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Altria
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Business Analysis

• Businesses
• Tobacco (57 of 01 revenues)
• Food (38)
• Miller Beer (4, sold this last July for 1.7b,
  for a .80/share gain)
• Financial Services and Real Estate (1)
• Main Products/Brands
• Marlboro, Benson Hedges, Merit, Virginia Slims,
  Lark
• Coffee, Post cereal and packaged goods, including
  Jell-O, Kool-Aid, Oscar Mayer, Kraft, Velveeta
  and Miracle Whip

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Business Demand

• Weak domestic markets, rapidly escalating state
  cigarette taxes and discount cigarettes are
  tightening profit margins for the tobacco
  industry. Discount cigarettes now account for
  10 of the US market, up from 3 in 1998.
• In 2002, the US cigarette shipment volume fell
  7.5, compared to 3.7 for the industry.
• Altria's market share in the US premium cigarette
  market is 48.9 (down from 51.0 in 2001). One
  out of three cigarettes sold in the US is a
  Marlboro.
• Greater competition from RJR and smaller tobacco
  rivals.
• Sales revenue dropped from 90b in 2001 to 80b
  in 2002.
• Altria is trying to focus more attention on its
  portfolio of brands, including Kraft and Nabisco.
  Philip Morris is considering relocating its
  headquarters to Richmond, Virginia due to New
  Yorks increasing hostility towards smokers
  (where packs of cigarettes are selling for more
  than 7.50). Altria will remain in New York.

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Business Supply and Pricing Power

• Due to state cigarette taxes, the price of
  premium cigarettes (averaging 3.60) has doubled
  during the past five years. At least 20 other
  states are considering raising taxes in 2003.
• With the higher price for premium cigarettes,
  discount cigarettes are stealing market share
  from Altria. Altria is having to engage in heavy
  discounting and promotional spending to prevent
  further market erosion.
• The threat of litigation is still looming, with
  the full extent of this liability still unknown.
  One lawsuit filed last year awarded the plaintiff
  80m, and the Oregon Supreme Court has declined
  to reconsider this case. The US Supreme Court is
  expected to look at this next.

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Financial Analysis Cash Flows
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Financial DuPont Analysis
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Valuation Analysis Valuation
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Valuation Analysis Valuation
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Valuation Earnings
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Valuation Dividends
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Valuation Total Returns
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Valuation Summary

• - Valuation
• Compared to both the SP 500 and Consumer
  Staples, Altria has reached its peak.
• - Earnings
• Earnings do not show as much potential for growth
  as other companies.
• Dividends
• Altria continues to pay out large dividends,
  which is attractive to income-oriented investors.

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Recommendation

• Underweight Altria from 3.07 to 1.48
• Too many risks and downsides
• Weak domestic economy
• State taxes
• Discount cigarettes
• Litigation

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Walgreens
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Business Analysis

• Walgreens is the nations largest drugstore
  operator, with 3,954 stores and 12 distribution
  centers
• Pharmacy 60 of sales in 2002
• General merchandise 29 of sales
• Nonprescription drugs 11 of sales

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Business Demand

• Demographic trends provide a favorable basis on
  which to invest in the pharmacy services
  industry. The Census Bureau forecasts a doubling
  of the American population aged 65 and older by
  the year 2030.
• The Federal Government is expected to overhaul
  the Medicare system and add a prescription drug
  benefits program for the elderly. The House
  majority leader, Bill Frist (a former heart
  surgeon) is now leading this initiative in
  conjunction with House democrats.
• Walgreens achieved its 28th consecutive year of
  record sales and profits in 2002 and is also
  expected to achieve record sales and profits for
  2003.
• The general drop in consumer spending generated
  softer-than-expected returns, which reduced
  Walgreens ability to leverage its SGA expenses.
  Nonetheless, Walgreens returns were good.
• The increase in sales of lower-priced generic
  drugs reduced pharmacy sales by approximately 2
  in 2002, however these drugs allow for higher
  margins.

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Business Supply

• Walgreens is aggressively expanding its store
  base and consequently increasing its share of the
  market. Last year, Walgreens opened 363 stores
  (adjusted for closings and relocations).
• Walgreens has increased its target number of
  store locations from 6000 to 7000 for 2010.
• Walgreens appears to be entering markets
  currently occupied by Longs and Eckerd and
  successfully capturing their markets.
• Walgreens expects 35 of the US population to be
  residing in CA, FL and TX in the next 25 years.
  They have subsequently been opening more stores
  in these locations.

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Financial Analysis Cash Flows
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Financial Dupont Analysis
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Valuation Analysis Valuation
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Valuation Analysis Valuation
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Valuation Growth
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Valuation Dividends
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Valuation Summary

• Valuation
• Even though the company seems to be dropping
  compared to the SP 500, it is still doing well
  against the Consumer Staples Sector with
  earnings, net profit margin is decreasing
• Earnings
• Earnings expectations are positive and the
  overall expected growth is high
• Dividends
• Walgreens is increasing its dividends per share
  but its yield has been decreasing

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Recommendation

• Keep Walgreens at its current weight of 1.63
• The company has been performing well in earnings.
  
• Net profit margin has been decreasing but appears
  to be on the rebound.
• Expectations for the future are good with
  expected growth at 16, the highest of all of our
  companies.

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Comparison of Companies

• Business
• Anheuser-Busch has the most opportunities for
  potential internal growth, Procter Gamble does,
  but is looking at foreign acquisitions instead
• Financial
• Altria has decreasing margins and is depleting
  its cash balance, but Walgreens has had a huge
  surge in cash
• Valuation
• A-B and Walgreens show the most potential for
  stock appreciation and improved earnings in the
  future, Altrias and Procter Gambles returns
  look like they will come mostly from dividends