Consumer Staples Sector

1
Consumer Staples Sector
May 2, 2006
CHANG JUNG-HOON CLEMENT LEANNE NICOLE CRAWFORD
BETHANY ANN
2
Table of Contents

• Sector Overview
• Financial Overview
• Business and Economic Analysis
• Valuation Analysis
• Investment Strategy

3
SP 500 Weights
4
Current SIM Weights
5
Consumer Staples Industries

• Beverages (8)
• Food Staples Retail (11)
• Food Products (11)
• Household Products (4)
• Personal Products (3)
• Tobacco (3)

6
Our Holdings

• Anheuser-Busch Beverage
• Procter Gamble Household Products
• Wal-Mart Food Staples Retail
• Sysco Corp Food Staples Retail

7
How are we doing??

Shares Price Pd Current Price Gain/(Loss)
BUD 15,700 44.55 44.58 471.00
PG 13,900 50.30 58.21 109,949.00
WMT 7,300 47.91 45.03 (21,024.00)
SYY 12,200 35.38 29.89 (66,978.00)
22,418.00
8
How is the Sector Doing??

• QTD 0.62
• YTD 1.60

9

• Financial Overview

10
Income Statement Ratios
11
Balance Sheet Ratios
12
Cash Flow
13
Revenues Margins
14
Relative Revenues Margins
15
Dupont Analysis
16
Business and Economic Analysis

17
Demand

• Mature industry steady demand in United States
• Room for growth overseas
• Dependent on GDP growth / population growth
• Defensive stocks typically experience stable
  demand and earnings growth despite external
  factors.
• Unemployment
• Inflation

18
Supply

• Factors that could affect input costs
• Oil prices
• Recently high, possibly increasing
• Increases inputs transportation, plastics, etc.
• Affects expected inflation
• Federal funds rate
• Higher rates favor defensive companies
• Lower rates favor cyclical companies
• Expectation
• Degree of inflation
• Increases cost of inventory, creates margin
  pressure

19
Profitability and Pricing

• Increases in input costs combined with stable
  demand would decrease profit margins.
• Barriers to entry in sector
• Dominated by large well-established companies
  high capital requirements impossible for new
  companies
• Relative maturity of industry
• Competition primarily for overseas market share
• Minimal product substitution under ordinary
  economic conditions power of branding.

20
Inflation vs Valuation
Inflation vs Trailing reported SP500 P/E
Negative relationship
Excerpt JPMorgan Equity View (21 April 2006)

• Inflation depress valuations JPMorgan finds that
  for every 1 rise in inflation above 25-year
  trend, the trailing P/Es decline by 0.85x.
• JPMorgan sees that inflation has been fairly well
  contained considering high energy and commodity
  prices. However, if energy and commodity prices
  are sustained at the current elevated levels,
  they see upside risks to inflation.

21
Fundamental Factors
CPI-Energy and Sector Valuation
22
Fundamental Factors
Interest Rates and Sector Valuation

• Interest rates significantly affect the earnings
  and values.
• Negative correlation.

23
Fundamental Factors
Consumer Expenditure and Sector Valuation

• Personal consumption expenditure is also a good
  indicator of the sectors relative earnings and
  valuation.

24
Valuation Analysis

25
Investment Cycle

• We expect the current phase is on the verge of
  the peak of the market cycle.
• According to the Sector Rotation Model, Consumer
  Staples sector will benefit as a result of the
  current economic situation.

26
Sector Valuation Comparison

• Consumer Staples P/E is higher than the sector
  value weighted P/E of 15.95x.
• P/B is also higher than the sector value weighted
  P/B of 3.25x
• Beta is lowest among the sectors.

27
Sector Valuation Forecast

• Based on the Firstcall data, the earnings
  estimates of Consumer Staples are increasing.

28
Fundamental Analysis

• P/B with ROE valuation (Earnings come from the
  estimate of 2006) shows that Consumer Staples
  sector is overvalued.
• However, considering the growth rate against the
  payout ratio, the premium on its value seems to
  be reasonable.

29
Technical Analysis

• Several technical analysis tools shows that
  Consumer Staples Sector has been on downward
  trend since this quarter.
• WM shows that the sector is now in the oversold
  levels. We can expect the sector index will
  increase before long.
• MACD and RSI show that the sector doesnt look
  good but these indicators also imply the upward
  movement potential.

30
Investment Strategy

31
Strategy

• Based on the current valuation, we dont believe
  there is a need to increase our investment weight
  in consumers staples.
• As consumers consider the possibility of
  increasing inflation, they may reduce
  discretionary spending, boosting defensive stocks
  such as consumer staples.
• In addition, we foresee our current holdings to
  be able to perform relatively well in the coming
  quarters and the stocks that we currently have a
  loss in will start to lean more towards the
  profit side therefore, we do not want to decrease
  our weight either.