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Kurt Brown René Hegglin Shengbo Mao

THE STOCK MARKET. Consumer Staples Stock Presentation. Kurt Brown René Hegglin Shengbo Mao. Agenda. Recap of Sector Recommendation Stock Recommendation Summary Questions. SIM Portfolio. Weights as of 10-31-09. Consumer Staples Recap.

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Kurt Brown René Hegglin Shengbo Mao

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  1. THE STOCK MARKET Consumer Staples Stock Presentation Kurt BrownRené HegglinShengbo Mao

  2. Agenda Recap of Sector Recommendation Stock Recommendation Summary Questions Consumer Staples Stock Presentation

  3. SIM Portfolio Weights as of 10-31-09 Consumer Staples Stock Presentation

  4. Consumer Staples Recap • Increase weight of consumer staples by 26 basis points • Gives a 55 bp overweighting • Slow economic recovery • The market has recovered too much too quickly • Will see a small correction fairly soon • Exposure to international growth Consumer Staples Stock Presentation

  5. Stock Recommendation SELL ~ 332 bps of Safeway (SWY) BUY ~ 332 bps of Procter & Gamble (PG) SELL ~ 50 bps of PepsiCo (PEP) BUY ~ 76 bps of Philip Morris (PM) Consumer Staples Stock Presentation

  6. Sector Holdings Weights as of 10-31-09 • Current Holdings S&P 500 – 11.94% SIM – 12.22% • PepsiCo – 4.00% • Safeway – 3.32% • Wal-Mart – 2.86% • Philip Morris – 2.04% • Recommended Holdings S&P 500 – 11.94% SIM – 12.48% • PepsiCo – 3.50% • Procter & Gamble – 3.32% • Wal-Mart – 2.86% • Philip Morris – 2.80% Consumer Staples Stock Presentation

  7. Industry Weightings Consumer Staples Stock Presentation

  8. Target Prices Consumer Staples Stock Presentation

  9. Safeway Safeway (founded 1915) is a food and drug retailer with over 1,700 stores mainly spread in the western and central parts of the United States and Canada. Founded in 1915, headquarters in Delaware, about 197,000 employees Competitors are: Kroger, SUPERVALU, Wal-Mart, Target Consumer Staples Stock Presentation

  10. Safeway YTD Jan 30: Safeway recalls peanuts from 66 stores Apr 30: lowers guidance to EPS: $2.10-$2.30 Expected was $2.23 Aug 6: Safeway recalls beef from six states Aug 26: Quarterly dividend of $0.10 per common share announced Oct 15: Reaffirmation of guidance EPS: $1.70-$1.90 expected was $1.74 (Q3 EPS was $0.31 instead of $0.29) Feb 26: Safeway reiterates EPS guidance of $2.34-$2.44 Expected was $2.32 Mar 6: Quarterly dividend of $0.0828 per common share ann. Aug 23: Safeway lowers guidance to EPS: $1.70-$1.90 Expected was $2.07 Aug 4: SIM decides to buy 288bps of Safeway at a price of $19.01 with target price $24.40 Consumer Staples Stock Presentation

  11. Safeway Perspective Last Quarter August 4, 2009: Price Target for Safeway (based on a multiples-only basis) was $24.40 Price Safeway August 4, 2009: $19.01 Potential Upside + Dividend Yield: 30.3% Class agreed to buy 288bps of Safeway Consumer Staples Stock Presentation

  12. Safeway Perspective Last Quarter Consumer Staples Stock Presentation

  13. Safeway This Quarter Consumer Staples Stock Presentation

  14. Safeway Sensitivity Analysis Consumer Staples Stock Presentation

  15. Safeway Valuation Multiples / DCF Consumer Staples Stock Presentation

  16. Safeway Valuation Summary Low upside left (~5-10%) even with optimistic assumptions concerning sales growth Revenues uncertain due to deflationary competition (Kroger, Wal-Mart, SUPERVALU) Overreaction of market when guidance was confirmed (10/15/09) Take away the gains from last quarters purchase (we nearly reached the implied price target of $25.48 estimated in Aug/09) Diversify into Consumer Goods Consumer Staples Stock Presentation

  17. Safeway Risks & Benefits • Risks • Deflationary price history in dairy and food YTD  even stronger price war upcoming? • Only national exposure instead of international (with highest exposure in California) • High unemployment in the US • Benefits • Stronger results than expected • Cash-flow increased (less investment) • Stock repurchase program still alive • Sales trend improves Consumer Staples Stock Presentation

  18. Procter & Gamble (PG) Company overview: Procter & Gamble is a consumer goods manufacturer, founded in 1837, headquartered in Cincinnati OH. Market capitalization of $181 billion. P&G’s products are sold in over 180 countries with only 55% in North America, and 32% in developing countries. Customers of P&G are merchandisers, grocery stores and drug stores like Wal-Mart and Target Consumer Staples Stock Presentation

  19. Procter & Gamble Consumer Staples Stock Presentation

  20. P&G Stock Consumer Staples Stock Presentation

  21. P&G Financial Analysis Consumer Staples Stock Presentation

  22. P&G Valuation Consumer Staples Stock Presentation

  23. P&G Valuation Consumer Staples Stock Presentation

  24. P&G Valuation Relative to Industry Consumer Staples Stock Presentation

  25. P&G Valuation Relative to S&P 500 Consumer Staples Stock Presentation

  26. P&G Absolute Valuation Consumer Staples Stock Presentation

  27. Benefits • Attractive valuation • Competitive strengths in developing markets • 45% of revenues are international • Gillette acquisition boosts sales and profits • 23 brands each generating over $1 billion in sales annually and another 20 over $500 million • Share buybacks • Increased dividend for 53 consecutive years • AA credit rating Consumer Staples Stock Presentation

  28. Risks Increases in raw material and energy costs Increased marketing and product development costs may hurt earnings New CEO Consumers continue trading down The US Dollar continue to decrease in value Consumer Staples Stock Presentation

  29. Philip Morris Company Overview Philip Morris International Inc. (PMI), incorporated in 1987, Philip Morris International the world's second-largest tobacco company, behind only China National Tobacco, and it claims almost 16% of the non-U.S. market. PMI owns seven of the leading 15 international cigarette brands, including Marlboro, the company's flagship brand. Its products are sold in over 160 countries. Consumer Staples Stock Presentation

  30. Philip Morris DCF Method Valuation range is 9% - 10% for the terminal discount rate and 2% - 4% for the terminal free cash flow growth rate. This subset of the analysis yields a valuation range of $61.80 to $87.20, which suggests almost zero downside risk against at least 22.0% upside gains. Consumer Staples Stock Presentation

  31. Final Price Target Taking account 70% of DCF model result and 30% of the result from multiples method, I come up with the final target price $62.39 Consumer Staples Stock Presentation

  32. Investment Thesis • Strong business fundamentals and results • Powerful pricing ability • Superior infrastructure, brand portfolio and geographic balance • Manageable excise tax and regulatory environment • Sustainable cash flows and excellent liquidity • Continue to reward shareholders over the long term • Potential growth in emerging markets • Expected currency tailwinds in long-term Consumer Staples Stock Presentation

  33. Possible Risks Weaker industry volume and some consumer down trading Tobacco sector resilient but not immune to the effects of a recession Currency headwinds in the short-term Long-term threats from increased regulation, litigation, and taxation Exposed to cultural, economic, and political risks inherent to regions of emerging and developing markets. Consumer Staples Stock Presentation

  34. PepsiCo • Sell ~ 50 bps • Attractively valuation • Frito-Lay – fastest growing major food or beverage company in the US this year • Merger with The Pepsi Bottling Co. and PepsiAmericas • Potential short-term issues • 5th largest holding in SIM portfolio • Trim some gains Consumer Staples Stock Presentation

  35. Summary SELL ~ 332 bps of Safeway (SWY) BUY ~ 332 bps of Procter & Gamble (PG) SELL ~ 50 bps of PepsiCo (PEP) BUY ~ 76 bps of Philip Morris (PM) Consumer Staples Stock Presentation

  36. What questions do you have? Consumer Staples Stock Presentation

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