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Consumer Discretionary Sector Presentation

Consumer Discretionary Sector Presentation. May 5, 2009 Diego Benavente, Matt Berkowitz, Conrad Bowman, Julie McGrover. Agenda . Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation. Sector in relation to S&P 500. 7 th largest.

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Consumer Discretionary Sector Presentation

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  1. Consumer Discretionary Sector Presentation May 5, 2009 Diego Benavente, Matt Berkowitz, Conrad Bowman, Julie McGrover

  2. Agenda • Sector Overview • Business Analysis • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation

  3. Sector in relation to S&P 500 7th largest

  4. Sector Performance YTD & 10 Years

  5. Top 10 Companies in Sector

  6. Business Analysis – Sector Composition Industries within Consumer Discretionary Sector: source: Baseline

  7. Business Analysis – 5 Forces Barriers to Entry: High Many well established companies with strong brand recognition Competition: High Companies have to keep evolving to stay current and keep/gain market share Substitution: High Consumers can trade up, down, sideways Supplier Power: Varied depending on industry Buyer Power: High

  8. Business Analysis – Current Economic Conditions • Positive Factors • Consumers' cash savings continue to expand and are now at a record level • More than 60% of homeowners have more than 30% equity in their homes • Mortgage rates have declined • The recently passed stimulus package includes some modest tax cuts • The recently launched Term Asset Loan Program (TALF) aims to loosen up consumer lending by unfreezing the securitization market • Tax refunds are 15% higher than at the same time last year. • Negative Factors • Margins in the retail space are diminishing • The unemployment rate continues to move higher • Savings rates in the United States have been increasing. • The credit card delinquency rate continues to move higher. • Revolving credit limits are being reduced & credit standards remain tight. • Personal net worth has declined • Delinquency rates for prime mortgage loans continue to rise Schwab Sector Views by Brad Sorensen

  9. Economic Analysis • Same Time Period • Negatively Correlated • Brent Crude Oil • CPI • Positively Correlated: • S&P500 Price Index • One Month Lag • Positively Correlated: • S&P500 Price Index • Retail Sales • One Month Lead • Negatively Correlated • Brent Crude Oil Spot Price • CPI • Positively Correlated • S&P500 Price Index • 3 Month Lag • Negatively Correlated: • Consumer Spending • Positively Correlated • Federal Funds Rate

  10. Financial Analysis- Sector ROE ?

  11. Financial Analysis- Sector Profit Margin ? ?

  12. Financial Analysis- Industry Breakdown

  13. Financial Analysis- Industry Breakdown

  14. Financial Analysis- Major Companies Revenue Growth

  15. Financial Analysis- Major Companies Net Income Growth

  16. Financial Analysis- Major Companies Net Profit Margin

  17. Valuation Analysis

  18. Valuation Analysis:P/E + 10 Cos with negative earnings (12%) + 11 Cos with negative earnings (14%) Only 23 Cos are expected to improve their earnings in the next 4Qs (28%)

  19. Valuation Analysis:EPS ?

  20. Valuation Analysis

  21. Trailing P/E by Industry • Harman Int’l • Amazon.com(54), Expedia (11) • McDonalds • Comcast • Best Buy • GameStop • GM, Ford • Centex, Horton, KB Home, Lennar, Pulte • Eastman Kodak • Goodyear

  22. Market cap vs Earnings GM: $ -17.6 B Ford: $ -11.6 B

  23. P/E (w/o Auto Mfrs & Homebuilders): 13.4  16.2 S&P500: 13.2  15.5

  24. P/CF P/CF (w/o Auto Mfrs & Homebuilders): 0.85

  25. Recommendation Start by closing the gap (-159 bps) Overweight the sector by at least 200 bps Source: Fidelity.com

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