Consumer Staples: Stock Recommendations

1. Consumer Staples:Stock Recommendations Robert Blake Jason Ebbing Rica Rahardjo

2. Agenda • Recap of Sector Overview • Recommendations • Summary • Questions

3. Where we left off… • Mature slow growth defensive sector • Offers protection during economic downturns • International markets key to growth • Sector weights as of July 27th • S&P500: 9.36% • SIM: 7.78% (Underweight 158 bp) • Recommended to further underweight by 50bp • Valuation indicates sector is not cheap • Sector faced with constricting margins • Believe economy will continue to grow • Opportunity to invest in higher growth sectors

4. Current Sector Holdings Proposed Sector Holdings

5. Recommendation #1: Reduce Anheuser-Busch Holdings

6. Anheuser-Busch • Largest brewer in North America • 48.8% market share • Segments • U.S. Beer • International Beer • Packaging • Entertainment • Growth opportunities • International expansion • Strategic investment in other beverage producers • Distribution agreements • Rumored merger with InBev

7. A-B Business Analysis Pros • Strong brand • Successfully implemented pricing increases • Massive distribution channel • Being leveraged to diversify product mix • Strategic investments contributing to growth • Grupo Modelo generating much of BUD’s recent growth • Consistent cash flows • Dividend yield of 2.70% • History of and planned stock buybacks which should boost stock price Cons • North American growth flat • Accounts for majority of revenues • Weakness in core brands • Margins under pressure • Commodity, labor, marketing, and distribution costs increasing • Expansion and diversification strategy is a wildcard • Growth so far has largely been just enough to offset declines in core brands

8. A-B Financial Analysis • Undervalued based on 5-year historical absolute multiples • Average of target prices: $51.05 • Yields a 4.9% upside from closing price of $48.65 on July 27th • Relative valuations imply that BUD is slightly undervalued

9. A-B Valuation & Technicals • DCF model implies a value of $50.70/share • 4.2% upside from July 27th closing price • Technical Analysis • Resistance around $55/share • 50 Day Moving average - bearish • 200 Day Moving average - bullish • Chart trending down - bearish

10. Anheuser-Busch Summary • Lack of organic growth is cause for concern • International growth slow in materializing • Concerned BUD will need to make sizeable unplanned investments in marketing and expansion • Valuation, performance, and market sentiment imply limited upside gains in the near term • Recommend selling 137bp (50% of holding) • Diversification and international endeavors could be catalysts for higher valuations • Re-evaluate remaining position in 3 months

11. Recommendation #2: Increase Colgate-Palmolive Holdings

12. Colgate-Palmolive • Large, mature consumer products company • Segments • Oral, Personal, and Home Care • Pet Nutrition • Growth Opportunities • International expansion • Possible merger talks with Unilever • Undergoing restructuring plan which includes increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets.

13. C-P Business Analysis Pros • Strong brand recognition • Market leader in 53 of the 71 largest toothpaste markets worldwide • Growth in foreign markets • Currently, 75% of sales are from international operations and growing • Benefit of weak dollar • Makes goods cheaper to foreign buyers and increases earnings when translated back to dollars • Benefits of restructuring • In the second quarter, earnings skyrocketed 49% to $0.76 per share. Excluding restructuring costs, Colgate earned $0.84 a share, compared to $0.72 a year ago.

14. C-P Business Analysis Cons • Modest growth domestically • 2nd quarter sales increase over previous year: North America : 3.5% Europe/South Pacific : 17.0% Latin America: 16.0% Asia/Africa : 15.5% • Pet food recall/counterfeit toothpaste hurting brand • Colgate has been proactive in restoring trust in brand • Rising commodity prices/energy prices reduces net margin

15. Colgate (CL) Valuation • DCF model implies a value of $80.47/share • 17.5% upside from July 27th closing price of $68.45 • 2.1% Dividend Yield • Price steadily increasing along the trend line

16. CL Financial Analysis • Moderately undervalued based on 10-year historical absolute multiple measurements • Average of target prices based on multiples: $73.70 • 7.6% upside from closing price of $68.45 on July 27th

17. Colgate Summary • Generating higher earnings through restructuring plan • Excellent international growth • Market leader in their key segment (toothpaste) • DCF target price: 80.47, 17.5% upside. • Recommend buying 85 basis points (61.2% increase in current holdings)

18. Recommendation Summary • Anheuser-Busch is fairly valued • Lacking a catalyst upside is currently limited • Sell 137bp now and re-evaluate position as information about diversification strategy is available • Colgate offers an attractive upside • Company restructuring should boost growth • International exposure and weak dollar create a favorable environment for CL • Accumulate an additional 85bp • Return 52bp for investment in other sectors

19. Questions

20. BACKUP SLIDES

21. A-B Absolute Valuation Charts

22. A-B Absolute Valuation Charts

23. A-B Relative Valuation Charts

24. A-B Relative Valuation Charts

25. A-B Technical Chart

26. CL Relative Valuation Chart

27. CL Relative Valuation Chart