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Sector Outlook: Consumer Staples. Robert Blake Jason Ebbing Rica Rahardjo . Agenda. Sector Overview Sector Factors Economic Factors Financial Analysis Valuation Recommendations Questions. Consumer Staples Sector (SP-30). Ranked 7 out of 10 by market cap
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Sector Outlook:Consumer Staples Robert Blake Jason Ebbing Rica Rahardjo
Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions
Consumer Staples Sector (SP-30) • Ranked 7 out of 10 by market cap • Consumer Staples lagging S&P500 by 1.06% QTD and 3.44% YTD • S&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 07/13/2007.
Industry Makeup of SP-30 S&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 07/13/2007.
S&P500 vs. SIM Portfolio • Consumer Staples • S&P500: 9.18% • SIM: 7.72% • SIM underweight 146 bp • In recent quarters SIM has typically been underweight more
Historical Sector Performance • Sustained growth trend over last 4 years (red line) • Currently locked in a narrow trading range with support at $48 and resistance around $50.50 (orange band)
Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions
Sector Factors • Defensive (non-cyclical) • Consistent returns irregardless of economic conditions • Good dividend yields • Generally lags market during periods of growth • Composed of stable, slow growth multinational companies • Wal-Mart • Proctor and Gamble • Necessities consumers use on a daily basis
Sector Demand Relative inelastic demand for products Steady demand in US Sector relying on international expansion to spur growth Branding important to differentiate an undifferentiated product
Sector Characteristics • High barriers to entry • Dominated by large, well-established companies • High capital requirements to enter sector • Mature industry with strong brand identities • Difficult to create wide distribution network • High buyer power • Undifferentiated product equates to low switching cost
Sector Characteristics (Cont.) • Low Supplier Power • Long-term contracting/agreements common • High threat of substitution • Multiple brands competing in same product line • High threat of competition • Consumers are price sensitive (despite brand loyalty) with undifferentiated products
Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions
Economic Analysis DEMAND: • GDP growth (+) • Population growth – especially growth in middle class of developing nations (+) • Unemployment rate (+) • Consumer Price Index (-) • Personal Income (+)
Economic Analysis (cont.) SUPPLY: • Energy Prices – increase cost of operations (-) • Commodity Prices – increase price of inputs (-) • Foreign Exchange Rates – reduces profits from international operation (+/-) • Inflation – increase input costs (commodities, labor, raw materials) (-) (Increasing supply costs reduces profit margins when demand is stable)
Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions
Financial Analysis • % Revenue growth is currently above average and trending down • Year over year net profit margins changes are negative. • % Net Profit Margin is currently decreasing • Growth rate is decreasing • Dividend Yield is stable
Procter and Gamble Co. (PG)Industry: Personal and Household Products
Income Statement AnalysisSP30 and S&P 500 • Gross Profit Margins are increasing slightly • Net Profit Margin is significantly higher than SP30 • Gross Profit margins have decreased slightly • Net Profit Margin also continues to decline year over year
Cash Flow Analysis – SP30 User of Cash Flow !!
Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions
Absolute Valuation – SP30 On an absolute basis sector looks slightly undervalued.
Absolute Valuation - SP5A On an absolute basis S&P500 appears fairly valued.
SP30 Relative Valuation On a relative basis SP30 appears fairly valued.
Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions
Recommendations • Defensive Sector – outperforms S&P 500 when economy is poor. • We believe the economy will continue to fair well in the near term • Consumer staples will continue to underperform relative to the S&P500 • Growth rate is decreasing and net profit margins have declined each year since 2000. • Recommend underweighting of sector by 50 basis points now, with possible further underweighting in the future based on economic indicators (GDP growth, unemployment, inflation)