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Sector Outlook: Consumer Staples

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

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  1. Sector Outlook:Consumer Staples Robert Blake Jason Ebbing Rica Rahardjo

  2. Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions

  3. 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.

  4. 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.

  5. Consumer Staples – Household Names

  6. 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

  7. 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)

  8. Performance Relative to S&P500

  9. Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions

  10. 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

  11. Sector Status

  12. 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

  13. 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

  14. 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

  15. Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions

  16. Economic Analysis DEMAND: • GDP growth (+) • Population growth – especially growth in middle class of developing nations (+) • Unemployment rate (+) • Consumer Price Index (-) • Personal Income (+)

  17. 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)

  18. Commodity Price Impact

  19. Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions

  20. 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

  21. Wal Mart (WMT)Industry: Hypermarkets & Super Centers

  22. Procter and Gamble Co. (PG)Industry: Personal and Household Products

  23. ALTRIA (MO) Industry: Tobacco

  24. 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

  25. Cash Flow Analysis – SP30 User of Cash Flow !!

  26. Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions

  27. Absolute Valuation – SP30 On an absolute basis sector looks slightly undervalued.

  28. Absolute Valuation - SP5A On an absolute basis S&P500 appears fairly valued.

  29. SP30 Relative Valuation On a relative basis SP30 appears fairly valued.

  30. Agenda • Sector Overview • Sector Factors • Economic Factors • Financial Analysis • Valuation • Recommendations • Questions

  31. 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)

  32. Questions

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