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Consumer Staples Sector Analysis by lqh68203

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									Consumer Staples Sector
      Analysis
              Assumptions
• Do not anticipate recession ending within
  the next 6 to 12 months
  – Unemployment
  – Company expenditures
  – Reported average to modest earnings

• Analysts are overly optimistic of economic
  recovery
                Assumptions
• Tech factor
  – Money flowing out of tech and into staples
            Recommendation
• Market-weight sector at approximately 9.56%
  (Currently holding 8.9%)
                Recession Scenarios
• Next class should under-weight sector, provided
  economic turnaround

• Build a defensive portfolio provided unexpected
  economic uncertainty and stagnation
           Recommendations
•   Stick with fundamentally sound companies
•   Focus on company managers
•   Company values will play a critical role
•   Invest in companies that provide
    EARNINGS
                     S&P 500 Sector Breakdown


                                                Consumer Discretionary
                                                Consumer Staples
           4.23%
      2.86%      3.37%    13.81%                Energy
  15.24%                               9.56%    Financials
                                                Health Care
                                   6.84%        Industrials
  10.75%                                        Information Technology
           14.24%            19.10%
                                                Material
                                                Telecommuncation Services
                                                Utilities




9.56% of the S&P 500 is represented by Consumer Staples

8.9% of Finance 724/824 Portfolio is represented by
Consumer Staples
         Sub-Industry Consumer Staples Breakdown
                       S&P 500 INDEX

                                         Agricultural Products
                                         Brewers
                   1% 5% 1% 6%           Distillers & Vitners
             13%
                                 2%      Drug Retail
                                   6%
  23%                                    Food Distributors
                                         Food Retailers
                                   20%   Household Products
        6%                               Packaged Foods & Meats
                   17%
                                         Personal Products
                                         Soft Drinks
                                         Tobacco




Soft Drinks represent the largest percentage of
the sector at 23%

Agriculture and Distillers represent the smallest
Percentage of the sector at 1% each
   Sub-Industry Description
• Drug Retail
• Food Distributors
• Food Retail
• Brewers
• Distillers & Vintners
  Sub-Industry Description,
           cont.
• Tobacco
• Household Products
• Personal Products
• Soft Drinks
• Agricultural Products
  Largest Consumer Staples Companies
Industry        Largest Company   Sector %   S&P %
Beverages       Coca Cola Co.      14.35     1.28

Food and Drug   Walgreen Co.        4.27      .38
Retailing
Food Products   Unilever            3.60      .32

Household       Procter &          12.47      1.11
Products        Gamble
Tobacco         Philip Morris      12.25     1.09

Personal        Gillette Co.        3.93      .35
Products
      Influence of Key Players
• Staple goods: Procter & Gamble and Kimberly
  Clark

• Home Appliances: Maytag and Stanley Works

• Food & Beverages: Unilever, Sara Lee, Coke

• Specialty Products: Avon and Estee Lauder
          Business Analysis
• Non-cyclical sector, demand is not
  dependent upon economic conditions

• Mature industries

• Defensive growth sector

• Productive sector during times of economic
  weakness
 Life Cycle of Consumer Staples
• Consumer Staples begin to gain popularity
  during a peaking economy “maxed out”
• Staples are more immune to recession then
  other sectors.
• Profits are not hurt because consumer
  products are a necessity not an alternative
 Impact of Yield Curve on Sector
• During steep yield curve, investors
  anticipate expansion coming out of
  recession

• Defensive sectors such as Consumer Staples
  do not provide high returns relative to other
  sectors during steep yield curves

• Average sector returns of 1.1% when steep
Impact of Yield Curve on Sector
• During inverted yield curves analyst expect
  economic slowdown
• Inverted yield curves are popular for
  defensive stocks (consumer staples)
          Economic Influences
• GDP
  – 3 month outlook 2.5% increase, will cause
    minimal impact on sector

• Inflation
  – 3 month outlook 3%, will cause minimal impact
    Economic Influences, cont.
• Risk-free rate
  – 3 month outlook ~5.0%, will have positive
    impact

• Dollar vs. Euro
  – 3 month outlook .9%, will have a very positive
    impact (Very Positive)
           External Factors
• Legal and regulatory issues (Tobacco)

• Global Strengths (Euro)

• Supply chain issues (multi-channel
  companies)

• Market based pressures
           Demand Analysis
• Low population growth in U.S.

• Aging baby-boom generation decreases
  demand for Consumer Staples

• International population increasing, markets
  expanding
          Difficulty of Entry
• High barriers to entry

• Large up-front investment

• Dominance in market share is important

• Only large companies will be able to
  compete on national and international level
                              Income Statement
                                                                        Consumer Staples   S&P 500
                                                                        ($ Mill)           ($ Mill)
Revenue                                                                 18,820             13,207
Cost of Sales                                                           11,348              8,360
Gross Profit                                                             6,545              4,011
Expenses:
           S,G,&A                                                         4,495             1,973
           R&D                                                              350               592
           Depreciation &                                                   561               740
              Amortization

EBIT                                                                      2,054             1,876
Interest Expense                                                            321               819
Income Tax Expense                                                          612               359

Net Income                                                                1,133              450

EPS Reported                                                                1.70             1.04
EPS Adjusted                                                                1.92             1.67
**Information obtained from Stock Val
**Numbers are mean (average) for Consumer Staples Sector and S&P 500, and LFY
        Cash Flows from Operations
               Cash Flow From Operations

10000
 9000
 8000
 7000                                      Individual Companies of
 6000                                      Consumer Staples ($ Mill)
                                           Consumer Staples-Mean ($
 5000
                                           Mill)
 4000                                      S&P 500-Mean ($ Mill)
 3000
 2000
 1000
    0
              Ratio Analysis
• Liquidity
  – Can the firm meet current obligations?

• Leverage
  – Can the firm cover interest expense payments?

• Activity
  – Is the firm efficient in managing total assets?

• Profitability
  – Is the firm profitable in its operations?
                          Financial Ratios
16
14
12
10
8                                                                                SECTOR
                                                                                 S&P
6
4
2
0
     Current Ratio        Quick Ratio   Times Interest Earned   Asset Turnover


              Liquidity                  Leverage               Efficiency
             Financial Ratios, cont.

80
70
60
50
40                                                                SECTOR
                                                                  S&P
30
20
10
0
     Days in Inventory   Days in Receivables   Days in Payables


                             Efficiency
                    Margin Ratios

45
40
35
30
25                                                               SECTOR
20                                                               S&P
15
10
5
0
     Gross Margin    ROE               ROA   Net Profit Margin


                       Profitability
Current Sector Rotation Model
       Valuation Analysis
25

20

15
                            Sector
10                          S&P

 5

 0
     P/E     P/B     P/S
               Price relative to S&P
                PRICE RELATIVE TO S&P 500 INDEX WITH OPERATING EPS (SPX) StockVal®
    APR 2001 = 100                                                   ANNUAL RATE          CUMULATIVE
S&P Cons. Staples Sector Composite A (SP-30)                            +31.8%              +31.8%




  133 04/30/01 - 04/30/02
                                                                                                   SP-30
  130

  127

  124

  121

  118

  115

  112

  109

  106

  103

  100                                                                                              SPX

   97
4/01    5/01    6/01        7/01   8/01   9/01   10/01 11/01 12/01   1/02   2/02   3/02     4/02    5/02
      Detailed Recommendation
• Market-weight sector at approximately
  9.56% (Currently holding 8.9%)
• Industries showing growing strengths in
  fundamental, values and quality
  –   Food and Beverage
  –   Household & Personal Products
  –   Restaurants
  –   Tobacco
             Final Thought
• Previous class should of increased portfolio
  weight in this sector when it was
  undervalued, not decrease.
• Tailor portfolio according to the health of
  the economy

								
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