Consumer Discretionary Goldman - PowerPoint

							Consumer Discretionary
     Jordan Coughlin
     Mercedes Davis
       Daniel Jones
     Nick Kleinhenz
       Keith Little
      Matt Rhenish
     Arik Shteinhauz
     Stephanie Vince
       Tim Watson
     Consumer Discretionary
 Sector Background
 Key Drivers
 Financial Analysis
 Valuation
 Recommendation- Market Weight
             Background
                 S&P 500 Sectors   Consumer
                                   Discretionary
                                   Consumer
                                   Staples
                                   Energy

         3.37%
                                   Financials
     4.23%
    2.86%            13.81%        Healthcare
15.24%                   9.56%
                                   Industrials
10.75%                    6.84%
    14.24%            19.10%       Information
                                   Technology
                                   Materials

                                   Telecommunicatio
                                   n Services
                                   Utilities
       Background
                        Auto Components
Consumer Discretionary Industries
                        Consumer Durables
                        and Apparel
           8%
                        Hotels Restaurants and
 24%            8%
                        Leisure

                 8%     Media


                        Retailing
                 12%
16%
                        Movies and
                        Entertainment
          24%
                        General Merchandising
           Background
                         Other Companies
Consumer Discretionary
     Companies           AOL Time Warner


           3%            Disney, Walt
                         Company
       3%
                         Home Depot
 18%
                         Target

                   48%   Viacom
6%
 3%                      Wal-Mart
 8%
      4%                 General Motors
           7%
                         McDonalds
       Background Summary
 Sector is 13.81% OF S&P 500
 Sector performance is dominated by three
  sub-sectors –General Merchandising, Retail,
  Movies and Entertainment
 8 companies make up over 50% of the
  sector; WMT, AOL, HD comprise 30% of
  the sector
            Key Drivers

 Consumer Spending
 Interest Rates
Drivers- Consumer Spending
– 3.5% increase in Q1 02; down from 6% from
  Q4 01
– Current personal savings rate at 2% (up from
  1.6% Feb)
– Held up well throughout recession; little pent
  up demand
     Drivers- Interest Rates
– Very strong inverse correlation between interest
  rates and sector’s price (relative to S&P 500)
   » Low interest rates fuel mortgage refinancing,
     durable goods spending
   » Low interest rates discourage saving, encourage
     spending
– Current rates are lowest in 30 years
– Analysts and consumers expect rate increase as
  soon as August
Sector Price Relative to S&P vs. Interest Rates
         Key Drivers Summary
   Spending: Pent up demand usually leads out
    of recession
    – Little pent up demand
   Interest Rates: Declining rates fuel spending
    – Rates expected to rise
   Implications for Sector?
    – Negative
         Financial Analysis
 Sales & Earnings
 Margins
                     Financial Analysis
                              Sales & Earnings
                                    1999          2000          2001
Sales Growth

  -Sector                                  14%           10%           37%
  -Industry
     -Apparel                               18%          14%            1%
     -Home Improvement Retail               21%          22%           18%
     -Tire & Rubber                          5%          16%           -3%
     -Auto Parts & Equipment               137%           4%           -7%
     -Broadcasting & Cable TV               27%          45%           22%
     -General Merchandise Stores            17%          16%           25%

                                    1999          2000          2001
Earnings Growth
   -Sector                                 -14%          -11%          -67%
   -Industry
      -Apparel                               4%            1%          -24%
      -Home Improvement Retail              33%           38%            4%
      -Tire & Rubber                       -50%          -64%            n/a
      -Auto Parts & Equipment              114%          -15%            n/a
      -Broadcasting & Cable TV              11%           92%            n/a
      -General Merchandise Stores           18%           10%           26%
                    Financial Analysis
                                    Margins
                                      1999           2000           2001
Operating Margins (EBIT/SALES)
  -Sector                                     9.82           8.92          5.11
  -Industry
     -Apparel                                11.77          11.07          8.89
     -Home Improvement Retail                 8.48           9.44          8.47
     -Tire & Rubber                           4.71           3.42          0.84
     -Auto Parts & Equipment                   6.7           5.72          1.23
     -Broadcasting & Cable TV                26.87          38.76          5.33
     -General Merchandise Stores              5.98           5.81          5.48


                                      1999           2000           2001
Net Profit Margin

   -Sector                                    4.52           3.95          2.62
   -Industry
      -Apparel                                7.18           6.66          6.45
      -Home Improvement Retail                4.92           5.58          5.31
      -Tire & Rubber                          2.32           1.51          0.18
      -Auto Parts & Equipment
      -Broadcasting & Cable TV
      -General Merchandise Stores
     Financial Analysis Summary
 Sales have continued to grow, driven by
  spending
 Have not translated into higher earnings
    – Difficult economic conditions
    – Price competition within industry cut margins
   Implications?
    – Margins likely to improve
    – Future spending remains uncertain
               Valuation
 Ratios
 Relative Valuation
Valuation
  Ratios
Relative Valuation
         Relative Valuation, cont.
 Historically, strong correlation between
  Sector’s price and earnings relative to the
  S&P’s.
 Recent divergence between sector earnings
  and price
    –   Expansionary Fed policy
    –   Strong consumer spending
    –   Expectations for growth
    –   Probably unsustainable
          Valuation Summary
 Ratios indicate sector overvalued
 Recent divergence between sector price and
  earnings is uncharacteristic and probably
  unsustainable
 Implications?
    – Negative
                      Summary
   Key Drivers
    – Consumer spending uncertain, interest rates likely to
      rise.
   Financial Analysis
    – Revenues strong, earnings & margins weak. Margin
      improvement likely, spending uncertain.
   Valuation
    – Ratios and relative charts indicate sector overvalued.
             Recommendation
   We recommend market weighting the
    Consumer Discretionary sector in the
    portfolio.
    – S&P: Rating = 3.6, slightly better than “Hold”
    – Gruntal: Suggests 17%
    – Goldman Sachs: Suggests 13%
Questions???
              Cooper Tire
 133% Return
 P/E 43.35 v. Industry P/E 33.4 v. Sector P/E
  27.1
 5 yr Capital Spending Growth Rate -10.2%
 ROE: 15.93% (1999), 13.93% (2000),
  7.04% (2001)