30-30 Household and Personal Products 2006F JDS

Document Sample
30-30 Household and Personal Products 2006F JDS Powered By Docstoc
					Household and Personal Products                               have appreciated recently against the dollar. Since sales    great opportunities for the leading firms in the industry
United States                                                 are predominantly outside of the United States,              to expand and significantly increase their revenues.
Industry Type                (9/6/06) Slow Growth             appreciation of foreign currencies increases the
Key Indices: S&P Household & Personal Products                industry’s profitability.                                    3. Expenses within the industry are not rising as rapidly
(S5HOUS)                                                                                                                   as in 2005. Although costs of raw materials are still
                                                              3.    Transportation and supply chain technology is          increasing, the increases are starting to slow down
Recommendation:                                    Hold       improving.        The mature companies within the            closer to the level of increasing revenues.
                                                              household and personal products industry are still
Description and Summary:                                      finding ways to increase their profitability through         Threats:
The Household and personal products industry is               technological improvements. These trends should              1. Energy prices are very high and could continue to
comprised of consumer durables. These products are            continue into the future. New technologies in inventory      increase.    Oil and natural gas prices affect the
purchased by virtually every home on a regular basis.         management and transportation efficiency should              production and transportation of all the products within
The industry is a mature industry with major                  provide a lift to the industry.                              the industry. Oil and natural gas prices have increased
competitors that have existed for a very long time.                                                                        significantly since 2005. The trend of increasing
                                                                                                                           energy prices could cut into future revenues.
Due to the intense competition in the industry and the        Weaknesses:
industries relationship with large retailers, product         1. Household and personal products companies have            2.    Costs for raw and packaging materials are
prices are relatively inelastic. The inelasticity of          relatively low price negotiability with their retailers.     increasing. Since 2005 costs for these materials have
product prices causes prices of raw materials, energy,        Due to low retail profit margins and intense                 increased significantly due to higher energy prices and
and other expenses for the industry to have a significant     competition, price increases traditionally are hard to       other costs.
effect on the industry’s profitability.                       come by. This can severely hurt profitability in times
                                                              of increasing raw material costs and other expenses.         Key Valuation Ratios to Watch:
International Competitive Structure:                                                                                       Expense ratios are very important in this industry. Due
The household and personal products industry is               2. Retailers are reducing their inventories. Walmart, the    to the intense competition, companies with the lowest
dominated by large multinational corporations. Of the         largest retailer of household and personal products, has     expense ratios have a significant advantage.
5 largest companies in the industry, sales in North           reduced the amount of inventory it holds. This directly
America comprise 31-48%. Sales in Europe comprise             reduces the sales of most household and personal             Key Items to Watch:
approximately 30% of the total, while the remaining           products companies by as much as 3%. As other                Changing energy and raw materials costs are significant
sales are scattered throughout the world.                     retailers try and follow Walmart and reduce inventory        to the success of the industry. Oil and natural gas prices
                                                              expenses, household and personal products companies          are the most important prices to watch.
The large multinational structure of these corporations       could lose even more sales.
makes the industry susceptible to changes in foreign                                                                       Return Performance versus the S&P 500 (in %):
exchange and nearly all economies throughout the              Opportunities/Trends:                                                  01    02      03  04   05 6YTD
world.                                                        1. Recent price increases from household and personal        S5HOUS -2.9      1.7 17.9 14.2 6.4 10.7
                                                              products have not caused a decrease in sales volume.         SPX      -11.9 -22.0 28.4 10.7 4.8 9.2
Strengths:                                                    This trend could show a great opportunity for the            Excess    9.0 23.7 -10.5 3.5 1.6        1.5
1. The large corporations that comprise the bulk of the       industry to relieve some of the pressure it faces to         GDP        0.8 1.9     2.7  4.2 3.5 1.6est
household and personal products industry are very well        continually cut costs in order to become more                Sources: NetAdvantage, Bloomberg
diversified. These large corporations can withstand a         profitable.
downturn in a specific portion of the industry. The size
and diversification of the companies in the industry          2. Expansion opportunities exist in China and other
promote very stable yearly growth.                            growing economies. The large conglomerate firms that
                                                              dominate this industry have the sound balance sheets
2.   The large household and personal product                 necessary to expand into growing markets. China,
companies are multinational. The Euro and the Yen             India, and many Eastern European countries provide

                                                       BM 416, Fall 2006, Analyst: Jason Stewart jason7stewart@gmail.com 2006