Transcript THE STOCK MARKET Consumer Staples Stock Presentation Kurt Brown René Hegglin Shengbo Mao Agenda • • • • Recap of Sector Recommendation Stock Recommendation Summary Questions 11/6/2015 Consumer Staples Stock Presentation.

THE STOCK MARKET
Consumer Staples
Stock Presentation
Kurt Brown
René Hegglin
Shengbo Mao
Agenda
•
•
•
•
Recap of Sector Recommendation
Stock Recommendation
Summary
Questions
11/6/2015
Consumer Staples Stock Presentation
2
SIM Portfolio
Sector
S&P 500 Weight
SIM Weight
+/-
Consumer Discretionary
9.11%
7.51%
-1.60%
Consumer Staples
11.94%
12.23%
0.29%
Energy
12.35%
12.80%
0.45%
Financials
14.66%
6.59%
-8.07%
Health Care
12.65%
13.13%
0.48%
Industrials
10.09%
11.97%
1.88%
Information Technology
19.04%
21.97%
2.92%
Materials
3.39%
4.52%
1.13%
Telecommunication
3.09%
3.51%
0.43%
Utilities
3.68%
3.19%
-0.49%
Weights as of 10-31-09
11/6/2015
Consumer Staples Stock Presentation
3
Consumer Staples Recap
• Increase weight of consumer staples by 26
basis points
– Gives a 55 bp overweighting
– Slow economic recovery
– The market has recovered too much too quickly
• Will see a small correction fairly soon
– Exposure to international growth
11/6/2015
Consumer Staples Stock Presentation
4
Stock Recommendation
SELL
BUY
SELL
BUY
11/6/2015
~
~
~
~
332 bps of Safeway (SWY)
332 bps of Procter & Gamble (PG)
50 bps of PepsiCo (PEP)
76 bps of Philip Morris (PM)
Consumer Staples Stock Presentation
5
Sector Holdings
• Current Holdings
S&P 500 – 11.94%
SIM – 12.22%
•
•
•
•
PepsiCo – 4.00%
Safeway – 3.32%
Wal-Mart – 2.86%
Philip Morris – 2.04%
• Recommended Holdings
S&P 500 – 11.94%
SIM – 12.48%
•
•
•
•
PepsiCo – 3.50%
Procter & Gamble – 3.32%
Wal-Mart – 2.86%
Philip Morris – 2.80%
Weights as of 10-31-09
11/6/2015
Consumer Staples Stock Presentation
6
Industry Weightings
40.0%
35.0%
30.0%
25.0%
S&P
20.0%
Current SIM
Recommended SIM
15.0%
10.0%
5.0%
0.0%
Soft Drinks
11/6/2015
Household
Products
Tobacco
Packaged Foods
Supercenters
Consumer Staples Stock Presentation
Drug Retail
Food Retail
7
Target Prices
Company
Current Price
Target Price
Dividend
Upside Potential
Philip Morris
$49.33 - $50.95
$62.39
4.7%
27.1%-31.0%
Procter & Gamble
$61.14 - $62.60
$74.55
2.8%
21.8% - 24.7%
Wal-Mart
$52.36 - $53.75
$62.19
2.1%
17.8% - 20.9%
PepsiCo
$61.15 - $62.47
$71.00
2.9%
16.6% - 19.0%
Safeway
$22.98 - $23.60
$25.05
1.7%
7.9-10.7%
11/6/2015
Consumer Staples Stock Presentation
8
Safeway
• Safeway (founded 1915) is a food and drug
retailer with over 1,700 stores mainly spread
in the western and central parts of the United
States and Canada.
• Founded in 1915, headquarters in Delaware,
about 197,000 employees
• Competitors are: Kroger, SUPERVALU, WalMart, Target
11/6/2015
Consumer Staples Stock Presentation
9
Safeway YTD
Jan 30:
Safeway
recalls
peanuts
from 66
stores
Feb 26:
Safeway reiterates
EPS guidance of
$2.34-$2.44
Expected was $2.32
11/6/2015
Apr 30:
lowers
guidance to
EPS: $2.10$2.30
Expected
was $2.23
Mar 6:
Quarterly
dividend of
$0.0828
per
common
share ann.
Aug 6:
Safeway
recalls beef
from six
states
Aug 23:
Safeway lowers
guidance to EPS:
$1.70-$1.90
Expected was $2.07
Consumer Staples Stock Presentation
Aug 26:
Quarterly
dividend of
$0.10 per
common
share
announced
Oct 15:
Reaffirmation of
guidance
EPS: $1.70-$1.90
expected was $1.74
(Q3 EPS was $0.31
instead of $0.29)
Aug 4:
SIM decides to buy
288bps of Safeway
at a price of
$19.01 with target
price $24.40
10
Safeway Perspective Last Quarter
• August 4, 2009: Price Target for Safeway
(based on a multiples-only basis) was $24.40
• Price Safeway August 4, 2009: $19.01
• Potential Upside + Dividend Yield: 30.3%
• Class agreed to buy 288bps of Safeway
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Consumer Staples Stock Presentation
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Safeway Perspective Last Quarter
11/6/2015
Consumer Staples Stock Presentation
12
Safeway This Quarter
11/6/2015
Consumer Staples Stock Presentation
13
Safeway Inc. (SWY)
Analyst: René Hegglin
13.11.2009
Terminal Discount Rate =
Terminal FCF Growth =
Year
2009E
Revenue
41,282
% Growth
-6.40%
EBT
1,168
EBT Margin
2.8%
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
Plus/(minus) Changes WC
% of Sales
2.0%
1,077
2.6%
42,950
2.0%
1,091
2012E
44,023
2.5%
1,211
2013E
45,124
2.5%
1,241
2014E
46,478
3.0%
1,278
2015E
47,872
3.0%
1,316
2016E
49,548
3.5%
1,387
2017E
51,282
3.5%
1,436
2018E
53,333
4.0%
1,493
2019E
55,466
4.0%
1,553
2.5%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
339
356
371
374
384
395
407
421
436
453
471
0.85%
0.86%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
0.9%
321
323
327
317
325
335
345
362
374
389
405
18.0%
22.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
754
764
894
916
943
972
847
% of Sales
42,108
2011E
0.82%
% Growth
Add Depreciation/Amort
2010E
9.5%
4.0%
1,026
1,062
1,104
1,148
-10.9%
1.3%
17.0%
2.5%
3.0%
3.0%
5.5%
3.5%
4.0%
4.0%
1,073
1,053
1,074
1,101
1,128
1,162
1,197
1,239
1,282
1,333
1,387
2.6%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
44
206
237
176
90
-139
-144
-149
-154
-160
-166
0.1%
0.5%
0.6%
0.4%
0.2%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
1,858
1,769
1,933
1,761
1,579
1,627
1,436
1,486
1,538
1,600
1,387
Capex % of sales
4.5%
4.2%
4.5%
4.0%
3.5%
3.5%
3.0%
3.0%
3.0%
3.0%
2.5%
Free Cash Flow
106
Subtract Cap Ex
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
2,940
7,491
10,431
1.10%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
11.4
12.3
7.1
7.4
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
416.5
$
$
23.21
25.05
7.9%
6,412
219
0.53
244
142
409
555
339
589
629
651
677
982
129.8%
-41.6%
187.3%
35.6%
-38.9%
73.5%
6.9%
3.5%
4.0%
44.9%
28%
72%
100%
Terminal Value
Free Cash Yield
12.8
13.8
7.4
7.8
12.7
13.7
7.3
7.7
18,564
5.29%
Terminal P/E
16.2
Terminal EV/EBITDA
8.4
Safeway Sensitivity Analysis
11/6/2015
9.25%
9.50%
9.75%
10.00%
3.50%
$24.67
$23.47
$22.36
$21.34
3.75%
$25.51
$24.22
$23.04
$21.96
4.00%
$26.43
$25.05
$23.78
$22.62
4.25%
$27.45
$25.95
$24.59
$23.35
4.50%
$28.57
$26.94
$25.47
$24.14
4.75%
$29.81
$28.04
$26.44
$25.00
Consumer Staples Stock Presentation
15
Safeway Valuation Multiples / DCF
Absolute
Valuation
P/Forward E
P/S
P/EBITDA
P/CF
Current
14.2
0.3
5.37
6.7
13.1
0.23
3.74
4.9
Avg Price from Multiples
Price Target from DCF
$
$
25.83
25.05
Weighted Price Target
Current Price
$
$
25.28
23.21
Upside Potential
11/6/2015
Median
Target
Multiple
13.65
0.27
4.25
5.6
Target E, S,
Target Price
etc/Share
1.74
23.75
98.6
26.16
6.35
25.4
5
28
30%
70%
8.93%
Consumer Staples Stock Presentation
16
Safeway Valuation Summary
• Low upside left (~5-10%) even with optimistic
assumptions concerning sales growth
• Revenues uncertain due to deflationary
competition (Kroger, Wal-Mart, SUPERVALU)
• Overreaction of market when guidance was
confirmed (10/15/09)
• Take away the gains from last quarters purchase
(we nearly reached the implied price target of
$25.48 estimated in Aug/09)
• Diversify into Consumer Goods
11/6/2015
Consumer Staples Stock Presentation
17
Safeway Risks & Benefits
• Risks
– Deflationary price history in dairy and food YTD 
even stronger price war upcoming?
– Only national exposure instead of international (with
highest exposure in California)
– High unemployment in the US
• Benefits
–
–
–
–
11/6/2015
Stronger results than expected
Cash-flow increased (less investment)
Stock repurchase program still alive
Sales trend improves
Consumer Staples Stock Presentation
18
Procter & Gamble (PG)
• Company overview: Procter & Gamble is a
consumer goods manufacturer, founded in 1837,
headquartered in Cincinnati OH.
• Market capitalization of $181 billion.
• P&G’s products are sold in over 180 countries
with only 55% in North America, and 32% in
developing countries.
• Customers of P&G are merchandisers, grocery
stores and drug stores like Wal-Mart and Target
11/6/2015
Consumer Staples Stock Presentation
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Procter & Gamble
11/6/2015
Consumer Staples Stock Presentation
20
P&G Stock
11/6/2015
Consumer Staples Stock Presentation
21
P&G Financial Analysis
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1997
1998
1999
2000
2001
2002
EBITDA Margin
11/6/2015
2003
2004
2005
2006
2007
2008
2009
Net Profit Margin
Consumer Staples Stock Presentation
22
Procter & Gamble
Terminal Discount Rate =
Terminal FCF Growth =
11/16/2009
9.5%
4.0%
Year
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Revenue
79,819
83,810
87,582
91,523
95,641
99,945
104,443
108,621
112,965
117,484
122,183
5.0%
4.5%
4.5%
4.5%
4.5%
4.5%
4.0%
4.0%
4.0%
4.0%
15,645
17,013
17,684
17,664
18,459
19,289
20,157
20,964
21,802
22,674
23,581
19.6%
20.3%
20.2%
19.3%
19.3%
19.3%
19.3%
19.3%
19.3%
19.3%
19.3%
1,357
1,425
1,496
1,563
1,634
1,707
1,784
1,855
1,930
2,007
2,087
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
4,068
4,424
4,598
4,999
5,224
5,459
5,705
5,933
6,170
6,417
6,674
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
26.0%
11,577
12,590
13,086
14,228
14,868
15,538
16,237
16,886
17,562
18,264
18,995
8.8%
3.9%
8.7%
4.5%
4.5%
4.5%
4.0%
4.0%
4.0%
4.0%
3,193
3,352
3,416
3,569
3,730
3,898
4,073
4,236
4,406
4,582
4,765
4.0%
4.0%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
(448)
(1,197)
(377)
(377)
(383)
(400)
(418)
(434)
(452)
(470)
(489)
% Growth
EBT
EBT Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
-0.6%
-1.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
Subtract Cap Ex
% of Sales
3,193
3,352
3,503
3,661
3,826
3,998
4,178
4,345
4,519
4,699
4,887
Capex % of sales
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
Free Cash Flow
11,129
11,393
12,622
13,759
14,390
15,038
15,714
16,343
16,997
17,677
18,384
2.4%
10.8%
9.0%
4.6%
4.5%
4.5%
4.0%
4.0%
4.0%
4.0%
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
92,199
40%
140,269
232,469
60%
100%
Terminal Value
5.67%
Free Cash Yield
347,620
5.29%
Current P/E
Projected P/E
17.0
20.1
15.6
18.5
15.0
17.8
Terminal P/E
18.3
Current EV/EBITDA
Projected EV/EBITDA
11.3
13.2
10.4
12.2
10.1
11.8
Terminal EV/EBITDA
12.8
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
3,154.0
$ 62.27
$ 73.71
18.4%
20,652
4,781
1.52
P&G Valuation
9.25%
9.50%
9.75%
10.00%
3.5%
$72.64
$69.53
$66.58
$63.91
3.75%
$74.91
$71.67
$68.45
$65.62
4.0%
$77.22
$73.71
$70.33
$67.32
4.25%
$79.69
$75.95
$72.33
$69.13
4.5%
$82.50
$78.35
$74.59
$71.18
4.75%
$88.99
$81.48
$77.43
$73.75
11/6/2015
Consumer Staples Stock Presentation
24
P&G Valuation
Procter & Gamble
Absolute
Valuation
P/Forward E
P/S
P/EBITDA
P/CF
Median
Current
20.2
2.6
11.31
16.8
14.8
2.3
8.48
11.5
Avg Price from Multiples
Price Target from DCF
$
$
76.51
73.71
Weighted Price Target
Current Price
$
$
74.55
62.31
Upside Potential
11/6/2015
Target
Target E, S, Target Price
Multiple
etc/Share
18
4.14
74.52
2.5
27.49
68.73
11
7.31
80.42
15
5.49
82.35
30%
70%
19.64%
Consumer Staples Stock Presentation
25
P&G Valuation Relative to Industry
P&G
Safeway
Median
Current
Difference
Median
Current
Difference
P/Trailing E
1.0
0.84
-16%
0.98
1.1
12%
P/Forward E
1.0
0.97
-3%
0.96
1
4%
P/B
1.0
0.70
-30%
1
0.7
-30%
P/S
1.1
1.1
-
1.2
1.2
0%
P/CF
1.1
1.0
-9%
1
1
0%
11/6/2015
Consumer Staples Stock Presentation
26
P&G Valuation Relative to S&P 500
P&G
Safeway
Median
Current
Difference
Median
Current
Difference
P/Trailing E
1.2
0.8
-33.3%
0.78
0.68
-13%
P/Forward E
1.2
0.86
-28.3%
0.77
0.76
-1%
P/B
2.6
1.2
-53.8%
0.8
0.6
-25%
P/S
1.8
2.1
16.7%
0.2
0.2
0%
P/CF
1.5
1.1
-26.7%
0.6
0.5
-17%
11/6/2015
Consumer Staples Stock Presentation
27
P&G Absolute Valuation
P&G
Safeway
Median
Current
Difference
Median
Current
Difference
P/Trailing E
20.2
14.8
-26.7%
15.6
12.4
-21%
P/Forward E
2.6
2.3
-11.5%
14.2
13.1
-8%
P/B
8.5
2.8
-67.1%
2.5
1.4
-44%
P/S
11.31
8.48
-25.0%
0.3
0.2
-33%
P/CF
16.8
11.5
-31.6%
6.7
4.9
-27%
11/6/2015
Consumer Staples Stock Presentation
28
Benefits
• Attractive valuation
• Competitive strengths in developing markets
– 45% of revenues are international
• Gillette acquisition boosts sales and profits
• 23 brands each generating over $1 billion in sales
annually and another 20 over $500 million
• Share buybacks
• Increased dividend for 53 consecutive years
• AA credit rating
11/6/2015
Consumer Staples Stock Presentation
29
Risks
• Increases in raw material and energy costs
• Increased marketing and product
development costs may hurt earnings
• New CEO
• Consumers continue trading down
• The US Dollar continue to decrease in value
11/6/2015
Consumer Staples Stock Presentation
30
Philip Morris
Company Overview
Philip Morris International Inc. (PMI), incorporated in 1987, Philip Morris
International the world's second-largest tobacco company, behind only China
National Tobacco, and it claims almost 16% of the non-U.S. market. PMI owns
seven of the leading 15 international cigarette brands, including Marlboro,
the company's flagship brand. Its products are sold in over 160 countries.
11/6/2015
Consumer Staples Stock Presentation
31
Philip Morris DCF Method
DCF Model Sensitivity Analysis
Valuation
8.5%
WACC
9.0%
9.5%
$ 125.09
$ 111.56
$ 101.41
$ 87.20
$ 77.73
$ 70.96
$ 107.63
$ 97.89
$ 90.32
$ 79.30
$ 71.67
$ 66.07
10.0%
10.5%
11.0%
Growth
6.0%
5.5%
5.0%
4.0%
3.0%
2.0%
$
$
$
$
$
$
149.52
129.77
115.66
96.86
84.89
76.60
$
$
$
$
$
$
94.52
87.25
81.43
72.71
66.47
61.80
$
$
$
$
$
$
84.31
78.73
74.16
67.13
61.98
58.03
$
$
$
$
$
$
76.14
71.75
68.09
62.35
58.04
54.69
Valuation range is 9% - 10% for the terminal discount rate and 2% - 4% for
the terminal free cash flow growth rate. This subset of the analysis yields a
valuation range of $61.80 to $87.20, which suggests almost zero downside
risk against at least 22.0% upside gains.
11/6/2015
Consumer Staples Stock Presentation
32
Final Price Target
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
Median
16.1
7.3
16.1
11.98
117
11.1
1.2
7.2
2.83
8.8
14
2
9.9
6.76
13.1
#Your *Your Target
Your Target
Current
Target
E, S, B,
Price
Multiple etc/Share
15.7
4
15.4
10.1
13.3
14.5
3
9.9
8.43
13.1
Taking account 70% of DCF model result and 30%
of the result from multiples method, I come up
with the final target price $62.39
11/6/2015
Consumer Staples Stock Presentation
3.49
17.40
6.82
5.73
2.97
Valuation
$
$
$
$
$
$
50.58
52.19
67.47
48.33
38.95
51.50
$
Current Price $
Differ
BUY below $
SELL above
$
62.39
50.64
23.20%
40.55
56.15
Final Val.
33
Investment Thesis
• Strong business fundamentals and results
• Powerful pricing ability
• Superior infrastructure, brand portfolio and geographic
balance
• Manageable excise tax and regulatory environment
• Sustainable cash flows and excellent liquidity
• Continue to reward shareholders over the long term
• Potential growth in emerging markets
• Expected currency tailwinds in long-term
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Possible Risks
• Weaker industry volume and some consumer down trading
• Tobacco sector resilient but not immune to the effects of a
recession
• Currency headwinds in the short-term
• Long-term threats from increased regulation, litigation, and
taxation
• Exposed to cultural, economic, and political risks inherent to
regions of emerging and developing markets.
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PepsiCo
• Sell ~ 50 bps
– Attractively valuation
– Frito-Lay – fastest growing major food or beverage
company in the US this year
– Merger with The Pepsi Bottling Co. and
PepsiAmericas
• Potential short-term issues
– 5th largest holding in SIM portfolio
• Trim some gains
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Summary
SELL
BUY
SELL
BUY
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~
~
~
~
332 bps of Safeway (SWY)
332 bps of Procter & Gamble (PG)
50 bps of PepsiCo (PEP)
76 bps of Philip Morris (PM)
Consumer Staples Stock Presentation
37
What questions do you have?
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Consumer Staples Stock Presentation
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