Transcript Consumer Staples Sector S&P500 Index

Consumer Staples Sector
Summer 2013
Clay Daney
Subrahmanyam Darbha
Agenda
• Sector Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Sector Overview
• Consumer Staples Sector (S5CONS)
o Manufacturers of essential products such as food, beverages,
tobacco, and household items
o People are unable or unwilling to cut consumer staples out of
their budget regardless of their financial situation.
o Non-cyclical
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Industry Classifications
Ticker
Name
Last Price
Market Cap
Food & Staples Retailing (8 members)
WMT
Wal-Mart Stores Inc
$73.56
$243B
CVS
CVS Caremark Corp
$57.52
$72B
COST
Costco Wholesale Corp
$108.08
$48B
Food Beverage & Tobacco (26 members)
KO
Coca-Cola Co/The
$39.41
$179B
PM
Philip Morris International Inc
$87.66
$147B
PEP
PepsiCo Inc
$79.62
$125B
Household & Personal Products (6 members)
PG
Procter & Gamble Co/The
$75.95
$212B
CL
Colgate-Palmolive Co
$56.13
$54B
KMB
Kimberly-Clark Corp
$94.35
$37B
Data as of:
Mar 28 2013
The Key Players
Company
Ticker
Last Price (6-20-13)
Market Cap
Wal-Mart Stores Inc
WMT
$73.56
$243B
Procter & Gamble Co/The
PG
$75.95
$212B
Coca-Cola Co/The
KO
$39.41
$179B
Philip Morris International Inc
PM
$87.66
$147B
PepsiCo Inc
PEP
$79.62
$125B
CVS Caremark Corp
CVS
$57.52
$72B
Altria Group Inc
MO
$34.72
$71B
Colgate-Palmolive Co
CL
$56.13
$54B
Mondelez International Inc
MDLZ
$28.68
$43B
Costco Wholesale Corp
COST
$108.08
$48B
Walgreen Co
WAG
$48.93
$47B
The Consumer Staples Sector
•The SIM portfolio is overweight consumer staples by 189 bps
SIM
Telecom,
1.49%
Utilities,
Cash, 3.19%
3.15%
Materials,
3.27%
S&P 500
Materials,
5.16%
Consumer
Discretionary,
11.78%
Information
Technology,
17.30%
Consumer
Staples,
11.06%
Energy,
11.48%
Industrials,
9.73%
Health Care,
11.41%
Data as of:
Telecom,
2.69%
Dividend
Receivables,
0.17%
Financials,
15.96%
May 13 2013
Information
Technology,
15.65%
Utilities, 3.35%
Consumer
Discretionary
, 11.97%
Consumer
Staples ,
9.17%
Energy ,
10.98%
Industrials,
10.71%
Health Care,
10.99%
Financials ,
19.34%
QTD / YTD Performance
Performance
QTD
YTD
Consumer Staples
2.67%
16.81%
S&P 500
4.45%
14.92%
Data as of:
Mar 28 2013
QTD Performance
Data as of:
Mar 28 2013
YTD Performance
Data as of:
Mar 28 2013
Business Analysis
Stock Market Cycles
“Cyclical”cycles = 4 years
“Secular” cycles = 30 years
• 2011 - beginning of a cyclical bull market.
• 2013 - tail end of cyclical bull market
Business Analysis:
Supply & Demand Dynamics
• Low price elasticity of demand
• Low beta
• Low correlation to overall market
• Producers grow by:
o Reducing costs
o Reducing prices
o Differentiating products
• Q: Why invest in staples?
• A: Slow and steady long term growth
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
The user and geography
• Consumer Staples are essential products for
consumers (domestic and foreign).
• People are unable or unwilling to cut consumer
staples out of their budget regardless of their
financial situation.
Porter’s Five Forces
Force
Characteristics
Threat level
Competition
-Low prices
-Standardized products
High
New Entrants
-Economies of Scale (high)
-Barriers to entry (high)
-Large Companies market share (high)
Low
Customer power
-Price sensitivity (high)
-Brand loyalty (low)
-Best Value seekers (high)
High
Supplier power
-Need for Low Input costs (high)
-Raw material inexpensive
Moderate
Substitutes
-Value products (low end prices)
-Necessity products (fewer substitutes)
High
Economic Analysis:
Profitability & Pricing
• Predictability and steadiness
- helps match supply and demand closely
• Economies of scale
- can be achieved relatively faster
• Non cyclical nature of the sector
- steady growth with regular dividends throughout
economic and business cycles
• Overall, the sector is well positioned for better
profitability & pricing
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Financial Analysis
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Correlation - Consumer Staples
& Other SPX500 sectors ’09 -’12
S5CONS S5COND S5HLTH S5FINL S5UTIL S5ENRS S5INFT S5INDU S5TELS S5MATR SPX500
S5CONS
S5COND
S5HLTH
S5FINL
S5UTIL
S5ENRS
S5INFT
S5INDU
S5TELS
S5MATR
SPX500
1.00
0.98
0.98
0.61
0.96
0.86
0.96
0.91
0.93
0.84
0.96
1.00
0.95
0.68
0.93
0.89
0.98
0.95
0.91
0.90
0.98
1.00
0.63
0.93
0.85
0.94
0.89
0.91
0.82
0.95
1.00
0.50
0.65
0.73
0.80
0.50
0.83
0.77
1.00
0.82
0.91
0.85
0.91
0.78
0.90
1.00
0.87
0.93
0.83
0.92
0.92
1.00
0.94
0.86
0.91
0.98
1.00
0.83
0.97
0.98
Weighted Moving Average of Price
1.00
0.76
0.88
1.00
0.94
1.00
Regression - Consumer Staples & Other SPX500
sectors ‘09-’12
Source |
SS
df
MS
-------------+-----------------------------Model | 378539.277
10 37853.9277
Residual | 682.371554
198 3.44632098
-------------+-----------------------------Total | 379221.649
208
1823.181
Number of obs
F( 10,
198)
Prob > F
R-squared
Adj R-squared
Root MSE
=
209
=10983.87
= 0.0000
= 0.9982
= 0.9981
= 1.8564
-----------------------------------------------------------------------------s5cons |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------s5cond | -.5593398
.0628114
-8.91
0.000
-.6832049
-.4354747
s5hlth |
-.758003
.0577293
-13.13
0.000
-.8718461
-.6441598
s5finl |
-1.48988
.0899044
-16.57
0.000
-1.667173
-1.312586
s5util |
.0567482
.0491653
1.15
0.250
-.0402066
.1537031
s5enrs | -.5348346
.032419
-16.50
0.000
-.5987654
-.4709039
s5inft | -1.176365
.0686285
-17.14
0.000
-1.311702
-1.041028
s5indu | -1.205989
.066378
-18.17
0.000
-1.336888
-1.075091
s5tels | -.7536217
.0552162
-13.65
0.000
-.862509
-.6447344
s5matr | -.2879355
.0292043
-9.86
0.000
-.3455269
-.2303441
spx |
1.883624
.1096506
17.18
0.000
1.667391
2.099857
_cons | -34.93129
4.583659
-7.62
0.000
-43.97035
-25.89224
------------------------------------------------------------------------------
Weighted Moving Average of Price
Reg., Corr., Ratio - Consumer Staples on SPX500 (past 5 yrs.)
Reg., Corr., Ratio - Consumer Staples on SPX500 (past 1 yr.)
Spread Analysis (5yrs.)
Spread Analysis (1yr.)
Total Returns (monthly) - Consumer Staples (past 5 yrs.)
Total Returns (monthly) - Consumer Staples vs. SPX500 (5 yrs.)
Interpretation of Valuation Metrics
•
In general, Ratios/Margins are interpreted relative to other similar
companies, Industry averages.
•
Stability of these ratios over time is an important indicator of risk or
other appropriate parameters.
•
Eg. Profitability Ratios
o Gross Profit Margin – relative cost to price standing
o Operating Profit Margin – measure of profitability (creditworthiness)
o Cash Flow to Sales – measure of productivity and creditworthiness
o Return on Assets – measure of amount of income generated per total
assets
Key highlights - valuation metrics & fundamentals
Field
CY 2014 CY 2013 Current CY 2012 CY 2011 CY 2010 CY 2009 CY 2008 CY 2007
Valuation Metrics
P/E
15.95
17.55
18.28
16.02
16.17
15.57
14.88
14.18
19.51
P/B
4.04
4.25
4.47
3.82
3.71
3.42
3.31
3.36
3.99
EV/Sales
1.27
1.33
1.35
1.22
1.24
1.21
1.14
1.04
1.4
14.08
12.67
12.58
12.18
11.43
10.93
14.25
EV/EBIT
EV/EBITDA
Dividend Yield
10.04
10.75
11.55
10.37
10.38
9.99
9.34
8.96
11.58
2.98
2.95
2.87
3.23
2.9
3.18
2.9
3.01
2.34
29.52
29.61
30.08
30.97
30.63
29.74
30.48
9.5
9.55
9.57
9.8
9.91
9.47
9.74
6.22
8.24
6.06
8.39
6.5
9.58
6.21
9.35
5.6
9.44
6.35
9.16
22.84
22.02
24.23
23.35
22.64
21.24
Fundamentals
Gross Margin
Op. Margin
Profit Margin
ROA
10.36
9.81
6.23
8.34
ROE
24.79
24.26
23.37
Periodicity: Annual; Currency: USD; Units: Billion
Key highlights - Leverage & Liquidity
Field
Current Ratio
Net Debt to
EBITDA
Total Debt
To EV
Total Debt to
Total Equity
Total Debt to
Total Assets
CY
2014
1.34
CY
2013 Current
CY
2012
CY
2011
CY
2010
CY
2009
CY
2008
CY
2007
CY
2006
1.13
1.13
1.15
1.15
1.22
1.09
1.04
1.04
1.54
1.51
1.51
1.55
1.31
1.51
1.5
1.3
0.18
0.19
0.19
0.2
0.18
0.21
0.16
0.14
87.62
84.3
82.91
78.53
68.42
82.98
71.36
63.12
31.31 30.38
29.99
29.42
27.22
30.36
27.99
24.84
1.43
Periodicity: Annual; Currency: USD; Units: Billion
Fundamentals - Income Statement
Field
CY
2014
CY
2013 Current
CY
2012
CY
2011
CY
2010
CY
2009
CY
2008
CY
2007
CY
2006
Income & Expenses per Share
Sales
Gross Margin %
383.76 367.23
32.72
32.66
EBIT
Margin %
EBITDA
48.5
45.31
R&D Expense
26.43
24.01
Earnings before
XO
Diluted Earnings
from Cont. Ops
Earnings, +ve
29.52 29.61
30.08
30.97
30.63
29.74
30.48
31.19
34.6 33.58
32.47
29.54
28.1
27.45
24.27
20.52
9.55
9.57
9.8
9.91
9.47
9.74
9.72
42.15 41.04
39.38
36.01
34.35
33.49
29.88
25.56
9.5
Margin %
Earnings
361.73 348.87 330.89 297.51 281.46 288.18 247.82 211.38
26.43
24.01
11.65
11.76
11.9
12.1
12.21
11.62
12.06
12.09
1.75
1.71
1.56
1.55
1.61
1.76
1.49
1.41
23.05 22.51
20.75
19.5
18.43
17.4
15.36
13.14
21.78 21.15
19.75
18.88
16.81
14.46
15.43
13.05
23.05 22.51
20.75
19.5
18.43
17.4
15.36
13.14
23.05 22.51
20.75
19.5
18.43
17.44
15.36
13.21
Periodicity: Annual; Currency: USD; Units: Billion
Fundamentals - Balance Sheet
CY
2012
CY
2011
CY
2010
CY
2008
CY
2007
CY
2006
Assets per Share
Cash &
Equivalents
19.94 19.37
16.34
15.23 12.94 11.41
8.63
8.03
Current Assets
83.21 82.59
82.53
71.6 63.51 62.65
Goodwill
63.11 61.62
59.14
Field
CY
2014
CY
2013 Current
Total Assets
57 49.62
56.28 50.05 47.78 46.18
31.6
273.43 268.2 261.81 240.51 212.73 203.6 193.93 166.66
Liabilities & Equity per Share
Current
Liabilities
73.94 73.07
71.59
Total Debt
85.62 81.47
78.51
Total Liabilities
Retained
Earnings
62.5 52.16 57.46 55.01 47.63
70.75
57.9 61.82 54.28 41.39
175.72 171.55 167.11 150.41 128.11 129.18 117.87 101.09
36.07 35.21
36.23
94.29 94.43
90.4
Tang Book Value
-7.76 -7.36
-5.68
Total Equity
97.72 96.64
94.7
Book Value
CY
2009
104.24
99.17
35.17
34.7 25.11 30.49 32.68
88.77 82.89 73.34 75.05 64.38
-2.81
5.05
0.55
4.99 17.22
90.09 84.62 74.51 76.06 65.58
Fundamentals - Cash Flow
CY
2014
Field
CY
2013 Current
CY
2012
CY
2011
CY
2010
CY
2009
CY
2008
CY
2007
CY
2006
32.06 31.24
26.68
25.65 26.98 23.67 20.01 18.82
Cash Flow Items per Share
Cash From
Operations
34.91
Cash Flow From
Investing
Cash From
Financing
CapEx
31.75
-14.41 -14.46
-8.44 -11.84
-10.6
-9.78 -12.99
-14.76 -14.61 -18.23 -12.51 -14.98 -12.34
-10.47 -10.15
-9.75 -9.49
-9.84
-8.55
-8.63
17.21 18.37
-9.44
-7.78
-6.61 -12.15
-8.95
-7.81
Free Cash Flow
24.44
21.62
22.41 21.82
17
14.3 11.13 11.03
Dividends
12.57
12.43
12.09 11.64
9.73
9.64
7.94
7.42
7
5.87
Dividends, Gross
12.09 11.64
9.73
9.64
7.94
7.42
7
5.87
Dividends, Net
12.09 11.64
9.73
9.64
7.94
7.42
7
5.87
Reference Items
FCF Yield
Dividend Yield
2.98
2.95
5.32
6.05
5.07
5.67
6.7
5.8
3.71
4.11
2.87
3.23
2.9
3.18
2.9
3.01
2.34
2.19
Periodicity: Annual; Currency: USD; Units: Billion
Financial Analysis:
Margins
Operating Profit Margins
Gross Margins
T12M EBITDA Margins
Profit Margins
Financial Analysis:
Earnings
Earnings per Share
Financial Analysis:
Price Ratios
Price/FCF
Price/Earnings
Price/Book
Price/Sales
Current EV/T12M EBITDA
Financial Analysis:
Equity Returns
Return on Assets
Return on Equity
Return on Capital
Financial Analysis:
Income Statement
Revenues
Operating Profit Margins T12M
Valuation Analysis
Sector
Overview
Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Valuation Analysis
Sector Valuation - Absolute
•
Absolute Basis
Median
Current
P/Trailing E
18.00
20.10
P/Forward E
17.10
17.60
P/B
4.00
4.50
P/S
1.00
1.10
P/CF
12.60
14.10
Sector is expensive relative to history
Relative Valuation
•
Relative to SP500
Median
Current
P/Trailing E
1.10
1.30
P/Forward E
1.10
1.20
P/B
1.60
1.80
P/S
0.70
0.70
P/CF
1.30
1.30
Sector is expensive relative to S&P 500
Valuation Analysis
• Relative Valuation – Industries/Companies
Absolute
Basis
•
S&P Consumer WMT.I CVS.I
500
Staples
KO.I
PM.I
PG.I
Super Retail centers Drugs
Soft
Drinks
Tobacco
Household
Products
P/Trailing
E
15.1
19.0
16.6
16.4
20.9
19.50
19.40
P/Forward
E
14.4
16.6
15.3
13.9
17.9
14.90
18.40
P/B
2.3
4.2
3.5
2.1
5.50
47.50
4.40
P/S
1.4
1.0
0.40
0.60
2.40
3.50
2.40
P/CF
10
13.4
10.9
11.40
14.60
14.80
15.0
Valuation varies widely amongst industries and companies within the sector
Valuation Analysis
Recommendation
• The SIM portfolio should maintain its overweight to the
Consumer Staples sector.
o We recommend increasing the overweight from 189 bps to
250 bps.
o We recommend trimming the portfolio’s exposure to financials
and allocating those funds to consumer staples
• Rationale
o The markets have run up significantly over the past 3 years.
o When the current cyclical bull market turns, consumer staples will
outperform other sectors with more cyclical exposure.
o Earnings are more predictable than cyclical sectors
o This makes consumer staples more attractive in the event of a
market pullback.
Q&A
Appendix
Spread Analysis (5yrs.)