Consumer Staples SectorConsumer Staples Sector

CHANG JUNG-HOONCHANG JUNG-HOON

CLEMENT LEANNE NICOLECLEMENT LEANNE NICOLE

CRAWFORD BETHANY ANNCRAWFORD BETHANY ANN

May 2, 2006

2Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Table of Contents

• Sector Overview

• Financial Overview

• Business and Economic Analysis

• Valuation Analysis

• Investment Strategy

3Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

S&P 500 Weights

S&P 500 Weights

10.27%

9.57%

9.55%

3.28%

15.29%3.35%11.34%

2.98%

21.10%

13.28%

Cons Discr Con Staples Energy Utilities Info Tech

Telecom Industrials Materials Financials Health Care

4Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Current SIM Weights

SIM Weights

8.80%10.91%

9.42%

1.15%

16.77%2.37%12.15%

1.87%

19.87%

16.35%

Cons Discr Con Staples Energy Utilities Info Tech

Telecom Industrials Materials Financials Health Care

5Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Consumer Staples Industries

• Beverages (8)

• Food & Staples Retail (11)

• Food Products (11)

• Household Products (4)

• Personal Products (3)

• Tobacco (3)

6Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Our Holdings

• Anheuser-Busch – Beverage• Procter & Gamble – Household Products• Wal-Mart – Food & Staples Retail• Sysco Corp – Food & Staples Retail

7Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

How are we doing??

Shares Price Pd Current Price Gain/(Loss)

BUD 15,700 $ 44.55 $ 44.58 $471.00

PG 13,900 $ 50.30 $ 58.21 $109,949.00

WMT 7,300 $ 47.91 $ 45.03 $(21,024.00)

SYY 12,200 $ 35.38 $ 29.89 $(66,978.00)

$22,418.00

8Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

How is the Sector Doing??

• QTD – 0.62%• YTD – 1.60%

Financial OverviewFinancial Overview

10Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Income Statement Ratios

11Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Balance Sheet Ratios

12Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Cash Flow

13Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Revenues & Margins

14Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Relative Revenues & Margins

15Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Dupont Analysis

Business and Economic Analysis Business and Economic Analysis

17Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Demand

• Mature industry – steady demand in United States• Room for growth overseas• Dependent on GDP growth / population growth• Defensive stocks – typically experience stable demand

and earnings growth despite external factors.• Unemployment • Inflation

18Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Supply

• Factors that could affect input costs:– Oil prices

• Recently high, possibly increasing

• Increases inputs – transportation, plastics, etc.

• Affects expected inflation

– Federal funds rate• Higher rates favor defensive companies

• Lower rates favor cyclical companies

• Expectation

– Degree of inflation• Increases cost of inventory, creates margin pressure

19Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Profitability and Pricing

• Increases in input costs combined with stable demand would decrease profit margins.

• Barriers to entry in sector:

– Dominated by large well-established companies – high capital requirements impossible for new companies

– Relative maturity of industry

– Competition primarily for overseas market share

• Minimal product substitution under ordinary economic conditions – power of branding.

20Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Inflation vs Valuation

• Inflation depress valuations: JPMorgan finds that for every 1% rise in inflation above 25-year trend, the trailing P/Es decline by 0.85x.

• JPMorgan sees that inflation has been fairly well contained considering high energy and commodity prices. However, if energy and commodity prices are sustained at the current elevated levels, they see upside risks to inflation.

Excerpt: JPMorgan Equity View (21 April 2006)

Inflation vs Trailing reported S&P500 P/E – Negative relationship

21Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

StockVal®S&P CONS. STAPLES SECTOR COMP ADJ (SP-30) Price 45.661996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

CPI-ENERGY YTY % CHANGE (SMOOTHED)-16

-8

0

8

16

24

32

HI 28.2 LO -14.9 ME 7.0 CU 20.6

04-30-199603-31-2006

PRICE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.5

0.6

0.7

0.8

0.9

1.1

1.3

HI 1.24 LO 0.59 ME 1.00 CU 0.94

04-26-199604-28-2006

EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.9

1.0

1.1

1.2

1.3

HI 1.30 LO 0.97 ME 1.06 CU 1.02 FY1 0.95 FY2 0.95

06-30-199603-31-2006

Fundamental Factors

CPI-Energy and Sector Valuation

22Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Fundamental Factors

• Interest rates significantly affect the earnings and values.

• Negative correlation.

StockVal®S&P CONS. STAPLES SECTOR COMP ADJ (SP-30) Price 45.021996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

US TREASURY NOTE 5 YR %2

3

4

5

7

HI 6.85 LO 2.08 ME 4.69 CU 4.90 GR -2.5%

04-19-199604-14-2006

PRICE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.5

0.6

0.7

0.8

0.9

1.1

1.3

HI 1.24 LO 0.59 ME 1.01 CU 0.92

04-19-199604-21-2006

EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.9

1.0

1.1

1.2

1.3

HI 1.29 LO 0.97 ME 1.06 CU 1.03 FY1 0.95 FY2 0.96

06-30-199612-31-2005

Interest Rates and Sector Valuation

23Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Fundamental Factors

• Personal consumption expenditure is also a good indicator of the sector’s relative earnings and valuation.

Consumer Expenditure and Sector ValuationStockVal®S&P CONS. STAPLES SECTOR COMP ADJ (SP-30) Price 45.66

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

PERSONAL CONSUMPTION EXP-REAL,SAAR ($BIL) YTY % CHANGE (SMOOTHED)1

2

3

4

5

6

HI 5.5 LO 1.9 ME 3.7 CU 3.3

04-30-199602-28-2006

PRICE RELATIVE TO S&P CONSUMER DIS. SECTOR COMP ADJ (SP-25) M-Wtd0.7

0.8

0.9

1.1

1.3

1.5

HI 1.47 LO 0.71 ME 1.12 CU 1.09

04-26-199604-28-2006

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P CONSUMER DIS. SECTOR COMP ADJ (SP-25) M-Wtd0.4

0.6

0.8

1.0

1.2

1.4

1.6

HI 1.55 LO 0.59 ME 1.02 CU 1.04

04-26-199604-28-2006

Valuation Analysis Valuation Analysis

25Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Investment Cycle

• We expect the current phase is on the verge of the peak of the market cycle.

• According to the Sector Rotation Model, Consumer Staples sector will benefit as a result of the current economic situation.

26Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Sector Valuation Comparison

• Consumer Staples’ P/E is higher than the sector value weighted P/E of 15.95x.

• P/B is also higher than the sector value weighted P/B of 3.25x

• Beta is lowest among the sectors.

27Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Sector Valuation Forecast

• Based on the Firstcall data, the earnings estimates of Consumer Staples are increasing.

28Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Fundamental Analysis

• P/B with ROE valuation (Earnings come from the estimate of 2006) shows that Consumer Staples sector is overvalued.

• However, considering the growth rate against the payout ratio, the premium on its value seems to be reasonable.

Sector Valuation

SP30

y = 13.297x + 0.5166

R2 = 0.4214

1.00

2.00

3.00

4.00

5.00

10.0% 14.0% 18.0% 22.0% 26.0% 30.0%

ROE

P/B

Growth vs Payout

SP30

R2 = 0.8251

4%

6%

8%

10%

12%

14%

16%

0% 10% 20% 30% 40% 50% 60%

Payout ratioG

row

th r

ate

29Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Technical Analysis

• Several technical analysis tools shows that Consumer Staples Sector has been on downward trend since this quarter.

• WM% shows that the sector is now in the oversold levels. We can expect the sector index will increase before long.

• MACD and RSI show that the sector doesn’t look good but these indicators also imply the upward movement potential.

Investment StrategyInvestment Strategy

31Consumer Staples SectorThe Ohio State University – Fisher College of Business – Fin824 Stock Market

Strategy

• Based on the current valuation, we don’t believe there is a need to increase our investment weight in consumers staples.

• As consumers consider the possibility of increasing inflation, they may reduce discretionary spending, boosting defensive stocks such as consumer staples.

• In addition, we foresee our current holdings to be able to perform relatively well in the coming quarters and the stocks that we currently have a loss in will start to lean more towards the profit side therefore, we do not want to decrease our weight either.