Consumer Discretionary Sector

transcript

October 27th , 2009

Tiffany Arnett, Pinjalim Bora,Sam Brickell

Recommendation

Deriving at the recommendation Top-down approach

• Sector Size and Composition

• Business Analysis

• Key Economic Drivers

• Financial Analysis

• Valuation Analysis

• Recommendation Recap

Sector Size and CompositionOverview

• The sector is composed of companies that vie for discretionary household income spent on non-necessities.

• Industries include:

– Retailing, Media, Consumer Services, Consumer Durables & Apparel, and Automobiles & Components

Sector Size and CompositionAs a percentage of S&P 500

Sector CompositionTop 10 Industries ( Market Value Weighted)

10.22%

13.42%

14.95%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%

Footwear

Hotels, Resorts & Cruise Lines

Apparel Retail

Internet Retail

Department Stores

General Merchandise Stores

Cable & Satellite

Home Improvement Retail

Restaurants

Movies & Entertainment

Sector CompositionTop 10 Companies ( % of market value)

Sector Performance

• Sector market cap: $26.7 billion, 9.18% of S&P 500

• Cyclical sector – moves with the market

• Sector has underperformed 3% relative to S&P 500 over the past 10 years

Sector PerformanceYear to date

Sector PerformanceQuarter to date

Business AnalysisOverview

• Mature Phase of Life Cycle– Competitive Industries– Established companies and products– Focus on productivity

• Cyclical performance linked with the economy– Poor economic conditions = lower consumer

discretionary income• Also perception of poor economic conditions

– Generally, the sector will recover along with the economy

Business AnalysisFive Forces Model

Economic AnalysisOverview

A few economic indicators - • Consumer confidence• Real Consumer Spending• Inflation • Unemployment• Personal Savings rate

• “..defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending” – Wikipedia

• Positive correlation - expected

Economic AnalysisConsumer Confidence (Long Term)

• Very high positive correlation

• “Confidence among U.S. consumers fell more than forecast in October, a reminder that households remain nervous about the strength of the emerging economic recovery.” –Bloomberg.com

Economic AnalysisConsumer Confidence (Short Term)

• Refers to the pure consumer spending number without any effect of inflation

• High positive correlation - expected

Economic AnalysisConsumer Spending (Long Term)

• Consumer spending boosted by programs like cash for clunkers

• High positive correlation - expected

• “US consumer electronics spending is expected to be slightly better this Christmas season than last year, the Consumer Electronics Association (CEA) said Monday in its annual survey”

Economic AnalysisConsumer Spending (Short Term)

• Core CPI (Consumer price index) - excludes goods with high price volatility, such as food and energy

• High Negative Correlation - expected

Economic AnalysisInflation – Core CPI (Long Term)

• Positive Correlation – unexpected

• Possible explanation – Recessions (Inflation low, spending low)

• Evident opposite movements before recession and by March

Economic AnalysisInflation – Core CPI (Short Term)

• Negative Correlation – expected

Economic AnalysisUnemployment rate (Long Term)

• Higher Negative Correlation – expected

• Cyclical unemployment effect

Economic AnalysisUnemployment rate (Short Term)

• Technically, Personal Saving = personal disposable income -personal consumption expenditure

• Expressed as % of disposable income

• High Negative Correlation – expected

Economic AnalysisPersonal Savings Rate (Long Term)

• High Negative Correlation – expected

• “U.S. households stocked away most of the extra income they got in January from annual cost-of-living raises, boosting the personal savings rate to a 14-year high, the Commerce Department said Monday.” - Marketwatch

Economic AnalysisPersonal Savings Rate (Short Term)

Economic AnalysisInference/ Expectation

• Consumer Confidence: Expected to rise, however short term outlook bleak : Negative (short term)

• Consumer spending: Responsive to incentives. Can retailers provide incentives ? Negative (short term)

• Unemployment rate: Expected to cross 10% by 2010: Negative (short term)

• Inflation: Expected to be low in the short term, Target FFR = 0-0.25%: Positive (Short term)

• Personal Savings rate : Expected to increase : Negative (Short Term/Long term ?)

Financial AnalysisRevenue Growth

Retail – Computers and Electronics

Sector

Financial AnalysisRevenue Growth

Cable and Satellite

Apparel and Accessory

Financial AnalysisReturn On Equity

Sector

Retail – Computers & Electronics

Financial AnalysisReturn On Equity

Cable & Satellite

Financial AnalysisNet Profit Margin

Sector

Financial AnalysisNet Profit Margin

Cable & Satellite

Are Margins expanding?

•Margins are likely to expand on an absolute basis as economy improves

•Margins are likely to expand for Consumer Discretionary versus the market

•Price raising, etc.

•Positive Cash Flow?

•Of course

•Mature Companies

Financial AnalysisInference / Expectations

Financial AnalysisRecap - Inference / Expectations

Measure Outlook View

Revenue Downward trend mainly due to macro economic

circumstances

Negative

Return on Equity Much less than median Negative

Net Profit Margin At historical low levels Negative

Valuation AnalysisTrailing P/E

Sector

Valuation AnalysisTrailing P/E

Cable & Satellite

Valuation AnalysisForward P/E

Sector

Valuation AnalysisForward P/E

Cable & Satellite

Valuation AnalysisPrice to sales

Sector

Valuation AnalysisPrice to sales

Cable & Satellite

Valuation AnalysisPrice to book

Sector

Valuation AnalysisPrice to book

Cable & Satellite

Valuation AnalysisPrice to cash flow

Sector

Valuation AnalysisPrice to cash flow

Cable & Satellite

•“We don’t need no stinking technical analysis.”

•People who are a fan of technical analysis probably say that “support is forming” or some such crap like that

•In reality the trend might be upwards in the long term as signs of the economy improving show themselves and consumers gain confidence

Valuation AnalysisTechnical Analysis

The Future

•Valuations likely to expand on an absolute basis as economy improves

•Valuations likely to expand for Consumer Discretionary versus the market

•Due to nature of the sector

Valuation AnalysisExpectations

Valuation AnalysisRecap - Inference/ Expectations

Trailing P/E Forward P/E P/S P/B P/CF

Sector 49.4 20.4 17.9 15.3 0.7 0.9 3.1 2.4 8.8 9.3

Retail Electronics

12.3 22.0 11.6 17.2 0.3 0.6 2.5 3.8 8.5 13

Cable & Satellite

16 35.9 13.9 14.1 1.2 2.0 1.5 1.4 4.9 5.9

Apparel & Accessory

17 14 16.6 14.7 1.3 1.0 3.6 2.3 12.6 10.2

• The sector seems to be trading at a premium.• Few industries inside the sector seems undervalue or cheap at present

Sector Conditions review

Analysis Conclusions View

Business Mature industry, cyclical in nature. Neutral

Economic Consumer confidence and consumer spending bleak in short term and weighed heavily by unemployment outlook which seems degrading although in a slow pace, personal savings rate increasing, low inflation

Negative slowly moving towards

positive

Financial Overall Revenue growth, profit margin and ROE declining In the short term for the sector as a whole.

Negative; depends upon the

economy.

Valuation Sector seems to be trading at a premium with pockets of opportunities within it.

Slightly negative

Recommendation

Current SIM holdings

Currently, Consumer discretionary is underweight by 1.39%

Current SIM Sector Composition

Dividend Yield

CostCurrent

PriceUnrealized gain/loss

Target Price

Upside

Best Buy 1.4% $48.18 $39.30 (18.4)% $51.56 31.2%

Coach 0.9% $28.27 $33.71 19.24% $36.23 7.47%

Comcast 1.8% $16.44 $14.84 (10.28)% $18.92 27.5%

Game Stop N/A $25.32 $24.11 (4.8)% $32.00 32.72%

Mc Donald’s 3.7% $54.64 $59.24 8.4% $63.00 6.34%

Consumer Discretionary Sector Presentation

Questions & Discussion

Consumer Discretionary Sector

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