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Kurt BrownRené HegglinShengbo Mao
Consumer StaplesSector Presentation
THE STOCK MARKET
Agenda
• Size and Composition• Business Analysis• Economic Analysis• Financial Analysis• Valuation Analysis• Recommendation• Q&A
04/19/23 2Consumer Staples Sector Presentation
Basics
• Consumer Staples - the industries that manufactureand sell food/beverages, tobacco, prescriptiondrugs and household products (Investopedia)
• Outperform the market in bear markets and underperform in bull markets
• Not an exciting sector– Stable returns– Diversification benefits – low beta
04/19/23 3Consumer Staples Sector Presentation
Size and Composition
S&P 500 Sectors
Consumer staples are currently 11.7% of the S&P 500
04/19/23 5Consumer Staples Sector Presentation
Largest Consumer Staples CompaniesRank Company Market Capitalization (10-23-09) % of Sector
1 Wal-Mart Stores, Inc. $194.7 billion 15.8%
2 Proctor & Gamble Co. $169.7 billion 13.8%
3 Coca-Cola Co. $125.3 billion 10.2%
4 PepsiCo, Inc. $96.0 billion 7.8%
5 Philip Morris International, Inc. $95.7 billion 7.8%6 CVS Caremark Corp. $54.5 billion 4.4%
7 Kraft Foods, Inc. $40.0 billion 3.2%
8 Colgate-Palmolive Co. $39.6 billion 3.2%
9 Walgreen Co. $39.2 billion 3.2%
10 Altria Group, Inc. $37.7 billion 3.0%
27 Safeway, Inc. $9.1 billion 0.7%
The three largest companies account for nearly 40% of the consumer staples market cap.
04/19/23 6Consumer Staples Sector Presentation
Sector PerformanceQTD Return YTD Return 2008 Return
S&P 500 2.1% 19.5% (38.5%)Energy 7.9% 14.3% (35.9%)
Materials 1.9% 38.4% (47.0%)
Industrials 0.6% 12.6% (41.5%)
Consumer Discretionary 2.6% 31.1% (34.7%)
Consumer Staples 2.0% 8.9% (17.8%)Health Care 0.0% 7.8% (24.5%)
Financials 0.9% 20.3% (56.9%)
Information Technology 3.2% 49.5% (43.7%)
Telecom Services (4.8%) (7.7%) (33.6%)
Utilities 0.4% 1.1% (31.5%)
04/19/23 7Consumer Staples Sector Presentation
Outperforming in bear markets
04/19/23 Consumer Staples Sector Presentation 8
Underperforming in bullish markets
04/19/23 Consumer Staples Sector Presentation 9
Relative Performance
04/19/23 Consumer Staples Sector Presentation 10
Industry % of Sector YTD Return Company
Agriculture Products 1.7% 4.0% Archer-Daniels Midland
Brewers 0.7% 2.1% Molson Coors Brewing
Distillers & Vintners 0.8% (1.9%) Constellation Brands
Drug Retail 8.5% 43.2% CVS Caremark
Food Distributors 1.4% 18.3% Sysco
Food Retail 3.1% 8.1% Kroger
Household Products 21.5% (1.9%) Proctor & Gamble
HyperMarkets/SuperCenters 12.2% (5.6%) Wal-Mart Stores
Packaged Foods & Meats 12.4% 9.7% Kraft
Personal Products 1.7% 39.1% Avon Products
Soft Drinks 21.9% 21.0% Coca-Cola
Tobacco 14.2% 19.8% Philip Morris
There are currently 41 companies in the consumer staples sector.
Consumer Staples Industries
04/19/23 11Consumer Staples Sector Presentation
Business Analysis
04/19/23 Consumer Staples Sector Presentation 13
Life Cycle
04/19/23 Consumer Staples Sector Presentation 14
• Stable inelastic demand based on consumer needs(less sensitive to economic cycles)
• Defensive (non-cyclical)– Hedge against economic downturn
04/19/23 Consumer Staples Sector Presentation 15
Industry Characteristics• High barriers to entry– Dominated by large, well-established companies – Tremendous capital requirements– Takes a long time to reach EOS– Hard to build wide distribution networks
• High buyer power – Not well differentiated product – Low switching cost
04/19/23 Consumer Staples Sector Presentation 16
• Low supplier power– Long-term contracting/agreements common– Companies such as Wal-Mart have huge bargaining
power• High threat of substitution– Multiple brands competing in same segment
• Intensive competition– Consumers are price sensitive (despite brand
loyalty) with undifferentiated products
04/19/23 Consumer Staples Sector Presentation 17
Growth Opportunities
• Sector relying on international expansion to spur growth.
• Branding is the key - powerful brand names command significant price premiums to similar generic labels
Economic Analysis
04/19/23 Consumer Staples Sector Presentation 19
Possible External Factors• Exchange Rates (Strength of dollar)• Commodity Prices• GDP growth• CPI and Inflation• Unemployment Rate• Trade Balance• Others Factors?
04/19/23 Consumer Staples Sector Presentation 20
Model Basis• Variables regarded do not fulfill Gauss-Markov
requirements to compute a Multiple Regression, but a Probit model allows a rough estimate
• Research question: Under which circumstances (changes in economic variables) does the consumer staples sector outperform the S&P500?
• Variables regarded include: Consumer Price Index, Producer Price Index, M2 Money Supply, Spread of 10year-2year Treasury Bill rate, Real GDP growth rate, Consumer Confidence, Unemployment Rate, Savings Rate, Trade Weighted Dollar Value, Trade Balance
Probit Model
04/19/23 Consumer Staples Sector Presentation 21
balancetrade
dollar
ratesaving
unemp
confcons
gdp
rf
moneym
ppi
cpi
X
XXY
Y
growth
yearyearSpread
_
,
,_
,
,_
,
,
,_2
,
,
'|1P
500 P&S soutperform St. Cons. if ,1
210
Probit Model OutputCall:
glm(formula = dummy ~ cpi + ppi + m2_money + I(rf_10 - rf_2) + gdp_growth + cons_conf + unemp + saving_rate + dollar + trade_bal, family = binomial(link = "probit"))
Coefficients:
Estimate Std. Error z value Pr(>|z|)
(Intercept) -5.6533276 4.7638175 -1.187 0.2353
cpi 0.7946791 0.3573893 2.224 0.0262 *
ppi -0.2416636 0.1498299 -1.613 0.1068
m2_money 0.1433757 0.1352248 1.060 0.2890
I(rf_10 - rf_2) 0.0438816 0.2642102 0.166 0.8681
gdp_growth -0.0477027 0.0749970 -0.636 0.5247
cons_conf 0.0036570 0.0188761 0.194 0.8464
unemp -0.1792947 0.3523537 -0.509 0.6109
saving_rate 0.3702471 0.1744287 2.123 0.0338 *
dollar 2.8677897 1.5581677 1.840 0.0657 .
trade_bal 0.0005463 0.0020099 0.272 0.7858
---
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
04/19/23 Consumer Staples Sector Presentation 22
Financial Analysis
Revenue Consumer Staples
04/19/23 Consumer Staples Sector Presentation 24
EBITDA Margins
04/19/23 Consumer Staples Sector Presentation 25
Return On Equity
04/19/23 Consumer Staples Sector Presentation 26
Valuation
Absolute Ratios
Price/Sales
Price/Book
04/19/23 28Consumer Staples Sector Presentation
Relative to S&P 500
Price/Sales
Price/Book
04/19/23 29Consumer Staples Sector Presentation
Valuation by IndustryIndustry P/E Change from Median
Agriculture Products (22%)
Brewers (25%)
Distillers & Vintners (24%)
Drug Retail (35%)
Food Distributors (26%)
Food Retail (13%)
Household Products (28%)
HyperMarkets/SuperCenters (13%)
Packaged Foods & Meats (24%)
Personal Products (19%)
Soft Drinks (23%)
Tobacco 4%
These percentages were similar across other ratios like P/S, P/B and P/CF
04/19/23 30Consumer Staples Sector Presentation
Recommendation
SIM PortfolioSector S&P 500 Weight SIM Weight +/-
Consumer Discretionary 9.11% 7.72% -1.39%
Consumer Staples 11.54% 11.48% -0.06%
Energy 11.70% 12.00% 0.29%
Financials 15.23% 6.65% -8.57%
Health Care 13.11% 13.11% -0.01%
Industrials 10.26% 12.91% 2.64%
Information Technology 18.65% 21.73% 3.08%
Materials 3.50% 4.99% 1.48%
Telecom Services 3.17% 3.70% 0.53%
Utilities 3.72% 3.30% -0.42%
Values based off of September 30, 2009 report
04/19/23 32Consumer Staples Sector Presentation
Recommendation
• Increase weight of consumer staples by 26 basis points– Slow economic recovery– The market has recovered too much too quickly• Will see a small correction fairly soon
– Exposure to international growth
04/19/23 33Consumer Staples Sector Presentation
What questions do you have?