SmithBarney 3/22/2005 11:11:31 AM Edward Kerschner 1 March 2005 The Next American Dream: Active “Actively working” boomers want a balance between “Actively working” boomers want a balance between work and personal life; “Actively relaxing” boomers work and personal life; “Actively relaxing” boomers are lazily active are lazily active 0% 10% 20% 30% 40% 50% 60% 70% 80% value being able to take a day off when you want to plan to work into their retirement years or never retire Source: Yankelovich Partners Inc., AARP March 2005 The Next American Dream: Active “Actively working” boomers want a balance between “Actively working” boomers want a balance between work and personal life; “Actively relaxing” boomers work and personal life; “Actively relaxing” boomers are lazily active are lazily active 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% walk run cruise swim drive hike Source: Yankelovich Partners Inc.
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SmithBarney
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The Next American Dream: Active“Actively working” boomers want a balance between “Actively working” boomers want a balance between work and personal life; “Actively relaxing” boomers work and personal life; “Actively relaxing” boomers are lazily activeare lazily active
0%
10%
20%
30%
40%
50%
60%
70%
80%
value being able to take a day off when youwant to
plan to work into their retirement years ornever retire
Source: Yankelovich Partners Inc., AARP
March 2005
The Next American Dream: Active“Actively working” boomers want a balance between “Actively working” boomers want a balance between work and personal life; “Actively relaxing” boomers work and personal life; “Actively relaxing” boomers are lazily activeare lazily active
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
walk run cruise swim drive hike
Source: Yankelovich Partners Inc.
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The Next American Dream The Next American Dream HealthyHealthyHealthy
March 2005
The Next American Dream: HealthySaying it, but not doing itSaying it, but not doing it
Watching cholesterol
68%
52%45% 44%
39%47%
37%32% 33% 32%
0%
20%
40%
60%
80%
100%
Healthy weight Exercising Reducing fat in diet Alcohol moderation
Care AboutCurrently doing
HealthHealth––Related Activities Boomers Related Activities Boomers “Care About” Versus “Currently Doing”“Care About” Versus “Currently Doing”
Source: Yankelovich Partners Inc.
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The Next American Dream: Healthy5050--59: the most obese segment of the population59: the most obese segment of the population
Source: Centers for Disease Control
Obesity by age groupObesity by age group
0%
10%
20%
30%
18-24 25-34 35-44 45-54 55-64 65+
2002 2003
March 2005
The Next American Dream: HealthyNo wrinklesNo wrinkles
Source: The American Society for Aesthetic Plastic Surgery
BotoxBotox Injections by Age GroupInjections by Age Group
+25% ‘04
+37% ’03
<18 19-34
35-50
51-64
65+
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The Next American Dream: HealthyEat out more; Not fast foodEat out more; Not fast food
Source: Bureau of Labor Statistics,Consumer Expenditure Survey; Yankelovich Partners Inc.
0.0%
2.0%
4.0%
6.0%
8.0%
Age 40 Age 50 Age 60
Today's 60 yr olds
Boomers
“I Eat Fast Food A “I Eat Fast Food A Few Times a Week”Few Times a Week”
0%
10%
20%
30%
40%
16-24 25-38 39-57 58+
Spending on Food Spending on Food Away from HomeAway from Home
March 2005
The Next American Dream: HealthyMore fish; Less breadMore fish; Less bread
0.0%
0.1%
0.2%
0.3%
0.4%
Age 40 Age 50 Age 60
Today's 60 yr olds
Boomers
Spending on FishSpending on Fishand Seafood and Seafood
0.0%
0.1%
0.2%
0.3%
Age 40 Age 50 Age 60
Today's 60 yr olds
Boomers
Spending on BreadSpending on Bread
Source: Bureau of Labor Statistics, Consumer Expenditure Survey
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The Next American Dream: HealthySoft drinks no; Alcohol yesSoft drinks no; Alcohol yes
Spending on NonSpending on Non--Alcoholic Beverages Alcoholic Beverages
0.0%
0.5%
1.0%
1.5%
Age 40 Age 50 Age 60
Today's 60 yr olds
Boomers
Spending on Alcoholic Spending on Alcoholic Beverages Beverages
Source: Bureau of Labor Statistics, Consumer Expenditure Survey
0.0%
0.5%
1.0%
1.5%
Age 40 Age 50 Age 60
Today's 60 yr olds
Boomers
March 2005
The Next American Dream: HealthyHSA’sHSA’s change landscape: More outchange landscape: More out--ofof--pocket costpocket cost
Health Expenditures by Public, PrivateHealth Expenditures by Public, Privateand Outand Out--ofof--Pocket Pocket PayorsPayors
Source: Citigroup Smith Barney
0%
20%
40%
60%
80%
100%
1965 1975 1988 1995 2001 2002 2004E 2006E 2008E
Private Out-of-Pocket Private Insurance Private Other Public Total
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HSAsHSAs grow; grow; pharmapharma losesloses
Source: Mercer Human Resource Consulting, Rand Health and Journal of the American medical Association
8%
35%
56%
19%
54%
28%
0%
10%
20%
30%
40%
50%
60%
2005 2006 2005 2006 2005 2006
Very likely Somewhat likely Not likely
Employer Interest in HSAs
-8%
-10%
-17%
-22%
-23%
-27%
-31%
-40% -30% -20% -10% 0%
Depression
Hypertension
Gastric acid disorder
Asthma
Diabetes
Arthritis
Allergic rhinitis
Average Prescription Drug Use afterDoubling of Co-Payments
The Next American Dream: Healthy
March 2005
The Next American Dream The Next American Dream WealthyWealthyWealthy
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The Next American Dream: WealthyBoomers are at their peak income levelsBoomers are at their peak income levels
Household Income LevelHousehold Income Level
Source: Bureau of Labor Statistics, Consumer Expenditure Survey
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
under 25 25-34 35-44 45-54 55-64 65-74 75+
March 2005
The Next American Dream: WealthyBoomers save more; Equity inflows returnedBoomers save more; Equity inflows returned
Savings Rate Savings Rate
0%
5%
10%
15%
20%
25%
Age 40 Age 50 Age 60
Today's 60 yr olds
Boomers
NMF
Source: Bureau of Labor Statistics, Consumer Expenditure Survey; Stockval
Net New Flow: Net New Flow: Stock Mutual FundsStock Mutual Funds
-$60
-$40
-$20
$0
$20
$40
$60
2000 2001 2002 2003 2004 2005
billi
ons
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The Next American Dream: WealthyVolatile marketsVolatile markets
Unique / Customized LuxuryLuxury Apparel & AccessoriesNeiman Marcus / Saks
“Better Than Home”LodgingFour Seasons Hotels / Starwood Hotels
"Club Membership""Forgiving Fit" ApparelChico's
"Safe Excitement"CruisesCarnival Corp / Royal Caribbean Cruises
“Treasure Hunt”ConsumablesBJ's Wholesale / Costco
ExperienceProductCompany
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Experience ItSatisfaction from experiences; “retailSatisfaction from experiences; “retail--tainmenttainment””
Source: American Express Platinum Luxury Survey, July 2004; Smith Barney REIT Group
21% 20%
59%
0%
20%
40%
60%
80%
100%
Personal Luxuries(autos, fashion, etc.)
Home Luxuries(furnishings, etc.)
Experiences
Personal Satisfaction Received from Experiences / Material Goods
90%
91%
92%
93%
94%
Q41998
Q41999
Q42000
Q42001
Q42002
Q42003
Q42004
Q42005
Regional Mall Occupancy
3x
March 2005
The Next American Dream
ØØ Large drug companies benefits Large drug companies benefits
ØØ Life Insurers benefitLife Insurers benefit
ØØ ““Equity CultureEquity Culture”” is deadis dead
ØØ Boomers are Boomers are ““couch potatoescouch potatoes””
MisconceptionsMisconceptions
Four “obvious” hypotheses about consumer Four “obvious” hypotheses about consumer behavior, which proved to be invalidbehavior, which proved to be invalid
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The Next American Dream
Source: Citigroup Smith Barney
Well PositionedWell Positioned
ØØ Healthy:Healthy:Managed health care, generic pharmaceuticals, Managed health care, generic pharmaceuticals, and biotech companies.and biotech companies.
ØØActive:Active:Homebuilders and home improvement, highHomebuilders and home improvement, high--end end hotels, casinos, and cruise lines.hotels, casinos, and cruise lines.
ØØWealthy:Wealthy:Consumer banks, Traditional mortality protection Consumer banks, Traditional mortality protection life insurers.life insurers.
ØØActive:Active:Auto parts retailers,Auto parts retailers,ThemeTheme--parks, Jewelry parks, Jewelry retailers, Department stores, Bookstores.retailers, Department stores, Bookstores.
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The Next American Dream
March 2005
Thematic Investing
Determining HowDetermining How
•• Demographic Demographic
•• TechnologicalTechnological
•• Political Political
•• StructuralStructural
trends will affect financial markets, trends will affect financial markets, and identifying market sectors and and identifying market sectors and individual securities that will benefit. individual securities that will benefit.
PP
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Riding the Wave Riding the Wave An Elongated M&A CycleAn Elongated M&A CycleAn Elongated M&A Cycle
March 2005
Riding the Wave
Number of Mergers & Value Number of Mergers & Value of U.S. M&A Activity/percentage of market valueof U.S. M&A Activity/percentage of market value
ØØ 20042004--???????? Internet and Info TechnologiesInternet and Info Technologies
Riding the WaveU.S. merger activity typically occurs in waves U.S. merger activity typically occurs in waves
Each wave ended around the time of a recessionEach wave ended around the time of a recession
March 2005
Riding the Wave
U.S. M&A Transactions: U.S. M&A Transactions: Deals Completed by Target Macro Industry 2004Deals Completed by Target Macro Industry 2004
Sources: Smith Barney
Merger activity typically “clusters” in a few areasMerger activity typically “clusters” in a few areas
Financials31%
Telecom, Media and Entertainment
19%
Healthcare11%
Other39%
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Riding the Wave
March 2005
Risky Business Risky Business A Less Volatile Economy,but More Volatile StocksA Less Volatile Economy,A Less Volatile Economy,but More Volatile Stocksbut More Volatile Stocks
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, National Science Foundation, Comin and Mulani
Residential and Nonresidential Construction Growth Residential and Nonresidential Construction Growth (10(10--Yr Rolling Standard Deviation)Yr Rolling Standard Deviation)
Firm-Level Volatility (LHS)Private R&D as % GDP (RHS)
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Risky BusinessRelationship Between FiveRelationship Between Five--Year Future Volatility of Year Future Volatility of Stock Returns and Financial Statement ItemsStock Returns and Financial Statement Items
Sources: Smith Barney0.870.87RR--SquaredSquared
8,5208,520ObservationsObservations
--0.00180.0018
((--0.53)0.53)
Sales/GDPSales/GDP
0.00010.0001(1.06)(1.06)
Sales/GDP SquaredSales/GDP Squared
--0.09950.0995((--3.74)3.74)
Capital Expenditures/SalesCapital Expenditures/Sales
ØØProfit to Sales Ratio:Profit to Sales Ratio: Firms with higher net margins experience lower Firms with higher net margins experience lower volatility levels. Profits enable firms to maintain liquidity, volatility levels. Profits enable firms to maintain liquidity, the lack of which the lack of which may result in higher volatilitymay result in higher volatility..
ØØ Capital Expenditures:Capital Expenditures: Firms with high levels of capital expenditures Firms with high levels of capital expenditures relative to sales experience lower volatility in the future.relative to sales experience lower volatility in the future.
ØØ Book Value to Stock Market Price:Book Value to Stock Market Price: The ratio has a positive effect on The ratio has a positive effect on future volatility, so that high Pricefuture volatility, so that high Price--toto--Book (the reciprocal) is associated with Book (the reciprocal) is associated with lower volatility in the future, to the extent that a high Pricelower volatility in the future, to the extent that a high Price--toto--Book ratio is Book ratio is indicative of a market perception of a indicative of a market perception of a ““growth stock.growth stock.””
Risky BusinessFirm Specific Factors Associated with Future Firm Specific Factors Associated with Future VolatilityVolatility
Source: Comin and Mulani
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ØØAge:Age: Older firms tend to be less volatile. The likely explanation oOlder firms tend to be less volatile. The likely explanation of this is f this is that, as firms age, they become more stable and volatility declithat, as firms age, they become more stable and volatility declines. But this nes. But this effect does diminish eventually, as evidenced by the ageeffect does diminish eventually, as evidenced by the age--squared squared relationship.relationship.
ØØ Size:Size: Larger firms tend to be less volatile than smaller firms; are lLarger firms tend to be less volatile than smaller firms; are likely ikely more diversified and are in a better position to cope with produmore diversified and are in a better position to cope with productct--specific specific shocks.shocks.
Source: Comin and Mulani
Risky BusinessFirm Specific Factors Associated with Future Firm Specific Factors Associated with Future VolatilityVolatility
March 2005
Risky BusinessRelationship Between Future Volatility of Stock Relationship Between Future Volatility of Stock Returns and Financial Statement Items: Division Returns and Financial Statement Items: Division by Participation in R&D and Advertisingby Participation in R&D and Advertising
--0.1180.118((--6.59)6.59)5 Year Past5 Year Past--VolatilityVolatility
0.790.79(20.26)(20.26)
0.78170.7817(14.07)(14.07)
0.5010.501(22.96)(22.96)
.04058.04058(24.37)(24.37)
ConstantConstant
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ØØR&DR&D has a positive effect on future volatility. Other things remaihas a positive effect on future volatility. Other things remaining the ning the same, firms engaging in R&Dsame, firms engaging in R&D——and subject to the windfall gains from the and subject to the windfall gains from the success of their innovations and losses from the innovations of success of their innovations and losses from the innovations of their their competitorscompetitors——are expected to have a higher level of volatility than firms whoare expected to have a higher level of volatility than firms whodo not engage in R&D.do not engage in R&D.
ØØ AdvertisingAdvertising is associated with lower future volatility. Advertising helps is associated with lower future volatility. Advertising helps firms create a brand image and generate a relatively steady strefirms create a brand image and generate a relatively steady stre am of sales.am of sales.
Source: Comin and Mulani
Risky BusinessFirm Specific Factors Associated with Future Firm Specific Factors Associated with Future VolatilityVolatility
March 2005
Risky Business
Sources: Smith Barney
An Econometric Model:An Econometric Model:Characteristics of Characteristics of Low Low Volatility Firms:Volatility Firms:
ØØ Old AgeOld AgeØØ High PriceHigh Price--toto--BookBookØØ High Net MarginsHigh Net MarginsØØ High Levels of Capital Expenditures High Levels of Capital Expenditures ØØ Large Size Large Size ØØ High Levels of AdvertisingHigh Levels of AdvertisingØØ Low Levels of R&D SpendingLow Levels of R&D Spending
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Risky Business
Source: Campbell, Lettau , Malkiel , and Xu
Risky Business: Average stock return volatility Risky Business: Average stock return volatility attributable to…attributable to…
Risky BusinessIncreasing volatility of individual stocks means Increasing volatility of individual stocks means that a wellthat a well--diversified portfolio needs more stocksdiversified portfolio needs more stocks
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Smith Barney's stock recommendations include a risk rating and an investment rating.Risk ratings, which take into account both price volatility and fundamental criteria, are: Low [L], Medium [M], High [H], and Speculative [S ].Investment ratings are a function of Smith Barney's expectation of total return (forecast price appreciation and dividend yield within the next 12months) and risk rating.For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings are: Buy [1] (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium -Risk stocks, 20% or more for High-Risk stocks, and 35% or more for Speculative stocks); Hold [2] (0%-10% for Low -Risk stocks, 0%-15% for Medium -Risk stocks, 0%-20% for High-Risk stocks, and 0%-35% for Speculative stocks); and Sell [3] (negative total return).For securities in emerging markets (Asia Pacific, Emerging Europe/Middle East/Africa, and Latin America), investment ratings are: Buy [1] (expected total return of 15% or more for Low -Risk stocks, 20% or more for Medium -Risk stocks, 30% or more for High-Risk stocks, and 40% or more for Speculative stocks); Hold [2] (5%-15% for Low-Risk stocks, 10%-20% for Medium-Risk stocks, 15%-30% for High -Risk stocks, and 20%-40% for Speculative stocks); and Sell [3] (5% or less for Low-Risk stocks, 10% or less for Medium-Risk stocks, 15% or less for High -Risk stocks, and 20% or less for Speculative stocks).Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk rating, or a change in target price. At other times, the expected total returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk.
ANALYST CERTIFICATIONI, Edward M. Kerschner, the author of this report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this presentation.
44%55%56%% of companies in each rating category that are investment banking clients
18%42%39%Smith Barney Global Equity Research Coverage (2598)
SellHoldBuySmith Barney Equity Research Ratings DistributionData current as of 31 December 2004
March 2005
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