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Kurt Brown René Hegglin Shengbo Mao

THE STOCK MARKET. Consumer Staples Sector Presentation. Kurt Brown René Hegglin Shengbo Mao. Agenda. Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Q&A. Basics.

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Kurt Brown René Hegglin Shengbo Mao

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  1. THE STOCK MARKET Consumer Staples Sector Presentation Kurt BrownRené HegglinShengbo Mao

  2. Agenda Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Q&A Consumer Staples Sector Presentation

  3. Basics • Consumer Staples - the industries that manufacture and sell food/beverages, tobacco, prescription drugs 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 Consumer Staples Sector Presentation

  4. Size and Composition

  5. S&P 500 Sectors Consumer staples are currently 11.7% of the S&P 500 Consumer Staples Sector Presentation

  6. Largest Consumer Staples Companies The three largest companies account for nearly 40% of the consumer staples market cap. Consumer Staples Sector Presentation

  7. Sector Performance Consumer Staples Sector Presentation

  8. Outperforming in bear markets Consumer Staples Sector Presentation

  9. Underperforming in bullish markets Consumer Staples Sector Presentation

  10. Relative Performance Consumer Staples Sector Presentation

  11. Consumer Staples Industries There are currently 41 companies in the consumer staples sector. Consumer Staples Sector Presentation

  12. Business Analysis

  13. Life Cycle Consumer Staples Sector Presentation

  14. Stable inelastic demand based on consumer needs(less sensitive to economic cycles) • Defensive (non-cyclical) • Hedge against economic downturn 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 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 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 Consumer Staples Sector Presentation

  18. Economic Analysis

  19. Possible External Factors Exchange Rates (Strength of dollar) Commodity Prices GDP growth CPI and Inflation Unemployment Rate Trade Balance Others Factors? 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 Consumer Staples Sector Presentation

  21. Probit Model Consumer Staples Sector Presentation

  22. Probit Model Output Call: 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 Consumer Staples Sector Presentation

  23. Financial Analysis

  24. Revenue Consumer Staples Consumer Staples Sector Presentation

  25. EBITDA Margins Consumer Staples Sector Presentation

  26. Return On Equity Consumer Staples Sector Presentation

  27. Valuation

  28. Absolute Ratios Price/Sales Price/Book Consumer Staples Sector Presentation

  29. Relative to S&P 500 Price/Sales Price/Book Consumer Staples Sector Presentation

  30. Valuation by Industry These percentages were similar across other ratios like P/S, P/B and P/CF Consumer Staples Sector Presentation

  31. Recommendation

  32. SIM Portfolio Values based off of September 30, 2009 report Consumer Staples Sector Presentation

  33. 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 Consumer Staples Sector Presentation

  34. What questions do you have?

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