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Consumer Discretionary Sector

Consumer Discretionary Sector. October 27 th , 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

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Consumer Discretionary Sector

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  1. Consumer Discretionary Sector October 27th , 2009 Tiffany Arnett, Pinjalim Bora, Sam Brickell

  2. Recommendation

  3. Deriving at the recommendation Top-down approach • Sector Size and Composition • Business Analysis • Key Economic Drivers • Financial Analysis • Valuation Analysis • Recommendation Recap

  4. 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

  5. Sector Size and CompositionAs a percentage of S&P 500

  6. Sector CompositionTop 10 Industries ( Market Value Weighted)

  7. Sector CompositionTop 10 Companies ( % of market value)

  8. 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 Performance

  9. Sector PerformanceYear to date

  10. Sector PerformanceQuarter to date

  11. 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

  12. Business AnalysisFive Forces Model

  13. Economic AnalysisOverview A few economic indicators - • Consumer confidence • Real Consumer Spending • Inflation • Unemployment • Personal Savings rate

  14. Economic AnalysisConsumer Confidence (Long Term) • “..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

  15. Economic AnalysisConsumer Confidence (Short 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

  16. Economic AnalysisConsumer Spending (Long Term) • Refers to the pure consumer spending number without any effect of inflation • High positive correlation - expected

  17. Economic AnalysisConsumer Spending (Short 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”

  18. Economic AnalysisInflation – Core CPI (Long Term) • Core CPI (Consumer price index) - excludes goods with high price volatility, such as food and energy • High Negative Correlation - expected

  19. Economic AnalysisInflation – Core CPI (Short Term) • Positive Correlation – unexpected • Possible explanation – Recessions (Inflation low, spending low) • Evident opposite movements before recession and by March

  20. Economic AnalysisUnemployment rate (Long Term) • Negative Correlation – expected

  21. Economic AnalysisUnemployment rate (Short Term) • Higher Negative Correlation – expected • Cyclical unemployment effect

  22. Economic AnalysisPersonal Savings Rate (Long Term) • Technically, Personal Saving = personal disposable income -personal consumption expenditure • Expressed as % of disposable income • High Negative Correlation – expected

  23. Economic AnalysisPersonal Savings Rate (Short 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

  24. 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 ?)

  25. Financial AnalysisRevenue Growth Sector Retail – Computers and Electronics

  26. Financial AnalysisRevenue Growth Cable and Satellite Apparel and Accessory

  27. Financial AnalysisReturn On Equity Sector Retail – Computers & Electronics

  28. Financial AnalysisReturn On Equity Cable & Satellite Apparel and Accessory

  29. Financial AnalysisNet Profit Margin Sector Retail – Computers & Electronics

  30. Financial AnalysisNet Profit Margin Cable & Satellite Apparel and Accessory

  31. Financial Analysis Inference / Expectations • 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

  32. Financial Analysis Recap - Inference / Expectations

  33. Valuation AnalysisTrailing P/E Sector Retail – Computers & Electronics

  34. Valuation AnalysisTrailing P/E Cable & Satellite Apparel and Accessory

  35. Valuation AnalysisForward P/E Sector Retail – Computers & Electronics

  36. Valuation AnalysisForward P/E Cable & Satellite Apparel and Accessory

  37. Valuation AnalysisPrice to sales Sector Retail – Computers & Electronics

  38. Valuation AnalysisPrice to sales Cable & Satellite Apparel and Accessory

  39. Valuation AnalysisPrice to book Sector Retail – Computers & Electronics

  40. Valuation AnalysisPrice to book Cable & Satellite Apparel and Accessory

  41. Valuation AnalysisPrice to cash flow Sector Retail – Computers & Electronics

  42. Valuation AnalysisPrice to cash flow Cable & Satellite Apparel and Accessory

  43. Valuation Analysis Technical Analysis • “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

  44. Valuation Analysis Expectations • 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

  45. Valuation Analysis Recap - Inference/ Expectations • The sector seems to be trading at a premium. • Few industries inside the sector seems undervalue or cheap at present

  46. Sector Conditions review

  47. Recommendation

  48. Current SIM holdings Currently, Consumer discretionary is underweight by 1.39%

  49. Current SIM Sector Composition

  50. Consumer Discretionary Sector Presentation Questions & Discussion

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