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Consumer Staples Sector

Consumer Staples Sector. May 2, 2006. CHANG JUNG-HOON CLEMENT LEANNE NICOLE CRAWFORD BETHANY ANN. Table of Contents. Sector Overview Financial Overview Business and Economic Analysis Valuation Analysis Investment Strategy. S&P 500 Weights. Current SIM Weights.

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Consumer Staples Sector

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  1. Consumer Staples Sector May 2, 2006 CHANG JUNG-HOON CLEMENT LEANNE NICOLE CRAWFORD BETHANY ANN

  2. Table of Contents • Sector Overview • Financial Overview • Business and Economic Analysis • Valuation Analysis • Investment Strategy

  3. S&P 500 Weights

  4. Current SIM Weights

  5. Consumer Staples Industries • Beverages (8) • Food & Staples Retail (11) • Food Products (11) • Household Products (4) • Personal Products (3) • Tobacco (3)

  6. Our Holdings • Anheuser-Busch – Beverage • Procter & Gamble – Household Products • Wal-Mart – Food & Staples Retail • Sysco Corp – Food & Staples Retail

  7. How are we doing??

  8. How is the Sector Doing?? • QTD – 0.62% • YTD – 1.60%

  9. Financial Overview

  10. Income Statement Ratios

  11. Balance Sheet Ratios

  12. Cash Flow

  13. Revenues & Margins

  14. Relative Revenues & Margins

  15. Dupont Analysis

  16. Business and Economic Analysis

  17. Demand • Mature industry – steady demand in United States • Room for growth overseas • Dependent on GDP growth / population growth • Defensive stocks – typically experience stable demand and earnings growth despite external factors. • Unemployment • Inflation

  18. Supply • Factors that could affect input costs: • Oil prices • Recently high, possibly increasing • Increases inputs – transportation, plastics, etc. • Affects expected inflation • Federal funds rate • Higher rates favor defensive companies • Lower rates favor cyclical companies • Expectation • Degree of inflation • Increases cost of inventory, creates margin pressure

  19. Profitability and Pricing • Increases in input costs combined with stable demand would decrease profit margins. • Barriers to entry in sector: • Dominated by large well-established companies – high capital requirements impossible for new companies • Relative maturity of industry • Competition primarily for overseas market share • Minimal product substitution under ordinary economic conditions – power of branding.

  20. Inflation vs Valuation Inflation vs Trailing reported S&P500 P/E – Negative relationship • Inflation depress valuations: JPMorgan finds that for every 1% rise in inflation above 25-year trend, the trailing P/Es decline by 0.85x. • JPMorgan sees that inflation has been fairly well contained considering high energy and commodity prices. However, if energy and commodity prices are sustained at the current elevated levels, they see upside risks to inflation. Excerpt: JPMorgan Equity View (21 April 2006)

  21. Fundamental Factors CPI-Energy and Sector Valuation

  22. Fundamental Factors Interest Rates and Sector Valuation • Interest rates significantly affect the earnings and values. • Negative correlation.

  23. Fundamental Factors Consumer Expenditure and Sector Valuation • Personal consumption expenditure is also a good indicator of the sector’s relative earnings and valuation.

  24. Valuation Analysis

  25. Investment Cycle • We expect the current phase is on the verge of the peak of the market cycle. • According to the Sector Rotation Model, Consumer Staples sector will benefit as a result of the current economic situation.

  26. Sector Valuation Comparison • Consumer Staples’ P/E is higher than the sector value weighted P/E of 15.95x. • P/B is also higher than the sector value weighted P/B of 3.25x • Beta is lowest among the sectors.

  27. Sector Valuation Forecast • Based on the Firstcall data, the earnings estimates of Consumer Staples are increasing.

  28. Fundamental Analysis • P/B with ROE valuation (Earnings come from the estimate of 2006) shows that Consumer Staples sector is overvalued. • However, considering the growth rate against the payout ratio, the premium on its value seems to be reasonable.

  29. Technical Analysis • Several technical analysis tools shows that Consumer Staples Sector has been on downward trend since this quarter. • WM% shows that the sector is now in the oversold levels. We can expect the sector index will increase before long. • MACD and RSI show that the sector doesn’t look good but these indicators also imply the upward movement potential.

  30. Investment Strategy

  31. Strategy • Based on the current valuation, we don’t believe there is a need to increase our investment weight in consumers staples. • As consumers consider the possibility of increasing inflation, they may reduce discretionary spending, boosting defensive stocks such as consumer staples. • In addition, we foresee our current holdings to be able to perform relatively well in the coming quarters and the stocks that we currently have a loss in will start to lean more towards the profit side therefore, we do not want to decrease our weight either.

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