Consumer Staples (SP-30)

Consumer Staples (SP-30) Ryan Chestnut Brian Cully Sabina Curovac Orla Costello

Agenda • Sector Overview • Business Analysis • Economic Forecasts • Financial Analysis • Sector Valuation • Recommendation Consumer Staples

Market Capitalization Source: standardandpoors.com Consumer Staples Consumer Staples Sector = $924,124 million S&P 500 = $7,192,455 million Consumer Staples accounts for 12.85% of the S&P 500 Consumer Staples accounts for 14.22% of the assets in SIM Portfolio.

Consumer Staples vs. S&P 500 YTD Consumer Staples

Industries Within Consumer Staples Sector Source: standardandpoors.com Consumer Staples Consumer Staples

Companies With Consumer Staples Sector Source: standardandpoors.com Consumer Staples Consumer Staples

Sector Overview • In theory, demand for consumer staples is steady or increases during economic downturn • Defensive sector of mature companies • Historical correlation with S&P is 0.64 • Stock price stability in downturns, but slow and steady growth in upswings • Low price elasticity of demand • Importance of differentiation Consumer Staples Consumer Staples

Industry Characteristics • High Barriers to Entry • Very high capital requirements • Mature companies • Strong brands put downward pressure on margins • Threat of substitution • International presence • Remaining growth opportunities Consumer Staples Consumer Staples

Business Opportunities • Reduce (commodity) costs • Hedge costs, merge or partner, create economies of scale • Reduce finished good prices to wholesalers • Price differentiation important in slowdowns • Differentiate products • “Superior” products can control prices • Importance of branding • Significant substitution threat Consumer Staples Consumer Staples

External Factors • Regulatory and legal issues • Foreign exchange prices • Implications of weakness in the dollar • Aging domestic population, but global growth • Commodity prices • State of the economy • Environmental Factors Consumer Staples Consumer Staples

Economic Analysis – Main Economic Indicators Consumer Staples

Economic Analysis (cont.) Source: Bloomberg Composite Consumer Staples

Economic Analysis (cont.) Consumer Staples Source: Bespoke Investment Group

Foreign Currency Exchange Consumer Staples

Foreign Currency Exchange (cont.) Consumer Staples Consumer Staples

Sector Sales Analysis Sales Growth Current growth below 10-year average Current growth close to low of 5.8% experienced in early 2002 Downward trend since end of 2006, continues out to 12/31/2008 Largest Companies in Sector Proctor & Gamble Currently at 5.5%, below 10 yr. average of 8.1% Downward trend since mid-2006 Wal-Mart Currently at 9%, below 10-yr. average of 11.7% Downward trend since beginning of 2007, with low (8.6%) occurring 1/31/08 Consumer Staples Consumer Staples

Sector Earnings Analysis Earnings Growth Very low relative to 10-year average EPS growth currently at 10 year low Large drop in EPS growth since 9/30/2007 Largest Companies in Sector Proctor & Gamble Current growth at 12.1%, above 10-yr. average of 11.1% Growth falling since mid-2008; Lowest EPS growth (-1%) occurred in 2001 Wal-Mart Current growth at 11.4%, just under 10-yr. average of 12.5% EPS growth from mid-2007 to mid-2008, slight drop since Consumer Staples Consumer Staples

Sector Sales and Earnings Growth Consumer Staples Consumer Staples

Index Sales and Earnings Growth Sales Growth Current growth right below 10-year average 7.6% compared to mean of 8% Downward trend since 9/30/2008 Earnings Growth Current EPS growth negative, extremely low -16.7% compared to mean of 13.4% Currently near 10-year low of -17.3%, which occurred in the beginning of 2002 EPS growth plummeting since end of 2006 Consumer Staples Consumer Staples

Index Sales and Earnings Growth Consumer Staples Consumer Staples

Comparison of Sales and Earnings Consumer Staples Consumer Staples

Margin Growth Analysis YTY net profit margin growth for both at 10-year low Consumer Staples: -5% S&P 500: -22.8% Downward trend in Consumer Staples starting in early 2006 S&P 500 plummeting roughly one year later Consumer Staples Consumer Staples

Comparative Margin Growth Consumer Staples Consumer Staples

Comparative Income Statement Ratios • Consumer Staples has seen relatively constant margins but decreasing ROE from 2000-2007 • S&P 500 has more volatile margins throughout the period and increasing ROE • EBITDA range from 16.55% to 23.5%; EBIT range from 10.86% to 17.98% Consumer Staples Consumer Staples

Free Cash Flow & Dividends Free cash flow increasing from 2004-2007 Dividends increasing Free cash flow after dividends decreasing most years Dividend yield increasing, currently at 10-year high Consumer Staples Consumer Staples

Sector Valuation Consumer Staples Consumer Staples

Sector Valuation (cont.) Consumer Staples Consumer Staples

Sector Valuation (cont.) Historical Correlation with the S&P 500 is 0.64 Consumer Staples Consumer Staples

Sector Valuation (cont.) Consumer Staples Consumer Staples

Recommendation • Keep current allocation, sector overweight relative to the S&P 500 by 175 basis points • Possibility of another market downturn followed by low volatility around the 8000 point mark • Higher return for the sector vs. the market in the next 3-4 months • We see the market having flat returns, and the consumer stables sector outperforming by 200-300 basis points • Attractive industries: Tobacco, Brewers Consumer Staples Consumer Staples

References • Bloomberg • Hoovers • Investopedia • Standard &Poor’s (www.standardandpoors.com) • StockVal • Value Line • Yahoo Finance (finance. yahoo.com) • Bespoke Investment Group (http://bespokeinvest.com) Consumer Staples

Supplemental Information Consumer Staples Commodity Prices Consumer Staples

Supplemental Information Consumer Staples Consumer Staples

Supplemental Information Consumer Staples Future Earnings Estimates Consumer Staples

Consumer Staples (SP-30)