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Consumer Discretionary

Consumer Discretionary. Reza Aditya Hakan Altan Adam Barrick Peter Manuselis. Agenda. Size and Composition Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation. Size and Composition. 10.54% of S&P 500 consists of consumer discretionary sector

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Consumer Discretionary

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  1. Consumer Discretionary Reza Aditya Hakan Altan Adam Barrick Peter Manuselis

  2. Agenda • Size and Composition • Business Analysis • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation

  3. Size and Composition • 10.54% of S&P 500 consists of consumer discretionary sector • Ranked 5 out of 10 as of 4/5/2007

  4. Sectors’ Industries • Consumer Discretionary sector consists of thirty-two different industries • Movies and Entertainment is the most largest industry, accounting for • 17% of the sector

  5. Sectors’ Top 10 Companies

  6. Sectors’ 5-yr Returns • 5.3% average annual 5 year return • Ranked 6th for return/standard deviation

  7. Sectors’ 2006 & YTD Returns • Ranked 3rd in 2006 returns • Ranked 8th in YTD returns

  8. Business Analysis • Phase of Life Cycle Mature: sales move in tandem with economic growth, positive correlation with disposable income • Business Cycle Cyclical: performance correlated to the economy • External Factors Interest rates, housing, employment

  9. Business Analysis • Ease of Entry Typically high barriers of entry, but can vary across industries • Strength of customers High • Strength of suppliers Relatively low • Competition High • Substitution • High

  10. Consumer Discretionary and Disposable Income (5 yrs) • High correlation with • disposable income • Sharp increase in 2003, • relatively flat until 2006

  11. Disposable Income and Unemployment (10 yrs) • Employment will have • significant effects on • disposable income growth

  12. Disposable Income and Interest Rates (10 yrs) • Do interest rates affect • disposable income? • Interest rates drive • changes in disposable • income because higher • interest rates lead to higher • costs to consumers • (i.e., financing costs)

  13. Consumer Discretionary and Interest Rates (10 yrs) • Do interest rates affect • consumer discretionary • sector? • No statistically • significant correlation, • potentially due to a lag

  14. Existing Home Sales and Housing Starts (10 yrs) • Sub-sectors of • consumer discretionary • suffer when home sales • decline • (i.e., Home improvement • retailers)

  15. Financial Analysis • Consumer Discretionary price index are on a positive trend.

  16. Financial Analysis • Consumer Discretionary price index relative to S&P 500 price index are at the average level.

  17. Revenues for Consumer Discretionary slowed down in 2006 Financial Analysis

  18. Revenues for Consumer Discretionary relative to S&P 500 • revenues are on a downtrend since 2004. Financial Analysis

  19. Financial Analysis • Low growth rate estimates • EPS for the sector has been • on a positive trend, but slowed • down at the end of 2006

  20. Financial Analysis • Increasing gross margin • Op. margin & net margin have remained relatively steady

  21. Financial Analysis • For the last three years, CF has been decreasing due to investing and • financing activities • Sector is a net user of cash

  22. Financial Analysis • Pretax margin and net profit • margin are contracting • compared to S&P 500.

  23. Multiple Valuation 5 -yr • Relative to S&P 500 • P/Forward E – High • Trending down • P/EBITDA – High • Stable • P/S – High • Trending Down

  24. Multiple Valuation 5 -yr • P/CF – Very High • Trending down • P/B – Very High • Trending down

  25. Multiple Valuation 10 -yr • Relative to S&P 500 • P/Forward E – High • Trending down • P/EBITDA – High • Trending Down • P/S – High • Trending Down

  26. Multiple Valuation 10 -yr • P/CF – High • Trending down • P/B – High • Trending down

  27. Current SIM Holdings

  28. Sector Recommendations Recommendation: Hold the Underweight Position

  29. Questions?

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