1 / 41

Consumer Staples Sector

This article provides a recommendation to under-weight the consumer staples sector during the interim period between Federal Reserve actions. Despite uncertainty, the economy is expected to rebound, which would have a relatively negative effect on the consumer staples sector. The article includes a sector overview, business analysis, financial analysis, valuation analysis, and recommendation.

talia
Download Presentation

Consumer Staples Sector

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Consumer Staples Sector Laura Fillman Mary Kanet

  2. Recommendation • Under-weight Consumer Staples • Interim period between Federal Reserve action • Under-weight .50%, S&P 500 is at 9.46% • Consider under-weighting more when the economy gains momentum • Although there is uncertainty, the economy is expected to rebound, which would have a relatively negative effect on the consumer staples sector

  3. Outline • Sector Overview • Business Analysis • Financial Analysis • Valuation Analysis • Recommendation

  4. Sector Overview

  5. S&P 500 Composition Source: www.standardandpoors.com, as of 01/31/03

  6. Consumer Staples Composition Source: Business Week Online, 01/31/03.

  7. Consumer Staples Composition Largest Companies • Procter & Gamble, 15.20% (Household Products) • Coca-Cola, 13.65% (Soft Drinks) • Altria Group, Inc., 10.84% (Tobacco)

  8. Business Analysis

  9. Demand • Growth/Mature Life Cycle • Growth • More Competition • High Cash Flow • Defensive Business Cycle • Stable performer • Performs better when market falls

  10. Users and Geography • High Foreign Exposure • Global Franchises for Coca-Cola and Procter & Gamble • Declining dollar since the beginning of 2002 • Emerging markets in Asia and Latin America

  11. Trend line analysis • Given that consumer staples is a stable/defensive sector, we predict future demand to be consistent with past demand

  12. Supply • New capacity additions increase linearly with demand

  13. Profitability and Pricing • Ease of Entry • Difficult • Established companies • High brand recognition • Global presence • High initial investment

  14. Strength of Customers • Widespread demand • Loyal to brand recognition • Increasing with global expansion • Strength of Suppliers • Lower • Trying to maintain current customers

  15. Competition • High • Pepsi vs. Coca-Cola • Very split • Substitution • Moderate • Lower cost items • Not as much because of brand recognition • Inelastic demand for tobacco and alcohol

  16. Financial Analysis

  17. Current Revenues are $34,566 Growth rate is 4.1%

  18. Revenues have a growth rate of 14.5% • Current growth rate estimate is 16.0% • Total returns have a growth rate of 19.7%

  19. -Revenues have a growth rate of 3.9% -Current growth rate estimate is 12.0% -Total returns have a growth rate of 13.6%

  20. -Revenues have a growth rate of 3.0% -Current growth rate estimate is 10.0% -Total returns have a growth rate of 8.1%

  21. -Revenues have a growth rate of 4.1% -Current growth rate estimate of 11.0% -Total Returns growth rate of 8.1%

  22. Profit margins have risen from 6.7% in December 2000 to 7.9% in September 2002. • Profit margins have risen as revenues have fallen, indicating cost-cutting activity within the sector. • Long-term estimated median growth rate is 10.8%.

  23. -Margins (EBIT/Sales) have fluctuated between 8.5% and 13.2% over the last decade. Margins for 2001 were 10.97%. -Asset turnover (Sales/Assets) has fluctuated between 1.37 and 1.66 over the past decade. Turnover for 2001 was 1.41. -Reported ROE has fluctuated between 20.6% and 34.0% over the last decade. ROE for 2001 was 29.4%.

  24. -Margins for the S&P 500 have been greater than those for consumer staples, however, the ROE has been less. Recall, ROE in 2001 for CS was 29.41%. For the S&P 500, ROE was 7.52% in 2001.

  25. -Free cash flow after dividends has been positive during the past 5 years -The sector had a positive change in free cash flow during four of the past five years.

  26. Price of consumer staples has generally been less relative to the S&P 500. It declines in expansion and grows in recession.

  27. Valuation Analysis

  28. Trends

  29. Dividends (+) Dividends are providing a higher yield than the S&P 500

  30. Earnings (-) Earnings are starting to dip as the economy starts to look promising

  31. Earnings Estimates

  32. Value relative to S&P 500 (-) P/E ratio is moving in the same direction as price and earnings. Earnings are starting to dip as well as the price, indicating that P/E will not be expanding in the future

  33. Value relative to S&P 500 Net profit margin is decreasing as the P/S ratio decreases. Trend toward poor future performance

  34. Momentum More selling activity than buying activity

  35. Total Return Estimates

  36. Valuation Summary • + Dividends, Dividend yield is higher than S&P 500 and trends toward remaining that way • - Earnings, Earnings growth is not as high as S&P 500 and is slowing • - P/E ratios are declining, it is a signal of bad things to come, not more value • Overall, the total return is too low, and will be worse with a strengthening economy

  37. Growth rate estimate has decreased to 10.9%. The estimate has not fallen as much as the rest of the market, causing the upward trend line.

  38. -Analysts have been recommending holding less consumer staples over the past year.

  39. Recommendation • Business • Cycle indicates that the sector will under perform due to the state of the economy • Financial • Profit margins are increasing, revenues are decreasing, bad mix • Valuation • Poor returns for Consumer Staples expected

  40. Recommendation (cont’d.) • Keep Consumer Staples under-weighted • Economy is still trying to rebound from recession • Consumer staples do not perform well coming out of recession • Prices, earnings and net profit margins are trending downwards • Estimate revisions and selling activity indicate skepticism about consumer staples’ future performance

More Related