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Consumer Staples Stock Recommendation. Mark Bauer and Joe Burch May 15, 2007. Agenda . Recap of sector recommendation Current SIM holdings Recommended actions Summary of stock sales Summary of stock buy Conclusion. Consumer Staples Recommendation. 9.6% of S&P 500

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Consumer staples stock recommendation

Consumer Staples Stock Recommendation

Mark Bauer and Joe Burch

May 15, 2007


  • Recap of sector recommendation

  • Current SIM holdings

  • Recommended actions

  • Summary of stock sales

  • Summary of stock buy

  • Conclusion

Consumer staples recommendation
Consumer Staples Recommendation

  • 9.6% of S&P 500

  • 7.8% of SIM (1.8% underweight)

  • Defensive (non-cyclical) stocks

  • Good hedge against economic downturn

  • Mature, slow growth companies

  • International growth is important

  • Brand is important to generate high margins

  • Valuations do not suggest that consumer staples is cheap

  • Maintain underweight position


  • Sell 142 BP of Altria

  • Sell 130 BP of Kraft (all)

  • Buy 272 BP of Colgate

  • No change to Anheuser-Busch

Kraft food products industry
Kraft - Food products industry

  • Industry dominated by large companies such as Kellogg, General Mills, Campbell, Heinz, and Sara Lee

  • Utilize economies of scale

  • Competition based on price, quality, and variety

  • Strong brand enables higher prices

  • Trends/Issues

    • Healthy eating and organic foods

    • Regulation and labeling

    • Competition from lower priced private label competitors

Kraft business analysis
Kraft – Business Analysis


  • Operating margins decreased 14% in Q1 2007 from 15.2% to 14.0%

    • Investments in marketing, quality improvements, systems and distribution architecture, soaring ingredient costs, competition from generic brands

  • Lost market share on trademark products such as cheese, coffee, and salad dressing

  • Organic revenue up 3.6% and 2007 guidance is 3-4%


  • Earnings beat consensus estimates by $.02 per share

  • Looking for possible acquisitions to build scale in international markets, enter new categories, or acquire new technologies

  • Independence from Altria will provide more flexibility for acquisitions

Kraft valuation analysis
Kraft – Valuation Analysis

  • P/Forward E in-line with 5-year mean

  • Slightly expensive relative to S&P 500 and sector

  • Limited upside based on valuation analysis. Priced target of $34 (4% upside)

  • Summary: Not attractive based on valuation

Kraft summary
Kraft Summary

  • Weak results and outlook

  • Moderate upside potential based on valuation analysis and price target

  • Poor DCF target price

  • Sell entire holding and move money to higher growth stock



  • Phillip Morris International (PMI) growth is strong (9.5% income growth)

  • Looking to spin-off PMI

    • Analyst believe spin-off could result in share buybacks and share price increases

  • Key strategic event from Q1: Spin-off of Kraft

  • Focus on growing tobacco business

  • Raised full-year guidance

  • Expecting margin improvement

  • DCF target price is $78 (13% upside)


  • Q1 earnings lower than expectations

  • Phillip Morris USA had a weak quarter

  • Domestic cigarette sales volumes declined 6.2%. Decline expected to moderate to 3-4% throughout the year.

  • Risks: Smoking bans, health concerns, litigation


  • Sell 142 basis points to diversify the staples portfolio and move the money to higher potential stock

Colgate household products industry
Colgate-Household Products Industry

  • Very mature industry with many familiar companies vying for market share.

  • Brand name is a big factor like other industries in the sector.

  • Competition and leverage from large retailers restrict price increases.

  • Companies rely on product innovation to bolster sales and profit margins.

  • Cost control is done effectively and more efficient operations are being employed.

Colgate business analysis
Colgate-Business Analysis


  • Gross margin of 56.4% in Q1 2007 compared to 54.5 % in Q1 2006.

    • Undergoing restructuring plan which includes increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets.

  • Smooth CEO transition is expected.

    • Reuben Mark, CEO since 1984, is retiring on 07/01/07. COO and long-time Colgate employee will become CEO.


  • Modest growth numbers domestically.

  • Cat food recall

    • Not expected to have a significant impact on Colgate’s financials.


  • Growth

    • Notice the higher growth internationally.


  • Market Share

    • Achieved an all-time high of 37.3% of the toothpaste market in the U.S.

    • Market leader in 53 of the 71 largest toothpaste markets worldwide.

    • Growth within developing markets is projected to rise 2-3 times that of developed markets in near term.

Colgate valuation
Colgate - Valuation

  • Price steadily increasing along the trend line.

  • P/E cheap on an absolute level and inline relative to its sector.

  • Historical P/E a little higher than sector average.

Colgate summary
Colgate Summary

  • Generating higher margins through restructuring plan.

  • Excellent international growth.

  • Leading share in most major markets.

  • Target price: 80.27, 21.0% upside.


  • Sell 142 BP of Altria

  • Sell 130 BP of Kraft (all)

  • Buy 272 BP of Colgate

  • No change to Anheuser-Busch