consumer discretionary sector
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Consumer Discretionary Sector. October 27 th , 2009 Tiffany Arnett, Pinjalim Bora, Sam Brickell. Recommendation. Deriving at the recommendation Top-down approach. Sector Size and Composition Business Analysis Key Economic Drivers Financial Analysis Valuation Analysis - PowerPoint PPT PresentationTRANSCRIPT
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Consumer Discretionary Sector
October 27th , 2009
Tiffany Arnett, Pinjalim Bora,Sam Brickell
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Recommendation
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Deriving at the recommendation Top-down approach
• Sector Size and Composition
• Business Analysis
• Key Economic Drivers
• Financial Analysis
• Valuation Analysis
• Recommendation Recap
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Sector Size and CompositionOverview
• The sector is composed of companies that vie for discretionary household income spent on non-necessities.
• Industries include:
– Retailing, Media, Consumer Services, Consumer Durables & Apparel, and Automobiles & Components
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Sector Size and CompositionAs a percentage of S&P 500
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Sector CompositionTop 10 Industries ( Market Value Weighted)
2.84%
3.32%
3.53%
4.12%
4.25%
4.84%
9.39%
10.22%
13.42%
14.95%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%
Footwear
Hotels, Resorts & Cruise Lines
Apparel Retail
Internet Retail
Department Stores
General Merchandise Stores
Cable & Satellite
Home Improvement Retail
Restaurants
Movies & Entertainment
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Sector CompositionTop 10 Companies ( % of market value)
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Sector Performance
• Sector market cap: $26.7 billion, 9.18% of S&P 500
• Cyclical sector – moves with the market
• Sector has underperformed 3% relative to S&P 500 over the past 10 years
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Sector PerformanceYear to date
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Sector PerformanceQuarter to date
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Business AnalysisOverview
• Mature Phase of Life Cycle– Competitive Industries– Established companies and products– Focus on productivity
• Cyclical performance linked with the economy– Poor economic conditions = lower consumer
discretionary income• Also perception of poor economic conditions
– Generally, the sector will recover along with the economy
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Business AnalysisFive Forces Model
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Economic AnalysisOverview
A few economic indicators - • Consumer confidence• Real Consumer Spending• Inflation • Unemployment• Personal Savings rate
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• “..defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending” – Wikipedia
• Positive correlation - expected
Economic AnalysisConsumer Confidence (Long Term)
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• Very high positive correlation
• “Confidence among U.S. consumers fell more than forecast in October, a reminder that households remain nervous about the strength of the emerging economic recovery.” –Bloomberg.com
Economic AnalysisConsumer Confidence (Short Term)
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• Refers to the pure consumer spending number without any effect of inflation
• High positive correlation - expected
Economic AnalysisConsumer Spending (Long Term)
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• Consumer spending boosted by programs like cash for clunkers
• High positive correlation - expected
• “US consumer electronics spending is expected to be slightly better this Christmas season than last year, the Consumer Electronics Association (CEA) said Monday in its annual survey”
Economic AnalysisConsumer Spending (Short Term)
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• Core CPI (Consumer price index) - excludes goods with high price volatility, such as food and energy
• High Negative Correlation - expected
Economic AnalysisInflation – Core CPI (Long Term)
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• Positive Correlation – unexpected
• Possible explanation – Recessions (Inflation low, spending low)
• Evident opposite movements before recession and by March
Economic AnalysisInflation – Core CPI (Short Term)
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• Negative Correlation – expected
Economic AnalysisUnemployment rate (Long Term)
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• Higher Negative Correlation – expected
• Cyclical unemployment effect
Economic AnalysisUnemployment rate (Short Term)
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• Technically, Personal Saving = personal disposable income -personal consumption expenditure
• Expressed as % of disposable income
• High Negative Correlation – expected
Economic AnalysisPersonal Savings Rate (Long Term)
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• High Negative Correlation – expected
• “U.S. households stocked away most of the extra income they got in January from annual cost-of-living raises, boosting the personal savings rate to a 14-year high, the Commerce Department said Monday.” - Marketwatch
Economic AnalysisPersonal Savings Rate (Short Term)
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Economic AnalysisInference/ Expectation
• Consumer Confidence: Expected to rise, however short term outlook bleak : Negative (short term)
• Consumer spending: Responsive to incentives. Can retailers provide incentives ? Negative (short term)
• Unemployment rate: Expected to cross 10% by 2010: Negative (short term)
• Inflation: Expected to be low in the short term, Target FFR = 0-0.25%: Positive (Short term)
• Personal Savings rate : Expected to increase : Negative (Short Term/Long term ?)
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Financial AnalysisRevenue Growth
Retail – Computers and Electronics
Sector
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Financial AnalysisRevenue Growth
Cable and Satellite
Apparel and Accessory
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Financial AnalysisReturn On Equity
Sector
Retail – Computers & Electronics
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Financial AnalysisReturn On Equity
Cable & Satellite
Apparel and Accessory
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Financial AnalysisNet Profit Margin
Sector
Retail – Computers & Electronics
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Financial AnalysisNet Profit Margin
Cable & Satellite
Apparel and Accessory
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Are Margins expanding?
•Margins are likely to expand on an absolute basis as economy improves
•Margins are likely to expand for Consumer Discretionary versus the market
•Price raising, etc.
•Positive Cash Flow?
•Of course
•Mature Companies
Financial AnalysisInference / Expectations
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Financial AnalysisRecap - Inference / Expectations
Measure Outlook View
Revenue Downward trend mainly due to macro economic
circumstances
Negative
Return on Equity Much less than median Negative
Net Profit Margin At historical low levels Negative
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Valuation AnalysisTrailing P/E
Sector
Retail – Computers & Electronics
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Valuation AnalysisTrailing P/E
Cable & Satellite
Apparel and Accessory
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Valuation AnalysisForward P/E
Sector
Retail – Computers & Electronics
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Valuation AnalysisForward P/E
Cable & Satellite
Apparel and Accessory
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Valuation AnalysisPrice to sales
Sector
Retail – Computers & Electronics
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Valuation AnalysisPrice to sales
Cable & Satellite
Apparel and Accessory
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Valuation AnalysisPrice to book
Sector
Retail – Computers & Electronics
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Valuation AnalysisPrice to book
Cable & Satellite
Apparel and Accessory
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Valuation AnalysisPrice to cash flow
Sector
Retail – Computers & Electronics
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Valuation AnalysisPrice to cash flow
Cable & Satellite
Apparel and Accessory
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•“We don’t need no stinking technical analysis.”
•People who are a fan of technical analysis probably say that “support is forming” or some such crap like that
•In reality the trend might be upwards in the long term as signs of the economy improving show themselves and consumers gain confidence
Valuation AnalysisTechnical Analysis
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The Future
•Valuations likely to expand on an absolute basis as economy improves
•Valuations likely to expand for Consumer Discretionary versus the market
•Due to nature of the sector
Valuation AnalysisExpectations
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Valuation AnalysisRecap - Inference/ Expectations
Trailing P/E Forward P/E P/S P/B P/CF
Sector 49.4 20.4 17.9 15.3 0.7 0.9 3.1 2.4 8.8 9.3
Retail Electronics
12.3 22.0 11.6 17.2 0.3 0.6 2.5 3.8 8.5 13
Cable & Satellite
16 35.9 13.9 14.1 1.2 2.0 1.5 1.4 4.9 5.9
Apparel & Accessory
17 14 16.6 14.7 1.3 1.0 3.6 2.3 12.6 10.2
• The sector seems to be trading at a premium.• Few industries inside the sector seems undervalue or cheap at present
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Sector Conditions review
Analysis Conclusions View
Business Mature industry, cyclical in nature. Neutral
Economic Consumer confidence and consumer spending bleak in short term and weighed heavily by unemployment outlook which seems degrading although in a slow pace, personal savings rate increasing, low inflation
Negative slowly moving towards
positive
Financial Overall Revenue growth, profit margin and ROE declining In the short term for the sector as a whole.
Negative; depends upon the
economy.
Valuation Sector seems to be trading at a premium with pockets of opportunities within it.
Slightly negative
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Recommendation
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Current SIM holdings
Currently, Consumer discretionary is underweight by 1.39%
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Current SIM Sector Composition
Dividend Yield
CostCurrent
PriceUnrealized gain/loss
Target Price
Upside
Best Buy 1.4% $48.18 $39.30 (18.4)% $51.56 31.2%
Coach 0.9% $28.27 $33.71 19.24% $36.23 7.47%
Comcast 1.8% $16.44 $14.84 (10.28)% $18.92 27.5%
Game Stop N/A $25.32 $24.11 (4.8)% $32.00 32.72%
Mc Donald’s 3.7% $54.64 $59.24 8.4% $63.00 6.34%
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Consumer Discretionary Sector Presentation
Questions & Discussion