consumer discretionary stock presentation shahyan ahmad
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TRANSCRIPT
Consumer Discretionary Stock Presentation
Shahyan Ahmad, Shantanu Basu, Jake Beham, Blaine Bosley
May 13th, 2008 – FIN 724/824
Agenda
• Sector Presentation Review
• Group Stock Recommendation
• Business Analysis of Stocks
• Financial Analysis
• Valuation Measures
• Additional Analysis
• Recommendation Recap
Current SIM Holdings Review
Current SIM Holdings Review
SIM Portfolio 4-30-2008
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Consu
mer
Disc
retio
nary
Consu
mer
Sta
ples
Energ
y
Finan
cials
Health
Car
e
Indu
stria
ls
Info
rmat
ion
Tech
nolo
gy
Mat
eria
ls
Tele
com
mun
icatio
n Ser
vices
Utilitie
sCas
h
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
S&P 500 Weight
SIM Weight
ANF45%
BBY36%
LTD19%
Sector Presentation Review
• The class agreed with us to buy more – Increase the weighting of the consumer discretionary
sector to approximately 9.67% (1% overweight)
Sector Conditions Review
• Economic stimulus package is in effect• Returns to date are -0.81% but trending upwards• Numerous buying opportunities
• Sector is cyclical in nature• Slowing of Fed rate cuts• Price ratios show that SP-25 is cheap compared to
the S&P 500• Consensus growth rate 1.1% higher than S&P 500
• SECTOR VALUATION:
Undervalued with growth potential
Current Positions in Portfolio
Company SharesCurrentPrice*
Market Value
SIM Weight
Dividend Yield
Abercrombie & Fitch
13,500 $75.03 $1,012,905 4.01% 1.00%
Best Buy 19,000 $43.67 $829,730 3.28% 1.20%
Limited Brands
23,400 $18.80 $439,920 1.74% 3.30%
* Prices as of close of business on 5/12/08
Potential Buying Opportunities
CompanyCurrent Price*
Target Price
UpsideDividend
Yield
Best Buy $43.67 $59.00 35.1% 1.20%
Comcast $22.04 $24.21 9.9% 1.10%
Limited Brands $18.80 $21.93 16.6% 3.30%
Sears Holdings $94.69 $105.91 11.8% N/A
Abercrombie $75.03 $91.89 22.5% 1.00%
Whirlpool $74.77 $100.32 34.2% 2.40%
* Prices as of close of business on 5/12/08
• BUY – 10,000 shares of Whirlpool Corp. (WHR)– Add 3,000 shares of Best Buy (BBY) for a total of
22,000 shares
• SELL – All of our 23,400 shares of Limited (LTD)– 4,000 shares of Abercrombie (ANF) to arrive at 9,500
shares
Group Stock Recommendations
Consumer Discretionary Holdings
Current Proposed
ANF29%
BBY40%
LTD0%
WHR31%
ANF45%
BBY36%
LTD19%
WHR0%
Business Analysis: WHR
• Consumer goods industry
• Manufacturer and marketer of home appliances
• Brands: Whirlpool, Maytag, KitchenAid, Jenn-Air, Roper, and many others
• Market Cap: $5.44B• Headquartered in
Benton Harbor, MI
Business Analysis: WHR
• Why it is undervalued– Cyclical stock – poor economy (industry sales down 9%)– Housing market woes – fewer big box items purchased– Missed earnings by 35 cents a share
• Why it will bounce back– Economic stimulus checks– Weak dollar (international sales of US manufactured goods)
• 40% of its sales are international
• Has manufacturing facilities in the US, one in Marion OH
– It has dammed it’s market share losses to GE of last year– Appears to be in the trough rather than on the way down
Business Analysis: BBY
• Best Buy is a retailer of consumer electronics, personal computers, appliances, entertainment software and related services.
• Consumer Electronics is the most important line of business
• The appliances division continues to have a sluggish growth in business
• Primary competitors for Best Buy are Dell, Circuit City, and Wal-Mart
Business Analysis: BBY
• Key Performance Drivers– Addition of 87 new Best Buy and Future Shop stores
during fiscal 2007. The trend is expected to continue.– Focus on expanding geographical reach and customer
base by strengthening its position in current markets and exploring new markets
– Acquiring targets which are suitable in terms of synergies (Pacific Sales Kitchen and Bath Centres in Fiscal 2007). Trend is expected to continue.
– Focus on customer centric approach.
•
Business Analysis: ANF
• ANF has 20+% upside (less than WHR or BBY)• LTD is up ~6.8% over the past week• Reducing exposure to apparel retail
– Retail is currently ~74% of our holding– Less bullish on retail than other areas of the
consumer discretionary segment– Proposed holding is much better diversified
Return Relative to S&P 500 v. Federal Funds Rate
• WHR returns have a low correlation to Fed Funds Rate
• Disposable income is a better measure
Return Relative to S&P 500 v. Disposable Income
• A positive lag correlation is noticeable
• With the announcement of Tax Rebates leading to higher disposable income we expect an upswing
Financial Analysis - WHR
• DuPont Analysis:
Whirlpool 05 Whirlpool 06 Whirlpool 07Profit Margin 3.31% 2.70% 3.19%Asset Turnover 1.74 1.63 1.40Return on Assets 5.77% 4.41% 4.47%Leverage Multiplier 4.90 4.41 3.86Return on Equity 28.29% 19.45% 17.24%
Earnings Est. v. Consensus - WHR
Earnings Estimates Net Income Shares EPS Consensus EPS2008 633 78.3 8.08 7.112009 732 76.7 9.54 8.712010 876 91.5 9.57 10.32
Revenue & Income Growth - WHR
2005 2006 2007Revenue 14,317 18,080 19,408 % Growth N/A 26.28% 7.35%Income 474 489 620 % Growth N/A 3.16% 26.79%
2008E 2009E 2010E Revenue 21,349 23,911 27,497 % Growth 10.00% 12.00% 15.00%Income 633 732 876 % Growth 2.10% 15.64% 19.67%
DCF Analysis- WHRDCF Valuation5/11/2008Ticker: WHR Terminal Discount Rate = 10.5%
Terminal FCF Growth = 5.0%
Forecast TerminalYear 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Value
Revenue 21,349 23,911 27,497 31,072 34,490 37,594 40,225 42,237 44,349 46,566 48,894 % Growth 12.00% 15.00% 13.00% 11.00% 9.00% 7.00% 5.00% 5.00% 5.00% 5.00%
Operating Income 1,067 1,196 1,375 1,554 1,724 1,504 1,609 1,267 1,330 1,397 1,467 Operating Margin 5.00% 5.00% 5.00% 5.00% 5.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00%
Interest - net (266) (270) (270) (270) (270) (270) (270) (270) (270) (270) (270) Interest % of Sales -1.25% -1.13% -0.98% -0.87% -0.78% -0.72% -0.67% -0.64% -0.61% -0.58% -0.55%
Taxes 158 183 219 456 499 443 470 384 400 417 434 Tax Rate 38.5% 38.5% 38.5% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Net Income 633 732 876 1,368 1,496 1,330 1,409 1,153 1,200 1,250 1,303 % Growth 16% 20% 56% 9% -11% 6% -18% 4% 4% 4%
Add Depreciation/Amort 640 717 825 621 690 752 402 422 443 466 489 % of Sales 3.00% 2.00% 2.00% 2.00% 2.00% 2.00% 1.00% 1.00% 1.00% 1.00% 1.00%Plus/(minus) Changes WC 200 200 200 (311) (345) (376) (402) (422) (443) (466) (489) % of Sales 0.94% 0.84% 0.73% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00%Subtract Cap Ex (427) (359) (275) (311) (345) (376) 0 422 887 1,397 1,467 Capex % of sales -2.00% -1.50% -1.00% -1.00% -1.00% -1.00% 0.00% 1.00% 2.00% 3.00% 3.00%
Free Cash Flow 1,901 2,008 2,176 1,989 2,186 2,082 1,409 730 313 (147) (164) YOY growth 6% 8% -9% 10% -5% -32% -48% -57% -147% 12%
Terminal (3,134.9) Terminal Value (3,135) P/E (2.4) NPV of free cash flows 8,962 112% EV/EBITDA (0.64) NPV of terminal value (946) -12% Free Cash Yield 5.24%Projected Equity Value 8,016 Free Cash Flow Yield 23.71%
Shares Outstanding 79.9
Current Price 74.00$
Implied equity value/share 100.32$
Upside/(Downside) to DCF 35.57%
Multiples Valuation - WHR
Absolute Valuation High Low Mean Current#Your Target
Multiple*Your Target
/Share
Your Target Price
P/Forward E 15.9 6.8 10.9 9.7 12 8.09 $97.08
P/S 0.58 0.25 0.39 0.29 0.39 273.00 $106.47
P/B 5.2 1.4 2.7 1.4 2 51.74 $103.47
P/EBITDA 12.1 2 4.4 3.5 4.6 20.69 $95.19
P/CF 9 3.2 5.8 4.6 6 15.75 $94.47
P/E/G ratio 2.8 0.5 1.1 0.8 1.1 90.54 $99.59
ROE 50.6 15.2 23.4 16.9 23.4 4.29 $100.29
Stock vs. Sector Valuation
High Low Mean Current
P/Forward E 0.75 0.23 0.51 0.57
P/S 0.53 0.23 0.39 0.37
P/B 2.39 0.36 0.92 0.56
P/EBITDA 2.01 0.29 0.54 0.54
P/CF 0.91 0.3 0.56 0.53
P/E/G ratio 2.4 0.43 0.85 0.61
ROE 4.59 0.95 1.73 1.17
Valuation Analysis: WHR
• The current price related ratios are all below the mean estimates
• With a mean revenue growth of 12% for the coming three years and a mean consensus EPS of around 9 we see a buy opportunity in WHR
Valuation Analysis: WHR
• In line with the previous slide the current price related ratios are all below the mean estimates
• Although ROE is dropping there is potential to reach the mean estimate relative to the sector
WHR Relative to Sector
• Performance of WHR in terms of price ratios are in line with sector performance
WHR Relative to S&P 500
• Historical ratios of WHR ratios are impressive when compared with S&P 500
WHR Valuation Summary
• Lower Price related ratios relative to the mean presents a good buying opportunity
• Tax rebates should boost the sales
• Recession could be an area of concern
• We project a top line growth of 12%
• EPS for the coming three years is projected at around 9.5
Price and Earnings - WHR
• Hit recently• Cyclical nature• Earnings
expected to increase steadily
• Whirlpool GRE: 13.0%
• S&P 500 GRE: 12.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
WHIRLPOOL CORPORATION (WHR)PRICE 72.43 DATE 05-09-2008PRICE 72.43 DATE 05-09-2008StockVal®
3232
3636
4040
4444
5050
5656
6262
6868
7676
8484
9494
106106
118
130
146
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day 0.84 1.51
1-Week -4.19 -2.38
4-Weeks -12.45 -16.61
QTD -16.54 -21.49
YTD -11.27 -5.82
2007 -1.67 -5.20
2006 -0.88 -14.50
2005 21.02 18.02 FYE Dec 2007 EPS 8.53
First Call Data 2008 2009 2010
Mean Estimate 7.11 8.71 10.32Change -17% +22% +19%
High 7.48 9.50 11.66
Low 6.75 7.25 9.40
Total 6 6 3
# Up 0 1 1
# Down 7 6 1
House Estimate
PE Ratio 10.2 8.3 7.0
Revenues ($Mil) 19,633
Market Value ($Mil) 5,505
Shares Out (Mil) 76.0
Volume 60-Day Avg (Th) 1,654
Volume 60-Day Avg ($M) 119.8
Dividend Estimate 1.72
Payout Ratio 24%
Retention Rate 76%
Dividend Yield 2.37%
Data Page # 1
Price and Earnings - BBY
• Stimulus checks
• Forecast strong growth in second half of year
• Best Buy GRE: 15.0%
• S&P 500 GRE: 12.0%
Price Momentum - WHR
• Very oversold
• Will have positive momentum once trades are made in June
Technical Analysis - WHR
• Approaching key pivot point
• Should get good support
• Potential double bottom pattern leads to support recovery
Summary
• BUY – 10,000 shares of Whirlpool Corp. (WHR)– Add 3,000 shares of Best Buy (BBY) for a total of
22,000 shares
• SELL – All of our 23,400 shares of Limited (LTD)– 4,000 shares of Abercrombie (ANF) to arrive at 9,500
shares
Reasons to Buy WHR and BBY• Cyclical in nature
• Solid business model
• Sustainable revenue and earnings growth with favorable upside potential
• Economic stimulus package
• Large international exposure
Price Targets
Whirlpool:• Target Price:
– $100.32• Current Price (5/12/08):
– $74.77• Upside Potential:
– 34.17%• 52 Week Range:
– $67.19-118.00
Best Buy:• Target Price:
– $59.00• Current Price (5/12/08):
– $43.67• Upside Potential:
– 35.10%• 52 Week Range:
– $38.75-53.90
Consumer Discretionary Stock Presentation
Questions & Discussion