Download Consumer Discretionary Sector

Consumer Discretionary Sector
October 27th , 2009
Tiffany Arnett, Pinjalim Bora,
Sam Brickell
Recommendation
Short Term
Hold on to the
underweight position of
the sector in the SIM
portfolio.
Long Term
Depending on the
positive organic sales
growth in the 3rd and the
4th quarter, decide on
increasing the weight to
the that of S&P 500
Deriving at the recommendation
Top-down approach
•
•
•
•
•
•
Sector Size and Composition
Business Analysis
Key Economic Drivers
Financial Analysis
Valuation Analysis
Recommendation Recap
Sector Size and Composition
Overview
• 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
Sector Size and Composition
As a percentage of S&P 500
Sector Composition
Top 10 Industries ( Market Value Weighted)
Movies & Entertainment
14.95%
13.42%
Restaurants
Home Improvement Retail
10.22%
Cable & Satellite
9.39%
General Merchandise Stores
4.84%
Department Stores
4.25%
4.12%
Internet Retail
Apparel Retail
3.53%
Hotels, Resorts & Cruise Lines
3.32%
Footwear
0.00%
2.84%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Sector Composition
Top 10 Companies ( % of market value)
Top 10 Cons. Discretionary Companies
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
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
Sector Performance
Year to date
Sector Performance
Quarter to date
Business Analysis
Overview
• 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
Business Analysis
Five Forces Model
Barriers to Entry
Threat of Substitutes
•High
•Mostly competitive industries
•Many mature industries
•High
•Many brands offering similar
products
Bargaining Power of
Customers
Supplier Power
•Dependent upon industry
•Supplier demand derived
from industry demand
•Fairly high
•Customer demand drives the
supply of discretionary goods
•If customers aren’t buying…
Degree of Rivalry
High
Low switching costs
Large number of firms
Economic Analysis
Overview
A few economic indicators •
•
•
•
•
Consumer confidence
Real Consumer Spending
Inflation
Unemployment
Personal Savings rate
Economic Analysis
Consumer Confidence (Long Term)
•
•
“..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 Analysis
Consumer Confidence (Short Term)
•
•
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 Analysis
Consumer Spending (Long Term)
•
•
Refers to the pure
consumer
spending number
without any effect
of inflation
High positive
correlation expected
Economic Analysis
Consumer Spending (Short Term)
•
•
•
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 Analysis
Inflation – Core CPI (Long Term)
•
•
Core CPI
(Consumer price
index) - excludes
goods with high
price volatility,
such as food and
energy
High Negative
Correlation expected
Economic Analysis
Inflation – Core CPI (Short Term)
•
•
•
Positive
Correlation –
unexpected
Possible
explanation –
Recessions
(Inflation low,
spending low)
Evident opposite
movements
before recession
and by March
Economic Analysis
Unemployment rate (Long Term)
•
Negative
Correlation –
expected
Economic Analysis
Unemployment rate (Short Term)
•
•
Higher Negative
Correlation –
expected
Cyclical
unemployment
effect
Economic Analysis
Personal Savings Rate (Long Term)
•
•
•
Technically,
Personal Saving =
personal disposable
income -personal
consumption
expenditure
Expressed as % of
disposable income
High Negative
Correlation –
expected
Economic Analysis
Personal Savings Rate (Short Term)
•
•
High Negative
Correlation –
expected
“U.S. households
stocked away most
of the extra income
they got in January
from annual cost-ofliving raises,
boosting the
personal savings
rate to a 14-year
high, the Commerce
Department said
Monday.” Marketwatch
Economic Analysis
Inference/ 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 ?)
Financial Analysis
Revenue Growth
Sector
Retail – Computers and Electronics
Financial Analysis
Revenue Growth
Cable and Satellite
Apparel and Accessory
Financial Analysis
Return On Equity
Sector
Retail – Computers & Electronics
Financial Analysis
Return On Equity
Cable & Satellite
Apparel and Accessory
Financial Analysis
Net Profit Margin
Sector
Retail – Computers & Electronics
Financial Analysis
Net Profit Margin
Cable & Satellite
Apparel and Accessory
Financial Analysis
Inference / Expectations
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 Analysis
Recap - 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
Valuation Analysis
Trailing P/E
Sector
Retail – Computers & Electronics
Valuation Analysis
Trailing P/E
Cable & Satellite
Apparel and Accessory
Valuation Analysis
Forward P/E
Sector
Retail – Computers & Electronics
Valuation Analysis
Forward P/E
Cable & Satellite
Apparel and Accessory
Valuation Analysis
Price to sales
Sector
Retail – Computers & Electronics
Valuation Analysis
Price to sales
Cable & Satellite
Apparel and Accessory
Valuation Analysis
Price to book
Sector
Retail – Computers & Electronics
Valuation Analysis
Price to book
Cable & Satellite
Apparel and Accessory
Valuation Analysis
Price to cash flow
Sector
Retail – Computers & Electronics
Valuation Analysis
Price to cash flow
Cable & Satellite
Apparel and Accessory
Valuation Analysis
Technical Analysis
•“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 Analysis
Expectations
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 Analysis
Recap - Inference/ Expectations
Trailing P/E
Forward P/E
P/S
P/B
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
P/CF
Sector Conditions review
Analysis
Conclusions
View
Business
Mature industry, cyclical in nature.
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
Neutral
Recommendation
Short Term
Hold on to the
underweight position of
the sector in the SIM
portfolio. However,
reshuffle the underlying
composition.
Long Term
Depending on the
positive organic sales
growth in the 3rd and the
4th quarter, decide on
increasing the weight to
that of S&P 500
Current SIM holdings
Currently, Consumer discretionary is
underweight by 1.39%
Current SIM Sector Composition
Dividend
Yield
Cost
Current
Price
Unrealized
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%
Consumer Discretionary Sector
Presentation
Questions & Discussion