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Consumer Discretionary Sector April 27, 2010 Robert Bauer Jorge Concha Thomas D’Amico Duncan De Wet Recommendation Currently SIM portfolio is underweight We recommend increasing weight Sector Business Economic Financial Valuation Final Overview Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Final Recommendations Sector Business Economic Financial Valuation Final Sector Overview The Consumer Discretionary sector is propelled by discretionary household income spending Due to this companies in this section tend to be some of the most sensitive to economic cycles Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services and education services. Sector Business Economic Financial Valuation Final Sector Weight as of 4/26/10 S&P 500 Market Cap ($mm): $10,949,048.17 10.67% Consumer Discretion ary Rest of Industries Consumer Discretionary ($mm): $1,168,759.43 Market Weight: 10.67% Sector Business Economic 89.33% Financial Valuation Final Industries As of 3/31/2010 29.9% 20.3% 15.3% 8.7% 5.9% Sector Business 5.0% Economic 4.6% 4.1% Financial 2.9% 1.4% Valuation 1.0% Final 0.6% Top 15 Companies As of 3/31/2010 6.72% 6.34% 5.15% 5.00% 4.35% 3.97% 3.71% 3.37% 3.34% 3.04% 2.96% 2.68% 2.08% 1.96% Sector Business Economic Financial Valuation Final 1.76% SIM Stock % As of 3/31/2010 5.00% 1.37% 0.62% Comcast Sector Best Buy Business Economic 0.34% GameStop Financial Valuation Ross Stores Final Sector Performance Sector Business Economic Financial Valuation Final Business Analysis Cyclical Performance General Sentiment: Rebound of market producing large gains for Consumer Discretionary sector Fear of a double dip recession could sway consumers’ perceptions Maturity of Sector Sector Competitive Industries, many changed since recession Opportunities with growth Business Economic Financial Valuation Final Porter’s 5 Forces High - Importance of branding - High capital requirements - Maturity of industry Competition High - Mature companies - Established market players - Difficult to gain market share Substitutes High - Similar products - Must differentiate Supplier Power High - Very industry specific Buyer Power High -Customer demand and discretionary income drive sales Sector Economic Barriers to Entry Business Financial Valuation Final Consumer Confidence Consumer Confidence declines end, poised to re-gain upward momentum Sector Business Economic Financial Valuation Final Consumer Spending Consumer spending increasing – key measure for consumer discretionary sector Sector Business Economic Financial Valuation Final Personal Savings Personal Savings declines on improved recovery outlook and confidence Sector Business Economic Financial Valuation Final Unemployment Unemployment rate holding steady – hiring and labor force both increasing Sector Business Economic Financial Valuation Final Retail Sales and CPI Retail sales rise as consumer spending recovers Consumer Price Index Stable – extreme/deep discounting no longer necessary Sector Business Economic Financial Valuation Final Disposable Income & Real Consumer Spending Disposable Income rising with other income categories Spending continues to rise as markets stabilize & disposable income increases Sector Business Economic Financial Valuation Final Default Rates & Financial Obligations Consumer Default Rates - Declining Financial Obligations, % of disposable income declines. More to spend on discretionary items Sector Business Economic Financial Valuation Final Alcohol Consumption Tom’s Bachelor Party More drinking = more consumer spending! Sector Business Economic Financial Valuation Final Consumer Discretionary Sector Revenues Return on Equity Consumer Discretionary Net Profit Margin Sector Business Net Profit Margin relative to S&P 500 Economic Financial Valuation Final Revenue Growth – Top Industries Movies & Entertainment Restaurant Movies and Entertainment Restaurant Cable & Satellite Sector Business Retail – Home Improvement Economic Financial Valuation Final Return on Equity – Top Industries Restaurant Movies & Entertainment Movies and Entertainment Restaurant Cable & Satellite Sector Business Retail – Home Improvement Economic Financial Valuation Final Absolute Net Profit Margin – Top Industries Movies & Entertainment Restaurant Movies and Entertainment Restaurant Retail – Home Improvement Cable & Satellite Sector Business Economic Financial Valuation Final Net Profit Margin Relative to S&P 500 – Top Industries Movies & Entertainment Restaurant Movies and Entertainment Restaurant Cable & Satellite Retail – Home Improvement Sector Business Economic Financial Valuation Final Revenue Growth – Top Companies Movies and Entertainment Restaurant Sector Business Economic Financial Valuation Final Return on Equity – Top Companies Movies and Entertainment Restaurant Sector Business Economic Financial Valuation Final Absolute Net Profit Margin – Top Companies Movies and Entertainment Sector Business Economic Financial Valuation Final Net Profit Margin Relative to S&P 500 – Top Companies Movies and Entertainment Restaurant Sector Business Economic Financial Valuation Final Revenues How does Revenue generation compare to historical levels? • Consumer Discretionary Sector • • Top 4 Industries • • Have a positive revenue trend after steep declines due to recession Top 4 Companies • Is still down and with no sign of immediate improvement in terms of revenue generation These companies are back to their steep upward trend of revenues after the hiccup that was the recession Conclusions • The sector is cyclical, and as such cash flows improve when the economy does • The sector usually generates positive cash flows due to having mature companies Sector Business Economic Financial Valuation Final Return on Equity How is the sector doing in terms of Return on Equity? • Consumer Discretionary Sector • • Top 4 Industries • • All have an upward trend Top 4 Companies • Has improved tremendously since the recession Mostly look like positive trends Conclusions • Return on equity in the macro and micro level is doing much better Sector Business Economic Financial Valuation Final Margins Are Net Profit Margins expanding? • • • Consumer Discretionary Sector • Absolute: Improving after recession • Relative to S&P 500: Not doing as well as S&P 500, but catching up Top 4 Industries • Absolute: Varies depending on industry • Relative to S&P 500: Generally better than S&P 500 Top 4 Companies • Absolute: Mostly improving • Relative to S&P 500:Varies depending on the company Conclusions • As the economy improves, so should the margins on an absolute level • The sector still has a lot of catching up to do versus the S&P 500 Sector Business Economic Financial Valuation Final Financial Recap Measure Outlook View Revenue Industries and Companies are picking it up, but sector as a whole is still having trouble Negative in the short term Positive in the long term Return on Equity Doing very well Positive Net Profit Margin Sector is improving and trying to catch up to S&P 500 Positive Sector Business Economic Financial Valuation Final Trailing P/E Sector Business Economic Financial Valuation Final Forward P/E Sector Business Economic Financial Valuation Final Price/book Sector Business Economic Financial Valuation Final Price/Sales Sector Business Economic Financial Valuation Final Price/Cash Flow Sector Business Economic Financial Valuation Final EPS Sector Business Economic Financial Valuation Final Final Recommendation Currently SIM portfolio is underweight, we recommend increasing weight The Consumer Discretionary sector has outperformed the S&P 500 YTD and continues to thrive during the market rebound Leading economic indicators point to positive returns for the S&P 500 and industry According to the financial analysis, the sector has a positive trend in terms of revenues, return on equity, and margins. In the short run we believe that this is a cyclical bull market, and this sector should outperform the market as a whole Sector Business Economic Financial Valuation Final What Questions Do You Have?
