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Consumer Staples Presentation. August 4, 2009 Shane Connor Josh Drushel Jessica Kirwin. Agenda. Update of Sector Recommendation Stock Recommendations Summary Questions. Consumer Staples Recap. SIM Current Holdings – 11.65% S&P 500 – 11.81% Sector Characteristics Stable demand - PowerPoint PPT Presentation
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Consumer Staples Presentation
August 4, 2009
Shane Connor
Josh Drushel
Jessica Kirwin
Agenda
Update of Sector Recommendation Stock Recommendations Summary Questions
Consumer Staples Recap
SIM Current Holdings – 11.65% S&P 500 – 11.81% Sector Characteristics– Stable demand – Defensive (non-cyclical)
International Growth could be a bonus Class approved 25 bps increase
Sector Holdings
Current Holdings
SIM – 11.65%
PepsiCo – 4.44%
Wal-Mart Stores Inc – 3.00%
Colgate Palmolive – 2.13%
Philip Morris Int’l – 2.09%
weights as of 7/31/09
Recommended Holdings
SIM – 11.90%
PepsiCo – 3.94%
Wal-Mart Stores Inc – 3.00%
Safeway – 2.88%
Philip Morris Int’l – 2.09%
Colgate-Palmolive (NYSE:CL)• Company Overview: CL has been manufacturing and
marketing consumer products worldwide since 1803.
It operates under two segments which are oral, personal,
and home care as well as pet nutrition.
• Recommendation: Sell 234 basis points
• Investment Thesis: CL is a very stable performer in both
good and bad economies, but due to the classes decision
that the economy is turning around we feel there are
much better opportunities that persist.
Industry: Personal and Household Products
Company Symbol Price /Earnings
Forward Price / Earnings
Price / Sales Dividend Yield
Industry Average 15.7 15.1 1.9 2.96%
Colgate-Palmolive CL 18 16.0 2.4 2.43%
Avon AVP 19.4 17.4 1.4 2.59%
Estee Lauder EL 19.9 24.1 .9 1.51%
Ecolab ECL 22.7 19.8 1.7 1.35%
Price TargetAbsolute Valuation
High Low Median Current # Your Target
Multiple
*Your Target E, S, B, etc/Share
Your Target Price
(F x G)
P/Forward E 21.9 13.7 19.1 16 17.68 4.12 72.84
P/S 3.2 1.9 2.6 2.4 2.53 32.62 82.53
P/B 48.8 13.9 23.4 20.5 26.65 2.73 72.87
P/EBITDA 16.5 8.83 11.83 10.46 11.9 5.65 67.23
P/CF 20.5 12.8 17.4 15.4 16.53 4.40 72.73
Average 73.64
DCF Discount Rate Terminal FCF Growth
CL 10% 3% 78.17
Final Price Target= 75% DCF PT + 25% Valuation PT= $77.03Closing price 8/4/09 = $72.21Implied Upside= Price Appreciation + Dividend Yield = 9.13%
Positives/Risks
• Positives
- Stable performer in all types of economies
- Potential for continued international growth
- Safe bet investment
• Risks - Recession may only be beginning internationally
- Continued loss of market share domestically
- Investing in CL and the economy completely turns around
Philip Morris Int’s (NYSE:PM)
Company Overview: PM is the leading international tobacco company with 7 of the world’s top 15 brands
Recommendation: Hold current position
Investment Thesis: PM is a stable performer
Industry: TobaccoCompany Symbol Price /
EarningsForward Price
/ EarningsPrice to Sales Price/Cash
Flow
Industry Average 13.1 12.6 2.7 11.4
Philip Morris Int’l PM 13.7 14.6 3.7 12.2
British American Tobacco BTI 13.4 12.5 2.9 -
Lorillard LO 12.9 12.3 2.7 12.5
Reynolds American RAI 9.0 9.6 1.5 8.1
As of 8/2/09
Price TargetAbsolute Valuation
High Low Median Current #Your Target
Multiple
*Your Target E,
S, B, etc/Share
Your Target Price
(F x G)P/Forward E 16.1 11.0 13.9 14.1 14.0 3.5 49.00
P/S 7.3 1.2 1.9 3.4 2.1 33.48 70.31P/B 14.6 7.2 8.4 14.6 12.0 3.01 36.12
P/EBITDA 11.98 2.87 9.4 8.8 9.2 5.0 46.00P/CF 117 8.8 64.5 11.5 11.0 3.83 42.13
Average 48.71DCF Discount
RateTerminal
FCF Growth
Price Target
PM 10% 3% 51.44
Final Price Target= 75% DCF PT + 25% Valuation PT= $50.76Implied Upside= Price Appreciation + Dividend Yield = 18.2%
Positives / Risks
• Positives– Lower litigation risk compared to U.S.
– Products sold in over 160 countries
– Prices of products increased to enhance profitability (2009)
– Free Cash Flow of $6.8 Billion in 2008
– Owns 7 of the world’s top 15 brands – including Marlboro the #1 Brand Worldwide
– Customers are addicted to its products
• Risks– Increased excise taxes in Europe
– Value of the dollar
– The potential of increased regulation abroad
PepsiCo (NYSE:PEP)
Company Overview: PepsiCo manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide
Recommendation: Sell 50 bpsInvestment Thesis: PepsiCo is a stable performer
that has a diversified product line and good international growth. I feel the company is currently undervalued.
Merger with PBG and PAS
• PepsiCo announced today merger agreements with The Pepsi Bottling Group Inc. and PepsiAmericas, Inc.
• Total cost will be 7.8 billion– Pepsi Bottling Group
• $36.50 / share or .6432 PepsiCo shares
– PepsiAmericas• 25.50 / share or .5022 PepsiCo shares
• Create annual pre-tax synergies of 300 million by 2015
Industry: BeveragesCompany Symbol Price /
EarningsForward
Price / Earnings
Price to Sales
Dividend Yield
Industry Current
20.2 19.3 2.4 2.12%
PepsiCo Inc PEP 15.5 14.8 2.1 3.17%Coca-Cola
CoKO 16.4 15.7 3.7 3.29%
Dr. Pepper Snapple Group
DPS N/A 14.1 1.1 N/A
Hansen Natural
HANS 15.1 13.6 2.6 N/A
Price TargetAbsolute Valuation
High Low Median Current #Your Target
Multiple
*Your Target E,
S, B, etc/Share
Your Target Price
(F x G)P/Forward
E22.7 13.1 19.8 14.8 17.5 $3.74 $65.45
P/S 3.5 1.8 3.1 2.1 2.5 $32.47 $81.71P/B 7.7 5.5 6.7 7.4 7.2 7.74 $55.71
P/EBITDA 14.72 8.55 12.61 9.2 10.5 6.22 $65.31P/CF 19.6 10.4 17.1 12.2 14.5 4.69 $68.00
Average $67.24DCF Current
PriceDiscount
RateTerminal
FCF Growth
Price Target
PEP $56.20 10% 3% $69.78
Final Price Target= 75% DCF PT + 25% Valuation PT= $69.15Implied Upside= Price Appreciation + Dividend Yield = 26.2%
Positives / Risks
• Positives– Frito-Lay brand – Acquisition of PBG and PAS– Continuing foreign investment– Low cost environment
• Risks– Merger integration issues– Continuing weak performance by Americas
Beverage segment– Private label growth– Possible sales tax on carbonated soda
beverages
Safeway (NYSE:SWY)Company Overview: Safeway is a food and drug retailer founded in 1915 and headquartered in California. They operate over 1,700 grocery stores in western and central U.S. as well as Canada and Mexico. They are the third largest grocery retailer.
Recommendation: Buy 288 basis points
Investment Thesis: We feel that Safeway is well positioned to benefit from a broad economic recovery. The company has an attractive FCF yield and is aggressively buying back shares.
Current Situation
• YTD :Safeway (-18.4%) vs. S&P 12.67%
Missed Analysts EPS est.
Lowered Guidance (2.10-2.30)
Lowered Guidance (1.70-1.90)
Positives
• Positives- Attractive Valuation
- Strong Free Cash Flow
- History of share repurchases
Numbers in millions
FY FY Q1 Q2
2007 2008 2009 2009
Diluted Shares 445 436 429 422
% change -2.02% -1.61% -1.63%# of shares repurchased 6.7 12.6 3.5 9.5
Average purchase price 33.57 28.45 18.40 19.63
Positives Cont.
• - More sensitive to economic recovery
Risks• Risks
-Unemployment continues to rise
Risk Cont.
-Food prices (disinflation)
-Margin compression
-Continuing same store sales declines
Industry: Retail FoodCompany Symbol Price /
EarningsForward
Price / Earnings
Price to Sales
P/CF
Industry 9.7 10.6 .2 4.3
Kroger KR 10.7 10.2 .2 5.0
Supervalu Inc. SVU N/A 6.8 .1 1.9
Wal-Mart WMT 14.5 13.8 .5 9.6
Safeway SWY 8.3 9.4 .2 4
Safeway Price TargetAbsolute Valuation
High Low Median Current #Your Target
Multiple
*Your Target E,
S, B, etc/Share
Your Target Price
(F x G)P/E (ttm) 21.1 8.3 15.6 9.4 11.5
P/Forward E
19 8 15 10.6 12 1.90 22.8
P/S .4 .2 .3 .2 .3 96.5 28.95P/B 2.8 1.1 2.2 1.1 1.5 17.21 25.81
P/EBITDA 6.43 2.68 4.92 2.98 3.75 6.35 23.81P/CF 9.2 3.8 6.5 4 5.5 4.73 26.03
Average 25.48Current Price
19.03
Implied Upside
34%
Final Price Target= Valuation PT + Risk Factor = 24.40Implied Upside= Price Appreciation + Dividend Yield = 30.3%
Thank You
• Questions?