Consumer Staples:Stock Recommendations
Robert BlakeJason EbbingRica Rahardjo
Agenda Recap of Sector Overview Recommendations Summary Questions
Where we left off… Mature slow growth defensive sector
Offers protection during economic downturns International markets key to growth Sector weights as of July 27th
S&P500: 9.36% SIM: 7.78% (Underweight 158 bp)
Recommended to further underweight by 50bp Valuation indicates sector is not cheap Sector faced with constricting margins Believe economy will continue to grow Opportunity to invest in higher growth sectors
Current Sector Holdings
Consumer Staples Holdings
BUD19%
CL31%
MO50%
CompanyTicker
SymbolSIM
Shares SIM %Current
Price Value
Altria Group Inc. MO 13,600 3.67 65.17 886,312
Anheuser-Busch BUD 13,500 2.72 48.65 656,775
Colgate-Palmolive Co. CL 4,900 1.39 68.45 335,405
Total Sector 7.781,878,49
2
CompanyTicker
SymbolSIM
Shares SIM %Current
Price Value Action
Altria Group Inc. MO 13,600 3.67 65.17 886,312 None
Anheuser-Busch BUD 6,700 1.35 48.65 325,955 Sell 137bp
Colgate-Palmolive Co. CL 7,900 2.24 68.45 540,755 Buy 85bp
Total Sector 7.26 1,753,022Return
52bp
Proposed Sector Holdings
Consumer Staples Holdings
BUD35%
CL18%
MO47%
Recommendation #1:
Reduce Anheuser-Busch Holdings
Anheuser-Busch Largest brewer in North America
48.8% market share Segments
U.S. Beer International Beer Packaging Entertainment
Growth opportunities International expansion Strategic investment in other beverage producers Distribution agreements Rumored merger with InBev
A-B Business AnalysisPros Strong brand
Successfully implemented pricing increases Massive distribution channel
Being leveraged to diversify product mix Strategic investments contributing to growth
Grupo Modelo generating much of BUD’s recent growth Consistent cash flows
Dividend yield of 2.70% History of and planned stock buybacks which should boost stock price
Cons North American growth flat
Accounts for majority of revenues Weakness in core brands Margins under pressure
Commodity, labor, marketing, and distribution costs increasing Expansion and diversification strategy is a wildcard
Growth so far has largely been just enough to offset declines in core brands
A-B Financial AnalysisMultiple High Low Mean Current
Target Multiple
Target/share value Price
Price/Forward EPS 22.7 16.0 18.9 16.4 17.8 2.67 47.53
Price/Sales 3.6 2.1 2.7 2.3 2.5 21.31 53.28
Price/Book 17.3 8.3 12.4 9.5 10.0 5.12 51.20
Price/EBITDA 12.7 8.3 10.1 10.0 10.5 4.87 51.14
Price/Cash Flow 17.8 10.9 13.4 12.5 13.4 3.89 52.13
Average 51.05
Undervalued based on 5-year historical absolute multiples Average of target prices: $51.05
Yields a 4.9% upside from closing price of $48.65 on July 27th
Relative valuations imply that BUD is slightly undervalued
A-B Valuation & Technicals
DCF model implies a value of $50.70/share 4.2% upside from July 27th closing price
Technical Analysis Resistance around $55/share 50 Day Moving average - bearish 200 Day Moving average - bullish Chart trending down - bearish
Anheuser-Busch Summary Lack of organic growth is cause for concern International growth slow in materializing Concerned BUD will need to make sizeable
unplanned investments in marketing and expansion Valuation, performance, and market sentiment
imply limited upside gains in the near term Recommend selling 137bp (50% of holding) Diversification and international endeavors could be
catalysts for higher valuations Re-evaluate remaining position in 3 months
Recommendation #2:
Increase Colgate-Palmolive Holdings
Colgate-Palmolive Large, mature consumer products company Segments
Oral, Personal, and Home Care Pet Nutrition
Growth Opportunities International expansion Possible merger talks with Unilever Undergoing restructuring plan which includes
increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets.
C-P Business AnalysisPros Strong brand recognition
Market leader in 53 of the 71 largest toothpaste markets worldwide
Growth in foreign markets Currently, 75% of sales are from international operations and
growing Benefit of weak dollar
Makes goods cheaper to foreign buyers and increases earnings when translated back to dollars
Benefits of restructuring In the second quarter, earnings skyrocketed 49% to $0.76 per
share. Excluding restructuring costs, Colgate earned $0.84 a share, compared to $0.72 a year ago.
C-P Business AnalysisCons Modest growth domestically
2nd quarter sales increase over previous year:North America : 3.5% Europe/South Pacific : 17.0%Latin America: 16.0% Asia/Africa : 15.5%
Pet food recall/counterfeit toothpaste hurting brand Colgate has been proactive in restoring trust in brand
Rising commodity prices/energy prices reduces net margin
Colgate (CL) Valuation
DCF model implies a value of $80.47/share•17.5% upside from July 27th closing price of $68.45•2.1% Dividend Yield
Price steadily increasing along the trend line
CL Financial AnalysisStock Valuation
Absolute Valuation High Low Mean Current #Your Target Multiple
*Your Target E, S, B, etc/Share
Your Target Price
(F x G)
A. B. C. D. E. F. G. H.
P/Forward E 36.7 17.3 24 19.2 24 3.13 75.12
P/S 4.72 2.31 3.25 2.99 3.25 23.89 77.64
P/B 100 9.3 24 26.4 24 3.04 72.99
P/EBITDA 26.1 9.8 14.8 14.3 14.8 4.77 70.60
P/CF 32.4 14.9 20.7 19 20.7 3.59 72.16
Average $73.70
•Moderately undervalued based on 10-year historical absolute multiple measurements•Average of target prices based on multiples: $73.70
•7.6% upside from closing price of $68.45 on July 27th
Colgate Summary Generating higher earnings through
restructuring plan Excellent international growth Market leader in their key segment
(toothpaste) DCF target price: 80.47, 17.5% upside. Recommend buying 85 basis points
(61.2% increase in current holdings)
Recommendation Summary Anheuser-Busch is fairly valued
Lacking a catalyst upside is currently limited Sell 137bp now and re-evaluate position as
information about diversification strategy is available
Colgate offers an attractive upside Company restructuring should boost growth International exposure and weak dollar create a
favorable environment for CL Accumulate an additional 85bp
Return 52bp for investment in other sectors
Questions
BACKUP SLIDES
A-B Absolute Valuation Charts
A-B Absolute Valuation Charts
A-B Relative Valuation Charts
A-B Relative Valuation Charts
A-B Technical Chart
CL Relative Valuation Chart
CL Relative Valuation Chart