Consumer Discretionary Sector Stocks February 23 rd, 2010 Sekhar Achanta,Tongyu Zhou

Consumer Discretionary Sector Stocks

February 23rd, 2010

Sekhar Achanta,Tongyu Zhou

S & P 500 Sector Weights (as of 2/21/2010)

Sector Performance YTD and QTD (2/21/2010)

Sector Recommendation

• Buy 200 basis points of Consumer Discretionary stocks.

• Current holdings are Best Buy, GameStop and Comcast.

• Buy 100 basis points of Target Corporation (TGT).

• Buy 50 basis points of Ross Stores (ROST). • Buy 50 basis points of Royal Caribbean Cruises

(RCL).

Target Stores

• Target is an upscale discounter • Provides high-quality, on-trend merchandise at attractive prices in

clean, spacious and guest-friendly stores. • In addition, Target operates an online business, Target.com.• 1740 Stores in 49 States (including 251 Super Target locations)

Target Earnings Growth Rates

Target EPS Growth Rates

Target Margins

Target Corporation Valuation Analysis

Relative to Industry High Low Median Current

P/Trailing E 1.2 .58 .96 .95

P/Forward E 1.0 .56 .99 1.0

P/B 1.2 .6 1.0 1.0

P/S 1.2 .7 1.0 1.0

P/CF 1.3 .5 1.1 1.0

Relative to S&P 500 High Low Median CurrentP/Trailing E 1.5 .63 1.1 .95

P/Forward E 1.3 .63 1.0 1.0

P/B 1.7 .7 1.2 1.1

P/S .7 .3 .5 .5

P/CF 1.5 .6 1.1 .9

Target Corporation Valuation Analysis

Absolute Valuation

High Low Median Current Target Multiple

Target E,S,B/Share

Target Price

P/Forward E 27.8 11.9 17.8 14.6 20 $3.10 $62.00

P/S 1.1 .3 .8 .6 0.8 120.97 $96.77

P/B 5.8 1.6 3.5 2.4 3.5 21.13 $73.95

P/EBITDA 10.87 3.57 8.17 6.33 8.17 8.01 $65.44

P/CF 17.0 5.5 12.6 9.3 12.6 5.45 $68.67

Current Share Price : $50.73Implied equity value/share : $66.92Upside/(Downside) to DCF : 32.2%Terminal Discount Rate:11.0%Terminal FCF Growth: 5.0%

Ross Stores - Profile

• Ross Stores, Fortune 500 company.• Second largest off-price retailer.• Revenues of $6.5 billion. • Ross Operates

– 904 Ross Stores and 52 DD’s discounts stores– In 27 states and Guam

• Offers name brand and designer apparel, accessories, footwear and home fashions at 20-60% discounts.

Ross Stores - Same Store Sales and Inventory

Measure Period % Change $ Change

Sales Four weeks ended January 30, 2010

13% increase $46 million

Sales 13 weeks ended January 30, 2010

14% increase $245 million

Sales 52 weeks ended January 30, 2010

11% increase $700 million

Inventory 13 weeks ended January 30, 2010

11% decrease

Sales 52 weeks ended January 30, 2010

1% decrease

Ross Stores - Stock Repurchase and Dividends

• Stock Repurchase– Two-year 750 million dollar stock repurchase program.– 13 percent of total market value.

• During fiscal 2009, Ross Stores repurchased – 7.4 million shares– 300 million dollars.

• Dividend– Increased by 45 percent– Current Dividend is 16 cents per share.– Current dividend yield is 1.4%.

• Institutions own 97% of the shares.• Debt to Total Capital is 12%.

Ross Stores - Forecasts

Measure Period % Change

Sales Year over Year 5% increase

Same Store Sales Year over Year 2% increase

Diluted Shares Year Over Year 5% decrease

Ross Stores Revenue Growth Rates

Ross Stores Earnings Growth Rates

Ross Stores Margins

Ross Stores Valuation Analysis

Relative to Industry High Low Median Current

P/Trailing E 1.5 .31 .96 .87

P/Forward E 1.3 .31 .98 .88

P/B 2.1 .2 1.4 1.3

P/S 1.7 .3 1.1 1.1

P/CF 1.8 .3 1.3 1.1

Relative to S&P 500 High Low Median CurrentP/Trailing E 1.4 .28 .96 .80

P/Forward E 1.3 .27 .96 .83

P/B 3.1 1 1.6 1.2

P/S 1.0 .2 .6 .7

P/CF 1.6 .4 1.2 1.0

Ross Stores Valuation Analysis

Absolute Valuation

High Low Median Current Target Multiple

Target E,S,B/Share

Target Price

P/Forward E 21.0 7.0 15.2 12.1 15.2 $3.89 $59.12

P/S 1.4 .5 .9 .8 .9 $74.09 $66.68

P/B 6.7 2.4 4.9 4.3 4.9 10.95 $53.65

P/EBITDA 11.59 3.92 8.90 7.51 8.9 6.27 $55.80

P/CF 17.2 5.7 12.1 10.7 12.1 4.40 $53.24

Current Share Price : $47.1Implied equity value/share : $87.75Upside/(Downside) to DCF : 86.1%Terminal Discount Rate = 12.0%Terminal FCF Growth = 5.0%

Royal Caribbean Cruise – Profile

• Royal Caribbean Cruises is a cruise company operating 38 ships.• The Company owns five cruise brands

– Royal Caribbean International,– Celebrity Cruises,– Pullmantur,– Azamara Cruises,– CDF Croisieres de France.

• Market Cap - $5.63 billion.• Revenues - $6.5 billion.• Net Income - $573 million• Operating Margin - 5.67%• LT Debt to Total Capital - 51%

Royal Caribbean Cruise - Revenues

Royal Caribbean Cruise - Earnings

Royal Caribbean Cruise - Margins

Royal Caribbean Cruise Valuation Analysis

Relative to Industry High Low Median Current

P/Trailing E 1.9 .36 .69 1.8

P/Forward E 1.7 .46 .73 .67

P/B .8 .2 .5 .3

P/S 1.2 .5 .9 .9

P/CF 1.0 .2 .6 .7

Relative to S&P 500 High Low Median CurrentP/Trailing E 1.8 .2 .83 1.7

P/Forward E 1.5 .33 .87 .99

P/B .8 .1 .4 .3

P/S 1.7 .3 1.0 .8

P/CF 1.3 .2 .7 .7

Royal Caribbean Cruise Valuation Analysis

Absolute Valuation

High Low Median Current Target Multiple

Target E,S,B/Share

Target Price

P/Forward E 37.7 4.0 14.2 14.5 15.0 1.81 $27.15

P/S 3.1 .2 1.5 1.0 1.5 38.14 $57.21

P/B 2.9 .2 1.3 .8 1.3 32.87 $42.73

P/EBITDA 12.12 .9 5.63 5.4 5.63 4.87 $27.47

P/CF 15.1 1.2 7.7 7.6 8 3.46 $27.68

Current Share Price : $26.3Implied equity value/share : $35.37Upside/(Downside) to DCF : 34.5%Terminal Discount Rate:12.0%Terminal FCF Growth: 5.0%

Questions