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Consumer Discretionary Sector. July 21, 2009 Joshua Anderson, Kunal Arora, Branyan Booth, Joseph Chandraraj. Sector Overview - S&P 500 Composition. Sectors as % of S&P 500. Sector Overview – Top 10 Industries. Industries as % of Consumer Discretionary Sector. $688 billion. % of sector. - PowerPoint PPT Presentation
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Consumer Discretionary Sector
July 21, 2009
Joshua Anderson, Kunal Arora, Branyan Booth, Joseph Chandraraj
Sector Overview - S&P 500 Composition
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Cum
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% 18.55 14.21 13.30 12.46 12.07 9.71 8.93 4.12 3.47 3.18
Cumulative 18.55 32.76 46.06 58.52 70.59 80.30 89.23 93.35 96.82 100.00
Energy Materials IndustrialsConsumer
DiscretionaryConsumer
StaplesHealth Care Financials
Information Technology
Telecommunication
Utilities
Information Technology Health Care Financials Consumer
Staples Energy Industrials Consumer Discretionary Utilities
Telecommunication
ServicesMaterials
% 18.55 14.21 13.30 12.46 12.07 9.71 8.93 4.12 3.47 3.18
Cumulative 18.55 32.76 46.06 58.52 70.59 80.30 89.23 93.35 96.82 100.00
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&P
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Sectors as % of S&P 500
Sector Overview – Top 10 Industries
$688 billion
2.84%
3.32%
3.53%
4.12%
4.25%
4.84%
9.39%
10.22%
13.42%
14.95%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%
Footwear
Hotels, Resorts & Cruise Lines
Apparel Retail
Internet Retail
Department Stores
General Merchandise Stores
Cable & Satellite
Home Improvement Retail
Restaurants
Movies & Entertainment
% of sector
Industries as % of Consumer Discretionary Sector
Sector Overview – Top 10 Companies
$688 billion
Top 10 Sector Companies by Market Cap
$23,660
$24,850
$27,830
$28,440
$28,660
$33,350
$38,230
$38,360
$41,610
$62,940
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000
DirecTV
Nike
Lowe's Cos
Target
Time Warner Inc
Amazon.com
Comcast
Home Depot
Walt Disney
McDonald's
Market Cap ($M)
Sector Overview – 5 Year Returns
S&P 500 Sector 5 Year Returns & 5 Yr Standard DeviationsPrice Change (%)
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
5 y
r re
turn
& 5
yr
std
ev (
%)
-0.70
-0.60
-0.50
-0.40
-0.30
-0.20
-0.10
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std
ev
5yr Rtn 6.90% 2.60% 1.30% -1.10% -1.40% -2.30% -2.70% -6.00% -6.50% -16.40%
5yr SD 23.30% 14.70% 10.70% 20.20% 21.50% 13.90% 17.10% 19.80% 19.80% 27.90%
5yr Rtn/5yr SD 0.30 0.18 0.12 -0.05 -0.07 -0.17 -0.16 -0.30 -0.33 -0.59
Energy UtilitiesConsumer
StaplesInformation Technology
Materials Health CareTelecom Services
Consumer Discretionary
Industrials Financials
Sector Overview - YTD & QTD Returns
S&P 500 Sector YTD & QTD ReturnsPrice Changes (%)
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
%
YTD Return 19.70% 6.06% 2.57% -3.53% -3.77% -7.43% -10.02% -11.53% -12.45% -12.67%
QTD Return -3.53% -5.54% -4.61% -2.59% -0.35% -3.50% -7.01% -7.11% -6.13% -5.40%
Information Technology
MaterialsConsumer
DiscretionaryHealth Care
Consumer Staples
Utilities Energy FinancialsTelecommun
ication Services
Industrials
Business Analysis – Porter’s 5 Forces
Barriers to Entry High
-Mature-Well established companies with strong brand recognition-High capital requirement
Competition HighMust keep evolving to stay current and keep/gain market share
Substitution High Consumers can trade up, down, sideways
Supplier Power Varies-Depending upon industry-Many national & international sources for commodities & raw materials
Buyer Power High Multiple brands
Economic Analysis - Disposable Income
• High correlation with
disposable income
• Sharp increase in 2003, peak of 12% in early 2007
• Continuous drop since second half of 2007
Economic Analysis - Consumer Spending
• High correlation with
consumer spending
• Sharp increase in 2003, peak of 12% in early 2007
• Continuous drop since second half of 2007
Economic Analysis – Personal Saving Rate
•Saving Rate = Disposable Income – Consumer Spending
•Disposable Income
•Consumer Spending
•Saving Rate
•Saving Rate currently at 6.9% (15 year high) and projected to hit 10%
• Is there a change in consumer behavior with home value going down, consumer is more cognizant of saving?
Personal Saving RateSAAR, %
Households Net Worth as a % of Disposable Personal Income%
0500959085807570Sources: Bureau of Economic Analysis, Federal Reserve Board
16
12
8
4
0
-4
640
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520
480
440
400
Economic Analysis - Unemployment Rate
• High negative correlation
with unemployment rate
• With unemployment projected to hit double digits by end of the year, consumer discretionary sector will be negatively affected
Economic Analysis - Home Sales
• R = 0.50 strong positive
correlation
• Leading indicator for the
overall economy
Financial Analysis – Net Profit Margin
High 4.59%Low 1.04%
Median 3.90%Current 1.04%
Financial Analysis – Net Profit Margin
Net Profit Margin Relative to S&P
500
High 0.6%
Low 0.2%
Median 0.5%
Current 0.2%
Financial Analysis – Top Industries Net Profit Margin
Financial Analysis – Sector ROE
Absolute ROEHigh 19.7%Low 6.6%
Median 11.9%Current 6.6%
Relative ROEHigh 1.0%Low 0.5%
Median 0.7%Current 0.5%
Financial Analysis - Major Companies Revenue Growth
Valuation Analysis - Sector P/CF
Valuation Analysis - Sector P/S
Valuation Analysis - Sector forward P/E
Valuation Analysis - Industry
Trailing P/E Forward P/E Trailing P/E Forward P/ECONSUMER ELECTRONICS 132.7 NA HOUSEHOLD APPLIANCES 8.6 14.4RETAIL-INTERNET 37.5 37.5 RETAIL-APPAREL 13.7 14CASINOS & GAMING 14.5 28.5 DISTRIBUTORS 12.2 13.9TIRES & RUBBER NA 24.8 MOTORCYCLE MFRS 6.2 13.6AUTO PARTS & EQUIP 16.1 22.8 GENERAL MERCHANDISE 14.2 13.2HOME FURNISHINGS 22.5 21.3 APPAREL & ACCESSORY 11.6 13.1SPECIALTY STORES 19.2 19 PUBLISHING 8.2 13.1HOMEFURNISHING RETL 19.0 18.8 CABLE & SATELLITE 14.7 12.8DEPARTMENT STORES 15.2 18.6 LEISURE PRODUCTS 14.1 12.8RETAIL-HOME IMPROVE 14.5 16.2 ADVERTISING 2.9 12.5AUTOMOTIVE RETAIL 16.5 15.8 HOUSEWARES & SPECS 9.8 12.1HOTEL/RESORT/CRUISE 9.5 15.6 MOVIES & ENTMT 11.1 12EDUCATION SERVICES 19.0 15 BROADCASTING 7.3 10.9RESTAURANTS 16.3 15 RETAIL-COMP/ELECTRN 10.7 10.7FOOTWEAR 13.7 14.7 SPECIAL CONSM SERV 11.8 10.1
17.5
Recommendation
View Reason
Business Slightly Positive Mature, Low growth but global expansion can open new opportunities
Economic Negative Disposable Income Consumer SpendingSaving Rate Unemployment
Financial Negative Revenue growthMargins
Valuation Negative Over valued high P/E ratios
“S&P recommends underweighting the S&P 500 Consumer Discretionary sector…” Standards & Poor’s 7/12/2009
Hold current underweight position
of 146bps
Hold current underweight position of 146bps, why?
Questions???