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Consumer Staples Sector Bridget Haggerty, Jessie Huang, Matt Huck, Akchat Jha

Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Page 1: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

Consumer Staples Sector

Bridget Haggerty, Jessie Huang,

Matt Huck, Akchat Jha

Page 2: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

2

• Overview

• Business Analysis

• Economic Analysis

• Financial Analysis

• Valuation Analysis

• Recommendations

Agenda

Page 3: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Consumer Staples:

non-cyclical goods

that are always in

demand

regardless of how

well the economy

is performing

Sector Overview

Page 4: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Market Cap:

3.64 Trillion

• Percentage of

S&P 500:

10.7%

• Percentage of

SIM Portfolio:

11.54%

Sector Overview

Page 5: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Industries in Sector

Page 6: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Procter & Gamble: $224.0 B

• Walmart: $216.0 B

• Coca-Cola: $196.8 B

• Anheuser-Busch:$196.2 B

• Philip Morris: $150.4 B

• PepsiCo: $147.3 B

• Altria Group: $120.2 B

• CVS:$110.7 B

• British American Tobacco: $105.9 B

• Kraft Heinz: $93.3 B

Top Companies in Sector

Page 7: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Companies in SIM Portfolio

Page 8: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Consumer Staples vs. S&P 500

Page 9: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Business Analysis

Page 10: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Business Cycle

Page 11: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Defensive sector

• Constant demand-consumers are

unwilling or unable to cut out consumer

staples products

• Low Beta

• Steady dividends

Business Cycle Sensitivity

Page 12: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Power of Suppliers: Low• Number of Suppliers: High

• Price Flexibility: Low

• Power of Buyers: High• Switching Costs: Low

• Price Sensitivity: High

• Brand Loyalty: Moderate

Porter’s Five Forces Model

Page 13: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Threat of New Entrants: Low• Brand Recognition: High

• Economies of Scale: High

• Access to Distribution Channels: Low

• Threat of Substitutes: Low• Demand: High

• Intensity of Rivalry: High• Product Differentiation: Low

• Number of Competitors: High

Porter’s Five Forces Model

Page 14: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Economic Analysis

Page 15: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Consumer Price Index

• Unemployment Rate

• Consumer Sentiment

• Commodity Price

• Exchange Rate

Key Drivers

Page 16: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Consumer Price Index

Page 17: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Unemployment Rate

Page 18: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Consumer Sentiment

Page 19: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Exchange Rate

Page 20: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Consumer Staples VS S&P 500

Page 21: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Regression Analysis

Page 22: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• US GDP• Economy recovering to expansion stage

• Stable and increasing

• Unemployment Rate• Strengthen purchasing power

• Consumer Sentiment• Strong consumer confidence

Outlook

Page 23: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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• Commodity Price• Low prices increases profit margins

• Exchange Rate• Strong US dollar

• Depreciation offsets international increasing revenue

• Global Economy• Slowing down emerging countries

Outlook

Page 24: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Financial Analysis

Page 25: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Sector Sales Average Growth Rate (10 yrs): 5%

Earnings Growth Rate(Yoy): 7%

Average Sales Growth for the Largest Players: 3.7%

CY 2005 CY 2006 CY 2007 CY 2008 CY 2009 CY 2010 CY 2011 CY 2012 CY 2013 CY 2014 CY 2015 Current

Best Sales 212.34 225.71 251.47 290.97 290.37 306.3 350.54 357.35 366.52 388.46 371.73 379.53

% Growth 10% 6% 11% 16% 0% 5% 14% 2% 3% 6% -4% 2%

General earnings 12.79 13.22 15.4 17.95 18.46 19.41 20.93 22.18 23.98 24.256 24.7 24.64

% Growth 6% 3% 16% 17% 3% 5% 8% 6% 8% 1% 2% 0%

Gross Margin % of sales 31.05 31.19 30.48 29.76 30.63 30.97 30.09 29.53 29.8 29.19 29.05 29.1

Return on Common Equity 24.45 21.78 21.74 19.9 22.74 22.8 21.62 22.79 25.25 22.42 21.98 22.06

% Growth -12% -11% 0% -8% 14% 0% -5% 5% 11% -11% -2% 0%

Operating Margin 9.76 9.72 9.74 9.48 9.87 9.8 9.54 9.46 9.95 9.15 9.4 9.38

Profit Margin 5.98 6.45 6.35 5.6 6.21 6.5 6.04 6.28 6.82 6.01 6.04 6.04

R&D Expenditure 1.58 1.42 1.49 1.76 1.6 1.55 1.72 1.75 1.93 1.66 1.5 1.47

% Growth 3% -10% 5% 18% -9% -3% 11% 2% 10% -14% -10% -2%

Page 26: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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-10%

-5%

0%

5%

10%

15%

20%

12/1/2003 12/1/2005 12/1/2007 12/1/2009 12/1/2011 12/1/2013 12/1/2015 12/1/2017

Sales Growth Vs Earnings Growth

Sales Growth Earnings Growth

Page 27: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

12/1/2004 12/1/2006 12/1/2008 12/1/2010 12/1/2012 12/1/2014 12/1/2016

Sales Growth & R&D Expense Growth

Sales Growth R&D Growth

Page 28: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Sector vs. S&P 500

Page 29: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Valuation Analysis

Page 30: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Absolute Data

• Consumer Staples Sector is expensive relative to history

• Current ratios near all time highs

Page 31: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Relative to S&P 500

• P/E, P/B, & P/S expensive relative to history

• Historically, Consumer Staples trades at a premium to S&P 500 (Except P/S)

Page 32: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Industry Comparison

• Positive earnings over the three time periods

• Food & Staples Retailing has most attractive P/S ratio but lowest P/E

Page 33: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Total Return Relative to S&P 500

Source: Yardeni Research, Inc.

• Since the Financial Crisis the Consumer Staples Sector has underperformed

• If S&P 500 enters bear market, Consumer Staples will likely outperform

Page 34: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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10 Year Chart3 Year Chart

Technical Analysis

• A break through resistance • Since Financial Crisis, Strong uptrend

Page 35: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Recommendation

Page 36: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

36Source: Yardeni Research, Inc.

Inline

• While the Consumer Staples Sector appears

expensive relative to the S&P 500, if the broad

market enters a bear market market, the Consumer

Staples Sector will likely outperform.

Risk: Underperform broad market

rallies.

Page 37: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Industry Recommendations

Overweight: Food & Staples Retailing

• Lowest P/E ratio hint better value

Underweight: Household & Personal Products

• Higher P/E ratio hints less value

Page 38: Consumer Staples Sector - Fisher College of BusinessS16) Consumer Staples.pdfConsumer Staples Sector ... • Business Analysis • Economic Analysis • Financial Analysis • Valuation

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Questions?