Transcript Consumer Discretionary - Fisher College of Business

Consumer Discretionary Sector
April 27, 2010
Robert Bauer
Jorge Concha
Thomas D’Amico
Duncan De Wet
Recommendation
Currently SIM portfolio is underweight
We recommend increasing weight
Sector
Business
Economic
Financial
Valuation
Final
Overview
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Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Final Recommendations
Sector
Business
Economic
Financial
Valuation
Final
Sector Overview

The Consumer Discretionary sector is propelled by discretionary
household income spending

Due to this companies in this section tend to be some of the most
sensitive to economic cycles
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Its manufacturing segment includes automotive, household durable goods,
textiles and apparel, and leisure equipment.
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The service segment includes hotels, restaurants and other leisure facilities,
media production and services, consumer retailing and services and
education services.
Sector
Business
Economic
Financial
Valuation
Final
Sector Weight
as of 4/26/10
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S&P 500 Market Cap
($mm): $10,949,048.17
10.67%
Consumer
Discretion
ary
Rest of
Industries
Consumer Discretionary
($mm): $1,168,759.43
Market Weight: 10.67%
Sector
Business
Economic
89.33%
Financial
Valuation
Final
Industries
As of 3/31/2010
29.9%
20.3%
15.3%
8.7%
5.9%
Sector
Business
5.0%
Economic
4.6%
4.1%
Financial
2.9%
1.4%
Valuation
1.0%
Final
0.6%
Top 15 Companies
As of 3/31/2010
6.72%
6.34%
5.15% 5.00%
4.35%
3.97%
3.71%
3.37% 3.34%
3.04% 2.96%
2.68%
2.08% 1.96%
Sector
Business
Economic
Financial
Valuation
Final
1.76%
SIM Stock %
As of 3/31/2010
5.00%
1.37%
0.62%
Comcast
Sector
Best Buy
Business
Economic
0.34%
GameStop
Financial
Valuation
Ross Stores
Final
Sector Performance
Sector
Business
Economic
Financial
Valuation
Final
Business Analysis
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Cyclical Performance
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General Sentiment:
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Rebound of market producing large gains for Consumer Discretionary
sector
Fear of a double dip recession could sway consumers’ perceptions
Maturity of Sector
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Sector
Competitive Industries, many changed since recession
Opportunities with growth
Business
Economic
Financial
Valuation
Final
Porter’s 5 Forces
High
- Importance of branding
- High capital requirements
- Maturity of industry
Competition
High
- Mature companies
- Established market players
- Difficult to gain market share
Substitutes
High
- Similar products
- Must differentiate
Supplier Power
High
- Very industry specific
Buyer Power
High
-Customer demand and discretionary
income drive sales
Sector
Economic
Barriers to Entry
Business
Financial
Valuation
Final
Consumer Confidence
Consumer Confidence declines end, poised to re-gain upward momentum
Sector
Business
Economic
Financial
Valuation
Final
Consumer Spending
Consumer spending increasing – key measure for consumer discretionary sector
Sector
Business
Economic
Financial
Valuation
Final
Personal Savings
Personal Savings declines on improved recovery outlook and confidence
Sector
Business
Economic
Financial
Valuation
Final
Unemployment
Unemployment rate holding steady – hiring and labor force both increasing
Sector
Business
Economic
Financial
Valuation
Final
Retail Sales and CPI
Retail sales rise as consumer spending recovers
Consumer Price Index Stable – extreme/deep discounting no longer necessary
Sector
Business
Economic
Financial
Valuation
Final
Disposable Income & Real Consumer Spending
Disposable Income rising with other income categories
Spending continues to rise as markets stabilize & disposable income increases
Sector
Business
Economic
Financial
Valuation
Final
Default Rates & Financial Obligations
Consumer Default Rates - Declining
Financial Obligations, % of disposable income declines. More to spend on discretionary items
Sector
Business
Economic
Financial
Valuation
Final
Alcohol Consumption
Tom’s Bachelor Party
More drinking = more consumer spending!
Sector
Business
Economic
Financial
Valuation
Final
Consumer Discretionary Sector
Revenues
Return on Equity
Consumer
Discretionary
Net Profit Margin
Sector
Business
Net Profit Margin relative to S&P 500
Economic
Financial
Valuation
Final
Revenue Growth – Top Industries
Movies & Entertainment
Restaurant
Movies and
Entertainment
Restaurant
Cable & Satellite
Sector
Business
Retail – Home
Improvement
Economic
Financial
Valuation
Final
Return on Equity – Top Industries
Restaurant
Movies & Entertainment
Movies and
Entertainment
Restaurant
Cable & Satellite
Sector
Business
Retail – Home Improvement
Economic
Financial
Valuation
Final
Absolute Net Profit Margin – Top Industries
Movies & Entertainment
Restaurant
Movies and
Entertainment
Restaurant
Retail – Home Improvement
Cable & Satellite
Sector
Business
Economic
Financial
Valuation
Final
Net Profit Margin Relative to S&P 500 – Top Industries
Movies & Entertainment
Restaurant
Movies and
Entertainment
Restaurant
Cable & Satellite
Retail – Home Improvement
Sector
Business
Economic
Financial
Valuation
Final
Revenue Growth – Top Companies
Movies and
Entertainment
Restaurant
Sector
Business
Economic
Financial
Valuation
Final
Return on Equity – Top Companies
Movies and
Entertainment
Restaurant
Sector
Business
Economic
Financial
Valuation
Final
Absolute Net Profit Margin – Top Companies
Movies and
Entertainment
Sector
Business
Economic
Financial
Valuation
Final
Net Profit Margin Relative to S&P 500 – Top Companies
Movies and
Entertainment
Restaurant
Sector
Business
Economic
Financial
Valuation
Final
Revenues
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How does Revenue generation compare to historical levels?
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Consumer Discretionary Sector
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Top 4 Industries
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Have a positive revenue trend after steep declines due to recession
Top 4 Companies
•
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Is still down and with no sign of immediate improvement in terms of revenue
generation
These companies are back to their steep upward trend of revenues after the hiccup
that was the recession
Conclusions
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The sector is cyclical, and as such cash flows improve when the economy does
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The sector usually generates positive cash flows due to having mature companies
Sector
Business
Economic
Financial
Valuation
Final
Return on Equity
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How is the sector doing in terms of Return on Equity?
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Consumer Discretionary Sector
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Top 4 Industries
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All have an upward trend
Top 4 Companies
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Has improved tremendously since the recession
Mostly look like positive trends
Conclusions
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Return on equity in the macro and micro level is doing much better
Sector
Business
Economic
Financial
Valuation
Final
Margins
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Are Net Profit Margins expanding?
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Consumer Discretionary Sector
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Absolute: Improving after recession
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Relative to S&P 500: Not doing as well as S&P 500, but catching up
Top 4 Industries
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Absolute: Varies depending on industry
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Relative to S&P 500: Generally better than S&P 500
Top 4 Companies
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Absolute: Mostly improving
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Relative to S&P 500:Varies depending on the company
Conclusions
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As the economy improves, so should the margins on an absolute level
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The sector still has a lot of catching up to do versus the S&P 500
Sector
Business
Economic
Financial
Valuation
Final
Financial Recap
Measure
Outlook
View
Revenue
Industries and Companies
are picking it up, but sector
as a whole is still having
trouble
Negative in the short term
Positive in the long term
Return on Equity
Doing very well
Positive
Net Profit Margin
Sector is improving and
trying to catch up to S&P
500
Positive
Sector
Business
Economic
Financial
Valuation
Final
Trailing P/E
Sector
Business
Economic
Financial
Valuation
Final
Forward P/E
Sector
Business
Economic
Financial
Valuation
Final
Price/book
Sector
Business
Economic
Financial
Valuation
Final
Price/Sales
Sector
Business
Economic
Financial
Valuation
Final
Price/Cash Flow
Sector
Business
Economic
Financial
Valuation
Final
EPS
Sector
Business
Economic
Financial
Valuation
Final
Final Recommendation
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Currently SIM portfolio is underweight, we recommend
increasing weight
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The Consumer Discretionary sector has outperformed the S&P 500
YTD and continues to thrive during the market rebound
Leading economic indicators point to positive returns for the S&P
500 and industry
According to the financial analysis, the sector has a positive trend in
terms of revenues, return on equity, and margins.
In the short run we believe that this is a cyclical bull market, and this
sector should outperform the market as a whole
Sector
Business
Economic
Financial
Valuation
Final
What Questions Do You Have?