Consumer DiscretionaryAlex Bloom, Logan Brittain, Carson Burt

Outline● Sector Overview● Business Analysis● Economic Analysis● Financial Analysis● Valuation Analysis● Recommendation

Sector OverviewConsumer spending that is not strictly necessary

Market Cap of $7.2T

11.18% of the S&P 500

Automobiles & Components, Consumer Services, Consumer Durables & Apparel, Retail

Amazon, Home Depot, Nike, Tesla, McDonald’s

20.41% YTD, 2.70% QTD

Business AnalysisCyclical, does very well in good times and very poorly in bad times

Amazon is in a unique position

↑ Consumer confidence/sentiment, ↑ wages … Cons Disc demand ↑

↑ IR, ↑ U, phasing out of traditional retail … Cons Disc demand ↓

Supply chain disruptions, lockdowns, quarantine from COVID have hurt Cons Disc supply

Porter’s 5 ForcesPower of Suppliers Vs. Buyers: Buyers retain the power of Cons Disc goods as large retailers like Walmart purchase such a high share of supplier goods, giving the retailer the ability to negotiate

New Entrants: Because of the high capital expenditure costs necessary to start manufacturing and establish supply chains, there is a high barrier to entry

Substitutes: There is a high threat of store-branded, cheap alternatives to steal market share

Economic AnalysisConsumer Discretionary performs better when:

● Disposable Income is high● Unemployment rate is low● Interest Rate is low● Money Supply is high

Disposable Income

https://fred.stlouisfed.org

Unemployment Rate

https://fred.stlouisfed.org

Interest Rate

https://fred.stlouisfed.org

Money Supply

https://fred.stlouisfed.org

Financial Analysis● When Economy is strong, Consumer Discretionary will outperform the market● Since 2018, Industries with positive percent change in value:

○ Specialty Retail○ Textiles○ Hotels○ Household Durables

● Company Leaders in Revenues:○ Amazon○ Home Depot○ Lowe’s○ Target

XLY SPDR Fund vs S&P 500

Sector vs S&P 500Consumer Discretionary

● Quarterly Revenue Growth Y/Y○ High: 74.83%, Q4 2018○ Avg: 3.69%○ Low: -38.52%, Q2 2020○ Past 4 Q’s have had negative growth○ On Avg, have higher growth

● EPS Growth (TTM vs. Prior TTM)○ 12.02%

https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=learn&sector=25https://csimarket.com/Industry/industry_growth_rates.php?s=400

S&P 500

● Quarterly Revenue Growth Y/Y○ High: 17.31 Q4 2017○ Avg: 1.93%○ Low: -12.92% Q2 2020

● EPS○ Current: 17.83 Q2 2020○ High since 2016: 36.36 Q3 2018○ Low since 2016: 11.88 Q1 2020

https://ycharts.com/indicators/sp_500_eps

Industry Growth Since 2018

https://www-capitaliq-com.proxy.lib.ohio-state.edu/CIQDotNet/Charting4/ModernBuilder.aspx?type=0&fromC3=1&fromC2=1

Top Companies

Company Comparison

https://www-capitaliq-com.proxy.lib.ohio-state.edu/CIQDotNet/Charting4/ModernBuilder.aspx?type=0&fromC3=1&fromC2=1

Company Comparison - w/out AMZN

Company Comparison - w/out AMZN, HD, TGT, LOW

Valuation AnalysisSP500 High Low Median Current

P/E 27.73 13.01 18.34 34.71

P/B 3.95 1.83 2.78 3.82

P/S 2.66 1.09 1.81 2.51

Consumer Discretionary

High Low Median Current

P/E 51.81 14.07 20.51 51.81

P/B 11.39 2.56 4.69 11.39

P/S 2.38 .92 1.43 2.38

AmazonWe can see that Consumer discretionary as a sector is overvalued but what is driving that?

If we take a look at a company like Amazon, they benefited from Covid and have had tremendous growth in the past few months that is so large it could be driving some of the sector overvaluation.

Amazon Current

P/E 122.62

P/B 21.68

P/S 5.02

https://ankura.com/wp-content/uploads/2020/08/Valuations-in-the-Consumer-Discretionary-Sector_Graphics_Web01.jpg

Valuation AnalysisThis high valuation could be a result of increased discretionary income for families as travel and vacations have been limited increasing possible spending associated

with Media, and online retailing that would be able to offset losses in consumer services.

Recommendation● We recommend selling

○ The valuation multiples are too high relative to the market and historical data to validate reasonable pricing

○ Covid could have inflated some of these stocks as lifestyles changed there was temporary need for some of the industries within. As we return to normal it seems this excitement could fall

○ Economic recovery (Especially associated with unemployment rates) isn't recovering as quickly as expected which will have an impact on this sector moving forward