consumer sector presentation 4/3/2002 brian pricejohn wilson sector head associate sector head...
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CONSUMER SECTOR PRESENTATION
4/3/2002
CONSUMER SECTOR PRESENTATION
4/3/2002
Brian Price John Wilson
sector head associate sector head
Arianne Obering Mary Whitehouse senior analyst research analyst
PRESENTATION OUTLINEPRESENTATION OUTLINE
State of the Sector Valuation Models, the future of the investment
fund (Wal-Mart example) Recommendation: Sell GPS (Gap) Future opportunities in the sector
STATE OF CONSUMER SECTOR
STATE OF CONSUMER SECTOR
Limited Inc LTD Pepsico Inc PEP Walmart WMT Gap Inc GPS
Price:
4-Sep-2001 13.94 47.30 48.95 19.68
2-Jan-2002 15.52 49.15 58.05 14.1
1-Apr-2002 16.92 51.43 59.56 14.93
Beta: 1.44 0.7 0.94 1.55
PE: 20.6 30.7 42 88.5
EPS: 1.19 1.66 1.4 0.18
Debt/Capital: 17% 35% 36% 39%
SECTOR PERFORMANCE 9/4/01-4/1/02
SECTOR PERFORMANCE 9/4/01-4/1/02
ND Consumer: 11.55%
IYK (consumer index): 7.64%
S&P 500: -.34%
SECTOR BETASECTOR BETA
1-Apr
GPS 160 $14.93 $2,388.80 7.31% 1.55 0.113271
LTD 218 $16.92 $3,688.56 11.28% 1.44 0.162489
PEP 170 $51.43 $8,743.10 26.75% 0.7 0.187227
WMT 300 $59.56 $17,868.00 54.66% 0.94 0.513818
$32,688.46 Beta Portfolio 0.976805
Sector Stock WeightsSector Stock Weights
9/4/01 4/1/02
11%11%
28%
50%
GPS
LTD
PEP
WMT
7%11%
27%55%
GPS
LTD
PEP
WMT
VALUATIONS: The Fund’s Future
VALUATIONS: The Fund’s Future
Applied Investment Management, aka AIM, is a senior and graduate level class for finance majors/MBA concentrators
Like professional management funds, they run valuation models to come up with their dollar estimate of the price per share
This makes decisions fairly simple: if the stock’s present share price is under the estimated value, buy, if above, sell.
VALUATIONS, cont.VALUATIONS, cont.
The problem: I have no clue how to run these valuation models
The solution: perhaps we could schedule either professor Reilly, Langley, or Malpass for a quick lecture on this, or bring in some senior AIM alumni for help
VALUATION EXAMPLEVALUATION EXAMPLE Check out www.nd.edu/~aim and click on AIM Alumni link (AIM
XIII) to see valuations. Some valuations of interest include Wal-Mart, Caterpillar, Amgen, EMC, and Enron
Valuation is, of course, not an exact science. The Enron valuation placed its value at $58.72.
“ Based on the previous reports, the industry is prime for the taking and Enron has the financial strength and the expertise to operate in such high volume, low margin market. Technical analysis had a very bearish outlook on the stock, but the latest trough may well have been the bottom, as the stock has risen in the past few weeks. My estimated price is greater than 25% of the current price and thus is a ‘strong buy’.” Frederick VonMering 10/15/01
The Moral: Don’t listen to Grad Students. Only take valuations from undergrads who aren’t named Jason King.
VALUATION TECHNIQUESVALUATION TECHNIQUESWAL-MART
Book Value Technique 61.38
Dividend Discount 48.46
Discounted Cash Flow 64.75
*DCF determined to be best for Wal-Mart, and since stock traded at $52.90, it was rated as a BUY. In this example, a very good call, and good valuation (today’s price about $59.00)
GAP, INCGAP, INC
THE PROBLEMS AND THE SOLUTION
GAP, INC.GAP, INC.
Banana Republic Gap Old Navy All three lost money in 2001—Old Navy and
Banana Republic lost less that Gap
MARKETING PROBLEMSMARKETING PROBLEMS
“We changed too much, too quickly, in ways that weren’t consistent with our brands”
“Gap stores became unfocused, trying to attract too many different customers”
Comments from Gap’s CEO
INVENTORY PROBLEMSINVENTORY PROBLEMS
Started in early 2000 Show no signs of stopping Already discounting new Spring merchandise Customers do not like what they see so far from
Gap this Spring
THE EFFECTTHE EFFECT
Loss of $0.01 per share in 2001 Very small gain in Revenue (1.27%) Worst performing year that I can find since 1985
GAP, NOW . . .GAP, NOW . . .
No PE—lost money in 2001 Dividend growth rate is –2% Industry avg. Div. growth rate is +5% Credit downgraded to “junk” status Gap Debt/Equity is 67% Limited’s Debt/Equity is 17% Financially weak compared to industry
GAP, FUTURE . . .GAP, FUTURE . . .
Priced at 56 times 2002 est. EPS Priced at 29 times 2002 est. EPS Industry avg. PE is 21 Note: It is hard to predict Gap’s earnings in
future years, due to its cyclical nature
GAP, INC.GAP, INC.
GAP, INC.GAP, INC.
CONCLUSIONCONCLUSION
Not a quick turnaround Already own Limited, which is a better company
right now Sell all of our shares of GAP, INC
Why Sell GPS ContinuedWhy Sell GPS Continued
We want to increase our return in the short-term. GAP will more than likely increase over the next couple of years. However, for our purposes holding on to this stock while the company figures its way out of the web it has weaved is not wise. Instead, the money lost in GAP and the portfolio as a whole may produce better results by diversifying and investing in better opportunities. There are many stocks that we feel are strong companies with high growth potential, perhaps a bit more risk and/ or both short-term and long-term gains.
Future Possibilities Future Possibilities
The Interpublic Group Company IPG Steak-n-Shake SNS Papa John’s Pizza
PZZA Linens-n-Things LIN Limited (add to holdings) LTD Backyard Burgers BYB
For next time…..For next time…..
Please take some time to look into these stocks and we will make a presentation in the near future as to which we feel would be most beneficial to our sector. Bear in mind how heavily weighted we currently are in Wal-Mart, and how few stocks the consumer sector holds.
In Closing…In Closing…
"99% of fund managers demonstrate no evidence of skill whatsoever."
1%