kurt brown rené hegglin shengbo mao consumer staples stock presentation the stock market

Kurt BrownRené HegglinShengbo Mao

Consumer StaplesStock Presentation

THE STOCK MARKET

Agenda

• Recap of Sector Recommendation• Stock Recommendation • Summary • Questions

04/19/23 2Consumer Staples Stock Presentation

SIM PortfolioSector S&P 500 Weight SIM Weight +/-

Consumer Discretionary 9.11% 7.51% -1.60%

Consumer Staples 11.94% 12.23% 0.29%

Energy 12.35% 12.80% 0.45%

Financials 14.66% 6.59% -8.07%

Health Care 12.65% 13.13% 0.48%

Industrials 10.09% 11.97% 1.88%

Information Technology 19.04% 21.97% 2.92%

Materials 3.39% 4.52% 1.13%

Telecommunication 3.09% 3.51% 0.43%

Utilities 3.68% 3.19% -0.49%

Weights as of 10-31-09


Consumer Staples Recap

• Increase weight of consumer staples by 26 basis points– Gives a 55 bp overweighting– Slow economic recovery– The market has recovered too much too quickly

• Will see a small correction fairly soon

– Exposure to international growth


Stock Recommendation

SELL ~ 332 bps of Safeway (SWY)BUY ~ 332 bps of Procter & Gamble (PG) SELL ~ 50 bps of PepsiCo (PEP)BUY ~ 76 bps of Philip Morris (PM)


Sector Holdings

• Current HoldingsS&P 500 – 11.94%SIM – 12.22%

• PepsiCo – 4.00%• Safeway – 3.32%• Wal-Mart – 2.86%• Philip Morris – 2.04%

• Recommended HoldingsS&P 500 – 11.94%SIM – 12.48%

• PepsiCo – 3.50%• Procter & Gamble – 3.32%• Wal-Mart – 2.86%• Philip Morris – 2.80%

Weights as of 10-31-09


Industry Weightings


Target Prices


Company Current Price Target Price

Dividend Upside Potential

Philip Morris $49.33 - $50.95 $62.39 4.7% 27.1%-31.0%

Procter & Gamble $61.14 - $62.60 $74.55 2.8% 21.8% - 24.7%

Wal-Mart $52.36 - $53.75 $62.19 2.1% 17.8% - 20.9%

PepsiCo $61.15 - $62.47 $71.00 2.9% 16.6% - 19.0%

Safeway $22.98 - $23.60 $25.05 1.7% 7.9-10.7%

Safeway

• Safeway (founded 1915) is a food and drug retailer with over 1,700 stores mainly spread in the western and central parts of the United States and Canada.

• Founded in 1915, headquarters in Delaware, about 197,000 employees

• Competitors are: Kroger, SUPERVALU, Wal-Mart, Target


Safeway YTDOct 15: Reaffirmation of guidanceEPS: $1.70-$1.90expected was $1.74(Q3 EPS was $0.31 instead of $0.29)

Aug 26: Quarterly dividend of $0.10 per common share announced

Aug 4: SIM decides to buy 288bps of Safeway at a price of $19.01 with target price $24.40

Aug 6: Safeway recalls beef from six states

Aug 23: Safeway lowers guidance to EPS: $1.70-$1.90Expected was $2.07

Apr 30: lowers guidance to EPS: $2.10-$2.30 Expected was $2.23

Mar 6: Quarterly dividend of $0.0828 per common share ann.

Feb 26: Safeway reiterates EPS guidance of $2.34-$2.44Expected was $2.32

Jan 30: Safeway recalls peanuts from 66 stores


Safeway Perspective Last Quarter

• August 4, 2009: Price Target for Safeway (based on a multiples-only basis) was $24.40

• Price Safeway August 4, 2009: $19.01• Potential Upside + Dividend Yield: 30.3%• Class agreed to buy 288bps of Safeway


Safeway Perspective Last Quarter


Safeway This Quarter


Safeway Inc. (SWY)

Analyst: René Hegglin Terminal Discount Rate = 9.5%13.11.2009 Terminal FCF Growth = 4.0%

Year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Revenue 41,282 42,108 42,950 44,023 45,124 46,478 47,872 49,548 51,282 53,333 55,466 % Growth -6.40% 2.0% 2.0% 2.5% 2.5% 3.0% 3.0% 3.5% 3.5% 4.0% 4.0%

EBT 1,168 1,077 1,091 1,211 1,241 1,278 1,316 1,387 1,436 1,493 1,553 EBT Margin 2.8% 2.6% 2.5% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8%

Interest 339 356 371 374 384 395 407 421 436 453 471 Interest % of Sales 0.82% 0.85% 0.86% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%

Taxes 321 323 327 317 325 335 345 362 374 389 405 Tax Rate 18.0% 22.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Net Income 847 754 764 894 916 943 972 1,026 1,062 1,104 1,148 % Growth -10.9% 1.3% 17.0% 2.5% 3.0% 3.0% 5.5% 3.5% 4.0% 4.0%

Add Depreciation/Amort 1,073 1,053 1,074 1,101 1,128 1,162 1,197 1,239 1,282 1,333 1,387 % of Sales 2.6% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Plus/(minus) Changes WC 44 206 237 176 90 -139 -144 -149 -154 -160 -166 % of Sales 0.1% 0.5% 0.6% 0.4% 0.2% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

Subtract Cap Ex 1,858 1,769 1,933 1,761 1,579 1,627 1,436 1,486 1,538 1,600 1,387 Capex % of sales 4.5% 4.2% 4.5% 4.0% 3.5% 3.5% 3.0% 3.0% 3.0% 3.0% 2.5%

Free Cash Flow 106 244 142 409 555 339 589 629 651 677 982 % Growth 129.8% -41.6% 187.3% 35.6% -38.9% 73.5% 6.9% 3.5% 4.0% 44.9%

NPV of Cash Flows 2,940 28%NPV of terminal value 7,491 72% Terminal Value 18,564 Projected Equity Value 10,431 100%Free Cash Flow Yield 1.10% Free Cash Yield 5.29%

Current P/E 11.4 12.8 12.7 Terminal P/E 16.2 Projected P/E 12.3 13.8 13.7 Current EV/EBITDA 7.1 7.4 7.3 Terminal EV/EBITDA 8.4 Projected EV/EBITDA 7.4 7.8 7.7

Shares Outstanding 416.5

Current Price 23.21$ Implied equity value/share 25.05$ Upside/(Downside) to DCF 7.9%

Debt 6,412 Cash 219 Cash/share 0.53

Safeway Sensitivity Analysis


9.25% 9.50% 9.75% 10.00%

3.50% $24.67 $23.47 $22.36 $21.34

3.75% $25.51 $24.22 $23.04 $21.96

4.00% $26.43 $25.05 $23.78 $22.62

4.25% $27.45 $25.95 $24.59 $23.35

4.50% $28.57 $26.94 $25.47 $24.14

4.75% $29.81 $28.04 $26.44 $25.00

Safeway Valuation Multiples / DCF

Absolute Valuation

Median Current Target Multiple

Target E, S, etc/Share

Target Price

P/Forward E 14.2 13.1 13.65 1.74 23.75P/S 0.3 0.23 0.27 98.6 26.16P/EBITDA 5.37 3.74 4.25 6.35 25.4P/CF 6.7 4.9 5.6 5 28

Avg Price from Multiples $ 25.83 30%Price Target from DCF $ 25.05 70%

Weighted Price Target $ 25.28 Current Price $ 23.21

Upside Potential 8.93%


Safeway Valuation Summary• Low upside left (~5-10%) even with optimistic

assumptions concerning sales growth• Revenues uncertain due to deflationary

competition (Kroger, Wal-Mart, SUPERVALU)• Overreaction of market when guidance was

confirmed (10/15/09)• Take away the gains from last quarters purchase

(we nearly reached the implied price target of $25.48 estimated in Aug/09)

• Diversify into Consumer Goods


Safeway Risks & Benefits• Risks

– Deflationary price history in dairy and food YTD even stronger price war upcoming?

– Only national exposure instead of international (with highest exposure in California)

– High unemployment in the US• Benefits

– Stronger results than expected– Cash-flow increased (less investment)– Stock repurchase program still alive– Sales trend improves


Procter & Gamble (PG)

• Company overview: Procter & Gamble is a consumer goods manufacturer, founded in 1837, headquartered in Cincinnati OH.

• Market capitalization of $181 billion.• P&G’s products are sold in over 180 countries

with only 55% in North America, and 32% in developing countries.

• Customers of P&G are merchandisers, grocery stores and drug stores like Wal-Mart and Target


Procter & Gamble


P&G Stock


P&G Financial Analysis


Procter & GambleTerminal Discount Rate = 9.5%

11/16/2009 Terminal FCF Growth = 4.0%

Year 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Revenue 79,819 83,810 87,582 91,523 95,641 99,945 104,443 108,621 112,965 117,484 122,183 % Growth 5.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.0% 4.0% 4.0% 4.0%

EBT 15,645 17,013 17,684 17,664 18,459 19,289 20,157 20,964 21,802 22,674 23,581 EBT Margin 19.6% 20.3% 20.2% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3% 19.3%

Interest 1,357 1,425 1,496 1,563 1,634 1,707 1,784 1,855 1,930 2,007 2,087 Interest % of Sales 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%

Taxes 4,068 4,424 4,598 4,999 5,224 5,459 5,705 5,933 6,170 6,417 6,674 Tax Rate 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0%

Net Income 11,577 12,590 13,086 14,228 14,868 15,538 16,237 16,886 17,562 18,264 18,995 % Growth 8.8% 3.9% 8.7% 4.5% 4.5% 4.5% 4.0% 4.0% 4.0% 4.0%

Add Depreciation/Amort 3,193 3,352 3,416 3,569 3,730 3,898 4,073 4,236 4,406 4,582 4,765 % of Sales 4.0% 4.0% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%

Plus/(minus) Changes WC (448) (1,197) (377) (377) (383) (400) (418) (434) (452) (470) (489) % of Sales -0.6% -1.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4% -0.4%Subtract Cap Ex 3,193 3,352 3,503 3,661 3,826 3,998 4,178 4,345 4,519 4,699 4,887 Capex % of sales 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Free Cash Flow 11,129 11,393 12,622 13,759 14,390 15,038 15,714 16,343 16,997 17,677 18,384 % Growth 2.4% 10.8% 9.0% 4.6% 4.5% 4.5% 4.0% 4.0% 4.0% 4.0%

NPV of Cash Flows 92,199 40%

NPV of terminal value 140,269 60% Terminal Value 347,620 Projected Equity Value 232,469 100%

Free Cash Flow Yield 5.67% Free Cash Yield 5.29%

Current P/E 17.0 15.6 15.0 Terminal P/E 18.3 Projected P/E 20.1 18.5 17.8

Current EV/EBITDA 11.3 10.4 10.1 Terminal EV/EBITDA 12.8 Projected EV/EBITDA 13.2 12.2 11.8

Shares Outstanding 3,154.0

Current Price $ 62.27 Implied equity value/share $ 73.71 Upside/(Downside) to DCF 18.4%

Debt 20,652 Cash 4,781 Cash/share 1.52

P&G Valuation9.25% 9.50% 9.75% 10.00%

3.5% $72.64 $69.53 $66.58 $63.91

3.75% $74.91 $71.67 $68.45 $65.62

4.0% $77.22 $73.71 $70.33 $67.32

4.25% $79.69 $75.95 $72.33 $69.13

4.5% $82.50 $78.35 $74.59 $71.18

4.75% $88.99 $81.48 $77.43 $73.75


P&G Valuation


Procter & Gamble

Absolute Valuation

Median Current Target Multiple

Target E, S, etc/Share

Target Price

P/Forward E 20.2 14.8 18 4.14 74.52P/S 2.6 2.3 2.5 27.49 68.73P/EBITDA 11.31 8.48 11 7.31 80.42P/CF 16.8 11.5 15 5.49 82.35

Avg Price from Multiples $ 76.51 30%Price Target from DCF $ 73.71 70%

Weighted Price Target $ 74.55 Current Price $ 62.31

Upside Potential 19.64%

P&G Valuation Relative to Industry

P&G Safeway

Median Current Difference Median Current Difference

P/Trailing E 1.0 0.84 -16% 0.98 1.1 12%P/Forward E 1.0 0.97 -3% 0.96 1 4%P/B 1.0 0.70 -30% 1 0.7 -30%P/S 1.1 1.1 - 1.2 1.2 0%P/CF 1.1 1.0 -9% 1 1 0%


P&G Valuation Relative to S&P 500


P&G Safeway


P/Trailing E 1.2 0.8 -33.3% 0.78 0.68 -13%P/Forward E 1.2 0.86 -28.3% 0.77 0.76 -1%P/B 2.6 1.2 -53.8% 0.8 0.6 -25%P/S 1.8 2.1 16.7% 0.2 0.2 0%P/CF 1.5 1.1 -26.7% 0.6 0.5 -17%

P&G Absolute Valuation


P&G Safeway


P/Trailing E 20.2 14.8 -26.7% 15.6 12.4 -21%P/Forward E 2.6 2.3 -11.5% 14.2 13.1 -8%P/B 8.5 2.8 -67.1% 2.5 1.4 -44%P/S 11.31 8.48 -25.0% 0.3 0.2 -33%P/CF 16.8 11.5 -31.6% 6.7 4.9 -27%

Benefits

• Attractive valuation• Competitive strengths in developing markets

– 45% of revenues are international• Gillette acquisition boosts sales and profits• 23 brands each generating over $1 billion in sales

annually and another 20 over $500 million• Share buybacks• Increased dividend for 53 consecutive years• AA credit rating


Risks

• Increases in raw material and energy costs• Increased marketing and product

development costs may hurt earnings• New CEO • Consumers continue trading down• The US Dollar continue to decrease in value


Philip MorrisCompany OverviewPhilip Morris International Inc. (PMI), incorporated in 1987, Philip MorrisInternational the world's second-largest tobacco company, behind only ChinaNational Tobacco, and it claims almost 16% of the non-U.S. market. PMI ownsseven of the leading 15 international cigarette brands, including Marlboro,the company's flagship brand. Its products are sold in over 160 countries.


Valuation range is 9% - 10% for the terminal discount rate and 2% - 4% for the terminal free cash flow growth rate. This subset of the analysis yields a valuation range of $61.80 to $87.20, which suggests almost zero downside risk against at least 22.0% upside gains.

Philip Morris DCF Method

Valuation WACC 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%

Growth

6.0% 149.52$ 125.09$ 107.63$ 94.52$ 84.31$ 76.14$ 5.5% 129.77$ 111.56$ 97.89$ 87.25$ 78.73$ 71.75$ 5.0% 115.66$ 101.41$ 90.32$ 81.43$ 74.16$ 68.09$ 4.0% 96.86$ 87.20$ 79.30$ 72.71$ 67.13$ 62.35$ 3.0% 84.89$ 77.73$ 71.67$ 66.47$ 61.98$ 58.04$ 2.0% 76.60$ 70.96$ 66.07$ 61.80$ 58.03$ 54.69$

DCF Model Sensitivity Analysis


Final Price Target

P/Forward E 16.1 11.1 14 15.7 14.5 3.49 $ 50.58 P/S 7.3 1.2 2 4 3 17.40 $ 52.19 P/B 16.1 7.2 9.9 15.4 9.9 6.82 $ 67.47 P/EBITDA 11.98 2.83 6.76 10.1 8.43 5.73 $ 48.33 P/CF 117 8.8 13.1 13.3 13.1 2.97 $ 38.95

Valuation $ 51.50

Final Val. 62.39$

Current Price 50.64$ Differ 23.20%BUY below 40.55$ SELL above 56.15$

Your Target Price

*Your Target E, S, B,

etc/Share

Absolute Valuation

High Low Median Current#Your Target

Multiple

Taking account 70% of DCF model result and 30% of the result from multiples method, I come up with the final target price $62.39


Investment Thesis• Strong business fundamentals and results

• Powerful pricing ability

• Superior infrastructure, brand portfolio and geographic

balance

• Manageable excise tax and regulatory environment

• Sustainable cash flows and excellent liquidity

• Continue to reward shareholders over the long term

• Potential growth in emerging markets

• Expected currency tailwinds in long-term


Possible Risks• Weaker industry volume and some consumer down trading

• Tobacco sector resilient but not immune to the effects of a

recession

• Currency headwinds in the short-term

• Long-term threats from increased regulation, litigation, and

taxation

• Exposed to cultural, economic, and political risks inherent to

regions of emerging and developing markets.


PepsiCo

• Sell ~ 50 bps– Attractively valuation– Frito-Lay – fastest growing major food or beverage

company in the US this year– Merger with The Pepsi Bottling Co. and

PepsiAmericas• Potential short-term issues

– 5th largest holding in SIM portfolio• Trim some gains


Summary


SELL ~ 332 bps of Safeway (SWY)BUY ~ 332 bps of Procter & Gamble (PG) SELL ~ 50 bps of PepsiCo (PEP)BUY ~ 76 bps of Philip Morris (PM)

What questions do you have?


kurt brown rené hegglin shengbo mao consumer staples stock presentation the stock market

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