CONSUMER DISCRETIONARY S 5 COND SECTOR OUTLOOK BASHEER

CONSUMER DISCRETIONARY (S 5 COND) SECTOR OUTLOOK BASHEER ALMATTAR, AUSTIN BLACKERBY, CONG BUI

AGENDA Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

SECTOR OVERVIEW “S&P'S 500 GICS Consumer Discretionary Sector Index is cap-weighted. Includes auto, household durables, textiles & apparel, leisure equipment, hotels, restaurants, other leisure facilities, media production & services and consumer retailing. ” Sources Bloomberg Terminal S&P 500 Weight Automobiles & Components 30. 0% Consumer Durables & Apparel 25. 0% 20. 0% 15. 0% Consumer Services 12. 6% 10. 0% 5. 0% Media e l. E R ea n at ic un st ic Se rv at M Te le co m m C at es er ia ls es til U gy En er ls st iti io m on su In du er cr is er D um on s ria s et St io ap na le ry e C ar lth H ea Fi na nc ia C In fo rm at io n Te ch no lo gy ls 0. 0% Retailing

e at st l. E es ic er ia ls Se rv at M R ea n io at ic un m m es iti til U gy ls ria En er st s le ry na ap St In du er m on su e C ar io et cr is er D 13. 0% C um lth H ea 25. 0% co le on s ls ia nc na Fi gy lo no ch Te 5. 0% C n io at rm fo 0. 0% In SIM Weight Te e at st l. E es ic er ia ls rv Se at M R ea n io at ic un m m co le es iti til U gy En er s al tri s le ap St ry na io e ls C ar du s In er m lth et cr is er D on su C um H ea ia nc na Fi lo gy no ch Te 15. 0% Te on s C n io at rm fo In S&P 500 VS SIM PORTFOLIO +/+/- 20. 0% 0. 5% 10. 0%

CONSUMER DISCRETIONARY INDUSTRY GROUP, INDUSTRY, AND SUB- INDUSTRY Consumer Discretionary Consumer Durables & Apparel Automobiles & Components Automobiles Household Durables Leisure Products Retailing Textiles, Apparel & Luxury Goods Apparel, Accessories & Luxury Goods Auto Parts & Equipment Automobile Manufactures Consumer Electronics Tires & Rubber Motorcycle Manufactures Home Furnishings Footwear Home Building Textiles Distributors Internet & Direct Marketing Retail Media Multiline Retail Specialty Retail Media Consumer Services Hotels, Restaurants & Leisure Diversified Consumer Services Department Stores Apparel Retail Advertising Casinos & Gaming Education Services General Merchandise Stores Computer & Electronics Retail Broadcasting Hotels, Resorts & Cruise Lines Specialized Consumer Services Home Improvement Retail Cable & Satellite Leisure Facilities Household Appliances Specialty Stores Movies & Entertainment Restaurants Housewares & Specialties Automotive Retail Publishing Distributors Home furnishing Retail

SECTOR OVERVIEW 84 Companies in the Sector Largest 10 companies by Market Cap ( Data as of Feb 25, 2018) Market Name Price Cap Amazon. com Inc 1500 726. 16 B The Home Depot Inc 188 219. 95 B Comcast Corp 40 183. 46 B The Walt Disney Co 107 161. 27 B Mc. Donald's Corp 163 129. 55 B Netflix Inc 286 124. 08 B NIKE Inc 68 96. 49 B Charter Communications Inc 365 93. 00 B The Priceline Group Inc 1907 80. 89 B Lowe's Cos Inc 97 78. 91 B

BEST PERFORMING VS. WORST PERFORMING STOCKS IN THE CONSUMER DISCRETIONARILY SECTOR

CONSUMER DISCRETIONARY PERFORMANCE Year to Date Index performance in comparison to the S&P 500 Index 10 years Quarterly performance in comparison to the S&P 500 Index

AGENDA Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

CONSUMER DISCRETIONARY BUSINESS CYCLE Cyclical Outperform during economic growth Quickly rebound during late during recession Underperform during economic contraction and early recessions Currently Outperform the market Table Source:

PORTER’S 5 -FORCES ANALYSIS Force Description Rank Threat of new entrants: • Brand recognition is very important for consumer discretionary low • The initial investment: high for automotive & household durable goods, moderate for textiles, apparel and leisure equipment (manufacturing segment), high for media & retailing, and moderate for hotels, restaurants, & other leisure facilities (services segment) Bargaining power of customers • By definition, consumer discretionary goods are not essential for consumers’ well- high being. • Wide range of available alternatives, low switching cost • The rising of ecommerce only strengthens customers’ power Threat of substitutes • The boundary between competitor and substitutes are hard to define due to the large scope of industry • With new technology and consumer trend, there are substitutes that have disrupted or have the potential to disrupt the industry. For instance: airbnb vs. traditional hotel, electric car vs. gasoline car moderate

PORTER’S 5 -FORCES ANALYSIS Force Description Rivalry • In each segment of the industry, there are multiple major, established firms as among well as smaller, niche players competing fiercely with each other existing • Strong foreign competitors from Europe and Asia Pacific. Rapidly-growing competitors from China. • Hard to differentiate Bargaining power of suppliers • Global trade has been expanding more than ever, making it easy to access suppliers all over the world and lowering switching costs • Suppliers for both manufacturing and services segment are abundant and competitive Rank high low

AGENDA Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

CONSUMER DISCRETIONARY ECONOMIC ANALYSIS Positive Correlation • Consumer confidence • Exports • GDP • CPI Negative Correlation INFLUENCING FACTORS • Oil price • Unemployment rate • Fed Interest rate • US Dollar Value

CONSUMER CONFIDENCE & CONSUMER DISCRETIONARY The relationship is positively correlated. Consumers are optimistic about the US economy in the near future which encourages spending.

US DOLLAR VALUE & CONSUMER DISCRETIONARY The relationship is Negatively correlated. Depreciation on the US Dollars would increase US Exports. US Consumers purchasing power internationally might be affected.

US EXPORTS & CONSUMER DISCRETIONARY Generally the Relationship is positively correlated. No strong relationship exist though.

US GDP & CONSUMER DISCRETIONARY There is a positive correlation with the economic status (Expansion or contraction ) and the sector performance.

OIL PRICE & CONSUMER DISCRETIONARY There is a negative correlation between Oil price and the sector. Lower oil prices help boosting the index upward

UNEMPLOYMENT RATE & CONSUMER DISCRETIONARY A negative correlation. Consumer spending increases as result of low unemployment rate which positively impact the sector.

CPI & CONSUMER DISCRETIONARY A positive correlation with the CPI. Normal inflation rate indicates the health of the economy and consumer spending

FED INTEREST RATE & CONSUMER DISCRETIONARY The Sector benefits from the low interest rate. The planned interest increases might impact the sector negatively due its impact on consumer spending and corporation cost of debt.

AGENDA Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

FINANCIAL ANALYSIS S 5 COND- Sales S 5 COND- Earnings • 2017 sales and earnings growth rates of the sector are 3. 7% and 2. 2% respectively, the lowest in the last 8 years. • However, as the economy has been doing very well recently and will likely to continue in the next years, especially with all the fiscal stimuli, consumer discretionary sector are expected to recover and grow

FINANCIAL ANALYSIS S 5 COND- Sales • Top companies: Amazon vs. Mc. Donald S 5 COND- Earnings

FINANCIAL ANALYSIS S 5 COND- Sales S 5 COND- Earnings • The sector’s gross margin in 2017 is 35. 0%, a slight increase from the popular level of 33% of the last 7 years. Likewise, EBITDA margin went up to 16. 1%, compared to around 15% every year since 2011; Operating margin: 11. 1%; Profit margin: 7. 9%

FINANCIAL ANALYSIS S 5 COND- Sales S 5 COND- Earnings • The sector has roughly the same gross margin as the S&P 500 • The sector has slightly lower profit margin as the S&P 500

FINANCIAL ANALYSIS S 5 COND- Sales S 5 COND- Earnings • This sector generates positive net cash flows (CFO + CFI + CFF), positive free cash flow

AGENDA Sector Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation

VALUATION ANALYSIS – S&P 500 VS. S 5 COND S&P 500 & S 5 COND (Last 5 years of data) S 5 COND P/E P/S P/B P/CF P/EBITDA High SPX P/E P/S P/B P/CF P/EBITDA High 25. 52 1. 79 5. 78 14. 76 11. 74 23. 26 2. 23 3. 52 15. 43 12. 31 Low 18. 24 1. 18 3. 71 11. 4 8. 38 15. 17 1. 36 2. 27 8. 79 7. 99 Median 20. 59 1. 43 4. 73 12. 94 9. 91 18. 68 1. 78 2. 78 10. 76 10. 2 Current 24. 21 1. 67 5. 49 14. 1071 11. 16 Current 21. 9 2. 09 3. 32 14. 55 11. 61

VALUATION ANALYSIS – LEVEL 2 INDICES GICS Level 2 Indices within S 5 COND (Indsustry Group) P/E Current Median (+/-) Median P/S Current Median (+/-) Median P/B Current Median (+/-) Median P/CF Current Median (+/-) Median S 5 RETL (Retail) S 5 AUCO (Automobiles & components industry) 7. 27 10. 53 3. 26 S 5 AUCO 0. 43 0. 5 0. 07 S 5 AUCO 1. 74 2. 23 0. 49 S 5 AUCO 3. 66 5. 76 2. 1 S 5 MEDA (Media) Undervalued 39. 17 28. 08 -11. 09 S 5 RETL 1. 86 1. 38 -0. 48 S 5 RETL 12. 43 7. 97 -4. 46 S 5 RETL 21. 52 16. 44 -5. 08 18. 18 18. 62 0. 44 S 5 MEDA 1. 98 2. 05 0. 07 S 5 MEDA 2. 81 3. 33 0. 52 S 5 MEDA 10. 24 11. 2 0. 96 Overvalued S 5 CODU (Consumer Durables & Apparel) S 5 HOTR (Consumer Services) 24. 06 23. 22 -0. 84 S 5 HOTR 3. 07 2. 78 -0. 29 S 5 HOTR 11 7. 69 -3. 31 S 5 HOTR 16. 18 15. 49 -0. 69 S&P 500 S 5 CODU 17. 93 19. 6 1. 67 21. 06 19. 68 -1. 38 S 5 CODU 1. 53 1. 64 0. 11 S 5 CODU 3. 47 3. 73 0. 26 21. 9 18. 68 P/S 2. 09 1. 78 P/B 3. 32 2. 78 P/CF 14. 55 10. 76

AGENDA Sector Overview Business Analysis Economic Analysis Financial analysis Valuation Analysis Recommendation

RECOMMENDATION Low Oil Price Low Unemployme nt Rate Continuous Economic Growth Tax Reforms OVERWIGH T Relative to the S&P 500 Increase in Fed Rates

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THE 84 COMPANIES IN THE CONSUMER DISCRIMINATORY SECTOR Name Omnicom Group Inc Tractor Supply Co Walt Disney Co/The Pulte. Group Inc DISH Network Corp Amazon. com Inc Home Depot Inc/The Ralph Lauren Corp Mc. Donald's Corp Yum! Brands Inc Charter Communications Inc Hanesbrands Inc Advance Auto Parts Inc Priceline Group Inc/The LKQ Corp Tiffany & Co TJX Cos Inc/The Netflix Inc Auto. Zone Inc Garmin Ltd VF Corp S 5 COND Index companies Name Whirlpool Corp MGM Resorts International Tapestry Inc Wyndham Worldwide Corp Best Buy Co Inc Twenty-First Century Fox Inc H&R Block Inc General Motors Co PVH Corp Ulta Beauty Inc Carnival Corp Dollar General Corp Hilton Worldwide Holdings Inc Trip. Advisor Inc Discovery Communications Inc Under Armour Inc Comcast Corp Hasbro Inc Car. Max Inc Macy's Inc Chipotle Mexican Grill Inc Ford Motor Co Nordstrom Inc Mohawk Industries Inc Goodyear Tire & Rubber Co/The News Corp Wynn Resorts Ltd Gap Inc/The Time Warner Inc Genuine Parts Co Target Corp Harley-Davidson Inc Expedia Inc Marriott International Inc/MD Norwegian Cruise Line Holdings Ltd Ross Stores Inc Discovery Communications Inc Starbucks Corp Viacom Inc Foot Locker Inc DR Horton Inc CBS Corp Name Interpublic Group of Cos Inc/The Kohl's Corp Leggett & Platt Inc O'Reilly Automotive Inc Lennar Corp Signet Jewelers Ltd Scripps Networks Interactive Inc L Brands Inc Borg. Warner Inc Lowe's Cos Inc Mattel Inc Under Armour Inc Aptiv PLC Newell Brands Inc Dollar Tree Inc Michael Kors Holdings Ltd Darden Restaurants Inc Twenty-First Century Fox Inc NIKE Inc News Corp Royal Caribbean Cruises Ltd

COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR

COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR

COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR

COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR