CONSUMER DISCRETIONARY S 5 COND STOCK OUTLOOK BASHEER
CONSUMER DISCRETIONARY (S 5 COND) STOCK OUTLOOK BASHEER ALMATTAR, AUSTIN BLACKERBY, CONG BUI
AGENDA Sector Overview Amazon GM L Brands Recommendation Summary
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 Automobiles & Components S&P Sectors Weight 25% Consumer Durables & Apparel 20% 15% 13% Consumer Services 10% 5% Media TE LS T S 5 R LS L S 5 TI U S 5 AT R S 5 EN M R S S S 5 C O N U S 5 D S 5 IN N D O S 5 C LT H H N L S 5 FI S 5 IN FT 0% Retailing
CONSUMER DISCRETIONARY BUSINESS CYCLE Cyclical Outperform during economic growth First sector to grow during late a recession Underperform during economic contraction and early recessions Currently Outperform the market Table Source:
CONSUMER DISCRETIONARY ECONOMIC ANALYSIS Positive Correlation • Consumer confidence • Average Wage Rate • Exports • GDP Negative Correlation INFLUENCING FACTORS • Oil price • Unemployment rate • Fed Interest rate • Inflation
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
RECOMMENDATION Low Oil Price Low Unemployme nt Rate Continuous Economic Growth Tax Reforms OVERWEIGH T Relative to the S&P 500 Increase in Fed Rates
AGENDA Sector Overview Amazon GM L Brands Recommendation Summary
COMPANY OVERVIEW Amazon is an online and traditional retailer which offers a wide range of consumer products. Furthermore, it offers cloud and enterprise software services in addition to a wide range of digital media and shipping services to consumers. Business Segments: North America, Amazon and Consumer Discretionary over the past 5 International, years Amazon Web Services (AWS)
MARKET DATA, DRIVERS AND RISK Company Information TICKER AMZN SECTOR Consumer Discretionary INDUSTRY Retail - Discretionary PRICE AS OF 3/27/2018 $1, 500 MARKET CAP $732. 52 B SHARE- DILUTED 484. 1 M Key Statistics (FY 2017) REVENUE EPS P/B P/E BETA $118. 57 B $6. 15 26. 44 332. 00 1. 05 Performance History 52 -WEEK HIGH 1 -YEAR RETURN $1617. 54 79% 52 -WEEK LOW $833. 50 Growth Drivers: • The growth of Amazon Prime membership • The synergies from various acquisitions • The growth in advertisement revenue • Cloud Services Growth • The growth of Amazon private label products • The positive outlook of the US and global economy. • Economic performance and cycle • Unemployment rate • Consumer Confidence Index • Oil Prices Risks: • High P/E ratio • Competitive environment • The geopolitical risk of a trade war. • Management distraction.
FINANCIAL ANALYSIS- DCF VALUATION Target Price: $1, 770 Assumptions: Higher than consensus Lower than Company Guidance Facts: 2013 Growth Rate: 22% 2014 Growth Rate: 20% 2015 Growth Rate: 27% 2016 Growth Rate: 31% 2017 Growth Rate: 27%
FINANCIAL ANALYSIS- ABSOLUTE VALUATION Amazon Ratios vs. peers Ticker Average Amazon Peers BABA US VIPS US JD US EBAY US MELI US P/E TTM 823. 90 328. 13 P/S TTM 6. 33 3. 84 P/B 15. 26 25. 31 P/CF TTM 36. 93 36. 96 EV/ EBITDA TTM 39. 81 35. 69 54. 79 30. 19 4388. 98 31. 34 109. 97 15. 04 0. 88 1. 26 4. 45 12. 49 9. 34 7. 75 8. 15 3. 57 37. 42 28. 49 65. 29 22. 58 14. 93 53. 34 41. 17 N/A 51. 82 15. 20 55. 16 Amazon Target Price based on Multiples Absolute Valuation P/E P/B P/S P/EBITD A Average Current Multiple 332. 07 26. 44 4. 24 #Your Target Multiple 404. 67 31. 24 4. 69 Target/ Current (% of Current) 1. 22 1. 18 1. 11 46. 76 48. 56 1. 04 Target Price $ 1, 846. 22 $ 1, 790. 04 $ 1, 675. 79 $ 1, 573. 32 $ 1, 721. 34 41 ANALYSTS Recommendation: Buy Average Price: $1, 712
AMAZON SIM RECOMMENDATIONS SELL Current Weight : 616 BPS Proposed Weight: 500 BPS
AGENDA Sector Overview Amazon GM L Brands Recommendation Summary
COMPANY DESCRIPTION General Motors Co. engages in the designing, manufacturing, and selling of cars, trucks, and automobile parts. It also provides automotive financing services through General Motors Financial Company, Inc. The firm operates through the following segments: GM North America, GM International, and GM Financial. It sells vehicles under the Chevrolet, Cadillac, Baojun, Buick, GMC, Holden, Jiefang, Wuling, Maven, and On. Star brands. The company was founded by William C. Durant on September 16, 1908 and is headquartered in Detroit, MI. Industry: Automobiles & Components Market Data Current Price $35. 20 Market Cap $53. 2 billion Shares Out. 1400. 52 52 Wk. Price Range 31. 92 – 46. 72 Forward Dividend (Yield %) 1. 52 (4. 01%) Financial Data (FY 2017) Rev (m) $ 145, 588 Rev Growth -12. 50% Op. Income (m) $ 10, 016
TOTAL VEHICLE SALES
BUSINESS SEGMENTS – TOTAL NET REVENUE Rev Breakdown Automobiles 91. 63% Consumer Finance 8. 37% • Around 77% of GM revenue comes from the GM North America vehicle sales • Vehicle Sales Internationally increased from 2016 to 2017, decreased in North America • Roughly 92% of Revenue comes from automobile sales
TOTAL SALES OF GM VS. INDUSTRY • Market Share in the North America has remained roughly the same over the past three years
TOTAL SALES BY VEHICLE TYPE • Trucks and larger vehicles have the highest profit margins, so it’s a positive to see such a large U. S. market share %
REVENUE AND GROSS PROFIT GROWTH Year 2015 2016 2017 GM -2. 30% 9. 20% -12. 5% F 3. 80% 1. 50% 3. 30% FCAU 15. 10% 0. 38% -0. 08% GM 35. 30% 16. 60% -8. 70% F 29. 12% 9. 34% 0. 90% FCAU 0. 24% 21. 18% 7. 86% Revenue YOY Growth Gross Profit YOY Growth • Although revenue decreased from 2016 to 2017, gross profit decreased by a smaller margin to due to significant cost saving efforts, such as closing factories that are unnecessary and selling off unprofitable international brands (such as Opel and Vauxhall)
GROWTH DRIVERS FOR GM has invested heavily in both alternative energy vehicles, autonomous vehicles, and ride-sharing technologies GM invested $500 million in Lyft, a 9% stake GM plans to begin selling cars without pedals and steering wheels in 2019, will be manufactured in Detroit Global economic growth Cost saving initiatives, such as selling unprofitable brands and closing excess factories = higher operating margin GMNA’s breakeven point is between 10 – 11 million units lower than it was under old GM (Morningstar) GM’s US hourly labor cost is $9 billion lower than it was under old GM in 2005 (Morningstar) Tax cuts will put more money in consumer pockets, more likely to make large purchases such as a new car or truck, may even incentive consumers to upgrade to luxury vehicles such as Cadillac vehicles Acquisitions fueling innovation Purchased Strobe last October, a driverless technology start-up focused on laser and radar technologies, to enhance development of autonomous vehicles Acquired another autonomous vehicle start-up in May of 2016, called Cruise Automation Inc.
GROWTH INHIBITORS FOR GM Increasing interest rates increase financing costs for consumers GM is once again facing a potential $1 billion stock payout related to defective ignition switches from 2014 This case was supposedly resolved in February, but the claims resurfaced this month and could potentially cause GM to pay $1 billion to the ”old GM” trust, which is the assets left behind from the 2009 $50 billion government rescue and bankruptcy restructuring Tariffs on steel and aluminum could potentially greatly increase the costs of production for auto makers 90% of steel used by GM comes from U. S. Morningstar estimates in a worst-case scenario the tariffs will cause a 1% increase in vehicle costs Roughly 16% of GM automotive revenue comes from its international segments, so a trade war could impact the bottom line of GM Increasing oil prices make consumers less likely to purchase trucks and SUVs, which have the highest profit margins of any vehicle type U. S. auto market becomes more crowded each year, with brands such as Hyundai and Tesla taking over more market share each year
COMPARISON VS COMPETITORS Comparison GM F FCAU Price $35. 20 $10. 86 $20. 58 YTD Performance -11. 04% -12. 10% 15. 39% 2017 EPS $ 6. 62 1. 78 2. 41 2017 REV 145. 6 B 145. 7 B 110. 9 B • Stock price has had a rough YTD performance, but has higher EPS than its competitors
RELATIVE VALUATION Relative Valuation P/E GM F FCAU TSLA S 5 AUTM (Level 4 Indices) 5. 232 6. 7533 6. 5919 - 5. 8294 24. 21 21. 6297 P/S 0. 3698 0. 276 0. 2331 4. 3825 0. 3162 1. 67 2. 1973 P/B 1. 4681 1. 2396 1. 5778 12. 3765 1. 3416 5. 49 3. 2732 P/CF 3. 0817 2. 391 2. 4951 605. 6917 2. 6923 14. 1071 14. 4243 P/EBITDA 2. 4117 3. 2616 1. 9145 5020. 1338 2. 7393 11. 16 11. 4704 S 5 COND S&P 500 • GM is currently trading at a discount to the automobile manufactures index on a P/E and P/EBITDA basis, and versus both the S 5 COND and S&P 500 on all relative metrics
ABSOLUTE VALUATION – PRICE TARGET Absolute Valuation Current Target % of Current Target Price P/E 5. 232 8. 5 1. 62 $57. 19 P/B 1. 4681 2 1. 36 $47. 95 P/S 0. 3698 0. 4 1. 08 $38. 07 P/EBITDA 2. 4117 3. 2 1. 33 $46. 71 Average: $47. 48 • The automobile manufacturing industry trades at a major discount to both the S&P 500 and S 5 COND sector due to the risks associated with the industry, but the valuation metrics are all extremely low • These ratios should be higher, especially due to the current economic conditions • With higher target ratios, an average target price of $47. 48 is given
DCF SENSITIVITY ANALYSIS
RECOMMENDATION AND RISKS HOLD at 450 BPS GM is currently a large part of the SIM portfolio I believe GM is undervalued by upwards of 35%, but due to the risks associated with the company and industry there is no need to buy more
RISKS TO RECOMMENDATION Risks to stock decline: Increasing interest rates and oil prices Trade war Pending litigation Increased competition Extremely cyclical nature of auto industry Risks to not buying more with significant upside potential: GM could establish itself as a dominant player in the autonomous and EV markets with lower costs vehicles compared to current dominate players such as Tesla GM is well positioned to outperform competitors in an economic downturn compared to competitors due to a lower breakeven point and other significant cost saving advantages Stronger than expected global economic growth Large decrease in oil prices
AGENDA Sector Overview Amazon GM L Brands Recommendation Summary
COMPANY OVERVIEW L Brands (LB - NYSE) is an American fashion retailer that sells lingerie, personal care and beauty products, apparel and accessories with such brands as Victoria’s Secret (including Pink), Bath & Body Works, Lacenza, and Henri Bendel Market: majority of sales is generated in North America, only < 4% coming from international market Fiscal Year ended Feb 3 2018
MARKET DATA, DRIVERS AND RISKS Company Information Key Statistics (FY 2017) TICKER LB SECTOR Consumer Discretionary INDUSTRY Retail - Discretionary PRICE AS OF 3/27/2018 $38. 21 MARKET CAP $10. 79 B SHARE- DILUTED 287 M REVENUE EPS P/E BETA FWD DIV $12. 63 B $3. 42 11. 07 1. 05 2. 40 (6. 09%) Performance History 52 -WEEK HIGH 1 -YEAR RETURN $62. 95 -35. 1% 52 -WEEK LOW $36. 06 Growth Drivers: • Revenue generated from company-owned mallbased specialty retail store; mall traffic • Pink and Bath & Body Works line of products • Online sales • International franchise, license and wholesale partner • Favorable consumer trends in fashion • The positive outlook of the economic conditions and consumer confidence Major risks: • The struggle of Victoria’s Secret business due to change in consumer trend • Brick-and-mortar stores in the age of ecommerce • Highly competitive specialty retail business • Seasonality and inventory management
VALUATION - MULTIPLES L Brands (LB) Nordstrom (JWN) Macy's (M) GAP (GPS) S 5 RETL S 5 COND S&P 500 P/E 11. 9 16. 8 10. 8 14. 0 38. 5 23. 5 21. 2 P/S 0. 86 0. 51 0. 33 0. 76 1. 82 1. 74 2. 15 4. 7 5. 0 3. 0 5. 9 16. 8 10. 9 11. 2 15. 2 11. 8 5. 8 18. 3 - 22. 2 22. 9 P/EBITDA P/FCF Current Target % of Current Target Price P/E 11. 9 14 117. 6% 45. 0 P/S 0. 86 1 116. 3% 44. 4 4. 7 6 127. 7% 48. 8 15. 2 17 111. 8% 42. 7 P/EBITDA P/FCF AVERAGE 45. 2
VALUATION - DCF Assumptions: • Discount rate: 9. 5% • Perpetual growth rate: 1. 5% • Tax rate of next years: 21% • Victoria’s Secret segment will stabilize without further decline, while other segments maintain current level of growth in the next few years Implied equity value: 43. 7
RECOMMENDATION HOLD Current Weight : 94 BPS Proposed Weight: 94 BPS
RECOMMENDATION – FOR & AGAINST FOR • Brand strength; consumer loyalty • Limited direct competition of the same scale and price point • Performance expected to stabilize in 2018 with improving comparable sales growth through out fiscal 2017 • Pink, Bath & Body Works, digital sales likely to continue doing well • Consensus: • Bloomberg: • Buy/Hold/Sell: 10/16/3 • Target price: 49. 35 • Nasdaq • Buy/Hold/Sell: 9/13/3 • Target price: 47. 00 AGAINST • The struggle of Victoria’s Secret business due to change in consumer trend • Brick-and-mortar stores in the age of ecommerce • Seasonality and inventory management
AGENDA Sector Overview Amazon GM L Brands Recommendation Summary
RECOMMENDATIONS Current Weight Proposed Weight Current Price Target Price Upside/ Downside Buy, Sell, Hold Amazon 616 BPS 500 BPS $1, 555 $1, 770 14% SELL (In portfolio) BUY (Otherwise) GM 450 BPS $35. 99 $47. 98 33% HOLD (In portfolio) BUY (Otherwise) L Brands 94 BPS $38. 21 $43. 65 14% HOLD
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