Sector Outlook:

Consumer Staples
Joshua Bohinc
Kevin Barney
Dan DeFrances
Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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Consumer Staples Sector (SP-30)
% of S&P Level
As of 10/31/2008 # of Companies MKTCAP 500 10/31 Daily MTD QTD YTD
S&P 500 500 $ 8,485,552 100.0% 968.8 1.54% -16.94% -16.94% -34.03%
                 
Energy 40 $ 1,115,525 13.1% 401.2 0.60% -18.01% -18.01% -33.47%
Materials 30 $ 266,696 3.1% 156.2 0.87% -22.18% -22.18% -39.90%
Industrials 57 $ 929,732 11.0% 223 1.86% -18.93% -18.93% -37.07%
Consumer Discretionary 80 $ 696,340 8.2% 178.6 2.72% -19.27% -19.27% -31.17%
Consumer Staples 41 $ 1,094,747 12.9% 253.7 0.96% -11.08% -11.08% -15.31%
Health Care 53 $ 1,175,390 13.9% 312.7 1.32% -11.81% -11.81% -23.69%
Financials 84 $ 1,266,175 14.9% 209.1 5.48% -22.74% -22.74% -46.66%
Information Technology 74 $ 1,335,754 15.7% 257.4 0.09% -17.81% -17.81% -37.46%
Telecommunications 9 $ 280,706 3.3% 104 -1.14% -9.53% -9.53% -38.17%
Utilities 32 $ 324,486 3.8% 148.1 -1.63% -11.87% -11.87% -31.49%

•Ranked 5 out of 10 by market cap

•Consumer Staples performing better than S&P500 MTD, QTD and YTD
S&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 10/31/2008.

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Industry Makeup of SP-30
Index % of 5 - Year
Value Sector Beta Std Dev.
Consumer Staples 234.17 13.17% 0.6 11.5
Household Products 337.28 23.48% 0.6 14.4
Soft Drinks 195.22 17.25% 0.8 16.6
Tobacco 382.54 14.94% 0.6 17.7
HyperMarkets & Super Centers 95.04 13.60% 0.4 15.8
Packaged Foods & Meats 221.78 12.37% 0.5 12.5
Drug Retail 365.45 6.16% 0.8 19.8
Brewers 416.08 4.62% 0.5 15.5
Food Retail 91.94 3.04% 0.7 17.8
Personal Products 270.94 1.40% 1.1 23.9
Food Distribution 277.65 1.38% 1.0 21.9
Agricultural Products 303.00 1.12% 0.9 33.8
Distillers & Vinters 120.68 0.67% 1.0 21.6

*All data as of 10/24/08

S&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 10/24/2008.

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Consumer Staples – Household Names
Symbol Company Price   Symbol Company Price
MO Altria Group Inc. $ 19.19 KMB Kimberly-Clark $ 61.29
BUD Anheuser-Busch $ 62.03 KFT Kraft Foods Inc-A $ 29.14
ADM Archer-Daniels-Midland $ 20.73 KR Kroger Co. $ 27.46
AVP Avon Products $ 24.83 LO Lorillard Inc. $ 65.86
BF.B Brown-Forman Corp. $ 45.40 MKC McCormick & Co. $ 33.66
CPB Campbell Soup $ 37.95 TAP Molson Coors Brewing $ 37.36
CLX Clorox Co. $ 60.81 PBG Pepsi Bottling Group $ 23.12
KO Coca Cola Co. $ 44.06 PEP PepsiCo Inc. $ 57.01
CCE Coca-Cola Enterprises $ 10.05 PM Philip Morris Intl. $ 43.47
CL Colgate-Palmolive $ 62.76 PG Procter & Gamble $ 64.54
CAG ConAgra Foods Inc. $ 17.42 RAI Reynolds American Inc. $ 48.96
STZ Constellation Brands $ 12.54 SWY Safeway Inc. $ 21.27
COST Costco Co. $ 57.01 SLE Sara Lee Corp. $ 11.18
CVS CVS Caremark Corp. $ 30.65 SVU Supervalu Inc. $ 14.24
DF Dean Foods $ 21.86 SYY Sysco Corp. $ 26.20
DPS Dr Pepper Snapple Group Inc $ 22.90 HSY The Hershey Company $ 37.24
EL Estee Lauder Cos. $ 36.04 TSN Tyson Foods $ 8.74
GIS General Mills $ 67.74 UST UST Inc. $ 67.59
HNZ Heinz (H.J.) $ 43.82 WMT Wal-Mart Stores $ 55.81
K Kellogg Co. $ 50.42 WAG Walgreen Co. $ 25.46
        WFMI Whole Foods Market $ 10.72
S&P500 Data provided by Standard and Poor’s web site and is based on market closing information from 10/31/2008. 5
S&P500 vs. SIM Portfolio

 Consumer Staples
 S&P500: 12.9%
 SIM: 14.3%
 SIM – currently overweight 140 bp
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Historical Sector Performance

•Declined in past 11 months, but sustained growth trend over last 4 years

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Performance Relative to S&P500

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Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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 Sector Factors
 Stable demand based on consumer needs
 Defensive (non-cyclical)
 Consistent returns regardless of economic
conditions
 Generally lags market during periods of growth
 Composed of stable, slow growth
multinational companies
 Wal-Mart / Costco
 General Mills
 Pepsi 10
Note: This slide has been reproduced from the Autumn Quarter 2007 Consumer Staples presentation.
 Sector Demand
 Steady demand in US
 Sector relying on international expansion
to spur growth
 Branding important to differentiate an
commoditized product

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Note: This slide has been reproduced from the Autumn Quarter 2007 Consumer Staples presentation.
Sector Characteristics
 High barriers to entry
 Dominated by large, well-established companies
 High capital requirements to enter sector
 Mature industry with strong brand identities
 Difficult to create wide distribution network
 High buyer power
 Undifferentiated product equates to low switching
cost

Note: This slide has been reproduced from the Autumn Quarter 2007 Consumer Staples presentation.

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Sector Characteristics (Cont.)
 Low Supplier Power
 Long-term contracting/agreements common
 High threat of substitution
 Multiple brands competing in same product line
 High threat of competition
 Consumers are price sensitive (despite brand loyalty) with
undifferentiated products

Note: This slide has been reproduced from the Autumn Quarter 2007 Consumer Staples presentation.

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Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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 Economic Analysis

DEMAND:
 GDP growth
 Unemployment rate
 Personal income
 Consumer Price Index

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Note: This slide has been reproduced from the Autumn Quarter 2007 Consumer Staples presentation.
 Economic Analysis

SUPPLY:
 Energy Prices
 Commodity Prices

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Note: This slide has been reproduced from the Autumn Quarter 2007 Consumer Staples presentation.
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Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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Financial Analysis
 Revenue growth is above average and falling
 Mean is 7.7%, currently 9%
 Net profit margins decreasing the past
two years with a slight correction in mid-2008
 Slow increase in dividend yield last five
years, but sharp increase last two months
 Falling growth rate estimates

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 Income Statement Analysis
Consumer Staples Income Statement Ratios
S&P CONS. STAPLES SECTOR COMP ADJ (SP-30)AsM-Wtd
Reported Financials StockVal ®
FYE Dec Company Filings

2007 2006 2005 2004 2003 2002 2001 2000

Gross Profit Margin (%) 29.14 29.74 29.61 29.76 29.84 29.82 29.65 29.73
Operating Profit Margin EBITDA (%) 11.64 11.50 11.84 11.38 10.94 11.69 12.01 11.93
Operating Profit Margin EBIT (%) 9.39 9.18 9.56 8.98 8.49 9.23 9.10 9.15
Pre-Tax Profit Margin (%) 12.05 12.05 12.45 12.34 11.68 11.80 11.48 10.97
Tax Rate (%) 30.73 30.95 31.90 34.76 35.67 34.87 35.04 35.44
Net Profit Margin Adjusted (%) 5.85 5.86 5.99 5.60 5.73 5.73 5.78 5.79

Return on Avg Common Equity (%) 61.91 29.62 35.74 31.12 47.88 34.58 33.42 40.95
Return on Average Total Equity (%) 21.24 22.07 23.87 23.35 24.82 24.97 25.90 29.26
Return on Average Capital (%) 13.71 14.08 14.79 13.90 13.92 13.69 14.53 16.36
Return on Average Assets (%) 8.33 8.39 8.74 8.46 8.63 8.55 8.85 9.59

Times Interest Earned 8.90 8.64 9.36 9.07 7.79 7.56 6.05 6.48

•Margins constant
•Returns decreasing
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 Income Statement Analysis
S&P 500
Income Statement Ratios
S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd As Reported Financials StockVal ®
FYE Dec Company Filings

2007 2006 2005 2004 2003 2002 2001 2000

Gross Profit Margin (%) 33.37 33.53 33.00 32.60 31.96 31.90 31.20 32.39
Operating Profit Margin EBITDA (%) 21.97 22.99 21.01 19.69 18.91 16.91 19.27 24.09
Operating Profit Margin EBIT (%) 17.54 18.73 16.73 14.82 13.50 11.24 12.75 18.34
Pre-Tax Profit Margin (%) 14.97 16.50 17.05 15.43 12.91 6.83 8.82 18.21
Tax Rate (%) 31.06 28.64 29.68 29.63 29.76 27.76 32.51 35.87
Net Profit Margin Adjusted (%) 8.83 9.29 8.85 8.53 7.64 7.22 7.84 8.71

Return on Avg Common Equity (%) 23.57 20.40 25.75 19.57 19.26 18.08 20.42 24.90
Return on Average Total Equity (%) 17.29 17.71 16.88 16.59 15.25 14.01 15.75 20.01
Return on Average Capital (%) 8.87 9.45 8.94 8.58 7.69 7.15 8.26 10.50
Return on Average Assets (%) 3.20 3.38 3.18 3.09 2.78 2.59 2.97 3.63

Times Interest Earned 2.68 3.20 3.69 4.19 3.74 2.62 2.13 2.77

•Margins increasing
•Returns fluctuating
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 Cash Flow Analysis
S&P CONS. STAPLES SECTOR COMP ADJ (SP-30)AsM-Wtd
Reported Financials StockVal ®
FYE Dec Company Filings

2007 % Chg 2006 % Chg 2005 % Chg 2004 % Chg 2003

FREE CASH FLOW

Net Cash From Operations 6399.3 4 6125.6 15 5316.8 6 5014.4 3 4845.7
Capital Expenditures 2888.6 6 2730.2 18 2307.5 6 2174.8 8 2020.5
Free Cash Flow 3510.8 3 3395.5 13 3009.4 6 2839.6 1 2825.2
Dividends Common ($ Mil) 2110.3 12 1877.3 17 1605.1 36 1176.6 17 1008.0
Free Cash Flow After Dividends 1400.5 -8 1518.2 8 1404.2 -16 1663.0 -8 1817.2

ADJUSTED CASH FLOW

Net Income Reported ($ Mil) 4760.8 8 4390.8 12 3925.2 19 3309.8 19 2792.2
Accounting Adjustment 30.6 -64.8 10 -72.2 54.1 -87 403.6
Net Income Adjusted 4791.4 11 4326.0 12 3853.0 15 3363.9 5 3195.7
Depreciation & Amortization 1834.7 7 1708.9 16 1469.2 2 1437.5 5 1367.0
Cash Flow Adjusted 6626.1 10 6035.0 13 5322.2 11 4801.4 5 4562.7
Capital Expenditures 2888.6 6 2730.2 18 2307.5 6 2174.8 8 2020.5
Free Cash Flow Adjusted 3737.5 13 3304.8 10 3014.7 15 2626.5 3 2542.2
Dividends Common ($ Mil) 2110.3 12 1877.3 17 1605.1 36 1176.6 17 1008.0
Free Cash Flow Adjusted After Divs 1627.2 14 1427.5 1 1409.6 -3 1450.0 -5 1534.2

CASH FLOW STATEMENT SUMMARY

Net Cash From Operations 6399.3 4 6125.6 15 5316.8 6 5014.4 3 4845.7
Net Cash From Investing -3874.3 -29 -3002.7 -18 -2550.4 15 -2990.4 -53 -1948.5
Net Cash From Financing -2603.4 19 -3216.9 -19 -2696.0 -40 -1930.1 18 -2349.2
Other Cash Flows 85.3 -16 101.0 196 34.1 -61 87.2 -11 98.5
Change In Cash & Equiv 6.9 -1 7.0 -93 104.6 -42 181.2 -72 646.4

Declining Free Cash Flow Production 26

Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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Valuation Analysis

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Valuation Analysis

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Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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Economic Outlook
 Real GDP growth projected to fall until mid-2009
at the earliest
 Growing fears of inflation because of massive
cash infusion by Fed
 Consumer spending growth trending downward
 Consumer confidence at all-time low

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Recommendations
 Decrease SIM portfolio allocation by 140 bp
 Bringallocation in line with broader S&P
 New target: 12.9% (S&P: 12.9%)
 Rationale:
 Currently overweighted due to outperformance over
past quarter
 Decrease exposure to sector because of underpricing
of other sectors
 SP-30 underperformance in upcoming quarters
 Recommend next class consider further underweighting if
economic turnaround seems imminent

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Agenda
 Sector Overview
 Sector Factors
 Economic Factors
 Financial Analysis
 Valuation
 Recommendations
 Anheuser-Busch Action

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Anheuser-Busch Action
 Proposed acquisition by InBev for $70/share, all cash
 Currently trading at $64.60
 BUD shareholders to vote on Nov. 12
 Already approved by InBev shareholders
 InBev hopes to complete acquisition by year end
 Options market
 Jan. 2009 $65 call options currently trading at $3.80
 Represents in-the-money share price of $68.80
 Return of 1.7%, or the cost of capital
 In short, options market believes merger will happen
 Purchase today represents 7.7% return over two months

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