Consumer Discretionary Sector Outlook

Consumer Discretionary Sector outlook covers industry groups, sector overview, market analysis, and company profiles. It includes details of companies in the sector, market capitalization data, and key investment recommendations.

• Consumer Discretionary
• Sector Outlook
• Industry Analysis
• Market Overview
• Investment Recommendations

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1. CONSUMER DISCRETIONARY (S5COND) SECTOR OUTLOOK BASHEER ALMATTAR, AUSTIN BLACKERBY, CONG BUI

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

3. 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% 25.0% Consumer Durables & Apparel 20.0% 15.0% 12.6% Consumer Services 10.0% 5.0% Media 0.0% Retailing

4. S&P500 VS SIM PORTFOLIO SIM Weight +/- 25.0% +/- 20.0% 15.0% 13.0% 0.5% 10.0% 5.0% 0.0%

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

6. SECTOR OVERVIEW 84 Companies in the Sector Largest 10 companies by Market Cap ( Data as of Feb 25, 2018) Market Cap Name Price Amazon.com Inc 1500 726.16B The Home Depot Inc 188 219.95B Comcast Corp 40 183.46B The Walt Disney Co 107 161.27B McDonald's Corp 163 129.55B Netflix Inc 286 124.08B NIKE Inc 68 96.49B Charter Communications Inc 365 93.00B The Priceline Group Inc 1907 80.89B Lowe's Cos Inc 97 78.91B

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

8. 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

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

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

11. PORTERS 5-FORCES ANALYSIS Force Description Rank Threat of new entrants: Brand recognition is very important for consumer discretionary 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) low - moderate Bargaining power of customers By definition, consumer discretionary goods are not essential for consumers well-being. Wide range of available alternatives, low switching cost The rising of ecommerce only strengthens customers power high 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

12. PORTERS 5-FORCES ANALYSIS Force Description Rank Rivalry among existing competitors In each segment of the industry, there are multiple major, established firms as well as smaller, niche players competing fiercely with each other Strong foreign competitors from Europe and Asia Pacific. Rapidly-growing competitors from China. Hard to differentiate high 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 low

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

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

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

16. 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.

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

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

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

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

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

22. 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.

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

24. FINANCIAL ANALYSIS S5COND- Sales S5COND- 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 strongly.

25. FINANCIAL ANALYSIS S5COND- Sales S5COND- Earnings Top companies: Amazon vs. McDonald

26. FINANCIAL ANALYSIS S5COND- Sales S5COND- 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%

27. FINANCIAL ANALYSIS S5COND- Sales S5COND- 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

28. FINANCIAL ANALYSIS S5COND- Sales S5COND- Earnings This sector generates positive net cash flows (CFO + CFI + CFF), positive free cash flow

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

30. VALUATION ANALYSIS S&P 500 VS. S5COND S&P 500 & S5COND (Last 5 years of data) S5COND P/E P/S P/B P/CF P/EBITDA High Low Median Current 25.52 1.79 5.78 14.76 11.74 18.24 1.18 3.71 11.4 8.38 20.59 1.43 4.73 12.94 9.91 24.21 1.67 5.49 14.1071 11.16 SPX P/E P/S P/B P/CF P/EBITDA High Low Median Current 23.26 2.23 3.52 15.43 12.31 15.17 1.36 2.27 8.79 7.99 18.68 1.78 2.78 10.76 10.2 21.9 2.09 3.32 14.55 11.61

31. VALUATION ANALYSIS LEVEL 2 INDICES GICS Level 2 Indices within S5COND (Indsustry Group) S5RETL (Retail) S5MEDA (Media) S5CODU (Consumer Durables & Apparel) S&P 500 P/E S5AUCO (Automobiles & components industry) S5HOTR (Consumer Services) Current Median (+/-) Median 7.27 10.53 3.26 39.17 28.08 -11.09 18.18 18.62 0.44 24.06 23.22 -0.84 21.06 19.68 -1.38 21.9 18.68 P/S S5AUCO 0.43 0.5 0.07 S5RETL 1.86 1.38 -0.48 S5MEDA 1.98 2.05 0.07 S5HOTR 3.07 2.78 -0.29 S5CODU 1.53 1.64 0.11 P/S 2.09 1.78 Current Median (+/-) Median P/B S5AUCO 1.74 2.23 0.49 S5RETL 12.43 7.97 -4.46 S5MEDA 2.81 3.33 0.52 S5HOTR 11 7.69 -3.31 S5CODU 3.47 3.73 0.26 P/B 3.32 2.78 Current Median (+/-) Median P/CF Current Median (+/-) Median S5AUCO 3.66 5.76 2.1 S5RETL 21.52 16.44 -5.08 S5MEDA 10.24 11.2 0.96 S5HOTR 16.18 15.49 -0.69 S5CODU 17.93 19.6 1.67 P/CF 14.55 10.76 Overvalued Undervalued

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

33. RECOMMENDATION Low Oil Price Low Unemployment Rate Tax Reforms Continuous Economic Growth Increase in Fed Rates OVERWIGHT Relative to the S&P500

34. THANK YOU Have? Do you Questions What

35. THE 84 COMPANIES IN THE CONSUMER DISCRIMINATORY SECTOR S5COND Index companies Name Omnicom Group Inc Tractor Supply Co Walt Disney Co/The PulteGroup Inc DISH Network Corp Amazon.com Inc Home Depot Inc/The Ralph Lauren Corp McDonald'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 AutoZone Inc Garmin Ltd VF Corp Name Whirlpool Corp Tapestry Inc Best Buy Co Inc H&R Block Inc PVH Corp Carnival Corp Hilton Worldwide Holdings Inc Discovery Communications Inc Comcast Corp CarMax Inc Chipotle Mexican Grill Inc Nordstrom Inc Goodyear Tire & Rubber Co/The Wynn Resorts Ltd Time Warner Inc Target Corp Expedia Inc Norwegian Cruise Line Holdings Ltd Discovery Communications Inc Viacom Inc DR Horton Inc Name MGM Resorts International Wyndham Worldwide Corp Twenty-First Century Fox Inc General Motors Co Ulta Beauty Inc Dollar General Corp TripAdvisor Inc Under Armour Inc Hasbro Inc Macy's Inc Ford Motor Co Mohawk Industries Inc News Corp Gap Inc/The Genuine Parts Co Harley-Davidson Inc Marriott International Inc/MD Ross Stores Inc Starbucks Corp Foot Locker 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 BorgWarner 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

36. COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR

37. COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR

38. COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR

39. COMPANIES IN THE CONSUMER DISCRETIONARILY SECTOR