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Dragon Fund: Consumer Staples 2016 Q3 UpdateSubsector to watch: Tobacco
Anthony GrelliElizabeth Cahill Ryan Lee
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Consumers Staples Breakdown
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Key Drivers for the Sector➕ Consumer Confidence
■ 104.1 in September the second consecutive month highest since recession.
➖ Commodity Prices
■ Oil rising from historic lows in Q1
■ Food price deflation is a major headwind
➖ Interest Rates
■ 81% chance interest rates will be raised in December
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Consumer Sentiment
+ Highest since recession
+ Indicates a strong economy
+ Good for retail sales
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Commodity Prices
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Probability of Interest Rate Hike
➖ Dividends
➖ M&A Activity
➖ FX Exposure
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Q3 Performance
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Matrix: Our Views
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Valuation**Sector is overpriced**
− Market turmoil early in year made staples attractive
− Fear of China having a hard landing
− Oil Price Drop− Bond Market Instability
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Subsector to Watch: Tobacco
➕ Key Positives:+ Globally tobacco sales grew 5.2% in 2015.+ Low gas prices, rising wages increase buyer power+ Underpriced relative to the sector+ Stocks are down 6.9% we believe it is a good value investment. + New products such as non-combustible cigarettes, vapor devices and are entering the market. + Producers can counter the fall in volume by raising prices, maintaining revenue growth.+ The market mature, and highly consolidated therefore lowering the threat of new entrants.
➖ Key Risks Rising interest rates will reduce tobacco's use as a yield alternative, as investors look towards corporate bonds.
Government regulations, and litigation which are generally seen as a cost of doing business, remain a lingering threat.
- FX exposure. Tobacco producers sell a great deal of products overseas. A strong dollar could increase the popularity of generic, locally produced cigarettes.
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Margins
+Low fixed costs
+Little advertising
+No threats
+Addictive product
+High pricing power
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Dividend Yields
➕ 80% of the cost of a pack of cigarettes goes directly to shareholders
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Tobacco Valuation & Growth
+ Tobacco valuation growing at a slower rate compared with consumer staples
+ EPS growth is consistent, and higher than the consumer staples sector
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Global Smoking Rates
+ US Growth is up 5.2% yoy
+ World total is slightly down, but emerging market growth remains optimistic.
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Questions?