This document discusses various healthcare and consumer staples stocks. It provides an overview of sectors like healthcare, pharmaceuticals, medical devices, restaurants, retail, and consumer staples. It also discusses economic moats, profitability, growth metrics, and 10-year performance of these sectors. Specific companies analyzed include Roche Holding, McKesson Corp, Coca-Cola, and Procter & Gamble. Financial data and charts from Morningstar are presented to analyze valuation, profitability, and growth of these companies.

1. STOCK SECTOR
PROJECT
By Miles Lester

2. Healthcare: The Basics
– Vital importance of health care (directly linked to
human survival) combined with free regulatory
environment creates strong potential
– Highly profitable with strong free cash flow and
returns on capital
– Drug companies, biotech's, medical device firms, and
health care service organizations
■ Drug companies and medical devices typically have the widest
economic moats
– Consistent demand
■ People continue to get sick and need doctors and hospitals
■ Defensive safe haven

3. Healthcare: Economic Moats
■ High start-up costs, patent protection, significant product differentiation,
and economics of scale
■ Create moats through patent protection, higher prices, and size
– Smaller firms often can’t compete with the established firms
– Gross margins surpassing 75-85 %
■ Great profitability
– 23 percent R.O.E. over last 5 years
– Tough for new players to enter market
■ Causes for concern
– Complex relationships, intense controversy, political pressures to regulate
who gets what

4. Healthcare: Pharmaceuticals
■ Wide Moats
– High margins, little debt, excess cash flow, top-notch profit margins, ROIC’s
in the 20’s, strong gross margins
■ Managing Patent Protection
– All drugs eventually lose patent
– The best healthcare companies manage these losses which will provide a
more steady cash flow
■ A full pipeline of drugs in clinical trials
– Larger the population, the better
■ Strong sales and marketing capabilities
– Salesforce that has penetrated the physician market already have
physicians’ ears and trust
■ Big market potential
– Larger % of population, more market power
– Drugs that treat chronic conditions, more potential for profit

5. Healthcare: Medical Device Companies
– Make hardware for medical procedures
■ Pacemakers and artificial hips
■ Two types of device firms
– 1. Cardiovascular
– 2. Orthopedic
– Many firms with wide economic moats
■ Attractive growth characteristics
■ Great deal of pricing power
■ High Barrier of Entry
– Economies of scale, high switching costs, long-term clinical histories
– Product Diversification
■ Reduce risk by offering various products
■ High-margin products with commodity or recurring products
– Product Innovation
■ Look at new product innovation relative to research and development to
see how well firm’s create new products

6. Healthcare: Conclusion- What to
Look For
■ Companies with long patent lives and full
pipelines
■ Products that target large patient populations or
significant unmet needs
■ Firms that have enough cash or cash flow to get
through development cycles
■ Watch for government regulations

7. Consumer Services: The Basics
■ Difficult to earn a moat because of all the
different services offered
■ Earn moats by doing something that keeps
shoppers at its stores rather than at
competitors
– Offer unique products or low prices
■ Successful companies enjoy economies of scale
that fend off competition
– Find what sets them apart
■ “Buy what you know”

8. Consumer Services: Companies
We See Everyday
– We shop at these stores everyday
– Being able to use the stores, interact with employees
and sample products is huge advantage for investing
– Companies that provide best overall service at a
competitive price survive and thrive
– Have outperformed the market over the past decade
■ Strong growth trends

9. Consumer Services:
Restaurants
■ Two types
– 1. Quick-service restaurants (fast food)
■ Pay and receive meals
– 2.Full-service restaurants
■ Seated at a table and place orders with a wait staff
■ Best restaurants have already developed a successful concept
■ Investors determine if a restaurants concept can be repeated in
other geographic areas
■ Older chains need to stay fresh, without reinventing themselves
■ Speculative growth stage- Aggressive growth stage- Slow growth
stage

10. Consumer Services: Retail
■ Shoppers want selection, quality, and reasonable prices
■ Best retail stores
– Everyday low prices, centralized checkouts at front of the stores,
freestanding locations with convenient parking
■ Cash Conversion Cycle
– How quickly a firm sells its goods, how fast it collects payments
from customers, and how long it holds on to the goods itself before
it pays suppliers
– Sell products fast, collect payments fast, pay suppliers slowly
■ Keep stores clean and fresh
■ Successful retailers have a positive employee culture

11. Consumer Services:
Conclusion
■ Primary way to build a moat is be the low-cost leader
■ Companies that establish store loyalty or store dependence
are very attractive buys
■ Compare inventory and payables to determine retailers
■ Check out the off-balance sheet obligations
■ Look for buying opportunities when a solid company has
poor earnings or sales for a month/quarter
■ When entire sector falls, check into the great companies as
potential investments

12. Stock Sector: Morningstar
Source: Morningstar

13. Morningstar: Cyclical Super
Sector
■ Basic Materials
– Manufacture chemicals, building materials, paper products and
commodities exploration and processing
– Examples: BHP Billiton, Rio Tinto, Nufarm
■ Consumer Cyclical
– Retail stores, auto and auto parts manufacturers, residential
construction, lodging facilities, restaurants, entertainment companies
– Examples: McDonald’s, Hyundai Motor Company, News Corporation
■ Financial Services
– Banks, savings and loans, asset management companies, credit
services, investment brokerage firms, and insurance companies
– Examples: Allianz, Commonwealth Bank, IOOF
■ Real Estate
– Mortgage companies, property management companies, REIT’s
– Examples: Westfield Retail Trust, Vornado Realty Trust, Simon
Property Group, Inc.

14. Morningstar: Defensive
Super Sector
■ Consumer Defensive
– Manufacture food, beverages, household and personal products,
packaging, tobacco
– Services such as education and training
– Examples: Woolworths, Procter & Gamble, Coca Cola
■ Health Care
– Biotechnology, pharmaceuticals, research services, home health
care, hospitals, long-term care facilities, and medical equipment
and supplies
– Examples: Johnson & Johnson, Pfizer Inc.
■ Utilities
– Electric, gas, and water utilities
– Examples: AGL, APA Group and Envestra

15. Morningstar: Sensitive Super
Sector
■ Communication Services
– Fixed-line networks, or wireless access and services
– Internet services, and Internet related software and services
– Examples: Telstra, Vodafone, iNET
■ Energy
– Produce or refine oil and gas, oil field services, equipment companies, pipeline
operators, mining of coal
– Examples: Origin Energy, Caltex, Woodside
■ Industrials
– Manufacture machinery, hand-held tools, industrial products, aerospace and defense
firms, and transportation and logistic services
– Examples: General Electric Company, Boeing
■ Technology
– Design, development, and support of computer operating systems and applications,
provide computer technology consulting services
– Manufacture computer equipment, data storage products, networking products,
semiconductors, and components
– Examples: Apple, Google, Microsoft

16. Stock Sector: Fidelity
Investments
■ Sector investing targets stocks of companies in specific
segments of the economy
■ Sectors vary as business cycles perform better or worse
which affect the various sectors
■ Investing in a theme
– Particular sector or industry can help you get exposure to
particular companies, industries, or trends that may be
poised for long-term growth

17. Fidelity: Breaking Down
‘Sector’
– Energy
■ Business that are dominated by oil, drilling, and other energy related service and
equipment
– Consumer Staples
■ Companies whose businesses are less sensitive to economic cycles
– Manufacturers and distributors of food, beverages and tobacco and producers of non-
durable household goods and personal products
– Food & drug retailing companies, hypermarkets, consumer super centers
– Consumer Discretionary
■ Industries sensitive to economic cycles
■ Consists of two segments
– 1. Manufacturing
■ Automotive, household durable goods, textiles & apparel, leisure equipment
– 2. Services
■ Hotels, restaurants, leisure facilities, media production and services, consumer retailing and services

18. Fidelity: Breaking Down
‘Sector’ Pt. 2
■ Financials
– Companies involved in banking, mortgage finance, consumer
finance, specialized finance, investment banking and brokerage
– Asset management and custody, corporate lending, insurance,
financial investment, REITs, real estate management & dev.
■ Health Care
– Two main industry groups
■ 1. Companies that manufacture health care equipment and supplies or
provide health care related services
■ 2. Companies involved in research, development, production and marketing
of pharmaceuticals and biotech products
■ Industrials
– Companies involved in capital goods, commercial services and
supplies, and transportation services and infrastructure

19. Fidelity: Breaking Down
‘Sector’ Pt. 3
■ Information Technology
– Three main areas
■ 1. Technology software & services
■ 2. Technology hardware & equipment
■ 3. Semiconductors & semiconductor equipment manufacturers
■ Materials
– Wide range of different commodity-related manufacturing industries
■ Real Estate
– Contains all REITs besides Mortgage REITs
– Also includes Real Estate management and development services
■ Telecommunication Services
– Companies that provide communications services
■ Utilities
– Companies considered electric, gas, or water utilities
– Companies that operate as independent producers and distributors of power

20. Fidelity: 10 Year Sector
Returns
Source: Fidelity

21. Healthcare Sector: What I
Learned
■ Category of stocks relating to medical and healthcare goods or services
■ Defensive sector because products and services are essential
■ Even during economic slides, people still need Healthcare to overcome
business
■ Less sensitive to fluctuations in the business cycle, better long- term
outlook
■ Ranks 3/11 for 10 year performance

22. Healthcare Sector 10 Year
Performance
Source: Fidelity

23. Healthcare Sector:
Fundamentals
Source: Fidelity

24. Healthcare Sector: Industries
5 Year Performance
Source: Fidelity

25. Consumer Staples/Defensive:
What I Learned
■ Companies which businesses are less sensitive to economic cycles
■ Manufacturers and distributors of food, beverages and tobacco
products as well as producers of non-durable household goods and
personal products
■ Also includes food & drug retailing companies as well as
hypermarkets and consumer super centers
■ Like healthcare, it is less sensitive to fluctuations because it is
classified as a defensive sector
■ Ranks 4/11 for 10 year performance

26. Consumer Staples: 10 Year
Performance
Source: Fidelity

27. Consumer Staples: Sector
Fundamentals
Source: Fidelity

28. Consumer Staples: Industries
5 Year Performance
Source: Fidelity

29. Roche Holding: Basic Info
Source: Morningstar
Date Established: 1896
Main Competition:
Johnson & Johnson
Pfizer Inc.
Headquarters: Switzerland

30. Roche Holding: Why I Chose
This Stock
■ Trading at a substantial M.O.S. ( 29 %) to it’s fair value estimate
($43.50)
■ Second largest healthcare company, so will be a solid long term
investment, especially when it is trading much lower than its fair
value is
■ Has created a wide economic moat through strong profitability,
strong growth rates, and its status as a leader in oncology
therapeutics (30 % market share)
– R.O.E. 42.7 % and is 54.2 % over last 5 years compared to industry
avg. of 17.2 %
– R.O.A. is 14.1 % over last 5 years compared to industry avg. of 6.4
%

31. RHHBY: Why I Chose This
Stock Pt. 2
■ FCF has steadily increased and has always been in the positive
■ Pays a dividend yield of around 3 % since 2010
– Has increased steadily since 2007
■ Strong management team which has continued to invest in
company, lowered debt, and increased dividend payouts
■ Operating margin % is 27.8 compared to an industry average of
20.6 %

32. RHHBY: Profitability Metrics
Source: Morningstar

33. RHHBY: Financial Metrics 10
Year
Source: Morningstar

34. McKesson Corp: Basic Info
Source: Morningstar
Date Established: 1833
Main Competition:
Cardinal Health Inc.
AmerisourceBergen Corp.
Headquarters: San Francisco, CA.

35. McKesson Corp: Why I Chose
This Stock
■ Trading at a large M.O.S. (31 %) compared to its fair value estimate
($200)
■ Wide economic moat by using significant market share into a
competitive advantage
■ Builds assets extremely efficiently
– Top asset turns, cash conversion and inventory management
metrics
■ Solid management team that has helped build McKesson into the
second-largest pharmaceutical distributor

36. McKesson Corp: Why I Chose
This Stock Pt. 2
■ Revenue growth over last 3 years has been 16.0 % which is higher
than the industry average of 13.0 %
■ Price to earnings is selling at 15.3 which is lower than it’s historical
average which means it’s a good time to purchase.
■ F.C.F. is in the positives and has continuously increased over the
last 10 years
■ Dividend payout has steadily increased over the last 10 years
■ Gross margin % and operating income have both steadily increased
over last 10 years

37. McKesson Corp: Financial
Metrics vs. 10 Year Period
Source: Morningstar

38. McKesson Corp: Growth
Metrics
Source: Morningstar

39. Coca-Cola Basic Info
Source: Morningstar
Date Established:1892
Main Competition:
PepsiCo Inc.
Monster Beverage Corp
Headquarters: Atlanta, GA

40. Coca- Cola: Why I Chose This
Stock
■ Selling at a M.O.S. (8 %) to its fair value estimate of ($46) but because of the long term
success of the company it is a strong buy at this price
■ Has created a wide economic moat through unparalleled brand strength and a global
distribution network and also its cost advantages created by strong relationships with
retailers and economies of scale
– Continues to create excess return on invested capital (R.O.I.C.)
– Healthy cash flow allows firm to continue to invest in its brand, pay dividends and
create strong growth
– Dominate the market share of the global nonalcoholic beverage market
– Massive scale allows it to benefit and take advantage of pricing power with retailers
and distributors
– Substantial cost advantages which allows it to produce beverages at a cheaper cost
than its peers
■ Excellent management that has continued to return capital to its shareholders over the
years

41. Coca- Cola: Why I Chose This
Stock Pt. 2
■ Operating margin of 20.6 % compared to an industry avg. of 17.8 %
■ Net margin of 15.6% compared to the industry avg. of 11.9 %
■ Strong financial position with Debt/Equity at 1.29
■ Has continued to pay a stead dividend yield which is now at 3.3 %
■ F.C.F./Rev % of 15.6 which is higher than the industry avg. of 12.7
% showing the strong increase and substantial amount of F.C.F.
Coca-Cola generates each year

42. Coca- Cola: Financials vs. 10
Year Period
Source: Morningstar

43. Coca- Cola: Financial
Position
Source: Morningstar

44. Proctor & Gamble (PG): Basic
Info
Source: Morningstar
Date Established:1837
Main Competition:
L’Oreal SA
Unilever NV
Headquarters: Cincinnati, OH

45. PG: Why I Chose This Stock
■ Trading at a discount of $87.33 compared to its fair value estimate
of 94.00, and because of its long-term outlook and advantages it is
a solid buy at this discount
■ Wide economic moat
– Intangible assets and cost edge
– Leading household and person-care manufacturer, while still brining
new products to market
– Size and scale of P& G allows it to have a lower unit cost than its
peers
■ Solid management that is looking out for the shareholders
– Continuous returns on invested capital (R.O.I.C.)
– Continue to extract cost from its operations while providing product
innovation globally
– Management has large stock-ownership in order to make sure they
look out for stockholders best interest

46. PG: Why I Chose This Stock
Pt. 2
■ R.O.A. of 12.1 % which is higher than the industry avg. of
10.1 %
■ Debt/Equity is 0.3
– Lower than industry avg.
– Great financial position, helps to have very little debt
■ Operating margin % of 20.8 and a net margin % of 22.8 both
of which are higher than industry averages
– Ability to produce a strong amount of revenue and profit
after all operations is a key characteristic in judging
companies to purchase

47. PG: Financials vs. 10 Year
Period
Source: Morningstar

48. PG: Financial Position
Source: Morningstar

49. Other Info: Morningstar
Research
Source: Morningstar

50. Other Info: Morningstar
Economic Moat
Source: Morningstar

51. Morningstar Rating System
Source: Morningstar

52. Morningstar Rating System
Source: Morningstar