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While gross margins have continued to miss expectations, improving price (and more recently the decline in oil) have fuelled hope of stabilizing/expanding margins in 2019

Despite generally improved organic growth, gross margins have continued to surprise to the downside given mounting input costs, unfavorable FX, and commodity pressure

However, more recently, constructive commentary on pricing coupled with deflating oil prices have allowed optimism on gross margins to build

		Average Beverages Reported Gross Margin vs. Expectations
	54.0%									80 bps
		53 bps
	53.0%									40 bps
	52.0%									0 bps
									-22 bps
	51.0%									-40 bps
							-68 bps
	50.0%			-62 bps	-88 bps					-80 bps
	49.0%									-120 bps
		4Q17		1Q18	2Q18		3Q18		4Q18E
				Consensus		Actual		YoY chg (RHS)

		Average HPC Reported Gross Margin vs. Expectations
	53.0%									-80 bps
	52.0%									-100 bps
				-115 bps					-109 bps
					-122 bps
	51.0%									-120 bps
		-141 bps					-140 bps
	50.0%									-140 bps
	49.0%									-160 bps
		4Q17		1Q18	2Q18		3Q18		4Q18E
				Consensus		Actual		YoY chg (RHS)

Source: FactSet, Company filings, Deutsche Bank analysis. Beverages includes CCEP, KO, MNST, PEP, STZ, and TAP. HPC includes AVP, CHD, CL, CLX, COTY, EL, ENR, EPC, IFF, KMB, NUS, NWL, PG, and VVV

Deutsche Bank	Steve Powers | ([phone] | [e-mail]
Research	Faiza Alwy | ([phone] | [e-mail]	5

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However, performance has varied by subsector

HPC/Bevs the biggest beneficiaries of recent pro-CPG sentiment

HPC has been the most volatile subsector this year…

HPC vs. S&P500 - P/E (NTM)

1.50x

1.40x

1.30x

1.20x

1.10x

1.00x

0.90x

Dec 03	Dec 05		Dec 07	Dec 09	Dec 11	Dec 13	Dec 15	Dec 17
		SP545 relative to S&P500				15-yr Avg
		+1 STDEV				-1 STDEV

Food valuations at multi-year lows…

Food vs. S&P500 - P/E (NTM)

1.40x

1.30x

1.20x

1.10x

1.00x

0.90x

0.80x

Dec 03	Dec 05		Dec 07	Dec 09	Dec 11	Dec 13	Dec 15	Dec 17
		SP521 relative to S&P500				15-yr Avg
		+1 STDEV				-1 STDEV

Source: FactSet, Deutsche Bank analysis

Beverages viewed as more of a safe haven all year…

Beverages vs. S&P500 - P/E (NTM)

1.60x

1.50x

1.40x

1.30x

1.20x

1.10x

1.00x

0.90x

Dec 03	Dec 05		Dec 07	Dec 09	Dec 11	Dec 13	Dec 15	Dec 17
		SP505 relative to S&P500				15-yr Avg
		+1 STDEV				-1 STDEV

Tobacco sentiment weak amidst JUUL and FDA actions

Tobacco vs. S&P500 - P/E (NTM)

1.50x

1.30x

1.10x

0.90x

0.70x

0.50x

Dec 03	Dec 05		Dec 07	Dec 09	Dec 11	Dec 13	Dec 15	Dec 17
		SP537 relative to S&P500				15-yr Avg
		+1 STDEV				-1 STDEV

Deutsche Bank	Steve Powers | ([phone] | [e-mail]
Research	Faiza Alwy | ([phone] | [e-mail]	6

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Within HPC, Beverages & Tobacco, EPS estimates have broadly declined since February; however, stock performance has been more diverse

Only CHD, CCEP, EL, and MO have seen EPS estimates rise since February

EPS estimate changes vs. share price performance since February

2018	40.0%								CHD
	30.0%
February				Overvalued vs.			CLX
									CCEP
	20.0%			the beginning
							PG
				of the year				KDP
	10.0%					PEP KO
since
	0.0%				KMB	COT		IFF		EL
perfrmance				NWL		NUS
					MNST
	(10.0%)			CL
							STZ
	(20.0%)		EPC	VVV	TAP	ENR				MO
					BF.b
				PM
proce
	(30.0%)
stock	(40.0%)			Undervalued vs.
		SPB		the beginning
Absolute	(50.0%)			of the year
		COTY
	(60.0%)
	(20.0%)	(15.0%)	(10.0%)	(5.0%)			0.0%			5.0%
			CY18 EPS consensus estimate changes since February 2018

Note: EBITDA estimates used for COT and SPB (DB ests).

Source: FactSet, Company filings, Deutsche Bank analysis

Deutsche Bank	Steve Powers | ([phone] | [e-mail]
Research	Faiza Alwy | ([phone] | [e-mail]	7

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In general, simple, defensive stories have worked, especially in 2H18; complicated stories have not

Valuation only a secondary factor

Current relative valuation vs. 5-year average

40.0%	Size of circle represents current P/E vs. market								Simple/Clean stories have
				Growth names middling;					worked; despite higher relative
									valuation multiples. IFF and KDP
30.0%				CL a significant underperformer with					exceptions
				worse-than-expected fundamentals
20.0%				NUS					KO	KDP	CHD
							EL
										CLX
10.0%					COT					PG	CCEP
						BF.B
									PEP	IFF
						VVV CL
0.0%									PM
					STZ		MNST		KMB
-10.0%		SPB		ENR						PEP and KMB underperformed
		Complicated stories have lagged; some with								"Simple/Clean" peers as CEO
		high leverage or hedge fund long ownership								transitions create complexity;
-20.0%		(STZ, ENR); weak fundamentals or turnarounds;				TAP				fear of re-basing
		lower relative valuations but viewed as			EPC
-30.0%		"value traps"				MO
				NWL
		COTY
-40.0%
-50.0%
(50%)		(40%)	(30%)	(20%)	(10%)		0%		10%	20%	30%

2H Stock Price Performance

Note: KDP performance since 7/10/18 and 5-year average valuation based on DPS history. Valuation metric used is NTM P/E in all cases except COT where NTM EV/EBITDA was used.

Source: FactSet, Deutsche Bank analysis

Deutsche Bank	Steve Powers | ([phone] | [e-mail]
Research	Faiza Alwy | ([phone] | [e-mail]	8