SUMMER 2015
STOCK PRESENTATION
MATERIALS SECTOR
JULY 29, 2015
ALIX PITTS & JD PISULA
AGENDA
SECTOR OVERVIEW
RECOMMENDATIONS
Q&A
SECTOR OVERVIEW
The Industry Classification Benchmark (ICB) is an industry classification taxonomy launched
by Dow Jones and FTSE in 2005 and now owned solely by FTSE International. It is used to
segregate markets into sectors within the macroeconomy. The ICB uses a system of 10
industries, partitioned into 19 supersectors, which are further divided into 41 sectors,
which then contain 114 subsectors.
The Basic Materials Sector consists of the following company types:
SECTOR OVERVIEW
LARGEST COMPANIES IN MATERIALS SECTOR
SECTOR OVERVIEW
S&P WEIGHTS
Materials Utilities
3%
3.13%
Energy
8%
Materials Utilities
2.25%
3%
Information
Technology
20%
Consumer
Staples
9%
Energy
7%
Telecommunication Services
3%
Information
Technology
21%
Consumer Staples
8%
Financials
17%
Industrials
10%
Consumer
Discretionary
13%
SIM WEIGHTS
Telecommunication Services
2%
Health Care
15%
Financials
18%
Industrials
9%
Consumer
Discretionary
13%
Health Care
16%
TCK – 10,600 shares @ ~$7.30 = $77,380 mkt value
ECL – 1,000 shares @ ~113.75 = $113,750 mkt value
SECTOR OVERVIEW
THREE-YEAR PERFORMANCE
SECTOR OVERVIEW
INDUSTRY PERFORMANCE
ECONOMIC ANALYSIS
TRENDS TO WATCH
-
Commodity prices
-
Currency headwinds
-
Low growth in Europe
-
Slowdown in China
-
Momentum in US Automotive
-
US Housing and Commercial
Construction
-
Shale gas investments
-
Speculation risk
RECOMMENDATION
- Continue to UNDERWEIGHT
- Global growth prospects create uncertainty for this sector
- Remember sector sub-segments are not all alike
- Avoid Mining and Metals
- Avoid value traps
- Search for diversified companies that are mildly less cyclical and speculative
RECOMMENDATION
- Ecolab Inc. (ECL) is a HOLD
- Current price as of 7/28/15 is $113.77
- Bloomberg analyst price target = $124
- DCF model target price of $121 provides over 10% upside
- Unlike most Materials, only 30% of ECL’s business is exposed to oil & gas
- 50% of revenues are earned in the USA and 25% in Western Europe
- Diversified product offerings (Hospitality, Healthcare, Industry, Energy)
- For a very cyclical sector, ECL is relatively defensive
RECOMMENDATION
RECOMMENDATION
- Teck Resources (TCK) is a SELL
- Current price of $7.32 as of July 28
- Bloomberg analyst target price of $11
- DCF target price of $8.12
- Mining sector continues to get CRUSHED
- Slowdown in Chinese growth
- Lower demand for coal and copper has resulted in over supply
- Shares are lowest since 2009
RECOMMENDATION
RECOMMENDATION
OTHER OPTIONS
- LyondellBasell Industries (LYB)
- Current Price = $92.46
Target Price = $105
Upside = 14%
Target Price = $29
Upside = 57%
Target Price = $24
Upside = 10%
Target Price = $49
Upside = 7%
- Huntsman Corporation (HUN)
- Current Price = $18.86
- Owens-Illinois (OI)
- Current Price = $20.96
- Mosaic (MOS)
- Current Price = $42.76
RECOMMENDATION
- LYB is a BUY
- Current price of $92.46 as of July 28
- Bloomberg analyst target price of $113
- DCF target price of $109 and weighted target of $106 – almost 15% upside
- Over 50% sales in North America, 20% in Western Europe
- Obtaining favorable margins due to lower feedstock prices
- Capacity advantages in Europe
- Accelerating demand in developed markets and outages among competitors
- Leader in ROA and ROE
RECOMMENDATION
So, why not Huntsman?
-
Not an S&P 500 component -- $5B market cap
puts it in Mid Cap
-
Approx. 25% sales in China and emerging
economies
-
Asia is primary growth driver in
Polyurethanes
-
Uncertainty on looming IPO/spinoff of
Titanium Dioxide business (~20% sales)
-
Shares at lowest in two years
-
Debt/EBITDA is 5x – relatively high for the
industry
-
Long-term debt rating of BB
RECOMMENDATION
RECOMMENDATION
RECOMMENDATION
RECOMMENDATION
-
Dividend increase by 11%, current dividend yield at 3.3%
-
10% share buy back this year with plans to continue for foreseeable future
-
Q2 EPS is at an all-time high -- $2.81
-
Best ROE of large chemical companies – 48%
-
Effectively managed since 2009 bankruptcy
-
Ahead of competition in bringing on line capital expenditures
-
Primarily utilizes Natural Gas feedstocks which remain oversupplied
-
Sales are mostly long-term agreements
-
Bottom line: LYB is positioned to capitalize on US and Europe with capacity and
cost advantages
RECOMMENDATION
Summary
- Sell 10,600 shares of Teck Resources (TCK)
- Reinvest proceeds in up to 1,250 shares of LyondellBasell (LYB)
- Hold 1,000 shares of EcoLab (ECL)
- Maintain sector weighting near 2.25% which is approx. 75bps underweight