Materials
Sector Analysis
Yi-Ruei Chen
Summer 2014
Agenda
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Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Sector Overview
•  Basic Materials Sector:
–  Chemicals, Construction Materials,
Containers and Packaging, Metal and Mining,
Forest and Paper Products
–  30 companies in the S&P 500 sector
–  Raw Beta (to S&P 500): 0.96
–  Highly cyclical
–  Sensitive to supply / demand & commodity
pricing levels
Sector Overview
•  S&P 500 and SIM Weights in % (May 2014)
Materials, 3.52
Telecom, 2.49
Utilities, 3.08
Telecom, 2.84
Consumer
Discrtionary,
12.07
Utilities, 3.41
Materials, 3.01
Consumer
Discrtionary, 11.3
Consumer
Staples, 9.51
Consumer
Staples, 9.67
Information
Technology, 22.31
Information
Technology, 18.41
Energy, 10.29
Iindustrials,
10.73
Health Care,
13.31
Financials, 16.43
Iindustrials, 7.44
Energy, 9.12
Financials,
14.75
Health Care,
14.93
•  Sector Size (Market Cap): $62,204.45 millions
•  SIM: Materials is underweight by 51bps
Sector Overview
Index % of SP 500 or Value Sector Materials 312.03 3.49 Aluminum 97.43 2.88 Commodity Chemicals 169.68 2.14 Construc<on Materials 128.77 1.38 Diversified Chemicals 315.58 23.84 Diversified Metals & Mining 445.98 6.17 Fer<lizers & Agricultural Chemicals 1441.64 15.5 Gold 59.3 2.07 Industrial Gases 875.46 12.07 Metal & Glass Containers 186.92 2.39 Paper Packaging 207.25 3.82 Paper Products 223.74 3.5 Specialty Chemicals 282.49 15.75 Steel 122.02 3.99 Sector Overview
•  Performance
Sector Overview
•  Performance: Total Return
Sector Overview
•  Current SIM Stocks: Eastman Chemical, Mosaic &
Teck
•  Eastman Chemical:
–  NYSE Ticker: EMN
–  2013 Revenue: $9,35B
–  2013 Net Income: $1.15B
•  Mosaic Corporation
–  NYSE Ticker: MOS
–  2013 Revenue: $7.84B
–  2013 Net Income: $401.3M
•  Teck Resources:
–  NYSE Ticker: TCK
–  2013 Revenue: $8.54B
–  2013 Net Income: $664.83M
Business Analysis
Porters 5 Forces
Strength
Top Reasons
Barriers to Entry
High
Mines / forests / land rights are
prohibitively expensive and / or already
owned by someone
Supplier Power
Low/High
Any input products needed are
commodities with low switching costs/
High switching costs for industrial
machine/equipments
Buyer Power
High
Commodity products with low switching
costs
Threat of
Substitutes
Medium
Some material/products have no known
substitutes or are tough to substitute
Intensity of Rivalry
High
Commodity products with low product
differentiation and low switching costs
(also depending on the industries)
Business Analysis
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Materials sector is in the mature phase
Slower revenue and earnings growth
Growth at overall economy rate
Higher dividend yields
Margin pressure
Business Analysis - Macro
•  US and China are still in recovery mode
•  Many other developed countries are in contraction or early
recovery
Business Analysis
External Factors
•  Risks
– Government Regulation: Environmental, Labor
– Commodity Price
– Europe and U.S.- Slow growth
•  Opportunities
–  new technology
–  Emerging markets
Economic Analysis
(Regression Analysis)
Materials & S&P 500
Materials & Steel
Materials & Dollar Strength Materials & Crude Oil
Materials & Commodities
Economic Analysis
Materials & Gold
Materials & GDP
Economic Analysis
Materials & PPI
Materials & Trade Weighted Dollar
Materials & CPI
Economic Analysis
•  Highly correlated with
•  S&P 500 Price Index,Real GDP, Oil Price,
steel, commodity price, gasoline, etc.
•  Negatively correlated with
•  PPI, CPI, and Trade Weighted Dollar index
Financial Analysis
Financial Analysis
•  T12M EBITA Margin & OPM
Financial Analysis
•  Moving Average
•  Total Return
Financial Analysis
P/E
Financial Analysis
Financial Analysis
Financial Analysis
ROE
P/CF
Financial Analysis
EPS
Valuation Analysis - Sector
Absolute Basis
High
Low
Median
Current
P/E
34.22
8.56
16.31
18.79
P/B
3.21
1.52
2.7
3.06
P/S
1.50
0.58
1.21
1.46
P/EBITDA
11.52
5.08
8.83
8.48
P/CF
29.04
12.85
21.54
11.77
Low
Median
Current
1.372643
0.703369
1.06671
1.091173
1.202247
0.830601
1.232877
1.172414
0.887574
0.637363
0.909774
0.869048
1.063712
0.647134
0.960827
0.978085
1.56973
1.291457
1.615904
1.265591
Relative to SP500 High
P/E
P/B
P/S
P/EBITDA
P/CF
Slightly higher than 10-year averages
Valuation Analysis - Sector
Slightly higher than 10-year averages
Behavioral Analysis
•  5-Yr Reversal/1-Yr
Momentum Theories
suggest:
5-Yr
–  Utilitiesand Con Stap
should be overweight
–  Healthcare and Industrial
should be underweight
1-Yr
Behavioral Analysis
•  Furthermore, small-cap Materials names
are preferred over large-cap
Source: S& P Dow
Recommendation
•  Remain Materials Sector Weight % the same
•  Positives:
–  Commodity prices will improve if following the business
cycle?
–  US / China picking up growth
•  Risks:
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Global economy (European/Asian Market)
Fed tapers asset purchases: continues/stops
Commodity prices remain depressed
Increasing costs: scarce of resources
•  Agricultural chemicals, gold, containers, paper
products, diversified metals & mining - undervalued
•  Specialty chemicals, aluminum, steel - overvalued
•  Industrial gases, diverse chemicals - inline
Thank You
•  Questions?