Materials
Stock Analysis:
ALB & MOS
Paul Lewis
Steve Meredith
Summer 2013
Sector Overview
• SIM Currently Underweight 159bps
• Recommendation was +20bps vs. S&P
– An increase of 179bps
• Mosaic Corporation
– NYSE Ticker: MOS
– 2012 Revenue: $11.1B
– 2012 Net Income: $1,930.2M
• Sold Albemarle at the end of June
MOS Overview
• A leading producer, marketer, and distributor of
crop nutrients and animal feed ingredients
Stock Profile
Current Price (7-13-13)
$56.10
Diluted Shares Outstanding:
425.8M
Market Capitalization:
$23.9B
Dividend:
$1.00
Dividend Yield:
1.78%
52 Week Price Range:
$48.29 – $64.65
Trailing P/E (ttm):
12.5
Forward P/E (consensus):
12.6
P/B:
1.9
P/S:
2.4
P/CF:
10
Beta (S&P 500):
1.55
MOS Overview
• Operates in two segments:
– Potash: (Potassium)
• Muriate of Potash (“MOP”)
• 12% of global & 39% of
North American production
• 40% OM, 30% of revenues
– Phosphates:
• Diammonium Phosphate (“DAP), Monoammonium
Phosphate (“MAP”) and MicroEssentials
• 13% of global & 58% of North American production
• 14% OM, 70% of revenues
MOS Overview
• Value Drivers:
– Favorable long term
trends
• Increasing population
• Increasing meat demand
• Decreasing farmland
– Emerging market growth
• China, India, Brazil
• Lack production capability
– Favorable input pricing
• Natural gas, ammonia,
sulfur
• Risks
– Foreign exchange rates
• 2/3 of sales are
international
– Volatile commodity pricing
• Cost inputs
• Product sell prices
• Customer sell prices
– Health of global economy
• 2/3 of sales are
international
MOS – Financial Analysis
MOS
Segments
(Mill$)
FY
2015E
FY
2014E
7,130
3,822
(30)
10,922
6,856
3,729
(30)
10,555
Operating Income / (Loss)
Total operating income
3,047
2,817
Sales Growth
Total revenue
3.48%
8.17% -12.16% 11.77% 47.03% -34.36%
Segments
Phosphates
Potash
Other
Total revenue
Operating Margin
Total operating income
27.90%
FY
2013E
FY
2012
FY
2011
FY
2010
6,319
7,839
3,485
3,301
(46)
(33)
9,758 11,108
6,895
3,061
(18)
9,938
4,731
7,410
2,174
2,817
(146)
71
6,759 10,298
7,477
2,251
84
9,813
2,236
2,664
1,271
2,807
2,611
FY
2009
2,401
FY
2008
4.95%
26.69% 22.92% 23.51% 26.81% 18.80% 23.31% 28.60%
MOS – Multiples Analysis
Mosaic
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
2.90
1.10
1.60
1.60
3.70
Low
0.26
0.24
0.40
0.20
0.40
Median
0.90
0.73
0.60
0.80
0.90
Current
0.89
0.81
0.70
0.90
0.90
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
7.60
1.70
4.90
6.50
6.60
Low
0.38
0.31
0.50
0.50
0.80
Median
1.60
0.99
1.10
1.80
1.40
Current
0.92
0.86
0.90
1.80
1.00
Trading under 10-year averages
MOS - DCF
Steve Meredith
7/15/2013
Year
2013E
Revenue
9,758
% Grow th
Operating Margin
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
2,236
22.9%
28
0.3%
3.5%
3,047
27.9%
6
0.1%
11,577
6.0%
3,357
29.0%
12,504
8.0%
3,689
29.5%
29.5%
8.0%
4,695
29.0%
17,324
7.0%
4,851
28.0%
18,364
6.0%
4,958
27.0%
19,007
5,037
26.5%
15
16
17
18
19
0.1%
0.1%
0.1%
0.1%
0.1%
2,493
10.2%
2,739
9.9%
1,076
26.0%
3,064
11.9%
1,154
26.0%
3,284
7.2%
1,225
26.0%
3,487
6.2%
1,266
26.0%
3,602
3.3%
1,294
26.0%
3,683
2.2%
1,314
26.0%
3,741
1.6%
537
581
601
632
687
738
787
832
871
903
928
5.5%
5.5%
5.5%
5.5%
5.5%
5.4%
5.2%
5.1%
5.0%
4.9%
4.9%
247
(147)
(89)
(116)
(125)
(138)
(150)
(162)
(173)
(184)
(190)
2.5%
-1.4%
-0.8%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
1,512
844
8.0%
1,680
76.7%
12,770
17,259
30,029
3.96%
14.3
17.9
7.8
10.0
428.0
$ 56.10
$ 70.16
25.1%
1,073
3,323
7.76
1,092
10.0%
1,683
0.2%
1,505
13.0%
1,504
-10.6%
1,500
12.0%
1,800
19.7%
1,513
11.0%
2,151
19.5%
1,499
10.0%
2,421
12.6%
1,457
9.0%
2,699
11.5%
43%
57%
100%
1,386
8.0%
2,914
8.0%
1,285
7.0%
3,117
7.0%
Terminal Value
Free Cash Yield
11.5
14.4
6.4
8.2
10.6
13.3
6.0
7.6
928
4.9%
3,551
13.9%
49,007
7.25%
Terminal P/E
13.1
Terminal EV/EBITDA
7.8
Sensitivity Analysis to Discount Rate and Terminal Growth Rate
$ 70.16
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
9.5%
$70.88
$73.73
$76.97
$80.66
$84.92
$89.90
$95.77
$102.82
$111.44
10.0%
$66.30
$68.74
$71.49
$74.61
$78.17
$82.28
$87.08
$92.74
$99.54
10.5%
$62.22
$64.33
$66.69
$69.34
$72.34
$75.78
$79.74
$84.37
$89.83
11.0%
$58.57
$60.40
$62.43
$64.71
$67.26
$70.16
$73.47
$77.30
$81.76
11.5%
$55.28
$56.88
$58.64
$60.60
$62.80
$65.27
$68.06
$71.26
$74.95
12.0%
$52.30
$53.71
$55.25
$56.95
$58.85
$60.96
$63.34
$66.04
$69.12
•
•
Terminal Value Discount Rate: 11%
Terminal FCF Growth: 3.5%
•
•
•
Current Price (7-13-13): $56.10
Implied Value: $70.16
Percentage Upside: 25.1%
3.5%
14
962
8.2%
4,423
16,191
2023E
0.1%
26.0%
2,263
30.0%
9.0%
2022E
13
876
24.5%
4,126
14,992
2021E
0.1%
26.0%
2,091
10.0%
2020E
12
791
1,679
13,754
2019E
0.1%
26.0%
951
Debt
Cash
Cash/share
10,922
2017E
730
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
3
0.0%
2018E
2016E
26.0%
Free Cash Flow
Shares Outstanding
26.7%
2015E
585
15.5%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
2,817
11.0%
3.5%
26.0%
Capex % of sales
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
10,555
8.2%
% Grow th
Add Depreciation/Amort
2014E
Terminal Discount Rate =
Terminal FCF Growth =
12.5%
$49.60
$50.84
$52.19
$53.68
$55.32
$57.15
$59.19
$61.49
$64.09
MOS – Price Target
Absolute Valuation
High
Low
Median
Current
Forward P/E
P/S
P/B
P/EBITDA
P/CF
DCF
25.6
8.8
12.9
48.74
74.6
3.4
0.7
1.6
4.09
5.8
14.5
2.3
2.4
9.75
13.3
12.6
2.4
1.9
9.73
10
Target
Target EPS
Multiple
14.5
$3.92
2.5
2.4
9.75
13.3
Target
Weighting
Price
$56.84
8%
$57.95
8%
$69.40
8%
$56.22
0%
$74.61
8%
$70.16
68%
Weighted Average: $68.41
% Upside: 21.95%
• Final price target: $68.41 with 21.95% Upside
• SIM recommendation is a Buy, +79 bps
Update: Mosaic released earnings on Tuesday 7/16
• Net sales were down 4.5% to $2.69 billion, which met expectations
• EPS of $1.14 versus projected earnings of $1.13
• Strong sales volumes but lackluster pricing
ALB - Overview
•
A leading developer of specialty chemicals,
which meet customer needs across a range
of end markets, including:
–
–
–
–
–
petroleum refining
consumer
electronics
plastics/packaging
construction
automotive
–
–
–
–
–
lubricants
pharmaceuticals
crop protection
food-safety
custom chemistry
services
•
Products and services create
value for its customers by:
–
–
improving product
performance
providing essential
product attributes
–
–
lowering costs
simplifying customers’
processes.
ALB - Segments
Operates in three segments:
 Polymer Solutions
 Catalysts
• Flame-retardants
• Refinery Catalyst Solns
o
Oil & Gas Refining
• Perf Catalyst Solns
o
Plastics
o
o
o
o
Automotive
Construction
Consumer Electronics
Wire & Cable
• Stabilizers
o
o
o
Lubricants
Plastics
Paints
 Fine Chemistry
• FCS
o
Pharma & Ag
• Perf Chem
o
o
o
o
Drilling
Water treatment
Emissions
Custom Chem
ALB – Drivers & Risks
• Value Drivers
– Wide moat of customers
– Products are necessary
components/ cost-saving
additives
– Well positioned for
economic recovery
– High demand growth for
fracking fluids and air
purifiers
– Located in low-cost/ low-tax
areas
– Own sources of Bromine
brine
• Risks
– Substitutions
– Changing customer
products
– Regulation against
chemicals
– Intellectual property rights
– Further deterioration/
sluggish recovery in world
economy (Europe)
– Currency exchange
– Positives already priced in
ALB – Financial Analysis
Albemarle Corporation (ALB)
Segmented Income Statement
(In Thous a nds , Except Percenta ges )
Year Ended December 31,
Net Sales:
Polymer Solutions
Catalysts
Fine Chemistry
Total Net Sales
2015E
2012
2013E
2014E
2011
2010
2008
2009
$1,003,034 $ 878,313 $ 820,853 $ 892,232 $1,001,922 $ 903,745 $ 697,206 $ 915,500
923,800
808,063
890,007
1,095,501 1,067,948 1,116,863
1,474,983
1,205,051
627,800
500,125
569,012
750,220
785,240
847,195
1,005,621
1,222,835
$3,700,851 $ 3,088,985 $ 2,763,550 $2,745,420 $2,869,005 $2,362,764 $2,005,394 $2,467,100
$ 2,940,000 $ 2,750,000
Consensus
$ 2,772,874
Guidance
Segment Operating Profit:
Polymer Solutions
Catalysts
Fine Chemistry
Subtotal
$ 219,664 $
390,870
303,263
913,798
Total Operating Profit
$ 728,755 $
204,383 $
332,594
247,383
176,483 $ 198,426 $ 243,396 $ 197,981 $ 63,780 $ 92,600
142,700
129,691
290,065
220,795
260,544
242,106
52,589
99,900
83,579
162,726
182,690
243,145
784,360
661,734
544,964 $
448,941 $ 406,164 $ 517,794 $ 401,943 $ 186,280 $ 220,600
641,660
696,187
502,355
246,060
335,200
Sales Growth
Polymer Solutions
Catalysts
Fine Chemistry
Total Sales Growth
14.20%
22.40%
21.60%
19.81%
7.00%
10.00%
18.70%
11.78%
-8.00%
2.58%
7.89%
0.66%
-10.95%
-4.38%
4.67%
-4.31%
10.86%
25.49%
31.85%
21.43%
29.62%
10.14%
13.77%
17.82%
-23.84%
-12.53%
-20.34%
-18.71%
1.22%
3.31%
16.80%
5.60%
Operating Margin:
Total Operating Margin
19.69%
17.64%
16.25%
14.79%
18.05%
17.01%
9.29%
8.94%
Earnings Per Share:
Diluted
Consensus
Guidance*
$
$
$
6.81 $
6.21 $
7.25 **
5.11 $
5.55 $
$
4.36
4.73
4.75
**2015 EPS Guidance Adjusted
*Management announced
plans to execute a buyback of
roughly 10% of shares in a 1213 month program.
ALB – Multiples Analysis
Specialty Chemicals Industry
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/EBITDA
P/CF
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/EBITDA
P/CF
High
Low
Median
26.2
23.1
6.3
2.0
11.7
17.7
14.6
14.8
3.1
0.9
5.3
8.2
20.5
23.0
18.7
21.6
4.3
5.1
1.6
1.5
8.8
7.89
12.3
17.4
Average Difference:
High
Low
Median
1.7
1.8
2.8
1.7
2.06
1.7
1.0
1.0
1.0
0.9
1.1
1.0
1.3
1.5
1.2
1.4
1.8
2.1
1.1
1.0
1.4
1.1
1.2
1.7
Average Difference:
•
ALB Stock
Current Difference
12.20%
15.51%
18.60%
-6.25%
-10.14%
41.46%
11.90%
Current Difference
At or near
10-year highs
15.38%
16.67%
16.67%
-9.09%
-20.00%
41.67%
10.22%
Relative to
Industry
P/EBITDA
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
19.00
1.20
1.00
1.00
1.50
1.30
0.61
0.44
0.38
0.30
0.60
0.50
0.98
0.83
0.81
0.60
0.90
0.80
**All information obtained from Thompson Reuters' Baseline**
Relative to S&P
500
P/EBITDA
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
2.00
1.30
1.20
1.80
2.10
2.00
0.70
0.65
0.68
0.60
0.60
0.70
1.00
1.10
0.97
1.20
1.10
1.00
**All information obtained from Thompson Reuters' Baseline**
• Trading at a premium
to 10-year averages
Current
1.20
0.64
0.60
0.60
1.40
0.70
Average:
Current
1.10
0.94
0.87
1.30
1.50
1.10
Average:
Difference
22.45%
-22.89%
-25.93%
0.00%
55.56%
-12.50%
2.78%
Difference
10.00%
-14.55%
-10.31%
8.33%
36.36%
10.00%
6.64%
ALB – Sum of Parts Analysis
Segments
Sales per
Segment
$ 1,067,948
Catalysts
Polymer Solutions
892,232
Fine Chemicals
785,240
TOTAL
$ 2,745,420
P/S
Ratio
2.16
Target P/S
Target Multiple x
Multiple
Sales/Segment
1.75
$
1,872,911
2.24
2,000,515
1.57
1,230,033
Target Market Cap: $
5,103,459
• Target multiples are given a
10% premium to competitors’
average
Date of Price: 7/11/2013 # of diluted shares: 80,896
Current Price: $ 65.06 Target Price:
$ 63.09
% return to target:
-3%
Catalysts
Polymer Solutions
Fine Chemicals
Catalysts
Polymer Solutions
Fine Chemicals
Catalysts
Polymer Solutions
Fine Chemicals
AkzoNobel
0.72
Eternal Chem
1.43
Ashland Inc
0.84
0.84
Fuchs Petrolub
2.06
Asian Paints
4.25
4.25
H.B. Fuller
Az Electronics
2.46
Hitachi Chem
1.00
Sakai Chem Sherwin-Williams Sin-Etsu Chem
0.40
2.00
0.40
2.90
Competitors P/S ratios
Calgon Corp Castrol India
Chemtura Corp
1.76
0.78
14.36
0.78
0.08
1.76
0.78
Johnson Matthey JSR Corp
Kemira
Kingfa S&T
Cabot Corp
0.76
0.70
Toray Ind
0.54
0.54
Umicore
1.30
1.30
Victrex
0.70
0.30
6.20
1.10
0.80
Wacker Chem W.R. Grace & Co.
2.10
0.72
0.72
Clariant Ltd.
0.59
0.59
Minerals Tech
Croda Int
3.33
3.33
3.33
Nippon
Cytec Ind
1.82
DSM NA
0.98
1.82
Nitto Denko Corp
0.98
PPG Inc
1.40
1.60
BASF Corp
0.90
0.90
0.90
1.50
1.60
Israel Chem Nabaltec GmbH Songwon Ind
1.85
1.85
0.45
DuPont
1.40
1.40
Rockwood Holdings
1.50
1.50
Lonza
0.40
0.98
ALB - DCF
Paul Lewis
7/11/2013
Terminal Discount Rate =
erminal FCF Growth =
2013E
Year
Revenue
2,763,550
% Grow th
0.66%
448,941
Operating Margin
Operating Margin
Interest (Expenses)
Interest % of Sales
Other Income (Expenses)
(38,091)
(44,692)
(52,962)
(44,862)
(55,313)
(58,782)
(61,133)
(64,968)
(67,567)
(69,932)
-1.23%
-1.21%
-1.2%
-1.2%
-1.2%
-1.2%
-1.2%
-1.2%
-1.2%
-1.2%
4.9%
357,981
Debt
Cash
Cash/share
0.50%
129,378
24.8%
413,713
109,699
2,703,886
2,761,733
5,465,619
6.80%
14.9
15.5
10.0
10.4
80,896
$
$
65.06
67.56
3.8%
695,820
434,904
5.38
3,701
0.10%
163,694
23.8%
550,516
33.1%
133,635
4,377
0.1%
193,524
23.8%
655,228
19.0%
170,705
3,708
0.1%
163,927
23.8%
555,019
-15.3%
140,890
4,571
0.1%
202,112
23.8%
684,303
23.3%
169,138
4,858
0.1%
214,790
23.8%
727,228
6.3%
174,889
5,369
5,052
0.1%
0.1%
237,394
223,382
23.8%
23.8%
803,759
756,317
4.0%
6.3%
176,832
193,294
5,584
0.1%
246,890
23.8%
835,909
4.0%
206,610
255,531
23.8%
3.6%
3.5%
3.6%
3.7%
3.9%
(67,828)
(143,512)
(175,082)
(148,306)
(182,851)
(194,321)
(202,094)
(214,771)
(223,362)
(231,179)
-2.2%
-3.9%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
-4.0%
325,846
396,675
21.7%
170,267
3.9%
480,583
21.2%
144,227
3.9%
403,376
-16.1%
177,823
3.9%
492,767
22.2%
188,977
3.9%
518,818
5.3%
208,865
196,536
3.9%
3.9%
534,519
573,417
3.0%
7.3%
49%
51%
100%
217,219
3.9%
601,938
5.0%
•
Percentage Upside:
3.8%
224,822
3.9%
633,987
5.3%
Terminal Value 8,202,202
Free Cash Yield
12.7
13.2
8.4
8.7
Implied Value: $67.56
224,822
3.7%
3.9%
•
3.5%
3.8%
143,963
Current Price (7-11-13):
$65.06
865,166
3.9%
4.2%
•
0.1%
3.6%
129,737
Terminal FCF Growth:
3.5%
5,779
3.6%
-9.0%
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
15,445
•
1,143,550
-1.20%
136,519
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
1,104,879
(33,025)
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
1,062,383
Terminal Value Discount
Rate: 11.5%
3.50%
19.8%
1.5%
Free Cash Flow
999,676
4.00%
•
5,779,483
19.8%
40,091
Capex % of sales
6.27%
4.00%
5,584,041
19.8%
3.7%
Subtract Cap Ex
961,227
5,369,271
2023E
19.8%
101,554
% of Sales
904,491
6.27%
5,052,350
2022E
19.8%
17.2%
Plus/(minus) Changes WC
733,607
23.29%
4,858,029
2021E
2020E
19.8%
352,856
% of Sales
866,059
-15.29%
4,571,285
2019E
19.8%
% Grow th
Add Depreciation/Amort
728,755
18.27%
3,707,638
2018E
19.8%
24.6%
Net Income
544,964
19.8%
4,377,052
2017E
19.7%
107,414
Tax Rate
11.8%
3,700,851
2016E
17.6%
0.75%
Taxes
3,088,985
2015E
16.2%
20,727
% of Sales
2014E
11.50% * Due to cyclicality of cash flow s, minimum Disc Rate should be 10%
3.50% * Max grow th Rate should be that of Market; 4%
9.6
9.9
6.4
6.6
Implied Price:
$ 67.56
3.00%
Terminal
3.25%
Growth
3.50%
Rate
3.75%
4.00%
7.73%
Terminal P/E
9.5
Terminal EV/EBITDA
6.2
11.00%
69.53
70.87
72.30
73.83
75.46
Discount Rate
11.25%
11.50%
67.30
65.20
68.54
66.35
69.85
67.56
71.26
68.86
72.76
70.24
11.75%
63.23
64.29
65.41
66.61
67.88
ALB – Price Target
Weighted-Average Valuation
Method
Implied Value Weight Cont to Total
Absolute Valuation
$63.86
25%
$15.97
Sum of Parts Valuation
$63.09
25%
$15.77
DCF Model
$67.56
50%
$33.78
Weighted-Average Price Target: 100%
$65.52
Current Price:
$65.06
Upside:
Dividend:
$0.96
Yield:
Total One-Year Projected Return: 2.18%
0.70%
1.48%
• Equal weight given to multiple
and fundamental analysis
• Final Price Target: $65.52
o 0.70% Upside
• Total Return: 2.18%
• Recommendation: SELL
• Update: ALB reported earnings after the bell 7/17/13
 EPS:
21.8% YOY
 Rev
7.4% YOY
Rep/Exp: $0.97 vs. $0.99
Rep/Exp: $634.2M vs. $653.5M
•
Sluggishness across Europe & China cited as reasons for
underperformance
•
Did maintain EBITDA margins of 22%
Rio Tinto (RIO)
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median
27.1 2.7
12.4
22.9 4.9
12.6
6.9 1.1
2.7
5.6 0.6
2.6
16.9 1.9
9.2
Current
10.7
7.8
1.7
1.2
5.9
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median
1.4 0.2
0.8
1.3 0.4
0.8
2.3 0.6
1.0
4.0 0.7
1.8
1.6 0.2
0.9
Current
0.67
0.53
0.7
0.8
0.6
Absolute Valuation
P/EBITDA
P/Forward E
P/B
P/S
P/CF
High Low Median Current
50.1 1.7
6.4
6.27
22.9 4.9
12.6
7.8
6.9 1.1
2.7
1.7
5.6 0.6
2.6
1.2
16.9 1.9
9.2
5.9
**All information obtained from Thompson Reuters' Baseline**
• Part of undervalued (based on forward P/E)
diversified metals & mining industry
• ADR’s traded on NYSE
• DCF – 12.5% discount, 2% terminal growth
• Target multiples at 10-year median
• DCF weighted at 25% and multiples at 75%
Target Multiple
6.40
12.60
2.70
2.60
9.20
Consensus Estimate
Implied Price
43.03
5.08
64.01
66.96
91.35
65.74
Average Implied Price:
66.22
Current Price:
42.16
Upside Potential:
57.06%
Valuation Implied Price
DCF Implied Price
Average Implied Price
Current Price:
Upside Potential:
66.22
82.93
70.40
42.16
66.97%
Summary
• Recommendations
– Albemarle: Sell (sold at end of June)
– Mosaic: Buy +79 bps
– Rio Tinto: Buy +100 bps
Thank You
• Questions?