Basic Materials
Presented By:
Jon Koval
Kyle Kretch
Ho Hong Lau
Spring 2013
Executive Summary
Overview
Sector Basics
• The materials sector involves companies that are
involved with the discovery, development, and
processing of raw materials.
• Usually these companies are not widely known.
They are intermediate companies that process and
supply materials to other more well-known
companies
• Some examples include metals (gold, silver,
aluminum), gases (helium, hydrogen, methane), and
building materials for construction projects.
Overview
Sector Size
Telecommunication
Services
Utilities
3.02%
3.44%
Consumer
Discretionary
11.52% Consumer Staples
10.88%
Information
Technology
18.20%
Utilities Cash
Telecommunication
3.27% 3.19%
Services
0.82%
Information
Technology
18.14%
Energy
11.08%
Industrials
10.22%
Health Care
12.32%
Financials
15.85%
Materials
3.46%
S&P 500
1/31/13
• SIM Underweight 83 bps
Dividend
Receivables
0.19%
Consumer
Discretionary
12.28%
Consumer Staples
12.59%
Energy
9.83%
Industrials
9.99%
Health Care
12.07%
Financials
14.99%
Materials
2.63%
SIM
1/31/13
Overview
Sector Industries & Performance
Industries
No. of Companies in S&P 500
Market Cap
YTD
Aluminum
1
9.1B
-1.80%
Chemicals – Agricultural/Fertilizer
3
44.3B
+7.50%
Chemicals - Commodities
1
36.4B
+10.90%
Chemicals - Diversified
5
33.8B
+2.70%
Chemicals - Specialty
4
17.2B
+10.30%
Construction Materials
1
6.7B
-0.70%
Containers Metal/Glass
2
6.1B
+12.70%
Diverse Metals/Mining
1
31.4B
-3.20%
Gold
1
20.8B
-9.80%
Industrial Gases
3
25.4B
+3.20%
Paper Packaging
2
4.4B
+29.10%
Paper Products
2
17.2B
+16.20%
Steel
4
10.2B
-9.20%
Basic Materials Sector
S&P 500
30
+4.17
500
+9.53%
Overview
Largest Companies in the S&P 500
Sector
Rank
Company
Industry
Market
Cap
Sector
Weight
1
Monsanto Company
Chemicals
Agricultural/Fertilizer
56.6B
20.6%
2
Du Pont
Precious Metals & Minerals
45.9B
16.7%
3
The Dow Chemical
Company
Mining & Metals
38.3B
13.9%
4
LyondellBasell Industries
Chemicals - Agricultural
36.4B
13.2%
5
Freeport-McMoRan
Copper & Gold Inc.
Chemicals - Diversified
31.4B
11.4%
6
Mosaic
Chemicals
Agricultural/Fertilizer
25.4B
9.2%
24
Albemarle Corporation
Chemicals - Specialty
5.6B
2.0%
Business Analysis
Business Analysis
Economic Cycle (10 year S&P 500)
• US currently seems to be mid-cycle phase
• Europe is in the recession phase
Business Analysis
Best Time to Buy?
• Materials are an extremely cyclical sector.
Businesses in this sector do extremely well in
economic upturn and equally as bad in an economic
downturn.
• Historically the Basic Materials Sector has
outperformed the S&P 500 in the early-cycle and
late-cycle phases.
• Materials is also a very diversified sector that
depends on multiple economies with the U.S.,
Europe, and China having the largest effect on
sector performance.
Business Analysis
Supply & Demand
Supply:
• Supply can be an issue in this industry as well. There are a
limited number of raw resources, and depending on the
industry the company is in, these resources can be rare and
expensive (i.e. gold/silver)
Demand:
• Heavy economic influence, both in the US and globally. Most
companies in this field have a global presence or are affected
by the global economy as well.
• The materials sector provides a ton of inputs for other sectors.
This means as other sectors have booms and recessions, it
also affects the materials sector.
Business Analysis
Porter’s Five Forces
•
Barriers to Entry
High
•
•
Power of Suppliers
Low
•
Utilize natural resources that are largely known
and locked-up
High CapEx
Many companies vertically integrate back to
source (i.e. own mines and resources)
Limited diversity of equipment (mining
machines, tanks, etc.)
Power of Buyers
Depends •
High for commodity product companies
with little to no diversification
Low for industries like specialty
chemicals which create niche, highly
diversified products
Rivalry
Depends • Low for niche product companies
•
High for commodity product companies
•
Provide majority of inputs for other sectors as
implied by sector name  ‘basic materials’
•
Substitutes
Low
Economic Analysis
Economic Analysis
Bent Crude Oil Price
Economic Analysis
Crude Oil Price
Economic Analysis
S&P 500 Price Index
Economic Analysis
Dollar-Euro Exchange Rate
Financial Analysis
Financial Analysis
Revenue
Financial Analysis
EPS Growth
Financial Analysis
Net Profit Margin
Financial Analysis
EBITDA Margin
Financial Analysis
Margins Summary
Financial Analysis
ROE
Valuation Analysis
Valuation Analysis
Absolute Basis
18
16.7 16.8
16
Median
Current
15.1 14.9
14
12
10.3
10
9.1
8
6
4
2.8 2.7
2
1.2
1.2
0
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Valuation Analysis
Relative to S&P 500
1.4
1.2
Median
Current
1.2
1.1
1.1
1.1
1.0
1.0
1.0
1.0
0.9 0.9
0.9
0.8
0.6
0.4
0.2
0.0
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Recommendation
Recommendation
• Add 50 bps (make underweight 23 bps)
• Positives
▫ U.S. economy continuing to improve
▫ Extremely global  diversified
• Negatives
▫ Continued uncertainty in Europe
 We believe that most of the downside risk is already reflected
in the market
▫ Highly cyclical, market timing dependent
Thank You!
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