Basic Materials
Company Presentation
Presented By:
Jon Koval
Kyle Kretch
Ho Hong Lau
Spring 2013
Table of Contents
•
•
•
•
•
•
•
Executive Summary
Sector Review
Recommendation
Company Analysis - Praxair
Company Analysis - Albemarle
Company Analysis - Mosaic
Summary
Executive Summary
• Sector presentation resulted in class vote to HOLD the SIM portfolio
at 83 bps underweight
• Due to recent price movement, new recommendation is to add 50
bps to holdings in the Basic Materials sector
• Recommendations:
Company
Current % of Assets
Recommendation
Praxair (PX)
0.00%
Do NOT Buy
Albemarle (ALB)
0.98%
Add 50 bps
Mosaic (MOS)
1.56%
HOLD
Sector Review
• SIM Underweight 89 bps
• Class decision was to hold sector at current weight
• Sector as a whole likely to underperform S&P 500 in near future
• However, there is potential opportunity in Specialty Chemicals
Industry
Recommendation
• Add 50 bps based on recent price movements
Current SIM Holdings
Company
(As of 3/28/2013)
Unrealized
Return
Gain/(Loss)
% of
Assets
Recommendation
Final % of
Assets
Albemarle
(ALB)
$3,120
2.85%
0.98%
Add 50 bps
1.48%
Mosaic (MOS)
$13,179
7.95%
1.56%
HOLD
1.56%
Other Companies Analyzed
Company
Praxair (PX)
(As of 3/28/2013)
Unrealized
Return
Gain/(Loss)
--
--
% of
Assets
0.00%
Recommendation
Final % of
Assets
Do Not Buy
• Final sector weight = 3.04% (39 bps underweight)
0.00%
Praxair
Praxair (NYSE: PX)
Company Overview
• Largest industrial gas
company in America and one
of the largest in the world.
• Provides helium, cryogenics,
oxygen, and other gases
• Also creates various coatings
and technologies for the use
and transportations of the
gases.
Praxair
Investment Outlook
Opportunities
Risks
• Strong finances and
longstanding company that is
a leader in the industry
• European economy is very
uncertain, strong global
exposure, especially in Europe
• Always will be a strong need
for industrial gases across
every sector
• Possibly overvalued as hopes
are high with the US economy
• US economy is improving,
European economy is low risk
as it could be near the bottom
• Diversified across world
economies
Praxair
Sensitivity & Multiples Valuation
• Highest probable value is 103.48 (still overpriced)
• Target price from 95.368 to 107.46
Praxair
Recommendation
• Current price $107.69, implied/target price $101
• Not currently held in SIM portfolio, overvalued
as a company and do not recommend adding it
to portfolio
• ~ 6% downside
• Given a SELL rating
Albemarle
Albemarle (NYSE: ALB)
Company Overview
• Sector: Basic Materials
• Industry: Specialty
Chemicals
• 3 Operating Segments
▫ Polymer Solutions
▫ Catalysts
▫ Fine Chemistry
Market Data
* As of
Last Price
52-Week High
52-Week Low
4/8/13
$
$
$
3-Mo. Avg. Daily Volume
Market Cap (Mil)
Shares Outstanding (Mil)
Annual Dividend Yield
Beta
Institutional Ownership
Insider Ownership
Source: Bloomberg
62.19
67.75
50.88
687,790
$
5,518.70
88.7
1.35%
1.44
87.10%
0.76%
Albemarle
Business Segments
2012 Segment Breakdown
• Polymer Solutions:
▫ 3 Product Markets: Flame Retardants, Antioxidants,
and Curatives
▫ End Products: consumer electronics enclosures,
circuit boards, wire and cable, electrical connectors,
textiles, foam insulation, lubricants, and fuels
% of Revenue
28.6%
Polymer Solutions
Catalysts
Fine Chemistry
38.9%
• Catalysts:
▫ Supplies robust chemicals for oil refining and clean
fuel technologies
▫ Creating solutions for every stage in the refinery
process
32.5%
% of Net Income
25.2%
30.6%
Polymer Solutions
Catalysts
Fine Chemistry
• Fine Chemistry:
▫ Manufactures high performance chemical inputs used
in large-scale chemical synthesis, oil and gas well
drilling and completion fluids, mercury control, paper
manufacturing, water purification, beef and poultry
processing, and various other industrial applications
▫ Niche Business: capitalizes on economies of scale in
manufacturing, distribution, and marketing to provide
cost-effective solutions to consumers
 Unique, customized products for customers
44.2%
Incremental
Margins
57.01%
40.97%
Polymer Solutions
Catalysts
60.35%
Source: Annual Report 2012
Fine Chemistry
Albemarle
Investment Outlook
Opportunities
Risks
• Global manufacturing,
distribution, and marketing
network
• Highly cyclical industry
• Fine Chemistry segment
displays considerable growth
potential and will an
increasing driver of value
• Financially strong compared
to competitors
• Industry leader in investing
and exploring renewable and
environmentally sustainable
business practices
• Continued political and
economic uncertainty in the
United States, Europe, and
global markets
Albemarle
1 Year Price History
1 Year Price History for ALB
68
66
64
62
60
58
56
54
52
4/
9/
1
5/ 2
9/
12
6/
9/
1
7/ 2
9/
12
8/
9/
12
9/
9/
10 12
/9
/1
11 2
/9
/
12 12
/9
/1
2
1/
9/
13
2/
9/
1
3/ 3
9/
13
50
Source: Yahoo! Finance
Albemarle
DCF
ALB
(in thousands)
Analyst: Ho Hong Lau
Date: 4/7/13
Year
Revenue
% Growth
Terminal Discount Rate =
Terminal FCF Growth =
2013E
$
Operating Income
Operating Margin
2014E
2015E
2016E
2,870,371
$ 3,048,821
6.22%
$ 3,098,802
1.64%
$ 3,216,556
3.80%
595,234
20.74%
677,286
22.21%
771,768
24.91%
804,139
25.00%
11.50%
4.25%
2017E
$
3,345,218
4.00%
2018E
$
3,479,027
4.00%
2019E
$
3,618,188
4.00%
2020E
$
3,762,916
4.00%
$
2021E
2022E
3,913,432
4.00%
$ 4,079,753
4.25%
TERMINAL
2023E
$
4,253,143
4.25%
836,305
25.00%
765,386
22.00%
796,001
22.00%
903,100
24.00%
939,224
24.00%
979,141
24.00%
935,691
22.00%
(10,326) $
(0.31%)
(10,739) $
(0.31%)
(11,168) $
(0.31%)
(11,615) $
(0.31%)
(12,080) $
(0.31%)
(12,593) $
(0.31%)
(13,128)
(0.31%)
Interest and Other
Interest % of Sales
$
Taxes
Tax Rate
$
139,187
23.63%
$
158,054
23.63%
$
180,131
23.63%
$
187,696
23.63%
$
195,204
23.63%
$
178,346
23.63%
$
185,480
23.63%
$
210,685
23.63%
$
219,112
23.63%
$
228,424
23.63%
$
218,029
23.63%
Unconsolidated Interests
% Growth
$
38,700
1.66%
$
39,571
2.25%
$
40,823
3.16%
$
42,375
3.80%
$
44,154
4.20%
$
46,009
4.20%
$
47,941
4.20%
$
49,955
4.20%
$
52,053
4.20%
$
54,239
4.20%
$
56,517
4.20%
Noncontrolling Interests
% of Operating Income
$
(34,735) $
(5.84%)
(42,954) $
(6.34%)
(45,103) $
(5.84%)
(42,397) $
(6.00%)
(41,125) $
(3.00%)
(40,302) $
(2.00%)
(40,302) $
0.00%
(40,302) $
0.00%
(40,302) $
0.00%
(40,302) $
0.00%
(40,302)
0.00%
Net Income
% Growth
$
453,730
$
507,349
11.82%
$
577,792
13.88%
$
606,493
4.97%
633,805
4.50%
$
582,008 $
(8.17%)
606,992
4.29%
690,452
13.75%
719,783
4.25%
752,060
4.48%
$
720,748
(4.16%)
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
$
114,815
4.00%
56,291
1.96%
114,815
4.00%
$
91,465 $
3.00%
(55,589) $
(1.82%)
121,953 $
4.00%
92,964
3.00%
20,242
0.65%
154,940
5.00%
$
160,828 $
5.00%
(20,779) $
(0.65%)
160,828 $
5.00%
167,261 $
5.00%
(22,747) $
(0.68%)
167,261 $
5.00%
173,951 $
5.00%
(23,657) $
(0.68%)
173,951 $
5.00%
180,909 $
5.00%
(24,604) $
(0.68%)
180,909 $
5.00%
188,146 $
5.00%
(25,588) $
(0.68%)
188,146 $
5.00%
195,672 $
5.00%
(26,611) $
(0.68%)
195,672 $
5.00%
203,988 $
5.00%
(29,476) $
(0.72%)
203,988 $
5.00%
212,657
5.00%
(30,729)
(0.72%)
212,657
5.00%
Free Cash Flow
% Growth
$
498,777
$
438,466 $
(12.09%)
544,395
24.16%
$
589,864
8.35%
615,601
4.36%
563,076 $
(8.53%)
587,303
4.30%
669,976
14.08%
698,487
4.26%
728,472
4.29%
696,158
(4.44%)
NPV of Cash Flows
NPV of Terminal Value
Projected Equity Value
Free Cash Flow Yield
$3,400,306.29
$
3,370,520
$
6,770,826
9.02%
50.22%
49.78%
100.00%
12.2
14.9
8.1
9.8
10.9
13.3
7.5
9.1
$
$
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
(6,282) $
(0.22%)
89,500
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
61.77
75.65
22.47%
Debt
Cash
Cash/share
Total Assets
Debt/Assets
Working Capital % of Growth
$
$
$
$
686,588
477,696
5
3,437,291
19.97%
17.00%
$
$
(8,500) $
(0.28%)
(9,565) $
(0.31%)
$
$
(9,929) $
(0.31%)
$
$
$
$
$
$
$
$
$
$
Terminal Value $
9.6
11.7
6.6
8.1
10,010,265
Free Cash Yield
6.95%
Terminal P/E
13.9
Terminal EV/EBITDA
8.9
Albemarle
Multiples Valuation
Absolute Basis Valuation
Date
2/17/13
High
P/Forward E
P/S
P/B
P/EBITDA
P/CF
Low
20.1
2.7
4.4
16.7
18.0
7.5
0.7
1.5
4.5
5.4
Median
Current
Target Multiple Target E, S, B, etc./Share
Target PriceWeight
14.8
13.0
14.8
5.7 $ 84.66
20.0%
1.5
2.1
1.5
32.7 $ 49.08
20.0%
2.7
3.2
2.7
35.4 $ 95.58
20.0%
8.2
9.0
8.2
7.5 $ 61.96
20.0%
9.7
11.2
9.7
5.7 $ 55.48
20.0%
Implied Price Per Share $ 69.35
Source: Thomson Reuters Baseline
Relative Valuation to Industry
Date
Relative Valuation to S&P 500
2/7/13
High
P/Trailing E
1.20
P/Forward E
1.00
P/B
1.00
P/S
1.50
P/CF
1.30
Source: Thomson Reuters Baseline
Date
Low
0.44
0.38
0.30
0.60
0.50
Median
Current
0.83
0.59
0.81
0.63
0.60
0.70
0.90
1.30
0.80
0.70
2/7/13
High
Low
P/Trailing E
1.30
P/Forward E
1.20
P/B
1.80
P/S
2.10
P/CF
2.00
Source: Thomson Reuters Baseline
0.65
0.68
0.60
0.60
0.70
Median
Current
1.10
0.94
0.97
0.91
1.20
1.40
1.20
1.60
1.00
1.10
Albemarle
Peer Comparison
Peer Comparison - Selected Financial Highlights
Date
4/8/13
* ending 2012
Albemarle
BASF Corporation Chemtura Corporation Lonza
Nabaltec
W.R. Grace & Corporation
ROA
9.38
7.78
3.43
2.57
1.54
1.96
ROE
18.19
20.03
9.63
7.64
5.00
40.23
ROC
14.05
14.67
8.17
n/a
9.16
n/a
Profit Margin
11.35
6.20
3.84
4.64
1.58
2.98
Quick Ratio
2.06
0.69
1.50
0.31
0.62
2.83
Current Ratio
3.38
1.66
3.15
1.48
1.21
3.78
Asset Turnover
0.83
1.25
0.89
0.55
0.77
0.66
Accounts Receivable Turnover
7.48
7.49
6.53
n/a
26.77
6.55
Accounts Payable Turnover
10.25
11.79
12.78
n/a
n/a
7.61
Inventory Turnover
4.27
5.81
4.46
n/a
n/a
6.55
Cash Conversion Cycle
98.97
5.81
109.48
n/a
n/a
63.68
P/E
14.31
13.40
15.19
14.02
21.86
16.08
M/B
3.01
2.66
1.96
1.09
1.07
16.47
D/E
36.19
51.76
82.02
116.95
137.92
355.42
Sales Growth - 1 Year
(4.31)
7.12
0.88
45.80
4.91
(1.76)
Operating Income Growth - 1 Year
0.01
6.95
25.14
28.35
(18.29)
6.87
Net Income Growth - 1 Year
(20.55)
(21.15)
(15.13)
18.18
120.00
(65.07)
Source: Bloomberg
Albemarle
Recommendation
• BUY: Target Price of $74.00
• Add 50 BPS
P/Forward E
P/S
P/B
P/EBITDA
P/CF
Discounted Cash Flow
Trianagulated Price Target
Weight Target Price
5.0% $
84.66
5.0% $
49.08
5.0% $
95.58
5.0% $
61.96
5.0% $
55.48
75.0% $
75.65
$
74.08
2013 -2014 EPS and Revenue Estimates
EPS
Analyst Opinion Consensus
2013E
$
5.07 $
5.02
2014E
$
5.72 $
5.74
Source: Yahoo! Finance
Revenue
Analyst Opinion
$2.8 B
$3.1 B
Consensus
$2.8 B
$3.0 B
The Mosaic Company
The Mosaic Company (NYSE: MOS)
Company Overview
• World’s leading producer and marketer of
combined concentrated phosphate and
potash crop nutrients.
• Formerly a subsidiary of Cargill
• Industry: Chemicals –
Agricultural/Fertilizer
• Current Stock Price = $57.21
• Target Stock Price = $67.00
• 17.2% Upside
Market Data
* As of
Last Price
52-Week High
52-Week Low
4/15/2013
$ 57.21
$ 63.46
$ 44.43
3-Mo. Avg. Daily Volume
2,995,910
Market Cap (billion)
Shares Outstanding (Mil)
Annual Dividen Yield
$
Beta
Source: Yahoo! Finance
24.36
425.75
1.70%
1.57
The Mosaic Company
Business Segments
2012 Sales & Earnings
Sales Tons by Segment
Net Sales
30%
36%
64%
Phosphates
Operating Earnings
Potash
45%
70%
Phosphates
Potash
55%
Phosphates
Potash
Source: The Mosaic Company 2012 Annual Report (10K)
• Phosphates have been main revenue driver for Mosaic
• Potash segment is more attractive due to fewer competitors which
allows higher margins
▫ Mosaic is investing more than $1B to increase Potash production
The Mosaic Company
Investment Outlook
Opportunities
Risks
• Crop futures
• Highly Cyclical
• World population growth
• Intense Global Competition
creates price pressure
• Household Incomes
▫ Emerging middle classes in
Brazil & China
▫ Increasing demand for
protein rich food
• Seasonal business
• Costs dependent on natural gas
& ammonia prices
• Potential for brine water
damage in mines
• Change in government
regulation
The Mosaic Company
1 Year Price History
The Mosaic Company
DCF
Analyst: Jon Koval
Date: 4/15/2013
Year
Terminal Discount Rate =
Terminal FCF Growth =
2012E
Revenue
10,382
% Grow th
11,680
12.5%
Operating Income
2,258
Operating Margin
21.8%
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
3,096
24.0%
13,517
4.8%
3,244
24.0%
14,139
4.6%
3,393
24.0%
14,761
4.4%
3,543
24.0%
2019E
15,410
4.4%
3,698
24.0%
2020E
16,073
4.3%
3,858
24.0%
2021E
16,764
4.3%
4,023
24.0%
2022E
17,477
4.25%
4,194
24.0%
(59)
(62)
(65)
(68)
(71)
(74)
(77)
(80)
(84)
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
568
724
741
758
795
831
868
906
945
986
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
2,172
2,224
2,275
2,384
2,494
2,604
2,718
2,835
2,957
3,083
2.3%
4.8%
4.6%
4.4%
4.4%
498
526
565
645
676
778
886
925
4.8%
4.5%
4.6%
5.0%
5.0%
5.5%
6.0%
6.0%
7.0%
7.0%
(44)
(350)
(52)
(54)
(54)
(54)
(54)
(57)
(58)
(60)
(62)
-0.4%
-3.0%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
-0.4%
584
% Grow th
9,183
16,441
25,624
2.39%
14.3
15.0
8.1
8.6
427
57.21
60.01
4.9%
14.5%
1,781
14.5%
699
994
19.6%
42.2%
36%
64%
100%
1,806
14.0%
1,096
10.3%
1,757
13.0%
1,282
17.0%
1,697
12.0%
1,549
20.8%
1,624
11.0%
1,835
18.4%
1,541
10.0%
2,065
12.5%
1,125
1,447
9.0%
2,467
19.5%
4.3%
25.0%
2.4%
1,694
4.3%
1,028
27.4%
Free Cash Flow
$
$
24.0%
5.0%
2018E
-0.5%
15.5%
Shares Outstanding
2,951
12,898
2017E
(58)
1,609
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
5.2%
2016E
-0.5%
Capex % of sales
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
24.7%
12,284
2015E
(57)
1,705
Add Depreciation/Amort
2,885
2014E
-0.6%
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2013E
11.00%
4.25%
1,173
1,341
8.0%
2,736
10.9%
Terminal Value
Free Cash Yield
11.2
11.8
6.6
6.9
11.0
11.5
6.4
6.7
4.3%
1,398
8.0%
1,398
8.0%
3,023
10.5%
46,682
6.47%
Terminal P/E
15.1
Terminal EV/EBITDA
8.0
The Mosaic Company
Multiples Analysis
Current
Target
Multiple
Target E,
S, B,
etc./Share
Target
Price
14.6
13.4
14.6
4.25
62.05
0.7
2.3
2.6
2.3
24.76
56.95
12.9
1.6
2.4
2.1
2.4
29.61
71.06
P/EBITDA
48.74
4.09
10.06
10.40
10.06
6.82
68.61
P/CF
74.6
5.8
14.0
11.7
14.0
5.29
74.06
Absolute
Valuation
High
Low
Median
P/Forward E
25.6
3.4
P/S
8.0
P/B
Source: Thompson Reuters Baseline
The Mosaic Company
Target Price Considering Cash on Hand
• Very conservative balance
sheet
▫ $3B+ in cash
▫ $1B in debt
• Announced plans to make
more efficient balance sheet
March 28th
• Current Price = $57.21
• Target Price = $67.00
• 17.2% upside
• Recommendation: HOLD
Target
Price
Weight
Final
Target
Price
P/Forward E
62.05
0.05
3.10
P/S
56.95
0.05
2.85
P/B
71.06
0.05
3.55
P/EBITDA
68.61
0.05
3.43
P/CF
74.06
0.05
3.70
DCF
67.06
0.75
50.30
Absolute
Valuation
Target Price: $66.93
The Mosaic Company
Sensitivity Analysis
Terminal Growth Rate
Target Share Price:
0
2.75%
3.25%
3.75%
4.25%
4.75%
5.25%
5.75%
9.5%
73.71
77.34
81.60
86.66
92.80
100.38
109.98
Terminal Discount Rate
10.0%
10.5%
11.0%
11.5%
68.40
63.79
59.77
56.22
71.40
66.30
61.89
58.02
74.88
69.18
64.29
60.06
78.97
72.52
67.06
62.37
83.83
76.45
70.27
65.03
89.72
81.12
74.04
68.11
96.99
86.77
78.52
71.72
12.0%
53.08
54.62
56.35
58.30
60.52
63.08
66.04
12.5%
50.27
51.60
53.08
54.74
56.62
58.76
61.21
12.0%
-7.2%
-4.5%
-1.5%
1.9%
5.8%
10.3%
15.4%
12.5%
-12.1%
-9.8%
-7.2%
-4.3%
-1.0%
2.7%
7.0%
Terminal Growth Rate
Updside/Downside to Current Share Price:
0.0%
2.75%
3.25%
3.75%
4.25%
4.75%
5.25%
5.75%
9.5%
28.8%
35.2%
42.6%
51.5%
62.2%
75.5%
92.2%
Terminal Discount Rate
10.0%
10.5%
11.0%
11.5%
19.6%
11.5%
4.5%
-1.7%
24.8%
15.9%
8.2%
1.4%
30.9%
20.9%
12.4%
5.0%
38.0%
26.8%
17.2%
9.0%
46.5%
33.6%
22.8%
13.7%
56.8%
41.8%
29.4%
19.1%
69.5%
51.7%
37.2%
25.4%
Summary
Summary
• Add 50 bps based on recent price movements
Company
Current
Price
Price
Target
Upside /
Downside
% of
Assets
Recommendation
Final
% of
Assets
Praxair
(PX)
$107.69
$101.00
-6.2%
0.00%
Do NOT Buy
0.00%
Albemarle
(ALB)
$59.24
$74.00
+24.9%
0.98%
Add 50 bps
1.48%
Mosaic
(MOS)
$57.21
$67.00
+17.2%
1.56%
HOLD
1.56%
What questions do you have?