MATERIALS
Presented By:
Debra Lei
Alex Douglas
Mengshi Li
Spring, 2012
Overview
Sector Overview


Market Capital size: $423106.74 millions
Performance: QTD : -3.77%, YTD: 6.43%;
Adjusted Market Cap ($ Million)
MTD
QTD
YTD
S&P 500
12,373,393.86
-2.06%
-2.80%
8.87%
Materials
423,106.74
-2.78%
-3.77%
6.43%
Energy
1,362,910.29
-3.82%
-4.77%
-1.55%
Industrials
1,302,866.38
-1.88%
-3.01%
7.35%
Cons Disc
1,394,080.13
-1.63%
-0.42%
15.06%
Cons Staples
1,366,823.37
-0.24%
-0.14%
4.61%
Health Care
1,417,822.38
-1.48%
-1.82%
6.45%
Financials
1,811,513.82
-2.31%
-4.74%
15.70%
Info Tech
2,488,506.37
-2.92%
-4.79%
15.34%
Telecom Svc
366,325.39
-0.42%
3.76%
4.42%
Utilities
439,439.00
-0.51%
1.26%
-1.46%
Industries within the Sector
Market Capital ($ Billions)
Mining & Metals-Speciality
No. of companies
140.2
58
57.3
54
42.7
300
34.3
12
30.9
124
26.8
34
16.1
30
11.3
26
9.7
10
7.1
16
BHP Billiton Ltd. (184.3 B), Freeport-McMorRan Co. (34.5B)
Steel
Vale (115.6B), POSCO (28.8B)
Precious Metals & Minerals
Rio Tinto PLC. (102.4B), Barrick Gold Corp. (37.9B)
Chemicals-Diversified
DuPont Company (49.6B), DeThe Dow Chemical Corp.(38.6B)
Chemicals-Commodity
BASF SE (71.9B), Praxair, Inc. (34.3B)
Chemicals-Agricultural
Monsanto Company (39.3B), Potash Corp.(36.5B)
Paper Products
Kimberly Clark Corp. (30.7B), International Paper Company (14B)
Construction Materials
CRH PLC (13.7B), Cemex SAB de CV (7.2B)
Aluminum
Aluminum Corp. (12.8B), Alcoa Inc. (10B)
Forest & Wood Products
Weyerhaeuser Company (10.7B), Plum Creek Timber Company (6.3B)
Portfolio Overview



S&P 500: 3.45%
SIM: 3.93% (Cliffs Natural Resource Inc.)
SIM overweight 48 bps
2.91%
Consumer Discretionary
3.50%
3.45%
Consumer Staples
11.22%
3.93%
3.47%
1.02%
20.29%
Consumer Staples
10.04%
Energy
10.85%
Consumer Discretionary
3.83% 0.08%
Energy
Financials
Financials
10.95%
Health Care
11.22%
Industrials
Industrials
21.91%
10.42%
Information Technology
10.51%
14.68%
11.39%
Materials
Telecommunication Services
Health Care
Information Technology
Materials
13.36%
7.37%
13.61%
Telecommunication Services
Utilities
Cash
Utilities
Dividend Receivables
S&P 500 (April 30th, 2012)
SIM (April 30th, 2012)
Business Analysis

Life-Cycle Analysis
 Maturity
Stage
 Companies
devote resources to improve products in order to
differentiate themselves from competitors
 This product differentiation is emphasized during promotion
 Price is a significant factor for competing products
Porter’s Five Forces

Threat of New Entrants(Low)


Bargaining Power of Customers (High)


Most companies obtain the materials by themselves, few suppliers,
companies buy large amounts
Threat of Substitute Products(Low)


Buyer switching costs is low, multiple suppliers exist
Bargaining Power of Suppliers (Low)


Capital requirements and switching costs are high, access to distribution
and raw materials is difficult
Most products are specialized, not many substitutes exist
Intensity of Rivalry (High)

Competitive advantage is hard to obtain, hard to differentiate among
competitors
Economic Analysis
S&P500 Price Index & Materials
(Index Level)
(SPBMS)
1800
1600
300
Correlation
.89
250
1400
1200
200
1000
150
800
600
100
S&P500 Price Index
400
50
Materials
200
0
2001
2002
2003
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
2013
CPI: Gas (Piped) and Electricity & Materials
2.5
300.0
(SPBMS)
(Index
Level)
Correlation
.67
2.0
250.0
200.0
1.5
150.0
1.0
100.0
CPI: Gas and Electricity
0.5
50.0
Materials
0.0
2001
2002
2003
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.0
2013
Crude Oil Price & Materials
160.0
300.0
($ per Barrel)
140.0
(SPBMS)
Correlation
.85
250.0
120.0
200.0
100.0
80.0
150.0
60.0
100.0
40.0
Crude Oil Price
20.0
50.0
Materials
0.0
0.0
2001 2002 2003 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Dollars per Euro & Materials
($/Euro) 1.8
1.6
300 (SPBMS)
Correlation
.75
250
1.4
1.2
200
1.0
150
0.8
0.6
100
0.4
Dollars per Euro
50
Materials
0.2
0.0
2001
2002
2003
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
2013
Financial analysis
0
1Q2002
2Q2002
3Q2002
4Q2002
1Q2003
2Q2003
3Q2003
4Q2003
1Q2004
2Q2004
3Q2004
4Q2004
1Q2005
2Q2005
3Q2005
4Q2005
1Q2006
2Q2006
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
4Q2007
1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012e
2Q2012e
3Q2012e
4Q2012e
1Q2013e
2Q2013e
3Q2013e
4Q2013e
Financial Analysis: Earnings per Share
Earning per Share
7
estimates
6
5
4
3
2
1
70
0
1Q2002
2Q2002
3Q2002
4Q2002
1Q2003
2Q2003
3Q2003
4Q2003
1Q2004
2Q2004
3Q2004
4Q2004
1Q2005
2Q2005
3Q2005
4Q2005
1Q2006
2Q2006
3Q2006
4Q2006
1Q2007
2Q2007
3Q2007
4Q2007
1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012e
2Q2012e
3Q2012e
4Q2012e
1Q2013e
2Q2013e
3Q2013e
4Q2013e
Financial Analysis: Revenue per Share
Revenue per Share
estimates
60
50
40
30
20
10
Financial Analysis: Margins
Financial Analysis: Return on Equity
(%)
25
20
15
10
ROE - S&P 500
5
ROE - Materials
0
2001
2002
2004
2005
2006
2008
2009
2010
2012
2013
Financial Analysis: Cash Flow
Valuation Analysis: Sector
Absolute
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
38.6
28.6
3.7
1.5
12.7
Low
8.1
9.3
1.3
0.5
5.4
Median
17.3
15.6
2.8
1.1
9.1
Current
13.3
13.2
2.5
1.1
8.7
Rel. S&P
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.8
1.9
1.3
1.1
1.1
Low
0.68
0.79
0.7
0.7
0.7
Median
1.1
1
1
0.8
0.9
Current
1.0
0.99
1.2
0.9
0.9
Valuation Analysis: Containers Metal/Glass
Absolute
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
21.3
26.5
5.4
1.1
11
Low
9.1
8
1.8
0.5
4.2
Median
15.4
13.7
3.6
0.9
7.7
Current
12.4
10.4
4.2
0.6
6.3
Rel. S&P
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.2
1.6
2
0.8
1
Low
0.61
0.63
0.9
0.5
0.5
Median
0.9
0.88
1.4
0.6
0.8
Current
0.93
0.78
2.0
0.5
0.7
Valuation Analysis: Steel
Absolute
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
860.8
366
4.5
1.3
35.8
Low
2.8
3.9
0.9
0.3
2.7
Median
12.4
11.3
2.2
0.6
7.5
Current
11.1
11.0
1.5
0.5
6.1
Rel. S&P
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
40.8
22.4
1.7
1
3.3
Low
0.27
0.29
0.4
0.3
0.4
Median
0.83
0.76
0.90
0.50
0.70
Current
0.83
0.82
0.70
0.40
0.70
Valuation Analysis

Current ratios generally lower than historical
median
 Mixed

compared to the S&P median
Two possibilities:
 Materials
sector is undervalued and we should buy
 Market is reflecting lower expectations for this sector
going forward
Key Sector Variable: Commodities

For many of our companies, their output is a raw
material (i.e. iron, coal, timber)
 Cash
flows highly dependent on global demand
 Can look at forward prices as a predictor of future
cash flows

Some companies in materials use raw materials as a
main input, so low prices can be good
 i.e.
containers, paper, chemicals
Steel Futures
Steel consumption expected to slow to 3.6% in 2012
from 5.6% a year earlier
Copper
Natural Gas
Nat gas is at record low prices, which is good for chemical
companies
Recommendation: Hold at +48 bps
• Given global economic uncertainty & our sector’s dependence on
global demand, we do not recommend adding more weight to
materials
• However, the materials sector provides most inputs for a majority of
other sectors, so demand is not going to completely disappear
• Reevaluate in the summer term when we will hopefully have a clearer
picture of the Euro debt crisis & global demand trends
THANK YOU
Spring, 2012