Materials
Sector Analysis
Presented by:
Bin Jia
Onur Unsal
Winter, 2012
Agenda
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•
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Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
What is Basic Materials?
Overview
• Market Cap: 444.96B
• SIM Underweight 21 BP
Overview
• Materials Sector Return vs S&P 500
Overview
• Industries within Basic Materials Sector
Overview
• Basic Material Sector companies by
Market Cap
Overview
• Stock Ownership in SIM Portfolio (3.4% total)
– International Paper (IP)
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Market Cap: $14.6B
YTD return: 13.04%
1-year return: 10.47%
Industry: Paper Products
– Crown Holdings (CCK)
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Market Cap: $5.6B
YTD Return: 9.65%
1-year return: -3.05%
Industry: Container Metal/Glass
Business Analysis
• Materials Sector Trend vs S&P 500 cyclical
1,800
280
1,600
250
1,400
220
1,200
190
1,000
160
S&P 500
800
Materials
130
600
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Data Source: Thomson Reuters Baseline as of Feb, 2012
2011
Business Analysis
•
Demand Analysis
– Mature phase in Life Cycle
– Strongly correlated to the downstream demand from manufacturers
- less correlated to consumer spending power and GDP growth
– Most of demand coming from emerging markets with high GDP
growth
– Lower revenue and profit growth in North America and Western
Europe due to slow economic recovery
•
Supply Analysis
– R&D investment mostly to improve current technologies to drive
costs down
– Increased capital investment in emerging markets - new plants and
line constructions
– Political Uncertainty in Middle East - may increase crude oil prices
significantly
Business Analysis
• Porter’s 5 Forces Analysis
Barriers to Entry
Low
Low initial capital investment, non-complex and widely available production
technology
Buyer Power
High
High number of suppliers, low switching costs due to undifferentiated products
Supplier Power
Low
Low amount of suppliers as companies in this sector typically obtain materials
themselves
Substitute Products
Low
Not many substitutes for raw materials
Intensity of Rivalry
High
High number of suppliers in fragmented industries
High fixed operating costs, therefore companies offer further volume discounts to
ensure high capacity utilization - cost a major factor for Downstream customers
(manufacturers) to buy raw materials
Economic Analysis
• Leading indicators are economic indicators
that anticipate a change in the direction of the
economy and are useful as short-term
predictors.
• Some of these include the returns on the
S&P 500 Index, Crude Oil Price, Import and
Export, Currency and Manufacturing
Machinery.
• Less-correlated Indicators: GDP,
Unemployment Rate, and Consumer
Confidence.
S&P 500 Price Index & Materials
1,800
CORRELATION
280
.87
1,600
250
1,400
220
1,200
190
1,000
160
S&P 500
800
Materials
130
600
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Data Source: Thomson Reuters Baseline as of Feb, 2012
2011
Crude Oil Price: West Texas
Intermediate & Materials
140
CORRELATION
280
.85
120
100
250
220
80
190
60
160
40
Crude Oil Price
130
Materials
20
100
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Data Source: Thomson Reuters Baseline as of Feb, 2012
2011
New Machinery Order & Materials
38
CORRELATION
280
.89
33
250
220
28
190
23
160
New Machinery Order
18
130
Materials
13
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Data Source: Thomson Reuters Baseline as of Feb, 2012
2011
100
Currency: Dollars per Euro &
Material
CORRELATION
1.80
280
.75
1.60
250
220
1.40
190
1.20
160
Dollars per Euro
1.00
130
Materials
0.80
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
Data Source: Thomson Reuters Baseline as of Feb, 2012
2010
2011
Import, Export & Materials
22
CORRELATION
20
280
.78 & .83
18
250
16
220
14
190
12
10
160
Imports (% of GDP)
Exports (% of GDP)
Materials
8
6
130
4
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Data Source: Thomson Reuters Baseline as of Feb, 2012
2011
GDP - Not correlated
9
280
7
250
5
3
220
1
190
-1
-3
CORRELATION
Nominal GDP Growth
-5
.17
Materials
-7
160
130
-9
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
Data Source: Thomson Reuters Baseline as of Feb, 2012
2010
2011
Unemployment Rate Not Correlated
12
280
10
250
8
220
190
6
160
CORRELATION
4
.01
Unemployment Rate
Materials
130
2
100
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Data Source: Thomson Reuters Baseline as of Feb, 2012
2011
Financial Analysis: Revenue per
Quarter
70
Revenue per Quarter
High
58
Low
26
Median
36
Current
47
60
50
40
30
20
Data Source: Thomson Reuters Baseline as of Feb, 2012
Financial Analysis: Earnings per
Share
8.0
Earning Per Share
7.0
6.0
5.0
4.0
3.0
2.0
1.0
2Q2013e
2Q2012e
2Q2011
2Q2010
2Q2009
2Q2008
2Q2007
2Q2006
2Q2005
2Q2004
2Q2003
2Q2002
2Q2001
2Q2000
2Q1999
2Q1998
2Q1997
2Q1996
2Q1995
2Q1994
2Q1993
2Q1992
2Q1991
2Q1990
0.0
Data Source: Thomson Reuters Baseline as of Feb, 2012
High
6.1
Low
0.0
Median
1.9
Current
2.8
Financial Analysis: Margins
•
Financial Analysis: Return on
Equity
22
2.0
20
18
1.5
16
14
1.0
12
10
ROE Absolute
8
0.5
ROE Relative to S&P 500
6
4
0.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Data Source: Thomson Reuters Baseline as of Feb, 2012
CURRENT
1.22
Valuation Analysis
• Material Sector – inline with S&P 500
Absolute Basis
High
Low
Median
Current
P/Trailing E
38.6
8.1
17.6
14.0
P/Forward E
32.0
9.3
15.8
12.7
P/B
3.7
1.3
2.8
2.6
P/S
1.5
0.5
1.1
1.2
P/CF
12.7
5.4
9.2
9.4
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.8
0.68
1.1
1.1
P/Forward E
1.9
0.79
1.0
0.96
P/B
1.3
0.7
1.0
1.2
P/S
1.1
0.7
0.8
0.9
P/CF
1.1
0.7
0.9
1.0
Valuation Analysis
• Material Sector – Industry variation
based on medians over 10 years
Absolute Basis Medians
P/E
P/B
P/S
P/CF
Diverse
Metal/Mining
10.3
3.2
1.9
7.3
Chemicals –
Agri/Fertilizer
20.4
3.4
3.1
13.6
Aluminum
14.9
1.9
1.0
9.0
Container
Metal/Glass
14.2
3.6
0.9
7.8
Paper Products
18.6
1.7
0.6
6.3
Valuation Analysis
• Paper Products Industry
Absolute Basis
High
Low
Median
Current
P/Trailing E
62.4
4.1
24.2
11.7
P/Forward E
568.2
8.4
18.6
11.9
P/B
2.6
.3
1.7
1.8
P/S
.8
.1
.6
.6
P/CF
8.9
1.7
6.3
6.5
Relative to SP500
High
Low
Median
Current
P/Trailing E
2.8
.38
1.4
.88
P/Forward E
36.6
.65
1.2
.89
P/B
.9
.2
.6
.8
P/S
.5
.2
.4
.5
P/CF
.8
.2
.6
.7
Valuation Analysis
• Paper Products Industry
– P/E multiples much below 10-year median
– Cheap valuation vs S&P 500
– Demand driven by downstream customers
(manufacturers), not directly by consumers
– High Intensity of Rivalry and Threat of
Substitute
• Shift from paper media to electronic devices
Valuation Analysis
• Container Metal/Glass Industry
Absolute Basis
High
Low
Median
Current
P/Trailing E
22.1
9.1
15.5
12.7
P/Forward E
26.5
8.0
14.2
10.8
P/B
5.4
1.8
3.6
2.7
P/S
1.1
0.5
0.9
0.7
P/CF
11.0
4.2
7.8
6.8
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.2
0.61
0.89
0.96
P/Forward E
1.6
0.63
0.88
0.82
P/B
1.8
0.7
1.4
1.3
P/S
0.8
0.5
0.6
0.5
P/CF
1.0
0.5
0.8
0.7
Valuation Analysis
• Container Metal/Glass Industry
– Cheap valuation vs S&P 500
– Demand driven by downstream customers
(manufacturers), not directly by consumers
– Unattractive industry due to
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Low barriers of entry
High buyer power
High threat of substitute products
High intensity of rivalry
– Earnings dependent heavily on raw material and
commodity prices
– Growth driven by emerging markets, low growth in
mature markets
Valuation Analysis
• Diverse Metal/Mining
Absolute Basis
High
Low
Median
Current
P/Trailing E
117.0
3.1
11.2
9.0
P/Forward E
280.2
5.2
10.3
9.3
P/B
9.4
0.6
3.2
2.8
P/S
3.2
0.5
1.9
1.9
P/CF
11.8
2.2
7.3
7.3
Relative to SP500
High
Low
Median
Current
P/Trailing E
6.6
0.25
0.69
0.68
P/Forward E
12.3
0.37
0.7
0.7
P/B
3.3
0.3
1.2
1.3
P/S
2.3
0.5
1.4
1.6
P/CF
1.2
0.3
0.7
0.8
Valuation Analysis
• Diverse Metal/Mining Industry
– Cheap valuation vs S&P 500 (P/E ratio)
– Highly dependent on commodity prices
• Recently going up
– Moderately attractive industry due to
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High barriers of entry
Moderate buyer power
Low threat of substitute products
Moderate intensity of rivalry
– High demand from emerging markets, demand
growing in mature markets
Recommendation
• Current Position: underweight by 21 BP
Materials Sector Decision Matrix by key indicators
Strong Sell
Moderate Sell
Hold
Moderate Buy
Strong Buy
S&P 500
Crude Oil Price
Currency (Euro)
Import & Export
New Machinery
Order
• Plus, estimated Revenue and Earning per share
for 2012/13 is on the rise too.
We recommend: Buy 50 BP