Materials
Stock Analysis
Presented by:
Bin Jia
Onur Unsal
Winter, 2012
Materials Stocks in SIM Portfolio
• International Paper (IP)
– Purchase price: $25.95
– Current price: $35.15 (as of Feb 29, 2012)
– Weight: 1.69%
• Crown Holding (CCK)
– Purchase price: $33.32
– Current price: $36.60 (as of Feb 29, 2012)
– Weight: 1.71%
• Recommendation from Sector presentation:
– Buy 50 BP, and make Materials sector total
3.91% of SIM
International Paper (IP)
Business Overview
Established in 1898, International Paper is a global leader in the
paper and packaging industry with manufacturing operations in
North America, Europe, Latin America, Asia and North Africa.
International Paper Segments
by Sales
Key Fundamentals
Current Price (as of 2/29/2012)
Market Cap
Beta
$35.15
$15.31 B
11.4x
Earnings per share
$2.98
Profit margin
Return on equity
Industrial
Packaging
39%
2.53
P/E ratio
Revenue
Distribution
25%
$26.0B
4.41%
19.21%
Consumer
Packaging
13%
Printing
Papers
23%
IP: Business Analysis
•
Value Drivers:
•
– Global balanced portfolio
– Superior Cost and Operational
Management
– Synergy and Industry Consolidation
from Acquisition ($3.6 B of TempleInland in 2012; $6B Weyerhaeuser's
partial business in 2008 )
Printing Papers Segment Revenue
2011
Asia
2%
51%
North…
Europe
Brazil
25%
22%
Risks
Short-term:
– High Debt-to-Capital ratio (compare
to peers, and historically)
– Uncertain market in US and Europe
while economy is recovering slowly
(raw material input price,
transportation)
Mid-Long term:
– Declining demand of Paper, partially
offsets the growth demand of
Packaging Segment.
– Profits are more sensitive to Price
than to Volume, and IP has no control
of input cost.
– Environmental Regulation Change
– Political risk exposed in Emerging
Market, including China, Russia and
India.
IP: Performance
Data Source: Morningstar.com, Feb 24 2012
Industry Outlook- Paper Products
Paper Products Industry
Strong Correlation with Macro Metrics
Economics
R-Value Outlook in 1 Year
S&P 500
Nominal GDP
Consumer Spending
Consumer Confidence
Unemployment Rate
0.72
0.73
0.78
0.78
-0.55
Postive
Neutral
Postive
Postive
Negative
“We have a positive fundamental outlook for the
paper packaging sub-industry for the next 12 months. We
expect a recovering economy to lead to modestly rising
demand for corrugated packaging, although the export
market could weaken. “
-Stuart J. Benway, CFA
Data Source: Thomson Baseline, Feb 2012
IP: Peer Comparison
Is IP’s share valued at discount against others in its sector?
Data Source: Standard & Poor's, Feb 2012
IP: Valuation Analysis
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.8
1.8
2.1
1.6
1.5
Low
0.68
0.04
0.8
0.8
0.6
Median
0.95
0.93
1.1
1
1.1
Current
0.91
0.95
1
0.9
0.9
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
4.1
14.5
1
0.6
1
Low
0.26
0.6
0.4
0.1
0.1
Median
1.5
1.1
0.7
0.4
0.7
Current
0.76
0.9
0.8
0.4
0.5
Data Source: Thomson Baseline, Jan 2012
IP: Valuation from DCF Model
International Paper (IP)
Analyst: Bin jia
Date: 1/22/2012
Terminal Discount Rate =
Terminal FCF Growth =
Year
2011E
Revenue
26,074
% Grow th
27,007
3.6%
Operating Income
2,554
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
2,245
% of Sales
2.0%
2,722
30,591
32,427
4.5%
6.0%
3,151
3,794
31,843
-1.8%
2,484
32,766
2.9%
3,113
2021E
33,586
2.5%
3,291
7.8%
9.5%
9.8%
652
432
529
652
660
673
704
746
732
754
772
2.5%
1.6%
1.9%
2.3%
2.3%
2.3%
2.3%
2.3%
2.3%
2.3%
2.3%
519
477
526
467
426
553
661
823
473
637
680
27.0%
26.0%
27.0%
27.0%
27.0%
27.0%
27.0%
27.0%
27.0%
27.0%
27.0%
1,336
1,526
1,398
4.7%
1,504
1,263
-9.7%
1,248
1,092
-13.5%
1,406
1,436
31.5%
1,639
1,727
2,165
20.2%
25.4%
1,927
1,719
1,218
-43.7%
1,879
1,662
36.4%
1,769
7.0%
1,982
5.8%
5.7%
5.4%
4.4%
4.9%
5.6%
6.3%
5.3%
5.9%
5.4%
5.9%
(116)
(120)
(284)
(287)
(293)
(306)
(324)
(318)
(328)
(336)
1,502
% Grow th
-0.4%
1,377
5.1%
1,368
-8.9%
8,661
6,128
14,789
10.79%
10.1
10.7
5.0
5.2
-0.4%
1,170
4.2%
1,613
17.9%
-1.0%
1,106
3.9%
1,121
-30.5%
59%
41%
100%
10.4
11.1
5.4
5.6
-1.0%
1,177
4.1%
1,035
-7.7%
-1.0%
1,230
4.2%
1,553
50.1%
-1.0%
1,468
4.8%
1,879
21.0%
-1.0%
1,265
3.9%
2,295
22.1%
-1.0%
1,497
4.7%
1,282
-44.1%
-1.0%
1,769
5.4%
1,335
4.1%
Terminal Value
10.0
10.6
5.1
5.3
443
31.43
33.38
6.2%
Price compared on Jan 22, 2012
Terminal Discount Rate =
Terminal FCF Growth =
1,779
(416)
3.8%
$
$
2,239
29,274
2020E
11.7%
Capex % of sales
Shares Outstanding
1.2%
2019E
10.3%
978
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
2,382
28,700
2018E
9.3%
-1.6%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
1.8%
2017E
7.8%
Subtract Cap Ex
Free Cash Flow
2,454
28,360
2016E
8.4%
1,512
% of Sales
3.2%
2015E
8.8%
-3.5%
Plus/(minus) Changes WC
27,858
2014E
8.3%
1,384
Add Depreciation/Amort
2013E
9.8%
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2012E
11.0%
2.5%
-1.0%
1,982
5.9%
1,443
8.1%
17,400
Current Price
Free Cash Yield
8.29%
ImpliedTerminal
equity
value/share
P/E
9.8
Upside/(Downside)
to DCF
Terminal EV/EBITDA
4.5
$
$
31.43
33.38
6.2%
11.0%
2.5%
IP: Recommendation
•
IP Share Valuation
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
P/Forward E
P/S
P/B
P/EBITDA
P/CF
196.5
0.9
2.6
14.31
10.7
2.8
0.1
0.6
1.73
1.1
25.3
0.6
1.9
5.59
7.9
10
0.5
1.8
3.96
5
13.5
0.55
1.85
4.45
6.2
Target
E, S, B, etc/Share
($)
3.12
58.85
16.99
7.06
5.07
– Target Price = 50%*DCF+30%*P/E+5%*(P/S+P/B+P/EBITA+P/CF) = $35.80
– Current Price (as of 2/29/12) : $ 35.15
– Upside: 2% < 10%
•
Bottom line:
– International Paper, is a healthy and competitive company with solid fundamentals
– Priced properly by market
•
Recommendation:
– SELL all SIM holding of 169 base points
Target
Price
($)
42.12
32.36
31.43
31.43
31.43
Crown Holding (CCK)
Business Overview
Established in 1892 and headquartered in Philadelphia, Crown
Holdings is one of the global leaders in design,
manufacturing and sale of metal packaging products for food,
beverage and consumer products.
Key Fundamentals
Current Price (as of
$36.48
Market Cap
Beta
$5.42B
0.71
03/04/2012)
P/E ratio
Earnings per share
Revenue
Profit margin
Return on equity
19.85x
$1.83
$8.6B
3.3%
Not
Measured
Crown Holding's Revenues in FY
2011 [in millions]
America's Beverage
$1,380, 16%
$2,273, 26%
North America Food
European Beverage
$434, 5%
European Food
$889, 10%
$1,999, 23%
European Speciality
Packaging
Non-reportable
Segments
$1,669, 20%
CCK: Business Analysis
•
Value Drivers:
– Strong revenue growth in emerging
markets due to high GDP growth
– Leadership in Product Innovation /
Customer Service
•
•
Orbit (glass jar closure), Superend
(beverage can end)
Proximity to Customers
– Economies of scale (global operations)
•
Risks
– EPS decrease vs Revenue growth
Crown Holding Revenues and Earnings
in millions
2009
7938
Revenues
Chg YoY
EPS
Chg YoY
2.1
2010
7941
0.04%
2.03
-3.33%
2011
8644
8.85%
1.86
-8.37%
– Non diversified product portfolio in
an unattractive industry
– Rising Raw Material Prices
– Risk on revenues in emerging
markets
•
•
Political/economic instability
Foreign currenct fluctuations
CCK: Performance
• %50.14 stock price increase last 5 years
Data Source: Google Finance, Mar 5, 2012
CCK: Performance
Data Source: Morningstar.com, Mar 5, 2012
Industry Outlook- Container
Metal/Glass
• Crown Holdings only competes in Metal Packaging
Industry
• Metal Can & Container Manufacturing – unattractive,
mature industry
– Moderate Barriers of Entry: Non-complex manufacturing
technology, offset by economies of scale
– High Buyer Power: Undifferentiated product, pressure
from customers on price
– Low Supplier Power: Rising raw material costs passed to
customers
– High Substitute Products: Significant threat from glass
and plastic packaging materials
– High Intensity of Rivalry: Strong competition from Ball,
Rexam PLC and Silgan on a global scale
CCK: Peer Comparison
• Competitors have wider product portfolio – plastic, aerospace
Data Source: Yahoo Finance, Mar 4, 2012
CCK: Valuation Analysis
• Inline with Industry on P/E and P/S ratios
• Relatively cheap compared to S&P 500, primarily driven by cheap industry
price Relative to Industry High
Low
Median
Current
P/Trailing E
12.9
0.75
1.1
0.99
P/Forward E
33.7
0.35
1.1
1.1
P/B
13.1
0.2
2.6
Not Measured
P/S
1.1
0.1
0.5
1.0
P/CF
1.8
0.1
0.8
1.4
Relative to S&P 500 High
Low
Median
Current
P/Trailing E
11.5
0.69
1.1
0.97
P/Forward E
22.2
0.45
0.95
0.88
P/B
20.6
0.1
3.3
Not Measured
P/S
0.6
0.0
0.3
0.5
P/CF
1.3
0.0
0.7
1.0
Data Source: Thomson Baseline, Jan 2012
CCK: Valuation from DCF Model
Discounted Cash Flow
Terminal Discount Rate =
Terminal FCF Growth =
(Millions)
10.00%
3.75%
Year
2011E
2012E
2013E
2014E
2015E
2016E
Revenue
8,731
9,045
9,593
9,900
9,910
9,493
% Grow th
3.6%
Cost of Goods Sold
% of Sales
Gross Profit
% of Sales
Selling and Administrative Expense (S&A)
% of Sales
7,399
7,837
81.80%
81.70%
1,405
1,467
1,572
% of Sales
Interest Income
% of Sales
Translation and Foreign Exchange Adjustments
82.2%
1,434
10.2%
8,631
82.5%
1,517
7.1%
9,277
82.8%
1,613
4.4%
9,674
82.7%
1,708
-0.4%
9,623
82.6%
1,724
3.8%
9,972
82.5%
1,813
15.7%
15.4%
15.1%
14.5%
14.4%
14.6%
14.8%
435
436
426
399
513
538
550
536
544
4.5%
4.5%
4.5%
4.4%
4.3%
4.2%
4.9%
4.8%
4.7%
4.6%
4.5%
26
23
19
20
30
38
63
45
35
23
0.3%
0.2%
0.2%
0.3%
0.4%
0.6%
0.4%
0.3%
0.2%
15.0%
12
0.1%
52
32
29
30
20
19
42
34
29
23
18
0.6%
0.4%
0.3%
0.3%
0.2%
0.2%
0.4%
0.3%
0.3%
0.2%
0.2%
(6)
(7)
(9)
(10)
(10)
(9)
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
0.4%
Interest Expense
1,526
-4.20%
7,804
16.4%
35
% of Sales
82.1%
2021E
12,088
410
Asset Impairments and Sales
% of Sales
1,554
0.1%
8,136
2020E
11,651
16.2%
0.3%
Loss from early Extinguishment of Debt
82.0%
2019E
11,698
396
Provision for Restructuring
% of Sales
3.2%
8,118
2018E
11,205
16.1%
Provision for Asbestos
% of Sales
6.1%
7,151
81.90%
2017E
10,462
27
0.3%
19
0.2%
10
0.1%
0
0.0%
0
0.0%
84
11
0.8%
0.1%
10
22
0.1%
0.2%
(12)
(12)
(12)
-0.1%
-0.1%
-0.1%
12
0.1%
23
0.2%
36
0.3%
230
232
261
277
287
266
324
381
374
350
338
2.6%
2.6%
2.7%
2.8%
2.9%
2.8%
3.1%
3.4%
3.2%
3.0%
2.8%
(10)
(12)
(13)
-0.1%
-0.1%
-0.1%
-
-
-
(16)
(15)
(11)
(10)
(8)
(9)
(12)
(12)
-0.2%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
-0.1%
(5)
(5)
(10)
-0.1%
22
(6)
682
763
832
813
788
738
502
568
735
792
894
7.8%
8.4%
8.7%
8.2%
8.0%
7.8%
4.8%
5.1%
6.3%
6.8%
7.4%
(1)
(2)
% of sales
-
-
-
-0.1%
-
Operating Income
-
0.2%
(6)
% of sales
-
0.0%
-0.1%
0.0%
-
-0.1%
-
0.0%
Equity Earnings
0.0%
-0.2%
% of Sales
(2)
0.0%
1
-0.1%
-
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Net Income attributable to Noncontrolling Interests
(110)
(90)
(73)
(59)
(79)
(95)
(126)
(112)
(94)
(70)
(97)
% of Sales
-1.3%
-1.0%
-0.8%
-0.6%
-0.8%
-1.0%
-1.2%
-1.0%
-0.8%
-0.6%
-0.8%
224
205
211
206
199
187
127
144
186
200
226
32.8%
26.9%
25.3%
25.3%
25.3%
25.3%
25.3%
25.3%
25.3%
25.3%
25.3%
348
468
548
547
507
456
250
312
453
523
Provision for Income Taxes
Tax Rate
Net Income
% of Sales
4.0%
Add Depreciation/Amortization
% of Sales
% of Sales
Subtract Cap Expenditures
Capex % of sales
Free Cash Flow
5.7%
5.5%
5.1%
4.8%
2.4%
2.8%
3.9%
4.5%
4.7%
17.2%
-0.3%
-7.2%
-10.1%
-45.3%
25.1%
45.0%
15.5%
9.3%
183
184
208
228
256
314
314
316
303
302
2.1%
2.0%
2.2%
2.3%
2.5%
2.7%
3.0%
2.8%
2.7%
2.6%
2.5%
(183)
92
(21)
(69)
(198)
(152)
84
(11)
47
(23)
(85)
-2.0%
-1.6%
-0.2%
-0.7%
1.0%
-0.2%
-0.7%
361
384
417
356
277
190
293
359
398
326
302
4.1%
4.3%
4.4%
3.6%
2.8%
2.0%
2.8%
3.2%
3.4%
2.8%
2.5%
418
476
487
63.0%
14.1%
(13)
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
359
-2909.7%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
2,188
3,116
5,304
-0.22%
41%
59%
100%
16.9
15.2
8.6
7.9
12.6
11.3
7.8
7.2
318
-11.5%
10.8
9.7
7.1
6.6
161.6
$
$
248
-2.1%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
571
5.2%
34.4%
% Grow th
Plus/(minus) Changes Working Capital
0.0%
36.48
32.82
-10.0%
1,978
463
2.87
Price compared on Mar 4, 2012
349
9.6%
279
-19.9%
0.8%
371
354
32.7%
-4.4%
-0.1%
256
-27.6%
0.4%
2.2%
Terminal Value
8,082
Free Cash Yield
6.02%
Terminal P/E
14.1
Terminal EV/EBITDA
8.0
CCK: Sensitivity Analysis
• Price Range – 28.49 to 39.26
• Current Price: 36.48
Terminal Discount Rate
$
32.82
9.50%
9.75%
10.00%
10.25%
10.50%
3.00% $ 33.12
$ 31.83
$ 30.63
$ 29.52
$ 28.49
3.25% $ 33.94
$ 32.57
$ 31.31
$ 30.14
$ 29.05
Terminal
3.50% $ 34.83
$ 33.38
$ 32.04
$ 30.80
$ 29.65
FCF
3.75% $ 35.79
$ 34.25
$ 32.82
$ 31.51
$ 30.30
Growth Rate
4.00% $ 36.84
$ 35.19
$ 33.68
$ 32.28
$ 31.00
4.25% $ 38.00
$ 36.22
$ 34.60
$ 33.12
$ 31.76
4.50% $ 39.26
$ 37.35
$ 35.61
$ 34.03
$ 32.57
Price compared on Mar 4, 2012
CCK: Recommendation
•
CCK Stock Valuation through Multiples
Absolute
Valuation
High
A.
Low
B.
Median
C.
Current
D.
#Your Target
Multiple
E.
*Your Target E, S,
B, etc/Share
F.
Your Target Price
(F x G)
G.
H.
P/Forward E
525.0
8.5
14.1
11.5
14
$2.32
$32.48
P/S
0.8
0.0
0.4
0.6
0.6
$54.03
$32.41
P/B
43.0
0.4
9.9
Not
measured
10
$3.47
$34.76
P/EBITDA
11.80
0.63
4.70
4.85
4.8
$7.24
$34.76
P/CF
11.7
0.6
7.1
8.9
8
$4.34
$34.76
– Target Price = 33%*DCF+33%*P/E+33%*P/S = $32.57
– Current Price (as of 3/4/2012) : $ 36.48
– Downside: 10%
•
Recommendation:
– SELL all SIM holding of 171 base points
Cliffs Natural Resources (CLF)
Business Overview
Cliffs Natural Resources is largest producer of iron ore in North America, a major
global iron ore producer, primarily selling production to integrated steel
companies in the U.S. and Canada, and the seaborne market for Asian steel
producers.
Company Profile
Sector
Industry
Core Products
CLF Segments by Sales 2011
Materials
Steel
Icon Ore, Coal
Current Price (as of 2/29/2012)
$63.27
Market Cap
$9.3 B
Beta
EPS
PE Trailing
Other
3%
Asia
Pacific
Iron Ore
20%
2.49
$11.48
5.9
Eastern
Canadian
Iron Ore
17%
North
American
Coal
8%
U.S. Iron
Ore
52%
CLF: Business Analysis
•
Value Drivers:
• Risks
– Diverse geographic locations (US,
Canada, Brazil, and Australia)
– Primary driver, global crude steel
production, rised 5% in 2011, led by
China’s economy and US’s recovery
– Market Inbalance (Demand outpaces
Supply), and produce upward pricing
– Increased Capital Investment to
consolidate Operation and Diversify
Client Base.
Revenue by Geographics 2011
Others
Japan
8%
7%
31%
China
Canada
US
13%
41%
Short-term:
– Uncertain global demands
impacts business adversely
– Pricing inflexibility from term
supply agreements in
volatile condition
– Operating Expense
sensitive to fluctuating price
of Electrical and Fuel.
Mid-Long term:
– China’s construction and
manufacturing slows down
– Governmental regulation on
icon and coal production,
including safety and
pollution.
CLF: Performance
Data Source: Morningstar.com, Feb 29 2012
CLF: Financial Analysis
CLF: Valuation Analysis
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
3.2
1.5
3
4
6.7
Low
0.04
0.05
0.3
0.5
0.1
Median
0.87
0.7
1.2
1.8
1.2
Current
0.45
0.76
1.1
2.4
0.6
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
4
10.4
3.7
3.3
4
Low
0.24
0.25
0.1
0.2
0.3
Median
0.71
0.61
1
0.9
1
Current
0.42
0.51
0.8
1.1
0.5
Data Source: Thomson Baseline, Feb 2012
CLF: Valuation from DCF Model
Cliffs Natural Resources (CLF)
Analyst: Bin jia
Date: 2/29/2012
Terminal Discount Rate =
Terminal FCF Growth =
11.5%
1.5%
Year
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Revenue
7,430
8,224
8,409
8,476
8,137
7,974
8,333
8,833
8,674
8,692
8,822
% Grow th
10.7%
Operating Income
1,844
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
% of Sales
Plus/(minus) Changes WC
1,865
-4.0%
1,139
-2.0%
1,276
4.5%
1,500
6.0%
2,120
-1.8%
1,041
0.2%
1,304
1.5%
1,500
27.6%
23.2%
22.0%
14.0%
16.0%
18.0%
24.0%
12.0%
15.0%
17.0%
126
156
151
144
138
136
142
150
147
148
150
1.7%
1.9%
1.8%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
343
452
351
379
220
251
299
433
197
254
297
21.0%
25.0%
19.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
% Grow th
Add Depreciation/Amort
1,950
0.8%
24.8%
9.68
1,375
Net Income
2,273
2.2%
11.72
1,664
10.19
1,447
21.1%
-13.1%
609
839
1,034
8.2%
10.2%
12.3%
1,342
-7.2%
721
829
999
-46.3%
15.1%
20.5%
1,476
47.7%
637
842
993
-56.9%
32.2%
18.0%
381
399
622
592
468
512
469
591
4.5%
4.9%
7.8%
7.1%
5.3%
5.9%
5.4%
6.7%
(149)
(82)
(84)
(85)
(81)
(80)
(83)
(88)
(87)
(87)
(88)
-2.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
Subtract Cap Ex
535
551
328
331
334
335
400
344
408
469
521
Capex % of sales
7.2%
6.7%
3.9%
3.9%
4.1%
4.2%
4.8%
3.9%
4.7%
5.4%
5.9%
% of Sales
Free Cash Flow
1,300
% Grow th
43.8%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
7,510
3,333
10,843
14.47%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
6.5
7.9
6.2
7.0
Shares Outstanding
142
Current Price (As of 2/29/12)
Implied equity value/share
Upside/(Downside) to DCF
1,870
$
$
2,069
10.7%
1,308
704
-36.8%
-46.2%
47.2%
1,108
6.9%
1,512
36.5%
654
755
975
-56.7%
15.4%
29.2%
Current Price (As of 2/29/12)
9,898
Implied
equity value/share
Free Cash Yield
9.85%
Upside/(Downside) to DCF
69%
31%
100%
5.4
6.5
4.9
5.5
1,037
Terminal Discount Rate =
Terminal FCF Growth =
Terminal Value
6.2
7.5
5.1
5.7
63.27
76.36
20.7%
Price compared on Feb 29, 2012
Terminal P/E
10.0
Terminal EV/EBITDA
7.7
$
$
11.5%
1.5%
63.27
76.36
20.7%
CLF: Recommendation
•
CLF Share Valuation
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
Median
Current
Target
Multiple
141.4
4.1
8.9
1670.1
44.8
3
0.2
0.5
1.7
1.9
9.5
1.2
2.7
6.5
9.4
6.9
1.4
1.8
3.5
4.5
8.3
1.3
2.2
4.8
6.8
Target
E, S, B, etc/Share
($)
9.54
53.58
28.76
13.18
9.30
Target
Price
($)
79.18
69.65
63.27
63.27
63.27
– Target Price = 50%*DCF+30%*P/E+5%*(P/S+P/B+P/EBITA+P/CF) = $74.91
– Current Price (as of 2/29/12) : $ 63.27
– Upside Potential: 18.5% > 10%
•
Bottom line:
– Cliff Natural Resource, is a balanced international company with solid fundamentals
– Under-valued by market
•
Recommendation:
– BUY 200 BPS out of 391 Materials BPS
FMC Corp (FMC)
Business Overview
Established in 1884 and headquartered in Philadelphia, FMC
Corporation, a chemical company, provides solutions, applications, and
products for agricultural, consumer, and industrial markets. The company
operates in three segments: Agricultural Products, Specialty Chemicals,
and Industrial Chemicals.
Key Fundamentals
Current Price (as of
$99.76
Market Cap
Beta
$6.97B
1.14
P/E ratio
Earnings per share
Revenue
Profit margin
19.58x
$5.10
$3.38B
10.83%
Return on equity
33.21%
03/04/2012)
FMC Corporation - Revenues in
FY 2011 [in millions]
1039, 31%
1465, 43%
Agricultural Products
Speciality Chemicals
879, 26%
Industrial Chemicals
FMC Corp (FMC)
Business Overview
• Revenue / Profit Growth by Segment
FMC: Business Analysis
• Value Drivers:
– Strong revenue growth in
agricultural product portfolio,
particularly from emerging
markets due to high GDP
growth
– Multiple Acquisitions and
Partnerships in FY 2011 to
enter new markets
– 20% increase in dividends in
FY 2011
– Strong EPS growth (116%) in
FY 2011
– Consecutive 3 years of
revenue growth (average of
8%)
• Risks
– Strong competition on price
– Effect of climate in revenues
– Importance of new
technology products to drive
prices down
– Rising Raw Material Prices
– Risk on revenues in
emerging markets
• Political/economic instability
• Foreign current fluctuations
FMC: Performance
• %159.35 stock price increase last 5 years
Data Source: Google Finance, Mar 5, 2012
FMC: Performance
Data Source: Morningstar.com, Mar 5, 2012
Industry Outlook- Diversified
Chemicals
• FMC has a diversified portfolio within Diversified
Chemicals Industry
• Diversified Chemicals – moderately attractive,
growing industry
– High Barriers of Entry: Complex manufacturing
technology, large dominant companies
– Moderate Buyer Power: Differentiated product, offset
pressure from customers on price
– Low Supplier Power: Rising raw material costs passed to
customers
– Moderate Substitute Products: Ongoing threat from
new chemicals in agricultural and industrial products
– High Intensity of Rivalry: Strong competition from
Dupont and Dow Chemicals on a global scale
FMC: Peer Comparison
• Smaller market cap (and correspondingly) revenues vs
competitors
• Outperforming its competitors in EPS and operating margin
• Overvalued vs competitors (higher P/E and P/S ratios)
Data Source: Yahoo Finance, Mar 4, 2012
FMC: Valuation Analysis
• Overvalued vs Industry on P/E and P/S ratios
• Overvalued vs S&P 500 on P/E and P/S ratios despite the industry is inline
with S&P 500
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
2.1
1.3
4.0
3.9
2.2
0.25
0.38
0.4
0.2
0.3
0.97
0.87
1.3
1.2
1.0
1.2
1.2
1.8
2.2
1.7
Relative to S&P
500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
1.5
1.1
2.4
1.8
1.7
0.35
0.45
0.5
0.2
0.3
0.84
0.77
1.4
0.8
0.8
1.2
1.1
2.4
1.7
1.7
Data Source: Thomson Baseline, Jan 2012
FMC: Valuation from DCF Model
FMC Corporation
Terminal
Discount Rate
=
Discounted Cash Flow
(Millions)
Year
2012E
Revenue
% Growth
3,694
Cost of Goods Sold
% of Sales
2,380
Gross Profit
% of Sales
1,314
2013E
3,942
4,198
2,517
64.4%
Operating Income
% of sales
625
Provision for Income Taxes
Tax Rate
112
1,425
512
(33)
Net income attributable to noncontrolling interests
% of sales
(15)
Net Income attributable to FMC
% of Sales
% Growth
464
1,552
1,461
1,781
7.0%
3,328
61.4%
1,779
61.0%
1,931
33.6%
34.2%
34.2%
34.8%
34.9%
35.4%
598
13.8%
121
2.8%
69
1.6%
(4)
-0.1%
0
0.0%
48
1.1%
548
13.2%
112
2.7%
187
4.5%
(4)
-0.1%
0
0.0%
42
1.0%
650
14.2%
151
3.3%
92
2.0%
(5)
-0.1%
0
0.0%
60
1.3%
706
14.4%
157
3.2%
59
1.2%
(5)
-0.1%
0
0.0%
59
1.2%
717
14.0%
159
3.1%
230
4.5%
(5)
-0.1%
0
0.0%
56
1.1%
693
13.6%
153
3.0%
56
1.1%
(5)
-0.1%
0
0.0%
51
1.0%
753
13.8%
175
3.2%
49
0.9%
(5)
-0.1%
0
0.0%
71
1.3%
728
745
18.5%
175
380
24.0%
553
619
478
(21)
(13)
-0.5%
572
419
(17)
-0.3%
213
462
(12)
-0.4%
417
582
(18)
369
456
623
(20)
508
738
13.5%
(33)
-0.8%
(20)
-0.4%
389
17.0%
12.2%
(41)
-0.9%
-0.5%
16.3%
151
25.0%
8.9%
(46)
(25)
420
27.0%
-1.0%
-0.4%
889
16.3%
208
11.9%
(49)
-0.5%
-0.3%
831
12.2%
169
17.0%
10.1%
(23)
-0.9%
625
14.3%
119
25.3%
10.1%
(37)
-1.0%
701
13.5%
156
18.0%
11.0%
(43)
-1.1%
618
12.3%
92
24.0%
6.3%
(48)
-0.6%
-0.4%
519
28.0%
273
-0.5%
511
14.5%
151
14.7%
(25)
(14)
8.8%
106
17.0%
14.0%
(20)
629
17.8%
127
-0.6%
(16)
-0.4%
562
-0.3%
689
12.6%
13.2%
11.9%
13.6%
10.2%
4.9%
-62.9%
9.6%
96.2%
8.9%
-11.5%
9.2%
13.9%
10.4%
20.9%
7.6%
-23.4%
11.0%
44.4%
12.6%
22.6%
132
3.6%
(62)
-1.7%
229
6.2%
160
4.1%
(79)
-2.0%
181
4.6%
162
3.9%
(12)
-0.3%
235
5.6%
160
3.7%
(43)
-1.0%
264
6.1%
152
3.5%
(152)
-3.5%
230
5.3%
166
4.0%
(199)
-4.8%
170
4.1%
174
3.8%
(82)
-1.8%
252
5.5%
177
3.6%
(49)
-1.0%
245
5.0%
174
3.4%
(102)
-2.0%
205
4.0%
189
3.7%
(92)
-1.8%
163
3.2%
196
3.6%
(11)
-0.2%
196
3.6%
305
419
37.4%
488
16.4%
65
-86.6%
187
186.9%
166
-11.6%
260
57.2%
391
50.1%
256
-34.4%
496
93.5%
678
36.8%
4,740
6,742
70%
100%
4.29%
13.9
13.2
12.9
12.2
9.8
9.3
8.3
7.9
11.5
10.9
8.2
7.8
71.8
$
$
1,677
3,131
61.8%
33.7%
NPV of terminal value
Projected Equity Value
Shares Outstanding
1,566
3,164
62.2%
624
14.4%
121
2.8%
260
6.0%
(4)
-0.1%
0
0.0%
52
1.2%
30%
Current EV/EBITDA
Projected EV/EBITDA
1,396
3,050
62.0%
2022E
5,456
-0.4%
33.1%
2,002
Current P/E
Projected P/E
2,839
62.4%
2021E
5,099
4.4%
596
14.2%
122
2.9%
38
0.9%
(3)
-0.1%
0
0.0%
53
1.3%
NPV of Cash Flows
Debt
Cash
Cash/share
1,432
2,592
62.8%
2020E
5,119
7.1%
37.0%
-0.4%
Free Cash Flow Yield
63.2%
2019E
4,903
10.2%
512
13.0%
115
2.9%
35
0.9%
(3)
-0.1%
0
0.0%
38
1.0%
-0.9%
Free Cash Flow
% Growth
2,723
63.0%
2018E
4,578
-4.20%
36.2%
13.9%
Add Depreciation/Amortization
% of Sales
Plus/(minus) Changes Working Capital
% of Sales
Subtract Cap Expenditures
Capex % of sales
2,740
4,155
0.1%
506
13.7%
111
3.0%
35
1.0%
(3)
-0.1%
0
0.0%
40
1.1%
18.0%
Net Income attributable to FMC - from continuing Operations
% of Sales
3.2%
35.6%
16.9%
Loss from discontinued Operations
% of sales
2,646
2017E
4,337
6.5%
63.8%
4.25%
2016E
2015E
4,332
6.7%
Selling and Administrative Expense (S&A)
% of Sales
R&D Expenses
% of Sales
Provision for Restructuring
% of Sales
Equity in (earnings) loss of affiliates
% of Sales
Minority Interest
% of Sales
Interest Expense
% of Sales
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2014E
10.00%
Terminal FCF
Growth =
98.97
93.90
-5.1%
458
159
2.21
Price compared on Feb 29, 2012
Terminal
Value
12,294
Free Cash
Yield
5.52%
Terminal P/E
16.7
Terminal
EV/EBITDA
11.6
FMC: Sensitivity Analysis
• Price Range – 78.71 to 117.46
• Current Price: 98.97
Terminal Discount Rate
$ 93.90
9.50%
9.75%
10.00%
10.25%
10.50%
3.50% $ 94.27
$ 89.89
$ 85.86
$
82.15
$
78.71
3.75% $ 97.30
$ 92.62
$ 88.33
$
84.38
$
80.74
Terminal
4.00% $100.60
$ 95.58
$ 91.00
$
86.80
$
82.93
FCF
4.25% $104.21
$ 98.81
$ 93.90
$
89.41
$
85.30
Growth Rate
4.50% $108.18
$ 102.35
$ 97.07
$
92.26
$
87.86
4.75% $112.58
$ 106.25
$100.53
$
95.36
$
90.65
5.00% $117.46
$ 110.55
$104.35
$
98.76
$
93.69
Price compared on Feb 29, 2012
FMC: Recommendation
•
FMC Stock Valuation through Multiples
Absolute
Valuation
High
Low
Median
Current
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
16.2
2.2
6.0
16.48
16.3
C.
8.1
0.2
1.3
1.85
2.5
D.
12.1
1.1
3.4
6.61
8.2
E.
14.4
2.1
5.2
11.34
16.3
#Your
Target
Multiple
F.
14.4
1.9
4.3
9
12.2
*Your
Target
E, S, B,
etc/Sha
re
G.
6.71
51.45
23.01
10.99
8.11
Your
Target
Price
(F x G)
H.
96.62
97.75
98.97
98.97
98.97
– Target Price = 33%*DCF+33%*P/E+33%*P/S = $96.09
– Current Price (as of 3/4/2012) : $ 98.97
– Downside: 2.91%
•
Recommendation:
– DO NOT BUY
Summary
Materials Company Symbol
Market Purchase Current Gain Target Price Target Price
Current Recommendation
-Industry
Value($ Bil) Price ($) Price ($) (Loss) By Previous
By Our
Weight
( Winter, 2012)
(As of 2/29/12)
Team ($)
Team ($) in SIM (bps)
International Paper
-Paper Products
Crown Holding
-Containers & Packaging
Cliff Natural Resource
-Steel
IP
15.3
25.95
35.15 35%
35.04
35.8
169
Sell 169 bps
CCK
5.4
33.32
36.6 10%
41.36
32.57
171
Sell 171 bps
CLF
9.3
N/A
N/A
74.91
N/A
Buy 391 bps
63.27
N/A
• Thank you Stock Market Class Winter 2012!
• What questions do you have?