SECTOR: Materials
FIN824
Sector Analysis
MATERIALS
Presented by
Hui Jiang
Chris Pflum
November 15, 2011
Current Portfolio Weight vs . S&P 500
SECTOR: Materials
S&P 500 Weight
Materials
3.56%
Telecom
3.02%
Consumer
Utilities Discretionary
3.70%
10.65%
Information
Technology
19.68%
SIM Weight
Telecom
4.12%
Consumer
Staples
11.05%
Energy
12.27%
Health Care
11.51%
Industrials
10.56%
Materials
3.25%
Dividend
Receivables
0.08%
Utilities
Cash
2.57%
3.98%
Consumer
Discretionary
8.74%
Information
Technology
21.69%
Financials
14.00%
Consumer
Staples
12.24%
Energy
12.41%
Health Care
11.77%
Industrials
9.08%
Financials
10.06%
Currently Underweight 31bp
Sector Overview
SECTOR: Materials
Sector Overview
Sector Size $413B
% of S&P 500: 3.56%
Performance (EPS)
YTD: -8.04% (up 49%)
QTD: 19.39% (up 51%)
Main Industries: chemicals, construction materials,
containers and packaging, metals and mining, and paper
and forest products
Recommendation: Increase 81bp
Industry Overview
SECTOR: Materials
Industry Overview
Industry
S&P Mkt Cap
Chemicals
591.8b
1 Year
3-Mo.
Forecast
5.10%
4.55%
stable
Dow, DuPont, PPG
Construction Materials
40.6b
-26.71% -0.55% underperform
58.8b
-10.25%
CRH, Wolseley
Containers and Packaging
2.19%
stable
Rexam, Smurfit, Crown Holdings
Metals and Mining
1,100.0b
-12.69% -0.39%
outperform
BHP Billiton, Rio Tinto
Paper and Forest Products
MONDI, Ballarpur, International Paper
56.6b
9.51%
11.65%
stable
Industry Overview
SECTOR: Materials
Industry Overview
Chemicals Industry still recovering from utilization low of 69.7% in 2009.
Slow growth in developed markets to be offset by continued strength in
emerging markets with China, India and Brazil leading
Construction Materials Continued weakness in US housing market and
problems in Europe to dog industry into 2012
Containers and Packaging Slow growth in developed markets will be offset
by increases in Asia/Latin America
Metals and Mining Cyclical, Oligopoly structure, historically hampered by
oversupply. Continued recovery and growth in biggest customer segment
(auto industry)
Paper and Forest Products Growth in online sales fueling corrugated
manufacturers while continued shift to electronic communication causing
declines in other products
Economic Analysis
SECTOR: Materials
Risk of a double dip recession in the US receding as
economic growth picks up
Economic Analysis
SECTOR: Materials
European Union woes will wane as debt crisis is dealt with
November 11, 2011
Italy's Senate passes austerity plans
October 21, 2011
Greece to get next round of bailout funds
October 20, 2011
Greece Passes New Austerity Bill
June 11, 2011
Greece Passes Key Austerity Vote
November 3, 2010
Portugal passes austerity budget
Economic Analysis
SECTOR: Materials
EU Sovereign Bond Rates Holding Steady or Declining for
Most Countries illustrating containment of crisis
Oct.
10
Nov.
10
Dec.
10
Jan.
11
Feb.
11
Mar.
11
Apr.
11
May
11
June
11
July
11
Aug.
11
Belgium 3.21
3.48
3.99
4.14
4.21
4.21
4.29
4.21
4.14
4.22
4.11
3.88
4.20
Germany 2.35
2.53
2.91
3.02
3.20
3.21
3.34
3.06
2.89
2.74
2.21
1.83
2.00
Ireland
Greece
Spain
France
Italy
Cyprus
8.22
11.52
4.69
3.00
4.18
4.60
8.45
12.01
5.38
3.34
4.60
4.60
8.75
11.73
5.38
3.44
4.73
4.60
9.10
11.40
5.26
3.60
4.74
4.60
9.67
12.44
5.25
3.61
4.88
4.60
9.79
13.86
5.33
3.69
4.84
4.60
10.64
15.94
5.32
3.49
4.76
4.60
11.43
16.69
5.48
3.43
4.82
5.78
12.45
16.15
5.83
3.40
5.46
6.25
9.57
15.90
5.25
2.98
5.27
6.42
8.51
17.78
5.20
2.64
5.75
7.00
8.10
18.04
5.26
2.99
5.97
7.00
2.94
3.32
3.30
3.45
3.47
3.58
3.29
3.15
3.03
2.59
2.27
2.37
3.90
4.12
4.42
4.51
4.60
4.68
4.73
4.63
4.63
4.59
4.32
4.14
4.26
2.58
2.79
3.16
3.23
3.41
3.42
3.65
3.40
3.28
3.17
2.68
2.34
2.46
2.82
6.05
3.01
6.91
3.43
6.53
3.54
6.95
3.68
7.34
3.68
7.80
3.76
9.19
3.53
9.63
3.43
10.87
3.35
12.15
2.84
10.93
2.64
11.34
2.92
11.72
Slovenia 3.56
3.77
4.11
4.29
4.26
4.30
4.53
4.43
4.58
4.89
4.99
4.86
5.16
Slovakia 3.67
3.80
4.06
4.16
4.24
4.32
4.33
4.33
4.39
4.55
4.55
4.25
4.33
Finland
2.82
3.19
3.27
3.41
3.45
3.57
3.32
3.29
3.16
2.68
2.35
2.51
6.42
9.57
4.04
2.72
3.80
4.60
Luxembo
2.73
urg ( 3 )
Malta
Netherla
nds
Austria
Portugal
2.63
SOURCE: European Central Bank
Sep.
11
Oct.
11
Economic Analysis
SECTOR: Materials
Global growth to accelerate in 2012 in most major
economies while China only moderately tampers its own
dramatic growth
Global GDP Growth by Country
12.0
Brazil
India
China
Japan
Australia
Korea
2000-2009 2010
3.3
7.5
7.4
9.0
9.4
10.4
0.6
4.0
3.1
2.7
4.4
6.2
2011
3.5
7.9
9.1
0.3
2.9
4.7
2012
4.0
8.3
8.9
3.2
3.0
5.0
10.0
Brazil
India
8.0
China
Japan
6.0
Australia
4.0
Korea
2.0
0.0
2000-2009
SOURCE: Scotia Bank Group
2010
2011
2012
Economic Analysis
Strongly correlated indices on the rise
SECTOR: Materials
Economic Analysis
Strongly correlated indices on the rise
SECTOR: Materials
Economic Analysis
SECTOR: Materials
Negatively correlated delinquency rates on the decline
SECTOR: Materials
Financial Analysis
Revenues
SECTOR: Materials
Financial Analysis
Earnings
SECTOR: Materials
Financial Analysis
Margins
SECTOR: Materials
Financial Analysis
Cash Flow/Share
SECTOR: Materials
Sector Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing E
33.0
8.1
16.6
13.1
P/Forward E
28.6
9.3
15.1
11.5
P/B
3.7
1.3
3.0
2.3
P/S
1.5
0.5
1.3
1.1
P/CF
12.7
5.4
9.5
8.0
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.8
0.68
1.0
1.0
P/Forward E
1.9
0.79
1.0
0.92
P/B
1.3
0.9
1.2
1.1
P/S
1.1
0.8
1.0
0.9
P/CF
1.1
0.7
1.0
0.9
Industry Analysis
SECTOR: Materials
Paper Products
• Earnings multiples way
under 10-year median
• Cheap valuation vs. S&P
• Fundamentals improving
• Demand for non-durable
consumer goods
• Raw materials and energy
Absolute Basis
Median
Current
P/Trailing E
24.6
10.4
P/Forward E
18.9
11.4
P/B
1.7
1.6
P/S
0.6
0.6
P/CF
6.4
5.1
Relative Basis
Median
Current
P/Trailing E
1.5
0.79
P/Forward E
1.2
0.89
P/B
0.6
0.8
P/S
0.4
0.5
P/CF
0.6
0.6
Industry Analysis
SECTOR: Materials
Containers Metal/Glass
• Higher valued than Paper
• Still cheaper vs. historical
median and S&P
• Influenced by consumer and
commercial spending
• Cost control crucial
• Look abroad for growth
Absolute Basis
Median
Current
P/Trailing E
15.5
12.8
P/Forward E
14.5
10.4
P/B
3.6
2.4
P/S
0.9
0.6
P/CF
7.8
6.0
Relative Basis
Median
Current
P/Trailing E
0.89
0.97
P/Forward E
0.88
0.81
P/B
1.4
1.2
P/S
0.6
0.5
P/CF
0.8
0.7
Industry Analysis
SECTOR: Materials
Chemicals
Absolute Basis
• Valuation lower than 10-year P/Trailing E
P/Forward E
median
P/B
P/S
• Still over-valued vs. S&P
P/CF
• Hit hard during recession
Relative Basis
• Recovery expected to continue P/Trailing E
P/Forward E
• Strong growth in end markets P/B
P/S
• Strong demand from EM
P/CF
Median
Current
26.6
16.6
19.6
12.1
6.8
4.0
3.3
2.5
16.5
11.1
Median
Current
1.6
1.3
1.3
0.95
2.5
1.9
2.5
2.0
1.7
1.3
SECTOR: Materials
Industry Analysis
Base Metals
• Cyclical
• Commodity prices drive
growth
• Economy continues to
recover
• LT demand to move
higher
• China represents largest
opportunity and risk
Industry Analysis
SECTOR: Materials
Valuation
Industry Analysis
SECTOR: Materials
DM Stabilize, Support Metal Demand
Industry Analysis
SECTOR: Materials
EM Construction Drives Demand
Industry Analysis
SECTOR: Materials
Precious Metals
• Increasing global money
supply
• Falling US dollars
• Rising debt levels
• EM appetite
• Overall economic
uncertainty
• Temporary bull run?
Industry Analysis
SECTOR: Materials
Valuation
Industry Analysis
SECTOR: Materials
U.S. Money Supply Poised for Record Jump
Industry Analysis
SECTOR: Materials
Gold Benefits from Declining Dollar
Industry Analysis
SECTOR: Materials
Rising Debt Levels Drive Gold/Silver
Industry Analysis
SECTOR: Materials
Silver/Platinum
Final Recommendation
SECTOR: Materials
Recommendation
• Cyclicals will outperform
as economy continues to
recover
• Good time to buy when
valuations are low to
reasonable
Currently UW by 31bps
Suggest increasing to 50bps OW