Materials Sector  l Analysis Michael Hughes

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Materials Sector Analysis
l
Michael Hughes
Stanley The
Lorraine Toth
Lorraine Toth
Overview
Overview
Market Capitalization: 400 billion
Overview
Industries Within Sector
Industrial metal and mining
44%
Forestry and paper
3%
Commodity chemicals
38%
Specialty chemicals
h i l
15%
Overview
Billion
Companies within material sector by market cap
300 250 200 150
150 100 50 ‐
Rio Tinto BHP Billiton Monsanto
Potash Corp.
Freeport McMoran
Vale S.A.
Dupont
Anglo Dow American Chemical
PLC
BASF SE
Overview
SIM Holdings in Material Sector
International Paper (IP)
 22,500 shares held
h
h ld
 Overall return : 18.3%
 3.3% of total SIM
3.3% of total SIM asset
Overview
SIM Portfolio Business Analysis
Life Cycle
Materials Sector is in the maturity phase life cycle
M
t i l S t i i th
t it h
lif
l
Grow earnings by cutting cost, international expansion or acquisition
Profit margin is small across industries
C
Companies get competitive advantage by being a cost leader
i
t
titi
d t
b b i
tl d
Business Analysis
Business Condition
Cyclical business (movement correlates with S&P
C
li l b i
(
t
l t
ith S&P 500) 500)
Huge international exposure since most companies have operations in several countries Benefit from growth of emerging economies
Benefit from growth of emerging economies
Business Analysis
Supply Condition
Businesses’ capital spending increases in general from 2010 B
i
’
it l
di i
i
lf
2010
Anticipate increases in demand in the future as economy heals from recession
Japan’ss earthquake and tsunami has minimal effect on supply condition
Japan
earthquake and tsunami has minimal effect on supply condition
Business Analysis
Demand Condition
The economy grows at a sluggish pace; manufacturers haven’t start Th
t l ih
f t
h
’t t t
increasing production  soft demand for materials
Non‐residential construction is still growing at negative rate
Demand for durable goods increases rapidly
Demand for durable goods increases rapidly
Business Analysis
Sector Profitability
Low Threat of Entry 
Threat of Entry  requires large capital expenditure requires large capital expenditure
and incumbent companies possess economies of scale
Low threat of suppliers  basic materials is needed in the early production process therefore no suppliers or a few
early production process, therefore no suppliers or a few suppliers for material companies
Moderate threat of buyers  currently demand still weak; companies are willing to sell at lower price to increase
companies are willing to sell at lower price to increase revenue; undifferentiated products gives buyers more pricing power
Moderate threat of rivalry 
threat of rivalry  fragmented industry with fragmented industry with
several big players in each industry
Low threat of substitute  there is no substitute for basic material Economic Analysis
Real GDP and Materials
Economic Analysis
Disposable Income and Materials – 10 years vs. 5 years
Economic Analysis
Real Capital Spending and Materials
Economic Analysis
Consumer Price Index and Materials
Financial Analysis
Beta
O
Overall Beta (XLB Spdr
ll B t (XLB S d Fund) is 1.22
F d) i 1 22
Dividend Yield
Continuing to decline – either prices are increasing or dividends are less
Continuing to decline either prices are increasing or dividends are less
Financial Analysis
Revenue
Financial Analysis
Absolute EPS
Financial Analysis
Net Profit Margin
Financial Analysis
EBITDA Per Share
Financial Analysis
EPS Growth
Financial Analysis
Return on Equity
Valuation Analysis
Sector Valuation
Materials Sector
Absolute Basis
P/Trailing E
P/Forward E
P/B
/
P/S
P/CF
Relative to S&P 500
Relative
to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median Current
8.1
18.8
16.9
10.5
16
12.7
1.3
2.9
2.9
0.5
1.1
1.3
5.4
9.4
9.7
Low
Median Current
0.68
1.2
1.2
0.79
1
0.93
06
0.6
1
13
1.3
0.6
0.8
1
0.7
0.9
1
38.6
32
3.7
1.5
12.7
High
1.8
1.9
13
1.3
1.1
1.1
Valuation Analysis
Industry Valuation
Paper Products Industry
Absolute
High
Low
P/Trailing E
P/Trailing E
62.4
62
4
P/Forward E
568.2
P/B
2.6
P/S
08
0.8
P/CF
8.9
Relative to S&P 500
Relative
to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
2.8
36.6
0.9
0.5
0.8
Median Current
41
4.1
25 1
25.1
12 2
12.2
8.4
19.8
11
0.3
1.7
1.9
01
0.1
06
0.6
06
0.6
1.7
6.6
5.6
Median Current
0.38
1.5
0.88
0.69
1.2
0.81
0.2
0.6
0.8
0.2
0.4
0.5
0.2
0.6
0.6
Paper Products Valuation
P/E multiples well under 10‐year median
Good value?
Longevity of industry in question in a i
increasingly paperless world
i l
l
ld
Highly cyclical market
IP’s beta is 2.48
Valuation Analysis
Industry Valuation
Containers Metal/Glass
C
t i
M t l/Gl
Absolute
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to S&P 500
P/Trailing E
P/Forward E
/
P/B
P/S
P/CF
High
Low
Median Current
9.41
15.6
14.8
8
14.6
11.9
1.6
3.6
3
0.5
0.9
0.8
4.2
7.8
7
Low
Median Current
0.61
0.88
1.1
0.58
0.88
0.88
0.4
1.4
1.4
0.3
0.6
0.6
0.4
0.7
0.7
22.1
26.5
5.4
1.1
11
High
1.2
1.6
1.8
0.8
1
Containers Valuation
Low price multiples across the board
Increasing demand in foreign countries
Substitute products
Tightening commodity prices
Products very standardized
y
Threat of substitute and buyers high
Valuation Analysis
Industry Valuation
Steel
Absolute
P/Trailing E
/
g
P/Forward E
P/B
/
P/S
P/CF
Relative to S&P 500
Relative
to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
860.8
826.5
4.5
1.3
35.8
High
Low
40.8
34.9
1.7
1
3.3
Median Current
2.8
13.3
29
3.9
12
9.3
0.9
2.2
2.1
0.3
0.6
0.7
2.7
8.1
11.8
Median Current
0.27
0.8
2.1
0.29
0.77
0.68
0.3
0.9
1
0.3
0.5
0.6
0.4
0.7
1.2
Steel Valuation
Slow growth since sales hit low in 2009
Emerging countries help demand growth
Steel prices still low
Aluminum, cement, composites all substitutes
Raw materials are highly concentrated
Threat of suppliers high
P/ Forward E below median
Recommendation
Hold
Outlook for material companies in the near‐term is O
tl k f
t i l
i i th
t
i
negative/market perform
SIM portfolio currently underweight material sector by 57 bps
Our recommendation from overall analysis is to hold at current position
current position
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