Materials Stock Analysis
l
Michael Hughes
Stanley The
Lorraine Toth
Lorraine Toth
Overview –– Summary of Sector
Overview Cyclical sector with large beta – will likely perform significantly worse than the S&P 500 if it falls
significantly worse than the S&P 500 if it falls
Some hope for this sector ‐ opportunities in the emerging markets; earnings are up for the sector
emerging markets; earnings are up for the sector
However, final recommendation is to underweight the materials sector by 75 additional bps
C
Current
t
S&P 500 Weight
3 61%
3.61%
SIM Weight
3 14%
3.14%
+/‐
‐0.47%
0 47%
Recommended
3.61%
2.39%
‐1.22%
Overview –– Sector Stocks
Overview International Paper ‐ the current SIM Portfolio in Materials at 3.14%
SIM Portfolio in Materials at 3.14% currently is entirely comprised of International Paper stock
As of the July Appraisal Report, IP As
of the July Appraisal Report IP
contributed an unrealized gain of $81,444 to the portfolio
Steel Dynamics – do not buy
Owens‐Illinois – do not buy
do not buy
Steel Dynamics Stock Analysis
Steel Dynamics: Overview
Fifth largest carbon steel producer in the United States
Diversified carbon‐steel producer and p
metal recycler
Grow business by expanding current
Grow business by expanding current capacities and expansion to other related steel business
steel‐business
Market Cap = 2.95B
Steel Dynamics: Business Analysis
Two most important market for STLD Automotive
Non‐residential construction
Non‐residential construction has been declining since the beginning of 2008 Small increase of 10.9% in auto sales from 2010
Steel Dynamics: Business Analysis
Product Mix
Steel Dynamics: Business Analysis
Market Mix
Automotive and construction are the two biggest industries for Steel Dynamics
Both industries contribute to 55% of STLD’ss market
Both industries contribute to 55% of STLD
market
Steel Dynamics: Business Analysis
Steel Dynamics: Business Analysis
Steel Dynamics: Business Analysis
Steel Dynamics: Business Analysis
Steel Dynamics: Financial Analysis
Net Sales
Company’s C
’
performance is cyclical and positively correlates with the economic performance
Negative outlook for
Negative outlook for the second half of 2011 implies that Steel D
Dynamics will not i
ill t
perform well
Steel Dynamics: Financial Analysis
Gross Margin
LLow gross margin due to higher raw material cost
i d t hi h
t i l
t
Lower capacity utilization in the industry hinders Steel Dynamics to achieve economy of scale ynamics to achieve economy of scale
Steel Dynamics: Financial Analysis
Profitability relative to the S&P 500
Steel Dynamics is underperforming the market
St
lD
i i
d
f
i th
k t
Profitability of commodity business depends on the sales volume
Declining construction spending in the United States contributes to lower profit margin for Steel Dynamics
Net Profit Margin
Return on Equity
Steel Dynamics: Valuation Analysis
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
2.3
1.6
1.4
3.2
25
2.5
0.02
0.03
0.6
0.7
01
0.1
0.8
0.8
0.9
1.3
09
0.9
0.6
1.0
0.7
0.7
07
0.7
Relative to
S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
6.5
2.8
17
1.7
1.4
1.7
0.2
0.29
03
0.3
0.3
0.3
0.76
0.66
07
0.7
0.7
0.9
0.95
0.64
06
0.6
0.4
0.7
Steel Dynamics: Valuation Analysis
Multiples Valuation
C
Current Price: $13.04
t P i $13 04
Target Price from multiples valuation : $ 17.70
Upside : 35 74%
Upside : 35.74%
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
68.3
3.3
10.2
9.7
10.5
1.52
15.96
P/S
2.2
0.2
0.9
0.5
0.5
34.20
17.10
P/B
4.5
0.9
1.8
1.6
1.7
11.03
18.75
P/EBITDA
11.55
1.42
5.47
4.81
4.9
3.63
17.78
P/CF
18.7
2.3
8.9
8.3
8.5
2.23
18.95
Steel Dynamics: Valuation Analysis
Discounted Cash Flow
Steel Dynamics: Recommendation Current Price: $13.52
Target Price (DCF) : $17.08
Target Price (Multiples Valuation): $17.70
Target Price (Multiples Valuation): $17.70
Recommendation: Do Not Buy
Owens‐‐Illinois Stock Analysis
Owens
Owens‐‐Illinois : Summary
Owens
Owens‐Illinois is a glass container manufacturer headquartered near Toledo Ohio
headquartered near Toledo, Ohio
Focused exclusively on providing containers for the food and beverage industries
food and beverage industries
Market Cap = 3.34B
Beta = 2.19
Current Stock Price = $20.33
Projected Upside = 2.4%
Owens‐‐Illinois: Business Analysis
Owens
Owens‐‐Illinois: Business Analysis
Owens
Owens‐Illinois divided into four reportable g
segments: North America
Asia‐Pacific
Europe
Latin America
Major customers include Anheuser‐Busch, Heinz, MillerCoors PepsiCo Coca Cola Nestle Heineken
MillerCoors, PepsiCo, Coca‐Cola, Nestle, Heineken, and Fosters
OI continues to benefit from growth and opportunities in emerging markets (especially Latin ii i
i
k (
i ll
i
America) but major issues in Asia‐Pacific and North American markets have greatly negatively impacted results this year
l hi
Owens‐‐Illinois: Business Analysis
Owens
Key Business Drivers currently include:
Overall demand for alcohol 
O
ll d
df
l h l  driven by disposable di
b di
bl
income, GDP, high interest and savings rates
Demand for types of alcohol 
yp
increased demand this year in craft beer which implies more SKUs, resulting in higher switching costs and less efficiency
A il bilit f b tit t  aluminum and plastic Availability of substitutes 
l i
d l ti
packaging Cost inflation  increases in energy prices, diesel gy p
,
prices (negatively impacted both Europe and North America regions this year)
Currency strength  e.g. strength of currency in Currency strength 
e g strength of currency in
Australian market has greatly decreased wine exports
Owens‐‐Illinois: Financial Analysis
Owens
Stock price has plummeted, especially after the 2nd Quarter Earnings Release!
Quarter Earnings Release!
Owens‐‐Illinois: Valuation Analysis
Owens
Valuation Analysis – Relative to Industry and S&P Stock Valuation
Relative to
Industry
P/Trailing
/ a gE
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
2.0
.0
1.4
2.0
1.5
15
1.5
.39
.49
.4
.3
.4
4
.93
.88
1.2
.8
.8
8
.6
.61
.68
.6
.6
.6
6
High
Low
Median
Current
2.1
2
1
1.4
3.4
.9
11
1.1
.33
33
.43
.7
.2
.3
3
.72
72
.71
1.6
.6
.6
6
.60
60
.56
.7
.4
.4
4
Owens‐‐Illinois: Valuation Analysis
Owens
Valuation Analysis ‐ Absolute Absolute
Valuation
High
Low
Median
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
35.0
1.2
10.6
7.31
11.6
C.
3.8
.3
1.3
2.00
2.2
D.
11.2
.7
3.3
4.70
5.8
Current
#Your
Target
Multiple
E.
7.5
.4
1.4
2.24
3.6
F.
9.5
.7
2.2
3.1
5
*Your
Target
E, S, B,
etc/Share
G.
1.31
41.61
9.68
6.45
4.24
Your
Target
Price
((F x G))
H.
12.45
29.13
21.30
20.019
21.18
Average Price = $19.65
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
18.07
20.00
10.7%
Owens‐‐Illinois: Valuation Analysis
Owens
Discounted Cash Flow
Analyst: Lorraine Toth
Date: 8/14/2011
Terminal Discount Rate =
Terminal FCF Growth =
Year
2011E
2012E
2013E
2014E
2015E
Revenue
6,974
7,498
8,061
8,786
9,489
% Grow th
Operating Income
Operating Margin
Interest and Other
Interest and Other
O
% off Sales
S
Taxes
Tax Rate
Net Income - Noncontrolling Interests
% of Net Income
Net Income Available to Shareholders
7.5%
1,253
% of Sales
Plus/(minus) Changes WC
% of Sales
1,580
9.0%
1,650
8.0%
1,808
2016E
10,153
7.0%
1,944
2017E
10,762
6.0%
2,044
2018E
11,300
5.0%
2,154
2019E
11,752
4.0%
2,241
2020E
12,105
3.0%
2,305
2021E
12,468
3.0%
2,371
18.0%
18.8%
19.6%
18.8%
19.1%
19.1%
19.0%
19.1%
19.1%
19.0%
19.0%
(913)
(974)
(1,041)
(1,135)
(1,225)
(1,311)
(1,390)
(1,459)
(1,518)
(1,563)
(1,610)
-13.1%
%
-13.0%
%
-12.9%
%
-12.9%
%
-12.9%
%
-12.9%
%
-12.9%
%
-12.9%
%
-12.9%
%
-12.9%
%
-12.9%
%
90
26.5%
115
143
137
154
168
173
184
192
197
202
26.5%
26.5%
26.5%
26.5%
26.5%
26.5%
26.5%
26.5%
26.5%
26.5%
(30)
(30)
(30)
(29)
(32)
(35)
(36)
(39)
(40)
(41)
(42)
-12.0%
-9.4%
-7.6%
-7.6%
-7.6%
-7.6%
-7.6%
-7.6%
-7.6%
-7.6%
-7.6%
220
289
366
350
396
430
444
472
491
504
517
31.6%
26.7%
-4.3%
13.0%
8.6%
3.4%
6.2%
4.1%
2.6%
2.7%
416
427
437
6.0%
5.7%
5.4%
5.4%
5.4%
5.4%
5.4%
5.4%
5.4%
5.4%
5.0%
27
(84)
(90)
(316)
(304)
(284)
(258)
(226)
(188)
(145)
(150)
-1.2%
% Grow th
Add Depreciation/Amort
1,408
7.5%
11.5%
3.0%
477
515
551
584
613
637
657
623
0.4%
-1.1%
-1.1%
-3.6%
-3.2%
-2.8%
-2.4%
-2.0%
-1.6%
-1.2%
Subtract Cap Ex
487
474
463
558
582
617
666
693
721
744
623
Capex % of sales
7.0%
6.3%
5.7%
6.3%
6.1%
6.1%
6.2%
6.1%
6.1%
6.1%
5.0%
Free Cash Flow
194
% Grow th
210
297
113
174
220
241
289
329
365
428
8.5%
41.3%
-62.0%
54.3%
26.7%
9.4%
20.0%
13.8%
10.7%
17.4%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
1,428
1,746
3,174
6.42%
45%
55%
100%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
13.8
14.5
3.8
3.9
10.5
11.0
3.4
3.5
Sh
Shares
Outstanding
O t t di
8.3
8.7
3.1
3.2
Terminal Value
5,185
Free Cash Yield
8.25%
Terminal P/E
10.0
Terminal EV/EBITDA
2.8
167
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
18.07
19.00
5.1%
Owens‐‐Illinois: Recommendation Owens
Do Not Buy
Catalysts
Emerging market growth
Increased sales across all end‐use categories
Upside on the Valuation Analysis and DCF
p
y
Risks
Very high beta of 2.19 – will not be a good buy until we hit the bottom
D
Decreased earnings which expect to continue to trend d
i
hi h
i
d
downward;
Final Thoughts: As Owens‐Illinois goes through a restructuring and expansion phase this stock will
restructuring and expansion phase, this stock will likely be a good buy in the near future; however, its correlation to certain economic indicators and its high beta imply that this stock may not be well
high beta imply that this stock may not be well invested at this point in time if the market continues to decline
IP: Stock Analysis
IP: Summary
Global paper and packaging company h d
headquartered in Memphis, TN
t di M
hi TN
Produces uncoated papers and industrial and consumer packaging
k i
Market Cap = $11.01 B
Beta = 2.50
Current Stock Price = $25.55
Price Target = $36
Projected Upside = 41.3%
j
p
IP: Stock Performance
Net underperformance against the S&P for the past six years
t i
Increasing commodity and transportation costs
R
Razor‐thin margins
thi
i
52‐‐Week Stock Performance
52
IP: Business Analysis
Pulp and Paper Mills and Converting and P k i Pl t
Packaging Plants
North America, Europe, Latin America, Russia, Asia, North Africa
North Africa
Business Segments
6000
5000
4000
3000
Sales
Operating Profit
2000
1000
0
Industrial Packaging
Printing Papers
Consumer Distribution
Packaging
IP: Business Segments
Industrial Packaging ($543 mil profit in Q1&2 2011)
Transport Packaging, Containerboard, Bulk Packaging, k
b d
lk
k
Retail Ready Packaging, Paper Bags
Printing Papers ($431 mil profit in 2011)
Printing Papers ($431 mil profit in 2011)
Commercial Paper (Hammermill)
Consumer Packaging ($199 mil profit in 2011)
Consumer Packaging ($199 mil profit in 2011)
Cosmetics, Confectionary, Healthcare, Sporting Goods, Private Labels
Distribution ($26 mil profit in 2011)
Xpedx – North American distribution business
Warehousing, logistics, transportation and distribution
IP: Business Analysis
IP: Future Growth Catalysts
Entering Emerging Markets
75 % stake in Andhra Pradesh Paper Mills
First American country with significant stake in market
$1 2 billi j i t
$1.2 billion joint venture in Russia
t
i R i
50% interest in two new Russian mills
St t
Start up in 2
i 2nd half of 2012, provide products to h lf f 2012
id
d t t
Russia, China
$101 mil profit in 2011
$101 mil profit in 2011
IP: Future Growth Catalysts
Exited the Forest Products business
Owned large amounts of land in S. America
Temple‐Inland Hostile Offer
Industrial Packaging business
Good synergy possibilities
Att
Attempt at $30.60/share, 20% premium over high
t t $30 60/ h
20%
i
hi h
Rejected unanimously by board
Downturn may cause trouble for current M&As
Downturn may cause trouble for current M&As
IP: Business Drivers
Rising Pulp and Paper Costs
Rise agitated by fuel surcharges
Slow GDP growth signals slow demand growth
Beta = 2.50
Falling inventories
Improving Turnover
Weak US dollar
Becoming more global company
IP: Financial Analysis
IP: Valuation Ratios
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
4.11
4
14.5
1.0
.6
1.0
.26
26
.6
.4
.1
.1
11.6
6
1.2
.7
.4
.7
.65
65
.67
.6
.4
.5
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
1.8
1.8
2.1
1.6
1.5
.68
.04
.8
.8
.6
.98
.93
1.1
1.0
1.1
.78
.8
1.0
.9
.9
Absolute
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
99.4
196.5
2.6
.9
10.7
Low
2.8
7.4
.6
.1
1.1
Median
27.5
18.8
1.9
.6
7.9
Current
8.2
8.3
1.6
.4
4.0
IP: DCF & Valuation
Absolute
Valuation
High
Low
Median
Current
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
196.5
.9
2.6
14.31
10.7
C.
7.4
.1
.6
1.73
1.1
D.
18.9
.6
1.9
5.86
7.9
E.
9.4
.5
1.9
3.64
4.9
#Your
Target
Multiple
F.
10
.6
1.9
5.86
7.9
*Your
Target
E S,
E,
S B
B,
etc/Sha
re
G.
3.65
58.0
17.2
6.08
4.24
Your
Target
Price
(F x G)
H.
36.50
34.80
32.68
35.63
33.52
Price Target ‐
Price Target ‐ IP
41.3% Upside
Cyclical stock, but good growth catalysts
Metric
DCF
P/Forward E
P/EBITDA
P/S
P/B
P/CF
Target Price
Weight
$ 36.11
70% $ 25.28
$ 36.50
10% $ 3.65
$
$ 35 63
35.63
10% $ $
3 56
3.56
$ 34.80
5% $ 1.74
$ 32.68
5% $ 1.63
$
$ 33 52
33.52
0% $ $
‐
Projected Price Target $ 35.86
$
$ Round To:
36.00
Current Price (8/12/11) $ 25.55
IP: Recommendation
Hold
Keep the money allocated to Materials (about 2.4% of SIM) in IP
SIM Portfolio Breakdown
Materials
Everyone Else