Materials
sector analysis
Kevin Bush
Dustin McCann
Hanyang Wei
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
Overview
•
•
•
•
•
•
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendations
BUY
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S&P Sector Weights
3.23% 2.98%
3.66%
18.07%
10.42%
10.60%
15.47%
11.15%
13.09%
Info Tech
Financials
Energy
Health Care
Industrials
Consumer Discretionary
Consumer Staples
Materials
Utilities
Telecom
11.27%
April Materials SIM Portfolio Weight: 3.09%
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S&P Industry Weights
3.41%
32.26%
Chemicals
Construction Materials
Containers & Packaging
Metals & Mining
Paper & Forest Products
58.14%
2.83%
3.36%
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Largest Companies
300
Market Cap in Billions
257.36
250
200
163.16
150
100
50.7
50
42.25
31.72
17.3
0
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13.69
1.89
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Sector Performance
1 Week Return
1 Month Return
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Sector Performance
3 Month Return
YTD Return
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Sector Performance
1 Year Return
5 Year Return
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Materials Sector Life Cycle
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Increasing Commodity Prices
S&P Goldman Sachs Commodities Index
Jan-2-70=100
S&P Goldman Sachs Non-Energy Commodities Index
Jan-2-70=100
1000
1000
800
800
600
600
400
400
200
200
0
0
80
85
90
Source: Standard and Poor's
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95
00
05
10
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Manufacturing Growth
Composite Manufacturing and Non-Manufacturing ISM Indices
50+=Expansion
NFIB Small Business Optimism Index
1986=100
65
110
60
105
55
100
50
95
45
90
40
85
35
80
Growth in the following
industries:
• Wood products
• Primary metals
• Fabricated Metal Products
• Paper Products
• Mineral Products
• Chemical Products
• Printing
Source: ISM
00
01
02
03
Sources: ISM/H, NFIB
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04
Business
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Analysis
05
06
07
08
09
10
11
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Weak Construction Industry
Housing Affordability Index
Median Inc=Qualifying Inc=100
Home Builders Housing Market Index
All Good = 100
200
80
180
60
160
140
40
120
20
100
80
0
85
90
Sources: REALTOR, NAHB
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95
00
05
10
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Improving Job Market
Employment Outlook Survey
Net % Higher
Announced Job Cuts
Number
25
250000
20
200000
15
150000
10
100000
5
50000
0
-5
0
90
95
00
05
Sources: Manpower, Challenger, Gray & Christmas, Inc.
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Porter’s 5 Forces
Barriers to Entry
High
High start up costs in already mature industries
Customer Power Medium Commodity inputs with little differentiation among outputs
Supplier Power Medium
Small window for prices, but companies
still need raw material inputs
Rivalry
High
High barriers to entry lead to a lot
of rivalry within industries
Substitutes
Low
Few opportunities where substitutes exist
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Economic Analysis
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Real GDP vs. Materials
270
2.5
170
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S&P 500 vs. Materials
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Trade Weighted dollar vs. Materials
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Uncertainty
• U.S. debt Downgraded
• Greek debt Downgraded
• Asia
– Market Share
– Loan
– Growth
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More good signs
• Material companies are raising dividends
–
–
–
–
CNBC Video (May 11)
International Paper raised 50% to 3.65%
Freeport-McMoRan raised 66% to 1.89%
Air Products & Chemicals Inc raised 18% to
2.57%
• Decreased supply from Peru: Gold, Silver, Tin
– Due to political reason
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Financial Analysis
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ROE and EBITDA
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Profitability compared to S&P
500
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Major Companies
2011 Q1
Sales
2011 Q1 Net I
Growth
ncome Growth
(million)
Market Cap
DOW
$45B
14733
7%
625
47%
EI DuPont
$49B
10039
35%
1428
379%
FreeportMcMoRan $45B
5741
2%
1499
-3%
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Valuation Analysis
Absolute Basis
High
Low
Median
Current
P/Trailing E
38.6
8.1
19.3
16.8
P/Forward E
32
10.5
16.2
12.4
P/B
3.7
1.3
2.8
2.9
P/S
1.5
.5
1.1
1.3
P/CF
12.7
5.4
9.4
10.1
Relative to SP500 High
Low
Median
Current
P/Trailing E
1.8
.68
1.1
1.2
P/Forward E
1.9
.79
1
0.9
P/B
1.3
.5
1
1.3
P/S
1.1
.5
.8
1.0
P/CF
1.1
.7
.9
1.0
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Sector Forward P/E
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Forward P/E Relative
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Diversified Metals and Mining
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Diversified Chemicals
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Aluminum
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Paper Products
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Paper Packaging
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Ag Chemicals and Fertilizer
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Relative Strength Monthly
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Relative Strength Monthly
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Relative Strength Monthly
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Relative Strength Weekly
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Relative Strength Weekly
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Materials Monthly
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Materials Weekly
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Materials Daily
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Sector Outlook
Positives
Negatives
• Global growth continues at a
strong pace
• Cost cutting during recession will
pay off in the next few years
• Higher prices are not destroying
demand
• Sentiment has turned thus
creating good VALUE
• Trading at a discount historically
• Continued affordability for new
homes will stimulate sector
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• Double dip would cause
commodity prices to drop
• Possibility of high inflation
• Strengthening USD
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Industry Outlook
Overweight
• Chemicals
• Metals and Mining
• Paper Products
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Underweight
• Containers and Packaging
• Construction Materials
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Recommendation: BUY
•Increase SIM to overweight S&P by 100 bps (4.66%)
•Raising Materials by 157 bps
•Adding another name to the portfolio
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