Materials
stock analysis
Kevin Bush
Dustin McCann
Hanyang Wei
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
Overview
•
•
•
•
•
Overview
Alcoa
International Paper (HOLD)
Stillwater Mining (BUY)
Recommendations
Fisher
Overview
Business of Economic
FinancialInvestment
Valuation Management
Recommendations
College
Business – Student
Analysis
Analysis
Analysis
Analysis
S&P Industry Weights
3.41%
32.26%
Chemicals
Construction Materials
Containers & Packaging
Metals & Mining
Paper & Forest Products
58.14%
2.83%
3.36%
Fisher
Overview
Business of Economic
FinancialInvestment
Valuation Management
Recommendations
College
Business – Student
Analysis
Analysis
Analysis
Analysis
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
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
Fisher
Overview
Business of Economic
FinancialInvestment
ValuationManagement
Recommendations
College
Business – Student
Analysis
Analysis
Analysis
Analysis
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
Fisher
Overview
• Double dip would cause
commodity prices to drop
• Possibility of high inflation
• Strengthening USD
Business of Economic
FinancialInvestment
Valuation Management
Recommendations
College
Business – Student
Analysis
Analysis
Analysis
Analysis
Industry Outlook
Overweight
• Chemicals
• Metals and Mining
• Paper Products
Fisher
Overview
Underweight
• Containers and Packaging
• Construction Materials
Business of Economic
FinancialInvestment
Valuation Management
Recommendations
College
Business – Student
Analysis
Analysis
Analysis
Analysis
Recommendation: BUY
•Increase SIM to overweight S&P by 100 bps (4.66%)
•Raising Materials by 157 bps
•Adding another name to the portfolio
Fisher
Overview
Business of Economic
FinancialInvestment
Valuation Management
Recommendations
College
Business – Student
Analysis
Analysis
Analysis
Analysis
Upside Projections
Stock
AA
IP
SWC
Target
Upside
$19 15.70%
$39
29%
$26
33%
Fisher
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FisherCollege
CollegeofofBusiness
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Alcoa
•Worlds Largest Aluminum company
•$17 billion market cap
•Sales 50% domestic / 50% overseas
•Four segments
• Alumina
• Primary metals
• Flat-Rolled Products
• Engineered Products and Solutions
Fisher
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FisherCollege
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Investment Thesis
The fundamental drivers for Alcoa are very straight forward and simple:
1. Alumina/Aluminum pricing – Prices have risen considerable since the lows of
2009 and prices are well supported at current levels with the possibility to rise
further
2. Improving exposure to spot pricing – As the transition continues to spot pricing
(from lagged) Alcoa will better be able to realize more accurate prices
3. Global growth – Global growth continues at a strong clip and this will directly
affect Alcoa with stronger demand and better pricing especially from the BRIC
nations
4. Portfolio and Cost Base Reshuffle – The move out of small low margin
business to concentrate on segments that Alcoa is a world leader in and
dropping costs to increase profitability
Fisher
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FisherCollege
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International Paper
Four Segments
Industrial Packaging
Printing Papers
Consumer Packaging
Distribution
FY 2011E Total Revenue:
$26,475 Million
Consensus Estimates of $26,500 Million
Fisher
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FisherCollege
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Segment Drivers
Industrial Packaging
-Second quarter forecast strong on agriculture
demands
-Driven by non-durable industrial goods production
Printing Papers
-Sales include everything from diapers to envelopes
-Sales driven by advertising budgets, white collar
employment and commercial printing budgets
Fisher
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FisherCollege
CollegeofofBusiness
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Segment Drivers
Consumer Packaging
-Driven by consumer spending
-Products include packaging for cosmetics, tobacco,
food, etc.
-Produces cups and lids for food service companies
Distribution
- Ultimately driven by growth of each of the other sectors
- Retail locations driven by small business growth
Fisher
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FisherCollege
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Growth Opportunities
Ilim Joint Venture
-Russian Joint Venture formed in 2007
-2011 Projected to be the best year yet
Andhra Pradesh Paper Mills
-75% stake in APPM by the end of the year
-Indian paper market expected to double within 10 years
-IP expects to increase productivity by 20% utilizing
assets in place
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FisherCollege
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Investment Management
One Year Performance
Current Price: $31.22
Price 1 Year Ago: $22.24
Previous Year Increase: 40.29%
Current Dividend Yield: ~3.5%
Market Capitalization: 13.65 Billion
Fisher
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FisherCollege
CollegeofofBusiness
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Investment Management
Multiples Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
E, S, B,
Target
EBITDA, Target
High Low Median Current Multiple CF/Share Price
196.5 7.4
19.4
11.1
15
2.9
$43.50
0.9 0.1
0.6
0.5
0.6
60.21
$36.13
2.6 0.6
1.9
2.1
2.2
15.61
$34.34
14.31 1.73
5.86
4.03
5
8.13
$40.65
10.7 1.1
7.9
5.6
6
5.85
$35.10
Average Price: $37.94
Annual Dividend: $1.05
Total Price: $38.99
Upside: 24.9%
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
Discounted Cash Flows Assumptions
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
Discounted Cash Flows Model
International Paper (IP)
Analyst: Dustin McCann
Terminal Discount Rate =
Terminal FCF Growth =
4/12/2011
Year
2011E 2012E 2013E
Revenue
% Growth
26475 27980
5.68%
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
10.75%
3.0%
2014E 2015E 2016E 2017E 2018E
2019E
2020E
2021E
29466
5.31%
30865
4.75%
32254
4.50%
33625
4.25%
34970
4.00%
36282
3.75%
37551
3.50%
38772
3.25%
39935
3.00%
2356
8.90%
2655
3000
9.49% 10.18%
3087
10.0%
3225
10.0%
3363
10.0%
3322
9.5%
3447
9.5%
3567
9.5%
3489
9.0%
3594
9.0%
596
2.25%
630
2.25%
663
2.25%
694
2.25%
726
2.25%
757
2.25%
787
2.25%
816
2.25%
845
2.25%
872
2.25%
899
2.25%
581
33%
668
33%
771
33%
789
33%
825
33%
860
33%
837
33%
868
33%
898
33%
864
33%
890
33%
Equity Earnings (losses), Net of Taxes
% of Sales
100
0.38%
105
0.38%
120
0.41%
126
0.41%
131
0.41%
141
0.42%
147
0.42%
152
0.42%
161
0.43%
167
0.43%
172
0.43%
Minority Interest
Interest % of Sales
21
0.08%
22
0.08%
24
0.08%
25
0.08%
26
0.08%
27
0.08%
28
0.08%
29
0.08%
30
0.08%
31
0.08%
32
0.08%
1258
1439
14.4%
1662
15.5%
1704
2.5%
1780
4.5%
1860
4.5%
1818
-2.3%
1886
3.8%
1955
3.7%
1889
-3.4%
1946
3.0%
Taxes
Tax Rate
Net Income
% Growth
Fisher
Management
FisherCollege
CollegeofofBusiness
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Discounted Cash Flows Model
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
% Growth
1456 1539
1621
1667
1742
1782
1853
1887
1953
1977
2037
5.5%
5.5%
5.5%
5.4%
5.4%
5.3%
5.3%
5.2%
5.2%
5.1%
5.1%
-294
-178
-175
-309
-323
-336
-350
-363
-376
-388
-399
-1.1% -0.6% -0.6%
-1.0% -1.0% -1.0% -1.0% -1.0%
-1.0%
-1.0%
-1.0%
1244 1315
1385
1482
1548
1648
1714
1814
1878
1977
2037
4.7%
4.7%
4.7%
4.8%
4.8%
4.9%
4.9%
5.0%
5.0%
5.1%
5.1%
1176 1486
1723
1580
1651
1659
1608
1595
1655
1501
1546
26.3% 16.0%
-8.3%
4.5%
0.4% -3.1% -0.8%
3.7%
-9.3%
3.0%
Current Price
31.22
Implied equity value/share
39.06
Upside/(Downside) to DCF
25.1%
Multiples Valuation: $39
DCF Valuation: $39
Final Weight: $39
Fisher
Management
FisherCollege
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Student Investment
Investment Management
Ilim Joint Venture Results
Year
2011E
Equity
Earnings ,
Net of Taxes
2012E
2013E 2014E 2015E
2016E 2017E 2018E 2019E
100
105
120
126
131
141
147
152
161
% of Sales 0.38%
0.38%
0.41%
0.41%
0.41%
0.42%
0.42%
0.42%
0.43%
2020E 2021E
167
172
0.43% 0.43%
Conservative estimates of Equity Earnings could lead to even larger upside
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
EPS History
-Fourth best quarter in past decade during historically weak first quarter
Fisher
Management
FisherCollege
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Investment Management
International Paper
Strong year ahead
Growth Prospect in India
Solid results from JV
Final Price Target: $39
Upside: 24.9%
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management
Stillwater Mining Company
Fisher College of Business – Student Investment Management
Business Analysis
• Main Business
– Exploration of Palladium and Platinum (PGM)
– PGM Recycling
•
•
•
•
Market Cap: $2.27B
52 week range: $11~$26
Operating Margin: 24%
EPS: $0.51
Fisher College of Business – Student Investment Management
Fisher College of Business – Student Investment Management
Fisher College of Business – Student Investment Management
Fisher College of Business – Student Investment Management
Main Sources of Palladium Supply
• Mine Production 82%
• Recovery/Recycle 18%
Fisher College of Business – Student Investment Management
Use of Palladium
4% 1%
15%
12%
64%
Autocatalyst
Chemical
Dental
Electronics
Jewelry
Other
4%
Fisher College of Business – Student Investment Management
Demand from Auto Industry
•
•
•
•
•
GM: 26% sales increase
Ford: 13%
Toyota: 1.3%
Nissan: 12%
Honda: 9.8%
• India: 13.2%
Fisher College of Business – Student Investment Management
PGM Deposit
• Russia: 43%
– Low Inventory
• South Africa: 41%
– Unrest
– Underperformance from Marula, Impala Platinum
• North America: 11%
– Mine Expansion
Fisher College of Business – Student Investment Management
The Blitz Project
Fisher College of Business – Student Investment Management
The Marathon PGM-Copper Project
Classification Tonnes
Proven
Cu
Pd
Pt
Au
Ag
(Mlb) (oz 000 (oz 000 (oz 000 (oz 000
)
)
)
)
76,461,00
452
2,237
625
222
3,600
14,986,00
46
209
71
29
635
91,447,00
498
2,446
696
251
4,235
0
Probable
0
Total
0
Fisher College of Business – Student Investment Management
GOOD NEWS
• Palladium Supply Deficit Widen
– Report shows supply surplus is 20000 ounces in
2010, 90% lower than estimated.
– Global demand grew 16% last year
– Recycling activities rose by 31%
Fisher College of Business – Student Investment Management
Fisher College of Business – Student Investment Management
Recommendation
•
•
•
•
BUY
Today’s Price: 19.53
Target Price: 26
Upside: 33%
Fisher College of Business – Student Investment Management
Recommendations
• Sell 76 bps of IP
• Buy 233 bps of SWC
(50-50 Split)
Or
• Hold IP at 309 bps
• Buy 157 bps of SWC
Fisher
Management
FisherCollege
CollegeofofBusiness
Business––Student
Student Investment
Investment Management