Sector Presentation

Overview

Business Analysis

Economic Analysis

Financial Analysis

Valuation Analysis

Summary and Recommendation
S&P 500 Weight
Consumer
Discretionary
Consumer Staples
2.92%
3.26%
3.65%
10.21%
18.97%
12.70%
11.15%
Financials
Health Care
Discretionary
Consumer Staples
3.23%
4.30%
Energy
9.31%
9.04%
21.51%
11.54%
11.74%
Technology
Materials
Telecommunication
Services
Utilities
Financials
Health Care
Industrials
Industrials
Information
10.70%
Consumer
2.32%
Energy
10.30%
16.13%
SIM Weight
13.19%
11.08%
Information
Technology
Materials
Telecommunication
Services
Utilities
Industries
Ticker
Market Cap ($ B)
Current Performance Relative to S&P 500
Aluminum
ALUMN
18
-48.6
FERTL
33.1
80.3
Chems-Commodity
CCHEM
796
-86.6
Chems-Diverse
DCHEM
39.2
17
Chems-Specialty
SCHEM
9
80.4
Construction Matrls
CONST
5.8
-41.2
Contain Metal/Glass
CONTM
5.9
51.8
Diverse Metal/Mining
METAL
50.5
136.1
Forest Products
FPROD
1.3
54.9
Gold
GOLDM
28.6
334.9
Industrial Gases
INGAS
24.3
69.3
Paper Packaging
PPACK
4.1
-0.9
Paper Products
PPROD
10.9
-0.69
Prec Metals & Minerals
PRECM
228
-57.2
Steel
STEEL
11.5
18.9
Chems-Agri/Fertilizer
*Baseline classifies ANR in the Energy Sector within
Coal & Consumable Fuel, so we grouped it into
Diverse Metal/Mining to stay in Materials Sector
Company
Ticker
Industry
Market Cap ($B)
Price as of 2/17/11
Beta
Dividend Yield
CF
Agri/Fertilizer
10.3
144.84
1.19
0.3%
Dow Chemical
DOW
CHEMS-Diverse
44.5
38.3
1.28
1.6%
Sherwin-Williams
SHW
Chems-Specialty
9.1
84.57
0.78
1.7%
Vulcan Materials
VMC
Construction matrls
5.8
45.42
1.57
2.2%
Ball
BLL
Contain Metal/glass
6.5
36.83
0.93
1.5%
Alpha Natural Resources
ANR
Diverse Metal/Mining
6.9
57.44
2.03
none
Newmont Mining
NEM
Gold
28.6
57.97
0.62
1.0%
Airgas
ARG
Industrial Gases
5.4
64.35
1.19
1.8%
Bemis
BMS
Paper Packaging
3.6
32.98
0.82
2.9%
IP
Paper Products
13.1
30.01
1.56
2.5%
AKS
Steel
1.9
16.85
2.11
1.2%
CF Industries Holdg
Int'l Paper
AK Steel Holding
*Baseline classifies ANR in the Energy Sector within
Coal & Consumable Fuel, so we grouped it into
Diverse Metal/Mining to stay in Materials Sector
*
Bargaining Power
of Customers
Threat of New
Entrants
-High
-Highly price
sensitive
-low switching costs
-hard to differentiate
product
Bargaining Power
of Suppliers
-Low
-High capital
investment required
-Many existing players
Threat of
Substitute
Products
-Low
-Low substitutes
-Medium
-Increased
government
regulations
Rivalry
-High
-Mature industries
-High rivalry across the
world

Net Sector Margins: Currently 7%, Median 5.5%

Net Sector Margin: Current .9 to a median of 1.1.

NEM Operating Margins: Currently 47.4% at it’s
all time high

IP Operating Margins: Currently at 7.9%,
Median 7.9%

ANR Operating Margin: Currently 15.6% which is
it’s all time high

Currently 16.6%, median of 17.8%

Currently at 1.1, median of 1.1

NEM currently at 17%, Median of 13.9%

IP currently at 14.0%, median of 7.3%

ANR currently at 9.9%, median at 8.7%



NEM’s turnover is a it’s current high, 6.9, and
looks to be at the top of it’s cycle
IP is near it’s all time high of 8.5 and is
currently at 7.9
ANR is currently at 11.1 near it’s low of 10.3,
but this is due to a lack of long-term data
(ANR public in 2005)

Currently at 11.5, median of 9.5



We are currently at the very high end of our
historical price to cash flow numbers as a
sector
Our sector is a net generator of cash
historically speaking, as our CF/Share is very
high
As a sector we are near some of our historical
high levels of CF/Share



Our sector is at the top or near the top of it’s
cycle
The margins are running at near all-time
highs (on an absolute and relative basis)
which leads us to believe that we will have
contracting margins moving forward
Our financial analysis points to the possibility
of our sector currently being overvalued
Absolute Basis
High
Low
Median
Current
P/Trailing E
21.3
6.1
13.5
15.9
P/Forward E
23.9
7.8
13.1
13.2
P/B
3.8
1.4
2.7
2.2
P/S
1.4
0.5
1
1.1
10.1
5
7.4
8.6
P/CF
Relative to
SP500
High
Low
Median
Current
P/Trailing E
1.1
.50
.74
1.0
P/Forward E
1.2
.57
.78
.92
P/B
1.4
.7
.9
1.0
P/S
1.0
.6
.7
.9
.9
.6
.7
.9
P/CF



Materials sector follows the overall market
Currently, materials sector is within 0.9-1.0
in all valuation metrics against SP500
Materials sector is currently valued at near
our all-time highs in each valuation category
Absolute Basis
High
Low
Median
Current
P/Trailing E
427.0
7.2
23.2
25.3
P/Forward E
28.8
5.3
15.0
16.4
P/B
4.3
2.1
3.0
3.5
P/S
4.9
.50
1.5
2.2
22.1
4.8
8.5
12.8
P/CF
Relative to
SP500
High
Low
Median
Current
P/Trailing E
23.3
.55
1.4
1.6
P/Forward E
2.1
.39
.99
1.1
P/B
2.1
.70
1.5
1.5
P/S
4.0
.40
1.1
1.7
P/CF
2.1
.50
.90
1.3




Cyclical industry compared to overall sector
Valuations depend upon the price of
commodities and other benchmarks
Valuation metrics still in line with SP500
P/S a little expensive
Absolute Basis
High
Low
Median
Current
P/Trailing E
745.5
11.7
27
14.4
P/Forward E
50.3
11.1
29.9
11.1
P/B
3.7
1.5
2.3
2.2
P/S
6.6
1.8
3.9
2.8
66.6
7
15.6
9.6
P/CF
Relative to
SP500
High
Low
Median
Current
P/Trailing E
45
.89
2
.93
P/Forward E
3.4
.79
1.8
.79
P/B
1.7
.4
.8
1.0
P/S
6.6
1.8
3.9
2.8
P/CF
8.3
.5
1.5
1.0




Again, a more cyclical industry with the
valuations of the companies depending
largely upon the price of gold
Most metrics right in line with SP500
Median P/S is almost 4.0, which is
significantly higher than overall sector (1.0)
High P/S due to higher price of gold with
relatively unchanged sales
Absolute Basis
High
Low
Median
Current
P/Trailing E
62.4
4.1
25.1
18.6
P/Forward E
568.2
8.4
20.2
11.6
P/B
2.6
0.3
1.6
1.8
P/S
0.8
0.1
0.6
0.6
P/CF
8.9
1.7
6.8
6.1
Relative to
SP500
High
Low
Median
Current
P/Trailing E
2.8
0.38
1.5
1.2
P/Forward E
36.6
0.69
1.2
0.82
P/B
0.9
0.2
0.6
0.8
P/S
0.5
0.2
0.4
0.4
P/CF
0.8
0.2
0.6
0.6




Paper industry is very cheap compared to the
market as a whole
Most metrics under 1.0 compared to SP500
Opportunities for value investing in this
industry
Most companies in this industry are mature


Multiples are currently near all-time highs
We feel that sector is at or near the top of
cyclical cycle
Recommendation


Keep it current underweight 42 bps
Reduce it to 100 bps underweight