Materials
sector analysis
Timothy Linn Yianni Lagos
Fisher College of Business – Student Investment Management
Overview
•
•
•
•
•
•
Sector Overview/Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendations
Q&A
Fisher College of Business – Student Investment Management
Sector
Overview/Business
Analysis
Fisher College of Business – Student Investment Management
S&P500 & SIM Sector Weights
as of 11/1/2010
Sector
S&P 500 Weight
SIM Weight
+/-
Consumer Discretionary
10.58%
10.57%
-0.01%
Consumer Staples
11.15%
9.98%
-1.17%
Energy
11.13%
11.54%
0.42%
Financials
15.39%
11.83%
-3.56%
Health Care
11.46%
11.58%
0.12%
Industrials
10.67%
12.50%
1.83%
Information Technology
19.32%
19.18%
-0.14%
Materials
3.63%
3.84%
0.20%
Telecommunication Services
3.12%
4.04%
0.92%
Utilities
3.55%
2.13%
-1.42%
Fisher College of Business – Student Investment Management
INDUSTRY OVERVIEW -
NYTIMES.COM
1-month
% change
1-year
% change
No. of
companies
Market cap.
Mining & Metals Specialty
Steel
6.25%
–0.17%
30.41%
11.16%
56
64
170.5B
86.9B
Precious Metals &
Minerals
6.89%
32.04%
304
56.5B
Chemicals - Commodity
2.83%
26.64%
118
31.3B
Chemicals - Diversified
1.66%
22.82%
11
30.6B
Chemicals - Agricultural
Paper Products
0.72%
–0.87%
23.76%
16.23%
31
33
27.7B
13.3B
Construction Materials
Aluminum
6.02%
–1.43%
–15.29%
1.73%
28
11
13.1B
10.9B
6.67%
21.58%
16
672
6.2B
457.5B
Industries defined by
Thomson Reuters
Forest & Wood Products
Fisher College of Business – Student Investment Management
Major Companies in Sector
TICKER
INDUSTRY
MARKET CAP
($B)
PRICE AS OF
11/12/2010
BETA
P/E
BHP Billiton Ltd.
BHP
Div. Metals & Mining
145
86.97
1.62
22.5
BHP Billiton PLC
BBL
Div. Metals & Mining
83.6
75.76
1.65
16.6
Vale
VALE
Div. Metals & Mining
105
32.37
1.63
13.2
Monsanto Co.
MON
Agri. Chem.
33.6
62.15
1.00
25.9
POSCO
PKX
Steel
35.9
102.95
1.61
8.3
Potash Corp. of
Saskatchewan Inc.
POT
Agri. Chem.
41.6
139.91
1.22
28.1
Alcoa
AA
Aluminum
13.8
13.49
1.93
40.9
The Dow Chemical Co.
DOW
Chemicals
36.3
31.3
1.27
18.5
FreeportMcMoRan Cooper
& Gold, Inc.
FCX
Div. Metals &
Mining
49.8
103.92
1.68
12.7
El du Pont de Nemours &
Co. “DuPont”
DD
Chemicals
42.2
46.52
1.15
14.3
Goldcorp, Inc.
GG
Gold
33.1
46.44
.53
44.2
Median:
1.17
18.6
COMPANY
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Sector Performance - FIDELITY.COM
Sector
1 Week
1 Month
3 Months
YTD
1 Year
S&P500
-2.17%
2.52%
10.67%
6.46%
10.30%
Consumer
Discretionary
-1.29%
4.57%
15.92%
19.56%
26.26%
Consumer
Staples
Energy
Financials
Health Care
Industrials
-1.28%
0.95%
-4.03%
-1.73%
-3.05%
1.52%
7.50%
0.53%
0.00%
0.50%
7.32%
17.15%
5.94%
5.91%
9.57%
6.92%
8.28%
3.33%
-2.30%
13.48%
8.28%
8.60%
1.70%
3.88%
17.20%
Information
Technology
-3.17%
4.24%
14.89%
4.56%
11.10%
Materials
-2.21%
3.94%
15.64%
8.65%
14.14%
Telecomunication
Utilities
-2.07%
-2.58%
0.60%
-1.69%
8.11%
2.49%
5.31%
-1.29%
15.25%
7.64%
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Where are we in the Economic Recovery?
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Porter’s 5 Forces Business Analysis
Barriers to Entry:
High
Industries are very mature and start up costs are very high
Customer Power: Medium/High No differentiation, commodity items, low switching costs.
Few heavy equipment manufacturers, but many
commercial construction companies, regulated energy, not
many trucking companies, not many transportation compa
Supplier Power:
Medium nies worldwide
Rivalry:
High
High capital investment, commodity products, competing
on price mainly
Substitution:
Low
No major substitution products available
Fisher College of Business – Student Investment Management
Effects on Materials Stock Performance
• Increased Performance
•Rising GDP
•Increased Non-Residential Construction
•Rising Durable Goods Orders
•Falling Global Material Production/Inventories
•Government Stimulus
•Rising Global Imports/Exports
•Increase raw material prices
•Decreased Performance
•Falling GDP
•Falling Non-Residential Construction
•Falling Durable Goods orders
•Rising Global Material Production/Inventories
•Falling Imports
•Falling raw material prices
Fisher College of Business – Student Investment Management
Economic Analysis
Fisher College of Business – Student Investment Management
Materials versus S&P 500
Fisher College of Business – Student Investment Management
Materials versus Dollar
Fisher College of Business – Student Investment Management
Materials versus Real GDP
Fisher College of Business – Student Investment Management
Financial Analysis
Fisher College of Business – Student Investment Management
08/01/2010
06/01/2010
04/01/2010
02/01/2010
12/01/2009
10/01/2009
08/01/2009
06/01/2009
04/01/2009
02/01/2009
12/01/2008
10/01/2008
08/01/2008
06/01/2008
04/01/2008
02/01/2008
12/01/2007
10/01/2007
08/01/2007
06/01/2007
04/01/2007
02/01/2007
12/01/2006
10/01/2006
08/01/2006
06/01/2006
04/01/2006
02/01/2006
12/01/2005
EPS
18.0
16.0
14.0
12.0
10.0
8.0
MATERIALS
(SPBMS) EPS
MATERIALS
(SPBMS) Average
6.0
4.0
2.0
0.0
Fisher College of Business – Student Investment Management
150
08/01/2…
06/01/2…
04/01/2…
02/01/2…
12/01/2…
10/01/2…
08/01/2…
06/01/2…
04/01/2…
02/01/2…
12/01/2…
10/01/2…
08/01/2…
06/01/2…
04/01/2…
02/01/2…
12/01/2…
10/01/2…
08/01/2…
06/01/2…
04/01/2…
02/01/2…
12/01/2…
10/01/2…
08/01/2…
06/01/2…
04/01/2…
02/01/2…
12/01/2…
Revenue
220
210
200
190
180
MATERIALS
(SPBMS) Revenue
MATERIALS
(SPBMS) Average
170
160
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Margins and ROE
Absolute Basis
High
Low
Median
Current
Net Profit Margin
8.5
4.5
7.0
6.8
EBITDA Margin
18.5
14.1
17.1
16.7
ROE
20.3
7.6
18.5
15.6
Relative to SP500 High
Low
Median
Current
Net Profit Margin
1.1
.6
.9
.8
EBITDA Margin
.8
.7
.8
.8
1.3
.7
1
1
ROE
Fisher College of Business – Student Investment Management
Valuation Analysis
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.8
.68
1
1.3
P/Forward E
1.9
.79
1
1.1
P/B
1.3
.9
1.1
1.3
P/S
1.1
.7
.9
1
P/CF
1.1
.7
.9
1.1
Absolute Basis
High
Low
Median
Current
P/Trailing E
33
8.1
16.2
18.6
P/Forward E
28.6
10.5
15.3
19.3
P/B
3.7
1.3
2.8
3
P/S
1.5
.5
1.2
1.3
P/CF
12.7
5.4
9.5
10.3
Fisher College of Business – Student Investment Management
10/01/2005
12/01/2005
02/01/2006
04/01/2006
06/01/2006
08/01/2006
10/01/2006
12/01/2006
02/01/2007
04/01/2007
06/01/2007
08/01/2007
10/01/2007
12/01/2007
02/01/2008
04/01/2008
06/01/2008
08/01/2008
10/01/2008
12/01/2008
02/01/2009
04/01/2009
06/01/2009
08/01/2009
10/01/2009
12/01/2009
02/01/2010
04/01/2010
06/01/2010
08/01/2010
10/01/2010
Absolute Valuation: Price/Cash Flow
14.0
13.0
12.0
11.0
10.0
9.0
8.0
MATERIALS
(SPBMS) Price/Cash Flow
MATERIALS
(SPBMS) Average
7.0
6.0
5.0
4.0
Fisher College of Business – Student Investment Management
10/01/2005
12/01/2005
02/01/2006
04/01/2006
06/01/2006
08/01/2006
10/01/2006
12/01/2006
02/01/2007
04/01/2007
06/01/2007
08/01/2007
10/01/2007
12/01/2007
02/01/2008
04/01/2008
06/01/2008
08/01/2008
10/01/2008
12/01/2008
02/01/2009
04/01/2009
06/01/2009
08/01/2009
10/01/2009
12/01/2009
02/01/2010
04/01/2010
06/01/2010
08/01/2010
10/01/2010
Relative Valuation: Price/Cash Flow
1.20
1.10
1.00
0.90
0.80
0.70
MATERIALS
S&P 500
(SPBMS) Price/CF Relative to
MATERIALS
(SPBMS) Average
0.60
0.50
0.40
0.30
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Technical Valuation
350
300
250
200
150
MATERIALS
(SPBMS) Close
MATERIALS
(SPBMS) Average
100
50
0
11/25/2005
11/25/2006
11/25/2007
11/25/2008
11/25/2009
Fisher College of Business – Student Investment Management
Agriculture Industry
Absolute Basis
High
Low
Median
Current
P/Trailing E
56.4
13.9
33.7
23.9
P/Forward E
43.1
13.2
27.2
19
P/B
9.3
2.4
4.4
3.2
P/S
7.6
2.2
3.4
3
P/CF
38
11.4
18.5
16.3
Relative to SP500
High
Low
Median
Current
P/Trailing E
3.5
.8
2.1
1.6
P/Forward E
3
.99
1.8
1.3
P/B
3.8
1.1
1.8
1.4
P/S
5.5
1.8
2.7
2.5
P/CF
3.6
1.1
1.8
1.7
Fisher College of Business – Student Investment Management
Paper Products Industry
Absolute Basis
High
Low
Median
Current
P/Trailing E
34
4.1
21.5
23.9
P/Forward E
568.2
8.4
18.2
15.3
P/B
2.6
.3
1.7
1.7
P/S
.8
.1
.6
.5
8.9
1.2
6.2
6
P/CF
Relative to SP500 High
Low
Median
Current
P/Trailing E
2
.38
1.4
1.2
P/Forward E
36.6
.69
1.2
.69
P/B
.9
.2
.6
.8
P/S
.5
.2
.4
.4
P/CF
.8
.2
.6
.6
Fisher College of Business – Student Investment Management
Recommendation
Fisher College of Business – Student Investment Management
Sector Positives
• Positives
oMaterials Sector in middle of recovery
oDollar should continue to decline against other
currencies in long term
oContinued robust growth in China/India and other
emerging markets should fuel global growth in
sector
oUS and EU should grow slowly in next few years
oDemand is projected to outstrip supply in short
term for some key elements (Copper, steel)
oSector went through significant cost cutting during
downturn
Fisher College of Business – Student Investment Management
Sector Risks
•Risks
oDollar could strengthen
oEU debt crisis could jeopardize recovery (reducing
demand)
oUS could experience a stalling of recovery
(reducing demand)
oEnergy prices could increase (reducing profits)
oLogistics costs could increase (reducing profits)
odecrease freight capacity
oSlowdown in global growth
oCould be near market peak
oChinese Raises interest rates (happened today)
Fisher College of Business – Student Investment Management
Recommendation
• Keep sector weight the same for now.
Sector
S&P 500 Weight
SIM Weight
+/-
Consumer Discretionary
10.58%
10.57%
-0.01%
Consumer Staples
11.15%
9.98%
-1.17%
Energy
11.13%
11.54%
0.42%
Financials
15.39%
11.83%
-3.56%
Health Care
11.46%
11.58%
0.12%
Industrials
10.67%
12.50%
1.83%
Information Technology
19.32%
19.18%
-0.14%
Materials
3.63%
3.84%
0.20%
Telecommunication Services
3.12%
4.04%
0.92%
Utilities
3.55%
2.13%
-1.42%
Fisher College of Business – Student Investment Management
Q&A
Fisher College of Business – Student Investment Management