Materials
Company Analysis
Timothy Linn Yianni Lagos
Fisher College of Business – Student Investment Management
Overview
• Sector Recommendation Review
• Freeport Summary
–
–
–
–
Business Analysis
Financial Analysis
Valuation
Recommended buy
• Alcoa summary
–
–
–
–
Business Analysis
Financial Analysis
Valuation
Recommended buy
• Q&A
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%
Class decided to do nothing on a % basis.
Fisher College of Business – Student Investment Management
Freeport Company Profile
• Products
– Exploration of minerals
– Mines Copper, Gold, Silver, Molybdenum, Cobalt
– Processes copper products
• Market Cap – $47.34B (largest public copper company
in world)
• Stock Range 52 Week – $56.71 to $108.51
• Dividend - $2.00 per share (just increased)
• Beta - 1.86
Fisher College of Business – Student Investment Management
Freeport SIM Portfolio Summary
•
•
•
•
•
Bought at $72.29
Current Price $101.30 (11/29/10)
Own 4700 shares
Current upside is 40.13% ($136,000 gain)
DCF Target - $86.29
– TDR 11%
– TGR 2% (GDP)
• Future Upside (-13.7%)
Fisher College of Business – Student Investment Management
Freeport Valuation Analysis
Absolute
Valuation
H
L
M
C
#Your
Target
Multiple
*Your
Target E,
S, B,
etc/Share
Your Target
Price
P/F E
21.3
2.9
10.1
11.7
10.1
7.85
$79.29
P/S
3.2
0.5
2.2
2.5
2.2
38.57
$84.85
P/B
16.2
0.6
5.7
5.8
5.7
16.63
$94.79
P/EBITDA
10.6
0.98
4.49
6.15
4.49
15.68
$70.40
P/CF
27.4
1.9
8.3
9
8.2
10.71
$87.82
•Price Range – $70.40 to $94.79
•Weighted Valuation - $85.33
Fisher College of Business – Student Investment Management
IP Company Profile
• Products
– Manufactures containerboard/packaging papers and finished packaging of
various grades
– Packaging manufacturing equipment
– Owns forest land for timber
– Distribution Services
• Markets – North America, Europe, Latin America, Russia, Asia, North
Africa
• Market Cap – $11.06B
• Revenue $24B per year
• Beta – 2.43
• Stock Range 52 Week – $19.69 to $29.25 (Current $25.29)
• Dividend - $0.50 per share annually
Fisher College of Business – Student Investment Management
IP Sales Percentage
Total Q3 Sales by Region
Distribution
26%
North
America
55%
Brazil
4%
Asia
5%
Europe
10%
Fisher College of Business – Student Investment Management
IP Financial Analysis’s Summary –
•
•
•
•
Strong Buy/Buy – 12
Hold – 1
Underperform – 1
Sell - 0
Price Target
Summary
Mean Target:
Thomson/First Call
Price
$33.83
Median Target:
$32.00
High Target:
$44.00
Low Target:
$27.00
No. of Brokers:
12
Fisher College of Business – Student Investment Management
IP DCF
Freeport
Timothy S. Linn
11/29/2010
(000,000s)
Year
Terminal Discount Rate =
Terminal FCF Grow th =
2010E
Revenue
22,378
% Grow th
2011E
22,825
2.0%
Operating Income
1,254
981
2012E
23,282
2.0%
1,001
2013E
23,747
2.0%
1,021
2014E
24,222
2.0%
1,042
11.0%
2.0%
2015E
24,707
2.0%
1,062
2016E
25,201
2.0%
1,084
2017E
25,705
2.0%
1,105
2018E
2019E
26,219
26,743
2.0%
2020E
27,278
2.0%
1,127
2.0%
1,150
1,173
Operating Margin
5.6%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
Interest Income
(506)
(516)
(527)
(537)
(548)
(559)
(570)
(582)
(593)
(605)
(617)
Interest % of Sales
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
-2.3%
Taxes
Tax Rate
Net Income
(389)
(304)
(310)
(317)
(323)
(329)
(336)
(343)
(349)
(356)
(364)
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
31.0%
359
161
164
167
171
174
178
181
185
188
192
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
% Grow th
Add Depreciation/Amort
1,119
% of Sales
5.0%
Plus/(minus) Changes WC
3,133
% of Sales
1,141
5.0%
3,196
1,164
5.0%
3,259
1,187
5.0%
2,375
1,211
5.0%
1,817
1,235
5.0%
1,235
1,260
1,285
1,311
1,337
5.0%
5.0%
5.0%
5.0%
756
514
262
134
1,364
5.0%
0
14.0%
14.0%
14.0%
10.0%
7.5%
5.0%
3.0%
2.0%
1.0%
0.5%
0.0%
Subtract Cap Ex
(559)
(571)
(582)
(594)
(606)
(618)
(630)
(643)
(655)
(669)
(682)
Capex % of sales
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
-2.5%
Free Cash Flow
4,052
% Grow th
NPV of Cash Flow s
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
14,647
3,489
18,136
36.93%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
30.5
50.5
4.6
7.6
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Dow nside) to DCF
Debt
Cash
Cash/share
3,927
4,006
-3.1%
2.0%
3,136
2,593
2,027
1,564
1,338
1,102
-21.7%
-17.3%
-21.8%
-22.9%
-14.4%
-17.6%
81%
19%
100%
68.2
112.7
5.2
8.5
66.9
110.5
5.1
8.4
991
874
-10.1%
-11.8%
Terminal Value
9,908
Free Cash Yield
8.82%
Terminal P/E
51.5
Terminal EV/EBITDA
3.9
434
$
$
25.29
11/29/2010
41.81
65.3%
P/S Projected
0.810
P/B Projected3.87
Growth Rate
0
8.75
1.43
0.00
Fisher College of Business – Student Investment Management
IP DCF Summary
Growth Rate
• DCF Target - $41.81
– TDR 11%
– TGR 2%
• Future Upside (65.3%)
• Sensitivity Analysis
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
9.5%
$40.09
$41.46
$42.95
$44.60
$46.44
$48.49
$50.81
$53.47
$56.55
10.0%
$38.94
$40.20
$41.57
$43.08
$44.73
$46.57
$48.63
$50.96
$53.62
Discount Rate
10.5%
11.0%
$37.88
$36.90
$39.05
$37.99
$40.31
$39.16
$41.69
$40.43
$43.20
$41.81
$44.86
$43.32
$46.70
$44.98
$48.77
$46.83
$51.10
$48.90
11.5%
$35.98
$37.00
$38.09
$39.27
$40.54
$41.92
$43.44
$45.11
$46.96
12.0%
$35.13
$36.08
$37.10
$38.20
$39.38
$40.65
$42.04
$43.56
$45.24
12.5%
$34.33
$35.23
$36.18
$37.21
$38.31
$39.49
$40.77
$42.16
$43.68
Fisher College of Business – Student Investment Management
IP Valuation Analysis
Absolute
Valuation
H
L
M
C
#Your
Target
Multiple
*Your
Target E,
S, B,
etc/Share
Your Target
Price
196.5
7.4
16.6
9.1
16.6
1.99
$33.04
P/S
.8
.1
.5
.4
.5
63.23
$31.61
P/B
2.2
.6
1.8
1.7
1.8
14.08
$25.34
P/EBITDA
13.36
1.73
3.76
7.56
3.76
3.34
$12.56
10
1.1
6.1
5
6.1
5.058
$30.85
P/F E
P/CF
•Price Range – $12.56 to $33.04
•Weighted Valuation - $30.75 (21.5% upside)
Fisher College of Business – Student Investment Management
IP Company Positives
• Record setting EPS in 3rd Quarter (excluding 1 time land sales)
• Increased margins from;
– Restructuring in 2008 and 2009
– Announced Price increases
– Increased volume in all markets
• Strong performance by JV in Russia
• Well positioned to capture benefits of global growth
– Asia (Direct Competitor of Mine)
– Brazil
• One of the Big 5 in the US (IP, Stone, Inland, GP, WH), they
have an oligopoly on paper raw materials for packaging
Fisher College of Business – Student Investment Management
Final IP Target Calculation
• DCF – 65% weight
• Valuation – 35% weight
• Target Price - $37.93
– Upside potential 49.9%
Fisher College of Business – Student Investment Management
Alcoa Valuation Analysis
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
*Your
Target
E, S, B,
etc/Shar
e
Your
Target
Price
(F x G)
B.
C.
D.
E.
F.
G.
H.
115.1
8.2
13
14.5
13
$.96
$12.48
1.2
.2
.9
.6
.9
$20.1
$18.09
2.5
.4
1.7
1.1
1.7
$12
$20.4
P/EBITDA
64.43
1.57
6.7
5.99
6.7
$2.2
$14.74
P/CF
39.6
2.3
8.9
7.5
8.9
$1.76
$15.66
A.
P/Forward
E
P/S
P/B
• weighted average – 16.27
•P/E, P/EDITDA, P/CF weighted average – 14.3
Fisher College of Business – Student Investment Management
Alcoa (AA)
Alcoa DCF
Year
Aluminum Price
Aluminum Price Growth Rate
Revenue
Aluminum Price Multiple
Terminal Discount Rate =
Terminal FCF Growth =
2010E
2140
2011E
2328
2012E
2385
2013E
2457
2014E
2530
2015E
2606
2016E
2684
2017E
2765
2018E
2848
2019E
2933
2020E
3021
28.2%
8.8%
2.4%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
20,648
9.7
Operating Income
1,177
Operating Margin
5.7%
Interest and Other
413
Interest % of Sales
2.0%
Taxes
Tax Rate
Net Income
23,047
9.9
2,120
9.2%
461
2.0%
% of Sales
Current Price
Implied equity value/share
Upside/(Downside) to DCF
11.00
3,954
31,326
11.00
4,072
32,266
11.00
4,195
33,234
11.00
4,320
13.0%
13.0%
13.0%
13.0%
13.0%
487
516
557
573
591
608
627
645
665
2.0%
2.0%
2.0%
1,298
31.5%
1,216
1,754
35.1%
1,290
1,865
6.3%
1,670
2.0%
1,041
33.0%
2,113
13.3%
1,720
2.0%
1,072
33.0%
2,176
3.0%
1,772
2.0%
1,104
33.0%
2,241
3.0%
1,825
2.0%
1,137
33.0%
2,309
3.0%
2,193
2.0%
1,171
33.0%
2,378
3.0%
2,259
2.0%
1,206
33.0%
2,449
3.0%
2,326
5.0%
5.0%
5.0%
5.0%
6.0%
6.0%
6.0%
6.0%
7.0%
7.0%
7.0%
(240)
(128)
(155)
(139)
(143)
(148)
(152)
(157)
(161)
(166)
4,614
10,353
14,967
-3.53%
26.2
29.2
9.9
10.6
-1.0%
2,074
9.0%
-0.5%
2,433
10.0%
(174)
(46)
-63.2%
-73.7%
-0.6%
2,579
10.0%
310
-773.4%
-0.5%
2,783
10.0%
612
97.8%
-0.5%
2,580
9.0%
1,109
81.2%
-0.5%
2,657
9.0%
1,143
3.0%
-0.5%
2,737
9.0%
1,177
3.0%
31%
69%
100%
-0.5%
2,506
8.0%
1,839
56.2%
-0.5%
2,581
8.0%
1,894
3.0%
Terminal Value
Free Cash Yield
13.6
15.2
6.7
7.2
10.4
11.5
5.6
6.0
-0.5%
2,326
7.0%
2,283
20.5%
29,396
7.77%
Terminal P/E
12.0
Terminal EV/EBITDA
5.7
1,021
$
$
13.17
14.65
11.3%
Terminal FCF Growth
Debt
Cash
Cash/share
3,839
30,414
(162)
(474)
Shares Outstanding
11.00
13.0%
918
1,152
3,727
29,528
12.0%
33.0%
987
11.00
12.0%
825
% Growth
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
3,340
28,668
11.1%
32.0%
9.0%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
11.00
686
-0.8%
Free Cash Flow
3,095
27,833
31.0%
1,858
Capex % of sales
10.5
498
1,032
Subtract Cap Ex
2,700
25,794
30.0%
92.3%
% of Sales
10.2
152
513
Plus/(minus) Changes WC
24,327
19.9%
% Growth
Add Depreciation/Amort
11.0%
3.0%
9,309
843
0.83
Terminal FCF Growth
2.5%
3.0%
3.5%
4.0%
4.5%
9%
$20.06
$21.38
$22.94
$24.81
$27.10
10%
$16.61
$17.51
$18.56
$19.77
$21.21
Discount Rate
11%
$14.01
$14.65
$15.38
$16.22
$17.18
12%
$12.00
$12.47
$12.99
$13.59
$14.26
13%
$10.39
$10.75
$11.14
$11.57
$12.06
2.5%
3.0%
3.5%
4.0%
4.5%
9%
52%
62%
74%
88%
106%
10%
26%
33%
41%
50%
61%
Discount Rate
11%
6%
11%
17%
23%
30%
12%
-9%
-5%
-1%
3%
8%
13%
-21%
-18%
-15%
-12%
-8%
Fisher College of Business – Student Investment Management
Alcoa Summary
• Alcoa Price Target: $14.65
•Current Share Price: $13.12
•Upside: 10%
•Recommendation: sell
Fisher College of Business – Student Investment Management
Newmont Mining
• Gold Producing Company
• Market Cap: 29.01 billion
• 52 week range: $42.80 - $65.50
Newmont
Mining Valuation
• Operations: United States,
Australia,
Peru, Indonesia, Ghana,
Canada, New Zealand
Fisher College of Business – Student Investment Management
Newmont Mining Valuation
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
*Your
Target
E, S, B,
etc/Share
Your
Target
Price
(F x G)
A.
B.
C.
D.
E.
F.
G.
H.
P/Forward E
50.2
12.1
22.3
12.6
22.3
$4.6
$102.58
P/S
6.3
1.8
3.7
3
3.7
$18.9
$69.93
P/B
3.3
1.5
2.4
2.4
2.4
$24.3
$58.32
661.49
6.7
11.16
8.14
11.16
$7.2
$80.35
26.3
7
14.2
10.2
14.2
$5.74
$85.51
P/EBITDA
P/CF
•Weighted average - $79.34
Fisher College of Business – Student Investment Management
Fisher College of Business – Student Investment Management
Newmont Mining Summary
• Price Target:$74
• Current Price: $58.83
• Upside: 26%
• Recommendation: Buy 175 BPS
• Sensitivity Analysis:
Fisher College of Business – Student Investment Management
Recommendation Summary
• Sell 100% of Freeport and Alcoa
• Buy 1.75% of International Paper
• Buy 1.75% of Newmont Mining
Fisher College of Business – Student Investment Management
Q&A
Fisher College of Business – Student Investment Management