Materials
sector analysis
Chris Pierce · Jyotixko Sinha · Colin Souza · Jake Vogel · Dustin Wills
Fisher College of Business – Student Investment Management
Overview
•
•
•
•
•
Sector & Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendations
• Q&A
Fisher College of Business – Student Investment Management
Sector &
Financial Analysis
Business Analysis
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Sector Information
•Materials sector size: $367 Billion
•Percent of the S&P 500: 3.55%
• Percent of the S&P 500 over 20
years:
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Sector Composition
•Industries within the materials
sector:
•Aluminum
•Forest Products
•Chemicals - Agri/Fertilizer
•Gold
•Chemicals - Diverse
•Industrial Gases
•Chemicals - Specialty
•Paper Packaging
•Construction Materials
•Paper Products
•Containers - Metal/Glass
•Steel
•Diverse Metals/Mining
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Major Companies
•Largest Companies in the
Materials Sector:
Company BHP Billiton Limited (ADR) BHP Billiton plc (ADR) Vale (ADR) ArcelorMittal (ADR) Barrick Gold Corporation (USA) E.I. du Pont de Nemours & Company Freeport‐McMoran Copper & Gold Inc. POSCO (ADR) The Dow Chemical Company Monsanto Company Sector & Business
Analysis
Ticker
BHP
BBL
VALE
MT
ABX
DD
FCX
PKX
DOW
MON
Economic
Analysis
Industry
Diverse Metals/Mining
Diverse Metals/Mining
Diverse Metals/Mining
Steel
Gold
Chems‐Diverse
Gold
Steel
Chems‐Diverse
Chems‐Agri/Fertilizer
Financial
Analysis
Market Cap P/E (ttm) Ann. Revenue 200.99B 21.53
50,211.00
171.24B 18.3
50,211.00
144.91B 25.96
23,311.00
46.34B 13.08
65,110.00
40.47B ‐
8,136.00
36.87B 11.86
27,328.00
33.62B 9.23
15,040.00
32.05B 9.52
30,923.19
31.56B 49.63
44,875.00
31.26B 31.61
11,724.00
Valuation
Analysis
Recommendation
Sector Performance
Sector Performance: Year-to-Date
Materials Sector: -3.13% S&P 500: -1.21%
Quarter to Date: Materials Sector: 12.23% S&P 500: 6.88%
Materials vs. S&P 500 YTD
15.00%
10.00%
5.00%
0.00%
-5.00%
Materials
S&P 500
-10.00%
-15.00%
-20.00%
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
S&P500 & SIM Sector Weights
as of 7/30/2010
Sector
S&P SIM 500 Weight
Weight
+/‐
20%
Consumer Discretionary
10.20%
10.21%
0.01%
Consumer Staples
11.41%
11.66%
0.25%
Energy
10.87%
9.50%
‐1.37%
Financials
16.45%
12.23%
‐4.22%
8%
Health Care
11.37%
12.78%
1.40%
4%
Industrials
10.64%
12.99%
2.35%
Information Technology
18.79%
17.44%
‐1.35%
Materials
3.55%
1.64%
‐1.90%
Telecommunication Services
3.03%
3.93%
0.90%
Utilities
3.69%
2.35%
‐1.33%
Cash
0.00%
5.21%
5.21%
Dividend Receivable
0.00%
0.06%
0.06%
16%
12%
0%
Sector & Business
Analysis
Economic
Analysis
S&P 500 Weight
Financial
Analysis
Valuation
Analysis
SIM Weight
Recommendation
Sector Analysis
What determines sector
performance?
What is the materials sector?
A category of stocks that accounts for
companies involved with the
discovery, development and
processing of raw materials. The
basic materials sector includes the
mining and refining of metals,
chemical producers and forestry
products.
The basic materials sector is
sensitive to changes in the
business cycle. Because the
sector supplies materials for
construction, it depends on a
strong economy. This sector is
also sensitive to supply and
demand fluctuations because
the price of raw materials, such as
gold or other metals, is largely
demand driven.
- Investopedia.com
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Business Analysis
• Materials sector is sensitive to supply and demand fluctuations
• Sensitive to Fluctuations in the Business Cycle
• Relies on Strong Economy
• Sensitive to Supply / Demand Fluctuations
• Prices of Raw Materials Largely Demand Driven
• Good way to benefit from growing economies such as China and Brazil
•Phase of the Life Cycle: Mature
•Potential Catalysts for the Sector: Improving housing data, European
economic recovery, and emerging markets
•Potential Risks for the Sector: Deteriorating economic conditions,
government regulations, and environmental regulations
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Sector Outlook
•What others are saying about the materials sector:
•Demand from India and China will powerful catalyst for materials.
•Increased government spending benefits materials because the government is a
huge customer.
•Tightening supply conditions will support strong performance by materials.
Materials has the highest
correlation to emerging
markets among the cyclicals!
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Interaction of Supply & Demand
• Materials sector is sensitive to
supply and demand fluctuations
• Gold and other metal prices for raw
materials are largely demand-driven
•Depends on a strong economy
- minerals.usgs.gov
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Interaction of Supply & Demand
- minerals.usgs.gov
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
How Materials Work
- minerals.usgs.gov
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Economic Analysis
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Micro-characteristics of the firms
Packaging
Construction
Forest
Products
Chemicals
•Capital intensive
•Less value addition
•Commodity like
•Supply demand dependent
•Global
Metals and Mining
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Micro Æ Macro economic variables
VALUE CHAIN
Materials Æ Manufacturing +Industries Æ RetailÆ Consumers
COST
Labor
REVENUE
Energy
Raw materials
Capital Expenditure-machinery
Transportation
Consumer Spending
Business Spending
Government Spending
Cost
GDP
Raw Material Cost
Construction
Capacity utilization
Freight Rates
Sector & Business
Analysis
Residential
Economic
Analysis
Financial
Analysis
Durable Goods Orders
Industrial Production
Import/Export
Non‐
residential
Valuation
Analysis
Recommendation
Key Economic Drivers
Bullish Drivers
Bearish Drivers
Rising GDP Growth
Falling GDP Growth
Rising non‐residential construction
Falling non‐residential construction
Rising durable goods order
Falling durable goods order
Rising industrial production
Falling industrial production
Falling global materials production
Rising global materials production
Falling inventories
Falling inventories
Rising global imports
Falling global imports
Rising Capacity Utilization
Falling Capacity Utilization
Rising raw material costs
Falling raw material costs
Rising marginal cost of production
Falling marginal cost of production
Increased commodity regulation (tariffs, etc)
Decreased commodity regulation (tariffs, etc)
Increased freight rates
Decreased freight rates
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Real GDP
RevenueÆ GDP
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Durable Goods Orders
RevenueÆ Durable Goods Orders
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Govt. Spending
RevenueÆ New Public Construction: Highway and Materials
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Non-Res. Const.
RevenueÆ Non Residential Construction
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Inventories
RevenueÆ Inventories
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus New Private Construction
RevenueÆ New Private Construction
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Industrial Construction
Revenue-Industrial Construction
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Exports
Revenue ÆExports
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Energy
Cost ÆEnergy
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Global Transportation
CostÆ Freight->Baltic Dry Index
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Materials versus Energy
Cost ÆCapacity Utilization
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Financial Analysis
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Historical Revenues and EPS
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Absolute EBITDA Margin
25%
20%
15%
10%
5%
0%
2000
2001
2002
2003
2004
Sector
Sector & Business
Analysis
Economic
Analysis
2005
Sector Average
Financial
Analysis
2006
2007
2008
2009
2010
Linear (Sector)
Valuation
Analysis
Recommendation
EBITDA Margin Relative to S&P 500
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2000
2001
2002
2003
Sector
Sector & Business
Analysis
2004
S&P 500
Economic
Analysis
2005
Sector Average
Financial
Analysis
2006
2007
2008
2009
2010
Linear (Sector)
Valuation
Analysis
Recommendation
Net Profit Margin
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2000
2001
2002
2003
2004
Sector
Sector & Business
Analysis
Economic
Analysis
2005
Sector Average
Financial
Analysis
2006
2007
2008
2009
2010
Linear (Sector)
Valuation
Analysis
Recommendation
Net Profit Margin Relative to S&P 500
1.2000
1.0000
0.8000
0.6000
0.4000
0.2000
0.0000
2000
2001
2002
2003
Sector
Sector & Business
Analysis
2004
S&P 500
Economic
Analysis
2005
Sector Average
Financial
Analysis
2006
2007
2008
2009
2010
Linear (Sector)
Valuation
Analysis
Recommendation
Sector & Business
Analysis
Sector
Economic
Analysis
Average
Financial
Analysis
Valuation
Analysis
03/01/2010
12/01/2009
09/01/2009
06/01/2009
03/01/2009
12/01/2008
09/01/2008
06/01/2008
03/01/2008
12/01/2007
09/01/2007
06/01/2007
03/01/2007
12/01/2006
09/01/2006
06/01/2006
03/01/2006
12/01/2005
09/01/2005
06/01/2005
03/01/2005
12/01/2004
09/01/2004
06/01/2004
03/01/2004
12/01/2003
09/01/2003
06/01/2003
03/01/2003
12/01/2002
09/01/2002
06/01/2002
03/01/2002
12/01/2001
09/01/2001
06/01/2001
03/01/2001
12/01/2000
09/01/2000
06/01/2000
Revenues
240
220
200
180
160
140
120
100
Linear (Sector)
Recommendation
Valuation Analysis
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Absolute Valuation
Price / Forward Earnings
32x
Forward P/E
27x
Median
22x
17x
16.7x
15.0x
12x
7x
2000
2001
Sector & Business
Analysis
2002
2003
2004
Economic
Analysis
2005
2006
2007
Financial
Analysis
2008
2009
2010
Valuation
Analysis
Recommendation
Relative Valuation
Price /Forward Earnings
1.9x
Forward P/E Relative
to S&P 500
1.7x
1.5x
Median
1.3x
1.1x
1.1x
1.0x
0.9x
0.7x
0.5x
2000
Sector & Business
Analysis
2001
2002
2003
2004
Economic
Analysis
2005
2006
2007
Financial
Analysis
2008
2009
2010
Valuation
Analysis
Recommendation
Absolute Valuation:
Price / Sales
1.50
1.30
1.2
1.1
1.10
0.90
0.70
0.50
2000
2001
2002
2003
2004
2005
Price/Sales
Sector & Business
Analysis
Economic
Analysis
2006
2007
2008
2009
2010
Median
Financial
Analysis
Valuation
Analysis
Recommendation
Relative Valuation:
Price / Sales
1.15
1.0
0.95
0.8
0.75
0.55
0.35
2000
2001
2002
2003
2004
2005
2006
Price/Sales Relative to S&P 500
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
2007
2008
2009
2010
Median
Valuation
Analysis
Recommendation
Multiple Valuations - Industry
Agriculture / Fertilizer
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
58.6
43.1
9.3
7.6
38.0
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Container Metal/Glass
+/-
9.5
22.2
17.8
10.8
22.8
18.6
0.5
3.2
2.8
0.7
2.9
2.7
5.4
13.5
13.2
Average Up/Downside
19.8%
18.4%
12.5%
6.9%
2.2%
12.0%
High Low Median Current
3.5 0.43
1.4
1.2
3.0 0.68
1.4
1.3
3.8
0.2
1.1
1.4
5.5
0.6
2.0
2.4
3.6
0.4
1.4
1.4
Average Up/Downside
+/14.3%
7.1%
-27.3%
-20.0%
0.0%
-5.2%
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
24.7 9.1
15.8
12.2
26.5 8.0
15
11.1
5.4 1.4
3.6
3.3
1.1 0.5
0.8
0.8
11.0 4.2
7.9
7.0
Average Up/Downside
+/22.8%
26.0%
8.3%
0.0%
11.4%
13.7%
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
1.2 0.5
0.86
0.80
1.6 0.58
0.9
0.8
1.8 0.3
1.4
1.6
0.8 0.2
0.6
0.7
1.0 0.3
0.7
0.8
Average Up/Downside
+/7.0%
11.1%
-14.3%
-16.7%
-14.3%
-5.4%
Industrial Gases
Specialty Chemicals
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
29.1 12.8
20.7
18.9
23.7 16.2
19.3
17.5
5.5
2.1
3.6
4.7
2.0
0.9
1.5
1.9
14.3 7.1
11.7
13.3
Average Up/Downside
+/8.7%
9.3%
-30.6%
-26.7%
-13.7%
-10.6%
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
24.7 11.9
20.1
19.2
23.2 12.1
18.3
16.6
5.2 2.6
3.7
3.8
2.7 1.3
2.0
2.2
13.6 6.5
9.7
10.7
Average Up/Downside
+/4.5%
9.3%
-2.7%
-10.0%
-10.3%
-1.8%
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
1.6 0.49
1.2
1.2
1.8 0.73
1.2
1.3
2.7
0.4
1.2
2.2
1.7
0.5
1.1
1.7
1.6
0.4
1.1
1.4
Average Up/Downside
+/0.0%
-8.3%
-83.3%
-54.5%
-27.3%
-34.7%
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
1.5 0.54
1.1
1.3
1.4 0.73
1.1
1.2
2.2 0.5
1.3
1.8
2.1 0.7
1.4
1.9
1.3 0.4
0.9
1.2
+/-18.2%
-9.1%
-38.5%
-35.7%
-33.3%
Average Up/Downside -27.0%
Multiple Valuations - Industry
Construction Materials
Metal / Mining
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
189
160.1
6.1
3.7
17.6
Low Median Current
13.2
22.3
NM
14.5
20.8
122.2
1.2
3.2
1.4
1.2
2.3
2.2
10.2
13
13.9
Average Up/Downside
+/0.0%
-487.5%
56.3%
4.3%
-6.9%
-86.8%
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
21.3 3.1
9.8
9.8
57
5.4
10
10.2
9.4
0.6
4.5
4.8
3.2
0.5
2.1
1.8
11.8 2.2
6.9
7.2
Average Up/Downside
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
10.7 0.86
1.4
NM
10.7 0.96
1.3
8.8
2.1
0.6
1.2
0.7
2.5
1.4
1.8
1.9
1.8
1
1.3
1.5
Average Up/Downside
+/0.0%
-576.9%
41.7%
-5.6%
-15.38%
-111.2%
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.2
4.5
3
2.2
1.1
Low Median Current
0.25
0.62
0.64
0.37
0.69
0.74
0.3
1.5
2.3
0.5
1.5
1.6
0.3
0.7
0.8
Average Up/Downside
+/0.0%
-2.0%
-6.7%
14.3%
-4.3%
0.3%
+/-3.2%
-7.2%
-53.3%
-6.7%
-14.29%
-17.0%
Aluminum
Steel
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
860.8 2.8
12.0
NM
826.5 3.9
12.1
13.2
4.5
0.9
2.0
1.9
1.3
0.3
0.6
0.9
49.0 2.7
7.7
39.1
Average Up/Downside
+/0.0%
-9.1%
5.0%
-50.0%
-407.8%
-92.4%
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
38.4 5.0
18.2
NM
114.9 8.1
15.5
20.4
2.8
0.3
2.0
0.9
1.5
0.2
1.0
0.6
67.0 3.1
10.1
8.9
Average Up/Downside
+/0.0%
-31.6%
55.0%
40.0%
11.9%
15.1%
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High Low Median Current
40.8 0.27
0.72
NM
34.9 0.29
0.77
0.96
1.7
0.2
0.8
0.9
1.0
0.2
0.4
0.8
5.0
0.3
0.7
4.3
Average Up/Downside
+/0.0%
-24.7%
-12.5%
-100.0%
-514.3%
-130.3%
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
2.4
7.0
0.9
0.9
5.9
+/0.0%
-64.8%
42.9%
28.6%
-11.11%
-0.9%
Low Median Current
0.46
0.99
NM
0.59
0.91
1.5
0.2
0.7
0.4
0.3
0.7
0.5
0.4
0.9
1.0
Average Up/Downside
Technical Valuation: Moving Avgs.
275
235
195
155
115
75
08/2008
11/2008
02/2009
05/2009
Materials
Sector & Business
Analysis
Economic
Analysis
08/2009
200 Day MA
Financial
Analysis
11/2009
02/2010
05/2010
50 Day MA
Valuation
Analysis
Recommendation
Technical Valuation: Support Line
220
210
200
190
180
170
160
07/2009
08/2009
09/2009
10/2009
11/2009
12/2009
01/2010
02/2010
03/2010
04/2010
05/2010
06/2010
MATERIALS
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Recommendation
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Outlook: Bullish
•Materials sector will respond and react faster to
mild economic recovery.
• Sector is correlated with GDP, Public Spending, and
Non-Residential/Industrial Construction.
•Certain areas within the sector are still
undervalued.
•“Diamonds in the Rough”
•Alcoa?
•Steel Dynamics?
•Lafarge ADR?
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Recommendation
• Increase SIM weight to even w/ S&P 500.
• Increase of 190 bps to 355 bps.
• Requires investment in another corporation not
currently assigned to the group.
Sector & Business
Analysis
Economic
Analysis
Financial
Analysis
Valuation
Analysis
Recommendation
Q&A
Fisher College of Business – Student Investment Management