Materials
sector analysis
Irene Lipin
Ryan Mayes
Mike Longo
Fisher College of Business – Student Investment Management
Overview
•
•
•
•
Sector & Business Analysis
Economic Analysis
Financial Analysis
Recommendations
• Q&A
Fisher College of Business – Student Investment Management
Sector &
Financial Analysis
Business Analysis
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Sector Composition
•Chemicals
•Commodity Chemicals
•Diversified Chemicals
•Specialty Chemicals
•Industrial Gasses
•Fertilizers
•Metals and Mining
•Manufacturing of Aluminum
•Mining/Extracting of Gold &
Silver
•Steel
•Other Precious Metals and
Materials
•Containers and Packaging
• Metal, Plastic, Cardboard,
and Glass Containers
• Paper Packaging
•Forestry and Paper Products
• Timber, Related Wood
Products
• All Grades of Paper
•Construction Materials
•Sand
•Clay
•Gypsum
•Aggregates
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
S&P500 & SIM Sector Weights
as of 1/31/2010
SECTO R
S&P 500
WEIGHT
SIM WEIGHT
+/-
9.67%
6.99%
-2.68%
Consumer Staples
11.65%
11.96%
0.31%
Energy
11.38%
11.90%
0.51%
Financials
14.71%
11.37%
-3.34%
Health Care
13.17%
14.30%
1.12%
Industrials
10.51%
12.36%
1.85%
Information Technology
18.80%
19.04%
0.24%
Materials
3.41%
3.46%
0.05%
Telecommunication Services
2.98%
3.27%
0.30%
Utilities
3.72%
2.94%
-0.78%
Cash
0.00%
2.32%
2.32%
Dividend Receivables
0.00%
0.08%
0.08%
Consumer Discretionary
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
S&P 500 Weight
SIM Weight
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Major Companies
MARKET CAP
($Mil)
PRICE AS OF
2/7/2010
Div. Metals & Mining
192,560
$69.20
1.47
32.96
BBL
Div. Metals & Mining
162,790
$58.50
1.47
27.73
Vale
VALE
Div. Metals & Mining
134,180
$25.74
1.70
45.32
Monsanto Co.
MON
Agri. Chem.
41,880
$76.74
.74
27.95
POSCO
PKX
Steel
34,860
$111.90
1.92
9.96
Potash Corp. of
Saskatchewan Inc.
POT
Agri. Chem.
30,630
$103.48
1.25
21.43
The Dow Chemical Co.
DOW
Chemicals
30,330
$26.52
2.35
120.56
Freeport-McMoRan Cooper
& Gold, Inc.
FCX
Div. Metals & Mining
30,200
$70.23
1.88
12.32
El du Pont de Nemours &
Co. “DuPont”
DD
Chemicals
29,580
$32.73
1.39
17.02
Goldcorp, Inc.
GG
Gold
26,020
$13.35
2.21
92.55
1.585
27.84
COMPANY
TICKER
INDUSTRY
BHP Billiton Ltd.
BHP
BHP Billiton PLC
Median:
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
BETA
P/E
Recommendation
Management
Industry and Business Cycle
• Mature Sector
• Highly Cyclical
• Sensitive to Fluctuations in the Business Cycle
• Relies on Strong Economy
• Sensitive to Supply / Demand Fluctuations
• Prices of Raw Materials Largely Demand Driven
•No New Buyers
•Repeat Purchase
•Can get Boring
•Fewer BIG players
• Growth through Acquisition
• Growth through R&D
• Exposed to Wide Array of Industries
• High Barriers to Entry
• Threat of New Competition is Low
• High Capital / Fixed Costs
•
Increased Environmental Regulation
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Economic Analysis
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
Materials versus S&P 500
10 Yr Performance
120%
100%
80%
60%
40%
30%
20%
0%
-20%
-23%
-40%
-60%
2000
2001
2002
2003
2004
Materials
2005
2006
2007
2008
2009
2010
S&P 500
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
Recent Key Economic Drivers
• Robust demand from emerging markets
• Chinese economy
• Sustained demand from developed markets
• United States, European Union
• Spring-time homebuilding
• Weak Dollar
• Upward price pressure on commodities / raw materials
• Cheapens American exports
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
Now, however…
• Tightening Chinese monetary authority
• Unfolding European debt crisis
• Strengthening dollar/Weakening Euro
• Downward price pressure on commodities / raw
materials
• Raises prices of American exports
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
Housing Starts vs. Sector Performance
Correlation Coefficient (R) = - .22
2.5000
120%
100%
2.0000
80%
60%
1.5000
40%
1.0000
20%
0%
0.5000
-20%
0.0000
-40%
1999
2000
2001
2002
2003
2004
Housing Starts
2005
2006
2007
2008
Materials
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
Commodities vs. Sector Performance
Correlation Coefficient (R) = .67
220
20%
10%
195
0%
-10%
170
-20%
-30%
145
-40%
120
-50%
1999
2000
2001
2002
2003
2004
Commodities
2005
2006
2007
2008
2009
Materials
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
$ Value vs. Sector Performance
Correlation Coefficient (R) = .79
$1.75
$1.65
95%
$1.55
75%
$1.45
$1.35
55%
$1.25
35%
$1.15
$1.05
15%
$0.95
-5%
$0.85
$0.75
-25%
2000
2001
2002
2003
2004
2005
Dollars per Euro
2006
2007
2008
2009
2010
Materials
Sector & Business
Financial
Analysis
Analysis
Fisher CollegeEconomic
of Business
– Student
Investment
Analysis
Recommendation
Management
Financial Analysis
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Revenue Growth Materials vs. S&P
Materials
250
209.1
200
150
156.0300
Average
increase
1.7%
100
50
2000
2001
2002
2003
2004
2005
Revenue per share
2006
2007
2008
2009
average
S&P 500
1,100
1,000
900
800
700
600
500
1061.2800
824.6400
Average
increase
3.4%
2000
2001
2002
2003
2004
S&P
2005
2006
2007
2008
2009
Median
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
EBITDA Growth Materials vs. S&P
Materials
22.0%
19.9%
% of
sales
18.0%
14.0%
13.6%
10.0%
2000
2001
2002
2003
2004
2005
EBITDA
2006
2007
2008
2009
Median
S&P 500
27.0%
25.6%
% of
sales
23.0%
19.0%
17.2%
15.0%
2000
2001
2002
2003
2004
S&P
2005
2006
2007
2008
2009
Median
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Absolute Valuation:
Price / Forward Earnings
32x
32x
29x
27x
22x
17.1X
17x
16.7X
12x
10x
7x
2000
2001
2002
2003
2004
2005
Forward P/E
2006
2007
2008
2009
2010
Median
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Relative Valuation: Forward P/E
1.9x
1.7x
1.5x
1.3x
1.2X
1.1x
1.0X
0.9x
0.7x
0.5x
2000
2001
2002
2003
2004
2005
2006
Forward P/E Relative to S&P 500
2007
2008
2009
2010
Median
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Absolute Valuation: Price / Book
4.0x
3.7x
3.5x
3.0x
2.7X
2.5X
2.5x
2.0x
1.5x
1.3x
1.0x
2000
2001
2002
2003
2004
2005
Price/Book
2006
2007
2008
2009
2010
Median
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Relative Valuation: Dividend Yield
3.0x
5.0%
4.5%
2.5x
4.0%
3.5%
2.0x
3.0%
2.5%
1.5x
2.0% < 2.0%
1.5%
1.2X
1.0x
1.0%
0.9X
0.5%
0.5x
0.0%
2000
2001
2002
2003
2004
2005
Materials Yield / S&P 500 Yield
2006
2007
2008
2009
2010
Absolute Yield
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Technical Valuation: Moving Avgs.
275
225
Materials
175
50 Day MA
200 Day MA
125
75
Sector & Business
Analysis
Financial
AnalysisManagement
Recommendation
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Long-term outlook: Bullish
• Materials Sector responds well to economic
recovery
• Impending inflation will “re-devalue” the dollar
• High growth potential in emerging markets and
chemical agriculture segments
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Short-term outlook: Bearish
• Tightening Chinese monetary policy
• Slower bank lending
• Deutsche Bank mid-March rate hike
• Recent rally in the Dollar
• EU crisis: may continue?
• Tumbling commodities (fewer financial buyers)
• Weak confidence, modest industrial spending
outlook
• Bottom line… 10-week horizon looks pretty bad
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Recommendation
• Reduce SIM fund exposure to 150 bps underweight.
Sector & Business
Financial
Analysis
Analysis
Fisher College Economic
of Business
– Student
Investment
Analysis
Recommendation
Management
Q&A
We Thank You,
Materials Sector
Fisher College of Business – Student Investment Management