Company Recommendation
Irene Lipin
Ryan Mayes
Mike Longo
BUS FIN 724
BUS FIN 724
Agenda
• Recap of Sector Composition and Outlook
• Recommendations
• Question and Answer
BUS FIN 724
Composition of Basic Materials
INDUSTRIES
•
•
•
•
•
Chemicals
Metals & Mining
Containers & Packaging
Forestry & Paper Products
Construction Materials
MAJOR PLAYERS
COMPANY
MKT CAP(B)
BHP Billiton Limited (ADR)
208.92
BHP Billiton PLC
175.86
Vale
148.35
Monsanto Co
38.87
POSCO
36.37
Potash Corp
33.43
The Dow Chemical Co
33.0
Freeport – McMoRan Copper & Gold Inc.
32.87
El Du Pont de Nemours & Co
30.76
BUS FIN 724
S&P Index v. SIM Weights
20.00%
Mkt Cap:11,615.5B
15.00%
3.42% of S&P
3.29% SIM weight
10.00%
Dividend…
Cash
Utilities
Telecommunicatio…
Materials
Information…
0.00%
Consumer…
Consumer Staples
Energy
Financials
Health Care
Industrials
5.00%
S&P 500 Weight
SIM Weight
BUS FIN 724
Materials Sector Recap
Long Term Outlook: BULLISH
Short Term Outlook: BEARISH
• Materials Sector responds well
to economic recovery
• Impending inflation will “redevaluate” the dollar
• High growth potential in
emerging markets & chemical
agriculture segments
• Tightening Chinese monetary
policy
• Recent rally in the Dollar
• Weak confidence, modest
industrial spending outlook
• Bottom line… 10 week
horizon looks pretty bad
BUS FIN 724
Recommendation
• Reduce SIM fund exposure to 150 BPS
underweight
• Current Holdings
▫ Dow Chemical Co – 1.41%
▫ Monsanto – 1.88%
• SELL: The Dow Chemical Company
• HOLD: Monsanto Company
▫ Monsanto – 1.88%
SELL:
The Dow Chemical Company (DOW)
BUS FIN 724
Company Overview
• Diversified chemical company
▫ Innovative chemical, plastic, agriculture
products/services
• Serves Customers in 160+ countries
▫ 150 manufacturing sites
▫ In 35 countries
▫ Produces 3,300+ products
• Market Capitalization $32.8 billion
• $44.9 billion revenue in last 12 months
BUS FIN 724
Commodities v. 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
Materials
2006
2007
2008
2009
BUS FIN 724
$ Value v. 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
Materials
2007
2008
2009
2010
Dow Chemical (Dow)
Analyst: Mike Longo
Date: 1/25/10
Year
Revenue
2009E
47,284
% Grow th
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
48,507
2.6%
3,310
3,699
7.0%
4,867
64,790
6.5%
5,183
68,677
6.0%
5,494
72,454
2017E
76,077
5.5%
5,796
5.0%
5,706
2018E
79,500
4.5%
5,963
2019E
82,680
4.0%
6,201
7.5%
7.5%
7.5%
482
485
520
569
608
648
687
725
761
795
827
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
689
693
743
30.5%
30.0%
30.0%
3,150
3,249
3.1%
1,891
1,940
3,583
10.3%
2,125
1,194
30.0%
2,726
-23.9%
2,558
1,278
30.0%
2,921
7.2%
2,677
1,361
30.0%
3,115
6.6%
2,786
1,442
30.0%
3,305
6.1%
2,884
1,522
1,484
30.0%
3,490
30.0%
3,402
5.6%
2,971
-2.5%
3,043
1,550
30.0%
3,557
4.6%
3,101
1,612
30.0%
3,702
4.1%
3,142
4.0%
4.5%
4.5%
4.5%
4.4%
4.3%
4.2%
4.1%
4.0%
3.9%
3.8%
(832)
(147)
(555)
(569)
(608)
(648)
(687)
(725)
(761)
(795)
(827)
-1.8%
1,655
3.5%
2,555
-0.3%
1,698
3.5%
3,345
30.9%
49%
100%
-1.0%
1,860
4.5%
3,293
-1.6%
10.0
9.1
10.1
9.1
6.3
5.8
5.3
6.4
5.9
5.3
$ 28.41
$ 28.57
0.6%
Debt
3,054
Cash
2,581
2.26
2,214
-32.8%
4.2%
2,434
9.9%
-1.0%
2,656
4.1%
2,596
6.7%
-1.0%
2,747
4.0%
2,756
6.1%
-1.0%
2,826
-1.0%
2,891
3.9%
2,911
3.8%
2,793
5.6%
-4.0%
-1.0%
2,942
3.7%
2,921
4.6%
Free Cash Yield
10.4
Implied equity value/share
4.4%
-1.0%
2,555
Terminal Value
10.3
1,143
-1.0%
2,502
-1.0%
2,976
3.6%
3,041
4.1%
51%
7.87%
Current Price
Cash/share
4,548
60,835
2016E
8.0%
32,659
Upside/(Downside) to DCF
7.0%
2015E
8.0%
Projected Equity Value
Shares Outstanding
4,134
56,855
2014E
8.0%
15,909
Projected EV/EBITDA
9.5%
2013E
8.0%
16,749
Current EV/EBITDA
53,136
2012E
8.0%
NPV of terminal value
Projected P/E
2011E
7.8%
NPV of Cash Flows
Current P/E
4.0%
7.6%
% Grow th
Free Cash Flow Yield
11.0%
Terminal FCF Growth =
7.0%
% Grow th
Add Depreciation/Amort
2010E
Terminal Discount Rate =
45,173
6.73%
Terminal P/E
12.2
Terminal EV/EBITDA
4.9
Valuation of Dow Chemical
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
61.6
1.4
5.1
17.89
16.1
C.
7.5
.1
.5
1.62
1.6
D.
14.9
.9
2.6
5.83
8.9
E.
21.8
.7
1.9
8.30
11.5
F.
14.9
.9
2.6
5.83
8.9
•
•
•
•
Current Price: $28.41
DCF Price: $28.57
Valuation Average: $27.68
Target Price: $28.43
*Your
Target
E, S, B,
etc/Share
G.
1.32
42.44
15.07
3.45
2.49
Your
Target
Price
(F x G)
H.
19.66
38.19
39.18
20.11
22.16
Recommendation
• Sell 141 basis points of Dow Chemical
HOLD:
Monsanto Company (MON)
BUS FIN 724
Company Overview
• Provides agricultural products
to farmers
• Two Segments
▫ Seeds & Genomics
▫ Agricultural Productivity
• Operates in US, Americas,
Europe, Africa, Asia-Pacific,
Canada
• Market Capitalization of $38.8
billion
• 14% LT debt to Total Capital
BUS FIN 724
Maintain Position in Monsanto…
• 2/24 – Management reaffirms FY 2010 EPS
guidance of $3.10-$3.30
• Late US harvest in Q1 pushed soybean product
deliveries to Q2
▫ Half of 2010 EPS captured in Q2.
• Genuity SmartStax & Roundup Ready 2 Yield
▫ Largest broad-acre introductions
• Trading comps and DCF suggest substantial
upside
BUS FIN 724
Monsanto: Absolute P/E
50.0x
40.0x
27.8x
30.0x
26.8x (DCF)
20.0x
20.6x
10.0x
0.0x
2005
2006
2007
Forward P/E
2008
Median
2009
2010
BUS FIN 724
Monsanto: Relative P/E
3.0x
2.5x
2.0x
2.0x
1.5x
1.2636
1.0x
0.5x
0.0x
2005
2006
2007
Forward P/E Relative to Sector
2008
Median
2009
2010
BUS FIN 724
Monsanto: EV/EBITDA
25.0x
20.0x
16.4x
14.9x (DCF)
15.0x
12.0x
10.0x
5.0x
0.0x
2005
2006
2007
2007
Enterprise Value/EBITDA
2008
Median
2009
2010
Quantities in thousands
Year
FY 2010E
FY 2011E
FY 2012E
FY 2013E
FY 2014E
FY 2015E
FY 2016E
FY 2017E
FY 2018E
FY 2019E
FY 2020E
$11,372
$12,964
14.0%
$14,779
14.0%
$16,849
14.0%
$19,039
13.0%
$21,324
12.0%
$23,669
11.0%
$26,036
10.0%
$28,379
9.0%
$30,650
8.0%
$32,489
6.0%
Operating Income
Operating Margin
2,824
24.8%
3,669
28.3%
4,183
28.3%
4,768
28.3%
5,521
29.0%
6,397
30.0%
7,101
30.0%
8,071
31.0%
8,798
31.0%
9,808
32.0%
10,396
32.0%
Net Interest Expense
Interest % of Sales
52
0.5%
45
0.3%
45
0.3%
51
0.3%
58
0.3%
65
0.3%
72
0.3%
79
0.3%
86
0.3%
93
0.3%
99
0.3%
Taxes
Tax Rate
808
30.0%
1,064
30.0%
1,218
30.0%
1,415
30.0%
1,639
30.0%
1,900
30.0%
2,109
30.0%
2,398
30.0%
2,613
30.0%
2,914
30.0%
3,089
30.0%
Net Income
% Growth
1,862
2,458
32.0%
2,818
14.6%
3,302
17.2%
3,824
15.8%
4,432
15.9%
4,920
11.0%
5,594
13.7%
6,098
9.0%
6,800
11.5%
7,208
6.0%
Plus: Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Less: Capital Expeditures
% of Sales
532
4.7%
(84)
-0.7%
889
7.8%
606
4.7%
(637)
-4.9%
1,013
7.8%
691
4.7%
(909)
-6.1%
1,155
7.8%
788
4.7%
(842)
-5.0%
1,685
10.0%
890
4.7%
(952)
-5.0%
1,904
10.0%
997
4.7%
(1,066)
-5.0%
1,919
9.0%
1,106
4.7%
(1,183)
-5.0%
1,894
8.0%
1,217
4.7%
(1,302)
-5.0%
1,823
7.0%
1,326
4.7%
(1,419)
-5.0%
1,703
6.0%
1,433
4.7%
(1,532)
-5.0%
1,532
5.0%
1,519
4.7%
(1,624)
-5.0%
1,527
4.7%
Free Cash Flow
Growth
1,421
1,414
-0.4%
1,445
2.2%
1,562
8.1%
1,858
19.0%
2,444
31.5%
2,949
20.7%
3,687
25.0%
4,303
16.7%
5,168
20.1%
5,575
7.9%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
21.2
26.8
11.8
14.9
16.0
20.3
9.2
11.7
14.0
17.7
8.1
10.2
Shares Outstanding
553
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
$
$
71.24
90
26.5%
2,003
1,897
3.43
Terminal P/E
13.5
Terminal EV/EBITDA
8.2
Sensitivity Analysis
Terminal Growth
Revenue
Growth
Discount Rate
26.5% 10.0%
4.0%
36.0%
4.5%
45.1%
5.0%
56.0%
5.5%
69.4%
6.0%
86.0%
10.5%
23.8%
31.1%
39.9%
50.4%
63.2%
11.0%
13.3%
19.4%
26.5%
34.8%
44.9%
11.5%
4.3%
9.3%
15.2%
22.0%
30.0%
12.0%
-3.6%
0.7%
5.5%
11.1%
17.7%
BUS FIN 724
Recommendation
• Maintain holding in Monsanto Company at 188
basis points
• 4/2 – Q2 Earnings Announcement
Closing Thoughts?
Thank you!
BUS FIN 724
Appendix A
USD per Euro
$1.48
$1.46
$1.44
$1.42
$1.40
1.376
$1.38
$1.36
$1.34
$1.35
$1.32
$1.30
$1.28
31-Dec
6-Jan
12-Jan
18-Jan
24-Jan
30-Jan
5-Feb
USD per Euro
11-Feb
17-Feb
23-Feb
1-Mar