Materials Sector
November 24, 2009
Ellis Krienik, Minh Le, Brian Mandel
Materials Sector Recommendation
Sell 50 bps:
Trim 150 bps of DOW
Buy 100 bps of MON
Market Performance
Index Name
Market
Cap
MTD
QTD
YTD
S&P 500
9,617B
5.33%
3.24%
20.83%
Info Tech
1,826B
5.06%
4.66%
51.54%
Materials
344B
11.01%
5.09%
42.78%
Cons Disc
911B
6.90%
4.25%
33.21%
Financials
1,389B
3.79%
-2.48%
16.24%
Industrials
996B
8.24%
3.19%
15.50%
Health Care
1,226B
7.87%
5.38%
13.68%
Cons Staples
1,136B
4.34%
5.42%
12.49%
Energy
1,154B
2.21%
5.43%
11.70%
Utilities
344B
2.32%
-0.97%
-0.30%
Telecom
291B
3.47%
-1.54%
-4.55%
SIM Portfolio Structure as of 10/31/09
Sector
S&P 500 Weight
SIM Weight
+/-
9.11%
7.51%
-1.60%
Consumer Staples
11.94%
12.23%
0.29%
Energy
12.35%
12.80%
0.45%
Financials
14.66%
6.59%
-8.07%
Health Care
12.65%
13.13%
0.48%
Industrials
10.09%
11.97%
1.88%
Information Technology
19.04%
21.97%
2.92%
Materials
3.39%
4.52%
1.13%
Telecommunication Services
3.09%
3.51%
0.43%
Utilities
3.68%
3.19%
-0.49%
Cash
0.00%
2.51%
2.51%
Consumer Discretionary
Materials Sector Valuation Multiples
Absolute
Basis
High
Low
Median
Current
P/Trailing E
25
8.1
15.7
25.0
P/Forward E
28.6
10.5
15.2
21.1
P/B
3.7
1.3
2.9
2.8
P/S
1.5
.5
1.2
1.1
P/CF
13.1
5.4
9.4
13.1
Current Materials Holdings in SIM Portfolio
$ Unit
Cost
Market
Price
% Gain/
(Loss)
% of
Portfolio
Dow Chemicals
(DOW)
$8.26
$27.98
238.74%
2.58%
Monsanto (MON)
$82.10
$80.13
(2.4%)
1.94%
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
Feb-06
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
Dec-04
Current Materials Holdings in SIM Portfolio
Monsanto (MON)
25,000,000
160.00
140.00
20,000,000
120.00
15,000,000
100.00
80.00
10,000,000
60.00
5,000,000
40.00
20.00
0
0.00
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
Feb-06
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
Dec-04
Current Materials Holdings in SIM Portfolio
Dow (DOW)
60,000,000
60.00
50,000,000
50.00
40,000,000
40.00
30,000,000
30.00
20,000,000
20.00
10,000,000
10.00
0
0.00
Dow Chemicals
Dow Multiples Analysis
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
7.9
3.4
1.2
1.1
1.7
Low
0.6
0.68
0.6
0.4
0.5
Median
1.0
0.9
0.9
0.8
0.9
Current
7.9
1.3
0.7
0.9
1.7
Dow Multiples Analysis
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
*Your
Target E,
S, B,
etc/Share
Your
Target
Price
(F x G)
P/Forward E
61.6
7.5
14.9
22.9
14.9
0.67
9.93
P/S
1.6
0.1
0.9
0.7
0.9
40.36
36.32
P/B
5.1
0.5
2.6
1.8
2.6
20.01
32.15
P/EBITDA 17.89
1.62
5.89
8.36
5.89
1.94
11.43
1.6
8.9
11.4
8.9
2.67
23.76
P/CF
16.1
The ‘average price’ for the stock from the 5 target prices above is
26.20
Dow Chemicals DCF
Dow Chemicals (DOW)
Analyst: Minh Le
10/19/2009
Terminal Discount Rate =
Terminal FCF Growth =
Year
2009E
Revenue
46,011
% Grow th
2010E
50,612
6.0%
EBT
1,429
EBT Margin
3.1%
Net Income
857
% Grow th
2,817
4.3%
1,690
97.1%
Add Depreciation/Amort
2,526
% of Sales
Plus/(minus) Changes WC
% of Sales
2,216
2011E
57,698
7.0%
3,969
6.9%
2,580
52.6%
2,014
2012E
60,179
4.3%
4,634
7.7%
3,568
38.3%
2,588
2013E
62,767
4.3%
4,833
7.7%
3,721
4.3%
2,573
11.0%
4.0%
2014E
65,466
4.3%
5,041
7.7%
3,881
4.3%
2,684
2015E
68,281
4.3%
5,258
7.7%
4,048
4.3%
2,800
2016E
71,149
4.2%
5,621
7.9%
4,328
6.9%
2,846
2017E
74,137
4.2%
5,857
7.9%
4,510
4.2%
2,891
2018E
77,251
4.2%
6,103
7.9%
4,699
4.2%
3,013
2019E
80,418
4.1%
6,353
7.9%
4,892
4.1%
3,056
4.4%
4.4%
4.4%
4.3%
4.1%
4.1%
4.1%
4.0%
3.9%
3.9%
3.8%
(1,181)
(1,181)
(1,181)
(1,204)
(1,255)
(1,309)
(1,366)
(1,423)
(1,483)
(1,545)
(1,608)
-2.6%
-2.3%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
(1,783)
(1,890)
(2,022)
(2,227)
(2,322)
(2,422)
(2,390)
(2,490)
(2,595)
(2,627)
(2,734)
Capex % of sales
-3.9%
-3.7%
-3.5%
-3.7%
-3.7%
-3.7%
-3.5%
-3.5%
-3.5%
-3.4%
-3.4%
Free Cash Flow
420
Subtract Cap Ex
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
836
99.0%
$
$
27.03
29.41
8.8%
1,391
66.5%
2,726
95.9%
2,717
-0.3%
2,834
4.3%
3,092
9.1%
3,261
5.4%
3,324
1.9%
3,540
6.5%
3,605
1.8%
Dow Sensitivity Analysis
3.0%
3.5%
4.0%
4.5%
10.5%
29.20
30.42
31.84
33.49
11.0%
27.20
28.23
29.41
30.77
11.5% 25.45
26.32
27.31
28.44
12.0% 23.89
24.64
25.47
26.43
Benefits/Risks of Selling Dow
Benefits
• Capture some capital gains ~
250%, since we bought at
around $8 per share.
• End markets do not appear so
attractive: automobile and
construction, both of which
have been slumping.
• Dow is already trading within
10% of target.
Risks
• Optimists believe the target
being > $40.
• Dow is a golden egg, very well
managed.
• Buffet is still in there, should
we?
• Beta is 2.5, so once economy
recovers, Dow will strongly
rebound.
Monsanto
Monsanto Multiples Valuation
Absolute
Valuation
High
Low
Median
Current
#Your
Target
Multiple
*Your
Target E,
S, B,
etc/Shar
e
Your
Target
Price
(F x G)
P/Forward E
43.2
15.4
26.6
24.3
26.6
3.79
100.81
P/S
7.1
2.2
3.6
3.7
3.6
24.15
86.94
P/B
7.6
2.1
4.2
4.3
4.2
18.44
77.45
P/EBITDA 34.85
3.6
15.1
10.6
15.1
7.74
116.87
12.4
20.5
14.8
20.5
3.52
72.25
P/CF
34.1
The ‘average price’ for the stock from the 5 target prices above is
90.86
Monsanto Multiples Valuation
Relative to
Industry
High
Low
Median
Current
P/Trailing E
1.2
.63
1.0
1.2
P/Forward E
1.3
.87
1.0
1.1
P/B
1.1
.7
1.0
1.1
P/S
1.5
.8
1.0
1.2
P/CF
1.7
.9
1.1
1.1
Monsanto DCF
Monsanto (MON)
Analyst: Brian Mandel
11/20/2009
Year
Revenue
2009
11,724
% Grow th
EBT
EBT Margin
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
13,405
14.3%
2,954
25.2%
2,109
% Grow th
Add Depreciation/Amort
2010E
2,975
22.2%
2,103
Terminal Discount Rate =
Terminal FCF Growth =
10.5%
4.5%
2011E
2014E
15,621
16.5%
3,458
22.1%
2,448
16.7%
4,025
22.1%
2,853
20,422
12.0%
4,084
20.0%
2,930
22,872
12.0%
4,574
20.0%
3,278
2015E
25,617
12.0%
5,123
20.0%
3,667
2016E
28,179
10.0%
5,636
20.0%
4,031
2017E
30,715
9.0%
6,143
20.0%
4,391
2018E
33,172
8.0%
6,634
20.0%
4,740
2019E
35,162
6.0%
7,032
20.0%
5,023
2020E
37,272
6.0%
7,454
20.0%
5,322
16.4%
16.6%
2.7%
11.9%
11.9%
9.9%
8.9%
7.9%
6.0%
6.0%
548
643
625
638
592
618
640
704
768
829
879
932
4.7%
4.8%
4.0%
3.5%
2.9%
2.7%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
(384)
(30)
(663)
(796)
(67)
(75)
(85)
(93)
(101)
(109)
(116)
(123)
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
592
618
640
704
768
829
879
932
2.9%
2.7%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
-3.3%
-0.2%
-4.2%
916
799
906
Capex % of sales
7.8%
6.0%
3.4%
1,357
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
18,234
2013E
-0.3%
Subtract Cap Ex
Free Cash Flow
2012E
1,918
41.3%
$ 80.08
$ 96.64
20.7%
1,503
-21.6%
1,039
3.1%
1,656
10.1%
2,862
72.8%
3,202
11.9%
3,583
11.9%
3,938
9.9%
4,290
8.9%
4,631
7.9%
4,907
6.0%
5,199
6.0%
Monsanto Sensitivity Analysis
3.5%
4.0%
4.5%
5.0%
10.0% 95.00
100.19
106.31
113.66
10.5% 87.39
91.66
96.64
102.52
11.0% 80.81
84.36
88.46
93.24
11.5% 75.07
78.05
81.46
85.39
Benefits/Risks of Buying Monsanto
Benefits
• 20% Upside
• Market leader
• Increasing demand
Risks
• Aggressive profit outlook
• Intense competition in
herbicide business
• Regulatory risks
Recommendation Recap
Sell 50 bps:
Trim 150 bps of DOW
Buy 100 bps of MON