Materials Sector Analysis
Theo Constantinou
Vikram Rao
Ryan Rettig
Fisher College of Business – Student Investment Management
Overview
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•
•
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•
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Sector Size and Composition
Business/Economic Analysis
Relative Valuation
Recommendations
Current Materials Sector SIM Holding
Questions
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Sector Composition
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Chemicals
–
–
–
–
•
Metals and Mining
–
–
–
–
–
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Commodity Chemicals
Diversified Chemicals
Specialty Chemicals
Industrial Gasses
Aluminum
Gold
Silver
Steel
Other Precious Metals and Materials
Containers and Packaging
– Metal, Plastic, and Glass Containers
– Paper Packaging
•
Forestry and Paper Products
– Timber
– Paper Products
•
Construction Materials
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S&P 500 and SIM Sector Weights (as of 4/30/2009)
Sector
S&P 500 Weight
SIM Weight
+/-
Consumer Discretionary
9.52%
7.93%
-1.59%
Consumer Staples
12.04%
13.06%
1.02%
Energy
12.51%
11.31%
-1.20%
Financials
12.19%
8.14%
-4.05%
Health Care
13.83%
17.74%
3.90%
Industrials
10.44%
9.44%
-1.00%
Information Technology
18.40%
19.92%
1.52%
Materials
3.37%
3.88%
0.51%
Telecommunication Services
3.71%
2.40%
-1.32%
Utilities
3.98%
2.50%
-1.49%
Cash
0.00%
3.69%
3.69%
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S&P 500 Weights by Sector (as of 4/30/2009)
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Historical Performance – Sectors (as of 4/30/2009)
Market Cap (in
millions)
S&P 500
MTD
YTD
5 Years
+/- vs. S&P 500 YTD
7,585,482
9.4%
-3.4%
-4.8%
721,919
18.5%
8.3%
-6.2%
Consumer Staples
913,657
3.0%
-8.6%
4.4%
-5.2%
Energy
948,939
4.8%
-7.8%
13.4%
-4.4%
Financials
924,373
22.2%
-13.9%
-12.5%
-10.5%
1,049,425
-0.9%
-9.3%
-0.8%
-5.9%
792,036
17.7%
-7.9%
-1.6%
-4.5%
1,395,938
12.0%
16.5%
-5.8%
19.9%
Materials
255,334
15.1%
11.9%
-1.4%
14.5%
Telecommunication Services
281,800
2.2%
-6.4%
3.8%
-3.0%
Utilities
302,059
0.4%
-11.5%
8.3%
-8.1%
Consumer Discretionary
Health Care
Industrials
Information Technology
11.7%
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S&P 500 vs. SPBMS Index Over Past 2 Years
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S&P 500 vs. SPBMS Index Over Past 20 Years
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10 Year Cumulative Total Return
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Top 10 Companies (as of 4/30/2009)
Company
Market
Cap
($Mil)
Price as
of
4/30/09
1 Year
Return
Ticker
Industry
BHP Billiton Ltd.
BHP
Div. Metals &
Mining
133,950
$48.14
1.63
19.8
-34.97%
BHP Billiton PLC
BBL
Div. Metals &
Mining
116,420
$41.84
1.74
16.7
-36.48%
Companhia Vale do
Rio Doce
RIO
Div. Metals &
Mining
87,146
$16.51
1.93
14.1
-51.19%
Rio Tinto PLC
RTP
Div. Metals &
Mining
52,305
$162.95
1.94
13.3
-62.53%
MON
Fertilizers &
Agricultural
Chemicals
46,333
$84.89
0.97
16.7
-27.91%
BASFY
Div. Chem.
34,857
$37.95
1.41
23.8
-37.41%
MT
Steel
32,210
$23.58
2.01
22.4
-69.05%
AAUK
Div. Metals &
Mining
28,357
$10.77
2.16
7.5
-63.29%
PKX
Steel
26,843
$76.97
1.76
21.2
-29.32%
POT
Fertilizers &
Agricultural
Chemicals
25,540
$86.49
1.81
9.9
-51.47%
1.736
16.54
-46.36%
Monsanto Co.
BASF S.E.
ArcelorMittal SA
Anglo American PLC
POSCO
Potash Corp. Of
Saskatchewan Inc.
Average:
Beta
P/E
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Largest Market Cap vs. SPBMS (Materials)
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Business Analysis
• Highly cyclical
• Growth through acquisition
– Dow Chemical Acquires Rohm and Haas
• International exposure
– Weaker Dollar => High Commodity Prices
• Commodity prices higher without significantly weak Dollar
• Exposed to wide array of industries
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Business Analysis – 5 Forces Analysis
• Suppliers - High
– Oligopolies (Oil companies for Chemical companies & Mining
companies for Metals companies)
• Customers – High/Middle
– High in some industries (Auto Makers)
– Middling in some industries (Chemical)
• Rivalry - High
– Global competition & cheap imports
– Mature companies fighting for market share
– Many mergers & acquisitions during economic booms
• Threat New Entrants – Low
– High entry barrier
• High capital costs
• High fixed costs
• Substitutes - Low
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Materials vs. Commodities/GDP
*79 % of movement in
the Materials sector
explained by the
commodity index over
past 10 years
*63% of movement in
the Materials sector is
explained by real GDP
over past 10 years
*77% of movement in
the Materials sector is
explained by S&P 500
index over past 5 years
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S&P 500 and Real GDP Trends
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Export Trends
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Economic Analysis – Life Cycle
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VALUATION
Forward P/E (Absolute)
Forward
P/E (Absolute)
Forward P/E (Relative to S&P500)
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VALUATION
Trailing P/E (Absolute)
Trailing P/E (Relative to S&P500)
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VALUATION
P/BV (Absolute)
P/BV (Relative to S&P500)
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VALUATION (Industry)
P/BV (Aluminum)
P/BV (Diversified Chemicals)
P/BV (Containers Metal/Glass)
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VALUATION (Industry)
Trailing P/E (Aluminum)
Trailing P/E (Diversified Chemicals)
Trailing P/E (Containers Metal/Glass)
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VALUATION
P/CF (Absolute)
P/CF (Relative to S&P500)
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Conclusion
• Cyclical business – materials sector will start
to outperform more rapidly
• Increase in exports expected
• Expected future GDP/ global economic growth
• Eventual rise in commodity prices
• Commodity prices high despite dollar value
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Recommendation
• Remain overweight by 51 bps
– Forward looking, if the economy recovers, an even more
overweight position may be in order.
• Relative to specific Industries in the Material Sector
• Current SIM Weight
– Overweight at 3.88%
• S&P 500 Weight
– 3.37%
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Current / Potential SIM Holdings vs. Overall SIM
Assuming Initial Investment of $300,000
Dow Chemicals
Alcoa
Greif
S&P (3/30 – 5/8)
Ticker
DOW
AA
GEF
-
Beta
2.35
2.18
1.55
1
Purchase Price
$8.26
$6.69
$33.07
$787.53
Current Price
$17.50
$10.01
$49.24
$929.23
Shares
36,260
44,843
9,072
381
$580,160
$448,878
446,705
$354,037
4.00%
-
-
-
93%
50%
49%
15%
$280,000
$148,878
$146,694
$53,988
Company
Market Value
% SIM
% Gain/(Loss)
Unrealized Gain/(Loss)
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Questions?
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