Alcoa/Dow Chemical Analysis
Theo Constantinou
Vikram Rao
Ryan Rettig
Fisher College of Business – Student Investment Management
Conclusion from Sector Presentation
• 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
Fisher College of Business – Student Investment Management
Recommendation from Sector Presentation
• 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%
• Class elected to overweight by 100 additional bps
Fisher College of Business – Student Investment Management
Current Materials Portfolio
• Dow Chemical
– Only stock owned in sector
– Own 36,260 shares
– Best performing stock in SIM
• 114% return since purchase
– 3.88% of SIM is Dow stock
• Now have 488 bps to allocate
Fisher College of Business – Student Investment Management
Dow Chemical- Valuation
Fisher College of Business – Student Investment Management
Dow Chemical- Valuation
Absolute Stock Valuation
High
Low
Median
Current
Target Multiple
Target /Share
Target Price
P/Book
P/ Sales
P/ Cash Flow
P/EBITDA
5.1
1.4
14.6
10.5
0.5
0.1
1.6
5.4
2.4
0.8
6.6
6.3
1.2
0.4
5.4
10.5
2.4
0.8
6.6
6.3
14.73
52.48
3.27
1.68
Average
35.35
41.98
21.58
10.58
27.38
Fisher College of Business – Student Investment Management
Key Indicators
• Price of Aluminum
*77% of movement
in Alcoa stock
explained by the
London Metal
Exchange aluminum
index over past 2
years
Fisher College of Business – Student Investment Management
AA vs. Commodities/Materials
*60% of movement in
Alcoa stock explained by
the commodity index
over past 5 years
*63% of movement in
the Alcoa stock
explained by the
materials sector over
past 5 years
Fisher College of Business – Student Investment Management
Where is Price of Aluminum Going?
Fisher College of Business – Student Investment Management
3 Year Price – Target Price
Fisher College of Business – Student Investment Management
Aluminum Price Decline Over Last Year
Fisher College of Business – Student Investment Management
Future Analyst Estimates
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10-Year Cumulative Total Return - Cyclical
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P/BV Valuation
P/BV (Absolute)
P/BV (Relative to S&P500)
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P/CF Valuation
P/CF (Absolute)
P/CF (Relative to S&P500)
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Absolute Valuation
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
B.
28.0
1.4
2.5
N/A
13.9
Low
C.
8.2
.20
.40
N/A
2.3
Median
D.
13.1
1.0
1.9
N/A
9.3
Current
E.
12.2
.40
.70
N/A
5.9
#Your
Target
Multiple
F.
14.5
1.2
2.3
N/A
12.0
*Your
Target
E, S, B,
etc/Share
G.
.90
39.64
12.55
N/A
1.49
Your
Target
Price
(F x G)
H.
13.05
47.568
28.87
N/A
17.88
• The current P/E is 12x earnings, where the 10
year average is around 13x earnings. I think
that the forward P/E based on our DCF analysis
is close in line with historical averages and
reversion to the mean will occur.
Fisher College of Business – Student Investment Management
S Curve of Future LT Growth in BRIC Countries
Fisher College of Business – Student Investment Management
LRMC – LME Price Estimates through 2013
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DCF Valuation – Upside of 200.53%
Fisher College of Business – Student Investment Management
Sensitivity Analysis – Upside
Fisher College of Business – Student Investment Management
Recommendation
• Buy 200 bps of Alcoa
• Dow Chemical: sell 100 bps to 288 bps
• Discretion to class:
– Add additional basis points to Alcoa
Fisher College of Business – Student Investment Management