Materials Sector Analysis
Kyle Shaner
Josh Carter
Fisher College of Business – Student Investment Management
Agenda
•
•
•
•
•
•
Sector Analysis
Business Analysis
Economic Conditions
Financial Analysis
Valuation
Recommendation
Fisher College of Business – Student Investment Management
Sector Analysis – Materials Sector
• Companies that are involved in the discovery,
development and processing of raw materials
• Includes companies that are involved with
mining and refining metals, chemical
production and oil and gas infrastructure
development
Fisher College of Business – Student Investment Management
Sector Analysis – Industries
• Chemicals
– Producers of commodity, diversified, fertilizers,
agricultural, and specialty chemicals
– Producers of industrial gases
• Construction Materials
– Manufacturers of construction materials including
sand, clay, gypsum, lime, aggregates, cement,
concrete and bricks
• Containers and Packaging
– Manufacturers of metal, glass, plastic, paper and
cardboard containers
Fisher College of Business – Student Investment Management
Sector Analysis - Industries
• Metals and Mining
– Producers of aluminum and related products
– Companies engaged in diversified metals and mining
production or extraction of gold, precious metals,
minerals and related products
– Producers of iron, steel and related products
• Paper & Forest Products
– Manufacturers of timber, related wood products and
all grades of paper.
– Manufacturers of lumber for the building industry but
excludes companies specializing in paper packaging
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Sector Analysis-Industry Performance
Fisher College of Business – Student Investment Management
Sector Analysis-Industry Performance
Fisher College of Business – Student Investment Management
Sector Analysis-Industry Performance
Fisher College of Business – Student Investment Management
Sector Analysis - Major Companies
Symbol
Company
Price (1)
Market Cap
(Billions)(1)
MON
Monsanto Co.
$79.41
$43.46
PX
Praxair Inc.
$67.46
$20.75
DD
Du Pont (E.I.)
$22.40
$20.21
NEM
Newmont Mining
Corp. (Hldg. Co.)
$41.58
$18.89
NUE
Nucor Corp.
$43.83
$13.77
(1) Price and market cap as of 2/13/2008
Fisher College of Business – Student Investment Management
Sector Analysis - SIM Weights
25.00%
20.00%
Current SIM Weight = 1.79%
Current S&P Weight = 3.04%
Underweight by 1.25%
15.00%
10.00%
S&P 500 Weight
SIM Weight
5.00%
0.00%
Fisher College of Business – Student Investment Management
Sector Analysis - Current Holdings
• Posco ADR (PKX)
– Manufactures and sells various steel products
primarily in Korea
Unit
Cost
117.06
Total
Cost
$468,225.60
Market
Price (1)
66.16
Market
Value(1)
$254,080.00
Unrealized
Gain/(Loss)
($214,146)
Loss
-45.74%
(1) Price and market cap as of 2/13/2008
Fisher College of Business – Student Investment Management
Business Analysis
•
•
•
•
•
Mature Sector
Cyclical
Growth through acquisition
International Exposure
Increased Environmental Regulation
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Business Analysis – M&A Activity
• Trend towards industry consolidation
• Notable transactions
– Failed BHP acquisition of Rio Tinto-$120 billion
– Chinalco minority investment in Rio - $20 billion
– Proposed DOW acquisition of Rohm & Haas - $15 billion
• M&A activity trends
• In 2007, M&A volume reached all time high of $4.7 trillion
• Led by unprecedented financial sponsor activity - $870 billion
• Materials represented ~$650 billion in announced deals
• Q4 2008 M&A volume decreased dramatically – down 73%
Data provided by Thompson Reuters
Fisher College of Business – Student Investment Management
Business Analysis – M&A Activity
Data provided by Thompson Reuters
Fisher College of Business – Student Investment Management
Economic Analysis – Global Demand
`
GDP Y-o-Y Growth
2008
2009
Brazil
4.80%
4.00%
Russia
6.80%
5.70%
India
7.90%
7.10%
China
9.30%
6.70%
• Euro zone GDP fell 5.6% annualized in Q4
2008
• Japan fell 12.7% annualized
Fisher College of Business – Student Investment Management
Economic Analysis - Performance
2007
2008
2009
S&P 500
3.53%
-38.49%
-8.57%
Materials
19.98%
-47.05%
-7.24%
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Economic Analysis – Metal Prices
Fisher College of Business – Student Investment Management
Economic Analysis – Metal Prices
Fisher College of Business – Student Investment Management
Economic Analysis - Regression Analysis
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.893326709
R Square
0.79803261
Adjusted R Square
0.796865168
Standard Error
4.153939056
Observations
523
ANOVA
df
Regression
Residual
Total
Intercept
Copper
Aluminum
Scrap Steel
3
519
522
SS
MS
F
Significance F
35385.63421 11795.2114 683.5739247
8.5479E-180
8955.453826 17.25520968
44341.08804
Coefficients Standard Error
t Stat
17.79974462
1.606531723 11.0796098
0.033807623
0.007130803 4.741068366
0.131516501
0.029357422
4.4798382
0.001846461
0.000423506 4.359943524
P-value
9.3967E-26
2.75008E-06
9.19506E-06
1.56937E-05
Lower 95%
14.64364036
0.019798839
0.073842517
0.001014465
Upper 95%
20.95584888
0.047816408
0.189190485
0.002678458
Lower 95.0%
14.64364036
0.019798839
0.073842517
0.001014465
Upper 95.0%
20.95584888
0.047816408
0.189190485
0.002678458
Fisher College of Business – Student Investment Management
Economic Analysis - Stimulus Package
• US passes $789 billion Economic Stimulus Package
• ~65% spending and ~35% tax cuts
• Obama administration has focus on infrastructure spending to spark
economy
• ~$62 billion in highway construction – spending may have 19
month lag time
• In November, China announced $586 billion stimulus package
• China faces growth issues as global trade declines
• Exports down 17% in January 2009
• Package focuses on upgrading infrastructure, particularly railways,
roads, and aiports
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Financial Analysis - Financials
Fisher College of Business – Student Investment Management
Financial Analysis - Financials
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Financial Analysis Continued…
Fisher College of Business – Student Investment Management
Financial Analysis Continued…
Fisher College of Business – Student Investment Management
Financial Analysis Continued…
Fisher College of Business – Student Investment Management
Financial Analysis Continued…
Fisher College of Business – Student Investment Management
Financial Analysis-Relative Valuation
High
Low
Mean
Current
P/Forward E
1.43
0.59
0.94
1.34
P/S
1.14
0.36
0.78
0.85
P/B
1.16
0.36
0.89
1.11
P/EBITDA
1.18
0.46
0.85
0.80
P/CF
1.08
0.39
0.82
0.82
P/E/G ratio
1.57
0.64
1.14
1.24
ROE ratio
1.15
0.57
0.80
1.05
Fisher College of Business – Student Investment Management
Recommendation
• Sector will struggle until economy rebounds
• Continue to underweight at 1.25%
• Bright spot – Chemicals
Fisher College of Business – Student Investment Management