Materials
Sector Analysis
Paul Lewis
Steve Meredith
Summer 2013
Sector Overview
• Basic Materials Sector:
– 30 companies in the S&P 500 sector
– Beta (to S&P 500): 1.20
– Mainly mining / processing / development of
raw materials such as:
• metals, chemicals, fertilizers, construction,
packaging, and paper products
– Highly cyclical
– Sensitive to supply / demand & commodity
pricing levels
Sector Overview
• S&P 500 and SIM Weights (June 2013)
• Sector Size (Market Cap): $515.4B
• SIM: Materials is underweight by 159bps
Sector Overview
Materials Sector Industries
% of Sector
Aluminum
1.82%
Commodity Chemicals
1.58%
Construction Materials
1.38%
Diversified Chemicals
27.47%
Diversified Metals & Minig
6.54%
Fertilizers & Agricultural Chemicals
16.86%
Gold
3.45%
Industrial Gases
12.33%
Metal & Glass Containers
2.26%
Paper Packaging
3.08%
Paper Products
4.10%
Specialty Chemicals
11.15%
Steel
4.55%
Sector Overview
Date
Index Name QTD Return YTD Return 1 Year Return 3 Year Return 5 Year Return
May 31, 2013
S&P 500
May 31, 2013 S&P 500 (TR)
Jun 14, 2013
Materials
Jun 14, 2013 Materials (TR)
3.92%
4.31%
1.53%
1.98%
14.34%
15.37%
5.76%
6.87%
24.45%
27.28%
16.17%
19.07%
49.69%
59.64%
11.08%
13.57%
16.45%
30.24%
-1.95%
0.32%
Sector Overview
• Most materials sector stocks are up over
the past 12 months
Sector Overview
• Current SIM Stocks: Albemarle & Mosaic
• Albemarle Corporation:
– NYSE Ticker: ALB
– 2012 Revenue: $2.75B
– 2012 Net Income: $311.5M
• Mosaic Corporation
– NYSE Ticker: MOS
– 2012 Revenue: $11.1B
– 2012 Net Income: $1,930.2M
Business Analysis
Porters 5 Forces
Strength
Top Reasons
Barriers to Entry
High
Mines / forests / land rights are
prohibitively expensive and / or already
owned by someone
Supplier Power
Low
Any input products needed are
commodities with low switching costs
Buyer Power
High
Commodity products with low switching
costs
Threat of
Substitutes
Medium
Some products have no known
substitutes or are tough to substitute
Intensity of Rivalry
High
Commodity products with low product
differentiation and low switching costs
Business Analysis - Sector
•
•
•
•
•
Materials sector is in the mature phase
Slower revenue and earnings growth
Growth at overall economy rate
Higher dividend yields
Margin pressure
Business Analysis - Macro
• US and China are still in recovery mode
• Many other developed countries are in
contraction or early recovery
Economic Analysis
• Materials & S&P 500
Economic Analysis
• Materials & Dollar Strength (USD / Euro)
Economic Analysis
• Materials & Trade Weighted Dollar
Economic Analysis
• Materials & Commodity Prices
Economic Analysis
• Materials & Real GDP
Economic Analysis
• Materials & Crude Oil (WTI)
Economic Analysis
• Materials & New Machinery Orders
Economic Analysis
• Materials & CPI
Financial Analysis
• Net Profit Margin
Financial Analysis
• Return on Equity
Financial Analysis
Financial Analysis
Valuation Analysis - Sector
Materials Sector
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
34.00
28.60
3.70
1.50
12.70
Low
8.10
9.30
1.30
0.50
5.40
Median
16.60
15.00
2.80
1.20
9.20
Current
17.20
14.70
2.70
1.20
10.20
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.80
1.90
1.30
1.10
1.10
Low
0.68
0.79
0.80
0.70
0.70
Median
1.10
1.00
1.10
0.90
0.90
Current
1.10
0.99
1.10
0.90
1.00
Trading inline with 10-year averages
Valuation Analysis –
Agricultural Chemicals
Agricultural Chemicals Industry
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
56.40
43.10
9.30
7.60
38.00
Low
13.00
10.80
0.90
1.00
5.80
Median
22.10
20.10
3.50
3.10
13.60
Current
16.10
15.80
3.20
2.80
12.80
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
3.50
3.00
3.80
5.50
3.60
Low
0.65
0.78
0.30
0.70
0.60
Median
1.40
1.30
1.50
2.30
1.40
Current
1.00
1.10
1.30
2.00
1.20
Valuation Analysis –
Agricultural Chemicals
• Currently trading under 10-year averages
• Relatively cheap vs. S&P 500
• Highly price driven industry
– Competes mainly on basis of delivered price
– Low threat of substitutes, but very low
switching costs, low product differentiation,
and multiple suppliers
• High exposure to a weak global economy
– MOS - 2/3 of sales outside the US
Valuation Analysis –
Specialty Chemicals
Valuation Analysis –
Specialty Chemicals
• Currently trading in line with or above10-year
averages
• Fairly priced vs. S&P 500
• Industry driven by prices and R&D innovations
– New compounds are easily copied, low costs of production
and access to mineral reserves are paramount
– Little substitution threat, but many suppliers and low
switching costs
– Innovators in Green technologies are likely to gain market
share (eg. Oil Refining, Nat. Gas Fracking, LED lights)
• High exposure to global economy
– ALB – 44% of sales from Americas; 39% from Europe,
Middle East & Africa; 17% from Asia Pacific
Behavioral Analysis
• 5-Yr Reversal/1-Yr
Momentum Theories
suggest:
– Financials, Utilities, and
Materials should be
overweight
– Consumer Discretionary,
Healthcare and Consumer
Staples should be
underweight
Behavioral Analysis
• Furthermore, small-cap Materials names
are preferred over large-cap
Recommendation
• Overweight Materials Sector:
• Positives:
– Commodity prices have to improve?
– US / China picking up growth
• Risks:
– Global economy continues to falter
– Fed tapers asset purchases – who knows what might
happen?
– Commodity prices remain depressed
• Agricultural chemicals, gold, containers, paper
products, diversified metals & mining - undervalued
• Specialty chemicals, aluminum, steel - overvalued
• Industrial gases, diverse chemicals - inline
Thank You
• Questions?