Materials Stock Analysis
By Joshua Carter & Kyle Shaner
Fisher College of Business – Student Investment Management
Presentation Overview
Sector Recap
Sell Recommendation
Buy Recommendation
Recommendation Summary
New SIM Portfolio
Fisher College of Business – Student Investment Management
Sector Recap
Current SIM Weight = 1.79%
Current S&P Weight = 3.04%
Continue to Underweight by 1.25%
25.00%
20.00%
15.00%
10.00%
S&P 500 Weight
SIM Weight
5.00%
0.00%
Fisher College of Business – Student Investment Management
Sector Recap – Current Holdings
Posco ADR (PKX)
South Korean steel manufacturer
Hot-rolled steel
Cold-rolled steel
Stainless steel
Unit
Cost
Total
Cost
Market
Price
Market
Value
Unrealized
Gain/(Loss)
Loss
$117.06
$468,225.60
$52.11
$208,440
($259,785.60)
(55.5)%
Fisher College of Business – Student Investment Management
Sector Recap – Current Holdings…
POSCO Notable News Events
Dec 2008 – Announces 1st
ever production cut at 10%
Feb 2009 – Cuts stainless
steel prices 10%
Feb 2009 – 6%
annual production cut
Jan 2009 – CEO steps down
after poor performance
Geographic Segments
North America
2%
Revenue Segments
Others
8%
Trading
10%
Asia/Pacific
6%
China
14%
Japan
6%
Feb 2009 – Iron Ore
miners increase price 5%
Korea
64%
Other
9%
Engineering and
Construction
9%
Steel
72%
Fisher College of Business – Student Investment Management
Sector Recap – Current Holdings…
∆ From
Mean
Posco vs. S&P
Valuation
High
Low
Mean
Current
P/Forward E
0.76
0.12
0.34
0.62
79.4%
Overvalued
P/S
1.37
0.22
0.47
0.66
40.4%
Overvalued
P/B
0.74
0.13
0.31
0.45
45.2%
Overvalued
P/EBITDA
0.67
0.13
0.31
0.29
-6.5%
Fair Value
P/CF
0.77
0.16
0.31
0.39
25.8%
Overvalued
P/E/G
2.60
0.09
0.47
1.46
211%
Overvalued
ROE
1.80
0.42
0.92
1.08
17.4%
Overvalued
Posco vs.
Materials
Valuation
High
Low
Mean
Current
P/Forward E
0.90
0.15
0.35
0.44
25.7%
Overvalued
P/S
1.44
0.42
0.65
0.76
16.9%
Overvalued
P/B
0.71
0.28
0.36
0.41
13.9%
Overvalued
P/EBITDA
0.71
0.18
0.36
0.19
-47.2%
Undervalued
P/CF
0.81
0.25
0.45
0.48
6.7%
Fair Value
P/E/G
2.38
0.12
0.40
1.10
175%
Overvalued
ROE
1.76
0.63
0.99
0.95
-4.0%
Fair Value
∆ From
Mean
Opinion
Opinion
Fisher College of Business – Student Investment Management
Sell Recommendation
Faces Many Economic Challenges
Steel prices have fallen dramatically
Slowdown in global & domestic demand
Ailing auto industry
Increase in raw materials prices
Scrap Steel ($ per Gross Ton)
5000
4000
Global Slowdown
`
G DP Y -o-Y G rowth
2008
2009
B raz il
4.80%
4.00%
R us s ia
6.80%
5.70%
India
7.90%
7.10%
C hina
9.30%
6.70%
South Korean Slowdown
15.00%
10.00%
5.00%
0.00%
3000
-5.00%
2000
-10.00%
1000
Oct
-15.00%
1
Nov
Dec
-20.00%
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-25.00%
-30.00%
Jan
-35.00%
Fisher College of Business – Student Investment Management
Sell Recommendation…
Comparables Analysis
Entity Name
POSCO
US Steel
Nucor Corporation
Arcelor Mittal
AK Steel
Timken
Gedau AmeriSteel
Enterprise
Value
$16,830
$4,720
$11,490
$52,900
$756
$2,320
$4,110
Total
Debt
$4,850
$3,160
$3,280
$34,080
$633
$624
$3,070
Equity
EV /
EV /
EBITDA
Sales
Value
EBITDA Sales
$14,480 $5,390 $22,810
3.12x
0.74x
$2,010 $3,410 $23,750
1.38x
0.20x
$9,650 $3,850 $23,660
2.98x
0.49x
$25,250 $18,140 $124,940
2.92x
0.42x
$607
$941
$7,640
0.80x
0.10x
$1,120
$753
$5,660
3.08x
0.41x
$1,630 $1,470
$8,530
2.80x
0.48x
P/E
5.46x
0.96x
5.13x
2.62x
N/M
4.21x
N/M
Debt /
EBITDA
0.90x
0.93x
0.85x
1.88x
0.67x
0.83x
2.09x
EBITDA
Margin
23.63%
14.36%
16.27%
14.52%
12.32%
13.31%
17.23%
As of March 2, 2009. Data provided by Yahoo Finance
Fisher College of Business – Student Investment Management
Sell Recommendation…
DCF Analysis
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
22,531
5,349
9,555
14,904
Shares Outstanding
301.6
Current Price
$
52.11
Implied equity value/share
$
49.42
Upside/(Downside) to DCF
-5.16%
DCF Sensitivity Analysis
FCF Growth
1%
2%
3%
4%
5%
DCF Value Per Share
Terminal Discount
8%
9%
10%
$56.61
$48.32
$41.90
$63.14
$52.87
$45.19
$72.28
$58.94
$49.42
$86.00
$67.43
$55.06
$108.86
$80.17
$62.95
11%
$36.79
$39.24
$42.30
$46.23
$51.48
12%
$32.63
$34.50
$36.77
$39.62
$43.28
Fisher College of Business – Student Investment Management
Sell Recommendation…
Absolute Valuation
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
High
Low
18.50x
2.18x
2.30x
5.40x
Mean
2.10x
0.36x
0.60x
1.10x
Comparables Analysis
Entity Name
POSCO
US Steel
Nucor Corporation
Arcelor Mittal
AK Steel
Timken
Gedau AmeriSteel
Averages
P/E
5.46x
0.96x
5.13x
2.62x
-
4.21x
2.63x
2009E
P/ E
6.60x
3.76x
7.40x
4.58x
3.88x
8.21x
3.85x
7.30x
0.74x
1.00x
2.70x
Current
6.60x
0.41x
0.70x
1.30x
Your
Your
Target
Target E,
Multiple
S, B
6.60x
$6.75
0.74x
$62.34
1.00x
$69.89
1.00x
$37.63
Average
Your
Target
Price
$44.55
$46.13
$69.89
$37.63
$49.55
Blended Multiples Price Target –
Abs. & Comp
5.47x
Fisher College of Business – Student Investment Management
Sell Recommendation…
EPS vs. Volume & Steel Price – Sensitivity Analysis
Income Statement
2009E
Volume
Steel
Steel Price per Ton
PKX Steel Output (In millions of tons)
Y-oY ∆
2007
32.11
2008
32.48
1.2%
2009
29.00
-10.7%
Implied Price per Ton
2009E Sales
Volume
Sales / Volume
Sales
Operating Expenses
$18,801
$29
$648.32
29
648.3
$18,801
$15,919
EBIT
Non-Op Expenses
$2,883
-$209
EBT
$2,674
Taxes
Net Income
$692
$1,982
*2009 Volume Projection per CEO
Shares
EPS
Target EPS
PS
EPS Sensitivity Analysis
Steel Price per Ton
% ∆ from Dec 08
-20%
-8%
4%
Volume
$500
$575
$648
Sensitivity
Analysis
Price
Target
25
$4.20
$4.90
$5.59
27
$4.57
$5.34
$6.08
29
$4.95
$5.77
$6.57
31
$5.33
$6.20
$7.06
33
$5.70
$6.64
$7.55
*Volume in millions of tons
*December 2008 price of $625 per ton
302
$6.57
Price Target
16%
$725
$6.32
$6.86
$7.41
$7.96
$8.50
28%
$800
$7.02
$7.63
$8.23
$8.83
$9.43
2009E EPS Multiple
$6.08
6.9x
Price
$41.95
Fisher College of Business – Student Investment Management
Conclusion
SELL
US$ 45.00:
Blended price target based on
DCF
EPS Sensitivity Analysis
Comparable & Absolute Multiple Valuation
Fisher College of Business – Student Investment Management
Buy Recommendation
DOW Chemical
Engages in manufacture and sale of chemicals, plastic materials,
agricultural, and other specialized products
 2008 Revenues of $57,514 billion: 7.4% increase
 Strong growth expected in agriculture segments
Equity Trading Statistics
Market
Price
$7.11
% 52 Wk Hi
(84.0%)
P/E
Market Cap
09 EPS est.
Beta
11.52x
$6.57 B
$1.75/sh
1.48
Fisher College of Business – Student Investment Management
Buy Recommendation…
Dec 2008 – Announces it will
cut 11% of workforce
Feb 2009 –
Announces top
executives won’t get
cash bonuses
Feb 2009 – Cuts dividend
64% to 15 cents a share
Jan 2009 – Rohm & Haas
sues Dow
Geographic Segments
March 2009 – S&P cuts
two short-term ratings
Revenue Segments
Other, 1%
Rest of World
30%
US
32%
Hydrocarbons &
Energy, 16%
Performance
Plastics, 27%
Basic Chemicals,
10%
Europe
38%
Basic Plastics,
23%
Performance
Chemicals, 16%
Agricultural
Sciences, 8%
Fisher College of Business – Student Investment Management
Buy Recommendation…
∆ From
Mean
Dow vs. S&P
Valuation
High
Low
Mean
Current
P/Forward E
4.56
0.58
0.85
1.20
41.2%
Overvalued
P/S
0.83
0.16
0.58
0.16
-72.4%
Undervalued
P/B
1.49
0.29
0.82
0.29
-64.6%
Undervalued
P/EBITDA
99.90+
0.31
0.69
0.31
-55.1%
Undervalued
P/CF
1.19
0.27
0.63
0.27
-57.1%
Undervalued
P/E/G
6.88
0.59
1.42
1.34
-5.6%
Fair Value
ROE
1.84
0.23
0.93
0.58
-37.6%
Undervalued
Dow vs.
Materials
Valuation
High
Low
Mean
Current
P/Forward E
4.00
0.68
0.90
0.87
-3.3%
Fair Value
P/S
1.07
0.29
0.87
0.19
-78.2%
Undervalued
P/B
1.58
0.26
1.09
0.26
-76.1%
Undervalued
P/EBITDA
99.90+
0.20
0.74
0.20
-73.0%
Undervalued
P/CF
1.47
0.33
0.94
0.33
-64.9%
Undervalued
P/E/G
5.08
0.68
1.23
1.00
-18.7%
Undervalued
ROE
1.72
0.34
1.09
0.54
-50.5%
Undervalued
∆ From
Mean
Opinion
Opinion
Fisher College of Business – Student Investment Management
Buy Recommendation…
An Industry Bright Spot
US - 2009 Economic Outlook
3.00%
Infrastructure spending plays to strengths
2.00%
Consumer spending is key
0.00%
2.60%
1.80%
1.00%
-1.00%
Product and geographic diversification
-2.00%
Decline in oil prices
-4.00%
Q1
Q2
Q3
Q4
-1.30%
-3.00%
-5.00%
-4.80%
-6.00%
Crude Oil (WTI) Spot
160
140
120
100
80
60
40
20
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Economic Stimulus
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
$787
$586
$167
US
China
Eurozone
Fisher College of Business – Student Investment Management
Buy Recommendation…
DOW Acquisition of Rohm & Haas ~$15 billion
Deeper Reach in Developing
Markets – Asia / Pacific
33%
DOW
$3 billion preferred equity investment
from ROH Investors
Grow performance and specialty
chemicals
Draw $10 billion from bank loan
Strengthens competitiveness of
basic chemicals
Receive $4 billion from Berkshire
and KIA
ROH
67%
Strategic Rationale
Financing Mix
30% of synergies come from
purchasing of raw materials
Divest $4 billion in ROH assets
2007 – 2012E CAGR
EPS Dilution / Accretion
8%
6%
EPS
4%
$2.6 billion in additional value creation
Dilution / Accretion
-10%
-5%
0%
5%
5%
$ 0.52 $ 0.58 $ 0.61 $ 0.64 $ 0.67
Stock Price $ 8.61
16.5x
$ 9.56
$ 10.07
$ 10.57
$1.3 billion in synergies
$ 11.10
$1.7 billion combined in R&D
Delivers more stable earnings with
higher growth
2%
0%
DOW
ROH
Combined
Fisher College of Business – Student Investment Management
Buy Recommendation…
Absolute Valuation (50% mean reversion)
Dow Chemical
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G
ROE
Average
High
Low
B.
99.9+
1.62
4.8
99.9+
15.4
8.6
31.1
Mean
C.
8.8
0.12
0.5
1.6
1.8
0.7
3.2
D.
17.7
0.99
2.9
5.2
9.3
1.9
16.7
Comparables Analysis
DOW
DuPont
Rohn & Haas
Sherwin Williams
Air Products & Chem.
11.52x
7.66x
26.01x
10.76x
14.07x
2009E
P/ E
14.80x
7.24x
21.48x
10.38x
9.83x
Average
14.00x
12.75x
Entity Name
`
P/E
Current
#Your
Target
Multiple
E.
F.
14.8
0.12
0.5
1.6
1.8
1.6
8.0
8.85
0.495
1.45
2.6
4.65
0.95
8.35
*Your
Target E,
S, B,
etc/Share
G.
0.61
54.6
14.12
4.41
3.92
4.4
0.88
Your
Target
Price
(F x G)
H.
$5.40
$27.03
$20.47
$11.47
$18.23
$4.18
$7.35
$13.45
Multiples Price Target – Blended
Abs. & Comp
2009E EPS Multiple
$0.61
16.5x
Price
$10.07
Fisher College of Business – Student Investment Management
Buy Recommendation…
Discounted Cash Flow Analysis
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
14,767
6,299
5,693
11,992
-14.76%
Shares Outstanding
930.4
Current Price
$
7.11
Implied equity value/share
$
12.89
Upside/(Downside) to DCF
81.28%
DCF Sensitivity Analysis
FCF Growth
1%
2%
3%
4%
5%
DCF Value Per Share
Terminal Discount
8%
9%
10%
11%
$14.56
$12.80
$11.44
$10.34
$15.85
$13.69
$12.07
$10.81
$17.65
$14.87
$12.89
$11.40
$20.34
$16.53
$13.98
$12.15
$24.84
$19.01
$15.50
$13.15
12%
$9.45
$9.80
$10.23
$10.77
$11.47
Fisher College of Business – Student Investment Management
Buy Recommendation…
Price Target Summary
US$ 12.00:
Blended price target based on
DCF
Comparable & Absolute Multiple Valuation
Fisher College of Business – Student Investment Management
New SIM Holdings
SELL POSCO AND BUY DOW
Conclusion:
Continue to hold underweight
Why not increase underweight? – Don’t want to miss an early economic rebound
Why not reduce underweight? – Basic materials as a whole still out of favor
SELL all of Posco holdings
BUY 125 bps of DOW Chemical
Fisher College of Business – Student Investment Management
Supplement
Supplement: Key Economic Indicators
Fisher College of Business – Student Investment Management
Supplement
Supplement: Key Economic Indicators
Fisher College of Business – Student Investment Management
Supplement
Possible Dilution from Merger
Company project possible dilution of 5%
Dilution / Accretion
-10%
EPS
-5%
0%
5%
5%
$ 0.52
$ 0.58
$ 0.61
$ 0.64
$ 0.67
Stock Price $ 8.61
$ 9.56
$ 10.07
$ 10.57
$ 11.10
16.5x
Fisher College of Business – Student Investment Management