materials final report

Materials, 2012

Oleksandr Matviienko, Soufianne Ayoche, Huizhong Li


Materials, 2012

1

Agenda Introduction ----------------------------------------------------------------------------------------------------------------------- 1

Investment Recommendations Summary ---------------------------------------------------------------------------------- 2

Materials Industry Analysis ---------------------------------------------------------------------------------------------------- 2

Materials Industry overview ------------------------------------------------------------------------------------------------ 2

Diversified Metals and Mining Industry --------------------------------------------------------------------------------- 3

Specialty and Diversified Chemicals Industry ------------------------------------------------------------------------- 7

Fertilizers and Agricultural Chemicals Industry ---------------------------------------------------------------------- 11

Steel Industry------------------------------------------------------------------------------------------------------------------ 13

Construction Material Industry ------------------------------------------------------------------------------------------- 17

Metal & Glass Containers industry -------------------------------------------------------------------------------------- 20

Paper and Forest Products Industry -------------------------------------------------------------------------------------- 23

Materials Industry outlook ------------------------------------------------------------------------------------------------- 26

Investing Process Description ------------------------------------------------------------------------------------------------ 27

Quantitative Screens and Analysis ------------------------------------------------------------------------------------------ 28

Qualitative Screens and Analysis -------------------------------------------------------------------------------------------- 30

Fundamental Analysis ---------------------------------------------------------------------------------------------------------- 31

Sensient Technologies (SXT). Current DFF holding. --------------------------------------------------------------- 32

Cytec Industries (CYT) ----------------------------------------------------------------------------------------------------- 37

Minerals Technologies (MTX) ------------------------------------------------------------------------------------------- 42

Scott Miracle Growth (SMG) --------------------------------------------------------------------------------------------- 48

Domtar Corporation (UFS) ------------------------------------------------------------------------------------------------ 52

Steel Dynamics (STLD) ---------------------------------------------------------------------------------------------------- 57

Silgan Holdings (SLGN). Current DFF holding. --------------------------------------------------------------------- 63

Investment Idea Summary ---------------------------------------------------------------------------------------------------- 68

Cytec Industries (CYT): STRONG BUY ------------------------------------------------------------------------------ 68

Scott Miracle Growth (SMG): MODERATE BUY------------------------------------------------------------------ 69

Sensient Technologies (SXT). Current DFF holding: HOLD ----------------------------------------------------- 70

Silgan Holdings (SLGN). Current DFF holding: SELL ------------------------------------------------------------ 71

References ------------------------------------------------------------------------------------------------------------------------ 72

Appendix--------------------------------------------------------------------------------------------------------------------------- 73


Materials, 2012

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Introduction

As of the date of current analysis, materials sector within S&P 400 is represented by 27

companies and 10 sub industries. Temple-Inland company which was previously one of

constituents of S&P 400 Materials sector was removed form it as the company was acquired in

February 2012. The materials companies are involved in exploration and processing of raw

materials into basic industrial and consumer products which have broad utilization in various

industries in the USA, as well as internationally. The table below presents current sector

constituents and their respective sub-industries.

It is worth noting that DFF fund currently has 2 holdings in the respective sector which were

indicated in the table. The weight of Silgan Holdings is around 5.1% and of Sensient

Technologies is approximately 5.9%. These companies were acquired in May 2010 and May

2011 respectively.

Company Name Ticker Sub-Industry

Martin Marietta Materials MLM Construction Materials

Ashland Inc ASH Diversified Chemicals

Cabot Corp CBT Diversified Chemicals

Olin Corp OLN Diversified Chemicals

Compass Minerals International CMP Diversified Metals & Mining

Scotts Co A SMG Fertilizers & Agricultural Chemicals

Intrepid Potash Inc IPI Fertilizers & Agricultural Chemicals

Louisiana Pacific Corp LPX Forest Products

AptarGroup Inc ATR Metal & Glass Containers

Greif Bros Corp A GEF Metal & Glass Containers

Silgan Holdings SLGN Metal & Glass Containers

Packaging Corp of America PKG Paper Packaging

Rock-Tenn RKT Paper Packaging

Sonoco Products Co SON Paper Packaging

Domtar Corp UFS Paper Products

Albemarle Corp ALB Specialty Chemicals

Cytec Industries Inc CYT Specialty Chemicals

Minerals Technologies Inc MTX Specialty Chemicals

RPM International Inc. RPM Specialty Chemicals

Sensient Technologies Corp SXT Specialty Chemicals

Valspar Corp VAL Specialty Chemicals

NewMarket Corp NEU Specialty Chemicals

Carpenter Technology Corp CRS Steel

Commercial Metals Co CMC Steel

Reliance Steel & Aluminum RS Steel

Steel Dynamics Inc STLD Steel

Worthington Industries Inc WOR Steel

Note:

represents current DFF holdings


Materials, 2012

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Investment Recommendations Summary We recommend a strong buy for Cytec Industries company, a moderate buy Scott Miracle

Growth company, a hold for Sensient Technologies company (current DFF holding), and a sell

for Silgan Holdings company (current DFF holding). It is worth noting that Silgan Holing was

also a sell recommendation previous year. Table below summarizes our recommendations:

Materials Industry Analysis Materials Industry overview

Materials Industry encompasses such sub-industries as Specialty, Diversified, and Agricultural

Chemicals, Fertilizers, Diversified Metals and Mining, Steel, Construction Materials, Forest and

Paper Products, Metal and Glass Containers, Paper Packaging.

This industry supplies commodities to such industries as aerospace, automotive,

telecommunications, construction, agriculture, general manufacturing, consumer staples, oil and

gas, etc.

The industry can be characterized as cyclical and to some degree oligopolistic and depends,

mainly, on industrial production rates, real GDP growth rates, construction activities, as well as

weather and population growth rates.

Also, the industry can be characterized by relative capital- and labor-intensiveness and energy-

dependence.

As main products are relatively uniform, producers tend to compete on prices by achieving the

effective cost control.

The average size of Materials Industry in the S&P 400 is $3.1 billion and average revenue figure

was $3.3 in FY2010.

The figure below allows tracking relative performance of Materials Industry to S&P 400 and

S&P 500 for past 6 months.

Materials Sector Final Recommendations

Company Name Ticker Sub-Industry Recommendation

Cytec Industries Inc CYT Specialty Chemicals Strong Buy

Scott Miracle Growth SMG Fertilizers & Agricultural Chemicals Moderate Buy

Sensient Technologies Corp SXT Specialty Chemicals Hold

Silgan Holdings SLGN Metal & Glass Containers Sell

Note:

represents current DFF holdings


Materials, 2012

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Source: FactSet

Based on this figure, generally, Materials Industry had similar trend to those of S&P 400 and

500. However, for past two months it outperformed both indices and continues to do so now.

Bollinger bands analysis, however, suggests some bearish trend of given Materials index.

Diversified Metals and Mining Industry

Industry Overview

Diversified Metals and Mining companies mine and produce non-ferrous metals, related base

materials and products.

This industry supplies commodities used in manufacturing various equipment and products used

in such industries as aerospace, automotive, telecommunications, construction etc.

According to S&P, this industry is dominated by copper companies. Apart from copper and

copper products, companies in this industry manufacture aluminum, nickel, zinc and related

products, as well as base chemicals, salt etc. The graph below describes recent production trends

in this industry.


Materials, 2012

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Note: Data is in Million metric tons

Source: Bloomberg

This sub-industry is represented in S&P 400 by a single company Compass Minerals. This

company produces salt used primarily in highway de-icing, water conditioning, food preparation,

and sulfate of potash for specialty fertilizers production. Please find descriptive financial

information in the table below.

Main players in this industry are represented by such companies as Freeport McMoRan Copper

and Gold (exploration, mining, and production of mineral resources), Titanium Metals Corp

(produces and sells titanium melted and mill products), as well as by smaller companies such as

Lundin Mining (produces copper, zinc, lead, and nickel), Quadra FNX Mining Ltd (produces

copper, gold, and platinum group metals), and Compass Minerals.

Revenue and Earnings Drivers

We will consider specifically Compass Minerals in this analysis, as our investment options for

diversified metals and mining are limited to this company.

Company‟s main revenue drivers are weather, which drives de-icing salt demand as well as

governmental budget policy allocating money for de-icing and safety purposes. Safety of

citizens is one of the main priorities of any government, thus, making Compass‟s salt highly

demanded in winter, especially cold, icy and snowy one.

1.39 1.39 1.40 1.39 1.46 1.45

3.02

3.33 3.12

3.21 3.44 3.58

0.12 0.12 0.11 0.12 0.14 0.16

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2006 2007 2008 2009 2010 2011

Non-ferrous metals production

Copper Aluminium Nickel

Target Companies Comparable Statistics*

In billions Mkt Cap Revenue P/E TEV/Sales TEV/EBITDA GM B/M

5-Year

GS

Compass Minerals 2.36 1.11 14.94 2.45 9.74 28.39% 0.189 10.80%

Peers Average 3.14 3.57 13.72 1.18 7.93 26.62% 0.33 10.64%

*Based on Bloomberg Peers


Materials, 2012

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From the other side, agricultural demand drives fertilizers demand. Fertilizers demand, in turn,

drives demand for the Company‟s potash production.

Agricultural, and, thus, fertilizers demands are expected to be robust in near and medium future,

as such trends as population growth, which drives demand for food, and a decline of arable land

per person, which drives demand for fertilizers to increase a land‟s productivity to compensate

for a decline in land‟s quantity may both boost demand for Company‟s potash products.

Moreover, constantly increasing level of personal income, especially in developing countries

where the majority of world‟s population is concentrated, stimulates such population to change a

diet towards more valuable food products, which require a more extensive use of fertilizers.

Such factors as anticipated crop prices also drive a fertilizers demand.

Moreover, according to Morningstar, this industry is oligopolistic in nature, which may produce

a positive effect on the Compass‟s profitability.

Risk Drivers

The industry is characterized by little differentiation of its products. Therefore, companies

mostly compete on price.

This produces such risks as the possibility of market damping by competitors willing gain more

of a market share.

Also, the threat of substitutes to road de-icing using salt exists, which may negatively impact

Company‟s position.

However, according to Morningstar, the threat of substitutes is not high.

The risk of warm weather seriously impacts Company‟s financial results.

Also, consistently low agricultural prices also may produce a devastating effect on the

Company‟s financial health.

The inability to find new mineral resources to support existing salt and potash production may

also greatly impact Company‟s operations. Please find risk matrix below.


Materials, 2012

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Outlook

As the industry is oligopolistic, we expect it to be profitable and stable, as prices, thus, profits

tend to be less volatile.

Moreover, as such natural resources as salt

and potash are non-renewable and scarce,

while population growth and demand for

food is expected to increase, as well as

budget spending on the safety of roads in

winter is expected to be stable, prices on

Company‟s main products are expected to

be relatively stable.

Total planted acreage for major crops in the

US is expected to increase in next 2 years

stimulating fertilizers demand. However,

according to Morningstar, potash supply

growth will outpace potash demand growth

in near future, thus, providing some

downside potential for potash prices. Please

find anticipated acreage dynamics for major crops in the US in the table below.

According to S&P, the outlook on general diversified metals and mining sub-industry for next 12

months is positive, as main products‟ prices are forecast to increase, thus, driving sales and

earnings of companies upward. Please find detailed information below.


Materials, 2012

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This, in turn, is dictated by stable non-ferrous metals demand growth outpacing supply growth,

reflecting new housing construction growth (especially in the US – second largest consumer) and

intensified industrialization rates in India and China.

Specialty and Diversified Chemicals Industry

Industry Overview

Specialty and diversified chemical products are mostly made from basic chemicals. They include

coatings, adhesives, pesticides, paints, sealants, catalysts, plastic additives, ethers, alkali, carbon

products etc. Please find more information on

current industry production trends in the graph

to the right.

Such products are usually produced in smaller

volumes, than basic chemicals, and require

higher R&D spending and

marketing/distribution costs.

Such industries as manufacturing, automobile,

agriculture, housing, construction,

pharmaceuticals are the major consumers of

specialties.

According to S&P, companies in this industry have greater control over prices and, thus, more

stable profit margins than commodity producers.

This sub-industry is represented in S&P 400 by a range of companies indicated in table below.


Materials, 2012

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Main players in this industry are represented by such companies as Dow Chemicals (largest US

chemical producer: from base chemicals to sophisticated specialties), DuPont (basic materials,

fertilizers, specialties, agricultural products, enzymes etc.), as well as by smaller companies such

as Albemarle (polymers, catalysts, performance chemicals etc.), Ashland (water solutions,

lubricants, polymers other).


As Specialty and Diversified Chemicals Industry supplies products to a wide range of industries

and consumers, its main drivers are also well diversified.

Such macro factors as industrial production growth rates, construction activity levels, personal

consumption expenditures, agricultural production growth rates are one of the main revenue

drivers.

Chemical production is capital intensive.

Thus, it requires significant modernization

and expansion capex. Therefore, capex is

also one of main revenue as well as

earnings drivers. According to American

Chemistry Council, aggregate capex in

chemical industry reached $27.5 billion in

2010, from which $4.9 billion was spent on

maintenance and repairs.

From the earnings perspective, energy

prices dynamics is an important driver.

Chemical industry is highly energy

intensive, as companies use energy

commodities as raw materials, fuels, and

power sources, according to S&P.

According to S&P, chemical industry

accounts for about 6% of total energy



5-Year

GS

Ashland Inc. 5.01 7 15.59 1.19 28.23 27.05% 0.81 3.82%

Cabot Corp. 2.58 3.27 13.17 0.81 7.27 18.77% 0.58 3.28%

Olin Corp. 1.7 1.96 7.94 0.9 6.18 21.36% 0.59 15.48%

Albemarle Corp. 5.89 2.87 13.86 1.73 9.13 33.09% 0.27 4.41%

Cytec Industries 2.85 3.07 15.83 0.74 7.5 23.55% 0.64 6.03%

Mineral Technologies 1.18 1.04 18.08 0.68 5.48 20.92% 0.63 0.43%

NewMarket Corp. 2.54 2.15 13.59 1.33 8.01 24.74% 0.21 10.96%

RPM International 3.34 3.56 16.91 1.13 9.95 40.28% 0.37 2.75%

Sensient Technologies 1.92 1.43 15.74 1.36 9.39 31.77% 0.55 4.64%

Valspar Corp. 4.29 4 16.3 1.25 11.25 33.12% 0.28 5.86%

Peer Average 4.13 4.23 14.24 1.07 8.27 27.10% 0.21 7.38%



Materials, 2012

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consumption in the US, as well as 9% of natural gas consumption. Of this consumption,

according to S&P, 53.7% by volume (72% by value) was used as raw materials with the

remainder used for fuel and power in 2010.

Energy costs, especially, natural gas, can occupy up to 90% of COGS for chemicals companies.

Governmental regulation can also produce large impact on companies‟ earnings as chemical

industry is highly regulated both on federal and state levels. Please find major regulation acts in

the graph to the right.

Risk Drivers

The industry is relatively cyclical (to a lesser degree than basic chemicals) and vulnerable to

changes in US/global industrial production and GDP growth rates, as well as personal income

levels, construction activities, international chemicals trade etc. The earnings tend to emulate

basic economic cycles.

The industry is characterized by high differentiation and customization of its products.

Therefore, companies mostly compete on quality of products, and, to a lesser degree, on prices.

However, low global chemical prices, as well as steel, agricultural and housing prices may

produce negative impact on the profitability of industry.

High energy prices, as well as relative elasticity of demand on main specialty chemical products

may erode chemical companies‟ margins.

According to S&P, threat of substitutes is low. Please find risk matrix below.


Materials, 2012

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Outlook

We believe Specialty and Diversified Chemicals Industry would benefit from US/global

industrial recovery as, according to EIU, US Real GDP growth rate is expected to be 1.8% in

2012 and accelerate to 2.3% by 2015, as well as global Real GDP growth rate is expected to be

3.1% in 2012 and reach 4.3% by 2015.

US industrial production growth rate is also projected to recover to be in a range of 2.4-3% for

the next 5 years. Please find main macroeconomic statistics which may produce high influence

on chemical industry in the table below.

Energy prices, especially, natural gas, have decelerated its growth recently.

Moreover, according to S&P, business

environment for chemical industry will

remain strong and manufacturing

industry will continue to grow.

Agricultural demand for chemicals is

also expected to be strong as population

growth rate and increase in personal

income levels in developing countries

would stimulate agricultural production.

All the aforementioned factors are

beneficial to the chemical industry.

Note: GR=Growth Rate

Gas Prices represent Henry Hub, Crude Oil Prices represent WTI

Source: EIU, Bloomberg

Macroeconomic factorsItem 2011/Spot 2012 2013 2014 2015

Global Real GDP GR 3.7 3.1 3.9 4.1 4.3

USA GR 1.7 1.8 2 2.2 2.3

Western Europe Real

GDP GR 1.7 -0.5 0.8 1.2 1.6

Transition Economies

Real GDP GR 3.7 2.3 3.4 3.8 3.8US Industrial

Production Growth 4.2 3 2.4 2.3 2.4

Gas Prices, $/MMBtu 2.56 3.15 3.85 4.2 4.4

Crude Oil Prices,

$BBL 102.31 103.49 102.27 97.72 94.08

US Personal

Disposable Income

($trillions, PPP) 11.656 12.021 12.435 12.894 13.410

Corn Price, cent/bu 639.75 641.64 560.85 561.41 558.21Wheat Price, cent/bu 635.25 663.74 718.01 739.24 n/a


Materials, 2012

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Moreover, Producer Price Index for Chemical Industry also shows positive dynamics after a drop

in 2008/2009, suggesting further increase.

Fertilizers and Agricultural Chemicals Industry

Industry Overview

We will first begin by giving a quick overview of the sector. The fertilizers sector is one of the

sub sectors of the chemical industry. Fertilizers contain one or more of the major plant nutrients

and sometimes secondary and/or trace nutrients. They are added to soil to replace essential

nutrients depleted by crops. Its main nutrients are phosphorus, nitrogen and potassium. The USA

is the world‟s largest consumer and importer of phosphate rocks and sulfur. Both chemicals are

nutrients for fertilizer and represents 95% and 90% of the use of such nutrients respectively;

therefore, if we can have analyze how the US demand is going to change in the future, we may

be able to forecast how the fertilizers sector will perform. Since the main consumers of fertilizers

are agricultural companies, forecasting the level of agricultural activity in the USA will yield

strong insights about the future fertilizers demand. The common distribution system is by rails.

This sector is also subject to a high level of mergers and acquisitions, which can yield in the

longer term to a more oligopolistic market.

Here is a table summarizing key statistics for the companies we are studying in our sector.


Agricultural demand for fertilizers and other chemicals is dictated by projected increase in

world‟s population, decrease in arable land per person and, thus, increase in agricultural

production. Furthermore, the expected increase in biofuel usage may boost the use of fertilizers.

Another revenue driver is the level of personal income: an increasing level of personal income in

developing world would stimulate the demand for quality food, and, thus, for fertilizer use in

agricultural production. Also, the risks of adverse weather conditions would stimulate the

fertilizers use. The price of natural gas is also a very important driver since it has a large impact

in pricing of agricultural chemicals as it occupies a vast part in COGS of fertilizers‟ companies.

As a result, prices of gas are major drivers for both revenue and earnings of fertilizers‟

companies. Finally, fertilizers are one of major parts of agricultural companies‟ raw materials

expenses. These raw materials expenses are determined by the anticipated prices of the end

products. Therefore, agricultural prices may produce a high impact on fertilizers and related

chemicals prices.

Since we have seen that overall agricultural activity is one of the most, if not the most, important

revenue driver, we have decided to look for corn and soybean projection for 2012. As you can



5-Year

GS

Intrepid Potash Inc 1.91 0.44 20.52 3.48 9.17 40.88% 0.45 n/a

Scotts Miracle-Gro 2.92 2.82 19.29 1.33 10.2 11.74% 0.16 -4.46%

Peer Average 16.29 10.67 15.69 2.24 8.87 32.98% 0.30 19.99%



Materials, 2012

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see, the consensus is quite bullish, which may positively affect the demand for fertilizers in the

short term.

The same goes for the crop producer confidence index which is slightly increasing again

suggesting that producers are no longer in the pessimistic loop they used to be in.

Risk Drivers

The first and most important risk driver is linked to high energy prices, especially, natural gas

prices since it may erode fertilizers‟ companies‟ margins and profitability. Moreover, agricultural

cycles may affect the financial stability of fertilizers‟ companies. Finally, low agricultural prices

may negatively impact fertilizers‟ and related chemicals prices.


Materials, 2012

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Outlook

According to Bloomberg, the recent rapid growth in the production of biofuels initiatives,

including ethanol, has been driving a boost in grain and oilseed use globally which in turns is

expected to affect positively the demand for fertilizers. In addition, longer term nutrient use is

expected to grow at about 2% per year, with the developing nations of Asia and Latin America

accounting for nearly all of this growth potential. On the other hand, according to Bloomberg,

there were some bearish trends concerning global corn and soybean demand/supply expectations.

Another bearish trend lies in the fact that US famers‟ future expectation are falling. Nonetheless,

the USDA long run projections for fertilizers were incrementally positive with 2.2 Million acres

of added planting of major crops.

Finally, the USDA expects higher wheat and corn planting, the latter being the highest end

market for fertilizers.

As a result of all those elements, the outlook for this sector is quiet mitigated since we both

bullish and bearish trends that must be taking into consideration. We however believe that this

sector will tend to market perform at the light of these facts. Below is a graph that supports our

view:

Steel Industry

Industry Overview

Steel products are mostly made from raw iron. Steel industry, as the base industry in the

industrial world, supplies commodities to industries ranging from appliances, automotive,

construction, containers to electrical equipment, machinery etc. The graph shows on the right.

Steel industry is energy and capital intensive industry. The integrated production process

requires expensive plant and equipment purchases.


Materials, 2012

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Main players in this industry are represented by such companies as Nucor Corp (segment: steel

mills, steel products, and raw materials), United States Steel Corp (segment: flat-rolled

products), U.S. steel (segment: tubular products), and Steel Dynamics Inc. (segment: steel

operations, metals recycling and ferrous resources operations, and steel fabrication operations),

as well as by smaller companies such as Reliance Steel & Aluminum (provides metals

processing services and distributes metal products).

Note: Data is in thousands of net tons Source: American Iron and Steel Institute


Revenue and Earning Drivers

The primary revenue driver is economic growth, measured by real GDP. The demand for steel is

cyclical in nature and highly sensitive to whether the economy is growing or declining.

Steel industry highly relies on the cyclical auto and construction industries, since steel

commodities rely heavily on demand for such consumer products as appliances, cars, and

containers. In addition, steel relies more on the capital goods markets.

According to S&P, scrap price has negative effect to Steel industry; higher scrap costs increase

the cost of raw steel production for integrated mills.



5-Year

GS

Carpenter Technology Corp 2.35 1.79 22.76 1.32 10.31 19.55% 0.33 0.48%

Commercial Metals Corp 1.58 8.12 n/a 0.31 10.04 8.68% 0.75 0.98%

Reliance Steel & Aluminum 4.24 8.13 12.44 0.6 7.83 21.66% 0.74 5.32%

Steel Dynamics Inc 3.37 8 12.59 0.54 6.83 9.25% 0.68 17.22%

Worthington Industries Inc 1.25 2.41 10.84 0.7 10.04 10.01% 0.53 -4.95%

Peer Average 6.43 8.87 41.62 0.78 7.37 13.00% 0.61 5.67%



Materials, 2012

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Steel companies face fierce competition from foreign producers. If the price of imported steel

products is lower than domestic steel price, domestic steel industry will be negative affected.

Steel industry is more concentrated and fragmented compared to other base metals industries.

Greater financial sources from mergers enable companies to directly source raw materials

through acquisitions. The four big companies are shown below.

As the world‟s largest steelmaking country, China has placed immense upward pressure on the

prices of raw materials, such as iron ore, ferrous scrap, coke, and coal. Graphs show below.

Steel industry is highly regulated with respect to the environment, subject to a variety of federal,

state, and local environmental laws that regulate air emissions, wastewater, and hazardous waste

disposal.

Risk Drivers

The industry is relatively cyclical and vulnerable to volatility in GDP growth rates, as well as

construction activities, autos industry performance and distributors‟ inventory accumulations etc.

The earnings tend to emulate basic economic cycles. Due to the fierce competition from

international steel markets, high global production and low global steel prices may produce

negative impact on the profitability of industry. Consolidations can dramatically cut down cost,

which is positive effect to Steel industry. At the same time, the industry is more fragmented than

before in terms of the number companies, who typically use about a 3-to-1 ratio of molten pig

iron to scrap and, thus, are less sensitive to rising prices for scrap.

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010

Largest US Steel Companies

Nucor Corp. United States Steel Corp.*

AK Steel Holding Steel Dynamics Inc.

151 182 222 280 356 423

495 501 574 627

90 92 91 100 95 99 98 91 64 81

850 903 969 1,069

1,146 1,250

1,351 1,327 1,231

1,414

-

500

1,000

1,500

2001200220032004200520062007200820092010

World Steel Production

China US World Total

*North American operations only.

Source: Company Reports


Note: Data is in thousands of net tons

Source: American Iron and Steel Institute *North American operations only.

Source: Company Reports



Materials, 2012

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Outlook

We have a slight positive fundamental outlook for the Steel industry for the following 12-month.

The projection of a 2.0% in U.S. GDP increase in 2012, compared with the GDP growth of 1.8%

in 2011. According to S&P, in the year 2012, there‟s an increase in auto sales to 13.5 million

units, from 12.8 million units in 2011. Weak construction markets in the U.S. will weigh on the

company's growth potential in the near term. Below two graphs are the outlook by Standard &

Poor and Value Line.


Materials, 2012

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Source: Standard and Poor’s Source: Value Line

Construction Material Industry

Industry Overview

Companies in Construction Materials Industry are engaged in the mining, quarrying and

processing of raw materials involved in road and building construction.

The industry includes a highly diverse range of suppliers, from cement manufacturers to

specialty glass and steel manufacturers, as well as provides a large market to white goods

manufacturers, furniture manufacturers, etc.

Construction materials companies have a wide range of customers from small house-builders, to

multiple projects within one country, even to shopping mall construction, or office blocks,

operating in multiple countries.

The industry has high barriers to entry. Main players in this industry are represented by such

companies as Vulcan Materials Corp. (engages in the production and sale of construction

aggregates for the infrastructure industry; segments: aggregates, concrete, asphalt mix, and

cement), as well as by smaller companies such as Martin Marietta Materials (engages in the

production and sale of aggregates for the construction industry).


Materials, 2012

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This sub-industry is represented in S&P 400 by a single company Martin Marietta Materials Inc.,

the second largest U.S. producer of aggregates for the construction industry.


The macroeconomic performance, which is measured by real GDP, is one of the revenue drivers

for Construction Materials industry. Construction activity in the U.S. is the single most important

driver of earnings power for Construction Materials industry.

Construction activity is driven by highway construction (public construction and supported by

government funding), commercial construction

(public construction), and housing (private

construction). Construction activity is highly

cyclical.

Public construction, funded by the government, is

an important segment of the industry. The

infrastructure spending is a key driver for the

industry.

The industry is subject to increasing challenges

from environmental advocates hoping to control

the pace and direction of future development,

which made it difficult for the industry to expand

and grow.

Meanwhile, these restrictions on supply have created a favorable pricing environment that is

expected to continue.

Risk Drivers

The biggest risk for Construction Materials industry is weak construction activity. Weak federal

and state budgets are a concern. Politicians are focused on cutting government spending. Future

restrictions will be more likely to make zoning and permitting more difficult, which means that

the favorable pricing environment is expected to continue. The commercial sector in coming

months will continue to be weak, but according to S&P, the residential spending has bottomed

and will improve gradually in 2012, which is a bull say. Raw material is like to inflate in the

form of higher costs for diesel and asphalt, which will drive up COGS and decrease earnings.



5-Year

GS

Martin Marietta Materials 3.99 1.81 48.59 2.48 15.11 16.60% 0.36 -4.07%

Peer Average 2.56 2.98 28.73 1.54 19.61 24.41% 0.53 -3.64%



Materials, 2012

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Outlook

Our fundamental outlook for the construction materials sub-industry for the next 12 months is

neutral. For the commercial construction sector, there‟s no obvious recovery trend leading to a

rebound in demand. Since the regression in 2008, housing starts stayed at quite low levels in the

past several years. According to S&P, in the coming months, the weak trend will continue but is

likely to show some recovery in 2012. Spending on infrastructure is uncertain. Due to the limited

visibility on federal infrastructure spending levels in 2012, we expect that public construction

demand for aggregates will be low. Pricing for aggregates is likely to hold up because of the

restrictions being placed on mining due to environmental concerns. Below two graphs are the

outlook by Standard & Poor and Value Line.


Materials, 2012

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Metal & Glass Containers industry

Industry Overview

The Containers & Packaging industry are engaged in the manufacturing of containers, as well as

offering packaging services. The food-and-beverage and household products sectors account for

the biggest portion of overall business.

The industry is concentrated toward metal, glass and plastic containers and packaging operations.

For DFF, we only focus on metal and glass containers.

Companies within the industry serve a wide variety of markets, but most rely on the food-and-

beverage, household products, and pharmaceutical sectors for the majority of business.

Main players in this industry are represented by such companies as Ball Corp. (supplies metal

packaging to the beverage, food, and household products industries worldwide) and Owens-

Illinois Inc.(manufactures and sells glass container products), as well as by smaller companies

such as AptarGroup Inc. (engages in the design, manufacture, and sale of consumer product

dispensing systems.), Greif Bros Corp A (manufactures and sells industrial packaging products)

and Silgan Holdings (engages in the manufacture and sale of metal and plastic consumer goods

packaging products).


Materials, 2012

21



Though companies in the industry offer their products to diversified end markets to stabilize

earnings and enhances customer base, the industry is not immune to macroeconomic cycles. As

the broader economy goes, so goes the Packaging and Containers Industry.

According to Value Line, consumer spending habits

can have an impact on operating results. Global sales

of beer, wine and spirits and food containers remain

fairly strong, due in part to more cost-conscious

consumers continuing to dine at home.

Since a good number of products utilize oil-based

materials, energy price is also a key driver factor

affecting revenues and earnings. Volatile petroleum-

based material prices can make cost management a

challenge. In addition, the raw material, such as steel

and aluminum etc. has a clear and direct effect on the

revenue and earnings. Thus, some companies in the

industry consider acquiring the self-make steel can

operations.

The metal container business' sales are dependent, in

part, upon the vegetable and fruit harvests in some

regions of the US.

Metal & Glass Containers industry is subject to the

global beverage industry. International expansion helps to limit volatility and enhance these

companies‟ attractiveness.

In terms of environment concern, government implements extensive regulations on mandating

recycling and limitations on certain packaging items. It will affect the sale of beverage

containers, as well as the supplies of post-consumer recycled glass.

New technology and production efficiencies can boost sales volume and margins.



5-Year

GS

AptarGroup Inc 3.48 2.34 19.66 1.5 8.38 32.17% 0.37 5.21%

Greif Bros Corp A 2.43 4.25 13.81 0.86 7.94 18.24% 0.51 n/a

Silgan Holdings 3.02 3.51 16.49 1.05 7.62 13.97% 4.58 5.35%

Peer Average 3.53 5.07 14.72 1.01 15.72 18.26% 2.43 7.30%



Materials, 2012

22

Risk Drivers

The packaging industry is highly competitive. Most participants in the industry have to compete

on price, especially in the food-and-beverage segment. The global containers and packaging

industry is witnessing an increasing trend. Companies‟ operations in the industry are subject to

federal, foreign, state and local environmental laws and regulations. These laws and regulations

limit the discharge of pollutants and establish standards for the treatment. In addition to costs

associated with regulatory compliance, companies may be held liable for alleged environmental

damage associated with the past disposal of hazardous substances. Due to dependence on crop

market, the weather conditions in those regions will affect the results of operations accordingly.

Outlook

We have moderately positive outlook for the metal and glass containers sub-industry in the

following 12-month, based on our view of a gradual economic recovery and growth in global

packaging and containers markets. According to Data monitor‟s report on 'Global Containers and

Packaging', the global containers and packaging market generated total revenues of $420.3

billion in 2009, representing a compound annual growth rate (CAGR) of 2.2% for the period

spanning 2005-09. The performance of the market is forecast to accelerate, at an anticipated

CAGR of 3.3% for the five-year period 2009-14, which is expected to drive the market to a value

of $493.5 billion by the end of 2014. The industry is undertaking consolidations to seek to

improve operating efficiencies and expand their global market reach. We believe improved

production efficiencies and new products, such as easy-open closures on cans and lighter-weight

glass bottles in new sizes, will eventually boost sales volume and margins. The structure and

enforcement of laws mandating recycling and limitations on certain packaging items can affect

the sale of beverage containers, as well as the supplies of post-consumer recycled glass, which

we view as a positive for companies within this group. Below two graphs are the outlook by

Standard & Poor and Value Line.


Materials, 2012

23


Paper and Forest Products Industry

Industry Overview

These industries are involved in the manufacturing of paper, paperboards and wood products

According to S&P, the main raw materials are timber and wood fiber (virgin or recycled). The

production process in this industry is very capital intensive which leads to large consolidations

within the industry. The main end users of such paper and forest products include industries as

manufacturing, automobile, agriculture, housing, construction, pharmaceuticals. The main

players are large paper and forest companies such as International Papers and Weyerhaeuser (see

table), whose financial structures and supply management abilities allow them to survive. The

main products of the paper industry are paperboard (containerboards and boxboards), paper

(printing and writing), newsprint, tissue paper and other.

For the Forest products industries, the main products are wood products such as lumber and

structural panels.


Materials, 2012

24

Here is a table summarizing key statistics for the companies we are studying in our sector.

Revenue Drivers

Housing starts is the most important driver for forest products since it is the highest end market

for lumber and other wood products. Moreover, interest rates are also important revenue drivers

since they affect the whole GDP outlook and corporate operating strategy, which is very

important for such industries since they are strongly correlated with the overall level of the

general economy. In this case, falling interest rates are positive since investment activity

increases. Another very important driver is GDP. Indeed, it is a very important indicator for

economic health with high impacts on paper and forest products. In addition, operating rates are

also important to consider. Indeed, the proportion of total manufacturing capacity being utilized

is a key indicator of the health of the overall industry. Main raw materials prices as well as final

product prices are also important to consider they affect operating rates and overall profitability.

Paper/Packaging Products: Target Companies Comparable Statistics*


5-Year

GS

ROCK-TENN

COMPANY 4.86 6.91 13.16 1.09 9.28 17.30% 0.71 47.20%

PACKAGING CORP

OF AMERICA 2.94 2.62 18.21 1.14 8.09 20.51% 0.33 3.73%

SONOCO PRODUCTS CO 3.27 4.50 14.62 0.98 8.16 16.36% 0.43 3.04%

TEMPLE-INLAND I 3.51 3.94 34.77 1.05 11.56 12.32% 0.28 -5.93%

DOMTAR CORP 3.43 5.61 8.35 0.6 3.47 17.17% 0.86 23.81%

LOUISIANA-PACIFIC

CORP 1.10 1.36 n/a 1.1 118.38 6.79% 0.92 0.60%

Peer Average 3.56 5.41 14.09 0.94 12.91 16.88% 0.45 9.65%



Materials, 2012

25

You can check in graph X that the prices of lumber and structural panels have rebounded since

its low in 2009, which in turn explained the increased production in 2010 as you can see in table

X. Finally, international trade is very important for the forest industry because solid level of

exports help exponentially the industry in periods of strengths and mitigates the bad effects in

periods of bad domestic performances.

Risk Drivers

According to S&P, expanding electronic communications are hurting the print market. Moreover,

growth in e-readers may be detrimental for some grades of paper products. Finally, pine beetles

impact can last for years for the lumber productions.


Materials, 2012

26

Outlook

We believe Paper and Forest Products Industry would benefit from US/global industrial recovery

as, according to EIU, US Real GDP growth rate is expected to be 1.8% in 2012 and accelerate to

2.3% by 2015, as well as global Real GDP growth rate is expected to be 3.1% in 2012 and reach

4.3% by 2015. Those results are show in graph Y. This factor coupled with the fact that the Fed

is expecting to keep interest rates low until 2015 are very good news for the industry. In addition,

according to S&P, supply is being controlled which is a good indicator of the industry capacity

to react to its environment. Moreover, pulp prices and other raw materials prices has decreased

significantly recently which coupled with the recent prices increase of many grades of paper,

which affected positively the industry‟s profitability. Another interesting element is linked to

new opportunities that may arise since cellulosic ethanol by contrast to traditional ethanol for

biofuel energy may add a market for this industry. Finally, existing home sales and housing

formation are improving which may have a positive effect on the forest products industry. You

can also check graph Z about housing starts information.

All in all, our outlook for the paper and forest products industries is positive and we expect those

industries to slightly over perform the market in 2012.

Materials Industry outlook

We believe Materials Industry would benefit from US/global industrial recovery, high industrial

demand and production levels in developing world, strong

agricultural production levels, as well as low substitution trends

and favorable government regulation regimes, as well as

accelerated international trade levels

In addition, we believe Materials industry is undervalued

currently on basis of overstated pessimism concerning current

global recovery and industrial production growth levels, as well

as relatively high B/M and low P/E levels. Please find more

information in table to the right.

Indices comparison

Index P/E B/M

S&P 400

Materials 17.35 0.478

S&P 400 20.19 0.476

S&P 500 14.44 0.452

Nasdaq 21.73 0.357

Source: Factset


Materials, 2012

27

Investing Process Description The flowchart below describes our general approach towards stock screening, analysis, and

selection processes.

We executed our analysis on three distinct levels: Quantitative, Qualitative, and Fundamental.

On the Qualitative and Quantitative levels each stock got a distinct score as a rank of the

company according to a given screen. Quantitative scores were aggregated in a C-score, which

measured a companies‟ overall standing according to quantitative screens, and qualitative scores

were aggregated in a Q-score, which measured companies‟ standing according to qualitative

screens. Further, we assigned 70% weight to quantitative score and 30% to qualitative score to

get a CQ-score. Top 6 companies according to CQ-score were sorted out for fundamental

analysis. As a result of fundamental analysis we selected 3 stocks for buy/hold recommendations

and 1 current DFF holding – Silgan Holdings – for a sell recommendation. Table below presents

the CQ-scores for each 27 companies. Also, since the past 3-year data was missing for Intrepid

Potash, we were unable to complete the screens for this company.


Materials, 2012

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“Leading Quant” means top 6 companies according to quantitative screens, “Leading Qualt”

means top 6 companies according to qualitative screens. One company, which is also a current

DFF holding – Sensient Technologies – was among top 6 companies in both quantitative and

qualitative screens.

Quantitative Screens and Analysis The quantitative analysis was based on different screening criteria to analyze the stocks from

different perspectives. Specifically we used such screening techniques as:

Glamour/Value screens, as based on DeBondt and Thaler, as well as Lakonishok,

Shleifer, Vishny (LSV) papers, characterize companies from value investing standpoint.

We used such parameters as past 3-year buy and hold returns and past 5-year sales

growth rates, as well as book value of equity to market value of equity and cash flow per

share to price per share screens. We averaged 3-year buy and hold return rank and 5-year

sales growth ranks of analyzed companies to get combined score used further in our

analysis. Also we averaged ranks of companies according to book-to-market and cash

Weights: Ticker Company C-Score Q-Score CQ-Score

C 70% IPI INTREPID POTASH n/a 70 n/a

Q 30% CYT CYTEC INDUSTRIES INC 135 46 108.3

SXT SENSIENT TECHNOLOGIES CORP 121.5 70 106.1

Legend: SMG SCOTT MIRACLE GROWTH 126 58 105.6

Ultimate Selection MTX MINERALS TECHNOLOGIES INC 133 39 104.8

Leading Quant UFS DOMTAR CORPORATION 125 57 104.6

Leading Qualt STLD STEEL DYN 118.5 59 100.7

Leading Both PKG PACKAGING CORPORATION OF AMERICA 106 80 98.2

Current Holding OLN OLIN CORP 111 64 96.9

No data available ALB ALBEMARLE CORP 108.5 62 94.6

SON SONOCO PRODUCTS 106 63 93.1

ATR APTARGROU 99.5 61 88.0

CMP COMPASS MINERALS INTL INC 92 58 81.8

MLM MARTIN MA 104 29 81.5

WOR WORTHINGT 87 68 81.3

CBT CABOT CORP 91.5 56 80.9

ASH ASHLAND INC NEW 90.5 53.5 79.4

SLGN SILGAN HO 86 58 77.6

CMC COMMERCIA 102 18.5 77.0

VAL VALSPAR CORP 95 33.5 76.6

RS RELIANCE 74 81 76.1

CRS CARPENTER 81.5 57 74.2

NEU NEWMARKET CORP 71.5 68 70.5

GEF GREIF INC 74.5 50 67.2

RKT ROCK TENN 59.5 67 61.8

RPM R P M INTERNATIONAL INC 60 63 60.9

LPX LOUISIANA PACIFIC CORPORATION 73 22.5 57.9


Materials, 2012

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flow-to-price screens to get combined score used further in our analysis. Please refer to

Appendix A for detailed calculations.

Earnings surprise screens, as based on Doyle, Lundholm, and Soliman paper, to

investigate how the market participants actually perceive the perspectives of companies

and how effectively market is valuing given securities. This measure is directly related to

companies‟ abilities to generate abnormal returns, as higher earnings surprises they

experience lead to higher abnormal returns they exhibit. Thus, we allocated higher ranks

to companies which exhibited higher earnings surprise as of the end of FY2011. Please

find detailed calculations in Appendix A.

Volatility screens, as based on Baker, Bradley, and Wurgler paper, measured by both

standard deviation and beta are used to investigate companies‟ risks as perceived by the

market. We allocated higher ranks to companies with lower standard deviation and betas

of 2 year monthly returns (regressed on S&P 400 for beta calculations). Then we

calculated average rank according to these two indicators to serve as a volatility score.

Please find detailed calculations in Appendix A.

Accruals screens, as based on Sloan paper, were used to check the earnings quality of

respective companies. Stocks with the lowest ranks got the highest scores. Please find

detailed calculations in Appendix A.

F-score screens, as based on Piotroski paper, were used to determine the fundamental

strength of the companies. Please find detailed calculations in Appendix A.

External financing screens, as based on Bradshaw, Richardson, and Sloan paper, to

determine companies‟ recent financing activities taking into account the scientifically

determined market reaction to the companies‟ financing activities. Please find detailed

calculations in Appendix A.

Thus, we believe proposed quantitative process would characterize the firm from different

investing and financing perspectives and allow us to make a better selection by basing our choice

on the variety of criteria. We aggregated each score obtained by companies according to the

aforementioned screens and got such results:


Materials, 2012

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Momentum represents past 3-year BaH return, GS represents 5-year growth in sales, Mom/GS

combined is the average of the scores companies got according to Momentum and GS screens.

Value combined represents average of the scores companies got according to BE/ME and CF/P

screens.

Qualitative Screens and Analysis The qualitative analysis tried to quantify different qualitative characteristics of companies. We

used materials from Fisher book “Common Stocks and Uncommon Profits”, Peter Lynch and

Ban Graham ideas to arrive at possible screens, as well as further in our fundamental analysis.

More specifically, we analyzed such qualitative characteristics:

Management quality. We measured this as a combined tenure of CEO and CFO of each

company. Then companies were ranked according to the combined tenure and received a

distinct score. Fisher argued that the longer management stays with company the more

knowledge and expertise they get, more loyal they become. High management turnover

was considered as a negative signal. Please find detailed information in Appendix B.

Technical and expansion effort. We measured this criterion by calculating the

companies‟ CAPEX to Market capitalization ratios and comparing them to the

companies‟ sub-industry average values as measured by Bloomberg Peers function in

Bloomberg. Higher ratios relative to the sub-industry average values received higher

scores. Fisher and Lynch argued that the more companies invest in development and in

innovation the more competitive they become in future. We tried to approximate this

idea by considering CAPEX relative to size, as companies in Materials sector rarely

report their R&D expenses. Please find detailed calculation in Appendix B.

Legend: Ticker Company Momentum GS Mom/GS combined BE/ME CF/P Value combined Earn-surp Volatility Accruals F-score Xfin C-Score

Leading Quant IPI INTREPID POTASH 26 n/a n/a n/a n/a n/a 9 6.5 5 25 15 n/a

CYT CYTEC INDUSTRIES INC 10 24 17 18 18 18 27 5 18 25 25 135

Leading Both MTX MINERALS TECHNOLOGIES INC 21 19 20 19 15 17 23 14.5 20 14.5 24 133

No data available SMG SCOTT MIRACLE GROWTH 16 11 13.5 2 6 4 16 24 27 14.5 27 126

Leading Qualt UFS DOMTAR CORPORATION 4 2 3 25 26 25.5 24 13 26 7.5 26 125

SXT SENSIENT TECHNOLOGIES CORP 14 10 12 15 9 12 15 22.5 15 25 20 121.5

Current Holding STLD STEEL DYN 23 1 12 22 24 23 20 11.5 13 25 14 118.5

OLN OLIN CORP 25 20 22.5 17 25 21 10 17 21 7.5 12 111

ALB ALBEMARLE CORP 7 16 11.5 6 13 9.5 11 9.5 19 25 23 108.5

PKG PACKAGING CORPORATION OF AMERICA 12 13 12.5 7 16 11.5 18 15.5 24 14.5 10 106

SON SONOCO PRODUCTS 18 14 16 12 21 16.5 8 23 17 20.5 5 106

MLM MARTIN MA 27 22 24.5 10 5 7.5 7 18.5 23 7.5 16 104

CMC COMMERCIA 22 23 22.5 20 3 11.5 21 15.5 6 14.5 11 102

ATR APTARGROU 19 9 14 9 10 9.5 5 17.5 14 20.5 19 99.5

VAL VALSPAR CORP 8 17 12.5 5 2 3.5 25 23.5 1 7.5 22 95

CMP COMPASS MINERALS INTL INC 24 4 14 1 11 6 12 13.5 25 3.5 18 92

CBT CABOT CORP 9 8 8.5 16 22 19 19 9.5 8 14.5 13 91.5

ASH ASHLAND INC NEW 2 12 7 26 4 15 26 16 10 14.5 2 90.5

WOR WORTHINGT 17 26 21.5 14 23 18.5 4 4.5 9 20.5 9 87

SLGN SILGAN HO 15 18 16.5 3 17 10 13 17 11 14.5 4 86

CRS CARPENTER 5 25 15 8 7 7.5 17 2.5 22 14.5 3 81.5

GEF GREIF INC 20 7 13.5 13 19 16 14 11 12 2 6 74.5

RS RELIANCE 6 6 6 23 20 21.5 22 7 2 7.5 8 74

LPX LOUISIANA PACIFIC CORPORATION 3 21 12 24 1 12.5 1 9.5 16 1 21 73

NEU NEWMARKET CORP 1 3 2 4 14 9 2 14 7 20.5 17 71.5

RPM R P M INTERNATIONAL INC 11 15 13 11 8 9.5 6 17 4 3.5 7 60

RKT ROCK TENN 13 5 9 21 12 16.5 3 19.5 3 7.5 1 59.5


Materials, 2012

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Cost control. We measured this criterion by comparing respective companies‟ Gross

margins to their sub-industry Gross margin average figures as measured by Bloomberg

Peers function in Bloomberg. Higher ratios relative to the sub-industry average values

received higher scores. Fisher argued that the lower production costs companies have the

more competitive and stable they are. Please find detailed calculation in Appendix B.

Operational efficiency. We measured this criterion as companies‟ ROIC ratios relative to

their sub-industry average values as measured by Bloomberg Peers function in

Bloomberg. Higher ratios relative to the sub-industry average values received higher

scores. Fisher argued that operational efficiency is one of the most important factors

determining companies‟ performance, competitiveness, and stability, thus, indicating

investment appeal. Please find detailed calculation in Appendix B.

After aggregating each stock‟s scores into distinct Q-score we got such results:

Fundamental Analysis On the basis of combined CQ-score we selected 6 companies for further fundamental analysis.

We also analyzed Silgan Holdings, a current DFF holding which performed poorly on

quantitative screens so may be candidate for a sell recommendation.

Legend: Ticker Company Oper Eff Tech and Exp Cost Control Mngmt Quality Q-Score

Leading Quant RS RELIANCE 22 6 27 26 81

Leading Qualt PKG PACKAGING CORPORATION OF AMERICA21 24 18 17 80

Leading Both IPI INTREPID POTASH 16 25 19 10 70

Current Holding SXT SENSIENT TECHNOLOGIES CORP 10 11 22 27 70

No data available WOR WORTHINGT 24 1 20 23 68

NEU NEWMARKET CORP 27 5 16 20 68

RKT ROCK TENN 12 16 14 25 67

OLN OLIN CORP 8 26 8 22 64

SON SONOCO PRODUCTS 18 15 9 21 63

RPM R P M INTERNATIONAL INC 11 2 26 24 63

ALB ALBEMARLE CORP 23 13 24 2 62

ATR APTARGROU 19 14 25 3 61

STLD STEEL DYN 25 10 13 11 59

SMG SCOTT MIRACLE GROWTH 13 12 15 18 58

CMP COMPASS MINERALS INTL INC 6 23 10 19 58

SLGN SILGAN HO 20 18 4 16 58

UFS DOMTAR CORPORATION 17 21 5 14 57

CRS CARPENTER 26 3 21 7 57

CBT CABOT CORP 14 27 6 9 56

ASH ASHLAND INC NEW 2.5 19 17 15 53.5

GEF GREIF INC 15 22 12 1 50

CYT CYTEC INDUSTRIES INC 7 20 11 8 46

MTX MINERALS TECHNOLOGIES INC 9 17 7 6 39

VAL VALSPAR CORP 2.5 4 23 4 33.5

MLM MARTIN MA 5 9 2 13 29

LPX LOUISIANA PACIFIC CORPORATION 2.5 7 1 12 22.5

CMC COMMERCIA 2.5 8 3 5 18.5


Materials, 2012

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Sensient Technologies (SXT). Current DFF holding.

Industry analysis and trends

Sensient Technologies operates in a Specialty chemicals sub-industry. As indicated in our

Materials industry analysis we are optimistic about this industry outlook:

US/global industrial recovery as measured by acceleration in real GDP and industrial

production growth rates

Deceleration of growth in energy prices

Strong agricultural demand for chemicals

Positive chemical price dynamics

All of the aforementioned factors would produce a positive impact on Sensient Technologies

growth and profitability.

Porter’s five forces analysis

The Specialty chemicals sub-industry can be characterized by greater control over prices than

basic chemicals industry, as specialty chemical products are diversified and customized. This, in

turn, affects the bargaining power of buyers which we believe is moderate, as buyers may

have moderate-to-high switching costs and

special preferences for special features and

quality of chemical products which only few

producers could satisfy. Also, we believe that

bargaining power of suppliers is moderate

as Specialty chemical companies‟ main

productive inputs are natural gas and other

energy products which are scarce in nature

and chemical companies have little power in

price negotiations as prices are determined on

world markets. The threat of substitutes is

low as specialty chemical products are

oftentimes used as intermediate goods in

making final products using latest

technologies and scarce natural resources, thus, making them irreplaceable. The threat of new

entrants is also low as current players oftentimes achieve considerable economies of scale in

production, distribution and marketing, as well as the industry itself is highly capital and labor

intensive requiring high capital expenditures. On the basis of all of the aforementioned factors

and the fact that specialty chemical companies mostly compete on quality and customization, but

there are high barriers to entry and low substitution threat, there is a moderate rivalry among

companies in Specialty chemicals sub-industry. This results in specialty chemical companies

having moderate control over prices and costs, thus, relatively stable margins.


Materials, 2012

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Company overview

Sensient Technologies (Sensient) is engaged in manufacturing, distribution, and marketing of

flavors, fragrances and colors throughout the world. According to Company‟s documents, it

develops specialty food and beverage systems, cosmetic and pharmaceutical formulations; inkjet

and specialty inks and colors; and other specialty chemicals. Its customers include major

international producers. It has two divisions: Flavors and Fragrances Group (produces systems

products comprising flavor-delivery systems, and compounded and blended products; and

ingredient products, such as essential oils, natural and synthetic flavors, and aroma chemicals),

Color Group (provides natural and synthetic color systems for use in foods, beverages, and

pharmaceuticals; colors and other ingredients for cosmetics and pharmaceuticals; and technical

colors for industrial applications and digital imaging). The company was founded in 1882 and is

headquartered in Milwaukee, Wisconsin. It operates in majority of international markets

including Brazil, Russia, Australia, Germany, France, UK, Mexico, Poland, Portugal, China etc

It serves food industries, which include savory, beverage, dairy, confectionery, and bakery

flavors; and non-food industries that comprise personal and home care-markets, and

pharmaceuticals markets, as well as such industries as cosmetics, digital imaging industry etc.

Table below represents Sensient‟s main competitors.

Management performance

The SXT‟s main management consists of CEO, CFO, and COO. After studying key executives

biographies, as provided by GlobalData services, we concluded that management is relatively

professional and experienced, as the average age of the team is 63 years and everybody has

around 35+ years of chemical industry experience and stayed with Sensient for a considerable

amount of time. Under current management market capitalization increased for around 50% for

past several years and 2011 was a record profitability year. Form a profitability standpoint,

management performance was fair, as, basically, main profitability ratios were increasing

consistently except for FY 2009. However, the Company had a steady growth in dividends.

Exhibits below summarize key management performance measures:

SXT: Key Competitors

Name Headquarters FY 2011 Revenue, mln USD

Agrium U.S. Inc. USA n/a

Covidien plc Ireland 11,574

International Flavors &

Fragrances Inc. USA 2,788

Sumitomo Bakelite

Company Limited Japan 2,395

Symrise France n/a

Valmont Industries, Inc. USA 2,661

Sensient USA 1,430

Source: Global Data


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On basis of the aforementioned analysis we believe management‟s qualifications and

performance was relatively strong.

Product differentiation and competitive position

The Company‟s products are highly diversified as portfolio of the company includes natural and

synthetic food and beverage colors; flavors, flavor enhancers and bionutrients; fragrances and

aroma chemicals; dehydrated vegetables and other food ingredients; cosmetic and

pharmaceutical colors and additives; and technical colors, inkjet colors and inks, and specialty

dyes and pigments. Such products are used in variety of industries (both cyclical and non-

cyclical) across various geographies, including Americas, Europe and Asia, presenting a rigid

hedge to the Company‟s margins and growth. Speaking about Company‟s competitive position,

according to Company‟s documents, Sensient is engaged in research and development, and

quality assurance to improve existing products, develop new products and improve its services.

In 2010, the company spent around $30.6m for its research and development. This would have a

positive effect on the company‟s competitiveness. According to S&P, Sensient invested

sufficiently in selling and technical support, which strengthens its competitive position. Also, it

is worth noting the Company‟s fundamental strength and a healthy balance sheet. Moreover, as

consumers become increasingly conscious of food and beverage ingredients, we believe Sensient

has strong growth perspectives in natural colors segment. It is also worth noting the acquisition

strategy of the Company: according to KeyBanc, having put nearly $75 million into investments

during 2011, which included two acquisitions, expansion of North America natural color

capacity and a color and flavor facility in Brazil, analysts expect SXT to grow that amount in

2012. It is believed that the Company will continue to pursue growth opportunities in some of

the faster growing color markets including digital inks, cosmetics, pharmaceutical and natural

color applications. Ending the year with $23 million in cash on hand, having generated roughly

$30 million in free cash flow, and holding a manageable Net Debt-to-EBITDA ratio of 1.3x, the

Company has an adequate balance sheet and cash generation capability to fund external and

internal growth measures. All-in-all, the Company has a strong product differentiation and solid

competitive standing.

SWOT Analysis

Source: Global Data


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35

North-

America

53%Europe

28%

Asia Pacific

13%

Other

6%

Geographic revenue breakdown in 2010

Source: Global Data

SXT: SWOT Analysis

Strenghts Weaknesses

Product and geographical Legal proceedings

diversification

Strategic invesments

Strong financial position

Opportunities Threats

Emerging markets operations Environmental regulations

Healthcare increased demand High competition

International business risk

M&A failure

Source: Team

The Company has numerous strengths, as well as weaknesses. One of the most important

strengths is the Company‟s

diversification strategy. A great level

of product differentiation is reflected in

two distinct segments – Flavors &

Fragrances (59% of revenue in 2010),

and Color (32% of revenue in 2010) –

the company operates in. These

segments supply products to various

industries described above. Thus,

Company effectively protects itself

from various industries‟ risks as well

as general economic risks as its

consumers represent companies from

different cyclical and non-cyclical

industries. Moreover, Company‟s

overall diversification is buttressed by

its presence in various geographic regions. It operates in a majority of countries in Americas,

Europe and Asia where the Company runs

plants, distribution and marketing facilities, as

well as research and development laboratories.

Thus, the Company defends itself from any

unanticipated business interruptions, or

economic meltdown from being geographically

and product-diversified. Moreover, Company‟s

recent strategic investments in technology

improvements, new production facilities in

China and USA, as well as new processing

equipment in the USA would allow it to

strengthen its competitive position, especially

in relation to Color Group business. Such

investments were possible due to the

Company‟s strong fundamental position. Our

quantitative F-sort showed Sensient to be one of the financially strongest companies. Also, its

debt ratios have been consistently falling for last 5 years, as well as liquidity ratios consistently

rising for last 5 years.

Speaking about Sensient‟s weaknesses it is worth mentioning some legal proceedings and other

claims the Company is subject to as part of its ongoing operations. According to Global Data,

such proceedings include Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co.; Cherry

Blossom Litigation; S.A.M. (Amaral) v. Sensient Technologies Corp.; and Daito Kasei Kogyo

Co. Ltd. vs. Sensient Cosmetic Technologies SAS. Such proceedings may potentially result in

substantial losses, as well as divert management‟s attention and efforts from the Company‟s

operations and strategy.

The Company has significant opportunities, as well as threats. We believe Sensient‟s substantial

presence in emerging markets of Eastern Europe, South and Central America and Asia is a

great opportunity for growth and expansion. Various experts forecast that emerging economies‟


Materials, 2012

36

growth rates, particularly in chemical industry, will significantly outperform developed ones.

According to Global Data, the chemical industry in the emerging nations is expected to grow

7.6% in 2011 and 2012. Moreover, the demand for main Company‟s products is growing more

rapidly in emerging countries. Therefore, the Company would benefit by increasing its

operations in emerging markets.

Also it is worth noting that the Company is perfectly posed to take an advantage of growing

pharmaceuticals and healthcare markets in the USA, which drive the demand for Company‟s

main products. According to the National Coalition on Healthcare, annual healthcare spending in

the US increased to $2.5 trillion in 2009. It is projected to reach $3.1 trillion by 2012 and $4.3

trillion by 2016. According to Global Data, the increase in the aging population contributes to

the rising healthcare expenditure in the US.

Speaking about Company‟s threats, we believe the most important is stringent government

regulations of Flavors and Fragrances industry. There are a lot of different standards,

compliance procedures, laws, regulations imposed by various regulations agencies, governments

and professional boards. The Chemical industry analysis contains the most important US

governmental regulations. These laws are highly complex and require significant investments in

adequate compliance and quality controls systems. The failure to comply with any of the

aforementioned regulations may result in huge fines and penalties, the loss of reputation,

products recall, market share loss, and damage to reputation. Also, intensified competition in

chemicals industry requires Company‟s constant investment in new technologies, processes,

upgrade of its existing products, marketing and customer services. If the Company‟s products

become obsolete or customer services inadequate, it will lose its market shares and possible go

bankrupt.

Company‟s operations in various locations across the globe create substantial international

business risks, such as nationalization of assets, political and economic instability, fluctuations

in currency exchange rates, etc.

The Company‟s recent M&A activity may also pose a significant threat, if such acquisitions are

not integrated properly into existing business model or cannibalize existing sales.

Analysts’ and investors’ sentiment

Analysts generally are optimistic about the stock in a near term, as EPS forecasts are increasing

till 2013 and then decreasing in 2014. Speaking about the ratings, the general analysts‟ rating is

hold, which is the recommendation of 4 out of 5 analysts. One more analysts recommends

moderate buy. We couldn‟t indicate that such sentiment changed recently. Since the beginning of

2012 there were only two changes of the rating and in both cases the stock was downgraded from

“buy” to “hold”. For past three months this stock was a consistent “hold”. We believe the low

number of analysts following the Company and their uncertainty of the stock investment appeal

is a positive sign indicating that the Company is not obviously a “glamour stock” and may be

priced irrationally. Current mean target price is $40.5 which represents around 11% upside of

current price of $36.5. The stocks‟ trading volume also looks quite stable indicating that

investors currently have no extreme sentiment concerning the stock.


Materials, 2012

37

Source: Thompson One Banker

Conclusion

We believe Sensient has strong fundamentals because:

The industry has a positive outlook and is moderately competitive

The management is experienced and demonstrated strong performance for past years

It has diversified products and operations which allows the Company to defend itself

from various specific industries/regions risks

It has strong presence in emerging markets where chemical growth is expected to be

robust

It has a strong presence in the US healthcare market which is also projected to grow

consistently

It has a solid competitive position created by recent successful investments and M&A

activity

It is a thinly followed stock with a positive outlook.

Cytec Industries (CYT)

Industry analysis and trends, Porter’s five forces analysis

Cytec Industries is a specialty chemicals company. Please refer to Sensient Technologies

analysis for chemicals industry outlook and analysis.

Company overview

Cytec Industries (Cytec) develops, manufactures, and markets value-added specialty chemicals

and materials. The Company breaks down its operations into four reportable segments: Coating

Resins, Additive Technologies, In Process Separation and Engineered Materials. According to

Company‟s documents, Cytec, through its Coating Resins segment, offers three product lines

including radcure resins, powder coating resins, and liquid coating resins. The major products of

radcure resins include oligomers, monomers, and photo-initiators. The powder coating resins

include conventional and ultraviolet powder coating resins. Its liquid coating resins include

amino cross-linkers, waterborne resins, urethane resins and solvent borne resins. Its coatings and

inks are used in industrial metal, wood and plastic coatings sector. The powder coatings are used

in industrial and heavy duty metal applications, while its industrial coatings are used in

automobiles, cans, coil, metal fixtures, metal and wood furniture. The Company's Additive


Materials, 2012

38

Technologies segment offers polymer additives, specialty additives, and polyurethanes. These

products have applications in plastics, coatings, fibers, automotive parts, agricultural films,

architectural lighting, textiles, non-woven and adhesives, pharmaceuticals and super absorbent

polymers. Company‟s In Process Separation segment offers mining chemicals and phosphines.

Its mining chemicals are used in mineral separation and processing of copper, alumina and other

minerals. Phosphines are used in the applications of chemical and electronic manufacturing,

pharmaceutical, and fumigants. The company‟s Engineered Materials business segment provides

technologically advanced materials for aerospace, high performance automotive, launch vehicles

and other extreme-demand environments. It produces carbon fibers, advanced composites and

aerospace adhesives and high performance industrial materials.

The Company operates in the Americas, Asia Pacific, Europe, Middle East, and Africa.

Table below represents Sensient‟s main competitors.


The CYT‟s main management consists of CEO and CFO. After studying key executives

biographies, as provided by GlobalData services, we concluded that management is relatively

professional and experienced, as the average age of the team is 53 years and everybody has

around 25+ years of chemical industry experience and stayed with Sensient for more than 10

years. Under current management the Company has undergone significant changes by focusing

on higher-margins segments and divesting non-core businesses, as well as making consistent

investments in R&D, patents and emerging markets. Moreover, the management was able to

sustain significant market downturn of FY2008-2009 and direct a company to a profitable path

staring FY2010. Form a profitability standpoint, management performance was fair, as,

basically, main profitability ratios were increasing consistently except for FY 2008. However,

the Company had negative profitability in FY2008 and 2009 and unstable dividends.

CYT: Key Competitors


Arch Chemicals USA 1,377

H. B. Fuller USA 1,558

Momentive Specialty

Chemicals USA 5,207

PPG Industries USA 14,885

The Lubrizol Corp USA 5,418

Sensient USA 3,073

Source: Global Data


Materials, 2012

39

Tables below summarize key management performance measures:


performance was relatively solid.


The company‟s products are highly diversified both by products offered and geographically.

Thus, we believe, Company‟s strong differentiation backed by the fact that Company‟s

customers represent companies from both cyclical and non-cyclical industries is one of its most

evident strengths.

Speaking about Company‟s competitive position, according to Company‟s documents, CYT has

around 1,800 patents issued in various countries across the world with manufacturing and

research facilities in 16 countries globally. In 2010, the company spent around $72.5m for its

R&D activities. Thus, the Company effectively protects margins by holding various patents and

continuously investing in new technology preserving its competitiveness.

Source: Global Data

Source: Global Data


Materials, 2012

40

According to Deutsche Bank, CYT has agreed to make an acquisition of Umeco, a UK based

advanced composites manufacturer, which will be accretive and secure the access of Cytec to

perspective auto composite market. The composite market is believed to be highly attractive as it

provides necessary materials to make cars lighter. The weight of the car recently became

extremely important, thus, Cytec believes that with Umeco's application expertise and strong

relationships with auto companies, coupled with its leading composites technology, it will be

well positioned to capitalize on this evolving and growing trend.

All-in-all, the Company has a strong product differentiation and solid competitive standing.

SWOT Analysis


strengths is the Company‟s diversification strategy. A great level of product differentiation is

reflected in four distinct segments the company operates in. These segments supply products to

various industries described above. Thus, company effectively protects itself from various

industries‟ risks as well as general

economic risks as its consumers

represent companies from different

cyclical and non-cyclical industries.

Moreover, company‟s overall

diversification is buttressed by its

presence in various geographic

regions. It operates in a majority of

countries in Americas, Europe, Asia,

Middle East, and Africa where the

Company runs plants, R&D

laboratories, and distribution and

marketing facilities. Moreover, apart

from other US chemical companies,

CYT does not derive the majority of

its revenue from North-American market. Thus, the Company defends itself from any

unanticipated business interruptions, or economic meltdown from being geographically and

product-diversified. Company‟s also protects itself by constantly investing in new technology

and protecting it by patents. Such investments were possible due to the Company‟s sound

fundamental position. Our quantitative F-sort showed CYT to be one of the financially

strongest companies. Also, its debt ratios have been consistently falling for last 3 years, as well

as liquidity ratios consistently rising for last 2 years.

Speaking about CYT‟s weaknesses it is worth mentioning some legal proceedings and other

claims the Company is subject to as part of its ongoing operations. According to Global Data, the

Company has substantial environmental liabilities, which include obligations to remove or limit

the environmental effects caused by release of wastes at various sites now or formerly owned by

Cytec or to pay compensation to the affected parties. It is also involved in the cleanup of various

other sites. Besides, Cytec is involved in numerous other lawsuits and claims related to product

liability, personal injury including asbestos, environmental, contractual, employment and

intellectual property matters. Such proceedings may potentially result in substantial losses, as

well as divert management‟s attention and efforts from the Company‟s operations and strategy.

CYT: SWOT Analysis


Product and geographical Legal proceedings

diversification Dependence on few

Technological expertise suppliers

Solid financial position


Umeco acquisition Environmental regulations

Emerging markets growth Raw materials supply risk

New product launchesSource: Team


Materials, 2012

41

Other substantial weakness is the dependence on few suppliers, specifically, of carbon fibers.

The delay or loss of a supplier would negatively affect Company‟s operations.

The Company has significant opportunities, as well as threats. We believe Cytec‟s substantial

presence in emerging markets of Eastern Europe, Middle East, Africa, South and Central

America and Asia is a great opportunity for growth and expansion. Various experts forecast that

emerging economies‟ growth rates, particularly in chemical industry, will significantly

outperform developed ones. According to Global Data, the chemical industry in the emerging

nations is expected to grow 7.6% in 2011 and 2012. Moreover, the demand for main Company‟s

products is growing more rapidly in emerging countries. Therefore, the Company would benefit

by increasing its operations in emerging markets.

Also, as noted above, the Company‟s acquisition of Umeco would position CYT to take an

advantage of rapidly growing auto composite market.

Successful new product launches help the Company to sustain its competitive position as well

as grow its top and bottom lines. More specifically, according to Global Data, to name few,

Cytec launched its latest ACORGA OR15 extractants and ACORGA OR25 extractants in May

2011. It introduced EBECRYL 8100, a newly developed urethane acrylate for consumer

electronics and a new product, CYASORB CYNERGY SOLUTIONS V703 stabilizer in April

2011. The Company launched EBECRYL 570, a chlorine-free diluted polyester oligomer in

March, 2011. In February 2011, the Company introduced RESYDROL AY6150 low VOC

(volatile organic compound) one-component core-shell alkyd emulsion and two new CYASORB

CYNERGY SOLUTIONS stabilizers for plastics applications. Cytec also formulated the new

generation of RESYDROL AY6705 waterborne acrylic modified alkyd resin in February 2011.

In January 2011, the Company launched EBECRYL 4858, aliphatic urethane acrylate for UV/EB

cured films and plastics. If the Company continues to introduce new successful products it will

remain profitable and competitive.

Speaking about Company‟s threats, we believe the most important is stringent government

regulations, especially in Europe. There are a lot of different standards, compliance procedures,

laws, regulations imposed by various regulations agencies, governments and professional boards.

The Chemical industry analysis contains the most important US governmental regulations. These

laws are highly complex and require significant investments in adequate compliance and quality

controls systems. The failure to comply with any of the aforementioned regulations may result in

huge fines and penalties, the loss of reputation, products recall, market share loss, and damage to

reputation. Also, main raw materials supply risks, such as carbon fiber, natural gas, methanol

derivatives, could adversely affect Company‟s margins, as such materials are irreplaceable in the

Company‟s productions cycle and scarce in nature. The prices of such products have been rising

in recent past negatively affecting Company‟s margins. However, relatively rigid competition

prevents CYT from increasing prices of end-products to compensate for increase in raw

materials prices.



Materials, 2012

42

Source: Thomson One Banker

Analysts are optimistic about the stock in a near term, as EPS forecasts are increasing for next 3

years. Speaking about the ratings, the general analysts‟ rating is moderate buy/hold, with one sell

recommendation. We do not think such situation makes any sense

as CYT has been consistently reporting its earnings which were

higher by around 50% of the consensus estimates and as of the

last reporting date the stock experienced 11% of up-movement.

To confirm our point of view recently 5 out of 6 analysts have

increased their earnings estimates. We believe the low number of

analysts following the Company and their uncertainty of the

stock investment appeal is a positive sign indicating that the

Company is not obviously a “glamour stock” and may be

priced irrationally, especially taking into account that it

experienced positive earnings surprises for past three

reporting periods. Current mean target price is $71.83 which

represents around 14% upside of current price of $63. The

stocks‟ trading volume also looks quite stable indicating that

investors currently have no extreme sentiment concerning the

stock. The sharp increases in stock‟s trading volume

correspond to sharp increases in stock prices as of the earnings announcements dates.

Conclusion

We believe Cytec has strong fundamentals because:


The management is relatively experienced and demonstrated solid performance for past

years, especially by recovering Company‟s profitability in FY 2010 and FY 2011



It has strong presence in emerging markets where chemical growth is expected to be

robust

It has made important steps in auto composite market which is expected to be dynamic

and promising

It has a solid competitive position created by recent successful investments in new

technologies and patents

It is a thinly followed non-glamour stock with a positive outlook and consistent earnings

announcements surprises.

Minerals Technologies (MTX)

Industry analysis and trends, Porter’s five forces analysis

Minerals Technologies is a specialty chemicals company. Please refer to Sensient Technologies

analysis for chemicals industry outlook and analysis.


Materials, 2012

43

Company overview

Minerals Technologies Inc. (MTX) is a resource and technology based company in United States

that engages in developing, producing, and marketing a wide range of specialty mineral, mineral-

based, and synthetic mineral products and supporting systems and services. According to Global

Data, MTX manufactures and sells synthetic mineral products for the paper, building materials,

paint and coatings, glass, ceramic, polymer, food, automotive, and pharmaceutical industries. It

operates in two segments, Specialty Minerals and Refractories. The Specialty Minerals segment

produces and sells precipitated calcium carbonate, a synthetic mineral product; and quicklime, a

processed mineral product. It also mines mineral ores; and processes and sells natural mineral

products, primarily limestone and talc. The Refractories segment produces and markets

monolithic and shaped refractory materials and specialty products, services, and application and

measurement equipment; and calcium metal and metallurgical wire products. Minerals

Technologies Inc. was founded in 1968 and is headquartered in New York, New York. MTX

relies principally on its worldwide direct sales force to market its products. The Company

oversees domestic marketing and sales activities from Bethlehem, Pennsylvania, and from

regional sales offices in the eastern and western United States. The Company's international

marketing and sales efforts are directed from regional centers located in Brussels, Belgium; Sao

Jose Dos Campos, Brazil; and Shanghai, China.

Table below represents MTX‟s main competitors.


Through a careful study of MTX‟s management, as shown by GlobalData services, we have a

relatively positive opinion on MTX‟s management. The average age of the management team is

53 years. However, none of the senior management members has stayed in MTX for a long time.

Under current management ROE, ROIC, EPS ratios are not very stable. MTX suffered a

significant loss in 2007 and 2009, which is due to the acquisition with Phoenix Pulp & Paper

Public in 2007 and the economic recession in 2009, respectively. Nevertheless, in most recent

two years, MTX has demonstrated a very good performance. From a profitability standpoint,

management performs well in 2010 and 2011. However, the company didn‟t increase dividends

from 2007 to 2011. According to SADIF, MTX rank sixth among competitors for the

management efficiency rating, according to following key indicators: return on assets, earnings

per employee and the earnings growth rate. As the figure shown below:

MTX: Key Competitors


Didier-Werke AG Germany 943

DONGKUK REFRACTORIES

& STEEL CO., LTD

Republic of

KoreaN/A

Nippon Crucible Co., Ltd Japan 75

Rath Aktiengesellschaft Austria 111

Yotai Refractories Co., Ltd Japan N/A

Minerals Technologies USA 1,045

Source: Global Data


Materials, 2012

44

Source: SADIF



performance was medium.


MTX‟s products are highly diversified as portfolio including synthetic mineral product

precipitated calcium carbonate, quicklime, limestone, talc, mineral ores and a range of dry PCC

products. In addition, according to Global Data, the Company also provides monolithic and

shaped refractory materials specialty products, application equipment and related supporting

systems and services. These products can be used in a wide range of industries, such as paint and

coatings, paper, building materials, glass, polymer, ceramic, food, pharmaceutical, and

automotive industries. MTX also has wide domestic and global markets, just as we have

mentioned in company overview part. In addition, MTX pay great attention to research and

development. Over the past recent years, MTX is continually engaged in efforts to develop new

products and technologies and refine existing products and technologies in order to remain

competitive and to position itself as a market leader. According to company‟s document, MTX's

research and development capability for developing and introducing technologically advanced

new products has enabled the Company to anticipate and satisfy changing customer

requirements, creating market opportunities through new product development and product

application innovations. A diversified product portfolio that caters to a range of industries and

research and development focus provide a competitive edge for the company. However, ending

the year with $414 million in cash on hand, having generated only $82 million in free cash flow,

Source: Global Data


Materials, 2012

45

and having Net Debt-to-EBITDA ratio of -2.0x, MTX, in our view, is not strong enough to play

a market leader role. All-in-all, the Company has a strong product differentiation, positive

competitive standing, and medium financial position.

SWOT Analysis

The company has obvious strengths and weaknesses. One of the most important strengths is the

Company‟s diversification strategy. As we have written before, the Company operates in two

segments, Specialty Minerals (53.7% of revenue in 2011) and Refractories (35.3% of revenue in

2011). The Specialty Minerals

segment‟s products are primarily used

in the paper, building materials, paint

and coatings, glass, ceramic, polymer,

food, automotive, and pharmaceutical

industries. The Refractories

segment‟s products are primarily used

in high-temperature applications in

the steel, non-ferrous metal, and glass

industries. Obviously, the Company‟s

two segments supply products to

various industries described above.

Thus, MTX can relatively effectively

MTXigate various business risks. However, since the principal market for the Company's

refractory products is the steel industry, which is a cyclical in nature, some threats to the

Company‟s stability exist.. In addition, the Company‟s operates domestically and globally. The

Company‟s domestic markets are located in Bethlehem, Pennsylvania, and in some regional sales

offices in the eastern and western United States. The Company has markets in Europe, like

Belgium, South America, like Brazil and Asia, like China. According to the Company‟s

documents, MTX relies principally on its direct sales force in global market. The technical

service teams that are familiar with the industries to which the Company markets its products

add more efficiency to its direct sales force. The Company considers continuing international

expansion in a majority of countries in Americas, Europe and Asia.

Moreover, according to Global Data, the Company has maintained strong Research &

Development focus over the years. Many of MTX‟s product lines are technologically advanced.

This has enabled the Company to maintain expertise in the fields of inorganic chemistry,

crystallography and structural analysis, fine particle technology and other aspects of materials

science. MTX‟s growth in sales is largely due to its continued success of its research and

development activities. The R&D efforts have resulted in numerous patents and trademarks. For

the years ended December 31, 2011, 2010 and 2009, the Company spent approximately $19.3

million, $19.6 million and $19.9 million, respectively, on research and development. The

Company's research and development spending for 2011, 2010 and 2009 was approximately 1.9

%, 2.0% and 2.2% of net sales, respectively. Even in the weak economic conditions, the

company has still invested a considerable amount of its revenues in Research and Development.

According to the Company‟s document, The Company will continuously reformulate its

refractory materials to be more competitive.

MTX: SWOT Analysis


Diversification Legal proceedings

Large R&D investments

Strong financial performance


New technologies introduced Industry cycle

Growng demand in India Fierce competition

Change in labor laws

Source: Team


Materials, 2012

46

MTX reported good financial performance for the fiscal year ended December 2011 following

another well-performed year 2010, reflecting its ability to fulfill operational and business

expansion needs. MTX has a relatively strong balance sheet and is diligent in reducing costs and

increasing capital returns. The Company posted operating margin of 9.6% and 9.8% in 2011 and

2010, respectively, against operating margin of -1.88% in 2009. The company recorded net profit

of $67.5m and $66.9m in 2011 and 2010, respectively, against a net loss of $23.80m in 2009.

The two years‟ increase in the operating and net profit improved the company‟s profitability. The

company‟s return on equity increased to 9.10% in 2011 from 8.85% in 2010, a remarkable

increase from -3.29% in 2009. Substantial increase in profitability ratios in 2011 and 2010

indicates that the Company had a good performance.

In terms of MTX‟s weaknesses, just as most of the companies in materials industry, MTX has

also faced several litigation cases. According to the Company‟s document, The Company

currently has 77 pending silica cases and 27 pending asbestos cases. To date, 1,389 silica cases

and 8 asbestos cases have been dismissed. One new silica case and one new asbestos case were

filed in the fourth quarter of 2011. The aggregate cost to the Company for the legal defense of

these cases since inception was approximately $0.2 million, according to Company‟s documents.

The Company has significant opportunities, as well as threats. As we mentioned above, MTX

has robust research and development capabilities, which enabled it to develop new technological

edge. In August 2011, the Company launched a new product line of engineered mineral

additives for reinforcement in bioplastic applications, which designed for bioplastic-based

consumer disposables including packaging, food and beverage gift cards, service ware, signage,

films and bags. This new technology enables the Company to exploit the great opportunity in

biopolymer market. Due to the growing concern for environment, consumers are looking for

„green‟ products, leading to the expectation of the improvement of the biopolymers market in the

US. Biopolymers could account between 5%-10 % of the total plastics market in Europe,

according to European Bioplastics‟ estimates. MTX could increase its presence and cater to these

potential markets. From historical data, we can predict that the new technologies introduced by

the company could lead to increase in market share and revenue in the future.

MTX intends to capture the great India opportunity and capitalize on the emerging

opportunities in the Indian infrastructure, which are being driven by the current and expected

demand and supply imbalance in India. According to the Company‟s document, the company‟s

projects are positioned to benefit under the SEZ Project policy of the government of India.

Already in February 2011, MTX's wholly owned subsidiary, Specialty Minerals Inc., entered

into an agreement with JK Paper LiMTXed for constructing a satellite precipitated calcium

carbonate (PCC) facility in Rayagada, Orissa, India. In January 2011, the company signed a

similar agreement with The West Coast Paper Mills LiMTXed for Dandeli, India. And In July

2010, the company had signed a similar contract with Ballarpur Industries LiMTXed. The

infrastructure sector in India is growing at a faster rate and is given importance to support the

growth rate and to fulfill the existing gap.

Speaking about Company‟s threats, we believe the most important is Cyclical Nature of

Businesses. As we mentioned above, the principal market for the Company's refractory products

is the steel industry. MTX‟s majority of the sales come from industries like steel, construction

and paper which are very cyclical industries. The macroeconomic performance has a very close

relationship with the performance of these industries. A robust growth in GDP will have a


Materials, 2012

47

positive influence on performance for these sectors, which leading to much demand for products

whereas a downturn could negatively impact the businesses. If the steel, construction and

automotive industries slump, MTX has to reduce workforce and production..

MTX has many strong competitors, such as Nippon Crucible, Didier-Werke AG, Yotai

Refractories Co., Ltd. Rath Aktiengesellschaft and Dongkuk Refractories & Steel. As a result of

the competitive environment in the markets in which MTX operate, the Company currently faces

and will continue to face price pressures from competitors.

The changing labor laws in MTX‟s global marketplace, like Europe, Middle East and Africa,

may have negative effect. Currently, the Company has about 2,132 employees across the world.

For example, the minimum wage rate was increased from $7.25 per hour in 2009 to $8.5 an hour

in January 2011 by the US government. Higher employee base, increasing costs of labor and new

or revised labor laws, rules or regulations could adversely affect the company‟s profitability.


The market sentiment in relation to MTX is positive and improving. Currently, MTX‟s EPS is

3.75. According to Standard & Poor, MTX‟s EPS will increase to 4.04 in 2012. In terms of the

ratings, the general rating is buy or buy/hold. For past three months this stock was a consistent

“buy”. MTX‟s current price is $64.77; the 12 months target price given by Standard & Poor is

$75, a 15.8% increase. The stocks‟ trading volume also looks quite stable in past six months

indicating that investors currently have no extreme sentiment concerning the stock.


Conclusion

We believe MTX has moderate-to-strong fundamentals because:

The specialty chemical industry has a positive outlook and is moderately competitive



It has robust research and development initials which can help MTX maintain expertise

in its industry and create more revenues

Recent unstable financial performance, which stabilized only in past two years, medium

current financial position


Materials, 2012

48

Potential lack of expertise on the management‟s side

Scott Miracle Growth (SMG)

Industry overview and trends

The fertilizers industry is mainly affected by the level of agricultural activity in the world as well

as the evolution of personal income in developing countries. It is also affected by adverse

weather conditions which are unfortunately very difficult factors to forecast. Our outlook for this

industry is optimistic due to the following factors:

1) According to Bloomberg, the recent rapid growth in the production of biofuels initiatives,

including ethanol, has been driving a boost in grain and oilseed use globally which in

turns is expected to affect positively the demand for fertilizers.

2) The USDA long run projections for fertilizers were incrementally positive with 2.2

Million acres of added planting of major crops.

3) Finally, the USDA expects higher wheat and corn planting, the latter being the highest

end market for fertilizers.

4) On the other hand, US famers‟ future expectations are falling.


This industry is highly seasonal and volatile. Indeed, demand for fertilizers depends on many

factors such as grain prices, weather conditions,

government plans and so forth. On the other

hand, there are no close substitutes to fertilizers

and since agricultural markets today are much

more competitive and intensive, farmers will

always need fertilizers when faced with a

favorable environment to plant crop. However,

the customers’ bargaining power is high,

especially in case of SMG, as it has 3 main

customers account for 61% of revenues, and

fertilizer companies have to constantly innovate

and offer better products to gain or even retain

customers. The industry for fertilizers is not only

capital intensive, but it is also very energy intensive which raises another concern: the industry is

highly regulated by the government. Indeed, many acts such as the Clean Air Act, the Clean

Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental

Response Compensation and Liability Act (CERCLA, also known as the Superfund program),

and the Toxic Substances Control Act add pressure to the existing actors within the industry.

Finally, a large wave of consolidation has been seen recently within the industry as large groups

want to take advantage of potential synergies to increase their profitability and competitive

positions. As a result, we strongly believe that the threat of new entrants in the industry is low

even if we forecast a good recovery in the fertilizer industry shortly. Another important element

of this industry is the high correlation between gas prices and profitability as natural gas is the


Materials, 2012

49

main raw material for fertilizers development. Indeed, fertilizers are made from nutrients such as

phosphorus, nitrogen or potassium, but they need natural gas regardless of the nutrient to create

fertilizers. Thus, it is essential to analyze the natural gas market to assess the level of bargaining

power of suppliers. Since, natural gas trade on international markets and its price is subject to

wide fluctuation due to supply and demand, we believe that supplier have some power over its

prices; thus the bargaining power of suppliers is moderate. Finally, given all the elements we

have been documenting in this part, we believe that the rivalry among competitors is

moderate-to-high as consumers have substantial bargaining power, and the industry is cyclical,

volatile and subject to large consolidations.

Company overview

The Scotts Miracle-Gro Co. (SMG) is among the oldest marketers and manufacturers of products

used to grow and maintain lawns, gardens and golf courses. Its revenues are distributed as

follows:

As we have seen before, demand for fertilizers is pretty seasonal and depend on many factors. As

a result, the bulk of SMG sales occurs in the second and third quarter in any fiscal year. SMG

have two main segment. The first one, Global Consumer segment, is pretty diversified in terms

of product line. Some of its products are Turf Builder, Miracle-Gro, Ortho, Growing Media,

Roundup, and Morning Song wild bird food. The second segment Scotts LawnService, provides

residential lawn care and limited external pest control services in the U.S., consisting of

fertilizer, weed control and disease control applications.

Now, let‟s talk about the company corporate strategies. Overall, Management plans to continue

to invest in consumer marketing, technology and innovation, while focusing on supply chain cost

savings, free cash generation, return on invested capital (ROIC), and investing in Europe,

especially in the United Kingdom. According to S&P analysts, SMG has introduced a new

product in 2010, E-Z seeds, in the US and UK and was its most successful product with very

high operating margins. Analysts are pretty optimistic regarding SMG ability to continue

increasing its margins with this product. Moreover, the recent government and global concerns

concerning organic versus chemical fertilizers has triggered SMG attention. As a result SMG

plans to have 50% of its products natural in the future. Finally, SMG is forecasting new

82%

18%

Geographical revenues

North America International Home Depot 30%

Lowe's 18%

Wal-Mart 13%

Others 39%

Revenues by custmomers

Source: Global Data


Materials, 2012

50

innovative product launches during FY 2012, including Scott's SNAP, a line of lawn fertilizer,

grass seed, insect killer and weed & feed.


Scott Miracle Grow top management consists mainly of CEO and CFO. The average age of the

top management team is 52 years old. Moreover, by looking up at the top management

biographies, we found out that all of them have solid experiences in their fields. To assess

whether the top management of SMG is efficient or not we have chosen to look over selected

financial data. Here are the two graphs we have considered.

As you can see, here the return on equity has consistently increased from 2008 to now which

signal solid management performances. On the other hand, the ROIC has decreased again in

2011 but seems to follow a path centered near 15% yearly on average which is good compared to

competitors. Additionally, the EPS have seen an overall increasing trend exept in 2011. Overall,

such stattistic show a solid top management team. Moreover, we have found out that the CEO of

the company, James Hagedorn, was planning to retire in 2011 but has annouced in 2010 that he

will stay longer. This represents good news for us at the light of the financial perormances of the

company. Moreover, given that M. Hagedorn has 31% of common stocks, we have no doubt

concerning his commitment to SMG success.


As we have seen in the company overview section, SMG occupies a strong competitive poisition

in its industry due to its ability to constantly innovate and reach the market on time. Its new

product, E-Z seeds, have also fabulous success and have very high operating margins. Moreover,

the fact that the company has two divisions with many product lines adds up to its competitivity.

SWOT Analysis

We will conduct this SWOT analysis following the order implied by its name.

23.66

-2.5

26.23 26.7 29.99

16.39

9.46

17.8

25.44

15.6

-5

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2011

ROE

ROIC

1.69 0.51 2.01

2.97

1.84

8.5

0.5 0.5 0.63 1.05

0

2

4

6

8

10

2007 2008 2009 2010 2011

EPS

Dividend pershare

Source: Global Data


Materials, 2012

51

SMG: SWOT Analysis


Strong management High customer concentration

Product differentiation High dependence on suppliers

Steady financial performance Legal proceedings


Low-cost supply chain model Stringent environmental

Further expansion in the USA regulations

Recent decline in natural gas Intensified competition

prices

Source: Team

We believe that SMG has many strenghts it can capitalize upon. First, it has a strong

management team whose records have been very decent over the last 5 years especially in the

context of a shrinking industry during this time period. Morever, SMG possesses strong

innovative capabilities, and product differention with high operating margins, occupying, thus,

a strong competitive position within its industry. Additionally, steady financial performance

allows the company to pursue its growth plans and maintain its strong market position.

One of the major weaknesses of SMG is

that the company has 61% of its revenue

depending on three main customers.

The potential drawbacks are huge and

SMG should diversify its distribution

policy since there is a high risk

associated with such a configuration.

Moreover, the company depends on

many third party manufacturers. This

dependence could result in various risks

such as decreased control over the

production process leading to production

delays or interruptions and inferior

product quality control. Finally, SMG

has some pending legal proceedings. It is easily perceivable that such legal problems can cause

a financial burden on the company. The main reason behind those legal problems concern one of

the company‟s products that contain a substance that have been identified as dangerous by some

customers. Clearly, SMG should deal with this situation.

We believe SMG faces many opportunities worth of mentioning. First, SMG strengthens its

existing businesses with diverse strategic initiatives. One of them concerns its regional supply

chain management model. This model increase cost savings for the company. The

opportunities here are that the companies can now exports this efficient model to other regions of

the world increasing thus cost saving activities and making the company more profitable in the

future. The second opportunity SMG face concerns its expansion activities. The company

expanded its presence in Ohio with the addition of new facilities in September 2009. It also

purchased new production facilities and opened regional sales and marketing offices in the

Northeast and the Midwest of the US in first half of 2009. The point here is that all these new

facilities and expansions are expected to provide significant opportunities for the Company to

enhance its services and revenue. Finally, a last opportunity concerns the recent decline in

natural gas prices which has now reach new historical lows. Such trends have significantly

decreased fertilizer companies‟ raw materials costs and will continue to do so until natural gas

reverse its declining trend.

The threats for SMG are mainly linked to stringent environmental regulations which can have

negative impacts on the Company‟s processes and profitability. Another important threat comes

from the intensified competition within the industry. As a result, SMG need to constantly

innovate and differentiate successfully its products in order to survive.


Materials, 2012

52

Source: Thomson One Banker



As you can see from the graph and table, analysts seem to share our opinion on the stock and

forecast a growth in EPS at a compounded annual growth rate of 11.37% annually. On the other

hand, analysts do not see the stock as a strong buy and value it more like a hold stock as seen by

the following chart, and consider it overpriced.

This consensus nevertheless also reflects the group overall

consensus as the industry is pretty competitive and that even if

SMG is doing right at this time and have huge potential in the

future, risks of better innovation and differentiation for

competitors can yield substantial risks. At the end, it all comes

down at whether you believe in the human assets of the

company.

Conclusion

We believe Scott Miracle Grow has moderate-to-strong fundamentals:

The industry is moderately-to-high competitive

Sound track records in innovation and differentiation

Solid financial performances

The Company has cyclical nature of business

It depends on few customers and critically on natural gas supply.

Domtar Corporation (UFS)


Domtar Corporation competes in the paper products industry. This industry is sensitive to the

level of interest rates in the economy as well as the overall GDP outlook. Moreover, the paper

products industry is also very sensitive to operating rates as they affect the profitability of the

companies and show the overall health of the industry. After analyzing the industry trends, we


Materials, 2012

53

have come up with a slightly positive outlook for this industry over the next year for the

following reasons:

1) US Real GDP growth rate is expected to be 1.8% in 2012 and accelerate to 2.3% by

2015, as well as global Real GDP growth rate is expected to be 3.1% in 2012 and reach

4.3% by 2015.

2) According to S&P, supply is being controlled which is a good indicator of the industry

capacity to react to its environment.

3) New opportunities may arise since cellulosic ethanol by contrast to traditional ethanol

may be used for biofuel energy, adding thus a market for this industry.

4) On the other hand, the demand for many grades of paper is expected to fall during the

next years. Such grades include demand for printing and writing papers.


The industry produces different grades and types of papers, some of which have strong

substitutes (electronic reading) and some of which don‟t have such close substitutes (paper

products used for packaging activities). Moreover, paper products are more or less standardized,

thus, companies mostly compete on prices. As a result, we believe that the customers’

bargaining power is high and the threat of

substitutes is medium. Moreover, since the

raw material needed in this industry (mainly

pulp) is traded on international market and

fluctuate based on the laws of demand and

supply, the paper companies have less

bargaining power in price negotiations with

suppliers. Therefore, we believe that the

bargaining power of suppliers is moderate

given those circumstances. Finally, given the

fact that this industry is the relatively capital

intensive, according to the USDA, and that

the bulk of the production is held by the

largest players, the threat of new entrants

is low. Moreover, although the companies have achieved higher degrees of efficiency (as seen by

higher operating rates) these years through better production processes (which may attract new

entrants), such economies of scale are tough to replicate. This result is further accentuated by the

fact that in recent years we can observe an increase in mergers and acquisitions activity within

the industry which now seem to give even more power to the biggest actors. As a result, we

believe that the rivalry among competitors is moderate-to-high and we expect it to increase in

the longer run due to the observed oligopolistic trend.

Company overview

Domtar Corporation was formed on August 16, 2006, for the purpose of combining the fine

paper assets of Weyerhaeuser with those of Domtar Inc. That transaction was completed on

March 7, 2007. The company is now the largest integrated manufacturer of uncoated free sheet

paper in North America and the second largest in the world, based on production capacity. The

company also makes papergrade, fluff, and specialty pulp. In 2011, 85% of the company's


Materials, 2012

54

revenues were generated from the sale of pulp and paper, 14% came from paper distribution, and

1% was from the sale of personal care products (a business it purchased in 2011). The products

that Domtar manufacture are used for three main market: businesses (46% of shipments),

commercial printing and publication (27%), and converting and specialty applications (27%).

The corporate goals of Domtar are pretty interesting. The company strives to be recognized as

the supplier of choice of branded and customer-branded pulp and paper products in North

America and to be recognized as leaders in sustainability and the manufacture of fiber-based

products. The strategies Domtar has chosen to pursue in order to achieve those objectives are

pretty straightforward: build customers loyalty and balance production with demand (by

adopting processes like just-in-time). On the front of their objectives regarding their willingness

to be recognized as leaders in sustainability and the manufacture of fiber-based products, Domtar

has pursed another strategy: it has developed EarthChoice, a line of environmentally and socially

responsible papers. The EarthChoice line is supported by leading environmental groups such as

the Forest Stewardship Council (FSC) from which it has managed a proper certification.


Domtar top management consists mainly of CEO and CFO. We studied and analyzed the data

about the current management team of the company and we found out that the average age of a

top executive in the company is 58 years old. Moreover, upon looking at the top executives

biography, we found out that almost all of them have solid experience in their expertise that

profits the Company on many sides such as marketing, finance and, of course, operations. We

also analyzed some data concerning the ratios that we judge necessary to help us evaluate how

efficient the management team is. Graphs below illustrate those metrics of interest.

Source: Global Data

As you can see from those two graphs, the top management has relatively successfully managed

to redress the situation after the huge negative impact 2008 crisis had on the industry. If we take

a look at further data on Global Data, Domtar has managed to do better that the majority of its

competitors during those tough times, which for us clearly indicate a good management team on

the company side. However, some of the indicators continued to be unstable after 2008 crisis.

2.19

-26.74

11.65

18.89

12.28 3.94

-8

10.65

10.71 11.49

-30

-20

-10

0

10

20

30

2007 2008 2009 2010 2011

ROE

ROIC 1.76

-13.33

7.18

14 9.08

-20

-10

0

10

20

2007 2008 2009 2010 2011

EPS

EPS


Materials, 2012

55

UFS: SWOT Analysis


Leading role in industry High customer concentration

Great brand loyalty Legal proceedings

Develops efficient operations


M&A activity Stringent environmental

Increased demand for some regulations

of the Company's products Dependence on third-party

Increased control of supply transportation

Growth in e-readers and

e-communications

Source: Team


As we have seen in the paragraph dealing with the company‟s overview, Domtar possesses a

strong diversity of products for diverse markets. Indeed, they produce uncoated freesheet papers

as well as papergrade, fluff and specialty pulp. They are also involved in personal care products

as they acquired a company operating in this industry. Moreover, as part of their corporate goals

and strategy that we have described in details in the previous parts, the company strives to

maintain a very competitive position within the industry by encouraging brand loyalty. Indeed,

they make up to 9 different types of paper products and 14 different types of pulp products

regrouped into 7 different brands, one being marketed as type of paper produced in a socially and

responsible way (EarthChoice). Finally, the Company strives to develop processes that match

production to customers‟ demand which can only make the production processes of the

Company even better in the long run and increase their operating efficiency.

SWOT Analysis

We will conduct this SWOT analysis following the order implied by its name.

We believe that Domtar possesses much important strength that make the Company an important

actor in its industry. First, it is largest integrated manufacturer and marketer of uncoated

freesheet paper in North America. Moreover, Domtar is the second largest manufacturer of

paper, based on the production

capacity. Additionally, as we stated

before, Domtar has a great brand

loyalty for its seven brands and is also

considered as a company that acts in a

socially and environmentally

responsible manner as shown by its

FSC certification. The Company also

strives for developing more and more

efficient processes that matches

production and customers‟ demand

which in turns increase their

profitability and shareholder value as

shown by the few financial metrics we

have used to evaluate the management

of Domtar Corporation.

One of the main weaknesses of the

Company lies in the way it manages its

working capital. According to graph

below, the problem lies in the fact that the

current ratio of the company has recently

seen a decrease despite higher levels of

receivables. This can put additional burden

on the financial soundness of Domtar

Corporation if such phenomena continue

Source: Global Data


Materials, 2012

56

in the long run. Another weakness of the company concerns its involvement in legal

proceedings. Indeed, Domtar is involved in various disputes regarding contract disputes, patent

infringements, environmental and product warranty claims, and labor issues. Such events can not

only add sunk costs to the Company in case of negative court ruling but it can also affect the

Company‟s reputation and integrity which it strives to maintain. In both case, this element puts a

double negative effect on the company future profitability and this problem should be addressed

promptly.

The first opportunity concerns the recent turns the whole industry has recently underwent.

Indeed, the paper products and packaging industry has recently entered a phase of consolidations

trough a lot of mergers and acquisitions activities. Of course Domtar is also involved in such a

wave as it has acquired Attends Healthcare, which has propelled Domtar as the leading suppliers

of adult incontinence products into North American hospitals (acute care) and nursing homes

(long-term care). Domtar through its cost-efficient production platform utilizing manufacturing

expertise and supply chain management would provide a complete and high-quality line of

branded and unbranded products to customers across all channels. Such strategic acquisitions

would expand its business portfolio thereby enhancing its revenue stream and growth prospects.

The second opportunity is linked to the increased demand for some grades of paper and pulp in

the industry such as the demand for newsprint which is expected to grow. As a result, we expect

the Company to increase sales during the next fiscal year. Another opportunity is linked to the

recent trend in the industry in which supply begins to get more and more controlled increasing

the prices for final outputs. This trend coupled with the fact that Domtar is becoming more

efficient in handling its operations can have huge potential for profits in the future if those trends

persist.

The Company is subject to a wide range of general and industry-specific laws and regulations

relating to the protection of the environment. As a result, this factor adds risk to the Company

profile in cases of unforeseen events that may harm the environment as well as their profits and

reputation. Another threat is linked to the fact that the Company depends on third party

companies for handling all their transportation issues. The risk of course comes from the

possibilities that such third parties may deliver products in a non-timely manner or even fail to

deliver it. Other important threats come from the fact that there is a higher growth in e-readers

nowadays and expanding electronic communication. Both factors are expected to increase with

time and technological advancement which will hurt some grades of paper such as newsprint and

reading and printing papers.




Materials, 2012

57

As you can see in the above graphs, analysts are confident about the future growth of earning for

Domtar as shown in the consensus. Indeed, they expect a compounded annual growth for the

company of 11.37% for the following 3 years. However, the general analysts‟ opinion is hold.

Moreover, we can see that it is a substantially followed stock.

Conclusion

We believe Domtar has moderate-to-strong fundamentals because of the following reasons:

The industry has a moderately optimistic outlook and is moderately-to-high competitive

The management team is experienced; however, we could observe some profitability

fluctuations

The Company has diversified products and profits from strong brand loyalty. However,

its geographical diversification is not strong

The Company adopts efficient operations management processes. However, its working

capital management procedures have not been entirely efficient recently

It is a substantially followed stock.

Steel Dynamics (STLD)


Steel Dynamics Inc. (STLD) is in a Steel sub-industry. As indicated in our Materials industry

analysis we have a slightly positive outlook about this industry outlook:

Positive outlook of U.S. GDP in 2012

Increase in auto sales in 2011

Weak construction markets in the U.S.

All of the aforementioned factors would produce a slightly positive impact on Steel Dynamics

growth and profitability.


The steel industry has moderate

bargaining power of buyers, as steel

industry‟s product differentiation is not as

obvious as the luxury or specialty goods

and thus does not have much substantial

price difference, which will increase buyers‟

bargaining power. However, since demand

still exceeds the supply in domestic steel

industry, buyers‟ bargaining power is

weakened. Thus, it‟s moderate. In addition,

we believe that bargaining power of

suppliers is low since companies in the steel industry are fully integrated. Most of companies


Materials, 2012

58

have their own mines of key raw material like iron ore or coal. However, those who are non-

integrated or semi integrated has to depend on suppliers. However, in general, bargaining power

of suppliers is low in the steel industry. The threat of substitutes is medium to low. Although

usage of aluminum has been growing continuously in the automobile and consumer durables

sectors, it still does not place any significant threat to steel since steel cannot be replaced

completely and the cost differential is also very high. We believe the threat of new entrants is

moderate for the steel industry due to several reasons. Steel industry is an extreme capital

intensive and economics of scale industry, which make it hard to enter. Meanwhile, the

government has both a favorable policy for steel manufacturers and regulations for the new

entrants. To sum up all the analysis, there is a moderate rivalry among companies in steel

industry. This results in steel companies having moderate control over prices and costs, thus,

relatively stable margins.

Company overview

Steel Dynamics, Inc., (STLD) along with its subsidiaries, engages in the manufacture and sale of

steel products in the United States and internationally. According to Company‟s documents, the

Company operations are managed and reported based on three operating segments: steel

operations, metals recycling and ferrous resources operations, and steel fabrication operations.

The Steel Operations segment provides a range of sheet steel products, including hot rolled, cold

rolled, and coated steel products; structural steel beams, pilings, and rails; special bar quality and

merchant bar quality rounds and round-cornered squares; billets and merchant steel products

comprising angles, plain rounds, flats, and channels; and merchant beams and specialty structural

steel sections. The Metals Recycling and Ferrous Resources Operations segment purchases,

processes, and resells ferrous products, such as heavy melting steel, busheling, bundled scrap,

shredded scrap, steel turnings, and cast iron products; and processes nonferrous products

consisting of aluminum, brass, copper, stainless steel, and other nonferrous metals for use in

foundry, mill refining, and smelting applications. The Steel Fabrication Operations segment

fabricates steel building components, which include steel joists, trusses, girders, and decking

products for the non-residential construction industry. The company was founded in 1993 and is

headquartered in Fort Wayne, Indiana.

It serves wide range of industries, such as automotive, agriculture, energy, construction,

commercial, transportation, industrial machinery and non-residential construction markets.

Table below represents the Company‟s main competitors.


Materials, 2012

59


After studying key executives biographies, as provided by GlobalData services, we concluded

that management is relatively professional and experienced, as the average age of the team is 57

years. All three people in the Executive Board including CEO, Executive Vice President and One

of the Directors stayed with STLD since the Company was founded in 1993, nearly twenty years.

It is absolutely a good sign. From the charts below, we can see that STLD performed well except

2009, largely due to the depressed micro economy that year. In 2010 and 2011, we can see strong

recovery sign of this company. Thus, from a profitability standpoint, management performance

was fair. In addition, the Company pays a stable dividend even in its difficult time. According to

SADIF, STLD has an efficient management.

Source: SADIF


STLD: Key Competitors


AK STEEL HOLDING CORPORATION USA 6,468

Allegheny Technologies Incorporated USA 5,183

Ampco-Pittsburgh Corporation USA 345

ArcelorMittal Luxembourg 93,973

ArcelorMittal South Afirca Limited South Africa 4,285

Commercial Metals Company USA 7,918

Cookson Group plc United Kindom 4,348

JSW Steel Limited India 5,264

Nucor Corporation USA 20,024

United States Steel Corporation USA 19,884

Steel Dynamics USA 7,997

Source: Global Data


Materials, 2012

60


performance was relatively strong.


The company‟s products are highly diversified as portfolio; the Company includes hot rolled,

cold rolled, and coated steel products; structural steel beams, pilings, and rails; special bar

quality and merchant bar quality rounds and round-cornered squares; billets and merchant steel

products comprising angles, plain rounds, flats, and channels; and merchant beams and specialty

structural steel sections. heavy melting steel, busheling, bundled scrap, shredded scrap, steel

turnings, and cast iron products; and processes nonferrous products consisting of aluminum,

brass, copper, stainless steel, and other nonferrous metals for use in foundry, mill refining, and

smelting applications. It also provides liquid pig iron and hot briquetted iron; and iron nugget

products. Such products are used in variety of industries, such as automotive, agriculture, energy,

construction, commercial, transportation, and industrial machinery industries. Speaking about

Company‟s competitive position, according to Company‟s documents, STLD faces significant

price and other forms of competition from other steel producers and scrap processors, which

could have a material adverse effect on their business, financial condition, results of operation or

prospects. Steel industry is highly consolidated, which results in fierce price competition and low

gross margin. STLD has a strong competitors group, such as Nippon Steel, Wheeling

Corrugating Co. etc. Thus, if the Company doesn‟t focus on their product quality and new

products development, their revenue may be damaged. In addition, due to new players entering

this market, the competition is expected to further intensify in the near future, which may also

result in price reductions. All-in-all, the Company has a strong product differentiation and

moderate competitive standing.

SWOT Analysis

Source: Global Data


Materials, 2012

61

The Company has pretty obvious strengths, as well as weaknesses. One of the most important

strengths is the Company‟s diversification strategy. Just as we mentioned above, a great level

of product differentiation is reflected in three distinct segments – Steel operations segment (27%

of revenue in 2011), Metals recycling and ferrous resources operations segment (31% of revenue

in 2011), and steel fabrication operations segment (56% of revenue in 2011). These segments

supply products to various industries described above. Thus, company effectively protects itself

from various industries‟ risks as well as general economic as the Company serve a broader

customer base, access an extensive range of end-user markets, and mitigate its exposure to

cyclical downturns in commodity grade flat rolled products or in any one product or end-user

market. Moreover, STLD is the fifth largest producer of carbon steel products in U.S. with 2011

revenues of $8.0 billion on steel shipments of 5.8 million tons, which means STLD is a leader in

steel markets. According to the Company‟s document, STLD acquired Recycle South, a

privately-held, regional scrap metal recycling company, in 2008, acquired both OmniSource

Corporation, one of the country‟s largest ferrous scrap processors and the largest nonferrous

metals processor, and the Techs, three galvanizing plants in Pittsburgh that coat flat-rolled steel,

in 2007. STLD acquired Roanoke

Electric Steel Corporation, including

Steel of West Virginia, in 2006. All

these acquisitions show that STLD‟s

rapid growth has resulted from

discovering and taking advantage of

business opportunities in the areas of

technical and operational expertise. In

addition, STLD has a strong

profitability in recent two years.

Such ratios as the Gross Margin,

Operating Margin, Return on Equity,

Return on Invested Capital and

Return on Working Capital had good dynamic, which shows STLD‟s good performance.

Speaking about the Company‟s weaknesses the major area that causes our concern is that STLD

has substantial debts on its balance sheet. As the end of December 31, 2011, a significant

portion of our indebtedness then may become immediately due and payable if the default is not

remedied. The Company's total long-term debt including current maturities was nearly USD 2.4

billion. In addition, the company‟s Debt to Capital Ratio was 132.7%, which is significantly

high. Highly leveraged towards debt obligation is a serious weakness for the Company as a

substantial portion of cash flow is dedicated for repaying principal and interest on debt. If the

Company is unable to generate sufficient cash flow or is unable to obtain the funds required to

meet payments, STLD could face a major impact on its business. It also constrains the

Company‟s ability to do expansion, strategic acquisitions and research and development.

The Company also has opportunities, as well as threats. The steel industry is rebound in

demand. We have a positive fundamental outlook for the Steel industry for the following 12-

month. The projection of a 2.0% in U.S. GDP increase in 2012, compared with the GDP growth

of 1.8% in 2011. According to S&P, in the year 2012, there‟s an increase in auto sales to 13.5

million units, from 12.8 million units in 2011. Weak construction markets in the U.S. will weigh

on the company's growth potential in the near term. These positive signals will bring STLD some

new opportunity.

STLD: SWOT Analysis


Large Market Share Substantial Debts

Diversification


Recovery in Steel Industry Environmental Regulations

Fierce Competition

Source: Team


Materials, 2012

62

Speaking about Company‟s threats, we believe the most important is stringent environmental

regulations of steel industry. Meanwhile, the Company also requires government approvals and

permits to maintain its steel manufacturing and processing activities. If the company fails to

comply with these regulations, it may be imposed with hefty fines and penalties, which could

have a material impact on the profitability of the company. The company may also be denied

with new projects, which might hamper its business prospects. Also, as we mentioned before, the

company competes with other steel producers and scrap processors based on the product

availability, service capability, and price. The company faces firm competition from some main

players like Nippon Steel, Wheeling Corrugating Co., Quincy Joist Co., North Star Bluescope

Steel, Duferco Steel, SeverStal, Gerdau Ameristeel, Arcelor Mittal, Voest-Alpine, Moravia Steel,

Akron, U.S. Steel, AK Steel Corporation and etc. The intensified competition in steel industry

requires Company to maintain the product quality and consumer loyalty, or this intense

competition could reduce the sales volume of the company, and could thereby hamper its market

position.


For fiscal year 2012, analysts estimate that STLD will earn $1.31. For fiscal year 2013, analysts

estimate that STLD's earnings per share will grow by 43% to $1.87. Of the total 22 analysts

following STLD, 19 analysts currently publish recommendations. 47% and 26% of analysts

recommend “hold” and “buy/hold”, respectively. According to Standard & Poor, the

recommendation is “buy/hold”. Figures shown below has a positive outlook on EPS in following

years, from 1.23 in 2011 to 2.10 in 2012, a significant 70% increase. Figure to the right shows

that the majority opinions on STLD are a hold recommendation. Analysts seem to have a

moderate outlook on STLD, which is also our fundamental analysis conclusion.


Conclusion

We believe STLD has medium fundamentals because:

We have a very slight outlook for steel industry

As a leader company in US market, the Company has a strong market position and

market share



The management is experienced and demonstrated strong performance for past two years


Materials, 2012

63

It faces intensified competition from other steel producers and scrap processors

Its substantial debt on balance sheet is a big concern.

Silgan Holdings (SLGN). Current DFF holding.


Silgan Holdings (Silgan) operates in a Metal and Glass Containers sub-industry. It is worth

noting that, according to KeyBanc, this industry is a slow-growth relatively mature industry. As

indicated in our Materials industry analysis we are moderately optimistic about this industry

outlook:

US/global industrial recovery as measured by acceleration in real GDP and industrial

production growth rates

Consumer spending recovery

Slow recovery of global packaging market

Stringent government regulation on recycling and packaging

All of the aforementioned factors would produce a neutral-to-positive impact on Silgan growth

and profitability.


The Metals and Glass containers sub-industry can be characterized by relatively low control over

prices, as containers are in majority uniform

products and, according to S&P, companies

in this industry mostly compete on price.

This, in turn, affects the bargaining power

of buyers which we believe is strong, as

buyers may have relatively low switching

costs and very few special preferences for

special features and quality of cans and

other packaging. Also, we believe that

bargaining power of suppliers is

moderate as packaging companies‟ main

productive inputs are basic materials like

steel, plastics, paper which are scarce in

nature and packaging companies have little power in price negotiations as prices are determined

on world markets. The threat of substitutes is high as metal and glass packaging may be

substituted by plastic pouches and carton-board containers to defray higher tinplate costs and

attract consumer attention on store shelves, according to Morningstar. The threat of new

entrants is low-to-moderate as current players oftentimes achieve considerable economies of

scale in production, distribution and marketing, as well as the industry itself is highly capital and

labor intensive requiring high capital expenditures. On the basis of all of the aforementioned

factors and the fact that packaging companies mostly compete on price, as well as high threat of

substitutes, there is a moderate-to-strong rivalry among companies in Metal and Glass


Materials, 2012

64

containers sub-industry. This results in packaging companies having moderate-to-low control

over prices and costs, thus, relatively volatile margins.

Company overview

Silgan is the largest food can producer in the USA which has gained such a consolidation

through directed M&A activity. According to KeyBanc, it has approximately 50% share of the

US market. The food can business accounts for about 63% of sales. The rest of the Company‟s

sales come from plastic and metal bottle closures (around 20% of sales) and rigid plastic bottles,

predominantly for the personal care industry (approximately 17% of sales). As of the end of

2010 the Company operated 68 plants in various parts of the world. The company was founded

in 1987 and is headquartered in Stamford, Connecticut. It operates in majority of international

markets of North America, Europe, Asia, and South America.

Table below represents Silgan‟s main competitors.


The SLGN‟s main management consists of CEO, CFO, and COO. After studying key executives

biographies, as provided by Data Monitor services, we concluded that management is

professionalism and experience is fair, as the average age of the team is 43 years and everybody

has around 15+ years of chemical industry experience. However top management stayed with

Silgan for around 7-10 years, which is not a considerable amount of time as compared to other

companies selected for fundamental analysis. According to KeyBanc, under current management

Silgan‟s stock performance outperformed the Dow Jones Container/Packaging Index and the

S&P 500. Form a profitability standpoint, management performance was solid, as, basically,

main profitability ratios are relatively high and dividends per share have been constantly

increasing for past 5 years. However, the Company has been demonstrating unstable profitability

and EPS performance: the decrease in main ratios in 2008 and 2009 was accompanied by an

increase in 2010 and 2011, or increase in 2009 was accompanied by a decrease in 2010.


SLGN: Key Competitors


Ball Corporation USA 8,630

Constar International USA 638

Rexam Plc UK 7,283

CCL Industries Canada 1232

Silgan USA 3,509

Source: Dlobal Data


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performance was relatively fair.


We cannot say that Company‟s products and operations are highly diversified as it mainly

manufactures containers and packaging for food-and-beverage, healthcare, and pharmaceuticals

companies and derives around 90% of its revenue from North American market. Thus,

Company‟s profitability may be seriously harmed by crisis in one of the aforementioned

industries or in North American market. Speaking about Company‟s competitive position, it is

worth noting that SLGN is a market leader in the USA with around 50% market share.

Moreover, according to Morningstar, Silgan‟s operational model is built on low-cost

manufacturing advantage. Shipping empty cans long distances is expensive and Silgan derives its

cost advantage by having its plants either co-located or with its customers' facilities or at least

nearby. Indeed, over the years Silgan has acquired many of its packaging facilities directly from

the food producers and has multidecade relationships with its major customers. We think it

would be very difficult for a would-be competitor to match Silgan's proximity to key customers

and forge similar customer relationships overnight. Unlike its competitors that typically rely on

single-year food can supply contracts, the majority of Silgan's supply contracts are multiyear

(typically 5-7 years in length). All-in-all, the Company has a weak product differentiation and

solid competitive standing.

Source: Global Data

Source: Global Data


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SWOT Analysis


strengths is the Company‟s low

cost production and long-term

contractual relationships with

main customers, which were

discussed previously. Moreover,

the Company has successful

M&A history. More specifically,

Company‟s M&A activity

allowed it to consolidate the US

cans market and achieve

significant economies of scale.

With such an M&A expertise the

Company can continue to grow

by acquisitions.

Speaking about Silgan‟s

weaknesses it is worth mentioning high customer concentration – around 30% of the

Company‟s sales come from 3 main consumers. The worsening of relationships with any of these

customers could adversely affect Company‟s profitability. Also, as indicated in our industry

analysis, Metals and Glass containers is a slow growth mature industry. According to

Morningstar, a negative containers demand volume trend is expected in the North-American

market.

The Company has significant opportunities, as well as threats. Silgan management expects

Eastern Europe food can demand to grow between 4% and 5% per year. Therefore, the

Company would benefit by increasing its operations in Easter European markets, which,

basically, the Company was doing in 2010 and 2011. Also, according to Datamonitor, the global

beverage industry is witnessing significant growth. According to Datamonitor estimates, the

global beverages industry grew by 15% in 2010 to reach a value of $1,749.4 billion. In 2015, the

global beverages industry is forecast to have a value of $1,909 billion, an increase of 9.1% since

2010. The high growth of beverages in turn converts into significant demand for beverages

packaging and, thus, for Silgan‟s products.

Speaking about Company‟s threats, we believe the most important is substitutes threat. As

mentioned before, according to Morningstar, a number of Silgan's major metal food customers

have recently expressed an interest in using alternative packaging types such as plastic pouches

and carton-board containers to defray higher tinplate costs and attract consumer attention on

store shelves. We think it's likely that such customers will have more bargaining power this time

around and may offer less supply volume and may look to share the burden of cost inflation with

Silgan. Also, there are little opportunities in emerging markets of Asia, as, according to

Morningstar, metal cans represented just 6% of the total food packaging mix in 2010 versus 62%

for flexible packaging, 10% for rigid plastic containers, and 7% for glass. Moreover, three

commonly-canned products in North America and Europe are fruits and vegetables, pet food,

and soup, but those products together represented just 3% of total Asia-Pacific food packaging in

2010. By comparison, those three categories represented 45% and 32% of food packaging in

SLGN: SWOT Analysis


Low-cost production High customer concentration

Long-term contractual Low-growth industry

relationships

Strong M&A history


Emerging European markets Little opportunities in emerging

Favourable outlook for markets of Asia

global beverage industry Substitutes threat

M&A failure

Source: Team


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67

North America and Western Europe. Far more commonly packaged foods in Asia-Pacific are

noodles, meat products, and condiments, which tend to be presented in flexible packaging,

pouches, and plastic trays. This is also partially true for other emerging markets, except for

Eastern European one where packaging needs basically coincide with those of Western Europe

and USA.

The Company‟s recent M&A activity may also pose a significant threat, if such acquisitions are

not integrated properly into existing business model or cannibalize existing sales.


Analysts generally are optimistic about the stock in a near term, as EPS forecasts are increasing

for next three years. Speaking about the ratings, the general analysts‟ opinion is highly diverse

ranging from strong buy to hold. However, hold rating is dominant. We couldn‟t indicate that

such sentiment changed recently: there was only moderate downward revision. This Company is

substantially followed by analysts which, we believe, is not a positive factor. Current mean target

price is $45.5 and current is $44.7. The stocks‟ trading volume does not look quite stable which

further indicates the uncertainty of investors concerning the stock.


Conclusion

We believe Silgan has medium fundamentals because:

The industry is slow-growth and highly competitive

The management is relatively experienced, however, it demonstrated unstable

performance for past years

It does not have a well-diversified products and operations

It does not have a strong emerging markets growth opportunities

However, it has a strong presence in the US market and is a leader there

It has a successful M&A history

There is a significant substitution threat to the Company‟s operations

It is a substantially followed stock


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Investment Idea Summary Based on the results of our quantitative, qualitative, and fundamental analyses we recommend a

strong buy for Cytec Industries company, a moderate buy Scott Miracle Growth company, a hold

for Sensient Technologies company (current DFF holding), and a sell for Silgan Holdings

company (current DFF holding). It is worth noting that Silgan Holing was also a sell

recommendation previous year.

Cytec Industries (CYT): STRONG BUY

Short business description: This is a specialty chemical company which is engaged in the

production and distribution of various chemical products for different industrial, consumer,

agricultural, and other uses. It has extensively diversified geographical operations and portfolio

of products providing necessary chemical components to both cyclical and non-cyclical

industries. Please find detailed company description and analysis in the Fundamental analysis

section.

Reasons to invest:

1. From a quantitative perspective, it is a non-glamour explicit value stock with the highest

earnings surprise ratio, perfect quality of earnings, and a strong fundamental position, as

well as with favorably negative external financing activities. This Company has the

highest quantitative score:

2. From a qualitative perspective, the Company showed high technical and expansion

efforts and relatively fair cost control:

3. From a fundamental perspective, this Company is strong, as we believe that:


The management is relatively experienced and demonstrated solid performance

for past years, especially by recovering Company‟s profitability in FY 2010 and FY

2011

It has diversified products and operations which allows the Company to defend

itself from various specific industries/regions risks

It has strong presence in emerging markets where chemical growth is expected to

be robust

It has made important steps in auto composite market which is expected to be

dynamic and promising

It has a solid competitive position created by recent successful investments in new

technologies and patents

Ticker Company Momentum GS Mom/GS combined BE/ME CF/P Value combined Earn-surp Volatility Accruals F-score Xfin C-Score

CYT CYTEC INDUSTRIES INC 10 24 17 18 18 18 27 5 18 25 25 135

Ticker Company Oper Eff Tech and Exp Cost Control Mngmt Quality Q-Score

CYT CYTEC INDUSTRIES INC 7 20 11 8 46


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It is a thinly followed non-glamour stock with a positive outlook and consistent

earnings announcements surprises.

All-in-all, Cytec is a strong buy because it is quantitatively and fundamentally strong non-

glamour value company. Moreover, we expect the Company to continue diversify across various

chemical market in the medium-term future with a special emphasis on emerging markets and

European auto-market.

Scott Miracle Growth (SMG): MODERATE BUY

Short business description: This is an agricultural chemical company which is engaged in the

production and distribution of various chemical products, fertilizers, additives for agricultural

users. It has solid diversified operations in North America and internationally. Please find

detailed company description and analysis in the Fundamental analysis section.

Reasons to invest:

1. From a quantitative perspective, the Company is a non-glamour stock with good growth

in sales and a low book to market ratio. It has a strong negative external financing and

sound earning surprise. The F-score is pretty good and gives us incentive to trade on such

technical:

2. From a qualitative perspective, the Company has a strong cost control management and a

very good management quality. Its Q-score is very sound and gives us solid reason to

think that the company possesses unique attributes not quantifiable that can be capitalized

upon:

3. From a fundamental perspective, this Company is medium-to-strong, as we believe that:

The industry is moderately-to-high competitive

Sound track records in innovation and differentiation

Solid financial performances

The Company has cyclical nature of business

It depends on few customers and critically on natural gas supply.

All-in-all, Scott is a moderate buy because of a very solid quantitative screen and because of

strong qualitative elements. Moreover, although the Company is a growth stock, the historical

track record of the Company in the face of adversity and the outstanding management

performances on the past five years make us think the company is well lead and able to compete

very efficiently in its market as the results of strong R&D and innovative products. Furthermore,

the fact that the current CEO owns 32 % of the shares and has decided to extend its contract in

the company sends a strong signal to the market. Finally, we expect the Company to continue

providing innovative products in the market for the upcoming year while expanding its E-Z seed


SMG SCOTT MIRACLE GROWTH 16 11 13.5 2 6 4 16 24 27 14.5 27 126


SMG SCOTT MIRACLE GROWTH 13 12 15 18 58


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worldwide which is until now a very successful product in all the markets it has been introduced

to and possesses a very high profit margin.

Sensient Technologies (SXT). Current DFF holding: HOLD

Short business description: This is a specialty chemical company which is engaged in the

production and distribution of various specialty chemical products for different industrial,

consumer, agricultural, and other uses. It has extensively diversified geographical operations and

portfolio of products providing necessary chemical components to both cyclical and non-cyclical

industries. Please find detailed company description and analysis in the Fundamental analysis

section.

Reasons to hold:

1. From a quantitative perspective, it is neutral-glamour and slightly value stock with a fair

earnings surprise ratio, and low volatility, as well as with solid quality of earnings,

strong fundamental position, and with favorably negative external financing activities:

2. From a qualitative perspective, the Company has a strong management and a high cost-

control quality, as well as relatively fair operational efficiency and technical and

expansion efforts:

3. From a fundamental perspective, this Company is strong, as we believe that:


The management is experienced and demonstrated strong performance for past

years

It has diversified products and operations which allows the Company to defend

itself from various specific industries/regions risks

It has strong presence in emerging markets where chemical growth is expected to

be robust

It has a strong presence in the US healthcare market which is also projected to

grow consistently

It has a solid competitive position created by recent successful investments and

M&A activity

It is a thinly followed stock with a positive outlook.

All-in-all, Sensient is a hold because it is quantitatively, qualitatively and fundamentally strong

company which is thinly followed and has a positive outlook. This company is the only one

which was among TOP 6 companies both in qualitative and quantitative screens. Moreover, in

the medium future we expect it to continue to benefit from increased healthcare demand in the

USA and enlarge its operations in the emerging markets.


SXT SENSIENT TECHNOLOGIES CORP 14 10 12 15 9 12 15 22.5 15 25 20 121.5


SXT SENSIENT TECHNOLOGIES CORP 10 11 22 27 70


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Silgan Holdings (SLGN). Current DFF holding: SELL

Short business description: This is a metals and glass containers company which is engaged in

the production and distribution of various container products for healthcare, pharmaceutical,

industrial and consumer users. It has fairly diversified geographical operations and portfolio of

products providing necessary. Please find detailed company description and analysis in the

Fundamental analysis section.

Reasons to divest:

1. From a quantitative perspective, it is a neutral-glamour and growth stock with average

earnings surprise ratio, and above-average low volatility, as well as with below-average

quality of earnings, average fundamental position, and with non-favorable negative

external financing activities:

2. From a qualitative perspective, the Company has solid operational efficiency, above-

average technical and expansion efforts, average management quality and low cost

control.

3. From a fundamental perspective, this Company is medium, as we believe that:

The industry is slow-growth and highly competitive

The management is relatively experienced, however, it demonstrated unstable

performance for past years

It does not have a well-diversified products and operations

It does not have a strong emerging markets growth opportunities

However, it has a strong presence in the US market and is a leader there

It has a successful M&A history

There is a significant substitution threat to the Company‟s operations

It is a substantially followed stock

All-in-all, Silgan is a sell because it is quantitatively, qualitatively and fundamentally below the

average company which is also substantially followed. This company was also a sell

recommendation previous year. Moreover, it is hard for us to determine the medium future of the

Company as the industry is slow-growth and highly competitive, as well as the Company is

significantly threatened by potential substitutions and has a high customer concentration.


SLGN SILGAN HO 15 18 16.5 3 17 10 13 17 11 14.5 4 86


SLGN SILGAN HO 20 18 4 16 58


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References We used such sources and materials to prepare given analysis:

1. Leo J. Larkin, August 4, 2011, Industry Analysis: Diversified Metals & Mining

2. February 2012, USDA Long-term Projections: U.S. Crops

3. Richard O‟Reilly, CFA, Chemicals Analyst, July 7, 2011, Industry Analysis: Chemicals

4. Stuart J. Benway, CFA, February 9, 2012, Industry Analysis: Paper Products & Forest

Products

5. Bloomberg

6. Thompson One Banker http://banker.thomsonib.com/

7. Global Data http://www.globaldata.com/

8. J.P. Morgan http://www.morganmarkets.com

9. Value Line. http://www.valueline.com/

10. Thompson Reuters http://thomsonreuters.com/

11. First Call http://thomsonreuters.com/products_services/financial/financial_products/a-

z/first_call/

12. SADIF http://www.sadifanalytics.com/stockmarks/main.php

13. Morningstar Equity Research http://news.morningstar.com/

14. Standard and Poor‟s http://www.standardandpoors.com/

15. Wharton Research Data Services. http://wrds.wharton.upenn.edu/

16. First Research http://www.firstresearch.com

17. FactSet http://www.factset.com/

18. http://www.finance.yahoo.com

19. http://www.scotts.com/

20. http://www.sensient-tech.com

21. https://www.cytec.com/

22. http://www.silganholdings.com

23. http://www.steel.org/

24. http://www.bea.gov/

25. http://www.commerce.gov/

26. Diversified Metal and Mining-Mid, S&P Market Inside

27. Metal and Glass Containers-Mid, S&P Market Inside

28. Diversified Chemicals-Mid, S&P Market Inside

29. Steel-Mid, S&P Market Inside

30. Specialty Chemicals-Mid, S&P Market Inside

31. Construction Material-Mid, S&P Market Inside

32. Fertilizer and Agriculture Chemical-Mid, S&P Market Inside


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Ticker Company BaH Return Rank

MLM MARTIN MA -17.58% 27

IPI INTREPID POTASH 8.96% 26

OLN OLIN CORP 25.11% 25

CMP COMPASS MINERALS INTL INC 25.54% 24

STLD STEEL DYN 26.63% 23

CMC COMMERCIA 28.58% 22

MTX MINERALS TECHNOLOGIES INC 39.88% 21

GEF GREIF INC 49.66% 20

ATR APTARGROU 55.55% 19

SON SONOCO PRODUCTS 72.95% 18

WOR WORTHINGT 63.03% 17

SMG SCOTT MIRACLE GROWTH 65.53% 16

SLGN SILGAN HO 68.25% 15

SXT SENSIENT TECHNOLOGIES CORP 72.42% 14

RKT ROCK TENN 75.25% 13

PKG PACKAGING CORPORATION OF AMERICA 105.19% 12

RPM R P M INTERNATIONAL INC 110.97% 11

CYT CYTEC INDUSTRIES INC 114.75% 10

CBT CABOT CORP 129.40% 9

VAL VALSPAR CORP 130.31% 8

ALB ALBEMARLE CORP 141.02% 7

RS RELIANCE 151.64% 6

CRS CARPENTER 169.47% 5

UFS DOMTAR CORPORATION 310.37% 4

LPX LOUISIANA PACIFIC CORPORATION 417.31% 3

ASH ASHLAND INC NEW 467.04% 2

NEU NEWMARKET CORP 492.38% 1

Note:

Current holdings

Appendix Appendix A.

1. 3-year buy and hold (BaH) return screens.

According to DeBondt and

Thaler, stock returns may

reverse in future and

companies which exhibited

highest returns will exhibit

lowest and wise versa. Thus,

the highest rank was allocated

to companies with lowest past

BaH returns. 3-year period is

consistent with the paper itself.


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2. 5-year growth rate in sales screens.

According to LSV, companies which exhibited highest growth rates in sales for last 5 years are

“glamour stock” and would underperform companies which exhibited lowest growth rates for

last 5 years. Thus, highest rank is allocated to companies which exhibited lowest growth rates.

The growth rate in sales was calculated as historical weighted average growth rate, where “1”

weight was assigned to the latest year (2007) and “5” weight was allocated to the earliest year

(2011).

3. Book value of equity to market value of equity (BE/ME) and cash flow per share to price

per share (CF/P) screens.

High BE/ME and CF/P companies are considered “value” stocks and allocated higher ranks,

according to LSV.

2007 2008 2009 2010 2011 GS Rank

Rank–> 1 2 3 4 5

Worthington Industries Inc -0.05901497 0.02575953 0.03208482 -0.14211518 -0.26156191 -0.11916745 26

Carpenter Technology Corp. 0.19327347 0.24014794 0.00447347 -0.30360891 -0.11893561 -0.07480826 25

Cytec Industries Inc 0.13801825 0.0523502 0.03884354 -0.23363279 -0.01476967 -0.04327535 24

Commercial Metals Company 0.14610402 0.10231712 0.2519336 -0.34855831 -0.07152689 -0.04302191 23

Martin Marietta Materials Inc 0.10086616 0.00033539 -0.03944471 -0.1969171 0.04713967 -0.03791782 22

Louisiana Pacific Corp. -0.1399823 -0.23721534 -0.19279723 -0.2336143 0.31184223 -0.03787005 21

Olin Corp. 0.3368113 -0.59489815 0.38197055 -0.13204874 0.03552073 -0.00384431 20

Minerals Technologies Inc 0.06373514 0.01737924 0.03200275 -0.18421881 0.10473703 -0.00124588 19

Silgan Holdings Inc 0.06891066 0.09577435 0.0677352 -0.0173759 0.00155865 0.02679698 18

Valspar Corp. 0.09731572 0.09107607 0.07173567 -0.17325507 0.12075206 0.02702766 17

Albemarle Corp. 0.12384816 -0.01364571 0.05603996 -0.18715015 0.17820474 0.02713998 16

RPM International Inc 0.17709617 0.10983466 0.09136027 -0.07564102 0.01322677 0.02896107 15

Sonoco Products Company 0.03635184 0.10477625 0.02039361 -0.12736575 0.14539672 0.03497372 14

Packaging Corp. Of America 0.0970025 0.05896527 0.01920544 -0.09019314 0.13411312 0.03882283 13

Ashland Inc -0.2197411 0.07631688 0.07655748 -0.03281231 0.11176906 0.03934408 12

Scotts Miracle-Gro Company 0.1383531 0.06477327 0.0383035 0.05355825 -0.00050931 0.03963311 11

Sensient Technologies Corp. 0.07309093 0.07827844 0.05725958 -0.04088231 0.10551768 0.05103238 10

Aptargroup Inc 0.16041188 0.18158713 0.09486991 -0.11104997 0.12765934 0.06681951 9

Cabot Corp. 0.19623529 0.02911094 0.21980122 -0.29708555 0.28979046 0.07829806 8

Greif Inc 0.08422225 0.26395864 0.1367942 -0.26068376 0.23970891 0.07855544 7

Reliance Steel And Aluminum Company 0.70553155 0.26348124 0.20165718 -0.39004157 0.18703379 0.08083122 6

Rock-Tenn Company 0.23341486 0.08311117 0.22588306 -0.00940505 0.06688713 0.09160679 5

Compass Minerals International Inc -0.1099286 0.29756319 0.36206695 -0.17521624 0.1098536 0.09465345 4

Newmarket Corp. 0.17457277 0.08831631 0.17642395 -0.0539807 0.17467257 0.10252782 3

Domtar Corp. 0.0157897 1.25239711 -0.13965882 0.07169014 0.0333413 0.1703383 2

Steel Dynamics Inc 0.48237195 0.35376174 0.8429531 -0.5100798 0.59161213 0.30909974 1

Note:

Current holdings


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Companies BE/ME Rank

Compass Minerals International Inc 0.149 1

Scotts Miracle-Gro Company 0.174 2

Silgan Holdings Inc 0.213 3

Newmarket Corp. 0.216 4

Valspar Corp. 0.259 5

Albemarle Corp. 0.284 6

Packaging Corp. Of America 0.322 7

Carpenter Technology Corp. 0.338 8

Aptargroup Inc 0.360 9

Martin Marietta Materials Inc 0.362 10

RPM International Inc 0.371 11

Sonoco Products Company 0.424 12

Greif Inc 0.475 13

Worthington Industries Inc 0.513 14

Sensient Technologies Corp. 0.535 15

Cabot Corp. 0.557 16

Olin Corp. 0.573 17

Cytec Industries Inc 0.621 18

Minerals Technologies Inc 0.651 19

Commercial Metals Company 0.690 20

Rock-Tenn Company 0.713 21

Steel Dynamics Inc 0.760 22

Reliance Steel And Aluminum Company 0.784 23

Louisiana Pacific Corp. 0.813 24

Domtar Corp. 0.835 25

Ashland Inc 0.864 26

Note:

Current holdings

4. Earnings surprise screens.

We calculated Earnings Surprise Ratio (ESR), which is equal to (Actual EPS reported for FY

2011 – Mean analyst EPS estimate for FY 2011)/Price as at the end of FY 2011. Then companies

were ranked according to the estimated ESR where higher ESR means more earnings surprise.

Companies CF/P Rank

Louisiana Pacific Corp. -0.075 1

Valspar Corp. -0.004 2


Ashland Inc 0.064 4


Scotts Miracle-Gro Company 0.069 6

Carpenter Technology Corp. 0.074 7


Sensient Technologies Corp. 0.088 9

Aptargroup Inc 0.089 10

Compass Minerals International Inc 0.092 11


Albemarle Corp. 0.095 13

Newmarket Corp. 0.098 14

Minerals Technologies Inc 0.110 15


Silgan Holdings Inc 0.114 17

Cytec Industries Inc 0.116 18

Greif Inc 0.116 19



Cabot Corp. 0.131 22



Olin Corp. 0.198 25

Domtar Corp. 0.201 26

Note:

Current holdings


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5. Volatility screens.

We calculated beta and standard deviations (StDev) of analyzed stocks on basis of 2-year daily

returns, as we believe this time period and horizon is a consistent measure of recent volatility and

used in practice in valuation firms for measuring volatilities. For beta calculations stocks‟ returns

for regressed on S&P 400 returns. Stocks with lowest standard deviations and betas were

assigned highest ranks and then two distinct ranks for betas and StDevs were averaged to get a

volatility score for each company,

Company Mean Actual Price ESR Rank

Louisiana Pacific Corp -0.198 -0.33 8.07 -1.636% 1

NewMarket Corp 3.416 2.570 198.110 -0.427% 2

Rock-Tenn 1.391 1.18 57.7 -0.366% 3

Worthington Industries Inc 0.315 0.270 17.590 -0.256% 4

AptarGroup Inc 0.601 0.570 52.170 -0.059% 5

RPM International Inc. 0.386 0.380 23.600 -0.025% 6

Martin Marietta Materials 0.391 0.380 75.410 -0.015% 7

Sonoco Products Co 0.46 0.46 32.96 0.000% 8

Intrepid Potash Inc 0.3 0.3 22.63 0.000% 9

Olin Corp 0.229 0.230 19.650 0.005% 10

Albemarle Corp 1.087 1.110 51.510 0.045% 11

Compass Minerals International 1.617 1.650 68.850 0.048% 12

Silgan Holdings 0.539 0.560 38.640 0.054% 13

Greif Bros Corp A 0.612 0.640 44.780 0.063% 14

Sensient Technologies Corp 0.560 0.590 37.900 0.079% 15

Scotts Co A -1.224 -1.18 46.69 0.094% 16

Carpenter Technology Corp 0.512 0.570 51.480 0.113% 17

Packaging Corp of America 0.367 0.4 25.24 0.131% 18

Cabot Corp 0.554 0.630 32.140 0.236% 19

Steel Dynamics Inc 0.107 0.140 13.150 0.251% 20

Commercial Metals Co 0.163 0.200 13.980 0.265% 21

Reliance Steel & Aluminum 0.780 0.910 48.690 0.267% 22

Minerals Technologies Inc 0.897 1.050 56.530 0.271% 23

Domtar Corp 2.242 2.49 81.51 0.304% 24

Valspar Corp 0.480 0.620 43.240 0.324% 25

Ashland Inc 0.986 1.200 57.160 0.374% 26

Cytec Industries Inc 0.472 0.860 44.650 0.869% 27

Note:

Current holdings


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Ticker Company Name Beta Score

LPX LOUISIANA PACIFIC CORPORATION 1.70 1

CRS CARPENTER 1.45 2

WOR WORTHINGT 1.42 3

RS RELIANCE 1.38 4

CYT CYTEC INDUSTRIES INC 1.33 5

ASH ASHLAND INC NEW 1.33 6

UFS DOMTAR CORPORATION 1.33 7

CMC COMMERCIA 1.32 8

STLD STEEL DYN 1.32 9

CBT CABOT CORP 1.32 10

ALB ALBEMARLE CORP 1.30 11

IPI INTREPID POTASH 1.24 12

NEU NEWMARKET CORP 1.23 13

OLN OLIN CORP 1.20 14

RKT ROCK TENN 1.19 15

MTX MINERALS TECHNOLOGIES INC 1.18 16

RPM R P M INTERNATIONAL INC 1.01 17

SXT SENSIENT TECHNOLOGIES CORP 1.01 18

PKG PACKAGING CORPORATION OF AMERICA 0.98 19

GEF GREIF INC 0.92 20

MLM MARTIN MA 0.90 21

VAL VALSPAR CORP 0.85 22

CMP COMPASS MINERALS INTL INC 0.84 23

ATR APTARGROU 0.80 24

SON SONOCO PRODUCTS 0.79 25

SMG SCOTT MIRACLE GROWTH 0.73 26

SLGN SILGAN HO 0.70 27

Ticker Company Name StDev Score

IPI INTREPID POTASH 51.83% 1

GEF GREIF INC 44.74% 2

CRS CARPENTER 43.97% 3

CMP COMPASS MINERALS INTL INC 43.02% 4

CYT CYTEC INDUSTRIES INC 42.47% 5

WOR WORTHINGT 41.55% 6

SLGN SILGAN HO 40.76% 7

ALB ALBEMARLE CORP 39.81% 8

CBT CABOT CORP 39.40% 9

RS RELIANCE 38.64% 10

ATR APTARGROU 38.59% 11

PKG PACKAGING CORPORATION OF AMERICA 38.47% 12

MTX MINERALS TECHNOLOGIES INC 38.20% 13

STLD STEEL DYN 34.98% 14

NEU NEWMARKET CORP 34.51% 15

MLM MARTIN MA 31.93% 16

RPM R P M INTERNATIONAL INC 30.43% 17

LPX LOUISIANA PACIFIC CORPORATION 29.56% 18

UFS DOMTAR CORPORATION 29.14% 19

OLN OLIN CORP 28.98% 20

SON SONOCO PRODUCTS 28.89% 21

SMG SCOTT MIRACLE GROWTH 28.55% 22

CMC COMMERCIA 28.29% 23

RKT ROCK TENN 26.71% 24

VAL VALSPAR CORP 26.26% 25

ASH ASHLAND INC NEW 22.73% 26

SXT SENSIENT TECHNOLOGIES CORP 22.32% 27

Ticker Company Name Volatility Score

IPI INTREPID POTASH 6.5

GEF GREIF INC 11

CRS CARPENTER 2.5

CMP COMPASS MINERALS INTL INC 13.5

CYT CYTEC INDUSTRIES INC 5

WOR WORTHINGT 4.5

SLGN SILGAN HO 17

ALB ALBEMARLE CORP 9.5

CBT CABOT CORP 9.5

RS RELIANCE 7

ATR APTARGROU 17.5

PKG PACKAGING CORPORATION OF AMERICA 15.5

MTX MINERALS TECHNOLOGIES INC 14.5

STLD STEEL DYN 11.5

NEU NEWMARKET CORP 14

MLM MARTIN MA 18.5

RPM R P M INTERNATIONAL INC 17

LPX LOUISIANA PACIFIC CORPORATION 9.5

UFS DOMTAR CORPORATION 13

OLN OLIN CORP 17

SON SONOCO PRODUCTS 23

SMG SCOTT MIRACLE GROWTH 24

CMC COMMERCIA 15.5

RKT ROCK TENN 19.5

VAL VALSPAR CORP 23.5

ASH ASHLAND INC NEW 16

SXT SENSIENT TECHNOLOGIES CORP 22.5


Materials, 2012

78

6. Accrual screens.

According to Sloan, accruals were calculated in such way:

Then Accruals figure was scaled by average total assets and ranked accordingly. The smallest

Accruals by avg assets figure was allocated the highest rank.

7. F-score screens.

Companies with higher F-scores are supposed to be fundamentally stronger, thus, they were

allocated higher ranks. We averaged scores for companies with equal F-scores. According to

Piotroski, F-score is calculated as follows:

Ticker Company Name ΔCA Δcash ΔCL ΔSTD ΔTP Dep Accruals Avg. Total Assets Accruals/Total Assets Rank

SMG SCOTT MIRACLE GROWTH -125.60 42.80 -268.20 -191.80 0.00 61.70 -153.70 2,108.10 -7.29% 27

UFS DOMTAR CORPORATION -66.00 -86.00 -9.00 -14.00 -5.00 376.00 -366.00 5,947.50 -6.15% 26

CMP COMPASS MINERALS INTL INC -5.60 39.20 144.20 151.80 -7.80 64.70 -109.70 2,319.80 -4.73% 25

PKG PACKAGING CORPORATION OF AMERICA 14.02 -40.24 -29.06 -93.95 7.80 162.13 -164.95 4,636.77 -3.56% 24

MLM MARTIN MA -38.36 -44.30 -211.78 -243.66 0.00 173.41 -199.34 6,222.57 -3.20% 23

CRS CARPENTER 216.10 161.60 -19.30 -100.00 0.00 73.60 -99.80 3,504.80 -2.85% 22

OLN OLIN CORP -102.5 -153.8 8.1 -65.6 0.00 99.30 -121.70 4,498.30 -2.71% 21

MTX MINERALS TECHNOLOGIES INC 44.72 27.33 25.67 9.79 -1.27 58.22 -57.98 2,281.06 -2.54% 20

ALB ALBEMARLE CORP 7.42 -60.23 37.00 5.43 -11.98 96.75 -72.65 3,135.95 -2.32% 19

CYT CYTEC INDUSTRIES INC -23.60 32.50 -57.70 -2.60 1.10 142.40 -142.30 7,210.60 -1.97% 18

SON SONOCO PRODUCTS 155.28 17.27 55.83 36.72 -1.43 179.87 -62.42 3,633.59 -1.72% 17

LPX LOUISIANA PACIFIC CORPORATION -56.80 -49.30 4.50 13.00 0.00 78.90 -77.90 4,550.50 -1.71% 16

SXT SENSIENT TECHNOLOGIES CORP 34.57 8.60 2.21 -2.48 -2.74 46.10 -27.57 1,626.72 -1.69% 15

ATR APTARGROU 79.97 1.19 95.53 88.10 0.00 134.24 -62.89 4,192.01 -1.50% 14

STLD STEEL DYN 455.26 204.25 539.10 435.15 5.65 222.61 -69.89 5,784.58 -1.21% 13

GEF GREIF INC 156.11 20.46 148.41 76.40 0.00 144.19 -80.54 7,705.73 -1.05% 12

SLGN SILGAN HO 469.23 221.88 182.35 73.83 0.00 158.80 -19.98 2,577.55 -0.77% 11

ASH ASHLAND INC NEW 554.00 320.00 52.00 68.00 0.00 299.00 -49.00 22,496.00 -0.22% 10

WOR WORTHINGT 52.086 -14.46 206.822 205.58 -1.96 54.43 8.91 3,452.41 0.26% 9

CBT CABOT CORP 117.00 -101.00 117.00 91.00 0.00 144.00 48.00 6,027.00 0.80% 8

NEU NEWMARKET CORP 76.96 1.18 9.64 7.21 -1.76 41.75 29.85 2,254.40 1.32% 7

CMC COMMERCIA 151.05 -176.92 95.90 28.07 0.00 159.58 100.57 7,389.28 1.36% 6

IPI INTREPID POTASH 67.82 -2.76 4.27 0.00 0.00 35.79 30.53 1761.754 1.73% 5

RPM R P M INTERNATIONAL INC 1,058.52 394.78 215.19 -5.58 0.00 72.98 370.00 13,069.34 2.83% 4

RKT ROCK TENN 1,519.90 25.80 687.10 -88.30 0.00 278.30 440.40 13,480.90 3.27% 3

RS RELIANCE 573.80 11.69 67.80 -74.03 0.00 133.10 287.18 5,137.40 5.59% 2

VAL VALSPAR CORP 40.21 10.55 50.03 369.23 -15.65 97.75 235.48 3,684.04 6.39% 1

Note:

Current holdings


Materials, 2012

79

Where F_ROA equals to 1 if ROA is positive and 0 if negative; F_∆ROA=1 if change in ROA

for the year was positive, zero otherwise; F_CFO=1 if CFO (cash-flow from operations/ttl assts)


Materials, 2012

80

Tick

er

NI(

-1)

be

fore

ext

r

NI(

0)

be

fore

ext

r

Tota

l ass

ets

(-1)

, be

g o

f

the

ye

ar

Tota

l ass

ets

(0)

,

be

g o

f th

e y

ear

RO

AC

FOC

FO/T

AD

RO

AA

CC

RU

AL

LT-D

eb

t (-

1)A

ve A

sse

ts (

-1)

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r (-

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bt

(0)

Ave

Ass

ets

(0)

Leve

r (0

)D

leve

rC

A(-

1)C

L(-1

)Li

q(-

1)C

A(0

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L(0)

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(0)

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idEQ

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er

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(-1)

GM

(0)

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rn(-

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k

LPX

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ity-3

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1

GEF

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ity

215.

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174

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03

2

CM

P U

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0.6

149

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5597

326.

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159.

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M U

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00

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ity

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01

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352

720.

289

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902

3.98

20

10.

2087

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310

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4911

0.93

616

16

14.5

PK

G U

S Eq

uit

y20

5.43

515

8.02

72,

152.

842,

224.

271

345.

514

10

157

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188.

560.

2608

7181

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318.

390.

3513

490

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041

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558

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2.15

71

10.

2185

10.

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01.

1313

461.

1779

61

614

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N U

S Eq

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4.64

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3.17

32,

214.

352,

176.

021

359.

582

11

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0.72

52,

195.

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4057

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88.4

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550.

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864.

495

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241

00.

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10.

1478

01.

3871

071.

6126

81

614

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SMG

US

Equ

ity

200.

512

1.9

2,22

0.10

2,16

4.00

112

2.1

10

143

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922

791.

82,

108.

100.

3755

990

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8.10

736.

81.

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992.

5046

8.6

2.11

81

10.

3712

60.

3537

01.

3053

471.

3104

16

14.5

ATR

US

Equ

ity

173.

589

183.

631,

956.

192,

032.

721

261.

042

11

125

8.77

31,

994.

460.

1297

4625

4.91

2,09

6.01

0.12

1617

11,

063.

9842

3.32

22.

513

1,14

3.95

518.

849

2.20

50

10.

3360

70.

329

01.

0616

131.

1497

81

720

.5

NEU

US

Equ

ity

177.

125

206.

907

1,02

5.19

1,06

2.74

118

4.59

81

10

217.

544

1,04

3.97

0.20

8382

232.

601

1,12

7.20

0.20

6353

160

2.77

520

6.38

72.

921

679.

731

216.

024

3.14

71

10.

2867

80.

2601

01.

7532

252.

0226

51

720

.5

SON

US

Equ

ity

201.

474

218.

044

3,06

2.58

3,28

1.01

124

5.27

51

11

603.

941

3,17

1.80

0.19

041

1232

.966

3,63

3.59

0.33

9324

01,

157.

5278

0.64

91.

483

1,31

2.79

836.

483

1.56

91

10.

1861

10.

1682

01.

3466

171.

3712

17

20.5

WO

R U

S Eq

uit

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4.03

125.

51,

363.

831,

520.

351

153.

511

01

250.

2414

42.0

90.

1735

2625

0.25

1,59

3.80

0.15

7015

178

2.29

379.

80.

877

891.

6452

51.

698

11

14.4

114

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11.

6066

171.

4724

80

720

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ALB

US

Equ

ity

337.

359

464.

363

2,77

1.56

3,06

8.08

148

7.35

91

11

851.

927

2,91

9.82

0.29

1774

749.

257

3,13

5.95

0.23

8925

11,

348.

2036

4.17

73.

702

1,35

5.62

401.

178

3.37

90

10.

3157

0.34

061

0.85

2504

0.93

511

18

25

CYT

US

Equ

ity14

4.8

168.

43,

559.

403,

673.

901

211.

81

11

641.

53,

616.

650.

1773

7463

5.9

3,60

5.30

0.17

6379

11,

311.

4057

9.6

2.26

31,

287.

8052

1.9

2.46

81

10.

2318

50.

2291

00.

7721

250.

8364

71

825

IPI U

S Eq

uit

y45.2

8510

9.41

176

8.99

828.

884

117

3.86

91

11

00

00

120

8.82

245

.405

4.59

927

6.64

549

.675

5.56

91

00.

2952

10.

4204

10.

4672

410.

5344

18

25

STLD

US

Equ

ity

129.

599

265.

692

5,12

9.87

5,58

9.93

148

6.35

51

11

2,37

7.90

5,35

9.90

0.44

3646

1,93

6.02

5,78

4.58

0.33

4687

12,

000.

003,

458.

810.

578

2,45

5.26

3,60

8.63

0.68

10

0.1

0.11

151

1.23

1.43

18

25

SXT

US

Equ

ity

107.

144

120.

484

1,59

1.69

1,59

9.27

114

2.87

71

11

324.

361,

595.

480.

2032

9931

2.42

21,

626.

720.

1920

571

672.

305

205.

063

3.27

970

6.87

207.

275

3.41

10

0.30

746

0.31

431

0.83

4446

0.89

465

18

25

Not

e:

>0, zero otherwise; F_Accrual=1 if CFO>ROA, zero

otherwise; F_∆Margin=1 if Gross margin for FY 2011

is great than that of FY 2010, zero otherwise;

F_∆Turn=1 if FY 2011 assets turnover is greater than

that of FY 2010, zero otherwise; F_∆Lever=1 if long-

term debt ratio declined, zero otherwise; F_∆Liquid=1

if firm‟s current ratio in FY 2011 was higher than in

2010; EQ_Offer=1 if did not issue any equity in 2011,

zero otherwise. F-Scores for each company are

presented to the left.

8. External financing screens.

We estimated ∆Xfin as ∆Debt+∆Equity, where:

Firms with lower levels of ∆Xfin were allocated

higher ranks.


Materials, 2012

81

Company XFIN Rank

Scotts Miracle-Gro Company -0.0945 27

Domtar Corp. -0.09204 26

Cytec Industries Inc -0.07954 25

Minerals Technologies Inc -0.05486 24

Albemarle Corp. -0.03335 23

Valspar Corp. -0.02573 22

Louisiana Pacific Corp. -0.02183 21

Sensient Technologies Corp. -0.01427 20

Aptargroup Inc -0.01373 19

Compass Minerals International Inc -0.00153 18

Newmarket Corp. -0.00015 17


Intrepid Potash Inc 0.014498 15


Cabot Corp. 0.031427 13

Olin Corp. 0.042612 12






Greif Inc 0.149504 6


Silgan Holdings Inc 0.23505 4Carpenter Technology Corp. 0.312189 3

Ashland Inc 0.348668 2


Note:

Current holdings


Materials, 2012

82

Appendix B.

1. Management Quality Screening Results:

Company

CEO duration,

months

CFO duration,

months Sum Score

Greif Bros Corp A 5 16 21 1

Albemarle Corp 7 16 23 2

AptarGroup Inc 4 31 35 3

Valspar Corp 10 38 48 4

Commercial Metals Co 6 44 50 5

Minerals Technologies Inc 49 16 65 6

Carpenter Technology Corp 21 45 66 7

Cytec Industries Inc 28 47 75 8

Cabot Corp 40 38 78 9

Intrepid Potash Inc 41 37 78 10

Steel Dynamics Inc 4 80 84 11

Louisiana Pacific Corp 88 4 92 12

Martin Marietta Materials 28 82 110 13

Domtar Corp 28 83 111 14

Ashland Inc 102 34 136 15

Silgan Holdings 61 80 141 16

Packaging Corp of America 21 145 166 17

Scotts Co A 119 55 174 18

Compass Minerals International 72 112 184 19

NewMarket Corp 118 82 200 20

Sonoco Products Co 129 72 201 21

Olin Corp 124 82 206 22

Worthington Industries Inc 175 40 215 23

RPM International Inc. 114 114 228 24

Rock-Tenn 138 127 265 25

Reliance Steel & Aluminum 144 144 288 26

Sensient Technologies Corp 174 129 303 27

Note:

Current holdings


Materials, 2012

83

2. Technical and Expansion Effort Screening Results:

Company CAPEX, mln

Mkt Cap,

mln

(CAPEX/Mkt

Cap)/Average Sub-

Industry CAPEX/Mkt Cap Score

Worthington Industries Inc -22.03 1565.86 13.09% 1

RPM International Inc. -39.83 3068.63 19.79% 2

Carpenter Technology Corp -79.6 2544.11 29.11% 3

Valspar Corp -66.47 3352.04 30.24% 4

NewMarket Corp -53.52 2655.63 30.73% 5

Reliance Steel & Aluminum -156.4 3652.12 39.84% 6

Louisiana Pacific Corp -21.4 1106.72 44.81% 7

Commercial Metals Co 73.22 1357.2 50.19% 8

Martin Marietta Materials -155.36 3448.2 51.35% 9

Steel Dynamics Inc -167.01 2878.19 53.98% 10

Sensient Technologies Corp -72.2 1891.85 58.20% 11

Scotts Co A -72.7 2711.68 58.86% 12

Albemarle Corp -190.57 4576.2 63.51% 13

AptarGroup Inc -179.69 3438 65.51% 14

Sonoco Products Co -173.37 3302.95 66.21% 15

Rock-Tenn -199.4 3430.38 73.32% 16

Minerals Technologies Inc -52.06 998.04 79.55% 17

Silgan Holdings -173.01 2700.31 80.30% 18

Ashland Inc -201 3442.92 82.71% 19

Cytec Industries Inc -116.5 2031.97 87.43% 20

Domtar Corp -144 3398.84 88.60% 21

Greif Bros Corp A -165.87 2108.82 98.58% 22

Compass Minerals International -107.4 2273.65 121.36% 23

Packaging Corp of America -280.21 2481.66 142.42% 24

Intrepid Potash Inc -137.11 1701.95 176.85% 25

Olin Corp -200.9 1573.97 180.83% 26

Cabot Corp -230 1582.47 205.91% 27

Note:

Current holdings


Materials, 2012

84

3. Cost Control Screening Results:

Company Gross Margin

Gross margin/ Average

Sub-Industry GM Score

Louisiana Pacific Corp 8.31 0.487962419 1

Martin Marietta Materials 17.62 0.589100635 2

Commercial Metals Co 7.76 0.645054032 3

Silgan Holdings 14.78 0.719922065 4

Domtar Corp 18.98 0.735089078 5

Cabot Corp 17.99 0.780138768 6

Minerals Technologies Inc 20.31 0.804994055 7

Olin Corp 19.74 0.856027754 8

Sonoco Products Co 16.82 0.906738544 9

Compass Minerals International 28.02 0.907971484 10

Cytec Industries Inc 22.91 0.908045977 11

Greif Bros Corp A 18.86 0.918655626 12

Steel Dynamics Inc 11.15 0.926849543 13

Rock-Tenn 18.37 0.990296496 14

Scotts Co A 35.37 1.001415629 15

NewMarket Corp 26.01 1.030915577 16

Ashland Inc 24.79 1.075021683 17

Packaging Corp of America 20.68 1.114824798 18

Intrepid Potash Inc 42.05 1.190543601 19

Worthington Industries Inc 14.58 1.211970075 20

Carpenter Technology Corp 14.86 1.23524522 21

Sensient Technologies Corp 31.43 1.245739199 22

Valspar Corp 33.21 1.316290131 23

Albemarle Corp 34.6 1.371383274 24

AptarGroup Inc 32.9 1.602532879 25

RPM International Inc. 41.42 1.641696393 26

Reliance Steel & Aluminum 22.78 1.893599335 27

Note:

Current holdings


Materials, 2012

85

4. Operational Efficiency Screening Results:

Company ROIC

ROIC/Average Sub-

Industry ROIC Score

Adjusted

Score

Ashland Inc 0 0 1 2.5

Commercial Metals Co 0 0 2 2.5

Louisiana Pacific Corp 0 0 3 2.5

Valspar Corp 0 0 4 2.5

Martin Marietta Materials 5.04 0.422110553 5 5

Compass Minerals International 17.39 0.563512638 6 6

Cytec Industries Inc 8.89 0.58679868 7 7

Olin Corp 8.52 0.597056762 8 8

Minerals Technologies Inc 9.53 0.629042904 9 9

Sensient Technologies Corp 9.69 0.63960396 10 10

RPM International Inc. 10.63 0.701650165 11 11

Rock-Tenn 7.45 0.726829268 12 12

Scotts Co A 14.94 0.802794197 13 13

Cabot Corp 12.07 0.845830413 14 14

Greif Bros Corp A 9.4 0.864765409 15 15

Intrepid Potash Inc 16.82 0.903815153 16 16

Domtar Corp 13.08 0.951272727 17 17

Sonoco Products Co 10.82 1.055609756 18 18

AptarGroup Inc 11.58 1.065317387 19 19

Silgan Holdings 12.76 1.173873045 20 20

Packaging Corp of America 12.43 1.212682927 21 21

Reliance Steel & Aluminum 8.61 1.38647343 22 22

Albemarle Corp 21.16 1.39669967 23 23

Worthington Industries Inc 8.91 1.434782609 24 24

Steel Dynamics Inc 9.08 1.46215781 25 25

Carpenter Technology Corp 10.72 1.726247987 26 26

NewMarket Corp 28.48 1.879867987 27 27

Note:

Current holdings

materials final report

Economy & Finance