materials sector analysis

Fisher College of Business – Student Investment Management

Materials Sector Analysis

Theo Constantinou

Vikram Rao

Ryan Rettig


Overview

• Sector Size and Composition

• Business/Economic Analysis

• Relative Valuation

• Recommendations

• Current Materials Sector SIM Holding

• Questions


Sector Composition

• Chemicals– Commodity Chemicals– Diversified Chemicals– Specialty Chemicals– Industrial Gasses

• Metals and Mining– Aluminum– Gold– Silver– Steel– Other Precious Metals and Materials

• Containers and Packaging– Metal, Plastic, and Glass Containers– Paper Packaging

• Forestry and Paper Products– Timber– Paper Products

• Construction Materials


S&P 500 and SIM Sector Weights (as of 4/30/2009)

Sector S&P 500 Weight SIM Weight +/-

Consumer Discretionary 9.52% 7.93% -1.59%

Consumer Staples 12.04% 13.06% 1.02%

Energy 12.51% 11.31% -1.20%

Financials 12.19% 8.14% -4.05%

Health Care 13.83% 17.74% 3.90%

Industrials 10.44% 9.44% -1.00%

Information Technology 18.40% 19.92% 1.52%

Materials 3.37% 3.88% 0.51%

Telecommunication Services 3.71% 2.40% -1.32%

Utilities 3.98% 2.50% -1.49%

Cash 0.00% 3.69% 3.69%


S&P 500 Weights by Sector (as of 4/30/2009)


Historical Performance – Sectors (as of 4/30/2009)Market Cap (in

millions)MTD YTD 5 Years +/- vs. S&P 500 YTD

S&P 500 7,585,482 9.4% -3.4% -4.8%

Consumer Discretionary721,919 18.5% 8.3% -6.2%

11.7%

Consumer Staples 913,657 3.0% -8.6% 4.4% -5.2%

Energy 948,939 4.8% -7.8% 13.4% -4.4%

Financials 924,373 22.2% -13.9% -12.5% -10.5%

Health Care 1,049,425 -0.9% -9.3% -0.8% -5.9%

Industrials 792,036 17.7% -7.9% -1.6% -4.5%

Information Technology 1,395,938 12.0% 16.5% -5.8% 19.9%

Materials 255,334 15.1% 11.9% -1.4% 14.5%

Telecommunication Services 281,800 2.2% -6.4% 3.8% -3.0%

Utilities 302,059 0.4% -11.5% 8.3% -8.1%


S&P 500 vs. SPBMS Index Over Past 2 Years


S&P 500 vs. SPBMS Index Over Past 20 Years


10 Year Cumulative Total Return


Top 10 Companies (as of 4/30/2009)

Company Ticker IndustryMarket

Cap ($Mil)

Price as of

4/30/09Beta P/E

1 Year Return

BHP Billiton Ltd. BHPDiv. Metals &

Mining 133,950 $48.14 1.63 19.8 -34.97%

BHP Billiton PLC BBLDiv. Metals &

Mining 116,420 $41.84 1.74 16.7 -36.48%

Companhia Vale do Rio Doce

RIODiv. Metals &

Mining 87,146 $16.51 1.93 14.1 -51.19%

Rio Tinto PLC RTPDiv. Metals &

Mining 52,305 $162.95 1.94 13.3 -62.53%

Monsanto Co. MONFertilizers & Agricultural Chemicals

46,333 $84.89 0.97 16.7 -27.91%

BASF S.E. BASFY Div. Chem. 34,857 $37.95 1.41 23.8 -37.41%

ArcelorMittal SA MT Steel 32,210 $23.58 2.01 22.4 -69.05%

Anglo American PLC

AAUKDiv. Metals &

Mining28,357 $10.77 2.16 7.5 -63.29%

POSCO PKX Steel 26,843 $76.97 1.76 21.2 -29.32%

Potash Corp. Of Saskatchewan Inc.

POTFertilizers & Agricultural Chemicals

25,540 $86.49 1.81 9.9 -51.47%

Average: 1.736 16.54 -46.36%


Largest Market Cap vs. SPBMS (Materials)


Business Analysis

• Highly cyclical

• Growth through acquisition– Dow Chemical Acquires Rohm and Haas

• International exposure– Weaker Dollar => High Commodity Prices

• Commodity prices higher without significantly weak Dollar

• Exposed to wide array of industries


Business Analysis – 5 Forces Analysis

• Suppliers - High– Oligopolies (Oil companies for Chemical companies & Mining

companies for Metals companies)• Customers – High/Middle

– High in some industries (Auto Makers)– Middling in some industries (Chemical)

• Rivalry - High– Global competition & cheap imports– Mature companies fighting for market share– Many mergers & acquisitions during economic booms

• Threat New Entrants – Low– High entry barrier

• High capital costs• High fixed costs

• Substitutes - Low


Materials vs. Commodities/GDP*79 % of movement in the Materials sector explained by the commodity index over past 10 years

*63% of movement in the Materials sector is explained by real GDP over past 10 years

*77% of movement in the Materials sector is explained by S&P 500 index over past 5 years


S&P 500 and Real GDP Trends


Export Trends


Economic Analysis – Life Cycle


Forward P/E (Absolute)

Forward P/E (Relative to S&P500)

Forward P/E (Absolute)

VALUATION


VALUATIONTrailing P/E (Absolute)

Trailing P/E (Relative to S&P500)


VALUATIONP/BV (Absolute)

P/BV (Relative to S&P500)


VALUATION (Industry)P/BV (Aluminum)

P/BV (Diversified Chemicals)

P/BV (Containers Metal/Glass)


VALUATION (Industry)Trailing P/E (Aluminum)

Trailing P/E (Diversified Chemicals)

Trailing P/E (Containers Metal/Glass)


VALUATIONP/CF (Absolute)

P/CF (Relative to S&P500)


Conclusion

• Cyclical business – materials sector will start to outperform more rapidly

• Increase in exports expected

• Expected future GDP/ global economic growth

• Eventual rise in commodity prices

• Commodity prices high despite dollar value


Recommendation

• Remain overweight by 51 bps– Forward looking, if the economy recovers, an even more

overweight position may be in order.• Relative to specific Industries in the Material Sector

• Current SIM Weight – Overweight at 3.88%

• S&P 500 Weight– 3.37%


Current / Potential SIM Holdings vs. Overall SIMAssuming Initial Investment of $300,000

Company Dow Chemicals Alcoa Greif S&P (3/30 – 5/8)

Ticker DOW AA GEF -

Beta 2.35 2.18 1.55 1

Purchase Price $8.26 $6.69 $33.07 $787.53

Current Price $17.50 $10.01 $49.24 $929.23

Shares 36,260 44,843 9,072 381

Market Value $580,160 $448,878 446,705 $354,037

% SIM 4.00% - - -

% Gain/(Loss) 93% 50% 49% 15%

Unrealized Gain/(Loss) $280,000 $148,878 $146,694 $53,988


Questions?

materials sector analysis

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