stock analysis: materials andrew givens march 6, 2007 student investment management
DESCRIPTION
Agenda Sector Recap Deltic Timber Company Overview Deltic Timber Valuation Dow Chemical Company Overview Dow Valuation RecommendationTRANSCRIPT
Stock Analysis: Materials
Andrew Givens
March 6, 2007Student Investment Management
Executive Summary• Sell entire position of Deltic Timber
– 7,000 shares• Buy equivalent amount of Dow
Chemicals (DOW)– 8,177 shares
• Maintain current underweighting in materials sector
Agenda• Sector Recap• Deltic Timber Company Overview• Deltic Timber Valuation• Dow Chemical Company Overview• Dow Valuation• Recommendation
Sector Recap• Smallest sector in S&P 500
– 3.05% weight– SIM currently underweight (1.5%)
• Highest gainer YTD– Up 5.33%
• Sector trading at historic levels based on– Price to book value– Price to sales
Sector RecapDeltic Timber Corp.
(DEL)Dow Chemicals
(DOW) Recommendations
Sector Recap• Remain underweight in Materials
– Expensive based on valuation analysis– Do not want to “chase” the money after an
excellent first two months of the year– Cyclical industry
• Economy appears to be slowing– Manufacturing utilization rates and MPI both down from
local highs– Expect sector to follow suit
Sector RecapDeltic Timber Corp.
(DEL)Dow Chemicals
(DOW) Recommendations
Deltic Timber Corporation (DEL)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Timber company with 438,000 acres of timber– Arkansas– Northern Louisiana
• Four operating segments– Woodlands– Mills– Real Estate– Del-Tin Fiber (50% equity stake)
• Key economic drivers– New home starts– Growth of GDP
Deltic Timber Corporation (DEL)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• New home starts– Biggest raw
material input is lumber
– Increases & decreases in new home starts will drive lumber prices
Deltic Timber Corporation (DEL)• Projections for new home starts
– Average quarterly home starts (millions)
• Decreased home starts lower lumber prices– Deltic should experience lower sales & a margin
squeeze
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
Historic Projected*
2002 2003 2004 2005 2006 2007 20081.7 1.85 1.96 2.07 1.80 1.62 1.70
*Freddie Mac 2007 Economic Outlook
Deltic Timber Corporation (DEL)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• DCF Valuation– Assumptions
• Discount Rate of 8.86% (Deltic’s WACC)• Terminal Growth Rate of 5%• Capital Expenditures = Depreciation in perpetuity
– Implied equity value per share of $38.23• Currently trading at $49.00 (Monday close)
Deltic Timber Corporation (DEL)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• DCF Sensitivity Analysis
Sensitivity Analysis of WACC and Terminal Growth Rate on Implied Value Per Share
WACC38.23 5.86% 6.86% 7.86% 8.86% 9.86% 10.86% 11.86%4.25% $103.65 $62.30 $43.96 $33.65 $27.07 $22.53 $19.214.50% $120.49 $67.70 $46.44 $35.00 $27.89 $23.06 $19.574.75% $144.90 $74.39 $49.31 $36.52 $28.79 $23.63 $19.955.00% $183.44 $82.87 $52.70 $38.23 $29.78 $24.25 $20.375.25% $253.43 $93.98 $56.72 $40.18 $30.87 $24.93 $20.815.50% $419.83 $109.17 $61.60 $42.42 $32.10 $25.67 $21.295.75% $1,322.50 $131.18 $67.64 $45.02 $33.47 $26.48 $21.81
Term
inal
Gro
wth
Deltic Timber Corporation (DEL)• Multiples valuation
– Relative to Materials Sector
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
High Low Mean CurrentPrice to forward earnings 5.32 1.89 2.93 3.84
Price to EBITDA 2.83 1.22 2.02 2.21
Price to Sales 3.54 2.24 2.88 3.06
Price to Book 1.25 0.77 1.00 0.97
Price to Adjusted Cash Flow 3.27 1.52 2.24 2.82
Deltic Timber Corporation (DEL)• Multiples valuation
– Relative to S&P 500
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
High Low Mean CurrentPrice to forward earnings 4.78 1.64 2.57 3.88
Price to EBITDA 2.71 1.35 1.85 2.04
Price to Sales 3.02 1.79 2.38 2.77
Price to Book 1.28 0.73 0.97 1.05
Price to Adjusted Cash Flow 2.67 1.45 1.83 2.42
Deltic Timber Corporation (DEL)• Multiples valuation
– Absolute
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
High Low Mean CurrentTarget
MultipleTarget # per
shareTarget Price
Price to forward earnings 71.8 25.6 38.8 58.20 38.8 1.02 $39.58
Price to EBITDA 19.5 10.9 14.2 14.50 14.2 2.80 $39.76
Price to Sales 4.46 2.78 3.56 4.00 3.56 11.10 $39.52
Price to Book 3.7 2.3 2.9 3.00 2.9 13.88 $40.25
Price to Adjusted Cash Flow 30.8 17.0 21.3 27.70 21.3 1.79 $38.02
Deltic Timber Corporation (DEL)• Both DCF and multiples analysis give prices in
$38-$40 range• Price target of $38.83
– Weighted average• DCF (50%)• Multiples price targets (12.5% each)
– Implied downside of 21%• Recommendation is to sell entire position
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Operates in Chemicals Industry within Materials Sector• Engages in manufacture and sale of:
– Chemicals– Plastic Materials– Agricultural Products
• $40.6 billion market cap• $49.2 billion revenues• Currently trading at $41.76 (Monday close)
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Operates in Chemicals Industry within Materials Sector• Engages in manufacture and sale of:
– Chemicals– Plastic Materials– Agricultural Products
• $40.6 billion market cap• $49.2 billion revenues• Currently trading at $41.76 (Monday close)
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
31-Dec-06 31-Dec-05 31-Dec-04
49,124,000 46,307,000 40,161,000 41,526,000 38,276,000 34,244,000
7,598,000 8,031,000 5,917,000
4,307,000 5,244,000 3,398,000
3,724,000 4,515,000 2,797,000 Net Income
Operating Income or Loss
Gross Profit
PERI OD ENDING
Total RevenueCost of Revenue
• Income Statement
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Balance Sheet31-Dec-06 31-Dec-05 31-Dec-04
Cash 2,757,000 3,806,000 3,108,000 Receivables 8,241,000 8,247,000 7,741,000 Inventory 6,058,000 5,319,000 4,957,000
17,209,000 17,404,000 15,890,000 13,722,000 13,537,000 13,828,000 14,193,000 14,550,000 15,632,000
45,581,000 45,934,000 45,885,000
Payables 9,310,000 9,384,000 9,645,000 ST debt 1,291,000 1,279,000 861,000
10,601,000 10,663,000 10,506,000 8,036,000 12,524,000 11,629,000 7,515,000 4,692,000 8,730,000
999,000 1,395,000 1,301,000 1,365,000 336,000 1,449,000
28,516,000 30,610,000 33,615,000 16,987,000 14,719,000 11,527,000
(970,000) (559,000) (995,000)830,000 661,000 274,000
-2235000 -1950000 (989,000)17,065,000 15,324,000 12,270,000
Other LT Assets
Other Stockholder EquityStockholders' Equity
Retained EarningsTreasury StockCapital Surplus
Total Liabilities
Long Term DebtOther LiabilitiesDeferred Long Term Liability ChargesMinority Interest
Liabilities
Total Current Liabilities
Total Assets
Total Current AssetsPP&E
PERI OD ENDING
AssetsCurrent Assets
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• DCF Valuation Assumptions– Discount Rate of 10% (higher than actual WACC of
8.44%)– Perpetuity Growth Rate of 3.25%
• Meant to mimic GDP growth
– Slow revenue growth• Typical for such a large company
• Implied value per share of $50.76
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• DCF Sensitivity Analysis
Sensitivity Analysis of Discount Rate and Terminal Growth Rate on Value Per ShareDiscount Rate
$50.76 7.00% 8.00% 9.00% 10% 11.00% 12.00% 13.00%2.50% $79.69 $65.38 $55.46 $48.18 $42.60 $38.19 $34.622.75% $82.69 $67.19 $56.64 $48.98 $43.17 $38.61 $34.933.00% $86.07 $69.19 $57.91 $49.84 $43.77 $39.04 $35.253.25% $89.90 $71.39 $59.29 $50.76 $44.41 $39.50 $35.59
3.50% $94.27 $73.84 $60.80 $51.75 $45.10 $39.99 $35.953.75% $99.32 $76.57 $62.45 $52.82 $45.83 $40.51 $36.334.00% $105.21 $79.65 $64.27 $53.98 $46.61 $41.06 $36.73Te
rmin
al G
row
th R
ate
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Multiples Analysis– Relative to Materials Sector
High Low Mean CurrentPrice to forward earnings 0.97 0.64 0.77 0.70
Price to EBITDA 1.82 0.58 0.85 0.82
Price to Sales 0.96 0.59 0.87 0.64
Price to Book 1.55 0.73 1.34 0.79
Price to Adjusted Cash Flow 1.44 0.58 0.92 0.67
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Multiples Analysis– Relative to S&P 500
High Low Mean Current
Price to forward earnings 1.28 0.56 0.69 0.70
Price to EBITDA 1.89 0.53 0.91 0.76
Price to Sales 0.85 0.5 0.67 0.57
Price to Book 1.51 0.71 1.23 0.85
Price to Adjusted Cash Flow 1.23 0.49 0.82 0.59
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Multiples Analysis– Absolute
High Low Mean CurrentTarget
MultipleTarget #
per shareTarget Price
Price to forward earnings 21.8 8.2 10.8 10.4 10.80 4.55 $49.14
Price to EBITDA 15.1 3.9 6.9 5.30 6.90 7.25 $50.03
Price to Sales 1.34 0.7 1.01 0.83 1.01 51.20 $51.71
Price to Book 4.8 2.0 3.6 2.4 3.60 14.70 $52.92
Price to Adjusted Cash Flow 15.4 5.4 9.5 6.7 9.50 5.34 $50.73
Dow Chemical Co. (DOW)
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Both DCF and multiples analysis give prices in the $49-$52 range
• Price target of $50.83• Upside of 21.7%
Recommendations
Sector RecapDeltic Timber Corp
(DEL)Dow Chemicals
(DOW) Recommendations
• Unload entire Deltic position– 7,000 shares
• Replace with Dow Chemicals– 8,177 shares
• Maintain underweighting in an overvalued sector
Thank You
Andrew GivensFisher College of [email protected]