Materials sector analysis Irene Lipin Ryan Mayes Mike Longo Fisher College of Business – Student Investment Management.
Download ReportTranscript Materials sector analysis Irene Lipin Ryan Mayes Mike Longo Fisher College of Business – Student Investment Management.
Materials sector analysis Irene Lipin Ryan Mayes Mike Longo Fisher College of Business – Student Investment Management Overview • • • • Sector & Business Analysis Economic Analysis Financial Analysis Recommendations • Q&A Fisher College of Business – Student Investment Management Sector & Financial Analysis Business Analysis Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Sector Composition •Chemicals •Commodity Chemicals •Diversified Chemicals •Specialty Chemicals •Industrial Gasses •Fertilizers •Metals and Mining •Manufacturing of Aluminum •Mining/Extracting of Gold & Silver •Steel •Other Precious Metals and Materials •Containers and Packaging • Metal, Plastic, Cardboard, and Glass Containers • Paper Packaging •Forestry and Paper Products • Timber, Related Wood Products • All Grades of Paper •Construction Materials •Sand •Clay •Gypsum •Aggregates Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management S&P500 & SIM Sector Weights as of 1/31/2010 SECTO R S&P 500 WEIGHT SIM WEIGHT +/- 9.67% 6.99% -2.68% Consumer Staples 11.65% 11.96% 0.31% Energy 11.38% 11.90% 0.51% Financials 14.71% 11.37% -3.34% Health Care 13.17% 14.30% 1.12% Industrials 10.51% 12.36% 1.85% Information Technology 18.80% 19.04% 0.24% Materials 3.41% 3.46% 0.05% Telecommunication Services 2.98% 3.27% 0.30% Utilities 3.72% 2.94% -0.78% Cash 0.00% 2.32% 2.32% Dividend Receivables 0.00% 0.08% 0.08% Consumer Discretionary 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% S&P 500 Weight SIM Weight Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Major Companies MARKET CAP ($Mil) PRICE AS OF 2/7/2010 Div. Metals & Mining 192,560 $69.20 1.47 32.96 BBL Div. Metals & Mining 162,790 $58.50 1.47 27.73 Vale VALE Div. Metals & Mining 134,180 $25.74 1.70 45.32 Monsanto Co. MON Agri. Chem. 41,880 $76.74 .74 27.95 POSCO PKX Steel 34,860 $111.90 1.92 9.96 Potash Corp. of Saskatchewan Inc. POT Agri. Chem. 30,630 $103.48 1.25 21.43 The Dow Chemical Co. DOW Chemicals 30,330 $26.52 2.35 120.56 Freeport-McMoRan Cooper & Gold, Inc. FCX Div. Metals & Mining 30,200 $70.23 1.88 12.32 El du Pont de Nemours & Co. “DuPont” DD Chemicals 29,580 $32.73 1.39 17.02 Goldcorp, Inc. GG Gold 26,020 $13.35 2.21 92.55 1.585 27.84 COMPANY TICKER INDUSTRY BHP Billiton Ltd. BHP BHP Billiton PLC Median: Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis BETA P/E Recommendation Management Industry and Business Cycle • Mature Sector • Highly Cyclical • Sensitive to Fluctuations in the Business Cycle • Relies on Strong Economy • Sensitive to Supply / Demand Fluctuations • Prices of Raw Materials Largely Demand Driven •No New Buyers •Repeat Purchase •Can get Boring •Fewer BIG players • Growth through Acquisition • Growth through R&D • Exposed to Wide Array of Industries • High Barriers to Entry • Threat of New Competition is Low • High Capital / Fixed Costs • Increased Environmental Regulation Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Economic Analysis Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management Materials versus S&P 500 10 Yr Performance 120% 100% 80% 60% 40% 30% 20% 0% -20% -23% -40% -60% 2000 2001 2002 2003 2004 Materials 2005 2006 2007 2008 2009 2010 S&P 500 Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management Recent Key Economic Drivers • Robust demand from emerging markets • Chinese economy • Sustained demand from developed markets • United States, European Union • Spring-time homebuilding • Weak Dollar • Upward price pressure on commodities / raw materials • Cheapens American exports Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management Now, however… • Tightening Chinese monetary authority • Unfolding European debt crisis • Strengthening dollar/Weakening Euro • Downward price pressure on commodities / raw materials • Raises prices of American exports Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management Housing Starts vs. Sector Performance Correlation Coefficient (R) = - .22 2.5000 120% 100% 2.0000 80% 60% 1.5000 40% 1.0000 20% 0% 0.5000 -20% 0.0000 -40% 1999 2000 2001 2002 2003 2004 Housing Starts 2005 2006 2007 2008 Materials Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management Commodities vs. Sector Performance Correlation Coefficient (R) = .67 220 20% 10% 195 0% -10% 170 -20% -30% 145 -40% 120 -50% 1999 2000 2001 2002 2003 2004 Commodities 2005 2006 2007 2008 2009 Materials Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management $ Value vs. Sector Performance Correlation Coefficient (R) = .79 $1.75 $1.65 95% $1.55 75% $1.45 $1.35 55% $1.25 35% $1.15 $1.05 15% $0.95 -5% $0.85 $0.75 -25% 2000 2001 2002 2003 2004 2005 Dollars per Euro 2006 2007 2008 2009 2010 Materials Sector & Business Financial Analysis Analysis Fisher CollegeEconomic of Business – Student Investment Analysis Recommendation Management Financial Analysis Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Revenue Growth Materials vs. S&P Materials 250 209.1 200 150 156.0300 Average increase 1.7% 100 50 2000 2001 2002 2003 2004 2005 Revenue per share 2006 2007 2008 2009 average S&P 500 1,100 1,000 900 800 700 600 500 1061.2800 824.6400 Average increase 3.4% 2000 2001 2002 2003 2004 S&P 2005 2006 2007 2008 2009 Median Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis EBITDA Growth Materials vs. S&P Materials 22.0% 19.9% % of sales 18.0% 14.0% 13.6% 10.0% 2000 2001 2002 2003 2004 2005 EBITDA 2006 2007 2008 2009 Median S&P 500 27.0% 25.6% % of sales 23.0% 19.0% 17.2% 15.0% 2000 2001 2002 2003 2004 S&P 2005 2006 2007 2008 2009 Median Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Absolute Valuation: Price / Forward Earnings 32x 32x 29x 27x 22x 17.1X 17x 16.7X 12x 10x 7x 2000 2001 2002 2003 2004 2005 Forward P/E 2006 2007 2008 2009 2010 Median Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Relative Valuation: Forward P/E 1.9x 1.7x 1.5x 1.3x 1.2X 1.1x 1.0X 0.9x 0.7x 0.5x 2000 2001 2002 2003 2004 2005 2006 Forward P/E Relative to S&P 500 2007 2008 2009 2010 Median Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Absolute Valuation: Price / Book 4.0x 3.7x 3.5x 3.0x 2.7X 2.5X 2.5x 2.0x 1.5x 1.3x 1.0x 2000 2001 2002 2003 2004 2005 Price/Book 2006 2007 2008 2009 2010 Median Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Relative Valuation: Dividend Yield 3.0x 5.0% 4.5% 2.5x 4.0% 3.5% 2.0x 3.0% 2.5% 1.5x 2.0% < 2.0% 1.5% 1.2X 1.0x 1.0% 0.9X 0.5% 0.5x 0.0% 2000 2001 2002 2003 2004 2005 Materials Yield / S&P 500 Yield 2006 2007 2008 2009 2010 Absolute Yield Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Technical Valuation: Moving Avgs. 275 225 Materials 175 50 Day MA 200 Day MA 125 75 Sector & Business Analysis Financial AnalysisManagement Recommendation Fisher College Economic of Business – Student Investment Analysis Recommendation Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Long-term outlook: Bullish • Materials Sector responds well to economic recovery • Impending inflation will “re-devalue” the dollar • High growth potential in emerging markets and chemical agriculture segments Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Short-term outlook: Bearish • Tightening Chinese monetary policy • Slower bank lending • Deutsche Bank mid-March rate hike • Recent rally in the Dollar • EU crisis: may continue? • Tumbling commodities (fewer financial buyers) • Weak confidence, modest industrial spending outlook • Bottom line… 10-week horizon looks pretty bad Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Recommendation • Reduce SIM fund exposure to 150 bps underweight. Sector & Business Financial Analysis Analysis Fisher College Economic of Business – Student Investment Analysis Recommendation Management Q&A We Thank You, Materials Sector Fisher College of Business – Student Investment Management