Fisher College of Business – Student Investment Management

Alcoa/Dow Chemical Analysis

Theo Constantinou

Vikram Rao

Ryan Rettig

Fisher College of Business – Student Investment Management

Conclusion from Sector Presentation

• 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

Fisher College of Business – Student Investment Management

Recommendation from Sector Presentation

• 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%

• Class elected to overweight by 100 additional bps

Fisher College of Business – Student Investment Management

Current Materials Portfolio

• Dow Chemical– Only stock owned in sector– Own 36,260 shares– Best performing stock in SIM

• 114% return since purchase

– 3.88% of SIM is Dow stock

• Now have 488 bps to allocate

Fisher College of Business – Student Investment Management

Dow Chemical- Valuation

Fisher College of Business – Student Investment Management

Dow Chemical- ValuationAbsolute Stock Valuation High Low Median Current Target Multiple Target /Share Target Price

P/Book 5.1 0.5 2.4 1.2 2.4 14.73 35.35P/ Sales 1.4 0.1 0.8 0.4 0.8 52.48 41.98

P/ Cash Flow 14.6 1.6 6.6 5.4 6.6 3.27 21.58P/EBITDA 10.5 5.4 6.3 10.5 6.3 1.68 10.58

Average 27.38

Fisher College of Business – Student Investment Management

Key Indicators

• Price of Aluminum

*77% of movement in Alcoa stock explained by the London Metal Exchange aluminum index over past 2 years

Fisher College of Business – Student Investment Management

AA vs. Commodities/Materials

*60% of movement in Alcoa stock explained by the commodity index over past 5 years

*63% of movement in the Alcoa stock explained by the materials sector over past 5 years

Fisher College of Business – Student Investment Management

Where is Price of Aluminum Going?

Fisher College of Business – Student Investment Management

3 Year Price – Target Price

Fisher College of Business – Student Investment Management

Aluminum Price Decline Over Last Year

Fisher College of Business – Student Investment Management

Future Analyst Estimates

Fisher College of Business – Student Investment Management

10-Year Cumulative Total Return - Cyclical

Fisher College of Business – Student Investment Management

P/BV ValuationP/BV (Absolute)

P/BV (Relative to S&P500)

Fisher College of Business – Student Investment Management

P/CF ValuationP/CF (Absolute)

P/CF (Relative to S&P500)

Fisher College of Business – Student Investment Management

Absolute Valuation

• The current P/E is 12x earnings, where the 10 year average is around 13x earnings. I think that the forward P/E based on our DCF analysis is close in line with historical averages and reversion to the mean will occur.

Absolute Valuation

High Low Median Current #Your Target Multiple

*Your Target E, S, B, etc/Share

Your Target Price (F x G)

A. B. C. D. E. F. G. H. P/Forward E 28.0 8.2 13.1 12.2 14.5 .90 13.05 P/S 1.4 .20 1.0 .40 1.2 39.64 47.568 P/B 2.5 .40 1.9 .70 2.3 12.55 28.87 P/EBITDA N/A N/A N/A N/A N/A N/A N/A P/CF 13.9 2.3 9.3 5.9 12.0 1.49 17.88

Fisher College of Business – Student Investment Management

S Curve of Future LT Growth in BRIC Countries

Fisher College of Business – Student Investment Management

LRMC – LME Price Estimates through 2013

Fisher College of Business – Student Investment Management

DCF Valuation – Upside of 200.53%

Fisher College of Business – Student Investment Management

Sensitivity Analysis – Upside

Fisher College of Business – Student Investment Management

Recommendation

• Buy 200 bps of Alcoa

• Dow Chemical: sell 100 bps to 288 bps

• Discretion to class:– Add additional basis points to Alcoa