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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 - PowerPoint PPT Presentation
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Fisher College of Business – Student Investment Management
Materials Sector Analysis
Theo Constantinou
Vikram Rao
Ryan Rettig
Fisher College of Business – Student Investment Management
Overview
• Sector Size and Composition
• Business/Economic Analysis
• Relative Valuation
• Recommendations
• Current Materials Sector SIM Holding
• Questions
Fisher College of Business – Student Investment Management
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
Fisher College of Business – Student Investment Management
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%
Fisher College of Business – Student Investment Management
S&P 500 Weights by Sector (as of 4/30/2009)
Fisher College of Business – Student Investment Management
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%
Fisher College of Business – Student Investment Management
S&P 500 vs. SPBMS Index Over Past 2 Years
Fisher College of Business – Student Investment Management
S&P 500 vs. SPBMS Index Over Past 20 Years
Fisher College of Business – Student Investment Management
10 Year Cumulative Total Return
Fisher College of Business – Student Investment Management
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%
Fisher College of Business – Student Investment Management
Largest Market Cap vs. SPBMS (Materials)
Fisher College of Business – Student Investment Management
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
Fisher College of Business – Student Investment Management
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
Fisher College of Business – Student Investment Management
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
Fisher College of Business – Student Investment Management
S&P 500 and Real GDP Trends
Fisher College of Business – Student Investment Management
Export Trends
Fisher College of Business – Student Investment Management
Economic Analysis – Life Cycle
Fisher College of Business – Student Investment Management
Forward P/E (Absolute)
Forward P/E (Relative to S&P500)
Forward P/E (Absolute)
VALUATION
Fisher College of Business – Student Investment Management
VALUATIONTrailing P/E (Absolute)
Trailing P/E (Relative to S&P500)
Fisher College of Business – Student Investment Management
VALUATIONP/BV (Absolute)
P/BV (Relative to S&P500)
Fisher College of Business – Student Investment Management
VALUATION (Industry)P/BV (Aluminum)
P/BV (Diversified Chemicals)
P/BV (Containers Metal/Glass)
Fisher College of Business – Student Investment Management
VALUATION (Industry)Trailing P/E (Aluminum)
Trailing P/E (Diversified Chemicals)
Trailing P/E (Containers Metal/Glass)
Fisher College of Business – Student Investment Management
VALUATIONP/CF (Absolute)
P/CF (Relative to S&P500)
Fisher College of Business – Student Investment Management
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
Fisher College of Business – Student Investment Management
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%
Fisher College of Business – Student Investment Management
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
Fisher College of Business – Student Investment Management
Questions?