fisher college of business – student investment management materials irene lipin ryan mayes mike...
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Fisher College of Business – Student Investment Management
Materials
Irene Lipin Ryan Mayes Mike Longo
sector analysis
Fisher College of Business – Student Investment Management
Overview
• Sector & Business Analysis• Economic Analysis• Financial Analysis• Recommendations
• Q&A
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Financial Analysis
Sector & Business Analysis
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Sector Composition
•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
•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
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
S&P500 & SIM Sector Weightsas of 1/31/2010SECTO R
S&P 500 WEIGHT
SIM WEIGHT +/-
Consumer Discretionary 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%
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Major Companies
COMPANY TICKER INDUSTRYMARKET
CAP($Mil)
PRICE AS OF
2/7/2010BETA P/E
BHP Billiton Ltd. BHPDiv. Metals &
Mining 192,560 $69.20 1.47 32.96
BHP Billiton PLC BBLDiv. Metals &
Mining 162,790 $58.50 1.47 27.73
Vale VALEDiv. Metals &
Mining134,180 $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.
FCXDiv. Metals &
Mining30,200 $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
Median: 1.585 27.84
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
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
• 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
•No New Buyers•Repeat Purchase•Can get Boring•Fewer BIG players
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Economic Analysis
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Materials versus S&P 500 10 Yr Performance
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
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
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
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
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Housing Starts vs. Sector Performance
Correlation Coefficient (R) = - .22
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Commodities vs. Sector Performance
Correlation Coefficient (R) = .67
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
$ Value vs. Sector PerformanceCorrelation Coefficient (R)
= .79
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Financial Analysis
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Revenue Growth Materials vs. S&P
Materials
S&P 500
Average increase
1.7%
Average increase
3.4%
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
EBITDA Growth Materials vs. S&PMaterials
S&P 500
% of sales
% of sales
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Absolute Valuation: Price / Forward Earnings
17.1X
16.7X
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Relative Valuation: Forward P/E
1.2X
1.0X
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Absolute Valuation: Price / Book
2.7X
2.5X
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Relative Valuation: Dividend Yield
0.9X
< 2.0%
1.2X
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Technical Valuation: Moving Avgs.
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Recommendation
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
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
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
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
Fisher College of Business – Student Investment ManagementSector & Business Analysis
Economic Analysis
Financial Analysis
Recommendation
Recommendation
• Reduce SIM fund exposure to 150 bps underweight.