Alcoa/Dow Chemical Analysis
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Transcript of Alcoa/Dow Chemical Analysis
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
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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
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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
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Dow Chemical- Valuation
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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
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Key Indicators
• Price of Aluminum
*77% of movement in Alcoa stock explained by the London Metal Exchange aluminum index over past 2 years
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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
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Where is Price of Aluminum Going?
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3 Year Price – Target Price
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Aluminum Price Decline Over Last Year
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Future Analyst Estimates
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10-Year Cumulative Total Return - Cyclical
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P/BV ValuationP/BV (Absolute)
P/BV (Relative to S&P500)
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P/CF ValuationP/CF (Absolute)
P/CF (Relative to S&P500)
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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
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S Curve of Future LT Growth in BRIC Countries
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LRMC – LME Price Estimates through 2013
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DCF Valuation – Upside of 200.53%
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Sensitivity Analysis – Upside
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Recommendation
• Buy 200 bps of Alcoa
• Dow Chemical: sell 100 bps to 288 bps
• Discretion to class:– Add additional basis points to Alcoa