Fisher College of Business – Student Investment Management

Materials Sector Analysis

Kyle ShanerJosh Carter

Fisher College of Business – Student Investment Management

Agenda

• Sector Analysis• Business Analysis• Economic Conditions• Financial Analysis• Valuation• Recommendation

Fisher College of Business – Student Investment Management

Sector Analysis – Materials Sector

• Companies that are involved in the discovery, development and processing of raw materials

• Includes companies that are involved with mining and refining metals, chemical production and oil and gas infrastructure development

Fisher College of Business – Student Investment Management

Sector Analysis – Industries

• Chemicals– Producers of commodity, diversified, fertilizers,

agricultural, and specialty chemicals– Producers of industrial gases

• Construction Materials– Manufacturers of construction materials including

sand, clay, gypsum, lime, aggregates, cement, concrete and bricks

• Containers and Packaging– Manufacturers of metal, glass, plastic, paper and

cardboard containers

Fisher College of Business – Student Investment Management

Sector Analysis - Industries

• Metals and Mining– Producers of aluminum and related products– Companies engaged in diversified metals and mining

production or extraction of gold, precious metals, minerals and related products

– Producers of iron, steel and related products• Paper & Forest Products

– Manufacturers of timber, related wood products and all grades of paper.

– Manufacturers of lumber for the building industry but excludes companies specializing in paper packaging

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Sector Analysis-Industry Performance

Fisher College of Business – Student Investment Management

Sector Analysis-Industry Performance

Fisher College of Business – Student Investment Management

Sector Analysis-Industry Performance

Fisher College of Business – Student Investment Management

Sector Analysis - Major Companies

Symbol Company Price (1) Market Cap (Billions)(1)

MON Monsanto Co. $79.41 $43.46

PX Praxair Inc. $67.46 $20.75

DD Du Pont (E.I.) $22.40 $20.21

NEM Newmont Mining Corp. (Hldg. Co.)

$41.58 $18.89

NUE Nucor Corp. $43.83 $13.77

(1) Price and market cap as of 2/13/2008

Fisher College of Business – Student Investment Management

Sector Analysis - SIM Weights

Current SIM Weight = 1.79%Current S&P Weight = 3.04%Underweight by 1.25%

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Sector Analysis - Current Holdings

• Posco ADR (PKX)– Manufactures and sells various steel products

primarily in Korea

Unit Cost

Total Cost

Market Price (1)

Market Value(1)

Unrealized Gain/(Loss)

Loss

117.06 $468,225.60 66.16 $254,080.00 ($214,146) -45.74%

(1) Price and market cap as of 2/13/2008

Fisher College of Business – Student Investment Management

Business Analysis

• Mature Sector• Cyclical• Growth through acquisition• International Exposure• Increased Environmental Regulation

Fisher College of Business – Student Investment Management

Business Analysis – M&A Activity• Trend towards industry consolidation• Notable transactions

– Failed BHP acquisition of Rio Tinto-$120 billion– Chinalco minority investment in Rio - $20 billion– Proposed DOW acquisition of Rohm & Haas - $15 billion

• M&A activity trends• In 2007, M&A volume reached all time high of $4.7 trillion

• Led by unprecedented financial sponsor activity - $870 billion• Materials represented ~$650 billion in announced deals

• Q4 2008 M&A volume decreased dramatically – down 73%

Data provided by Thompson Reuters

Fisher College of Business – Student Investment Management

Business Analysis – M&A Activity

Data provided by Thompson Reuters

Fisher College of Business – Student Investment Management

Economic Analysis – Global Demand

` GDP Y-o-Y Growth

2008 2009

Brazil 4.80% 4.00%

Russia 6.80% 5.70%

India 7.90% 7.10%

China 9.30% 6.70%

• Euro zone GDP fell 5.6% annualized in Q4 2008

• Japan fell 12.7% annualized

Fisher College of Business – Student Investment Management

Economic Analysis - Performance

2007 2008 2009

S&P 500 3.53% -38.49% -8.57%

Materials 19.98% -47.05% -7.24%

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Economic Analysis – Metal Prices

Fisher College of Business – Student Investment Management

Economic Analysis – Metal Prices

Fisher College of Business – Student Investment Management

Economic Analysis - Regression Analysis

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.893326709R Square 0.79803261Adjusted R Square 0.796865168Standard Error 4.153939056Observations 523

ANOVAdf SS MS F Significance F

Regression 3 35385.63421 11795.2114 683.5739247 8.5479E-180Residual 519 8955.453826 17.25520968Total 522 44341.08804

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 17.79974462 1.606531723 11.0796098 9.3967E-26 14.64364036 20.95584888 14.64364036 20.95584888Copper 0.033807623 0.007130803 4.741068366 2.75008E-06 0.019798839 0.047816408 0.019798839 0.047816408Aluminum 0.131516501 0.029357422 4.4798382 9.19506E-06 0.073842517 0.189190485 0.073842517 0.189190485Scrap Steel 0.001846461 0.000423506 4.359943524 1.56937E-05 0.001014465 0.002678458 0.001014465 0.002678458

Fisher College of Business – Student Investment Management

Economic Analysis - Stimulus Package• US passes $789 billion Economic Stimulus Package

• ~65% spending and ~35% tax cuts• Obama administration has focus on infrastructure spending to spark

economy• ~$62 billion in highway construction – spending may have 19

month lag time

• In November, China announced $586 billion stimulus package• China faces growth issues as global trade declines

• Exports down 17% in January 2009• Package focuses on upgrading infrastructure, particularly railways,

roads, and aiports

Fisher College of Business – Student Investment Management

Financial Analysis - Financials

Fisher College of Business – Student Investment Management

Financial Analysis - Financials

Fisher College of Business – Student Investment Management

Financial Analysis Continued…

Fisher College of Business – Student Investment Management

Financial Analysis Continued…

Fisher College of Business – Student Investment Management

Financial Analysis Continued…

Fisher College of Business – Student Investment Management

Financial Analysis Continued…

Fisher College of Business – Student Investment Management

Financial Analysis-Relative Valuation

High Low Mean CurrentP/Forward E 1.43 0.59 0.94 1.34P/S 1.14 0.36 0.78 0.85P/B 1.16 0.36 0.89 1.11P/EBITDA 1.18 0.46 0.85 0.80P/CF 1.08 0.39 0.82 0.82P/E/G ratio 1.57 0.64 1.14 1.24ROE ratio 1.15 0.57 0.80 1.05

Fisher College of Business – Student Investment Management

Recommendation

• Sector will struggle until economy rebounds• Continue to underweight at 1.25%• Bright spot – Chemicals