materials sector - files.fisher.osu.edu

Materials SectorFelix Kvarnstroem, Luke Lentin, Jeffrey Li, Michael Li

SIM BUSFIN 4228 SP21

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Table of Contents● Sector Overview● Business Analysis-Jeffrey Li● Economic Analysis-Michael Li● Financial Analysis-Luke Lentin● Valuation Analysis-Felix Kvarnstrom● Recommendation

Table of Contents

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SectorOverview

By Jeffrey Li

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Sector Overview

Source: Capital IQ

$895,630.4

$33,051,344.2

5

2.71%

Source: Capital IQ

Sector Overview:Sector Weights in the S&P 500

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Sector Overview:Materials Sector Breakdown

Mat

eria

ls S

ecto

r Bre

akdo

wn

Chemicals

Construction Materials

Containers & Packaging

Metals & Mining

Paper & Forest Product

• Commodity Chemicals• Diversified Chemicals

• Fertilizers & Agricultural Chemicals Industrial Gases

• Specialty Chemicals

• Construction Materials

• Metal & Glass Containers• Paper Packaging

• Aluminum• Diversified Metals & Mining

• Copper• Gold

• Precious Metals & Minerals• Silver• Steel

• Forest Products• Paper Products

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Sector Overview:Sector Performance

Historical Price Changes in Materials Sector and the S&P 500

Source: Net Advantage

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Sector Overview:Sector Performance

Historical Price Changes in Materials Sector Industries


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Sector Overview:

Source: Capital IQ

Material Sector Visualization

Sized by market capColored by index weight

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Sector Overview:Global Top Companies


Top 10 Materials Companies by Market Cap(USD $MM)

1. Linde plc - $140,859.522. The Sherwin Williams Company - $63,899.163. Air Products and Chemicals, Inc. - $61,696.424. Ecolab Inc. - $59,524.275. Freeport McMoRan Inc. - $51,061.406. Newmont Corporation - $48,731.137. Dow Inc. - $47,329.238. DuPont de Nemours, Inc. - $41,756.759. LyondellBasell Industries N.V. - $35,418.0510.Corteva, Inc. - $35,194.13

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BusinessAnalysis

By Jeffrey Li

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Business Analysis:Overview

• The Materials sector includes companies involved in Chemicals, Construction Materials,

Containers and Packaging, Metals and Mining, Paper and Forest Product

• Sell products to companies in other stock sectors, many materials used to make goods

in other sectors

• The Mosaic Company- mines for phosphates to be used in fertilizers

• Sherwin-Williams- develops, manufactures, and sells paints, coatings, and related

products to professional, industrial, commercial, and retail customers

• Dupont de Nemours Inc.- specialty chemicals company that focuses on the

manufacturing of materials necessary to produce equipment in a wide range of

industries

• Corteva- Agriscience company that focuses on the protection of seeds and crops,

promoting maximum yields for framers.

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Business Analysis:Economic Cycle

• The sector is cyclical- very sensitive to economic business cycle• Demand for materials is affected by changes in the economy• Economy is in expansion stage right now• Congressional Budget Office- GDP growth in 2021• Materials had huge dip in middle of March 2020, has been steadily growing since

then

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External Factors- PESTELPolitical◦ Prices of materials easily manipulated by political actions◦ Example- Mosaic has distribution businesses in China that

their government could interfere with Economic◦ consumers’ disposable income used to buy goods made of

materials from Materials Sector◦ Example-Consumer Confidence Index up to 109.7 pts in

March from 90.4 in February, highest reading in a year

Environmental◦ Policy, Regulations, Tariffs on how to source materials◦ Example- Mosaic Company mines for phosphates in Brazil,

conforms to Brazilian environmental regulations

Business Analysis:External Factors

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Porter’s Five ForcesBargaining Power of Suppliers-

Medium• Not that easy for suppliers

to increase prices, due to regulations, and set market prices

• However, most Materials sector companies are first in the supply chain-have some power

Threat of New Entrants-Low-Medium

• Large capital expenditures required to compete and gain significant market share

• Many new companies were formed from mergers of pre-existing companies

Industry Rivalry-Medium

• Several well-established competitors already entrenched in each industry Bargaining Power of Buyers-

High• Buyers include other

companies in the supply chain

• Products of Materials sector are necessities for the world to operate

• Buyers buy in massive quantities

Substitutes-Low

• No other products from another industry can replace key raw materials, such as fertilizer, agricultural chemicals, paint

Business Analysis:Porter’s Five Forces

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Economic Analysis

by Michael Li

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• Cyclical Sector – Sensitive to economic cycle• Investigated Indicators:

• Producer Price Index (PPI), PPI for construction• Consumer Price Index (CPI)• 10-Year Treasury Yield• Home Price• US Dollar Index• Unemployment Rate• WTI Oil Price

Economic Analysis:Economic Indicators

Economic Indicators

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Economic AnalysisSector Correlation with PPI

• Producer Price Index (PPI) measures the average changes in prices received by domestic producers for their output.

• Fitted model: y = -214.069+2.549x, R-squared: 0.6398• Interpretation: Materials sector is positively related with PPI, and their

relationship is moderately strong.

Sector Correlation with PPI

Data Source: Investing.com, FRED

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Economic AnalysisSector Correlation with PPI

• Producer Price Index by Commodity: Intermediate Demand by Commodity Type: Materials and Components for Construction

• Fitted model: y =-217.43212+2.22453x, R-squared: 0.8306• Interpretation: Materials sector has strong positive relationship with PPI for

construction.

Sector Correlation with PPI (Construction)


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Economic AnalysisSector Correlation with CPI

• CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

• Fitted model: y =-387.96949+2.86647x, R-squared: 0.848• Interpretation: Materials sector has strong positive relationship with CPI.

Sector Correlation with CPI


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Economic AnalysisSector Correlation with Treasury Yield

• 10-year Treasury Yield: The yields are paid by the U.S. government as interest for borrowing money via selling the bond.

• Fitted model: y = 384.562 - 45.087x, R-squared: 0.5228• Interpretation: Materials sector is negatively related with 10-year Treasury

Yield rate, and their relationship is moderate.

Sector Correlation with 10-year Treasury Yield


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Economic AnalysisSector Correlation with Home Price

• S&P/Case-Shiller 20-City Composite Home Price Index: a composite index of the home price index for 20 major Metropolitan Statistical Areas in the United States.

• Fitted model: y = -84.92999+1.89925x, R-squared: 0.6039• Interpretation: Materials sector is positively related with the U.S. home price,

and their relationship is moderately strong.

Sector Correlation with Home Price


https://en.wikipedia.org/wiki/Metropolitan_Statistical_Area

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Economic AnalysisSector Correlation with US Dollar Index

• US Dollar Index: measuress the value of US dollar relative to a basket of foreign currencies (U.S. trade partners.)

• Fitted model: y = 355.3681 - 1.3214x, R-squared: 0.03414• Interpretation: Materials sector is negatively related with US Dollar Index,

and their relationship is weak.

Sector Correlation with US Dollar Index

Data Source: Yahoo Finance, FRED

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Economic AnalysisSector Correlation with Unemployment Rate & Oil Price

• Unemployment:• Fitted model: y = 266.342-5.188x,• R-squared: 0.0155• Relationship: weak, negative

Sector Correlation with Unemployment & Oil Price


• WTI Oil Price:• Fitted model: y = 178.6840+0.9326x,• R-squared: 0.0866• Relationship: weak, positive

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Economic AnalysisSummary of Correlation

Summary of Correlation

Indicator Name Relationship with Materials Sector

Strength of Relationship

PPI Positive Moderately StrongPPI for Construction Positive StrongCPI Positive Strong10-year Treasury Yield Negative ModerateHome Price Positive Moderately StrongUS Dollar Index Negative WeakUnemployment Rate Negative WeakWTI Oil Price Positive Weak

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Financial Analysis

By Luke Lentin

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Financial Analysis

Data Source: Net Advantage

Revenue● Negative growth over recent

years

● Similar trend to SPX as wholeEBIT/EBITDA● Slightly higher margins than

SPX, similar trendEPS

● Much smaller and more volatile than SPX

Sales Comparison

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Financial Analysis


● Margins and Returns have increased since 2019

● Return on equity traditionally greater for SPX

● Margins follow same trend

Margins Comparison

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Financial Analysis


Cash from Ops.

● Materials sector does not follow same trend as SPX

Free Cash Flow● Same trend for sector

and SPX as whole● Much greater volatility in

materials sector

Cash Flow Comparison

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Financial Analysis

Chemicals Industry

• EPS are much higher than other industries and higher than sector as a whole

• Related to the large FCF posted by the industry


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Financial Analysis

Construction Material Industry

• Since 2019 revenues have not changed and even increased

• Margins are much higher than other industries and sector as a whole


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Financial Analysis

Containers and Packaging Industry

• EPS has been drastically decreasing since 2017

• Not in line with the trend of sector as a whole


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Financial Analysis

Metals and Mining Industry

• In line with sector as a whole


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Valuation Analysis

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Valuation Analysis:

Materials Sector Historical Trading Multiples

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Materials Sector P/E Ratio

Valuation Analysis:

Data Source: Morningstar (03/21/21)

P/E Overvalued: The 2020

average is slightly above the

2020 median value as well as

the five-year average.

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P/S Ratio Overvalued: The

2020 average is slightly

above the median value

as well as the 5-yr

average.

Valuation Analysis:

Materials Sector P/S Ratio

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Valuation Analysis:

Materials Sector P/B Ratio

P/B Ratio Overvalued: The 2020 Average is

above the 2020 Median Value, and the 5 yr

average.

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P/FC Ratio Overvalued: The 2020

average is above the 5 year

average

Valuation Analysis

Materials Sector P/FC Ratio

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S&P 500 in general, and the materials sector in particular are trading on high multiples compared to historical numbers. However, we believe the materials sector will outperform the S&P in the foreseeable future because this sector is trading on a lower premium to the 5 yr average than what the S&P does.

Valuation Analysis:Summary

How does the Materials Sector Compare to S&P 500?

Multiple Premium as a %

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Recommendation

Factors to consider:•Positives:•Steadily increasing PPI & CPI (overall sector)

•Fast-growing home price (construction materials, chemicals)

•New government's infrastructure plan (construction materials,

metals & mining)

•Electric vehicles & related infrastructures (metals & mining)

•Negatives:•Rise in Treasury Yield (overall sector)

•Potential increase in tax rates (overall sector)

•Potential for more-stringent environmental regulations (overall sector)

•Short-term economic growth may not endure (overall sector)

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Industry Insights

Industry Overweight/Underweight

Chemicals OverweightConstruction Materials OverweightContainers & Packaging NeutralMetals & Mining OverweightPaper & Forest Product Neutral

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Recommendation

We recommend that the Materials Sector be overweight in the SIM(3.18%), compared to its weighting in the SPX(2.63%). Hence, we agree with the way the sector is weighted in SIM(as of 2/26/21). We feel Neutral to the SIM weighting of 3.18% for the long-term, given the current U.S. and global economic condition as previously described.

Sector S&P 500 Weight SIM Weight +/-

Information Technology 27.37% 30.46% 3.09%Financials 11.22% 11.88% 0.66%Health Care 13.12% 13.09% -0.03%Consumer Discretionary 12.40% 10.98% -1.42%Consumer Staples 5.97% 4.55% -1.42%Industrials 8.43% 7.71% -0.72%Energy 2.84% 3.65% 0.81%Utilities 2.51% 1.91% -0.60%Materials 2.63% 3.18% 0.55%Communication Services 11.08% 10.91% -0.17%Real Estate 2.43% 1.68% -0.75%

Total 100.00% 100.00% 0.00%

Securities Allocation

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Recommendation

Q&A

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