Materials Stock Analysis By Joshua Carter & Kyle Shaner Fisher College of Business – Student Investment Management
Presentation Overview v. Sector Recap v. Sell Recommendation v. Buy Recommendation v. Recommendation Summary v. New SIM Portfolio Fisher College of Business – Student Investment Management
Sector Recap Current SIM Weight = 1. 79% Current S&P Weight = 3. 04% Continue to Underweight by 1. 25% 25. 00% 20. 00% 15. 00% 10. 00% S&P 500 Weight SIM Weight 5. 00% sh Ca s ie ilit Ut ice rv Se tio n ica n io un at Te le co m m m fo r s ls ia er M Te ch n at ol tri du s In al th He og y al s re ls cia an Fin gy er En St er ns um Co Ca In Co ns um er Di sc re tio ap na le ry s 0. 00% Fisher College of Business – Student Investment Management
Sector Recap – Current Holdings Posco ADR (PKX) v. South Korean steel manufacturer v. Hot-rolled steel v. Cold-rolled steel v. Stainless steel Unit Cost Total Cost Market Price Market Value Unrealized Gain/(Loss) Loss $117. 06 $468, 225. 60 $52. 11 $208, 440 ($259, 785. 60) (55. 5)% Fisher College of Business – Student Investment Management
Sector Recap – Current Holdings… POSCO Notable News Events Dec 2008 – Announces 1 st ever production cut at 10% Feb 2009 – Cuts stainless steel prices 10% Jan 2009 – CEO steps down after poor performance Geographic Segments Feb 2009 – 6% annual production cut Feb 2009 – Iron Ore miners increase price 5% Revenue Segments Fisher College of Business – Student Investment Management
Sector Recap – Current Holdings… Posco vs. S&P Valuation High Low Mean Current ∆ From Mean P/Forward E 0. 76 0. 12 0. 34 0. 62 79. 4% Overvalued P/S 1. 37 0. 22 0. 47 0. 66 40. 4% Overvalued P/B 0. 74 0. 13 0. 31 0. 45 45. 2% Overvalued P/EBITDA 0. 67 0. 13 0. 31 0. 29 -6. 5% Fair Value P/CF 0. 77 0. 16 0. 31 0. 39 25. 8% Overvalued P/E/G 2. 60 0. 09 0. 47 1. 46 211% Overvalued ROE 1. 80 0. 42 0. 92 1. 08 17. 4% Overvalued Posco vs. Materials Valuation High Low Mean Current P/Forward E 0. 90 0. 15 0. 35 0. 44 25. 7% Overvalued P/S 1. 44 0. 42 0. 65 0. 76 16. 9% Overvalued P/B 0. 71 0. 28 0. 36 0. 41 13. 9% Overvalued P/EBITDA 0. 71 0. 18 0. 36 0. 19 -47. 2% Undervalued P/CF 0. 81 0. 25 0. 48 6. 7% Fair Value P/E/G 2. 38 0. 12 0. 40 1. 10 175% Overvalued ROE 1. 76 0. 63 0. 99 0. 95 -4. 0% Fair Value ∆ From Mean Opinion Fisher College of Business – Student Investment Management
Sell Recommendation Faces Many Economic Challenges Global Slowdown v. Steel prices have fallen dramatically v. Slowdown in global & domestic demand v. Ailing auto industry v. Increase in raw materials prices Scrap Steel ($ per Gross Ton) South Korean Slowdown 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fisher College of Business – Student Investment Management
Sell Recommendation… Comparables Analysis As of March 2, 2009. Data provided by Yahoo Finance Fisher College of Business – Student Investment Management
Sell Recommendation… DCF Analysis DCF Sensitivity Analysis Fisher College of Business – Student Investment Management
Sell Recommendation… Absolute Valuation Comparables Analysis Blended Multiples Price Target – Abs. & Comp Fisher College of Business – Student Investment Management
Sell Recommendation… EPS vs. Volume & Steel Price – Sensitivity Analysis Target EPS Price Target Fisher College of Business – Student Investment Management
Conclusion SELL US$ 45. 00: Blended price target based on üDCF üEPS Sensitivity Analysis üComparable & Absolute Multiple Valuation Fisher College of Business – Student Investment Management
Buy Recommendation DOW Chemical v. Engages in manufacture and sale of chemicals, plastic materials, agricultural, and other specialized products v 2008 Revenues of $57, 514 billion: 7. 4% increase v Strong growth expected in agriculture segments Equity Trading Statistics Market Price $7. 11 % 52 Wk Hi (84. 0%) P/E Market Cap 09 EPS est. Beta 11. 52 x $6. 57 B $1. 75/sh 1. 48 Fisher College of Business – Student Investment Management
Buy Recommendation… Dec 2008 – Announces it will cut 11% of workforce Feb 2009 – Cuts dividend 64% to 15 cents a share Jan 2009 – Rohm & Haas sues Dow Geographic Segments Feb 2009 – Announces top executives won’t get cash bonuses March 2009 – S&P cuts two short-term ratings Revenue Segments Fisher College of Business – Student Investment Management
Buy Recommendation… Dow vs. S&P Valuation High Low Mean Current ∆ From Mean P/Forward E 4. 56 0. 58 0. 85 1. 20 41. 2% Overvalued P/S 0. 83 0. 16 0. 58 0. 16 -72. 4% Undervalued P/B 1. 49 0. 29 0. 82 0. 29 -64. 6% Undervalued P/EBITDA 99. 90+ 0. 31 0. 69 0. 31 -55. 1% Undervalued P/CF 1. 19 0. 27 0. 63 0. 27 -57. 1% Undervalued P/E/G 6. 88 0. 59 1. 42 1. 34 -5. 6% Fair Value ROE 1. 84 0. 23 0. 93 0. 58 -37. 6% Undervalued Dow vs. Materials Valuation High Low Mean Current P/Forward E 4. 00 0. 68 0. 90 0. 87 -3. 3% Fair Value P/S 1. 07 0. 29 0. 87 0. 19 -78. 2% Undervalued P/B 1. 58 0. 26 1. 09 0. 26 -76. 1% Undervalued P/EBITDA 99. 90+ 0. 20 0. 74 0. 20 -73. 0% Undervalued P/CF 1. 47 0. 33 0. 94 0. 33 -64. 9% Undervalued P/E/G 5. 08 0. 68 1. 23 1. 00 -18. 7% Undervalued ROE 1. 72 0. 34 1. 09 0. 54 -50. 5% Undervalued ∆ From Mean Opinion Fisher College of Business – Student Investment Management
Buy Recommendation… An Industry Bright Spot US - 2009 Economic Outlook v. Infrastructure spending plays to strengths v. Consumer spending is key v. Product and geographic diversification v. Decline in oil prices 160 Crude Oil (WTI) Spot Economic Stimulus 140 120 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Fisher College of Business – Student Investment Management
Buy Recommendation… DOW Acquisition of Rohm & Haas ~$15 billion Deeper Reach in Developing Markets – Asia / Pacific 33% v$3 billion preferred equity investment from ROH Investors v. Grow performance and specialty chemicals v. Draw $10 billion from bank loan DOW v. Strengthens competitiveness of basic chemicals v. Receive $4 billion from Berkshire and KIA ROH 67% Strategic Rationale Financing Mix v$1. 3 billion in synergies v 30% of synergies come from purchasing of raw materials v. Divest $4 billion in ROH assets 2007 – 2012 E CAGR EPS Dilution / Accretion 8% 6% EPS 4% $ Stock Price $ 16. 5 x v$2. 6 billion in additional value creation -10% 0. 52 $ Dilution / Accretion -5% 0% 5% 0. 58 $ 0. 61 $ 0. 64 $ 8. 61 9. 56 $ $ 10. 07 $ 10. 57 5% 0. 67 $ 11. 10 v$1. 7 billion combined in R&D v. Delivers more stable earnings with higher growth 2% 0% DOW ROH Combined Fisher College of Business – Student Investment Management
Buy Recommendation… Absolute Valuation (50% mean reversion) Dow Chemical Absolute Valuation A. P/Forward E P/S P/B P/EBITDA P/CF P/E/G ROE Average High B. 99. 9+ 1. 62 4. 8 99. 9+ 15. 4 8. 6 31. 1 Comparables Analysis Low Mean C. 8. 8 0. 12 0. 5 1. 6 1. 8 0. 7 3. 2 D. 17. 7 0. 99 2. 9 5. 2 9. 3 1. 9 16. 7 Current #Your Target Multiple E. F. 14. 8 0. 12 0. 5 1. 6 1. 8 1. 6 8. 0 8. 85 0. 495 1. 45 2. 6 4. 65 0. 95 8. 35 *Your Target E, Price S, B, (F x G) etc/Share G. H. 0. 61 $5. 40 54. 6 $27. 03 14. 12 $20. 47 4. 41 $11. 47 3. 92 $18. 23 4. 4 $4. 18 0. 88 $7. 35 $13. 45 Multiples Price Target – Blended Abs. & Comp 2009 E EPS Multiple $0. 61 16. 5 x Price $10. 07 Average Fisher College of Business – Student Investment Management
Buy Recommendation… Discounted Cash Flow Analysis DCF Sensitivity Analysis Fisher College of Business – Student Investment Management
Buy Recommendation… Price Target Summary US$ 12. 00: Blended price target based on üDCF üComparable & Absolute Multiple Valuation Fisher College of Business – Student Investment Management
New SIM Holdings SELL POSCO AND BUY DOW Conclusion: üContinue to hold underweight üWhy not increase underweight? – Don’t want to miss an early economic rebound üWhy not reduce underweight? – Basic materials as a whole still out of favor üSELL all of Posco holdings üBUY 125 bps of DOW Chemical Fisher College of Business – Student Investment Management
Supplement: Key Economic Indicators Fisher College of Business – Student Investment Management
Supplement: Key Economic Indicators Fisher College of Business – Student Investment Management
Supplement Possible Dilution from Merger ØCompany project possible dilution of 5% Dilution / Accretion -10% EPS -5% 0% $ 0. 52 $ 0. 58 $ 0. 61 Stock Price $ 8. 61 $ 9. 56 $ 10. 07 5% $ 0. 64 $ 10. 57 5% $ 0. 67 $ 11. 10 16. 5 x Fisher College of Business – Student Investment Management
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