Student Investment Management BUSFIN 4228 Stocks Material Sector -Garrett Koutsopoulos, Kun Li, Quinn Liu, Jiaxuan Li,

Schedule - Overview: Quinn Liu - Business Analysis: Quinn Liu - Economic Analysis: Kun Li - Financial Analysis: Jiaxuan Li - Financial Valuation: Garrett Koutsopoulos - Recommendation: Garrett Koutsopoulos

Overview

Overview SIM Weight

Overview Sector Industries

Overview overview Sector Leaders

Overview YTD Performance vs. S&P 500

Overview QTD Performance vs. S&P 500

Business Analysis Materials Sector is in the mature phase of the life cycle – Low profit margins Pressure on profit – Low growth Follows growth rate of the economy – Companies are merging Dow + Dupont = DowDupont (DWDP) – Competition on price High price sensitivity – Low risk Mature sector with established structure The materials sector is sensitive to economic cycles – According to the Performance vs. S&P 500, it follows the market during times of recession and expansion

Business analysis Supply and Demand Demand is catching up oversupply Commodity price is highly related to supply and demand Increasing demand with limited supply (natural resources) But weaker USD = Higher cost = Lower margin Continued development of infrastructure Construction materials Etc. Potential problem High inventory in China…. At the same time… Trade War?

Business analysis Five Forces Analysis Threat of Entry Low High government regulation High Capital requirements Limited sources and geographical accessibility Bargaining Power of Suppliers Companies provide their own materials Limited finite control over resources Bargaining Power of Buyers High Low product differentiation Low price difference Threat of Substitutes Few substitutes for raw materials Rivalry Price competition

Materials & Real GDP Economic Analysis The basic material sector is a category for companies involve in the discovery, development and processing of raw material. The sector includes the mining and refining of metals, chemical products and forestry products. This sector is sensitive to change in the business cycle. Because companies in this sector supply materials for construction, they depend on a strong economy.

Materials & S&P 500 Economic Analysis As we can see that this sector has a very high correlation with economy and the graph shows that SP500 and materials are moving in an almost the same pattern.

Materials & Commodity Prices Economic Analysis Materials & Commodity Prices Here is the graph for materials and commodity price. It turns out that they do not have that much correlation. commodities include copper, crude oil, wheat, coffee beans and gold.  “Soft”: one that cannot be stored for extended periods. Sugar, coffee, cocoa and cotton are example of soft commodities. They also fall into non-edible(paper products, household cleaning products) and edible(wine, beer categories0 Several factors that may affect the material sector: increase demand for more raw material to support their infrastructure building for developing county. Accommodative monetary: central banks in the developed world are now in easing mode, with support of economic activity from Central banks. Nagtive affect: reduction in demand from china, demand for raw material decrease as technological advance. Increase domestic production, for example from a import country to a export country.

Materials & Crude Oil (WTI) Economic Analysis Materials & Crude Oil (WTI) The chemicals sector is one of the largest of all market sectors worldwide. It is part of the basic materials sector and the chemical sector encompassed. Its purpose is converting raw material, such as crude oil and gas, and metals and minerals, into the complex compounds and then put to use in an extremely wide variety of commercial and industrial. With the price decrease of oil, the cost of production goes down, which make the sector to rally.

Financial analysis S5MATR Sales

Financial analysis S5MATR Earnings

S5MATR Operating & Gross Margin Financial analysis S5MATR Operating & Gross Margin

Financial analysis S5MATR R&D

S5MATR Free Cash Flow Yield Financial analysis S5MATR Free Cash Flow Yield

Financial Valuation Materials Basis Current Median High Low P/E 20.85 19.58 24.7 14.8 P/B 2.75 3.2 3.9 1.5 P/S 1.83 1.3 2.07 0.6 P/EBITDA 11.25 8.2 12.3 3.7

Financial Valuation S&P 500 Basis Current Median High Low P/E 21.46 17.5 24.7 14.8 P/B 3.25 2.3 3.2 1.5 P/S 2.05 1.3 2.1 0.7 P/EBITDA 11.42 7.96 12.08 4.4

Financial Valuation P/E Ratio

Financial Valuation P/B Ratio Price to Book – Historically the P/B ratio has always been higher than the market. • The gap has increased in recent years nearing the 10 year high.

Financial Valuation P/S Ratio

Financial Valuation P/EBITDA Ratio

Recommendations Hold Should the SIM portfolio over or underweight the sector relative to the S&P 500? Keep Materials in line with the S&P 500. We recommend within 1-5 bps of the index. What are the major positives that you foresee and the biggest risks to your recommendation? Positives - Increased demand - Accommodative monetary policy Negative factors for the materials sector - Larger inventories in China - Increased labor costs Within your sector, which industries would you over and underweight versus the S&P 500? Overweight: Construction Materials Underweight: Metals & Mining