1. Materials Sector Analysis Paul Lewis Steve Meredith Summer 2013

2. Sector Overview Basic Materials Sector: –30 companies in the S&P 500 sector –Beta (to S&P 500): 1.20 –Mainly mining / processing / development of raw materials such as: metals, chemicals, fertilizers, construction, packaging, and paper products –Highly cyclical –Sensitive to supply / demand & commodity pricing levels

3. Sector Overview S&P 500 and SIM Weights (June 2013) Sector Size (Market Cap): $515.4B SIM: Materials is underweight by 159bps

4. Sector Overview

6. Most materials sector stocks are up over the past 12 months

7. Sector Overview Current SIM Stocks: Albemarle & Mosaic Albemarle Corporation: –NYSE Ticker: ALB –2012 Revenue: $2.75B –2012 Net Income: $311.5M Mosaic Corporation –NYSE Ticker: MOS –2012 Revenue: $11.1B –2012 Net Income: $1,930.2M

8. Business Analysis Porters 5 ForcesStrengthTop Reasons Barriers to EntryHighMines / forests / land rights are prohibitively expensive and / or already owned by someone Supplier PowerLowAny input products needed are commodities with low switching costs Buyer PowerHighCommodity products with low switching costs Threat of Substitutes MediumSome products have no known substitutes or are tough to substitute Intensity of RivalryHighCommodity products with low product differentiation and low switching costs

9. Materials sector is in the mature phase Slower revenue and earnings growth Growth at overall economy rate Higher dividend yields Margin pressure Business Analysis - Sector

10. Business Analysis - Macro US and China are still in recovery mode Many other developed countries are in contraction or early recovery

11. Economic Analysis Materials & S&P 500

12. Economic Analysis Materials & Dollar Strength (USD / Euro)

13. Economic Analysis Materials & Trade Weighted Dollar

14. Economic Analysis Materials & Commodity Prices

15. Economic Analysis Materials & Real GDP

16. Economic Analysis Materials & Crude Oil (WTI)

17. Economic Analysis Materials & New Machinery Orders

18. Economic Analysis Materials & CPI

19. Financial Analysis Net Profit Margin

20. Financial Analysis Return on Equity

21. Financial Analysis

23. Valuation Analysis - Sector Trading inline with 10-year averages

24. Valuation Analysis – Agricultural Chemicals

25. Currently trading under 10-year averages Relatively cheap vs. S&P 500 Highly price driven industry –Competes mainly on basis of delivered price –Low threat of substitutes, but very low switching costs, low product differentiation, and multiple suppliers High exposure to a weak global economy –MOS - 2/3 of sales outside the US

26. Valuation Analysis – Specialty Chemicals

27. Currently trading in line with or above10-year averages Fairly priced vs. S&P 500 Industry driven by prices and R&D innovations –New compounds are easily copied, low costs of production and access to mineral reserves are paramount –Little substitution threat, but many suppliers and low switching costs –Innovators in Green technologies are likely to gain market share (eg. Oil Refining, Nat. Gas Fracking, LED lights) High exposure to global economy –ALB – 44% of sales from Americas; 39% from Europe, Middle East & Africa; 17% from Asia Pacific

28. Behavioral Analysis 5-Yr Reversal/1-Yr Momentum Theories suggest: –Financials, Utilities, and Materials should be overweight –Consumer Discretionary, Healthcare and Consumer Staples should be underweight

29. Behavioral Analysis Furthermore, small-cap Materials names are preferred over large-cap

30. Recommendation Overweight Materials Sector: Positives: –Commodity prices have to improve? –US / China picking up growth Risks: –Global economy continues to falter –Fed tapers asset purchases – who knows what might happen? –Commodity prices remain depressed Agricultural chemicals, gold, containers, paper products, diversified metals & mining - undervalued Specialty chemicals, aluminum, steel - overvalued Industrial gases, diverse chemicals - inline

31. Thank You Questions?