1. Stock Analysis: Materials Andrew Givens March 6, 2007 Student Investment Management

2. Executive Summary Sell entire position of Deltic Timber –7,000 shares Buy equivalent amount of Dow Chemicals (DOW) –8,177 shares Maintain current underweighting in materials sector

3. Agenda Sector Recap Deltic Timber Company Overview Deltic Timber Valuation Dow Chemical Company Overview Dow Valuation Recommendation

4. Sector Recap Smallest sector in S&P 500 –3.05% weight –SIM currently underweight (1.5%) Highest gainer YTD –Up 5.33% Sector trading at historic levels based on –Price to book value –Price to sales Sector Recap Deltic Timber Corp. (DEL) Dow Chemicals (DOW) Recommendations

5. Sector Recap Remain underweight in Materials –Expensive based on valuation analysis –Do not want to “chase” the money after an excellent first two months of the year –Cyclical industry Economy appears to be slowing –Manufacturing utilization rates and MPI both down from local highs –Expect sector to follow suit Sector Recap Deltic Timber Corp. (DEL) Dow Chemicals (DOW) Recommendations

6. Deltic Timber Corporation (DEL) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Timber company with 438,000 acres of timber –Arkansas –Northern Louisiana Four operating segments –Woodlands –Mills –Real Estate –Del-Tin Fiber (50% equity stake) Key economic drivers –New home starts –Growth of GDP

7. Deltic Timber Corporation (DEL) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations New home starts –Biggest raw material input is lumber –Increases & decreases in new home starts will drive lumber prices

8. Deltic Timber Corporation (DEL) Projections for new home starts –Average quarterly home starts (millions) Decreased home starts  lower lumber prices –Deltic should experience lower sales & a margin squeeze Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Historic Projected* 2002200320042005200620072008 1.71.851.962.071.80 1.621.70 *Freddie Mac 2007 Economic Outlook

9. Deltic Timber Corporation (DEL) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations DCF Valuation –Assumptions Discount Rate of 8.86% (Deltic’s WACC) Terminal Growth Rate of 5% Capital Expenditures = Depreciation in perpetuity –Implied equity value per share of $38.23 Currently trading at $49.00 (Monday close)

10. Deltic Timber Corporation (DEL) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations DCF Sensitivity Analysis

11. Deltic Timber Corporation (DEL) Multiples valuation –Relative to Materials Sector Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations HighLowMeanCurrent Price to forward earnings5.321.892.933.84 Price to EBITDA2.831.222.022.21 Price to Sales3.542.242.883.06 Price to Book1.250.771.000.97 Price to Adjusted Cash Flow3.271.522.242.82

12. Deltic Timber Corporation (DEL) Multiples valuation –Relative to S&P 500 Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations HighLowMeanCurrent Price to forward earnings4.781.642.573.88 Price to EBITDA2.711.351.852.04 Price to Sales3.021.792.382.77 Price to Book1.280.730.971.05 Price to Adjusted Cash Flow2.671.451.832.42

13. Deltic Timber Corporation (DEL) Multiples valuation –Absolute Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations HighLowMeanCurrent Target Multiple Target # per share Target Price Price to forward earnings71.825.638.858.2038.81.02$39.58 Price to EBITDA19.510.914.214.5014.22.80$39.76 Price to Sales4.462.783.564.003.5611.10$39.52 Price to Book3.72.32.93.002.913.88$40.25 Price to Adjusted Cash Flow30.817.021.327.7021.31.79$38.02

14. Deltic Timber Corporation (DEL) Both DCF and multiples analysis give prices in $38-$40 range Price target of $38.83 –Weighted average DCF (50%) Multiples price targets (12.5% each) –Implied downside of 21% Recommendation is to sell entire position Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations

15. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Operates in Chemicals Industry within Materials Sector Engages in manufacture and sale of: –Chemicals –Plastic Materials –Agricultural Products $40.6 billion market cap $49.2 billion revenues Currently trading at $41.76 (Monday close)

16. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Operates in Chemicals Industry within Materials Sector Engages in manufacture and sale of: –Chemicals –Plastic Materials –Agricultural Products $40.6 billion market cap $49.2 billion revenues Currently trading at $41.76 (Monday close)

17. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Income Statement

18. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Balance Sheet

19. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations DCF Valuation Assumptions –Discount Rate of 10% (higher than actual WACC of 8.44%) –Perpetuity Growth Rate of 3.25% Meant to mimic GDP growth –Slow revenue growth Typical for such a large company Implied value per share of $50.76

20. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations DCF Sensitivity Analysis

21. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Multiples Analysis –Relative to Materials Sector HighLowMeanCurrent Price to forward earnings0.970.640.770.70 Price to EBITDA1.820.580.850.82 Price to Sales0.960.590.870.64 Price to Book1.550.731.340.79 Price to Adjusted Cash Flow1.440.580.920.67

22. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Multiples Analysis –Relative to S&P 500 HighLowMeanCurrent Price to forward earnings1.280.560.690.70 Price to EBITDA1.890.530.910.76 Price to Sales0.850.50.670.57 Price to Book1.510.711.230.85 Price to Adjusted Cash Flow1.230.490.820.59

23. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Multiples Analysis –Absolute HighLowMeanCurrent Target Multiple Target # per share Target Price Price to forward earnings21.88.210.810.410.804.55$49.14 Price to EBITDA15.13.96.95.306.907.25$50.03 Price to Sales1.340.71.010.831.0151.20$51.71 Price to Book4.82.03.62.43.6014.70$52.92 Price to Adjusted Cash Flow15.45.49.56.79.505.34$50.73

24. Dow Chemical Co. (DOW) Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Both DCF and multiples analysis give prices in the $49-$52 range Price target of $50.83 Upside of 21.7%

25. Recommendations Sector Recap Deltic Timber Corp (DEL) Dow Chemicals (DOW) Recommendations Unload entire Deltic position –7,000 shares Replace with Dow Chemicals –8,177 shares Maintain underweighting in an overvalued sector

26. Thank You Andrew Givens Fisher College of Business givens_34@cob.osu.edu