Materials Stock Analysis. Michael Hughes Stanley The

Transcription

1 Materials Stock Analysis Michael Hughes Stanley The Lorraine Toth

2 Overview Summary of Sector Cyclical sector with large beta will likely perform significantly worse than the S&P 500 if it falls Some hope for this sector opportunities in the emerging markets; earnings are up for the sector However, final recommendation is to underweight the materials sector by 75 additional bps S&P 500 Weight SIM Weight +/ Current 361% 3.61% 314% 3.14% 0.47% 0 Recommended 3.61% 2.39% 1.22%

3 Overview Sector Stocks International Paper the current SIM Portfolio in Materials at 3.14% currently is entirely comprised of International Paper stock As of the July Appraisal Report, IP contributed an unrealized gain of $81,444 to the portfolio Steel Dynamics do not buy Owens Illinois do not buy

4 Steel Dynamics Stock Analysis

5 Steel Dynamics: Overview Fifth largest carbon steel producer in the United States Diversified carbon steel producer and metal recycler Grow business by expanding current capacities and expansion to other related steel business Market Cap = 2.95B

6 Steel Dynamics: Business Analysis Two most important market for STLD Automotive Non residential construction Non residential construction has been declining since the beginning of 2008 Small increase of 10.9% in auto sales from 2010

7 Steel Dynamics: Business Analysis Product Mix

8 Steel Dynamics: Business Analysis Market Mix Automotive and construction are the two biggest industries for Steel Dynamics Both industries contribute to 55% of STLD s market

9 Steel Dynamics: Business Analysis

10 Steel Dynamics: Business Analysis

11 Steel Dynamics: Business Analysis

12 Steel Dynamics: Business Analysis

13 Steel Dynamics: Financial Analysis Net Sales Company s performance is cyclical and positively correlates with the economic performance Negative outlook for the second half of 2011 implies that Steel Dynamics will not perform well

14 Steel Dynamics: Financial Analysis Gross Margin Low gross margin due to higher h raw material cost Lower capacity utilization in the industry hinders Steel Dynamics to achieve economy of scale

15 Steel Dynamics: Financial Analysis Profitability relative to the S&P 500 Steel Dynamics is underperforming the market kt Profitability of commodity business depends on the sales volume Declining construction spending in the United States contributes to lower profit margin for Steel Dynamics Net Profit Margin Return on Equity

16 Steel Dynamics: Valuation Analysis Relative to High Low Median Current Industry P/Trailing E P/Forward E P/B P/S P/CF Relative to S&P 500 High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF

17 Steel Dynamics: Valuation Analysis Multiples Valuation Current tpi Price: $13.04 Target Price from multiples valuation : $ Upside : 35.74% Absolute Valuation High Low Median Current #Your Target Multiple *Your Target E, S, B, etc/share Your Target Price (F x G) A. B. C. D. E. F. G. H. P/Forward E P/S P/B P/EBITDA P/CF

18 Steel Dynamics: Valuation Analysis Discounted Cash Flow

19 Steel Dynamics: Recommendation Current Price: $13.52 Target Price (DCF) : $17.08 Target Price (Multiples Valuation): $17.70 Recommendation: Do Not Buy

20 Owens Illinois Stock Analysis

21 Owens Illinois : Summary Owens Illinois is a glass container manufacturer headquartered near Toledo, Ohio Focused exclusively on providing containers for the food and beverage industries Market Cap = 3.34B Beta = 2.19 Current Stock Price = $20.33 Projected Upside = 2.4%

22 Owens Illinois: Business Analysis

23 Owens Illinois: Business Analysis Owens Illinois divided into four reportable segments: North America Asia Pacific Europe Latin America Major customers include Anheuser Busch, Heinz, MillerCoors, PepsiCo, Coca Cola, Cola Nestle, Heineken, and Fosters OI continues to benefit from growth and opportunities ii in emerging markets (especially Latin America) but major issues in Asia Pacific and North American markets have greatly negatively impacted results this year

24 Owens Illinois: Business Analysis Key Business Drivers currently include: Overall lldemand dfor alcohol l di driven by disposable income, GDP, high interest and savings rates Demand for types of alcohol increased demand this year in craft beer which implies more SKUs, resulting in higher switching costs and less efficiency Availability of substitutes btit t aluminum and plastic packaging Cost inflation increases in energy prices, diesel prices (negatively impacted both Europe and North America regions this year) Currency strength eg e.g. strength of currency in Australian market has greatly decreased wine exports

25 Owens Illinois: Financial Analysis Stock price has plummeted, especially after the 2 nd Quarter Earnings Release!

26 Owens Illinois: Valuation Analysis Valuation Analysis Relative to Industry and S&P Stock Valuation Relative to Industry High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Relative to S&P High Low Median Current 500 P/Trailing E P/Forward E P/B P/S P/CF

27 Owens Illinois: Valuation Analysis Valuation Analysis Absolute Absolute Valuation High Low Median Current #Your Target Multiple *Your Target E, S, B, etc/share Your Target Price (F x G) A. B. C. D. E. F. G. H. P/Forward E P/S P/B P/EBITDA P/CF Average Price = $19.65 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 10.7%

28 Owens Illinois: Valuation Analysis Discounted Cash Flow Analyst: Lorraine Toth Terminal Discount Rate = 11.5% Date: 8/14/2011 Terminal FCF Growth = 3.0% Year 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Revenue 6,974 7,498 8,061 8,786 9,489 10,153 10,762 11,300 11,752 12,105 12,468 % Grow th 7.5% 7.5% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 3.0% Operating Income 1,253 1,408 1,580 1,650 1,808 1,944 2,044 2,154 2,241 2,305 2,371 Operating Margin 18.0% 18.8% 19.6% 18.8% 19.1% 19.1% 19.0% 19.1% 19.1% 19.0% 19.0% Interest and Other (913) (974) (1,041) (1,135) (1,225) (1,311) (1,390) (1,459) (1,518) (1,563) (1,610) Interest and Other % of Sales -13.1% -13.0% -12.9% -12.9% -12.9% -12.9% -12.9% -12.9% -12.9% -12.9% -12.9% Taxes Tax Rate 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% 26.5% Net Income - Noncontrolling Interests (30) (30) (30) (29) (32) (35) (36) (39) (40) (41) (42) % of Net Income -12.0% -9.4% -7.6% -7.6% -7.6% -7.6% -7.6% -7.6% -7.6% -7.6% -7.6% Net Income Available to Shareholders % Grow th 31.6% 26.7% -4.3% 13.0% 8.6% 3.4% 6.2% 4.1% 2.6% 2.7% Add Depreciation/Amort % of Sales 6.0% 5.7% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% 5.0% Plus/(minus) Changes WC 27 (84) (90) (316) (304) (284) (258) (226) (188) (145) (150) % of Sales 0.4% -1.1% -1.1% -3.6% -3.2% -2.8% -2.4% -2.0% -1.6% -1.2% -1.2% Subtract Cap Ex Capex % of sales 7.0% 6.3% 5.7% 6.3% 6.1% 6.1% 6.2% 6.1% 6.1% 6.1% 5.0% Free Cash Flow % Grow th 8.5% 41.3% -62.0% 54.3% 26.7% 9.4% 20.0% 13.8% 10.7% 17.4% NPV of Cash Flows 1,428 45% NPV of terminal value 1,746 55% Terminal Value 5,185 Projected Equity Value 3, % Free Cash Flow Yield 6.42% Free Cash Yield 8.25% Current P/E Terminal P/E 10.0 Projected P/E Current EV/EBITDA Terminal EV/EBITDA 2.8 Projected EV/EBITDA Shares Outstanding t 167 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 5.1%

29 Owens Illinois: Recommendation Do Not Buy Catalysts Emerging market growth Increased sales across all end use categories Upside on the Valuation Analysis and DCF Risks Very high beta of 2.19 will not be a good buy until we hit the bottom Decreased earnings which h expect to continue to trend downward; Final Thoughts: As Owens Illinois goes through a restructuring and expansion phase, this stock will likely be a good buy in the near future; however, its correlation to certain economic indicators and its high beta imply that this stock may not be well invested at this point in time if the market continues to decline

30 IP: Stock Analysis

31 IP: Summary Global paper and packaging company headquartered din Memphis, TN Produces uncoated papers and industrial and consumer packaging Market Cap = $11.01 B Beta = 2.50 Current Stock Price = $25.55 Price Target = $36 Projected Upside = 41.3%

32 IP: Stock Performance Net underperformance against the S&P for the past six years Increasing commodity and transportation costs Razor thin margins

33 52 Week Stock Performance

34 IP: Business Analysis Pulp and Paper Mills and Converting and Packaging Plants North America, Europe, Latin America, Russia, Asia, North Africa Business Segments Sales Operating Profit Industrial Packaging Printing Papers Consumer Packaging Distribution

35 IP: Business Segments Industrial Packaging ($543 mil profit in Q1&2 2011) Transport Packaging, Containerboard, Bulk Packaging, Retail Ready Packaging, Paper Bags PrintingPapers Papers ($431 mil profitin2011) in Commercial Paper (Hammermill) Consumer Packaging ($199 mil profitin in 2011) Cosmetics, Confectionary, Healthcare, Sporting Goods, Private Labels Distribution ($26 mil profit in 2011) Xpedx North American distribution business Warehousing, logistics, transportation and distribution

36 IP: Business Analysis

37 IP: Future Growth Catalysts Entering Emerging Markets 75 % stake in Andhra Pradesh Paper Mills First American country with significant stake in market $1.2 billion joint venture in Russia 50% interest in two new Russian mills Start t up in 2 nd hlf half of 2012, provide products to Russia, China $101 mil profit in 2011

38 IP: Future Growth Catalysts Exited the Forest Products business Owned large amounts of land in S. America Temple Inland Hostile Offer Industrial Packaging business Good synergy possibilities Attempt t at $30.60/share, 20% premium over high h Rejected unanimously by board Downturn may cause trouble for current M&As

39 IP: Business Drivers Rising Pulp and Paper Costs Rise agitated by fuel surcharges Slow GDP growth signals slow demand growth Beta = 2.50 Falling inventories Improving Turnover Weak US dollar Becoming more global company

40 IP: Financial Analysis

41 IP: Valuation Ratios Relative to S&P High Low Median Current 500 P/Trailing E P/Forward E P/B P/S P/CF Relative to High Low Median Current Industry P/Trailing E P/Forward E P/B P/S P/CF Absolute High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF

42 IP: DCF & Valuation Absolute Valuation High Low Median Current #Your Target Multiple *Your Target ESB E, S, B, Your Target Price etc/sha (F x G) re A. B. C. D. E. F. G. H. P/Forward E P/S P/B P/EBITDA P/CF

43 Price Target IP 41.3% Upside Cyclical stock, but good growth catalysts Metric Target Price Weight DCF $ % $ P/Forward E $ % $ 3.65 P/EBITDA $ % $ P/S $ % $ 1.74 P/B $ % $ 1.63 P/CF $ % $ Projected Price Target $ Round To: $ Current Price (8/12/11) $ 25.55

44 IP: Recommendation Hold Keep the money allocated to Materials (about 2.4% of SIM) in IP SIM Portfolio Breakdown Materials Everyone Else