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Alcoa/Dow Chemical Analysis

Alcoa/Dow Chemical Analysis. Theo Constantinou Vikram Rao Ryan Rettig. Conclusion from Sector Presentation. Cyclical business – materials sector will start to outperform more rapidly Increase in exports expected Expected future GDP/ global economic growth Eventual rise in commodity prices

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Alcoa/Dow Chemical Analysis

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  1. Alcoa/Dow Chemical Analysis Theo Constantinou Vikram Rao Ryan Rettig

  2. Conclusion from Sector Presentation Cyclical business – materials sector will start to outperform more rapidly Increase in exports expected Expected future GDP/ global economic growth Eventual rise in commodity prices Commodity prices high despite dollar value

  3. Recommendation from Sector Presentation • Remain overweight by 51 bps • Forward looking, if the economy recovers, an even more overweight position may be in order. • Relative to specific Industries in the Material Sector • Current SIM Weight • Overweight at 3.88% • S&P 500 Weight • 3.37% • Class elected to overweight by 100 additional bps

  4. Current Materials Portfolio • Dow Chemical • Only stock owned in sector • Own 36,260 shares • Best performing stock in SIM • 114% return since purchase • 3.88% of SIM is Dow stock • Now have 488 bps to allocate

  5. Dow Chemical- Valuation

  6. Dow Chemical- Valuation

  7. Key Indicators *77% of movement in Alcoa stock explained by the London Metal Exchange aluminum index over past 2 years • Price of Aluminum

  8. AA vs. Commodities/Materials *60% of movement in Alcoa stock explained by the commodity index over past 5 years *63% of movement in the Alcoa stock explained by the materials sector over past 5 years

  9. Where is Price of Aluminum Going?

  10. 3 Year Price – Target Price

  11. Aluminum Price Decline Over Last Year

  12. Future Analyst Estimates

  13. 10-Year Cumulative Total Return - Cyclical

  14. P/BV Valuation P/BV (Absolute) P/BV (Relative to S&P500)

  15. P/CF Valuation P/CF (Absolute) P/CF (Relative to S&P500)

  16. Absolute Valuation The current P/E is 12x earnings, where the 10 year average is around 13x earnings. I think that the forward P/E based on our DCF analysis is close in line with historical averages and reversion to the mean will occur.

  17. S Curve of Future LT Growth in BRIC Countries

  18. LRMC – LME Price Estimates through 2013

  19. DCF Valuation – Upside of 200.53%

  20. Sensitivity Analysis – Upside

  21. Recommendation • Buy 200 bps of Alcoa • Dow Chemical: sell 100 bps to 288 bps • Discretion to class: • Add additional basis points to Alcoa

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