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Stock Analysis: Materials

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

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Stock Analysis: Materials

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  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. Dow Chemicals (DOW) Recommendations Deltic Timber Corp. (DEL) Sector Recap 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

  5. Dow Chemicals (DOW) Recommendations Deltic Timber Corp. (DEL) Sector Recap 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

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

  8. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap 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

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

  11. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Multiples valuation • Relative to Materials Sector

  12. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Multiples valuation • Relative to S&P 500

  13. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Multiples valuation • Absolute

  14. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap 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

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

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

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

  21. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Multiples Analysis • Relative to Materials Sector

  22. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Multiples Analysis • Relative to S&P 500

  23. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Multiples Analysis • Absolute

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

  25. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap 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

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