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Materials Sector Analysis

Materials Sector Analysis. Theo Constantinou Vikram Rao Ryan Rettig. Overview. Sector Size and Composition Business/Economic Analysis Relative Valuation Recommendations Current Materials Sector SIM Holding Questions. Sector Composition. Chemicals Commodity Chemicals

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Materials Sector Analysis

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  1. Materials Sector Analysis Theo Constantinou Vikram Rao Ryan Rettig

  2. Overview • Sector Size and Composition • Business/Economic Analysis • Relative Valuation • Recommendations • Current Materials Sector SIM Holding • Questions

  3. Sector Composition • Chemicals • Commodity Chemicals • Diversified Chemicals • Specialty Chemicals • Industrial Gasses • Metals and Mining • Aluminum • Gold • Silver • Steel • Other Precious Metals and Materials • Containers and Packaging • Metal, Plastic, and Glass Containers • Paper Packaging • Forestry and Paper Products • Timber • Paper Products • Construction Materials

  4. S&P 500 and SIM Sector Weights (as of 4/30/2009)

  5. S&P 500 Weights by Sector (as of 4/30/2009)

  6. Historical Performance – Sectors (as of 4/30/2009)

  7. S&P 500 vs. SPBMS Index Over Past 2 Years

  8. S&P 500 vs. SPBMS Index Over Past 20 Years

  9. 10 Year Cumulative Total Return

  10. Top 10 Companies (as of 4/30/2009)

  11. Largest Market Cap vs. SPBMS (Materials)

  12. Business Analysis Highly cyclical Growth through acquisition Dow Chemical Acquires Rohm and Haas International exposure Weaker Dollar => High Commodity Prices Commodity prices higher without significantly weak Dollar Exposed to wide array of industries

  13. Business Analysis – 5 Forces Analysis Suppliers - High Oligopolies (Oil companies for Chemical companies & Mining companies for Metals companies) Customers – High/Middle High in some industries (Auto Makers) Middling in some industries (Chemical) Rivalry - High Global competition & cheap imports Mature companies fighting for market share Many mergers & acquisitions during economic booms Threat New Entrants – Low High entry barrier High capital costs High fixed costs Substitutes - Low

  14. Materials vs. Commodities/GDP *79 % of movement in the Materials sector explained by the commodity index over past 10 years *63% of movement in the Materials sector is explained by real GDP over past 10 years *77% of movement in the Materials sector is explained by S&P 500 index over past 5 years

  15. S&P 500 and Real GDP Trends

  16. Export Trends

  17. Economic Analysis – Life Cycle

  18. VALUATION Forward P/E (Absolute) Forward P/E (Absolute) Forward P/E (Relative to S&P500)

  19. VALUATION Trailing P/E (Absolute) Trailing P/E (Relative to S&P500)

  20. VALUATION P/BV (Absolute) P/BV (Relative to S&P500)

  21. VALUATION (Industry) P/BV (Aluminum) P/BV (Diversified Chemicals) P/BV (Containers Metal/Glass)

  22. VALUATION (Industry) Trailing P/E (Aluminum) Trailing P/E (Diversified Chemicals) Trailing P/E (Containers Metal/Glass)

  23. VALUATION P/CF (Absolute) P/CF (Relative to S&P500)

  24. Conclusion 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

  25. Recommendation • 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%

  26. Current / Potential SIM Holdings vs. Overall SIMAssuming Initial Investment of $300,000

  27. Questions?

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