Materials Sector Analysis Overview
Materials Sector Analysis
Ally Hornstein, Xuejing Huang, Stephen Hill
Autumn 2021
Materials Agenda
Material Sector: 2.49%
Material Sector: 3.28%
The Materials Sector Represents 2.49% of the S&P 500
Current SIM holding is 3.28% of total (overweight)
S&P 500 vs. SIM
Industry Overview
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Sector Performance
S&P500
Materials
Source: Fidelity.com
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Materials sector is HIGHLY
cyclical
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Currently in the early stage
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Demand to rebound as
economy begins to recover
Business Cycle
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COVID-19
Economy
CPI
Interest Rates
Unemployment
Supply Chain
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Due to COVID-19, the materials sector has been hard hit with supply
chain issues
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One interesting sub sector of the Metals & Mining Industry to
evaluate is the Steel Industry
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"
At one point, steel prices were 300% above their pre-pandemic
levels at more than $1,900 per ton. Before the pandemic, steel priced
between
$500 per ton and $800 per ton
." (CNBC)
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This has led several analysts to question if we are currently in a steel
market bubble
Source:
https://www.cnbc.com/2021/10/07/how-a-us-steel-shortage-created-a-market-bubble.html
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Industry Focus: Metals & Mining
End Users Include:
Energy
Non-Energy (Pipe & Tube)
Construction
Automotive
Manufacturing Markets
Jewlery-Making
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Supply for materials is in high
demand, but supply chain issues
has created a shortage
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Materials is #1 reason for project
disruptions
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Industries such as Construction
and Manufacturing effected the
most from materials shortage
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Demand for materials at all time
highs
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https://disruptivnation.com/2019/11/17/porters-five-forces/
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The Materials Sector Requires:
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Large Capital Needs
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Quality products, that require the greatest efficiency and effectiveness as
possible
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Government Regulations
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Patents
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Large Human Capital
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Expensive Technology
Threat of Entry:
Low
https://graduateway.com/chemical-industry-analysis-using-porters-five-force-model/
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Suppliers of goods such as lumber, steel, and stone have moderate
power
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Suppliers of rare materials such as chemicals and precious minerals
have significant power
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Due to the materials sector being broadly diversified, supplier power
is mixed
Supplier Power:
Moderate
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Buyer Power is generally low in the Materials Sector
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The government can step in and place price ceilings on raw materials
if necessary
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Most materials companies sell directly to their user industries
through their own distribution networks
Buyer Power:
Low
https://www.equitymaster.com/detail.asp?date=12/29/2008&story=4&title=Steel-Five-force-analysis
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Difficult to substitute since many of these companies produce
specialized materials
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Chemicals and minerals are not readily available to be replaced
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Moderate Competition
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Metals & Mining
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High Competition
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Chemicals
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Containers & Packaging
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Construction Materials
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Materials vs. GDP
Materials vs. PPI
Construction Materials vs. S&P500
Financial Analysis
Sector & Industry
Financial Analysis
Companies
Financial Analysis
S&P500 vs. Materials: Profit Margin
Financial Analysis
Future Profit Margins vs. Current
Valuation Analysis
Sector & Industry
Companies
Valuation Analysis
Historical Analysis – Materials Sector
Valuation Analysis
Historical Analysis – MOS
Valuation Analysis
YTD Material Stocks Performance
RATIO ANALYSIS
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P/E
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S&P 500: 25.92
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Materials Sector: 20.54
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Undervalued: Current Materials P/E is lower than the S&P 500
P/E by 29.2%
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P/S
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S&P 500: 3.46
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Materials Sector: 2.83
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Undervalued:
Current Materials P/S is lower than the S&P 500
P/S by 10.2%
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P/B
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S&P 500: 4.77
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Materials Sector: 3.26
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Undervalued:
Current Materials P/B is lower than the S&P
500 P/B by 33.6%
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P/FCF
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S&P 500: 16.99
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Materials Sector: 12.31
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Undervalued:
Current Materials P/B is lower than the
S&P 500 P/B by 27.5%
TREND ANALYSIS
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P/E Forecasts significantly increased for 2020 A, but seem to be leveling
out per analyst estimates
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COVID-19
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This increase is apparent in the recent Valuation Analysis
of MOS
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P/S, P/B, P/FCF have generally increased for the Materials Sector
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Spotlight:
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Materials Sector Stocks have generally reported substantial gains
YTD
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Profit Margins, Return on Assets, and Return on Equity are worth
notable mention as they have greatly increased
Valuation Analysis vs. S&P 500
Recommendation
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Currently the SIM
portfolio has
materials weighted
higher than the
S&P500 (Overweight)
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Materials is second
lowest weighted in
the S&P500 while it's
third lowest in the
SIM portfolio
Recommendation
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Recommendation: Keep Position
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In the future, lower position to S&P500
Positives
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Future growth projections high for the sector
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Several industries and companies valued low
compared to projected earnings
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Historically, materials sector does significantly
well after a recession
Risks
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Supply chains will prolong
economic recovery
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Highly cyclical and dependent on
US economy
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Future economic outlook is
uncertain with Covid-19 causing
disruptions
Questions
This analysis delves into the performance, trends, and external factors affecting the Materials Sector, focusing on S&P 500 comparison, industry overview, business analysis, business cycle, and external impacts like COVID-19 and supply chain disruptions
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Presentation Transcript
Materials Sector Analysis Ally Hornstein, Xuejing Huang, Stephen Hill Autumn 2021
Materials Agenda Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recomendation
S&P 500 vs. SIM The Materials Sector Represents 2.49% of the S&P 500 Current SIM holding is 3.28% of total (overweight) Material Sector: 3.28% Material Sector: 2.49%
Material Companies in S&P500 Material Companies in S&P500
Sector Performance YTD Materials Sector Performance Vs. S&P 500 YTD Materials Sector Performance Vs. S&P 500 The Materials Sector has outperformed the S&P 500 this year Materials S&P500
Business Cycle Materials sector is HIGHLY cyclical Currently in the early stage Demand to rebound as economy begins to recover Source: Fidelity.com
External Factors External Factors CPI COVID-19 Economy Unemployment Interest Rates Supply Chain
External Factors External Factors Due to COVID-19, the materials sector has been hard hit with supply chain issues One interesting sub sector of the Metals & Mining Industry to evaluate is the Steel Industry "At one point, steel prices were 300% above their pre-pandemic levels at more than $1,900 per ton. Before the pandemic, steel priced between $500 per ton and $800 per ton." (CNBC) This has led several analysts to question if we are currently in a steel market bubble Source: https://www.cnbc.com/2021/10/07/how-a-us-steel-shortage-created-a-market-bubble.html
User & Geography User & Geography Industry Focus: Metals & Mining End Users Include: Energy Non-Energy (Pipe & Tube) Construction Automotive Manufacturing Markets Jewlery-Making
Supply and Demand Supply and Demand Supply for materials is in high demand, but supply chain issues has created a shortage Materials is #1 reason for project disruptions
Supply and Demand Supply and Demand Industries such as Construction and Manufacturing effected the most from materials shortage Demand for materials at all time highs
Supply and Demand Supply and Demand
Poter's Five Forces Poter's Five Forces https://disruptivnation.com/2019/11/17/porters-five-forces/
Threat of Entry Threat of Entry Threat of Entry: Low The Materials Sector Requires: Large Capital Needs Quality products, that require the greatest efficiency and effectiveness as possible Government Regulations Patents Large Human Capital Expensive Technology https://graduateway.com/chemical-industry-analysis-using-porters-five-force-model/
Supplier Power Supplier Power Supplier Power: Moderate Suppliers of goods such as lumber, steel, and stone have moderate power Suppliers of rare materials such as chemicals and precious minerals have significant power Due to the materials sector being broadly diversified, supplier power is mixed
Buyer Power Buyer Power Buyer Power: Low Buyer Power is generally low in the Materials Sector The government can step in and place price ceilings on raw materials if necessary Most materials companies sell directly to their user industries through their own distribution networks https://www.equitymaster.com/detail.asp?date=12/29/2008&story=4&title=Steel-Five-force-analysis
Threat of Substitution Threat of Substitution Threat of Substitution: Threat of Substitution: Low Difficult to substitute since many of these companies produce specialized materials Chemicals and minerals are not readily available to be replaced
Competitive Rivalry Competitive Rivalry Competitive Rivalry: Competitive Rivalry: Moderate to High Moderate Competition Metals & Mining High Competition Chemicals Containers & Packaging Construction Materials
Financial Analysis Sector & Industry
Financial Analysis Companies
Financial Analysis S&P500 vs. Materials: Profit Margin
Financial Analysis Future Profit Margins vs. Current
Valuation Analysis Sector & Industry Companies
Valuation Analysis Historical Analysis Materials Sector
Valuation Analysis Historical Analysis MOS
Valuation Analysis YTD Material Stocks Performance
Valuation Analysis vs. S&P 500 RATIO ANALYSIS TREND ANALYSIS P/E Forecasts significantly increased for 2020 A, but seem to be leveling out per analyst estimates COVID-19 This increase is apparent in the recent Valuation Analysis of MOS P/E S&P 500: 25.92 Materials Sector: 20.54 Undervalued: Current Materials P/E is lower than the S&P 500 P/E by 29.2% P/S, P/B, P/FCF have generally increased for the Materials Sector P/S Spotlight: S&P 500: 3.46 Materials Sector Stocks have generally reported substantial gains YTD Materials Sector: 2.83 Undervalued: Current Materials P/S is lower than the S&P 500 P/S by 10.2% Profit Margins, Return on Assets, and Return on Equity are worth notable mention as they have greatly increased P/B S&P 500: 4.77 Materials Sector: 3.26 Undervalued: Current Materials P/B is lower than the S&P 500 P/B by 33.6% P/FCF S&P 500: 16.99 Materials Sector: 12.31 Undervalued: Current Materials P/B is lower than the S&P 500 P/B by 27.5%
Recommendation Currently the SIM portfolio has materials weighted higher than the S&P500 (Overweight) Materials is second lowest weighted in the S&P500 while it's third lowest in the SIM portfolio
Recommendation Recommendation: Keep Position In the future, lower position to S&P500 Positives Future growth projections high for the sector Several industries and companies valued low compared to projected earnings Historically, materials sector does significantly well after a recession Risks Supply chains will prolong economic recovery Highly cyclical and dependent on US economy Future economic outlook is uncertain with Covid-19 causing disruptions
