Stock Recommendation for Autumn 2021 - Sector Overview and Analysis
Materials Sector overview and analysis for Autumn 2021, including SIM Holdings & Allocation, Sector Performance, Business Cycle analysis, External Factors affecting the sector such as COVID-19 impact and supply chain issues, and Supply and Demand dynamics. The report discusses the current state of the Materials Sector in the market, highlighting opportunities and challenges for investors.
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Stock Recommendation Ally Hornstein, Xuejing Huang, Stephen Hill Autumn 2021
Materials Agenda SIM Holdings & Allocation Overview Sector Recap Dupont Scotts Miracle-Gro Steel Dynamics Inc. Conclusion
SIM Holdings & Allocation Overview
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%
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
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
Dupont (DD) Overview Dupont manufactures engineering specialty materials, packaging with a focus on chemicals and agricultural products After recent divestures, Dupont is made of three segments: electronics and industrial, mobility and materials, and water and protection The company is valued at approximately $3.9 billion
Dupont de Nemours Recent News Recent Events -Dupont's sales increased 18% compared to the previous year at $4.3 billion with average prices increasing 6% to offset inflation - Dupont's Q3 Earnings report showed higher than expected EPS beating analyst's estimates by $.02 - Ed Breen announced the acquisition of Roger's Corporation for $5.2 billion, an electronics-materials specialist with a focus on 5G infrastructure - Divestures of Non-Core and Nutrition and Bioscience segments for $7.3 billion is shifting the company's strategy of acquiring more secular themed companies for entry into telecommunication, semiconductors, and electric vehicle parts - Inflation on raw materials has not impacted Dupont's financials with costs being passed to the customer
Dupont de Nemours Valuation Discounted Cash Flow performed with a relatively conservative 9.5% discount rate and a 4% growth rate Operating income expected to increase with divestures within the company Dupont currently has approximately $22 billion in debt with $2.5 billion cash on hand Dupont continues to beat EPS estimates every quarter for the last year with revenues being on pace with consensus estimates
Dupont de Nemours Outlook Growth Drivers Risks Dupont's specialty products such Omicron variant may cause a delay in economic recovery As Kevlar and Tyvek command pricing Power Litigation and regulation may undercut financial gains with more rules imposed for companies dealing with chemicals and other hazardous substances Divestures of underperforming segments and acquisitions of secular focused companies International exchange rates will affect Dupont's financials as significant proportion of Dupont's business is conducted internationally A rebounding economy with large amount of infrastructure spending
Dupont de Nemours Recommendation Dupont is positioned to take advantage of economic growth as long as variants of coronavirus do not cause severe outbreaks Acquisition of Roger's Corporation into telecommunication, semiconductors, and 5G networks makes Dupont more resistant to economic fluctuations and more competitive Divestures of segments nutrition and biosciences will refine Dupont's business model by releasing inefficient lines of business Revenues expected to increase on average by 5% over the next year with costs to be reduced through the divestures
Scotts Miracle-Gro Overview The Scotts Miracle-Gro Company is a company based in Ohio which manufactures, markets, and sells consumer lawn and garden products not only in the United States but also outside of the United States, especially in Canada, the Netherlands, and China. In 2020, the Scotts Miracle-Gro Company generated 4131.6 million in revenue, an 30.9% increase from 2019, and the earnings per share were $6.81. As a multinational corporation, Scotts Miracle-Gro divides its business into three reportable segments: Hawthorne, and Other. U.S. Consumer,
Scotts Miracle-Gro News Recent News: On August 17, 2021, Scotts Miracle-Gro announced the purchase of Rhizoflora's premier nutrients business, including its Terpinator and Purpinator brands, bolstering The Hawthorne Gardening Company's product portfolio. Such acquisition will lead to high long-term debt level iAt the end of the fiscal third quarter, 40.6% year over year to $2,132 million. On November 3rd, 2021, Scott Miracle-Gro announces record year results. Despite a 28 percent drop in sales in the fourth quarter in U.S. consumer segment, 11 percent growth was realized in fiscal 2021. And total revenues increased 19 percent to $4.93 billion, compared to $4.13 billion last year.
Scotts Miracle-Gro Investment Outlook Growth Drivers: Risks: The development of cannabis industry will demand more equipment from Hawthorne segment Changes in environmental and other public health legislation, as well as regulatory enforcement objectives, might raise their operating expenses or limit their ability to commercialize all of their goods. Expanding residential household developments are likely to fuel demand and lead to higher demand for lawn and gardening supplies. The company developed patents for their technologies related to fertilizer, weed killer, chemical, and hydroponic growing systems. They also have exclusive patent licenses and supply agreements, which allow them to use and sell patented fertilizers, pesticides, and mechanical devices. Their abilities to retain or expand revenues may be harmed by the highly competitive nature of our markets. Their most price-sensitive clients may trade down to lesser-cost products.
Scotts Miracle-Gro Investment Outlook With the development of the cannabis industry, I gave it an aggressive growth rate of 4.5% Sales revenue grow approximately 19% for 2021 and is expected to grow 5.5% for 2022.
Steel Dynamics: Overview Steel Dynamics is one of the largest domestic steel producers and metal recyclers in the United States. It was founded in 1993 and is headquartered in Fort Wayne, Indiana. Steel Dynamics has three business segments: steel operations, metals recycling operations, and steel fabrication operations. Steel Operations accounted for 74% of 2020 consolidated net sales, representing the largest business segment of the company. Metals Recycling, Steel Fabrication, and Other Activities accounted for 11%, 9%, and 6% of 2020 consolidated net sales respectively
Steel Dynamics: Recent News Skyrocketing Margins Q3 YOY Net income of $991 million or $4.85 per share Last Year's Q3 - Net income of $100 million or $0.47 per share This represents an 891% increase in net income and 932% increase per share. Revenue was also reported as 5.09B, which increased 118% year over year. Net Profit Margin, currently at 19.47% up 353% this year. Operating Income is also at 1.32B, which has increased 748% year over year. Growth Opportunity in Sinton, Texas Current Capacity: 13 million tons Sinton, Texas Estimated Capacity: 2.7 million tons Shipments between 2 and 2.2 million tons in just 2022 EBITDA is estimated to be in the range of $475 million to $525 million. Steel Dynamic is unwavering in [their] vision to see [their] investment in Sinton, Texas, create long-term value creation in the Southwest U.S. and Mexico. Strategically located to provide significant freight benefits and shorter lead times, this new mill will be one of the most advanced of its kind, capable of producing products currently unavailable in the U.S." - CEO
Steel Dynamics: Valuation Averaged Multiples DCF Derived from DCF Analysis Discount Rates ranging from 10.75- 11.25%. Growth Rates ranging from 3.25-3.75%. Equity value for Steel Dynamics between $22,480,118,000- $24,146,841,308. Equity value per share ranged from $107.40- $113.44. With a stock price of $62.19 the average implied stock price for is $97.53, 56.83%
Steel Dynamics: Outlook Growth Drivers: Risks: Supply & Demand The steel industry is highly dependent on the availability and demand for steel. Decreasing Steel Prices Several financial analysts have even gone on to say that the steel industry is currently experiencing a market bubble". Infrastructure Bill November 5th, The House of Representatives passed a $1.2 trillion infrastructure bill. This would support the improvement. The American Iron and Steel Institute estimates that every 100 billion dollars invested into infrastructure, that will translate into 5 million addition tons of steel demand. This results in an expected 60 million ton increase in steel demand in the U.S. alone. Legal and Environmental Compliance Ever so changing environmental, climate change, greenhouse gas emissions, and sustainability regulations are presenting new obstacles to the steel industry. Competitive Market The global steel market is highly competitive and has become even more so due to global supply chain constraints. Growth Opportunity in Sinton, Texas
Steel Dynamics: Outlook Steel Dynamics stock is currently undervalued given the future intrinsic value. Not only does Steel Dynamics have a diversified product offering to combat volatility, but their operational efficiency has also allowed them to outperform their competitors. Steel Dynamics has recently begun operations at the new Sinton, Texas Flat Roll Steel Mill. $1.2 trillion infrastructure bill passed by the House of Representatives will further benefit the Steel Industry and Steel Dynamics. 12/7/21 $62.19 56.83%
Final Recommendation New SIM Weight Company Current Price Target Price Upside (Downside) Current SIM Weight Buy (+)/Sell (-) Recommendation Dupont de Nemours (DD) 3.5% 3.23% +27bps BUY $76.96 $91.71 16% Scott Miracle- Gro(SMG) 0.4% 0.00% +40bps BUY 134.99 165.58 18.5% Steel Dynamics, Inc. (STLD) 1.1% 0.00% +110bps BUY $62.19 $97.53 56.8%
