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Materials Stock Analysis

Materials Stock Analysis. By Joshua Carter & Kyle Shaner. Presentation Overview. Sector Recap Sell Recommendation Buy Recommendation Recommendation Summary New SIM Portfolio. Sector Recap. Current SIM Weight = 1.79% Current S&P Weight = 3.04% Continue to Underweight by 1.25%.

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Materials Stock Analysis

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  1. Materials Stock Analysis By Joshua Carter & Kyle Shaner

  2. Presentation Overview • Sector Recap • Sell Recommendation • Buy Recommendation • Recommendation Summary • New SIM Portfolio

  3. Sector Recap Current SIM Weight = 1.79% Current S&P Weight = 3.04% Continue to Underweight by 1.25%

  4. Posco ADR (PKX) Sector Recap – Current Holdings • South Korean steel manufacturer • Hot-rolled steel • Cold-rolled steel • Stainless steel

  5. POSCO Notable News Events Geographic Segments Revenue Segments Sector Recap – Current Holdings… Feb 2009 – Cuts stainless steel prices 10% Feb 2009 – 6% annual production cut Dec 2008 – Announces 1st ever production cut at 10% Jan 2009 – CEO steps down after poor performance Feb 2009 – Iron Ore miners increase price 5%

  6. Sector Recap – Current Holdings…

  7. Sell Recommendation Faces Many Economic Challenges Global Slowdown South Korean Slowdown • Steel prices have fallen dramatically • Slowdown in global & domestic demand • Ailing auto industry • Increase in raw materials prices

  8. Sell Recommendation… Comparables Analysis • As of March 2, 2009. Data provided by Yahoo Finance

  9. Sell Recommendation… DCF Analysis DCF Sensitivity Analysis

  10. Sell Recommendation… Comparables Analysis Blended Multiples Price Target – Abs. & Comp Absolute Valuation

  11. Sell Recommendation… Price Target EPS vs. Volume & Steel Price – Sensitivity Analysis Target EPS

  12. Conclusion SELL • US$ 45.00: Blended price target based on • DCF • EPS Sensitivity Analysis • Comparable & Absolute Multiple Valuation

  13. Buy Recommendation DOW Chemical Equity Trading Statistics • Engages in manufacture and sale of chemicals, plastic materials, agricultural, and other specialized products • 2008 Revenues of $57,514 billion: 7.4% increase • Strong growth expected in agriculture segments

  14. Geographic Segments Revenue Segments Buy Recommendation… Feb 2009 – Announces top executives won’t get cash bonuses Feb 2009 – Cuts dividend 64% to 15 cents a share Dec 2008 – Announces it will cut 11% of workforce Jan 2009 – Rohm & Haas sues Dow March 2009 – S&P cuts two short-term ratings

  15. Buy Recommendation…

  16. Buy Recommendation… An Industry Bright Spot US - 2009 Economic Outlook Economic Stimulus • Infrastructure spending plays to strengths • Consumer spending is key • Product and geographic diversification • Decline in oil prices

  17. Buy Recommendation… DOW Acquisition of Rohm & Haas ~$15 billion Strategic Rationale Deeper Reach in DevelopingMarkets – Asia / Pacific Financing Mix • Grow performance and specialtychemicals • Strengthens competitiveness of basic chemicals • $1.3 billion in synergies • 30% of synergies come frompurchasing of raw materials • $2.6 billion in additional value creation • $1.7 billion combined in R&D • Delivers more stable earnings withhigher growth • $3 billion preferred equity investmentfrom ROH Investors • Draw $10 billion from bank loan • Receive $4 billion from Berkshireand KIA • Divest $4 billion in ROH assets 2007 – 2012E CAGR EPS Dilution / Accretion

  18. Buy Recommendation… Absolute Valuation (50% mean reversion) Comparables Analysis Multiples Price Target – Blended Abs. & Comp Average

  19. Buy Recommendation… Discounted Cash Flow Analysis DCF Sensitivity Analysis

  20. Buy Recommendation… Price Target Summary • US$ 12.00: Blended price target based on • DCF • Comparable & Absolute Multiple Valuation

  21. New SIM Holdings SELL POSCO AND BUY DOW • Conclusion: • Continue to hold underweight • Why not increase underweight? – Don’t want to miss an early economic rebound • Why not reduce underweight? – Basic materials as a whole still out of favor • SELL all of Posco holdings • BUY 125 bps of DOW Chemical

  22. Supplement Supplement: Key Economic Indicators

  23. Supplement Supplement: Key Economic Indicators

  24. Supplement Possible Dilution from Merger • Company project possible dilution of 5%

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