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Analysis of the S&P 500 Materials Sector: Opportunities and Challenges Ahead

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This report delves into the current state of the Materials sector within the S&P 500, examining key industries such as Chemicals, Metals & Mining, Paper, and Construction Materials. We analyze market trends, particularly the decline in demand for glass and metals, and the rising use of plastics. Factors affecting profitability, including raw material prices and globalization, are discussed. Financial performance metrics like revenue growth and profit margins provide insights into sector viability. Overall, while the long-term outlook remains positive, short-term uncertainties require cautious investment strategies.

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Analysis of the S&P 500 Materials Sector: Opportunities and Challenges Ahead

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  1. Sector Presentation Sector: Materials Brian Mandel Minh Le Ellis Krienik

  2. INTRODUCTION&BUSINESS ANALYSIS

  3. S&P 500 Index Table

  4. Materials Companies in the S&P 500 • Chemical • Metal & Mining • Paper • Construction Material

  5. SIM Portfolio

  6. Phase of Life Cycle Mature – Chemical, Plastics Declining – Glass, Metals • Plastic increasingly used as substitute for glass • Increase in demand for metals being met by importers

  7. End Market - Construction Sept. 2008 to Sept. 2009: -16.7% Growth Construction consumes synthetic materials Stimulates demand for appliances, paint, carpet, windows

  8. End Market – Motor Vehicle Sept. 2008 to Sept. 2009: -11.5% Growth Production for 1st half of 2009 50% lower than 2008 1st half production Demand boosted by “Cash for Clunkers”

  9. End Market – Consumer Goods Sept. 2008 to Sept. 2009: -1.7% Growth Important market for containers and chemicals

  10. Key Factors Raw Material Prices Electricity Prices Globalization Consolidation

  11. Profitability & Pricing Long-term sales contracts help maintain profit stability Production and sale of value added products give firms competitive advantage and premium pricing Supply contracts for key inputs

  12. ECONOMIC ANALYSIS

  13. Commodity prices and Sector

  14. Exchange Rate & Sector

  15. CPI and Materials Sector

  16. GDP and Material Sector

  17. FINANCIAL ANALYSIS

  18. S&P 500 vs. SPBMS Index – YTD

  19. S&P 500 vs. SPBMS Index – ROE • Currently below 10-yr average • ROE steadily declining with recent market downturn.

  20. Revenue Growth – Sector Performance 5 year Growth Rate: 6% Materials 5 year Growth Rate: 7% S&P 500

  21. Revenue Growth – Industry Performance Metal/Glass Containers 5 year Growth Rate: 10% Diversified Chemicals 5 year Growth Rate: 7% Agricultural Chemicals 5 year Growth Rate: 23%

  22. Margins – Historically lower EBITDA Margin Currently at the 10-YR average. Net Profit Margin Profit margins falling.

  23. Margins – Cyclical EBITDA Margin • Currently below 10-yr average

  24. Earnings Growth – Industry Performance 4 Quarter Moving Average Materials Index Diversified Chemicals Agricultural Chemicals Metal/Glass Containers

  25. VALUATION ANALYSIS

  26. P/E absolute

  27. P/E RELATIVE TO S&P 500

  28. Aluminum Industry vs. Sector

  29. Gold Industry vs. Sector

  30. Chemical-Diverse Industry vs. Sector

  31. P/B ABSOLUTE

  32. P/B RELATIVE TO S&P 500

  33. RECOMMENDATIONS

  34. Recommendation Sector returns • Positive for long term • Uncertain for short term Sector vs. S&P • Magnified gains/losses compared to S&P Positive forces • Weak dollar • Strong emerging markets • Domestic economy starting to improve Risks • Unemployment • Weak demand (lack of stimulus programs)

  35. Recommendation Remain overweight in sector Underweight commodity companies, overweight specialty companies $400K in DOW – 15,444 shares $300K in MON – 4,466 shares $200K in ATI – 6,481 shares

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