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Sector Analysis: Materials Investment Recommendations

Detailed analysis of Deltic Timber and Dow Chemicals including valuations, sector recap, and investment recommendations for maximizing returns in the materials sector.

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Sector Analysis: Materials Investment Recommendations

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  1. Stock Analysis: Materials Andrew Givens March 6, 2007 Student Investment Management

  2. Executive Summary • Sell entire position of Deltic Timber • 7,000 shares • Buy equivalent amount of Dow Chemicals (DOW) • 8,177 shares • Maintain current underweighting in materials sector

  3. Agenda • Sector Recap • Deltic Timber Company Overview • Deltic Timber Valuation • Dow Chemical Company Overview • Dow Valuation • Recommendation

  4. Dow Chemicals (DOW) Recommendations Deltic Timber Corp. (DEL) Sector Recap Sector Recap • Smallest sector in S&P 500 • 3.05% weight • SIM currently underweight (1.5%) • Highest gainer YTD • Up 5.33% • Sector trading at historic levels based on • Price to book value • Price to sales

  5. Dow Chemicals (DOW) Recommendations Deltic Timber Corp. (DEL) Sector Recap Sector Recap • Remain underweight in Materials • Expensive based on valuation analysis • Do not want to “chase” the money after an excellent first two months of the year • Cyclical industry • Economy appears to be slowing • Manufacturing utilization rates and MPI both down from local highs • Expect sector to follow suit

  6. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Timber company with 438,000 acres of timber • Arkansas • Northern Louisiana • Four operating segments • Woodlands • Mills • Real Estate • Del-Tin Fiber (50% equity stake) • Key economic drivers • New home starts • Growth of GDP

  7. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • New home starts • Biggest raw material input is lumber • Increases & decreases in new home starts will drive lumber prices

  8. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Projections for new home starts • Average quarterly home starts (millions) • Decreased home starts  lower lumber prices • Deltic should experience lower sales & a margin squeeze

  9. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • DCF Valuation • Assumptions • Discount Rate of 8.86% (Deltic’s WACC) • Terminal Growth Rate of 5% • Capital Expenditures = Depreciation in perpetuity • Implied equity value per share of $38.23 • Currently trading at $49.00 (Monday close)

  10. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • DCF Sensitivity Analysis

  11. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Multiples valuation • Relative to Materials Sector

  12. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Multiples valuation • Relative to S&P 500

  13. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Multiples valuation • Absolute

  14. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Deltic Timber Corporation (DEL) • Both DCF and multiples analysis give prices in $38-$40 range • Price target of $38.83 • Weighted average • DCF (50%) • Multiples price targets (12.5% each) • Implied downside of 21% • Recommendation is to sell entire position

  15. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Operates in Chemicals Industry within Materials Sector • Engages in manufacture and sale of: • Chemicals • Plastic Materials • Agricultural Products • $40.6 billion market cap • $49.2 billion revenues • Currently trading at $41.76 (Monday close)

  16. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Operates in Chemicals Industry within Materials Sector • Engages in manufacture and sale of: • Chemicals • Plastic Materials • Agricultural Products • $40.6 billion market cap • $49.2 billion revenues • Currently trading at $41.76 (Monday close)

  17. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Income Statement

  18. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Balance Sheet

  19. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • DCF Valuation Assumptions • Discount Rate of 10% (higher than actual WACC of 8.44%) • Perpetuity Growth Rate of 3.25% • Meant to mimic GDP growth • Slow revenue growth • Typical for such a large company • Implied value per share of $50.76

  20. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • DCF Sensitivity Analysis

  21. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Multiples Analysis • Relative to Materials Sector

  22. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Multiples Analysis • Relative to S&P 500

  23. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Multiples Analysis • Absolute

  24. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Dow Chemical Co. (DOW) • Both DCF and multiples analysis give prices in the $49-$52 range • Price target of $50.83 • Upside of 21.7%

  25. Dow Chemicals (DOW) Recommendations Deltic Timber Corp (DEL) Sector Recap Recommendations • Unload entire Deltic position • 7,000 shares • Replace with Dow Chemicals • 8,177 shares • Maintain underweighting in an overvalued sector

  26. Thank You Andrew Givens Fisher College of Business givens_34@cob.osu.edu

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