Apr 3, 2013

1st Quarter Index Comparison.

  This is merely a comparison of how the Dow Jones Basic Material Index has compared against the other three big U.S. composite indices. As seen in the first stock chart below, the Dow Jones US Basic Material Index is actually posting a slight loss during the 1st Quarter of 2013. This compares with an 8.7% gain for the DOW, a 5% gain for the NASDAQ, and a 7.3% gain for the S&P500. Over the coming weeks we’ll look into the factors that may be causing the Basic Material Index to lag behind the other major indices, but it is interesting to note how closely resembled the NASDAQ until Mid-March, 2013.

  Since mid-March, the index has lost about 7 points (roughly 2.5% of its value). This sudden decrease has essentially wiped out nearly all the gains from the mid-February crash, where it climbed from 272 (Feb 25th) to 289 (March 15) - a 6.4% gain. The end of March saw the index close at 282.92 – roughly 3.2 points off its Jan 2nd close (a 1.1% decline). In addition, its April 2nd close of 276 constitutes a further drop of 2.5% from March 28th and may indicate some weaknesses within the Sector.

1st Quarter Basic Materials

1st Quarter Dow Jones Industrial

1st Quarter NASDAQ

1st Quarter S&P500

Mar 23, 2013

Plum Creek Timber, Inc. Stock Analysis (PCL)

  Plum Creek Timber Co. Inc, a timber and forestry company headquartered in Seattle, WA specializes in products ranging from longs and lumber, to plywood and medium density fireboard. They also spend quite a bit of resources on conversation and environmental education, as well as land leasing and hunting programs. 

  Plum Creek is a company that simply owns a lot of land suitable for growing timber and wood products. From a Capital Expenditure perspective, Plum Creek Timber currently accounts for$3.85 billion in assets with nearly 90% of that being attributed to “Other Assets,” a.k.a, Land. This is from a company with a total Net Income of $203 million that paid out $272 million in dividends.

  Despite this, their stock has been on the incline closing at $50.48 on 3/22/13 – up from $45.40 on Jan 2nd –an 11.2% YTD growth.

  When we look at their financials, we calculated a CAPM growth of 5.2% with a WACC of 5.5%. We calculated an FCFF of $443 million, with a long term growth rate that is -5.6%. Their growth rate is negative because of the fact that their dividend payout was higher than their Net Income numbers. Their last dividend was $0.42 with a dividend yield of 3.33. As of this posting, we valued their stock price to be approximately $69.55 which means it is about 38% undervalued according to our calculations.  We certainly don’t expect a 38% growth anytime in the near future; however, based on their financials, we do believe that this stock has room to for growth.  We are bullish on PCL, and in addition to their dividend yield, we believe that this is a good stock to take a look at.Their other keys financial are below:

  • EPS: 1.25 
  • Beta: 1.05 
  • Trailing P/E : 40.38 
  • Forward P/E : 30.05 
  • Price / Sales: 6.08 
  • Price / Book: 6.65 
  • Profit Margin: 15.16% 
  • Operating Margin: 20.99% 
  • ROA: 4.06% ROE: 16.33%
  Overall, their financials look ok, but they certainly need to bolster their Net Income numbers, however their profit and operating margins are strong as are the P/E numbers. Their EPS is not strong mainly because their revenues have not been strong the last couple of years. However, as the economy recovers, and if housing starts increase, this could be a stock to watch in the coming months. Experts have downgraded them to a hold, but now may be the time to jump in.

  Plum Creek Timber Co. Inc YTD stock and volume chart is below:

Plum Creek Stock and Volume Chart
All data taken from 10K reports and public domain data.

Mar 22, 2013

Stock Analysis of Kaiser Aluminum Corp. (KALU)

  Kaiser Aluminum (kaiseraluminum.com) is a supplier of aluminum products to various markets, such as Aerospace and Defense, Automotive, General Engineering and Custom Industrial. Founded in 1946, Kaiser made their mark in the aluminum industry after purchasing three plants from the U.S. Government and eventually growing it to their current number of twelve facilities in North America, and sales facilities in Paris and Beijing. They currently specialize in the production of semi-fabricated specialty aluminum products.
Headquartered in Foothill Ranch, CA, USA, Kaiser Aluminum currently has a full-time staff of 2600 employees and is led by Chairman and CEO, Mr. Jack A. Hockema.

  Kaiser Aluminum is the typical stock that has seen its ups and downs during the recession, but is now essentially trading at the same level they were in August, 2007. Despite this, they still have a way to go before regaining pre-2008 market crash strength with market analysts forecasting a growth of between 7% and 12% in F.Y. 2013.

  Kaiser is currently trading on the NASDAQ platform under the KALU ticker. Their March 21 close was $63.78 with a market cap of $1.22 Billion and an EPS of 4.45. Their other main financial stats are listed below:

  • BETA: 1.19 52 
  • Week High / Low $65.18 / $45.65 
  • Enterprise Value $1.25B 
  • Trailing P/E 14.33 
  • Forward P/E 13.60 
  • PEG Ratio 1.04 
  • Price/Book 1.14 
  • Price/Sales 0.92
  Using a Capital Asset Pricing Model we re-evaluated the stock to try to determine if it is currently trading at the correct market value or if it’s under or overvalued. From our analysis of Kaiser’s recent financial data we determined the following:
Their Free Cash Flow to the Firm is slightly above $87 million.
This is with an EBIT of $16.7 million on revenues of $1.36 billion.
Their CAPEX from 2011 to 2012 was a gain of nearly $250 million.
Their depreciation write off was $36 million.
Their WACC was 8.8%
Their calculated growth is 6.25% for five years with a 3% growth there after.

  We used a risk free rate of 0.83% (Treasury bond rate), with a market rate premium of 8.25% and a yearly growth expected to be 10.5% for F.Y. 2013.

  With this data in mind, we believe that KALU should be trading at $71.97 – approximately 13% undervalued from its March 21st close.
Thus, we believe that this is a stock worth looking closer at. It has potential growth for this year, the price we estimate is in the midrange of various other analysts’ opinions, and it’s a decent income stock with a 1.88 dividend yield on $0.30 per share.

  The YTD price and volume chart is below:

Price and Volume of KALU

  We see the increasing global demand for aircraft frames and assemblies as a main factor in Kaiser’s growth, as well as a recovering market for high-end automobile sales worldwide. In addition, the current rebound as aluminum as a commodity is starting to have a positive effect on many aluminum companies – Kaiser should be able to profit from this growing commodity.

Mar 17, 2013

Evaluation of Southern Copper Corporation (SCCO)

   The Basic Material stock that we looked at this week is Southern Copper Corp: southerncoppercorp.com (NYSE:SCCO). Southern Copper Corp is a company that produces copper, silver and zinc, among other metallic materials. Their operations are mainly in Central and South America with smelting and refining operations in Mexico and Peru, and exploration activities in Argentina, Chile and Ecuador. The bulk of their mining operations are in Peru with open-pit copper excavation operations in Mexico.

  They are currently traded on the NYSE with a recent closing price of $36.74. Their 52 week range is from 27.72–42.03. They have a $31 Billion Market Cap with a Beta of 1.59. Their other indicators are as follows: 
  • Enterprise Value: 32.69B 
  • EPS: 2.28 P/E 16.11 
  • PEG ratio: 0.82 
  • Price/Sales: 4.70 
  • Price/Book: 6.57 
  • ROA: 23.21% 
  • ROE: 44.0% 
  • Current Ratio: 5.00 
  • Book Value to Share: 5.64 

  We re-evaluated their current stock price using a typical CAPM model. From our analysis, we calculated the following via their 2012 & 2011 10k Reports: 
  • Free Cash Flow to the Firm (FCFF) at $1.7B 
  • Weighted Average Cost of Capital at 8.4% 
  • Their Growth Rate at 12% for five years with a long term growth rate after at 3%. 

  We used at risk free rate of 0.83% (5 Year Treasury Bond), a market premium of 5%, and long tem sustainable growth at 3%. 

  From our calculated data and other published data, we calculated at share price of $34.07. SCCO closed last at (03.15.13) at $36.74 ~ technically 7% undervalued, but we believe their share price is fairly valued. Other analysts expect growth of around 17% this year and just over 3% next year. 

  We believe that this growth is a fair estimate, assuming their South American exploration operations come to fruition and that the commodity market for silver and precious metals remains high. 

  The main reason why we highlighted this equity is because of their dividend payouts. SCCO paid out over $3.1 Billion in dividends on only $2 Billion of Net Income and $6.7 Billion on revenue with 845 million shares outstanding. Their annual dividend rate is 0.96 with a yield of 2.6% and a payout ratio of 163%. 

  SCCO, in our opinion, is an outstanding equity for anyone interested in adding a stock to an income portfolio. 
 Their recent stock performance is below:
SCCO YTD Stock Performance

Mar 16, 2013

1st Quarter Index Recalculated.

  We believe that the Dow Jones US Basic Materials Index (DJUSBM) is still slightly overvalued for the first quarter of this year based on our latest analysis, which currently stands at 289.15

  The iShares IYM index fund (the main fund that follows the DJUSBM index) currently gives a dividend of yield of 1.94% - however with the latest stock buybacks of the time period the modified yield to increased to 2.94%. Analysts estimate the index to grow at approximately 8.5% for the next 5 years after which, the earnings and dividends is expected to grow at about 3.22% ( a rate set by the Treasury Bond Rate, a good predictor of long term growth). We then used a market risk premium of 4% and arrived at a Cost of Equity at 7.22%

  Thus the current modified dividends = 2.94% of the current index value of 289.15 = 8.50

  We can then put them into the yearly dividend table as follows:

Stock Graph for B.M.Index

  We estimated the terminal value of year 6 as:
 Expected Dividends, Year 6 = (12.04)(1.0322) = $12.47 

  Thus the Terminal Value of the index =
 12.47/(0.0722-0.0322) = $311.75 

  The Present Value of the Terminal Value = $220.00

  Therefore, the value of the index can be calculated as:
 220 + 8.49 + 8.50 + 8.50 + 8.51 + 8.52 = 262.52 

  Based upon this analysis, the calculated value of 262.52 is approximately 10% less than the stated index value of 289.15, making the entire index slightly overvalued.

   This is mainly due to the fact that the index has suffered from lower than normal interest rates and yield rates. We would not recommend selling any equities in this sector and are, in fact, bullish on the sector as a whole. As seen in the graph below, there have been significant gains in this sector since the mid-February selloff and is now seemingly correlated with the S&P 500. The chart below illustrated the recovery since mid February.

Dow Jones Basic Material Index(DJUSBM) 2.1.13 to 3.15.13
Dow Jones Basic Material Index(DJUSBM)

*All data obtained from multiple public domain sources.

Mar 14, 2013

First Quarter Basic Materials Outlook.

  The Dow Jones U.S. Basic Materials Index (DJUSBM) has been on a bit of a bumpy ride for the first quarter of 2013, predicated, in part, to its 3.2% drop back on February 20th. All in all, the DJUSBM has seen a virtual break even in it’s YTD, essentially erasing all the Feb.20th - 25th losses, as well as all the gains it generated from Jan. 4th through Feb. 14th.

  As of March 13, 2013, the index stands at 286.62. The YTD mean for the sector is 288.09 with the median at 288.0. The yearly high and low are 293.02 and 271.78 respectively with a range of 24.24 (8.1% range and a standard error of 0.733).

  The Sector is underperforming the S&P500 which has seen a YTD increase of approximately 6.2%, thus far. The S&P500 has seen a yearly high and low of 1556.22 and 1457.15 respectively with a range of 99.07 (6.8% range).

   However, since the DJUSBM’s February 25th close of 271.78, the index has seen an increase of approximately 5.5% and now appears to be in correlation with the S&P500. The chart below shows the daily closing index values with the S&P500 scale on the left and the DJUSBM scale on the right. The lower chart shows the daily volume of shares traded : S&P500 (INDEXSP:.INX) and DJUSBM: INDEXDJX:DJUSBM.

S&P500 and Basic Materials Index Comparison
(All data from various public domain sources)

S&P500 and Basic Materials Volume Comparison
(No volume data between Jan 14-18:  All data from various public domain sources)

One of the main contributing factors to the mid-February decline was the announcement that Basic Materials sector giant BHP Billiton Limited (ADR) (NYSE:BHP) is under U.S. investigation for possible fraud at the Beijing Olympics in 2008. BHP has seen a dramatic decline from $80.46 on Feb. 15th to value of around $72.50 as of March 14th. This is a nearly 11% decline on a stock that represents a $116.4 Billion market cap on the sector. Although the overall trend line is down for Basic Materials, there are some shining stars in the sector, with companies like Syngenta AG (SYT), Monsonto Company (MON), Praxair (PX) and Mosaic Co. (MOS) among many others, with positive net gains for the first quarter of 2013.

Jan 24, 2013

Part 3: Relative Valuation Analysis Series for January.

Our third and final valuation method uses the Price to Book Value (P/BV) regressed against the Return on Equity (ROE) for 40 of the 88 firms listed in the Chemical Manufacturing sub-sector of the Dow Jones Basic Material Sector Index.  As stated in the previous two articles, we believe that because the top 40 Chemical manufacturing firms represent 94% of the total market cap for all Chemical Manufacturers, we capture the majority of the firms that are involved in this sub-sector’s systematic market fluctuations.  The table below shows the top 25 of those 40 firms that we analyzed.  As stated before, this data is current as of Jan 15th, 2013*.

Typically, in an evaluation such as this, firms with high P/BV ratios with low ROE numbers are considered to be more overvalued than firms that have lower P/BV rations and higher ROE values; which would be considered to be more undervalued when compared against a plotted regression line.  In our analysis, the regression line was calculated at :  (as before, the t-stats are in brackets).

Predicted P/BV = 3.01 + 9.01(ROE)   [2.10] & [2.64]

R² = 16% (another traditionally low R² value).

From the three relative analyses that we conducted, we have chosen five firms that we believe may be undervalued and preformed more detailed CAPM models on them.  The results of these are forthcoming in a future issue.  The films that we have chosen this month are:
  1. Lyondell Basell Industries NV (LYB)
  2. Mosaic Co. (MOS)
  3. Air Products & Chemicals, Inc. (APD)
  4. Agrium Inc. (USA) (AGU)
  5. Eastman Chemical Company (EMN)

These five firms shows undervalued predicted P/BV values vs. their ROE values when use applied our regression model:
  1. LYB :  P/BV 2.83 – Predicted P/BV 4.42  – Undervalued by 35.9%
  2. MOS : P/BV 1.94 – Predicted P/BV 4.47 – Undervalued by 56.6%
  3. APD : P/BV 2.90 – Predicted P/BV 4.54 – Undervalued by 36.2%
  4. AGU : P/BV 2.23 – Predicted P/BV 5.05 - Undervalued by 55.8%
  5. EMN : P/BV 3.59 – Predicted P/BV 5.15 – Undervalued by 30.3%

Using the same model, two firms that are considered to be overvalued were:
1. Sherman Williams – 49.2% overvalued
2. Rentech Nitrogen Partners LP – 250% overvalued (a relatively low market value firm, the high percentage is because of the lower numbers, P/BV at 17.23 was predicted by the model to be approximately 5.0)

The average P/BV for the sector (from the top 40 firms analyzed) is 5.66, while the predicted P/BV average as calculated by our model is 5.71.  This means that this sub-sector, as a whole, is fairly priced when it comes to its overall price to book value when regressed against its return on equity.

As stated in our two previous valuation articles, this regression is just one tool that an analyst can use from an arsenal of valuation tools at his disposal.  Thus, this is just one result from a series of results that we will present this month and should not be the sole basis to buy, sell or hold any specific equity.  It is, however, one of many data points that we will use to determine an overall under /overvalue trend within this sub-sector and (as a stand-alone statistic) is interesting in ascertaining a relative value with other similar firms that compete within the same sector.
Price to Book Value vs. ROE Valuation of Chemical Manufacturers

As previously stated, we use these three regressing valuation models as a basis to conduct further analysis on equities that may or may not be undervalued when compared to the rest of the market.  The three regressions we preformed were the P/E regressed against Growth to predict future PE ratios; PEG regressed against a linear growth to predict future PEG ratios, and finally P/BV regressed against ROE values to predict future P/BV values.  With these models in mind, we chose the top five firms, in terms of overall market cap value, who all showed to be undervalued in all three regressions for further analysis.  
It is important to remember that these regressions are just mathematical models of available data and that we are simply using these regressions as a way to weed out other equities that “may” be overvalued when compared to the overall market.  No buying, holding or selling of equities should be done with these three regressions alone as further investigation in these five firms is warranted.  However, we will use these regressions as a way to choose the firms for further CAPM evaluations.  The five firms we will evaluate further are:
Top 5 Undervalued Companies From Our Analysis

Look for our CAPM analysis coming in late January at BMSectorWatch.com!

*All information was gathered from either published data from multiple sources that is in the public domain, specific firm’s websites, or firms’ annual & quarterly SEC filings.