Basic Materials Sector.News,analysis and outlook.

noreply@blogger.com (Steve Reynolds) — Wed, 04 Mar 2015 19:48:00 +0000

ADP released its monthly national employment report today which showed a continued positive trend in job growth in the U.S. On the national front, 214,000 new nonfarm private sector jobs were created in the month of January. This positive growth, however, is a slight downtick from 241,000 jobs created in December, 2014 (however, keep in mind that many of those jobs were seasonal retail positions).

The same trend was shown on the small business front, with 78,000 jobs created in January as compared to 106,000 jobs created in December, 2014. Both months showed positive job growth, but again, seasonal jobs can account for December’s higher growth.

When analyzed by sector, ADP reports a 31,000 gain in the goods-producing sector, +18,000 in construction, +14,000 in manufacturing, and +183,000 in the service-providing sector.

The chart below shows the trend in the change in nonfarm private employment for the previous 12 months.

Source: ADP, LLC & Moody's Analytics

All data and information was provided by Automatic Data Processing, Inc. (ADP) and Macroeconomic Advisors, LLC. This information can be obtained at ADP National Employment Report.

2015 US GDP Analysis

noreply@blogger.com (Steve Reynolds) — Wed, 25 Feb 2015 19:35:00 +0000

The Bureau of Economic Analysis has announced that 4th Quarter 2014 Real GDP numbers continued to grow in positive fashion with an estimated increase of 2.6% after a Q3 (2014) increase of 5%. The Bureau emphasized that this 4th Quarter increase is merely an “estimate” based on extensive but incomplete data with a updated estimate expected on February 27, 2015. The BEA announced that the slowdown in GDP growth from Q3 to Q4 in 2014 was partly attributed to an uptick in imports vs. exports, a reduction in government spending and a downtick in nonresidential fixed investments. The chart below shows the growth in Real GDP over a 5 year period.

As stated above, although Q4 saw positive growth, the percent change from Q3 to Q4, 2014 was a decline of 2.4%. The graph below shows the quarterly percent change from F.Y. 2007 through 2014.

*All data and info was obtained from the U.S. Department Of Commerce’s Bureau of Economic Development and can be obtained at: http://www.bea.gov

1st Quarter Index Comparison.

noreply@blogger.com (Steve Reynolds) — Wed, 03 Apr 2013 07:02:00 +0000

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.

Plum Creek Timber, Inc. Stock Analysis (PCL)

noreply@blogger.com (Steve Reynolds) — Sat, 23 Mar 2013 08:36:00 +0000

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:

All data taken from 10K reports and public domain data.

Stock Analysis of Kaiser Aluminum Corp. (KALU)

noreply@blogger.com (Steve Reynolds) — Fri, 22 Mar 2013 08:04:00 +0000

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:

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.

Evaluation of Southern Copper Corporation (SCCO)

noreply@blogger.com (Steve Reynolds) — Sun, 17 Mar 2013 09:21:00 +0000

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:

1st Quarter Index Recalculated.

noreply@blogger.com (Steve Reynolds) — Sat, 16 Mar 2013 17:47:00 +0000

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:

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

*All data obtained from multiple public domain sources.

First Quarter Basic Materials Outlook.

noreply@blogger.com (Steve Reynolds) — Thu, 14 Mar 2013 20:01:00 +0000

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.

(All data from various public domain sources)

(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.

Part 3: Relative Valuation Analysis Series for January.

noreply@blogger.com (Steve Reynolds) — Thu, 24 Jan 2013 08:20:00 +0000

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:

Lyondell Basell Industries NV (LYB)
Mosaic Co. (MOS)
Air Products & Chemicals, Inc. (APD)
Agrium Inc. (USA) (AGU)
Eastman Chemical Company (EMN)

These five firms shows undervalued predicted P/BV values vs. their ROE values when use applied our regression model:

LYB : P/BV 2.83 – Predicted P/BV 4.42 – Undervalued by 35.9%
MOS : P/BV 1.94 – Predicted P/BV 4.47 – Undervalued by 56.6%
APD : P/BV 2.90 – Predicted P/BV 4.54 – Undervalued by 36.2%
AGU : P/BV 2.23 – Predicted P/BV 5.05 - Undervalued by 55.8%
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.

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:

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.

Relative Valuation Part 2. PEG ratio & Growth.

noreply@blogger.com (Steve Reynolds) — Wed, 23 Jan 2013 07:24:00 +0000

Part two of our three part valuation series on Chemical Manufacturers has us looking at the relationship between a firm’s PEG ratio and their 5 year growth rate. As in our first valuation, we looked at the top 40 of 88 firms in this Basic Materials sub-sector which constitutes over 94% of the total market cap of all publicly traded Chemical Manufacturers. We are also still assuming (for the sake of the valuation model) that all firms in this sub-sector have the same basic systematic and non-systematic risk. The table shown below highlights the top 25 companies in terms of market cap (of the 40 we analyzed) and is current as of Jan 15th, 2013.*

From our experience, it does appear that higher-growth companies typically have lower PEG ratios, thus allowing for a non-linear relationship if graphed on scatter plot. To account for this non-liberality (so that we can perform the linear regression) we regress the PEG ratio against the natural log of the 5 year expected growth rate. This gives us a better mathematical model to work with and is evidenced by that fact that our R² is 0.17. This result is still traditionally low, but higher than our previous model. As in part one, we use this data to determine an overall under/overvalue trend – the specific PEG ratio results, in and of themselves, should not be used to formulate a market buying decision one way or the other. Our regression formula for all 40 firms is: (t-stats in brackets)

Predicted PEG = -0.41 + 0.81 ln(Expected 5 year growth rate) [2.77] & [-0.51] respectively.

Lyondell Basell Industries NV (LYB)
Mosaic Co. (MOS)
Air Products & Chemicals, Inc. (APD)
Agrium Inc. (USA) (AGU)
Eastman Chemical Company (EMN)

These five firms shows undervalued predicted PEG ratios vs. the natural log of their expected 5 year growth rates according to the regressed model:

LYB : F.PE 15.36 – Predicted PEG 2.40 – Undervalued by 37.5%

MOS : F.PE 13.77 – Predicted PEG 4.48 – Undervalued by 56.6%

APD : F.PE 13.83 – Predicted PEG 2.11 – Undervalued by 14.8%

AGU : F.PE 10.97 – Predicted PEG 1.75 - Undervalued by 11.2%

EMN : F.PE 11.16 – Predicted PEG 1.52 – Undervalued by 5.1%

Using the same model, the top two firms that are considered to be overvalued are :

HB Fuller – overvalued by 93.1%%

Potash Corp. /Saskatchewan. – overvalued by roughly 70%

The average PEG ratio for the Chemical Manufacturing sub-sector is 1.8, while its predicted average value is 1.71, meaning that, according to the regression model, the sub-sector is slightly overvalued – but certainly not enough to draw any valid conclusions about the value of the sub-sector from this ratio alone.

Please bear in mind that this 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. Parts one and three of our relative valuation will look at the P/E ratios against 5 year growth rates, and, and Price-to-Book values against ROE values.

* Natural log of Expected 5 year growth rate.

Used to achieve a linear relationship in our

regression model.

*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.

Chemical Manufacturing Valuation Models. Part 1.

noreply@blogger.com (Steve Reynolds) — Sun, 20 Jan 2013 19:47:00 +0000

In the next three posts, we are going to attempt to look for under and/or valued equities using a few relative valuation methods. Specifically, we are looking at the top 40 firms by Market Value in the Chemical Manufacturing subsector of the Basic Materials industrial sector. We are going to look for misevaluations within the market by analyzing and predicting future P/E ratios, Predicted PEG ratios, and finally Predicted Price-to-Book ratios. The data that we used was current as of Jan 15th, 2013*

We first analyzed the top forty stocks in the Chemical manufacturing sub-sector of the Basic Materials sector. These firms we listed in order of their Market Cap valuations as of Mid-January, 2013. The total market cap value for this subsector is approximately $542.7 billion dollars and represents 88 publically traded firms. The top 40 firms that we analyzed in this subsector have a combined Market Value of $517 billion dollars, or approximately 94% of the entire market value for this subsector. With this in mind, and by assuming that all firms in the same industrial sector have the same basic systematic and non-systematic business risk (these assumptions are just for this valuation model only and not intended for real trading) we can begin by looking at recent PE ratios and published 5 year expected growth rates. We believe that by analyzing 94% of the Market Value for this subsector, we capture the vast majority of the firms that can be considered to be the “market movers.” The data in the table below show the top 25 of the 40 firms we analyzed.

The PE ratios that we used were current PE ratios. Typically in market analysis, we like to use trailing PE ratios; however, the regressed R² was too low for our comfort so we regressed the firm’s current PE ratio instead. Of the firms listed below, Sherman Williams (SHW) had the highest PE ratio at 29.51, with Kronos Worldwide (KRO) having the lowest at 7.15. The differences in PE ratios can typically be explained by differences in growth potential - however, in our model, the 5 year expected growth doesn't necessarily translate into higher or lower PE ratios. This can explain why our R² is low (which we will show momentarily).

We regressed the P/E ratio for each of the 88 firms against the 5 year expected growth rates. The results were (t-statistics in brackets).

Predicted P/E ratio = 16.1 + 29.02(Exp. Growth) R²=12%** t-stats: [11.5] & [2.28] respectively.

Lyondell Basell Industries NV (LYB)
Mosaic Co. (MOS)
Air Products & Chemicals, Inc. (APD)
Agrium Inc. (USA) (AGU)
Eastman Chemical Company (EMN)

These five firms shows undervalued predicted P/E ratios vs. Forward P/E ratios according to the regressed model:

LYB : F.PE 15.36 – Predicted PE 16.97 – Undervalued by 9.4%
MOS : F.PE 13.77 – Predicted PE 18.38 – Undervalued by 25.1%
APD : F.PE 13.83 – Predicted PE 17.34 – Undervalued by 20.2%
AGU : F.PE 10.97 – Predicted 18.07 - Undervalued by 39.3%
EMN : F.PE 11.16 – Predicted 18.73 – Undervalued by 40.4%

Using the same model, the top two firms that are considered to be overvalued are :

Valhi, Inc. – overvalued by nearly 37%
Monsanto Co. – overvalued by nearly 26%

Please keep in mind that this 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 sector and (as a stand-alone statistic) is interesting in ascertaining a relative value with other similar firms that compete within the same sector. Parts two and three of our relative valuation will look at 5 year expected growth rates against PEG ratios, and Price-to-Book values against ROE values.

*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.
**It is true that the R² is relatively low for this model. Because of this, we will conduct two additional relative valuation models to try to establish an over / under value trend. From this trend we can begin to ascertain whether any specific firm’s stock warrants further investigation into a possible stock purchase based on the specific firm’s overall valuation models and business risk analysis.

Basic Materials Index Recalculated.

noreply@blogger.com (Steve Reynolds) — Mon, 07 Jan 2013 20:24:00 +0000

Why we think the sector is overvalued.

Currently, the Dow Jones U.S. Basic Materials Index (DJUSBM) stands at around 287.19 (as of 1-07-13). We start by using the dividend yield from IYM (the iShares Dow Jones US Basic Material Index ETF) which is currently at 1.91%.

We calculated our cost of equity at 5.52% - essentially we looked at the 10 Year Treasury Bond which is yielding 1.77% and added in a conservative market risk premium of 3.75% to come up with the 5.52% Cost of Equity value.

From there, we looked at the Basic Materials growth from the last 52 weeks. The index low was 241.87. Today (1-7-13) it’s at 287.19 : an 18.73% gain. However, we realize that an 18% gain on a year to year basis for 5 years is unrealistic, thus, we believe (by looking that this sector, the Dow Jones Industrial index, the S&P500, and the NASDAQ) that a fair growth rate for a five year period looking forward would be around 8.5%, with a 1.76% growth after year 6 and thereafter. This rate is based on the assumption that the Treasury bond rate is a reasonable proxy for long-term growth in the economy (which will have to be adjusted when, and if, interest rate increase).

The expected dividends from this sector can be estimated from the current dividends and the expected growth rate of 8.5%.

Current Modified Dividends: 1.91% of 287.19 = $5.49.

	Y 1	Y 2	Y 3	Y 4	Y 5	Y 6
Expected Dividends	5.95	6.46	6.59	7.15	7.75	7.91
Present Value	5.63	5.80	5.61	5.77	5.93

The Terminal Value of the index = $210.35 and was calculated via:
Terminal Value of Index = Expected Dividends / (r-g)

The Present Value of this Terminal Value = $160.79

Thus, the value of the index can be calculated to be 189.53
(The present value of the T.V. plus the present value of the dividends from Y1 to Y5.

Therefore, we believe that the index (like most indices) is currently overvalued, by roughly 50%, in fact.

However, we don’t believe that this is a time to sell equities. We feel that these numbers are skewed low mainly because of low interest rates and the fact that we are still in recovery-mode economically wise. The growth of all these indices has been substantial since their lows in March, 2008, and we do not forecast a slowdown in growth in the near future. GDP is strong, CPI is still relatively low, and US Mfg. numbers are getting stronger.

Wish this in mind, however, we still look at this (and all sectors) as being overvalued at the moment, so we recommend caution when entering the market or expanding your portfolio. We will update these numbers on a frequent basis to see if there is indeed an upward or downward trend.

Important Economic Indicators We Use.

noreply@blogger.com (Steve Reynolds) — Fri, 28 Dec 2012 14:07:00 +0000

In order to make proper valuations of any asset, one must play close attention to a number of important economic indicators. Just to give our readers a better understanding of the tools we use to value different equities, these are some of the more important economic indicators that we follow and how to find them. Typically, these are ones that have high market sensitivity.

U.S. Employment Situation. This is the unemployment numbers put out by the Bureau of Labor Statistics on a monthly basis. The numbers typically are announced on the first Friday of each month. The data can be found here: http://stats.bls.gov/news.release/empsit.toc.htm
This is one of the most important indicators as it has a profound effect on the stock and bond markets in the US and overseas.

ADP National Employment Report. This is put out by Automatic Data Processing, Inc. (ADP) and, thus, not quite as important as the government report. However, since it does indicate the direction of the overall economy it can have high market sensitivity. This report comes out two days before the BLS unemployment report. It is monthly and can be found here: www.adpemploymentreport.com/report_analysis.aspx

Weekly Claims for Unemployment Insurance. This is put out weekly (announced every Thursday morning) and is critical to stock market sensitivity. It tracks weekly new filing claims for unemployment insurance benefits. While there is some controversy as to who it counts and who it doesn't count, the fact remains that it does get a lot of attention from institutional investors and market movers, and, thus, needs to be looked at. It can be found here on Thursdays at 8:30am EST : www.ows.doleta.gov

Personal Income and Spending. Another indicator of high importance in that it shows how much consumers are spending in the economy. Consumers are, by and large, THE Economy. Consumption is, by far, the largest section of GDP – this indicator is important and needs to be looked at.
It comes out monthly at: www.bea.gov/bea/newsrel/pinewrelease.htm

Retail Sales. Important since it tracks the sales trends of Americans. Another monthly report with very high market sensitivity that can be found here: www.census.gov/svsd/www/advtable.html

GDP – the granddaddy of all economic indicators. It measures the Gross Domestic Product of the USA. It’s a barometer of how the economy is growing or shrinking and is used by economists, financial professionals, CEOs, and market makers world wide. There are many different subsections of GDP and we’ll explain which one we look at in a future article. The GDP report is put out quarterly and can be located here: www.bea.gov/newsrelease/national/gdp/gdpnewsrelease.htm

Durable Goods Orders. An important indicator for our sector because it’s a key indicator of manufacturing activity and forecasting. It’s a monthly report put out by the Census Bureau and the Dept. of Commerce. It can be found here: www.census.gov/indicator/www/m3/adv

ISM Manufacturing Survey. The Institute for Supply Management Manufacturing Survey is a non-sexy, but highly important indicator for our sector. It’s a monthly report that surveys many different manufacturing companies in 20 different industries and measures purchasing activities of the firms. It has very high market sensitivity but, strangely, is very under reported. It can be found here: www.ism.ws/ISMReport/index.cfm

The Federal Open Market Committee Statement. Ahhh, THE FED… this is where the Federal Funds rate is announced. It can, and has, driven investors crazy. It’s announced roughly eight times a year and states on whether The Fed will or will not raise the “federal funds rate.” This announcement drives all the other interest rates and is an indicator on how much it costs to borrow money. Arguably, the most important indicator here and it can be seen around 2:15pm EST on the day the FOMC concluded their meeting. It’s on the web under “monetary policy” at www.federalreserve.gov/newsevents.htm

Consumer Price Index (CPI). Another crazy-critical indicators that effect markets world-wide. This one measures inflation and, like GDP, has a number of sub-sections that we look at. It’s a monthly report that the BLS releases. It can be found here: www.bls.gov/cpi

Producer Price Index (PPI). A sister-indicator of the CPI, but this measures the change in prices that business pay. It’s basically the inflation that companies face, and like the CPI, it has many subsections. It can be found here: www.bls.gov/ppi

Obviously, there are many more indicators that have varying degrees of effect on market sensitivity. I just feel that these are the main one, and the ones that we pay the closest attention to. By monitoring these on a regular basis, you get a good feel of where the overall economy is heading, and that is of particular importance to investors who try to time the market. As always, any questions, comments, or suggestions can be directed here: Contact Me.

Welcome to the new Finance Blog!

noreply@blogger.com (Steve Reynolds) — Fri, 28 Dec 2012 07:14:00 +0000

Welcome to the Basic Materials Sector Watch blog! As our name implies, we are an organization that will focus primarily on companies and equities that fall within the basic materials sector. Our basic philosophy is this: There are, give or take, roughly 8,600 stocks on the different exchanges here in the U.S. Many financial organizations claim that they can effectively value them all AND give you reliable information to help you create a well-diversified portfolio. As a trader who has worked in the business in the past, I kind of doubt that they are experts in every potential equity asset out there.
Thus, we take a different approach… we know we can’t effectively value every hot stock in every hot sector, so we’re not even going to try. Sure, we will pass long important information as it becomes available, but the focus of this blog is to give you the very best information and valuations from a sector that we feel is under reported and extremely valuable to our economy.
So what is the basic material sector? The Basic Material sector, as defined by Dow Jones are companies listed in, and contribute to, the Dow Jones U.S. Basic Materials Index (DJUSBM). They are comprised of companies that are involved in Chemical Manufacturing, Plastics and Rubber, Container and Packaging, Forestry and Wood Products, Mining (including precious metals, iron, steel, etc.), non metallic mining (like stone and quarries), and paper products just to name a few. In many cases, these are companies who supply raw materials to other manufacturing firms and, as such, are truly one of the backbone sectors of our global economy. In fact, many of the giants that we will report are listed as ADRs on the various exchanges – meaning that this is truly a global sector that is vitally important to our global economy and recovery.
The information that we will report and blog about is meant to give our readers ideas on how to diversify into this all-important economic sector. BMSectorWatch will never suggest that a specific equity is a “must buy,” or a “must sell.” We believe that it is up to the individual investor, working in conjunction with their professional financial advisor, to determine ultimately what is best for that investor’s portfolio. We believe strongly that investors today are too caught up in stock prices without taking into account that their portfolio may be under or over diversified in specific areas. As financial professionals who have passed various FINRA Series exams, we are acutely aware that giving our readers unbiased information is of the utmost importance – both for themselves and for our own credibility. As such, all authors of this blog and its materials state that we will never personally invest in any companies in this sector and that all of the authors’ investments lie in heavily diversified funds, such as mutual funds and the like.
Thank you for you interest in our blog and website. Feel free to drop us a line if you have any questions, comments, suggestion, or requests here. We can also be followed on Twitter at : @BMSectorWatch .