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CIF Sector Update Report (Spring 2015)
Sector: __Materials___________________
Analysts: __Courtney Hastings and Dominic Niolu______________
Presentation Date: __April 22, 2015_______________
Review Period: Start: _Jan 12, 2015__ End: _April 16, 2015______
Section (A) Sector Performance Review
(A-1) Sector Performance Relative to SP500
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How did the sector perform relative to the broad market (SP500) during the review period?
What might have caused the out-/under-performance of the sector in relation to the broad
market? You should weigh in macro, sector/industry, and company-specific factors that might
have contributed to sector’s out-/under-performance
The materials sector was outperforming the S&P 500 from late January to mid-March, but then
there was a cross and the S&P 500 was outperforming the materials sector until about early
April where the performance for both were about on par with each other.
Also, large investors in Monsanto have been reducing their positions in the company. Three
companies with somewhat significant holdings lowered their positions during our review
period. Since Monsanto is a top holder in the materials ETF, this could be a big contributing
factor to the ETF. Spyder materials fund saw a huge increase in the amount of purchased puts,
which would benefit from dropping prices which could have drove the prices down. Also the
macro factors of oil prices are still volatile which the materials ETF depends on, which could
contribute to the decrease in price compared to the S&P 500.
What are some of the noteworthy news/events from the sector during the review period?
These news/events can be either specific to the company or relevant to the industry/sector
As we already know, oil prices play a big role in the materials sector. Although many analysts
thought that the dropping oil prices would benefit the sector since oil is a large input for
chemical companies, this has not been the case. Monsanto performed poorly in their Q2
earnings and because of this several hedge funds reduced their positions in the stock.
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“Materials ETF Mauled by Falling Oil Prices”
http://finance.yahoo.com/news/materials-etfs-mauled-falling-oil-184038049.html
“Corvex Reduces its’ Position in Monsanto”
http://finance.yahoo.com/news/corvex-reduces-position-monsanto-220942021.html
“Monsanto is dropped from the TPG Axon Portfolio”
http://finance.yahoo.com/news/monsanto-dropped-tpg-axon-portfolio-140925824.html
“Blue Ridge Capital Exits Position in Monsanto”
http://finance.yahoo.com/news/blue-ridge-capital-exits-position-150544690.html
(A-2) Big Sector Movers
What might have contributed to big price moves in the period examined (recent 3 month) of
each of the named big gainers/losers?
Mosaic Company had to file a Form 8-k with the SEC due to a change in management around
the beginning of March, which could have led to the severe drop in price. Also changes in
potash taxes in providence in Canada will cost MOS 80-100 million dollars in 2015. More taxes
such as this could lead to extra costs for the company. These taxes also hurt CF Industries
Holdings Inc., which is another company that operates in the fertilizer industry.
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As for the winners, Air Products and Chemicals Inc. has been performing well despite the oil
prices due to their recent innovations and products they are coming out with, as well as signing
new contracts worldwide. International Paper recently decided to expand one of their factories
to increase the production of “fluff pulp” which is predicted to be good for business.
(A-3) Two Largest Stocks in the Sector
Highlight noteworthy news, announcements, or events relevant to the two stocks that took
place in recent 3 months.
Monsanto holds 9.60% of the sector ETF. As mentioned above, Monsanto has been lagging in
performance in the last couple months due to the poor Q2 earnings and the decrease of
holdings of MON in a few hedge funds. Dow Chemical holds 9.20% of the materials ETF. DOW
recently had a merger of their Gulf Coast business for $5 billion. They have been performing
well since 2015 started and is continuing on that trend, outperforming the materials sector as
well as the S&P 500.
(A-4) Technical Indicators of the Sector ETF (“Moving Average” and “Relative Strength Index”
from https://www.google.com/finance?tab=we)
Short-term moving average and relative strength index indicators
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Long-term moving average and relative strength index indicators
Any golden or death cross on either set of moving average chart? Any “oversold” or
“overbought” signal from RSI? Do these technical indicators signal bullish or bearish
sentiment on the sector?
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In the short term, there are many golden and death crosses within the last year due to the
volatility of the materials sector, and the market as a whole. The RSI is also extremely volatile, it
is impossible to say whether the stock is generally over or under bought. For the long term,
there is one death cross before the recession and a golden cross right after it. After the golden
cross, the short term SMA is above the long term SMA line. The RSI currently is sitting a bit over
50, showing the sector ETF is slightly overbought, but not much. There seems to be a slightly
bearish outlook for the sector, but it is sitting at a pretty neutral position at this point in time.
(A-5) Short-term (up to Three Months) Outlook of the Sector
What is your short-term (up to three months) outlook of the sector? Provide arguments in
support of your view.
The materials sector ETF is still facing headwinds due to the oil prices and the conditions in the
global economy. However we are seeing a slight positive growth in the sector overall, compared
to the negative growth it was seeing about a month ago. It seems the sector could have faced
the worst and is starting to show slightly bullish conditions, which could be a good time for
investors to jump into this sector. But investors need to pay close attention to the macro
environment, such as the strength of the dollar, oil prices, and the state of the global market.
Section (B) Updates on Stocks recommended
Stock #1: DuPont (DD)
Date Recommended: 3/2/2015
Date Re-evaluated: 4/16/2015
(B-1) Company Updates and Stock Performance
Company Update
Continued proxy war with Trian Fund Management through out review period
Trian claims that the Du Pont is too large and complex to be efficient
Trian seeks to breakup the company
1/27/2015: DuPont releases Q4 Earnings report
Sales missed
Operating earnings and dividends up
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Reduced share count
1/28/2015: JP Morgan downgrades Dupont
Downgraded from overweight to neutral
Earnings per share lower than previously thougth
Dupont
Relative Performance
3- Month Stock Price Chart
DuPont for the most part underperformed with the exception of a short gain mid-March. This
may have been a result of analyst downgrades and the ongoing proxy war with Trian.
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(B-2) Valuations, Estimates and Recommendations
Valuations
Original Analysis (3/2/2015)
Re-evaluation Analysis
Copy/paste the requested valuation multiples from http://www.reuters.com/ , “Financials”
tab; also copy/paste forward P/E (from Reuters as well) here.
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Comment on the changes; comment also how current forward P/E differs from current P/E
(TTM)
The P/E of DuPont and the industry fell in comparison to the sector, which rose. The P/S and
P/CF ratios fell as well. Which is expected given the most recent earnings report and the stock
price fluctuation throughout the period. Overall, the changes in the ratios reflect the decline in
stock prices and analyst downgrades. The forward P/E is lower than the current at 16.08
showing bearish signals for the stock.
Consensus Estimates
Original Analysis (3/2/2015)
Copy/paste “Consensus Estimates Analysis” Table (Module E3) from the original stock report
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Re-Evaluation Analysis
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Estimates Call for lower revenues in the coming periods through the year ending in 2016.
Likewise, earnings per share are now estimated to be substantially lower than previously
thought.
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Estimate Revision Analysis
Original Analysis (MM/DD/YY)
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Re-Evaluation Analysis
Hand in hand with the analyst revisions for earnings and revenues, the stock has been down
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Analysts’ Recommendations
Original Analysis (MM/DD/YY)
Re-Evaluation Analysis
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A few analysts have downgraded DuPont to a hold or underperformance, the mean rating has
risen to 2.86 from 2.71
(B-3) Technical Indicators (Module I4 from stock research report)
*** Note: see Sector Update Report Guidelines for instructions ***
Short-term technical indicators
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Long-term technical indicators
Any golden or death cross on either set of moving average chart? Any “oversold” or
“overbought” signal from RSI? How have the two sets of technical charts changed from the
ones in the original report? Are findings from technical analysis supportive of your other
findings?
There are several golden and death crosses observed in the short-term technical indicators.
There was a recent golden cross and the short term SMA is currently well above the long term
SMA. This indicates possible bullish conditions. The long term SMA only shows a golden cross
coming out of the recession during 2009. The RSI is 34.86 and indicates that the stock is
oversold.
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Stock #2: Praxair (PX)
Date Recommended: 04/06/2015
Date Re-evaluated: 04/16/2015
(B-1) Company Updates and Stock Performance
Company Update
Praxair has been facing serious headwinds with their extreme dependence on the energy prices
and the global economy, which has been hurting them in the short run. After the earnings
announcement, PX beat on earnings but missed on revenues. Their top line was lowered by 6%
and bottom line by 7% due to foreign currency movements. As mentioned in our previous
report, PX has been expanding their operations despite the slow growth and headwinds PX is
facing. They also plan on spending $1.7 billion in capital to improve its production and capacity
capabilities to prepare for the growing applications of industrial gases worldwide.
Relative Performance
Praxair has been underperforming both the materials sector ETF as well as the S&P 500,
although still tracking the movement of the ETFs since it is a cyclical stock. This is due to the
aforementioned macro issues.
3- Month Stock Price Chart
(B-2) Valuations, Estimates and Recommendations
Valuations
Original Analysis (04/06/2015)
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Re-evaluation Analysis
Ratio Analysis Company Industry Sector P/ E (TTM) 21.03 31.15 17.39
P/S (TTM) 2.83 1.39 3.36
P/B (MRQ) 18.31 1.57 2.60
P/CF (TTM) 12.10 14.09 23.17
Comment on the changes; comment also how current forward P/E differs from current P/E
(TTM)
Most of our ratios have decreased for PX since last time, but only marginally. Except for
Price/Book has about tripled since last time. The industry and the sector’s performance stayed
about the same too, with a few ratios showing slight increases. PX has a forward P/E of 17.55
compared to the trailing twelve months P/E of 21.03. This shows bearish signals for the stock in
coming months.
Consensus Estimates
Original Analysis (MM/DD/YY)
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Re-Evaluation Analysis
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Comment on the changes
The estimates for the sales have been slightly adjusted down, but not significantly. The earnings
estimates have stayed almost identical to the estimates from the original report, with a few
down adjustments.
Estimate Revision Analysis
Original Analysis (04/06/2015)
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Re-Evaluation Analysis
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Comment on the changes
There have been many down revisions for the revenues and the earnings in the recent earnings
revisions, which can be seen in the consensus estimates analysis above. The short-term is
showing very bearish signs for Praxair.
Analysts’ Recommendations
Original Analysis (04/06/2015)
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Re-Evaluation Analysis
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Comment on the changes
There have been no changes in any revisions. Mean rating is still a 2.5 with the same number of
analysts reporting.
(B-3) Technical Indicators (Module I4 from stock research report)
*** Note: see Sector Update Report Guidelines for instructions ***
Short-term technical indicators
Long-term technical indicators
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Any golden or death cross on either set of moving average chart? Any “oversold” or
“overbought” signal from RSI? How have the two sets of technical charts changed from the
ones in the original report? Are findings from technical analysis supportive of your other
findings?
Many golden and death crosses seen in the short term technical indicators. The most recent
was a death cross, and the long term SMA is currently above the short term SMA which shows
bearish conditions for Praxair currently. In the long term technical indicators show only the
death and golden cross during the recession, but the short term SMA is still above the long
term SMA, although it is headed close to the long term SMA. The long term RSI is currently
sitting around 50, which shows neither bearish nor bullish conditions.
Section (C) Update Stock Recommendations
(C-1) Update on Stock(s) CIF Did Not Buy
Based on your sector update research, would you have recommended a “buy” or a “do not
buy” on the stock? Provide justifications to support your recommendation for each stock CIF
did not buy. Repeat if more than one stock
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1. Provide summary of your recommendations in the following table
DuPont is facing more and more scrutiny from shareholders as they become increasingly
concerned with the internal struggle with Trian fund management. Coupling this with the
overall poor performance in the sector and individual industry, a buy recommendation is not
possible at this time.
Although Praxair proves to be profitable in the long run with signs of increased demand, as a
short term investment it is not a good time to purchase this stock. The macro environment is
too unstable and makes PX too volatile to invest in.
Company Name
Ticker Symbol
Date
Recommended
Date Re-
evaluated
Recommendation
As Is
Adjust “Target Price”
Adjust “Stop-
loss Price”
Adjust “Limit
Buy Price”
Sell/ Do Not
Buy
Du Pont DD 3/2/2015 4/20/15 Do not buy
Praxair PX 4/6/2015 4/20/15 Do not buy
