Student Investment Management BUSFIN 4228 Stocks Material Sector -Garrett Koutsopoulos, Kun Li, Quinn Liu, Jiaxuan Li,

Overview

Overview SIM Weight

Overview YTD Performance vs. S&P 500

Owens-illinois Business Owens-Illinois is a manufacturer of glass materials, especially glass containers. Industry leader The company’s profit report is divided into segments for the management level to have a better understanding of performances of different segments and have a rational allocation of the company’s resources.

Growth Drivers Owens-Illinois Increasing market of glass containers The acquisition of Vitro's food and beverage Helped the company to gain competitiveness in the growing packaging market in Mexico The company’s 50-50 Joint venture relationship with Constellation Brands Will be earnings accretive in the future till 2034.

Financials Owens-Illinois The basic material sector is a category for companies involve in the discovery, development and processing of raw material. The sector includes the mining and refining of metals, chemical products and forestry products. This sector is sensitive to change in the business cycle. Because companies in this sector supply materials for construction, they depend on a strong economy.

Valuations Owens-Illinois Fair price to book value -- Good sign Lower sales ratio – Lower margin Fair P/E and EV/EVITDA compare to competitors But P/E is generally high However, there should not be worries about these valuation multiple ratios since the company suffered from the shrink of sales in the past five years and it just got recovered from declining in sales revenue, this could be a result of the company put more money in to research and development in the past years.

Increasing inventories in China Owens-Illinois Risks Increasing inventories in China Decrease in commodities prices Government regulation (environmental) Panic sells about P/E being too high Here is the graph for materials and commodity price. It turns out that they do not have that much correlation. commodities include copper, crude oil, wheat, coffee beans and gold.  “Soft”: one that cannot be stored for extended periods. Sugar, coffee, cocoa and cotton are example of soft commodities. They also fall into non-edible(paper products, household cleaning products) and edible(wine, beer categories0 Several factors that may affect the material sector: increase demand for more raw material to support their infrastructure building for developing county. Accommodative monetary: central banks in the developed world are now in easing mode, with support of economic activity from Central banks. Nagtive affect: reduction in demand from china, demand for raw material decrease as technological advance. Increase domestic production, for example from a import country to a export country.

Owens-Illinois

Huntsman Business Huntsman is a leading global manufacturer of chemical goods with operations in over 30 different countries. The company was founded in 1970 by the Huntsman family. The sales for the company can be broken down into advanced materials (13%), Polyurethanes(53%), performance products (25%), and Textile Effects (9%). Ticker HUN Sector Materials Industry Chemicals Price as of 4/16/2018 $30.87 Market Cap (MN) $7,483 Stock Rating SELL Target Price $20.93 Implied Upside -32.20% Dividend Yield 2.20% Total Implied Return 32.20%

Growth Drivers Trends and Risks Huntsman Growth and consumption in the emerging markets Low production costs (Due to high bargaining power of buyers) Trends and Risks Economic weakness could lead to underperformance Commodity market fluctuations: earnings and cash flows remain very sensitive to volumes, prices, and margins Exchange rate risk Material sector: mature phase of the life cycle; low margins and growth period. Huntsman: revenue declined since 2016, and do not have clear signals for fully recovering with its un-diversified product line. Market: Potential trade war between China and the US: increasing labor costs and decreasing demand from the emerging markets.

Financial Analysis Huntsman Materials Sector Financial Ratios Basis Current Median High Low P/E 20.85 19.58 24.7 14.8 P/B 2.75 3.2 3.9 1.5 P/S 1.83 1.3 2.07 0.6 P/EBITDA 11.25 8.2 12.3 3.7 Projected Target Multiples Absolute Valuation Current Target Multiple Target/Current Target Price P/E 14.4 14 0.972 $27.47 P/B 2.6 2.0 0.769 $21.73 P/S 0.8 0.75 0.934 $26.39 Average Price $25.20

Huntsman DCF Analysis Discount Rate: 11% to reflect the cyclical nature of the company Terminal Growth Rate: 2.5% to match the long-term economic growth rate Valuation range: $18.54 — $22.81 10.00% 10.25% 10.50% 10.75% 11.00% 11.25% 11.50% 11.75% 12.00% 1.50% 21.57 21.13 20.71 20.30 19.92 19.55 19.20 18.86 18.54 1.75% 21.67 21.22 20.78 20.37 19.97 19.59 19.23 18.89 18.56 2.00% 21.79 21.31 20.86 20.44 20.03 19.64 19.28 18.92 18.58 2.25% 21.91 21.42 20.96 20.52 20.10 19.70 19.33 18.96 18.62 2.50% 22.05 21.55 21.07 20.61 20.18 19.77 19.39 19.01 18.66 2.75% 22.21 21.69 21.19 20.72 20.28 19.85 19.45 19.07 18.71 3.00% 22.39 21.84 21.33 20.84 20.38 19.95 19.53 19.14 18.77 3.25% 22.59 22.02 21.48 20.98 20.50 20.05 19.62 19.22 18.83 3.50% 22.81 21.65 20.63 20.17 19.72 19.31 18.91

Recommendation HuntsMan 0.00 % SELL: 1.68% Method Weight Price Target DCF 0.85 $20.18 P/E 0.05 $27.47 P/B $21.73 P/S $26.39 Final Target Price 1 $20.93 SELL: 1.68% 0.00 %

Business Crown Holdings Crown Holdings Inc. (CCK) is one of the world's leading producer of metal packaging products. The company manufactures beverage cans, metal food cans, closures, and aerosol cans. Beverage cans are the main business segment for the company as it makes up 58% of sales. Crown mainly operates in developed markets making 62% of their market and emerging markets making up the rest of the 38%. Cans and containers are made out of metal (steel/aluminum) Internationally driven business model: Americas, Asia, Europe

Growth Drivers Trends and Risks Crown Holdings International/emerging market Growth (78% of sales) Consistent demand Leader in emerging markets presence Trends and Risks Exchange rates if the dollar strengthens or weakens Relies heavily on commodity pricing High debt levels may lead to liquidity problems

Financials Crown Holdings Key Ratio Comparison Crown Ball Silgan $61.25 8.00% 9.00% 10.0% 11.00% 12.00% 2.1% $77.59 $65.53 $56.57 $49.66 $44.18 2.6% $82.33 $68.66 $58.75 $51.23 $45.34 3.1% $88.03 $72.34 $53.00 $46.63 3.6% $95.05 $76.70 $64.14 $55.01 $48.08 4.1% $103.89 $81.95 $67.52 $57.31 $49.71 Key Ratio Comparison Crown Ball Silgan Westrock Revenue 8,698 10,983 4,090 14,860 Operating Margin 12.38% 9.31% 8.73% 7.26% Return on Assets 3.19% 2.24% 6.92% 2.94% Return on Equity 66.80% 10.14% 43.65% 7.06% Return on Inv. Capital 8.29% 5.19% 13.70% 5.43% EPS 2.38 1.05 2.42 2.77 P/E 21.30 37.80 11.50 9.40

Recommendation Crown Holdings I recommend a HOLD for Crown Holdings Inc. at the current price. Crown will continue to perform well in a consistent sector. Crown is expanding internationally, building cash flows, and buying back shares. All while outperforming their peers in margins and expectations. If prices dip below $50 I would recommend buying more shares of Crown. Risks in Recommendation: International Markets: 78% of sales were derived from intl. markets so various risks regarding exchange rates may cause financial distress for the firm. Material Pricing: Profits will be adversely effected if the price of raw materials or energy rises and Crown cannot increase the price of its products. Debt: Serious debt levels may cause problems in liquidity for Crown moving forward if markets take a downturn. Method Weight Price DCF 80% $61.25 Multiple 20% $49.78 Final Price 100% $58.95

Business W. R. Grace Company Overview: Supplier of specialty chemical Serves food beverages, consumer products, petroleum refinery worldwide. Segment: Grace Catalysis Technologies Refining Refining: Fluid catalytic cracking (help distill crude oil) Advanced Refinery Hydro processing catalyst (Upgrade heavy oil into lighter products) Polyolefin Application, such as high pressure pipe, medical device and textiles Grace Material Technologies Coatings for food, chemical process

Growth Drivers W. R. Grace Innovation in terms of new products, new environmental products. Grace can serve end-user for their specific needs. Rising demand in Asia market for special chemicals. Grace is very active in technological superiority and innovation, which help them obtain patents in different countries.

Buy！ Valuation W. R. Grace DCF use 10.5% terminal discount rate and growth rate at 4% annually. PE, EV/EBITDA, PS and PB are similar to industrial average. The implied equity value is $78.63 per share with 30% upside to DCF and stock price is under value right now. Buy！

Recommendation Stock Current Price Target Price Weight +/- Owens-Illinois (OI) $21.54 $25.35 HOLD Crown Holdings Inc. (CCK) $52.25 $58.95 1.28% Huntsman Corp. (HUN) $30.87 $20.93 1.68% -1.68% SELL W.R. Grace & Co. $61.26 $78.63 BUY