Materials Sector

Materials Sector Distribution of the Market Brief Introduction • Materials sector: The segment of the economy in which firms encompass the discovery, processing, and sale of materials to other sectors of the economy.  Industries within sector:     Chemicals (69%) Metals and Mining (22%) Paper/Packaging Products (5%) Other (4%) IMPORTANT MACROECONOMIC FACTORS • • • Materials sector is very dependent on outside variables interest rate -Low interest rate, banks lend, encourages capital spending Industry groups effected differently (as well as cyclically) -Housing market crashed, squeezed supply, prices rise -This has subsequent effect on other industries, i.e. paper/packaging Longview Fibre -Agricultural industry is affected by weather; no relation to business cycles -The different industries and companies can be very interrelated Business Fluctuation • Still sensitive to fluctuations in the business cycle -Key economic drivers are volatile • Sensitive to supply and demand highs and lows Global Impacts • Sub-sectors can be impacted by global events, but depends on industry. • • For example, International Paper in global operations Interesting example: the gold craze, governments, and precious metals industry Competitive Landscape • Very globally active sector (as well as domestic) • • Metal and mining companies expand their operations to where the resources are, as well as to maintain business relationships Ex: Monsanto (seed supplier) has created genetically modified plant cell and now sells them to farmers across the globe • Companies use the global arena to increase market cap, sales, profits, etc. Industry lifecycle Chemicals/Metals And Mining Paper and Packaging Products Industry Life Cycle • The Materials sector is heavily dependent upon the strength of the economy. • Each industry will move separately, based upon the demand driven by the economy as a whole. • • Chemicals/Metals and Mining: • Growth (Coal vs. Commodities?) • • Ex. Construction demand: As the economy declined in ‘09, we also saw a decline in the materials sector almost identical to that of the S&P. Important to analyze differences within industries Paper and Packaging Products: • Maturity  Decline Commonly Used Matrixes • P/E Ratio: Important when comparing two companies in same sector. • MAT companies tend to have high P/E’s, due to high expected growth (typically high P/E’s are unattractive) • PEG Ratio: Favored over the P/E ratio because growth is taken into account (relevant to MAT sector). • P/S Ratio and P/B ratio Other relevant statistics • Beta(ß, systematic risk) and Standard Deviation: very important to know the risk associated within each specific industry and the return it expects to yield in comparison to the market as a whole. Materials Sector Performance • Historically, materials sector is fairly stable in growth in the long-term. • • • • The economy needs its raw materials. Important to keep in mind the specific industries’ lifespan in stock market (coal). Recently, materials has been about on par with S&P 500. YTD for materials about 3% lower than S&P 500 performance. Materials Sector ETF (XLB) vs. S&P500