Materials Sector

1
Materials Sector

• Nikhil Shah
• Corinne Sibly
• Jeff Stickel
• Rohini Vagarali
• Mike Webb
• Luke Whitworth

2
Materials Sector Overview

• 13 industries including Diversified Chemicals
  and Steel
• Currently represents 2.71 of SP 500 Index
• Currently represents 2.88 of SIM Portfolio
• DOW Chemical (DOW) 1.95
• Worthington Industries (WOR) .93

3
Materials Sector Recommendation

• Decrease Material sector position
• 2.88 ? 1.93
• Decrease DOW holdings
• 1.95 ? 1.00
• Maintain WOR holdings
• .93 ? .93

4
Worthington Industries (WOR)

• Processes steel and fabricates metal, focusing on
  specialized products requiring exact
  specifications
• Life Cycle Mature
• Business Cycle Cyclical
• Three segments of business
• Processed Steel Products
• Metal Framing
• Pressure Cylinders

5
Steel Industry Overview

• Most steel companies have raised prices,
  improving revenue amounts
• Struggling industry, suffering from overcapacity
• Several steel companies have filed for bankruptcy
  protection

6
Competitive Advantage WOR

• Clear position in the market offer specialized
  value-added services in steel processing and
  manufactured metal products which is rare for the
  industry
• Strong employee base with non-unionized work force

7
Business Analysis

• Awareness and reaction to poorly performing
  assets
• Higher selling prices due to raw material
  increases
• Continual consolidation of steel processing
  industry led by Worthington Industries

8
Financial Analysis WOR
9
Financial Analysis WOR

• Reduction in capital expenditures and closure of
  poor performing facilities resulting in improved
  operating margins and ROIC
• Quarterly returns for 2003 have been positive to
  date with significant improvements in revenue due
  to
• price increases, resulting in higher margins
• Acquisition and integration of Unimast
  (associated with metal framing)
• Regulation change within cylinder business
• Greater international activity contributing to
  sales

10
Valuation WOR vs. SP 500
11
Valuation WOR vs. Sector
12
Valuation WOR Price and ROE
13
Valuation WOR Dividends
Dividends of 0.64 per share despite poor
performance of past several years
14
Recommendation WOR

• Worthington Industries is a strong company within
  its industry
• Quarterly earnings for the company for FY
  2003 appear to be positive
• Maintain current weight due to current economy
  and cyclical nature of the company

15
Dow Chemical (DOW)

• Dow is a leading science and technology company
  that provides innovative chemical, plastic and
  agricultural products and services to many
  essential consumer markets.
• With annual sales of 27 billion, Dow serves
  customers in more than 170 countries and a wide
  range of markets that are vital to human
  progress, including food, transportation, health
  and medicine, personal and home care, and
  building and construction, among others.
• Products include performance plastics,
  performance chemicals, agricultural sciences,
  plastics, chemicals, hydrocarbons and energy.

16
Chemicals Industry Overview

• High energy prices have affected chemical
  companies severely.
• Analysts are cutting earnings estimates across
  the board for chemical companies who are heavily
  dependent on derivatives of oil/natural gas for
  feedstock and energy.
• Difficult balancing act between supplier prices
  and competition.
• Few industries can claim to be as sensitive to
  increases in raw material costs at one end of the
  supply chain and, at the other end, as pressured
  by competitors to keep prices down. The price
  increases should help to off-set rising natural
  gas and scrap prices.
• Chemical industry taking a more aggressive stand
  in attempting to raise prices.
• Efforts include eliminating, where possible,
  60-day price-protection clauses, putting
  customers on order control unless they agree to
  higher prices, and imposing energy surcharges.

17
Competitive Advantage DOW

• Core competency revolves around global
  integration strategy and innovation
• Innovation
• In the name of innovation, we will make science a
  way of living.
• President George W. Bush honors The Dow Chemical
  Company with the National Medal of Technology
  "for the vision to create great science and
  innovative technology in the chemical industry
  and the positive impact that commercialization of
  this technology has had on society."

18
Business Analysis DOW

• Concentration on managing cash and fundamentals
• Dow has identified assets with 1.5 billion in
  revenues as potential candidates for
  divestitures. Moreover, Dow is reducing its 2003
  CapEx spending by 25 to improve cash generation.
  These actions along with other restructuring
  measures will better position the company to reap
  the benefits of improving petrochemical
  fundamentals expected over the next 12-18 months.

19
Financial Analysis DOW

• Since 1995, ROE, ROA, ROC have all dropped
  steadily
• Falling operating and profit margins and unusual
  losses created large decline in earnings
  (misrepresentation of true value)
• Asset turnover has remained steady and DOWs
  leverage ratios are still acceptable

20
Financial Analysis DOW
21
Financial Analysis DOW
22
Valuation DOW vs. SP 500
23
Valuation DOW vs. Sector
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Dividend Price History
25
Recommendation DOW

• Multiple valuation methods indicate stock is
  overpriced
• Feedstock and energy prices unstable and expected
  to reduce margins further
• Litigation liabilities from Union Carbide unit
  still looming over company
• Repeated negative earnings revisions for 03
  04
• Decrease SIM Portfolio position from 1.95 to 1

26
Materials Sector Recommendation

• Decrease Material sector position
• 2.88 ? 1.93
• Decrease DOW holdings
• 1.95 ? 1.00
• Maintain WOR holdings
• .93 ? .93