Materials Stock Recommendations

1
Materials Stock Recommendations

• Rob Nuccio
• Roshan Patel
• Jordan Payne

2
Materials Sector Review

• One chemical company and one packaging company
• No metals or mining companies

3
Materials Sector Review

• Maintain Current Overweight of 124 basis points
• Materials benefits from weakening dollar
• International Exposure
• SP-15 at all-time high, However, relative
  valuation does not suggest overpriced

4
Recommendation

• Replace entire position of Dow Chemicals with
  Alcoa.

5
Chemical Industry Cyclical

• Largest World Chemical Company's ROA
• Extremely Cyclical
• Commodity Driven- Crude Oil Natural Gas
• Supply Demand Driven
• Cash spent during high margin up-cycle periods
  on capacity upgrades, facility additions,
  improved existing operations

• An imbalance in supply and demand will lower
  product prices for extended periods of time until
  the new capacity is able to become absorbed by
  the slower paced demand

6
Dow has similar Cyclicality
7
Problems for Dow

• Consensus Earnings in 08 09 fall to 3.53
  2.83
• Over past 4 years, energy prices for Dow have
  tripled annual fossil fuel costs to 22 B
• Many US markets are struggling Dow Automotive
  Dow Building Solutions
• Ethylene Supply to exceed demand

8
Increased Hydrocarbon Feedstocks Hurting Margins

• Hydrocarbons Energy have increased since 1997
• Management tells same story quarter after
  quarter, year after Dow doing well but due to
  increased feedstock costs, margins declined.

9
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10
Alcoa Overview

• Mature Aluminum Company
• Control 24 of the Worlds Bauxite Reserves
• Restructuring Downstream Portfolio
• Share Repurchase Program
• Expansion into Developing Regions

11
Alcoa
Revenue Breakdown
12
Aluminum Prices

• China is the Key
• 2007 Projected Growth 35
• Energy Concerns
• Poised to become Net Importer
• of Aluminum by the end of 2008
• Following Trends of Oil and Coal

13
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14
Conclusion

• Sell entire Dow Chemical position and replace
  with Alcoa
• Questions?