CHEMICALS_SCORECARD：OCTOBER_SCORECARD-2012-11-09.ppt

top picks,buy,buy,deutsche bank markets research,north america united states industrials chemicals/commodity,periodical chemicals scorecard,date 8 november 2012 david begleiter, cfa,october scorecard m 4%) with its smooth integration of recently acquired specialty chemicals company solutia. tio2 and fertilizer stocks lagged. for companies levered to tio2, 2h12 is proving to be challenging as tio2 fundamentals have continued to deteriorate with prices down 5%, 14% and 20% from their peaks in north america, europe and asia, respectively. price weakness and elevated inventory levels are causing customers to defer purchases. notable underperformers for the month with exposure to tio2 are,research analyst (+1) 212 250-5473 ramanan sivalingam associate analyst ( ) 212 250-8619 jermaine brown research associate (+1) 212 250-3624 ashland (ash.n),usd72.23 lyondellbasell (lyb.n),usd52.78,dupont (dd; buy; -11%) and kronos (kro; hold; at-11%). companies levered to potash experienced weakening fundamentals as unabsorbed supply, stemming from unsettled contracts in china and india, created an oversupply in north american potash (39% above the 5-year avg). notable underperformers with exposure to potash are mosaic (mos; hold; - 9%) and potashcorp (pot; hold; -7%). irs ruling and mlp implications for olefin producers. other notable performers for october were companies that stood to gain from a recent irs ruling which allows olefin-related income to qualify for mlp treatment including westlake (wlk; hold; +4%), lyondellbasell (lyb; buy; +3%) and dow chemical (dow; hold; +1%). a private letter ruling (plr), requested by williams companies (wmb; nr) concluded that “income derived from processing ngls into olefins will constitute qualifying income” for mlp purposes. while this ruling may be beneficial to some commodity names, each plr is company specific and, even if qualified, the asset may not necessarily be suitable for mlp status. however with the opportunity now available to put olefin-producing assets into mlps, this is a potential eps tailwind in 13e. absolute valuations look reasonable, but macro weakness may limit upside todays 12x fwd p/e multiple for us chemicals (ex-ag) is 19% below the 15-yr avg. while we view relative valuation (currently 14% below the s 3) our calculation of cash return on cash invested and the strong correlation (r270%) we have found between chemical sector valuations and returns on capital. risks to forecasts include rises in energy, raw materials, n-t interest rates or sharp improvement in end-market demand (see p. 73-75). _ deutsche bank securities inc. all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,8 november 2012 chemicals/commodity chemicals scorecard table of contents stock performance. 3 current valuations 6 forward company valuations 15 growth & profitability . 29 leverage, liquidity & capital . 49 valuation & risks . 73,page2,deutsche bank securities inc.,wlk,21%,ecl,cmp,cyt,alb,wlk,emn,lyb,px,agu,ppg,dow,hun,ce,val,ful,ash,roc,chemicals,s&p500,cbt,ggc,fmc,(0%),(1%),(1%),(2%),(2%),(2%),(2%),(2%),(3%),shw,oln,mon,rpm,apd,pot,mos,kro,dd,foe(23%),(4%),(5%),(5%),(6%),(6%),(7%),(9%),(11%),(11%),3%,2%,2%,2%,1%,1%,0%,4%,4%,5%,5%,6%,7%,arg,8%,28%,lyb,20%,14%,13%,12%,12%,11%,10%,8%,8%,7%,6%,5%,4%,3%,3%,3%,3%,2%,1%,1%,1%,0%,(2%),(3%),(5%),(8%),hun,emn,arg,cyt,val,agu,cmp,ggc,ppg,ecl,shw,roc,ful,oln,chemicals,dow,px,s&p500,rpm,ash,mon,ce,fmc,apd,alb,cbt,pot,(8%),mos,(9%),dd,(10%),foe,(14%),kro(20%),8 november 2012 chemicals/commodity chemicals scorecard stock performance figure 1: ranking by october performance 15% 10% 5% 0% (5%) (10%) (15%) (20%) (25%) (30%) source: deutsche bank, factset; include dividends figure 2: ranking by 3-month performance (august, 2012- october, 2012) 40% 30% 20% 10% 0% (10%) (20%) (30%) source: deutsche bank, factset; include dividends,deutsche bank securities inc.,page3,ggc,97%,lyb,agu,wlk,shw,mon,ppg,emn,val,ecl,ash,cyt,hun,cmp,rpm,s&p500,oln,ggc,mos,chemicals,arg,fmc,pot,ful,px,apd,dow,alb,dd,roc,cbt,ce,kro,foe,(43%),(49%),(0%),(2%),(3%),(4%),(7%),(7%),(8%),(12%),(15%),(15%),(16%),(16%),(21%),14%,12%,11%,10%,10%,9%,9%,8%,4%,2%,1%,1%,0%,0%,19%,19%,21%,30%,lyb,86%,75%,63%,55%,54%,43%,39%,37%,36%,32%,31%,31%,29%,26%,23%,21%,20%,14%,13%,9%,7%,6%,5%,1%,(4%),(7%),(9%),(12%),(14%),93%,wlk,shw,val,cyt,emn,ful,ppg,fmc,ash,hun,arg,ecl,agu,chemicals,rpm,cbt,mon,oln,s&p500,dow,px,cmp,alb,roc,dd,apd,mos,ce,pot,kro,(38%),foe,(59%),8 november 2012 chemicals/commodity chemicals scorecard figure 3: ranking by 6-month performance (may, 2012- october, 2012) 50% 30% 10% (10%) (30%) (50%) (70%) source: deutsche bank, factset; includes dividends figure 4: ranking by 12-month performance 120% 100% 80% 60% 40% 20% 0% (20%) (40%) (60%) (80%) (100%) source: deutsche bank, factset; includes dividends,page4,deutsche bank securities inc.,jan-99,jan-00,jan-01,jan-02,jan-03,jan-04,jan-05,jan-06,jan-07,jan-08,jan-09,jan-10,jan-11,agu,lyb,alb,arg,val,cyt,ash,apd,oln,ce,ggc,dow,mos,roc,shw,wlk,cmp,fmc,hun,emn,ppg,foe,cbt,ecl,ful,dd,jan-12,8 november 2012 chemicals/commodity chemicals scorecard figure 5: chemicals sector index 10-year performance (january 1999-present) 300 250 200 150 100 50,s&p chems index,xlb materials select sector spdr,s&p 500,db u.s. chemicals universe index,source: deutsche bank, factset note: s&p chems index includes: apd, ash, dd, dow, ecl, emn, hpc, iff, mon, ppg, px, roh, sial (as of oct 2006). db u.s. chemicals universe includes 45 chemical names covered by team and selected as comps contact team for further details figure 6: chemicals short interest as of days volume and % of float,25%,16,14 20% 12,15% 10%,10 8 6,4 5% 2,0% source: factset first call estimatezs deutsche bank securities inc.,days short interest (rhs),% of float (lhs),-,page5,12.9,12.5,11.7,11.5,11.5,10.5,10.4,10.1,10.0,shw,cyt,ecl,mon,cmp,shw,arg,px,val,wlk,dow,fmc,ppg,rpm,apd,ful,foe,dd,ggc,alb,roc,mos,pot,14.6,14.2,14.1,13.6,12.9,12.6,12.2,11.8,11.7,11.5,11.2,cbt,oln,11.1,emn,ash,lyb,ce,hun,kro,7.1,6.2,11.0,10.6,10.3,10.1,14.7,15.4,15.7,16.5,17.1,19.1,21.7,22.1,23.0,23.2,23.3,25.5,cmp,ecl,px,mon,arg,val,fmc,cyt,9.3,8.8,8.7,8.7,8.4,8.4,8.2,8.1,8.1,7.6,7.6,7.3,6.9,6.8,6.3,6.2,6.1,5.8,5.5,5.5,4.8,4.5,ppg,ful,rpm,agu,dd,apd,cbt,pot,alb,emn,dow,wlk,roc,ce,ash,mos,oln,foe,ggc,lyb,hun,kro,8 november 2012 chemicals/commodity chemicals scorecard current valuations figure 7: ranking by 2012e p/e 30 25 20 15 10 5 0 source: deutsche bank securities inc. estimates and company information figure 8: ranking by 2012e ev/ebitda 14 12 10 8 6 4 2 0 source: deutsche bank securities inc. estimates and company information,page6,deutsche bank securities inc.,20.0,19.6,19.6,18.4,17.1,16.3,15.6,15.3,14.2,13.8,13.4,13.4,13.2,12.5,12.2,11.9,11.7,11.1,11.1,10.3,9.8,9.7,9.5,9.4,9.1,9.0,8.9,7.4,7.2,hun,arg,val,cyt,apd,alb,ash,oln,lyb,wlk,mon,ggc,cmp,fmc,ce,dow,rpm,mos,roc,emn,shw,agu,shw,mon,ppg,px,10.9,10.6,10.6,10.6,10.4,9.8,9.6,9.6,9.5,9.3,9.1,8.3,7.8,7.7,7.6,7.4,7.4,7.2,6.9,6.5,6.4,6.3,6.1,6.0,5.9,5.1,kro,ppg,5.0,4.9,4.3,foe,dd,px,ful,pot,cbt,ecl,5.8,val,ash,alb,roc,cyt,lyb,arg,wlk,cmp,fmc,kro,apd,oln,pot,dow,rpm,mos,emn,hun,foe,dd,cbt,ecl,ful,ce,4.2,8 november 2012 chemicals/commodity chemicals scorecard figure 9: ranking by 2013e p/e 22 20 18 16 14 12 10 8 6 4 2 source: deutsche bank securities inc. estimates and company information; based on month-end share price figure 10: ranking by 2013e ev/ebitda 12 11 10 9 8 7 6 5 4 3 2 source: deutsche bank securities inc. estimates and company information; based on month-end share price,deutsche bank securities inc.,page7,10.9%,10.5%,10.4%,9.4%,9.1%,7.1%,7.0%,6.7%,6.3%,5.5%,5.4%,5.2%,5.0%,4.9%,4.8%,4.7%,4.6%,4.5%,3.7%,3.4%,2.5%,2.4%,2.1%,1.6%,1.4%,1.4%,1.0%,(0.3%),lyb,alb,val,ash,apd,ggc,arg,mon,wlk,cmp,cyt,ce,hun,rpm,fmc,dow,mos,roc,emn,kro,shw,31.4%,23.0%,18.8%,17.6%,14.7%,14.6%,13.9%,13.7%,ppg,13.3%,12.0%,11.9%,10.4%,11.2%,9.7%,8.4%,8.0%,8.0%,7.6%,7.2%,7.1%,7.1%,6.9%,6.7%,5.1%,4.9%,4.8%,4.0%,3.2%,cmp,oln,-2.2%,ash,val,foe,lyb,dd,alb,roc,kro,shw,arg,cyt,cbt,apd,ce,pot,dow,mon,wlk,rpm,fmc,hun,ppg,mos,emn,ful,ecl,px,foe,dd,pot,cbt,ecl,ful,px,(3.4%),8 november 2012 chemicals/commodity chemicals scorecard figure 11: ranking by 2012e free cash flow yield (defined as free cash flow per share divided by share price) 12% 10% 8% 6% 4% 2% 0% (2%) (4%) (6%) (8%) source: deutsche bank securities inc. estimates and company information. based on month end share price. figure 12: ranking by 2012e free cash flow yield ii (defined as ebitda-capex divided by share price) 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% source: deutsche bank securities inc. estimates and company information. based on month end share price,page8,deutsche bank securities inc.,dd,arg,shw,cmp,mon,fmc,ppg,px,5.5,8.5,5.4,4.7,4.6,4.1,4.0,3.9,3.8,3.5,3.4,3.4,3.4,3.0,2.7,2.5,2.5,2.4,2.3,2.1,2.0,1.9,1.8,1.7,1.6,1.4,1.4,1.4,1.4,val,ash,alb,lyb,roc,apd,cyt,oln,ggc,wlk,7.8%,4.5%,4.4%,3.9%,3.8%,3.4%,3.1%,2.7%,2.5%,2.5%,2.2%,2.2%,2.2%,2.0%,1.4%,1.4%,1.4%,1.4%,1.2%,1.2%,1.1%,1.1%,0.8%,dow,rpm,mos,emn,0.8%,0.7%,kro,hun,0.6%,ce,lyb,alb,val,arg,mon,ash,oln,apd,cmp,cyt,dow,rpm,hun,fmc,dd,px,shw,mos,roc,kro,cbt,cbt,ppg,pot,ecl,ful,0.5%,foe,pot,cbt,ce,ecl,ful,0.4,8 november 2012 chemicals/commodity chemicals scorecard figure 13: ranking by 2012e price/book 9 8 7 6 5 4 3 2 1 0 source: deutsche bank securities inc. estimates and company information. based on month end share price figure 14: ranking by 2012e dividend yield 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% source: deutsche bank securities inc. estimates and company information; based on month end share price,deutsche bank securities inc.,page9,4.2,3.5,3.3,2.8,2.2,2.2,2.2,2.2,1.9,1.9,1.6,1.6,1.8,1.5,1.5,1.4,1.3,1.3,1.3,1.1,1.1,1.1,1.0,0.9,0.9,0.9,0.6,0.7,val,ash,alb,arg,roc,shw,mon,wlk,cmp,kro,cyt,apd,fmc,oln,lyb,pot,25.7%,22.6%,11.6%,12.6%,10.6%,9.9%,9.6%,9.2%,9.2%,8.0%,7.4%,7.3%,6.6%,6.6%,7.8%,5.9%,5.9%,5.7%,5.3%,5.1%,4.9%,3.7%,dow,mos,rpm,emn,3.6%,2.0%,px,3.6%,hun,ppg,ash,foe,dd,lyb,roc,alb,kro,arg,cbt,oln,shw,ggc,dow,mos,wlk,hun,rpm,emn,fmc,apd,pot,ce,ppg,ful,ecl,0.9%,foe,px,ecl,dd,cbt,ce,ful,0.3,8 november 2012 chemicals/commodity chemicals scorecard figure 15: ranking by 2012e ev/sales 5 4 3 2 1 0 source: deutsche bank securities inc. estimates and company information figure 16: ranking by 2013e free cash flow yield (defined as free cash flow per share divided by share price) 30% 25% 20% 15% 10% 5% 0% source: deutsche bank securities inc. estimates and company information,page10,deutsche bank securities inc.,34.8%,31.5%,20.7%,30.6%,19.6%,17.6%,17.3%,15.5%,15.3%,16.7%,13.2%,13.1%,11.1%,11.1%,10.9%,10.6%,10.6%,10.3%,12.4%,9.6%,9.3%,8.5%,8.4%,8.4%,7.0%,6.3%,6.0%,7.1%,5.4%,apd,foe,0.4,alb,lyb,ash,val,oln,ggc,arg,wlk,mon,cyt,ce,dow,mos,cmp,foe,rpm,fmc,hun,dd,emn,ful,roc,kro,cbt,5.1,5.0,4.7,7.3,4.5,3.8,3.6,3.3,3.6,3.2,2.8,2.8,2.4,2.3,2.6,2.2,2.2,2.1,2.1,2.1,2.1,1.9,1.4,1.3,1.3,1.7,shw,pot,ppg,ecl,1.3,1.2,val,ash,dd,arg,shw,cmp,mon,fmc,ppg,px,lyb,alb,cyt,roc,ggc,wlk,dow,rpm,mos,emn,kro,oln,apd,pot,hun,cbt,ce,ecl,ful,1.2,px,5.3%,8 november 2012 chemicals/commodity chemicals scorecard figure 17: ranking by 2013e free cash flow yield ii (defined as ebitda-capex divided by share price) 40% 35% 30% 25% 20% 15% 10% 5% 0% source: deutsche bank securities inc. estimates and company information based on month-end stock price figure 18: ranking by 2013e price/book 8 7 6 5 4 3 2 1 0 source: deutsche bank securities inc. estimates and company information,deutsche bank securities inc.,page11,3.6,kro,dow,dd,oln,rpm,lyb,apd,roc,ppg,cmp,hun,cbt,px,mos,arg,mon,emn,alb,val,pot,ash,shw,ecl,cyt,fmc,ful,ce,2.3%,2.2%,1.9%,1.8%,1.7%,1.7%,1.5%,1.4%,1.4%,1.3%,1.2%,1.1%,0.9%,0.9%,0.8%,0.6%,3.1%,3.0%,3.0%,2.8%,2.7%,2.7%,3.9%,3.9%,3.6%,4.3%,4.5%,pot,3.4,3.1,2.6,2.2,2.2,2.0,2.0,1.8,1.7,1.6,1.5,1.4,1.3,1.3,1.3,1.2,1.2,1.1,1.1,1.0,0.9,0.9,0.9,0.8,0.8,0.8,px,mon,cmp,apd,fmc,ecl,arg,alb,mos,shw,cyt,roc,val,ppg,dd,emn,ce,wlk,rpm,ash,oln,ful,cbt,dow,kro,lyb,hun,0.6,foe,0.3,8 november 2012 chemicals/commodity chemicals scorecard figure 19: ranking by 2013e dividend yield 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% source: deutsche bank securities inc. estimates and company information figure 20: ranking by 2013e ev/sales 4 3 2 1 0 source: deutsche bank securities inc. estimates and company information,page12,deutsche bank securities inc.,pot,3.6,mon,pot,mon,px,cmp,mos,fmc,cyt,alb,ecl,apd,shw,arg,wlk,val,ppg,dd,emn,roc,ce,rpm,oln,1.7,1.5,1.5,1.3,1.3,1.2,1.1,1.1,1.1,1.0,0.9,0.8,ful,0.8,kro,cbt,ash,lyb,dow,ggc,hun,foe,0.4,0.3,0.1,0.8,0.7,0.7,0.7,0.6,1.8,1.8,1.9,2.0,2.1,2.5,2.9,3.4,4.0,3.2,2.7,2.3,2.0,2.0,1.8,1.6,1.5,1.5,1.4,1.4,1.2,1.2,1.2,1.1,1.0,1.0,0.9,0.9,0.8,0.8,0.7,0.7,0.7,0.6,px,cmp,mos,fmc,alb,apd,shw,ecl,arg,cyt,val,wlk,ppg,dd,emn,roc,ce,rpm,oln,lyb,kro,ful,ash,cbt,dow,0.6,ggc,0.4,hun,0.3,foe,0.1,8 november 2012 chemicals/commodity chemicals scorecard figure 21: ranking by 2012e price/sales 5 4 3 2 1 0 source: deutsche bank securities inc. estimates and company information figure 22: ranking by 2013e price/sales 4 3 2 1 0 source: deutsche bank securities inc. estimates and company information,deutsche bank securities inc.,page13,pot,hun,rpm,pot,mon,oln,fmc,mos,ggc,ppg,emn,roc,shw,ash,kro,val,lyb,apd,ecl,dd,ce,alb,cmp,arg,dow,px,wlk,cbt,ful,foe,cyt,(0.4%),(0.7%),7.6%,7.5%,7.3%,7.2%,7.2%,6.9%,6.5%,6.4%,5.9%,5.4%,5.2%,4.7%,4.0%,3.2%,3.0%,2.8%,1.9%,1.7%,1.1%,7.6%,8.4%,9.6%,9.6%,9.9%,17.9%,18.2%,18.9%,21.4%,26.4%,25.0%,16.8%,15.4%,14.8%,13.2%,11.0%,9.0%,8.9%,8.5%,8.0%,7.5%,7.3%,6.7%,6.6%,6.5%,5.9%,5.6%,5.4%,5.3%,5.3%,5.3%,4.7%,4.4%,4.2%,3.8%,3.0%,2.2%,1.5%,mos,hun,oln,rpm,mon,arg,alb,emn,kro,lyb,dd,ful,val,ppg,fmc,cmp,roc,ecl,ce,px,ash,shw,ggc,wlk,dow,foe,cbt,apd,cyt,(2.1%),8 november 2012 chemicals/commodity chemicals scorecard figure 23: ranking by 2012e free cash flow/sales 25% 20% 15% 10% 5% 0% (5%) source: deutsche bank securities inc. estimates and company information figure 24: ranking by 2013e free cash flow/sales 30% 25% 20% 15% 10% 5% 0% (5%) (10%) source: deutsche bank securities inc. estimates and company information,page14,deutsche bank securities inc.,jan-90,jan-91,jan-92,jan-93,jan-94,jan-95,jan-96,jan-97,jan-98,jan-99,jan-00,jan-01,jan-02,jan-03,jan-04,jan-05,jan-06,jan-07,jan-08,jan-09,jan-10,jan-11,jan-12,12,10,8,6,4,8 november 2012 chemicals/commodity chemicals scorecard forward company valuations figure 25: db u.s. chemicals universe p/e ratio, january (1991-present),24,300%,average ntm p/e,22 20 18,15yr avg. = 14.7,oct-12 = 12.1,250% 200%,current: 12.1 3-year: 12.9 5-year: 12.9,16 14,150%,10-year: 14.2,15yr avg. vs. s&p = 85%,oct-12 = 94%,100% 50% 0%,average relative p/e current: 94% 3-year: 97% 5-year: 96%,10-year: 95%,chemicals ntm p/e vs. s&p 500 15-year average ntm p/e,chemicals ntm p/e 15-year average ntm p/e vs. s&p 500,source: firstcall consensus, factset note: ntm eps based on firstcall consensus figure 26: s&p 500 ntm consensus p/e (1991-present),35 30 25,average ntm p/e current: 13.0 3-year: 13.2 5-year: 13.3,10-year: 15.0 20 15 10 20-year m edian=16.6 5 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12,source: factset, i/b/e/s deutsche bank securities inc.,ntm p/e (lhs),15-year av erage,page15,dec-90,dec-91,dec-92,dec-93,dec-94,dec-95,dec-96,dec-97,dec-98,dec-99,dec-00,dec-01,dec-02,dec-03,dec-04,dec-05,dec-06,dec-07,dec-08,dec-09,dec-10,dec-11,2012e,1990,1991,1992,1993,1994,1995,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012e,1990,1991,1992,1993,1994,1995,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,8 november 2012 chemicals/commodity chemicals scorecard figure 27: forward-looking components of share gains (% yoy): 1) p/e multiple expansion, 2) earnings growth (1990-present) 120% 100% 80% 60% 40% 20% 0% (20%) (40%) (60%),u.s. chems ntm eps est. (median % yoy),u.s. chems ntm p/e multiple (median % yoy),u.s. chems share price index (median % yoy) source: deutsche bank, factset note: ntm eps based on firstcall consensus, share price index represents median %yoy of db chems universe figure 28: specialty chemicals forward p/e history (1990-present),20,median = 14.7,18 16 14 12 10 8 source: deutsche bank, factset note: median p/es based on period-end price & firstcall ntm eps estimates. current “e” value is based on latest data figure 29: specialty chemicals ev/ebitda history (1990-present),11,median = 8.5,10 9 8 7 6 5 source: deutsche bank, factset note: median p/es based on period-end price & firstcall ntm eps estimates. current “e” value is based on latest data,page16,deutsche bank securities inc.,1990,1991,1992,1993,1994,1995,1996,1997,1990,1991,1992,1993,1994,1995,1996,1997,1998,1999,2012e,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012e,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,8 november 2012 chemicals/commodity chemicals scorecard a2q2figure 30: differentiated chemicals forward p/e history (1990-present) 25,23,median = 13.1,21 19 17 15 13 11 9 7 5 source: deutsche bank, factset note: median p/es based on period-end price & firstcall ntm eps estimates. current “e” value is based on latest data figure 31: differentiated chemicals ev/ebitda history