Materials final report

Materials,
2012
Oleksandr Matviienko,
Soufianne Ayoche, Huizhong Li

Oleksandr Matviienko, Soufianne Ayoche, Huizhong Li Materials, 2012
1
Agenda
Introduction ----------------------------------------------------------------------------------------------------------------------- 1
Investment Recommendations Summary---------------------------------------------------------------------------------- 2
Materials Industry Analysis ---------------------------------------------------------------------------------------------------- 2
Materials Industry overview------------------------------------------------------------------------------------------------ 2
Diversified Metals and Mining Industry--------------------------------------------------------------------------------- 3
Specialty and Diversified Chemicals Industry ------------------------------------------------------------------------- 7
Fertilizers and Agricultural Chemicals Industry----------------------------------------------------------------------11
Steel Industry------------------------------------------------------------------------------------------------------------------13
Construction Material Industry -------------------------------------------------------------------------------------------17
Metal & Glass Containers industry --------------------------------------------------------------------------------------20
Paper and Forest Products Industry--------------------------------------------------------------------------------------23
Materials Industry outlook-------------------------------------------------------------------------------------------------26
Investing Process Description ------------------------------------------------------------------------------------------------27
Quantitative Screens and Analysis ------------------------------------------------------------------------------------------28
Qualitative Screens and Analysis --------------------------------------------------------------------------------------------30
Fundamental Analysis----------------------------------------------------------------------------------------------------------31
Sensient Technologies (SXT). Current DFF holding.---------------------------------------------------------------32
Cytec Industries (CYT)-----------------------------------------------------------------------------------------------------37
Minerals Technologies (MTX) -------------------------------------------------------------------------------------------42
Scott Miracle Growth (SMG) ---------------------------------------------------------------------------------------------48
Domtar Corporation (UFS) ------------------------------------------------------------------------------------------------52
Steel Dynamics (STLD)----------------------------------------------------------------------------------------------------57
Silgan Holdings (SLGN). Current DFF holding.---------------------------------------------------------------------63
Investment Idea Summary ----------------------------------------------------------------------------------------------------68
Cytec Industries (CYT): STRONG BUY ------------------------------------------------------------------------------68
Scott Miracle Growth (SMG): MODERATE BUY------------------------------------------------------------------69
Sensient Technologies (SXT). Current DFF holding: HOLD-----------------------------------------------------70
Silgan Holdings (SLGN). Current DFF holding: SELL ------------------------------------------------------------71
References ------------------------------------------------------------------------------------------------------------------------72
Appendix---------------------------------------------------------------------------------------------------------------------------73

1
Introduction
As of the date of current analysis, materials sector within S&P 400 is represented by 27
companies and 10 sub industries. Temple-Inland company which was previously one of
constituents of S&P 400 Materials sector was removed form it as the company was acquired in
February 2012. The materials companies are involved in exploration and processing of raw
materials into basic industrial and consumer products which have broad utilization in various
industries in the USA, as well as internationally. The table below presents current sector
constituents and their respective sub-industries.
It is worth noting that DFF fund currently has 2 holdings in the respective sector which were
indicated in the table. The weight of Silgan Holdings is around 5.1% and of Sensient
Technologies is approximately 5.9%. These companies were acquired in May 2010 and May
2011 respectively.
Company Name Ticker Sub-Industry
Martin Marietta Materials MLM Construction Materials
Ashland Inc ASH Diversified Chemicals
Cabot Corp CBT Diversified Chemicals
Olin Corp OLN Diversified Chemicals
Compass Minerals International CMP Diversified Metals & Mining
Scotts Co A SMG Fertilizers & Agricultural Chemicals
Intrepid Potash Inc IPI Fertilizers & Agricultural Chemicals
Louisiana Pacific Corp LPX Forest Products
AptarGroup Inc ATR Metal & Glass Containers
Greif Bros Corp A GEF Metal & Glass Containers
Silgan Holdings SLGN Metal & Glass Containers
Packaging Corp of America PKG Paper Packaging
Rock-Tenn RKT Paper Packaging
Sonoco Products Co SON Paper Packaging
Domtar Corp UFS Paper Products
Albemarle Corp ALB Specialty Chemicals
Cytec Industries Inc CYT Specialty Chemicals
Minerals Technologies Inc MTX Specialty Chemicals
RPM International Inc. RPM Specialty Chemicals
Sensient Technologies Corp SXT Specialty Chemicals
Valspar Corp VAL Specialty Chemicals
NewMarket Corp NEU Specialty Chemicals
Carpenter Technology Corp CRS Steel
Commercial Metals Co CMC Steel
Reliance Steel & Aluminum RS Steel
Steel Dynamics Inc STLD Steel
Worthington Industries Inc WOR Steel
Note:
represents current DFF holdings

2
Investment Recommendations Summary
We recommend a strong buy for Cytec Industries company, a moderate buy Scott Miracle
Growth company, a hold for Sensient Technologies company (current DFF holding), and a sell
for Silgan Holdings company (current DFF holding). It is worth noting that Silgan Holing was
also a sell recommendation previous year. Table below summarizes our recommendations:
Materials Industry Analysis
Materials Industry overview
Materials Industry encompasses such sub-industries as Specialty, Diversified, and Agricultural
Chemicals, Fertilizers, Diversified Metals and Mining, Steel, Construction Materials, Forest and
Paper Products, Metal and Glass Containers, Paper Packaging.
This industry supplies commodities to such industries as aerospace, automotive,
telecommunications, construction, agriculture, general manufacturing, consumer staples, oil and
gas, etc.
The industry can be characterized as cyclical and to some degree oligopolistic and depends,
mainly, on industrial production rates, real GDP growth rates, construction activities, as well as
weather and population growth rates.
Also, the industry can be characterized by relative capital- and labor-intensiveness and energy-
dependence.
As main products are relatively uniform, producers tend to compete on prices by achieving the
effective cost control.
The average size of Materials Industry in the S&P 400 is $3.1 billion and average revenue figure
was $3.3 in FY2010.
The figure below allows tracking relative performance of Materials Industry to S&P 400 and
S&P 500 for past 6 months.
Materials Sector Final Recommendations
Company Name Ticker Sub-Industry Recommendation
Cytec Industries Inc CYT Specialty Chemicals Strong Buy
Scott Miracle Growth SMG Fertilizers & Agricultural Chemicals Moderate Buy
Sensient Technologies Corp SXT Specialty Chemicals Hold
Silgan Holdings SLGN Metal & Glass Containers Sell
Note:
represents current DFF holdings

3
Source: FactSet
Based on this figure, generally, Materials Industry had similar trend to those of S&P 400 and
500. However, for past two months it outperformed both indices and continues to do so now.
Bollinger bands analysis, however, suggests some bearish trend of given Materials index.
Diversified Metals and Mining Industry
Industry Overview
Diversified Metals and Mining companies mine and produce non-ferrous metals, related base
materials and products.
This industry supplies commodities used in manufacturing various equipment and products used
in such industries as aerospace, automotive, telecommunications, construction etc.
According to S&P, this industry is dominated by copper companies. Apart from copper and
copper products, companies in this industry manufacture aluminum, nickel, zinc and related
products, as well as base chemicals, salt etc. The graph below describes recent production trends
in this industry.

4
Note: Data is in Million metric tons
Source: Bloomberg
This sub-industry is represented in S&P 400 by a single company Compass Minerals. This
company produces salt used primarily in highway de-icing, water conditioning, food preparation,
and sulfate of potash for specialty fertilizers production. Please find descriptive financial
information in the table below.
Main players in this industry are represented by such companies as Freeport McMoRan Copper
and Gold (exploration, mining, and production of mineral resources), Titanium Metals Corp
(produces and sells titanium melted and mill products), as well as by smaller companies such as
Lundin Mining (produces copper, zinc, lead, and nickel), Quadra FNX Mining Ltd (produces
copper, gold, and platinum group metals), and Compass Minerals.
Revenue and Earnings Drivers
We will consider specifically Compass Minerals in this analysis, as our investment options for
diversified metals and mining are limited to this company.
Company‟s main revenue drivers are weather, which drives de-icing salt demand as well as
governmental budget policy allocating money for de-icing and safety purposes. Safety of
citizens is one of the main priorities of any government, thus, making Compass‟s salt highly
demanded in winter, especially cold, icy and snowy one.
1.39 1.39 1.40 1.39 1.46 1.45
3.02
3.33
3.12
3.21
3.44 3.58
0.12 0.12 0.11 0.12 0.14 0.16
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2006 2007 2008 2009 2010 2011
Non-ferrous metals production
Copper Aluminium Nickel
Target Companies Comparable Statistics*
In billions Mkt Cap Revenue P/E TEV/Sales TEV/EBITDA GM B/M
5-Year
GS
Compass Minerals 2.36 1.11 14.94 2.45 9.74 28.39% 0.189 10.80%
Peers Average 3.14 3.57 13.72 1.18 7.93 26.62% 0.33 10.64%
*Based on Bloomberg Peers

5
From the other side, agricultural demand drives fertilizers demand. Fertilizers demand, in turn,
drives demand for the Company‟s potash production.
Agricultural, and, thus, fertilizers demands are expected to be robust in near and medium future,
as such trends as population growth, which drives demand for food, and a decline of arable land
per person, which drives demand for fertilizers to increase a land‟s productivity to compensate
for a decline in land‟s quantity may both boost demand for Company‟s potash products.
Moreover, constantly increasing level of personal income, especially in developing countries
where the majority of world‟s population is concentrated, stimulates such population to change a
diet towards more valuable food products, which require a more extensive use of fertilizers.
Such factors as anticipated crop prices also drive a fertilizers demand.
Moreover, according to Morningstar, this industry is oligopolistic in nature, which may produce
a positive effect on the Compass‟s profitability.
Risk Drivers
The industry is characterized by little differentiation of its products. Therefore, companies
mostly compete on price.
This produces such risks as the possibility of market damping by competitors willing gain more
of a market share.
Also, the threat of substitutes to road de-icing using salt exists, which may negatively impact
Company‟s position.
However, according to Morningstar, the threat of substitutes is not high.
The risk of warm weather seriously impacts Company‟s financial results.
Also, consistently low agricultural prices also may produce a devastating effect on the
Company‟s financial health.
The inability to find new mineral resources to support existing salt and potash production may
also greatly impact Company‟s operations. Please find risk matrix below.

6
Outlook
As the industry is oligopolistic, we expect it to be profitable and stable, as prices, thus, profits
tend to be less volatile.
Moreover, as such natural resources as salt
and potash are non-renewable and scarce,
while population growth and demand for
food is expected to increase, as well as
budget spending on the safety of roads in
winter is expected to be stable, prices on
Company‟s main products are expected to
be relatively stable.
Total planted acreage for major crops in the
US is expected to increase in next 2 years
stimulating fertilizers demand. However,
according to Morningstar, potash supply
growth will outpace potash demand growth
in near future, thus, providing some
downside potential for potash prices. Please
find anticipated acreage dynamics for major crops in the US in the table below.
According to S&P, the outlook on general diversified metals and mining sub-industry for next 12
months is positive, as main products‟ prices are forecast to increase, thus, driving sales and
earnings of companies upward. Please find detailed information below.

7
This, in turn, is dictated by stable non-ferrous metals demand growth outpacing supply growth,
reflecting new housing construction growth (especially in the US – second largest consumer) and
intensified industrialization rates in India and China.
Specialty and Diversified Chemicals Industry
Industry Overview
Specialty and diversified chemical products are mostly made from basic chemicals. They include
coatings, adhesives, pesticides, paints, sealants, catalysts, plastic additives, ethers, alkali, carbon
products etc. Please find more information on
current industry production trends in the graph
to the right.
Such products are usually produced in smaller
volumes, than basic chemicals, and require
higher R&D spending and
marketing/distribution costs.
Such industries as manufacturing, automobile,
agriculture, housing, construction,
pharmaceuticals are the major consumers of
specialties.
According to S&P, companies in this industry have greater control over prices and, thus, more
stable profit margins than commodity producers.
This sub-industry is represented in S&P 400 by a range of companies indicated in table below.

8
Main players in this industry are represented by such companies as Dow Chemicals (largest US
chemical producer: from base chemicals to sophisticated specialties), DuPont (basic materials,
fertilizers, specialties, agricultural products, enzymes etc.), as well as by smaller companies such
as Albemarle (polymers, catalysts, performance chemicals etc.), Ashland (water solutions,
lubricants, polymers other).
As Specialty and Diversified Chemicals Industry supplies products to a wide range of industries
and consumers, its main drivers are also well diversified.
Such macro factors as industrial production growth rates, construction activity levels, personal
consumption expenditures, agricultural production growth rates are one of the main revenue
drivers.
Chemical production is capital intensive.
Thus, it requires significant modernization
and expansion capex. Therefore, capex is
also one of main revenue as well as
earnings drivers. According to American
Chemistry Council, aggregate capex in
chemical industry reached $27.5 billion in
2010, from which $4.9 billion was spent on
maintenance and repairs.
From the earnings perspective, energy
prices dynamics is an important driver.
Chemical industry is highly energy
intensive, as companies use energy
commodities as raw materials, fuels, and
power sources, according to S&P.
According to S&P, chemical industry
accounts for about 6% of total energy
5-Year
GS
Ashland Inc. 5.01 7 15.59 1.19 28.23 27.05% 0.81 3.82%
Cabot Corp. 2.58 3.27 13.17 0.81 7.27 18.77% 0.58 3.28%
Olin Corp. 1.7 1.96 7.94 0.9 6.18 21.36% 0.59 15.48%
Albemarle Corp. 5.89 2.87 13.86 1.73 9.13 33.09% 0.27 4.41%
Cytec Industries 2.85 3.07 15.83 0.74 7.5 23.55% 0.64 6.03%
Mineral Technologies 1.18 1.04 18.08 0.68 5.48 20.92% 0.63 0.43%
NewMarket Corp. 2.54 2.15 13.59 1.33 8.01 24.74% 0.21 10.96%
RPM International 3.34 3.56 16.91 1.13 9.95 40.28% 0.37 2.75%
Sensient Technologies 1.92 1.43 15.74 1.36 9.39 31.77% 0.55 4.64%
Valspar Corp. 4.29 4 16.3 1.25 11.25 33.12% 0.28 5.86%
Peer Average 4.13 4.23 14.24 1.07 8.27 27.10% 0.21 7.38%

9
consumption in the US, as well as 9% of natural gas consumption. Of this consumption,
according to S&P, 53.7% by volume (72% by value) was used as raw materials with the
remainder used for fuel and power in 2010.
Energy costs, especially, natural gas, can occupy up to 90% of COGS for chemicals companies.
Governmental regulation can also produce large impact on companies‟ earnings as chemical
industry is highly regulated both on federal and state levels. Please find major regulation acts in
the graph to the right.
Risk Drivers
The industry is relatively cyclical (to a lesser degree than basic chemicals) and vulnerable to
changes in US/global industrial production and GDP growth rates, as well as personal income
levels, construction activities, international chemicals trade etc. The earnings tend to emulate
basic economic cycles.
The industry is characterized by high differentiation and customization of its products.
Therefore, companies mostly compete on quality of products, and, to a lesser degree, on prices.
However, low global chemical prices, as well as steel, agricultural and housing prices may
produce negative impact on the profitability of industry.
High energy prices, as well as relative elasticity of demand on main specialty chemical products
may erode chemical companies‟ margins.
According to S&P, threat of substitutes is low. Please find risk matrix below.

10
Outlook
We believe Specialty and Diversified Chemicals Industry would benefit from US/global
industrial recovery as, according to EIU, US Real GDP growth rate is expected to be 1.8% in
2012 and accelerate to 2.3% by 2015, as well as global Real GDP growth rate is expected to be
3.1% in 2012 and reach 4.3% by 2015.
US industrial production growth rate is also projected to recover to be in a range of 2.4-3% for
the next 5 years. Please find main macroeconomic statistics which may produce high influence
on chemical industry in the table below.
Energy prices, especially, natural gas, have decelerated its growth recently.
Moreover, according to S&P, business
environment for chemical industry will
remain strong and manufacturing
industry will continue to grow.
Agricultural demand for chemicals is
also expected to be strong as population
growth rate and increase in personal
income levels in developing countries
would stimulate agricultural production.
All the aforementioned factors are
beneficial to the chemical industry.
Note: GR=Growth Rate
Gas Prices represent Henry Hub, Crude Oil Prices represent WTI
Source: EIU, Bloomberg
Macroeconomic factors
Item 2011/Spot 2012 2013 2014 2015
Global Real GDP GR 3.7 3.1 3.9 4.1 4.3
USA GR 1.7 1.8 2 2.2 2.3
Western Europe Real
GDP GR 1.7 -0.5 0.8 1.2 1.6
Transition Economies
Real GDP GR 3.7 2.3 3.4 3.8 3.8
US Industrial
Production Growth 4.2 3 2.4 2.3 2.4
Gas Prices, $/MMBtu 2.56 3.15 3.85 4.2 4.4
Crude Oil Prices,
$BBL 102.31 103.49 102.27 97.72 94.08
US Personal
Disposable Income
($trillions, PPP) 11.656 12.021 12.435 12.894 13.410
Corn Price, cent/bu 639.75 641.64 560.85 561.41 558.21
Wheat Price, cent/bu 635.25 663.74 718.01 739.24 n/a

11
Moreover, Producer Price Index for Chemical Industry also shows positive dynamics after a drop
in 2008/2009, suggesting further increase.
Fertilizers and Agricultural Chemicals Industry
Industry Overview
We will first begin by giving a quick overview of the sector. The fertilizers sector is one of the
sub sectors of the chemical industry. Fertilizers contain one or more of the major plant nutrients
and sometimes secondary and/or trace nutrients. They are added to soil to replace essential
nutrients depleted by crops. Its main nutrients are phosphorus, nitrogen and potassium. The USA
is the world‟s largest consumer and importer of phosphate rocks and sulfur. Both chemicals are
nutrients for fertilizer and represents 95% and 90% of the use of such nutrients respectively;
therefore, if we can have analyze how the US demand is going to change in the future, we may
be able to forecast how the fertilizers sector will perform. Since the main consumers of fertilizers
are agricultural companies, forecasting the level of agricultural activity in the USA will yield
strong insights about the future fertilizers demand. The common distribution system is by rails.
This sector is also subject to a high level of mergers and acquisitions, which can yield in the
longer term to a more oligopolistic market.
Here is a table summarizing key statistics for the companies we are studying in our sector.
Agricultural demand for fertilizers and other chemicals is dictated by projected increase in
world‟s population, decrease in arable land per person and, thus, increase in agricultural
production. Furthermore, the expected increase in biofuel usage may boost the use of fertilizers.
Another revenue driver is the level of personal income: an increasing level of personal income in
developing world would stimulate the demand for quality food, and, thus, for fertilizer use in
agricultural production. Also, the risks of adverse weather conditions would stimulate the
fertilizers use. The price of natural gas is also a very important driver since it has a large impact
in pricing of agricultural chemicals as it occupies a vast part in COGS of fertilizers‟ companies.
As a result, prices of gas are major drivers for both revenue and earnings of fertilizers‟
companies. Finally, fertilizers are one of major parts of agricultural companies‟ raw materials
expenses. These raw materials expenses are determined by the anticipated prices of the end
products. Therefore, agricultural prices may produce a high impact on fertilizers and related
chemicals prices.
Since we have seen that overall agricultural activity is one of the most, if not the most, important
revenue driver, we have decided to look for corn and soybean projection for 2012. As you can
5-Year
GS
Intrepid Potash Inc 1.91 0.44 20.52 3.48 9.17 40.88% 0.45 n/a
Scotts Miracle-Gro 2.92 2.82 19.29 1.33 10.2 11.74% 0.16 -4.46%
Peer Average 16.29 10.67 15.69 2.24 8.87 32.98% 0.30 19.99%

12
see, the consensus is quite bullish, which may positively affect the demand for fertilizers in the
short term.
The same goes for the crop producer confidence index which is slightly increasing again
suggesting that producers are no longer in the pessimistic loop they used to be in.
Risk Drivers
The first and most important risk driver is linked to high energy prices, especially, natural gas
prices since it may erode fertilizers‟ companies‟ margins and profitability. Moreover, agricultural
cycles may affect the financial stability of fertilizers‟ companies. Finally, low agricultural prices
may negatively impact fertilizers‟ and related chemicals prices.

13
Outlook
According to Bloomberg, the recent rapid growth in the production of biofuels initiatives,
including ethanol, has been driving a boost in grain and oilseed use globally which in turns is
expected to affect positively the demand for fertilizers. In addition, longer term nutrient use is
expected to grow at about 2% per year, with the developing nations of Asia and Latin America
accounting for nearly all of this growth potential. On the other hand, according to Bloomberg,
there were some bearish trends concerning global corn and soybean demand/supply expectations.
Another bearish trend lies in the fact that US famers‟ future expectation are falling. Nonetheless,
the USDA long run projections for fertilizers were incrementally positive with 2.2 Million acres
of added planting of major crops.
Finally, the USDA expects higher wheat and corn planting, the latter being the highest end
market for fertilizers.
As a result of all those elements, the outlook for this sector is quiet mitigated since we both
bullish and bearish trends that must be taking into consideration. We however believe that this
sector will tend to market perform at the light of these facts. Below is a graph that supports our
view:
Steel Industry
Industry Overview
Steel products are mostly made from raw iron. Steel industry, as the base industry in the
industrial world, supplies commodities to industries ranging from appliances, automotive,
construction, containers to electrical equipment, machinery etc. The graph shows on the right.
Steel industry is energy and capital intensive industry. The integrated production process
requires expensive plant and equipment purchases.

14
Main players in this industry are represented by such companies as Nucor Corp (segment: steel
mills, steel products, and raw materials), United States Steel Corp (segment: flat-rolled
products), U.S. steel (segment: tubular products), and Steel Dynamics Inc. (segment: steel
operations, metals recycling and ferrous resources operations, and steel fabrication operations),
as well as by smaller companies such as Reliance Steel & Aluminum (provides metals
processing services and distributes metal products).
Note: Data is in thousands of net tons
Source: American Iron and Steel Institute
Revenue and Earning Drivers
The primary revenue driver is economic growth, measured by real GDP. The demand for steel is
cyclical in nature and highly sensitive to whether the economy is growing or declining.
Steel industry highly relies on the cyclical auto and construction industries, since steel
commodities rely heavily on demand for such consumer products as appliances, cars, and
containers. In addition, steel relies more on the capital goods markets.
According to S&P, scrap price has negative effect to Steel industry; higher scrap costs increase
the cost of raw steel production for integrated mills.
5-Year
GS
Carpenter Technology Corp 2.35 1.79 22.76 1.32 10.31 19.55% 0.33 0.48%
Commercial Metals Corp 1.58 8.12 n/a 0.31 10.04 8.68% 0.75 0.98%
Reliance Steel & Aluminum 4.24 8.13 12.44 0.6 7.83 21.66% 0.74 5.32%
Steel Dynamics Inc 3.37 8 12.59 0.54 6.83 9.25% 0.68 17.22%
Worthington Industries Inc 1.25 2.41 10.84 0.7 10.04 10.01% 0.53 -4.95%
Peer Average 6.43 8.87 41.62 0.78 7.37 13.00% 0.61 5.67%

15
Steel companies face fierce competition from foreign producers. If the price of imported steel
products is lower than domestic steel price, domestic steel industry will be negative affected.
Steel industry is more concentrated and fragmented compared to other base metals industries.
Greater financial sources from mergers enable companies to directly source raw materials
through acquisitions. The four big companies are shown below.
As the world‟s largest steelmaking country, China has placed immense upward pressure on the
prices of raw materials, such as iron ore, ferrous scrap, coke, and coal. Graphs show below.
Steel industry is highly regulated with respect to the environment, subject to a variety of federal,
state, and local environmental laws that regulate air emissions, wastewater, and hazardous waste
disposal.
Risk Drivers
The industry is relatively cyclical and vulnerable to volatility in GDP growth rates, as well as
construction activities, autos industry performance and distributors‟ inventory accumulations etc.
The earnings tend to emulate basic economic cycles. Due to the fierce competition from
international steel markets, high global production and low global steel prices may produce
negative impact on the profitability of industry. Consolidations can dramatically cut down cost,
which is positive effect to Steel industry. At the same time, the industry is more fragmented than
before in terms of the number companies, who typically use about a 3-to-1 ratio of molten pig
iron to scrap and, thus, are less sensitive to rising prices for scrap.
0
5,000
10,000
15,000
20,000
25,000
2006 2007 2008 2009 2010
Largest US Steel Companies
Nucor Corp. United States Steel Corp.*
AK Steel Holding Steel Dynamics Inc.
151 182 222 280
356 423
495 501
574 627
90 92 91 100 95 99 98 91 64 81
850 903 969
1,069
1,146
1,250
1,3511,327
1,231
1,414
-
500
1,000
1,500
2001200220032004200520062007200820092010
World Steel Production
China US World Total
*North American operations only.
Source: Company Reports
*North American operations only.
Note: Data is in thousands of net tons
Source: American Iron and Steel Institute

16
Outlook
We have a slight positive fundamental outlook for the Steel industry for the following 12-month.
The projection of a 2.0% in U.S. GDP increase in 2012, compared with the GDP growth of 1.8%
in 2011. According to S&P, in the year 2012, there‟s an increase in auto sales to 13.5 million
units, from 12.8 million units in 2011. Weak construction markets in the U.S. will weigh on the
company's growth potential in the near term. Below two graphs are the outlook by Standard &
Poor and Value Line.

17
Source: Standard and Poor’s Source: Value Line
Construction Material Industry
Industry Overview
Companies in Construction Materials Industry are engaged in the mining, quarrying and
processing of raw materials involved in road and building construction.
The industry includes a highly diverse range of suppliers, from cement manufacturers to
specialty glass and steel manufacturers, as well as provides a large market to white goods
manufacturers, furniture manufacturers, etc.
Construction materials companies have a wide range of customers from small house-builders, to
multiple projects within one country, even to shopping mall construction, or office blocks,
operating in multiple countries.
The industry has high barriers to entry. Main players in this industry are represented by such
companies as Vulcan Materials Corp. (engages in the production and sale of construction
aggregates for the infrastructure industry; segments: aggregates, concrete, asphalt mix, and
cement), as well as by smaller companies such as Martin Marietta Materials (engages in the
production and sale of aggregates for the construction industry).

18
This sub-industry is represented in S&P 400 by a single company Martin Marietta Materials Inc.,
the second largest U.S. producer of aggregates for the construction industry.
The macroeconomic performance, which is measured by real GDP, is one of the revenue drivers
for Construction Materials industry. Construction activity in the U.S. is the single most important
driver of earnings power for Construction Materials industry.
Construction activity is driven by highway construction (public construction and supported by
government funding), commercial construction
(public construction), and housing (private
construction). Construction activity is highly
cyclical.
Public construction, funded by the government, is
an important segment of the industry. The
infrastructure spending is a key driver for the
industry.
The industry is subject to increasing challenges
from environmental advocates hoping to control
the pace and direction of future development,
which made it difficult for the industry to expand
and grow.
Meanwhile, these restrictions on supply have created a favorable pricing environment that is
expected to continue.
Risk Drivers
The biggest risk for Construction Materials industry is weak construction activity. Weak federal
and state budgets are a concern. Politicians are focused on cutting government spending. Future
restrictions will be more likely to make zoning and permitting more difficult, which means that
the favorable pricing environment is expected to continue. The commercial sector in coming
months will continue to be weak, but according to S&P, the residential spending has bottomed
and will improve gradually in 2012, which is a bull say. Raw material is like to inflate in the
form of higher costs for diesel and asphalt, which will drive up COGS and decrease earnings.
5-Year
GS
Martin Marietta Materials 3.99 1.81 48.59 2.48 15.11 16.60% 0.36 -4.07%
Peer Average 2.56 2.98 28.73 1.54 19.61 24.41% 0.53 -3.64%

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Outlook
Our fundamental outlook for the construction materials sub-industry for the next 12 months is
neutral. For the commercial construction sector, there‟s no obvious recovery trend leading to a
rebound in demand. Since the regression in 2008, housing starts stayed at quite low levels in the
past several years. According to S&P, in the coming months, the weak trend will continue but is
likely to show some recovery in 2012. Spending on infrastructure is uncertain. Due to the limited
visibility on federal infrastructure spending levels in 2012, we expect that public construction
demand for aggregates will be low. Pricing for aggregates is likely to hold up because of the
restrictions being placed on mining due to environmental concerns. Below two graphs are the
outlook by Standard & Poor and Value Line.

20
Metal & Glass Containers industry
Industry Overview
The Containers & Packaging industry are engaged in the manufacturing of containers, as well as
offering packaging services. The food-and-beverage and household products sectors account for
the biggest portion of overall business.
The industry is concentrated toward metal, glass and plastic containers and packaging operations.
For DFF, we only focus on metal and glass containers.
Companies within the industry serve a wide variety of markets, but most rely on the food-and-
beverage, household products, and pharmaceutical sectors for the majority of business.
Main players in this industry are represented by such companies as Ball Corp. (supplies metal
packaging to the beverage, food, and household products industries worldwide) and Owens-
Illinois Inc.(manufactures and sells glass container products), as well as by smaller companies
such as AptarGroup Inc. (engages in the design, manufacture, and sale of consumer product
dispensing systems.), Greif Bros Corp A (manufactures and sells industrial packaging products)
and Silgan Holdings (engages in the manufacture and sale of metal and plastic consumer goods
packaging products).

21
Though companies in the industry offer their products to diversified end markets to stabilize
earnings and enhances customer base, the industry is not immune to macroeconomic cycles. As
the broader economy goes, so goes the Packaging and Containers Industry.
According to Value Line, consumer spending habits
can have an impact on operating results. Global sales
of beer, wine and spirits and food containers remain
fairly strong, due in part to more cost-conscious
consumers continuing to dine at home.
Since a good number of products utilize oil-based
materials, energy price is also a key driver factor
affecting revenues and earnings. Volatile petroleum-
based material prices can make cost management a
challenge. In addition, the raw material, such as steel
and aluminum etc. has a clear and direct effect on the
revenue and earnings. Thus, some companies in the
industry consider acquiring the self-make steel can
operations.
The metal container business' sales are dependent, in
part, upon the vegetable and fruit harvests in some
regions of the US.
Metal & Glass Containers industry is subject to the
global beverage industry. International expansion helps to limit volatility and enhance these
companies‟ attractiveness.
In terms of environment concern, government implements extensive regulations on mandating
recycling and limitations on certain packaging items. It will affect the sale of beverage
containers, as well as the supplies of post-consumer recycled glass.
New technology and production efficiencies can boost sales volume and margins.
5-Year
GS
AptarGroup Inc 3.48 2.34 19.66 1.5 8.38 32.17% 0.37 5.21%
Greif Bros Corp A 2.43 4.25 13.81 0.86 7.94 18.24% 0.51 n/a
Silgan Holdings 3.02 3.51 16.49 1.05 7.62 13.97% 4.58 5.35%
Peer Average 3.53 5.07 14.72 1.01 15.72 18.26% 2.43 7.30%

22
Risk Drivers
The packaging industry is highly competitive. Most participants in the industry have to compete
on price, especially in the food-and-beverage segment. The global containers and packaging
industry is witnessing an increasing trend. Companies‟ operations in the industry are subject to
federal, foreign, state and local environmental laws and regulations. These laws and regulations
limit the discharge of pollutants and establish standards for the treatment. In addition to costs
associated with regulatory compliance, companies may be held liable for alleged environmental
damage associated with the past disposal of hazardous substances. Due to dependence on crop
market, the weather conditions in those regions will affect the results of operations accordingly.
Outlook
We have moderately positive outlook for the metal and glass containers sub-industry in the
following 12-month, based on our view of a gradual economic recovery and growth in global
packaging and containers markets. According to Data monitor‟s report on 'Global Containers and
Packaging', the global containers and packaging market generated total revenues of $420.3
billion in 2009, representing a compound annual growth rate (CAGR) of 2.2% for the period
spanning 2005-09. The performance of the market is forecast to accelerate, at an anticipated
CAGR of 3.3% for the five-year period 2009-14, which is expected to drive the market to a value
of $493.5 billion by the end of 2014. The industry is undertaking consolidations to seek to
improve operating efficiencies and expand their global market reach. We believe improved
production efficiencies and new products, such as easy-open closures on cans and lighter-weight
glass bottles in new sizes, will eventually boost sales volume and margins. The structure and
enforcement of laws mandating recycling and limitations on certain packaging items can affect
the sale of beverage containers, as well as the supplies of post-consumer recycled glass, which
we view as a positive for companies within this group. Below two graphs are the outlook by
Standard & Poor and Value Line.

23
Paper and Forest Products Industry
Industry Overview
These industries are involved in the manufacturing of paper, paperboards and wood products
According to S&P, the main raw materials are timber and wood fiber (virgin or recycled). The
production process in this industry is very capital intensive which leads to large consolidations
within the industry. The main end users of such paper and forest products include industries as
manufacturing, automobile, agriculture, housing, construction, pharmaceuticals. The main
players are large paper and forest companies such as International Papers and Weyerhaeuser (see
table), whose financial structures and supply management abilities allow them to survive. The
main products of the paper industry are paperboard (containerboards and boxboards), paper
(printing and writing), newsprint, tissue paper and other.
For the Forest products industries, the main products are wood products such as lumber and
structural panels.

24
Here is a table summarizing key statistics for the companies we are studying in our sector.
Revenue Drivers
Housing starts is the most important driver for forest products since it is the highest end market
for lumber and other wood products. Moreover, interest rates are also important revenue drivers
since they affect the whole GDP outlook and corporate operating strategy, which is very
important for such industries since they are strongly correlated with the overall level of the
general economy. In this case, falling interest rates are positive since investment activity
increases. Another very important driver is GDP. Indeed, it is a very important indicator for
economic health with high impacts on paper and forest products. In addition, operating rates are
also important to consider. Indeed, the proportion of total manufacturing capacity being utilized
is a key indicator of the health of the overall industry. Main raw materials prices as well as final
product prices are also important to consider they affect operating rates and overall profitability.
Paper/Packaging Products: Target Companies Comparable Statistics*
5-Year
GS
ROCK-TENN
COMPANY 4.86 6.91 13.16 1.09 9.28 17.30% 0.71 47.20%
PACKAGING CORP
OF AMERICA 2.94 2.62 18.21 1.14 8.09 20.51% 0.33 3.73%
SONOCO PRODUCTS CO 3.27 4.50 14.62 0.98 8.16 16.36% 0.43 3.04%
TEMPLE-INLAND I 3.51 3.94 34.77 1.05 11.56 12.32% 0.28 -5.93%
DOMTAR CORP 3.43 5.61 8.35 0.6 3.47 17.17% 0.86 23.81%
LOUISIANA-PACIFIC
CORP 1.10 1.36 n/a 1.1 118.38 6.79% 0.92 0.60%
Peer Average 3.56 5.41 14.09 0.94 12.91 16.88% 0.45 9.65%

25
You can check in graph X that the prices of lumber and structural panels have rebounded since
its low in 2009, which in turn explained the increased production in 2010 as you can see in table
X. Finally, international trade is very important for the forest industry because solid level of
exports help exponentially the industry in periods of strengths and mitigates the bad effects in
periods of bad domestic performances.
Risk Drivers
According to S&P, expanding electronic communications are hurting the print market. Moreover,
growth in e-readers may be detrimental for some grades of paper products. Finally, pine beetles
impact can last for years for the lumber productions.

26
Outlook
We believe Paper and Forest Products Industry would benefit from US/global industrial recovery
as, according to EIU, US Real GDP growth rate is expected to be 1.8% in 2012 and accelerate to
2.3% by 2015, as well as global Real GDP growth rate is expected to be 3.1% in 2012 and reach
4.3% by 2015. Those results are show in graph Y. This factor coupled with the fact that the Fed
is expecting to keep interest rates low until 2015 are very good news for the industry. In addition,
according to S&P, supply is being controlled which is a good indicator of the industry capacity
to react to its environment. Moreover, pulp prices and other raw materials prices has decreased
significantly recently which coupled with the recent prices increase of many grades of paper,
which affected positively the industry‟s profitability. Another interesting element is linked to
new opportunities that may arise since cellulosic ethanol by contrast to traditional ethanol for
biofuel energy may add a market for this industry. Finally, existing home sales and housing
formation are improving which may have a positive effect on the forest products industry. You
can also check graph Z about housing starts information.
All in all, our outlook for the paper and forest products industries is positive and we expect those
industries to slightly over perform the market in 2012.
Materials Industry outlook
We believe Materials Industry would benefit from US/global industrial recovery, high industrial
demand and production levels in developing world, strong
agricultural production levels, as well as low substitution trends
and favorable government regulation regimes, as well as
accelerated international trade levels
In addition, we believe Materials industry is undervalued
currently on basis of overstated pessimism concerning current
global recovery and industrial production growth levels, as well
as relatively high B/M and low P/E levels. Please find more
information in table to the right.
Indices comparison
Index P/E B/M
S&P 400
Materials 17.35 0.478
S&P 400 20.19 0.476
S&P 500 14.44 0.452
Nasdaq 21.73 0.357
Source: Factset

27
Investing Process Description
The flowchart below describes our general approach towards stock screening, analysis, and
selection processes.
We executed our analysis on three distinct levels: Quantitative, Qualitative, and Fundamental.
On the Qualitative and Quantitative levels each stock got a distinct score as a rank of the
company according to a given screen. Quantitative scores were aggregated in a C-score, which
measured a companies‟ overall standing according to quantitative screens, and qualitative scores
were aggregated in a Q-score, which measured companies‟ standing according to qualitative
screens. Further, we assigned 70% weight to quantitative score and 30% to qualitative score to
get a CQ-score. Top 6 companies according to CQ-score were sorted out for fundamental
analysis. As a result of fundamental analysis we selected 3 stocks for buy/hold recommendations
and 1 current DFF holding – Silgan Holdings – for a sell recommendation. Table below presents
the CQ-scores for each 27 companies. Also, since the past 3-year data was missing for Intrepid
Potash, we were unable to complete the screens for this company.

28
“Leading Quant” means top 6 companies according to quantitative screens, “Leading Qualt”
means top 6 companies according to qualitative screens. One company, which is also a current
DFF holding – Sensient Technologies – was among top 6 companies in both quantitative and
qualitative screens.
Quantitative Screens and Analysis
The quantitative analysis was based on different screening criteria to analyze the stocks from
different perspectives. Specifically we used such screening techniques as:
 Glamour/Value screens, as based on DeBondt and Thaler, as well as Lakonishok,
Shleifer, Vishny (LSV) papers, characterize companies from value investing standpoint.
We used such parameters as past 3-year buy and hold returns and past 5-year sales
growth rates, as well as book value of equity to market value of equity and cash flow per
share to price per share screens. We averaged 3-year buy and hold return rank and 5-year
sales growth ranks of analyzed companies to get combined score used further in our
analysis. Also we averaged ranks of companies according to book-to-market and cash
Weights: Ticker Company C-Score Q-Score CQ-Score
C 70% IPI INTREPID POTASH n/a 70 n/a
Q 30% CYT CYTEC INDUSTRIES INC 135 46 108.3
SXT SENSIENT TECHNOLOGIES CORP 121.5 70 106.1
Legend: SMG SCOTT MIRACLE GROWTH 126 58 105.6
Ultimate Selection MTX MINERALS TECHNOLOGIES INC 133 39 104.8
Leading Quant UFS DOMTAR CORPORATION 125 57 104.6
Leading Qualt STLD STEEL DYN 118.5 59 100.7
Leading Both PKG PACKAGING CORPORATION OF AMERICA 106 80 98.2
Current Holding OLN OLIN CORP 111 64 96.9
No data available ALB ALBEMARLE CORP 108.5 62 94.6
SON SONOCO PRODUCTS 106 63 93.1
ATR APTARGROU 99.5 61 88.0
CMP COMPASS MINERALS INTL INC 92 58 81.8
MLM MARTIN MA 104 29 81.5
WOR WORTHINGT 87 68 81.3
CBT CABOT CORP 91.5 56 80.9
ASH ASHLAND INC NEW 90.5 53.5 79.4
SLGN SILGAN HO 86 58 77.6
CMC COMMERCIA 102 18.5 77.0
VAL VALSPAR CORP 95 33.5 76.6
RS RELIANCE 74 81 76.1
CRS CARPENTER 81.5 57 74.2
NEU NEWMARKET CORP 71.5 68 70.5
GEF GREIF INC 74.5 50 67.2
RKT ROCK TENN 59.5 67 61.8
RPM R P M INTERNATIONAL INC 60 63 60.9
LPX LOUISIANA PACIFIC CORPORATION 73 22.5 57.9

29
flow-to-price screens to get combined score used further in our analysis. Please refer to
Appendix A for detailed calculations.
 Earnings surprise screens, as based on Doyle, Lundholm, and Soliman paper, to
investigate how the market participants actually perceive the perspectives of companies
and how effectively market is valuing given securities. This measure is directly related to
companies‟ abilities to generate abnormal returns, as higher earnings surprises they
experience lead to higher abnormal returns they exhibit. Thus, we allocated higher ranks
to companies which exhibited higher earnings surprise as of the end of FY2011. Please
find detailed calculations in Appendix A.
 Volatility screens, as based on Baker, Bradley, and Wurgler paper, measured by both
standard deviation and beta are used to investigate companies‟ risks as perceived by the
market. We allocated higher ranks to companies with lower standard deviation and betas
of 2 year monthly returns (regressed on S&P 400 for beta calculations). Then we
calculated average rank according to these two indicators to serve as a volatility score.
Please find detailed calculations in Appendix A.
 Accruals screens, as based on Sloan paper, were used to check the earnings quality of
respective companies. Stocks with the lowest ranks got the highest scores. Please find
detailed calculations in Appendix A.
 F-score screens, as based on Piotroski paper, were used to determine the fundamental
strength of the companies. Please find detailed calculations in Appendix A.
 External financing screens, as based on Bradshaw, Richardson, and Sloan paper, to
determine companies‟ recent financing activities taking into account the scientifically
determined market reaction to the companies‟ financing activities. Please find detailed
calculations in Appendix A.
Thus, we believe proposed quantitative process would characterize the firm from different
investing and financing perspectives and allow us to make a better selection by basing our choice
on the variety of criteria. We aggregated each score obtained by companies according to the
aforementioned screens and got such results:

30
Momentum represents past 3-year BaH return, GS represents 5-year growth in sales, Mom/GS
combined is the average of the scores companies got according to Momentum and GS screens.
Value combined represents average of the scores companies got according to BE/ME and CF/P
screens.
Qualitative Screens and Analysis
The qualitative analysis tried to quantify different qualitative characteristics of companies. We
used materials from Fisher book “Common Stocks and Uncommon Profits”, Peter Lynch and
Ban Graham ideas to arrive at possible screens, as well as further in our fundamental analysis.
More specifically, we analyzed such qualitative characteristics:
 Management quality. We measured this as a combined tenure of CEO and CFO of each
company. Then companies were ranked according to the combined tenure and received a
distinct score. Fisher argued that the longer management stays with company the more
knowledge and expertise they get, more loyal they become. High management turnover
was considered as a negative signal. Please find detailed information in Appendix B.
 Technical and expansion effort. We measured this criterion by calculating the
companies‟ CAPEX to Market capitalization ratios and comparing them to the
companies‟ sub-industry average values as measured by Bloomberg Peers function in
Bloomberg. Higher ratios relative to the sub-industry average values received higher
scores. Fisher and Lynch argued that the more companies invest in development and in
innovation the more competitive they become in future. We tried to approximate this
idea by considering CAPEX relative to size, as companies in Materials sector rarely
report their R&D expenses. Please find detailed calculation in Appendix B.
Legend: Ticker Company Momentum GS Mom/GS combined BE/ME CF/P Value combined Earn-surp Volatility Accruals F-score Xfin C-Score
Leading Quant IPI INTREPID POTASH 26 n/a n/a n/a n/a n/a 9 6.5 5 25 15 n/a
CYT CYTEC INDUSTRIES INC 10 24 17 18 18 18 27 5 18 25 25 135
Leading Both MTX MINERALS TECHNOLOGIES INC 21 19 20 19 15 17 23 14.5 20 14.5 24 133
No data available SMG SCOTT MIRACLE GROWTH 16 11 13.5 2 6 4 16 24 27 14.5 27 126
Leading Qualt UFS DOMTAR CORPORATION 4 2 3 25 26 25.5 24 13 26 7.5 26 125
SXT SENSIENT TECHNOLOGIES CORP 14 10 12 15 9 12 15 22.5 15 25 20 121.5
Current Holding STLD STEEL DYN 23 1 12 22 24 23 20 11.5 13 25 14 118.5
OLN OLIN CORP 25 20 22.5 17 25 21 10 17 21 7.5 12 111
ALB ALBEMARLE CORP 7 16 11.5 6 13 9.5 11 9.5 19 25 23 108.5
PKG PACKAGING CORPORATION OF AMERICA 12 13 12.5 7 16 11.5 18 15.5 24 14.5 10 106
SON SONOCO PRODUCTS 18 14 16 12 21 16.5 8 23 17 20.5 5 106
MLM MARTIN MA 27 22 24.5 10 5 7.5 7 18.5 23 7.5 16 104
CMC COMMERCIA 22 23 22.5 20 3 11.5 21 15.5 6 14.5 11 102
ATR APTARGROU 19 9 14 9 10 9.5 5 17.5 14 20.5 19 99.5
VAL VALSPAR CORP 8 17 12.5 5 2 3.5 25 23.5 1 7.5 22 95
CMP COMPASS MINERALS INTL INC 24 4 14 1 11 6 12 13.5 25 3.5 18 92
CBT CABOT CORP 9 8 8.5 16 22 19 19 9.5 8 14.5 13 91.5
ASH ASHLAND INC NEW 2 12 7 26 4 15 26 16 10 14.5 2 90.5
WOR WORTHINGT 17 26 21.5 14 23 18.5 4 4.5 9 20.5 9 87
SLGN SILGAN HO 15 18 16.5 3 17 10 13 17 11 14.5 4 86
CRS CARPENTER 5 25 15 8 7 7.5 17 2.5 22 14.5 3 81.5
GEF GREIF INC 20 7 13.5 13 19 16 14 11 12 2 6 74.5
RS RELIANCE 6 6 6 23 20 21.5 22 7 2 7.5 8 74
LPX LOUISIANA PACIFIC CORPORATION 3 21 12 24 1 12.5 1 9.5 16 1 21 73
NEU NEWMARKET CORP 1 3 2 4 14 9 2 14 7 20.5 17 71.5
RPM R P M INTERNATIONAL INC 11 15 13 11 8 9.5 6 17 4 3.5 7 60
RKT ROCK TENN 13 5 9 21 12 16.5 3 19.5 3 7.5 1 59.5

31
 Cost control. We measured this criterion by comparing respective companies‟ Gross
margins to their sub-industry Gross margin average figures as measured by Bloomberg
Peers function in Bloomberg. Higher ratios relative to the sub-industry average values
received higher scores. Fisher argued that the lower production costs companies have the
more competitive and stable they are. Please find detailed calculation in Appendix B.
 Operational efficiency. We measured this criterion as companies‟ ROIC ratios relative to
their sub-industry average values as measured by Bloomberg Peers function in
Bloomberg. Higher ratios relative to the sub-industry average values received higher
scores. Fisher argued that operational efficiency is one of the most important factors
determining companies‟ performance, competitiveness, and stability, thus, indicating
investment appeal. Please find detailed calculation in Appendix B.
After aggregating each stock‟s scores into distinct Q-score we got such results:
Fundamental Analysis
On the basis of combined CQ-score we selected 6 companies for further fundamental analysis.
We also analyzed Silgan Holdings, a current DFF holding which performed poorly on
quantitative screens so may be candidate for a sell recommendation.
Legend: Ticker Company Oper Eff Tech and Exp Cost Control Mngmt Quality Q-Score
Leading Quant RS RELIANCE 22 6 27 26 81
Leading Qualt PKG PACKAGING CORPORATION OF AMERICA21 24 18 17 80
Leading Both IPI INTREPID POTASH 16 25 19 10 70
Current Holding SXT SENSIENT TECHNOLOGIES CORP 10 11 22 27 70
No data available WOR WORTHINGT 24 1 20 23 68
NEU NEWMARKET CORP 27 5 16 20 68
RKT ROCK TENN 12 16 14 25 67
OLN OLIN CORP 8 26 8 22 64
SON SONOCO PRODUCTS 18 15 9 21 63
RPM R P M INTERNATIONAL INC 11 2 26 24 63
ALB ALBEMARLE CORP 23 13 24 2 62
ATR APTARGROU 19 14 25 3 61
STLD STEEL DYN 25 10 13 11 59
SMG SCOTT MIRACLE GROWTH 13 12 15 18 58
CMP COMPASS MINERALS INTL INC 6 23 10 19 58
SLGN SILGAN HO 20 18 4 16 58
UFS DOMTAR CORPORATION 17 21 5 14 57
CRS CARPENTER 26 3 21 7 57
CBT CABOT CORP 14 27 6 9 56
ASH ASHLAND INC NEW 2.5 19 17 15 53.5
GEF GREIF INC 15 22 12 1 50
CYT CYTEC INDUSTRIES INC 7 20 11 8 46
MTX MINERALS TECHNOLOGIES INC 9 17 7 6 39
VAL VALSPAR CORP 2.5 4 23 4 33.5
MLM MARTIN MA 5 9 2 13 29
LPX LOUISIANA PACIFIC CORPORATION 2.5 7 1 12 22.5
CMC COMMERCIA 2.5 8 3 5 18.5

32
Sensient Technologies (SXT). Current DFF holding.
Industry analysis and trends
Sensient Technologies operates in a Specialty chemicals sub-industry. As indicated in our
Materials industry analysis we are optimistic about this industry outlook:
 US/global industrial recovery as measured by acceleration in real GDP and industrial
production growth rates
 Deceleration of growth in energy prices
 Strong agricultural demand for chemicals
 Positive chemical price dynamics
All of the aforementioned factors would produce a positive impact on Sensient Technologies
growth and profitability.
Porter’s five forces analysis
The Specialty chemicals sub-industry can be characterized by greater control over prices than
basic chemicals industry, as specialty chemical products are diversified and customized. This, in
turn, affects the bargaining power of buyers which we believe is moderate, as buyers may
have moderate-to-high switching costs and
special preferences for special features and
quality of chemical products which only few
producers could satisfy. Also, we believe that
bargaining power of suppliers is moderate
as Specialty chemical companies‟ main
productive inputs are natural gas and other
energy products which are scarce in nature
and chemical companies have little power in
price negotiations as prices are determined on
world markets. The threat of substitutes is
low as specialty chemical products are
oftentimes used as intermediate goods in
making final products using latest
technologies and scarce natural resources, thus, making them irreplaceable. The threat of new
entrants is also low as current players oftentimes achieve considerable economies of scale in
production, distribution and marketing, as well as the industry itself is highly capital and labor
intensive requiring high capital expenditures. On the basis of all of the aforementioned factors
and the fact that specialty chemical companies mostly compete on quality and customization, but
there are high barriers to entry and low substitution threat, there is a moderate rivalry among
companies in Specialty chemicals sub-industry. This results in specialty chemical companies
having moderate control over prices and costs, thus, relatively stable margins.

33
Company overview
Sensient Technologies (Sensient) is engaged in manufacturing, distribution, and marketing of
flavors, fragrances and colors throughout the world. According to Company‟s documents, it
develops specialty food and beverage systems, cosmetic and pharmaceutical formulations; inkjet
and specialty inks and colors; and other specialty chemicals. Its customers include major
international producers. It has two divisions: Flavors and Fragrances Group (produces systems
products comprising flavor-delivery systems, and compounded and blended products; and
ingredient products, such as essential oils, natural and synthetic flavors, and aroma chemicals),
Color Group (provides natural and synthetic color systems for use in foods, beverages, and
pharmaceuticals; colors and other ingredients for cosmetics and pharmaceuticals; and technical
colors for industrial applications and digital imaging). The company was founded in 1882 and is
headquartered in Milwaukee, Wisconsin. It operates in majority of international markets
including Brazil, Russia, Australia, Germany, France, UK, Mexico, Poland, Portugal, China etc
It serves food industries, which include savory, beverage, dairy, confectionery, and bakery
flavors; and non-food industries that comprise personal and home care-markets, and
pharmaceuticals markets, as well as such industries as cosmetics, digital imaging industry etc.
Table below represents Sensient‟s main competitors.
Management performance
The SXT‟s main management consists of CEO, CFO, and COO. After studying key executives
biographies, as provided by GlobalData services, we concluded that management is relatively
professional and experienced, as the average age of the team is 63 years and everybody has
around 35+ years of chemical industry experience and stayed with Sensient for a considerable
amount of time. Under current management market capitalization increased for around 50% for
past several years and 2011 was a record profitability year. Form a profitability standpoint,
management performance was fair, as, basically, main profitability ratios were increasing
consistently except for FY 2009. However, the Company had a steady growth in dividends.
Exhibits below summarize key management performance measures:
SXT: Key Competitors
Name Headquarters FY 2011 Revenue, mln USD
Agrium U.S. Inc. USA n/a
Covidien plc Ireland 11,574
International Flavors &
Fragrances Inc. USA 2,788
Sumitomo Bakelite
Company Limited Japan 2,395
Symrise France n/a
Valmont Industries, Inc. USA 2,661
Sensient USA 1,430
Source: Global Data

34
On basis of the aforementioned analysis we believe management‟s qualifications and
performance was relatively strong.
Product differentiation and competitive position
The Company‟s products are highly diversified as portfolio of the company includes natural and
synthetic food and beverage colors; flavors, flavor enhancers and bionutrients; fragrances and
aroma chemicals; dehydrated vegetables and other food ingredients; cosmetic and
pharmaceutical colors and additives; and technical colors, inkjet colors and inks, and specialty
dyes and pigments. Such products are used in variety of industries (both cyclical and non-
cyclical) across various geographies, including Americas, Europe and Asia, presenting a rigid
hedge to the Company‟s margins and growth. Speaking about Company‟s competitive position,
according to Company‟s documents, Sensient is engaged in research and development, and
quality assurance to improve existing products, develop new products and improve its services.
In 2010, the company spent around $30.6m for its research and development. This would have a
positive effect on the company‟s competitiveness. According to S&P, Sensient invested
sufficiently in selling and technical support, which strengthens its competitive position. Also, it
is worth noting the Company‟s fundamental strength and a healthy balance sheet. Moreover, as
consumers become increasingly conscious of food and beverage ingredients, we believe Sensient
has strong growth perspectives in natural colors segment. It is also worth noting the acquisition
strategy of the Company: according to KeyBanc, having put nearly $75 million into investments
during 2011, which included two acquisitions, expansion of North America natural color
capacity and a color and flavor facility in Brazil, analysts expect SXT to grow that amount in
2012. It is believed that the Company will continue to pursue growth opportunities in some of
the faster growing color markets including digital inks, cosmetics, pharmaceutical and natural
color applications. Ending the year with $23 million in cash on hand, having generated roughly
$30 million in free cash flow, and holding a manageable Net Debt-to-EBITDA ratio of 1.3x, the
Company has an adequate balance sheet and cash generation capability to fund external and
internal growth measures. All-in-all, the Company has a strong product differentiation and solid
competitive standing.
SWOT Analysis
Source: Global Data

35
North-
America
53%Europe
28%
Asia Pacific
13%
Other
6%
Geographic revenue breakdown in 2010
Source: Global Data
SXT: SWOT Analysis
Strenghts Weaknesses
Product and geographical Legal proceedings
diversification
Strategic invesments
Strong financial position
Opportunities Threats
Emerging markets operations Environmental regulations
Healthcare increased demand High competition
International business risk
M&A failure
Source: Team
The Company has numerous strengths, as well as weaknesses. One of the most important
strengths is the Company‟s
diversification strategy. A great level
of product differentiation is reflected in
two distinct segments – Flavors &
Fragrances (59% of revenue in 2010),
and Color (32% of revenue in 2010) –
the company operates in. These
segments supply products to various
industries described above. Thus,
Company effectively protects itself
from various industries‟ risks as well
as general economic risks as its
consumers represent companies from
different cyclical and non-cyclical
industries. Moreover, Company‟s
overall diversification is buttressed by
its presence in various geographic regions. It operates in a majority of countries in Americas,
Europe and Asia where the Company runs
plants, distribution and marketing facilities, as
well as research and development laboratories.
Thus, the Company defends itself from any
unanticipated business interruptions, or
economic meltdown from being geographically
and product-diversified. Moreover, Company‟s
recent strategic investments in technology
improvements, new production facilities in
China and USA, as well as new processing
equipment in the USA would allow it to
strengthen its competitive position, especially
in relation to Color Group business. Such
investments were possible due to the
Company‟s strong fundamental position. Our
quantitative F-sort showed Sensient to be one of the financially strongest companies. Also, its
debt ratios have been consistently falling for last 5 years, as well as liquidity ratios consistently
rising for last 5 years.
Speaking about Sensient‟s weaknesses it is worth mentioning some legal proceedings and other
claims the Company is subject to as part of its ongoing operations. According to Global Data,
such proceedings include Pleasant Gardens Realty Corp. v. H. Kohnstamm & Co.; Cherry
Blossom Litigation; S.A.M. (Amaral) v. Sensient Technologies Corp.; and Daito Kasei Kogyo
Co. Ltd. vs. Sensient Cosmetic Technologies SAS. Such proceedings may potentially result in
substantial losses, as well as divert management‟s attention and efforts from the Company‟s
operations and strategy.
The Company has significant opportunities, as well as threats. We believe Sensient‟s substantial
presence in emerging markets of Eastern Europe, South and Central America and Asia is a
great opportunity for growth and expansion. Various experts forecast that emerging economies‟

36
growth rates, particularly in chemical industry, will significantly outperform developed ones.
According to Global Data, the chemical industry in the emerging nations is expected to grow
7.6% in 2011 and 2012. Moreover, the demand for main Company‟s products is growing more
rapidly in emerging countries. Therefore, the Company would benefit by increasing its
operations in emerging markets.
Also it is worth noting that the Company is perfectly posed to take an advantage of growing
pharmaceuticals and healthcare markets in the USA, which drive the demand for Company‟s
main products. According to the National Coalition on Healthcare, annual healthcare spending in
the US increased to $2.5 trillion in 2009. It is projected to reach $3.1 trillion by 2012 and $4.3
trillion by 2016. According to Global Data, the increase in the aging population contributes to
the rising healthcare expenditure in the US.
Speaking about Company‟s threats, we believe the most important is stringent government
regulations of Flavors and Fragrances industry. There are a lot of different standards,
compliance procedures, laws, regulations imposed by various regulations agencies, governments
and professional boards. The Chemical industry analysis contains the most important US
governmental regulations. These laws are highly complex and require significant investments in
adequate compliance and quality controls systems. The failure to comply with any of the
aforementioned regulations may result in huge fines and penalties, the loss of reputation,
products recall, market share loss, and damage to reputation. Also, intensified competition in
chemicals industry requires Company‟s constant investment in new technologies, processes,
upgrade of its existing products, marketing and customer services. If the Company‟s products
become obsolete or customer services inadequate, it will lose its market shares and possible go
bankrupt.
Company‟s operations in various locations across the globe create substantial international
business risks, such as nationalization of assets, political and economic instability, fluctuations
in currency exchange rates, etc.
The Company‟s recent M&A activity may also pose a significant threat, if such acquisitions are
not integrated properly into existing business model or cannibalize existing sales.
Analysts’ and investors’ sentiment
Analysts generally are optimistic about the stock in a near term, as EPS forecasts are increasing
till 2013 and then decreasing in 2014. Speaking about the ratings, the general analysts‟ rating is
hold, which is the recommendation of 4 out of 5 analysts. One more analysts recommends
moderate buy. We couldn‟t indicate that such sentiment changed recently. Since the beginning of
2012 there were only two changes of the rating and in both cases the stock was downgraded from
“buy” to “hold”. For past three months this stock was a consistent “hold”. We believe the low
number of analysts following the Company and their uncertainty of the stock investment appeal
is a positive sign indicating that the Company is not obviously a “glamour stock” and may be
priced irrationally. Current mean target price is $40.5 which represents around 11% upside of
current price of $36.5. The stocks‟ trading volume also looks quite stable indicating that
investors currently have no extreme sentiment concerning the stock.

37
Source: Thompson One Banker
Conclusion
We believe Sensient has strong fundamentals because:
 The industry has a positive outlook and is moderately competitive
 The management is experienced and demonstrated strong performance for past years
 It has diversified products and operations which allows the Company to defend itself
from various specific industries/regions risks
 It has strong presence in emerging markets where chemical growth is expected to be
robust
 It has a strong presence in the US healthcare market which is also projected to grow
consistently
 It has a solid competitive position created by recent successful investments and M&A
activity
 It is a thinly followed stock with a positive outlook.
Cytec Industries (CYT)
Industry analysis and trends, Porter’s five forces analysis
Cytec Industries is a specialty chemicals company. Please refer to Sensient Technologies
analysis for chemicals industry outlook and analysis.
Company overview
Cytec Industries (Cytec) develops, manufactures, and markets value-added specialty chemicals
and materials. The Company breaks down its operations into four reportable segments: Coating
Resins, Additive Technologies, In Process Separation and Engineered Materials. According to
Company‟s documents, Cytec, through its Coating Resins segment, offers three product lines
including radcure resins, powder coating resins, and liquid coating resins. The major products of
radcure resins include oligomers, monomers, and photo-initiators. The powder coating resins
include conventional and ultraviolet powder coating resins. Its liquid coating resins include
amino cross-linkers, waterborne resins, urethane resins and solvent borne resins. Its coatings and
inks are used in industrial metal, wood and plastic coatings sector. The powder coatings are used
in industrial and heavy duty metal applications, while its industrial coatings are used in
automobiles, cans, coil, metal fixtures, metal and wood furniture. The Company's Additive

38
Technologies segment offers polymer additives, specialty additives, and polyurethanes. These
products have applications in plastics, coatings, fibers, automotive parts, agricultural films,
architectural lighting, textiles, non-woven and adhesives, pharmaceuticals and super absorbent
polymers. Company‟s In Process Separation segment offers mining chemicals and phosphines.
Its mining chemicals are used in mineral separation and processing of copper, alumina and other
minerals. Phosphines are used in the applications of chemical and electronic manufacturing,
pharmaceutical, and fumigants. The company‟s Engineered Materials business segment provides
technologically advanced materials for aerospace, high performance automotive, launch vehicles
and other extreme-demand environments. It produces carbon fibers, advanced composites and
aerospace adhesives and high performance industrial materials.
The Company operates in the Americas, Asia Pacific, Europe, Middle East, and Africa.
Table below represents Sensient‟s main competitors.
The CYT‟s main management consists of CEO and CFO. After studying key executives
biographies, as provided by GlobalData services, we concluded that management is relatively
professional and experienced, as the average age of the team is 53 years and everybody has
around 25+ years of chemical industry experience and stayed with Sensient for more than 10
years. Under current management the Company has undergone significant changes by focusing
on higher-margins segments and divesting non-core businesses, as well as making consistent
investments in R&D, patents and emerging markets. Moreover, the management was able to
sustain significant market downturn of FY2008-2009 and direct a company to a profitable path
staring FY2010. Form a profitability standpoint, management performance was fair, as,
basically, main profitability ratios were increasing consistently except for FY 2008. However,
the Company had negative profitability in FY2008 and 2009 and unstable dividends.
CYT: Key Competitors
Arch Chemicals USA 1,377
H. B. Fuller USA 1,558
Momentive Specialty
Chemicals USA 5,207
PPG Industries USA 14,885
The Lubrizol Corp USA 5,418
Sensient USA 3,073
Source: Global Data

39
Tables below summarize key management performance measures:
performance was relatively solid.
The company‟s products are highly diversified both by products offered and geographically.
Thus, we believe, Company‟s strong differentiation backed by the fact that Company‟s
customers represent companies from both cyclical and non-cyclical industries is one of its most
evident strengths.
Speaking about Company‟s competitive position, according to Company‟s documents, CYT has
around 1,800 patents issued in various countries across the world with manufacturing and
research facilities in 16 countries globally. In 2010, the company spent around $72.5m for its
R&D activities. Thus, the Company effectively protects margins by holding various patents and
continuously investing in new technology preserving its competitiveness.
Source: Global Data
Source: Global Data

40
According to Deutsche Bank, CYT has agreed to make an acquisition of Umeco, a UK based
advanced composites manufacturer, which will be accretive and secure the access of Cytec to
perspective auto composite market. The composite market is believed to be highly attractive as it
provides necessary materials to make cars lighter. The weight of the car recently became
extremely important, thus, Cytec believes that with Umeco's application expertise and strong
relationships with auto companies, coupled with its leading composites technology, it will be
well positioned to capitalize on this evolving and growing trend.
All-in-all, the Company has a strong product differentiation and solid competitive standing.
SWOT Analysis
The Company has numerous strengths, as well as weaknesses. One of the most important
strengths is the Company‟s diversification strategy. A great level of product differentiation is
reflected in four distinct segments the company operates in. These segments supply products to
various industries described above. Thus, company effectively protects itself from various
industries‟ risks as well as general
economic risks as its consumers
represent companies from different
cyclical and non-cyclical industries.
Moreover, company‟s overall
diversification is buttressed by its
presence in various geographic
regions. It operates in a majority of
countries in Americas, Europe, Asia,
Middle East, and Africa where the
Company runs plants, R&D
laboratories, and distribution and
marketing facilities. Moreover, apart
from other US chemical companies,
CYT does not derive the majority of
its revenue from North-American market. Thus, the Company defends itself from any
unanticipated business interruptions, or economic meltdown from being geographically and
product-diversified. Company‟s also protects itself by constantly investing in new technology
and protecting it by patents. Such investments were possible due to the Company‟s sound
fundamental position. Our quantitative F-sort showed CYT to be one of the financially
strongest companies. Also, its debt ratios have been consistently falling for last 3 years, as well
as liquidity ratios consistently rising for last 2 years.
Speaking about CYT‟s weaknesses it is worth mentioning some legal proceedings and other
claims the Company is subject to as part of its ongoing operations. According to Global Data, the
Company has substantial environmental liabilities, which include obligations to remove or limit
the environmental effects caused by release of wastes at various sites now or formerly owned by
Cytec or to pay compensation to the affected parties. It is also involved in the cleanup of various
other sites. Besides, Cytec is involved in numerous other lawsuits and claims related to product
liability, personal injury including asbestos, environmental, contractual, employment and
intellectual property matters. Such proceedings may potentially result in substantial losses, as
well as divert management‟s attention and efforts from the Company‟s operations and strategy.
CYT: SWOT Analysis
Product and geographical Legal proceedings
diversification Dependence on few
Technological expertise suppliers
Solid financial position
Umeco acquisition Environmental regulations
Emerging markets growth Raw materials supply risk
New product launches
Source: Team

41
Other substantial weakness is the dependence on few suppliers, specifically, of carbon fibers.
The delay or loss of a supplier would negatively affect Company‟s operations.
The Company has significant opportunities, as well as threats. We believe Cytec‟s substantial
presence in emerging markets of Eastern Europe, Middle East, Africa, South and Central
America and Asia is a great opportunity for growth and expansion. Various experts forecast that
emerging economies‟ growth rates, particularly in chemical industry, will significantly
outperform developed ones. According to Global Data, the chemical industry in the emerging
nations is expected to grow 7.6% in 2011 and 2012. Moreover, the demand for main Company‟s
products is growing more rapidly in emerging countries. Therefore, the Company would benefit
by increasing its operations in emerging markets.
Also, as noted above, the Company‟s acquisition of Umeco would position CYT to take an
advantage of rapidly growing auto composite market.
Successful new product launches help the Company to sustain its competitive position as well
as grow its top and bottom lines. More specifically, according to Global Data, to name few,
Cytec launched its latest ACORGA OR15 extractants and ACORGA OR25 extractants in May
2011. It introduced EBECRYL 8100, a newly developed urethane acrylate for consumer
electronics and a new product, CYASORB CYNERGY SOLUTIONS V703 stabilizer in April
2011. The Company launched EBECRYL 570, a chlorine-free diluted polyester oligomer in
March, 2011. In February 2011, the Company introduced RESYDROL AY6150 low VOC
(volatile organic compound) one-component core-shell alkyd emulsion and two new CYASORB
CYNERGY SOLUTIONS stabilizers for plastics applications. Cytec also formulated the new
generation of RESYDROL AY6705 waterborne acrylic modified alkyd resin in February 2011.
In January 2011, the Company launched EBECRYL 4858, aliphatic urethane acrylate for UV/EB
cured films and plastics. If the Company continues to introduce new successful products it will
remain profitable and competitive.
Speaking about Company‟s threats, we believe the most important is stringent government
regulations, especially in Europe. There are a lot of different standards, compliance procedures,
laws, regulations imposed by various regulations agencies, governments and professional boards.
The Chemical industry analysis contains the most important US governmental regulations. These
laws are highly complex and require significant investments in adequate compliance and quality
controls systems. The failure to comply with any of the aforementioned regulations may result in
huge fines and penalties, the loss of reputation, products recall, market share loss, and damage to
reputation. Also, main raw materials supply risks, such as carbon fiber, natural gas, methanol
derivatives, could adversely affect Company‟s margins, as such materials are irreplaceable in the
Company‟s productions cycle and scarce in nature. The prices of such products have been rising
in recent past negatively affecting Company‟s margins. However, relatively rigid competition
prevents CYT from increasing prices of end-products to compensate for increase in raw
materials prices.
Analysts’ and investors’ sentiment

42
Source: Thomson One Banker
Analysts are optimistic about the stock in a near term, as EPS forecasts are increasing for next 3
years. Speaking about the ratings, the general analysts‟ rating is moderate buy/hold, with one sell
recommendation. We do not think such situation makes any sense
as CYT has been consistently reporting its earnings which were
higher by around 50% of the consensus estimates and as of the
last reporting date the stock experienced 11% of up-movement.
To confirm our point of view recently 5 out of 6 analysts have
increased their earnings estimates. We believe the low number of
analysts following the Company and their uncertainty of the
stock investment appeal is a positive sign indicating that the
Company is not obviously a “glamour stock” and may be
priced irrationally, especially taking into account that it
experienced positive earnings surprises for past three
reporting periods. Current mean target price is $71.83 which
represents around 14% upside of current price of $63. The
stocks‟ trading volume also looks quite stable indicating that
investors currently have no extreme sentiment concerning the
stock. The sharp increases in stock‟s trading volume
correspond to sharp increases in stock prices as of the earnings announcements dates.
Conclusion
We believe Cytec has strong fundamentals because:
 The industry has a positive outlook and is moderately competitive
 The management is relatively experienced and demonstrated solid performance for past
years, especially by recovering Company‟s profitability in FY 2010 and FY 2011
 It has diversified products and operations which allows the Company to defend itself
from various specific industries/regions risks
 It has strong presence in emerging markets where chemical growth is expected to be
robust
 It has made important steps in auto composite market which is expected to be dynamic
and promising
 It has a solid competitive position created by recent successful investments in new
technologies and patents
 It is a thinly followed non-glamour stock with a positive outlook and consistent earnings
announcements surprises.
Minerals Technologies (MTX)
Industry analysis and trends, Porter’s five forces analysis
Minerals Technologies is a specialty chemicals company. Please refer to Sensient Technologies
analysis for chemicals industry outlook and analysis.

43
Company overview
Minerals Technologies Inc. (MTX) is a resource and technology based company in United States
that engages in developing, producing, and marketing a wide range of specialty mineral, mineral-
based, and synthetic mineral products and supporting systems and services. According to Global
Data, MTX manufactures and sells synthetic mineral products for the paper, building materials,
paint and coatings, glass, ceramic, polymer, food, automotive, and pharmaceutical industries. It
operates in two segments, Specialty Minerals and Refractories. The Specialty Minerals segment
produces and sells precipitated calcium carbonate, a synthetic mineral product; and quicklime, a
processed mineral product. It also mines mineral ores; and processes and sells natural mineral
products, primarily limestone and talc. The Refractories segment produces and markets
monolithic and shaped refractory materials and specialty products, services, and application and
measurement equipment; and calcium metal and metallurgical wire products. Minerals
Technologies Inc. was founded in 1968 and is headquartered in New York, New York. MTX
relies principally on its worldwide direct sales force to market its products. The Company
oversees domestic marketing and sales activities from Bethlehem, Pennsylvania, and from
regional sales offices in the eastern and western United States. The Company's international
marketing and sales efforts are directed from regional centers located in Brussels, Belgium; Sao
Jose Dos Campos, Brazil; and Shanghai, China.
Table below represents MTX‟s main competitors.
Through a careful study of MTX‟s management, as shown by GlobalData services, we have a
relatively positive opinion on MTX‟s management. The average age of the management team is
53 years. However, none of the senior management members has stayed in MTX for a long time.
Under current management ROE, ROIC, EPS ratios are not very stable. MTX suffered a
significant loss in 2007 and 2009, which is due to the acquisition with Phoenix Pulp & Paper
Public in 2007 and the economic recession in 2009, respectively. Nevertheless, in most recent
two years, MTX has demonstrated a very good performance. From a profitability standpoint,
management performs well in 2010 and 2011. However, the company didn‟t increase dividends
from 2007 to 2011. According to SADIF, MTX rank sixth among competitors for the
management efficiency rating, according to following key indicators: return on assets, earnings
per employee and the earnings growth rate. As the figure shown below:
MTX: Key Competitors
Didier-Werke AG Germany 943
DONGKUK REFRACTORIES
& STEEL CO., LTD
Republic of
Korea
N/A
Nippon Crucible Co., Ltd Japan 75
Rath Aktiengesellschaft Austria 111
Yotai Refractories Co., Ltd Japan N/A
Minerals Technologies USA 1,045
Source: Global Data

44
Source: SADIF
Tables below summarize key management performance measures:
performance was medium.
MTX‟s products are highly diversified as portfolio including synthetic mineral product
precipitated calcium carbonate, quicklime, limestone, talc, mineral ores and a range of dry PCC
products. In addition, according to Global Data, the Company also provides monolithic and
shaped refractory materials specialty products, application equipment and related supporting
systems and services. These products can be used in a wide range of industries, such as paint and
coatings, paper, building materials, glass, polymer, ceramic, food, pharmaceutical, and
automotive industries. MTX also has wide domestic and global markets, just as we have
mentioned in company overview part. In addition, MTX pay great attention to research and
development. Over the past recent years, MTX is continually engaged in efforts to develop new
products and technologies and refine existing products and technologies in order to remain
competitive and to position itself as a market leader. According to company‟s document, MTX's
research and development capability for developing and introducing technologically advanced
new products has enabled the Company to anticipate and satisfy changing customer
requirements, creating market opportunities through new product development and product
application innovations. A diversified product portfolio that caters to a range of industries and
research and development focus provide a competitive edge for the company. However, ending
the year with $414 million in cash on hand, having generated only $82 million in free cash flow,
Source: Global Data

45
and having Net Debt-to-EBITDA ratio of -2.0x, MTX, in our view, is not strong enough to play
a market leader role. All-in-all, the Company has a strong product differentiation, positive
competitive standing, and medium financial position.
SWOT Analysis
The company has obvious strengths and weaknesses. One of the most important strengths is the
Company‟s diversification strategy. As we have written before, the Company operates in two
segments, Specialty Minerals (53.7% of revenue in 2011) and Refractories (35.3% of revenue in
2011). The Specialty Minerals
segment‟s products are primarily used
in the paper, building materials, paint
and coatings, glass, ceramic, polymer,
food, automotive, and pharmaceutical
industries. The Refractories
segment‟s products are primarily used
in high-temperature applications in
the steel, non-ferrous metal, and glass
industries. Obviously, the Company‟s
two segments supply products to
various industries described above.
Thus, MTX can relatively effectively
MTXigate various business risks. However, since the principal market for the Company's
refractory products is the steel industry, which is a cyclical in nature, some threats to the
Company‟s stability exist.. In addition, the Company‟s operates domestically and globally. The
Company‟s domestic markets are located in Bethlehem, Pennsylvania, and in some regional sales
offices in the eastern and western United States. The Company has markets in Europe, like
Belgium, South America, like Brazil and Asia, like China. According to the Company‟s
documents, MTX relies principally on its direct sales force in global market. The technical
service teams that are familiar with the industries to which the Company markets its products
add more efficiency to its direct sales force. The Company considers continuing international
expansion in a majority of countries in Americas, Europe and Asia.
Moreover, according to Global Data, the Company has maintained strong Research &
Development focus over the years. Many of MTX‟s product lines are technologically advanced.
This has enabled the Company to maintain expertise in the fields of inorganic chemistry,
crystallography and structural analysis, fine particle technology and other aspects of materials
science. MTX‟s growth in sales is largely due to its continued success of its research and
development activities. The R&D efforts have resulted in numerous patents and trademarks. For
the years ended December 31, 2011, 2010 and 2009, the Company spent approximately $19.3
million, $19.6 million and $19.9 million, respectively, on research and development. The
Company's research and development spending for 2011, 2010 and 2009 was approximately 1.9
%, 2.0% and 2.2% of net sales, respectively. Even in the weak economic conditions, the
company has still invested a considerable amount of its revenues in Research and Development.
According to the Company‟s document, The Company will continuously reformulate its
refractory materials to be more competitive.
MTX: SWOT Analysis
Diversification Legal proceedings
Large R&D investments
Strong financial performance
New technologies introduced Industry cycle
Growng demand in India Fierce competition
Change in labor laws
Source: Team

46
MTX reported good financial performance for the fiscal year ended December 2011 following
another well-performed year 2010, reflecting its ability to fulfill operational and business
expansion needs. MTX has a relatively strong balance sheet and is diligent in reducing costs and
increasing capital returns. The Company posted operating margin of 9.6% and 9.8% in 2011 and
2010, respectively, against operating margin of -1.88% in 2009. The company recorded net profit
of $67.5m and $66.9m in 2011 and 2010, respectively, against a net loss of $23.80m in 2009.
The two years‟ increase in the operating and net profit improved the company‟s profitability. The
company‟s return on equity increased to 9.10% in 2011 from 8.85% in 2010, a remarkable
increase from -3.29% in 2009. Substantial increase in profitability ratios in 2011 and 2010
indicates that the Company had a good performance.
In terms of MTX‟s weaknesses, just as most of the companies in materials industry, MTX has
also faced several litigation cases. According to the Company‟s document, The Company
currently has 77 pending silica cases and 27 pending asbestos cases. To date, 1,389 silica cases
and 8 asbestos cases have been dismissed. One new silica case and one new asbestos case were
filed in the fourth quarter of 2011. The aggregate cost to the Company for the legal defense of
these cases since inception was approximately $0.2 million, according to Company‟s documents.
The Company has significant opportunities, as well as threats. As we mentioned above, MTX
has robust research and development capabilities, which enabled it to develop new technological
edge. In August 2011, the Company launched a new product line of engineered mineral
additives for reinforcement in bioplastic applications, which designed for bioplastic-based
consumer disposables including packaging, food and beverage gift cards, service ware, signage,
films and bags. This new technology enables the Company to exploit the great opportunity in
biopolymer market. Due to the growing concern for environment, consumers are looking for
„green‟ products, leading to the expectation of the improvement of the biopolymers market in the
US. Biopolymers could account between 5%-10 % of the total plastics market in Europe,
according to European Bioplastics‟ estimates. MTX could increase its presence and cater to these
potential markets. From historical data, we can predict that the new technologies introduced by
the company could lead to increase in market share and revenue in the future.
MTX intends to capture the great India opportunity and capitalize on the emerging
opportunities in the Indian infrastructure, which are being driven by the current and expected
demand and supply imbalance in India. According to the Company‟s document, the company‟s
projects are positioned to benefit under the SEZ Project policy of the government of India.
Already in February 2011, MTX's wholly owned subsidiary, Specialty Minerals Inc., entered
into an agreement with JK Paper LiMTXed for constructing a satellite precipitated calcium
carbonate (PCC) facility in Rayagada, Orissa, India. In January 2011, the company signed a
similar agreement with The West Coast Paper Mills LiMTXed for Dandeli, India. And In July
2010, the company had signed a similar contract with Ballarpur Industries LiMTXed. The
infrastructure sector in India is growing at a faster rate and is given importance to support the
growth rate and to fulfill the existing gap.
Speaking about Company‟s threats, we believe the most important is Cyclical Nature of
Businesses. As we mentioned above, the principal market for the Company's refractory products
is the steel industry. MTX‟s majority of the sales come from industries like steel, construction
and paper which are very cyclical industries. The macroeconomic performance has a very close
relationship with the performance of these industries. A robust growth in GDP will have a

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