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SEE LAST PAGE OF THIS REPORT   Graham Copley / Nick Lipinski

FOR IMPORTANT DISCLOSURES   203.901.1629/203.883.1927


February 2nd, 2015


SSR Industrials & Materials Monthly Review, January 2015

Tone of Earnings More Pessimistic than Expected – Cue the Negative Revisions


The broad tone of Industrials & Materials earnings reports has been more pessimistic than expected, as evidenced by across the board cuts to 2015 EPS and net income estimates. Negative revisions have been most pronounced in the Metals, Capital Goods, and Chemicals sectors, but estimates for all our groups have fallen from a month ago.

With roughly half of the 120+ companies in our coverage having reported, revenue growth has clearly slowed in the Chemicals, Capital Goods, Conglomerates and Paper & Packaging sectors. Electrical Equipment has been more stable, Transports continue to show strength, and Metals are actually up significantly thus far into earnings season (likely the result of fairly easy comps).

From a performance standpoint, the Metals and E&C sectors saw the weakness of 2014 continue in the first month of the year, down 7.5% and 4.1% respectively as the worst performing groups in our coverage. These sectors remain the cheap outliers – Transports and Industrial Conglomerates (excluding GE) are the only sectors that screen as materially expensive.

At the stock level, NEM was the best performer in January, up 33% as gold prices rose – FCX (-28%) did not see the same strength after another weak quarter. MWV and RKT buoyed the Packaging sector, seeing large gains on their merger announcement – the combined entity is slightly under the group average with an implied enterprise value of roughly 7.9x 2016 EBITDA (providing the announced synergies can be achieved).

In January we published two separate pieces on the ethylene market in the context of the developments in the energy complex, as well as stock specific pieces on Alcoa, Eastman Chemical, and Ball/Crown Holdings.

Our preferences at the sector and stock level are shown in Exhibit 1. See our recent piece reviewing our methodology and highlighting our favorites for 2015.


Exhibit 1

Source: SSR Analysis


Exhibit 2

Source: SSR Analysis – Normal Value looks at valuation relative to historical norms and the SI measures current valuation versus current return on capital and what movement in returns on capital is implied in valuation.


Exhibit 3

Source: Company Reports and SSR Analysis


See Appendix 3 for the data underlying this exhibit.

Exhibit 4




Optimistic expectations for 2015 took a hit in the first month of the year –the right most columns in Exhibit 4 above show that revisions in January have exacerbated the broader negative trend seen over the past half year. Cuts were most severe in the Metals space – Metals stocks saw 2015 net income and EPS estimates cut by roughly 20% on the average in the first month of the year. AA was a notable exception (net income +8%, EPS +9%). Miners remain particularly challenged – CLF cancelled its dividend and FCX lost 28% on the month. NEM, however, was up 33% as gold benefitted from a flight to safety following the abrupt change in Swiss currency policy. See Appendix 1 for the full list of best and worst performers in January.


Revenue growth quarter over quarter has been positive on average with roughly half the companies in our coverage having reported – Exhibit 5. The trend has turned negative for some key sectors: Capital Goods, Chemicals, Conglomerates, and Paper & Packaging – Exhibit 6. Electrical Equipment, Metals, and Transports look more stable thus far into earnings season.


Exhibit 5










Source: Capital IQ, SSR Analysis









Exhibit 6

Source: Capital IQ, SSR Analysis


Sector performance relative to the S&P in January is shown in Exhibit 7. The Paper & Packaging space was boosted by the announcement of the RKT-MWV merger – both stocks rose considerably on the news. E&C stocks remain weak in anticipation of earnings (only JEC has reported). FCX weighed heavily on the Metals sector, offsetting NEM’s gain (our stock indices are market cap weighted). The Chemicals sector was led by agricultural stocks – CF (+12%) and MOS (+7%) were among the top seven performers in our entire coverage on the month, and NEU (+11%) and OLN (+10%) were in this group of leaders as well.


Exhibit 7

Source: Capital IQ and SSR Analysis


Exhibit 8 summarizes discount from normal value by sector. The sector positioning has not changed much month over month. The Packaging group is a bit less cheap with MWV and RKT spiking on the merger news. E&C and Metals grew even cheaper. Only the Transports and Conglomerates (excluding GE) screen as materially expensive on our framework.





Exhibit 8

Source: Capital IQ and SSR Analysis


Values for our Skepticism Index are shown by sector in Exhibit 9. We recently refreshed and expanded our analysis here – see research for more detail. We will look to revisit the ROC trend for our Electrical Equipment group, as the trend from 1980 has a more pronounced downward slope than is likely appropriate – the group’s earnings are well above this trend and that is largely what is driving the high Skepticism Index value. The Paper & Packaging space is cheap in the aggregate despite over-earning.


Exhibit 9

Source: Capital IQ and SSR Analysis


Exhibit 10 is a very busy chart but shows how each sector and sub-sector breaks down by skepticism index component – valuation versus ROC. All things being equal, you want to buy sectors in the top right corner and sell those in the bottom left. The combined Paper & Packaging sector, Metals and Electrical Equipment screen well here. Only Mail looks overly concerning.

Exhibit 10

Source: Capital IQ and SSR Analysis

Portfolio Performance


We track three model portfolios, one based on our normal mid-cycle earnings screen, one based on our Skepticism Index and one based on the stocks that appeared on both metrics. Effectively, we bought the cheapest/most Skeptical and we sold short the most expensive/least Skeptical, as summarized in Exhibit 2 of our last monthly.


2015 did not start particularly well for our portfolios (Exhibit 11), but the overall screen was about flat to the market, and has consistently been the most robust – Exhibit 12 shows the cumulative monthly returns for 2013 and 2014 (exclusive of transaction costs).


Exhibit 11

Source: Capital IQ and SSR Analysis








Exhibit 12

Source: Capital IQ and SSR Analysis


In Appendix 2 we show the companies coming into our screens and leaving our screens.


Macro Environment


At SSR we are not economists, nor do we seek to be. We look at the economic indicators that are publicly available and put them into context relative to the drivers within the industries we cover. We examine trends or fundamental influences and we then look at these relative to valuation with the goal of identifying mismatches between what is implied in valuation and what is expected to happen.


Concerns about the vitality of the US growth story are already surfacing, with Q4 GDP coming in below expectations (a still healthy 2.6% versus estimates of 3.2%). The strengthening dollar is impacting trade, weighing on export volumes. Consumer confidence was revised down slightly but remains at a level not seen in over a decade – at some point we would expect the impact of lower oil prices to be reflected in consumer spending.


In Europe, employment conditions across seem to be improving across the board. However, QE from the ECB speaks to the lingering weakness in the Eurozone. The Euro has weakened and is drawing closer to dollar parity. The Russian ruble has lost roughly half of its value versus the dollar in the past several months. Chinese manufacturing activity continues to slow, as the PMI fell below 50 (indicating contraction) for the first time in over two years.


The most recent Macro data changes are summarized in Exhibit 13.








Exhibit 13

Source: Capital IQ, Government Publications, Bloomberg, SSR Analysis


Commodity Pricing


There has been widespread weakness in commodity pricing, coinciding with the decline in oil. Metal pricing, notably copper, has fallen sharply in recent months – concerns about Chinese demand have contributed to the drop. Crude appears to have stabilized in the mid $40/barrel range, while natural gas ended January significantly below $3.00 per mmBTU.


US commodity and energy prices are indexed in Exhibits 14 through 18.

Exhibit 14                  Exhibit 15

Source: Capital IQ, IHS, CRU Steel Price Index, Bloomberg, SSR Analysis

Exhibit 16

Source: Capital IQ, Bloomberg, SSR Analysis


Exhibit 17                   Exhibit 18

Source: Capital IQ, IHS, Bloomberg, SSR Analysis


Expectation Analysis


In Exhibit 19 we look at expected net income growth by sector, comparing 2015 estimates with 2013 actual net income (we will update this to reflect 2014 actual figures when complete). The Metals sector has fallen to the back of the pack, joining Capital Goods and Chemicals in showing negative net income growth. E&C tops the list here but we would view these estimates with caution considering the group’s recent history of negative guidance and the current energy market, which might slow down investment in the US.


Exhibit 19                  Exhibit 20

Source: Capital IQ and SSR Analysis


Exhibit 21 shows how these longer term estimates have changed over the month. Metals stocks saw significant cuts, on both a weighted and un-weighted basis. Estimates for the Capital Goods, Chemicals, and E&C sectors fell by at least 4% on both metrics.


Exhibit 21

Source: Capital IQ and SSR Analysis


In Exhibit 22 we show the change in 2015 EPS estimates in January – again severe cuts in the Metals space again. Note these figures differ slightly from those in Exhibit 4, which shows a market cap weighted average, while here we show an indexed percentage change.


Exhibit 22                Exhibit 23

Source: Capital IQ and SSR Analysis           Source: Capital IQ and SSR Analysis













Mid-Cycle “Normal Valuation Analysis

Exhibit 25

Exhibit 24

Exhibit 30

Exhibit 28

Exhibit 29

Exhibit 27

Exhibit 26

Source: Capital IQ and SSR Analysis

Exhibit 32

Exhibit 31

Exhibit 33

Source: Capital IQ and SSR Analysis




Our Skepticism Analysis by sector is summarized in the Exhibits 34 through 44.











Optimism High

Skepticism High

Exhibit 34


Exhibit 35

Optimism High

Exhibit 36

Skepticism High

Source: Capital IQ and SSR Analysis





Exhibits 37-39

Optimism High

Skepticism High

Exhibit 37

Optimism High

Skepticism High

Exhibit 38

Optimism High

Exhibit 39

Source: Capital IQ and SSR Analysis





Exhibits 40-42

Exhibit 40

Skepticism High

Optimism High

Exhibit 41

Exhibit 42

Source: Capital IQ and SSR Analysis





Exhibits 43-44

Optimism High

Skepticism High

Exhibit 43

Skepticism High

Optimism High

Exhibit 44

Source: Capital IQ and SSR Analysis


Research Published in January


January 29, 2015 – DuPont: Trian Engages the Big Gun!

January 27, 2015 – US Ethylene: Who Blinks First

January 20, 2015 – BLL & CCK: It’s the Geography, Stupid

January 20, 2015 – Another Buying Opportunity in Alcoa

January 20, 2015 – Chemicals Monthly: Free Falling

January 13, 2015 – Own Goal Investing: EMN Presents Another Opportunity

January 12, 2015 – Favorites for 2015 & Industrials & Materials Methodology Review

January 5, 2015 – The Ethylene Conundrum: EMN the Value Play

January 2, 2015 – SSR Industrials & Materials Monthly Review, December 2014









In Exhibit 45 we show a screen of stocks with low value, high Skepticism and high dividend yield. This month OLN is the only company to appear on all three screens.


Exhibit 45

Source: Capital IQ and SSR Analysis


Appendix 1


Appendix 2



Appendix 3



































Appendix 3