Sector & Sovereign Industrials & Basic Materials: Monthly Review June 2012

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  • Despite a month of broad absolute and relative underperformance valuation changes in May did not do enough to alter our view. The Paper sector underperformed but remains very richly valued in our view, though commodity pricing in the sector is stable.  Electrical Equipment is now as expensive as Paper after a month of outperformance.
  • Outside Paper, commodity pricing trends turned negative in May, most significantly in plastics, where surplus supply combined with declining input costs, causing US pricing to fall more than 10%.  Base metal pricing has also moved lower.
  • With the exception of Paper and Metals and Mining, each sector saw small positive revisions for 2012 in May, mostly an extension of activity post Q1 earnings.  Though still small, the most positive revisions were for Capital Goods.  We would expect this more positive trend to reverse in June given more negative expectation for demand and the weaker Euro.
  • The broader Chemical group is looking more expensive and given that the commodity subset has underperformed, it leaves the rest of the group looking very richly valued.  There is considerable Euro exposure in this group.  Ten of the 25 companies in our “overvalued” screen are in the chemical group.
  • The Packaging sector underperformed in May and while not cheap enough to make a recommendation on valuation alone, should be a beneficiary of falling commodity prices.  There are no packaging companies in our “overvalued” screen and a couple in the “undervalued” screen.

25 Most/Least Attractive Companies, May 31, 2012 (click to enlarge)

 

 

 

 

 

 

Source: SSR Analysis

  • Given the risk that we see weaker demand exaggerated by an inventory correction in the near-term we would stay away from any stocks trading at an all time high multiple.  This group generally does not outperform in a period of demand weakness, regardless of valuation.
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