Top three non-mining materials stocks

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This week, I’m going to take an in-depth look at non-mining stocks in the materials sector, of which there are nine listed in the ASX 100 and in the table below. If you missed the first half of my materials sector review, in which I looked into the mining sector, you can read it now in Eye on the materials sector.

Clearly, from the column below marked ‘Market cap. share’ – which is the percentage share of each company within the ASX 200 materials sector – these companies are relatively small. As such, there may be no need to delve into this sub-sector to build a high conviction portfolio. However, for completeness, I will take my usual approach to analysing stocks.

Note: the estimates in the table are current to the close of business 3 December 2012. The price target is the brokers’ forecast of where the stock price is heading – often considered to be in the next 12 months.)

The top three stocks

The top three stocks (Orica, Amcor and Incitec Pivot) all have reasonable to good ratings with a ‘Consensus re.’ of 2.5 (meaning, market outperform) or less. Orica is a diversified manufacturer of chemicals, food and beverage flavourings, fragrances and explosives (used in the mining sector). Amcor is an international integrated packaging company and Incitec Pivot is a fertilizer manufacturer and supplier – also including explosives.

Orica’s share price has fluctuated in a narrow channel between 2007 and the present, except for the during the GFC between June 2008 and June 2010. It has a respectable dividend yield (4.1%), but it doesn’t seem the stuff of a smaller cap stock used to spice up a portfolio. It has been a reasonably good defensive stock.

Amcor’s stock price, on the other hand, has grown steadily since the bottom of the market. As a momentum play with a reasonable recommendation of 2.5, and a slightly higher dividend (5.1%) it might be preferred to Orica.

Incitec Pivot was a market darling in 2007 and 2008 as its price shot up rapidly to just under $9 (after correcting for a share split), but it fell just as dramatically. With food for Asia being a recent catchcry, fertilizer is important, but the market hasn’t yet valued it so. However, IPL does have the best recommendation in this subsector.

The remaining stocks in the subsector, except for SMS Metal Management – a scrap metal recycler, relate to building materials manufacturing. Steel (Bluescope and Arrium) doesn’t seem to me to be a viable industry in this country – without government assistance – and so I would avoid them. Indeed, I have never held any of these stocks.

Turning back to the big three stocks in the sector, data on their recommendations from the past 12 months are shown in Figure 1. Orica’s rating has been stable and strong for the last 12 months, but that hasn’t been accompanied by good capital gains. Amcor’s rating has been deteriorating for 12 months and that takes some of the gloss off the preference I alluded to earlier. Incitec Pivot’s recommendation has been gradually improving and is at a strong level with a respectable number of brokers.

Note: the estimates in the Figure are current to the close of business 3rd December 2012. The price target is the brokers’ forecast of where the stock price is heading – often considered to be in the next 12 months.

We still have the whole materials sector (including mining) predicted to have the best capital gain – 29.8% – of the 11 sectors over the next 12 months and, as the exuberance chart in Figure 2 shows, the sector is still underpriced (at -2.5%).

It should be stressed that this sector is dominated by mining stocks and the broader index may not be representative of the non-mining subsector. There is no readily available data on this subsector to enable a fuller analysis.

Orica’s price is almost equal to the low target price and the median target doesn’t inspire acquiring this stock. Amcor’s and Incitec Pivot’s prices are well inside the respective low to high ranges. Without other strong information on these companies – which I do not have, but may exist – I find no reason to add any of these stocks to a high conviction portfolio.

Readers who want more detail on how I carry out my style of analysis can find a new paper on my approach on www.woodhall.com.au under the ‘Market Updates’ tab and general information.

Note: the estimates in the Figure are current to the close of business 16 November 2012. Please go to www.woodhall.com.au for more information on the assumptions behind the estimates. 

Ron Bewley is the Executive Director of Woodhall Investment Research.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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