The basic materials sector is considered a risky one in which to invest due to exchange rates, commodity price volatility, import controls, governmental regulation, environmental policies and changes in consumer demand.
Market valuations: SLW currently trades at a price to earnings ratio of 14.7 and a price to book ratio of 2.76. Alcoa Inc (NYSE:AA) trades at a lofty P/E of 36.7, but a low price to book ratio of 0.67. FCX trades at a modest P/E of 9.9 and a price to book of 1.64.
Recent stock performance: FCX hit a 52-week high of $41.30 in September 2012, but has fallen considerably since then to the $30 range, having lost half its value since reaching the $60 mark in January 2011.
SLW has followed a similar path, hitting a 52-week high of $41.30 in November, but falling since to $24. It is also down nearly half in the last two years, having traded as high as $46 in April 2011.
Alcoa Inc (NYSE:AA) has taken the largest plunge of the three in recent years, having lost 75% of its value since reaching a five-year high of more than $40 in May 2008. It reached a 52-week high of nearly $10 a share in September and is now priced at about $8.50.
Management effectiveness: In the most recent 12-month period, Alcoa Inc (NYSE:AA)’s return on equity was 1.7%, its return on assets was 0.6% and its return on investments was 1.1%. It also generated a minuscule 1% net profit margin. The story hasn’t been any better over the last five years, resulting in a declining stock price. Its average net profit margin during that period has been 0.2%, its average ROA was 0.1% and its ROI was 0.2%.
SLW has produced fairly solid returns and margins. Over the recent 12-month period, its return on equity, assets and investments were all between 18% and 19%, while its net profit margin was a robust 69%. Over the last five years, the company has averaged a 30% net profit margin, and 6% returns on its assets and investments.
For FCX in the previous 12 months, its return on equity was 22.7%, its return on assets was 11.2%, its return on investments was 18.9% and its net profit margin was 26.7%. These recent figures are in stark contrast to its average over the last five years, when it has generated negative profit margins and negative ROA and ROI.
Recent earnings reports:Alcoa Inc (NYSE:AA) reported first quarter net income of $149 million, or $0.13 per share, down from the previous year’s first quarter income of $242 million, or $0.21 per share. First quarter 2013 revenue was $5.8 billion, a decrease of 3% from the first quarter of 2012. Prior to last year, the company’s revenues had grown each of the previous three years, from $18.4 billion in 2009 to $25 billion in 2011, down to $23.7 billion in 2012. Net income has been inconsistent during that time, ranging from a $1 billion loss in 2009, to $611 million in net income in 2011 and $191 million for the full year in 2012.
SLW will report its first-quarter earnings on May 10. Its 2012 results included record revenue of $849.6 million, compared with $730 million in 2011, an increase of 16%. The company also booked record net earnings of $586 million, $1.66 a share, compared with $555 million, $1.56 a share, in 2011. In the last four years, SLW has nearly quadrupled its sales and net income.
FCX reported net income of $648 million on revenue of $4.583 billion in the first quarter of 2013, compared with net income of $764 million on revenue of $4.605 billion in the first quarter of 2012. The company also announced the completion of $10.5 billion in debt financings associated with the pending acquisitions of Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR).
Analyst ratings: Analysts’ opinion on FCX is mostly positive, with five strong buy ratings, six buys, five holds and a lone sell rating.
SLW analysts are more bullish on the company than those of the other two firms, with four strong buy ratings and eight buy opinions.
Opinion on Alcoa is a mixed bag. Two rate the stock a strong buy, four have it as a buy and nine believe its a hold. There are also three analysts rating it as an underperform and another one with a sell rating.
Dividend and yields: Alcoa pays an annual dividend of $0.12 for a payout ratio of 52%, with a yield of 1.4%. Its average annual yield over the last five years was 2.1%.
SLW currently distributes an annual dividend of $0.56, yielding 2.3% with a payout ratio of 21%.
FCX pays back its investors an annual $1.25 per share dividend for a yield of 4.1% and an average yield over five years of 3.6%.
There are also several exchange traded funds specializing in the basic materials sector, three of which are listed below:
Materials Select Sector SPDR (NYSEMKT:XLB) Fund
The Materials Select Sector SPDR Fund seeks to match the returns and characteristics of the S&P Materials Select Sector Index. The fund has 31 stocks in the industry, including FCX, which accounts for 6% of its holdings, and Alcoa, which accounts for 1.92%. The fund has an expense ratio of 0.18%. Currently, XLB is trading around $40, which is also a 52-week high.
iShares Dow Jones U.S. Basic Materials
The fund corresponds to the Dow Jones U.S. Basic Materials Index. The fund holds 63 equities from the sector, including FCX, which accounts for 6% of its holdings, and Alcoa, which accounts for 1.92%. Total Market Index. The fund has an expense ratio of 0.46%. Currently, IYM is trading around $72, which is also a 52-week high, similar to XLB. With both of these ETFs trading at a 52-week high, your best bet may be to wait for a pullback before investing.
It is clear that there are a wide variety of companies in the basic materials industry, and each one has its pros and cons. From the three companies above, many would agree that Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Silver Wheaton Corp. (NYSE:SLW) are the most attractive, with good yields, strong outlooks, and recent slumps providing a good time to buy. However, Alcoa continues to be popular with many people, and should not be overlooked.
In the end, if you can’t make up your mind, the ETFs discussed above are great ways to invest in the industry (and the companies discussed) without choosing a single company. For many people with less money to invest, these ETFs are a great way to get exposure to the industry and a wide variety of companies.
The article Where to Start: Basic Materials originally appeared on Fool.com and is written by Daniel Murray.
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