The mining boom is behind a top performing materials sector. According to Standard & Poor’s, the materials sector has delivered an annualised return of 10.99 per cent for the 12 months to March 31, 2011 compared with a negative annualised return of .77 per cent for the S&P/ASX 200.

Over five years, the materials sector has rewarded investors with a 5.7 per cent annualised return compared to a negative 1.16 per cent for the S&P/ASX 200. The materials sector is broad, consisting of 747 companies across chemicals, construction materials, containers and packaging, metals and mining and paper and forest products.  Total market capitalisation of the sector was about $431 billion on April 19, 2011. According to Standard &Poor’s, the materials sector at 28.63 per cent of the total index is the second biggest behind financials at 37.58 per cent.

Diversity and size makes the materials sector one of the most closely watched sub indexes of the ASX, according to Shawn Uldridge, of William Shaw Securities. He says macro factors, such as currency and commodity prices, have a significant impact on the performance of materials companies. Uldridge has extracted his best five stocks that should reward investors over the next two years if demand for their products remains strong.  

Fortescue Metals Group (FMG)

Chart: Share price over the year to 20110511 versus ASX200 (XJO)

Share price: $6.15
Market capitalisation: $20 billion
Price/earnings ratio:  20.06 times

Fortescue is the new force in Australian iron ore since making its first shipment in May 2008. Demand for iron ore continues to drive up the price. In its recent quarterly report up to March 31, 2011, Fortescue says the realised average selling price was US$162 a (dry) tonne, representing an 8 per cent increase on the previous period. It also reported a significant increase in its resource portfolio to more than 10 billion tonnes. However, Fortescue reported a 15 per cent reduction in shipping volumes to 8.4 million tonnes due to heavy rain impacting operations in the Pilbara region.  

Uldridge says continuing urbanisation in China provides a bright outlook for iron ore and Fortescue.

Uldridge says Fortescue also offers quality management. “Andrew Forrest (company chief executive) has proven he’s a great miner,” Uldridge says.


BHP Billiton (BHP)

Chart: Share price over the year to 20110511 versus ASX200 (XJO)

Share price: $45.83
Market capitalisation: $159 billion
Price/earnings ratio:  14 times

The undisputed king of the materials sector, BHP Billiton is Australia’s biggest stock with a market capitalisation of $159 billion at April 19, 2011.  The company booked a record half year profit of $US10.52 billion for the six months to December 31, 2010, up 71.5 per cent on the previous corresponding period. Revenue was up 39 per cent to US$34.166 billion. Despite the fact that BHP is trading near all-time price highs, Uldridge says it still offers strong upside value from a diversified suite of businesses, including iron ore, coal, oil, gas, base metals, aluminium and manganese. Uldridge says there will always be demand for these raw materials.  “BHP’s strategy is to own and operate long-life, low-cost production of these materials,” he says.  “The company will be there for the long term.”

Amcor (AMC)

Chart: Share price over the year to 20110511 versus ASX200 (XJO)

Share price: $7.00
Market capitalisation: $8.6 billion
Price/earnings ratio: 27 times

First listed in 1969, Amcor is an Australian cardboard and packaging company operating in five major world markets. Amcor has more than 300 sites in 43 countries, generating sales of $14 billion a year. The company announced a 55 per cent increase in interim profit after tax, before significant items, of $267 million for the six months to December 31, 2010. The interim dividend was 17 cents a share.  According to Uldridge, Amcor is one of the most consistent dividend payers in the market. “As long as people buy everyday products of any kind, companies like Amcor will be providing packaging for them,” he says. “For example, Amcor is the world’s largest manufacturer of PET products (plastic bottles).” Uldridge views Amcor as a long-term cornerstone investment for almost any portfolio.

BlueScope Steel (BSL)

Chart: Share price over the year to 20110511 versus ASX200 (XJO)

Share price:  $1.73
Market capitalisation: $3.6 billion
Price/earnings ratio 35 times

Times are tough for BlueScope Steel, with the company reporting a $55 million net loss after tax for the 2011 first half. The loss was driven by a soaring Australian dollar, higher input costs and lower demand in the Australian market. However, the company retains a strong balance sheet, with gearing below 15 per cent. The company is encouraged by a higher steel price environment, a recovery in the US and its continuing strong performance in Asia. Uldridge says BlueScope makes the products people need, such as Colorbond roofs and steel for cars. He argues the softer share price provides a long term buying opportunity, particularly when the global recovery gathers pace.  “Buy on the sound of cannons, sell on the sound of trumpets” he says.

Incitec Pivot (IPL)

Chart: Share price over the year to 20110511 versus ASX200 (XJO)

Share price: $3.76
Market capitalisation: $6.7 billion
Price/earnings ratio: 16.4 times

Uldridge says the world’s population is expected to reach 6.9 billion people this year, with the United Nations forecasting it to grow by another billion by 2020. “Fertiliser to assist in growing food will inevitably be required in much greater quantities,” he says.  Uldridge says Incitec Pivot isn’t expensive on a historical basis, and it tends to pay out a high ratio of earnings when it can. “Although 2009 was difficult, Incitec Pivot is recovering well from the global financial crisis and we expect the current upward trend to continue well into the next decade,” he says.


*Market capitalisation taken at April 19, 2011

*Share price close at April 28, 2011

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