Businesses in the materials sector are involved with discovering, developing and processing raw materials that are used as inputs in various other products and services.
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The materials sector provides the foundation for a range of industries and products. Common activities by firms operating in the area are related to extracting, producing, processing and distributing raw materials. Businesses are often working with mining, chemicals, forestry, packaging, construction, and metals.
Investors should note that the materials sector’s earnings are often tied to commodity prices, with the performances of stocks in this sector being linked to economic trends. For those looking for more stability and insulation against market cycles, shares in the consumer staples or utility industries could be better suited.
Linde is an industrial gas and engineering firm that services a variety of end markets. One of their main activities is designing and constructing large chemical plants that cater to clients in both non-cyclical segments such as consumer and cyclical ones like industry with a relatively even split in their largest market of the North and South America. This diversification could suit investors looking for a less volatile option amongst material stocks. Investors wanting consistent dividends will also see Linde as good choice.
Q3 2023 figures for sales, operating profits and income figures were within 1% of Q2 2023 results, while earnings per share grew from US$3.57 to US$3.63 over the same period. A 17% increase in operating cashflows could provide useful in the future, as Linde’s projects tend to require large upfront capital investments. The firm is pursuing new opportunities with hydrogen production, which could become significant sources of growth in the future, but come with higher technical risk than their traditional markets at this stage.
Freeport McMoran ($FCX)
The mining company is a significant producer of copper and gold, with operations in the U.S., Peru, Chile and Indonesia. The global nature of the firm means that they are exposed to regulatory changes in various countries. The business is currently constructing a smelter in Indonesia due to the government’s push to bring the processing stage of the operations into the nation and capture more of the value chain.
Freeport could benefit from increased demand for copper due to electrification trends and limited new projects coming online in the next few years. However, some investors view the lagging copper price as a signal for slowing economic sentiments in 2023. While the company also mines gold, which has a reputation as a safe haven asset, a majority of its sales come from copper. Q3 2023 saw copper sales exceed estimates to reach 1,109 million pounds, while gold number were below forecasts at 399 thousand ounces.
CF Industries ($CF)
CF Industries is responsible for nitrogen and hydrogen products. The firm is the world’s largest producer of ammonia, which is predominantly used in fertilizers. Natural gas is a significant input into its products, which means that business is exposed to changes in this commodity’s price. The energy and fertilizer industries are affected by geopolitics, with the outbreak of the Russia-Ukraine conflict causing major disruptions for firms involved in the area.
As a supplier from outside the region, CF Industries saw increased demand from buyers looking to switch. H1 2023 net earnings were US$1.09b, a decline from US$2.05b for the same period in 2022. Investing in CF Industries is one way of accessing the increasing demand for food, as the world’s population grows and needs to produce more crops from limite farmland. However, this is a long term trend and on an annual basis their sales depend on agricultural seasons.
There are several ETF options for investors who want to invest in the industrial sector generally, rather than looking for a specific stock. Vanguard Materials ETF ($VAW) is for investors looking to track 113 in the MSCI US IMI/Materials 25/20 Index, which contains large, medium and small cap firms. VAW has expense ratio of 0.10%, while the Fidelity MSCI Materials ETF ($FMAT) is a similar offering that could help investors save a small amount with fees of 0.084%.
The Materials Select Sector SPDR ETF ($XLB) is better suited for those wanting to invest in large companies as it only includes the 29 materials stocks in the S&P 500 index as at the end of September 2023. Investors searching for a more active product can consider the Invesco DWA Basic Materials Momentum ETF ($PYZ). This ETF screens the NASDAQ US Benchmark Index to look for least 30 materials stocks that are showing relative momentum compared to others.