Company Analysis - Industrials
By: Hahn, Wesley; Hartman, Michael;
Heschel, Andrew; Holzman, Joshua
1
Agenda
 Recap class decision to hold industrials
 Review SIM Holdings
 Recommendations
 Conclusion
2
Recap:
Class voted to leave Industrials underweight by ~1.5%
relative to S&P500
Sector
S&P 500
SIM Weight
+/Weight
3
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication
Services
Utilities
Cash
10.65%
11.05%
12.27%
14.00%
11.51%
10.56%
19.68%
3.56%
3.02%
8.74%
12.24%
12.41%
10.06%
11.77%
9.08%
21.69%
3.25%
4.12%
-1.91%
1.19%
0.14%
-3.94%
0.26%
-1.48%
2.01%
-0.31%
1.10%
3.70%
0.00%
2.57%
3.98%
-1.13%
3.98%
Current Positions (Industrials)
 Industrials ~10% of portfolio
4
Recommendation
5
Overall Recommendation
 Industrials is starting to trend up!
 United Technologies (UTX) has limited
forward upside and Flowserve (FLS) and Danaher (DHR)
have value positions and forward momentum.
 We recommend selling a portion of our position in UTX and
levering up equally the position of FLS and DHR.
DHR
FLS
UTX
6
% Assets Recommended %
2.83%
3.59%
2.80%
3.56%
3.03%
1.52%
Levering %
126.77%
127.05%
50.00%
Union Pacific
7
Union Pacific Railroad
Conclusion:
Current Market Price ~$102, or a +10% price premium
relative to target price of $93.
Aggressive growth-rate
estimates
+
2013
2012
2011
8%
8%
9%
(
Revenue
Growth
Rates
Low proportionate cost
growth
+
EPS estimates > Consensus
8
= 1 year price target of $93.
EPS - diluted
Consensus
Estimate (+/-)
2012
2011
$8.92
$7.08
$7.75
$6.50
15%
9%
United Technologies Corporation
9
United Technologies Corporation
 Provides high technology products and services to the
building systems and aerospace industries worldwide.
 Otis, Carrier, UTC & Fire Security, Pratt & Whitney, Hamilton Sundstrand,
and Sikorsky
 Market Cap: $71.63 B
 Current Price: $79.05
 2.7% Dividend Yield
 Target Price: $84.76 (+7.2%)
 Current Weight: 3.13%
 Recommend: Sell 157 bps
10
UTX – Positives
 Global Footprint: big in BRIC countries and emerging
markets.
 History of strong growth and earnings over the past 10 years.
 Strong Balance Sheet and Free Cash Flow
 Ripe for new acquisitions.
 Recent Acquisition - Goodrich
 Well diversified company.
11
United Technologies Corp. has won a maintenance
contract worth up to $350 million to support
Japan Airlines’ fleet of Boeing 787 aircraft.
United Technologies said Monday that its
subsidiary, Hamilton Sundstrand Corp., would
provide the maintenance for the fleet of 35
aircraft.
UTX – Risks & Concerns
 Foreign Exchange:
 Over of business is done overseas, particularly in Europe.
 Potential strengthening dollar, recently weak dollar has boosted earnings.
 Integration of Goodrich acquisition.
 Complementary products, may not see the results
in our time frame.
 Defense spending.
 State of the Economy.
 UTX doesn’t sell direct to end users.
12
BofA Merrill Lynch: “If we
assume run rate net synergies
approach 30% (based on a
conservative estimate) of GR’s 2010
selling and administrative costs and
are phased in and $3.4bn paid in
cash (assuming that UTX leaves
$2bn in cash on its balance sheet in
keeping with its historical
precedent), we estimate the deal
would neither be accretive nor
dilutive to 2012 earnings. Assuming
synergies phase in in year two, we
estimate 2013 could be accretive last
few months, some see UTX taking a
risk in paying for up for GR at
present. UTX appears to be focused
on maintaining its credit rating,
judging by the amount of equity to
be used in the transaction”
UTX – Valuation
13
Relative to Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
20.6
18.7
5.0
1.6
17.2
Low
8.2
8.9
2.2
0.7
6.4
Median
16.8
15.6
3.6
1.3
12.9
Current
14.1
12.9
3.0
1.2
11.0
Relative to S&P 500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.3
1.1
1.8
1.1
1.6
Low
0.57
0.46
0.9
0.6
0.7
Median
.98
0.99
1.3
1.0
1.3
Current
1.1
1.0
1.5
1.0
1.3
UTX – Valuation Con’t
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low Median Current
B.
C.
18.7 8.9
1.6 0.7
5.0 2.2
11.78 4.59
17.2 6.4
D.
15.6
1.3
3.6
9.17
12.9
E.
12.9
1.2
3.0
7.57
11.0
#Your Target
Multiple
F.
14.0
1.3
3.5
8.5
12.0
 Average: $85.14
 Target: (80/20 DCF & P/E) $84.76
 Sell 157 bps of UTX.
 Limited Upside.
 Foreign Exchange Concern.

14
Wait and see what happens with global economy and Europe.
*Your Target E, Your Target Price
S, B, etc/Share
(F x G)
G.
H.
5.89
82.46
61.56
80.03
24.54
85.89
10.36
88.06
7.44
89.28
Danaher
15
Danaher Overview
 Designs, manufactures and markets professional, medical,
industrial and commercial products and services
 Operates in five segments:
 Test & Measurement
 Environmental
 Life Sciences & Diagnostics
 Dental
 Industrial Technologies
 Outperforming the S&P 500 and Main Competitors
 (5 Year)
 Growth derives from both segment core expansion and frequent
external acquisitions
Danaher Key Statistics
 Market Cap: $33.82 Billion
 Current Price: $49.27
 Target Price: $59.26 (20.3% Upside)
 Recommendation: Buy 125 bps
DHR vs. GE vs. S&P500
 Over a 5 year time period...
Danaher Positives
 Strong sales in foreign markets, notably those with
growing economies
 Will thrive during early stages U.S. economic recovery
 Experienced management knowledgeable in the
“Danaher Business System”
 Strong sales and revenue growth
 Danaher saw outstanding year-over-year core revenue
growth, core operating margin expansion, cash flow and
earnings performance.
 With purchase of Beckman Coulter, decreased
exposure to potential economic decline
Danaher Concerns
 Other companies are acquiring former Danaher managers
 Over 70% of sales growth in the last 5 years has come from
acquisitions
 Large investment made with the $6.8 billion purchase of
Beckman Coulter showed low Q3 earnings
Absolute Valuation
What are the experts saying…
Flowserve
23
Flowserve Overview
 Sector: Industrial Goods
 Industry: Diversified Machinery
 Sells precession engineered flow control equipment.
 Three Segments
 FSG Engineered Products Division
 FSG Industrial Products Division
 Flow Control Division
 International operations
 No competitors are all inclusive : valves, pumps, and seals.
 Revenues $ 4,032,036
24
Flowserve Performance
 They are a growth company and over the last 5 years they






25
have seen an 87% increase in net income.
Bookings up 15.9% versus previous year at $1.16 billion
Recent increases in costs and decreases in Margins.
Significant backlogged low to medium margin high cost
projects.
Rapid growth in short term projects and original equipment
Record service and aftermarket bookings (support) of 42%
of bookings ($488 million)
Company commitment to equity value with share buy backs
and large insider buys.
Flowserve Concerns
 Operating margins continue to shrink for the last five
quarters to 33.6%
 Currency exposure continues to effect bookings, 15.9% is
effectively 10.2%.
 Large backlog of projects that continues to growth. People
are not committing on large projects.
 SG&A and cost controls are offsetting lower earnings and
will not continue forever.
26
Flowserve
Conclusion:
Historically has traded well above it’s competitors and
the S&P 500.
27
Flowserve
Conclusion:
Current Market Price ~$97, trading close to the ratio’s.
The value is being realized.
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
28
High
Low
Median
Current
B.
53.9
2.1
6.0
16.26
28.0
C.
6.2
.2
.9
1.89
3.1
D.
15.1
.9
2.8
7.26
10.4
E.
10.3
1.1
2.0
6.78
9.1
#Your
Target
Multiple
F.
15.1
.9
2.8
7.26
10.4
Target
Target
Price
G.
7.34
73.29
41.00
11.19
9.27
H.
110.834
65.96
114.8
81.24
96.422
Flowserve
Conclusion:
Current Market Price ~$97, or a 26% price discount
relative to target price of $131.16.
Growth-rate estimates
consistent with past
performance
+
= 1 year price target of $131.16 is
conservative.
Terminal Discount Rate =
Terminal FCF Growth =
29
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
$
12.0%
3.0%
97.30
131.16
34.8%
2012
2011
20%
18%
15%
$6,593
$5,494
$4,656
(
Revenue
Growth
Rates
(
EPS estimates < Consensus
2013
Revenues
EPS - diluted
Consensus
Estimate (+/-)
2012
2011
$8.26
$8.91
$7.07
(under mgmt.
$7.45)
$7.69
15%
9%
30
Appendices
31
A: UTX DCF
32
B: Danaher DCF
33
C: Flowserve DCF
34