IndustrialsSectorAnalysis
WilliamLiu,JiangochaoLu,RemingtonLyman,Javier
Maldonado
StudentInvestmentManagement- BUSFIN4228
Spring2016
1
Spring2016
Overview
● $30.5trillioninmarketcapitalization
○ 10.05%ofS&P500
○ 6thlargestsectorinS&P500
● Performance:
○ YTD:
+4.53%
○ 3Months:
+7.11%
2
Spring2016
Overview
14Industries
Aerospace&Defence
IndustrialConglomerates
AirFreight&Logistics
Machinery
Airlines
Marine
BuildingProducts
ProfessionalServices
CommercialServices&Supplies
Road&Rail
Construction&Engineering
TradingCompanies&Distributors
ElectricalEquipment
TransportationInfrastructure
3
Spring2016
Overview
10LargestCompaniesinSector(bymarketcap.)
GeneralElectric(GE)
$283.09B
LockheedMartin(LMT)
66.31B
3M(MMM)
97.94B
Danaher(DHR)
62.26B
Honeywell(HON)
83.01B
Caterpillar(CAT)
42.39B
Boeing(BA)
82.57B
GeneralDynamics(GD)
42.17B
UnitedTechnologies(UTX)
80.92B
Raytheon(RTN)
36.69B
4
Spring2016
CompaniesinSIMportfolio
5
Spring2016
BusinessAnalysis
Deteriorating financial and business
conditions are indicators of late cycle, but
U.S. recession risk is still low. As 2016
progresses, it is expected that the global
economy (including the U.S. economy) to
gradually stabilize. Based on that, it is
difficult to predict the demand of the
sector due to a mixed performance of
assets and no clear pattern. If the economy
improves, the Industrials sector should
improve.
*TableandinformationprovidedbyFidelity
6
Spring2016
Porter’s5forces:
BusinessAnalysis
● BarrierstoEntry- HIGH
○ Economiesofscaleisanadvantageforexistingcompanies
○ Largecapitalrequirements
● PowerofSuppliers- LOW
○ Lowswitchingcosts
○ Readilyavailablesubstitutes
○ Rawmaterialseasilyaccessible
○ Consistentinputs- notmuchdifferentiation
● PowerofBuyers- MODERATE
○ Lowswitchingcosts
○ Industrialsverydependentofeconomy,demandwillvary
7
Spring2016
BusinessAnalysis
Porter’s5forces(continued):
● ThreatofSubstitutes- MODERATE
○ Newsubstitutescould offerattractivepriceperformancetrade-off
(comingfromadvancesintechnology)
○ Buyer’scostofswitchingtosubstitutelow
● Rivalryamongexistingcompetitors- MODERATEtoHIGH
○ Variesamongdifferentindustries
○ Industrydominatedbymajorkeyplayers
○ Industrygrowthdirectlyaffectstheintensityoftherivalryamongexisting
competitors
○ Highexitbarriers(i.e.boeing)
8
Spring2016
EconomicAnalysis
Variables:
Dependent:S5INDUIndex
Independent:SPXIndex(S&P500)
Beta:1.114
Alpha:-0.027
Correlation:0.947
R^2:0.897
*ChartsandinformationprovidedbyBloombergFinanceL.P.
9
Spring2016
EconomicAnalysis
Variables:
Dependent:S5INDUIndex
Independent:CLAComdty(Oil)
Beta:0.322
Alpha:0.289
Correlation:0.398
R^2:0.158
*ChartsandinformationprovidedbyBloombergFinanceL.P.
10
Spring2016
EconomicAnalysis
Variables:
Dependent:S5INDUIndex
Independent:USGG10YRIndex
(Govt10yryield)
Beta:0.219
Alpha:0.207
Correlation:0.496
R^2:0.246
*ChartsandinformationprovidedbyBloombergFinanceL.P.
11
Spring2016
EconomicAnalysis
Variables:
Dependent:S5INDUIndex
Independent:GDPCUR$Index
(GDPUSNominalDollars)
Beta:2.406
Alpha:-0.023
Correlation:0.143
R^2:0.020
*ChartsandinformationprovidedbyBloombergFinanceL.P.
12
Spring2016
EconomicAnalysis
Variables:
Dependent:S5INDUIndex
Independent:EHUPUSIndex
(USUnemploymentrate%)
Beta:-0.752
Alpha:1.059
Correlation:0-0.421
R^2:0.177
*ChartsandinformationprovidedbyBloombergFinanceL.P.
13
Spring2016
FinancialAnalysis
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Spring2016
FinancialAnalysis
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Spring2016
FinancialAnalysis
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Spring2016
FinancialAnalysis
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Spring2016
FinancialAnalysis
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Spring2016
FinancialAnalysis
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Spring2016
FinancialAnalysis
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Spring2016
21
Spring2016
FinancialAnalysis
● Industrialsgeneratesfreecashflow
○ Sharerepurchases
○ Payingoutcashtoshareholders
22
Spring2016
SectorValuation- AbsoluteBasis
● IndustrialSectoriscurrentlytradingarounditsmedianpoint.
High
Low
Median
Current
P/E
20.468
7.322
17.000
14.800
P/B
3.847
1.632
2.966
3.346
P/S
1.684
0.579
1.370
1.395
10.065
3.758
8.655
8.072
P/EBITDA
23
Spring2016
RelativetoS&P500
● Relativetothemarket,Industrialssectoristradingbelowthemarketcurrently.
● Thesectorisverycyclical,itoverperformthemarketwhentimesaregoodandunderperformthe
marketwhentimesarebad.
High
Low
Median
Current
P/E
1.1845
0.5933
0.9252
0.8538
P/B
1.3694
0.9612
1.2056
1.3226
P/S
1.274
0.7462
0.9252
0.8538
P/EBITDA
1.441
0.8185
1.1214
0.8591
24
Spring2016
P/E, P/B and P/EBITDA
●
●
●
Industrials sector is highly correlated with the market.
High S&P500 multiples = industrials’ multiples expansion.
Multiples might be lower based on business cycle.
25
Spring2016
Industry to Industry Comparison
26
Spring2016
Company to Company Comparison
27
Spring2016
TechnicalPicture
CurrentIndexValue:485.73
- Priceabove200-daySMA
- All-timehigh:498.92
- Majorresistancearound500.00
28
Spring2016
EmergingTrends
● Onshoring
○ Demandforhighlyskilledlabor
○ Additivemanufacturing
○ Rapidprototyping
● Automation
○ Lowerdowntime
○ Higherproductivity
○ Higheroutput
29
Spring2016
Recommendation- Hold
Industrials
S&PWeight
SIMWeight
+/-
10.05%
9.99%
-0.06%
● Sectorcyclicalinnature
● Currentlyfairlyvalued
● Furthereconomicgrowthwill
boostsector
● USeconomyresilientsofar
- Strongemployment
- Recoveryinhousingmarket
30
Spring2016
References
●
●
●
●
Fidelity’swebsite- https://www.fidelity.com
Fidelity BusinesscycleUpdate(March2016)
StrategicManagement(2ndEdition),byFrankRothaermel
BloombergFinance
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