IndustrialsSector
Recommendation
WesFaulkenberry,MattLandy,JeridLinkhart&
MichaelMcLelland
BUSFIN7225-SIM
Agenda
Sector Overview
Stock Analysis & Valuation
Recommendation
Sector Overview
Sector
Consumer-Discretionary
Consumer-Staples
Energy
Financials
Health Care
Industrials
IT
Materials
Telecommunications
Utilities
Cash
Dividend Receivables
Total
©2014. All rights reserved
SIM
S&P
10/30/15 10/30/15
11.88% 13.15%
9.33%
9.69%
6.99%
7.11%
15.49% 16.19%
13.09% 14.58%
10.39% 10.19%
21.75% 20.84%
2.91%
2.95%
2.28%
2.37%
2.44%
2.93%
3.31%
0.00%
0.12%
0.00%
100.00% 100.00%
Weight vs S&P
Over/(Under)
(1.27%)
(0.36%)
(0.12%)
(0.70%)
(1.49%)
0.20%
0.91%
(0.04%)
(0.09%)
(0.49%)
3.31%
0.12%
(0.00%)
3
Sector Overview
©2014. All rights reserved
4
Sector Overview
•
©2014. All rights reserved
Placeholder
5
Sector Overview
Industrials Sector (S5INDU)
Absolute Basis
High
P/E
20
P/B
3.9
P/S
1.7
P/EBITDA
10.1
Low
7.3
1.6
0.6
3.8
Median
17.1
3.0
1.4
8.7
Current
16.3
3.6
1.5
8.5
P/E
P/B
P/S
P/EBITDA
High
24
3.0
1.8
10.3
Low
11.9
1.6
0.7
4.4
Median
16.6
2.4
1.4
7.2
Current
18.1
2.7
1.8
10.1
Relative to SP500
High
Low
Median
Current
P/E
P/B
P/S
P/EBITDA
0.83
1.30
0.94
0.98
0.61
1.0
0.86
0.86
1.03
1.25
1.0
1.21
0.90
1.33
0.83
0.84 6
Absolute Basis (SPX)
©2014. All rights reserved
Sector Overview
Stock
Boeing (BA)
Eaton (ETN)
Fluor (FLR)
Hertz (HTZ)
©2014. All rights reserved
Current
Price
(11/18/15)
$148.28
$56.88
$48.39
$16.66
% of SIM
Portfolio
(10/30/15)
2.40%
4.02%
3.97%
0.00%
Recommendation
BUY
BUY
SELL
BUY
7
•
Boeing is the world’s largest
and leading aerospace
company. They manufacture
and sell commercial
airplanes, defense, space
and security systems. They
have customers in 150
countries and employ over
165,000 people in 65
countries.
Segments:
•
•
•
•
Commercial Airplanes
Defense, Space & Security
Boeing Capital
©2014. All rights reserved
Stock Ticker
BA
Recommendation
BUY
Current SIM %
2.40%
Recommended Sim %
3.14%
Current Price
$148.15
Target Price
$167
Dividend Yield
2.76%
Projected Return
12.4%
Forward P/E
15.86
P/B
14.86
P/Sales
1.03
P/EBITDA
14.18
8
©2014. All rights reserved
9
Historical Performance
Strengths
•
2012
2013
2014
•
Revenue
$81,698
$86,623
$90,762
Op Margin
$6,311
$6,562
$7,473
OM %
ROE
7.7%
7.6%
8.2%
83.14%
44.21%
46.27%
Weaknesses
•
•
©2014. All rights reserved
Double-digit growth in Commercial
Airlines leads strong revenue
growth
Gross and Operating margins have
settled at levels above historical
averages
Government spending cuts have
dragged on Defense, Space &
Security segment
COGS as a percentage of sales
continues to rise year over year
10
Opportunities
Risks
•
•
•
•
Global economic growth will
stimulate additional demand for
commercial aircraft as more
passengers utilize airlines and air
cargo volume increases
Chinese growth offers the.
opportunity to develop in a market
that is expected to grow
substantially in the coming years.
Low oil prices further drive demand
for additional aircraft as both
passenger and cargo levels rise
©2014. All rights reserved
•
•
The global economy may slow
down, causing catalytic drivers to
slow and reduce demand.
Growth in China may slow even
further, representing a loss in
potential revenue.
U.S. federal budget cutbacks may
negatively impact the revenue of
the Defense, Space & Security
segment.
11
Key Ratios
Boeing
High
Low
Average
Current
Forward P/E
21.70
13.33
16.94
16.80
P/B
17.35
6.27
10.70
14.71
P/S
1.20
0.67
0.92
1.06
P/EBITDA
12.39
6.41
8.98
10.11
Forward P/E
20.20
13.18
17.85
17.89
P/B
3.21
2.41
2.84
2.78
P/S
1.41
0.85
1.20
1.29
P/EBITDA
10.35
6.91
9.03
8.71
Competitors
©2014. All rights reserved
12
DCF Valuation
©2014. All rights reserved
13
Eaton Corp. plc is a power
management company providing
energy efficient solutions to help
effectively manage electrical, hydraulic,
and mechanical power. The company
operates under four business
segments:
•
Electrical Products
•
Hydraulic
•
Vehicle
•
Aerospace
Headquartered in Cleveland, Ohio.
Incorporated in Dublin, Ireland. Eaton
Employs nearly 99,000 with customers
in nearly 175 countries.
©2014. All rights reserved
Stock Ticker
ETN
Recommendation
BUY
Current SIM %
4.02%
Recommended Sim %
4.25%
Current Price
$57.22
Target Price
$64.00
Dividend Yield
3.93%
Projected Return
12.00%
Forward P/E
12.09x
P/B
1.72x
P/Sales
1.3x
P/EBITDA
10.4x
14
©2014. All rights reserved
15
Historical Performance
Strengths
•
2013
2014
2015
Doubled revenue over past 5 years (
partially due to Cooper Industries
acquisition)
•
Revenue
$21.9B
$22.6B
$22.1B
Op Margin
$1.88B
$1.76B
$2.11B
OM %
8.6%
7.8%
9.5%
•
Company wide restructuring project
aimed at increasing Operating
Margins to 15% company-wide.
14.5% in Q3 Earnings Report.
Electrical segment posting 18.5%.
Weaknesses
ROE
11.7%
11.0%
12.7%
•
•
©2014. All rights reserved
Smaller revenue gains partially due to
FX. Will be hedging more in future.
Auto segment only 9% OM
16
Opportunities
Risks
•
•
•
•
•
Companywide restructuring
program to increase company and
segment OM to 15%.
Over $1 Billion of capital to deploy
in 2016 with a focus on stock
buybacks.
Increased worldwide focus on
power generation practices
specifically in US which makes up
about 50% of sales.
High dividend yield.
©2014. All rights reserved
•
•
Interest rate increases raising the
cost to borrow which could
decrease spending on new
machinery.
Relatively correlated with oil prices
which are expected to stay lower in
the near future.
Continued strengthening of dollar.
17
Key Ratios
Eaton
High
Low
Average
Current
Forward P/E
14.2
6.29
11.47
12.09
P/B
2.43
1.54
1.97
1.72
P/S
1.64
.77
1.26
1.25
P/EBITDA
14.47
5.68
9.44
8.03
Competitors
Schneider
Electric
Mitsubishi
Electric
Wabco
Holdings
Rockwell
Collins
Forward P/E
14.2
12.53
16.78
16.06
P/B
1.65
1.61
7.82
6.61
P/S
1.26
.66
2.33
2.38
P/EBITDA
8.60
6.13
16.99
9.90
©2014. All rights reserved
18
DCF Valuation
Eaton (ETN)
Analyst: Wes Faulkenberry
Terminal Discount Rate =
Terminal FCF Grow th =
Year
2015E
Revenue
22,168
% Grow th
Operating Income
2016E
22,362
0.9%
2,487.23
Operating Margin
22,879
2.3%
2,608.23
23,451
2.5%
2,744
24,061
2.6%
2,815
377
184
92
94
96
1.7%
0.8%
0.4%
0.4%
0.4%
58
196
138
128
131
2.8%
8.0%
5.5%
4.5%
4.5%
Taxes
Tax Rate
2,052
% Grow th
2,258
2,378
11.7%
2019E
11.8%
Interest % of Sales
11.4%
2018E
11.2%
Interest and Other
Net Income
2,638.75
2017E
2,710
11.7%
2,780
2020E
24,735
2.8%
2,894
11.7%
2021E
25,452
2.9%
2,927
2022E
26,216
3.0%
3,015
2023E
26,976
2.9%
3,102
2024E
27,677
2.6%
3,183
11.5%
99
153
157
162
111
113
0.4%
0.6%
0.6%
0.6%
0.4%
0.4%
135
139
143
147
148
152
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
2,858
961
3.8%
4.1%
4.3%
4.0%
4.2%
4.0%
3.9%
4.0%
98
166
127
(117)
(120)
(124)
(51)
(52)
54
55
0.4%
0.7%
0.6%
-0.5%
-0.5%
-0.5%
-0.2%
-0.2%
0.2%
0.2%
Subtract Cap Ex
(411)
205
236
Capex % of sales
-1.9%
4.5%
4.8%
Free Cash Flow
3,448
% Grow th
-9.7%
NPV of Cash Flow s
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
17,040
13,331
30,370
12.90%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
13.0
14.8
11.7
12.7
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Dow nside) to DCF
Debt
Cash
Cash/share
3,113
3,139
0.8%
56%
44%
100%
4.9%
2,405
-23.4%
1,131
4.7%
2,564
6.6%
1,138
4.6%
2,586
0.9%
1,069
4.2%
2,890
11.8%
1,036
1,049
4.0%
2,964
2.5%
2.9%
3,145
869
1,069
3.0%
3,117
4.0%
989
2.9%
3,029
894
1,149
2.8%
2,941
4.0%
% of Sales
1,052
1,052
3.9%
3,171
7.0%
0.9%
1,107
1,107
4.0%
3,201
0.9%
Terminal Value
Free Cash Yield
11.8
13.4
11.1
12.2
11.2
12.8
11.3
12.4
3,262
11.5%
887
Plus/(minus) Changes WC
2.5%
11.5%
13.9%
1,035
28,369
11.5%
5.3%
% of Sales
2025E
11.5%
10.0%
Add Depreciation/Amort
2.6%
11.0%
2.5%
3,224
2.5%
1,163
4.1%
(85)
-0.3%
1,163
4.1%
3,139
-1.9%
37,851
8.29%
Terminal P/E
11.7
Terminal EV/EBITDA
11.4
474
$
$
56.36
64.06
13.7%
13,379
781
1.65
©2014. All rights reserved
19
•
Fluor Corporation is a global
engineering, procurement,
and construction (EPC) firm
that designs and builds
some of the world’s most
complex projects. The
company creates and
delivers innovative and
integrated solutions for its
clients with engineering,
procurement, fabrication,
construction, maintenance,
and project management
services.
©2014. All rights reserved
Stock Ticker
FLR
Recommendation
SELL
Current SIM %
3.97%
Recommended Sim %
0%
Current Price
$48.15
Target Price
$50.64
Dividend Yield
1.71%
Projected Return
6.88%
Forward P/E
10.51
P/B
2.28
P/Sales
0.36
P/EBITDA
9.4
20
©2014. All rights reserved
21
Historical Performance
Strengths
•
$ (thousands)
2013
2014
2015
Continued “backlog” revenue
growth ($42.5B at FY ‘14 end vs.
$34.9B at FY ‘13 end)
Strong cash position ($2B)
Steady operating margin % despite
revenue contraction
Diversified across multiple
industries
27,352
21,532
19,818
•
•
Op Margin
1,191
1,216
973
•
OM %
4.4%
5.6%
4.9%
Weaknesses
Revenue
•
ROE
18.6%
14.4%
20.8%
•
©2014. All rights reserved
Significant revenue contraction
each of the past two years
Lagging sector and competition in
key ratios
22
Opportunities
Risks
•
•
•
Acquisitions
Enhance focus on aligning best
practices within business units
•
•
•
©2014. All rights reserved
Commodity prices (oil and natural
gas)
Oil refining capacity utilization
(lowest since 2011 at 93%)
Large % of revenue comes from
two clients (15% from ExxonMobil
and 11% from U.S. government)
Not all backlog revenue is
guaranteed
23
Key Ratios
Fluor
High
Low
Average
Current
Forward P/E
15.48
10.15
12.92
11.76
P/B
3.76
1.97
2.86
2.25
P/S
0.62
0.33
0.43
0.37
P/EBITDA
17.43
4.88
9.20
5.58
Competitors
AECOM
Hyundai
Jacobs
KBR
Forward P/E
9.63
363.24
13.63
13.47
P/B
1.16
0.41
1.26
2.84
P/S
0.26
0.10
0.45
0.51
P/EBITDA
6.14
8.01
9.28
27.19
©2014. All rights reserved
24
DCF Valuation
©2014. All rights reserved
25
•
Hertz Global Holdings, Inc.
(NYSE:HTZ) is a leading
provider of rental cars,
equipment, and fleet
leasing/management. The
company owns the Hertz,
Dollar, Thrifty, and Firefly car
rental brands and provides
equipment rental services to
more than 350 countries
worldwide. International and
domestic airport car rental
services provide the majority of
sales ($5.998 billion) for Hertz.
©2014. All rights reserved
Stock Ticker
HTZ
Recommendation
BUY
Current SIM %
0.00%
Recommended Sim %
3.00%
Current Price
$16.04
Target Price
$18.84
Dividend Yield
0.00%
Projected Return
17.5%
Forward P/E
11.11
P/B
1.59
P/Sales
0.63
P/EBITDA
1.83
26
©2014. All rights reserved
27
Historical Performance
Strengths
•
($100,000s)
2012
2013
2014
Revenue
9,013
10,775
11,046
365
603
(23)
Op Margin
OM %
4.05%
5.60%
-0.21%
ROE
10.25%
11.90%
-3.26%
•
Weaknesses
•
•
©2014. All rights reserved
One of the most recognized brands
in the world. HTZ has the largest
market share in the secondary
passenger vehicle rental service.
Numerous awards recognizing
stellar customer service (best-inclass awards)
Accounting issues from 2012-13
have weakened Wall Streets
opinion of them
Slow to begin their “car-sharing”
business line as opposed to
competitors
28
Opportunities
Risks
•
•
•
Surge of demand in international
markets due to wealth creation has
increased global tourism at large.
Hertz has an opportunity to be the
first car rental company for many of
these consumers and establish a
loyalty.
Technological advancements keep
the industry fragmented, and Hertz
needs to significantly increase R&D
in order to stay competitive
©2014. All rights reserved
•
A decrease in industrial production
would have an adverse effect on
Hertz’s equipment rental services
Airport car rentals account for 72%
of Hertz’s US Car Rental revenue
and 55% of the International Car
Rental Revenue. A decrease in
global tourism and/or business
travel would have an adverse effect
on a vast amount of Hertz’s net
revenue.
29
Key Ratios
Hertz
High
Low
Average
Current
Forward P/E
883.20
2.44
25.16
11.11
P/B
5.13
0.39
2.69
1.59
P/S
1.20
0.12
0.69
0.63
P/EBITDA
3.14
0.32
1.81
1.83
Competitors
Penske
Avis
Sonic
AutoNation
Forward P/E
10.04
10.24
11.00
14.83
P/B
1.63
1.15
1.59
2.89
P/S
0.19
0.42
0.12
0.33
P/EBITDA
7.23
1.40
4.33
7.99
©2014. All rights reserved
30
DCF Valuation
Hertz Global Holdings, Inc. HTZ
Analyst: Michael McLelland
10/4/2015
(000s)
Year
Terminal Discount Rate =
Terminal FCF Growth =
2015E
Revenue
10,692,528
% Grow th
283,352
Operating Margin
2.7%
Taxes
113,341
Tax Rate
40.0%
Net Income
170,011
% Grow th
728,995
6.6%
291,598
40.0%
437,397
157.3%
Add Depreciation/Amort
3,090,141
% of Sales
28.9%
Plus/(minus) Changes WC
14,448
% of Sales
0.1%
Subtract Cap Ex
3,100,833
Capex % of sales
29.0%
Free Cash Flow
173,767
% Grow th
3,192,115
28.9%
(21,171)
-0.2%
3,258,388
29.5%
349,954
101.4%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
3,872,082
4,681,814
8,553,896
2.39%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
42.8
50.3
8.2
8.6
Shares Outstanding
Debt
Cash
Cash/share
11,045,381
3.3%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2016E
2017E
11,579,978
2018E
12,442,686
4.8%
648,479
7.5%
858,545
5.6%
259,392
6.9%
343,418
40.0%
389,087
40.0%
515,127
-11.0%
3,346,614
32.4%
3,595,936
28.9%
83,724
28.9%
37,328
0.7%
3,358,194
0.3%
3,608,379
29.0%
461,231
29.0%
540,013
31.8%
45%
55%
100%
17.1%
2019E
13,506,536
8.6%
985,977
7.3%
394,391
40.0%
591,586
14.8%
3,903,389
28.9%
40,520
0.3%
3,916,895
29.0%
618,599
14.6%
10.25%
4.25%
2020E
14,830,176
9.8%
1,171,584
7.9%
468,634
40.0%
702,950
18.8%
4,263,676
28.8%
44,491
0.3%
4,271,091
28.8%
740,026
19.6%
2021E
16,276,119
9.8%
1,334,642
8.2%
533,857
40.0%
800,785
13.9%
4,679,384
28.8%
48,828
0.3%
4,687,522
28.8%
841,475
13.7%
2022E
17,789,798
9.3%
1,378,709
7.8%
551,484
40.0%
827,226
3.3%
5,114,567
28.8%
53,369
0.3%
5,123,462
28.8%
871,700
3.6%
2023E
19,319,720
2024E
20,633,461
8.6%
1,304,081
521,632
21,665,134
6.8%
1,279,275
6.8%
2025E
5.0%
1,083,257
6.2%
5.0%
511,710
40.0%
782,449
433,303
40.0%
40.0%
767,565
-5.4%
5,554,420
5,932,120
28.8%
57,959
649,954
-1.9%
-15.3%
6,239,559
28.8%
28.8%
61,900
0.3%
5,564,079
0.3%
5,942,437
28.8%
830,748
64,995
0.3%
6,239,559
28.8%
28.8%
819,148
-4.7%
714,949
-1.4%
Terminal Value
-12.7%
12,422,246
Free Cash Yield
16.6
19.6
7.1
7.4
18.7
22.0
7.0
7.3
5.76%
Terminal P/E
19.1
Terminal EV/EBITDA
4.5
454,000
$
$
16.04 premarket after preannouncement
18.84
17.5%
21,592,000
1,060,000
2.33
©2014. All rights reserved
31
Recommendation
Stock
Current
Price
Expected
Price
Dividend
Yield
Projected
Return
Current
Weight
Recommended
Weight
Basis
Points
Change
Boeing (BA)
$148.28
$167.00
2.76%
12.40%
2.40%
3.14%
+74 BP
Eaton (ETN)
$56.88
$64.00
3.90%
12.00%
4.02%
4.25%
+23 BP
Fluor (FLR)
$48.39
$50.64
1.71%
6.88%
3.97%
0.00%
-397 BP
Hertz (HTZ)
$16.66
$18.84
N/A
17.50%
0.00%
3.00%
+300
BP
©2014. All rights reserved
32