STOCK ANALYSIS - INDUSTRIALS
Sukumar Madugula
MBA 7225 – Student Stock Market
July 22, 2015
• Overview
• SIM Holdings & Performance
– Eaton Corp (ETN)
– Fluor Corp (FLR)
•
•
•
•
Business Analysis
Economic Analysis
Financial Analysis
Valuation
• Stocks to Consider
– Paccar Inc. (PCAR)
– Precision Castparts Corp (PCP)
• Recommendation
Overview
Industrials Sector
• Cyclical
• Capital Goods - manufacture and
distribution including
–
–
–
–
–
Aerospace & Defense
Construction
Engineering & Building Products
Electrical Equipment
Industrial Machinery
• Services
– Transportation
– Printing, Office Supplies
– Couriers
Overview
Financials,
16.87%
Health
Care,
14.65%
Cons Discr,
12.69%
Energy,
8.16%
Materials,
2.76%
Industrials,
8.84%
Con
Staples,
9.26%
Utilities,
2.95%
Telecom,
3.06%
Info Tech,
20.77%
SIM as of 7/18/15
As of 7/18/15, SIM has 8.84%. Recommend Overweight +175 bps to Marketweight
Overview
Business Analysis
Porter’s Five Forces
ETN
• Among leaders in electrical equipment
• Diverse segments and markets
• Established incumbent
• Among top gross margins efficiencies
• Innovates for competitive edge
FLR
• Leader in complex construction and engineering projects
• Diverse segments and markets
• Fixed Bid contracts attracting repeat orders
• Established incumbent
SIM Holdings
• Fluor Corp (FLR)
• Eaton Corp (ETN)
•
•
A leading Power Management Company since
1911
Segments & 2014 Sales
Asia
Pacific,
12%
Europe,
22%
•
•
A leading Construction and Engineering
Company since 1912
Backlog: a measure of the total dollar value of
work to be performed on contracts awarded
and in progress
Backlog by Segments & Region
•
Drivers
•
United
States,
52%
Latin
America, Canada,
5%
9%
•
Drivers
–
–
•
–
Among industry’s top 20 in operating yield
Profitable growth in Aerospace and Vehicle segments
–
–
–
Risks
–
–
–
–
Strong dollar makes products unaffordable in 48% intl mkts
Increase in interest rates
Challenging global markets
Strong domestic competition due to cheaper imports
•
Client investments particularly in Oil & Gas, Industrials
and Government segments
Emerging markets’ investments for population growth
Renew infrastructure in developed countries.
Competitive cost control strategies/Fixed Bids
Risks
–
–
–
–
Cyclical Markets.
Risk of overruns on Fixed Cost projects
Low revenues causing headwinds on margins
Interest rate increase/strong dollar
SIM Holdings - Performance
•
ETN lagged both Industrials and S&P
500 by almost 20% over 1 year
•
•
•
•
FLR lagged by over 35%
•
•
•
•
•
•
PCAR – 1Q revenues trimmed by $281 M due to
unfavorable forex
PCP suffered headwinds in Oil & Gas and Pipe
investments, flat organic sales.
AOS outperformed Industrials and S&P 500 by
almost 50% over 1 year but on hold
15% loss in ETN’s Hydraulics unit
Overall strong dollar/unfavorable
currency exchange rates
Sluggish growth overseas markets
2014 revenue declined 21.28%
Decline in Infra’s metals + mining
Strong $ reduces backlog by $ 1.6B
Economic Analysis
10% appreciation in the dollar over the course of a
three-month period slices half a percentage point off
of the year's total growth rate. If the rise in the dollar
is maintained, it will take another 0.2 percentage
point off growth the following year.
With the Fed estimating the economy's long-run
growth trend at around 2% to 2.3%
– DJ Business News – 7/17/15
Financial Analysis
Current SIM Holdings
Current Weight
Current Price
Target Price
Recommended Wt. Upside
Recommendation
Eaton Corp
416 bps
$ 65.11
$ 78 (consensus)
($79.81 - mine)
500
bps
19.8 %
Hold
Fluor Corp
467 bps
$ 50.27
$ 70
500
bps
39 %
Sell
Eaton (ETN)
Fluor (FLR)
Valuation
Terminal
Discount
Rate =
Stock: Eaton Corp (ETN)
ETN
• Target Price: $79.81
• Used Discount Rate of 10.25%
• Terminal FCF Growth of 3.25%
• Implied P/E of 15.3
Analyst: Sukumar Madugula
7/18/2015
Year
Revenue
2015E
21,891
2016E
22,732
% Growth
EBT
2,469
2,677
11.3%
11.28%
Operating Margin
222
9.0%
2,247
985
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
2,568
340
11.0%
2,658
3,311
11.8%
10.80%
352
11.0%
2,751
3,427
11.8%
11.20%
364
11.0%
2,847
30,055
3.5%
3,547
377
2,947
31,107
3.5%
11.8%
11.20%
11.0%
3.5%
3,671
11.8%
11.00%
390
11.0%
3,050
2025E
11.8%
11.00%
404
11.0%
3,156
11.0%
3,267
7.6%
0.2%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
1,063
1,100
1,139
1,179
1,220
1,263
1,307
1,352
1,400
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
(4)
(205)
(171)
(122)
(127)
(131)
(136)
(140)
(145)
(150)
(156)
0.0%
-0.9%
-0.7%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
-0.5%
652
672
692
734
759
786
813
842
871
902
933
3.0%
3.1%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
2,576
2,528
2,763
2,812
2,911
3,013
3,118
3,227
3,340
3,457
3,578
-1.9%
9.3%
1.8%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
Terminal
Value
52,775
Free Cash
Yield
6.78%
Terminal P/E
16.2
48%
NPV of terminal value
Projected Equity Value
19,890
38,056
52%
100%
8.30%
Current P/E
Projected P/E
13.8
16.9
13.0
16.0
12.1
14.8
Current EV/EBITDA
Projected EV/EBITDA
11.8
14.0
11.0
13.1
10.3
12.2
Debt
Cash
Cash/share
328
11.0%
3,199
11.8%
10.80%
29,039
3.5%
2024E
6.0%
18,165
Current Price
Implied equity value/share
Upside/(Downside) to DCF
317
3,091
11.8%
10.80%
28,057
3.5%
2023E
1,023
NPV of Cash Flows
Shares Outstanding
2,986
27,108
3.5%
20122E
4.5%
% Growth
Free Cash Flow Yield
26,191
3.5%
2021E
3.0%
Capex % of sales
Free Cash Flow
2020E
11.8%
10.40%
11.0%
2,563
3.25%
2019E
25,306
2,885
317
Terminal FCF
Growth =
3.5%
12.2%
12.19%
11.0%
% Growth
Add Depreciation/Amort
24,450
2,880
2,382
2018E
3.9%
11.8%
11.77%
294
Tax Rate
Net Income
23,623
3.8%
EBT Margin
Taxes
2017E
10.25%
Terminal
EV/EBITDA
11.8
476.8
Target Price:
$ 79.81
Assumptions: ETN has the lowest P/E ratio among its peers. S&P P/E is higher at 18.8 as opposed to ETN’s 15.
$ 65.11
$ 79.81
23%
8,024
781
1.64
Valuation
Valuation
TTM
20
Indust
rials
17.73
ETN
FLR
PCP
PCAR
P/E
S&P
500
18.81
17.03
15.34
18.52
15.79
P/B
2.92
3.92
2.01
2.90
2.69
3.57
P/S
1.88
1.64
1.44
0.45
3.04
1.27
P/EBITDA
10.26
9.69
10.73
4.46
10.36
9.69
P/E
P/EBITDA
10
5
0
Profitability
Gross
Margin
Operatin
g Margin
EBITDA
Margin
Profit
Margin
ROE
P/S
15
S&P 500 Industrials
TTM
P/B
S&P
500
Indust
rials
28.27
ETN
FLR
PCP
PCAR
30.60
6.50
32.51
15.18
12.39
11.52
5.66
26.42
10.43
16.66
7.81
5.60
25.38
10.62
15
7.39
7.95
3.32
15.44
7.15
10
16.27
11.01
20.84
13.85
20.30
ETN
FLR
Gross Margin
Operating Margin
Profit Margin
Return on Equity
PCP
PCAR
EBITDA Margin
35
30
25
20
5
0
S&P 500 Industrials
ETN
Sector Revenue/Employee is 380,135 while PCAR’s is 815,322
FLR
PCP
PCAR
Stocks to Consider
• Paccar Inc. (PCAR)
• Precision Castparts (PCP)
•
Headquartered in Bellevue, WA, PACCAR Inc. is the third
largest manufacturer of heavy-duty and light/medium
trucks, with plants in US, Europe, Australia, Canada,
Brazil and Mexico. Kenworth, Peterbilt and DAF trucks.
•
•
Two segments
Precision Castparts Corp. is a market leader in manufacturing
large, complex structural investment castings and airfoil
castings used in jet aircraft engines. The company expanded
into the industrial gas turbine, fluid management, industrial
metalworking tools and machines and other metal products
markets.
•
Three segments
–
–
•
–
–
–
Drivers
–
–
–
–
–
•
Truck, Parts and Other
Financial Services
76 year track record of generating profits
Record 2014 sales and high Q1 growth
Well positioned in key non-US markets due to
strategic investments
Loyal customer base in US and Canada (28%
market share)
No debt
•
–
–
–
–
Drivers
–
–
–
–
Risks
–
5.8% declining sales in Europe.
Reduced guidance by 20000 trucks in South
America
Shortage or increase in raw material prices
Unfavorable currency exchange rates
•
Investment Cast Products
Forged Products
Airframe Products
Low cost, high quality, complex critical components
Skin and fasteners used in every aircraft
Strategic acquisitions to widen sustainable moat
Backlog and strong customer relationships e.g. GE, Rolls Royce,
Boeing
Very cost conscious for high operating margins
Risks
–
–
–
Decline in Industrial investment due to low energy prices
Increase in interest rates
Unfavorable currency exchange rates
Stocks to Consider
To Consider for 117 bps
Current Weight
Current Price
Target Price
PCAR
0 bps
$ 64.48
$ 71
500
10 %
Buy
PCP
0 bps
$ 193.45
$ 225
500
16 %
Buy
PCAR
PCP
Recommended Wt.
Up/Downside
Recommendation
Recommendation
• SIM is currently underweight. Recommend overweight +275 bps to match
S&P recommended market weight (since we can +100 bps for sector)
• Replace FLR with PCP as a better buy in long term
• Buy PCAR for 275 bps.
• Reasons
– PCAR’s consistent trajectory record of profits for 76+ years
– Tempted to sell ETN but will wait for Q2 earnings report on 7/29/15
– FLR and PCP dependent on recovery of Oil & Gas investments from higher
energy costs but PCP has better margins and higher returns
– PCAR dependent on lower diesel costs and trucking companies replacing fleets
with higher efficiency vehicles (85-90% availability)
– Expect More investments prior to interest rate increases to avoid capital
increases.