Stock Analysis-Industrials
Jordan Wittbrot
Tian Xu
Agenda
•  Sector Review & Overview
•  Fluor Corporation
•  Eaton Corporation
•  Recommendation
Overview
Sector Weight
Overview of Sector Recommendation
•  The Current Industrial allocation in the SIM portfolio is 3.42%
underweighted, relative to the S&P 500
•  We recommended reducing the allocation further by 68 basis
points, to a 4% under allocation
•  Reasons:
•  Extremely cyclical industry and downturn is possible
•  P/B and P/EBITDA suggest a slight overvaluation, along with large
overvaluation within the sub sectors
Industrials is Overvalued Relative to S&P 500
•  Price to Book and Price to EBITDA
are relatively higher than the S&P
•  These figures suggest that the
Industrials sector is overvalued,
relative to the S&P
•  S&P P/E is 17.9 and P/B is 2.71
•  General Contractors is overvalued
P/E and P/B of 20 and 45,
respectively
•  Diversified Machinery is overvalued
P/E and P/B of 22.7 and 15.6,
respectively
SIM Holdings
Current SIM Holdings
Current Weight Recommended Weight Potential Up/Down Recommendaiton Fluor Corporation 442 bps
500 bps
13.50%
BUY
Eaton Corporation
0 bps 150 bps
15.70%
BUY
Fluor Corporation
Company Overview
•  Founded in 1912
•  A leading Construction and
Engineering Company
•  Business Segments
•
•
•
•
•
Oil & Gas
Industrial & Infrastructure
Government
Global Services
Power
Drivers & Risks
•  Overall Driver
•  Increased project demand
•  Consistent revenue, rather than extremely large one time projects
•  Overall Risk
•  More efficient international competitive activity
•  Oil and Gas
•  Driver: Need of pipeline for shale gas transportation
•  Industrial and Infrastructure
•  Driver: Population growth and migration to city
•  Government
•  Driver: Increased regulation requiring innovative engineering products
Stock Performance
•  S&P vs FLR over previous 6 Months
•  FLR has Underperformed
Key Financials
2013
2012
2011
Revenue
$27,351.60
$27,577.10
$23,381.40
Net Income
668
456
594
ROA
8.03%
5.51%
7.18%
Gross Profit Margin
4.99%
3.21%
4.91%
Current Ratio
1.76
1.57
1.53
Debt/Assets
53.38%
58.59%
58.15%
Operating Margin
4.35%
2.66%
4.28%
What is Backlog?
•  Backlog: a measure of the total dollar value of work to be
performed on contracts awarded and in progress
Backlog and Revenue
$45,000.00
$40,000.00
$39,483.70
$35,000.00
$30,000.00
$25,000.00
$38,199.40
$34,908.70
$34,907.10
$26,778.70
$20,000.00
26692
21990.3
25986
22232
20849.3
$15,000.00
$10,000.00
$5,000.00
$2009
2010
Backlog at end of Year
2011
Revenue
2012
2013
Fluor Corp. DCF Valuation
Valuation
•  DCF Valuation
Sensitivity to Discount Rate and Growth Rate
•  Terminal Discount Rate: 12%
•  Above market 10% due to recent
volatility and beta of 1.9
•  Terminal Growth Rate: 5%
•  Above the markets 4% due to emerging
markets growth.
•  Target Price: $74.88
•  Conservative target, relative to the 23
analyst survey range of $75-$103
•  Sensitivity Analysis
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
10.5%
$ 82.00
$ 85.21
$ 88.94
$ 93.36
$ 98.66
$ 105.13
$ 113.23
11.0%
$ 76.87
$ 79.53
$ 82.61
$ 86.20
$ 90.44
$ 95.52
$ 101.74
11.5%
$ 72.36
$ 74.60
$ 77.16
$ 80.11
$ 83.56
$ 87.63
$ 92.52
12.0%
$ 68.37
$ 70.27
$ 72.42
$ 74.88
$ 77.72
$ 81.02
$ 84.94
12.5%
$ 64.82
$ 66.44
$ 68.26
$ 70.33
$ 72.69
$ 75.41
$ 78.59
13.0%
$ 61.62
$ 63.02
$ 64.57
$ 66.33
$ 68.31
$ 70.58
$ 73.20
13.5%
$ 58.74
$ 59.95
$ 61.29
$ 62.78
$ 64.47
$ 66.38
$ 68.56
Fluor Corporation(FLR)
(millions)
Terminal Discount Rate =
Terminal FCF Grow th =
11/12/2014
Year
2013
Revenue
27,352
% Grow th
2014E
27,899
2.0%
Operating Income
1,190
Operating Margin
4.4%
Interest
Interest % of Sales
Taxes
Tax Rate
Non Controlling interest
4.4%
29,259
4.9%
1,263
4.3%
2016E
30,686
4.9%
1,300
4.2%
2017E
32,220
5.0%
1,450
4.5%
2018E
33,831
5.0%
1,522
4.5%
2019E
35,523
5.0%
1,599
4.5%
2020E
37,299
5.0%
1,678
4.5%
2021E
39,164
5.0%
1,762
4.5%
2022E
41,122
5.0%
1,850
4.5%
2023E
43,178
5.0%
1,943
4.5%
14
28
29
31
32
34
36
37
39
41
43
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
355
401
413
433
482
506
507
532
558
586
616
30.1%
32.5%
32.5%
32.5%
32.5%
32.5%
31.0%
31.0%
31.0%
31.0%
31.0%
-131.56
-171.02
(161.1)
(135.3)
(142.1)
(130.5)
(172.3)
(180.9)
(151.1)
0.6%
0.5%
0.4%
0.4%
0.4%
0.4%
0.4%
-155.32
0.57%
Net Income
1,226
2015E
12.0%
5.0%
668
% Grow th
-101.20
0.36%
0.45%
725
712
839
914
985
9.4%
-0.7%
-1.9%
17.8%
9.0%
7.8%
6.9%
1.7%
5.0%
8.5%
1,124
1,219
973
976
902
846
817
746
783
576
432
% of Rev
3.6%
3.5%
3.5%
3.5%
2.8%
2.5%
2.3%
2.0%
2.0%
1.4%
1.0%
Plus/(minus) Changes WC
375
373
310
200
226
169
142
71
63
62
65
1.4%
1.3%
1.06%
0.7%
0.7%
0.5%
0.4%
0.2%
0.2%
0.2%
0.2%
Subtract Cap Ex
289
341
403
476
322
338
355
373
587
535
432
Capex % of sales
1.1%
1.2%
1.4%
1.6%
1.0%
1.0%
1.0%
1.0%
1.5%
1.3%
1.0%
Free Cash Flow
977.50
% Grow th
1.6%
NPV of Cash Flow s
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
6,502
5,576
12,078
9.19%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
15.9
18.1
4.3
4.9
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Dow nside) to DCF
Debt
Cash
Cash/share
993.21
161.3
$
$
65.95
74.88
13.5%
497
1,900
11.78
1,036.05
4.3%
54%
46%
100%
1,074
1,071
Add Depreciation/Amort
% of Sales
1,024
1,053
0.4%
731
1,109.52
7.1%
1,193.08
7.5%
1,252.73
5.0%
1,305.10
4.2%
1,355.43
3.9%
1,203.89
-11.2%
1,103.71
-8.3%
Terminal Value
Free Cash Yield
14.6
16.5
4.2
4.8
14.7
16.6
4.0
4.7
1,154.58
4.6%
17,319
6.67%
Terminal P/E
14.2
Terminal EV/EBITDA
6.7
Recommendation- BUY
•
•
•
•
Investment Thesis
DCF states FLR is undervalued
with upside potential of 13.5%
Architectural Billing Index hit the
highest level since 2007 recently
Emerging market growth opens
further opportunity
The power sector of business is
consistently increase amount of
products
•
•
•
•
•
Risks to Recommendation
Slowing or depreciation of U.S. or
global economy
Decrease in project demand
Rise in commodity prices
Rise in interest rates
Large level of backlog remains or
increases
Eaton Corporation
Company Overview
•  Founded in 1911
•  A leading Power Management
Company
•  Headquartered in Ireland
•  101,000 employees
•  Business Segments:
•
•
•
Aerospace
Electrical
Vehicle
•
Hydraulics
About Eaton’s Sectors
•  Two Sectors: Electrical and Industrial
•  Electrical
•  Distributes power and makes electrical equipment
•  Ex. Circuit breakers, Panel Boards
•  Industrial
•  Hydraulics for agriculture, mining, forestry, etc
•  Design and manufacture aerospace components for hydraulics and fuel parts
•  Manufactures commercial vehicle powertrain systems
•  Ex. Cylinder heads, engine valves, safety controls, etc.
Recent News
•  Electrical Sector
•  Revenue grew 74%
•  Largely due to acquisitions of Cooper, Rolec and Gycom
•  Hydraulics
•  Sales increase of 1%
•  Strong growth in Latin America aided in this
•  Aerospace
•  Sales increased 3%
•  Expansion of commercial aircraft markets
•  Defense spending weakened
•  Vehicle
•  Sales declined 2%
•  Weaker commercial vehicle demand
Stock Performance (Previous 3 Months)
Key Financials
2013
•  Revenue made a large leap
•
Largely due to acquisitions
•  Operating margin is lowering
•
Not an issue if revenue remains
high
2012
2011
$22,046.00 $16,311.00 $16,049.00
Revenue
1873
1220
1352
Net Income
9.38%
10.18%
Operating Margin 9.74%
Eaton DCF Valuation
Terminal Discounted Rate =
Terminal FCF =
Eaton Corp (ETN)
Year
Revenue
% Grow th
2014E
2015E
DCF Valuation
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
23865
8%
25696
6%
27238
6%
28055
3%
28896
3%
29763
3%
30656
3%
31576
3%
32523
3%
33499
3%
3260
15%
4054
17%
4817
19%
4630
17%
4208
15%
4334
15%
4464
15%
4292
14%
4105
13%
4228
13%
4355
13%
443
2%
415
2%
573
2%
545
2%
561
2%
578
2%
595
2%
613
2%
632
2%
650
2%
670
2%
(460)
35%
(274)
35%
(514)
35%
1811
35%
1669
35%
1719
35%
1771
35%
1717
35%
1658
35%
1707
35%
1759
35%
2247
3155
40%
3771
20%
3364
-­‐11%
3100
-­‐8%
3193
3%
3289
3%
3188
-­‐3%
3079
-­‐3%
3171
3%
3266
3%
1328
6%
(442.79)
-­‐2%
664
3%
1432
6%
(477.29)
-­‐2%
716
3%
1542
6%
(513.92)
-­‐2%
771
3%
1634
6%
(544.75)
-­‐2%
817
3%
1683
6%
(561.09)
-­‐2%
1122
4%
1734
6%
(577.93)
-­‐2%
1156
4%
2083
7%
(595.27)
-­‐2%
1191
4%
2146
7%
(919.69)
-­‐3%
1226
4%
2210
7%
(947.28)
-­‐3%
947
3%
2468
3393
37%
4028
19%
3636
-­‐10%
3100
-­‐15%
3193
3%
3586
12%
3188
-­‐11%
3394
6%
20483
15392
35874
7.96%
57%
43%
100%
% Grow th
NPV of Cash Flows
3.00%
22140
8%
% Grow th
Add Depreciation/Amort
11.00%
476.7
$65.07
$75.26
15.7%
Terminal Value
43703
Free Cash Yield
8%
Terminal P/E
13.38
Terminal EV/EBITDA
7.81
2277
2345
7%
7%
(975.69) (1004.96)
-­‐3%
-­‐3%
976
1005
3%
3%
3496
3%
3601
3%
Recommendation- BUY
Investment Thesis
•  DCF states that Eaton
Corporation is undervalued
with an upside potential of
15.7%
•  Analysts believe the vehicle
sector is expecting high growth
•  A consistent growth in the
dividend
Risks to Recommendation
•  A slow or depreciating U.S or
global Economy
•  Rise in interest rates
•  Aerospace has consistently
underperformed and may
continue to do so
Dividend Growth
Recommendations
Adjustments to SIM Portfolio
Summary
Stock
Fluor Corporation Eaton Corporation
Current Price
Target Price
Expected Return
Current Weight
Reccommended Recommendation
Weight
$65.95 $74.88 13.50%
442 bps
500 bps
BUY
$65.07 $75.26 15.70%
0 bps
150 bps
BUY
Questions?