INDUSTRIALS
US
SS
SECTOR
C O
Hugh Garside
MBA 7225 – Student Stock Market
June 24, 2014
•Sector
S t Overview
O
i
•Business Analysis
y
•Economic Analysis
•Financial Analysis
•Valuation
Valuation Analysis
•Recommendation
2
SECTOR
OVERVIEW
3
Sector Overview
Industrials Sector
•
Cyclical in Nature
•
Producing
g Goods or Services
used in Construction and
Manufacturing
•
Types of Industries
• Goods
•
•
•
•
Aerospace and Defense
Building Materials
Construction Machinery and Heavy
Trucks
Services
•
•
•
Logistics
L
i ti
Printing Services
Data Processing
4
Sector Overview
Sector Name
S&P 500
C
Consumer
Discretionary
11.7%
%
Consumer Staples
9.6%
Energy
11 0%
11.0%
Financials
16.1%
Health Care
13.2%
Industrials
10.6%
Information Technology
18.7%
M t i l
Materials
3 5%
3.5%
Telecommunication Services
2.4%
Utilities
3 1%
3.1%
SIM
11.3%
%
9.5%
9 1%
9.1%
14.8%
14.9%
7.4%
22.3%
3 0%
3.0%
2.8%
3 4%
3.4%
+/-0.4%
%
-0.1%
-1 9%
-1.9%
-1.4%
1.7%
-3.2%
3.6%
-0.5%
0 5%
0.4%
0 3%
0.3%
Source: Bloomberg
5
Sector Overview
Top Ten Companies in the Industrials Sector
Company
General Electric Co
United Technologies Corp
Boeing Co
3M Co
United Parcel Service Inc
Union Pacific Corp
Honeywell Intl Inc
Caterpillar
p
Inc
Danaher Corp
Emerson Electric Co
Symbol
GE
UTX
BA
MMM
UPS
UNP
HON
CAT
DHR
EMR
Subtotal
Mrkt. Cap.
267.54
107.38
95.42
94.27
93.79
91.21
73.82
67.90
56.19
47.59
995.11
%
13.91%
5.58%
4.96%
4.90%
4.88%
4.74%
3.84%
3.53%
2.92%
2.47%
51.72%
SIM Holdings in the Industrials Sector
Company
Precision Castparts
Fl
Fluor
Corp
C
Total Industrials Market Cap
Symbol
PCP
FLR
Subtotal
Mrkt. Cap.
38.00
12 40
12.40
50.40
%
1.98%
0 64%
0.64%
2.62%
Total
1,923.88
100.00%
Source: Bloomberg
6
BUSINESS
ANALYSIS
7
Business Analysis
Business Life Cycle
Industrials
8
Business Analysis
Porters Five Forces Analysis
AT
TTRIBUTES
Force
Threat Level
BARRIERS TO ENTRY
HIGH
(+) Start up costs are
extremely high due to
significant capital
expenditure
(+) Established
companies with brand
awareness
SUPPLIER POWER
MEDIUM
(+) Most raw materials
are easily obtainable
(+) Switching costs are
low
BUYER POWER
LOW
(-) Demand is cyclical.
Need for goods is
dependent upon the
economy
(+) Because demand is
cyclical, buyer's
dependence upon the
industrial companies is
high when economy
spikes
SUBSTITUTES
MEDIUM
(-) Products can be
replicated or substituted
with new technologies
RIVALRY
HIGH
(+) Incumbent companies
have established
relationships with
customers
(+) Industrial materials
(-) Consumers want lower
must be readily available cost products which can
creating a desire to work cause a price war
with an established
between companies and
business to ensure
shrink margins
prompt delivery
(+) is good for Industry
(-) is bad for Industry
9
ECONOMIC
ANALYSIS
10
Economic Analysis
11
Economic Analysis
12
Economic Analysis
13
FINANCIAL
ANALYSIS
14
Financial Analysis
Industrials
S&P 500
15
Financial Analysis
Revenue Growth %
2006 - 2013
20.0%
15.0%
10.0%
5 0%
5.0%
0.0%
-5.0%
2006
2007
2008
2009
2010
2011
2012
2013
-10.0%
-15
15.0%
0%
-20.0%
S&P 500
Industrials
Revenue Growth Table
S&P 500
2005
826 88
826.88
Industrials
198.79
2006
878 12
878.12
6.20%
212.03
6.66%
2007
951 43
951.43
8.35%
241.23
13.77%
2008
2009
990 77 903.15
990.77
903 15
4.13% -8.84%
257.33 222.14
6.67% -13.68%
2010
2011
2012
2013
CAGR
939 88 1019
939.88
1019.68
68 1064
1064.25
25 1103
1103.58
58
3 67%
3.67%
4.07%
8.49%
4.37%
3.70%
235.7 256.59 272.26 282.19
4.48%
6.10%
8.86%
6.11%
3.65%
Source: Bloomberg
16
Financial Analysis
Gross Margin %
2005-2013
34.00
32.00
30.00
28.00
26.00
24.00
22.00
20 00
20.00
2005
2006
2007
2008
2009
2010
S&P 500
Industrials
2011
2012
2013
Gross Margin % Table
S&P 500
2005
31.27
Industrials
29.07
2006
31.11
-0.51%
28.12
-3.27%
2007
31.39
0.90%
27.60
-1.85%
2008
30.49
-2.87%
27.52
-0.29%
2009
31.69
3.94%
25.45
-7.52%
2010
32.63
2.97%
27.78
9.16%
2011
32.31
-0.98%
27.80
0.07%
2012
31.95
-1.11%
26.26
-5.54%
2013
CAGR
32.06
0.31%
0.34%
27.00 -0.92%
2.82%
Source: Bloomberg
17
Financial Analysis
Return on Equity
2005 to 2013
25
20
15
10
5
0
2005
2006
2007
2008
S&P 500
2009
2010
Industrials
2011
2012
2013
Return on Equity Table
S&P 500
Industrials
2005
16.15
2006
2007
2008
2009
2010
2011
2012
2013 CAGR
17.89
13.51
4.29
10.91 14.21 14.97 13.55 15.28 -0.69%
10.77% -24.48% -68.25% 154.31% 30.25% 5.35% -9.49% 12.77%
16.3
18.93
19.61
16.77
13.72 16.42 18.22 17.43 19.67 2.38%
16 13% 3.59%
16.13%
3 59% -14.48%
14 48% -18.19%
18 19% 19
19.68%
68% 10
10.96%
96% -4.34%
4 34% 12.85%
12 85%
Source: Bloomberg
18
VALUATION
ANALYSIS
19
Valuation Analysis
Absolute Values
Index
S&P 500
Industrials
S&P 500
Industrials
S&P 500
Industrials
S&P 500
S&
Industrials
S&P 500
Industrials
S&P 500
Industrials
S&P 500
Industrials
S&P 500
Industrials
S&P 500
Industrials
Valuation Ratio
Price/Earnings
Price/Earnings
Price/Cash Flow
Price/Cash Flow
Price/Sales
Price/Sales
Price/EBITDA
/
Price/EBITDA
Price/Book
Price/Book
EV/Sales
EV/Sales
EV/EBITDA
EV/EBITDA
Dividend Yield
Dividend Yield
Free Cash Flow Yield
Free Cash Flow Yield
2005
16.90
18.57
13.60
10.21
1.51
1.46
7.100
9.01
2.73
3.02
2.43
1.64
11.43
10.09
1.80
1.89
3.85
6.13
2006
16.60
18.09
16.01
11.46
1.62
1.52
66.99
99
9.28
2.85
3.24
2.56
1.67
11.06
10.20
1.77
1.92
3.50
4.99
2007 2008 2009 2010 2011 2012 2013 Current
17.35 15.40 18.37 15.10 12.79 14.10 17.05 17.95
17.24 9.97 16.81 17.21 13.56 14.03 18.06 18.63
15.92 5.71 8.73 8.32 6.98 8.41 9.21
9.75
10.40 6.20 8.66 10.02 8.88 9.74 11.74 11.97
1.54 0.91 1.23 1.34 1.23 1.34 1.67
1.76
1.47 0.81 1.09 1.28 1.14 1.21 1.60
1.65
66.69
69 4.94
9
66.57
5
66.95
95 66.488 7.155 88.68
68
99.05
05
9.21 5.20 7.98 8.21 7.15 7.73 9.67
9.83
2.77 2.00 2.16 2.18 2.06 2.14 2.58
2.73
3.31 2.27 2.47 2.75 2.65 2.62 3.19
3.30
2.53 1.47 1.68 1.77 1.60 1.69 2.02
2.11
1.61 1.37 1.22 1.39 1.26 1.35 1.74
1.83
10.96 7.98 8.91 9.21 8.42 9.02 10.45 10.86
10.11 8.84 8.91 8.95 7.91 8.65 10.48 10.89
1.93 3.15 2.12 1.88 2.12 2.24 1.89
1.91
1.95 3.63 2.48 1.98 2.38 2.43 1.87
1.95
2.11 10.25 6.83 7.87 9.11 6.77 6.94
6.50
5.80 9.60 7.75 6.70 6.90 5.69 5.19
5.16
Avg
16.16
16.22
10.26
9.93
1.42
1.32
7.06
06
8.33
2.42
2.88
1.99
1.51
9.83
9.50
2.08
2.25
6.37
6.39
CAGR
0.67%
0.04%
-3.63%
1.78%
1.72%
1.37%
2.73%
3%
0.97%
0.00%
0.99%
-1.56%
1.56%
1.23%
-0.57%
0.85%
0.66%
0.35%
5.99%
-1.90%
Source: Bloomberg
20
Valuation Analysis
Industrials Relative to S & P 500
Valuation Ratio 2005 2006 2007 2008 2009 2010 2011 2012 2013 High
Price/Earnings
1 10 1.09
1.10
1 09 0.99
0 99 0.65
0 65 0.92
0 92 1.14
1 14 1.06
1 06 1.00
1 00 1.06
1 06 1.14
1 14
Price/Cash Flow
0.75 0.72 0.65 1.09 0.99 1.20 1.27 1.16 1.27 1.27
Price/Sales
0.97 0.94 0.95 0.89 0.89 0.96 0.93 0.90 0.96 0.97
Price/EBITDA
1 27 1.33
1.27
1 33 1.38
1 38 1.05
1 05 1.21
1 21 1.18
1 18 1.10
1 10 1.08
1 08 1.11
1 11 1.38
1 38
Price/Book
1.11 1.14 1.19 1.14 1.14 1.26 1.29 1.22 1.24 1.29
EV/Sales
0.67 0.65 0.64 0.93 0.73 0.79 0.79 0.80 0.86 0.93
EV/EBITDA
0 88 0.92
0.88
0 92 0.92
0 92 1.11
1 11 1.00
1 00 0.97
0 97 0.94
0 94 0.96
0 96 1.00
1 00 1.11
1 11
Divident Yield
1.05 1.08 1.01 1.15 1.17 1.05 1.12 1.08 0.99 1.17
Free Cash Flow Yield 1.59 1.43 2.75 0.94 1.13 0.85 0.76 0.84 0.75 2.75
Low Median Current
0 65
0.65
1 00 1.04
1.00
1 04
0.65
1.01 1.23
0.89
0.93 0.94
1 05
1.05
1 19 1.09
1.19
1 09
1.11
1.19 1.21
0.64
0.76 0.87
0 88
0.88
0 97 1.00
0.97
1 00
0.99
1.08 1.02
0.75
1.23 0.79
Source: Bloomberg
21
Recommendation
22
Recommendation
•
•
•
SIM is currently 320 basis points underweight; therefore
portfolio should be balanced
Reasons to consider increasing
g the weight
g
• Industrials are cyclical and tied to a strong economy
• Positive economic indicators
• Unemployment contracting
• GDP growing
• Maintain diversification of portfolio
Reasons to consider maintaining the weight
• More
M
expensive
i th
than the
th S & P 500 on mostt
indicators
• Economic indicators could be wrong
23