INDUSTRIALS
Haoyu Mi, Ashley L. Myers ,
Xin Zou, Aditya Parkhe
AGENDA
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Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
OVERVIEW
SECTOR WEIGHT
Total Market Cap
P/E Ratio
Total Revenue
Total Revenue 1YR Growth
7.72T
20.14
9.17T
1.31%
S&P 500 Sector Weight
Telecommunicat
ion Services
2%
Materials Utilities
3%
3%
Information
Technology
19%
Industrials
10.83%
Consumer
Discretionary
12%
SIM Sector Weight
Telecommunica
tion Services
1%
Materials
3%
Consumer
Staples
10%
Energy
10%
Health Care
14%
Financials
16%
Utilities
Cash
3%
2%
Consumer
Discretionary
13%
Consumer
Staples
10%
Energy
9%
Information
Technology
20%
Industrials
8.69%
Health Care
14%
Financials
16%
10Y PERFORMANCE
1Y PERFORMANCE
INDUSTRIES
Aerospace & Defense
Building Products
Construction & Engineering
Capital Goods
Electrical Equipment
Industrials
Industrial Conglomerates
Machinery
Trading Companies & Distributors
Commercial &
Professional Services
Commercial Services & Supplies
Professional Services
Air Freight & Logistics
Airlines
Transportation
Marine
Road & Rail
Transportation Infrastructure
INDUSTRY GROUPS
BIG COMPANIES
Company Name
Market Cap (m)
Primary Industry
General Electric Company
260,421.1
Industrial Conglomerates
United Technologies Corp.
104,217.9
Aerospace and Defense
The Boeing Company
96,761.5
Aerospace and Defense
United Parcel Service, Inc.
90,044.9
Air Freight and Logistics
3M Company
87,554.9
Industrial Conglomerates
Union Pacific Corporation
81,974.1
Railroads
Honeywell International Inc.
74,186.7
Aerospace and Defense
Caterpillar Inc.
61,440.2
Construction and Farm Machinery and Heavy Trucks
Danaher Corp.
53,355.8
Industrial Conglomerates
Lockheed Martin Corporation 52,357.8
Aerospace and Defense
BUSINESS
ANALYSIS
KEY DRIVERS
RISK FACTORS
Key Performance Drivers for the companies in this sector:
• Gross Domestic Product (GDP)
• Government Spending (Infrastructure, Military)
• Commodity Prices (Oil, Metals)
Risk Factors in this sector:
• Environmental Issues
• Government Regulation & Law
• Competition from Emerging Market
• Cost of raw materials, components, equipment, labor
LIFE CYCLE
Maturity Phase
(1) Slow growth
Introduction
Growth
Maturity
Decline
(2) Consistent returns
Industry Output
(3) Low number of new entrants
(1) Dominated by a few large
companies
(2) Grow through M&A
(3) Sector slightly cyclical
(4) Influenced by economic
situation
Time
LIFE CYCLE
Maturity Phase
(1) Slow growth
(2) Consistent returns
(3) Low number of new entrants
(1) Dominated by a few large
companies
(2) Grow through M&A
(3) Sector slightly cyclical
(4) Influenced by economic
situation
(S&P DOW JONES INDICES)
LIFE CYCLE
Maturity Phase
(1) Slow growth
(2) Consistent returns
% Market Cap
(3) Low number of new entrants
(1) Dominated by a few large
companies
(2) Grow through M&A
(3) Sector slightly cyclical
(4) Influenced by economic
situation
28%
72%
PORTER’S FIVE
FORCES
(1) Barriers to Entry : HIGH
a. High start up costs
b. Significant capital requirement
c. Economies of scale
(2) Buyer Power: LOW TO MODERATE
a. Limited number of brands
b. Products are relatively important to buyer
c. Switching costs are low
(3) Supplier Power: LOW
a. High level of substitutes
b. Large volume required by single company
c. Inputs relatively consistent
(4) Substitutes : LOW TO MODERATE
a. Switching costs are low
b. Hard to substitute over the short run
(5) Rivalry: MODERATE TO HIGH
a. Mature industry dominated by several
global brands
b. High exit barriers
ECONOMIC
ANALYSIS
S&P 500 (0.936)
GDP (0.393)
INDUSTRIAL
PRODUCTION (0.512)
CAPACITY UTILIZATION
PERCENTAGE (0.499)
PURCHASING MANAGERS
INDEX (0.595)
CAPITAL SPENDING(0.471)
DURABLE GOODS NEW
ORDERS (0.410)
MANUFACTURING &
TRADE INVENTORY(-0.54)
OTHER
Index
Correlation
Industrial Production Business Equipment
0.339
Imports Industrial Supplies
0.524
Unit auto inventory production
0.458
Crude Oil Price
0.628
Unemployment rate
-0.469
FINANCIAL
ANALYSIS
FINANCIAL ANALYSIS
Earnings
Growth Actual
Industrials
Initial Earning
Growth Estimate
Revenue Growth
Actual
Initial Revenue
Growth Estimate
3%
6%
2%
4%
Aerospace & Defense
10%
2%
4%
3%
Air Frieght & Logistics
2%
5%
3%
6%
Airlines
17%
32%
1%
3%
Building Products
Commercial Services & Supplies
Constructin & Engineering
51%
0%
12%
48%
6%
20%
8%
-2%
2%
7%
-1%
4%
9%
15%
9%
13%
Industrial Conglomerates
-6%
3%
-2%
2%
Machinery
-9%
0%
-2%
1%
Marine
18%
18%
7%
8%
Professional Services
16%
14%
0%
5%
3%
4%
6%
7%
17%
-12%
18%
33%
8%
8%
11%
8%
Electrical Equipment
Road & Rail
Trading Companies & Distributors
Transportation Infrastructures
FINANCIAL ANALYSIS
Operating Margin over 10 years
compared to S&P500
Profit Margin over 10 years
compared to S&P500
FINANCIAL ANALYSIS
Cash Flow per share over 10 years
compared to S&P500
Capital Expenditures over 10 years
compared to S&P500
FINANCIAL ANALYSIS
R&D Expenditures over 10
years compared to S&P500
ROE over 10 years compared
to S&P500
VALUATION
ANALYSIS
INDUSTRY ANALYSIS
Industry
Aerospace/Defense - Major Diversified
Aerospace/Defense Products & Services
Cement
Diversified Machinery
Farm & Construction Machinery
General Building Materials
General Contractors
Heavy Construction
Industrial Electrical Equipment
Industrial Equipment & Components
Lumber, Wood Production
Machine Tools & Accessories
Manufactured Housing
Metal Fabrication
Pollution & Treatment Controls
Residential Construction
Small Tools & Accessories
Textile Industrial
Waste Management
Market
Cap
16833.21B
341.46B
70.19B
34179.03B
1395.74B
7982.52B
4583.17B
888.74B
91.17B
107.57B
91.27B
83.32B
774.24M
825.40B
46.45B
2333.02B
17.99B
1098.36B
243.96B
Price to
P/E
Book
14.1
19.3
520.8
21.5
10
133.1
24.5
39.4
32.3
30.5
34.6
17.4
0
22.2
34.9
11.2
23.5
47
25.8
-49.32
-27.81
5.84
36.54
5.18
22.04
6.4
4.4
12.76
25.11
4.6
22.83
4.05
5.77
5.12
2.01
6.08
4.73
-9.25
Price To Free
Cash Flow
(mrq)
21.9
60.1
-37.2
57.2
35.4
1730.1
-156.7
-159.6
-709.7
-43.7
-403.9
32.8
99.4
-23.9
62.4
-12.7
52.3
38.3
1038.8
ROE
(%)
19.8
24.7
0.2
14.5
28
3.2
11.8
8.3
10.7
10.2
13.1
14.1
-0.1
12.9
12.2
21
17.3
6.1
9
Net Profit
Debt to
Margin
Equity
(mrq)
7.1
63.775
6.3
71.449
0.1
55.334
9.3
692.486
8.6
181.03
1.2
64.485
4
95.681
1.8
249.612
5
72.914
5.7
54.639
7
113.782
7.2
73.376
0
28.524
7.2
16.347
6.5
20.722
13.2
25.773
8.7
31.387
3.4
83.89
4
203.354
INDUSTRY ANALYSIS
Historical Comparison:
Industrials > Key Stats & Ratios
Trading Multiples
TEV/Total Revenue
TEV/EBITDA
TEV/EBIT
P/E
P/BV
P/TangBV
Profitability
Return on Assets %
Return on Capital %
Return on Equity %
Margin Analysis
Gross Margin %
EBITDA Margin %
EBITA Margin %
EBIT Margin %
Earnings from Cont. Ops Margin %
Net Income Margin %
Levered Free Cash Flow Margin %
Unlevered Free Cash Flow Margin %
CY2010
1.1x
9.5x
13.6x
16.1x
2.0x
2.5x
CY2011
1.0x
8.7x
12.3x
13.8x
1.7x
2.1x
CY2012
1.0x
9.3x
13.4x
15.1x
1.8x
2.2x
CY2013
1.3x
10.6x
15.0x
17.5x
2.1x
2.8x
Latest
1.1x
10.2x
14.5x
16.7x
1.9x
2.4x
3.6%
5.4%
11.1%
3.4%
5.3%
10.3%
3.2%
4.9%
9.1%
3.8%
5.6%
11.2%
5.0%
7.7%
9.1%
15.6%
9.9%
6.4%
6.4%
3.4%
2.8%
(2.3%)
(1.0%)
14.6%
9.2%
6.1%
6.1%
3.2%
2.9%
(0.9%)
0.3%
13.4%
8.4%
5.0%
5.0%
2.6%
2.3%
(2.0%)
(0.8%)
16.1%
8.0%
5.2%
5.2%
3.4%
3.3%
0.3%
0.9%
12.9%
8.0%
4.3%
4.3%
1.6%
1.3%
(0.9%)
0.2%
COMPANY ANALYSIS
Major Companies in the sector at a glance:
GE
UTX
BA
UNP
MMM
HON
UPS
CAT
LMT
EMR
SP500
Trailing P/E Forward P/E
18.47
13.88
18.41
15.88
21.74
15.69
18.88
14.54
19.58
15.95
19.02
15.24
20.75
16.11
16.86
14.07
17.99
14.62
22.77
15.06
17.71
15.65
P/S
1.74
1.67
1.11
3.64
2.80
1.87
1.58
1.10
1.16
1.80
P/B
1.93
3.28
6.45
3.78
4.95
4.16
24.13
2.94
10.66
4.15
1.65
2.7
P/CF
22.73
18.19
16.07
24.80
32.15
22.00
25.40
9.61
14.45
13.94
RECOMMENDATIONS
RECOMMENDATIONS
• Currently SIM portfolio is 2.14% underweight in Industrials
• We recommend keeping it underweight
Reasons
• The industrial sector is in the mature phase of its business
cycle and we expect growth to be tempered during this year
• Earnings have remained positive despite difficulties facing the
sector globally, but the earnings estimates have consistently
disappointed analysts
• From a valuation point of view, the forward P/E multiples are
not as attractive compared to recent years
RECOMMENDATIONS
• However, there are some bright spots across the sector which
deserve attention
Homebuilding
• Improving economic conditions coupled with low interest rates
will be beneficial for new homebuyers thereby benefitting the
homebuilding industry
Aerospace and defense
• The growing demand for commercial as well as military aircrafts
around the world will boost revenues for major players in this
industry
THANK YOU