STOCK ANALYSIS
—INDUSTRIALS
Xin Zou
Haoyu Mi
Aditya Parkhe
Ashley L. Myers
AGENDA
•
•
•
•
•
Overview
Fluor Corporation
Quanta Services
Precision Castparts Corp.
Recommendation
OVERVIEW
SECTOR WEIGHT
S&P 500
Industrials
P/E Ratio
P/B Ratio
P/S Ratio
1-Y Return
17.96
3.15
1.58
25.03%
S&P 500 Sector Weight
Telecommunic
ation Services
2%
Utilities
Materials
3%
3%
Information
Technology
19%
Health Care
14%
Telecommunic
Cash
ation Services Utilities 2%
3%
1%
Materials
Information 3%
Consumer
Discretionary
12%
Energy
10%
Industrials
10.74%
SIM Sector Weight
Financials
16%
Consumer
Staples
10%
Consumer
Discretionary
13%
Technology
20%
Energy
9%
Industrials
8.87%
Health Care
14%
Financials
16%
Consumer
Staples
10%
SIM HOLDINGS
Current SIM Holdings
Current Weight
Recommended
Weight
Potential
Up/Down
Recommendation
Fluor
Corporation
450 bps
450 bps
+3.98%
HOLD
Quanta Services
437 bps
0 bps
-15.38%
SELL
FLUOR CORPORATION
COMPANY OVERVIEW
2013 FY Revenue by Geographic Area
 Founded in 1912
United States
Canada
 A leading Construction &
Engineering Company
Asia Pacific
(includes Australia)
Europe
Central and South
America
 Business Segments:





Oil & Gas
Industrial & Infrastructure
Government
Global Services
Power
Middle East and
Africa
Revenue by Segments
Power
30,000,000
25,000,000
Global
Services
20,000,000
Government
15,000,000
Industrial &
Infrastructure
10,000,000
5,000,000
Oil & Gas
-
2008
2009
2010
2011
2012
2013
STOCK PERFORMANCE
Fluor 3-month Stock Performance
86
$80.25
84
82
$74.33
80
78
Share Price
76
74
72
70
68
1/2/14
1/9/14
1/16/14 1/23/14 1/30/14
2/6/14
2/13/14 2/20/14 2/27/14
3/6/14
3/13/14 3/20/14 3/27/14
KEY FINANCIALS
2013
2012
2011
27,351
27,577
23,381
667
456
802
ROA
8.02%
5.51%
7.18%
Gross Profit Margin
4.99%
3.21%
4.91%
Current Ratio
1.76
1.57
1.53
Debt /Asset
53.38%
58.59%
58.15%
Operating Margin
4.35%
2.66%
4.28%
Revenue
Net Income
WHAT IS BACKLOG?
 Backlog: a measure of the total dollar value of work to be
performed on contracts awarded and in progress.
Fluor Backlog Analysis
30,000
25,000
20,000
Expected Backlog
15,000
Actual Revenue
?
10,000
5,000
0
2009
2010
2011
2012
2013
2014
VALUATION
 DCF Valuation:
 Terminal Discount Rate: 11%
 Terminal Growth Rate: 4%
 Target Price: $79.45
 Peer Valuation:
 Sensitivity Analysis
Terminal Growth Rate
 Five Competitors
 Valuation Range:
$67.56 - $109.20
Discount Rate
10.0%
10.5%
11.0%
11.5%
12.0%
3.0%
85.08
78.95
73.58
68.86
64.66
3.5%
89.00
82.21
76.32
71.18
66.64
4.0%
93.57
85.97
79.45
73.81
68.87
4.5%
98.98
90.36
83.07
76.82
71.40
5.0%
105.4
95.55
87.28
80.29
74.29
RECOMMENDATION - HOLD
Investment Thesis
Risks to recommendation
• Fluor is fairly priced with only about 4%
upward potential, according to Multiple
Valuation and DCF Valuation.
• Ethical and innovative company with healthy
financial position.
• Diversity across different countries and
different industries allows it to minimize
market risks.
• Its concentration on renewable energy,
consistent with the increasing demand for the
renewable energy throughout the world, would
consolidate its leading position and paves its
way to be a strong player in the market.
• Facing a challenging environment for
backlog growth.
• Facing a highly competitive market.
• Federal government has a tighter
budget.
• Regulatory risk and the responsibility
to protect its employee’s safety.
• New emission compliance may impact
future profit margin.
QUANTA SERVICES
COMPANY OVERVIEW
 Founded in 1997
 A leading provider of specialty contracting services, of fering
infrastructure solutions primarily to the electric power and oil
and gas industries in the US, Canada and Australia.
Basic Information
FY2013 Revenue by Country
Current Price
$36.47
52-week range
$25.26~$37.28
Trailing P/E
23.81
Annual Div
N.A.
LT Debt/Equity
0.0%
Beta
1.15
3%
17%
80%
US
Canada
Australia
COMPANY OVERVIEW
 Operates under three segments:
 Electric Power Infrastructure Services Segment
 Oil and Gas Infrastructure Services Segment
 Fiber Optic Licensing and Other Segment
FY2013 Revenue by Segment
Operating Margin by Segment
40%
2%
30%
29%
20%
69%
10%
0%
-10%
Electric Power
Oil and Gas Infrastructure
Fiber Optic Licensing and Other
2009
2010
2011
2012
2013
Electric Power
Oil and Gas Infrastructure
Fiber Optic Licensing and Other
*Excludes corporate and non-allocated costs
DRIVERS & RISKS
Segments
Drivers
Risks
Electric Power
· Replacement of infrastructure
· Growth for demand for electricity
· Technological advancements in
access to natural gas resources
· Extreme weather conditions
· Decline in transmission spending
· Fewer large projects in 2013 vs.
2012
Oil and Gas
· Insufficient existing pipeline
· Abundant natural gas supply
· Increase in liquefied natural gas
(LNG) export facilities
· Currently tight pipeline construction
industry capacity
· Efficiency of offshore services
· Nature gas prices internationally
Fiber Optic
· Continued investment in dark
fiber network
· Demand for fiber optic bandwidth
driven by data intensive services
· Demand for metro market fiber
optic networks
· Capital intensive and recently
experiencing negative growth
· Ongoing CAPEX needs to maximize
asset value, revenue and cash flow
potential
· Competition in lit fiber services
STOCK PERFORMANCE
Stock Return
Last Qtr
1 Yr.
17.04%
28.23%
Industrials
-1.40%
23.27%
S&P 500
1.76%
20.23%
PWR
KEY FINANCIALS
PWR
Rank in Peers (out of 10)
Operating Margin
8.08%
No. 1
Return on Equity
10.05%
No. 7
Current Ratio
2.22
No. 2
Asset Turnover Ratio
1.19
No. 10
17.46
No. 5 *
Inventory Turnover Ratio
Accounts Receivable Turnover Ratio
Debt to Asset Ratio
*Out of 9 since one of the companies doesn’t have inventory
4.71
No. 9
0.039%
No. 2
RELATIVE VALUATION - MULTIPLES
Current
Multiple
Peers
CBI
P/E
23.81 20.25
FLR MYRG
JEC
Target Target
Multiple Price
% Chg
from
Current
Price
EME
URS
MTZ
18.0
15.06 20.03
5
21.5
4
14.1
8
23.7
9
18.99
29.08
-20.3%
P/S
1.20
0.81
0.45
0.57
0.68
0.49
0.32
0.77
0.58
17.74
-51.4%
P/B
1.83
3.87
3.25
1.77
1.94
2.14
0.87
3.27
2.45
48.78
33.7%
10.92 11.50
7.40
5.29 11.30
10.8
3
6.34
9.55
8.89
28.46
-22.0%
31.01
-15.0%
EV/EBI
TDA
Average
RELATIVE VALUATION – PEG RATIO
Peers
PWR
CBI
FLR
MYRG
JEC
EME
URS
MTZ
2013 Actual EPS ($)
1.53
4.23
4.06
1.58
3.23
2.23
3.31
1.80
2014 Estimated EPS ($)
1.82
5.14
4.36
1.54
3.67
2.54
3.26
2.25
2015 Estimated EPS ($)
2.14
5.86
5.14
1.70
4.29
2.98
3.61
2.74
2016 Estimated EPS ($)
2.31
6.21
5.94
-
5.26
-
-
-
Annualized EPS growth (%)
14.65 13.64 13.52
3.75 17.67 15.66 11.59 23.49
Current P/E Ratio
23.81 20.25 18.05
15.06 20.03 21.54 14.18 23.79
PEG Ratio
1.63
1.48
1.33
4.01
1.13
1.38
1.22
1.01
DCF VALUATION - ASSUMPTIONS





Terminal Discount Rate – 10%
Terminal Growth Rate – 4.5%
Operating Margin – 9.0%~7.5%
Depreciation/Amortization – 2.3%~2.7%
CAPEX – 3.2%~2.7%
DCF VALUATION
DCF VALUATION
Multiples
Current Price
$36.47
Price
Implied equity value/share
$30.81
Weight
Upside/(Downside) to DCF
-15.5%
Final Price Target
DCF
31.01
30.81
0.25
0.75
30.86
RECOMMENDATION - SELL
Investment Thesis
Risks to recommendation
• Quanta is overpriced by around 15%,
according to multiples and DCF valuation
• The $1.87 EPS in 2013 is mainly contributed
by its selling of an investment. Trailing 12m
EPS is $1.53
• Too reliable on electric or gas industries and
two customers accounted for approximately
15% and 11% of its consolidated net position
• Transmission spending is expected to fall after
it peaks at 2013
• The industry operates in is highly competitive
with low barriers of entry and fixed-price
contracts holds high risks against the market.
• Uncertain potential regulation
• May face fierce competition when expanding
in Australia
• Increased spending in electric power
segment may lead to a longer period
of double-digit growth
• The stock repurchase program starting
in 2014
• Potential regulations may be favorable
for Quanta or its customers
• Quanta may have a better presence in
Canada and Australia through
acquiring local firms and add to
revenue growth
• Quanta may take on more leverage to
amplify its earnings
PRECISION CASTPARTS
CORP
COMPANY OVERVIEW
 Founded in 1949 as a division of Oregon Saw Chain
 Broke of f on its own in 1952
 Is now a worldwide manufacturer of complex metal products
and components that serve aerospace along with general
industrial markets
Basic Information
Current Price
$247.58
52-week range
$180.06 - $274.96
Trailing P/E
21.75
Annual Dividend
0.05
Beta
1.12
COMPANY OVERVIEW
 Three segments:
 Investment Cast Products
 Forged Products
 Airframe Products
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Percent of Net Sales by Segment
28%
43%
24%
22%
25%
23%
44%
45%
42%
44%
Airframe Products
Forged Products
30%
32%
34%
34%
33%
2013
2012
2011
2010
2009
Investment Cast Products
DRIVERS & RISKS
Drivers
Risks
One of very few manufacturers that
can produce quality complex and
large castings in high quantities
Availability of raw materials
Long-term customer relationships
A large percentage of revenues
come from a small number of large
customers
Technical expertise – a leader in
innovating new casting technologies
Inclement weather disrupts delivery
of products
History of very successful
acquisitions which create synergies
Dependent on federal, state, and
foreign environmental regulations
NYSE:PCP - Share Pricing
^SPX - Share Pricing
3/20/14
3/11/14
2/28/14
2/19/14
2/7/14
1/29/14
1/17/14
1/8/14
12/27/13
12/17/13
12/6/13
11/26/13
11/15/13
11/6/13
10/28/13
10/17/13
10/8/13
9/27/13
9/18/13
9/9/13
8/28/13
8/19/13
8/8/13
7/30/13
7/19/13
7/10/13
6/28/13
6/19/13
6/10/13
5/30/13
5/20/13
5/9/13
4/30/13
4/19/13
4/10/13
4/1/13
STOCK PERFORMANCE
KEY FINANCIALS
PCP
Industry Avg
Operating Margin
27.96
13.96
Return on Equity
16.63
17.80
Quick Ratio
1.15
1.13
Asset Turnover
Ratio
0.54
0.71
Inventory Turnover
Ratio
1.99
4.08
Accounts
Receivable
Turnover Ratio
6.62
6.52
Debt to Asset
Ratio
19.75
27.12
RELATIVE VALUATION
PCP
GE
Trailing P/E
21.75
20.48
17.3
13.83
24.66
N/A
Forward P/E
18.04
14.23
15.87
13.32
17.02
9.96
1.4
1.79
2
3.47
1
0.62
Price/Sales
3.77
1.78
2.32
0.8
2.58
0.67
Price/Book
3.26
1.99
6.2
1.67
3.45
2.69
EV/EBITDA
13.63
21.78
12.35
8.81
PEG Ratio
COL
LLL
BEAV
SPR
13.89 -20.11
DCF VALUATION
Year
Revenue
2014
9,690
% Growth
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
2,722
28.1%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
3,136
28.6%
2016
11,729
6.8%
3,401
29.0%
2017
12,526
6.8%
3,257
26.0%
2018
13,378
6.8%
3,478
26.0%
2019
14,248
6.5%
3,704
26.0%
2020
15,145
6.3%
3,938
26.0%
2021
16,054
6.0%
4,174
26.0%
2022
16,985
5.8%
4,416
26.0%
2023
17,919
5.5%
4,659
26.0%
2024
18,815
5.0%
4,892
26.0%
15
16
18
25
27
28
30
32
34
36
38
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
893
33.0%
1,814
1,030
33.0%
2,090
15.2%
1,200
1,197
1,117
33.0%
2,267
8.5%
938
1,066
33.0%
2,105
-7.1%
1,002
1,139
33.0%
2,253
7.0%
1,070
1,213
33.0%
2,403
6.7%
1,140
12.4%
10.9%
8.0%
8.0%
8.0%
8.0%
420
(417)
(242)
(251)
(268)
-3.8%
-2.1%
-2.0%
-2.0%
4.3%
1,030
10.6%
2,404
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
10,981
13.3%
% Growth
Add Depreciation/Amort
2015
1,200
10.9%
1,670
-30.5%
14,241
26,609
40,850
6.69%
19.8
22.5
10.0
11.3
938
8.0%
2,025
21.3%
35%
65%
100%
17.2
19.5
9.1
10.2
15.9
18.0
9.0
10.2
1,002
8.0%
1,855
-8.4%
1,070
8.0%
1,985
7.0%
1,289
33.0%
2,558
6.5%
1,181
1,367
33.0%
2,715
6.1%
1,252
1,446
33.0%
2,876
5.9%
1,274
1,526
33.0%
3,038
5.6%
1,344
1,602
33.0%
3,192
5.1%
1,411
7.8%
7.8%
7.5%
7.5%
(142)
76
80
85
90
94
-1.0%
0.5%
0.5%
0.5%
0.5%
0.5%
1,140
8.0%
2,260
1,181
7.8%
2,634
13.9%
16.5%
Terminal Discount Rate =
Terminal FCF Growth =
10.0%
5.0%
1,252
7.8%
2,795
6.1%
1,274
7.5%
2,961
5.9%
1,344
7.5%
3,127
5.6%
Terminal Value
7.5%
1,411
7.5%
3,287
5.1%
69,017
Free Cash Yield
4.76%
Terminal P/E
21.6
Terminal EV/EBITDA
11.5
DCF VALUATION
Current Price
Implied equity value/share
Upside/(Downside) to DCF
$
281.33
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
Terminal
Discount Rate
3.0%
324.30
293.10
267.15
245.23
226.48
210.27
196.11
183.65
172.59
3.5%
349.47
312.85
282.94
258.05
237.03
219.04
203.48
189.90
177.93
min
$
$
247.58
281.33
13.6%
Terminal FCF Growth Rate
4.0%
4.5%
5.0%
380.92
421.36
475.27
336.99
367.16
405.95
301.89
325.04
353.99
273.20
291.39
313.61
249.34
263.88
281.33
229.17
240.98
254.95
211.91
221.63
232.98
196.98
205.07
214.41
183.93
190.73
198.51
5.5%
550.76
457.67
391.21
341.39
302.66
271.70
246.38
225.30
207.48
6.0%
663.99
530.08
440.84
377.11
329.33
292.18
262.47
238.18
217.94
172.59
median
272.45
max
852.70
6.5%
852.70
638.70
510.32
424.73
363.61
317.78
282.14
253.63
230.31
RECOMMENDATION - BUY
Investment Thesis
• PCP is currently undervalued by
13.6%
• PCP has done very well with past
acquisitions (over 10 in the last 3
years) and successfully creates
synergies
• They are a leader in innovative
production and design and have
perfected all of their processes to
consistently produce quality castings
• Long contracts/good relationships
with high-spending customers
Risks to Recommendation
• Raw materials are not always readily
available and only found in few parts
of the world
• Unknown changes in regulation
• Due to the small number of large
companies that provide a substantial
portion of sales, a loss in any one of
those customers would be
detrimental
RECOMMENDATIONS
SUMMARY
Stoc
k
Current
Price
Target
Price
Expected
Return
Current
Weight
Recommende
d weight
Recommendatio
n
FLR
76.41
79.45
+3.98%
450 bps
450 bps
HOLD
PWR
36.47
30.86
-15.38%
437 bps
0 bps
SELL
PCP
247.58
281.33
+13.6%
0 bps
350 bps
BUY
QUESTIONS?