Industrials
Research Analysts
Fan Yang
Gavin Smith
Fluor Corporation
Caterpillar Inc.
Precision CastParts
Corporation
Quanta Services Inc.
Agenda
•
•
•
•
•
•
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendations
Overview
SIM Portfolio Weights
Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash
Dividend Receivables
As of 9/30/13
S&P 500 Weight
SIM Weight
+/-
12.46%
14.33%
1.87%
10.09%
8.47%
-1.62%
10.49%
14.39%
3.90%
16.30%
13.48%
-2.82%
12.97%
11.90%
-1.07%
10.73%
8.95%
-1.78%
17.89%
19.10%
1.21%
3.51%
2.90%
-0.61%
2.42%
2.11%
-0.31%
3.14%
3.84%
0.70%
0.00%
0.49%
0.49%
0.00%
0.05%
0.05%
Distribution of Sector
Lumber, Wood Metal Fabrication
Production
1% Residential
0%
Construction
2%
Heavy Construction
0%
2%
General Contractors
4%
General Building Materials
8%
Farm &
Construction
Machinery
7%
Aerospace/Defense Major Diversified
20%
Aerospace/Defense - Major
Diversified
Aerospace/Defense Products &
Services
Cement
Diversified Machinery
Farm & Construction Machinery
General Building Materials
General Contractors
Heavy Construction
Industrial Electrical Equipment
Diversified Machinery
53%
Industrial Equipment &
Components
Lumber, Wood Production
Machine Tools & Accessories
Manufactured Housing
Metal Fabrication
Total Market Cap: 79,933.8 Billion
Pollution & Treatment Controls
Residential Construction
Largest Companies
Industrials YTD Performance – 26.4%
Industrials QTD Performance – 4.48%
Business Analysis
Phase of Life Cycle
Percent change, seasonally adjusted
Phase of Life Cycle
Phase of Life Cycle
Classification by Business Cycle – U.S
Classification by Business Cycle –
Foreign
• Globally linked sector since customers are over the world
• China and Europe are undergoing late cycle and recession phase of
business cycle.
External Factors
• Demographic – Low
• Society – Low
• Government & Regulatory – moderate
• Technology – high
Capacity and Utilization
Intensity of Competition
• Threat of Substitute
 Moderate
 Depend on different field
• Bargaining Power of Customers
 Small Corporations & Individuals vs. Large Corporations &
Government
• Bargaining Power of Suppliers
 Low
 Abundant Resources such as Coal, Renewable Energy
• Threat of New Entrants
 Low
 High Startup Costs, Long-term Relationship and Reputation
• Intensity of Rivalry
 High within industries
 Undifferentiated Products and High Exit Barriers
Economic Analysis
Economic Analysis – Industrials
Economic Analysis – Industrials
Economic Analysis – Industrials
Economic Analysis – Industrials
Economic Analysis – Industrials
Economic Analysis – Aerospace
Economic Analysis – Building Products
Financial Analysis
Sector Revenue
Revenue Growth
15%
10%
5%
0%
-5%
-10%
-15%
-20%
2009
2010
2011
2012
2013
2014
Major Industry Revenue
40%
30%
20%
10%
Aerospace/Defense
Conglomerates
0%
2009
-10%
2010
2011
2012
2013
2014
Construction Materials
Homebuilding
Machinery Const/Farm
-20%
-30%
-40%
-50%
Machinery Industrial
Sector EPS
EPS Growth
24%
22%
8%
2009
-32%
2010
2011
2012
6%
2013
10%
2014
Major Industry EPS
EPS Growth
150%
Aerospace/Defense
100%
Conglomerates
50%
Homebuilding
0%
2009
2010
2011
2012
2013
2014
-50%
Machinery Const/Farm
Machinery Industrial
-100%
EPS Growth
800%
600%
400%
Construction
Materials
200%
0%
-200%
-400%
-600%
2009
2010
2011
2012
2013
2014
Net Margin and Price Comparison
Valuation Analysis
Sector Multiples
Absolute
Median
Relative S&P
Current
Median
Current
Trailing P/E
19.1
17.4
1.1
1.1
Forward P/E
18.1
15.7
1
1.1
P/S
1.3
1.4
1
1
P/B
3.2
3.2
1.2
1.3
P/CF
11.1
11.7
1.1
1.1
Major Industry Multiples
Aerospace/Defense
Absolute
Median
Current
Construction
Materials
Conglomerates
Median
Current
Median
Current
Trailing P/E
13.1
16.8
14.7
17.3
Forward P/E
12.8
15.7
14
15.5
94.1
P/S
0.9
1.2
1.4
1.9
P/B
3.2
4.1
1.8
P/CF
9.5
12.8
8.8
Relative
S&P
Aerospace/Defense
Median
Current
36 NM
Median
Current
Median
Machinery Industrial
Current
Median
Current
36.7
16.6
12.9
12.7
15.8
19.3
231.9
32.9
13.7
12.6
12.7
15
17
2
2.6
0.7
1
1
1
1.3
1.6
2.4
1.4
1.8
1.4
2
3.8
3.1
2
2.8
11.5
17.8
27.1
19.4
14.4
8.5
8.5
9.4
14.2
Construction
Materials
Conglomerates
Median
Machinery
Const/Farm
Homebuilding
Current
Median
Homebuilding
Current
Trailing P/E
0.93
1.1
1
1.1
Forward P/E
0.94
1.1
1
1
6.1
P/S
0.8
0.8
1.1
1.3
P/B
1.4
1.7
0.9
P/CF
1.1
1.2
1
Machinery
Const/Farm
2.6 NM
Median
Current
Median
Machinery Industrial
Current
Median
Current
2.7
1
0.9
0.79
1.1
1.2
15.6
2.7
0.92
0.93
0.85
1.1
1.1
1.7
1.8
0.6
0.7
0.8
0.7
1
1.1
1
0.7
0.8
0.6
0.8
1.7
1.3
0.9
1.1
1.1
2
2.6
2.2
1.4
0.9
0.8
1.1
1.3
Recommendations
• SIM Portfolio is 1.78% underweight in Industrials
 Our Recommendation is to keep Industrials Underweight
Reasons:
• Based on business cycle, the U.S. is in the Mid to Late phase, and as shown in
the graphs, the Industrial Sector can expect small growth rates in these periods
• Based on Financial Analysis, the Industrials Sector’s revenue as a whole is going
through a declining phase as is the EPS
• Looking at technical analysis, the price of the Industrials Sector (SPIN) tends to
decrease after there is a decrease in the Net Profit Margin, which is forecasted to
happen
• The Capital Utilization vs. Industrials economic graph indicates that the price of
the Industrials Sector is overpriced
Recommendation by Industry
• Although, we believe the Industrial Sector as a whole should be
underweight, we believe some industries within the sector look
promising
Homebuilding
• Residential Construction
• Manufactured Housing
Thanks!
Q&A