The Industrials Sector
The Ohio State University SIM Program
Analysts
Name
Contact information
Nicole Heffle
heffle.1@osu.edu
Jingyuan Huang
huang.1039@osu.edu
Meng Jea Joo
joo.50@osu.edu
Dun Hou
hou_49@fisher.osu.edu
Agenda
 Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendations
Overview of the Sector
SIM Fund at Ohio State
Overview
Industrials
Companies that provide industrial and
commercial equipment and services,
transportation, and distribution
operations
The sector has a vast exposure to
emerging markets
Cyclical Sector
Sector Size – Market Cap = $1.428
Trillion
As a percent of the S&P:
Industries Within the Sector
 Aerospace & Defense
 Machinery
 Industrial Conglomerates
 Air Freight & Logistics
 Road & Rail
 Commercial Services &
Supplies
 Electrical Equipment
 Trading Companies &
Distributors
 Construction &
Engineering
 Thrifts & Mortgage
Finance
 Household Durables
 Airlines
 Building Products
Largest Companies in Industrials
Recent Sector Performance
Last Year
Last Quarter
 Earnings Per Share
 Up 8%
 Earnings Per Share
 Up 5.78%
 Revenues (% Change)
 5%
 Revenues (% Change)
 5.65%
Business Analysis
Key Performance Drivers
 Gross Domestic Product (GDP)
 Government Spending
 Infrastructure and Military, primarily
 Commodity Prices
 Oil and metals
 Manufacturing Capacity Utilization
 Capital Spending
Phase of the Life Cycle
 Currently in the
Maturity Phase
 “Mid-to-late” part of
the cycle
 Growth – still occurring
through Technology
and M&A
 Selling in large
volumes = maximizing
profits
External Factors
Raw Material / Natural Resource Costs
Government Regulation & Laws
Government / Capital Spending
Environmental Issue
Rising Competition from Emerging Markets
Porter’s Five Forces
Industry
Force
Factors
Barriers to Entry • Requiring Significant Startup Capital
Analysis
High
•
•
•
•
Requiring High Technology
Patents
Economic of Scale
Distribution/Dealers network
Buyer Power
•
•
•
Product Differentiation is big
Switching Cost is low
No substitutes for industrial equipment
Moderate
Supplier Power
•
•
•
Supplier is relatively less important to the industry
Raw materials are common
Large purchasing power from manufacturing
companies
Low
Substitutes
•
•
•
•
Products can be replaced by other brands
Specialized equipment is fewer. Like engine.
Unspecialized products are more. Like raw materials
Stability in market growth
Moderate
Rivalry Intensity • Public tender bidding
•
•
Powerful Player s
Price and quality competition
High
Economic Analysis
Highly Correlated Index
S&P 500 Price Index
Real GDP
Labor Market
New Manufacturing Orders
PPI on Gasoline
S&P 500 Price Index
Real GDP
Labor Market
New Manufacturing Orders
Relatively lower correlative index
But, it’s worth to take a look.
 Oil Price
 New Housing Starts
 PPI – Aluminum
 PPI - Steel
Oil Price
New Housing Starts
PPI-Aluminum
PPI-Steel
Financial Analysis
Industrials Select Sector
SPDR (XLI) vs. S&P 500
Industrials Sector Performance
Industry Performance
Sales Growth Rates of the
Major Companies
Ticker
Company
GE
Sales Growth (%)
MRQ
TTM
5-yr
General Electric
3.57
0.05
-3.10
UTX
United Technologies Corp
14.37
3.50
0.71
UNP
Union Pacific Corp
2.78
7.00
5.15
MMM
3M Co
4.20
0.99
4.10
CAT
Caterpillar Inc
-6.77
9.54
7.94
UPS
United Parcel Service Inc
2.86
1.92
1.72
HON
Honeywell International Inc
1.14
3.11
1.72
BA
Boeing Co
14.05
18.86
4.24
EMR
Emerson Electric Co
4.60
2.75
1.98
DHR
Hanaher Corp
5.48
13.49
10.62
5.65
7.00
5.87
Sector
Industrials Sector Revenue
Industrials Sector Revenue
Industrials Sector Earnings
Industrials Sector Earnings
Industrials vs. S&P500
EBITDA Margin
Industrials vs. S&P500
Net Profit Margin
Industrials vs. S&P500
ROE Margin
Sales & Cash Flow Per Share
Valuation Analysis
Sector Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing E
24
7.1
17.6
15.3
P/Forward E
20.9
9.2
16.2
14.7
P/B
3.6
1.4
3.0
2.9
P/S
1.6
0.6
1.3
1.3
P/CF
14
6
10.6
10.5
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.2
0.66
1.1
1.0
P/Forward E
1.2
0.84
1.0
1.0
P/B
1.3
0.9
1.1
1.3
P/S
1.1
0.8
1.0
0.9
P/CF
1.2
0.8
1.1
1.1
Sector Valuation (cont’d)
Trend
Industry Valuation
Absolute Basis
High
Low
Median
Current
P/Trailing E
31
5.2
14.7
11.3
P/Forward E
36.1
6.7
13.1
12.6
P/B
6.3
1.5
4.0
3.7
P/S
1.7
0.3
1.0
1.0
P/CF
14.5
4.8
8.8
8.3
Relative to SP500
High
Low
Median
Current
P/Trailing E
1.8
0.48
0.92
0.76
P/Forward E
2.2
0.56
0.91
0.88
P/B
2.6
1.0
1.4
1.6
P/S
1.3
0.5
0.7
0.7
P/CF
1.5
0.6
0.9
0.8
Valuations Variation Across
Industries
Industry
Aerospace/Defense
Machinery Industrial
Machinery Cons/Farm
Electrical Component
Conglomerates
Absolute
Median
Current
Median
Current
Median
Current
Median
Current
Median
Current
P/Trail E
16.4
13.6
27.6
7.6
15.9
13.2
20.4
17.3
17.3
14.9
P/Forw E
16.1
13.6
16
13.1
14.1
10.9
18.1
15.6
16.4
13.6
P/B
3.1
3.6
2.8
2.3
4.0
4.3
3.8
3.6
3.1
2.0
P/S
1.0
1.0
1.4
1.3
0.9
1.1
1.7
1.8
1.9
1.5
P/CF
11.4
10.1
11.4
10.8
9.0
9.0
13.4
13.2
11.6
9.6
Valuations Variation Across
Industries (cont’d)
Industry
Aerospace/Defense
Machinery Industrial
Machinery Cons/Farm
Electrical Component
Conglomerates
Relat SP
Median
Current
Median
Current
Median
Current
Median
Current
Median
Current
P/Trail E
1.0
0.99
1.1
1.1
1.0
0.97
1.2
1.3
1
1.1
P/Forw E
0.99
0,99
1.0
0.96
0.94
0.79
1.1
1.1
1.0
0.99
P/B
1.2
1.6
1.0
1.0
1.4
1.9
1.5
1.6
1.1
0.9
P/S
0.7
0.8
1.0
1.0
0.6
0.9
1.2
1.4
1.3
1.2
P/CF
1.1
1.1
1.1
1.2
0.9
1.0
1.3
1.4
1.1
1.0
Recommendations
SIM Portfolio
Recommendation
SIM Portfolio
Select Sector
SPDR Fund
 Current Industrials Sector Weight
Annualized
Three
Five
Ten
Year
Year
Year
9.72%
1.32%
10.24%
Health Care (XLV)
13.65%
7.92%
7.08%
Cons Stap (XLP)
15.40%
9.93%
9.96%
Cons Disc (XLY)
20.28%
12.01%
9.98%
Energy (XLE)
13.47%
2.20%
15.07%
Financials (XLF)
7.77%
-5.35%
0.44%
Industrials (XLI)
14.80%
4.80%
10.00%
Technology (XLK)
12.69%
7.51%
8.76%
Utilities (XLU)
13.23%
3.91%
11.74%
Materials (XLB)
Total = 44.25 %
Industrials Sector Portion = 10.85 %
 S&P 500: 10.19%
 SIM Weight: 10.25%
 Recommendation:
Overweight 60 BPS
 Suggested Weight: 10.85 %
U.S. Macro Indicators
 Major Positives
 Continuous Strength in Consumer Spending
 Rebound in Housing
 Expanding Commercial Construction
 Improved Manufacturing Purchasing Managers Index
(PMI)
 Major Risks
 Threats from Emerging Markets (i.e. China)
 Natural Resource/Raw Material Price Fluctuation
Any Questions??