Industrials Sector
Stock Analysts
Member
Contact Information
Scott Cloud
Cloud_50@fisher.osu.edu
Meng Jin
Jin_259@fisher.osu.edu
Hongfei Jiang
Jiang_490@fisher.osu.edu
Xia Jiang
Jiang_485@fisher.osu.edu
Daniel Krikorian
Krikorian_4@fisher.osu.edu
Agenda
1
• Overview of Industrials Sector and Class
Recommendation
2
• Review of Current SIM Holdings and Industrials
Team Recommendations
3
4
• Stock Analysis
• Recommendations Summary and Conclusion
Overview of Industrials
Overview of Industrials
• Market Cap: $1.339 Trillion
• Industries
–
–
–
–
–
–
Air Freight & Logistics
Airlines
Building Products
Commercial Printing
Construction/Engineering
Electrical Components
– Industrial Conglomerates
– Railroads
– Industrial & Construction
Machinery
– Data Processing,
Environmental Services
– Farm Machinery
• Largest Companies:
– Boeing, GE, Caterpillar, United Technologies, 3M, UPS
Class Recommendation - Industrials
•
Industrials team requested to increase industrials approximately
300 bps to S&P 500 weight; class voted to increase by 150 bps
Current SIM Holdings and
Industrials Team Recommendations
Company
TOTAL (in bps)
Current SIM
Allocation
Buy/Sell/Hold
Recommended
Recommendation SIM Allocation
391 bps
Hold
391 bps
347 bps
Sell 169 bps
178 bps
0
Buy 177 bps
177 bps
0
Buy 142 bps
142 bps
0
Don’t Buy
0
0
Don’t Buy
0
738
150
888
Stock Analysis
Honeywell International, Inc.
• Market Cap: $44.98 Billion
• Business Segments
– Aerospace; Automation and Control Solutions; Performance
Materials and Technologies; Transportation Systems
• Main Competitors
– Aerospace – General Electric, Northrop Grumman
– Automation and Control – Johnson Control, United Technologies
– Performance Materials – BASF, Dupont, Exxon, Chevron
– Transportation Systems – Borg-Warner
• Current growth in high-tech supplies/services to oil/gas,
business aircraft, auto turbo-chargers, acquisitions, emerging
markets
Honeywell International, Inc. (cont...)
Absolute
High
Valuation
P/Forward E 23.9
Low
Median
Current
13.3
Target
Multiple
13.7
Target
Price
60.55
7.6
15.6
P/S
1.5
0.5
1.2
1.2
1.2
58.73
P/B
5.0
1.9
3.1
4.2
3.1
43.34
P/EBITDA
365.02
3.85
10.52
9.30
10.52
66.49
P/CF
16.8
5.4
12.1
11.8
12.1
60.26
• Current Price: $58.55
• Target Price: $63.38
– DCF value/share = $64.12
• Margin of Safety: 8.25%
• Recommendation: Do Not Buy
J.B. Hunt
• Market Cap: $6.41 Billion
• Transportation and Delivery Services in Four Segments:
– Intermodal; Dedicated Contract Services; Full-Load Dry Van;
Integrated Capacity Solutions
• Current Price: $55.26
Absolute
High
Valuation
P/Forward E 27.1
Low
Median
Current
20.4
Target
Multiple
18.1
Target
Price
49.05
12.8
18.1
P/S
1.6
0.4
1.2
1.4
1.2
47.36
P/B
13.4
1.6
5.0
11.4
5.0
24.25
P/EBITDA
10.89
3.73
7.45
9.56
7.45
43.06
P/CF
14.4
4.7
10.0
13.3
10.0
41.50
• Recommendation: Do Not Buy
CAT OVERVIEW
 Line of Business
Caterpillar is the world‘s leading manufacturer of construction
and mining equipment, diesel and natural gas engines,
industrial gas turbines and diesel- electric locomotives
 Business Segments:
Machinery and Power Systems
Financial Products
 Pros
Low threats of substitute products.
Worldwide demand for energy.
 Cons
High rivalry among competitors.
Cyclical to economic environment.
PRICE HISTORY FOR CAT
JUSTIFICATION- HOLD CAT
•
•
•
•
•
•
Industry: Machinery Construction/Farm
Market Cap: 69.64b
Current Stock Price: $95.50(5/13/2012)
52 week range: $67.54-$116.95
Target price:$121.77
ROE
1 year
ROE
5 year
37.4
10 year
40.2
Current
36.9
38.7
• EPS
1 year
EPS
5 year
7.93
10 year
6.07
Current
4.86
8.27
DCF VALUATION
RELATIVE VALUATION
Relative to Industry High
P/Trailing E
1.3
Low
.55
Median
1.0
Current
1.1
P/Forward E
1.5
.63
1.0
.99
P/B
2.0
.8
1.2
1.2
P/S
1.7
.8
1.1
1.0
P/CF
1.5
.5
1.0
1.0
Relative to S&P 500
High
Low
Median
Current
P/Trailing E
2.1
.41
1.0
1.0
P/Forward E
2.6
.61
.90
.86
P/B
2.6
.9
1.9
2.5
P/S
1.3
.4
.8
.9
P/CF
1.4
.4
.9
1.0
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target E,
S, B/Share
Target Price
(F x G)
P/Forward E
40.1
7.3
13.6
11.4
12.5
9.61
120.1
P/S
1.7
.3
1.2
1.2
1.2
109.6
131.5
P/B
7.4
2.3
4.6
5.5
5.5
19.9
109.5
P/EBITDA
15.5
2.2
7.4
7.3
7.4
14
103.6
P/CF
13.2
2.8
9.7
9.4
9.5
14
133.0
JUSTIFICATION- HOLD CAT
Price Target
The chart below presents the price target of CAT within 1 year,
Including High, Mean, Low stock prices as well as my target.
Price Target Summary
My Target: $121.77
Mean Target
$130.95
High Target
$142.00
Low Target
$117.00
No. of Brokers
Current Price: $95.50
1-year target
19
JUSTIFICATION- HOLD CAT
JUSTIFICATION- HOLD CAT
CAT CONCERNS
• Risks:
Political and economic risks
Interest rate risks
Company price risks
Stock repurchases risk
• Chinese Market
Expansion in mainland of China
China’s slowdown in overall economic activity
Recent weakness in China construction
equipment
Major competitor from Komatsu(Japan)
CAT RECOMMENDATION
%age assets
3.91%
Unit cost
$110.28
Market Price
$95.50
Target Price
$121.77
HOLD
DHR OVERVIEW
•
Designs, manufactures and markets professional, medical, industrial
and commercial products and services, which are typically
characterized by strong brand names, innovative technology and
major market positions.
•
Operates in five business segments:
− Test & Measurement
− Environmental
− Life Sciences & Diagnostics
− Dental
− Industrial Technologies
•
Growth potential is derived from segment core business and
external acquisitions.
PRICE HISTORY FOR DHR
JUSTIFICATION – SELL HALF DHR
•
Industry: Conglomerate
•
Market Cap: $37.17 Billion
•
Current Stock Price:$53.66
•
52 Week Range: $39.34 - $56.45
•
Target Price: $60.07
•
Review of ROE and EPS
Dec 09
Dec 10
Dec 11
Current
ROE
10.74
14.15
14.19
14.51
EPS
June 11
Sep. 11
Dec. 11
Mar. 12
Actual
0.69
0.73
0.81
0.73
Estimate
0.67
0.70
0.78
0.71
DCF MODEL
MULTIPLE VALUATION
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
2.4
1.7
1.9
2.5
2.3
1.0
0.94
0.8
1.0
1.1
1.3
1.2
1.1
1.3
1.7
1.3
1.3
1.1
1.5
1.6
Relative to S&P
500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
1.6
1.4
1.5
2.1
2.4
0.95
1.0
0.9
1.5
1.1
1.3
1.2
1.2
1.8
1.8
1.4
1.2
1.0
1.8
1.6
Absolute
Valuation
High
Low
Median
Current
Your
Target
Multiple
P/Forward
E
P/S
26.1
12.9
19.0
16.5
3.3
1.3
2.4
P/B
4.8
1.6
P/EBITDA
17.60
P/CF
27.4
Your
Target
Price
19.0
Your
Target E,
S, B,
etc/Share
3.3
2.3
2.4
23.94
57.46
3.4
2.2
3.4
21.50
73.10
7.28
12.66
11.56
12.66
4.79
60.64
9.6
18.0
14.5
18.0
3.24
58.32
62.70
JUSTIFICATION – SELL HALF DHR
Analyst Opinion
Our Calculation
Mean Target
60.89
DCF Target
59.69
Median Target
61.00
P/Forward E
62.70
High Target
66.00
P/S
57.46
Low Target
54.00
P/B
73.10
P/EBITDA
60.64
P/CF
58.32
Number of Brokers
20
Source is from Thomson.
• According to DCF, Multiple, and analysts` opinion,
the final target price is $60.07.
TECHNICAL ANALYSIS
TECHNICAL ANALYSIS
DANAHER CONCERNS
•
Pros
– Strong growth in sales and
gross margin during the last 5
years.
– Successful cost reduction
undertaken.
– Active and optimistic on the
M&A front. Danaher is
expected to have
approximately $5 billion of M&A
capacity over the next 2 years.
– Outstanding cash flow
performance.
•
Cons
– Mild organic revenue growth.
Over 70% of sales growth is
from acquisitions in the last 5
years.
– In 2012 1st Quarter, China
revenues were essentially flat
while revenue decreased in
Europe.
– Relative low margin of safety
when compared with other
stocks like CAT, Quanta, and
WM.
DHR RECOMMENDATION
%age assets
3.47%
Unit cost
$50.52
Market Price
$53.66
Target Price
$60.07
SELL 169 bps
HOLD 178 bps
Quanta Service Overview
• Quanta Services, Inc. provides specialty contracting services
primarily in North America.
• Segments:
 Electric Power Infrastructure Services
 Natural Gas and Pipeline Infrastructure Services
 Telecommunications Infrastructure Services
 Fiber Optic Licensing
•
Competitors:
 Chicago Bridge & Iron Company N.V.
 Comfort Systems USA Inc.
 EMCOR Group Inc.
 Pike Electric Corporation
 URS Corporation
Price History
Justification – Buy Quanta
• Industry: Construction and Engineering
• Market Capital: $4,425.4 million
• Current price: $23.31 (May 11, 2012)
• 52 weeks range: $15.37 - $24.06
• Price Target: $ 27.62
DCF Valuation
Multiple Valuation
Technical Analysis
Expected-value Analysis
Expected Value with High-Variability Scenarios
Stock Price
Probability
Weighted Value
$
14.00
10%
$
1.40
$
23.31
50%
$
11.66
$
42.00
40%
$
16.80
$
29.86
Expected Value
Expected-value Analysis
Expected Value with Low-Variability Scenarios
(Consensus)
Stock Price
Probability
Weighted Value
$
21.00
10%
$
2.10
$
23.31
50%
$
11.66
$
28.00
40%
$
11.20
$
24.96
Expected Value
Expected-value Analysis
Expected Value with Low-Variability Scenarios
(Non-Consensus)
Stock Price
Probability
Weighted Value
$
21.00
8%
$
1.68
$
23.31
25%
$
5.83
$
28.00
67%
$
18.76
$
26.27
Expected Value
Quanta Recommendation
Price Target Summary
Mean Target:
28.38
Median Target:
28.00
High Target:
32.00
Low Target:
24.00
No. of Brokers:
17
• Margin of safety: 18.5%
BUY 177 bps
COMPANY OVERVIEW
•
•
•
•
•
•
Market Cap: $15.07 Billion
Beta: 0.65
Dividend Yield: 4.20%
52 Week Range: $27.75 - $39.43
Current Price: $32.57
Target Price: $41
“Leading provider of comprehensive waste management services
in North America.”
PRICE HISTORY
Revenue Mix by Line of Business
Waste-toenergy, 6%
Other, 2%
Transfer, 9%
Recycling, 8%
Collection,
57%
Landfill, 18%
Growth Profile
• Core operations are quite mature, significant
opportunities for growth in recycling & waste-to-energy
segments.
• Strong industry positioning
• Threat of new entrants is very low Regulatory
environment, high fixed investment costs
• Controllable and predictable recurring cash flows
• Margin expansion from cost cutting programs
• Transition to natural gas fueled trucks
• New recycling initiatives and commodity price increases
DCF VALUATION
RELATIVE VALUATION
Relative to Industry High
P/Trailing E
1.1
Low
.85
Median
.98
Current
.9
P/Forward E
1.1
.83
.98
.95
P/B
1.2
.8
1.1
1.1
P/S
1.4
.8
1.2
.9
P/CF
1.2
.8
1.1
.9
Relative to S&P 500
High
Low
Median
Current
P/Trailing E
1.4
.79
1.1
1.2
P/Forward E
1.4
.77
1.1
1.2
P/B
1.6
.9
1.1
1.2
P/S
1.5
.8
1.0
1.0
P/CF
1.0
.6
.8
.8
Absolute
Valuation
High
Low
Median
Current
Target
Multiple
Target E,
S, B/Share
Target Price
(F x G)
P/Forward E
21.5
12.5
16.1
16.1
16.1
$2.25
$36.23
P/S
1.6
.9
1.4
1.2
1.4
$30.21
$42.29
P/B
3.4
2.1
2.8
2.7
2.8
$13.18
$36.90
P/EBITDA
7.13
3.68
5.53
5.03
5.5
$7.10
$39.05
P/CF
9.4
5.4
7.7
7.3
7.7
$4.70
$36.19
Recommendation
• SIM Portfolio currently does not own any WM.
• We recommend BUYING 142 bps.
• Equal to 16% of the Industrials allocation
Investment Thesis:
WM has consistent and predictable free cash flows, and is the industry leader in
a relatively stable business. It currently pays a strong dividend and is an
active share repurchaser. Nature of the waste management industry is more defensive
than Industrials sector, therefore position will serve as a hedge against other Industrials
owned in the portfolio.
Summary of
Recommendations
Current SIM Holdings and
Industrials Team Recommendations
Company
TOTAL (in bps)
Current SIM
Allocation
Buy/Sell/Hold
Recommended
Recommendation SIM Allocation
391 bps
Hold
391 bps
347 bps
Sell 169 bps
178 bps
0
Buy 177 bps
177 bps
0
Buy 142 bps
142 bps
0
Don’t Buy
0
0
Don’t Buy
0
738
150
888