INDUSTRIALS SECTOR
GARRETT GANDEE, SHI TING GU, STEVEN ROEHLIG
FIN 824 - Industrials Sector Overview
The Ohio State
University: SIM
Program
AGENDA
 O verview
 B usiness Analysis
 E conomic Analysis
 F inancial Analysis
 Valuation Analysis
 R ecommendation
FIN 824 - Industrials Sector Overview
SIM PORTFOLIO WEIGHT
December, 2011
FIN 824 - Industrials Sector Overview
INDUSTRIALS OVERVIEW
  Sector Size
  Market Cap = 1.2 Trillion
  Industries
S&P Sectors
  Air Freight & Logistics
  Airlines
Industrials
  Building Products
  Commercial Printing
  Construction / Engineering
  Electrical Components
  Industrial Conglomerates
  Railroads
  Industrial & Construction Machinery
  Data Processing, Environmental Services
  Farm Machinery
FIN 824 - Industrials Sector Overview
SEVEN LARGEST COMPANIES
FIN 824 - Industrials Sector Overview
RECENT PERFORMANCE
Last Year
Last Quarter
 Earnings Per Share
 Up 21%
 Revenues (% Change)
 Up 10%
 Earnings Per Share
 Up 20%
 Revenues (% Change)
 Up 11%
FIN 824 - Industrials Sector Overview
PAST PERFORMANCE VS. S&P 500
•  Very Highly Correlated - r = .98
FIN 824 - Industrials Sector Overview
INDUSTRIALS LIFE CYCLE PHASE
Industrials Sector is in the
“Maturity Phase”
•  Performance tied to market
•  Selling in large volumes
•  Maximizing Profit
•  Stable # of Competitors
FIN 824 - Industrials Sector Overview
FIVE FORCES ANALYSIS
FIN 824 - Industrials Sector Overview
KEY DRIVERS
  Gross Domestic Product
  New Product Orders
  Government Spending
  Business Capital Spending
  Manufacturing Capacity Utilization
  Oil Prices
FIN 824 - Industrials Sector Overview
New Orders
•  Machinery orders appear to have peaked.
FIN 824 - Industrials Sector Overview
Capacity Utilization
•  Utilization peaking; still some slack.
FIN 824 - Industrials Sector Overview
Business Capital Expenditures
•  Businesses continue to invest as economy recovers.
FIN 824 - Industrials Sector Overview
Business Capital Expenditures
•  Industrial spending strong as output recovers.
FIN 824 - Industrials Sector Overview
Economy
•  Recovery still gradual; expected to pick up pace.
FIN 824 - Industrials Sector Overview
Real-GDP 10-Year
•  Pace of recovery softens as consumption moderates.
FIN 824 - Industrials Sector Overview
Oil Prices
•  Prices slightly higher on Middle-East instability.
FIN 824 - Industrials Sector Overview
New Orders
•  Supported by higher oil prices
FIN 824 - Industrials Sector Overview
Nominal-GDP 10-Year
•  Consumer spending and inventory support growth.
FIN 824 - Industrials Sector Overview
HOUSING BOTTOM?
FIN 824 - Industrials Sector Overview
Valuation Analysis
Absolute (Sector) P/Trailing E P/Forward E P/B P/S P/CF Median Rela+ve Current Current Median Current 18.1 15.3 1.1 1.2 16.7 13.4 16.5 13.7 1.1 1.1 15.6 13.3 3.1 2.7 1.1 1.3 2.8 2.2 1.4 1.2 1 1 1.4 1.2 11.1 10.3 1.1 1.1 10.4 9.3 Aero/Defense Industry Median S&P Median Conglomerates Current Median Machinery Current Median Current P/Trailing E 18.1 15.3 17.5 14.5 18.1 15.6 P/Forward E 16.5 13.7 16.6 13.4 16.5 14.0 P/B 3.1 2.7 3.1 1.8 3.1 2.7 P/S 1.4 1.2 2.0 1.4 1.4 1.2 11.1 10.3 11.6 9.3 11.1 10.4 P/CF FIN 824 - Industrials Sector Overview
FINANCIAL ANALYSIS
  The estimated growth rate of the sector in the next few years
is roughly 6%-9%.
  Cash flow to Earnings ratio is around 1.3.
  ROE for the sector is higher than the market.
FIN 824 - Industrials Sector Overview
SALES OF UTX COMPARED TO INDUSTRY
  The revenue of UTX is constantly growing during the past
5years, with a slightly back during the financial crisis
FIN 824 - Industrials Sector Overview
SALES OF DHR COMPARED TO INDUSTRY
  The revenue growth rate of DHR is much better than the
performance of the industry.
FIN 824 - Industrials Sector Overview
SALES OF FLS COMPARED TO INDUSTRY
  With a slightly back during the financial crisis, it seems
Machinery industry will gain a huge growth in revenue during
the next few years.
FIN 824 - Industrials Sector Overview
Financial Analysis
FIN 824 - Industrials Sector Overview
RECOMMENDATIONS
  Currently -1.18% Underweight
  Our recommendation is to move to even weight, or slightly
overweight
  Took into account Gina Martin Adams’ recommendation to increase
weight in this sector
  Pros
  Future Indicators (Capacity Utilization, Oil, Employment) look good
  Cons
  General economic volatility
FIN 824 - Industrials Sector Overview
RECOMMENDATIONS WITHIN SECTOR
Industry Diversified Machinery Aerospace and Defense Products and Services Industrial Electrical Equipment Farm & ConstrucKon Machinery Industrial Equipment & Components Waste Management General Building Materials Metal FabricaKon Aerospace & Defense – Major Diversified Heavy ConstrucKon ResidenKal ConstrucKon Machine Tools & Accessories Small Tools & Accessories Cement General Contractors TexKle Industrial PolluKon & Treatment Controls Lumber, Wood ProducKon Manufactured Housing FIN 824 - Industrials Sector Overview
QUESTIONS?
FIN 824 - Industrials Sector Overview