Industrials Sector
Jerod Hickey
Logan Smyth
Jing He
Agenda
● Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendations
 Q&A
Overview
Industrials Overview
 The Sector has a 1.34 T market capitalization
 It is the 4th largest sector in the S&P 500
 Accounts for 11.26% of the S&P 500, Underweight
1.35%
Current SIM Holdings
Company
Shares held
Market price
Overall gain
Gain %
Danaher
12600
$663,894
$19,783
3.07%
Flowserve
7000
$735,840
$61,950
9.19%
United
Technologies
8000
$706,640
$37,280
5.57%
$2,106,374
$119,013
Total
Industries Within The Sector
Sector Performance
Top 5 Holdings
 General Electric: 10.95%
 United Technologies: 5.84%
 Caterpillar: 5.36%
 United Parcel Services: 5.13%
 3M: 4.83%
Top 5 Segments
 Machinery: 24.99%
 Aerospace & Defense: 24.51%
 Industrial Conglomerates: 17.94%
 Airfreight & Logistics: 9.03%
 Road & Rail: 8.49%
Business Analysis
Analyzing Demand: Life Cycle
 Industrials are in the Maturity Phase of the life cycle
 Companies in this sector will display:
 Sales growth similar to that of the economy
 Earnings still growing, but at a declining rate
 Late entrant competitors trying to steal market share
Analyzing Demand: Steve Stovall’s
Theoretical Model of Sector Rotation
 According to the model of sector rotation, with a firm
belief that we are in the “early recovery” stages of the
recession, now might just be the right time to invest in
the industrial sector
Profitability and Pricing
Industrials serve
a very large and
diverse customer
base
Companies in
Sector are already
well established, but
there is much
competition
Products are
well
established,
but could
eventually be
replaced
Raw material for this
sector are readily
available
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
Economic Analysis
Financial Analysis
Absolute EPS by Industry
Sector EPS Growth
Industry Sector Sales Per Share
Net Profit Margin
Net Profit Margin relative to
S&P 500
Sector Cash Flow Per Share
Valuation Analysis
Sector Valuations
Absolute
Relative
Average
Current
Average
Current
Trailing P/E
18.3
16.9
1.1
1.2
Forward P/E
16.7
14.3
1.1
1.0
P/B
3.2
2.9
1.1
1.3
P/S
1.4
1.3
1.0
1.0
P/CF
11.2
11.1
1.1
1.2
Industry Comparison
Aerospace
Defense
Construction &
Engineering
Industrial
Congolm.
Industrial
Machinery
Trailing P/E
14.1
26.5
15.0
17.7
Forward P/E
13.1
17.9
13.5
13.4
P/S
3.2
2.1
1.9
2.5
P/B
1.0
0.6
1.4
1.5
P/CF
10.6
18.4
9.1
12.6
Forward P/E
Trailing P/E
Price/Cash Flow
Technical Analysis
Technical Analysis
Technical Analysis
Recommendation
Recommendation
 Under-weight the Industrials relative to the S&P
 Current: U/W 135bp
 Target: U/W 200bp
 Industrials outperform in the early stages of a recovery
 Performance since March 2009 low
 Industrials: +141%
 S&P 500: +98%
Recommendation
 Catalysts:
 Continuation of global recovery
 Future performance driven by strong growth/demand from
emerging markets (BRIC)
 Weaker dollar helping exports and repatriation of
earnings
 Risks:
 Considerable macroeconomic uncertainty
 Sector has already outperformed the S&P 500
 Mixed technical picture
Recommendation
 Attractive valuation
 Aerospace and Defense
 Industrial Conglomerates
 Fair valuation
 Industrial Machinery
 Unattractive valuation
 Construction and Engineering
Recommendation
Aerospace
Defense
Construction &
Engineering
Industrial
Congolm.
Industrial
Machinery
Trailing P/E
14.1
26.5
15.0
17.7
Forward P/E
13.1
17.9
13.5
13.4
P/S
3.2
2.1
1.9
2.5
P/B
1.0
0.6
1.4
1.5
P/CF
10.6
18.4
9.1
12.6