Industrials Sector Stock Presentation
Saniya Mussinova
Daniel Pierce
Michael Royer
Nicholas Stuart
Zane Stephens
Sector Recap
Weighting the sector
12 bps over S&P
 Adding 25 bps to
portfolio
 Industrials have
outperformed S&P
 Remain cautiously
optimistic going
forward

Current Holdings

(DHR)
3.10%

(FLS)
3.94%

(GD)
4.05%
11.09%
Stock Recommendations

Sell 405 bps of GD

Buy 105 bps of DHR

Buy 325 bps of UTX

Hold 394 bps of FLS
Flowserve Corp
Market cap: $7.38 billion
 Current Price: $117
 Target Price: $134 (15% upside)
 Recommendation: Hold
 Recent Developments:

◦ Quarterly cash dividend of $0.32 per share
Positives





Bookings and aftermarket growth
Stock price has grown by 35% in 1
year
Repurchasing plan of up to $2 mln
shares
Segment restructuring
Good purchasing decisions:
◦ Purchase of FEDD Wireless (Intelligent
Process Solutions) in 2011
◦ Purchase of Valbart in 2010


Stable growth in emerging markets
Q4 anticipating strong shipment –
bring down backlog
Negatives
Recent increase in backlog (8.4% vs prior
year)
 Decrease in margins
 7.2% increase in DSO (AR/Sales) over
prior year quarter
 Long cycle market continues to be
choppy and competitive
 Nuclear projects being delayed: nuclear
power outlook under scrutiny as
countries re-evaluate nuclear strategy





Recommendation: Increase 105 BP
Current Price: $53.72
Target Price: $60.00 (11.7% upside)
Overview:
◦ Designs, manufactures and markets professional,
medical, industrial and commercial products and
services
◦ Operates in five segments: Test & Measurement;
Environmental; Life Sciences & Diagnostics; Dental,
and Industrial Technologies
◦ Outperforming the S&P 500 Industrials Group YTD
◦ Growth derives from both segment core expansion
and frequent external acquisitions
DHR Relative to Sector
2.5
2
1.5
High
Low
Median
1
Current
0.5
0
P/Trailing E
P/Forward E
P/B
P/S
P/CF
P/EBITDA
DHR Overview

Positives:
◦ Increasing sales in foreign markets, notably those
with growing economies
◦ Experienced management knowledgeable in the
Danaher Business System, a proven lean
production method
◦ Strong sales and margin growth, including double
digit core growth in Industrial Technologies and
Test & Measurement segments. Margins now
above 20% in both segments
◦ With purchase of Beckman Coulter, decreased
exposure to potential economic decline


Manufactures and markets biomedical testing
instrument systems, tests and supplies
Operates in two segments:
◦ Clinical Diagnostics - Products physicians use to
diagnose disease, make treatment decisions and
monitor patients. Approx. 87% of revenues
◦ Life Science - Products used by scientists to study
complex biological problems, including the causes
of disease, identifying new therapies and testing
new drugs. Approx. 13% of revenues
DHR Overview

Concerns:
◦ Other companies are acquiring former
Danaher managers, possibly acquiring key
information about Danaher’s vital lean
production system
◦ Over 70% of sales growth in the last 5 years
has come from acquisitions
◦ With the $6.8 billion purchase of Beckman
Coulter, Danaher is reducing funds for
acquisitions from roughly $2 billion to $300
million for remainder of year
Company Overview
Aerospace
•Designs, manufactures and outfits mid- and
large-cabin business-jet aircraft and provides
maintenance, refurbishment, outfitting and
aircraft services for a variety of business-jet
customers.
Combat Systems
•Provides design, development, production, support and
enhancement of tracked and wheeled military vehicles,
weapons systems and munitions for the United States
and its allies.
Sector (S&P):
Industrial
Industry (S&P):
Aerospace,
Defense
Market Cap:
27.27B
Shares Outstanding: 373M
Avg. Daily Vol:
2.05M
YTD Return:
2.92%
52 Week Range:
55.46 – 78.27
Dividend Yield:
$0.47 (2.57%)
Marine Systems
•Designs, builds and supports submarines
and surface ships for the United States
Navy and commercial ships for Jones Act
customers
Information Systems and Technology
•Provides technologies, products and services that support a range of
Government and commercial digital-communication and informationsharing needs
Business Analysis
FY 2010 (Millions)
Segment
Aerospace
Combat Systems
Marine Systems
Information Systems
Revenue
5,299
8,878
6,677
11,612
32,466
% Revenue Earnings % Earnings Operating Margin
16.32%
860
21.35%
16.23%
27.35%
1,275
31.65%
14.36%
20.57%
674
16.73%
10.09%
35.77%
1,219
30.26%
10.50%
100.00%
4,028 100.00%
Business Analysis
Strengths




Diverse business segments
Incumbent status with certain products
Success with acquisitions
Improving economy
Weaknesses
Uncertain defense spending
 Fixed price contracts
 High energy costs
 Slow economic recovery

GD VS Industry VS Sector
DCF Valuation
General Dynamics (GD)
Analyst: Michael Royer
5/22/2011
Terminal Discount Rate =
Terminal FCF Growth =
Year
2011E
Revenue
34,094
% Grow th
2012E
35,803
5.0%
Operating Income
4,035
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Plus/(minus) Changes WC
% of Sales
3.9%
4,412
40,643
4.1%
4,593
42,188
3.8%
4,725
2017E
43,664
3.5%
4,847
2018E
44,974
3.0%
4,992
2019E
46,099
2.5%
5,163
2020E
47,251
2.5%
5,292
2021E
48,551
2.8%
5,438
11.3%
11.3%
11.2%
11.1%
11.1%
11.2%
11.2%
11.2%
170
179
169
176
183
190
196
202
207
213
218
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
2,666
% of Sales
4,476
39,043
2016E
11.9%
% Grow th
Add Depreciation/Amort
5.0%
2015E
12.0%
31.0%
Net Income
37,577
2014E
11.8%
1,198
Tax Rate
4,283
2013E
10.5%
2.75%
1,272
31.0%
2,832
1,335
31.0%
2,972
1,313
31.0%
2,923
1,367
31.0%
3,043
1,406
31.0%
3,129
1,442
31.0%
3,209
1,485
31.0%
3,305
1,536
31.0%
3,419
1,575
31.0%
3,505
1,618
31.0%
3,601
6.2%
5.0%
-1.6%
4.1%
2.8%
2.5%
3.0%
3.5%
2.5%
2.8%
648
680
733
664
691
717
742
765
784
803
825
1.9%
1.9%
2.0%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
1.7%
(534)
(435)
(451)
(449)
(491)
(473)
(451)
(398)
(340)
(348)
(394)
-1.6%
-1.2%
-1.2%
-1.1%
-1.2%
-1.1%
-1.0%
-0.9%
-0.7%
-0.7%
-0.8%
Subtract Cap Ex
511
501
451
664
691
717
742
765
784
803
825
Capex % of sales
1.5%
1.4%
1.2%
1.4%
1.4%
1.4%
1.4%
1.4%
1.5%
1.5%
1.5%
Free Cash Flow
2,269
% Grow th
13.5%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
16,596
15,669
32,265
8.06%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
10.6
12.1
6.1
7.0
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
2,576
385
$
$
73.03
83.75
14.7%
3,203
2,613
6.78
2,802
8.8%
51%
49%
100%
2,474
-11.7%
2,551
3.1%
2,657
4.1%
2,758
3.8%
2,907
5.4%
3,080
5.9%
3,157
2.5%
Terminal Value
Free Cash Yield
9.9
11.4
5.8
6.6
9.5
10.9
5.5
6.3
3,208
1.6%
42,526
7.54%
Terminal P/E
11.8
10-year
16.0
Terminal EV/EBITDA
6.9
9.6
Multiples Valuation
Absolute
Valuation
High
Low
Median
P/ Forward E
P/S
P/B
P/EBITDA
P/CF
19.7
1.8
4.7
12.3
18.2
6.5
0.6
1.6
3.93
5.5
15.1
1.2
3.1
9.52
13.9
Your
Target E,
Target
S, B,
Current Multiple etc/Share
10.1
0.8
2
6.12
8.6
12
0.95
2.2
7
10.5
7.11
90.92
40
12
8
Your
Target
Price
$
$
$
$
$
85.32
86.37
88.00
84.00
84.00
Average Multiples Target Price = $85.54
DCF Target Price = $83.75
Weighted Average Target Price = (.80 * 83.75) + (.20 * 85.54) = $84.11 (15.17% upside)
Recommendation
Deciding Factors
 High energy costs
 Government dependence
 Slow economic recovery
Sell 405 Basis Points of
General Dynamics
UTX Overview
Aerospace & Defense
 Beta 1.01
 Dividend yield 2.2%, very few in industry
 UTX outperformed the S&P by 6.7%
 History of steady growth in earnings and
dividends over the past 10 years
 Strong balance sheet

◦ Cash represents 7% of assets
◦ Long-term debt 30%
Segments






Pratt- major supplier of jet engine to commercial, business
and military aircraft, 25% operating profit, 52% international
Otis-world’s largest maker of elevators and escalators, freight
mover, 32% operating profit, 82% international
Carrier- #1 marker of HVAC systems- provides installation,
service, parts, 25% operating profit, 52% international
Sikorsky- largest manufacturer of helicopters, aftermarket
products and services, 9% operating profit, 33% international
UTC Fire & Security- global provider of fire and safety
security products, 9% operating profit, 84% international
Hamilton- advanced industrial products, power generation,
propeller systems, environmental control units, etc, 12%
operating profit, 49% international
1 Year Price Movement
5 Year Price Movement
Risks
Double dip recession
 Sustained rise in the dollar
 Increasing prices of energy dampening
airline industry
 Lack of recovery in housing sector,
residential and commercial construction
 Insider selling as of April
 High price/book ratio

Historic trends

For the past 10 years, annual
compounded rates were:
◦ Sales growth of 7.4%
◦ Income from continuing operations growth of
9.2%
◦ 10.3% Earnings per share
◦ ROC 16.2%, S&P average 15.8%
◦ FCF growth of 9.2%, S&P average 6.7%
UTX vs. competitors
Future Catalysts






Large backlogs of commercial aircraft from
Boeing and Airbus hope to provide steady sales
and production levels the next three years,
Development of Boeing 787 and Airbus 350
Continued strong growth of emerging markets
UTC Fire & Security: purchased GE Security in
March 2010
Increased OEM demand, aerospace aftermarket
recovery
Developing CH-35K for USMC
Current Financials
Diluted EPS 5.36
 Last year’s sales growth- 10%
 TTM P/E is 17.78, industry average 28.27
 ROE 22.55%, average of Manufactured
Industrials is 7.33%
 Last quarter EPS $1.11, beating $1.07
estimate
 Current ratio 1.3, well below Aerospace
average 2.8
 Days of sale inventory 78 days, 123 industry

(TTM)
Qtrly Rev Growth
Revenue
Gross Margin
Operating Margin
Diluted EPS
P/E
UTX
10.80%
55.63B
28.21%
14.35%
4.92
17.40
BA
-2%
64B
19.14%
7.06%
4.53
16.66
GE
6.20%
152.46B
37.76%
13.31%
1.20%
15.94
Valuations

DCF using consensus estimates, updated
earnings
◦ $100

EBITDA value driver, multiple 9x
◦ $96

Recommendation:
◦ BUY 325 basis points UTX
Questions?
Appendix A: Danaher DCF
Appendix B: Flowserve DCF
Appendix C: UTX DCF