Industrial Sector
Stock Presentation
Ryan Moore
Jordan Winters
Tony Lovell
James Murray
Kimberly Chianese
Recap Current
Holdings
• S&P Sector Weight = 10.64%
• SIM Weight = 12.99%
• Overweight = 235 bps
Current Weights
•Own 530bps
•Own 391bps
•Own 391bps
•Do Not Own
• Do Not Own
• Do Not Own
Sector Overview
Recap
Absolute
Basis
High
Low
Median
Current
P/E
26.9
9.2
17.2
14.6
% Current
to LT
Median
-15.11%
P/B
5.6
1.4
3.2
2.5
-21.88%
P/S
1.9
0.6
1.4
1.1
21.43%
P/CF
16.4
6.0
11.5
10.2
-11.3%
Relative to
SP500
High
Low
Median
Current
P/E
1.2
0.82
1.1
1.1
% Current
to LT
Median
0.00%
P/B
1.4
0.9
1.1
1.2
9.09%
P/S
1.1
1.8
1.0
1.0
0.00%
P/CF
1.2
0.8
1.1
1.1
0.00%
Key Drivers
• Geopolitical
• Increase in international defense spending
• Emphasis on alternative energy resources
• Industrialization
• Industrial growth in emerging markets
• Shift in Asia from agriculture to industrialized economy
• Global infrastructure growth
• Technological
• Economies of scale allowing for greater spread
• Global sourcing and manufacturing
Recommendations
• Sell 100 bps
• Sell 391bps
• Buy 100bps
• Buy 391bps
• Do Nothing
• Do Nothing
Covanta Corporation
Market Cap: $2.27 billion
Total Revenue: $1.55 billion
Div. Yield: 0.30%
Segments:
1. Waste to Energy
2. Electric and Steam Energy Generation
Covanta Corporation
Stock Price: $14.67
DCF Target Price: $18.39
Valuation Target Price: $17.33
Final Target Price: $18.39
Upside:
25.3%
Recommendation: Do Not Buy
Bucyrus
International Inc.
• Recommendation: Sell 100bps
• Current Price: $59.35
• DCF Value: $76.50
• Stock Valuation: $65.82
• Analyst Median Price Target: $80.00
• Average Percent Upside: 24.8%
• Recent Developments
• Analysts recommending Hold or Buy (no Sell recommendations)
• 30% Order backlog growth – 12 month outlook $1.6B additional Sales
• 2011 Estimated growth of 35.20%
Oshkosh Corporation
• Recommendation: Sell all 391bps
•
Current Price: $27.62
•
DCF Value: $43.87
•
Stock Valuation: $38.68
•
Average Percent Upside: 29%
•
Recent Developments
•
Heavily reliant on U.S. Department of Defense
•
Sales consensus decreases roughly 30% in 2011 and 2012
•
Arbitrage opportunity related to market sell-off
Tyco Int’l
Market Cap: $18.2 billion
Total Revenue: $17.2 billion
Div. Yield: 2.30%
Segments:
1. ADT Worldwide
2. Flow Control
3. Fire Protection Services
4. Electrical and Metal Products
5. Safety Products
Tyco Int’l
Positives:
1. Diversified, global revenue base
2. Recurring service revenue up to 33% of total revenue
3. Strong balance sheet and cash conversion
4. Potential inclusion into S&P 500
5. Broadview acquisition creates dominant share in security industry
6. TEMP spin-off removes highly cyclical segment
7. Share repurchase program could provide upside to earnings estimates
Negatives:
1. No obvious catalyst
2. More attractive names
Tyco Int’l
Stock Price: $36.48
Target Price: $45.00
Upside: 23%
Recommendation: Do Not Buy
Flowserve Corp.
Market Cap: $5.3 billion
Total Revenue: $4.3 billion
Div. Yield: 1.20%
Segments:
1. Flow Solutions Group
ƒ Engineered Products
ƒ Industrial Products
2. Flow Control Division
Flowserve Corp.
Positives:
1. Diversified, global revenue base with strong presence in Middle East
2. High margin aftermarket business represents 40% of revenue
3. Strong balance sheet and cash conversion
4. Fragmented markets allow FLS to gain share and do acquisitions
5. Secular growth story in water desalination
6. Top notch management
Negatives:
1. Bookings can be erratic, but 8 quarters in a row ~$1 billion
2. Very little news flow between quarters
Multiple Pricing
Current Value Price
Multiples Target Price
DCF Target Price
Average Target Price
Target Price
$138
$136
$137
Flowserve Corp.
Stock Price: $96.22
Target Price: $137
Upside: 41.3%
Recommendation: Buy 391 bps
General Dynamics
Market Cap: $22.9 billion
Total Revenue: $32.0 billion
Div. Yield: 2.78%
Industry:
• Aerospace and Defense
Primary Markets:
ƒ Combat Systems
•
Defense & National Security
ƒ Marine Systems
•
Business Aviation
ƒ Information Systems and Technology
Industry Valuation
20.0
18.0
16.0
14.0
12.0
Median
10.0
Current
8.0
6.0
4.0
2.0
0.0
P/Trailing E
P/Forward E
P/B
P/S
P/CF
DCF Model
Analyst: Kimberly Chianese
7/14/2010
Year
Revenue
2010E
33,770
% Grow th
EBIT
EBT Margin
Interest
Interest % of Sales
Taxes
Tax Rate
Discontinued Operations, Net
Net Income
% of Sales
35,668
5.6%
3,891
4,073
11.5%
11.4%
(125)
-0.4%
1,167
31.0%
11.0%
3.5%
2012E
2015E
37,802
6.0%
4,284
2013E
40,070
6.0%
4,408
11.3%
11.0%
(132)
(140)
(148)
-0.4%
-0.4%
-0.4%
1,222
31.0%
1,285
31.0%
1,320
31.0%
2014E
42,474
6.0%
4,460
10.5%
45,022
6.0%
4,727
2016E
47,273
5.0%
4,727
2017E
49,637
5.0%
4,964
2018E
51,871
4.5%
5,187
53,946
4.0%
5,395
55,834
3.5%
5,583
10.0%
10.0%
(340)
(360)
(473)
(496)
(519)
(539)
(558)
-0.8%
-0.8%
-1.0%
-1.0%
-1.0%
-1.0%
-1.0%
31.0%
1,354
31.0%
1,319
31.0%
1,385
31.0%
1,447
31.0%
10.0%
2020E
10.5%
1,277
10.0%
2019E
1,505
31.0%
10.0%
1,558
31.0%
37
3
3
-
-
-
-
-
-
-
-
2,636
2,722
2,863
2,939
2,843
3,013
2,936
3,082
3,221
3,350
3,467
% Grow th
Add Depreciation/Amort
2011E
Terminal Discount Rate =
Terminal FCF Growth =
3.3%
5.1%
2.7%
439
464
491
521
425
1.3%
1.3%
1.3%
1.3%
1.0%
6.0%
-2.6%
5.0%
4.5%
4.0%
3.5%
450
473
496
519
539
558
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
(67)
(76)
(132)
(140)
(149)
(156)
(164)
(171)
(178)
(184)
0.4%
-0.2%
-0.2%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
-0.3%
Subtract Cap Ex
371
392
416
441
425
450
473
496
519
539
558
Capex % of sales
1.1%
1.1%
1.1%
1.1%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Plus/(minus) Changes WC
% of Sales
Free Cash Flow
122
-3.3%
2,825
% Grow th
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2,727
-3.5%
$ 61.51
$ 84.89
38.0%
2,862
5.0%
2,887
0.9%
2,703
-6.4%
2,865
6.0%
2,780
-3.0%
2,919
5.0%
3,050
4.5%
3,172
4.0%
3,283
3.5%
Stock Valuation
Relative to the Industry
Relative to the S&P 500
1.4
1.2
1.2
1
1
0.8
0.8
0.6
0.6
Median
0.4
0.2
Current
0.4
0.2
0
0
Median
Current
Multiple Pricing
Current Value Price
Current Target Target Price
P/Forward E
8.8
6.6
57.99
P/S
0.7
87.0
60.93
P/B
1.8
32.9
59.20
P/EBITDA
5.34
11.1
59.21
P/CF
7.9
7.5
59.21
Median:
59.21
Median Value Price
Median Target Target Price
P/Forward E
15.2
6.6
100.17
P/S
1.2
87.0
104.45
P/B
3.1
32.9
101.96
P/EBITDA
9.6
11.1
106.44
P/CF
13.9
7.5
104.18
Median:
104.18
Weighted Target Price
Median Multiple
DCF
Target Price
104.18
84.89
0.25
0.75
26.05
63.67
89.00
Potential Price
Drivers
•
Valuation failing to price in a recovery in business jet demand.
•
Morgan Stanley estimates global passenger air traffic declined 3.5%
in 2009, however growth of approximately 6% is expected in 2010.
•
Opening of Chinese markets.
•
Continuation of best in class results for GD franchises in combat
vehicles and ships.
•
Need to repair/replace conventional military equipment (planes,
ships, tanks, etc.)
•
Increased funding for New Virginia Class Submarines and DDG 1000
Destroyers.
•
Continuation of low interest rates.
Potential Risks
• Slower than expected economic recovery.
• Cuts in military budgets/government spending.
• U.S. withdrawal from Iraq and an eventual
withdrawal from Afghanistan.
• Failure to perform well on existing contracts.
Recommendations
Stock Price: $60.10
Target Price: $89.00
Upside: 32.4%
Recommendation: Buy 100bps
Recommendations
• Sell 100 bps
• Sell 391bps
• Buy 100bps
• Buy 391bps
• Do Nothing
• Do Nothing