Industrial Sector Presentation
PREPARED BY:
ASHLEY CLARK
RICHARD GROSS
JON HARMACEK
OLGA ISENBERG
BRYON JORDAN
Agenda
 Sector Analysis
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendation
 Q&A
Sector Analysis
SIM Weight
Industrials Sector SIM Weight vs S&P 500
12.00%
12.36%
10.68%
11.57%
11.50%
7.50%
9.33%
Consumer Discretionary
Consumer Staples
11.00%
Energy
Financials
3.53%
10.50%
S&P 500 Weight
Health Care
3.87%
Industrials
13.58%
3.28%
Information Technology
Materials
Telecommunication Services
4.12%
SIM Weight
10.00%
9.79%
9.50%
Utilities
Cash
9.00%
8.50%
20.19%
S&P 500 Weight
SIM Weight
11.57%
The Industrials Sector makes up 11.57% of the SIM Portfolio, 178 basis points above the S&P 500.
Sector Analysis – Top 10 companies
General Electric Co
14.7%
United Parcel Service Inc
6.1%
United Technologies Corp
5.9%
3M Co
5.5%
Union Pacific Corp
3.6%
Boeing Co
3.5%
Lockheed Martin
3.4%
Emerson Electric Co
3.2%
Burlington Northern Santa Fe Co
3.1%
Honeywell Intl Inc
2.9%
All Other
48.1%
Sector Analysis – Returns by sector
Returns by Sector
Utilities
Telecommunications Services
Information Technology
Financials
Sector
Health Care
YTD
Consumer Staples
QTD
Consumer Discretionary
Industrials
Materials
Energy
S&P 500
-10.00
%
-5.00%
Industrial QTD Return – 3.65%
Industrial YTD Return - -4.32%
0.00%
5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%
% Return
Business Analysis – Economic cycle
Source: http://personal.fidelity.com/products/funds/content/sector/cycle.shtml
Business Analysis – Industrials vs. S&P 500
Industrials versus S&P YTD 2009
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
Industrials
-15.00%
S&P 500
-20.00%
-25.00%
-30.00%
-35.00%
-40.00%
1/1/2009
2/1/2009
3/1/2009
Source: http://www.yahoo.com
4/1/2009
5/1/2009
6/1/2009
7/1/2009
Residential Construction
4%
Industrial Sector Breakdown
Pollution &
Treatment Controls
1%
Textile Industrial
Waste Management
Small Tools & 1%
5%
Accessories
1%
Aerospace/Defens
e - Major
Diversified
7%
Metal Fabrication
3%
Manufactured Housing
0%
Machine Tools & Accessories
1%
Lumber, Wood Production
3%
Industrial
Equipment &
Components
7%
Industrial Electrical
Equipment
13%
Heavy Construction
4%
General Contractors
2%
Aerospace/Defense Products
& Services
19%
Cement
4%
Diversified Machinery
13%
Farm & Construction
Machinery
10%
General Building Materials
4%
Business Analysis – Stages of Maturity
Source: http://openlearn.open.ac.uk/mod/resource/view.php?id=281253
Economic Analysis

Industrials are highly correlated to GDP, real interest rates, real private investments, federal
government spending and housing market

In June 2009, The Fed Beige Book report indicated that the expectations of several districts
regarding the recession have improved, though they do not see the substantial increase in
economic activity through the end of the year

In Q2 2009, manufacturing activity declined or remained at a low level across most states
Economic Analysis – GDP vs. Industrial Equipment
Economic Analysis – GDP vs. Change in Real Investment
Economic Analysis – GDP vs. New Single Family Home Sales
Economic Analysis – Industrial Production Index vs. Recessions
Economic Analysis – Capacity Utilization vs. Recessions
Economic Analysis – Real Private Investment vs. Recessions
12/01/1999
03/01/2000
06/01/2000
09/01/2000
12/01/2000
03/01/2001
06/01/2001
09/01/2001
12/01/2001
03/01/2002
06/01/2002
09/01/2002
12/01/2002
03/01/2003
06/01/2003
09/01/2003
12/01/2003
03/01/2004
06/01/2004
09/01/2004
12/01/2004
03/01/2005
06/01/2005
09/01/2005
12/01/2005
03/01/2006
06/01/2006
09/01/2006
12/01/2006
03/01/2007
06/01/2007
09/01/2007
12/01/2007
03/01/2008
06/01/2008
09/01/2008
12/01/2008
03/01/2009
06/01/2009
Financial Analysis - Net Profit Margin
Industrials Net Profit Margins vs. SP500
1.30
1.20
1.10
1.00
0.90
0.80
0.70
0.60
Financial Analysis - ROE
ROE Industrials vs. SP500
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0.80
ROE Industrials (%)
22
21
20
19
18
17
16
15
Financial Analysis - ROE Key Operating Statistics
EBITDA Margin
Net Profit Margin
ROE
2005
2006
2007
2008
2009
18.0%
17.8%
18.5%
18.4%
18.4%
7.7%
8.2%
8.4%
7.8%
7.3%
Decreasing
17.3%
17.8%
19.5%
20.7%
21.3%
Increasing
*Red indicates consensus estimates
Stable
30
25
20
15
10
5
0
-5
-10
-15
-20
06/01/2009
03/01/2009
12/01/2008
09/01/2008
06/01/2008
03/01/2008
12/01/2007
09/01/2007
06/01/2007
03/01/2007
12/01/2006
09/01/2006
06/01/2006
03/01/2006
12/01/2005
09/01/2005
06/01/2005
03/01/2005
12/01/2004
09/01/2004
06/01/2004
03/01/2004
12/01/2003
09/01/2003
06/01/2003
03/01/2003
12/01/2002
09/01/2002
06/01/2002
03/01/2002
12/01/2001
09/01/2001
06/01/2001
03/01/2001
12/01/2000
09/01/2000
06/01/2000
03/01/2000
12/01/1999
09/01/1999
06/01/1999
09/01/1999
12/01/1999
03/01/2000
06/01/2000
09/01/2000
12/01/2000
03/01/2001
06/01/2001
09/01/2001
12/01/2001
03/01/2002
06/01/2002
09/01/2002
12/01/2002
03/01/2003
06/01/2003
09/01/2003
12/01/2003
03/01/2004
06/01/2004
09/01/2004
12/01/2004
03/01/2005
06/01/2005
09/01/2005
12/01/2005
03/01/2006
06/01/2006
09/01/2006
12/01/2006
03/01/2007
06/01/2007
09/01/2007
12/01/2007
03/01/2008
06/01/2008
09/01/2008
12/01/2008
03/01/2009
06/01/2009
25
20
15
10
5
0
-5
-10
-15
06/01/1999
Financial Analysis - EPS YOY Growth
EPS Industrial YOY Growth
EPS YOY Growth vs. SP500
Financial Analysis - Earnings Per Share
Next Expected EPS Date: Sep
2004
2005
2006
2007
2008
2009
2010
Mar
2.91
3.48
4.06
4.52
5.05
3.12
3.09
Jun
3.37
4.08
4.52
5.24
5.73
3.21
3.58
Sep
3.34
4.07
4.72
5.22
5.4
3.36
3.88
Dec
3.6
4.37
5.16
5.63
4.72
3.62
4.03
Expected Significant
Decrease in 2009
Overall
Year
Year to Year
13.22
Expected Increase
in 2010 Overall
16.00
18.46
20.61
20.90
13.83
14.64
21%
15%
12%
1%
-34%
6%
*Red indicates consensus estimates
Validation Analysis - Industrials
Industrials
Sector
High
Low
Median
Current
P/E
30.5
7.1
20.2
10.7
P/S
1.6
0.6
1.4
0.8
P/B
3.6
1.4
3.2
2.3
P/CS
14.0
4.9
11.4
6.7
P/E
1.2
0.66
1.1
0.69
P/S
1.1
0.8
1.0
0.8
P/B
1.3
1.0
1.1
1.1
P/CS
1.2
0.7
1.1
0.8
vs S&P 500
Validation Analysis - P/E vs. S&P 500
Validation Analysis - P/S vs. S&P 500
Validation Analysis - P/B vs. S&P 500
Validation Analysis - P/CF vs. S&P 500
Recommendation
 Maintain the current overweight of 178 basis points (SIM 11.57% vs. S&P 500
9.79%)
 Positives:
 During the recession most of industrial stocks are undervalued
 Most of the stocks should have an upside when economy turns around
 Increased government spending (i.e. OSK, GE, Shaw)
 Low interest rates
 Risks:
 Double-dip recession driving prices further down
 Lag between GDP growth and Industrial growth
 Companies have divested most of the assets due to the prolonged recession
 Excess capacity in the housing market and commercial real estate
Q&A