Sector Recap

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Sector Recap
Sector Weighting
Industrials Sector SIM Weight vs S&P 500
July 14, 2009
Industrials Sector SIM Weight vs S&P 500
July 31, 2009
14.00%
12.00%
12.37%
11.57%
11.50%
12.00%
11.00%
10.00%
9.98%
8.00%
10.50%
S&P 500 Weight
S&P 500 Weight
10.00%
SIM Weight
9.79%
SIM Weight
6.00%
9.50%
4.00%
9.00%
2.00%
0.00%
8.50%
S&P 500 Weight
SIM Weight
S&P 500 Weight
SIM Weight
The sector was over weighted by 178 bps on 7/14/09. As of 7/31/09, the sector was over weighted by 239 bps.
Sector Recommendation
 Original 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
Current Holdings/Company Weightings
 As of July 31, 2009
Canadian Pacific Railway
Emerson Electric Co.
General Electric Co.
Oshkosh Truck Corp.
Shaw Group
Industrials
Portfolio
$288,962.55
$184,810.40
$235,840.00
$849,714.75
$577,171.20
$2,136,498.90
1.67%
1.07%
1.37%
4.92%
3.34%
12.37%
$17,271,303.43
100.00%
** Oshkosh recently issued 13 million shares, diluting the value from the July 31 value of
$849,714 (4.92%) at a share price of $27.45 to approximately $800,000 (4.62%) at a share
price of $25.80.
Proposed Holdings/Company
Weightings
Canadian Pacific Railway
Emerson Electric Co.
General Electric Co.
Oshkosh Truck Corp.
Shaw Group
$0.00
$184,810.40
$409,329.88
$677,035.08
$0.00
0.00%
1.07%
2.37%
3.92%
0.00%
First Solar, Inc.
UTI Worldwide, Inc.
Industrials
$400,709.28
$400,709.28
$2,072,593.92
2.32%
2.32%
12.00%
Portfolio
$2,072,593.92
100.00%
Sector Weighting Recommendation
Industrials Sector SIM Weight vs S&P 500
Proposed
14.00%
12.00%
12.00%
9.98%
10.00%
8.00%
S&P 500 Weight
SIM Weight
6.00%
4.00%
2.00%
0.00%
S&P 500 Weight
SIM Weight
The proposed sales/purchases result in an overweighting of 202 bps.
Canadian Pacific Railway
Company Overview
 Holding company whose direct and indirect subsidiaries operate railways in North
America
 Own/leases 15,500 miles of track mostly in western Canada and the US Midwest
 Grain, industrial products, and intermodal freight account for 75% of their revenue
 Acquired Dakota, Minnesota and Eastern Railroad Corporation in SEP ‘07 which
opened them up to the US Midwest region
Canadian Pacific Railway P/E
Canadian Pacific Railway P/S
P/CF
Canadian Pacific Railway Valuation
Firm:
Ticker:
Relative to Sector
P/TE
P/FE
P/B
P/S
P/CF
Canadian Pacific Railway Ltd.
CP
Price:
$ 46.98
High
Low
Median Current
1.4
0.7
0.9
1.4
1.1
0.7
0.9
0.9
0.8
0.4
0.6
0.6
2.2
1
1.5
2.2
1.2
0.6
0.8
1.2
Relative to S&P
P/TE
P/FE
P/B
P/S
P/CF
High
ABSOLUTE
P/FE
P/S
P/B
P/EBITDA
P/CF
Low
1.3
1.1
0.8
1.9
1.1
High
Low
17.9
2.9
2.6
8.54
11.5
Average Valuation: $ 43.27
Current price:
$ 46.98
Upside/(Downside):
Median
0.64
0.72
0.5
1
0.6
-7.9%
8.8
0.9
0.9
2.75
4.3
1
0.95
0.7
1.5
0.9
Current
0.98
0.88
0.7
1.9
1
Median Current Target Multiple
14.6
15.7
14.6
2
1.9
1.7
1.8
1.5
1.55
5.96
6.21
5.5
9
8.7
8.5
Target E, S,
B,
etc/share
2.66
24.39
31.32
7.57
5.40
Target Price
$
38.84
$
41.46
$
48.55
$
41.61
$
45.90
Canadian Pacific Railway DCF
DCF Valuation
7/14/2009
Ticker: CP
Rick Gross
Terminal Discount Rate =
Terminal FCF Growth =
11.5%
4.5%
Year
2009E
2010E
2011E
2012E
2013E
Forecast
2014E
2015E
2016E
2017E
Revenue
% Growth
4,180
4,276
2.29%
4,500
5.25%
4,816
7.00%
5,153
7.00%
5,462
6.00%
5,789
6.00%
6,137
6.00%
6,505
6.00%
Operating Income
Operating Margin
665
15.90%
760
17.77%
800
17.77%
939
19.50%
1,005
19.50%
1,065
19.50%
1,129
19.50%
1,166
19.00%
1,236
19.00%
Interest and Other- net
Interest % of Sales
(128)
-3.06%
(133)
-3.11%
(145)
-3.23%
(155)
-3.23%
(166)
-3.23%
(176)
-3.23%
(187)
-3.23%
(198)
-3.23%
(210)
-3.23%
150
22.6%
-
172
22.6%
-
181
22.6%
-
177
22.6%
-
190
22.6%
-
201
22.6%
-
213
22.6%
-
219
22.6%
-
232
22.6%
-
387
455
18%
473
4%
606
28%
649
7%
688
6%
729
6%
749
3%
794
6%
513
12.0%
9
0.20%
(785)
-18.4%
540
12.0%
20
0.45%
(826)
-18.4%
496
10.3%
22
0.45%
(867)
-18.0%
541
10.5%
23
0.45%
(876)
-17.0%
584
10.7%
25
0.45%
(874)
-16.0%
637
11.0%
26
0.45%
(897)
-15.5%
706
11.5%
28
0.45%
(921)
-15.0%
781
12.0%
29
0.45%
(943)
-14.5%
192
10%
207
8%
257
24%
337
31%
423
25%
494
17%
562
14%
660
18%
Taxes
Tax Rate
Minority Interest
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Shares Outstanding
502
12.00%
53
1.27%
(767)
-18.36%
174
$2,361.5
$4,360.3
6,721.7
2.58%
168
Current Price
46.98
Implied equity value/share
40.01
Upside/(Downside) to DCF
-14.8%
Total Debt
Total Cash
4,208
487
35%
65%
Pros/Cons
 Pros





Current price = $46.98; Price target = $41.64; 12.8% downside
CP restructured their contract with Teck Coal this year to an unfavorable
outcome
Growth is limited to M&A
US GDP slow to recover will continue to eat away at their revenue
Additional government regulation on grain transport rates (grain is 2nd largest
revenue driver)
 Cons

They are integrating some trip planning software that will decrease fuel expense
by estimated 10% (fuel only makes up ~15% of total operating expenses)
Oshkosh Corporation
Latest Developments
 SIM ownership of Oshkosh is near 5%. We decided to sell 100 basis points
 At $23.69 per share, Oshkosh had about 97% upside
 In June and July 2009 Oshkosh won $2.8 billion army contract for M-ATV
vehicles with the March 2010 delivery date
 On August 5th, 2009 Oshkosh announced an offering of 13 million shares of
common stock. The company currently has 74.4 million shares outstanding
 The company priced its public offering of new shares at $25 per share. Assuming
no overallotment by the underwriters, Oshkosh expects to receive net proceeds
from this offering of around $ 311.4 million after deducting the underwriting
commissions
 Oshkosh plans to use the net proceeds of the offering to repay a portion of the
term loan borrowings under its credit agreement
The Shaw Group
Company Overview
 Expertise with engineering, technology, construction, fabrication, environmental,
and industrial services.
 Fossil and Nuclear segment handles designing, building, and running refineries and
nuclear power facilities (plants, subs, etc.)
 Environmental and Infrastructure segment has a lot of government contracts.
 Owns 20% stake in Westinghouse (nuclear synergies.)
 Fabrication and Manufacturing of piping systems
.
29
28
24
6/22/2009
6/23/2009
6/24/2009
6/25/2009
6/26/2009
6/27/2009
6/28/2009
6/29/2009
6/30/2009
7/1/2009
7/2/2009
7/3/2009
7/4/2009
7/5/2009
7/6/2009
7/7/2009
7/8/2009
7/9/2009
7/10/2009
7/11/2009
7/12/2009
7/13/2009
7/14/2009
7/15/2009
7/16/2009
7/17/2009
7/18/2009
7/19/2009
7/20/2009
7/21/2009
7/22/2009
7/23/2009
7/24/2009
7/25/2009
7/26/2009
7/27/2009
7/28/2009
7/29/2009
7/30/2009
7/31/2009
8/1/2009
8/2/2009
8/3/2009
8/4/2009
8/5/2009
8/6/2009
8/7/2009
The Shaw Group Valuation
Shaw Group Closing Price
32
31
30
Earnings Announced
(Missed)
27
26
25
$23.69
23
22
The Shaw Group Valuation
Firm: The Shaw Group
Ticker: SGR
Relative to Sector
Price: $ 31.13
High
Low
As of 8/10 @ 2:00 p.m.
Median
Current
P/TE
8.4
0.7
1.5
1.2
P/FE
2.6
0.5
1.2
0.8
P/B
1.4
0.2
0.7
0.8
P/S
0.7
0.1
0.4
0.4 <-- Coincidence?
P/CF
6.2
0.4
1.7
1.3
Relative to S&P
High
Low
Median
Current
P/TE
9.6
0.57
1.7
0.84
P/FE
3.0
0.48
1.2
0.77
P/B
1.6
0.2
0.8
0.8
P/S
0.7
0.1
0.4
0.4 <-- Coincidence?
P/CF
7.0
0.5
1.8
1.0
ABSOLUTE
High
Low
Median
Current
Target E, S, B,
etc/share
Target Multiple
Target Price
P/FE
44.9
5.7
19.1
13.7
15.5
2.39 $ 37.05
P/S
1.1
0.1
0.5
0.4
0.45
84.41 $ 37.98
P/B
4.9
0.6
1.9
1.9
1.9
16.38 $ 31.13
82.61
4.33
20.02
6.45
11.0
4.83 $ 53.09
78.6
5.2
18.8
9.3
12.5
3.35 $ 41.84
P/EBITDA
P/CF
Average Valuation: $ 40.22
Current price: $ 31.13
Upside/(Downside):
29.2%
The Shaw Group Valuation
ABSOLUTE
P/FE
P/S
P/B
Target Price (7/14)
$ 32.85
$ 31.54
$ 27.88
Target Price (8/10)
$ 37.05
$ 37.98
$ 31.13
The Shaw Group DCF
DCF from 7/14
Terminal Discount Rate = 10%
Terminal FCF Rate = 4.5%
Current Price (7/14) = $25.46
Implied equity value/share (7/14) = $25.57
Upside/(Downside) to DCF on 7/14 = 0.4%
Current data
Current Price (8/10 @ 2:00 p.m.) = $31.13
Implied equity value/share (7/14) = $25.57
Upside/(Downside) to DCF on 8/10 = (17.9%)
The Shaw Group Pros/Cons
 Pros


Current price = $31.13; DCF Price target = $25.57; 17.9% downside
Westinghouse is a drain on their bottom line since they bought a 20% stake.
 Cons




They have a $22.3 Billion back log of work.
$1.3 Billion Cash on hand. First time ever of $1 Billion.
Still made a profit during this recession ($7.9 Million)
Nuclear power will be a big industry as the US looks into the next generation of
plants (2016.)
GE Company Overview
 Industrial Conglomerate
 Develops manufactures and markets products for generation, transmission,




distribution, control and utilization of electricity.
Operating Segments: Infrastructure, Commercial Finance, GE Money, Healthcare,
NBC Universal and Industrial
Products range from aircraft engines, power generation, water processing and
security technology to medical imaging, business and consumer financing
Has continued to meet earnings for several quarters, despite a blip in reporting
which cost them $50 million
Future of GE looks bright according to analysts who support a buy or hold on this
stock due to its high correlation to the S&P 500 performance and the economy as a
whole
GE P/E
GE P/S
GE Valuation
DCF Valuation
7/17/2009
Ticker: GE
Year
Terminal Discount Rate =
Terminal FCF Growth =
2009E
10.5%
3.0%
2010E
2011E
2012E
2013E
164,493
-1.09%
169,289
2.92%
176,061
4.00%
183,984
4.50%
Forecast
2014E
2015E
2016E
2017E
2018E
193,183
5.00%
203,808
5.50%
213,998
5.00%
224,698
5.00%
235,933
5.00%
2019E
Revenue
% Growth
166,309
Operating Income
Operating Margin
19,087
11.48%
19,378
11.78%
21,142
12.49%
22,888
13.00%
23,918
13.00%
25,114
13.00%
28,533
14.00%
29,960
14.00%
31,458
14.00%
33,031
14.00%
34,352
14.00%
Corp items and elimin
% of Sales
Interest/oth finl charges
% of Sales
(2,495)
-1.50%
(1,663)
-1.00%
(2,467)
-1.50%
(1,645)
-1.00%
(2,116)
-1.25%
(1,693)
-1.00%
(2,201)
-1.25%
(1,761)
-1.00%
(2,300)
-1.25%
(1,840)
-1.00%
(2,415)
-1.25%
(1,932)
-1.00%
(2,548)
-1.25%
(2,038)
-1.00%
(2,675)
-1.25%
(2,140)
-1.00%
(2,809)
-1.25%
(2,247)
-1.00%
(2,949)
-1.25%
(2,359)
-1.00%
(3,067)
-1.25%
(2,454)
-1.00%
Taxes
Tax Rate
(3,471)
-23.3%
(3,511)
-23.0%
(3,987)
-23.0%
(5,264)
-23.0%
(5,501)
-23.0%
(5,776)
-23.0%
(6,563)
-23.0%
(6,891)
-23.0%
(7,235)
-23.0%
(7,597)
-23.0%
(7,901)
-23.0%
Net Income
% Growth
11,125
11,426
13,008
13,662
14,277
14,991
17,385
18,254
19,167
20,125
20,930
245,370
4.00%
3%
14%
5%
4%
5%
16%
5%
5%
5%
4%
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
Initial Working Capital
Subtract Cap Ex
Capex % of sales
11,316
6.80%
2,639
1.6%
15,514
9.33%
10,644
6.47%
2,266
1.4%
12,473
7.58%
10,528
6.22%
(273)
-0.2%
12,337
7.29%
10,949
6.22%
(352)
-0.2%
13,205
7.50%
11,441
6.22%
(368)
-0.2%
12,879
7.00%
12,013
6.22%
(386)
-0.2%
12,943
6.70%
12,674
6.22%
(408)
-0.2%
13,044
6.40%
13,308
6.22%
(428)
-0.2%
13,696
6.40%
13,973
6.22%
(449)
-0.2%
14,381
6.40%
14,672
6.22%
(472)
-0.2%
15,100
6.40%
15,259
6.22%
(491)
-0.2%
15,704
6.40%
Free Cash Flow
YOY growth
9,567.0
11,861.9
24%
10,925.1
-8%
11,054.3
1%
12,471.6
13%
13,674.8
10%
16,607.6
21%
17,438.0
5%
18,309.9
5%
19,225.4
5%
19,994.4
4%
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Shares Outstanding
$85,764.4
$101,172.4
186,936.7
5.12%
10,564
Current Price
$14.50
Implied equity value/share
$17.70
Upside/(Downside) to DCF
22.0%
Total Debt
Total Cash
514,100
97,500
46%
54%
Terminal
Value
Terminal
P/E
EV/EBITDA
Free Cash Yield
274,590.0
13.1
13.9
7.28%
GE Pros/Cons
 Pros




if economic outlook is stable to positive, GE’s returns are highly correlated to the
overall economy and S&P 500
Huge growth potential in energy due to renewable legislation
Recent stock rebound
 Purchased stock at average price of $34.79/share, currently trading
at $14.57/share  gaining about $1/share per week for last 3 weeks
Recently signed $115 million deal with Chinese energy company, Fujian Jingjiang
Gas Power Co.
 Cons
 Earnings have severely declined 2009 v. 2008
 Recent issue of $1.5 billion of global medium-term notes
 Recent issue of $2 billion in 10-year notes
First Solar
Company Overview
 First Solar designs and makes solar modules using proprietary thin film






semiconductor technology to convert sunlight into electricity
First Solar was formed in 1999 and launched production of commercial products
in 2002. It had IPO in 2006
First Solar is the largest manufacturer of thin film solar modules. It plans to
expand its capacity from 735MW in 2008 to more than 1 GW by the end of 2009
In 2008 company generated 94% if revenues from customers in Europe, mainly
Germany, which accounted for 74%. The company is also targeting other markets
as well, including China, India and Australia
In 2008 First Solar reported $1.2 billion in revenue, an increase of $498 million
over 2007
First Solar has achieved the lowest manufacturing cost per watt in the industry $.87 per watt
First Solar developed the first pre-funded module collection and recycling
program in the industry
First Solar P/E
First Solar P/S
P/CF
First Solar Valuation
Firm:
Ticker:
Relative to Sector
P/TE
P/FE
P/B
P/S
P/CF
First Solar
PCAR
Price:
$ 146.47
High
Low
Median
Current
42.3
1.8
7.9
1.8
13.2
1.3
5.8
1.3
6.1
1.7
4
2.2
55.3
0
16.7
8.5
23.2
2.5
9.3
2.5
Relative to S&P
P/TE
P/FE
P/B
P/S
P/CF
High
ABSOLUTE
P/FE
P/S
P/B
P/EBITDA
P/CF
High
Low
46.1
13.6
7.7
55.6
25.2
218.1
84.4
20.2
683.24
279.4
Average Valuation: $ 220.81
Current price:
$ 146.47
Upside/(Downside):
50.8%
1.3
1.3
1.9
0
2
Low
16
0
5.2
16.17
18.2
Median
Current
8.1
1.3
5.4
1.3
4.6
2.4
14.9
7.3
9.5
2
Median
Current
Target Multiple
Target E, S,Target
B, etc/share
Price
79.1
22.3
25
7.28 $ 182.00
13
7.2
10
23.32 $ 233.18
11.2
5.4
7
27.12 $ 189.87
95.41
16.54
20
8.86 $ 177.11
105.4
18.2
40
8.05 $ 321.91
First Solar Pros/Cons
 Cons:



Some investors worry about the competition from China (Yingli Green
Energy). Experts do not expect Chinese competitors to match First Solar
module manufacturing costs over the next 12-18 months
Difficult financial environment for the companies to invest into the
renewable energy development
The storage of renewable electricity (batteries) is underdeveloped
 Pros:




Carbon legislature is working its way through Congress
Pros: Fossil fuel sources are finite
Pros: U.S. attempt to decrease its dependency on foreign oil
Pros: U.S. green energy movement. Several states require utility companies
to increase the percentage of its renewable assets
UTI Worldwide Inc.
Company Overview
 International, non-asset-based supply chain services and
solutions company



air and ocean freight forwarding
contract logistics
customs brokerage
 Provide total logistics solutions
 Cyclical industry
 Revenues down 35% in 1st Qtr FY10 and Net Income was down
27%

Attributed to cost cutting efforts
UTI Worldwide Inc. P/E
UTI Worldwide, Inc. P/S
P/CF
UTI Worldwide, Inc. Valuation
Firm:
Ticker:
Relative to Sector
P/TE
P/FE
P/B
P/S
P/CF
Uti Worldwide Inc.
UTIW
Price:
$ 12.55
High
Low
Median Current
2.2
1
1.5
1.1
2
0.9
1.4
0.9
2
0.7
1.2
0.7
0.9
0.3
0.5
0.4
2.9
1
1.7
1.2
Relative to S&P
P/TE
P/FE
P/B
P/S
P/CF
High
ABSOLUTE
P/FE
P/S
P/B
P/EBITDA
P/CF
Average Valuation:
Current price:
Upside/(Downside):
Low
2.4
2.2
2.2
0.8
3.1
High
32.9
1.3
6.4
26.68
35.8
$ 19.83
$ 12.55
58.0%
0.82
0.83
0.8
0.3
0.9
Low
10.1
0.2
1.4
4.98
6.6
Median Current
1.7
0.82
1.4
0.83
1.3
0.8
0.5
0.3
1.9
0.9
Median Current
21.5
14.8
0.8
0.3
4
1.7
14.44
15.84
19.7
8.4
Target E,
Target
S, B,
Multiple etc/share
19
0.76
0.7
35.14
3.5
7.38
15
0.79
15
1.49
Target
Price
$ 14.44
$ 24.60
$ 25.84
$ 11.88
$ 22.41
UTI Worldwide, Inc. Pros/Cons
 Pros




Current price = $12.55; Price target = $19.83; 58% upside
Increased global trade and outsourcing of logistics solutions
Network of freight forwarding offices and contract logistics and distribution
centers in a total of 62 countries with an additional 79 countries serviced through
independent offices
 Room for growth in these 79 countries
Taken measures to reduce their cost structure saving $50m in expenses in
FY2010 (began 1 FEB)
 Cons


Until demand spikes they will continue to see revenues at lower levels
Global recession could last longer than predicted
Summary Recommendation
 Sell 167 basis points of Canadian Pacific Railway
 7.9% downside
 Unfavorable restructuring
 Sell 334 basis points of Shaw Group
 17.9% downside
 Westinghouse purchase
 Buy 232 basis points of First Solar, Inc.
 50.8% upside
 Future Renewable legislation and state requirement
 Buy 232 basis points of UTI Worldwide, Inc.
 58% upside
 Revamped cost structure
Summary Recommendation Cont’d
 Sell 100 basis points of Oshkosh Truck Corp.
 Approaching 5% maximum holding cap
 Still has upside potential
 Buy 100 basis points of General Electric
 22% upside potential
 Future looks healthy for many segments, especially energy
Questions?
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