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?