Industrial Sector Presentation
Terres Maloney
Kwan Wang
Roman Zeltser
Nikita Zorin
Student Managed
Investment Portfolio Class
Prof. P.V. Viswanath
Spring 2002
Objective
Identify and price potentially undervalued equity
investments in the U.S. Industrial Sector, assuming
that the economy is in the beginning stages of
recovery.
Industrial Production Snapshot
• Jumped 0.7% in March
• Biggest increase since May-2000
• High-tech production up 1.4%
• Operational capacity up 0.6%
• Production still below 9/11 level
Analytical Approach
• Top-Down industry analysis
• Quantitative & qualitative examination
• Single out undervalued equities
Analytical Approach
Top-Down industry analysis
•
Focus On Leverage:
 Low leverage increases flexibility
 Greater potential to increase shareholder wealth
 Reduced financial risk
 Better access to debt financing sources
Analytical Approach
Top-Down industry analysis
•
Develop leverage regression model by using the
following variables:
 Total Debt / Total Assets
 EBITDA / Firm’s Market Value
 CAPEX / Total Assets
 Intangible Assets / Total Assets
 Natural Log of Firm’s Market Value
Analytical Approach
Top-Down industry analysis
•
Under-Leveraged Sectors
 Healthcare
 Industrial
 Consumer Discretionary
 Transportation
Industrial Sector Analysis
Industrial Universe
435
Elimination Criteria
# Stocks
Stocks under $5 / shr &
Total Assets under $200MM
331
Ratio Analysis – Top Rank
16
Implementation Of Ratios
Evaluate each of top 16 companies by looking at weighted
and ranked Key Ratio Factors
Determine which company is best positioned to increase
shareholder wealth.
Key Ratio Factors:
•Financial Strength / Credit Position
•Profitability
•Growth
Ratio Analysis
• Relates Income Statement, Balance Sheet, and Cash
Flow Statement items to one another
• Provides clues in evaluating a firm’s current position
• Aids in spotting trends toward future performance
Ratio Analysis
Ratio Categories Employed
Credit Ratios
Measure the firm’s ability to repay its obligations, its
existing leverage situation, and its resultant financial risk.
• CURRENT RATIO
• LONG-TERM DEBT / EQUITY
• EBIT / INTEREST
Ratio Analysis
Ratio Categories Employed
Profitability Ratios
Measure return on assets and equity investments.
• EBIT / TOTAL ASSETS
• NET PROFIT / EQUITY
Ratio Analysis
Ratio Categories Employed
Growth Ratios
Measure the firm’s performance in expanding its business,
a key criterion in valuation.
• EPS GROWTH
• REVENUE GROWTH
Ratio Analysis
Financial Strength
Company Name
APOLLO GROUP INCORPORATED
ESCO TECHNOLOGIES INCORPORATED
MOLEX INCORPORATED
PRE-PAID LEGAL SERVICES INC
EDO CORPORATION
ROBERT HALF INTERNATIONAL
AMERICAN POWER CONVERSION CORP
GRACO INCORPORATED
SIMPSON MANUFACTURING COMPANY
VICOR CORPORATION
TRAVELOCITY.COM INCORPORATED
LAWSON PRODUCTS INCORPORATED
PAYCHEX INCORPORATED
KAYDON CORPORATION
ELECTRO SCIENTIFIC INDUSTRIES
CURTISS-WRIGHT CORPORATION
Weight
Industry
Schools
DefElect
Elec Eqp
Bus Svcs
DefElect
Employmt
Elec Eqp
IndEquip
BldgMatl
Elec Eqp
Con Svcs
InduDist
DataProc
Ind Prod
Elec Eqp
IndFlowC
1.60
1.68
1.78
1.90
1.98
2.18
2.45
2.50
2.78
2.88
3.00
3.03
3.05
3.18
3.20
3.28
Profitability
Growth
Revenue
Curr. Ratio
LT Debt / Eqty
EBIT / Int.
EBIT / T. A.
Net Prof. / Eqty
EPS Growth
2
1
2
1
2
3
4
1
4
4
3
3
1
3
4
2
1
2
1
2
1
2
2
4
3
1
4
3
4
3
3
4
4
4
1
3
4
4
4
2
1
4
2
3
4
2
3
4
1
1
2
3
1
2
3
2
2
4
3
4
1
4
3
4
1
2
3
1
4
1
1
2
2
4
3
3
4
3
4
2
3
1
1
2
1
3
3
2
4
3
1
2
4
4
2
4
3
2
4
4
4
2
1
4
1
15.0%
30.0%
5.0%
15.0%
20.0%
12.5%
2.5%
3
3
2
1
2
3
Electro Scientific Industries Inc.
Electro Scientific Industries Inc.
Manufactures equipment for production of key
electronic components and circuitry for:
• Wireless Communications
• Computers & Personal Digital Assistants (PDA)
• Automotive Electronics
• Home Entertainment Devices
Electro Scientific Industries Inc.
Product Line
Semiconductor Yield Improvement Systems
• Increase manufacturing yield for memory
manufacturers.
Electronic Component Production Systems
• Test and termination equipment.
• Used in multi-layer ceramic capacitors (MLCC’s).
Electro Scientific Industries Inc.
Product Line
Advanced Electronic Packaging Systems
• Advanced Packaging Equipment for High Density
Interconnect (HDI) circuit boards and advanced
integrated circuit packages.
Vision and Inspection Systems
• Critical enabler in the processing and packaging of
semiconductors and other electronic components.
• Circuit Fine Tuning Systems
• Help electronic device manufacturers tune devices to
precise electrical tolerances.
Electro Scientific Industries Inc.
Competition
•
•
•
•
•
•
•
•
Market Share
15%
GSI Lumonics
Tokyo Weld
Kanebo and
Humo
Hitachi
Excellon
Vision
Cognex
NEC
• DRAM Repair
85%
• Laser Trimming
System
40%
60%
• Capacitor Test &
Termination
Equipment
Electro Scientific Industries Inc.
Customers
•
•
•
•
•
•
•
•
•
IBM
muRata
Hyundai
KEMET
Samsung
Siemens
Motorola
Hitachi
Altera
Electro Scientific Industries Inc.
FY 2001 GEOGRAPHIC REVENUE DISTRIBUTION
Japan
21%
Asia
North America
28%
37%
Europe
14%
Electro Scientific Industries Inc.
Valuation Model
Two-stage Dividend Discount and Free Cash Flow to
Equity (FCFE) discount model *
Source: www.damodaran.com
Electro Scientific Industries Inc.
Key Elements of The Valuation Model
•
•
Current Beta
Projected Beta
1.98
1.10
•
•
Risk-Free Rate
Risk Premium
5.05%
4.00%
•
•
Last Fiscal Year EPS
Historical EPS
$3.25
$0.68
•
•
Projected Growth Rate in Earnings
Stable Growth Rate after High Growth
23.00%
3.50%
Electro Scientific Industries Inc.
Estimates Of Growth
Weight
•
70%
Fundamental Growth
 Confidence in our analysis
 Fundamentals are structured to screen
out under-valued stocks
•
Analyst Projection of Growth
20%
 Biased towards positive estimates, but
 Also should be taken into consideration
•
Historical Growth
 Already incorporated into current prices
10%
Electro Scientific Industries Inc.
Sensitivity Analysis of Estimated Growth
Fundamental Analyst
70 %
50 %
30 %
10 %
20 %
30 %
30 %
40 %
Historical
Stock Price
10 %
20 %
40 %
50 %
$94.04
$101.65
$106.15
$113.69
Electro Scientific Industries Inc.
Stable Growth Period Beta Sensitivity Analysis
Future Beta
1.0
1.1
1.5
2.0
Stock Price
$105.43
$99.04
$80.24
$65.60
Electro Scientific Industries Inc.
Institutional Ownership
Institutional Holders
90.20 %
Total Shares Held
24,623,562
Number of Institutional Investors
138
3 Months Net Change in Shares Purchased
1,928,758
Top Institutional Holders:
•
•
•
Capital Guardian Trust
EQSF Advisers
J. & W. Seligman & Co.
Source: Multex.com
Electro Scientific Industries Inc.
Insider Trading
DATE
March-02
March-02
March-02
March-02
January-02
January-02
January-02
December-01
December-01
December-02
December-02
October-02
October-02
WHO
DIRECTOR HORSELY
DIRECTOR MESSINA
DIRECTOR MESSINA
DIRECTOR HORSELY
DEJESUS
DIRECTOR SEBO
DIRECTOR CLARK
DIRECTOR MESSINA
VP TUREK
CEO GOLISANO
DIRECTOR CLARK
DIRECTOR SEBO
DIRECTOR MESSINA
SHARES
-50,000
-6,409
-138
-2,500
-5,000
-24,580
140,830
-30
-1,670
-248,895
-4,000
-1,500
-58,000
TRANSACTION
Sale @ 38.98
Sale @ 41.75
Sale @ 41.75
Sale @ 40.46
Sale @ 36.13
Sale @ 34.60
Purchase @ 34.60
Sale @ 35.64
Sale @ 35.53
Sale @ 34.50
Sale @ 35.93
Sale @ 33.40
Sale @ 33.47
Source: Multex.com
Electro Scientific Industries Inc.
Revenue Growth
Income Reported Growth
500.00%
70.00%
60.00%
400.00%
50.00%
300.00%
40.00%
30.00%
200.00%
20.00%
100.00%
10.00%
0.00%
0.00%
-10.00%
-100.00%
-20.00%
-200.00%
-30.00%
1993
1994
1995
1996
1997
1998
1999
2000
1993
2001
R&D Expense Growth
1994
1995
1996
1997
1998
1999
2000
2001
Pre-Tax Margin Growth
70.00%
35
60.00%
30
25
50.00%
20
40.00%
15
30.00%
10
20.00%
5
10.00%
0
0.00%
-5
-10.00%
-10
-20.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
-15
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Electro Scientific Industries Inc.
Ratio Comparison
•
•
•
•
•
•
•
Sales – 5yr Growth
Current Ratio
NI / Employee
Net Profit Margin
ROA
ROI
Inventory Turnover
Electro Scientific
Industry
21.24
26.19
9,689
6.15
3.47
3.76
1.97
15.60
3.56
6,453
-2.49
-1.79
-2.22
4.71
Electro Scientific Industries Inc.
Future Investment Outlook
•
Healthy and Liquid Balance Sheet
•
Positive Leading Indicators
 Net orders of $33mm were up 19% sequentially
 Backlog is down 14% sequentially to 19mm
 The Electronics Components business is up 26%
 Vision business is up 54% sequentially
 Business has reached a bottom of the cycle, in our view
Electro Scientific Industries Inc.
STRENGTHS
•
Worldwide Presence
 Over 90% of sales generated through foreign offices
•
Direct sales in Asia eliminate brokerage costs
•
ESI has 95% Market Share in Semiconductor Yield Improvement
•
Experiencing growth in its capacitor production and vision business
 Early sign of recovery of company’s overall business
 Production equipment business up 26% during this quarter
•
Dominates memory repair market with 90% Market Share
 Posting sequential growth in this market
 Decreasing cancellation and backlog
Electro Scientific Industries Inc.
WEAKNESSES
•
Lingering inventory over capacity in passives continues to limit
near-term upside
•
Some of the production components are obtained from exclusive
suppliers
•
ESI’s customers’ markets are cyclical and historically experience
periodic downturns
Electro Scientific Industries Inc.
OPPORTUNITIES
•
Expanding Markets
• Embedded memory for logic devices and voltage regulators
• Continued consumer demand for smaller and lighter phones
and PDA’s
•
Dominant Market Share
• Pursuing an aggressive strategy to capture capacity expansion
in China
Electro Scientific Industries Inc.
THREATS
•
Slackening in demand due to the global slowdown in electronics
manufacturing
•
Unfavorable foreign exchange rates
Electro Scientific Industries Inc.
5-Year Price History
Electro Scientific Industries Inc.
Our Recommendation
•
ESIO is undervalued
•
We recommend to take a Long Position in ESIO
•
Current Stock Price is $30.47
•
Model Price is $94.04
•
Set Limit-Stop order at $27.00
Paychex Corporation
Paychex Corp.
National provider of payroll processing, human resources
and benefits outsourcing solutions for small-to mediumsized businesses
Major Products & Services
•
•
•
•
•
•
•
•
•
Payroll Processing
Tax Services
Employee Pay Option
Workers’ Compensation
State Unemployment Insurance Service
Handbook Services
Retirement Services
Paychex Administrative Services
Paychex Business Solutions
Paychex Corp.
Valuation Model
Two-stage Dividend Discount and Free Cash Flow to
Equity (FCFE) discount model *
Source: www.damodaran.com
Paychex Corp.
Key Elements of The Valuation Model
•
•
Current Beta
Projected Beta
0.87
1.10
•
•
Risk-Free Rate
Risk Premium
5.05%
4.00%
•
•
Last Fiscal Year EPS
Historical EPS
$0.68
$0.15
•
•
Projected Growth Rate in Earnings
Stable Growth Rate after High Growth
20.00%
3.50%
Paychex Corp.
Sensitivity Analysis of Estimated Growth
Fundamental Analyst
70 %
50 %
30 %
10 %
20 %
30 %
30 %
40 %
Historical
Stock Price
10 %
20 %
40 %
50 %
$25.75
$23.04
$21.22
$19.30
Paychex Corp.
Stable Growth Period Beta Sensitivity Analysis
Future Beta
1.0
1.1
1.5
2.0
Stock Price
$17.45
$16.27
$12.95
$10.50
Paychex Corp.
SWOT Analysis
Strengths
• More than 100 locations nationwide
• Small employer markets = Greater Growth Potential
• Excellent management of costs
• Strong client retention, new payroll & HR services
• Fully functional Web-Based Payroll solution
Opportunities
• Expansion into international markets
Paychex Corp.
Revenue Growth
Income Reported Growth
50.00%
25.00%
45.00%
40.00%
20.00%
35.00%
30.00%
15.00%
25.00%
20.00%
10.00%
15.00%
10.00%
5.00%
5.00%
0.00%
0.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
1993
1994
1995
1996
1997
1998
1999
2000
2001
Pre-Tax Margin Growth
45
40
35
30
25
20
15
10
5
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Paychex Corp.
Ratio Comparison
Paychex Corp
•
•
•
•
•
•
•
Sales – 5yr Growth
Current Ratio
NI / Employee
Net Profit Margin
ROA
ROI
Inventory Turnover
21.15
1.32
37,483
29.13
9.49
33.79
N/A
Industry
17.17
2.42
28,579
10.00
6.97
9.27
25.99
Paychex Corp.
Future Investment Outlook
•
Balance Sheet strong with 760m in cash and no debt
•
Positive Leading Indicators
 Eventual rebounds in employment levels and interest rates
 The small-employer payroll market has the best longterm growth potential.
 Positive news about economy in the near future may put an
upward pressure on the price of the stock.
Paychex Corp.
Institutional Ownership
Institutional Holders
56.70 %
Total Shares Held
212,696,272
Number of Institutional Investors
421
3 Months Net Change in Shares Purchased
2,745,093
Top Institutional Holders:
•
•
•
Janus Capital Mgt.
TCW Group
Barclays Global Investors
Source: Multex.com
Paychex Corp.
Insider Trading
DATE
March-01
April-01
April-01
April-01
May-01
July-01
August-01
January-02
January-02
March-02
March-02
March-02
March-02
March-02
WHO
OFFICER BELTER
OFFICER HARPER
SECRETARY REINHARDT
VP BELTER
VP BELTER
SECRETARY REINHARDT
OFFICER GLASGLOW
OFFICER LONGE
SECRETARY REINHARDT
CFO DOOLEY
SECRETARY REINHARDT
OFFICER KAPRAL
OFFICER LONGE
VP KURDOCK
SHARES
100
1000
-1500
-5000
-10000
-650
-6228
-404
-1600
-3870
-9760
-480
-5000
-5484
TRANSACTION
Purchase @ 26.81
Purchase @ 26
Sale @ 36.58
Sale @ 33.65
Sale @ 36.23
Sale @ 37
Sale @ 34.10
Sale @ 33.03
Sale @ 30.92
Sale @ 36.06
Sale @ 36.60
Sale @ 36.74
Sale @ 36.74
Sale @ 36.74
Source: Multex.com
Paychex Corp.
5-Year Price History
Paychex Corp.
Our Recommendation
•
PAYX is overvalued
•
We recommend not to invest into PAYX
•
Current Stock Price is $38.10
•
Model Price is $25.75
Curtiss Wright Corp.
Curtiss Wright Corp.
Curtiss Wright Corporation operates through its
consolidated subsidiaries as a designer and manufacturer
of motion control, metal treatment and flow control
products for the aerospace, defense, automotive,
construction, oil, petrochemical, metal working and
other industries. The Company operates three segments:
• Motion Control: designs, engineers and manufactures
actuation components and systems
• Flow Control: provide valves for nuclear submarines
and aircraft carriers.
• Metal Treatment: provides protection against
corrosion and longevity in metal products.
Curtiss Wright Corp.
Product Line
•
Perimeter intrusion detection systems
•
Flight control computers
•
Aiming systems for armored vehicles
•
Suspension systems
•
Flow control products
•
Reed valves
•
Inductive position sensors
•
Digital panel indicators
•
Hydraulic
Curtiss Wright Corp.
Business Segment Diversification
Commercial Aerospace
9.6
Military/Defense
6.7
30.9
8.6
General Industrial
Pow er Generation
11.9
32.3
Process Industry (Oil &
Gas)
Automotive/Transportation
Curtiss Wright Corp.
STRENGTHS
•
•
•
Diverse business segments
Niche leader in industrial technology
Improved position in the military defense industry
WEAKNESSES
•
•
Commercial airspace markets
Expected below average economic activity
Curtiss Wright Corp.
OPPORTUNITIES
•
•
•
•
•
Growth through acquisitions
Pursue defense electronics market – key strategic initiative and will
provide a compelling long-term growth opportunity
Expected growth in defensive spending
Continually expand its geographic network of metal treatment
facilities
Expand further into markets company currently serves and position
the firm to exploit niche opportunities as a supplier of high valueadded products and services.
Curtiss Wright Corp.
Valuation Model
Two-stage Dividend Discount and Free Cash Flow to
Equity (FCFE) discount model *
Source: www.damodaran.com
Curtiss Wright Corp.
Key Elements of The Valuation Model
•
•
Current Beta
Projected Beta
•
•
Risk-Free Rate
Risk Premium
5.05%
4.00%
•
•
Last Fiscal Year EPS
Historical EPS
$6.14
$1.58
•
•
Projected Growth Rate in Earnings
Stable Growth Rate after High Growth
31.25%
4.00%
-0.06
1.10
Curtiss Wright Corp.
Sensitivity Analysis of Estimated Growth
Fundamental Analyst
70 %
50 %
30 %
10 %
20 %
30 %
30 %
40 %
Historical
Stock Price
10 %
20 %
40 %
50 %
$278.79
$319.84
$365.85
$417.46
Curtiss Wright Corp.
Stable Growth Period Beta Sensitivity Analysis
Future Beta
1.0
1.1
1.5
2.0
Stock Price
$298.40
$278.79
$222.61
$180.32
Curtiss Wright Corp.
Institutional Ownership
Institutional Holders
39.40 %
Total Shares Held
4,090,225
Number of Institutional Investors
69
3 Months Net Change in Shares Purchased
(4,331,023)
Top Institutional Holders:
•
•
•
Royce & Associates
Gabelli Asset Management
Gabelli Funds LLC.
Source: Multex.com
Curtiss Wright Corp.
Ratio Comparison
Curtiss Wright
•
•
•
•
•
•
•
Sales – 5yr Growth
Current Ratio
NI/employee
Net Profit Margin
ROA
ROI
Inventory Turnover
15.01
2.97
23,954
18.32
14.47
16.55
4.2
Industry
10.94
1.16
9,449
3.58
4.16
6.81
6.34
Curtiss Wright Corp.
Ratio Comparison Con’t
•
•
•
•
•
•
•
•
•
P/E Ratio
Beta
Price to Book
Sales growth *
EPS growth *
Current Ratio
TD/Equity
Gross Margin *
Op. Margin *
CW
Industry
SP
12.11
-0.08
2.14
15.01
31.25
2.97
0.06
35.25
15.05
21.67
0.47
3.52
10.92
-1.77
1.16
0.97
15.00
7.96
29.33
1.00
5.13
12.60
8.13
1.66
1.06
47.45
17.97
Curtiss Wright Corp.
Revenue Growth
Income Reported Growth
30%
250%
25%
200%
20%
150%
15%
100%
10%
50%
5%
0%
0%
-5%
-50%
-10%
-100%
-150%
-15%
1993
1994
1995
1996
1997
1998
1999
2000
1993
2001
Income Reported Growth (Quarterly)
1994
1995
1996
1997
1998
1999
2000
2001
R & D Expenditures Growth
120%
300.00%
100%
250.00%
80%
200.00%
60%
150.00%
40%
100.00%
20%
50.00%
0%
0.00%
-20%
-40%
-50.00%
M -01
J-01
S-01
D-01
1996
1997
1998
1999
2000
2001
Curtiss Wright Corp.
5-Year Price History