Cy Barton Jac Charles

Industrial Goods Sector  In general products are sold to other businesses or government agencies  Lagging but high sensitivity to business cycle events  19 sub-sectors  Classified as companies that produce:  1. Production goods Raw materials and components  2. Support Goods Assist in the production process, e.g. fixed equipment 2

Sector Overview Mkt CapYTD Return1 Yr Return3 Yr Return5 Yr Return Industrials$ 918, %15.85%-9.38%-3.68% S&P 500$ 9,495, %21.92%-6.77%-0.31%  Mature to declining sector in general due to: Few barriers to entry Commoditized products Sensitivity to outsourcing High risk of technological obsolescence to many products  Little control over product demand  Lack of price control  Many companies exhibit either declining revenues, declining profits or both 3

Sector Growth and Value  High Revenue Growth Areas: Green technologies and processes ○ Solar power, geothermal power, wind power ○ High performance batteries Industrial Electrical Equipment sub-sector Pollution & Treatment Controls sub-sector  Consistent Profit Areas: Control an established long-term market niche ○ Waste management and removal ○ Defense contracting ○ Construction of unique industrial machinery 4

Investment Philosophy  Aim for high performance in the long run Firms with established and predictable competitive advantages Difficult to outsource Barriers to entry Control over prices Comfortable capital structure Consistent upward earnings trend Generous dividend policy 5

Sub-Sector Easily Outsourced Few Barriers to Entry Little Price Control Aerospace/Defense Products & Services Cement XX Diversified Machinery XX Farm & Construction Machinery General Building Materials XXX General Contractors XXX Heavy Construction Industrial Electrical Equipment Industrial Equipment & Components X Lumber, Wood Production XX Machine Tools & Accessories XXX Manufactured Housing XX Metal Fabrication XX Pollution & Treatment Controls Residential Construction XX Small Tools & Accessories XXX Textile Industrial XXX Waste Management Sub-Sector Disadvantages 6

Finalist Sub-Sectors & Firms Sub Sector Established Profits Aerospace/Defense Products & Services Farm & Construction Machinery Heavy Construction Industrial Electrical Equipment X Pollution & Treatment Controls X Waste Management 7

Waste Management Sub-Sector  Philosophy: Difficult to outsource and barriers to entry  First Idea: Waste Management Inc. (WM) 8

Waste Management Sub-Sector  Philosophy: Difficult to outsource and barriers to entry  First Idea: Waste Management Inc. (WM) 9

Waste Management Sub-Sector  Republic Services  P/E ratio of 27.2 vs sub-sector average of 21.1  Low daily trading volume  Acquisition in early 2008 nearly doubled the company’s size 10

Farm and Construction Sub-Sector Bucyrus  Strong profit margin 17.4% vs sub-sector average of 4.4%  Sky-high revenue growth – 63.3%  Sustainable? Highly cyclical mining industry Volatile returns on invested capital Heavily dependent on commodity prices  Inconsistent with our investment philosophy 11

Aerospace & Defense  Annual Industry Revenue: $145 billion  Highly concentrated 20 largest firms earn approximately 90% of industry revenue  Demand driven primarily by US defense spending and overall economic climate  Major products include: Aircraft, space craft, missile systems Information systems and guidance systems 12 Dow Jones US Aerospace Index S&P 500

Lockheed and Defense Spending 13

Ratio Analysis CompanyP/EP/S CFO to Earnings EV/EBITDAEPS Lockheed Martin Raytheon Northrop Grumman General Dynamics Company 5-Year Revenue Growth Rate 5-Year EPS Growth Rate 5-Year Operating Income Growth Rate Return on Assets Lockheed Martin 6.10%27.40%21%10.32% Raytheon5.10%25.10%15%8.11% Northrop Grumman 5.30%12.5%16.7%-3.97% General Dynamics 12.00%20% 9.09%

Relative Valuation Lockheed Martin Current Price$ EPS$ 8.11 Sales$ 45,189,000,000 Shares Outstanding380,780, Projected P/E Price Projected P/S Price Raytheon $ 92.45Raytheon $ Northrop Grumman $ Northrop Grumman $ General Dynamics $ General Dynamics $ Average$ 93.40Average $ 87.03

Investment Thesis  Aggressive cash deployment strategy Historically pays out 50% of free cash flows as dividends  Thesis : Given LMT’s strategic economic advantages and its appealing price generated by relative valuation, we feel that LMT will outperform the aerospace subsector and the industrial sector for the coming years 16