INDUSTRIAL STOCK RECOMMENDATION Student Investment Management, Dec. 5, 2017 Anthony Lazzeri, Colin Lippincott and Nicolas Smith

Outline Sector overview Stock analysis Honeywell Intl. Eaton Corp. Span-on Inc. United Continental Recommendation Q&A

Overview

Overview * As of 10.31.17

Recommendation Overweight industrials sector Recommended SIM weight of 11.08% vs. S&P 500 weight of 10.25%

Honeywell Intl.

Outline Industries include: Aerospace Manufacturing Buildings Home Invent and manufacture technologies that address challenges such as energy, safety, security, productivity and global urbanization Customers include private consumers to governments and major corporations

Outline Valuation range of $97.25 - $109.73 based on P/E and EBITDA multiples

Eaton Corp.

Eaton Corporation Power Management Company with 4 distinct segments : Electrical Products, Electrical Systems & Services Hydraulics Aerospace Vehicle Flagship segment is Vehicle; has added other segments through acquisition Transitioned to Electricals through acquisition (Cooper Industries) Acquisition also expanded footprint outside US (originally from currently incorporated in Ireland

Recommendation Drivers Eaton Corporation Recommendation Drivers Positives: Supplier to Electrical Manufacturers (e.g. GE, Honeywell) Diversified: 4 segments Potential infrastructure spending in Congress ($1 trillion spending bill) GDP growth in emerging economies: organically and as a supplier Growth in renewables

Recommendation Drivers Eaton Corporation Recommendation Drivers Negatives: Failure to gain foothold in key emerging economies (all non-US markets lost market share, including -13% market share in Europe since Cooper acquisition) Continues to rely on Vehicle segment for growth (Cummins joint venture) CEO Craig Arnold: 1 year into position, replaced veteran Alexander Cutler (41 years with company, 15 as CEO and Chairman) Future growth will be based on international expansion or improving financial performance (next slide) Improving financial results will be unlikely with new CEO

Eaton Corporation

Eaton Corporation Past 10 years: Revenue growth (white) EPS growth (green)

Eaton Corporation Past 10 years: ROE (blue) ROIC (red)

Eaton Corporation Past 10 years: Operating Margin (brown) FCF Margin (blue)

Eaton Corporation Risks: Infrastructure spending bill Execution of financial performance metrics (improved operating margins, organic growth, FCF margins, EPS growth) Successful expansion into emerging markets (e.g. China, India, Africa)

Snap-on Inc.

Snap-on Incorporated Tool and accessory company with 4 distinct segments : Snap-on Tools Group Repair Systems & Information Group Commercial & Industrial Group Financial Services Vehicle repair business represents 69% of company revenue (Snap-on Tools Group & Repair Systems & Information Group) Emphasis on critical industries through innovation and acquisitions Acquisitions expand company’s push into other countries

Snap-on Incorporated Investment Thesis: An increase in revenue and margins in Snap-on’s core business as they prioritize expanding franchises and current distribution channels Push towards critical markets outside of the company’s core business through acquisitions and new product offerings Low P/E ratio compared to the industry average Higher profit margins compared to peers

Snap-on Incorporated

Snap-on Incorporated

Snap-on Incorporated Driving factors for vehicle segment: Increasing vehicle complexity Vehicles on the road General aging of all vehicles Number of miles driven

Snap-on Incorporated

Snap-on Incorporated Driving factors for Critical Industries: In 2015 800+ page catalog covering all critical industries tools and equipment covering more than 25,000 products Acquisitions heavy weighed towards this business segment

Snap-on Incorporated Emphasis on setting up distribution channels in emerging markets Acquisitions geared towards growing market share outside United States

Snap-on Incorporated

Snap-on Incorporated Risks: An adverse economic environment would impede spending in the premium tools market Decline in franchisee and company relations could ruin company image with the end customer Failure to expand into critical industries and emerging markets outside of the United States Increase in cost of steel and energy sources

Snap-on Incorporated ** Up 12% over last several weeks

United Continental

United Continental Holdings United combined with Continental Airlines in early 2010 4th largest airline by passengers Operations in over 190 countries Segments include passenger revenue, cargo revenue, and other revenue Competes with low-cost-carriers as well as other traditional major airlines Utilizes a unique hub-and-spoke system, with mainline and regional flights

United Revenue Breakdown by Segment United Continental Holdings United Revenue Breakdown by Segment

Bottom line – margins will improve, warranting a higher valuation United Continental Holdings Investment thesis: Network initiatives will drive revenue growth Strategies to compete with ULCCs will protect United from losing market share Industry pricing will go through a period of rationalization. Excess supply will be reduced Attractive valuation relative to peers and on an intrinsic basis Bottom line – margins will improve, warranting a higher valuation

United Continental Holdings Network initiatives & ULCC competition: “Banking” flights Re-fleeting and upgauging Segmentation Will prevent market share loss to ULCCs

United Continental Holdings Consolidation needed in international markets

United Continental Holdings See appendix for complete valuation models

United Continental Holdings Investment risks: Geopolitical threats of conflict in the Pacific Macroeconomic risk of entering an economic slowdown or recession A price war for an extended period with ultra-low-cost carriers Increased oil prices, which would harm the entire airline industry

Recommendation

Recommendation Overweight industrials sector Recommended SIM weight of 11.08% vs. S&P 500 weight of 10.25%

Questions?

Appendix

Appendix SNA DCF Analysis

Appendix UAL DCF Analysis

Source: Barclays research Appendix UAL Comparable Companies Analysis Source: Barclays research