Student Investment Management: Summer 2017 Industrials Student Investment Management: Summer 2017 Team members: Seth Frey & Sam Goldberg

Overview Business Analysis Economic Analysis Financial Analysis Industrials: Seth Frey and Sam Goldberg Agenda Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation Sannad, can you copy in your data analysis? 2

3 Overview Industrials: Seth Frey and Sam Goldberg Sannad, can you copy in your data analysis? 3

Industrials: Seth Frey and Sam Goldberg Overview Industrial Sector is comprised of companies that have the following activities: Manufacturing and distributing of capital goods (ex: aerospace, construction, engineering/building of products, electrical equipment and machinery). Commercial services and supplies (ex: printing, employment, environmental and office services). Transportation services (ex: airlines, couriers, marine, road & rail and transportation infrastructure). Sannad, can you copy in your data analysis? 4

5 Overview Industrials: Seth Frey and Sam Goldberg Sannad, can you copy in your data analysis? 5

6 Overview Industrials: Seth Frey and Sam Goldberg Sannad, can you copy in your data analysis? 6

9 Business Analysis Industrials: Seth Frey and Sam Goldberg Growth: Commercial aerospace sub-sector analysis: Stable global gross domestic product (GDP) growth, relatively lower commodity prices including crude oil, and strong passenger travel demand, especially in the Middle East and Asia Pacific regions, will likely drive the commercial aerospace sub-sector growth. Defense sub-sector analysis: Defense sub-sector revenues are likely to grow at a much faster 3.2 percent in 2017 as defense spending in the US has returned to growth after multi-year declines in defense budgets, and future growth many be driven by the new US administration’s increased focus on strengthening the US military. Rising global tensions have led to increasing demand for defense and military products in the Middle East, Eastern Europe, North Korea, and the East and South China Seas. This is in turn resulting in increased defense spending globally, especially in the United Arab Emirates (UAE), Saudi Arabia, South Korea, Japan, India, China, Russia. *Deloitte analysis 2017 Global aerospace and defense industry outlook Did life cycle analysis for largest industry in the Industrial Sector 9

Average Input Prices Since 2010 Industrials: Seth Frey and Sam Goldberg Business Analysis Average Input Prices Since 2010 Input prices spiked in 2011, especially rare earth metals and rubber products Energy is much cheaper now than in 2010 Base metals, precious metals and rubber are cheaper now than in 2010 Input prices spiked in 2011, especially rare earth metals and rubber products Energy is much cheaper now than in 2010 Base metals and Rubber are cheaper now than in 2010 10

Industrials: Seth Frey and Sam Goldberg Economic Analysis Regression analysis is often useful for sectors/stocks that are highly correlated to a particular economic (or other) data statistics. For example, oil prices and Energy stock prices are highly correlated. Regression analysis of sectors within S&P 500: Industrial Sector is closely correlated to the S&P 500 The industrial Sector is also closely correlated to Raw Materials and Consumer Discretionary The industrial Sector is not closely correlated to Utilities. 11

Inventories/Sales: Industrials 2012-17 Industrials: Seth Frey and Sam Goldberg Economic Analysis Inventories/Sales: Industrials 2012-17 ISM Manufacturing Index: 2012-17 12

Financial Analysis

15 Financial Analysis Industrials: Seth Frey and Sam Goldberg S&P Margins relatively constant, slight increase, while R&D slightly increasing Industrials relatively constant, slight decrease, while R&D expense slightly increasing 15

Inventories/Sales: Industrials 2012-17 Industrials: Seth Frey and Sam Goldberg Financial Analysis Inventories/Sales: Industrials 2012-17 Industrials generate free cash flow Industrials’ cash flow decreasing faster than market cash flow 16

17 Financial Analysis Industrials: Seth Frey and Sam Goldberg ETN FY   FY Millions 2019 (EST) 2018 (EST) 2017 (EST) 2016 2015 2014 2013 2012 Revenue 21,309 20,916 20,391 19,545 19,568 19,850 19,626 14,731 Operating income 2,630 2,457 2,255 1,925 858 (941) (536) (329) Net Income 2,394 2,236 2,052 1,742 792 (2.4) 0.6 (2.5) Profit Margin 11% 10% 9% 4% (5%) (3%) (2%) 17

18 Financial Analysis Industrials: Seth Frey and Sam Goldberg UAL FY   FY Millions 2019 (EST) 2018 (EST) 2017 (EST) 2016 2015 2014 2013 2012 Revenue 38,244 37,761 37,205 36,556 37,864 38,901 38,279 37,152 Operating income 4,126 3,525 4,315 4338 5166 2373 1249 39 Net Income 3,625 3,072 3,624 2263 7340 1132 571 (723) Profit Margin 9% 8% 10% 6% 19% 3% 1% (2%) 18

Industrials: Seth Frey and Sam Goldberg Valuation Analysis Since 2014, Market P/E increasing faster than Industrials Industrials P/Sales lower than market Consider P/E, P/S, P/B, P/CF, etc. Does valuation vary widely across the sector from industry to industry and company to company? Consider the P/E, P/S, P/B, P/CF, etc. of the sector and industries versus the market If the relative valuations (above) have expanded/contracted over the years then tell us why Do you think that valuations will expand, contract or remain the same for this group? Versus the market? Why? What does technical analysis (i.e. the charts) suggest? (e.g. is support/resistance forming, do you see trends?, etc.) 19

Price/Sales: Major Industrials Industrials: Seth Frey and Sam Goldberg Valuation Analysis Price/Sales: Major Industrials P/S trending upwards P/S decreased in 2011, 2014, and 2015 Roper and 3M have highest P/S Philips and Siemens have lowest Consider P/E, P/S, P/B, P/CF, etc. Does valuation vary widely across the sector from industry to industry and company to company? Consider the P/E, P/S, P/B, P/CF, etc. of the sector and industries versus the market If the relative valuations (above) have expanded/contracted over the years then tell us why Do you think that valuations will expand, contract or remain the same for this group? Versus the market? Why? What does technical analysis (i.e. the charts) suggest? (e.g. is support/resistance forming, do you see trends?, etc.) 20

Simple Moving Average S5INDU: 2010-17 Industrials: Seth Frey and Sam Goldberg Valuation Analysis Simple Moving Average S5INDU: 2010-17 Google finance 7-4-17 Consider P/E, P/S, P/B, P/CF, etc. Does valuation vary widely across the sector from industry to industry and company to company? Consider the P/E, P/S, P/B, P/CF, etc. of the sector and industries versus the market If the relative valuations (above) have expanded/contracted over the years then tell us why Do you think that valuations will expand, contract or remain the same for this group? Versus the market? Why? What does technical analysis (i.e. the charts) suggest? (e.g. is support/resistance forming, do you see trends?, etc.) 21

The major positives affecting the Industrial sector are: Industrials: Seth Frey and Sam Goldberg Recommendation The major positives affecting the Industrial sector are: Increase in 2015 to 2016 sales growth, predicted to continue Slightly under valued compared to S&P 500 Net producer of cash flow Input prices generally constant to decreasing The biggest risks are: Decreasing cash flows Increasing p/s, p/e High expectations Estimated gross margin of S&P 500 predicted to increase 10% Recommendation Overweight or inline relative to S&P 500 Industries to overweight: defense, healthcare Industries to underweight: industrial/factory automation equipment Should the SIM portfolio over or underweight the sector relative to the S&P 500? What are the major positives that you foresee and the biggest risks to your recommendation? Within your sector, which industries would you over and underweight versus the S&P 500? Why? 22