1. Industrials Stock Recommendations
Jie Jin, Tyler Keister, Austin Kotler, Brian Kountz
Spring 2018

2. Agenda Overview Stock Analysis Eaton General Electric Co. Snap-On Inc.
United Continental Holdings
Summary of Recommendations

3. S&P 500 Sector Breakdown

4. SIM Sector Breakdown
SIM holdings are 14 basis points above S&P 500

5. Recommendation OVERWEIGHT Early enough in economic cycle to thrive
Rising oil prices can actually help industrials, but hurt airlines
Trump’s tax cuts will help investment With industrials’ ability to benefit from rising metal prices, tariffs may actually help
Industrials appear to be expensive as a whole, but there are opportunities within the sector
OVERWEIGHT Subsectors
Aerospace & Defense
Construction Equipment
Road & Rail
UNDERWEIGHT Subsectors
Airlines
Air Freight & Logistics

6. Holdings & Recommendation
HOLD Eaton
NOT IN PORTFOLIO – AVOID General Electric Co.
BUY Snap-On Inc.
HOLD United Continental Holdings

7. Eaton

8. Eaton Business Segment
Electrical Products and Electrical Systems and Services
Hydraulics
Aerospace
Vehicle

9. Eaton

10. Eaton Investment Thesis:
1. Electrical-Equipment Stocks Beat Market in We are still on the economy expanding cycle.
2. Continued investment in organic growth in 2018
Electric-vehicle market
3. M&A as lowest of its capital-allocation priorities
4. Improved operating leverage from restructuring may push Eaton's 2018 performance toward the high end of its margin guidance via a higher variable contribution margin,
up to 40% that the company expects vs. the 25% normally seen at this stage in the demand cycle.

11. Eaton
Risks:
1. Eaton's Electrical Systems and Services (ESS) business has been late to take part in the Industry 4.0/Industrial Internet of Things trend.
2. Major competitors to Eaton's ESS have well established IoT platforms such as Ability (ABB), Predix (GE), Uniformance (Honeywell), EcoStruxure (Schneider) and Mindsphere (Siemens).

12. Eaton

13. General Electric Co.

14. General Electric Co.
Global digital industrial conglomerate focused on transforming the industry.
GE prides itself on developing new technologies leading to the growth and expansion of the company since 1892.

15. General Electric Co.
Thesis: Too much uncertainty Analyst price target range: $ $22.00
Sources: Barron’s, Seeking Alpha, Investor’s Business Daily, CNBC, The Street

16. General Electric Co.

17. General Electric Co. Risks: 1. Economic downturn
Corporate restructuring to be effective
2. U.S. enter into a trade war
cost overrun
3. Failure in CEO John Flannery’s strategy
Hard to imagine anything else going right
Basis of everything
4. Power division
Controlling costs and redeveloping to be more streamlined and efficient
5. Any problems in the Aviation and Healthcare divisions

18. Snap-On

19. Snap-On Business Segments: Snap-On Tools Group
Repair Systems & Information
Commercial & Industrial
Financial Services
Premium tools and equipment for vehicle repair which accounts for 65.3% of revenue
Deliver their tools via franchised mobile vans and have a loyal customer base in the U.S.
working to develop the same loyalty abroad

20. Snap-On
Thesis:
1. Vehicles are on average getting older and becoming more complex; creating demand for vehicle repair equipment.
2. Strong economic outlook through 2018
3. Operating margins are higher than competition and current valuation multiples are very low.
4. Snap-On continues to boost their growth prospects with increased revenue coming from diagnostics and a stronger international presence.
5. Snap-On’s customer loyalty gives them an economic moat to differentiate from their competition.

21. Snap-On

22. Snap-On

23. Snap-On
Risks:
1. Geopolitical uncertainty, specifically tariffs on steel will squeeze Snap-On Tool’s operating margins, as steel is main input.
2. If economy turns for the worst Snap-On’s van franchisees will be hurt, causing more bad credit allowances and hurting new franchise opportunities.
3. Interest rate increases will help Snap-On’s Financial Services profitability, but it may also hurt franchisee ability to initiate future leases.
4. Moving internationally is good for growth but is also inherently riskier, especially with Snap-On’s slight troubles with negative currency translation.

24. Snap-On

25. Snap-On Valuation: DCF:
Discount Rate of 12%, and terminal growth rate of 3%
Comps (P/E,P/B,P/S,P/EBITDA):
Used mix of comparable company multiples and past Snap-On multiples.
Price Target = $168.08
+15.5% upside

26. United Continental Holdings

27. United Continental Holdings
Macro Environment Affects Demand
Air transportation is a discretionary purchase that many consumers may not make under negative economic conditions. The airline industry is highly cyclical, thus the demand for United’s travel services is correlated to the strength of the U.S. and global economies in which United operates.
Oil Prices
Oil and jet fuel prices are fundamental drivers of airline companies’ performance. United does not fuel-hedge, which has proven to be the best strategy for 1Q18

28. United Continental Holdings

29. United Continental Holdings
HOLD United Continental Holdings, Inc. with a target price of $72.37 and implied upside of 4.18%.
Thesis:
UAL will continue its aggressive competitive pricing position to crowd out ultra-low cost carriers in the long-term
Margins will be pressured by accelerated capacity growth in FY18 and FY19 in mid-continental hubs: Chicago, Denver, and Houston
The launch of Basic Economy and Premium Economy options in Atlantic and Latin American routes will attract customers from competitors

30. United Continental Holdings
Risks:
Low-cost carriers could put pressure on United’s pricing ability
Macroeconomic risk of slowdowns in global economies could reduce demand for air travel services
Fuel price risk can be volatile and can significantly increase expenses
Geopolitical uncertainty and terrorism risk

31. Conclusion
HOLD Eaton
BUY Snap-On Inc.
HOLD United Continental Holdings

32. Appendix

33. GE DCF

34. United Continental Holdings