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

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

3. Overview

4. Overview
* As of

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

6. Honeywell Intl.

7. 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

8. Outline
Valuation range of $ $ based on P/E and EBITDA multiples

9. Eaton Corp.

10. 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

11. 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

12. 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

13. Eaton Corporation

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

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

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

17. 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)

18. Snap-on Inc.

19. 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

20. 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

21. Snap-on Incorporated

22. Snap-on Incorporated

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

24. Snap-on Incorporated

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

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

27. Snap-on Incorporated

28. 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

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

30. United Continental

31. 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

32. United Revenue Breakdown by Segment
United Continental Holdings
United Revenue Breakdown by Segment

33. 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

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

35. United Continental Holdings
Consolidation needed in international markets

36. United Continental Holdings
See appendix for complete valuation models

37. 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

38. Recommendation

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

40. Questions?

41. Appendix

42. Appendix
SNA DCF Analysis

43. Appendix
UAL DCF Analysis

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