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

2. 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. 3 Overview Industrials: Seth Frey and Sam Goldberg
Sannad, can you copy in your data analysis? 3

4. 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. 5 Overview Industrials: Seth Frey and Sam Goldberg
Sannad, can you copy in your data analysis? 5

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

9. 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

10. 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

11. 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

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

13. Financial Analysis

15. 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

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

17. 17 Financial Analysis Industrials: Seth Frey and Sam Goldberg ETN FYFY
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. 18 Financial Analysis Industrials: Seth Frey and Sam Goldberg UAL FYFY
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

19. 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

20. 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

21. Simple Moving Average S5INDU: 2010-17
Industrials: Seth Frey and Sam Goldberg
Valuation Analysis
Simple Moving Average S5INDU:
Google finance
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

22. 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