Bernard Hosanna Shawana Jackson
Brett Kinkopf Jonathan Kocon Chien-Ying Lee
Industry Analysis Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation
What is the Industrial Sector?• Publicly traded companies that are
responsible for manufacturing, agriculture, mining, and construction.• “Extremely heterogeneous”
What is the Industrial Sector?
• This includes:• Aerospace/Defense
• Residential and Commercial Construction (Including materials and services)
• Machinery (Farm, Construction, and Industrial)
• Electrical Equipment
• Waste Management
• Wood Production
• Small and Machine Tools
• Metal Fabrication
Who Are The Big Players?
#10- Raytheon Co. 20.4B
#9- Deere & Co. 21.1B
#8- Illinois Tool Works Inc. 21.4B
#7- General Dynamics Corp. 25.7B
#6- Lockheed Martin 28.2B
#5- Honeywell International 28.6B
#4- Caterpillar 32.3B
#3- Emerson Electric Co. 34.0B
#2- ABB Ltd. 40.1B
#1- Boeing Co. 44.1B
How big is this sector?• Total Market Cap of $836.0 Billion
• This is 10.51% of the S&P 500
• How do we weigh compared to the S&P 500?
S&P 500 = 10.51%SIM = 12.36Δ = 1.85%
Performance• Year to date of -1.9%
• Quarter to date of -1.9%
Year to Date
Three Months to Date
Performance
Maturity: Sales growth ≈
growth of the economy
Earnings growing, but at a slower rate
Some expansion from cash cows, late entrants
TIMEExpansion?
Consumer confidence slightly up Unemployment slightly down Growth in developing economies
Ou
tpu
t
Expansion
Contraction
LIFE CYCLE: MATURITY
INDUSTRY BREAKDOWN
Larger, more dominant firms
Minimal innovations
Business Cycle: Expansion
• Expansion of production capacity
• Emerging markets a source of competition?
FIVE FORCES MODEL
High initial capital investment
Cyclical sector High rivalry Substitution,
supplier power nonissue
The Industrials sector is strongly correlated with
• S&P 500• Real GDP• Commercial and Industrial loans• Durable Goods Orders
Correlation= 0.9
Correlation= 0.85
Key drivers for the Industrials sector ISM Manufacturing & Non-Manufacturing
data Global Economic Growth Capital spending Unemployment rate Industrial Production
Bulls Improved Global
Growth Improving
Manufacturing Data Better Consumer
Confidence GDP Growth
Bears• High Unemployment
Rate• Rising Interest Rates• Global Political
Issues• Growing Debt Risk
Absolute Basis
High Low Median Current % Current to LT
MedianP/E 21.5 7.1 17.6 16.0 -9.09%P/B 3.6 1.4 3.2 2.5 -21.88%P/S 1.6 0.6 1.4 1.0 -28.57%
P/CF 12.7 6.0 11.2 9.8 -12.5%
Relative to SP500
High Low Median Current % Current to LT
MedianP/E 1.2 0.66 1.1 0.89 -19.09%P/B 1.3 1.0 1.1 1.2 9.1%P/S 1.1 0.8 1.0 0.9 -10%
P/CF 1.2 0.8 1.1 1.0 -9.1%
P/E Relative to S&P 500
High 1.3
Low 0.65
Median 1.1
Current 0.79
P/E Relative to S&P 500
High 1.4
Low 0.7
Median 1.2
Current 1.0
INDUSTRIALS SECTOR SHOULD ADD 15 BASIS POINTS TO BRING SECTOR TO 200 BASIS POINTS
OVERWEIGHT Bears
Slower than expected global growth Rising commodity prices
BullsFINANCIALS Sector ratios indicate that the sector is slightly undervaluedECONOMIC Improving global growth Unemployment rate improving Rising GDP data Favorable industrial spending