Company Analysis - Industrials. By: Hahn, Wesley; Hartman, Michael; Heschel, Andrew; Holzman, Joshua

Transcription

1 Company Analysis - Industrials By: Hahn, Wesley; Hartman, Michael; Heschel, Andrew; Holzman, Joshua 1

2 Agenda Recap class decision to hold industrials Review SIM Holdings Recommendations Conclusion 2

3 3 Recap: Class voted to leave Industrials underweight by ~1.5% relative to S&P500 Sector S&P 500 Weight SIM Weight +/- Consumer Discretionary 10.65% 8.74% -1.91% Consumer Staples 11.05% 12.24% 1.19% Energy 12.27% 12.41% 0.14% Financials 14.00% 10.06% -3.94% Health Care 11.51% 11.77% 0.26% Industrials 10.56% 9.08% -1.48% Information Technology 19.68% 21.69% 2.01% Materials 3.56% 3.25% -0.31% Telecommunication 3.02% 4.12% 1.10% Services Utilities 3.70% 2.57% -1.13% Cash 0.00% 3.98% 3.98%

4 Current Positions (Industrials) Industrials ~10% of portfolio 4

5 5 Recommendation

6 Overall Recommendation Industrials is starting to trend up! United Technologies (UTX) has limited forward upside and Flowserve (FLS) and Danaher (DHR) have value positions and forward momentum. We recommend selling a portion of our position in UTX and levering up equally the position of FLS and DHR. % Assets Recommended % Levering % DHR 2.83% 3.59% % FLS 2.80% 3.56% % UTX 3.03% 1.52% 50.00% 6

7 7 Union Pacific

8 Union Pacific Railroad Conclusion: Current Market Price ~$102, or a +10% price premium relative to target price of $93. 8 Aggressive growth-rate estimates + Low proportionate cost growth + EPS estimates > Consensus = 1 year price target of $93. ( Revenue Growth Rates % 8% 9% EPS - diluted $8.92 $7.08 Consensus $7.75 $6.50 Estimate (+/-) 15% 9%

9 9 United Technologies Corporation

10 United Technologies Corporation Provides high technology products and services to the building systems and aerospace industries worldwide. Otis, Carrier, UTC & Fire Security, Pratt & Whitney, Hamilton Sundstrand, and Sikorsky Market Cap: $71.63 B Current Price: $ % Dividend Yield Target Price: $84.76 (+7.2%) Current Weight: 3.13% Recommend: Sell 157 bps 10

11 UTX Positives Global Footprint: big in BRIC countries and emerging markets. History of strong growth and earnings over the past 10 years. Strong Balance Sheet and Free Cash Flow Ripe for new acquisitions. Recent Acquisition - Goodrich Well diversified company. United Technologies Corp. has won a maintenance contract worth up to $350 million to support Japan Airlines fleet of Boeing 787 aircraft. United Technologies said Monday that its subsidiary, Hamilton Sundstrand Corp., would provide the maintenance for the fleet of 35 aircraft. 11

12 UTX Risks & Concerns 12 Foreign Exchange: Over of business is done overseas, particularly in Europe. Potential strengthening dollar, recently weak dollar has boosted earnings. Integration of Goodrich acquisition. Complementary products, may not see the results in our time frame. Defense spending. State of the Economy. UTX doesn t sell direct to end users. BofA Merrill Lynch: If we assume run rate net synergies approach 30% (based on a conservative estimate) of GR s 2010 selling and administrative costs and are phased in and $3.4bn paid in cash (assuming that UTX leaves $2bn in cash on its balance sheet in keeping with its historical precedent), we estimate the deal would neither be accretive nor dilutive to 2012 earnings. Assuming synergies phase in in year two, we estimate 2013 could be accretive last few months, some see UTX taking a risk in paying for up for GR at present. UTX appears to be focused on maintaining its credit rating, judging by the amount of equity to be used in the transaction

13 UTX Valuation Relative to Industry High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF Relative to S&P 500 High Low Median Current P/Trailing E P/Forward E P/B P/S P/CF

14 UTX Valuation Con t Absolute Valuation High Low Median Current #Your Target Multiple *Your Target E, S, B, etc/share Your Target Price (F x G) A. B. C. D. E. F. G. H. P/Forward E P/S P/B P/EBITDA P/CF Average: $85.14 Target: (80/20 DCF & P/E) $84.76 Sell 157 bps of UTX. Limited Upside. Foreign Exchange Concern. Wait and see what happens with global economy and Europe. 14

15 15 Danaher

16 Danaher Overview Designs, manufactures and markets professional, medical, industrial and commercial products and services Operates in five segments: Test & Measurement Environmental Life Sciences & Diagnostics Dental Industrial Technologies Outperforming the S&P 500 and Main Competitors (5 Year) Growth derives from both segment core expansion and frequent external acquisitions

17 Danaher Key Statistics Market Cap: $33.82 Billion Current Price: $49.27 Target Price: $59.26 (20.3% Upside) Recommendation: Buy 125 bps

18 DHR vs. GE vs. S&P500 Over a 5 year time period...

19 Danaher Positives Strong sales in foreign markets, notably those with growing economies Will thrive during early stages U.S. economic recovery Experienced management knowledgeable in the Danaher Business System Strong sales and revenue growth Danaher saw outstanding year-over-year core revenue growth, core operating margin expansion, cash flow and earnings performance. With purchase of Beckman Coulter, decreased exposure to potential economic decline

20 Danaher Concerns Other companies are acquiring former Danaher managers Over 70% of sales growth in the last 5 years has come from acquisitions Large investment made with the $6.8 billion purchase of Beckman Coulter showed low Q3 earnings

21 Absolute Valuation

22 What are the experts saying

23 23 Flowserve

24 Flowserve Overview Sector: Industrial Goods Industry: Diversified Machinery Sells precession engineered flow control equipment. Three Segments FSG Engineered Products Division FSG Industrial Products Division Flow Control Division International operations No competitors are all inclusive : valves, pumps, and seals. Revenues $ 4,032,036 24

25 Flowserve Performance They are a growth company and over the last 5 years they have seen an 87% increase in net income. Bookings up 15.9% versus previous year at $1.16 billion Recent increases in costs and decreases in Margins. Significant backlogged low to medium margin high cost projects. Rapid growth in short term projects and original equipment Record service and aftermarket bookings (support) of 42% of bookings ($488 million) Company commitment to equity value with share buy backs and large insider buys. 25

26 Flowserve Concerns Operating margins continue to shrink for the last five quarters to 33.6% Currency exposure continues to effect bookings, 15.9% is effectively 10.2%. Large backlog of projects that continues to growth. People are not committing on large projects. SG&A and cost controls are offsetting lower earnings and will not continue forever. 26

27 Flowserve Conclusion: Historically has traded well above it s competitors and the S&P

28 Flowserve Conclusion: Current Market Price ~$97, trading close to the ratio s. The value is being realized. Absolute Valuation High Low Median Current #Your Target Multiple Target Target Price A. B. C. D. E. F. G. H. P/Forward E P/S P/B P/EBITDA P/CF

29 Growth-rate estimates consistent with past performance + Flowserve Conclusion: Current Market Price ~$97, or a 26% price discount relative to target price of $ ( Revenue Growth Rates % 18% 15% ( Revenues $6,593 $5,494 $4,656 EPS estimates < Consensus = 1 year price target of $ is conservative. 29 Terminal Discount Rate = 12.0% Terminal FCF Growth = 3.0% Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 34.8% EPS - diluted $8.26 $7.07 (under mgmt. $7.45) Consensus $8.91 $7.69 Estimate (+/-) 15% 9%

30 30

31 31 Appendices

32 A: UTX DCF 32

33 B: Danaher DCF 33

34 C: Flowserve DCF 34