STOCK ANALYSIS - INDUSTRIALS

Transcription

1 STOCK ANALYSIS - INDUSTRIALS Sukumar Madugula MBA 7225 Student Stock Market July 22, 2015

2 Overview SIM Holdings & Performance Eaton Corp (ETN) Fluor Corp (FLR) Business Analysis Economic Analysis Financial Analysis Valuation Stocks to Consider Paccar Inc. (PCAR) Precision Castparts Corp (PCP) Recommendation

3 Overview Industrials Sector Cyclical Capital Goods - manufacture and distribution including Aerospace & Defense Construction Engineering & Building Products Electrical Equipment Industrial Machinery Services Transportation Printing, Office Supplies Couriers

4 Overview Financials, 16.87% Materials, 2.76% Industrials, 8.84% Health Care, 14.65% Telecom, 3.06% Cons Discr, 12.69% Con Staples, 9.26% Energy, 8.16% Utilities, 2.95% Info Tech, 20.77% SIM as of 7/18/15 As of 7/18/15, SIM has 8.84%. Recommend Overweight +175 bps to Marketweight

5 Overview

6 Business Analysis Porter s Five Forces ETN Among leaders in electrical equipment Diverse segments and markets Established incumbent Among top gross margins efficiencies Innovates for competitive edge FLR Leader in complex construction and engineering projects Diverse segments and markets Fixed Bid contracts attracting repeat orders Established incumbent

7 SIM Holdings Eaton Corp (ETN) A leading Power Management Company since 1911 Segments & 2014 Sales Asia Pacific, 12% Fluor Corp (FLR) A leading Construction and Engineering Company since 1912 Backlog: a measure of the total dollar value of work to be performed on contracts awarded and in progress Backlog by Segments & Region Drivers Latin America, 9% Europe, 22% Canada, 5% Among industry s top 20 in operating yield Profitable growth in Aerospace and Vehicle segments Risks United States, 52% Strong dollar makes products unaffordable in 48% intl mkts Increase in interest rates Challenging global markets Strong domestic competition due to cheaper imports Drivers Client investments particularly in Oil & Gas, Industrials and Government segments Emerging markets investments for population growth Renew infrastructure in developed countries. Competitive cost control strategies/fixed Bids Risks Cyclical Markets. Risk of overruns on Fixed Cost projects Low revenues causing headwinds on margins Interest rate increase/strong dollar

8 SIM Holdings - Performance ETN lagged both Industrials and S&P 500 by almost 20% over 1 year 15% loss in ETN s Hydraulics unit Overall strong dollar/unfavorable currency exchange rates Sluggish growth overseas markets FLR lagged by over 35% 2014 revenue declined 21.28% Decline in Infra s metals + mining Strong $ reduces backlog by $ 1.6B PCAR 1Q revenues trimmed by $281 M due to unfavorable forex PCP suffered headwinds in Oil & Gas and Pipe investments, flat organic sales. AOS outperformed Industrials and S&P 500 by almost 50% over 1 year but on hold

9 10% appreciation in the dollar over the course of a three-month period slices half a percentage point off of the year's total growth rate. If the rise in the dollar is maintained, it will take another 0.2 percentage point off growth the following year. With the Fed estimating the economy's long-run growth trend at around 2% to 2.3% DJ Business News 7/17/15 Economic Analysis

10 Financial Analysis Current SIM Holdings Current Weight Current Price Target Price Recommended Wt. Upside Recommendation Eaton Corp 416 bps $ $ 78 (consensus) ($ mine) 500 bps Fluor Corp 467 bps $ $ bps 19.8 % Hold 39 % Sell Eaton (ETN) Fluor (FLR)

11 Valuation Stock: Eaton Corp (ETN) Terminal Discount Rate = 10.25% ETN Target Price: $79.81 Used Discount Rate of 10.25% Terminal FCF Growth of 3.25% Implied P/E of 15.3 Analyst: Sukumar Madugula Terminal FCF Growth = 3.25% 7/18/2015 Year 2015E 2016E 2017E 2018E 2019E 2020E 2021E 20122E 2023E 2024E 2025E Revenue 21,891 22,732 23,623 24,450 25,306 26,191 27,108 28,057 29,039 30,055 31,107 % Growth 3.8% 3.9% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% EBT 2,469 2,677 2,880 2,885 2,986 3,091 3,199 3,311 3,427 3,547 3,671 EBT Margin 11.3% 11.8% 12.2% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.28% 11.77% 12.19% 10.40% 10.80% 10.80% 10.80% 11.20% 11.20% 11.00% 11.00% Operating Margin Taxes Tax Rate 9.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% Net Income 2,247 2,382 2,563 2,568 2,658 2,751 2,847 2,947 3,050 3,156 3,267 % Growth 6.0% 7.6% 0.2% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Add Depreciation/Amort 985 1,023 1,063 1,100 1,139 1,179 1,220 1,263 1,307 1,352 1,400 % of Sales 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Plus/(minus) Changes WC (4) (205) (171) (122) (127) (131) (136) (140) (145) (150) (156) % of Sales 0.0% -0.9% -0.7% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% Subtract Cap Ex Capex % of sales 3.0% 3.0% 3.1% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Free Cash Flow 2,576 2,528 2,763 2,812 2,911 3,013 3,118 3,227 3,340 3,457 3,578 % Growth -1.9% 9.3% 1.8% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% NPV of Cash Flows 18,165 48% NPV of terminal value 19,890 52% Projected Equity Value 38, % Free Cash Flow Yield 8.30% Terminal Value 52,775 Free Cash Yield 6.78% Current P/E Terminal P/E 16.2 Projected P/E Current EV/EBITDA Projected EV/EBITDA Terminal EV/EBITDA 11.8 Shares Outstanding Target Price: $ Current Price $ Assumptions: ETN has the lowest P/E ratio among its peers. S&P P/E is higher at 18.8 as opposed to ETN s 15. Implied equity value/share $ Upside/(Downside) to DCF 23% Debt 8,024 Cash 781 Cash/share 1.64

12 Valuation Valuation TTM S&P Indust ETN FLR PCP PCAR 500 rials P/E P/B P/S P/EBITDA P/E P/B P/S P/EBITDA S&P 500 Industrials ETN FLR PCP PCAR Profitability TTM Gross Margin Operatin g Margin EBITDA Margin Profit Margin S&P 500 Indust ETN FLR PCP PCAR rials ROE Gross Margin Operating Margin EBITDA Margin Profit Margin Return on Equity S&P 500 Industrials ETN FLR PCP PCAR Sector Revenue/Employee is 380,135 while PCAR s is 815,322

13 Stocks to Consider Paccar Inc. (PCAR) Headquartered in Bellevue, WA, PACCAR Inc. is the third largest manufacturer of heavy-duty and light/medium trucks, with plants in US, Europe, Australia, Canada, Brazil and Mexico. Kenworth, Peterbilt and DAF trucks. Two segments Truck, Parts and Other Financial Services Drivers 76 year track record of generating profits Record 2014 sales and high Q1 growth Well positioned in key non-us markets due to strategic investments Loyal customer base in US and Canada (28% market share) No debt Risks 5.8% declining sales in Europe. Reduced guidance by trucks in South America Shortage or increase in raw material prices Unfavorable currency exchange rates Precision Castparts (PCP) Precision Castparts Corp. is a market leader in manufacturing large, complex structural investment castings and airfoil castings used in jet aircraft engines. The company expanded into the industrial gas turbine, fluid management, industrial metalworking tools and machines and other metal products markets. Three segments Investment Cast Products Forged Products Airframe Products Drivers Low cost, high quality, complex critical components Skin and fasteners used in every aircraft Strategic acquisitions to widen sustainable moat Backlog and strong customer relationships e.g. GE, Rolls Royce, Boeing Very cost conscious for high operating margins Risks Decline in Industrial investment due to low energy prices Increase in interest rates Unfavorable currency exchange rates

14 Stocks to Consider To Consider for 117 bps Current Weight Current Price Target Price Recommended Wt. Up/Downside Recommendation PCAR 0 bps $ $ % Buy PCP 0 bps $ $ % Buy PCAR PCP

15 Recommendation SIM is currently underweight. Recommend overweight +275 bps to match S&P recommended market weight (since we can +100 bps for sector) Replace FLR with PCP as a better buy in long term Buy PCAR for 275 bps. Reasons PCAR s consistent trajectory record of profits for 76+ years Tempted to sell ETN but will wait for Q2 earnings report on 7/29/15 FLR and PCP dependent on recovery of Oil & Gas investments from higher energy costs but PCP has better margins and higher returns PCAR dependent on lower diesel costs and trucking companies replacing fleets with higher efficiency vehicles (85-90% availability) Expect More investments prior to interest rate increases to avoid capital increases.