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