Industrials Sector Stock Presentation
Saniya Mussinova
Daniel Pierce
Michael Royer
Nicholas Stuart
Zane Stephens
Sector Recap
Weighting the sector
12 bps over S&P
Adding 25 bps to
portfolio
Industrials have
outperformed S&P
Remain cautiously
optimistic going
forward
Current Holdings
(DHR) 3.10%
(FLS) 3.94%
(GD) 4.05%
11.09%
Stock Recommendations
Sell 405 bps of GD
Buy 105 bps of DHR
Buy 325 bps of UTX
Hold 394 bps of FLS
Flowserve Corp
Market cap: $7.38 billion
Current Price: $117
Target Price: $134 (15% upside)
Recommendation: Hold
Recent Developments:
◦ Quarterly cash dividend of $0.32 per share
Positives
Bookings and aftermarket growth
Stock price has grown by 35% in 1
year
Repurchasing plan of up to $2 mln
shares
Segment restructuring
Good purchasing decisions:
◦ Purchase of FEDD Wireless (Intelligent
Process Solutions) in 2011
◦ Purchase of Valbart in 2010
Stable growth in emerging markets
Q4 anticipating strong shipment –
bring down backlog
Negatives
Recent increase in backlog (8.4% vs prior year)
Decrease in margins
7.2% increase in DSO (AR/Sales) over prior year quarter
Long cycle market continues to be choppy and competitive
Nuclear projects being delayed: nuclear power outlook under scrutiny as countries re-evaluate nuclear strategy
Recommendation: Increase 105 BP
Current Price: $53.72
Target Price: $60.00 (11.7% upside)
Overview:◦ Designs, manufactures and markets professional,
medical, industrial and commercial products and services
◦ Operates in five segments: Test & Measurement; Environmental; Life Sciences & Diagnostics; Dental, and Industrial Technologies
◦ Outperforming the S&P 500 Industrials Group YTD
◦ Growth derives from both segment core expansion and frequent external acquisitions
DHR Relative to Sector
0
0.5
1
1.5
2
2.5
P/Trailing E P/Forward E P/B P/S P/CF P/EBITDA
High
Low
Median
Current
DHR Overview
Positives:
◦ Increasing sales in foreign markets, notably those with growing economies
◦ Experienced management knowledgeable in the Danaher Business System, a proven lean production method
◦ Strong sales and margin growth, including double digit core growth in Industrial Technologies and Test & Measurement segments. Margins now above 20% in both segments
◦ With purchase of Beckman Coulter, decreased exposure to potential economic decline
Manufactures and markets biomedical testing
instrument systems, tests and supplies
Operates in two segments:
◦ Clinical Diagnostics - Products physicians use to
diagnose disease, make treatment decisions and
monitor patients. Approx. 87% of revenues
◦ Life Science - Products used by scientists to study
complex biological problems, including the causes
of disease, identifying new therapies and testing
new drugs. Approx. 13% of revenues
DHR Overview
Concerns:
◦ Other companies are acquiring former Danaher managers, possibly acquiring key information about Danaher’s vital lean production system
◦ Over 70% of sales growth in the last 5 years has come from acquisitions
◦ With the $6.8 billion purchase of Beckman Coulter, Danaher is reducing funds for acquisitions from roughly $2 billion to $300 million for remainder of year
Company Overview
Aerospace•Designs, manufactures and outfits mid- and
large-cabin business-jet aircraft and provides
maintenance, refurbishment, outfitting and
aircraft services for a variety of business-jet
customers.
Combat Systems•Provides design, development, production, support and
enhancement of tracked and wheeled military vehicles,
weapons systems and munitions for the United States
and its allies.
Marine Systems•Designs, builds and supports submarines
and surface ships for the United States
Navy and commercial ships for Jones Act
customers
Information Systems and Technology•Provides technologies, products and services that support a range of
Government and commercial digital-communication and information-
sharing needs
Sector (S&P): Industrial
Industry (S&P): Aerospace,
Defense
Market Cap: 27.27B
Shares Outstanding: 373M
Avg. Daily Vol: 2.05M
YTD Return: 2.92%
52 Week Range: 55.46 – 78.27
Dividend Yield: $0.47 (2.57%)
Business AnalysisSegment Revenue % Revenue Earnings % Earnings Operating Margin
Aerospace 5,299 16.32% 860 21.35% 16.23%
Combat Systems 8,878 27.35% 1,275 31.65% 14.36%
Marine Systems 6,677 20.57% 674 16.73% 10.09%
Information Systems 11,612 35.77% 1,219 30.26% 10.50%
32,466 100.00% 4,028 100.00%
FY 2010 (Millions)
Business Analysis
Strengths Diverse business segments
Incumbent status with certain products
Success with acquisitions
Improving economy
Weaknesses Uncertain defense spending
Fixed price contracts
High energy costs
Slow economic recovery
GD VS Industry VS Sector
DCF ValuationGeneral Dynamics (GD)
Analyst: Michael Royer Terminal Discount Rate = 10.5%
5/22/2011 Terminal FCF Growth = 2.75%
Year 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Revenue 34,094 35,803 37,577 39,043 40,643 42,188 43,664 44,974 46,099 47,251 48,551
% Grow th 5.0% 5.0% 3.9% 4.1% 3.8% 3.5% 3.0% 2.5% 2.5% 2.8%
Operating Income 4,035 4,283 4,476 4,412 4,593 4,725 4,847 4,992 5,163 5,292 5,438
Operating Margin 11.8% 12.0% 11.9% 11.3% 11.3% 11.2% 11.1% 11.1% 11.2% 11.2% 11.2%
Interest and Other 170 179 169 176 183 190 196 202 207 213 218
Interest % of Sales 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Taxes 1,198 1,272 1,335 1,313 1,367 1,406 1,442 1,485 1,536 1,575 1,618
Tax Rate 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0%
Net Income 2,666 2,832 2,972 2,923 3,043 3,129 3,209 3,305 3,419 3,505 3,601
% Grow th 6.2% 5.0% -1.6% 4.1% 2.8% 2.5% 3.0% 3.5% 2.5% 2.8%
Add Depreciation/Amort 648 680 733 664 691 717 742 765 784 803 825
% of Sales 1.9% 1.9% 2.0% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%
Plus/(minus) Changes WC (534) (435) (451) (449) (491) (473) (451) (398) (340) (348) (394)
% of Sales -1.6% -1.2% -1.2% -1.1% -1.2% -1.1% -1.0% -0.9% -0.7% -0.7% -0.8%
Subtract Cap Ex 511 501 451 664 691 717 742 765 784 803 825
Capex % of sales 1.5% 1.4% 1.2% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5% 1.5% 1.5%
Free Cash Flow 2,269 2,576 2,802 2,474 2,551 2,657 2,758 2,907 3,080 3,157 3,208
% Grow th 13.5% 8.8% -11.7% 3.1% 4.1% 3.8% 5.4% 5.9% 2.5% 1.6%
NPV of Cash Flows 16,596 51%
NPV of terminal value 15,669 49% Terminal Value 42,526
Projected Equity Value 32,265 100%
Free Cash Flow Yield 8.06% Free Cash Yield 7.54%
10-year
Current P/E 10.6 9.9 9.5 Terminal P/E 11.8 16.0
Projected P/E 12.1 11.4 10.9
Current EV/EBITDA 6.1 5.8 5.5 Terminal EV/EBITDA 6.9 9.6
Projected EV/EBITDA 7.0 6.6 6.3
Shares Outstanding 385
Current Price 73.03$
Implied equity value/share 83.75$
Upside/(Downside) to DCF 14.7%
Debt 3,203
Cash 2,613
Cash/share 6.78
Multiples Valuation
Absolute
Valuation High Low Median Current
Your
Target
Multiple
Target E,
S, B,
etc/Share
Your
Target
Price
P/ Forward E 19.7 6.5 15.1 10.1 12 7.11 85.32$
P/S 1.8 0.6 1.2 0.8 0.95 90.92 86.37$
P/B 4.7 1.6 3.1 2 2.2 40 88.00$
P/EBITDA 12.3 3.93 9.52 6.12 7 12 84.00$
P/CF 18.2 5.5 13.9 8.6 10.5 8 84.00$
Average Multiples Target Price = $85.54
DCF Target Price = $83.75
Weighted Average Target Price = (.80 * 83.75) + (.20 * 85.54) = $84.11 (15.17% upside)
Recommendation
Deciding Factors
High energy costs
Government dependence
Slow economic recovery
Sell 405 Basis Points of
General Dynamics
UTX Overview
Aerospace & Defense
Beta 1.01
Dividend yield 2.2%, very few in industry
UTX outperformed the S&P by 6.7%
History of steady growth in earnings and dividends over the past 10 years
Strong balance sheet
◦ Cash represents 7% of assets
◦ Long-term debt 30%
Segments
Pratt- major supplier of jet engine to commercial, business and military aircraft, 25% operating profit, 52% international
Otis-world’s largest maker of elevators and escalators, freight mover, 32% operating profit, 82% international
Carrier- #1 marker of HVAC systems- provides installation, service, parts, 25% operating profit, 52% international
Sikorsky- largest manufacturer of helicopters, aftermarket products and services, 9% operating profit, 33% international
UTC Fire & Security- global provider of fire and safety security products, 9% operating profit, 84% international
Hamilton- advanced industrial products, power generation, propeller systems, environmental control units, etc, 12% operating profit, 49% international
1 Year Price Movement
5 Year Price Movement
Risks
Double dip recession
Sustained rise in the dollar
Increasing prices of energy dampening
airline industry
Lack of recovery in housing sector,
residential and commercial construction
Insider selling as of April
High price/book ratio
Historic trends
For the past 10 years, annual
compounded rates were:
◦ Sales growth of 7.4%
◦ Income from continuing operations growth of
9.2%
◦ 10.3% Earnings per share
◦ ROC 16.2%, S&P average 15.8%
◦ FCF growth of 9.2%, S&P average 6.7%
UTX vs. competitors
Future Catalysts
Large backlogs of commercial aircraft from Boeing and Airbus hope to provide steady sales and production levels the next three years,
Development of Boeing 787 and Airbus 350
Continued strong growth of emerging markets
UTC Fire & Security: purchased GE Security in March 2010
Increased OEM demand, aerospace aftermarket recovery
Developing CH-35K for USMC
Current Financials
Diluted EPS 5.36
Last year’s sales growth- 10%
TTM P/E is 17.78, industry average 28.27
ROE 22.55%, average of Manufactured Industrials is 7.33%
Last quarter EPS $1.11, beating $1.07 estimate
Current ratio 1.3, well below Aerospace average 2.8
Days of sale inventory 78 days, 123 industry
(TTM) UTX BA GE
Qtrly Rev Growth 10.80% -2% 6.20%
Revenue 55.63B 64B 152.46B
Gross Margin 28.21% 19.14% 37.76%
Operating Margin 14.35% 7.06% 13.31%
Diluted EPS 4.92 4.53 1.20%
P/E 17.40 16.66 15.94
Valuations
DCF using consensus estimates, updated
earnings
◦ $100
EBITDA value driver, multiple 9x
◦ $96
Recommendation:
◦ BUY 325 basis points UTX
Questions?
Appendix A: Danaher DCF
Appendix B: Flowserve DCF
Appendix C: UTX DCF