in dust rials primer 2010

8/8/2019 In Dust Rials Primer 2010

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Industrials A Primer

Gator Student Investment Fund

September 30 2010


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Industrials A Breakdown

The industrials sector composes approximately 10.8% of the S&P 500 Index. XLI, our etf, is further broken

down into the following subcategories:


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Economic Drivers

GDP

PPI (Producer PriceIndex)

Industrial Production

Index

ISM Manufacturing

Index

Durable Goods

Orders

Broadest Measure of

Economic Activity

Leading Indicator ofInflation

Measuring Industrial

Output

Managers Outlook

Who Is Buying

y The industrial sector overall is cyclical when GDP is strongand the economy is healthy, industrial companies are

profitable and exhibit growth potential

y Credit crisis and economic uncertainty slowed industrial

production. Latest Data: Today 9/30

y Measures basket of goods from producers rising costs area signal of higher future inflation

y Important for industrial companies higher costs due toinflation lead them to raise prices to maintain margins. Higher

end price for consumer. Fed may get involved

y Examines how much factories, mines, and utilities areproducing.

y High numbers signal strong demand and more robusteconomy in the future

y Capacity Utilization Rate

y Gets managers views on manufacturing industry

y Has five components new orders, production, employmentsupplier deliveries, and inventories

y Sign of how fast the economy is growing. A number greater

than 50 shows a healthy, growing economy

y Reflects orders placed to domestic manufacturers for futuredelivery of factory hard goods

y Leading indicator of capital investment and industrialproduction good data signal a stronger economy in the

future


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Infrastructure Meng Liu, Analyst

y Focus on growth in the infrastructure

spending and development

y Emphasis on where capital is flowing and

profitability of various projects

y Effect on suppliers of finished goods and

raw materials

Transportation Jonnie Boltuch, Analyst

y Coverage of Auto & Auto Parts, Railway,

and Airlines

y Importance of domestic and global demand

for goods and freight

y Focus on global commodity supply and

demand

Aerospace & Defense Ryan Lane, Analyst

y Government spending

y New orders and contracts

y Emerging markets potential

Equipment & Machinery Rishabh Das, Analyst

y Global economic health and GDP growth

y Investment in capital goods and industrial

materials

y Anticipation of future demand by businesses

and consumers

GSIF Plan


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Infrastructure

Meng Liu


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Private Company Involvement

Companies contribute mainly through 3 ways:

Public Private Partnership

Several hundred billion dollars of private capital are currently available for investment in U.Sinfrastructure projects

y $32 billion in major highway and transit projects through PPPs between 1993-2005

y Only 25 states have PPP authority

Direct Ownership Setback: consumer backlash

Concession

y Projects with High Profitability:

Essential & Inelastic Demand

High Capital Requirements

Capital expansion projects - difficult for new entrants, thus less competition and higherreturn

Asset appreciate in value over time

Few substitutes exist (monopolistic characteristics)

Stable/growing cash flow that increases in line with inflation

Low maintenance capital expenditures


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Potential Growth Drivers & Outlook

Clear need in infrastructure activities (American Society ofCivil

Engineers ASCE)

Estimated that total infrastructure funding need over five year period is $1.6 trillion

U.S currently invests more than $400 billion per year in infrastructure

y $60 billion of this amount is financed by federal government

Spending on infrastructure (% of GDP): U.S 2%; Australia, India 2-3%;

Europe 5%; China 9-12%

Developed countries average 3%, developing countries 6%

Federal spending on infrastructure is declining, but total spending is staying constantbetween 2.3-2.5% over the past 20 years.

y More dependent on local and state government and the private sector for funding


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Potential Growth Drivers & Outlook

Highway & Bridges

y Currently: 3.9 million miles of roads and high ways; 5,400 public airports; 3,600 waterportterminals; 200,000 miles of freight and passenger railroad track

y 61% of all freight tonnage and 96% of all passenger miles occur on roads

y U.S population expected to grow to 420 million by 2050

Rise in congestion is costly for America

Lower and lower acceptable road quality

Need to bring annual high way investment spending up to $150 billion per year from $68 billionin 2005 to maintain existing capacity (National Surface Transportation Infrastructure FinancingCommission)

Rail

Rail is 16% of total transportation

Great need to increase infrastructure to maintain growth and position for future growth

Reasons that deter private investors from Rail:y Very capital intensive 17.8% of revenue are invested back into infrastructure, compared to

3.7% for all other US industries

y No guarantees that investments will generate appropriate returns

Potential Solution:

y Freight Rail Infrastructure Capacity Expansion Act of 2007

Using tax credit to incentivize private investment in rail infrastructure

Unfortunately, no update on this bill in House or Senate


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Transportation

Jonnie Boltuch


10/18

Coordinates the transport of freight, business passengers, and leisure travel; largely

through airlines, automobiles & parts, and railroads

Key Players

y Airlines: Delta, American, United, Continental, Southwest, US Airways

y Auto: General Motors, Ford, Chrysler, Toyota, Honda, Nissan as well as original equipmentmanufacturers i.e. Dana corp., Goodyear and Tire and Rubber Co.

y Rail: Union Pacific, BNSF Railway, CSX Transportation, Norfolk Southern Railway

Major Headlines

y United Airlines acquisition of Continental Airlines; surpasses Delta as the largest airline

y Toyota Recall slows auto sales but creates new safety legislation and creates new sales

incentives to increase profit growth

Transportation


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Potential Growth Drivers

yAirlines: Increased ancillary fees ($5.2 billion). Strengthening corporateand leisure demand as the economy improves. Decreased capacitylevels = smaller available seat miles. Gains expected yet dependent onoil prices not escalating drastically.

y

Auto: Additional closings less than anticipated. Growth in replacementparts market. More companies entering global market. Growth inautomobile electronics. Overall growth expected due to increasedproduction and discretionary income.

y Rail: Scaling fleet size increases profit. Growth depends on oil pricesremaining down. Decreased coal demand requires more efficiency for

profit. Growth depends on efficiency and increased demand fro long haul,low-value goods such as coal, grain, ores, chemicals and forest products.Gains expected based on increased GDP, but are dependent heavilyupon oil prices and derived demand.


12/18

Industry Outlook

yAirlines: Revenues expected to increase from $96.8 billion in2009 to $108 billion and $121 billion in 2010 and 2011.Profits projected to rise 29.5% in 2010. Revenue passengermiles up 1.3% with available seat miles down 2.3%.

yAuto: Production up 70%. Sales rise 12.7% in 2010 and 15%in 2011. Seasonally adjusted annual rate up to 11.21 millionindicating strengthening demand.

yRail: Rail Car loadings up to 290,000/week in 2010 from

233,000. Operating profit increased 40% through may 2010compared to the same period 2009. Rail volume increased8%.


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Aerospace & Defense

Ryan Lane


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Aerospace & Defense

y Trends and Drivers:

Slowing but still growing defense budget

2.2% growth (avg. growth 9.4% yearly since fiscal 2002)

Commercial

Aircraft

Boeing vs. Airbus duopoly- Regional competitors

Textrons Cessna, Gulfstream, Bombardier, Falcon Jet

Maintenance,

Repair, and

Overhaul (MRO)

Divisions of: GE, Rolls-Royce, Honeywell Aerospace,

United Technologies, and Boeing, Pure-players:

Triumph, AARJet Engines GE, Rolls-Royce, and United Technologies Pratt &

Whitney

Defense Lockheed Martin, BAE Systems, Boeing, Northrop

Grumman, General Dynamics, and Raytheon


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Trends & Outlook

Procurement vs RDT&E

Procurement up 7.7%, RDT&E down 5%

Shifting of war from Iraq to Afghanistan

Per soldier cost 2x greater in Afghanistan than Iraq

Commercial Aerospace to grow faster than Defense

Improvements in passenger and cargo traffic figures

y 2010 growth 7.1% passenger, 18.5% cargo

Aging Fleets (commercial and military) and improving traffic lead to potential in MRO subsector.

Growing China and Emerging Market Commercial Aerospace demand

China Needs 3,770 new planes by 2028

Conclusion: There is potential in production-heavy Defense companies but the biggest growth is in

Commercial Aerospace. MRO subsector has the biggest potential for short-term growth.


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Heavy Machinery & Equipment

Rishabh Das


17/18

Heavy Machinery & Equipment Breakdown

y Global Energy Equipment & Servicesy Main Players

Baker Hughes Incorporated Halliburton Company Schlumberger Limited Transocean Ltd.

Oil & gas equipment & services (70.4%) The oil & gas drilling segment (29.6%)

Generated total revenues of$252.3 billion Drop in value in 2009 of 14%. The industry is set to

decline further in 2010 Lots of regulatory pressure because of BP spill

y Industrial Machinery Expectation for higher revenue and earnings in

2010, led by: Expected recovery in the global economy Various stimulus spending packages

implemented in the US and internationally Alleviation of the liquidity crisis that began in the

fall of 2008.

Purchasing Managers Index (PMI) has shownmonthly sequential gains since December 2008 indicates manufacturing growth

Sectors growth relies on theinternational/developing market economies

y Heavy Machinery Heavy machinery industry encompasses a wide

range of industrial businesses

construction equipment farm machinery heavy trucks

Drivers:

Construction (public and private), Housing starts

y Industrial Metals

Domestic steel industry experienced a dramatic upturn

(2010)Steel consumption up 52% from 2009 Total

imports up 24% from 2009 . Leading steel companies AK

Steel Holding Corp Nucor Corp Steel Dynamics Inc

United States Steel Corp.Demand:

Service centers: increase by 20%25% for 2010

Autos: rise 10%15%, due to light auto sales

Construction: 7% to 10% increase because of

increased infrastructure spending


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Analyst Opinion

Growth Potential & Trends

Factories are producing, capacity utilization

rates are strong, and business inventories are

rising all signs that point to a healthy

industrial sector and growing economy

Consolidation in the airline industry could lead

to synergies and increased profitability

Southwest acquisition of AirTran for 1.4

Billion

United and Continental Merger

Global demand for infrastructure spending is

growing

Government continues spending on defense

recently put a $5.8 Billion order with Boeing

Economic Uncertainty

Industrial production strong in the first half of

2010, but showing signs of weakness

Government stimulus propping up the

economy

Higher future inflation

The threat of a Double Dip companiescould stop capital investments and industrial

growth would be slowed

in dust rials primer 2010

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