Buy: Sun Hydraulics Inc. (SNHY)

Sell: Air Products and Chemicals Inc. (APD)

! Hydraulics are mechanical system used to produce power and motion.

Control   Produce   Sustain  

!  Specializes in the manufacturing of custom fluid valves !  Direct sales to distributors and customers !  Has the most range and depth of fluid valves of any

manufacturer

Directs and regulates flow of fluid within a hydraulic system

Screw-in cartridge valves

Manifolds/Integrated solutions

Functions like a electronic switch board

Electronics

Digital controllers use to digitally regulate valves

INDUSTRY SIZE

!  The Global Power fluid industry is $20 Billion

!  Valves grows at 2x industry rates !  Cartridge valves grows at 4x GDP

•  Cartridges valves are replacing traditional hydraulic valves: ! Flexibility ! Durable ! Cost effective

Industry Valves Cartridges

100%

0.46%

Sales % VS. Peers

Other Sun

30%

60%

10%

Industrial Mobile Other

Industrial: 30% •  Machine

Tools •  Automation •  Testing •  Packaging

Mobile: 60% •  Aerial •  Construction •  Mining •  Energy

Other: 10% •  Wind •  Animation •  Solar •  Stage

Shows $4B

$20B

$1.5B

$205 Mil

MARKETS SERVED

49% 30%

21%

Global Sales break down

Americas

Europe, Africa, Middle East

Asia/Pacific Region

Sales breakdown •  Total sales (2013) = 205 Mil

!  Americas = 100 Mil !  Europe = 62 Mil !  Asia/Pacific = 43 Mil

Regional EBITDA breakdown •  EBITDA (2013) = 63 Mil

"  The United States = 26 Mil "  Germany = 6.2 Mil "  Scandinavia = 4.1 mil "  Korea, South = 6 Mil "  China = 3.8 Mil

#  Grade: A (9)

•  Global and domestic trends are favorable across all markets #  PMI shows confidence

in all markets

! Conservative capital allocation •  Uses debt only when necessary: D/E =0 •  Has paid dividends since public and been profitable

since 1972 ! Strategic acquisition

•  Acquired White Oak and integrated it into High Country Tek, Inc. to add digital capability to control cartridge valves ! The only known company to offer digitally controlled valves

! “Horizontal” style of management and culture •  Lean process focused organization ! Shortest Inventory on Hand 39.30 VS 92.73 days among peers ! Sun’s COSG/Sales ratio: 60% VS 75% average amongst peers ! Quality distributor and supplier relationships

!  MANY ORIGINAL DISTRIBUTORS FROM 1980S ARE STILL WITH SUN TODAY

!  LIVE INVENTORY UPDATES WITH SUPPLIERS TO BALANCE DEMAND #  Grade: A (9)

!  Market Capitalization 1.1B !  Cash & Equivalents: 93.6 Mil !  Key Metrics

"  P/E: 28.27 "  ROA: 19.5% "  ROC: 21.9% "  ROE: 21.9% "  ROIC: 20.62% "  D/E: 0 "  Price/Book: 5.6

!  Growth: 12% per annum for the next 5 years

!  Revenue •  Industrials: 30% •  Mobile: 60%

!  Profitability •  Operating Margins: X>20%

COSG/Sales: 60% VS 75% (Peers)

•  Inventory turnover: 9.26 VS 4.76 (Peers)

#  Grade: A (9.5)

Balance sheet

Growth  rate:  

8.00%   10.00%   12.00%   14.00%   16.00%  

P/E = 24   $51.49   $56.43   $61.75   $67.47   $73.60  

Upside   27.19%   39.41%   52.55%   66.67%   81.81%  

Expectations and current records !  Price = $40.48 !  Sun is projected to grow at 12% for the next 5 year per annum !  Current P/E = 28 Conservative assumptions !  Sun grows at 10% for the next 5 year per annum !  P/E = 24 (Avg = 27; Median = 24) !  Price = $56.43 !  Upside = 39.41% !  EPS = $2.35, Return on EPS = 61% ((2.35-1.46)/1.46)

#  Grade: A (9)

! Industry standard on fluid valves •  Sun’s niche market advantage will diminish

! Shareholder control •  Brown Capital Management owns 15% •  The Koski family owns 10%

! Natural disaster •  Majority of Sun’s operation is in Sarasota, FL

! Acquisition •  Sun is a small player in the Power fluid industry: ! EV = 1.1Bllion VS. 18.7Billion Parker-Hannifin Corporation

(PH)

!  Business: A (9) •  Favorable economic conditions •  Offers the broadest and most in depth products in the fluid-power

valve industry •  Digital control system has high potential in mobile applications

!  Management: A (9.5) •  Conservative capital allocation •  Horizontal style of management

"  Continuous process improvement !  Balance Sheet: A(9)

•  Strong balance sheet: no debt and plenty of cash •  Strong metrics: P/E = 28, ROE = 21.9%, ROA = 19.5%, ROIC = 20.6%

!  Price: A(9) •  Stock is on the pricy side, but Sun is a quality company •  Upside/Margin of safety is 39.41% at conservative estimates of 10%

per annum

! Air Products and Chemicals, Inc. (APD)

! Supplier of Chemical for industrial applications ! Sells directly to large customers directly on-site

with APD’s own facility " Large capital requirement

! Sells to customers through either customer picks or direct delivery

40%

31%

26%

3%

Revenue by product segment

Merchant Gases

Tonnage Gases

Electronics and Perf. Materials Equipment & Energy

46%

3%

27%

24%

Reveunes by region

US & Canada

Latin America

Europe

Asia

24%

28% 12%

36%

Market Share by revenue

APD

PX

ARG

LNAGF

70% of the world market

! Business segments •  Merchant gases (40%) "  Atmospheric gases: oxygen, nitrogen, and argon "  Used in wide variety of industrial applications

•  Tonnage gases (31%) "  Provides hydrogen, carbon monoxide, nitrogen, oxygen,

and syngas for energy production and refining •  Electronics and Performance Materials (26%) "  Applications technology to provide integrated solutions

•  Equipment and Energy (3%) " Cryogenic equipment for air separation, hydrocarbon

recovery and purification, natural gas liquefaction, helium distribution, and variety of services

!  Business: A (9.5) •  Oligarchy type of market •  Recession resilient •  Profit margin could be greater if facilities are regionally

concentrated !  Balance Sheet: A (9)

•  Okay use of debt: ! Current debt = 3227.6 Mil VS. Cash & Equivalents = 450 Mil ! Current ratio = 1.1; Quick ratio = 0.6; Interest coverage = 10.52

•  A/R Turnover = 6.55 VS 8.07 (peers) !  Management: B+ (85%)

•  Management shake up - Pershing Square ! Corporate restructuring; cost cutting

•  Repurchase of 5.7 million shares at $416 million •  APD is currently under 33 environmental regulatory Settlements

Expectations and current records !  Price = $118.47 !  APD is projected to grow at 9% for the next 5 year per annum !  P/E = 21 Conservative assumptions !  APD grows at 8% for the next 5 year per annum !  P/E = 16 (Both the mean and average = 17) !  Price = $135.88 !  Upside = 14.70% !  EPS = $8.49, Return on EPS = 47% ((8.49-5.78)/5.78)

#  Grade: A (90%)

Growth  rate:   7.00%   8.00%   9.00%   10.00%   11.00%  

P/E = 16   $129.71   $135.88   $142.29   $148.94   $155.83  upside   9.49%   14.70%   20.11%   25.72%   31.54%  

Sun Hydraulics (SNHY)   Air  Products  and  Chemicals,  Inc.  (APD)  

1.  Niche  market  in  the  fluid-­‐power  

valve  industry  Defensible  moat  

2.   Strong  balance  sheet  with  no  debt   Balanced  balance  sheet  

3.   Stable management with a clear profit driven focus

Current management changes

4.  Has  margin  of  safety  with  conservaVve  esVmates  

Has  margin  of  safety  with  conservaVve  esVmates  

5.  PotenVal  moat:  Digitally  controlled  

fluid  valves  In constant threat of regulations and

litigation

SNHY APD

Business A (9) A(9.5)

Management A (9) B (8.5)

Balance sheet A (9.5) A (9)

Price A (9) A (9)

Total A (9.1) A (9)

Buy Sell

SNHY APD

!  Key Metrics •  Market Cap = 1.1B •  Pretax Margin = 27.9% •  ROA = 19.5% •  ROE = 21.9% •  ROC = 21.9% •  ROIC = 20.62% •  D/E = 0 •  R&D/Sales = 0 •  Retention ratio = 68.9% •  5 Yr. CAGR – EPS% = 61%

!  Key Metrics •  Market Cap = 35B •  Pretax Margin = 13.3% •  ROA = 5.7% •  ROE = 14.5% •  ROC = 8.5% •  ROIC = 9.63% •  D/E = 89% •  R&D/Sales = 1.3% •  Retention ratio = 42.2% •  5 Yr. CAGR – EPS% = 47%

Bottom line: Sun still has much room to grow and Sun grows on pure equity

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2012 2013 2014 2015 2016 2017 2018 2019

% C

han

ge

Years

GDP % Change: Americas

United States Canada Mexico

-2 -1.5

-1 -0.5

0 0.5

1 1.5

2 2.5

3 3.5

2012 2013 2014 2015 2016 2017 2018 2019

% C

han

ge

Years

GDP % Change: Europe/ Africa/ME

Germany Finland Norway

Sweden United Kingdom

0

1

2

3

4

5

6

7

8

9

2012 2013 2014 2015 2016 2017 2018 2019

% C

han

ge

Years

GDP % Change: Asia/Pacific

Australia France Japan Korea China

In summary: •  Global and domestic business

trends are favorable for growth •  Sun’s customers are expected

to experience favorable growth

•  Sun grows well with the economy: X>20% EBTIDA YoY margin

Name Mkt Cap (USD) P/E D/E ROIC

Gross Profit (millions) EV/EBITDA Revenue COSG

COSG/Sales

Average 3.75B 22.296859 41.10129175 14.383107 182395001.6 12.487924 594494411.9 444.61M 75%

SUN HYDRAULICS CORP 1.06B 27.657536 0 20.615738 19442000 15.590652 49050000 29.61M 60%

PARKER HANNIFIN CORP 17.77B 16.616457 43.254799 12.872805 686035008 11.446257 3106006016 2.42B 78%

DANFOSS POWER SOLUTIONS INC 0 25.663996 29.02021 121923000 6.973162 413007008 291.08M 70%

CIRCOR INTERNATIONAL INC 1.25B 25.283865 10.408755 12.590307 67507000 13.208073 214035008 146.53M 68%

SPX CORP 4.28B 20.698988 77.145485 397600000 11.815258 1319000064 921.4M 70%

FLOWSERVE CORP 10.34B 21.810791 63.943508 17.572884 470472000 13.256067 1389440000 918.97M 66%

MUELLER WATER PRODUCTS INC-A 1.44B 38.442566 186.668732 8.939021 67100000 12.066719 257400000 190.3M 74%

RTI INTERNATIONAL METALS INC 831.61M 24.253677 55.596184 5.36216 45684000 9.509752 200011008 154.33M 77%

GORMAN-RUPP CO 782.60M 24.842344 3.407284 21465000 15.40765 91607000 70.14M 77%

FRANKLIN ELECTRIC CO INC 1.89B 23.048388 31.410852 12.124647 76011000 14.064094 229651008 153.64M 67%

ITT CORP 3.86B 6.886014 0 208600000 11.374283 645500032 436.9M 68%

GRAHAM CORP 321.53M 26.82353 0.145507 6090000 15.456705 23385000 17.3M 74%

INGERSOLL-RAND INDIA LTD 232.12M 17.974518 0 4.061966 14.372974 106905423.1 0%

CRANE CO 4.02B 16.409613 72.035522 15.035235 226851008 11.242914 681449024 454.6M 67%

GRACO INC 4.37B 21.407738 65.885414 20.188869 147199008 14.895597 271923008 124.72M 46%

GARDNER DENVER INC #NAME? 22.05463 14.213444 173946000 9.126627 513540992 339.6M 66%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

COSG/Sales

COSG/Sales

Avg. = 75%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2002 2003 2005 2006 2007 2008

Per

cen

tage

(%)

Years

YoY growth

EBITDA

Profit Margin

EPS

2002 2003 2004 2005 2006 2007 2008 Average

EBITDA 13.81% 3.70% 101.01% 39.56% 24.68% 29.37% 8.75% 19.98%

Profit Margin 88.43% 11.58% 169.57% 32.40% 3.94% 15.97% 9.17% 26.92%

EPS 86.67% 17.86% 245.45% 55.26% 26.27% 35.91% 14.81% 39.46%

*Data excludes yr. 2004

! Current ratio: 9.2 ! D/E: 0 ! EV/EBITDA: 16 ! Gross Margin 23.20% ! ROA: 19.5% ! ROC: 21.9% ! ROE: 21.9% ! ROI: 19.3 ! ROIC: 20.62% ! Quick ratio: 8.2 ! Oper Margin: 23.2%

! P/B: 5.6 ! P/E : 28 ! P/FCF: 54.77 ! P/S: 5.18 ! PEG: 2.32

8.00% 10.00% 12.00% 14.00% 16.00%

14 $30.03 $32.92 $36.02 $39.36 $42.93 16 $34.32 $37.62 $41.17 $44.98 $49.06 18 $38.61 $42.32 $46.31 $50.60 $55.20 20 $42.90 $47.03 $51.46 $56.22 $61.33 22 $47.19 $51.73 $56.61 $61.84 $67.46 23 $49.34 $54.08 $59.18 $64.66 $70.53 24 $51.49 $56.43 $61.75 $67.47 $73.60 28 $60.07 $65.84 $72.04 $78.71 $85.86 27 $57.92 $63.49 $69.47 $75.90 $82.80 31 $66.50 $72.89 $79.76 $87.14 $95.06

8.00% 10.00% 12.00% 14.00% 16.00%

14 $2.15 $2.35 $2.57 $2.81 $3.07 16 $2.15 $2.35 $2.57 $2.81 $3.07 18 $2.15 $2.35 $2.57 $2.81 $3.07 20 $2.15 $2.35 $2.57 $2.81 $3.07 22 $2.15 $2.35 $2.57 $2.81 $3.07 23 $2.15 $2.35 $2.57 $2.81 $3.07 24 $2.15 $2.35 $2.57 $2.81 $3.07 28 $2.15 $2.35 $2.57 $2.81 $3.07 27 $2.15 $2.35 $2.57 $2.81 $3.07 31 $2.15 $2.35 $2.57 $2.81 $3.07

8.00% 10.00% 12.00% 14.00% 16.00%

14 46.93% 61.05% 76.23% 92.54% 110.03% 16 46.93% 61.05% 76.23% 92.54% 110.03% 18 46.93% 61.05% 76.23% 92.54% 110.03% 20 46.93% 61.05% 76.23% 92.54% 110.03% 22 46.93% 61.05% 76.23% 92.54% 110.03% 23 46.93% 61.05% 76.23% 92.54% 110.03% 24 46.93% 61.05% 76.23% 92.54% 110.03% 28 46.93% 61.05% 76.23% 92.54% 110.03% 27 46.93% 61.05% 76.23% 92.54% 110.03% 31 46.93% 61.05% 76.23% 92.54% 110.03%

! Current ratio: 1.10 ! Gross Margin 26.80% ! D/E: 0.85 ! EV/EBITDA: 12.4 ! Oper Margin: 15.6% ! P/B: 3.45 ! P/C: 64.69 ! P/E : 21.3 ! PEG: 2.71 ! P/S: 2.47

! ROA: 5.7% ! ROC 8.6% ! ROE: 14.8% ! ROI: 7.6 ! Quick ratio: 0.8

7.00% 8.00% 9.00% 10.00% 11.00%

14 $113.49 $118.90 $124.51 $130.32 $136.35 15 $121.60 $127.39 $133.40 $139.63 $146.09 16 $129.71 $135.88 $142.29 $148.94 $155.83 17 $137.81 $144.38 $151.19 $158.25 $165.57 20 $162.13 $169.85 $177.86 $186.17 $194.79 22 $178.35 $186.84 $195.65 $204.79 $214.27 24 $194.56 $203.83 $213.44 $223.41 $233.75 26 $210.78 $220.81 $231.22 $242.03 $253.23 28 $226.99 $237.80 $249.01 $260.64 $272.71 30 $243.20 $254.78 $266.80 $279.26 $292.19

7.00% 8.00% 9.00% 10.00% 11.00%

14 $8.11 $8.49 $8.89 $9.31 $9.74 16 $8.11 $8.49 $8.89 $9.31 $9.74 18 $8.11 $8.49 $8.89 $9.31 $9.74 20 $8.11 $8.49 $8.89 $9.31 $9.74 22 $8.11 $8.49 $8.89 $9.31 $9.74 23 $8.11 $8.49 $8.89 $9.31 $9.74 24 $8.11 $8.49 $8.89 $9.31 $9.74 28 $8.11 $8.49 $8.89 $9.31 $9.74 30 $8.11 $8.49 $8.89 $9.31 $9.74

7.00% 8.00% 9.00% 10.00% 11.00%

14 40.26% 46.93% 53.86% 61.05% 68.51% 16 40.26% 46.93% 53.86% 61.05% 68.51% 18 40.26% 46.93% 53.86% 61.05% 68.51% 20 40.26% 46.93% 53.86% 61.05% 68.51% 22 40.26% 46.93% 53.86% 61.05% 68.51% 23 40.26% 46.93% 53.86% 61.05% 68.51% 24 40.26% 46.93% 53.86% 61.05% 68.51% 28 40.26% 46.93% 53.86% 61.05% 68.51% 30 40.26% 46.93% 53.86% 61.05% 68.51%