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Industrials Student Investment Management: Summer 2017 Team members: Seth Frey & Sam Goldberg

Industrials Student Investment Management: Summer 2017 Team members: Seth Frey & Sam Goldberg. Industrials: Seth Frey and Sam Goldberg. Agenda. Overview Business Analysis Economic Analysis Financial Analysis Valuation Analysis Recommendation. 2. Industrials: Seth Frey and Sam Goldberg.

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Industrials Student Investment Management: Summer 2017 Team members: Seth Frey & Sam Goldberg

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  1. Industrials Student Investment Management: Summer 2017 Team members: Seth Frey & Sam Goldberg

  2. Industrials: Seth Frey and Sam Goldberg • Agenda • Overview • Business Analysis • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation 2

  3. Industrials: Seth Frey and Sam Goldberg • Overview 3

  4. Industrials: Seth Frey and Sam Goldberg • Overview • Industrial Sector is comprised of companies that have the following activities: • Manufacturing and distributing of capital goods (ex: aerospace, construction, engineering/building of products, electrical equipment and machinery). • Commercial services and supplies (ex: printing, employment, environmental and office services). • Transportation services (ex: airlines, couriers, marine, road & rail and transportation infrastructure). 4

  5. Industrials: Seth Frey and Sam Goldberg • Overview 5

  6. Industrials: Seth Frey and Sam Goldberg • Overview 6

  7. Industrials: Seth Frey and Sam Goldberg • Business Analysis Growth: Commercial aerospace sub-sector analysis: Stable global gross domestic product (GDP) growth, relatively lower commodity prices including crude oil, and strong passenger travel demand, especially in the Middle East and Asia Pacific regions, will likely drive the commercial aerospace sub-sector growth. Defense sub-sector analysis: Defense sub-sector revenues are likely to grow at a much faster 3.2 percent in 2017 as defense spending in the US has returned to growth after multi-year declines in defense budgets, and future growth many be driven by the new US administration’s increased focus on strengthening the US military. Rising global tensions have led to increasing demand for defense and military products in the Middle East, Eastern Europe, North Korea, and the East and South China Seas. This is in turn resulting in increased defense spending globally, especially in the United Arab Emirates (UAE), Saudi Arabia, South Korea, Japan, India, China, Russia. *Deloitte analysis 2017 Global aerospace and defense industry outlook 9

  8. Average Input Prices Since 2010 • Industrials: Seth Frey and Sam Goldberg • Business Analysis • Input prices spiked in 2011, especially rare earth metals and rubber products • Energy is much cheaper now than in 2010 • Base metals, precious metals and rubber are cheaper now than in 2010 10

  9. Industrials: Seth Frey and Sam Goldberg • Economic Analysis • Regression analysis is often useful for sectors/stocks that are highly correlated to a particular economic (or other) data statistics. For example, oil prices and Energy stock prices are highly correlated. • Regression analysis of sectors within S&P 500: • Industrial Sector is closely correlated to the S&P 500 • The industrial Sector is also closely correlated to Raw Materials and Consumer Discretionary • The industrial Sector is not closely correlated to Utilities. 11

  10. Inventories/Sales: Industrials 2012-17 • Industrials: Seth Frey and Sam Goldberg • Economic Analysis ISM Manufacturing Index: 2012-17 12

  11. Financial Analysis

  12. Industrials: Seth Frey and Sam Goldberg • Financial Analysis • S&P Margins relatively constant, slight increase, while R&D slightly increasing • Industrials relatively constant, slight decrease, while R&D expense slightly increasing 15

  13. Inventories/Sales: Industrials 2012-17 • Industrials: Seth Frey and Sam Goldberg • Financial Analysis • Industrials generate free cash flow • Industrials’ cash flow decreasing faster than market cash flow 16

  14. Industrials: Seth Frey and Sam Goldberg • Financial Analysis 17

  15. Industrials: Seth Frey and Sam Goldberg • Financial Analysis 18

  16. Industrials: Seth Frey and Sam Goldberg • Valuation Analysis • Since 2014, Market P/E increasing faster than Industrials • Industrials P/Sales lower than market 19

  17. Industrials: Seth Frey and Sam Goldberg • Valuation Analysis Price/Sales: Major Industrials • P/S trending upwards • P/S decreased in 2011, 2014, and 2015 • Roper and 3M have highest P/S • Philips and Siemens have lowest 20

  18. Industrials: Seth Frey and Sam Goldberg • Valuation Analysis Simple Moving Average S5INDU: 2010-17 Google finance 7-4-17 21

  19. Industrials: Seth Frey and Sam Goldberg • Recommendation • The major positives affecting the Industrial sector are: • Increase in 2015 to 2016 sales growth, predicted to continue • Slightly under valued compared to S&P 500 • Net producer of cash flow • Input prices generally constant to decreasing • The biggest risks are: • Decreasing cash flows • Increasing p/s, p/e • High expectations • Estimated gross margin of S&P 500 predicted to increase 10% • Recommendation • Overweight or inline relative to S&P 500 • Industries to overweight: defense, healthcare • Industries to underweight: industrial/factory automation equipment 22

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