Industrials Stock Recommendation

transcript

Bernard Hosanna

Shawana Jackson

Brett Kinkopf

Jonathan Kocon

Chien-Ying Lee

Agenda

Recap of Sector Industrial Holdings Stock Recommendations Summary Q&A

Sector Recap

SIM Industrials Weight: 12.76%

S&P500 Industrials Weight : 10.28%

Overweight by 248bps Class agreed to increase 15bps to overweight the sector by

200bps Positive sector developments

• Improving global growth

• Unemployment rate improving

• Rising GDP data

• Favorable industrial spending

Industrial Holdings

Current Holdings

Emerson =1.23%

General Dynamics =3.57%

Oshkosh =4.01%

UTI Worldwide =2.38%

First Solar =1.57%

Total=12.76%

Proposed Holdings

Emerson =1.23%

General Dynamics=3.00%

Oshkosh =3.50%

Bucyrus =2.17%

Total=12.28%Sell 57 bps of General Dynamics

Sell 51 bps of OshkoshSell 157 bps of First SolarBuy 217 bps of Bucyrus

Sell 57 bps of General DynamicsSell 51 bps of OshkoshSell 157 bps of First SolarBuy 217 bps of Bucyrus

First Solar (FSLR) Overview

• Produces Cadmium Telluride Solar Panels and provides solar energy solution services

• Is attempting to attain “grid parity” or a ~$0.70/watt price of electricity

• Have claimed they hit $1/watt… Much lower than the $4/watt for most solar units

• Considered a growth stock

– Has paid no dividends and has seen massive capital gains since its IPO

FSLR in Relation to XLI

FSLR Valuation

Absolute Valuation

High Low Median Current #Your Target Multiple

*Your Target E, S, B,

etc/Share

Your Target Price

P/Forward E 218.1 16.0 44.7 17.7 20 6.1 122

P/S 84.4 0 11.2 4.5 7 24 168

P/B 97.5 3.4 9.1 3.5 5 30.8 154

P/EBITDA 633.24 10.72 81.33 11.18 20 9.6 192

P/CF 973.7 11.6 87.7 11.9 20 9.0 180

FSLR DCF and Target Price

• Terminal DCR of 12%

• Terminal FCF growth of 4.5%

• Target price of $148.74

• Current price of $108.62

• Upside of 36.9%!!!

• So why sell?

Everything Looks OK- So Why Sell?

• A considerable portion of FSLR’s revenue is based on purchases backed by international governmental subsidies

• Recently the German government announced that it would decrease its subsidies for photovoltaic panels

• On February 18th, FSLR management announced it would widen its EPS guidance to $6.05 - $6.85

• So the DCF may still look good, but these forecasts are much less certain now

• In other words- overnight the volatility of this stock increased greatly.

• This company is beholden to the whims of foreign governments

Bucyrus International

• Products:– Draglines

– Drills

– Shovels & excavators

– Mining trucks

• Demand Drivers: – Coal

– Copper

– Oil sands

– Iron ore

– Other minerals

• Designs, manufactures, and markets mining equipment

• Supplies aftermarket parts and services for mining equipment

Bucyrus International

NASDAQ: BUCY

Stock Price: $65.82

Market Cap: $4.80b

Revenue: $2.65b

Diluted EPS: $4.12

Shares: 74.46m

Dividend Yield: 0.20%

• Commodities market

• Mining activity

• Global economy

• Foreign currency

GDP & Bucyrus

Crude oil spot price & Bucyrus

International Growth• Largest surface markets:

– Australia– Canada– China– India– South Africa– South America– US

• Expected growth in Russian and Indonesian markets

• Largest underground markets:

– Australia

– Germany

– China

– US

• Germany expected to decline as a market

• Expected growth in Russian, Indian, and Eastern European markets

70% of sales outside of U.S.

Bucyrus’s Financials

Bucyrus’s Key Financial Stats• Low current to D/E ratio at 0.37 compared to industry at 2.63

• Low PEG ratio at 1.24 compared to industry at 2.02

• 5-year Historical EPS Growth Rate 86.5%

• Low P/E ratio at 15.33 compared to industry at 27.16

BUCY’s ValuationsRelative to S&P 500 High Low Median CurrentP/Trailing E 2.8 0.37 1.5 0.88P/Forward E 1.6 0.34 1.1 1.1P/B 14.8 0.7 1.7 1.7P/S 2.2 0.5 1.3 1.5P/CF 2.6 0.4 1.9 1.2

Relative to Industry High Low Median CurrentP/Trailing E 3.5 0.49 1.8 0.52P/Forward E 2.1 0.29 1.4 0.7P/B 11.7 0.7 1.2 0.9P/S 2.8 1 2.1 1.5P/CF 3.5 0.6 2.2 1

BUCY’s Valuations

Absolute Valuation High Low Median Current

Target Multiple

Target E,S,B

Price Target

P/Forward E 26.1 4 17.6 15.7 18 4.93 88.74

P/S 3 0.4 1.8 1.8 1.8 45.31 81.56

P/B 49.1 1 4.9 3.8 4.9 16.83 82.47

P/EBITDA 23.53 2.09 14.49 8.85 14 7.2 100.8

P/CF 28.2 3.2 20.1 12.7 20 4.98 99.6

Average Price Target = $90.63 = 38% upside

Joy Global’s Valuation

Average Price Target = $62.52 = 11% upside

Absolute Valuation

High Low Median Current Your Target Multiple

Your Target E,

Your Target Price

P/Forward E 36.7 5.0 19.6 17.6 19.6 3.1 $60.8 P/S 3.8 0.3 1.4 1.6 1.4 29.3 $41.0 P/B 12.0 0.7 5.3 8.0 5.3 7.9 $41.9 P/EBITDA 27.7 2.9 12.3 7.6 12.3 7.6 $93.5 P/CF 40.8 3.3 16.4 11.4 16.4 4.6 $75.4

DCF model & Target Price

=(50% ave multiples + 50% DCF)

=(0.5*$90.63 + 0.5*$81.50)

(30% upside)

Current Share Price : $65.82Implied equity value/share : $81.5Upside/(Downside) to DCF : 23.8%Terminal Discount Rate:10.5%Terminal FCF Growth: 5.0%

What the charts suggests

Industry Charts

BUCY vs JOYG Charts over 5 yrs

Summary

Proposed Holdings

Emerson =1.23%

General Dynamics=3.00%

Oshkosh =3.50%

Bucyrus =2.17%

Total=12.28%Sell 57 bps of General Dynamics

Sell 51 bps of OshkoshSell 157 bps of First SolarBuy 217 bps of Bucyrus

Sell 57 bps of General DynamicsSell 51 bps of OshkoshSell 157 bps of First SolarBuy 217 bps of Bucyrus

First Solar• Uncertain outlook

• Highly volatile

• Germans reduces subsidies

Bucyrus• Rising global growth driven by

emerging markets

• Improving Asian urbanization should drive commodity prices higher

• Technical charts bullish

BUCY Sensitivity Analysis

9.5 10 10.5 11 11.54 88.06 79.08 71.53 65.10 59.56

4.5 95.09 84.70 76.10 68.86 62.69

5 103.67 91.45 81.50 73.24 66.30

5.5 114.41 99.69 87.97 78.42 70.51

6 128.21 110.00 95.88 84.64 75.48

Discount Rate

Emerson Electric

• Emerson is a global diversified technology company

• The company engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide

Current Share Price : $48.49Implied equity value/share : $54.56Upside/(Downside) to DCF : 12.5%Terminal Discount Rate:10.5%Terminal FCF Growth: 5.0%

Oshkosh

Industry: Trucks and Other Vehicles

Market Cap: $3.3 B

Target Price: $44

Current Price: $37.25

Upside Potential: 18%

Uti Worldwide

DCF:– Current Price: $15– Implied/Equity Value: $17– Upside/(Downside): 10.3%

Discount rate: 10%

Terminal growth rate: 3.5%

High Low Median Current Target Multiple

Target / Share

Target Price

P/E - Forward

32.90 10.10 19.90 20.40 19.90 0.56 11.14

P/S 1.20 0.20 0.60 0.40 0.60 36 21.60

P/B 6.40 1.40 3.20 2.00 3.20 7.88 25.60

P/EBITDA

25.29 4.98 13.97 11.32 13.97 1.39 19.44

P/CF 34.70 6.60 16.60 13.00 16.60 1.21 20.11

Multiples Target Price: $20

Average Target Price: $18.50

General Dynamics

Multiple ValuationAbsolute Valuation

High Low Median Current Target Multiple

Target value/share

Valuation Opinion

P/Trailing E

19.7 6.5 15.3 10.2 12.7 6.48 82.3

P/Forward E

1.8 0.6 1.2 0.8 1.0 79.431 79.431

P/B 4.8 1.6 3.2 2.2 2.7 30.386 82.042P/S 13.42 3.93 9.66 6.21 7.2 10.765 77.508P/CF 18.2 5.5 13.9 8.8 11.35 7.6 86.26

RecommendationsDCF Low High Target

Current Price (04/03/2010)

72.91 72.91 72.91 72.91

Implied equity value/share

81.95 77.51 86.26 81.73

Upside/( Downside) 12.40% 6.31% 18.31% 12.10%

HOLD Price Range: $77.51-- $86.26

Target Price: 0.5* Ave of multiple valuation price + 0.5* DCF

General Dynamics--DCFTerminal Discount Rate =11.5%

Terminal FCF Growth =4.0%

Year 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019ERevenue 31981 30737 33899 34916 35964 36683 37417 38165 38928 39707 40501 % Growth -3.89% 10.29% 3% 3% 2% 2% 2% 2% 2% 2%

Operating Income 3628 3802 4359 4365 4495 4585 4677 4771 4866 4963 5063 Operating Margin 11.34% 12.37% 12.86% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% 12.50%

Interest and Other -141 -133 -147 -152 -156 -159 -162 -166 -169 -172 -176 Interest % of Sales

-0.441%

-0.434%

-0.435%

-0.434%

Taxes 1102 1159 1331 1331 1371 1399 1427 1455 1484 1514 1544 Tax Rate 31.60% 31.60% 31.60% 31.60% 31.60% 31.60% 31.60% 31.60% 31.60% 31.60% 31.60%Net Income 2374 2509 2880 2882 2968 3027 3088 3150 3213 3277 3342 % Growth 5.69% 14.80% 0.04% 3.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%CFO 3011 2920 3220 3317 3417 3485 3555 3626 3698 3772 3848% of Sales 9.41% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%Subtract Capital Expense 475 461 505 520 532 543 550 561 568 580 587% of Sales 1.49% 1.50% 1.49% 1.49% 1.48% 1.48% 1.47% 1.47% 1.46% 1.46% 1.45%Free Cash Flow 2536 2459 2715 2797 2884 2942 3005 3065 3130 3192 3260% of Growth -3.02% 10.43% 3.00% 3.13% 2.00% 2.13% 2.00% 2.13% 2.00% 2.13%

Industrials Stock Recommendation

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