Date post: | 31-Dec-2015 |
Category: |
Documents |
Upload: | david-flowers |
View: | 214 times |
Download: | 0 times |
Industrial Sector Presentation
Terres MaloneyKwan Wang
Roman ZeltserNikita Zorin
Student Managed Investment Portfolio Class
Prof. P.V. Viswanath
Spring 2002
Objective
Identify and price potentially undervalued equity investments in the U.S. Industrial Sector, assuming that the economy is in the beginning stages of recovery.
Industrial Production Snapshot
• Jumped 0.7% in March
• Biggest increase since May-2000
• High-tech production up 1.4%
• Operational capacity up 0.6%
• Production still below 9/11 level
Analytical Approach
• Top-Down industry analysis
• Quantitative & qualitative examination
• Single out undervalued equities
Analytical Approach
Top-Down industry analysis
• Focus On Leverage:
Low leverage increases flexibility
Greater potential to increase shareholder wealth
Reduced financial risk
Better access to debt financing sources
Analytical Approach
Top-Down industry analysis
• Develop leverage regression model by using the following variables:
Total Debt / Total Assets
EBITDA / Firm’s Market Value
CAPEX / Total Assets
Intangible Assets / Total Assets
Natural Log of Firm’s Market Value
Analytical Approach
Top-Down industry analysis
• Under-Leveraged Sectors
Healthcare
Industrial
Consumer Discretionary
Transportation
Industrial Sector Analysis
Industrial Universe 435
Elimination Criteria # StocksStocks under $5 / shr &Total Assets under $200MM
331
Ratio Analysis – Top Rank 16
Implementation Of Ratios
Evaluate each of top 16 companies by looking at weighted and ranked Key Ratio Factors
Determine which company is best positioned to increase shareholder wealth.
Key Ratio Factors:
•Financial Strength / Credit Position
•Profitability
•Growth
Ratio Analysis
• Relates Income Statement, Balance Sheet, and Cash Flow Statement items to one another
• Provides clues in evaluating a firm’s current position
• Aids in spotting trends toward future performance
Credit Ratios
Measure the firm’s ability to repay its obligations, its existing leverage situation, and its resultant financial risk.
• CURRENT RATIO
• LONG-TERM DEBT / EQUITY
• EBIT / INTEREST
Ratio Categories Employed
Ratio Analysis
Profitability Ratios
Measure return on assets and equity investments.
• EBIT / TOTAL ASSETS
• NET PROFIT / EQUITY
Ratio Categories Employed
Ratio Analysis
Growth Ratios
Measure the firm’s performance in expanding its business, a key criterion in valuation.
• EPS GROWTH
• REVENUE GROWTH
Ratio Categories Employed
Ratio Analysis
Company Name Industry Curr. Ratio LT Debt / Eqty EBIT / Int. EBIT / T. A. Net Prof. / Eqty EPS Growth Revenue
APOLLO GROUP INCORPORATED Schools 1.60 2 1 4 1 1 3 3ESCO TECHNOLOGIES INCORPORATED DefElect 1.68 1 2 4 1 2 1 2MOLEX INCORPORATED Elec Eqp 1.78 2 1 1 2 3 1 4PRE-PAID LEGAL SERVICES INC Bus Svcs 1.90 1 2 3 3 1 2 4EDO CORPORATION DefElect 1.98 2 1 4 1 4 1 4ROBERT HALF INTERNATIONAL Employmt 2.18 3 2 4 2 1 3 2AMERICAN POWER CONVERSION CORP Elec Eqp 2.45 4 2 4 3 1 3 1GRACO INCORPORATED IndEquip 2.50 1 4 2 2 2 2 4SIMPSON MANUFACTURING COMPANY BldgMatl 2.78 4 3 1 2 2 4 1VICOR CORPORATION Elec Eqp 2.88 4 1 4 4 4 3TRAVELOCITY.COM INCORPORATED Con Svcs 3.00 3 4 2 3 3 1 3LAWSON PRODUCTS INCORPORATED InduDist 3.03 3 3 3 4 3 2 3PAYCHEX INCORPORATED DataProc 3.05 1 4 4 1 4 4 2KAYDON CORPORATION Ind Prod 3.18 3 3 2 4 3 4 1ELECTRO SCIENTIFIC INDUSTRIES Elec Eqp 3.20 4 3 3 3 4 2 2CURTISS-WRIGHT CORPORATION IndFlowC 3.28 2 4 4 4 2 4 3
Weight 15.0% 30.0% 5.0% 15.0% 20.0% 12.5% 2.5%
Profitability Financial Strength Growth
Ratio Analysis
Electro Scientific Industries Inc.
Manufactures equipment for production of key electronic components and circuitry for:
• Wireless Communications
• Computers & Personal Digital Assistants (PDA)
• Automotive Electronics
• Home Entertainment Devices
Electro Scientific Industries Inc.
Product Line
Semiconductor Yield Improvement Systems
• Increase manufacturing yield for memory manufacturers.
Electronic Component Production Systems
• Test and termination equipment.
• Used in multi-layer ceramic capacitors (MLCC’s).
Electro Scientific Industries Inc.
Advanced Electronic Packaging Systems
• Advanced Packaging Equipment for High Density Interconnect (HDI) circuit boards and advanced integrated circuit packages.
Vision and Inspection Systems
• Critical enabler in the processing and packaging of semiconductors and other electronic components.
• Circuit Fine Tuning Systems
• Help electronic device manufacturers tune devices to precise electrical tolerances.
Electro Scientific Industries Inc.
Product Line
Competition Market Share
Electro Scientific Industries Inc.
• GSI Lumonics• Tokyo Weld • Kanebo and
Humo• Hitachi • Excellon• Vision• Cognex• NEC
85%
15%
• DRAM Repair
• Laser TrimmingSystem
• Capacitor Test &TerminationEquipment
50%50%
60%
40%
Customers
Electro Scientific Industries Inc.
• IBM• muRata• Hyundai• KEMET• Samsung• Siemens• Motorola• Hitachi• Altera
Electro Scientific Industries Inc.
North America
28%
Japan
21%
Europe
14%
Asia
37%
FY 2001 GEOGRAPHIC REVENUE DISTRIBUTION
Valuation Model
Two-stage Dividend Discount and Free Cash Flow to Equity (FCFE) discount model *
Source: www.damodaran.com
Electro Scientific Industries Inc.
Key Elements of The Valuation Model
• Current Beta 1.98• Projected Beta 1.10
• Risk-Free Rate 5.05%• Risk Premium 4.00%
• Last Fiscal Year EPS $3.25• Historical EPS $0.68
• Projected Growth Rate in Earnings 23.00%• Stable Growth Rate after High Growth 3.50%
Electro Scientific Industries Inc.
Estimates Of Growth Weight• Fundamental Growth 70%
Confidence in our analysis Fundamentals are structured to screen
out under-valued stocks
• Analyst Projection of Growth 20% Biased towards positive estimates, but Also should be taken into consideration
• Historical Growth 10% Already incorporated into current prices
Electro Scientific Industries Inc.
Sensitivity Analysis of Estimated Growth
Fundamental Analyst Historical Stock Price
70 % 20 % 10 % $94.0450 % 30 % 20 % $101.6530 % 30 % 40 % $106.1510 % 40 % 50 % $113.69
Electro Scientific Industries Inc.
Stable Growth Period Beta Sensitivity Analysis
Future Beta Stock Price
1.0 $105.431.1 $99.041.5 $80.242.0 $65.60
Electro Scientific Industries Inc.
Institutional OwnershipInstitutional Holders 90.20
%
Total Shares Held24,623,562
Number of Institutional Investors 138
3 Months Net Change in Shares Purchased1,928,758
Top Institutional Holders:• Capital Guardian Trust• EQSF Advisers• J. & W. Seligman & Co.
Source: Multex.com
Electro Scientific Industries Inc.
Insider Trading
Source: Multex.com
Electro Scientific Industries Inc.
DATE WHO SHARES TRANSACTION
March-02 DIRECTOR HORSELY -50,000 Sale @ 38.98March-02 DIRECTOR MESSINA -6,409 Sale @ 41.75March-02 DIRECTOR MESSINA -138 Sale @ 41.75March-02 DIRECTOR HORSELY -2,500 Sale @ 40.46
January-02 DEJESUS -5,000 Sale @ 36.13January-02 DIRECTOR SEBO -24,580 Sale @ 34.60January-02 DIRECTOR CLARK 140,830 Purchase @ 34.60
December-01 DIRECTOR MESSINA -30 Sale @ 35.64December-01 VP TUREK -1,670 Sale @ 35.53December-02 CEO GOLISANO -248,895 Sale @ 34.50December-02 DIRECTOR CLARK -4,000 Sale @ 35.93
October-02 DIRECTOR SEBO -1,500 Sale @ 33.40October-02 DIRECTOR MESSINA -58,000 Sale @ 33.47
Electro Scientific Industries Inc.
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001-200.00%
-100.00%
0.00%
100.00%
200.00%
300.00%
400.00%
500.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001-15
-10
-5
0
5
10
15
20
25
30
35
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Revenue Growth Income Reported Growth
R&D Expense Growth Pre-Tax Margin Growth
Ratio Comparison Electro Scientific Industry
• Sales – 5yr Growth 21.24 15.60• Current Ratio 26.19 3.56• NI / Employee 9,689 6,453• Net Profit Margin 6.15 -2.49• ROA 3.47 -1.79• ROI 3.76 -2.22• Inventory Turnover 1.97 4.71
Electro Scientific Industries Inc.
Future Investment Outlook• Healthy and Liquid Balance Sheet
• Positive Leading Indicators
Net orders of $33mm were up 19% sequentially
Backlog is down 14% sequentially to 19mm
The Electronics Components business is up 26%
Vision business is up 54% sequentially
Business has reached a bottom of the cycle, in our view
Electro Scientific Industries Inc.
Electro Scientific Industries Inc.
STRENGTHS
• Worldwide Presence Over 90% of sales generated through foreign offices
• Direct sales in Asia eliminate brokerage costs
• ESI has 95% Market Share in Semiconductor Yield Improvement
• Experiencing growth in its capacitor production and vision business Early sign of recovery of company’s overall business Production equipment business up 26% during this quarter
• Dominates memory repair market with 90% Market Share Posting sequential growth in this market Decreasing cancellation and backlog
Electro Scientific Industries Inc.
WEAKNESSES
• Lingering inventory over capacity in passives continues to limit near-term upside
• Some of the production components are obtained from exclusive suppliers
• ESI’s customers’ markets are cyclical and historically experience periodic downturns
Electro Scientific Industries Inc.
OPPORTUNITIES
• Expanding Markets• Embedded memory for logic devices and voltage regulators• Continued consumer demand for smaller and lighter phones
and PDA’s
• Dominant Market Share• Pursuing an aggressive strategy to capture capacity expansion
in China
Electro Scientific Industries Inc.
THREATS
• Slackening in demand due to the global slowdown in electronics manufacturing
• Unfavorable foreign exchange rates
5-Year Price History
Electro Scientific Industries Inc.
Our Recommendation• ESIO is undervalued
• We recommend to take a Long Position in ESIO
• Current Stock Price is $30.47
• Model Price is $94.04
• Set Limit-Stop order at $27.00
Electro Scientific Industries Inc.
Paychex Corporation
Paychex Corp.
National provider of payroll processing, human resources and benefits outsourcing solutions for small-to medium-sized businesses
Major Products & Services
• Payroll Processing• Tax Services• Employee Pay Option• Workers’ Compensation• State Unemployment Insurance Service• Handbook Services• Retirement Services• Paychex Administrative Services• Paychex Business Solutions
Valuation Model
Two-stage Dividend Discount and Free Cash Flow to Equity (FCFE) discount model *
Source: www.damodaran.com
Paychex Corp.
Key Elements of The Valuation Model
• Current Beta 0.87• Projected Beta 1.10
• Risk-Free Rate 5.05%• Risk Premium 4.00%
• Last Fiscal Year EPS $0.68• Historical EPS $0.15
• Projected Growth Rate in Earnings 20.00%• Stable Growth Rate after High Growth 3.50%
Paychex Corp.
Sensitivity Analysis of Estimated Growth
Fundamental Analyst Historical Stock Price
70 % 20 % 10 % $25.7550 % 30 % 20 % $23.0430 % 30 % 40 % $21.2210 % 40 % 50 % $19.30
Paychex Corp.
Stable Growth Period Beta Sensitivity Analysis
Future Beta Stock Price
1.0 $17.451.1 $16.271.5 $12.952.0 $10.50
Paychex Corp.
SWOT Analysis
Strengths• More than 100 locations nationwide• Small employer markets = Greater Growth Potential• Excellent management of costs• Strong client retention, new payroll & HR services• Fully functional Web-Based Payroll solution
Opportunities• Expansion into international markets
Paychex Corp.
Revenue Growth Income Reported Growth
Pre-Tax Margin Growth
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
1993 1994 1995 1996 1997 1998 1999 2000 20010.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001
0
5
10
15
20
25
30
35
40
45
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Paychex Corp.
Ratio Comparison Paychex Corp Industry
• Sales – 5yr Growth 21.15 17.17• Current Ratio 1.32 2.42• NI / Employee 37,483 28,579• Net Profit Margin 29.13 10.00• ROA 9.49 6.97• ROI 33.79 9.27• Inventory Turnover N/A 25.99
Paychex Corp.
Future Investment Outlook• Balance Sheet strong with 760m in cash and no debt
• Positive Leading Indicators
Eventual rebounds in employment levels and interest rates
The small-employer payroll market has the best long-term growth potential.
Positive news about economy in the near future may put an upward pressure on the price of the stock.
Paychex Corp.
Institutional OwnershipInstitutional Holders 56.70 %
Total Shares Held 212,696,272
Number of Institutional Investors 421
3 Months Net Change in Shares Purchased 2,745,093
Top Institutional Holders:• Janus Capital Mgt.• TCW Group• Barclays Global Investors
Source: Multex.com
Paychex Corp.
Insider Trading
Source: Multex.com
DATE WHO SHARES TRANSACTION
March-01 OFFICER BELTER 100 Purchase @ 26.81April-01 OFFICER HARPER 1000 Purchase @ 26April-01 SECRETARY REINHARDT -1500 Sale @ 36.58April-01 VP BELTER -5000 Sale @ 33.65May-01 VP BELTER -10000 Sale @ 36.23July-01 SECRETARY REINHARDT -650 Sale @ 37
August-01 OFFICER GLASGLOW -6228 Sale @ 34.10January-02 OFFICER LONGE -404 Sale @ 33.03January-02 SECRETARY REINHARDT -1600 Sale @ 30.92
March-02 CFO DOOLEY -3870 Sale @ 36.06March-02 SECRETARY REINHARDT -9760 Sale @ 36.60March-02 OFFICER KAPRAL -480 Sale @ 36.74March-02 OFFICER LONGE -5000 Sale @ 36.74March-02 VP KURDOCK -5484 Sale @ 36.74
Paychex Corp.
Paychex Corp.
5-Year Price History
Our Recommendation• PAYX is overvalued
• We recommend not to invest into PAYX
• Current Stock Price is $38.10
• Model Price is $25.75
Paychex Corp.
Curtiss Wright Corp.
Curtiss Wright Corporation operates through its consolidated subsidiaries as a designer and manufacturer of motion control, metal treatment and flow control products for the aerospace, defense, automotive, construction, oil, petrochemical, metal working and other industries. The Company operates three segments:
• Motion Control: designs, engineers and manufactures actuation components and systems
• Flow Control: provide valves for nuclear submarines and aircraft carriers.
• Metal Treatment: provides protection against corrosion and longevity in metal products.
Curtiss Wright Corp.
Product Line
• Perimeter intrusion detection systems
• Flight control computers
• Aiming systems for armored vehicles
• Suspension systems
• Flow control products
• Reed valves
• Inductive position sensors
• Digital panel indicators
• Hydraulic
Curtiss Wright Corp.
Business Segment Diversification
Curtiss Wright Corp.
30.9
32.3
11.9
8.6
9.66.7
Commercial Aerospace
Military/Defense
General Industrial
Pow er Generation
Process Industry (Oil &Gas)
Automotive/Transportation
STRENGTHS
• Diverse business segments• Niche leader in industrial technology• Improved position in the military defense industry
WEAKNESSES
• Commercial airspace markets• Expected below average economic activity
Curtiss Wright Corp.
OPPORTUNITIES
• Growth through acquisitions• Pursue defense electronics market – key strategic initiative and will
provide a compelling long-term growth opportunity• Expected growth in defensive spending• Continually expand its geographic network of metal treatment
facilities• Expand further into markets company currently serves and position
the firm to exploit niche opportunities as a supplier of high value-added products and services.
Curtiss Wright Corp.
Valuation Model
Two-stage Dividend Discount and Free Cash Flow to Equity (FCFE) discount model *
Source: www.damodaran.com
Curtiss Wright Corp.
Key Elements of The Valuation Model
• Current Beta -0.06• Projected Beta 1.10
• Risk-Free Rate 5.05%• Risk Premium 4.00%
• Last Fiscal Year EPS $6.14• Historical EPS $1.58
• Projected Growth Rate in Earnings 31.25%• Stable Growth Rate after High Growth 4.00%
Curtiss Wright Corp.
Sensitivity Analysis of Estimated Growth
Fundamental Analyst Historical Stock Price
70 % 20 % 10 % $278.7950 % 30 % 20 % $319.8430 % 30 % 40 % $365.8510 % 40 % 50 % $417.46
Curtiss Wright Corp.
Stable Growth Period Beta Sensitivity Analysis
Future Beta Stock Price
1.0 $298.401.1 $278.791.5 $222.612.0 $180.32
Curtiss Wright Corp.
Institutional OwnershipInstitutional Holders 39.40
%
Total Shares Held4,090,225
Number of Institutional Investors 69
3 Months Net Change in Shares Purchased(4,331,023)
Top Institutional Holders:• Royce & Associates• Gabelli Asset Management• Gabelli Funds LLC.
Source: Multex.com
Curtiss Wright Corp.
Ratio Comparison Curtiss Wright Industry
• Sales – 5yr Growth 15.01 10.94• Current Ratio 2.97 1.16• NI/employee 23,954 9,449• Net Profit Margin 18.32 3.58• ROA 14.47 4.16• ROI 16.55 6.81• Inventory Turnover 4.2 6.34
Curtiss Wright Corp.
Ratio Comparison Con’t CW Industry
SP
• P/E Ratio 12.11 21.6729.33
• Beta -0.08 0.47 1.00• Price to Book 2.14 3.52 5.13• Sales growth *15.01 10.92 12.60• EPS growth * 31.25 -1.77 8.13• Current Ratio 2.97 1.16 1.66• TD/Equity 0.06 0.97
1.06• Gross Margin * 35.25 15.00
47.45• Op. Margin * 15.05 7.96 17.97
Curtiss Wright Corp.
Revenue Growth Income Reported Growth
R & D Expenditures Growth
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1993 1994 1995 1996 1997 1998 1999 2000 2001-150%
-100%
-50%
0%
50%
100%
150%
200%
250%
1993 1994 1995 1996 1997 1998 1999 2000 2001
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
1996 1997 1998 1999 2000 2001
Curtiss Wright Corp.
-50.00%
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
M-01 J -01 S-01 D-01
Income Reported Growth (Quarterly)
Curtiss Wright Corp.
5-Year Price History