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1
Security Analysts’ Summary Recommendations
Company Ticker AnalystVoting Item?
RecommendationStock is in the
portfolio?Rio Tinto RIO Garett Mahoney YES SELL Yes
PPG Industries PPG Marin Dacaudaveine YES SELL Yes
Chevron CVX Edward Weagel No BUY Yes
Honeywell HON Benjamin Yang No BUY Yes
Kinder Morgan Energy Partners KMP Robert Nagaki No BUY Yes
Pepsico PEP Chase Eggleston No BUY Yes
Schlumberger SLB Jordan Fuentes No HOLD Yes
Stryker SYK Bryan Deshayes No BUY Yes
Union Pacific UNP Kathy Hollingsworth No BUY Yes
Walgreen WAG Thai Yaparwong No BUY Yes
2
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
Recommendation: “Sell”
Target Price: $39
Today’s Price: $55.01
3
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
47%
22%
11%
10%
8% 3%
Segment Revenues
Iron Ore
Aluminium
Copper
Energy
Diamonds & Minerals
Other Operations
Segments:
1. Iron Ore2. Aluminium3. Copper4. Energy5. Diamonds
& Minerals
4
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Price of Aluminium
5
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
Copper (₵/lb) Oyu Tolgoi
Largest New Copper Mine Disputes with Mongolian
Government Regarding Expansion Expansion Required in order to
turn profit. Turquoise Resources estimates
current operating output to decline.
Northern Dynasty 19.1% stake gifted to Charities
2009 2010 2011 2012 2013 2014 2015 2016 2017200
250
300
350
400
450
6
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
May-13 Nov-13 Jun-14 Dec-14 Jul-15 Jan-16 Aug-16 Mar-17$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
Price of Iron Ore
7
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
China’s Influence
8
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
9
Rio Tinto (Ticker: Rio)Analyst: Garett Mahoney
Source: Spring 2014 portfolio management class
10
Recommendation SELL
China’s economic and political changes will negatively impact multiple segment revenues.
Significant impact on iron ore prices.
Development of GHOST Cities cannot be sustained. China’s consumption will be cut.
Aluminium demand and price increase will be overshadowed by Chinese policy changes.
Copper price decrease.
Poor HPR and Risk-Adjusted Returns shows investment would be more beneficial in Sector ETF.
Target Price: $39
Today’s Closing Price: $55.01
11
Recommendation for PPG Industries (Ticker: PPG)Analyst: Marin Decaudaveine
Recommendation: SELL
Target price (6/30/2015): $181
Closing Price (5/7/2014): $198.74
12
Performance coatings
53%
Industrial coatings
40%
Glass7%
2013 Sales
PPG Segments Overview
Performance coatings:Aerospace, Marine,
Architectural coatings
Industrial coatings:Automotive OEM,
Packaging, Specialty coatings
Glass: Fiber Glass, Flat Glass
13
• Very high return since its purchase: 210.32% since 4/8/2010 (S&P 500 return in the same time: 58.31%). Sell PPG to secure these gains.
Why sell PPG?
Morningstar
14
Why sell PPG? (cont)
• Exposure to the risk of raw materials inflation. Titanium dioxide purchases are 70% to 80% of the cost of goods sold of the coatings business (93% of the total revenues of PPG in 2013). Only one large supplier, Henan Billions.
• Architectural coatings business (29% of revenues) weaker than other coatings businesses, despite the construction market recovery. Due to fewer competitive advantages, based on technological leadership and not on prices.
• Transitions optical business separation, which was very profitable, and had excellent margins (29.2% versus 15.5% for the whole company)
15
However, PPG has some strengths
• Current PPG’s portfolio shift. Focus on coating activity (2004: 56%, 2014: 93%). Strong acquiring activity, and a lot of divestitures. Coatings manufacturing industry benefits from many positive points. Low capital intensive and consolidating industry. High growth potential. Results improved in the long run.
• 25% of the firm's sales are from emerging regions. It will drive growth, because the western regions expand at a slower rate.
• High return of cash to shareholders ($1.35 billion in 2013), through shares repurchases and dividends.
16
Questions?
17
Chevron Corporation (Ticker: CVX)Analyst: Edward Weagel
18
Recommendation for Chevron (CVX)
Recommendation: BUY Target Price (12/31/2015): $141
Closing Price (05/06/2014): $126.23
Reasoning Behind the Recommendation The company is investing heavily in new US and International projects. Barrels of Oil Equivalent per day (BOEPD) production is projected to
increase into 2017. CVX outperformed the other supermajors in profit per barrel. The company reliably pays dividends. For the past decade, dividends have grown at 9.8% per annum. Cash is also used for stock buybacks.
Industry OutlookBecause of new technology, global liquid production is still growing
despite several analysts claiming that it would peak in the 2000’s.
19
Strengths
Upstream Strengths Greater than 90% of earnings come from 27% of revenue Production per day is projected to increase to 3.1 million bpd of BOE. New Projects
Angola LNG project started shipping its product. Australia – Wheatstone LNG project Delaware Basin Kurdistan Region – 80% stake in Qara Dagh Block Marcellus Shale
Downstream Strengths Demand is expected to rise for refined products in the next 15 years. US Gulf Coast Petrochemicals Project
20
Weaknesses
Risk-adjusted performance during the past 5 quarters The sector performed worse than the S&P. The company performed worse than the sector.
Upstream WeaknessesExploration expense is at a high for the past 5 years at $1.8 billionCapital and Exploratory expenditures are at a high for the past 5 years The increasing reliance on offshore drilling means more risks.
Downstream Weaknesses Historically, the segment is vulnerable to low margins. This segment contributes less than 10% to earnings. For both US and International, sales decreased for refined products.
21
Questions?
22
Recommendation for Honeywell International (Ticker: HON)Analyst: Benjamin Yang
Recommendation: BUY Target price (12/2015): $103
Closing Price (5/7/2014): $92.92
2013 Sales: $39.1 B (+4%)
2013 Net Income: $3.96 B (+12%)
23
Strengths Ties to macroeconomic trends with positive outlook
High expected earnings growth through M&A
Transportation
Global Economy
Construction
Green Technology
Aerospace
ACS
PMT
2008 2010 2012 2014 2016 2018 2020$0.00
$5.00
$10.00 EPS
2X EPS
Year
EP
S (
$)
24
Weaknesses and Risks Defense and Space (Aero) faces headwinds (Target: bottom out in 2014)
Net income margin improvement capacity uncertain beyond 2015 (Target: continued improvement in 2014)
Risk: M&A could be poorly managed. Target: monitor to ensure organic
growth for PMT and ACS in the 1%-4% range or better in 2014-2018.
2012 2013 2014 2015 2016 2017 2018 2019 $-
$5,000
$10,000
$15,000 AeroDe-fense
Year
Aer
o R
even
ue
($M
)
2012 2013 2014 2015 2016 2017 2018 20190.0%
10.0%
Year
Net
In
com
e M
arg
in
25
26
Recommendation for Kinder Morgan Energy Partners LP (Ticker: KMP)Analyst: Robert Nagaki
Recommendation: BUY Target price (12/2015): $90
Closing Price (5/07/2014): $75.09
Industry Overview
- Energy Transportation and Storage
Business Segments
- Natural Gas Pipelines
- CO2 Pipelines
- Product Pipelines
- Terminals
- Kinder Morgan Canada *Source of basic data company 10-k
27
Positives
Tennessee Gas Pipeline
El Paso Natural Gas
Jones Act Tankers
$16.2 billion in future growth projects
28
Negatives
Interest Rates
Alternative forms of Energy Transportation
Terrorist Attacks
29
Questions?
30
Recommendation for PepsiCo (PEP)Analyst: Chase Eggleston
Recommendation: BUY Target price (12/2015): $94
Closing Price (05/07/2014): $86.80Segments• PepsiCo Americas Foods
• Frito-Lay North America (FLNA)• Quaker Food North America (QFNA)• Latin American food businesses (LAF)
• PepsiCo Americas Beverage (PAB)• Europe• Asia, Middle East and Africa (AMEA)
31
Reasons for RecommendationPositives:
Return to Shareholders Share Repurchases Dividends
- $2.27 per share to $2.62 per share
SizeCash FlowsRevenue VolatilityLow Risk Growth Potential
Emerging Markets Shanghai’s DisneyLand At Home Beverage Production
32
Reasons for RecommendationThings to be aware of:
Consumer TrendsCommodity PricesCurrency ExchangeCompetitors
33
Sources
1. IBIS World
2. Mergent
3. PepsiCo 2013 10-k
4. PepsiCo 2012 10-k
5. http://seekingalpha.com/article/2059583-pepsi-tingyi-take-aim-at-coke-with-disney-win
6. http://www.fool.com/investing/general/2014/03/17/pepsico-enters-at-home-carbonation-market-before-c.aspx
7. http://seekingalpha.com/article/2018301-pepsico-ceo-discusses-q4-2013-results-earnings-call-transcript?part=single
8. http://advisor.marketscope.com/SP/msa/reports.pdf?reportURL=/indsurv/fnb/fnb.pdf
34
Recommendation for Schlumberger Ltd (Ticker: SLB)Analyst: Jordan Fuentes
Recommendation: HOLD Target price (12/2015): $114.00
Closing price (5/07/2014): $101.88
% of Revenues
Reservoir Characterization DrillingProduction Eliminations & Other
27.05%
38.26%
35.19%
-0.49% % of Revenues
North America Latin AmericaEU/CIS/Africa MidEast/AsiaElimination & Other
17.12%27.32%
23.88%
0.98%
30.70%
Segments: Regions:
35
Recommendation for Schlumberger Ltd (Ticker: SLB)Analyst: Jordan Fuentes
Recommendation: HOLD Target price (12/2015): $114.00
Closing price (5/07/2014): $101.88
Positives:• Technological innovation and efficiency• Financial performance against competition• Industry outlook bullish
Negatives:• Highly dependent on expenditures from oil and gas industry related to the
exploration and production (E&P) of hydro-carbons. • Subject to risk related to foreign exchange and geo-political events• Alternative energy production
Competitors:
Halliburton Company (HAL) Baker Hughes Incorporated (BHI)
Weatherford International (WFT)
36
Technological Innovation: SLB• 1.2 billion invested into
R&E in 2013 (2.46% of revenues)
• Over 125 R&E facilities worldwide
• Involved in optimization of hydro-carbon rigs.
• Improved efficiency for customers
• Shale, fracking, and deep-water E&P
• PowerDrive Vortex drill bit can penetrate 92% further than traditional drills bits.
• OneSubsea Joint Venture: world record for shortest time between exploration and production: 14 Months
• Wearable Intelligence:Google Glass
37
Financial Advantage• Expanding margins• Double digit EPS growth• Shareholder approved
buyback program: 2.6 of 10 billion spent
• Improved 2013: asset utilization, inventory management
SLB
HAL
BHI
WFT
0% 5% 10% 15% 20% 25%
Operating Margins: Annual
2012 2013
38
Recommendation Stryker Corporation (Ticker: SYK)Analyst: Bryan Deshayes
Recommendation: BUY Target price (12/2015): 93
Closing Price (5/07/2014): 79.42
Company Overview 2013 Revenue : $9.02 Billion
- 4.2% Increase from 2012
Segments- Reconstructive (4.8% increase)- MedSurg (2.9% increase)- Neurotechnology and Spine (5.6% increase)
44%
37%
19%
Sales
Reconstructive
MedSurg
Neurotechnology and Spine
39
Stryker Corporation Future Industry Outlook
- Change in government regulation- Reduced Cost Trend for Healthcare Providers- Emerging Markets – Growing middle class
Strengths- Recent Acquisitions : MAKO, Trauson, Patient
Safety Technologies- Research and Development - Fast Long-Term Growing Dividend
40
Stryker CorporationOpportunities
- International Expansion : Emerging Markets- Aging Population (Over 65 to double by 2030)- Increased Obesity
Threats- New Entrants in the Market/Competition- Regulation- Litigation/Lawsuits
41
Stryker Corporation
Questions?
Recommendation for Union Pacific Corporation (Ticker: UNP)Analyst: Kathy Hollingsworth
Recommendation: BUY Target price (12/2015): $216
Closing Price (5/7/2014): $188.35
Diversified Commodity mix
Current leader in the industry
Strong Brand Recognition
43
Commodity Market Share2012 Market Share
Agriculture 30.6% Automotive 37.5% Chemicals 35.1% Coal/Energy 23% Industrial Products 14.3% Intermodal 44.9%
Agricu
lture
Autom
otive
Chem
icals
Coal/E
nerg
y
Indu
stria
l Pro
ducts
Inte
rmod
al0%
20%
40%
60%
80%
100%
3280 1807 32383912 2494
3955
7442 3070 597813094 14948
4848
Union Pacific 574 Companies
*Commodity Total Revenues from the Association of American Railroads
44
Positives
• Operations are tied to the economy
• Only railroad to have all six ports to Mexico -More manufacturing moving to Mexico (especially auto industry)
• $60 million buybacks until 2017
• Investing in technology for locomotives to improve fuel efficiency
• Best transportation industry to turn to when fuel prices spike
• Investing capital into networks and infrastructure to grow
45
Negatives
• Legacy contracts
• Railroad Unions
• Volatile fuel costs; Enforcement of fuel surcharges
• Pending law suits regarding price fixing
• Coal Industry/Natural Gas Competition
46
Conclusion
Union Pacific Corporation Leading the Rail Industry Maintaining strong financials Railroads are the best choice among industry competitors as fuel costs
rise Preparing itself to grow with the forecasted economic rise Taking care of their investors
It’s a buy.
50
Walgreens Company (WAG)
51
Walgreens Company (WAG)Analyst: Thai Yaparwong
Recommendation: BUY Target price (12/2015): $76.00
Closing Price (5/07/2014): $69.87
Company OverviewOver 8,600 Locations
- 408 Healthcare ClinicsRevenue: $72.2 B (+0.8%)Net Income: $2.3 B (+10.6%)
Prescription DrugsFront End Products
63%
27%
10%
2013 Revenue Breakdown
Prescription Drug Sales
General Merchandise
Non-prescriptions Drug Sales
52
Walgreens Company (WAG)Analyst: Thai Yaparwong
Recommendation: BUY Target price (12/2015): $76.00
Closing Price (5/07/2014): $69.87
Reasons for RecommendationStrategic Partnerships
Alliance BootsEurope, Asia & AfricaNew Products2016 Revenue Forecast: $130B
AmerisourceBergen10yr. Distribution Agreement
Global Platform Synergies2014 Projected: $425M2016 Goal: $1B
53
Walgreens Company (WAG)Analyst: Thai Yaparwong
Recommendation: BUY Target price (12/2015): $76.00
Closing Price (5/07/2014): $69.87
Market Presence & Reputation Iconic Brand
Loyalty Rewards ProgramDividend
38 Consecutive Years
Key DriversCreating a Well ExperienceAdvancing Community PharmacyEstablishing an Efficient Global Platform
54
Walgreens Company (WAG)Analyst: Thai Yaparwong
Recommendation: BUY Target price (12/2015): $76.00
Closing Price (5/07/2014): $69.87
Risks Uncertainty of International EconomiesUncertainty of Government Regulation
BuyStable, Sustainable GrowthLong Term Gains Increasing Dividends