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Page 1: Industrials  Stock Recommendation

Industrials Stock Recommendation

Bernard Hosanna

Shawana Jackson

Brett Kinkopf

Jonathan Kocon

Chien-Ying Lee

Page 2: Industrials  Stock Recommendation

Agenda

Recap of Sector Industrial Holdings Stock Recommendations Summary Q&A

Page 3: Industrials  Stock Recommendation

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

Page 4: Industrials  Stock Recommendation

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%

UTI Worldwide =2.38%

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

Page 5: Industrials  Stock Recommendation

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

Page 6: Industrials  Stock Recommendation

FSLR in Relation to XLI

Page 7: Industrials  Stock Recommendation

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

Page 8: Industrials  Stock Recommendation

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?

Page 9: Industrials  Stock Recommendation

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

Page 10: Industrials  Stock Recommendation

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

Page 11: Industrials  Stock Recommendation

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%

Risks

• Commodities market

• Mining activity

• Global economy

• Foreign currency

Page 12: Industrials  Stock Recommendation

GDP & Bucyrus

Page 13: Industrials  Stock Recommendation

Crude oil spot price & Bucyrus

Page 14: Industrials  Stock Recommendation

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.

Page 15: Industrials  Stock Recommendation

Bucyrus’s Financials

Page 16: Industrials  Stock Recommendation

Bucyrus’s Financials

Page 17: Industrials  Stock Recommendation

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

Page 18: Industrials  Stock Recommendation

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

Page 19: Industrials  Stock Recommendation

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

Page 20: Industrials  Stock Recommendation

Joy Global’s Valuation

Average Price Target = $62.52 = 11% upside

Absolute Valuation

High Low Median Current Your Target Multiple

Your Target E,

S, B,

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

Page 21: Industrials  Stock Recommendation

DCF model & Target Price

=(50% ave multiples + 50% DCF)

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

=$86

(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%

Page 22: Industrials  Stock Recommendation

What the charts suggests

Page 23: Industrials  Stock Recommendation

Industry Charts

Page 24: Industrials  Stock Recommendation

BUCY vs JOYG Charts over 5 yrs

Page 25: Industrials  Stock Recommendation

Summary

Proposed Holdings

Emerson =1.23%

General Dynamics=3.00%

Oshkosh =3.50%

UTI Worldwide =2.38%

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

Page 26: Industrials  Stock Recommendation

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

FCF G

rowth

Page 27: Industrials  Stock Recommendation

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%

Page 28: Industrials  Stock Recommendation

Oshkosh

Industry: Trucks and Other Vehicles

Market Cap: $3.3 B

Target Price: $44

Current Price: $37.25

Upside Potential: 18%

Page 29: Industrials  Stock Recommendation

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

Page 30: Industrials  Stock Recommendation

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

Price

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

Page 31: Industrials  Stock Recommendation

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%

-0.434%

-0.434%

-0.434%

-0.434%

-0.434%

-0.434%

-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%


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