The Industrials

1
The Industrials Materials Sectors

• Andy Fisher, Vince McDonald, Doug McWhorter, Eric
  Milavickas, Mahesh Veeramani

2
Materials/Industrials Overview

• Materials 3.2 of SP 500 Industrials 10.7 of
  SP 500
• Materials currently 1.9 of the SIM Portfolio?
  voted to increase to 4 (1 overweight)
• Industrials currently 12.2 of the SIM Portfolio?
  voted to decrease to 10.7 (market weight)

3
Holdings/ Transaction Overview

• Current Holdings
• Dow Chemical (DOW) 0.96
• Worthington Industries (WOR) 0.92
• L3 Communications (LLL) 3.6
• General Electric (GE) 4.7
• Masco (MAS) 4.0
• Total 14.18

• New Holdings
• DOW, WOR,LLL,MAS
• No change
• GE ? Reduce to 1.7 weight
• Boeing (BA)? Buy 1.4 weight
• Ball (BLL) ? Buy 2.3 weight

4
Holdings/ Transaction Overview

• Revised Complete Portfolio
• Dow Chemical (DOW) 0.96
• Worthington Industries (WOR) 0.92
• Ball Corp. (BLL) 2.3
• Total Materials 4.18
• L3 Communications (LLL) 3.6
• General Electric (GE) 1.7
• Masco (MAS) 4.0
• Boeing (BA) 1.4
• Total Industrials 10.7
• Total SIM Portfolio 14.88

5
Economic Analysis

• Economics indicated cyclical recovery, class
  discussion approved weighting change
• Increase Material sector holdings to 1
  overweight
• 1.9 4.2
• Decrease Industrial Sector holdings to market
  weight
• 12.3 10.7

6
Style Overview

• Outlook is that value stocks are more attractive
• Sector is better evaluated on a value basis
  mature companies where growth is hard to get
• As we know, P/E of cyclical companies is not the
  best indicator of when they are cheapmust look
  at multitude of factors
• Interested in dividend yield

7
Sector Overview (Materials)

• Economic group indicated 500
• Cyclicals are a good group to own if rebound is
  foreseen. So we want to choose cyclical materials
  companies, not defensive ones.
• Looking at current holdings
• DOW showing good results, lowering capital
  expenditures, and working to decrease sensitivity
  to energy prices
• WOR lower steel raw material prices coming with
  possible removal of tariffs
• Both are cyclical and will respond accordingly
  with economic growth

8
Sector Overview (Industrials)

• Diversified companies not as cyclicalmacro
  perspective said to exit
• Overweight of this sector does not offer out
  performance in a recovery period
• Looking at current holdings
• GEDiversified conglomerate experiencing slowdown
  in major businesses, very equivalent to ENTIRE
  SP 500
• LLLDefense spending will be increasing with new
  US foreign policies
• MASIncreased dividend, divesting portions of
  companies, growing via plumbing and services

9
General Electric (GE)

• General Electric is a diversified industrial
  conglomerate, with large business in Aircraft
  Engines /Services, Medical Imagine/Info Tech.,
  Power Systems, and GE Capital, and financial
  services arm.
• Cyclical Businesses (20 earnings)
• Plastics
• Broadcasting (NBC)
• Consumer Products (Appliances/Lighting)
• Defensive/Long cycle businesses (55 earnings)
• Power Systems
• Aircraft Engines
• Medical Systems
• GE Capital (25 earnings)

10
General Electric Segments
11
Boeing (BA)

• Boeing is a diversified aerospace company with
  commercial aircraft, military aircraft, space
  /communications, and capital arms.
• Cyclical Businesses (69 earnings)
• Commercial Aircraft
• Space / Communications
• Boeing Capital
• Defensive businesses (31 earnings)
• Military aircraft, missiles

12
Boeing Segments
13
Financial Analysis BA

• Boeing took a big charge in Q2 2003 to write off
  commerical satellite mistakes
• This is an opportunityfor large companies this
  is evidence of a turnaround
• Commerical Aviation revenues and margins way down
• 15B 1H02, 12B 1H03 7.5 1H02, 1.5 1H03
• ROE for past few year much increased from years
  back company is showing better ability to
  profitably deal with cyclicality
• SGA up, Capex trending down
• Company working toward right-sizing
  not-so-profitable commercial satellite division,
  shoring up capital corp

14
Financial Analysis BA
15
Financial Analysis BA
16
Financial Analysis BA
17
Financial Analysis BA
18
Valuation BA Estimate Revisions
19
Recommendation BA

• Airline demand stunted by 9/11 now returning
  Boeing 1 supplier for growing Asian, and US low
  cost carriers (Southwest, Airtran)
• Defense business is growing, profitable, and
  makes Boeing the 3 defense contractor to the US
  Government
• Cash flow target of 2-2.6 B for 2003 (market cap
  26 B) with commercial aircraft doing so poorly,
  means company is very cheap

20
Ball Corporation (BLL)

• Ball Corporation is a manufacturer of metal and
  plastic containers.
• Defensive Businesses (88 earnings)
• Packaging Consumer Staples
• Defensive businesses (12 earnings)
• Aerospace Technology (Civil, defense systems)

21
Ball Corp. Segments
22
Financial Analysis BLL

• Positive indicators are overwhelming
• COGS stay relatively constant with improvements
  in revenues Increase in Gross Margins
• SGA is up
• RD is up
• Current Assets less Current Liabilities is down
• A/R less A/P is up
• Cash Flow from operations has increased by 41,
  following a previous year that was up 82
• ROE up nearly double from last year and triple
  from five years ago.

23
Financial Analysis BLL
24
Financial Analysis BLL
25
Financial Analysis BLL
26
Financial Analysis BLL
27
Valuation BLL vs. SP 500
28
Valuation BLL Estimate Revisions
29
Recommendation BLL

• Fundamentally Metal and plastic
  packaging/container company. In a recovery,
  packaging is one of the first to experience
  growth because things must get shipped. Risk
  level is low, because they focus primarily on
  food and beverage which is a consumer staple.
  Beta is .2
• Financial analysis is outstanding. Nearly all
  the indicators point toward favorable
  performance. Excellent FCF for dividends,
  reinvestment or M/A activity. 1 market position
  because low cost provider key indicator in
  mature, value industry.
• Valuation Not over valued at this time.
  Majority of companies within value sector are
  expensive, this company looks to be a good buy.
  Upward sloping 200-day moving average at 50.95
  stock currently at 50.15
• Acquisition in late 2002 of European company
  gives them exposure abroad. Currently
  experiencing an increase in business due to hot
  summer in Europe.
• Latest news is re-issuance of debt, basic
  refinance of debt to take advantage of low
  interest rates.

30
Summary

• Increase Material sector holdings to overweight
  SP500 by 1
• 1.88 4.18
• Increase BLL holdings 0.00 2.30
• Decrease Industrial sector holdings market weight
  of SP500
• 12.3 10.7
• Decrease GE holdings 4.70 1.70
• Increase BA holdings 0.00 1.40