Industrials and Materials Sector Analysis

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Industrials and Materials Sector Analysis

• Team Members
• Joshua Doyle
• Nick Tucci
• Elena Han
• Ashish Tandon
• Siddharth Sardana
• Joshua Spengler

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Overview

• Size and Composition
• Business Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation

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Size and Composition
4
Life Cycle

• Analysis Mature Industry
• Industries have been around a long time
• Several major growth phases
• Focus on optimization as compared to revenue, so
  value not growth
• SP 500 Index P/E19 Div Yield1.68
• Materials P/E28.3 Div Yield2.24
• Industrials P/E22.7 Div Yield1.75

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Cyclical Defensive

• Materials Cyclical
• Dow (Chemical), Wor (Construction material),
• Industrials Cyclical / Defensive
• Mas (Building products / construction), GE
  (Electrical equip)
• Long Term Both sectors appear to follow the
  SP 500 fairly close

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Business Cycle

• Economic group indicated we were around 615
• - Cyclicals are good to own when the economy
  is rebounding
• - Cyclicals also good between a Fed cut and
  its first increase
• Not very strong dollar
• - Chemicals are a huge exporter so
  international sales are not decreasing

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External Factors

• Globalization
• - many companies rely on the global economies as
  well as the US economy
• Foreign Affairs
• - government involvement, war
• Currency
• Energy prices

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Supply AnalysisCapacity and Utilization
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ROE - Industrials

• A measure of a corporation's profitability,
  calculated as Net Income/ Shareholder's
  Equity
• The ROE is useful in comparing the profitability
  of a company to other firms in the same industry

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ROE - Materials
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Forces that Determine Industry Profitability

• Suppliers
• - acquire through domestic and global
  (integrate or outsource)
• Customers
• - more than 2X as many domestic than global
• Competition
• - industrials (59) materials (34)
• Entry
• - high costs of technology
• Substitutes
• - foreign diversified portfolio companies

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Financial Analysis

• Sales and Earnings Growth
• Financial Statement Analysis
• Cash Flow
• Margins vs. SP500
• Quantitative Factors

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Growth Rate of Materials

• Growth Rate is still low but hinting at an upturn

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Growth Rate of Industrials

• Growth Rate showing a sharp decline

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Growth Rate For Sector

• Shows the higher weight in industrials over
  materials
• Still sharp decline

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Revenues and Profits for Materials and
Industrials Combined for 30 years

• Profits are declining but still greater than in
  history

• Revenues continue to grow

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Income Statement for Industrials/Materials

• Revenues have increased?
• SGA Expense has increased?
• Depreciation has varied
• Net Income has increased?

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Cash Flow for Industrial/Material

• Cash from Operations gone down slightly in last
  year?
• Net cash from investing has gone down in last
  year ?
• Cash/Equiv has gone down over last year ?

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Margins Compared to the SP

• Margins consistently below the SP
• High comp
• High cogs
• High cost of capital
• Shows cyclical nature
• Revenues below SP but heading up.

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Quantitative Factors

• Materials
• PPE (down)?
• RD (down)?
• SGA (remained same)
• Common Stock (down)?
• COGS (down)?
• Quantitative factors show positive results for
  majority

• Industrials
• PPE (up)?
• RD (down)?
• SGA (up)?
• Common Stock (up)?
• COGS (up)?
• Quantitative factors show negative results for
  the majority

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Quantitative Factors

• Industrials and Materials
• PPE (increased)?
• RD (decreased)?
• SGA (increased)?
• Common Stock (increased)?
• COGS (increased)?
• Quantitative factors show negative results for
  the majority
• Shows how industrials are more weighted in SP

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Valuation Materials Technical Analysis

• Trend is upward
• Currently at 37.4
• Potential room to grow depends on the economy
• Almost reached the two year resistance level
• Time to buy?

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Growth Margin Check Materials

• Revenues took a drop in the 3rd qtr
• Earnings increased last qtr

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Valuation Materials Ratio Analysis

• CU P/E 21.60,
• above the mean
• (already expensive)
• CU P/S is slightly below the mean
• CU P/CF is above the mean
• CU P/B is above the mean
• Improved ratios
• Indicate the growth

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Materials Sector Ratio Analysis vs. SP 500

• P/CF
• Cu 0.93,
• greater
• than mean
• P/BV
• Cu 0.90,
• greater
• than mean
• P/E
• Cu 1.27,
• greater
• than mean

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Valuation Industrials Technical Analysis

• Trend is upward this year
• Will it continue?
• Currently at 37.6

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Valuation Industrials Ratio Analysis

• Ratios are below the mean, therefore it could be
  a good time to buy more stock.
• Potential for further growth.

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Industrials Sector Ratio Analysis vs. SP 500

• P/E Cu 1.16,
• Greater than mean
• P/CF Cu 1.12,
• greater than mean
• P/B Ratio
• Cu 1.08, less than
• Mean
• At the present
• Economy growth
• Rate Industrials will
• outperform the Market.

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Growth Margin Check Industrials

• Revenues are Increasing
• Earnings are increasing too

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Valuation First Call Announcement Surprise
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Recommendation

• Sector Weightings
• Cyclical companies are on the rise and therefore
  we have to keep the present weight of industrials
  and materials in the SIM portfolio.
• Risk and Returns
• Industrial and materials is a cyclical sector and
  will outperform the rest of the market.
• With the news of 7.2 economic growth, we are
  expecting higher returns.
• However, if raw material costs increase then COGS
  will go up.
• Exposure of to foreign exchange rates will make
  companies more sensitive to changes in dollar
  value