INDUSTRIAL SECTOR

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INDUSTRIAL SECTOR

• COMPANY PRESENTATION
• Team Members
• Rohit Chaba
• Tom Hayata
• Alok Sharma

2
Recommendation

• Market weight Industrials
• Overweight
• GE
• Masco Corp (MAS)
• Lockheed Martin (LMT)
• Underweight
• Concord EFS (CE)
• TYCO

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• Industrial
• Sector
• Overview

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Business Analysis

• Industrial conglomerates make up over 30 weight
• Mature life cycle and cyclical business
• 25 of sales from foreign business
• Increased capacities depressed earnings but will
  help as economy picks up
• Higher barriers to entry and exit

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Financial Analysis

• Revenues have been increasing but margins have
  reached a plateau
• Increased investments and increased debt
• ROE lower but not by much
• Earning estimates have fallen

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Valuation Analysis

• Valuations are below the mean
• They are stable / slight uptrend relative to SP
• Relative growth rates are expanding
• Stable and up-trend growth sectors
• Aerospace Defense, Air freight/Logistics,
  Building Products, Conglomerates, Commercial
  Services, Electrical

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• Concord EFS

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Business Analysis

• CE Business
• Top 10 US merchant processor
• Provide transaction authorization, data capture,
  settlement, and funds transfer services to
  retailers and financial institutions.
• Sales (Profits)
• Payment Services 62 (64)
• Network Services 38 (54)
• Industry
• Shift away from cash toward card and electronic
  payment
• Strong long term merchant processing growth
• High Single digit
• Debit transactions to grow at over 15
• Strongest of computer service sector

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Business Analysis

• Management
• Recent changes in companys senior management
• Market concerns over management credibility
• The new team will have to deliver several
  quarters of solid results to rebuild investor
  confidence
• Changing environment
• Low interest rate environment is negative
• Potential cap payments for bank renewals into the
  star network will adversely impact earnings

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Financial Analysis
There has been a continuous growth in Revenues,
EPS ROCE
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Financial Analysis
Stable margins and a small drop in asset
utilization has contributed to a marginal drop in
ROE
12
Financial Analysis
Steady increase in EPS in the past and expected
for the future
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Valuation Analysis
Valuations have fallen to an all time low. CE is
not a dividend paying company.
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Valuation Analysis
Valuations are touching industrial sector averages
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Valuation Analysis
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Recommendation

• Under weight the stock
• Leader, with ability to leverage its
  infrastructure, provide stable earnings
• Management yet to prove themselves but growing
  industry will help
• Valuations cant get lower from here
• Risks
• Pricing pressures
• Earnings dont match expectations

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• General Electric
• Tyco

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Recommendation GE and Tyco
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Business Analysis GE Tyco
Short-Term Time Horizon (GE) Sales would be flat
in 2003. Increase in Earnings (Low
Valuation) Increase in Dividends
(Value-Oriented) Short-Term Time Horizon
(Tyco) Sales would slightly fall in
2003. Downtrend in Earnings (Jump in P/E) Low
Dividend Yield (Growth-Oriented)
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Breakup Analysis of GEs Business
Power systems, industrial products (locomotives),
aircraft engines have pushed up GEs consolidated
revenue. These heavy industries are
GDP-supportive, and would decline in revenue as
the economy downturns.
Source GE Annual Report 2001
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Breakup Analysis of GEs Business
Power systems and Aircraft engines are GEs cash
cow businesses. Speculation The CEO, Mr. Jeff
Immelt, is from Technical Products (Medical
Equipment). Did Mr. Jack Welch pick up too young
talented CEO ?
Source GE Annual Report 2001
22
Business Analysis Tyco (TYC)
Legal Proceedings in Tyco The Wall Street
Journal (Nov. 15, 2002) Tyco has been rocked
this year by criminal charges that former top
executives, including former Chief Executive L.
Dennis Kozlowski, looted the company of 600
million in unauthorized pay and stock. All have
pleaded not guilty. After Mr. Kozlowski and his
chief financial officer, Mark Swartz, left in
recent months, new management under Chief
Executive Edward Breen has vowed to restore the
companys credibility. The new management had
said the conglomerates operating units hadnt
been tainted by unethical business practices.
Then, Tyco disclosed in late October that
auditors had found that the company had
exaggerated income from certain fees ADT charges
to its dealers. Its loss after taxes was
9.13 billion. Soon after Tyco International
Ltd. acquired ADT, ADT began pressing (ADT
dealers) to target the scummiest neighborhoods
possible Does this MA loving conglomerate
swallow too many enterprises and cause
indigestibility ?
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Business Analysis Tyco (TYC)
Tycos leading segment, Electronics, has dropped
sales significantly. Security Services (ADT
business) had inflated revenue events, which
would offset revenue and operating income growth
going forward.
Source Tyco Consolidated Financial Statements
2002
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Business Analysis Tyco (TYC)
Electronics segment has bad sales and operating
income. Healthcare segment has good sales and
operating income.
Source Tyco Consolidated Financial Statements
2002
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Financial Analysis GE TYC
Short-Term Time Horizon (GE) Operating Margin
would remain low. NM would slightly rise in
2003. ROE would stay the same. Short-Term
Horizon (Tyco) Swing in Operating
Margin (Accounting Issues in 2002) NM, ROE would
fall in 2003.
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Financial Analysis GE
Price has fallen since 2000, but would probably
hit the price floor in 2003. Sales dropped in
2001, rebounded in 2002, but would stagnate (or
fall) in 2003. NM and ROE have grown since 2000,
but would drop in 2003.
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Financial Analysis GE
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Financial Analysis TYC
Price has dropped significantly in 2002, and it
would not go up in 2003. Sales have grown
overtime. (Healthcare segment supports
Electronics segment.) NM and ROE have dropped
since 2002. This would continue in 2003.
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Financial Analysis TYC
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Valuation Analysis GE Tyco
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Valuation Analysis GE
Ratios are compared overtime (absolute) and
against the sector (relative). Ratios have
fallen since 2000, but would project upward in
2003.
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Valuation Analysis TYC
P/E skyrocketed due to negative operating income
in Electronics segment, auditing adjustments to
inflated earnings (ADT), etc. P/S, P/CF, P/B
would go down in 2003.
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• Lockhead Martin

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Business Analysis

• LMT Business
• Leading defense company
• Researches, designs, develops, manufactures,
  integrates, and operates advanced technology
  systems, products and services in domestic and
  international defense and commercial markets. LMT
  operates in four main business segments Systems
  Integration, Space Systems, Aeronautics, and
  Technology Services.
• Sales (Profits)
• 2003 and 2004 EPS estimates of 2.15 and 2.35,
  respectively.
• Industry
• Improving defense spending outlook beginning of
  a 10 year increase in spending to rebuild U.S.
  military capability.
• Large diversified pure-play defense company 70
  billion diversified backlog, with thousands of
  contracts within the defense and government IT
  sectors.
• Business is not significantly linked to
  commercial aerospace segments (large commercial
  business aircraft).
• Portfolio hedge on negative impact of future
  terrorist acts and/or Iraq invasion.

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Business Analysis

• Management
• Solid management team has regained investor
  credibility by repairing its relationship with
  the DoD, selling noncore assets, and deleveraging
  the Companys balance sheet.
• Changing environment
• Iraq, North Korea
• Terrorism

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Financial Analysis
The revenues, EPS, Net profit margin and ROC has
been trending upwards
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Financial Analysis
Falling margins and a small drop in asset
utilization has contributed to a light drop in ROE
38
Financial Analysis
Steady increase in EPS in the past and expected
for the future
39
Valuation Analysis
Falling valuations indicate that this is the
right time to get into this stock.
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Valuation Analysis
Valuations are touching industrial sector numbers
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Valuation Analysis
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Recommendation

• Market weight the stock because
• Leader in defense sector, with ability to
  leverage its infrastructure, provide stable
  earnings
• Solid Management team
• Strong valuations
• Risks
• Defense budget cuts or terminations of key LMT
  programs after fiscal 2004 could affect the
  growth trajectory of the company.
• Pricing of the likes of F 22s, F 16s F 35s.

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Recommendation - Summary

• Market weight Industrials 11.53
• Overweight
• General Electric (GE) 4.50
• Masco Corp (MAS) 3.50
• Lockheed Martin (LMT) 3.18
• Underweight
• Concord EFS (CE) 0.1
• Tyco (TYC) 0.25
• Stock watch (for Spring 2003)
• Fedex , Ryder
• Northrop Grumman
• Catterpillar Inc

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Industrial Sector

• Questions