Transcript SecAn IAC presentation 5 7 2014

Security Analysts’ Summary Recommendations
Company
Ticker Analyst
Rio Tinto
RIO
Garett Mahoney
PPG Industries
PPG
Marin Dacaudaveine
Chevron
CVX
Honeywell
Voting
Recommendation
Item?
YES
SELL
Stock is in the
portfolio?
Yes
YES
SELL
Yes
Edward Weagel
No
BUY
Yes
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
1
Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
Recommendation: “Sell”
Target Price: $39
Today’s Price: $55.01
2
Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
Segment Revenues
Segments:
7%
1.
2.
3.
4.
5.
Iron Ore
Aluminium
Copper
Energy
Diamonds
& Minerals
3%
10%
47%
11%
Iron Ore
Aluminium
Copper
Energy
22%
Diamonds & Minerals
Other Operations
3
Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
Price of Aluminium
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
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Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
Copper (₵/lb)
Oyu Tolgoi
450
 Largest New Copper Mine
 Disputes with Mongolian
Government Regarding Expansion
400
 Expansion Required in order to
turn profit.
 Turquoise Resources estimates
current operating output to
decline.
350
300
250
Northern Dynasty
 19.1% stake gifted to Charities
200
2009
2011
2013
2015
2017
5
Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
Price of Iron Ore
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
May-13
Nov-13
Jun-14
Dec-14
Jul-15
Jan-16
Aug-16
Mar-17
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Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
China’s Influence
7
Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
8
Rio Tinto (Ticker: Rio)
Analyst: Garett Mahoney
Source: Spring 2014 portfolio management class
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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
10
Recommendation for PPG Industries (Ticker: PPG)
Analyst: Marin Decaudaveine
Recommendation: SELL
Target price (6/30/2015):
Closing Price (5/7/2014):
$181
$198.74
11
PPG Segments Overview
2013 Sales
Glass
7%
Industrial
coatings
40%
Performance
coatings
53%
Performance coatings:
Aerospace, Marine,
Architectural coatings
Industrial coatings:
Automotive OEM,
Packaging, Specialty
coatings
Glass:
Fiber Glass, Flat Glass
12
Why sell PPG?
•
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.
Morningstar
13
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)
14
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.
15
Questions?
16
Chevron Corporation (Ticker: CVX)
Analyst: Edward Weagel
17
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 Outlook
 Because of new technology, global liquid production is still growing
despite several analysts claiming that it would peak in the 2000’s.
18
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
19
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 Weaknesses
 Exploration expense is at a high for the past 5 years at $1.8 billion
 Capital 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.
20
Questions?
21
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: $3.96 B (+12%)
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Strengths
 Ties to macroeconomic trends with positive outlook
Aerospace
Global Economy
ACS
Construction
PMT
Green Technology
Transportation
EPS ($)
 High expected earnings growth through M&A
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
EPS
2X EPS
2005
2010
2015
Year
2020
23
Weaknesses and Risks
 Defense and Space (Aero) faces headwinds (Target: bottom out in 2014)
Aero Revenue
($M)
$15,000
Aero
$10,000
Defense
$5,000
$2008
2010
2012
2014
Year
2016
2018
2020
 Net income margin improvement capacity uncertain beyond 2015
Net Income
Margin
(Target: continued improvement in 2014)
10.0%
0.0%
2008
2010
2012
2014
Year
2016
2018
2020
 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.
24
25
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
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Positives
 Tennessee Gas Pipeline
 El Paso Natural Gas
 Jones Act Tankers
 $16.2 billion in future growth projects
27
Negatives
 Interest Rates
 Alternative forms of Energy Transportation
 Terrorist Attacks
28
Questions?
29
Recommendation for PepsiCo (PEP)
Analyst: Chase Eggleston
Recommendation:
BUY
Target price (12/2015): $94
Closing Price (05/07/2014): $86.80
Segments
•
•
•
•
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)
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Reasons for Recommendation
Positives:
 Return to Shareholders
 Share Repurchases
 Dividends
- $2.27 per share to $2.62 per share
 Size
 Cash Flows
 Revenue Volatility
 Low Risk
 Growth Potential
 Emerging Markets
 Shanghai’s DisneyLand
 At Home Beverage Production
31
Reasons for Recommendation
Things to be aware of:
 Consumer Trends
 Commodity Prices
 Currency Exchange
 Competitors
32
Sources
1.
2.
3.
4.
5.
IBIS World
Mergent
PepsiCo 2013 10-k
PepsiCo 2012 10-k
http://seekingalpha.com/article/2059583-pepsi-tingyi-take-aim-at-coke-with-disneywin
6. http://www.fool.com/investing/general/2014/03/17/pepsico-enters-at-homecarbonation-market-before-c.aspx
7. http://seekingalpha.com/article/2018301-pepsico-ceo-discusses-q4-2013-resultsearnings-call-transcript?part=single
8. http://advisor.marketscope.com/SP/msa/reports.pdf?reportURL=/indsurv/fnb/fnb.pdf
33
Recommendation for Schlumberger Ltd (Ticker: SLB)
Analyst: Jordan Fuentes
Recommendation:
HOLD
Target price (12/2015): $114.00
Closing price (5/07/2014): $101.88
Regions:
Segments:
% of Revenues
% of Revenues
-0.49%
35.19%
27.05%
38.26%
0.98%
23.88%
27.32%
30.70%
17.12%
Reservoir Characterization
Drilling
North America
Latin America
Production
EU/CIS/Africa
MidEast/Asia
Eliminations & Other
Elimination & Other
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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)
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Technological Innovation: SLB
• 1.2 billion invested into
• PowerDrive Vortex drill bit
R&E in 2013 (2.46% of
can penetrate 92% further
revenues)
than traditional drills bits.
• Over 125 R&E facilities
• OneSubsea Joint Venture:
worldwide
world record for shortest
• Involved in optimization of
time between exploration
hydro-carbon rigs.
and production: 14 Months
• Improved efficiency for
• Wearable Intelligence:
customers
Google Glass
• Shale, fracking, and deepwater E&P
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Financial Advantage
• Expanding margins
• Double digit EPS growth
• Shareholder approved
buyback program: 2.6 of
10 billion spent
• Improved 2013: asset
utilization, inventory
management
Operating Margins:
Annual
WFT
BHI
HAL
SLB
0%
5%
10%
2012
15%
20%
25%
2013
37
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)
Sales
19%
44%
37%
Reconstructive
MedSurg
Neurotechnology
and Spine 38
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
39
Stryker Corporation
Opportunities
- International Expansion : Emerging Markets
- Aging Population (Over 65 to double by 2030)
- Increased Obesity
 Threats
- New Entrants in the Market/Competition
- Regulation
- Litigation/Lawsuits
40
Stryker Corporation
Questions?
41
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
Commodity Market Share
2012 Market Share






Agriculture 30.6%
Automotive 37.5%
Chemicals 35.1%
Coal/Energy 23%
Industrial Products 14.3%
Intermodal 44.9%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
7442
3070
3280
1807
5978
3238
Union Pacific
4848
13094
14948
3955
3912
2494
574 Companies
*Commodity Total Revenues from the Association of American Railroads
43
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
44
Negatives
• Legacy contracts
• Railroad Unions
• Volatile fuel costs; Enforcement of fuel surcharges
• Pending law suits regarding price fixing
• Coal Industry/Natural Gas Competition
45
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.
46
Walgreens Company (WAG)
50
Walgreens Company (WAG)
Analyst: Thai Yaparwong
Recommendation: BUY
Target price (12/2015): $76.00
Closing Price (5/07/2014): $69.87
Company Overview
 Over 8,600 Locations
- 408 Healthcare Clinics
 Revenue: $72.2 B (+0.8%)
 Net Income: $2.3 B (+10.6%)
 Prescription Drugs
 Front End Products
2013 Revenue Breakdown
10%
Prescription Drug Sales
27%
General Merchandise
63%
Non-prescriptions Drug
Sales
51
Walgreens Company (WAG)
Analyst: Thai Yaparwong
Recommendation: BUY
Target price (12/2015): $76.00
Closing Price (5/07/2014): $69.87
Reasons for Recommendation
 Strategic Partnerships
 Alliance Boots
 Europe, Asia & Africa
 New Products
 2016 Revenue Forecast: $130B
 AmerisourceBergen
 10yr. Distribution Agreement
 Global Platform Synergies
 2014 Projected: $425M
 2016 Goal: $1B
52
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 Program
 Dividend
 38 Consecutive Years
 Key Drivers
 Creating a Well Experience
 Advancing Community Pharmacy
 Establishing an Efficient Global Platform
53
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 Economies
 Uncertainty of Government Regulation
 Buy
 Stable, Sustainable Growth
 Long Term Gains
 Increasing Dividends
54