Transcript Eric Hatch Christina Haubrock Melissa Hickey November 3, 2009     Industrials Sector Overview Economic & Business Analysis Financial Analysis Valuation & Recommendation.

Eric Hatch
Christina Haubrock
Melissa Hickey
November 3, 2009




Industrials Sector Overview
Economic & Business Analysis
Financial Analysis
Valuation & Recommendation
Currently overweight by 188 BP
S&P 500 Weight vs. SIM Weight
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
S&P 500 Weight
SIM Weight
Industrials
12.50%
12.00%
11.50%
11.00%
10.50%
10.00%
9.50%
9.00%
11.97%
10.09%
S&P 500 Weight
SIM Weight
Aerospace & Defense
Building Products
Construction & Engineering
Capital Goods
Electrical Equipment
Industrial Conglomerates
Machinery
Trading Companies & Distributors
Commercial & Professional Services
Commercial Services & Supplies
Professional Services
Air Freight & Logistics
Airlines
Transportation
Marine
Road & Rail
Transportation Infrastructure
Industrials
# of
% of
% of SIM
Companies Industry Portfolio
Transportation
Commercial & Professional
Services
61
19.70%
17.99%
96
4.90%
0.00%
Capital Goods
248
75.40%
82.01%
SIM OWNED COMPANIES
Emerson Electric Co.
Capital Goods
EMR
First Solar Inc.
Capital Goods
FSLR
General Electric Co.
Capital Goods
GE
Oshkosh Truck Corp.
Capital Goods
OSK
UTI Worldwide Inc.
Transportation
UTIW
Media
Financial Services
Industrials
Hardware
Software
Energy
QTD (% Return)
Consumer Goods
YTD (% Return)
Consumer Services
Business Services
Telecommunications
Health Care
Utilities
0
10
20
30
40
50
60
70
80
Capital Goods: Capital spending tends to increase midway through the business cycle, as the
economy is heating up and higher demand for products leads companies to expand their
production capacity. Demand in global export markets is key for agricultural equipment,
industrial machinery, and machine tools.
http://personal.fidelity.com/products/funds/content/sector/cycle.shtml#7

The Industrials industry as a whole can be placed in the Maturity phase.



Companies in the maturity phase can have new product lines that exist in the Introduction
or Growth phases (Oshkosh).
Other companies within the sector can be in the Introduction or Growth phase (First Solar).
Many mature companies can be entering large, untapped growth markets
internationally (Emerson or GE).

Outlook for U.S. Industrial activity much better for the rest of ’09
and into ’10 (Morningstar Q4 Outlook 9/30/09).

ISM purchasing managers survey: ratio of new orders to
inventories indicates industrial production will be materially
higher.
 Ratio’s highest point in 30 years.
 Been at this level only 10 out of 740 months measured.

The Fed Beige Book offers mixed expectations for near-term
outlook on manufacturing (10/21/09).



Expecting slight gains and modest economic growth.
Deferred projects and maintenance to conserve capital.
Increasing optimism leading to more new hires and increased
spending on capital goods.

The Industrials sector is strongly correlated with the S&P
500, real GDP, commercial and industrial loans, and durable
goods orders.

Industrials appear to be correlated to Capital Spending with the
sector acting as a leading indicator by approximately 6 months.

Don’t wait for Capital Spending to completely return before
jumping on board Industrials?
0.0000
15.0000
10.0000
5.0000
04/01/2009
09/01/2008
02/01/2008
07/01/2007
12/01/2006
05/01/2006
10/01/2005
03/01/2005
08/01/2004
01/01/2004
06/01/2003
11/01/2002
04/01/2002
09/01/2001
02/01/2001
07/01/2000
12/01/1999
CF per Share
35.0000
30.0000
25.0000
CF per Share
20.0000
High
Low
Median
Current
30.86
16.39
20.70
30.44
Absolute Net Profit Margin
08/01/2009
04/01/2009
12/01/2008
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
08/01/2000
04/01/2000
12/01/1999
Absolute Net Profit Margin
9.00%
8.00%
7.00%
6.00%
5.00%
Absolute Net Profit Margin
4.00%
High
8.40%
3.00%
Low
6.40%
2.00%
Median
7.10%
1.00%
Current
6.90%
0.00%
Net Profit Margin Relative to S&P 500
08/01/2009
04/01/2009
0.40
12/01/2008
0.60
08/01/2008
04/01/2008
12/01/2007
08/01/2007
04/01/2007
12/01/2006
08/01/2006
04/01/2006
12/01/2005
08/01/2005
04/01/2005
12/01/2004
08/01/2004
04/01/2004
12/01/2003
08/01/2003
04/01/2003
12/01/2002
08/01/2002
04/01/2002
12/01/2001
08/01/2001
04/01/2001
12/01/2000
08/01/2000
04/01/2000
12/01/1999
Net Profit Margin Relative to S&P 500
1.40
1.20
1.00
0.80
Net Profit Margin Relative to S&P 500
High
Low
Median
Current
0.20
0.00
1.20
0.80
0.90
1.10
14.00
12.00
10.00
%
8.00
6.00
4.00
High
Low
CONGL
11.1
9.2
10.6
9.2
EEQPM
10
6.1
8.8
8.8
TRKPT
7.3
2
4.8
4.8
AIRFR
7.5
3.4
5.7
4.8
INDUST
8.4
6.4
7.1
6.9
2.00
0.00
Ind'l Conglomerates
Electrical Component
Airfrght & Logistics
Industrial Sector
Machinery Const/Farm
Median Current
Industrial Companies EPS
Growth (YoY)
Industry EPS Growth (YoY)
120.00
100.00
100.00
80.00
80.00
60.00
60.00
40.00
40.00
20.00
20.00
0.00
0.00
-20.00
-20.00
-40.00
-40.00
-60.00
-60.00
-80.00
-80.00
Ind'l Conglomerates
Airfrght & Logistics
Machinery Const/Farm
Electrical Component
Industry EPS Growth (YoY)
CONGL
EEQPM
TRKPT
AIRFR
INDUST
High
Low
23.4
30.8
100.8
24.8
22
-44.7
-38.9
-66.5
-36
-35.3
General Electric
Siemens AG
United Parcel Service
3M Company
Company EPS Growth (YoY)
Median Current
7.7
14.4
6.6
5.8
9.9
-28
-17.8
-45.7
-28.2
-21.3
GE
SI
UPS
MMM
High
Low
19
208
28.2
22.8
-49
-96
-38.3
-19.1
Median Current
6.8
20.4
8.7
10.6
-36.5
-56.4
-16
-19.1
0.0000
07/01/2009
02/01/2009
09/01/2008
04/01/2008
11/01/2007
06/01/2007
01/01/2007
08/01/2006
03/01/2006
10/01/2005
05/01/2005
12/01/2004
07/01/2004
02/01/2004
09/01/2003
04/01/2003
11/01/2002
06/01/2002
01/01/2002
08/01/2001
03/01/2001
10/01/2000
05/01/2000
12/01/1999
Industrial Sector Absolute ROE
25.0000
20.0000
Absolute ROE
15.0000
10.0000
5.0000
High
Low
Median
Current
21.3
16.2
17.8
21.3
Correlation = .86 with 0 Lag
time
One Year
Absolute Basis High
Low
Median Current
P/Forward E
26.9
9.2
17.8
16.9
% Current to LT
Median
-5%
P/B
5.9
1.4
3.3
2.5
-24%
P/S
1.9
0.6
1.5
0.9
-40%
P/CF
16.7
4.9
11.9
7.3
-39%
Relative to
SP500
P/Forward E
High
Low
1.2
0.8
1.0
1.0
% Current to LT
Median
0%
P/B
1.4
0.9
1.1
1.2
9%
P/S
1.1
0.8
1.0
0.9
-10%
P/CF
1.2
0.7
1.1
0.7
-36%
Median Current
Ratios indicate that the industrials sector
is currently undervalued.
3-MTD
YTD
P/E
P/S
Dividend
Yield
Industrials
5.46%
8.35%
22.8x
0.8x
2.41%
Transportation
0.30%
5.42%
54.1x
0.8x
1.88%
Commercial &
Professional Services
3.50%
5.38%
65.4x
0.7x
1.83%
Capital Goods
6.72%
9.34%
19.2x
0.9x
2.58%
Capital Goods
Commercial &
Professional
Services
Transportation
Aerospace & Defense
Building Products
Construction & Engineering
Electrical Equipment
Industrial Conglomerates
Machinery
Thomson
Best Best Fit
Ticker
Correlation Fit
Lag
aerod
0.57
0.59
2
bldgp
0.45
0.53
12
engnr
0.39
0.5
11
eeqpm
0.66
0.66
congl
0.75
0.75
machn
0.45
0.45
Trading Companies & Distributors
Trade
0.28
0.3
Commercial Services & Supplies
print
0.56
0.56
airfr
ARLNS
shipp
railr
Truck
0.28
0.24
0.26
0.45
0.31
0.32
0.43
0.39
0.29
0.45
0.43
0.37
0.43
0.48
Professional Services
Air Freight & Logistics
Airlines
Marine
Road & Rail
Transportation Infrastructure
Average
Electrical Equipment and Machinery have a higher correlation with the S&P
500 than the other industries within the Industrials Sector
2
11.5
12
2
11
12
One Year
High
Low
Median
Current
1.4
.7
1.2
.8
One Year
High
Low
Median
Current
1.1
.48
.8
.97
INDUSTRIALS SECTOR SHOULD MAINTAIN THE CURRENT
LEVEL OF 188 BASIS POINTS OVERWEIGHT

Positives:
FINANCIAL
 Sector ratios indicate that the sector is undervalued
ECONOMIC
 Improving global economic recovery
 Increasingly global in scope
 Favorable impact anticipated from the infrastructure spending

Risks:


Slower economic recovery than anticipated
Lag time associated with the Industrials Sector