In Dust Rials Primer 2010
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Transcript of In Dust Rials Primer 2010
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Industrials A Primer
Gator Student Investment Fund
September 30 2010
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Industrials A Breakdown
The industrials sector composes approximately 10.8% of the S&P 500 Index. XLI, our etf, is further broken
down into the following subcategories:
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Economic Drivers
GDP
PPI (Producer PriceIndex)
Industrial Production
Index
ISM Manufacturing
Index
Durable Goods
Orders
Broadest Measure of
Economic Activity
Leading Indicator ofInflation
Measuring Industrial
Output
Managers Outlook
Who Is Buying
y The industrial sector overall is cyclical when GDP is strongand the economy is healthy, industrial companies are
profitable and exhibit growth potential
y Credit crisis and economic uncertainty slowed industrial
production. Latest Data: Today 9/30
y Measures basket of goods from producers rising costs area signal of higher future inflation
y Important for industrial companies higher costs due toinflation lead them to raise prices to maintain margins. Higher
end price for consumer. Fed may get involved
y Examines how much factories, mines, and utilities areproducing.
y High numbers signal strong demand and more robusteconomy in the future
y Capacity Utilization Rate
y Gets managers views on manufacturing industry
y Has five components new orders, production, employmentsupplier deliveries, and inventories
y Sign of how fast the economy is growing. A number greater
than 50 shows a healthy, growing economy
y Reflects orders placed to domestic manufacturers for futuredelivery of factory hard goods
y Leading indicator of capital investment and industrialproduction good data signal a stronger economy in the
future
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Infrastructure Meng Liu, Analyst
y Focus on growth in the infrastructure
spending and development
y Emphasis on where capital is flowing and
profitability of various projects
y Effect on suppliers of finished goods and
raw materials
Transportation Jonnie Boltuch, Analyst
y Coverage of Auto & Auto Parts, Railway,
and Airlines
y Importance of domestic and global demand
for goods and freight
y Focus on global commodity supply and
demand
Aerospace & Defense Ryan Lane, Analyst
y Government spending
y New orders and contracts
y Emerging markets potential
Equipment & Machinery Rishabh Das, Analyst
y Global economic health and GDP growth
y Investment in capital goods and industrial
materials
y Anticipation of future demand by businesses
and consumers
GSIF Plan
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Infrastructure
Meng Liu
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Private Company Involvement
Companies contribute mainly through 3 ways:
Public Private Partnership
Several hundred billion dollars of private capital are currently available for investment in U.Sinfrastructure projects
y $32 billion in major highway and transit projects through PPPs between 1993-2005
y Only 25 states have PPP authority
Direct Ownership Setback: consumer backlash
Concession
y Projects with High Profitability:
Essential & Inelastic Demand
High Capital Requirements
Capital expansion projects - difficult for new entrants, thus less competition and higherreturn
Asset appreciate in value over time
Few substitutes exist (monopolistic characteristics)
Stable/growing cash flow that increases in line with inflation
Low maintenance capital expenditures
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Potential Growth Drivers & Outlook
Clear need in infrastructure activities (American Society ofCivil
Engineers ASCE)
Estimated that total infrastructure funding need over five year period is $1.6 trillion
U.S currently invests more than $400 billion per year in infrastructure
y $60 billion of this amount is financed by federal government
Spending on infrastructure (% of GDP): U.S 2%; Australia, India 2-3%;
Europe 5%; China 9-12%
Developed countries average 3%, developing countries 6%
Federal spending on infrastructure is declining, but total spending is staying constantbetween 2.3-2.5% over the past 20 years.
y More dependent on local and state government and the private sector for funding
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Potential Growth Drivers & Outlook
Highway & Bridges
y Currently: 3.9 million miles of roads and high ways; 5,400 public airports; 3,600 waterportterminals; 200,000 miles of freight and passenger railroad track
y 61% of all freight tonnage and 96% of all passenger miles occur on roads
y U.S population expected to grow to 420 million by 2050
Rise in congestion is costly for America
Lower and lower acceptable road quality
Need to bring annual high way investment spending up to $150 billion per year from $68 billionin 2005 to maintain existing capacity (National Surface Transportation Infrastructure FinancingCommission)
Rail
Rail is 16% of total transportation
Great need to increase infrastructure to maintain growth and position for future growth
Reasons that deter private investors from Rail:y Very capital intensive 17.8% of revenue are invested back into infrastructure, compared to
3.7% for all other US industries
y No guarantees that investments will generate appropriate returns
Potential Solution:
y Freight Rail Infrastructure Capacity Expansion Act of 2007
Using tax credit to incentivize private investment in rail infrastructure
Unfortunately, no update on this bill in House or Senate
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Transportation
Jonnie Boltuch
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Coordinates the transport of freight, business passengers, and leisure travel; largely
through airlines, automobiles & parts, and railroads
Key Players
y Airlines: Delta, American, United, Continental, Southwest, US Airways
y Auto: General Motors, Ford, Chrysler, Toyota, Honda, Nissan as well as original equipmentmanufacturers i.e. Dana corp., Goodyear and Tire and Rubber Co.
y Rail: Union Pacific, BNSF Railway, CSX Transportation, Norfolk Southern Railway
Major Headlines
y United Airlines acquisition of Continental Airlines; surpasses Delta as the largest airline
y Toyota Recall slows auto sales but creates new safety legislation and creates new sales
incentives to increase profit growth
Transportation
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Potential Growth Drivers
yAirlines: Increased ancillary fees ($5.2 billion). Strengthening corporateand leisure demand as the economy improves. Decreased capacitylevels = smaller available seat miles. Gains expected yet dependent onoil prices not escalating drastically.
y
Auto: Additional closings less than anticipated. Growth in replacementparts market. More companies entering global market. Growth inautomobile electronics. Overall growth expected due to increasedproduction and discretionary income.
y Rail: Scaling fleet size increases profit. Growth depends on oil pricesremaining down. Decreased coal demand requires more efficiency for
profit. Growth depends on efficiency and increased demand fro long haul,low-value goods such as coal, grain, ores, chemicals and forest products.Gains expected based on increased GDP, but are dependent heavilyupon oil prices and derived demand.
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Industry Outlook
yAirlines: Revenues expected to increase from $96.8 billion in2009 to $108 billion and $121 billion in 2010 and 2011.Profits projected to rise 29.5% in 2010. Revenue passengermiles up 1.3% with available seat miles down 2.3%.
yAuto: Production up 70%. Sales rise 12.7% in 2010 and 15%in 2011. Seasonally adjusted annual rate up to 11.21 millionindicating strengthening demand.
yRail: Rail Car loadings up to 290,000/week in 2010 from
233,000. Operating profit increased 40% through may 2010compared to the same period 2009. Rail volume increased8%.
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Aerospace & Defense
Ryan Lane
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Aerospace & Defense
y Trends and Drivers:
Slowing but still growing defense budget
2.2% growth (avg. growth 9.4% yearly since fiscal 2002)
Commercial
Aircraft
Boeing vs. Airbus duopoly- Regional competitors
Textrons Cessna, Gulfstream, Bombardier, Falcon Jet
Maintenance,
Repair, and
Overhaul (MRO)
Divisions of: GE, Rolls-Royce, Honeywell Aerospace,
United Technologies, and Boeing, Pure-players:
Triumph, AARJet Engines GE, Rolls-Royce, and United Technologies Pratt &
Whitney
Defense Lockheed Martin, BAE Systems, Boeing, Northrop
Grumman, General Dynamics, and Raytheon
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Trends & Outlook
Procurement vs RDT&E
Procurement up 7.7%, RDT&E down 5%
Shifting of war from Iraq to Afghanistan
Per soldier cost 2x greater in Afghanistan than Iraq
Commercial Aerospace to grow faster than Defense
Improvements in passenger and cargo traffic figures
y 2010 growth 7.1% passenger, 18.5% cargo
Aging Fleets (commercial and military) and improving traffic lead to potential in MRO subsector.
Growing China and Emerging Market Commercial Aerospace demand
China Needs 3,770 new planes by 2028
Conclusion: There is potential in production-heavy Defense companies but the biggest growth is in
Commercial Aerospace. MRO subsector has the biggest potential for short-term growth.
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Heavy Machinery & Equipment
Rishabh Das
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Heavy Machinery & Equipment Breakdown
y Global Energy Equipment & Servicesy Main Players
Baker Hughes Incorporated Halliburton Company Schlumberger Limited Transocean Ltd.
Oil & gas equipment & services (70.4%) The oil & gas drilling segment (29.6%)
Generated total revenues of$252.3 billion Drop in value in 2009 of 14%. The industry is set to
decline further in 2010 Lots of regulatory pressure because of BP spill
y Industrial Machinery Expectation for higher revenue and earnings in
2010, led by: Expected recovery in the global economy Various stimulus spending packages
implemented in the US and internationally Alleviation of the liquidity crisis that began in the
fall of 2008.
Purchasing Managers Index (PMI) has shownmonthly sequential gains since December 2008 indicates manufacturing growth
Sectors growth relies on theinternational/developing market economies
y Heavy Machinery Heavy machinery industry encompasses a wide
range of industrial businesses
construction equipment farm machinery heavy trucks
Drivers:
Construction (public and private), Housing starts
y Industrial Metals
Domestic steel industry experienced a dramatic upturn
(2010)Steel consumption up 52% from 2009 Total
imports up 24% from 2009 . Leading steel companies AK
Steel Holding Corp Nucor Corp Steel Dynamics Inc
United States Steel Corp.Demand:
Service centers: increase by 20%25% for 2010
Autos: rise 10%15%, due to light auto sales
Construction: 7% to 10% increase because of
increased infrastructure spending
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Analyst Opinion
Growth Potential & Trends
Factories are producing, capacity utilization
rates are strong, and business inventories are
rising all signs that point to a healthy
industrial sector and growing economy
Consolidation in the airline industry could lead
to synergies and increased profitability
Southwest acquisition of AirTran for 1.4
Billion
United and Continental Merger
Global demand for infrastructure spending is
growing
Government continues spending on defense
recently put a $5.8 Billion order with Boeing
Economic Uncertainty
Industrial production strong in the first half of
2010, but showing signs of weakness
Government stimulus propping up the
economy
Higher future inflation
The threat of a Double Dip companiescould stop capital investments and industrial
growth would be slowed