Industrials Overview - PowerPoint Presentation

Slide1

Industrials Overview

PM: KJ Chua

Coverage team: Brandon Liu

Jacobo

Ochoa

Joe

Matten

Michael

Straka

Sreyas

MisraSlide2

Airlines

Jacobo

OchoaSlide3

Highlights

Expanding rapidly (83.82% in the past year)

Market Cap of $197.56 billion

Revenues highly dependent on oil prices

Worldwide airline industry used $210 billion of oil in 2013

Fuel accounts for 30% of operating expenses (the largest cost)

Also affected by pathogen epidemics and terrorism

U.S. market dominated by four airlines: American Airlines, Delta Airlines, United Airlines, and Southwest Airlines

Stocks are currently rising rapidly due to low oil pricesSlide4

Airline equities have routinely outperformed the S&P 500 in the past yearSlide5

Reasons for Growth

Improving economy and more travel, both business and leisure

Dropping oil prices

American Airlines and U.S. Airways merger

Higher faresSlide6
Slide7

Return on Equity ComparisonsSlide8

Airline Margins

Aggregate Gross Margin TTM: 54.35%

Aggregate

Operating Margin TTM:

9.65%Slide9

Most airline stocks move together in the short runSlide10

Air Freight

Joe

MattenSlide11

Market Overview

a system of transporting 

cargo

 by 

aircraft, aka air

cargo

Largest 5 Companies (by air freight cargo volume):

FedEx Express - largest volume & largest dedicated fleet

UPS Airlines - recently announced large investment in fleet

DHL Aviation - 12% of world market; leader in Europe; privately owned

Cathay Pacific Cargo

–

Hong

Kong

; growth opportunity as China grows

Korean Air Cargo

– Part

of largest airline in S. Korea; recently announced large investment in fleetSlide12

Market Trends

Air Freight is a growing industry

Q3 earnings are up due to lower oil prices and increased consumer demand

Demand

expected to rise in Q4

(Cargo)

(Capacity)

(%age of Capacity)Slide13

Recent Market News

8/13/14

– Cathay’s net

profit for the six months ended June 30 was 347 million Hong Kong dollars (US$44.8 million) compared with a first-half net profit of HK$24 million a year earlier

11/10/

14 –

Korean Air Lines Co.’s Q3 operating profit up 50% from a year earlier due to drop in oil prices.

Earnings expected to improve further in the Q4 on lower fuel costs, a weaker yen and increased cargo traffic toward the end of the year.Slide14

Earnings growth

Lawsuit

Strong Earnings

Weak profit



Lower Earnings Forecast

Domestic ChartsSlide15

Regional Trends (Cargo & Capacity Growing)

Asia Pacific – iPhone 6; +5.7% FTK/+5.6% AFTK

Europe – weak Eurozone, sanctions on Russia, Air France strike -1.6% FTK/+1.2% AFTK

North America – Strong business activity +5.4%FTK/ -0.02% AFTK

Middle East – Demand grew by 10.1%. +17.0%

FTK

/+14.5% AFTK

Latin American - +0.3%

FTK

/+1.7% AFTK

African – Volatile regional trade volumes +11.5% FTK/-1.3%

AFTKSlide16

However, revenue growth is slowingSlide17

Market Trends Continued

Largely affected by macro outlook, consumer spending, & oil prices

Slowing global macro environment

 hit on consumer

spending

Yields for cargo are fairly low due to overcapacity in the market

Companies making large capital investments in fleet



Margins

are getting squeezedSlide18

Thesis

Air Freight looks

good (oil and Q4 shopping),

but only for a shorter time

horizon than Blyth’s 3-5 year horizon.

Freight yields have declined at an average rate of 2.3%

per

year over the past 20 years.

Cargo revenue represents approximately 14% of total

air traffic

revenue on

average (up to 35% for some airlines).

Continuing industrywide declines

in yield for cargo

reflect productivity

gains, technical improvements, and intense

competition (which is increasing)

Decreasing yields along with slowing global macro environment



Don’t investSlide19

Logistics & Shipping

Brandon LiuSlide20

Notable trends in shipping

Trucking capacity issues: freight rates remained pretty flat in 2013 and 2014 while volume rose

Rising costs for drivers, equipment and maintenance



pushed

smaller

companies into bankruptcy

“Freight

rate hikes

by

as much as 5% to 8% before 2014 is over

” –

Fleetowner.com

New regulations are hampering productivity

Far

East importing raw materials and exporting manufactured goods at an accelerating

clip

growth

in demand for air and ocean shippers looks

good

Investors typically stay away from shipping because of its cyclical nature (follows the business cycle)

might be interesting due to increased demand for US natural gas…

…but also depends on the development of export capabilitiesSlide21

Trends in transportation

Stocks: very fast growth

Low oil prices and low interest rates



investor confidence

China is currently stockpiling oil

 may be an eventual correction in demandSlide22

Trends in transportation

U

ncertainty with

trucking capacity

 interest in

maritime

and air freight

However, there have also been shifts from air to ocean freight

A

ir

cargo industry lost 5.4 million metric tons of cargo to container lines between 2000 and

2013

as

shippers opted for slower but cheaper transit via the

oceanSlide23

General trends in international trade

Steady growth in international trade



paired

with

tech advancements +

expanding market demandsSlide24

Consequently, on the logistics side, there has been

steady

growth in

3

rd

party

logistics

providers (3PL)

“

N

on

-asset-based”

shippers

serve

as shipping coordinators

&

use their own technology and

systems…

…but

use other shippers’ assets to handle the physical delivery

B

usiness model: steadier

earnings growth and less volatile share

prices

Some interesting companies: "non-asset-based"

shippers:

Landstar System1C

. H. Robinson

Worldwide



posting

consistent gains

+ impressive

histories of

growth

1

http

://

www.thestreet.com/story/12867810/1/why-

landstar-system-lstr-stock-is-higher-today.htmlSlide25

3rd

party logistics

Looks very promising

Trends in big data, analytics:

The expansion of global trade requires more interconnected management systems

Big data will improve global supply chain performance and help quantify risk

Centralization of information systems allows for more swift response to market events

Looking at companies that have traditionally done well may not be as good of an indicator of future performance

Researching tech and systems expansion of these 3PLs may be a better indicator of their future performance