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Highlighting key takeaways following the 45th annual Baird Industrial Conference.
Observations on demand into 2016 focused on continuing sources of strength (building
products, auto, packaging & coating), persisting headwinds from commodities/general
industrial, and “guarded optimism” for second-half 2016 as negative comparisons ease with
potential crude price stability and cost/margin opportunities. This edition includes direct
respondent commentary regarding 2016 conditions, themes by sector, and best and/or
incrementally positive ideas. Contact the Baird Senior Analyst for additional information.
■ Areas of strength in 2015 expected to sustain momentum into next year. In markets
that have seen growth during 2015, companies expressed conviction in the fundamentals
supporting further gains in 2016
- Building Products. Double-digit growth in housing starts with low/mid-single digit growth
in repair/remodel activity sets stage for another solid year.
- Global Auto. US market remains healthy with slight upward bias given acceleration
being observed at year end. Europe is solidly in recovery while China has inflected after
stimulus measures.
- Packaging & Coating. Tone was confidently positive with outlook for core volume
growth. The consumer economy across the developed world is stable with some
encouraging signs of bottoming in emerging countries.
■ While visibility limited, cautious optimism toward mid-year bottoming in Energy.
- Commodity markets driving deceleration in 4Q15 sales/orders across Process Controls,
Distributors, Industrial Equipment and Machinery, while contributing to low near-term
visibility on project approval for Engineering & Construction firms.
- That being said, companies believe stabilizing trends could be observed in subsequent
quarters, with improvement by the second half. Outlooks center on potential for
supply/demand balance by mid-year in energy markets, implying an operational
inflection 1-2 quarters beyond. This dynamic, along with easier comparisons and benefit
from cost savings, could support 2H improvement.
- Admittedly, commodity visibility remains extremely limited and the magnitude/slope of
improvement is a key risk into next year. As evidence, companies in our recap piece
from 2014 (link) substantially understated the headwinds ultimately seen from energy
markets in 2015.
■ Outside of U.S., emerging market risks remain.
- China commentary was somewhat mixed with general Industrial and heavy machinery
still decelerating (versus auto, healthcare, specialty chemical, environmental growing).
Brazil best described as a “disaster.” Several companies noted new found caution in the
Middle East.
■ M&A a priority in current environment.
- Pipelines appear healthy but with valuations slightly elevated and companies willing to
wait for some multiple compression (seller/buyer expectations remain divergent in
commodity-oriented areas).
■ Included in the full report are incremental takeaways from each individual sector along
with company comments.
Baird Industrial Research
www.rwbaird.com
414.765.3500
Mircea (Mig) Dobre, CFA
414.298.6138
Richard C. Eastman, CFA
414.765.3647
Michael Halloran, CFA
414.298.1964
Benjamin J. Hartford, CFA
414.765.3752
Ben Kallo, CFA
415.364.3345
Daniel P. Katzenberg
646.557.3209
Daniel R. Leben, CFA
414.298.1903
David Leiker, CFA
414.298.7535
David J. Manthey, CFA
813.288.8503
Ghansham Panjabi, Ph.D.
214.373.2955
Andrew J. Wittmann, CFA
414.298.1898
Timothy Wojs, CFA
414.298.5009
November 13, 2015 Baird Equity ResearchIndustrial
IndustrialIndustrial Insights Special Edition – Baird 2015 Conference Highlights
Robert W. Baird & Co.
[Please refer to Appendix- Important Disclosuresand Analyst Certification]
Details
What Respondents are Saying…
During the conference, the Baird Industrial team collected quotations from management teams regarding
swing factors for revenue growth and profitability into 2016. Below we provide an overview of
commentary across the Industrial universe.
In general, the outlook remains positive into 2016 for areas that have observed growth during 2015:
building/construction products, automotive, packaging & coatings, and maintenance/repair related
spending. Exposure to commodities and heavy manufacturing likely remain a challenge, though
management teams did express some guarded optimism for a second-half improvement behind easier
comparisons, the potential that oil reaches a supply/demand equilibrium around midyear, and
cost/margin opportunities.
Revenue Commentary
■ “2016 will be fairly muted, low growth; we are focused on costs and cash.” (Diversified Chemicals)
■ “2016 looks good from our perspective. Macro trends look positive including housing starts,
commercial construction, residential repaint, and commercial repaint.” (Coatings Supplier)
■ "Non-residential construction remains surprisingly positive, and is expected to stay positive for the
next six months at least. Transportation also good.” (Industrial Gases)
■ “Europe has improved every quarter of 2015. If there is upside risk to next year, it is likely Europe.
Whereas, Latin America is not improving at all. Negative bias into 2016 and…thinking volume does
not come back for several years.” (Commercial Truck OEM)
■ “Regulatory malaise and general extension of the project permitting/approval process has seen the
timeline for project sanctioning extended, further pressured by crude volatility, reducing our visibility. It
has become increasingly difficult for us to forecast near-term revenue which has made it difficult to
manage our cost structure.” (Engineering & Construction)
■ “Commercial aerospace spending up mid-single digit, this should continue into next year.”
(Multi-Industry)
■ “Federal Highway bill would be a boost to construction spending.” (Mobile Automation)
■ “Things remain really tough in China [construction] and still seeing all Asian OEMs reduce orders.
Bright spots are European auto, new product launches in China auto, and US auto.” (Vehicle
Supplier)
■ “We think the short cycle business can be up next year. We can’t see this [maintenance deferrals]
continuing for long into 2016.” (Large Diversified OEM)
■ “I won’t use the recession word, but we’re very cautious. Auto is the one bright spot we’re seeing
[outside of intermodal].” (Rail)
■ “Our expectation is that we'll see a good solid freight market in 2016. It's hard to determine the extent
of that strength at this point, but if we have a peak season that's more normal this year, and if we
have the electronic logging device ruling here in fourth quarter, we think that will set the stage for a
good market condition in 2016.” (Truckload Carrier)
■ “My hands are a little shaky standing over our Asia forecast.” (Industrial Instruments)
■ “Equipment cannibalization is hurting replacement demand and it could take another 3-4 months to
clear out that inventory.” (Short-cycle OEM)
■ “We believe key drivers [to demand] are employment, GDP, and adoption. All those things are
signaling positive signs… There is ebb and flow in favorable trends.” (Nonresidential Building
Products)
■ “We think next year is going to be better in every market we serve.” (Building Products)
■ “U.S. Construction is strong. Industrial is soft in the U.S. It's soft and softening… Europe … has hit
bottom… China is soft, Brazil is soft, and Russia is soft.” (Diversified Industrial)
■ “What we see happening right now is far more about a lower level of end user demand beginning to
cause destocking rather than the other way around. Inventory levels never rose out of line with
demand before this downturn.” (Diversified Component Manufacturer)
■ “Have started to see auto customers in Europe and China slow spending, “way too much capacity in
November 13, 2015 | Industrial
2Robert W. Baird & Co.
China.” (Factory Automation)
■ “Although macroeconomic weakness in China remains a concern, we have not seen a material
impact on our business”. (Specialty Chemicals)
Margin Commentary
■ “We need to see the timeline for the [Electronic Logging Device] implementation…the ELD mandate
is a capacity tightening event for the industry.” (Truckload Carrier)
■ “If raw materials are held flat moving forward, we expect a raw material tailwind throughout 2016.”
(Coatings Supplier)
■ “We know the work is there, but holding under-utilized staffing levels has weighed on margins and is
a primary swing factor to our outlook going forward.” (Engineering & Construction)
■ “We believe there are enough levers to pull to at least hold margins in 2016, despite volume and price
pressures, due to mix, sourcing benefits, and our internal restructuring actions.” (Diversified
Component Manufacturer)
Best Ideas and/or Incrementally Positive Ideas
Below is a list of best ideas and/or incrementally positive ideas across Baird’s Industrial Research
platform following the Baird 2015 Industrial Conference. Price targets, valuation/justification, and risks
for each of the companies listed below can be found on pages 21-32. Please contact the respective
analyst(s) for additional details.
Figure 1: Ideas across Baird’s Industrial Research Platform
Company Name Ticker Market Cap Best Idea/Incrementally Positive Sector Analyst
A.O. Smith Corporation AOS $6,856 Best Idea Process Controls Ha llo ran
Alleg ion p lc ALLE $6,235 Best Idea Building Products W ojs
AMETEK, Inc. AME $13,267 Increm entally Positive Advanced Industrial Equ ipment Eastm an
Astec Industries, Inc. ASTE $857 Increm entally Positive Diversified Industria l & Machinery Dobre
Axa lta Coating Systems AXTA $6,677 Best Idea Packag ing & Coatings Panjabi
Badger Meter, Inc. BMI $883 Increm entally Positive Advanced Industrial Equ ipment Eastm an
Ball Corporation BLL $9,294 Best Idea Packag ing & Coatings Panjabi
Berry P latics Group, Inc. BERY $4,037 Best Idea Packag ing & Coatings Panjabi
Carlisle Com panies Inc. CSL $5,596 Best Idea/Incrementally Positive Building Products W ojs
Chemtura Corporation CHMT $2,082 Best Idea Energy Techno logy & Resource Managem ent Kallo
Chicago Bridge & Iron Company N.V. CBI $4,577 Increm entally Positive Industria l Serv ices (Engineering & Construction) W ittm ann
Cognex Corporation CGNX $3,016 Increm entally Positive Advanced Industrial Equ ipment Eastm an
Danaher Corpora tion DHR $65,184 Best Idea/Incrementally Positive Advanced Industrial Equ ipment Eastm an
Dover Corporation DO V $9,837 Increm entally Positive Diversified Industria l & Machinery Dobre
EOG Resources, Inc EOG $45,802 Best Idea Exploration & Production Katzenberg
HD Supply Holdings, Inc. HDS $5,935 Best Idea Industrial D istribu tion Manthey
Lennox International Inc. LII $6,093 Best Idea Building Products W ojs
Mettler-Toledo In ternationa l Inc. MTD $9,105 Increm entally Positive Advanced Industrial Equ ipment Eastm an
Mohawk Industries, Inc. MHK $13,875 Best Idea Building Products W ojs
MSA Safety Incorpora ted MSA $1,614 Best Idea Advanced Industrial Equ ipment Eastm an
Multi-Co lor Corp. LABL $1,035 Best Idea Packag ing & Coatings Panjabi
P ioneer Natural Resources Co. PXD $21,017 Best Idea Exploration & Production Katzenberg
PPG Industries, Inc. PPG $27,508 Best Idea Packag ing & Coatings Panjabi
Roper Technologies RO P $18,898 Increm entally Positive Advanced Industrial Equ ipment Eastm an
Sch lum berger Lim ited SLB $97,899 Best Idea Oilf ie ld Services & Equipm ent Leben
Sealed A ir Corporation SEE $8,977 Best Idea Packag ing & Coatings Panjabi
Sherwin-W illiams Co. SHW $24,776 Best Idea Packag ing & Coatings Panjabi
Sun Hydraulics Corporation SNHY $811 Increm entally Positive Diversified Industria l & Machinery Dobre
Swift Transportation Co. Inc. SW FT $2,385 Best Idea Transportation/Logistics Hartford
Terex Corporation TEX $2,282 Increm entally Positive Diversified Industria l & Machinery Dobre
Visteon Corpora tion VC $4,765 Best Idea G loba l Auto & Truck Leiker
W ABCO Holdings Inc. W BC $6,424 Best Idea G loba l Auto & Truck Leiker
Source: Baird Research, FactSet
November 13, 2015 | Industrial
3Robert W. Baird & Co.
Current Observations/Trends and Common Themes from Conference by Industrial Research
Sector
Similar to the last couple of years, we summarize in this section current observations/trends and
common themes across Baird’s Industrial Research platform as we exit 2015 and look ahead to 2016
and beyond. Price targets, valuation/justification, and risks for each of the companies listed below can
be found on pages 20-31. Note that the order of appearance for each team’s submission is alphabetized
by sector group. Please contact the respective analyst(s) for additional details.
Advanced Industrial Equipment Richard C. Eastman, CFA
414.765.3647
■ Virtually all company presenters expressed incremental caution regarding end-market trends
(Industrial end markets, exceptions were Healthcare and Environmental, Food Safety end markets).
Numerous managements have been “surprised” by order trends in September and October which
have trailed off, rather than delivering typical seasonal (M/M) strength.
■ Step down in broader industrial market growth expectations (versus a year ago); seemingly
handicapped around +/- 0%. Almost universally companies were very cautious regarding their ability
to deliver core growth (from their Industrial businesses) in CY16E.
■ When asked to comment on end markets of concern, relative to CY16 outlooks, the majority of
our managements noted emerging market risk. China was noted as still decelerating (Industrial
spend, bifurcated end markets as healthcare, water, and environmental were still experiencing
positive mid-single-digit growth). Brazil was a “disaster” and Russia perhaps showing signs of
stabilizing or at least annualizing the initial precipitous decline. Middle East also began to show
cracks in 2H15 as lower oil prices/reserve work-downs slow government spending across sectors.
■ Commentary expressed included a noted determined shift toward inorganic (M&A) growth, as
well as maintaining, but heavily vetting, growth investments. Investments in feet-on-the Street and
R&D are largely being preserved, but growth in those internal drives has decelerated.
■ Companies have sharpened their focus on cost initiatives, “lean” programs and incremental
restructuring actions. Productivity, either sales/sq. ft. or sales/per employee, are being emphasized in
preliminary CY16 budget discussions. One company characterized its existing restructuring plan as
the “first step in a much broader reduction.” There was a universal acknowledgment that the
operating environment, soft demand, stronger USD, may remain challenges for a prolonged period of
time.
■ One area of interest to us was that a few of our companies had begun to rationalize
investments in China. Reductions in force and consolidation in manufacturing square footage (to
boost productivity) were noted. Another commented that it had down-shifted its investment, but still
adding to sales.
■ M&A multiples remain elevated. It was suggested that deal multiples had “plateaued” in recent
periods. Another multi-industry participant added that the market may be “loosening up” regarding
seller valuation expectations, adding that they had started to get incoming calls from potential sellers.
A more uncertain operating environment and an interest rate outlook that eventually includes higher
rates may be influencing sellers. Companies appear more determined to utilize off-shore cash (for
M&A), which may be helping bridge valuation discussions.
■ Pricing environment appears firm heading into CY16 (with the exception of exports). We
observed a few companies, if available, took “extra price” in CY15 to partially FX headwinds. Planned
CY16 price increases are below CY15; however, “input costs should be lower Y/Y” allowing for
targeted net price capture of +50-150bps
■ Incrementally positive exiting the Industrial Conference: AME, BMI, CGNX, DHR, MTD, ROP
November 13, 2015 | Industrial
4Robert W. Baird & Co.
Diversified Industrial & Machinery Mircea (Mig) Dobre, CFA
414.298.6138
■ Clear bifurcation in industrial trends with commodity-related end markets (oil & gas, mining, & ag)
currently weak and expected to remain so, while consumer-related markets (construction, food &
beverage, automotive, and aerospace) were cited as stronger (expected to continue). At this point,
the question is whether such a divergence is sustainable, our own view is that consumer driven end
markets are lagging rather than decoupling from cap goods/commodity end markets. General
industrial was noted as “moderating” due to the knock-on impacts from oil & gas as well as a stronger
USD.
■ Current industrial headwinds expected to continue into 2016... Broadly speaking, the tone from
companies under the machinery and diversified industrial coverage was subdued as current industrial
headwinds (primarily commodity-related) are expected to stretch into 2016. Sales are expected to be
most challenged in the 4Q15 (increased OEM shutdowns planned year/year) and into the 1Q16. This
is a notable difference from prior conferences where management teams typically find ways to talk up
the upcoming year.
■ …though most are calling for improvement in the 2H16. But, most companies are also expecting
improvement in the 2H16 due to easier comparisons, the end of inventory destocking in the channel,
and the realization of restructuring benefits. A number of management teams are also calling for a
bottom in the oil & gas markets within the next six months.
■ Weaker trends might not necessarily be priced in as LECO dropped 7% after noting a step down
in demand in October relative to the 3Q15 which is expected to continue into November and
December (extended OEM shutdowns). Destocking has been widely blamed by Industrials as a driver
of poor distributor orders, note however that LECO attributed the October downtick to end user
demand contraction rather than destocking.
■ Incrementally positive exiting the Industrial Conference: ASTE, DOV, SNHY, TEX
Energy Technology & Resource Management Ben Kallo, CFA
415.364.3345
■ Low oil prices are expected to remain a tailwind for specialty chemical companies in 2016.
Specialty chemical companies continue to benefit from lower input costs due to depressed oil prices,
which are expected to continue in 2016. Additionally, low gasoline prices are expected to drive
transportation miles driven, and increase demand for lubricants over the intermediate-term.
■ Softening China growth is giving caution to specialty chemical companies, although demand
has largely held up. Multiple specialty chemical companies noted they have not seen
macroeconomic weakness in China have a material impact on their businesses. Additionally, demand
for personal care additive products is growing which is offsetting weakness in demand for products
used in the automotive and coatings sectors.
■ Solar demand in the U.S. remains robust in major markets although companies are preparing
for short-term U.S. softness in 2017. Multiple solar developers indicated demand remains robust in
the rooftop and utility-scale markets. Although companies expect weaker U.S. demand in 2017 after
the reduction of the Investment Tax Credit from 30% to 10%, U.S. solar sector growth is expected in
2018+.
■ A large electric vehicle maker is seeing accelerating demand in Europe, Asia, and the U.S. A
large EV manufacturer indicated Q3 demand increased ~50% y/y, and it has seen stronger demand
in Q4 with increasing orders from Europe and Asia. The company indicated it continues to ramp
production towards its FY:15 targets, and is confident in its ability to ramp production of its newest
vehicle to several hundred units per week by year-end. Over the longer-term, the company
anticipates many more players in the EV market, as electric motors allow for better vehicle design
November 13, 2015 | Industrial
5Robert W. Baird & Co.
and a lower cost per mile driven.
■ An enhanced oil recovery company is seeing increased inquiries for its services and more
distressed assets coming to market. Oil companies continue to look for ways to lower overall
production costs and reduce expenses, which is driving interest in enhanced oil recovery
technologies that can lower the incremental cost per barrel. The EOR company is seeing higher
interest in its services, particularly for older oil fields which are lower/non-producing, as oil companies
seek to maximize volumes to help offset low prices. Additionally, the company indicated more oil
fields are being brought to market as companies seek to eliminate assets and bolster their capital
positions..
Exploration & P roduction Daniel P. Katzenberg
646.557.3209
■ Low near-term expectations from the oil & gas sector as investors await a potential
rebalancing in 2H16. With widespread expectations for a further 500,000 bbl./d decline in U.S. crude
production to the range of 8.5 MMbbls./d or so by summer 2016, E&P presenters remain sanguine
about near-term prospects for the upstream industry. At the same time, we heard both E&P senior
executives and investors express growing awareness for a potential crude rally in mid-to-late 2016 as
global supply/demand balance reaches a new equilibrium. Link to Oil & Gas Takeaways from Baird’s
Industrial Conference.
■ Until then, secondary and tertiary impacts of weak hydrocarbon pricing are being felt across
the industrial landscape. Industrial companies with oil & gas-related exposure told attendees to
expect another challenging year for order flow in 2016 as retrenchment continues. At the same time,
manufacturers are exploiting this slowdown to decrease costs and pursue selective energy-related
M&A.
■ Midstream and downstream spending offers some potential offset though public
acknowledgments limited. Slack hydrocarbon prices and expectations for the U.S. to remain awash
in natural gas have kept interest in ethane crackers, other feedstock-related projects, and select dry
gas transportation development firm. Refiners also are reviewing feed-slate optimization opportunities
amid still percolating oil export ban talk. Broadly, industrials have turned to mid- and downstream
diversification to offset upstream declines, with varying degrees of success
General Industrial & Build ing P roducts Timothy Wojs, CFA
414.298.5009
■ Residential trends expected to continue. In the residential construction market, companies
generally project a continuation of recent trends into 2016. Housing starts are anticipated to grow in a
~10% range in 2016, which would mark the third consecutive year of growth near this pace. This
would place 2016 housing starts in a 1.2m range, still below the historical average of 1.5m.
Repair/remodel demand is expected to grow in a low-to-mid- single-digit range, also similar to recent
years driven by gradually improving consumer confidence.
■ Some choppiness in non-res, but generally solid. In the nonresidential market, commentary has
been choppier with companies noting varying demand backdrops across verticals. Office, retail, and
hospitality are generally described as solid though some note moderating rates of growth.
Industrial/manufacturing is typically described as softer while education demand appears mixed.
Based on improvement in macroeconomic fundamentals, however, most companies anticipate
continued growth in nonresidential construction in 2016.
■ M&A remains a theme. Across the space, most companies have the balance sheet capacity and
appetite to pursue acquisitive growth. Acquisition pipelines are generally described as healthy and we
November 13, 2015 | Industrial
6Robert W. Baird & Co.
expect M&A potential to be an ongoing catalyst for most companies over the next 6-12 months.
■ Lag/labor anecdotes grow. Companies are increasingly mentioning a growing lag between
construction starts and completion. Among many factors, labor shortage is the most highlighted with
trade workers not returning to the field following the downturn. We view labor as a potential governor
to the pace of growth for both residential and nonresidential markets. However, more gradual growth
may be a positive for our companies as it creates an environment that is easier to manage.
■ Incrementally positive: CSL
Global Auto & Truck David Leiker, CFA
414.298.7535
■ Global automotive environment remains healthy. Conference participants expecting US markets
remain steady into 2016 with a slight upward bias given how 2015 is finishing (auto SAAR
accelerating through recent months). Europe is still recovering with several more years of growth
possible. China experienced a meaningful inventory correction through summer with retail demand
inflecting in October behind stimulus measures; the outlook for this market is consequently improved
from several months ago with a “baseline” expectation for ~mid-single digit growth next year.
■ European truck remains a clear bright spot. Companies were uniformly positive on Europe
remaining a growth market into 2016. Western Europe in particular could continue to see double-digit
increases, with a lingering question of whether stabilization can occur in Eastern Europe, Russia, and
the Export markets (collectively, as much as 40% of what is produced from the broader Eurozone).
■ Outside of Europe, truck markets remain mixed. North America is expected to come down from
high levels in 2015, with a “consensus” view from participants for a 10% decline next year (in line with
our viewpoint and much better than investor expectations). Several truck OEMs acknowledged that
used pricing sees modest pressure in 2016 given higher inventory of used trucks; however, any price
decline will be from all-time record levels (meaning 2016 is still one of the best pricing years on
record). Outside of the US, China remains an unknown while Brazil is a disaster with no improvement
in sight.
■ Higher levels of safety content a noticeable secular theme. Several conference participants
focused on the opportunity for active safety technologies (vision, radar, vehicle-to-vehicle
communication, LIDAR) given updates to regional crash test standards. This area is expected to be
the fastest growing product category within the automotive supply chain for the foreseeable future.
The same trend is being observed in the commercial truck space, where adding collision avoidance
systems is resulting in a material reduction in insurance costs for trucking operators (real-world
examples show an 80% reduction in accidents amongst fleets with these systems installed).
■ Automakers emphasizing electronics user experience to differentiate new vehicles. The cockpit
electronics market (clusters, displays, audio, infotainment, connectivity) is expected to grow 2x the
pace of underlying vehicle production. The user experience from this area has become the most
important factor for why consumers choose an automobile (and conversely, the biggest area of
complaint when something is difficult to operate). Going forward, suppliers are “experimenting” with
all-new means to operate devices in the car: gesture control for audio and infotainment functions, eye
tracking for infotainment menu selection, cloud-based voice recognition.
November 13, 2015 | Industrial
7Robert W. Baird & Co.
I ndustria l Distr ibution David J. Manthey, CFA
813.288.8503
■ Industrial trends likely to remain weak. 2016 industrial/manufacturing demand is not expected to
meaningfully improve, given continued headwinds relating to weaker commodities (energy, mining,
agriculture) and lower export activity. Consequently companies remain focused on defense versus
offense, with costs cuts/efficiencies being used to fund growth investments, driving continued
underlying share gains (one Industrial Supply distributor, for example, noted “compelling
opportunities” to take share in the current environment).
■ Pricing environment very challenging. Sharply lower commodities and weak demand continues to
weigh on pricing, with two CEOs both characterizing the current environment as the worst they’ve
seen in their entire careers. Despite this, there has been surprisingly little overall net impact so far,
suggesting the potential for further downside to price/gross margins entering 2016.
■ Construction/Building materials remain steady. End market trends remain steady with strength
expected to continue in 2016, spanning both solid repair/remodel (HVAC, pools, multi-family) and
residential/non-residential construction. Technology investments a key theme across the sub-sector
as leaders press advantages of scale.
■ “Lower for longer” energy outlook intact. Finally, oil & gas distributors anticipate a choppy start to
2016, and believe any eventual preliminary improvement will likely be modest given the supply-driven
nature of the current downturn – all very consistent with our “lower for longer” view. Notably, however,
we believe distribution trends will ultimately turn before rig count bottoms, given the significant
number of drilled but uncompleted wells.
I ndustria l Services (Engineering & Construction) Andrew J. Wittmann, CFA
414.298.1898
■ Specialty contracts carrying excess costs today, regulatory challenges have intensified.
Specialty contractors broadly acknowledge a tougher regulatory environment today with larger
projects increasingly challenged by (well-organized) environmental opposition, including active social
media engagement. The extent of opposition and regulatory oversight has clearly extended traditional
project timelines but with contractors hesitant to “right-size” labor forces in anticipation of larger
project work, which remains in limbo. This imbalance, coupled with increased pricing pressure on
smaller project work (where regulatory challenges are less systemic), is weighing on sector margins,
likely continuing well into 2016.
■ Diversified E&Cs continue to adopt more integrated delivery models, a secular theme.
Traditionally, E&C companies offered single source services, focused on overall
engineering/construction content and/or project management, with supply chain logistics deferred to
third parties, procured on a customer’s behalf. More recently, models are becoming more integrated
in an effort to lower total cost of delivery/improve risk-management and helping to achieve customer
capital efficiency mandates, particularly in a low commodity environment. Indeed, the trend toward
broader vertical integration, with less sub-contracted work and, in many cases, direct in-house
modular fabrication technologies, are providing E&Cs with opportunity to preserve pricing, with project
delivery costs cited as 20-40% cheaper today versus several years ago. This change has helped
E&C profit content hold stable and margins move higher, despite broader industrial pricing pressure.
■ Fewer LNG prospects today, better opportunities in refining/petrochemical within the energy
sector. 2014-2015 offered strong LNG award activity, with energy-exposed backlogs holding stable
as large LNG bookings helped keep book-to-burn ratios near 1x, particularly as revenue burn rates
remained modest. Today, fewer LNG prospects remain, with E&C contracts increasingly
November 13, 2015 | Industrial
8Robert W. Baird & Co.
acknowledging potential over-supply, with marginal prospective projects finding difficulty in securing
offtake agreements. Additional capacity additions through decade-end exacerbate this disconnect,
leaving incremental project prospects more muted. Offsetting, downstream/midstream energy
prospects appear to offer better economics, with increased confidence in a “second wave” of
domestic ethylene cracker FEEDs in 2016 ($1.5-4.0B of eventual contract scope/cracker), coupled
with a strong derivatives chemical market (~$500-1B, per project).
- Geographically, we note increased caution around the Middle East, previously a strong market, with
some idiosyncratic opportunities in refining/petrochemical, but with broader pressure from
commodity-linked funding, including for general infrastructure projects.
■ Incrementally positive: CBI
Oilfield Services & Equipment Daniel R. Leben, CFA
414.298.1903
■ Challenged oil & gas end market dynamics expected to persist as few are willing to call the
bottom. Rather, companies – both industrials with diversified exposures as well as the oil & gas
sector – continue to look internally to address a consecutive down year in energy. Right-sizing
initiatives remain in the spotlight, and for those aptly positioned, opportunistic M&A ranks high on the
capital deployment priority list. Of those offered, outlooks tended to center around the mid-2016
timeframe for a potential tightening in energy market fundamentals, although the operational inflection
would likely lag by a quarter or two beyond. Outlooks across the energy spectrum were further
bifurcated with the sharpest headwinds in upstream while mid- and downstream exposures tended to
see support from global, long-cycle project-based activity. Link to Oil & Gas Takeaways from Baird’s
Industrial Conference 2015.
P ackaging & Coatings Ghansham Panjabi, Ph.D.
214.373.2955
■ Headwinds offset by positive variances—sector(s) outlook favorable. Noting that the tone from
the Packagers and Coaters at our recent conference was confidently positive, we have increased
conviction in our view that the fundamental outlook for 2016 remains favorable
■ Outlook intact. Post our well-attended 2015 Industrials Conference, we believe that while there are
several layers of uncertainty related to the outlook for 2016, particularly unfavorable FX, the outlook
for core volume growth remains positive, with free cash flow allocation biased towards being offensive
(acquisitions in particular).
■ Packaging customers adapting. The biggest theme for the Packagers was basically capitulation
from their customer set that the change in consumer preferences is secular, prompting a focus on
removing artificial ingredients and thus reconstituting products for the next generation of consumers
(millennials want product to be visible / fresh / convenient to dispense).
■ Global consumer stable. Further, while the macro globally remains fragile, the consumer economy
across the developed world seems stable (including Europe), while even some emerging countries
are starting to show early signs of bottoming (Brazil included).
■ Stock-specific 2016 outperformance. Accordingly, our view is that while it is unlikely valuation
multiple expansion will continue for the Packagers (or Coaters for that matter), 2016 should be
fundamentally favorable overall—albeit much more company specific (internal improvement /
deleveraging should dominate in our view).
■ Coaters organic growth also robust. Switching to the Coaters, volume growth for 2016 is shaping
up to be positive. A combination of steady fundamentals across N.A. construction, global auto
production, and contributions from previous/future acquisitions should combine for continued earnings
November 13, 2015 | Industrial
9Robert W. Baird & Co.
outperformance in our opinion.
■ Incrementally positive exiting the Industrial Conference: BLL, PPG, SEE
P rocess Controls Michael Halloran, CFA
414.298.1964
■ Positively inflecting end markets increasingly difficult to find. A key theme at the conference
surrounded management’s views on top-line inflections (positive or negative) into 2016. While
acknowledging that underlying demand trends were deteriorating through 3Q15 and into 4Q15, most
companies expected industrial exposed end markets to stabilize at low levels in the near term, with
some predicting very difficult conditions in 4Q15 and 1H16. Visibility into potential improvement
remains limited. While global demand appears to lack a catalyst, many we spoke with expect a
continued muted growth industrial world for several years to come, with some expressing optimism
that aftermarket/short-cycle trends could experience 2H16 improvement.
■ Some headwinds emerging for capex in consumer-driven end markets? In 2015, we have
largely recommended positioning toward companies with higher-growth “consumer” exposure, though
there are some signs emerging of slowing capex demand (not core consumer demand) in these key
markets (potential for non-residential construction moderating on oil & gas spillover, aerospace
overcapacity concerns, peak auto commentary). Positively, muni trends are improving modestly.
While consumer-driven markets are still likely to outpace broader industrial trends, we recommend
that investors gravitate toward companies with higher levels of non-discretionary replacement
demand and/or exposures in consumer staple markets.
■ Margins likely remain under pressure, despite significant structural cuts. Margins have come
under pressure in 2015 as companies react to the lower-than-expected environment with significant
restructuring programs. Holding margins steady in 2016 remains a key goal for many across our list,
though visibility remains quite low in terms of volumes and pricing. We expect the bias remains to the
downside, particularly as savings are shared, incentive compensation creeps higher, and overhead
costs (wages, health insurance) rise.
■ Capital structures increasingly in focus, as companies look to mitigate the impact of challenging
top-line prospects. In the face of shifting investor appetite away from highly levered balance sheets,
management teams are struggling to find ROIC positive and reasonably priced transactions in healthy
end markets, while seller/buyer expectations remain divergent in commodity-oriented areas.
Buybacks remain prevalent.
Transportation/ Logistics Benjamin J. Hartford, CFA
414.765.3752
■ Remain cautious with the group, but some structural opportunities emerging. Recent group
underperformance has been material (Dow Jones Transports -11% versus the S&P 500 year-to-date,
and -2% relative over the past five years even with help in the composite from strong airline relative
performance). Structural opportunities are beginning to emerge as demographic and regulatory
changes in upcoming years should drive industry consolidation (particularly within the
truckload/brokerage space), but we still see few catalysts for the group into mid-2016 and believe
pricing growth will be below managements’ communicated expectations.
■ Pricing growth decelerating in 2016 – but the degree to which remains unknown. Consensus
truckload carriers’ core contractual pricing growth outlooks at the conference seem to be settling at
+2-4%. Core pricing growth will undoubtedly decelerate in 2016 from 2015’s +4-5% year/year range,
though the magnitude of the deceleration depends on the strength of 4Q15’s peak season and the
passage of an ELD mandate. As it stands, we see 2016’s pricing growth outlook as overly optimistic
November 13, 2015 | Industrial
10Robert W. Baird & Co.
and believe +2% year/year core pricing growth is a reasonable 2016 target -- even assuming the ELD
mandate is passed during 4Q15. However, without an ELD mandate, or if demand is weaker than
expected (more on that below), we see risk of flat/down core pricing growth during 2016.
■ Demand is improving seasonally but trends remain soft. Demand has improved sequentially in
4Q through the first week of November for conference attendees (with one TL carrier noting a shift
from being under booked three weeks ago to over booked now and another expecting “good” freight
volumes for the rest of 2015), though September and October were slightly below expectations.
Carriers continue to expect a compressed (mid-November to December 20) peak both in 2015 and as
the new normal peak environment going forward. 2015’s weak peak is largely the result of tepid retail
demand in 2H15, high inventory-to-sales levels, and the continued development of the B2C channel.
■ Expect M&A in the industry moving forward. Following the conference, our stated view on M&A in
the transportation space is unchanged: we expect continued consolidation in this space in upcoming
years given demographic and regulatory changes. We believe consolidation is more likely in the
truckload/brokerage space (following the still-expected ELD mandate in 4Q), though a resumption in
rail mergers remains a possibility (more below). We continue to believe models with key
characteristics (e.g., integrated networks/IT capabilities, strong organizational culture, and
ownership/control of capacity) are best positioned to benefit structurally from continued consolidation
in the space.
- The biggest headline surrounding industry M&A this week came November 9, when a published
report stated Canadian Pacific (CP, Not Rated) was interested in a takeover of Norfolk Southern (N,
$89 PT). Recall, CP approached CSX in 4Q14 with a merger proposal, which was rebuffed. In our
view, continued industry consolidation makes sense, given potential service enhancements
specifically concerning routing alternatives around the congested Chicago market. However,
regulatory approval remains a critical unknown, given the STB raised the standard by which
industry consolidation is judged in 2000 (to require evidence of incremental service enhancement
via mergers, not just service preservation). We suspect CP (and its leadership) strongly believes it
can meet such a standard and is motivated to make its case to the STB. However, a combination
requires a partner – and, to-date, the US Class I rails maintain that industry consolidation does not
make sense given minimal overhead cost savings and the anticipated difficulty in achieving STB
clearance.
- Appetite among trucking carriers at the conference was also strong, but we believe carriers will be
patient, disciplined buyers - allowing valuation multiples to compress into signs of softening
fundamentals in 2015/2016.
November 13, 2015 | Industrial
11Robert W. Baird & Co.
Company-specific Incremental Comments from Conference by Industrial Research Sector
This section includes more company-specific incremental insights/tidbits from select companies in
attendance at the conference. Once again, the order of appearance for each team’s submission is
alphabetized by sector group, and price targets, valuation/justification, and risks for each of the
companies listed below can be found on pages 20-31. Please contact the respective analyst(s) for
additional details.
Advanced Industrial Equipment
■ AME: While CY16 budgeting is ongoing, management does not see any notable changes (“seeing no
catalyst for things to get better or worse”), suggesting baseline planning into CY16 may reflect current
trends--aerospace +MSD, Power +LSD, non-O&G Process Instruments up. O&G trend-line (relative
to CY15 -10%) was not commented upon. Management hinted that CY16E budget process (which
begins next week) would lean heavily toward cost initiatives and M&A to drive EBIT growth. AME has
no plans to divest any businesses.
■ BMI: BMI noted backlog is at record level, seemingly supporting “industry tone” that business
prospects can improve in CY16. Management said its ITRI-related supply issues are “all caught up”
as far as BMI is concerned even though management acknowledged this statement may conflict with
ITRI’s indications that further internal progress may be required to fully resolve ITRI issue. BMI expect
to continue consolidating its indirect distribution channel over the next five years but required capital
to complete the strategy is likely less than $60M as management assesses the opportunity today.
■ CGNX: Management said it was more confident recent wins at Apple can be parlayed into wins with
other large consumer electronics companies in 2016. This comment was based on current
discussions/quoting activity (not yet supported by purchase orders awarded). Life Sciences designs
wins that CGNX has referenced in the past are starting to ramp. CY15 associated LS revenue will be
~$5-10M from just a few platforms that have entered production but management expects additional
new programs and higher volumes in CY16.
■ CLC: PECO, CLC’s natural gas filtration business, we estimate will end FY15 (Nov) with a lower Y/Y
backlog. “There has been some shift in pipeline capital spend as gas is diverted toward LNG
facilities”. However, management was uncertain if PECO could deliver growth in FY16. A $5M
restructuring effort was announced. This initiative is focused on reducing headcount in product lines
that are weak. We expect additional cost actions to be announced over the next twelve months as
CLC reviews its global manufacturing footprint. Management noted some anticipated cost headwinds
for FY16E including; an incremental compensation/profit sharing accrual, step-up in IT and R&D
spend.
■ DCI: In China, OE’s, with first fit revenues under pressure, are intensifying attention on aftermarket
sources and driving more substantive discussions re: building out aftermarket channels and raise
retention via proprietary filtration (e.g., Powercore) albeit proprietary design wins/revenue generation
would be expected to be 3-5 years out. With first fit backdrop weak DCI continues to focus on
expanding market share in Engine with more aggressive liquid filter aftermarket fuel filtration
penetration (with Synteq XP product), as first-fit “wins” have been slower to come to market
■ DHR: DHR expressed confidence on the $300M of targeted PLL cost synergies, appears
incrementally more excited about the working capital opportunity and improvements in certain
customer metrics at PLL and has identified real value in PLL’s inherent ability to commercialize
solutions developed for particular customer problems (which could provide some best practices for
other DHR business units). DHR has imported ~12 executives/operators into PLL to start the
integration. Prior PLL management had created many initiatives for leaning out the organization that
DHR should be able to accelerate and deepen given the wealth of DBS experience and resources it
could bring to bear. NewCo M&A opportunities rank as current priorities. We believe a main objective
of NewCo M&A going forward will be to reduce cyclicality, whether accomplished via end market
exposure or sales mix toward aftermarket service/subscription/consumables.
■ FARO: We still lack full clarity on 3Q FLS weakness (-40% in 3Q) – primary reason for the abrupt
decline appears channel-related, at least partially related to the roll-off of TRMB distribution
agreement, transition of channel toward direct in under-performing regions. Although impact from
November 13, 2015 | Industrial
12Robert W. Baird & Co.
recent Topcon product introduction appears the lesser influence. Anticipated introduction of next-gen
Imager product (disruptive price point, faster imaging speed) has the potential to impact sales growth.
Currently FARO’s revenue from legacy Imager sales is “immaterial”. Sounded like a release likely in
NTM.
■ MSA: A preliminary view of end markets heading into CY16E expects limited recovery in O&G and
general industrial. Mid-stream O&G capital spending holds potential downside. On a potential positive
note, Utility (due to recent OSHA safety regulations), downstream O&G turnaround activity and
Municipal Fire Service spend potentially could be higher next year. Management believes the U.S.
market is in year one of an SCBA replacement cycle, with an expectation that the $1.2-$1.5B
opportunity will extend for an additional 2-3 years. MSA is targeting +10pts of share gain.
■ MTD: China expectations remain muted. MTD anticipates core Industrial spend to continue to decline
into CY16. MTD is forecasting the rate of decline to slow, as comparisons become easier. YTD, MTD
core Industrial sales are -20% (LC). Management is adjusting the cost structure in its China Industrial
business to preserve margin in CY16E, also to put in place visibility for +MSD profit growth on the
potential for +LSD revenue growth in CY17E. MTD China Lab and Environmental businesses
continue to grow, but at a decelerated +MSD% rate. Management feels that its consolidated China,
may not grow “above the group average” until after CY17E.
■ ROP: Management believes the current portfolio of businesses has core growth prospects of
1.5-2.0X GDP, or in case of the current no growth global GDP environment, implied a target rate of
“at least +3.0%”. Optimism that recently acquired Aderant can sustain +HSD growth rate in the near
term, through share gains (and potential technology transition at leading competitor). Longer term,
“Aderant more likely a +LSD% grower”. Management re-emphasized the significance of the MHA and
Sunquest acquisitions, as they provide significant opportunities for bolt-on acquisitions and as
leverage to expand the Medical Solutions platform at ROP.
■ TRMB: Management supported secular opportunities for E&C business/technology use-case and
noted “next 5 years are going to be transformative for vertical construction” (BIM business).
Management confidence remains that secular growth potential for its overall “workflow solutions”
technologies remains 10%+. TRMB views channel strategy as extremely important (“winner of the
game will best perfect the channel”) and just as, if not more, important than the hardware. Relatedly,
recent AGRI-TREND acquisition adds significant strategic value to TRMB, in our opinion, although
revenue contribution was not disclosed. AGRI-TREND provides a much expanded channel to market
for its expanding Precision Ag product portfolio.
Diversified Industrial & Machinery
■ ASTE: Management believes a federal highway bill with six years of spending and three years of
funding will be passed before the current extension expires on November 20. Management expects
ASTE would receive several orders immediately following the highway bill passage from pent-up
demand with orders for incremental mobile pavers and aggregate plants coming later once new
infrastructure projects are determined.
■ ATU: To achieve the FY18 EBITDA target of $300 million (up from $190 million in FY15), $50 million
of EBITDA growth is assumed to be driven by $150-175 million of incremental organic revenue at a
30-35% incremental EBITDA margin. Considering FY16 core revenue is guided down 1-4%,
FY17-FY18 core growth would need to trend in the mid-to-high single-digits. By segment for
FY17-FY18, management assumes 4% annual growth in Industrial (3% from price increases), 5%
annual growth in Engineered Solutions (75% of this growth is currently in the backlog from new
contract wins) and 10% annual growth in Energy (assumes the oil & gas end market recovers at
roughly half the rate as the prior recovery in FY11-12).
■ CAT: CAT is taking a careful approach in eliminating mining capacity (~20% utilization in mining truck
operations) while looking to maintain potential for high incremental margin on future demand
snap-back. Current mining truck fleet is ~20,000 globally, assuming a ten-year average life, this
implies ~2,000 units of replacement demand annually. At the peak, annual mining truck demand was
~3,000, currently expected to be ~400 in 2015 (~200 CAT trucks). Roughly 15% of the current mining
truck fleet is idled (~5% normally) – current levels of fleet idling have been seen for 18 months,
though some of the idled fleet has likely been cannibalized beyond repair.
November 13, 2015 | Industrial
13Robert W. Baird & Co.
■ DOV: While formal 2016 EPS guidance will be introduced at the December 15 analyst day,
management believes EPS can increase in 2016, aided by: 1) M&A accretion (Tolkien expected to be
$0.18/share accretive), 2) lower share count due to past and future buyback activity, 3) lower
restructuring expense in 2016 coupled with restructuring benefits, 4) positive organic growth in
Refrigeration due to easy comparisons from lost WMT business ($115 million in 2015) along with
orders from new customer (national and regional grocery chains), 5) continued stable trends in Fluids
and Engineered Systems, and 6) less of a drag from Energy. Assuming oil & gas activity remains flat
sequentially from current levels, management believes Energy revenue will decline 9-10% in 2016
(down ~35% organically in 2015) with operating margin 14-15% (comparable to 3Q15 margin ex.
restructuring).
■ JOY: Management is focused on generating cash and paying down debt in order to avoid a credit
rating downgrade (Joy’s debt remains investment grade), with inventory still expected to be reduced
by $100 million in the 4Q15, although the current structure of the business requires more inventory
than in the past as JOY has a larger geographic reach, broader product line and higher service
component.
■ LECO: Management pointed to further deceleration in demand in October from levels experienced in
the 3Q15 while expecting further pressure in November and December as OEMs are likely to have
longer shutdowns relative to last year. On a consolidated basis, sales fell 19.2% in October (down
11.5% ex. FX with volume down 16.8%). For North America, sales fell 13.9% (down 10.6% ex. FX
with a 14.6% decline in volume).
■ MTW: The spin-off of the Foodservice Equipment business is still on track for the 1Q16. Management
believes it would be inefficient to delay the spin-off as organization structures have been put in place,
documents have been filed with the SEC, discussions have taken place with the credit rating
agencies and progress has been made on financing for each business. The Foodservice business
has a CEO, CFO and COO in place and is currently operating as if it were an independent company,
including the recent appointment of Tim Fenton, the former COO of McDonalds, to the board of
directors. Foodservice management expects to focus on debt pay-down initially with M&A to follow
(focused on adding cold-side product in Europe).
■ OSK: Management was confident in its FY16 Access outlook based on conversations with large
rental companies (outlook assumes order improvement from recent levels). Access equipment
demand in China could see a boost from change in regulatory environment: the penalty for a
construction worker accident resulting in injury/death on the job increased 10x, management
mentioned penalties of up to $40k per incident. Longer term, management is targeting double-digit
operating margin in the Defense segment.
■ PH: Management does not expect a V-shaped recovery given stronger USD, and excess capacity
globally driving lower demand levels. The distribution and aftermarket businesses have 10-15%
higher gross margins relative to the OE business, part of the reason why Industrial: International
segment (higher mix of OE) margins are lower than Industrial: North America (higher mix of
aftermarket/distribution). Recent weakness in aerospace orders was attributed to OEMs ordering for
production out 9-12 months vs. 18-24 months previously.
■ RXN: A majority of sales and EBITDA are now derived from better-performing water, food &
beverage, and aerospace end markets.
■ SNHY: There was considerable investor interest in the new digital logical valve (DLV) technology:
DLV currently has ~100 units operating in the field on a trial basis, full product launch expected in
December 2015. Management expects DLV to replace electrical actuated valves in existing designs
(potential is somewhat limited to 10-20% of existing designs), with bigger product penetration
opportunity in the next machine design cycle (3-5 years out). DLV appears to have attractive
economics (management provided directional color): it costs less to produce DLV relative to legacy
products but SNHY expects to charge more for the product compared to legacy products (5% royalty
to Sturamen must also be paid). From a technical standpoint, DLV uses ~1% of the power that legacy
products use, allowing OEMs to save on wiring costs while potentially allowing for a wireless product
powered by a solar cell. Ultimately, DLV is expected to not only replace the existing market for
electrically actuated valves but is also expected to expand the market into new applications (Ag).
■ TEX: New CEO bringing operating focus with emphasis on margin expansion and cash flow
generation – this could mark an important positive longer term turn in TEX given existing excess
November 13, 2015 | Industrial
14Robert W. Baird & Co.
capacity across multiple segments and an upcoming operationally complex merger with Konecranes.
From a pricing standpoint (AWP) Haulotte has not attempted to use the lower EUR to gain share in
North America, however Skyjack was noted as particularly aggressive given the lower CAD in an
attempt to gain share in small booms. Pricing pressure is being more-than-offset by material cost
reductions - primarily lower steel prices (10-15% of COGS). On a blended basis, steel costs are down
~22%. Every segment except for AWP purchases steel at the spot rate - steel purchases in AWP are
indexed and lag 3-6 months. Steel-related cost savings should continue through the 1H16.
■ TITN: TITN recently amended its floorplan facility, reducing the interest rate by 100 bps without direct
financial covenants. The early order program has recently become less important compared to past
programs which allowed farmers to take advantage of Section 179; currently bankers are more
restrictive with financing, performing additional due diligence post-harvest. Management believes
Deere was more active with three-year leasing over the summer with high assumed residual values.
Management believes the International segment can be profitable next year in spite of continued
challenges in Ukraine as TITN has removed $5 million in expenses from the segment with further
headcount and store count reductions possible going forward.
Energy Technology/Resource Management
■ CHMT: CHMT expects to have the full benefit of its cost-out program in 2016 and should see positive
benefits from its bromine price increase. CHMT also expects that it and other players in the bromine
market will maintain their price increases. If oil prices rebound in 2016 then input costs could
increase, but currently remain low. CHMT is seeing some softening in Asia, but it is not material at
this point.
■ GLRI: GLRI’s Coke field production decline rate has been flat since deploying the AERO system, and
the company should have reportable results about the AERO impact over the next few quarters.
Additionally, the company continues to see increasing interest in its Services segment as companies
seek to reduce costs and increase output. Acquisition opportunities are also increasing as companies
are looking to divest assets and bolster their cash positions.
■ POWR: POWR is seeing strength in all segments. Datacenter demand continues to drive growth in its
distributed generation segment and POWR expects strong DG growth in 2016. Additionally, POWR
expects its solar business to be ~$25-$35M of revenue in 2017 after the ITC steps down from 30% to
10%. The company continues to evaluate bolt-on acquisitions which it believes it can leverage to
increase sales channels and cross selling opportunities.
■ SCTY: SCTY feels confident its 2016 targets are achievable and is seeing continued strong demand
for residential and commercial projects. The company remains focused on reducing costs and
ramping its manufacturing facility to be well positioned for 2017+.
■ TSLA: TSLA is targeting a $100/kwh battery cost in 2020, and continues to ramp Model X production
which it expects will reach several hundred units per week by YE:15. Additionally, Q4 demand has
accelerated after the release of its autopilot software, including demand in Europe and China.
Exploration & Production
■ CLR: Management expects fewer rigs needed to achieve growth on an eventual upswing in the
industry, perhaps 25% fewer. The company maintains that the industry underestimates the time
required to get crews back into a rebound, which could take 6-12 months to fully staff into upswing.
For context, only 15 completion crews running in the Bakken at present compared to ~50 at the peak.
CLR notes that other firms are running out of core acreage to drill, which will begin to drag on rig
productivity as the current downturn continues.
■ EOG: Management expects total U.S. crude production to trend down to 9.0 MMbbls./d by year-end
with eventual industry rebalancing occurring sometime next year. The company’s pace of drilled but
on completed well (DUC) completions in 2016 will depend on oil prices. Ongoing material gains in
technology have increased the forward return profile on these DUC wells, all else equal. Much of the
field level workforce laid-off in the industry downturn has found other jobs in stronger parts of the
economy.
■ PXD: Management does not model efficiency gains or higher type curves into long range growth
plans, underscoring the potential for fewer rig adds than originally estimated in the coming years. The
current largest efficiency gains in the company’s portfolio come from drilling longer lateral lengths.
November 13, 2015 | Industrial
15Robert W. Baird & Co.
Permian Basin in second or third inning vs. middle innings for Bakken and Eagle Ford. PXD still sees
a 50-60% chance of lifting of crude export ban with current legislative discussion centering around
attaching the measure to the highway or omnibus bill in December.
■ RRC: Management believes that this is a year of differentiation in the upstream industry – the right
companies with the right assets will come out ahead. RRC expects gathering and transportation costs
per Mcfe. to crest in the near term and decline thereafter. Management plans to hold acreage with
Marcellus drilling and develop the Utica at better price points.
General Industrial & Building Products
■ ALLE: Allegion sees improving nonresidential construction activities across most verticals, though
education appears to be a laggard. M&A pipeline remains strong, driven by international targets
though ALLE also sees potential opportunities in North America. Management hints at further margin
improvement potential in EMEIA through consolidation. Interflex the one remaining non-core business
of size.
■ AYI: Acuity expects continued nonresidential lighting market growth in both new construction and
renovation. Juno acquisition is expected to bring enhanced growth opportunities, leveraging Juno’s
strength in retail, hospitality, and residential, and AYI’s distribution and controls capabilities.
■ B: Barnes sees a mixed environment for its industrial businesses with certain markets such as
medical stronger than other such as industrial distribution. Aerospace OEM outlook is positive on the
basis of backlog, though management classifies 2016 as a transition year, with growth expected to
re-accelerate in 2017. Spares are inherently unpredictable though directionally positive given
improved traffic. No change to management view of capital allocation.
■ BGG: Briggs & Stratton continues to focus on innovations, citing recent introduction of Ferris
commercial cutter. BGG to maintain a balanced approach to capital allocation with modest dividend
growth, opportunistic buybacks, and disciplined M&A (likes 6-7X EBITDA).
■ CSL: Carlisle notes commercial roofing volumes have improved since a weak August, which
impacted Q3 comparisons. Management also clarified that pricing pressure noted in Q3 call was
isolated to one competitor in a single product line. CSL is targeting CCM EBIT margin to be flat to up
in 2016, with mid-single-digit revenue growth. Company cites new growth opportunity in CIT, though
notes moving parts in Q4. CSL also has been repurchasing shares during Q4. M&A pipeline also
slightly improved.
■ LFUS: Littelfuse is confident regarding achieving $10m of cost synergies in TE CPD deal, noting
management familiarity and suggesting potential upside. The TE deal likely enables the company to
maintain its 5-year financial targets including acquisitions. In core electronics business, distributor
inventory management remains cautious.
■ LII: Lennox remains confident regarding the current replacement cycle, placing the present day at the
middle innings. Raw materials could be an incremental benefit in 2016. LII’s comments are generally
similar to recent management meetings. Company is likely to provide new 3-year targets at
December analyst day, which we expect to be bullish.
■ MAS: Masco expects a continuation of end market trends in 2016 with repair/remodel growth in a
GDP + 1-2% range and housing starts growth nearing 10%. Management continues to focus on the
cabinet business turnaround, and is not committing to a timeline to make a portfolio decision.
■ MHK: Mohawk is optimistic on US construction outlook despite somewhat choppy residential
repair/remodel fundamentals. Company believes that margin movements related to raw materials
tend to be temporary, but emphasizes structural productivity improvements made. M&A pipeline
remains solid, with smaller opportunities domestically and seemingly more abundant opportunities
internationally. Management agrees that recent SG&A investments signal confidence in the
company’s outlook.
■ MIDD: Middleby believes recent Viking range recall could negatively impact the business in Q4 with
dissipating impact into Q1. Management views current disruption as temporary and remains confident
regarding longer-term strategy in residential. MIDD is targeting 20% EBITDA margins for the AGA
business (5% EBITDA margin in 2014), with margins potentially reaching double-digits in H2-16.
■ PLOW: Douglas Dynamics believes pent-up demand realization is in the middle innings, noting that
strong dealer acceptance of new products and solid orders from areas with average snowfall drove
upside surprise in recent pre-season. Management notes ability to consummate additional
November 13, 2015 | Industrial
16Robert W. Baird & Co.
acquisitions as soon as twelve months post Henderson deal.
■ SSD: Simpson continues to target the truss plate market with software release targeted for Q4.
Testing results for carbon fiber product line also released recently.
■ SWK: Stanley Black & Decker appears optimistic regarding new product introductions in Tools during
Q4, suggesting that launches represent unique applications of existing technologies. Company sees
400bps of margin expansion opportunity in Security, and appears to lean toward selling part(s) of the
business, particularly the mechanical business.
■ TWIN: Twin Disc sees depressed oil & gas market impacting both transmission and marine
businesses. Management focused on right-sizing the business under current restructuring initiatives
and could explore additional rationalization options in the near future.
■ USG: USG believes all end markets will grow in 2016, but notes increased lag between construction
starts and completion. Absence of wallboard pre-buys could impact Q4 volume comparisons.
Although USG has not disclosed timing of wallboard price increase, company hints that it is unlikely to
be on January 1st.
Global Auto & Truck
■ ALSN: The company’s core markets (straight trucks and medium-duty) are expected to remain solid
next year. Allison has limited exposure to the freight hauling truck space which is weakening. Their
off-highway markets, while weak are showing sequential stability (i.e., not getting worse).
■ BWA: Net-net we are in the same place. However, we pulled out of them that the pace of new
bookings for launches in 2018-2020 time frame support 8-10% revenue growth (major incremental
comment); near-term growth is below that (3-5%) due to mix issues with end markets (construction
mining, ag, China/Brazil truck) and customers (VW, Audi, great Wall, Volvo, Navistar). As these
stabilize we should see an inflection in organic revenue growth that would be a major catalyst for the
stock.
■ DLPH: In March, after the analyst day, we suggested this was becoming a tech-focused name in the
space. Today, other than Mobileye, this is now the “go to” tech name across our coverage – active
safety, self-driving cars, electrification, infotainment, interior electronics.
■ GNTX: The short story is based on falling orders for mirrors as cameras rise as a risk to the business.
In our chat, we pulled out of them that the pace of incoming orders supports 8-10% revenue growth
(major incremental comment) through 2018-20 pushing this short story out several years, if it ever
emerges.
■ MOD: Best small-cap value idea. Used their time to present the final step in its transformation that
supports $1.00+ in EPS by 2017.
■ VC: Raising to our single best idea in auto space. Initial presentation of go-forward strategy under
new CEO. Updated previous 2018 outlook (moved higher) and published a 2020 revenue/margin
target that shows inflection as new business booked the next 1-2 years hits the revenue line.
■ WBC: Best business in the truck space. End markets expected to hold up better than consensus
expects coupled with best-in-class execution on margins.
Industrial Distribution
■ ARG: Management more bullish on the US economy longer-term, but current trends are seen as
challenged outside of non-residential construction.
■ AXE: Utility opportunities include filling out the geographic footprint, pursuing new alliance contracts,
and leveraging expected transmission growth.
■ BECN: The company is not as concerned about shingle pricing in 2016, as pre-buy activity is
expected to again be limited this year.
■ CLH: All Technical Services lines of business are expected to be flat-to-higher in 2016.
■ DNOW: Run-rate expense reductions now total $180 million (and still growing), most of which isn’t
expected to come back in an upturn.
■ FAST: If trends stabilize, management believes high-single-digit or better growth is possible as
comparisons ease next year.
■ HDS: The company is working to leverage sales and category management best practices from
Facilities Maintenance and White Cap in the Waterworks business.
November 13, 2015 | Industrial
17Robert W. Baird & Co.
■ MRC: The eventual recovery is expected to be slow due to the supply-driven nature of the current
downturn.
■ MSM: CEO Erik Gershwind characterized the current pricing environment as the most difficult he’s
seen in his 20-year career at the company.
■ POOL: Consistent sales and earnings growth profile attributed to investments in the right people and
technologies, trends continue to steadily improve.
■ STCK: The company's new e-business platform is geared towards improving customer productivity,
which is seen as being especially valuable for smaller customers.
■ WCC: CEO John Engel characterized the current pricing environment as the most difficult he’s seen
in his 11-year career at the company.
■ WSO: Investments in technology (current $20 million run-rate) are not expected to be “outrageously”
higher in 2016, underlying industry trends remain favorable (volume + price/mix).
Industrial Services (Engineering & Construction)
■ AMFW: Amec Foster Wheeler (along with MasTec and Fluor) cited Mexico as an emerging project
market, gaining steam post-deregulation. More prospects to come, though risk profile needs to be
monitored.
■ CBI: Chicago Bridge & Iron sees the massive (~$15B+ total project investment; ~$3-4B booking
potential) Anadarko LNG EPC contract sanctioned in 4Q15, with FID in early 2016. Market has been
more cautious of timeline. We are incrementally positive on CBI, citing the company’s exit from its
large disputed nuclear contracts (through sale to Westinghouse) providing a “cleaner” story today.
Planned 2016 bookings (~$14-16B) combined with an expectation for less cash drain from the nukes
should provide substantially improved cash flow, per management. Management expects ~$200M in
annual buybacks and debt deleveraging to ~1.5x EBITDA over the next 12-18 months, on double-digit
revenue/earnings growth (ex-nukes), attractive, if achieved. Increased shareholder interest post-nuke
divestiture is notable.
■ FLR: Fluor has submitted a bid for BG Group’s Lake Charles LNG project but has no expectation of
near-term decision until the Shell/BG Group deal closes, with project decisions steadily pushed to the
right. Canadian LNG prospects (i.e., Kitimat) are similar. The company sees four additional domestic
ethylene cracker prospects ($1.5-4B each) with FEED contracts expected in 2016. FLR won 3 or the
4 previous cracker awards in 2014-2015. Management sees ethane-based feedstock still preferred,
despite temporary naphtha spread narrowing.
■ MTZ: MasTec cited a 40% organic decline in wireless revenue in 2015, driven largely by AT&T.
Unprecedented.
■ PWR: Quanta Services said that large electric transmission project visibility is “lower than it has ever
been” for the company, a notable change.
Oilfield Services & Equipment
■ NOV: NOV remains focused on those factors that are within its control as both longer- and
shorter-cycle industry dynamics remain challenged. Following a decade of significant capital
investment into well- and production-levered segments, diversifying the portfolio from the traditional
rig business, management continues to see ample opportunity to invest further in counter-cyclical
offerings and remains active on the M&A front. Modest levels of offshore rig orders are expected to
continue but a significant recovery in the newbuild cadence will not occur in the next 2-4 years.
Service activity and technology-enablers will be key areas of opportunity as the industry progresses
along the economic learning curve.
Packaging & Coatings
■ ATR: Management remains cautiously optimistic on the outlook given that cost take-outs, easier
comparisons, improving general market trends, and strong Pharma results are more than offsetting
select pockets of weakness within the business—sluggish overall food & beverage volumes /
unfavorable skincare and haircare trends / slower emerging markets.
■ BLL: Management reiterated an aura of optimism regarding its outlook on organic volume
opportunities given recent capital projects and also on the proposed acquisition of Rexam,
highlighting that Ball remains focused on generating strong FCF via its footprint within a consolidating
November 13, 2015 | Industrial
18Robert W. Baird & Co.
global supply chain.
■ CCK: In an industry that is being shaped by consolidation at current on both a customer
(ABI-SABMiller) and competition (BLL-Rexam) level Crown is no exception, highlighting that the
Empaque and Mivisa integration efforts are well underway, noting also that flexibility will be key
moving forward as the packaging mix continues its shift towards cans (and specialty sizes
specifically).
■ LABL: Although the company’s 2FQ16 report unveiled lower organic volumes (-1%) and pricing
(-1%) relative to expectations based on self-induced actions (exiting lower margin beer business and
customer contract renewals, respectively), management remains confident on future organic growth
(3%-5%), long-term EBITDA margins targets (~20%), and the current M&A pipeline, remembering
that LABL expects to acquire $100 million in revenues per year.
■ PPG: Despite subdued demand across select end markets during 2015 (general industrial, etc.)
management has stayed diligent in pulling levers within its control to aggressively control costs and
outperform sluggish end markets (China auto), while also remaining strategic in deploying ~$2 billion
in cash towards share buybacks and M&A activity.
■ RPM: Positive trends in U.S. commercial construction and housing turnover continue to provide
tailwinds across both the Consumer and Industrial segments, while margin expansion due to lower
raw material costs and internal productivity improvements should provide a buffer to FX headwinds
and significant exposure to the choppy Brazilian economy.
■ SEE: Management reiterated its positive tone despite global macro uncertainty (particularly in the
emerging markets) and FX headwinds based on segment specific tailwinds heading into 2016 that
include an improving U.S. beef cycle for Food Care, increasing e-commerce penetration in Product
Care, and internal productivity improvement in Diversey Care.
■ SON: While management has acknowledged that the heightened complexity of the business
stemming from a broad spectrum of product lines, substrates, and end markets can be tough to
navigate, momentum in select businesses has lifted performance with Protective, Consumer, and
M&A (Weidenhammer) offsetting Industrial segment softness.
■ SHW: Management portrayed a clear sense of optimism heading into 2016 based solid household
formation trends, strong U.S. commercial construction backlogs, and a snap-back in residential
repaint activity in the context of a new leadership team beginning next year as Chris Connor exits the
company and John Morikis moves into the CEO role.
Process Controls
■ AOS: Management remains very confident in their organic growth targets both in China (they expect
15% constant currency sustainably through a cycle) and for the company as a whole (~8%
sustainably). NA profitability appears sustainable in the 19-20% range moving forward, while ROW
margins likely remain around the mid-teens long term.
■ CFX: Management has highlighted expectations for a difficult environment over the next 6-9 months
and will need to see how the environment trends into the middle of 2016 to get a better feel for a
potential rebound. Lincoln Electric (ticker: LECO, covered by Baird analyst Mig Dobre) highlighted
worsening welding trends in October vs. 3Q15 run-rate at our conference, showcasing the underlying
welding headwinds for CFX’s Fab Tech division (50% of revenue).
■ FLOW: In handicapping Food & Beverage sales in 2016, management noted a good case would be
low-single digit growth, predicated on some of the larger frontlog opportunities being booked in the
next two quarters. Downside analysis is more difficult, but assuming no large OE projects (~50% of
segment is OE, within that ~25% is truly “up for grabs” $25-50 million projects), the company would
be surprised if the decline exceeded 10%.
■ GGG: Contrary to more bearish views on the 4Q and 2016 outlook, management does not see
demand deteriorating in the coming quarters, driven by healthy construction fundamentals in the
Americas along with positive growth in Western and Central Europe. Emerging markets remain tough,
and there has been some slowing/continued softness in industrial markets and China, though
management is optimistic 2016 will prove to be less challenging than 2015.
■ IEX: Management views the industrial slowdown that has played out in recent months as caused by
lower levels of demand in NA and China that emerged in 2Q/3Q rather than elevated inventory levels
to start with. Inventory levels are now being taken down to reflect the deterioration in the demand
November 13, 2015 | Industrial
19Robert W. Baird & Co.
environment, and the company expects 4Q15 and 1Q16 to be very challenging broadly for industrials
as a result of companies adjusting to this new reality.
■ ITT: Management remains confident in its ability to expand margins, most notably ICS and IP.
Despite headwinds entering next year, this margin confidence extends into Industrial Process
division, where mix (toward baseline and aftermarket), significant restructuring/repositioning, and
additional cost actions are expected to drive year/year margin gains. Confidence in the near- and
medium-term Motion growth prospects remains high.
■ PNR: Management continues to emphasize that its Valves & Controls segment can hold margin in
2016 even in the face of ongoing top-line pressures and the potential for another leg down in oil & gas
capital expenditures. Further, management remains confident in Flow & Filtration long-term
opportunities as new leadership is expected to capitalize on attractive growth and margin
opportunities.
■ WTS: The company sees continued healthy NA trends into 2016 balanced against continued
selectivity and discipline around pricing of the full product offering, while Europe is being planned for
flattish demand into 2016 as management continues to work on the cost structure (contemplating
further actions). To that end, WTS is targeting a mid-teens operating margin over time aided by
Transformation benefits.
Transportation/Logistics
■ HTLD: With an ELD mandate and good peak season demand, pricing growth in 2016 is expected to
be +3-5% year/year; otherwise, +1-3% year/year. Don’t see negative pricing in 2016 unless an ELD
mandate is not adopted and the holiday season demand is worse than expected. E-commerce has
shifted peak permanently to November-December. Still targeting low-to-mid 80% OR. Believe an ELD
mandate will be an even bigger deal than most observers assume.
■ JBHT: Incrementally positive. 2016 expectations introduced at our conference for overall operating
income growth met consensus estimates. JBHT's Intermodal load growth target for 2016 (+8-10%
year/year) was ahead of expectations on share gains (assumed volume growth is likely to be roughly
2x underlying domestic intermodal load growth next year).
■ KNX: Currently seeing typical season demand improvement in 4Q, and view loads under ~700 miles
as safe from intermodal conversion in the current fuel/service environment. Core pricing is expected
to be up 2-4% year/year in 2016.
■ ODFL: Incrementally positive. A weak macro and potential aggression among competitors remain the
biggest risks to ODFL in 2016, but a weak macro environment could also put ODFL in a good position
as an LTL consolidator (as small regional LTLs struggle, and ODFL can take advantage of its strong
balance sheet). Additionally, XPO’s recent acquisition of CNW was cited as putting 3PL business
back into the market (an opportunity for additional share gains).
■ R: Incrementally negative. No incremental points, but FMS margins will be negatively impacted by
weaker used truck pricing in 2016. Consensus 2016 EPS estimates remain too high, in our view
($6.85, versus our unchanged $6.62 estimate).
■ SWFT: Seeing signs of “peak” in November. Confident in company-specific margin improvement
across its business units in 2016. Healthy cash generation (10-15% estimated FCF yield in 2016)
supports new share repurchase authorization and incremental deleveraging.
■ UNP: Expects modestly positive volume growth over the next five years. Sees coal-fired electricity
generation as a percent of total in the low 30%s by 2019, suggesting a 1-2% annual coal volume
decline in upcoming years (versus -5% year/year annual declines in recent years).
■ WERN: Seeing normal seasonal volume pick-up, with WERN noting a shift from being underbooked
three weeks ago to overbooked now. Pricing is expected to be up +2-4% in 2016 assuming passage
of the still-expected ELD mandate during 4Q15. Targeting +2-5% fleet growth, if the market will allow.
View increasing average amount of driver experience as the biggest opportunity to drive utilization
improvement
November 13, 2015 | Industrial
20Robert W. Baird & Co.
Price Target, Valuation/Justification, and Risks for Covered Stocks Mentioned
Advanced Industrial Equipment
■ AMETEK (AME-Outperform): Our $56 price target assumes mid-cycle multiple, with shares trading
at 11.5X our CY16E EV/EBITDA forecast, compared to AME's historical 8X-12X trading range. Risks
include reliance on acquisitions, access to capital markets and macroeconomic factors.
■ Badger Meter (BMI-Neutral): Our $59 price target (13X CY16E EV/EBITDA), compares to BMI's
9X-15X, 10-year trading range and reflects a slightly above midpoint target multiple reflective of
current depressed (cyclical) impact from YTD-15 (weather, O&G, FX). Risks include trading
liquidity/earnings volatility, municipal spending trends, and elongated utility customer technology
adoption.
■ CLARCOR (CLC-Neutral): Our $53 price target is based on 10X our FY16E EV/EBITDA, versus
CLC's historical 8X-11X trading range, with the above midpoint target multiple reflecting future
sales/profit growth prospects of GE Air/Stanadyne acquisitions and our expectation CLC's increased
level of growth investments will drive sales and profit returns. Risks include economic recovery,
acquisitions/integration, success of cost reduction initiatives, and IT/other growth investments.
■ Cognex (CGNX-Neutral): Our $37 price target assumes 13X CY16E EBITDA, within CGNX's
historical NTM EV/EBITDA range of 11X-15X. Also equates to 21X our CY16E EPS $1.35, plus ~$9
in ending CY16E cash per share. Risks include cyclical end markets, patent litigation/protection and
continued penetration in the factory automation/bar code scanning markets to support strong +DD
top-line expectations.
■ Danaher (DHR-Outperform): Our $98 price target is based on shares trading at 19.5X our adjusted
EPS of $5.03 (or 13X our CY16E EBITDA), at the upper end of DHR's eight-year average NTM P/E
range of 17X-21X. Separating DHR into two entities should offer a better valuation perspective on the
respective entities and improved access to growth capital by NewCo. Price target also reflects
continued confidence in internally funded growth investments, productivity leverage from DBS. Risks
include acquisition integration, maintaining organic sales and cash flow growth.
■ Donaldson Co. (DCI-Neutral): Our $32 price target assumes shares trade at 11X and 19X our
CY16E EV/EBITDA and EPS forecasts, respectively, versus DCI's historical 9X-13X (EV/EBITDA)
and 16X-23X (P/E) trading range. Risks include global economy demand, currency, and raw
materials costs/pricing.
■ FARO Technologies (FARO-Neutral): Our $37 price target assumes 9X CY16E EBITDA (or 17X
CY16E EPS, less ~$11/share CY16 ending cash), at the low end of 9X-13X AIE peer group average,
reflecting limited confidence/visibility in our CY16E forecasts. Risks include limited sales visibility/no
guidance, market potential/adoption rate, ability to grow sales faster than expenses, competition and
acquisition integration.
■ MSA Safety (MSA-Outperform): Our $52 price target assumes shares trade at 11X our CY16E
EV/EBITDA, at the high end of MSA's five-year 7.5-11.0X EV/EBITDA trading range, reflecting
expectations for continued share gains, also accelerating sales/margin/EPS in CY16E off a FX and
O&G depressed CY15 base. Risks include industrial business cycle, government security subsidies,
product liability and exposure to O&G end markets.
■ Mettler-Toledo International (MTD-Neutral): Our $315 price target reflects 13X CY17E EV/EBITDA
(historical range of 9X-14X), also reflects 19.1X CY17E EPS within MTD's seven-year average P/E
trading range of 14X-23X. We also note MTD's franchise strength, history of strong execution,
emerging market presence/growth potential and free cash flow generation. Risks include sales into
mature markets, economic sensitivity, and currency translation.
■ Roper Technologies (ROP-Neutral): Our $175 price target assumes 13.0X CY16E EV/EBITDA
(23X CY16E EPS), at the upper end of ROP's historical (10-year) EV/EBITDA 9.5X-13X trading range
(16.5X-23.5X P/E trading range), capturing elevated NTM inorganic EBITDA contribution/potential for
added contribution. Risks include exposure to municipal spending and budgets, global economic
conditions, continued ability make/integrate acquisitions and oil and gas end markets.
■ Trimble Navigation (TRMB-Outperform): Our $24 price target (13X CY16E EV/EBITDA) equates to
18.5X CY16E adjusted EPS. This falls outside TRMB average trading range of 19X-23X NTM EPS
the past 10 years but reflects, in our view, the risk around CY16E viability/confidence. Risks include
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21Robert W. Baird & Co.
sensitivity to global economic conditions, commodity markets, limited sales visibility, and continued
investor acceptance of non-GAAP accounting.
Diversified Industrial & Machinery
■ Actuant (ATU-Neutral): Our $21 price target is based on our calendar 2016 earnings estimates,
averaging P/E as well as EV/EBITDA based valuation. Our target assumes ATU can achieve a
late-cycle 15x P/E multiple of our $1.39 EPS estimate and/or a 10.0x EV/EBITDA multiple of our
EBITDA estimate (~$179 million). Risks include global economic growth; (convertible) auto, RV,
construction, farm, European truck, oil & gas and general industrial market fundamentals; solar
subsidy levels; and acquisition integration.
■ Astec (ASTE-Outperform): Our $41 price target assumes ASTE can achieve a 20x P/E multiple of
our $1.90 estimate for 2016 EPS power and/or a 10x EV/EBITDA multiple of our estimate for 2016
EBITDA (~$90 million). Our price target is based on our estimates for late-cycle earnings and target
multiples that are consistent with the high end of valuation metrics experienced at prior late business
cycles (primarily 1997-98 and 2007-08). We then calculate the (average) present value of our
late-cycle targets, discounted back to a year from now. Risks include global economic growth; rising
foreign exchange value of US$; highway construction funding; nonresidential construction spending;
oil, stone, and steel prices; acquisitions and integration; and management succession.
■ Caterpillar (CAT-Neutral): Our $74 price target assumes CAT can achieve a 20x P/E multiple of our
$3.50, 2016 estimate and/or a 10x EV/EBITDA multiple of 2016 EBITDA (~$4.8 billion) plus the
estimated future book value of CAT Financial. Our price target averages the results of the P/E and
EV/EBITDA methods and is based on target multiples that are consistent with valuation metrics
experienced at prior troughs (primarily 2002-2003 and 2009-10). Risks include global economic
growth; residential and nonresidential construction, quarrying and mining, power generation,
industrial, oil and gas, marine, road construction, and forestry industry fundamentals; acquisition
integration; and CPS implementation.
■ Dover (DOV-Neutral): Our $66 price target assumes DOV can achieve a 17.0x P/E multiple on our
2016 EPS estimate and/or a 9.5x EV/EBITDA multiple of our estimate for 2016 EBITDA (~$1.35
billion). Our price target reflects multiples that are the average of valuation metrics experienced
during prior late portions of the business cycle (primarily 1997-98 and 2007-08). Risks include global
economic growth, consumer confidence and spending, industrial production and capital spending;
electronics, foodservice, automotive, and general industrial fundamentals; currency fluctuations;
acquisition pricing and integration.
■ Manitowoc (MTW-Outperform): Our $15 price target assumes MTW can achieve a 20.0x P/E
multiple of our $0.75 estimate 2016 EPS and/or a 10.0x EV/EBITDA multiple of our estimate for 2016
EBITDA (~$352 million). Our price target is based on our estimates for late-cycle earnings and target
multiples that are consistent with the high end of valuation metrics experienced at the prior late cycles
(primarily 1997-98 and 2007-08). We then calculate the (average) present value of our late-cycle
targets, discounted back to a year from now. Risks include global economic growth; high financial
leverage; residential and non-residential building construction activity, foodservice fundamentals;
input costs; acquisition integration; and foreign currency fluctuations.
■ Oshkosh (OSK-Outperform): Our $48 price target assumes OSK can achieve a 17.0x P/E multiple
of our $3.40 estimate for CY16 EPS and/or a 7.0x EV/EBITDA multiple of our estimate for CY16
EBITDA (~$553 million). Our price target is based on target multiples that are consistent with
machinery valuation metrics experienced toward the later portion of past business cycles (primarily
1997-98 and 2007-08). Note: Our multiples take into account the $6.7 billion JLTV contract win, with
the potential for $30 billion in JLTV revenue (through 2040). Risks include global economic growth;
construction spending; municipal spending; commercial waste hauler and equipment rental capital
spending; federal defense budgets; success competing for new military program contracts; and
financial leverage.
■ Parker Hannifin (PH-Neutral): Our $99 price target assumes PH can achieve a 15.0x P/E multiple of
our $6.49 estimate for CY16 EPS power and/or a 10.0x EV/EBITDA multiple of our estimate for CY16
EBITDA potential (~$1.6 billion). Our price target is based on multiples that are consistent with
valuation metrics experienced during prior late business cycles. Risks include global economic
growth; automotive, commercial vehicle, mobile equipment, industrial machinery, HVAC, and
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22Robert W. Baird & Co.
commercial and military aerospace fundamentals; acquisition pricing and integration; foreign
exchange rates.
■ Rexnord (RXN-Outperform): Our $23 price target assumes RXN can achieve a 15.0x P/E multiple
of our estimate for CY16 EPS ($1.49) and/or a 10.5x EV/EBITDA multiple of our estimate for CY16
EBITDA (~$385 million). Our price target is based on our estimates for late-cycle earnings and target
multiples that are consistent with historical late-cycle valuation metrics of comparable companies.
Risks include global economic growth; commodity prices; nonresidential construction fundamentals;
foreign currency fluctuations; acquisition integration; acquisition availability and pricing.
■ Sun Hydraulics (SNHY-Neutral): Our $30 price target assumes SNHY can achieve a 25.0x P/E
multiple of our $1.15 estimate for 2016 EPS and/or a 13.0x EV/EBITDA multiple of our estimate for
2016 EBITDA (~$54 million). Our price target is based on our estimates for late-cycle earnings and
target multiples that are consistent with valuation metrics experienced during prior late business
cycles (primarily 1997-98 and 2007-08). Risks include global economic growth; mobile and industrial
equipment demand; and foreign currency fluctuations (euro, sterling, and won).
■ Terex (TEX-Neutral): Our $24 price target assumes TEX can achieve an 11.0x P/E multiple of our
$2.00 estimate for 2016 EPS and/or a 7.5x EV/EBITDA multiple of our estimate for 2016 EBITDA
(~$550 million). Our price target is based on multiples that are consistent with valuation metrics
experienced during prior late business cycles (primarily 1997-98 and 2007-08) and takes into account
TEX’s proposed merger with Konecranes in the 1H16. Risks include global economic growth;
commodity prices; nonresidential construction and equipment rental fundamentals; foreign currency
fluctuations; acquisition integration; acquisition availability and pricing.
■ Titan Machinery (TITN-Neutral): Our $14 price target is based on our FY17 earnings estimate,
assuming TITN can achieve a 50x P/E multiple of our $0.25 EPS estimate and/or a 16x EV/EBITDA
multiple of our adjusted EBITDA estimate ($48 million). Our price target is based on multiples at the
high end of the observed historical ranges (8-70x and 5-24x, respectively), accounting for the cyclical
downturn in North America ag. Risks include commodity prices and US ag fundamentals; farm
equipment demand; regional economic conditions, construction and equipment rental fundamentals,
inventory financing terms, acquisition availability and pricing.
November 13, 2015 | Industrial
23Robert W. Baird & Co.
Energy Technology/Resource Management
■ Chemtura Corporation (CHMT-Outperform): Our $35 price target is based on 8.5x EV/EBITDA
multiple using our 2016 estimates, which is in line with chemical comps (currently ~8.5x). Risks
include ongoing weakness in flame retardant end markets, cost overruns, and environmental
regulations.
■ Glori Energy (GLRI-Outperform): Our $4 price target is based on EV/EBITDA multiple of 3.0x our
2017 estimate. This is in line with E&P comps currently trading at ~3.0x. Risks include commodity
price volatility, regulatory changes, technology risk, oil field acquisition risk, and customer
concentration risk.
■ PowerSecure (POWR-Outperform): Our $18 price target is based on a ~10x EV/adj. EBITDA
multiple using our 2016 estimate. This is above POWR’s comps, which are currently trading near a
mean of ~8.2x, which we think is justified given POWR’s high growth trajectory across several
markets. Risks include customer concentration, long utility purchasing cycles, and limited number of
suppliers.
■ SolarCity (SCTY-Neutral): Our $60 price target is based on our estimates of the net present value of
SCTY's current contracted projects and our estimates of levered retained value for projects deployed
through 2028. We discount our estimates to YE:2015 using an 11% discount rate. Risks include net
metering headline risk, challenges in scaling, and financing risk.
■ Tesla Motors (TSLA-Neutral): Our $282 target price is based on a P/E of 32x on our 2020 EPS
estimate of ~$18 discounted back at a 20% discount rate. This is in line with other category creators,
which currently trading at a forward P/E range of 17.5x-222x and a median of 48x. Risks include
production issues, slow acceptance of EVs, and unfavorable changes to federal incentives for EVs.
Exploration & Production
■ Continental Resources (CLR-Neutral): Our $34 price target is based on an average of our risked
net asset value ($24/share PDP value + $38/share unproved inventory value - $20/share debt and
balance sheet items) and $27/share EV/EBITDAX multiple (9x NTM EBITDAX). Risks include
volatility in oil and natural prices, development execution, availability and costs of drilling and
completion services, unexpected severe weather, geological risk, and regulatory and environmental
issues.
■ EOG Resources (EOG-Outperform): Our $92 price target is based on an average of our $100
RNAV ($34/share PDP value + $77/share unproved inventory value - $12/share debt and balance
sheet items) and $83/share EV/EBITDAX implied target (12x NTM EBITDAX). Risks include volatility
in oil and natural prices, development execution, availability and costs of drilling and completion
services, unexpected severe weather, geological risk, and regulatory and environmental issues.
■ Pioneer Natural Resources (PXD-Outperform): Our $178 price target is based on an average of
our $233 RNAV ($51/share PDP value + $188/share unproved inventory value - $8/share debt and
balance sheet items) and $122/share EV/EBITDAX implied target (11x NTM EBITDAX). Risks include
volatility in oil and natural prices, development execution, availability and costs of drilling and
completion services, unexpected severe weather, geological risk, and regulatory and environmental
issues.
■ Range Resources (RRC-Outperform): Our $178 price target is based on an average of our $54
RNAV ($24/share PDP value + $47/share unproved inventory value - $18/share debt and balance
sheet items) and $25/share EV/EBITDAX implied target (10x NTM EBITDAX). Risks include volatility
in oil and natural prices, development execution, availability and costs of drilling and completion
services, unexpected severe weather, geological risk, and regulatory and environmental issues.
General Industrial & Building Products
■ Acuity (AYI-Outperform): Our $228 price target represents 28X our F2017 EPS estimate (including
an estimated $0.30 of accretion from Juno), which is relatively consistent with the one-year average
of 28X NTM. This also represents a ~65% premium to the NTM EPS multiple of the S&P, consistent
with the ~65% average premium for AYI over the past year (70%). Risks include cyclical
nonresidential construction market, competitive industry, risks related to migration towards LED and
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24Robert W. Baird & Co.
other technological changes, potential industry pricing pressure, and rising and/or volatile raw
material costs.
■ Allegion (ALLE-Outperform): Our $72 price target reflects 19.2X prospective 2017 EPS and 14.2X
prospective 2017 EBITDA. These multiples are relatively consistent with the company’s averages
since the spin two years ago (20.1X NTM PE and 13.6X NTM EBITDA). Risks include cyclical end
markets, ability to successfully consummate or integrate acquisitions, technology risks with migration
to electronics, turnaround in EMEIA, rising and/or volatile commodity costs, FX, dependence on
favorable tax status.
■ Barnes (B-Neutral): Our $40 price target reflects 15X 2017P EPS and 8.8X 2017P EBITDA,
consistent with the company's three-year average NTM multiples of 14.9X and 8.7X, respectively.
Risks include cyclical end markets, market entrance risks, ability to find and successfully integrate
acquisitions.
■ Briggs & Stratton (BGG-Outperform): Our $23 price target is based on a 15.5X NTM P/E applied to
our prospective C2017 EPS estimate of approximately $1.45. The target multiple is consistent with
BGG’s long-term forward P/E multiple (15.4X) and the average multiple over the past year (15.7X).
The target multiple represents a 10% discount to the S&P multiple, which we believe is appropriate
considering lower growth and return profile. Risks include cyclical consumer end markets, exposure
to seasonality and weather, rising and/or volatile commodity costs, customer concentration, channel
conflicts with OEM customers, low-cost competition, and changes in emission standards.
■ Carlisle (CSL-Outperform): Our $98 price target is based on a 17X P/E multiple applied to our
prospective 2017 EPS estimate of $5.80. The target multiple is in line with CSL’s current NTM P/E
multiple (16.8X), which we believe is appropriate considering that the prospective 2017 EPS reflects a
continuation of the ~10% earnings growth profile seen in 2016. The target multiple is above CSL’s
historical average (15X), though we believe appropriate due to a higher return portfolio of businesses
versus a few years ago. Risks include economic sensitivity, changes in competitive dynamics (i.e.,
pricing, distribution), acquisition integration, FX.
■ Douglas Dynamics (PLOW-Neutral): Our $24 price target is based on the base case of our scenario
analysis which assumes normalized snowfall levels with legacy PLOW achieving equipment units
sold of roughly 55K and EBITDA of around $60m+ in 2016. Onto this we add pro forma contribution
from Henderson. Assuming an 10.5X NTM EV/EBITDA multiple on the normalized earnings level
would result in a $24 stock in 12 months. The multiple is above the current NTM EBITDA multiple
accorded PLOW's outdoor peers, but we believe appropriate considering the company's strong FCF
generation profile and well-above-market dividend yield. Risks included dependence on timing,
location, and amount of snowfall, macroeconomic conditions, exposure to dealer confidence, channel
inventory risks, seasonality.
■ Lennox (LII-Outperform): Our $140 price target reflects 19.3X prospective 2017 EPS and 11.7X
prospective 2017 EBITDA. These are modest premiums vs. the company’s three-year averages of
18.5X NTM EPS and 11.2X NTM EBITDA. We believe a premium to those ranges is fair, given LII’s
differentiated growth prospects (HVAC replacement cycle, company-specific growth/margin
initiatives) and history of shareholder friendly capital deployment, with potential for 20% EPS growth
particularly attractive in a choppy US industrial environment. On a relative basis, the 19.3X EPS
multiple reflects a 15-20% premium vs. the NTM S&P, relatively consistent with the 20% average
premium LII has garnered over the past three and five years. Risks include exposure to cyclical
housing and commercial construction markets, competitive market dynamics, weather fluctuations,
regulatory wildcard, rising and/or volatile commodity costs, and FX exposures.
■ Littelfuse (LFUS-Outperform): Our $124 price target is based on a 19X NTM P/E multiple applied to
our prospective 2017 EPS estimate of $6.50 which includes the pending TE CPD acquisition. The
multiple is about a 10% premium to the current S&P multiple, within the 5-10% premium LFUS has
averaged over the past five years. Risks include cyclical markets, short-cycle electronics business,
pricing pressure, rising and/or volatile commodity costs, low-cost competition, FX, and ability to find
and successfully integrate acquisitions.
■ Masco (MAS-Neutral): Our $30 price target reflects 10X 2017P EBITDA, a modest premium to the
Building Product peer set at 9.5X NTM EBITDA. We believe MAS deserves a premium to the group,
given its stable of high-quality brands and improved recent execution. Risks include exposure to
cyclical housing markets, client concentration (Home Depot, Lowe’s), competitive industry dynamics
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25Robert W. Baird & Co.
(pricing, distribution), FX, raw material fluctuations.
■ Middleby (MIDD-Outperform): Our $132 price target is based on 25.5X P/E multiple applied to our
prospective 2017P EPS. The multiple is relatively consistent with the three-year average multiple
accorded MIDD (24.6X). On a relative basis, it represents a 55% premium to the NTM S&P,
consistent with the three-year average of 58% premium for MIDD. Risks include cyclical end markets,
volatile Food Processing spending, rising and/or volatile commodity costs, ability to find and
successfully integrate acquisitions, market entrance uncertainties, key CEO.
■ Mohawk (MHK-Outperform): Our $224 price target reflects 10.5X prospective 2017 EBITDA,
relatively consistent with the company’s current 10.7X 2016E EBITDA multiple and the median of
peer NTM multiples of 11.3X. We believe MHK could trade at a similar multiple to higher-quality
building product peers (e.g., FBHS, MAS, SWK) – while we believe other categories have better
structural dynamics, MHK’s strong track record of execution and capital allocation offset this, in our
view. Risks include cyclical end markets, exposure to consumer preference, competitive industry,
rising and/or volatile commodity costs, FX, ability to find and successfully integrate acquisitions,
expiring UNICLIC patents.
■ Simpson (SSD-Neutral): Our $37 price target is based on a 9X NTM EBITDA multiple applied to our
prospective 2017 EBITDA estimate of approximately $175m. This is below the current NTM EBITDA
multiple (10.7X) considering the progression towards mid-cycle. The target multiple is also consistent
with SSD’s historical forward EBITDA multiple. Risks include cyclical end markets, rising and/or
volatile commodity costs, potential pricing competition, ability to find and successfully integrate
acquisitions, and high insider ownership.
■ Stanley Black & Decker (SWK-Neutral): Our new $115 price target reflects 16X 2017P EPS, or
roughly in line with the S&P, consistent with the company’s historical relative valuation vs. the S&P
(over the past three years, -2% premium vs. S&P). On an EBITDA basis, 10X is consistent with the
average NTM EBITDA multiple of 9.7X over the last three years. Risks include cyclical end-market
exposure (construction, automotive, industrial, oil & gas), customer concentration, acquisition
identification and integration, FX (translational and transactional), competitive dynamics (pricing,
distribution), debt leverage.
■ Twin Disc (TWIN-Neutral): Our $12 price target is based on approximately 1.0X tangible book value.
Historically shares have traded at an average of 2.3X tangible book, but during periods of business
distress, tangible book value has provided valuation support. Risks include cyclical end markets,
concentrated manufacturing footprint, and ability to find and successfully integrate acquisitions.
■ USG (USG-Neutral): Our $30 price target is based on a sum-of-the-parts analysis based on 2017
prospective EBITDA of nearly $780m. We generally have USG trading at modest discounts to peer
NTM EBITDA multiples due to lower margins in comparable businesses. The blended multiple is
7.1X. Risks include economic sensitivity to regional construction markets, competitive industry
dynamics (pricing, distribution), volatile commodity costs, customer concentration (Home Depot), and
financial leverage.
Global Auto & Truck
■ Allison Transmission (ALSN – Outperform): Our $35 price target is based on 11.4x estimated
calendar-2017 EBITDA, valuation observed during prior periods of 3% GDP growth, discounted by
10%. Risks include increasing competition from suppliers/OEMs that “automate” manual
transmissions, mimicking the performance of automatic transmissions, exposure to key customers,
particularly Daimler and Navistar at 17% and 10% of revenue, respectively, the cyclical nature of core
on-highway truck markets and off-highway mining/energy markets, the currently high level of debt and
ability to meet future obligations, a premium valuation and risks associated with maintaining this level,
and the potential impairment of intangible assets.
■ BorgWarner (BWA – Neutral/Average Risk): Our $48 price target is based on 7.0x estimated 2016
EBITDA, median of the auto suppliers, plus 2016 estimated equity income less minority interest at
15.0x EPS. Risks include end market demand, particularly in global commercial vehicle, the
timing/pace of new product launches to drive outperformance, acquisition integration efforts, and
foreign exchange/commodity prices.
■ Delphi Automotive (DLPH – Outperform): Our $94 price target is based on 9.1x estimated 2016
EBITDA, median valuation of high-quality automotive supplier peer group during the last cycle. Risks
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26Robert W. Baird & Co.
include end market demand, particularly in commercial vehicle markets, exposure to key customers
and take rates of Delphi content (notably at GM in North America), commodity prices (notably copper,
which is a pass through but can distort margins), new technology advancements.
■ Gentex (GNTX – Outperform): Our $22 price target is based on 9.8x estimated 2016 EBITDA,
bottom 25th percentile of the 2005-2009 trading range. Risks include end market demand, adoption
rates for mirrors and mirror-related content among automotive buyers, ability for margins to
stabilize/improve with capacity addition plans largely complete, investments in R&D to introduce new
products, ability to win new mirror program awards, new technology advancements.
■ Modine Manufacturing (MOD – Outperform): Our $16 price target is 7.1x estimated calendar 2017
EBITDA, valuation observed during prior periods of 3% GDP growth, discounted by 25%. Risks
include cyclical end markets, raw material costs, major customers/programs, launch costs, modeling
risk.
■ Visteon (VC – Outperform): Our $132 price target is based on 8.5x estimated 2016 EBITDA, the
current valuation of Electronics peers. Risks include end market demand, competitive positioning,
uncertainty with capital deployment, foreign exchange, modeling risk, raw materials, legacy liabilities,
and tax status.
■ WABCO Holdings (WBC – Outperform): Our $147 price target is based on 13.4x calendar 2017
EBITDA, median valuation of the current up cycle (2014-present), plus per share equity income net of
minority interest at 20.0x earnings, discounted at 10%. Risks include cyclical end markets, commodity
prices, foreign exchange, major customers, costs to develop new technologies, and ability to invest
and win new business to sustain above-market growth.
Industrial Distribution
■ Airgas (ARG-Neutral): Our $101 price target is based on 9.5x EV/C017E EBITDA, equal to the
10-year NTM average. Risks include general U.S. economic conditions, demand/pricing, SAP
post-implementation, and opening/operating ASUs.
■ Anixter International (AXE-Neutral): Our $73 price target is based on 8x EV/2017E EBITDA, vs. the
8-9x NTM historical range for the Electrical & Datacomm distributors. Risks include copper prices,
global economic conditions, customer capital expenditure trends, and acquisition integration.
■ Beacon Roofing (BECN-Outperform): Our $40 price target is based on ~10x EV/2016E EBITDA
including theoretical RSG accretion, equal to the historical NTM multiple. Risks include underlying
replacement trends for residential and nonresidential roofing, new construction, pricing, and storm
activity.
■ Clean Harbor (CLH-Neutral): Our $50 price target is based on 7.5x EV/2017E, below the low end of
the long-run NTM average of 8-9x given uncertainty surrounding the company's energy-related
businesses, but consistent with current TTM and NTM levels. Risks include maintaining utilization
rates, partially unionized workforce, exposure to crude/base oil prices, acquisition integrations,
environmental liabilities, changes in regulation, and cyclicality.
■ NOW (DNOW-Neutral): Our $20 price target is based on 0.6x EV/2017E sales, roughly equal to the
multiple used for close peer MRC, as EBITDA valuation multiples are less meaningful due to
depressed earnings power. Risks include economic sensitivity, oil & gas exposure, high customer
concentration, international operations, acquisitions and stock volatility.
■ Fastenal (FAST-Neutral): Our $43 price target is based on ~11x EV/2017E EBITDA / 20x 2017E
EPS, in line with recent levels but below historical averages due to elevated cyclical headwinds. Risks
include economic sensitivity, pricing power, relatively high valuation, success of "Pathway to Profit"
initiative, ability to sustain historical growth rate, margins, and return trends.
■ HD Supply (HDS-Outperform): Our $40 price target is based on 12x EV/2016E EBITDA, below the
~13x NTM average since the mid-2013 IPO for the sake of conservatism. Risks include economic
conditions, construction cyclicality, weather, high leverage, geographic concentration, commodity
exposure/pricing power, and supplier concentration.
■ MRC Global (MRC-Neutral): Our $17 price target is based on 0.5x EV/2017E sales, equal to the
one-year NTM average and roughly equal to the multiple used for close comparable DNOW, as
EBITDA valuation multiples are less meaningful due to depressed earnings power. Risks include
energy industry cyclicality, overall economic sensitivity, commodity exposure, significant
customer/supplier concentration, and international operations.
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27Robert W. Baird & Co.
■ MSC Industrial Direct (MSM-Neutral): Our $69 price target is based on 9.0x EV/C2017E EBITDA,
below the five-year NTM average (~10.5x) due to elevated cyclical headwinds and high earnings
uncertainty, but equal to recent levels. Risks include economic sensitivity, pricing power, relatively
high valuation, high exposure to durable goods OEMs, sustainability of historical growth/margin
trends, and two classes of stock.
■ Pool Corporation (POOL-Neutral): Our $85 price target is based on 13.5x EV/2017E EBITDA and
23x 2017 EPS, consistent with the three-year NTM averages (13.5x and 23x, respectively). Risks
include weather, new residential housing trends/attach rates, consumer confidence, pool financing
options, acquisitions, high historical valuation, and sustainability of historical growth and margins.
■ Stock Building Supply Holdings (STCK-Neutral): Our $21 price target is based on ~8.5x
EV/2016E EBITDA, between the current NTM EBITDA multiple (~10x) and the peak earnings
valuation closer to the mid-single digits (~6x). Risks include residential construction cyclicality, lumber
prices, geographic concentration, competitive pressures, and weather.
■ WESCO International (WCC-Neutral): Our $55 price target is based on ~8x EV/2017E EBITDA, on
the low end of the 8-9x EV/NTM EBITDA trading range for the Electrical & Datacomm peer group,
due to heightened cyclical risks. Risks include economic sensitivity, copper prices, pricing power,
relatively high valuation, and industrial manufacturing and non-residential construction trends.
■ Watsco (WSO-Outperform): Our $134 price target is based on 12.5x EV/2017E EBITDA - in line
with the 3- and 5-year NTM averages, and below the current 13x NTM valuation. Risks include
economic sensitivity, pricing/mix trends, relatively high valuation, weather, Carrier Enterprise JVs,
acquisitions, two classes of stock, and new residential construction trends.
Industrial Services (Engineering & Construction)
■ Chicago Bridge & Iron (CBI-Neutral): Our $52 price target uses an applied 7.5x FTM Adjusted
EBITDA multiple one year from today. The 7.5x FTM EBITDA multiple is a slight premium to the
broader E&C group today (at ~7x). This premium multiple is offset and balanced by a modest PE
multiple (~10x, versus 12-13x at peers), with the discrepancy explained by the company’s ~2x
balance sheet leverage. This valuation reflects the mitigated risk profile from the removal of the
overhang caused by the nuclear contracts, but risk from relatively high leverage and a high mix of
fixed price contracts still present. Risks include a highly competitive industry, large project
concentration, fixed-price contract exposure, economically sensitive end markets and legacy SHAW
integration.
■ Fluor (FLR-Neutral): Our $50 price target assumes a relative sector P/E multiple of 13.0x our FTM
estimates one year from today (peers in the ~13x range, on average), in line with the company’s
historical range of ~10-20x and appropriately tempered for the prospect of a flattening EPS outlook, in
our view. Risks include a highly competitive industry, economically sensitive end-market exposure,
fixed-price contracts and large project concentration.
■ MasTec (MTZ-Neutral): Our $18 price target assumes 6.2x FTM EBITDA and 12.0x EPS, below
10-year averages of 7.6x/13.4x and generally in line with E&C sector peers (~7x/13x) against
depressed earnings, a framework for eventual upside despite today's risks. Risks include a highly
competitive industry, state and federal regulatory changes, and fixed-price contract exposure and
acquisition integration risk.
■ Quanta Services (PWR-Neutral): Our $24 price target reflects 7.4x our FTM EBITDA estimate one
year from today and 12.9x FTM EPS. The multiple compares to an historic 10-year average
EV/EBITDA multiple of 9.9x and 20.0x, but recognizes today’s execution, regulatory, and weather
challenges as well as a potentially slower growth profile in the company’s core Electric business and
a somewhat more cautious intermediate term growth outlook in Oil & Gas. The multiple is near peers
in the ~7x/13x, respectively. Risks include a highly competitive industry, economically sensitive end
markets, high financial leverage, high customer concentration, and a large insider
ownership/corporate governance issues
Oilfield Services & Equipment
■ National Oilwell Varco (NOV-Neutral): Our $39 price target represents a 2014 and 2016E
EV/EBITDA multiple average of 7x, below the historical 10x multiple but in line with the 7x average
observed over the past three years given the underlying secular newbuild floater growth cycles
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28Robert W. Baird & Co.
embedded in prior years as well as the challenges in navigating through the current market downturn.
Risks include commodity prices, subsea complexity, manufacturer liability, currency and geopolitical,
environmental and regulatory, project slippage, material accretion and integration of acquisitions,
traction in transforming FPSO market, and further optimization in construction cycles.
■ Schlumberger (SLB-Outperform): Our $99 price target represents a 2014 and 2016E EV/EBITDA
multiple average of 12x, in line with the 12x historical average and reflective of mid-cycle valuation
levels. Risks include commodity prices, currency and geopolitical, environmental and regulatory,
seasonal weather, uncertainty related to Venezuela, control of reserves by state-owned operators,
CAM and OneSubsea accretion, technological competitiveness.
Packaging & Coatings
■ AptarGroup (ATR-Outperform): Our $80 price target is based on 11.0x '16E EV:EBITDA (20-year
average of 7.3x on a LTM basis), and we believe the premium is warranted based on increased
volume momentum across most businesses, the superior profitability of the Pharma segment, and a
more aggressive approach toward capital allocation. Risks include an elongated decline in consumer
spending, volatile raw material costs including plastic resin and steel, and an overly conservative
approach toward free cash flow allocation—which combined with a sluggish macro backdrop could
weigh on upside.
■ Ball Corporation (BLL-Outperform): Our $85 price target is based on 12.5x '16E EV:EBITDA,
noting that historically Ball has traded roughly in line with its rigid packaging peers (~9.5x
EV:EBITDA). Given that the catalysts for the shares include stable volume trends, significant FCF
generation and M&A activity (pending Rexam acquisition), we believe a premium to the historical
multiple is warranted. Risks include macroeconomic sensitivity (Europe/Emerging Markets), volatile
raw material costs, the potential for investors to favor macro cyclicality, and transaction risk
associated with the pending Rexam acquisition.
■ Crown Holdings (CCK-Outperform): Our $60 price target is based on 10.0x '16E EV:EBITDA
(ahead of the 20-year average LTM EV:EBITDA multiple for the packaging sector of 9.0x and Crown's
historical LTM EV:EBITDA average of 8.0x). Given that the catalysts for the shares include continued
margin expansion in Europe (restructuring activity), outsized exposure to the emerging markets,
acquisition-related growth (Mivisa/EMPAQUE) and significant FCF generation, we believe a premium
to the historical multiple is warranted. Risks include a reversal in emerging market trends, the
revenue impact from volatile FX rates and the possibility that investors begin to prefer macro
cyclicality.
■ Multi-Color Corporation (LABL-Outperform): Our $80 price target is based on 11.5x FY16E
EV:EBITDA—above our target multiple for the packaging sector (9.5x) based on LABL's defined
algorithm which is supportive of further, consolidation driven shareholder value generation, offset
partially by low liquidity and heavy private equity ownership. Risks include a fragmented competitive
landscape, raw material volatility, concentrated ownership structure, concentrated customer
exposure, and an acquisition heavy strategy.
■ PPG Industries (PPG-Outperform): Our $125 price target is based on 13.0x '16E EV:EBITDA,
above its historical average of 8.0x LTM. The above-average multiple assumes multiple expansion as
PPG continues to improve its focus on the coatings niche. Further, in our view, the multiple
encompasses the company's acquisition of Comex Mexico, considerable balance sheet capacity, and
increased exposure to the recovering N.A. housing market. Risks include macroeconomic sensitivity,
volatile raw material costs and the potential for constrained FCF.
■ RPM International Inc. (RPM-Neutral): Our $48 price target based on 11.5x FY16E EV:EBITDA
(RPM’s 10-year EV:EBITDA multiple has averaged 9.5x). Our 11.5x FY16E EV:EBITDA target is
below our coatings index target (~13.5x), as the company has carried a historical valuation discount.
Risks include macroeconomic sensitivity, holding company corporate structure, the acquisition heavy
strategy, raw material price spikes, and supply constraints.
■ Sealed Air Corporation (SEE-Outperform): Our $65 price target is based on 13.5x '16E
EV:EBITDA, which we believe is based on conservative assumptions (at the low end of Sealed Air's
guidance as well). Furthermore, we believe Sealed Air’s inherent pseudo-cyclicality and deleveraging
potential support a premium to the packaging sector ('16E target multiple of 9.5x). Risks include
macro instability, raw material cost inflation, integration risks related to previous acquisitions, and
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29Robert W. Baird & Co.
competitive pricing pressures.
■ Sherwin-Williams (SHW-Outperform): Our $300 price target is based on 14.5x '16E EV:EBITDA,
above the company's historical average of 8.5x LTM EV:EBITDA, which we believe is justified given
the Sherwin’s strong brand equity, significant free cash flow generation, pricing power, and cash flow
allocation track record. Risks include lead litigation risk, outsized exposure to the U.S. housing
market, volatile raw material costs, and significant operating leases.
■ Sonoco Products (SON-Neutral): Our $47 price target is based on an 8.5x '16E EV:EBITDA
multiple, above the company's long-term 7.6x LTM average, and slightly below the overall packaging
sector (9.5x targeted '15E EV:EBITDA) as the company’s inherent cyclicality is offset by a lack of
significant catalysts for the shares. Risks include a deteriorating macroeconomic environment, M&A
integration risk, and raw material inflation.
Process Controls
■ A.O. Smith (AOS-Outperform): Our $80 price target assumes forward multiples of 12.0x
EV/EBITDA and 20.1x earnings, above average historical multiples of 8.9x and 14.6x, respectively,
based on average water/flow company multiples (9.0-12.0x EV/EBITDA, 17.0-22.0x earnings),
above-industry growth potential, capital deployment opportunities, and improved profitability/returns
profile. Risks include sensitivity to economic cycles and cyclical construction markets, uncertain
consumer spending patterns (particularly in China), execution on efficiency regulation transitions,
meaningful raw material exposure (primarily steel), integration of future acquisitions, and efficacy of
capital deployment.
■ Colfax (CFX-Neutral): Our $27 price target assumes forward multiples of 8.0x EV/EBITDA and 16.3x
earnings, respectively. Multiples are below historical average multiples of 9.7x and 18.2x,
respectively, given the sizeable estimate pressure over the last few years, cyclicality of the portfolio,
and disappointing margin performance. Risks include global macro conditions, highly competitive fluid
handling industry, exposure to changing technology in welding industry (>50% of sales), correlation to
oil prices, FX risk, integration/execution of recent and future acquisitions, and asbestos litigation.
■ Graco (GGG-Neutral): Our $77 price target assumes forward multiples of 12.5x EV/EBITDA and
20.4x earnings, slightly above historical average multiples of 11.0x and 18.5x, respectively, largely
due to cycle timing and a premium for high quality in the current environment, and consistent with
recent trading performance. Risks include significant exposure to highly cyclical industrial and
construction end markets, exposure to changing currency rates, competitive fluid handling industry,
integration of acquisitions, and efficacy of capital deployment.
■ IDEX (IEX-Outperform): Our $78 price target assumes forward multiples of 12.0x EV/EBITDA and
19.4x earnings, above historical average multiples of 10.5x and 17.3x, respectively given elevated
peer multiples, expectations for differentiated revenue/earnings performance over the next several
years, and a premium for high quality in the current environment. Risks include exposure to cyclical
end markets globally, significant exposure to changing foreign exchange rates, highly competitive
fluid handling industry, uncertainty around government budgets and spending, and integration of
recent and future acquisitions.
■ ITT Corporation (ITT-Outperform): Our $46 price target assumes forward multiples of 9.0x
EV/EBITDA and 15.9x earnings, ahead of historical average multiples of 9.1x and 13.8x, respectively,
due to more attractive long-term growth prospects and improving profitability profile relative to prior
years. Risks include exposure to cyclical end markets, global macroeconomic conditions (~60% of
revenue comes from outside North America), correlation to oil prices, integration of recent and future
acquisitions, highly competitive markets, FX risk, and asbestos liability.
■ Pentair (PNR-Neutral): Our $56 price target assumes forward multiples of 11.7x EV/EBITDA and
14.0x earnings (including amortization) vs. historical average multiples of 9.5x and 14.8x,
respectively. Our EV/EBITDA multiple is above historical average given synergy/margin expansion
opportunities, improving returns profile, and potential capital deployment benefits. Risks include
global macroeconomic conditions, exposure to cyclical end markets, FX risk, integration and
execution of acquisitions, most notably ERICO, raw material cost inflation, highly competitive flow
control industry, and exposure to cyclical end markets.
■ SPX FLOW (FLOW-Outperform): Our $41 price target assumes forward multiples of 9.0x
EV/EBITDA and 13.9x earnings. Our assumed multiples are slightly below peer multiples of
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30Robert W. Baird & Co.
~9.0-11.0x and ~15.0-17.0x, respectively, as limited project order visibility, capital spending reduction
trends, and end market weakness (primarily O&G and dairy) are concerning, however we expect
post-spin operational improvements and improved capital allocation to offer incremental tailwinds
over a longer horizon. Risks include exposure to cyclical end markets (power, energy, general
industrial), global economic conditions (~65% of revenue outside U.S.), correlation to oil prices,
integration/execution of future acquisitions, efficacy of capital deployment, spin-related inefficiencies,
and FX risk.
■ Watts Water (WTS-Neutral): Our $56 price target assumes forward multiples of 9.5x EV/EBITDA
and 18.9x earnings, above historical averages of 7.8x and 15.2x, respectively, given anticipation for
improved long-term revenue growth profile and sustainable margin expansion over the next several
years. Risks include significant exposure to residential and commercial construction spending,
sensitivity to the global economy, Transformation efforts across the businesses, meaningful raw
material exposure (~65% of COGS), and integration of recent and future acquisitions.
Transportation/Logistics
■ CSX Corporation (CSX-Outperform): Our $31 price target reflects 14.0x our forward estimates, one
year out, and ~3x our accelerating 2016E EPS growth assumption (+5%). Our target represents a
premium to CSX's 10-year average of 13.2x, supported by expectations for accelerating EPS growth
and improved capital returns. Risks include competing in mature, cyclical industry, improving ROC
key to thesis, potential liability exposure for hazardous materials, truckload competition in Intermodal,
significant coal exposure, highly regulated industry potentially subject to further regulation, unionized
workforce cost inflation/service disruptions.
■ Heartland Express, Inc. (HTLD-Neutral): Our $21 price target is reflects 7.3x EV/forward EBITDA
estimate, below HTLD's 7.9x 10-year average given decelerating industry fundamentals. Downside
should be protected by an ~8.75% 2016 FCF yield. Risks include exposure to a highly fragmented
industry with cyclical exposure, slower growth given its selective growth strategy focused on premium
freight, potential margin pressures from driver availability, self-insurance liability, and other rising
costs.
■ J.B. Hunt Transport Services, Inc. (JBHT-Neutral): Our $82 price target reflects 9.0x EV/forward
EBITDA, below JBHT's five-year median multiple of 11.0x. With a falling multiple and prospects of
industry consolidation, which we believe JBHT to be well-positioned for, we look to be more
constructive buyers of JBHT into evidence of 1) macroeconomic strengthening, or 2) accelerating
share gains. Risks include economic sensitivity of freight demand, self-insurance liability, and reliance
on credible service by its underlying railroad partners.
■ Knight Transportation, Inc. (KNX-Neutral): Our $30 price target reflects 17.5x our forward EPS
estimate, one year out, a multiple below KNX's 10-year average 19.8x NTM P/E, given our
expectation for decelerating truckload real pricing growth this cycle and increased cyclical valuation
multiple compression risk. Risks include Competing in a highly fragmented industry subject to cyclical
exposure; driver availability, self-insured liability expenses, and rising costs are potential risks to
margins; sustained growth depends on qualified personnel able to replicate KNX's model.
■ Old Dominion Freight Line (ODFL-Neutral): Our $68 price target reflects ~8.0x EV/forward
EBITDA, or a ~1.3% unlevered 2016E FCF yield that reflects a more normalized maintenance capex
run-rate. We recommend investors increasingly use ODFL's FCF yield as a valuation basis given its
emerging FCF profile. Alternatively, our $68 price target reflects ~15x our forward EPS estimate, one
year out, roughly in line with its five-year average 16.7x NTM P/E, reflecting best-in-class operating
margins and long-term growth potential, but also tempered near-term growth expectations and
incremental industrial end-market risk. Risks include competing in highly cyclical business, with
potential for price competition in a highly competitive LTL market. Growth focus has resulted in
inconsistent FCF generation.
■ Ryder System, Inc. (R-Outperform): Our $84 price target reflects 12x our forward EPS estimate,
one year out, below Ryder's adjusted average NTM P/E of 12.3x during the last cycle, owing to
near-term cyclical headwinds. We continue to believe Ryder's multi-year fleet outsourcing story
remains intact, which has the potential to support sustained mid-to-upper-single digit EPS growth this
cycle and improved ROC/FCF characteristics. However, we expect Ryder's valuation multiple to
remain below average levels given the evidence of cyclicality in its model stemming from the 3Q15
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31Robert W. Baird & Co.
preannouncement, until it can prove that the secular growth opportunities can more than offset the
near-term cyclical headwinds. Risks include dependence on freight volumes, which depends on
domestic economic growth. Leasing organizations such as Ryder depend on access to capital to
secure equipment. Rising interest rates negatively impact operating costs.
■ Swift Transportation Co. Inc. (SWFT-Outperform): Our $20 price target reflects 11.5x our forward
estimate, one year out. This multiple is a ~30% discount to our assumed multiple for SWFT’s
high-quality Truckload peers on one year’s time. This multiple is below its ~12x NTM average since
its IPO but above its 9x trough (2011-2012) given progress in improving its balance sheet (2.2x
debt/EBITDA at 3Q15-end, from 3.2x in 2011). Our $20 price target is 5.8x EV/forward EBITDA, in
line with SWFT's 5.8x EV/EBITDA from 2003-2007 prior to its May 2007 LBO. We believe our target
multiples are appropriate given SWFT's demonstrated operational improvement and ongoing
deleveraging, with further upside potential given continued execution of its strategy and/or a
strengthening macroeconomic environment. Risks include operating in a highly fragmented, cyclically
sensitive and capital-intensive business. SWFT’s elevated debt structure exposes risk to equity
holders if broader economic trends deteriorate and/or margin improvement slows. Acquisition risk;
customer concentration risk
■ Union Pacific (UNP-Neutral): Our $103 price target reflects 15x our forward EPS estimate, one year
out, above UNP's ~14.4x 10-year average but well below the top of its 10-year representative range
(10-18x), supported by real pricing growth, share repurchases, and efficiency initiatives. Consistent
mid-teen EPS growth with an improving ROC/FCF profile deserves a valuation multiple premium to its
historical average. Risks include competing in mature, cyclical industry, improving ROC key to thesis,
potential liability exposure for hazardous materials movement, truckload competition in Intermodal,
highly regulated industry potentially subject to further regulation, unionized workforce cost
inflation/service disruptions.
■ Werner Enterprises, Inc. (WERN-Neutral): Our $29 price target reflects ~15x our forward EPS
estimate, one year out, a multiple below its average 17.4x average NTM P/E during the previous
cycle, which we believe appropriately reflects our expectation for decelerating truckload real pricing
growth this cycle and increased cyclical valuation multiple compression risk. Risks include operating
in a highly fragmented, cyclically sensitive and capital-intensive business. The truckload market has
historically earned limited real pricing growth, and WERN is subject to numerous cost pressures and
self-insurance liabilities.
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32Robert W. Baird & Co.
Appendix - Important Disclosures and Analyst Certification
Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend to seek investment banking related compensationfrom the company or companies mentioned in this report within the next three months.Robert W. Baird & Co. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions inforeign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information.Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity marketover the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months.Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12months.Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis onsafety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue andearnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Companycharacteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H -Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Companycharacteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and pricevolatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk.Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changingmarket dynamics, high leverage, extreme price volatility and unknown competitive challenges.Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by asubjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may beused to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons,and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific informationregarding the price target and recommendation is provided in the text of our most recent research report.Distribution of Investment Ratings. As of October 30, 2015, Baird U.S. Equity Research covered 733 companies, with 51% ratedOutperform/Buy, 48% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 15% of Outperform/Buy-rated,4% of Neutral/Hold-rated and 1% rated Underperform/Sell companies have compensated Baird for investment banking services in thepast 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months.Analyst Compensation. Analyst compensation is based on: 1) the correlation between the analyst's recommendations and stock priceperformance; 2) ratings and direct feedback from our investing clients, our institutional and retail sales force (as applicable) and fromindependent rating services; 3) the analyst's productivity, including the quality of the analyst's research and the analyst's contribution tothe growth and development of our overall research effort and 4) compliance with all of Robert W. Baird’s internal policies andprocedures. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's ResearchOversight Committee.Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does notcompensate research analysts based on specific investment banking transactions.A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed athttp://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx .You can also call 1-800-792-2473 or write: Robert W. Baird & Co. Incorporated, Equity Research, 777 E. Wisconsin Avenue, Milwaukee,WI 53202.Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report and/or financial modelaccurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensationwas, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.DisclaimersBaird prohibits analysts from owning stock in companies they cover.This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflectour judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but wecannot guarantee the accuracy.ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUESTThe Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure andreport performance of various sectors of the stock market; direct investment in indices is not available.Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securitiesand Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ fromAustralian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers andnot Australian laws.Copyright 2015 Robert W. Baird & Co. IncorporatedOther DisclosuresThe information and rating included in this report represent the Analyst’s long-term (12 month) view as described above. The researchanalyst(s) named in this report may at times, discuss, at the request of our clients, including Robert W. Baird & Co. salespersons and
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33Robert W. Baird & Co.
traders, or may have discussed in this report, certain trading strategies based on catalysts or events that may have a near-term impacton the market price of the equity securities discussed in this report. These trading strategies may differ from the analysts’ published pricetarget or rating for such securities. Any such trading strategies are distinct from and do not affect the analysts’ fundamental long-term (12month) rating for such securities, as described above. In addition, Robert W. Baird & Co. Incorporated and/or its affiliates (Baird) mayprovide to certain clients additional or research supplemental products or services, such as outlooks, commentaries and other detailedanalyses, which focus on covered stocks, companies, industries or sectors. Not all clients who receive our standard company-specificresearch reports are eligible to receive these additional or supplemental products or services. Baird determines in its sole discretion theclients who will receive additional or supplemental products or services, in light of various factors including the size and scope of theclient relationships. These additional or supplemental products or services may feature different analytical or research techniques andinformation than are contained in Baird’s standard research reports. Any ratings and recommendations contained in such additional orresearch supplemental products are consistent with the Analyst’s long-term ratings and recommendations contained in more broadlydisseminated standard research reports.United Kingdom (“UK”) disclosure requirements for the purpose of distributing this research into the UK and other countriesfor which Robert W. Baird Limited (“RWBL”) holds a MiFID passport.This material is distributed in the UK and the European Economic Area (“EEA”) by RWBL, which has an office at Finsbury Circus House,15 Finsbury Circus, London EC2M 7EB and is authorized and regulated by the Financial Conduct Authority (“FCA”).For the purposes of the FCA requirements, this investment research report is classified as investment research and is objective.This material is only directed at and is only made available to persons in the EEA who would satisfy the criteria of being "Professional"investors under MiFID and to persons in the UK falling within articles 19, 38, 47, and 49 of the Financial Services and Markets Act of2000 (Financial Promotion) Order 2005 (all such persons being referred to as “relevant persons”). Accordingly, this document is intendedonly for persons regarded as investment professionals (or equivalent) and is not to be distributed to or passed onto any other person(such as persons who would be classified as Retail clients under MiFID).Robert W. Baird & Co. Incorporated and RWBL have in place organizational and administrative arrangements for the disclosure andavoidance of conflicts of interest with respect to research recommendations.This material is not intended for persons in jurisdictions where the distribution or publication of this research report is not permitted underthe applicable laws or regulations of such jurisdiction.Investment involves risk. The price of securities may fluctuate and past performance is not indicative of future results. Anyrecommendation contained in the research report does not have regard to the specific investment objectives, financial situation and theparticular needs of any individuals. You are advised to exercise caution in relation to the research report. If you are in any doubt aboutany of the contents of this document, you should obtain independent professional advice.RWBL is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the FCA under UK laws,which may differ from Australian laws. This document has been prepared in accordance with FCA requirements and not Australian laws.Dividend Yield. As used in this report, the term “dividend yield” refers, on a percentage basis, to the historical distributions made by theissuer relative to its current market price. Such distributions are not guaranteed, may be modified at the issuer’s discretion, may exceedoperating cash flow, subsidized by borrowed funds or include a return of investment principal.
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November 13, 2015 | Industrial
34Robert W. Baird & Co.