Capital Goods for Beginners

A detailed look at the Capital Goods sector for beginners (and non-beginners too)
The capital goods sector is heterogeneous but often behaves in a homogenous way. In this updated 2012 edition, we look at what drives revenue growth, profitability and share prices. The primary driver of growth is industrial production but the relationship varies widely from company to company. Valuation multiples are surprisingly stable over the longer term, so accurate forecasting is arguably the single most useful skill for a sector analyst.

英文101页。


The Drivers of Growth .................................................................... 6
Introduction ......................................................................................................................... 6
Over the long run, it’s a GDP and IP story… ....................................................................... 6
The relationship between share prices and German IP is surprising ................................ 11
IFO expectations are a good predictor of German IP ....................................................... 12
Confidence Surveys can provide early warning ................................................................ 13
Inventory cycles are rare but dramatic.............................................................................. 14
The Credit Impulse can also be a useful leading indicator ............................................... 16
We are very sceptical about capacity utilisation statistics ............................................... 17
Conclusion ......................................................................................................................... 18
The Drivers of Profitability ............................................................ 20
Introduction ....................................................................................................................... 20
The sector is highly operationally geared… ...................................................................... 20
At the company level, Gearing is most evident during downturns… ............................... 22
…and barely visible during upturns .................................................................................. 23
A quick look at the long term margin history ................................................................... 24
Internal de-stocking is bad for margins… ......................................................................... 25
Companies have lowered their fixed cost bases ............................................................... 26
Pricing correlates highly with inflation expectations ........................................................ 30
Conclusion ......................................................................................................................... 32
The Rise of Emerging Markets ..................................................... 34
Introduction ....................................................................................................................... 34
About 40% of sector sales now come from Emerging Markets… ................................... 34
…and North America exposure has fallen to about 18% ................................................. 35
Europe is still the largest end market ................................................................................ 36
Conclusion ......................................................................................................................... 37
What Drives Share Prices? ........................................................... 38
Introduction ....................................................................................................................... 38
Capital Goods tends to trade at 9-10x prospective EBIT .................................................. 38
What does CROCI tell us? ................................................................................................. 39
A quick look at EV/Sales .................................................................................................... 42
Conclusion ......................................................................................................................... 42
Share prices versus EPS revisions ................................................ 44
It’s a momentum sector… ................................................................................................. 44
A word on methodology .................................................................................................... 44
Earnings revisions from 2007 to date… ............................................................................ 44
…and how revisions relate to share prices ....................................................................... 46
Lessons from last downturn ......................................................... 48
Share price falls are not highly correlated with EPS contraction ..................................... 48
Case study 1: 2009 ............................................................................................................ 48
Case study 2: 2011 ............................................................................................................ 49
Conclusion ......................................................................................................................... 49

Company Snapshots .................................................................... 50
Introduction ....................................................................................................................... 50
ABB .................................................................................................................................... 51
Alfa Laval ........................................................................................................................... 53
Alstom ................................................................................................................................ 55
Andritz ............................................................................................................................... 57
Assa Abloy ......................................................................................................................... 58
Atlas Copco ....................................................................................................................... 60
Cargotec ............................................................................................................................ 62
Cookson ............................................................................................................................. 63
Fiat Industrial ..................................................................................................................... 64
GEA .................................................................................................................................... 65
Heidelberger Druckmaschinen .......................................................................................... 66
Hexagon ............................................................................................................................. 67
Invensys ............................................................................................................................. 68
Kone ................................................................................................................................... 69
Konecranes ........................................................................................................................ 71
Legrand .............................................................................................................................. 72
MAN ................................................................................................................................... 74
Metso ................................................................................................................................. 76
Nexans ............................................................................................................................... 77
Outotec .............................................................................................................................. 78
Palfinger ............................................................................................................................. 79
Philips ................................................................................................................................ 80
Prysmian ............................................................................................................................ 82
RHI ..................................................................................................................................... 83
Sandvik .............................................................................................................................. 84
Scania ................................................................................................................................ 86
Schneider Electric .............................................................................................................. 88
Siemens ............................................................................................................................. 90
SKF ..................................................................................................................................... 92
Smiths Group ..................................................................................................................... 94
Trelleborg ........................................................................................................................... 95
Volvo .................................................................................................................................. 96
Wärtsilä .............................................................................................................................. 98
Zumtobel ............................................................................................................................ 99