Europe
Capital Goods
28 November 2008
Capital Goods
2009 Outlook: Hope for the
best, plan for the worst
Peter Reilly
Research Analyst
(44) 20 754 59835
peter.reilly@db.com
Martin Wilkie
Research Analyst
(44) 20 754 51956
martin.wilkie@db.com
Johan Wettergren
Research Analyst
(46) 8 4635 518
johan.wettergren@db.com
What could possibly go wrong?
With the sector plumbing new multi-decade valuation lows, optimists might be
tempted to dust off the old cliché "it's all in the price". We think it is too early to be
upbeat. In this report, we look at recessions over the last 80 years and conclude
that this one could be the worst since 1945 due to the speed of descent and its
synchronised global nature.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Strategy
German IFO vs. sector performance
80
85
90
95
100
105
110
115
120
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
0%
50%
100%
150%
200%
250%
300%
350%
IFO MSCI Cap Goods (rebased, right scale)
Order vs. sector performance
-30%
-20%
-10%
0%
10%
20%
30%
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
-150%
-50%
50%
150%
250%
350%
German Capital Goods orders
MSCI Cap Goods (rebased, right scale)
VIX vs. sector performance
0
10
20
30
40
50
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
0%
50%
100%
150%
200%
250%
300%
350%
VIX (inverted)
MSCI Cap Goods (rebased, right scale)
The short-term outlook is deteriorating rapidly
There is now considerable macro and anecdotal evidence that short-term
economic trends are deteriorating at a pace not seen for many decades. To give
two examples: 1) our US economist recently warned that US GDP growth could
be -8% in Q4 and 2) more and more manufacturing companies are planning
extended Christmas shutdowns. Our forecast cuts after the Q3 results season are
already starting to look overly optimistic. We look at various possible scenarios in
this report but our central case is that we are likely to have a U-shaped recession
with the risk of prolonged weakness in industrial demand.
Lessons from history
In this report we look at the key indicators for our companies going as far back in
time as the data permits. We can track some end markets back to the 1960s and
we have also unearthed some fascinating (and rather scary) research from the
1929-1932 depression. While we do not expect history will repeats itself, some
lessons can be drawn. First, the unfolding recession looks like it will be worse than
anything we have seen in the last 30 years, in industrial terms at least. Second,
this recession looks like it will be unusually synchronised, with virtually the entire
world suffering at the same time. Third, we think it is too early to offer a definite
opinion on when the upturn will come.
Suggested sector strategy
Given the above, we think the best strategy is to have minimal net exposure to the
sector. Our preference is for ‘safe’ companies (limited debt, high recurring
revenues), and for relative recommendations in two similar companies but with
anomalous valuations or prospects. We suggest Alstom, GEA and Schindler as
Buys. On a relative basis, we prefer MAN to Volvo, and prefer Atlas Copco to
Sandvik.
Valuation and risks
We value the sector on EV/EBIT multiples. The sector currently trades on a median
EV/EBIT of 5.8x on 2008 forecasts, compared to a long term average of 9.6x. Key
risks include the extent of the industrial down-cycle and the ability of customers to
finance capital investment. For further risks see page 56.

Table of Contents
Hope for the best but plan for the worst......................................... 3
Executive summary ........................................................................... 4
Scenarios for the future .................................................................... 7
End market outlook......................................................................... 11
Industrial production....................................................................... 12
Power Generation............................................................................ 15
Power T&D....................................................................................... 18
Construction .................................................................................... 20
Trucks ............................................................................................... 22
Oil & Gas .......................................................................................... 24
Metals and mining........................................................................... 26
Shipping ........................................................................................... 28
Emerging markets ........................................................................... 30
The general capex cycle.................................................................. 32
Looking for leading indicators........................................................ 37
Changing cost structures................................................................ 41
Growth update ................................................................................ 47
Valuation .......................................................................................... 50