Industrial Research March 2012 Global Auto & Truck Markets Cruisin’ Road Map to the Auto & Truck Markets DAVID LEIKER, CFA Senior Analyst [email protected]414.298.7535 JOE VRUWINK Research Analyst [email protected]414.298.5934 JARED PLOTZ Research Analyst [email protected]414.298.7351 Please Refer to Appendix – Important Disclosures and Analyst Certification 10R.9
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Company Recommendations ........................................................................................................................................................ 30
Auto Supplier Performance - Relative to S&P 500 Baird Daily Commercial Vehicle Index – Relative to S&P 500 Source: FactSet, Baird estimates
All stock prices are as of Friday, February 24, 2012 unless otherwise noted.
Aug Sep Oct Nov Dec Jan Feb70
80
90
100
110
Source: FactSet Prices
Six-Month PerformanceIndexed Price Performance Price (Indexed to 100)
Baird Auto CoverageS&P 500
4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/1280
100
120
140
160
180
Source: FactSet Prices
Two-Year PerformanceIndexed Price Performance Price (Indexed to 100)
Baird Auto CoverageS&P 500
Aug Sep Oct Nov Dec Jan Feb70
80
90
100
110
Source: FactSet Prices
Six-Month PerformanceIndexed Price Performance Price (Indexed to 100)
Baird Truck OEM/Supplier CoverageS&P 500
4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12100
125
150
175
200
Source: FactSet Prices
Two-Year PerformanceIndexed Price Performance Price (Indexed to 100)
Baird Truck OEM/Supplier CoverageS&P 500
Automotive Markets
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 1
Recent Trends - Automotive
Q1 Automotive Macro Assumptions
Source: Ward’s Automotive, FactSet, Baird estimates *Data through January **Sales distorted due to Chinese Lunar New Year
Michigan Consumer Expectations (L) EU Consumer Confidence (R)
80
90
100
110
120
Dec‐90 Dec‐94 Dec‐98 Dec‐02 Dec‐06 Dec‐10
IFO Business Index
Automotive Markets
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 4
Cyclical Recovery - Automotive The greatest excess returns from this group are those seen during a cyclical recovery in end-market demand. Cyclical Demand Recovery: We are looking for global vehicle demand to grow at a 4-5% annual pace through 2014 with stronger demand in NA and Asia than Europe. Organic Revenue Growth: The average auto supplier is expected to grow revenue at a 4-5% annual rate over this period driven by increasing vehicle content—safety, fuel economy, comfort. Margin Recovery: Using “normal” contribution margins augmented by down-sizing and cost cutting, we look for EBITDA margins to move back to levels seen in 2002-04. Cyclical EPS Growth: The combination of 8-10% revenue growth (4-5% end-market growth and 4-5% organic growth) combined with margin improvement drives 17-20% annualized EPS growth through 2014. Normal Valuation: We look for enterprise value-to-EBITDA valuations to move back to the midpoint of past cycles. This represents an average multiple around 6.2x EBITDA. Potential Stock Performance: The combination of EPS growth and mid-cycle valuations drives significant upside potential in stock prices from current levels. The chart to the right highlights the stocks ranked by potential upside. Note these represent annualized returns through 2014 with an assumption that market return is in the 10-11% range.
New Business Growth (Quarter) New Business Growth (LTM) (Calendar Year Ending)
RWBEstimate
-200%
-100%
0%
100%
200%
OEM Suppliers S&P 500
Q1E 2012
1998 20022000 2004
(year-over-year)
2006 2008 2010 2012E
21% annual EPS growth2010‐2014
0%
15%
30%
45%
60%
S&P 500 MEI ALV SNA HAR BWA STRT Average GNTX JCI TOWR
Automotive Markets
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 5
US Automotive Demand US Trend Demand: There are three broad drivers of trend demand for light vehicles in the US: 1) replacement demand, the number of vehicles scrapped each year; 2) household growth, the number of new drivers entering the population; and 3) vehicle penetration, the number of vehicles per household. Adding up these three drivers results in US trend demand of about 15 million units today as shown in the “Trend Demand” chart to the right. The period from 1997 through 2008 saw actual vehicle sales exceed trend demand by a cumulative of 15 million vehicles. We are modeling that actual sales remain below trend demand through 2013 with a cumulative “under selling” of trend by about 15 million vehicles. Vehicle Scrap Rates: The US scraps about 5% of the vehicles on the road each year representing about 12 million units. The scrap rate has declined over time due to vehicles lasting longer. Household Growth: The number of new households formed in the US total about one million units per year. With constant vehicles per household, this represents an incremental 2-3 million units of trend demand. Vehicle Penetration: The US has 2.2 vehicles per household. The under-selling of trend demand through 2013 should bring this to 1.8-1.9 vehicles per household seen in the early 1990s.
Components of Trend Demand
Source: Polk, Census Bureau, Ward’s, Baird estimates. Vehicle Scrap Rates
Vehicle Population (L) Car Median Age (R) Truck Median Age (R)
(Vehicle Population in 000s) (Median Age)
Automotive Markets
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 6
Supply of Credit Auto Loans and Leases: Financial institutions have demonstrated an increase in the amount of credit extended for loans and leases in recent months. ABS Market Still Constrained: The amount of loans securitized, while much improved from a year ago, remains well below the levels seen at the market’s peak in 2004-06. Credit Standards Remain Tight: The Federal Reserve’s Senior Loan Officer survey continues to show the credit standards remain relatively tight for consumer loans. This is improving, but still exhibits a market of tight credit. Lending Terms Are Attractive Interest Rates: The interest rate on
typical auto loans has fallen back to previous levels after a quick spike upward a year ago.
Loan-To-Value: The average loan-to-value for loans extended has moved into the 85-90% range, relatively low compared to the past two decades.
Loan Maturities: The average loan maturity has fallen modestly and not rebounded to previous levels. Today, the average car loan is 60-65 months, down from approaching 70 months 18 months ago.
Weekly Bank Loans – Commercial vs. Consumer
Source: Federal Reserve, Baird estimates Change in Auto Loans / Leases – Y/Y Change
Source: Federal Reserve, Baird estimates. Loan-To-Value Ratios
Source: Federal Reserve, Experian Automotive, Baird estimates.
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 7
Demand for Credit Credit Demand Improving: Consumer demand for credit has rebounded in recent months: Senior Loan Officer Survey: The
Federal Reserve survey of lenders indicates a significant increase in consumers’ willingness to borrow.
Consumer Confidence: While confidence measures have improved in recent weeks, the overall trend remains at the low end of a range seen over the last several years.
Employment: Employment remains a weak spot in the recovery story, though nonfarm payrolls have generally improved over recent months.
Personal Income: The U.S. has now
witnessed 16 straight months of personal income growth, reversing the 15 straight months of personal income declines seen in 2008-2009.
Household Debt Is Improving: Household debt has declined to 90% of GDP, down from the 98% observed in 2009. Moving this back to 65% of GDP, as seen in the early 1990s, represents financing for about 15 million vehicles. Going back to the 1960-70s level represents another 10 million vehicles. Savings Rate Is Declining: Following increased consumer saving patterns during the downturn, the savings rate has declined to approximately 5%.
Senior Loan Officer Survey – Weak Demand
Source: Federal Reserve, Baird estimates. Hiring as a Percent of Total Employment
Source: BLS, Baird estimates. Household Debt to GDP and Disposable Income
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 12
Secular Trends - Automotive Developed Markets: The markets in the US, Europe and Japan are well established, mature markets that are increasingly moving toward a replacement market. Population and household growth in the US does offer some incremental growth. Emerging Markets: The fastest-growing auto demand is found in emerging markets where rapidly improving GDP per capita is providing consumers the opportunity to own a car. China is on track to outsell the US, becoming the largest auto/truck market in the world. Safety Penetration: Safety standards across the world are rising. New test processes in Europe and the US will make it more difficult for vehicles to attain a 5-star crash test rating. To maintain this level of rating will require additional safety content in the vehicle. The safety content in emerging markets is limited to seat belts, maybe. China appears to be moving toward European-type safety standards that will drive safety content higher. Rising Content: The amount of content in a vehicle, essentially tracked by average price over time, is driven higher by: 1) increased active and safety content; 2) increased regulation (emissions, fuel economy); and 3) creature comforts (entertainment, electronics, trim level).
China Private Vehicle Growth and Share ‐ 2000 to 2009
Private Total Private Growth Private Share
(Units in Thousands)
Source: China National Bureau Of Statistics
‐50% ‐25% 0% 25% 50%
Mitsubishi
Mazda
BMW
Suzuki
Ford
PSA
Total Industry
Honda
Renault‐Nissan
Toyota
Hyundai
GM
VWRankedby size
‐50% ‐25% 0% 25% 50%
Great Wall
JAC
Brilliance
Geely
BYD
Chery
Total Industry
Guangzhou
Chang'an
BAIC
FAW
DFM
SAICRankedby size
‐50% ‐25% 0% 25% 50%
Compact Car
Sub‐Compact Car
SUV
Midsize Car
Light Truck
Mini Car
Luxury Car
MPV/Minivan
Mini Truck
Sporty Car
Fullsize Car
Ranked by size
77,000 RMB, $11,700
45,000 RMB, $6,800
130,000 RMB, $19,700
236,000 RMB, $35,800
450,000 RMB, $68,300
196,000 RMB, $29,800
(ASP in yuan)
Automotive Markets
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 14
Fuel Economy / Emissions Fuel Economy Standards: All markets are pursuing stricter fuel economy and emission standards. Gasoline Prices: The US consumer reacted to higher gas prices in 2008 by shifting new vehicle purchases to those with higher fuel economy; lower gas prices reversed this trend this past year. Gasoline prices in the US (Canada and China) remain well below global gas prices. The primary variance is the level of taxation in each market. The countries with tax policy boosting the spread between gasoline and diesel also see the highest penetration rate of diesel-powered vehicles. US Fuel Economy: Fuel economy in Europe today is roughly where the US market needs to be in 2016. The difference comes from: Vehicle Mix (two-thirds): Nearly 50%
of the European market is made up of small/compact cars; this is only 20% of the US market.
About 40% of US market is made up of SUVs, vans, pickups; this is less than 10% of the European market.
Powertrain (one-third): More-efficient
diesel vehicles capture about 50% of the European market; diesel cars barely exist in the US.
European OEMs use advances in technology to deliver higher fuel economy while maintaining performance; Americans boosted performance while maintaining fuel economy.
Global Fuel Economy Standards (List by Region)
Source: BorgWarner company presentation. Selected Gas Prices
*China represents total cost Source: IEA,China NDRC, Baird estimates (As of October 2011)
US Versus European Segment Mix (2009)
Source: ACEA, Ward’s, Baird estimates.
U.S. Retail Gasoline Prices – National Average
Source: EIA, Baird estimates. Premium for Gasoline Versus Diesel
Source: IEA,China NDRC, Baird estimates (As of October 2011) Engine Power Versus Fuel Economy
Source: NHTSA, Ward’s, Baird estimates.
0.00
2.50
5.00
7.50
10.00
Fran
ce
Ger
man
y
Italy
Spai
n
UK
Japa
n
Can
ada
US
Chi
na
Ex-Tax Tax
($ per gallon - gasoline)
European Market United States MarketMarket Market Equivalent Model
Segment Share European Model Share American Asian EuropeanMinicar 7.9% Fiat Panda N/A None None Smart forTw oSmall Car 24.5% Peugeot 207 2.8% Chevrolet Aveo Honda Fit Mini CooperCompact Car 21.3% VW Golf 16.4% Dodge Caliber Honda Civic VW GolfMid/Full-Size Car 8.4% VW Passat 25.0% Ford Fusion Hyundai Sonata VW PassatLuxury 16.6% BMW 3-Series 7.8% Cadillac CTS Lexus ES Audi A4
Total Car 78.7% 52.0%
Minivan 11.6% Citroen Picasso 2.8% Dodge Caravan Honda Odyssey VW RoutanSUV/CUV 7.2% Toyota RAV4 31.0% Ford Explorer Toyota 4Runner VW TouaregVan 1.4% Citroen Berlingo 1.4% Ford Econoline None NonePickup 0.0% None 12.8% Ford F-150 Toyota Tundra None
Total Light Truck 20.2% 48.0%
0
1
2
3
4
5
Dec‐99 Dec‐01 Dec‐03 Dec‐05 Dec‐07 Dec‐09 Dec‐11
U.S. Retail Gas Price ($/gal) NYMEX Gasoline Futures ($/gal)
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 15
Electrification of the Vehicle Vehicle Types Micro/Mild Hybrid ICE + start-stop system Hybrid Electric ICE + electric-motor assist Plug-in Electric Electric-motor drive w/ICE Electric Vehicle Full electric vehicle w/battery Fuel Cell Electric Vehicle Any of the above w/fuel cell Companies with Exposure
Improve Existing Engine BWA TEN MGA PCAR NAV MOD AXL CTB CMI DAI DAN ETN GT HON PH TRW VOLVY WBC
Alternative Fuels FSYS CLNE WPRT RTK SYNM CAP
Power Storage JCI PPO MXWL HEV AONE VLNC EFL XIDE
Infrastructure / Smart Grid ENOC COMV ECTY
Electric Motors and Drivetrain QTWW AZD ETN ARM BWA MGA UQM HEV RZ RMYI ENA
Power Electronics JCI MGA UQM ETN ARM LEA MEI
Electronic Components BWA MOD JCI MEI MGA ARM SRI DAN LEA
Secular Demand Drivers Fuel Efficiency and Carbon Emissions Energy independence Greenhouse gas reduction Technology enables development Improve internal combustion engine (ICE) Improve combustion Downsize engines Alternative Fuels Vehicle mix Enable electrification Power storage Electric motors Power electronics Electric infrastructure Electronic components Money funds development Government loans and grants Private sector capital Government tax credits Industry Challenges Driving range on battery charge Cost of energy storage - $1000/kW today Charging infrastructure – smart grid needed Size of carbon footprint – source of electricity Raw materials – lithium and rare-earth elements Redesign vehicle systems and components Consumer education – manage expectations Legacy costs – engine plants Safety – vehicle size, electricity and pedestrian Electrified Vehicle Sales – Annually (US)
Source: Ward’s, Baird estimates.
Payback Analysis – PEV Versus ICE Using Today’s Economics
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 16
New Vehicle Launches New Vehicle Debuts – Detroit Auto Show
Source: Automotive News, Baird estimates
OEM Positioning in North America
Source: Ward’s Automotive, Baird estimates
2010 Product Offering Momentum: Criteria Top Ranked Style Ford, BMW Interiors Ford, Daimler, BMW Powertrain Ford, Toyota Technology BMW, Daimler Electrification Strategy Toyota 2010 Market Share Trends: OEM LTM Share % of 10-Year Peak Hyundai 8% 100% Nissan 8% 100% VW 3% 99% Daimler 2% 98% Honda 11% 95%
Expected Plug-in Hybrid Vehicle Launches
Expected Electric Vehicle Launches
0
20
40
60
80
2004 2005 2006 2007 2008 2009 2010 2011
New/Redesign Concept
GM
Ford
Chrysler
Toyota
NissanHonda
Mazda
Hyundai
VWBMWDaimler
0%
5%
10%
15%
20%
0 15 30 45 60
Product Position (Style, Interiors, Powertrain, Technology, Electrification, Max Score = 55)
Mar
ketS
hare
(20
11)
North American New and Replacement Vehicles - Model Year 2011
Chrysler BMW HondaFiat 500 (N) BMW 5-Series Honda CR-Z (N)Jeep Grand Cherokee BMW X1 (N) Honda Odyssey
BMW X3Ford Mini Countryman (N) HyundaiFord Explorer Hyundai Equus (N)Ford Fiesta (N) Daimler Hyundai SonataLincoln MKX Mercedes-Benz SLS AMG (N) Kia Cadenza (N)
Kia OptimaGeneral Motors Volkswagen Kia SorentoBuick Regal (N) Audi A8 Kia SportageCadillac CTS Coupe (N) Audi Q3 (N)Chevrolet Cruze (N) Volkswagen Touareg MazdaChevrolet Volt (N) Mazda MAZDA2 (N)
Source: ACEA, Baird estimates. China Truck Production
Source: JD Power, Robert W. Baird & Co. estimates
RWB Est. Actual*North America Build:Medium 11% 5% Heavy 38% 58% Total 26% 36% EU CV Registatations ‐5% 4% North AmericaProduction Schedules:Medium ‐ ‐Heavy ‐ ‐ Total ‐ ‐China Production:Light ‐ (24%)Medium ‐ (13%)Heavy ‐ (54%) Total (18%) (31%)
Q1‐2012 (Y/Y Chg)
Production Schedules
Q1‐2012 (Y/Y Chg)
‐100%
‐50%
0%
50%
100%
North America Orders Western Europe Registrations Asia Production
North America Class 5-7 Vehicle ShareTruck Type 2009 2010 2011Truck 64.6% 65.2% 74.2%Bus 29.3% 22.8% 16.9%RV 4.7% 10.2% 7.3%Step Van 1.5% 1.8% 1.6%Total Class 5-7 100.0% 100.0% 100.0%
North America Build for Export - Y/Y Change2009 2010 2011
Source: Company reports, Baird estimates China Heavy Truck - Market Participants¹²
¹A joint venture between JAC and Navistar is pending approval. ²PACCAR has sales offices in China (parts/engines) and a JV with a Taiwanese company for trucks. Source: JD Power, Baird estimates.
North America
Europe
Japan
Korea
China
India
BrazilRussia
0%
15%
30%
45%
60%
Commercial Vehicle Group Meritor Modine Manufacturing WABCO
Daimler Navistar PACCAR Volvo
0
400
800
1,200
1,600
1998 2000 2002 2004 2006 2008 2010
MD Truck MD Bus HD Truck HD Bus
(units in thousands)
North America
Europe
JapanKorea
China
India
BrazilRussia
0%
25%
50%
75%
100%
Commercial Vehicle Group
Meritor Modine Manufacturing WABCO
North America Europe Rest of World
Dongfeng (Renault)
FAW (Volvo)
CNHTC (MAN)
Shaanxi (MAN)
Beiqi (Daimler)
Baotou North Benz
(Daimler)
SAIC-IVECO (Fiat)
Others (26)(indicates relationships with Eastern OEMs)
Commercial Vehicle Markets
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 27
Valuation - Truck
S&P Industries– Short Interest (Days to Cover)
Source: FactSet, Baird estimates. Price to LTM EPS
Source: Company reports, FactSet, Baird estimates. Enterprise Value to LTM Sales
Source: Company reports, FactSet, Baird estimates
Truck Suppliers – Short Interest
Source: Company reports, FactSet, Baird estimates. Enterprise Value to LTM EBITDA
Source: Company reports, FactSet, Baird estimates. Price to Book Value
Source: Company reports, FactSet, Baird estimates.
MTOR CVGI CMI ETN MOD NAV PCAR SRI VOLV.B WBC Group
Average Last Quarter
0%
15%
30%
45%
60%
MTOR CVGI MOD NAV PCAR WBC VOLV.B Group
Last Quarter (LTM basis) 2012E
‐10%
0%
10%
20%
30%
MTOR CVGI MOD NAV PCAR WBC Average
Peak to Peak Growth Cal. 2012E Revenue Growth
‐50%
‐25%
0%
25%
50%
MTOR CVGI CMI ETN MOD NAV PCAR SRI VOLV.B WBC Group
Average Last Quarter
0% 6% 12% 18% 24%
PCAR
MOD
CVGI*
NAV
MTOR
WBC
OPEB Pension
‐15%
0%
15%
30%
45%
60%
ARM CVGI MOD NAV PCAR SRI WBC Average
Peak to Peak Growth Cal. 2012E EPS Growth
Autoliv
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 30
Autoliv (ALV - $68.21 – Outperform / Higher Risk) Target Price: $68 (5.9x 2014E EBITDA discounted by 20% - Median Valuation of Last Cycle Range) Current View Passive Safety Leadership: Autoliv is a global leader in the passive
safety market (airbags, seatbelts), with a global market share exceeding 35% in 2011 (more than 50% higher than the nearest competitors). The biggest passive safety growth opportunity is in emerging markets, where average content is approximately 25% below the global average and as much as 45% below that of developed markets. In developed markets, passive safety growth is driven by ever-tightening safety standards.
Active Safety Investments: Bolstering the company’s strong passive safety market position, the company is investing in active safety (e.g. driver information, crash detection, crash avoidance, and crash mitigation using image/radar/infra red/sonar sensors). Over the next three years, the active safety market is expected to grow 40% annually to $1.1 billion, eventually reaching $4-5 billion by 2020. The company recently launched an integrated radar/image sensor for BMW for several active-safety applications. Management has noted penetration of the developing active safety market is better than the company’s passive safety share, while also generating higher return on capital.
Strong Cash Flow: We expect Autoliv to generate average annual free cash flow of nearly $700 million over the next five years. We expect management to use free cash flow to pay dividends and fund investments and acquisitions to strengthen the company’s position in active safety. In the past, the company has also repurchased shares.
Valuation: The stock recently traded near 5.3x LTM EBITDA, below the 5.9x median valuation of the last cycle.
Key Risks: 1) light vehicle demand in Europe and China; 2) rising commodity prices; 3) pricing pressure; 4) foreign currency; 5) the automotive market; 6) major customers; 7) emerging markets; 8) costs associated with new business and new technologies; and 9) ongoing antitrust investigations.
Price Target. Our $68 price target is based on 5.9 times our 2014 estimate of EBITDA discounted by 20%, the median of the historical range.
Company Description Autoliv, Inc., headquartered in Stockholm, Sweden, develops and manufactures integrated safety systems including airbags, seat belts, safety electronics, infrared night vision systems, steering wheels, anti-whiplash systems, seat components and child seats. Autoliv was the 20th largest North American and 23rd largest global supplier to automotive OEMs in 2010, as ranked by Automotive News. The company was founded in 1956, and employs approximately 48,000 people in approximately 80 wholly-owned or joint venture facilities located in 29 countries. The company estimates it accounts for one-third of global restraint systems.
Stock Chart
Source: FactSet Revenue Profile – FY December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
2.5
5
7.5
10
0
25
50
75
100NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1105
10
15
20NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
By Geography By End Market By Customer
North America29%
Europe38%
Japan11%
(China 11%)
RoW22% GM 14%
Ford 10%
Chrysler/Fiat 6%
2
VW 9%PSA 5%BMW 5%
Daimler 5%
Volvo 3%
Toyota 5%
Honda 4%
Hyundai/Kia 9%
Other 12%
NA OEMs28%
EU OEMs41%
Asian OEMs18%
Automotive100%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Autoliv Inc. (ALV $68.21)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (5.9x 2014E EBITDA, Median Valuation of Last Cycle Range, Discounted by 20%): $68Last Cycle Range (2000-08) is 3.0-7.5x LTM EBITDA. Median is 5.9x.
Current Multiple = 5.3x LTM EBITDA (25th percentile), 4.9x 2012E and 4.3x 2013E.(in $ Millions)
Lt. Vehicle Build Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income Fully Diluted EPS First Avg.Year (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Cash Chg Call* Shares
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 31
BorgWarner (BWA - $82.43 – Neutral / Average Risk) Target Price: $90 (10.2x 2014E EBITDA plus calendar 2014 equity income less minority interest at 19x earnings per share discounted by 27.5% - Median Valuation of Current-Cycle Range) Current View “Green” Growth Prospects. The company is exposed to “green” secular
trends toward increased fuel economy and reduced emissions worldwide. Products such as turbochargers (diesel and, more recently, gasoline engines), timing chain systems (traditional and variable cam timing systems), diesel engine technologies, 4WD/AWD systems, and new transmission technologies (dual-clutch transmission) are all capable of improving fuel economy and/or reducing emissions.
Strong New Business Growth. The new business pipeline (11-12% annual revenue growth, +/- production and currency) is filled with orders for new, higher-ROIC products that should further diversify the customer base and geographic exposure. Recent comments from management have indicated that this growth can be maintained well beyond the current three-year backlog.
Diversified Revenue Mix. Sales in North America to North American-based OEMs are only 18% of total revenue. North America as a whole accounts for less than one-third of total sales, while Europe is the company's largest geographic region at approximately half of revenue.
Key Risk Factors. 1) Raw material and commodity costs; 2) slowing European end markets; 3) truck (SUV, pickup) demand in North America; 4) slowing penetration of diesel engines; 5) increasing competition in turbochargers (Continental, Cummins, Bosch); 6) foreign currency; 7) major customers, programs, and product groups; 8) the commercial vehicle market; 9) the automotive market; 10) new business launches; 11) new technology; and 12) post-retirement liabilities.
Target Price. Our $90 target price is based on 10.2x our estimate of calendar 2014 EBITDA, the median percentile of the current-cycle range, plus per-share equity income net of minority interest valued at 19.0x earnings.
Company Description BorgWarner Inc., headquartered in Auburn Hills, MI, was incorporated in 1987 and is a leading global supplier of highly engineered systems and components primarily for automotive powertrain applications (turbochargers, timing chains, and cooling systems) and drivetrain applications (four-wheel-drive, all-wheel-drive and transmission) for light vehicles. BorgWarner was the 31st largest North American supplier and 31st largest global supplier in 2010, according to Automotive News. BorgWarner Inc. employs approximately 19,250 people and has 60 operations in 19 countries.
Stock Chart
Source: FactSet Revenue Profile – FY December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
1
2
3
4
0
20
40
60
80
100NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
2
4
6Price to Book
By Geography By End Market By Customer
North America24%
Europe56%
(China 6%)
Asia20%
Automotive 78%
Commercial Vehicles 16%
Aftermarket 6%
Ford 11%
GM 4%
Chrysler 3%
VW/Audi 15%
Renault/Nissan 5%
Daimler 6%BMW 3%Toyota 5%
Hyundai/Kia 4%
Commercial Vehicle 9%
Other 29%
China 6%NAOEMs 18%
EU OEMs 32%
Asia OEMs 9%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 BorgWarner (BWA $82.43)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Neutral
12-Month Target Price (10.2x 2014E EBITDA, Median Valuation of Current-Cycle (2009-Present) Range, plus cal-2014E eq inc less min int at 19.0x earnings per share, Discounted by 27.5%): $90Current Cycle (2009-Present) Range is 5.1-19.2x LTM EBITDA. Median is 10.2x.
Current Multiple = 9.4x LTM EBITDA (44th percentile), 8.4x 2012E and 7.0x 2013E.(in $ Millions)
Lt. Vehicle Build Revenues Gross Profit** EBITDA Operating Income Pretax Income Tax Net Income Fully Diluted EPS GAAP First AvgYear (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Cash Chg EPS Call* Shs.
*Assumed contribution margin for 2011-2015 is 24-26% 2014E represents trend EPS with stock price of: $136 (22% CAGR)* Excludes pretax loss on sale of transmission business of $61.5 million or $0.75 a share. *As of February 14.
** Gross Profit = Sales - COGS (excludes Depreciation and Amortization) New Business Growth* Shares Outstanding (Dec-11)Year Rev Chg Basic Shares 109.2
NA Production NA +9% 2010 570 14% Diluted Shares 127.6EU Production NA +2% 2011 750 13% Insiders Own: 3.8%
2012 833 12% Headquartered: Auburn Hills, MichiganRevenue NA +19-23% Inc. Haldex acq 2013 833 11%EBIT Margin NA 10.5% At least 10.5% 2011-13 2,417 12%EPS NA $3.85-4.15 * Revenue growth with flat NA build (ex-price of -2%).
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 32
Commercial Vehicle Group (CVGI - $13.00 – Outperform / Higher Risk) Target Price: $19 (6.5x 2014E EBITDA, Discounted by 20% - Median of Last Cycle Range) Current View Cyclical Recovery in North America: The North American commercial
vehicle market represents approximately 40% of the company’s revenue and is expected to grow at a 5-10% CAGR through 2014.
International Expansion: The company has recently taken steps to accelerate international expansion, investing in China and Mexico; recent wins in China with XCMG, John Deere, and Beiqi Foton have verified this strategy. Collectively, these awards represent approximately $40 million of annualized revenue when fully launched.
New Business Wins and Acquisitions: During 2007-2010, the company won numerous new business awards with both new and existing customers. Several of these awards were with foreign customers, offering the opportunity to penetrate fast-growing emerging markets. These awards/acquisitions should become more meaningful as volume rebounds, resulting in a larger, more profitable company. A meaningful portion of this business will begin to launch during 2012 ($45 million, or 6% net new business growth).
Valuation: The stock recently traded near 7.3x LTM EBITDA, elevated due to still-recovering EBITDA, above the historical median (6.5x) and peer-group average (6.0x).
Key Risks: 1) the pace of volume recovery in the North American commercial vehicle market; 2) mix issues (lower-contented Mexico and export trucks); 3) international expansion risks; 4) sustaining working capital management improvements; 5) acquisition integration risk; 6) rising raw material costs; 7) historical losses; and 8) major customers.
Target Price. Our $19 target price is based on the stock trading at 6.5 times our 2014 estimate of EBITDA, the median of the historical range.
Company Description Commercial Vehicle Group, Inc. manufactures seat systems, interior trim systems (instrument and door panels, headliners, flooring), vision safety systems (exterior mirrors, windshield wipers, switches and controls), cab structures, and wire harnesses. In addition to the North American medium- and heavy-duty truck market (40% of 2010 revenue), Commercial Vehicle Group also supplies the following markets: construction equipment (23%), marine and RV, agriculture, military, and bus (23%), and the commercial vehicle aftermarket (14%). The company employs approximately 5,430 people at 37 facilities worldwide.
Stock Chart
Source: FactSet
Revenue Profile – FY December 2010
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11-2
0
2
4
6
0
10
20
30
40NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1106
12
18
24Price to Book
By Geography By End Market By Customer
United States85%
Europe7%
(China7%)
Rest of World8% NA Cl. 8
40%
NA Cl. 5‐74%Europe Truck
4%Construction
15%
Other8%
Aftermarket14%
Bus/Agriculture5%
Military10%
Global Truck 48%
International 16%
PACCAR 14%
Volvo 10%
Freightliner 9%
OshkoshTruck 8%
Caterpillar 7%
Komatsu 2%Deere 2%
Other 32%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Commercial Vehicle Group, Inc. (CVGI $13.00)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (6.5x 2014E EBITDA, Median Valuation of Last Cycle Range, Discounted by 20%): $19Last Cycle Range (2004-08) is 4.4-14.4x LTM EBITDA. Median is 6.5x.
Current Multiple = 7.3x LTM EBITDA (60th percentile), 5.8x 2012E and 4.5x 2013E.(in $ Thousands)
Hvy-Truck Bld Med-Truck Bld Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income Fully Diluted EPS (GAAP) Pro First Avg.Year (000) Chg (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Cash Chg Forma Call* Shares
*Assumed contribution margin for 2011-2015 is in the range of 17-25%. 2014E represents trend EPS with stock price of: $27 (30% CAGR)*As of February 14.
EPS Sensitivity Target Price Sensitivity New Business Growth* Shares Outstanding (Dec-11)Year Downside Base Upside Percentile Multiple Downside Base Upside Year Rev. Change Basic Shares 28,0882010 $0.15 $0.23 $0.50 25th 5.7 #VALUE! $10 #VALUE! 2008 35 5% Options (Diluted) 1072011 $0.65 $0.93 $1.30 Median 6.5 #VALUE! $11 #VALUE! 2009 35 5% Convertible Securities 0
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 33
Delphi Automotive (DLPH - $32.00 as of March 1 – Outperform / Higher Risk) Target Price: $32 (5.1x 2014E EBITDA, Discounted by 25% - Median Percentile of 1999-2005 Trading Range) Current View Repositioned business model. Since filing for bankruptcy, Delphi has
dramatically reformed its business model by divesting or exiting non-core businesses and product lines, rationalizing global headcount, and diversifying exposure to customers, end markets, and geographies.
Secular growth opportunities. Delphi’s strategic decision in 2006 to focus on market-relevant products in which the company held technical and competitive advantages has resulted in a leading portfolio of products aimed at the most significant secular opportunities in the automotive space: fuel efficiency, safety, connectivity, and growth in emerging markets.
Cyclical end-market recovery. As of December 2010, North America and Europe accounted for 75% of Delphi’s overall revenues. Collectively, these markets are expected to grow 3% annually through 2014, with growth driven by a replacing of an aged fleet and return to “trend” levels of demand (the level expected based on scrappage and population growth).
Strong free cash flow and balance sheet. Near double-digit top-line growth over the next several years, coupled with margin expansion as the company leverages this higher volume, positions Delphi to generate substantial free cash flow. We estimate free cash flow could average $1.0 billion annually through 2014, representing 25-30% annual growth.
Key risks. Key risks include: 1) the cyclicality of the global automotive and commercial vehicle industries; 2) the rate and length of growth in emerging markets; 3) changes in technology and the necessary investments needed to remain competitive; 4) future stock sales (only 7% of shares are currently trading); 5) ongoing antitrust investigations by the European Commission and U.S. Department of Justice; 6) foreign exchange risk; and 7) raw material inflation, particularly copper.
Target Price. Our $32 price target is based on 5.1 times our estimate of 2014 EBITDA, the median percentile valuation of the 1999-2005 time frame.
Company Description Delphi Automotive PLC, incorporated in Jersey with world operations headquartered in Troy, Michigan, is a leading global supplier and manufacturer of electrical and electronic, powertrain, safety and thermal technology for the global automotive and commercial vehicle industries. The company is well positioned to help OEM customers meet increasing government regulations and consumer demands for improved fuel economy, safety, and connectivity with products such as gasoline and diesel engine management systems, HVAC modules, passive safety electronics, active safety systems, and infotainment.
Stock Chart
Source: FactSet Revenue Profile – FY December 2011
Source: Company filings, Robert W. Baird & Co. estimates
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb0
3
6
9
12
0
10
20
30
40NTM Estimated EPS (Left) Price
By Geography By End Market By Customer
North America32%
Europe45%
Asia15%
South America7%
Automotive 84%
Commercial Vehicle 8%
Aftermarket 8% GM 19%
Ford 7%
Volkswagen 9%
Daimler 7%
PSA 5%Renault 5%Fiat 3%
Shanghai GM 4%Toyota 3%
Hyundai 2%
Other Automotive 26%
Volvo/Geely 2%
MD/HD Truck OEMs 8%
NA OEMs 26%
"Major" EU OEMs 28%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Delphi Automotive (DLPH $32.00)David Leiker, CFA (414) 298-7535 [email protected] March 1, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] 12-Mo. Target Price (5.1x 2014E EBITDA, Median Valuation of 1999-2005 Range, Discounted by 25%) = $32
Rating: OutperformPrior Trading Range as Public Company (1999-2005) is -16.3-26.7x LTM EBITDA. Median is 5.1x.
Current Multiple = 4.3x LTM EBITDA (29th percentile), 4.0x 2012E and 3.1x 2013E.(in $ Millions)
Lt. Vehicle Build Revenues Gross Profit EBITDA* Operating Income Pretax Income Tax Net Income GAAP First AvgYear (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg EPS Call* Shs.
*Gross margin contribution is in the range of 20-30% during 2011-2015 2014E represents trend EPS with stock price of: $49 (26% CAGR)*EBITDA = Operating Income (incl. Restructuring) + D&A *As of January 26.
Shares Outstanding (Dec-11) NA 32% General Motors (NA, Int'l) 12% Electrical/Electronic Architecture 41% Basic Shares 328Europe 45% Ford 7% Powertrain Systems 31% Options (Diluted) 0Asia 16% Total Detroit 3 19% Electronics/Safety 18% Convertible Securities 0South America 7% Foreign Auto 65% Thermal Systems 11% Diluted Shares 328Total 100% Total Auto 84% Total 100% Insiders Own <1%
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 34
Gentex (GNTX - $27.64 as of Feb. 28 – Outperform / Average Risk) Target Price: $35 (14.5x 2014E EBITDA, Discounted by 15% - Median Percentile of "Steady Growth" Phase from 2000-2004) Current View Secular Revenue Growth: We expect Gentex to grow revenue at a 15-
20% annual rate for the next several years, driven by the cyclical recovery in global light vehicle production (4-5% annual growth through 2015) and 10-15% organic growth above end market growth.
Incremental Revenue Drivers: We expect Gentex to grow revenue 10-15% above end market growth, driven by increasing vehicle penetration (low- and mid-priced vehicles, exterior mirrors, underpenetrated OEMs,) and increasing content (embedded technology interfaces, Rear Camera Display, SmartBeam, emerging potential for driver assistance features).
Upward Pressure on Margins: As revenue grows at a 15-20% rate, we expect the company to generate a 35-40% incremental contribution margin on fixed costs leverage, productivity gains, and value-added value-engineering activities.
Near-term, contribution margin is under pressure from increased costs associated with capacity expansions at existing facilities.
Attractive Valuation: Gentex recently traded near 12.2x LTM EBITDA, below the 14.6x median of the “steady growth” period during 2000-2004. We continue to believe that the shares will see an upward revaluation over the next several years, as revenue and earnings growth accelerate. Upside could be as high as the 15.1x multiple reached during the “rapid growth” period during 1994-1999.
Key Risks: 1) timing the pace and slope of end-market recovery; 2) adoption of auto-dimming mirrors and advanced features, especially Rear Camera Display; 3) a shift in mix between large and small vehicles; 4) raw material and component costs, primarily purchased electronics components; 5) costs associated with bringing concepts to market and winning new business; 6) major customers and vehicle programs; 7) modeling risk; 8) the automotive and competitive environment; and 9) premium valuation.
Target Price. Our $35 price target is based on 14.5 times our estimate of 2014 EBITDA, the median percentile valuation of the 2000-2004 time frame.
Company Description Gentex Corporation was founded in 1974 to manufacture residential smoke detectors. In 1982, the company introduced an automatic rear view mirror that was the first commercially successful glare-control product offered as an alternative to the conventional prism mirror. Today, Gentex operates out of five facilities in Zealand, Michigan (four automotive); automotive sales/engineering offices in Livonia, Michigan; China, France, Germany, Japan, South Korea, Sweden, and the United Kingdom; and four regional U.S. sales offices for the Fire Protection Group.
Stock Chart
Source: FactSet Revenue Profile – FY December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
0.5
1
1.5
2
0
10
20
30
40NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
2
4
6Price to Book
By Geography By End Market By Customer
United States33%
Germany25%
Japan8%
Other International*
34%
Automotive 98%
Fire Protection 2%
GM 12%
Ford 9%
Chrysler 5%
VW/Audi 15%
Daimler 11%BMW 9%
Toyota 12%
Hyundai/Kia 11%
Other OEMs 16% NA OEMs 29%
EU OEMs 31%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Gentex Corporation (GNTX $27.64)David Leiker, CFA (414) 298-7535 [email protected] February 28, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings Model
Jared Plotz (414) 298-7351 [email protected] Rating: Outperform12-Month Target Price (14.5x 2014E EBITDA, 50th Percentile Valuation of 2000-2004 Range, Discounted by 15%): $35
Last Cycle Range is 9.0-27.6x LTM EBITDA. Median is 14.6x.(in $ Thousands) Current Multiple = 12.2x LTM EBITDA (25th percentile), 11.4x 2012E and 9.9x 2013E.
Lt. Vehicle Build Revenue Gross Profit EBITDA Operating Income Pretax Income Tax Net Income F.D. EPS First Avg.Year (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Call* Shares
Assumed contribution margin for 2011-15 is in the range of 35% 2014E represents trend EPS with stock price of: $45 (20% CAGR)EPS estimates include $0.04 of FAS-12R expense annually in 2006, 2007, and 2008. * As of January 31.
New Business Growth* Shares Outstanding (Dec-11)EPS Sensitivity Target Price Sensitivity Year Total % Basic Shares 143,133
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 35
Harman International (HAR - $49.95 – Neutral / Higher Risk) Target Price: $49 (7.8x Cal-2014E EBITDA, Discounted by 30% - 50th Percentile Valuation of 1998-2003 range) Current View Revenue Growth Opportunities. The company is a leader in next-
generation technology for in-vehicle entertainment, evidenced by recent orders from Toyota, Fiat/Chrysler, and “entry-level” BMWs. Building on this leadership, management is targeting growth in: 1) incremental infotainment features and content; 2) mid-level infotainment systems; 3) emerging markets; and 4) professional video, where the company currently has no offering for the market.
Key Near-Term Issues. Our key near-term issue is the timing of “old” business running off and “new” business launching, with a high risk of a hiccup in margin over the next few quarters.
Margin Recovery. After arriving in July 2007, CEO Dinesh Paliwal launched an ambitious restructuring program, called STEP Change, during the first quarter of fiscal 2009 (September). The program targeted $400 million of sustainable, annualized cost savings, relative to the fiscal 2008 baseline, by the end of fiscal 2011, and achieved its goal by the end of its third quarter.
Business Model Strengths. The key strengths of the business model include: 1) strong and well-recognized brand names, including JBL, Harman Kardon, Mark Levinson, Lexicon, Infinity, and Revel; 2) a leading position in automotive branded audio, with an estimated 45% global market share; 3) a leading position in the global professional audio market; and 4) a strong balance sheet, currently in a net cash position, and good cash flow.
Key Risks. 1) new vehicle demand in Europe, 2) costs associated with new business launches, 3) volatile/weak results from the Consumer business, 4) softer-than-expected organic growth, 5) lower-than-expected STEP change savings, 6) the automotive market, 7) major customers and vehicle programs, and 8) technology adoption.
Target Price. Our $49 price target is based on 7.8x estimated calendar 2014 EBITDA, the 50th percentile valuation of 1998-2003 range.
Company Description Harman International Industries, Inc. is a leading supplier of high-fidelity audio products and electronics systems for the consumer and professional end markets. In the consumer segment, Harman sells audio and integrated multimedia systems, loudspeakers and electronics for home audio systems under several brand names including JBL, Harman Kardon, Mark Levinson, Lexicon, Infinity and Revel. In the automotive segment the company provides infotainment and branded audio systems to OEMs worldwide, though primarily to European luxury vehicle OEMs. Harman employs approximately 10,100 people throughout North America and Europe.
Stock Chart
Source: FactSet Revenue Profile – FY June 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
2.5
5
7.5
10
0
40
80
120
160NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1103
6
9
12Price to Book
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Harman International Industries Inc. (HAR $49.95)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings Model
Jared Plotz (414) 298-7351 [email protected] Rating: Neutral12-Month Target Price (7.8x Cal-2014E EBITDA, 50th Percentile Valuation of 1998-2003 Range, discounted at 30%): $49
Valuation Range (1994-2003) is 5.3-18.4x LTM EBITDA. Median is 11.8x.Current Multiple = 7.4x LTM EBITDA (39th percentile), 6.0x 2012E and 4.7x 2013E.
(in $ thousands)NA Lt. Veh. Build Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income F.D. EPS GAAP EPS First Avg.
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 36
Johnson Controls (JCI - $33.19 – Outperform / Lower Risk) Target Price: $53 (10.5x Cal-2014E EBITDA, Discounted by 15% - Median Valuation of the S&P Industrials over the last cycle) Current View Power Solutions: In addition to a modest cyclical recovery in aftermarket volumes, the
company’s revenue growth should benefit from secular opportunities such as penetration of AGM batteries (“start-stop” hybrids) and traditional lead-acid volume in China and emerging markets. Margin expansion opportunities come from increasing sales of higher-margin AGM batteries, vertical integration, and capacity expansion in China.
Building Efficiency: Traditional non-residential end markets have begun to rebound, with the company’s backlog registering 8% year-over-year growth to an all-time high $5.3 billion during the most recent December quarter. While segment margin is expected to be challenged during the upcoming quarter – largely a function of weaker residential HVAC demand – we believe the second half will represent solid margin improvement and bring full-year results closer to management’s original October guidance (for 50 basis points of margin improvement).
Automotive Experience: We expect global light vehicle production to increase 4-5% annually over the next four years, with Johnson Controls outpacing the market due to meaningful China exposure, increasing interior content (electronic features/functionality, interior refinement and “creature comforts”). The main near-term driver of margin recovery will be improvement in Europe, currently near 1-2% EBIT margin versus the 7-8% margin in the company’s North America/Asia automotive businesses. Additional margin expansion opportunities arise from operating leverage as light vehicle production rebounds, higher-margin new business launches, and vertical integration.
Capital Reinvestment: Johnson Controls has a strong balance sheet and we expect the company to generate significant cash flow over the next several years. Management has historically deployed free cash flow to fund acquisitions, which the company views as new platforms to support continued growth. Assuming free cash flow is used towards acquisitions that generate a 15% return on capital adds $1.00 per share to our mid-term earnings estimates; presently, our model applies free cash flow to debt reduction and acquisitions would provide upside to our target price.
Valuation: The stock recently traded near 10.1x LTM EBITDA, below the 10.5x median valuation of the S&P 500 Industrials during the last cycle. We believe the stock should move near the 10.5x median valuation given financial performance/metrics that compares favorably to other S&P 500 Industrials.
Key Risks: 1) uncertainty regarding the pace and trajectory of the recovery in global light vehicle production, particularly in Europe and China; 2) the pace and recovery of residential and non-residential new construction markets (about 5-10% of total sales); 3) the automotive and new construction environment; 4) major customers; 5) automotive new business; 6) raw material prices; 7) acquisitions; and 8) post-retirement liabilities.
Price Target. Our $53 price target is based on the stock trading at 10.5 times our estimate of calendar 2014 EBITDA, the median valuation of the S&P 500 Industrials, plus per-share equity income net of minority interest valued at 12.0x earnings.
Company Description Headquartered in Milwaukee, Wisconsin, Johnson Controls is a global market leader in automotive systems and facility management and control. In the automotive market, Johnson Controls is a major supplier of seating and interior systems, electronics, lead-acid batteries, and advanced lithium-ion batteries for hybrid and electric vehicle applications. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Johnson Controls was the 2nd largest North American supplier and the 7th largest global supplier to automotive OEMs in 2010, as ranked by Automotive News.
Stock Chart
Source: FactSet Revenue and Earnings Profile – FY September 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
1
2
3
4
0
15
30
45
60NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1106
12
18
24NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Johnson Controls, Inc. (JCI $33.19)David Leiker, CFA w (414) 298-7535 w [email protected] February 24, 2012Joe Vruwink w (414) 298-5934 w [email protected] Summary Earnings ModelJared Plotz w (414) 298-7351 w [email protected] Rating: Outperform
12-Month Target Price (10.5x cal-2014E EBITDA, median valuation of S&P Industrials, plus cal-2014E equity income less minority interest at 12.0x earnings per share, discounted by 15%): $53Last Cycle Range (2000-08) is 3.9-11.8x LTM EBITDA. Median is 7.0x.
Current Multiple = 10.1x LTM EBITDA (92nd percentile), 8.7x 2012E and 6.9x 2013E.(in $ Millions)
Lt. Veh. Build Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income Fully Diluted EPS GAAP First AvgYear (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Cash Chg EPS Call* Shs
* Assumed gross contribution margin for 2011-2015 is in the range of 16-20% 2014E represents trend EPS with stock price of: $69 (35% CAGR)*As of January 18.
New Business Growth* Shares Outstanding (Dec-11) Year $ % Basic Shares 679.82009 900 5% Options (Diluted) 5.62010 450 4% Equity Units 3.72011 853 5% Diluted Shares 689.12012 710 4% Insiders Own: 0.4% 2013 1,065 5% Headquartered: Milwaukee, Wisconsin2014 1,207 5%
2012-14 2,982 5%* Revenue growth with flat NA build (excludes 2% price downs in NA)* Excludes revenue in unconsolidated joint ventures
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 37
Meritor (MTOR - $7.73 – Outperform / Higher Risk) Target Price: $12 (5.9x Cal-2014E EBITDA, Discounted by 30% - Median Valuation of Last Cycle Range)
Current View Near-Term Headwinds: Revenues look to be flat sequentially as South
America and Europe see declines in truck volumes. However, pricing actions and manufacturing rationalization undertaken by the company should aid in margin improvement sequentially (~100 bps of adjusted EBITDA margin).
Secular Business Model Improvement: Over the past five years, Meritor has transformed itself into a pure-play commercial vehicle supplier, with a globally-diversified footprint, lean cost structure, and improved product portfolio.
Cyclical Truck Volumes: The company has a diversified exposure to global on-highway truck markets, with North America, Europe, and South America each accounting for roughly one third of Truck segment revenues. While Europe and South America are expected to have flat/down volumes during 2012, North America should continue to offer solid end-market growth.
Balance Sheet Deleveraging: As end markets recover, financial performance improves and cash flow increases, we expect net debt to decline to under 2.0x EBITDA from current levels of 4.0x EBITDA (through 2014).
Valuation: The stock recently traded near 6.3x LTM EBITDA, a premium to the historical median (5.9x).
Key Risks: 1) exposure to steel (though the company has pass-through agreements covering 85% of purchases); 2) a slower-than-expected recovery in North American volumes; 3) weakness in European commercial vehicle volumes, particularly at Volvo; 4) a potential slowdown in emerging markets such China, Brazil, and India; 5) lumpiness in military awards, the near-term timing in FMTV volumes, and the associated modeling risk.
Target Price. Our $12 target price is based on 5.9x our estimate of calendar 2014 EBITDA, the median of the last cycle range, plus per-share equity income net of minority interest valued at 8.0x earnings.
Company Description Meritor, Inc., headquartered in Troy Michigan, is a global supplier of axles, undercarriages, drivelines, and brakes and braking systems to commercial truck OEMs (56% of fiscal 2011 revenue), to trailer OEMs and the global commercial vehicle aftermarket (22% of fiscal 2011 revenue), and to military and specialty vehicle OEMs, off-highway equipment manufacturers in China, and commercial truck OEMs in India (22% of fiscal 2011 revenue. Meritor employs approximately 14,100 people in 19 countries worldwide.
Stock Chart
Source: FactSet Revenue Profile – FY September 2011
Source: Company filings, Robert W. Baird & Co. estimate
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
1
2
3
4
0
10
20
30
40NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1105
10
15
20NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Meritor, Inc. (MTOR $7.73)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (5.9x cal-2014E EBITDA, median valuation of last cycle range, plus cal-2014E equity inc less min int at 7.0x earnings per share, discounted by 30%): $12Last Cycle Range (2000-08) is 3.6-11.4x LTM EBITDA. Median is 5.9x.
(in $ Millions) Current Multiple = 6.3x LTM EBITDA (60th percentile), 5.4x 2012E and 4.6x 2013E.NA Cl. 8 Build Revenues Gross Profit ARM CVS EBITDA1 Operating Income Pretax Income Tax Net Income Fully Diluted EPS GAAP First Avg.
*Assumed contribution margin for 2012-2015 is in the range of 20-25% 2014E represents trend EPS with stock price of: $20 (49% CAGR)1) Adjusted net income + minority interest expense + income tax expense + interest expense + D&A - loss on sale of receivables - LVS segment EBITDA (after 2007) or LVS segment EBIT and D&A (prior to 2007) - LVA EBIT and D&A (prior to 2003) *As of February 2.
EPS Sensitivity Target Price Sensitivity ** GAAP EPS ex-accounting change. Year Downside Base Downside
Cal-2011 #DIV/0! $0.91 New Business Growth* Shares Outstanding (Sep-11)Cal-2012 #DIV/0! $1.28 Revenue Mix Fiscal $ Chg Basic Shares 96.8
North South 2008 100 4% Options (Diluted) 0.02011 Macro Assumptions Fiscal 2011 America Europe America Asia Total 2009 75 3% Convertible Securities 0.0
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 38
Methode Electronics (MEI - $9.74 – Neutral / Average Risk) Target Price: $9 (6.6x Cal-2014E EBITDA, Discounted by 20% - Median Valuation of Last Cycle Range) Current View Volatile Earnings: Methode has missed earnings expectations the past
two quarters due to high launch costs, new product development costs and supplier issues. These costs should continue in coming quarters, limiting earnings visibility.
Weak Near-term Revenue Opportunity: Near-term outlook lacks a revenue catalyst, with the Ford center stack award not launching until 2013. Weakening end-market demand outside the EU, particularly in Europe (which represents roughly one-third of total revenues) likely to be a headwind in 2012.
Margin Contraction: EBIT margins are running at about one-half the level seen last year (2.6% in FQ2-12 vs. 5.6% in FQ2-11), without any meaningful margin improvement expected over the next two quarters.
Valuation: The stock recently traded near 7.2x estimated CY12 EBITDA, a premium to the historical median (6.6x) and to the peer-group average (5.4x).
Key Risks: 1) exposure to the automotive industry, particularly to two large customers (Ford and GM) that account for approximately 60% of total Automotive revenue (32% of consolidated revenue); 2) volatile and lumpy results in the company’s non-automotive businesses; 3) modeling uncertainty as legacy Delphi/Ford business finished rolling off in the October 2010 quarter; 4) acquisition integration risk; 5) execution risk as new business is launched; and 6) non-automotive businesses and end markets.
Target Price. Our $9 price target is based on the stock trading at 6.6 times our estimate of calendar 2014 EBITDA, the median percentile of the last cycle range.
Company Description Methode Electronics manufactures electronic component devices for original equipment manufacturers in several industries. Methode's automotive segment is the company's largest product group, accounting for approximately 53% of sales. Products include full-engineered center stacks as well as sensors, connectors and switches (ergonomic and hidden) on steering columns, steering wheels, instrument panels and seats (occupant detection). Non-automotive products (47% of sales) include PC cards, copper interconnect devices, fiber optic connectors, field-effect switches, and remote control HMIs. Methode employs 2,743 people in 23 plants worldwide.
Stock Chart
Source: FactSet Revenue Profile – FY April 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11-2
-1
0
1
2
0
5
10
15
20NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '111015
20
25
30NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Methode Electronics, Inc. (MEI $9.74)David Leiker, CFA (414) 298-7535 [email protected] Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Neutral
12-Mo. Target Price (6.6x Cal-2014E EBITDA, Median Valuation of 2000-2008 Range, Discounted at 20%): $9Last Cycle Range (2000-08) is 2.3-11.4x LTM EBITDA. Median is 6.6x.
(in $ Thousands) Current Multiple = 10.9x LTM EBITDA (99th percentile), 8.5x 2012E and 5.7x 2013E.Lt. Vehicle Build Prod. Rev. Tooling Total Revenue Gross Profit EBITDA Operating Income Pretax Income Tax Net Income F.D. EPS First Avg.
*Assumed contribution margin for 2013-2015 is in the range of 25-35%. 2014E represents trend EPS with stock price of: $14 (10% CAGR)*As of January 29.
EPS Sensitivity Target Price Sensitivity New Business Growth (Auto)*Year Downside Base Upside Percentile Multiple Downside Base Upside Year Fisc-Rev Chg. Basic Shares 37,310
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 39
Modine Manufacturing (MOD - $9.64 – Outperform / Higher Risk) Target Price: $16 (6.6x 2014E EBITDA, Discounted by 25% - 25th Percentile of Last Cycle Range) Current View Valuation: The stock trades at 4.8x 2011 EBITDA, a discount to both the
7.7x median valuation over the last cycle and the 6.0x median valuation of a peer group of commercial vehicle companies. Closing this gap represents $3-4 per share of equity value.
Secular Business Model Improvement: Modine enters the cyclical recovery with a restructured global footprint, streamlined operations, and an improved product portfolio. Recent technology investments have the company positioned to capitalize on trends toward energy efficiency and reduced emissions.
Strong Balance Sheet: The company’s balance sheet is the strongest since the early 2000s, with net debt slightly above 1.0x LTM EBITDA. We expect the company to generate average annual cash flow in excess of $60 million over the next four years, to be used to reduce financial leverage and pursue growth opportunities, and potentially pay a dividend.
Key Risks: 1) execution risk; 2) a delayed and/or more muted recovery in global vehicular end markets; 3) rising raw material costs; 4) modeling risk related to an unpredictable tax rate; 5) risks associated with global vehicular end markets; 6) major customers/programs; 7) the roll-off of the BMW module business; and 8) post-retirement liabilities.
Target Price. Our $16 target price is based on the shares trading at 6.6x our estimate of 2014 EBITDA, the 25th percentile of the last cycle range.
Company Description Modine Manufacturing Co., headquartered in Racine, Wisconsin, is a global supplier of thermal management systems and components for several end markets, including automotive, commercial vehicle, industrial, and building markets. Modine manufactures heat-transfer products and systems including radiators, air, fuel and oil coolers, condensers and heaters, as well as air conditioning systems, and engine cooling modules. Modine employs approximately 6,800 people in 27 manufacturing facilities located in 14 countries.
Stock Chart
Source: FactSet Revenue Profile – FY March 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11-2
0
2
4
6
0
10
20
30
40NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11015
30
45
60NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Modine Manufacturing Company (MOD $9.64)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (6.6x 2014E EBITDA, 25th Percentile of Last Cycle Range, Discounted by 25%): $16Last Cycle Range (2000-08) is 3.9-12.2x LTM EBITDA. Median is 7.7x.
Current Multiple = 4.8x LTM EBITDA (3rd percentile), 4.0x 2012E and 3.2x 2013E.(in $ thousands)
NA LV Build Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income F.D. EPS Cash EPS (Oper) GAAP FC-Comp First Avg.Year (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg $ Chg EPS EPS^ Call* Shares
Mid-Term Targets: 18.0-20.0% 6.5-8.5% 2014E represents trend EPS with stock price of: $25 (40% CAGR)* As of February 3.
Excludes non-operating costs, charges and gains.^ Includes/excludes special items consistent with First Call consensus New Business Growth* Shares Outstanding (Dec-11)
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 40
Navistar International (NAV - $43.31 – Outperform / Higher Risk) Target Price: $62 (6.6x 2014E EBITDA, Discounted by 30% - Median of Last Cycle Range) Current View Delivering on Promises: Navistar has consistently delivered promised
performance over the past 12 months, certifying both a 13-liter and 15-liter engine as EPA 2010 compliant (with credits), producing military revenue at or above the high-end of the sustainable range, and meeting or exceeding earnings guidance and analyst expectations.
Valuation: The stock recently traded near 6.0x calendar 2011 EBITDA, a discount to the 6.6x median valuation over the last cycle and a significant discount to a peer group of global commercial vehicle OEMs.
Cyclical Recovery in North America: The North American commercial vehicle market represents approximately 60% of revenue and is expected to grow at a 5-10% CAGR through 2014.
We also expect the company to benefit from improving North American commercial vehicle aftermarket volumes.
Secular Business Model Improvement: The company has taken significant action during the recession to reduce its cost structure, expand its product lineup into new markets, expand its geographic reach outside or North America, and implement a differentiated engine strategy. Collectively, these actions are expected to result in a larger, more profitable Navistar during the current cyclical recovery.
Key Risks: 1) cyclical end markets; 2) emissions regulations; 3) fuel economy/CO2 regulations; 4) near-term engine transition; 5) major customers; 6) credit markets/availability; 7) loan portfolio performance; 8) raw material prices; 9) post-retirement liabilities; 10) union labor agreements; and 11) modeling risk.
Target Price. Our $62 target price is based on the stock trading at 6.6x our estimate of 2014 EBITDA, the median percentile of the last cycle range.
Company Description Navistar, based in Lisle, Illinois, is a major manufacturer of medium- and heavy-duty commercial trucks, buses, and military vehicles in North America. The company also produces engines for both its own vehicles and external customers in North and South America and has an in-house financing operation for retail and wholesale customers. In 2010, Navistar was the largest North American medium-duty truck and school bus OEM, third-largest North American heavy-duty truck OEM, and 10th-largest US defense contractor.
Stock Chart
Source: FactSet Revenue Profile – FY October 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
2.5
5
7.5
10
0
25
50
75
100NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1105
10
15
20NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1105
10
15
20Price to Book
By Geography By End Market
North America84%
South America 9%
Rest of World 7% Bus
Medium
Heavy
Severe ServiceNon‐U.S.
Truck
Military Truck
Engine
PartsFinance
Total Truck: 69%Engine: 15%
Parts: 14%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Navistar International Corp. (NAV $43.31)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (6.6x 2014E EBITDA, Median Valuation of Last Cycle Range, Discounted at 30%): $62Last Cycle (1999-2008) Range is 3.1-11.2x LTM EBITDA. Median is 6.6x.
Current Multiple = 6.0x LTM EBITDA (36th percentile), 4.7x 2012E and 4.0x 2013E.(in $ Millions)
Class 8 Build Class 5-7 Build Revenues Gross Profit EBITDA (Mfg. Co.) Operating Income Pretax Income Tax Net Income Fully Diluted EPS GAAP First AvgYear (000) Chg (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Cash Chg EPS Call* Shs.
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 41
PACCAR (PCAR - $45.84 – Outperform / Average Risk) Target Price: $54 (8.3x 2014E EBITDA, Discounted by 20% - Median Valuation of Last Cycle Range) Current View Pull Back on Margin Concerns Creates Buying Opportunity. Investors
quickly discounted PACCAR’s strong Q4-2011 performance on comments gross margin performance would be “flat to slightly down” in 2012 versus 2011. While Europe is a headwind, we believe PACCAR has the ability to deliver solid incremental margins on the back of strong N.A. truck demand and aftermarket parts.
Cyclical Recovery in Europe, North America: The European and North American commercial vehicle markets represent more than 80% of the company’s revenue. In 2012, we expect North America Class 8 production to increase roughly 12%.
Outgrowing End Markets: Historically, PACCAR has outgrown its end markets by 5-7 percentage points over the course of a cyclical recovery, via market share gains and acquisitions/international expansion. We expect this trend to continue, driven by market share gains (DAF vocational trucks, North America medium-duty) and organic growth internationally (primarily South America).
Secular Margin Expansion: Historically, PACCAR has grown margins by 100-200 basis points over the course of a cyclical recovery. We expect this trend to continue due to an improved cost structure, engine in-sourcing in North America, higher parts revenue, and Financial Services growth.
Valuation: The stock recently traded near 7.7x LTM EBITDA, a discount to the company’s median valuation over the last cycle and a slight premium to a peer group of global commercial vehicle OEMs.
Key Risks: 1) Cyclical end markets, 2) commodity prices, 3) credit markets and credit availability, 4) loan portfolio performance, 5) post-retirement liabilities, 6) foreign exchange, 7) premium market position, 8) the EPA 2010 emissions regulation and GHG emissions/fuel economy regulations, and 9) major shareholders.
Target Price. Our $54 target price is based on 8.3x our estimate of 2014 EBITDA, the median percentile of the valuation range over the last cycle.
Company Description PACCAR Inc., headquartered in Bellevue, WA, was incorporated in 1924. The company can trace its roots back to the Seattle Car Manufacturing Company, formed in 1905. PACCAR is a leader in the design and manufacture of medium- and heavy-duty trucks marketed under the Kenworth, Peterbilt, and DAF nameplates. The company's trucks are used for both over-the-road and off-highway hauling of freight and other goods. In addition, PACCAR provides financing and leasing to its customers and dealers through its wholly-owned finance subsidiaries. The company employs approximately 17,700 and has 12 manufacturing/assembly facilities in seven countries
Stock Chart
Source: FactSet Revenue Profile – FY December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
1.5
3
4.5
6
0
20
40
60
80NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101.5
3
4.5
6Price to Book
By Geography By End Market
North America54%
Europe31%
RoW15%
Heavy Truck 70%
Medium Truck 8%
Aftermarket Parts 16%
Financial Services 6%
Commercial Truck 80%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 PACCAR Inc. (PCAR $45.84)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (8.3x 2014E EBITDA, Median Valuation of Last Cycle Range, Discounted at 20%): $54Last Cycle (1999-2008) Range is 5.1-14.5x LTM EBITDA. Median is 8.3x.
Current Multiple = 7.7x LTM EBITDA (32nd percentile), 6.9x 2012E and 6.0x 2013E.(in $ Millions)
Class 8 Build Class 5-7 Build Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income F.D. EPS GAAP First AvgYear (000) Chg (000) Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg EPS Call* Shs.
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 42
Snap-on (SNA - $60.73 – Outperform / Lower Risk) Target Price: $74 (8.8x 2014E EBITDA - Median Valuation of Last Cycle Range) Current View Revenue Growth. Snap-on has reported strong organic growth during
2011, offsetting headwinds from continued weakness in Southern Europe and a run off of Defense business. Long term, end-market demand for auto repair tools, equipment and information is estimated to be 3-4% with incremental 2-4% from: o New products and productivity solutions such as wheel imaging
aligners, innovative power tools, and advanced diagnostic/information products that are increasingly software-related
o Expansion into emerging markets o Selective expansion in North America and Europe o Expansion into "mission critical" industrial end markets such as
aerospace, mining, government/military, and vocational markets o Expansion into adjacent repair markets such as
construction/agricultural equipment and commercial trucks. EBIT Margin. Snap-on management has also successfully improved
profitability through intense focus on execution, cost reduction and streamlining operations. During the downturn, management was able to hold EBIT margins above 9% with current run rate back to pre-recession levels. The company believes it can boost EBIT margin (ex-Snap-on Credit) by another 300-400 basis points through growing volume, continuous improvement activities and business mix.
Business Model Strengths. The key strengths of the business model include: 1) fantastic brands (Snap-on, Bahco; Snap-on named best in five categories in Frost & Sullivan survey of automotive repair technicians); 2) strong distribution system; 3) broad product offering to supply everything needed to repair vehicles (tools, equipment, diagnostic products, information systems); and 4) significant free cash flow.
Key Risk Factors. 1) Modest economic sensitivity, though the US auto repair tool market is just 30% of sales; 2) dealer business depends on automotive repair spending; 3) weakness versus our assumptions for annual end-market performance in the base business; and 4) limited intra-quarter visibility into performance.
Price Target. Our $74 price target is based on the shares trading at 8.8x our estimate of expected 2014 EBITDA, the median of the last cycle range.
Company Description Headquartered in Kenosha, Wisconsin, Snap-on Incorporated is a leading global developer, manufacturer and marketer of tool, equipment and diagnostic solutions for professional technicians, automotive service centers and OEMs, and commercial and industrial tool users worldwide. Snap-on has evolved from the leading hand-tool provider for the technician to the company with the most complete set of capabilities in the automotive service industry.
Stock Chart
Source: FactSet Revenue Profile – FY December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
1.5
3
4.5
6
0
20
40
60
80NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1106
12
18
24NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
Revenue by Segment Revenue by Geography Revenue by End Markets
Snap-on Tools Group35%
Commercial & Industrial Group34%
Financial Services
4%
Repair Systems & Information
Group27%
United States59%
Europe25%
Asia8%
Rest of WorldU.S. 26%
International 10%
Commercial (auto repair equipment)
12%
Industrial (aerospace, military,
China) 24%
Diagnostics 9%
OEM/Dealer Service 9%
Equipment 9%
Snap‐on Tools
Commercial & Industrial
Repair Systems & Information
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Snap-on Incorporated (SNA $60.73)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Outperform
12-Month Target Price (8.8x 2014E EBITDA, Median Percentile of Last Cycle Range, Discounted by 15%): $74Last Cycle Range (2000-08) is 4.4-11.5x LTM EBITDA. Median is 8.8x.
Current Multiple = 7.5x LTM EBITDA (28th percentile), 0.0x 2011E and 7.1x 2012E.(in Thousands)
Revenues EBITDA Op. Inc. (Inc. SOC) Pretax Income Tax Net Income Fully Diluted Operating EPS GAAP First AvgYear $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Cash Chg Ex-FS* Chg FS % EPS Call* Shs.
* Assumed contribution margin for 2011-2015 is in the range of 45-50% 2014E represents trend EPS with stock price of: $93 (19% CAGR)Operating EPS = GAAP EPS less FASB-recognized restructuring costs, asset write-downs, asset gains/losses and out-of-period items. *As of Feb. 2.* Adjusted to exclude the earnings of the Financial Services segment (before interest expense). Shares Outstanding (Dec-11)
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 43
STRATTEC Security (STRT - $23.07 – Neutral / Higher Risk) Target Price: $25 (4.3x 2014E EBITDA, Discounted by 27.5% - 25th Percentile of Last Cycle Valuation Range) Current View Delphi Power Products Acquisition. We view the acquisition of Delphi
Power Products as a positive. It offers access to a new customer in Hyundai and expands the company's product offering into areas (sliding doors, liftgates, trunk lids, and latches/strikers) complementary to the existing suite of vehicle access technologies.
Investment in New Technologies. The company continues to invest in new technology and looks to gain content by adding electronic content to the head of the key and provide backup systems for keyless vehicle operation.
Market Share Gains. After losing the business several years ago, the company has recently taken back significant business on several car platforms at GM.
Business Model Strengths. 1) Leading market share position with Chrysler, Ford, and General Motors; 2) strong financial position with no debt and $14 million of cash ($4.00 per share); and 3) membership in the VAST alliance, which provides exposure to the Chinese market.
Key Risk Factors. 1) Exposure to the North American OEMs in North America, which we estimate represent close to two-thirds of revenue; 2) de-contenting, as OEMs have removed locks from passenger doors, truck lids, and lift gates; and 3) rising raw material costs, primarily zinc and brass.
Target Price. Our $25 target price is 4.3x our estimate of 2014 EBITDA, the 25th percentile of last cycle range.
Company Description Headquartered in Milwaukee, Wisconsin, STRATTEC SECURITY CORPORATION designs, develops, manufactures, and markets mechanical locks, electro-mechanical locks, and related access control products and sliding doors, lift gates, and trunk lids for major global automotive manufacturers with operations in the United States, Mexico, and Canada. STRATTEC also supplies products for the heavy truck, recreational vehicle, marine, and industrial markets, as well as precision die castings for the transportation, security and recreational products industries. The company has been the world's largest manufacturer of automotive locks and keys since the late 1920's and currently maintains a dominant share of the North American market for these products.
Stock Chart
Source: FactSet Revenue Profile – FY June 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
1.5
3
4.5
6
0
20
40
60
80NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1108
16
24
32NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
By Geography By End Market By Customer
U.S.60%
Foreign (export sales)40%
Automotive 90%
Aftermarket 10%
GM 25%
Ford 10%
Chrysler 31%
Other 34%
NAOEMs 67%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 STRATTEC Security Corporation (STRT $23.07)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings ModelJared Plotz (414) 298-7351 [email protected] Rating: Neutral
12-Month Target Price (4.3x 2014E EBITDA, 25th Percentile of Last Cycle Valuation Range, Discounted by 27.5%) $25Last Cycle (2000-08) Range is 2.6-17.6x LTM EBITDA. Median is 5.2x.
Current Multiple = 2.5x LTM EBITDA (0th percentile), 2.1x 2012E and 1.7x 2013E.(in $ Thousands)
Lt. Vehicle Build Dollar Content Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income F.D. EPS First AvgYear (000) Chg $ Chg $ Chg $ % Chg $ % Chg $ % Chg $ % Chg Rate $ % Chg $ Chg Call* Shs
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 44
Tower International (TOWR - $13.15 – Outperform / Speculative Risk) Target Price: $17 (4.1x 2014E EBITDA, Discounted by 45% - Median Percentile of the Post-IPO Trading Range) Current View Valuation: Following its initial public offering in October 2010, the stock
recently traded near 3.6x LTM EBITDA, a 20-30% discount to the supplier group and a ~40% discount to the predecessor company’s historical median valuation. Every one-half multiple point adds $5-6 to our target prices, meaning that closing this valuation gap could add $10-15 to our target price.
Improved Business Model: “New” Tower’s business model is significantly improved versus the predecessor company. New management, brought in by Cerberus, immediately made significant operating improvements and exited unprofitable/low-margin contracts. Exposure to the North American OEMs in North America and to frame-based SUVs and pickups has fallen dramatically, while emerging markets now represent nearly one-fifth of revenue.
Free Cash Flow: From 2013-2015, we expect the company to generate average annual free cash flow over $50 million. Free cash flow will be used primarily for deleveraging, but also small acquisitions and capacity expansion to serve growing emerging markets.
Key Risks: 1) the cyclicality and competitive dynamics of the global automotive industry, 2) elevated financial leverage, 3) high fixed costs and operating leverage, 4) major customers and programs/platforms, 5) rising commodity prices (primarily steel), 6) post-retirement liabilities, 7) foreign exchange rate volatility, 8) investment in solar and other non-automotive revenue opportunities, 9) the company relationship with its majority shareholder Cerberus, 10) modeling risk, 11) net losses, and 12) below-average organic (net new business) revenue growth.
Target Price. Our $17 target price is 4.1x our estimate of 2014 EBITDA, the median percentile of the post-IPO valuation range.
Company Description Tower International, Inc., headquartered in Livonia, Michigan, is a leading global supplier and manufacturer of engineered structural metal components and assemblies for the global automotive industry. Products include body-structure stampings, frame and chassis structures, and complex welded assemblies. The company employs approximately 7,900 associates in 30 manufacturing and product development facilities worldwide. In 2010, Tower ranked as the 61st largest North American automotive supplier and the 71st largest global automotive supplier. Tower International, Inc. emerged from bankruptcy protection as Tower Automotive, LLC on July 31, 2007. Cerberus Capital Management acquired substantially all of the assets and assumed certain liabilities of the predecessor company, Tower Automotive, Inc. from Chapter XI bankruptcy protection. The predecessor company filed for Chapter XI bankruptcy protection on February 2, 2005.
Stock Chart
Source: FactSet Revenue Profile – FY December 2010
Source: Company filings, Robert W. Baird & Co. estimates
10/10 1/11 4/11 7/11 10/11 1/120
1
2
3
4
0
5
10
15
20NTM Estimated EPS (Left) Price
10/10 1/11 4/11 7/11 10/11 1/12010
20
30
40NTM Forward P/E
10/10 1/11 4/11 7/11 10/11 1/1202.5
5
7.5
10Price to Book
By Geography By End Market By Customer
Europe40%
North America29%
Korea12%
South America10%
China9%
Automotive 100%
VW 17%
Fiat 13%
Ford 13%
Hyundai / Kia 10%
Volvo 10%
Nissan 6%
Daimler 5%
Chrysler 5%
Toyota 5%
BMW 5%
Chery 3%Honda 3%
Opel 1%Other 5%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 Tower International, Inc. (TOWR $13.15)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings Model
Jared Plotz (414) 298-7351 [email protected] Rating: Outperform12-Month Target Price (4.1x 2014E EBITDA, Median Percentile of Post-IPO Range, Discounted by 45%): $17
Post-IPO Range (2010-Present) is 4.4-2.9x LTM EBITDA. Median is 4.1x.Current Multiple = 3.6x LTM EBITDA (28th percentile), 3.7x 2012E and 2.8x 2013E.
(in $ Thousands)Lt. Vehicle Build Revenues Gross Profit EBITDA Adjusted EBITDA(1) Operating Income Pretax Income Tax Net Income Fully Diluted EPS GAAP First F.D.
*Assumed contribution margin for 2012-2015 is in the range of 20-30% 2014E represents trend EPS with stock price of: $35 (40% CAGR)"Old Tower Automotive" filed for Chapter XI bankruptcy on February 2, 2005; the current company emerged from bankruptcy on July 31, 2007 when Cerberus purchased certain assets of "Old Tower Automotive" *As of February 16. 1) As defined and reported by the company to exclude items such as restructuring, receivables factoring charges, acquisition costs, and certain incentive compensation. Shares Outstanding (Dec-11)
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 45
AB Volvo (VOLV.B - SEK 94.60 – Outperform / Average Risk) Target Price: SEK 107 (8.2x Cal-2014E EBITDA, Discounted by 25% - Median Valuation of Last Cycle Range) Current View Margin Performance: Volvo has shown the ability to generate strong
incremental profitability on the rising truck/construction volumes seen recently. Both Truck and Construction Equipment operating margins are currently running at/near record levels.
Valuation: The stock recently traded near 7.2x estimated 2011 EBITDA, a discount to the 8.2x median valuation over the last cycle and nearly a full multiple point discount to a peer group of global commercial vehicle OEMs.
Major End Markets: The European and North American commercial truck/bus and construction equipment markets represent just over 50% of revenue. The company expects 14% growth in North America truck volumes and 11% growth in global construction equipment demand in 2012.
Margin Expansion: We expect Volvo to achieve higher profit margins over the next capital goods cycle than over previous cycles, after reducing structural costs by SEK 21 billion during the recession.
Product Line Expansion: Volvo’s primary strategy to outperform end markets is to expand its product lineup into unfilled areas, typically organically but occasionally via acquisition.
Key Risks: 1) cyclical end markets; 2) foreign exchange; 3) commodity risk; 4) credit markets/availability; 5) residual value risk; 6) union labor agreements; 7) government emissions/fuel efficiency regulations; 8) dual-class share structure; 9) major shareholders (Renault SA); 10) modeling risk; and 11) post-retirement liabilities.
Target Price. Our SEK 107 target price is based on the shares trading at 8.2x our estimate of 2014 EBITDA, the median percentile over the last cycle.
Company Description The Volvo Group, headquartered in Gothenborg, Sweden, is a leading global manufacturer of commercial trucks, construction and road building equipment, commercial buses, marine and industrial engines, and aircraft engine components with a meaningful presence in nearly every major geographic market worldwide. The Group also offers various financial services solutions to its customers via Volvo Financial Services. The Group can trace its roots back to 1915, with the first Volvo car produced in 1927 (a business that was divested in 1999), and has grown both organically and via acquisitions over the years to focus on providing a broad array of commercial transportation solutions in all regions of the world.
Stock Chart
Source: FactSet Revenue Profile – December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
3
6
9
12
0
40
80
120
160NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1101
2
3
4Price to Book
By Geography By End Market
Europe37%
North America18%
(China 6%)
Asia Pacific23%
South America11%
Other6%
Commercial Truck65%
Construction21%
Bus7%
Penta3%
Aero2%
Finance2%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 AB Volvo (VOLV.B-OME David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012Joe Vruwink (414) 298-5934 [email protected] Summary Earnings Model
Jared Plotz (414) 298-7351 [email protected] Rating: Outperform12-Month Target Price (8.2x Cal-2014E EBITDA - Median Valuation of Last Cycle Range - Discounted by 25%): SEK 107
Last Cycle Range (2000-08) is 4.6-14.7x LTM EBITDA. Median is 8.2x.Current Multiple = 7.2x LTM EBITDA (35th percentile), 7.0x 2012E And 5.8x 2013E.
(in SEK millions) - Note: 1 U.S. Dollar Equals Approximately 6.7 SEK as of February 03, 2012Truck & Bus Production Revenue Gross Profit EBITDA (Industrial Group) Op. Income (Industrial Group) Op. Income (Volvo Group) Pre-Tax Income Tax Net Income Full-Diluted EPS* First Average
Assumed contribution margin for 2013-2015 is in the range of 25-30%2014E represents trend EPS with stock price of: SEK 164 (22% CAGR)
Industrial Group: includes Volvo Truck, Volvo Construction Equipment, Volvo Bus, Volvo Penta, and Volvo Aero *As of February 3.Volvo Group: includes the Industrial Group as well as Volvo Financial Services Shares Votes Shares Outstanding (Dec-11)
EPS Sensitivity Target Price Sensitivity As of December 2011 # % # % Basic Shares 2,027Year Downside Base Upside Percentile Multiple Downside Base Upside Class A 1 Vote 643 31.7% 643 82.3% Options (Diluted) 0
2010 3.20 5.36 7.50 25th 6.6 41 50 56 Class B 1/10 of 1 Vote 1,385 68.3% 138 17.7% Diluted Shares 2,0272011 6.30 8.76 11.20 Median 8.2 54 65 71 Total 2,027 100.0% 781 100.0% Insider Ownership1: 7%
Robert W. Baird & Co. Global Auto & Truck Markets – March 2012 Page 46
WABCO Holdings (WBC - $60.72 – Outperform / Higher Risk) Target Price: $69 (8.0 x Cal-2014E EBITDA, Discounted by 15% - Median Valuation of Commercial Vehicle Peers over Last Cycle) Current View Earnings Momentum: WABCO has significant earnings momentum,
beating analyst expectations each of the last eight quarters. We expect this momentum to continue into 2012, as the North American truck market continues recovery and the company increases content growth globally.
Strong Content Growth Story: WABCO has perhaps the best content growth story among commercial vehicle suppliers, capitalizing on secular trends toward increased safety and fuel efficiency with its product portfolio of braking technology, air management systems, and electronics capabilities. Content growth potential is largest in emerging markets, which represent more than 20% of revenue.
Strong Cash Flow: We expect average free cash flow of more than $350 million annually through 2015, which we expect will fund acquisitions, dividends, or repurchases.
Key Risks: 1) the cyclicality of European/North American commercial vehicle markets; 2) contractual price reductions; 3) major customers; 4) costs to develop new technologies, enter new markets; 5) foreign exchange; 6) rising commodity prices; and 7) post-retirement liabilities.
Target Price. Our $69 target price is based on the shares trading at 8.0x our estimate of 2014 EBITDA, the median percentile over the last cycle of a comparable group of commercial vehicle suppliers.
Company Description WABCO Holdings Inc., headquartered in Brussels, Belgium, is a leading provider of air management and electronic technologies, supplying advanced braking, stability, suspension, transmission control, and air compressing and processing systems for the world's leading commercial truck, trailer, bus, and passenger car manufacturers. The company's products improve vehicle performance and safety and reduce overall vehicle operating costs. WABCO was founded in 1869 as the Westinghouse Air Brake Company, purchased by American Standard Companies Inc. in 1968, and separated and spun off to shareholders in July 2007.
Stock Chart
Source: FactSet Revenue Profile– December 2011
Source: Company filings, Robert W. Baird & Co. estimates
'02 '03 '04 '05 '06 '07 '08 '09 '10 '110
2
4
6
8
0
20
40
60
80NTM Estimated EPS (Left) Price
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11010
20
30
40NTM Forward P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '1105
10
15
20Price to Book
By Geography By End Market By Customer (estimated)
North America 9%
Europe 62%
(China 6%)
(India 7%)
Asia Pacific 18%
South America 7%
Rest of World 6%
Truck and Bus 64%
Aftermarket 23%
Trailer 9%
Automotive 4%
Daimler 12%
Volvo 11%
Other truck bus 41%
Aftermarket Distributors
23%
Trailer Manufacturers
9%
Auto OEMs 4%
BAIRD 777 EAST WISCONSIN AVENUE MILWAUKEE, WI 53202 WABCO Holdings, Inc. (WBC $60.72)David Leiker, CFA (414) 298-7535 [email protected] February 24, 2012
Jared Plotz (414) 298-7351 [email protected] Summary Earnings Model12-Month Target Price (8.0x Cal-2014E EBITDA, Median Valuation of Peer Group Last Cycle Range, Discounted by 15%): $69
Last Cycle Range (2000-08) is 1.7-11.2x LTM EBITDA. Median is 7.3x.
Current Multiple = 7.9x LTM EBITDA (58th percentile), 7.3x 2012E And 5.6x 2013E.
($ in millions)EU CV Build NA CV Build NA LV Build Revenues Gross Profit EBITDA Operating Income Pretax Income Tax Net Income Fully Diluted EPS GAAP First Avg
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 compensation from 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 in foreign 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 market over 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 12 months.
Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics 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. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. 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 changing market 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 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used 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 information regarding the price target and recommendation is provided in the text of our most recent research report.
Distribution of Investment Ratings. As of February 29, 2012, Baird U.S. Equity Research covered 672 companies, with 53% rated Outperform/Buy, 45% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 13% of Outperform/Buy-rated, 8% of Neutral/Hold-rated and 17% of Underperform/sell-rated companies have compensated Baird for investment banking services in the past 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 price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst’s productivity, including the quality of the analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird’s Research Oversight Committee.
Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate 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 at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx. You can also call 800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 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 model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.
Disclaimers
Baird 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 reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report 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 Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws.
Copyright 2012 Robert W. Baird & Co. Incorporated
Other Disclosures
The information and rating included in this report represent the Analyst’s long-term (12 month) view as described above. Robert W. Baird & Co. Incorporated and/or its affiliates (Baird) may provide to certain clients additional or research supplemental products or services, such as outlooks, commentaries and other detailed analyses, which focus on covered stocks, companies, industries or sectors. Not all clients who receive our standard company-specific research reports are eligible to receive these additional or supplemental products or services. Baird determines in its sole discretion the clients who will receive additional or supplemental products or services, in light of various factors including the size and scope of the client relationships. These additional or supplemental products or services may feature different analytical or research techniques and information than are contained in Baird’s standard research reports. Any ratings and recommendations contained in such additional or research supplemental products are consistent with the Analyst’s long-term ratings and recommendations contained in more broadly disseminated standard research reports.
UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISD passport.
This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective.
Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.
Contacts
Research M&A and Investment Banking Baird Capital Partners
North America United Kingdom
David Leiker, CFA Steven G. Booth John Fordham Andrew BrickmanDirector Head of Investment Banking Chairman, Baird International Partner
Robert W. Baird & Co. www.rwbaird.com 800.RW.BAIRD
Equity Capital Markets and Private Equity Office Locations
U.S. Offices Atlanta One Buckhead Plaza 3060 Peachtree Road Suite 1815 Atlanta, GA 30305 888.792.9478 Boston One Post Office Square Suite 3617 Boston, MA 02109 888.661.5431 Charlotte 4725 Piedmont Row Drive Piedmont Town Center Two Suite 750 Charlotte, NC 28210 704.553.6600 Chicago 227 West Monroe Street Suite 2100 Chicago, IL 60606 800.799.5770 Milwaukee 777 East Wisconsin Avenue Milwaukee, WI 53202 888.224.7326 Nashville 2525 West End Avenue Suite 1000 Nashville, TN 37203 888.454.4981 Palo Alto 1661 Page Mill Road Suite A Palo Alto, CA 94304 650.858.3800
San Francisco 101 California Street Suite 2450 San Francisco, CA 94111 866.715.4024 555 California Street Suite 1350 San Francisco, CA 94104 415.627.3270 St. Louis 8000 Maryland Avenue Suite 500 St. Louis, MO 63105 888.792.7634 Stamford 100 First Stamford Place 3rd Floor Stamford, CT 06902 800.380.3247 Tampa 401 East Jackson Street Suite 2900 Tampa, FL 33602 888.238.2672 Washington, D.C. Pinnacle Tower North 1751 Pinnacle Drive Suite 1100 McLean, VA 22102 888.853.2753
International Locations* Frankfurt Neue Mainzer Strasse 28 60311 Frankfurt Germany 011.49.69.13.01.49.0 Hong Kong Suite 3304, 33/F Bank of America Tower No.12 Harcourt Road Central, Hong Kong 011.852.2827.8822
London Mint House 77 Mansell Street London E1 8AF UK 011.44.207.488.1212 Shanghai Rm 42-022, 42/F, Hang Seng Bank Tower No.1000 Lujiazui Ring Road Pudong Shanghai 200120, China 011.86.21.6182.0980