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Brandon KnutsonTaylor DehlinBrett Larson

Summit Student Investment FundIndustrials Sector Update

AgendaFall 2014 ReviewSector OverviewCompany OverviewsProposals

Fall 2014 Review

Fall Transaction Review JEC sold because of their exposure to a weakening subsector.ETN was trimmed because of their poor stock performance and negative outlook.PCP was purchased because of their strong position in a strong sub-sector.PRLB was purchased due to their position in a rapidly growing sub-sector (3D Printing) as well as their great margins.

TransactionsSold85 shares of JECTrimmed57 shares of ETNBought37 shares of PCPBought62 shares of PRLB

Current AllocationCompanyTickerHolding ValuePrecision Castparts Corp.PCP$7,851Eaton Corp. PLCETN$3,669Cummins Inc.CMI$5,498Proto Labs Inc. PRLB$4,354Honeywell International Inc. HON$8,7523M Co.MMM$8,339Total$38,463Need to Free Up.5%= $1,691

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Correlation Matrix

Sector Overview

Industrials SectorComprised of companies that engage in the production of products used in construction and manufacturing. Includes machinery, materials, aerospace and defense, industrialized shipping, and engineering services.

Industrials SectorS&P 500YTD Return-1.79%+.10%Average P/E17.8718.26Mean Dividend2.09%2.00%

Industrials Index vs SPX

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Industrials Subsector ExposureEatonCummins3MHoneywellPrecision Proto LabsAerospace & DefenseElectrical EquipmentMachineryManufactured GoodsTransportation EquipmentEngineering & Construction Serv.Industrial ServicesTransportation & LogisticsWaste & Environmental Serv. & Equipment

Aerospace and Defense Outlook

RPK (Trillions) = revenue passenger kilometers or distance traveled by revenue producing customers

Aerospace and Defense Outlook

Aerospace and DefenseOther Trends:Strong growing market expected to continue over next 30 yearsIncreased demand for efficiency in aircrafts Airlines will need 36,800 new planes from 2013 to 2033 Defense spending is flat volatileStrongest growth is in emerging markets Boeing and Airbus have substantial backlogs

Company Overviews

Honeywell (HON)A diversified technology and manufacturing company.3 product segmentsAerospace (38.7%)Automation and Control Solutions (35.9%)Performance Materials and Technologies (25.4%)Key MetricsLatest Closing Price$102.96MKT Cap$80.4BBeta ()1.09Dividend Yield1.81%Debt/Equity48.82%Return YTD6.00%Return since purchase11.53%

HON vs SPX vs Industrials Index

Relative Valuation

Earnings HistoryEarnings Surprises PeriodConsensusReportedSurpriseQ4 2014$1.42$1.43+0.99%Q3 2014$1.41$1.47+4.18%Q2 2014$1.36$1.38+1.62%Q1 2014$1.26$1.29+2.22%

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Coverage Ratio: 18.34 ROA=9.33% ROE=24.14%

Critical Factors and CatalystsCritical FactorsGreat Management: Dave Cote (+)HOS Gold and HUE initiatives (+)$10 billion in M&A over next 5 years (+)Positive long-term outlook for aerospace (+)Increased demand for efficiency in aerospace (+)Slowing growth in China and slow growth in Europe (-)Urbanization, population growth, and infrastructure development in emerging markets (+)Strengthening dollar (-)Commercial construction picking up (+)CatalystsShare buyback (+)Dividends growing faster than earnings (+/-)

Corporate Social Responsibility New product development incorporates eco-efficiency criteria. Many of their products focus on high efficiency.High efficiency focused aerospace products.New environmentally friendly refrigerants.

The SteinWhy we bought them (Spring 2014):Could not find pitch on the drive so difficult to say if anything has changed.We assume they liked the firms growth strategy as well as their exposure to industries with positive outlooks.What has changed?Portfolio goals (beta and market cap)Double digit earnings growth expected over the next 5 years.HOS GoldHUERecommendation: HOLD

Precision Castparts Corp. (PCP)Key MetricsLatest Closing Price$212.18MKT Cap$30.08BBeta ()1.16P/E16.42Dividend Yield0.06%Debt/Equity35.10%Return YTD-12.74%Return since purchase-5.90%

Precision Castparts Corp. has been around for over 60 years and has grown into a worldwide, diversified manufacturer of complex metal components and products such as:

Investment CastingsForged ComponentsAerostructuresAerospace

S&P 500 vs. PCP vs. Industrials Index

Precision Castparts Relative Valuation

RevenueRevenues in 2014 were increased to $9,616M15% increase from $8,361M in 20132014 acquisitions account for $1.2B in extra salesAerospace accounts for 68% of total sales in 2014Earnings/SharePeriodConsensusActualSurpriseQ4 2014$3.084$3.09+0.19%Q3$3.321$3.24-2.44%Q2$3.354$3.32-1.01%Q1$3.198$3.27+2.25%

Revenue Segments

Interest Coverage = 39.01ROA = 9.89%ROE = 16.47%

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Catalysts/Critical FactorsCritical Factors:Aerospace industry is continuing to grow (+)Strong acquisition of 18 businesses since 2013 (+)Highly cyclical aerospace/power generation markets (-)Subject to contract revision by customers (-)

Catalysts:$7.3B in backlog for all revenue segments (+/-)Roughly 82% expected to be filled in 2015$1B expansion to the share repurchase program (+)

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Corporate Social ResponsibilityPrecision Castparts handles issues with conflict materialsTin, Tantalum, & Gold have large reserves in the DRCReview and understand the composition of all inputs

Attempting to obtain ISO 14001 certificationFramework for an environmental management system

The SteinWhy we bought them (Fall 2014):Strong outlook in the aerospace and defense industriesSolid acquisition history/vertical integration

What has changed?Misaligned with funds goals (large cap of $30.08B)

Recommendation: HOLD

Cummins Inc (NYSE: CMI)

Cummins is a global power leader that designs, manufactures, sells and services diesel engines and related technology around the world. Cummins serves its customers through its network of 600 company-owned and independent distributor facilities and more than 7,200 dealer locations in over 190 countries and territories.

Key MetricsPrice$137.46Market Cap$25.01BBeta1.35P/E15.76Dividend Yield2.28%Return YTD-3.46%Return Since Purchase47.37%

CMI vs S&P 500 Industrials

CMI US EquityS5INDU Index

Business Segment OverviewEngine BusinessHeavy and medium duty truck, bus, light duty automotiveAgricultural, construction, mining, marine, oil and gas, military equipment

Power Generation BusinessPower generation systems, components and services, auxiliary power

Components BusinessFiltration, emission solutions, fuel systems

Distribution BusinessGlobal distribution strategy and channel management

-Distribution segment steadily increasing vertically integrating through acquisitions (7 in 2014 and 3 more planned for 2015)-Ongoing distributor acquisition caused Dist. Rev to jump 38%

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Segment Revenues

*Non-Segment Items: includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. -Divestitures, legal matters, sale of assets/liabilities in light duty filtration business (Components Segment), flood damage recoveries.

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Geographic Revenues

*Continued strength in US and concerns in China/Brazil due to weak economics conditions and low demand37

Balance Sheet Summary

Interest Coverage: 36.95xROE: 21.64ROA: 10.82

*Slightly increased ST and LT liabilities due to companys distributor acquisition strategy*Healthy financial position to cover any debt payments38

Relative Valuation

Earnings Report

QuarterConsensusActualSurpriseQ1 2014$1.67$1.83+9.45%Q2 2014$2.38$2.43+1.89%Q3 2014$2.28$2.42+5.95%Q4 2014$2.50$2.56+2.24%

*2012 Q3 dip: significantly weakened demand in North American heavy duty truck market due to industry wide production rate cuts (that were anticipated) and slower than expected new order rates

*2013 Q3 dip: Declined engine business revenues due to weakness in global mining and power generation demand. -Power generation demand: weak international market demand in India, Australia and Europe offsetting the growth in China and Brazil40

Corporate Social ResponsibilityEight years and counting: Named one of the Worlds Most Ethical CompaniesNo. 11 on 100 Best Corporate Citizens List by Corporate Responsibility MagazineRaising awareness about Waste Management in La Pila, MexicoFocus on fuel efficiency in new product linesCSR included as one of six company core values

The SteinPurchased: October 2012Continued economic recoveryBullish outlook

Whats ChangedCyclical industryExpansionary phaseCurrent positive truck production outlook

Cummins: The Bottom LineCritical FactorsStrong North American truck demand for 2015 (+)Aggressive vertical integration in distribution segment (+)Weak Power Generation segment (-)

CatalystsHigh freight rates and low diesel prices to expand fleet capacity and increase profitability (+)Exposure to weak emerging markets in China and Brazil (-)Cyclical nature of commercial vehicle sales (-)

Recommendation: Hold

-Strong N.A. truck demand 2014 grew 20% - industry truck production up 10%. Highest backlog orders since 2006. New product lines implementing in 2015 ISG heavy duty engine, QSK95 engine, 2016 Nissan Titan (light duty truck market)-Distribution segment: 7 acquisitions in 14, 3 more planned for 15. Company focus on reducing quality costs improvement of product quality and customer service. Even in the eyes of the most demanding customers expect that quality costs will be reduced in 15.-Power Generation: decreased demand from emerging market customers and lower oil/gas industry down 23% YoY. To be offset by truck market. Heavily due to increased emissions regulations.

-Diesel prices down 27% YoY, which fuel represents 35-40% of truckers costs. Diesel forward contracts indicate prices will remain at or below $3.02/gallon for next 2 years. 98.5% fleet utilization close to record high. -Weak Brazil construction forecasted to decline truck production forecast an additional 15%. China slow infrastructure/construction spending down 7% YoY due to new NS4 on-highway emission standards.-Sensitive to the slowing manufacturing sector and consumer and industrial demand. This could put 2H orders at risk for cancellations. ISM dropped past four months due to slow global growth and strengthening USD (hurting exports).43

Proto Labs Inc. (PRLB)Was founded in 1999 as The ProtoMold Company and has become the worlds fastest source for custom prototyping for low- to mid-volume parts

finelineAdditive ManufacturingfirstcutCNC MachiningprotomoldInjection MoldingKey MetricsLatest Closing Price$70.22MKT Cap$1.82BBeta ().75P/E43.89Dividend Yield0%Debt/Equity.06%Return YTD4.23%Return since purchase11.32%

S&P 500 vs. PRLB vs. Industrials Index

Proto Labs Relative Valuation

RevenueRevenue in 2014 was $209.6M 28.5% increase from $163.1M in 2013

Record quarterly revenue growth in all three geographies23% year over year in America10% in Europe25% in Japan

Earnings/SharePeriodConsensusActualSurpriseQ4 2014$0.423$0.43+1.65%Q3$0.465$0.44-5.38%Q2$0.422$0.45+6.64%Q1$0.389$0.41+5.40%

Revenue Segments

ROA = 16.08% ROE = 17.45%

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Catalysts/Critical FactorsCritical Factors:Acquisition of fineline in April 2014 (+)Expansion into the 3D printing market (+)New proprietary technology allowing for fast turnaround times (+)Larger competitors are able to obtain market share (-)

Catalysts:Revenue has grown in all geographical locations (+)Strengthening dollar (-)fineline accounted for 4.49% of revenues in 2014 (+)

New proprietary processes allowing for fast turnaround timesCustomers upload 3D CAD design to websiteSoftware analyzes the manufacturability of the productReturns the firm a price based on:Input materialsQuantityProcess

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Corporate Social ResponsibilityProto Labs handles issues with conflict materialsTin, Tantalum, & Gold have large reserves in the DRCReview and understand the composition of all inputs

High supply chain expectationsExpect suppliers to establish a due diligence programCompliance with the Conflict Free Smelter (CFS) Program

The SteinWhy we bought them (Fall 2014):Acquisition of fineline allowed them to enter 3D printing marketEmerging market with significant future growthIndustry leader due to quick quoting and turnaround times

What has changed?Beta is misaligned with portfolios goals ( = .75)

Recommendation: HOLD

$482 million in income 6 months 201452

3M (MMM)Globally diversified technology company (they do everything)5 Product SegmentsIndustrials (34%)Safety and graphics (18%)Electronics and Energy (17.6%)Health Care (17.5%)Consumer (14.2%)

Key MetricsLatest Closing Price$163.50MKT Cap$103.9BBeta ()1.07Dividend Yield2.09%Debt/Equity52.02%Return YTD1.94%Return since purchase61.45%

MMM vs SPX vs Industrials Index

Relative Valuation and EQRV

Earnings HistoryEarnings Surprises PeriodConsensusReportedSurpriseQ4 2014$1.796$1.81+0.78%Q3 2014$1.961$1.98+0.97%Q2 2014$1.908$1.91+0.10%Q1 2014$1.796$1.79-0.33%

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Coverage Ratio: 50.25 ROA=15.29% ROE=32.38%

Critical Factors and CatalystsCritical FactorsIncreased M&A activity ($1-2B a year) (+)Divesting lower margin business (+)Reorganizing segments to increase synergies (+)Continuing heavy emphasis on R&D (+)Heavy exchange rate risk (-)Slowing foreign growth (-)CatalystsShare repurchase program (+)

Corporate Social Responsibility3M has long held the belief that reputation depends not solely on financial performance but also on the way we run our business.One of the first manufacturing companies to address environmental issues (1975).

The SteinWhy we bought them (Fall 2011):Could not find specific reasons. They were and are a great company. What has changed?Portfolio goals (beta and market cap)Strong dollarRecommendation: SELL

Eaton Corp PLC (NYSE: ETN)Eaton provides power-management solutions to diversified industrial customers, including electrical systems, hydraulics components, aerospace fuel systems, and truck and auto powertrain systems. The company sells to both original equipment manufacturers and aftermarket customers and generates more than 50% of its sales outside the United States.

Key MetricsPrice$66.70Market Cap$31.18BBeta1.48P/E14.19Dividend Yield3.30%Return YTD1.57%Return Since Purchase-8.37%

ETN vs S&P Industrials

ETN US EquityS5INDU Index

Business Segment OverviewElectrical BusinessPower distribution and control products, circuit breakers, LED lighting, operator interface hardware and software, motor control products, etc.

Fluid Power BusinessFluid power connectors, hydraulic pumps, motors, power steering units, filtration products, etc.

Automotive BusinessValvetrain systems, intake and exhaust valves, superchargers, transmission dampers, engine sensors and controls, etc.

Aerospace BusinessHydraulic systems, fuel and inerting systems, motion control, engine solutions

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Segment Revenues

*2012 Cooper acquisition65

Geographic Revenues

Balance Sheet Summary

Interest Coverage: 7.22ROE: 11.01ROA: 5.20

Cooper AcquisitionGlobal manufacturer of electrical products and systems

$13.19B ($6.5B Cash, $6.6B Stock) in November 2012

Cumulative Cost Savings Targets2015: $280M2016: $325M (Peak)

Little progress narrowing gap between margins and the S&P Industrials Index

*Past 2 years: $250M of acquisition related charges-This could be tied to weaker performance from non-Cooper assets compared with the peer group-or signal that the company is using Cooper savings to support R&D initiatives)68

Relative Valuation

Earnings ReportQuarterConsensusActualSurpriseQ1 2014$1.002$1.010+0.8%Q2 2014$1.118$1.110-0.72%Q3 2014$1.236$1.290+4.37%Q4 2014$1.200$1.270+5.83

Corporate Social ResponsibilityChina:Recognized for the Golden Bee CSR Report Evergreen AwardRanked in the top ten of the 2013 China CSR Honor Roll Top 100 EnterprisesSustainability not viewed as an autonomous program or initiative. Its how we do business. Doing business right is a part of the central vision.

The SteinPurchased: May 2014Opportunities for growth due to heavy exposure to electrical equipment

Revised and Trimmed: October 2014Growing exposure to international markets in China and Brazil have caused operational growth to sufferManagement consistently revising earnings

Eaton: The Bottom LineCritical FactorsVehicle Segment: North American truck market (+)Strong US LED lighting products sales (+)International electrical sales outlook (-)

CatalystsHigh customer switching costs (+)High hopes for increased credit rating (-)Weak European electricals and utilities (-)

Recommendation: Sell

-Vehicle segment: truck market drove sales up 8% organic growth Q4 2014.-LED lighting products make up 50% of electrical sales (which is 30% of total rev). Large exposure to both commercial and residential construction (strong expansion in US) could be bright for ETN.-International: weak construction in China, low oil and gas spending, and low European utility demand giving negative outlook for China, Russia, Brazil, and Europe. -International sales make up roughly 50% of ETNs total revenues.-2014 organic growth of 3-4% is projected to be offset by a 4% decline due to currency devaluations.

-Switching costs even if a competitor introduced a more compelling technology than ETNs, the significant costs of changing aircraft design and engineering would make switching away from them uneconomical.-Distributors prefer to limit number of vendors, makes its difficult for smaller scale electrical manufacturers to have similar scale advantages as ETN. Cooper acquisition strengthens this.-Credit Rating: since Cooper acquisition ETN has signaled desire to return to an A credit rating. Stock has lagged behind both S&P and S&P Industrials since the announcement deal.-ETN has launched incentive program to boost EPS, cash flow and total shareholder returns (could be a sign of weakness hurting chances of getting credit rating increased)-Consensus expectations (even after accounting for its debt reduction plans) indicate that it may fall short of targets for credit metrics that Fitch and S&P factor into its A- and BBB+ ratings.-Weak Europe: Combination of over-capacity and weak demand power prices remain too soft to support construction in most Euro power plants.73

Proposals

Buy/Sell/HoldHoldSellBuy

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