Sector Review

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Sector Review

• Industrials are currently 1.07 underweight
• Sector slightly overvalued, but SIM holdings
  undervalued
• Decided to maintain sector weight

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SIM Industrials Holdings
of Assets

• General Electric (GE) 4.21
• FedEx (FDX) 3.50
• Oshkosh (OSK) 2.95

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• Recommendation
• Maintain GE (421 bps) and OSK (295 bps)
• Sell half (175 bps) of current FedEx holding
• Reallocate 175 bps to Rockwell Automation (ROK)

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General Electric

• Market Cap 330 BLN (2nd largest)
• Well Diversified Industrials Giant
• The Most Successful Firm of This Type
  (Conglomerate)
• Very Defensive Only company from the original
  Dow
• All-time Favorite Stock!

Industrials Sector
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General Electric

• Current Price 33.2
• Valuation Summary
• DCF (r 10, g 4) 43.0 (29 upside)
• Sensitivity Analysis Results 34 60
• Price Multiples 44.2 (33 upside)
• Range from 39 48
• P/S Sum-of-Parts 40.3 (21 upside)
• Comparables UTX, HON, ETN, BAX, MDT, BAC, WFC,
  DIS, CBS
• Already one of the most heavily weighted stocks

Industrials Sector
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Oshkosh Corporation

• Current Price 42.85
• DCF Implied Share value 59.97 (39 upside)
• Absolute Valuation Target Average 62.25 (45
  upside)
• However, substantial risk present
• Election/change in worldwide conflict policies
• Very levered (Debt/Equity gt2)
• Integration of new branch (JLG)

Therefore, we recommend maintaining current
position in OSK, and further diversify the
Industrial holdings
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FedEx Price Movements

• Oversold in second half of 2007
• (down 32 since Feb 07)

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FedEx Valuation
Target Price 109.45 Current Price 89.22 Upsid
e 23
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Rockwell Automation, Inc

• ROK provides industrial automation power, control
  and information solutions to manufacturing
  customers.
• Company Highlights
• 20,000 employees
• Market Cap - 8 billion
• Annual Sales - 5 billion
• 46 of Sales generated Internationally
• Customers in over 80 countries

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Rockwell Financial Highlights

• Management effectively executing on business plan
  by
• Consistently generating cash through operations
  (531 MM in 2007)
• Reinvesting in organic growth and strategic
  acquisitions
• Continuing to grow revenue in emerging markets
• Returning excess cash to shareholders

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Rockwell DuPont Analysis

• Margins, ROE and asset turnover increasing
• ROE has more than doubled in the past five
  years
• Able to maintain high quality ROE by keeping
  40 of ROE derived from operations.

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Rockwell DCF
DCF Target Price -- 64.70
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Rockwell Price Performance
Currently Oversold
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Rockwell Relative Valuation

• Relative Valuation vs. SP-20
• Relative Valuation vs. ECE Sub-sector

(Note Historical 10-year values used)
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Rockwell Absolute Valuation
Average Target Price - 71.97
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Rockwell Recommendation

• Strong financial performance over past 5 years
• Continuing to grow market share internationally
• Over 1 billion in cash for strategic investments
• Undervalued relative to sector, sub-sector and on
  absolute scale
• Target Price 68.33
• Current Price 54.48
• Upside 25

BUY
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Diversification Benefit

• Correlation between and
  other Industrials names
• ROK is a good addition in terms of
  diversification benefit
• ROK likewise have a very good upside potential
• GE and OSK appear to be better, but any forecasts
  can be subjective
• Adding less correlated stock helps reduce overall
  portfolio variance
• Thus, adding ROK is likely value-creating in
  portfolio standpoint

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Recommendation Summary

• Rationale
• Diversify Portfolio in Cyclical Sector
• ROK - strong financial condition and undervalued
• Risks
• Failure to capture market share in emerging
  markets
• Raw material inflation
• Acquisition difficulties
• Recommendations
• GE 421 Bps (Hold)
• OSK 295 Bps (Hold)
• FDX 175 Bps (Sell 175 Bps)
• ROK 175 Bps (Buy 175 Bps)

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Appendix
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Economic Indicators
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Industrial Sector Composition

• 17 industries 56 Constituents

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Revenue Growth Organic and International(from
2007 10-K)
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ROK DCF Sensitivity
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Acquisitions

• ICS Triplex (UK) control and safety solutions.
  Markets include oil and gas, chemicals and power
  generation industries
• ProsCon (IRE) process technology, control
  systems, and IT. Markets include pharma and
  biotech industries
• CEDES AG (SWZ) optoelectronics, safety and
  controls systems

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Comparables