Industrials Flashcards
Why have industrial manufacturers shifted their focus towards the aftermarket?
- Clear-focus towards becoming more service-orientated and offering more aftermarket services.
Overall cyclicality within the manufacturing industry in terms of customer demand and market maturity has led to manufacturers attempting to mitigate the risk of cyclical fluctuations by decreasing the proportion of revenue from new equipment sales
For industrial companies, compare the capital intensity of new product development and aftermarket services?
Product development usually quite capital-intensive, whereas revenue from aftermarket service is a more predictable, recurring stream of revenue.
What is servitisation?
Diversifying a manufacturing firm away from merely offering products; instead, also providing innovative and invaluable services alongside their products.
Why is there a high level of M&A activity in the industrial manufacturing space?
Industry is highly specialised meaning there are hundreds of niches which all produce innovative products with differentiated capabilities
For those reasons, existing incumbents acquire companies with proven technologies and an existing customer list rather than incurring high R&D expenses to build it on-house
Why are financial sponsors active in the industrials space?
Attempt to acquire niche players to grow through add-ons and then exit to large strategics such as Honeywell, Siemens, ABB, ASSA, ABLOY, and Johnson Controls
With M&A, would industrial companies grow organically or inorganically?
Inorganically - for many industrial conglomerates, recent revenue growth has become almost entirely inorganic.
Which valuation multiples are most often used to value companies in industrials?
Most common multiple is EV / EBITDA, especially for industrial tech.
EV / ( EBITDA - Capex) is often used for manufacturing companies that have high capital intensity, while EV / EBITDAR can be used for the transportation and logistics segments if equipment such as the trucks are rentals
What business and industry characteristics are important to consider for industrial companies?
- End markets
- Supply chain
- Product value / Upgrade cycles
- Competitive landscape
Why are the end markets important when valuing an industrials company?
Customers served and their diversification will determine how cyclical the revenues are.
The relationship between the company and their customers, and how essential their products are will determine how recurring the revenue is
Why is the supply chain important when valuing an industrials company?
Looking to see how many suppliers it depends on and how well integrated it appears.
Distribution network would also be examined to see how much reach the company has and opportunities for expansion by selling in more channels.
Why are upgrade cycles important when valuing an industrials company?
Looking at the c capital intensity of the business
Why is the competitive landscape important when valuing an industrials company?
Looking at the strength of the industry’s barriers to entry and how products stack up to competitions is important as these factors will affect the stability in the revenue generates and the pricing power of the company over its end markets.
An Industrials company has shown impaired revenue related to a severe economic slowdown. What metric would you look at to assess the damage and predict the pace of recovery?
- Inventory backlog as many customers delay their projects into the future.
Walk me through the stages from Industry 1.0 to Industry 4.0?
1.0 - Industrial revolution
2.0 - Technological revolution
3.0 - Digital revolution
4.0 - Automation revolution
What is the difference between process manufacturing and discrete manufacturing?
Process is following recipes using ingredients and raw materials to do something, found in food, beverage, chemical, Pharma industries
Discrete is lower volumes but more specialised/complex manufacturing. End products are composed of individual components (which are themselves produced using process manufacturing).
