Fisher Investments on Industrials FISHER INVESTMENTS PRESS Fisher Investments Press brings the research, analysis, and market intelligence of Fisher Investments’ research team, headed by CEO and New York Times best-selling author Ken Fisher, to all investors The Press covers a range of investing and market-related topics for a wide audience—from novices to enthusiasts to professionals Books by Ken Fisher The Ten Roads to Riches The Only Three Questions That Count 100 Minds That Made the Market The Wall Street Waltz Super Stocks Fisher Investments Series Own the World Aaron Anderson 20/20 Money Michael Hanson Fisher Investments On Series Fisher Investments on Energy Fisher Investments on Materials Fisher Investments on Consumer Staples Fisher Investments on Industrials Fisher Investments on Industrials Fisher Investments with Matt Schrader and Andrew S Teufel John Wiley & Sons, Inc Copyright © 2009 by Fisher Investments All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/ go/permissions Important Disclaimers: This book reflects personal opinions, viewpoints and analyses of the author and should not be regarded as a description of advisory services provided by Fisher Investments or performance returns of any Fisher Investments client Fisher Investments manages its clients’ accounts using a variety of investment techniques and strategies not necessarily discussed in this book Nothing in this book constitutes investment advice or any recommendation with respect to a particular country, sector, industry, security or portfolio of securities All information is impersonal and not tailored to the circumstances or investment needs of any specific person Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Fisher Investments Fisher Investments on consumer staples / Fisher Investments with Michael Cannivet, Andrew S Teufel p cm — (Fisher Investments Press) Includes bibliographical references and index ISBN 978-0-470-41665-5 (pbk.) Consumer goods—United States—History Consumption (Economics)— United States—History I Cannivet, Michael II Teufel, Andrew S III Title HF1040.8.F56 2009 332.67'22—dc22 2009001913 ISBN-13 978-0-470-45228-8 Printed in the United States of America 10 Contents Foreword ix Preface xi Acknowledgments xv Part I: Getting Started in Industrials Chapter 1: Industrials Basics Industrials Basics Industrials Characteristics The Modern Production Process 14 Chapter 2: History of Modern Manufacturing 21 The Advancement of Trade and Investment 22 The Rise of Asia and Changes in the Manufacturing Landscape 29 The State of US Manufacturing 41 Chapter 3: Industrials Sector Drivers 47 Corporate Spending 48 Government Spending 59 v vi Contents Part II: Next Steps: Industrials Details 65 Chapter 4: Industrials Sector Breakdown 67 Global Industry Classification Standard (GICS) 67 Global Industrials Benchmarks 69 Capital Goods Industry Group 75 Transportation 85 Commercial & Professional Services 93 Chapter 5: Staying Current: Tracking Sector Fundamentals 97 What to Watch 97 Corporate and Government Spending-Related Metrics 98 Industry Specific Indicators Chapter 6: The Infrastructure Market 111 117 A Very Big Market 118 Infrastructure Investment Drivers 120 Risks to Infrastructure Growth 123 Participating in the Infrastructure Boom 125 Part III: Thinking Like a Portfolio Manager 131 Chapter 7: The Top-Down Method 133 Investing Is a Science 133 Einstein’s Brain and the Stock Market 134 The Top-Down Method 136 Top-Down Deconstructed 142 Managing Against an Industrials Benchmark 149 Contents vii Chapter 8: Security Analysis 155 Make Your Selection 156 A Five-Step Process 157 Important Questions to Ask 164 Chapter 9: Allocating your “Capital Good” 171 Strategy 1: Adding Value at the Industry Level 171 Strategy 2: Adding Value at the Security Level 179 Strategy 3: Industrials Sector Downturn 180 How to Implement Your Strategy 180 Appendix: Industrials Websites and Data Sources 183 Notes 185 Glossary 194 About the Authors 197 Index 198 Glossary 195 Dwell time The amount of time a train is docked at the station Earth-moving machine Machines used in civil engineering and construction projects, including excavators, cranes, and bulldozers Excavators Construction machinery used for multiple purposes including excavating, digging, and material loading Fixed-price contract A negotiated contract in which a contractor is given a fixed sum for completing a contract Profit is generated when actual costs are less than the costs to complete the contract Full truckload Freight shipments where a full truck is utilized by one shipper and shipments go to one place Funded backlog Uncompleted firm orders for which funding has been both authorized and appropriated Heavy construction equipment Construction equipment weighing over 12 metric tons, usually used in infrastructure projects and mining applications Horizontal keiretsu A Japanese corporate organizational structure where a family of firms cooperate and often take equity stakes in each other A bank & trading company are usually in the center HVAC Heating, ventilation, and air conditioning equipment Hydraulic machinery Machines and tools powered by liquid, often oil-based, which is controlled by valves This includes pumps, motors, and cylinders Intermodal transport Shipments where more than one mode of transportation is utilized (e.g., shipments via railroad and truck) Inventory Values of raw materials and supplies purchased for use in production and finished products not yet sold Large commercial aircraft Commercial airplanes that seat more than 110 people Less-than-truckload Freight shipment where a truck is shared among multiple customers, with shipments typically weighing 10,000 pounds or less 196 Glossary Light construction equipment Construction equipment weighing under 12 metric tons, usually used in residential and commercial construction Operating ratio Total operating costs divided by revenues The operating ratio is used most commonly in transportation industries as a measure of operating efficiency Passenger load factor The proportion of aircraft seating capacity to seats sold and utilized Pneumatic machine Machines that are powered by compressed air or gas Regional aircraft Commercial airplanes that seat 110 people or less Revenue passenger miles (RPM) Total number of passengers paying revenue, multiplied by the total distance traveled RPM reflects the number of available seats actually sold Terminal dwell time Time a rail car spends at its terminal Time-and-materials contracts Contracts under which contractors are paid an hourly rate for labor and reimbursed for allowable direct costs Twenty-foot equivalent units (TEU) Standard unit of shipping container capacity, equal to one standard 20 ft (length) ϫ ft (width) container Unfunded backlog Uncompleted orders for which funding has not been appropriated Vertical keiretsu A Japanese corporate organizational structure with a major manufacturer at its core and its suppliers working closely alongside About the Authors Matt C Schrader (San Francisco, California) is an Industrials analyst for Fisher Investments Matt graduated from the University of California at San Diego with a BS in Management Science Matt grew up in Marin County, California, and currently resides in San Francisco Andrew S Teufel (San Francisco, California) has been with Fisher Investments since 1995 where he currently serves as a Co-President and Director of Research Prior to joining Fisher, he worked at Bear Stearns as a Corporate Finance Analyst in its Global Technology Group Andrew also instructs at many seminar and educational workshops throughout the US and UK and lectures at the Haas School of Business at UC Berkeley He is also the Editor-in-Chief of MarketMinder.com Andrew is a graduate of UC Berkeley 197 Index Airlines: concentration of, 74 investment strategies cheat sheet, 176 overview, 86–87 as part of Transportation industry group, 68 traffic data and economic measurement, 114–115 Airport Services, 69, 93 See also Transportation Infrastructure Alarm services See Security and alarm services Allied Signal See Honeywell Alligator Alley, 126 American Airlines, 12 American Association of Railroads, 114 American Eagle, 87 American Institute of Architects (AIA), 107–108 American Society of Civil Engineers (ASCE), 121 American Stock Exchange Defense index, 60 American Trucking Association (ATA), 114 AMR Corp., 12 Announcements, company earnings, 109 Annual reports, websites and data sources, 183–184 Appropriations, budget, 106, 107, 197 Architecture Billings Index, 107–108 Asia, rise of See Asian Tigers; China; Japan Asian Tigers, 30, 33–34, 85 education, 34 exports, changing nature of, 36 foreign investment and technology, 35–36 savings and investment, 34 trade promotion, 34–35 Assembly line production, 14 Asset allocation, 138 Association of American Railroads, 112, 114 Atchison, Topeka, and Santa Fe Railway, 91 3M: diversification and, role in Industrials, Six Sigma and, 18 10-K, 109, 162 10-Q, 109 20-F, 109, 162 ABB, role in Industrials, Advantages, competitive and comparative, 159 Aerospace & Defense: airplane demand, 79 comparison to Construction & Engineering, 80 concentration of, 74 diversity of impact, 4, investment strategies, 172 cheat sheet, 175–176 overview, 75–78 as part of Capital Goods industry group, 68 spending and, 61 construction, 51 top 10 defense firms, 76 transportation equipment and, 55 Aerospace Products & Parts, 102 Africa, South, 124 Aftermarket, 197 Agriculture, Construction, & Mining Machinery, 102 Air Freight & Logistics: cargo volumes and, 114 concentration of, 74 diversity of impact, 4, investment strategies cheat sheet, 176 overview, 86 as part of Transportation industry group, 68 Airbus, 78 Aircraft, 78, 198 198 Index Atlanta, airline industry, 87 Authorizations, budget, 106, 107, 197 Automobile industry: emission standards, 55 Japanese, 32–33 production process, 14–15 transportation equipment and, 54 Available seat mile (ASM), 197 Backlog, 197 funded, 198 unfunded, 199 BAE Systems, 76 Balance sheet, security analysis and, 168–169 Baltic Dry Freight Index, 114, 197 dry vs wet bulk, 88 Baltic Exchange, 114 Barriers: to entry concentration of industrials industries, 74 security analysis and, 167 reduced trade, 22 BEA: as a corporate economic measurement, 109 Government Consumption Expenditures and Gross Investment, 105 National Defense Consumption Expenditures and Gross Investment by Type, 105 Benchmarks: global industries and differences in, 69–71, 72 See also Top-down method, benchmarks Bloomberg, 109 shipping rates and, 114 Bobcat, 25 Boeing: as a bellwether, 72 competition and, 78 defense spending, 60 economic measurements and, 112 role in Industrials, as a top 10 defense firm, 76 transportation equipment and, 54 Bombardier, 78 Bottlenecks, 165 Brand awareness: cross-border mergers and acquisitions, 25 security analysis and, 167 199 Brazil: government risks to infrastructure growth, 124 infrastructure and, 119 Bridge collapse, 123 Budget See Appropriations, budget; Authorizations, budget Building Products: concentration of, 74 construction spending and, 51 diversity of impact, investment strategies, 172 cheat sheet, 176 overview, 78–79 as part of Capital Goods industry group, 68 Bureau of Transportation Statistics, 114, 115 Burlington Northern, 91 Business cycle indicators, 100–101 Business Week, 109 Business Wire, 109 Cadillac, 15 Capacity constraints, 165 Capacity utilization, 104 Capital Goods: benchmarking and, 71, 73 diversification and, economic sensitivity and, 9–10 industries and sub-industries, 68 investment strategies, 172 as a measurement of economic health, 111–112, 113 overview, profit margins and, 12 sector breakdown, 75–85 Cargo volumes, 114 Cash flow use, security analysis and, 168 Caterpillar: demand and, 82 FDI and, 23 global distribution, 83 investment strategies and, 181 Six Sigma and, 18 Central Railroad, 91 Cessna, 78 Charge-offs, 111 Chicago and North Western (CNW) Railway, 91 200 Index China, 30 airplane designs, 78 exports, changes in, 39–40 foreign investment and, 23, 37–39 globalization and technological improvements, 26 infrastructure and, 119 government risks to growth, 124 process trading, 40 sentiment drivers and, 146 Claymore S&P Global Water Index (CGW), 128 Clements, Charles, 83 CNH Global, 82 Cohen & Steers Global Infrastructure Fund (CSUAX), 128 Combinatory play, 136 Commercial Printing, 69, 93 See also Commercial Services & Supplies Commercial & Professional Services, 69, 93–94 Commercial Services: construction spending and, 51 overview, See also Commercial Services & Supplies Commercial Services & Supplies, 69 benchmarking and, 71, 73 concentration of, 74 diversity of impact, investment strategies, 172 cheat sheet, 176–177 overview, 93–94 Commodities: demand, 56–57 as a measurement of economic health, 106–107 Company description, 157–158 Company strategy, 167 Competition: government promotion of, 35 security analysis and, 156, 158, 167 Conference Board, 100 Conrail, 91 Consensus expectations, 163–164 Construction: machinery, 68, 198 spending and economic strength, 48–51, 104–105 See also Machinery Construction & Engineering: buying infrastructure-related stocks and, 128 concentration of, 74 commodities demand and, 57 construction spending and, 51 defense spending and, 61 infrastructure spending and, 62 investment strategies, 172 cheat sheet, 176 overview, 68, 79–80 See also Capital Goods Consumer Discretionary: correlation to broad markets and, 11 transportation equipment and, 54 Consumer spending, construction spending and, 49 Consumer Staples: correlation to broad markets and, 11 demand and, profit margins and, 13 Containerzation, 27 Continental Airlines, 87 Contrarians, 146 Corporate history, security analysis and, 158 Corporate spending drivers, 48 assessing capital, ease of, 58 economic strength, 48–58 financial health, 58 Corporations, rise of multinational, 28–29 Correlation, to broad markets, 11–12 Cost-plus contracts, 197 Cost-reimbursable: Construction & Engineering, 80 defense firms and, 76, 77 Credit approval ratios, 111 CSX, 91 Daewoo Shipbuilding, 82 Damage, transportation and reduced, 27 Data sources, websites, 183–185 Dead-weight ton, 197 Deere: demand and, 82 economic measurements and, 112 Defects, risk of product, 16, 18 Defense spending, 59–61 budget process, 105–106 vs defense industry outperformance, 61 See also Aerospace & Defense Index DeFeo, Ronald M., 117 Delta, 87 Demand: economic sensitivity and, 8–10 lean manufacturing and, 16 See also Commodities demand; Freight transportation demand Demographics, construction spending and, 50 Department of Defense (DoD): economic measurement and, 106 See also Aerospace & Defense Distribution, security analysis and, 166 Diversification, industrials and, 7–8 Diversified Support Services See Commercial Services & Supplies Dividend yield (DY), 164 Doha trade talks, 29 Domestic securities, investing heavily in, xii Doosan Infracore, 25, 82 Double-stacking technology See Technology, double-stacking Dow Jones Brookfield Global Infrastructure Index, 129 DP World, 127 Dry bulk, 88 investment strategies and, 177 Dubai World, 127 Durable Goods: as a measurement of economic health, 102–103 non-, 42 U.S manufacturing and, 44, 45 Dwell time, 197 terminal, 199 EADS, 76 Earnings breakdown, 165 Earth-moving machine, 197 East Japan Railway, Education: promotion of, 34 services, growth of, 42 Efficiency: market, 134 transportation and, 27 EFT, 181–182 Einstein, Albert, 134–136 Electrical Components & Equipment See Electrical Equipment 201 Electrical Equipment, 68 concentration of, 74 construction spending and, 51 diversity of impact, 4, infrastructure spending and, 62 investment strategies, 175 cheat sheet, 177 manufacturing spending, 53 overview, 80, 81 transportation equipment and, 54 See also Capital Goods Electrical Products, 128 Embraer, 78 Emerging markets (EM), 71 See also specific countries Emerson Electric: diversification and, economic measurements and, 112 foreign sales growth, 53 production bases in foreign markets, 29 role in Industrials, Employees, number of, 111 End markets, measuring economic, 99 Energy: correlation to broad markets and, 11, 12 infrastructure and, 62, 118 exposure and boom in, 128 profit margins and, 13 Enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), 164 Environmental & Facilities Services, 69, 93 See also Commercial Services & Supplies EPA, 55 Equipment Leasing and Finance Association (ELFA), Monthly Leasing and Finance Index (MLFI-25), 110–111 Europe, machinery and, 82, 83 See also specific country European Union, as a political driver, 145 Excavators, 198 Exchange traded funds (ETFs): infrastructure boom and, 125, 127–128 top-down method and, 149 Execution, risks to infrastructure growth, 123, 124 Expansions, industry growth and, 102 Exposure, 127–128 ExpressJet, 87 202 Index Farm industry, 68 Chinese, 37–38, 39 commodities demand and, 56–57 U.S manufacturing and, 44, 45 See also Machinery Fastenal, 112 Federal Reserve: industrial production and, 101 Senior Loan Officer Opinion Survey on Bank Lending Practices, 111 FedEx: as a bellwether, 72 economic sensitivity and, 10 investment strategies and, 176 Six Sigma and, 18 transportation equipment and, 54 Financials: correlation to broad markets and, 11, 12 profit margins and, 13 risks to infrastructure growth, 123, 125 Financial services, growth of, 42 Financial Times, 109, 146 Finmeccanica, 76 Firm size, 74 First American Global Infrastructure (FGIAX), 128 First Trust ISE Water Index (FIW), 128 Fixed-price contract, 198 Construction & Engineering, 80 defense firms and, 76, 77 Ford, Henry, 14 Forecasting, 10, 183–184 Foreign direct investment (FDI): cross-border merger and acquisitions, 25 as an infrastructure investment driver, 120, 122 Freight transportation: demand, 57–58 diversification and, Frontier, 87 Gasoline, shipping demand, 89 General Agreement on Tariffs and Trade (GATT), 28 General Dynamics: competition and, 78 as a top 10 defense firm, 76 General Electric: as a bellwether, 72 diversification and, economic sensitivity and, 10 FDI and, 24 role in Industrials, Six Sigma and, 18, 19 Geneva trade talks, 29 Geographic breakdown, 165 Geopolitical risk, 165 Germany, political drivers and, 145 Global Industry Classification Standard (GICS), 4–5, 67–69 Global, Joy, 124 Globalization: Air Freight & Logistics, 86 causes, 26–29 evidence of, 22–25 industry benchmarks, 69–74 Government: concentration of industrials industries, 74 risks to infrastructure growth, 123–124 spending, 59–62 Grainger, 112 Gross domestic product (GDP): global trade and, 22 spending-related metrics, 98, 100 construction and growth in, 48, 49, 50–51 Growth markets, measuring economic, 99 Health Care: correlation to broad markets and, 11 profit margins and, 13 Heavy construction equipment, 198 Heavy Electrical Equipment See Electrical Equipment Heavy Trucks See Machinery Highway Diesel Rule, 55 Highways & Railtracks See Transportation Infrastructure Holt Manufacturing Company, 83 Holt No 77, 83 Home Depot, 79 Honeywell, 18 Hong Kong: foreign investment, 36 See also Asian Tigers Horizon, 87 House Committee on Appropriations, 127 Human effort, lean manufacturing and reduced, 15 Human resources, 94–95 See also Commercial & Professional Services Index HVAC, 198 Equipment and infrastructure spending, 62 Hydraulic machinery, 198 Hyundai Heavy, 82 Illinois Tool Works, 112 Import control, Japanese government, 31 India, government risks to infrastructure growth, 124 Indonesia, government risks to infrastructure growth, 124 Industrial Conglomerates, 68 buying infrastructure-related stocks and, 128 commodities demand and, 57 concentration of, 74 construction spending and, 51 defense spending and, 61 investment strategies, 172 cheat sheet, 177 manufacturing spending, 53 overview, 81 transportation equipment and, 55 See also Capital Goods Industrial Machinery See Machinery Industrial production, as a measurement of economic health, 101 Industry overview, security analysis and, 157 Infrastructure market, 117–119 aging, 120–121 investment drivers, 120–123 participating in potential boom, 125–129 risks to growth, 123–125 Infrastructure spending, 61–62 Japanese government, 31 as a measurement of economic health, 105 Ingersoll-Rand: cross-border mergers and acquisitions, 25 demand and, 82 production bases in foreign markets, 29 Six Sigma and, 18 Innovation, security analysis and, 167 Input availability, construction spending and, 50 Institute of Supply Management (ISM) Report on Business, 103 Integration, vertical, 166 Interest rates, 50, 110 See also Loans Intermodal transport See Transportation, intermodal 203 International Air Transport Association, 114, 115 International Monetary Fund (IMF), GDP and, 100 Inventory, 198 durable goods and, 103 excess, 10 as a measurement of economic health, 103–104 See also Waste, elimination Investment strategies: downturn, industrials sector, 180 implementing, 180–182 industry level, adding value at, 171–175, 178–179 cheat sheet, 175–178 security level, adding value at, 179 Inward FDI Performance Index, 36 iShares Dow Jones US Aerospace & Defense, 181 iShares Dow Jones US Industrial, 181 iShares Infrastructure Fund (IGF), 127–128 iShares S&P Global Industrials, 181 Japan, 30 Asian Tigers and, 33–34 benchmarking, 71 exports, change in, 32–33 government role, 31 horizontal keiretsu, 31–32 infrastructure boom and, 126 machinery and, 82, 83 political drivers and, 145 technology, 32–33 JetBlue, 87 Jidoka, 33 Jordaan, Danny, 124 Just-in-Time Manufacturing (JIT), 17 Keiretsu, horizontal and vertical, 32 Keller, Maryann, 15 Kensington Global Infrastructure Fund (KGIAX), 128 Komatsu, 26 demand and, 82 Korea, foreign investment, 36 Kubota, demand and, 82 L-3 Communications, 76 Lean manufacturing, 14–19 204 Index Legal services, growth of, 42 Legislative risks, 166 Liebherr T 282 B, 82 Loans: Japanese subsidized, 31 as a measurement of corporate health, 111 Lockheed Martin: as a bellwether, 72 defense spending, 60 role in Industrials, as a top 10 defense firm, 76 London Metal Exchange, 107 Looting, transportation and, 27 Louvre, 79 Machine orders, 111–112 Machinery, 68 buying infrastructure-related stocks and, 129 commodities demand and, 57 concentration of, 74 construction spending and, 51 defense spending and, 61 diversity of impact, infrastructure spending and, 62 cheat sheet, 177 investment strategies, 175 manufacturing spending, 53 overview, 81–84 rental market, 83 transportation equipment and, 55 See also Capital Goods Macquarie/First Trust Global Infrastructure/ Utilities Dividend & Income Fund (MFD), 128 Macquarie Global Infrastructure Total Return Fund Inc (MGU), 127–128 Macro overview, top-down method and, 138 Manufacturing: economic strength, 51–54 flow and lean manufacturing and, 16 Margins, security analysis and, 168 Marine: commodities demand and, 57 concentration of, 74 investment strategies cheat sheet, 177 overview, 87–89 See also Transportation Marine Ports & Services See Transportation Infrastructure Market share, security analysis and, 168 Market supply, construction spending and available, 49 Market Vectors Agribusiness ETF, 181 Market Vectors Nuclear Energy (NLR), 128 Mark Vectors Environmental Services (EVX), 128 Masco, sales to other companies, 78–79 Mass production, 14 Materials: correlation to broad markets and, 11, 12 profit margins and, 13 Mergers and acquisitions, cross-border, 25 Mexico: government risks to infrastructure growth, 124 infrastructure and, 119 Minneapolis, bridge collapse, 123 Miracle, economic, 31 Mitsubishi: Heavy, demand and, 82 keiretsu, 32 Motorola See Six Sigma Motorway/Toll roads, 92 MSCI All Country World Index, 71, 73 MSCI EAFE, 73 MSCI EM, 71, 73 MSCI World Industrials, 73 correlation to broad markets, 11 managing against industrial benchmarks and, 149–150 top-down method and, 138, 139, 140, 141 Multinational corporations See Corporations, multinational Mutual funds: infrastructure boom and, 125, 127–128 investment strategies and, 179 National Economic Account, 105 National Infrastructure Program (NIP), 119 Neutrality, benchmark risk and, 150 News sources: as a corporate economic measurement, 109 security analysis and, 158 websites, 184–185 New York Mercantile Exchange, 107 Newton, Sir Isaac, 135 Norfolk Southern, 91 North American Free Trade Agreement (NAFTA), railroads and, 91 Index North American Industry Classification System (NAICS), 101 Northrop Grumman: Six Sigma and, 18 as a top 10 defense firm, 76 Northwest Airlines, 87 Office Management and Budget (OMB), 106 Office Services & Supplies See Commercial Services & Supplies Office supplies, 93 Oil exploration, diversification and, The Only Three Questions That Count, 146 Operating ratio, 198 Orders, durable goods and, 103 Organization for Economic Cooperation and Development (OECD), 145 GDP and, 100 as a measurement of international market health, 108 Paccar: demand and, 82 diversification and, Parker-Hannifin, 112 Parking lots, 93 Passenger load factor, 198 Peer group, 156 Pennsylvania Turnpike, 126 Performance, fundamental and stock price, 160–161 Pneumatic machine, 198 Political drivers, 145 See also Geopolitical risk Population growth, construction spending and, 50 Port operations, 92 Portfolio drivers, 144 PowerShares Building & Construction (PKB), 128 PowerShares Global Water Portfolio (PIO), 128 PowerShares Water Resources (PHO), 128 Price to book (P/B), 163 Price to cash flow (P/CF), 164 Price to earnings (P/E), 163 Price to forward earnings (P/FE), 163 Price to sales (P/S), 164 Processing time, lean manufacturing and reduced, 16 205 Production: changes, ill-conceived, 10 costs and security analysis, 166 process, 14–19 Professional Services, 69 concentration of, 74 investment strategies cheat sheet, 178 overview, 5, 94 See also Commercial & Professional Services Profit margins, lower, 12–13 Profit reports, corporate, 109–110 Public private partnerships (PPP), 125–127 Quantitative factor screening See Top-down method, quantitative factor screening Railroads, 69 Class I, 90, 197 history, 91–92 local linehaul, 90–91 regional, 90 switching and terminal carriers, 91 See also Road & Rail Rail volumes, 112, 114 Raytheon: competition and, 78 Six Sigma and, 18 as a top 10 defense firm, 76 Real estate prices, construction spending and, 49 Receivables, 111 Recession, industry growth and, 102 Regulation: security analysis and, 166–167 transportation equipment and, 54 Rental market See Machinery, rental market Research & Consulting Services, 69, 94–95 See also Commercial & Professional Services Residential/nonresidential data, construction spending and, 104 Reuters, 109 Revenue passenger miles (RPM), 198 Revenues, security analysis and, 165 Risks: control and top-down method, 137–138 security analysis and, 161–163 Road & Rail, 69 commodities demand and, 57 concentration of, 74 206 Index Road & Rail (continued ) diversity of impact, 4, investment strategies, 175 cheat sheet, 178 overview, 89–91 See also Transportation Rockwell Automation, 53 Rolls Royce, 78 Russell 2000: benchmarking differences and, 71, 73 top-down method and, 138, 141 Russia: infrastructure and, 119 government risks to growth, 124 new airplane designs, 78 Ryder Systems, 86 S&P 500: benchmarking and, 73 correlation to broad markets, 11 defense spending, 60 industrials industry total returns, 173, 174 investment strategies, 172, 181 profit margins and, 13 top-down method and, 138, 141 S&P Global Infrastructure Index, 129 Safety, public, 120, 122–123 Saint-Gobain, 79 Sakane, Masahiro, 26 Samsung Heavy, 82 Sanitation, infrastructure and, 118 Saudi Arabia, infrastructure and, 119 Savings, East Asia and promotion of, 34 Scalability, top-down method and, 137 Scania, 82 SEC, company earnings announcements, 109 Security & Alarm Services See Commercial Services & Supplies Security analysis, 155 process of, 157–164 questions and factors for consideration, 164–169 selection, 156–157 Security selection, top-down method and, 138 Segments, business, 158 Sensitivity, economic, 8–11 Sentiment drivers, 145–146 Shipments: durable goods and, 103 rates as an economic measurement, 114 Siemens: as a bellwether, 72 role in Industrials, Singapore See Asian Tigers Six Sigma, 14, 17–19 impact on U.S manufacturing, 43 lean manufacturing and, 17–19 Skyway Toll Road, 126 Social categories, infrastructure and, 118 Socialism, market, 37 Solar power See Energy power South Korea: machinery and, 82 trade promotion in, 35 See also Asian Tigers South Sea Bubble, 135 Southwest Airlines, 87 Space, lean manufacturing and reduced, 15 SPDR FTSE/Macquarie Global Infrastructure Fund (GII), 127–128 Special economic zones (SEZ): East Asia, 35 FDI and, 24 Staggers Rail Act, 91 Standardization, transportation and, 27 Standard Variable Management (SVM), 26 Statistical Process Control (SPC), 17 Stocks: infrastructure-related, 125, 128–129 price performance, 160–161 small-cap, sentiment drivers and, 146 specific risks, 161–162 See also Top-down method, stock selection Strategic attributes, security analysis and, 158–160 Suppliers, lean manufacturing and relationships with, 16 Sutherlin, Michael W., 124 Systematic risks, security analysis and, 162–163 Taiwan: education in, 34 exports, 36 See also Asian Tigers Taxes: construction spending incentives, 50 Japanese government shelters, 31 Technology: correlation to broad markets and, 11, 12 double-stacking, 27, 197 Index globalization and improvements to, 26–29 profit margins and, 13 security analysis and, 167 sentiment drivers and, 146 Telecom Services: correlation to broad markets and, 11, 12 profit margins and, 13 Telecommunications, infrastructure and, 118, 120 Thailand, political drivers and, 145 Time, lean manufacturing and reduced, 15, 16 Time-and-materials contracts, 199 defense firms and, 76, 77 Top-down method, 136–138 benchmarks, 138–141 managing against, 149–152 drivers and country/sector selection, 143–147 portfolio decisions, 138 quantitative factor screening, 147–148 reasons for selecting, xi stock selection, 137, 148–149 Torquay trade talks, 29 Tortoise Energy Infrastructure Fund (TYG), 128 Total Quality Management (TQM), 17 Toyota Production System, 15, 32, 33 Trade liberalization, 28 Trading Companies & Distributors: commodities demand and, 57 concentration of, 74 investment strategies cheat sheet, 178 manufacturing spending, 54 overview, 84–85 See also Capital Goods Transportation: benchmarking and, 71, 73 construction spending and, 51 economic sensitivity and, 9–10 economic measurements and, 112 equipment economic strength, 54–55 emission standards, 55 globalization and improved, 27–28 industries and sub-industries, 68–69 infrastructure and, 118, 120 intermodal, 27, 28, 198 investment strategies, 172 manufacturing spending, 54 207 overview, profit margins and, 12 sector breakdown, 85–93 Transportation Infrastructure, 69 buying infrastructure-related stocks and, 129 concentration of, 74 diversity of impact, investment strategies cheat sheet, 178 overview, 92–93 Trucking, 69 full truckload, 198 less-than-truckload, 198 See also Road & Rail Truck Tonnage Index, 114 Twenty-foot equivalent units (TEU), 199 Tyco International, Six Sigma and, 18 Underweight, benchmark risk and, 150 Union Pacific, economic sensitivity and, 10 United Airlines, 87 United Nations Conference on Trade and Development (UNCTAD), 29 United Parcel Services (UPS): Air Freight & Logistics, 86 as a bellwether, 72 economic sensitivity and, 10 investment strategies and, 176 role in Industrials, United Rentals, 83 United Technologies: diversification and, economic sensitivity and, 10 role in Industrials, as a top 10 defense firm, 76 Urbanization, as an infrastructure investment driver, 120, 121–122 U.S Bureau of Economic Analysis, 100 U.S Census Bureau: business inventories and, 103 construction spending and, 104 durable goods and, 103 U.S Federal Highway Administration, 123 U.S National Highway System (NHS), 126 U.S Department of Defense, 59 U.S manufacturing: decreased importance, 41–42 machinery and, 82, 83 place in economy, 42–46 208 Index USG Corporation, sales to other companies, 78–79 Utilities: Industrials correlation to broad markets and, 11, 12 profit margins and, 13 Utilization See Capacity utilization Vacancy rates, construction spending and, 49 Valuations, security analysis and, 163–164 Vertical integration See Integration, vertical Vestas Wind Systems, 81 Volvo, 82 Wall Street Journal, 109, 146 Waste, elimination, 16–17 Water exposure, 128 Water and Sanitation, 118 Welch, Jack, 24 Werner Enterprises, 89 Wet bulk, 87–88, 89 investment strategies and, 177 Wind power See Energy power Work-in-process (WIP) inventory, 16 World Bank: GDP and, 100 infrastructure and, 118 World Cup, 124 World Trade Organization (WTO), 28 China and, 38–39 World War II: economic changes since, 22 growth in service-related industry, 41 Write-offs, Japanese government, 31 Xiaoping, Deng, 37–38 on INDUSTRIALS The fourth installment of the Fisher Investments On series is an all-encompassing guide to understanding and analyzing investment opportunities within the global Industrials sector With this book as your guide, you can quickly become familiar with how the investment universe of the Industrials sector is segmented by industries, their respective macroeconomic drivers, and the challenges facing companies in this sector Additionally, there are discussions regarding the global infrastructure market—which cover the drivers and risks behind investment, the benefits to the Industrials sector, and ways to participate in this boom—as well as a look at specific security analysis techniques that have proven effective within this arena You don’t have to be a professional to successfully invest in the Industrials sector—but you need to be prepared Fisher Investments on Industrials can get you up to speed in this area and help you make the most of your time in this market About Fisher Investments Press Fisher Investments Press brings the research, analysis, and market intelligence of Fisher Investments’ research team, headed by CEO and New York Times bestselling author Ken Fisher, to all investors The Press covers a range of investing and market-related topics for a wide audience—from novices to enthusiasts to professionals ... Aaron Anderson 20/20 Money Michael Hanson Fisher Investments On Series Fisher Investments on Energy Fisher Investments on Materials Fisher Investments on Consumer Staples Fisher Investments on Industrials. .. Industrials Fisher Investments on Industrials Fisher Investments with Matt Schrader and Andrew S Teufel John Wiley & Sons, Inc Copyright © 2009 by Fisher Investments All rights reserved Published by. .. Library of Congress Cataloging-in-Publication Data: Fisher Investments Fisher Investments on consumer staples / Fisher Investments with Michael Cannivet, Andrew S Teufel p cm — (Fisher Investments