Module 1- Farm & Construction Machinery: VOVLY

1. Module 1- Farm & Construction Machinery: VOVLY Thomas Maguire 1/15/2014

2. Introduction • The Link between Valuation and Financial Statement Analysis • Must be able to: • Gather and Understand Currently Available Financial Information- Industry and Company • Apply the Understanding of Current Information to Arrive at Forecasts of Future Performance • Compute an Estimate of Value Based on Forecasted Performance

3. Understanding Industry and Company • In this module we focus on the first step of the valuation process: • Understanding all Available Information • In order to arrive at a correct final output, we must take time to fully synthesize all information • Without synthesizing the company’s environment, all further assumptions and forecasts are merely guesses

4. The Industry • Manufacturing of vehicles &machinery for construction &agriculture • Includes heavy trucks, road paving and earth-moving machines, tractors, bulldozers, locomotives, lawn mowers, and commercial landscaping equipment • Excludes residential gardening equipment and small flat-bed trucks

5. Industry Competitors Caterpillar (CAT) Deere (DE) Komatsu (KMTUY) AB Volvo (VOLVY)

6. Formalizing Knowledge • Porter’s Value-Chain Model • Understand and Identify Activities That Create a Company’s Profit Margin • Primary VS Support Activities • These Activites DO NOT Occur in a Vacum • Porter’s Five Forces- Influence a company’s Value Chain:

7. Formalizing Knowledge Continued • SWOT Analysis- Dual Faceted Test • Internal Factors: Strengths, Weaknesses • External Factors: Opportunities, Threats • Understand Particulars Opportunities to Exploit Strengths • Understand Particular Threats Caused by Weaknesses • Life Cycle Stage- • Understand Current Profitability as Well as Provide Insights Useful in Forecasting Exercise

8. Porter’s Value Chain Model • Primary Activities • Inbound Logistics • Operations • Outbound Logistics • Marketing and Sales • Servicing

9. Support Activity Company Infrastructure Human Resource Management Technology/Product Development Procurement

10. Porter’s Five Forces • Industry Competition • Construction and Mining – high competition and increasing • Farming and Agricultural Machinery – low competition • Top two companies account for 50% of market share • Buyer Power • Mature industries that are low to medium concentrated • High buyer power

11. Porter’s Five Forces (cont.) • Supplier Power • Medium – commodity pricing on a number of inputs, purchasing of finished products like engines give power to supplier • Product Substitutes • Low – substitutes like shovels and manual labor do not compete with machinery

12. Porter’s Five Forces (cont.) • Threat of Entry • Medium – capital intensive industry with fragmented competition • Little government regulation aside from environmental regulations • Incumbent firms have solidified supply chain relationships

13. Industry Life Cycle and Cash Flows Comparing an industry’s stage in its life cycle to the cash flow signs of the companies within it can be useful in forecasting Identified as a mature industry but Volvo is poised for growth

14. 2012 Industry Comp. Financial Performance

15. Industry Aggregate Performance • Construction & Mining Equipment • $81.8bn Revenue • $3.7bn Profit • Farm, Lawn, & Garden Equipment • $63bn Revenue • $2.9bn Profit

16. References Lerman, Sally IBIS WORLD. “Farm, Lawn & Garden Equipment Wholesaling in the US” November 2013 Smith, Deonta IBIS WORLD. “Construction & Mining Equipment Wholesaling in the US” December 2013