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Front of Auditorium

Front of Auditorium. STAGE. REAL ESTATE. UNASSIGNED AND NEW MEMBERS. TECHNOLOGY. HEALTHCARE. CONSUMERS. MATERIALS. ENERGY. INDUSTRIALS. Back of Auditorium. The Industry Review. September 22, 2009. Agenda. Industry Review Presentation Choosing a Micro Industry

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Front of Auditorium

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  1. Front of Auditorium STAGE REAL ESTATE UNASSIGNED AND NEW MEMBERS TECHNOLOGY HEALTHCARE CONSUMERS MATERIALS ENERGY INDUSTRIALS Back of Auditorium

  2. The Industry Review September 22, 2009

  3. Agenda Industry Review Presentation Choosing a Micro Industry Conducting Industry Research Semester Schedule Announcements

  4. Who We Are

  5. Our Network And growing…

  6. What You Will Learn Deeper investment insight Stellar classroom performance Competitive edge for internships/jobs Industry leading financial analyst

  7. What Do We Do? Research Approach

  8. Club Structure President VP of Investment Research VP of Investment Management VP of Investor Relations VP of Finance VP of Human Resources VP of Operations Managing Director Trading Managing Director Investment Research Managing Director Risk CONSUMER ENERGY HEALTHCARE INDUSTRIALS FINANCIALS MATERIALS TECHNOLOGY

  9. Sector Structure • Sector Director • Organize investment discussions • Meet with IM team and Sector Sector Director • Research Analyst • 2 person teams • Research for Sector Director and IM • Maintain industry coverage Senior Analyst Research Analyst Team Junior Analyst Team • Senior Analyst • Lead Jr Analyst in research process • Meet with IM team and Sector • Junior Analyst • 15-20 person teams • Learn industry research/valuation • Prepare Industry Review presentation

  10. National Airlines Industry Review Services Sector

  11. Industry Definition The National Airline Industry consists of commercial airline companies that operate exclusively in North America and do not participate in contract flying.

  12. Industry Breakdown Major: Delta, American, United, Continental, U.S. Airways National: Southwest, JetBlue, AirTran, Alaska Air, Hawaiian Air Regional: ExpressJet, SkyWest, American Eagle, Frontier Cargo: FedEx, UPS

  13. Marketshare

  14. Marketshare

  15. Revenue Generation • Online Reservations • Travel Websites • Travel Agents • Computer Reservation Systems are programmed to book and adjust prices • Hub and Spoke • Specific Direct Routes • Perishable Inventory • Bag Fees • Switching Fees • Cocktails • Movies • Leg Room • Customer loyalty • Discounts retain customers

  16. Major Costs

  17. Low Cost Model • Southwest, JetBlue, and AirTran started as low-cost carriers • Fly direct routes to (near) major cities only • As opposed to Hub & Spoke and regional contracts • Significantly reduced industry fares • Limit aircraft type (easier labor, maintenance) • Higher yield • Focus on simplified operations and customer service • Able to enter market by leasing planes

  18. Competitive Environment

  19. Trends: Fuel Costs

  20. Trends: Regulation • Increased regulation and adverse tax policies have negatively affected profits in the industry

  21. Trends: Ancillary Fees Baggage Fees, Switching Fees, Entertainment, Cocktails, etc. No influence on demand or loyalty Most customers do not even consider costs until arriving at airport

  22. Balance Sheet Strength • High risk of bankruptcies • Exceptionally high Debt/Capital due to post-9/11 demand • Upcoming Refinancing Cliff

  23. Risks • Unpredictable Fuel Prices • Each $0.01 rise in the price of fuel costs the industry $190-$200 million; 2008 fuel prices were 49% higher than 2007 • Labor • Union disputes and contract negotiations could disrupt schedules and negatively impact customer service • Regulation • Increased taxes, security, and safety standards could decrease the bottom line by 1-5% • Prolonged Recovery • Flat or negative growth in business and leisure flying • From both current downturn and 9/11

  24. Risks – Fare Wars Fare War

  25. Keys to Success Strong Balance Sheet Growth Opportunities Proven Financial Management Customer Loyalty Significant Free Cash Flow Generation Positive Profitability Trends

  26. Financial Performance & Valuation

  27. Revenue Growth

  28. Industry Performance

  29. Index Performance

  30. Airline Comps

  31. Financial Comps

  32. Time Series Analysis

  33. Cross Sectional Analysis JBLU AAI Forward P/E ALK HA Forward EPS

  34. Cross Sectional Analysis II JBLU AAI Forward P/E ALK HA Forward PASM

  35. Additional Considerations • Most volatile industry in the market • Investors tend to sell after making profits off of big swings • High inverse correlation to oil prices • Although movements are much smaller (oil drops 10%, airlines up 2%) • Investors play volatility before fundamentals

  36. Recommendation Southwest is currently overpriced and too large (>$2 billion) for S&P 600 JetBlue has strongest fundamentals, although its current price level suggests a hold Based on cross-sectional analysis, Alaska Air currently has best value opportunity

  37. Questions?

  38. Industry Research

  39. Choosing A Micro Industry Use the S&P 600 Universe found on the Finance Club page on YouDo@BU Read descriptions to find companies in which you are interested Go to company websites, glance through 10-K’s, look at news on Yahoo! Finance and Bloomberg Work with sector team to create a micro industry of 4-5 peers

  40. Questions to Ask How big is the industry? Who are the players? Is the industry growing? HOW DO COMPANIES MAKE MONEY? What is the competitive environment? What are current trends? What are the major risks? What makes companies successful?

  41. Resources • Pardee Library • Standard & Poor Industry Surveys, Datamonitor • Market Share Reporter • Bloomberg Terminal (Financials and News) • 10-K’s, 10-Q’s, Annual Reports • Management Discussion & Analysis • Earnings Call Transcripts • Seekingalpha.com • Company Websites • Industry/Trade Associations • Mergent, Yahoo! Finance, Bloomberg.com • Wall Street Journal, Barron’s • Investopedia.com

  42. Important Tips QUANTIFY EVERYTHING! Visuals (Charts/Graphs) are better than text Use bullets, no block text Some animation is okay to emphasize a point, do not overkill Understand how the business works

  43. Your Sector Meet with Senior Analyst after Meeting to discuss meeting time and develop a plan

  44. Semester Schedule Oct. 1 – Josh Ciampa, GE (KCB) Oct. 6 – Valuation Oct. 13 – Evolution of Investment Management Oct. 20 – Industry Presentations (Pre-Valuation) Oct. 27 – Speaker/Networking (TBD) Nov. 3-5 – Full Presentation to E-Board, MD’s Nov. 10/11 – Presentations to Dr. Stewart, Faculty Nov. 17 – Semester End Presentation Nov. 24 – Holiday: No Meeting Dec. 1 – Feedback and Look at Spring Semester

  45. Announcements • Oct. 1st – Josh Ciampa, GE • Former Club President • 6:30PM in Kenmore Classroom Building • Following GE Info Session 5PM in 208 • Sign up at YouDo@BU

  46. Sectors

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