Baird Analysts Discuss Industrial Recovery, Preview Upcoming Conference

Experts to Recap Key Conference Themes on Nov. 12 Call

Baird, an international, employee-owned capital markets, private equity, wealth and asset management firm, will host its 39TH annual Industrial Conference in Chicago on November 10 and 11, 2009. Senior executives from over 100 leading public corporations, including Caterpillar, Danaher, Emerson Electric, Illinois Tool Works, and Johnson Controls, will present to institutional investors and discuss the critical factors facing this sector.

As a preview to the conference, three of Baird’s Senior Equity Research Analysts -- Jon Langenfeld, (Transportation/Logistics), David Leiker (Auto & Truck) and Peter Lisnic (General Industrial and Building Products) -- provide their thoughts on an industrial sector recovery. These three analysts will also recap key themes discussed at the conference during a conference call on Thursday, Nov. 12, at 10:30 A.M. CST. To participate in the panel discussion conference call, email or call Jody Lowe at (414)322-9311 or jodylowe@att.net.

Discussion of an Industrial Recovery

Are some industrial companies bottoming? Are volumes stabilizing?
Lisnic: Generally, the companies we cover indicate that fundamental demand appears to have bottomed in both the general industrial and housing end markets. Demand continues to deteriorate in nonresidential construction markets, including end markets like office and manufacturing construction, though this lag is consistent with historical patterns.

Langenfeld: We believe shipping volumes have bottomed, but shipping companies continue to see freight volumes remain weak, and we do not expect to see a demand catalyst until the second half of 2010.

Leiker: The US automotive market appears to have bottomed with annualized sales around 9-10 million units. However, near-term annualized production rates around 11 million units is expected to result in excess inventory during the fourth quarter without end market demand rebounding to an 11-12 million annualized selling rate. Key catalysts for a cyclical recovery in auto are evidence that the gap between the supply of credit and the demand for credit is closing and improved employment, income and consumer confidence.

What have companies done to weather the downturn?
Lisnic: Industry participants have, for the most part, dramatically reduced their cost structures to serve a new “normalized” level of demand. Significant capacity has been taken out of the system through typical restructuring actions, productivity initiatives, and a greater focus on supply chain optimization. New product innovation and addressing the entire price-value spectrum have been key strategic tactics used to gain market share. Combined, we believe these steps should drive significant operating leverage when demand conditions improve.

Langenfeld: Across the transportation industry, companies have aggressively managed headcount and fixed costs to adjust to lower tonnage levels. This focus on improving productivity with its adjusted cost base should yield positive results as volumes improve because some of the removed costs will not need to return to facilitate higher volumes, leading to potential margin upside opportunities during the next up cycle.

Leiker: The auto and truck companies with strong balance sheets have been able to reduce their cost structures to where they are breakeven at today’s depressed level of demand. Companies in weaker financial positions have struggled to get to breakeven.

Do improving international economic conditions help?
Langenfeld: Inbound ocean freight volumes, particularly to LA/Long Beach, and airfreight volumes from Asia to the U.S. are typically leading indicators into the health of the U.S. freight economy. Given that the U.S. procures much of our retail goods from Asia generally and China specifically, these freight trends are important.

Do you expect any of your companies to lead in a recovery?
Langenfeld: Transport stocks historically have bottomed when industry fundaments were at their worst, and have discounted a recovery 6-9 months ahead of improving fundamentals. Our analysis suggests this group outperforms the market for the first 18-24 months. We don’t believe it is too late for investors to enter the sector and we are recommending names with cyclical exposure that possess meaningfully higher peak margin potential than previous cycles. We like Knight Transportation Inc (KNX), CSX Corp (CSX), and JB Hunt Transport Services (JBHT).

Lisnic: Historically, building products stocks have been early cycle participants in a cyclical recovery. However, we remain cautious overall as we believe valuations reflect more normal demand conditions that could take longer to emerge. Companies with secular growth opportunities like Acuity (AYI) and Kaydon (KDN) appear well-positioned to grow at above market rates when demand improves. We also like Stanley Works (SWK) and Carlisle (CSL) as they have created more structural leverage than the market is reflecting.

Leiker: We recommend investors look for an entry point to buy automotive suppliers on pullbacks, with key catalysts being improved near-term risk reward at lower prices or increased confidence in a cyclical recovery in demand is underway as evidenced by closing the gap between supply/demand for credit. Among auto suppliers, most attractive are Gentex (GNTX) and Johnson Controls (JCI) followed by Autoliv (ALV) and BorgWarner (BWA) at lower prices.

Among truck suppliers, we recommend increasing exposure to the group on pullbacks, becoming more aggressive on evidence that the North American market is set to recover and the European market is stabilizing. Focus on PACCAR (PCAR) and WABCO Holdings (WBC) at lower prices. Among small-caps, we believe Modine (MOD) is attractive below $10 with ArvinMeritor (ARM), Commercial Vehicle Group (CVGI) and Stoneridge (SRI) offering attractive value today.

What are you looking to hear from presenting companies this year?
Lisnic: Because visibility remains challenging for 2010, we are looking for incremental insights from companies on their demand expectations. With commodity prices rising and demand potentially remaining under pressure, we will also be looking for insights on the price/cost relationship. Lastly, we hope to hear more from managements regarding their expectations for the consumer, particularly on the discretionary spending front with impacts remodeling demand.

Leiker: We are looking for incremental data points on near-term end-market demand and production rates. Also, we want to have a better understanding of the longer-term growth opportunities from efforts to improve fuel efficiency and to bring electrified vehicles to market.

To speak with Baird’s industrial analysts, email or call Jody Lowe at jodylowe@att.net or (414)322-9311.

About Baird’s Equity Research Team
Baird’s Research Department consists of approximately 110 research professionals covering 600 U.S. companies. Baird analysts have been recognized repeatedly in The Wall Street Journal’s annual “Best on the Street” survey and honored by StarMine as top analysts.

About Baird
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has more than 2,400 associates serving the needs of individual, corporate, institutional and municipal clients. Baird oversees and manages client assets of more than $66 billion. Committed to being a great place to work, Baird ranked 14th on FORTUNE’s “100 Best Companies to Work For” in 2009 – its sixth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has operating subsidiaries in Asia supporting Baird’s private equity and investment banking operations. For more information, visit Baird’s Web site at www.rwbaird.com.