2. Global Investments Committee
Global Investments Committee (GIC) is a student-run
multi-asset investment fund at the University of Michigan,
Ann Arbor.
Mission Statement
Since its inception in 2010, GIC is focused on providing its
members with a holistic, hands-on experience that introduces
them to various aspects of the financial services industry.
3. GIC Investment Fund
Through endowments from several sponsors, GIC members
currently get to actively manage an investment fund of
$18,000. Members are assigned to different investment groups,
effectively working to create a diversified portfolio of
investments. This unique layout provides members with an
exposure to several asset classes.
US Equities Global Equities
Emerging Market
Equities
Industrial
Equities
High Yield and
Distressed Debt
Real Estate Energy
4. GIC Investment Fund Performance – 1Y
0
2
4
6
8
10
12
14
16
Fall 2016 Winter 2017 Fall 2017 Winter 2018 Till Date
GIC vs SPX
GIC S&P 500
5. Portfolio Highlights
Pitched Long Tata Motors
(TTM) in March 2016 realizing
a 57% upside. Primary thesis
included volume growth
outperformance with Jaguar
Land Rover versus peers.
Coupled with strong exports
due to a weaker Rupee and a
rapidly expanding middle class
in India, TTM delivered strong
returns.
Pitched Garda 7.25% Senior
Notes due Nov. 2021 with 9%
YTM, which is the world’s
largest privately owned cash
logistics company. The primary
thesis was that Garda benefits
from high volume of retailers
outsourcing cash logistics by
offering the cheapest yet most
efficient customer service, thus
rendering it in a better than
expected position to pay off its
debt.
Pitched Long Panasonic
equity in January 2016
realizing a 42.23% upside.
Primary thesis based on
Panasonic’s new strategy
that lithium ion battery
production and global
investments will turn lagging
sales around and solidify the
company as a leader.
8. Debate on the Corporate Tax Reform
Negatives: The new tax plan aims to pay for itself
by increasing economic growth in the US. However,
the reality is that the new tax plan will just increase
the federal deficit by $1.5 trillion. The new tax
reform hopes to utilize a trickle-down effect to
benefit all Americans. In reality, the trickle-down
approach will fail as it has historically and will
effectively increase income inequality. Moreover, the
US is currently going through a period of strong
economic growth and should be implementing
contractionary policy to safeguard against future
recessions rather than implementing further
expansionary policies.
Positives: The new tax policy will leave more money
in the pockets of large corporations, small businesses,
and every day Americans. By instituting a
repatriation tax, slashing the corporate tax rate from
35% to 21%, and lowering the effective tax rate
below the UK, large corporations will have more
money and incentive to spend that money in the US.
In terms of small businesses, the deduction for pass-
through income as well as the immediate expense
section will stimulate small business growth and
innovation in the US Economy. Additionally, by
lowering the tax rate for 5 of the 7 individual income
tax brackets, everyday Americans, especially the
lower-middle class, will pay less in taxes.
Team IndustrialsTeam Energy
9. Discussion - Macroeconomic Trends 2018
• Find ways to take advantage of low unemployment and
increasing disposable income in the US and Europe (retail,
financial services, real estate)
Peak of Global
Growth and
Resurgence of Europe
• Understand that large companies are likely to get larger as
global growth has peaked. Demographics can no longer
increase size of the pie; therefore, market share becomes key
Allure of Large Cap
Stocks
• Exercise caution with investments given that excess liquidity
may be fueling price gains as opposed to intrinsic growth
Overvaluation and
Impending Market
Correction
• Best companies to invest in are the ones which are strategically
placed to exploit the exponential growth in tech
Exponential
Technological Progress
10. Pitch – Long Embraer
• Pitch Summary: Long Embraer (NYSE: ERJ) in October 2017 with a price target of $25.85 (34% Upside).
• Company Overview: Embraer is a company that designs, develops, manufactures and provides after-sale
support for commercial and executive aviation as well as defense. Product portfolio includes the ERJ 145 Series,
the ERJ 170/190 Series, and Defense and Executive planes.
• Thesis: From an industry perspective, the 70 to 130-seat commercial jet fleet is expected to increase from 2,700
aircrafts in 2016 to 6,710 aircrafts in 2036 primarily due to right-sizing. ERJ has over 50% market share in the
regional jet segment. Market is mispricing ERJ due to development
of its E2 series and is unable to price in future upside due to erratic
earnings. Market is also linking the stock to the Brazil’s economic
volatility despite 90% of ERJ’s sales being exports. Finally, investors
are overreacting to the recent deal between Airbus and Bombardier
despite ERJ’s superior E2 project vis-à-vis Bombardier’s CS Series.
• Catalyst: Based on partnerships in the past and Boeing’s rivalry with Airbus, it was also taken into consideration
that Embraer may enter into a joint venture with Boeing. This catalyst was realized in December 2017 and ERJ
was divested from the GIC portfolio with a 32% gain.
12. GIC Alumni
20 analysts across various divisions (Investment Banking,
Capital Markets, Sales and Trading, Asset Management)
7 analysts in various buy side roles (Real Estate, Equities,
Private Equity, Credit)
2 analysts in Management Consulting positions
4 analysts as generalists across various boutique banks
18 analysts across various divisions (Investment Banking,
Capital Markets, Sales and Trading, Risk Management)
20 analysts in various roles across different Fortune 500
companies
4 analysts in various roles (Real Estate Debt, Strategic
Alternatives, Data Analytics)
98%
Placement
Rate since
2016
13. GIC UpTick Simulation
GIC hosts an Uptick/RIT
Simulation competition every
semester for all students across the
University of Michigan in the Tozzi
Trading Center at the Ross School
of Business. Students form teams to
compete against each other in
software simulated trading sessions
that re-create high volume periods in
market history. Top 3 teams receive
up to $500 each after the three hour
simulation.
14. More Information
For more information, please visit our website.
Please do not hesitate to contact us:
Aditya Banerji – Co-President (adityaab@umich.edu)
Hannah Sabey – Co-President (hsabey@umich.edu)
Jack Lancaster – Vice President (jacklanc@umich.edu)
Cooper Drippe – Co-Head of Investments (cdrippe@umich.edu)
Aayushi Madani – Co-Head of Investments (aayushic@umich.edu)
17. COMPANY OVERVIEW
• Design, development, manufacturing and after-sale
support of commercial and executive aviation
• Integrated solutions and systems for defense and
security, and military aircrafts
• Limited exposure to agricultural aviation
• Key Management: P. Silva, J. Slattery, M. Pellegrini
Background Key Facts
Historical Stock Performance Segments
• Over 100 airlines use ERJ’s commercial jets
• 1 out of 5 executive jets delivered are by ERJ
• Defense contracts with more than 60 countries
• Market Capitalization: USD 3.5B
• Credit Rating: BBB (S&P), BBB- (Fitch)
• Headquarters: Sao Paulo, Brazil
Bombardie
r Deal
3Q
Earnings
4Q
Earnings
Sector EBIT Margin
Commercial 13.6%
Executive 4.1%
Defense 1.2%
19. Earnings and Ownership
• Historically erratic earnings due to
development of E2 series of planes
• EPS of USD 0.6 vs. forecast of USD 0.3
• Gross margin increased 30 basis points
• Revenue of USD 1,239.7 mm vs. USD
1,453.0 estimate on lower deliveries
• Harsh guidance due to transition period
• Largest shareholder: Brandes
Investment Partners, a value fund,
which has increased in stake in ERJ
since the conceptualization of the E2
jets (2012)
Q3 2017 Earnings
Ownership
20. ECONOMIC OVERVIEW
• Standard & Poor's credit rating for Brazil stands
at BB with negative outlook.
• Moody's credit rating last set at Ba2 with
negative outlook
• Fitch's rating last reported at BB with negative
outlook.
•Ratings lowest in last 11 years
Recovery
Risks
• Sharp deceleration of deflation
• Selic rate cuts imply expansive monetary policy
• Recovery based on dynamism of exports and
stabilization of domestic demand
• Exchange rates should weaken ahead, with BRL
3.30 at the end of this year and 3.5 at the end
of 2018
• Increased political noise has decreased price of
Brazilian assets
Credit Rating
21. INDUSTRY OVERVIEW: Commercial Jets
• 70-130+ segment will grow at double the pace of wide
bodied aircrafts
• The 70 to 130-seat jet world fleet-in-service will increase from
2,700 aircraft in 2016 to 6,710 by 2036, the fastest growing
segment among all aircraft categories.
• Replacement of ageing aircraft will represent 37% of new
deliveries and 63% will represent market growth.
• Upgauging in 50 seater market facilitated by scope clause
amendments will increase demand for 70-130 seat aircrafts
Big Picture
Embraer E2 Series vs. Bombardier CS Series
Enter service in 2018
and on schedule
Enter service in 2015
vs. planned 2013
Budget of USD 1.7B
On track
Budget of USD 4.4B
Over budget
200 orders since 2015
215 at Paris air show
203 orders since 2009
0 at Paris air show
E2 is 20% more fuel
efficient than
Bombardier and
requires 2x less
maintenance
22. COMMERCIAL JETS: Geographical Outlook
LATAM
Propensity to Travel
0.5 airline
pax/capita which
is 5x that of the USA
2x higher service
level with 70-130
seaters than
larger aircrafts
INDIA
RPK Growth
>20%
Regional
Connectivity
Scheme by DGCA
to double
regional air travel
UNITED STATES
RJs offer antidote to
capacity growth and
PRASM conflict
Hub and Spoke
Importance 40% of
transatlantic traffic via
O’Hare transported in
regional jets
AFRICA
40% of RJ fleet to
refresh
65% of city pairs
have
traffic volume
under 100
while planes are
130 seater
EUROPE
Risk of
upgauging yet
25% of ERJ-E
airlines
MIDDLE EAST
60% of regional
flights
depart with
fewer than
120 passengers
24. INDUSTRY OVERVIEW: Executive Jets and Defense
• Record levels of HNWI will increase demand for
Executive Jets
• High correlation between US private jet demand
and S&P 500
• US adds 903,000 millionaires with China in second at
152,000
• The list price per aircraft, which already increased 56%
throughout the last decade, is projected to increase
a further 16% through 2026
• Larger cabin aircrafts to account for more than 85%
of all expenditures on new business jets in the next five
years
• Competitors include Learjet and Cessna
Executive Jets Defense
Costs $2.46/mile
Costs $2.85/mile
2220 lbs payload
2150 lbs payload 1990 miles range
2100 miles range
Under 5ft cabin pace
Over 5ft cabin space
• Sector revenues likely to grow at 3.2 % in 2017 as US
DoD reported spending increase of US $9.0 billion in
FY2017, inclusive of Overseas Contingency Operations
(OCO) funding
• Affordability key in procurement criteria
• Industry’s need to recapitalize equipment: Brazil
R&M market annually expanded 5-6%
• Defense spending ramped up in China, UAE, Saudi
Arabia, India due to regional tensions
• Consolidations in industry with Embraer and Boeing on
tactical jet KC-390
• World’s airlift average age is at 31.5. Most shall be
replaced over the next 20 years
• Prices of US tactical jets tripled over predecessors
25. INVESTMENT THESIS
• ERJ erratically
impacted by Airbus-
Bombardier Deal
• Market is not able to
look past transitional
phase
• Market is assuming
high correlation to
Brazilian economic
uncertainty
• 90% of ERJ’s sales are
derived from exports
• Favorable
economics and
market share
• Sturdy backlog of
USD 18.8B
• Lower costs: E2
redesign & cheap
labor + materials
• E2, Defense will grow
• Switching costs high
• ERJ capitalizing on
position while
Bombardier tries to
target other
segments
• Best products in the
market: commercial
and executive
Market Short Sight Brazilian Economy Company Comps
Upside realizable within 1 year: 11% Upside realizable between 1-2 years: 34%
26. VALUATION: Comparable Companies
Comps Graphical Output
Company Weights
Bombardier 25%
Dassault 10%
Leonardo 5%
Mitsubishi 15%
Lockheed Martin 5%
Airbus 20%
Boeing 20%
Median = 17.56x
29. CATALYSTS
First delivery of E2 in 2Q
2018 and earnings
report with mellower
guidance
Negative
development of
Bombardier-Airbus
deal or JV with Boeing
Brazilian economy
stability and
certainty
Securing more
contracts
30. •Risk 1: Not meeting production and delivery targets for new E2 series
•Mitigant: Project under budget and on time
•Risk 2: Because Embraer attributes a majority of its sales to commercial aircrafts and executive jets, a downturn in the
commercial and executive aviation markets may reduce sales and revenue, and, consequently, profitability
•Mitigant: Most orders are long-term and ERJ maintains large backlogs
•Risk 3: Manufacturing of parts is highly concentrated among key suppliers (approximately 85% of production costs for
Commercial Aviation fleet is purchased from select partners and components are typically very exclusive, meaning
that replacements are not readily available which could slow overall assembly)
•Mitigant: Addition of suppliers (i.e. Panasonic Aviaonics Corporation, Meggitt Polymers and Composites, and KID-
Systeme) for a diversified supply chain
•Risk 4: Dependence on key customers across Commercial and Executive Aviation as well as Defense and Security
Segments (e.g. >85% of Commercial Aviation orders come from Skywest, American, United, JetBlue, Alaska, Air France-
KLM, Hainan, and leasing company NAC/Aldus)
•Mitigant: Recurring orders and high switching costs; highest number of airlines among regional players
RISKS
