So what makes industrial companies special? There are many different factors, but some of the main ones are long cycle versus short cycle. While there's no strict definition of the difference between short and long cycle businesses, a typical rule of thumb is that businesses which have contracts that take longer than a quarter to deliver are considered long cycle. Lockheed Martin produces the F-35 stealth fighter, which takes about 12 to 18 months to build. This would make it a long cycle contract. While a forklift truck may take days to weeks to build, making it short cycle.

Long cycle businesses are more predictable and less cyclical. They tend to deliver more smooth growth rates. However, a long cycle business is also associated with longer term contract risk. If Lockheed Martin's main customer, the US government decides it wants to change the way F-35 stealth fighters are procured, Lockheed Martin's fortunes may be in the balance. When analyzing industrial companies, it's important to consider their mix of long and short cycle products. R&D spend, industrial companies typically have very high levels of capitalized R&D spend relative to other sectors. Since a significant amount of R&D spending can be categorized as development spending for other sectors with high levels of R&D spend, such as pharma, they're required to expense that cost directly into their income statements as there's no viable product until very late in the R&D process. This means the money spend is classified as research spending, which is not allowed to be capitalized. However, if you're an industrial company creating an engine of a new product, it may well be the case that the new engine will be an upgrade to an existing engine, meaning that all the money spent improving that engine can be capitalized straight away. R&D is typically a high proportion of industrial companies costs, so this creates a lot of complexity around the capitalization of R&D spend.

Customer financing, industrial products often have very high unit price. Aircraft, vehicles, and machines will often cost thousands, potentially millions of dollars each. This means industrials often offer credit to their customers. In many cases, this is such an integral part of the business model that it's reported as a separate segment within the company's financial statements. This segment is effectively operating as a bank within the industrial company.

Pension liabilities. Industrials are often large, long dated companies, which may have been historically government run. This means that many have a history of offering defined benefits, pensions to their employees. This often causes a lot of complexity in M&A transactions. As the regulations and tax implications of these pension plans differ across countries. Pension liabilities may need to be treated as debt like items in the company's valuation.