INVESTMENT STRATEGY GROUP JANNEY CAPITAL MARKETS EQUITY RESEARCH TOP PICKS
First Quarter 2013
Please refer to the Important Disclosures at the end of this report. Past performance is no guarantee for future performance. For illustrative and informational purposes only. Not a solicitation to sell or recommendation to buy the securities highlighted. Please consult your Financial Advisor.
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
METHODOLOGY
§ This list provides the Janney Equity Research team’s highest conviction ideas in one location § Each Janney Research Analyst identified up to two (2) top stock picks based on a 6-12 month time horizon
§ In an effort to limit the list to only high-conviction ideas, analysts could submit less than two (2) stocks
§ The final result is a list of 43 top stock ideas which is 12% of the universe of the 364 covered companies at Janney
§ For each name, a short summary of the Analyst’s thesis is provided as a starting point for further analysis
§ At the end, we included our Technical Strategist’s “Favorite Five” of the top picks
§ These should not be viewed as an investment portfolio; rather they are simply a current snapshot of the Research Analysts’ top
picks in their coverage universes § This list will be updated on a quarterly basis
§ The data in the discussions regarding the top stock picks are as of December 27, 2012.
1
Investment Strategy Group Janney Montgomery Scott LLC
• V.F. Corporation designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe.
• The company has several high growth, global brands including The North Face and Vans complemented by more mature assets including Jeanswear and Timberland. It is well positioned in high growth Asian markets including China while gaining market share in more mature regions.
• The company is shareholder friendly as demonstrated by opportunistic share buybacks and dividend increases and is also increasing profitability through innovative supply chain optimization. The stock also has valuation and dividend support.
Company Name Ticker Price Market Cap Forward P/E Dividend Yield FY13E EPS
Growth
Deckers DECK $38.11 $1.34 Billion 10.1 - 9.2%
• Deckers Outdoor Corporation engages in the design, manufacture, and marketing of footwear and accessories for outdoor activities and casual lifestyle use for men, women, and children.
• We believe concerns over UGG brand are overdone and that its brand relevance remains in-tact and continues to receive solid retailer support. • We also think profitability will improve in 2013 driven by better product costs and ongoing supply chain initiatives. • Valuation largely reflects the risks with little discounting of positive outcomes. The shares are trading at 10x FY2013 estimated earnings while the historical
average is 16x.
4
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
HOUSEHOLD & PERSONAL CARE
John San Marco
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Energizer Holdings, Inc. ENR $79.61 $4.9 Billion 11.7x - 9.7%
• Energizer Holdings, Inc. engages in the manufacture and sale of primary batteries, portable lighting, and personal care products worldwide. It offers household and specialty batteries, including carbon zinc, alkaline, rechargeable, and lithium batteries.
• Management has set highly attainable revenue expectations for F13 and long-term, which should allow them to convert gross cost savings to a greater than anticipated bottom line impact. Aside from a robust cost program (savings equal to 29% of EBIT within 3 years), rich FCF and a low multiple (11.5x) imply attractive potential for repurchase accretion.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. • Colgate has a long-term, dominant Emerging Market position that provides industry leading growth and profitability opportunities. • Colgate also has a best-in-class cost structure that enhances profitability and enables growth opportunities. • Premium valuation reflects superior revenue and profitability growth.
5
Investment Strategy Group Janney Montgomery Scott LLC
• Starbucks Corporation purchases and roasts whole bean coffees. It operates 6,705 company-operated stores and 4,082 licensed stores in the United States; and 2,326 company-operated stores and 3,890 licensed stores in Canada, the U.K., China, Germany, Thailand, and internationally.
• Buy rating is driven by continued solid U.S. same-store sales trends, potentially lower coffee costs over FY 2013-15, and a large long-term worldwide single cup opportunity.
• We remain enthusiastic about the company's plentiful growth opportunities -- and about chances to enhance margins over the next 2-3 years, in part due to what we believe should be a lower average price per pound for coffee.
• The company recently reiterated its fiscal 2013 EPS growth goal of 15-20 percent and integration of recent acquisitions also remain on track.
Ticker Price Market Cap Forward P/E Dividend Yield FY13E EPS
• McDonald's Corporation franchises and operates McDonald's restaurants in the global restaurant industry. Its restaurants offer various food items, soft drinks, coffee, and other beverages. The company operates approximately 34,000 restaurants in 120 countries around the world.
• BUY rating is based on the possibility of improving same store sales trends as 2013 progresses and gradually improving y/y comparisons. • Additionally, we believe that investors are more prepared today than they were in September for the tough sales comparisons. • Valuation is also attractive.
6
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
RETAIL - HARD-LINE
David Strasser
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
OfficeMax Incorporated OMX $9.50 $824 Million 11.6x 0.8% 7.9%
• OfficeMax Incorporated, together with its subsidiaries, distributes business-to-business and retail office products. • The company has implemented multiple operating initiatives which should provide tangible results in 2013. The company has also made significant progress in
simplifying its balance sheet and selling non-core assets which should help investor perception and understanding of the company. • OMX has a strong balance sheet with $506 million (60%+ of market cap) in cash and is expected to generate over $30 million in cash this year. • The stock has strong valuation support and the current price represents an attractive entry point for future earnings growth and improved valuation.
Company Name Ticker Price Market Cap Forward P/E Dividend Yield FY13E EPS
Growth
Best Buy Corporation BBY $11.51 $3.9 Billion 4.3x 5.9% N/A
• Best Buy Co., Inc. operates as a retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China.
• The new management team has begun aggressively cutting costs, streamlining U.S. operations, expanding the digital platform, and right-sizing international operations. These actions will fund reinvestment back into core operations and position BBY for the next TV, PC and other product cycles.
• While current valuation implies BBY will go out of business, we disagree. We believe BBY’s strong balance sheet and cash flow, along with strong vendor support, will allow it to complete a successful turn-around. At its current valuation, the stock offers a worthwhile risk-reward proposition.
7
Investment Strategy Group Janney Montgomery Scott LLC
• Abercrombie & Fitch Co., through its subsidiaries, operates as a specialty retailer of casual apparel for men, women, and kids. • We believe ANF is setting up as relative sector Buy as we foresee several catalysts on the horizon over the next 12- to 15-month period, including: 1) potential
promotional inflection, as defined by better (less) promotional activity year-over-year, in 4Q12; 2) inventory-to-sales growth, and accompanying GMROI (Gross Margin Return on Inventory Investment), inflection in 4Q12; and 3) potential gross margin rate inflection in early-to-mid 2013.
• Company repurchases shares as consolidated margin trends begin to stabilize. During 3Q12, the company repurchased 3.0 million shares of its common stock at an aggregate cost of approximately $104.3 million. As of October 27, 2012, the company had approximately 19.9 million remaining shares available for purchase under its publicly announced stock repurchase authorizations. We would expect share repurchase activity to continue as consolidated margin trends continue to stabilize and show signs of improvement.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
Urban Outfitters, Inc. URBN $38.61 $5.6 Billion 20.0x - 22.2%
• Urban Outfitters Inc. operates lifestyle specialty retail stores under the Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN brand names in the United States, Canada, and Europe.
• We continue to remain confident that the turn in the business is on track for 4Q12 and will be driven by: 1) leadership changes that we expect to continue to positively impact the business, 2) a focus on inventory discipline, and 3) improved merchandising at both Urban Outfitters and Anthropologie.
• Urban Outfitters division remains solid; Anthropologie division shows improvement over last year. We continue to believe that the Urban Outfitters division is capitalizing on many of the key fashion trends that are happening now, and we note that the stores look increasingly fashion forward and believe the Urban Outfitters division continues to improve store level traction with customers. We believe that Anthropologie stores look the best we have seen them all year.
8
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
FOOD & BEVERAGE
Jonathan Feeney, CFA
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
The J.M. Smucker Company SJM $85.53 $9.3 Billion 16.5x 2.4% 9.5%
• The J. M. Smucker Company engages in manufacturing and marketing branded food products primarily in the United States, Canada, and internationally. • The company generates significant cash flow and is excellent at deploying this cash flow including re-investing into the business and returning cash to share
holders via dividends and share buybacks. • The stock trades at a discount to the packaged food group while we see likely faster free cash flow and dividend growth with steady share buybacks.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
ConAgra Foods Inc. CAG $29.39 $12.0 Billion 14.2x 3.4% 12.5%
• ConAgra Foods, Inc. operates as a food company primarily in North America. The company operates through two segments, Consumer Foods and Commercial Foods.
• We believe in ConAgra’s contrarian style of looking for acquisitions to get bigger and more profitable in the less glamorous, dry grocery aisles of North American markets, while its peers pay higher valuations for acquisitions to chase growth overseas.
• ConAgra trades at a roughly 20% discount to the peer group, lower than its historical 10% discount despite comparable earnings visibility and similar domestic volume trends.
9
Investment Strategy Group Janney Montgomery Scott LLC
• MPEL operates two casinos in Macau, the largest gaming market in the world with $37.5 bln in 2012 estimated revenue compared to Las Vegas strip at $6 bln in 2011. MPEL also has solid exposure to the fastest growing segment of this market, the premium mass segment. The company also has a solid property development pipeline that will enhance future growth.
• The stock is also selling at a discount relative to other Macau operators.
10
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
CONSUMER AND SPECIALTY FINANCE
Sameer Gokhale, CPA
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Capital One Financial Corp. COF $57.35 $33.4 Billion 8.4x 0.3% -
• Capital One Financial Corporation operates as the bank holding company for the Capital One Bank (USA), National Association (COBNA), and Capital One, National Association (CONA), which provide various financial products and services in the United States, the United Kingdom, and Canada.
• Favorable risk / reward characteristics with potential upside in a higher interest rate environment compared to other large banks as most of its portfolio consists of high, variable rate credit card and auto loans.
• Valuation is very reasonable with stock trading at a relatively modest 8.5x our 2013 estimate. • COF is estimated to have $6 billion of excess equity by year end 2013 and will be able to return a significant amount of excess capital to shareholders.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• SLM Corporation, through its subsidiaries, originates, acquires, finances, and services private education loans in the United States. It offers processing capabilities to educational institutions, 529 college-savings plan program management services, and a consumer savings network.
• The company has a large liquidating portfolio of federally guaranteed student loans that generate a lot of cash. • SLM has been returning its cash generation to shareholders though dividends and buybacks. • The company’s private student loan portfolio is also a source of growth. • The stock has significant upside to our conservative sum-of-the-parts valuation which yields a fair value estimate of $20.00 per share.
11
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
INSURANCE
Robert Glasspiegel, CFA
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Allstate ALL $40.13 $19.3 Billion 8.3x 2.2% 32.9%
• The Allstate Corporation, through its subsidiaries, engages in the personal property and casualty insurance, life insurance, and retirement and investment products business primarily in the United States.
• The company is on track to achieve 13% ROE in 2014, possibly a year earlier. • Allstate’s stock trades slightly below book value. Historically, when ALL was achieving double-digit ROE’s, price-to-book ratio was 1.5x. • The company is in position to return 10% of capital in the form of buybacks and dividends.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
Loews Corp. L $40.49 $15.9 Billion 11.6x 0.6% N/A
• Loews Corporation operates primarily as a commercial property and casualty insurance company. • Shares sell at a significant discount to a sum-of-the-parts valuation. • Investors may also come to view the natural gas investment as an asset. • Loews has a liquid balance sheet ($3.7 billion of cash and $3.0 billion of net-cash) to use for share repurchase/asset acquisitions. • We are optimistic that management efforts to turn around CNA Financial ($27.85 – CAN – Neutral) will ultimately pay off.
12
Investment Strategy Group Janney Montgomery Scott LLC
• Premier Insurance Broker with global operations. • Well positioned to benefit from high growth, developing economies and insurance penetration in emerging markets. • Should benefit from what we expect will be continued price strengthening in commercial property-casualty lines. • Company generates strong cash flows that will be used for organic growth, acquisitions and stock repurchases. • Dividend yield of 2.7% and low risk business model should provide downside protection from potential global uncertainties.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• A leading Property-Casualty company. • Will remain actively engaged in buying back its own stock. • Stock trades at 10% premium to book value and yields 2.5%; we believe there is upside potential for multiple expansion. • Property-casualty pricing has been improving and Travelers is well positioned as the marketplace continues to firm. • Company has an excellent investment team that maintains a risk averse investment portfolio.
13
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
BDCS/SPECIALTY FINANCE
John T.G. Rogers, CFA
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Hercules Technology Growth Capital HTGC $10.87 $575 Million 9.4x 8.8% 19.6%
• HTGC provides senior secured debt to venture backed, start-up companies in the life-sciences and technology industries. Hercules is a leading lender to this attractive niche market that generates strong mid-teens current returns with low loss rates (less than 1% annually).
• We see further upside to the company’s current 8.8% dividend. Significant capital to deploy in attractive market should drive 30% earnings and dividend growth over the next 12-18 months. Further pushing risk/reward in favor of investors is the upside opportunity from the warrant portfolio or rising interest rates which are not included in our estimate.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
New Mountain Finance Corporation NMFC $14.77 $593 Million 10.9x 9.2% 3.0%
• New Mountain Finance Corp is a provider of senior secured, 2nd lien, and mezzanine debt to private equity (PE) sponsored and un-sponsored middle market companies. The company’s PE parent provides deep due diligence capability. This combined with management’s focus on investing in non-cyclical, secular growth industries we expect will result in lower loss rates over time.
• We view the company’s fully covered 9.2% dividend yield and the potential for further capital appreciation driven by expanding middle market valuations as attractive. Further pushing risk/reward in investors favor is the potential for outperformance in a negative economic environment.
14
Investment Strategy Group Janney Montgomery Scott LLC
• Among largest and most diversified MLPs both geographically and in midstream services offered. • High level customer service makes EPD the midstream provider of choice for many energy producers. • Well capitalized, one of few MLPs to focus on retained earnings to fund growth. • Several growth projects planned and in progress lend visibility to future growth. • We project mid-single digit growth in distribution.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• Focuses on gas gathering and processing. • Structured with favorable long term contracts which reduce commodity risk and should generate stable mid-teens returns. • Recent purchase of midstream assets from Chesapeake Energy, Inc. expand its position in the Marcellus and bring it into the Eagle Ford, Utica, and Nibrara. • The portfolio of midstream assets held within Global Infrastructure Partners, which owns half of the GP, provide visibility on future drop-down acquisition
growth. • We project low – to- mid teens growth in the distribution.
15
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
WATER & AGRICULTURE
Ryan M. Connors
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
American Water Works AWK $36.80 $6.5 Billion 16.4x 2.7% 2.3%
• American Water Works Company, Inc., through its subsidiaries, provides water and wastewater services to residential, commercial, industrial, public, and other customers in the United States and Canada.
• AWK is a steady grower with stable “recession resistant” regulated water utility business model. • The company expects to grow EPS 8%-10% and has pegged dividend growth to that figure (currently yielding 2.7%).
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
Xylem, Inc. XYL $26.85 $5.0 Billion 14.1x 1.5% 8.6%
• Xylem Inc. engages in the design, manufacturing, and application of technologies for the water industry. The company operates in two segments, Water Infrastructure and Applied Water.
• Best-of-breed player in water infrastructure space, with #1 market position in many key product categories and a broad distribution channel. • Primed to benefit from improvement in municipal water capital expenditures in 2013. • Reasonably valued with forward P/E of 14 times.
16
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
INDUSTRIAL SERVICES
Liam D. Burke
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Lincoln Electric Holdings, Inc. LECO $48.06 $4.0 Billion 14.2x 1.4% 9.7%
• Lincoln is a leading provider of welding and cutting equipment and consumables that have wide application in multiple sectors. • Lincoln is a consistent generator of free cash and has a long record of carefully allocating its capital. The company has maximized the value of its free cash flow
through disciplined capital allocation to improve returns on invested capital. • In addition to its attractive valuation, Lincoln has very strong fundamentals including improving operating margins, return on invested capital of over 20%, and
free cash flow of about 85% of earnings. The company has a very strong balance sheet and recently increased the dividend by over 17%.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
Koppers Holdings, Inc. KOP $37.88 $780 Million 10.1x 2.5% 16.9%
• Koppers operates diverse businesses with about 60% of the company’s revenues tied to aluminum production and railroad related products. The balance of the company’s revenue is driven by construction, utilities, rubber, and plastics.
• The company has strong fundamentals and generates strong free cash flow and high returns on invested capital. • With a strong base business and consistent free cash flow generation, Koppers continues to invest in growth opportunities in emerging markets and make
accretive acquisitions. • The stock also has valuation support and a solid dividend.
17
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
INDUSTRIAL
John Baliotti
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
AMETEK, Inc. AME $37.31 $9.1 Billion 17.8x 0.6% 12.3%
• AMETEK, a global manufacturer of electronic instruments and electromechanical devices, is among the best managed industrial companies with several senior members of management with over 20 years at AME. Quality of management and operations as well as a more strategic portfolio has enabled AME to continue to under promise and over deliver for well over 10 years.
• Through dozens of acquisitions over the past 10-15 years, AME has become a higher core growth, more secular vs. cyclical company. • Over the last 15 years, AME has generated over $3.0 billion of free cash, averaging 106% of net income. $2.8 billion of which was generated in the last 10 years
averaging almost 120% of net income. We believe AME will continue raising its core revenue growth profile.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
W.W. Grainger, Inc. GWW $200.52 $13.9 Billion 17.2x 1.5% 10.2%
• Over the past 15-20 years, GWW, the largest global distributor of industrial and commercial supplies, has made significant investments in its operations to enable it to take market share in a highly fragmented $160 billion addressable market that smaller competitors are unable to duplicate. Over 80% of the market is controlled by over 150,000 local competitors and GWW has just 5% share despite being the largest competitor.
• Current weak/sluggish economic conditions are optimal for share gains for GWW, since smaller more geographically concentrated competitors will be more sensitive to current conditions. GWW benefits from a customer base of over 2.0 million active customers making it less sensitive to any specific customers or end-market.
• Academically, 1% market share gain is equal to 20% core revenue growth for GWW. While we do not expect a full point of share gain in a given year, this illustrates the tremendous opportunity few companies have before them.
• 41 years of dividend increases with an average increase of 15% over the past 10 years. Last 3 years the average was 21%.
18
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNOLOGY, MEDIA & TELECOM - COMMUNICATIONS EQUIPMENT & IT HARDWARE
Bill Choi, CFA
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Aruba Networks, Inc. ARUN $20.36 $2.3 Billion 25.1x - 24.6%
• Aruba Networks, Inc. provides network access solutions for the mobile enterprises worldwide. • Benefiting from a secular shift to Wi-Fi. Aruba Networks is well-positioned in the Wireless LAN market and is gaining share across industry verticals due to
higher adoption of Wi-Fi. We believe Aruba will exhibit among one of the highest growth rates in our coverage sector, benefit from proliferation of mobile devices in the workplace, and provide solid earnings upside potential over the next 12 months.
• Improving revenue growth and gross margins should help. We believe Aruba will grow higher than 15-20% growth in WLAN market and expect a reacceleration in year-over-year revenue growth rate. We also believe gross margins will improve as Aruba ramps its high-margin ClearPass software solution. We believe the stock will get re-rated and awarded with a higher valuation multiple (from current 22x P/E to approximately 28x P/E).
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
Apple, Inc. AAPL $515.06 $484.5 Billion 9.9x 2.1% 18.2%
• Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players, as well as sells various related software, services, peripherals, and networking solutions.
• Best-in-class play on consumerization of technology. Apple differentiates itself in the market by leveraging the ability to design and manage its own operating system, hardware, applications, and its iTunes Store platform. Apple is one of few companies that has successfully bridged the world of technology and content. We continue to believe Apple will leverage its ecosystem, and expect new products to generate significant earnings growth over the next 12 months.
• Remains a secular play despite macro uncertainty. Apple derives majority of its sales from high-end consumer electronics that sell at premium prices. Secular growth trends in iPhone and iPad are well established, and sales are dependent on Apple's continued ability to deliver new products, manage supply chain, and expand distribution. We believe Apple will continue to innovate and see new customers and upgrades from its existing installed base driving growth.
• Stock is reasonably valued given its growth profile and offers a solid dividend.
19
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
INTERNET
Richard Fetyko
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
Akamai AKAM $41.03 $7.3 Billion 21x - 10.8%
• Akamai Technologies, Inc. provides content delivery and cloud infrastructure services for accelerating and improving applications over the Internet in the United States and internationally.
• Akamai is well positioned to coattail the secular trends in online and mobile content consumption, migration of applications to the web (SaaS and cloud computing), and adoption of e-commerce and digital marketing.
• Following 3Q12 results, we raised our estimates based on improved visibility into 2013/ 2014. The continued uptick in Cloud segment revenue (58% of total) growth indicates that the new products and cross-selling strategy are seeing good traction, while the Volume segment (42%) remains in resurgence. Gross margins and EBITDA margins are expanding in part due to implementation of more efficient content delivery methods.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
ValueClick VCLK $19.21 $1.4 Billion 10.5x - 13.7%
• ValueClick is a diversified provider of Internet advertising solutions for online advertisers and website publishers. The company remains a strong free cash flow generator and has been aggressively buying back its shares.
• With acquisitions of Dotomi (retargeting), Greystripe (mobile ad), Investopedia.com, and scaling back on paid search arbitrage, the quality and sustainability of the revenue and earnings streams is improving, which should also earn it higher valuation multiples and position the company for a potential take-out.
20
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNOLOGY, MEDIA & TELECOM - INTERNET
Shawn Milne
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
eBAY
EBAY $50.29 $65.1 Billion 18.6x - 15.8%
• EBay Inc. provides online platforms, services, and tools to help individuals and merchants in online and mobile commerce and payments in the United States and internationally. Its Marketplaces segment operates ecommerce platform eBay.
• Our top large cap pick is EBAY with our thesis being 1) we believe eBay’s play book of driving traffic to its top-rated sellers should ultimately improve the buying experience; 2) increased selection and an improved buying experience will drive potential market share gains; and 3) expect strong growth at PayPal with room for operating margin expansion.
• Our BUY rating and $58 FV is based on 18.5x our FY14 Non-GAAP EPS estimate of $3.16. We believe a forward multiple in the 18-20x range is appropriate given the continued rebound in Marketplace GMV growth and ongoing strength of PayPal TPV growth.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• Liquidity Services, Inc. operates various online auction marketplaces for surplus and salvage assets in the United States. Its auction marketplaces include liquidation.
• We believe Liquidity Services remains in the early stages of building the leading B2B online marketplace for Surplus assets in a highly fragmented $150BN industry.
• We would use the near term margin compression (mainly from GoIndustry acquisition) to buy the stock. We continue to expect 20%+ GMV growth and slightly faster EBITDA growth (post 1H investments).
21
Investment Strategy Group Janney Montgomery Scott LLC
• Best positioned cloud computing vendor in the tech industry. • History of strong sales execution, and we expect this trend to continue. • History of innovation. Expecting a strong uplift in its business with the expected release of its flagship database Oracle 12c in the coming months. • Valuation. Trades only at 12X CY13 earnings estimate, vs. the industry average of 17X.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• Only enterprise software company to have multi-year margin expansion target. PMTC expect operating margin in the 25-27% range in FY15, which we have high confidence that it can deliver on that goal. It has also committed to growing its earnings by 20% annually during that span.
• Perhaps the largest, underpenetrated market opportunity in enterprise application software segment – PLM (product lifecycle management). Using software to improve the product design and development processes.
• Valuation. Trades only at 12X CY13 earnings estimate, vs. the industry average of 17X.
22
Investment Strategy Group Janney Montgomery Scott LLC
• Accenture’s leading global management consulting, technology services and outsourcing business model receives a large percentage of its revenues through sole sourced work which means it does not go out for bid. Accenture reported record bookings two quarters ago providing a healthy backlog to work through in 2013. Visibility is better on an annual basis heading into 2013 with revenue estimates backed by contracted work.
• Accenture is trading at an attractive 12x multiple for 2013 when you exclude the cash for a long term double digit earnings grower. The company has solid free cash flow which it returns to shareholders through dividends and stock buy backs which protect earnings.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• The Corporate Executive Board Company provides data analysis, research, and advisory services to executives and professionals in the United States, Europe, and internationally.
• Corporate Executive Board is a subscription based model. Investors should be attracted to subscription models in mediocre economic times like these given their high level of visibility, ability to increase margins, and good free cash flow. We expect the company to perform assuming economic growth remains stable and does not deteriorate.
• The company helps its customer's improve their business by providing best practices. Street estimates for 2013 in both the core business (11% vs. current 13%) and acquisition (low single digits vs. historical double digits) look reasonable.
• The risk/reward is positive. Corporate Executive Board is trading at 14x versus its historical multiple of 20x. The company produces solid free cash flows and pays a dividend.
23
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
MEDIA AND ENTERTAINMENT
Tony Wible, CFA
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
GameStop GME $24.67 $3.0 Billion 7.1x 4.1% 11.2%
• We recommend GameStop, the largest U.S. video game and PC entertainment software specialty retailer, with a $32 fair value, based on: 1) its peak market share position at the onset of a next gen game cycle; 2) new sources of high margin revenue from iDevice trades and digital initiatives that reposition GME in the evolving landscape; and 3) the move towards usage-based billing of Internet data.
• Furthermore, the company will benefit from easing comps, a strong balance sheet, large dividend payments, and share repurchases. We believe low expectations and a high short interest create a positive risk/reward, and that investors able to buy/hold the stock through holiday 2013 will be rewarded.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
• Comcast is a media and entertainment conglomerate with diversified interests in cable, broadcasting, film and theme parks. • We recommend CMCSA with a $46 fair value, as we see it poised to leverage its infrastructure to introduce new services (home automation, security services,
cloud storage, media streaming, etc.) that will provide meaningful growth for decades. • It should also benefit from Ultra HD technology on the horizon, the move to client/server technology, Usage Based Billing (UBB), and new tools/assets that can
help contain programming cost inflation. • Lastly, CMCSA is uniquely positioned to develop next gen video products through recent innovation and a robust set of content rights. We believe investors will
increasingly see new technology as a growth catalyst that will afford the company a premium multiple.
24
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
FINANCIAL TECHNOLOGY
Thomas C. McCrohan
Company Name Ticker Price Market Cap Forward P/E Dividend Yield Earnings Growth Company Name Ticker Price Market Cap FY13E P/E Dividend Yield
FY13E EPS Growth
MICROS Systems, Inc. MCRS $42.24 $3.4 Billion 17.5x - 8.6%
• MICROS Systems provides hardware and software solutions as well as systems support in the restaurant, retail, and hotel segments of the hospitality industry. The company maintains an extensive worldwide service organization to provide ongoing support to its existing hardware and software customers.
• MICROS has an established management team and a sticky product set, and their deep penetration in hospitality via their integration with point of sale payment systems is an extremely important strategic asset. As real-time couponing, reservations, loyalty, and payments all converge, MICROS is well-positioned to be a key player within the in-store point-of-sale evolution. The company has a geographically diverse market base and a global support and service business that could prove difficult to replicate.
Company Name Ticker Price Market Cap FY13E P/E Dividend Yield FY13E EPS
Growth
SEI Investments SEIC $23.30 $4.0 Billion 16.1x 0.7% 20.8%
• SEI Investments provides fund processing and investment management solutions to corporations, financial institutions, and financial advisors. SEI has Assets Under Management of over $190 billion and Assets Under Administration of over $440 billion.
• Financials will continue to muddle along in the near term as SEI invests in its Global Wealth Platform, but will be somewhat buoyed by continued share buybacks and management cost control efforts.
• The lack of visibility into when scale will be achieved on the platform is certainly frustrating, but momentum on the new business front keeps us interested in the shares and we would rather be early than miss the upside potential in this stock.
• Meanwhile, SEI generates solid cash flow from operations (+$200 million annually), has a dividend yield of 1.3%, and manages a strong stock repurchase program (has repurchased 24 million shares for $478 million since the beginning of January 2010).
25
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNICAL STRATEGY – FAVORITE FIVE
1. Energizer Holdings (ENR)Energizer Holdings, Inc. – ENR sports a bullish weekly chart at this time. – We believe targets toward the high-$90s zone are possible on an intermediate-term basis. – We would watch for initial support within the $73-75 zone.
Dan Wantrobski
26
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNICAL STRATEGY – FAVORITE FIVE
2. Capital One Financial (COF) – We like the broader financial sector on a technical basis at this time. – COF currently sports a bullish weekly chart. – Potential targets measure toward the mid-$70s zone on an intermediate-term basis. – We would watch for initial support near $55.
Dan Wantrobski
27
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNICAL STRATEGY – FAVORITE FIVE
3. Aruba Networks (ARUN) – We believe the broader technology sector may perform better in 2013. – ARUN currently sports a bullish reversal on its weekly charts. – Potential targets measure toward the $28 zone on an intermediate-term basis. – We would watch for initial support near $20.
Dan Wantrobski
28
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNICAL STRATEGY – FAVORITE FIVE
4. Oracle Corporation (ORCL) – ORCL is one of the technical leaders in the technology sector. – The stock appears to be breaking out on its longer-term weekly charts. – Potential targets measure toward the $38-39 zone on an intermediate-term basis. – We would watch for initial support near $32.
Dan Wantrobski
29
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
TECHNICAL STRATEGY – FAVORITE FIVE
5. SEI Investments (SEIC) – SEIC is breaking higher on its longer-term weekly charts after a multi-month basing effort. – Potential targets measure toward the low-$30s zone on an intermediate-term basis. – We would watch for initial support near $20-21.
Dan Wantrobski
30
Investment Strategy Group Janney Montgomery Scott LLC
IMPORTANT DISCLOSURES Janney Montgomery Scott LLC is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. The Janney Capital Markets Equity Research Top Picks for First Quarter 2013 is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy the securities highlighted in the list, and does not constitute investment advice by Janney Montgomery Scott LLC or its affiliates. The securities referenced in this report do not refer, and should not be taken as referring, to an actual fund, portfolio or account, and should not be deemed as a model investment portfolio. Decisions to buy or sell a stock should be based on an investor’s investment objectives and risk tolerance and this material should not be relied upon in substitution of independent judgment. This material does not take into account individual client circumstances, objectives or needs and is not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Disclosures Regarding Companies The information provided in the report has been obtained or derived from sources believed by Janney Montgomery Scott LLC to be reliable. Janney Montgomery Scott LLC, however, does not represent that this information is accurate or complete. Any opinions or estimates contained in this report regarding specific companies represent the judgment of Janney Montgomery Scott LLC’s Research Department at this time and are subject to change without notice. The data referenced in the discussions regarding the companies is as of December 27, 2012. The company stock price listed on slide T2 is as of December 31, 2012. The opinions and estimates with respect to specific companies do not necessarily represent the viewpoint of the Investment Strategy Group of Janney Montgomery Scott LLC or any other group or employee associated with Janney Montgomery Scott LLC or its affiliates, and may differ from opinions or estimates of the Investment Strategy Group or other groups or employees associated with Janney Montgomery Scott LLC and its affiliates. The companies referenced in this report only include those that receive research analyst coverage from Janney Montgomery Scott LLC’s Research Department. Investment opinions are based on each stock’s 6-12 month return potential. Janney Montgomery Scott LLC, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Disclosures Regarding Economic Sectors The opinions and estimates with respect to the overweight, neutral or underweight exposure of particular economic or market sectors represent the viewpoint of the Investment Strategy Group of Janney Montgomery Scott LLC and does not necessarily represent the viewpoint of Janney Montgomery Scott LLC or any other group or employee associated with Janney Montgomery Scott LLC or its affiliates, and may differ from opinions or estimates of Janney Montgomery Scott LLC and its affiliates. The Overweight/Neutral/Underweight referenced in this report is intended to be used as a guide for sector rankings relative to the sector make-up of the S&P 500 Index. Currently, the S&P 500 Index includes securities grouped into 10 economic sectors. Overweight generally refers to the Investment Strategy Group’s expectation that the sector’s fundamentals and/or valuation is likely to be favorable over the next 12 months. Neutral generally refers to the Investment Strategy Group’s expectation that the sector’s fundamentals and/or valuation is likely to be neutral over the next 12 months. Underweight generally refers to the Investment Strategy Group’s expectation that the sector’s fundamental and/or valuation is likely to be cautious over the next 12 months. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.
Investment Strategy Group Janney Montgomery Scott LLC
Please refer to the Important Disclosures at the end of this report
IMPORTANT DISCLOSURES Research Analyst Certification Each of the primarily responsible analysts contributing to this report certify that all the views in this report attributed to such analyst accurately reflects their personal views about any and all of the
subject securities or issuers. No part of their compensation was, is, or will be directly or indirectly related to specific requirements or views expressed in this report. Janney Montgomery Scott LLC Equity Research Disclosure Legend Janney Montgomery Scott LLC currently is, or during the past 12 months has acted as, a market-maker in the securities of Abercrombie & Fitch Co., Accenture PLC, Akamai, Allstate, American Water
Janney Montgomery Scott LLC intends to seek or expects to receive compensation for investment banking services from Abercrombie & Fitch Co., Accenture PLC, Access Midstream Partners LP,
Akamai, Allstate, American Water Works, AMETEK, Inc., Apple, Inc., Aruba Networks, Inc., Best Buy Corporation, Capital One Financial Corp.,Colgate-Palmolive, Comcast Corporation, ConAgra Foods Inc., Corporate Executive Board Co., Deckers, eBay, Energizer Holdings, Inc., Enterprise Products Partners, LP, GameStop, Hercules Technology Growth Capital, Inc., Koppers Holdings, Lincoln Electric Holdings Inc., Liquidity Services, Loews Corporation, Marsh & McLennan, McDonald’s Corp., Melco Crown Entertainment Ltd., MICROS Systems, Inc., MicroStrategy Inc., NetLogic Microsystems, New Mountain Finance Corporation, OfficeMax Incorporated, Oracle Corporation, Parametric Technology Corp., SEI Investments, SML Corp. (Sallie Mae), Starbucks Corp., The J.M. Smucker Company, Urban Outfitters, Inc., ValueClick, Inc., V.F. Corporation, W.W. Grainger, Inc., and Xylem, Inc. in the next three months.
Janney Montgomery Scott LLC received compensation for investment banking services from American Water Works, Enterprise Products Partners, LP, Hercules Technology Growth Capital, Inc. and
New Mountain Finance Corporation in the past 12 months. American Water Works, Enterprise Products Partners, LP, Hercules Technology Growth Capital, Inc. and New Mountain Finance Corporation currently is, or during the past 12 months was, a Janney
Montgomery Scott LLC client. Janney Montgomery Scott LLC provided investment banking related services. Janney Montgomery Scott LLC managed or co-managed a public offering of securities for American Water Works, Enterprise Products Partners, LP, Hercules Technology Growth Capital, Inc. and New
Mountain Finance Corporation, in the past 12 months. Janney research analysts are compensated on, in part, (i) the profitability of Janney Montgomery Scott LLC, which includes investment banking revenue , and (ii) commission revenue derived from
transactions in securities, including securities covered in this report. Individual disclosures for the companies mentioned in this report can be obtained by calling or writing Janney Montgomery Scott LLC at 1717 Arch Street, Philadelphia, PA 19103, (215) 665-6000.
Additional information is available upon request. Technical opinions expressed in this report are not dependent upon the opinion(s) of the fundamental analyst(s) covering the securities. Accordingly, the Technical opinions contained herein may
differ from those of the fundamental analyst(s). Copies of the Fundamental Analysis report(s) are available upon request. Risks There are risks to the assumed attractiveness of investing in the companies identified in this report. These risks include, for example, general macroeconomic and market risks that may result in
market declines or may impair a company’s ability to grow or expand. In addition, there is a risk that a company may not be able to successfully execute its business strategy or that a turnover in management may adversely affect a company’s performance. Further information regarding the companies mentioned in this report, including further risk information, can be obtained by calling or writing Janney Montgomery Scott LLC at 1717 Arch Street, Philadelphia, PA 19103, (215) 665-6000.
