USA | Themes & Tactics US Insights November 16, 2016 US Insights Research Rundown: Franchise Picks, Key Themes, Focus Stocks EQUITY RESEARCH GLOBAL Key Takeaway The Jefferies Franchise Picks List has significantly outperformed the S&P since inception, and has helped convey Jefferies' highest conviction stock ideas. This document revisits the current Franchise Picks List, introduces a new, broader focus list of stocks where we hope to similarly acquaint clients with our views, and contains a slide deck with certain of the research department's high conviction themes. Franchise Picks: The Jefferies Franchise Picks List is a selection of the highest conviction, Buy-rated stock ideas from across the Jefferies US Research coverage universe. Stocks included on the list should have a differentiated aspect to the analysis and offer compelling risk reward ratios. The list has outperformed the S&P by 1348bps since inception (total return, as calculated by S&P Global), and there are currently 23 stocks on the list. The current list is as follows: Abbvie, Activision, Ally Financial, Alphabet, Ball Corp., Boeing, Coach, Computer Sciences, Dish Network, Encana, Hain Celestial, Halliburton, Ingersoll- Rand, KeyCorp, Murphy USA, National Fuel Gas, NVIDIA, Owens Corning, PayPal, Range Resources, Stericycle, T-Mobile US, Urban Outfitters. Focus List: The new Focus List contains 88 institutionally relevant stocks where Jefferies analysts have observed elevated investor interest in their views, and the views and analysis around these stocks are often differentiated. Every Franchise Pick is on the Focus List, and many of the Focus stocks are top picks for the respective analysts. The median stock on the list has both higher market cap and higher average daily notional trading volume than the median S&P 500 stock. Conviction Themes: Jefferies analysts often express their views on themes they believe will impact large swaths of stocks, but until now, the rationale behind those themes wasn't contained in a single document. This report highlights 11 themes; in many cases, views on these themes are different from current consensus views. Themes include a constructive view on natural gas owing to low reinvestment and secular strength in demand, a cautious view on restaurant stocks owing to excess capacity and higher labor costs, a bullish view on trucking equipment owing largely to regulatory change, a view that elevated M&A activity will continue in certain groups, and many more. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 71 to 79 of this report. Jefferies Equity Research * Jefferies LLC (888) JEFFERIES [email protected]Brian Abrahams, M.D. * Equity Analyst (212) 284-2403 [email protected]Laurence Alexander, CFA * Equity Analyst (212) 284-2553 [email protected]Biren Amin * Equity Analyst (212) 284-8162 [email protected]Andy Barish * Equity Analyst (415) 229-1524 [email protected]Daniel Binder, CFA * Equity Analyst (212) 284-4614 [email protected]Brandon Couillard * Equity Analyst (212) 284-2462 [email protected]Anthony C. Crowdell * Equity Analyst (212) 284-2563 [email protected]Sean Darby § Chief Global Equity Strategist +852 3743 8073 [email protected]Raj Denhoy * Equity Analyst (212) 336-7070 [email protected]Steven G. DeSanctis, CFA * Equity Strategist (212) 284-2056 [email protected]John DiFucci * Equity Analyst (212) 284-2196 [email protected]Sean Dodge, CFA * Equity Analyst (615) 963-8340 [email protected]Daniel T. Fannon * Equity Analyst (415) 229-1523 [email protected]Brian Fitzgerald * Equity Analyst (212) 284-2491 [email protected]Corey Goldman * Equity Analyst (212) 284-3411 [email protected]Scott Goldman * Equity Analyst (212) 284-4606 [email protected]Kevin Grundy, CPA * Equity Analyst (212) 336-7091 [email protected]Casey Haire * Equity Analyst (212) 707-6418 [email protected]Brad Handler * Equity Analyst (212) 336-7249 [email protected]John Hecht * Equity Analyst 415-229-1569 [email protected]Jeffrey Holford, PhD, ACA * Equity Analyst (212) 336-7409 [email protected]Akshay Jagdale * Equity Analyst (212) 444-4300 [email protected]John Janedis, CFA * Equity Analyst (212) 284-2187 [email protected]Bret Jordan, CFA * Equity Analyst (617) 342-7926 [email protected]Randal J. Konik * Equity Analyst (212) 708-2719 [email protected]Jason Kupferberg * Equity Analyst (646) 805 5412 [email protected]Christopher LaFemina, CFA * Equity Analyst (212) 336-7304 [email protected]Mark Lipacis * Equity Analyst (415) 229-1438 [email protected]Christopher Mandeville, CFA * Equity Analyst (646) 805-5407 [email protected]Mike McCormack, CFA * Equity Analyst (212) 284-2516 [email protected]Philip Ng, CFA * Equity Analyst (212) 336-7369 [email protected]George C. Notter * Equity Analyst (415) 229-1522 [email protected]Howard A. Rubel * Equity Analyst (212) 284-2126 [email protected]Christopher Sighinolfi, CFA * Equity Analyst (212) 707-6420 [email protected]Alexander Slagle, CFA * Equity Analyst (415) 229-1508 [email protected]David Steinberg * Equity Analyst (415) 229-1553 [email protected]Brian Tanquilut * Equity Analyst (615) 963-8338 [email protected]Surinder Thind, CFA * Equity Analyst (415) 229-1515 [email protected]Ken Usdin * Equity Analyst (212) 284-2444 [email protected]Stephen Volkmann, CFA * Equity Analyst (212) 284-2031 [email protected]David Windley, CFA, CPA * Equity Analyst (615) 963-8313 [email protected]Jonathan D. Wolff, CFA * Equity Analyst (646) 805-5466 [email protected]Eun K. Yang, Ph.D. * Equity Analyst (212) 284-2264 [email protected]* Jefferies LLC § Jefferies Hong Kong Limited ^Prior trading day's closing price unless otherwise noted.
Transcript
USA | Themes & Tactics
US Insights November 16, 2016
US InsightsResearch Rundown: Franchise Picks, KeyThemes, Focus Stocks
Key TakeawayThe Jefferies Franchise Picks List has significantly outperformed the S&P sinceinception, and has helped convey Jefferies' highest conviction stock ideas. Thisdocument revisits the current Franchise Picks List, introduces a new, broaderfocus list of stocks where we hope to similarly acquaint clients with our views,and contains a slide deck with certain of the research department's highconviction themes.
Franchise Picks: The Jefferies Franchise Picks List is a selection of the highest conviction,Buy-rated stock ideas from across the Jefferies US Research coverage universe. Stocksincluded on the list should have a differentiated aspect to the analysis and offer compellingrisk reward ratios. The list has outperformed the S&P by 1348bps since inception (totalreturn, as calculated by S&P Global), and there are currently 23 stocks on the list. Thecurrent list is as follows: Abbvie, Activision, Ally Financial, Alphabet, Ball Corp., Boeing,Coach, Computer Sciences, Dish Network, Encana, Hain Celestial, Halliburton, Ingersoll-Rand, KeyCorp, Murphy USA, National Fuel Gas, NVIDIA, Owens Corning, PayPal, RangeResources, Stericycle, T-Mobile US, Urban Outfitters.
Focus List: The new Focus List contains 88 institutionally relevant stocks where Jefferiesanalysts have observed elevated investor interest in their views, and the views and analysisaround these stocks are often differentiated. Every Franchise Pick is on the Focus List, andmany of the Focus stocks are top picks for the respective analysts. The median stock on thelist has both higher market cap and higher average daily notional trading volume than themedian S&P 500 stock.
Conviction Themes: Jefferies analysts often express their views on themes they believewill impact large swaths of stocks, but until now, the rationale behind those themes wasn'tcontained in a single document. This report highlights 11 themes; in many cases, views onthese themes are different from current consensus views. Themes include a constructiveview on natural gas owing to low reinvestment and secular strength in demand, a cautiousview on restaurant stocks owing to excess capacity and higher labor costs, a bullish view ontrucking equipment owing largely to regulatory change, a view that elevated M&A activitywill continue in certain groups, and many more.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 71 to 79 of this report.
Thematic Trade Ideas 49 Table of Contents 50 US Infrastructure Investment 51 Natural Gas – Jon Wolff 52 Interactive Entertainment – Brian Fitzgerald & Mark Lipacis 53 Apparel and Handbags – Randy Konik 54 Restaurants – Andy Barish & Alex Slagle 56 Civil Aerospace – Howard Rubel 57 Trucking Equipment – Stephen Volkmann 58 Mining & US Steel – Chris LaFemina & Seth Rosenfeld 59 Immuno-oncology Stocks – Brian Abrahams, Biren Amin, Jeffrey Holford & Eun Yang 60 M&A 62 SMID- Cap Strategy– Steven DeSanctis 67 Thematic Trade Ideas Comparison Table 68
Global Macro Outlook 70
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Jefferies Franchise Pick Stocks
The Jefferies Franchise Pick List is a selection of the 23 highest conviction, Buy-rated stock ideas across the Jefferies US Research coverage universe. The stocks are added to the Franchise Pick list in conjunction with pieces of research containing differentiated analysis, and/or opportunistically when stock moves create compelling entry points.
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The Franchise Pick list is a selection of the highest conviction, Buy-rated stock ideas across the Jefferies US Research coverage universe.
Stocks are added to the Franchise Pick list in conjunction with pieces of research containing differentiated analysis, and/or opportunistically when stock moves create compelling entry points.
Stocks are removed from the list if the underlying investment thesis has come to fruition or if the thesis is disrupted.
Stocks may also be removed if a stop loss is triggered.
While the list does not have a market cap or daily notional trading volume minimum, liquidity of the underlying stocks is a consideration.
There is not a fixed number of stocks on the list, the number will vary with the number of ideas deemed worthy of the list, but the quantity has tended to be in the 20-25 range.
Franchise Picks Ticker Analyst AbbVie ABBV Jeff Holford
Source: Bloomberg, FactSet, Jefferies; price as of November 17, 2016
Jefferies Franchise Picks – Performance Relative to S&P 500
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Since the inception of the Franchise Picks list in December 2013 the basket has returned 38.14% (on a total return basis), outperforming the S&P 500 by 13.48% as of October 31, 2016. S&P Global Market Intelligence calculates the portfolio returns and their methodology employed assumes the portfolio is re-weighted both monthly and when stocks are added/removed from the List. Below we have broken down the relative individual performance of the current and historical portfolio of stocks on the list.
Current List Relative Individual Performance
Current and Past Franchise Picks – Relative Individual Performance
-75%
-25%
25%
75%
125%
175%
Relative to SPX (%)
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-50%
0%
50%
100%
150%
200%
250%
ABBV ATVI ALLY GOOG BLL BA COH CSC DISH ECA HAIN HAL IR KEY MUSA NFG NVDA OC PYPL RRC SRCL TMUS URBN
Return to S&P†
Jefferies Franchise Picks – Performance Relative to S&P 500
*The Jefferies Franchise Pick list performance is calculated by S&P Global Market Intelligence. The theoretical portfolio performance is calculated based on an initial asset base of $1m. The portfolio is rebalanced to equal-weighted positions every time a trade is made (i.e., any time a name is added/removed from the list). Additionally, the portfolio is rebalanced to equal-weight at the end of every month. Jefferies supplies the dates on which we added and removed stock picks. **S&P provides performance data on a lagging basis - 11/1/16 is our most up-to-date data. ***Our stop losses are guidelines--if an analyst has a strong preference for not removing a stock, and if there’s an identifiable catalyst, the stock will be left on the list despite the “breach.”
Source: Jefferies, S&P Global Market Intelligence
Performance Since Inception (12/13/13) 38.14%
S&P 500 Performance - Same Period 24.66%
Relative Performance Since Inception 13.48%
Performance Measures
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AbbVie - Jeffrey Holford, ABBV, PT $90
Franchise Picks
AbbVie remains Jeff’s Top Global Pick and he has confidence that US biosimilar Humira launches will be delayed to 2022 vs consensus of 2018/19. AbbVie has already begun the “patent dance” of exchanging patent information with Amgen in relation to its Humira biosimilar application in the US and has filed suit on multiple patents. Jeff views litigation against Amgen as a positive event as he believes it will help clarify the extent of infringement against the Humira IP estate In the meantime, strong revenue, EPS and cash flow growth should fund further accretive M&A and the mid to late stage pipeline looks increasingly de-risked and set to deliver. Jeff expects further major label expansion for Imbruvica and Venclexta in hematology as several potential new filings in 2016.17 (Next gen HCV combo, Rova-T [SCLC], BI655066 [autoimmune disease], Elagolix [endometriosis], Veliparib [TNBC], Xinlay [diabetic retinopathy], ABT-414 [GBM]). Jeff’s $90 PT is based on 10.7x FY17e P/E and is supported by DCF, SOTP, PE and PEG-relative valuations.
Activision Blizzard - Brian Fitzgerald, ATVI, PT $55
Ally Financial - John Hecht, ALLY, PT $28
John believes ALLY continues to represent a compelling value currently trading at ~8.8x FY16e EPS and the stock at current levels overly-discounts credit risk and competitive threats. From an operating perspective, ALLY is now a leading auto lender and from a balance sheet perspective, ALLY has a diversified capital structure bolstered by low cost deposits driven by the growing online bank. With the ongoing replacement of unsecured debt with deposits and mix shift to increasing prime/near prime used car loans, ALLY has been able to expand its NIM, despite the low rate environment. John believes these NIM tailwinds and new product initiatives will continue to drive earnings growth. John views ALLY’s prioritization of profitability over growth very favorably, particularly in the context that the company can now allocate excess capital/liquidity to shareholders. ALLY recently announced a capital allocation plan that exceeded both John’s forecast and the Street’s expectations and has received approval to repurchase up to $700M shares and pay a $0.08 quarterly dividend, a total cash return of $850MM, representing ~10% of Ally’s market cap. John’s $28 PT is based on ~12x FY16E EPS and equates to ~1.2x adjusted TBV.
Brian Fitzgerald continues to see multiple tailwinds for ATVI. Video games is the fastest growing form of media and audience sizes continue to grow; there are now 2.6 gamers worldwide, up from ~200MM about 10 years ago. At the same time, a mix-shift towards direct-to-consumer digital downloads is driving structurally improved profitability for companies like Activision. And the new consoles continue to sell around 2x faster than the last hardware cycle, suggesting demand for high-end experiences remains robust. Fitz sees meaningful upside to ATVI estimates as management pursues large opportunities around eSports, in-game advertising, and micro-transactions. Management recently noted that COD saw record users and profits YTD in ’16 and they believe over time, they will be able to continue generating higher ARPU growth through digital offerings and in-game purchases. Brian expects 30-40% of units could see higher ASP. Additionally, Activision is the best positioned name in eSports (competitive video gaming), in Brian’s view, with five of the top fifteen most popular games on Twitch. King expects to launch the one non-Candy Crush title towards the end of 2016 however he does not expect ATVI mobile titles until 2017. They expect 2017 will be a foundational year and 2018 to see meaningful contribution from advertising, which is a potential billion dollar business.
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Alphabet - Brian Fitzgerald, GOOGL, PT $1,000
Ball Corporation - Phil Ng, BLL, PT $93
Phil added Ball Corp to the Franchise Pick list in August, as Phil believes BLL’s FCF profile is under-appreciated by the Street and management’s FCF guidance for 2017-2019 for the combined Ball-Rexam is likely conservative with room for upside in 2017. The implied core FCF potential for 2H’16 is tracking ~ $800M, and coupled with $100 mil of working capital benefit in 2017 it gives Phil confidence that there is upside to 2017 FCF guidance ($750-850 mil). Further, as the synergies flow through and FCF conversion approaches legacy BLL levels, Phil believes the company has potential to reach its 2019 FCF target ($1B) a year early. With FCF/share expected to grow 68% and cash EPS growing at 20-30% in the next three years, Phil believes Ball warrants a higher multiple on 2018/2019 numbers, which is when the REX transaction is expected to be fully integrated. Additionally, with Ball buying primarily Rexam’s 12oz (commodity) can capacity in North America and with Rexam’s European margins 200-300 bps below Ball’s, management has been surprisingly open about looking to take a value over volume approach which we believe implies pushing pricing in North America and Europe, and would be incremental to the $300 mil synergy target. While the stock has pulled back since the election as a result of its Mexico exposure and an new plant coming online in Mexico (aligned with Constellation Brands) for export to the U.S., we believe the reaction has been overblow considering the total exposure to Mexico is ~4 bil cans of a 102 bil can system, and roughly 2.5 bil cans is for in-country consumption in Mexico. Phil’s PT of $93 is based on 11x 2018E EV/EBITDA.
Franchise Picks
Brian Fitzgerald’s bullish Alphabet view has a lot to do with the continuation of their positive stance on YouTube, as they believe online video is the biggest online ad growth driver and YouTube is the premier vehicle to play that trend. The acceleration in Google Websites paid click growth, which grew +42% Y/Y in confirms YouTube is certainly large enough to move the needle for GOOG, especially as TV ad budgets begin to shift online. In mobile alone, YouTube reaches more 18-34/18-49 year olds than any other TV network, broadcast or cable. Mobile search was the number one driver of revenue growth for the past five quarters and Brian sees continued opportunity given the ubiquity of smartphones and the important location and contextual signals from mobile devices. The Pixel phone has been highly reviewed, comes to market just as Samsung faces reputational issues thanks to the Note 7, and Fitz models Pixel selling 2.25MM units during the holidays. Google recently announced the acquisition of API management provider, Apigee for $625MM, representing the largest acquisition the company has made in over two years and further evidences Google’s push into corporate computing and objective to further expand their cloud computing platform and customer base. Amazon has a lead on GOOG with their Echo home assistant, but GOOG’s new Google Home product gets them in the race, neutralizing a potential competitive threat, and Brian believes it could help lead to multiple expansion. GOOGL currently trades at ~19x FY17e EPS.
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Boeing - Howard Rubel, BA, PT $165
Howard believes that Boeing has the potential to improve its profitability by timely achievement of development milestones and completion of projects that improve productivity and manufacturing performance. He also believes the market is too bearish on the commercial aerospace cycle, where peak deliveries aren’t expected until 2020. Howard estimates Boeing could generate $7.6B in FCF in 2016 and $8.7B in 2017. In terms of capital allocation, Howard expects a 7% dividend increase in December 2016, to an annual rate of $4.68/sh and estimates the company could complete ~$5B in share repurchases in 2017, making for a total yield of nearly 10%. Company management attended our Industrials conference, where they highlighted that the 737MAX appears to be tracking ahead of schedule, as the first program to be run through the integrated R&D process and potential for early 2017 EIS. Howard believes the U.S. market is causing an extension in the cycle, which should provide modest growth, as rising incomes and expanding employment keep demand healthy. Management is determined to drive down recurring production costs and improve productivity by evaluating cost structure and leveraging lessons learned from the 787 production to ensure future transitions run smoother. Management is also confident that despite lower production rates on widebodies, it will be able generate growth in FCF.
Coach - Randy Konik, COH, PT $53
Randy is bullish on Coach and recent channel checks indicate a heightened degree of innovation in the product line. After 2+ years of negative North American comps, comps have now been positive for two consecutive quarters, marking an inflection in trend. Broadly speaking, Randy is optimistic on the handbag space, driven by AUR improvement, product innovation and strong media attention and reception by consumers. Randy also believes Coach’s decision to reduce their already-small exposure to the wholesale channel should help further elevate the brand by reducing promotional posturing and avoiding confusion between channels. Randy is confident that Coach is poised to capitalize on current momentum and further growth in comps and operating margins in FY17. Randy’s FY’18 EPS estimate is ~10% ahead of consensus and his $53 PT is based on 21.5x EPS and 12x EV/EBITDA on his CY’17 estimates.
Computer Science Corp - Jason Kupferberg, CSC, PT $63
Jason added CSC to the Franchise Pick list at the end of September as he expects the merger with HPE Enterprise Solutions could be over 102% accretive in the first year, which puts shares at about 8x on pro forma year 1 EPS. That forecast does not include any additional upside to CSC’s announced gross synergy cost targets of $1b in year one and $1.5b in year two. Management’s track record of execution leads h im to believe his forecast could be conservative. An analyst day planned for early ’17 could act as a catalyst for shares as the company is likely to discuss details for its financial targets and plans for post-merger capital deployment.
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Dish Network Corp - Michael McCormack, DISH, PT $80
Mike McCormack believes the market is mispricing DISH shares, not giving enough credit for the company’s spectrum, the Pay TV business or the strategic value. He believes DISH’s spectrum portfolio is dramatically undervalued and sees $32B of after tax value, which is in line with current EV and thus Mike believes the market assigns no value to DISH’s TV business, which Mike believes is worth nearly $15B. Disappointing results for the broadcaster auction, currently ongoing, are actually a positive for DISH’s auction, since it suggests carriers will have money to spend, and the DISH spectrum is suited for capacity, not coverage, and it’s the latter that’s less useful for carriers at this time. There’s debate about the value of low-band vs. mid- or high-band spectrum for wireless network architecture, and Mike’s view is that DISH’s mid-band spectrum is particularly well suited to the urban markets, where capacity issues are often most acute. Mike’s price target of $80 is based on a $1.35/Mhz-POP blended spectrum valuation, and he believes the market currently assigns $0.89/MHz-POP, roughly a 35% discount to his estimate. Mike assumes 4.5x EV/EBITDA for the underlying pay TV business, which the market currently ascribes no value to, Mike notes that there’s strategic value especially as a complement to a mobility platform or for a company which is sub-scale in video.
Encana Corp - Jon Wolff, ECA, PT $14
Jon remains confident that ECA has mitigated many of the prevailing bear cases on the stock by 1) demonstrating economic strength and acting as the technology leader in the Midland Basin, ECA’s ‘crown jewel’ asset, 2) announcing the Montney and DJ Basin asset sales for a combined ~$1.1B in proceeds, which will be used to reduce debt and achieve balance sheet restoration, and 3) posting improved development efficiency with minimal output declines despite tight budget constraints. ECA is amongst the largest Midland basin producers with ~49 mboe/d in volumes; Jon expects with a restored balance sheet ECA will accelerate their testing of unbooked reservoirs in the basin that have proved commercial. Following the latest quarter, ECA raised its capex budget by 21%, $200MM at midpoint, with $150MM of the incremental capex spend in the Midland Basin. They also plan to add an additional rig in the Midland in 2H16. The higher capex guidance gives us confidence in the more rapid development of ECA’s core Permian, Midland and remaining Montney assets while dispositions remove ongoing take or pay liabilities by a combined $300MM. Jon recently raised his PT from $13 to $14 based on positive outlook and expectations for a more rapid development pace and lower well costs. Encana recently announced an ~$1B equity offering to fund Midland acreage and at their recent Analyst Day, management provided guidance on their 5-year growth plan which targets volume expansion of 60%, all to be self-funded. Jon believes non-core asset divestitures are still possible, although the company does not assume any asset sales in its current 5-year plan; he believes if the assets were sold the capital would be reinvested into the core and accelerate growth above current guidance. Jon’s $14 PT is derived from a 10% trading discount to gross asset value less debt.
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Hain Celestial - Akshay Jagdale, HAIN, PT $50
Akshay has conviction in the value of Hain’s brands, category exposure and cash flow despite recent weakness in the stock as a result of the audit committee review and managements’ expectation to likely miss FY16 guidance. Following are the key tenets of his thesis: 1) accounting review should result in non-material impact on earnings; 2) sales growth deceleration is transitory; 3) margins do not need to be reset meaningfully lower to re-accelerate growth; and 4) the value of Hain’s brands, category growth exposure and acquisition potential is not priced into the stock. HAIN has until December 27th to file its 10K and Akshay believes there is a very low probability of material restatements (his base case estimates restatement risk to be ~2.5-5% of US sales). Akshay recently conducted a scenario analysis to determine the potential impact assuming best and worst case outcomes from the audit committee review, and results of the valuation scenario point to $42/sh on a probability-weighted basis (range of $29/sh in the worst case scenario to $50/sh in the best case). Akshay believes the market is pricing in greater than a 50% chance of the worst case coming to fruition, while he believes there’s only a 25% likelihood of that scenario. Akshay’s $50 PT is supported by his sum-of-the-parts analysis and implies a P/E multiple of 23.1x his FY18 EPS estimate of $2.16.
Halliburton - Brad Handler, HAL, PT $58
Brad added Halliburton to the Franchise Pick list in July as Brad believes HAL is poised to benefit from its leading U.S. completions position (including advantaged technologies like AccessFrac® and Q10TM Pumps) and robust International service infrastructure which should allow it to lift profitability as the cyclical recovery unfolds. HAL is the leader in U.S. completions, including an estimated 15% of industry capacity of hydraulic fracturing equipment and 20% market share on a revenue basis. With secular growth expected in U.S. completions activity, owing to evidence of longer laterals and more stages per well; Brad expects to see pricing improvements in 2017, something HAL reinforced in their commentary around 3Q16 results. Brad believes the industry has the potential to see 60% more completion stages in 2020 even on a 20% lower rig count vs. the prior cycle peak. Brad believes that as non-U.S. activity continues to recover, HAL will be well positioned competitively primarily because BHI’s proposed combination with GE Oil & Gas (and BHI’s internal strategic shift even pre-merger) is likely to have it pullback from certain product-geo-market combinations. Brad raised estimates in conjunction with his Franchise Note on completions, and raised them again after HAL’s 3Q16 earnings. Brad’s current FY2017/18 EPS estimates of $1.10/$3.00 are 15%/13% ahead of consensus.
Ingersoll – Rand - Stephen Volkmann, IR, PT $80
IR remains Steve’s top pick as it is one of the most exposed to the housing and commercial construction end markets, where trends have been improving over the last few years. Order rates for the climate business continue to outpace management guidance and overall industry trends have performed above expectations despite industrial markets being weaker. Operating margin has increased 90bps YTD and Steve believes the company can continue expanding margins through 2017 as the company should benefit from productivity and investments in new products despite material deflation abating. Stephen’s $80 price target incorporates a multiple of 160% EV/Sales and 10.5x EV/EBITDA on his 2017 estimates, in line with the current valuation of the peer group.
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KeyCorp – Ken Usdin, KEY, PT $16
Ken had been bullish on KeyCorp as he felt that the market was too negative on the First Niagara deal, something that had led to a discount to the group that was too large. The September quarter was the first that included First Niagara, it gave Ken more confidence in the trajectory for EPS and ROTCE, and Ken added the stock to the Franchise Pick list. Ken believes the stock can continue to re-rate closer to peers, with the stock currently trading at 9.6x 2018E EPS vs. an 11.5x peer average. Ken’s core thesis drivers are predicated on 1) legacy KEY loan growth continuing, up 5% Y/Y in the latest period, 2) legacy KEY operating leverage remaining intact, 3) FNFG cost saves being realized faster than expected and beating the initial $400mm target, 4) strong credit performance keeping losses low, and 5) buybacks helping to reduce share count by 3-5%. Ken’s 2017/2018 EPS estimates are both above consensus at $1.30 and $1.45, respectively, and his $16 price target implies KEY should trade at 11x his 2018 EPS. At the peer average, Ken notes he believes the shares could trade closer to $17.50, but believes more than one quarter is needed to convince investors to close the gap.
Murphy USA - Chris Mandeville, MUSA, PT $85
MUSA is Chris’ top convenience store pick and he added it to the Franchise Pick list in early after strong 2Q16 earnings as he believes in-store margin improvement, solid mid-single digit non-tobacco merchandise sales, and reductions in store-level opex will continue to drive EPS growth. Helped by a new supplier contract with Core-Mark (Hold, $33 PT), merchandise margins have meaningfully expanded (up ~120bps in total for 1H16; we estimate ~80bps from CORE). In addition, MUSA has a healthy balance sheet (only 1.3x Net Debt/EBITDA), what should be a FCF yield of ~5% by 2017, and it remains committed to enhancing shareholder value through buybacks (currently ~$290M or ~12% of its market cap). The aforementioned margin improvements and capital programs lead Chris to estimate a ~10% EPS 5yr. CAGR. Incremental upside is possible if RIN prices, currently trading at ~83c/each remain stable in the near-term. However, it should be noted that a Trump presidency has created some investor concern over the potential for a materially negative change to the RFS mandate, which could severely impair RIN prices, and shares have fallen under pressure. While he does not share such concerns, Chris believes the market is overestimating MUSA’s financial impact even under a worst case scenario as the company’s PS&W business would largely offset such losses (we estimate the two segments are -79% correlated). With shares currently trade at only a ~13x NTM P/E (vs. 17x its 3 year average), Chris sees a strong value proposition for long-term investors. MUSA is focused on operating highly efficient, low cost store models (ultimately leads to strong ROIC of ~15%) to provide value to its lower income consumer at both the pump and in-store. This makes the company more defensive vs. peers with greater exposure to discretionary spending on foodservice, in Chris’ view.
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National Fuel Gas Co. – Chris Sighinolfi, NFG, PT $67
National Fuel Gas was added to the Franchise Pick list in October following Chris’ upgrade of the stock to Buy from Hold. Chr is lifted his Sum-of-the-Parts derived price target to $67 from $60, due to a roll forward to FY18 financial expectations and the incorporation of the Northern Access pipeline project related growth. Chris believes the company is in a unique position to have the N. Access pipeline approvals secured for its November 2017 planned in-service, given its differentiated attributes which he believes can be politically supported. Chris notes that the N. Access, in part, is designed to bring low-cost PA natural gas into NY state for the benefit of greater Buffalo utility customers and 80% of its route crosses existing utility corridors and nearly all of its proposed route has been secured. The final ruling on the project from the NY Department of Environmental Conservation is expected in March 2017. Even without the N. Access benefits, Chris is bullish on NFG given its attractive valuation, currently trading at 17.4x F17 EPS and its 3% dividend yield, as well as attractive attributes vs. diversified gas utility peers averages. Should N. Access secure approvals, Chris sees NFG trading at ~7.2x F18 EV/EBITDA, with ~60% of F18 EBITDA coming from the midstream and utility.
NVIDIA - Mark Lipacis, NVDA, PT $95
NVDA is uniquely investing in new platforms and tools that are enabling new markets like Deep Learning, VR, self-driving cars and, of course, PC Gaming and remains one of Mark’s highest conviction calls. He expects these secular growth vectors to continue to drive growth; NVDA has beaten consensus expectations for four consecutive quarters. In 2Q16, the company saw significant upside from deep learning, with Datacenter sales up 107% YoY. Mark thinks deep learning could potentially be a larger opportunity than VR, and he recently highlighted the win at Tesla for self-driving vehicles, that underscores the opportunity in Autos specifically, and Deep Learning broadly. Nintendo recently announced it would use NVDA for its new Switch console, which could be a $200M to $320M annual revenue opportunity for NVDA. NVDA product GMs are now approaching 60%, due primarily to growth in PC gaming, HPC/Cloud due to Pascal, and high ASP - high margin VR GPUs, and Mark expects GMs to continue to expand for the next two years. His current F17 EPS estimate of $1.80 reflects an anticipated 22% YoY increase in product revenues and GM of ~58%. In his 3 year bull case, Mark thinks NVDA has $3.50 of EPS power.
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Owens Corning - Phil Ng, OC, PT $60
Phil believes that OC is poised to benefit from higher insulation prices beginning in 2H17 as market capacity utilization tightens and from continued earnings growth in the composites business. While insulation pricing competition has heated up, it has since stabilized the last two months, and with OC's operating margins for residential insulation at 2% in 2015 versus 26% at the peak and competitors capacity running pretty full, we expect the focus to shift back to pricing next year. Composites earnings growth should be aided by a substantial reduction in furnace rebuild costs over the next four years and the ramp-up of its new non-wovens capacity. He anticipates this will reduce capex by $120m from 2017-2020. With the stock trading with an 8% FCF yield, it offers great value, significant runway for margin expansion in insulation, and a capital deployment story.
PayPal - Jason Kupferberg, PYPL, PT $52
Jason likes PYPL due to its scarcity value, as it combines strong top-line growth (high teens over the next several years), solid and improving profitability, a strong global brand, secular tailwinds, attractive cash flow and balance sheet characteristics. Market concerns about competition have meant that the stock still trades at a lower multiple than it should, in Jason’s view. While investors have expressed concerns on what the new V and MA agreements will mean for PYPL going forward as users migrate from ACH transactions to cards, Jason’s recent survey work suggests the migration will be limited and gradual, and the company’s recent long term margin guidance (stable to up) helps to reinforce that case.
Range Resources - Jon Wolff, RRC, PT $50
Jon added RRC to the Franchise Pick list following the announcement of the merger with MRD. In his view, the combined company will be one of the best ways for investors to participate in higher expected natural gas prices as the high-potential Cotton Valley acreage from MRD is paired with RRC’s marketing capabilities and added to RRC’s current acreage. In addition, RRC management is confident that they will be able to grow both the Cotton Valley and Marcellus production by 10% in 2017, likely leading to even stronger growth in 2018. As MRD-sponsor NGP intends to spin out some RRC shares to its LPs following the all-stock transaction, Jon views associated weakness as a buying opportunity since the pressure will ease, and the distribution of shares has acted as an overhang. Based on Jon’s natural gas price forecast, RRC trades at 11.5x 2017E EV/DACF, ahead of the gas-leveraged peer average of 8.6x. He believes the premium multiple is warranted given RRC’s long-dated inventory life.
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Stericycle - Sean Dodge, SRCL, PT $108
A confluence of macro headwinds and poor communication efforts on the part of management have resulted in Stericycle being a big underperformer since it was added to the Franchise Pick list in January 2016. However, Sean believes Stericycle remains a quality business with double-digit earnings growth potential over the next five years, and post-3Q results, the story has become ‘investable’ again. What has changed? Sean sees evidence the macro headwinds are stabilizing, management has debuted achievable ’17 targets, a plethora of margin levers exist and solid plans are in place to remove the two biggest overhangs on the stock—the SQ pricing pressures and the M&I business. Uncertainty remains around Brazil, UK patient transport and NT hazardous waste volumes, all of which could continue to drag on results, though recent meetings with management indicate much of this risk has been accounted for in guidance. Despite SRCL’s highly-recurring and recession-resistant core business model and double-digit growth outlook, shares currently trade 15.5x ’17E EPS, which is a 300 bps discount to the S&P 500 and well below its 29x historical (10-year) average. His $108 PT is based on 23x 2017E Cash EPS and assumes shares trade six turns below their 10-year historic average.
T-Mobile - Mike McCormack, TMUS, PT $59
Subscriber momentum remains very strong, as shown by the strong 3Q results, which had net handset adds of 851k, better than estimates and better than the competition, some of which have been seeing negative handset net adds. ARPU improved Q/Q and EBITDA was above Mike’s forecast despite better subs, and indeed, that’s one of the reasons Mike likes the stock, he believes that the company is poised to deliver $1.7b in FCF in ’16 and $2.6b in ’17. He anticipates that the cash would be used to improve leverage, particularly coming out of the current broadcaster auction, during which he believes TMUS could potentially pick up additional low-band spectrum at a reasonable price. Additionally, there’s strategic value in TMUS, especially as MSOs may look to gain scale and own a wireless asset.
Urban Outfitters - Randy Konik, URBN, PT $45
Randy recently added URBN to the Franchise Picks list as he sees an opportunity for the underlying brands to regain peak margins and store checks point to offerings being in tune with trends that favor denim and retro designs. Randy believes URBN has been ahead of the curve with '90s brands, body suits, platform heels and new trends in denim, particularly as he sees athleisure slowing. URBN has also appeared to capitalize on the resurgence of Adidas, which too has paid off. Randy believes margins can recover from 10% in F16 to the mid-teens and notes that his EPS estimates are 3% and 4% ahead of the Street for F17 and F18, respectively. Randy assumes modest margin improvement in his numbers, but assuming another ~200bps of upside for both his Anthro and UO margin estimates could easily yield F18 EPS of ~$2.68, above his estimates and the stock trades at less than 13x those estimates.
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Jefferies Focus Stocks
The Jefferies Focus Stock List contains 88 institutionally relevant stocks in which Jefferies analysts have observed elevated investor interest in their views; Jefferies’ analysis around these stocks is often differentiated. The median stock on the list has both higher market cap and higher average daily notional trading volume than the median S&P 500 stock.
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Jefferies Focus Stocks– Company Comparison Table
Ticker Company Name Market Cap
($M) Analyst Rating
Price Target
Current Price
C17 Jef EPS C17 Cons.
EPS C17 Jef P/E
Consumer Discretionary
COH Coach, Inc. 10,369 Randal J. Konik Buy 53 36.99 2.18 2.15 17.42
URBN Urban Outfitters, Inc. 4,439 Randal J. Konik Buy 45 37.87 2.34 2.26 16.77
DHR Danaher 55,986 Brandon Couillard Buy 93 80.94 3.95 3.96 20.03 HUM Humana Inc. 28,805 David Windley Buy 230 193.19 10.97 10.80 18.13 PRAH PRA Health Sciences 3,388 David Windley Buy 63 55.17 3.05 2.92 17.75
PTHN Patheon NV #N/A David Windley Buy 35 27.71 1.45 1.41 19.47 Q Quintiles IMS 18,988 David Windley Hold 78 77.13 4.51 4.50 17.05 EW Edwards Lifesciences 19,459 Raj Denhoy Buy 115 91.01 3.36 3.41 25.77
ABMD ABIOMED, Inc. 4,772 Raj Denhoy Buy 135 110.01 1.81 1.80 60.78 ABBV AbbVie, Inc. 102,544 Jeffrey Holford Buy 90 63.10 5.44 5.48 11.58 LLY Eli Lilly and 85,744 Jeffrey Holford Buy 100 77.67 3.90 3.98 19.75 SHPG Shire PLC Sponsored 56,797 David Steinberg Buy 248 188.59 15.33 15.32 12.07
SUPN Supernus 1,069 David Steinberg Buy 28 21.60 1.01 1.44 21.39 Industrials BA Boeing Company 91,662 Howard A. Rubel Buy 165 148.52 9.45 9.34 15.87 RTN Raytheon Company 43,536 Howard A. Rubel Buy 160 148.26 7.50 7.33 19.96
GD General Dynamics 51,327 Howard A. Rubel Buy 175 168.55 10.35 10.05 16.44
AAP Advance Auto Parts 10,679 Bret Jordan Hold 150 145.02 7.73 7.98 18.49
LKQ LKQ Corporation 9,902 Bret Jordan Buy 37 32.20 2.04 2.05 15.94 CE Celanese 11,023 Laurence Alexander Buy 83 76.98 7.20 7.17 10.90
PX Praxair, Inc. 33,633 Laurence Alexander Buy 140 117.85 5.75 5.94 20.31 DOW Dow Chemical 60,162 Laurence Alexander Hold 58 53.65 3.95 4.03 13.53
DD E. I. du Pont 60,167 Laurence Alexander Hold 67 69.21 3.75 3.75 18.42
IR Ingersoll-Rand Plc 19,589 Stephen Volkmann Buy 80 75.83 4.50 4.50 16.68
KMT Kennametal Inc. 2,735 Stephen Volkmann Buy 35 34.22 1.30 1.31 26.55 BLL Ball Corporation 13,280 Philip Ng Buy 93 75.97 4.42 4.27 17.23 OC Owens Corning 5,736 Philip Ng Buy 60 50.62 3.82 3.69 13.25 WRK WestRock Co. 12,059 Philip Ng Buy 59 47.95 2.98 2.85 16.58 Source: FactSet, Jefferies
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FCX Freeport-McMoRan 18,982 Chris LaFemina Buy 16 13.94 1.54 1.23 9.04 Technology GOOGL Alphabet Inc. Class A 530,736 Brian P. Fitzgerald Buy 1000 771.75 41.91 41.14 17.97 ATVI Activision Blizzard 29,290 Brian P. Fitzgerald Buy 55 39.41 2.04 2.22 18.52
FB Facebook, Inc. Class 341,464 Brian P. Fitzgerald Buy 170 119.02 4.51 5.21 25.52
FOXA Twenty-First Century 50,354 John Janedis Buy 32 27.14 1.89 1.91 14.56
NFLX Netflix, Inc. 49,257 John Janedis Underperform 80 114.78 1.05 0.95 107.98
VMW VMware, Inc. Class A 31,460 John DiFucci Buy 89 76.44 4.65 4.69 16.31
CRM salesforce.com, inc. 50,654 John DiFucci Hold 80 74.59 1.21 1.27 60.13 DISH DISH Network 25,833 Mike McCormack Buy 80 55.55 2.57 2.62 21.00
T AT&T Inc. 224,208 Mike McCormack Buy 48 36.51 2.94 2.97 12.29
TMUS T-Mobile US, Inc. 43,294 Mike McCormack Buy 59 52.54 1.68 1.87 31.50
ARRS ARRIS International 4,256 George C. Notter Buy 34 29.02 3.25 3.14 8.88 BSFT BroadSoft, Inc. 1,268 George C. Notter Buy 55 42.05 2.45 2.36 17.18
CSCO Cisco Systems, Inc. 157,624 George C. Notter Buy 35 31.36 2.50 2.43 12.55
Source: FactSet, Jefferies
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Consumer Discretionary Randy Konik – Apparel & Footwear Retail Coach Inc. (COH, Buy, PT: $53) - Randy believes fundamentals have inflected as the company has stepped up brand elevation efforts, has now reported two consecutive quarters of positive comps, and saw gross margin inflect positively in the most recent quarter. Overall, he anticipates the handbag category is rebounding and COH is his top pick. Urban Outfitters, Inc. (URBN, Buy, PT: $45) - Randy recently added the stock to the Franchise Pick list as he believes the company is poised to capitalize on current, retro fashion trends. His above consensus estimates are driven by his expectation that the Urban Outfitters and Anthropologie brands both recover margins toward peak levels. Tiffany & Co. (TIF, Buy, PT: $100) - Though sales may remain pressured in the NT due to softness in tourism, Randy expects GM to benefit as the company positions itself to sell a more favorable mix of products, with emphasis on silver and fashion jewelry. He also thinks the company should benefit from lower commodity costs and sees a potentially 300+ bp improvement in GM as lower input costs in ’15 flow through the supply chain.
Kevin Grundy – Cosmetics, Household & Personal Care Newell Brands (NWL, Buy, PT: $65) – Newell is one of Kevin’s top picks in his coverage given: (i) > 30% EPS accretion from JAH deal in FY18; (ii) c. $500M in add'l cost synergies ($100M = $2/share); (iii) other synergy levers (i.e., portfolio rationalization, working capital improvements, lower tax rate, etc.); (iv) best-in-class mgmnt; (v) attractive valuation at 17.5x EV/ULFCF (>20% disc. to staples); and (vi) asymmetrical risk reward (i.e., $65 PT, plausible $85 bull case, less likely mid $30s bear case).
Spectrum Brands (SPB, Buy, PT: $160) – Kevin is bullish on Spectrum’s growth prospects into FY17 and beyond and considers Spectrum a top pick, given: (i) accelerating org sales growth; (ii) EBITDA margin improvement ahead of expectations; (iii) upside to Street est. (our FY17-18 EBITDA est. are 3%/4% ahead of consensus); and (iv) attractive valuation at 17.5x adj. EV/ULFCF (20% disc. to peers). Our $160 PT (~18x CY3Q17 NTM adj. EV/ULFCF) offers 19% potential TSR over the NTM.
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Consumer Discretionary
Kevin Grundy – Cosmetics, Household & Personal Care Church & Dwight (CHD, Buy, PT: $53) – Kevin views CHD’s shares favorably, given (i) strong mgmnt team; (ii) best "M&A optionality" in the group as either a target or acquirer (i.e., $500M-$2B deal could be 4-17% EPS accretive); (iii) high EPS visibility; (iv) liquid laundry compaction (c. 100-150 bps accretive to GM); (v) superior FCF conversion (125% vs. ~100% peer avg.); and (vi) attractive valuation at 20x EV/ULFCF (~10% disc. to 22x peer avg.).
Akshay Jagdale – Food Products
ConAgra Foods (CAG, Buy, PT: $56) – CAG remains Akshay’s top-pick amongst his 18 company coverage universe with a 4x1 upside/downside ratio representing the best risk/reward in his space. CAG is one of the cheapest stocks in large-cap food and has significant optionality for value creation. Akshay sees opportunity to unlock ~$10B (or $23/CAG share) in incremental value by executing on several strategic initiatives – Lamb Weston spinoff, CAG Brands portfolio reshaping & margin enhancement and FCF generation. His work on CAG’s tax structure, portfolio segmentation, accretion/dilution model and stand-alone modeling of two stubs is differentiated. Hain Celestial (HAIN, Buy, PT: $50) – Akshay reiterated his conviction in HAIN, despite the audit committee review, due to the underlying value of the company’s brands, category exposure and cash flow generation. Following are the key tenants of his thesis: 1) accounting review should result in non-material impact on earnings; 2) sales growth deceleration is transitory; 3) margins do not need to be reset meaningfully lower to re-accelerate growth; and 4) the value of Hain’s brands, category growth exposure and acquisition potential is not priced into the stock. To help frame the risk associated with the audit committee review, Akshay has presented a proprietary framework that estimates HAIN’s share price under 3 possible scenarios, and has further backed his research through a consultation with a forensic accountant, conversations with multiple CFOs that have been through similar situations, and a thorough review of HAIN’s distributor contracts. He also draws from his past experience with similar situations (e.g. GMCR, ANFI, DMND).
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Consumer Discretionary Andy Barish & Alex Slagle – Restaurants
Panera Bread (PNRA, Buy, PT: $245) – Alex’s above-consensus FY17 estimates for Panera are predicated on his belief that the Street underappreciates the company’s potential for multiple years of SSS outperformance and margin improvement. Although labor costs remain a headwind, Alex believes that underlying margin expansion driven by improving revenues from 2.0, as well as catering and delivery will lead to solid performance in 2017, especially if SSS continue to improve. Chipotle Mexican Grill (CMG, Underperform, PT: $300) – Andy believes CMG is a “broken” growth company, which will eventually need to slow unit growth and revert back to a mid-teens EPS growth rate, and thus sees a lower multiple over time. In addition to competitive issues and the food safety concerns, Andy believes the fast casual space faces slower sales trends and in CMG’s case, promotional activity will not be enough to drive growth. SSS have started out -20%ish in 4Q and will likely be negative for 4Q even as the company begins to lap the much easier food-safety incident sales impact in Nov/Dec. Andy believes guidance for ’17 may prove aggressive for high single-digit SSS gains and 20% rlm, and, although new sales drivers such as technology, innovation and TV ads may be in place, they could take time to build SSS and have incremental costs.
Dan Binder - Retailing/Hardlines Wal-Mart (WMT, Buy, PT: $86) – Dan upgraded WMT shares in June following his field research that pointed to meaningful execution improvement in stores and an opportunity to accelerate sales growth with price investments and growth in ecommerce. Walmart beat Q2 sales and margin expectations even as it started increasing price investment. Dan believes the WMT is being thoughtful about where it is making investments and is encouraged by improvement in units per transaction as well as an acceleration in the ecommerce growth rate. Dollar General (DG, Hold, PT: $72) – Dan downgraded DG shortly before earnings based on his pricing work that showed the company was being impacted by Walmart’s price investment activity. He believes visibility on DG is less clear than it used to be with upside to estimates firmly off the table in the near-term. He expects sales headwinds will persist given food deflation, a reduction in SNAP benefits and increased competition.
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Consumer Discretionary
Dan Binder - Retailing/Hardlines Dollar Tree (DLTR, Hold, PT: $71) – Similar to DG, Dan believes the competitive environment has intensified, providing a headwind to sales and lower visibility for the acquired Family Dollar business. He believes cost controls and deal synergies may continue to benefit EPS, but believes the company will need to invest some of the gross margin synergies into price. Target (TGT, Hold, PT: $72) – Dan’s research has pointed to increasing price competition that appears to be impacting sales and margins. While he believes expectations have been lowered sufficiently for the near-term, Dan remains concerned about the company’s longer-term strategies in food and ecommerce.
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Energy
Anthony Crowdell – Electric Utilities FirstEnergy (FE, Hold, PT: $34.50) – Anthony believes that FE is fairly valued and believes management will not support the credit rating of the parent leading to a sub-investment grade rating. He has lowered his equity assumptions and struggles to find FE as a compelling investment opportunity given 1) using a P/E valuation that ignores the $8.5B of parent debt and 2) the headwinds that a potential FES bankruptcy may bring. Xcel Energy (XEL, Hold, PT: $42) - Anthony believes that management will be successful in executing on its renewables growth strategy , but thinks that the majority of the growth will be backloaded to 2019 and later. The recent approval of 600 WM of wind in Colorado increases rate base growth from 3.4% to 4.5%, and with 750 MW of wind in Minnesota and $1.5 billion in not yet announced additional renewables spend in the 2018-2021 time frame on the table, Anthony thinks Xcel will be able to hit its rate base CAGR of 5.4% and long-term EPS growth rate of 5%-6%. That being said, he currently finds the stock fairly valued.
Chris Sighinolfi – MLPs National Fuel (NFG, Buy, PT :$67) – Chris believes the company is in a unique position to have the N. Access pipeline approvals secured for its November 2017 planned in-service. However, even without the N. Access benefits, Chris is bullish on NFG given its attractive valuation, currently trading at 17.4x F17 EPS and its 3% dividend yield, as well as attractive attributes vs. diversified gas utility peers. Williams Co. (WMB, Buy, PT: $35) – Chris believes that despite the terminated ETE merger, WMB remains an attractive takeout target. Following the deal break, the company sold its Canadian assets, cut its dividend, instituted an equity purchase agreement for its MLP subsidiary WPZ, and has worked to recompose its Board with independent directors. Our scenario analysis found that EPD could offer WMB shareholders $44/sh in equity and still produce flat ’17 DCF/unit vs. its independent case.
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Energy
Corey Goldman – Refining & Marketing Marathon Petroleum (MPC, Buy, PT: $59) and MPLX (MPLX, Buy, PT: $40) – Corey believes news that MPC is evaluating options to highlight its MPLX GP value and optimize MPLX’s long term cost of capital could imply ~40%+ upside to MPC. He believes this will result in an accelerated drop-down schedule and an IDR –for-LP unit swap in 2018 with the creation of a c-corp tracking stock, boosting growth and offering multiple expansion at MPC and MPLX.
Jon Wolff- Oil & Gas Exploration and Production Encana Corp. (ECA, Buy, PT: $14) – Encana is one of Jon’s top conviction names and a Franchise pick. Jon reiterates his positive outlook and expectations for increased development and lower well costs. ECA recently raised capex/growth in 2016 and coupled with the restoration of the balance sheet through asset sales, Jon is confident in the more rapid development of ECA’s core Permian, Midland and remaining Montney assets in 2017+. In addition, as the market has been pricing in premiums for the Montney and discounts to operators the Midlands (discount for midland vs what, because they have Permian assets and the market has paid premiums for Permian), our SOTP analysis suggests there is a case for strategic alternative to separate the assets in order to generate additional value for shareholders. Range Resources (RRC, Buy, PT: $50) – Range Resource was added to the Franchise Pick list following the MRD merger announcement. Jon believes the combined company will be able to leverage RRC’s marketing capabilities and current acreage with MRD’s high-potential Cotton Valley acreage. Management has guided for 10% growth production in Cotton Valley and Marcellus by 2017; however, Jon expects growth to ramp even further into 2018.
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Energy
Brad Handler – Oilfield Services & Equipment Haliburton (HAL, Buy, PT: $58) – Brad added HAL to the Franchise Pick list as he believes that the environment for oilfield services has troughed, the rig count is ticking up and he expects completions demand is gaining momentum into 2017. He expects HAL to generate FCF of $1.7B/$3.1NB in 2017/18 despite a $200MM/$325MM working capital build. His recently raised 2017/18 and EPS estimates of $1.10 and $3.00 are 15%/13% ahead of consensus.
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Financials
Daniel Fannon – Brokers, Asset Mgrs & Exchanges Intercontinental Exchange (ICE, Buy, PT: $62) – ICE is one of Dan’s top picks within Exchanges and he remains positive on the company’s earnings trajectory given stable to improving growth within the data business combined with management’s increased synergy expectations for the IDC transaction and recent buyback authorization. Futures volumes particularly in energy and interest rates have been strong to start 4Q16, offset by weaker equity and options volumes. The company recently announced a $1B share repurchase authorization, which Dan believes will accelerate capital return in the near term. Affiliated Managers Group (AMG, Buy, PT: $192) – Dan believes AMG’s exposure to institutional clients vs retail positions it well relative to their peers as regulatory headwinds from the DOL’s Fiduciary rule take hold. In addition, global equity and alternatives still represent end markets where demand trends remain favorable. AMG has been active in terms of new affiliates over the last 2 years, with the company announcing early this year the acquisition of Petershill Fund I which represents minority interests in 5 alternative asset managers. This transaction highlights the scale and opportunity set that AMG has as a serial acquirer of boutique asset managers (adds $0.50-$0.80, or up to 5% to FY17E EPS). Dan believes secular trends in the industry shifting towards alternatives will continue to benefit AMG and is one of his top picks in the space.
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Financials
John Hecht – Consumer Finance Ally Financial (ALLY, Buy, PT: $28) – Ally is a Jefferies Franchise Pick and John believes represents a compelling value, currently trading at ~8.8x FY16E EPS, and the stock at current levels overly-discounts credit risk and competitive threats. As the leading auto lender from a B/S perspective and with the on-going replacement of unsecured debt with deposits and mix shift to prime/near prime car loans, Ally has been able to expand its NIM despite the low interest rate environment. John expects these NIM tailwinds and new product initiatives will continue to drive earnings growth and is incrementally positive on their recently announced and better than expected capital allocation plan. Santander Consumer (SC, Buy, PT: $15) – John’s detailed analysis of Santander’s loan portfolio suggests stabilizing credit and lower NCO’s may benefit the company’s earnings and valuation into CY17, given improved earnings visibility and lack of further allowance for loan and lease losses (ALLL) building. Analysis of recent trust data shows that the majority of the ’15 vintages are outperforming their ’14 counterparts and should the trend continue John expects to see Y/Y comps improve. John estimates that a 10bps reduction in NCO's would result in a 10% increase in EPS for SC, and at only 5.3x C17 EPS, he also expects multiple expansion with improved EPS and ROE. Synchrony Financial (SYF, Buy, PT: $35) – John believes Synchrony is one of the best positioned players in the industry as it continues to benefit from better than industry loan growth and secular tailwinds in private-label/cobrand loan growth. He notes that the company’s focus on driving sales at a retail level leaves it in a unique partnership with merchants, given their aligned interests. He expects the company’s continued focus on growing the loan portfolio in the high single digits, through the penetration of retail partners and new portfolio acquisitions will continue to improve their B/S and EPS growth.
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Casey Haire – Regional Banks Signature Bank (SBNY, Buy, PT: $147) – Concerns around taxi medallion exposure and CRE concentration have created an especially attractive entry point for SBNY, which trades at 12x 2018 (12% discount to peers). Although CRE growth is moderating, SBNY has C&I opportunities to avoid exacerbating CRE concentration and is still capable of double-digit loan growth, which is faster than peers. Furthermore, deposit growth momentum is showing no signs of slowing down. SBNY’s medallion exposure is manageable (only 2% of loans) and the NYC market is much stronger than Chicago and showing signs of stability, which should allow the bank to avoid meaningful credit losses. Casey believes the shares can expand to a peer multiple as the bank posts robust growth and clean credit quality. Western Alliance Bancorp (WAL, Buy, PT: $45) – Western Alliance possesses top quartile TCE ratio within Casey’s coverage and he expects the company has the potential to reach 10% by YE-2017, which would put the bank in an excess capital position to either pursue M&A and/or provide a strong buffer to normalizing credit costs. Management has effectively used M&A to enhance earnings with four deals since 2012, which remains a wild-card going forward. Further, takeout is also a possibility given CEO is a significant shareholder that has sold a bank before. SVB Financial Group (SIVB, Buy, PT: $149) – Casey believes SVB will be able to generate above average loan growth in the long-term due to its unique exposure to Silicon Valley and secular tailwinds in the innovation markets. He expects low credit costs and large securities/warrant gains will contribute significantly to EPS results. SIVB also possesses one of the strongest asset sensitivity profiles among mid-cap banks, and thus is advantageously positioned to rising rates.
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Ken Usdin – Trust & Regional Banks KeyCorp (KEY, Buy, PT: $16) – KeyCorp was recently added to the Jefferies Franchise Picks List. Ken believes that KEY has achievable out-year EPS estimates and an attractive valuation in both absolute and relative terms. KEY currently trades at 9.7x on ’18 EPS, a 1.7x multiple discount to regional bank peers. After a strong 3Q16 result (the first quarter with FNFG in the numbers), Ken continues to believe that the FNFG deal could add both upside potential and downside support to EPS, with more costs saves than the original $400mm looking increasingly probable and any revenue synergies (zero modeled) gravy on top. State Street Corp. (STT, Buy, PT: $81) – Ken has conviction in State Street’s prospective growth outlook, with potential upside to EPS estimates driven by cost control initiatives (Project Beacon) and asset servicing fee growth. Ken believes that upward consensus revisions and double-digit EPS growth could lead to a re-rating, offering potential for STT’s shares to reach $95-$100 over a few years’ time. The stock currently trades at 10.7x on our ’18E EPS of $6.50 (vs. the $6.22 consensus), a decent discount relative to its mid-teens historical average multiple.
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Healthcare
Brian Abrahams – Biotechnology Gilead Sciences (GILD, Buy, PT: $91) - Brian sees a compelling opportunity at current share levels, driven by strength in the LT prospects of the HIV franchise and despite our N-T concerns around HCV. He believes that any success in the pipeline outside of HIV and Harvoni are largely priced out of shares and could provide additional upside. Alder Biopharmaceuticals, Inc. (ALDR, Buy, PT: $57) - Brian believes the company’s chronic migraine drug candidate ALD403 is attractive and competitive. In Brian’s view, ALD403 is on a path for positive future data readouts and represents a potential multi-$B opportunity, which is impactful given that ALDR’s market cap is less than $2B. Biogen, Inc. (BIIB, Hold, PT: $310) - Brian was recently Buy-rated and recommended stepping to sidelines. Though Hold-rated, he notes a number of catalysts near-term, including additional Alzheimer’s data for BIIB and other players in the space, IP clarity, and potential strategic developments continuing to draw high attention to the name.
Brian Tanquilut – Health Care Facilities AmSurg (AMSG, Buy, PT: $96) – While the merger with EVHC will likely mute NT growth, Brian expects the integration will yield LT financial and strategic synergies, especially as the company establishes the largest 1-stop shop for hospital outsourcing services (that offers multiple service lines, including ER, anesthesia, radiology, hospitalist). AMSG’s outpatient surgery business is poised for accelerating growth as key orthopedic (joint replacement) procedures shift from hospitals and into ambulatory surgery centers. He expects the percentage of joint replacements done in outpatient surgery centers to rise from 2-5% today to ~20% in 5 years, driving growth healthy growth for companies such as AMSG.
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Healthcare
Brian Tanquilut – Health Care Facilities Walgreens (WBA, Buy, PT: $95) – Brian is bullish on WBA given his view that the Street is underappreciating the volume acceleration that is likely to result from WBA’s recent partnerships with large PBMs including UNH/Optum, Prime Therapeutics, and the Department of Defense. Additionally, WBA has succeeded in reducing G&A expenses to offset expected gross margin declines and drive increased FCF (current yield >7%). Lastly, Brian thinks that as it related to the pending RAD acquisition, the risk-reward for WBA is favorable, with the stock having >11% upside in reaction to a positive outcome on RAD and 7% downside.
Brandon Couillard – Life Sciences & Diagnostic Tools Agilent Technologies (A, Buy, PT: $53) - Brandon views Agilent’s unique leverage to an uptick in Chemical/Energy end-market demand as a solid counterbalance to any potential Biopharma slowdown in 2017. Brandon is confident in the company’s core revenue growth target for +4.5% in FY17, supported by: 1) robust new product pipeline, 2) an expanding recurring revenue base, 3) ongoing strength in China & applied markets (food safety); and, 4) modest recovery in Chemical/Energy demand (+2-3% in FY17E vs. -3% in FY16E), supported by recent new GC (gas chromatography) product launches. Bruker Corp (BRKR, Buy, PT: $30) – Brandon likes Bruker’s longer-term profit margin expansion opportunity. After three-years of heavy lifting, he sees Bruker as well-positioned to drive 50-100bps of operating profit margin expansion annually. Brandon is further encouraged by the company move to structurally re-price the economics of its NMR franchise (~20-25% of revenues), where it now enjoys a virtual monopoly in the category following Agilent’s exit from the market. While near-term visibility is limited, owing to Bruker’s outsized exposure to weak gov’t/academic end-markets & relatively higher mix of instrumentation, he finds the valuation as attractive, especially on out-year earnings power.
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Healthcare
Brandon Couillard – Life Sciences & Diagnostic Tools Danaher Corp. (DHR, Buy, PT: $93) – Following the recent spin-off of its legacy industrial franchises, Brandon believes consensus under-appreciates the growth profile of DHR’s healthcare-centric portfolio relative to those of its closest peers. Brandon’s bottom-up analysis suggests DHR could generate 4%+ in organic growth and that the company’s new portfolio would have generated organic growth equal to that of its peers over the past 5 years (+4.3% since 2011). He believes their runway to drive future margin gains of 50-100bps/yr is greater than most peers and views the 3-5 year CAGR of 10%+ as achievable. Brandon’s $93 PT implies an EV of 20.5x his ‘18E uFCF, which is a 1-2x premium vs. peers, which he thinks is warranted given the portfolios growth expectations & quality of its management team.
Dave Windley – Managed Care Humana (HUM, Buy, PT: $230) – Concerns about HUM MA Stars scores have quickly given way to opportunity in a Trump Presidency. HUM has several avenues to improve its Stars position before 2018 More important, Medicare Advantage enrollment growth and pricing could improve meaningfully with the GOP in control of Washington. He believes the current scores do not constitute a viable deal-break, keeping the takeout possibility alive.
Dave Windley – Pharmaceutical Services
PRA Health Sciences (PRAH, Buy, PT: $63) – Dave believes that the CRO market will continue to benefit from strong trends in outsourcing, particularly by SMID-Cap Biotechs, which is ~30% of PRAH’s revenue. The company has sustained top line growth above peer averages and we believe the recent strategic deal announcement with Takeda could add ~2% to revenue growth each year for the next 3-4 years.
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Healthcare
Dave Windley – Pharmaceutical Services
Patheon (PTHN, Buy, PT: $35) – Dave maintains a bullish LT view on PTHN as the company offers a differentiated, full-service approach to contract manufacturing, a rarity in the space. The company’s high market share in outsourced manufacturing for new drug approvals provides a multi-year revenue tailwind. Quintiles (Q, Hold, PT: $78) – The company recently closed on the IMS acquisition. Recent survey data and sponsor interviews led Dave to downgrade the stock, as he believes sponsors are skeptical that Q will be able to leverage IMS’ data to more efficiently recruit patients for clinical trials. This could threaten the realization of management’s revenue synergy targets.
Raj Denhoy – Medical Supplies & Devices
Edwards Lifesciences Corp (EW, Buy, PT: $115) - Raj remains bullish on EW as the company remains in the lead position in the quickly developing transcatheter aortic valve replacement (TAVR) market. Global TAVR sales are now annualizing over $3bn and while the sheer size of the market will lead to some slowing in growth, the market is still only 25% penetrated. With recent extension into the intermediate risk population and the lower risk population by 2018, the entire surgical valve market will soon be open to conversion to TAVR. The mitral valve represents another considerate growth opportunity that is 3-4x the size of aortic and clinical efforts here are just beginning. Abiomed (ABMD, Buy, PT: $135) - Raj believes ABMD is perhaps the best positioned growth story in medtech. With big underpenetrated clinical opportunities, including PCI, cardiogenic shock, and a new market in STEMI; geographic expansion into Japan and other markets; secure and improved reimbursement; and no competition for at least 2 years—growth should continue for some time to come. We model revenues of $445mn in FY17 growing to over $1.1bn by FY20; average growth of over 35%. And these targets could prove conservative. ABMD remains a top growth pick.
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Healthcare
Jeff Holford – Pharmaceuticals AbbVie (ABBV, Buy, PT: $90) – ABBV remains Jeff’s top pick and he is confident the launch of Humira biosimilars will be delayed longer than Street expectations, not occurring until 2022 vs consensus of 2018/19. In the meantime, he is bullish on the de-risked, late-stage pipeline and sees new product launches for Imbruvica, Rova-T, HCV and Venclexta, as well as margin expansion, propelling the shares. Eli Lilly (LLY, Buy, PT: $100) – LLY remains one of Jeff’s top picks as he expects continued growth from key drug franchises, including Trulicity and Jardiance. He also anticipates that EXPEDITION-3 data for Alzheimer’s, due out by YE16, could add considerable upside to the current share price.
Dave Steinberg – Specialty Pharmaceuticals Shire (SHPG, Buy, PT: $248) – Shire remains Dave’s top large-cap pick as he expects continued strength from the base business, upside from the BXLT integration, rapid growth from recently launched Xiidra and believes the pipeline contains several assets underappreciated by investors. Given recent prescription data, he sees the potential for the company to make dry eye drug Xiidra its largest ever in the US with potentially over $2b in peak sales. Supernus (SUPN, Buy, PT: $28) – Despite significantly outperforming this year, Dave remains positive on the outlook for Supernus shares due to 1) continued strength in Rxs for Oxtellar XR and Trokendi XR, 2) continued de-risking of the pipeline – SPN-810 (impulse aggression ADHD) and SPN-812 (non-stimulant ADHD), and 3) an increasing likelihood for a patent settlement with Teva for the epilepsy franchise ($230M+ revenue runrate). He believes Supernus has the upper hand in part due to its legal victory for Oxtellar XR in February 2016.
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Industrials
Howard Rubel - Aerospace & Defense Boeing (BA, Buy, PT: $165) – Boeing is a Franchise Pick and one of Howard’s highest conviction names. Howard believes Boeing has the potential to continue improving their profitability through the timely implementation of development milestones and improving their integrated R&D process. Howard believes the US market is causing an extension in the cycle, believes the Street is too bearish on the commercial aero cycle, and doesn’t expect deliveries to peak until 2020. Raytheon (RTN, Buy, PT: $160) – Howard believes that Raytheon’s breadth of products and solutions have continued to appeal to a broad array of customers. With the widening of the company’s business solutions for counter-terrorism and situational awareness, they have built a strong presence in this market and helped to deliver better than expected bookings year-to-date. He expects this should translate into greater volume growth going into 2017 & 2018. Howard sees RTN well-positioned to capitalize on the change in tenor related to the need to modernize core air defense systems, as a result of the changing threat of drones. RTN’s partnership with Kongsberg also has opened doors in Poland for a short range air defense system. General Dynamics (GD, Buy, PT: $175) – Howard expects that superior performance in the Aerospace segment should flow into 2017, driving his above consensus estimates for FY17. Howard also anticipates a solid improvement in cash flow in 2017 as the company transitions to production of key Combat Systems programs. He expects new product development at Gulfstream to lead to seamless introduction into service for the G500 and G600 long-range business jet aircraft. He believes the company is the low cost producer and should be able to capture above average profitability, despite the difficult market conditions.
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Bret Jordan – Autos & Automotive Aftermarket Advanced Auto Parts (AAP, Hold, PT: $160) – Bret expects that AAP’s NA business will remain under pressure due to ongoing supply chain expenses caused by DC inefficiencies. He believes that margins will continue to deteriorate in 2H16 as comps lag. His ‘17E EPS estimate of $7.22 is 11c below the consensus. Bret’s online retail analysis suggested that AMZN’s robust branded hard-parts and online discounts could pressure L-T margin growth for traditional retailers and in the event of a DIY “reprice,” could result in a 2% headwind to AAP’s ’17 estimates. LKQ (LKQ, Buy, PT: $37) – Bret anticipates a rebound in North American parts and service in 2H16 as easier weather comps lap and miles driven remain high. Growth from Europe remains high, and Bret believes additional branch openings will allow the company the leverage both its cost structure and pricing with vendors.
Laurence Alexander – Chemicals Celanese Corporation (CE, Buy, PT: $83) – Laurence believes there is room for further upside in Celanese’s shares over the next 5 years and estimates the company can continue to improve FCF/share another 60% through 2020 with improvement driven by share buybacks and capex growth funded by productivity efforts. Laurence estimates the company can deliver 8% EPS growth through 2020, despite a slow growth environment and expects M&A could approach $1bn through 2018 and add 150-200 bps to EPS through 2020. Praxair (PX, Buy, PT: $140) – Laurence estimates that growth and optimization of Praxair’s core business and execution on backlog should contribute 2-3% topline growth per year through 2020E. The company has continued to leverage strength in consumer end-markets despite weakness in energy, and estimates they will be able to capitalize on their strength in these markets especially in Europe and LATAM. Laurence believes a merger between Praxair and Linde remains plausible and would make sense from a strategic perspective, with Linde’s expertise in engineering and homecare. He believes anti-trust concerns are manageable with largest risk of divestitures in the US.
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Industrials Laurence Alexander – Chemicals
DOW (DOW, Hold, PT: $58) / DuPont (DD, Hold, PT: $67) – For Dow Chemical, Laurence believes cost synergies (>$3bn by 2H18-2019), a turn in the ag cycle (~40% improvement in Ag EBITDA by 2020E), capacity additions in the USGC and a production ramp at Sadara ($0.80-$1.00/sh contribution to DOW EPS) will offset headwinds from a steady erosion of ethylene chain margins. Additionally, margin spikes caused by outages will likely be offset by rising ethane in 2H17-2018. Laurence believes the DuPont’s cost saving initiatives and recovery in agriculture are the main drivers in his 17% EPS CAGR through 2018E. The company’s cost saving initiatives for $1bn year-end run rate have proven to be on track and Laurence estimates that the allocation of cost synergies could lift EBIT prospects for the Agriculture spin by ~40%, compared to the 15-17% for the other two spins. Laurence maintains his Hold rating as he expects pension overhang and uncertainty surrounding the ag outlook and ethylene-chain prospects will keep the shares range bound in the near to medium term.
Stephen Volkmann - Machinery Ingersoll-Rand (IR, Buy, PT: $80) - Ingersoll – Rand is a Franchise Pick and one of Stephen’s top conviction names given the company is one of the most exposed to the housing and commercial construction end markets, which have seen improvement over the last few years but still offer significant pent-up replacement demand. Solid Climate order rates have continued to trend above expectations. Stephen believes the company can deliver top line growth ahead of consensus along with continued margin expansion and his SOTP analysis supports 20% upside potential based on FY17 estimates. Kennametal Inc. (KMT, Buy, PT: $35) –With EBIT margins more than 1000 bps. below industry peers, Kennametal has significant upside on its restructuring and consolidation efforts. Stephen expects 75% of the guided 1000 headcount reduction should be completed by CY-end and should provide upside to estimates even in a flat end market environment. As end markets recover and restructuring efforts drive margin expansion, Stephen believes there is ample room for KMT to drive organic growth, and margins could move from mid single to mid double digits. In this scenario KMT should have ~$3 in earnings power and trade at a mid-teens multiple, in Stephen’s view.
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Phil Ng - Paper & Packaging Ball Corporation (BLL, Buy, PT: $93) – Phil added Ball Corp. to the Franchise Pick list in August and believes there is upside to managements’ 2017 FCF guidance for the combined BLL/Rexam company. Phil believes the potential for substantial FCF growth over the next three years warrants a higher multiple for the shares and his focus remains on 2018/2019 once the transaction is fully integrated. Additionally, with Ball taking a leadership position in the global beverage can market (40% global market share), management is taking a more disciplined approach and is focused on realizing the value of its products and taking a value over volume approach. The latter implies to us that pricing in beverage cans could improve the next few years, which would be incremental to Phil’s estimates. Owens Corning (OC, Buy, PT: $60) – Owens Corning is one of Phil’s top conviction names and a Franchise Pick. Phil believes that OC is poised to benefit from higher insulation prices beginning in 2H17 as market capacity utilization tightens and from solid earnings growth in the composites business, aided by a substantial reduction in furnace rebuild costs over the next four years and the ramp-up of its new non-wovens capacity. Additionally, Phil expects strong FCF conversion of 100% to continue as the company leverages $2.0 bil of NOLs. With the stock trading with an 8% FCF yield, it offers great value, significant runway for margin expansion in insulation, and a capital deployment story. WestRock Company (WRK, Buy, PT: $59) - Phil believes that despite WestRock’s YTD underperformance relative to peers, the company is well-positioned to outperform with improving containerboard sentiment and is one of his favorite value ideas. Phil sees significant room for upside driven by synergies from the MWV acquisition and the containerboard price increase in 2016. Phil expects the company will be able to generate 10% FCF yield next year, which is the highest in the group.
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Natural Resources
Chris LaFemina - Metals & Mining
BHP Billiton Ltd (BBL, Buy, PT: $39) - Chris recently took a more bullish stance on BHP as he anticipates the company’s competitive position will improve due to strong operational performance, further cost cutting potential, low-cost organic volume growth, FCF growth, and some commodity price tailwinds. His FY’18 EBITDA estimate is ahead of consensus, and he believes there could be additional upside to his forecasts. Freeport-McMoRan Inc. (FCX, Buy, PT: $16) - Chris continues to expect FCX to focus on improving its balance sheet and notes the company can reduce its net debt from $18bn at Sep 30 '16 to less than $10bn by EOY '17 if copper prices just stay flat over that period and the company receives proceeds from pending asset sales. His ’17 and ’18 EPS estimates are ahead of consensus, mainly based on an improved balance sheet and EBITDA growth primarily at the Cerro Verde and Grasberg mines. He also expects FCX to benefit from continued strength in the copper price.
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Technology
Brian Fitzgerald – Interactive Entertainment Alphabet Inc. (GOOGL, Buy, PT: $1,000) – Brian’s bullish stance on Franchise Pick, Alphabet, is based on his belief that YouTube will be one of the largest online ad growth drivers for the company, with the acceleration in paid click growth +42% Y/Y as of 3Q16. Google recently announced a slew of new hardware products and Brian believes that should they prove successful, there is possibility for multiple expansion. Activision Blizzard, Inc. (ATVI, Buy, PT: $55) – ATVI remains a franchise pick and Brian sees meaningful upside to estimates as management pursues large new opportunities in eSports, in-game advertising, and micro-transactions. Advertising is a potential billion-dollar business and is not included in Street estimates. Brian believes in-game spending will contribute to high-margin digital revenue for Overwatch and that over time for Call of Duty, digital offerings and in-game purchases will drive higher ARPU growth. Brian anticipates 2017 will be a foundational year and in 2018 he expects to see meaningful contribution from advertising. Facebook, Inc. (FB, Buy, PT: $170) - Brian continues to like the risk/reward for Facebook given its soaring mobile ad business, narrowing expense outlook and record user levels for Facebook, Instagram, WhatsApp and Messenger. As of 3Q16, FB reported 1.8B monthly active users and 1.2B daily users, with mobile ad revenues up 71% Y/Y. Brian notes that 2017 could be more challenging given tougher comps and potential user-transition to Snapchat. His analysis suggests Snapchat could impact 3-9% of FB 2018 EPS, although we believe impact in the N-T will likely be minimal. For now, FB remains the primary beneficiary as ad dollars flood into mobile ad campaigns, following users who are spending 5% of total media time (including TV, movies, gaming, music, etc) on Facebook properties.
John Janedis – Media & Entertainment 21st Century Fox (FOXA, Buy, PT: $32) – With its attractive domestic and international cable network portfolios, 21st Century Fox is one of the best positioned content providers in the media universe. Domestically, John believes that FOXA will continue to offset current pressure on subscriber trends through its investments in networks (most recently Nat Geo) and increased digital distribution on Hulu / other VMVPDs. As a result, EBITDA growth should be at the top end of the group.
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Technology
John Janedis – Media & Entertainment Netflix (NFLX, Underperform, PT: $80) – John maintains his negative outlook on NFLX as he believes that current domestic subscriber growth expectations are too aggressive, largely due to increased competition and a building penetration rate. Further, the local programming / marketing costs necessary to build out a global platform may put pressure on margin expansion. His domestic net adds for ’16 and ’17 are 6% and 18% below the consensus, respectively.
Jason Kupferberg - Payments, Processors & IT Services PayPal Holdings (PYPL, Buy, PT: $52) –PayPal is a Franchise Pick and Jason is incrementally positive on the outlook given strong core business trends and outperformance to date in TPV growth and net revenue growth. Jason believes PYPL is still the best way to play digital/online payments on a global basis. In addition, his recent survey work shows that fears surround the recent V/MA card-favoring agreements may be overdone and that 50%+ of EPS headwind could be offset by increased usage of the PayPal platform. Computer Sciences Corp (CSC, Buy, PT: $63) - Jason recently added the stock to the Franchise Pick list as he expects the recent merger with HPE to be 102% accretive in Year one in his base case, which would put the stock at a multiple of ~8x. Further upside could be driven by additional upside to CSC management’s cost synergy targets.
Mark Lipacis - Semiconductors NVIDIA Corporation (NVDA, Buy, PT: $95) – NVIDIA is a Franchise Pick and one of Mark’s highest conviction calls. Mark believes the company’s investment in new platforms and tools to enable Deep Learning and Virtual reality markets demonstrate the diversity of apps demanding NVDA’s Datacenter products. He expects NVDA will be able to continue delivering upside surprises over the next 12-18 months, driven by growth in Gaming, Deep Learning, Self-driving vehicles and VR.
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Technology
Mark Lipacis – Semiconductors Advanced Micro Devices, Inc. (AMD, Buy, PT: $9) – Mark believes there is upside to Street estimates for AMD and anticipates the company’s new ZEN MPU platform could be $0.22-$0.96 EPS accretive in the next 2 years. Mark forecasts growth in 2017 in the computing and graphics segment from sales from higher ASP Zen-based DT and server MPU’s. The company has announced several deals this year with China-based companies to deploy GPU’s and we expect more could be in the works. Longer-term, we believe management is executing a turnaround, which along with multiple catalysts ahead, will to continue to help drive growth going forward.
John DiFucci - Software Oracle Corp (ORCL, Buy, PT: $51) - John believes that the newly launched 12c R2 product will be a major product cycle. His sensitivity analysis shows this could potentially add 2-9% of additional revenue growth to his estimates over the next few years. John believes the shares offer compelling value, especially at current levels trading at trading at 14.3x F17E EPS. Paycom Software (PAYC, Buy, PT: $58) - John believes the company is well-positioned to continue delivering sustainable high revenue growth and strong profitability driven by increased adoption of HCM/Payroll SaaS solutions, particularly among small and mid-market companies. He believes management’s current full-year guidance for 45-46% revenue growth implies only modest ANRR growth in 2016, which is impacted by a very difficult compare against an ACA-related benefit that was primarily in 2H15. He believes that the setup for 2017 is better, and that new regulations such as the FLSA overtime rules will continue to support secular growth momentum, similar to what the ACA did, and support Paycom’s continued strong performance. VMware, Inc. (VMW, Buy, PT: $89) - John continues to believe that the opportunity for compute virtualization is greater than the market realizes as less than 50% of CPUs have been virtualized. In addition, he thinks there could be significant deal synergies from Dell’s acquisition of EMC due to improvements in OEM relationships.
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Technology
John DiFucci - Software Salesforce.com, Inc. (CRM, Hold, PT: $80) - CRM surprised investors with a billings miss in its July-ended F2Q17, citing softness in the US in July, and without providing a clear explanation for the miss. This follows a few quarters of very strong enterprise business momentum that more than offset some softness in the midmarket segment in the last couple of quarters, as supported by John’s channel checks. CRM’s F3Q guidance implies about 12% billings growth, and about a 28% decline in new Subscription ACV by John’s calculation. This appears beatable, and a beat is likely expected by most investors, though how much is needed relative to expectations is uncertain for now. Another disappointing quarter could put CRM’s long-term targets and its ability to sustain organic growth in key markets into question, but the company also expressed confidence in increasingly backend loaded business momentum. Execution in the near term, integration of the recent Demandware acquisition, and future M&A activity will both be subject to investor scrutiny and could impact our view of the shares.
Mike McCormack – Telecommunications Dish Network (DISH, Buy, PT: $80) – DISH remains a Jefferies Franchise Pick as Mike believes the market continues to misprice the value of DISH’s portfolio of spectrum and the role the company may play in the consolidation of the industry. His price target is based on a $1.35/Mhz-POP blended spectrum valuation, and he believes the market currently assigns ~$0.89/MHz-POP. AT&T (T, Buy, PT: $48) – Mike remains bullish on T’s prospects as the company works to integrate the DirecTV product and develop their OTT video solutions. The promotional environment seems stable, and in addition, Mike believes the company is well positioned to provide reliable service, especially since the traffic-inducing initiatives highlight the company’s confidence in its network. The recently announced transaction to acquire Time Warner inserts regulatory uncertainty, but the prospects of marrying content with distribution provides the opportunity for better growth and innovative programming.
Focus Stocks
Themes & Tactics
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Technology
Mike McCormack – Telecommunications T-Mobile (TMUS, Buy, PT: $59) – Mike added TMUS to the Franchise Pick list anticipating continued subscriber adds, ARPU stabilizing and that bad debt would be kept to manageable levels. He expects the company will generate $2.6b in FCF in 2017, up from an expected $1.7b in ’16, and use funds to delever and potentially pick up spectrum in the current auction. He believes the growth profile of the company should reflect a premium to peers.
George Notter – Telecom and Networking Equipment ARRIS International (ARRS, Buy, PT: $34) – George likes the risk/reward for Arris at current levels, trading at 8.2x F17E EPS. George believes investor sentiment on STB’s is too negative, which is supported by the strong 1H16 results, solid existing customer demand and next generation STB development. He expects the Network and Cloud segment will continue to benefit from the increasingly competitive market for high speed internet and anticipates spending will pick up in 2017 with the completion of network planning and integration efforts. BroadSoft (BSFT, Buy, PT: $55) – George is positive on the company’s long term business fundamentals and believes BroadSoft presents a strong play on the long-term secular growth of Hosted Unified Communications (UC) and SIP Trunking in enterprises. George expects software billings growth will improve in 2017, based on an uptick in Professional Services revenue which reflect the company’s progress in Transformation projects, which he believes will translate into better billings revenue in 2017. Shares currently trade at 14.4x George’s 2017 base business EPS, which in his view is still too cheap given their strong competitive advantage in VolP adoption.
Focus Stocks
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November 16, 2016
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Technology
George Notter – Telecom and Networking Equipment CommScope (COMM) – George continues to view the risk/reward for CommScope favorably and believes the company has potential to see some remaining upside to his merger synergy assumptions and expects further growth in the company’s Fiber Connectivity sales. He expects Fiber Connectivity to benefit from FTTX-related spending and increased competition between Telecom Operators and Cable MSOs. FTTX capacity additions are currently underway for CommScope and lead times should also come down going forward. On the Wireless side, expectations are low right now and George sees potential recovery in India and among North American customers like Verizon, Sprint, and AT&T surprising positively – particularly against easier comps. Cisco Systems (CSCO, Buy, PT: $35) - George sees a number of opportunities for Cisco to generate incremental growth in the Security, Hyper-converged Storage, and SMB space. He also believes there is additional potential for Cisco to increase their capital return and dividend and that risks surrounding workload migration to Public Cloud, White Box, Hardware Virtualization have diminished, which in his view warrants the assignment of incrementally better valuations.
Focus Stocks
Themes & Tactics
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November 16, 2016
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Jefferies High Conviction Themes for 2H’16 and 2017
Jefferies Research Analysts identified 11 high conviction themes expected to have the greatest impact on their coverage. In addition to highlighting the key tenets of these themes, the analysts have identified the stock ideas levered to each theme.
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Thematic Trade Ideas
US Infrastructure Investment 51 Natural Gas – Jon Wolff 52 Interactive Entertainment – Brian Fitzgerald & Mark Lipacis 53 Apparel and Handbags – Randy Konik 54 Restaurants – Andy Barish & Alex Slagle 56 Civil Aerospace – Howard Rubel 57 Trucking Equipment – Stephen Volkmann 58 Mining & US Steel – Chris LaFemina & Seth Rosenfeld 59 Immuno-oncology Stocks – Brian Abrahams, Biren Amin, Jeffrey Holford & Eun Yang 60 M&A 62 Biotech, Pharma, Specialty Pharma – Brian Abrahams, Jeff Holford, David Steinberg 62 Asset Managers & Managed Care – Daniel Fannon, David Windley 63 Auto Aftermarket & MLP’s – Bret Jordan, Chris Sighinolfi 64 Semiconductors & Software – Mark Lipacis, John DiFucci 65 Media – John Janedis 66 SMID- Cap Strategy– Steven DeSanctis 67 Thematic Trade Ideas Comparison Table 68
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November 16, 2016
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Public Spending on Transportation and Water Infrastructure as a Share of GDP, 1956 to 2014
US Infrastructure Investment – Potential Beneficiary Under a Trump Presidency
Jefferies Equity Research published a collaborative piece on September 30 examining the case for higher infrastructure spend and the stock implications for such an increase. Public spending on infrastructure as a share of GDP is near all-time lows at 2.42% as of 2014 (shown right), a factor in rising delays per commuter, the percentage of flights delayed and something that has caused other productivity sapping problems. As the bottom chart shows, construction wages tend to be higher than many other industries, so infrastructure spend could be particularly helpful to wage growth and, ultimately, inflation. Note here
High Exposure:
Metals & Mining: FCX, FM-CN, GLEN
Steel: CMC, NUE, RS
Medium Exposure:
Diversified Industrials: PNR, AOS, RBC, NWPX
Machinery: CAT, KMT, OSK, MTW, TEX. If higher spending leads to higher wages, trucking companies may be forced to raise their own wages, leading to higher costs.
The Research department also published a collaborative note in April taking a look at the implications of rising CPI and real wages. We looked at the groups that have tended to perform best when inflation expectations are rising, and the groups that tend to have the highest correlation to accelerating CPI. Not surprisingly, Energy and Materials topped the list. Note here
Average Hourly Earnings by Sector 2006 - Present
Source: US Bureau of Labor Statistics
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More Upside to Natural Gas--Falling Supply, Rising Demand, Lower Storage
Gas Reinvestment Low, Modest Rig Additions Expected in 2H16: The Baker Hughes Natural Gas rig count has fallen 58% YoY (chart right) and sits at historical lows. 2Q conference calls made clear the limited appetite for reinvestment until prices are well-above $3.00 per MMBtu. Within Jon’s coverage only ~20 gas-focused rigs in aggregate are expected to be added in 2H16.
Storage Surplus Continues to Evaporate: At the start of the refill season (April 1), the YoY storage surplus was ~1,000 Bcf, but has now shrunk below 300 Bcf. The speed of the re-adjustment of gas storage has been staggering. Jon’s forecasts are higher than consensus, but he also sees the potential for winter weather spikes.
Conclusion: Jon reiterates his bullish position on natural gas for late-2016+ as storage normalizes and moves into deficit in 2017. Jon’s top gas picks are Franchise Pick RRC as well as RICE.
Top Pick Stocks for Natural Gas Exposure:
Franchise Pick: Range Resources (Wolff, RRC, BUY, PT: $50)
Rice Energy (Wolff, RICE, BUY, PT: $32)
Gulfport Energy (Wolff, GPOR, BUY, PT: $35)
Jefferies Natural Gas Supply Forecast
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November 16, 2016
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Cumulative Console Install Base per Cycle
Consumer Electronics Adoption Case Studies
Source: Company Data, Jefferies
Source: Jefferies, Jeremy Reimer
Long Interactive Entertainment Stocks – VR and Deep Learning Gain Momentum
Accelerated Growth in Gaming Demand: Brian anticipates accelerated growth in gaming with the transition to digital gaming and estimate 80MM in next generation consoles by YE2016e, comparatively to the 55MM YE2015a. (chart right)
Deep Learning (DL) Gaining Traction: Mark believes DL has the potential to transform business processes spanning multiple industries and likely become a larger market than VR. DL has gained traction with improvements in data access, cheaper storage and faster GPU processing. Mark met with start-ups earlier this year, that have already deployed GPU’s to enable DL algorithms for applications for chat-bots, medical applications, stock trading and online shopping. DL has also been a continued source of upside for NVDA, with an especially strong recent Jul Q print.
Large Base of Early Adopters in VR: Early adopters of VR will likely come from the ranks of video gamers, which is a large audience base. There are currently 200 - 250MM users that currently own an Xbox, PlayStation, or Wii. Our case study suggests that VR has the potential to make annual shipments of 10m units in 3-to-5 yrs, and up to 50m units in 5-to-10 yrs. Virtual Reality Franchise Note here (Published 12/22/2015)
Conclusion: Mark believes secular growth in gaming will trump PC weakness and translate to top-line growth for the GPU suppliers for names such AMD and NVDA. In the gaming space, Brian sees an emerging opportunity for publishers like ATVI and EA given these VR platforms could enable deeper and more engaging gameplay than ever before.
Top Pick Stocks for Virtual Reality and Deep Learning Exposure:
Durable Goods vs. Non Durable Goods Share of Real PCE
Clothing and Clothing Accessories Sales Suffered Slowdown in October 2015, Making for Easy Fall/Winter Comps
Source: Bureau of Economic Analysis: Real PCE (seasonally adjusted)
Source: FactSet, Jefferies
Long Apparel and Handbags – The Days of Losing Share to Durable Goods May Be Over
Consumer Backdrop: Since 2008, Randy has seen an improving consumer backdrop – driving a rebound in the durable goods category (chart right). However, government data and consumer spending components suggest that non-durable spending could regain lost share. Randy believes apparel and handbags in particular are set to benefit.
Auto Sales: Randy suggests auto sales show signs of plateauing growth. October auto sales came in at 17.9M units, failing to eclipse the Oct’15 peak rate of 18.1M (chart lower right, next slide).
Potential for Improved Tax Structure: With Trump and a Republican Congress, we highlight Trump’s plan for fewer tax brackets and lower top rates of 12%, 25% and 33%. Lower income taxes could benefit retail given higher disposable income.
Easy Comps: Consumer apparel demand was weak in CY15. Poor performance was driven by a lull in the fashion cycle, the headwinds listed above, and unseasonable weather. 2016 weather trends are setting up much more favorably and CY16 is up against four Qs of negative comps. (chart right)
Shift in Trends: Randy’s latest mall checks point to a shift in consumer trends towards denim and retro, away from athleisure. He also notes the prevalence of new footwear trends including the re-emergence of basketball shoes, benefiting adidas and also easy comps ahead for boots as a result of a record warm winter last year. Randy believes these trends are poised to provide the most benefit the teen retailer space and as he sees increasing adoption by younger consumers.
Conclusion: Pent up demand, diminishing secular headwinds along with easy comps position apparel and handbag names to perform well going into 2H16. Randy’s top picks are: AEO, COH, FL, KORS and URBN.
Franchise Pick: Urban Outfitters, Inc. (Konik, URBN, BUY, PT: $45)
American Eagle Outfitters (Konik, AEO, BUY, PT: $25)
Foot Locker, Inc. (Konik, FL, Buy, PT: $80)
Michael Kors Holdings Ltd (Konik, KORS, BUY, PT: $75)
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November 16, 2016
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Apparel Spending Trends – Wallet Share Appears to Be Heading in Favor of Retail
Category share of after tax income Pace of Sports Apparel Growth is Slowing…
Our Case to Own Handbags in 2016 … and Auto sales are starting to peak
Source: US Bureau of Economic Analysis: Consumer Expenditure Surveys
2000-2014
Source: Jefferies Note: US Auto Sales Annualized, Seasonally Adjusted (SAARTOTL)
Source: Bloomberg
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November 16, 2016
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Implied Full-Service Restaurants Unit Growth versus Full Service Sales and Knapp Track Casual Dining SSS
Restaurant EBIT Margins vs. Industry SSS
Source: Bureau of Economic Analysis, Knapp Track, Jefferies
Source: Company Reports, Jefferies Estimates
Underweight Restaurant Stocks – Calling the Top of Restaurant Cycle
Excess Capacity Curtailing SSS Growth, Despite Macro Tailwinds: Andy and Alex believe SSS growth will remain under pressure from excess supply and increased competition from grocery/C-Store Players. The October MillerPulse SSS data indicated overall restaurant SSS remained weak and was -0.7%, while industry traffic was -2.4%, suggesting broad slowing across the industry.
Rising Labor Costs and Wage Inflation to Pressure Margins: Broad wage inflation driven by the market and mandates will pose an incremental challenge on margins, especially into 2017 as the industry will need to adjust for increasing costs associated with people, technology, brands and assets and lower SSS growth.
Casual Dining Positioned the Worst: Andy and Alex reduced earnings growth expectations by nearly half for their coverage in this space and expect these stocks to see the most impact from rising labor costs and slowing deflationary commodity trends.
Andy and Alex Recently Downgraded Several Names in Their Coverage and Lowered Estimates: Andy and Alex published a Franchise Note on 7/26 and FRGI, RRGB and RUTH were downgraded to Hold from Buy and TXRH was downgraded to Underperform. Their estimates for FY16/17 are now well below consensus. Franchise Note here
Conclusion: Expect Challenges Ahead: Andy and Alex anticipate softness in the industry for the remainder of 2016 and into 2017, primarily driven by weaker SSS performance and higher labor costs due to capacity growth and labor tightness. They believe street estimates will need to be revised downwards over the course of the next several quarters, which could bring about valuation compression.
Restaurant Stocks Identified with Most Downside Risk:
Airline Traffic, Capacity, and Load Factor (Mar ‘05 – March ‘16)
Source: Jet Information Services, International Air Transport Association, and Jefferies estimates.
Source: Company data and Jefferies estimates
Long Civil Aerospace – Commercial Aerospace Offers Attractive Growth in a Slow Growth World
Delivery Forecast is for Ongoing Expansion: Howard expects market growth of 5% and a continued rise in civil market deliveries. The three main drivers for an uptick in deliveries are:
1) Improving air traffic and airline profitability
2) Rising replacement demand
3) Increasing emerging market demand
He expects civil jetliner deliveries to reach 1,925 by 2020 up from the 1,537 estimated in 2016, with narrowbody growth expected to outpace the widebody advance, driven by the introduction of Airbus’A320neo and Boeings’ 737 Max platforms.
Aging Fleet Driving Replacement Demand: 17% of the existing commercial aircraft fleet of 24,606 were delivered in ‘95 or earlier, equating to ~3 years of production which we estimate would be spread over the next 5-8 years This retirement draw drives annual net fleet additions (deliveries less retirements) to only 3.85% of the fleet over the next 5 years, which is 1-2 points lower than expected air traffic growth of 5-6 % (shown top right).
Fleet By Geography: The average age of a North American fleet is 13 years vs. the rest of the world which is 8.7 years (shown bottom left) and after years of aging, it is apparent both fleets have become younger as new deliveries outpaced retirements.
Load Factors and Airline Capacity: Airline reduction of unprofitable routes has raised load factors and caused a reallocation of planes. We believe there is a practical ceiling and that when hit, demand for aircraft will match revenue passenger mile growth. (shown below)
Howard’s top name within his commercial aerospace OEMs and suppliers coverage is Boeing (BA, Buy, PT: $165).
Average Age of the World Aircraft Fleet
Source: Ascend, Jefferies estimates
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November 16, 2016
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Implied Fleet Utilization Rate (y/y % change)
Trucks over 500K miles cost nearly $0.16/mile in maintenance
Source: ACT Research, Jefferies.
Source: ATA
Long Trucking Equipment - Regulatory Headwinds to Tighten Truck Capacity
Despite Weak Sentiment in 2016, Steve Believes in “Stronger for Longer” Growth in 2017-18: Stephen noted earlier this year that he believes the market has been too bearish on trucks and expects that regulatory headwinds now and future emissions regulations in 2020 will drive productivity headwinds and tightness for trucking capacity.
Productivity Headwinds to Drive Capacity Crunch: Stephen believes headwinds facing the trucking industry from various government mandates including the Electronic Logging Device, Speed Limiter, and others could remove 5-10% of US trucking capacity over the next 3-5 years, which will need to be replaced with fleet growth. With the tightening of capacity, he expects higher freight rates, higher driver pay and market share gains for large fleets and most importantly higher sales in truck equipment.
Recent Class 8 and 5-7 Orders Suggest Declines in Inventory: September Class 8 orders were inline and continue to suggest both backlog and inventory continue to decline and Class 5-7 orders remained strong. Stephen expects order to continue to accelerate into the end of the year.
Our Top Truck Names: Stephen recommends Navistar (NAV, $35, Buy) and believes should the “stronger for longer” thesis play out, NAV will have the most leverage to stronger industry trends. He also recommends PACCAR (PCAR, $70, Buy), the premium name in the space with strong cash flow and incremental margins. Stephen is well-above consensus on his 2017-2018 estimates for both names due to expected ELD-related capacity tightness.
Class 5-7 Net Orders, YoY % Change
Source: ACT Research
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November 16, 2016
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Seth Recently Upgraded X, CMC and AKS as He Expects Improved US Steel Prices and Company Cost Controls Will Provide Upside Into 2017. Seth believes the Trump Presidential victory will provide additional support to domestic steel prices, as a result of protectionist trade policies driving lower imports.
November US Steel Scrap Prices Expected Up +15-20/t on Improved Export and Constrained Flows, Which Lends Support to Higher Steel Pricing. Seth noted several factors that point to a bottom in the US steel pricing cycle as export demand is expected to remain strong for scrap given the broader inflationary environment in raw material inputs, such as iron ore and coking coal. He also notes US steel prices appear increasingly undervalued relative to global averages following the inflationary China/Euro prices, which has made imports notably less attractive.
Chris Recently Upgraded GLEN, S32 and CNXC to Buy from Hold, as well as AAL and VED to Hold from Underperform on Higher Expectations for Coal Price Inflation Spreading to Other Commodities. Chris recently raised his price forecast for coal, aluminum, copper, zinc and iron ore (shown below) and raised estimates for miners within his coverage, as he believes supply-side coal reform in China will drive inflationary pricing trends in other commodities, a view that is currently underappreciated by the market.
Potential for Infrastructure Investment to Benefit Broader Industrials Group: Both Chris and Seth expect potential increased infrastructure spend from Trump would bode well for companies in their respective groups. CMC, which derives 52% of mix from construction, would likely see upside from increased construction, given that it is the largest end market for US steel (c.40% of demand). FCX would benefit from improved copper demand and other mined commodities.
Change in Chinese Thermal Coal Production (y/y % change)
Source: China National Bureau of Statistics
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November 16, 2016
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Selected Key Immuno-oncology Assets by Company
Key Catalysts for Immuno-oncology Class Evolution, 2016-18
Jeff Believes Combo Therapy is the Next Pivotal Phase of Treatment: Jeff estimates by 2023E, the I/O market will be worth c$37B vs. consensus estimates of $31B.
Competition on the Rise: Jeff is rapidly seeing the development of a wide variety of I/O mechanisms that could potentiate the activity of the PD-1/L1 backbone of treatment, which will significantly alter the competitive landscape. Strong I/O combination program will be the critical factor for success.
Combination of Opdivo/Yervoy in NSCLC Data Demonstrated Improved Efficacy over Monotherapy, Validating I/O Combo Concept: The Opdivo/Yervoy combo validated the concept of I/O combinations in general although the rate of AE’s have elevated and there remains significant room for improvement on efficacy and safety.
Jeff Believes CLTA-4, Chemo-IO, IDO and 4-1BB are the Most Promising Mechanisms of Action in Development: The 2016 ASCO meeting further validated the CTLA-4 mechanism in combination with PD-1 in multiple tumor types and Jeff estimates c$4.1B by 2023E vs. consensus estimates of $2.5B. His preference for the various classes of mechanisms and lead players in the space (chart right).
Conclusion: Jeff sees AZN and Roche as the best positioned pharmaceutical stocks within the I/O combo landscape, with competitive NSCLC data.
Top Pick Pharma and Biotech Stocks with I/O Exposure:
Immuno-Oncology Combo Race Heats Up for Large Cap Pharma and Biotech
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November 16, 2016
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Biotechnology Stocks with Immuno-oncology Leverage
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Analysts Are Expecting Elevated M&A in Certain Groups
Biotechnology & Large Cap Pharma
Brian continues to see M&A as the near-term sector driver for the space and believes the recent persistence of M&A and high premiums highlight the potential for upside for companies with promising pipelines, notably the 6-fold premium paid by AGN for TBRA.
Within his universe he sees ALDR as a top candidate, given their promising ALD403 which is relatively de-risked and has multi-billion dollar potential.
Brian believes there’s potential for GILD to do acquisitions, which he believes will help shift the narrative away from HCV towards other future growth drivers that should help catalyze upside.
Jeff believes a Republican-controlled White House and Congress will work together to repatriate overseas cash for US companies. He expects up to $98B of incremental cash could become available for acquisitions under his large cap pharma coverage, specifically for JNJ, PFE and MRK.
Specialty Pharma
David has already seen part of his M&A thesis for the sector play out this year, with 3 companies from his initial “takeout list” (shown below) acquired and expects to continue to see a stream of small/mid-sized bolt-on M&A in the coming months, especially for the “cash rich/product poor” acquirers seeking higher quality assets.
Key subsectors ripe for continued robust M&A include generic drug companies and therapeutic areas such as CNS and dermatology.
Potential targets on his “Takeout List” include: ACRS (aesthetic and medical dermatology), AKRX (niche generic drugs), PCRX (non-opioid pain management), and SUPN (CNS).
“Takeout List” Consisting of Companies with EV’s Less than $10B
Source: Jefferies, FactSet
Summary of Cash Positions for Large-Cap Pharma Companies
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Analysts Are Expecting Elevated M&A in Certain Groups
Excess Cash (as a % of market cap) Asset Managers
Asset Managers
Dan’s M&A analysis from earlier this year pointed to a pick up in industry consolidation, given declining organic growth prospects, increased regulatory headwinds and plentiful excess cash on balance sheets.
Dan has already started to see the global M&A story play out, with the recent merger of JNS and HGG LN and expects to continue to see further consolidation in the industry.
Dan believes BEN is the most likely to benefit from a large scale acquisition, given its excess cash position and in terms of takeout candidates views WETF as most desirable target, given the company’s breadth of ETF product offering.
Source: Company Data, Jefferies
Managed Care
David conducted a thorough scenario analysis of pending M&A deals within his coverage and the potential options should the DOJ block the impending deals for ANTM/CI and AET/HUM.
Base Case Scenario AET/HUM: David’s base case scenario assigns a 60% probability of the AET/HUM deal closing given that:
1) He believes the DOJ divesture requirements will be surmountable and
2) AET/HUM’s draw of a favorable judge and DOJ’s politically-biased arguments makes for a favorable AET position.
3) His downside scenario assumes shares only trade down ~10%, should the deal break and believes HUM would have a very strong B/S with $2B in parent cash.
Base Case Scenario ANTM/CI: David believes the deal will not close. He expects both will pursue M&A, and CI’s superior competitive positioning will give it the most optionality to either buy WCG, its own stock, or (with the passage of time) Humana.
Decision Tree Diagram
Source: Jefferies, Company Data
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November 16, 2016
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Analysts Are Expecting Elevated M&A in Certain Groups
Forward P/E Multiple for Auto Aftermarket vs. S&P 500
Williams (WMB/WPZ and Enterprise Products Partners (EPD) Merger Analysis – Pro Forma Structure
Auto Aftermarket
Bret believes LAD’s recent acquisition of Carbone Auto Group could be an early sign of more acquisitions to come.
Bret notes that although dealership acquisition pace has slowed in the latter stages of cyclical SAAR recovery, he sees increased opportunity as private dealers may be willing to exit the business in a flat to down SAAR environment and valuation expectations likely to adjust lower.
Bret believes LAD remains the primary consolidator given the dual metro and exclusive market strategy, he sees opportunity to grow their East Coast footprint.
Source: Jefferies Estimates, FactSet
MLP’s
Chris conducted a merger analysis for WMB and EPD and outlined potential pro-forma structure projections (Note: Not formally modeled in Chris’ estimates).
He believes there is strategic logic for the merger and expects a recomposed Board may encourage suitors to re-engage.
Assuming 100% equity swaps and no ops synergies, Chris’ analysis indicates EPD could offer WMB/WPZ 30%/15% respective premiums.
For every ~$100M in ops synergies created, he expects would permit addt’l ~$1.80 in upside to its WMB offer.
Baseline assumptions project the pro-forma structure would trade at 14.3x ’17E EV/EBITDA, a 2 turn premium to peer avg.
Chris recently upgraded NFG to Buy and lifted his SOP- derived PT. He thinks there is potential for M&A should its N. Access pipeline in NY get approved. Chris believes N. Access contributions could significantly advance the company's value proposition and would see NFG trading at 7.2x F18E EV/EBITDA.
Source: Jefferies, Company Data
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Analysts Are Expecting Elevated M&A in Certain Groups
Semi EV/S, Absolute and Relative to S&P 500
Semiconductors
Mark continues to believe semi fundamentals and stocks are benefiting from industry consolidation, as the wave of M&A announcements has remained steady for the group throughout 3Q16.
The consolidation has helped drive better operating leverage and pricing power, thus translating to higher margins and FCF.
Mark expects many of the names within his coverage will continue to benefit from secular growth drivers in Autos (NXPI, NVDA), gaming (AMD, NVDA), Datacenter (IPHI, MTSI, MXIM) and Deep learning (NVDA) plays.
Source: Jefferies, FactSet
Software
John believes low interest rates, increased PE funding and a better understanding of the sustainability and profitability of the software model have increased PE activity in Software in recent years and also increased their willingness to pay higher valuations. He anticipates the consolidation trend will continue for PE and strategic acquirers.
Commentary from Dreamforce indicated CRM will continue to focus its M&A strategy on augmenting CRM submarkets and expanding into new markets, although the N-T focus will be on successful integration execution and accelerating time to market for acquired products.
John views ORCL’s impending acquisition of NetSuite as very strategic, given it allows the company to penetrate the mid-market segment of the Cloud market especially as many peers have struggled to enter this market. He expects the company will begin to grow the consulting business to implement SaaS solutions, a current limitation to SaaS growth.
M&A Deal Activity in Software/Tech to Set Record This Year
Source: Factset Research, Russell Investment Group
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Analysts Are Expecting Elevated M&A in Certain Groups
Telecommunications
M&A remains a key theme in Telco/Cable as companies look to diversify and gain scale, with consolidation in wireless and legacy wireline at the fore-front.
Cable’s Wireless Aspirations Remain Early. In recent months, Charter and Comcast have both indicated intent to get into wireless. Both companies have activated their Verizon MVNOs, however, Comcast appears further along in testing. We believe the strategy will focus on bundling and cross selling (quad play), leveraging Wi-Fi networks as a key advantage. Acquisition of a wireless carrier could accelerate the wireless strategy, with T-Mobile the likely candidate.
Sprint/T-Mobile an Unlikely Pair. To us, T-Mobile has several logical acquirers (Cable, DISH) yet scale advantages have kept a Sprint combination on the table. Given Sprint’s high leverage and distressed nature, we see a deal as highly unlikely.
DISH M&A Probability Low. While many believe a transaction is necessary to realize DISH’s spectrum value, we don’t see any realistic M&A transaction on the horizon. We believe the most likely outcome will be a leasing deal with one or more of the big carriers.
Legacy Wireline Consolidation Should Drive Scale. With the recently announced CTL/LVLT transaction, we would not be surprised to see further transactions in the traditional wireline or fiber/enterprise spaces; meaningful synergies and scale could accelerate stabilization in legacy wireline businesses for names including FTR, WIN, and CNSL, among others.
Diversifying Wireless with Content/Video. AT&T’s recent acquisition of Time Warner Entertainment helps diversify the revenue base while hedging against the commoditization of distribution platforms. While the pending transaction inserts regulatory uncertainty, the prospects of marrying content with distribution provides the opportunity for better growth and innovative programming. Meanwhile, VZ’s video strategy is less certain (i.e., AOL, Yahoo) however, we expect the company to remain acquisitive focusing on millennial content.
CenturyLink and Level 3 Merger Model (In Millions USD, Except Per Share)
Source: Company Data, Jefferies estimates
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Domestic over foreign - if dollar appreciates, better for domestic…
…And if the US economy shows signs of strength, also good for domestic stocks
Source: FactSet; Russell Investment Group; Jefferies
Source: FactSet; Russell Investment Group; Jefferies
Domestic over Foreign: With better growth in the US than globally and the potential for higher rates in December, Equity Strategist Steven DeSanctis expects dollar appreciation will favor domestic over foreign names. Ward McCarthy, Fixed Income Economist, believes GDP will pick up in the second half of the year, with 3Q growth about 2.8%. Domestic names tend to outperform with the correlation between relative performance and rolling GDP standing at 0.30. (chart right)
Relative Valuations Are Still Very Attractive for Russell 2000 Growth over Value: Since 2012, growth has consistently delivered better sales and earnings than value and he expects this trend to continue into the second half of the year. Growth tends to perform better when the dollar appreciates and Steven expects M&A activity to continue in the Tech and Healthcare space, also benefiting growth names. Steven’s preference for growth over value favors IWO over IWM.
Preference for Quality and Size: Highest ROE names are significantly cheaper than the low ROE stocks and tend to perform well when volatility increases and in lower return years, highest ROE names beat the lowest by an average of 12.7% vs. high return years when they lag by 2.1%. Given Steven’s more cautious outlook overall, stick with larger small caps.
Conclusion: Steven reiterates that his positioning remains focused on keeping exposure limited to domestic over foreign names with a stronger US economy and expectation for dollar appreciation and prefers SMID cap names with less than 20% foreign revenue exposure. In terms of sector preference, Steven is Overweight Discretionary, Industrials and Tech and Underweight Materials and Utilities.
Growth is Cheaper on All Measures We Track For the Russell 20000
Long Domestic over Foreign, Long Growth over Value
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Jefferies Thematic Trade Ideas – Company Comparison Table
Ticker Company Name Market Cap
($M) Analyst Rating Price Target Current Price C17 Jef EPS
C17 Cons. EPS
C17 Jef P/E
RRC Range Resources Corporation 7,906 Jonathan D. Wolff Buy 50 31.99 0.38 0.44 88.45 RICE Rice Energy Inc. 4,483 Jonathan D. Wolff Buy 32 22.13 0.68 0.29 33.82 GPOR Gulfport Energy Corporation 2,992 Jonathan D. Wolff Buy 35 23.87 0.93 0.96 26.48 ATVI Activision Blizzard, Inc. 29,290 Brian P. Fitzgerald Buy 55 39.41 2.04 2.22 18.52 NVDA NVIDIA Corporation 47,064 Mark Lipacis Buy 95 87.97 2.47 2.65 33.86 AMD Advanced Micro Devices, Inc. 6,196 Mark Lipacis Buy 9 6.69 0.12 0.03 56.58 EA Electronic Arts Inc. 23,371 Brian P. Fitzgerald Buy 105 77.45 4.10 4.17 18.63 TXRH Texas Roadhouse, Inc. 3,178 Andy Barish Underperform 37 45.06 1.93 2.00 23.91 CMG Chipotle Mexican Grill, Inc. 11,495 Andy Barish Underperform 300 397.08 8.01 9.42 51.71 COH Coach, Inc. 10,369 Randal J. Konik Buy 53 36.99 2.18 2.15 17.42 URBN Urban Outfitters, Inc. 4,439 Randal J. Konik Buy 45 37.87 2.34 2.26 16.77 AEO American Eagle Outfitters, Inc. 3,324 Randal J. Konik Buy 25 18.29 1.50 1.41 12.24 FL Foot Locker, Inc. 9,531 Randal J. Konik Buy 80 71.53 5.33 5.25 13.41 KORS Michael Kors Holdings Ltd 8,770 Randal J. Konik Buy 75 49.70 5.00 4.58 9.43 BA Boeing Company 91,662 Howard A. Rubel Buy 165 148.52 9.45 9.34 15.87 NAV Navistar International 2,195 Stephen Volkmann Buy 35 26.89 0.80 0.59 34.35 PCAR PACCAR Inc 20,741 Stephen Volkmann Buy 70 59.17 4.00 3.49 14.89 AZN-LON AstraZeneca PLC 54,726 Jeffrey Holford Buy 56 43.26 3.24 3.18 13.57 ROG-SWX Roche Holding Ltd Genusssch. 162,102 Jeffrey Holford Buy 270 234.50 15.20 15.77 15.36 CELG Celgene Corporation 92,587 Brian Abrahams Buy 140 119.45 7.04 7.09 17.15 INCY Incyte Corporation 19,688 Brian Abrahams Buy 109 104.51 1.44 1.49 72.81 IMDZ Immune Design Corp. 211 Brian Abrahams Buy 15 8.30 -2.55 -2.56 #N/A MRUS Merus N.V. 268 Brian Abrahams Buy 21 17.40 -2.06 -2.03 #N/A OMED OncoMed Pharmaceuticals, Inc. 378 Brian Abrahams Buy 15 10.19 0.52 -1.44 19.33 ADXS Advaxis, Inc. 403 Biren Amin Buy 24 10.12 -1.71 -1.76 #N/A AGEN Agenus Inc. 468 Biren Amin Buy 7 5.37 -1.33 -1.26 #N/A KITE Kite Pharma, Inc. 2,569 Biren Amin Buy 72 51.50 -7.27 -6.64 #N/A ALDR Alder Biopharmaceuticals, Inc. 1,617 Brian Abrahams Buy 57 32.15 -2.62 -3.63 #N/A GILD Gilead Sciences, Inc. 100,680 Brian Abrahams Buy 91 76.42 9.99 10.82 7.68 JNJ Johnson & Johnson 322,301 Jeffrey Holford Hold 119 118.47 7.06 7.14 16.52 PFE Pfizer Inc. 197,768 Jeffrey Holford Hold 34 32.59 2.59 2.61 12.50 MRK Merck & Co., Inc. 176,319 Jeffrey Holford Hold 59 63.95 4.14 3.88 15.35 ACRS Aclaris Therapeutics, Inc. 486 David Steinberg Buy 29 22.70 -2.92 -3.09 #N/A AKRX Akorn, Inc. 2,778 David Steinberg Buy 24 22.18 2.46 2.26 9.33 PCRX Pacira Pharmaceuticals, Inc. 1,376 David Steinberg Buy 53 36.80 1.59 1.00 23.55 SUPN Supernus Pharmaceuticals, Inc. 1,069 David Steinberg Buy 28 21.60 1.01 1.44 21.39 BEN Franklin Resources, Inc. 21,227 Daniel T. Fannon Hold 36 37.22 2.80 2.69 13.83 WETF WisdomTree Investments, Inc. 1,243 Surinder Thind Buy 12 9.11 0.25 0.25 37.56 AET Aetna Inc. 41,855 David Windley Hold 125 119.28 8.53 8.76 14.53 HUM Humana Inc. 28,805 David Windley Buy 230 193.19 10.97 10.80 18.13
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Jefferies Thematic Trade Ideas – Company Comparison Table
Ticker Company Name Market Cap
($M) Analyst Rating Price Target Current Price C17 Jef EPS
C17 Cons. EPS
C17 Jef P/E
ANTM Anthem, Inc. 35,216 David Windley Hold 138 133.68 11.30 11.55 12.27 CI Cigna Corporation 34,318 David Windley Buy 149 133.67 9.60 9.57 14.18 LAD Lithia Motors, Inc. Class A 2,098 Bret Jordan Buy 115 83.34 8.40 8.27 10.35 WMB Williams Companies, Inc. 22,600 Chris Sighinolfi Buy 35 30.10 1.02 1.10 29.55 ETE Energy Transfer Equity, L.P. 17,788 Chris Sighinolfi Buy 20 16.99 1.14 1.31 14.76 NFG National Fuel Gas Company 4,353 Chris Sighinolfi Buy 67 51.14 3.08 3.00 16.77 NXPI NXP Semiconductors NV 22,560 Mark Lipacis Hold 110 97.73 7.11 7.04 13.61 NVDA NVIDIA Corporation 47,064 Mark Lipacis Buy 95 87.97 2.47 2.65 33.86 IPHI Inphi Corporation 1,761 Mark Lipacis Buy 45 42.73 1.84 1.85 23.15 MTSI MACOM Technology Solutions 2,188 Mark Lipacis Buy 42 40.78 2.75 2.63 14.84 MXIM Maxim Integrated Products, Inc. 11,031 Mark Lipacis Buy 45 38.94 1.98 1.95 19.64 CRM salesforce.com, inc. 50,654 John DiFucci Hold 80 74.59 1.21 1.27 60.13 ORCL Oracle Corporation 161,968 John DiFucci Buy 51 39.45 2.84 2.87 13.84 DISH DISH Network Corporation 25,833 Mike McCormack Buy 80 55.55 2.57 2.62 21.00 CMCSA Comcast Corporation Class A 159,028 Mike McCormack Buy 77 66.46 3.71 3.77 18.14 CTL CenturyLink, Inc. 13,011 Mike McCormack Underperform 20 23.80 2.40 2.28 10.13 LVLT Level 3 Communications, Inc. 19,292 Scott Goldman Hold 55 53.60 1.77 1.90 30.57 T AT&T Inc. 224,208 Mike McCormack Buy 48 36.51 2.94 2.97 12.29 VZ Verizon Communications Inc. 190,338 Mike McCormack Hold 53 46.69 4.00 4.02 11.55 TWX Time Warner Inc. 66,934 John Janedis Buy 105 86.80 5.73 5.94 15.15 Source: FactSet, Jefferies
Prices as of November 15, 2016
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Key Targets and Forecasts
Jefferies Global Macro Outlook
Ward McCarthy – Chief US Economist:.
Ward’s GDP forecast for 2017 is 2.4%
Ward forecasts one more rate hike in 2016 and two rate hikes per year in 2017-2018
Steven DeSanctis – US Equity Strategist
Steven is cautious on small caps given that absolute valuations trade above the one – standard deviation line and earnings growth has been weak.
Steven believes there are a number of upcoming events (Italian referendum, Brexit, etc.) which could elevate the VIX index to the 15 to 20 range as opposed to the 12 to 15 range and this tends to hurt small-cap performance.
David Owen – Chief European Economist
EMEA Outlook: David expects 2017 will see the UK triggering Article 50 to start the tortuous process of negotiating its exit from the EU, just before elections in France and then Germany, and at more or less the same time that real incomes are squeezed in the UK by a significant pick-up in inflation.
He expects the ECB will see more of the same, with QE being extended out beyond March 2017, in the hope that inflation in the euro area eventually picks up. Despite repeated calls for there to be a fiscal response in countries like Germany, the ECB remains the only game in town, with Brexit further extending out this period of abnormally low rates.
In the UK, there is likely to be some increase in infrastructure spending, with perhaps more of a focus at the BoE on its corporate bond buying program.
Sean Darby – Chief Global Equity Strategist:
US Outlook: Sean expects 3 themes will dominate 4Q16 performance: 1) the US Election, 2) Further rotation in market as money moves away from the ‘reach for yield’ into inflation hedges and stocks offering pricing power, and 3) Earnings optimism spurred by a resynchronization of emerging markets growth.
China Outlook: Sean notes that following China's surprise 'devaluation' of the RMB in Aug ‘15 and subsequent market angst, the economy has provided solid economic numbers while the Chinese currency has silently 'depreciated'. This has helped underwrite emerging market growth while providing a benevolent tailwind of inflation.
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Analyst Certification:I, Jefferies Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Brian Abrahams, M.D., certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Laurence Alexander, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Biren Amin, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Andy Barish, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Daniel Binder, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brandon Couillard, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Anthony C. Crowdell, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Sean Darby, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Raj Denhoy, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Steven G. DeSanctis, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, John DiFucci, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Sean Dodge, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Daniel T. Fannon, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brian Fitzgerald, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Corey Goldman, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Scott Goldman, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Kevin Grundy, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Casey Haire, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brad Handler, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Hecht, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.
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I, Jeffrey Holford, PhD, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Akshay Jagdale, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Janedis, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Bret Jordan, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Randal J. Konik, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). 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Notter, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Howard A. Rubel, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Christopher Sighinolfi, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Alexander Slagle, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, David Steinberg, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). 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I, Eun K. Yang, Ph.D., certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Sean Darby is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Christopher LaFemina, CFA is employed by Jefferies LLC, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.
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Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.
Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.
Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.
Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial
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and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report• A.O. Smith Corporation (AOS: $47.53, BUY)• AbbVie (ABBV: $62.87, BUY)• Abiomed (ABMD: $111.59, BUY)• Aclaris Therapeutics, Inc. (ACRS: $23.43, BUY)• Activision Blizzard, Inc. (ATVI: $38.53, BUY)• Advance Auto Parts, Inc. (AAP: $164.33, HOLD)• Advanced Micro Devices, Inc. (AMD: $6.97, BUY)• Advaxis, Inc. (ADXS: $10.03, BUY)• Aetna Inc. (AET: $123.59, HOLD)• Affiliated Managers Group (AMG: $142.78, BUY)• Affimed N.V. (AFMD: $2.50, HOLD)• Agenus (AGEN: $5.86, BUY)• Agilent Technologies (A: $45.40, BUY)• Airbus Group NV (AIR FP: €56.47, BUY)• Akorn (AKRX: $23.27, BUY)• AK Steel Holding Corp. (AKS: $8.07, BUY)• Alder Biopharmaceuticals, Inc. (ALDR: $32.95, BUY)• Alkermes, Inc. (ALKS: $59.40, BUY)• AllianceBernstein Holding L.P. (AB: $23.30, HOLD)• Ally Financial, Inc. (ALLY: $19.21, BUY)• Alphabet, Inc. (GOOGL: $775.16, BUY)• Amazon.com, Inc (AMZN: $743.24, BUY)• American Eagle Outfitters, Inc. (AEO: $18.14, BUY)• American Express Co. (AXP: $72.47, HOLD)• Amgen, Inc. (AMGN: $147.06, BUY)• AmSurg Corporation (AMSG: $65.32, BUY)• Anglo American (AAL LN: p1,096.50, HOLD)• Anthem (ANTM: $138.42, HOLD)• Arctic Cat Inc. (ACAT: $15.01, BUY)• ARRIS International Plc (ARRS: $29.05, BUY)• Artisan Partners Asset Management, Inc. (APAM: $27.95, HOLD)• AstraZeneca PLC (AZN LN: p4,361.50, BUY)• AT&T Inc. (T: $36.77, BUY)• Ball Corporation (BLL: $76.39, BUY)• Bank of America Corp. (BAC: $20.16, BUY)• BB&T Corporation (BBT: $42.98, HOLD)• Bellicum Pharmaceuticals, Inc. (BLCM: $22.32, BUY)• BHP Billiton (BBL: $32.05, BUY)• Biogen Inc. (BIIB: $322.58, HOLD)• BlackRock, Inc. (BLK: $372.15, HOLD)• Bluebird Bio, Inc. (BLUE: $63.60, BUY)• Bristol-Myers Squibb (BMY: $56.69, HOLD)• Broadsoft, Inc. (BSFT: $41.60, BUY)• Bruker Corporation (BRKR: $23.06, BUY)• Capital One Financial Corporation (COF: $82.15, HOLD)• Caterpillar (CAT: $94.44, HOLD)• Celanese Corporation (CE: $78.68, BUY)• Celgene Corporation (CELG: $120.91, BUY)• Celldex Therapeutics, Inc. (CLDX: $4.77, HOLD)• Cellectis S.A. (CLLS: $18.74, BUY)• CenturyLink (CTL: $24.72, UNDERPERFORM)• Charter Communications, Inc. (CHTR: $260.20, HOLD)• Chipotle Mexican Grill (CMG: $400.00, UNDERPERFORM)• Church & Dwight Co, Inc. (CHD: $44.57, BUY)• Cigna Corp. (CI: $137.80, BUY)• Cisco Systems, Inc. (CSCO: $31.70, BUY)• Citizens Financial Group, Inc. (CFG: $30.94, HOLD)• CNX Coal Resources LP (CNXC: $20.60, BUY)• Coach, Inc. (COH: $37.44, BUY)
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• Comcast Corporation (CMCSA: $66.98, BUY)• Commercial Metals Co. (CMC: $21.52, BUY)• Computer Sciences Corporation (CSC: $61.18, BUY)• Conagra Brands, Inc. (CAG: $35.82, BUY)• Consolidated Communications Holdings Inc. (CNSL: $26.77, HOLD)• Core-Mark Holding Co., Inc (CORE: $35.60, HOLD)• Danaher Corp. (DHR: $79.63, BUY)• Discover Financial Services (DFS: $66.33, BUY)• Dish Network Corp. (DISH: $54.80, BUY)• Dollar General Corporation (DG: $76.85, HOLD)• Dollar Tree Inc. (DLTR: $79.17, HOLD)• Dow Chemical (DOW: $53.17, HOLD)• DuPont (DD: $68.64, HOLD)• Eaton Vance (EV: $40.65, HOLD)• Edwards Lifesciences Corporation (EW: $88.91, BUY)• Electronic Arts Inc. (EA: $77.62, BUY)• Eli Lilly & Co. (LLY: $77.32, BUY)• Encana Corp. (ECA: $11.14, BUY)• Energy Transfer Equity, L.P. (ETE: $16.86, BUY)• Enterprise Products Partners, L.P. (EPD: $25.59, BUY)• Facebook, Inc. (FB: $117.20, BUY)• Federated Investors, Inc. (FII: $28.30, BUY)• Fiesta Restaurant Group, Inc. (FRGI: $28.80, HOLD)• Fifth Third Bancorp (FITB: $25.67, HOLD)• FirstEnergy Corp. (FE: $32.09, HOLD)• First Quantum (FM CN: C$13.90, BUY)• Five Prime Therapeutics, Inc. (FPRX: $58.53, BUY)• Foot Locker, Inc. (FL: $70.06, BUY)• Ford Motor Co. (F: $12.04, UNDERPERFORM)• Fox Factory Holding Corp. (FOXF: $23.30, BUY)• Franklin Resources Inc. (BEN: $38.91, HOLD)• Freeport-McMoRan (FCX: $13.99, BUY)• Frontier Communications Corporation (FTR: $3.30, BUY)• General Dynamics Corp. (GD: $168.02, BUY)• General Motors Company (GM: $33.43, HOLD)• Gilead Sciences, Inc. (GILD: $76.35, BUY)• GlaxoSmithKline Plc (GSK LN: p1,534.50, BUY)• Glencore (GLEN LN: p267.40, BUY)• Gulfport Energy Corp. (GPOR: $25.39, BUY)• Hain Celestial (HAIN: $36.00, BUY)• Halliburton Company (HAL: $49.76, BUY)• Henderson Group (HGG LN: p244.50, HOLD)• Hewlett Packard Enterprise Company (HPE: $23.41, BUY)• Humana Inc. (HUM: $198.82, BUY)• Immune Design (IMDZ: $7.90, BUY)• Incyte Corporation (INCY: $103.16, BUY)• Indivior PLC (INDV LN: p346.90, BUY)• Ingersoll-Rand Plc (IR: $75.92, BUY)• Inphi Corporation (IPHI: $43.39, BUY)• Intercontinental Exchange (ICE: $55.50, BUY)• Invesco Ltd. (IVZ: $32.31, BUY)• Janus Capital Group, Inc. (JNS: $14.09, HOLD)• Kennametal Inc. (KMT: $34.63, BUY)• KeyCorp (KEY: $17.09, BUY)• Kite Pharma (KITE: $50.50, BUY)• Legg Mason Inc. (LM: $32.00, BUY)• Level 3 Communications, Inc. (LVLT: $54.88, HOLD)• Lion Biotech (LBIO: $7.45, BUY)• LKQ Corporation (LKQ: $32.90, BUY)• M/A-COM Technology Solutions Holdings, Inc. (MTSI: $41.51, BUY)• M&T Bank Corp (MTB: $138.85, HOLD)• Manitowoc Co. (MTW: $5.00, BUY)• Marathon Petroleum Corp. (MPC: $43.83, BUY)• Maxim Integrated Products, Inc. (MXIM: $39.41, BUY)
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• Merck & Co. (MRK: $63.65, HOLD)• Merus BV (MRUS: $16.99, BUY)• Michael Kors Holdings Ltd. (KORS: $46.90, BUY)• MPLX LP (MPLX: $32.49, BUY)• Murphy USA, Inc. (MUSA: $63.40, BUY)• NantKwest Inc. (NK: $7.50, BUY)• National Fuel Gas Company (NFG: $52.97, BUY)• Navistar International (NAV: $28.42, BUY)• Netflix, Inc. (NFLX: $113.59, UNDERPERFORM)• Newell Brands (NWL: $47.05, BUY)• Newlink Genetics Corp. (NLNK: $13.63, HOLD)• Northwest Pipe Company (NWPX: $16.97, HOLD)• Nucor Corp. (NUE: $60.33, BUY)• NVIDIA Corporation (NVDA: $86.19, BUY)• NXP Semiconductors NV (NXPI: $97.80, HOLD)• OncoMed Pharmaceuticals (OMED: $9.74, BUY)• Oracle Corporation (ORCL: $39.17, BUY)• Oshkosh Corporation (OSK: $67.13, BUY)• Owens Corning (OC: $51.71, BUY)• PACCAR Inc. (PCAR: $60.63, BUY)• Pacira Pharmaceuticals, Inc. (PCRX: $37.60, BUY)• Panera Bread Co. (PNRA: $208.76, BUY)• Paycom Software Inc (PAYC: $41.58, BUY)• PayPal Holdings Inc. (PYPL: $38.94, BUY)• Pentair Ltd. (PNR: $58.90, HOLD)• Pfizer, Inc. (PFE: $32.23, HOLD)• Polaris Industries Inc. (PII: $86.83, HOLD)• PRA Health Sciences (PRAH: $53.87, BUY)• Praxair (PX: $117.08, BUY)• QuintilesIMS (Q: $77.94, HOLD)• Range Resources Corporation (RRC: $34.69, BUY)• Raytheon Company (RTN: $147.29, BUY)• Red Robin Gourmet Burgers Inc. (RRGB: $53.55, HOLD)• Regal Beloit Corporation (RBC: $69.45, HOLD)• Regions Financial Corp. (RF: $13.53, BUY)• Reliance Steel & Aluminum Co. (RS: $79.38, HOLD)• Rice Energy (RICE: $23.96, BUY)• Roche (ROG VX: CHF232.60, BUY)• Ruth's Hospitality Group (RUTH: $16.45, HOLD)• Salesforce.com (CRM: $74.02, HOLD)• Santander Consumer USA Holdings (SC: $13.93, BUY)• Shire (SHPG: $181.04, BUY)• Signature Bank (SBNY: $148.02, BUY)• South32 Limited (S32 LN: p158.75, BUY)• Spectrum Brands Holdings, Inc. (SPB: $130.74, BUY)• Sprint Corporation (S: $7.74, UNDERPERFORM)• State Street Corporation (STT: $79.25, BUY)• Stericycle, Inc. (SRCL: $75.21, BUY)• SunTrust Banks, Inc. (STI: $52.38, HOLD)• Supernus Pharmaceuticals Inc. (SUPN: $24.00, BUY)• SVB Financial Group (SIVB: $150.92, BUY)• Synchrony Financial (SYF: $33.34, BUY)• T. Rowe Price Group (TROW: $73.62, BUY)• Target Corp. (TGT: $71.44, HOLD)• Terex Corporation (TEX: $28.47, HOLD)• Texas Roadhouse, Inc. (TXRH: $46.20, UNDERPERFORM)• The Boeing Company (BA: $148.11, BUY)• The Medicines Company (MDCO: $36.79, BUY)• The PNC Financial Services Group, Inc. (PNC: $108.78, HOLD)• The Williams Companies, Inc. (WMB: $30.97, BUY)• Tiffany & Co. (TIF: $75.96, BUY)• Time Warner Inc. (TWX: $88.67, BUY)• T-Mobile US (TMUS: $53.46, BUY)• Twenty-First Century Fox, Inc. (FOXA: $27.45, BUY)
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• United Rentals, Inc. (URI: $94.14, BUY)• United States Steel (X: $28.53, BUY)• United Therapeutics (UTHR: $135.19, HOLD)• Urban Outfitters, Inc. (URBN: $39.37, BUY)• Vedanta (VED LN: p760.00, HOLD)• Verizon Communications Inc. (VZ: $47.37, HOLD)• Virtus Investment Partners, Inc. (VRTS: $111.50, HOLD)• VMware, Inc. (VMW: $78.25, BUY)• Waddell & Reed Financial, Inc. (WDR: $19.56, HOLD)• Walgreens Boots Alliance (WBA: $83.28, BUY)• Wal-Mart Stores, Inc. (WMT: $71.42, BUY)• Wells Fargo & Company (WFC: $52.59, BUY)• Western Alliance Bancorporation (WAL: $44.66, BUY)• WestRock Company (WRK: $49.65, BUY)• Williams Partners, L.P. (WPZ: $35.50, HOLD)• Windstream Corporation (WIN: $7.07, UNDERPERFORM)• WisdomTree Investments, Inc. (WETF: $9.52, BUY)• Xcel Energy (XEL: $39.25, HOLD)• Yahoo!, Inc. (YHOO: $40.21, HOLD)
For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.
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