1. business and industrial
2. business operations
3. management
4. business process

EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
October 13, 2014
Ratings Revisions
! Dana Holding Corporation
! Johnson Controls, Inc.
Summary
See Risk to 2014/15 Estimates
Summary
FY15 about execution; continued transformation, better demand further out
Summary
Lowering estimates and price target post pre-announce
Summary
Challenged But Don't Expect a Quick Sale
Summary
Expecting 3Q at Low End of Guide Range
Summary
All-oral is here; Pricing in-line, we see cons ests going up over next 6+ months
! Alliance Data Systems
! Cubist Pharmaceuticals
! Tech Supply Chain: 3Q14 Preview,
Summary
3Q/14 Preview: numbers OK, could be noise with FY15 guidance
Summary
3Q:14 preview: Things to think about – Focus on litigation, Cubicin and guidance
Summary
We Highlight APH, TEL, SSYS and FLEX
!
! IGATE Corporation
! Intel Corporation
! Regeneron Pharmaceuticals, Inc
Summary
3Q Preview - NAM Logistics on Center Stage
Summary
Transitional costs on large transformative deals may weigh on margins and EPS
Summary
Q3 Earnings Preview and Cheat Sheet
Summary
3Q:14 preview: DME approval is a good setup; things to think about
Summary
Setting up for a 3Q Meet or Beat
Summary
Incrementally More Positive Following Investor Conference; Reiterate Outperform
Summary
Thoughts post management meeting; well positioned for growth
Summary
Thoughts Post Management Meetings, Reiterate Outperform
Summary
3Q Preview - Keep your Eye on the '17 Prize
Summary
Thoughts Post Meeting With CFO. Maintain OP
Summary
Takeaway from NDR
Summary
3Q:14 preview: Things to think about – Focus on pipeline and guidance
Summary
Building a CF franchise for upside hetero's w/ both '661 option and dual correctors
Price Target Revisions
! Manitowoc Co., Inc.
! Riverbed Technology, Inc.
! Weatherford International
First Glance Notes
! Gilead Sciences
Earnings Preview
Going To Be A Noisy EPS Season
Halliburton Company
Company Comments
! Baker Hughes, Inc.
! DCP Midstream Partners, LP
! Global Payments Inc.
! LDR Holding Corp.
! Schlumberger Limited
! Stratasys, Ltd.
! Synopsys, Inc.
! The Medicines Company
! Vertex Pharmaceuticals Inc.
Industry Comments
! 3Q14 Large-Cap Cardio Earnings
Summary
!
Summary
Preview
Generally Speaking
Islamic State - the problem
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 19.
EQUITY RESEARCH
! H8 Update: Loans up Strongly in First Summary
Week of 4Q
Insurance Observations
!
! Life & Health Insurance
! Machinery: N. America Farm
Summary
For the week of October 10
Summary
A top disability insurance expert weighs in on the business
Summary
September retail sales: High-HP still soft; total tractors up on low-HP, easier comp
!
Summary
Equipment Update
Machinery: September quarter
preview
MLPs Amid Oil Price Weakness
!
! Nexus.One
! Precious Metals & Minerals Weekly
Summary
Volatility until crude settles; distributions secure; analyzing troughs/peaks
Summary
Through October 10, 2014
Summary
Chart of the Week: Squeezing Costs From a Stone
!
! RBC International E&P Daily
! Semiconductors – In search of
Summary
Transformation in the air: Highlights from RBC Airline & Aerospace Investor Day
Summary
LUPE; PRE
Summary
We could be 13% away from pricing in a -2%y/y decline in 2015 revenues
!
Summary
Valuation Tables
RBC Flight Deck
support
US Autos & Auto Parts: 3Q14
Earnings Preview
Investment Strategy Research
! 3Q14 Earnings Preview
Summary
Quantitative Research
! Q-Tips: Highlighting Quantitative
Summary
3Q14 EPS Season - Reaction to EPS Surprise Will Likely Remain Low
Themes
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
2
Ratings Revisions
Dana Holding Corporation(NYSE: DAN; 18.05)
Joseph Spak, CFA (Analyst)
(212) 428-2364; [email protected]
Jacob Hughes (Associate)
(212) 618-5594; [email protected]
Ritapa Ray (Associate)
212 266 4099; [email protected]
Rating:
Price Target:
See Risk to 2014/15 Estimates
52 WEEKS
18OCT13 - 10OCT14
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2014
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A
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MA 40 weeks
Revenue Prev.
6,769.0
6,680.6↓
6,740.6
6,629.1↓
6,987.3
6,817.9↓
7,249.8
2013A
2014E
2015E
2016E
Sector Perform (prev: Outperform)
20.00 ▼ 27.00
Downgrading to Sector Perform seeing risk to 2014/2015 consensus forecasts.
Despite the sell-off in the stock and management's solid execution in the face of
tough markets, owing to soft end-markets, likely negative earnings revisions and
limited near-term catalysts, we prefer to remain on the sidelines for now. Price
target drops to $20 (from $27).
• 2015 EBITDA expectations appear exuberant. As we assess the 2015 outlook for
DAN's end-markets, growth may be muted. We are left believing 2015 consensus
expectations of $811mm are too high and would not be surprised by relatively
flat EBITDA in 2015 vs. our lowered 2014 forecast. This is driven by slower Class
8 growth, still low levels of VZ light vehicle production, not yet counting on a
meaningful snap-back in 2015 for DAN’s off-highway exposure, and flat Ford
Super Duty levels.
All values in USD unless otherwise noted.
Johnson Controls, Inc.(NYSE: JCI; 41.27)
Joseph Spak, CFA (Analyst)
(212) 428-2364; [email protected]
Jacob Hughes (Associate)
(212) 618-5594; [email protected]
Ritapa Ray (Associate)
212 266 4099; [email protected]
52.00
Rating:
Price Target:
FY15 about execution; continued transformation, better demand further out
52 WEEKS
18OCT13 - 10OCT14
50.00
48.00
46.00
44.00
42.00
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2013A
2014E
2015E
2016E
J
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M
Rel. S&P 500
Revenue Prev.
41,410.0
42,981.6↓ 43,032.0
40,680.5↓ 42,131.7
40,081.0↓ 41,909.3
All values in USD unless otherwise noted.
J
Outperform (prev: Top Pick)
49.00 ▼ 61.00
J
A
S
MA 40 weeks
O
We are moving to Outperform from Top Pick as many of the portfolio catalysts
have played out and we see a bit of a lull in the transformation story. At the same
time, end-market growth appears muted. While we still like the story, we don't
see enough near-term upside to justify a Top Pick rating.
• We are moving to Outperform from Top Pick as many of the portfolio catalysts
have played out and we see a bit of lull in the transformation story. At the same
time, end-market growth appears muted. As such, with "normalized earnings"
likely further away than previously believed, we see it as prudent to revise our
approach. While we still like the story, we don't see enough near-term upside to
justify a Top Pick rating. Our price target goes to $49.
• Pruning done; additions a year+ away. We believe JCI has completed Phase 1 of
its portfolio review. Phase 2 of the plan is to grow via a transformative acquisition
(residential HVAC makes a lot of sense). However, management has indicated
that the ideal timing is post FY15.
• Our current FY15 view. As it relates to FY15, in BE organic growth could be flat
to low-single-digits. The ADT acquisition should add ~5% to FY15 BE growth. In
Auto, similar to the rest of our coverage, we modestly tweaked our production
forecast as well as updated our euro assumption (1.25). Meanwhile, we believe
FY15 Power Solutions growth should be similar to FY14 (~6%), but remain below
JCI’s longer-term targets. The net of it is we see FY15 EPS of $3.55. This is below
the Street at $3.70 which likely needs to come down, but we believe the recent
correction has in part accounted for this.
Price Target Revisions
Seth Weber (Analyst)
(212) 618-7545; [email protected]
Manitowoc Co., Inc.(NYSE: MTW; 18.76)
3
Rating:
Price Target:
Daniel Politzer, CFA (Associate)
(212) 905-5811; [email protected]
52 WEEKS
18OCT13 - 10OCT14
32.00
30.00
28.00
26.00
Outperform
27.00 ▼ 33.00
Lowering estimates and price target post pre-announce
Our Outperform rating is primarily based on MTW's exposure to the crane cycle,
which should support significant operating leverage/EPS growth as it occurs. We
also expect improved performance from the foodservice business, where results
have lagged expectations.
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EPS, Ops Diluted Prev. P/E Ops Diluted
2013A
1.41
13.3x
2014E
1.26↓
1.60
14.9x
2015E
1.48↓
1.93
12.6x
2016E
2.15↓
2.70
8.7x
All values in USD unless otherwise noted.
• Disappointing turn, with lower sales and margin for Cranes and Foodservice.
Whereas crane industry trends were known to be subdued, reductions more
severe than expected; meanwhile, Foodservice cuts highlight inconsistent
performance of that business, as MTW’s initiatives/resources committed to the
category have not delivered anticipated/required results.
• New RBC estimates reflect the view that crane orders are stable/MTW not seeing
cancellations, and both segments benefit from aforementioned initiatives. Our
FY14 EPS to $1.26 from $1.60 including Crane revenue and margin of -8% and
7.1%, with Foodservice +3% and 15.1%, respectively. FY15 EPS to $1.48 from
$1.93, including Crane revenue and margin of +3% and 8.5% with Foodservice
+4% and 16.2%, respectively. FY16 EPS of $2.15 assumes crane cycle acceleration
(revenue +15%, margin to 11.1%).
• Price target to $27 from $33. With shares -12.9% on the pre-announcement
(S&P -1.6%), our Outperform rating is primarily based on the view the latest
estimate reductions should have the bar reset to an achievable level, while
an eventual crane cycle (and recently detailed operating improvements/cost
initiatives) support significant operating leverage/EPS growth by 2016.
Riverbed Technology, Inc.(NASDAQ: RVBD; 18.06)
Mark Sue (Analyst)
(212) 428-6491; [email protected]
Ameet Prabhu (Associate)
(212) 618-3330; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 10OCT14
22.00
Sector Perform
18.00 ▼ 20.00
Challenged But Don't Expect a Quick Sale
The WAN Optimization market isn’t growing like it used to and Riverbed’s working
through Opnet integration. While a strategic review is underway, we don't expect
a quick sale as Riverbed works through issues. Until then we're cutting our
estimates; target to $18 or 12x CY16E earnings. Opex cuts may get OMs to 30%
but at the sake of sacrificing its future technology competitiveness.
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EPS, Ops Diluted Prev.
2013A
0.91
2014E
1.15↓
1.16
2015E
1.25↓
1.32
2016E
1.45↓
1.50
A
S
MA 40 weeks
P/E
19.8x
15.7x
14.4x
12.5x
All values in USD unless otherwise noted.
Kurt Hallead (Analyst)
(512) 708-6356; [email protected]
Peter Knerr (Associate)
(512) 708-6384; [email protected]
Robert Pinkard (Analyst)
(512) 708-6339; [email protected]
O
• Little growth in base business. With the latest negative pre-announcement,
Riverbed is now tracking near 5% YoY revenue growth down from its hey days
of 40%. The rate of cuts are starting to slow nonetheless and our CY15 declines
from $1.32 to $1.25 which factors in more opex cuts. Free cashflow is healthy at
~$175M per year which is why activists are pushing for an LBO.
• WAN optimization and ADC weakness. Riverbed highlighted a slowdown in
growth for WAN optimization and ADC segments as the factor driving its lowered
guidance. WAN optimization is a mature market and Riverbed has very high
market share (near 50%) which is why it’s looking to diversify its revenue
base...but its acquisition of Opnet was quite messy and not growing much either.
Weatherford International(NYSE: WFT; 17.59)
Rating:
Price Target:
Sector Perform
25.00 ▼ 28.00
Expecting 3Q at Low End of Guide Range
We think operational execution, consistent EPS delivery & FCF generation are focal
points for investors. On the quarter, we expect key datapoints to include NAM
logistics, disruptions of Iraq ops, and long-term growth targets for Russia.
4
52 WEEKS
18OCT13 - 10OCT14
24.00
Discussion Topics
•
•
•
•
•
22.00
20.00
18.00
16.00
IPO/sale of int'l land rigs
Sale of Production Testing/Fluids businesses
FCF trends
Russia, Iraq & NAM frac sand logistics challenges
Road map to 20% margins by 2016
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EPS, Ops Diluted Prev.
2013A
0.60
2014E
1.13↓
1.16
2015E
1.91↓
1.96
2016E
2.61↓
2.76
A
S
O
MA 40 weeks
P/E
29.3x
15.6x
9.2x
6.7x
All values in USD unless otherwise noted.
First Glance Notes
Gilead Sciences(NASDAQ: GILD; 105.85)
Michael J. Yee (Analyst)
(415) 633-8522; [email protected]
John Chung (Associate)
(415) 633-8620; [email protected]
Adnan Butt (Analyst)
(415) 633-8588; [email protected]
Jeffrey Takimoto (Associate)
(415) 633-8538; [email protected]
108.00
102.00
96.00
90.00
84.00
Rating:
52 WEEKS
18OCT13 - 10OCT14
78.00
72.00
66.00
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All values in USD unless otherwise noted.
J
Outperform
All-oral is here; Pricing in-line, we see cons ests going up over next 6+ months
J
A
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MA 40 weeks
O
• GILD's all-oral "Harvoni" was approved for 12 and 8 weeks at price of $94.5k
(12wks) as expected. We believe the price is very reasonable and attractive to
payors as it is a discount to previous regimens that costs upwards of $100-140k
when combined with IFN or Simeprevir. In fact, numerous abstracts at this
year's AASLD meeting discuss the positive cost-effectiveness of LDV/SOF through
better health outcomes and the benefit of early treatment due to prevention
of future liver complications (as opposed to prioritizing treatment to only pts
with advanced disease). We don't expect insurance to be an issue as well as
payors have better planned their budgets for next yr (See our note 8/1 "GILD:
What did the payors say?"). Also by looking at a single-center example from
AASLD abstract, 58% were prescribed Sof/Sim combo and 84% were approved
for treatment, evenly split between private and gov't insurance.
• Big Picture: We expect GILD to continue higher with this green light as scripts will
bounce-back in Q4 and 2015 HCV estimates are conservative in our view. WW
cons for 2015 is ~$15B (we est. $12B US, 3B ROW) and we think OUS estimates
leave significant room for upside. EU big 5 could be just as big as the US and
based on latest negotiations, EU gov'ts have assigned a very positive rating for
Sovaldi in terms of both cost and effectiveness.
Earnings Preview
Daniel R. Perlin, CFA (Analyst)
(410) 625-6130; [email protected]
Matt Roswell, CFA (Associate)
(410) 625-6131; [email protected]
Alliance Data Systems(NYSE: ADS; 241.31)
Rating:
Price Target:
Outperform
310.00
3Q/14 Preview: numbers OK, could be noise with FY15 guidance
After last quarter’s better-than-expected results, we expect ADS to report roughly
in line with the Street consensus, which is slightly above our estimate. In addition
to the results, we believe that investors are looking for 1) an early read into
FY15 earnings power and 2) further clarification on the rationale behind the
Conversant acquisition.
• Expectations for Q3/14 (September). ADS is scheduled to report Q3/14 earnings
before the market opens on October 16th and will hold a conference call at
5
300.00
290.00
280.00
52 WEEKS
18OCT13 - 10OCT14
270.00
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Revenue
3,641.5
4,319.0
5,335.3
6,066.6
2012A
2013A
2014E
2015E
8:30am the same day. We are forecasting EPS/Revenues of $3.28 / $1.34B,
which is slightly below the Street consensus (~$3.31), but believe our expense
assumptions (mainly in Private Label given receivables build) are the difference.
Company guidance is for $3.25 in EPS and we note that the company has a track
record of modestly exceeding forecasts.
• Recent stock price weakness. ADS’ shares are off ~20% since their 52-week high
set in the middle part of July after reporting better-than-expected Q2/14 EPS,
about 2x the sell-off seen in the S&P 500 over the same time period. We attribute
the stock price weakness to 1) the launch of Apple Pay & its perceived impact on
private-label cards, 2) concerns over Private Label's valuation given a new public
comp, and 3) questions surrounding its recent acquisition.
• First look at FY15 could create noise. We believe that investors are looking
for FY15 guidance that incorporates the current consensus (~$14.60) plus deal
accretion ($0.50). Given management's typical conservatism early in the year, we
expect this number ($15.10) to be at the high-end of the range rather than the
midpoint.
All values in USD unless otherwise noted.
Cubist Pharmaceuticals(NASDAQ: CBST; 63.19)
Adnan Butt (Analyst)
(415) 633-8588; [email protected]
Jeffrey Takimoto (Associate)
(415) 633-8538; [email protected]
Michael J. Yee (Analyst)
(415) 633-8522; [email protected]
John Chung (Associate)
(415) 633-8620; [email protected]
Rating:
Price Target:
Outperform
84.00
3Q:14 preview: Things to think about – Focus on litigation, Cubicin and guidance
52 WEEKS
18OCT13 - 10OCT14
80.00
We expect caution going into the quarter though Cubicin could beat. Shares should
go up with a resolution of the paragraph litigation especially with a trial win. Set up
remains favorable at current levels with commercial execution and positive news
likely to lead to an expansion in valuation multiples.
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EPS, Ops Diluted Prev.
2013A
(0.27)
2014E
0.50
2015E
0.98↓
1.10
2016E
2.83↓
3.20
A
S
MA 40 weeks
P/E
NM
NM
64.5x
22.3x
All values in USD unless otherwise noted.
Amit Daryanani, CFA (Analyst)
(415) 633-8659; [email protected]
Karl Ackerman, CFA (Associate)
(415) 633-8533; [email protected]
Mitch Steves (Associate)
(415) 633-8535; [email protected]
O
• We expect caution going into the quarter, though Cubicin could beat. Shares
should go up with a resolution of the paragraph litigation especially with a trial
win. Set up remains favorable at current levels with commercial execution and
positive news likely to lead to an expansion in valuation multiples.
• 3Q:14 results should be in line to a beat. RBC estimates Cubicin sales of $245M,
in line with consensus (up from $240M). Both IMS and WK point to a beat
though their predictive value has decreased with Cubicin missing in 1Q and 2Q.
We estimate total revenues of $302M vs. consensus of $305M. We expect the
most interesting metrics will be Sivextro sales (Street expectations likely low
given recent 2Q launch; RBC at $3.5M) followed by Cubicin and Dificid growth
(Street likely neutral given prior misses). We estimate non-GAAP EPS is $0.31 vs.
consensus at $0.36.
• 2014 Cubicin guidance could be lowered. RBC estimates Cubicin sales of $953M
below consensus of $962M both already below guidance of $970-$1,020M. Total
revenue guidance of $1,190-1,275M likely stays (RBC at $1,186M; consensus at
$1,195M). We believe specific Sivextro guidance is unlikely. Expense guidance
should also be unchanged as EU approvals for Sivextro and toltaz are 2015 events.
RBC and consensus 2015E revenue ($1.35B and $1.4B) and non-GAAP EPS ($2.17
and $2.33) estimates assume Cubicin remains on patent.
Tech Supply Chain: 3Q14 Preview, Going To Be A Noisy EPS
Season
Tech Supply Chain: 3Q14 Preview, Going To Be A Noisy EPS Season
• All You Need to Know: Our checks point toward a cautiously stable demand
environment in Sept-qtr; however, we think Q4:14 guides could be sub-seasonal
given a deceleration in demand momentum in September/early October (e.g.,
recent negative pre-announcements (MCHP, JNPR), FX headwinds and concerns
on slowdown in China/Europe). On an end-market basis, demand has been
healthy in mobile devices (AAPL centric), PCs and N. American automotive.
6
Conversely, areas of weakness or those that have begun to lose momentum
include networking, telecom and industrial. Heading into this earnings season
we favor APH, TEL, SSYS and FLEX.
Halliburton Company(NYSE: HAL; 54.29)
Kurt Hallead (Analyst)
(512) 708-6356; [email protected]
Robert Pinkard (Analyst)
(512) 708-6339; [email protected]
Peter Knerr (Associate)
(512) 708-6384; [email protected]
Rating:
Price Target:
Outperform
80.00
3Q Preview - NAM Logistics on Center Stage
52 WEEKS
18OCT13 - 10OCT14
70.00
65.00
60.00
55.00
Crude weakness and geopolitical turmoil have put pressure on the diversified
services group since 2Q earnings. Even in a $90 WTI environment for 2015, we
think US pressure pumping fundamentals will continue to improve and HAL can
overcome logistical challenges. Internationally, growth in Latin America could
offset the headwinds in Russia and Iraq.
NAM Logistics Challenges Likely Only a Near Term Drag
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EPS, Ops Diluted Prev.
2013A
3.10
2014E
4.04↑
4.03
2015E
5.20
2016E
6.20
P/E
17.5x
13.4x
10.4x
8.8x
All values in USD unless otherwise noted.
• Due to increased demand for proppant, supply-chain bottlenecks are occurring
on major railways, primarily in the Bakken and the Niobrara, where HAL has a
strong market share position (~80% Niobrara, 35% Bakken).
• In the long run, increasing activity and service intensity is a positive given
HAL's market position as a leader in US frac services. However, near-term
transportation and logistics issues are providing a drag on margin progression.
• Looking into 4Q and 2015, cost recovery is in process, higher revenues are
expected to offset the margin drag, and we expect pricing power as frac contracts
roll through year-end.
Int'l Shifting Landscape and Growth Rates
• Eastern Hemisphere growth rates may slow while Latin America accelerates. Net
effect could be a wash.
• Heading into '15, we could see a downshift in Eastern Hemisphere revenue
growth rates from +10% to high single digits. The shift relates to Russia and Iraq.
• LAM could be the highest growth geo-market in 2015. In Mexico, the mega
tender projects have started and should be at full run rate exiting 2014. In Brazil,
HAL's recent project win is expected to be significantly accretive to overall LAM
margins.
IGATE Corporation(NASDAQ: IGTE; 34.49)
Daniel R. Perlin, CFA (Analyst)
(410) 625-6130; [email protected]
Matt Roswell, CFA (Associate)
(410) 625-6131; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 10OCT14
42.00
Outperform
45.00
Transitional costs on large transformative deals may weigh on margins and EPS
We expect IGTE to report in line with our EPS estimate of $0.50, which is
currently below the Street consensus given the margin impact of the ramping
of large transformative deals. Any weakness on the print would represent an
attractive entry point on the shares, in our opinion, as these near term margin
pressures should abate as the contracts are implemented and revenues ramp.
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EPS, Adj Diluted
2012A
1.57
2013A
1.88
2014E
2.00
2015E
2.46
F
M
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2014
M
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A
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P/AEPS
22.0x
18.3x
17.2x
14.0x
All values in USD unless otherwise noted.
O
• Q3/14 Earnings Preview (September). IGTE is scheduled to report Q3/14
earnings on October 15th before the market opens and will hold a conference call
at 8:00am. We expect the company to report in line with our recently (August
2014) reduced EPS estimate of $0.50 on revenues of $322 mm (up 10% y/y). Our
EPS estimate is currently below the Street (~$0.52) and reflective of the costs
associated with the ramping of large transformative contracts. Key areas to watch
for in the quarter include: 1) sales & implementation pipeline, 2) margin pressure
from contract ramps, and 3) commentary around pricing & demand.
• Margins are the swing factor. At an investor presentation in August, IGTE’s
management announced that it had won a series of new long-term larger deals.
At the time, we reduced our gross and operating margin estimates to reflect the
transitional cost associated with ramping these new deals. The nature and timing
7
of these costs, however, may cause additional volatility in margins for Q3/14,
where our estimates call for gross margins of 35% (down 160 bps sequentially)
and operating margins of 17% (down 150 bps).
Intel Corporation(NASDAQ: INTC; 31.91)
Doug Freedman (Analyst)
(415) 633-8631; [email protected]
Jeriel Ong (Associate)
(415) 633-8559; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 10OCT14
Sector Perform
34.00
Q3 Earnings Preview and Cheat Sheet
We see some upside to Q4 GMs as Broadwell startup charges push out, and
combined with a potential R&D tax credit, Q4 could be a strong guide for INTC.
We continue to view shares as expensive on P/FCF ex-cash basis as INTC trades at
a 17.4x vs. the median of companies in the SOX at 13.4x. Reiterate SP and $34 PT.
34.00
32.00
30.00
28.00
26.00
24.00
300000
200000
100000
O
2013
N
D
J
F
Close
M
A
2014
M
J
J
Rel. S&P 500
A
S
O
MA 40 weeks
Revenue
52.7
55.6
55.9
57.6
2013A
2014E
2015E
2016E
All values in USD unless otherwise noted.
• See SepQ Revenue Beat: The midpoint of revenue/GM/OpEx guidance is $14.4bil
(+4.4% Q/Q)/66.1%/$4.9bil vs. our $14.5bil (+5.0% Q/Q)/65.9%/$4.9bil and
Street $14.4bil (+4.4% Q/Q)/66.1%/$4.9bil. As such, we believe the implied EPS
guided midpoint is ~$0.65 vs. our and Street $0.65. INTC’s 10-year seasonal SepQ
revenue increase is +8.0% Q/Q.
• With Strong DecQ Guide, But Below Seasonal: We believe INTC could guide
below its 10-yr DecQ seasonal average of +2.9% (RBC/-0.5% and Street/+0.2%),
and below consensus expectations, driven by a slower ramp of Broadwell,
offset by a continued enterprise refresh cycle and more stabilized trends in
the PC market, as tablet cannibalization is slowing. We expect revenue/GM/EPS
of $14.5bil (-0.5% Q/Q)/61.7%/$0.67 and Street $14.5bil (+0.2% Q/Q)/62.5%/
$0.62.
Regeneron Pharmaceuticals, Inc(NASDAQ: REGN; 343.51)
Adnan Butt (Analyst)
(415) 633-8588; [email protected]
Jeffrey Takimoto (Associate)
(415) 633-8538; [email protected]
John Chung (Associate)
(415) 633-8620; [email protected]
Michael J. Yee (Analyst)
(415) 633-8522; [email protected]
Rating:
Price Target:
Outperform
373.00
3Q:14 preview: DME approval is a good setup; things to think about
52 WEEKS
18OCT13 - 10OCT14
360.00
345.00
Eylea sales should be solid given DME approval and launch for 3Q and 4Q.
With alirocumab approval expected in 2015 the focus should shift more to nonEylea assets, a number of which will have key data in 2014 and 2015, including
alirocumab, dupilumab and earlier stage assets. We remain buyers of REGN shares
on any pullbacks.
330.00
315.00
300.00
285.00
270.00
7500
6000
4500
3000
1500
O
2013
N
D
Close
2013A
2014E
2015E
2016E
J
F
M
A
2014
M
Rel. S&P 500
Revenue Prev.
2,104.7
2,797.1↑
2,786.7
3,658.4↓
3,663.9
4,172.6
All values in USD unless otherwise noted.
Company Comments
J
J
A
S
MA 40 weeks
O
• Our view is Eylea sales should be solid given DME approval and launch for 3Q
and 4Q. With alirocumab approval expected in 2015 the focus should shift more
to non-Eylea assets a number of which will have key data in 2014 and 2015,
including alirocumab, dupilumab and earlier stage assets. We remain buyers of
REGN shares on any pullbacks.
• 3Q:14 Eylea could beat; 4Q could be strong too. RBC is at $458M (consensus
at $466M). Both are up solidly from $415M in 2Q given the DME approval (US
on Jul. 29th; EU on Aug. 11th). We believe chances of a beat are high in 3Q and
4Q:14 since Lucentis has been on the market for DME for nearly 2 years, there
should be a pool of hard-to-treat patients. We forecast ex-US sales of $278M. We
estimate total 3Q revenues of $741M and non-GAAP EPS of $2.12 vs. consensus
of $731M and $2.56, respectively.
• 2014 Eylea guidance range could be tightened. The low end of $1.7-1.8B appears
achievable, barring inventory drawdowns, which we believe is unlikely. Even if
guidance is not increased the lower end could be raised. RBC is at $1.74B and
consensus at $1.77B. Our total revenues are $2.8B, in-line with consensus. Our
non-GAAP EPS estimate is $8.60 vs. consensus at $10.21. For 2015E, RBC Eylea
forecast is $2.33B while consensus is $2.3B.
8
Baker Hughes, Inc.(NYSE: BHI; 56.68)
Kurt Hallead (Analyst)
(512) 708-6356; [email protected]
Peter Knerr (Associate)
(512) 708-6384; [email protected]
Robert Pinkard (Analyst)
(512) 708-6339; [email protected]
75.00
Rating:
Price Target:
Sector Perform
80.00
Setting up for a 3Q Meet or Beat
52 WEEKS
18OCT13 - 10OCT14
70.00
65.00
60.00
We think investors will be focused on NAM logistics issues and margin progression
heading into 3Q. On the international side, we expect key datapoints will include
ECA growth rates post Russia sanctions, activity levels in the Mid East and
new revenue growth targets in Latam with BHI's recent market share gain from
Petrobras' re-tender.
55.00
50.00
30000
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10000
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2013
N
D
J
F
Close
M
A
2014
M
J
J
Rel. S&P 500
EPS, Ops Diluted Prev.
2013A
2.78
2014E
4.12↓
4.13
2015E
5.45
2016E
6.75↓
6.77
A
S
O
MA 40 weeks
P/E
20.4x
13.8x
10.4x
8.4x
•
•
•
•
•
•
Discussion Topics
NAM margin progression? 15% exiting '14; 17% by '16
Frac sand logistics, 24-7 ops and pricing
Russia sanction impact
Brazil drilling services contract
Spending cuts in Norway
All values in USD unless otherwise noted.
DCP Midstream Partners, LP(NYSE: DPM; 52.32)
Elvira Scotto, CFA (Analyst)
(212) 905-5957; [email protected]
TJ Schultz, CFA (Analyst)
(512) 708-6385; [email protected]
Robert Muller, CFA (Associate)
(212) 905-5816; [email protected]
Ashok Subramanian (Associate)
(212) 618-3304; [email protected]
52 WEEKS
Rating:
Price Target:
Outperform
59.00
Incrementally More Positive Following Investor Conference; Reiterate
Outperform
18OCT13 - 10OCT14
56.00
54.00
52.00
50.00
We left DPM's Analyst Conference incrementally more positive. While dropdown
acquisitions should continue to drive growth at DPM, we are favorable on DPM's
expanded organic growth targets in 2015 and 2016 as we expect organic growth
projects to generate attractive returns. We believe DPM remains well positioned
to deliver highly visible distribution growth and we reiterate our Outperform rating
and $59 price target.
48.00
46.00
10000
8000
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4000
2000
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2013
N
D
Close
2012A
2013A
2014E
2015E
J
F
M
A
2014
M
J
J
Rel. S&P 500
DCF/unit Prev.
2.62
3.19
3.21↑
3.04
3.70↑
3.42
All values in USD unless otherwise noted.
A
S
MA 40 weeks
P/DCF
20.0x
16.4x
16.3x
14.1x
O
• Expanding its organic growth potential: In 2015 and 2016, DPM intends to
increase its organic growth target to $750MM per year, a 50% increase from its
2014 anticipated organic growth of $500MM. We view this increase positively
as DPM targets returns of ~5x-7x EV/EBITDA on organic growth compared to
~8x-10x or more on dropdowns.
• Increased DCF guidance: DPM increased its 2014 DCF target to $435MM$450MM from $400MM-$420MM, with part of the increase attributable to
lower maintenance capex projections. However, at the midpoint, netting out
maintenance capex, we estimate DCF to be $25MM higher than originally
targeted.
• Management outlined growth opportunities across the DCP enterprise
geographic footprint: Opportunities include: 1) $1.0B-$1.5B in the Permian
Basin; 2) $0.75B-$1.0B in the Midcontinent; 3) $1.0B-$1.5B in the DJ Basin; 4)
$0.5B-$1.0B in the Eagle Ford; and 5) $0.75B-$1.0B for Marketing & Logistics.
• Sand Hills / Southern Hills volumes continue to ramp: The Sand Hills
and Southern Hills NGL pipelines continue to deliver strong volumes and
management believes they are well on the way to reaching the combined 2014
exit rate target of 230 Mbpd. These pipelines are strategically important as lateral
connections offer a strong backlog of growth.
• Updating estimates; Distribution forecasts unchanged: We now forecast 2014
EBITDA/DCF of $532MM/$435MM (was $514MM/$417MM) and 2015 EBITDA/
9
DCF of $744MM/$591MM (was $722MM/$569MM) as we are incrementally
more positive on NGL Services and Natural Gas Services, and as we incorporate
DPM's growth plans. Our distribution estimates remain unchanged and we
maintain our $59 price target and Outperform rating.
Global Payments Inc.(NYSE: GPN; 72.88)
Daniel R. Perlin, CFA (Analyst)
(410) 625-6130; [email protected]
Matt Roswell, CFA (Associate)
(410) 625-6131; [email protected]
Rating:
Price Target:
52 WEEKS
18OCT13 - 10OCT14
Outperform
81.00
Thoughts post management meeting; well positioned for growth
Recent management meeting is supportive of our belief that FQ1/15 strength
can continue throughout the year, driven by strong international growth, deal
accretion, and continued margin enhancing mix shift in the U.S.
75.00
70.00
65.00
60.00
55.00
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N
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J
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M
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2014
M
J
J
Rel. S&P 500
EPS, Rpt Diluted
2013A
3.64
2014A
4.12
2015E
4.75
2016E
5.35
A
S
O
MA 40 weeks
P/Rpt EPS
20.0x
17.7x
15.3x
13.6x
All values in USD unless otherwise noted.
LDR Holding Corp.(NASDAQ: LDRH; 31.09)
Glenn Novarro (Analyst)
(212) 428-6411; [email protected]
Brandon Henry, CFA (Analyst)
(212) 428-6982; [email protected]
Julia Kufman (Associate)
(212) 428-6384; [email protected]
40.00
• Management meeting supportive of growth. We met with the CFO and Chief
of Staff and came away feeling that GPN still has several growth opportunities
in FY15 to keep momentum going, coming off a very strong FQ1/15. Key drivers
include: 1) secular growth and pricing opportunities in Spain; 2) Global Solutions
business in U.K.; 3) revenue synergies from combining PayPros and APT under
the OpenEdge umbrella; 4) deal accretion from Ezidebit; and 5) ~$850mm in
incremental capital to deploy for revenue or earnings enhancements.
• International opportunities led by Spain. Despite FX headwinds expected for the
remainder of the year, international markets (heavily tilted toward Spain) offer
pricing optionality given recent regulatory/interchange caps. Two noteworthy
events creating pricing options: 1) in May, Visa Europe agreed to cap its interbank fees to 30bps (down 40–60%); and 2) effective September 1, 2014, the
Spanish government approved interchange fee caps of 20/30bps for debit/credit
transactions.
• Ezidebit accretion and $850mm capital deployment opportunity. We estimate
that Ezidebit should generate ~$0.07–0.08 of cash EPS accretion or ~2% in
FY15. In addition, assuming that all $850mm of available capital were used for
acquisitions, we estimate the embedded cash earnings power to be ~$0.60 or
12%, all else equal.
Rating:
Price Target:
Outperform
34.00
Thoughts Post Management Meetings, Reiterate Outperform
52 WEEKS
18OCT13 - 10OCT14
36.00
32.00
We recently spent time with the CEO and CFO of LDR Spine (LDRH) on a non deal
road show. We walked away confident that LDRH will be among the fastest growing
companies in small cap med tech over the next several years, led by the U.S. launch
of Mobi-C.
28.00
24.00
2000
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500
O
2013
N
D
J
Close
2013A
2014E
2015E
2016E
F
M
A
2014
M
Rel. S&P 500
Revenue
111.6
135.7
161.0
191.4
All values in USD unless otherwise noted.
J
J
A
S
MA 40 weeks
O
• We are buyers of LDRH owing to 1) expectations for the U.S. cervical disc
market to accelerate, led by improved reimbursement, 2) LDRH has a large
runway ahead, with only 50% of the U.S. hospital market penetrated and <20% of
spine surgeons trained on Mobi-C, 3) Mobi-C Data will continue to impress and
separate the device from the competition, and 4) consensus seems reasonable,
if not conservative.
• Significant room for market penetration with Mobi-C. Over 1K surgeons have
now been trained on Mobi-C, which is still <20% of the total number of U.S. spine
surgeons. This combined with the fact that LDRH only covers ~50% of the U.S.
with its current sales force, points to there being significant runway ahead for
market penetration.
• Consensus estimates look reasonable. Premium valuation warranted. We
believe consensus 2014/2015 top-line estimates look reasonable, if not a touch
conservative, as we expect Mobi-C momentum to build in 2H14 and 2015. We
10
believe that 3Q consensus seems reasonable, as consensus assumes that sales
will be down sequentially from 2Q levels. While LDRH trades at a premium
valuation, we believe this is warranted given mid to high-teens revenue growth,
above the peer group average (low-double-digits y/y). We expect LDRH shares to
move higher driven by continued quarterly execution, strong Mobi-C data, and
positive reimbursement changes in the U.S. cervical disc market.
Schlumberger Limited(NYSE: SLB; 93.07)
Kurt Hallead (Analyst)
(512) 708-6356; [email protected]
Robert Pinkard (Analyst)
(512) 708-6339; [email protected]
Peter Knerr (Associate)
(512) 708-6384; [email protected]
Rating:
Price Target:
Outperform
129.00
3Q Preview - Keep your Eye on the '17 Prize
52 WEEKS
18OCT13 - 10OCT14
115.00
110.00
105.00
100.00
Crude weakness and geopolitical turmoil have put pressure on the diversified
services group since 2Q earnings. Even in a $90 WTI environment for 2015, we think
US pressure pumping fundamentals will continue to improve and SLB can overcome
any logistical challenges. Internationally, growth in Latin America could offset the
headwinds in Russia and Iraq.
95.00
90.00
Discussion Topics
85.00
40000
20000
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2013
N
D
J
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M
A
2014
M
J
J
Rel. S&P 500
A
S
O
MA 40 weeks
EPS, Ops Diluted
2013A
4.79
2014E
5.56
2015E
6.63
2016E
7.93
P/E
19.4x
16.7x
14.0x
11.7x
•
•
•
•
•
•
NAM frac sand - Logistics impact on margin improvement
Russia sanctions - Duration and magnitude of EPS impact
Iraq - Ready to restart?
Seismic - Outlook given exploration spend headwinds
Pockets of int'l strength - Do Latam, Saudi, etc. offset Russia/Iraq?
Pricing power?
All values in USD unless otherwise noted.
Stratasys, Ltd.(NASDAQ: SSYS; 105.67)
Amit Daryanani, CFA (Analyst)
(415) 633-8659; [email protected]
Karl Ackerman, CFA (Associate)
(415) 633-8533; [email protected]
Mitch Steves (Associate)
(415) 633-8535; [email protected]
136.00
Rating:
Price Target:
Outperform
130.00
Thoughts Post Meeting With CFO. Maintain OP
52 WEEKS
18OCT13 - 10OCT14
128.00
120.00
We recently had the opportunity to meet with SSYS’ CFO (Erez Simha). Post our
meeting we are maintaining our OP and $130 price target as we think SSYS can
accelerate revenue growth and generate stable to improving margins over the next
2-6 quarters.
112.00
104.00
96.00
88.00
12000
10000
8000
6000
4000
2000
O
2013
N
D
J
Close
EPS, Adj Diluted
2013A
1.84
2014E
2.26
2015E
2.94
F
M
A
2014
M
J
J
Rel. S&P 500
A
S
MA 40 weeks
P/AEPS
57.4x
46.8x
35.9x
O
• ALL YOU NEED TO KNOW: 1) Revenue in H2:14 and FY15 should benefit from
levers beyond MakerBot (high-end momentum); 2) Margins: The focus remains
on investing for growth near term, but the model should show modest leverage;
3) M&A: SSYS is focused on integrating recent acquisitions vs. doing large deals;
4) Metals: remains in exploration phase given uncertainty about true market
potential; and 5) Materials: Should continue to surprise by keeping pace with
overall hardware growth and shift to advanced materials (drives ASPs and
consumption).
All values in USD unless otherwise noted.
Mahesh Sanganeria, CFA (Analyst)
(415) 633-8550; [email protected]
Shawn Yuan (Associate)
415 633 8565; [email protected]
Synopsys, Inc.(NASDAQ: SNPS; 37.28)
Rating:
Price Target:
Outperform
46.00
Takeaway from NDR
11
52 WEEKS
18OCT13 - 10OCT14
42.00
40.00
38.00
We hosted an NDR with Synopsys CFO Brian Beattie and came away incrementally
positive on the company’s ability to achieve long-term growth target. We expect
new product release (ICC2 and Verification Compiler) to help drive low- to midsingle-digit core EDA organic growth in the next few years. We believe current
operating model will support the company to drive high-single-digit EPS growth
target.
36.00
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2013
N
D
J
F
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M
A
2014
M
J
J
Rel. S&P 500
EPS, Ops Diluted
2013A
2.44
2014E
2.49
2015E
2.67
A
S
O
MA 40 weeks
P/E
15.3x
15.0x
14.0x
All values in USD unless otherwise noted.
• 2014 is the biggest product release year with IC Compiler 2 (ICC2) being the
highlight of the year. We believe the new product introduction will help the
company to generate low- to mid-single-digit core EDA organic growth in the next
few years.
• Synopsys remains committed to its long-term objective of driving high-singledigit EPS growth. We believe current operating model will help SNPS to achieve
long-term growth target.
• The recent Coverity acquisition has successfully helped Synopsys to enter the
software quality market and expanded its TAM by approximately $500M. We
believe Coverity will be able to increase its current 13% market share and
strengthen its leader position through cross-sale opportunities post acquisition.
The Medicines Company(NASDAQ: MDCO; 20.68)
Adnan Butt (Analyst)
(415) 633-8588; [email protected]
Jeffrey Takimoto (Associate)
(415) 633-8538; [email protected]
John Chung (Associate)
(415) 633-8620; [email protected]
Michael J. Yee (Analyst)
(415) 633-8522; [email protected]
Rating:
Price Target:
Outperform
38.00
3Q:14 preview: Things to think about – Focus on pipeline and guidance
52 WEEKS
18OCT13 - 10OCT14
Shares could be rangebound into YE:14 and 1H:15, paragraph IV litigation is pending
but there's potential for significant upside should Angiomax hold, new launches
deliver and the value reflected in the pipeline get unlocked in 2015.
40.00
36.00
32.00
28.00
24.00
12000
10000
8000
6000
4000
2000
O
2013
N
D
Close
J
F
M
A
2014
M
J
J
Rel. S&P 500
EPS, Ops Diluted Prev.
2013A
0.25
2014E
(0.26)↓
(0.15)
2015E
1.74↓
2.22
2016E
0.81↓
0.85
A
S
MA 40 weeks
P/E
NM
NM
11.9x
25.5x
All values in USD unless otherwise noted.
Michael J. Yee (Analyst)
(415) 633-8522; [email protected]
John Chung (Associate)
(415) 633-8620; [email protected]
Jeffrey Takimoto (Associate)
(415) 633-8538; [email protected]
Adnan Butt (Analyst)
(415) 633-8588; [email protected]
O
• Our view is that shares could be rangebound into YE:14 and 1H:15, paragraph
IV litigation is pending but there's potential for significant upside should
Angiomax hold, new launches deliver and the value reflected in the pipeline
get unlocked in the 2015.
• 3Q:14 Angiomax projected to be a miss; projection trends have been wrong
before. RBC is at $145M and consensus is $152M. IMS/WK show uncharacteristic
weakness, point to a much larger miss ($20-30M+); however, the same
methodology projected misses in 1Q/2Q and was wrong. Furthermore, the last
sequentially down quarter was 1Q:13. So while it looks like Angiomax could miss,
we believe the miss is unlikely to be as bad as projected barring unexpected
items such as inventory drawdowns. We estimate total revenues of $180M, vs.
consensus $190M, and GAAP-EPS of ($0.09), in-line with consensus.
• 2014 guidance could be lowered; more uncertainty for 2015. Management
revenue guidance, excluding new product launches, for 2014 is $745-$760M with
RBC at $725M and consensus likely at or above that range. Expense guidance
is another area of focus, which could be raised with the addition of the antiinfectives infrastructure. 2015 revenues are $704M by RBC and $778M by
consensus and EPS is $1.74 vs. $1.26, respectively. Since paragraph IV litigation is
ongoing with decisions expected in 2014 and 2015, there is uncertainty around
Angiomax and total revenues and whether the 4+ new product launches can
make up a loss in Angiomax for 2015 and beyond.
Vertex Pharmaceuticals Inc.(NASDAQ: VRTX; 104.73)
Rating:
Price Target:
Outperform
120.00
Building a CF franchise for upside hetero's w/ both '661 option and dual
correctors
12
52 WEEKS
18OCT13 - 10OCT14
112.00
104.00
96.00
We came away from NACF incrementally more (+) given four new pivotal studies
likely starting for new '661 – raising the bar in 2 big markets: homo-CF and going
after hetero-CF in 2015-16.
88.00
80.00
72.00
64.00
40000
30000
20000
10000
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
Rel. S&P 500
EPS, Adj Diluted
2012A
(0.51)
2013A
(2.01)
2014E
(2.75)
2015E
(0.79)
A
S
MA 40 weeks
P/AEPS
NM
NM
NM
NM
All values in USD unless otherwise noted.
O
• Coming away from the NACF conference this week, we reiterate our
Outperform and think VRTX trades higher into H1:15 and for 2015-16 because
(1) upcoming Phase II VX-661 in homozygous CF could have good combo data
around the corner in early 2015 which could prove they have an even "better"
drug to raise the bar on its current lead combo VX-809/Kalydeco....(2) the readthrough is that if better than '809, then '661 could show positive Phase III
"heterozygous" data by 2016 which although risky and a call option – is a big
event and is quite earlier than investors thought pivotal data would be possible,
(3) ultimately in 2015 and 2016 they'll be bringing the 3rd combo regimen
program called "dual correctors" and that is where we have the most confidence
to show positive data which wouldn't be too far behind the '661 data anyways.
• This "heterozygous" opportunity could play out in 2015-16 and is not fully in
consensus estimates and thus they have "two ways to do this" and either positive
event can get us to upside scenarios of $135+ or potentially higher depending
on price.
• There's a big launch likely too in 2015 – we think '809/Kalydeco NDA filing in
Q4:14 likely leads to rapid approval in Spring '15 – we predict high price and
strong launch due to pent up demand will take consensus numbers higher.
Industry Comments
Glenn Novarro (Analyst)
(212) 428-6411; [email protected]
Brandon Henry, CFA (Analyst)
(212) 428-6982; [email protected]
Julia Kufman (Associate)
(212) 428-6384; [email protected]
All values in USD unless otherwise noted.
3Q14 Large-Cap Cardio Earnings Preview
• STJ will report 3Q14 earnings on Wednesday, October 15th, before the market
open (Conference call at 8:00 a.m. ET; Dial-in: 866-393-8590 | Code: 10298793).
For STJ, we are lowering our 3Q14 revenue sales estimate by ~$11M to $1.37B to
reflect negative currency trends and lower Portico sales. Our 3Q sales forecast is
now about ~$15M below the Street. For EPS, we are maintaining our 3Q estimate
of $0.96, +11% y/y, in-line with Consensus as not all F/X falls through the income
statement.
• BSX will report 3Q14 earnings on Wednesday, October 22nd, before the market
open (Conference call at 8:00 a.m. ET; Dial-in: 800-230-1059). For BSX, we are
lowering our 3Q sales estimate by $20M to $1.78B to reflect f/X, offset by a
modest contribution from the Bayer Interventional acquisition. This yields 3Q
EPS for BSX of $0.20, as BSX employs natural hedges with manufacturing and
operating expenses in foreign countries.
• EW will report 3Q14 earnings on Thursday, October 23th, after the market close
(Conference call at 5:00 p.m. ET; Dial-in: 877-407-8037 | Code: N/A). With the
U.S. dollar index strengthening, we are slightly lowering our 3Q estimates. We are
forecasting revenues of $550M, up ~11% y/y (vs. $555M prior) vs. Cons: $546M.
We project WW TAVR sales of $212M, up ~23% y/y (Cons: $207M). In the U.S.,
our TAVR sales estimate is $85M, -1% y/y.
Robert Stallard (Analyst)
212 905 2928; [email protected]
Generally Speaking
Karl Oehlschlaeger (Associate)
212 618 7649; [email protected]
• The most significant aspect of the current situation is that it is an intra-islamic
issue; it is not a conflict directed primarily against the West – after all it is worth
noting that in the last 25 years more muslims have, by a factor of at least a
hundred, been killed by other muslims than by western forces. Yes, there will
be a fall-out which affects us and which will generate a terrorist threat within
our borders; but what we are seeing at the moment in the Middle East is the
resolution of two, perhaps three internal muslim conflicts: one, fundamentalists
vs a modernizers; two: shi’ia vs sunni; and, three: Saudi Arabia vs Iran.
• The US is adamant that IS presents a real threat to security in continental USA; but
is equally clear that it does not intend to put combat ‘boots on the ground’. It will
undertake air operations to impede IS activities, and provide logistic support13
as
Steven Cahall (Analyst)
212 618 7688; [email protected]
Krishna Sinha (Associate)
(212) 428-6922; [email protected]
All values in USD unless otherwise noted.
Islamic State - the problem
it can. However, and General Martin Dempsey, the Chairman of the Joint Chiefs,
has made this very plain, to be effective there have to be ground troops to take
and hold the ground. The dilemma for the US is the need to take on IS in Syria
without taking sides in the Syrian civil war; and ultimately how to separate the
‘good’ Free Syrian Army rebels from the ‘bad’, IS rebels.
Gerard Cassidy (Analyst)
(207) 780-1554; [email protected]
Jon G. Arfstrom (Analyst)
(612) 373-1785; [email protected]
Joe Morford (Analyst)
(415) 633-8518; [email protected]
Jake Civiello (Analyst)
(617) 725-2152; [email protected]
Steven Duong (Associate)
(207) 780-1554; [email protected]
H8 Update: Loans up Strongly in First Week of 4Q
Weekly industry loans up. Non seasonally adjusted total loan balances were up
+0.6% on a week-over-week (w/w) basis ending October 1, 2014, and up +7.2% on
a year-over-year (y/y) basis. Loan trends consisted of the following:
•
•
•
•
•
•
Commercial and Industrial (C&I): +0.6% w/w and +13.1% y/y.
Consumer: 0.0% w/w and +3.9% y/y.
Commercial Real Estate: -0.3% w/w and +6.9% y/y.
Residential Real Estate: +0.2% w/w and +1.3% y/y.
Home Equity: -0.1% w/w and -4.7% y/y.
All Other: +2.9% w/w and +16.0% y/y.
Jeannette Daroosh (Associate)
(415) 633-8572; [email protected]
John Hearn (Associate)
(207) 780-1554; [email protected]
Garrett Davis (Associate)
(612) 371-7217; [email protected]
Billy Young, CFA (Associate)
(415) 633-8567; [email protected]
Karl Shepard (Associate)
612 371 2709; [email protected]
All values in USD unless otherwise noted.
Mark A. Dwelle, CFA (Analyst)
(804) 782-4008; [email protected]
Insurance Observations
Scott Heleniak (Associate)
(804) 782-4006; [email protected]
• Apple picking – We offer Q3 preview comments along with some conventional
wisdom about how to pick apples and stocks. On commercial pricing we note
that the discussion could change from the rate of rate declines to whether rate
increases might stabilize and for how long. On reinsurance we comment on how
this cycle is unfolding different than prior ones as a result of an increase in thirdparty underwriting and different primary insurance responses to pricing cues.
We also comment on reserves (a potential wild card) and capital management
(a potential positive surprise).
• Q2/14 industry statistics – margins could have been better – We recap recent
Q2 industry data from ISO/PCI, which showed an industry combined ratio for the
quarter of more than 100%. While there was a little bit of cat loss and weather
loss in the quarter, these weren’t exactly impressive results considering we’re
three years into a rate firming cycle. We highlight all the key data and suggest
that pricing should remain in positive territory unless there’s some improvement
in the Q3 numbers.
• Earnings recap – PGR – We recap results from companies our universe which
reported during the week.
All values in USD unless otherwise noted.
For the week of October 10
Eric N. Berg, CPA (Analyst)
(212) 618-7593; [email protected]
Life & Health Insurance
Kenneth S. Lee (Associate)
(212) 905-5995; [email protected]
• Disability insurance has proved to be a challenging line of business—and not
only during the financial crisis. Since the crisis, MetLife, Prudential, and Lincoln
National have been among several carriers that have reported higher-thananticipated disability claims.
• Against this backdrop, RBC Capital Markets Life Insurance Research thought
it would be helpful to put investors together with one of the top disability-
Bulent Ozcan, CFA (Analyst)
(212) 863-4818; [email protected]
All values in USD unless otherwise noted.
A top disability insurance expert weighs in on the business
14
•
•
•
•
Seth Weber (Analyst)
(212) 618-7545; [email protected]
Emily McLaughlin (Associate)
(212) 618-3280; [email protected]
All values in USD unless otherwise noted.
Seth Weber (Analyst)
(212) 618-7545; [email protected]
Emily McLaughlin (Associate)
(212) 618-3280; [email protected]
Daniel Politzer, CFA (Associate)
(212) 905-5811; [email protected]
All values in USD unless otherwise noted.
insurance experts in the country. We did this last week, arranging investor
meetings in New York with Milliman disability actuary Dan Skwire.
Key takeaways include:
Profit margins: Improving for some and deteriorating for others, but on balance
stable
An expert’s perspective on small-case business vs. large-case business and on
employer-pay business vs. employee-pay business
New disability reserving tables: Probably a neutral on the group side and a
negative on the individual side
Machinery: N. America Farm Equipment Update
September retail sales: High-HP still soft; total tractors up on low-HP, easier
comp
• September retail sales of North American farm equipment (reported October 10
by the AEM) exhibited familiar recent themes, with softer y/y sales of higherhorsepower machines and relative strength in lower-horsepower equipment.
• Year to date, total North American tractor sales are +5% y/y, driven by lowerhorsepower equipment as row crop tractor sales are down 7%, while combines
are lower by 18%.
• Monthly retail sales for September (reported October 10) showed that DE's North
American farm equipment sales outperformed the industry although they were
mixed on an absolute basis.
Machinery: September quarter preview
• Pre-announcements from AGCO, Manitowoc, and Terex have fanned negative
Machinery sentiment as concerns over slowing Europe/developing markets,
limited operating leverage, and strong U.S. dollar/commodity price/capex
pressure have squeezed some multiples and raised questions about revenue and
earnings trajectory.
• In this report, we are reducing estimates and price targets for a number of
companies, aside from those that pre-announced. With the declines in share
price, we view many at/near levels where we would expect valuation support;
however, we believe they could remain choppy near-term as commentary from
most companies will likely reflect limited visibility toward the global landscape.
For the most part, our bias is focused toward companies with U.S. exposure.
• Construction: Although the U.S. cycle turn remains uneven with relative strength
in private non-residential offset by soft public, we believe trends are heading
in the right direction. Elsewhere, Europe construction trends are mixed while
developing markets are soft. We expect solid results/maintained outlooks from
equipment rental companies United Rentals and H&E, for which our estimates
are intact, and we would be opportunistic buyers on weakness.
• We expect sentiment on AGCO and Deere to remain cautious; AGCO’s significant
2014 outlook reduction underscores near-term headwinds facing the OEMs.
• The NAFTA Class 8 cycle has been stronger than expected for most of the year,
offsetting some weaker trends elsewhere.
• With most commodity prices under pressure, we view mining markets as
bouncing along the bottom.
TJ Schultz, CFA (Analyst)
(512) 708-6385; [email protected]
MLPs Amid Oil Price Weakness
Elvira Scotto, CFA (Analyst)
(212) 905-5957; [email protected]
• In this note, we look at past sell-offs and subsequent rebounds for reference
points on different MLP "classes" (i.e., core holdings, high-yielding, low-yielding,
etc.) during past cycles.
• We expect continued volatility in MLPs until crude oil stabilizes, but MLP cash
flow and distribution outlook intact given fee-based cash flow bias.
• Once support levels for crude oil are determined, we think the sell-off should
present buying opportunities.
Benjamin Owens, CFA (Associate)
(512) 708-6355; [email protected]
Vimal Patel (Associate)
(512) 708-6386; [email protected]
All values in USD unless otherwise noted.
Volatility until crude settles; distributions secure; analyzing troughs/peaks
15
• Our analysis is a snapshot showing that investors have returned to and rewarded
both low-yielding, high-growth MLPs and large-cap MLPs following periods of
weakness.
Nik Modi (Analyst)
212 905 5993; [email protected]
Nexus.One
William Kirk, CFA (Associate)
(212) 548-3183; [email protected]
HPC: Moody's downgraded Avon's notes to Ba1 from Baa3; with outlook remaining
stable. Helen of Troy reported 2Q EPS of $0.99 vs. consensus $0.80 and revenue
of $319.9M vs. consensus $313M. HELE commented that sales and earnings
surpassed revised guidance due to stronger orders late in the quarter and better
gross profit margins in August. P&G agreed to sell a stake in its Chinese battery
manufacturer Fujian Nanping Nanfu Battery Co. to CDH Investments. Rite Aid
reported September comps of 5.1% vs. consensus 3.5% with front end comps up
2.3% vs. consensus 1%.
Nikhil Nichani (Associate)
(212) 428-6955; [email protected]
Russell Miller (Associate)
(212) 437-9074; [email protected]
All values in USD unless otherwise noted.
Through October 10, 2014
Beverages: PepsiCo reported 3Q14 adjusted EPS of $1.36 on revenue of $17.2bn,
compared to consensus expectations of $1.29 and $17.1bn, respectively. The beat
was primarily driven by a lower-than-expected FX hit (-1pp vs. RBCe -4pp) and
what seems to be solid cost controls/productivity in North America (FLNA, PAB and
Quaker). Global volume performance was in line with expectations +1% and Pepsi
Americas Beverages was flat (consensus flat).
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Precious Metals & Minerals Weekly Valuation Tables
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
• This week, we highlight key takeaways from the 6th edition of our Capital
Punishment Report entitled "Squeezing Costs From a Stone". While the
potential to generate FCF has been dampened by a weaker commodity pricing
environment, we expect global mining capex to recede as a response to this, and
estimate a 24% and 29% fall in 2014 and 2015 vs 2013 levels.
• Preferred Names
• We would focus on gold producers with strong balance sheets, low cost
operations, and achievable growth plans which include: Goldcorp, Agnico Eagle,
Eldorado, B2 Gold, New Gold, and Klondex.
• The royalty companies are less exposed to cost pressures and our preferred
names are Royal Gold, Silver Wheaton, and Franco Nevada.
• Pre-production names we prefer have above average grades such as Continental
Gold (10.4g/t), Torex (2.7g/t), Guyana Goldfields (3.2g/t), Romarco (1.8g/t) and
Premier Gold (1.7g/t) (grades are M&I resource grades), or low capital intensity
heap leach projects such as Midway.
• Good time for project building, primed for selective M&A activity
• Given the slowdown in development activity in the gold industry and stabilizing
all-in development costs at ~$180 per reserve ounce (Exhibit 1), we believe this is
an excellent time to build a project, given only a handful of projects are capable
of generating a double digit IRR at spot prices. We expect some of the single mine
companies may well be targets (Romarco, Pretivm, Continental Gold, Torex,
Guyana) in the next round of junior gold M&A.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; [email protected]
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
Akbar Badri (Associate)
416 842 7840; [email protected]
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; [email protected]
Paul Hissey (Analyst)
+61 3 8688 6512; [email protected]
Ioannis Masvoulas, CFA (Associate)
+44 20 7653 4647; [email protected]
Chart of the Week: Squeezing Costs From a Stone
Cameron Klutke (Associate)
+61 3 8688 6551; [email protected]
All values in USD unless otherwise noted.
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
RBC Flight Deck
Derek Spronck (Analyst)
(416) 842-7833; [email protected]
We hosted our fourth annual RBC Airline Forum yesterday in Toronto. Key highlights
are as follows:
All values in CAD unless otherwise noted.
• WestJet: For WestJet we centered our focus on the company's growth strategy
as it embarks on the next leg of company evolution. What we heard was that new
Transformation in the air: Highlights from RBC Airline & Aerospace Investor Day
16
growth initiatives were exceeding initial expectations with still plenty of upside
remaining.
• Air Canada: While management broke down the mechanics of the planned 15%
unit cost reduction, management also noted that there will be a second wave of
cost reductions. Additionally, management noted that the planned densification
of Air Canada's existing 18 aircraft fleet of 777 aircraft, was not included in the
15% CASM target - and as such, provides for another avenue of cost reductions.
• Cargojet: Management highlighted the additional revenue opportunities that
they plan on pursuing following the fleet optimization currently underway.
• Chorus Aviation: Management at both Chorus Aviation and Air Canada
reaffirmed at our conference that they share a common interest in lowering the
cost base. As such, we continue to believe that any cost benefit associated with
a new frame work will be mutually beneficial.
• Bombardier: With two test flight vehicles back in the air, management noted that
they are once again seeing customer interest build for the CSeries.
Assessment: Should industry trends continue to lean towards a positive bias, we
believe that the Canadian airline industry as a whole can evolve, while at the sametime generating new growth opportunities at attractive rates of return.
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; [email protected]
LUPE.ST: Starts drilling the Gobi-1 well; Generally Speaking - Islamic State: the
problem; Companies provide clarity on 2015 hedging as oil price weakens; PRE.TO:
Applies to delist Brazilian Depository receipts; Argentina - Halliburton opens sand
plant
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
LUPE; PRE
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
All values in USD unless otherwise noted.
Doug Freedman (Analyst)
(415) 633-8631; [email protected]
Semiconductors – In search of support
Jeriel Ong (Associate)
(415) 633-8559; [email protected]
• Having managed through many semiconductor cycles, we continue to believe
that the present cycle will be faster and more muted than past major macro
based cycles. That said, there can be no arguing that we are headed for softer
than expected results and guidance. As such, we think it is important to take a
reasonably bearish view of demand. We have chosen to use -2% in 2015 and -1%
in 2016 to set our trough earnings. We have also increased the applied multiple
to said trough earnings and lastly applied a 25% discount to find where we think
support levels could exist.
• Our 13% support level would mean the SOX could reach 495 before we reach
support levels. Again, remember that we are setting support as 25% below target
valuations, should the industry experience a 2% revenue contraction next year.
The key to the cycle is likely to be the industry's ability to maintain pricing levels.
All values in USD unless otherwise noted.
Joseph Spak, CFA (Analyst)
(212) 428-2364; [email protected]
Jacob Hughes (Associate)
(212) 618-5594; [email protected]
Ritapa Ray (Associate)
212 266 4099; [email protected]
All values in USD unless otherwise noted.
We could be 13% away from pricing in a -2%y/y decline in 2015 revenues
US Autos & Auto Parts: 3Q14 Earnings Preview
• Previewing 3Q14 results. In general, we see risk to current 3Q14 EPS, and
perhaps more importantly, 2015 forecasts primarily related to FX translation but
also slightly softer production. With the supplier stocks acting like European
production is falling off a cliff, when the more likely outcome is a slight
moderation in growth, we find some interesting levels in certain names. Our
favorite names are DLPH, LEA, TEN.
• Relative positioning in DLPH, LEA, TEN. DLPH is our favorite name as we see
an inflection in revenue growth in 2H14 and into 2015. On LEA, we believe our
forecasts are conservative and see a coming inflection in Seating margins. Despite
concerns over TEN’s end-markets, we are left feeling fairly comfortable that 2014
CV guidance remains valid and continue to see solid CV growth. Further, we
believe the market is underestimating the mid-term margins/earnings power.
17
• More cautious on DAN, JCI, automakers. Downgrading DAN to Sector Perform
and taking the Top Pick rating off JCI (now Outperform). On DAN, we believe
it could prove difficult for the name to work amid soft end-markets, negative
earnings revisions and limited near-term catalysts. On JCI, a number of the
portfolio catalysts have played out and we see a bit of lull in the transformation
story. At the same time, some of the end-market cooperation we were counting
on may be further out. Post their analyst days, we believe both F and GM are
lacking a meaningful catalyst and 2015 consensus estimates look high to us.
Investment Strategy Research
Jonathan Golub (Analyst)
212 618 7634; [email protected]
Patrick Palfrey (Associate)
(212) 618-7507; [email protected]
Josh Jamner, CFA (Associate)
212 618 3312; [email protected]
3Q14 Earnings Preview
Earnings Growth Likely Near 10%
Despite current investor angst over growth trends and tighter monetary policy,
the outlook for 3Q earnings remains favorable. Current EPS consensus is 7.2%.
However, factoring in a historical beat rate of ~3%, EPS is likely to come in close to
10%, shown below. Contributing to this is 1.8% of buybacks and an additional 1%
earnings due to legal expense.
Limited Impact of Dollar & Commodities on 3Q EPS
Our work indicates that the impact of currency and energy prices is relatively
modest in 3Q. While the recent move is significant, the YoY change remains
relatively muted. Should these trends continue, earnings in 4Q and 2015 could
come under pressure.
Idiosyncratic Issues Have Outsized Impacts on Sector Results
· Energy: Stronger crack spreads offset much of the weakness in underlying oil
prices.
· Tech: Weakness at Microsoft, a drag on an otherwise healthy sector.
· Health Care: 60% of the group’s growth driven by Gilead.
· Discretionary: Half of the sector’s growth eliminated by Ford.
· Financials: The net impact of bank legal expenses adds ~1% to the S&P 500.
Quantitative Research
Ronald Dottin (Analyst)
(212) 858-7484; [email protected]
Q-Tips: Highlighting Quantitative Themes
Isabel Huang (Associate)
(212) 428-6420; [email protected]
• The Market Has Factored in EPS Surprise. Our 12-month forward net income
vs. market cap analysis shows that many sectors have “fully priced in” or traded
beyond their expected earnings contribution (see exhibit 1). Therefore, their
earnings announcements will be blunted.
• Strong Dollar Is Likely To Produce Headwinds For Many S&P 500 Companies.
The trade weighted dollar (DXY) is up almost 8 percent in 3Q14, half of this
rise came in right as companies were closing the books on 3Q14 financial
Statements – it’s unlikely that they were able to fully hedge against the negative
FX translation.
• The stronger dollar theme is already playing out in some of our quantitative
factors. Domestic companies are the major drivers behind the YTD excess returns
of our 12M Forward EPS revision factor (see exhibit 3). Meanwhile, investors have
taken a more cautious approach to multinationals in this factor.
• Modest EPS growth, low EPS dispersion and low overseas exposure is a
simple screen to gauge potential opportunities as we head deeper into 3Q14’s
earnings season (see exhibit 5 & 6).
3Q14 EPS Season - Reaction to EPS Surprise Will Likely Remain Low
18
Required disclosures
Non-U.S. analyst disclosure
Nathan Piper;Al Stanton;Victoria McCulloch;Haydn Rodgers;Dan Rollins;Sam Crittenden;Jonathan Guy;Jamie Kasprowicz;Timothy
Huff;Mark Mihaljevic;Akbar Badri;Richard Hatch;Paul Hissey;Ioannis Masvoulas;Cameron Klutke;Walter Spracklin;Derek Spronck
(i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC
Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with
a subject company, public appearances and trading securities held by a research analyst account.
Conflicts disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses
to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Sep-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
858
683
98
Percent
52.35
41.67
5.98
Investment Banking
Serv./Past 12 Mos.
Count
Percent
308
35.90
151
22.11
8
8.16
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