Weekly Market Strategy ScotiaMcLeod Portfolio Advisory Group November 27, 2014 In this issue… Canadian Equity Strategy ATD.B: Q2F15 Results Summary This weekly comment is based on a Scotiabank GBM comment titled “ATD.B: Q2 Firing Nicely”, which summarizes the company’s Q2F15 results reported Nov. 25/2014. U.S. Equity Strategy Google (GOOG/GOOGL $539.58/$547.33) S&P recently featured Google (GOOG/GOOGL) as a Focus Stock of the Week. Google carries S&P Capital IQ's highest investment recommendation of 5‐STARS, or Strong Buy. S&P recently upgraded its opinion on GOOGL, which is the ticker for the Class A shares of the company, after the company reported third‐quarter results and following notable year‐to‐date underperformance. Fixed Income Strategy Bonds Have Continued to Rally This Week on the Back of Lower Oil and Generally Softer Data Despite the US Thanksgiving holiday this week, there has been no shortage of events or data – all eyes will be on OPEC Thursday. Portfolio Advisory Group
Canadian Equity Strategy
ATD.B: Q2F15 Results Summary Warren Hastings, CFA, MBA – Associate Director, Portfolio Advisory Group Year‐End North American Benchmark Information Recent
2014E 2015E
S&P/TSX Composite Index TSX Level/Target
TSX Earnings
TSX P/E
TSX Dividends
TSX Yield
15,111.13
787.20
19.20
$416.75
2.76%
15600 $940.00 $975.00
16.60 16.00
N/A
N/A N/A N/A
This weekly comment is based on a Scotiabank GBM comment titled “ATD.B: Q2 Firing Nicely”, which summarizes the S&P 500 company’s Q2F15 results reported Nov. 25/2014. We continue to hold ATD/b shares 2,063.50
S&P 500 Level/Target
2050 in our portfolios. At 19.9x NTM P/E, the $112.56
S&P 500 Earnings
$118.00 $128.00
18.33
S&P 500 P/E
16.70 15.60
shares trade toward the higher end of the $39.12
N/A
S&P 500 Dividends
N/A historical valuation range, but this is 1.90%
S&P 500 Yield
N/A N/A
complemented by projected 17% EPS CAGR (F14‐F16e). Organic sales trends remain Fixed Income & Currency favourable and as the Scotiabank GBM 1.00%
BoC Overnight Rate
1.00% 1.00%
analyst notes the company stands to benefit 2.008%
2.20% 2.85%
Canada 10‐Year Bond
should consumer trends continue 1.12
U.S. Dollar/ Cdn Dollar
$1.10 $1.12
strengthening in its operating footprint. M&A 0.25%
0.25% 1.25%
U.S. Fed Funds Rate
activity could serve as a further share price 2.31
2.50% 3.25%
U.S. 10‐Year Treasury
1.24
Euro/U.S.Dollar
U$1.32 U$1.23
catalyst and while difficult to predict timing/targets, ATD/b’s progress toward Commodities deleveraging (at 2.0x net debt/EBITDAR, $1,201.55 U$1275.00 Gold
U$1225.00
leverage is now below where it stood $76.51
Oil (WTI)
U$95.00 U$85.00
immediately prior to the SFR acquisition) and Source: Scotiabank GBM Portfolio Strategy, Thomson Financial, Bloomberg.
synergy realization appear to position the Source: Scotiabank GBM Estimates, Bloomberg. company to consider opportunities in both North America and Europe. According to the Scotiabank GBM analyst, Q2F15 EPS growth of +26% YOY was a good continuation of the trend seen in Q1F15 (EPS +23% YOY). Underlying operating trends remained solid. YOY comparisons were hampered by FX translation due to higher USD ($0.91 USD/CAD vs. $0.97 last year), offset by strong U.S. fuel margins of 24.17 cents per gallon (cpg), up from 21.56 cpg a year ago. The margin trend expanded in Canada by 23bps while Europe delivered another substantial improvement. Q2 saw merchandising margins contract 4bps YOY to 32.7% in the US, reflecting a negative mix shift to higher tobacco sales, as the company has been a share gainer following CVS’ decision to exit the tobacco market. ATD/b is, however, achieving double digit sales increases in food and gaining good traction with the consumer. The story in Europe continues to strengthen and Q2 merchandising margins advanced 132bps YOY to 41.2%. Couche‐Tard is seeing good results with the execution of improved merchandising strategies in its European operations. The SFR integration strategy is playing out well and the benefits to this business of being owned by a savvy merchandise operator in the form of ATD are beginning to accrue. ATD saw good overall volume trends on fuel in Q2 across the board. In Europe, the roll out and implementation of a new marketing strategy developed by the Couche‐Tard team for Statoil helped drive a 2.2% comp increase. In the US, same store fuel volume increased 2.1%, while Canada saw a decrease of 1.1%. Synergies appear to be very much on track. ATD recorded synergies and cost savings of approximately $22M in the quarter. To date, total realized synergies amounted to $119M and are expected to accelerate through the remainder of F2015. The company remains confident it will achieve its previously stated target of $150M‐$200M by Dec/2015. The Scotiabank GBM analyst believes innovation will be a key driver for growth at ATD.B over the course of the next several years. A good example of ATD/b’s capability on the innovation front is a new program in Europe around its coffee offer Simply Great Coffee. This program contributed to the comps and bettered margins in Europe during Q2. It is currently present in approximately 20% of the European stores. Interestingly, management believes this innovation has application to its North American operations. The program is driving double digit cup count growth and helps the basket. In Q3, the program will be rolled out to twenty sites and two November 27, 2014
1
Weekly Market Strategy
test markets in Canada. Couche‐Tard has made substantial progress deleveraging the balance sheet. In Q2, the company repaid $260M in debt with cash generated from operations, lowering the net debt/EBITDAR ratio to 2.01x, down from 2.23x in Q1F15 and 3.58x immediately following the close of the SFR acquisition. With leverage quickly having reached levels seen immediately preceding this deal (2.10x), the company is well positioned to consider other opportunities of varying sizes in both North America and Europe. Overall, the analyst believes that Couche‐Tard continues to execute very well its overarching strategy with respect to merchandising and fuel operations across its three geographies. Trends continue to show improvement and balance sheet deleveraging has been successful, and according to the analyst, further M&A remains highly probable and will drive added returns. Bloomberg consensus: 10 Buys, 3 Holds, and 1 Sell rating, with an average $43.35 12‐month share price target. 2
Portfolio Advisory Group
U.S. Equity Strategy Google (GOOG/GOOGL $539.58/$547.33) Caroline Escott, CFA – Director, Portfolio Advisory Group Marco Martin – International Equity Consultant, Portfolio Advisory Group S&P recently featured Google (GOOG/GOOGL) as a Focus Stock of the Week. Google carries S&P Capital IQ's highest investment recommendation of 5‐STARS, or Strong Buy. S&P recently upgraded its opinion on GOOGL, which is the ticker for the Class A shares of the company, after the company reported third‐quarter results and following notable year‐to‐date underperformance (as detailed below). The analyst sees leading franchises, healthy growth, benefits from the pending sale of the Motorola smartphone and tablet unit, a strong and flexible balance sheet, and a compelling valuation. GOOGL is a global technology company whose stated mission is to organize the world's information and make it universally accessible and useful. GOOGL has amassed and maintains what S&P believes is the Internet's largest index of information, and makes most of it freely accessible and usable to anyone with online access. GOOGL's websites are a leading Internet destination, and its brand is one of the most recognized in the world. International sources accounted for 58% of third quarter revenues. Ticker: GOOGL
GOOGLE INC-CL A
Date: 26-Nov-14
Bloomberg
Cons. Rating :
4.6 / 5
The company's advertising program, called AdWords, enables advertisers to present online ads when users Summary Data
are searching for related information. Advertisers Current Price $547.59
Fiscal Year-End: 12/2013
employ GOOGL's tools to create text‐based ads, bid 12-Month Target: $651.58
Dividend:
$0.00
Total Return:
19%
Yield:
0.0%
on keywords that trigger display of their ads, and set 52-Week High: $615.04
52-Week Low: $511.00
daily spending budgets. Ads are ranked for ROE
14%
Market Value $376,370 (mil)
presentation based on the maximum cost per click set by the advertiser, click‐through rates, and other Earnings Per Share
2013A
2014E
2015E
factors used to determine ad relevance. This process Annual
EPS:
$17.91
$25.80
$30.24
is designed to favor the most relevant ads. GOOGL's P/E Multiple:
19.8
21.2
18.1
AdSense technology enables its network affiliates to provide targeted ads from AdWords advertisers. Source: Bloomberg
The word Google has become synonymous with the Internet search category. We believe this reflects GOOGL's historically strong focus on the search segment, and the company's related market share leadership in many countries around the world, including the U.S. Google has expanded its efforts beyond the traditional online search category and now has an e‐mail service (Gmail), mapping offerings (Google Maps), an instant messaging service (Google Talk), a finance offering (Google Finance), a mobile Internet software platform (Android), an Internet browser (Google Chrome), a social network (Google+), computer tablets (under the Nexus brand), and wearable technology (Google Glass). S&P believes these initiatives and others have been intended to broaden GOOGL's reach, and to increasingly attract users and spur activity and engagement. The company has been discontinuing investment in and operations of offerings that have not gained sufficient traction. S&P has noted more recent investment and acquisition activity related to robotics and the "Internet of Things." S&P is forecasting revenues will rise 11% in 2014 and 18% in 2015. In April 2013, GOOGL sold Motorola's Home unit to Arris in a deal valued at $2.4 billion in cash and stock. In October 2014, GOOGL completed the proposed sale of the remainder of Motorola for some $2.9 billion. S&P sees healthy growth from the namesake business unit, with opportunities related to mobile, video, and international. S&P believes that concerns related to mobile advertising pricing persist, but have moderated somewhat. S&P sees growth in the Google segment notably exceeding that of the company in 2014, owing to growth in online advertising and increasing traction for GOOGL's November 27, 2014
3
Weekly Market Strategy
display offerings. The firm is forecasting non‐GAAP EPS of $26.05 for 2014, $30.92 for 2015, and $36.23 for 2016, following $19.94 in 2012 and $21.95 in 2013. Meanwhile, year to date through October 24, GOOGL declined 7.1%, while the S&P 500 rose 12%, the S&P 500 Technology Sector index rose 21%, and the S&P 500 Internet Software & Services sub‐industry index increased 18%. S&P’s 12‐month target price of $650 reflects a DCF analysis. Their model assumes a WACC of 8.6%, five‐year average annual FCF growth of 15%, and a perpetuity growth rate of 3%. Motorola has restrained FCF growth, reflecting a less profitable business model and the need for greater investment. As of September 2014, the company had $58 billion in cash and short‐term investments and $8.6 billion in debt. Risks to S&P’s recommendation and target price include the potential for challenges in selling Motorola, market share losses, excess expenditures associated with expansion, and adverse legal/regulatory developments. 4
Portfolio Advisory Group
Fixed Income Strategy Bonds Have Continued to Rally This Week on the Back of Lower Oil and Generally Softer Data Andrew Mystic – Director, Portfolio Advisory Group Canadian Bond Yields ‐ Weekly Change Despite the US Thanksgiving holiday this week, November 21 November 14 Change (bps) there has been no shortage of events or data – all eyes will be on OPEC Thursday. On Thursday, Canada 2‐Year Bond
1.06
1.01
0.06
markets will have to opportunity to evaluate the Canada 10‐Year Bond
2.01
2.03
-0.03
implications of what’s been characterized as the Canada 30‐Year Bond
2.55
2.59
-0.04
most important OPEC meeting since the credit crisis. BoC Target Overnight
1.00
1.00
0.00
Markets will get to see if OPEC will cut production 3.00
3.00
0.00
Prime
quotas and by how much. It’s generally thought that U.S. 2‐Year Bond 0.50
0.51
0.00
a production cut of less than 1‐1.5MM barrels a day U.S. 10‐Year Bond
2.31
2.32
-0.01
will likely be negative for oil. Although production U.S. 30‐Year Bond
3.02
3.05
-0.03
cuts of this magnitude would likely buoy oil markets Federal Funds 0.25
0.25
0.00
at least in the short term, it may not be enough 3.25
3.25
0.00
Prime
Source: Bloomberg longer term if market participants remain skeptical of OPEC’s willingness to abide by their decision. Bond Index Performance (YTD)
There is a good deal of incentive for OPEC members to cheat in the current environment. November 21 November 14 Change 7.04%
6.74%
0.30%
Bonds have generally continued their flattening DEX Universe Bond Index trend this week, similar to last week where we DEX All Government Bond Index 7.31%
6.98%
0.34%
saw Canadian yields rise by about 0.06% on the 6.38%
6.17%
0.21%
front end of the yield curve and fall 0.04% in the DEX All Corporate Bond Index Source: PC‐Bond 30‐year range. We saw a plethora of US data Wednesday, much of which was modestly softer than expected which left bonds rallying into the Thanksgiving holiday. On Wednesday October durable goods orders printed much better than expected at +0.4% (vs. exp. ‐0.6%) although the ex‐transportation component came in notably weaker at ‐0.9% (exp. 0.5%). Initial and continuing claims data printed in mixed fashion with the initial claims print coming in higher than expected at 313k (vs. exp. 288k) while continuing claims printed lower than expected at 2,316k (vs. exp. 2,348k). Personal income and spending printed a bit softer than expected in October 0.2% (vs. exp. 0.4%) and 0.2% (vs. exp. 0.3%). Interestingly, Wednesday’s PCE deflator data offered up a noteworthy surprise with headline inflation remaining steady while core inflation surprised to the upside. The Fed’s favorite measure of inflation printed at 1.4% y/y (vs. exp. 1.4 y/y) on the headline yesterday and 1.6% y/y (vs. exp. 1.5% y/y) on the core. As Scotia Economics highlighted in their Closing Points yesterday, the divergence in prints might be hinting at the prospect that falling oil prices could act to push down headline inflation while ultimately acting as a reflationary mechanism via a positive shock to the consumer. The balance of the weekly data was generally softer as well. Both the Chicago Purchasing Managers and the University of Michigan confidence indices printed softer than expected at 60.8 (vs. exp. 63.0) and 88.8 (vs. exp. 90.0) respectively. Rounding out the data, pending and new home sales were also softer. Pending home sales printed at ‐1.1% m/m (vs. exp. 0.5% m/m) although the prior print was revised upward from 0.3%m/m to 0.6% m/m. New home sales printed at 0.7% m/m (vs. exp. 0.8% m/m). November 27, 2014
5
Weekly Market Strategy
Current PAG Recommendations (changes in blue) 1.
2.
3.
4.
Term Call – We continue to view the risk reward trade off of extending term as insufficient and continue to suggest investors remain defensively positioned within the 1‐5 year term. Although value in the front end of the Canadian curve has diminished, we remain cautious of extending term. Sector Call – Underweight Canada bonds, overweight provincials, municipals and corporates. Investors should begin to migrate towards better rated credits, in particular, looking to move out of the BBB category to more liquid credit categories. Currency Call – We recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – Underweight high yield, underweight emerging markets debt, underweight inflation protected debt. Canadian Curve: Scotia Economics’ October, 2014 forecast suggests that Canadian 5-years bonds will rise to
2.75% by Q3/15. 10-year and 30-year bonds are expected to rise to 3.25% and 3.55% respectively.
Source: Scotia Economics Forecasts; ScotiaMcLeod PAG 6
Portfolio Advisory Group
1.
Term Call – We continue to view the risk reward trade off of extending term as insufficient and continue to suggest investors remain defensively positioned within the 1‐5 year term. Although value in the front end of the Canadian curve has diminished, we remain cautious of extending term. Forecasts Returns: We continue to recommend investors remain short duration (1‐5year range). Although returns could improve in the 10‐year part of the curve, we remain cautious as the trajectory of rates is expected to remain upward moving – potentially leaving prices at risk. . 2.0%
2-Year Term
1.5%
1.0%
0.5%
0.0%
Scotia
Consensus
Canada
1.0%
Ontario
1.1%
Corporate A
1.6%
Corporate BBB
1.8%
Banks AA
1.5%
Utilites A
1.6%
0.8%
1.0%
1.5%
1.7%
1.4%
1.4%
0.4%
5-Year Term
0.2%
0.0%
-0.2%
-0.4%
-0.6%
-0.8%
-1.0%
-1.2%
-1.4%
Scotia
Consensus
0.0%
Canada
-1.2%
Ontario
-0.7%
-1.1%
-0.6%
Corporate A
-0.3%
Corporate BBB
0.1%
Banks AA
-0.4%
Utilites A
-0.4%
-0.2%
0.2%
-0.3%
-0.3%
10-Year Term
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
Scotia
Consensus
0.0%
Canada
-5.7%
Ontario
-4.5%
Corporate A
-4.2%
Corporate BBB
-3.6%
Banks AA
0.0%
Utilites A
-4.4%
-6.5%
-5.3%
-5.0%
-4.4%
0.0%
-5.1%
30-Year Term
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
-18.0%
-20.0%
Canada
Ontario
Corporate A
Scotia
-17.9%
-15.0%
-13.4%
Corporate
BBB
-12.5%
Consensus
-17.6%
-14.7%
-13.2%
-12.3%
Banks AA
Utilites A
0.0%
-13.5%
0.0%
-13.2%
Source: Scotia Economics Forecasts; ScotiaMcLeod PAG 2
Sector Call – We recommend investors look to the provincial, municipal, and corporate sectors for yield enhancement. Credit spreads (the yield pick‐up over Canada bonds) still remain relatively attractive. Investors should begin to re‐balance towards better quality credits. Investors should move towards a market weight on BBB names. November 27, 2014
7
Weekly Market Strategy
3 Currency Call – Scotia Economics’ and consensus forecast expectations are for the Canadian dollar to outperform most major currencies over the next year, therefore we recommend Canadian investors remain in Canadian dollars for their fixed income holdings at this time. Currency Comments: Scotia’s October, 2014 forecast suggests that the Canadian dollar should generally
outperform over the next 12-months (Q3/15), although consensus forecasts are a bit more bullish on the USD and
MXN Peso.
Source: Scotia Economics Forecasts; Scotia McLeod PAG 4. Alternative Strategies: Within a broadly diversified portfolio our recommendations are as follows: a) High Yield – We continue to view the high yield sector as carrying particular risks at this time. We have already begun to see some softness in the sector but liquidity and duration extension issues pertaining to high yield add an element of concern. We believe retail investors should currently be underweight the sector at this time. b) Emerging Markets – We remain cautious about EM corporates. We recommend reducing bond exposure by shortening duration and staying in the short end and the belly of the curve. We favour corporates with solid fundamentals, minimal government intervention, and low local currency revenue exposure. We favour Mexican corporates in general since the economy is relatively more resilient to global economic headwinds than other LATAM countries thanks to better fundamentals. c) Inflation Protected Bonds – With current real yields in the area of 0.55%, and nominal Canada bonds pricing in an effective long term inflation rate of 2.01% (versus June headline CPI of 2.4% y/y), there appears to be some value in RRBs at the moment. Having said that, expectations for transient inflation and rising rates continues to suggest to us that gains will be short lived and investors holding RRBs should potentially look at taking profit –if they do not require a perfect inflation hedge. 8
November 27, 2014
‐ S&P 500 Index 2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
05/28/12
11/28/11
05/28/11
11/28/10
05/28/10
11/28/09
05/28/09
11/28/08
05/28/08
11/28/07
05/28/07
11/28/06
05/28/06
11/28/05
05/28/05
11/28/04
05/28/04
11/28/03
05/28/14
11/28/13
05/28/14
05/28/13
11/28/13
11/28/12
05/28/13
11/28/12
05/28/12
11/28/11
05/28/11
11/28/10
05/28/10
11/28/09
05/28/09
11/28/08
05/28/08
11/28/07
05/28/07
11/28/06
05/28/06
11/28/05
05/28/05
11/28/04
05/28/04
11/28/03
Index Level
Index Level
Portfolio Advisory Group
Equity Index Returns ‐S&P/TSX Composite Index 17,000
15,000
13,000
11,000
9,000
7,000
5,000
9
10
05/28/14
11/28/13
05/28/13
11/28/12
05/28/12
11/28/11
05/28/11
11/28/10
05/28/10
11/28/09
05/28/09
11/28/08
05/28/08
11/28/07
05/28/07
11/28/06
05/28/06
11/28/05
05/28/05
11/28/04
05/28/04
11/28/03
Index Level
05/28/14
11/28/13
05/28/13
11/28/12
05/28/12
11/28/11
05/28/11
11/28/10
05/28/10
11/28/09
05/28/09
11/28/08
05/28/08
11/28/07
05/28/07
11/28/06
05/28/06
11/28/05
05/28/05
11/28/04
05/28/04
11/28/03
Index Level
Weekly Market Strategy
‐NASDAQ 5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
‐Dow Jones Industrial Average 19,000
17,000
15,000
13,000
11,000
9,000
7,000
5,000
Portfolio Advisory Group
Important Disclosures The author(s) of the report own(s) securities of the following companies. Google Inc, The supervisors of the Portfolio Advisory Group own securities of the following companies. None. Scotia Capital Inc. is what is referred to as an “integrated” investment firm since we provide a broad range of corporate finance, investment banking, institutional trading and retail client services and products. As a result we recognize that we there are inherent conflicts of interest in our business since we often represent both sides to a transaction, namely the buyer and the seller. While we have policies and procedures in place to manage these conflicts, we also disclose certain conflicts to you so that you are aware of them. The following list provides conflict disclosure of certain relationships that we have, or have had within a specified period of time, with the companies that are discussed in this report. Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months. Alimentation Couche‐
Tard Inc. Alimentation Couche‐Tard Inc engaged Scotiabank as a financial advisor in the acquisition of Statoil Fuel & Retail ASA. Alimentation Couche‐
Tard Inc. November 27, 2014
11
Weekly Market Strategy
General Disclosures The ScotiaMcLeod Portfolio Advisory Group prepares this report by aggregating information obtained from various sources as a resource for ScotiaMcLeod Wealth Advisors and their clients. Information may be obtained from the Equity Research and Fixed Income Research departments of the Global Banking and Markets division of Scotiabank. Information may be also obtained from the Foreign Exchange Research and Scotia Economics departments within Scotiabank. In addition to information obtained from members of the Scotiabank group, information may be obtained from the following third party sources: Standard & Poor’s, Valueline, Morningstar CPMS and Bloomberg. The information and opinions contained in this report have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. While the information provided is believed to be accurate and reliable, neither Scotia Capital Inc., which includes the ScotiaMcLeod Portfolio Advisory Group, nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of such information. Neither Scotia Capital Inc. nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is provided to you for informational purposes only. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation or particular needs of any specific person. Investors should seek advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Nothing contained in this report is or should be relied upon as a promise or representation as to the future. The pro forma and estimated financial information contained in this report, if any, is based on certain assumptions and management’s analysis of information available at the time that this information was prepared, which assumptions and analysis may or may not be correct. There is no representation, warranty or other assurance that any projections contained in this report will be realized. Opinions, estimates and projections contained in this report are our own as of the date hereof and are subject to change without notice. Copyright 2012 Scotia Capital Inc. All rights reserved Additional Disclosures ScotiaMcLeod is committed to offering its valued clients a disciplined approach to investing. A hallmark of this approach is access to comprehensive research reports, including fundamental, technical, and quantitative analysis that investors can use to assist them in bringing informed judgment to their own financial situation and investment decisions. In addition to the reports prepared by ScotiaMcLeod through its Portfolio Advisory Group, we also offer our clients access on request to insights in the form of research from other leading firms such as Standard and Poor’s, which offers independent research of relevance to our investment process. Further to your request, please find attached a research report of Standard and Poor’s (or one of its research affiliates), a member of the National Association of Securities Dealers (or similar securities regulatory authority). As Standard & Poor’s is not subject to Canadian regulation, this research report does not conform to Canadian disclosure requirements. ScotiaMcLeod is a division of Scotia Capital Inc. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Neither Scotia Capital Inc. nor its affiliates accepts any liability whatsoever for any loss arising from any use of this document or its contents, including for any errors or omissions in the data or information included in the document or the context from which it is drawn. The content may have been based at least in part, on material provided by Standard & Poor's (S&P), our correspondent research service. S&P has given ScotiaMcLeod general permission to use its research reports as source materials, but has not reviewed or approved this report, nor has it been informed of its publication. S&P’s Stock Appreciation Ranking System is used by S&P analysts to rate stocks within their coverage universe assigning one to five STARS – five STARS – five STARS indicating a “buy” and one STAR a “sell”. S&P’s analysts also provide earnings estimates for these covered issues. S&P’s Stock Appreciation Ranking System is a rank of the potential for future performance over a six to 12‐month period. The STARS selection process relies on a disciplined investment approach that combines fundamental and technical analysis, sector weightings, reasonable turnover, performance‐based bonus system, and a “top‐down” overlay with influence from the S&P's Investment Policy Committee. The overarching investment methodology is “growth at a reasonable price”. Unlike equity valuations from other financial firms, STARS is a forecast of a company's future capital appreciation potential versus the expected performance of the S&P 500 before dividends. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod under license. ScotiaMcLeod is a division of Scotia Capital Inc. Scotia Capital Inc. is a member of Canadian Investor Protection Fund. 12
Portfolio Advisory Group
Definition of Scotiabank GBM Equity Research Ratings & Risk Rankings We have a three‐tiered system, with ratings of 1‐Sector Outperform, 2‐Sector Perform, and 3‐Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Historical financial results, share price volatility, liquidity of the shares, credit ratings, and analyst forecasts are evaluated in this process. The final ranking also incorporates judgmental, as well as statistical, criteria. Consistency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet are key factors considered. Scotiabank GBM has a committee responsible for assigning risk rankings for each stock covered. The rating assigned to each security covered in this report is based on the Scotiabank GBM research analyst’s 12‐month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter‐term views on these securities that differ from their 12‐month view due to several factors, including but not limited to the inherent volatility of the marketplace. Ratings Risk Rankings Sector Outperform The stock is expected to outperform the average total return of the analyst's coverage universe by sector over the next 12 months. Low Low financial and operational risk, high predictability of financial results, low stock volatility. Sector Perform The stock is expected to perform approximately in line with the average total return of the analyst's coverage universe by sector over the next 12 months. Medium Moderate financial and operational risk, moderate predictability of financial results, moderate stock volatility. High Sector Underperform High financial and/or operational risk, low predictability of financial The stock is expected to underperform the average total return of the results, high stock volatility. analyst's coverage universe by sector over the next 12 months. Caution Warranted Other Ratings Exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, exceptionally high stock volatility. For Tender ‐ Investors are guided to tender to the terms of the takeover offer. risk tolerant investors only. Venture Under Review ‐ The rating has been temporarily placed under review, Risk and return consistent with Venture Capital. For risk‐tolerant until sufficient information has been received and assessed by the investors only. analyst. November 27, 2014
13