View
6
Download
0
Category
Preview:
Citation preview
USA | Themes & Tactics
US Insights December 19, 2014
US InsightsJefferies Franchise Picks Update - 14 StocksWith Differentiated Analysis
EQU
ITY R
ESEARC
H A
MERIC
AS
Jefferies Equity Research *Jefferies LLC
(888) JEFFERIES rdepartm@jefferies.comSundeep Bajikar *
Equity Analyst(415) 229-1552 sbajikar@jefferies.com
Kevin Grundy, CPA *Equity Analyst
(212) 336-7091 kgrundy@jefferies.comBrian Fitzgerald *
Equity Analyst(212) 284-2491 bfitzgerald@jefferies.com
Jason Kupferberg *Equity Analyst
(646) 805 5412 jkupferberg@jefferies.comJohn Janedis, CFA *
Equity Analyst(212) 284-2187 jjanedis@jefferies.com
Philip Ng, CFA *Equity Analyst
(212) 336-7369 png@jefferies.comMark Lipacis *
Equity Analyst(415) 229-1438 mlipacis@jefferies.com
Anthony Petrone, CFA *Equity Analyst
(212) 708-2703 apetrone@jefferies.comHoward A. Rubel *
Equity Analyst(212) 284-2126 hrubel@jefferies.com
Brian Pitz *Equity Analyst
(212) 336-7413 bpitz@jefferies.comAlexander Slagle, CFA *
Equity Analyst(415) 229-1508 aslagle@jefferies.com
Christopher Sighinolfi, CFA *Equity Analyst
(212) 707-6420 csighino@jefferies.comStephen Volkmann, CFA *
Equity Analyst(212) 284-2031 svolkmann@jefferies.com
Surinder Thind, CFA *Equity Analyst
(415) 229-1515 sthind@jefferies.com
* Jefferies LLC
Key TakeawayThe Jefferies Franchise Pick list was introduced in December 2013 to highlightJefferies' highest conviction Buys in the US. The stocks on the list have returned13% since inception, 180bps above the S&P 500. In this publication, we updatethe list, removing JACK and adding EPAM and WETF. Stocks currently on the listare: ATVI, BA, CBS, CCK, EPAM, GOOG, IR, INTC, JAH, MNK, MU, PAY, WETF andWMB.
The S&P has returned 11.2% since we initiated the Jefferies Franchise Picks list, while the listis up 13%. A look beyond the headline returns, however, reveals large divergences in sectorand stock performance.
Micron and INTC have been on the list since inception and are in the top 10% of S&P 500performers YTD. JACK, which is being removed today, is in the top 10% of Russell 2000performers YTD. RH, which was removed last Friday, outperformed the S&P by 31%. MNK,PAY and JAH, all of which remain on the list, have outperformed the S&P 500 by 23%, 13%and 7%, respectively. NFX had outperformed the S&P by 80% when we removed it on 8/29.NFX has seen a change in its fortunes since.
Our modest outperformance, though, suggests that there's a partial offset to all thosestrong performers and indeed, since inception, we've removed 13 stocks because theybreached our 15% stop loss.
Given rising volatility and declining S&P correlation, we are changing our methodology forstop losses to either 15% or 20% relative from 15% relative. Stocks having 120 day volatilityin the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainderwill have a 20% stop loss.
JACK removed from Franchise Picks List. Although the analyst, Alex Slagle, believesthe company has the ability to deliver segment-leading EPS growth, he acknowledges thatthe stock's 55% run YTD will be tough to match in 2015 as valuations in the group havereached all-time peak levels. Alex has made the case that JACK could be a $100 stock in thenext 2-3 years thanks to a turnaround at Qdoba, and he continues to believe that such anopportunity remains intact, though even that stretch target of $100 now offers less upside.
EPAM Systems added to Jefferies Franchise Picks. EPAM is an outsourced softwaredeveloper with approximately ~90% of employees in the former Soviet bloc and Central andEastern Europe. The analyst, Jason Kupferberg, is confident this will have little impact ontheir business, though the valuation suggests otherwise, creating opportunity.
WisdomTree Investments added to Jefferies Franchise Picks. The stock is down10% from levels seen in early December as the ECB failed to start QE, the Nikkei fell fromhighs, and the JPY rallied from lows. Surinder believes this weakness offers a compellingopportunity as central bank policies are on the verge of diverging, which could increaseinflows into currency hedged ETFs. His earnings power analysis suggests $1.05 of EPS in 2017with the potential for upside, particularly as that number assumes nothing from WisdomTreeEurope. Surinder also notes the strategic value of this company is compelling.
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 11 to 14 of this report.
Jefferies Franchise Picks as of December 19, 2014 Company Name Ticker Analyst Date Added Relative Ret.
Since Addition
Price ($) Mkt Cap ($M) JEF C15
P/E
GICS Sector
Activision ATVI Brian Pitz 12/18/2013 2.1% 19.67 14,143.3 12.4 Technology
Boeing BA Howard Rubel 9/18/2014 -2.7% 125.06 89,159.1 14.1 Industrials
CBS CBS John Janedis 10/29/2014 -3.0% 53.29 27,644.8 14.8 Discretionary
Crown Holdings CCK Phil Ng 4/22/2014 -3.7% 49.21 6,835.5 12.7 Materials
EPAM Systems EPAM Jason Kupferberg 12/19/2014 N/A 48.43 2,319.8 18.5 Technology
Google GOOG Brian Pitz 9/3/2014 -15.3% 506.45 342,986.6 15.4 Technology
Ingersoll-Rand IR Stephen Volkmann 12/18/2013 -6.6% 61.99 16,456.6 15.7 Industrials
Intel INTC Mark Lipacis 12/18/2013 35.3% 36.24 175,220.4 12.9 Technology
Jarden JAH Kevin Grundy 12/1/2014 6.9% 46.28 8,903.2 15.1 Discretionary
Mallinckrodt MNK Anthony Petrone 7/21/2014 22.6% 92.89 10,801.1 14.2 Health Care
Micron* MU Sundeep Bajikar 12/18/2013 41.7% 33.83 36,315.0 7.3 Technology
VeriFone PAY Jason Kupferberg 1/28/14 13.0% 37.43 4,242.5 19.5 Technology
Williams Cos WMB Chris Sighinolfi 11/25/2014 -17.1% 43.60 32,589.4 30.9 Energy
WisdomTree WETF Surinder Thind 12/19/2014 N/A 14.81 1,977.0 30.2 Financials
Source: Bloomberg, Jefferies * MU EPS are non-GAAP Relative return is to S&P 500
Removals from Franchise Picks Since August 5, 2014*
*August 5 is the date of the last full Franchise Pick update note, changes made since have been in documented in individual notes.
Company Name Ticker Analyst Date Added Date Removed Reason Removed Relative Ret.
on List
Pfizer PFE Jeff Holford 2/28/2014 8/6/2014 Stop Loss -15.1%
Newfield Exploration NFX NC 12/18/2013 8/29/2014 Dropped Coverage 80.2%
ARRIS ARRS James Kisner 7/25/2014 9/30/2014 Stop Loss -16.5%
Abercrombie & Fitch ANF Randy Konik 8/5/2014 10/6/2014 Stop Loss -16.8%
Fifth Third Bancorp FITB Ken Usdin 12/18/2013 10/16/2014 Stop Loss -15.8%
Agilent A Brandon Couillard 12/18/2013 10/22/2014 Stop Loss -15.7%
Envision Healthcare EVHC Brian Tanquilut 12/18/2013 11/7/2014 Stop Loss -17.4%
Restoration Hardware RH NC 12/18/2013 12/12/2014 Suspended Coverage 31.1%
Jack in the Box JACK Alex Slagle 12/18/2013 12/19/2014 Appreciation; Less Favorable
Risk/Reward
46.5%*
Source: Bloomberg, Jefferies * JACK return is based on the closing price as of 12/17/14 Relative return is to S&P 500
Themes & Tactics
US Insights
December 19, 2014
page 2 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Franchise Picks
Activision Blizzard (Pitz, ATVI, PT $27) The recent pullback in the stock reflects concerns over Call of Duty (COD), which
launched Nov. 4 to solid reviews and low competition. COD sales estimates for November
(per NPD) were lighter than Street expectations, but Brian attributes the shortfall to 1) the
fact NPD doesn’t track digital downloads, which likely account for 15%+ of all units sold,
and 2) the expectation that this year’s COD sales will be more December-weighted than
prior years as gamers wait to buy until they have received next-gen consoles as holiday
gifts. For example, Brian expects solid digital downloads of COD on Christmas day; a
trend we have not really seen before. Assuming this is correct, there could be compelling
opportunity with the stock trading ~15% off annual highs – especially given that
resurgent World of Warcraft high-margin subscription revenue will hit the P&L in 2015 on
top of easy comps. Brian’s 2015 EPS estimate is 11% ahead of the Street and he remains
especially positive around Blizzard, ATVI’s PC-game hit-factory.
Boeing (Rubel, BA, PT $165) The market seems to have forgotten that Boeing’s backlog is at a record and bookings
may well continue to outpace shipments. Backlog at the end of 3Q14 was up 12.5% from
year-end 2013 but shares were down 6.5% over the same period (spread is even more
dramatic when looking at market cap due to buybacks). It seems to Howard that the
company is one year further along in developing a number of crucial new planes, has
lowered its costs, and is more competitive.
Chart 1: Boeing Backlog ($B) vs. Share Price, 1980-3Q14
Source: Baseline, Company Data, Jefferies
$0
$20
$40
$60
$80
$100
$120
$140
$160
0
50
100
150
200
250
300
350
400
450
500
1980:Q1 1985:Q1 1990:Q1 1995:Q1 2000:Q1 2005:Q1 2010:Q1
Sh
are
Pri
ce
Ba
cklo
g (
$ i
n b
illio
ns
)
Backlog: Q3 2014: $475BB Share Price Q3 2014: $127.38
Themes & Tactics
US Insights
December 19, 2014
page 3 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
CBS (Janedis, CBS, PT $65) CBS was added to the Franchise Picks list on 10/29. The stock has underperformed YTD
on weaker ad growth and secular concerns, but John believes that a number of things can
go right for the company, namely around spectrum sales, and better Showtime
distribution. John thinks CBS will look to monetize spectrum in its 9 duopoly markets
where station retrans and margin opportunities are more modest, with spectrum in those
markets potentially worth $3/$4 per share. Showtime has 5-8mm fewer subs than HBO,
they may look to offer an OTT product, and John estimates an incremental 1mm subs
would equate to $0.13 EPS upside to his model. Advertising demand and pricing are
weak, and he cut media numbers again on 12/12 but still believes it’s hard for F16 to fall
much below $4.50, and ad weakness may mean spectrum sales and Showtime OTT come
sooner.
Crown Holdings (Ng, CCK, PT $56) Stock has a compelling 8% FCF yield, and sells into stable markets, but ones that could
also benefit from consumers’ energy savings. CCK made two sizeable (+$1 bil each)
acquisitions in 2014, which should accelerate growth and be accretive to EPS and FCF,
and CCK should be able to de-lever quickly and begin returning more cash to
shareholders. The Mivisa acquisition should help expand margins with a lower cost base
and positive European food can pricing in 2015 as a result of the consolidation, and
Empaque adds exposure to a growth market (Mexico) with accretive margins. In NA,
energy represents about 20% of household costs for the lower income demographic, and
the cost/wage squeeze on the low-end consumer is one of the reasons food and beverage
cans have been sluggish in recent history. With gasoline prices falling, Phil believes CCK
should benefit from improving volumes as more of consumers’ disposable income
becomes available for discretionary purchases.
Chart 2: CCK's Increasing FCF and FCF Yield, Moderating Capex
Source: Jefferies
EPAM Systems (Kupferberg, EPAM, PT $62) EPAM gets added to the Franchise Picks list in this publication. The company currently
derives about 70% of their revenues from high-end software development services,
significantly higher than comps and the higher end nature of their services commands
better pricing power. Jason expects growth to come from increased penetration of IT
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
($100)
$0
$100
$200
$300
$400
$500
$600
$700
$800
2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
FC
F Y
ield
FC
F /
Ca
pe
x (
$ i
n M
M)
FCF Capex FCF Yield
Themes & Tactics
US Insights
December 19, 2014
page 4 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
outsourcing within European companies, and ongoing regulatory/secular trends in their
biggest verticals—financial, healthcare and retail. Stock trades at about 19x C15 EPS,
despite 20% earnings growth, revenue growth in the high 20% range, and Jason believes
the PEG discount comes because approximately 90% of the company’s employees are
located in the former Soviet bloc and in Central and Eastern Europe. Though not without
risk, the conflict in the Ukraine has thus far not caused any operational disruptions, and
the company has robust business continuity plans in place. Jason expects the PEG to
expand to closer to 1x, and also note his C15 EPS is 3.5% ahead of consensus. Link to
12/11 initiation report here.
Google (Pitz, GOOG, PT $700) Brian expects a 33% CAGR for Internet video advertising over the ’14-’17 timeframe and
YouTube seems best positioned to take advantage of this growth. He also notes that
YouTube has shifted its strategy to one that’s focused on monetization and securing
advertiser relationships, which in combination with the adoption of third party verification
metrics (Nielsen OCR & comScore vCE) should help it in its bid for the $60B US TV ad
market. The growing PLA business should pay off this Holiday season, and the headwind
it had faced with declining CPCs should be behind it this Q as he models flat CPC growth,
the first non-negative CPC number since 3Q11.
Ingersoll-Rand (Volkmann, IR, PT $75) The HVAC industry remains well below the last cycle peak [28% below in residential and
17% below in commercial]. Additionally, construction spending in the U.S. while
improving is nearly 20% below the prior cycle peak. With roughly 60% of sales
attributable to the U.S. and 75% of sales related to the HVAC industry, we believe IR
remains poised to realize cyclical upside as end market fundamentals continue to
improve. Beyond the cycle, IR should also realize margin improvement through both an
increased focus on productivity as well as favorable mix with the high-margin Thermo
King business growing ahead of industry trends and supplemented by the recently
announced acquisition of German refrigeration manufacturer FRIGOBLOCK. Incremental
EBIT margins through the cycle could range between 30-35%, versus the mid-20’s last
cycle. A focus on returning cash to shareholders in the form of repurchases (>$1.1bln
under the current authorization remaining) and increasing dividends (~20% increase in
2014) provides additional return for investors beyond improving business operations.
Intel (Lipacis, INTC, PT $45) Mark’s ’15 EPS estimate is a full 14% ahead of consensus. Importantly, he expects FCF to
inflect in ’15 after declining in ’14, driving additional capital returns. There are three main
reasons for his optimism relative to the Street: 1) the Data Center Group, which accounts
for about 25% of revenues currently, should grow in the mid-teens, and improve margin
mix; 2) manufacturing leadership will enable the company to compete in tablets and
detachable form factors; and 3) recent strategic deals position the company to compete
more effectively in China and break in to their 600mm unit smartphone market.
There is a positive correlation between capital return and relative stock performance.
Mark thinks Intel is entering its 4th and largest capital return cycle in 2015.
Themes & Tactics
US Insights
December 19, 2014
page 5 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Chart 3: INTC Capital Return & Relative Performance Correlation
Source: Jefferies, FactSet, Company Data
He also adds Intel typically sees a 200-300bps gross margin headwind from startup costs
following a new manufacturing process node ramp. He believes a richer mix, elimination
of contra-revenues for tablet MPUs, and higher penetration of lower cost Silvermont and
Airmont MPUs into its product line could offset these costs.
Chart 4: Potential Offset to Startup Costs
Source: Jefferies, company data
30
40
50
60
70
-
2
4
6
8
10
12
14
16
18
1Q
02
4Q
02
3Q
03
2Q
04
1Q
05
4Q
05
3Q
06
2Q
07
1Q
08
4Q
08
3Q
09
2Q
10
1Q
11
4Q
11
3Q
12
2Q
13
1Q
14
4Q
14
E
3Q
15
E
bill
ion
s o
f U
S$
1400bps outperformance
3Q07-4Q08
2800bps outperfomance
3Q10-2Q12
Intel net buybacks & dividends (TTM) INTC relative to SOX
Gross Margin Offset Potential Impact Comments
Startup Costs -200 to -300 bps for the year
DCG Growth +50 to 100 bpsFaster growth of higher
margin business
Elimination of Contra Rev
for Tablets+50 to 200 bps
Tablet contra rev elimination
plus profitable tablet growth
expected in 2015
Penetration of Lower Cost
Silvermont/Airmont+50 to 100 bps
Better cost structure
translates to GM accretion
Net Impact on GM -150 to +200 bps
Themes & Tactics
US Insights
December 19, 2014
page 6 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Jarden (Grundy, JAH, PT $55) Kevin’s ’15 EPS estimate is 4% ahead of consensus, but beyond what’s modeled, he sees
increasing likelihood of a bull case, which presumes that Yankee Candle sales growth
accelerates to 10-12% and that EBITDA margins improve to 16.6% by 2018 (c. 265 bps
higher than his FY14 estimate). The bull case also includes reasonable buyback/M&A
assumptions, and results in $5.15-$5.80 in FY18e EPS, or a 12-month bull case target of
$64. The stock trades at about 15x Kevin’s C15 EPS, a multiple which does not give the
stock enough credit for the bull case, in his view.
Kevin’s bull case is more optimistic than the company’s L-T targets.
Chart 5: JEF Bull Case vs. JAH's Long-Term (FY18) Targets
Source: Jefferies; "JEF Bull Case FY18 EPS of $5.15 puts excess cash toward share repurchases while maintaining debt leverage of c. 3x. JEF Bull Case FY18 EPS of $5.80 includes a combination of share repurchases and one deal similar in size to Yankee Candle financed with debt.
Mallinckrodt (Petrone, MNK, PT $110) Anthony’s Buy thesis on MNK heading into 2015 continues to be based on: 1)
attractiveness of the base pain/generics/API business, 2) margin expansion opportunities
from higher Spec Pharma brand mix and operating leverage gains; 3) significant accretion
potential from Acthar and Ofirmev, and 4) optionality as either a buyer or seller in the still
consolidating Spec Pharma universe. Valuation remains attractive with shares trading sub
12.0x forward earnings or an approximate 7-8% FCF yield on forward estimates. He sees
upside beyond $110 in the event that these levers offset headwinds on the generic
Concerta shift. Further, shares are recently range bound on the FDA’s reclassification of
generic Concerta and DEA’s rescheduling of hydrocodone combination products to
Schedule II from III both in the Oct-Nov timeframe. However, recent IMS data show that
generic Concerta volumes are only off 10%, far better than the 50% drop-off he modeled,
while generic Vicodin volumes are noticeably up with the company gaining share on early
vault compliance.
JAH Target JEF Bull Case JAH Target JEF Bull Case JAH Target JEF Bull Case
FY18 EPS Org Sales Growth*EBITDA Margin
$4.00 $5.15 14.2%
16.6%
3-5%
4.5%$5.80
With Theoretical
M&A Benefit:
Themes & Tactics
US Insights
December 19, 2014
page 7 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Chart 6: Generic Concerta Better than our Model
Source: Jefferies
Chart 7: Vicodin Rx Recently Spiked on Vault Compliance
Source: Jefferies
Micron (Bajikar, MU, PT $42) Sundeep has argued that Moore Stress means that the industry is transitioning to one
with more stability, better supply discipline, and better returns. Micron’s $1B share
repurchase authorization, announced in late October, supports that case as it highlights
the company’s confidence in its model and belief in the stability of DRAM prices. Despite
an improved industry, the multiple remains too low in his view, at 8x P/E (NTM) versus
semis at 17x. His F15 EPS estimates are 16% ahead of the Street, which equates to 32%
earnings growth.
Chart 8: MU non-GAAP Gross Margins, Historic and Estimated
Source: Jefferies
VeriFone (Kupferberg, PAY, PT $43) The turnaround at VeriFone is not over, and Jason believes the company can approach
Ingenico’s gross and operating margin profile (Ingenico’s operating margins are 600bps
higher) over the long term. He believes his operating margin estimates (and
management’s initial F15 guidance) may be conservative, and margin improvement
(which he expects will accelerate in F16) could come from several initiatives, including
software platform consolidation in the terminal biz, increased product development
0%
5%
10%
15%
20%
25%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
16
-Mar-
12
20
-Ap
r-1
2
25
-May-1
2
29
-Ju
n-1
2
3-A
ug
-12
7-S
ep
-12
12
-Oct
-12
16
-No
v-1
2
21
-Dec-
12
25
-Jan
-13
1-M
ar-
13
5-A
pr-
13
10
-May-1
3
14
-Ju
n-1
3
19
-Ju
l-1
3
23
-Au
g-1
3
27
-Sep
-13
1-N
ov-1
3
6-D
ec-
13
10
-Jan
-14
14
-Feb
-14
21
-Mar-
14
25
-Ap
r-1
4
30
-May-1
4
4-J
ul-
14
8-A
ug
-14
12
-Sep
-14
17
-Oct
-14
21
-No
v-1
4
Methylphenidate ER (MNK) MNK % of total TRx
Generic Concerta FDA
shift effective Nov 13.
Weekly TRx only off
10% and recently
rebounded.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
16-M
ar-1
2
16-M
ay-1
2
16-J
ul-1
2
16-S
ep-1
2
16-N
ov-1
2
16-J
an-1
3
16-M
ar-1
3
16-M
ay-1
3
16-J
ul-1
3
16-S
ep-1
3
16-N
ov-1
3
16-J
an-1
4
16-M
ar-1
4
16-M
ay-1
4
16-J
ul-1
4
16-S
ep-1
4
16-N
ov-1
4
HYCD/APAP (generic Vicodin) HYCD/APAP growth %
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
C1
Q1
2
C2
Q1
2
C3
Q1
2
C4
Q1
2
C1
Q1
3
C2
Q1
3
C3
Q1
3
C4
Q1
3
C1
Q1
4
C2
Q1
4
C3
Q1
4
C4
Q1
4E
C1
Q1
5E
C2
Q1
5E
C3
Q1
5E
Themes & Tactics
US Insights
December 19, 2014
page 8 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
efficiencies, top-line leverage, and G&A cost takeout. The below chart highlights Jason’s
normalized earnings estimate ($2.49) and implied EPS with Ingenico’s margins ($2.83).
Additionally, he thinks the Street underappreciates the company’s EMV (chip enabled
terminals) opportunity, which is likely to generate upside to F15 revenue estimates.
Chart 9: Operating Leverage Scenario Analysis – F16
Source: Jefferies
Williams Cos (Sighinolfi, WMB, PT $70) Uncertainty around Geismar and around the closure of the ACMP/WPZ deal are in the
process of being removed as Geismar restarts, and the ACMP/WPZ deal is slated for close
in January. Chris believes the removal of these overhangs should enable the market to
focus on what he expects will be ~15% dividend growth over the next several years. Pro
forma for the ACMP deal, about 25-30% of WMB revenues are exposed to commodity
prices, and even at current oil prices he estimates distribution growth and excess
coverage is intact. Additionally, WMB is the only C-corp GP pure play with an IG credit
rating, which should enable it to make opportunistic asset purchases amidst this recent
downturn. WMB trades at a 30% discount to pure play C-Corps on a market cap to GP
DCF basis, despite higher distribution growth.
Chart 10: WMB Dividend & Coverage Expectations
Source: Jefferies
Chart 11: 2015E Pro-Forma Operating Margin Breakdown
Source: Jefferies
WisdomTree (Thind, WETF, PT $20) We’ve added WETF to the Franchise Picks list in this publication. Surinder believes WETF is
the only company in its peer group that is positioned to grow organically at a double-
digit rate in 2015. He also believes the company has the potential to exit 2015 with close
Adjusted Operating
Margin
Improvement vs. JEFe
(bps) Adjusted EPS EPS Impact
14.6% -100 $2.09 -$0.16
15.1% -50 $2.17 -$0.08
15.6% 0 $2.25 $0.00
16.1% 50 $2.33 $0.08
16.6% 100 $2.41 $0.16
17.1% 150 $2.49 $0.24
17.6% 200 $2.57 $0.32
19.3% 367 $2.83 $0.59
1.05x
1.20x
1.52x
1.20x
1.10x1.07x
1.01x 1.01x
1.00x
1.10x
1.20x
1.30x
1.40x
1.50x
1.60x
1.70x
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Co
vera
ge R
ati
o
Div
iden
d p
er
Sh
are
Dividend Coverage
Barnett
9% Eagle Ford
6% Haynesville
3%
Marcellus
0%
Niobrara
1%
Utica
4%Mid-
Continent
3%Other
(unconsol)
1%
Northeast
G&P (WPZ)
10%
Atlantic-Gulf
(WPZ)
26%
West (WPZ)
18%
NGL &
Petchem
Services
(WPZ)
19%
Themes & Tactics
US Insights
December 19, 2014
page 9 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
to industry-leading non-GAAP operating margins (48-50%+) despite being one-tenth the
size of competitors. The recent price weakness represents an attractive entry point, as a
pending divergence in global central bank policies equates to a highly favorable
backdrop, one that could drive strong fund flows into its currency hedged and rising rate
ETFs. The Street has consistently underestimated the company’s growth potential in
Surinder’s view, which tends to occur in a step, rather than linear fashion. A number of
catalysts remain to drive the stock higher: 1) 2015 guidance yet to be released, 2) QE yet
to be undertaken in Europe, and 3) interest rates yet to rise in the US. Longer term as the
only publicly-traded asset manager exclusively focused on ETFs, the ongoing secular shift
from active to passive investing will remain a tailwind for years to come, and as Jefferies
recently pointed out in its asset manager M+A piece (note here), WETF could be a
strategic asset. Link to recent WETF note here.
Chart 12: WETF Organic Growth Tends to Occur in Steps
Source: Company Data
(3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
-300
-200
-100
0
100
200
300
400
500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Cu
mu
lati
ve N
et
Flo
ws
($M
illio
ns)
Dai
ly N
et
Flo
ws
($M
illio
ns)
Cumulative Net Flows (Shaded Area, Right Axis) Daily Net Flows (Bars, Left Axis)
YTD net flows are now sharply
positive, exceeding $4.0B., as
QTD net flows total $3.7B
Net inflows have accelerated post
Japan QE announcement and as
likelihood of European QE grows.
Themes & Tactics
US Insights
December 19, 2014
page 10 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Analyst Certification:I, Jefferies Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Sundeep Bajikar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Kevin Grundy, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brian Fitzgerald, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Jason Kupferberg, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Janedis, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Philip Ng, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Anthony Petrone, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Howard A. Rubel, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brian Pitz, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.I, Alexander Slagle, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Christopher Sighinolfi, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Stephen Volkmann, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Surinder Thind, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.
Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.
Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform
Themes & Tactics
US Insights
December 19, 2014
page 11 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.
Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.
Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion.Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pickfalls within an investment style such as growth or value.
Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report• Activision Blizzard, Inc. (ATVI: $20.04, BUY)• CBS Corporation (CBS: $54.60, BUY)• Crown Holdings (CCK: $50.28, BUY)• EPAM Systems (EPAM: $48.29, BUY)• Google, Inc. (GOOG: $511.10, BUY)• Ingersoll-Rand Plc (IR: $63.52, BUY)• Intel Corporation (INTC: $37.02, BUY)• Jarden Corporation (JAH: $47.03, BUY)• Mallinckrodt Plc (MNK: $95.49, BUY)• Micron Technology, Inc. (MU: $34.45, BUY)• The Boeing Company (BA: $125.67, BUY)• The Williams Companies, Inc. (WMB: $44.80, BUY)• VeriFone Systems, Inc. (PAY: $37.14, BUY)• WisdomTree Investments, Inc. (WETF: $15.13, BUY)
Distribution of RatingsIB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 1044 52.28% 277 26.53%HOLD 808 40.46% 141 17.45%UNDERPERFORM 145 7.26% 5 3.45%
Themes & Tactics
US Insights
December 19, 2014
page 12 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Other Important Disclosures
Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:
United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.
United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.
Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.
Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.
Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.
India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited(INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400051, India; Tel +91 22 4356 6000.
This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligationunder applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of whichare available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only byprofessional or institutional investors. None of the investments or investment services mentioned or described herein is available to other personsor to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited isregulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limitedpursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert orinstitutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connectionwith this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +656551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report isissued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities andFutures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation tothis report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India PrivateLimited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning ofthe Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject ofthis document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or productdisclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authorityunder the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securitiesand Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under theAct in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should informthemselves about and observe any applicable legal requirements in relation to the receipt of this document.
This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange
Themes & Tactics
US Insights
December 19, 2014
page 13 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer priorto the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.
This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproductionand distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party contentproviders do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible forany errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party contentproviders give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose oruse. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content,including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. Theydo not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.
Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research issimultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damagesor losses arising from any use of this report or its contents.
For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES
© 2014 Jefferies Group LLC
Themes & Tactics
US Insights
December 19, 2014
page 14 of 14 , Jefferies LLC, (888) JEFFERIES, rdepartm@jefferies.comJefferies Equity Research
Please see important disclosure information on pages 11 - 14 of this report.
Recommended