equity analyst john janedis, cfa usa | themes & tactics ... · abercrombie & fitch anf...

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 [email protected] Bajikar *

Equity Analyst(415) 229-1552 [email protected]

Kevin Grundy, CPA *Equity Analyst

(212) 336-7091 [email protected] Fitzgerald *


Jason Kupferberg *Equity Analyst

(646) 805 5412 [email protected] Janedis, CFA *


Philip Ng, CFA *Equity Analyst

(212) 336-7369 [email protected] Lipacis *


Anthony Petrone, CFA *Equity Analyst

(212) 708-2703 [email protected] A. Rubel *


Brian Pitz *Equity Analyst

(212) 336-7413 [email protected] Slagle, CFA *


Christopher Sighinolfi, CFA *Equity Analyst

(212) 707-6420 [email protected] Volkmann, CFA *


Surinder Thind, CFA *Equity Analyst

(415) 229-1515 [email protected]

* 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, [email protected] 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



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



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



http://bit.ly/1yB1QKY

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



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



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



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



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



http://bit.ly/1wl4W2i

http://bit.ly/1zltU2a

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



https://javatar.bluematrix.com/sellside/Disclosures.action

https://javatar.bluematrix.com/sellside/Disclosures.action

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



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



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



equity analyst john janedis, cfa usa | themes & tactics ... · abercrombie & fitch anf...

Documents