john janedis, cfa equity analyst jeffrey holford, phd, aca ... · james kisner, cfa * equity...

USA | Themes & Tactics

US Insights June 12, 2015

US InsightsJefferies Franchise Picks Update - 21 StocksWith Differentiated Analysis

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Jefferies Equity Research *Jefferies LLC

(888) JEFFERIES [email protected] Bajikar *

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

Colin Devine, CFA, CPA, CFP *Equity Analyst

(212) 707-6327 [email protected] DiFucci *


Brian Fitzgerald *Equity Analyst

(212) 284-2491 [email protected] Grundy, CPA *


Jeffrey Holford, PhD, ACA *Equity Analyst

(212) 336-7409 [email protected] Janedis, CFA *


James Kisner, CFA *Equity Analyst

(713) 308-4509 [email protected] Kupferberg *

Equity Analyst(646) 805 5412 [email protected]

Mark Lipacis *Equity Analyst

(415) 229-1438 [email protected] McCormack, CFA *


Philip Ng, CFA *Equity Analyst

(212) 336-7369 [email protected] Petrone, CFA *


Brian Pitz *Equity Analyst

(212) 336-7413 [email protected] A. Rubel *


Surinder Thind, CFA *Equity Analyst

(415) 229-1515 [email protected] Volkmann, CFA *


* Jefferies LLC

Key TakeawayThe Jefferies Franchise Pick List was introduced in December 2013 to highlightJefferies' highest conviction Buy rated stocks in the US. The stocks on the listhave returned 29% since inception, 1250 bps above the S&P 500, with thebulk of that outperformance coming in 2015. This piece takes a closer lookat performance for the list, and offers the latest investment theses for the 21stocks.

It's been a good first half. We last published performance data for the List inmid December, and at that point, the List had outperformed the S&P by 180bps.Outperformance since inception now stands at 1250bps and ATVI, CHTR, EPAM, JACK,MNK, NFX, RH, and WETF have each returned 20% or more relative to the S&P. Looking atperformance contribution since our December update, the biggest positive contributors,in order, have been WETF, EPAM, MNK, ATVI and PRU, with all but PRU outperforming theS&P by 20% or more. Importantly, the List has also avoided blow-ups in 2015, and afterremoving 13 names in 2014 due to stop loss violations, we've only removed 1 stock for sucha violation in 2015. That stock was WMB, analyst Chris Sighinolfi continued to like the stockat the time of removal, the rules forced our hand, and the stock has since outperformed theS&P by 10% as we sat and watched.

Intel and Micron have been the biggest drags on performance since ourDecember 2014 update. Mark Lipacis and Sundeep Bajikar have defended INTC andMU, respectively, publishing notes in late May that pointed to a PC MPU destock in 1H15,and expectations for a restock beneficial to INTC and MU in 2H15. Additionally, Mark hassuggested that the ALTR acquisition will help INTC diversify further away from PCs, boostingthe multiple, and Sundeep has pointed out that MU will benefit from DRAM under-supplyin 2H15.

Stocks currently on the Franchise Picks List are: ABBV, ATVI, AMAT, T, BA, CBS,EPAM, GOOGL, IR, INTC, JAH, MNK, MU, OC, PFE, PRU, RKT, PAY, VMW, WDC andWETF. Stocks that have been added since the December 2014 update are: ABBV, AMAT, T,OC, PFE, RKT, VMW, and WDC and the two stocks that have been removed are: CCK (whichwe swapped for RKT) and WMB (which, as noted, violated the stop loss).

The Jefferies Franchise Pick List is intended to highlight our highest convictionsingle name opportunities. We may consider sector balance and factor exposure, butultimately we're looking to highlight the stocks that our analysts believe are most compellingand where they can point to differentiated work and/or estimates. Our stop loss is 15% or20% relative to the S&P depending on the volatility of the stock. Stocks having 120 dayvolatility in the bottom quartile of S&P stocks have a 15% stop loss, and the remainder have20% stop losses.

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 13 to 17 of this report.

Current Stocks and Investment Theses

AbbVie (Holford, ABBV, PT $90) Jeff has increased confidence in a delay in Humira biosimilars following his work on the

patent estate and recent management commentary. He does not expect biosimilars to

arrive before mid-2019 in the US and 2H 2018 outside the US. Further, he estimates that

Humira operating margins are currently around 59% but can be improved in the face of

biosimilars, owing to the drop-off in royalty stack and lower SG&A costs, forming a long-

run rate of 77% even after allowing for increased rebates. Jeff’s revenue estimates are 4%-

30% above consensus (2016E-20E) and EPS estimates are 7%-45% ahead of consensus

(2016E-20E). The $90 target implies a 2018 PE multiple of 11.3x vs the US Pharma sectors

average of 13.6x

Chart 1: Jefferies Base Case estimates vs Consensus sales for Humira ($m),

2012A-2025E

Source: First Order, Company Data, Jefferies estimates

Activision (Pitz & Fitzgerald, ATVI, PT $26) Brian Pitz and Brian Fitzgerald like ATVI’s product pipeline and believe that strong game

sales increasingly lead to longer tailed, annuity-like revenue streams. Call of Duty (COD)

was the #1 console game of 2014, selling-through well over $1B (~17MM unit sales) and

digital licensing / season pass sales were up double digits Y/Y. Destiny now has 16MM

users, up from 9.5MM in November. Engagement is impressive (3 hours/day), suggesting

robust go-forward digital license purchases. New free-to-play PC game Heroes of the

Storm launched June 2 to mostly positive reviews. The closed beta had 11MM users.

Applied Materials (Bajikar, AMAT, PT $28) The TEL merger termination was disappointing to Sundeep, as part of his thesis was on

industry consolidation, but there are still multiple reasons to invest. His proprietary

bottom up analysis suggests WFE CapEx growth in CY16 is likely to be driven by 3D

NAND and Foundry, and he expects Dep/Etch growth to outpace WFE growth, with

AMAT to benefit. Sundeep also believes AMAT will benefit from larger, higher-res, and

flexible screens, DRAM and NAND end markets are likely to be more stable customers

going forward, and foundry competition is intensifying with Samsung disrupting TSMC.

Our EPS are 13%/17% above Street for calendar ‘15/’16, respectively.

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Themes & Tactics

US Insights

June 12, 2015

page 2 of 17 , Jefferies LLC, (888) JEFFERIES, [email protected] Equity Research

Please see important disclosure information on pages 13 - 17 of this report.

AT&T (McCormack, T, PT $40) The close of the DTV acquisition should remove lingering dividend concerns, and pro

forma for the deal, fully taxed, Mike expects a 63% payout in 2016, versus 105% in 2014.

He believes deal synergy estimates are conservative, and also sees upside to Street

estimates for Wireless margins (thanks to a less heavy iPhone refresh in 4Q) and ARPU

(lapping of Mobile Share Value). Pro forma for DTV, the Jefferies target is based on a 13x

2016 P/FCF multiple, which is in line with the group, currently, the pro-forma entity

trades at a discounted 11.2x.

Chart 2: Improving Dividend Sustainability under Multiple Scenarios

Source: Jefferies estimates, company data

Boeing (Rubel, BA, PT $185) Howard’s investment case for Boeing is based on margin improvement driven by capital

investment and advances in productivity. Strong cash flow and a visible backlog allows

for long-range production planning. Operationally, BA has been focused on reducing the

cost of manufacturing through improving its production processes and managing the

make versus buy decision. Howard thinks the aircraft market remains healthy with air

traffic growth of 6% for ’15, which supports his long-range sales forecast. BA enjoys a

FCF yield of 7%+, and cash flow should improve in 2H15, with better working capital

management and an improvement in operations. Our $185 price target is based on

above consensus 2016 EPS of $9.40 and a 5% premium to the S&P500 market multiple.

(See chart on following page.)

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Themes & Tactics

US Insights

June 12, 2015



Chart 3: BA Capex as % of Revenues vs. Sales per Employee 1965-2018E

Source: Company filings and Jefferies estimates

CBS (Janedis, CBS, PT $68) John thinks CBS has several levers to pull that could offer upside to numbers into 2016

and beyond. He thinks the most upside could come from the recently announced

Showtime OTT offering, where he estimates that every 1mm subs equates to about $0.13

upside to our model. Additional upside could come from international Showtime

licensing deals (Canada). John believes $4.40 is a reasonable minimum level of earnings

in 2016, that’s above the Street’s $4.30, we look for $4.60, and as stated, believe there’s

upside to the Jefferies estimate. Spectrum sales could also drive long term upside.

Management remains focused on returning cash to shareholders through share buybacks

and dividends. Valuation is attractive on a P/E basis with shares trading at 13.5x vs the

group at 15.3x.

EPAM Systems (Kupferberg, EPAM, PT $70) Jason’s analysis leads him to believe offshore IT services growth in Continental Europe

could significantly outpace that in the United States. Market research/channel checks

indicate Europe is becoming increasingly open to offshoring, and he concludes EPAM is

among the best positioned. Geopolitical tensions especially in Russia and the Ukraine

(~25% of headcount is in Ukraine) have created headline risk but Jason hasn’t seen an

indication that their business has been impacted. Management continued to sound

bullish in recent meetings. Valuation remains attractive, trading at about 21x EPS despite

mid-high 20% constant-currency top-line growth.

Google (Pitz & Fitzgerald, GOOG, PT $700) Brian Pitz and Brian Fitzgerald’s bullish Google view has much to do with their positive

stance on YouTube, as they believe the video offering is best positioned as TV ad budgets

begin to shift online. In fact, the 7% decline in cost per click in the March quarter was

driven by the high growth in YouTube and resulting mix shift—YouTube ads currently

cost less than traditional search ads, driving down overall CPC, but core search CPC is

actually improving Y/Y. Pitz and Fitz believe 2015 will be an inflection point for online

video as advertisers are finally better equipped to produce ads suited to the medium and

as they look to take advantage of the shift in video viewership from TV to online. They

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US Insights

June 12, 2015



estimate the value of YouTube at about 10% of the Google value and note that the stock

trades at only about 12x (ex-cash) Jefferies’ ’16 Op EPS.

Ingersoll-Rand (Volkmann, IR, PT $78) Though Steve has largely been cautious on machinery stocks he continues to recommend

IR as a relatively defensive name. With little to no exposure to the oil & gas markets the

business should benefit from improving trends in North American residential and non-

residential construction markets. Order trends continue to outpace revenue guidance

(and expectations) with Climate bookings increasing 6% in 1Q while Consensus forecasts

call for just 3% top-line growth in the business for 2015. Notably, with high-margin

Thermo King bookings up high-single digits in 1Q there is potentially another leg to

margin expansion beyond the existing cost reduction programs the company has in

place.

Chart 4: HVAC Shipments Continue to Trend Higher

Source: AHRI data, Jefferies

Intel (Lipacis, INTC, PT $48) Though expensive, Mark likes the ALTR deal for potential top-line synergies and believes

that it signals a shift to a “Data Center” from “PC” play. Although they continue to

diversify away from PCs, Mark believes the PC destock seen in 1H15 will yield to a restock

by 2H15, bolstering results. He expects that lower mobile losses in 2H15 and the

potential for a Tier 1 OEM modem socket in early 2016 would shift sentiment on the

stock. We model a significant step up in 2016 EPS to $3.00 (25% ahead of the Street) as

mobile losses fade and data center continues to grow. Our $48 PT assumes a 16x 2016, a

discount to peers and in line with historical avg.

Jarden (Grundy, JAH, PT $63) Kevin looks for 5% organic sales growth in F15, at the high end of their guidance, boosted

in 2H15 by the sell-in of “American Home” by Yankee Candle. Building on that sales

growth, he sees opportunity for margin expansion, notes that the P/E multiple, at 16x

Jefferies’ ’16 EPS estimate, is at the very low end of consumer staples, and Kevin believes

we’ll see either M&A or a buyback announcement by year end ’15. He doesn’t currently

model M&A, but a $500M deal could be mid/high single digit accretive.

JAH’s organic sales growth is accelerating and should continue to trend toward the high

end of the co.’s 3-5% org sales guidance on an LTM avg. basis with the launch of

“American Home” in 2H15.

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Themes & Tactics

US Insights

June 12, 2015



Chart 5: JAH Organic Sales Growth

Source: Jefferies

Mallinckrodt (Petrone, MNK, PT $145) Anthony considers them well positioned for M&A--prepared to execute on a potential

$2B-18B transaction but also ripe to be taken out. He likes the Ikaria acquisition with

further out accretion potentially surpassing $1 per share, in his view. We think double-

digit Acthar growth is sustainable and the company can see revenue tripling from today’s

~$1B run-rate, Ofirmev is in position to be used in “multi-modal” pain management

that’s becoming increasingly adopted, and there are no plans to leave the gConcerta

market where volumes have benefitted from KUDCO exiting and Actavis increasing prices.

Micron (Bajikar, MU, PT $40) MU remains Sundeep’s top Semiconductor pick driven by Moore Stress and industry

consolidation. He expects Micron's DRAM cost structure to improve at a faster pace versus

the competition, driven by solid advances in spacer based patterning for 20nm, as well as

1Xnm and 1Ynm nodes, which we believe are unlikely to use EUV. DRAM pricing was

weaker than expected in Q1, but corrective supply-side actions are likely going forward,

this should drive better DRAM pricing, and Sundeep believes that would be a surprise to

the market. Our C15 EPS estimate is 14% above Street and C16 is 18% above. (See the

chart on the following page.)

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Themes & Tactics

US Insights

June 12, 2015



Chart 6: MU stock vs. PC inventory cycle

Source: Factset, Jefferies

Owens Corning (Ng, OC, PT $51) Phil expects margin expansion as OC benefits from a pickup in roofing demand coupled

with a decline in asphalt prices (35-45% of COGS for roofing, closely correlated to crude

prices), noting a 10% decline in asphalt prices translates to 18% increase in earnings.

While the spring roofing price increase has seen mixed traction thus far, Phil is

encouraged the industry is showing much improved discipline, with TAMKO announcing

a second price increase. OC should work as long as the industry holds pricing firm, which

will allow the company to capture the cost tailwind from lower asphalt prices and benefit

from a recovery in insulation and roofing demand.

Pfizer (Holford, PFE, PT $45) Short term drivers include strength in Ibrance, which is shaping up to be one of the fastest

oncology product launches ever and where we estimate $5.5B in 2020 sales versus

consensus’ $3.3B. Additionally, Jeff believes the market will start to better appreciate the

durable growth at GEP, the separation of GEP by ’17 at a minimum, and optionality on

further accretive M&A (Shire, Actavis, AstraZeneca and Glaxo are potential targets, in his

view). Jeff’s sum of the parts analysis gets us to $45, which considers the potential for a

4% yield for GEP and a 14x multiple on 2016 EPS.

Prudential (Devine, PRU, PT $100) Colin believes the market has over discounted risks of oversight by the Federal Reserve

and possible capital requirements. PRU offers good growth potential and a balanced mix

of businesses that can deliver a 14-16% ROE even with low rates or uneven markets.

Higher rates provide optionality. A potential SIFI designation comes with risk to capital

flexibility, but Colin views those risks as tolerable due to management’s ability to work

constructively with Federal regulators. His $100 price target implies a P/B (ex. OCI) of

1.58x on projected YE15 BV and is consistent with a forecasted 17.1% ROE.

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Themes & Tactics

US Insights

June 12, 2015



Rock-Tenn (Ng, RKT, PT $84) With RKT getting regulatory approval for the MWV transaction, it’s on track to close on

July 1st. Phil believes there’s meaningful runway for margin expansion from upside to the

synergies and cost takeout initiatives. Based on its strong FCF profile and under-levered

BS, Phil believes RKT can buy back 18-23% of the shares outstanding over the next 2

years. The combination will help to improve the industry structure, and he believes

boxboard prices are likely to increase and could provide upside to Jefferies’ estimates. The

combination will also increase RKT’s exposure to less commodity oriented consumer

packaging markets, a positive for the multiple as boxboard stocks trade 1.6x turn higher

on an EV/EBITDA basis.

Chart 7: Current RKT Segment Revenue Split

Source: Company Data, Jefferies Estimates

Chart 8: PF Segment Revenue Split

Source: Company Data, Jefferies Estimates

VeriFone (Kupferberg, PAY, PT $43) The 500+bps gap between Verifone‘s operating margins and those of competitor

Ingenico offer an opportunity, in Jason’s view, as Verifone is working to expand margins

by accelerating the top line (we look for 8.4% growth in ’16) and controlling operating

expense growth (4.4% in ’16 and 3.7% in ’17 down from double digits in in ’13 and ‘14).

Top line will benefit from a long tailed EMV terminal replacement cycle, and Jason doesn’t

see a cliff coming next year. He believes the APAC business has bottomed and is poised to

show improvement over the next 12 months. Next phase of the turnaround is about

achieving normalized earnings power (we think ~$2.50 in EPS), and on this basis the

stock remains undervalued.

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Themes & Tactics

US Insights

June 12, 2015



VMware (DiFucci, VMW, PT $104) The market is focused on the 80%+ of x86 workloads that have been virtualized, believing

that the company is running out of growth, but fails to appreciate that a much smaller

percentage of CPUs have been virtualized (see chart). Additionally, John thinks there’s a

good chance VMW can transform themselves into one of the software greats by

leveraging success in virtualization into other markets in which they already have a

toehold. These markets include End User Computing, Software Defined Networking,

Software Defined Storage, and Hybrid Cloud among others.

Chart 9: x86 Server Workloads

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Source: IDC Software Tracker Pivot Table, September 2014; IDC Worldwide Virtual Machine 2013-2017 Forecast, Aug 2013 (Doc #242762); IDC Worldwide Bi Annual Enterprise Server Forecast, March 2014 (Doc #247479); Jefferies

Western Digital (Kisner, WDC, PT $123) The stock is down about 17% from last year’s highs owing primarily to concerns about

PCs and accelerating NAND adoption. James took advantage of this weakness to add

WDC to the Franchise Pick list in mid-April. James’ work suggests Cloud/Web 2.0

investments will lead to a return to HDD revenue growth by C16. While NAND is likely to

grow robustly, the gap in cost per bit (which we don’t believe will fall below 15x) will

help to insulate HDDs, and the shift to Cloud applications can drive ASPs and potentially

upside to our numbers, which for ’16 are already 11% ahead of the Street. His analysis of

gross margins by product indicates that gross profits from business critical HDDs

(capacity/nearline HDDs used by enterprises and hyperscale) will exceed gross profits

from PCs in H2’CY16. James thinks this could catalyze multiple expansion as the stock is

seen as more of a cloud play than PC play. A PC restock cycle in 2H15 is another tailwind.

(See chart on following page.)

Themes & Tactics

US Insights

June 12, 2015



Chart 10: % of WDC Gross Profit from PCs and Enterprise

Source: Jefferies

Wisdom Tree (Thind, WETF, PT $23) As the only publically traded ETF manager, Wisdom Tree is a pure play on the secular

growth in ETFs and well positioned to continue outperforming its peers as investment

dollars continue to shift away from active asset managers and towards passive strategies.

WETF’s diverse product set helps it attract assets under almost all economic conditions.

With QE in Europe still in its early stages and QE in Japan ongoing, Surinder expects net

flows to remain elevated, especially within its suite of currency hedged products (e.g.,

HEDJ and DXJ). Additionally, with US interest rates set to rise later this year, he expects

net flows in the back half of 2015 to be aided by these rising rate (interest rate hedged)

products.

Chart 11: WETF Organic Growth Tends to Occur in Steps

Source: Company Data

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Japan QE Europe QE

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Themes & Tactics

US Insights

June 12, 2015



Jefferies Franchise Picks

Company Name Ticker Analyst Date Added Rel. Ret. Since

Addition*

Price ($) Mkt Cap ($M) JEF C15

P/E

Sector

AbbVie ABBV Jeff Holford 6/8/2015 -0.7% 68.17 119,298.4 16.2 Health Care

Activision ATVI Brian Pitz 12/18/2013 31.5% 25.50 18,517.8 21.1 Technology

Applied Materials AMAT Sundeep Bajikar 4/20/2015 -8.0% 20.04 24,681.2 14.1 Technology

AT&T T Mike McCormack 6/3/2015 -0.6% 34.71 180,249.0 13.4 Telecom

Boeing BA Howard Rubel 9/18/2014 5.9% 141.57 97,898.1 16.0 Industrials

CBS CBS John Janedis 10/29/2014 3.3% 59.47 29,382.3 16.7 Discretionary

EPAM Systems EPAM Jason Kupferberg 12/19/2014 44.2% 70.78 3,461.5 26.8 Technology

Google GOOG Brian Pitz 9/3/2014 -13.1% 552.60 371,245.8 17.5 Technology

Ingersoll-Rand IR Stephen Volkmann 12/18/2013 0.5% 69.18 18,313.3 18.0 Industrials

Intel INTC Mark Lipacis 12/18/2013 12.6% 31.82 150,954.1 12.8 Technology

Jarden JAH Kevin Grundy 12/1/2014 17.4% 53.38 10,279.1 18.4 Discretionary

Mallinckrodt MNK Anthony Petrone 7/21/2014 59.3% 124.37 14,548.2 16.1 Health Care

Micron MU Sundeep Bajikar 12/18/2013 -4.3% 25.19 27,244.0 7.1 Technology

Owens Corning OC Phil Ng 1/26/2015 -0.3% 40.42 4,769.4 19.2 Industrials

Pfizer PFE Jeff Holford 3/23/2015 -1.8% 34.29 211,146.5 16.8 Health Care

Prudential PRU Colin Devine 1/30/2015 14.6% 90.54 41,014.6 9.3 Financials

Rock-Tenn RKT Phil Ng 5/5/2015 1.3% 63.14 8,892.2 15.6 Materials

VeriFone PAY Jason Kupferberg 1/28/2014 4.9% 36.94 4,222.0 19.9 Technology

VMware VMW John DiFucci 2/18/2015 6.1% 90.72 38,452.8 22.9 Technology

Western Digital WDC James Kisner 4/13/2015 -2.9% 93.60 21,613.4 11.6 Technology

WisdomTree WETF Surinder Thind 12/19/2014 55.5% 22.88 3,135.3 32.7 Financials

Average 10.7% 66,634.2 17.2

Source: Bloomberg, Jefferies Prices are as of 6/10/15 close * Relative return compared to S&P 500 during time on the list

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Franchise Picks Performance Statistics

Franchise Picks and S&P 500 Returns Since Inception

Source: Bloomberg, Jefferies

Quick Facts Around Portfolio Performance

Source: Bloomberg, Jefferies Sharpe calculation uses a 2.84% risk free rate * Measure takes the performance of all stocks that were/are on the list compared to the S&P 500’s return during that time. Discrepancy with overall portfolio performance due to the portfolio’s compounding returns.

Performance Methodology Franchise Picks performance is measured as an equal-weighted portfolio, compounding

based on the average daily return for each stock; daily returns for every stock are added

together, averaged, then multiplied by the prior day’s closing value. The index was

created with a value of 100 at inception and has risen to 128.8 as of 6/10/15. Prices at

which securities are added/removed are done as of market close the day the report is

released.

85

90

95

100

105

110

115

120

125

130

135

D-13 J-14 F-14 M-14 A-14 M-14 J-14 J-14 A-14 S-14 O-14 N-14 D-14 J-15 F-15 M-15 A-15 M-15

Price Return Since Inception (100 = 12/18/13)

Franchise Picks SPX

Measure Return

Franchise Picks Absolute 28.83%

S&P 500 16.27%

Franchise Picks Relative 12.56%

Portfolio Sharpe Ratio 2.79

Avg. Rel. Including Removes* 4.28%

Current Best (Rel.): MNK 59.29%

Current Worst (Rel.): GOOGL -13.13%

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Analyst Certification:I, Jefferies Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, 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, Colin Devine, CFA, CPA, CFP, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, John DiFucci, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, 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, 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, Jeffrey Holford, PhD, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, 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, James Kisner, 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, 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, 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, Mike McCormack, 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, 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, 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, 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, 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, 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.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.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.

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

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

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, 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• AbbVie (ABBV: $68.04, BUY)• Activision Blizzard, Inc. (ATVI: $25.30, BUY)• AT&T Inc. (T: $34.88, BUY)• CBS Corporation (CBS: $58.77, BUY)• EPAM Systems (EPAM: $70.09, BUY)• Ingersoll-Rand Plc (IR: $69.65, BUY)• Intel Corporation (INTC: $31.85, BUY)• Jarden Corporation (JAH: $53.51, BUY)• Mallinckrodt Plc (MNK: $126.29, BUY)• Micron Technology, Inc. (MU: $25.02, BUY)• Owens Corning (OC: $40.41, BUY)• Pfizer, Inc. (PFE: $34.46, BUY)• Prudential Financial, Inc. (PRU: $89.93, BUY)• Rock-Tenn Company (RKT: $63.98, BUY)• The Boeing Company (BA: $142.96, BUY)• VeriFone Systems, Inc. (PAY: $36.39, BUY)

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• VMware, Inc. (VMW: $89.36, BUY)• Western Digital (WDC: $94.46, BUY)• WisdomTree Investments, Inc. (WETF: $22.82, BUY)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1073 51.59% 296 27.59%HOLD 839 40.34% 162 19.31%UNDERPERFORM 168 8.08% 13 7.74%

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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

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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.

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For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES

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