Market Maker Stock picks for 1-26-2017
NSC – reaffirm our HOLD investment rating and are raising our price target for NSC shares from $104 to $110 to account for general market valuation changes, as well as adjusting our EPS estimates for tax reform HXL – reported generally-solid 4Q16 results, and our first blush analysis indicates nothing inconsistent with our favorable Buy rating. Earnings came in at $0.64 per share, a couple pennies ahead of the Street’s consensus number and in line with our estimate exactly
UTX downgraded to hold from buy STT downgraded to hold from buy
IGT downgraded buy to neutral
MDP downgraded from Buy to Hold as we believe shares no longer offer a favorable risk reward profile given the recent run-up, and given that we do not believe a strategic transaction is imminent EBAY – Given what has historically been conservative guidance, in conjunction with a more aggressive investment game plan, we believe the turnaround is firmly underway, with results likely benefiting from operational leverage as the structured data initiative continues to move forward at an accelerated pace
MAT – lowers estimates on MAT after a surprisingly disappointing preannouncement, but sticks with his Outperform rating on the stock on more positive longer-term fundamentals
Life science – as we roll forward estimates and update models, we make PT changes for: Accelerate Diagnostics (AXDX, Buy, $30 PT –> $27 PT), Cerus (CERS, Buy, $9 PT –> $8 PT), and Fulgent (FLGT, Buy, $15 PT –> $16 PT) NOW – with another year of >35% subscription billings and revenue growth (adjusted for Fx and duration headwinds) and +300bps of margin expansion expected in FY17, we believe Servicenow remains one of the few category-leading enterprise SaaS companies. We raise our estimates and target to $102
EBAY – tweaking our estimates and our PT to $31 from $30, while maintaining a Neutral rating on EBAY. 4Q results were in line with muted Street expectations, as management continues to make progress with its structured data efforts to reaccelerate growth PLD – reiterate our Overweight rating on PLD and raise our price target to $57.00 from $55.00, primarily reflecting 4Q financials and our higher NAV/sh. estimate. Our Overweight rating is driven by our expectation of positive industrial real estate fundamentals; continued rent growth, given that Prologis’ in-place global rents are lower than market rents QSII – Bookings remain tempered. The company expects bookings to improve in F18, setting up stronger top line growth in F19. The QSII turnaround remains a work in progress but is probably moving in the right direction. The shares trade slightly below our revised DCF-based price target of $15 (up from $14).
AVXS – We now see an increasing likelihood that AVXS-101 will ultimately be approved in SMA types 2 and 3. Although AveXis has yet to start clinical trials for AVXS-101 in SMA types 2 and 3 (a phase I trial for SMA type 2 is expected to start in 2Q17), based on the results of the AVXS-101 phase I study in SMA type 1, and on a possible unmet medical need left by the ongoing safety concerns for Spinraza, we would not rule out the possibility for AVXS-101 to be approved for SMA types 1 to 3 with its initial label. (Spinraza was approved broadly without completing its SMA types 2 and 3 programs, albeit with much more clinical investigation than AVXS-101.)
Paper industry – Over the past week we’ve seen a number of data points that lead us to believe a containerboard price hike is highly likely, either announced around Feb 1 or Mar 1. Accordingly we’re raising est. for the containerboard group to reflect a $40/ton hike implemented in 2H ’17, partly offset by marked-to-market nat gas & OCC; also upgrade IP to buy APH – Conservative Guidance Despite Revenue and EPS Beat; Reit Buy & Add To US Focus List MET – We argue consensus estimates for 2017/18 are too aggressive. We do not expect the separation of Brighthouse Financial will materially alter MET’s earnings growth rate or nominal free cash flow AMP – We expect an ongoing mix shift favoring asset accumulation segments, led by margin expansion in A&WM toward ~22% by 2021 VOYA – We feel the combination of an improving business mix and strong capital deployment should drive upside. CBVA optionality increases with higher interest rates UNM – We forecast consistent top-line growth with stable margins. A permanent solution for the LTC closed block could be a game-changer for valuation RGA – We expect continued strong top-line growth and feel elevated excess capital provides optionality for block deals LNC – We feel LNC is the most levered to the current environment of macro improvement / potentially lower regulatory pressures. LNC’s distribution franchise allows for solid growth at reasonable returns CNDT & XRX– init CNDT with buy and raise our Xerox target price post tax free separation which occurred in January 2017. Both stocks trade at a discount to peers as both companies have excess costs that will be removed thereby driving margins higher. Prior to separation, our rating on Xerox was Buy with a TP of $12 and post separation our TP on Xerox is $9 and Conduent is $17
RES upgraded to outperform and raise tgt to $25 from $18- reported the most impressive revenue growth and margin improvement in US pressure pumping so far this reporting cycle. The results smashed the performance of the large-cap players
MSM upgraded to hold from sell GWW upgraded to hold from sell RLGY init hold and $29 tgt
VAR downgraded hold to sell saying the earnings report had a number of moving parts and confusing FY17 guidance
BANC upgraded to outperform
RES upgraded neutral to buy
TXT – added Textron to Franchise Pick list saying that while the company’s 2017 was disappointing, the ingredients are in place for accelerating earnings growth in the medium term ACAT downgraded to hold on buyout
Industrial: Brokerage Update: Headwinds near Term, Improving Outlook. Brokerage: Reiterate Overweight ratings on LSTR ($100PT) & CHRW ($80PT) post our channel checks and proprietary gross margin analysis. While some potential headwinds exist NT, we remain constructive intermediately. Our checks suggest limited transactional volumes and firm spot rates could potentially weigh on 4Q16. As such, we are cautious on CHRW NT. NT, we favor exposure to LSTR, where we expect modest upside and favorable 1Q guidance E&C sector – initial review of Trump’s 50 priority infrastructure projects suggests positive potential implications for ACM (OW, $42PT), FLR (OW, $65PT), & PWR (OW, $39PT). Our preliminary analysis of the 50 infrastructure projects on Trump’s priority list suggests a total estimated cost of ~$137B with the majority of projects (> 70%) tied to transportation systems and facilities
MAT downgraded to neutral from buy with $27 tgt from $36 turnaround story has lost momentum as it pushed up its 4Q earnings release and last night revealed disappointing year-end results CTXS – While these could pressure CTXS shares near term after a strong run, we are maintaining our Buy rating — we see continuing improvements in the core and think 2017 looks conservative while valuation for the core, at an estimated 11x EV/CFO and 16x P/E remains attractive. We are raising our 12-month price target to $105 from $100 FFIV – maintaining our Neutral rating, however, because we think the secular backdrop is different now versus previous F5 product cycles. Because of trends like Public Cloud and DevOps, we suspect the product cycle-driven growth may be more muted this time. Nevertheless, we are increasing our fair value estimate to $150 from $142 NOW – We previously feared that the billings upside investors required was becoming less frequent in late 2015 and early 2016 because new ACV growth was slowing. Now it is back, likely helped by new products, maturation of the sales process, and seasonality. With the shares up and a seasonal slowdown ahead, we are raising our fair value estimate to $95 from $80 but maintaining our Neutral
PCRX – raise PCRX PT to $50 from $41 while reiterating our Buy rating. The company signed a JNJ commercial partnership that we believe increases its eventual probability of takeout and should drive higher Exparel sales volumes NOW – remains one of our top picks in enterprise software and we believe n-t momentum can continue while valuation remains supportive. Maintain Buy rating while raising PT to $100 from $90 EBAY – With a backdrop of increasing competition, especially from Amazon and Google, we remain skeptical eBay can exit 2017 with low- to mid-double-digit GMV growth. For now, we view eBay as a show-me story, so we’re staying on the sidelines
FWONK – resume coverage at EW with a $29 PT – We agree F1 is a unique asset deserving a premium. However, it has appreciated ~20% above Liberty’s purchase price. While revenue growth has been healthy it likely slows in ’17. In addition, team payments have kept EBITDA flattish. Lack of EBITDA growth at premium multiple leaves us EW ENDP – Lower PT to $13 from $15 – Mgmt recently implied a ’17 base generics decline similar to ’16’s ~30% decline, which is worse than we had modeled. Cutting ’17e EBITDA by 5% to $1.7B WDC – Raised PT to $81 from $68 – NAND pricing and integration savings put upward pressure on gross margin in 2017. We now see $9 of EPS in CY17, which drives our $81 PT assuming a 9x P/E, the mid-point of where HDD/NAND stocks trade on peak earnings EBAY – Raised PT to $28 from $26 – ’17 top-line guidance was modestly better than expected, but lower operating profit and long-term margin commentary limits long-term earnings upside, leaving us cautious until we see a sustainable driver of faster top-line growth VNTV – Raised PT to $68 from $65 – Following the recent run in stock price, we think expectations are high into 4Q print and mgmt’s tendency to be conservative could be a near-term damper. But we think VNTV has potential to continue to deliver upside to current Street expectations despite the significant headwinds in FI.
PKX upgraded neutral to buy
EL upgraded to outperform as believe the company’s recent M&A in the makeup category, more aggressive partnerships with ULTA/Sephora, easier US compares, the potential for an inflecting EPS trajectory, and a now much more subdued sentiment toward the shares could lead to a better setup and the potential for share price outperformance V & MA – Heading into calendar year 2017, we affirm our Outperform ratings for MasterCard and Visa. Looking ahead to earnings, we are encouraged by solid intra-quarter volume growth, improving gas price trends (now a slight US purchase volume tailwind), strong retail sales growth (up 3.6% Y/Y in 4Q), and broadly positive card issuer trends
FB – We expect solid Q4 results and believe the likelihood for cautious commentary on ad load and conservative expense guidance are captured in current expectations. We see the potential for upside to 2017 expectations from improved pricing, growth in video, or a stabilized hiring rate CVLT – would be buyers of CVLT shares on the pullback. We see the operating margin guidance disconnect for F2018 (~80 bps below Street) as driven by FX headwinds of 100 bps to revenue, as well as lower-than-expected maintenance revenue in 1H18 due to historical license growth. We continue to see CVLT as a vendor to benefit from the Boomerang Effect as more IT organizations look for automated hybrid cloud solutions
CLVS upgraded to OW from neutral and raise tgt to $77 from $43 – has confidence in the total market potential for PARP inhibitors and expects them to “supplant platinum therapy well beyond ovarian or breast cancer and define new combinations broadly in oncology.
US banks – believe there are three catalysts that could move profitability meaningfully higher over the next 2–3 years: 1) continued increases in short-term interest rates and a steeper yield curve; 2) large bank M&A; and 3) significantly higher returns of excess capital NOW – positives were many and included an acceleration of billings at scale, record deals including non-ITSM products and strong new customer additions while the only real question was the 2017 FCF guide as we think the company remains on track to achieve their stated 2020 FCF goals. Maintain Top Pick, increasing estimates and raising our target to $108 WDC – We think fundamentals remain intact, as WDC should benefit from a favorable HDD environment and a tight NAND market; raise tgt to $90 Air leasing – Lease rates were flat for most aircraft types in 4Q16 relative to the prior quarter, with modest weakness in the A321 and 737-800, along with pressure in A330s on the widebody side – lease rates are closely tied to market interest rates, so continued upside here should offer support. Aircraft Lessors Continue to Offer Deep Value: Air Lease Corp (AL) remains our Top Pick rated favorite, AerCap (AER) and FLY Leasing (FLY) are both very attractive and rated Outperform, while Aircastle (AYR) is Sector Perform-rated
WNC upgraded to hold from sell MTOR upgraded to buy from hold and raise tgt to $17 from $14 after increasing his heavy and medium duty commercial vehicle production estimates
WGL upgraded to neutral from sell RACE tgt raised to $70 from $60 as believes the company can beat EBITDA guidance fueled by the new Aperta supercar
Specialty Retail – New Survey Indicates Rapid Growth of Bed-in-a-Box Mattresses that Will Likely Continue to Constrain Sales Growth of Traditional Brands EBAY – Q4 Results In Line and FY17 Guidance Implies Benefit from Structured Data Initiative; Maintain NEUTRAL Restaurants – Q4 Preview: Higher Valuations, but Fundamentals Remain Under Pressure PEGA – Greater Clarity on Margins and Recurring Mix Could Be a Catalyst; Reiterating OP and Raising PT to $42 from $40 ULTI – Set-Up for 4Q Looks Positive; Reiterate OUTPERFORM and $248 P EA – Q3:17 Preview: Battlefield 1 to Drive Q3 Upside; Positive Momentum to Continue in FY:18; Maintain OP, $95 PT
JNJ downgraded to Market Perform from Outperform given the disappointing 2017 revenue guidance the company provided on 1/24 which suggests to us that the company’s pharma business is facing more headwinds in 2017 than we realized ADC init MP and $46-$50 tgt KATE – look at a possible take out, view KATE as an attractive asset, see COH or KORS as most likely bidders but view PVH as a ‘dark horse’ in the mix, see a deal occurring in the $23-25 range FB – remains our top pick, based on continued improvement to its ad platform capabilities, sustained high engagement and reasonable growth adjusted value, TXT – lowering ests on weaker guide, 2017 outlook is conservative and reflects weaker biz jet pricing, after 17 biz jet outlook will be driven by new product growth rather than legacy products that are price sensitive in our view
CLR – Our increased numbers, predicated on stronger-than-expected 2017 guidance and improved well EURs, cause us to also raise our price target from $59 to $65. We look for CLR to show strong production growth in 2H17 and beyond; reiterate buy
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