MARKET DIGEST ARGUS IN THIS ISSUE:

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1 ARGUS Independent Equity Research Since DJIA: DJIA: 19, TUESDAY, DECEMBER 5, 2017 DECEMBER 4, DJIA 24, UP Good Morning. This is the Market Digest for Tuesday, December 5, 2017, with analysis of the financial markets and comments on Expedia Inc., Walt Disney Co., The Kraft Heinz Company, and NextEra Energy Inc. IN THIS ISSUE: * Change in Rating: Expedia Inc.: Downgrading to HOLD on weaker outlook (John Staszak) * Growth Stock: Walt Disney Co.: Reaffirming BUY and $129 target (Joseph Bonner) * Value Stock: The Kraft Heinz Company: Maintaining BUY but lowering target by $3 to $93 (Deborah Ciervo) * UtilityScope: NextEra Energy Inc.: NEE: Boosting target by $8 to $173 (Jacob Kilstein) CONFERENCE CALL ANNOUNCEMENT: Argus Research will host a conference call for clients at 11 a.m. ET on Wednesday, December 6, The call is entitled Argus Analysts Top Picks for Argus Director of Research Jim Kelleher, CFA, will host the call, which will be in webinar format. He will be joined by Argus President John Eade. Jim and John will describe the operating outlooks, including competitive advantage and growth dynamic, as well as valuations for a group of high-quality stocks that our analysts regard as well-positioned for outperformance in We will also review the performance of our 2017 top picks. Please note that the Investment & Wealth Institute has accepted Argus Monthly Conference Call for one (1) hour of continuing education (CE) credit toward the CIMA/CIMC/CPWA certifications. The program has also been accepted by CFP Board for one (1) hour of CE credit. Visit to register for this call. Once on the site, follow simple instructions to sign up for the call and receive a call-in number and passcode. If you have any problems registering, please contact us at clientservices@argusresearch.com or by calling (212) The call, as always, will be interactive with a question-and-answer period. We will be recording the call, and a rebroadcast will be available on the password-protected portion of our website. Slides related to the presentation will be posted on our website the day of the call and also will be available via the webcast itself. MARKET REVIEW: Stocks continue to move higher in a remarkable 2017, with new records in one index or another seemingly on a daily basis. But that s not to say there s nothing worth noting about the behavior of equities. Indeed, sector rotation over the past week may have been overlooked by those reading only the headlines. On Wednesday, November 29, Technology (the top year-to-date performer, up 34.5%) was the worst performer for the session (down 2.6%). On the flipside, the worst year-to-date performer, Telecom (down almost 13%), was up 1.6%. A look at five-day charts from last week tells a similar story, with the Blue Chip Dow Jones Industrial Average higher by 2.49% for the week, but the technology-laden Nasdaq Composite down 0.64%. So are investors simply taking profits in a sector that has performed above and beyond in 2017? Or is there evidence that the Technology group has moved too far, too fast and is due for a more substantial return to earth? Vickers Stock Research, Argus sister company, has examined how insiders reacted last week. After all, corporate executives, directors and beneficial owners as a group are famous for buying when others are selling (and vice versa), and presumably would swoop in to buy if the herd was headed in the wrong direction. The results suggest that the easy money in Technology indeed may be a thing of the past. A R G U S R E S E A R C H C O M P A N Y 6 1 B R O A D W - A 1 Y - N E W Y O R K, N. Y ( ) LONDON SALES & MARKETING OFFICE TEL / FAX

2 In the last week, the Vickers NYSE One-Week/Sell/Buy Ratio improved to 4.71 from While that is not a screamingly bullish result, it is clearly a positive sentiment move for this Blue Chip group. Yet over the same period, the Vickers Nasdaq One-Week Sell/Buy Ratio landed at 3.84 noticeably worse than the 3.36 recorded a week earlier. Looking at actual purchases and sales by insiders, NYSE insiders logged a 22% increase in purchase transactions compared to a lesser 16% increase in sales transactions. On the Nasdaq, the opposite occurred with a 26% increase in sales transactions compared to only a 10% increase in purchase transactions. So if one is looking for assurances from corporate executives that technology boats will continue to rise, we re sorry to say that (at least for now) we can t ring that bell. In the bigger picture, though, there is little sign of panic among insiders. Vickers broadest sell/buy reading, the Total Eight-Week Sell/Buy Ratio, landed at 3.61 an improvement of 17 basis points from the prior week. That s the fourth consecutive weekly improvement, with the reading progressing from 4.41 back on November 13. Sector rotation may be under way, but insiders don t seem to be throwing in the towel on the overall advance in equity prices

3 EXPEDIA INC. (NYSE: EXPE, $122.24)... HOLD EXPE: Downgrading to HOLD on weaker outlook * Our downgrade reflects the company s reduced 2018 guidance and prospects for increased spending on employee compensation, technology, and marketing next year. * Although we believe that these investments are necessary to counter aggressive competition from larger tech companies, we expect them to weigh on operating margins and free cash flow in the near term. * In addition, we note that growth has slowed in the U.S., which currently accounts for about 60% of bookings, and that major hotel chains are increasingly booking rooms through their own websites. * We are lowering our 2017 EPS estimate to $4.50 from $5.40 and our 2018 forecast to $5.60 from $6.90. ANALYSIS INVESTMENT THESIS We are downgrading Expedia Inc. (NYSE: EXPE) from BUY to HOLD, reflecting the company s reduced 2018 guidance and prospects for increased spending on employee compensation, technology, and marketing next year. Although we believe that these investments are necessary to counter aggressive competition from larger tech companies, we expect them to weigh on operating margins and free cash flow in the near term. In addition, we note that growth has slowed in the U.S., which currently accounts for about 60% of bookings, and that major hotel chains are increasingly booking rooms through their own websites. For investors interested in the leisure segment, we recommend shares of Wynn Resorts (WYNN) and Royal Caribbean Cruises Ltd (RCL). Our long-term rating remains BUY, as we expect the company to benefit over time from growth in online travel bookings, as well as from increased business in China and other emerging markets. In all, we expect Expedia s share of the global travel bookings market to grow from 6% in 2016 to 8%-9% in RECENT DEVELOPMENTS On October 26, Expedia reported adjusted 3Q EPS of $2.51, up from $2.41 in the prior-year period. GAAP EPS rose to $2.23 from $1.81 a year earlier. Third-quarter revenue grew 15% year-over-year to $2.97 billion, below the consensus of $2.98 billion. Gross bookings rose 11% year-over-year to $22.2 billion, but missed the consensus forecast of $22.55 billion. Including the HomeAway business, room nights rose 16% year-over-year, down from the 31% growth reported in the second quarter. The consensus estimate had called for room night growth of 20%. Online travel agency revenues rose 11% from the prior year to $2.3 billion, reflecting gains in the Brand Expedia, Hotels.com, and HomeAway businesses. Trivago revenue jumped an impressive 22% year-over-year in 3Q17, to $338 million. In the trailing four-quarter period, Trivago surpassed $1 billion in annual revenue for the first time. In the Egencia business (corporate travel management), revenue rose 13% year-over-year to $126 million. Expedia plans to strengthen the sales force in this business in order to boost bookings and revenue growth. HomeAway revenue surged 45% year-over-year to $305 million. HomeAway property night bookings rose 44% from the prior year. Geographically, U.S. sales were up 9% and contributed about 53% of Expedia s third-quarter revenue, while the international business accounted for 47% of revenue (up from 44% in 3Q16) and grew 23%. Lodging revenue contributed 71% of revenue and rose 15%, driven by a 16% increase in room nights at Brand Expedia, Hotels.com and HomeAway. Airfare revenue fell 7%, reflecting a 10% decrease in tickets sold, offset in part by a 4% increase in ticket volume. Advertising and media revenue rose 24%, driven by growth at Trivago and Expedia Media Solutions. Other revenue rose 21%, reflecting strength in car rental products and travel insurance. The EBITDA margin fell 200 basis points to 23.8%. The decrease reflected much higher-than-expected sales and marketing, technology, and content costs. Adjusted EBITDA rose 6% to $709 million, missing the consensus forecast by $26 million. During the first three quarters of 2017, Expedia spent $139 million to repurchase 1.0 million shares of stock. The company has approximately 5.5 million shares remaining on its February 2015 buyback authorization

4 Management now projects mid- to high single-digit EBITDA growth in 2017, down from its prior forecast of 10%-15% growth. The revised guidance reflects a lower EBITDA contribution from Trivago in the fourth quarter and the negative impact of recent hurricanes. Management also projected 2018 EBITDA growth at the low end of its usual 10%-20% range. EARNINGS & GROWTH ANALYSIS We now expect revenue to increase to $10.0 billion in 2017, down from a prior forecast of $10.2 billion, reflecting the negative impact of Hurricanes Harvey and Irma on 4Q17 revenue. We are also lowering our 2018 revenue forecast from $11.6 billion to $11.4 billion. In 2017, we expect the EBITDA margin to increase 120 basis points to 19.6%, driven by cost savings from the Orbitz acquisition and growth in the higher-margin advertising business. However, increased spending on data centers and cloud technology, as well as higher marketing expenses will offset part of this gain. In 2018, we expect the EBITDA margin to increase 130 basis points to 21%, driven by incremental earnings from the company s high-margin advertising business. Reflecting a slowdown in Trivago revenue, higher selling and marketing expenses, and hurricane-related disruptions, we are lowering our 2017 EPS estimate from $5.40 to $4.50. In 2018, reflecting increased spending on compensation, marketing and technology, we are lowering our EPS forecast to $5.60 from $6.90. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Expedia is Medium. At the end of 3Q17, cash and cash equivalents totaled $3.8 billion, up from $1.8 billion at the end of Long-term debt increased to $3.7 billion from $3.2 billion at the end of 2016 and the longterm debt/capital ratio increased 80 basis points to 37.5%. In September 2017, management raised the quarterly dividend from $0.28 to $0.30, or $1.20 annually, for a yield of about 1.0%. Our dividend estimates are $1.16 for 2017 and $1.28 for MANAGEMENT & RISKS On August 30, 2017, Expedia announced that it had appointed Mark Okerstrom, formerly its CFO, to replace Dara Khosrowshahi as president and CEO. Mr. Khosrowshahi recently left Expedia after 12 years to become the CEO of Uber. Expedia faces the risk of competition from a range of companies, including tech industry heavyweights Amazon, Facebook, and Google. The company would also be hurt by weaker economic conditions, which typically lead to reductions in business and leisure travel. It also faces currency risk as it generates more than 40% of revenue from international operations. COMPANY DESCRIPTION Expedia Inc. is an online travel agency (OTA). The company s technology provides tools and information that helps consumers to research, plan and book trips. With a market cap of approximately $18.7 billion, the shares are generally regarded as large-cap growth. INDUSTRY We have lowered our rating on the Consumer Discretionary sector to Market-Weight from Over-Weight. On top of the well-documented pressures on traditional retailers in this sector, the housing market is facing pressure from insufficient home supply and the new model year has failed to trigger higher purchases of new vehicles. While demand for big ticket consumer goods falters, we expect consumer discretionary investors to focus on leisure-related stocks. The sector accounts for 12.3% of the S&P 500. We think investors should consider allocating 12%-13% of their diversified portfolios to the group. Over the past five years, the weighting has ranged from 8% to 13%. The sector underperformed in 2016, with a gain of 4.3%, after outperforming in 2015, with a gain of 8.4%. It is underperforming thus far in 2017, with a gain of 9.6%. Consumer Discretionary earnings are expected to increase 11.0% in 2018 and 4.8% in 2017 after rising 9.4% in 2016 and 9.9% in On valuation, the 2018 projected P/E ratio is 18.9, above the market multiple of The sector s debt ratios are high, with an average debt-to-cap ratio of 52%. Yields are below average at 1.4%. VALUATION EXPE shares fell 6% following the company s October 26 earnings report, reflecting disappointment with both the thirdquarter results and management s guidance. We believe that EXPE shares are fairly valued at 27.4-times our revised FY17 EPS estimate, in the lower half of the five-year historical range of We believe that the current valuation adequately reflects the company s weaker earnings outlook and prospects for increased spending on employee compensation, technology, and marketing in the near term. We would consider returning the stock to our BUY list on signs of stronger-than-expected earnings and travel bookings. On December 4, HOLD-rated EXPE closed at $122.24, down $0.46. (John Staszak, CFA, 12/4/17) - 4 -

5 WALT DISNEY CO. (NYSE: DIS, $110.22)... BUY DIS: Reaffirming BUY and $129 target * Disney is preparing to release a new installment of Star Wars after limping out of FY17. * CEO Bob Iger made clear that the launch of new direct-to-consumer digital initiatives would be the company s top priority in FY18. * Management again warned that earnings growth would be suppressed in FY18 after a paltry 0.3% EPS growth in FY17. * We are lowering our FY18 EPS estimate to $6.13 from $6.47 and establishing an FY19 forecast of $6.53. ANALYSIS INVESTMENT THESIS We are maintaining our BUY rating on Walt Disney Co. (NYSE: DIS) to a target price of $129. Disney is preparing to launch its own over-the-top streaming ESPN video service, as well as a Disney-branded streaming service, leveraging its investments in Major League Baseball s BAMTech platform. While this may not end the debate over ESPN s place in the emerging/converging cable/ott distribution landscape, we see the BAMTech deal as a step in the right direction and as a hedge against further traditional cable subscriber losses. We also like Mr. Iger s reassurance that ESPN is getting the same (high) persubscriber rates from new OTT distributors that it gets from its traditional cable-affiliated distributors. Although increased investment in Shanghai Disneyland and other projects has weighed on earnings, Disney is also positioning itself for long-term growth. However, Management again warned that earnings growth will be suppressed in FY18 after a paltry 0.3% EPS growth in FY17. Disney s 2017 selloff has made valuation metrics more attractive; however, the shares have rebounded lately and are up 8% since the release of 4Q17 results. RECENT DEVELOPMENTS Disney reported fiscal 4Q and fiscal 2017 results (for the period ended September 30) on November 9 after the close. Revenue fell 3% year-over-year to $12.8 billion as growth at Parks and Resorts partially offset declines at Studio Entertainment, Media Networks, and Consumer Products & Interactive Media. Segment operating income fell by 11% to $2.8 billion and the segment operating margin narrowed by 220 basis points to 22%. Adjusted EPS attributable to Disney fell 3% to $1.07 from $1.10 in 4Q16. Adjusted EPS exclude a $0.10 gain related to BAMTech acquisition and a $0.04 charge for restructuring and impairment expense in 4Q17. GAAP diluted EPS rose 3% to $1.13. For all of FY17, revenue fell 1% to $55.1 billion. Adjusted EPS slipped to $5.70 from $5.72 in FY16. On the quarterly call, CEO Bob Iger made clear that the launch of Disney s new direct-to-consumer (what others call over-the-top ) digital initiatives are the company s top priority for FY18. Disney had previously announced that it would launch its own ESPN-branded multisport digital video streaming subscription service in early It also expects to launch a new Disney-branded streaming subscription service later in 2018, moved up from Pay TV subscribers will be able to access the new ESPN service through the usual authentication process. ESPN already has an audience of 23 million monthly unique mobile users. The new Disney-branded service will include Disney s hit first-run film content as well as movies, TV shows, and shortform content originally produced for the new service itself. Disney will also sever its film output arrangement with Netflix in 2019 in order to redirect content to its new streaming service. In line with these announcements, Disney is increasing its investment in digital streaming technology company BAMTech, LLC by an additional 42%, and will now have a controlling 75% stake. Disney will pay $1.58 billion for the additional 42% after paying $1 billion for its original 33% interest in August The difference in these prices implies that the value of BAMTech has risen by 24% since August BAMTech is expected to be intimately involved in powering the launch of new ESPN- and Disney-branded digital direct-to-consumer subscription services as well as other new digital initiatives. Disney expects that its BAMTech investment will be modestly dilutive to earnings over the next two years. EARNINGS & GROWTH ANALYSIS We are lowering our FY18 estimate to $6.13 from $6.47 and establishing an FY19 forecast of $6.53. In general comments on the fourth-quarter call, CFO Christine McCarthy said that earnings growth would be suppressed in FY18 due to the consolidation of, and investments in, BAMTech, as well as investments in Hulu

6 In FY17, Media Networks revenue fell 1% to $23.5 billion and operating income declined 11% to $6.9 billion. At ESPN, higher programming expense for NFL, NBA and other sports rights and lower advertising revenue more than offset affiliate revenue growth. Lower advertising revenue resulted from a decline in average viewership and in units delivered. Affiliate revenue growth was driven by contractual rate increases, partly offset by a decline in subscribers. The high cost of ESPN s sports rights is another significant investor concern. The Parks and Resorts division, the company s second major growth driver, posted strong 8% growth in segment operating income in FY18, to $18.4 billion. Results were driven by growth at both international and domestic locations. The segment benefited from the first full year of operations at Shanghai Disney Resort, higher guest spending and admissions at the company s theme parks, and increased cruise ship sailings. However, Hurricane Irma dinged the segment s 4Q18, forcing the closure of the Orlando parks for two days, the cancellation of three cruise itineraries, and the shortening of two others. Irma had an adverse $100 million impact on 4Q operating income. Domestic park guest attendance was up 2% in 4Q, despite the hurricane, though guest spending was flat prior year. So far in the current December quarter, domestic resort reservations are pacing down 1% due to reduced room inventory, though booked rates are up 9%. The Studio Entertainment division reported a 13% decline in segment operating income, to $2.36 billion, in FY17. Lower theatrical and home video results drove the decline, which was partly offset by higher television distribution revenue. Both film and home video release slates faced a tough comparison with the titles released in FY16, particularly the comp to Star Wars: The Force Awakens. Disney remains in second place, well behind Warner Bros. in theatrical U.S. market share in 2017 and year-todate is $250 million behind its 2016 box office performance (according to industry tracker Box Office Mojo). Thor: Ragnarok, another Marvel franchise theatrical released in early November, has performed quite well; the company also has high expectations for the next installment of the Star Wars franchise, The Last Jedi, scheduled for release on December 15. CEO Bob Iger has noted three key elements to Disney s success. The company s first priority, as always, is to invest in compelling high-quality branded content as exemplified by the Star Wars franchise reboot. The second priority is to exploit new technologies to create a fantastic user experience and incredible interface navigation. The third priority, also technologyoriented, is to provide audiences with anytime, anywhere access to Disney content, which means digital/mobile. These last two priorities are exemplified by the BAMTech investments, as well as by the company s development of its new subscription video services. FINANCIAL STRENGTH & DIVIDEND We rate Disney s financial strength as Medium-High, the second-highest point on our five-point scale. With Shanghai Disneyland now in operation, we had expected capex to moderate. However, the ongoing capital projects at Orlando and Anaheim will mean an incremental $1 billion in capex spending in FY18. Doing the math, this would bring Disney s capex spending to $4.6 billion, well above the long-term average of $3.75 billion. Trailing 12-month free cash flow rose 3% to $8.72 billion in FY17. The credit agencies give Disney ratings in the low to mid-a s (investment grade); S&P raised its rating a notch to A+ in May. Outlooks are stable. Disney s semiannual dividend is $0.78, or $1.56 annually, for a yield of about 1.5%. Disney boasts a five-year compound annual dividend growth rate of 21%. Our FY18 estimate is $1.71 and our new FY19 forecast is $1.81. Disney repurchased 89.5 million shares for $9.4 billion in FY17, in line with its guidance of $9-$10 billion. The company expects to repurchase about $6 billion of its stock in FY18. The share count fell 4% in FY17. MANAGEMENT & RISKS The FCC and consumer advocates had pushed for smaller, more selective cable channel bundles for years, but had little success in the face of industry opposition. However, skinny bundles from both legacy cable distributors and new-entrant internet streaming providers look like the wave of the future. Disney s plans to join the OTT fray are simply a recognition of the building relevance of this emerging form of content distribution to viewers. At the very least, digital streaming will be an addition to, if not an outright replacement for, traditional large multichannel cable bundles. ESPN, as the most valuable cable channel, could be saddled with expensive long-term sports contracts, without a reliable affiliate revenue stream, if it is unable to generate the kind of revenue from these new forms of distribution that it has generated from traditional cable bundles in the past. Skinny bundles could also take a toll on Disney s other cable and broadcast channels. We think that CEO Robert Iger deserves much of the credit for making alliances and catapulting Disney to the top of the media industry. Mr. Iger wooed Steve Jobs and Pixar first into an alliance to distribute Disney/ABC television content through Apple s itunes store, then arranged Disney s acquisition of Pixar. In 2009, Disney signed on to the Hulu joint venture to distribute content over the internet, and announced an agreement with the Chinese government for a new park in Shanghai, which opened - 6 -

7 in June In 2010, it acquired Marvel Entertainment and agreed to distribute some ABC television content through Netflix. In December 2012, Disney acquired Lucasfilm, with its iconic Star Wars intellectual property. Mr. Iger remains under contract through July 2, COO Tom Staggs, the presumed heir-apparent, resigned in April 2016, and the board must now find a new candidate to succeed Mr. Iger, perhaps from outside the firm. The succession issue adds a level of uncertainty for Disney. Disney investors face numerous risks. A drop in consumer spending businesses can impact businesses across its portfolio. The company can fight back with discounts, especially in the Parks division, though this hurts profitability. The company has recently benefited from price increases, even in the face of a continued slow-growth economy. Another financial or other crisis could be a blow to consumer confidence. All of these factors could reduce travel and spending at Disney locations. Disney has also increased its economic sensitivity through the reacquisition of Disney retail stores in North America and Japan. The Studio Entertainment and Media Networks divisions, like all creative content producers/distributors, depend on advertising spending, which is a major component of revenue for the networks and makes their revenue highly sensitive to cyclical fluctuations. These divisions must also deal with the hit-or-miss nature of the media business, as studios try to anticipate the changing tastes of a fickle public. The studios must also try to contain the high costs of producing entertainment content. We note that media audience fragmentation and the secular shift in advertising dollars away from broadcast television and toward digital/ internet platforms have magnified the above-mentioned risks. Of course, Disney is in the forefront of adapting to the new digital delivery platforms, and has at times shortened distribution windows to the consternation of its theatrical exhibition partners. Investors have been pointedly concerned about the fate of Disney s crown jewel asset, cable sports network ESPN, ever since the company revealed that ESPN had begun to suffer subscriber defections in calendar 2Q15. Subscriber declines remain a drag for ESPN as the network has weathered rounds of layoffs. However, CEO Bob Iger has noted the attractiveness of the ESPN sports media brand to new virtual multichannel video program distributors (vmvpds). ESPN has already been included in Dish s Sling TV, AT&T DirecTV Now, Hulu, Sony s PlayStation Vue, and YouTube TV. Mr. Iger noted that from a per sub pricing standpoint, these new services are just as valuable to us as traditional platforms, signaling to the investment community that ESPN continues to garner its premium per subscriber license fees from the new services. vmvpds are currently immaterial to Disney s business; however, ESPN s inclusion in them represents a hedge against their future growth and the concomitant shrinkage of the cable subscriber universe if the cord-cutter/cord-never phenomenon accelerates. While ESPN may now be included in the new vmvpd services, so-called skinny bundles that exclude sports could be a future threat for ESPN. This threat is balanced by ESPN s unique sports programming; this programming tends to be watched live rather than time-delayed, thus making it more valuable to advertisers, including advertisers on mobile video. COMPANY DESCRIPTION Walt Disney Co. is a global entertainment company with four divisions: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The company owns and leverages well-known brands, ranging from Mickey Mouse and Frozen to ESPN and ABC. Disney acquired the animated movie producer Pixar Animation Studios in 2006, comic book and movie producer Marvel Entertainment in 2010, and Star Wars originator, Lucasfilm, in Disney derives 24% of its revenue from outside of North America and 12% of its revenue from Europe. VALUATION Our valuation methodology is multistage, including peer analysis, a multiple-analysis matrix applied to our proprietary forecasts, and discounted cash flow modeling. DIS shares have traded between $96 and $116 over the past year, and are currently above the midpoint of that range. The shares have risen 7% year-to-date on a total-return basis, compared to a 21% gain for the S&P 500 and a 9% gain for the S&P 500 Media Index. We note that all of that gain and more has come since Disney reported its 4Q17 results. DIS is trading at a trailing enterprise value/ebitda multiple of 11.7, above the peer average of Disney s forward enterprise value/ebitda multiple of 10.7 is 9% above the peer average, compared to an average premium of 1% over the past two years. Our rating remains BUY with a target price of $129. On December 4, BUY-rated DIS closed at $110.22, up $4.97. (Joseph Bonner, CFA, 12/4/17) - 7 -

8 THE KRAFT HEINZ COMPANY (NGS: KHC $81.92)... BUY KHC: Maintaining BUY but lowering target by $3 to $93 * KHC shares have underperformed the S&P 500 over the past three months, rising just 1% while the index has risen 2.6%. * On November 1, KHC reported 3Q17 adjusted EPS of $0.83, flat with the prior year and in line with consensus. * Based on the company s slower-than-expected sales and gross margin trends, we are trimming our 2017 adjusted EPS estimate to $3.63 from $3.70. We are also lowering our 2018 estimate to $3.93 from $4.00. * We still see value. Our target price of $93 implies a multiple of 23.7-times our 2018 EPS estimate, above the peer average but warranted, in our view, by the company s prospects for strong cost synergies and continued earnings growth. ANALYSIS INVESTMENT THESIS We are maintaining our BUY rating on The Kraft Heinz Company (NGS: KHC), one of the world s largest food and beverage producers, with a target price of $93, reduced from $96. Although reported sales have been sluggish in recent quarters and market share has sagged in certain categories, we expect improvement in 2018 as Heinz and Kraft continue to integrate their operations and leverage their respective sales platforms. We also expect the combined company to benefit from an increased focus on healthier foods, and to generate strong cost savings and above-peer-average earnings growth over time. Based on the positive long-term outlook, we believe that KHC shares are favorably valued at 20.7-times our 2018 EPS estimate. Our revised target price of $93 implies a multiple of 23.7-times our 2018 EPS estimate, above the peer average but warranted, in our view, by the company s prospects for strong cost synergies and earnings growth. RECENT DEVELOPMENTS KHC shares have underperformed the S&P 500 over the past three months, rising just 1% while the index has risen 2.6%. The stock has also underperformed since it began trading under the KHC ticker on July 5, 2015, with a 14.7% gain, compared to a 25.4% advance for the S&P 500. On November 1, KHC reported 3Q17 adjusted EPS of $0.83, flat year-over-year and in line with consensus. The results reflected higher sales, lower integration and restructuring expenses, offset by higher taxes. GAAP earnings rose to $0.77 per share from $0.69 a year earlier. Net sales rose 0.7% to $6.31 billion, just shy of the consensus forecast of $6.33 billion. Favorable currency translation increased reported sales by 0.4%. Organic net sales rose 0.3% from the year-earlier period, reflecting a 0.5-percentage-point benefit from higher pricing and a negative 0.2-percentage point impact from volume and product mix. Operating income rose 17.6% to $1.66 billion, as the operating margin expanded to 26.3% from 22.6% in 3Q16. Adjusted EBITDA rose 7.0% to $1.9 billion, driven primarily by cost-savings. The gross margin was 36.7%, up from 35.4% a year earlier. The integration of Kraft and Heinz has thus far generated $1.58 billion in cost synergies. Management noted the firm is on track to achieve $1.7-$1.8 billion in savings by the end of Management does not provide guidance, but does provide a general outlook for the current year. It is focused on organic sales growth in the fourth quarter and in In 4Q, it expects weaker results in the U.S. and Canada to be offset by acceleration in other regions. In addition, it looks for stronger margins and an effective tax rate of 29%, down from its previous forecast of 30%. As noted above, it also expects continued cost savings from the merger. On the negative side, management said that retail markets remain challenging. In February 2017, the company withdrew its proposal to acquire Unilever after Unilever rejected the offer, citing disagreements over strategy. However, KHC remains interested in acquisitions. EARNINGS & GROWTH ANALYSIS Kraft Heinz has four geographic segments: the United States (69% of 3Q17 sales), Canada (9%), Europe (9%) and Rest of World (12%). Operating results by segment are summarized below. In the United States, 3Q organic net sales and overall net sales declined 0.4% to $4.38 billion. Pricing rose 0.4 percentage points, while volume and product mix had a negative 0.8-percentage-point impact. These results were driven by distribution losses in cheese and nuts as well as by lower meat and coffee shipments, offset in part by better performance in Lunchables, Portable Protein products, and the foodservice business. Adjusted EBITDA rose 6.8% from the prior-year period, to $1.44 billion, as the EBITDA margin expanded by 218 basis points. Despite strength in certain product lines, management noted that sales and market share continued to face pressure in the natural cheese, Kraft salad dressing and cold cuts categories

9 In Canada, organic sales fell 2.4% from the prior year to $537 million, as higher sales of condiments and sauces were offset by lower sales of macaroni and cheese. There was a negative 1.9-percentage-point impact from lower pricing due to promotional activity, and a negative 0.5-percentage-point impact from volume and product mix. Segment adjusted EBITDA rose 9.0% from the prior year to $148 million as the EBITDA margin expanded by 207 basis points. In Europe, organic sales rose 3.4% to $577 million, as a 0.7-percentage-point negative impact from pricing was more than offset by a positive 4.1-percentage-point impact from volume and product mix. The positive volume/mix was driven by strong sales of condiments and sauces as well as foodservice sales. Segment adjusted EBITDA rose 7.9% to $206 million. In the Rest of World, which includes the Asia Pacific region, Latin America, India, the Middle East, Russia, and Africa, organic sales grew 3.6% to $778 million. Pricing contributed 3.8 percentage points to growth while volume and mix had a negative 0.2-percentage-point impact. Segment adjusted EBITDA rose 2.7%, reflecting the impact of business investments to support growth and higher local-currency input costs. Based on the company s slower-than-expected sales and gross margin trends, we are trimming our 2017 adjusted EPS estimate to $3.63 from $3.70. Our estimate implies 9% growth from 2016 adjusted earnings of $3.33. We are also lowering our 2018 EPS estimate to $3.93 from $4.00. We expect sales in FY17 to benefit from new products and reduced currency headwinds, and look for significant margin gains as Heinz and Kraft continue to integrate their operations. As noted above, the company now expects $1.7-$1.8 billion merger-related cost savings in FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Kraft Heinz is Medium-High, the second-highest rank on our five-point scale. The company s debt is rated BBB-/stable by S&P and BBB-/stable by Fitch. At the end of 3Q17, the company had a debt/total capital ratio of 34.6%, well below the food industry average of 66.6%. The company also scores high on profitability, with a 26.3% operating margin, well above the peer average of 20.8% Kraft Heinz pays a dividend. The company recently raised its quarterly payout by 4.2% to $0.625 per share, or $2.50 annually, for a yield of about 3.0%. The company generates strong cash flow, so we think the dividend is secure. Our dividend forecasts are $2.46 for 2017 and $2.58 for MANAGEMENT & RISKS Bernardo Hees became CEO of Kraft Heinz following the merger in July He had been the CEO of Heinz since 2013 and served as CEO of Burger King Worldwide Holdings from 2010 through In addition to merger-related risks, KHC investors face risks related to the highly competitive nature of the food products industry, the need to correctly anticipate and respond to changes in consumer preferences, and the high proportion of sales that are made to the company s largest customers (with Wal-Mart Stores accounting for 20% of sales in 2015). COMPANY DESCRIPTION Kraft Heinz is one of the largest food and beverage companies in the world. Its leading brands include Heinz, Kraft, Oscar Mayer, Planters, Philadelphia, Velveeta, Lunchables, Maxwell House, Capri Sun, Ore-Ida, Kool-Aid and Jell-O. The company was formed through the merger of Kraft Foods and H.J. Heinz on July 2, (Heinz was previously owned by Berkshire Hathaway Warren Buffet is on KHC board and 3G Global Food Holdings LP.) Management expects the merger to generate annualized cost savings of $1.7-$1.8 billion by the end of The merger is also helping Kraft, which previously generated 98% of its sales in North America, to expand internationally by leveraging Heinz s strength in overseas markets. Prior to the merger, Heinz generated approximately 60% of its sales from outside North America, including 25% in emerging markets. VALUATION We think that KHC shares are attractively valued at prices near $82, below the midpoint of the 52-week range of $75- $98. The technical outlook is mixed. The shares shot to a 52-week high in February on expectations of a merger with Unilever, but have since pulled back. We see support near $82. We have a favorable view of the Kraft Heinz merger, as the two companies should be able to leverage each other s sales platforms and geographic strengths. As such, we expect the combined company to achieve strong sales growth and to reach management s target of $1.7-$1.8 billion in annualized cost savings. On a fundamental basis, the shares trade at 20.7-times our 2018 earnings estimate, in line with the peer average but below their recent historical average range of Our revised target price of $93 implies a multiple of 23.7-times our 2018 EPS estimate, above the peer average but warranted, in our view, by prospects for strong cost synergies and continued earnings growth. On December 4, BUY-rated KHC closed at $81.92, up $0.71. (Deborah Ciervo, CFA, 12/4/17) - 9 -

10 NEXTERA ENERGY INC. (NYSE: NEE, $155.97)... BUY NEE: Boosting target by $8 to $173 * We see new growth opportunities at the nonregulated NextEra Energy Resources business and at the limited partnership, NextEra Energy Partners, both of which should contribute to earnings growth and support the dividend. * On October 26, NEE reported 3Q17 non-gaap earnings of $875 million or $1.85 per share, compared to $809 million or $1.74 per share in 3Q16. EPS came in $0.03 above our estimate and $0.08 above consensus. * Along with its 3Q earnings release, the company reiterated its 2017 and 2018 guidance. It projects 2017 adjusted EPS of $6.35-$6.85 and 2018 adjusted EPS of $6.80-$7.30. It also reaffirmed its long-term earnings growth rate forecast of 6%-8% through * We are lowering our 2017 EPS estimate to $6.80 from $6.81 based on our expectations for slower growth in the fourth quarter as the company pursues refinancing. However, we are raising our 2018 estimate to $7.29 from $7.21 as we see operational improvements continuing into next year. Our five-year earnings growth rate forecast is 7%. ANALYSIS INVESTMENT THESIS We are maintaining our BUY rating on NextEra Energy Inc. (NYSE: NEE), which combines a successful regulated utility with a faster-growing renewables business. We are also raising our 12-month target price to $173 from $165, based on our higher 2018 EPS estimate. We see new growth opportunities at the nonregulated NextEra Energy Resources business and at the limited partnership, NextEra Energy Partners, both of which should contribute to earnings growth and support the dividend. NextEra has a solid record of dividend increases. It is targeting a payout ratio of 65%, with projected dividend growth of 12%-14% in In a rising interest-rate environment, we prefer utility stocks with above-average dividend growth potential. While NEE trades at a premium to peers, we believe that this is warranted based on the company s consistent EPS and dividend growth. Our long-term rating is also BUY based on the following four factors: (1) We expect solid earnings growth from Florida Power & Light as the economy strengthens and the rate base expands; (2) We look for NextEra Energy Resources to continue to increase its investment in renewables; (3) The company continues to reduce risk through new contracts and balance sheet improvements; and (4) We expect management to maintain its focus on shareholder and customer value. RECENT DEVELOPMENTS NEE shares have underperformed the market over the last three months, rising 5%, compared to the S&P 500 s rise of 7%. Over the past 12 months, however, the shares have outperformed, rising 37% versus an increase of 21% for the S&P 500. NEE shares have outperformed the Utility Sector ETF (IDU) over the past 1-year, 5-year, and 10-year periods. The beta on NEE shares is 0.70, in line with peers. On October 26, NEE reported 3Q17 non-gaap earnings of $875 million or $1.85 per share, compared to $809 million or $1.74 per share in 3Q16. EPS came in $0.03 above our estimate and $0.08 above consensus. GAAP net income was $847 million or $1.79 per share, up from $753 million or $1.62 per share in 3Q16. (Non-GAAP net income excludes gains from hedging and discontinued operations as well as other nonoperating adjustments.) Revenue was unchanged from a year earlier, at $4.81 billion, matching our estimate but missing the consensus of $4.89 billion. The consolidated GAAP operating margin rose to 29.1% from 26.6% in 3Q16 due to lower merger costs. Adjusted EBITDA rose by $83 million from last year, to $2.5 billion, but missed the consensus estimate of $2.6 billion. Along with its 3Q earnings release, the company reiterated its 2017 and 2018 guidance. It projects 2017 adjusted EPS of $6.35-$6.85 and 2018 adjusted EPS of $6.80-$7.30. It also reaffirmed its long-term earnings growth rate forecast of 6%-8% through 2020, when it expects adjusted EPS of $7.85-$8.45. In July, the Public Utility Commission of Texas rejected NEE s $2.4 billion bid for a 19.75% stake in Oncor, a Texas transmission company owned by the bankrupt utility, Energy Future Holdings. The commission had rejected NEE s outright acquisition offer earlier in the year, saying the financial structure of the proposed company might be too risky for customers. On August 20, Energy Future Holdings agreed to sell Oncor to Sempra Energy for $9.45 billion. The deal narrowly beat a $9.0 billion bid by Warren Buffett s Berkshire Hathaway. The winning bid was aided by hedge fund, Elliott Management. Elliott had previously purchased distressed debt on Energy Future Holdings, which led EFH to hold out for a higher bid from Sempra

11 NEE believes it is owed a $275 million breakup fee from Oncor due to the collapsed deal, while Elliott says its debt payments take priority over the breakup fee. On September 19, a federal judge in Delaware said he would reconsider his own year-old approval of the breakup fee, a negative development for NEE. Judge Christopher Sontchi reversed his own order, saying he misunderstood testimony by the debtor s witnesses, which he also categorized as incorrect, and that the fee did not benefit to the debtors estate. NEE can appeal Judge Sontchi s decision or settle with Energy Future Holdings. The utility industry is heavily regulated and NextEra works closely with local officials at the Florida Public Service Commission to set rates and returns. FPL expects new rates to take effect this year following a recent favorable rate case decision. The agreement provides for an average allowed ROE of 10.55% with a range of 9.6%-11.6%. Management believes the ROE will be toward the top of the range based on its sales growth, capex, and expense forecasts. As a result of the decision, FPL s retail customer base will see rate increases of $400 million in 2017, $211 million in 2018, and $200 million in the first half of EARNINGS & GROWTH ANALYSIS Third-quarter adjusted earnings at NextEra s regulated utility, Florida Power & Light Co. (FPL), came to $566 million or $1.19 per share, compared to $515 million or $1.11 per share in 3Q16. The improvement was driven by new investments. However, third-quarter retail sales decreased 3.0% due to Hurricane Irma. GAAP results were the same as the adjusted results. Weather-normalized sales decreased 3.0%, hurt by a 1.7% decrease in customer usage. Management expects weather-normalized usage per customer to be flat to down 0.5% in the near term. The economy in Florida continues to grow. To meet the expected increase in demand in the Florida market, the next major investment in FPL s capital plan is a 1,748-MW combined-cycle power plant fueled by natural gas in Okeechobee County. Construction will begin this year, with an in-service date of mid NEE is also working to modernize its Lauderdale Plant in Dania Beach through the construction of a fuel-efficient energy center. NextEra Energy Resources (NEER), the company s nonregulated business, posted 3Q GAAP earnings of $292 million or $0.62 per share, down from $307 million or $0.66 per share a year earlier. Adjusted earnings, which exclude asset sale and hedging gains along with other nonoperating items, also came to $292 million or $0.62 per share, but were up from $279 million or $0.60 per share in 3Q16. Earnings were driven by growth in the contracted renewables portfolio, which reflected wind and solar investments, as well as investments in natural gas pipelines. Additions to the renewables portfolio added $0.11 to EPS. New investments in natural gas pipelines added $0.01 per share. Existing generation assets lowered earnings by $0.03 per share. NEER expects to add 4,900-8,000 MW of new wind and solar capacity in , and 10,100-16,500 MW in NEE shares have outperformed the market since the presidential election as concerns have eased about the impact of Trump administration policies on renewable energy development, including tax incentives for renewable projects. The 2016 rate case settlement mentioned above supports investments in clean energy, and provides a solar base rate adjustment for Management noted that the tax incentives were extended by Congress under a five-year phase-down in late 2015, and expects them to be maintained given the jobs created by renewable energy projects. We are lowering our 2017 EPS estimate to $6.80 from $6.81 based on our expectations for slower growth in the fourth quarter as the company pursues refinancing. However, we are raising our 2018 estimate to $7.29 from $7.21 as we see operational improvements continuing into next year. Our five-year earnings growth rate forecast is 7%. We remain optimistic about the long-term potential of Florida Power and Light (FPL), the company s competitive utility, based on management s record of improving efficiency. We expect this regulated business to be a source of stable earnings growth going forward. This growth should be supported by an improving Florida economy, with continued strength in housing, employment, and customer power usage metrics. Management projects above-average economic growth in Florida over the long term. The company s unregulated segment, NextEra Energy Resources, has become one of the world s largest renewable generation companies, and on a standalone basis would be a top-15 utility. As NEER continues to develop its wind and solar portfolio, these investments should complement the company s existing portfolio of nuclear and combined-cycle gas turbines. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for NEE is Medium, the midpoint on our five-point scale. At the end of the quarter, the total debt/capital ratio was 56%, in line with peers. Third-quarter EBITDA covered interest expense by a factor of 6.7, also in line with peers. NextEra generated $3.2 billion in cash from operations in the third quarter, covering 120% of capital expenditures. The adjusted profit margin in 3Q17 was 17.7%, well above the peer average of 13.3%. The company pays a quarterly dividend of $ per share, or $3.93 annually, for a yield of about 2.5%. On October 13, the board of directors declared a quarterly dividend of $ cents per share, payable December 15 to shareholders of record as of November 24. The current payout represents an increase of 13% from 2016 and implies a 60% payout ratio based on the

12 midpoint of management s 2017 EPS guidance. The company has increased the dividend at an average annual rate of 10% over the last five years. The board has approved a 65% target payout ratio (based on adjusted EPS) by This should translate into annual growth of 12%-14% through 2018 from a 2015 base of $3.08 per share. Our 2017 dividend estimate is $3.93 and our 2018 estimate is $4.44. MANAGEMENT & RISKS In 2013, President and CEO Jim Robo was elected chairman. Mr. Robo has held various management positions at NextEra for more than a decade. Management is committed to electric service expansion strategies in its regulated service territory, and believes that significant growth opportunities exist in the company s wind power and merchant generating operations. We think NextEra s platform for growth is solid, and are confident in management s ability to provide shareholders with increased value over the long term. Key risks for stocks in our electric utility universe include commodity price risk, the effect of adverse weather conditions on revenues, regulatory risk (especially when it involves construction cost recovery), and environmental and safety liabilities. In addition, the capital-intensive nature of utility operations creates ongoing liquidity risk that must be actively managed by each company. We would probably lower our earnings estimates for NEE in the event of a prolonged recession or slower demographic growth in Florida. COMPANY DESCRIPTION NextEra Energy provides a range of regulated and nonregulated energy-related products and services, with a growing presence in 30 U.S. states and 4 Canadian provinces. Its principal wholly owned subsidiary, Florida Power & Light, serves 4.9 million customers in eastern and southern Florida. In 2016, Florida Power & Light s energy mix was 70% natural gas, 23% nuclear, 4% coal, and 3% purchased power. NextEra Energy Resources, a nonregulated electricity generating subsidiary, is the largest U.S. generator of wind and solar power. Through its subsidiaries, NextEra Energy also operates one of the largest fleets of nuclear power stations in the U.S. VALUATION We believe that NextEra shares remain attractively valued at recent prices near $157, near the high end of their 52-week range of $113-$159. The shares are trading at 21.4-times our 2018 EPS estimate, toward the high end of their five-year range of They also trade toward the high end of the range on price/sales and price/book. The stock trades at a premium to peers based on P/E, price/book and price/sales. However, we believe that a premium valuation is warranted given the company s prospects for above-average earnings and dividend growth. Our revised 12-month target price of $173, up from $165, implies a potential 12- month total return, including the dividend, of more than 13% from current levels. On December 4, BUY-rated NEE closed at $155.97, down $1.50. (Jacob Kilstein, CFA, 12/4/17)