Reiterate OW: This Makeover is More Than Cosmetic

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1 November 24, 2015 Estee Lauder Companies Inc Reiterate OW: This Makeover is More Than Cosmetic MORGAN STANLEY & CO. LLC Dara Mohsenian, CFA Bob Doctor, CFA Kyle Fitzgerald Industry View In-Line Stock Rating Overweight Price Target $99.00 We rate EL Overweight as we believe valuation does not fully reflect the company's higher EPS growth/returns than peers. Reiterate OW: We highlighted EL as our top pick at our Consumer conference, and detail below seven key reasons behind our OW rating. Organic Transformation Underappreciated; Favorable 1. Channel & 2. Brand Mix: EL's -7% EV/EBITDA discount to peers is far too low in our minds. We believe the most significant area where the market is mispricing the stock is in not fully understanding that EL has transformed itself organically into higher-growth and -margin channels & brands, away from its historical leverage to less attractive department store channels & heritage brands. As EL does not break out profitability by channel/brand, we believe this transformation is not fully understood and also drives much greater EL growth potential than CPG peers. From a channel standpoint, EL is exposed to multiple attractive channels where other CPG companies have little leverage, including the much higher growth/margin online (est. 18% of EL's profit vs. a LSD CPG avg.) & travel retail businesses (est. 24% of EL's profit vs. little exposure at CPG peers), and high growth specialty stores/el's own retail stores (est. 16% of EL's profit vs. little exposure at CPG peers). On brand mix, EL is attempting to turn around declining heritage brands (est. 42% of mix), but we are more focused on the other 58%, which is growing organic sales low-tomid teens and has become more important to mix. In an era of quick fix strategic (EPS accretive acquisitions in the short-term that hurt long-term ROIC) and/or cost-cutting actions, EL is building its business the old fashioned way, organically, which we believe is a more enduring approach that the market will increasingly reward over time. Other Reasons to Own EL: 3. EPS Visibility: Our analysis shows EL's nearterm sales/eps guidance is conservative this year, offering a near-term catalyst. 4. Expansion Potential: We continue to see significant LT expansion potential in emerging markets in the beauty category well above other CPG categories. 5. Self-Help Levers: We continue to think EL has multiple self-help levers it can pull to drive shareholder value beyond market expectations. 6. Attractive Prestige Beauty Category: EL's solely high-end exposure through the prestige side of beauty is favorable given higher growth, greater pricing power, and strong barriers to entry in prestige vs. typical CPG categories. 7. Attractive Valuation: EL trades in-line with CPG peers despite much higher LT topline and EPS growth, ROIC, as well as self-help opportunities. Estee Lauder Companies Inc ( EL.N, EL US ) Household & Personal Care / United States of America Stock Rating Overweight Industry View In-Line Price target $99.00 Shr price, close (Nov 23, 2015) $85.41 Mkt cap, curr (mm) $32, Week Range $ Fiscal Year Ending 06/15 06/16e 06/17e 06/18e ModelWare EPS ($) Prior ModelWare EPS ($) P/E Consensus EPS ($) Div yld (%) Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates QUARTERLY MODELWARE EPS ($) 2016e 2016e 2017e 2017e Quarter 2015 Prior Current Prior Current Q a Q Q Q e = Morgan Stanley Research estimates, a = Actual Company reported data Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1

2 Risk Reward: Estée Lauder (EL) Favorable Risk-Reward with High Growth Potential Source: Thomson Reuters,Morgan Stanley Research estimates. Price Target $99 Bull $ x CY17e Bull Case EBITDA Base $99 15x CY17e Base Case EBITDA Bear $ x CY17e Bear Case EBITDA Assumes a 15x C2017e EV/EBITDA multiple, at the high end of peers given EL s greater topline/eps growth, higher ROIC, a superior balance sheet, and strategic potential. Topline and margin upside: Revenue upside from travel retail, emerging markets, and pricing, and EL also delivers cost-cutting upside. Valuation expands to 16.5x CY17e EBITDA. Peer-leading EPS growth: E-commerce and emerging markets drive strong organic revenue growth (+6.5% five-year CAGR). Cost-cutting and topline leverage drive annual margin expansion of ~60 bps/year, and we apply a 15x CY17e EBITDA multiple. Travel retail and EM's slow; pricing and cost-cutting disappoint: Topline misses as travel retail weakens 10%, with emerging markets -5%, and pricing -50 bps. Valuation contracts to 12.5x CY17e EBITDA. Exhibit 1: Bear to Bull: Key Drivers - Travel Retail and Cost-Cutting Investment Thesis Peer-leading organic sales growth: We project ~6.5% long-term organic revenue growth for EL, which is at the high end of our HPC coverage. Our forecast is driven by EL s: (i) attractive product category growth in beauty; and (ii) market share gains in the overall beauty segment, with strong EL growth particularly from expansion in emerging markets and high growth in the travel retail and e- commerce channels. Favorable Channel Mix: EL s much greater exposure to high growth, high margin channels (~70% of profit mix, nearly double peers) should drive much higher LT EPS growth at EL (12%) than peers (8%). Favorable Brand Mix: Very high growth in small to mid size brands at EL should dwarf weakness in heritage brands, particularly with favorable mix shifts as these brands become a greater portion of EL's mix over time. Self-help drivers that can unlock shareholder value: We believe there are four key areas where EL can drive substantial shareholder value, including: a) cost-cutting and margin expansion, b) working capital improvements, c) enhanced use of its strong balance sheet, and d) lowering its tax rate. Attractive valuation: EL s 2017 EV/EBITDA is at a -7% discount to CPG peers, which we believe is too low given EL s growth potential and returns are well above peers, and EL has a number of potential self-help levers that could drive shareholder value. Risks to Achieving Price Target Risks include macro conditions, travel retail volatility, China results, category growth trends, and FX. 2

3 EL's Transformation is Not Being Recognized by the Market, in our View We are reiterating our OW rating on EL, as we see seven key reasons why EL should trade at a premium to CPG peers, vs its current in-line valuation that we believe significantly undervalues the EL's higher long-term growth and superior financial profile. We believe investors don't fully understand the organic transformation underway at EL, particularly from a channel and brand mix perspective, as EL diversifies into higher growth and higher margin channels outside of US department stores, and away from its lower growth Heritage brands (Estee Lauder and Clinique) into higher growth smaller and mid sized brands. We see seven key positives at EL: Favorable Channel Mix: EL s much greater exposure to high growth channels (~70% of profit mix, nearly double peers) should drive much higher LT EPS growth at EL (12%) than peers (8%). Favorable Brand Mix: Very high growth in small to mid size brands at EL should dwarf weakness in heritage brands, particularly with favorable mix shifts over time. Near-term EPS Visibility: We expect EL to beat consensus sales/eps estimates in FY16. Expansion Potential: EL should benefit from rapid expansion of the premium beauty category in emerging markets over time. Myriad Self-Help Levers: EL has numerous self-help levers at its disposal, including costcutting, working capital improvement, balance sheet utilization, and the potential to lower its tax rate. Attractive Prestige Beauty Category: The prestige beauty category offers higher growth with superior pricing power and brand equity compared to other CPG categories. Valuation Attractive: EL trades in-line with CPG peers despite much higher LT topline and EPS growth, ROIC, as well as self-help opportunities. 3

4 Key Point #1: Favorable EL Channel Mix Not Priced into Valuation What sets EL apart from other CPG companies is a much more favorable channel mix, with EL deriving a large estimated 70% of their profit from channels that are growing in between the +HSD to 30% range. That is double the 35% of mix in high growth channels at their CPG peers, which typically only have emerging markets as a growth area, as illustrated below. Exhibit 2: EL Derives a Much Greater Portion of Profits from High Growth Areas Than Peers While EL has meaningful emerging markets exposure, similar to CPG peers, it also has a significant presence in other distinct areas that are unique vs peers. First, we estimate e-commerce makes up ~18% of EL s profit, which is far ahead of our coverage generally in the LSD range, and grew revenue +28% for EL last year. Second, travel retail is a +HSD% growth channel given rising air passenger traffic and greater traveler conversion in airports, and we estimate represents ~24% of EL s profit, while most of our CPG companies have little to no exposure to this channel. Importantly, both of these channels are structurally attractive with much higher growth, as well as much higher margins, as online margins are higher given more than half of EL sales are through its own sites (no middle man), while travel retail is higher-end, supported by generally more affluent travelers. In addition, neither requires staffing the counter like EL's department store business does (although some of the margin advantage is due to corporate allocation and historical advertising/etc investment in department stores, which drives growth in other channels indirectly). In addition, we estimate EL's exposure to high growth specialty stores and its own retail stores is 16% (CPG peers generally have no exposure here), which is a channel growing DD's, although not higher margin. If one were to add emerging markets on top of these other high growth channels, we estimate nearly 70% of EL's profit mix is in high-growth channels, double the estimated 35% rate at CPG peers. To put it simply, we would much rather have exposure to these much higher growth (and typically much higher margin) channels than the retail channel (Wal-Mart is barely growing US comps, as an example) most of our CPG companies are exposed to. To better illustrate the magnitude of these dynamics, in the chart below we plot our long-term EL revenue growth estimates by channel vs. the estimated FY15 operating margin for each, with the size of the bubble reflecting the channel's FY15e operating profit (dotted lines reflect total EL). 4

5 Exhibit 3: The Magnitude of EL's Favorable Channels Mix Dynamics (Higher Growth, Higher Margin) as Well as Contribution to Profit Today are Not Fully Appreciated by Investors Our key point here is that investors don't appreciate the contribution of these higher growth and higher margin channels (and thus also underappreciate the impact of favorable mix shifts on corporate growth and margins over time), in large part because EL does not break out profit by channel mix. The conventional wisdom on EL is that the company still has a high degree of reliance on US department stores, which are struggling in the current environment. While that may have been true 5 or 10 years ago, today we estimate e-commerce is actually worth nearly 50% more to EL profit than US department stores (sales exposure to US department stores is higher), highlighting that EL is a transformed company with structural channel favorability. 5

6 Key Point #2: Favorable Brand Mix: Non-Heritage Brands Are the Key at EL, not Heritage Brands Historically, EL heritage brands (Clinique and Estee Lauder) have received the bulk of investor attention given they dominated EL mix, but their importance, while still high at ~42% of est. FY15 sales, has now diminished. Instead, increasingly EL's high growth non-hertitage brands will drive the long-term story, albeit on a much more fragmented brand level basis. To put it simply, we are much more focused on the 58% of the portfolio which is growing low-to-mid-teens than the 42% declining LSD's. As an example, if investors are focused more on Estee Lauder and Clinique individually instead of MAC, they are missing an opportunity. We estimate MAC will actually become EL's largest brand in FY17 (we estimate each of these three brands was around 20% of mix in 2015, with Estee Lauder, MAC, and Clinique in that order), and MAC has been consistently growing DD's annually (we estimate mid-teens over the last 5 years), which makes it much more important than the heritage brands, which declined LSD's in MAC is the best representation of strong non-heritage brand growth, but other brands including La Mer (EL's fourth largest brand) which we estimate has grown at a high-teens annual rate in the last five years, and Jo Malone, which has grown at a 25% annual rate. Essentially, EL's heritage bucket is structurally challenged in our view, as they skew to lower growth department stores and older consumers, while the non-heritage brand are generally the opposite, skewing younger and to higher growth channels. Exhibit 4: EL's Non-Heritage Brands Over-Index to Younger Consumers Source: GFK MRI, Morgan Stanley Research To illustrate the power of this favorable brand mix dynamic, if we assume that heritage brands (which comprise an est. ~42% of total sales and EL indicated decline LSD in FY15) and non-heritage brands both continue to grow at their respective rates, EL corporate organic sales growth would rise ~70 bps per annum, from +6.2% in FY15 to +9.4% by FY20, just based on favorable brand mix alone (see Exhibit 5). 5 Note: we split half the 58% non-heritage bucket into a higher growth bucket growing 500 bps ahead of the segment average to capture variability in this bucket from FY15. This analysis illustrates the power of brand mix, although higher growth brands will likely slow over time as they become larger, limiting actual upside below this theoretical amount. Still, this is a very powerful point, with much higher EL brand variability than at other CPG peers, and drives home the point that EL's organic transformation from a brand standpoint should drive enduring EL growth over time above market expectations. 6

7 Exhibit 5: Brand Mix Should Enhance EL's Organic Sales Growth at the Corporate Level 7

8 Key Point #3: High Near-Term Topline and EPS Visibility We see high visibility that EL can achieve its +6-8% organic sales growth guidance range in FY16 given a strong start in Q1 (+8%), continued strength in non-heritage brands, and a temporary expected recovery at EL's secularly challenged heritage brands (Estee Lauder and Clinique) behind higher advertising, greater innovation, and easier comparisons. One of the primary factors limiting EL topline growth recently has been a slowdown in EL's heritage brands, which we estimate represented ~42% of EL's mix in FY15. EL has made clear its intention to invest behind its heritage brands in order to drive a recovery in FY16, with greater innovation (New Dimension launched in NA in late July, with a September global roll out, as well as new campaigns/innovations in Clinique, which has already driven growth in makeup). Additionally, EL has taken a significant step towards rebalancing the Estee Lauder brand towards the millennial demographic with its announced launch of The Estee Edit collection in North America Sephora stores and Sephora.com slated for March. Net, we remain skeptical longer-term, but greater innovation and investment, as well as easier comparisons, should support a temporary rebound in FY16. As illustrated below, we expect a ~300 bp acceleration in EL's heritage brands from -2.5% in FY15 to +0.5% in FY16 (at the low end of EL's +LSD% guidance). Based on the midpoint of EL's 6-8% organic sales growth guidance, this would imply EL's non heritage business decelerates ~80 bps from 12.5% growth in FY15 to 11.7% growth in FY16, and EL can still hit its guidance. Exhibit 6: An Improvement in Heritage Brands Should Provide EL Ample Flex to Hit Organic Sales Growth Guidance Regarding EPS, EL increased its FY16 local FX EPS growth target with 1Q16 EPS to % vs. 8-10% prior, and we see good visibility of estimate achievability given strong topline growth, coupled with $200M in cost saves (worth +180 bps to adjusted margins, and doubling the $100M in savings achieved in FY15) should give EL ample flex to support greater investment and achieve bottom line goals. We estimate that EL's FY16 EPS guidance implies roughly +20 bps FX-neutral operating margin y-o-y, excluding a -20 bps impact from acquisitions, with FX expected to be a -40 bp headwind. This modest underlying expansion looks conservative with solid topline leverage, favorable channel mix, and +180 bps of benefit from cost savings. Our EPS estimate 8

9 is ~3% above the midpoint of EL guidance and ~1% above consensus. Estee Lauder Companies Inc November 24, 2015 Moreover, we point out that EL has traditionally handily beat initial FY guidance (by 6% in FY13 and 5% in FY14 vs the midpoint, as illustrated below). While FY15 EPS was -3% below the midpoint of original guidance, it would have been 3.4% above on an operating basis ex FX and acquisitions having a 20 cent worse than expected EPS impact. Exhibit 7: EL Has Delivered FY EPS Above Initial Guidance in Recent Years. *FY15 reflects initial guidance adjusted for greater than expected FX and acquisitions EPS impact 9

10 Key Point #4: Significant Emerging Market Growth Potential for EL Despite short-term macro concerns in emerging markets, we do believe longer-term emerging markets expansion opportunity is much greater for EL than CPG peers. Our analysis of per capita consumption by product category versus disposable income by individual country illustrates that beauty category growth potential in emerging markets is much higher than other household product categories, with greater consumption growth as disposable income increases. We believe this dynamic is driven by emerging market consumers typically purchasing more basic needs in categories such as oral care/home care/tissue & hygiene at lower disposable income levels. In contrast, more aspirational categories such as beauty experience a greater increase in demand as disposable income increases. As illustrated below, as per capita disposable income in a given country increases, we see outsized increases in per capita category consumption in EL's beauty categories relative to other CPG categories, and as such, we see a significantly greater emerging markets growth opportunity for EL than CPG peers over the long term. This is particularly true for EL given its 100% prestige exposure on the high-end of the beauty category. Exhibit 8: Emerging Markets Exposure is a Long Term Positive for EL Relative to Other HPC Peers Source: Euromonitor, Morgan Stanley Research 10

11 Key Point #5: Self-Help Update: Progress Being Made Below, we are providing an update on the progress of EL's potential self-help drivers (productivity, working capital improvement, balance sheet monetization, and a lower tax rate) that we believe could lead to stock outperformance over time as management starts to pull these levers more aggressively. We originally detailed this potential in our 5/15/14 note Reiterate OW: Favorable Mix + Self-Help Drivers Ahead. (i) Sizing the Self-Help Opportunity: EL has not promised much in addressing the four self-help levers we highlighted above, as to date management has only guided to bps of cumulative margin improvement through FY18, and targeting a reduction in inventory days down to 155 by FY18. We believe EL has greater opportunity in these areas than it has promised, which offers investors an investment opportunity given many of these value enhancing levers are not fully priced into valuation here. Based on our assumptions around each of EL's four self-help levers, including cost-cutting, working capital improvement, balance sheet monetization, and a lower tax rate, if EL were to pursue almost 100% of these opportunities, we estimate EL could drive an incremental 25% of shareholder value vs. our base case scenario over the next few years, or if EL pursued only 2/3rds of the opportunity, roughly 15% in incremental shareholder value. Below we detail the opportunity in each of these four self-help areas. Exhibit 9: We See Incremental Upside From Self-Help Levers Relative to Our Base Case As shown in Exhibit 10 below, the opportunity for self-help improvements at EL are robust in the context of peer benchmarks. We believe EL can generate an +6% EPS impact from +200 bps of margin lift by FY17, bringing operating margins in-line with L'Oreal's Luxury division. We see potential for a $975M WC reduction, worth 3% of market cap, which we view as largely achievable given EL's significantly worse Cash Conversion Cycle than peers (and EL's own historical levels), and given that EL now has much greater visibility into areas of working capital opportunity post the recent implementation of SAP. We estimate a potential +2% EPS impact from share repurchases, if EL went up to 1.4x leverage, in-line with large cap peers, although we do note EL will likely not lever up and more likely use its balance sheet to pursue more high growth acquisitions. Finally, we estimate that EL could generate a +4% EPS impact by closing half of its ~500 bps gap of actual vs. theoretical geo-weighted 11

12 tax rate gap vs. peers. Estee Lauder Companies Inc November 24, 2015 Exhibit 10: EL Still has Significant Opportunities Across Four Self-Help Areas 12

13 Key Point #6: Attractive Prestige Beauty Category Estee Lauder's 100% exposure to the prestige beauty category continues to be a long-term positive in our minds, with higher beauty category growth vs. typical CPG categories supported by much greater pricing power, strong barriers to entry given the importance of brand equity within the space, and much greater long-term emerging markets expansion potential as disposable income increases over time. Greater Pricing Power: We prefer companies with greater exposure to beauty and personal care categories, which have higher pricing power, vs. typical household products categories that have greater trade-down risk and higher private label penetration, and less product differentiation within specific sub-categories. We conducted an AlphaWise consumer survey of 2,000 US consumers in May of 2013 to gauge which staples companies have the most pricing power, based on nine key questions related to consumer trade-down. Within the HPC space, we see a clear distinction in pricing power between household products categories (e.g. bleach, soap, cleaners, etc.), and personal care categories (e.g. beauty, oral care, skin care, etc.), which have greater pricing power, as illustrated in our survey results below. Exhibit 11: Personal Care Categories Have More Pricing Power than Household Products Categories... Source: AlphaW ise, Company data, Morgan Stanley Research Based on category exposure alone (i.e. agnostic of brand equity), EL is the most favorably positioned from a pricing power perspective in our coverage with the highest z-score below, given EL's 100% exposure to beauty categories which have higher pricing power according to our survey. In addition, we believe that EL's portfolio of powerful prestige brands would support greater pricing power than that of the category average. 13

14 Exhibit 12: EL is the Most Favorably Positioned from a Pricing Power Perspective Based on its Beauty Category Exposure Estee Lauder Companies Inc November 24,

15 Key Point #7: EL's Lack of Valuation Premium vs Peers Does Not Reflect its Numerous Advantages EL is essentially trading in-line with CPG peers from a valuation perspective, despite much higher topline (7% at EL vs 4% at peers) and EPS growth (12% at EL vs 8% at peers), higher returns (27% EL ROIC vs ~19% at peers), a stronger balance sheet (0.4 times net debt/ebtida at EL vs 1.4x at peers), and greater self-help potential.. Exhibit 13: EL Higher Growth is Not Reflected in Valuation This is apparent in EL's significantly lower PEG ratio, with EL trading at 1.8x, at the very low end of the group and nearly 40% below the peer average. 15

16 Exhibit 14: EL Trades Below Peers from a PEG Ratio Perspective Estee Lauder Companies Inc November 24, 2015 We believe EL s stock is undervalued here, trading at a 1% P/E premium and -7% EV/EBITDA discount to consumer peers, including Colgate/L Oreal/Beiersdorf/Coke/Pepsi/PG. This discount comes despite higher EL topline/eps growth potential and returns, driven by EL s leverage to the attractive prestige beauty category and high growth channels including travel retail/e-commerce, as well as greater self-help potential outlined earlier. Exhibit 15: EL Trades In-line with Large-Cap Peers on a P/E Basis Exhibit 16:...Although at a Discount on a EV/EBITDA Basis 16

17 Exhibit 17: Despite Higher Revenue Growth Potential Exhibit 18: Higher Long-Term EPS Growth Estee Lauder Companies Inc November 24, 2015 Exhibit 19: with EL s PEG Ratio Well Below CPG Peers Exhibit 20: EL Also Has Higher Returns 17

18 Key Risks to Our Investment Thesis Currency movements: ~63% of Estée s revenue is derived from international markets, and as such, FX fluctuations may drive upside/downside versus our topline/profit forecasts. We estimate that a 5% move in the US dollar against EL s basket of currencies would be worth 4% to EPS. Macro Conditions: While EL s categories enjoy relatively high pricing power, and the high-end consumer has been relatively resilient in recent quarters, we believe persistent macro pressure could hurt beauty demand. Each 100 bps change in volume due to macros would be worth 3% to EPS. Travel retail slowdown: We believe any slowdown in international air traffic, or a pressured consumer in this channel, could negatively impact EL s travel retail channel, which constitutes 12% of sales, and a disproportionate 20% of profit. Each 5% change in travel retail sales would be worth 2% to FY15 EPS. Europe: We estimate EL has ~30% revenue exposure to the Western European region, which we believe puts it at inherent risk from the economic volatility in the region. We estimate each 1% change in EL s European sales would be worth ~1% to EPS. Morgan Stanley is acting as financial advisor to Coty Inc. ( Coty ) in relation to its definitive agreement to merge The Procter & Gamble Company s fine fragrance, color cosmetics, and hair color businesses into Coty through a tax-free Reverse Morris Trust transaction as announced on July 9, The proposed transaction is subject to regulatory clearances, works council consultations, and other customary conditions. Coty has agreed to pay fees to Morgan Stanley for its financial services a significant portion of which are contingent upon the consummation of the proposed transaction. Please refer to the notes at the end of this report.. 18

19 Exhibit 21: EL Income Statement 19

20 Exhibit 22: EL Balance Sheet 20

21 Exhibit 23: EL Cash Flow Statement 21

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23 COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY Overweight/Buy % % 28% Equal-weight/Hold % % 24% Not-Rated/Hold 91 3% 9 1% 10% Underweight/Sell % 95 12% 15% TOTAL 3, Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Stock Price, Price Target and Rating History (See Rating Definitions) Important Disclosures for Morgan Stanley Smith Barney LLC Customers 23

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