Equity Research: Research Summary

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1 TechnologySpecialistsof Equity Research: September 10, 2015 KBCM Topics: D, IP, LULU, NWE, SCSS PCS Topics: AMD, INTC, MRVL, NVDA, ON, SYNA, HUBS Estimate Changes Ticker Old 2015E New 2015E Cons. Old 2016E New 2016E Cons. Old 2017E New 2017E Cons. Analyst NWE Ridzon Important disclosures for the companies mentioned in this report can be found at Please refer to the analysts' recently published reports for company-specific valuation and risks. KeyBanc Capital Markets Inc. Member NYSE/FINRA/SIPC

2 INDUSTRIAL: KeyBanc Intermodal Weekly Week 35 Update Fowler 3 INDUSTRIAL: Breaking Ground: A Monthly Look at Non-Res Construction Starts August Box 4 TECHNOLOGY: Notebook ODM Tracker Update McConnell 5 ENERGY: D - ALERT: No Additional Public Equity Needs This Decade Tucker 6 TECHNOLOGY: Expanding TAM and Increasing Strategic Value Barnicle 7 INDUSTRIAL: IP - ALERT: Commentary on China and Brazil Negative, as Expected Josephson, CFA 8 CONSUMER: LULU - ALERT: 2Q - Earnings Opportunity Yruma 9 ENERGY: NWE: Lost DSM Tracker; Lowering 2016 Estimate Ridzon 10 CONSUMER: SCSS: Investing in Innovation Acquiring Remaining Interest in BAM Labs Thomas, CFA 11 Disclosure Appendix 12 Page 2

3 KeyBanc Intermodal Weekly Week 35 Update Todd C. Fowler / (216) / tfowler@key.com Joseph Frankenfield, CFA / (216) / joseph.y.frankenfield@key.com Intermodal volumes for week 35 (ending September 5) increased 17% year-over-year, and are up 4% 3Q15 to-date and 3% year-to-date. Intermodal train speeds were down 0.4% from last week but up 0.5% year-over-year. Terminal dwell was down 1% from last week and 9% year-over-year. See the following exhibits for current week, 3Q15-to-date and 2015 volume, train speeds and dwell times by carrier. Volume comparisons reflect a later Labor Day holiday, likely resulting in a volume decline next week. That said, volumes continue to trend positively ahead of the seasonal fall peak, though growth rates differ by carrier and geographically, reflecting share shift between eastern and western ports and varying rail service. Rail service as measured by train speeds and dwell times generally remains ahead of prior year levels, but still below normalized levels. We anticipate rail service to continue to improve in coming months as capital investments more fully materialize, potentially benefiting intermodal volumes. Over the intermediate term, we continue to anticipate some secular benefit from modal shift and truck capacity constraints, while stabilizing or improving rail service could reduce operational headwinds. Page 3

4 Breaking Ground: A Monthly Look at Non-Res Construction Starts August Joe Box / (216) / jbox@key.com Sean Egan / (216) / sean.j.egan@key.com August construction starts >$20M marked the third consecutive monthly decline with project starts falling 28% YOY; less volatile TTM starts remain healthy at +22% YOY, though both TTM rate of growth and absolute dollars continue to soften from May s level. Positive data in August largely stemmed from a major Energy/Chemical project, as well as Apartment and Infrastructure projects. The Numbers Total large-scale construction project starts with August start dates decreased 28% YOY to $16.6B, although August 2014 was a challenging comp (+31% YOY to $23.2B). Apartment starts were the most robust this August (+44% YOY), whereas YOY declines were seen across 4 of the 5 other project categories. However, TTM large project starts were 22% higher at $296.8B vs. $242.6B for the comparable period last year given continued strength in the Apartment and Industrial categories, while Health/Education and Commercial categories have somewhat moderated. The largest positive YOY variance in August project start dollars was seen within Apartment projects (+ $1.6B) given the continued strength in urban projects. Conversely, the Office category saw starts decrease $2.3B given difficult comparisons from several highprofile projects starting within the prior period. Regionally, the Midwest saw the strongest YOY improvement in August with project start dollars up 12% as the remaining regions were either flat or saw a YOY decline. However, on a TTM basis, the Gulf Coast region continues to see the highest level of non-residential construction starts; which are up 51% compared to the prior period. Although a $6.3B LNG facility is targeted to start in September in the Gulf Coast, we suspect the 51% growth rate could moderate heading forward given the tough comparisons heading into the back half of the year. Of note, the Northeast was again the second-best performing region on a TTM basis, led by Apartment and Commercial projects. The Takeaway TTM project start dollars have now decelerated YOY for the 4 th straight month, which suggests that our view that we may be near peak start activity could be materializing. However, because of the longer project duration for these starts, we continue to see solid spending visibility over the next months. We therefore maintain a more balanced view toward the equipment rental space (HEES, URI) as we begin to consider appropriate valuation should we migrate into the later stage of the non-res cycle in As such, we reiterate our Sector Weight ratings for HEES and URI. Page 4

5 Notebook ODM Tracker Update August Shipments Exceed Expectations for the First Time This Year; Q3 Estimate Remains +5% August unit shipments were above expectations. Unit shipments of 11.3 million, up 17% m/m, were above our estimate of 11.1 million, up 15% m/m, primarily due to higher-than-expected shipments at Quanta and Compal, which came in 200k and 100k higher than expected, respectively, partially offset by weaker shipments at Pegatron, which came in 150k lower than expected. We believe upside at Quanta was due to some shipment pull-ins from September, and upside at Compal was mainly due to share gains from Pegatron and better-than-expected pulls at an Asian OEM. We note that this is the first month of shipment upside at the notebook ODMs this year. Semiconductors Michael McConnell Hans Chung, CFA Our unit shipment estimate of +5% q/q/-14% y/y remains unchanged. Given shipment upside in August, most notebook ODMs now become more confident in meeting their Q3 shipment target of up 5% to 10% q/q with the exception of Quanta (low single digits). That said, given the weak macro economy, we remain relatively cautious and maintain our unit shipment estimate at +5% q/q/-14% y/y. PC demand outlook is sub-seasonal for Q3. Conversations with the PC supply chain indicate a sub-seasonal outlook for PC end demand in Q3, despite Microsoft s Windows 10 launch and Intel s upcoming release of its Skylake family of processors in late Q3. While Q2 is expected to be a bottom for end demand, signs of excess notebook system inventory at PC OEMs, continued currency headwinds, no hardware upgrade requirements for Windows 10 (free), a higher bill of materials for Skylake platforms (due to the 10% to 15% price premium for DDR4), and uncertainty with macroeconomic demand are driving a subdued outlook for this quarter. We view better-than-expected notebook ODM shipments in August as positive for Intel. While investors remain highly skeptical of Intel s implied CCG sales guidance for Q3 (+8% q/q) and overall sales guidance for the year (-1% y/y), we contend that this guidance is not as aggressive as it looks: (1) Intel sell-in versus PC supply chain sell-out in Q2 (see page 2) was the lowest since 2Q12, indicating that Intel undershipped PC end demand in 1H15, and (2) unit demand forecasts at motherboard manufacturers remain more optimistic than notebook ODMs for Q3 given acute demand weakness in 1H15, with units still expected to grow over 10% q/ q. In addition, we believe Intel s unchanged 2015 outlook for DCG growth (15%+ y/y) should support the stock at current levels. Other PC-exposed companies under our coverage universe include AMD, MRVL, MU, NVDA, ONNN and SYNA. Stock Implications Positive, Negative, Neutral Company Stock Rating Target Price Mkt Cap. Advanced Micro Devices, Inc. AMD SW NA $1.85 $1,439.3M Intel Corporation INTC OW $35.00 $29.24 $143,539.2M Marvell Technology Group Ltd. MRVL SW NA $10.54 $5,640.6M NVIDIA Corporation NVDA SW NA $22.23 $12,359.9M ON Semiconductor Corporation ON SW NA $10.23 $4,463.3M Synaptics, Incorporated SYNA SW NA $71.73 $2,795.3M Page 5

6 Dominion Resources, Inc. (Sector Weight) D - ALERT: No Additional Public Equity Needs This Decade Matt Tucker / (917) / mtucker@key.com Grier Buchanan / (917) / gbuchanan@key.com Speaking at an investor conference this morning before market open, management indicated it has no plans or need to issue additional public equity for the remainder of this decade, following its $500M common equity issuance in 1Q15. D s prior plan had contemplated $0.5B-$1.0B in additional equity and/or equity-linked issuance over We estimate the avoided dilution equates to roughly $0.05-$0.09 in EPS (~1-2%), assuming $0.5B-$1.0B common equity issuance in 2016 at D s current share price. Our current estimates do not reflect any additional public equity issuance, consistent with D s new plan. Management attributed the avoided equity needs largely to the expected cash flows from its GP and LP interests in Dominion Midstream Partners, LP (DM). New Market Access Projects. D announced two new Market Access projects at Dominion Energy: a $150M project with firm commitment to serve LDC and power generation demand, and a separate $34M project to serve power generation. Major Projects on Track. Management maintained its $19.2B capex budget for , and indicated all major projects (e.g., Brunswick County, Cove Point LNG, ACP) are on schedule and on budget. Solar Transactions. As announced earlier this week, D sold a 33% interest in its 425 MW portfolio of solar projects to SunEdison (SUNE) for $300M, with proceeds tabbed to pay down DRI debt. D also agreed to acquire a 50% equity interest (99% tax equity interest) in SUNE s 210 MW Three Cedars solar project for $320M. Initial Take. We would expect a favorable response to the revised financing plan, although we think the reaction in D s shares may be limited by expectations, as management has saved major announcement for this conference in recent years. We view the new Market Access projects as incremental positives, and while not major needle movers, they serve to underscore D s strong midstream positioning. Page 6

7 HubSpot, Inc. Expanding TAM and Increasing Strategic Value HubSpot introduced new products for marketing and sales at its annual INBOUND conference on Wednesday, increasing HubSpot's TAM, as well as its strategic value to customers. These new initiatives could drive additional revenue in 2016, making consensus estimates too conservative for We reiterate our Overweight rating and $60 price target. HubSpot's product announcements enhance marketing and sales offering. At its INBOUND conference, HubSpot introduced several important new features for its marketing and sales offerings. More importantly, the company introduced new products that will enhance its core marketing and sales offerings, including reporting and lead scoring. Agency feedback on CRM continues to be positive. At INBOUND, we spoke with several agencies, and they remain very positive on HubSpot's CRM and Sidekick solutions for sales. They highlighted the ease of use of the products. Because the CRM product pulls in data automatically, customers can spend significantly less time on data entry, compared to other CRM solutions. The product is also intuitive enough that sales representatives can be onboarded in hours. New products include upsell opportunities to HubSpot's base. HubSpot's new products include: Sites ($300/month), Reports ($200/month), and Ads Add-On ($100/ month). They represent upsell opportunities for HubSpot. As a result, these products are likely to enable HubSpot to continue to drive increases in revenue per account. The new products also expand HubSpot's TAM to more than $30 billion. Estimates likely too low for Currently, consensus estimates are forecasting 2016 revenue to grow at 57% of the 2015 growth rate and for 2017 to grow at 89% of the 2016 growth rate, which seems to suggest too much deceleration in growth. So, estimates seem way too conservative. We believe there could be meaningful upside to 2016 and 2017 revenue expectations. Brendan Barnicle / bbarnicle@pacific-crest.com Trevor Upton, CFA / tupton@pacific-crest.com NYSE: HUBS Rating: Overweight Price Target: $60.00 Price: $46.27 $80 $70 $60 $50 $40 $30 $20 HUBS $46.27 (+85% Y/Y) Bull Case $70 (+51%) Target $60 (+30%) Bear Case $23 (-50%) 11/14 12/14 01/15 02/15 03/15 04/15 05/15 Nasdaq (+6% Y/Y) Sources: Company reports, FactSet, KeyBanc Capital Markets Inc.. Company Data 52-week range $26 - $55 Market Cap. (M) $1,530.6 Shares Out. (M) Enterprise Value (M) $1,394.5 Avg. Daily Volume (30D) 265,573.0 SI as % of Float 7.2% Net cash/market cap 8.9% Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. 06/15 07/15 08/15 09/15 Estimates FY ends 12/31 F2014A 1Q15A 2Q15A 3Q15E 4Q15E F2015E F2016E EPS (Net) $(2.77) $(0.18) $(0.17) $(0.33) $(0.23) $(0.91) $(0.82) Cons. EPS $(0.32) $(0.21) $(0.89) $(0.79) Revenue (M) $115.9 $38.2 $42.9 $44.2 $47.1 $172.3 $228.8 Cons. Revenue $44.5 $47.3 $173.0 $222.0 FCF (24.36) (2.61) 0.40 (8.12) (4.80) (15.13) (14.64) Valuation EV/Sales 12.0x x 6.1x Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Page 7

8 International Paper Company (Sector Weight) IP - ALERT: Commentary on China and Brazil Negative, as Expected Adam J. Josephson, CFA / (917) / ajosephson@key.com Marc Solecitto / (917) / marc.solecitto@key.com At a conference this morning, IP noted that business in China has become "more challenging" of late, and that its box volumes in China are essentially flat (compared to "up a couple percent" on its 2Q14 call in July 2014, for perspective). IP also said Brazil is clearly in a recession, and that in its box business in Brazil, the Company is down "a little bit more than the market" on account of its exposure to electronics and high-end items. IP has yet to see the weakness in emerging markets seep into the U.S. market. IP entered 2015 thinking it could generate 5% EBITDA growth, and that appears exceedingly unlikely in light of the weakness in China, Brazil, Russia, etc. We expect IP's EBITDA to decline both this year and next. Page 8

9 lululemon athletica inc. (Overweight) LULU - ALERT: 2Q - Earnings Opportunity Edward Yruma / (917) / eyruma@key.com Jessica Schmidt / (917) / jessica.l.schmidt@key.com Noah Zatzkin / (917) / noah.zatzkin@key.com We think the weakness in LULU should be short lived. First, the +11% comp points to strong demand for the brand. We believe that product innovation at LULU will accelerate (new pant wall, tanks, among others), which will provide support to the comp. Also of note was the positive commentary about new international store openings. While rent/occupancy will remain a headwind, 2Q was particularly impacted by the store opening calendar, and the impact should lessen in 2H. Yes, +55% inventory deserves scrutiny. However, we would add that inventory grew well below sales in 2Q14 (+13% rev, +10% inventory) and issues with port delays were well known. Notably, the Company called out that there was no sequential build in stock from 1Q to 2Q. As such, while levels are certainly higher than ideal, mitigation plans seem reasonable, and we think reflect more of a short-term phenomenon. Management took the opportunity to reaffirm the +300 bps product margin (pre FX) opportunity ( ). Frankly, we were positively surprised that management reaffirmed this. Moreover, moves to increase pricing brands can also provide some margin offset. In sum, we think that LULU can maintain a ~50% or so GM (which is still below many athletic and luxury peers) despite ongoing investment spend. Page 9

10 NorthWestern Corporation NWE: Lost DSM Tracker; Lowering 2016 Estimate The Montana commission has directed its staff to draft an order discontinuing NWE's Lost Revenue Adjustment Mechanism (LRAM), designed to make the Company whole for revenues lost to Demand Side Management (DSM). NWE recognizes $7.1 million of these revenues annually. We are lowering our 2016 estimate to $3.35 from $3.40 per share. We assume NWE is able to offset roughly half the negative impact. The long-term impact of this development is increased regulatory lag, largely addressable by filing rate cases and cost cutting. LRAM Discontinued - We expect NWE to start losing $7.1 million of annual revenues starting around early October These revenues were to make NWE whole for reduced sales under DSM programs (efficiency and conservation) Guidance Maintained - Management maintained its 2015 guidance of $3.10-$3.30 per share. We see minimal impact to 2015, given the relatively short period of reduced revenues, and therefore leave our 2015 estimate unchanged at $3.20 per share. Lowering 2016 Estimate - We are reducing our 2016 estimate by $0.05, assuming half the impact can be offset. More Frequent Rate Cases Expected - We believe that NWE will file more frequent rate cases to align its rates with shifting load patterns. Given ongoing capex, we believe NWE was already entering a period of more frequent filings. Paul T. Ridzon / (216) pridzon@key.com John Barta / (216) john_j_barta@key.com NYSE: NWE Rating: Price Target: Sector Weight NA Price: $ Nov-14 Vol (mil) Jan-15 Mar-15 May-15 Jul-15 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Company Data Sep-15 NWE 52-week range $45 - $60 Market Cap. (M) $1,965.2 Shares Out. (M) Enterprise Value (M) $3,875.2 Avg. Daily Volume (30D) 335,197.0 Annual Dividend $1.92 Dividend Yield 3.8% SI as % of Float 6.9% SI % Chg. from Last Per. (0.4)% Book Value/Share $22.90 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Estimates FY ends 12/31 F2014A 1Q15A 2Q15A 3Q15E 4Q15E F2015E F2016E EPS (Net) $2.70 $1.09 $0.46 $ $3.20 $3.35 Cons. EPS -- $1.18 $0.48 $0.55 $1.03 $3.18 $3.44 Previous $ $3.40 Valuation P/E 18.6x x 15.0x Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. NWE reported adjusted $0.92 EPS, excluding $0.09 unfavorable weather normalization NWE reported adjusted $0.31 EPS, excluding $0.05 unfavorable weather normalization NWE reported adjusted $0.36 EPS, excluding $0.06 favorable weather normalization NWE reported adjusted $0.78 EPS, excluding $0.06 unfavorable weather normalization NWE reported adjusted $2.37 EPS, excluding $0.14 unfavorable weather normalization Page 10

11 Select Comfort Corporation SCSS: Investing in Innovation Acquiring Remaining Interest in BAM Labs This morning, SCSS announced an agreement to acquire the remaining interest in BAM Labs for $58 million (in addition to its current 18% equity ownership of BAM). The acquisition further highlights management s commitment to invest in and develop innovative technologies. SCSS Acquires Remaining Stake in BAM Labs for $58 Million. This morning, SCSS announced that the Company has agreed to acquire the remaining interest in BAM Labs. SCSS currently hold a ~18% equity stake in BAM and has agreed to acquire the remaining stake for $58 million in cash (implying a $70 million total valuation). SCSS initially partnered with BAM in 2012 to develop and market the SleepIQ technology. The deal is expected to be immaterial to revenue and earnings in 2015, but management expects the acquisition to be accretive to EPS within two years. The acquisition is expected to accelerate SCSS s innovation pipeline. The deal is expected to close in 3Q, subject to customary closing conditions. SCSS also announced that it has obtained a new $100 million revolving credit facility, though the Company does not expect to tap the new facility for the acquisition. With $117 million of cash (and no borrowings) at the end of 2Q, SCSS would still be in a positive net cash position after the acquisition closes. Positive Outlook for SCSS Long Term, but Headwinds Likely in 2H. SCSS has been executing at a high level, but we believe investors may step to the sidelines with tougher comparisons ahead in 2H, and roll-out of a new ERP system in 4Q (which comes with elevated expenses, as well). Longer term, we believe that SCSS has a compelling growth story with top-line results benefiting from comp and unit growth. Bradley B. Thomas, CFA / (917) bthomas@key.com Jason Campbell / (917) jason.campbell@key.com NASDAQ: SCSS Rating: Price Target: Sector Weight NA Price: $ Nov-14 Vol (mil) Jan-15 Mar-15 May-15 Jul-15 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Company Data Sep-15 SCSS 52-week range $20 - $36 Market Cap. (M) $1,251.5 Shares Out. (M) Enterprise Value (M) $1,134.3 Avg. Daily Volume (30D) 537,705.0 SI as % of Float 8.2% SI % Chg. from Last Per. (0.2)% Book Value/Share $4.82 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Estimates FY ends 12/31 F2014A 1Q15A 2Q15A 3Q15E 4Q15E F2015E F2016E EPS (Net) $1.25 $0.54 $0.21 $0.42 $0.20 $1.37 $1.70 Cons. EPS -- $0.54 $0.21 $0.39 $0.22 $1.36 $1.75 Valuation P/E 19.1x x 14.0x Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Page 11

12 Disclosure Appendix Important disclosures for the companies mentioned in this report can be found at Disclosures.action. Reg A/C Certification The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this research report. Rating Disclosures Distribution of Ratings/IB Services KeyBanc Capital Markets IB Serv./Past 12 Mos. Rating Count Percent Count Percent Overweight [OW] Sector Weight [SW] Underweight [UW] Rating System Overweight - We expect the stock to outperform the analyst's coverage sector over the coming 6-12 months. Sector Weight - We expect the stock to perform in line with the analyst's coverage sector over the coming 6-12 months. Underweight - We expect the stock to underperform the analyst's coverage sector over the coming 6-12 months. Note: KeyBanc Capital Markets changed its rating system after market close on February 27, The previous ratings were Buy, Hold and Underweight. Additionally, Pacific Crest Securities changed its rating system to match KeyBanc Capital Markets rating system after market close on April 10, 2015, in conjunction with the merger of the broker dealers. The previous ratings were Outperform, Sector Perform and Underperform. Page 12

13 Other Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC ( KBCMI ), and KeyBank National Association ( KeyBank N.A. ), are marketed. Pacific Crest Securities is a division of KeyBanc Capital Markets Inc. KeyBanc Capital Markets Inc. ( KBCMI ) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This report has been prepared by KBCMI. The material contained herein is based on data from sources considered to be reliable; however, KBCMI does not guarantee or warrant the accuracy or completeness of the information. It is published for informational purposes only and should not be used as the primary basis of investment decisions. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. The opinions and estimates expressed reflect the current judgment of KBCMI and are subject to change without notice. This report may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. No portion of an analyst s compensation is based on a specific banking transaction; however, part of his/her compensation may be based upon overall firm revenue and profitability, of which investment banking is a component. Individuals associated with KBCMI (other than the research analyst(s) listed on page 1 of this research report) may have a position (long or short) in the securities covered in this research report and may make purchases and/or sales of those securities in the open market or otherwise without notice. As required by NASD Rule 2711(h)(1)(A), financial interest, if any, by any research analysts listed on page 1 of this report will be disclosed in Important Disclosures, Company-specific regulatory disclosures located above in the Disclosure Appendix. KBCMI itself may have a position (long or short) in the securities covered in this research report and may make purchases and/or sales of those securities in the open market or otherwise without notice. As required by NASD Rule 2711(h)(1)(B), if KBCMI beneficially owns 1% or more of any class of common equity securities of the subject company(ies) in this research report as of the end of the month immediately preceding the date of publication of this research report will be disclosed in Important Disclosures, Company-specific regulatory disclosures located above in the Disclosures Appendix. This communication is intended solely for use by KBCMI clients. The recipient agrees not to forward or copy the information to any other person without the express written consent of KBCMI. Page 13