MARKET DIGEST ARGUS IN THIS ISSUE:

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1 ARGUS Independent Equity Research Since DJIA: DJIA: 19, WEDNESDAY, AUGUST 23, 2017 AUGUST 22, DJIA 21, UP Good Morning. This is the Market Digest for Wednesday, August 23, 2017, with analysis of the financial markets and comments on Masco Corp., Intel Corp., Ralph Lauren Corp., Tractor Supply Co., Yum Brands Inc., and Atmos Energy Corp. IN THIS ISSUE: * Focus List: Masco Corp.: Maintaining BUY and $44 target (Chris Graja) * Growth Stock: Intel Corp.: New 8th Gen core processors (Jim Kelleher) * Growth Stock: Ralph Lauren Corp.: Raising EPS estimates (Stephen Biggar and Deborah Ciervo) * Growth Stock: Tractor Supply Co.: Improved 2Q17 earnings; reiterating HOLD (Stephen Biggar and Deborah Ciervo) * Growth Stock: Yum Brands Inc.: Maintaining BUY; raising target by $8 to $88 (John Staszak) * UtilityScope: Atmos Energy Corp.: Boosting target by $5 to $97 (Gary Hovis) MARKET REVIEW: The S&P 500 recently broke lower for a second week. As equity weakness played out, our market indicators fell. Our technical composite slipped closer to the bearish zone as NYSE breadth fell further on fewer stocks above their 150-day moving average and weakness in the bullish percentage. Meanwhile, CBOE trading indexes saw a small dip on put/call hedging and an adverse move in the NYSE TRIN. Our strategic composite also fell but remained in neutral territory, with market internals hurt by relative weakness in energy and consumer cyclicals and strength in defensive consumer staples. Market externals were little changes as relative weakness in crude oil versus industrial commodities was offset by weak U.S. dollar-driven gains in emerging stocks and debt. We note that small caps are near March-April lows. We expect to see some support for the market at the 3%-5% decline level (or about 2,400 on the S&P 500), while a break below would point to a deeper correction. Obi-Wan Kenobi would have called it a great disturbance in the Force. But whatever it was, the market has been giving investors jitters. Yes, we all know that August has become a favorite month for profit-taking, as investors in better safe than sorry mode cash out before heading to the beach or mountains. But this was a bit different, based on several signs of deterioration. First, the S&P 500, which through July had recorded three 1%-plus single-day moves all year, was suddenly slammed with three more in the middle few weeks of August. Two of those three 1%-plus days were to the downside. Daily rate of change, a tepid 0.31% through 7/31/17, is above 0.42% in August and 0.64% since 8/10/17. While the major indices are pulling back 2%-3%, small-caps are getting hammered. We are also beginning to see a worsening divergence between the Dow Jones Industrial Average and Dow Jones Transports. The two indices were nicely in rhythm through mid-july. Since then, however, the DJT is down nearly 4%, while the DJIA is clinging to a half-point gain. Finally, VIX is flashing an end to complacency. On 8/11/17, the VIX posted its first close above 15 since April 2017 and before that, since November Unlike those past spikes, the VIX has remained elevated in the low teens. Every prior dip in the past few years has been buyable, and this may be no exception. Again, we would monitor any break below 2,400 in the S&P 500 as a prelude to more short-term pain. (Jim Kelleher, CFA, Director of Research) 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 MASCO CORP. (NYSE: MAS, $36.99)... BUY MAS: Maintaining BUY and $44 target * We remain optimistic that the recovering U.S. housing market and increasing remodeling activity will contribute to growing sales and profitability for Masco. * Management believes that the repair and remodeling market is strong and that its initiatives with Home Depot have led to market share gains for Behr professional paint. * We are raising our 2017 EPS estimate to $1.97 from $1.95. This increase reflects the better-than-expected 2Q earnings and a small reduction in our share count estimate, offset by a small increase in our interest expense forecast. Management s updated guidance is $1.93-$2.00, up from $1.90-$2.00 previously. * MAS has recently traded at an enterprise value of about 12-times trailing EBITDA, which is in line with, or slightly below peer levels. Based on our EBITDA estimate of $1.39 billion for the next four quarters and a multiple of 12 in one year, the shares would be worth $46, up from $44 in our previous analysis. ANALYSIS INVESTMENT THESIS Our rating on Focus List selection Masco Corp. (NYSE: MAS) is BUY. We remain optimistic that the recovering U.S. housing market and increasing remodeling activity will contribute to growing sales and profitability for Masco, whose marketleading products include Delta faucets, Hansgrohe faucets (internationally), Behr Paints, Milgard windows and KraftMaid cabinets. The company has pushed through a long period of volatility and annual losses, carving off $600 million in plant and employment costs and eliminating about half of the jobs at headquarters. The repair/remodel market (from which Masco derives over 80% of its sales) appears to have additional upside, with growing demand for big-ticket items and upgraded products, which are often more profitable for MAS to sell. We re seeing more big-ticket purchases at Home Depot and Lowe s, as both of these Masco customers see growing business with professional contractors. Another indicator suggesting that the housing recovery has additional upside is that Private Fixed Residential Investment is still near a 66-year low, at 3.5% of GDP, and well below the average of 4.6% since We would expect PFRI to approach and likely exceed the long-term average before this current expansion is done. Home prices are only now reaching 2006 peak levels and affordability is still positive. In addition, about 70% of U.S. homes are more than 25 years old and likely in need of upgrades and repairs. The National Association of Home Builders Remodeling Index indicates improving conditions. Harvard University s Leading Indicator of Remodeling Activity also points to strong growth over the next year. We believe that these factors point to sustainable growth for HD and Lowe s as well as for suppliers such as Masco and Fortune Brands Home and Security. Masco CEO Keith Allman has said that rising prices of existing homes were a driver for sales of big ticket items, including cabinets and windows, and that accelerating housing turnover was a leading indicator for spending on repairs and remodeling. He said that these factors, along with affordability, are giving consumers the confidence to spend on their homes. We estimate that more than 80% of the company s sales will come from projects for repairing and remodeling, compared with approximately 55% before the housing crisis. The remainder of the business is still tied to new home construction. Based on this weighting, we believe that home prices and investors confidence in the value of their homes is more important to Masco than home-building statistics. The importance of management-controllable factors, including the vitality of its brands, should also grow. The company has a strong record of brand management and innovation. About 30% of its 2016 sales came from products that were introduced within the prior 36 months. Maintaining margin growth is critical for Masco in order to leverage improving end-market demand, and we are encouraged by the company s efforts to reduce costs and improve efficiency. We expect Masco to improve its financial strength by lowering debt over time and we expect productive capital deployment to dividend increases, share repurchases and targeted acquisitions. We are maintaining our BUY rating with a target price of $

3 RECENT DEVELOPMENTS On July 27, Masco reported 2Q17 net revenues of $2.06 billion, up 3% from the prior year. This was in line with our estimate but just below the StreetAccount consensus of $2.07 billion. North American sales rose 4%. Management believes that the repair and remodeling market is strong and that its initiatives with Home Depot have led to market share gains for Behr professional paint. MAS sees continued growth in the housing market driven by favorable demographics, rising home prices, and aging homes that are in need of updates or repairs. International sales increased 4% in local currency, boosted by the international plumbing businesses. Adjusted earnings rose 30% to $0.60 per share, which matched the StreetAccount consensus and topped our estimate of $0.57. The important drivers were strong sales in the North American plumbing and Decorative Architectural businesses and improvement in the Window business. GAAP earnings were up 9% to $0.49 per share. The 2Q adjusted operating margin widened by 30 basis points to 17.4%. The StreetAccount consensus was 17.0%. Our estimate was 16.7%. Adjusted operating income dollars increased 4.4% to $357 million, above our estimate of $344 million. The gross margin of 35.8% exceeded the StreetAccount consensus by 20 basis points. Breaking down Masco s second-quarter results by segment, sales in the Plumbing business were up 3%, to $949 million, above our estimate of $923 million and above the StreetAccount consensus of $945 million. North American sales were up 4% in local currency, with good results in both the retail and wholesale channels as well as in products with higher price points. International sales were up 5% in local currency. Adjusted operating margins in the plumbing segment increased by 10 basis points, to $198 million, or 20.9% of sales, which was better than our estimate of $185 million and the StreetAccount consensus of $195 million. In the Decorative Architectural Products business, 2Q sales rose 5% year-over-year, to $653 million. Our estimate was $670 million and the consensus was $650 million. Management seems pleased with the growth of the paint offering for professional contractors, appropriately called Behr Pro, as well as with the premium Behr Marquee DIY paint that it sells at Home Depot. HD and MAS are working to gain market share in the professional paint business. This is a large market with significant upside potential. The operating margin decreased by 80 basis points to 21.6% as a result of management s long-term investments. But even with these investments, 21.6% is a very healthy margin. The segment profit of $141 million was above our estimate of $137 million and better than the StreetAccount consensus of $134 million. The Cabinet segment posted a 2% decrease in revenue to $251 million. Our estimate was $256 million and consensus was $267 million. The segment posted an adjusted operating profit of $30 million in 2Q. Our estimate was $26 million and the StreetAccount consensus was $36 million. The adjusted operating margin decreased by 220 basis points to 12% hurt, in part, by the exit from certain product categories in the U.K. In the Windows and Other Specialty Products segment, sales were up 4% to $204 million, and up 7% excluding currency effects. Our estimate was $211 million and consensus was $202 million. The segment had an $18 million operating profit, up from a $2 million loss a year earlier. Segment profitability is benefiting from management s turnaround initiatives. Masco has transferred some of its top managers from other businesses to run the division. The company expects improvement but acknowledges that it will take some time. The companywide adjusted gross margin of 35.8% improved by 60 basis points. The consensus was 35.6%. SG&A increased by 40 basis points to 18.5% on an adjusted basis. This included planned investments such as increased staffing to drive paint sales at Home Depot. We remain optimistic that Masco s expertise in developing new products and management s efforts to make the business more efficient will boost the shares as the housing and remodeling market continues to improve. EARNINGS & GROWTH ANALYSIS We are raising our 2017 EPS estimate to $1.97 from $1.95. This increase reflects the better-than-expected 2Q earnings and a small reduction in our share count estimate, offset by a small increase in our interest expense forecast. Management s updated guidance is $1.93-$2.00, up from $1.90-$2.00 previously. We are raising our 2018 estimate to $2.20 per share from $2.15. The increase is based mostly on a reduced share count estimate and a small reduction in our 1Q tax rate forecast. We expect the cabinet and window businesses to continue to improve and look for benefits from the additional staffing to support the Home Depot professional paint departments. At its spring 2017 analyst meeting, management established an earnings target of $2.50 per share, which we believe is achievable. Our long-term growth rate for Masco is 11%. We continue to see upside in the home improvement market. We believe that the housing market and home-related spending still have room to run. We are also encouraged by management s recent - 3 -

4 execution of the business plan, the increased emphasis on efficiency under CEO Keith Allman, and continuing indications of endmarket demand from Home Depot and Lowe s, which probably account for a third of the company s sales. In the 2Q16 earnings call, MAS management raised its long-term operating margin expectation to the high teens from 16%-17% for the Plumbing business, and to the low to mid-teens from 8%-9% for cabinets. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for Masco is Medium-Low, the second-lowest rank on our five-point scale. The company had $1.14 billion in cash and equivalents at the end of 2Q16. Total debt was $3.1 billion or 98% of total capital. Debt is such a high portion of capital because equity is just $70 million, largely because of the spinoff of TopBuild. In 4Q12, to fund the redemption of $645 million in existing notes, the company issued $400 million of notes due 2022 at a more favorable rate. During 2Q16, Masco used cash and new borrowings to repay $1 billion of notes due in Overall, the company retired $400 million of debt last year. The company entered into a new $1.25 billion revolving credit agreement in 1Q13, replacing a similarly-sized credit line and restoring its credit liquidity. The former facility mandated a debt/cap threshold of 65%, which Masco violated, causing its borrowing capacity to shrink to $630 million for a short period of time. In 2015, the company amended the credit agreement, reducing the capacity to $750 million and extending the maturity to There were no borrowings at the end of 2016 or the end of 2Q17. Masco generated $155 million in cash in the first half of That was down from $190 million in the prior-year period. One major difference is that receivables and inventories were higher in the current year. Masco s long-term debt is rated Ba1 by Moody s and BBB by S&P. The outlook from S&P is stable and the outlook from Moody s is now stable after a recent one-notch increase. Masco repurchased $456 million of its stock in 2015 and $460 million in The company repurchased $92 million in 1Q17. In May 2017, it authorized a new $1.5 billion repurchase plan, which replaced the previous plan. At the end of March 2009, the board cut the annual dividend from $0.94 to $0.30. Masco raised the quarterly payout to $0.09 from $0.075 in May of As a result, MAS paid 2014 dividends of $0.33 and 2015 dividends of $ With the 2Q earnings release, Masco announced its intention to raise the annual dividend to $0.40 per share beginning with the 4Q16 payment. In 2016, dividend payments totaled $ In its 2Q17 release, MAS announced its intention to raise its quarterly payout to $0.105 per share beginning in 4Q. We are reducing our 2017 dividend estimate to $0.41 from $0.42 per share. We are maintaining our 2018 estimate of $0.44. The company maintains a defined-benefit pension plan. However, it has been underfunded by more than $300 million for the last several years. The underfunding was $338 million at the end of Management made contributions totaling $100 million to the qualified defined-benefit plans in The annual report says that MAS will be required to contribute $21 million to the plans in MANAGEMENT & RISKS Since 2003, management has shifted its emphasis from acquisitions (which helped the company become a leading player in the market) to an approach focused on boosting return on invested capital and improving financial strength. Richard Manoogian, son of Masco s founder Alex Manoogian, retired as CEO in 2007, naming Timothy Wadhams as his successor. Mr. Wadhams worked at the company from 1976 until his retirement in February of He was replaced as CEO by Keith Allman. Mr. Allman joined the company in He had most recently been president of the Plumbing and North American Cabinet businesses. The current CFO, John Sznewajs, has been with Masco since Exposure to the housing market was Masco s most significant challenge for several years, particularly in the cabinet and installation businesses. Conditions are improving, but newly built houses tend to be smaller and simpler, and contracts for large batches of new homes are rarer than in the past. One reason is that there is a limited supply of building lots around cities with a healthy job market and amenities such as good schools and hospitals. There has also been a shift to multi-family condominiums and apartments, which are smaller than stand-alone homes and therefore have less need for cabinets and faucets. Masco has reduced its exposure to new home construction, but we continue to expect some correlation between sales and housing activity even as management has put more emphasis on the repair and remodel businesses. Masco must also contend with input cost inflation, as its products require lumber, particleboard, finishing material, titanium dioxide, and petroleum-based resins. Although it uses hedging strategies to mitigate this exposure, the company occasionally takes losses on these contracts due to mark-to-market adjustments. Furthermore, price hikes implemented to counteract these effects may not be well received by consumers

5 The company relies on big-box retailers to distribute its products, and would be adversely impacted by a dispute with a major retailer or by poor retailer performance. Although Masco works hard to manage relationships with big-box stores and has over 750 employees dedicated to this task, retailers such as Lowe s and Home Depot tend to be tough negotiators with regard to pricing. The loss of a paint distribution contract with Wal-Mart put a dent in Architectural segment revenues, and similar losses at other big-box chains would also impact the company s top line. Although Masco retains a healthy market share, it faces the risk of being undercut in price in a promotional environment. The impact of consumer tradedown to lower-priced products would be amplified in a period of weak consumer spending. In addition, many of these competitors are less exposed to Europe than Masco. To maintain its shelf space and margins, Masco must constantly innovate. The company could be subject to litigation and product liability claims as discussed in the annual report. COMPANY DESCRIPTION Masco manufactures home improvement and building products. Following the spinoff of the installation business in 2015 Masco has four segments, which had 2016 sales of $7.4 billion: Cabinets and Related Products, which include the KraftMaid brand (130% of 2016 sales); Plumbing Products, including Delta Faucets (48%); Decorative Architectural Products, including Behr paint (28%); and Other Specialty Products, including Milgard (11%). Approximately 20% of the company s sales are international dominated by the UK and Europe. Plumbing has the most international exposure, about 40%. About 80% of revenue is linked to repair and remodel and 20% to new construction. MAS is one of the biggest suppliers to Home Depot & Lowe s. 34% of Masco s 2016 sales were to HD. Lowe s represents less than 10%. VALUATION MAS shares have returned approximately 6% over the last 12 months. They are difficult, though getting easier, to value on a historical basis due to weakness in the company s core markets following the Great Recession. As such, we use our multistage dividend discount and peer multiple comparison models, and assume consistent improvement in the housing market and Masco s profitability over the next several years. Our dividend discount model now reflects our new estimates for 2017 and We are using a cost of equity of 9.25% in the early years of the analysis. We assume a slight decline to 9.1% as the growth rate declines and our dividend estimates increase. This could potentially decrease if the company can further reduce leverage and generate more consistent cash flow. This puts the value of the shares at approximately $44. Current comparable analysis, which contrasts EV/EBITDA multiples with those of close peers, points to a value over $40. MAS has recently traded at about 12-times trailing EBITDA, which is in line with, or slightly below peer levels. Based on our EBITDA estimate of $1.39 billion for the next four quarters, a multiple of 12 in one year, which is the same multiple we used in our previous note, and current levels of cash, debt and shares outstanding, the shares would be worth $46, up from $44 in our previous analysis. Based on these valuation metrics, we are maintaining our BUY rating and $44 price target. On August 22, BUY-rated MAS closed at $36.99, up $0.46. (Christopher Graja, CFA, 8/22/17) - 5 -

6 INTEL CORP. (NGS: INTC, $34.65)... BUY INTC: New 8th Gen core processors * Intel has launched its initial 8th Gen Core CPUs, which are designed to deliver up to 40% better performance than previous processors. * The initial rollout of devices is aimed at the light and thin 2-in-1 and notebook PC markets. Desktop processors, enterprise, and purpose-built devices will follow this fall, in time for the holiday quarter. * Intel recently completed the acquisition of MobileEye, a leader in computer vision technologies for the autonomous vehicle market. * In 2Q17, Intel grew its top line by 9% (14% excluding the divested McAfee) and boosted EPS by 20%. Those aboveindustry trends are positive for INTC stock, which continues to trade at a discount to its historical relative P/E and to peer average multiples. ANALYSIS INVESTMENT THESIS BUY-rated Intel Corp. (NGS: INTC) has launched the first set of products within its eighth generation of Intel Core Processors. The so-called 8th Gen processors are designed to deliver up to 40% better performance than the preceding generation of 7th Gen processors. The new devices are meant to upgrade computers to handle rapidly advancing technologies such as VR and AR, and to accommodate 4K ultra-high-definition media content. The initial rollout of devices is aimed at the light and thin 2-in-1 and notebook PC markets. The first set of chips is based on the Kaby Lake architecture used in 7th Gen devices, but packs a higher core count and higher clock speeds. The Intel chips will be available to meet the challenge from AMD, which is also releasing new chips and should have a notebook-ready Ryzen chip in time for holiday sales. Intel recently completed the acquisition of MobileEye, a leader in computer vision technologies for the autonomous vehicle market. The move jump-starts Intel s autonomous vehicle presence at a time when GPU leader NVidia has already struck numerous autonomous driving partnerships with leading automotive OEMs. While MobileEye s top-line contribution will be nearly immaterial to Intel s massive revenue stream, the technology catch-up will be crucial as Intel seeks to expand its Internet of Things presence. Based on 2Q17 results issued late in July, Intel is ramping high-value-add products in both CCG and DCG, and ASP trends show that it is succeeding in the cadence of its rollouts. Generally good margin and revenue trends across its compute business in 2Q17 enabled Intel to raise its annual revenue and EPS guidance. The INTC share price continues to be held down by data center concerns, which we believe creates a value situation. As such, INTC shares appear attractive at current levels. We are reiterating our BUY rating to a 12-month target price of $45. RECENT DEVELOPMENTS INTC is down 4% year-to-date in 2017, lagging the 14% year-to-date peer-group gain and the 19% gain for the SOX index. INTC rose just 5% in 2016, while the peer group of Argus-covered communications and computing semiconductor stocks soared 70%, mainly on strength in GPU companies NVidia and AMD. INTC shares declined 5% in 2015, lagging the 9% gain for the peer group. INTC rose 40% in 2014, compared to an 18% advance for the peer group and a 28% gain for the SOX. Intel rose 26% in 2013, declined 15% in 2012, and rose 15% in INTC, which has been as high at $38.45 this year, has slid below year-opening levels and at around $35 is down slightly year to date. Amid broad profit-taking in the technology sector that has been particularly hard on old-line names, INTC shares have failed to rise on three significant events in the past month. These include strong top- and bottom-line growth and aboveconsensus results for 2Q17; completion of the MobileEye acquisition; and the launch of the eighth generation of Intel Core CPUs. While none of these events were ground-breaking, we believe they contribute to the steady evolution of the company as Intel both defends its leadership in computing while pushing into important new opportunities. ON 8/21/17, Intel launched the first set of products within its new eighth generation (8th Gen) Intel core processors. The new devices are meant to upgrade computers to handle rapidly advancing technologies such as VR and AR and accommodate 4K ultra-high-definition media content

7 In a recent blog post, Grey Bryant, SVP of Client Compute Group (CCG) at Intel, contrasted the performance boost that users would experience from 8th Gen relative to 7th Gen and to a five-year-old PC. Editing photos or creating a slide show would be 48% faster with 8th Gen than with 7th Gen, while editing video footage would be 15-times faster with 8th Gen than on a fiveyear-old PC. SVP Bryant stated that the first wave of 8th Gen-powered devices, in Core i5 and i7, would come to market beginning in September on more than 145 notebook and 2-in-1 devices. The first 8th Gen desktop processors will be available later in the fall, followed by enterprise and purpose-built applications. Since the first generation of core processors, prior generations have been limited to a single chip family. For instance, all 4th Gen Core CPUs were in the Haswell family. By contrast, 8th Gen Core will span multiple families including Kaby Lake (built on 14 nm+ process), Coffee Lake (14 nm++) and in the future, Cannon Lake (10 nm process). This suggests the 8th gen of Core CPUs will last for several years. SVP Bryant acknowledged that 8th Gen will even include some of our first 10 nm products. The first set of four chips, targeted at slim and light notebooks, is based on the Kaby Lake architecture used in 7th Gen devices. Looking at comparable i7 Core products (the flagship line) for 8th Gen vs. 7th Gen, the 8th Gen devices for mobile PCs have four cores and eight threads; 7th Gen was two core and four threads only for mobile and notebook PCs. Maximum turbo speed is higher and smart cache is larger for the 8th Gen products. The 8th gen chips, including i5 and i7, offer hyper-threading, which helps with parallelization (multi-task computing); that feature was not available on 7th Gen. 8th Gen chips are designed to stay within the 15 watt TDP (thermal design point) that PC OEMs want to maintain without being subject to excessive cooling costs. Within 8th Gen, the move from Kaby Lake to Coffee Lake will be part of Intel s move from its 200 series chipsets to a new 300 series. That means the Coffee Lake chips won t be backwards-compatible with machines using Kaby Lake. AMD historically served the low end of the consumer notebook market, but that changed this year. In winter 2017, AMD launched its Ryzen 7 processor family, featuring high-end devices. By April, AMD followed up with Ryzen 5 mid-range devices. The new AMD devices are meant to compete directly with Intel s core i5 and i7 products. According to the website ExtremeTech, the new Ryzen chips tested well against 7th Gen Intel Core i7 CPUs, and Ryzen products are now among the top selling high-end CPUs on Amazon.com. The new Intel devices may be arriving just in time to spoil Ryzen s coming-out party. Still, Intel must now up its game if it wants to stay ahead. In March 2017, Intel agreed to pay $63.54 per share in cash for Mobileye, representing an equity value of $15.3 billion and an enterprise value of $14.7 billion. Mobileye. On 8/8/17, Intel announced that it had completed its tender offer for outstanding ordinary shares of Mobileye, a deal which positions Intel as a leading technology provider in the market for partially and fully autonomous vehicles. Intel s Automated Driving Group (ADG) will combine operations with Mobileye. MBLY is positioned for multiple years of double-digit growth in perhaps the fastest-growing niche connecting the technology and industrial sectors. For the first few years, however, Mobileye s $350-$400 million in annual revenue will barely register in Intel s $60 billion top line. Intel is not too concerned with immediate impact on its already huge revenue base. It believes that the total available market for autonomous driving and ADAS, including vehicle systems, data, and services, could total around $70 billion by Mobileye is a leader in computer vision, machine learning, data analysis, localization and mapping for advanced driver assistance systems (ADAS) and autonomous vehicles. Mobileye s proprietary software and EyeQ chips perform detailed interpretation of the visual field to identify and read traffic signs and signals and to anticipate and prevent collisions with objects and pedestrians. While autonomous driving is seen as an exciting future technology, ADAS is a well-established technology that is widely deployed today, and Mobileye plays a leading role. For model year 2016, Mobileye was selected for implementation in 237 car models with 20 OEMs. Mobileye equipment is installed in more than 4 million vehicles, and the company s customer count now exceeds 27 vehicle OEMs. While Mobileye is a leader in the established ADAS market, some investors are convinced that fully autonomous driving will follow a different path, through GPU-enabled artificial intelligence and machine learning. Camera-based systems, built around Mobileye s EyeQ, are cheaper than Light detection and ranging (LIDAR)-based systems such as that being developed by Alphabet s Google. NVidia s Drive platform for autonomous driving, based on its Tegra SoC, appears to have a head start and is seen as the better, more powerful processor than EyeQ. But Mobileye connects its processor to its camera technology, enabling it to provide a more integrated solution. Moreover, Mobileye as part of Intel will have the funds to map every road in the U.S. and, eventually, the world

8 At the time of the Mobileye acquisition announcement, we wrote that acquiring Mobileye was risky and pricey, but that Intel nonetheless accelerated its entry into an important developing market by acquiring an existing industry leader. For investors valuing INTC, the heart of the company remains computing. In 2Q17, Intel grew its top line by 9%, or by 14% excluding divested McAfee, and grew EPS by 20%. Those above-industry trends are positive for INTC, which continues to trade at a discount to historical relative P/Es and to its peer group. EARNINGS & GROWTH ANALYSIS For 2Q17, Intel generated revenue of $14.76 billion, which was up 9% year-over-year and down less than 0.5% sequentially from 1Q17. Excluding the divested McAfee security business from all comparisons, sales would have been up 14%. Revenue was above the midpoint of management s guidance of $14.4 billion, plus or minus $500 million, and topped the $14.4 billion consensus estimate. The GAAP gross margin narrowed slightly on a sequential basis to 61.6% in 2Q17 from 61.8% in 1Q17 while expanding sharply from 58.9% a year earlier. The non-gaap operating margin broadened sequentially to 28.25% in 2Q17 from 26.5% in 1Q17 and from 23.8% a year earlier. Non-GAAP earnings totaled $0.72 per diluted share, which was up 23% year-over-year and up $0.06 on a sequential basis. Non-GAAP EPS topped the $0.68 consensus forecast by four cents. For all of 2016, Intel s total revenue of $60.21 billion grew 14% from $55.37 billion in Intel earned $2.72 per diluted share on a GAAP basis in 2016, up 14% from $2.39 in Intel offered an above-consensus outlook for 3Q17, while also raising its full-year guidance. Intel guided for revenue of $15.7 billion, +/- $500 million; non-gaap gross margin of 63%, +/- two points; core operating costs of $5.1 billion; and non- GAAP EPS of $0.80, +/- five cents. Revenue at the guidance midpoint would be up about 3% annually, excluding Intel Security Group from all comparisons. Intel raised its full-year revenue guidance to $61.3 billion, +/- $500 million; and its non-gaap earnings forecast to about $3.00 per diluted share. In April, Intel projected revenue and earnings (at the guidance midpoints) of $60 billion and $2.90 per diluted share. Our 2017 non-gaap earnings forecast for Intel is $2.88 per diluted share. Our 2018 non-gaap earnings forecast is $2.96 per diluted share. Our GAAP forecasts are $2.58 per diluted share for 2017 and $2.73 for Our long-term EPS growth rate estimate is 10%. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for Intel is High. Intel s credit ratings are mainly A1 or A2, per Moody s. To pay for the $16.7 billion Altera acquisition, Intel issued $8 billion in debt in 3Q15. The company used cash and/or short-term paper for the balance. In an effort to accelerate the process of rebuilding cash following the acquisition, Intel has slowed (though not discontinued) share repurchases. Intel added $7.1 billion in debt in 2Q17 in anticipation of its planned $14.7 billion acquisition of MobileEye. The company also generated $2.1 billion from assets sales, primarily from the sale of Intel Security Group (now called McAfee). Intel s cash & equivalents and investments totaled $31.8 billion at midyear 2017, up from $24.1 billion at the end of 1Q17. Cash was $23.3 billion at the end of Cash was reduced from $31.3 billion at the end of 2015 by the Altera acquisition. Cash & equivalents and investments totaled $21.15 billion at the end of 2014 and $20.1 billion at the end of Total debt was $32.0 billion at midyear 2017, up from $25.75 billion at the end of 1Q17. Total debt was $24.3 billion at the end of 2016, $22.7 billion at the end of 2015, and $13.6 billion at the end of Cash flow from operations was approximately $21.8 billion in 2016, up from $19.0 billion in 2015 and $20.5 billion in Intel spent $2.6 billion to repurchase stock in 2016 and a like amount in Share repurchases totaled $4.0 billion in 2014, $2.1 billion in 2013, and $5.5 billion in Over the past 10 years, Intel has spent $60 billion to repurchase stock. On 11/19/15, Intel announced an 8.3% hike in its quarterly dividend, to $0.26 per common share, or $1.04 annually. Our annual dividend forecasts are $1.12 for 2017 and $1.20 for MANAGEMENT & RISKS Longtime COO Brian Krzanich became CEO on 5/16/13. Former CFO and director of corporate strategy Stacy Smith has taken on a larger role overseeing sales, manufacturing, and operations. Intel has appointed Robert Swan as its new CFO. In November 2015, Murthy Renduchintala came over from Qualcomm to run Intel s mobile chip division. According to CEO Krzanich, Mr. Renduchintala will conduct a complete review of products as part of the restructuring program and report his findings directly to the CEO. In July 2015, Intel announced several leadership changes. Aicha Evans is now part of the - 8 -

9 management committee and is Communications and Devices Group General Manager. Josh Walden is General Manager of Intel s New Technology Group. Former Intel President Renee James left the company in January The restructuring program, while painful, reflects the reality of reduced global PC demand. This business throws off substantial cash, and Intel will be challenged to replace volumes and improve margins as it seeks to grow its focus businesses. The acquisition of Altera creates risks related to the premium price and Intel s spotty record in integrating past acquisitions. Although ALTR was expensive, the acquisition should future-proof Intel s presence in the data center. Altera also looks like a better and more logical fit than McAfee. The same holds true for Mobileye. Although Mobileye is even more expensive than Altera, this leader in autonomous and assisted driving systems exposes Intel to a much larger TAM (total available market) opportunity. Intel faces the usual array of competitive risks, but is the clear leader in microprocessors with a roughly 80% share in PCs and 95% in the data center. Given this near hegemony, we see more stock-price risk than business risk for the company. In other words, the loss of a few points of market share would likely hit the stock much harder than it would impact the bottom line. Given the company s history of technology leadership, we do not expect any meaningful market share losses going forward. COMPANY DESCRIPTION Intel supplies the computing industry with the chips, boards, systems and software that are the primary components of computer architecture. Intel has also expanded through acquisitions, although these businesses are now being reviewed and in some cases sold to other semiconductor firms. Intel has the largest market share in the semiconductor industry, with approximately $55.4 billion in 2015 sales. INDUSTRY We have raised our rating on the Technology sector to Over-Weight from Market-Weight. Technology is showing clear investor momentum, topping the market in the year-to-date and trailing one-month and three-month periods. At the same time, the average two-year-forward EPS growth rate exceeds our broad-market estimate and sector averages. This has kept technology sector valuations from becoming too rich, and resulted in PEG ratios that are below the median for all sectors. Over the long term, we expect the Tech sector to benefit from pervasive digitization across the economy, greater acceptance of transformative technologies, and the development of the Internet of Things (IoT). Healthy company and sector fundamentals are also positive. For individual companies, these include high cash levels, low debt, and broad international business exposure. In terms of performance, the sector rose 12.0% in 2016, above the market average, after rising 4.3% in The sector is outperforming thus far in 2017, with a gain of about 11.5%. Fundamentals for the Technology sector look reasonably balanced. By our calculations, the P/E ratio on projected 2017 earnings is 18.1, near the market multiple of Earnings are expected to grow 31.9% in 2017 following low single-digit growth in The sector s debt ratios are below the market average, as is the average dividend yield. VALUATION In the wake of the Altera acquisition, the Street is valuing INTC on non-gaap results; we have adjusted our model accordingly. INTC shares are trading at 12.1-times our 2017 non-gaap EPS estimate and at 11.8-times our 2018 estimate. The twoyear forward P/E of 11.9 is in line with the five-year average P/E of 12.0; but the two-year forward relative P/E of 0.68 is below the five-year average relative P/E of Our historical comparable valuation model renders a value for INTC in the high $30s, in a rising trend. Peer group analysis shows INTC trading at substantial discounts to Argus semiconductor peers on a variety of measures. That includes trading at just 51% of the peer average on P/E; 47% on price to sales; 44% on price to book value; and at just 58% of the group PEG ratio. Given Intel s exceptional cash-generating capabilities, our more forward-looking DFCF model indicates a fair value in the low $60s. We calculate a blended value in the low $50s, also in a rising trend. Appreciation to our 12-month target price of $45, along with the 3.0% dividend yield, implies a risk-adjusted return above our projected return for the broad market. As such, our rating remains BUY. On August 22, BUY-rated INTC closed at $34.65, down $0.27. (Jim Kelleher, CFA, 8/22/17) - 9 -

10 RALPH LAUREN CORP. (NYSE: RL, $85.32)... HOLD RL: Raising EPS estimates * On August 8, Ralph Lauren posted fiscal 1Q18 adjusted EPS of $1.11, up from $1.06 a year earlier and above the consensus of $0.96. Net revenue fell 13% to $1.35 billion, in line with guidance and just above the consensus of $1.34 billion. * In the near term, we continue to expect earnings at Ralph Lauren to be pressured by weak consumer spending, high input costs, and the company s investments in new products. * To revive earnings growth, the company is streamlining operations, focusing on core brands (Ralph Lauren, Polo, and Lauren) and eliminating underperforming products and distribution points. * Our rating remains HOLD. We would consider placing the stock back on our BUY list on signs of stabilizing revenue and improved international results. ANALYSIS INVESTMENT THESIS In the near term, we expect earnings at HOLD-rated Ralph Lauren Corp. (NYSE: RL) to face pressure from internet competition, weak consumer spending at brick-and-mortar stores, high input costs, and the company s investments in new products. In June 2016, Ralph Lauren announced a restructuring plan, called the Way Forward, to drive future growth by streamlining operations and focusing on core brands. The strategy includes eliminating underperforming stores and department store distribution points, restructuring the company s global e-commerce platform, and reducing supply-chain lead times. Together with fewer shipments, a reduction in surplus inventory, and fewer markdowns, these actions have led to expanded margins; however revenues continue to suffer. Unfavorable currency effects have also weighed on revenue and earnings. If costs continue to moderate, revenue stabilizes, and results in Europe and North America improve, we would consider an upgrade. On the other hand, we could lower our rating in the event of continued weak revenue and additional store closings. RECENT DEVELOPMENTS Ralph Lauren shares have underperformed over the last year, losing 21% while the S&P 500 has risen more than 12%. However, the shares have rallied over the last three months, gaining nearly 25% versus a gain of 1.9% for the index. On August 8, Ralph Lauren reported fiscal 1Q18 results. Net revenue was $1.35 billion, down 13% year-over-year but in line with the company s guidance and just above the consensus of $1.34 billion. Adjusted EPS rose to $1.11 from $1.06 a year earlier and topped the consensus estimate of $0.96. The adjusted gross margin rose 210 basis points to 57.9%, and the operating margin rose 200 basis points to 10.2%. The margin improvements were driven by reduced inventory, fewer promotional discounts, and lower sourcing costs, partly offset by unfavorable currency effects. Margins also benefited from a more favorable mix as higher-margin international and retail business represented a larger portion of sales than in fiscal 1Q17. At 52.6%, the SG&A rate rose 10 basis points from last year. Interest expense increased to $5 million from $3 million a year earlier. The share count fell from 83.3 million to 82.5 million. At the end of the quarter, the company had $100 million remaining on its buyback authorization. Patrice Louvet became the company s new president and CEO in July 2017, replacing interim CEO Jane Nielsen. Mr. Louvet was previously the group president of Procter & Gamble s Global Beauty division, and has more than 25 years experience in the consumer products industry. EARNINGS & GROWTH ANALYSIS Ralph Lauren now has three reporting segments. First-quarter results for each segment are summarized below. Revenue in North America fell 17% to $710 million, reflecting the discontinuation of less profitable brands and distribution points, reduced shipments, and weaker consumer demand. Comparable sales fell 8%, with a 4% decline in brick-andmortar stores and a 22% decrease in e-commerce. North America accounts for approximately 53% of the company s net revenues. In Europe, revenue fell 14% to $323 million (down 10% in constant currency), driven by the timing of wholesale shipments, discontinued brands, and unfavorable currency effects. Comp sales fell 11%, partly offset by an increase of $10.5 million from new store openings. Wholesale revenue in the segment fell 28% while retail sales fell 8%; retail sales were flat in constant currency. Europe represents about 24% of net revenues

11 Asia revenue fell 1% to $209 million (up 1% in constant currency), driven by lower wholesale revenue in Japan and South Korea, retail store closings, and unfavorable currency effects. Store traffic rose from the prior year, which boosted comp sales by 2%. Asia accounted for about 15.5% of 1Q18 net revenues. Along with the 1Q earnings release, management reiterated its guidance for FY18. It continues to expect an 8%-9% decline in revenue and an operating margin of 9.0%-10.5%, up 300 basis points, at the midpoint of the range, from FY17. Management expects to restore revenue growth and further improve operating margins in FY19. It is targeting a mid-teens operating margin by FY20. We are raising our FY18 diluted EPS estimate to $5.19 from $4.80 and our FY19 estimate to $5.30 from $4.95. Our estimates for both years are below consensus. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Ralph Lauren is High. The company ended 1Q18 with $1.65 billion in cash and shortterm investments, up from $1.37 billion a year earlier. Total debt was $590 million at the end of 1Q18, up from $588 million a year earlier. Total liabilities were approximately $2.5 billion, up from $2.4 billion. Inventories in the first quarter declined 31% from the prior year to $860 million. The company pays a quarterly dividend of $0.50 per share, or $2.00 annually, for a yield of about 2.3%. Our dividend estimates are $2.20 for both FY18 and FY19. RISKS Ralph Lauren faces risks from slower consumer spending, especially at brick-and-mortar stores, as well as from higher input, manufacturing, and labor costs. Management has limited discounts in recent quarters, but has noted that higher revenue may not fully offset cost inflation. RL also faces currency risk, as changes in exchange rates impact reported sales and earnings in international operations as well as spending by foreign tourists in the U.S. The company hedges inventory purchases to reduce the impact of currency fluctuations. COMPANY DESCRIPTION Ralph Lauren, based in New York, designs, markets and distributes premium apparel, accessories and fragrances, and home products. The company s brands include Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren Collection, Black Label, Blue Label, Lauren by Ralph Lauren, RRL, RLX, Rugby, Ralph Lauren Childrenswear, Chaps (at Kohl s), and Club Monaco. VALUATION RL shares are trading at 16.4-times our FY18 EPS estimate, below the range of for other luxury apparel manufacturers; however, the company s earnings and revenues are declining. At current levels, we believe that the shares adequately reflect our expectations for weak apparel sales and continued pressure on earnings. As such, our rating remains HOLD. We would consider raising our rating on signs of stabilizing revenues and a return to sustainable EPS growth. On August 22, HOLD-rated RL closed at $85.32, up $0.42. (Stephen Biggar and Deborah Ciervo, CFA, 8/22/17)

12 TRACTOR SUPPLY CO. (NGS: TSCO, $56.17)... HOLD TSCO: Improved 2Q17 earnings; reiterating HOLD * While Tractor Supply s same-store sales grew during the second quarter, we remain concerned about same-store sales growth and expect the company to add fewer new stores than previously planned, resulting in less rapid earnings growth. * On July 26, Tractor Supply reported results for 2Q17. Revenue increased 8.9% to $2.02 billion. Second-quarter comp sales rose 2.2% following a decrease of 0.5% in the prior-year period. Diluted EPS rose to $1.25 from $1.16 a year earlier, topping the consensus of $0.94. * Along with the second-quarter results, management lowered its full-year guidance. It now projects EPS of $3.22- $3.27, down from a prior $3.44-$3.52; revenue of $7.13-$7.19 billion, down from $7.22-$7.29 billion; and comp sales growth of 1.1%-1.7%, down from a previous estimate of 2.0%-3.0% growth. * Based on management s guidance and the company s first-half results, we are lowering our 2017 EPS estimate to $3.27 from $3.50. We are maintaining our 2018 estimate of $3.96. Our five-year earnings growth rate estimate is 12%. ANALYSIS INVESTMENT THESIS We are maintaining our HOLD rating on Tractor Supply Co. (NGS: TSCO). We remain concerned about the company s weak same-store sales outlook and expect it to add fewer new stores than previously planned, resulting in less rapid earnings growth. We are also concerned that declining prices for agricultural commodities will pressure Tractor Supply s customer base. If margins expand and same-store sales improve more than we anticipate, we would consider returning the stock to our BUY list. Our long-term rating remains BUY. We expect the company to emphasize more profitable clothing and private-label products, and to increase its store count at a low double-digit pace. We note that Tractor Supply has few competitors with similar product lines, and that it typically focuses on markets that are too small for Lowe s and Home Depot. RECENT DEVELOPMENTS On July 26, Tractor Supply reported results for 2Q17. Revenue increased 8.9% to $2.02 billion. Second-quarter comp sales rose 2.2% following a decrease of 0.5% in the prior-year period. After adjusting for a calendar shift associated with a 53rd week in 2016 and one additional sales day in 2Q17 than in 2Q16, same-store sales rose approximately 2.8%. Diluted EPS rose to $1.25 from $1.16 a year earlier, topping the consensus of $0.94. Customer traffic rose 2.2% in the first quarter, led by C.U.E. (consumable, usable and edible) products, following a 1.4% decline in the first quarter. The gross margin fell 10 basis points to 34.9%, reflecting the impact of higher freight costs. SG&A expense rose to $446.8 million, or 22.1% of sales, primarily due to higher store payroll costs, infrastructure and technology investments, and the integration of Petsense. Interest expense rose to $2.8 million from $1.1 million in the prior-year period. Tractor Supply is strengthening the connection between its physical stores and e-commerce business. During the second quarter, it completed the rollout of its Buy Online, Pick Up in Store program and continued to develop its Neighbor s Club program. Management believes that customers have responded positively to these initiatives, and expects them to be significant future growth drivers. Along with the second-quarter results, management lowered its full-year guidance. It now projects EPS of $3.22-$3.27, down from a prior $3.44-$3.52; revenue of $7.13-$7.19 billion, down from $7.22-$7.29 billion; and comp sales growth of 1.1%- 1.7%, down from a previous estimate of 2.0%-3.0% growth. In 2Q17, the company opened 14 new Tractor Supply stores and closed one. It also opened eight new Petsense stores. In the first half, it opened a total of 38 new stores. It is targeting 100 store openings this year, down from 113 in EARNINGS & GROWTH ANALYSIS The company s operating margin fell in both the first and second quarters, and we expect it to be down slightly in 2017 from last year s 10.2%. Driven by supply-chain improvements and increased private-label revenue, we expect gross margins to improve next year. Based on management s guidance and results in the first half of 2017, we are lowering our EPS estimate to $3.27 from $3.50 for 2017; however, we are maintaining our 2018 estimate of $3.96. We previously lowered our estimates in mid-april after the company reported disappointing 1Q results. Our five-year earnings growth rate estimate remains 12%