Recommended Corporates

Transcription

1 Recommended Corporates Pat McCluskey, Senior Fixed Income Analyst Michael P. White, Fixed Income Analyst Recommended Corporates May 22, 2018» Our Recommended Corporates List consists of issuers that Advisory Services Group (ASG) believes represent an attractive risk/reward profile for new investment.»»» The client risk suitability scale described on page 5 is the guidance for what type of portfolio we beleive a particular issuer is suitable for. We shade those suitability categories we feel are most appropriate for holding the corporate bonds of each particular issuer. We recommend that any investor considering a bond from the Recommended Corporates List do so as a portion of a well-diversified portfolio with no undue concentration in a specific issuer or sector. In our view, no single company should represent more than 5% of a fixed-income portfolio. Wells Fargo Investment Institute (WFII) currently recommends an even-weight allocation to investment-grade credit and an even-weight allocation to duration. Please see pages 7-8 of this report for Important Disclosures, Disclaimers & Analyst Certification Offerings listed may not be appropriate for all investors. See pages 5 and 6 for portfolio suitability scale and agency rating definitions. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value 1 of 8

2 Consumer Discretionary DR Horton, Inc. Homebuilders Baa3 STABLE BBB STABLE DR Horton builds single-family detached homes for every entgry-level, move up, active adults and luxury buyers. As a homebuilder, the company is the largest and most diverse in terms of geography with operations across 26 states and more than 70 markets. In addition, DR Horton offers homebuyers title agency services and mortgage financing. Conservative Growth & Income Consumer Staples Altria Group, Inc. Tobacco A3 STABLE A- STABLE The largest cigarette producer in the U.S. The Company's international operations were spun-off in Because of its very stgrong product portfolio, it holds about 50% of the U.S. Market for cigarettes, which has produced very strong cash flows. Diageo Plc Beverages A3 STABLE A- - After its merger with Guinness and Grand Metrtopolitan in 1997, Diageo Plc has become a global leading producer of premium spirits and marketer of been and wines. A few of Diageo's brand products include Captain Morgan Rum, Smirnoff vodka, Bailey's Irish Cream, Johnnie Walker scotches, and Guinness stout. Diageo enjoys low business risk and generates significant cash after operating expenses, depreciation and amounts paid in stock dividends. General Mills, Inc. Food/Diversified Baa2 STABLE BBB STABLE A leading producer of packaged foods sold throughout the world. General Mills holds leading positions in a number of plroduct areas within the highly competitive plackaged foods industry and has been a consistently strong producer of cash flow. Lowe's Companies, Inc. Retail A3 STABLE A- STABLE The world's second largest retailer of home improvement products. The home improvement industry is basically a duopoly with Lowe's as one of the participants. PepsiCo Inc. Beverages A1 STABLE A+ STABLE International producer of branded beverages and snack foods. The company has a well-balanced product portfolio that has produced strong cash flow. Wal-Mart Stores Inc. Retail Aa2 STABLE AA NEG The world's largest retailer with a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercentgers. We believe that Wal-Mart is among the best positioned retailers in the industry owing to the diversity of its retail channels. Energy: Investment Grade Enterprise Products Partners LP Pipelines Baa1 STABLE BBB+ STABLE An integrated provider of natural gas pipeline and related services and natural gas liquids (NGLs) including fractionation and storage. We view the company's business line diversity and high proportion of fee-based revenues as credit strengths. Magellan Midstgream Partners LP Energy Baa1 STABLE BBB+ STABLE Magellan Midstream Partners is a master limited partnership. Magellan Midstream holds a prominent U.S. position in the transportation, storage, and distribution of refined petroleum products and crude oil in the central and eastern United States. In addition, Magellan has maintained a conservative balance sheet with over 80% of cash flows being generated from stable, fee-based business. Magellan's links to oil refineries and overall low direct connection to upstream commodities products protects the company from unexpected negative movements in natural gas and crude oil market prices. Moderate Income 2 of 8

3 Energy: High Yield Devon Energy Corp Oil & Gas Ba1 STABLE BBB STABLE One of the largest independent oil and gas exploration and production companies in the U.S. We view the company's competitive full-cycle cost structure and strong organic growth prospects as major competitive advantages. Moderate Income Financials 1 Goldman Sachs Group, Inc. Banks WR STABLE NR STABLE One of the top 5 U.S. bank holding company and one of the world's leading investment banking and securities companies. Goldman's securities potentially add additional yield spread pick up. JP Morgan Chase & Co. Diversified Financial A3 STABLE A- STABLE Services The largest U.S. bank holding company and a leading global financial services firm. In our view, the firm is among the best managed and most consistent performers in the financial segment. U.S. Bancorp Banks A1 Review Down A+ STABLE Headquartered in Minneapolis, MN, it is one of the largest U.S. bankholding companies. As a large regional bank, U.S. Bancorp does not have "size" issues or foreign exposures that large banks do. 1 The ASG Fixed Income Research team recommends holding senior securities of these issuers. Health Care Aetna Inc. Healthcare Services Baa2 STABLE A *- A leading health care benefits company offering a wide range of services including group life, dental, disability and health care. We believe that Aetna's strength is the diversity of its health insurance business, which should allow it to continue to benefit from changing trends in U.S. healthcare. Anthem Healthcare Services Baa2 STABLE A STABLE The Anthem network is one of the nation's larghest managed care companies serving some 37 million members primarilyh under the Blue Cross and/or Blue Shield license. The company has benefited from a very strong business profile, strong earnings and cash flow. Medtronic plc Medical Devices A3 STABLE A - Medtronic plc as a company functions in eight operating segments that manufacture and sell device-based medical therapies: Cardiac Rhythm Disease Management, Spinal and Navigation, Vascular, Neurological, Diabetes, Cardiac Surgery, Ear, Nose and Throad, and Phyusio-Control Pfizer, Inc. Pharmaceuticals A1 STABLE AA STABLE The world's largest pharmaceuticals company, Pfizer has grown through acquisitions including the 2009 acquisition of Wyeth. Despite patent expirations, we believe the strength and diversityof its product portfolio should allow it produce strong free cash flows. Stryker Corp Health Care Products Baa1 STABLE A - One of a few leading competitors in the medical devices market, Stryker has consistently provided innovative orthopedic, medical and surgical, and neurovascular products. Its surgical products include drills, cement mixers and asaws marketed globally to doctors, hospitals and various types of healthcare facilities. Conservative Growth & Income Information Technology Microsoft Corp. Software Aaa STABLE AAA STABLE The world's largest software company and developer of the Windows operating system for personal computers (PCs). We view the company's business position as excellent and its financial risk as minimal. 3 of 8

4 Industrials Deere & Co. Machinery A2 STABLE A STABLE The world's largest producer of farm equipment and supplier of construction, forestry, and commercial and consumer equipment. Throuogh its capitve finance unit, John Deere Finance, the company also provides financing for the many products it sells, which is a strong competitive advantage. Emerson Electric Co. Electric Products A2 STABLE A STABLE Emerson is a leading producer of industrial, electrical products and systems. Its focus on high-end speciality products should enable a continuation of solid profitability and cash flow throughout the business cycle. Honeywell International, Inc. Electronics A2 STABLE A STABLE Honey is a leader in aerospace, performance materials, and automation and control. The company has over 1,000 manufacturing facilitie, and research and sales global locations. Overall, trhe U.S. accounts for close to 62% of consolidated sales while Asia and Europe represent over 40% of the company's product manufacturing. Moderate Income Lockheed Martin Corp Aerospace/Defense Baa1 STABLE BBB+ POS The world's largest military weapons manufacturer; over 90% of revenues are derived from global defense sales. We recommend Lockheed Martin for the diversity it adds to a portfolio. Telecommunication Comcast Corp. Media WR STABLE NR #N/A N/A Media and entertainment conglomerate with interests in cable, broadcasting, film and theme parks. Despite increasing competitive pressures, we believe the strength of Comcast's businesses gives it strong advantages. About 36% of consolidated revenues and 18% of earnings before interest tax depreciation and amortization (EBITDA) a measure of cash flow, were derived from its programming partnership with General Electric (The NBC Universal business). Verizon Communications, Inc. Telecommunications Baa1 STABLE BBB+ STABLE Verizon Communnications is the second largest local phone company after AT&T but the number one wireless carrier in the U.S. The copmpany provides services to approximately 110 million retail wireless consumers. In addition to serving consumers, Verizon is a major communications provider for the federal goverbnment, business phone lines, telecommunications equipment, and data services globally. Utilities Duke Energy Corp Electric Utility Baa1 NEG BBB+ STABLE Following its July 2012 merger with Progress Energy, Duke is the largest electric power holding company in the U.S. serving more than 7 million customers in 7 states. It also operates the nation's largest fleet of nuclear generators. Historically, the states in which the companies operate have been supportive of the companies' rate requests and return metrics. Source: Bloomberg Information as of 5/21/18 unless otherwise noted *See page 6 for Moody's and S&P Credit rating definitions Rating Outlooks: Average time frame covered - one year. A positive outlook implies that the rating may be raised A negative outlook implies that the rating may be lowered A stable outlook implies that the rating is not likely to change 4 of 8

5 Portfolio suitability CONSERVATIVE INCOME MODERATE INCOME AGGRESSIVE INCOME CONSERVATIVE GROWTH & INCOME MODERATE GROWTH & INCOME AGGRESSIVE GROWTH & INCOME CONSERVATIVE GROWTH MODERATE GROWTH AGGRESSIVE GROWTH SPECULATIVE Category 1: Category 6: for a conservative income investor or an investor Category 2: Category 7: for a moderate income investor or an investor with a greater risk tolerance. for an aggressive growth and income investor or an investor for a conservative growth investor or an investor Category 3: Category 8: for an aggressive income investor or an investor for a moderate growth investor or an investor Category 4: Category 9: for a conservative growth and income investor or an investor for an aggressive growth investor or an investor Category 5: Category 10: for a moderate growth and income investor or an investor for speculative investors willing to accept unlimited downside risk. We recognize that investors with similar investment objectives may have substantially different risk tolerances. Although all investments involve some degree of risk, including the potential loss of principal, some securities have more risks than others. With a Category 1, we believe the risk of losing money due to a credit event is small, but the potential for gain also appears limited. With a Category 10, the risk of losing money appears much higher, but we believe there is also a greater potential for gain. Our risk opinion on fixed income securities should be used as a guide to the potential credit risk from a particular issuer and structural subordination*. The risk opinion takes into account credit and structural subordination considerations only and does not incorporate risks related to interest rate risk, inflation risks, liquidity risks, call and prepayment risks or other types of security specific risk. The risk opinion is a guide to the risk from a credit perspective only; it does not factor how the security is used within a portfolio. If a security falls into category 4, this does not mean the security is unsuitable for categories 1-3, as an allocation of the security in these categories may be acceptable in a diversified portfolio. Diversification is a key component of portfolio construction, concentration among issuers or sectors expose an investor to added risk. Investors should consider their individual financial condition and ability to evaluate and tolerate the risks of any product before investing. The suitability of the individual security should be reviewed by investors and their Wells Fargo Advisors Financial Advisor to determine whether a particular security is suitable for their portfolios, with full consideration given to existing portfolio holdings. * Structural subordination incorporates where in the capital structure the security ranks. In a default of payment situation securities that have priority typically receive payment prior to security claims that rank lower (subordinate) in the capital structure of the company. 5 of 8

6 Credit ratings Investment-grade ratings Moody's S&P Highest possible credit rating principal and interest payments considered very secure Aaa AAA High quality differs from highest rating only in the degree of protection offered to bondholders Good ability to pay interest and principal more susceptible to adverse effects due to changing conditions Adequate ability to make principal and interest payments adverse conditions are more likely to affect ability to service debt Speculative ratings Moody's S&P Issuer faces ongoing uncertainties or exposure to adverse business or economic conditions Greater vulnerability to default, but currently meeting debt-service requirements Judged to be of poor standing and are subject to very high credit risk Ba1 Ba2 Ba3 BB+ BB B1 B+ B2 B B3 B- Likely in, or very near, default with some prospect of recovery of principal and interest Ca CC These obligations are typically in default with little prospect for recovery C C Bonds in default NA D Methodology The ASG Recommended Corporates List uses a combination of quantitative screening coupled with a qualitative analysis to identify issuers for inclusion. The initial quantitative screening is done in order to identify issuers that meet certain minimum criteria in terms of valuation and credit characteristics. These criteria include valuation metrics such as option adjusted spread and credit default swap levels, market based information including performance of a company s securities, as well as financial strength measures. Once an issuer is identified as having met certain numerical criteria, an analyst then reviews it for possible inclusion on the Recommended Corporates List. This qualitative analysis utilizes information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents. Current issuers on the Recommended Corporates List are monitored in the same manner for continued inclusion or deletion. Caa1 Caa2 Caa3 CCC+ CCC Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- Baa1 BBB+ Baa2 BBB Baa3 BBB- BB- CCC- What Does A Deletion Mean? Removal of an issuer from the ASG Recommended Corporates List is an indication that the WFA Fixed Income Analyst team no longer views the issuer s securities as attractive for purchase on a risk/reward basis. That decision could be due to either a change in market valuation or deterioration in the issuer s credit profile. When we remove an issuer from the ASG Recommended Corporates List, coverage will be reduced and review will be changed from ongoing to periodic. Removal of an issuer from the Recommended Corporates List, in and of itself, does not connote a sell recommendation. We would also suggest at that time a Financial Advisor review with their clients the security as well as its place in a particular portfolio. 6 of 8

7 IMPORTANT DISCLOSURES Wells Fargo Advisors trades or may trade as principal in the fixed income securities (or in related derivatives) discussed in this report. Disclosure Information For important disclosure information, please contact: Wells Fargo Advisors Attn: Advisory Services (Disclosure Information) One North Jefferson St. Louis, MO Or call by phone: (888) Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. ANALYST CERTIFICATION: The Analyst who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Disclaimers Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Investment in Master Limited Partnerships (MLPs) involves certain risks which differ from an investment in the securities of a corporation. MLPs may be sensitive to price changes in oil, natural gas, etc., regulatory risk, and rising interest rates. A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash flows distributed by the MLP. Other risks include the volatility associated with the use of leverage; volatility of the commodities markets; market risks; supply and demand; natural and man-made catastrophes; competition; liquidity; market price discount from Net Asset Value and other material risks. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. Wells Fargo Advisors research analysts receive no compensation in connection with the firm s investment banking, sales and trading, or principal trading revenues. Analysts may be eligible for annual bonus compensation based on the overall profitability of the firm, which takes into account revenues derived from all the firm s business activities, including its investment banking business, sales and trading, and principal trading. The Advisory Services Group (ASG) of Wells Fargo Advisors works with information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents as well as other sources. ASG does not assign ratings to or project target prices for any of the securities mentioned in this report. 7 of 8

8 ASG receives research from affiliated and unaffiliated correspondent research providers with which Wells Fargo Advisors has an agreement to obtain research reports. Each correspondent research report reflects the different assumptions, opinions, and the methods of the analysts who prepare them. Any opinions, prices or estimates contained in this report is as of the date of this publication and is subject to change without notice. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company Wells Fargo Clearing Services, LLC. All rights reserved. 8 of 8