HOLT U.S. Sector Specialist Quarterly Ideas Second Quarter

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1 U.S. Sector Specialist Quarterly Ideas Second Quarter Adam Fuelleman, CFA Sector Specialist - Industrials adam.fuelleman@credit-suisse.com Steve Bock, CFA Sector Specialist - Healthcare steven.bock@credit-suisse.com credit-suisse.com/holtmethodology Market Commentary

2 U.S. Sector Specialist Team Consumer Specialist Bhumika Gashti, CFA Healthcare & Utilities Specialist Steve Bock, CFA Technology, Media & Telecom Specialist John Talbott, CFA, CPA Financials Specialist Ben Weyers, CFA Energy & Materials Specialist Vadim Vintsevsky Industrials Specialist Adam Fuelleman, CFA SMID Cap Specialist Rachael Harrison Generalists Stephen Price Ryan Ruggaard Pooja Shakya Charlie Kreis 1

3 Idea Summary¹: The following stocks were selected by the US Sector Specialist team. Slide Company Name Ticker Market Cap Sector CFROI (LFY, %) Warranted Upside - Downside (%) Economic PE Dividend Yield (%) Theme 6 AMAZON.COM INC AMZN Consumer Discretionary Quality Trap 7 HASBRO INC HAS 12.4 Consumer Discretionary Best in Class 8 INSTALLED BLDG PRODUCTS INC IBP 1.7 Consumer Discretionary Style Neutral 9 ULTA BEAUTY INC ULTA 17.5 Consumer Discretionary 11.6 (19) Quality at any Price 10 NATIONAL BEVERAGE CORP FIZZ 3.7 Consumer Staples 14.2 (18) Quality at any Price 11 PINNACLE FOODS INC PF 6.8 Consumer Staples 22.8 (29) Quality at any Price 12 ALIGN TECHNOLOGY INC ALGN 9.1 Health Care Style Neutral 13 AMERISOURCEBERGEN CORP ABC 18.8 Health Care 48.4 (8) Best in Class 14 CELGENE CORP CELG 96.1 Health Care Best in Class 15 ICON PLC ICLR 4.4 Health Care 24.8 (2) Contrarian 16 ALPHABET INC GOOGL Information Technology Style Neutral 17 COMMSCOPE HOLDING CO INC COMM 8.0 Information Technology Style Neutral 18 FIDELITY NATIONAL INFO SVCS FIS 26.3 Information Technology Contrarian 19 GLOBAL PAYMENTS INC GPN 11.9 Information Technology Best in Class 20 SCRIPPS NETWORKS INTERACTIVE SNI 10.2 Information Technology Best in Class 21 BANK OF AMERICA CORP BAC Financials Restructuring 22 JPMORGAN CHASE & CO JPM Financials 10.3 (7) Style Neutral 23 MARKETAXESS HOLDINGS INC MKTX 7.0 Financials 23.9 (18) Quality at any Price 24 NASDAQ INC NDAQ 11.6 Financials Best in Class 25 CHEVRON CORP CVX Energy Style Neutral 26 CONCHO RESOURCES INC CXO 18.3 Energy -2.8 (1) Trap 27 PATTERSON-UTI ENERGY INC PTEN 3.6 Energy Style Neutral 28 SUPERIOR ENERGY SERVICES INC SPN 2.0 Energy Style Neutral 29 COMPASS MINERALS INTL INC CMP 2.2 Materials 5.3 (30) Style Neutral 30 NEENAH PAPER INC NP 1.3 Materials Style Neutral 31 RPM INTERNATIONAL INC RPM 7.2 Materials Contrarian 32 ROCKWELL AUTOMATION ROK 19.7 Industrials 12.9 (17) Style Neutral 33 SNAP-ON INC SNA 9.6 Industrials Contrarian 34 TEXTRON INC TXT 12.5 Industrials Value Trap 35 TRANSDIGM GROUP INC TDG 11.2 Industrials Best in Class 36 CONSOLIDATED EDISON INC ED 23.9 Utilities Contrarian New Ideas for Second Quarter 2017: HAS, IBP, ULTA, PF, GOOGL, FIS, GPN, SNI, BAC, JPM, MKTX, NDAQ, NP, TXT, TDG ¹ Source: Credit Suisse. All data and summary pages as of March 24, The Q stock ideas are a compilation of attractive stocks from the sector specialist team. No turnover is permitted over the quarter, there is no active portfolio management and it does not adhere to country or sector weights of any market index. The Investment Styles group companies based on Operational Quality, and characteristics. 2

4 Stock Selection Process Macro Analysis Style Analysis Lifecycle Stage Opportunity to grow US Universe firm s Segment Exposure Initial Fa de Ability to grow appetite Fade Wealth creation Scorecard Corporate Disclosures Quality of earnings Executive Compensation folio Them es Operations Fram ework Analysis Top Ideas ¹ Source: Credit Suisse. All data and summary pages as of March 24, The Q stock ideas are a compilation of attractive stocks from the sector specialist team. No turnover is permitted over the quarter, there is no active portfolio management and it does not adhere to country or sector weights of any market index. The Investment Styles group companies based on Operational Quality, and characteristics. 3

5 Sector Specialist Stock Ideas Link to Portfolio in Credit Suisse Lens: Sector Specialist Ideas

6 How to read this page Additional summary data, including the recent stock price and the warranted price based on s valuation model. 2 Price USD upside Warranted Price % 1 The relative wealth chart shows a company s historical CFROI or economic return on investment over time in the top panel, in addition to forecasts built up from IBES consensus estimates (the two pink bars). The second panel shows real asset growth over time. The two black lines show the progression of CFROI and asset growth based on s valuation model, while the green dots represent the levels implied by current market expectations. Transaction CFROI (light shaded blue bars) depicts CFROI including goodwill and other intangibles. 4 Recent momentum trends from both the sell side (revisions) and the buy side (price) Aerospace & Defense, US-Americas Dividend Yield 0.8% section includes probability of default and accounting quality metrics. BB+ Current 32.2 Regional Industry 23.6 CFROI Revisions Price Change %

7 AMAZON.COM INC (AMZN): AMZN s continued reinvestment has increased economic profit every year for most of the last decade. Market expectations are reasonable relative to history. Price USD upside Warranted Price % Current 44.4 Regional Industry Internet and Direct Marketing Retail, US-Americas 54.7 Dividend Yield 0.0% AA- Above Poor CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 6

8 HASBRO INC (HAS): A commitment to greater content mix has improved CFROI levels. Even after the run-up in the stock, the market is still embedding CFROI falls below 2012 levels. Price USD upside Warranted Price % Current 22.4 Regional Industry Leisure Products, US-Americas Dividend Yield 2.0% BBB Above Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 7

9 INSTALLED BLDG PRODUCTS INC (IBP): Rapid sales growth and reinvestment has accompanied improving CFROI levels. Despite strong sentiment and momentum, valuation is reasonable to history. Price USD upside Warranted Price % Current 26.2 Regional Industry Household Durables, US-Americas Dividend Yield 0.0% BB- Above CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 8

10 ULTA BEAUTY INC (ULTA): ULTA remains one of the few pockets of growth within the sector; this growth has contributed to economic profit increases every year since the credit crisis. Price USD downside Warranted Price % Regional Industry 23.1 Current Specialty Retail, US-Americas Dividend Yield 0.0% NA Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 9

11 NATIONAL BEVERAGE CORP (FIZZ): Shift to higher margin products provided a plateau shift in CFROI. Continuing sales growth and reinvestment has multiplied shareholder wealth (economic profit). Price USD downside Warranted Price % Current 43.4 Regional Industry Beverages, US-Americas 58.0 Dividend Yield 0.0% NA Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 10

12 PINNACLE FOODS INC (PF): Ranked against regional peers, PF scores in the 93rd percentile of s Growth Percentile, but is being priced for only single digit growth going forward. Price USD downside Warranted Price % Current 25.5 Regional Industry Food Products, US-Americas Dividend Yield 1.9% BB- Below CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 11

13 ALIGN TECHNOLOGY INC (ALGN): Stable, consistent CFROI performance near industry median levels. Market expectations are low relative to peers with similar growth profiles. Price USD upside Warranted Price % Regional Industry 30 Current Health Care Equipment & Supplies, US-Americas 46.0 Dividend Yield 0.0% NA CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 12

14 AMERISOURCEBERGEN (ABC): CFROI levels improved over recent years as high asset efficiency offset its thin margins. Best in Class Distributor priced for slowing returns and limited growth. Price USD downside Warranted Price % Current 18.5 Regional Industry Health Care Providers & Services, US-Americas 30.3 Dividend Yield 1.7% A- Below Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 13

15 CELGENE (CELG): CELG earned a step-up CFROI increase in 2008 which has remained fairly stable since then. Despite strong momentum, the market is embedding a decline in CFROI to 2007 levels. Price USD upside Warranted Price % Current 21.6 Regional Industry Biotechnology, US-Americas Dividend Yield 0.0% BBB+ CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 14

16 ICON (ICLR): Strong shareholder wealth creation since 2011 trough utilizing acquisitions to help drive growth. Market is pricing in fading CFROI and 5% asset growth. Price USD downside Warranted Price % Current 20.4 Regional Industry Life Sciences Tools & Services, US-Americas Dividend Yield 0.0% BBB- Above CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 15

17 ALPHABET INC (GOOGL): Multi-year wealth compounder that has coupled high CFROI with high growth for many years. Market expectations look modest for this high quality firm. Price USD upside Warranted Price 1, % Current 28.4 Regional Industry Internet Software & Services, US-Americas 35.0 Dividend Yield 0.0% AA+ Good Poor CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 16

18 COMMSCOPE HOLDING CO INC (COMM): Over the past few years CFROI levels have increased largely due to margins. Current market expectations embed much lower CFROI in the future. Price USD upside Warranted Price % Current 18.8 Regional Industry Communications Equipment, US-Americas 21.1 Dividend Yield 0.0% Probability of Default 1% BB- Below CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 17

19 FIDELITY NATIONAL (FIS): Recent acquisition of Sungard helped boost CFROI levels nearly 500bps. looks attractive on an absolute basis and relative to peers FISV/JKHY. Price USD upside Warranted Price % Current 22.7 Regional Industry IT Services, US-Americas Dividend Yield 1.3% BBB CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 18

20 GLOBAL PAYMENTS INC (GPN): Strong operator that has consistently generated +20% CFROI level. Growth has been achieved via organic and acquisitive means over the years. Price USD upside Warranted Price % Current 28.9 Regional Industry IT Services, US-Americas 42.0 Dividend Yield 0.1% BB+ Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 19

21 SCRIPPS NETWORKS (SNI): CFROI improved to a multi-year high on the back of higher asset turns. SNI has also shown an ability to aptly deploy capital towards M&A, dividends and buybacks. Price USD upside Warranted Price % Current 17.1 Regional Industry Media, US-Americas Dividend Yield 1.5% BBB CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 20

22 BANK OF AMERICA CORP (BAC): Market expectations for CFROE levels appear achievable at ~7%, as they are still below the average US Bank return of (~10%). Price USD upside Warranted Price % Current 16.5 Regional Industry Banks, US-Americas Dividend Yield 1.1% Reserves to NPA (bps) 139 Tier 1 Capital Ratio % 14% 5 Year CDS 66 CFROE Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 21

23 JPMORGAN CHASE & CO (JPM): JPM has consistently delivered at or above cost of capital returns. Given this, current expectations appear reasonable. Price USD downside Warranted Price % Current 16.9 Regional Industry Banks, US-Americas Dividend Yield 2.2% Reserves to NPA (bps) 183 Tier 1 Capital Ratio % 14% 5 Year CDS 57 Poor CFROE Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 22

24 MARKETAXESS HOLDINGS INC (MKTX): Continuous margin improvement has driven increasing returns. The market is pricing in stable to declining CFROI with high single digit growth. Price USD downside Warranted Price % Regional Industry 20.1 Current Capital Markets, US-Americas Dividend Yield 0.6% NA Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 23

25 NASDAQ INC (NDAQ): The market is embedding a decline in CFROI levels with low single digit growth. Current expectations are low and reasonable given industry peers. Price USD upside Warranted Price % Current 20.0 Regional Industry Capital Markets, US-Americas Dividend Yield 1.7% BBB Below CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 24

26 CHEVRON CORP (CVX): CVX consistently earned CFROI above the cost of capital until Market expectations are pessimistic, suggesting CVX will earn 0% CFROI going forward. Price USD upside Warranted Price % Regional Industry 51.7 Current Oil, Gas & Consumable Fuels, US-Americas Dividend Yield 3.9% AA- CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 25

27 CONCHO RESOURCES (CXO): CXO has been among the highest quality US E&Ps, but expectations are towards the low end of high quality peers, implying cost of capital CFROI and lower growth relative to history. Price USD downside Warranted Price % Current Regional Industry Oil, Gas & Consumable Fuels, US-Americas Dividend Yield 0.0% BB+ Below Poor CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 26

28 PATTERSON-UTI ENERGY (PTEN): Market expectations imply negative CFROI and growth going forward. If PTEN can achieve cost of capital CFROI with no growth, 50% upside is warranted. Price USD upside Warranted Price % Current Regional Industry Energy Equipment & Services, US-Americas Dividend Yield 0.7% NA Above CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 27

29 SUPERIOR ENERGY SERVICES (SPN): Post the super-cycle, SPN consistently earned CFROI above the cost of capital until CFROI in line with historic performance warrants upside. Price USD upside Warranted Price % Current Regional Industry Energy Equipment & Services, US-Americas Dividend Yield 0.6% Probability of Default 7% BB- Poor CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 28

30 COMPASS MINERALS (CMP): CFROI hit 15-year lows in 2016, but market expectations appear modest, implying future CFROI near all-time troughs. Price USD downside Warranted Price % Current 30.9 Regional Industry Metals & Mining, US-Americas 31.9 Dividend Yield 4.2% Probability of Default 1% BB Poor CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 29

31 NEENAH PAPER (NP): NP has continually grown CFROI over the last decade, expanding margins by 1000 bps. Market expectations appear pessimistic, implying current CFROI is not sustainable. Price USD upside Warranted Price % Current 20.6 Regional Industry Paper & Forest Products, US-Americas 32.1 Dividend Yield 1.8% BB Above CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 30

32 RPM INTERNATIONAL (RPM): Over the last two decades RPM has only earned CFROI in the single digits once. Similar performance going forward warrants upside. Price USD upside Warranted Price % Current 22.2 Regional Industry Chemicals, US-Americas Dividend Yield 2.2% BBB- CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 31

33 ROCKWELL AUTOMATION (ROK): CFROI has been declining since 2010 due to increasing levels of low-earning cash on the balance sheet; removing excess cash adds ~700 bps to 2016 CFROI. Price USD downside Warranted Price % Current 28.8 Regional Industry Electrical Equipment, US-Americas 29.1 Dividend Yield 2.0% A Above CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 32

34 SNAP-ON INC (SNA): CFROI continued to accelerate to new highs in 2016 and near-term consensus suggests stable returns; however, the market is implying a dramatic reversion by Price USD upside Warranted Price % Current 20.8 Regional Industry Machinery, US-Americas Dividend Yield 1.5% A- Above Good CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 33

35 TEXTRON INC (TXT): TXT has continued to realign the business through acquisitions. Consensus estimates suggest a cycle low in 2017, while the market implies no return in CFROI to previous levels. Price USD upside Warranted Price % Current 24.0 Regional Industry Aerospace & Defense, US-Americas 24.0 Dividend Yield 0.2% BBB Below CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 34

36 TRANSDIGM (TDG): Expectations have come down significantly on the back of a negative short-seller report, but business fundamentals remain in tact, suggesting possible upside if sentiment improves. Price USD upside Warranted Price % Current 19.5 Regional Industry Aerospace & Defense, US-Americas Dividend Yield 0.0% Probability of Default 7% NA Above CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 35

37 CONSOLIDATED EDISON (ED): ED has remained a cost of capital business over its history. However, market expectations imply sub cost of capital CFROI with zero long-term asset growth Price USD upside Warranted Price % Current 27.9 Regional Industry Multi-Utilities, US-Americas Dividend Yield 3.4% BBB+ NA CFROI Revisions Price Change % Note: Sourced from Credit Suisse Lens as of 3/27/2017. Default valuation shown above. 36

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Disclaimer The methodology does not assign ratings or a target price to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. 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