Focus Items. Capital One Financial Corp. (COF) FINANCIAL INSTITUTIONS. Netflix, Inc. (NFLX) Ulta (ULTA) Monro Muffler Brake (MNRO)

Transcription

1 April 5, 2016 What's Inside Rating Change COF U Capital One Financial Corp. Estimates & PT Revisions BAC O Bank of America BBT P BB&T Corporation C O Citigroup Inc. CFG O Citizens Financial Group DFS O Discover Financial Services FITB O Fifth Third Bancorp GS O Goldman Sachs Group JPM P JPMorgan Chase & Co. KEY P KeyCorp MS P Morgan Stanley NFLX O Netflix, Inc. PNC P PNC Financial Services Group STI P SunTrust Banks, Inc. ULTA O Ulta USB P U.S. Bancorp WFC P Wells Fargo Updates AXP P American Express Company BMRN P BioMarin Pharmaceutical Inc. COF U Capital One Financial Corp. CYTR O CytRx GE P General Electric LAZ P Lazard Ltd. MNRO O Monro Muffler Brake Estimates/Ratings/Price Target Updates Annual Estimates Focus Items EQUITY RESEARCH MORNING RESEARCH SUMMARY Capital One Financial Corp. (COF) Ben Chittenden, CFA The Tide Is Shifting--Downgrade to Underperform FINANCIAL INSTITUTIONS Chris Kotowski 1Q16 Bank Preview: A Familiar Pattern But With Some New Twists Netflix, Inc. (NFLX) Jason Helfstein Updating Model to Reflect Higher 16 Churn Following Price Increases Ulta (ULTA) Rupesh Parikh, CFA A Still Very Compelling Upside Case; Reiterate Outperform Monro Muffler Brake (MNRO) Brian Nagel, CFA Select Acquisitions a Key Growth Driver for MNRO General Electric (GE) Christopher Glynn Integrative Year for Organic Equipment Platform Ramps, Acquisition/Divestiture Other Headlines BioMarin Pharmaceutical Inc. (BMRN) Christopher Marai, Ph.D. SIMD Data Supportive of Neurocognitive Benefit with Pegvaliase in PKU CytRx (CYTR) Christopher Marai, Ph.D. Top-Line PFS Data for Aldox Data in STS Expected June 2016 HEALTHCARE CMS Issues 2017 MA Final Rule Michael Wiederhorn Atmel Corp. (ATML) Andrew Uerkwitz Dropping Coverage: Acquisition by Microchip Complete Current FY Next FY Ratings Price Targets Company Ticker Prev Curr Prev Curr Prev Curr Prev Curr Atmel Corp. ATML NR NR NA NA Bank of America BAC O O $18.00 $19.00 For analyst certification and important disclosures, see the Disclosure Appendix. Oppenheimer & Co Inc. 85 Broad Street, New York, NY Tel: Fax:

2 Morning Summary - April 5, 2016 BB&T Corporation Capital One Financial Corp. BBT P P NA NA COF P U NA $58.00 Citigroup Inc. C O O $67.00 $71.00 Citizens Financial Group Discover Financial Services Fifth Third Bancorp Goldman Sachs Group JPMorgan Chase & Co. CFG O O $27.00 $28.00 DFS O O $67.00 $74.00 FITB O O $20.00 $20.00 GS O O $ $ JPM P P NA NA KeyCorp KEY P P NA NA Morgan Stanley MS P P NA NA Netflix, Inc. NFLX O O $ $ PNC Financial Services Group SunTrust Banks, Inc. PNC P P NA NA STI P P NA NA U.S. Bancorp USB P P NA NA Ulta ULTA O O $ $ Wells Fargo WFC P P NA NA 2

3 Snap Commentaries - Equities Updates FINANCIAL INSTITUTIONS Capital One Financial Corp. (COF - $69.83) US Banks Ben Chittenden, CFA Rating / Prior Market Cap Price Target / Prior Earnings Type 2015A 2016E / Prior 2017E / Prior U / P $36,246.8M $58.00 / NA EPS / / 7.77 The Tide Is Shifting--Downgrade to Underperform When we downgraded COF to Perform from Outperform on January 4 at $70.74 (see our note, '17 Expectations Ahead of Themselves), we felt 2017 estimates were too high mainly on the pre-provision earnings (PPE) side. From a credit perspective we actually had lower NCOs than consensus, but higher reserve builds due to the loan growth. Net-net, our provision expense was roughly in line. We now have more data points on the credit front and are adjusting our estimates for higher NCOs and higher reserve builds. The impact of lower than consensus PPE and higher provision is that our estimate for 2017 is now $7.28 (from $7.77), which is ~$1 below the Street (13%). For that reason, we are downgrading to Underperform with a $58 PT. FINANCIAL INSTITUTIONS Chris Kotowski Q16 Bank Preview: A Familiar Pattern But With Some New Twists We feel as if we have written quite a few earnings previews very much like this one in recent years: Capital markets turmoil will pressure trading, investment banking and asset management revenues, but most other traditional commercial banking fundamentals will be on trend, which has been pretty flattish. This quarter does, however, present a unique opportunity to see if bank net interest margins do in fact respond to the December 16 rate hike positively. The banks have been telling us for years that they are very asset sensitive, but actually seeing a bump after 18 consecutive quarters of flat net interest income would set expectations for more improvement from future rate bumps. INTERNET Netflix, Inc. (NFLX - $104.35) Internet Jason Helfstein Rating Market Cap Price Target Earnings Type 2015A 2016E / Prior 2017E / Prior O $44,670.3M $ EBITDA 1.26B 1.61B / 1.59B 1.95B / 1.94B Updating Model to Reflect Higher 16 Churn Following Price Increases We are modestly lowering our domestic streaming subscriber net adds to reflect the expiration of price grandfathering, but maintaining our positive long-term view on domestic pricing power/margins and Int'l sub growth. Beginning in May, we will see the first cohort of older-2014 domestic subscribers see their monthly price increase by $2.00 (for HD and two concurrent streams) or the option of downgrading (to SD and one stream) for the same price. In October, the newer-2015 subscribers will see a $1.00 increase. As a result, we expect higher 2Q churn, which will take a few quarters to stabilize, resulting in lower domestic subs. However, we now estimate higher ARPU, so '16 revenue actually increases, consistent with mgmt's focus on domestic revenue and Int'l sub growth. 3

4 CONSUMER Ulta (ULTA - $194.18) Consumer, Household & Personal Care Products Rupesh Parikh, CFA Rating Market Cap Price Target / Prior Earnings Type 2015A 2016E / Prior 2017E / Prior O $12,159.2M $ / $ EPS / / 7.10 A Still Very Compelling Upside Case; Reiterate Outperform With ULTA shares approaching our $195 PT, we spent time revisiting our investment thesis. ULTA has represented a top pick for us since we formally launched on the name in January We quite frankly have been surprised by the magnitude of market share gains lately with results easily topping any bullish scenario that we could have contemplated. We do not take our price target raises lightly, especially with the shares trading at 31x NTM consensus forecasts. Based on our work, we still see a case for outperformance and sufficient momentum in the business to propel results above Street forecasts and at least match underlying investor expectations embedded in shares. We are lifting our PT to $225 from $195. This represents more than 15% potential upside. CONSUMER Monro Muffler Brake (MNRO - $71.56) Hardlines Retailing Brian Nagel, CFA Rating Market Cap Price Target Earnings Type 2014A 2015E 2016E O $2,303.9M $80.00 EPS Select Acquisitions a Key Growth Driver for MNRO On Mar. 28th in a report entitled "A Long-Standing Sector Up-and-Comer," we initiated coverage of Monro Muffler Brake (MNRO) with an Outperform rating (at $69.68) and $80 price target. Against a backdrop of historically superb execution and favorable industry dynamics, we articulated a nearer-term view that in coming quarters, sales and EPS growth at the chain should reaccelerate as acquisitions pick up, dynamics within tires strengthen, and internal initiatives take hold. Select acquisitions represent a key growth driver for MNRO. Herein, we quickly review MNRO's track record as a roll-up and our confidence in the ability of management to execute successfully upon this strategy going forward. Our $80 price target implies upside potential of nearly 15% from current levels. INDUSTRIAL/CAPITAL GOODS General Electric (GE - $31.93) Industrial Multi-Industry Christopher Glynn Rating Market Cap Price Target Earnings Type 2015A 2016E 2017E P $296,474.2M NA EPS Integrative Year for Organic Equipment Platform Ramps, Acquisition/Divestiture We are updating model and commentary around revenue timing dynamics during 2016 to better reflect 1Q volume pressure points at Power (balance of plant) and Renewables (Units delivery schedule) on timing of project/unit shipment rollouts (amidst overall 1Q estimate for industrial organic down msd). Full year revenue estimates are unchanged, and quarterly and full year EPS estimates are unchanged (1Q margin mix and rounding factors, notwithstanding incremental revenue timing softness). Our full year expectations continue to reflect significant restructuring 4

5 benefits (~$2B) in balance with price headwinds (~$1B) and salary/other inflation (~$1B). Alstom accretion of $0.05 nets neutral against divestitures. HEALTHCARE BioMarin Pharmaceutical Inc. (BMRN - $84.47) Biotechnology Christopher Marai, Ph.D Rating Market Cap Price Target Earnings Type 2015A 2016E 2017E P $13,649.6M $99.00 EPS (1.07) (2.67) (2.08) SIMD Data Supportive of Neurocognitive Benefit with Pegvaliase in PKU BioMarin presented clinical data for Pegvaliase PRISM-1 and PRISM-2 Phase 3 trials at SIMD (April 3-6; Ponte Vedra Beach, FL). We previously previewed SIMD data here, following abstract release. Importantly, data from PRISM-1 (open-label, dose titration) supported BioMarin's hypothesis of long-term treatment necessary to demonstrate improvement in ADHD-RS inattention score. Patients treated demonstrated -3.5 point improvement in ADHD-RS inattention score; however, placebo effect likely contributed to improvements. We continue to believe data from the PRISM-2 trial could support accelerated approval for Pegvaliase in 2H17; more updates to come at FDA meeting in 3Q16. We previously outlined our thoughts on PRISM-2 results here. HEALTHCARE CytRx (CYTR - $3.02) Biotechnology Christopher Marai, Ph.D Rating Market Cap Price Target Earnings Type 2015A 2016E O $200.8M $10.00 EPS (0.97) (1.17) -- Top-Line PFS Data for Aldox Data in STS Expected June 2016 CytRx on 4/4 announced that its pivotal Phase 3 clinical trial of aldoxorubicin as second-line treatment in soft tissue sarcoma (STS) has achieved its 191 target events, triggering statistical analysis of progression-free survival (PFS). We expect data to be released in the next few months (by June 2016). Recall, CytRx announced full enrollment in the trial on December 1, STS remains a heterogeneous indication, and we view this as a primary risk to the trial read out. We note management did include entrance criteria. Entrance criteria can be difficult to maintain in second-line patient population with no other treatment options. HEALTHCARE Michael Wiederhorn CMS Issues 2017 MA Final Rule CMS finalized FY2017 MA rates Monday evening, which implements an 0.85% overall increase compared to a 1.35% increase in the proposal, according to CMS, due to a slightly worse FFS normalization factor. We note that the insurers' and industry's expectations were slightly worse than the CMS assumptions, so we will await more color as to the effective impact on each company. However, two of the factors that the industry/ companies thought to be incrementally negative to CMS's net payment impact table were slightly improved in the final rule: 1) phase in the changes to EGWP over two years and 2) slowed the increase in Encounter data from 50% in the proposal to 25% in the final rule (vs 10% in 2016). 5

6 TECHNOLOGY Atmel Corp. (ATML - $8.14) Emerging Technologies and Services Andrew Uerkwitz Rating Market Cap Price Target Earnings Type NR $3,445.6M NA EPS Dropping Coverage: Acquisition by Microchip Complete We are discontinuing research coverage of Atmel Corp. due to the completion of its acquisition by Microchip. Each share of Atmel common stock is being exchanged for $7/share cash and $1.15 of Microchip stock. ATML was previously Not Rated with no price target. Oppenheimer Marketing Events May th Annual Industrial Growth Conference May 17 Emerging Growth Conference May 22 17th Annual Israeli Conference June th Annual Global Consumer Conference August th Annual Technology, Internet & Communications Conference 6

7 Disclosure Appendix Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Other companies mentioned in this report: ATML AXP BAC BBT BMRN C CFG CIT COF CYTR DFS FITB GE GS HUM JPM KEY LAZ MCHP MNRO MS NFLX PNC STI ULTA UNH USB VNTV WCG WFC Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by Oppenheimer & Co. Inc.: Stock Prices as of April 5, 2016 American Express Company (AXP - NYSE, 60.62, PERFORM) Bank of America (BAC - NYSE, 13.51, OUTPERFORM) BB&T Corporation (BBT - NYSE, 33.51, PERFORM) BioMarin Pharmaceutical Inc. (BMRN - NASDAQ, 84.47, PERFORM) Citigroup Inc. (C - NYSE, 42.06, OUTPERFORM) Citizens Financial Group (CFG - NYSE, 21.51, OUTPERFORM) CIT Group (CIT - NYSE, 31.45, OUTPERFORM) Capital One Financial Corp. (COF - NYSE, 69.83, UNDERPERFORM) CytRx (CYTR - NASDAQ, 3.02, OUTPERFORM) Discover Financial Services (DFS - NYSE, 50.76, OUTPERFORM) Fifth Third Bancorp (FITB - NASDAQ, 16.75, OUTPERFORM) General Electric (GE - NYSE, 31.23, PERFORM) Goldman Sachs Group (GS - NYSE, , OUTPERFORM) Humana, Inc. (HUM - NYSE, , NOT RATED) JPMorgan Chase & Co. (JPM - NYSE, 59.20, PERFORM) KeyCorp (KEY - NYSE, 10.96, PERFORM) Lazard Ltd. (LAZ - NYSE, 38.46, PERFORM) Monro Muffler Brake (MNRO - NASDAQ, 70.56, OUTPERFORM) Morgan Stanley (MS - NYSE, 25.04, PERFORM) Netflix, Inc. (NFLX - NASDAQ, , OUTPERFORM) PNC Financial Services Group (PNC - NYSE, 85.32, PERFORM) SunTrust Banks, Inc. (STI - NYSE, 36.50, PERFORM) Ulta (ULTA - NASDAQ, , OUTPERFORM) UnitedHealth Group, Inc. (UNH - NYSE, , OUTPERFORM) U.S. Bancorp (USB - NYSE, 40.68, PERFORM) Vantiv Inc. (VNTV - NYSE, 54.05, OUTPERFORM) Wells Fargo (WFC - NYSE, 48.50, PERFORM) All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories, please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department, Business Manager. Oppenheimer & Co. Inc. Rating System as of January 14th, 2008: Outperform(O) - Stock expected to outperform the S&P 500 within the next months. 7

8 Perform (P) - Stock expected to perform in line with the S&P 500 within the next months. Underperform (U) - Stock expected to underperform the S&P 500 within the next months. Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflict of interest. Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008: Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector. Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere. Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group. Distribution of Ratings/IB Services Oppenheimer & Co. Inc. IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [O/B/OP] HOLD [N/P/SP] SELL [UP/S/U] Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform. Oppenheimer & Co. Inc. makes a market in the securities of ULTA, NFLX, C, FITB, USB, MNRO, BMRN, CYTR, ATML and MCHP. Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3 months from GE, C, CFG, USB and CYTR. In the past 12 months Oppenheimer & Co. Inc. has provided non-investment banking, securities-related services for GE. In the past 12 months Oppenheimer & Co. Inc. or an affiliate has received compensation for non-investment banking services from GE. The Oppenheimer & Co. Inc. analyst/associate(s) who covers this company also has a long position in GS, KEY, PNC, MS, STI, JPM and FITB. In the past 12 months Oppenheimer & Co. Inc. has provided investment banking services for CYTR. In the past 12 months Oppenheimer & Co. Inc. has managed or co-managed a public offering of securities for CYTR. In the past 12 months Oppenheimer & Co. Inc. has received compensation for investment banking services from CYTR. 8

9 Analyst Certification - The author certifies that this research report accurately states his/her personal views about the subject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.the author certifies that this research report accurately states his/her personal views about the subject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Additional Information Available Please log on to or write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department, Business Manager. Other Disclosures This report is issued and approved for distribution by Oppenheimer & Co. Inc. Oppenheimer & Co. Inc. transacts business on all principal exchanges and is a member of SIPC. This report is provided, for informational purposes only, to institutional and retail investor clients of Oppenheimer & Co. Inc. and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security recommended in this report, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal. Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable to Oppenheimer & Co. Inc. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete (with the exception of information contained in the Important Disclosures section of this report provided by Oppenheimer & Co. Inc. or individual research analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser. This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This research is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA s protection rules nor compensation scheme may be applied. Distribution in Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by Oppenheimer Investments Asia Limited (OIAL) to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. OIAL, an affiliate of Oppenheimer & Co. Inc., is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on 9

10 securities, and advising on Corporate Finance. For professional investors in Hong Kong, please contact for all matters and queries relating to this report. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright Oppenheimer & Co. Inc