the monthly research conference call argus … › assets › doc › 20191204_concall.pdfdec 04,...

A R G U S R E S E A R C H C O M P A N Y

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Wednesday, December 4, 201911:00 a.m. ET

61 Broadway • NYC, N.Y. 10006Telephone: (212) 425-7500

THE MONTHLY RESEARCH CONFERENCE CALLARGUS ANALYSTS' TOP STOCK IDEAS FOR 2020

MODERATORS

Jim Kelleher, CFADirector of Research

John M. EadeArgus President


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WHAT’S NEW AT ARGUSDECEMBER 2019

■ 2020 Investment Themes: A PreviewOur January call will feature market outlook & investment themesLong-standing themes: dividend growth, ESG, etc.New themes: 5G, the pre-election market, etc.January 1 is New Year's Day, so our call is on 1/8/20

■ App Economy UpgradesTwo former unicorns upgraded to BUYBoth dragged down in the WeWork fiascoUber - scale economies, untapped opportunitiesWayfair - market leader, play on nesting consumerAdditional App Economy stocks coming into coverage in 2020

■ Argus Millennial Generation PortfolioMillennials now the largest demographic cohortNew lifestyle preferences, different career goalsSustainable everything, entrepreneurial spiritThese trends come together in our Millennial PortfolioFind it on the site: Portfolio Strategy, Theme Portfolios


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MACRO FORECASTS

REAL GDP W/FORECASTS (%) TREASURY YIELD CURVE (%)

S&P 500 QUARTERLY EARNINGS GROWTH MARKET SECTOR DISTRIBUTION - PERCENT OF S&P 500

-8

-6

-4

-2

0

2

4

6

8

'00 '02 '04 06 08 10 12 14 16 18 20 E

Source: Bureau of Economic Analysis, Argus Research Corp.1

2

3

4

3-Mo bill 2-Yr Note 5-Yr Note 10-Yr Bond 30-Yr Bond

Year-Ago Current 6-Month Forecast

-40%

-20%

0%

20%

40%

60%

80%

100%

'00 '02 '04 06 '08 '10 '12 '14 '16 '18 '20E 0% 5% 10% 15% 20% 25%

Technology

Financial Services

Real EstateHealthcare

Energy

Consumer StaplesIndustrial

Consumer Discretionary

UtilitiesBasic Materials

Communication Services

Sectors in Green are Recommended Overweight; Blue are Marketweight; Red are Underweight


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MARKET PERFORMANCEDATA AS NOVEMBER 30, 2019

MAJOR INDEX SECTOR

GLOBAL EQUITY MARKETS

0% 5% 10% 15% 20% 25% 30% 35%

Nasdaq Composite

S&P 500

Growth Stocks (Wilshire Large Growth)

DJIA

Russell 2000

Value Stocks (Wilshire Large Value)

Lehman US Aggregate Bond Index

0% 10% 20% 30% 40% 50%

Technology

Industrials

Utilities

Consumer Discretionary

Real Estate

Materials

Consumer Staples

Communication Services

Financials

Health Care

Energy

0% 10% 20% 30% 40% 50%

Russia

US

Euro Zone

Brazil

Canada

Japan

DJ World Index

India

China

UK

Mexico


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ARGUS ANALYSTS’ TOP PICKS 2020

BASIC MATERIALS» Sherwin-Williams Company (SHW)

CONSUMER DISCRETIONARY» Lowe's Companies Inc. (LOW)» lululemon Athletica (LULU)

CONSUMER STAPLES» Colgate-Palmolive (CL)

ENERGY» ONEOK, Inc. (OKE)

FINANCIAL SERVICES» Citizens Financial Group Inc. (CFG)» Discover Financial Services (DFS)» Wells Fargo & Co. (WFC)

HEALTHCARE» Zimmer Biomet (ZBH)» Emergent BioSolutions Inc. (EBS)» Novartis AG (NVS)

INDUSTRIALS» Jacobs Engineering Group (JEC)» Lockheed Martin Inc. (LMT)» Republic Services Inc. (RSG)

REAL ESTATE» Equinix Inc. (EQIX)

TECHNOLOGY» Qualcomm Inc. (QCOM)» NVidia Corp. (NVDA)» Microsoft Corp. (MSFT)» Paychex Inc. (PAYX)» Square Inc. (SQ)

UTILITIES» CMS Energy Corp. (CMS)» Eversource Energy Inc. (ES)» Xcel Energy Inc. (XEL)


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■ Sherwin-Williams Company (SHW)12-month target price: $651 (Bill Selesky)

» Largest U.S. producer of paint, coatings and related products. » Residential remodeling solid and commercial construction remains strong. » Valspar acquisition provide meaningful synergies. » Positive drivers: median age of existing homes, home price appreciation. » Margins rising, costs leveling off.

BASIC MATERIALS


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■ Lowe's Companies Inc. (LOW)12-month target price: $132 (Chris Graja, CFA)

» CEO Marvin Ellison expected to improve profitability, raise ROE. » 5-year EPS growth rate forecast of 14%: better merchandising, improving e-commerce,

streamlining operations, better inventory management. » Strength in big-ticket discretionary purchases and in the professional segment. » 5-year dividend growth 20% annualized.

■ lululemon Athletica (LULU)12-month target price: $230 (John Staszak, CFA)

» Power of Three program aims to double sales in the men’s and digital categories. » Power of three looks to quadruple sales internationally by 2023. » Expanding online offerings of men’s and women’s products. » Strong margins and prospects for further improvements.

CONSUMER DISCRETIONARY


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■ Colgate-Palmolive (CL)12-month target price: $82 (Chris Graja, CFA)

» Dividend yield of 2.6% exceeds 10-year Treasury yield of 1.8%. » Paid a dividend for 124 consecutive years, raised it for 57 consecutive years. » Investment-grade credit ratings in the low AAs. » 29% return on invested capital well above the peer average of 14%.

CONSUMER STAPLES


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■ ONEOK, Inc. (OKE)12-month target price: $82 (Bill Selesky)

» Leading midstream (pipeline) service provider. » Legacy contracts transitioned to “fee-for-service” business model, mitigates commodity price exposure. » Asset base generates significant operating cash flow. » Forecast three-year dividend growth CAGR of 16%.

ENERGY


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■ Citizens Financial Group Inc. (CFG)12-month target price: $42 (Kevin Heal)

» Strong growth from capital markets, trust & investment, credit card businesses. » Fee income is rising from robust mortgage business. » Focus on shareholder returns (buybacks, dividend hikes). » Trading below peer multiples, warrants premium to peers. » Total potential return of 22% from current levels.

■ Discover Financial Services (DFS)12-month target price: $105 (Stephen Biggar)

» Benefiting from cyclical trends: healthy consumer spending, low charge-offs. » Loan portfolio grew at 6%-8% pace in 2019. » Net charge-offs below historical levels. » Highest share buyback yield of the major credit card companies. » Target price of $105 implies 11-times our 2020 EPS estimate.

■ Wells Fargo & Co. (WFC)12-month target price: $60 (Stephen Biggar)

» Leadership change in October, expected revamp of sales culture. » Working with regulators to lift asset cap. » Positive drivers: low rates help housing, millennials forming households. » Expect valuation discount to improve as regulatory issues abate.

FINANCIAL SERVICES


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■ Zimmer Biomet (ZBH)12-month target price: 160 (David Toung)

» Orthopedic company moving past product supply issues. » Corporate turnaround including Biomet integration. » Wider availability of the ROSA robotics-assist system » Stock at attractive valuation, below medical device peers.

■ Emergent BioSolutions Inc. (EBS)12-month target price: $66 (Jasper Hellweg)

» Strong U.S. military demand for anthrax and smallpox vaccines. » Narcan nasal spray (opioid overdoses). » FDA fast-track candidates tom treat Chikungunya and Zika virus. » Trading well below the peer average multiples. » Target price implies 21% return.

■ Novartis AG (NVS)12-month target price: $105 (John Eade)

» Exiting a transition phase, resuming growth. » Diverse businesses generated stable earnings. » New drugs in coronary disease, oncology and gene therapy. » Clean balance sheet is clean, dividend hikes. » NOV earns its premium multiples.

HEALTHCARE


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INDUSTRIALS

■ Jacobs Engineering (JEC)12-month target price: $106 (John Staszak, CFA)

» Accretive acquisitions and organic assets driving top- and bottom-line growth. » Successful track record of integrating acquired companies. » Backlog positions JEC in 2020. » Acquisitions synergies, contract wins, and backlog drive growth.

■ Lockheed Martin Inc. (LMT)12-month target price: $400 (John Eade)

» Consistently surprised the Street. » Focus on international revenue diversification. » Management history of navigating challenges. » Raised the dividend, aggressively buying back stock.

■ Republic Services Inc. (RSG)12-month target price: $100 (David E. Coleman)

» Fully integrated waste management company. » Well-run RSG benefits from favorable economy, demographic growth. » Growth through acquisition model. » Thriving through recyclables transition.


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REAL ESTATE

■ Equinix Inc. (EQIX)12-month target price: $630 (Jacob Kilstein, CFA)

» Leading transition from on-premises to cloud data centers. » Customers lower costs, increase security, reduce inefficiencies. » Strong opportunities in global colocation. » Shares remain undervalued given growth prospects.


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TECHNOLOGY

■ Qualcomm Inc. (QCOM)12-month target Price: $110 (Jim Kelleher, CFA)

» Qualcomm uniquely positioned for 5G rollout. » Executing across product roadmap, signing anchor agreements. » Apple settlement a long-term positive. » Expect resolution with FTC during 2020. » Very early days for 5G, long growth runway.

■ NVidia Corp. (NVDA)12-month target Price of $240 (Jim Kelleher, CFA)

» Leader in AI based on GPUs in cloud data center. » RTX gaming GPUS dominate PC gaming market. » Autonomous driving coming soon, NVDA the industry leader. » Preeminent vehicle for the AI economy, most technology investors should own.

■ Microsoft Corp. (MSFT)12-month target price: $173 (Joseph Bonner, CFA)

» Renaissance under CEO Nadella, pivot toward high-value cloud applications. » De-emphasized Windows, but benefits from large installed base. » Microsoft Azure the clear #2 behind AWS in cloud. » Strong capital returns, growing dividend.


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TECHNOLOGY

■ Paychex Inc. (PAYX)12-month target price: $88 (David E. Coleman)

» Payroll services to SME companies. » Consistent high ROIC, solid balance sheet. » Room for growth in sub-50 employee market. » Low unemployment rates, rising use by small businesses.

■ Square Inc. (SQ)12-month target price: $94 (Stephen Biggar)

» Taking advantage of changing payments landscape. » Cyclical trends from healthy consumer spending. » Secular trends from transition to digital payments. » Gross payment volumes rising 25% per quarter.


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UTILITIES

■ CMS Energy Corp. (CMS)12-month target price: $56 (Jacob Kilstein, CFA)

» Stable earnings, continued capital investment fuel above-peer-average EPS growth. » Michigan: rising population, skilled labor, business-friendly regulatory environment. » Above-average growth offsets stock’s high valuation. » Shares warrant their premium to peers given consistent above-average performance.

■ Eversource Energy Inc. (ES)12 month target price: $96 (Gary Hovis)

» Strong cost controls, solid cash flow from operations, favorable regulatory environment. » Continued strong kilowatt-hour sales growth. » Adequate liquidity to meet anticipated cash requirements through 2020. » Forecast average annual dividend growth of 4%-5%.

■ Xcel Energy Inc. (XEL)12 month target price: $72 (Gary Hovis)

» Continued debt refinancing, balanced regulation. » Adequate liquidity to meet all anticipated cash requirements through 2020. » Stable regulated utility provides growing dividend income. » Regulated business model drives EPS growth.


DISCLAIMER

Argus Research Co. (ARC) is an independent investment research provider whose parent company, Argus Investors’ Counsel, Inc. (AIC), is registered with the U.S. Securities and Exchange Commission. Argus Investors’ Counsel is a subsidiary of The Argus Research Group, Inc. Neither The Argus Research Group nor any affiliate is a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of The Argus Research Group, Inc. The information contained in this research report is produced and copyrighted by Argus Research Co., and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. In addition, this content is not prepared subject to Canadian disclosure requirements. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since 1934. Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company’s stock. Argus Investors’ Counsel (AIC), a portfolio management business based in Stamford, Connecticut, is a customer of Argus Research Co. (ARC), based in New York. Argus Investors’ Counsel pays Argus Research Co. for research used in the management of the AIC core equity strategy and model portfolio and UIT products, and has the same access to Argus Research Co. reports as other customers. However, clients and prospective clients should note that Argus Investors’ Counsel and Argus Research Co., as units of The Argus Research Group, have certain employees in common, including those with both research and portfolio management responsibilities, and that Argus Research Co. employees participate in the management and marketing of the AIC core equity strategy and UIT and model portfolio products.

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