THE MONTHLY RESEARCH CONFERENCE CALL ARGUS ANALYSTS' TOP STOCK IDEAS FOR 2020 - Wednesday, December 4, 2019 11:00 a.m. ET
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THE MONTHLY RESEARCH CONFERENCE CALL
ARGUS ANALYSTS' TOP STOCK IDEAS FOR 2020
MODERATORS
Jim Kelleher, CFA
Director of Research
John M. Eade
Argus President
Wednesday, December 4, 2019
11:00 a.m. ET
61 Broadway • NYC, N.Y. 10006
Telephone: (212) 425-7500 -1-
ARGUS RESEARCH COMPANYWHAT’S NEW AT ARGUS
DECEMBER 2019
■ 2020 Investment Themes: A Preview
Our January call will feature market outlook & investment themes
Long-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 Upgrades
Two former unicorns upgraded to BUY
Both dragged down in the WeWork fiasco
Uber - scale economies, untapped opportunities
Wayfair - market leader, play on nesting consumer
Additional App Economy stocks coming into coverage in 2020
■ Argus Millennial Generation Portfolio
Millennials now the largest demographic cohort
New lifestyle preferences, different career goals
Sustainable everything, entrepreneurial spirit
These trends come together in our Millennial Portfolio
Find it on the site: Portfolio Strategy, Theme Portfolios
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ARGUS RESEARCH COMPANYMACRO FORECASTS
REAL GDP W/FORECASTS (%) TREASURY YIELD CURVE (%)
8 4
6 Year-Ago Current 6-Month Forecast
4
3
2
0
-2
2
-4
-6
Source: Bureau of Economic Analysis, Argus Research Corp.
-8 1
'00 '02 '04 06 08 10 12 14 16 18 20 E 3-Mo bill 2-Yr Note 5-Yr Note 10-Yr Bond 30-Yr Bond
S&P 500 QUARTERLY EARNINGS GROWTH MARKET SECTOR DISTRIBUTION - PERCENT OF S&P 500
100% Sectors in Green are Recommended Overweight; Blue are Marketweight; Red are Underweight
Communication Services
80%
Basic Materials
60% Utilities
Consumer Discretionary
40%
Industrial
Consumer Staples
20%
Energy
0% Healthcare
Real Estate
-20% Financial Services
Technology
-40%
'00 '02 '04 06 '08 '10 '12 '14 '16 '18 '20E 0% 5% 10% 15% 20% 25%
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ARGUS RESEARCH COMPANYMARKET PERFORMANCE
DATA AS NOVEMBER 30, 2019
MAJOR INDEX SECTOR
Nasdaq Composite Technology
Industrials
S&P 500
Utilities
Consumer Discretionary
Growth Stocks (Wilshire Large Growth)
Real Estate
DJIA Materials
Consumer Staples
Russell 2000
Communication Services
Value Stocks (Wilshire Large Value) Financials
Health Care
Lehman US Aggregate Bond Index Energy
0% 5% 10% 15% 20% 25% 30% 35% 0% 10% 20% 30% 40% 50%
GLOBAL EQUITY MARKETS
Russia
US
Euro Zone
Brazil
Canada
Japan
DJ World Index
India
China
UK
Mexico
0% 10% 20% 30% 40% 50%
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ARGUS RESEARCH COMPANYARGUS ANALYSTS’ TOP PICKS 2020
BASIC MATERIALS INDUSTRIALS
» Sherwin-Williams Company (SHW) » Jacobs Engineering Group (JEC)
» Lockheed Martin Inc. (LMT)
CONSUMER DISCRETIONARY
» Republic Services Inc. (RSG)
» Lowe's Companies Inc. (LOW)
» lululemon Athletica (LULU) REAL ESTATE
» Equinix Inc. (EQIX)
CONSUMER STAPLES
» Colgate-Palmolive (CL) TECHNOLOGY
» Qualcomm Inc. (QCOM)
ENERGY
» NVidia Corp. (NVDA)
» ONEOK, Inc. (OKE)
» Microsoft Corp. (MSFT)
FINANCIAL SERVICES » Paychex Inc. (PAYX)
» Citizens Financial Group Inc. (CFG) » Square Inc. (SQ)
» Discover Financial Services (DFS)
UTILITIES
» Wells Fargo & Co. (WFC)
» CMS Energy Corp. (CMS)
HEALTHCARE » Eversource Energy Inc. (ES)
» Zimmer Biomet (ZBH) » Xcel Energy Inc. (XEL)
» Emergent BioSolutions Inc. (EBS)
» Novartis AG (NVS)
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ARGUS RESEARCH COMPANYBASIC MATERIALS
■ 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.
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ARGUS RESEARCH COMPANYCONSUMER DISCRETIONARY
■ 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.
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ARGUS RESEARCH COMPANYCONSUMER STAPLES
■ 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%.
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ARGUS RESEARCH COMPANYENERGY
■ 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%.
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ARGUS RESEARCH COMPANYFINANCIAL SERVICES
■ 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. - 10 -
ARGUS RESEARCH COMPANYHEALTHCARE
■ 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. - 11 -
ARGUS RESEARCH COMPANYINDUSTRIALS
■ 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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ARGUS RESEARCH COMPANYREAL 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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ARGUS RESEARCH COMPANYTECHNOLOGY
■ 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. - 14 -
ARGUS RESEARCH COMPANYTECHNOLOGY
■ 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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ARGUS RESEARCH COMPANYUTILITIES
■ 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.
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ARGUS RESEARCH COMPANYDISCLAIMER
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