Top Picks Credit Suisse Top Investment Ideas in the United States
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Credit Suisse Equity Research
Americas/United States
Top Picks
Credit Suisse Top Investment Ideas in the United States
Novem ber 9, 2018
Credit Suisse US Equity Research Credit Suisse Global Product Marketing Arbin Sherchan, CFA
equity.research@credit-suisse.com global.productmarketing@credit-suisse.com arbin.sherchan@credit-suisse.com
(877) 291-2683 (212) 538-4442 (212) 325-8967
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE
STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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.Top Picks
105 Top Ideas : We highlight 98 Top Outperform and 7 Top Underperform Ideas.
Ideas Across Style, Sector, and Siz e: We have grouped Top Outperform ideas by style (growth/value), sector and
market cap on slide 7.
What is New?
2 New Sectors Added: Electrical Equipment & Multi-Industry (EE/MI), Midstream & MLPs. See recent research: EE/MI:
Initiation of Coverage, Midstream & MLPs: Initiation of Coverage
7 New #1 Top Outperform s: 5 Additions (DCP, MMM, RL, SYF, WLTW) and 2 Upgrades (PTCT, VOYA). Recent
Research on New #1 Top Outperforms: DCP, MMM, PTCT, RL, SYF, VOYA, WLTW
2 New Top Underperform s: ABBV, GWR. Recent Research on New Top Underperforms: ABBV, GWR
19 Nam es Added to Top Outperform Ideas: ALLE, CSX, DCP, ESPR, FMC, INSM, KMI, MMM, MPLX, NINE, NRZ,
OLLI, PUMP, RL, SYF, VFC, VNOM, WLTW, XYL
18 Nam es Rem oved from Top Outperform Ideas: ALL, ANAB, APD, BMRN, BURL, COF, ESV, FDC, HD, KSU,
LOW, MKC, PVH, PYPL, SEE, TWO, USFD, WRK
Methodology
“One-stop shop” for the research team ’s best ideas. Every US research analyst identifies and ranks up to three top
stock picks based on a 6- to 12-month time horizon. For each name, we include a short summary of our analyst’s thesis
as a starting point for further analysis.
These should not be viewed as portfolios; they are simply a current snapshot of the analysts’ top picks in their coverage
universes.
1Table of Contents
Section Page
#1 Top Outperform s 3
Sum m ary of Top Ideas 4
Top Outperform s by Style, Siz e and Sector 7
Top Outperform s That Rank in Top 25% in HOLT Scorecard 8
Top Ideas by Sector / Industry
Basic Materials 10
Consumer 12
Energy / Utilities 19
Financials 27
Healthcare 34
Industrials 41
Services 47
TMT 49
Valuation Tables 55
2#1 Top Outperform s Click here for previous edition, 10/9/18
BASIC MATERIALS FINANCIALS SERVICES
Chemicals & Ag Sciences ASH Asset Managers / Retail Brokers BX Business Services ARMK
Metals & Mining EAF Banks JPM
TMT
Paper & Packaging Insurance – Life VOYA
Communications & Networking
ANET
CONSUMER Insurance – P&C / Brokers WLTW Equipment
Gaming CZR Mortgage Finance COOP Consumer Internet GOOGL
Homebuilding & Building Products FBHS Specialty Finance SYF Datacenter REITs CONE
Leisure VAC Semiconductors MU
HEALTHCARE
Packaged Food NOMD Software ORCL
Biotechnology – SMID Cap PTCT
Retail: Hardlines Telecom & Media ATUS
Healthcare Facilities HCA
Softlines Retail & Global Brands RL Healthcare Technology &
CVS
Staples Retail & Distribution Distribution
DLTR
ENERGY / UTILITIES Managed Care UNH
Alternative Energy RUN Pharmaceuticals MRK
E&Ps – Large Cap MRO INDUSTRIALS
E&Ps – SMID Cap WPX Aerospace & Defense BBDb.TO
Midstream & MLPs DCP Airfreight & Ground Transport JBHT
Oilfield Services & Equipment HAL Electrical Equipment & Multi-
MMM
Industry
Refining & Marketing MPC
Engineering & Construction FLR
Utilities EXC
Machinery DE
Source: Credit Suisse
New Top Pick Stock Moved Up in Rank 3Sum m ary of Top Ideas
Top Outperform Top
Analyst Rem ovals
#1 #2 #3 Underperform
BASIC MATERIALS
Chemicals & Ag Sciences Chris Parkinson ASH FMC DWDP APD
Metals & Mining Curt Woodworth EAF HCC CSTM
Paper & Packaging Lars Kjellberg SEE, WRK
CONSUMER
Gaming Cameron McKnight CZR VICI
Homebuilding & Building Products Susan Maklari FBHS SWK DHI
Leisure Cameron McKnight VAC HGV
Packaged Food Rob Moskow NOMD MDLZ BGS MKC
Retail: Hardlines Seth Sigman HD, LOW
Softlines Retail & Global Brands Michael Binetti RL VFC TIF BURL, PVH
Staples Retail & Distribution Judah Frommer DLTR PFGC OLLI USFD
ENERGY / UTILITIES
Michael Weinstein /
Alternative Energy RUN NEP BE
Maheep Mandloi
E&Ps – Large Cap Bill Featherston MRO APC PXD
E&Ps – SMID Cap Betty Jiang WPX CLR VNOM
Midstream & MLPs Spiro Dounis DCP KMI MPLX
Oilfield Services & Equipment James Wicklund HAL PUMP NINE ESV
Source: Credit Suisse
New Top Pick Stock Moved Up in Rank Stock Moved Down in Rank 4Sum m ary of Top Ideas
Top Outperform Top
Analyst Removals
#1 #2 #3 Underperform
ENERGY / UTILITIES
Refining & Marketing Manav Gupta MPC
Utilities Michael Weinstein EXC NI NEE SO
FINANCIALS
Asset Managers / Retail Brokers Craig Siegenthaler BX BLK LPLA
Banks Susan Katzke JPM BAC
Insurance – Life Andrew Kligerman VOYA MET ATH
Insurance – P&C / Brokers Mike Zaremski WLTW PGR AJG ALL
Mortgage Finance Doug Harter COOP NRZ STWD TWO
Specialty Finance Moshe Orenbuch SYF V AXP COF
HEALTHCARE
Biotechnology – SMID Cap Martin Auster PTCT ESPR INSM UTHR ANAB BMRN
Healthcare Facilities A.J. Rice HCA
Healthcare Technology &
Erin Wright CVS ABC ZTS
Distribution
Managed Care A.J. Rice UNH ANTM
Pharmaceuticals Vamil Divan MRK AGN JNJ ABBV
Source: Credit Suisse
New Top Pick Stock Moved Up in Rank Stock Moved Down in Rank 5Sum m ary of Top Ideas
Top Outperform Top
Analyst Rem ovals
#1 #2 #3 Underperform
INDUSTRIALS
Aerospace & Defense Rob Spingarn BBDb.TO BA HRS
Airfreight & Ground Transport Allison Landry JBHT CSX UNP GWR KSU
Electrical Equipment & Multi-
John Walsh MMM XYL ALLE
Industry
Engineering & Construction Jamie Cook FLR JEC
Machinery Jamie Cook DE CAT
SERVICES
Business Services Kevin McVeigh ARMK ADP IRM
TMT
Communications & Networking
Sami Badri ANET FFIV MSI
Equipment
Consumer Internet Stephen Ju GOOGL AMZN FB
Datacenter REITs Sami Badri CONE EQIX SWCH
Financial Technology & Payments FDC, PYPL
Semiconductors John Pitzer MU LRCX AMAT
Software Brad Zelnick ORCL CRM ZS
Doug Mitchelson /
Telecom & Media ATUS
Brian Russo
Source: Credit Suisse
New Top Pick Stock Moved Up in Rank Stock Moved Down in Rank 6Top Outperform s by Style, Siz e, and Sector
Sm all Cap (4.3B, $28.7B)*
Growth Stocks*
Basic Materials ASH, FMC
Consum er VAC, DHI, DLTR, FBHS, OLLI, RL, SWK, TIF VFC
Energy RUN CLR MPC
Financials AJG, LPLA BLK, V
AGN, ANTM, CVS, HCA, JNJ, MRK, UNH,
Healthcare ESPR, INSM, PTCT ABC
ZTS
Industrials ALLE, HRS, JBHT BA, CAT, CSX, DE, MMM, UNP
Services ARMK ADP
AMAT, AMZN, CRM, EQIX, FB, GOOGL,
TMT ANET, CONE, FFIV, LRCX, MSI
MU, ORCL
Value Stocks*
Basic Materials
Consum er CZR MDLZ
Energy MRO, NI, PXD, WPX APC, EXC, HAL, KMI, NEE
Financials NRZ, STWD, SYF, VOYA BAC, JPM, MET, PGR
Healthcare
Industrials FLR, JEC, XYL
Services
TMT
* Note: Market Cap cut offs and Style categorization are based on Russell classifications.
Source: Credit Suisse
7Top Outperform s That Rank in Top 25% in HOLT® Scorecard
Company Name Ticker Quality Momentum Valuation Company Name Ticker Quality Momentum Valuation
BASIC MATERIALS HEALTHCARE
Ashland Global Holdings Inc. ASH a PTC Therapeutics PTCT a
FMC Corporation FMC a HCA Healthcare HCA a a
DowDuPont Inc. DWDP a CVS Health CVS a
Graftech International Ltd. EAF a AmerisourceBergen ABC a a
Warrior Met Coal Inc. HCC a a a UnitedHealth Group Inc. UNH a a a
CONSUMER Anthem, Inc. ANTM a a
VICI Properties Inc. VICI a a Merck & Co., Inc. MRK a
Stanley Black & Decker, Inc. SWK a Allergan Plc. AGN a a
D.R. Horton Inc. DHI a Johnson & Johnson JNJ a
Nomad Foods NOMD a INDUSTRIALS
VF Corporation VFC a Boeing BA a
Tiffany & Co TIF a CSX Corporation CSX a
Ollie’s Bargain Outlet Holdings, Inc. OLLI a a Union Pacific UNP a
ENERGY/UTILITIES Xylem XYL a
Marathon Oil Corporation MRO a Allegion ALLE a
Anadarko Petroleum Corp. APC a a Jacobs Engineering JEC a
Pioneer Natural Resources Company PXD a Deere & Co. DE a
WPX Energy Inc. WPX a Caterpillar Inc. CAT a
DCP Midstream LP DCP a TMT
Halliburton HAL a Arista Networks ANET a a
ProPetro Holding Corporation PUMP a a F5 Networks, Inc. FFIV a a
Nine Energy Service, Inc. NINE a a Alphabet GOOGL a
Marathon Petroleum Corporation MPC a a a Amazon com Inc. AMZN a
Exelon Corporation EXC a a Facebook Inc. FB a a
NextEra Energy Inc. NEE a CyrusOne Inc. CONE a
FINANCIALS Equinix, Inc. EQIX a
BlackRock BLK a Micron Technology Inc. MU a a
LPL Financial Services LPLA a a Lam Research Corp. LRCX a a
Voya Financial VOYA a a Applied Materials Inc. AMAT a a
MetLife MET a a Salesforce.com CRM a
Athene ATH a a a Altice USA ATUS a
Progressive Corporation PGR a a
Arthur J. Gallagher & Co. AJG a a
New Residential NRZ a a
Starwood Property Trust STWD a
Synchrony Financial SYF a a
Visa Inc. V a
The HOLT scorecard calculates factors scores on a group relative basis. We indicate above where a company ranks above the 25th percentile in each of the categories:
(1) Quality: A firm’s track record of earning returns on capital (CFROI®) and managing growth. (2) Momentum: Revisions to consensus EPS estimates translated into
cash flow impact (CFROI) and medium-term share price momentum. (3) Valuation: Based on the HOLT DCF framework and traditional valuation multiples
Source: Credit Suisse
8
Source: Credit SuisseTop Ideas by Sector / Industry
Basic Materials Chris Parkinson
christopher.parkinson@credit-suisse.com
Chemicals & Ag Science (212) 538-6286
Top Outperform
Rank Company Pricing Rationale
Thesis: More visibility into cost-cutting initiatives, including speed of execution, margin acceleration on improving mix,
and portfolio optionality (sale of businesses, debt pay down, potential take-out). ASH is our top pick, as we view:
(1) improving price/mix, (2) accelerating Pharma / PC demand, and (3) cost-cutting / asset optimization opportunities
Ashland Global Price: $83.97 driving ASI margin expansion. Portfolio optionality exists with CSe >$1bln net proceeds from the sales of Composites
Holdings Inc. and I&S (excl. Lima); we note ASH is also a potential takeout target (CSe >$100/share).
1 (ASH) Target: $95.00
Potential Catalysts over next 3-6 months: Sale of the Composites and I&S (ex. Lima) businesses, cost-cutting, mix
HOLT® Lens Mkt Cap: $5.2B improvement, potential takeout.
Valuation: Our price target for Ashland Inc. is $95, based on blended sum of the parts of ~10.5x 2020 EBITDA,
discounted back.
Our bull thesis is underscored by: (i) FMC's ability to outgrow CPC markets by 200-400bps, (ii) ability to further
Price: $83.94
FMC Corporation expand LT margins via mix, new MOAs and cost reductions, (iii) further benefits from the DuPont asset integration /
(FMC) revenue synergies, (iv) Central / SE Asian and EE growth potential, and (v) M&A / cap allocation optionality; this
2 Target: $105.00
includes new molecule purchases. FMC's balance sheet provides a strong degree of upside optionality, with net
HOLT® Lens debt/EBITDABasic Materials Curt Woodworth
curt.woodworth@credit-suisse.com
Metals & Mining (212) 325-5117
Top Outperform
Rank Company Pricing Rationale
Thesis: As the lowest-cost graphite electrode producer globally, attributed to unique vertically integrated position,
GrafTech, with locked-in 60-70% EBITDA margins, has the potential to return 75% of its market capitalization in
dividends/buybacks through 2021. Barriers to entry (technological know-how and high capital investment) in both
needle coke and graphite electrodes, as well as incoming demand from electric vehicles for needle coke, provide
Graftech Price: $17.51
large scope for continued capital returns.
International Ltd.
1 (EAF) Target: $27.00
Potential Catalysts over next 3-6 months: Progression on ~30kt of graphite electrode debottlenecking efforts,
continued rising in needle coke prices, rolling off of lower priced legacy contracts, ability to source third-party needle
HOLT® Lens Mkt Cap: $5.1B
coke to allow for increased LTA deals, St. Mary’s restart, capital return announcements.
Valuation: Our $27 TP and Outperform rating for EAF are based on 50/50 blend of (1) a DCF ($26) using a 10%
discount rate and a 1% terminal growth rate and (2) 6.5x our 2019 estimated EBITDA ($28).
Warrior Met Coal Price: $26.00
Inc.
We like Warrior for its strong capital return profile, and its leverage to the metallurgical coal market, which should
2 (HCC) Target: $32.00
continue to drive strong EBITDA and free cash flow (FCF) generation through 2018.
HOLT® Lens Mkt Cap: $1.4B
Price: $9.48
Constellium
(CSTM) CSTM has a highly visible growth trajectory, is seeing better execution at UACJ, and trades at a substantial discount
3 Target: $20.00
to peers.
HOLT® Lens
Mkt Cap: $1.1B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
11Consumer Cameron McKnight
cameron.mcknight@credit-suisse.com
Gaming (212) 325-6608
Top Outperform
Rank Company Pricing Rationale
Thesis: Caesars Entertainment (CZR) is one of the largest US gaming operators, with eight Las Vegas Strip and 22
Regional properties. Our thesis is premised on (1) defensive mix of Vegas and Regionals exposure, (2) expected
share gains in Las Vegas, (3) business model driven more by defensive Gaming than Hotel revenues, (4) improved
Regional Gaming industry structure, which supports marketing reductions, (5) very attractive valuation, with low
expectations and (6) activist interest likely drives a floor in valuation, and potentially positive risk-reward.
Caesars
Price: $9.52 Potential Catalysts over next 3-6 months: (1) post-bankruptcy shareholders continue to sell down and stock
Entertainment
overhang diminishing; (2) regional gaming revenue trends and reported earnings (given disconnect between public
Corp.
1 Target: $13.00 data and reported results); (3) Las Vegas visitation and results during critical September-October-November and Q1
(CZR)
2019; (4) Las Vegas trends in 4Q 2018 – and whether y/y growth returns once the market laps easy comparisons;
Mkt Cap: $6.4B and (5) potential for further real estate transactions, with an extremely strong gaming M&A environment.
HOLT® Lens
Valuation: In our view, expectations are low, with still material concern over the meaning of Q3 weakness,
achievement of FY guidance and very limited interest from long-only investors. CZR currently trades at 8.1x 2019E
EBITDAR, roughly in-line with MGM’s implied OpCo multiple of 7.8x. This is despite CZR owning the real estate
behind 50% of its EBITDAR versus MGM at approximately 35%. Our $13 target price is based on our sum-of-the-
parts, with 10.5x EBITDA on the Las Vegas assets, and 8.5x EBITDA on Regionals.
VICI Properties Price: $22.13 VICI is a triple-net gaming REIT that owns the real estate of 21 of CZR’s Las Vegas and regional assets and one of
Inc. Penn National Gaming’s assets. In our view, the market is looking through VICI’s incremental internal and external
2 (VICI) Target: $24.00 growth potential and placing a large discount on the overhang from cornerstone shareholders. Using our long-term
DDM, we estimate VICI is discounting a substantial 9.30% cost of equity, significantly wider than the 8.4% and 8.3%
HOLT® Lens Mkt Cap: $8.2B implied by MGP and GLPI.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
12Consumer Susan Maklari
susan.maklari@credit-suisse.com
Homebuilding & Building Products (212) 325-3134
Top Outperform
Rank Company Pricing Rationale
Thesis: We believe Fortune Brands is among the best positioned names within our coverage, as: (1) it leverages its
base of established brands, especially in plumbing, to gain share, (2) seeks expansion in attractive, higher margin
Fortune Brands categories through acquisitions, and (3) maintains a balanced capital structure, including returning cash to
Price: $45.50
Home & Security shareholders. As such, the company has delivered industry-leading margins, which we expect to hold as we enter the
Inc. mid to latter parts of the housing cycle.
1 Target: $53.00
(FBHS)
Potential Catalysts over next 3-6 months: The fourth quarter will provide an update on the progress being made in
Mkt Cap: $6.5B
HOLT® Lens pricing, and the pace of margin and EPS expansion.
Valuation: Our target price equates to 10x our NTM EBITDA forecast versus its historical average of 9-15x.
Stanley Black & Price: $128.69
Decker, Inc.
Our positive outlook reflects: (1) further price realization, especially in Tools & Storage, as it leverages its market
2 (SWK) Target: $135.00
leadership, (2) potential upside as the benefits of integration and investments in more recent acquisitions come
through, and (3) leveraging of its significant FCF to pursue value-enhancing growth and shareholder returns.
HOLT® Lens Mkt Cap: $19.4B
Price: $37.59
D.R. Horton Inc.
Our Outperform rating is based on DR Horton’s: (1) focus on entry-level buyers (~50% of F2017 closings), (2) higher
(DHI)
3 Target: $45.00 level of spec construction, allowing it to better manage the tight labor market, and (3) continued focus on reducing
costs, benefiting margins.
HOLT® Lens
Mkt Cap: $14.2B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
13Consumer Cameron McKnight
cameron.mcknight@credit-suisse.com
Leisure (212) 325-6608
Top Outperform
Rank Company Pricing Rationale
Thesis: Marriott Vacations (VAC) is a top-tier timeshare company—an industry we like given strong forward macro
indicators, consolidation and the shift of consumer spending to travel and leisure. VAC recently completed the
acquisition of close competitor, ILG, in a transaction we think is highly accretive, with minimal synergies reflected in
Marriott Vacation
Price: $91.69 the stock. We’ve modeled potential revenue and cost synergies that could be >2.5x the company’s preliminary guide.
Worldwide
In addition, we see potential upside to VAC’s estimates – as they are now selling through very new developments,
Corporation
1 Target: $120.00 and a significant new marketing agreement with Marriott is coming online.
(VAC)
Mkt Cap: $4.3B Potential Catalysts over next 3-6 months: Fourth quarter earnings and update on synergy guidance.
HOLT® Lens
Valuation: VAC currently trades at a pro forma 8.3x 2019E EBITDA, roughly a half turn premium to HGV. Our $120
target price is based on 8.3x 2020E EBITDA discounted back.
(1) HGV’s stock is reflecting an overly bearish view on the economic cycle, in our view, and over-reacting negatively
Hilton Grand Price: $30.14
to near-term growth investment. (2) We see strong growth prospects and potential upside to estimates, with a unique
Vacations Inc.
business model and levers: HGV has strong unit growth opportunities, highly valuable link to Hilton’s network, and a
2 (HGV) Target: $37.00
monopoly Japanese business. (3) We see less expected downside in a recession, with the least sensitivity to
consumer financing defaults, an inbuilt buffer from its new owner and inventory bank and long-term investment in new
HOLT® Lens Mkt Cap: $2.9B
owners.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
14Consumer Rob Moskow
robert.moskow@credit-suisse.com
Packaged Food (212) 538-3095
Top Outperform
Rank Company Pricing Rationale
Thesis: Nomad’s leadership in European frozen foods, margin expansion initiatives, and M&A expertise stand to
generate significant upside for shareholders similar to that of historical U.S M&A roll-up peers. Business momentum
has been accelerating with strong organic sales growth and market share gains over the past year. The company
stands to create enormous value as gross margin looks to expand through an increase in volume, trade optimization
Price: $19.29 and supply chain productivity initiatives.
Nomad Foods
(NOMD)
1 Target: $24.00 Potential Catalysts over next 3-6 months: We believe management may revise Goodfella’s and Aunt Bessie’s
acquisition synergies higher when it reports earnings in 2H18, and outline innovation plans and marketing initiatives to
HOLT® Lens
Mkt Cap: $2.9B accelerate organic growth.
Valuation: Our $24 target price assumes Nomad’s valuation multiple rerates higher to 12.5x, which would be roughly
in line with Conagra and Pinnacle Foods’ historical average. The growth of European purchasing alliances presents
the largest risk to Nomad’s pricing power and our thesis.
Mondelez offers a compelling risk-reward scenario in the challenged packaged foods space. Nearly 40% of the
Price: $43.66
Mondelez company’s sales come from developing markets. Consumption in China and India has accelerated, and Western
(MDLZ) Europe is showing strong sales trends. Management has provided confidence that it can accelerate sales growth
2 Target: $48.00
without sacrificing any ground it has gained on margins. We expect top-line growth to accelerate in 2019 owing to
HOLT® Lens favorable economic conditions globally as Mondelez capitalizes on its leadership position in advantaged snack
Mkt Cap: $65.3B
categories.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
15Consumer Rob Moskow
robert.moskow@credit-suisse.com
Packaged Food (212) 538-3095
Top Underperform
Rank Company Pricing Rationale
(1) Management has moved away from its comfort zone by adding more complex businesses to B&G’s slow-growth
B&G Foods Inc - Price: $28.31 portfolio. We harbor substantial concern around whether B&G can continue to execute its traditional “manage for
Class A cash” strategy at a time when retailers are putting more pressure on vendors for growth and big competitors are
1 (BGS) Target: $23.00 making big investments. (2) Management’s willingness to part with the growing Pirate’s Booty snack brands indicates
it had no alternative to bringing its balance sheet in order, and hurts the company’s argument that it can grow its
HOLT® Lens Mkt Cap: $1.9B portfolio in a profitable way. (3) B&G is unlikely to deliver material EBITDA growth in 2019 as it realizes the limits of its
ability to offset higher input costs with pricing.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
16Consumer Michael Binetti
michael.binetti@credit-suisse.com
Softlines Retail & Global Brands (212) 325-7812
Top Outperform
Rank Company Pricing Rationale
Why #1 Now? With RL’s relatively poor sentiment (only 26% Buy ratings, among the lowest in our coverage) and low
China exposure (~1% of revenues), we believe incremental evidence of success in the ongoing turnaround strategy
could provide considerable upside for the stock.
Thesis: We believe the company’s core North American categories like Men’s could be poised to turn positive over
Ralph Lauren Price: $127.40
the holidays for the first time in several years. Further, RL’s recent collaboration with streetwear brand Palace sets the
Corporation
stage for a brand repositioning that chips away at the bear case that RL isn’t doing enough to appeal to younger
1 (RL) Target: $156.00
consumers. Lastly, we continue to see sources of margin upside on both GMs (North America wholesale GMs still
“several hundred” bps below recent peaks) & ongoing SG&A optimization.
HOLT® Lens Mkt Cap: $10.3B
Potential Catalysts over next 3-6 months: F2Q earnings report in November; Holiday shopping season
performance
Valuation: Our $156 target price is based on ~12x our FY20 EBITDA and implies ~21x our FY20 EPS.
We see VFC as having one of the most aggressive value creation agendas in our coverage with the company
Price: $86.19
VF Corporation recently selling off underperforming brands and focusing investment on the higher growth brands (Vans, The North
(VFC) Face, Timberland). Vans growth in particular remains strong (+27% YOY ex-FX in C3Q) and 2H revenue growth
2 Target: $98.00
guidance looks conservative, with implied revenues of +6-8% YOY (vs. +30% in 1H) providing ample room for upside.
HOLT® Lens We also see Timberland checks improving and The North Face poised for an acceleration (with both brands having
Mkt Cap: $34.2B
EBIT margins 500bp-plus below prior peak—offering ample cushion for any Vans slowdown).
We remain positive on TIF’s turnaround strategy and are encouraged by a much faster reversal in SSS trends than
Price: $117.03
Tiffany & Co expected in 1H. We believe TIF has multiple ways to offer operational/margin upside to offset any potential China
(TIF) slowdown: (1) A clear path to improve EBIT margins to the mid-20s (from 19% currently); (2) Stepped-up product
3 Target: $146.00
innovation + a significant increase in brand investments (after years of underinvestment vs. peers); and (3) Ongoing
HOLT® Lens strategic brand value, with major European luxury platforms (LVMH, Richemont, Kering) pivoting to a net cash
Mkt Cap: $14.3B
position for the first time by 2020 (opening up the luxury space for a potential acceleration in M&A).
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
17Consumer Judah Frommer
judah.frommer@credit-suisse.com
Staples Retail & Distribution (212) 325-8681
Top Outperform
Rank Company Pricing Rationale
Thesis: DLTR currently trades at near-cycle lows following Q2 earnings, but our SOTP valuation, recent ramp in
remodel activity, a potential activist involvement, and potentially opportune timing in the economic cycle gives us
incremental confidence in the name. Our thesis is (1) based on SOTP, and with DG now trading at ~11x NTM
EBITDA, we see no reason a standalone Dollar Tree business should not garner at least a 1x premium multiple given
its superior margin structure, recent comp history, and larger white space opportunity with a better new store return
Price: $86.45
Dollar Tree Inc. model. (2) Remodels should drive comp stability and one-time margin headwinds abate next year. We also see a
(DLTR) modest optionality in incremental rebanners.
1 Target: $96.00
HOLT® Lens Potential Catalysts over next 3-6 months: Third quarter earnings showing signs of improvement at FDO;
Mkt Cap: $20.6B
accelerated store remodel activity; a confirmed stake or any new interest on the FDO asset from activist investors or
strategic buyers; ease of trade talks with China.
Valuation: Our $96 target price assumes that DLTR can trade at ~14x our CS adjusted NTM EPS estimate of $6.78
(ex. favorable lease rights amortization) in 12 months and approximately ~14.5x reported EPS.
Performance Price: $32.71 (1) PFGC is consciously managing freight and labor issues, hiring more salespeople, warehouse workers, and truck
Food Group drivers, in order to keep service levels high. We see this as a proactive and strategic move, and afford them the
2 (PFGC) Target: $39.00 requisite benefit of the doubt. (2) The sales backdrop within this highly fragmented, rational industry appears to be
intact, and PFGC's top- and bottom-line momentum should continue to outpace peers' medium term.
HOLT® Lens Mkt Cap: $3.4B
Price: $91.73
Ollie’s Bargain
Outlet Holdings, (1) Largest dedicated retailer of closeout merchandise in the U.S. enjoying best buying environment ever and sizable
3 Target: $96.00
Inc. white space opportunity. (2) Unparalleled insulation from Amazon deserving of a premium valuation to peers
(OLLI)
Mkt Cap: $5.8B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
18Energy / Utilities Michael Weinstein / Maheep Mandloi
w.weinstein@credit-suisse.com / maheep.mandloi@credit-suisse.com
Alternative Energy (212) 325-0897 / (212) 325-2345
Top Outperform
Rank Company Pricing Rationale
Thesis: Non-regulated residential rooftop solar financing and installation with a market price that only reflects
current contract with no credit for growth. See recent research: 8/10 Results, Opportunities Better than Expected
Price: $13.19
Sunrun
Potential Catalysts over next 3-6 months: Catalysts include refinancing at lower spreads, growth due to California
(RUN)
1 Target: $23.00 rooftop solar mandate (starting 2020), and safe harbor for ITC extension through 2023.
HOLT® Lens
Mkt Cap: $1.5B Valuation: Our $23 target price is based on a DCF of future cash flows, assuming installation growth of 15% in 2018,
15% in 2019, 19% in 2020 (CA rooftop mandate), 10% from 2021 to 2023, and flat thereafter. We assume a 6%
project-level discount rate and a 15% corporate development discount rate.
NextEra Energy Price: $47.92
Partners Sector high dividend growth. Valuation is attractive, as we forecast 15% dividend growth at the upper end of guidance
2 (NEP) Target: $49.00 through 2024 given strong growth visibility with contracted assets from its sponsor NEE and a growing third-party
install base. Sector leading cost of capital and capital structure flexibility helps acquisition at attractive prices.
HOLT® Lens Mkt Cap: $2.7B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
19Energy / Utilities Bill Featherston
william.featherston@credit-suisse.com
E&Ps – Large Cap (212) 325-6283
Top Outperform
Rank Company Pricing Rationale
Thesis: MRO’s divestiture of its Canadian oil sands mining business coupled with two Permian acquisitions last year
sharply improved the company’s portfolio, a dynamic we believe is still underappreciated by investors. Meanwhile,
MRO offers one of the most attractive oil and cash flow per debt-adjusted share growth profiles among the global
E&Ps, driven by the combination of attractive absolute growth and free cash flow assuming just $50/Bbl. We also
believe MRO’s “stale” US resource potential and drilling location guidance are conservative and see upside potential
to these figures (and thus NAV) without it pursuing another acquisition.
Marathon Oil Price: $18.51
Corporation
Potential Catalysts over next 3-6 months: (1) accelerated pace of share repurchases (recently commenced
1 (MRO) Target: $28.00
buybacks in 3Q18), with potential upside to its current $1.5 billion authorization given increased organic FCF visibility;
(2) US onshore resource update: at last update, MRO estimated its Big-4 resource plays to hold 2P resource potential
HOLT® Lens Mkt Cap: $15.8B
of ~4.4 BBoe with upside to >6.5 Bboe vs. our current estimate of ~4.3 BBoe; and (3) disclosure of Northern
Delaware type well economics.
Valuation: MRO still trades at a steep >1x discount to peers on 2019-20 EV/DACF, which we note is even wider than
its historical average discount to the group when it had its Canadian oil sands mining business and before it acquired
its Permian position (high multiple assets). MRO also trades at a moderate discount on P/NAV.
Anadarko Price: $57.89
Petroleum Corp. APC’s material free cash flow generation should enable it to deliver superior growth in cash flow per debt-adjusted
2 (APC) Target: $89.00 share grow, and its large cash balance enables it to return cash to shareholders at an increased level while providing
additional optionality. Meanwhile, APC trades at a discount to peers on both EV/DACF and price/NAV.
HOLT® Lens Mkt Cap: $29.2B
With nearly 700,000 net acres in the Midland Basin (one of the most prolific, lowest-cost US shale oil plays), PXD
Pioneer Natural
Price: $161.71 offers an unmatched depth/quality of inventory with significant running room as the industry is still in the early stages
Resources
of development. PXD offers ~10 years of >15% per annum growth with a growing free cash flow wedge as long as oil
Company
3 Target: $251.00 remains >$50/Bbl long term. PXD is also one of the best positioned operators to navigate the potentially widening
(PXD)
basis resulting from Permian Basin infrastructure constraint. The shares trade at a modest premium to Permian-
Mkt Cap: $27.6B levered peers on 2019-20E EV/EBITDX despite its massive unbooked resource potential, and trade at a steep
HOLT® Lens
discount to Permian-levered peers on the more relevant P/NAV.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
20Energy / Utilities Betty Jiang
betty.jiang@credit-suisse.com
E&Ps – SMID Cap (212) 325-6259
Top Outperform
Rank Company Pricing Rationale
Thesis: WPX stands out as having the most differentiated Permian takeaway portfolio in the SMID E&P space which
provides protection from widening Mid-Cush basis—a key investor concern. Moreover, shares have historically
traded at a discount in-part due to an elevated leverage profile vs. peers; however, assuming strip pricing we see
WPX reaching CF neutrality in 2019 and forecast 2018/19 net debt leverage at 2.4x and 1.5x (CS price deck),
roughly in-line with peers at 1.9x and 1.5x, respectively. Lastly, shares offer a differentiated 2017-2022 cash flow per
Price: $16.45
WPX Energy Inc. debt-adjusted share CAGR of 39% versus peers at ~27%, assuming strip pricing.
(WPX)
1 Target: $23.00
Potential Catalysts over next 3-6 months: We see Bakken upside from continued strong performance from wells
HOLT® Lens drilled on their North Sunday Island position, we also see NAV upside from continued delineation of their Permian
Mkt Cap: $6.9B
position by WPX and peers focused on Bone Spring, Wolfcamp, and Avalon. Lastly, we see monetization of
midstream assets as adding yet another near-term catalyst.
Valuation: Our $23 target price is based on a blended average of 7.0x normalized 2019 EBITDX and ~0.8x our
NAV.
Having navigated the downturn remarkably well through cost-cutting and technical improvements, CLR is on the
Continental Price: $52.26
cusp of generating 15-20% per annum of oil-led production growth and meaningful free cash flow for years to come.
Resources
This is enabled by technical enhancements across its asset base (Bakken renaissance) and further de-risking of the
2 (CLR) Target: $75.00
Springer Oil play. We view CLR as a top pick based on an attractive combination of (1) quality oil beta with above
average debt-adjusted growth, (2) Bakken well outperformance driving production beat and raises, and (3) non-core
HOLT® Lens Mkt Cap: $19.7B
asset sales further optimizing the portfolio.
The recently announced tax status and structure change marks a fundamental shift in the company’s investment
Price: $34.69 appeal as the only growth and high income vehicle exposed to the Permian, now in a C-Corp structure with no tax
Viper Energy burden. Post change, VNOM will see a significantly expanded potential investor base which should help further
3 Partners LP Target: $42.00 accelerate their role as a natural consolidator of royalty acreage in the Permian. We forecast VNOM is capable of
(VNOM) generating ~23% annual "organic" distribution growth through 2022 from 1Q18 production of 14.1 MBoed while
Mkt Cap: $1.8B yielding ~6.2% and ~7.5% in 2018-19 based on the CS price deck ($67/Bbl), which can be further enhanced by
acquisitions.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
21Energy / Utilities Spiro Dounis
spiro.dounis@credit-suisse.com
Midstream & MLPs (212) 325-3463
Top Outperform
Rank Company Pricing Rationale
Thesis: DCP offers investors exposure to two of the nation’s fastest growing basins: the DJ Basin and the Permian
Basin. We expect peer leading growth with a five-year CAGR of 10%. DCP trades 1-2x below peers; we believe two
DCP Midstream Price: $40.71
catalysts could narrow that margin: investment grade status and IDR removal. DCP’s growth focuses on moving
LP
NGLs toward export markets, consistent with our preferred strategy.
1 (DCP) Target: $57.00
Potential Catalysts over next 3-6 months: Bighorn project FID expected in 4Q18.
HOLT® Lens Mkt Cap: $5.8B
Valuation: Our $57 TP is based on 12.75x our FY19 EBITDA estimate.
Price: $17.50
Kinder Morgan KMI provides unparalleled capital return with distribution growth of 25% over the next two years and a share
(KMI) repurchase program with $1.75 billion remaining. We expect KMI to benefit from strong natural gas growth in the US,
2 Target: $23.00
which includes LNG exports. KMI is in the top quartile of our investor scorecard but screens at a 2-3x discount vs.
HOLT® Lens large-cap midstream peers, which makes valuation compelling here.
Mkt Cap: $38.6B
Price: $34.02
MPLX LP MPLX offers a dominant footprint in the largest natural gas basin (Appalachia), allowing it to secure volumes from all
(MPLX) major counterparties in the region and grow with minimal capex. MPLX is expanding into the Permian without paying
3 Target: $45.00
a premium price tag due to its sponsor relationship and notoriety in Appalachia. After years of transactions, the stock
HOLT® Lens trades at a discount due to fatigue which we expect to result in a 2.0x upward re-rating.
Mkt Cap: $27.0B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
22Energy / Utilities James Wicklund
james.wicklund@credit-suisse.com
Oil Services & Equipment (214) 979-4111
Top Outperform
Rank Company Pricing Rationale
Thesis: North America has come back first and fastest; considering HAL is the biggest player in the NAM onshore
market, this is a major positive. In many ways HAL has been cursed by the step change in NAM activity. Rather than
a 20% CAGR for five or six quarters, the rig count doubled in a few months. We do not view this as a negative, as
activity will now move forward from a higher level than expected. HAL has the most exposure to the fastest-growing
segment of the NAM market (completions) than any other large company we cover. The last time HAL traded at
Price: $36.41
Halliburton current levels was 2Q16, around when the oil rig count bottomed at 316 and the frack spread count at 155. The
(HAL) continuing international recovery is becoming increasingly important and noticeable, with HAL beating its larger peer
1 Target: $46.00
in int’l revenue growth in 6 of the past 8 quarters (2Q18 was Eastern Hemisphere only). While 1Q19 is likely the
HOLT® Lens international activity bottom due to seasonality, it is clear investors should start discounting the global recovery by
Mkt Cap: $31.9B
year-end at the latest. See recent report, HAL: Contrary to Some, Not Dead Yet
Potential Catalysts over next 3-6 months: Q4 earnings.
Valuation: Our $46 target price for HAL equates to 10x our 2019 EBITDA estimate.
ProPetro (PUMP) is a Midland, Texas-based oilfield services provider of hydraulic fracturing and ancillary services.
The primary driver of PUMP's business is activity in the Permian basin. 97% of PUMP's revenues are derived from
ProPetro Holding Price: $18.67
this basin. As a result, completion activity and relationships with customers in the Permian will be key. Capital
Corporation
allocation drives management’s thinking more than margin objectives, with a two-year cash and three-year all-in
2 (PUMP) Target: $19.00
payback being more critical than other metrics (a positive). The goal is to increase profitability by cooperating and
partnering with customers with a vested interest in PUMP's success. A combination of unique culture and very
HOLT® Lens Mkt Cap: $1.6B
efficient operations has been ignored by investors who only focus on the company’s sole operating basin – the
Permian. We expect upside to surprise to earnings and its better positioning than many realize.
Nine Energy Services (NINE) is an onshore completion and production-related company with conveyance systems,
Nine Energy Price: $35.94
downhole tools, specialized services, proprietary operating software, and technology alliances: everything needed to
Service, Inc.
complete a well except pressure pumping. The trend toward more multi-well pads is positive for the company in the
3 (NINE) Target: $38.00
increased capital efficiency of equipment on location for extended periods and optimized execution demands act as
barriers to entry from competitors. NINE has beat every quarter since its 2017 IPO, has grown market share
HOLT® Lens Mkt Cap: $0.9B
significantly with expanding margins, has high basin diversity and a very capable management.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
23Energy / Utilities Manav Gupta
manav.gupta@credit-suisse.com
Refining & Marketing (212) 325-6617
Top Outperform
Rank Company Pricing Rationale
Thesis: MPC leverage to discounted crude and ability to place refined products is unparalleled. MPC’s Mid-Con /
Midwest runs a crude cocktail of advantaged crude that includes: WTI, WCS, Syncrude, Bakken, WTS and Midland
WTI crudes which gives it an edge over peers. MPC is somewhat unique as it can run 70% light or seamlessly switch
to 70% mediums on the GC. As 2.5-3.0 mmb/d of additional light barrels make their way from the Permian, we expect
Marathon
Price: $69.82 GC light discounts will widen. We also expect buybacks at MPC will exceed all its peers. At its Dec 4, 2018 analyst
Petroleum
day, MPC could: (1) Revise its synergy targets particular on the retail front, (2) Set 2019 share buyback guidance at
Corporation
1 Target: $106.00 ~$3.5-$4Bn, and (3) Provide explicit IMO 2020 guidance.
(MPC)
Mkt Cap: $48.2B Potential Catalysts over next 3-6 months: Third quarter earnings.
HOLT® Lens
Valuation: Our $95 target price is based on a sum-of-the-parts methodology: 6.25x EBITDA multiple on our $3.57b
CY19 refining est., 10.0x on our $1.07b CY18 marketing est., 12x on our $2.3b (net) CY19 MPLX EBITDA estimate,
less corporate expenses + debt.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
24Energy / Utilities Michael Weinstein
w.weinstein@credit-suisse.com
Utilities (212) 325-0897
Top Outperform
Rank Company Pricing Rationale
Thesis: The stock remains inexpensive on our sum of the parts valuation. EXC also has a series of positive catalysts
coming up: the NJ zero emission credit subsidy program (signed into law on May 23), the Fast Start energy market
reform approval at FERC (2019), and baseload energy market reform approvals (mid-2019). Furthermore these
catalysts are not yet in guidance so there is a guidance raise coming, likely by the EEI conference in November 2018.
Exelon Price: $44.67 Also, in 2019, we expect positive outcomes in PHI ratecases to begin flowing into higher reported ROEs for these
Corporation utilities. Strong non-regulated nuclear cash flows are set to increase 2H18 and beyond with electric market reforms
1 (EXC) Target: $48.00 support above-average utility growth, dividend and de-levering.
HOLT® Lens Mkt Cap: $43.1B Potential Catalysts over next 3-6 months: Catalysts include the Fast Start docket (FERC EL 18-34); PJM capacity
market reform, baseload energy market reform in PJM; outcomes of PHI ratecases.
Valuation: Our $47 TP is based on sum-of-the-parts methodology using a 2020 P/E multiples. We continue to see
room for another $1-2 upside from potential energy market reforms in PJM.
Price: $26.16
NiSource Inc. Above-average EPS & dividend growth of 5-7% through 2020 driven by superb 8-10% ratebase growth (9-11% gas,
(NI) 4-6% elec) and a constructive regulatory backdrop across its seven state jurisdictions. We expect the company to
2 Target: $28.00
recover from the incident in Massachusetts once its accelerated line replacement is completed there, likely before
HOLT® Lens December 2018.
Mkt Cap: $9.5B
NextEra Energy Price: $173.54
NEE is a premier way to invest in a coming revolution for the electric generation industry as both renewables and
Inc.
battery storage pricing rapidly decline to levels by the early-mid 2020s that could ultimately replace significant
3 (NEE) Target: $186.00
portions of conventional nuclear, coal, and gas-fueled electricity. NEE is confident on its ability to hit the high end of
long-term 6-8% EPS growth.
HOLT® Lens Mkt Cap: $82.9B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
25Energy / Utilities Michael Weinstein
w.weinstein@credit-suisse.com
Utilities (212) 325-0897
Top Underperform
Rank Company Pricing Rationale
Southern Price: $47.01
Company While Vogtle has received approval from co-owners to proceed with construction, we continue to highlight the risks
1 (SO) Target: $42.00 associated with the project. Under the revised ownership agreement, SO has a higher share of cost overruns and
savings while the company has an option to cancel the project at its discretion.
HOLT® Lens Mkt Cap: $47.6B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
26Financials Craig Siegenthaler
craig.siegenthaler@credit-suisse.com
Asset Managers / Retail Brokers (212) 325-3104
Rank Company Pricing Rationale
Thesis: Markets are missing the improvement in underlying earnings power: Given the rapid growth in BX’s
core/underlying earnings power (carry generating AuM, carry eligible AuM, fee-earning AuM), we believe BX could
roughly double its ’15 (last cycle peak) Distributable Earnings (DE) generation in three to five years, implying DE in
the $6-7 range in 2019-2021.
Price: $35.17
Blackstone Group Potential Catalysts over next 3-6 months: Strong fundraising across a diversified product set: BX's fundraising has
(BX) tracked much stronger than its competitors, even without its vintage PE and RE funds in the market. Additionally, BX
1 Target: $49.00
is currently building out its insurance, infrastructure and Core Plus RE platforms and its flagship PE and RE funds are
HOLT® Lens expected to start fundraising in 2019. Large fundraises and product diversification/innovation supports a more
Mkt Cap: $42.3B
consistent (and growing) level of cash earnings.
Valuation: The PTP (publicly traded partnership) alts trade at ~10x discount to the C-corp alts owing to ownership
constraints (K-1 tax filing, no index inclusion and limited active ownership). In the longer-term, C-corp conversion
could result in a multiple re-rate given new investors.
(1) ETFs: BLK owns the largest ETF manager in the world in iShares, which is large across all key product segments
Price: $424.73 and in most geographies. We view ETF and passive as high growth segments, and we believe BLK's iShares
BlackRock
business will capitalize on the secular trends. While passive share will likely reach ~50% of US equity retail AuM, the
(BLK)
2 Target: $573.00 trend is less mature outside of the US which will benefit iShares internationally. (2) Technology: BLK's Aladdin
business provides solutions to asset managers, insurance companies, trust banks, and retail brokers (CIO/home-
HOLT® Lens
Mkt Cap: $67.9B office and advisors). We think this fee stream will grow by 15%, and also help BLK to cross-sell other asset
management products into the retail channel.
LPL Financial Price: $64.43
We forecast upside to both LPL's discounted relative valuation and 2019 sell-side EPS estimates. Specifically, we
Services
estimate incremental profit upside from NT asset sensitivity (zero effective asset duration and low deposit beta),
3 (LPLA) Target: $88.00
disciplined expense control, EPS accretion from the NPH acquisition, and an improving return on client assets
adjusted (ROCA-adjusted) organic growth rate.
HOLT® Lens Mkt Cap: $5.6B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
27Financials Susan Katzke
susan.katzke@credit-suisse.com
Banks (212) 325-1237
Top Outperform
Rank Company Pricing Rationale
Thesis: JPMorgan represents the value inherent in the universal banking model--best-in-class execution—leveraging
its complete, scaled and well-integrated product set to drive profitable and sustainable revenue growth. Add to that a
willingness to drive down unit operating costs (capacity for investment to drive incremental growth; a virtuous circle)
and an ability to optimize capital; this sustains better-than-average earnings growth and ROEs.
JPMorgan Chase Price: $111.48
& Co.
Potential Catalysts over next 3-6 months: (1) Regulatory relief (Volcker, CCAR, GSIB surcharge) and (2) Material
1 (JPM) Target: $130.00
longer term, opportunities to consolidate market share in the highly fragmented retail and middle market commercial
banking businesses to drive above average earnings growth and sustain above average returns.
HOLT® Lens Mkt Cap: $380.2B
Valuation: We arrive at our $130 target price applying our weighted average valuation methodology (using a 35%
weight on our Blue Sky scenario, a 50% weight on our base case scenario, and a 15% weight on our Grey Sky
scenario), our target price of $130 translates to 1.8x year-end 2019 book value (2.2x P/TBV).
Bank of America Price: $28.54 Bank of America is driving value through optimization of a superior and increasingly well integrated/optimized
Corp. universal banking model. Organic revenue growth, visible operating leverage, manageable credit cost increases, and
2 (BAC) Target: $36.00 capital efficiency will drive realization of franchise value. BAC, like JPM, is one of the few banks willing and able to
outperform peers to consolidate market share in the still highly fragmented basic banking business—actively entering
HOLT® Lens Mkt Cap: $280.1B new markets to drive above-average and sustainable organic growth.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
28Financials Andrew Kligerman
andrew.kligerman@credit-suisse.com
Insurance – Life (212) 325-5069
Top Outperform
Rank Company Pricing Rationale
Why Now? We are moving VOYA to #1 Top Pick because we expect several positive near-term catalysts to be
announced at the upcoming investor day on November 13.
Thesis: VOYA has attractive, capital light businesses including Retirement, Investment Management, and Group
Benefits, and we expect continued improvement in adjusted operating ROE led by the Annuities divestiture, organic
growth, capital management, and expense management. Based on these factors we think VOYA can achieve 13-15%
ROE within the next few years, up from 10% this year. The company has chosen to retain its Individual Life business
while ceasing new sales, which management projects to free up $1 billion-plus of cash over the next 5-6 years,
Voya Financial, Price: $46.24 returning roughly half of its current book value over this time frame (see our October 30 “VOYA: Solid 3Q18,
Inc. Announced Retention of Life Unit” note).
1 (VOYA) Target: $59.00
Potential Catalysts over next 3-6 months: Near term, we expect positive developments could be announced at
HOLT® Lens Mkt Cap: $7.2B upcoming November 13 investor day, including the likely implementation of a material dividend. Longer-term,
regulatory proposals expanding access to 401(k)s could be a positive (see our October 22 “Regulatory Proposals
Represent Potential Boost for Defined Contribution Providers” note). We also see the potential for a sale of VOYA as
a whole with an attractive 80%-plus upside implied by our SOTP analysis.
Valuation: Our $59 target price is based on our P/B:ROE/COE valuation methodology, applying a 14% ROE which
we think is reachable in three to five years, and supported by our SOTP analysis. VOYA is currently trading at 0.94x
on BVPS (ex. AOCI), which reflects compelling value given strong businesses, catalysts, and expected improvements
in expense and capital management.
MET has a relatively high degree of control over its future success, driven by strong retirement, group benefits, and international
Price: $45.18 businesses, which have low sensitivity to equity market fluctuations. Further, with the majority of its variable annuities (VA) business
Metlife, Inc.
divested via the BHF spinoff, we expect the large one-time charges experienced over the last several years to subside, as the VA
(MET)
2 Target: $63.00 business was the source of most of the charges. See our November 2 “MET: A Good 3Q18” note for more detail, reflecting MET’s
third consecutive solid quarter. Catalysts include anticipated share repurchases of around $500 million in 4Q18, likely clearing of
HOLT® Lens material weaknesses by early 2019 at the latest, and completion of MET’s expense initiatives (run-rate $400 million of annual
Mkt Cap: $44.9B
savings by 2020).
Athene Holding Price: $47.03 ATH continues to generate impressive growth and returns supported by a strategic relationship with Apollo, multiple revenue
Ltd. sources, ability to scale and a tax efficient structure. On October 31, ATH posted strong 3Q18 results(see ATH: Strong 3Q18
Growth and Trends for details). At its September 20 investor day, ATH discussed $4 billion of available capital that could potentially
3 (ATH) Target: $67.00 fuel $50 billion of asset deals, with another $50 billion of accessible assets (see ATH: Takeaways from Investor Day for details). We
see the potential for a block or reinsurance deal, given ATH’s strong capital position, which has the potential to boost ROE by as
HOLT® Lens Mkt Cap: $8.9B much as 100 bps, compared with our current 14% projection for 2019.
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
29Financials Mike Zaremski
michael.zaremski@credit-suisse.com
Insurance – P&C/Brokers (212) 325-5061
Top Outperform
Rank Company Pricing Rationale
Why Now? WLTW stock showed weakness post what was admittedly a confusing 2Q’18 EPS report, yet some of
WLTW’s peers, whom also had messy 2Q prints, re-rated upwards. While WLTW stock has since rebounded
following its 3Q EPS beat, we believe there continues to be upside potential given the stock is still trading more than a
standard deviation below its three-year average NTM P/E.
Willis Towers
Watson Public Price: $158.30 Thesis: We believe Investors do not find management’s EPS guidance to be credible and estimate the stock is
Limited Company discounting in a high level of forward EPS uncertainty.
1 (WLTW) Target: $166.00
Potential Catalysts over next 3-6 months: Stronger-than-expected operating performance and the potential for
HOLT® Lens Mkt Cap: $20.6B WLTW to signal for increased efficiencies to be realized from restructuring programs.
Valuation: Our $166 TP, which drives our Outperform rating, is equal to 15.8x our NTM EPS estimate. This
compares to WLTW's 3-yr historical NTM P/E of 15.9x. Our forward EPS growth estimates are materially higher than
WLTW's 6-yr track record due to material restructuring programs before and after the 2016 merger making it tough to
compare on an apples-to-apples basis.
Progressive Price: $73.12
Corporation (1) Telematics, aka “Auto Insurance 2.0,” is a profitability game changer. PGR has a huge lead on the competition to
2 (PGR) Target: $79.00 drive continued EPS beat. (2) Agency distribution increasingly gravitating to insurers who can offer Home + Auto
bundles (3 )Telematics for commercial auto drivers is a huge untapped market.
HOLT® Lens Mkt Cap: $42.6B
Arthur J. Price: $76.96
(1) Non-M&A related hires to add 1.00-1.50 pts of organic growth by 2021 as recent years’ recruits mature into their
Gallagher & Co.
positions. (2) Brokerage facilities offer long-term upside should they be deemed “kosher” by UK regulators. Longer
3 (AJG) Target: $84.00
term, facilities within the US are the next frontier. (3) Best-in-class back-office leadership. Overseas key to continued
efficiency/margin gains.
HOLT® Lens Mkt Cap: $14.1B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
30Financials Doug Harter
douglas.harter@credit-suisse.com
Mortgage Finance (212) 538-5983
Top Outperform
Rank Company Pricing Rationale
Thesis: Following the acquisition of NSM was completed on 7/31, cash flow generation of the combined company
should improve through the use of the DTA. The improved cash flow should allow for the ability to grow the servicing
platform and/or reduce leverage.
Mr. Cooper Group Price: $14.37
Inc Potential Catalysts over next 3-6 months: Any large servicing acquisitions would be additive to earnings power, as
1 (COOP) Target: $22.00 our 2019 numbers only include about $35 billion of smaller additions. Additionally, stabilizing expenses and growing
EBITDA in the Xome segment represents additional upside optionality in the stock.
HOLT® Lens Mkt Cap: $1.3B
Valuation: Our target price for WMIH based on a sum of the parts (10x fully taxed 2019 servicing and Xome
earnings, 6.0x fully taxed 2019 Origination earnings, NPV of DTA, less corporate debt load) as well as traditional
price to book (1.15x BV ex-DTA plus NPV of DTA) and P/E (8.0x 2019 EPS estimate).
Price: $17.37
New Residential We expect NRZ to continue to generate a best-in-class ROE given its attractive business mix between mortgage
(NRZ) servicing rights (MSR) and non-agency mortgaged-backed securities (MBS) with associated call rights. This
2 Target: $20.00
attractive return coupled with favorable book value sensitivity relative to rising rates positions NRZ favorably from a
HOLT® Lens risk/reward standpoint
Mkt Cap: $6.3B
Price: $21.80
Property Trust
Considering its multi-cylinder earnings stream strategy, STWD remains best positioned among peers to take
(STWD)
3 Target: $25.00 advantage of the current environment, as their diversified approach will allow the company to protect earnings and
book value through the commercial real estate cycle, and warrants a premium valuation to book value
HOLT® Lens
Mkt Cap: $5.8B
Note: For changes to Top Picks, please see slides 4-6.
Source: Credit Suisse; Data as of 7-Nov-18
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