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>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch 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. Refer to important disclosures on page 25 to 28. Analyst Certification on Page 24. Price Objective Basis/Risk on page 12. Link to Definitions on page 24.11096507
Global Research Highlights
Signs of risk-on emerge
A little “risk-on” Investors sold the US dollar this week, preferring to step back lightly into “risk” assets like US, EU and Japanese equities, and high yield bonds amid signs that things may not be as bad as they seem. Recent data in the US indicate the economy is tracking toward 2.6% GDP for the third quarter, EU policy makers may face their problems and China may still avoid a hard economic landing. However, warning signs have not completely subsided. LIBOR, the interbank lending rate, continued to climb. The difference between the lowest and highest LIBOR offerings rose to 18.75; the highest level since September 2009 in a sign of just how fragile the EU banking system remains.
The bulls take a stand From a technical perspective, Mary Ann Bartels sees some encouraging signs. She notes that US equity markets are trying to make a bottom, but warns the bottoming process can still take months. One potential positive catalyst is just how oversold the markets remain today. Investors Intelligence, % Bears is the most deeply oversold since early March, 2009. At 45.2% this week, the number can surely go higher, as it did in October, 2008. But this is a contrarian indicator: markets could rally.
Fueled by policy optimism in EU … Policy could be another positive catalyst for the markets. Credit Strategist Hans Mikkelsen writes this week in the Situation Room that EU policy makers may have just had their “TARP” moment that pushes them to finally stop denying the extent of their problems. The Research Investment Committee (RIC) has long argued that markets will stop panicking when policy makers panic. Mikkelsen is of the opinion that headlines will be market positive for now.
… but tempered by policy in the US A draft proposal of the Volcker rule was released this week, making the must read list of everyone in finance. While in early form, and potentially subject to much comment and change, the proposal has four broad implications to financial institutions, according to our financials analyst. The rule could 1) raise their cost of compliance, 2) drive financials to exit certain businesses, 3) widen bid/offer spreads of financial instruments due to lower liquidity, and 4) cause foreign banks to leave the US. See page 7 for comments from analyst Guy Moszkowski.
Odds & ends Savita Subramanian details winners from a proposed tax repatriation bill. Sara Gubins reports on bottoming signs in temporary staffing. Erika Penala reinstates on regional banks. Joe Buckley writes on YUM’s global reach. Robert Ohmes comments on Wal-Mart.
Investment Strategy
Global 14 October 2011
Joseph Zidle +1 646 855 5854 Strategist MLPF&S [email protected] Investment Strategy MLPF&S
Click the image above to watch the video.
Top macro reports of the week
Market Analysis Comment – Mary Ann Bartels 2 Global Equity Volatility Insights – Benjamin Bowler 3 Quantitative Strategy Update – Savita Subramanian 4 Business, Ed. & Professional Services – Sara Gubins 5 Small & Mid Cap Exploration & Prod. – Gil Yang 6 Top industry reports of the week Banks-Multinational/Universal – Guy Moszkowski 7Situation Room – Hans Mikkelsen 8US Regional Banks – L. Erika Penala 10 Top stock reports of the week Yum Brands Inc - BUY – Joseph T. Buckley 11Wal*Mart Stores Inc - BUY – Robert F. Ohmes 12
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Market Analysis Comment Bulls make a stand, but risk is a rally in a downtrend
Credit spreads remain elevated LIBOR-OIS is the difference between LIBOR and the overnight indexed swap (OIS) rates. The spread is a measure of the health within the banking system. For Europe the measure is Euribor-OIS. Widening credit spreads indicate decreasing confidence in global capital markets and suggests increasing risk aversion. This is a market headwind. Euribor-OIS (top) and LIBOR-OIS (bottom)
Source: BofA Merrill Lynch Global Research, Bloomberg
Support and resistance levels Support Levels 1st Support 2nd Support S&P 500 1100-1075 1020-910 DJIA 10600-10400 9700-9400 NASDAQ Comp 2330-2300 2140-2075 Resistance Levels 1st Resistance 2nd Resistance S&P 500 1200-1260 1350-1375 DJIA 11700-12000 12500-12800 NASDAQ Comp 2600-2650 2860-2900 Source: BofA Merrill Lynch Global Research, Bloomberg
Bulls make a stand on test of August low, but … The bulls finally make a stand. Last Tuesday’s low 1075 on the S&P 500 marked a lower volume test of the early August low near 1100, and this is an early sign that the US equity market is trying to form a bottom. This is encouraging, but the risk is that the market has not yet seen the explosion in volume that typically comes with a climactic capitulation. In addition, last Thursday’s and Monday’s 90% up days occurred on lackluster volume. This suggests a lack of conviction from the bulls and likely points to short covering, which is not the recipe for a sustainable rally.
… time is needed to form a base and reverse the downtrend Once a bottom is formed it usually takes several months to complete a bottoming process. This process can involve additional tests and/or undercuts of the 1100 and 1075 area lows. In late October 2008 to early March 2009 the basing process from the climactic low in October for the S&P 500 undercut the prior lows by 10% to 12%, which suggests that a probe into the 985-910 is not ruled out. The 1020 area also remains a key support level. Resistance within a basing process for the S&P 500 is the 1170 to 1235 zone. Additional resistance is 1260.
Positive divergences, but Trip Wires still negative Positive divergences developed on last week’s upside reversal, but this is not enough to move the Trip Wires out of a negative reading. For example, VIM Accumulation and VIM Distribution did not confirm the drop in the equity market early last week, but the Volume Intensity Model has not reversed its negative signal. The Trip Wires suggest more time is needed to form a base.
Sector review: financials remain a market headwind This week we review the ten GIC S&P 500 sector charts and highlight attractive stocks in each sector. The key takeaways are 1) the financials remain a market headwind that has the potential to limit rallies; 2) the market has a defensive postured with higher-yielding mega cap names technically attractive; 3) discretionary and technology, the two sectors most tied to our longer-term outperformance of growth over value theme, remain in strong relative price trends with technology emerging from a decade long base; and 4) the cyclical commodity sectors have found support, but need time to build bases for sustainable rallies.
Levels for the S&P 500 Critical Support: 1100-1075 – a break is likely to escalate the market to the
downside with next support at 1020. A 50% probability remains of 985-910.
Resistance: 1170, then 1200 to 1260
For Full Report Market Analysis Comment: Bulls make a stand, but risk is a rally in a downtrend, dated 10 October 2011
Mary Ann Bartels Technical Research Analyst MLPF&S +1 646 855 0206 [email protected]
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Global Equity Volatility Insights Cheap upside & downside hedges in today’s high vol environment
3m ATM implied and realized vol (weekly change) Implied Realized S&P500 31.8 (-3.3) 34.6 (1.0)ESTX50 35.8 (-2.3) 40.8 (1.5)FTSE 29.2 (-1.7) 31.7 (1.9)NKY 27.0 (0.1) 21.6 (0.4)HSI 36.6 (-0.1) 33.9 (3.9)KOSPI 35.2 (0.2) 39.4 (1.6)EEM US 41.8 (-7.3) 43.9 (0.9)TOP40 32.1 (-0.2) 21.8 (0.1)RDX 53.9 (1.7) 50.0 (5.0)IBOV 34.3 (0.0) 35.6 (0.8)ISE30 40.6 (3.7) 37.8 (0.6)Source: BofA Merrill Lynch Global Research
Global: looking for cheap upside & downside hedges With the VIX trading above 30 for over two months (the longest period since 2008), and threats of both relief rallies and market declines creating paralysis among many investors, we look for ways to cheapen upside and downside hedges across global markets. The key is finding cheap optionality, which provides the confidence to keep investing despite today’s elevated vol environment.
US: four low-cost downside hedges to protect assets into YE We highlight four strategies for efficiently hedging risk in the current high volatility environment that either identify markets least pricing in a tail event or sell expensive volatility to fund hedges. In particular, we see good value in (1) puts on EM ETFs such as Russia (RSX) or Brazil (EWZ), (2) puts on sector ETFs such as Energy (XLE) or Industrials (XLI), (3) year-end SPY zero-cost put spread collars and (4) long Dec-11 / short Mar-12 SPX variance (p. 3 of full report). S&P500 skew came in, implied vol term structure less inverted (p. 5 of full report).
Europe: hedging Q4 risk-asset rally using Euro sector options Given conservative positioning and the strength of recent rallies, investors are likely on the lookout for attractive upside hedges. In reflationary environments, relative performance of cyclical versus defensive sectors can be more predictable than that of country indices. We favor (1) long SXPP vs short SXKP calls (Basic Resources vs Telecoms) that halve the cost of cyclical upside and (2) long 1x2 call spreads on SXAP (Autos), which offer greatest expected upside per unit risk, in our view (p. 5 of full report). Relative to the level of ATM implied vol, ESTX50 skew is not far off the lows in March 2009. Skew could be relatively resilient in the face of further vol declines (p. 11 of full report).
Asia-Pacific: five reasons to buy TWSE calls We believe TWSE calls are an attractive way to position for potential market upside for reasons including investor positioning, fundamentals, and supportive technicals. Selling puts or put spreads can further cheapen the upfront costs by leveraging the historically steep skew (p. 14 of full report). ASX 200 puts are the cheapest globally and are a good proxy to hedge China hard-landing risk. Asian term structures became less inverted (p. 12 of full report).
For Full Report Global Equity Volatility Insights: Cheap upside & downside hedges in today’s high vol environment, dated 11 October 2011
Benjamin Bowler Equity-Linked Analyst MLPF&S +1 415 676 3595 [email protected]
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Quantitative Strategy Update Repatriation impact to US equities
Other research on this topic US Foreign Earnings Reinvestment Act
Repatriation Games
Implications of Tax policy changes on Tech sector
What-ifs for sectors and stocks The Foreign Earnings Reinvestment Act was recently introduced in the US Senate, and if passed, could reduce the tax liability faced by US corporations with retained earnings held abroad, a similar scenario to the last tax repatriation holiday in 2004. We have received many questions on which sectors and stocks would be most likely to see a lift from this program. While the likelihood of the current bill’s passage is uncertain, we examine the effects on US equities if it goes through.
Market impact could be greater than economic impact Based on its survey, our FX team estimates a lower bound of $1.5 trillion in total retained earnings eligible for repatriation, mostly held by larger companies. This represents a sizable portion (about 14%) of the S&P 500 float-adjusted market capitalization. In 2004, repatriation resulted in buybacks and dividends rather than capital expenditure and hiring as the dominant use of excess profits. If that repeats, the economic impact may be minimal. But if share prices remain depressed and interest rates remain low, new buybacks and dividends could have a bigger positive impact on stock prices than in 2004-05, in our opinion. If even a quarter of the estimated capital were used for dividends, the yield of the S&P 500 could triple.
Sectors to watch: Tech, Commodities, Staples, Health Care Tech is the sector that could reap the greatest benefit given its high foreign exposure and high net cash position, in our opinion. Materials, Energy, Health Care and Staples are similarly positioned, and if history is a guide, Health Care, Tech and Staples were sectors with the largest increase in repatriated earnings in 2004 and could be this time. There may be little effect from a tax holiday for sectors like Utilities, Telecom and Financials given their low levels of overseas cash.
Stocks most likely to repatriate We screened the S&P 500 for companies most likely to benefit from a tax holiday based on foreign exposure and cash positions. And we polled our analysts to determine whether there were reasons to include or exclude particular stocks, or whether there were other likely candidates we were missing. About a third of the stocks in our screen are in the Tech sector, consistent with our sector findings. One caveat in interpreting our screen: in 2004, some companies that appeared likely to repatriate a significant portion of earnings did not take advantage of the tax holiday because it either conflicted with their plans to grow operations overseas or they already had fairly low tax rates, and the incremental benefit was negligible.
For Full Report Quantitative Strategy Update: Repatriation impact to US equities, dated 11 October 2011
Savita Subramanian Quantitative Strategist MLPF&S +1 646 855 3878 [email protected]
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Business, Education & Professional Services There’s life on planet staffing
BofAML ratings versus consensus
No. of %
breakdown Ticker BAML Rating Q-R-Q opinions Buy Hold Sell MAN Buy C-1-7 17 65% 35% 0% RECN Buy C-1-7 11 36% 55% 9% RHI Buy C-1-7 17 71% 24% 6% TBI Buy C-1-9 10 70% 30% 0% Source: BofA Merrill Lynch Global Research, Bloomberg
Recent staffing reports Business services: ideas into 3Q earnings (10/12) September US temporary help payrolls better than expected (10/7) Staffing Clock: steady temp help growth in September (10/5) RECN delivers strong 1QF12 (10/5) MAN: employment survey softens (9/13)
Takeaways from the largest US staffing conference We are attending the American Staffing Association’s Staffing World Conference in New Orleans. Attendance is down roughly 5% from last year. We have a few early takeaways from the conference: 1) all of the staffers we spoke with saw a normal seasonal pattern from August to September; 2) increasing pricing is tough in a high unemployment environment; and 3) industrial staffing is holding up more than we expected to hear, while finance and accounting (F&A) was described as more mixed. This is a theme we have heard for some time during the recovery.
Normal seasonal upturn seen post summer Every one of the staffers we asked saw a normal seasonal pickup following August. New orders in October were typically up in the low teens range YoY. The lowest response we had was flat. Sales trends were not a major concern for conference attendees. Staffing executives expressed concern about the stock market, but not recent sales trends. We also note that profitability-focused workshops were better attended than business development sessions.
The illusion of supply creates difficulty raising prices The 9.1% US unemployment rate has two effects on staffing clients. It raises client expectations around candidate quality because “the right person is out there”. At the same time it hurts the perceived value of recruiting because “it’s easy to recruit now”. The reality is that many of the unemployed lack the skills required for open positions. There are many applicants, but few qualified candidates. New account pricing is improving, but moving bill rates at existing accounts remains difficult, according to several staffing salespeople.
Industrial staffing holding up, finance & accounting mixed We expected to hear about ebbing demand from industrial focused staffing firms. Instead, we were pleasantly surprised to hear a more balanced view about demand. “Overfired” was used over and over in describing why industrial clients are still ordering temps. The F&A staffing firms we spoke with talked about new account wins. However, existing customers are not growing “like we were in an economic expansion”. F&A staffing has been the slowest growing specialty in this period. In spite of this, Robert Half (RHI), which specializes in F&A staffing, grew revenue 22% YoY in 2Q11.
Worth hanging on to staffing stocks Headed into 3Q earnings, we maintained 3Q forecasts but lowered FY11 and FY12 and price targets on staffing stocks given increased macro concerns. The tone of our conversations with management teams in September suggested relative stability, though they were understandably somewhat more cautious. However, recent September BLS temp data was encouraging. We still see prospective upside ranging from 20-50% among our coverage staffing stocks, but recognize that macro sentiment remains a key driver for the stocks.
For Full Report Business, Education & Professional Services: There’s life on planet staffing, dated 13 October 2011
Sara Gubins Research Analyst MLPF&S +1 646 855 1961 [email protected]
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Small & Mid Cap Exploration & Production Looking ahead at liquidity; previewing 3Q11
SMID Cap E&P coverage Ticker Rating PO QRQ 3Mth∆ COG BUY 103.00 C-1-7 -4% XEC BUY 125.00 C-1-7 -37% CXO BUY 109.00 C-1-9 -20% CLR BUY 77.00 C-1-9 -27% EQT BUY 66.00 C-1-8 2% FST UNDERPERFORM 15.00 C-3-9 -40% NFX BUY 82.00 C-1-9 -42% PXD BUY 127.00 C-1-7 -25% KWK BUY 15.00 C-1-9 -47% RRC BUY 72.00 C-1-7 7% SD UNDERPERFORM 10.00 C-3-9 -44% SWN UNDERPERFORM 34.00 C-3-9 -22% SM BUY 83.00 C-1-7 -17% WLL BUY 76.00 C-1-9 -39% Source: BofA Merrill Lynch Global Research
BofAML price deck WTI Spot Henry Hub ($/BBL) ($/MMBtu) Q4:11E $88.00 $4.25 FY:11E $94.15 $4.22 FY:12E $102.00 $4.70 FY:13E $94.75 $5.00 Source: BofA Merrill Lynch Global Research
Liquidity is better vs 2008, and should be steady We have looked back at the liquidity available in 2008 versus today and find that bank lines are less drawn (22% vs 34%) and liquidity is higher on average ($1.1bn vs $770mn). Banks generally held borrowing bases constant through the last cycle, suggesting we should not expect significant pressure to come from the banks in this cycle. We stress test liquidity and balance sheets at $70/$4 and find COG and CXO should fare better while FST, SD, KWK and WLL are most at risk.
Possible winners: gassier names generally fare better COG should fare well from strong volume growth (40-50%), keeping debt/EBITDA low and good well productivity that should provide capital flexibility. CXO benefits from a good oil hedge position and substantial liquidity that could likely absorb a modest reduction in cash flow while retaining over $1.5 billion in remaining liquidity.
Stress test points to those most at risk At our $70/$4 stress test scenario, FST, KWK, SD all could reach high debt/EBITDA of 4-5.5x while WLL could exhaust nearly all of its current liquidity. However, we expect KWK to obtain joint venture funding that would likely keep spending within cash sources in 2012. SD is likely to tap the JV, royalty trust or asset sale market to help close its gap. FST may be most at risk with a need to slow spending, while substantial drilling obligations to hold its Eagle Ford acreage may limit the amount of spending directed to other initiatives.
Previewing 3Q results We adjust Q3 EPS and CFPS estimates to reflect actual benchmark prices (-2% oil; +5% gas), revise FY2012 capex estimates for some companies and perform various housekeeping items. Across our coverage the net impact is a 3% increase in our Q3 EPS estimates and 1% decrease in our CFPS estimates. In aggregate, our revised EPS estimates are 11% below the current consensus for Q3 while CFPS estimates are 2% below the consensus. On a YoY basis, we expect Q3 EPS and CFPS growth of 20% each, driven by a 20% increase in production per share, 3% increasing liquids mix and a 12% increase in benchmark prices (commodity weighted).
For Full Report Small & Mid Cap Exploration & Production: Looking ahead at liquidity; previewing 3Q11, dated 13 October 2011
Gil Yang Research Analyst MLPF&S +1 646 855 2558 [email protected]
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Banks-Multinational/Universal Volcker: high compliance costs; potential spread mitigation
The draft describes various activities that qualify as exemptions from Volcker prohibitions (e.g., market making/hedging).
The draft is full of questions to be addressed during the comment period; this implies to us the proposal could change materially.
As written, Merchant Banking does not appear to fall into the trading account definition and, in our view, should be permitted. If so, we would view this as a positive for GS, as Merchant Banking is a big contributor to GS earnings.
Volcker draft proposal published for comment The draft describes various activities that qualify as exemptions from Volcker prohibitions (eg, market making/hedging). Myriad quant metrics used to monitor ongoing compliance suggest to us costs could be significant for banks in our coverage universe, and could negatively impact market liquidity. However, as Euro banks re-size FICC businesses, thereby removing capital from the system, and Volcker limitations potentially result in reduced market liquidity, we believe there may be a potential for some mitigation from long-term secular widening of bid/offer spreads of financial instruments traded by the firms. However, in our view, this potential impact remains uncertain. Hedge/PE fund restrictions discussed in Volcker are more in line with our expectations. The draft is full of questions to be addressed during the comment period; this implies to us the proposal could change materially.
Exemptions for market-making and hedging activities There are several exemptions, or “permitted activities”, with the two principal ones being “bona-fide” market making and hedging. Given the potential difficulty differentiating between hedging/market-making vs. prop activities, the draft includes various criteria banks must adhere to in order for such activities to be considered “permitted” activities. Definitions of the 17 individual metrics for market-making included in the draft appear vague to us, and generally exclude “hard” targets; the draft provides for the determination of appropriate target ranges for individual metrics following an extended two-year trial period.
Merchant Bank activity appears permissible, positive for GS Prop trading, as defined under Volcker, is “engaging as principal for the trading account of a bank entity” in covered financial instruments. The three proposed criteria for determining the “trading account” definition are: 1) Purpose rule, where the account uses trading positions for short-term resale (≤ 60 days); 2) Market Risk rule, where Market Risk capital is held against a position; and 3) Status rule, where the account belongs to a registered broker/dealer, and used for position-taking in registered activities. As written, Merchant Banking does not appear to fall into the trading account definition and, in our view, should be permitted, as the activity is: 1) not short-term in nature (ie, compliant with Purpose rule); 2) a credit related activity (ie, does not require market risk capital); and 3) outside the scope of Status rule (ie, not registered activity). If so, we would view this as a positive for GS, as Merchant Banking is a big contributor to GS earnings.
Restrictions on foreign banks harsher than anticipated Under this Volcker draft, only trades done wholly outside the US by foreign banks (banking entities legally organized outside the US) are excluded from Volker. Specifically, this means: 1) no party of the trade may be a US resident; 2) no trading personnel directly involved may be physically located in the US; and 3) the trade must be wholly executed outside the US. We believe these limitations are harsher on foreign banks than market participants envisaged; this could be a modest positive for US banks in leveling the regulatory playing field.
For Full Report Banks-Multinational/Universal: Volcker: high compliance costs; potential spread mitigation, dated 11 October 2011
Guy Moszkowski, CFA Research Analyst MLPF&S +1 646 855 5004 [email protected]
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Situation Room Has Europe already had its “TARP moment”?
The European Commission statement contains the latest iteration of strong language from a European leader signaling, not only an appreciation of the seriousness of the issues, but also a willingness to act and a sense of urgency.
While we keep highlighting the risk that a “TARP moment” is needed to align the various interests in Europe and force decisive intervention, we wonder if Europe already had its TARP moment.
Under our base scenario, nearly €189bn of new capital will be required to reach a target 9% Core Tier 1 ratio.
Has Europe already had its “TARP moment”? The October 12 European Commission statement titled “A roadmap for stability and growth” contains from President Barroso the latest iteration of strong language from a European leader signaling, not only an appreciation of the seriousness of the issues, but also a willingness to act and a sense of urgency.
Barosso said, among other things: “Reactive and piecemeal responses to different aspects of the crisis are no longer sufficient. We now need to get ahead of the curve”. He also stressed the need for agreement at the October 23 EU Summit. While we keep highlighting the risk that a “TARP moment”(ie, a major adverse market reaction) is needed to align the various interests in Europe and force decisive intervention, with the recent sharp turn in Europe away from denial we are wondering if Europe already had its TARP moment.
Perhaps the succession of events from contagion to Italy and Spain, the following quickly mark-to-market of sovereign exposure in French bank stocks, to funding pressures and the collapse of Dexia combined as the “TARP moment”.
Count us as skeptics but we maintain our tactical long trade in CDX.IG as headlines are more likely to continue to be market-positive for now.
Hans Mikkelsen (p. 4 of full report)
Capital assessment. The European Commission put out a press release recommending various steps toward a resolution of the current crisis in Europe. A key suggestion is to strengthen European banks “using a temporary significantly higher capital ratio of highest quality capital after accounting for exposure”. Media reports had also suggested that European authorities may require banks to raise their Core Tier1 (CT1) capital ratio to 9%, even after accounting for writedowns on their sovereign debt holdings.
Here we calculate the amount of capital that may be required under various assumptions of sovereign debt haircuts and target CT1 ratios for the recently stress-tested banks. Under our base scenario, nearly €189bn of new capital will be required to reach a target 9% CT1 ratio. Banks in peripheral countries will require the highest amount of capital, and recapitalizing them will have a negative effect on the sovereigns’ finances – posing a challenge to the plan.
Anurag Bhardwaj (p. 4 of full report)
For Full Report Situation Room: Has Europe already had its “TARP moment”?, dated 12 October 2011
Hans Mikkelsen Credit Strategist MLPF&S +1 646 855 6468 [email protected]
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US Regional Banks Reinstating large regional banks: Finding the sweet spot
More bullish on large regionals Price Current
Ticker Rating Opinion Objective Price
BBT B-2-7 NEUTRAL $23.00 $22.06PNC A-1-7 BUY $62.00 $50.14STI B-2-7 NEUTRAL $20.00 $18.58USB A-1-7 BUY $28.00 $24.12WFC B-1-7 BUY $33.00 $26.09
CMA B-1-7 BUY $33.00 $25.42FITB B-1-7 BUY $15.00 $10.92HBAN C-1-7 BUY $7.00 $5.24KEY B-2-7 NEUTRAL $7.00 $6.57MTB B-1-7 BUY $90.00 $73.51RF B-1-7 BUY $5.75 $3.57ZION C-2-7 NEUTRAL $18.00 $16.59
ASBC B-3-7 UNDERPERFORM $10.00 $10.35BOH A-3-7 UNDERPERFORM $39.00 $38.04BKU C-1-7 BUY $35.00 $21.03CBSH A-3-7 UNDERPERFORM $35.00 $37.26CYN B-2-7 NEUTRAL $48.00 $40.91FHN B-2-7 NEUTRAL $7.00 $6.40SBNY A-1-9 BUY $62.00 $51.30SNV C-2-7 NEUTRAL $1.50 $1.17TCB B-3-7 UNDERPERFORM $10.00 $10.26
SMID Regionals (<$50bn in assets)
New Coverage Universe
Large Regionals (>$50bn in assets)
Source: BofA Merrill Lynch Global Research, Bloomberg
Still selective, but prefer large regionals over smids We are reinstating coverage of Wells Fargo (WFC), US Bancorp (USB), PNC (PNC), BB&T (BBT), and SunTrust (STI). Cyclical and structural issues are clearly continuing to cloud the EPS and return outlook for banks. This said, there is far more capital in the system and far less credit loss left to recognize vs. in March ’08, and we do not believe our new coverage should mirror those trough valuation levels (1.1x TBV). Though we still believe individual stock picking is key, we generally prefer the large regional names over the smid banks against this challenging backdrop, due to more compelling valuation relative to EPS power and return potential. Even with M&A activity at a pause, the smid banks are still trading at material premium (12.8x ’12E, 1.28x TBV) over the large regional banks (8.9x ’12E, 0.95x TBV) on both earnings and tangible book.
Top picks: Buy Wells Fargo, PNC Within our new coverage universe, our top picks are WFC and PNC, both trading at just 0.2x above their March ’09 trough TBV. For WFC, the market appears to be mispricing its ability to support EPS generation near-term, as well as its long-term EPS power and capital return potential. PNC is another top pick and we believe its lending revenues will be more defensible that the market believes. Moreover, it will not likely need to raise capital for RBC USA or Basel 3 compliance.
Valuation: mostly clearing higher value hurdles In order to discern “real value,” we have set higher valuation bars for our new coverage universe. At median, we find our new coverage fairly valued at 10x ’12E and 1.3x ’11TBV – well below long-term historical averages. We have changed our methodology and have weighed our DCF factor (the highest implied upside) less than P/E and P/TBV, given what we view to be a slow march to more “normal” payout levels.
Lending revenues may be more defensible than meets the eye We project lending revenues to grow 1.5% annually through ’12 for our new coverage. Clearly, lending margins will be under pressure, although we view related compression at WFC and PNC to be more manageable than the market believes. Loan growth likely will remain anemic. But, large corporate demand appears to be healing more quickly than middle market, and a lack of a jumbo secondary market and lower conforming limits could increase residential real estate (RE) on-balance sheet retention. On a relative basis, our new coverage universe should benefit more meaningfully from these trends.
Tail risk in residential real estate, home equity baked in Credit quality is healing, but recovery in residential RE and home equity likely will lag. For WFC, PNC, USB, BBT, and STI, we forecast a slow recovery in first mortgage losses and flat-to-up losses in home equity. Moreover for BBT and STI, we accounted for incremental impairment upon resolution of their impaired loan book. And yet, we did not find any Underperform ratings in this group.
For Full Report US Regional Banks: Reinstating large regional banks: Finding the sweet spot, dated 11 October 2011
L. Erika Penala Research Analyst MLPF&S +1 646 855 1584 [email protected]
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Yum Brands Inc — BUY Takeaways From Yum Visit
Stock Data Price US$51.88 Price Objective US$66.00 Date Established 14-Jul-2011 Investment Opinion B-1-7 Volatility Risk MEDIUM 52-Week Range US$46.27-57.75 Mrkt Val / Shares Out (mn) US$25,019 / 482.3 BofAML Ticker / Exchange YUM / NYS Bloomberg / Reuters YUM US / YUM.N ROE (2011E) 71.8% Total Dbt to Cap (Sep-2011A) 90.8% Est. 5-Yr EPS / DPS Growth 12.0% / 12.0%
Quarterly Earnings Estimates 2010 2011 Q1 0.59A 0.63A Q2 0.58A 0.66A Q3 0.73A 0.83A Q4 0.63A 0.72E
Company Description Louisville-based Yum! Brands, Inc., whose brands
include KFC, Pizza Hut, Taco Bell, Long John Silver's, A&W, WingStreet and East Dawning, is the largest restaurant operator in the world based with >35k stores in more than 100 countries. More than 50% of operating profits are derived from its two int'l divisions: Yum China and Yum Restaurants International (YRI).
More insights into China sales and margins We hosted an investor meeting at Yum’s Louisville headquarters with CEO David Novak and a brief visit from CFO Rick Carucci. Much of the discussion was predictably focused on China. Yum is enjoying an extraordinary sales growth year in China with same store sales in the recently reported 3Q up 19%, including transaction growth of 27%. Year to date same store sales in China are up 17% and total system sales are up 27% (pre FX benefits). Yum expressed optimism about comping up again in 2012 against these difficult comparisons because of growth in relatively new sales layers such as breakfast, delivery and 24-hour operation, as well as higher pricing that will start the year up more than 5% and possibly up effectively in the 7-8% range as value offerings are adjusted from a product composition as opposed to pricing perspective. Yum also noted there is no sign of a hard landing for the Chinese consumer.
China restaurant level margins targeted at 20%+ Restaurant level margins in China will be down year over year in the 4Q and most likely again in early 2012. But Yum defended its 20%+ China margin goal for 2012 and on a sustainable basis. Near-term factors that should help stabilize margins include a recent 2%+ price increase pushing year over year pricing to up 5%; planned modification of value offering products that will effectively boost prices another 2-3% by the end of the 4Q; signs of food cost inflation moderating; the lap of last December’s business tax that penalized margins by 50bp; less year-earlier one-time World Expo contribution; and less impact than the 100bp 3Q margin hit related to staffing for faster expansion.
Reaffirming Buy rating and $66 price objective We continue to rate Yum shares Buy with a $66 price objective based on a sum of the parts P/E valuation methodology that recognizes the growing earnings mix shift toward Yum’s China and Yum Restaurants Int’l (YRI) businesses.
Estimates (Dec)
(US$) 2009A 2010A 2011E 2012E 2013E EPS 2.17 2.53 2.84 3.17 3.52 GAAP EPS 2.22 2.49 2.94 3.27 3.63 EPS Change (YoY) 15.4% 16.6% 12.3% 11.6% 11.0% Consensus EPS (Bloomberg) 2.85 3.19 3.66 DPS 0.76 0.92 1.03 1.15 1.28
Valuation (Dec) 2009A 2010A 2011E 2012E 2013E P/E 23.9x 20.5x 18.3x 16.4x 14.7x GAAP P/E 23.4x 20.8x 17.6x 15.9x 14.3x Dividend Yield 1.5% 1.8% 2.0% 2.2% 2.5% EV / EBITDA 12.8x 11.7x 10.5x 9.4x 8.6x Free Cash Flow Yield 2.4% 4.7% 5.3% 4.8% 5.8%
For Full Report Yum Brands Inc: Takeaways From Yum Visit, dated 12 October 2011
Joseph T. Buckley, CFA Research Analyst MLPF&S +1 646 855 2232 [email protected]
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Wal*Mart Stores Inc — BUY Analyst Day: Old School strategy driving positive US comps
Stock Data Price US$55.20 Price Objective US$65.00 Date Established 18-Feb-2009 Investment Opinion A-1-7 Volatility Risk LOW 52-Week Range US$48.31-57.90 Mrkt Val / Shares Out (mn) US$192,758 / 3,492.0 BofAML Ticker / Exchange WMT / NYS Bloomberg / Reuters WMT US / WMT.N ROE (2012E) 20.4% Total Dbt to Cap (Jul-2011A) 44.5% Est. 5-Yr EPS / DPS Growth 9.0% / 10.7%
Quarterly Earnings Estimates 2011 2012 Q1 0.88A 0.98A Q2 0.97A 1.09A Q3 0.89A 0.95E Q4 1.34A 1.44E
Company Description Wal-Mart Stores is the world's largest retailer
operating retail stores under the formats of Wal-Mart Stores, Supercenters, Neighborhood Markets and SAM'S CLUB locations in the United States. Internationally Wal-Mart also operates locations in several countries, including Argentina, Brazil, Canada, China, Japan, Mexico, and the United Kingdom.
Improving US comps under Old School strategy Following positive WMT US comps in July 2011, positive comp momentum continued into August and September, and we continue to believe sequential improvement in WMT US comps will continue to be supported by Walmart’s Old School strategy given (1) aggressive re-emphasis on EDLP supported by a marketing campaign that highlights WMT’s price match guarantee (including a robust holiday marketing campaign twice as large as last year); (2) a planned $2bn investment in price over the next two years; (3) return to the broadest assortment possible (10k items added back) that continues to support one-stop shopping and basket growth; (4) WMT’s gas 10c rollback program (which was recently extended through December 24) at roughly 1,000 locations; and (5) ongoing expansion of multi-channel efforts. See Top 10 Reasons to Buy WMT.
Sam’s benefiting from merchandising & industry strength Focus on item merchandising (such as offering Apple products) and better leveraging of customer data insights, along with favorable warehouse club industry trends, continue to support improving comp trends for Sam’s, where customer demographics are more favorable (average income $75-80k vs low to mid-$40k at WMT US). Additionally, Sam’s eValues initiative continues supporting solid results. Despite recent membership fee increases from warehouse club competitors and renewal rates at 10-year highs, Sam’s currently has no plans for a membership fee increase.
International growth shifting toward Emerging Markets International remains a key component of Walmart’s growth strategy, with emerging markets driving 90% of international square footage F2013 (up from 76% in F2007). WMT has ambitious goals to raise international op margins and returns over the next five years driven by EDLC/EDLP implementation and better leverage of sourcing, processes and operations across geographies. However, the response to EDLP implementation in Brazil (began January 2011) has been somewhat disappointing and is taking longer than expected. Estimates (Jan)
(US$) 2010A 2011A 2012E 2013E 2014E EPS 3.66 4.07 4.46 4.88 5.26 GAAP EPS 3.70 4.19 4.45 4.88 5.26 EPS Change (YoY) 7.3% 11.2% 9.6% 9.4% 7.8% Consensus EPS (Bloomberg) 4.48 4.89 NA DPS 1.09 1.21 1.46 1.60 1.72
Valuation (Jan) 2010A 2011A 2012E 2013E 2014E P/E 15.1x 13.6x 12.4x 11.3x 10.5x GAAP P/E 14.9x 13.2x 12.4x 11.3x 10.5x Dividend Yield 2.0% 2.2% 2.6% 2.9% 3.1% EV / EBITDA 7.5x 7.1x 6.7x 6.2x 5.8x Free Cash Flow Yield 6.1% 3.7% 5.9% 6.9% 7.8%
For Full Report Wal*Mart Stores Inc: Analyst Day: Old School strategy driving positive U.S. comps, dated 12 October 2011
Robert F. Ohmes, CFA Research Analyst MLPF&S +1 646 855 0078 [email protected]
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Price objective basis & risk
Manpower (MAN, $40.26) Our $60 price objective is based on 16x our 2012 EPS estimate. Our target multiple is slightly below MAN's historical median forward P/E of 19x. Downside risks to our price objective are: 1) a worse economic backdrop than forecast, 2) increased regulation of temporary help or increased flexibility in full-time employment, 3) increased competition from other staffing companies, 4) strengthening in the US dollar, 5) a decline in gross margin due to pricing pressure, and 6) increased regulation of temporary help.
Resources Connection (RECN, $10.68) Our $13 price objective is based on a 20x multiple of our FY13 EPS estimate. Our target multiple is a discount to RECN's historical median forward P/E of 27x. Downside risks to our price objective are: 1) a worsening economic backdrop, 2) a sluggish economic recovery yielding low revenue growth, 3) increases in employee compensation without offsetting increases in bill rates, 4) further acquisitions, 5) reputational risks, and 6) increased competition from accounting firms and staffing companies.
Robert Half International (RHI, $24.17) Our $29 price objective is based on 22x our 2012 EPS estimate. Our target multiple is slightly below RHI's historical median forward P/E of 24x. Downside risks to our price objective are: 1) a faltering economic recovery, 2) slower-than-anticipated demand from small business, 3) increased competition from other staffing companies, 4) a decline in gross margin due to pricing pressure, and 5) increased regulation of temporary help.
TrueBlue (TBI, $12.38) Our $15 price objective is based on 18x our 2012 EPS estimate. Our target multiple is slightly below TBI's 19x historical median forward P/E. Downside risks to our price objective are: 1) a worse economic backdrop than forecast, 2) a decline in revenue from large customers, 3) increased competition among staffing firms, 4) decline in gross margin due to pricing pressure, and 5) increased regulation of temporary help.
Cabot Oil & Gas Corp. (COG) We base our price objective of $103 on the pre-tax Net Asset Value of Cabot's proved reserves and its unproved potential using $87.5/Bbl oil and $5.50/Mcf natural gas prices and a 10% discount rate. We estimate that COG's proved reserves have an NAV of $38/share pre-tax. The COG's unproved potential has an NAV of $99/share pre-tax. Less debt of $9 gives us a NAV/share of $128 net to equity.
Since our NAV is based on the BofAML long-term commodity price deck it represents a fair LT estimate for the value of COG, in our view. However, as we have a guarded near-term view on natural gas, we think it is appropriate to discount our LT NAV by 20% to arrive at our P.O. of $103/share. We base our NAV estimates on our assessment of well costs, flow rates, decline rates, risk and expected ultimate recovery using publicly available data, comparisons to nearby operators and wells, and proprietary analysis.
Risks to our price objective: E&P companies in general are subject to price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific risks that would cause COG not reach our price objective are: Cost inflation, poor results in untested areas of the Marcellus, well interference reducing the number of locations in inventory in the Marcellus, disappointing test results in the Eagle Ford and delays in establishing sufficient pipeline capacity out of the Marcellus Shale.
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Cimarex Energy (XEC) We base our price objective on our estimate of the NAV of the company's proved reserves, combined with the NAV of its unproved resource potential, using $87.5/bbl oil and $5.50/Mcf natural gas prices and a 10% discount rate. We estimate that the NAV of XEC's proved reserves is $49/share and that the NAV of the unproved potential is $85/share. After allowing for debt of $2/share, we arrive at an NAV net to equity of $132/share.
Since our NAV is based on the BofA Merrill Lynch long-term commodity price deck, it represents a fair long-term estimate for the value of the company. However, as we have a more guarded near-term view on natural gas, we believe it is appropriate to discount our long-term NAV by roughly 5% to arrive at our $125 PO.
Our NAV estimates incorporate XEC expectations for well results, as well as historical drilling and performance results for wells drilled by SEC and other operators.
Our assessment of risk is generally conservative and combines probabilities for geologic and commercial success based on similar plays and recent results. E&P companies are subject to price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific risks are: poor exploration results on the Gulf Coast, where success rates are anticipated to be 65%, indications that downspacing in the Cana Shale would be uneconomic, discovery that prospective acreage in the Permian or Cana is more limited than expected or less productive than anticipated.
Concho Resources (CXO) Our $109 price objective is based on our sum-of-the-parts NAV estimate (DCF- 10% WACC: $87.5/Bbl & $5.50/MMBtu) and equates to a 10.1x 2011E EBITDA multiple, a premium to the high-growth peers, reflecting CXO's above-average growth rates, high cash margins, and concentrated exposure to some of the highest rate-of-return drilling projects in our group. Our NAV gives the company risked credit for 75% of its probable and possible reserve potential in South East New Mexico, 75% of probable reserves in the Wolfberry project, and 55% of potential reserves from the Bone Springs.
Risks to our price objective are: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risks, and uncertainty of reserve estimates. Company-specific risks to our price objective are: Concho's concentrated asset base in the Permian Basin increases the potential impact from regional basis blowouts, midstream constraints, and rising oil field service costs. Our valuation reflects significant credit for downspacing potential and potential reserves associated with early stage projects in the Delaware Basin. In both cases, a significant amount of production history and delineation will be necessary to validate our assumptions. As a result, actual results could fall short of our expectations.
Continental Resources, Inc. (CLR) We base our $77 price objective on the pre-tax net asset value we ascribe to the company's proved oil and gas reserves of $29 per share and an NAV of $57 per share we estimate for the portfolio of unproven resources the company has disclosed. We use a price deck of $87.5/Bbl oil and $5.50/Mcf natural gas and a 10% discount rate. From the combined NAV of $86 per share we subtract $5 of net debt per share to arrive at our estimate of $81 per share of NAV net to equity. We believe this is an achievable valuation as we have endeavored to use conservative assumptions on costs, productivity and viability. We also apply a 5% valuation discount for the small float of 18% of shares to arrive at our PO of $77 per share (the remaining shares are held by the chairman and CEO and by trusts established for his family). We base our risking assumptions on well success rates by this and offset operators combined with our expectations for how risks in the play will progress over time.
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Risks to our price objective: E&P companies in general are subject to price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific factors include failure of the company to be able to further improve on IP and EURs for wells in the Bakken, poor results in the Cana southeast extension and inability to reproduce the results to date on the northwest play, decision to sell substantial holdings by the principal shareholder creating an overhang on the stock.
EQT Corporation (EQT) Our $66 price objective is based on our sum of parts NAV estimate (DC-10% WACC: $87.5/Bbl & $5.50/MMBtu) and equates to 10.6x FY11E EBITDAX multiple, a premium to the SMID cap peers. In our view, a premium is justified by EQT's long-lived reserves, significant inventory depth, and sizeable midstream segment. Our NAV calculation gives the company credit for 40% of potential reserves in the PA Marcellus, 25% of potential reserves in W. VA Marcellus, and no credit for non-proved reserves in the Huron/Berea, CBM, or other vertical plyas. Risks to our price objective are: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risks, and uncertainty of reserve estimates. Company-specific risks to our price objective are: (1) Results or disclosure from upcoming wells in the Marcellus could fall short of our expectations. (2) Tax and regulatory changes in the Marcellus could have a greater-than-expected impact on estimates of resource potential, development timelines, and well economics than reflected in our forecast. (3) EQT's concentrated regional asset base increases the potential impact of regional basis issues, midstream constraints, and rising oilfield service costs.
EXCO Resources Inc. (XCO) We have removed the investment opinion on the company's stock. Investors should no longer rely on our previous opinions or price objectives.
Forest Oil Corp. (FST) We base our price objective for FST on our estimate that the NAV of Forest proved reserve base is $28/share and that of the probable and possible resource potential is $22/share. We subtract $12/share of net debt to find an NAV net to equity of $38/share. Our NAV is based on the BofAML long term commodity price deck, and is thus an estimate for the long term fair value of the company. We discount the NAV substantially to account for the lack of visibility of growth given our expectation for poor capital efficiency through 2011. We set our price objective at $15, a 60% discount to the $38 NAV. Our NAV incorporates FST expectations for well results, as well as historical drilling and performance results for wells drilled by Forest and other operators.
E&P companies in general are subject to price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific downside risks include: rising costs in the Eagle Ford and Granite Wash, disappointing step-out drilling in the Granite Wash and Eagle Ford, lower commodity prices prompting banks to lower Forest's undrawn drawn credit line, and slowing growth in response to high costs assets become uneconomic in a weak nat gas environment. At the same time upside risk could come from significant new discoveries in the Permian basin or Granite Wash. improved drilling in the Eagle Ford or Granite Wash, or unexpected asset sales that provide additional fuel for growth.
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Newfield Exploration Co. (NFX) We base our $82 price objective on our estimate of the company's NAV (pre-tax) net to equity, including both proved and resource potential, using a price deck of $87.5/Bbl oil and $5.50/Mcf natural gas and a 10% discount rate. We run well economics based both on company expectations for well costs and performance, as well as our best estimates based on comparable wells drilled by the company and offset operators.
We estimate that the company's proved reserves have an NAV of $59 per share, while the unproved probable and possible resources have an NAV of $61 per share. After subtracting net debt of $17, we arrive at an NAV net to equity holders estimate of $103 per share. In addition, we discount this NAV by 20% to adjust for a negative natural gas environment in the near term, and the conglomerate valuation discount that larger E&P companies tend to receive.
Company-specific risks that may prevent NFX shares from attaining our P.O. are: weather-related delays in the offshore GOM or Asian projects, permitting issues in the Rockies and refinery outages in the Rockies reducing demand for the company's crude oil.
Pioneer Natural Resources Co. (PXD) We base our price objective of $127 per share on PXD's NAV (pre-tax) net to equity including both proved and resource potential. We assume a commodity price deck of $87.5/bbl oil and $5.50/Mcf natural gas prices and a 10% discount rate. We run well economics based both on PXD expectations for well costs, probabilities for geologic and economic success, and performance, as well as our estimates based on comparable wells drilled by PXD and offset operators. We estimate the value of the company's proved reserves to be about $83 per share on a pre-tax basis and $69 per share after accounting for net of debt of $14 per share.
We believe there is an additional $67 per share of NAV in the company's probable and possible resources and $5/sh in drilling carry, according to our analysis. At current trading levels, we believe shareholders are getting this unproved NAV at no cost. Our PO reflects PXD shares trading at 10% discount to NAV, to take account of PXD's natural gas exposure.
Company-specific risks that could prevent PXD shares from attaining our price objective are: failure to sign a new contract to extend the life of the South Coast Gas project, and poor development results or rising costs in Alaska.
Quicksilver Resources Inc. (KWK) Our $15 price objective is based on our sum of parts NAV estimate (DCF-10% WACC: $87.5/Bbl & $5.50/MMBtu) and equates to a 8.3x FY11E EBITDAX multiple, a premium to its SMID Cap peers which we see as justified by KWK's concentrated portfolio of high potential projects. Our NAV calculation gives the company risked credit for 65% for reserve potential in the Barnett Shale, 20% credit for potential reserves in the Horn River Basin, and $350/acre in the S. Alberta Bakken. We assign no credit for potential reserves from the Mancos Shale/Niobrara or the shallow Horn River Oil play.
Risks to our price objective are: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risks, and uncertainty of reserve estimates. Company specific risks to our price objective are: (1) High debt levels coupled with weaker than expected commodity prices could drive downside to our estimates of spending and growth. (2) Results from upcoming exploration wells could fall short of our assumptions. Of these, only the Horn River Basin is reflected in our estimate of net value
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Range Resources Corp. (RRC) We base our price objective for Range Resources on our estimate of the NAV of the company's asset base of proved natural gas and oil reserves combined with the NAV of its unproved resource potential. We estimate that the NAV of Range's proved reserve base is $34/share and that the NAV of the probable and possible resource potential is $58/share. After allowing for per share debt of $12/share we arrive at an NAV net to equity of $80/share. Since our NAV is based on the BofA Merrill Lynch long term commodity price deck it represents a fair long term estimate for the value of the company. However as we have a more guarded near term view on natural gas we feel it is appropriate to discount our long term NAV by 10% to arrive at our PO of $72. Our NAV estimates incorporate company expectations for well results as well as historical drilling and performance results for wells drilled by Range and other operators.
Our assessment of risk is generally conservative and combines probabilities for geologic and commercial success based on similar plays and recent results. Company specific risks that might cause RRC to fail to attain our price target are: adverse environmental regulatory rulings in Pennsylvania, significant cost inflation for services and equipment in Pennsylvania, inability to obtain sufficient equipment to keep on drilling plans in Pennsylvania, delays in pipeline startups causing RRC to miss production goals, poor well results in Appalachian shale test wells
SandRidge Energy (SD) Our $10/share price objective is based sum of parts NAV estimates (DCF -10% WACC: $85/BBl & $5.50/MMBtu) and equates to 11.5x FY11E EBITDAX, a premium to the mid-cap peers. Our estimated NAV assigns risk credit for 25% of potential reserves in the Permian Basin and a value of $1.7 billion for reserves and potential divestitures in the horizontal Miss play ($3.60/share). Risk to our price objective: E&P companies in general are subject price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates.
Company specific risks to achieving our price objective are: 1) Well results and divestiture proceeds in the Hz Miss play could undermine our estimates of reserve potential. 2) Covenant violations and other challenges related to the balance sheet could undermine the development/growth assumptions in our valuation and 3) divestiture activity could result in proceeds not reflected in our estimates of net asset value
SM Energy (SM) Our $83 price objective is based on our sum-of-parts NAV estimate (DCF- 10% WACC: $87.5/Bbl & $5.50/MMBtu) and equates to a 6.0x FY12E EBITDAX multiple. Our NAV reflects risked credit for 65% of potential reserves in the Permian Basin and an average of 40% of potential reserves from emerging unconventional projects (Eagleford the largest at 50%). Risks to our price objectives are: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risks, and uncertainty of reserve estimates.
Company-specific risks to our price objective are: (1) Our valuation reflects significant credit for the Eagleford Shale. Well performance and development timelines could fall short of the assumptions in our valuation. (2) Logistical and takeaway capacity constraints in emerging projects could surpass expectations and undermine our intermediate term growth forecasts. (3) A significant portion of the company's capital spending is directed towards early-stage resource plays with minimal performance history. Initial results could vary materially from our assumptions
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Southwestern Energy Corp. (SWN) We base our price objective of $34 for Southwestern on our estimate of the pre-tax NAV net to equity of both proved and unproved resource potential. We run well economics at $87.5/Bbl oil and $5.50/Mcf natural gas prices and a 10% discount rate and use company expectations for well costs and performance as well as our best estimates based on comparable wells drilled by the company and offset operators. We risk these wells based on historical and anticipated success rates for similar fields and offset operators. We estimate that SWN's proved reserves have a pre-tax NAV of $11/share while the probable and possible natural gas projects have an NAV of $41 per share. After adjusting for net debt of $3 per share we arrive at a total pre-tax NAV estimate net to equity of $49 per share. However, we discount this value by 30% to account for the perceived risk associated with the company's strong natural gas production leverage, and relatively modest hedging program.
Comp. specific risks that might cause SWN to exceed our PO are: better than expected well performance in the Fayetteville Shale, earlier than anticipated positive drilling results from New Ventures or New Brunswick, earlier than anticipated monetization of the midstream business or spill over sentiment from turmoil in the Middle East to the shares of North American gas producers. Downside risks: 1) Development drilling erodes well performance, 2) Initial drilling in Western part of Fayetteville acreage proves unsuccessful
Whiting Petroleum Corp. (WLL) We base our $76 price objective for Whiting on the combined Net Asset Value of the company’s proved reserves ($47) and that of its unproved resource potential ($35). We use a price deck of $87.5/Bbl oil and $5.50/Mcf natural gas prices and a 10% discount rate to run our NAV calculations. We risk the unproved resource potential based on reasonable estimates of probability of success and commerciality for this and similar fields. At the same time, we have taken a conservative approach to our risking such that our PO does not represent a full valuation for the company’s assets. We deduct $6 in net debt to arrive at NAV net to equity of $76. Since the bulk of Whitings asset and production is oil, we set our PO equal to the NAV net to equity holders.
Company-specific risks that could prevent WLL shares from achieving our PO are failure of the EOR projects in North Ward Estes and Postle to deliver expected volumes on budget, disappointing drilling in the Sanish Three Forks, disappointing drilling in the Lewis and Clark field
Associated Banc-Corp (ASBC) We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $10 price objective and assign a 0.9x multiple to 2011E TBV and a 10x P/E multiple on 2012E EPS both of which are slightly below peers. Our DCF assumes a two-stage cost of capital of 11.2% and 10.6% and a terminal growth rate of 5%. Upside risks to our underperform rating and price objective are the successful challenge of the Durbin amendment and a less onerous residential RE cycle. Downside risks are a double dip in housing prices and deteriorating rental income for commercial properties.
Bank of Hawaii Corp. (BOH) We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $39 PO and assign a 2.0x multiple to 2011E TBV, representing a premium to peers of 1.0x, which we believe is appropriate given a stronger profitability and capital profile and no dilution risk from a TARP-related capital issuance. Our 11x multiple on 2012E EPS is in line with the peer median of 11x. Our DCF assumes a two-stage cost of capital of 10.2% and 9.9% and a terminal growth rate of 3%.
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Upside / downside risks to our $39 price objective are a reversal of local economic improvement / deterioration, regulatory headwinds and a longer- / shorter-than-anticipated low rate environment
BankUnited, Inc. (BKU) To arrive at our $35 price objective, we have employed an equal-weighted two-factor valuation methodology that incorporates target P/TBV and a DCF model. For our P/TBV analysis, we have applied a target P/TBV value multiple of 1.5x on our 2011E TBV. We then add the present value of BKU's remaining accretable yield on its loan portfolio, the remaining accretion related to the FDIC indemnification asset, and earnings related to non-accretable yield, each at 1.0x TBV. Our DCF analysis uses a cost of capital of 9.5%, net income growth of 7.5% and a tier 1 leverage ratio of 8% at termination. Unlike for the other regional banks we have under coverage, we did not take into account P/E valuation when determining our price objective as the majority of BKU's current, visible earnings stream comes from the rundown portfolio of a failed bank.
Downside to our $35 price objective are key man risk as CEO Kanas is critical to BKU's expansion plans, as well as an inability to deploy excess capital, increased competition for Florida M&A and an inability to implement an organic growth strategy in New York City.
BB&T Corporation (BBT) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $23 PO and assign a 1.3x multiple to 2011E TBV and 10.0x multiple on 2012E EPS, in line with our target multiples for the median large regional bank under coverage. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our 1.3x multiple on our 2011 TBV estimate is in-line with both the large regional median and BBTs current market multiple, largely reflecting its ROTE potential of 14%. Our 10x EPS multiple is in-line with our median multiple analysis and conservatively below BBTs historical 13x that reflects very high-growth years in the 1990s, a pace unlikely achieved near term given BBTs size as well as the challenging macro backdrop and industry headwinds. Our DCF assumes a two-stage cost of capital of 9.70% and 10.90% and a terminal growth rate of 3.00%.
Risks to our Neutral rating and $23 price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to BBT, risks are enhanced regulatory scrutiny and capital standards as a Domestic SIFI and an announcement of a large, expensive deal.
City National Corp. (CYN) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $48 PO and assign a 1.8x multiple to 2011E TBV and a 11x multiple on 2012E EPS, representing a premium to peer P/TBV median of 1.0x and in line with peer P/E of 11x due to a stronger profitability and capital profile and no dilution risk from TARP capital issuance. Our DCF assumes a two-stage cost of capital of 11.9% and 10.2% and a terminal growth rate of 6%. Upside risks to our price objective are further FDIC assisted deal activity and more meaningful economic recovery.
Downside risks are a double dip in housing prices and deteriorating rental income for commercial properties.
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Comerica Incorporated (CMA) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $33 PO, and assign a 1.1x multiple to 2011E TBV and 11x multiple on 2012E EPS. Our TBV multiple represents a slight discount to peers (1.2x) and our 2011E TBV reflects estimated dilution from its pending SBIB acquisition. Our P/E multiple is in-line with peers (11x), reflecting EPS growth that is less dependent on credit leverage. Our DCF assumes a two-stage cost of capital of 12.25% and 10.5% and a terminal growth rate of 5% and Tier 1 common of 8% at termination. Downside risks to our PO are an unsuccessful integration of its pending SBIB acquisition, the announcement of another deal and a Fed on hold longer than expected.
Commerce Bancshares Inc. (CBSH) We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $35 PO and assign a 1.5x multiple to 2011E TBV, representing a premium to peers given higher-quality earnings and capital position. Our 11x multiple on 2012E EPS is in line with the peer median. Our DCF assumes a two-stage cost of capital of 9.2% and 9.3% and a terminal growth rate of 4%.
Downside risks to our $35 price objective are regulatory headwinds, a longer-than-anticipated low rate environment and a double-dip in housing prices. Upside risks are a stronger than economic rebound, better than expected capital distribution and a potential takeout above our price objective.
Fifth Third Bank (FITB) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $15 PO and assign a 1.3x multiple to 2011E TBV and 11x multiple on 2012E EPS. Our TBV is at a slight premium to peers (1.2x), which we view reflects FITB's above peer ROTE potential. We believe FITB should trade at 12x forward earnings, or at a 1x premium to the group, given superior pre-tax, pre-provision EPS growth, but discount our P/E multiple 1x due to uncertainty regarding the SEC's investigation into FITB's commercial loans. Our DCF assumes a two-stage cost of capital of 16.7% and 11% and a terminal growth rate of 5.5% and Tier 1 common of 8% at termination.
Downside risks to our PO are expensive M&A, a Fed on hold longer than expected and an unfavorable resolution to the SEC inquiry
First Horizon National Corp. (FHN) We use a three-prong valuation framework (P/E, P/TBV, DCF) to arrive at our $7 price objective and assign a 0.9 x multiple to 2011E TBV and a 9.0x multiple to 2012E EPS, compared to our peer median multiples of 1.2x and 11x, respectively. Our P/TBV target reflects our expectation that FHN does not earn its cost of equity until 2014, while our P/E multiple is below peers. Our DCF assumes a two-stage cost of capital of 12.0% and 11.1% and a terminal growth rate of 4%.
Downside risks to our price objective are a double dip in home prices, greater than expected dilution from TARP repayment, slower residential real estate recovery.
Huntington Bancshares Inc. (HBAN) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $7.00 and assign a 1.2x multiple to 2011E TBV and a 11x multiple on 12E EPS versus peer multiples of 1.2x and 11x respectively and below historical multiples. We believe HBAN is unlikely to recover due to more stringent capital standards and negative fee income impact of pending regulatory reform. Our DCF analysis uses a cost of equity of 15.7% in the first stage and 11.6% in the second stage, and a terminal growth rate of 5.5%.
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Risks to our price objective are an inability to offset regulatory fee income headwinds, a double dip in housing prices. Other risks are an inability to return capital to shareholders in a timely fashion or overpaying for an acquisition target.
Key Corp (KEY) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $7.00 PO and assign a 0.8x multiple to 2011E TBV and 9x multiple on 2012E EPS. Our P/TBV target is discounted to peers (1.2x), as our estimates imply that KEY will be unable to earn its cost of equity until 2014. We believe KEY deserves to trade at 9x forward earnings, a slight discount to its historical multiple of 11.2x and the group due to lower earnings growth prospects. Our DCF assumes a two-stage cost of capital of 14.1% and 10.9% and a terminal growth rate of 4% and Tier 1 common of 8% at termination.
Downside risks to our PO are the announcement of expensive deals, inability to maximize balance sheet efficiency and a double dip in home prices.
M&T Bank (MTB) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $90 PO and assign a 2.4x multiple to 2011E TBV and 12x multiple on 2012E EPS, representing a premium to peer target multiples of 1.2x and 11x, respectively due to a superior profitability profile. Our P/E multiple reflects a 1x discount to account for dilution risk from a potential equity issuance. Our DCF assumes a two-stage cost of capital of 11.05% and 9.5% and a terminal growth rate of 3.5% and Tier 1 common of 8% at termination. Downside risks to our PO are a larger than expected common equity issuance, greater than expected attrition from WL's wealth management arm, and a Fed on hold longer than expected.
Regions Financial (RF) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $5.75 PO and assign a 0.9x multiple to 2011E TBV and 10x multiple on 2012E EPS. Our estimates imply RF will generate ROTEs of 13% in 2013-2014. However, our TBV target is at a discount to peers (0.9x), as RF will lag peers in returning to normalized earnings. We believe RF deserves to trade at 11x forward earnings, and we discount our multiple 1x to account for possible TARP dilution as well as above-peer vulnerability to regulatory reform and headline risk. Our DCF assumes a two-stage cost of capital of 13.6% and 10.4% and a terminal growth rate of 4% and Tier 1 common of 8% at termination.
Downside risks to our PO are greater-than-expected dilution from a common equity issuance related to TARP, a slower-than-expected credit recovery, and the Fed on hold for a longer period of time
Signature Bank (SBNY) We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $62 PO and assign a 2.3x multiple to 2012E TBV representing a premium to peers of 1.1x we believe is appropriate given a stronger profitability and capital profile, and above peer growth prospects. Our 14x multiple on 12E represents a 3x premium to the peer median of 11x. Our DCF assumes a two-stage cost of capital of 8.65% and 10.35% and a terminal growth rate of 4.0%. Risks to our Buy rating and $64 price objective are required provisioning at higher than forecast levels, further deterioration in rental income for commercial properties, and a longer than anticipated low rate environment.
SunTrust Banks, Inc. (STI) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $20 PO, assigning a 0.8x multiple to 2011E TBV and 9.5x multiple on 2012E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
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Our 0.8x TBV multiple represents a 0.5x discount to our median multiple, but we believe this is justified due to STIs lower returns on tangible equity (ROTE of 10% throughout our forecast period, versus 12% for peers) and because we believe it will be unable to earn its cost of capital until 2013. Our 9.5x EPS multiple is a 0.5x discount to our median multiple. We believe this is justified due to slower PPNR growth and greater exposure to mortgage putback risk. Our DCF assumes a two-stage cost of capital of 11.9% and 12.1% and a terminal growth rate of 3%.
Risks to our Buy rating and $20 price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to STI, risks are enhanced regulatory scrutiny and capital standards as a Domestic SIFI, mortgage putback risk and failure to meet its expense reduction goals.
Synovus Financial Corp. (SNV) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $1.50 price objective and assign a 0.8x multiple to 2011E TBV, below the peer median multiple and reflective of our estimate of true TBV and the expectation that SNV does not earn its cost of capital. We place a 8.0x multiple on 2012E EPS, representing a 3x discount to a peer median multiple, reflective of dilution risk from TARP redemption and EPS headwinds. Our DCF assumes a two-stage cost of capital of 13.3% and 11.5%, and a terminal growth rate of 4%. Downside risks to our price objective are a double-dip in home prices, greater-than- expected TARP repayment dilution, and a takeout price that is lower than where the stock is trading today.
Upside risks to our price objective are a quicker recovery in credit than we are expecting and SNV being acquired above our price objective.
TCF Financial Corp. (TCB) We expect credit headwinds and sluggish lending revenue potential to drive EPS meaningfully below consensus in 2011. Outsized exposure to regulatory reform calls for a valuation discount to peers, in our view. We use an equal weighted, three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $10. We assigned a 1.2x multiple to 11E TBV and a 10x multiple on 12E EPS, representing an in-line view with peer P/TBV of 1.2x and a slight discount to peer P/E of 11x. Our DCF assumes a two-stage cost of capital of 12.6% and 10.8% and a terminal growth rate of 3%.
Upside risks to our $10 price objective are: 1) a successful challenge of the Durbin Amendment benefitting fee income expectations and 2) a less onerous residential real estate cycle favorably benefiting credit provision forecasts. Downside risks are a double dip in home prices and a prolonged low rate environment.
The PNC Financial Services Group, Inc. (PNC) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $62 PO and assign a 1.3x multiple to 2011E TBV and 10.0x multiple on 2012E EPS, in line with target multiples for the median large regional bank under coverage. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our 1.3x multiple on our 2011 TBV estimate is in-line with the large regional median above its market multiple of 1.1x as we believe the market is under-appreciating ROTE potential even when normalized to exclude the impact of reserve release. Our 10x EPS multiple is in-line with our median multiple analysis and below PNCs historical 13x. A superior profitability profile suggests an above peer multiple- however, a challenging macro backdrop and specific industry headwinds restrains our P/E target. Our DCF assumes a two-stage cost of capital of 9.57% and 11.19% and a terminal growth rate of 3.75%.
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Risks to our Buy rating and $62 PO are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to PNC, risks are enhanced regulatory scrutiny and capital standards, a potential common equity issuance for the RBC USA acquisition, unsuccessful RBC USA integration, and the announcement of a large expensive deal that could weigh on stock price.
U.S. Bancorp (USB) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $28 PO, assigning a 2.2x multiple to 2011E TBV and 11x multiple on 2012E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our 2.2x TBV multiple represents a 0.9x premium to our median multiple, but in our view this is justified by USBs far superior ROTE potential of 21% versus 12% median for peers. Our 11x P/E multiple represents a 1x premium to our target multiple on median large regional banks under coverage, which accounts for USBs higher growth payments business. Our 11x P/E multiple is a blended P/E of 10x on USBs traditional bank earnings and 14x multiple on earnings from its payment businesses. Our DCF assumes a two-stage cost of capital of 9.4% and 10.9% and a terminal growth rate of 3.50%.
Risks to our Buy rating and $28 price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to USB, risks are enhanced regulatory scrutiny and capital standards as a Domestic SIFI and an announcement of a large expensive deal that could weigh on the stock price.
Wells Fargo & Company (WFC) We use a three- factor valuation framework (P/E, P/TBV, DCF) to arrive at our $33 PO, assigning a 1.6x multiple to 2011E TBV and 10x multiple on 2012E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Our 1.6x TBV multiple represents a 0.3x premium to our median multiple, but we believe this is justified due to WFCs superior returns on tangible equity (ROTE consistent at 17% throughout our forecast period, versus 12% for peers). Our 10x EPS multiple is in-line with our median multiple. We believe WFC deserves to trade at a premium due to better earnings growth, but we are assuming WFC trades in-line with peers due to a higher percentage of earnings from mortgage banking and accretable yield, as well as potentially grater regulatory scrutiny as the second largest US depository. Our DCF assumes a two-stage cost of capital of 9.8% and 10.9% and a terminal growth rate of 4.25%.
Risks to our Buy rating and $33 price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to WFC, risks are enhanced regulatory scrutiny and capital standards as a Global SIFI, mortgage putback risk, an expensive foreclosure settlement with the Attorney Generals and the announcement of a large expensive deal that could weigh on stock price.
Zions Bancorp (ZION) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $18 price objective and assign a 1.0x multiple to 2011E TBV, a discount to peers at 1.0x as ZION is not expected to earn its cost of capital through 2014. Our 10x P/E multiple, which we apply on blended 2012E EPS is slightly below the group. Our DCF assumes a two-stage cost of capital of 16.2% and 11.8% and a terminal growth rate of 4.5%. Upside risk to our Neutral rating and price objective are more robust economic recovery and less onerous post cycle reserve requirements. Downside risks are greater-than-expected TARP repayment dilution and a double dip in housing prices.
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Yum Brands Inc (YUM) Our valuation methodology for Yum shares is a sum-of-the-parts approach derived by applying a 30x multiple (in a range of 25x to 35x) to China's earnings (2012 EPS contribution estimated at $1.43, or 45% of total),16x to YRI (2012 contribution estimated at $0.96, or 30% of the total), and 10x to the domestic earnings (2012 EPS estimated at $0.77, or 25% of the total). This valuation approach leads to a $66 price objective.
The primary risk to investing in Yum shares and to our price objective is event risk in China that could penalize near-term results in this key and high multiple part of Yum's business. Also, should China GDP growth weaken more than expected, earnings could be at risk. Another risk is a more inflationary cost environment that will penalize margins. Wal*Mart Stores (WMT) Our $65 price objective is 13-14x P/E multiple on our F13E earnings of $4.88, which is in line with WMT's 2-year forward multiple of the past three and five years of 14x. The premium multiple also reflects an outlook for improving same-store sales, global growth opportunities, a more consistent International profit growth outlook and a high ROIC of 13-14% in F12E vs TGT's 9-10%. Risks are a continued rotation into more discretionary retailing stocks, impact of FX, food & gas deflation, Wal-Mart's longer-term ability to continue gaining incremental market share given its large size, a continued weakening global retailing environment, competitive pressures at Sam's Clubs.
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Link to Definitions Consumer & Retail Click here for definitions of commonly used terms.
Energy Click here for definitions of commonly used terms.
Financials Click here for definitions of commonly used terms.
Industrials Click here for definitions of commonly used terms. Analyst Certification We, Gil Yang, Hans Mikkelsen, Joseph T. Buckley, CFA, L. Erika Penala, Robert F. Ohmes, CFA and Sara Gubins, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
We, Mary Ann Bartels and Savita Subramanian, hereby certify that the views expressed in this research report about securities and issuers accurately reflect our respective models applied in the analysis. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
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Important Disclosures Investment Rating Distribution: Banks Group (as of 01 Oct 2011) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 123 48.05% Buy 63 63.00% Neutral 76 29.69% Neutral 41 65.08% Sell 57 22.27% Sell 27 49.09% Investment Rating Distribution: Business Services Group (as of 01 Oct 2011) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 16 69.57% Buy 11 73.33% Neutral 1 4.35% Neutral 1 100.00% Sell 6 26.09% Sell 2 33.33% Investment Rating Distribution: Energy Group (as of 01 Oct 2011) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 164 57.95% Buy 92 60.93% Neutral 71 25.09% Neutral 32 55.17% Sell 48 16.96% Sell 20 48.78% Investment Rating Distribution: Restaurants Group (as of 01 Oct 2011) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 9 37.50% Buy 6 66.67% Neutral 7 29.17% Neutral 3 42.86% Sell 8 33.33% Sell 6 75.00% Investment Rating Distribution: Retailing Group (as of 01 Oct 2011) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 100 55.56% Buy 31 32.63% Neutral 43 23.89% Neutral 16 39.02% Sell 37 20.56% Sell 14 40.00% Investment Rating Distribution: Global Group (as of 01 Oct 2011) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 2073 54.13% Buy 923 49.12% Neutral 961 25.09% Neutral 460 52.57% Sell 796 20.78% Sell 287 38.32% * Companies in respect of which BofA Merrill Lynch or one of its affiliates has received compensation for investment banking services within the past 12 months. For purposes of this distribution, a stock rated Underperform is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.ml.com, or call 1-800-MERRILL to have them mailed. MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Assoc Banc-Corp, Bank Hawaii Corp, BankUnited,
BB&T, Cabot Oil & Gas, Cimarex, City National, Comerica, Commerce Bancs, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, First Horizon, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Newfield Explor, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., Robert Half Intl, SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, SunTrust Banks, Synovus, TCF, TrueBlue, U.S. Bancorp, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: Assoc Banc-Corp, BankUnited, Cabot Oil & Gas, Concho Resources, Contl Res Inc, Fifth Third, KeyCorp, PNC, Range Resources, SandRidge Energy, Signature Bank, St Mary Land, Wal*Mart Stores.
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The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Assoc Banc-Corp, BankUnited, BB&T, Cabot Oil & Gas, City National, Comerica, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., Robert Half Intl, SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, Synovus, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Assoc Banc-Corp, Bank Hawaii Corp, BankUnited, BB&T, Cabot Oil & Gas, Cimarex, City National, Comerica, Commerce Bancs, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, First Horizon, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Newfield Explor, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., Robert Half Intl, SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, SunTrust Banks, Synovus, TCF, TrueBlue, U.S. Bancorp, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Assoc Banc-Corp, Bank Hawaii Corp, BankUnited, BB&T, Cabot Oil & Gas, Cimarex, City National, Comerica, Commerce Bancs, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, First Horizon, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Newfield Explor, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., Robert Half Intl, SandRidge Energy, Southwestern Egy, St Mary Land, SunTrust Banks, Synovus, TCF, TrueBlue, U.S. Bancorp, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Assoc Banc-Corp, BankUnited, BB&T, Cabot Oil & Gas, City National, Comerica, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., Robert Half Intl, SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, Synovus, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Assoc Banc-Corp, BankUnited, BB&T, Cabot Oil & Gas, Cimarex, City National, Comerica, Commerce Bancs, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, First Horizon, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, SunTrust Banks, TrueBlue, U.S. Bancorp, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 8th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 8th day of a month reflect the ownership position at the end of the second month preceding the date of the report: Cabot Oil & Gas, City National, Comerica, Fifth Third, PNC, Resources Connec., Whiting Petrole, Yum Brands Inc.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Assoc Banc-Corp, Bank Hawaii Corp, BankUnited, BB&T, Cabot Oil & Gas, Cimarex, City National, Comerica, Commerce Bancs, Concho Resources, Contl Res Inc, EQT Corp., EXCO Resources, Fifth Third, First Horizon, Forest Oil, Huntington Banc, KeyCorp, M&T Bank, Manpower, Newfield Explor, Pioneer Nat Res, PNC, Quicksilver Res, Range Resources, Regions Bank, Resources Connec., Robert Half Intl, SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, SunTrust Banks, Synovus, TCF, TrueBlue, U.S. Bancorp, Wal*Mart Stores, Wells Fargo, Whiting Petrole, Yum Brands Inc, Zions.
The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Assoc Banc-Corp, Bank Hawaii Corp, BankUnited, BB&T, City National, Comerica, Commerce Bancs, Concho Resources, EXCO Resources, Fifth Third, First Horizon, Huntington Banc, KeyCorp, M&T Bank, Manpower, Pioneer Nat Res, PNC, Quicksilver Res, Regions Bank, Robert Half Intl, SandRidge Energy, Signature Bank, Southwestern Egy, St Mary Land, SunTrust Banks, Synovus, TCF, TrueBlue, U.S. Bancorp, Wal*Mart Stores, Wells Fargo, Yum Brands Inc, Zions.
BofA Merrill Lynch Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues.
MLPF&S is affiliated with an NYSE Designated Market Maker (DMM) that specializes in one or more securities issued by the subject companies. This affiliated NYSE DMM makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies: Assoc Banc-Corp, BankUnited, BB&T, Forest Oil, M&T Bank, Synovus, Wal*Mart Stores.
Other Important Disclosures
MLPF&S or one of its affiliates has a significant financial interest in the fixed income instruments of the issuer. If this report was issued on or after the 8th day of a month, it reflects a significant financial interest on the last day of the previous month. Reports issued before the 8th day of a month reflect a significant financial interest at the end of the second month preceding the date of the report: BB&T, Forest Oil, Quicksilver Res, Range Resources, SandRidge Energy, St Mary Land, SunTrust Banks, U.S. Bancorp, Wal*Mart Stores, Wells Fargo.
Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments.
BofA Merrill Lynch Global Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf. "BofA Merrill Lynch" includes Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and its affiliates. Investors should contact their BofA
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This research report has been approved for publication and is distributed in the United Kingdom to professional clients and eligible counterparties (as each is defined in the rules of the Financial Services Authority) by Merrill Lynch International and Banc of America Securities Limited (BASL), which are authorized and regulated by the Financial Services Authority and has been approved for publication and is distributed in the United Kingdom to retail clients (as defined in the rules of the Financial Services Authority) by Merrill Lynch International Bank Limited, London Branch, which is authorized by the Central Bank of Ireland and is subject to
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