Global | Equity Strategy December 6, 2017 LN, IVZ and SDR LN, LMT and BA/ LN. Please see analyst...

STRATEGY NOTE

Global | Equity Strategy

December 6, 2017

Equity StrategyJefferies Global Strategy: Battle of Europe vs.US; Not Clear Cut As Expected

EQU

ITY STRATEG

Y GLO

BA

L

+44 (0) 20 7029 8667 [email protected] Gulliver §

Equity Analyst+44 (0) 20 7029 8226 [email protected]

Jeffrey Holford, PhD, ACA *Equity Analyst

(212) 336-7409 [email protected] Houchois §


Justin Jordan §Equity Analyst

+44 (0) 20 7029 8976 [email protected] Kahyaoglu *

Equity Analyst(212) 336-7216 [email protected]

Randal J. Konik *Equity Analyst

(212) 708-2719 [email protected] LaFemina, CFA *


Sandy Morris §Equity Analyst

+44 (0) 20 7029 8111 [email protected] Phillips §


Seth Rosenfeld, CFA §Equity Analyst

+44 (0) 20 7029 8772 [email protected] Usdin *


Stephen Volkmann, CFA *Equity Analyst

(212) 284-2031 [email protected] Wissink *


* Jefferies LLC § Jefferies International Limited

|| Jefferies Hong Kong Limited

^Prior trading day's closing price unlessotherwise noted.

Key TakeawayAlthough not King Kong vs. Godzilla, we examined the battle between US &Europe for investors' funds. Investors have loved Europe YTD, as flows havetopped $100B, while US has seen inflows of $16B. We find relative valuationsof US vs Europe just slightly ahead of averages. And with tax reform boostingearnings for US companies, we think US is cheaper. We found a modestpreference by our analysts for US stocks, and highlight 34 ideas across 15industries.

Where to go in 2018—Europe is only slightly cheaper than US: Since the marketlows back in 2009, the US has smoked the European benchmarks and even in 2017, the UShas won in both large and small caps. Given the underperformance by Europe, investorsbelieve a game of catch up might be in store. In fact, European equities have seen inflowsof over $100 billion year to date, versus a measly $16 billion for the US. However, whenwe looked at the relative valuations today versus where they stand historically,it was not clear to us that Europe is all that cheap. When we add in the fact thatearnings estimates now need to rise for US companies due to tax cuts, the US clearly looksbetter to us.

Absolute levels say stocks are expensive, PERIOD: We really don't see great bargainsin any market right now with the US trading at 18.2x and 14% above its average and Europeat 15.1x, 10% ahead of the average. US small caps are the extreme at 21.6x, while Europe isa bit better at 17x and "just" 17.4% above its long-term average.On a relative basis, yes, the US trades at premiums on all six measures we looked at;however, three of the six are only marginally higher. Again, US small is more expensive thanEurope with the relative forward P/E 17% above average.

Under blue sky scenario, large & small get cheaper but still above averages:Tax reform is now likely to happen in the US and we've estimated earnings impact. We notethat this is the blue sky scenario. With that said, small-cap earnings growth for 2018 movesfrom 22% to an amazing 48% and large goes from 10% to 23%. This drops the S&P 500'smultiple to 16.2x, which is still above the 20-year average. Small moves from 21.6x to 17.7xand still above its norm.At least purely on valuations, a number of sectors look better in Europe...A few groups did pop out at us with Europe looking better in Consumer Services, Energy,Financials, and Basics. The US looked better in Staples and Consumer Goods along withIndustrials. Of course tax reform does change the picture for a few of these sectorswith Financials now trading below average on P/E along with the Consumergroups.

When asked to compare two stocks across the regions and to express apreference when possible, in seven out of the 13 "clear" cases, the analystschose a US stock over a European/UK stock. Merely comparing headline valuationnumbers for indexes and sectors glosses over many important differences, but whencomparing the intricacies of comparable names, Jefferies analysts, in this exercise at least,showed a slight preference for the US stock despite the fact that headline valuationsare higher for the US. Indeed, that may be behind the US' continued outperformance--collectively better fundamentals. Also, of course, US names generally have more to gainfrom reform but given that details on reform are yet to be finalized, it's more of an upsidedriver for US names than something that was critical to analysts' stated preferences.

Clear preferences expressed in this report include: RDSA NA over XOM, GPS overHMB SS, CMCSA over BT/A LN, KMT over SAND SS, EL over OR FP, ROG SW over MRK, BAover AIR FP, BAC over BARC LN, BMW GR over GM, AHT LN over URI, PX & LIN GR over AI FP& APD and KGF LN over LOW. Other stocks discussed include: STLD and VOE AV, FCX andANTO LN, IVZ and SDR LN, LMT and BA/ LN.

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 29 to 35 of this report.

Jefferies Equity Research * Equity Analyst

(888) JEFFERIES [email protected]

Jefferies Global Strategy * Equity Research Team

(212) 284-2300 [email protected]

Marchel Alexandrovich § European Economist

+44 (0) 20 7898 7344 [email protected]

Sean Darby || Chief Global Equity Strategist

+852 3743 8073 [email protected]

Steven G. DeSanctis, CFA * Equity Strategist


Ward McCarthy * US Economist


David Owen § European Economist

+44 (0) 20 7898 7317 [email protected]

Laurence Alexander, CFA * Equity Analyst


Daniel Binder, CFA * Equity Analyst


Martin Deboo § Equity Analyst

+44 (0) 20 7029 8670 [email protected]

Jerry Dellis § Equity Analyst

+44 (0) 20 7029 8517 [email protected]

Joseph Dickerson § Equity Analyst

+44 (0) 20 7029 8309 [email protected]

Phil Dobbin § Equity Analyst

+44 (0) 20 7029 8478 [email protected]

Daniel T. Fannon * Equity Analyst


Jason Gammel § Equity Analyst

+44 (0) 20 7029 8709 [email protected]

Scott Goldman * Equity Analyst


James Grzinic § Equity Analyst

+44 (0) 20 7029 8667 [email protected]

Caroline Gulliver § Equity Analyst

+44 (0) 20 7029 8226 [email protected]

Jeffrey Holford, PhD, ACA * Equity Analyst


Philippe Houchois § Equity Analyst

+44 (0) 20 7029 8983 [email protected]

Justin Jordan § Equity Analyst

+44 (0) 20 7029 8976 [email protected]

Sheila Kahyaoglu * Equity Analyst


Randal J. Konik * Equity Analyst


Christopher LaFemina, CFA * Equity Analyst


Sandy Morris § Equity Analyst

+44 (0) 20 7029 8111 [email protected]

Graham Phillips § Equity Analyst

+44 (0) 20 7029 8346 [email protected]

Seth Rosenfeld, CFA § Equity Analyst

+44 (0) 20 7029 8772 [email protected]

Ken Usdin * Equity Analyst


Stephen Volkmann, CFA * Equity Analyst


Stephanie Wissink * Equity Analyst


* Jefferies LLC § Jefferies International Limited || Jefferies Hong Kong Limited

^Prior trading day's closing price unless otherwise noted.

Where Do You Want To Invest In ’18—

The Good Old USA Or Europe? Not to say that the United States is not a beautiful country but investors may want to do a

bit of globetrotting, as the US equity markets have repeatedly reached new all-time highs

and valuations are looking full and downright expensive down the market cap. However,

with tax reform potentially days away from being signed, this could make the US look a

lot cheaper (at least on P/E), as earnings growth should improve dramatically. Europe has

seen its fits and starts over the last several years, but as we will discuss in the Framing of

the Economies section, growth is touching levels not seen in the last 20 years. Europe

could play a game of catch up if earnings growth, revisions, and valuations appear to be

better than that of the US even taking into account tax reform.

We examine the US versus Europe in terms of the overall markets, both large and small, as

well as across the sectors for large caps. Sean Darby, Jefferies Global Strategist, opines on

Europe and believes there are three factors that anchor European equities that will allow

multiples to continue to expand. We looked across the sectors between the two regions

to see what and if any groups really stand out. Last but certainly not least, we asked our

analysts to face off and determine which areas of their coverage are better. In the end, the

analysts present 34 ideas across 15 industries.

Sean Darby—3 Factors Anchor Europe While there were significant worries over European Election populism in 2017, the

‘popular’ trade has been to underweight and go long Europe, Japan or EM. The returns

have been enhanced by a weakening in the dollar versus most currencies. Even worries

over Catalonia separatism or the failed attempt to form a coalition in Germany have not

been able to knock European shares. Indeed, Long Europe, Short Politics has

ultimately been one of the most successful trades of 2017.

European bourses have benefited from base effect in earnings, poor investor positioning

and ongoing surprises in the economic data. Funds flows into European equities have

been strong from 2Q17. Of course, common equity financial valuations have been on the

side of continental Europe all through the past year but it has been the relative spread

versus local government bonds that has been the most compelling. In particular,

European real interest rates have been deeply negative while the ‘convergence’ trade of

Italian and French spreads narrowing versus Bunds has proved to be a tailwind.

Although the fact that the ECB will be still buying bonds and the Fed will be allowing

treasuries to run off in 2018 will help monetary conditions in Europe and valuations are

still on the side of Europe, it is not easy to compare the indices due to the different

weighting of sector constituents and just as importantly the source of revenues.

Optically, the European bourses trade on low P/B but this is reflected in low

ROEs and a heavy weighting in financials.

Europe has been a laggard for quite

some time and investors have been

looking for the region to bounce

back. In fact, over $100 billion have

come into Europe versus a paltry $16

billion into the US.

The US is only slightly more

expensive than Europe even before

tax reform, at least based on forward

P/E.

Equity Strategy

December 6, 2017

page 2 of 35 , Equity Analyst, (888) JEFFERIES, [email protected] Equity Research

Please see important disclosure information on pages 29 - 35 of this report.

Sean would argue that there are three factors that can ‘anchor’ European

equities allowing the multiple to expand. Firstly, as Ireland and Spain showed post

the 2011 sovereign crisis, there has been a willingness to accept painful economic

reforms. The two economies have produced stellar economic growth numbers and strong

equity rallies. In his view France, stands as a reform candidate in 2018. Secondly, the

‘urge to merge’ and consolidate ought to allow ROEs to improve as slack capacity is

reduced. There are signs of a revival in European cross-border M&A. Lastly, the weak euro

is keeping the economies competitive and this mean that deflation fears should ebb in

2018. Producer prices have turned the corner in most countries.

Framing the Economies

Ward McCarthy—Jefferies’ US Fixed Income Economist Economic Growth—with tax reform, the elusive 3%?

The US economy is going well and the growth trajectory is poised to improve with or

without tax reform and relief. Growth in the second and third quarters averaged 3%, and

JEF Economics projects 2.9% in Q4. Ward sees growth accelerating to 2.7% in 2018 due

to the cumulative effects of deregulation, persistent job growth, and an acceleration of

activity in the housing sector.

With tax reform, the US should foster in faster growth with lower corporate tax rates

making the US more competitive in a globalized economy and incentivize in teased

investment activity. Lower taxes for the middle class will provide a gradual lift to

consumer spending as well. JEF Economics current 2018 GDP forecast does not take into

account any boost from tax reform and we would look to raise our GDP forecast 30 to 40

basis points to over 3%.

With the passage of the Senate tax bill, Congress will move on to the next step in the

process which is the reconciliation of the House and Senate versions. We are not out of

the woods yet. It is probable that the weeks will become more chaotic, not less chaotic,

while the House and senate Reconciliation Conference proceeds.

The bottom line on corporate tax reform is that it is not perfect, but it is pretty good.

Despite its imperfections, it will still make the US a more competitive place to do business

and contribute to growth. As for individual tax reform, it is far from being perfect, or even

good at this point. It is too complicated and will not cut taxes for all taxpayers. Rather, it

will likely raise taxes for upper middle class taxpayers in high tax states and, consequently,

have unintended and negative economic consequences in those states, especially in the

housing markets.

Ahoy, Inflation ahead

Accelerated housing due to the depletion of the housing stock in the regions plagued by

hurricanes and wild fires will prompt acceleration in inflation that is driven by the shelter

related component of the indices. Increased demand for labor in the construction sector

will also contribute to faster wage growth and rising price pressure from construction

related materials.

Equity Strategy

December 6, 2017



More hikes ahead

Ward thinks that it is almost a slam dunk that the Fed will raise rates in a few weeks and

then we get to the hard part, which is the transition to a new Fed chair come February. He

sees Powell taking some time in setting his course for the Fed but given an uptick in

inflation, and Ward has penciled in three more hikes in 2018. That puts the Fed Funds rate

at 2.25% by the end of 2018. He also thinks that the 10 year will climb and hit 3% by Q4.

The wild cards—regime change at the Fed

As for the wild cards, they include the transformation of monetary policy from a Janet

Yellen regime to a Jerome Powell regime, although the Fed is likely to implement policy

normalization more aggressively.

David Owen & Marchel Alexandrovich—Jefferies’ European Economists Economic growth strongest in 20 years

The euro area economy is in the midst of its strongest recovery in 20 years, with GDP

growth expected to exceed 2% in both 2017 and 2018. Particularly encouraging for

policymakers is the fact that the recovery is becoming more-broad based, with even the

traditional laggard Italy approaching growth of 1.5%.

Unemployment across the region continues to fall, which will continue to boost

household consumption; the headwinds from tighter fiscal policy are dissipating, and

Germany could well see some pick up in government investment next year as the new

coalition is formed.

Limited inflation in Europe

Much stronger wage growth remains elusive in Europe, which is not surprising given that

outside of Germany, the degree of spare capacity in the labor markets in France, Italy and

Spain still remains substantial. With wage growth likely to remain subdued, core inflation

in the euro area is also likely to stay adrift of where the ECB will want to see it (closer to

1.5-1.6%). This means that any normalization in policy is likely to be a slow and gradual

process.

Rate hikes more of a story in 2019

QE is being stepped down, but the ECB's presence in the market will be boosted through

its reinvestment policy. Rate rises are expected to be a story for 2019, with Draghi aiming

to bring the deposit rate toward zero before he steps down later that year.

Lots of wild cards—Politics in the form of Brexit and Italian elections

Against this positive macroeconomic background, there are potentially very serious

stumbling blocks around politics. If it comes to pass, a disorderly Brexit would do most

damage to the UK, but the rest of the EU will also suffer.

The Italian elections could well produce a messy outcome early next year, and depending

on the coalition formed, could affect market confidence. In Spain, the Catalonia issue will

not be resolved any time soon.

Equity Strategy

December 6, 2017



Steven DeSanctis- US Equity SMID-Cap Strategist

Performance makes case for preferring Europe Steven sees why investors would think a move back to Europe makes sense, as since the

March 2009 lows both US large caps and small caps have trounced their European

counterparts (Charts 1 & 2). Just because one market is doing better than the other does

not mean we need to see a change, however. Since 2009, the S&P 500 has risen 323%

versus the Stoxx Europe 600 at 121%, which translates to an annualized gain of 18%

versus 9.5% for Europe. The European small-cap index has performed much better than

the large caps; however its gain since the bottom comes in at 217% versus 347% for the

Russell 2000. This translates into an annualized difference of over 4% with the Russell

2000 up 18.7% versus 14.1% for the Stoxx Europe Small 200.

Chart 1: The US has trounced Europe since the March 2009 low in large …

Source: Factset; Jefferies

Chart 2: ... And in small caps

Source: FTSE Russell; FactSet; Jefferies

0.6

1.1

1.6

2.1

2.6

3.1

3.6

4.1

Stoxx Europe 600 Index S&P 500

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Stoxx Europe Small 200 Index Russell 2000

Why do investors prefer Europe over

the US? Because it has lagged

significantly from the March 2009

lows with US small posting an

annualized gain of 18.7% and US

large 18%, whereas European Small

has returned 14.1% and large 9.5%.

Equity Strategy

December 6, 2017



Europe has seen quite the turn in flows… Investors have latched onto the idea that Europe does need to play a game of catch up

with the US and Steven has seen a significant shift in equity fund flows. As Sean

highlighted earlier money has been pouring into Europe since late 2016 and fund flows

are positive so far in 2017 (Chart 3). As for the US, we saw an initial rebound after the

presidential election but have stalled out since March 2017 (Chart 4). All totaled since

November 2015, Europe has seen inflows of $34.5 billion, whereas the US has seen

outflows of $26 billion. As for 2017 alone, over $100 billion has come into Europe versus

a measly $16 billion into the US.

Chart 3: Equity Flows into Europe (US$ mn, cumulative).

Source: EPFR; Jefferies

Chart 4: Equity Flows into the United States (US$ mn, cumulative)

Source: EPFR; Jefferies

-80000

-60000

-40000

-20000

0

20000

40000

60000

-120000

-100000

-80000

-60000

-40000

-20000

0

20000

The game of catch up has not been

lost by investors with significant

inflows into Europe this year to the

tune of over $100 billion versus $16

billion into the US.

Equity Strategy

December 6, 2017



…But not big difference in valuations, at least large Equity indexes around the globe are having a very solid year with the US posting strong

gains. Steven thinks this is reflected in valuations but he does not find Europe much

cheaper (Table 1). On a relative basis using six measures, he finds that all are above

average however really only one stands out (Table 2):

The S&P 500 is currently trading at 18.2x, while the Stoxx Euro 600 stands at

15.1x and these are premiums of 14% and 10% versus their long-term averages.

Price to sales is most stretched between the two indexes with the US at a

premium of 40% versus 17% for Europe.

Only two measures are trading at a discount in Europe, the P/E to growth and

price to book. However, P/E to growth is a subjective metric, as the growth rate

used in the calculation tends to be way too high and subjective.

In the end, US large caps trade at a premium to Europe on all measures but

three are very close to their averages and the forward premium on P/E stands at

a slim 2.2%.

Table 1: Stocks are expensive in both Europe and in the US …

S&P 500 Euro Stoxx 600

Valuation Metric Current LT Avg % Diff Current LT Avg % Diff

Trailing P/E (Non Neg) 21.6 18.0 19.9 17.8 15.3 15.8

Forward P/E 18.2 16.0 14.0 15.1 13.7 10.0

Price to Book 3.2 2.9 8.2 2.0 2.0 -3.1

Price to Cash Flow 13.8 11.4 20.9 9.7 8.3 17.2

Price to Sales 2.2 1.6 39.9 1.2 1.0 17.1

P/E to Growth 1.7 1.4 19.8 1.3 1.5 -13.6

Source: FactSet, Jefferies

Table 2: … With the US marginally more expensive in large caps

Large Caps—US vs. Europe

Valuation Metric Current LT Avg % Diff

Trailing P/E (Non Neg) 1.22 1.17 3.6

Forward P/E 1.21 1.17 3.6

Price to Book 1.63 1.46 11.7

Price to Cash Flow 1.41 1.37 3.1

Price to Sales 1.79 1.50 19.5

P/E to Growth 1.33 0.96 38.6

Source: FactSet; Jefferies

European small offers up some bargains When speaking to clients that have a global SMID cap mandate, Steven finds that Europe

is a better place than the US at least in finding cheaper stocks. He put that to the test by

looking at the Russell 2000 and the Stoxx Europe 200 and found the following:

As Steven has spoken about for quite some time, the US small caps are

extremely overpriced in his opinion with the Russell 2000 trading at 21.6x an

aggressive forward earnings growth rate. Of course this is before the benefit of

lower taxes, which we discuss shortly. Small-cap names in Europe trade at a

more reasonable 17.0x, which is about a 17% premium to its 20-year average of

14.4x (Table 3).

Yes the US is more expensive than

Europe but not by a wide margin,

even before tax reform.

Moving down market cap, Steven

does find European small caps much

cheaper than their US counterparts.

Equity Strategy

December 6, 2017



In the US, none of the six metrics are even close to their long-term averages with

the extremes running from an 88% premium to 16% based on price to book. In

Europe, the P/E to growth is below its mean and the price to book stands less

than 6% away from its average. The forward P/E is above its trendline but not by

a “huge” amount at 17%.

On a relative basis, Europe does win out with all measures for the US

substantially more expensive than their long-term means (Table 4). The trailing

P/E and price to book are close, but the relative forward P/E is 17% above its

mean, price to sales 11.6%, and price to cash flow a whopping 50%.

Table 3: US small extremely expensive, Europe just a bit better …

Russell 2000 Stoxx Europe Small 200

Valuation Metric Current LT Avg % Diff Current LT Avg % Diff

Trailing P/E (Non Neg) 23.0 17.4 32.3 17.3 15.0 15.6

Forward P/E 21.6 15.8 37.3 17.0 14.4 17.4

Price to Book 2.3 2.0 16.1 2.0 1.9 5.7

Price to Sales 22.4 15.9 41.0 10.8 8.6 26.3

Price to Cash Flow 2.0 1.1 79.9 1.1 0.9 19.3

P/E to Growth 2.0 1.0 87.7 1.4 1.5 -9.3

Source: FactSet; FTSE Russell; Jefferies

Table 4: … And thus Europe is a better bargain down market cap

Small Caps—US vs. Europe

Valuation Metric Current LT Avg % Diff

Trailing P/E (Non Negative) 1.33 1.16 14.4

Forward P/E 1.28 1.09 16.9

Price to Book 1.15 1.05 9.8

Price to Sales 2.07 1.86 11.6

Price to Cash Flow 1.77 1.17 50.8

P/E to Growth 1.43 0.69 107.0


Tax reform alters trajectory of earnings/lowers P/Es Of course investors need to take into account tax reform in the US, what that will mean to

earnings growth, and how it will lower multiples across size segments and sectors. The

more domestically oriented small caps will get the biggest boost to earnings growth, as

2018’s estimate goes from an unrealistic 21.6% up to over 48%, while large caps moves

from 10% to 23.7% (Table 5). Of course we must make a number of caveats regarding

this simple analysis. First of all, we don’t quite know what the final plan will look like and

thus we did not make any adjustments to account for debt, pass thus, etc. This is the best

case scenario for each size segment and sector.

Just looking at the changes to valuations at the size segments, Steven sees that the

forward P/E for the S&P 500 stands at 18.2x but under the new growth regime it falls to

16.2x and is still above its long-term average (Chart 5). Of course we see the large

reduction in the Russell 2000’s P/E to 17.7x but it is still well above the historical norm.

The relative valuations on just P/E tighten to 1.1x versus 1.2x for large caps, while US

small caps now trade at a slight discount to Europe at 1.0x versus the average of 1.2x

(Chart 6).

Of course tax reform will be a

substantial boost to US company

earnings with small caps getting the

biggest tailwind.

Under our Miami blue sky scenario,

the small-cap earnings growth goes

from 21.8% to 48% when we use a

20% tax rate and for large, 10%

becomes 23%.

The forward P/E would go from

21.6x to 17.7x for small caps and

18.2x to 16.2x. However, these

numbers are both above their long-

term averages.

Equity Strategy

December 6, 2017



Table 5: Lower taxes will really boost small and the domestic groups

Earnings Growth Earnings Growth

Current 20% Current 20%

Large Cap 10.0 23.7 Small Cap 21.6 48.1

Discretionary 6.4 24.6 Discretionary 21.1 46.6

Staples 5.5 20.6 Staples 26.2 56.8

Energy 39.0 68.1 Energy 37.2 55.7

Financials 12.1 33.7 Financials 20.7 52.3

Health Care 5.5 13.7 Health Care 24.7 60.1

Industrials 8.0 23.3 Industrials 15.2 40.3

Info Tech 12.1 16.0 Info Tech 18.4 36.2

Materials 23.1 36.7 Materials 44.5 70.3

Utilities 6.4 29.1 Utilities 11.2 38.3

Source: FTSE Russell; S&P; Jefferies

Chart 5: P/Es fall in the US ...


Chart 6: … And relative multiples move closer to the norm


More bargains in Europe than US across sectors The second-most important item (stocks are number one) when looking at Europe and

the US is which groups look the best inside of their own markets as well as across the two

regions. Steven looked at each of the sectors in the US and Europe over the last 20 years

and compared today’s levels to their averages (Tables 5 & 6). To take into account the

differences in characteristics of each sector, he used relative multiples over this time

frame. He also included adjusted the P/E ratios for the US to take into account higher blue

sky growth rates from the tax cut. Here are a number of key takeaways:

Despite the lagging performance of Discretionary, the group is expensive in

both the US and in Europe but on a relative basis, Europe is cheaper with all of

its metrics below average (Table 7). Of course Discretionary gets a big boost in

earnings according to our calculations due to tax reform. He has the growth rate

rising to from 6.4% to over 20%, thus the P/E moves from 20.8x to 17.8x.

18.2

21.6

15.1

17.016.2

17.716.0 15.8

13.714.4

0.0

5.0

10.0

15.0

20.0

25.0

S&P 500 Russell 2000 Euro Stoxx

600

Euro Stoxx

Small 200

Current 20% Long-Term Avg.

Absolute P/E 1.2

1.11.0

1.3

1.0

1.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Current 20% Long-Term Avg.

Large Small

The better sectors in Europe are:

1. Consumer Services.

2. Energy.

3. Financials.

4. Health Care.

5. Tech?

6. Basics.

7. Utilities.

Only a few sectors look better in the

US:

1. Staples/Consumer Goods.

2. Industrials.

Equity Strategy

December 6, 2017



Safety has been given a premium multiple in both the US and Europe with only

one measure on an absolute basis trading below average in both regions. The

growth rate should rise from about 5% to 20% based on a 20% tax rate and

with that, the group’s P/E falls to 17.2x from 19.7x.

Given the weaker oil price and earnings, Energy and Oil & Gas are not cheap in

either market. However, he would prefer Europe to US based on where relative

valuations stand. Steven is not sure how to handle the adjustments to Energy

with the new tax regime and thus he calculates the new growth rate and PE but

does not feel confident about either of the two.

There has been quite a love affair with Financials even before we really see the

earnings turn up and thus the group is expensive on an absolute basis in both

regions. When push comes to shove, Steven sees that European Financials look

better than those in the US. However, tax reform and deregulation will play a

very significant role for this group. Steven estimates that earnings growth will

move from 12% to 33% based on 20% tax rate and forward P/E heads lower to

12.5x.

Health Care has a few of its measures below average in both the US and in

Europe and here Steven thinks the US is a better bargain. Repatriation of cash

will be a huge deal for the US Health Care names and even the growth moves

up to 13.7% from 5.5%. The forward P/E was already below the average even

without the boost to growth and now we see the multiple standing at 15.6x.

Industrials are flat out expensive across the globe and up and down the market

cap. If investors want to find better values in this sector, the US seems to be

cheaper with four of the five relative measures below average. Even though the

US Industrials have significant overseas exposure, the growth rate runs from 8%

to about 20%, thus lowering the P/E to 16.8x and right in line with the long-

term average.

Tech is a different animal in the US than in Europe but if one is to go on pure

valuations, Europe is the better bargain. He also sees that the sector does not get

a big boost from tax reform, as its growth rate climbs to 16% from 12%,

lowering the P/E to 18.3x from 18.9x.

Equity Strategy

December 6, 2017



Materials and Basics are expensive no matter how you slice the data, but when

compared to each other across the two regions, Europe offers the best discount

with four of five measures below average. Now the Street was already looking

for strong growth by the Materials group in the US and the rate climbs to almost

37% when the tax rate is reduced to 20%. This drives down the P/E to 16.4x and

is now in line with the long-term average.

Defense has been best offense in the US and thus Utilities is extremely expensive,

hence Steven thinks Europe offers a bit better valuations inside of this group.

This is another group where we don’t really know how to handle tax reform and

thus we show the numbers but do not feel confident in drawing any

conclusions.

Table 6: On absolute basis for the large caps, Tele Comm & Health Care look OK, Discretionary and Industrials do not

S&P 500

Absolute Level % Difference from long-term average

GICS Sector

Trailing

P/E

Forward P/E

Price to

Book

Price to

Sales

Price to

Cash

Flow

Trailing

P/E

Forward P/E

Price to

Book

Price to

Sales

Price to

Cash

Flow

Discretionary 22.3 20.8 5.3 1.7 14.3 8.6 15.7 74.0 45.6 17.1

Consumer Staples 21.2 19.7 5.2 1.4 16.2 14.2 15.1 11.0 8.3 17.5

Energy 41.9 26.6 1.9 1.5 10.8 97.0 51.8 -12.2 34.0 35.3

Financials 17.0 15.0 1.5 2.5 NM 9.4 16.4 -14.6 8.6 NM

Health Care 17.7 16.8 3.9 1.9 15.9 -8.3 -4.1 -4.3 -11.9 -0.8

Industrials 20.6 19.2 4.9 1.8 14.1 15.0 18.0 55.9 29.3 19.6

Info Tech 20.9 18.9 5.3 4.4 16.2 -14.3 -9.1 40.8 49.2 3.1

Materials 21.2 18.2 4.1 2.0 12.8 27.3 30.8 88.1 65.5 55.3

Real Estate 19.2 18.2 3.2 7.3 18.9 17.5 19.2 51.9 39.5 19.0

Telecomm Serv 12.9 12.7 2.6 1.5 6.0 -27.9 -23.0 10.2 -12.6 -5.4

Utilities 19.2 18.6 2.0 2.2 8.1 31.2 31.5 23.0 72.9 19.9


Table 7: As for Europe, same groups look cheaper than rest, while Industrials, Cons Goods, and Basics look expensive

Stoxx Euro 600

Absolute Level % Difference from long-term average

GICS Sector

Trailing

P/E

Forward P/E

Price to

Book

Price to

Sales

Price to

Cash

Flow

Trailing

P/E

Forward P/E

Price to

Book

Price to

Sales

Price to

Cash

Flow

Basic materials 15.1 14.4 2.0 1.2 8.9 2.4 11.0 4.9 11.6 15.9

Consumer Goods 17.2 15.9 2.9 1.5 11.4 4.9 8.8 16.6 42.2 22.7

Consumer Services 17.1 15.8 2.8 0.9 10.4 -7.6 -2.8 8.9 14.4 4.9

Financials 13.4 12.1 1.0 1.5 NM 0.7 6.1 -22.0 5.8 NM

Health Care 17.5 16.6 3.5 3.1 14.7 -2.3 0.9 -5.1 6.4 4.0

Industrials 19.7 17.7 2.9 1.2 12.6 22.3 25.0 31.0 50.8 39.6

Oil & Gas 17.4 15.6 1.3 0.8 6.3 37.1 30.0 -31.5 -2.0 1.0

Real Estate 19.7 19.7 1.0 10.5 18.5 -0.9 3.5 2.7 45.9 -0.5

Technology 24.1 21.1 3.1 2.8 19.2 -19.5 -4.3 -27.6 16.9 3.2

Telecomm 17.7 15.5 1.9 1.2 4.8 -12.5 -10.5 4.1 -23.7 -22.7

Utilities 15.1 14.7 1.5 0.7 5.9 9.5 10.5 -14.0 -19.0 -1.1


Equity Strategy

December 6, 2017



Table 8: The battle between the regions leaves us with US Health Care and Industrials, Financials and the Consumer

groups in Europe

US versus Europe

Relative Level % Difference from long-term average

GICS Sector

Trailing

P/E

Forward

P/E

Price

to

Book

Price

to

Sales

Price

to Cash

Flow

Trailing

P/E

Forward

P/E

Price

to

Book

Price to

Sales

Price to

Cash

Flow

Discretionary/Services 1.3 1.3 1.9 1.8 1.4 17.4 19.1 59.8 27.2 11.6

Staples/Goods 1.2 1.2 1.8 0.9 1.4 9.0 5.8 -4.8 -23.9 -4.3

Energy/Oil & Gas 2.4 1.7 1.5 1.8 1.7 43.7 16.8 28.3 36.8 33.9

Financials 1.3 1.2 1.5 1.7 NM 8.6 9.7 9.4 2.7 NM

Health Care 1.0 1.0 1.1 0.6 1.1 -6.2 -5.0 0.9 -17.3 -4.6

Industrials 1.0 1.1 1.7 1.6 1.1 -6.0 -5.6 19.0 -14.3 -14.3

Info Tech 0.9 0.9 1.7 1.6 0.8 6.4 -5.0 94.6 27.6 -0.1

Materials/Basics 1.4 1.3 2.1 1.7 1.4 24.4 17.8 79.4 48.4 33.9

Real Estate 1.0 0.9 3.2 0.7 1.0 18.5 15.2 47.9 -4.4 19.6

Telecomm Serv 0.7 0.8 1.4 1.2 1.3 -17.6 -13.9 5.9 14.5 22.5

Utilities 1.3 1.3 1.4 3.0 1.4 19.8 19.0 43.0 113.5 21.3


Table 9: With higher growth rates, Discretionary, Staples, Financials, Health Care, Industrials, Materials now trade

below their long-term average P/E ratios

2018 Earnings Growth (In %) P/E Scenarios

Under various corporate tax rates

Benchmark/GICS

Current

20%

Current

20%

Long-Term

Avg.

Large Cap 10.0 23.7 18.2 16.2 16.0

Discretionary 6.4 24.6 20.8 17.8 18.0

Staples 5.5 20.6 19.7 17.2 18.7

Energy 39.0 68.1 26.6 22.0 17.4

Financials 12.1 33.7 15.0 12.5 14.1

Health Care 5.5 13.7 16.8 15.6 18.7

Industrials 8.0 23.3 19.2 16.8 16.9

Info Tech 12.1 16.0 18.9 18.3 20.8

Materials 23.1 36.7 18.2 16.4 16.5

Utilities 6.4 29.1 18.6 15.3 15.0


Table 10: We compared P/Es for US and Europe with and without tax

P/E Ratios

Current Tax Adjusted

Sector US Europe US Europe

Discretionary/Services 20.8 15.8 17.8 15.8

Staples/Goods 19.7 15.9 17.2 15.9

Energy/Oil & Gas 26.6 15.6 22.0 15.6

Financials 15.0 12.1 12.5 12.1

Health Care 16.8 16.6 15.6 16.6

Industrials 19.2 17.7 16.8 17.7

Info Tech 18.9 21.1 18.3 21.1

Materials/Basics 18.2 14.4 16.4 14.4

Utilities 18.6 14.7 15.3 14.7


Equity Strategy

December 6, 2017



Analyst Commentary

Jason Gammel – Integrated Oil

Prefer Royal Dutch Shell to ExxonMobil on Valuation and as RDS Has Eliminated Scrip Dividend

ExxonMobil (XOM, Hold, PT: $84) and Royal Dutch Shell (RDS.A, Buy, PT:

$67.90) are the largest integrated oil companies by market capitalization in the US and

Europe, respectively. XOM has historically attracted a premium valuation to RDS and the

integrated oil sector. Since the beginning of 2006, XOM has attracted an average 3.6 turn

advantage to RDS on P/E, or 35% over that period. Similarly, the dividend yield on RDS

has been 2.9pp higher than XOM over the same period. The XOM premium does

dissipate in periods where the market perceives less downside in the oil price. If Jason

excludes 2008/2009 and July 2014-present, then the average ‘normalized’ XOM premium

falls to 2.3 turns on P/E, and similarly the RDS dividend yield is 2.5pp higher.

RDS looks attractive relative to XOM based on P/E. XOM is currently trading at a

21.1x P/E based on consensus forward 12-month estimates, while RDS is

trading on 16.2x. Though the XOM premium has been dissipating since early 2016, it

is still 1.3 turns higher than the historic average and 2.6 turns higher than the premium

excluding the high oil price volatility periods. However, Jason notes that P/E’s remain

elevated and thus the XOM premium of 30% is lower than the historic average.

Jason expects that RDS’s elimination of its scrip dividend effective 4Q17 could

be a catalyst for yield compression relative to XOM. The current yield is 6.6%

(based on consensus forward 12-month estimate), 2.6pp higher than XOM. The full RDS

dividend is being covered with free cash flows in a $50/bbl Brent price environment, and

now that the full dividend is paid in cash we expect that the yield premium will dissipate.

While this will not have a lot to do with the relative payout comparison to XOM, it will

determine fund flows. The 2016 RDS dividend of $15b was the largest declared dividend

in US$. It is 15.6% of the total dividend payout of the FTSE100 (and the largest absolute

dividend of that index) and it will be a difficult underweight for European income

investors now that it is all paid in cash. XOM’s dividend of $12.9b is the largest absolute

dividend in the S&P500, but only represents 2.9% of total dividend payouts for that

index. Jason believes a lower US corporate tax rate would be more beneficial

for XOM than RDS, as XOM has a larger taxable income in the US and RDS has loss

carryforwards in the US that will shield it from paying US cash taxes for several years. That

said, this uplift would not likely be sufficient to change his preference for RDS,

it would simply shrink the XOM premium on cash multiples.

Equity Strategy

December 6, 2017



Exhibit 1: RDS dividend yield vs XOM (pp)

Source: Bloomberg

Exhibit 2: XOM P/E premium to RDS

Source: Bloomberg

Caroline Gulliver & Randy Konik– Dept. Stores & Specialty Softlines

Gap Inc. ~2 P/E Points Cheaper than H&M. Old Navy Comps Better, GPS Sourcing and Omnichannel Superior Randy and Caroline believe that comparing H&M (Gulliver, HMB SS, Hold, PT: 210

SEK) to Gap, Inc. (Konik, GPS, Buy, PT: $41), illuminates the significant upside

potential at GPS. While these two retailers do share some similarities on the surface, they

trade at disparate multiples, with GPS trading at an FY’1 P/E multiple of 13.9x, but H&M

trading at a FY’1 P/E multiple of 16.2x. Despite the discounted multiple, they believe GPS

is significantly better positioned versus H&M on several fronts, particularly with regard to

its Old Navy division. Old Navy accounts for over 70% of GPS profits (and growing), but is

often overlooked within the broader Gap, Inc. umbrella, with the market assigning the

company a multiple that does not adequately reflect the company’s growth opportunity

and fundamental competitive advantages.

They believe the key similarities between H&M and GPS are as follows: 1) Value

credentials, with both retailers focusing on offering a strong value proposition to the

consumer, although they would argue that H&M has ceded its value leadership in Europe

to Primark, while Old Navy continues to lead in the US; 2) Growth opportunity, with Old

Navy targeting sales of $10B over the next few years from $7.1B in FY’18E driven by store

expansion (including international, where they are in the early innings), market share

growth (including a focus on loyalty categories, plus new categories) and the expansion

of online and mobile, while H&M is aiming for 10-15% sales growth annually from a

combination of online growth and new stores in less developed markets.

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Equity Strategy

December 6, 2017



However, Randy and Caroline would argue that GPS (and especially Old Navy)

is better positioned relative to H&M in many regards including: 1) Stronger

current momentum. While H&M’s comps have been negative for roughly two years

and profitability has been eroding as Primark has won value leadership, Old Navy has

been pulling away from the pack with 6 consecutive quarters of positive comps and

improving on its already-robust margins; 2) Speed-to-market. While H&M is known for

its relatively long sourcing model, GPS has successfully translated its size and scale into a

considerable competitive advantage in sourcing, with a significant amount of the

assortment now on a ~2 month lead time. Old Navy is also generally less fashion reliant

than H&M, which further mitigates markdown risk; and 3) Omni-channel

development. This is an area where H&M lags (although they are now making

investments to play catch-up), but GPS excels, having been one of the first to market with

initiatives such as reserve in store and ship from store.

On the tax reform front, Randy also highlights that GPS would be one of the bigger

beneficiaries of a lower corporate tax rate. At 38%, it has one of the higher tax rates

across Randy’s coverage universe, given that 77% of its sales are generated in

the US. Randy believes the company would likely reinvest a portion of these savings

towards continuing to grow their high-margin, high-growth potential vehicles of Old

Navy and Athleta. GPS has historically been an aggressive buyer of its own stock

(although the pace of repurchase has moderated as of late), and could also use this

savings to accelerate the level of buybacks.

Taken together, they prefer GPS to H&M, and note that GPS is also a JEF Franchise Pick.

Randy sees opportunity for both multiple expansion, as the market begins to

take note of the earnings power of the Old Navy division, and upward EPS

revisions. His $41 PT is based on ~18x F'19E EPS and 7.8x EV/EBITDA, slightly ahead of

the peer average and recent history.

Jerry Dellis & Scott Goldman – Telecommunication Services

Prefer Comcast to BT Given Better Growth, Return of Capital, Improving US Regulatory Env’t The relative valuation of the US and EU telecom services sectors has not followed a clear

pattern in recent years. However, at this point in time, multiples are not far apart. With

only limited direct business overlap, the forces that shape the two trading environments,

namely the regulatory environment and competitive market structure, can and do diverge

materially. In Scott and Jerry’s view, these factors favor investment in the US

Telecommunications sector over the European counterparts, though they recommend a

selective approach in both markets. In the US, Scott highlights Buy-rated Comcast

(CMCSA, Buy, PT: $47), which offers attractive growth, margin expansion, and

steady/growing return of capital. Shares are at an attractive entry point given recent cord-

cutting fears, which he believes are overblown, while the FCC’s de-regulatory regime,

including the potential roll-back of net neutrality protections, should benefit the

company. By contrast, Jerry remains cautious on Hold-rated BT (BT/A LN, Hold, PT:

265p) given weak prospects for a return to FCF growth, with a perfect storm of a

tougher consumer environment, lower wholesale and a structural shift in Enterprise.

Further, regulator Ofcom is due to publish a decision on wholesale fiber prices, where any

expectations for a watered down approach are overly optimistic in Jerry’s view.

Equity Strategy

December 6, 2017



Tax reform strengthens Scott’s conviction in US Telco, where savings will likely be

reinvested in the network or in shareholder returns. He suspects Comcast is a

significant beneficiary given his current forecasts for cash taxes to rise in

2017+ (above the 25-30% levels paid in the last few years). Assuming a 20% tax

rate, Scott estimates Comcast would save $1.7bn in ’18, representing a ~14.5% lift to

FCF.

Graham Phillips & Steve Volkmann – Machinery

Prefer Kennametal to Sandvik as Turnaround Boosts Margins and Could Erode SAND Share Steve has continued to highlight the opportunity he sees at Kennametal (KMT, Buy,

PT: $55) regarding their “self-help” actions as well as benefiting from being a shorter-

cycle name as depressed end markets (oil & gas and mining) begin to improve off of

trough levels. There is also a compelling valuation story developing as well, in his view.

KMT’s operating margins over the past decade are nearly half that of their competitive

peer group (Sandvik and ISCAR). Over the past two years under new management the

company has begun to correct these operational missteps and in doing so has improved

operating margins from ~6% in F2016 to a consensus forecast of ~13% for F2018. Still

well below +20% operating margins at Sandvik (SAND SS, Underperform, PT: 120

SEK) and potentially even higher at Berkshire Hathaway portfolio company ISCAR. Steve

believes the next stage of $200-$300M in capital investments over the next three years

aimed at improving productivity and a continued shift toward indirect distribution will

further bridge the margin gap.

As Graham has previously highlighted, KMT’s recent focus on increasing their indirect

sales as well as some new Asian entrants (still on the lower end of quality) are likely to

chip away at Sandvik’s global leading market share position. Industrial production

recovery in Europe and the US has been ahead of initial expectations, which has been a

positive for volumes across the cutting tool industry. Steve would note that given the

relative regional exposures (50+% Europe for Sandvik, ~50% North America for KMT)

there has been a slightly more favorable trend in North America where oil & gas and

mining end markets have begun to climb out of trough levels. In addition, Steve believes

tax reform would benefit KMT due to an uptick in IP growth. He notes that while their tax

rate is lower than average for the Machinery group, the company would benefit from

their lack of US competitors with tax tailwinds and the expensing of anticipated capex

spend on the upgrade of their manufacturing capabilities.

Over the course of a cycle the relative P/E valuation for KMT and SAND SS is 1.0x, with

significant variance through the cycle. While KMT was trading at a premium to Sandvik

from 2015 through the end of 2016 the story reversed in 2017 and the valuation for KMT

is now at a discount to SAND SS. They believe that a higher organic growth

opportunity and continued margin expansion at KMT should result in an

accelerated earnings growth profile for the company for the next few years

which should warrant a premium multiple over the near-term. Steve and

Graham maintain their respective Buy rating on KMT and Underperform recommendation

on SAND SS.

Equity Strategy

December 6, 2017



Martin Deboo & Stephanie Wissink – Consumer Products

Prefer Estee Lauder to L’Oreal on Better Growth, Op. Margin Expansion, Mix. Valuations are Similar Steph and Martin are positive on the outlook of the beauty industry, which has continued

to deliver strong growth ahead of other sub-sectors in staples. Estee Lauder (EL, Buy,

PT: $140) and L’Oréal (OR FP, Hold, PT: €193) are the leading global players; Steph

and Martin prefer EL given better top line growth and operating margin expansion

prospects.

Martin likes L’Oréal’s dominant market positions across its category-geographies, strong

LFL sales growth and a good track record of judicious M&A. The Luxe and Active

Cosmetics divisions are both going from strength to strength. However, 50% of sales are

from the mass category, which has been slower than expected and concerns around the

US market in particular remain. Martin forecasts 4.6% and 4.7% growth in FY17/18, in

line with the industry growth rate of 4-5%. His biggest concern is margin progress, where

the company guidance is for margins to be “at or around 18%” – a small contraction

once the accretion impact of The Body Shop disposal is stripped out (JEFe -20bps FY17,

+30bps FY18).

In contrast to this, Estee offers growth set to outpace the beauty industry (JEFe 6% FY18)

and EBIT margin expansion as operating leverage is realized through ‘Leading Beauty

Forward’ is expected to be +50bps in both FY18 and FY19. They expect the gap

between the two companies’ operating margins to narrow as a result; OR

FY18 18.2% vs EL 16.7%. They also prefer EL’s mix, which is better exposed to both

prestige (100% sales) and skincare (40%) than L’Oréal’s (50% and 25% respectively).

They think the competitive threat is more intense in mass where niche/small brands are

attempting to take share from legacy brands and consequently the investment required

to defend share is higher. In addition, they also favor EL’s higher exposure to skincare

given industry commentary around a rotation out of makeup and into skin. Both

companies are cash positive with headroom to make acquisitions, something they believe

both will continue to do well (OR FY18 net debt/EBITDA -0.6x, EL 0.25x).

Steph believes tax reform would be a net positive for EL, given that the company is US

domiciled and a profitable federal tax payer. She estimates a 5% reduction in the tax rate

would add 1ppt of profitability to FY19 (13% vs. 12%) and FY20 (14% vs. 13%). A 10%

reduction would add 2ppts of profitability to both FY19 and FY20.

OR trades at a NTM PE of 26.5x and EL at 29.9x, but they the think the superior top line

growth and margin prospects at EL justify the small valuation premium.

Equity Strategy

December 6, 2017



Jeff Holford – Pharmaceuticals

Prefer Roche to Merck on What We Expect to Be Higher and Better Quality Growth Amidst Similar Valuations Jeff compares Roche (ROG SW, Buy, PT: 290CHF) with Merck & Co. (MRK, Hold, PT:

$53) to highlight the significant advantage in terms of innovation and revenue

replacement that Roche has over Merck, whilst trading on a more attractive valuation.

Whilst both companies have their fair share of exclusivity losses over the next few years,

only Roche promises a diversified set of new product growth opportunities.

Merck is the “Least Preferred” company in Jeff’s US and European coverage space and for

the base business, Jeff estimates a sales CAGR of 2% between 2017E-2021E, driven by

LOEs (Remicade, Zetia/ Vytorin, Cubicin), pricing pressure (Januvia franchise) and new

competitors (Zostavax, HCV franchise). While he estimates new products (recently

launched drugs and pipeline assets) will add $7.0bn in incremental sales between 2017E-

2021E, this is largely driven by a single drug, Keytruda, which he expects will add $4.1bn

in incremental sales between 2017E-21E. However, competitive readouts for novel PD-X

combinations in 1L NSCLC over the next 12 months create significant uncertainties in the

projected sales for Keytruda.

Roche is Jeff’s “Top Pick” in Global Large Cap Pharma despite facing some mid-term

challenges as the first biosimilar competitors to its three leading cancer drugs are

expected to launch in Europe and the US between now and 2020E. In 2016A, global sales

of Rituxan, Herceptin and Avastin currently amount to over CHF20bn, representing c41%

of total group sales. Jeff currently estimates cCHF9bn of sales will be lost to biosimilars by

2021E, although the growth of the underlying base business should limit this to a net

cCHF4bn erosion. The start of this biosimilar impact has been well anticipated by the

company, which has also been working hard to replace the potential erosion of these

products. To this end, he expects the combination of the TOGA Party assets

(Ocrevus (MS), Hemlibra (haemophilia A), Gazyva (iNHL), Tecentriq (1L NSCLC) and

Perjeta (adjuvant HER2+ breast cancer)) to deliver cCHF19bn of new sales over the

same time frame, more than offsetting any of the biosimilar erosion. At the

end of this transitory period, Roche’s earnings will be driven by a set of high quality,

young and rapidly growing products, to which a higher multiple than current should be

applied.

Jeff sees Merck growing revenue and earnings at 1.8% and 4.5% CAGRs respectively, but

trading on a 2018E PE of 13.4x. Roche, however, is expected to grow revenue and EPS at

CAGRs of 5.6% and 8.1% with a 2018E PE of 14.9x. In terms of PEG Roche trades on 2.0

whilst Merck is on a PEG of 3.1. Whilst the growth on offer is clearly superior and

cheaper at Roche, it is the quality of the growth (new asset launches from

Roche and base rejuvenation) that is the real story here, whilst Jeff feels Merck is

still at high risk of negative estimate revisions for Keytruda and as a company overall.

Jeff also points out that more broadly, US tax reform will likely raise expectations of major

M&A in the sector, though he believes it is more likely to drive large scale sector

consolidation, rather than SMID cap biotech acquisitions (which could easily be done

without tax reform). Jeff continues to believe that large scale consolidation is needed as

companies overcrowd into oncology with essentially the same products and are

increasingly fighting for the same patients, whilst drug prices fall.

Equity Strategy

December 6, 2017



More specifically at the company level, Jeff would focus on three companies. First, Zoetis

as they have an inefficient tax structure at present with a 30% tax rate, which

management has said recently would fall to a lower rate. AbbVie, as management has

previously mentioned at the JEF Healthcare Conference that tax reform could allow them

to significantly step up share repurchases as the company is expected to generate excess

cash from Humira over the next five or more years. Pfizer would also benefit as Jeff

believes reform would help them to break-up the company more efficiently. He also

points out that the company has said that no deal would be too large for them post-

reform.

Sheila Kahyaoglu & Sandy Morris – Aerospace and Defense

Boeing More Expensive than Airbus on P/E but Airbus’ Large Hedging Needs and Boeing’s Strong Cash Flow Among the Reasons We Prefer BA If Airbus (AIR FP, Hold, PT: €75) and Boeing (BA, Buy, PT: $312) each has

around a 50% share of the market for large commercial aircraft and products that all

appear broadly similar and competitive, the layman might be puzzled as to why Sandy

and Sheila do not believe Airbus should command the same valuation as Boeing.

The most obvious reason is that nearly all commercial aircraft sales are priced in US$, yet

Airbus incurs significant costs in Euro and Sterling. Airbus must hedge this exposure –

US$92.3bn in total at end September 2017. Such hedging does consume credit capacity

and so they believe Airbus will likely always operate with an overtly strong balance sheet;

probably with a significant net cash position.

Unlike Boeing, there is currently no large profitable and cash generative

Defense business within Airbus. Airbus Defense & Space may report a significant

profit, but cash flow is burdened by the utilization of loss-making contract provisions,

primarily in respect of the A400M. The latter also continues to pose the risk of further

material losses, in their view.

At a more detailed level, the definition of an Enterprise Value (EV) for Airbus has also

proven contentious in the past. Sandy figures the Airbus EV could include government

refundable advances (€7.1bn end Dec 2016) and pension provisions (€8.7bn). When he

defines the Airbus EV, he excludes €8bn from net cash to allow for the US$/€ hedging

demand. The calculation appears to be far simpler with BA, with most of the focus on

cash flow, which is easier to define. The investor focus for BA has gone from order activity

and backlog to a focus on productivity and execution. With six or seven years of

production in backlog, it is hard to fathom orders continuing to top deliveries, which has

facilitated some of the change in focus. BA has minimal net debt and expects to generate

$10BB of FCF in 2017 or about 6.3% its current market cap. The expectation of

improving FCF through the end of the decade is enough to shift investor focus

and perception. Although complicated by accounting standards, the BA story

appears to be simplified by the focus on the cash. Investors have paid up for the

relative value vs. other cyclical industrial end markets. Note too, that our F18 Airbus

numbers are below consensus mostly because of A350 losses and A320neo/ceo mix.

Equity Strategy

December 6, 2017



In the long-term, Sandy and Sheila concede the valuation of Airbus is likely to converge

with that of Boeing, and Sandy’s Airbus concerns are mostly short term in nature, but the

pricing of aircraft would have to change dramatically in order to believe they could be

valued identically.

LMT Trades at Nearly 2x BAE’s P/E, but Offers Visibility and Growth and May Offer Opportunity in European Defense Based on consensus estimates, the prospective FY18 P/E’s for BAE Systems (BA/ LN,

Hold, PT: 615p) and Lockheed Martin (LMT, Hold, PT: $310) are 12.6x and 23.4x,

respectively. There is a similar disparity between BAE and Northrop Grumman (NOC,

Hold, PT: $333) and between BAE and Raytheon (RTN, Buy, PT: $204).

Over the last several decades, Sandy has been accustomed to BAE trading at between a

10% and 20% discount. The only occasions they can recall it narrowing were after BAE

had secured very material export contracts in Saudi Arabia. The main occasion when the

discount widened was when there was the prospect of a Labor government in the UK.

LMT on the other hand trades at about a 30% premium to the U.S. market

and 50% above its 10-year average. Sheila believes this can be traced to

investor expectations of mid-single digit growth in the U.S. defense budget

and confidence that Congress can circumvent the Sequester that caused disruption and

declines for defense spending earlier this decade. Improved valuations for U.S.

defense stocks can be traced directly to the better outlook for defense

spending.

At a more detailed level, only 36% of BAE’s FY16 sales by destination were to the USA. In

broad terms, BAE has about half the US presence of its US-listed peers. In the UK and in

export markets, BAE arguably also faces a more challenging contracting environment;

there is no equivalent of Foreign Military Sales. Sandy believes BAE has no products that

can compare with the likes of the F-35 and Patriot, to mention just two. Finally, around

30% of BAE’s annual FCF is used for pension deficit reduction – a demand that he believes

is certain to continue. This is in contrast to LMT, which generates 71% of sales from U.S.

government, with the remainder from international sales. With export volumes for the F-

35, tactical munitions and missile defense systems set to rise, there is a high level of

visibility in the international business. There is a perception of lower risk.

For BAE, there is currently some political risk in the UK that could see the Trident

submarine successor programme called into question; the major UK political parties lie

some distance apart on Defense. There is the UK economic uncertainty generated

by Brexit. This means UK defense spending is not certain to grow. Finally, there

has been several years’ delay to the anticipated follow-on order for Typhoon aircraft from

Saudi Arabia. This is in contrast to LMT that continues to enjoy upside bias for F-35

production and should close on an order for THAAD with Saudi in 2018. The opportunity

set domestically and internationally for LMT appears to be broad, with little in the way of

programs to dissect as being major risk items. Although there still are obstacles to

overcome domestically, with Congress yet to pass a FY18 Appropriation bill, there

appears to be broad support for defense spending.

One can estimate the adjustments that might be made to make the valuation of BAE more

directly comparable with its US-listed peers, but this is a subjective exercise. There is,

however, no question pension deficit funding is the first major step towards explaining

the disparity, in our view.

Equity Strategy

December 6, 2017



Regarding tax reform, Sheila believes lower corporate taxes within her A&D coverage

would be most beneficial to the IT Services stocks including Leidos (LDOS, Buy, PT: $75)

and Booz Allen Hamilton (BAH, Buy, PT: $44). Although this may encourage some price

pressure on contracts over the medium term the net benefit would be most substantial

given effective tax rates >35%. HEICO (HEI, Hold, PT: $89) and Spirit AeroSystems (SPR,

Buy, PT: $90) also have relatively high tax rates in Sheila’s coverage. For United

Technologies (UTX, Buy, PT: $141) and Honeywell (HON, Buy, PT: $162), Sheila notes

that the majority of their cash is overseas. Any change to repatriation laws could have a

substantial benefit. In terms of stimulation in capex spending Boeing (BA, Buy,

PT: $312) and TXT (Textron, Buy, PT: $65) may be the biggest beneficiaries.

Joseph Dickerson & Ken Usdin – Banks Prefer Bank of America to Barclays. BAC More Expensive but Benefits from Positive US Macro/Reform, BARC Numbers Below the Street Joe and Ken prefer Bank of America (BAC, Buy, PT: $30) in the U.S. more than

Barclays (BARC LN, Hold, PT: 216p) in the U.K.

Absolute valuation metrics tilt toward European banks in general and this is

certainly so in this case. BAC trades at 13x on ’18 EPS versus BARC at 9.6x, while on

tangible book value, BAC trades at 1.5x with an estimated ’19 ROTCE of 13% versus BARC

at 0.6x TBV with an estimated ’19 ROTCE of 8%. Both companies have come a long way

from post-financial crisis challenges, with BAC ahead of BARC in terms of profitability

improvements and capital planning, which is why the valuation gap is deserved. Ken’s

EPS estimates for BAC are close to in-line with consensus, while Joe’s estimates for BARC

are decently below the Street. BAC EPS estimates for ’18 have held very steady since

March ’17, while BARC EPS is down to 21p from 23p.

BAC faces many of the positive macro drivers helping U.S. bank stocks: 1) rising

interest rates (especially on the front-end of the yield curve), 2) positive regulatory reform

momentum; 3) potential corporate tax relief, which we believe could be a ~15% helper to

EPS (see “Banks and Tax Math: It's Complicated; Framework Model 2.0”). Further, Ken

sees BAC as one of the few U.S. banks that can still improve its CCAR stress test

performance and increase total capital distributions over the next few years. BAC also has

a distinct absolute message on cost control (~$53B by end of ’18) after years of aggressive

expense reductions and also has a very clean credit profile across its loan portfolio. These

two forms of leverage should lead to better EPS growth vs. BARC.

In contrast, while BARC is finally past its own restructuring, Joe still sees a lot

of heavy lifting to do. BARC has finally put a time frame on its aspiration for a 10%

ROTCE, expecting to achieve such a level by 2020 and a 9% ROTCE 2019 (ex. litigation

and conduct charges), assuming a 13% CET1 level. Joe’s estimate for ’19 is an 8% ROTCE

and our earnings estimates would have to rise 9%-10% to meet management’s target.

Further, BARC failed the U.K. stress test and while the company does not need to submit a

revised capital plan given future actions to generate capital, Joe does not expect

meaningful capital distributions.

Equity Strategy

December 6, 2017



https://javatar.bluematrix.com/pdf/Rtz9WWMP

Negative earnings revisions have weighed on BARC shares. One of the biggest

challenges for BARC has been market share concessions in its trading businesses (22% of

group revenues over LTM on a USD basis vs. 16% for BAC). Management’s recent signal

of competitive re-engagement here will require investments and need proving out. Cost

expectations have moved higher over the past year as a result. Credit card losses have

trended higher this year, similar to U.S. banking peers, and rising provision forecasts have

also weighed on EPS revisions. Joe also points out that while US tax reform may provide a

potential earnings uplift in the out years, it would also likely result in a c30bps CET1 hit

up front due to re-measurement of US deferred tax assets.

Philippe Houchois – Autos BMW and GM Trade at Similar P/E Multiples, But GM Has a Worse Balance Sheet and Earnings are Expected to Decline While BMW’s New/Renewed SUVs Should Help Drive Growth Looking at relative valuations between the US and Europe, Philippe finds the most

interesting divergence between BMW (BMW GR, Buy, PT: €100) and GM (GM,

Hold, PT: $40). Both companies are currently delivering above industry average

operating margins, at c.8% and c.7% expected in 2018E respectively and strong cash

conversion. Both are also facing significant re-investment into EVs, autonomous

technology and ride-sharing at the peak of the industry cycle.

BMW benefits from exposure to diversified markets across Europe, North

America and Asia and is entering renewal and expansion of its SUV range

with X3, X2 and X7 in the coming 12 months, both of which support moderate

earnings progression in 2018 even taking into account higher R&D spending and further

erosion in used diesel pricing. With the disposal of its European division, GM has re-

focused exposure mainly onto North America, now accounting for nearly 100% of

operating profit. Replacement of the large pick-up model range is positive for mix and

earnings but GM is facing a more difficult trading environment in our view with a further

decline in US SAAR and erosion in used values expected in 2018E. Phillippe expects GM

operating earnings will decline c.7% in 2018-19 while earnings from new mobility

businesses should remain marginal for the coming two to three years.

With regard to US tax reform, Philippe believes GM would benefit given $9.6bn of NOLs,

which would extend the period when GM would pay low cash tax. BMW's exposure to

NA is largely focused on production of SUVs in the US for NA and global exports and he

assumes above average profitability in the US.

PE multiples are similar at 7.8x and 8.2x 2-18E, but EV multiples differ

considerably given significant differences in balance sheet structures with

BMW showing the least risk and GM at the high end of industry leverage and

undermining further cash returns. At the end of Q3, BMW reported auto liquidity of

€18.8bn and group net cash of €16.7bn after adjusting for finco debt at group level.

Pension funding continues to improve with a net deficit of €2.7bn while high cash

conversion and dividend coverage suggest dividend safety. GM has been returning cash

aggressively ($27bn over the past 5 years) through dividends and share buy-backs,

leaving net liquidity of only $3.2bn at the end of Q3 and $19bn net debt adjusted for

finco leverage. Pension/OPEB funding deficit of $22.6bn leaves GM with one of the

industry’s worst funded pension positions. On JEF defined EV (group net debt), BMW is

trading on 0.42x sales and 4.5x EBIT vs GM trading on 0.55x revenue and 8.9x EBIT (all

2018E).

Equity Strategy

December 6, 2017



Justin Jordan – Equipment Rental

Prefer Ashtead to United Rentals Ahead of Forthcoming 12/12 Q2 Earnings

Ashtead (AHT LN, Buy, PT: £22) and United Rentals (URI, Buy, PT: $165) are

the two largest equipment rental operators in the fragmented $50B US equipment rental

market, serving construction and industrial end markets.

Despite Upgrades, Ashtead has lagged peers: Ashtead has enjoyed 8% consensus

FY18 EPS upgrades over past 12 months; despite this positive earnings momentum, its

shares have lagged key equipment rental peers United Rentals (US Rental #1) and HERC

Rentals (US Rental #3) by 10% and 16% respectively over past 3 months. Justin believes

Ashtead investors fail to appreciate potential benefit of 1) Improving US macro 2) 2018-

20 Hurricane rebuild activity 3) Possible US Corporate Tax cut from 35% to 20%.

Chart 7: Share price over 3 mths: Aug 31-Nov 30: Ashtead

has lagged: United Rentals by 10%, HERC Rentals by 16%

Source: Bloomberg. All performance data in UK£

Chart 8: Share price over 1 year: Nov 16-Nov 17: Ashtead

has lagged: United Rentals by 32%, HERC Rentals by 20%

Source: Bloomberg. All performance data in UK£

Summary of Justin’s Buy Stance ahead of Dec 12 Ashtead Q2 Earnings: Ashtead

has lagged peer United Rentals by 10% over three months (and by 32% over 12 months)

giving appealing entry point ahead of forthcoming Tuesday December 12 Ashtead 18Q2

results. Justin believes positive macro and upbeat equipment rental peer news of

accelerating rental revenue growth and improving rental rates give upside risk to both

FY18 Ashtead fleet capex plans and consensus estimates. Additionally: Whilst listed in UK,

Ashtead generates 93% of EBITDA/EBIT in US, pays full 35% US corporate tax, hence

is well placed to benefit from any reduction in US corporate tax rate from

35% to 20%.

Bottom Line: Trading on CY 2018 6.7x EV/EBITDA & 15x PE: Reaffirm Buy with increased

£22.00 PT ahead of forthcoming Dec 12 Q2.

0.90

1.00

1.10

1.20

1.30

1.40

31 Aug 2017 30 Sep 2017 31 Oct 2017 30 Nov 2017

Ashtead United Rentals

HERC Rentals FTSE 100

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Nov

16

Dec

16

Jan

17

Feb

17

Mar

17

Apr

17

May

17

Jun

17

Jul

17

Aug

17

Sep

17

Oct

17

Nov

17

Ashtead United RentalsHERC Rentals FTSE 100

Over past three months: Ashtead has

lagged rental peers United Rentals

by 10% and HERC Rentals by 16%

See forthcoming December 12

Ashtead 18Q2 as re-rating catalyst

Equity Strategy

December 6, 2017



Laurence Alexander – Chemicals

Prefer Praxair and Linde to Air Liquide and Air Products on Valuation, Growth, Balance Sheet Laurence continues to favor the industrial gases within the chemical sector, and finds

Praxair (PX, Buy, PT: $176) and Linde (LIN GR, Buy, PT: €233) attractive relative

to Air Liquide (AI FP, Hold, PT: €114) and Air Products (APD, Hold, PT: $166)

for several reasons: more attractive valuation, slightly better growth given the imminent

wave of cost cuts, a longer cycle of portfolio optimization that should lift margins and

ROIC and significantly more capacity for dividends, buybacks and M&A.

Within the chemical sector, Laurence favors the industrial gases for 2018 as a way to

benefit from a late-cycle turn in industrial capex. He believes the risk premium embedded

in Praxair (PX, Buy, PT: $176) and Linde (LIN GR, Buy, PT: €233) remains too

high and will compress over the next 12-18 months. The combined company trades at

11.1x 2018E EBITDA, compared to 10.8x at Air Liquide (AI FP, Hold, PT: €114) and

12.1x at Air Products (APD, Hold, PT: $166). Deal risk, in Laurence’s view, has

diminished with the Linde tender process crossing the 75% threshold, and with progress

on the regulatory front fundamentals should reassert themselves.

Valuing the bond-like elements of the business model (on-site revenues and cylinder

rental streams) on a 5% discount rate, the “growth stub” of the new company trades at

9.9x, compared to 9.4x at Air Liquide, 11.0x at Air Products and 12.2x at Praxair.

Moreover, Laurence believes that Praxair-Linde are on track to deliver a 8.7% net income

CAGR, vs. 8.4% at Air Products and 8.2% at Air Liquide, as cost synergies should offset a

slightly weaker mix due to Praxair’s large footprint in Brazil and Linde’s US healthcare

business. Assuming each company targets 2x net debt/EBITDA, he estimates the total FCF

and balance sheet flex available for dividends, buybacks and M&A at $40B in 2018E-

2022E for Praxair-Linde (46% of the current market cap), compared to €9B for Air Liquide

(22%) and $8.3B (23%) for Air Products. Looking longer-term, Laurence believes

Praxair-Linde has the furthest room to improve margins, ROIC and FCF due to

the combination of Linde’s sprawl and an attractive environment for

divestitures (low rates imply a premium for even second-tier industrial gas regions

given the stability of the cash flow streams). Air Liquide has less opportunity to upgrade

the acquired Airgas assets, and Air Products has already pulled most of the available levers

to upgrade its portfolio.

Laurence notes that the industrial gases will likely benefit from lower taxes in the US,

some of which at least they will likely retain. If tax reforms prove to be a net stimulus for

demand, that would likely have a more significant effect (both on earnings and on the

valuation multiples).

Equity Strategy

December 6, 2017



Daniel Binder & James Grzinic – Broadline & Hardline Retailers Relative Preference for KGF Over LOW; KGF Trades at a ~30% Discount to LOW Since the beginning of 2009, compared to Kingfisher (KGF LN, Buy, PT: 400p)

shares, Lowes (LOW, Hold, PT: $81) shares have traded at a ~30% premium based on

FY+1 P/E; that premium drops slightly to 25% based on FY+2 P/E. Dan and James note the

discount that KGF shares have traded at vs. LOW, and even its own UK competitors, is

likely an indicator of the headwinds that KGF has faced in the recent past, namely

exposure to the UK consumer (i.e., wage contraction, lower savings, weak consumer

sentiment, et al.) and housing market, two core areas that have performed relatively

weaker than those in the US. Other headwinds that could explain the discount include

implementation of the company’s ONE project, heightened competition in the industry in

the UK, especially following the acquisition of KGF’s competitor, Homebase, by Bunnings;

and larger FX exposure on the part of KGF vs. LOW. That said, James recently

upgraded KGF shares to Buy after seeing evidence of a strong sales response

to new ONE product builds and an improving outlook in the French market.

While both LOW and KGF face headwinds, relatively speaking, LOW is in a somewhat

better position given a favorable macro backdrop and is attempting to course correct on

execution issues noted above; this, they believe, is largely reflected in its premium

valuation vs. KGF.

Dan’s thesis behind LOW’s valuation has long reflected the relative sales

underperformance to HD. He believes the relative underperformance reflects less

consistent execution on labor, advertising and merchandising as well as it

relative real estate position to HD’s strong portfolio. Although LOW has made

progress with the Pro customer, HD appears to be outperforming on this front too. In

fact, the US comp gap between HD and LOW widened in Q3 to ~270 bps, above the

long-term average of roughly 220 bps. This is particularly notable, given the higher sales

per sq. ft. at HD.

LOW could also potentially benefit from new tax legislation designed to cut

corporate taxes and this could contribute to a higher valuation relative to

KGF. It is unclear how much of the tax cut will get competed away on price investments

over time, so until there is further clarity, some portion of the LOW premium valuation to

KGF could reflect the likelihood of stronger EPS revisions ahead.

Equity Strategy

December 6, 2017



Seth Rosenfeld – Materials (Steel)

Positive on Both but Prefer Steel Dynamics to Voestalpine into 2018 as STLD Plays Catch-Up While Steel Dynamics (STLD, Buy, PT: $43) and Voestalpine (VOE AV, Buy, PT:

€55) are both considered to be amongst the highest quality steelmakers in their

respective regions, US and Europe, STLD’s share price performance has significantly

lagged that of VOE during the course 2017. Both the US and Euro steel markets currently

benefit from robust global market tailwinds driven by Chinese supply-side reform, which

has re-set margins well above historical trends, and falling Chinese exports, which allow

Western steelmakers to ramp-up domestic production. But the Euro steel market has been

fundamentally far stronger than the US during 2017 due to more consistent demand

growth across end markets (from construction to autos) and also more consistent

government policy. Seth attributes much of the US market’s lacklustre performance to

flip-flop policy out of Washington including both infrastructure and trade.

Heading into 2018, Seth remains very bullish on the Euro steel market and expects VOE’s

realised margins to continue to surprise to the upside as long-term auto contracts re-set

higher. But he also sees potential for a meaningful catch-up in the US as domestic steel

prices/margins move higher following stronger global trends. In addition, with

market expectations for Washington infrastructure/trade policy limited, any

positive outcome would be an incremental surprise versus cautious base case

forecasts (the reverse of previously elevated expectations for 2017). Seth also points out

that in 9M17 STLD paid an effective tax rate of 36% and as such the company’s earnings

and FCF generation would meaningfully benefit from a reduction in the US corporate tax

rate; a tax rate cut to 20% would imply 22% upside to STLD’s FCF generation.

With a diversified product mix across flat and long products, flexible mini-mill operating

base and healthy FCF yield, STLD is his top pick in the US steel sector into 2018. STLD

continues to trade at a modest premium to VOE at 5.9x vs 5.5x 2018 EV/EBITDA, but this

premium has narrowed meaningfully versus the 1.9x premium seen in early 2017.

Reiterate Buy on both VOE and STLD. Other top picks: ArcelorMittal (MT NA, Buy, PT:

$32), ThyssenKrupp (TKA GY, Buy PT: €38), APAM (APAM, Buy, PT: €55), Nucor (NUE,

Buy, PT: $67) and US Steel Corp (X, Buy, PT: $33).

Chris LaFemina – Metals & Mining

Freeport Likely to Close Some, Not all of the Valuation Gap to Antofagasta After Indonesia Overhang Diminishes In metals and mining, the inverse of the norm is true – miners tend to trade at higher

multiples in Europe than in the US. Mining is a key sector in Europe and the UK given the

global scale and quality of the mining companies listed on the LSE (Rio Tinto, BHP,

Glencore, Anglo American and others), and mining is a significant component of the FTSE

Index. In addition, miners in the UK tend to have high quality operations, diversity across

geographies and commodities and less company-specific risk than miners listed in the US.

For example, consider Antofagasta (ANTO LN, Buy, PT: 1200p) and Freeport

(FCX, Buy, PT: $19). Both are large, pure-play copper miners with significant free

floats and trading liquidity; however, Freeport has significantly higher geopolitical risk

due to ongoing issues relating to its important Grasberg mine in Indonesia, and Freeport

is listed in the US whereas ANTO is listed in the UK.

Equity Strategy

December 6, 2017



On Chris’ estimates, ANTO trades at a 2018E P/E of 12.0x and EV/EBITDA of 5.7X while

FCX trades at a 2018E P/E of just 6.0x and EV/EBITDA of 3.4X. He expects ANTO and

FCX shares to go higher as the copper price goes higher, and Chris reiterates

his Buy rating on shares of both. That said, he does not expect a significant

contraction of the valuation spread between these two copper miners until Freeport’s

problems in Indonesia are resolved. Even then, he thinks ANTO is likely to continue to

trade at a premium due to its listing on the FTSE.

Regarding the impact of tax reform on the mining sector, Chris believes that lower

taxes in the US would not significantly affect his views on any of the mining

stocks under coverage unless lower taxes leads to stronger US growth.

Phil Dobbin & Dan Fannon – Asset Managers

Prefer Invesco and Schroeders. EU Asset Managers Generally More Expensive but Have Better Growth European asset managers trade at a modest premium to that of their U.S. counterparts.

The difference in multiples reflects the organic growth prospects for these markets as well

as the competitive dynamics around passive/active as well as regulatory uncertainty.

Within the U.S., growth has become increasingly more challenged as the passive

penetration continues to accelerate and performance for active managers remains subpar.

While Europe is also facing competitive pressures, the regulatory changes (i.e., DOL in

U.S.) and heightened focus on fees is less of a headwind at this point in the cycle.

In the U.S., Dan would highlight Invesco (IVZ, Buy, PT: $42), which trades at 12.8x his

2018 EPS and a discount to its peer group, as well its European peers, despite positive

organic growth and exposure to ETF’s through its PowerShares subsidiary (and recent

acquisition of Guggenheim). In the U.K., Phil regards Schroders (SDR LN, Buy, PT:

3593p) as the ‘poster-boy’ for business diversity among UK asset managers. Schroders is

well diversified by asset class, geographic distribution and client type and have long

argued that the persistency characteristics of its institutional client base help underpin its

value. Regulatory pressures remain a headwind but to some extent, the final FCA report

(published in the summer) was a reiteration of previous work and provided little in the

way of incrementally bad news. As ever, Phil notes we will need to continue to forecast,

as we already do, fee attrition and regulatory cost pressures. The key to share price

performance across assets in the UK this year has been a stronger than anticipated trend

in net fund inflow. This has been seen across the UK asset managers pushing share prices

to near 12-month highs, contrary to an investor view at the beginning of the year that the

headwinds of regulatory and passive growth (where the UK lags the development in the

US) would dominate share price performance.

As for tax reform, IVZ is a beneficiary but less so than its pure domestic peers. IVZ’s

adjusted tax rate is currently approx. 27% and given it global mix of business (with

sizeable U.S. exposure) Dan estimates its blended tax rate would decline to the mid-to-

low 20’s based on the current versions of the bills.

Equity Strategy

December 6, 2017



Table 11: Companies Mentioned in the Above (Listed in Order of Mention)

Company Name Ticker Analyst Market

Cap (MM) Rating

Price

Target

Current

Price

C18

P/E

JEF C18

EPS

Cons.

C18 EPS

Integrated Oil

Royal Dutch Shell Plc RDS.A Jason Gammel 201,137.75 Buy $67.90 $64.15 16.2 - -

Exxon Mobil Corporation XOM Jason Gammel 353,628.86 Hold $84.00 $83.57 20.3 3.61 4.11

Dept. Stores & Specialty Softlines

Gap, Inc. GPS Randal J. Konik 12,435.65 Buy $41.00 $34.09 15.9 2.30 2.14

Hennes & Mauritz AB HM.B-OME Caroline Gulliver 285,415.30 Hold SEK 210.00 SEK 196.20 16.7 12.02 11.77

Telecom

Comcast Corporation CMCSA Scott Goldman 179,250.09 Buy $47.00 $40.32 18.1 2.25 2.23

BT Group plc BT.A-LON Jerry Dellis 25,498.62 Hold £2.65 £2.58 9.2 0.27 0.28

Machinery

Kennametal Inc. KMT Stephen Volkmann 3,775.22 Buy $55.00 $46.46 18.3 2.55 2.54

Sandvik AB SAND-OME Graham Phillips 177,997.35 Sell SEK 120.00 SEK 144.60 17.7 7.10 8.18

Consumer Products

Estee Lauder Companies EL Stephanie Wissink 27,932.33 Buy $140.00 $125.34 30.1 4.12 4.17

L'Oreal SA OR-PAR Martin Deboo 103,354.54 Hold 193.00 € 187.25 € 26.6 7.03 7.04

Global Pharma

Roche Holding Ltd. ROG-SWX Jeffrey Holford 214,017.81 Buy CHF 290.00 CHF 247.00 15.1 16.68 16.34

Merck & Co., Inc. MRK Jeffrey Holford 152,813.64 Hold $53.00 $56.22 13.8 4.16 4.06

Aerospace & Defense

Boeing Company BA Sheila Kahyaoglu 161,628.23 Buy $312.00 $277.97 25.2 11.10 11.04

Airbus SE AIR-PAR Sandy Morris 66,077.38 Hold 75.00 € 87.87 € 20.0 3.66 4.40

Lockheed Martin LMT Sheila Kahyaoglu 89,911.19 Hold $310.00 $311.78 23.2 13.45 13.41

BAE Systems plc BA-LON Sandy Morris 17,586.37 Hold £6.15 £5.56 12.7 0.47 0.44

Banks

Bank of America BAC Kenneth Usdin 293,100.15 Buy $ 30.00 $ 29.06 13.4 2.10 2.16

Barclays PLC BARC-LON Joseph Dickerson 32,304.25 Hold £2.16 £1.94 9.6 0.22 0.20

Autos

Bayerische Motoren BMW-ETR Philippe Houchois 54,254.93 Buy 100.00 € 85.33 € 7.8 11.51 10.97

General Motors Company GM Philippe Houchois 60,779.26 Hold $ 40.00 $ 43.05 7.4 5.48 5.82

Equipment Rental

Ashtead Group plc AHT-LON Justin Jordan 9,505.26 Buy £22.00 £19.54 14.5 1.30 1.35

United Rentals, Inc. URI Justin Jordan 13,276.21 Buy $165.00 $159.75 13.2 12.50 12.09

Chemicals

Praxair, Inc. PX Laurence Alexander 43,481.14 Buy $176.00 $153.36 24.1 6.40 6.36

Linde AG LIN-ETR Laurence Alexander 33,822.01 Buy 233.00 € 183.45 € 21.9 8.30 8.37

Air Liquide SA AI-PAR Laurence Alexander 44,191.94 Hold 114.00 € 105.80 € 20.2 5.20 5.23

Air Products APD Laurence Alexander 35,230.63 Hold $166.00 $162.40 23.1 7.00 7.04

Broadline & Hardline Retailers

Lowe's Companies, Inc. LOW Daniel Binder 70,147.77 Hold $81.00 $88.04 17.1 5.07 5.16

Kingfisher Plc KGF-LON James Grzinic 7,121.83 Buy £4.00 £3.31 12.4 0.28 0.27

Materials (Steel)

Steel Dynamics, Inc. STLD Seth Rosenfeld 9,080.00 Buy $43.00 $39.79 13.6 3.31 2.93

voestalpine AG VOE-WBO Seth Rosenfeld 8,628.77 Buy 55.00 € 49.22 € 11.6 4.13 4.24

Metals & Mining

Antofagasta plc ANTO-LON Chris LaFemina 8,862.85 Buy £12.00 £9.00 18.0 0.78 0.50

Freeport-McMoRan, Inc. FCX Chris LaFemina 20,425.51 Buy $19.00 $14.30 8.3 2.32 1.71

Asset Managers

Invesco Ltd. IVZ Daniel T. Fannon 14,740.33 Buy $42.00 $36.88 12.7 2.83 2.89

Schroders PLC SDR-LON Phil Dobbin 9,084.97 Buy £35.93 £33.93 15.3 2.17 2.21

Source: FactSet, Jefferies

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Analyst Certification:I, Jefferies Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Jefferies Global Strategy, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Marchel Alexandrovich, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Sean Darby, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Steven G. DeSanctis, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Ward McCarthy, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, David Owen, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Laurence Alexander, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Daniel Binder, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Martin Deboo, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Jerry Dellis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Joseph Dickerson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Phil Dobbin, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Daniel T. Fannon, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Jason Gammel, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Scott Goldman, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, James Grzinic, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Caroline Gulliver, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Jeffrey Holford, PhD, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Philippe Houchois, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Justin Jordan, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.

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I, Sheila Kahyaoglu, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Randal J. Konik, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Christopher LaFemina, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Sandy Morris, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Graham Phillips, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Seth Rosenfeld, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Ken Usdin, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Stephen Volkmann, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Stephanie Wissink, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Jefferies Global Strategy is employed by Jefferies LLC, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Marchel Alexandrovich is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and isnot registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.Registration of non-US analysts: Sean Darby is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: David Owen is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Martin Deboo is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Jerry Dellis is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Joseph Dickerson is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.Registration of non-US analysts: Phil Dobbin is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Jason Gammel is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.Registration of non-US analysts: James Grzinic is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.

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Registration of non-US analysts: Caroline Gulliver is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.Registration of non-US analysts: Philippe Houchois is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.Registration of non-US analysts: Justin Jordan is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Sandy Morris is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.Registration of non-US analysts: Graham Phillips is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.Registration of non-US analysts: Seth Rosenfeld, CFA is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and tradingsecurities held by a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number

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https://javatar.bluematrix.com/sellside/Disclosures.action


can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• AbbVie (ABBV: $95.22, BUY)• Airbus Group NV (AIR FP: €87.87, HOLD)• Air Liquide SA (AI FP: €105.80, HOLD)• Air Products (APD: $162.40, HOLD)• Anglo American (AAL LN: p1,385.00, HOLD)• Antofagasta (ANTO LN: p899.50, BUY)• Aperam SA (APAM NA: €42.80, BUY)• ArcelorMittal (MT NA: €26.20, BUY)• Ashtead Group plc (AHT LN: p1,954.00, BUY)• BAE Systems (BA/ LN: p556.00, HOLD)• Bank of America Corp. (BAC: $29.06, BUY)• Barclays PLC (BARC LN: p194.25, HOLD)• Bayerische Motoren Werke AG (BMW GR: €85.45, BUY)• BHP Billiton (BLT LN: p1,360.00, HOLD)• Booz Allen Hamilton (BAH: $38.60, BUY)• BT plc (BT/A LN: p258.20, HOLD)• Comcast Corporation (CMCSA: $40.32, BUY)• ExxonMobil (XOM: $83.57, HOLD)• Freeport-McMoRan (FCX: $14.30, BUY)• General Motors Company (GM: $43.05, HOLD)• Glencore (GLEN LN: p341.75, BUY)• H&M (HMB SS: SEK196.20, HOLD)• Heico Corporation (HEI: $88.79, HOLD)• Honeywell International Inc. (HON: $153.77, BUY)• Invesco Ltd. (IVZ: $36.88, BUY)• Kennametal Inc. (KMT: $46.46, BUY)• Kingfisher PLC (KGF LN: p330.60, BUY)• L'Oreal (OR FP: €187.25, HOLD)• Leidos Holdings (LDOS: $63.46, BUY)• Lockheed Martin Corp. (LMT: $311.78, HOLD)• Lowe's Companies, Inc. (LOW: $88.04, HOLD)• Merck & Co. (MRK: $56.22, HOLD)• Northrop Grumman Corp. (NOC: $300.56, HOLD)• Nucor Corp. (NUE: $58.82, BUY)• Pfizer, Inc. (PFE: $36.06, HOLD)• Praxair (PX: $153.36, BUY)• Raytheon Company (RTN: $185.54, BUY)• Rio Tinto (RIO LN: p3,540.00, BUY)• Roche (ROG SW: CHF247.00, BUY)• Royal Dutch Shell plc (RDSA LN: p2,374.00, BUY)• Sandvik AB (SAND SS: SEK144.60, UNDERPERFORM)• Schroders (SDR LN: p3,393.00, BUY)• Spirit AeroSystems Holdings, Inc. (SPR: $84.00, BUY)• Steel Dynamics, Inc. (STLD: $39.79, BUY)• Textron Inc. (TXT: $55.18, BUY)• The Boeing Company (BA: $277.97, BUY)• The Estee Lauder Companies Inc. (EL: $125.34, BUY)

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• The Gap, Inc. (GPS: $34.09, BUY)• The Linde Group (LIN GR: €183.54, BUY)• ThyssenKrupp AG (TKA GY: €22.86, BUY)• United Rentals, Inc. (URI: $159.75, BUY)• United States Steel (X: $29.84, BUY)• United Technologies Corp. (UTX: $120.04, BUY)• Voestalpine AG (VOE AV: €49.22, BUY)• Zoetis, Inc. (ZTS: $71.02, BUY)

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Distribution of RatingsIB Serv./Past 12 Mos. JIL Mkt Serv./Past 12

Mos.Rating Count Percent Count Percent Count Percent

BUY 1092 52.80% 342 31.32% 64 5.86%HOLD 837 40.47% 165 19.71% 21 2.51%UNDERPERFORM 139 6.72% 16 11.51% 4 2.88%

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Other Important DisclosuresJefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision.Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443), Research Analyst (INH000000701) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and NationalStock Exchange of India Limited (INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-KurlaComplex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000.This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. 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Equity Strategy

December 6, 2017



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