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2016 - DJIA: 19,762.60 TUESDAY, AUGUST 8, 2017 1934 - DJIA: 104.04 AUGUST 7, DJIA 22,118.42 UP 25.61

Good Morning. This is the Market Digest for Tuesday, August 8, 2017, with analysis of the financial markets and comments on Tesla Motors Inc., American International Group Inc., Inc., Integra LifeSciences Holdings Corp., Nabors Industries Ltd., Ethan Allen Interiors Inc. and New York Times Co.

IN THIS ISSUE: n Change in Rating: Tesla Motors Inc.: Upgrading to BUY with target of $444 (Bill Selesky) n Growth Stock: American International Group Inc.: Solid 2Q as new CEO fuels optimism (Jacob Kilstein) n Growth Stock: Berkshire Hathaway Inc.: Strength in manufacturing and railroad offset by insurance underwriting losses (Stephen Biggar) n Growth Stock: Integra LifeSciences Holdings Corp.: Reiterating BUY and $64 target (David Toung) n Growth Stock: Nabors Industries Ltd.: Maintaining HOLD on challenging outlook (David Coleman) n Value Stock: Ethan Allen Interiors Inc.: Initiating FY19 estimate at $2.00 (Christopher Graja and Jeremy Platt) n Value Stock: New York Times Co.: Strong 2Q, but stock fairly valued (Stephen Biggar and Deborah Ciervo)

MARKET REVIEW: The current corporate earnings season is progressing “better than expected” as per many in the financial press. As such, it is no huge surprise that major stock indices continue to push higher and higher. In response, insiders have started to pick up the pace of selling. That, too, is not a huge surprise and is in keeping with the historical behavior of corporate executives and directors — who often sell into market upturns, thereby taking profits on shares that in many cases cost them little to nothing to acquire. Vickers’ broadest measures of insider sentiment, the eight-week sell/buy ratios, currently indicate 4.91 insider sales for each purchase on Vickers’ NYSE/ASE measurement and 4.71 sales for each purchase on Vickers’ Total measurement (which includes transactions on the Nasdaq). Any reading north of 2.50 is bearish. This week, analysts at Vickers highlighted insider transactions of interest at Apollo Global Management LLC (NYSE: APO) and International Flavors & Fragrances Inc. (NYSE: IFF). (David Coleman)

A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W- A1 Y- • N E W Y O R K , N. Y. 1 0 0 0 6 • ( 2 1 2 ) 4 2 5 - 7 5 0 0 LONDON SALES & MARKETING OFFICE TEL 011-44-207-256-8383 / FAX 011-44-207-256-8363 MARKET DIGEST

TESLA MOTORS INC. (NGS: TSLA, $355.17)...... BUY TSLA: Upgrading to BUY with target of $444 n Our upgrade reflects recent strong orders for the Model 3, which is expected to reach the market in the fourth quarter. The company is currently receiving about 1800 Model 3 orders per day — without any advertising or other marketing campaigns. n Although the ramp-up of the Model 3 will boost labor and overhead costs in the near term, we expect these additional costs to diminish over the course of 2018. As such, we believe that Tesla will be able to reach its 25% gross margin target on the Model 3 late next year, in line with the margins already achieved on the Model S and Model X. n We are narrowing our 2017 loss estimate to $5.36 from $5.48 to reflect the 2Q results, which topped our forecast by $0.12. Our revised estimate assumes stronger gross margins over the remainder of 2017, with continued sales growth for all three models. n We are also boosting our 2018 estimate to breakeven from a loss of $0.50 per share, reflecting our expectations for lower expenses and higher sales. We now look for Tesla to reach breakeven two quarters earlier than we previously expected and to achieve full-year profitability in FY19. ANALYSIS INVESTMENT THESIS We are raising our rating on Tesla Inc. (NGS: TSLA) to BUY from HOLD and setting a target price of $444. Our upgrade reflects recent strong orders for the Model 3, which is expected to reach the market in the fourth quarter. The company is currently receiving about 1800 Model 3 orders per day — without any advertising or other marketing campaigns. We think this highlights the strong demand for an electric car that provides buyers with high-end features and styling at a relatively affordable $35,000 retail price — well below those of the company’s earlier models. In addition, although the ramp-up of the Model 3 will boost labor and overhead costs in the near term, we expect these additional costs to diminish over the course of 2018. As such, we believe that Tesla will be able to reach its target of a 25% gross margin on the Model 3 late next year, in line with the margins already achieved on the Model S and Model X. RECENT DEVELOPMENTS TSLA shares have outperformed thus far in 2017, rising 67.0% while the S&P 500 Consumer Discretionary index has risen 12.1%. The shares have also outperformed over the past year, rising 57.8% compared to a gain of 12.1% for the index. On August 2 after the close, Tesla reported an adjusted 2Q17 net loss of $220.4 million or $1.33 per share, compared to an adjusted net loss of $149.5 million or $1.06 per share in the prior-year quarter. However, the loss was narrower than our loss estimate of $1.45 per share and the consensus loss estimate of $1.88, reflecting the impact of higher sales and a higher gross margin. The wider loss relative to 2Q16 reflected higher R&D costs (up 93%), increased SG&A costs (up 68%) and higher total operating expenses (up 77%). The company also increased spending on equipment installation and new production lines. Second-quarter revenue rose to $2.790 billion from 1.270 billion in the prior-year quarter. Within that total, Automotive segment revenue rose to $2.287 billion from $1.182 billion. Tesla no longer provides a breakout of new vehicles sold or models sold. Services and Other revenue rose to $216.2 million from $84.2 million in 2Q16, an increase of 157%. The increase reflected higher sales of used Tesla vehicles. The 2Q17 gross margin was 25.0%, up from 23.6% a year earlier, driven by higher average transaction prices and increased deliveries. Energy Generation and Storage revenue jumped to $286.8 million from $3.95 million a year earlier, driven by strong demand for home battery (Powerwall) products as well as for utility-scale Powerpack batteries. The 2Q gross margin was 28.9%, up from negative 106.7% in 2Q16. Tesla began Powerwall production in 3Q15 at its Fremont, California plant, but shifted production to the Gigafactory in Nevada in 4Q15. The first Powerwalls have been installed in the U.S., Australia, and Germany. The Model 3 program remains on track and began limited production in July 2017. Management expects production to ramp up steadily in the third and fourth quarters, with first deliveries to nonemployee customers in 4Q. Tesla plans to deliver 500,000 total units (Model S, Model X, and Model 3) by 2018, two years ahead of its previous forecast. On November 21, 2016, Tesla completed its acquisition of SolarCity Corp. in a $2.6 billion all-stock deal. Although the acquisition will provide Tesla with greater economies of scale in electrical energy management systems, it will dilute near-term earnings. On its 2Q17 conference call, management said that the integration was proceeding smoothly.

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EARNINGS & GROWTH ANALYSIS Tesla expects to produce more than 1500 Model 3 vehicles in the third quarter and to achieve a quarterly run rate of 5,000 vehicles by the end of the year. It also expects to begin Model 3 deliveries to the public in 4Q17. In addition, management expects both Model S and Model X deliveries to increase in 2H17 from the first half of the year, when the company produced 47,077 vehicles. In 2016, it delivered 76,230 Model S and Model X vehicles. We are narrowing our 2017 loss estimate to $5.36 from $5.48 to reflect the 2Q results, which topped our forecast by $0.12. Our revised estimate assumes stronger gross margins over the remainder of 2017, with continued sales growth for all three models. The 2017 consensus loss estimate is $6.32 per share. We are also boosting our 2018 estimate to breakeven from a loss of $0.50 per share, reflecting our expectations for lower expenses and higher sales. Based on the recent improvement in order trends, we project 2018 revenue of 20.57 billion, up 13% from our prior estimate. We now look for Tesla to reach breakeven two quarters earlier than we previously expected. The 2018 consensus loss estimate is $0.50 per share. Tesla first gained attention with its 2008 introduction of the Tesla Roadster, the first fully electric sports car, at a price of $128,500. The company’s second vehicle, the Model S luxury sedan, began U.S. retail distribution in June 2012 at $95,400. In 2013, the Model S was named “Motor Trend Car of the Year,” “World Green Car,” and Automobile Magazine’s “Car of the Year.” In 2012, it was also named by Time magazine as one of the “Best 25 Inventions of the Year.” The company recently began to deliver its Model X sport utility vehicle. It had postponed the launch several times due to production issues, including engineering challenges related to the car’s upward-opening falcon-wing doors. As noted above, the first deliveries of the Model 3, an all-electric car with a range of 200 miles per battery charge, are expected to be made to nonemployee customers in the fourth quarter. The Model 3 is expected to sell for approximately $35,000 before government incentives. Tesla has completed construction of its battery production plant or “Gigafactory” in Nevada, which management believes will reduce battery pack costs by more than 30%. The lower battery cost will allow Tesla to price its third-generation vehicles at about $35,000, well below the price of older models. The plant has been constructed in partnership with Panasonic Corp., which is supplying Tesla with specially designed lithium-ion fuel cells for electric vehicles. Tesla broke ground on the Gigafactory in June 2014 outside Sparks, Nevada, and began mass fuel-cell production in January 2017. FINANCIAL STRENGTH & DIVIDEND We rate TSLA’s financial strength as Medium, the middle rank on our five-point scale. The company’s debt is rated B/ negative by Standard & Poor’s. The debt is not rated by the other ratings agencies. At the end of 2Q17, total debt stood at $7.942 billion, up from $3.247 billion at the end of 2Q16. The total debt/cap ratio was 54.7%, down from 55.9% a year earlier, but well above the average for auto manufacturers. The company’s five-year average debt/cap ratio is 66.2%. Cash and cash equivalents totaled $3.04 billion at the end of 2Q17, down from $3.25 billion a year earlier. The company does not pay a dividend and is unlikely to implement one in the near term. In 2Q17, cash flow from operations was a negative $200.2 million, compared to positive $150.3 million a year earlier. For all of 2016, cash flow from operations was a negative $123.8 million, compared to a negative $524.5 million in 2015. MANAGEMENT & RISKS Tesla founder Elon Musk has served as the company’s CEO since 2008. He is also the CEO and chief designer of Space Exploration Technologies (SpaceX), and the nonexecutive chairman and principal shareholder of SolarCity, one of the leading providers of solar power systems in the U.S. Mr. Musk has overseen product development and design at Tesla from the start, and has had a nearly two-decade-long interest in electric vehicles and other environmentally friendly technology. He holds a B.A. in physics from the University of Pennsylvania and a business degree from Wharton. Like its competitors, Tesla faces risks from weak global economic conditions and changes in consumer preferences and spending patterns. Tesla is also at risk from higher costs for components and raw materials, as well as from manufacturing disruptions. In addition, the company is a new player in an established, high-volume industry, and is heavily dependent on the leadership of founder and CEO Musk.

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COMPANY DESCRIPTION Tesla Motors designs and manufactures electric vehicles and electric vehicle powertrain components. It sells its vehicles through a network of 80 stores and galleries in North America, Europe, and Asia and through its website. The company was founded in 2003 and went public in June 2010. It introduced its first model, the Tesla Roadster, in 2008 and its Model S four-door sedan in 2012. Tesla has approximately 10,000 employees and is headquartered in Palo Alto, California. INDUSTRY We have raised our rating on the Consumer Discretionary sector to Over-Weight from Under-Weight. While retail stocks continue to drag on the sector, growth is accelerating in key areas including hospitality & restaurants, media, housing materials, and automotive parts and services. The sector accounts for 12.3% of the S&P 500. We think investors should consider allocating 13%-14% of their diversified portfolios to the group. Over the past five years, the weighting has ranged from 8% to 14%. The sector underperformed in 2016, with a gain of 4.3%, after outperforming in 2015, with a gain of 8.4%. It is outperforming thus far in 2017, with a gain of 10.4%. Consumer Discretionary earnings are expected to increase 12.6% in 2018 and 4.6% in 2017 after rising 9.4% in 2016 and 9.9% in 2015. On valuation, the 2018 projected P/E ratio is 18.1, above the market multiple of 16.1. The sector’s debt ratios are high, with an average debt-to-cap ratio of 52%. Yields are below average at 1.4%. VALUATION Tesla shares have traded between $178.19 and $386.99 over the past 52 weeks and are currently toward the high end of this range. The shares have risen strongly since early December 2016. Valuation analysis based on P/E is meaningless for Tesla given our projected loss estimate for 2017 and our breakeven forecast for 2018. However, the shares trade below the low end of their six-year historical average range for price/book and price/ EBITDA. They are trading above the high end of the range for price/cash flow. Despite these mixed valuations, we see significant upside for TSLA shares based on recent revenue trends and strong demand for the new Model 3. As such, we now expect the company to reach profitability in FY19, earlier than our original projection. We are raising our rating to BUY with a target price of $444. On August 7, BUY-rated TSLA closed at $355.17, down $1.74. (Bill Selesky, 8/7/17)

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AMERICAN INTERNATIONAL GROUP INC. (NYSE: AIG, $64.98) ...... BUY AIG: Solid 2Q as new CEO fuels optimism n On August 2, AIG reported 2Q17 results that beat consensus expectations. After-tax operating income came to $1.4 billion or $1.53 per share, compared to $1.3 billion or $1.15 per share a year earlier. EPS came in above both our estimate and the consensus forecast of $1.20. The better-than-expected results reflected improvements in the core Consumer business, particularly in personal insurance. n We like the company’s leading positions in global P&C and U.S. life insurance, geographic diversification, ongoing divestitures of noncore assets, strong liquidity, and aggressive share buybacks. Additionally, we feel the replacement of CEO Peter Hancock with industry veteran Brian Duperreault should give investors greater confidence in the company turnaround. n We are raising our 2017 EPS estimate to $5.38 from $5.08 as the company’s 2Q earnings were much higher than we expected. However, we are lowering our 2018 estimate to $5.55 from $5.80 as AIG struggles with reserve losses, divests some business segments, and works to find its long-term strategic footing. n AIG shares look cheap relative to peers. The price/book ratio is 0.8, versus an industry median of 1.4. The forward P/E ratio is 12.1 versus a peer median of 18.3. Our revised target price of $72 (up from $70) implies modest expansion of the price/book multiple to 0.9, still well below the industry median. ANALYSIS INVESTMENT THESIS We are reiterating our BUY rating on American International Group Inc. (NYSE: AIG) and raising our target price to $72 from $70. Second-quarter results surpassed our expectations and the sentiment on the stock is much more positive with new CEO Brian Duperreault replacing Peter Hancock. Mr. Duperreault is an industry veteran who favors growth, including via accretive M&A, over management’s previous perennial emphasis on restructuring. We like the company’s leading position in global P&C and U.S. life insurance, geographic diversification, efforts to cut costs and sell noncore assets, strong liquidity, and aggressive share buybacks. The company has spun off its mortgage insurance business, plans to boost dividends and stock buybacks, and raise ROE to 9.5%. AIG also appears well positioned to improve returns on its $249 billion bond portfolio as interest rates move higher. We also expect earnings growth and share price gains to be driven by reduced financial regulation, lower taxes, acquisitions, and the possible removal of the company’s SIFI designation. AIG shares look cheap relative to peers. The price/book ratio is 0.8, versus an industry median of 1.4. The forward P/ E ratio is 12.1 versus a peer median of 18.3. The 9.1% ROE is below the five-year average but is in line with peers. As profitability improves, the price/book gap should close between AIG and its peers. Our target price of $72 implies modest expansion of the price/book multiple to 0.9, still well below the industry median. RECENT DEVELOPMENTS AIG shares have underperformed slightly over the past three months, rising 2.9%, compared to 3.3% for the S&P 500. They have also underperformed the market over the past year, rising 9.2% compared to a gain of 13.5% for the S&P 500. The beta on AIG shares is 1.13, compared to 0.90 for peers. On August 2, AIG reported 2Q17 results that beat consensus expectations. After-tax operating income came to $1.4 billion or $1.53 per share, compared to $1.3 billion or $1.15 per share a year earlier. EPS came in above both our estimate and the consensus forecast of $1.20. The better-than-expected results reflected improvements in the core Consumer business, particularly in personal insurance. Net premiums earned fell 13% to $6.5 billion, and net premiums written fell 10% to $6.7 billion. Revenue fell 15% to $12.5 billion, which was above our estimate of $11.7 billion and the consensus of $12.1 billion. Normalized ROE came to 9.1% in 2Q17, up from 8.3% a year earlier but below management’s long-term target of 9.5%. The year-over-year improvement was due to personal insurance results, capital management, and operating efficiencies. ROE was also higher than the 8.1% achieved in 1Q17 and the 7.5% ROE for FY16. Book value at the end of the quarter was $81.62 per share, down from $83.08 at the end of 2Q16. The company’s two main segments reported positive operating results. Commercial Insurance earned pre-tax operating income of $716 million, down from $941 million a year earlier, due to higher Property losses and loss reserve estimates, while Consumer Insurance earnings grew 33% to $1.3 billion, due to better underwriting results, lower expenses, and better results in the Retirement segment. However,

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revenue and fees in the unit were flat with 2Q16. The combined ratio in Commercial deteriorated to 102.7 from 98.3 a year earlier. In Consumer Insurance, the combined ratio improved 590 basis points to 91.1 from 2Q16, and benefited from lower catastrophe losses and favorable loss experience. Management did not speak to its previously stated 2017 ROE target of 9.5%. However, CFO Sid Sankaran said core normalized ROE year-to-date was 9.2% and that the company expected to achieve profitability in its core operations for the year. On the previous call, former CEO Hancock said that the company would improve ROE in 2017 through better risk selection, the sale of underperforming businesses, and reduced catastrophe risk. On May 9, AIG announced the appointment of Brian Duperreault as CEO, replacing Peter Hancock on May 14. Mr. Duperreault had served as CEO at Marsh & McLennan and ACE, two competing insurance companies. He had also previously worked at AIG for 21 years. Additionally, on July 5, AIG appointed Peter Zaffino as COO. Since 2011, he had served as CEO of Marsh, an insurance firm and subsidiary of Marsh & McLennan. While there, he had worked with CEO Duperreault. Carl Icahn, a board member with a 5% ownership stake in AIG, had publicly called for Mr. Hancock’s ouster last year and was influential in the new hires. Mr. Icahn, as well as other investors, would like to see an improved P&C business and lower losses in the Commercial unit. On the 2Q call, CEO Duperreault stressed growth over restructuring. Importantly, he also said the company would no longer provide financial targets, such as ROE or repurchase amounts. AIG has disappointed investors on some of these goals over the years, especially under Mr. Hancock’s . The company joins its peers Travelers and Chubb in scaling back its disclosures, due to the erratic nature of weather and P&C pricing trends. The company is four quarters into an eight-quarter plan to reduce expenses, narrow revenue sources, and return capital to shareholders. AIG expects to return $25 billion to investors in 2016-2017, which means a remaining $5 billion will be returned through the end of the year. Additionally, the company has been reducing operating expenses, which fell 8% to $2.2 billion during the quarter. AIG shares have risen 9% since the November 9 election, likely reflecting expectations that reduced financial regulation under the new administration, as well as higher interest rates, would boost earnings for financial companies. CFO Sankaran also noted that a reduction in the statutory tax rate to 25% (from about 35%), would boost ROE by 90 basis points. President Trump has suggested lowering the tax rate to 15% in some cases. However, we believe that tax benefits are more likely in 2018 than in 2017, given the recent healthcare legislative impasse. EARNINGS & GROWTH ANALYSIS AIG’s recent financial performance has been poor, and we feel that management’s new strategic plan could be more aggressive. In particular, boosting the ROE to 9.5% in 2017 appears to be an inadequate target given that MetLife and Prudential regularly have ROEs of almost 10%. However, we believe that AIG is effectively changing direction, and the tone of the new CEO is going a long way in boosting confidence in the company. We like the company’s leading positions in global P&C and U.S. life insurance, geographic diversification, ongoing divestitures of noncore assets, strong liquidity, and aggressive share buybacks. We also see margins improving due to reduced operating expenses. We are raising our 2017 EPS estimate to $5.38 from $5.08 as the company’s 2Q earnings were much higher than we expected. However, we are lowering our 2018 estimate to $5.55 from $5.80 as AIG struggles with reserve losses, divests some business segments, and works to find its long-term strategic footing. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on AIG is Medium, the midpoint on our five-point scale. The total debt-to-capital ratio was 30% during the second quarter, while the peer average was 20%. EBIT for the second quarter covered interest expense by a factor of 5.7, in line with peers. AIG’s adjusted net profit margin was 12.2%, above the average net profit margin of 7.3% for peers. The company’s senior debt has a Baa1 rating with a stable outlook from Moody’s and a BBB+ rating with a negative outlook from S&P. AIG pays a quarterly dividend of $0.32 per share, or $1.28 annually, for a yield of about 2.0%, in line with peers. Concurrent with earnings, AIG’s board of directors declared a quarterly dividend of $0.32 per share, payable on September 29 to holders of record on September 15. Our dividend estimates are $1.28 for both 2017 and 2018. During the quarter, AIG bought back 39 million shares of its stock for $2.4, which lowered the remaining authorization to $2.5 billion. AIG has been particularly aggressive with share buybacks, which have had a greater impact on EPS growth than the company’s operating results. However, on the 2Q call, CFO Sankaran said the company would no longer target an annual level of buybacks and would prioritize the allocation of capital toward growth initiatives.

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MANAGEMENT & RISKS On May 9, AIG announced the appointment of Brian Duperreault as CEO, replacing Peter Hancock on May 14. Mr. Duperreault had served as CEO at Marsh & McLennan and ACE, two competing insurance companies. He had also previously worked at AIG for 21 years. Additionally, on July 5, AIG appointed Peter Zaffino as COO. Since 2011, he had served as CEO of Marsh, an insurance firm and subsidiary of Marsh & McLennan. While there, he had worked with CEO Duperreault. Carl Icahn, a board member with a 5% ownership stake in AIG, had publicly called for Mr. Hancock’s ouster last year and was influential in the new hires. Risks for AIG include larger-than-expected catastrophe losses, reserve losses, pricing pressure, lower investment income, and continued low interest rates. COMPANY DESCRIPTION AIG is a leading provider of insurance products. It is organized into three segments: property casualty insurance, life insurance and retirement services, and mortgage guaranty. AIG is based in New York and has operations in more than 130 countries. VALUATION We think that AIG shares are attractively valued at current prices near $65. Over the past year, the share price has ranged between $57 and $67. AIG shares look cheap relative to peers. The price/book ratio is 0.8, versus an industry median of 1.4. The forward P/ E ratio is 12.1 versus a peer median of 18.3. We note that forecast ROE of 9.5% is below the long-term industry average of 10%. In our view, that’s the opportunity for AIG investors. As the company responds to pressure from activist shareholders, we expect earnings and ROE to improve, as has been shown in 2Q. And as the profitability gap with peers closes, the price/book gap should close as well. Our target price of $72 implies modest expansion of the price/book multiple to above 0.9, still well below the industry median. On August 7, BUY-rated AIG closed at $64.98, down $0.10. (Jacob Kilstein, CFA, 8/7/17)

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BERKSHIRE HATHAWAY INC. (NYSE: BRK.B, $178.04) ...... HOLD BRK.B: Strength in manufacturing and railroad offset by insurance underwriting losses n On August 4, Berkshire reported 2Q17 operating earnings attributable to Berkshire shareholders of $1.67 per diluted Class B share, down from $1.87 a year earlier, and below the $1.88 consensus. n We expect stronger economic conditions to boost the company’s railroad, manufacturing, insurance and energy revenues, although insurance underwriting losses have weighed on profits. n Berkshire’s cash and short-term investments swelled to $86 billion at June 30. At its recent annual meeting, management noted that it may adjust its share buyback program, which currently prevents repurchases at prices above 120% of book value, if suitable investments are not found. n While BRK has made an offer to acquire a Texas-based electricity company, it has not made a sizeable acquisition since the early 2016 purchase of both Duracell and Precision Castparts. We note that acquisitions have been a revenue driver in recent years. n BRK.B stock appears fairly valued at over 25-times our reduced 2017 operating EPS forecast, above the five-year historical average of 14 and the average of 19 for peers. ANALYSIS INVESTMENT THESIS We are maintaining our HOLD rating on Berkshire Hathaway Inc. (NYSE: BRK.B) following the company’s 2Q earnings report. We have a positive view of Berkshire, whose stock returns have more than doubled those of the S&P 500 since 1965 (compound annual growth of 20.8% versus 9.7% for the index). Once known more for purchasing large equity stakes, the company now augments its growth through acquisitions, typically paying cash for targets in the $5-$20 billion range. Purchases in recent years have included the Duracell battery business from Procter & Gamble, in February 2016, and Precision Castparts, a manufacturer of complex metal components, in January 2016. Berkshire’s revenues are economically sensitive, and an expected stronger U.S. economy should boost revenues and earnings from traditional manufacturing, insurance and energy businesses in 2017; however, the company will face difficult comparisons on nonoperating earnings due to strong investment gains over the past two years. The company’s cash and cash equivalent position was $86.2 billion at June 30. Management has noted a desire to keep at least $20 billion of balance sheet cash for liquidity purposes, which leaves a substantial amount uninvested. With high market valuations providing limited investment opportunities, management noted at its recent annual meeting that it may adjust its buyback program, which currently prevents repurchases at prices greater than 120% of book value. Berkshire’s A class shares are currently trading at more than 145% of June 30 book value of $182,816. The company pays no dividend, and investors in BRK.B must thus rely entirely on capital appreciation. That said, management’s interests are well aligned with those of shareholders, as insiders own just over 40% of the outstanding stock. The performance of Berkshire’s five largest public investments was mixed in the first half of 2017, with gains of 37% for Apple, 16% for and 10% for Coca-Cola, but declines of 14% for IBM and 5% for Wells Fargo. The advanced age of Chairman and CEO , 86, and Vice Chairman , 93, who have been critical to the company’s success, remains a concern. While succession plans are known to the company’s board, we believe this remains a headline risk. On valuation, the stock is trading at more than 25-times our 2017 operating EPS forecast, above the five-year historical average of 14 and the peer average of 19. As such, we believe that a HOLD rating remains appropriate. RECENT DEVELOPMENTS BRK.B shares have underperformed over the past quarter, rising 7.8%, compared to a 3.3% gain for the S&P 500. Over the past year, the shares are up 21% versus a 14% increase for the index. The stock’s 107% gain over the past five years exceeds the index return of 75%. The beta on BRK.B is 0.85. Berkshire has two classes of common stock: Class A and Class B. Each of the larger Class A shares may be converted at any time into 1,500 shares of Class B stock, but Class B cannot be converted into Class A. Although Class B shares have 1/ 1,500 the market value of Class A shares, they have only 1/10,000 of the voting rights of Class A.

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On August 4, Berkshire reported 2Q17 revenues of $57.5 billion, up 6% from the prior-year period, with gains of 5.3% for insurance and 11.2% for railroad, utilities and energy, but a 2.2% decline for finance and financial products. Costs climbed at a faster 9.8% pace, hurt in particular by higher insurance losses and loss adjustment expenses. Net operating earnings were $4.12 billion, down 11% from $4.61 billion a year earlier. Earnings totaled $1.67 per diluted Class B share, down from $1.87 a year earlier. Warren Buffett and Charlie Munger oversee the organization and are responsible primarily for capital allocation, while the executives of BRK subsidiaries are responsible for operating decisions at their companies. The subsidiaries send excess cash to the parent company, which then decides how to deploy it. Mr. Buffett, Mr. Munger and their team have been very successful in allocating this cash. From 1965 (when Mr. Buffett gained control of Berkshire) through the end of 2016, the company’s shares rose at a compound annual rate of 20.8%, compared to a gain of 9.7% (including dividends) for the S&P 500. In July 2017, Berkshire Hathaway Energy agreed to acquire 80% of the equity interests of Oncor Electric Delivery Co. for $9 billion. Oncor is a regulated electricity transmission and distribution company in Texas, delivering electricity to more than 3.4 million homes and businesses and operating more than 122,000 miles of transmission and distribution lines. BRK intends to acquire the remaining 20% minority interest positions in Oncor through additional separate transactions. Elliott Management has also indicated interest in making a bid for Oncor. In February 2016, Berkshire acquired the Duracell battery business from Procter & Gamble. Berkshire exchanged 52 million PG shares that it held in exchange for Duracell. Procter & Gamble also contributed $1.8 billion in cash to Duracell in a pretransaction recapitalization. In January 2016, Berkshire purchased Precision Castparts (PCP), a manufacturer of metal components and products, for $37.2 billion including debt. PCP generated revenue of $10 billion in fiscal 2015, and is a major supplier to the aerospace industry. EARNINGS & GROWTH ANALYSIS Berkshire’s profits are derived from several sources. In 2016, profits of roughly $24 billion were derived from investments (27%); manufacturing, services and retailing (23%); investment income from insurance (15%); railroads (15%); utilities and energy (9%); finance and financial products (6%); and underwriting income from insurance (5%). We believe that the insurance businesses (GEICO, General Re and reinsurance operations) are benefiting from generally favorable underwriting trends, heathy premium income, and competitively priced insurance products. These factors have helped to drive market share gains, as well as generally good investment results. Revenues for this segment grew 16% in the first half of 2017, aided by rate increases and new auto business at GEICO. However, the segment generated an after-tax loss from underwriting, due mainly to higher estimates for prior-year loss events at General Re, wider current-year catastrophe losses, and increased deferred charge amortization in property and casualty reinsurance businesses. Railroad segment revenues, derived from Burlington Northern Santa Fe, have been a drag in recent years, and were down about 10% in 2016, while pretax earnings declined a faster 16%. The decline reflected lower coal volume, driven by political pressure on the coal industry and competition from low-cost natural gas. However, revenues rebounded in the first half of 2017, rising 12% on an 8% increase in volumes and 4% higher revenues per car/unit. We expect some improvement in coal volumes going forward, and note support for the industry from the Trump administration. While volume growth may slow in the second half of the year, we believe an improving U.S. economy bodes well for healthy volumes going forward. Utility and energy revenues fell 2% in 2016, hurt mostly by a 13% decline in revenue at NV Energy, which operates regulated electric and natural gas utilities in Nevada. While revenue growth has generally been sluggish, earnings in this segment have benefited from lower costs. In general, the segment provides a predictable, though slow-growing, profit stream. Railroad, utility and energy businesses require considerable capital expenditures over time and also have high depreciation expense. Segment revenue rose 5.5% in the first half of 2017, while earnings rose 10%. In the manufacturing, service and retailing segment, which includes (specialty chemicals), Shaw (flooring), Acme (bricks and masonry), Benjamin Moore (paints and coatings), NetJets (fractional jet ownership), (quick- service restaurants), and a variety of home furnishing, jewelry, and other retailers, revenue rose 6% in the first half of 2017, while net earnings were up 8%. With the early 2016 acquisitions of Precision Castparts and Duracell now in quarterly comparisons going forward, revenue growth is likely to be slower in the second half. Gains from investments are influenced by the timing of sales and purchases, and can have a substantial impact on annual profits. Pretax earnings totaled $7.6 billion in 2016, and included gains on the sale of Wrigley preferred stock, Kraft preferred stock, the conversion of Dow Chemical preferred stock to common stock, and the exchange of P&G common shares for Duracell. As of June 30, 2017, Berkshire’s equity investments had a market value of $137.1 billion (up from $122.0 billion

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at the end of 2016) and a cost of $71.9 billion (up from $66.4 billion). Large individual public investments at the end of the quarter included Wells Fargo (market value of $27 billion), Apple Inc. ($19 billion), Coca-Cola ($18 billion), American Express ($13 billion), and International Business Machines ($8 billion). The Apple stake represents a doubling of the position in 1Q17. Berkshire also owns 26.7% of the outstanding shares of common stock, with a carrying value of $15.6 billion at June 30, 2017. Other large investments include 50,000 shares of 6% non-cumulative perpetual preferred stock of (BAC) and warrants to purchase 700 million shares of common stock of BAC. In June 2017, BRK announced its intention to exercise all of the BAC warrants when BAC’s upcoming dividend increase occurs. It expects to use substantially all of BAC preferred as consideration for the $5 billion cost to exercise the BAC warrants. The warrants, which would expire in 2021, are exercisable at $7.14 per BAC share. Reflecting continued high insurance losses in 2Q, we are lowering our 2017 EPS estimate on the Class B shares to $7.06 from $7.60. We expect revenue to rise 8%, led by a full year of contributions from Precision Castparts and Duracell and higher insurance premiums. We are lowering our 2018 EPS forecast to $8.00 from $8.45. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Berkshire Hathaway is High. At June 30 2017, Berkshire had cash and investments of $277 billion. It posted a 2016 operating margin of 15%. Berkshire has a stock repurchase program under which it may repurchase Class A and Class B shares at no more than a 20% premium to the book value of the shares. Book value for the Class A shares was $172,108 at December 31, 2016 (up from $155,501 a year earlier). At a current market value of roughly $250,000 per share, the Class A shares are trading well above the 20% premium threshold. At the company’s 2017 annual meeting, management said that it could expand the 20% threshold if it was unable to find suitable investments for its large cash position. The company does not pay a cash dividend, and we do not expect any dividend payments over the next five years. MANAGEMENT & RISKS Warren Buffett has been the controlling shareholder of the company since 1965, and its chairman and CEO since 1970. Charlie Munger has been Berkshire’s vice-chairman since 1978. About 41% of Berkshire is held by Mr. Buffett and other insiders. In our view, one of the primary risks facing Berkshire Hathaway involves the company’s management succession plan. Warren Buffett and Charlie Munger are 86 and 93 years old, respectively, and have been major factors in the company’s success. Although Mr. Buffett has recommended possible successors to the Berkshire board, his recommendations have not been made public and there is no way of knowing how successful any new CEO will be in his place. Other risks facing Berkshire include a likely significant reduction in coal volume at Burlington Northern Santa Fe; the continued loss of subscribers at the company’s newspapers; and the impact of e-commerce on the company’s retail holdings and some of its consumer brands. COMPANY DESCRIPTION Berkshire Hathaway is a holding company with subsidiaries in a diverse range of industries, including insurance, railroads, utilities, energy, finance, manufacturing, and retailing. Its major subsidiaries include GEICO, Burlington Northern Santa Fe, Precision Castparts, and McLane Company. As of June 30, 2017, Berkshire also had about $135 billion of equity investments, including significant stakes in Wells Fargo, Apple Inc., Coca-Cola, IBM and American Express. VALUATION We expect Berkshire’s revenue and operating earnings in 2017 to benefit from a rebound in its manufacturing, energy and financial services businesses. In general, the company’s earnings are sensitive to economic activity and should benefit from the expanded U.S. economy. However, underwriting losses add a volatile and difficult to predict component to the earnings stream. First-half 2017 earnings were negatively impacted by higher estimates for prior-year loss events, while underlying insurance revenue trends were favorable. Our forward estimates exclude investment gains, which were significant in 2015 and 2016, and can also have a large swing impact on earnings. BRK.B shares have traded in a range of $142-$180 over the past year and are currently near the top of this range. They are trading at 25.2-times our 2017 operating EPS forecast, a multiple that has climbed recently both from stock price appreciation and our lower estimate. The shares are trading above the five-year historical average of 14 and the peer average of 19. As such, we believe that a HOLD rating remains appropriate. On August 7, HOLD-rated BRK.B closed at $178.04, down $1.78. (Stephen Biggar, 8/7/17)

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INTEGRA LIFESCIENCES HOLDINGS CORP. (NGS: IART, $50.49) ...... BUY IART: Reiterating BUY and $64 target n Despite a selloff following the company’s 2Q earnings report, we believe that Integra has strong growth prospects. As the smallest company (by market cap) in our med-tech coverage universe, Integra is also able to execute M&A deals that can move the needle on both revenue and EPS. n The Codman and Derma Sciences deals could together add more than $400 million in annual revenue. n We expect recently launched products and the expansion of the company’s wound care portfolio to drive revenue growth in the second half of 2017. n We are reaffirming our adjusted EPS estimates of $1.94 for 2017 and $2.22 for 2018. ANALYSIS INVESTMENT THESIS We are reaffirming our BUY rating on Integra LifeSciences Holdings Corp. (NGS: IART) with a price target of $64. Our positive view of Integra reflects the company’s success in integrating acquisitions and adding growth drivers through new product launches. As the smallest-cap stock in our med-tech coverage universe, Integra is also able to execute M&A deals that can move the needle on revenue and EPS. The company is adding growth drivers with the recent purchase of Derma Sciences and the pending acquisition of Codman. The Codman acquisition will add neurosurgery products and expand Integra’s distribution channels and sales presence in overseas markets. Integra management has been clear about its intention to grow overseas sales, and the Codman deal should provide the scale needed to achieve that goal. Integra is also launching new products, including a tissue ablation system for neurosurgery and a reverse-shoulder implant. Despite our positive view, IART shares fell 10.6% following the company’s July 26 earnings report on concerns about management’s lower revenue forecast. However, we believe that the selloff was overdone and that it provides investors with a favorable buying opportunity. RECENT DEVELOPMENTS Integra delivered mixed 2Q17 results as sales of dural repair products, which are used to seal cranial sutures, fell short of expectations. The company also lowered its full-year sales forecast. However, we regard the dural repair issue as temporary and continue to have a positive view of Integra as it prepares to complete the Codman acquisition. We see Codman as a strong growth driver, with a range of products that complement Integra’s existing neurosurgery portfolio. Integra’s 2Q17 results also included solid sales of tissue-regeneration and orthopedic extremities products, a favorable initial response to its new tissue- ablation system, and a strong contribution from the recent Derma Sciences acquisition. Second-quarter adjusted EPS rose 12.5% from the prior year to $0.45 and matched the consensus estimate. GAAP net income was $10.8 million or $0.14 per share, compared to $12.8 million or $0.16 per share a year earlier. Overall revenue rose 13.2% to $282.2 million. Organic revenue, which excludes acquisitions and divestitures, grew 4.6%, a slowdown from 6.4% in 1Q17. The adjusted gross margin was 68.4%, down 80 basis points, reflecting the dilutive impact of the Derma Sciences acquisition. The adjusted EBITDA margin was 22.2%, up 30 basis points, as improved management of SG&A and R&D costs more than offset the lower gross margin. EARNINGS & GROWTH ANALYSIS Management has reaffirmed its 2017 adjusted EPS guidance of $1.88-$1.94. Due to the slowdown in dural repair sales, it now expects organic revenue growth 6.0%-7.0%, down from a prior view of 7.0%-8.5%. We are reiterating our adjusted EPS estimates of $1.94 for 2017 and $2.22 for 2018. RISKS Integra faces the risk of integrating the recently completed Derma Sciences acquisition and the pending Codman acquisition. It also faces pricing pressure as hospitals seek to lower the cost of supplies, equipment and implants. Insurers may also seek to reduce reimbursement for certain surgical procedures. The company faces regulatory risk. Its products are subject to review and premarketing approval by the FDA.

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COMPANY DESCRIPTION Based in Plainsboro, New Jersey, Integra is an integrated medical device company that develops and markets devices for use in neurosurgery and the orthopedic reconstruction of extremities and spinal discs. The company’s products are used in cranial and spinal procedures, peripheral nerve repair, small bone and joint injuries, and the repair and reconstruction of soft tissue. It operates in two segments: Specialty Surgical Solutions and Orthopedics, and Tissue Technologies. The company also markets products through private-label relationships with larger medical device companies. VALUATION IART trades at 22.1-times our 2018 EPS estimate, above the average of 20.9 for peers in our med-tech coverage universe. However, we believe this premium is warranted given Integra’s strong sales growth, steady flow of new products, success in integrating acquisitions, and rising margins. As the smallest med-tech company in our coverage universe (by market cap), Integra is also “moving the needle” on revenue and EPS growth from its recent M&A deals. We are reiterating our BUY rating with a price target of $64. On August 7, BUY-rated IART closed at $50.49, up $1.41. (David Toung, 8/7/17)

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NABORS INDUSTRIES LTD. (NYSE: NBR, $7.05) ...... HOLD NBR: Maintaining HOLD on challenging outlook n On August 2, Nabors reported a 2Q17 adjusted net loss of $132.9 million or $0.46 per share, compared to a loss of $184.7 million or $0.65 per share in 2Q16. The loss was wider than our forecast of $0.35 per share. n NBR shares have underperformed over the past three months, falling 20% while the S&P 500 has risen 3.6%. Over the past year, they have fallen 16.8%, compared to a gain of 14.3% for the index. n Management expects further growth in the rig count in the second half of the year, reflecting the completion of recertification work and an expected increase in drilling activity. n We are widening our 2017 loss estimate to $1.50 from $1.33 per share following the wider-than-expected 2Q loss. We are also widening our 2018 loss estimate to $0.35 from $0.05 per share. ANALYSIS INVESTMENT THESIS We are maintaining our HOLD rating on Nabors Industries Ltd. (NYSE: NBR). While P/E is not meaningful for valuation purposes given our 2017 and 2018 loss forecasts, the shares are trading near the midpoint of their five-year historical range for most other valuation metrics, and appear fully valued given the company’s current challenges. We see limited upside for NBR based on its continued losses and current energy sector volatility. We also believe that Nabors will be unable to react quickly enough to move to profitability before 2019. RECENT DEVELOPMENTS NBR shares have underperformed over the past three months, falling 20% while the S&P 500 has risen 3.6%. Over the past year, they have fallen 16.8%, compared to a gain of 14.3% for the index. The beta on the stock is 1.55. On August 2, Nabors reported 2Q17 operating revenues of $631 million, up from $571 million in 2Q16. The company reported an adjusted net loss of $132.9 million or $0.46 per share, compared to a loss of $184.7 million or $0.65 per share in 2Q16. The loss was wider than our loss forecast of $0.35 per share. Adjusted EBITDA fell to $138.8 million from $165.5 million in 2Q16 but rose from $100 million in the first quarter. EARNINGS & GROWTH ANALYSIS In the second quarter, average daily rig margins in the Lower 48 segment rose 19% sequentially, and average rigs working rose 15% sequentially to 95 rigs. This is up from a low of 35 rigs in May 2016. On the international side, the company had an average of 93 working rigs. In all, NBR had an average of 206 working rigs at an average rate of $10, 809 per day in 2Q17, compared to 201 rigs at an average $9,333 per day in 1Q. In 4Q16, NBR signed a joint venture agreement with Saudi Aramco that should help to drive growth for both companies. During the 2Q conference call, CEO Anthony Petrello said that he was pleased with the company’s progress. Management expects further growth in the rig count in the second half of the year, reflecting the completion of recertification work and an expected increase in drilling activity. In the U.S. daily margins improved with help from higher pricing and cost reductions. In addition, the company has been able to obtain higher rates for rigs on spot or short-term contracts. We are widening our 2017 loss estimate to $1.50 from $1.33 per share following the wider-than-expected 2Q loss. We are also widening our 2018 loss estimate to $0.35 from $0.05 per share, though we still expect an increase in the rig count and higher pricing next year. FINANCIAL STRENGTH & DIVIDEND We rate Nabors’ financial strength as Medium, the midpoint on our five-point scale. The company’s debt is rated BBB- /negative by Standard & Poor’s and BBB-/negative by Fitch. As of June 30, 2017, NBR had cash and short-term investments of $232.0 million and working capital of $297.6 million. Both amounts include $40.0 million in cash to be used exclusively by a joint venture to fund future operations. As of December 31, 2016, the company had cash and short-term investments of $295.2 million and working capital of $333.9 million. It has $272.0 million outstanding under its $2.25 billion revolving credit facility and commercial paper program. It ended the second quarter with a debt/cap ratio of 55%, compared to 48% at the end of 2Q16. Capital spending came to $132 million in 2Q17, up from $63 million in 2Q16. Nabors pays a quarterly dividend of $0.06 per share or $0.24 annually, for a yield of about 3.3%. Our dividend estimates are $0.24 per share for both 2017 and 2018.

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MANAGEMENT & RISKS Like its peers, Nabors continues to face pressure from low commodity prices and weak drilling activity. The company’s international results could also be hurt by political instability, war, or acts of terrorism. COMPANY DESCRIPTION Nabors Industries Ltd. owns approximately 450 land drilling rigs and offshore rigs. It also manufactures specialty rigs, rig components and drilling instrumentation systems. The company was founded in 1968 and is headquartered in Hamilton, Bermuda. VALUATION NBR shares have traded between $6.93 and $18.40 over the past 52 weeks. On a technical basis, the shares have been in a bearish pattern of lower highs and lower lows that dates to January 2017, though they appear to be approaching a bottom. While P/E is not meaningful for valuation purposes given our 2017 and 2018 loss forecasts, the shares are trading near the midpoint of their five-year historical range for most other valuation metrics, and appear fully valued given the company’s current challenges. We see limited upside for NBR based on its continued losses and current energy sector volatility. We also believe that Nabors will be unable to react quickly enough to move to profitability before 2019. As such, our rating remains HOLD. On August 7, HOLD-rated NBR closed at $7.05, down $0.52. (David Coleman, 8/7/17)

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ETHAN ALLEN INTERIORS INC. (NYSE: ETH, $32.30)...... HOLD ETH: Initiating FY19 estimate at $2.00 n We believe that CEO Farooq Kathwari has a methodical plan to increase sales and improve profitability; however, with the shares trading close to our fair value estimate, our rating on Ethan Allen remains HOLD. n Fourth-quarter earnings came in lower than we modeled and we expect increased operating expenses to continue to weigh on first-half earnings. n We are lowering our FY18 estimate to $1.84 from $1.87, which is on an adjusted, or non-GAAP basis. Our 1Q18 estimate is $0.41. n We are initiating a FY19 EPS estimate of $2.00. This 9% increase in EPS is the result of our expectation for about a 5% sales increase, about a 20 basis point increase in operating margin and continuing, small, share repurchases. ANALYSIS INVESTMENT THESIS We believe that CEO Farooq Kathwari has a methodical plan to increase sales and improve profitability; however, with the shares trading close to our fair value estimate, our rating on Ethan Allen Interiors Inc. (NYSE: ETH) remains HOLD. Ethan Allen should benefit from a range of strategic initiatives that include: adding and acquiring a small number of new design centers, transferring design centers to more productive locations, hiring experienced and entrepreneurial designers, aggressively introducing new products, adding Disney themed products to reach shoppers with young families, working with realtors to reach new homeowners, expanding internationally, selling products through Amazon, introducing new technology that will help designers to add incremental sales, and improving digital marketing. The company has a number of ways to raise operating margins. A more profitable product mix and more sales through the Retail channel could drive gross margin expansion. Margins are also likely to improve as recovering sales lead to higher capacity utilization and additional expense leverage, as ETH is both a manufacturer and retailer of furniture. We expect the company to expand sales in overseas markets, such as China, where affluent shoppers have a strong demand for luxury goods, including furniture made in the U.S. from American hardwoods. Going forward, our decision to upgrade ETH could depend on the company’s ability to drive sales growth by reaching a wider and younger demographic than affluent baby boomers. RECENT DEVELOPMENTS On July 19, we attended Ethan Allen’s investor day at the company’s headquarters in Danbury, Connecticut. We had the opportunity to tour the design studio, meet senior members of the management team and learn how the company is developing new products to meet its revenue targets. Among recent initiatives, we are very bullish on the company’s partnership with Amazon.com. Ethan Allen now has its own “store” under the Amazon domain. We like the initiative. ETH has had a difficult time reaching a younger, less affluent demographic than its core, wealthy Baby Boomers. There are obviously a lot reasons for this. The biggest explanation is financial/ economic. We have also spoken to affluent Millennials who don’t expect to be living in the same place for very long. They don’t want to sink money into furniture that may not fit the next place they live. Another issue is that many younger shoppers simply would not go into an Ethan Allen store. The stores are elegant, but perhaps a little intimidating to a less formal Millennial, compared with a wide-open Target or even a lower-end furniture store that has price signs and big display windows. Some of the ETH styles may also be a little formal for the generation that came of age during the Great Recession and seems to rank pets as a very high priority. The Amazon initiative puts ETH’s products where its target customers shop – on Amazon. We give management credit for trying something new and very different. While we give the initiative two thumbs up, there are a few things that could go on ETH’s “To Do” list. The Ethan Allen home page on Amazon has a clean inviting appearance, but we don’t think it does enough to explain the brand and product quality to a potentially new audience. Another issue for ETH shoppers on Amazon is that we did not see Prime, free shipping. In fact the shipping price for many furniture items is over $100. A careful browser will see that this price includes delivery, unpacking and even placement in a particular room, but many buyers may not read far enough to see the value that ETH is providing. ETH must also do more to explain its value proposition. For an Amazon shopper who doesn’t know the brand, it won’t be clear why an ETH dining set might cost $3,500 or $4,000 and another brand on Amazon might be $299. We know the ETH set uses solid wood like Maple, rather than a particle board with a thin veneer. The ETH wood is probably aged and dried so it won’t warp, it is made in North America and it is constructed in a way that will make it durable.

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While ETH’s new Amazon presence allows more eyeballs to see individual pieces of furniture, it may cannibalize the design services and designer relationship that could lead to add on sales. We believe that many of ETH’s designers are hopeful that the Amazon storefront will drive more traffic to stores. We are more circumspect on the Disney furniture line. The line features furniture, rugs, lamps, artwork and bedding with Mickey Mouse images. In some case the Disney theme is subtle, in other cases, like a pink $759 ottoman in the shape of mouse ears, the design is more overt and playful. While some shoppers will embrace this merchandise, a possible concern is that sales may be constrained because shoppers prefer to add novelty to their rooms at considerably lower price points and purchase their high quality furniture pieces in more timeless finishes that can be used for many years. On the topic of revenue, CEO Farooq Kathwari noted three issues that had caused some recent softness in sales. Mr. Kathwari believes less aggressive discounting practices, and the slow start for the Disney products caused lower sales in early 2017. On July 26, Ethan Allen reported its official fourth-quarter earnings results after releasing preliminarily 4Q financial results on July 17 in anticipation of its investor’s day. The final numbers were consistent with the previously-released expectations. Fourth-quarter adjusted earnings declined 26%, to $0.42 per share for the fiscal fourth quarter ended June 30. Our preliminary estimate was $0.51 per share. GAAP earnings were also $0.42 per share, but the adjusted net income was $34 thousand lower than the GAAP number in 4Q because of a tax item. GAAP earnings fell 30% year-over-year. Sales declined by 5.2% to $194.9 million in 4Q17. One factor was that the company made an effort to reduce discounting. Most companies seek to avoid discounting with high quality brands because it hurts the brand image. Business was weakest in April, but it improved in May and June. Our preliminary estimate was $207.8 million. In the Retail division, net sales decreased 6.4% to $153.2 million, including a comparable design center sales decrease of 9.2%. To be sure, the company did have a difficult comparison against a 9.4% net sales increase in the prior-year quarter. Our preliminary sales estimate was $165.2 million. Retail orders written in 4Q increased 1.9%, a meaningful turnaround from declines of 3.6% and 7.7% in fiscal 2Q and 3Q, respectively. Taking a closer look, written orders decreased 7.1% in April before rising 7% May and 6.9% in June. Mr. Kathwari seemed pleased that the positive trend appears to have continued into July. Written orders have been hurt by the company’s decision to reduce discount pricing. Comparable written orders were down 1.0% in the quarter. Going into the fourth quarter, ETH was willing to be a bit more promotional to drive sales. We visited an array of competitors over the Memorial Day weekend, and there was a correlation between traffic and advertised markdowns. It is always hard to assess which discounts are real, but it appeared to us that 15%-20% off were the magic numbers for attracting customers. The Retail segment posted operating income of $5.3 million. This compares to an adjusted profit of $7.5 million in the prior-year quarter. Fourth-quarter operating income was equivalent to about 3.5% of sales. The operating margin in the prior-year quarter was 4.6%. Our preliminary operating profit estimate was $14.9 million. Profitability in the Retail segment was hurt by lower sales. Sales in the Wholesale segment fell 10.3% to $110.8 million, and came in below our preliminary estimate of $128.7 million. Wholesale operating income decreased to $13.1 million from $18.4 million. We had been looking for $23.4 million in operating profit. As a percentage of sales, adjusted wholesale margin decreased to 11.5% from 14.4%. The wholesale division was hurt by increased advertising expense and lower retail sales. Total sales are less than the sum of individual segment sales because of intersegment eliminations. Consolidated gross margin in the quarter decreased by 70 basis points to 55.6% of sales, which was slightly below our estimate of 55.8%. Gross margins were hurt by lower sales, partially offset by a favorable sales mix leaning towards retail. The company continued its policy of offering fewer discounts in 4Q. Expenses fell 0.3% to $89.8 million, or 46.1% of sales. Variable costs decreased relative to sales, offset by 27.5% higher advertising expense compared to the prior year. Expenses were 230 basis points higher than in the prior-year quarter. We expect this trend to continue into the first half of fiscal 2018 before management pares back on advertising. Operating margin decreased to 9.5% of sales from 12.3% on an adjusted basis. Our estimate was for an operating margin of 10.9%. Operating income of $18.6 million was down 26% versus 4Q16 adjusted operating income. We had expected $22.6 million. Adjusted EBITDA, which is a non-GAAP calculation provided by the company, decreased to $23.6 million from $30.1 million, and the adjusted EBITDA margin rate decreased by 250 basis points to 12.1% of sales. Inventories were down 7.9% year-over-year, to $149.5 million at the end of 4Q. For FY17, Ethan earned $1.45 per share on an adjusted basis.

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EARNINGS & GROWTH ANALYSIS We are lowering our FY18 EPS estimate to $1.84 from $1.87 which is on an adjusted, or non-GAAP basis. Next year, we expect high operating expenses to come down slightly in the second half of the year with 4.5%-5.0% revenue growth helped by easy comps starting in the second quarter. We believe Mr. Kathwari will stay disciplined on pricing with possibly some more discounting in the second half of the fiscal year. The monthly written orders data from 4Q is encouraging, telling us consumers are adjusting to higher average prices. We are also modeling for a small boost from ETH’s various initiatives and government contract which will start to materialize in the company’s fiscal third quarter. We are initiating a FY19 earnings estimate of $2.00 per share. This 9% increase in EPS is the result of our expectation for about a 5% sales increase, about a 20-basis-point increase in operating margin and continuing, small, share repurchases. Over the next few years, we believe that the company will drive sales growth by opening a small number of new design centers, relocating design centers to more productive locations, adding designers in its own stores, and attracting independent designers who will bring their existing clients to Ethan Allen. The company is using technology such as tablet devices to improve the sales process at existing locations. The company recently produced a virtual reality capability that allows customers to see ETH furniture in their homes. ETH is very focused on driving sales with initiatives to reach younger shoppers and sell more accessories. We believe the new initiative to essentially use Amazon as a showroom is a positive step. We believe that despite the quality that goes into ETH’s products, it will be difficult to persuade younger shoppers to pay premium prices when lower priced alternatives are available at Target, West Elm and even on Etsy. The company’s initiative with Disney may also contribute to sales, but we do have reservations. Our thesis is that many shoppers who are willing to pay for ETH quality will want pieces with more timeless finishes rather than Disney motifs. Earlier this year, the company announced that it will be collaborating with Amazon to launch the “Ethan Allen Design Studio” on Amazon. The products will be sold and shipped by Ethan Allen in an effort to reach Amazon’s vast customer base. Amazon will receive a small commission from Ethan Allen for each Amazon-related sale, echoing ETH’s partnership with its interior designers. We also expect the company to open stores in more international markets. Ethan Allen currently has approximately 82 locations in China, and management is encouraged by the long-term growth potential. Some 60% of the products at these Chinese stores are shipped from the United States. There is clearly demand for luxury goods around the world, and furniture made from American hardwoods is no exception. ETH has a total of approximately 113 international design centers, of which six are company owned and operated. The Disney program will soon be offered with its Chinese partners. During FY17 international sales were 10.0% of consolidated sales versus 9.2% the prior year. However, we note that net total company sales shrunk 3.9% in FY17. ETH is also trying to drive sales by winning corporate and government business. We expect this to be slow going; however, it is an incremental source of business that deserves attention. ETH is also adding outdoor furniture as a category. We see this as a good product-line extension, but are not modeling a significant contribution to sales in the near term. There is a lot of competition from Lowe’s, Home Depot, Pottery Barn, Pier 1 and Restoration Hardware. Ethan Allen acquired a former case goods manufacturing plant in Honduras, which should help it to manage further growth. The company’s website is also helping sales by allowing prospective shoppers to do research, look at design ideas, and even speak with a designer before they enter a store. Although traffic has recently been a challenge, the stores are seeing more “qualified” traffic and closing a higher percentage of sales because of the company’s online capabilities. Nine of 10 shoppers go to the website before visiting a store. Additionally, the company recently launched an online wedding and gift registry, which could provide some incremental traffic increases. The company is also developing international versions of its e-commerce site in different languages. We believe that these online capabilities will help to support the company’s international presence. The company has been reducing its discounting. The bigger issue is managing pricing integrity in a market where there are a lot of very visible discounts. During 2Q, ETH had offered high discounts of 25%-30%. Management reduced average discount levels back to 15%-20% in 3Q, partly to get off the cycle of needing bigger and bigger discounts to stimulate sales. Management attributed that quarter’s underwhelming growth to the lack of such significant discounts. Mr. Kathwari has reiterated that “honest pricing” (fewer discounts at lower average prices) will be a part of ETH’s strategy for the foreseeable future. We think ETH, and everyone else, will struggle with maintaining the integrity of their brand. While customers want to feel like they are getting high quality furniture, they also want to feel like they are getting a good deal.

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We expect that gross margin will improve over the next couple of years. The company is vertically integrated, meaning that it manufactures most of the products it sells. As sales improve, we expect higher capacity utilization and additional expense leverage from the company’s manufacturing facilities to result in higher profitability. The company is operating its supply chain more efficiently. Its upholstery manufacturing now has the capacity to maintain backlog in the four- to six-week range. We also believe that ETH can increase gross margin by selling more through the retail channel. More efficient manufacturing and a more profitable product mix are potential drivers of gross margin expansion. A recent innovation is an emphasis on made-to-order products, which has reduced excess inventory in stores and therefore the need for clearance-related markdowns. Some of that benefit may diminish as the company aims to have more merchandise in stock, but the main goal will be to boost sales and leverage fixed expenses. Using technology to display product photos, and building to customer specifications, rather than selling right off the showroom floor, may also reduce the need for design-center space and allow Ethan Allen to reduce its rental expense. This could be particularly advantageous as the company expands internationally. We believe that the company can leverage its SG&A expense over time, despite the recent increases in marketing and staffing expenses that is intended to drive future sales. Management has consolidated design centers in some markets, and we believe there is an opportunity for smaller design centers depending on balance of products that are made to order and how extensively management uses computer applications, rather than floor models, to present products. We also expect the company to experiment with more effective ways to advertise including the use of digital media. ETH aims to serve households with an average income of more than $75,000, but the recession pushed that level to $150,000 and higher. We believe that expanding the company’s target demographic to households with incomes above $100,000, along with some sales to less affluent households, could help business. Ethan Allen is focused on developing product offerings that will expand its reach to a larger and younger customer base. We believe the company is focusing on individual pieces because individual shoppers decorate in a manner that is more eclectic than simply buying a whole suite of furniture in matching wood and upholstery. The home furnishing business remains extremely competitive with respect to both the sourcing of products and the wholesale and retail sale of those products. While domestic manufacturers continue to face pricing pressures from lower-cost manufacturers in other countries, Ethan Allen chooses to maintain a substantial domestic manufacturing base, with about 75% of products made in North American facilities. Sales dipped to $590 million in FY10 from $1 billion in FY07, before recovering to $729 million in FY12, and were about $750 million in FY14 and FY15. Management would like to boost sales back to $1 billion. The company believes, based on its operating structure, that it can achieve EPS of about $3.45 with sales slightly above $1 billion. Over the next five years, we believe that EPS could grow at a compound annual growth rate of 15%-20%. It is difficult to provide a useful long-term growth rate for a cyclical business that appears to be in the early to middle innings of a recovery. This CAGR is substantially above what we regard as the company’s normalized potential. Once the company fully rebounds from the recession, and gets sales back to approximately $1 billion, we expect earnings to increase 5%-7% annually. However, we are unsure if that $1 billion mark is attainable in the near future. We expect sales of about $800 million in FY18 and $840 million in FY19. This appears reasonable given prospects for economic improvement, international expansion, and potential market share gains. A risk to this forecast is that younger shoppers furnishing homes for the first time may place less value than older shoppers on high-end furniture. Management does not ordinarily provide guidance; however, during the July investors’ presentation, management reiterated four opportunity scenarios which highlight potential margin expansion, given higher sales. Management indicated that at sales of $900 million, $1.066 billion, and $1.2 billion, the company could achieve operating margins of 12.7%, 15.0%, and 16.6% respectively. Gross margins increase by 50 basis points per each of these incremental improvement in the sales scenario, peaking at 56.5% on the high end. As of FY17, the company had net sales of $763 million, gross margin of 55%, and an operating margin of 7.6%. The slide does not include a timeline for any of these future scenarios. FINANCIAL STRENGTH & DIVIDEND We are maintaining our financial strength rating for ETH at Medium, which is the middle rank on our five-point scale. We gave strong consideration to raising the rating primarily because of the company’s unusually low level of debt at $14.3 million. Ethan Allen also maintains a healthy cash balance. It had about $58 million in cash and marketable securities at the end of 4Q17. We did not raise our assessment because ETH is a small company in a very cyclical industry. While the balance sheet and credit metrics have surely improved, we don’t believe that the consistency of sales and cash-flow generation ranks with companies like Costco, Wal-Mart and TJX.

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ETH is no longer rated by Standard and Poor’s. In March of 2015, the company redeemed the remaining $129 million of its senior notes. As anticipated, the company used a combination of cash and $75 million of borrowings under the revolving credit facility and term loan. Prior to the redemption, the bonds were rated BB. Total debt was $14.3 million or 3.5% of capital at the end of 4Q17. For 4Q16, debt was 9.6% of capital. Outstanding debt decreased $27.5 million from $41.8 million in 4Q16. Debt decreased by $15.8 million from 3Q17 as a result of repayments on the company’s revolving credit facility, as well as other scheduled payments. Most of the balance sheet debt is from the term loan. There was no debt on the revolving credit facility, which like the term loan, matures in October of 2019. The remaining balance sheet debt, approximately $1 million, is in the form of capital leases. If we reclassify operating leases (which do not appear on the balance sheet) as debt, the adjusted debt/capital ratio would be approximately 42%, which is slightly below average for the consumer companies we follow. We estimate that lease-adjusted debt was about 4.0-times EBITDAR at the end of FY12 and approximately 3.4-times at the end of FY13, 3-times at the end of FY14, 2.8-times at the end of FY15, 2.5-times at the end of FY16 and 2.4-times at the end of 2017 (lower is better). We’d normally equate a multiple of 2.4 with a Medium financial strength rating and a multiple of 2.0, or lower with a Medium-High rating. The trend of improvement in adjusted debt to EBITDAR is a primary reason why we raised our assessment of financial strength. We also think the currently high cash to debt ratio warrants a Medium-High rating. The revolving credit facility had available borrowing capacity of $115 million at the end of FY17. The quarterly dividend had been as high as $0.25 in late November 2008 and January 2009, but management cut the payout to $0.10 and then to $0.05 in early 2009. In FY11, the company paid quarterly dividends totaling $0.20 per share. In FY12, the company paid dividends of $0.28. The FY13 dividend payout was $0.36. This does not include a $0.41 per share, special cash dividend that the company paid in December of 2012. The FY14 payout was $0.40 per share. In April of 2015, ETH raised the quarterly payout to $0.14 from $0.12. The company paid FY15 dividends of $0.46 per share. On January 27 of 2016, the company raised the quarterly dividend to $0.17 from $0.14. ETH made FY16 dividend payments of $0.59 per share. ETH made another increase, to $0.19 in January of 2017. For 4Q17, ETH paid dividends of $0.19 per share, in line with the prior quarter. The company made FY17 dividend payments of $0.72 per share. On July 27, the company also announced dividends of $0.19 per share for the 1Q18, to be paid on October 25. We are raising our current FY18 dividend estimate to $0.82 per share from $0.79 per share. We expect ETH to raise its dividend next quarter to $0.21. We are initiating a FY19 estimate of $0.87. ETH repurchased 100,000 shares for $3.4 million in 1Q17 and had a remaining authorization to repurchase $1.65 million shares. There were no repurchases in either 2Q or 3Q. During the 4Q the company repurchased 250,000 shares for roughly $6.9 million. We expect additional share repurchases in the future. The company had a remaining authorization to repurchase 1.4 million shares at the end of 4Q. The company owns its corporate headquarters in Danbury, Connecticut as well as a 193-room hotel that is adjacent to the corporate offices. The hotel is used for corporate functions though it also offers public accommodations. Of the 148 company- operated retail design centers, as of June 30, 2017, 66 were owned (including 17 on land leases), and 82 were leased from independent third parties. The 4Q balance sheet lists the value of the properties, plant and equipment at $270 million. MANAGEMENT & RISKS Mr. Farooq Kathwari is the current CEO of Ethan Allen. He has been president of the company since 1985 and chairman and principal executive officer since 1988. We have been impressed by Mr. Kathwari’s deep knowledge of the company and the furniture industry, as well as by his insights on growing and managing the business. He regards building the ETH management team as his life’s work. Mr. Kathwari has been honored by the U.S. Association for the United Nations High Commissioner for Refugees. He has been widely recognized for his activities outside the boardroom. In November of 2015, the company announced, following Ethan Allen’s shareholder meeting, that all seven of the company-nominated directors, including CEO Farooq Kathwari, were reelected to the board. The vote keeps control in the hands of Mr. Kathwari, who has run the company for about 30 years. This followed a contentious challenge from Sandell Asset Management, which held about 5.5% of ETH’s shares at the time and had nominated a slate of six directors for the seven-director ETH board. The future of the company’s owned real estate and the pace of sales growth were among the contentious issues. The Wall Street Journal reported that Sandell had proposed to sell some of ETH’s real estate, broaden the product line and boost online sales. Mr. Sandell had told the press that ETH could be worth $40 per share if it spun into a Real Estate Investment Trust.

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As background, the most recent annual report says that the company owns 66 of the 148 retail design centers that the company operates. The company also owns its 144,000 square foot headquarters in Danbury, Connecticut and an adjacent hotel and conference center with about 200 guest rooms. Spinning off real estate is something retailers discuss often. Some of the challenges are that the most marketable locations also tend to be the ones that the retail company wants to operate and control. Other issues include the fact that the retailer would have to pay escalating rent on the properties it was selling, that it might need to keep some equity tied up in the REIT and that a REIT that invests in the same type of properties that are almost entirely rented by one company may not trade at the same levels as a more diversified REIT. Still, we believe that activists like Sandell are doing other shareholders a service in prodding companies to consider their capital allocation. While some retailers, including Macy’s, have seen only selective upside in real estate deals, we think it makes sense for a company like ETH to keep its eyes open. It could be that it doesn’t need all of its owned stores, that it might be better off in different locations or by consolidating locations or that it might be able to get by with less space in an existing location. We regularly visit the Etan Allen store in Princeton. We think the company did a brilliant job in reducing its square footage and in leasing the excess space to Trader Joe’s and Chipotle on either side of the store. We also think it is reasonable to ask if the company needs to own its headquarters in that particular location as well as a hotel. To be sure, the company said just prior to the election that it owned 53 design centers after selling and repositioning 38 locations with about $67 million of net proceeds. In the 4Q15 call, Mr. Kathwari estimated that there was potential to sell and re- locate $70-$80 million of properties over the next decade. In 1Q16, ETH considered issuing approximately $250 million of debt in fiscal 2Q, with some proceeds slated for dividends and share repurchases. The company decided against this because of volatility in the financial markets and probably because there was less demand for debt that is riskier than Treasury notes. With the shareholder vote resolved, we want to see the company continuing its efforts to reach new customers and drive profitable sales. Demand for the company’s big-ticket discretionary products can be very sensitive to economic growth and consumer confidence. Ethan Allen faces a still-fragile economic environment in which discretionary spending is being constrained by, softness in real wages, constrained credit conditions and a slowly-recovering housing market. While many of the company’s customers have above-average incomes, their confidence and spending has, at times, been hurt by geopolitical concerns as well as weakness and volatility in the stock market. To grow the business, ETH will need to win more business from younger, less affluent shoppers, perhaps the children of the ‘Baby-Boomer” clients who sustained the company through the recession. We also see prospects for intense competition from competitors such as Ashley, Bassett, Haverty, La-Z-Boy, Pier 1, Williams-Sonoma Home, Restoration Hardware, Crate and Barrel, and a host of local furniture stores. Ethan Allen makes most of its products in the United States and the company must compete with companies that sell products made overseas. It is also a challenge for ETH’s designers to articulate the value of more expensive furniture that may be better made but look similar to a competing product. Another challenge is the growing tendency of many consumers to “mix and match” in both fashion and furniture. Some shoppers may try to economize by mixing pieces from ETH with lamps and accessories from Pottery Barn or Target. ETH has its own initiative to capitalize on this trend. Costs associated with production, distribution and retail operations may increase or be difficult to model. Profits could be squeezed by a range of commodity costs from lumber to fabrics. Fuel represents approximately 5% of the company’s cost structure. On the plus side, the company is vertically integrated and getting more orders should help ETH to use its factories more efficiently and raise profits. The company’s fulfillment and logistics could be impaired if a facility was damaged or affected by bad weather. In addition, making furniture can be dangerous. The company could face liabilities if it doesn’t maintain stringent personal and environmental safety standards. The company has tried to move its design centers to better locations, but could face higher lease rates or competition in retaining attractive properties. COMPANY DESCRIPTION Ethan Allen Interiors Inc., based in Danbury, Connecticut, is a manufacturer and retailer of home furnishings. FY17 sales were $763 million. At the end of FY17, the company sold its products through a network of approximately 300 retail design centers: about half are company-operated and half are operated by independent retailers. There were approximately 80 centers in China. Some 77% of sales are through the company’s retail segment and 23% are through the wholesale segment. Beds, tables and other case goods represent approximately 33% of wholesale sales. Upholstered items, such as sofas and recliners, represent 51%.

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Accessories, such as clocks, window coverings and rugs, represent 16%. Ethan Allen has a vertically integrated operating structure. It manufactures 70% of its products in North America. 80% of furniture products are custom made. About 10% of revenue is generated outside the U.S. VALUATION ETH shares have fallen about 8% in the last year. The shares are trading just over 17-times our FY18 EPS estimate, 16- times our FY19 estimate, and at 22-times trailing 12-month adjusted earnings. The historical average P/E range is 14-24 times one-year forward earnings, with a median of 17.6-times. We believe that the shares are trading at reasonable levels relative to peers, at 18-times consensus 2018 EPS. A pure comparison is somewhat difficult because ETH is both a retailer and a manufacturer of home furnishings. We believe that the capital-intensive nature of the manufacturing component argues for a lower normalized multiple, while the retail business, though mature, would potentially command a slightly higher multiple, helped by the potential for international expansion. La-Z-Boy trades at 18-times forward earnings. The peer median is also 18. At 18-times our FY19 estimate of $2.00 the shares would be worth $36 in two years. Discounted to the present at 9%, which is the rate we use for the majority of our retail universe, the shares would be worth approximately $30. ETH shares are trading at an enterprise value of 14.4-times trailing EBIT. A group of similar companies, including La- Z-Boy, Haverty, Williams-Sonoma, and Bassett trade at 11-times. At a multiple of 12-times our EBIT estimate for the next four quarters, which is a multiple we use for quality retailers with growth potential, the shares would be worth $36. On August 7, HOLD-rated ETH closed at $32.30, up $0.25. (Christopher Graja, CFA, and Jeremy Platt, 8/7/17)

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NEW YORK TIMES CO. (NYSE: NYT, $19.15) ...... HOLD NYT: Strong 2Q, but stock fairly valued n On July 27, NYT reported 2Q17 adjusted earnings of $0.18 per share, up from $0.11 in 2Q16 and above the consensus estimate of $0.14. n With the addition of 93,000 net new subscribers in the second quarter, the company now has 2.3 million digital- only subscriptions. n We are raising our 2017 adjusted EPS forecast to $0.69 from $0.64 and our 2018 forecast to $0.74 from $0.65. n NYT shares are trading at 27.8-times our 2017 EPS estimate, within the five-year historical average range but above the peer average. ANALYSIS INVESTMENT THESIS HOLD-rated New York Times Co. (NYSE: NYT) has been mired in a business sector experiencing secular decline. To combat weak industry trends, the company is expanding its digital business, migrating print products to the web and enhancing its visual capabilities. These efforts are generating promising results: digital-only subscriptions grew 46% year-over-year in the second quarter, while digital advertising revenues rose 23%. Including crosswords, the company now has approximately 2.3 million digital-only subscriptions. However, print advertising, which accounted for 58% of total 2Q advertising revenue, continues to decline, and digital ad revenue appears unlikely to account for the majority of revenue until at least 2020. Management said that it expects total advertising revenue to decline in the mid- to high-single digits in 3Q, as lower print ad revenue more than offsets low double-digit growth in digital advertising. In the near term, earnings will continue to be driven by subscription revenues and cost cutting, although over the long term, the deeper that management cuts, the less attractive the core business – industry-leading journalism – will be. Until the outlook for sustained earnings growth, driven by digital initiatives, becomes clearer, we believe that a HOLD rating is warranted. RECENT DEVELOPMENTS NYT shares have outperformed year-to-date, rising 44% while the S&P 500 has risen 11%. They have also outperformed over the past year, rising nearly 50% while the market has gained 14%. The beta on NYT is 1.41. On July 27, the company reported 2Q17 adjusted earnings of $0.18 per share, up from $0.11 in 2Q16 and above the consensus of $0.14. Second-quarter revenue grew 9% to $407.1 million, driven by growth in digital as well as print home delivery. Operating costs rose 11% to $ 377.4 million, mainly due to $19 million in severance costs for newsroom layoffs as well as higher marketing costs and costs at acquired companies, partly offset by lower production and distribution costs. Raw material costs continued to decline amid lower print newspaper volume. The operating margin increased to 11.0% from 9.7% a year earlier, and operating profit rose to $27.7 million from $9.1 million. Net income came to $15.6 million, up from a net loss of nearly $0.5 million in 2Q16. The company does not issue earnings guidance, but did offer a general outlook for the third quarter. Management expects total subscription revenue to increase at a rate similar to the second quarter, with digital-only subscription growth of about 40%. It expects total advertising revenue to decline in the mid- to high-single digits, as lower print advertising revenue more than offsets low double-digit growth in digital advertising. It looks for operating costs to increase in the mid-single digits. EARNINGS & GROWTH ANALYSIS The company generates revenue through three segments: Subscription (61% of 2Q17 revenue), Advertising (32%), and Other. Second-quarter results by segment are discussed below. In 2Q17, the company renamed “circulation revenues” as “subscription revenues.” These revenues consist of both print and digital subscriptions and single-copy newspaper sales. Subscription revenue grew 13.9% to $250 million, with digital-only subscriptions rising 46% to $82.5 million. The segment also benefited from an increase in print home-delivery prices, partly offset by a decrease in print copies sold. The company added 93,000 net digital subscriptions in the second quarter, following 308,000 in the first quarter. We believe that the growth in digital subscriptions reflects increased interest in national political news and in the company’s White House coverage, along with data-driven adjustments in the pay model and improved results from consumer marketing; however, we do not believe the recent growth is sustainable.

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Total advertising revenue grew 0.8% to $132 million, driven by digital advertising, marking the first-time that ad revenue has grown in the last three years. Print advertising, which comprises 58% of total ad revenue, fell 11% on a decline in display advertising within the luxury, real estate, technology, telecommunications and travel categories. Digital advertising, which comprises 42% of total ad revenue, rose 23%. Other revenue, which includes revenue from news syndication, digital archives, rental income, NYT Live and e- commerce, rose 13% in the second quarter. Revenue in this segment was largely driven by affiliate referral revenue from the 4Q16 acquisitions of two product recommendation sites, The Wirecutter and The Sweethome. We expect these businesses to continue to drive growth in the Other revenue category in late 2017 and 2018. Reflecting the better-than-expected 2Q earnings, we are raising our 2017 adjusted EPS forecast to $0.69 from $0.64. We are also boosting our 2018 forecast to $0.74 from $0.65. Our estimates assume an increase in spending on digital initiatives and further declines in print advertising, with continued growth in digital and other revenues. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on NYT is Medium. The company achieves average scores on our three main financial strength criteria of debt levels, fixed-cost coverage, and profitability. At the end of 2Q17, NYT had $587 million in cash and short-term marketable securities, with $398 million in current liabilities and $249 million in long-term debt and capital lease obligations. NYT has paid a modest annual dividend of $0.16 since late 2013, for a current yield of about 0.9%. We believe that the dividend is secure but unlikely to grow. Our dividend estimates are $0.16 for both 2017 and 2018. The company has a stock buyback plan. In January 2015, the board authorized $101.1 million for the repurchase of Class A common stock. As of June 2017, the company had spent $84.9 million under this program. It has $16.2 million remaining on its existing authorization, which does not expire. The company has not repurchased any stock since 1Q16. MANAGEMENT & RISKS Mark Thompson became CEO of The New York Times in August 2012, after serving as director general of the BBC. He ran the BBC’s television and radio units, as well as its website, and his selection underscores the Times’ emphasis on its digital business. After about a year in office, Mr. Thompson outlined a four-part growth strategy focusing on new digital subscription products; an enhanced global presence, including the re-branding of the International Herald-Tribune as the International New York Times; video; and games. He has brought on new staff members to lead these initiatives. The secular trend in advertising is away from newspapers and toward digital. Looking out over the next 10-15 years, online advertising is expected to continue to grow at a low double-digit rate, while the newspaper industry shrinks 3%-5% per year. To its credit, NYT management has constructed a growing online business within the newspaper industry. Takeout multiples for this business line have run as high as 5-times sales; the current price/sales ratio for the entire company, which is tightly controlled by the founding Sulzberger family, is 1.8. COMPANY DESCRIPTION The New York Times Co. is a multimedia news and information company. The company has a dual-class ownership structure, and the founding Sulzberger family is effectively in control. Hedge funds and activist investors, including Harbinger Capital, ValueAct Holdings, and Carlos Slim of Mexico, have built and divested substantial stakes in NYT in recent years. VALUATION NYT shares are trading near the top of their 52-week range of $10.60-$20.15 but well below their all-time highs, suggesting long-term value. On the fundamentals, the shares are trading at 27.8-times our 2017 EPS estimate, within the five-year historical average range but above the peer average. The shares also trade above their historical average price/sales and price/book multiples. The forward P/E is starting to rise after trending lower over the last three years. On August 7, HOLD-rated NYT closed at $19.15, unchanged. (Stephen Biggar and Deborah Ciervo, CFA, 8/7/17)

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