EQUITY RESEARCH MORNING RESEARCH SUMMARY July 16, 2014 What's Inside Focus Items Initiation Country Allocation Samuel Burns, CFA UNFI O United Natural Foods Inc. Portfolio Strategy Country Allocation July 2014 Estimates & PT Revisions INDUSTRIAL/CAPITAL GOODS Christopher Glynn CTAS P ¯ Cintas Corporation 2Q14 Industrial Preview GS P ­ Goldman Sachs Group INTC P ­ Intel Corp. TECHNOLOGY Andrew Uerkwitz 2 Up, 1 Down SYNA P ­ Synaptics, Incorporated TSCO P ¯ Tractor Supply Company Yahoo! Inc. (YHOO) Jason Helfstein YHOO O ­ Yahoo! Inc. Core Results Below Expectations, But Will Maintain Larger Post- IPO Stake Estimates/Ratings/Price Target Updates Annual Estimates Tractor Supply Company (TSCO) Brian Nagel, CFA Current FY Next FY Ratings Price Targets Still Not the Time to Jump into TSCO Company Ticker Prev Curr Prev Curr Prev Curr Prev Curr Other Headlines Intel Corp. (INTC) Rick Schafer Cintas CTAS 3.04 3.00 3.36 3.36 P P NA NA Corporation Solid Print and Guidance, Driven by PC & Data Center Goldman Sachs GS 16.50 17.12 17.61 18.50 P P NA NA Group TECHNOLOGY Rick Schafer Intel Corp. INTC 1.94 2.13 1.84 2.15 P P NA NA Daily Chip Clips Synaptics, SYNA 4.15 4.15 -- -- P P NA NA Incorporated United Natural Foods Inc. (UNFI) Rupesh Parikh, CFA Tractor Supply TSCO 2.64 2.55 3.05 2.90 P P $70.00 $60.00 Pullback Creates an Attractive Entry Point; Initiating with an Company Outperform Rating Yahoo! Inc. YHOO 1.52 1.28 1.82 0.94 O O $40.00 $43.00 Cintas Corporation (CTAS) Scott Schneeberger, CFA Solid F4Q14; FY15 Adjusted EPS Guidance Consistent with Consensus Goldman Sachs Group (GS) Chris Kotowski Solid 2Q14 Beat On Investing & Lending, Assist By FICC Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures and Certifications" section at the end of this report for important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 212-885-4646 Fax: 212-856-3989 Morning Summary -July 16, 2014 Snap Commentaries - Equities Updates PORTFOLIO STRATEGY Samuel Burns 617-556-3735 Portfolio Strategy Country Allocation July 2014 INDUSTRIAL/CAPITAL GOODS Christopher Glynn 617 556-3711 2Q14 Industrial Preview In this report, we provide write-ups on earnings setup and considerations beyond for each of our covered companies ahead of 2Q14 reporting season. For context and backdrop, we also include compilations from 1Q earnings season: (1) tables of 1Q financial results for 31 industrial companies breaking down organic growth rates, incremental margins, and earnings trends across the early, mid-, and late-cycle groups; (2) analysis of earnings surprise and coincident stock price performance; (3) analysis of industrials' relative valuations by group; and (4) tables of conference call commentary for about a dozen categories. We currently favor shares of HON, ETN, GWW, ST, and NDSN. Near term, we see modest risk to GWW's consensus expectations for 2Q, but expect that favorable transitions in investment and pricing cycles into 2H create a favorable backdrop for the shares. TECHNOLOGY Andrew Uerkwitz 212 667-5316 2 Up, 1 Down In our quarterly preview, we try to identify short-term plays into the 2Q14 earnings season—companies that we think are likely to beat expectations and those that are likely to under-deliver. Our favorite picks into the quarter are INVN, for its several near-term catalysts and a potential Apple design win, and ORBK, for its significantly undervalued acquisition of SPTS and near-term tailwinds in PCB segments. We have a cautious near-term outlook on HIMX, which may see more headwinds from weak Samsung orders (well known) and no update on catalysts. We maintain a negative long-term outlook on the upstream LED supply chain (MOCVD and sapphire) based on consolidation, muted capex and pricing environment. However, we see room for debate in the near-term performance of this space, as these companies have stayed at the bottom of the cycle for an extended period and general LED lighting growth is greatly expanding. Jason Helfstein INTERNET 212-667-6433 Yahoo! Inc. (YHOO - $35.61) Internet Rating Market Cap Price Target / Prior Earnings Type 2013A 2014E / Prior 2015E / Prior O $35,852.4M $43.00 / $40.00 EPS 1.48 1.28 / 1.52 0.94 / 1.82 Core Results Below Expectations, But Will Maintain Larger Post-IPO Stake We are raising our target to $43 from $40 as YHOO can now sell 33% fewer shares during the Alibaba IPO, and we are now assuming a 2016 target P/E of 25x (was 22x) discounted 12% to 2015. Meanwhile, YHOO reported weaker 2Q results and guidance, driven by a delay in the company's new programmatic ad platform (Ad Manager+), and weaker results in premium ad sales, caused by overly aggressive pricing, less 2 Morning Summary -July 16, 2014 competitive ad formats and reduced sales productivity. While we are reducing '14E and '15E EBITDA by 15% and 13%, respectively, we believe investors are focused on the value creation caused by an Alibaba IPO. Maintain Outperform as target assumes 25% upside. Brian Nagel, CFA CONSUMER & BUSINESS SERVICES 212 667-8381 Tractor Supply Company (TSCO - $60.98) Hardlines Retailing Rating Market Cap Price Target / Prior Earnings Type 2013A 2014E / Prior 2015E / Prior P $8,445.3M $60.00 / $70.00 EPS 2.32 2.55 / 2.64 2.90 / 3.05 Still Not the Time to Jump into TSCO Earlier this year, we lowered our rating on TSCO to Perform (2/14/14 at $66.18). Thus far in 2014, TSCO is down 21% and underperforming the S&P 500 (+7%) and our Opco Hardlines coverage (-3%). Management indicated recently that Q2 (June) results would fall short of plan. Clients reach out frequently to discuss our latest thinking on TSCO. We remain impressed with the operating prowess of TSCO and foresee no structural cracks in the company’s business model. Investors are nonetheless advised to stay on the sidelines. TSCO still trades at a premium valuation. More subdued EPS forecasts remain at risk of further downward revisions. Our price target on TSCO goes to $60 from $70. Rick Schafer TECHNOLOGY 720-554-1119 Intel Corp. (INTC - $31.71) Semiconductors & Components Rating Market Cap Price Target Earnings Type 2013A 2014E / Prior 2015E / Prior P $157,852.4M NA EPS 1.89 2.13 / 1.94 2.15 / 1.84 Solid Print and Guidance, Driven by PC & Data Center INTC kicked off earnings season Tuesday night, reporting solid 2Q sales/EPS of $13.8B/$0.55, in line with estimates and June 12's positively pre-announced results. The third quarter was guided up 4% Q/Q to $14.4B, ahead of consensus and in line with historical seasonality. WinXP/ Enterprise refresh and DCG are driving strength while MCG drags. Gross margin of 64.5% was impressive, is expected up another 150bps in 3Q. Mgmt's effort to return cash to shareholders ($2.1B in share buybacks in 2Q, $4B expected in 3Q, and new $20B authorization) are also encouraging. PC momentum looks sustainable near-term; we remain on the sidelines as INTC's pay-to-play strategy in mobile will likely continue presenting a trade-off between top-line growth and bottom-line dollars for the foreseeable. Maintain Perform. TECHNOLOGY Rick Schafer 720-554-1119 Daily Chip Clips ■ Earnings—Intel Reports Second-Quarter Revenue of $13.8 Billion (Company Release) ■ China Mobile excluded from FD-LTE pilot operation licenses (Digitimes) ■ Samsung finishes LTE-A solution development for mobile processors, says report (Digitimes) ■ Smartphone sales volume to reach 23.6% growth in 2014, says MIC (Digitimes) ■ Cumulative shipments of 300Mbps smartphone modems to exceed 700 million by 2019, says ABI Research (Digitimes) 3 Morning Summary -July 16, 2014 Rupesh Parikh, CFA CONSUMER & BUSINESS SERVICES 212 667-5263 United Natural Foods Inc. (UNFI - $64.00) Specialty Food Retailers and Packagers Rating Market Cap Price Target / Prior Earnings Type 2013A / Prior 2014E / Prior 2015E / Prior O $3,177.7M $75.00 / EPS 2.26 / -- 2.50 / -- 2.85 / -- Pullback Creates an Attractive Entry Point; Initiating with an Outperform Rating We are initiating coverage of UNFI with an Outperform rating and $75 PT. The company is a leading distributor of natural, organic, specialty foods and non-food products. Following five years of outperformance, the shares have declined more than 15% year to date, easily lagging a 7% gain in the S&P 500. We believe the recent weakness reflects investor concerns over increasing competition and to a certain extent a "rating reset" for natural/organic names. We view competitive concerns as overblown and remain confident in management's ability to sustain organic sales growth north of 10% and drive mid-teens EPS growth. We believe the shares should return closer to recent highs over time as UNFI delivers on longer-term targets. Scott Schneeberger, CFA CONSUMER & BUSINESS SERVICES 212-667-8114 Cintas Corporation (CTAS - $62.85) Business Services Rating Market Cap Price Target Earnings Type 2014A / Prior 2015E / Prior 2016E P $7,598.6M NA EPS 2.79 / 2.77 3.00 / 3.04 3.36 Solid F4Q14; FY15 Adjusted EPS Guidance Consistent with Consensus Cintas' F4Q14 adjusted EPS of $0.76 (+10% y/y) compared to our $0.74E and consensus of $0.75E.