® ARGUS MARKET DIGEST Independent Equity Research Since 1934 2017 - DJIA: 24,719.22 MONDAY, JUNE 4, 2018 1934 - DJIA: 104.04 JUNE 1 DJIA 24,635.21 UP 219.37 Good Morning. This is the Market Digest for Monday, June 4, 2018, with analysis of the financial markets and comments on Automatic Data Processing Inc., Charles River Laboratories Inc., Marvell Technology Group Ltd., Deere & Co. and WEC Energy Group Inc. IN THIS ISSUE: * Growth Stock: Automatic Data Processing Inc.: Raising target price to $145 (Jim Kelleher and Jack Ferguson) * Growth Stock: Charles River Laboratories Inc.: Raising target to $125 (David Toung) * Growth Stock: Marvell Technology Group Ltd.: Weakness creates entry point; reiterating BUY (Jim Kelleher) * Value Stock: Deere & Co.: Strong revenue recovery fuels future gains (John Eade and Olivia Hoyda) * UtilityScope: WEC Energy Group Inc.: Reiterating BUY and $75 target (Jacob Kilstein and Emily Sayles) CONFERENCE CALL ANNOUNCEMENT: Argus Research will host a conference call for clients at 11 a.m. ET on Wednesday, June 6, 2018. The call is entitled Healthcare: Opportunities in a Stabilizing Environment. Argus Director of Research Jim Kelleher, CFA, will host the call, which will be in webinar format. He will be joined by Argus President John Eade, as well as Senior Healthcare Analyst David Toung. The outlook for the Healthcare sector includes a blend of positives and negatives. Demographics continue to favor higher patient utilization; and relatively wealthy boomers have the resources for lifestyle enhancements, not just life-saving measures. At the same time, drug development is increasingly expensive while yielding fewer blockbusters. On the policy front, the Affordable Care Act has (for now) withstood every challenge it has faced; but ACA is weakened and no longer generating enrollee growth. The environment for Healthcare is mixed, and analysis of successful stocks is essential for making money in the sector. David will be joined by John Eade in a lively discussion of key Healthcare investment themes. He will also discuss his favorite ideas in the sector, ranging across biotech & pharmaceutical, devices, and services. Please note that the Investments & Wealth Institute has accepted Argus’ Monthly Conference Call for one (1) hour of continuing education (CE) credit toward the CIMA/CIMC/CPWA certifications. The program has also been accepted by CFP Board for one (1) hour of CE credit. Visit https://attendee.gotowebinar.com/register/861826191647107843 to register for this call. Once on the site, follow simple instructions to sign up for the call and receive a call-in number and passcode. If you have any problems registering, please contact us at [email protected] or by calling (212) 425-7500. The call, as always, will be interactive with a question-and-answer period. We will be recording the call, and a rebroadcast will be available on the password-protected portion of our website. Slides related to the presentation will be posted on our website the day of the call and also will be available via the webcast itself. MARKET REVIEW: Aided by a strong jobs report for May, stocks rose strongly on Friday, with gains of 0.9% for the Dow Jones Industrial Average, 1.1% for the S&P 500 and 1.5% for the Nasdaq Composite. Still, political uncertainty in Italy and renewed concerns on tariffs weighed heavily on the equity markets earlier in the week, leaving the S&P 500 with a more limited gain of 0.5% for the holiday-shortened trading week, and the Dow with a 0.5% decline. The Nasdaq entered Friday with a slight gain and finished up 1.6% for the week. Year-to-date, the Nasdaq is up 9.4% and the S&P 500 has risen 2.3%, while the Dow returned to negative territory with a 0.3% decline. 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 Traders continue to be whipsawed by geopolitical events that on Friday included news that a previously canceled summit with North Korea in mid-June was back on schedule. The week began with global concerns following Italy’s president blocking the formation of a new government after worries the proposed new economic minister was skeptical of remaining in the European Union. Lastly, the Trump administration indicated it was moving ahead with tariffs on Chinese imports, as well as tariffs on steel and aluminum from Canada, Mexico and the European Union. We expect equity market volatility, which spiked in late January and again in March but has since calmed, to remain elevated on geopolitical events and as slower summer trading volumes exacerbate price moves. Friday’s nonfarm payrolls report, showing 223,000 jobs created in May, was well above the consensus and reversed a prior two consecutive months of relative jobs weakness. The unemployment rate fell further, to 3.8%, which is an 18-year low. Wage growth ticked higher, to a 2.7% annual rate, but was not seen as too inflationary. Jobs growth was best in retail, healthcare, construction and professional and technical services. Still, there remains slack in the labor force. The labor participation rate was 62.7%, down month-to-month and below the 10-year average, which is closer to 65%. We view the report as indicative of a healthy economy, and believe it supports a rate hike when the central bank meets in two weeks. While rebounding Friday on the strong jobs report, the 10-year Treasury yield fell for the full week, ending Friday at 2.90%, down from 2.93% the prior week. Geopolitical concerns had pushed yields sharply lower earlier in the week. In addition to the employment report, other economic news released last week painted a picture of a generally strong economic environment. Tuesday’s Case-Shiller home price index for March showed a 6.8% rise in U.S. home values over the past year, while consumer confidence for May came in at a robust 128.0, an improvement from April as consumers expressed more confidence in the jobs outlook. However, the Commerce Department’s second estimate for 1Q GDP was lowered slightly from 2.3% to 2.2%. Non- residential investment was revised sharply higher to a 9.2% growth rate from 6.1%, while residential investment was revised lower to negative 2% from flat. We believe the GDP report was likely affected by winter weather and look for a pick-up in growth to a minimum of 3% for each of the remaining quarters of 2018. Following last week’s Dodd-Frank reform that eased regulation on small and mid-sized banks, larger banks also received some favorable news with the Federal Reserve’s proposal to ease the Volcker Rule, which limits proprietary trading. Proposals include fewer audits on individual securities and derivatives transactions, although limits on traders would be set. In this week’s economic calendar, Monday brings factory orders for April. On Tuesday, job openings report for April and the ISM non-manufacturing index for May will be released. Wednesday brings international trade for April, as well as revised productivity and costs for the first quarter. Last week, Argus analysts upgraded Wolverine World Wide (WWW) to BUY from HOLD and downgraded Arconic Inc. (ARNC) and Owens Corning (OC) to HOLD from BUY. The average stock in the Argus universe gained 0.1% last week. The largest percentage gainers were Chesapeake Energy (CHK; HOLD; +20.3%), Noble Corporation (NE; SELL; +15.0%) and Macy’s Inc. (M; HOLD; +14.6%), while the largest percentage decliners were Campbell Soup (CPB; HOLD; -15.1%), Itron Inc. (ITRI; HOLD; -11.9%), and Viacom Inc. (VIAB; HOLD; -9.9%). (Stephen Biggar) - 2 - MARKET DIGEST AUTOMATIC DATA PROCESSING INC. (NYSE: ADP, $132.73) ............................................ BUY ADP: Raising target price to $145 * ADP shares have outperformed the market over the past quarter, rising 14.99% while the S&P 500 has declined 0.2%. * In addition, ADP has outperformed the S&P 500 over the past 5-year period. * The company recently reported better-than-expected 3Q results, raised bookings guidance and raised its EPS growth guidance. * We are raising our FY18 EPS estimate to $4.31 from $4.15. We are also raising our FY19 estimate to $4.91 from $4.80. ANALYSIS INVESTMENT THESIS We rate the shares of Automatic Data Processing Inc. (NYSE: ADP) as a BUY. We are raising our target price to $145 from $130. The company has a strong record of growing its dividend, which currently yields about 2.2%, and has raised its payout for 43 straight years. ADP also has one of the strongest balance sheets in U.S. business. Management continues to focus on providing high-quality, cloud-based Human Capital Management (HCM) services to customers, which should help to drive growth as the economy continues to recover. Indeed, management is at work on a new set of products to help companies manage their workforces in a tight labor market. Meanwhile, activist investor Bill Ackman lost a proxy vote in November 2017, but has stated he would consider resuming his challenge to management if he is dissatisfied with the company’s progress. ADP will outline its strategy at an investor day in June 2018. While this could increase share price volatility, we expect returns to stay strong. We think the ADP shares are suitable as a core portfolio holding in diversified accounts.