Splunk : Update Raising Target Price

SPLK : NASDAQ : US$64.94

BUY 
Target: US$80.00 

COMPANY DESCRIPTION:
Splunk software collects and indexes machine-generated big data
coming from the websites, applications, servers, and mobile
devices that power business. The firm’s software enables
organizations to monitor, search, analyze, visualize and act on
massive streams of real-time and historical machine data. Splunk
is headquartered in San Francisco, was founded in 2003 and has
been public since April, 2012.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Infrastructure

AS SOLID AS EXPECTED. MOMENTUM WARRANTS PREMIUM VALUATION.
It is quite clear to us that investors are shifting money back into business software and
that the investments are tightly targeted toward perceived quality names. We strongly
believe Splunk is one of the best-in-class systems software firms, and arguably one of the
most promising companies in the broader software space. Obviously, SPLK is expensive,
but in software stock investing, execution trumps valuation for long periods of time. We
expect to see SPLK shares higher in three months, six months and a year. BUY.
 Bullish items. A larger revenue upside than last quarter. Product and use case
momentum. Major wins in Public Sector, Sporting Goods, Healthcare, Education and
Telco. Broader use cases for stream wire data. Sales restructuring by functionality
generated strong wins in security. Real-time data and analytics now deployed in
sports stadiums.
 Bearish items. Frankly, not much. We would like to see continued progress toward
the high end of 25-35% ratable revenues as a percentage of total revenues.
Operating margins were guided to be roughly flat next year, although we believe
there is upside to margin assumptions if revenues upside a bit. Finally, the obvious –
SPLK is highly valued at 13x and 10x our C2015 and C2016E EV/revenues.
 Sales excellence. The call had a large focus on continued strong sales performance
with 500+ new customers added, 290 orders above $100k, positive data points from
the segment-focused model, more than 70% of bookings from existing customers,
2/3rds of upsells from horizontal expansion and the largest ever transaction for
cloud (7 figures). The list goes on, but ultimately shows how SPLK’s sales organization is firing on all cylinders and a major reason for the company’s growth.

 Guidance update to bring positive revisions. Management increased revenue
guidance for the full year by $13.5M at the midpoint, mostly reflecting the $10M
beat in Q3. Operating margin guidance at 1-2% for the full year was increased from
1%. The company also released initial F2016 guidance for revenue of $575M. While
possibly still conservative, implying 31% growth over F2015 guidance, it was above
both our estimate and consensus, which should bring about positive revisions to
forecasts.

We raised our F2016 revenue estimate by $21.5M to $580M

Erickson

EAC : NYSE : US$13.80
HOLD 
Target: US$17.00

COMPANY DESCRIPTION:
Erickson Air-Crane is a provider of heavy and medium-lift
air services for government and commercial customers.
Key markets include firefighting, personnel transport,
construction, and oil and gas. The company is the largest
operator, and type certificate holder, of the SH-64
Aircrane. The company is based in Portland, Oregon.

Transportation and Industrials — Aerospace and Defense
STRONG Q3/14 OVERSHADOWED BY SOFTER FULL YEAR OUTLOOK
Investment recommendation
EAC reported adjusted Q3/14 EPS of $1.22, compared to our estimate of
$0.95 and consensus of $1.01. Cash flow in the quarter was a positive
~$17M. Note that Q3 is usually seasonally the strongest quarter for EAC.
However, the company indicated that full year results would likely be at
the lower end of its guidance range, which was unchanged from prior
quarters. In the Government segment, firefighting revenues were up
12% over Q3/13, while Defense & Security revenues were down 25%
year-over-year. Much of the growth was in Infrastructure (oil and gas)
markets. We continue to see risk associated with the timing of the
commercial market ramp, while revenues in the defense segment
seemed to be declining slighter faster than we had modeled. We are
maintaining our HOLD rating and lowering our price target to $17.
Investment highlights
 The company saw a nice step-up in bill rates across markets.
However, the company indicated that Q4/14 results will drive full
year results at the lower end of the guidance range. We are
maintaining our full-year 2014 $0.46 EPS estimate.
 While there was good cash flow in the quarter, the outlook for 2015
is still about the ramp down in Government revenues, and how fast
they can be replaced by commercial revenues, specifically in oil and
gas. The company did announce a win in Ecuador, which should be
positive for 2015.
Valuation
We are lowering our price target to $17. Our price target is based on the
average of a 12.0x EPS multiple and a 5.25x EBITDA multiple applied to
our 2015 estimates

Service Now BUY

NOW : NYSE : US$58.07
BUY 
Target: US$72.00 

COMPANY DESCRIPTION:
ServiceNow is a leading provider of cloud-based services
that automate enterprise IT operations — this includes a
suite of applications built on the firm’s proprietary
platform that automates workflow and provides
integration between related business processes.
ServiceNow was founded in 2004, is headquartered in
San Diego, CA and has been public since June 2012.

Technology — Enterprise Software — Infrastructure
PREMIUM EXECUTION FROM A PREMIUM COMPANY; REITERATE BUY
Investment thesis
Whether we get a Q4 software rally or not, we continue to believe that the first place
investors will look is going to be open-ended, leading growth firms in relatively
uncrowded segments. This describes ServiceNow. While more than 9x revenues on
2015E is at the high end of where we like to recommend the most premium growth
names, we believe NOW warrants the premium. Indeed, even with a likely
degradation of the multiple, we believe this stock should easily generate more than
20% upside over the coming 12 months. Reiterate BUY.

No surprises here, another upside quarter. NOW reported strong Q3/14 results
with revenue of $178.7M (+61% y-o-y) and operating income of $10.2M, which
were respectively $3.7M and $8.0M ahead of our estimates
Calculated billings of $200.7M (+ 58% y-o-y) were $2.3M better than our Street-high
forecast and well ahead of management’s $190-193M guidance.
 Customer metrics. Average revenue per user was $275K, up 21%

Outlook: momentum continues,

 

inching forecasts higher again. NOW’s Q4/14
guidance set expected revenues roughly $1.5M ahead of our previous estimate
(despite a $4M FX headwind) and calculated billings ~$10M ahead. Our revised
Q4/14 revenue and billings estimates imply respective y-o-y growth of 55% and
50%. We have similarly increased our C2015 revenue and FCF estimates by
$7M and $25M to $940M (+39%) and $127M, or $0.74 per share

Splunk – Analyst Day Update Target Price $68

SPLK : NASDAQ : US$57.25
BUY 
Target: US$68.00

Technology — Enterprise Software — Infrastructure
ANALYST DAY TAKEAWAYS: STILL PLENTY OF ROOM FOR GROWTH

 
With the 26% increase in SPLK shares since the firm last reported results at the end
of August, the stock is again sporting a top decile valuation, at more than 11x
C2015E EV/revenue. While this may be hard for some to stomach in today’s skittish
tape, we continue to believe that continually increasing use cases will drive capacity
expansion (and revenue growth) beyond what current estimates capture. An upside
estimate bias combined with the scarcity value of being the only public company, big
data pure play on the “Internet of Things” warrants a premium valuation. Our call on
SPLK continues to be that we anticipate revenue growth to more than outpace a
gradual multiple compression so that investors can expect 15%+ gains over the next
9-12 months. Reiterate BUY.

Analyst day.

On Tuesday SPLK hosted an analyst day in conjunction with its 5th
Annual Worldwide User’s Conference in Las Vegas.
 Splunk Enterprise 6.2. From a product standpoint, news centered on the firm’s
end of October release of the latest version of its machine data analytics
platform. Highlights include: enhanced event pattern detection to make the
software more intuitive to less technical users, simplified onboarding of any
machine data, and efforts aimed at reducing total cost of ownership through
increasing concurrent user capacity and eliminating shared storage
requirements (reducing underlying infrastructure investments).
 Evolving to a segment-focused sales model. This area of continued investment
will focus on augmenting normal field reps with subject matter and industry
vertical experts – not only will this help to drive new customer adoption, but it
should also increase horizontal expansion (i.e. new use cases) within the firm’s
nearly 8,000 customer installed base.

 What’s it mean for the numbers?

An increase in ratable bookings, while tough
to predict in the near-term (~25-35% of deals, up from 10-20% at the time of
IPO), will drive improved revenue visibility over time. Longer-term, SPLK
continues to manage the business towards a 20-25% operating margin, the
timing of which will be determined by the pace of top line growth.

Stantec Inc.

STN : TSX : C$70.12
STN : NYSE
BUY 
Target: C$78.00

COMPANY DESCRIPTION:
Focused on fee-for-service work, Edmonton-based
Stantec plans, designs, and manages projects in the
North American infrastructure and facilities sector. The
company’s business model incorporates diversity across
regions, end markets, and all phases of the infrastructure
life cycle to manage risk and deliver growth. 2013
marked Stantec’s 60th consecutive year of profitability.

Sustainability — Infrastructure
SOLID Q2/14 RESULTS; MAINTAIN BUY RATING AND INCREASING TARGET TO

C$78.00 (FROM C$75.00)
Investment recommendation
We are maintaining our BUY rating and increasing our one-year target
price to C$78.00 from C$75.00 following better-than-expected Q2/14
financial results, an increase in our estimates, and as we roll forward
our valuation base by a quarter. We still believe that Stantec’s 5%
targeted organic growth rate for 2014, paired with the strong pick-up in
acquisition activity (closed and announced deals), are supportive of the
company’s long-standing growth targets. In our view, Stantec should
remain a core holding: management has a clear and consistent strategy
and game plan, no lack of opportunities to drive average annual revenue
and earnings growth of ~15% for the foreseeable future, and a long
track record of very disciplined and consistent execution. We also expect
regular annual dividend increases of 10% or more for the foreseeable
future.
Valuation
We rely on our five-year DCF model (10.5% discount rate) to value
Stantec. Our target price equates to a P/E multiple of 20.0 times and an
adjusted EV/EBITDA multiple of 11.4 times our 2015 estimates. Given
the company’s available growth opportunity and consistent ROE (~18%
level), we view these multiples as supportable, although nearer to the
higher end of the historical range. We are comfortable with this given
current overall momentum, where we are in the cycle, and what we feel
are relatively conservative forward estimates.

Stuart Olson Inc.

SOX : TSX : C$9.87 BUY 
Target: C$14.00

COMPANY DESCRIPTION:
The Churchill Corporation provides commercial and
institutional building construction, industrial construction,
industrial insulation, industrial electrical and
instrumentation, and maintenance and related services
in Canada. It operates in three segments: General
Contracting, Industrial Services and Commercial Systems.
All amounts in C$ unless otherwise noted.

Infrastructure — Engineering and Construction
THESIS INTACT DESPITE SOFT GUIDE; REITERATE BUY; TARGET TO C$14.00
FROM C$14.50
Investment recommendation
We view Stuart Olson as a late cycle industrial play that, at this juncture,
offers investors unparalleled revenue visibility and meaningful cyclical
margin upside; we rate the stock a BUY. A solid balance sheet (3x
debt/LTM EBITDA) and attractive 4.9% dividend yield only further
enhance the Stuart Olson investment case. While lackluster 2014 margin
guidance has caused us to trim our estimates, it does not diminish the
company’s long-term investment case, in our view. Our target is based
on 6x 2016E EBITDA (7x 2015E previously). Stuart Olson trades at 6.3x
2015E EBITDA vs. its peers at 5.8x.
Investment highlights
Q2/14 revenue was $334 million (+20.2% y/y) and EBITDA was $10.5
million (+21.1% y/y) compared to our respective estimates of $304.7
million and EBITDA $11.5 million. The consensus revenue and EBITDA
estimates were $306.2 million and $11.6 million. Revenue beat in
SODCL but margin was weaker than expected as execution on some oil
sands jobs was challenged.

However, the Industrial segment, benefiting from the maintenance spend in the oil sands, posted EBITDA that was 12% better than expected. Management expects group EBITDA margin to be flat to slightly down from 2013 due to mix at Canem. Key to our thesis, SODCL EBITDA margin is expected to improve in 2H/2014.
The book-to-bill was 0.7:1.0 leaving backlog at $2.1 billion (+17% y/y).
With key long-term contracts with Shell and Suncor up for renewal this
year and an otherwise robust bid funnel we believe this level of backlog
can be maintained through year-end, providing visibility through 2018.

Badger Daylighting Ltd

BAD : TSX : C$33.62 
BUY  Target: C$38.00

COMPANY DESCRIPTION: Badger Daylighting Ltd. is North America’s largest provider of non-destructive excavating services. Badger traditionally works for contractors and facility owners in the utility and petroleum industries. The company has a fleet of 791 hydrovac trucks (Q4/13) in the US and Canada. All amounts in C$ unless otherwise noted.

Infrastructure — Infrastructure Q4/13 AND 2013 REVIEW; BUILD RATE INCREASED OVER 35%; REITERATING BUY RATING AND INCREASING TARGET PRICE TO C$38.00 (FROM C$34.50)
Investment recommendation

We are reiterating our BUY rating and increasing our one-year target price from C$34.50 to C$38.00 following Q4/13 results and news that the build rate has now officially been increased to five trucks per week (comfortably above our previous forecast). We continue to view Badger as an exceptionally well-run company with a proven track record. Moreover: (1) activity levels remain healthy, with accelerating growth over the last two years; (2) long-term organic growth potential is excellent, particularly in the U.S. (although Canada continues its above- average growth too); (3) the company’s return on capital is well above average; (4) its valuation multiples are justified in the context of all of the above; and (5) it pays an attractive and supportable monthly dividend. We still think modest annual dividend increases are within the realm of possibility, but continue to note that available growth opportunities will likely compete for cash flow.
Valuation Our target price continues to be supported by our DCF model (discount rate of 11%). This equates to an EV/EBITDA multiple of 10.9 times our 2015 adjusted EBITDA estimate. Given Badger’s market leading position, unique business model (sustainable competitive advantage), organic growth potential (long runway) and trailing ROE of 25.7%, we think this multiple is justified

Capital Power Corporation

CPX : TSX : C$22.92 
BUY  Target: C$26.00

 COMPANY DESCRIPTION: Capital Power has interests in 16 facilities across North America, with about 3,600 MW of net owned or operated power generation capacity as well as 371 MW of capacity owned through power purchase agreements (PPAs). The company has an additional 595 MW of capacity under construction or in advanced development.
All amounts in C$ unless otherwise noted.  Refer to page 2 for target price valuation methodology.
Infrastructure — Power CLEAN Q4/13; MORE CONTRACTS, GROWTH PROJECTS ON SCHEDULE AND TALK OF DIVIDEND INCREASE 
Investment recommendation

Capital Power reported fourth quarter recurring earnings of $0.35 per share, in line with our estimate and the $0.34 consensus estimate. The earnings benefitted from strong plant availability, but were offset by a lower average Alberta power price on merchant production. The fourth quarter results were clean, with solid numbers, and had little in the way of additional news. However, Capital Power continues to march along with the development and construction of new assets which are on time and below original budget: the Port Dover & Nanticoke Wind Farm is now expected to have a capital cost of $300 million, down from an original estimate of $340 million and a revised estimate of $315 million. We view 2014 as a transition year where increased contracting at a modestly lower average price may provide greater certainty over earnings and cash flow yet at a lower level than seen in 2013. However, as new, highly contracted projects are completed in 2015 and 2016, earnings should steadily improve. Also, as greater clarity is known on the targeted early 2015 startup of the Shepard facility, the potential for a dividend increase also climbs. Given the statements from management about a possible dividend increase, we have speculated that an announcement could occur later this year. The company has quality assets, a robust growth portfolio, is becoming more contracted and should generate strong and improving cash flow and earnings per share growth over the next three years, which should garner an expansion in the stock’s valuation multiples as well as provide flexibility for future dividend growth. We believe the stock is set for gradual turnaround as growth initiatives are executed on and as the EPCOR block of shares declines. We are maintaining our BUY rating.

Rio Tinto plc Expansion Plans

RIO: 3140p
Buy
Target: 4000p

Basic Resources – Mining – General Mining
Iron ore mine expansion to 350Mt unveiled
What’s new?
Rio Tinto management have outlined the route to fill the bulk of the 360Mt logistics capacity currently being developed A mix of brownfield expansions at various mines plus new greenfield mines at Silvergrass and, in the latter part of the decade, Koodaideri. Management is targeting 330Mt ore production in 2015 from with 350Mt capacity by 2017.
Impact 
Our current estimates had assumed that management would fill the new transport capacity on roughly this timetable. Our current assumptions see the Pilbara produce 282Mt in 2014 rising to 321Mt in 2015 and plateauing at 348Mt in 2017. We had assumed a RIO share of capex of US$6.6B to develop this mine output.
The volume estimates are broadly in line with the comments from management.
We had assumed that the mining capital cost intensity would be ~US$95/tonne on top of a logistics cost intensity of ~US$50/tonne. From the comments from RIO this morning the capital cost intensity of the mining assets looks to be ~US$70 – 80/tonne or 15 – 25% lower than the earlier estimate. This, all else equal, should mean net we can expect improved cash returns on cash invested from RIO over the latter part of the decade further bolstering its appeal.
Valuation
We retain our BUY recommendation and 4000p 12 month price target. We derive our price target using a mix of EV/EBITDA, P/CFPS and NAV based methodologies.
The main risk to our view is lower than expected iron ore prices. The announcement gives us increased confidence in our production forecasts for RIO through the next few years, increasing our conviction that the volume growth to
be delivered will drive falling EV/EBITDA mutliples and a rising dividend yield, underpinning RIO’s attractive current valuation.
Share performance catalyst
The next catalyst we expect is the investor presentations on Dec 2 (Australia) and Dec 11 (UK). After this we expect an agreement with the Mongolian government allowing underground development to restart will be the next operational catalyst.

Veeco Instruments SELL

VECO : NASDAQ : US$30.59
SELL 
Target: US$22.00

COMPANY DESCRIPTION:
Veeco Instruments manufactures process equipment and instrumentation for the LED, solar, data storage, wireless,
semiconductor and scientific research markets. Veeco’s manufacturing and engineering facilities are located in New York, New Jersey, California, Colorado, Arizona and Minnesota, and sales offices are found globally.

Investment highlights
 Our current rating is in-line with our bearish view that there is limited upside for both MOCVD equipment names.
 Now that the company is current we have seen the expected negative effect on Veeco’s margins due to price competition and lack of a bubble-type spending environment which we do not believe will be repeated. We do not envision that pricing will materially recover over the next investment cycle, continuing to weigh on margins.
 While we are bullish on the SSL secular trend, we believe expectations for both Veeco and AIXTRON are not in-line
with the new normal of a 200-400 annual tool market.
 We see some potential upside from Synos; however, this technology is still nascent and we harbor concerns about the increase in OPEX to support this and other new initiatives.
 We believe that fundamental downside exists in VECO shares, despite investor enthusiasm on the secular trend.
Given the risks of a slower MOCVD cycle and limited earnings power we would advise investors put money downstream for exposure to the LED macro.

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