Service Now BUY

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

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
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
Target: US$68.00

Technology — Enterprise Software — Infrastructure

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
Target: C$78.00

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

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
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

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
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.

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.
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
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.
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.
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
Target: US$22.00

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.

Foster Wheeler AG

FWLT : NASDAQ : US$28.86
Target $37.50

Corporation Description

Based in Zug, Switzerland, Foster Wheeler AG is a global engineering and construction contractor and power equipment supplier delivering technically advanced, reliable facilities and equipment. The company employs approximately 13,500 professionals with specialized expertise dedicated to serving clients. Its two primary business groups consist of the Global Engineering & Construction Group and the Global Power Group.
All amounts in US$ unless otherwise noted.


Investment recommendation
We reiterate our BUY rating and increase our one-year target price 25% to US$37.50 following strong Q3/13 results and an increased EPS forecast. Global E&C backlog is 71% higher y/y (and 61% above last cycle’s peak) and we found management’s view of booking opportunities incrementally more positive. We see robust EPS growth through 2015, notwithstanding our downgraded E&C margin expectations to reflect mix. We have increased our 2015 EPS estimate to $2.45 from $2.15 and our target multiple to 14x from 13x, brining our target price to US$37.50 when adding $3.50/share in freehold cash forecast at year-end 2014.
Investment highlights
Excluding a $0.05 FX gain, FW reported Q3/13 EPS of $0.47, ahead of our $0.40 estimate and the Street at $0.43. Scope revenue was 7% below forecast, but GPG EBITDA margin offset this coming in at 25% compared to our 17% estimate on solid profit enhancement realization. GPG 2013 margin guidance was unchanged at 17-19% while E&C was increased to 11-13% from 10-12%.
Management believes activity is picking up in E&C. This is especially true in N. America (abundant small/medium sized awards and EPC opportunities in the US plus SAGD in Canada) and the Middle East (Iraq and Saudi Arabia where a $70 billion petchem spend is on tap).
FW trades at 15.2x our 2014E EPS vs. the group at 14.5x.

Ducommun BUY Target $ 34

DCO : NYSE : US$26.87
Target: US$34.00

Ducommun, headquartered in Carson, California, is a supplier of aerostructures and components for commercial and military aircraft and engines, as well as a supplier of electronic assemblies and systems for commercial, military, industrial, medical and natural resources markets.

Investment recommendation
We are initiating coverage of Ducommun (DCO) with a BUY rating and a $34 price target. As execution continues to improve, confidence in cash flows and debt reduction should increase, serving as positive catalysts. We believe H2/13 represents the bottom for non-A&D sales, which should provide additional upside into 2014.
Investment highlights
 While structures represent only 42% of sales, sentiment on segment margin improvement is important for DCO stock. We believe strong improvement in 2013 (100bps over 2012) and then steady improvement into 2014-2015 will be positive, demonstrating execution capabilities and success with new programs. Improved execution is also reducing the negative overhang from the 2011 LaBarge acquisition.
 DCO on track to reduce debt by ~$30M each year through 2015, which would contribute ~$0.10 to EPS. We believe the non-A&D sales will trough in H2/13, adding to the 2014 upside.
Our $34 price target is based on the average of a 15.0x EPS multiple and an 8.0x EBITDA multiple, applied to our 2014 estimates. We believe even with the strong 2013 YTD performance (up >70%), investor interest will remain positive as execution improves.


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