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S&P June 22 2014

S&P June 22 2014

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Published by Phoebe Hepzibah
the outlook
the outlook

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Published by: Phoebe Hepzibah on Jun 22, 2014
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June 23, 2014Volume 86 Number 23
Summer Tech Investing
What seasonal slump?
To subscribe, call 800-523-4534Follow us on Twitter:@spmarketscope
Please see page 8 for required research analyst certification disclosures.
Some market wags suggest avoiding information technology stocks during the seasonal summer slump. S&P Capital IQ dis-agrees. The S&P Capital IQ Investment Policy Committee maintains an overweight recom-mendation for the S&P 500 Information Technology sector, which makes up 18.9% of the index. According to Capital IQ consensus estimates, the sector is likely to post profit growth of 7.8% in the second quarter, 6.3% in the third quarter, and 10.5% in the fourth quarter.“Within the information technology sector, the strong balance sheets will likely be used to pursue value-added R&D, M&A, buybacks, and dividends,” says Sam Stovall, managing director-U.S. equity strategy for S&P Capital IQ’s Global Market Intelligence team, who notes the S&P 500 tech sector pays a divi-dend yield of 1.6%.Several tech-focused mutual funds garner S&P Capital IQ’s highest four- or five-star ranking (based on our proprietary fund rank-ing methodology, which incorporates not only past performance, but also an analysis of the likely future prospects of underlying holdings, as well as risk considerations and fees). The funds are listed in the table, below.Within the tech sector, the personal com-puter (PC) industry appears to be heading towards a period of stabilizing, according to S&P Capital IQ Equity Analyst Angelo Zino, after a shipment decline of more than 10% in 2013. Obviously, the poor results can be largely attributable to the tablet cannibaliza-tion of PCs. However, Zino thinks this head-wind is starting to alleviate as there remains a need for PCs in the marketplace, especially on the corporate side. An indication of the stabilizing PC landscape comes from Intel’s (INTC 30.09
) positive pre-announcement earlier this month. The company provided a prelimi-nary second quarter update after the market close on June 12 and now foresees revenue of $13.7 billion, compared with $13 billion previously. Intel also raised its gross margin view to 64%. The technology giant said the
What’s Inside
Intelligencer2Focus Stock3Mutual Fund Strategies4ETF Strategies5Master List6Top Ten Portfolio7Observatory8
Fidelity NASDAQ Composite Index Fund / FNCMX557.762.4619.680.33MFS Technology Fund / MTCAX423.481.6218.151.54Rydex NASDAQ-100 Fund / RYOCX522.602.3820.021.27Vanguard Information Tech. Index Fund / VITAX549.202.1618.250.15
Source: S&P Capital IQ. *Average annualized.
(Continued on page 8)
 JUNE 23, 2014
S&P Capital IQ’s
The Outlook 
Content Director
 Beth Piskora
Contributing Editors
 John Hackett, Robin Mordfin
Director, Global Equity Research
Kenneth Leon
Managing Director, U.S. Equity Strategy
 Sam StovallFor customer service, please call
 and choose option 1 and then option 2 between 9am and 4pm Eastern Time, Monday through Friday.
The Outlook 
 (USPS 415-780, ISSN 0030-7246) is published weekly except for one issue in January, March, July, and September by S&P Capital IQ, 55 Water St., New York, NY 10041.Annual subscription: $325. Periodicals postage paid at New York, NY, and additional mailing offices. POSTMASTER: Send address changes to
The Outlook 
, S&P Capital IQ, 55 Water St., New York, NY 10041.Copyright ©2014. All rights reserved. “Standard & Poor’s,” “S&P,” “S&P 500,” “S&P MidCap 400,” and “S&P SmallCap 600” are registered trademarks of McGraw Hill Financial. Reproduction in whole or in part prohibited except by permission. All rights reserved. Officers of McGraw Hill Financial: Harold W. McGraw, III, Chairman; Douglas Peterson, Presi-dent and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer; Elizabeth O’Melia, Senior Vice President, Treasury Operations; Kenneth M. Vittor, Executive Vice President and General Counsel. Because of the possibil ity of human or mechanical error by S&P’s sources, S&P, or others, S&P does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.
STARS Rankings
Our evaluation of the 12-month potential of stocks is indicated by STARS:
Strong Buy
—Total return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares ris-ing in price on an absolute basis.
—Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
—Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
—Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
Strong Sell
—Total return is expected to underper-form the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Not ranked
Quality & Fair Value Rankings
Our appraisals of the growth and stability of earnings and dividends over the past 10 years for STARS and other companies are indi-cated by Quality Rankings:
 Below Avg.
 In reorganization
 Above Avg.
 Not RankedQuality Rankings are not intended to predict stock price movements.S&P Fair Value Rank: Using S&P’s exclusive proprietary quantita-tive model, stocks are ranked in one of five groups, ranging from Group 5, listing the most undervalued stocks, to Group 1, the most overvalued issues. Group 5 stocks are expected to generally out-perform all others. The Fair Value rankings imply the following: 5-Stock is significantly undervalued; 4-Stock is moderately undervalued; 3-Stock is fairly valued; 2-Stock is modestly over-valued; 1-Stock is significantly overvalued. As an input to the S&P Mutual Fund Ranking, S&P evaluates the weighted average Fair Value Rank of the underlying holdings of the mutual fund com-pared with its category.
For important regulatory information, go to www.capitaliq.com/home/legal-disclaimers/sp-capital-iq-research-reports.
 Covidien (COV 91.24
) was deleted from the Platinum portfolio effective June 16, 2014.
 The French government has backed General Electric’s (GE 26.93
) revised proposal to acquire certain assets and form joint ventures related to other assets with Alstom, a French multina-tional company with interests in the electricity generation and rail transport markets. “This approval makes it likely the deal with Alstom, will go ahead,” says S&P Capital IQ Equity Analyst Jim Corridore. Under the new proposal, GE will create 50:50 joint ventures with Alstom on its grid energy and renewables busi-nesses. “Overall, we would be favorable on the deal, which we think accelerates GE’s transition to a much more industrial focused company as it intends to transition away from its finance business,” says Corridore. “We see significant synergy and cross selling potential. Though this would be the largest deal in GE’s history, we think the company has a successful track record with large deals.”
 S&P Capital IQ raised its target price on Aetna (AET 81.41
) by $12 to $98 or 15 times S&P’s 2014 EPS estimate, which is slightly above peers and historical levels. According to S&P Capital IQ Equity Analyst Jeffrey Loo, “we see AET growing faster than its peers, driven by its Coventry acquisition and a healthy rise in membership, mainly in commercial and government businesses, and by new contract wins.” Loo adds that though Aetna limited its participation in the healthcare exchanges, “we still see benefits from the better-than-expected enrollment of eight million Americans in the exchanges and by the five million new Medicaid enrollees.” Finally, says Loo, “Aetna’s cost controls should enable a healthy EPS rise in spite of the new tax.”
 S&P Capital IQ maintains its buy recommendation on shares of Intel (INTC 30.09
), and raises its 2014 operating EPS estimate by $0.17 to $2.04 and 2015’s by $0.12 to $2.14. “We up our 12-month target price by $4 to $34, on higher revised P/E near peers,” says S&P Capital IQ Equity Analyst Angelo Zino. Indications of improved pros-pects for sales of personal computers bode well for the company. “We believe that INTC is benefiting from PC stabilization in the more mature U.S./Europe markets, which is driving sales/earnings growth,” says Zino. Meanwhile, S&P Capital IQ believes that Intel “will also see multiples expand and trade closer to other semiconductor companies given an improving PC outlook and our view that it will witness greater momentum for its foundry/mobility businesses,” says Zino.
 S&P Capital IQ maintains its 12-month target price of $36 on Korn/Ferry (KFY 29
), applying a P/E of 21 times, at the mid-point of its three-year range, to S&P Capital’s fiscal year 2015 (Apr.) EPS estimate of $1.73. S&P Capital IQ Equity Analyst Joseph Agnese says, “we are initiating fiscal year 2016 EPS of $1.99. Apr-Q adjusted EPS of $0.43 vs. $0.32 is $0.05 above our estimate.” Results benefited from strong growth across all business segments. “However, we expect margin expansion in FY ‘15 to be limited by increased expenses,” says Agnese.
Headlines, Highlights, and What’s on our Minds
 JUNE 23, 2014
Jeffrey Loo, CFA
S&P Capital IQ Equity Analyst
The Focus Stock for the week ended June 22 is Icon Plc, which carries S&P Capital IQ’s highest investment recommendation of 5-STARS, or “strong buy.” Icon (ICLR) is a leading global contract research organization (CRO) providing services to support all stages of the clinical development process, from compound selection to Phase I-IV clinical trials for the pharmaceutical, biotechnology, and medical devices industries. The company has an extensive global footprint, with 77 locations in 38 countries, which we believe gives ICLR a competitive advantage.The CRO industry is highly frag-mented, with about 1,000 CROs worldwide. There are, however, only a handful of truly global full-service CROs, with the top six accounting for about 40% of the industry’s estimated $24 billion in sales. We believe that figure will grow to $33 billion in five years, with the market share of top six growing to 50%. The industry has been grow-ing at a solid rate of about 7% over the past several years, as drug firms are increas-ingly outsourcing to CROs to drive efficiencies and reduce costs in their drug develop-ment process. However, larger global players like ICLR have disproportionately benefitted from the increased demand from biopharmaceutical firms. ICLR’s extensive global footprint enables it to design and man-age parallel, multi-country clinical trials to accelerate time to market. This ability to quickly and efficiently attract volun-teers and/or patients to a clinical trial could enable a drug firm to complete clinical trials faster and potentially get a drug approved earlier, thereby boosting sales and cost savings.We believe the recent share price volatility within the CRO industry due to increased pharmaceutical merger and acquisition activ-ity is overdone. ICLR’s shares, in particular, were hurt as its largest client, Pfizer, offered to acquire Astra Zeneca. We believe some investors were concerned that a large merger would result in Pfizer canceling a substantial number of projects. However, we do not agree with the perception that pharma-ceutical mergers cause project cancellations. Rather, we believe the main driver of these mergers is the strengthening or expansion of pipelines. Pfizer subsequently ended its pursuit of Astra Zeneca, but we believe it could revive its pursuit later in the year.We expect 2014 net sales at Icon to rise 12.3% to $1.5 billion, fol-lowing the 19.8% growth in 2013, driven primarily by the strategic partnership with Pfizer. In May 2011, Pfizer chose ICLR as one of two preferred CRO providers. This significantly reduced the number of CROs Pfizer had used, which we believe totaled over two dozen. Pfizer now accounts for about 29% of ICLR sales, but we see healthy growth from other clients and segments. Backlog as of March 31, 2014 was a robust $3.1 billion as ICLR was awarded more than $1.65 billion in new contracts over the past 12 months. We expect contin-ued solid new bookings.We look for operating margins to increase 160 basis points to 11.4% in 2014, following the 320 basis point increase in 2013. Our operat-ing EPS estimate for 2014 is $2.36, which would represent an increase of 33.3% over 2013’s $1.77. There are several risks to our recommendation and target price. ICLR’s quarterly opera-tions can fluctuate depending on the number and scope of ongoing client projects. The company is subject to signifi-cant project cancellation risks each quarter due to various reasons that may be beyond its control. ICLR may also encoun-ter a slowdown in the outsourc-ing trend by the pharmaceutical industry. Client concentration risk has increased as ICLR’s top client, Pfizer, accounted for about 26% of sales in 2013 and 29% of sales in the first quarter 2014.
Icon Plc
Global presence confers a competitive advantage
Ticker: ICLRS&P Ranking:
Current Price: $47.3212-Month Target Price: $54Market Capitalization ($ Blns): $2.91Price/Earnings Ratio: 18.20Fair Value Rank: 4Source: S&P Capital IQ.

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