USA | Themes & Tactics US Insights

December 19, 2014

Jefferies Franchise Picks Update - 14 Stocks With Differentiated Analysis Key Takeaway The Jefferies Franchise Pick list was introduced in December 2013 to highlight Jefferies' highest conviction Buys in the US. The stocks on the list have returned 13% since inception, 180bps above the S&P 500. In this publication, we update the list, removing JACK and adding EPAM and WETF. Stocks currently on the list are: ATVI, BA, CBS, CCK, EPAM, GOOG, IR, INTC, JAH, MNK, MU, PAY, WETF and WMB. The S&P has returned 11.2% since we initiated the Jefferies Franchise Picks list, while the list is up 13%. A look beyond the headline returns, however, reveals large divergences in sector and stock performance. Micron and INTC have been on the list since inception and are in the top 10% of S&P 500 performers YTD. JACK, which is being removed today, is in the top 10% of Russell 2000 performers YTD. RH, which was removed last Friday, outperformed the S&P by 31%. MNK, PAY and JAH, all of which remain on the list, have outperformed the S&P 500 by 23%, 13% and 7%, respectively. NFX had outperformed the S&P by 80% when we removed it on 8/29. NFX has seen a change in its fortunes since. Our modest outperformance, though, suggests that there's a partial offset to all those strong performers and indeed, since inception, we've removed 13 stocks because they breached our 15% stop loss. Given rising volatility and declining S&P correlation, we are changing our methodology for stop losses to either 15% or 20% relative from 15% relative. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop loss. JACK removed from Franchise Picks List. Although the analyst, Alex Slagle, believes the company has the ability to deliver segment-leading EPS growth, he acknowledges that the stock's 55% run YTD will be tough to match in 2015 as valuations in the group have reached all-time peak levels. Alex has made the case that JACK could be a $100 stock in the next 2-3 years thanks to a turnaround at Qdoba, and he continues to believe that such an opportunity remains intact, though even that stretch target of $100 now offers less upside. EPAM Systems added to Jefferies Franchise Picks. EPAM is an outsourced software developer with approximately ~90% of employees in the former Soviet bloc and Central and Eastern Europe. The analyst, Jason Kupferberg, is confident this will have little impact on their business, though the valuation suggests otherwise, creating opportunity. WisdomTree Investments added to Jefferies Franchise Picks. The stock is down 10% from levels seen in early December as the ECB failed to start QE, the Nikkei fell from highs, and the JPY rallied from lows. Surinder believes this weakness offers a compelling opportunity as central bank policies are on the verge of diverging, which could increase inflows into currency hedged ETFs. His earnings power analysis suggests $1.05 of EPS in 2017 with the potential for upside, particularly as that number assumes nothing from WisdomTree Europe. Surinder also notes the strategic value of this company is compelling.

Jefferies Equity Research * Jefferies LLC (888) JEFFERIES [email protected]

Sundeep Bajikar * Equity Analyst (415) 229-1552 [email protected]

Kevin Grundy, CPA * Equity Analyst (212) 336-7091 [email protected]

Brian Fitzgerald * Equity Analyst (212) 284-2491 [email protected]

Jason Kupferberg * Equity Analyst (646) 805 5412 [email protected]

John Janedis, CFA * Equity Analyst (212) 284-2187 [email protected]

Philip Ng, CFA * Equity Analyst (212) 336-7369 [email protected]

Mark Lipacis * Equity Analyst (415) 229-1438 [email protected]

Anthony Petrone, CFA * Equity Analyst (212) 708-2703 [email protected]

Howard A. Rubel * Equity Analyst (212) 284-2126 [email protected]

Brian Pitz * Equity Analyst (212) 336-7413 [email protected]

Alexander Slagle, CFA * Equity Analyst (415) 229-1508 [email protected]

Christopher Sighinolfi, CFA * Equity Analyst (212) 707-6420 [email protected]

Stephen Volkmann, CFA * Equity Analyst (212) 284-2031 [email protected]

Surinder Thind, CFA * Equity Analyst (415) 229-1515 [email protected]

* Jefferies LLC

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies 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. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 11 to 14 of this report.

EQUITY RESEARCH AMERICAS

US Insights

Themes & Tactics US Insights December 19, 2014

Jefferies Franchise Picks as of December 19, 2014 Company Name

Ticker

Analyst

Date Added

Mkt Cap ($M)

JEF C15 P/E

GICS Sector

ATVI

Brian Pitz

12/18/2013

2.1%

19.67

14,143.3

12.4

Technology

BA

Howard Rubel

9/18/2014

-2.7%

125.06

89,159.1

14.1

Industrials

CBS

CBS

John Janedis

10/29/2014

-3.0%

53.29

27,644.8

14.8

Discretionary

Crown Holdings

CCK

Phil Ng

4/22/2014

-3.7%

49.21

6,835.5

12.7

Materials

EPAM

Jason Kupferberg

12/19/2014

N/A

48.43

2,319.8

18.5

Technology

GOOG

Brian Pitz

9/3/2014

-15.3%

506.45

342,986.6

15.4

Technology

IR

Stephen Volkmann

12/18/2013

-6.6%

61.99

16,456.6

15.7

Industrials

INTC

Mark Lipacis

12/18/2013

35.3%

36.24

175,220.4

12.9

Technology

JAH

Kevin Grundy

12/1/2014

6.9%

46.28

8,903.2

15.1

Discretionary

MNK

Anthony Petrone

7/21/2014

22.6%

92.89

10,801.1

14.2

Health Care

Micron*

MU

Sundeep Bajikar

12/18/2013

41.7%

33.83

36,315.0

7.3

Technology

VeriFone

PAY

Jason Kupferberg

1/28/14

13.0%

37.43

4,242.5

19.5

Technology

Williams Cos

WMB

Chris Sighinolfi

11/25/2014

-17.1%

43.60

32,589.4

30.9

Energy

WisdomTree

WETF

Surinder Thind

12/19/2014

N/A

14.81

1,977.0

30.2

Financials

Activision Boeing

EPAM Systems Google Ingersoll-Rand Intel Jarden Mallinckrodt

Relative Ret. Price ($) Since Addition

Source: Bloomberg, Jefferies * MU EPS are non-GAAP Relative return is to S&P 500

Removals from Franchise Picks Since August 5, 2014* *August 5 is the date of the last full Franchise Pick update note, changes made since have been in documented in individual notes. Company Name

Ticker

Analyst

Date Added

Date Removed

Reason Removed

PFE

Jeff Holford

2/28/2014

8/6/2014

Stop Loss

Relative Ret. on List -15.1%

NFX

NC

12/18/2013

8/29/2014

Dropped Coverage

80.2%

ARRS

James Kisner

7/25/2014

9/30/2014

Stop Loss

-16.5%

Abercrombie & Fitch

ANF

Randy Konik

8/5/2014

10/6/2014

Stop Loss

-16.8%

Fifth Third Bancorp

FITB

Ken Usdin

12/18/2013

10/16/2014

Stop Loss

-15.8%

A

Brandon Couillard

12/18/2013

10/22/2014

Stop Loss

-15.7%

EVHC

Brian Tanquilut

12/18/2013

11/7/2014

Stop Loss

-17.4%

RH

NC

12/18/2013

12/12/2014

Suspended Coverage

31.1%

JACK

Alex Slagle

12/18/2013

12/19/2014

Appreciation; Less Favorable Risk/Reward

46.5%*

Pfizer Newfield Exploration ARRIS

Agilent Envision Healthcare Restoration Hardware Jack in the Box

Source: Bloomberg, Jefferies * JACK return is based on the closing price as of 12/17/14 Relative return is to S&P 500

page 2 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014

Franchise Picks Activision Blizzard (Pitz, ATVI, PT $27) The recent pullback in the stock reflects concerns over Call of Duty (COD), which launched Nov. 4 to solid reviews and low competition. COD sales estimates for November (per NPD) were lighter than Street expectations, but Brian attributes the shortfall to 1) the fact NPD doesn’t track digital downloads, which likely account for 15%+ of all units sold, and 2) the expectation that this year’s COD sales will be more December-weighted than prior years as gamers wait to buy until they have received next-gen consoles as holiday gifts. For example, Brian expects solid digital downloads of COD on Christmas day; a trend we have not really seen before. Assuming this is correct, there could be compelling opportunity with the stock trading ~15% off annual highs – especially given that resurgent World of Warcraft high-margin subscription revenue will hit the P&L in 2015 on top of easy comps. Brian’s 2015 EPS estimate is 11% ahead of the Street and he remains especially positive around Blizzard, ATVI’s PC-game hit-factory.

Boeing (Rubel, BA, PT $165) The market seems to have forgotten that Boeing’s backlog is at a record and bookings may well continue to outpace shipments. Backlog at the end of 3Q14 was up 12.5% from year-end 2013 but shares were down 6.5% over the same period (spread is even more dramatic when looking at market cap due to buybacks). It seems to Howard that the company is one year further along in developing a number of crucial new planes, has lowered its costs, and is more competitive. Chart 1: Boeing Backlog ($B) vs. Share Price, 1980-3Q14 500

$160

450

$140 $120

350 $100

300 250

$80

200

$60

Share Price

Backlog ($ in billions)

400

150 $40 100 $20

50 0 1980:Q1

$0 1985:Q1

1990:Q1

1995:Q1

Backlog: Q3 2014: $475BB

2000:Q1

2005:Q1

2010:Q1

Share Price Q3 2014: $127.38

Source: Baseline, Company Data, Jefferies

page 3 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014

CBS (Janedis, CBS, PT $65) CBS was added to the Franchise Picks list on 10/29. The stock has underperformed YTD on weaker ad growth and secular concerns, but John believes that a number of things can go right for the company, namely around spectrum sales, and better Showtime distribution. John thinks CBS will look to monetize spectrum in its 9 duopoly markets where station retrans and margin opportunities are more modest, with spectrum in those markets potentially worth $3/$4 per share. Showtime has 5-8mm fewer subs than HBO, they may look to offer an OTT product, and John estimates an incremental 1mm subs would equate to $0.13 EPS upside to his model. Advertising demand and pricing are weak, and he cut media numbers again on 12/12 but still believes it’s hard for F16 to fall much below $4.50, and ad weakness may mean spectrum sales and Showtime OTT come sooner.

Crown Holdings (Ng, CCK, PT $56) Stock has a compelling 8% FCF yield, and sells into stable markets, but ones that could also benefit from consumers’ energy savings. CCK made two sizeable (+$1 bil each) acquisitions in 2014, which should accelerate growth and be accretive to EPS and FCF, and CCK should be able to de-lever quickly and begin returning more cash to shareholders. The Mivisa acquisition should help expand margins with a lower cost base and positive European food can pricing in 2015 as a result of the consolidation, and Empaque adds exposure to a growth market (Mexico) with accretive margins. In NA, energy represents about 20% of household costs for the lower income demographic, and the cost/wage squeeze on the low-end consumer is one of the reasons food and beverage cans have been sluggish in recent history. With gasoline prices falling, Phil believes CCK should benefit from improving volumes as more of consumers’ disposable income becomes available for discretionary purchases.

$800

16%

$700

14%

$600

12%

$500

10%

$400

8%

$300

6%

$200

4%

$100

2%

$0

FCF Yield

FCF / Capex ($ in MM)

Chart 2: CCK's Increasing FCF and FCF Yield, Moderating Capex

0% 2006

2007

2008

2009

2010

2011

2012

2013

2014E 2015E 2016E

($100)

-2%

FCF

Capex

FCF Yield

Source: Jefferies

EPAM Systems (Kupferberg, EPAM, PT $62) EPAM gets added to the Franchise Picks list in this publication. The company currently derives about 70% of their revenues from high-end software development services, significantly higher than comps and the higher end nature of their services commands better pricing power. Jason expects growth to come from increased penetration of IT page 4 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 outsourcing within European companies, and ongoing regulatory/secular trends in their biggest verticals—financial, healthcare and retail. Stock trades at about 19x C15 EPS, despite 20% earnings growth, revenue growth in the high 20% range, and Jason believes the PEG discount comes because approximately 90% of the company’s employees are located in the former Soviet bloc and in Central and Eastern Europe. Though not without risk, the conflict in the Ukraine has thus far not caused any operational disruptions, and the company has robust business continuity plans in place. Jason expects the PEG to expand to closer to 1x, and also note his C15 EPS is 3.5% ahead of consensus. Link to 12/11 initiation report here.

Google (Pitz, GOOG, PT $700) Brian expects a 33% CAGR for Internet video advertising over the ’14-’17 timeframe and YouTube seems best positioned to take advantage of this growth. He also notes that YouTube has shifted its strategy to one that’s focused on monetization and securing advertiser relationships, which in combination with the adoption of third party verification metrics (Nielsen OCR & comScore vCE) should help it in its bid for the $60B US TV ad market. The growing PLA business should pay off this Holiday season, and the headwind it had faced with declining CPCs should be behind it this Q as he models flat CPC growth, the first non-negative CPC number since 3Q11.

Ingersoll-Rand (Volkmann, IR, PT $75) The HVAC industry remains well below the last cycle peak [28% below in residential and 17% below in commercial]. Additionally, construction spending in the U.S. while improving is nearly 20% below the prior cycle peak. With roughly 60% of sales attributable to the U.S. and 75% of sales related to the HVAC industry, we believe IR remains poised to realize cyclical upside as end market fundamentals continue to improve. Beyond the cycle, IR should also realize margin improvement through both an increased focus on productivity as well as favorable mix with the high-margin Thermo King business growing ahead of industry trends and supplemented by the recently announced acquisition of German refrigeration manufacturer FRIGOBLOCK. Incremental EBIT margins through the cycle could range between 30-35%, versus the mid-20’s last cycle. A focus on returning cash to shareholders in the form of repurchases (>$1.1bln under the current authorization remaining) and increasing dividends (~20% increase in 2014) provides additional return for investors beyond improving business operations.

Intel (Lipacis, INTC, PT $45) Mark’s ’15 EPS estimate is a full 14% ahead of consensus. Importantly, he expects FCF to inflect in ’15 after declining in ’14, driving additional capital returns. There are three main reasons for his optimism relative to the Street: 1) the Data Center Group, which accounts for about 25% of revenues currently, should grow in the mid-teens, and improve margin mix; 2) manufacturing leadership will enable the company to compete in tablets and detachable form factors; and 3) recent strategic deals position the company to compete more effectively in China and break in to their 600mm unit smartphone market. There is a positive correlation between capital return and relative stock performance. Mark thinks Intel is entering its 4th and largest capital return cycle in 2015.

page 5 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 Chart 3: INTC Capital Return & Relative Performance Correlation

1400bps outperformance 3Q07-4Q08

18 16

2800bps outperfomance 3Q10-2Q12

70

billions of US$

14 12

60

10 8

50

6 4

40

-

1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14E 3Q15E

2

Intel net buybacks & dividends (TTM)

30

INTC relative to SOX

Source: Jefferies, FactSet, Company Data

He also adds Intel typically sees a 200-300bps gross margin headwind from startup costs following a new manufacturing process node ramp. He believes a richer mix, elimination of contra-revenues for tablet MPUs, and higher penetration of lower cost Silvermont and Airmont MPUs into its product line could offset these costs. Chart 4: Potential Offset to Startup Costs

Gross Margin Offset

Potential Impact

Startup Costs

-200 to -300 bps for the year

DCG Growth

+50 to 100 bps

Faster growth of higher margin business

Elimination of Contra Rev for Tablets

+50 to 200 bps

Tablet contra rev elimination plus profitable tablet growth expected in 2015

+50 to 100 bps

Better cost structure translates to GM accretion

Penetration of Lower Cost Silvermont/Airmont Net Impact on GM

Comments

-150 to +200 bps

Source: Jefferies, company data

page 6 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014

Jarden (Grundy, JAH, PT $55) Kevin’s ’15 EPS estimate is 4% ahead of consensus, but beyond what’s modeled, he sees increasing likelihood of a bull case, which presumes that Yankee Candle sales growth accelerates to 10-12% and that EBITDA margins improve to 16.6% by 2018 (c. 265 bps higher than his FY14 estimate). The bull case also includes reasonable buyback/M&A assumptions, and results in $5.15-$5.80 in FY18e EPS, or a 12-month bull case target of $64. The stock trades at about 15x Kevin’s C15 EPS, a multiple which does not give the stock enough credit for the bull case, in his view. Kevin’s bull case is more optimistic than the company’s L-T targets. Chart 5: JEF Bull Case vs. JAH's Long-Term (FY18) Targets

FY18 EPS

EBITDA Margin

With Theoretical M&A Benefit: $5.80

Org Sales Growth*

4.5%

16.6% 3-5%

$4.00

$5.15

14.2%

JAH Target JEF Bull Case JAH Target JEF Bull Case JAH Target JEF Bull Case Source: Jefferies; "JEF Bull Case FY18 EPS of $5.15 puts excess cash toward share repurchases while maintaining debt leverage of c. 3x. JEF Bull Case FY18 EPS of $5.80 includes a combination of share repurchases and one deal similar in size to Yankee Candle financed with debt.

Mallinckrodt (Petrone, MNK, PT $110) Anthony’s Buy thesis on MNK heading into 2015 continues to be based on: 1) attractiveness of the base pain/generics/API business, 2) margin expansion opportunities from higher Spec Pharma brand mix and operating leverage gains; 3) significant accretion potential from Acthar and Ofirmev, and 4) optionality as either a buyer or seller in the still consolidating Spec Pharma universe. Valuation remains attractive with shares trading sub 12.0x forward earnings or an approximate 7-8% FCF yield on forward estimates. He sees upside beyond $110 in the event that these levers offset headwinds on the generic Concerta shift. Further, shares are recently range bound on the FDA’s reclassification of generic Concerta and DEA’s rescheduling of hydrocodone combination products to Schedule II from III both in the Oct-Nov timeframe. However, recent IMS data show that generic Concerta volumes are only off 10%, far better than the 50% drop-off he modeled, while generic Vicodin volumes are noticeably up with the company gaining share on early vault compliance.

page 7 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 Chart 6: Generic Concerta Better than our Model Methylphenidate ER (MNK)

Chart 7: Vicodin Rx Recently Spiked on Vault Compliance

MNK % of total TRx

HYCD/APAP (generic Vicodin)

45,000

1,200,000

20%

20%

1,000,000

10%

40,000 35,000

0%

30,000 25,000 20,000 15,000 10,000

HYCD/APAP growth %

25%

800,000

15% Generic Concerta FDA shift effective Nov 13. Weekly TRx only off 10% and recently rebounded.

-10% 600,000

10%

-20% 400,000 -30%

5%

5,000

-40%

0

-50%

0%

16-Nov-14

16-Sep-14

16-Jul-14

16-May-14

16-Mar-14

16-Jan-14

16-Nov-13

16-Sep-13

16-Jul-13

16-May-13

16-Mar-13

16-Jan-13

16-Nov-12

16-Sep-12

16-Jul-12

16-May-12

16-Mar-12

16-Mar-12 20-Apr-12 25-May-12 29-Jun-12 3-Aug-12 7-Sep-12 12-Oct-12 16-Nov-12 21-Dec-12 25-Jan-13 1-Mar-13 5-Apr-13 10-May-13 14-Jun-13 19-Jul-13 23-Aug-13 27-Sep-13 1-Nov-13 6-Dec-13 10-Jan-14 14-Feb-14 21-Mar-14 25-Apr-14 30-May-14 4-Jul-14 8-Aug-14 12-Sep-14 17-Oct-14 21-Nov-14

0

200,000

Source: Jefferies

Source: Jefferies

Micron (Bajikar, MU, PT $42) Sundeep has argued that Moore Stress means that the industry is transitioning to one with more stability, better supply discipline, and better returns. Micron’s $1B share repurchase authorization, announced in late October, supports that case as it highlights the company’s confidence in its model and belief in the stability of DRAM prices. Despite an improved industry, the multiple remains too low in his view, at 8x P/E (NTM) versus semis at 17x. His F15 EPS estimates are 16% ahead of the Street, which equates to 32% earnings growth. Chart 8: MU non-GAAP Gross Margins, Historic and Estimated 45% 40% 35%

30% 25% 20% 15% 10% 5%

C3Q15E

C2Q15E

C1Q15E

C4Q14E

C3Q14

C2Q14

C1Q14

C4Q13

C3Q13

C2Q13

C1Q13

C4Q12

C3Q12

C2Q12

C1Q12

0%

Source: Jefferies

VeriFone (Kupferberg, PAY, PT $43) The turnaround at VeriFone is not over, and Jason believes the company can approach Ingenico’s gross and operating margin profile (Ingenico’s operating margins are 600bps higher) over the long term. He believes his operating margin estimates (and management’s initial F15 guidance) may be conservative, and margin improvement (which he expects will accelerate in F16) could come from several initiatives, including software platform consolidation in the terminal biz, increased product development page 8 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 efficiencies, top-line leverage, and G&A cost takeout. The below chart highlights Jason’s normalized earnings estimate ($2.49) and implied EPS with Ingenico’s margins ($2.83). Additionally, he thinks the Street underappreciates the company’s EMV (chip enabled terminals) opportunity, which is likely to generate upside to F15 revenue estimates. Chart 9: Operating Leverage Scenario Analysis – F16

Adjusted Operating Margin 14.6% 15.1% 15.6% 16.1% 16.6% 17.1% 17.6% 19.3%

Improvement vs. JEFe (bps) -100 -50 0 50 100 150 200 367

Adjusted EPS $2.09 $2.17 $2.25 $2.33 $2.41 $2.49 $2.57 $2.83

EPS Impact -$0.16 -$0.08 $0.00 $0.08 $0.16 $0.24 $0.32 $0.59

Source: Jefferies

Williams Cos (Sighinolfi, WMB, PT $70) Uncertainty around Geismar and around the closure of the ACMP/WPZ deal are in the process of being removed as Geismar restarts, and the ACMP/WPZ deal is slated for close in January. Chris believes the removal of these overhangs should enable the market to focus on what he expects will be ~15% dividend growth over the next several years. Pro forma for the ACMP deal, about 25-30% of WMB revenues are exposed to commodity prices, and even at current oil prices he estimates distribution growth and excess coverage is intact. Additionally, WMB is the only C-corp GP pure play with an IG credit rating, which should enable it to make opportunistic asset purchases amidst this recent downturn. WMB trades at a 30% discount to pure play C-Corps on a market cap to GP DCF basis, despite higher distribution growth. Chart 10: WMB Dividend & Coverage Expectations $3.50

1.50x

$2.00

1.40x

$1.50

1.20x

1.30x

1.20x

$1.00

1.10x

1.05x

1.20x

1.07x 1.01x

1.01x

2016E 2017E Coverage

2018E

$0.00

Coverage Ratio

1.60x

1.52x

$2.50

$0.50

NGL & Petchem Services (WPZ) 19%

1.70x

$3.00 Dividend per Share

Chart 11: 2015E Pro-Forma Operating Margin Breakdown Barnett 9% Eagle Ford 6%

Marcellus 0% Niobrara 1%

West (WPZ) 18%

1.10x 1.00x

2011

2012

2013 2014E Dividend

2015E

Atlantic-Gulf (WPZ) 26%

Haynesville 3%

Northeast G&P (WPZ) 10%

Utica 4% MidContinent 3% Other (unconsol) 1%

Source: Jefferies

Source: Jefferies

WisdomTree (Thind, WETF, PT $20) We’ve added WETF to the Franchise Picks list in this publication. Surinder believes WETF is the only company in its peer group that is positioned to grow organically at a doubledigit rate in 2015. He also believes the company has the potential to exit 2015 with close

page 9 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 to industry-leading non-GAAP operating margins (48-50%+) despite being one-tenth the size of competitors. The recent price weakness represents an attractive entry point, as a pending divergence in global central bank policies equates to a highly favorable backdrop, one that could drive strong fund flows into its currency hedged and rising rate ETFs. The Street has consistently underestimated the company’s growth potential in Surinder’s view, which tends to occur in a step, rather than linear fashion. A number of catalysts remain to drive the stock higher: 1) 2015 guidance yet to be released, 2) QE yet to be undertaken in Europe, and 3) interest rates yet to rise in the US. Longer term as the only publicly-traded asset manager exclusively focused on ETFs, the ongoing secular shift from active to passive investing will remain a tailwind for years to come, and as Jefferies recently pointed out in its asset manager M+A piece (note here), WETF could be a strategic asset. Link to recent WETF note here. Chart 12: WETF Organic Growth Tends to Occur in Steps 500

5,000 YTD net flows are now sharply positive, exceeding $4.0B., as QTD net flows total $3.7B

4,000

300

3,000

200

2,000

100

1,000

0

0

-100

(1,000) Net inflows have accelerated post Japan QE announcement and as likelihood of European QE grows.

-200

Cumulative Net Flows ($Millions)

Daily Net Flows ($Millions)

400

(2,000)

-300

(3,000) Jan

Feb

Mar

Apr

May

Jun

Jul

Cumulative Net Flows (Shaded Area, Right Axis)

Aug

Sep

Oct

Nov

Dec

Jan

Daily Net Flows (Bars, Left Axis)

Source: Company Data

page 10 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014

Analyst Certification: I, Jefferies Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Sundeep Bajikar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Kevin Grundy, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Brian Fitzgerald, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Jason Kupferberg, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, John Janedis, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Philip Ng, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Anthony Petrone, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Howard A. Rubel, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Brian Pitz, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Alexander Slagle, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Christopher Sighinolfi, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Stephen Volkmann, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Surinder Thind, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific Disclosures For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/ Disclosures.action or call 212.284.2300.

Meanings of Jefferies Ratings Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform page 11 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided.

Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months. Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value.

Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report • Activision Blizzard, Inc. (ATVI: $20.04, BUY) • CBS Corporation (CBS: $54.60, BUY) • Crown Holdings (CCK: $50.28, BUY) • EPAM Systems (EPAM: $48.29, BUY) • Google, Inc. (GOOG: $511.10, BUY) • Ingersoll-Rand Plc (IR: $63.52, BUY) • Intel Corporation (INTC: $37.02, BUY) • Jarden Corporation (JAH: $47.03, BUY) • Mallinckrodt Plc (MNK: $95.49, BUY) • Micron Technology, Inc. (MU: $34.45, BUY) • The Boeing Company (BA: $125.67, BUY) • The Williams Companies, Inc. (WMB: $44.80, BUY) • VeriFone Systems, Inc. (PAY: $37.14, BUY) • WisdomTree Investments, Inc. (WETF: $15.13, BUY)

Distribution of Ratings IB Serv./Past 12 Mos. Rating BUY HOLD UNDERPERFORM

page 12 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Count

Percent

Count

Percent

1044 808 145

52.28% 40.46% 7.26%

277 141 5

26.53% 17.45% 3.45%

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014

Other Important Disclosures Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) group companies: United States: Jefferies LLC which is an SEC registered firm and a member of FINRA. United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and Wales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010. Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 5251 6100; facsimile +813 5251 6101. India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a Merchant Banker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited (INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000. This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information set forth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligation under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European Economic Area this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or have been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. Jefferies International Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of which are available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancy work. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage any potential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited is regulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limited pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. 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Recipients of this document in any other jurisdictions should inform themselves about and observe any applicable legal requirements in relation to the receipt of this document. This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion or estimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligation to maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors, and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or services to certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons or under differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term views expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange page 13 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]

Themes & Tactics US Insights December 19, 2014 rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. None of Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s). Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein are those of the author(s) and may differ from the views of Jefferies. This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Jefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES © 2014 Jefferies Group LLC

page 14 of 14

Please see important disclosure information on pages 11 - 14 of this report.

Jefferies Equity Research, Jefferies LLC, (888) JEFFERIES, [email protected]