📄 Extracted Text (27,629 words)
Deutsche Bank
Markets Research
North America
United States
Periodical
US Equity Insights
2016 S&P EPS growth to surge to 5%!
Falling standards of excellence this cycle: Is there an objective passing
grade?
We reduce 2016E S&P EPS from $128 to $125. We're unsure of the tone of
language appropriate to describe this reduction. Slashing or even cutting is
too
harsh as our new estimate is merely 2.5% lower. This trimming shouldn't
surprise investors given recent commodity and currency markets. So is $125
good S&P EPS in 2016? Is it bullish or bearish? It's only 5% growth,
subnormal
mid-cycle real EPS growth, but 10x better than 2015. Thus, S&P EPS growth is
set to surge in 2016! But is there an objectively healthy S&P EPS growth
rate?
In this note we present our new 2016E S&P EPS and we explain why a healthy
S&P EPS growth rate is the nominal cost of equity less the dividend yield.
2016 S&P EPS cut from $128 to $125 on stronger dollar, lower oil assumptions
We have long cautioned that every 10% appreciation in the dollar vs. mature
currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines
vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by
$1,
net of small benefits outside of Energy, Industrial Capital Goods &
Materials;
which all suffer. Airlines, Consumer Staples & Discretionary firms benefit
from
lower oil prices, but most of the cost savings is passed forward to
customers.
We lower our average 2016 Euro assumption from about $1.10 to $1.05. We
raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016
avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75.
We
also tempered our growth assumptions at US Retailers, Housing and Banks.
2015 did not have healthy underlying revenue or EPS growth ex oil and dollar
S&P sales and operating EPS growth was broadly weak in 2015. Weakness
extended beyond commodity producers and FX drags at multinationals. A
surge in airline profits masked a significant Industrial Cap Goods profit
decline.
Revenue was flat at Financials with EPS growth from less litigation than
2014.
No growth at Consumer Staples despite lower input costs. Good growth at
Retailers, but disappointing given the macro tailwinds owing to fierce price
competition. Strong at auto, but home builders disappointed. The strongest
growth was at Health Care and consumer oriented Tech firms. Corporate tech
spending on equip. and software remains very sluggish and chip makers were
flattish on earnings given slow PC, handset and weak industrial end markets.
Ex. Energy, Financials, HC and AAPL, AMZN & GOOG 2015 S&P EPS growth is
EFTA01476303
-2.5%; this is the underlying trend with —4% FX drag that should fall to
—1.5%.
Stronger revenue growth is key to achieving healthy S&P EPS growth in 2016
Strong revenue growth at Health Care, better capex on productivity enhancers
like tech equip/software, slower but still strong revenue growth at consumer
oriented big cap Tech are key to our 4% S&P sales growth, 1% share shrink
and flat net margin estimates for 2016. Some cyclically risky sectors like
Auto
Airlines, Chemicals & Semiconductors must avoid losing any earnings power.
Margin expansion is possible, but upside counterbalanced by downside risk
Fierce price competition at Retailers, more global competition at
Industrials and the
political threats at Health Care pose some sales risk, but mostly margin
risk. There
is also tax rate risk. Many are concerned about wage pressure on margins,
but this
is not a major risk for S&P firms. However, a tighter than expected labor
market
could lead to more Fed hikes than expected and thus EPS risks via dollar,
oil or PE
risk via credit market or a Tsy yield jump. Fed hikes are a small boost to
S&P EPS.
5% delineates healthy from unhealthy S&P EPS growth and supports an 18 PE
Our 1 year target of 18x trailing S&P EPS uses a 5.5% real and 7.5% nominal
CoE.
EPS is retained, so real EPS g must = real CoE - div yld to justify a PE = 1/-
real CoE.
Date
20 November 2015
David Bianco
Strategist
(+1) 212 250-8169
[email protected]
Winnie Nip
Strategist
(+1) 415 617-3297
[email protected]
S&P 500 Key Forecasts
Price
Ju Wang
Strategist
(+1) 212 250-7911
[email protected]
2089.17
Next 5%+ move Balanced
Risk
2014
Year-end Target 2058.90
EPS
Target P/E
Current P/E
EFTA01476304
DPS
$118
17.4x
17.7x
$38.30
Related recent research
S&P should finish the year in
black, but more red ahead for
Energy
Amazing margins, but mind the
GAAP
A structural slowing of
Industrials: Investing around this
late cycle risk
Don't pull the plug on Health
Care
US Equity Strategy Baskets
High Foreign Cash (Repatriation
Beneficiaries)
Big-Cap Reasonable PE Tech
Challenged Industrial Capital
Goods
US Domestic Strength
2015E
20502100
$119
17.4x
17.6x
$41
2016E
22502300
$125
18.2x
16.7x
$44
Date
16
Nov 2015
8 Nov 2015
1 Nov 2015
23 Oct 2015
Bloomberg
Ticker
DBUSHIFC
DBUSBRTE
DBUSCICG
DBUSDMST
Deutsche Bank Securities Inc.
Deutsche Bank does and seeks to do business with companies covered in its
EFTA01476305
research reports. Thus, investors should
be aware that the firm 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. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
EFTA01476306
20 November 2015
US Equity Insights
2016E S&P EPS cut from $128 to $125 mostly on stronger
dollar and lower oil price assumptions
We have long cautioned that every 10% appreciation in the dollar vs. mature
currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines
vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by
$1,
net of small benefits outside of Energy, Industrial Capital Goods &
Materials;
which all suffer. Airlines, Consumer Staples & Discretionary firms benefit
from
lower oil prices, but most of the cost savings is passed forward to
customers.
We lower our average 2016 Euro assumption from about $1.10 to $1.05. We
raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016
avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75.
We
also tempered our growth assumptions at US Retailers, Housing and Banks.
Figure 1: DXY & EUR/USD
2015YTD avg: 96.0
100
2013 & 2014 EUR avg: 1.33
2012 EUR avg: 1.29
75
80
85
90
95
2015YTD EUR avg:
1.11
2012 avg: 80.6
2013 avg: 80.4
2014 avg: 82.6
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
DXY (lhs)
Source: Bloomberg Finance LP, Deutsche Bank
EUR/USD (rhs)
Figure 2: Oil prices (1st month futures)
105
115
125
EFTA01476307
35
45
55
65
75
85
95
WTI
Source: Bloomberg Finance LP, Deutsche Bank
Brent
105
115
125
35
45
55
65
75
85
95
Figure 3: WTI now expected to settle at —$50 at 2016
end and stay under $55 even by 2018 end
WTI futures prices over time
$35
$40
$45
$50
$55
$60
$65
$70
$75
$35
$40
$45
$50
$55
$60
$65
$70
$75
$40
$45
$50
$55
$60
$65
$70
$75
$80
Figure 4: Brent now expected to settle at —$50 at 2016
EFTA01476308
end and stay under $60 even by 2018 end
Brent futures prices over time
$40
$45
$50
$55
$60
$65
$70
$75
$80
Dec 2015
Dec 2016
Source: Bloomberg Finance LP, Deutsche Bank
Dec 2017
Dec 2018
Dec 2015
Dec 2016
Source: Bloomberg Finance LP, Deutsche Bank
Dec 2017
Dec 2018
Figure 5: Weak oil prices: Industry impact spectrum
Detriment
Benefit
Energy
Industrial Cap Gds
Machinery
Materials
Metals & Mining, mixed for Chems
Utilities
MLPs
Rails
Based on observed EPS history and DB estimates, oil prices have no material
influence on Health Care or Telecom
Source: Deutsche Bank
Tech
Financials
REITs
Cons. Disc.
Retailers
Cons. Staples
Transports
Packaged Food Airlines/Trucking
Page 2
Deutsche Bank Securities Inc.
Front Month Futures ($/barrel)
Jan-13
Mar-13
May-13
Jul-13
Sep-13
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Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
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US Equity Insights
20 November 2015
Deutsche Bank Securities Inc.
Page 3
Figure 6: S&P 2016 EPS scenarios
Poor global growth (China —5%)
A continued profit recession,
Foreign
Cons Disc
Cons Staples
Energy
Financials
Health Care
Industrials
Tech
Materials
Telecom
Utilities
S&P 500
per share
Avg oil price
Euro
Avg FF rate
US UE yr end
US GDP
Global GDP
Source: Deutsche Bank
Sales % Profits %
27%
28%
41%
18%
20%
36%
59%
49%
1%
6%
31%
FX A possible upside scenario
2015
2016
25%
28%
20%
15%
20%
35%
37%
40%
0%
EFTA01476311
6%
25%
115.5
85.5
45
218
154.5
115
225
30.3
33.5
33.4
1055 7
$119
$47
89
y/y 2016 EPS
128 10.8% 14.39
4.1% 10.01
6.75
60 33.3%
234
168
120
242
34.5
1142
$128
$60
1.10 1.10-1.15
0.2% 0.75%
5.0%
4.7%
2.5% 2.5-3%
3%
3.5%
34 12.2%
32.5 -3.0%
3.3%
7.3% 26.31
8.7% 18.89
4.3% 13.49
7.6% 27.21
3.82
3.65
3.88
8.2% 128.39
DB's base case for 2016 S&P EPS
2016
125
87.5
EFTA01476312
2015
115.5
85.5
45
218
154.5
115
225
30.3
33.5
33.4
1055.7
$119
$47
1.05
2.3%
52 15.6%
230
165
117
239
32.5
32.5
34.5
1115
$125
$55
1.05
0.2% 0.50%
5.0%
2.5% -2.5%
3% -3.0%
4.7%
y/y 2016 EPS
8.2% 14.05
9.84
5.85
5.5% 25.86
6.8% 18.55
1.7% 13.15
6.2% 26.87
7.3%
-3.0%
3.3%
but decent US and global GDP growth
y/y 2016 EPS
2015
115.5
85.5
45
218
EFTA01476313
3.65
3.65
3.88
5.6% 125.35
154.5
115
225
30.3
33.5
33.4
2016
125
85.5
230
161
232
34.5
1055 7 1064.5
$119
$47
1.05
$40
0.90
0.2% 0.50%
5.0%
4.7%
2.5% -2.5%
3% -3.0%
8.2% 14.05
0.0%
30 -33.3%
5.5% 25.86
4.2% 18.10
105 -8.7% 11.80
3.1% 26.08
3.26
3.65
3.88
0.8% 119.68
$120
29 -4.3%
32.5 -3.0%
3.3%
9.61
3.37
yet 2%+ US growth with low credit costs
Tight US labor mkt, Fed hikes >1% in 2016 Global recession and flat US GDP
y/y 2016 EPS
2015
115.5
85.5
EFTA01476314
45
218
154.5
115
225
30.3
33.5
33.4
1055.7
$119
$47
1.05
0.2%
5.0%
2016
122
85
233
160
225
5.6% 13 72
-0.6%
30 -33.3%
9.56
3.37
6.7% 26.16
3.6% 17.99
100 -13.0% 11.24
0.0% 25.30
2.92
3.60
3.82
26 -14.2%
-4.5%
1.8%
32
34
1046.7
$118
$40
0.90
1.2%
4.4%
2.5% 2.25%
3%
2.5%
-0.9% 117.68
2015
115.5
85.5
45
EFTA01476315
218
154.5
115
225
30.3
33.5
33.4
1055.7
$119
$47
1.05
2016
y/y 2016 EPS
110 -4.8% 12.37
83 -2.9%
20 -55.6%
210 -3.7% 23.61
2.3% 17.76
158
90 -21.7% 10.12
210 -6.7% 23.61
23 -24.1%
30 -10.4%
32.5 -2.7%
966.5 -8.4% 108.66
$109
$35
0.85
0.2% 0.25%
5.0%
2.5%
3%
6.5%
0.5%
1.5%
2.59
3.37
3.65
9.33
2.25
Figure 7: S&P annual EPS rule-of-thumb sensitivities
Rules of thumb sensitivities
Oil prices: Every $5/bbl decline in oil prices reduces S&P net income by
roughly $7.5bn or nearly $1 EPS
Dollar FX rates: Every 10% appreciation in the dollar vs. mature currencies
(DXY) tends to reduce S&P net income by $20bn or —$2.50 of EPS
FF rate: Every 25bp on the FF rate, if it similarly moves net interest
margins at banks is —$0.50 to S&P
US GDP: S&P EPS is most sensitive to US investment spending on equipment and
software and exports
Global GDP: S&P EPS tends to be more sensitive to global GDP than US GDP
EFTA01476316
Source: Deutsche Bank
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US Equity Insights
20 November 2015
Page 4
Deutsche Bank Securities Inc.
Figure 8: S&P 500 Advised Sector and Industry Allocation (2014/15 PE based
on DB US Equity Strategy top down sector and industry EPS estimates)
Market
Advised
Weight (%) Weight (%)
Sector
2015 2016
PE
PE
Biotechnology
Health Care Equipment & Supplies
14.5% 18.0% Health Care
17.0 15.9 Health Care Technology
Life Sciences Tools & Services
Pharmaceuticals
Technology Hardware, Storage & Peripherals
Internet Software & Services
IT Services
21.0%
Overweight
16.4%
17.2%
Financials
21.0%
Information
Technology
17.5
16.5 Semiconductors
Software
Communications Equipment
Electronic Equipment
Banks
Capital Markets
14.0 13.2 Consumer Finance
Electric Utilities
Gas Utilities
2.9%
2.3%
3.4%
2.6%
Utilities
15.7
15.2
Independent Power Producers
Multi-Utilities
Telecom 12.6 13.0 Telecommunication Services
Overweight
EFTA01476318
2015 2016
PE
PE
15.1 13.5
21.8 20.4
27.2 23.6
19.5 18.8
17.1 16.3
12.2 11.5
29.8 26.6
19.0 17.9
16.6 16.1
21.4 20.2
12.2 11.7
17.5 16.3
12.1 11.5 Diversified Financial Services
15.0 13.9 Insurance
11.7 11.2 REITs
Real Estate Mgmt. & Development
Thrifts & Mortgage Finance
15.0 14.7
21.2 19.8
10.8 9.8
17.1 16.5
12.6 13.0
Auto Components
Automobiles
Distributors
Equalweight
13.0%
13.2%
Consumer
Discretionary
21.1 19.5
Household Durables
Leisure Products
Multiline Retail
Specialty Retail
Internet & Catalog Retail
Media
Food & Staples Retailing
9.6%
8.5%
Consumer
Staples
20.6
20.1
Airlines
Underweight
10.3%
8.5%
EFTA01476319
Industrials
16.8
16.5
7.3
8.3 Building Products
Air Freight & Logistics
Commercial Services & Supplies
Industrial Conglomerates
Professional Services
Road & Rail
Chemicals
3.0%
2.6%
Materials
17.9
16.7
24.2
18.8
19.6
23.0
20.1
15.9
17.3
13.7
8.6
19.5
16.6
21.2
14.5
21.1
80.7
18.9
18.1
12.7 Diversified Consumer Services
8.2 Hotels, Restaurants & Leisure
18.2 Textiles, Apparel & Luxury Goods
14.7
20.0
13.6
19.4
64.6
17.8
17.5 Beverages
Food Products
Household Products
Personal Products
Tobacco
22.6 Aerospace & Defense
17.6 Construction & Engineering
18.7 Electrical Equipment
21.8 Machinery
EFTA01476320
18.3 Trading Companies & Distributors
15.0
16.5 Construction Materials
Containers & Packaging
Metals & Mining
Paper & Forest Products
7.0%
5.0%
Energy
28.5
Aggregate PE of DB Industry allocations
S&P 500 Index
Source: Deutsche Bank Markets Research
24.6
Overweight
15.6
2081.24
14.9
Equalweight
2015 & 2016 DB Strategy EPS
Bottom-up Cons. EPS
18.5
17.4
Energy Equipment & Services
Oil, Gas & Consumable Fuels
Underweight
119.0 125.0 2015 & 2016 DB Strategy PE
118.8 128.5 Bottom-up Cons. PE
23.1 22.9
21.3 20.4
20.6 20.0
27.7 24.2
20.3 20.6
17.7 16.7
13.7 13.7
16.3 16.3
15.5 16.0
16.7 15.9
45.6 38.0
16.1 15.4
28.3 18.5
11.0 11.0
20.9 29.9
30.6 23.8
21.3
20.0
17.5 16.6
17.5 16.2
18.3 16.7
25.0 22.8
23.6 21.5
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20.9
12.3
18.8
17.4
33.2
19.3
11.7
18.0
16.1
11.7
Equalweight
2015 2016
PE
PE
Underweight
Health Care Providers & Services
2015 2016
PE
PE
16.0 15.2
EFTA01476322
US Equity Insights
20 November 2015
Deutsche Bank Securities Inc.
Page 5
Figure 9: S&P EPS Model by sector — 2016 S&P EPS cut from $128 to $125 on
stronger dollar, lower oil assumptions
EPS
Bottom-up
2005A
S&P 500 EPS (historical index)
S&P 500 EPS (current constituents)
Sector ($ bn)
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
S&P 500 ($ bn)
S&P ex. Financials ($bn)
S&P ex. Energy ($bn)
S&P ex. Tech ($bn)
Energy & Financials ($bn)
S&P ex. Energy and Financials ($bn)
Key Macro Forecast
Global GDP growth (real, DB est.)
US GDP growth (real, DB est.)
US Bus. FI (Equip + IPP, DB est.)
US Unemployment Rate (year-end, DB est.)
US 10yr Treasury Yield (year-end, Our est.)
Bank Litigation (post-tax, $bn)
Loan Loss Provisioning (% of loans, Our est.)
US$/Euro (average/year-end, Our est.)
US$/Euro (year-end, DB est.)
Avg Oil Price (WTI/Brent, $/bbl)
Avg Natural Gas Price (Henry Hub $/mmbtu)
$76.28
$79.53
51.6
94.0
133.8
68.6
63.2
83.6
17.4
13.9
21.4
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603.1
469.3
509.1
519.5
227.8
375.3
2006A
$88.18
$91.14
53.9
57.0
2007A
2008A
2009A
2010A
$85.12 $65.47 $60.80 $85.28
$93.81 $71.79 $64.23 $88.54
2007 - 14 shown below is agg. net income, 2014 y/y is EPS growth:
55.6
52.5
61.1
114.3
173.1
73.0
71.0
97.6
21.2
18.0
23.4
702.6
529.4
588.3
605.0
287.5
415.1
118.7
143.8
81.8
83.9
121.4
24.8
26.4
25.9
740.2
596.5
621.6
618.8
262.4
477.8
40.9
66.8
EFTA01476324
141.5
-19.9
86.7
75.3
122.1
21.0
27.0
26.9
588.2
608.1
446.7
466.1
121.6
466.6
48.6
68.9
59.0
56.6
88.3
51.7
105.6
13.2
21.8
26.6
540.3
483.7
481.3
434.7
115.6
424.7
74.1
73.6
94.5
129.0
101.3
73.8
151.4
24.9
23.2
28.2
773.9
644.9
679.4
622.5
223.5
550.4
2011A
2012A
2013A
2014A
Y/Y
EFTA01476325
$97.82 $103.75 $110.39 $118.82 7.6%
$99.73 $105.09 $111.63 $117.75 5.5% $118.84 0.9% $128.55 8.2% $119
84.0
78.0
129.7
132.5
109.6
88.2
175.2
31.7
22.4
29.5
880.7
748.2
751.0
705.4
262.1
618.5
90.4
78.7
122.1
162.6
112.5
94.3
185.7
29.2
23.9
29.8
929.1
766.6
807.0
743.5
284.6
644.5
99.5
84.2
113.9
189.1
117.9
102.5
193.1
30.5
25.1
30.4
986.2
797.1
872.3
793.1
303.0
683.2
102.9
EFTA01476326
86.2
112.3
189.9
136.3
113.4
209.8
32.7
30.7
33.2
1047.4
857.5
935.1
837.6
302.2
745.2
4.7% 5.2% 5.3% 2.7% -0.4% 5.2% 3.9% 3.2% 2.8% 3.4%
3.4% 2.7% 1.8% -0.3% -2.8% 2.5% 1.9% 2.8% 1.9% 2.6%
8.4% 7.1% 3.8% -3.1% -14.1% 9.4% 9.2% 5.9% 4.1% -5.5%
4.9% 4.4% 5.0% 7.3% 9.9% 9.5% 8.6% 7.8% 7.0% 5.7%
4.4% 4.7% 3.9% 2.5% 3.8% 3.3% 1.9% 1.8% 3.0% 2.2%
8.9
5.7
8.4
14.3
23.3
0.8% 0.7% 1.3% 3.0% 4.2% 2.6% 1.2% 0.8% 0.4% 0.4%
1.25/1.18 1.26/1.32 1.37/1.46 1.47/1.40 1.39/1.32 1.33/1.29 1.39/1.30
1.28/1.32 1.33/1.38 1.33/1.21
56/54
8.67
Source: Deutsche Bank
Based on current constituents in the index unless specified
66/65
6.74
72/72
6.96
100/97
8.88
61/61
3.95
79/79
4.40
95/111
3.99
94/111
2.75
98/108
3.73
93/99
4.26
3.4% 115.5
EFTA01476327
2.4% 85.1
-1.5% 46.8
0.4% 216.8
15.6% 155.0
10.7% 116.3
8.6% 224.1
7.4% 30.6
22.1% 33.7
9.2% 33.2
6.2% 1057.1
7.6% 840.3
7.2% 1010.3
5.6% 833.0
-0.3% 263.6
9.1% 793.5
-1.3% 91.0
-58.4% 46.8
14.2% 235.5
13.7% 168.9
2.6% 121.5
6.8% 243.3
-6.5% 34.3
9.8% 34.9
-0.1% 34.4
0.9% 1143.4
-2.0% 907.9
8.0% 1096.6
-0.6% 900.1
-12.8% 282.3
6.5% 861.1
15.0% 115.5
6.9% 85.5
0.1% 45.0
8.6% 218.0
9.0% 154.5
4.4% 115.0
8.6% 225.0
12.0% 30.3
3.4% 33.5
3.7% 33.5
8.2% 1055.7
8.0% 837.7
8.5% 1010.7
8.1% 830.7
7.1% 263.0
8.5% 792.7
3.1%
2.1%
-4%
4.8%
2.25%
EFTA01476328
4 5
0.6%
-$1.10
1.05
-$50
-2.50
1.1% $125
All 2015/16 estimates are aggregate earnings representative of EPS
12.3% 132.8
12.2% 125.0
-0.8% 87.5
-59.9% 52.0
14.8% 230.0
13.4% 165.0
1.4% 117.0
7.3% 239.0
-7.5% 32.5
9.1% 32.5
0.7% 34.5
5.0% $122
8.3% 115.5
2.3% 85.5
15.6% 80.0
5.5% 218.0
6.8% 151.5
1.7% 112.2
6.2% 225.0
7.3% 31.4
-3.0% 33.5
3.1% 33.5
1.1% 1114.9 5.0% 1086.0
-2.3% 884.9
5.6% 868.0
8.1% 1062.9 5.2% 1006.0
-0.8% 875.9
-13.0% 282.0
6.4% 832.9
5.4% 861.0
7.2% 298.0
5.1% 788.0
3.5%
2.7%
-4%
4.5%
2.75%
2
0.5%
-$1.05
0.90
-$55
-2.75
EFTA01476329
<3%
0.75%
$1.10-1.15
-$65
- 3.00
103%
100%
100%
178%
100%
98%
98%
100%
104%
100%
100%
103%
104%
100%
104%
113%
99%
2015E
Y/Y
2016E
Y/Y
2015E
DB US Equity Strategy
Y/Y
2016E
Normalized 2015
Y/Y
($) % of 2015
EFTA01476330
US Equity Insights
20 November 2015
Page 6
Deutsche Bank Securities Inc.
Figure 10: S&P EPS Model by industry (1 of 2)
2005A
2006A
CONSUMER DISCRETIONARY ($bn)
Auto Components
Automobiles
Distributors
Diversified Consumer Services
Hotels, Restaurants & Leisure
Household Durables
Internet & Catalog Retail
Leisure Products
Media
Multiline Retail
Specialty Retail
Textiles, Apparel & Luxury Goods
CONSUMER STAPLES ($bn)
Beverages
Food & Staples Retailing
Food Products
Household Products
Personal Products
Tobacco
ENERGY ($bn)
Energy Equipment & Services
Oil, Gas & Consumable Fuels
FINANCIALS ($bn)
Capital Markets
Banks
Consumer Finance
Diversified Financial Services
Insurance
Real Estate Investment Trusts (REITs)
Real Estate Management & Development
Thrifts & Mortgage Finance
HEALTHCARE ($bn)
Biotechnology
Health Care Equipment & Supplies
Health Care Providers & Services
Health Care Technology
Life Sciences Tools & Services
Pharmaceuticals
53.9
2007A
52.5
1,423
3,454
EFTA01476331
434
567
7,420
5,352
692
700
13,078
5,131
15,042
2,269
51.6
10,386
10,759
7,801
10,956
251
11,485
94.0
6,038
133.8
15,673
69,061
5,600
3,165
1,533
(1,711)
472
428
8,153
3,788
577
746
5,931
2,817
57.0
1,939
519
502
427
9,029
(2,025)
909
859
5,528
2008A 2009A 2010A
40.9
1,354
(6,288)
472
494
9,208
EFTA01476332
(2,460)
1,158
655
4,344
3,393
66.8
48.6
332
396
501
74.1
2011A
2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth:
55.6
2,354
69 12,291
471
438
8,480 10,326
(263)
1,549
831
5,023
3,383
68.9
1,384
2,123
1,016
15,151 16,986 16,265 15,425 18,574
6,196
16,045 14,639 12,310 12,847 14,779
3,236
61.1
4,099
73.6
11,407 13,256 14,398 14,586 16,411
11,879 13,960 15,323 15,742 16,462
8,266
8,625
268
8,928 10,298 11,651
13,058 14,777 16,354 16,955 16,521
256
222
118.7
143.8
141.5
243
59.0
12,135 10,242 11,529 11,062 12,137
114.3
EFTA01476333
94.5
10,634 14,712 19,272 12,769 12,051
173.1
(19.9)
129.0
22,636 20,810 10,948 17,073 20,564
78,646 54,072 (17,914)
6,707
2,288
6,320
3,082
30,279
9,386
198
398
69.1
5,062
13,260
12,599
76
1,179
36,969
428
480
3,216
394
8,867
179
609
87.7
8,010
159
2,326
388 51,586
7,189
8,806 13,138
51,613 47,404 (26,200) 20,581 26,359
10,526 11,160
299
422
6,688
94
611
73.7
6,259
82.6
7,046
127
89.4
9,220
178
EFTA01476334
102.5
9,949
13,706 15,061 17,284 18,656 20,079
14,952 16,835 15,183 15,859 17,985
98
1,458
Source: Deutsche Bank, IBES
2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth
2,326
2,500
2,103
2,756
37,226 41,208 44,533 43,409 51,559
220
9,293
206
644
382
84.0
3,566
12,310
559
393
11,867
1,986
2,343
1,096
22,014
6,987
16,018
4,887
78.0
17,613
17,336
12,715
15,795
485
14,025
129.7
14,886
132.3
15,695
55,025
9,910
2012A
90.4
3,782
10,832
642
415
12,003
EFTA01476335
3,597
2,042
1,209
25,579
7,302
17,370
5,671
78.7
17,300
19,249
10,963
16,064
572
14,531
122.1
16,874
87,976 103,680 103,941 122,236 46,261 82,431 114,789 105,211
56.6
11,536
27,881
12,463
288
(502)
110.9
11,009
21,631
20,796
283
3,278
53,915
162.6
18,152
67,599
10,824
13,752
36,495
14,899
344
500
114.1
12,292
22,952
22,813
366
3,544
52,089
2013A
99.5
4,616
11,678
646
EFTA01476336
452
12,536
5,643
2,980
1,225
27,898
6,680
18,721
6,379
84.2
18,055
20,396
13,666
16,617
674
14,794
113.9
17,681
96,265
188.8
23,804
76,558
12,217
15,412
43,545
16,466
409
415
119.5
14,114
18,523
24,935
433
3,619
57,897
2014A
Y/Y
102.9 3%
5,156 12%
705 9%
474 5%
2015E
Y/Y
2016E
Y/Y
2015E
115.5 12.3% 132.8 15.0% 115.5
5,384 4.4%
702 -0.4%
545 14.8%
755 7.5%
EFTA01476337
639 17.3%
Y/Y
6,255 16.2% 5,400 4.7%
700 -0.7%
550 16.0%
2016E
12.2% 125.0
Y/Y
5,800 7.4%
750 7.1%
600 9.1%
Normalized 2015
($) % of 2015
8.3% 115.5
100%
5,400 100%
9,867 -16% 14,184 43.7% 16,329 15.1% 14,000 41.9% 14,700 5.0% 14,000 100%
700 100%
550 100%
12,652 1%
4,350 -23%
3,391 14%
865 -29%
30,273 9%
7,300 9%
20,781 11%
7,048 10%
86.2 2%
18,510 3%
21,253 4%
14,968 10%
16,534 0%
685 2%
112.3 -1%
20,584 16%
189.9 0%
26,314 11%
12,199 0%
17,166 11%
21,969 33%
484 18%
412 -1%
13,627 7.7% 15,730 15.4% 13,700 8.3% 15,000 9.5% 13,700 100%
4,800 100%
4,850 11.5%
4,415 30.2%
815 -5.8%
7,589 4.0%
5,580 15.1% 4,800 10%
800 -7.5%
5,400 12.5%
EFTA01476338
6,654 50.7% 4,800 41.6% 6,000 25.0%
927 13.8%
850 6.3%
8,328 9.7%
91.0 6.9%
7,500 2.7%
8,000 6.7%
7,900 9.7%
87.5 2.3%
4,800 100%
800 100%
32,747 8.2% 37,026 13.1% 33,000 9.0% 35,000 6.1% 33,000 100%
7,500 100%
23,331 12.3% 26,469 13.4% 23,000 10.7% 25,000 8.7% 23,000 100%
7,200 100%
100%
7,316 3.8%
85.1 -1.3%
8,152 11.4% 7,200 2.2%
85.5 -0.8%
85.5
18,361 -0.8% 19,513 6.3% 18,300 -1.1% 18,500 1.1% 18,300 100%
22,173 4.3% 23,256 4.9% 22,500 5.9% 23,300 3.6% 22,500 100%
14,029 -6.3% 15,722 12.1% 14,000 -6.5% 14,600 4.3% 14,000 100%
15,844 -4.2% 16,575 4.6% 16,000 -3.2% 16,500 3.1% 16,000 100%
700 100%
683 -0.3%
46.8 -58.4%
779 14.2%
46.8 0.1%
700 2.3%
800 14.3%
14,274 -4% 14,031 -1.7% 15,147 8.0% 14,000 -1.9% 13,800 -1.4% 14,000 100%
45.0 -59.9% 52.00 15.6%
80.0
216.8 14.2% 235.5 8.6%
218.0
178%
10,696 -48.0% 6,890 -35.6% 10,000 -51.4% 7,000 -30% 15,000 150%
91,707 -5% 36,065 -60.7% 39,930 10.7% 35,000 -61.8% 45,000 28.6% 65,000 186%
218.0 14.8% 230.0 5.5%
100%
27,020 2.7% 30,868 14.2% 27,300 3.7% 29,500 8.1% 27,300 100%
68,385 -11% 92,332 35.0% 98,156 6.3% 93,200 36.3% 98,000 5.2% 93,200 100%
11,887 -2.6% 12,637 6.3% 12,000 -1.6% 12,500 4.2% 12,000 100%
18,040 5.1% 21,396 18.6% 18,000 4.9% 19,500 8.3% 18,000 100%
42,951 -1% 43,172 0.5% 46,390 7.5% 43,100 0.3% 45,000 4.4% 43,100 100%
23,460 6.8% 25,009 6.6% 23,500 7.0% 24,500 4.3% 23,500 100%
600 100%
300 100%
98%
EFTA01476339
586 21.0%
295 -28.4%
138.1 16%
26,719 89%
20,386 10%
26,541 6%
504 16%
4,464 23%
59,445 3%
667 14.0%
346 17.4%
155.0 12.3% 168.9 9.0%
600 23.9%
300 -27.2%
650 8.3%
350 16.7%
154.5 11.9% 165.0 6.8%
151.5
37,528 40.5% 40,218 7.2% 38,500 44.1% 43,000 11.7% 38,500 100%
19,364 -5.0% 21,291 10.0% 17,500 -14.2% 18,700 6.9% 17,500 100%
29,977 12.9% 33,541 11.9% 30,000 13.0% 31,500 5.0% 27,000
90%
632 25.5%
4,316 -3.3%
718 13.6%
650 29.0%
4,801 11.2% 4,350 -2.5%
750 15.4%
4,500 3.4%
650 100%
4,350 100%
63,174 6.3% 68,332 8.2% 63,500 6.8% 66,500 4.7% 63,500 100%
EFTA01476340
US Equity Insights
20 November 2015
Deutsche Bank Securities Inc.
Page 7
Figure 11: S&P EPS Model by industry (2 of 2)
2005A
2006A
INDUSTRIALS ($bn)
Aerospace & Defense
Air Freight & Logistics
Airlines
Building Products
Commercial Services & Supplies
Construction & Engineering
Electrical Equipment
Industrial Conglomerates
Machinery
Professional Services
Road & Rail
Trading Companies & Distributors
INFORMATION TECHNOLOGY ($bn)
Communications Equipment
Technology Hardware, Storage & Peripherals
IT Services
Software
MATERIALS ($bn)
Chemicals
Metals & Mining
Paper & Forest Products
TELECOMMUNICATION SERVICES ($bn)
UTILITIES ($bn)
Electric Utilities
Gas Utilities
Multi-Utilities
71.0
2007A
83.9
13,997
4,924
(2,963)
958
5,897
414
3,025
22,232
10,111
713
3,215
663
83.6
11,360
EFTA01476341
17,783
Electronic Equipment, Instruments & Components 1,454
Internet Software & Services
3,551
14,226
Semiconductors & Semiconductor Equipment 15,276
19,948
17.4
Construction Materials
Containers & Packaging
11,063
526
1,070
4,204
516
13.9
21.4
12,373
194
772
Independent Power and Renewable Electricity Producers
8,057
2008A 2009A 2010A
75.3
51.7
73.8
2011A
2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth:
63.2
16,143 21,089 21,283 17,753 20,532
5,553
(3,940)
882
5,114
546
3,631
797
5,754
1,464
659
3,296
844
4,029
4,721
(2,835)
109
3,580
1,242
4,111
857
3,452
EFTA01476342
(3,356)
25
3,277
1,176
2,687
4,752
2,591
56
3,612
867
3,835
24,932 27,201 22,830 15,318 17,891
11,980 12,641 12,380
882
6,747 11,764
(90)
4,616
790
97.6
5,085
908
121.4
6,060
928
122.1
4,215
495
105.6
151.4
13,448 13,708 13,448 12,992 15,777
26,262 38,703 38,380 21,589 34,033
1,961
5,162
3,616
7,128
13,172 14,879
24.8
3,808
8,466
9,832
21.0
3,000
4,828
9,197 11,789
16,461 18,598 21,833 23,225 27,369
8,163 23,992
21,096 24,800 26,316 27,394 33,620
21.2
13.2
12,009 13,313 12,173
716
EFTA01476343
709
1,081
6,786
630
18.0
23.4
1,093
8,406
Source: Deutsche Bank, IBES
2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth
1,516
8,338
950
26.4
25.9
211
1,260
9,176
360
1,559
6,108
843
27.0
26.9
208
1,959
9,449
1,328
2,995
371
21.8
26.6
223
1,670
24.9
8,405 15,424
102
(6)
1,438
7,168
878
23.2
28.2
13,646 15,204 15,261 14,857 16,442
213
1,178
9,888 10,358
238
920
6,264
728
EFTA01476344
88.2
23,118
5,745
1,563
7
3,650
1,062
4,848
20,687
17,511
1,324
7,648
1,060
175.2
17,039
47,528
4,530
13,955
30,354
23,937
37,905
31.7
20,512
(26)
1,297
8,540
1,332
22.4
29.5
17,508
236
1,138
10,605
2012A
94.3
23,181
5,984
2,400
112
3,396
1,366
5,051
22,656
18,886
1,557
8,280
1,427
185.7
18,963
57,598
3,754
EFTA01476345
16,068
31,272
19,351
38,660
29.2
20,796
46
1,296
5,858
1,155
23.9
29.8
17,984
290
986
10,544
2013A
102.5
26,449
5,992
5,724
474
3,645
1,390
5,821
23,844
16,710
1,744
9,002
1,689
193.1
21,367
53,981
3,780
19,854
35,794
20,165
38,190
30.5
22,693
128
1,444
4,819
1,401
25.1
30.4
18,830
304
555
10,741
2014A
EFTA01476346
Y/Y
113.4 11%
29,332 11%
6,361 6%
10,010 75%
599 26%
3,839 5%
1,525 10%
6,174 6%
24,285 2%
17,199 3%
2,006 15%
10,146 13%
1,963 16%
209.8 9%
21,413 0%
58,701 9%
4,304 14%
24,308 22%
36,653 2%
27,382 36%
32.7 7%
24,473 8%
333 160%
2,193 52%
4,469 -7%
1,280 -9%
30.7 22%
33.2 9%
19,691 5%
563 85%
1,085 96%
11,879 11%
2015E
Y/Y
116.3 2.6%
7,413 16.5%
4,013 4.5%
2016E
Y/Y
121.5 4.4%
2015E
Y/Y
115.0 1.4%
2016E
Y/Y
117.0 1.7%
8,258 11.4% 7,300 14.8% 7,800 6.8%
845 23.4%
4,289 6.9%
5,757 0.6%
EFTA01476347
700 16.9%
4,000 4.2%
750 7.1%
4,200 5.0%
Normalized 2015
($) % of 2015
112.2
17,091 70.7% 14,805 -13.4% 17,000 69.8% 15,000 -12% 15,300
684 14.3%
1,296 -15.0% 1,394 7.6%
5,723 -7.3%
1,300 -14.7% 1,300 0.0%
5,500 -10.9% 5,500 0.0%
2,410 11.6% 2,100 4.7%
2,300 9.5%
2,000 5.3%
239.0 6.2%
98%
29,413 0.3% 31,789 8.1% 29,300 -0.1% 31,000 5.8% 29,300 100%
7,300 100%
90%
700 100%
4,000 100%
1,235
5,225
95%
95%
21,279 -12.4% 24,367 14.5% 21,000 -13.5% 22,100 5.2% 21,000 100%
95%
15,350 -10.7% 14,752 -3.9% 15,000 -12.8% 14,500 -3.3% 14,250
2,160 7.7%
9,834 -3.1% 10,675 8.5%
2,088 6.3%
224.1 6.8%
2,171 4.0%
243.3 8.6%
9,900 -2.4% 10,500 6.1%
1,900 -3.2%
225.0 7.3%
225.0
2,100 100%
9,900 100%
1,900 100%
100%
21,374 -0.2% 22,026 3.1% 21,600 0.9% 22,500 4.2% 21,600 100%
70,219 19.6% 75,362 7.3% 70,800 20.6% 75,000 5.9% 70,800 100%
4,100 100%
4,179 -2.9%
4,510 7.9%
4,100 -4.7%
4,400 7.3%
EFTA01476348
25,112 3.3% 29,979 19.4% 25,500 4.9% 28,600 12.2% 25,500 100%
38,022 3.7% 41,148 8.2% 38,000 3.7% 40,300 6.1% 38,000 100%
27,838 1.7% 29,248 5.1% 27,500 0.4% 28,500 3.6% 27,500 100%
36,992 -3% 37,325 0.9% 41,026 9.9% 37,500 1.4% 39,700 5.9% 37,500 100%
30.3 -7.5%
30.6 -6.5%
532 59.8%
2,151 -1.9%
1,554 21.4%
33.7 9.8%
33.2 -0.1%
34.3 12.0%
864 62.3%
2,343 9.0%
500 50.1%
2,200 0.3%
32.5 7.3%
600 20.0%
2,300 4.5%
32.5 -3.0%
34.5 3.1%
375 7.1%
31.4
104%
24,522 0.2% 26,357 7.5% 24,500 0.1% 25,700 4.9% 24,500 100%
500 100%
1,857 -58.4% 3,054 64.4% 1,500 -66.4% 2,300 53.3%
1,665 7.2%
34.9 3.4%
34.4 3.7%
1,600 25.0% 1,600 0.0%
33.5 9.1%
33.5 0.7%
356 -36.7%
979 -9.8%
365 2.5%
1,033 5.6%
1,000
350 -37.8%
-8%
1,100 10.0%
2,200 100%
2,625 175%
1,600 100%
100%
100%
33.5
33.5
19,889 1.0% 20,402 2.6% 20,000 1.6% 20,500 2.5% 20,000 100%
350 100%
1,000 100%
EFTA01476349
11,968 0.8% 12,615 5.4% 12,100 1.9% 12,500 3.3% 12,100 100%
EFTA01476350
US Equity Insights
20 November 2015
Page 8
Deutsche Bank Securities Inc.
Figure 12: S&P DPS Model by sector
2005
S&P 500 DPS (historical index)
S&P 500 DPS (current constituents)
Sector ($ billions)
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
S&P 500
S&P 500 ex. Financials
Financials and Tech
S&P 500 ex. Financials and Tech
S&P 500 Banks
Source: Deutsche Bank, IBES
DB US Equity Strategy
Dividends
2006
2007
2008
2009
2010
2011
2012
2013
Payout Ratio (%)
2014 2007 2008 2009 2010 2011 2012 2013 2014 2015
$22.21 $24.89 $27.73 $28.38 $22.41 $22.73 $26.43 $31.24 $34.99 $39.44 33%
43% 37% 27% 27% 30% 32% 33%
$23.24 $26.02 $29.40 $28.31 $22.48 $23.86 $27.13 $31.44 $35.78 $38.31 31%
39% 35% 27% 27% 30% 32% 33% $41
9.9
21.6
15.9
48.0
19.7
22.7
10.3
6.5
10.1
11.6
EFTA01476351
12.2
24.5
18.5
54.2
22.0
25.4
12.2
7.8
11.3
12.5
66.5
35.3
13.4
33.1
20.6
61.2
24.1
28.0
14.9
7.8
15.9
13.0
76.1
38.8
13.9
30.8
22.3
54.5
26.0
29.5
16.6
8.1
16.9
13.5
71.1
32.9
12.8
29.9
22.6
20.4
24.1
24.0
17.6
6.1
17.7
14.2
38.0
16.1
32.5
24.4
20.7
EFTA01476352
30.0
23.7
20.4
7.3
18.7
15.1
41.1
19.0
35.4
27.7
29.9
30.1
27.4
25.1
9.1
20.1
16.2
55.1
13.4
22.5
37.7
31.4
36.7
37.4
30.5
33.5
10.4
20.1
18.1
70.3
13.3
26.4
41.2
35.8
44.6
36.3
33.6
48.0
12.5
19.1
19.1
7%
$44 7% 34% 35%
31.5 26% 34% 26% 22% 23% 25% 27% 31% 34.6 10% 38.1 10% 30% 31%
44.0 54% 46% 43% 44% 45% 48% 49% 51% 45.3 3% 47.3 4% 53% 54%
34.6 17% 16% 38% 26% 21% 26% 31% 31% 29.3
-15% 23.4 -20% 65% 45%
51.9 43% -274% 36% 16% 23% 23% 24% 27% 58.9 13% 66.7 13% 27% 29%
37.7 29% 30% 27% 30% 27% 33% 31% 28% 44.8 19% 49.5 10% 29% 30%
37.9 33% 39% 46% 32% 31% 32% 33% 33% 39.1 3% 40.9 5% 34% 35%
50.3 12% 14% 17% 13% 14% 18% 25% 24% 60.8 21% 69.3 14% 27% 29%
EFTA01476353
12.1 32% 39% 47% 29% 29% 36% 41% 37% 11.8
-3% 12.0 2% 39% 37%
21.5 60% 63% 81% 81% 90% 84% 76% 70% 23.5 9% 23.7 1% 70% 73%
19.6 50% 50% 53% 53% 55% 61% 63% 59% 20.7 6% 21.7 5% 62% 63%
176.3 200.7 232.1 232.2 189.4 208.9 239.9 278.4 316.6 341.2 31% 39% 35% 27%
27% 30% 32% 33% 368.7 8% 392.7 6% 34% 35%
128.3 146.5 170.9 177.7 169.0 188.2 210.0 241.6 272.0 289.3 28% 38% 39% 30%
30% 32% 34% 35% 309.9 7% 326.0 5% 37% 37%
58.3
92.6 102.3 29% 70% 23% 15% 18% 20% 24% 26% 119.6 17% 136.0 14% 27% 29%
118.0 134.3 156.0 161.1 151.4 167.8 184.9 208.1 224.0 239.0 31% 47% 46% 36%
35% 37% 37% 38% 249.1 4% 256.7 3% 41% 40%
19.0 72% NM NM 7% 24% 20% 21% 28% 23.3 22% 27.4 18% 25% 28%
31.7
5.3
3.7
16.2
Dividends
Y/Y
2016
Y/Y
Payout (%)
2015 2016
Figure 13: S&P fair valuation by sector — we still see 5% downside to Energy
Market
Value
($bn)
Consumer Discretionary
Consumer Staples
Energy
Financials
Banks
Health Care
Industrials
Information Technology
Materials
Telecom
Utilities
S&P 500 ($ bn)
S&P 500 Index ($/sh)
Source: Deutsche Bank, IBES
2,433
1,762
1,281
3,044
1,127
2,628
1,930
3,939
543
423
EFTA01476354
526
18,508
2081.24
17.5
Current
2015
PE
21.1
20.6
28.5
14.0
12.1
17.0
16.8
17.5
17.9
12.6
15.7
2015E
Earnings
($bn)
115.5
85.5
45.0
218.0
93.2
154.5
115.0
225.0
30.3
33.5
33.5
1055.7
119.0
Normal
Ratio
100%
100%
178%
100%
100%
98%
98%
100%
104%
100%
100%
102.9%
103%
Normal
2015E
EFTA01476355
Earnings
115.5
85.5
80.0
218.0
93.2
151.5
112.2
225.0
31.4
33.5
33.5
1086.0
122.0
Accounting
Quality
Adjustment
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
Fully
Adjusted
Earnings
103.9
77.0
72.0
196.2
83.9
136.4
101.0
202.5
28.3
30.2
30.1
977.4
109.8
Real
CoE
5.25%
5.00%
6.25%
EFTA01476356
6.25%
6.50%
5.25%
5.75%
5.50%
6.25%
5.00%
5.00%
5.58%
5.50%
Steady
State
Value
1,979
1,539
1,152
3,139
1,290
2,597
1,756
3,682
453
603
602
17,502
1996.4
Growth
Premium
10%
5%
0%
-5%
-5%
10%
0%
5%
0%
-15%
0%
3%
0%
2015 Start
Fair Value
($bn)
2,177
1,616
1,152
2,982
1,226
2,857
1,756
EFTA01476357
3,866
453
513
602
17,974
1996.4
2015E
Dividend
Yield
1.4%
2.6%
2.3%
1.9%
2.1%
1.7%
2.0%
1.5%
2.2%
5.5%
3.9%
2.0%
2.0%
2015 End
Fair Value
($bn)
2,304
1,688
1,221
3,171
1,305
3,015
1,857
4,096
480
520
620
18,972
2106.8
2015 End
Fair Value
PE
20.0
19.7
27.1
14.5
14.0
19.5
16.1
18.2
15.8
15.5
EFTA01476358
18.5
17.7
2015 end
Upside
-5%
-4%
-5%
4%
16%
15%
-4%
4%
-12%
23%
18%
2.5%
1.2%
EFTA01476359
20 November 2015
US Equity Insights
2015 did not have healthy underlying broad based revenue or EPS
growth ex oil and dollar
S&P sales and operating EPS growth was broadly weak in 2015. Weakness
extended
beyond commodity producers and FX drags at multinationals. A surge in
airline profits
masked a significant decline in profits at Industrial Capital Goods. Revenue
was flat at
Financials with EPS growth from less litigation than 2014. No growth at
Consumer
Staples despite lower input costs. Good growth at Retailers, but
disappointing given the
macro tailwinds owing to fierce price competition. Strong at auto, but home
builders
disappointed.
The strongest growth was at Health Care and consumer oriented Tech firms.
Corporate
tech spending on equip. and software remains very sluggish and chip makers
were
flattish on earnings given slow PC, handset and weak industrial end markets.
Ex.
Energy, Financials, HC and AAPL, AMZN & GOOG 2015 S&P EPS growth is —2.5%;
this
is the underlying trend with —4% FX drag that should fall to —1.5%.
Figure 14: S&P Industrials ex. Defense sales growth vs.
Core capital goods shipments & Mfg ISM
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
y/y growth
was high single-digit
y/y sales growth was low single-digit in 2014
when ISM was >55. 1H sales growth is negative
on lower Mfg ISM.
34.0
38.0
42.0
46.0
50.0
54.0
58.0
62.0
EFTA01476360
Industrials ex. Def sales growth (y/y, lhs)
Mfg ISM (3m avg, rhs)
Source: Census, ISM, IBES, Deutsche Bank
Core Capital Goods Shipment (3m avg, y/y)
New Orders
Source: Census, Deutsche Bank
Shipments
Figure 15: Core non-defense capital goods new orders &
shipments
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Non defense Capital Goods ex. Aircraft (Core)
3mo average y/y
y/y growth
was double-digit
y/y growth has slowed down
since late 2014, and new orders
3mo average started to decline in
202015
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Figure 16: Industrials ex. Airlines / Defense sales growth
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
EFTA01476361
24%
Sales growth
Y/Y
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
Industrials
Source: IBES, Deutsche Bank
Industrials ex. Defense
Industrials ex. Airlines
Figure 17: Tech ex. AAPL & GOOG sales growth
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
Sales growth
Y/Y
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
Information Technology
Source: IBES, Deutsche Bank
Tech ex. AAPL & GOOG
Deutsche Bank Securities Inc.
Page 9
2006
1006
EFTA01476362
3006
1007
3007
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3012
1013
3013
1014
3Q14
1Q15
3Q15
2007
2008
2009
2010
2011
2012
2013
2014
2015
1Q06
3Q06
1007
3007
1008
3Q08
1Q09
3Q09
1010
3010
1011
3011
1Q12
3Q12
1013
3013
1014
3Q14
1Q15
3Q15
2000
2001
2002
EFTA01476363
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
EFTA01476364
20 November 2015
US Equity Insights
Figure 18: S&P EPS growth ex Energy, Fin., HC and
AAPL, AMZN & GOOG
EPS growth y/y
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Energy
Financials Healthcare AAPL,
AMZN &
GOOG
2015 btm-up
Source: Gartner, Deutsche Bank (October 2015)
8.2%
0.9%
7.9%
2.5%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
S&P S&P ex all of
above
2016 btm-up
Source: IBES, Deutsche Bank
2.5%
1.3%
3.1%
3.2%
3.4%
Figure 19: Global enterprise tech spending growth
forecast by region
-3.0%
2014
N. America
2015E
2016E
EFTA01476365
W. Europe
2017E
Japan
2018E
ROW
2019E
Global
Figure 20: Linear Technology (LLTC, broad-based
Industrial player) Industrial bookings, weak through
1H16
100
110
120
130
140
150
160
170
180
-10%
-5%
0%
5%
10%
15%
20%
Figure 21: Aggregate Industrial revenues (DB US
semiconductor coverage) expected to rebound after
1Q16
2500
2750
3000
3250
3500
3750
4000
Industrial bookings (m)
Y/Y
-10%
0%
10%
20%
30%
40%
50%
Industrial revenues ($m)
Source: Linear Technology, Deutsche Bank estimates
Source: Company data, Deutsche Bank estimates
Y/Y
Figure 22: S&P 500 trailing 4-qtr EPS growth: 1960 — 3Q2015
-40%
EFTA01476366
-30%
-20%
-10%
0%
10%
20%
30%
40%
Est
1960-2014 CAGR: 6.7%
Aggressive Fed tightening
slowed GDP growth and
weighed on S&P EPS
Weak oil and
strong $ weighed
on S&P EPS
Weak oil and
Russian default
weighed on
S&P EPS
Recession
S&P 500 Trailing 4-qtr EPS (y/y)
Source: IBES, Compustat, Deutsche Bank
CAGR avg.
Page 10
Deutsche Bank Securities Inc.
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
EFTA01476367
2011)
2012
2014
EFTA01476368
20 November 2015
US Equity Insights
Figure 23: S&P Sales growth lags US GDP growth_
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
y/y % chg
Correl: 0.69
1977-79
GDP: 12.1%
Sales: 17.1%
1985-89
GDP: 6.8%
Sales: 5.3%
2H1993-99
GDP: 5.9%
Sales: 7.9%
Recession
Avg 1970-1990
GDP: 8.7%
Sales: 9.7%
Source: S&P, BEA, Deutsche Bank
Nominal GDP
2004-07
GDP: 5.6%
Sales: 9.2%
2H2011-2H14
GDP: 4.0%
Sales: 3.0%
S&P 500 Sales
Avg 1991-now
GDP: 4.5%
Sales: 4.9%
Recession
Source: BEA, Deutsche Bank
Real GDP
Real Exports of Goods
-20%
-15%
-10%
-5%
0%
5%
EFTA01476369
10%
15%
20%
25%
30%
Figure 24: ... even though GDP growth was not
particularly strong
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
y/y % chg
1992-99
GDP: 4.0%
Exports: 8.0%
2003-07
GDP: 3.0%
Exports: 7.8%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Figure 25: Capex growth is key for healthier S&P Sales growth
y/y % chg
1967
capex
slowdown
1985-87
capex
slowdown
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
EFTA01476370
25%
FY2015
estimates
1962-69
Domestic
infrastructure
GDP: 4.7%
Capex: 8.7%
Recession
Avg 1951-1970
GDP: 3.7%
Capex: 5.0%
Source: BEA, Deutsche Bank
1976-79
Oil boom
GDP: 4.3%
Capex:10.4%
1992-99
Productivity
driven IT
capex boom
GDP: 4.0%
Capex: 10.3%
Real GDP
Avg 1971-1990
GDP: 3.2%
Capex: 5.7%
2003-07
Asia / export/
commodity capex
GDP: 3.0%
Capex: 6.3%
Capex (Equip. + IPP) y/y % chg
Avg 1991-2014
GDP: 2.6%
Capex: 5.3%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Figure 26: Spenders of capex (S&P 500 capex by sectors)
Healthcare
4%
Financials
5%
EFTA01476371
Telecom
6%
Energy
28%
Figure 27: Receivers of capex (GDP accounts — US capex
by type)
2014
27%
Energysensitive
Ag/Mining/
Const.
Equip.
6%
Tech
12%
$711bn
Cons. Staples
6%
Materials
4%
Cons. Disc.
13%
Utilities
12%
Source: Company reports, Deutsche Bank
Source: BEA, Deutsche Bank
Industrials
10%
—54% S&P
heavy
industrial
Industrial Equip.
13%
$1,720bn
Software
18%
Transportation
Equip.
16%
Other IPP
5%
R&D
17%
22%
Intangibles
Other Equip
7%
Medical Equip.
5%
Comm. Equip.
6%
EFTA01476372
Computers
5%
Other IT
2%
31% of
capex =
Tech &
Telecom
Deutsche Bank Securities Inc.
Page 11
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
EFTA01476373
2008
2010
2012
2014
EFTA01476374
20 November 2015
US Equity Insights
Reiterating OW on Healthcare
Healthcare is 15.3% of US GDP (22.4% of PCE). The largest piece of this is
healthcare
services as rendered by healthcare professionals, hospitals and other
facilities. The
smaller but even faster growing part of Healthcare is drugs, devices and
equipment. As
is typical for the S&P 500, the Health Care sector is more exposed to
manufacturing
products than delivering services. We believe growth in healthcare products
will stay
strong owing to an aging population and increasing efforts to treat
conditions with
drugs and maximize the productivity of scarce healthcare labor with as many
tools and
conveniences as conceivable. We believe S&P 500 Biotech, Pharma, Devices,
Equipment, Supplies, Tech and Tools sit in the sweet spot of these trends.
We remain
cautious on Managed Care and other HC services and facilities.
Given superior growth, the sector normally trades at a 10% premium to the
S&P, so the
current discount is rare. We see nearly 4pts of PE upside as we believe the
sector
should trade at 18-20x fwd PE or —20x trailing, if the 10yr Treasury yield
doesn't
significantly exceed 3%. Currently, HC is trading at a 15.5-16x fwd PE,
below S&P's
16.7x.
HC trailing PE is already as undemanding at it was in 1993 during the worst
of the
Hillary Care sell-off back then as a 13-14 PE with 6-7% 10yr Tsy yields is
more
demanding than a 14-15 trailing PE with 2-2.5% 10yr Tsy yields. So
valuations are
similar or even less demanding now than during the bottom of the 1993 sell-
off.
Moreover in 1993, Democrats held a Congress majority and when Republicans
took it in
1994, Hillary Care stopped. Today, Republicans control Congress.
We expect 6%+ sales growth and —7% EPS growth from S&P Healthcare next year,
and
it has best sales and EPS estimates revision trends of any major sector. We
also like its
low cyclicality and strong balance sheets. As the biggest and fastest
growing part of US
GDP and household consumption, HC remains our most favored sector.
Figure 28: S&P Healthcare Trailing PE as low as during
worst of Hillary Care sell-off in 1993
10
EFTA01476375
15
20
25
30
35
40
5
Figure 29: 10yr Treasury yields 6-7% in 1993 sell-off vs.
2-2.5% today
10
0
1
2
3
4
5
6
7
8
9
Source: Clarifi/Compustat, Deutsche Bank
Source: Bloomberg Finance LP, Deutsche Bank
Page 12
Deutsche Bank Securities Inc.
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1990
EFTA01476376
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
EFTA01476377
20 November 2015
US Equity Insights
Figure 30: Relative price performance during Clinton
healthcare initiatives in the 1992-1994 election
-20%
0%
20%
40%
60%
80%
100%
S&P 500
S&P Healthcare
Nov 1992: Clinton Elected
Jan 1993: Hillarycare task
force created
Figure 31: Hit to Health Care since Hillary Clinton's tweet
on Sept 21 (relative price performance)
Sept 1994: Sen Majority
leader Mitchell declares
Clinton initiatives dead
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
S&P 500
S&P Healthcare
Sept 21: Hillary Tweets
about drug prices
Source: IBES, Deutsche Bank
Source: IBES, Deutsche Bank
Reiterating UW on Energy
We continue to question the still highly elevated valuations at Energy
stocks. YTD oil
prices are down nearly $50 y/y, a huge headwind to Energy profits. Every $5/-
barrel
decline in oil prices reduces S&P annual net income by —$7.5bn or nearly $1
EPS, as it
hits S&P Energy profits by 10%, even as Energy companies cut costs
aggressively.
We think Energy stocks are overvalued. We assume normalized oil prices of
$65-70
(40% gain vs. —$50 YTD average), but likely not achieved until 2017. For
EFTA01476378
normalized
Energy earnings, we forecast $80bn on improved costs (60% gain in profits on
40%
gain in oil price), but again, not until 2017.
However, at Energy's current —$1.3tr market cap, the market-implied
normalized
Energy earnings is $90bn in 2016, if a fair forward PE on normalized
earnings is
assumed to be 15x. In fact, history suggests 13-15x fair fwd PE on
normalized earnings
is more appropriate, in which case the market is implying an even higher
normalized
Energy earnings of $90-100bn in 2016. Note: we are not applying 13-15x on
either our
forward Energy earnings or bottom-up consensus; we are using a 13-15x fwd 12-
month
PE as suggested by history solely for the purpose of implying the level of
Energy
earnings that the market currently expects to be achieved by 2016.
$90bn+ of normalized earnings would imply that either an 80% gain in profits
is
required on 40% gain in oil price (to $65-70) for the entire sector, or that
the market
assumes oil prices will normalize above $70. Achieving $90bn+ in profits
even with
$70/bbl oil will be challenging given:
1) oil service profits staying very weak given the capacity rationalization
likely
needed to get oil prices to $70/bbl,
2) natural gas prices that are likely to stay very depressed for a long time,
3) oil refining margins would suffer a big hit should oil prices rise to $70/-
bbl without
a large WTI to Brent price spread.
We think a fair intrinsic value for Energy at YE2015 is —$1.2tr or 25x our
actual (but
sub-normal) estimate for 2016 Energy earnings of $52bn. We see —5% downside
to
Energy stocks into YE2015, unless oil prices quickly rally to —$60 or
higher. Credit
markets also supp
ℹ️ Document Details
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Bates Number
EFTA01476303
Dataset
DataSet-10
Document Type
document
Pages
252
Comments 0