Equity Research: Morning Meeting Notes PCS Topics: AMT ...

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Equity Research: Morning Meeting Notes

July 7, 2016

KBCM Topics: LII, IR, RBC, WSO, NGVT PCS Topics: AMT, CCI, SBAC, AMD, INTC, MRVL, MU, NVDA, ON, SYNA

Initiation of Coverage

Ticker NGVT

Company Ingevity Corporation

Rating Overweight

Price Target

$43.00

2016 $1.80

2017 $2.00E

2018 --

2018 --

Analyst Sison

Estimate Changes

Ticker

AMT SBAC LII WSO

Old 2016E New 2016E

5.67

5.72

6.00

6.06

6.60

6.55

5.45

5.40

Cons.

6.61 5.49

Old 2017E New 2017E Cons.

6.35

6.41

6.27

6.32

7.60

7.50

7.53

6.20

6.05

6.11

Old 2018E New 2018E Cons.

--

--

--

--

--

--

--

--

--

--

Analyst

Bowen Bowen Hammond Hammond

Important disclosures for the companies mentioned in this report can be found at .

Please refer to the analysts' recently published reports for company-specific valuation and risks.

KeyBanc Capital Markets Inc. | Member NYSE/FINRA/SIPC

July 7, 2016

Morning Meeting Notes

Industrial: HVAC: 2Q16 Checks Reveal Momentum Intact (Outside of Weather) -- Hammond

4

HVAC: Our HVAC channel checks indicate a modestly cautious sales growth backdrop for 2Q16. That said, despite the quarter's unfavorably cool start, we were encouraged as a hotter June leaves the selling season intact and full-year outlooks largely unchanged. IR (Overweight, $75PT) remains our favorite way to play the space given attractive relative valuation, solid Applied backlog visibility, and price/cost margin upside potential in Climate. Conversely, weaker trends in the Sun Belt region leave us incrementally cautious on near-term results for WSO (Sector Weight).

Following significantly lower Cooling Degree Days in April/May, June (key month for the quarter) saw a favorably warm finish. On the back of a hotter June, the vast majority of dealers nationwide affirmed optimistic 3Q16 expectations and left full-year outlooks largely unchanged (+LSD-MSD volume; +LSD pricing).

Amid the formalized June 30 Regional Standard transition (in the Sun Belt), the majority of contacts attributed the entry level shift to 14-SEER to be a net-positive to product mix, and importantly, we received confirmation of rational pricing behavior at both the OE and distributor levels. We continue to get the sense traction in higher efficiency remains favorably ahead of the curve.

Estimate Changes: We are lowering estimates on WSO to reflect our incremental caution on the impact tied to cooler weather across the Sun Belt. Additionally, we are lowering our estimates on LII (Sector Weight), though the Company's predominant presence in the more favorable North Central and Midwest regions does act as a positive offset.

Industrial: NGVT: Another Specialty Chemical Story "Activated", Initiating Coverage with an Overweight

Rating -- Sison

5

Ingevity Corporation (NGVT, Initiate Overweight, $43PT): '16E $1.80 (FS $1.88); `17E $2.00 (FS $2.39). Initiate with Overweight rating ($43PT). While the Performance Chemicals segment faces challenges near term tied to lower oil prices and weak global industrial demand, we believe investor focus should be on the higher-margin and faster-growing Performance Materials segment (i.e., activated carbon business), which remains favorably positioned to benefit from secular demand driven by emission regulations and automotive demand growth. We view risk/reward as attractive at current levels as we believe NGVT's high-quality specialty chemical portfolio, growth potential, and solid balance sheet/FCF growth profile should garner a premium valuation.

Valuation: ~9.6x EV/EBITDA on our `17E vs. the KBCM Specialty Chemical Universe average of ~9.0x. We believe NGVT should trade in an EV/EBITDA range of 8.5-11.0x over a cycle. PT=11.0x.

Ratings: 5/1/0. Short Interest (6/15): 1.5d, 2.8%.

Technology: FX Gives Back Some of What It Took Away -- Bowen

6

Communications Services: FX Gives Back Some of What It Took Away: It appears to us that investors ascribe a discount to international exposure in the tower industry; however, we believe international tower exposure should provide stronger long-term growth prospects. In our view, the highest probability of long-term returns will be found in higher AFFO/share growers that should also continue to grow dividends in line, if not faster than AFFO/share. American Tower (AMT, Overweight, PT $123) is our favorite idea and it continues to trade at a discount to peers.

FX headwind in 2015 is turning into a tailwind in 2016. Raising estimates for AMT and SBA Communications (SBAC, Sector Weight). Long-term dividend growth should result from higher AFFO/share growth. Crown Castle International (CCI, Sector Weight) trades at a premium, SBAC trades at a discount, while AMT should

trade at a premium.

Technology: Notebook ODM Tracker Update -- McConnell

7

Semiconductors: Notebook ODM Tracker Update: Q2 Closes on a Strong Note: Introducing a Q3 Unit Shipment Estimate of +4% Q/Q: We now expect unit shipments of 11.0 million in June, up 14% m/m versus a prior estimate of 9.6 million, or down 1% m/m. The shipment upside is attributable to better-than-expected monthly shipments at Quanta, Compal and Wistron. Supply-chain conversations indicate that the upward revision is largely driven by new product introductions across all major PC OEMs.

Our Q2 unit shipment estimate increases to +7% from +2% q/q. Introducing a Q3 unit shipment estimate of +4% q/q/-14% y/y. Component suppliers likely to benefit from restocking off lean Q2 inventory levels. Consensus estimates on Intel appear too low.

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July 7, 2016

Morning Meeting Notes

Consumer: Austin to Zener: Local job-to-permit analysis (May 2016) -- Zener

8

Homebuilders/Building Products: Our May "Austin to Zener" jobs-to-permits analysis points to slowing job growth against falling total permits, though with divergent trends seen between single and multi-family. We maintain our "7th Inning Stretch" thesis.

Our 35-city cohort added 1.62M jobs in May (down vs. the 1.85M trailing 3-month avg. and 1.91M in mid-2015). The ratio of job growth to building permits was 2.6x in May, which remains elevated vs. the long-term average of ~1.2-1.4x. We think a high job-to-permit ratio this far into the cycle is reflective of not only high land costs limiting supply, but also changing demographics.

Over the trailing 3 months, our top markets' total permits dropped 7%, with divergent trends between single-family (+10%) and multi-family (-25%). Solid SF growth stands in contrast to our later cycle "7th Inning Stretch" thesis, but we note this growth needs to both be accompanied by affordable homes and in profitable markets (i.e., coastal) for builders to not dilute unit growth with mix from lower-priced regions.

Disclosure Appendix

9

Page 3

July 7, 2016

HVAC: 2Q16 Checks Reveal Momentum Intact (Outside of Weather)

Our 2Q16 HVAC channel checks confirm intact cyclical momentum and wellreceived 14-SEER pricing despite some concern over the quarter's cool start. In the face of significantly lower Cooling Degree Days (CDD) in both April and May, June (typically accounting for ~50%+ of the quarter) finished a much needed 5% higher YOY. This drove the majority of our survey's resilient commentary, crediting the 2Q's final month to moderate growth and sustained replacement driven demand, which we believe was led by the Midwest and North Central regions based on feedback from our checks and CDD trends [mitigating positive to LII (SW)]. Meanwhile, the Sun Belt faced more challenging weather throughout [incremental negative to WSO (SW)], yet still eked out modest growth, in our view, thanks to intact mix and replacement drivers.

Key Investment Points

Our Conclusion. We see 2Q16 having shown no break in underlying business momentum (outside of cooler weather), as the vast majority of dealers nationwide affirmed optimistic 3Q16 expectations (on the back of a hotter June) and largely unchanged full-year outlooks (+LSD-MSD volume; +LSD pricing). Given their domestic tilt, WSO and LII are trading at all-time highs and elevated multiples.

What's the Mix? With the June 30 deadline now in the rear-view mirror for Sun Belt distributors, we received confirmation of positive mix trends and, more importantly, rational pricing behavior at both the OE and distributor levels. The majority of contacts attributed the entry level shift to 14-SEER to be a net-positive to product mix, complementing the industry's solidly intact replacement over repair catalyst (amid supportive homeowner fundamentals). We did have some distributors cite the transition as a modest drag to their overall ability now to sell 16-SEER+ given the increased attention (whether by accident or intentional) paid to the "new" entry level offering. All told, we maintain that heading into the first full quarter under the new Regional Standards, positive mix trajectory remains on track, with replacement (over repair) activity sustaining as the key cyclical force, which almost all dealers corroborated.

Positive Pricing and Outlooks Largely Unchanged; Commodities Likely a Headwind in 2017. While weather did not cooperate in 2Q16, pricing commentary around increases passed at the beginning of the year in addition to select midyear price hikes on parts all signaled positively. The current competitive landscape also appears rational with no perceivable discounting on 14-SEER. Despite this selling season's cautionary start, overall dealer outlooks continue to call for MSD volume growth. Looking out to next year, based on current commodity price trends and the timing of company hedges, we are now baking in an incrementally greater raw material cost headwind in 2017.

Lowering Estimates for LII (SW) and WSO (SW); Reiterate HVAC Preference to Play IR (OW; $75 PT) on account of its discounted relative peer valuation, solid Applied backlog visibility and ample earnings upside contingency, which we believe offset incremental commodity price drags into next year. For both LII and WSO, we are lowering our 2016E to better reflect the 2Q's collective -4% CDD YOY, as well as a more gradual top line and margin expansion trajectory for WSO's 2017E, and revised raw material impacts next year tied to LII. We are also maintaining our SW on RBC.

Morning Meeting Notes

Jeffrey D. Hammond / (216) 689-0236 jhammond@ James Picariello / (216) 689-0447 james.picariello@

Sym

IR LII RBC WSO

Rating

OW SW SW SW

Target

$75.00 NA NA NA

Mkt. Cap. (M)

$16,738.9 $6,624.3 $2,522.7 $4,676.1

EPS LII Consensus IR Consensus RBC Consensus WSO Consensus Revenue ($B) LII Consensus IR Consensus RBC Consensus WSO Consensus EBITDA ($M) LII Consensus IR Consensus RBC Consensus WSO Consensus

2016E Old New

$6.60 $4.05 $4.55 $5.45

$6.55 $6.61

NC $4.09

NC $4.57 $5.40 $5.50

$3.64 $13.50 $3.27 $4.32

$3.63 $3.65

NC $13.56

NC $3.27 $4.29 $4.35

$508 $1,986 $488 $329

$505 $523 NC $2,004 NC $486 $327 $391

2017E Old New

$7.60 $4.50 $5.10 $6.20

$7.50 $7.53

NC $4.51

NC $4.98 $6.05 $6.10

$3.81 $14.03 $3.37 $4.58

$3.80 $3.83

NC $14.03

NC $3.34 $4.50 $4.58

$566 $2,115 $512 $362

$560 $578 NC $2,134 NC $517 $354 $427

Source: Company reports, FactSet, KeyBanc Capital Markets Inc.

EPS LII Consensus IR Consensus RBC Consensus WSO Consensus

2Q16E Old New

$2.36 $1.30 $1.26 $2.07

$2.30 $2.36

NC $1.30

NC $1.28 $2.00 $2.06

Source: Company reports, FactSet, KeyBanc Capital Markets Inc.

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July 7, 2016

Ingevity Corporation

NGVT: Another Specialty Chemical Story "Activated", Initiating Coverage with an Overweight Rating

We are initiating coverage on Ingevity Corporation (NGVT) with an Overweight rating establishing a 12-month price target of $43.00 based on a 2017E EV/ EBITDA multiple of 11.0x. We believe NGVT offers investors a high quality specialty chemical portfolio with solid secular growth drivers and manageable exposure to the potential for rising demand in energy markets. Long term, NGVT should be capable of LSD to MSD organic sales growth levered into HSD EBITDA growth and has a solid balance sheet with net debt-to-EBITDA of ~2.5x that can be further utilized to support ~10% EPS growth.

Key Investment Points

Ingevity Is a Specialty Chemical Company with Leading Market Positions in High Performance Activated Carbon Materials and a Leader in Pine Chemicals Spun off by Westrock on May 16th, 2016.

High Margins with Solid Sales Growth Potential: EBITDA Margins Have Been Above 20% Since 2010, Sales Growth CAGR 2010?2015 Is ~7%, While Generating MSD EBITDA Growth Despite FX and Energy Headwinds.

Performance Materials (PM) Boasts EBITDA Margins Consistently in the Mid 30s (%). PM is the Leading Manufacturer of Activated Carbon for Automotive Applications with a Dominant #1 Market Share. We See Double-Digit EBITDA Growth in 2016E and Beyond Driven by Emission Regulations and Steady Gasoline Powered Vehicle Demand.

Performance Chemicals Has Struggled but Should Bottom in 2016E and Only Represents ~40% of NGVT's Earnings Power. On the Positive, Cost Savings Should Drive $25 Million-$30 Million, While Pavement Technologies Sees Double-Digit Growth Offsetting Another Down Year in Oilfield Technologies and Industrial Specialties.

Morning Meeting Notes

Michael J. Sison / (216) 689-0276 msison@

Curtis Siegmeyer / (216) 689-4325 curtis.siegmeyer@

NYSE: NGVT Rating: Price Target: Price:

Overweight $43.00 $34.70

12 10

8 6 4 2 0

Vol (mil)

38 36 34 32 30 28 26 24 22 Jul-16 NGVT

Sources: Company reports, FactSet, KeyBanc Capital Markets Inc.

Company Data

52-week range

$22 - $35

Market Cap. (M)

$1,460.9

Shares Out. (M)

42.10

Enterprise Value (M)

$1,948.6

Avg. Daily Volume (30D)

1,068,800.0

SI as % of Float

2.9%

SI % Chg. from Last Per.

(0.3)%

Sources: Company reports, FactSet, KeyBanc Capital Markets Inc.

2016 Outlook ? We See EPS at $1.80 with EBITDA at ~$185 Million, Down from 2015 to Reflect Additional Public Company Costs and a Down Year in Performance Chemicals. EBITDA and Operating Margins Are Healthy at ~21% and ~17%, Respectively.

Estimates

FY ends 12/31

F2015A 1Q16A 2Q16E 3Q16E

EPS (Net)

$2.12

$0.41

$0.50

$0.50

Cons. EPS

--

--

$0.51

$0.54

Valuation

P/E

16.4x

--

--

--

Sources: Company reports, FactSet, KeyBanc Capital Markets Inc.

4Q16E $0.34 $0.42

F2016E $1.80 $1.88

F2017E $2.00 $2.39

--

19.3x

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17.4x

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