A Cheap but Winning Stock

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1 RESEARCH'S BEST IDEAS for the SECOND HALF of 2016 To obtain important disclosure information regarding Hilliard Lyons' rating system, valuation methods, risk factors and potential conflicts of interest with respect to the companies covered in this report, please call (800) ext. 8820, or send a request via to RsLib@hilliard.com. Requests should include the name and date of this report and a list of companies for which the disclosure information is requested. Note Important Disclosures on Pages 8 Note Analysts' Certification on Page 7

2 Stocks listed here may not be suitable for all investors. A report on each stock mentioned is available upon request, offers more detailed information, and should be consulted before any investment is made. Check with your Financial Consultant for the investment appropriate for you. Banking, Andy Stapp Pinnacle Financial Partners, Inc. (PNFP) $49.61 $2.02 $2.59 $ x 19.2x 15.9x $ % $58 Buy 2 Growth story in a modest growth sector Founded in 2000, Pinnacle Financial Partners, Inc. is a growth oriented commercial banking organization with operations primarily in Chattanooga, Knoxville, Memphis, and Nashville. Despite its short history, the company has grown to become the second largest financial institution based in Tennessee with over $9 billion in assets. The secrets to PNFP's ability to drive double-digit loan and EPS growth: it is smaller and more nimble than its larger competitors and able to provide superior service; it has the proven ability to lure lenders and other revenue producers from these institutions. This is a great way to grow from a credit quality perspective because the lenders they hire can bring over their stronger relationships and leave the others with their former employers. We believe there are a number of opportunities that will enable Pinnacle to continue its outsized growth. It has recently entered Chattanooga and Memphis and will utilize its growth strategy in these markets. The pipeline for new talent is growing. PNFP hired 14 revenue producers in Q1'16 (an annualized pace of 52) versus 36 in all of 2015 and approximately 12 per year in It has historically been a commercial lender and has recently begun to offer commercial real estate loans in the markets it serves. PNFP formed a team in 2H'15 to offer investment banking services to its middle market customers. The company increased its stake in Bankers Healthcare Group in Q1'16 to 49% from 30%. Consumer Discretionary, Jeff Thomison Churchill Downs Inc. (CHDN) $ $2.64 $3.71 $ x 33.1x 24.5x $ % $150 Buy 3 Rating recently upgraded to Buy On May 6th, we upgraded our rating on Churchill Downs Inc. to Buy from Neutral. Our upgrade came at a price of $127, and the stock is now slightly below that figure. Our one year price target is $150 per share. This represents potential price appreciation of 21% and potential total return (including a small dividend) of about 22%. We like the added diversification acquisitions brought to the company over the past few years, and we also like the strong financial condition, the growth-seeking management team, and, most importantly, the upward trend in annual revenues, cash flow, and EPS. The bigger growth areas of the company include the casino business and the mobile videogame publishing business. Lower growth areas, but representing growth nonetheless, include the company's TwinSpires.com online wagering platform and what we refer to as "Kentucky Derby week" at CHDN's namesake racetrack. As for company mix, we note the Racing segment generated 21% of the company's full year EBITDA in Hilliard Lyons Equity Research 2

3 2015, and the TwinSpires online wagering segment generated 15%. The company's Casino and Big Fish Games segments collectively represented 65%. We find the valuation on CHDN shares attractive, as the Enterprise Value/EBITDA multiple (approximately 8.5x our 2016 estimate of adjusted EBITDA and 7.5x our 2017 estimate) is the lowest we have seen in 3-4 years despite a favorable fundamental outlook for the company. Electric Utilities, David Burks PPL Corp. (PPL) $39.32 $2.03 $2.21 $ x 17.8x 16.7x $ % $40 Buy 2 Positive fundamental outlook and reasonable relative valuation We continue to recommend purchase of PPL Corp. Based in Allentown, PA, PPL is one of the nation's largest utilities, serving 10 million customers in the United States and the United Kingdom. We believe PPL has a positive fundamental outlook while the stock trades at a reasonable valuation relative to its peer group. The company expects to grow its earnings by a 5-6% annual rate through 2018 from a 2014 base. PPL's growth is expected to be driven by growth in its domestic utility operations in Pennsylvania and Kentucky. The stock trades at 16.7x estimated 2016 earnings compared to its peer group, which is near 18x estimated earnings. Though PPL probably deserves some discount associated with the uncertainty surrounding Great Britain's potential exit from the European Union, we feel the company is well positioned to deliver consistent earnings and dividend growth over the next several years. Health Care, Kurt Kemper Meridian Bioscience, Inc. (VIVO) $19.41 $0.83 $0.86 $ x 22.6x 21.3x $ % $22 Buy 3 Potential growth via new products and acquisitions Our top pick for 2H'16 remains the same as our original pick for 2016: Meridian Bioscience. Shares are down ~4.4% year to date and our price target is $22. We believe Meridian is in a phase of capital deployment, something a bit cyclical for the company due to their high dividend payout ratio; shares currently yield 4.1%. VIVO recently acquired Magellan Diagnostics with debt, so their cash pile is still near all-time highs for the company and management has stated their appetite for new assets has not been satiated. We believe business development is a strength of this management team and view Magellan as an example. Magellan, which manufactures tests for lead poisoning, currently has approximately 25% market share in the US. However, there are no other point-of-care platforms for lead testing, and Magellan offers compelling value to pediatric offices, in our opinion. The breakeven test number is around 280, a low bar we believe a pediatric office with more than two pediatricians can achieve in less than a year in most cases. Beyond breakeven, the reimbursement schedule enables the pediatricians to achieve over 50% operating margins. With the National Ambulatory Medical Care survey pointing to 87% of pediatric visits occurring in an office setting, we believe Magellan can continue to grow its market share, as well as access Meridian's international footprint for further growth. Hilliard Lyons Equity Research 3

4 Meridian has also been busy internally, launching several new products we believe investors should watch carefully. In the Diagnostics segment, the company launched a malaria assay in Africa and the EU. The malaria market may be shrinking at a modest pace, but it is still a large opportunity (likely over $750 million) for Meridian's verified best-inclass test. We are uncertain about the speed and trajectory of the product ramp, but we expect Meridian to garner solid market share over time. In the Life Sciences segment, the company is now offering basic materials for next generation sequencing (NGS) for DNA analysis, plant genetic analysis, and Zika virus antibodies and antigens. The NGS market is growing rapidly, and we believe plant genetic analysis may receive a boost from any legislation that requires foods to be tested for the presence of GMOs. Finally, the Zika virus continues to garner headlines and could enable the company to gain some additional business. Industrials, Spencer Joyce Multi-Color Corp. (LABL) $61.16 $2.14 $3.20 $3.22A 28.6x 19.1x 19.0x $ % $73 LTB 3 Attractive valuation Label-maker Multi-Color Corp. is our favorite Industrials sector pick as we move into the second half of the year. We believe the pullback in price and turnover in shares over the past several months has been healthy from a tactical standpoint, and we remain encouraged by management's recent growth assumptions for the in-progress fiscal year (2017), which began on April 1, The company reiterated a position that acquisition activity will be subdued for the next couple of quarters, and we expect sentiment to improve alongside cleaner financial results in fiscal Natural Gas Utilities, Spencer Joyce Spire, Inc. (SR) $66.49 $3.07 $3.20 $ x 20.8x 19.4x $ % $72 LTB 3 Good relative value In the Gas Utility industry, we like adding exposure to Spire, Inc. (SR) as we enter 2H'16. SR marks good relative value, in our view, and offers a competitive indicated yield of nearly 3%. We believe the street is assuming too high a level of execution risk at this point, and in our view investors are slightly undervaluing the predominately-regulated business mix. Hilliard Lyons Equity Research 4

5 REITs, Carol Kemple Kite Realty Group Trust (KRG) (*) Price FY FFO Per Share P/FFO Multiple Indicated Annual Target $25.72 $1.56 $2.11 $ x 12.2x 12.7x $ % $30 Buy 3 Trading at discount to peer group Kite Realty Group Trust had a strong Q1'16. FFO per share was a penny ahead of consensus. The same store portfolio was 95.5% leased, 60 basis points ahead of the year ago period. Leasing spreads were up 7.8% in the quarter. We believe the company's development and redevelopment pipeline will be additive to FFO. We rate KRG Buy with a $30 target price. REITs, John Roberts Omega Healthcare (OHI) (*) Price FY FFO Per Share P/FFO Multiple Indicated Annual Target $32.99 $2.85 $3.08 $ x 10.7x 9.8x $ % $40 Buy 2 REIT continues to exceed expectations We see Omega Healthcare as our best company for the second half of 2016, mainly for the following reasons: A 7% dividend yield on a dividend we believe will continue to be increased quarterly A valuation among the lowest of all of the healthcare REITs A strong management team focused on accretive growth plus better than anticipated increase in government reimbursement for operator services Extremely compelling demographics, and a service that is a necessity and one where demand typically sharply outstrips supply A diversified portfolio, where problems at a single operator are generally unlikely to have significant adverse impact. OHI is the largest skilled nursing facility REIT, offering it substantial economies of scale, and the shares are a solid long-term holding, in our view, offering high income and price appreciation potential. Technology, Stephen Turner GoPro (GPRO) $10.26 $1.32 $0.75 ($0.44) 7.8x 13.7x NM $ % $17 LTB 4 Small cap pick for aggressive growth investors Our best small cap idea for the second half of 2016 is GoPro, which we direct toward aggressive growth investors with a risk appetite suitable to handle significant swings in near-term share performance. GPRO shares have underperformed since we began recommending the name as consumer electronic demand weakened on a global basis, including digital camera, smartphone, and PC sales. Last year, management also did not deliver new product at a regular yearly cadence which has further pressured shares. Hilliard Lyons Equity Research 5

6 GoPro recently announced a partnership with energy drink seller and media company, Red Bull. Red Bull will receive a ~1% equity stake in GPRO while GPRO will become Red Bull's sole point-of-view capturing device provider at over 1,800 Red Bull events globally. GoPro also announced an exclusive deal with India's largest consumer electronics retail chain, Reliance Digital. This holiday season GoPro is expected to launch two new products, including the Karma drone and HERO 5 cameras. We believe these partnerships and new product launches will reignite sales for GoPro and boost GPRO shares off their recent record lows. We note GoPro shares have a suitability rating of 4, as we base our valuation on future demand for product that has yet to be introduced to the market, which could differ substantially from our view. We continue to suggest staggering trades into a full position over multiple quarters. We rate GPRO shares Long-term Buy-4 with a FYE'18 price target of $17. Apple Inc. (AAPL) $98.83 $6.45 $9.22 $ x 10.7x 11.7x $ % $121 LTB 1 Large cap tech pick Our top large cap pick for the second half of 2016 is Apple. Investing in AAPL includes risks, such as deteriorating economic growth in China, but remains suitable for a broad base of investors, in our opinion. Recently, management raised the capital return program allotment by $50 billion to $250 billion, which included a 10% increase in the dividend to $2.28 per share. The dividend has increased 50.4% in the four years since its inception and we continue to expect annual raises going forward. Apple continues to have a strong balance sheet and cash flows. FQ2'16 net cash totaled $153 billion or $27.62 per share. We forecast global demand for the iphone 7, which is expected to launch in autumn, to increase substantially following a year of subdued global smartphone demand and tough year/year comparisons. We also expect revenue to improve following the expected refresh of ios 10, the Apple Watch, and Macbook. Future growth drivers include emerging market opportunities, potential M&A activity, and increased services revenue. We rate Apple shares Longterm Buy-1 with a FYE'17 price target of $121. Telecommunications, David Burks AT&T Inc. (T) $40.33 $2.56 $2.71 $ x 14.9x 14.0x $ % $41 Buy 2 Attractive on both a valuation and yield basis We recommend purchase of AT&T Inc. for income oriented investors seeking modest capital appreciation. The biggest reason we have become more positive on the shares over the past year is that the company has finally demonstrated an ability to generate consistent, albeit modest earnings growth after several years of earnings stagnation. Margins in each of T's domestic businesses increased in the first quarter, reflecting cost reductions and efficiencies. We project earnings of $2.88 per share in 2016 compared to last year's $2.71 per share. Looking ahead, we anticipate earnings of $3.02 per share in We believe management has positioned the company to where it can grow its earnings by a mid-single digit each year. In addition, the stock is trading at what appears to be a Hilliard Lyons Equity Research 6

7 reasonable valuation to us, at 14x estimated 2016 earnings. Finally, the stock offers an attractive 4.8% dividend yield and dividends have been increased for 31 consecutive years. Water Utilities, Spencer Joyce Aqua America, Inc. (WTR) $33.81 $1.20 $1.26 $ x 26.8x 25.8x $ % $27 Undpfm 2 Sell or trim positions Our best idea in the Water Utility space as we move into 2H'16 is selling and/or trimming positions in Underperformrated Aqua America, Inc. Based on earned-roes that remain above allowed levels, we expect Aqua to post just industry-average (or slightly below average) growth over the next few years, which we believe leaves shares vulnerable to a pullback while currently priced at ~25x consensus EPS for Risks Price targets may be dependent on a variety of factors including, but not limited to, a company meeting projected earnings forecasts, product acceptance, weather and consumer sentiment, industry trends meeting expectations, changes in the economy and interest rates, and the geopolitical environment. Risks may also be specific to the company profiled. Suitability ratings of companies mentioned may range from 1 (Conservative) to 4 (Most Aggressive); therefore, not all securities highlighted are necessarily appropriate for all investors. Stocks priced as of the close, 10 June Additional information is available upon request. * - Annual yield is calculated by dividing the distribution amount by the current market price of the security. For US income tax purposes, the Company may classify all or a portion of its distributions as dividends or other non-dividend distributions. Note that for some investors, for US income tax purposes all or a portion of the Company's 2015 dividend or distribution was treated as return of capital and not as "dividend income" as reflected on the IRS Form 1099-Div for the 2015 tax year. The Company generally makes a final determination regarding the proper tax treatment of distributions after calendar year end. We urge each shareholder to consult with his or her own tax advisor to determine the tax consequences of the distributions received, including any state, local or foreign tax considerations. Analysts' Certification The contributors to this report hereby certify that the views expressed in this report accurately reflect their personal views about the subject. They also certify that they have not been, are not, and will not be receiving direct or indirect compensation in exchange for expressing the specific points of view in this report. Hilliard Lyons Equity Research 7

8 Important Disclosures The contributors to this report or members of their households typically have positions in the companies they follow, which may include, but are not limited to, common stock, options, rights, warrants, or futures contracts. They may not engage in buying or selling securities contrary to their recommendation. Hilliard Lyons' analysts receive bonus compensation based on Hilliard Lyons' profitability. They do not receive direct payments from investment banking activity. Investment Ratings Buy: We believe the stock has significant total return potential in the coming 12 months. Long-term Buy: We believe the stock is an above average holding in its sector, and expect solid total returns to be realized over a longer time frame than our Buy rated issues, typically 2-3 years. Neutral: We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform: We believe the stock is vulnerable to a price set back in the next 12 months. Suitability Ratings 1 - A large cap, core holding with a solid history. 2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks. 3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage. 4 - Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volume or a narrow customer or product base. Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 44 37% 14% 86% Hold/Neutral 72 60% 4% 96% Sell 4 3% 0% 100% As of 6 June 2016 Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 8