Promontory Investment Research Fall 2018

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Autumn 2018, Issue 1
Promontory Investment Research
www.promontoryir.com

General Motors Company

General Motors Company | NYSE: GM Investment Thesis

Negative
Neutral Positive

Due to declining automotive sales across the industry and a late-stage auto cycle, General Motors is
Share price, 11/30/18: $37.95 picking and choosing its battles. The company is undergoing cost-cutting initiatives across its

Market capitalization: $53,560mm traditional automotive segments and shedding product lines while refocusing on higher-margin
Shares outstanding:
1,410mm automobiles, battery-electric vehicles, and autonomous driving technology. Our sum of the parts

52-week range: $45.52 / $30.56 analysis implies that the company’s shares trade at a 30.8% discount to the full value of its core

EPS (FY17): $4.1 operations and equity investments.

Beta (3Y Monthly) 0.93

Average analyst opinion: $44.75
Price target:

$49.69 Investment Highlights

§ Core Restructuring. GM announced its implementation of a $3 to $3.8bn restructuring program

Price Chart in November, expected to be completed by 2020. The restructuring is expected to be comprise
of $1.8bn in non-cash asset write-down and pension adjustments, and up to $2bn of cash for
GM
employee separation and other closure costs. The company is closing three assembly plants and
120 S&P 500
two powertrain facilities in North America, and cutting 15% of salaried workers, including a 25%
110 cut on the executive layer. Management expects the initiative to generate $4.5bn in annual cost

savings by 2020, net of lost product contribution, as well as a $1.5bn reduction in capital
100
expenditures from an annual $8.5bn to $7bn. GM is pursuing a variable cost structure where
90

workforce and manufacturing costs rise and decline with volume.
80
70 §
Product Line Changes. GM discontinued the production of its electric hybrid plug-in model, the
60 Chevrolet Volt, in anticipation of a reduction in buyer credits from electric vehicle subsidies, as

well as in the face of declining YoY unit sales in both its hybrid and battery EV lines. The company
is refocusing its efforts on the battery-electric vehicle market, a higher-technology segment

where General Motors’ Chevrolet Bolt is the second best-selling brand behind Tesla. Along with
Financial Highlights

the Volt, GM discontinued production of the Impala and Cruze in an effort to shift its product

mix away from passenger car models towards larger, higher-margin vehicles.
(Dollars in millions) 2017 2018E 2019E
§ Automated Vehicle Potential. GM has significantly grown Cruise Automation’s valuation since
Revenue 145,588 145,330 146,580 its purchase in 2016. In the latest investor round this October, Honda made an equity investment

% Growth -12.5% -0.2% +0.9% of $750mn and pledged $2bn over the next twelve years, valuing Cruise at $14.6bn. GM
EBITDA 21,983 14,005 14,162
continues to focus significant resources on the division and plans to launch an autonomous fleet
% Growth +27.0% -36.3% +1.1% in 2019. Head count is estimated to be growing at roughly 40% per quarter amid workforce cuts
Dividends p/share 1.52 1.52 1.53
across the rest of the company. GM may also seek to spin off the autonomous vehicle division
EPS 6.62 6.24 5.92 and focus on its core business should the valuation grow further.
Source: FactSet Consensus Estimates, 11/30/18
§ Asia Market Potential. GM’s international business has performed well in China, generating

roughly $2.2bn in EBIT over the last twelve months. The company’s JVs (SAIC General Motors,
SAIC-GM-Wuling, FAW-GM) have generated consistently strong earnings results and are

relatively insulated from the macroeconomic slowdown in China. GM’s vehicles mostly service
Tier 1 cities in China, which have been impacted far less by auto sale slowdowns than Tier 3 cities
and below. The company logged a 9% profit margin in the first ten months of 2018 off $38 billion
in revenue. By 2023, GM plans to launch 20 new electric, hybrid, and hydrogen fuel-cell models
across North America and China, with a focus on Chinese Tier 1 cities.
© Promontory Investment Research 2018

2
A student-run publication at the University of Chicago
Investment Risks
§

Electric Vehicles. As a part of GM’s restructuring efforts, the company closed plants in Ohio, Michigan, and Maryland. President Trump
expressed disapproval of the company for reducing its U.S. operations, and threatened to cut the firm’s electric vehicle subsidies in a

tweet this November. GM’s buyer credit is expected to step down to a quarter of current levels by the first half of 2020, however, the
company already discontinued its Volt production line in anticipation. The administration’s disapproval means GM will be unlikely to
secure a legislative extension for subsidies.
§ China, Trade War. Given GM International’s significant exposure to the China market, the company runs the risk of a substantial
reduction in earnings should the auto sales slowdown creep into Tier 1 and Tier 2 cities. China is GM International’s only profitable
segment, meaning that any impact will create a meaningful drag on the entire division’s performance. Additionally, GM is subject to
the risk of rising raw material prices, which have been driven over the past year by import tariffs. Around 15% of GM’s COGS, excluding
D&A, comes from the purchase of raw materials. A third of those materials don’t have prices locked in from long-term contracts,
leaving GM exposed to any fluctuations in raw material prices. GM estimated headwinds from rising commodity prices of $1 billion
2019.
§ Trucking Competition. GM faces increased competition in the trucks market, its highest margin segment. The industry grew by 8% in
the first ten months of 2018, while GM’s unit sales for trucks only grew by 5%. Volkswagen and Hyundai-Kia are some of the leading
competitors entering the market, putting pressure on GM’s best performing segment, Chevrolet trucks.

Company Overview
Company History
General Motors Company was originally founded in 1908 by William Durant. It brought together several car companies, including Buick
and Oldsmobile, and by 1918 controlled brands GMC, Cadillac, Pontiac, and Chevrolet. After producing automobiles for two world wars,
General Motors had a 54% market share of the auto market. Along with Ford and Chrysler, it became one of the Big Three U.S.
automakers, which dominated the global market through the 1960s. However, following multiple oil crises and fierce competition from
Japanese automakers, American automakers began to sputter, and seemingly never recovered. On June 1, 2009, after suffering multiple
years of heavy losses and receiving two multi-billion-dollar government bailouts, GM filed for bankruptcy. One month later, it emerged
from bankruptcy as the new General Motors Company entity. Following their restructuring, in 2010, GM raised $20bn for an initial public
offering at $33/share. In 2011 the company made its first profit since 2004, and in 2012, became the world’s largest automobile
manufacturer. However, despite this resurgence, GM has seen its share of struggles since 2014—including legal problems due to a slew
of recalls totaling nearly 30 million vehicles as well as selling off its European business. Currently, GM is focused on expanding its
autonomous vehicle (AV) arm, Cruise Automation, in order to address a rapidly changing industry.

Exhibit 1: GM EBIT Waterfall 3Q18 (USD millions) Exhibit 2: GM 3Q18 Sales by Segment

3
Business Lines
GM operates through three main business segments: GM North America, GM International, and GM Financial. It runs its automotive
operations through GMNA and GMI, selling vehicles through its dealer network to both retail customers and fleet customers. GM’s

business model relies heavily on its plethora of brands that it owns and operates, which it believes are essential to serving the different

automobile
markets across the world. GM Financial is GM’s global captive automotive finance company and global provider of
automotive finance solutions. GM also runs an autonomous vehicle technology segment under its GM Cruise, also referred to as Cruise

Automation.

GM North America
GM North America develops, manufactures, and markets vehicles under the Buick, Cadillac, Chevrolet, and GMC brands. In FY 2017,

GMNA sold 3.5 million new vehicles, representing 73.5% of GM’s total wholesale vehicle sales. GM has the largest market share of retail
sales in North America at 17.1% of sales volume. On November 26, 2018, GM announced multiple restructuring initiatives in its GMNA

segment, including a plan to lay off 14,700 workers (representing 15% of its North American workforce), end two model lines, and a

planned closure of 5 manufacturing plants in 2019. GM’s plants have already been running further below capacity than its rivals, as
demand for small and mid-sized cars has declined while gas prices have risen. The move indicates that GM is more seriously focusing on

developing its electric and autonomous vehicle technologies.

GM International
GM International meets the demands of customers primarily in South America and Asia, developing, manufacturing, and marketing

vehicles under the Buick, Cadillac, Chevrolet, GMC, and Holden brands. GMI also owns stakes in entities like Baojun, Jiefang, and Wuling.

In FY17, GMI sold 1.2 million new vehicles, representing 26.5% of its total wholesale vehicle sales. GMI has the third largest market share
in the Asia, the Middle East, and Africa, including the number two market share in China.

GM Financial

GM Financial is a global provider of auto finance, operating in North America, South America, Europe, and China. The company was
founded
in 1992 as AmeriCredit Corp. and then acquired by GM and renamed General Motors Financial in 2010. It serves as a
replacement for GM’s previous financial services company, GMAC (now Ally Financial), which it sold in 2006. Its retail automobile finance

programs include prime and sub-prime lending and full credit spectrum leasing. GM Financial focuses its retail finance activities on

providing loans in the form of retail installment contracts that the company purchases from automobile dealers, which help to finance
the purchase of new and used GM vehicles sold by franchised dealerships. Its commercial finance activities include floorplan financing
(lending to finance vehicle inventory), dealer loans (loans to finance improvements to dealership facilities, provide working capital, and
purchase/finance dealership real estate), and financing for parts and accessories, dealer fleets and storage centers.
GM Cruise
GM currently owns an 84.6% stake in Cruise Automation, an American driverless car company headquartered in San Francisco. GM
purchased Cruise in 2016 for $581 million, with a potential total payout of $1 billion including incentive payments. The latest investor
rounds were led by Softbank in June 2018 and Honda in October 2018. The two deals valued Cruise at $11.5 billion and $14.6 billion,
respectively.
Lyft Stake
GM owns a 9% stake in the ride-sharing company Lyft.
Exhibit 3: GM Historical Sales and EBITDA (billions) Exhibit 4: GM Historical FCF Yield

4
Industry Overview
Automotive OEMs

The U.S. auto market is navigating through the late stages of the automotive cycle following a strong run-up following the financial
crisis. Seasonal adjusted annual rates have declined at a stable rate since peaking in 2016 and are unlikely to reverse upwards in the
near future.
Under a rising rate environment, consumers will face greater difficulty in accessing affordable financing options, especially given
consumer sentiment shifts towards larger, more expensive vehicles such as SUVs and truck models in recent years. If the Fed Funds
rate follows guidance to hit ~3.5% by the end of 2019, OEMs will have trouble providing consumers with reasonable financing packages.
We may see consumers trade down for smaller, cheaper models or move into the motorcycles market to adjust. This will generate
significant headwinds as pickup trucks continue to be the most profitable product line for U.S. Auto OEMs, supported by the strong
consumer demand environment for larger vehicles, so a shift in product mix will certainly result in margin contraction for automakers.
Additionally, trucking has performed especially well in the most recent cycle as a result of high freight rates. The current cycle is nearly
twice as long as the typical trucking cycle, indicating that a correction may be near. Automotive sales are closely tied to the general
macroeconomic environment, which remains strong in the United States. U.S. GDP growth continues to grow on a YoY basis, up an
annualized 3.5% in 3Q18.
China, the world’s largest automotive market, has been especially weak for the year as a result of the macroeconomic uncertainty
caused by the trade war. Sales of light vehicles declined 1% YoY in the first ten months of 2018, paving the road for a potential full year
decline. Most of the decline has come from tier 3, 4, and 5 cities and especially impacted lower end vehicles. Additionally, tariffs are
weighing heavily on OEM margins. With 25% steel tariffs and 10% aluminum tariffs on internationally sourced commodities, OEMs will
bear the brunt of the increased costs themselves. Given declining consumer purchases of automobiles in recent years, the demand
environment is not strong enough for OEMs to pass through cost increases.
GM’s primary competitor in the United States automotive market continues to be Ford Motor Company. Both companies have
undertaken significant restructuring initiatives as a means of adapting to industry headwinds. Trucks represent around 80% of both
company’s total vehicle sales, a proportion that is expected to grow as the two OEMs continue shifting towards larger, more profitable
models. GM holds the highest market share in North America at 15.5%, over 2% larger than Ford’s.
In the electric vehicles and hybrids market, Tesla leads the group with the first, third, and fourth most popular vehicles by total unit
sales in 2018. Year to date, Tesla has sold 95,882 Model 3s, far surpassing Toyota’s Prius at second place with 22,524 units. GM’s
Chevrolet Volt is the fifth most popular model, having sold 14,718 units YTD.
Exhibit 5: U.S. SAAR 2009-2018 (%). Exhibit 6: United States Total Vehicle Sales (2018, billions).
Source: GS Global Investment Research Source: tradingeconomics.com

5
Valuation

To value GM, we conducted a sum of the parts model.

We split GM’s core automotive business from its equity investments in China, controlling 84.6% stake of GM Cruise, 9% equity stake in
Lyft, and the value of GM Financial.

We estimate General Motor’s fair value at $49.69 per share, a 30.8% upside from the company’s current share price of $37.95 and
market capitalization of $53.6bn. 49.5% of this value is derived from GM’s core automotive business, while the remaining 50%+ value
comes from GM’s equity and JV holdings as well as GM Financial.
We assume nearly full liquidity for GM’s equity holdings, which comprise 35% of the company’s total valuation using our method. These
positions carry greater room for error in valuation estimates, as well as more liquidity risk. A 5% liquidity discount has been applied to
GM’s positions in Lyft and GM Cruise to accommodate. However, a full sale of GM’s positions in Cruise, Lyft, and its China JVs (SAIC
General Motors, SAIC-GM-Wuling, FAW-GM) will require a significantly heavier liquidity discount and carry potential for a lower valuation
than anticipated. This is especially true in the current market environment, where valuations of public equities have been approaching
cyclical highs on an earnings basis. Applying a 60% discount to our estimates of GM’s external equity positions returns a fair value in line
with the company’s current market capitalization.

6
http://www.promontoryir.com

Abbott Laboratories

Abbott Laboratories | NYSE: ABT Growth Remains Sustainable for the

Negative
Neutral Positive
Share price, 11/30/18: $74.05

Healthcare Giant

Market capitalization: $ 126,526mn We initiate a positive rating for Abbott Laboratories and suggest a price of $82.20, assuming an
Shares outstanding:
1.756mn
EV/EBITDA multiple of x17.5. We believe that the premium multiple reflects the premium organic

52-week range: $ 54.32 - 74.92 growth Abbott has realized in the last year compared to its peers. Successful product launches such

EPS (FY17): $ 0.27
as MitraClip and FreeStyle Libre have boosted this growth, whereas last year’s effective acquisitions
Beta 1.5 have paid off well in margin expansion. We Abbott’s growth momentum to carry on going into

Average analyst opinion: $ 78.39
2019.
Price target: $ 82.20
The only visible tailwind remains to be the currency risk faced by the company, and the uncertainty

surrounding it. Management currently predicts a -3% impact of foreign exchange on total sales

Price Chart given the increasingly strengthening dollar. Though the international presence can immensely
hamper long-term expansion through FX risk, it can also help reach double-digits in certain
segments of the business. Excluding the impact of the Alere acquisition, the divestitures of AMO
Abbott S&P 500

and the legacy St. Jude Medical vascular closure business, and the unfavorable impact of foreign
exchange, total net sales increased 7.8% in the 3Q18 and 7.6% in the first nine months of FY18.
140

130

120
110 Investment Thesis

100
90
§ Organic growth look promising along with new product launches. Abbott’s new products have
recently contributed to a stronger growth outlook for the leading global healthcare company.

While FreeStyle Libre added 200k+ patients QoQ and Libre 2 gained approval in Europe,

MitraClip is seeing additional expansion opportunities following the widely-applauded COAPT
trial. Upcoming near-term launches such as, the U.S. Libre, Confirm, MRI Safe CRM, and

Heartmate 3 seek to add to this growth going into 2019.
(Dollars in millions) 2017 2018E 2019E § Concerns have been fading about recent acquisitions, as well
as the promised margin

expansion and cost synergies with Alere and St Jude. Future earnings momentum is bolstered
Revenue 27,390 30,622 32,276 by the 60 bps of growth in margin expansion in 3Q18, with +50 bps from core margins and +60

% Growth 31.3% 11.8% 5.4% bps from the St Jude and Alere integrations. With Alere leading Diagnostics, and St Jude leading
Cardiovascular and Neuromodulation segments, Abbott will be able to sustain upper single-digit
EBITDA 7,934 8,661 9,492 growth within the next year.
% Gross Margin 58.3% 58.3% 58.4%
§ International exposure exhibits a high-risk, high-return profile. Around 65% of Abbott’s
% SG&A Margin 33.0% 32.5% 31.7% revenue is derived from international sales. Emerging markets including China, India, Indonesia,

% R&D Margin 7.9% 8.0% 8.1% Brazil are home to half the world's population, but healthcare spending there is less than half
% EBIT Margin 17.9% 17.3% 17.8%

that of developed markets. Public investment in healthcare in EM countries will pick up in the
next 10 years due to a rapidly aging population, and rising demand for modern healthcare
EPS 2.50 2.90 3.18 services from urban middle classes, as BMI Research projects a 100% growth in the EM
Pharmaceuticals market between 2015-2025. Despite the foreign exchange aspect, the
Established Pharmaceuticals line looks to deliver both in the near and long-term future.

7
Investment Risks

§ International exposure and currency risk along with a strengthening US dollar. The international nature of Abbott's business subjects

it to additional business risks that may cause a deceleration in top-line growth. Abbott’s branded generic products line solely operates
in the emerging markets. The segment has constituted 11% of sales in 3Q18. Similarly, the company has derived 65.6% of its revenue
from overseas sales in the first nine months of 2018. The favorable currency impact of +0.9% has started to slow down as the last
quarter yielded to a -2.7% decrease in revenue caused by a strengthening U.S. dollar in the global stage. A similar future would be the
single major catalysts preventing Abbott from reaching double-digit overall sales growth in FY19.
§ Failure to deliver on synergy target with St Jude and Alere Inc. would lead to persisting lower margins compared to peers. Both
acquisitions promised synergies worth $500mn, until 2019 for Alere, and 2020 for St Jude. Integration problems in the next two years
would lead to a downside scenario and put pressure on the top line.
Company Overview
Abbott Laboratories is an Illinois corporation, incorporated in 1900. Originally, the company was founded by Chicago physician Wallace
Calvin Abbott in 1888 to formulate known drugs. Abbott's principal business is the discovery, development, manufacture, and sale of a
broad and diversified line of health care products.
The company operates in over 150 countries worldwide, with over 99,000 employees and 100 manufacturing facilities.
Abbott primarily derives revenue from the sale of a broad line of health care products under short-term receivable arrangements. Patent
protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which
products are sold. Price controls, competition and rebates most impact the net selling prices of products, and lastly, foreign currency
translation impacts the measurement of net sales and costs. Abbott’s products are generally sold directly to retailers, wholesalers,
distributors, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world. Sales in
international markets comprise approximately 65% of consolidated net sales.
Notable M&A Activity
In 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary
pharmaceuticals business. Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation,
as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation.
Abbott completed the acquistion of St. Jude Medical, a global medical device manufacturer, for approximately $23.6bn, including
approximately $13.6bn in cash and approximately $10bn in Abbott common shares, which represented approximately 254 million shares
of Abbott common stock, in January FY2017. The acquisition provides expanded opportunities for future growth particularly in the
Cardiovascular and Neuromodulation segment, with $500mn in synergies until 2020.
8.000 Abbott Laboratories

7.000 646 Johnson & Johnson
6.000 913 DexCom
Insulet
5.000 937 1.524
2.209 Baxter International
4.000 1.431 416
361 Zimmer Biomet Holdings
3.000 807 468
Edwards Lifesciences
1.376 1.225
2.000 Becton, Dickinson and …
3.233
2.525 Boston Scientific
1.000 1.708 1.586
Stryker
0
Established Nutritionals Diagnostics Cardiovascular Medtronic
Pharmaceutical and
Products Neuromodulation 0% 10% 20% 30% 40%
Exhibit 1: Revenue breakdown 3Q18 Exhibit 2: LTM Revenue Growth %

8
In October FY17, Abbott completed the acquisition of Alere, Inc., a diagnostic device and service provider, for a consideration of
approximately $4.5bn in cash. Becoming a subsidiary of Abbott, Alere would heavily complement the point of care segment within

diagnostics by bringing in products for infectious diseases, molecular, cardiometabolic and toxicology testing. The deal was expected
to realize pre-tax synergies of about $500mn by 2019.

In February FY17, Abbott completed the sale of Abbott Medical Optics, its vision care business, to Johnson & Johnson for $4.325bn in

cash. This decision was a result of Abbott wanting to proactively shape its product portfolio in line with its strategic priorities, and thus

be able to concentrate on segments with higher profitability.
Despite an effective history of M&A, in the latest investor call, CEO Miles White announced that the company wasn’t currently looking

into further activity in the M&A field, and has mostly been focusing on consistently repaying debt taken on by acquisitions in FY17.

Abbott’s debt ratio has accordingly dropped by 2bps in the past financial year.

All of Abbott’s segments have reported 6-9% organic growth in the past year according to the company’s non-GAAP measurements.
Overall growth momentum will continue to accelerate at around 7% sales growth as new product launches in diabetes, EP, CRM and

Heart Failure look promising.
YoY Growth FX Impact Organic Growth
1Q18 2Q18 3Q18 1Q18 2Q18 3Q18 1Q18 2Q18 3Q18

Established Pharmaceuticals 9.90% 10.60% -1.00% 3.10% -1.70% -6.90% 6.80% 12.30% 5.90%
Nutritionals
6.90% 7.30% 4.00% 2.20% 1.00% -2.20% 4.80% 6.40% 6.10%
Diagnostics 58.60% 47.10% 42.70% 4.80% -2.50% -2.50% 5.50% 6.60% 7.50%

Cardiovascular and Neuromodulation 11.10% 7.10% 3.60% 4.90% 2.70% -1.30% 6.2 4.40% 4.80%
Exhibit 3: Abbott business segment growth FY18

Source: Morgan Stanley Research

Established Pharmaceutical Products: The segment consists of international sales of branded generic pharmaceutical products. The

category divides itself into two: key emerging markets including India, Russia, Brazil and China leading 75% of the sales, and other

emerging markets that represent the most attractive long-term growth opportunities. Abbott has a well-diversified portfolio of over
1,500 generic products.
Nutritional Products: Abbott offers both pediatric and adult nutritional products in the international markets. Ensure stands out in this
segment as a market leader in the nutritionals liquid and powder products category with 10.8% market share, according to Drug Store
News as of August 2018. Ensure offers a variety of products tailored those with chronic illnesses, including Glucerna, for people with
diabetes, and Nepro, for patients on dialysis. PediaSure, another nutritional supplement, has 7.2% of the market share in the same
category.
Diagnostic Products: This segment consists of sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories,
physician offices and alternate-care testing sites. The Point of Care subcategory is based on Abbott’s i-STAT System, a portable blood
analyzer, which can perform many of the most commonly ordered blood tests at the bedside, using only a few drops of blood. Molecular
Diagnostics offer tests that analyze DNA and RNA at the molecular level, providing more-accurate means to detect and monitor diseases
like HIV and hepatitis. Rapid Diagnostics, or informatics solutions such as STARLIMS, creates smarter labs while addressing the full
spectrum of clinical needs, making actionable information available through mobile devices in a secure, user-friendly manner. Core
Laboratory segment offers a comprehensive array of immunoassay and clinical-chemistry instrument platforms, tests, and services.
Abbot’s new family of systems, Alinity, will be the highlight of this segment. Alinity includes next-generation instruments for clinical
chemistry, immunoassay, hematology, point of care, blood and plasma screening, and molecular diagnostics. About half of the products
are in new accounts driving market share in Europe and in the U.S., while its clinical chemistry and immunoassay instruments have
been approved, management is seeking substantial expansion in 2H19.

Exhibit 4: FreeStyle Libre and a selection of market-leading Abbott products

9
Cardiovascular and Neuromodulation Products: The cardiovascular and neuromodulation segment consists of international sales of
cardiac rhythm management, electrophysiology, heart failure, vascular, structural heart and neuromodulation products. Notable new

products of the segment include Confirm RxTM Insertable Cardiac Monitor (ICM), the world’s first and only smartphone-compatible ICM
designed to help physicians remotely identify cardiac arrhythmiasm. In 2Q18, FDA approved Advisor HD Grid Mapping Catheter, Sensor
Enabled, which creates detailed maps of the heart and expands Abbott’s electrophysiology product portfolio. The segment also takes up
much of the research & development costs. For the nine months ended in 3Q18, R&D expenditures totaled $781mn for Cardiovascular
and Neuromodulation Products, $436mn for Diagnostics, $146mn for Nutritionals and $135mn for Established Pharmaceuticals.
Management expects acceleration within the segment in 2019 with the launch of MRI safe CRT-P driving recovery in Rhythm
Management, and HeartMate3 leading Heart Failure.
New Product Developments in 2018
Abbott’s organic growth acceleration is led by the success of FreeStyle Libre, MitraClip and Alinity. FreeStyle Libre has witnessed
substantial sales figures as the technology is able to measure glucose levels through a small sensor worn on the back of the upper arm,
eliminating the need for finger sticks diabetes patients have to use. Even though the FreeStyle Libre 14-day system is approved in the
U.S., Libre 2 system is only approved in Europe, and management is unable to give an estimate in terms of an approval timeline. In 3Q18,
Libre started treating over a million people worldwide, up from 800k in 2Q18.
MitraClip NTR and MitraClip XTR are heart valve repair devices that have gained approval in the U.S. A recent COAPT (Cardiovascular
Outcomes Assessment of the MitraClip Percutaneous Therapy) trial for the device has revealed that the procedure significantly reduced
not only the primary endpoint of heart failure (HF) rehospitalizations, but also mortality at 2 years for patients with heart failure and
severe functional mitral regurgitation (MR). The latter is characterized as a condition when a backflow of blood caused by failure of the
heart's mitral valve to close tightly. MitraClip sales grew by 20%+ in the last quarter and carried the Structural Heart franchise to double-
digit growth.
Industry Overview
U.S. Healthcare vs. the World
The American healthcare system tends to stand in stark contrast to other countries in the developing world. The average spending on
healthcare as a percentage of GDP for OECD companies was 8.6% on average in 2017. Within 22 OECD countries, U.S. took the first place
with 17.2%, followed by Switzerland at 12.3% and France at 11.5%. Despite investing heavily in technology and research within
healthcare, this doesn’t necessarily lead to the most optimal outcomes in terms of public health. While all OECD countries demonstrate
a positive correlation between life expectancy as expenditures increase, gains in life expectancy from additional investment within the
U.S. were much smaller.
Growing Worldwide Needs
Numbers laid out by the QuintilesIMS Institute’s Outlook for Global Medicines through 2021 report are indicative of the scope of growth
expected in the next few years. Global medicine spending will reach nearly $1.5tn by 2021 on an invoice price basis, up nearly $370bn
from the 2016 estimated spending level. Oncology, autoimmune and diabetes treatments are forecasted to drive much of this growth.
The U.S. will continue as the world’s largest pharmaceutical market and emerging markets will make up 9 of the top 20 markets with
China as number 2. In the latter markets, volume growth is driven by non-original, generic products, whereas medicine costs in the U.S.
will be driven by the transformative specialty brands, price increases and offset by rebates and lower cost generics. According to the
Center of Medicare & Medicaid Services (CMS), U.S. national health spending is projected to grow at an average rate of 5.5%/year for
2017-26 and to reach $5.7tn by 2026. While this projected average annual growth rate is more modest than that of 7.3% observed over
the longer-term history prior to the recession (1990-2007), it is more rapid than has been experienced 2008-16 (4.2%).
Key Drivers: Policy and Consolidation
The midterm election and the ongoing debate regarding healthcare policy are key drivers going into 2019. The current administration made a focus on
reducing prescription drug costs a priority. Tangible moves to decrease drug prices would create a cause a struggle for pharmaceutical and certain biotech
stocks, while potentially being a positive for some managed care names. A strengthening of the Republican majority in the Senate could yield to the
replacement of the ACA, while a Democratic majority in either House would likely result in a renewed effort to strengthen the ACA, helping healthcare
providers and potentially managed care companies.

10
M&A has been the most significant driver of performance among biotech stocks and to a lesser degree specialty pharmaceuticals. A rising

interest rate environment could prompt some companies considering new deals while borrowing costs are still manageable. In addition,
tax reform had been expected to be a driver of consolidation as well.
Innovative approaches in the industry, led by the planned entry of Amazon into the drug chain and several large vertical mergers
combining players across sectors, promise to disrupt the broad healthcare sector over time.
17,1500
20,00
12,2590
18,00
11,4580
11,2720

10,9160
10,7450
10,4110
10,3690
10,3210
10,2180
10,1430
10,0200
16,00
9,6450
9,2200
9,1330
9,0010
8,9850
8,9010
8,8410
14,00
8,4860
8,3660
8,0910
7,9720
7,5690
7,3720
7,2180
7,0980
7,0790

7,0600
12,00
6,7190
6,6750
6,3130
6,2690
6,0790
5,4040
10,00
4,2270
8,00
6,00
4,00
2,00
,00
Exhibit 5: Healthcare spending ad a % of GPD

Source: OECD
Valuation
We project a 11% upside to the current ABT share price of $74, assuming a WACC of 10.10%, and an EV/EBITDA multiple of x17.5 against the x18.3
industry median. We believe that the impressive revenue Abbott has generated in the last twelve months compared to its peers will persist, along with
strong growth prospects from new additions to its portfolio, and the momentum of FreeLibre and MitraClip. Additionally, cost synergies realized by the
2017 acquisitions have bolstered bottom-line numbers immensely, ultimately shaping an optimistic outlook for the company in the near-term.
Revenues are expected to maintain 7-9% growth in the next quarter given the increasing healthcare medicine in emerging market economies and
Abbott’s ability to launch successful products in different segments. Even the segment with the weakest historical growth rates, Nutritionals, has seen
recent growth thanks to the market-leading Ensure family of products, and recent regulatory approval in China. St Jude and MitraClip are the key drivers
in the Cardiovascular and Neuromodulation segment. Diagnostics can grow at or above 7%, affected by the potential U.S. approval of FreeStyle Libre 2
in 2019 resulting in another year of 30+% sales growth in Diabetes Care as U.S. and EU penetration of Alinity accelerates. The momentum in diagnostics
should continue at least for the next couple of years given the impressive impact of the Alere transaction, and the addition of Rapid Diagnostics to ABT's
portfolio.
Specifically, in our FY19 analysis, we forecast a YoY acceleration of 3% in Nutritionals given the recent approval in China and strong growth seen in key
markets outside of the U.S. Diagnostics is expected to witness 6% growth as momentum persists with the expanding Alinity family and pending approval
timeline within the next two quarters. For Established Pharmaceuticals, 8% growth would be driven by the positive market outlook of increasing
healthcare needs and extensive presence in the pharmaceutical market with over 1,500 products. Lastly, we expect a 9% YoY growth in the
Cardiovascular and Neuromodulation segment following the COAPT trial and new products waiting to be released. Overall, Abbott is looking at double
digit growth by the end of this year and the next.
We expect constant R&D margins, but see SG&A and EBIT margins expanding as acquisition synergies settle and management pursues cost-reduction
opportunities in the Diagnostics and Cardiovascular and Neuromodulation segments.

11
2016 2017 2018E 2019E 2020E 2021E
Revenue (millions $) 20,853 27,390 30,622 32,276 34,406 36,608
% Growth 2.2% 31.3% 11.8% 5.4% 6.6% 6.4%
COGS 9,015 11,418 12,769 13,427 14,313 15,339
Gross Profit 11,838 15,972 17,853 18,849 20,093 21,269
% Margin 56.8% 58.3% 58.3% 58.4% 58.5% 58.5%
SG&A 6,653 8,899 10,105 10,490 10,907 11,714
% Margin 31.9% 32.5% 33.0% 32.5% 31.7% 32.0%
R&D 1,358 2,158 2,450 2,614 2,787 2,965
% Margin 6.5% 7.9% 8.0% 8.1% 8.1% 8.1%
OpEx 8,011 11,057 12,555 13,104 13,694 14,680
EBIT 3,563 3,827 4,915 5,298 5,745 6,399
% Margin 18.4% 17.9% 17.3% 17.8% 18.6% 18.0%
D&A 1,351 3,019 3,363 3,747 4,181 4,666
% Margin 6.5% 11.0% 11.4% 11.4% 11.6% 11.6%
Change in WC 692 -327 -612 -646 -860 -1,098
% Margin 3.3% -1.2% -2.0% -2.0% -2.5% -3.0%
CapEx 1,121 1,135 1,286 1,388 1,445 1,501
% Margin 5.4% 4.1% 4.2% 4.3% 4.2% 4.1%
Tax 804 1,032 1,112 1,204 1,341 1,376
FCF 3,945 5,440 5,650 6,252 6,932 7,273
DFCF 5,515 5,541 5,577 5,313
Exhibit 6: Discounted Cash Flow Model
Terminal value 136,617

Enterprise value 160,757
Equity Value 144,296
Shares Outstanding 1756.33mn
Target Price $82.2
Upside 11%

Company Name Market Cap EV/Sales EV/EBITDA P/E P/B
Medtronic plc (NYSE:MDT) 123,929.3 4.6x 13.8x 57.7x NM
Stryker Corp. (NYSE:SYK) 62,081.4 5.1x 18.8x 51.2x NM
Boston Scientific Corp. (NYSE:BSX) 48,446.9 5.7x 21.1x 72.5x NM
Becton, Dickinson and Company
64,945.2 5.3x 18.0x NM NM
(NYSE:BDX)
Edwards Lifesciences Corp. (NYSE:EW) 31,911.4 8.7x 28.6x 45.9x 18.0x
Zimmer Biomet Holdings, Inc. (NYSE:ZBH) 23,100.3 4.0x 12.1x 13.2x NM
Baxter International Inc. (NYSE:BAX) 35,110.7 3.2x 14.4x 30.0x 7.4x
Insulet Corp. (NasdaqGS:PODD) 4,778.8 9.6x 203.0x NM 31.8x
DexCom, Inc. (NasdaqGS:DXCM) 11,193.5 11.9x 108.7x 260.2x 20.6x
Johnson & Johnson (NYSE:JNJ) 379,151.2 4.8x 14.0x 248.4x NM

Abbott Laboratories (NYSE:ABT) 120,853.3 4.5x 19.3x 150.6x NM

Mean 78,464.9 6.3x 45.2x 97.4x 19.4x
Median 41,778.8 5.2x 18.4x 54.5x 19.3x

Exhibit 7: Comparable Companies Model

12

Mondelez International

Mondelez International | NASDAQ: MDLZ
Investment Thesis

Negative Neutral Positive

Our analysis of Mondelez International (NASDAQ: MDLZ) has yielded to an upside of 11 %
Share price, 11/30/18: $44.42
in the next 12 months, and we maintain a Positive rating for the stock overall. Assuming a
Market capitalization: $64.58bn
6.6% WACC and 1.5% terminal growth rate, we have set a target price of $50 for Mondelez
Shares outstanding: 1.4538bn given the company’s ability to sustain organic top line growth (reflected in 3Q18 earnings),

52-week range: $46.54 / 37.42 its success in increasing incremental pricing while maintaining a balance between pricing

EPS (FY17): $2.24 and volume/mix, and its strong emerging market growth.

Beta 0.79
Though Mondelez currently faces challenges by supply chain issues in its North American
Average analyst opinion: $44.47
business and is currently trading at relatively high multiples of 15.9x EV / EBITDA and 19.9x
Price target:
$50.00 P/E, we believe that overall, Mondelez has a Positive rating because the business is one of

the few in its industry with positive organic top line trends and solid exposure to emerging

Price Chart markets.

Mondelez
115 S&P 500

Investment Highlights
110
105

100
95

90 • Expanding more into emerging markets in recent months. Mondelez obtains 40% of
its net sales from emerging markets, and organic revenue from EM’s grew 6% YoY
85

80 while both volume/mix and pricing have expanded as well. Traditionally strong EM’s
like India, Southeast
Asia, and Mexico have continued positive momentum, and
weaker markets like Brazil are beginning to show more optimistic long-term
prospects. Moving forward, Mondelez is also expanding production in China and
increasing its focus on EM in order to capitalize on growth opportunities here and

diversify away from the relatively sluggish North American market.

(Dollars in millions) 2017 2018E 2019E • Better pricing due to category and retail mix. Mondelez is well positioned to
capitalize on the price increases that have impacted North America this year and will
Revenue 25,896 26,025 25,765
implement additional line pricing on its biscuits, gum, and candy in early 2019 that

% Growth --13% 0% 1% should drive top-line growth. Mondelez will also be strategic in its price increases,
EBITDA 4,429 5,074 5,122
focusing on North America and EM’s while refraining from raising prices in Europe,
% Payout -3.9% 15.0% 54.5% where consumer elasticity is lower and price changes are more risky.

• Innovation and reinvestment in the business and focus on localizing decision

making, boosting topline, and revamping marketing efforts will result in long-term
growth creation. Under the leadership of Mr. Van de Put, Mondelez will sacrifice

short-term growth in order to reinvest in the business and reshape its strategy to
position itself for long-term growth. Specifically, the company will seek to invent new

businesses and brands in strategic areas, reinvent smaller brands with untapped
potential, and create new ventures with early-stage entrepreneurs.


13
Investment Risks

• Supply chain issues in North America. Supply chain challenges in NA have impacted Q3 revenue by adversely impacting production.

The amount of upside that Mondelez could realize could be affected by how long it takes to resolve these issues.

• Organic growth may slow. Though organic growth has historically been strong for Mondelez, this is a very competitive industry and
Mondelez may not be able to maintain this current growth unless it successfully manages to price aggressively (especially in EMs) and
innovate its products to stay competitive.

• Emerging markets growth deceleration. Although emerging markets have contributed to Mondelez’s top line growth more than
established markets in recent years, foreign currency devaluations or fluctuations in developing markets such as Argentina, Brazil,
China, Mexico, Turkey and Ukraine can dampen growth.

Company Overview
Description

Mondelez International is one of the world’s largest snack companies that is headquartered in Deerfield, Illinois and serves snack food
and beverage products to 160 countries around the world. Leading products of Mondelez include Oreo, belVita, Cadbury, Toblerone,
Trident and Halls. The brands span biscuits, chocolate, gum, candy, beverages, cheese and grocery. The company was formerly known
as Kraft Foods Inc. and changed its name to Mondelez International, Inc. in October 2012.

Segments

Rather than by product, the company divides itself into four segments based on core geographies of Latin America, AMEA, Europe, and
North America. Mondelez focuses on geographical breakdown because this allows them to leverage regional operating scale, manage
different and changing business environments more effectively, and pursue growth opportunities as they arise. Of the four segments,
the majority of 2017 operating income came from Europe (43.3%), followed by North America (28.9%), Latin America (14.5%), and AMEA
(13.3%).

Strategy

Mondelez’s strategy focuses on 3 core pillars: 1) grow people, 2) grow business, and 3) grow impact.

1) Grow people: Mondelez is very focused on investing in its employees and their development and believes that innovators and leaders
can create value for the company.

2) Grow Business: Mondelez wants to accelerate its core snacks business and expand the reach of its Power Brands globally.
Furthermore, Mondelez seeks to capitalize on the trend towards healthier food products by enhancing the nutrition profile of its
products. It also seeks to increase its presence in higher growth non-grocery channels including e-commerce. Finally, Mondelez is
working on optimizing its cost structure by reinventing its supply chain and adding and upgrading to more efficient production lines
while also reducing the complexity of products, ingredients, and suppliers and implementing zero-based budgeting practices to facilities
cost reduction.

3) Grow impact: Mondelez wants to reduce its environmental footprint, empower farmers in its supply chain, and support communities
where its snacks are sourced, produced, and sold.

Recent Activity

The company raised prices on some US-focused brands during the summer months such as Fig Newtons, Wheat Thins and Triscuits. It
kept prices of Oreos the same because the brand is popular around the world. The company is planning its next round of price increases
to take effect at the start of 2019 with straight hikes, adjustment to promotional deals and smaller package sizes. The company has tried
to move towards more natural foods in the US by buying brands that offer healthier and gluten-free alternatives, as seen in their
purchase of Tate’s Bake Shop cookies last year. Mondelez has also been answering with brands like belVita, Vea, and GOOD THiNS
crackers which are marketed for their lack of high-fructose corn syrup, artificial flavors, and hydrogenated oils among other "bad"
ingredients.

14
Business Segments
Mondelez manages its operations by the following regions: Latin America, AMEA, Europe, and North America. This is part of the
company’s strategy to leverage operating scale and manage the widely different and ever-changing environments of these various

regions. Regional management teams are responsible for product categories and financial results as well. Across these segments,

Mondelez sells its products to supermarkets, local chains, wholesalers, club stores, convenience stores, gasoline stations, drug stores,
and various other channels. Since customers are increasingly starting to shop online, Mondelez is working to build its global e-

commerce capabilities by working with partners in key makers both pure e-tailers and brick-and-mortar retailers.

Latin America
There is some concern for Mondelez in this region particularly for its gum category. Most notably, its Brazil business, which represents

6% of the company’s revenue, was impacted by trucker strikes which resulted in delayed shipping.

Asia, Middle East, Africa (AMEA)

In 2016, Mondelez integrated their Eastern European, Middle East, and Africa operating segment into their European and Asia Pacific
segment in order to leverage and optimize their economies of scale within those regions. Mondelez is focusing more on its Asia market

as well because demand of snacking goods is steadily increasing. The company’s new innovation strategy is to experiment with various

brands and items and introduce them to local markets in small quantities to see what works and what doesn’t.

Europe
Mondelez is experiencing much growth in Europe. Their biscuit business had strong volume growth across most of Western Europe

including Germany, France, Italy and Spain. Their chocolate brands also performed quite well (Milka, Toblerone, Cote d’Or). Milka is
particularly strong in Eastern Europe. Mondelez also experienced strong revenue growth in Russia as a result of continued success of

the Alpen Gold Dark and Milka Dark launch products.

North America

Currently, Mondelez is experiencing weaker sales in North America due to rapidly changing customer preferences; however, the
company is in the process of making major adjustments to fit those preferences of organic and healthy food products.

Bottom Line
Mondelez is heavily focused on reinvesting in the business as of current and especially on growing sales rather than cutting costs, as
they already have a fairly lean business model due to localized management. This investment in sales is expected to weigh a bit on next
year’s earnings; however, once Mondelez boosts existing brands, mainstreams their e-commerce, and expands its footprint in higher-
growth parts of the world, we expect to see strong top line growth.

Sales by Geography Sales by Category
5%
8%
14%
22%
14% 42%
26%
31%
38%
Biscuits Chocolate
Gum & Candy Beverages
AMEA Europe North America Latin America Cheese & Grocery

15
Industry Overview

Competition

The food and snacking industry is highly competitive. Mondelez’s major competitors include other international food, snack, and
beverage companies including Pladis, Unilever, Kraft Group, Hershey, Pepsico and others. Because Mondelez has so many competitors
in the food and beverage industry, both the competitors and customers place pressure on the company to reduce prices. Price
reductions restrict the company’s ability to respond to changes in manufacturing and shipping costs. However, the company focuses
on effectively assessing these forces and responding to them by reallocating or increasing spending in core areas such as marketing,
new product innovation, and entering new distribution channels to protect and increase the company’s market share in the industry.
This large competition in the food and beverage industry means that companies must focus on improving their cost structure and
becoming leaner.

Mondelez’s Competitive Advantage

Mondelez faces competition in all aspects of their business, including both large multinational and regional companies. Mondelez
competes based on areas such as product quality, brand recognition, service, product innovation, taste, convenience, nutritional value,
distribution networks and price. In general, the company works to identify and satisfy consumer preferences before competitors do.
This involves investing substantially in research, development, advertising and promotional activity to stay ahead and be innovative.
Mondelez’s competitive advantage is that the company owns eight brands with at least $1bn in annual revenue, including Oreo,
Cadbury, Trident, Milka, LU and Nabisco. The company’s management has labeled these as Power Brands - a label that classifies
products that are experiencing the most growth, have advantaged assets, and superior margins. In total, Power Brands consist around
70% of its $25.9bn in net revenue for 2016.

Key Trends

The food and beverage industry has experienced both trends and challenges in the past few years and in order for companies to stay
relevant they must keep up. Some of these trends include: 1) shifting customer preferences, 2) digital transformation and 3) acquisitions
and mergers. In recent years, consumer preferences around the world have been changing towards exotic flavors and fresh/natural
products. Companies are experiencing rising costs due to inflation which has decreased profit margins and forced them to pass this on
to consumers as higher prices. However, consumer sentiment is strong and they are getting used to higher prices and thus some
companies are charging more to boost profits.

Net Confectionary Sales 2017
Hershey
Nestle
Meiji
Mondelez
Ferrero Group
Mars Inc.
0 5000 10000 15000 20000

16
Valuation

Discounted Cash Flow Analysis

Our discounted cash flow analysis arrived at a per-share price of $50, which is a 12% premium over the current share price, using
the perpetuity method with a terminal growth of 1.5% and a WACC of 6.6%.

Assumptions
• Revenue - will decrease initially due to reinvestment in the business but projected to grow steadily at about 2% over the
next few years with a terminal growth rate of 1.5%.
• COGS - projected to remain flat at historical rates in the long run.
• Op Ex - held slightly lower than historic level of 24% of sales as operating efficiency is expected to improve.
• D&A - held flat at historical level of 2% of sales.
• Working Capital - held flat at historical level as % of sales.
• Tax rate - assumed to be corporate tax rate of 21%.
• CapEx - gradually stepped down as a % of sales from 4% to 2%.

Future Projects
• Company has said that it expects to buy back about $2bn in stock in 2019.
• The company is not planning a divestiture of its slower-growing wholesale business which would help them boost growth
rates but is instead planning to revive the business which gives it large market share in overseas markets.
• While keeping the Power Brands in place, Mondelez recognizes that it needs to adjust to changing markets and fit the
demands of emerging markets. In order to do this, the company is focused on three core goals: 1) extend chocolate brands
into biscuits and cakes, 2) build a global savory platform, 3) expand Oreo cookie brand across all snacking.
• Shift in value creation model: Mondelez will focus on unlocking local brands such as the Opavia biscuit brand in the Czech
Republic.

Growth Expectations
• Mondelez expects adjusted 2019 adjusted earnings to rise by 3% to 5%.
• The company aims for 3% annual organic revenue growth over the long term. Although the company’s 2019 EPS outlook
may be lower than consensus, their investment will pay off in the long term and help generate sustainable value for
shareholders, as per CEO comments.
• It is projected that, in 2019, there will be sales growth in Argentina, Russia, China and India. Additionally, it is projected
that there will be a decline in sales in the Brazil market.
• The European market is expected to stay at a similar level, with organic revenue increasing 0.2%. Regional growth was
driven by chocolate and biscuit sales, particularly in Germany, France and Russia.


17
Mondelez International
2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E
Revenue
(millions $) $29,636 $25,923 $25,896 $26,025 $25,765 $26,281 $26,806 $27,208 $27,616
% growth -13% 0% 1% -1% 2% 2% 2% 2%

18,124 15,795 15,831
COGS 15,867 15,867 15,903 15,903 15,939 15,939
% growth -13% 0% 0% 0% 0% 0% 0% 0%

Gross Profit 11,512 10,128 10,065 10,158 9,898 10,377 10,903 11,269 11,677
gross margin 39% 39% 39% 39% 38% 39% 41% 41% 42%

Opex 7,742 6,736 6,274 5,726 5,411 5,782 5,897 5,986 6,076
% of sales 26% 26% 24% 22% 21% 22% 22% 22% 22%

EBIT 3,770 3,392 3,791 4,433 4,487 4,596 5,006 5,283 5,601
EBIT Margin 13% 13% 15% 17% 17% 17% 19% 19% 20%

D&A 713 647 638 641 635 647 660 670 680
% of sales 2% 2% 2% 2% 2% 2% 2% 2% 2%

Change in WC (1,919) (830) (71) (71) (71) (72) (73) (75) (76)
% of sales -6% -3% 0% 0% 0% 0% 0% 0% 0%

Capex (1,514) (1,224) (1,014) (1,019) (1,009) (788) (804) (544) (552)
% of sales -5% -5% -4% -4% -4% -3% -3% -2% -2%

Tax Rate 21% 21% 21% 21% 21% 21%

Taxes 931 942 965 1,051 1,109 1,176

EBITDA 4,483 4,039 4,429 5,074 5,122 5,243 5,666 5,953 6,282
EBITDA Margin 15% 16% 17% 19% 20% 20% 21% 22% 23%

EPS

FCF 3,195 3,242 3,562 3,884 4,374 4,629

PV FCF $2,997 $2,853 $2,940 $3,008 $3,178 $3,154


18

WACC 6.6% WACC
Terminal growth 1.5% Debt 15,612
Equity 64,584
Terminal value 92,094 Total Capitalization 80,196
PV of Terminal Value 62,755 % Equity 81%
% Debt 19%
Enterprise Value 80,885
Net Debt 14,180
Equity Value 66,705 Risk-free rate 3.0%
12 Month Equity Value 71,108 Beta 0.79
Shares Outstanding 1,435.8 Market risk premium 5.5%
Tax 0.21

12 month Target Price 50 Cost of debt 4.5%
Share Price $ 45.0 Cost of equity 7.3%
Upside 11% WACC 6.6%

Sensitivity Analysis
WACC
$ 50 5.6% 6.1% 6.6% 7.1% 7.6%
1.0% $ 57 $ 51 $ 45 $ 41 $ 37
1.3% $ 60 $ 53 $ 47 $ 42 $ 38
1.5% $ 64 $ 56 $ 50 $ 44 $ 40
1.8% $ 68 $ 59 $ 52 $ 46 $ 41
2.0% $ 73 $ 63 $ 55 $ 48 $ 43

Upside Analysis

$ 50 9.9% 10.9% 11.9% 12.9% 13.9%
1.5% 27% 13% 0% -10% -18%
1.8% 34% 18% 5% -6% -15%
2.0% 43% 25% 10% -2% -12%
2.3% 52% 32% 16% 3% -8%
2.5% 62% 40% 22% 8% -4%

Comparable Companies Analysis

The comparable companies approach selected 10 other companies based on similar business models and industry focus. Based
on an EV / EBITDA multiple of 17.5x, this analysis suggests a per share price of $46.94, a 4% upside over the current share price.

19
We attempted to select competitors from each of Mondelez’s product segments in order to diversify our comparable pool:
Kellogg and General Mills for biscuits segment, Dyson for cheese segment, Hershey for chocolate and gum/candy segments,
among others. There is overlap between the segments that the companies operate in.

Company Comp Set

Company Name EV / Rev EV / EBITDA EV / EBIT P/E P/B

S&P Comps
Heinz 3.6x 12.3x 14.1x 6.1x NM
Kellogg 2.3x 9.6x 11.3x 11.8x NM
General Mills 2.6x 11.9x 14.5x 11.7x NM
Campbell 2.3x 11.0x 14.1x 66.9x NM
Conagra 2.5x 12.5x 14.8x 15.8x NM
Tyson 0.8x 7.3x 9.4x 7.0x NM
Hershey 3.4x 13.8x 16.2x 22.0x NM
Dean Foods 0.2x 6.1x 22.6x NM 2.1x
Hormel Foods 2.5x 17.5x 19.8x 24.1x 14.2x
J.M. Smucker 2.3x 10.5x 14.1x 8.6x NM

Mondelez 3.2x 15.9x 18.8x 19.8x NM

Summary Statistics EV / Rev EV / EBITDA EV / EBIT P/E P/B
High 3.6x 17.5x 22.6x 66.9x 14.2x
Low 0.2x 6.1x 9.4x 6.1x 2.1x
Mean 2.3x 11.3x 15.1x 19.3x 8.2x
Median 2.4x 11.5x 14.3x 11.8x 8.2x

Mondelez 3.2x 15.9x 18.8x 19.8x NM
Median 2.4x 11.5x 14.3x 11.8x 8.2x
Max 3.6x 17.5x 22.6x 66.9x 14.2x
EBITDA
17.5x
Multiple
Mondelez LTM EBITDA 4,662
Enterprise Value
81,585
Net Debt 14,180
Equity Value 67,405

Fully Diluted Shares Outstanding 1,435.84
Price Per Share $46.94
Current Share Price $44.98
Upside % 4%


20

Cypress Semiconductor Corporation

Cypress Semiconductor Corporation | NASDAQ: CY

Investment Thesis
Negative Neutral Positive
Our analysis of Cypress Semiconductor Corporation (NASDAQ: CY) has yielded to a significant upside

Price (Sept 27, 2018): $14.4
of 44% in the next 12 months, and we hold a Buy rating for the stock overall. Assuming a 12% WACC
Market capitalization: $520B and 2.0% terminal growth rate, we have set a target price of $18.91 for the company given Cypress’

Shares outstanding: 362mm successful Cypress 3.0 strategy, growing market share, and rapidly expanding product offerings.
52-week high/low: $18.87 / $14.16 Propelled by a recent 5.4% increase in gross margins and strong EBITDA growth, Cypress’

EPS (Q2’18): $0.33
management aims to continue to deliver strong financial results and to create value for shareholders.
Dividend yield: 2.8% However, it is important to note that despite having a large runway for growth and a market

Beta: 2.71 leadership position, Cypress faces the major risk of intense domestic and international competition.
Price target:
$18.91

Notably, Cypress has recently experienced a temporary setback in its share price, which dropped 6.5%
from $15.52 to $14.52. This drop to almost a 52-week low increases the value potential in the stock

Price Performance as it presents an opportunity to purchase the stock at a discount. The case for Cypress as undervalued
is supported by its current trading multiples; Cypress currently trades at 16x EV / EBITDA compared
with an industry average of 18x and at 2.7x EV / Revenue compared with an industry average of 4.8x.

Cypress Indexed S&P 500 Indexed
130
120
Investment Highlights

110
§

Positioned for high-growth due to the rise of the IoT industry and Cypress’ increasing focus on
100
90 IoT. The IoT market, or the addition of sensors and connectivity to billions of existing objects,

80 grew by 31% to 8.4B devices in 2018 and is expected to reach 30B devices by 2020 with a total
28.10.2017
28.11.2017
28.12.2017
28.9.2017
28.1.2018
28.2.2018
31.3.2018
30.4.2018
31.5.2018
30.6.2018
31.7.2018
31.8.2018
market value of $7 trillion. As Cypress strives to become a leading player in this disruptive

industry, it will benefit greatly from this high-growth market. Furthermore, expanding into IoT

allows Cypress to diversify its product base and reduce exposure to cycle fluctuations that pose
a threat to Cypress’ competitors who rely more heavily on sales of digital memory.

Financial Highlights § Market leadership positions in several products and diversified customer base. One of Cypress’
key advantages is that
it is successful across several different products and customers (no
Valuation
2017 2018E 2019E 2020E
Analysis customer comprises >10% of revenue). It is gaining market share not only in Microcontroller and
Revenue (US$m) 2,328 2,801 3,291 3,773
IoT markets, but also in flash storage opportunities in automotive and wireless infrastructure
markets. Furthermore, Cypress currently holds the #1 market position in all of the following: IoT
% Growth 21% 20% 17% 15%

Wi-Fi/Bluetooth Combos, Auto Instrument Cluster MCUs, Auto NOR flash memory, Auto Touch
EBITDA (US$m) 366 494 681 846 Controller, Secure, Ultra-Low Power MCUs, USB-C Controllers, and USB Solutions.
% Margin 16% 18% 21% 22%
§ Impressive recent financial performance and strong projected financial targets. Cypress
EV/Sales 3.0x 2.5x 2.1x 1.8x

released strong financial results in its most recent quarter, with 7% revenue growth, gross
EV/EBITDA 18.8x 13.9x 10.1x 8.1x margin increase of 5.4% YoY, EPS growth of 57% YoY to $0.33, and EBITDA growth of 45% YoY to

$156mm. Management is focused on improving gross margins even further (up to 46.3%) and
keeping operating margins at the same level above 20%, while also repaying debt (targeting 2x

Debt / Adj. EBITDA) and improving returns to shareholders.

21
Investment Risks

• Significant volatility in supply and demand conditions that translate into volatility in the stock price. Cypress’ performance is
largely tied to the supply and demand for semiconductors, which has fluctuated widely in the past (ex: memory products were very

volatile in 2017) due to market dynamics of electronics companies that purchase semiconductor products. Cypress’ forecasts may
be inaccurate if the market fluctuates heavily, which could cause Cypress to make too many or too few products and negatively

impact the company’s performance and share price.

§ Competition in the global semiconductor space. Cypress faces intense competition from both domestic and foreign semiconductor
manufacturers, which have recently increased their participation in markets that Cypress operates in.

Company Overview
Cypress Semiconductor Corporation, founded in 1982 in San Jose, California, manufactures and sells advanced systems solutions for
automotive, industrial, home automation and appliances, consumer electronics, and medical products. The company has other operations
in the United States, Ireland, India, and the Philippines. Cypress’ key customers include leading companies in several end markets including
smartphone manufacturers, electric vehicle corporations, music system manufacturers, and more.
Segments
The company has 2 major segments: the Microcontroller & Connectivity Division (MCD) and the Memory Products Division (MPD). IT
offers products such as USB connectivity solutions, Bluetooth solutions, microcontrollers (mini-computers on a single circuit), chips for
consumer wearables, and more. Cypress competes with companies such as Microchip Technology, NXP, and Micron.
Strategy
In late 2015, Cypress began to pursue a new “3.0” strategy that is focused on higher-growth markets and improving gross margins. The
first major step towards this new strategy was marked by Cypress’ acquisition of Broadcom’s Wireless IoT Business in 2016. This
transformative acquisition was instrumental in Cypress’ evolution from a traditional memory producer into a player in the fast-growing
IoT and automotive markets.

The breakdown of Cypress’ revenues by end market and by solution are as follows:
Cypress Sales by End Market Cypress Sales by Solution
19%
31% 26%
41%
19%
33%
31%
Consumer Automotive Industrial Enterprise Memory MCU Connectivity
Exhibit 1: Sales, % by end market, FY17 Exhibit 2: Sales, % by solution type, FY17`

22
This new high-growth strategy has proven successful in boosting Cypress’ revenues over the past few years, which has seen an impressive 47% CAGR
since 2014.

Cypress Revenue Growth driven by 3.0 Strategy
$2,33B

$1,94B
$1,63B

$0,73B

2014 2015 2016 2017
Exhibit 3: Cypress historical sales
Industry Overview

The semiconductor industry consists of companies engaged in the design and fabrication of circuit boards, microcircuits, microprocessor

chips, integrated circuits, memory chips, and fuel and solar cells. Companies engaged in chip components designed for specific industries
will often be classified in the specific end markets. Such markets are computing, networking, telecom/datacom, wireless, digital

consumer and automotive electronics. Despite US-based semiconductor companies making up 50% of the total world market, the U.S.
accounts for less than 20% of total global sales. Indeed, most sales take place in China, EU, Japan, Korea, and Taiwan. US exports of

semiconductors were worth $44 billion in 2017, which was the fourth highest among US exports behind only airplanes, refined oil, and

automobiles.
Semiconductor industry demand is very much dependent on the demand of electronics. The largest consumers of semiconductors are
the computing, communications, and consumer electronics markets. Gross margins are generally in the high ~40% to 50% range, though
they compress during periods of low utilization or difficult pricing. Companies remain heavily invested in R&D; thus, much of cost savings
come from the SG&A line. US semiconductor companies annually invest about one-fifth of total revenue in R&D. The semiconductor
industry has consistently prioritized R&D to be able to stay competitive and develop process technology and complex designs.
Trends that will drive the semiconductor demand through 2021
Sensors and microprocessors are expected from the rise of The Internet of Things, a rapidly growing market that consists of
interconnecting computing devices embedded in everyday objects to send and receive data with internet connection. These products
remain critical pieces of not only IoT, but also of other end markets such as artificial intelligence, automotive, and computing. Current
venture capital trends indicate a substantial focus towards focusing on chipsets to support AI, neural networks for machine learning, and
IoT. Furthermore, personal computing devices such as tablets, PCs, and smartphones have brought about the success of 4G and 5G with
virtual reality features, which will have a big impact on sales of NAND flash memory, analog, DSP, and logic sales moving forward.
Forecasts
Worldwide Semiconductor Market (WSTS) forecasts the global semiconductor market to grow 12.4% in 2018 to US$463 billion, with a
significant growth of 26.5% in the memory segment and 9.5% in the analog segment. The demand from artificial intelligence, cloud, and
IoT for semiconductor products is expected to have greater impact on revenue in 2018 compared to prior years. Wireless
communications should be a top revenue driver beyond 2018 as 5G networking begins to take off. In 2019, the growth rate is expected
to reach 4.4%, with the sensors contributing the highest growth.

23
Competition in memory segment

The semiconductor sector is extremely competitive with rapid advancements in technology attracting more and more players into the
space and with current players attempting to diversify across product groups. The increased competition has led to a major concern about
ASP (average selling price), in addition to the expectation that memory prices will flatten out as more facilities are built to pump out

memory, leading to excess inventory. Key competitors by product can be summarized into the following:

Exhibit 4: Cypress competitors by product
Exhibit 5: Industry breakdown by product
Source: WSTS

24
Valuation

Valuation Summary

For our valuation, the DCF suggests an upside of 32% and the comparable companies analysis suggests an upside of 43% over the next

12 months.

Discounted Cash Flow Analysis

Our discounted cash flow analysis arrived at a per-share price of $18.91, a 32% premium to the current share price, using the perpetuity

method with a terminal growth rate of 2.0% and a WACC of 11.9%.

Assumptions

• Revenue – top line growth is expected to remain strong in future years due to the high projected growth of the IoT market;
revenue growth rate is stepped down yearly to reach management guidance for long-term revenue growth rate of 9% in
terminal year
• COGS – projected as flat at average of 2-year historical COGS growth rate, per management guidance
• Op Ex – stepped down to 25% as per management guidance on long-term operating expenses as a % of sales
• D&A – held constant at 3% of sales
• Working capital – projected in line with historical levels (as % of sales)
• Tax rate – assumed corporate tax rate of 21% post new tax law
• CapEx – initially projected as higher than historical levels and higher than D&A due to plans to expand the business and
continued investment in high-growth markets, then stepped down to 3% in terminal year to match D&A to represent steady
state growth

Comparable Companies Analysis

For the comparable companies analysis, we selected 10 peers based on similar business models and industry focus. Using a median EV

/ EBITDA multiple of 15.6x, this analysis suggests a per share price of $20.51, representing a 43% upside over the current share price.

Company name Market LTM Rev EV / EV/ P/E
Cap Revenue EBITDA

Xilinx 20,016 2,621 7.0x 19.8x 37.0x

Maxim Integrated Products 16,606 2,480 6.2x 15.6x 36.4x
Microchip 19,386 4,221 7.1x 19.2x 170.0x

Broadcom 103,134 20,248 5.8x 12.7x 9.0x

Advanced Micro Devices 31,791 6,403 5.0x 51.6x 112.8x
Marvell Technology Group 12,431 2,502 5.5x 22.7 29.7

Skyworks 16,677 3,844 3.9x 9.5x 18.8x

SMART Global Holdings 663 1,138 0.7x 4.4x 8.1x
Nanya Technology 5,830 2,392 1.6x 2.8 3.6x

Qualcomm 108,099 22,832 4.1x 13.9 NM

Cypress 5,611 2,409 2.7x 16.0x NM

Median 15.6 x

Implied share price $20.51

Exhibit 9: Comparable companies analysis

25
Exhibit 6: Discounted cash flow analysis

(Dollars in millions) FY13 FY14 FY15 FY16 FY17 18E 19E 20E 21E 22E 23E

Revenue $723 $725 $1,608 $1,923 $2,328 $2,801 $3,291 $3,773 $4,220 $4,600 $5,014

% growth 0% 122% 20% 21% 20% 17% 15% 12% 9% 9%
COGS 359 362 1,071 1,236 1,370 1,550 1,754 1,984 2,244 2,539 2,872
% growth 1% 196% 15% 11% 13% 13% 13% 13% 13% 13%

Gross Profit 364 364 537 688 957 1,251 1,537 1,790 1,976 2,061 2,142

gross margin 50% 50% 33% 36% 41% 45% 47% 47% 47% 45% 43%
Op Ex 378 342 703 810 8856 840 954 1,057 1,139 1,196 1,253

% of sales 52% 47% 44% 42% 37% 30% 29% 28% 27% 26% 25%

EBIT (15) 22 (167) (122) 101 410 583 733 836 865 888
EBIT margin (2%) 3% (10%) (6%) 4% 15% 18% 19% 20% 19% 18%

D&A 41 40 133 91 70 84 98 113 126 138 150

% of sales 6% 6% 8% 5% 3% 3% 3% 3% 3% 3% 3%
Change in WC 1 10 185 (9) (78) (13) (110) (17) (141) (21) (168)

% of sales 0% 1% 12% 0% (3%) 0% (3%) 0% (3%) 0% (3%)

CapEx 37 21 47 57 54 140 156 169 179 184 150
% of sales 5% 3% 3% 3% 2% 5% 5% 4% 4% 4% 3%

Tax Rate 21% 21% 21% 21% 21% 21%

Taxes (8) (1) 17 3 11 86 122 154 176 182 187
EBITDA 34 68 75 144 366 494 681 846 962 1,003 1,038

EBITDA margin 5% 9% 5% 7% 16% 18% 21% 22% 23% 22% 21%

FCF (4) 32 (283) (82) 184 281 513 540 749 658 870

PV FCF $251 $410 $385 $477 $375 $442

Exhibit 7: Fair value derivation Exhibit 8: Sensitivity analysis (share price in %)

Beta 2.71
$ 19 9.9% 10.9% 11.9% 12.9% 13.9%

Equity market risk premium 3.8% 1.5% $ 24 $ 21 $ 18 $ 16 $ 14
1.8% $ 24 $ 21 $ 19 $ 16 $ 15
Risk-free rate 2.9% 2.0% $ 25 $ 22 $ 19 $ 17 $ 15
2.3% $ 26 $ 22 $ 19 $ 17 $ 15
Cost of equity (Using CAPM) 13.3%
2.5% $ 27 $ 23 $ 20 $ 17 $ 15
Terminal growth rate, g 2.0%
$ 19 9.9% 10.9% 11.9% 12.9% 13.9%
Cost of debt 4.0%
1.5% 65% 44% 27% 12% 1%
1.8% 70% 47% 29% 14% 2%
Terminal value 8,939
2.0% 74% 51% 32% 17% 4%
Net present value of equity 6,838 2.3% 79% 54% 35% 19% 6%
Fair value per share at present $18.91 2.5% 84% 58% 38%
21% 7%


26
Appendix

Key Terms

Semiconductor: A semiconductor is a solid substance that is placed between a conductor and an insulator. When charged, the substance

becomes conductive, and
it loses its conductive status if the charge is absent. It’s possible to control the movement of electricity by
combining
conductive material, semiconductor material, and Insulators. Semiconductors are therefore ideal for building devices that
control the operation of electronic equipment.

Non-integrated
(discrete) circuits: Simpler semiconductor devices compromising of a single transistor. The discrete components are
manufactured separately and are connected together by using wires on a circuit board or a printed circuit board.

Integrated circuits (ICs): The components are together on a microscopic array of electronic components such as transistors and inductors

that are implanted on the surface of semiconductor material. The integration of large numbers of components into a small chip results in

circuits that are orders of magnitude smaller, cheaper, and faster than those constructed of discrete circuits. System-on-a-chip devices

(SoCs), are the most integrated type of such circuits.


27

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Share price, 11/30/18: $74.05

% EBIT Margin 17.9% 17.3% 17.8%

© Promontory Investment Research 2018

Notable M&A Activity

8.000 Abbott Laboratories

Exhibit 1: Revenue breakdown 3Q18 Exhibit 2: LTM Revenue Growth %

© Promontory Investment Research 2018

© Promontory Investment Research 2018

New Product Developments in 2018

Growing Worldwide Needs

Key Drivers: Policy and Consolidation

Exhibit 5: Healthcare spending ad a % of GPD

Terminal value 136,617

© Promontory Investment Research 2018

115 S&P 500

© Promontory Investment Research 2018

© Promontory Investment Research 2018

Net Confectionary Sales 2017

0 5000 10000 15000 20000

© Promontory Investment Research 2018

Discounted Cash Flow Analysis

© Promontory Investment Research 2018

© Promontory Investment Research 2018

© Promontory Investment Research 2018

Company Comp Set

Max 3.6x 17.5x 22.6x 66.9x 14.2x

Equity Value 67,405

© Promontory Investment Research 2018

© Promontory Investment Research 2018

Cypress Sales by End Market Cypress Sales by Solution

Consumer Automotive Industrial Enterprise Memory MCU Connectivity

© Promontory Investment Research 2018

Exhibit 3: Cypress historical sales

Trends that will drive the semiconductor demand through 2021

© Promontory Investment Research 2018

Exhibit 4: Cypress competitors by product

Exhibit 5: Industry breakdown by product

© Promontory Investment Research 2018

Marvell Technology Group 12,431 2,502 5.5x 22.7 29.7

Nanya Technology 5,830 2,392 1.6x 2.8 3.6x

Implied share price $20.51

© Promontory Investment Research 2018

© Promontory Investment Research 2018

© Promontory Investment Research 2018

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