COC Keybanc-Feb-8-2010.pdf

Summary Of This Morning's Changes
Rating Changes: Upgrades
Ticker Company Old Rating New Rating
IDA IDACORP, Inc.HOLD BUY
Rating Changes: Downgrades
Ticker Company Old Rating New Rating
ARG Airgas, Inc.BUY HOLD
Price Target Changes: Increases
Ticker Company Old Price Target New Price Target
FLO Flowers Foods, Inc.$25.00 $27.00
Estimate Changes: Increases
Ticker Old 2009E New 2009E Old 2010E New 2010E Old 2011E New 2011E
FLO ----$1.56 $1.60 ----
IDA $2.40 $2.60 $2.55 $2.75 ----
February 8, 2010 KeyBanc
Equity Research Capital Markets
Morning Call Summary - First Edition
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described in this report.
Important disclosures for the companies
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PLEASE CONTACT ANDREW
DEANGELIS AT 216.689.3649
Contents
Summary Of This Morning's Changes............................................................................................................................... 1
On The Morning Call............................................................................................................................................................ 3
Airgas, Inc. (ARG) — Michael J. Sison, Douglas Chudy, CFA......................................................................................... 3
Airgas (ARG-NYSE) is one of the most consistent growth companies in the specialty chemical sector with good certainty
that growth would accelerate heading into an industrial economic recovery. With that said, we are downgrading our rating
on ARG from BUY to HOLD given the recent offer by Air Products and Chemicals (APD-NYSE) to acquire ARG for $60.00
per share. Our previous price target was $55.00 and at roughly $61, the stock is trading at an estimated FY11 EV/EBITDA
multiple of 9.1x. While we believe APD will have to raise its bid to better reflect ARG's growth potential, we believe the
risk/reward profile at currents levels warrants our HOLD rating at this time.
IDACORP, Inc. (IDA) — Paul T. Ridzon, Timothy Yee....................................................................................................... 4
IDA's Idaho regulatory settlement acts to put a floor of 9.5% on the Company's earned ROE in the Idaho jurisdiction, where
approximately 95% of regulated assets are held. Further, this ROE is calculated on the year-end equity balance, which we
view favorably during a period of elevated capital expenditure. The settlement offers earnings stability through 2011.
Historically IDA has seen under-earnings and earnings volatility driven by regulatory lag and variability in hydro
conditions. After updating our estimates to incorporate IDA's Idaho regulatory settlement, we are upgrading our rating
from HOLD to BUY with a $33 price target.
Flowers Foods, Inc. (FLO) — Akshay S. Jagdale, Adam Josephson..............................................................................5
We are increasing our 2010 estimates and price target from $25 to $27 and maintaining our BUY rating. Last week, Flowers
Foods (FLO-NYSE) reported 4Q09 earnings and maintained its 2010 sales growth (2.5-4.5%) and EPS growth (10-15%)
guidance. In the face of unprecedented headwinds (lower foodservice volumes and promotions were ~3.5% drag to the top
line and commodity costs were up 6.5%) FLO grew EPS by 10% in 2009, which makes us feel comfortable about the
Company's ability to deliver at least double-digit EPS growth over the long term. Furthermore, we feel more comfortable
that the worst is behind FLO, given that the competition likely cannot get any more severe than it has been, the Company
will likely realize significant savings next year from lower wheat costs, and any increase in foodservice demand will likely
be to FLO's benefit. Consequently, we are increasing our 2010 EPS estimate to $1.60 (15% growth), increasing our price
target to $27 and maintaining our BUY rating. We believe that the Company's guidance and our estimates could prove
conservative owing to higher than expected gross margins. Continued deflation in bread prices (we expect inflation to
resume in 2H10) resulting from higher promotional activity (already at historically high levels) remains the biggest risk to
our thesis and price target.
Air Products and Chemicals Inc. (APD) — Michael J. Sison, Douglas Chudy, CFA......................................................7
Given Air Products and Chemical Inc.'s (APD-NYSE) stock weakness on Friday due to its offer to acquire ARG, we are
reiterating our BUY rating on APD as we believe valuation is attractive whether the Company acquires ARG or not. If APD
is successful assuming its bid will have to rise, we believe the transaction will be accretive to "cash" EPS and neutral to
slightly dilutive on a "GAAP" EPS, makes very good strategic sense, will not overly stretch APD's balance sheet and can
generate more integration savings than initially expected. We see upside to $96 based on an estimated FY10 EV/EBITDA
multiple of 10.0x.
KeyBanc Capital Markets Inc. Disclosures and Certifications........................................................................................ 8
February 8, 2010 Morning Call Summary - First Edition
Page 2
On The Morning Call
Airgas, Inc. (ARG) — Michael J. Sison [phone] [e-mail], Douglas Chudy, CFA (216)
689-0296 [e-mail]
Airgas (ARG-NYSE) is one of the most consistent growth companies in the specialty chemical sector with good
certainty that growth would accelerate heading into an industrial economic recovery. With that said, we are
downgrading our rating on ARG from BUY to HOLD given the recent offer by Air Products and Chemicals
(APD-NYSE) to acquire ARG for $60.00 per share. Our previous price target was $55.00 and at roughly $61, the
stock is trading at an estimated FY11 EV/EBITDA multiple of 9.1x. While we believe APD will have to raise its bid
to better reflect ARG's growth potential, we believe the risk/reward profile at currents levels warrants our HOLD
rating at this time.
Rating HOLD
Price $60.96
12-Mo. Price Target NA
Market Cap $5,115.2
Trading Volume 1,052
Revenues(mm)$4,349.5
2011E $3.05
2011 P/E 20.0x
2010E $2.67
2010 P/E 22.8x
2009A $3.12
Book Value/Share $18.33
Next Quarter March
Next Quarter E $0.68
FC Mean Quarter $0.69
FC Mean 2011E $3.11
FC Mean 2010E $2.68
Yield 1.2%
•Offering Details:APD announced an unsolicited bid to acquire ARG for $60 per share. Total transaction value is
estimated to be approximately $7.0 billion, including $5.1 billion of equity and $1.9 billion of assumed debt. It represents
a 38% premium to ARG's closing price on February 4, 2010 of $43.53 and an 18% premium to ARG 52-week high in
October 2009.
•Thoughts on the Offer Price? - Good But Not Great:At $60, ARG trades at an estimated FY11 EV/EBITDA of 9.1x
and an estimated FY11 P/E of 19.7x. ARG has traded at an EV/EBITDA multiple high on average over the last 10 years
at 10.0x or a P/E of 23.0x. We believe APD's offer is a 10-15% discount to a level that better reflects ARG's growth
potential.
•An Impressive U.S. Packaged Gas Franchise:Peter McCausland, CEO, has done a phenomenal job building ARG
and has always, in our opinion, been focused on creating value for its shareholders. ARG is the the clear #1 player in
the U.S. package gas industry with the #1 market position with roughly 25% share. Over the last 10 years, ARG has
been one of the most impressive growth companies in the specialty chemical sector.
•Growth Culture:Through our FY10 EPS outlook of $2.67, which can be considered trough levels given the recent
economic downturn, ARG is estimated to have grown annually by 17% over the last 10 years. ARG is one of the few
companies we cover that will post EPS well above past trough levels ($0.41 in 2001).
•Earnings Potential:We believe ARG can return to mid-teens annualized EPS growth through FY13, as the Company
heads out of this downturn. Including acquisitions, we believe earnings power for ARG could approach $4.50 per share
by FY13.
February 8, 2010 Morning Call Summary - First Edition
Page 3
IDACORP, Inc. (IDA) — Paul T. Ridzon [phone] [e-mail], Timothy Yee [phone]
[e-mail]
IDA's Idaho regulatory settlement acts to put a floor of 9.5% on the Company's earned ROE in the Idaho
jurisdiction, where approximately 95% of regulated assets are held. Further, this ROE is calculated on the
year-end equity balance, which we view favorably during a period of elevated capital expenditure. The settlement
offers earnings stability through 2011. Historically IDA has seen under-earnings and earnings volatility driven by
regulatory lag and variability in hydro conditions. After updating our estimates to incorporate IDA's Idaho
regulatory settlement, we are upgrading our rating from HOLD to BUY with a $33 price target.
Rating BUY
Price $30.51
12-Mo. Price Target $33.00
Market Cap $1,437.0
Trading Volume 233
Revenues(mm)$960.4
2010E $2.75
2010 P/E 11.1x
2009E $2.60
2009 P/E 11.7x
2008A $2.23
Book Value/Share $28.97
Next Quarter December
Next Quarter E $0.51
FC Mean Quarter $0.29
FC Mean 2010E $2.53
FC Mean 2009E $2.43
Yield 3.9%
We view several attributes of the settlement as constructive, particularly the aspect of putting a 9.5% floor on the Idaho
jurisdictional ROE. We believe the settlement offers protection from water variability and feel comfortable that IDA can
manage through the "stay-out" moratorium precluding the Company from filing for new rates to be effective before January
2012.
We are raising our 2009 and 2010 estimates to $2.60 and $2.75 from $2.40 and $2.55, respectively.We are
introducing a 2011 estimate of $2.80 per share. Our estimates are meaningfully higher than respective consensus
estimates of $2.43, $2.53 and $2.62 per share.
Beyond 2011, we note attractive investment opportunities in transmission and generation of roughly $1.3 billion.
We believe IDA has seen a move toward more constructive regulation over the past few years.
Including a 3.9% yield, our price target represents total return potential of over 12%.
Valuation
Based upon our revised 2010 estimate, shares of IDA sell at an 8% discount to the group average P/E of 12.0x. We
believe shares warrant an average valuation given stability of earnings under the settlement and attractive investment
opportunities. We derive our $33 price target by capitalizing our 2010 estimate of $2.75 at the group average P/E multiple
of 12.0x.
Risks
We believe the primary risks that could impede the stock from achieving our price target are well below normal
precipitation levels for a few years, worsening demand trends and high inflation, which could exert pressure, given IDA's
inability to file a near-term general rate case.
February 8, 2010 Morning Call Summary - First Edition
Page 4
Flowers Foods, Inc. (FLO) — Akshay S. Jagdale 917-368-2317 [e-mail], Adam Josephson
[phone] [e-mail]
We are increasing our 2010 estimates and price target from $25 to $27 and maintaining our BUY rating. Last
week, Flowers Foods (FLO-NYSE) reported 4Q09 earnings and maintained its 2010 sales growth (2.5-4.5%) and
EPS growth (10-15%) guidance. In the face of unprecedented headwinds (lower foodservice volumes and
promotions were ~3.5% drag to the top line and commodity costs were up 6.5%) FLO grew EPS by 10% in 2009,
which makes us feel comfortable about the Company's ability to deliver at least double-digit EPS growth over the
long term. Furthermore, we feel more comfortable that the worst is behind FLO, given that the competition likely
cannot get any more severe than it has been, the Company will likely realize significant savings next year from
lower wheat costs, and any increase in foodservice demand will likely be to FLO's benefit. Consequently, we are
increasing our 2010 EPS estimate to $1.60 (15% growth), increasing our price target to $27 and maintaining our
BUY rating. We believe that the Company's guidance and our estimates could prove conservative owing to higher
than expected gross margins. Continued deflation in bread prices (we expect inflation to resume in 2H10)
resulting from higher promotional activity (already at historically high levels) remains the biggest risk to our
thesis and price target.
Rating BUY
Price $24.39
12-Mo. Price Target $27.00
Market Cap $2,258.5
Trading Volume 613
Revenues(mm)$2,414.9
2010E $1.60
2010 P/E 15.2x
2009A $1.39
2009 P/E 17.5x
2008A $1.26
Book Value/Share $7.53
Next Quarter March
Next Quarter E $0.45
FC Mean Quarter $0.44
FC Mean 2010E $1.55
FC Mean 2009A $1.41
Yield 2.9%
We are raising our estimates.Our 2010 EPS estimate is going from $1.56 to $1.60; consensus is at $1.55 and FLO's
EPS growth guidance implies 2010 EPS of $1.53-$1.60. Our new EPS estimate of $1.60 implies 15% growth and is driven
just 2% by sales growth (below the lower end of guidance) and 100 bps of EBIT margin improvement (roughly in line with
guidance, but which we believe is conservative particularly regarding gross margins). While we expect continued weak
sales growth (we are projecting 1% volume growth and a pricing decline of 0.1%), and while we have been surprised by
the extent and persistence of the price competition that has taken place in the bread industry over the past few months,
we think FLO could top our and consensus estimates over the next four quarters (particularly in 2H10, by which point we
expect bread price deflation to have abated) owing to higher than expected gross margins.
Guidance of 10-15% EPS growth could prove conservative.FLO's DSD segment continued to be adversely impacted
by heavy promotional activity at retail (the Company has experienced more of the same in 1Q10), and its warehouse
delivery segment remained adversely impacted by weak food service sales in the broad economy. However, despite the
heavy promotional activity and food service weakness, we believe FLO's 2010 gross margin guidance (and thereby EPS
guidance) could prove conservative given that its gross margin guidance assumes flat sales. As a reminder, the Company
is guiding to 2.5-4.5% sales growth.
COGS should be down by roughly 5% in 2010, driven by a decline of roughly 8-9% in input costs.The price of
wheat has declined substantially since 2008, but FLO did not benefit in 2009 because of hedges it put in place in 2008: its
input costs were up 7% (excluding acquisitions) in 2009. We expect the benefits to accrue to FLO in 2010: the Company
said that its input costs (ingredients, packaging and natural gas) will be down 8-9% (excluding acquisitions) this year. Most
of the projected decline is a result of lower wheat/flour-related costs (represents ~26% of COGS). Given that the Company
is not fully hedged for 2010 (hedged 6-9 months out) and our expectation for lower wheat prices over the next 12 months
(see detailed wheat section in note), FLO's ingredient costs could end up being down more than currently projected. While
the Company expects other COGS (~40% of COGS) to be up 3-4%, its COGS should still be down by roughly 5% (~$70
million) in 2010, which is equivalent to 2.5% of estimated 2010 sales.
Increased rate of promotional activity could be a 50 bp drag on margin.In our view, the important question to
consider is to what extent FLO will invest its savings from lower wheat costs into higher promotions. The Company did not
disclose what it expects its promotional activity will be, but assuming promotions account for 5.5% of FLO's DSD sales in
2010 (roughly 50 bps higher than they were in 2009, and 1.5-2.0% of DSD sales higher than FLO's historical average),
FLO's net gross margin benefit could end up ~2% of sales (200 bps). If this assumption regarding promotional activity in
2010 proves accurate, we believe FLO's gross margins could be up significantly more than the 50 bp improvement
guidance suggests. However, if promotional activity proves even heavier than we expect, we believe our gross margin
estimate of up 50 bps would prove reasonably accurate.
February 8, 2010 Morning Call Summary - First Edition
Page 5
FLO's sales guidance (and our estimates) assumes 0-1% price increases in 2010, which we believe is sufficiently
conservative.The Company's latest 2010 sales guidance (growth of 1.8-3.3%) is comprised of 1.5-2.6% volume growth
and 0.25-0.65% price increases (most of the projected price increase will be mix related). Given what we see as a robust
new product pipeline (bagel thins and sandwich rounds), easy comps in 2H10 and record high promotion levels
(foodservice volume were down 6% in 2009), we believe FLO's top-line guidance is fairly conservative. According to the
Bureau of Labor Statistics, bread CPI was up 1% in 2009 despite the heavy promotions in the 2H09 (bread CPI down
2.1%). If we assume bread prices remain at December 2009 levels (Bread CPI down 3.5% in December) for all of 2010,
then bread prices would fall by another 2% in 2010. FLO's DSD price increases tend to track bread CPI (~90%
correlation). Both bread CPI and FLO's pricing guidance indicate a significant slowdown in growth from 2009 (prices down
300 bps in 2010), which we believe suggests that FLO's guidance is appropriately conservative. Our 2010 estimates also
incorporate what we believe are conservative assumptions on volume and pricing: 1% volume growth and flat prices. Our
expectation for flat pricing in 2010 is predicated on our belief that pricing promotions will continue at historically high levels
as wheat costs remain low and bread demand remains weak.
Valuation
At 7.7x our forward 12-month EBITDA estimate of $313 million, FLO stock trades at a 18% discount to its historical
multiple of 9.1x. On an EV/EBITDA basis, the stock currently trades at a 15% discount (on our numbers) to its large cap
peers compared to a premium of 4% historically (9.1x vs. 8.7x). Given FLO's higher growth (15% projected 2010 EPS
growth vs. 7% projected EPS growth for large cap packaged food peers), positive ROIC spread and consistent
performance, we believe the stock should trade at a premium to its large cap peers. Our new price target of $27 implies
than FLO trades at 8.3x our forward 12-month EBITDA projection of $317 million compared to 8.8x for its large cap peers.
Furthermore, we see the risk/reward equation as being favorable. Our upside case points to 30% gains while our
downside case points to a 16% decline.
Risks
Risks that could impede the shares from achieving our price target include:
•Volume growth continues to decline owing to either a further slowdown in bread category volume growth or market
share loss.
•Wheat and other commodity prices increase more than anticipated, and the Company is unable to pass on these costs
to consumers.
•Lack of pricing power as a result of competitive pressures causes a deceleration in sales growth.
•Wal-Mart represented 20.5% of sales in FY08. Loss of this customer would severely negatively impact earnings.
•If the government passes legislation that makes it easier to organize labor unions, FLO's labor costs would increase
more than its peers would, given that only 9% of its labor force is unionized.
February 8, 2010 Morning Call Summary - First Edition
Page 6
Air Products and Chemicals Inc. (APD) — Michael J. Sison [phone] [e-mail],
Douglas Chudy, CFA [phone] [e-mail]
Given Air Products and Chemical Inc.'s (APD-NYSE) stock weakness on Friday due to its offer to acquire ARG, we
are reiterating our BUY rating on APD as we believe valuation is attractive whether the Company acquires ARG or
not. If APD is successful assuming its bid will have to rise, we believe the transaction will be accretive to "cash"
EPS and neutral to slightly dilutive on a "GAAP" EPS, makes very good strategic sense, will not overly stretch
APD's balance sheet and can generate more integration savings than initially expected. We see upside to $96
based on an estimated FY10 EV/EBITDA multiple of 10.0x.
Rating BUY
Price $68.64
12-Mo. Price Target $96.00
Market Cap $14,894.9
Trading Volume 1,253
Revenues(mm)$8,256.2
2010E $4.85
2010 P/E 14.2x
2009A $4.06
2009 P/E 16.9x
2008A $4.97
Book Value/Share $21.85
Next Quarter March
Next Quarter E $1.20
FC Mean Quarter $1.20
FC Mean 2010E $4.92
FC Mean 2009A $4.06
Yield 2.6%
•Offering Details:APD announced an unsolicited bit to acquire ARG for $60 per share. Total transaction value is
estimated to be approximately $7.0 billion, including $5.1 billion of equity and $1.9 billion of assumed debt. It represents
a 38% premium to ARG's closing price on February 4, 2010 of $43.53 and an 18% premium to ARG's 52-week high in
October 2009.
•Thoughts on the Offer Price? - Good But Not Great:At roughly $61, ARG would trade at an estimated FY11
EV/EBITDA of 9.1x and an estimated FY11 P/E of 19.7x. ARG has traded at an EV/EBITDA multiple high on average
over the last 10 years of 10.0x or a P/E of 23.0x. We believe APD's offer is a 10-15% discount to a level that better
reflects ARG's growth potential.
•Strategic Fit? - YES:We believe acquiring ARG would be an excellent way for APD to re-enter the U.S. packaged gas
industry with the #1 market position and market share of around 25%.
•Integration Synergy - Conservative:APD noted that integration synergies would be around a $250 million run rate by
the end of year two, which is roughly 6% of ARG's sales. Dow is generating synergies of almost 15-16% of ROH's pro
forma sales by our analysis. We believe there is good upside here.
•Balance Sheet? - No Problem:At $60, APD's total debt/total cap would increase to nearly 70% vs. 43% at the end of
fiscal 1Q10 and APD should remain investment grade (BBB+ minimum).
•EPS Accretive in Year 1:At $60, the acquisition would be accretive to "GAAP" EPS and "Cash EPS" by our analysis.
We believe the deal would be still accretive to "GAAP" EPS in the high $60s and to "CASH EPS" well into the $70s.
Valuation
Our 12-month $96 price target is based on an estimated FY10 EV/EBITDA multiple of 10.0x. Over the last seven years,
APD has traded in an average EV/EBITDA multiple range of 7.4-10.0x and a P/E range of 14.8-21.1x. At current levels,
APD is trading at an estimated FY10 EV/EBITDA multiple of 8.6x and an estimated FY10 P/E of 16.6x, near the middle of
historical average multiples.
Risks
Risks that could impede the stock from reaching our price target include a "double-dip" economic scenario playing out
over the next year, no recovery in industrial production-related markets, rapidly rising energy costs, the major gas players
reversing their focus on capital discipline and acquisition execution risk as large acquisitions in specialty chemical land
have historically come with some bumps on the road.
February 8, 2010 Morning Call Summary - First Edition
Page 7
KeyBanc Capital Markets Inc.Disclosures And Certifications
During the past 12 months, Airgas, Inc. has been a client of the firm or its affiliates for non-securities related services.
During the past 12 months, Flowers Foods, Inc. has been a client of the firm or its affiliates for non-securities related
services.
During the past 12 months, IDACORP, Inc. has been a client of the firm or its affiliates for non-securities related
services.
For the three-year history represented in this chart, this stock has been rated HOLD.
IDACORP, Inc. is an investment banking client of ours.
On 4/1/08, KeyBanc Capital Markets changed its rating scale from a 5-tiered system to a 3-tiered system. The rating
change from Aggressive Buy to Buy on 4/1/08 reflects this transition, and not a rating downgrade or change in opinion.
We expect to receive or intend to seek compensation for investment banking services from Airgas, Inc. within the next
three months.
We expect to receive or intend to seek compensation for investment banking services from Air Products and Chemicals
Inc. within the next three months.
We expect to receive or intend to seek compensation for investment banking services from Flowers Foods, Inc. within
the next three months.
We expect to receive or intend to seek compensation for investment banking services from IDACORP, Inc. within the
next three months.
We have received compensation for investment banking services from IDACORP, Inc. during the past 12 months
Reg A/C Certification
The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed
in this research report accurately reflect the research analyst's personal views about any and all of the subject
securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly
related to the specific recommendations or views expressed by the research analyst(s) in this research report.
Three-Year Rating and Price Target History
February 8, 2010 Morning Call Summary - First Edition
Page 8
February 8, 2010 Morning Call Summary - First Edition
Page 9
Rating Disclosures
Distribution of Ratings/IB Services
KeyBanc Capital Markets
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]0 0.00 35 0.00
HOLD [HOLD]0 0.00 51 0.00
SELL [UND]0 0.00 1 0.00
Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the security
to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell action is
recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should reduce their
holdings opportunistically.
February 8, 2010 Morning Call Summary - First Edition
Page 10
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of
publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an
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Copyright 2010, KeyBanc Capital Markets Inc. All rights reserved.
Securities, mutual funds and other investment products are:
•Not Insured by the FDIC.
•Not deposits or other obligations of, or guaranteed by KeyBanc Capital Markets Inc., KeyBank, N.A. or any of
their affiliates.
•Subject to investment risks, including possible loss of the principal amount invested.
February 8, 2010 Morning Call Summary - First Edition
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