KeyBanc-1-23-2012.pdf

January 23, 2012 KeyBanc
Equity Research Capital￿Markets
Morning Summary

Important disclosures for the companies mentioned in this report can
be found at https://key2.bluematrix.com/sellside/Disclosures.action.
Please refer to the analysts' recently published reports for company-specific valuation
and risks.
FOR FURTHER INFORMATION,
PLEASE CONTACT ANDREW
DEANGELIS AT 216.689.3649
Summary Of Today's Changes
Price Target Changes: Increases
Ticker Company Old Price Target New Price Target
AEP American Electric Power Company, Inc.$40.50 $43.50
IDA IDACORP, Inc.$41.50 $44.00
CMS CMS Energy Corporation $21.50 $23.00
Estimate Changes: Increases
Ticker Old 2011E New 2011E Old 2012E New 2012E Old 2013E New 2013E
XEL 1.70 1.73 1.80 1.80 ----
Estimate Changes: Decreases
Ticker Old 2011E New 2011E Old 2012E New 2012E Old 2013E New 2013E
GXP 1.30 1.25 1.50 1.50
AVA 1.80 1.75 1.75 1.75
TE 1.30 1.30 1.45 1.35
PPL 2.65 2.65 2.50 2.40
PGN 3.10 3.05 3.20 3.20
NEE 4.35 4.35 4.55 4.50
FE 3.40 3.40 3.30 3.20
ETR 7.65 7.60 5.90 5.80
CV 1.65 1.60 1.80 1.80
LFUS 4.09 4.05 4.19 4.00
January 23, 2012 Morning Summary
Page 2
Contents
Summary Of Today's Changes..........................................................................................................................................1
On Today's Call.....................................................................................................................................................................3
TransDigm Group Incorporated (TDG) — Michael F. Ciarmoli, Kevin Ciabattoni, CFA.................................................3
Friday after the market close TransDigm Group Incorporated (TDG-NYSE) announced that it had entered into a definitive agreement to
acquire AmSafe Global Holdings for $750 million cash, its third acquisition in the last five months and the most sizable since McKechnie,
which was acquired in September 2010.
We see the deal as carrying higher risk than McKechnie largely due to our belief that the global commercial aerospace aftermarket will
begin to show signs of weakening in 2012. Accordingly we believe TDG management will have a harder time executing on its value
creation process, and specifically we anticipate that planned margin expansion will take longer compared to what was accomplished
with McKechnie.
We believe two investor camps are likely to emerge on this transaction - the cult followers and the non-believers. We anticipate that
the cult followers will quickly point to the Company's historic integration track record, compelling margin profile, and continuously rising
earnings. The non-believers will point to slowing organic growth and a leverage ratio that will likely exceed 5x once the deal closes
and new debt financing is in place. We fall somewhere in between.
Our pro forma analysis of the deal points to FY13 adjusted earnings power of $7.32 implying a current PE ratio of 13.4x, below the
Company's historic multiple of 15.4x, but ahead of its peer group FY13 PE multiple of 12.4x. At the moment we are inclined to maintain
our patient and disciplined approach on TDG shares. We continue to believe TDG represents one of the highest quality names in the
sector but would rather wait for the dust to settle around the acquisition, gain better clarity on our out-year pro forma estimates or wait
for a more favorable valuation before getting involved. We are maintaining our HOLD rating on TDG shares but will wait to officially
change estimates until the deal closes.
ENERGY: Electric Utilities / Multi-Utilities — Paul T. Ridzon, Timothy Yee....................................................................5
On average, we expect that the companies in our universe will report lower 4Q11 quarterly earnings, down 6.9% compared to 4Q10.
Our growth expectations for our coverage universe are for average annual earnings per share growth of 10.1% based on our year-end
2011 estimates and then a 1.4% decline in 2012. Our coverage universe currently trades at an average peer group 2012 P/E multiple
of 14.3x. We also anticipate two potential earnings downside surprises [Dominion Resources, Inc. (D-NYSE) and Progress Energy,
Inc. (PGN-NYSE)] relative to current consensus expectations this quarter.
INDUSTRIAL: Electronic Manufacturing Services (Ind'l) / Electric Components — Anthony Kure, Karl
Ackerman...............................................................................................................................................................................6
KEMET Corporation (KEM-NYSE) and Littelfuse, Inc. (LFUS-NASDAQ) – Incrementally Confident in Positive Thesis After
Industry Expert Call on Component Names; Sentiment on KEM and LFUS Still Disproportionately Negative to Magnitude
of Headwinds; Positive on Long-Term Industry and Company Fundamentals; Maintaining Estimates on KEM; Reiterate BUY
rating on KEM and $13 Price Target; Lowering Estimates on LFUS; Reiterate BUY Rating and $58 Price Target.
Quick Alerts..........................................................................................................................................................................3
INDUSTRIAL: Construction & Engineering — Matt Tucker, Tahira Afzal, Aleena Khan, Saagar Parikh.......................7
E&C - Quick Alert: Takeaways for E&C Players from KBCM Houston Bus Tour
KeyBanc Capital Markets Inc. Disclosures and Certifications........................................................................................8
January 23, 2012 Morning Summary
Page 3
On Today's Call
TransDigm Group Incorporated (TDG) — Michael F. Ciarmoli 610-260-6046 [e-mail],
Kevin Ciabattoni, CFA 610-260-6047 [e-mail]
HOLD, Price Target: NA
2012: $5.48, 2013: $5.97
Friday after the market close TransDigm Group Incorporated (TDG-NYSE) announced that it had entered into a definitive
agreement to acquire AmSafe Global Holdings for $750 million cash, its third acquisition in the last five months and the most
sizable since McKechnie, which was acquired in September 2010.
We see the deal as carrying higher risk than McKechnie largely due to our belief that the global commercial aerospace
aftermarket will begin to show signs of weakening in 2012. Accordingly we believe TDG management will have a harder
time executing on its value creation process, and specifically we anticipate that planned margin expansion will take longer
compared to what was accomplished with McKechnie.
We believe two investor camps are likely to emerge on this transaction - the cult followers and the non-believers. We anticipate
that the cult followers will quickly point to the Company's historic integration track record, compelling margin profile, and
continuously rising earnings. The non-believers will point to slowing organic growth and a leverage ratio that will likely exceed
5x once the deal closes and new debt financing is in place. We fall somewhere in between.
Our pro forma analysis of the deal points to FY13 adjusted earnings power of $7.32 implying a current PE ratio of 13.4x,
below the Company's historic multiple of 15.4x, but ahead of its peer group FY13 PE multiple of 12.4x. At the moment we
are inclined to maintain our patient and disciplined approach on TDG shares. We continue to believe TDG represents one of
the highest quality names in the sector but would rather wait for the dust to settle around the acquisition, gain better clarity
on our out-year pro forma estimates or wait for a more favorable valuation before getting involved. We are maintaining our
HOLD rating on TDG shares but will wait to officially change estimates until the deal closes.
Rating HOLD
Price $97.06
12-Mo. Price Target NA
Market Cap $5,173.3
Trading Volume 341
Revenues(mm)$1,206.0
2013E $5.97
2013 P/E 16.3x
2012E $5.48
2012 P/E 17.7x
2011A $4.48
Book Value/Share $15.21
Next Quarter December
Next Quarter E $1.25
FC Mean Quarter $1.24
FC Mean 2013E $6.43
FC Mean 2012E $5.58
Yield 0.0%
TDG enters into definitive agreement to buy AmSafe Global Holdings. Friday after the market close TDG announced
that it had entered into a definitive agreement to purchase AmSafe Global Holdings from a group controlled by Berkshire
Partners and Greenbriar Equity Group. The total purchase price is $750 million and will include substantial tax benefits that
TDG should begin to realize as soon as FY12.
On the surface this deal is likely to remind investors of the McKechnie acquisition. AmSafe represents TDG's second
largest transaction, was acquired from a private equity group, and will again push the Company's leverage ratio close to
5x. Total debt will likely get pushed north of $3.5 billion and the debt-to-capital ratio will approach 80%. The integration
of McKechnie was made easier due to a very robust commercial aerospace aftermarket, which helped TDG grow 23%
organically in FY11. We believe a slower growth rate coupled with economic uncertainty in FY12 will make the AmSafe
integration slightly more challenging. TDG naysayers will also point to the size of the acquisition as a sign that smaller tuck-
ins can no longer move the needle.
Our pro forma analysis points to substantial adjusted EPS growth. We are estimating that TDG pro forma revenues
(including AmSafe and the recently acquired Harco) will total $1.6 billion in FY12 leading to GAAP EPS and adjusted EPS
of $4.93 and $6.28, respectively. Moving parts and one time charges in FY12 will include acquisition expenses, refinancing
costs, and elevated interest expense. In FY13 we believe total revenues will be roughly $1.88 billion leading to GAAP EPS
and adjusted EPS of $7.10 and $7.32. We are modeling for pro forma adjusted EBITDA margins of 47.7% in FY12 and 46.1%
in FY13, the first full-year with both Harco and AmSafe. See figure 1. for a more detailed view of our pro forma analysis.
January 23, 2012 Morning Summary
Page 4
Valuation
TDG shares currently trade at 17.2x our CY12 EPS estimate of $5.63, which is above the Company's historic average
multiple of 15.3x and ahead of the KBCM Aerospace suppliers multiple of 14.1x.
Risks
Risks that could impede the stock include cyclicality in the aerospace markets, a disruption at one of the major aircraft OEMs,
rising oil prices, a global economic recession, a terror-related event that affects air travel materially, customer concentration
and integration risk.
January 23, 2012 Morning Summary
Page 5
ENERGY: Electric Utilities / Multi-Utilities — Paul T. Ridzon [phone] [e-mail],
Timothy Yee [phone] [e-mail]
On average, we expect that the companies in our universe will report lower 4Q11 quarterly earnings, down 6.9% compared to
4Q10. Our growth expectations for our coverage universe are for average annual earnings per share growth of 10.1% based
on our year-end 2011 estimates and then a 1.4% decline in 2012. Our coverage universe currently trades at an average peer
group 2012 P/E multiple of 14.3x. We also anticipate two potential earnings downside surprises [Dominion Resources, Inc.
(D-NYSE) and Progress Energy, Inc. (PGN-NYSE)] relative to current consensus expectations this quarter.
Cur Prv Cur Prv FC FC Current EPS Previous EPS
Sym Rtg Rtg Target Target 2011 2012 2010 2011 2012 2010 2011 2012
AEP BUY BUY $43.50 $40.50 $3.12 $3.18 $3.03 $3.15 $3.20 $3.03 $3.15 $3.20
AVA HOLD HOLD NA NA $1.76 $1.77 $1.68 $1.75 $1.75 $1.68 $1.80 $1.75
CMS BUY BUY $23.00 $21.50 $1.45 $1.55 $1.36 $1.45 $1.55 $1.36 $1.45 $1.55
CV HOLD HOLD NA NA $1.65 $1.80 $1.66 $1.60 $1.80 $1.66 $1.65 $1.80
ETR HOLD HOLD NA NA $7.55 $5.89 $7.10 $7.60 $5.80 $7.10 $7.65 $5.90
FE HOLD HOLD NA NA $3.38 $3.31 $3.57 $3.40 $3.20 $3.57 $3.40 $3.30
GXP HOLD HOLD NA NA $1.27 $1.49 $1.53 $1.25 $1.50 $1.53 $1.30 $1.50
IDA BUY BUY $44.00 $41.50 $3.39 $3.13 $2.95 $3.40 $3.10 $2.95 $3.40 $3.10
NEE HOLD HOLD NA NA $4.39 $4.57 $4.30 $4.35 $4.50 $4.30 $4.35 $4.55
PGN HOLD HOLD NA NA $3.11 $3.20 $3.06 $3.05 $3.20 $3.06 $3.10 $3.20
PPL HOLD HOLD NA NA $2.63 $2.44 $3.01 $2.65 $2.40 $3.01 $2.65 $2.50
TE HOLD HOLD NA NA $1.31 $1.42 $1.28 $1.30 $1.35 $1.28 $1.30 $1.45
XEL HOLD HOLD NA NA $1.73 $1.81 $1.62 $1.73 $1.80 $1.62 $1.70 $1.80
We expect that the companies in our universe will report lower 4Q11 quarterly earnings, down 6.9% on average from 4Q10.
Our EPS growth expectations for our coverage universe are for average annual earnings growth of 10.1% based on our
year-end 2011 estimates and then a 1.4% decline in 2012. This quarter, we feel that earnings will mostly be driven by new
rate increases in effect, cost management efforts, and sluggish retail demand growth, more than offset by mild weather and
rising operating expenses.
By our weather tracking estimates, the United States, as a whole, experienced above-average temperatures during the
autumn period, despite some significant weather events during the quarter. In October, an early season snow storm brought
heavy wet snow and power outages to the interior Northeast, along with below-normal temperatures along the eastern
seaboard and Southeast. November returned the eastern half of the country to above-average temperatures, with warmer-
than-average temperatures lasting through much of December in the East, Northern Plains, and Great Lakes regions while
the West, Southwest, and Rockies regions began to cool. Precipitation was varied across the United States during the quarter.
We believe estimating weather impacts for the 4Q can be particularly challenging as the quarter includes both air conditioning
load in October that switches over to heating load through December. Given the generally milder temperature patterns
experienced across the country this quarter, we would expect 4Q11 weather earnings impacts to trend more negative for
many utility service areas when compared to 4Q10 weather degree days. Our estimates of weather impacts to earnings are
highlighted in our Investment Opinion section.
Earnings conference calls this quarter may generally be focused more on the following themes: mild weather; environmental
regulations (CSAPR and MATS); regulatory updates; projected capital spend and financing plans; pension funding; power
pricing and hedging updates; and general retail sales trends and the local economy.
January 23, 2012 Morning Summary
Page 6
INDUSTRIAL: Electronic Manufacturing Services (Ind'l) / Electric Components — Anthony Kure
[phone] [e-mail], Karl Ackerman [phone] [e-mail]
KEMET Corporation (KEM-NYSE) and Littelfuse, Inc. (LFUS-NASDAQ) – Incrementally Confident in Positive Thesis
After Industry Expert Call on Component Names; Sentiment on KEM and LFUS Still Disproportionately Negative
to Magnitude of Headwinds; Positive on Long-Term Industry and Company Fundamentals; Maintaining Estimates
on KEM; Reiterate BUY rating on KEM and $13 Price Target; Lowering Estimates on LFUS; Reiterate BUY Rating
and $58 Price Target.
Cur Prv Cur Prv FC FC Current EPS Previous EPS
Sym Rtg Rtg Target Target 2011 2012 2010 2011 2012 2010 2011 2012
KEM BUY BUY $13.00 $13.00 --$1.28 $0.10 $2.23 $1.40 $0.10 $2.23 $1.40
LFUS BUY BUY $58.00 $58.00 $4.14 $3.89 $3.54 $4.05 $4.00 $3.54 $4.09 $4.19
We recently hosted an industry expert conference call with Dennis Zogbi, President and Founder of Paumanok Publications,
and came away with our positive thesis on KEM and LFUS intact. Our intent was to provide investors with perspective into
the fundamental drivers and growth forecasts for the electrical component industry. More specifically, we were seeking to
derive specific insight into demand trends for the next 12 months, the expected time-frame for continued distributor inventory
destocking and the impact associated with the flooding of competitors’ production facilities in Thailand.
Overall, we sense both KEM and LFUS are likely to realize continued top-line and gross margin pressure in the near term due
to the inventory destocking in the distribution channel (see detail below) that should last through the calendar 1Q12 (March).
In addition, we think both KEM and LFUS could realize some ancillary near term top-line impact as a result of the flooding
of HDD (hard disk drive) facilities in Thailand, which could impact production of some products (e.g., PCs) to which both
KEM and LFUS have accompanying content. However, we view both these headwinds as temporary as it appears industry
forecasts are still pointing to modest overall unit growth in calendar 2012. Moreover, we think shares of both KEM and LFUS
are still priced as if a much worse scenario is on the horizon.
We are maintaining our FY12E of $1.40 for KEM, which includes our fiscal 3Q12E of $0.10, and maintaining our
FY13E of $1.55. We are also reiterating our BUY rating and $13 price target. For LFUS, we are lowering our 4Q11E
to $0.62 from $0.65. For FY12, we are lowering our estimate to $4.00 from $4.19. We are also introducing our initial
FY13E of $4.30, reiterating our BUY rating and our $58 price target. Our downward revision for LFUS is predicated on
the near-term destocking impact on electronics and our more cautious view on European auto demand given the recent
downward revision to production forecasts. For LFUS, we think the risks to substantial earnings decline in FY12 are largely
priced in and we continue to believe the name gets “lumped in” with pure component suppliers despite the Company’s more
diverse revenue profile and vastly improved cost footprint.
For KEM, we fully acknowledge risks to the story (volatile distribution channel, overhang from outstanding warrants, tantalum
pricing) but we believe the current valuation is still too pessimistic (despite the recent move up in the shares) and still does
not fully capture what we think will remain an improved operating model in the context of a modest demand environment. In
addition, as we detail below, it is possible KEM could see a partial offset to the destocking headwind moving into the June
2012 quarter (fiscal 1Q13) as we are under the impression a significant portion of competitors’ tantalum capacitor production
capacity was severely damaged from the Thailand floods. Given the uncertainty around this situation, this potential windfall
is not factored into our FY13E.
January 23, 2012 Morning Summary
Page 7
Quick Alerts
INDUSTRIAL: Construction & Engineering — Matt Tucker [phone] [e-mail], Tahira
Afzal [phone] [e-mail], Aleena Khan [phone] [e-mail], Saagar Parikh
[phone] [e-mail]
E&C - Quick Alert: Takeaways for E&C Players from KBCM Houston Bus Tour
We attended the KeyBanc Capital Markets E&P Team’s Houston Bus Tour last week, visiting five largely shale focused E&P
sponsors. We came away with a generally intact outlook on 2012 pipeline activity being flat to slightly up year-over-year in
North America, driven largely by continued production growth in the more liquids rich shale plays and pent up demand for
gathering lines and short to mid distance laterals, vs. a flat to slightly down outlook for long-haul transmission pipelines.
That said, the E&P sponsors we met with provided a bearish view on near to mid-term natural gas prices and indicated gas
drilling could decline more materially next year as a result. While we think catch-up infrastructure work and a concurrent shift
toward drilling liquids rich plays could help offset the impact on overall pipeline activity, we will be keeping a closer eye on
gas prices and rig counts going forward. Below we highlight a few key takeaways for our major pipeline contractors (PWR,
WG, MTZ, PRIM, ENG):
l Marcellus and Eagle Ford Activity to Remain Key Drivers of Pipeline Activity – We assess pipeline infrastructure
needs in the Eagle Ford and Marcellus, in particular, will continue to grow in the medium term as sponsors continue to build
out production in the liquids rich portions of these plays. Further, we assess there remains significant pent up demand in
these regions based on the prolific production growth seen to date, and the pipeline infrastructure there remains somewhat
in catch-up mode. That said, we assess the pipeline bottlenecks seem less acute vs. a year ago, suggesting a potential
slowdown in 2013+ if gas rig counts continue declining and are not offset by growth on the liquids side. We see pipeline
activity in dry gas plays such as the Haynesville and Barnett as declining in sympathy with gas drilling activity, and as the
infrastructure in these plays seems to be more mature at this point.
l Shift in Spending from Natural Gas to More Liquids Rich Plays a Net Neutral for Pipeline Contractors – While E&P
management teams we met suggested gas drilling could decline further, particularly in 2013 barring a price recovery, we
perceived that a shift toward liquids plays could largely offset the overall impact on the pipeline activity outlook, with oil and
NGL pipeline spending replacing natural gas. That said, the decline in gas drilling would become more of a concern to the
extent that the shift to liquids activity fails to provide a complete offset, as current spending plans seem to suggest it will.
l Emerging Plays Could Provide Mid to Longer-Term Upside to Pipeline Needs – We assess that relatively nascent
shale plays such as the Utica, in particular, as well as Brown Dense and Tuscaloosa Marine could provide upside to
current pipeline spending expectations in the 2013+ timeframe, depending on the success of early drilling operations
currently getting underway. We sensed the most potential from the Utica, which seems to be further along than the other
two, though we believe all three would require significant infrastructure investment should they take off and are currently
underappreciated by E&C investors.
l Weak Natural Gas Price Outlook Could be Positive for Petrochemical Players – We think continued weak natural gas
prices, as generally forecast through 2012 by the sponsors we met with, could be a positive for E&C players with exposure
to the U.S. petrochemical/chemical sector, which would likely benefit from cheap feedstocks. While this is consistent with
our positive view on petrochemicals spending over the past few months, we view a near-term spike in gas prices (or
expectation of one) that could derail current spending plans as less likely.
January 23, 2012 Morning Summary
Page 8
KeyBanc Capital Markets Inc. Disclosures And Certifications
Important disclosures for the companies mentioned in this report can be found at https://key2.bluematrix.com/sellside/
Disclosures.action.
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.
Rating Disclosures
Distribution of Ratings/IB Services
KeyBanc Capital Markets
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]231 45.70 44 19.05
HOLD [HOLD]264 52.20 50 18.94
SELL [UND]11 2.20 4 36.36

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.
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 offer to buy any securities. Our company policy prohibits research analysts and members of their
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In some instances, such investments may be inconsistent with the opinions expressed herein. One or more of our
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