EFTA Document EFTA01476303

Deutsche Bank Markets Research North America United States Periodical US Equity Insights 2016 S&P EPS growth to surge to 5%! Falling standards of excellence this cycle: Is there an objective passing grade? We reduce 2016E S&P EPS from $128 to $125. We're unsure of the tone of language appropriate to describe this reduction. Slashing or even cutting is too harsh as our new estimate is merely 2.5% lower. This trimming shouldn't surprise investors given recent commodity and currency markets. So is $125 good S&P EPS in 2016? Is it bullish or bearish? It's only 5% growth, subnormal mid-cycle real EPS growth, but 10x better than 2015. Thus, S&P EPS growth is set to surge in 2016! But is there an objectively healthy S&P EPS growth rate? In this note we present our new 2016E S&P EPS and we explain why a healthy S&P EPS growth rate is the nominal cost of equity less the dividend yield. 2016 S&P EPS cut from $128 to $125 on stronger dollar, lower oil assumptions We have long cautioned that every 10% appreciation in the dollar vs. mature currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by $1, net of small benefits outside of Energy, Industrial Capital Goods & Materials; which all suffer. Airlines, Consumer Staples & Discretionary firms benefit from lower oil prices, but most of the cost savings is passed forward to customers. We lower our average 2016 Euro assumption from about $1.10 to $1.05. We raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016 avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75. We also tempered our growth assumptions at US Retailers, Housing and Banks. 2015 did not have healthy underlying revenue or EPS growth ex oil and dollar S&P sales and operating EPS growth was broadly weak in 2015. Weakness extended beyond commodity producers and FX drags at multinationals. A surge in airline profits masked a significant Industrial Cap Goods profit decline. Revenue was flat at Financials with EPS growth from less litigation than 2014. No growth at Consumer Staples despite lower input costs. Good growth at Retailers, but disappointing given the macro tailwinds owing to fierce price competition. Strong at auto, but home builders disappointed. The strongest growth was at Health Care and consumer oriented Tech firms. Corporate tech spending on equip. and software remains very sluggish and chip makers were flattish on earnings given slow PC, handset and weak industrial end markets. Ex. Energy, Financials, HC and AAPL, AMZN & GOOG 2015 S&P EPS growth is EFTA01476303 -2.5%; this is the underlying trend with —4% FX drag that should fall to —1.5%. Stronger revenue growth is key to achieving healthy S&P EPS growth in 2016 Strong revenue growth at Health Care, better capex on productivity enhancers like tech equip/software, slower but still strong revenue growth at consumer oriented big cap Tech are key to our 4% S&P sales growth, 1% share shrink and flat net margin estimates for 2016. Some cyclically risky sectors like Auto Airlines, Chemicals & Semiconductors must avoid losing any earnings power. Margin expansion is possible, but upside counterbalanced by downside risk Fierce price competition at Retailers, more global competition at Industrials and the political threats at Health Care pose some sales risk, but mostly margin risk. There is also tax rate risk. Many are concerned about wage pressure on margins, but this is not a major risk for S&P firms. However, a tighter than expected labor market could lead to more Fed hikes than expected and thus EPS risks via dollar, oil or PE risk via credit market or a Tsy yield jump. Fed hikes are a small boost to S&P EPS. 5% delineates healthy from unhealthy S&P EPS growth and supports an 18 PE Our 1 year target of 18x trailing S&P EPS uses a 5.5% real and 7.5% nominal CoE. EPS is retained, so real EPS g must = real CoE - div yld to justify a PE = 1/- real CoE. Date 20 November 2015 David Bianco Strategist (+1) 212 250-8169 [email protected] Winnie Nip Strategist (+1) 415 617-3297 [email protected] S&P 500 Key Forecasts Price Ju Wang Strategist (+1) 212 250-7911 [email protected] 2089.17 Next 5%+ move Balanced Risk 2014 Year-end Target 2058.90 EPS Target P/E Current P/E EFTA01476304 DPS $118 17.4x 17.7x $38.30 Related recent research S&P should finish the year in black, but more red ahead for Energy Amazing margins, but mind the GAAP A structural slowing of Industrials: Investing around this late cycle risk Don't pull the plug on Health Care US Equity Strategy Baskets High Foreign Cash (Repatriation Beneficiaries) Big-Cap Reasonable PE Tech Challenged Industrial Capital Goods US Domestic Strength 2015E 20502100 $119 17.4x 17.6x $41 2016E 22502300 $125 18.2x 16.7x $44 Date 16 Nov 2015 8 Nov 2015 1 Nov 2015 23 Oct 2015 Bloomberg Ticker DBUSHIFC DBUSBRTE DBUSCICG DBUSDMST Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its EFTA01476305 research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. EFTA01476306 20 November 2015 US Equity Insights 2016E S&P EPS cut from $128 to $125 mostly on stronger dollar and lower oil price assumptions We have long cautioned that every 10% appreciation in the dollar vs. mature currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by $1, net of small benefits outside of Energy, Industrial Capital Goods & Materials; which all suffer. Airlines, Consumer Staples & Discretionary firms benefit from lower oil prices, but most of the cost savings is passed forward to customers. We lower our average 2016 Euro assumption from about $1.10 to $1.05. We raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016 avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75. We also tempered our growth assumptions at US Retailers, Housing and Banks. Figure 1: DXY & EUR/USD 2015YTD avg: 96.0 100 2013 & 2014 EUR avg: 1.33 2012 EUR avg: 1.29 75 80 85 90 95 2015YTD EUR avg: 1.11 2012 avg: 80.6 2013 avg: 80.4 2014 avg: 82.6 1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 DXY (lhs) Source: Bloomberg Finance LP, Deutsche Bank EUR/USD (rhs) Figure 2: Oil prices (1st month futures) 105 115 125 EFTA01476307 35 45 55 65 75 85 95 WTI Source: Bloomberg Finance LP, Deutsche Bank Brent 105 115 125 35 45 55 65 75 85 95 Figure 3: WTI now expected to settle at —$50 at 2016 end and stay under $55 even by 2018 end WTI futures prices over time $35 $40 $45 $50 $55 $60 $65 $70 $75 $35 $40 $45 $50 $55 $60 $65 $70 $75 $40 $45 $50 $55 $60 $65 $70 $75 $80 Figure 4: Brent now expected to settle at —$50 at 2016 EFTA01476308 end and stay under $60 even by 2018 end Brent futures prices over time $40 $45 $50 $55 $60 $65 $70 $75 $80 Dec 2015 Dec 2016 Source: Bloomberg Finance LP, Deutsche Bank Dec 2017 Dec 2018 Dec 2015 Dec 2016 Source: Bloomberg Finance LP, Deutsche Bank Dec 2017 Dec 2018 Figure 5: Weak oil prices: Industry impact spectrum Detriment Benefit Energy Industrial Cap Gds Machinery Materials Metals & Mining, mixed for Chems Utilities MLPs Rails Based on observed EPS history and DB estimates, oil prices have no material influence on Health Care or Telecom Source: Deutsche Bank Tech Financials REITs Cons. Disc. Retailers Cons. Staples Transports Packaged Food Airlines/Trucking Page 2 Deutsche Bank Securities Inc. Front Month Futures ($/barrel) Jan-13 Mar-13 May-13 Jul-13 Sep-13 EFTA01476309 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 EFTA01476310 US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 3 Figure 6: S&P 2016 EPS scenarios Poor global growth (China —5%) A continued profit recession, Foreign Cons Disc Cons Staples Energy Financials Health Care Industrials Tech Materials Telecom Utilities S&P 500 per share Avg oil price Euro Avg FF rate US UE yr end US GDP Global GDP Source: Deutsche Bank Sales % Profits % 27% 28% 41% 18% 20% 36% 59% 49% 1% 6% 31% FX A possible upside scenario 2015 2016 25% 28% 20% 15% 20% 35% 37% 40% 0% EFTA01476311 6% 25% 115.5 85.5 45 218 154.5 115 225 30.3 33.5 33.4 1055 7 $119 $47 89 y/y 2016 EPS 128 10.8% 14.39 4.1% 10.01 6.75 60 33.3% 234 168 120 242 34.5 1142 $128 $60 1.10 1.10-1.15 0.2% 0.75% 5.0% 4.7% 2.5% 2.5-3% 3% 3.5% 34 12.2% 32.5 -3.0% 3.3% 7.3% 26.31 8.7% 18.89 4.3% 13.49 7.6% 27.21 3.82 3.65 3.88 8.2% 128.39 DB's base case for 2016 S&P EPS 2016 125 87.5 EFTA01476312 2015 115.5 85.5 45 218 154.5 115 225 30.3 33.5 33.4 1055.7 $119 $47 1.05 2.3% 52 15.6% 230 165 117 239 32.5 32.5 34.5 1115 $125 $55 1.05 0.2% 0.50% 5.0% 2.5% -2.5% 3% -3.0% 4.7% y/y 2016 EPS 8.2% 14.05 9.84 5.85 5.5% 25.86 6.8% 18.55 1.7% 13.15 6.2% 26.87 7.3% -3.0% 3.3% but decent US and global GDP growth y/y 2016 EPS 2015 115.5 85.5 45 218 EFTA01476313 3.65 3.65 3.88 5.6% 125.35 154.5 115 225 30.3 33.5 33.4 2016 125 85.5 230 161 232 34.5 1055 7 1064.5 $119 $47 1.05 $40 0.90 0.2% 0.50% 5.0% 4.7% 2.5% -2.5% 3% -3.0% 8.2% 14.05 0.0% 30 -33.3% 5.5% 25.86 4.2% 18.10 105 -8.7% 11.80 3.1% 26.08 3.26 3.65 3.88 0.8% 119.68 $120 29 -4.3% 32.5 -3.0% 3.3% 9.61 3.37 yet 2%+ US growth with low credit costs Tight US labor mkt, Fed hikes >1% in 2016 Global recession and flat US GDP y/y 2016 EPS 2015 115.5 85.5 EFTA01476314 45 218 154.5 115 225 30.3 33.5 33.4 1055.7 $119 $47 1.05 0.2% 5.0% 2016 122 85 233 160 225 5.6% 13 72 -0.6% 30 -33.3% 9.56 3.37 6.7% 26.16 3.6% 17.99 100 -13.0% 11.24 0.0% 25.30 2.92 3.60 3.82 26 -14.2% -4.5% 1.8% 32 34 1046.7 $118 $40 0.90 1.2% 4.4% 2.5% 2.25% 3% 2.5% -0.9% 117.68 2015 115.5 85.5 45 EFTA01476315 218 154.5 115 225 30.3 33.5 33.4 1055.7 $119 $47 1.05 2016 y/y 2016 EPS 110 -4.8% 12.37 83 -2.9% 20 -55.6% 210 -3.7% 23.61 2.3% 17.76 158 90 -21.7% 10.12 210 -6.7% 23.61 23 -24.1% 30 -10.4% 32.5 -2.7% 966.5 -8.4% 108.66 $109 $35 0.85 0.2% 0.25% 5.0% 2.5% 3% 6.5% 0.5% 1.5% 2.59 3.37 3.65 9.33 2.25 Figure 7: S&P annual EPS rule-of-thumb sensitivities Rules of thumb sensitivities Oil prices: Every $5/bbl decline in oil prices reduces S&P net income by roughly $7.5bn or nearly $1 EPS Dollar FX rates: Every 10% appreciation in the dollar vs. mature currencies (DXY) tends to reduce S&P net income by $20bn or —$2.50 of EPS FF rate: Every 25bp on the FF rate, if it similarly moves net interest margins at banks is —$0.50 to S&P US GDP: S&P EPS is most sensitive to US investment spending on equipment and software and exports Global GDP: S&P EPS tends to be more sensitive to global GDP than US GDP EFTA01476316 Source: Deutsche Bank EFTA01476317 US Equity Insights 20 November 2015 Page 4 Deutsche Bank Securities Inc. Figure 8: S&P 500 Advised Sector and Industry Allocation (2014/15 PE based on DB US Equity Strategy top down sector and industry EPS estimates) Market Advised Weight (%) Weight (%) Sector 2015 2016 PE PE Biotechnology Health Care Equipment & Supplies 14.5% 18.0% Health Care 17.0 15.9 Health Care Technology Life Sciences Tools & Services Pharmaceuticals Technology Hardware, Storage & Peripherals Internet Software & Services IT Services 21.0% Overweight 16.4% 17.2% Financials 21.0% Information Technology 17.5 16.5 Semiconductors Software Communications Equipment Electronic Equipment Banks Capital Markets 14.0 13.2 Consumer Finance Electric Utilities Gas Utilities 2.9% 2.3% 3.4% 2.6% Utilities 15.7 15.2 Independent Power Producers Multi-Utilities Telecom 12.6 13.0 Telecommunication Services Overweight EFTA01476318 2015 2016 PE PE 15.1 13.5 21.8 20.4 27.2 23.6 19.5 18.8 17.1 16.3 12.2 11.5 29.8 26.6 19.0 17.9 16.6 16.1 21.4 20.2 12.2 11.7 17.5 16.3 12.1 11.5 Diversified Financial Services 15.0 13.9 Insurance 11.7 11.2 REITs Real Estate Mgmt. & Development Thrifts & Mortgage Finance 15.0 14.7 21.2 19.8 10.8 9.8 17.1 16.5 12.6 13.0 Auto Components Automobiles Distributors Equalweight 13.0% 13.2% Consumer Discretionary 21.1 19.5 Household Durables Leisure Products Multiline Retail Specialty Retail Internet & Catalog Retail Media Food & Staples Retailing 9.6% 8.5% Consumer Staples 20.6 20.1 Airlines Underweight 10.3% 8.5% EFTA01476319 Industrials 16.8 16.5 7.3 8.3 Building Products Air Freight & Logistics Commercial Services & Supplies Industrial Conglomerates Professional Services Road & Rail Chemicals 3.0% 2.6% Materials 17.9 16.7 24.2 18.8 19.6 23.0 20.1 15.9 17.3 13.7 8.6 19.5 16.6 21.2 14.5 21.1 80.7 18.9 18.1 12.7 Diversified Consumer Services 8.2 Hotels, Restaurants & Leisure 18.2 Textiles, Apparel & Luxury Goods 14.7 20.0 13.6 19.4 64.6 17.8 17.5 Beverages Food Products Household Products Personal Products Tobacco 22.6 Aerospace & Defense 17.6 Construction & Engineering 18.7 Electrical Equipment 21.8 Machinery EFTA01476320 18.3 Trading Companies & Distributors 15.0 16.5 Construction Materials Containers & Packaging Metals & Mining Paper & Forest Products 7.0% 5.0% Energy 28.5 Aggregate PE of DB Industry allocations S&P 500 Index Source: Deutsche Bank Markets Research 24.6 Overweight 15.6 2081.24 14.9 Equalweight 2015 & 2016 DB Strategy EPS Bottom-up Cons. EPS 18.5 17.4 Energy Equipment & Services Oil, Gas & Consumable Fuels Underweight 119.0 125.0 2015 & 2016 DB Strategy PE 118.8 128.5 Bottom-up Cons. PE 23.1 22.9 21.3 20.4 20.6 20.0 27.7 24.2 20.3 20.6 17.7 16.7 13.7 13.7 16.3 16.3 15.5 16.0 16.7 15.9 45.6 38.0 16.1 15.4 28.3 18.5 11.0 11.0 20.9 29.9 30.6 23.8 21.3 20.0 17.5 16.6 17.5 16.2 18.3 16.7 25.0 22.8 23.6 21.5 EFTA01476321 20.9 12.3 18.8 17.4 33.2 19.3 11.7 18.0 16.1 11.7 Equalweight 2015 2016 PE PE Underweight Health Care Providers & Services 2015 2016 PE PE 16.0 15.2 EFTA01476322 US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 5 Figure 9: S&P EPS Model by sector — 2016 S&P EPS cut from $128 to $125 on stronger dollar, lower oil assumptions EPS Bottom-up 2005A S&P 500 EPS (historical index) S&P 500 EPS (current constituents) Sector ($ bn) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities S&P 500 ($ bn) S&P ex. Financials ($bn) S&P ex. Energy ($bn) S&P ex. Tech ($bn) Energy & Financials ($bn) S&P ex. Energy and Financials ($bn) Key Macro Forecast Global GDP growth (real, DB est.) US GDP growth (real, DB est.) US Bus. FI (Equip + IPP, DB est.) US Unemployment Rate (year-end, DB est.) US 10yr Treasury Yield (year-end, Our est.) Bank Litigation (post-tax, $bn) Loan Loss Provisioning (% of loans, Our est.) US$/Euro (average/year-end, Our est.) US$/Euro (year-end, DB est.) Avg Oil Price (WTI/Brent, $/bbl) Avg Natural Gas Price (Henry Hub $/mmbtu) $76.28 $79.53 51.6 94.0 133.8 68.6 63.2 83.6 17.4 13.9 21.4 EFTA01476323 603.1 469.3 509.1 519.5 227.8 375.3 2006A $88.18 $91.14 53.9 57.0 2007A 2008A 2009A 2010A $85.12 $65.47 $60.80 $85.28 $93.81 $71.79 $64.23 $88.54 2007 - 14 shown below is agg. net income, 2014 y/y is EPS growth: 55.6 52.5 61.1 114.3 173.1 73.0 71.0 97.6 21.2 18.0 23.4 702.6 529.4 588.3 605.0 287.5 415.1 118.7 143.8 81.8 83.9 121.4 24.8 26.4 25.9 740.2 596.5 621.6 618.8 262.4 477.8 40.9 66.8 EFTA01476324 141.5 -19.9 86.7 75.3 122.1 21.0 27.0 26.9 588.2 608.1 446.7 466.1 121.6 466.6 48.6 68.9 59.0 56.6 88.3 51.7 105.6 13.2 21.8 26.6 540.3 483.7 481.3 434.7 115.6 424.7 74.1 73.6 94.5 129.0 101.3 73.8 151.4 24.9 23.2 28.2 773.9 644.9 679.4 622.5 223.5 550.4 2011A 2012A 2013A 2014A Y/Y EFTA01476325 $97.82 $103.75 $110.39 $118.82 7.6% $99.73 $105.09 $111.63 $117.75 5.5% $118.84 0.9% $128.55 8.2% 84.0 78.0 129.7 132.5 109.6 88.2 175.2 31.7 22.4 29.5 880.7 748.2 751.0 705.4 262.1 618.5 90.4 78.7 122.1 162.6 112.5 94.3 185.7 29.2 23.9 29.8 929.1 766.6 807.0 743.5 284.6 644.5 99.5 84.2 113.9 189.1 117.9 102.5 193.1 30.5 25.1 30.4 986.2 797.1 872.3 793.1 303.0 683.2 102.9 $119 EFTA01476326 86.2 112.3 189.9 136.3 113.4 209.8 32.7 30.7 33.2 1047.4 857.5 935.1 837.6 302.2 745.2 4.7% 5.2% 5.3% 2.7% -0.4% 5.2% 3.9% 3.2% 2.8% 3.4% 3.4% 2.7% 1.8% -0.3% -2.8% 2.5% 1.9% 2.8% 1.9% 2.6% 8.4% 7.1% 3.8% -3.1% -14.1% 9.4% 9.2% 5.9% 4.1% -5.5% 4.9% 4.4% 5.0% 7.3% 9.9% 9.5% 8.6% 7.8% 7.0% 5.7% 4.4% 4.7% 3.9% 2.5% 3.8% 3.3% 1.9% 1.8% 3.0% 2.2% 8.9 5.7 8.4 14.3 23.3 0.8% 0.7% 1.3% 3.0% 4.2% 2.6% 1.2% 0.8% 0.4% 0.4% 1.25/1.18 1.26/1.32 1.37/1.46 1.47/1.40 1.39/1.32 1.33/1.29 1.39/1.30 1.28/1.32 1.33/1.38 1.33/1.21 56/54 8.67 Source: Deutsche Bank Based on current constituents in the index unless specified 66/65 6.74 72/72 6.96 100/97 8.88 61/61 3.95 79/79 4.40 95/111 3.99 94/111 2.75 98/108 3.73 93/99 4.26 3.4% 115.5 EFTA01476327 2.4% 85.1 -1.5% 46.8 0.4% 216.8 15.6% 155.0 10.7% 116.3 8.6% 224.1 7.4% 30.6 22.1% 33.7 9.2% 33.2 6.2% 1057.1 7.6% 840.3 7.2% 1010.3 5.6% 833.0 -0.3% 263.6 9.1% 793.5 -1.3% 91.0 -58.4% 46.8 14.2% 235.5 13.7% 168.9 2.6% 121.5 6.8% 243.3 -6.5% 34.3 9.8% 34.9 -0.1% 34.4 0.9% 1143.4 -2.0% 907.9 8.0% 1096.6 -0.6% 900.1 -12.8% 282.3 6.5% 861.1 15.0% 115.5 6.9% 85.5 0.1% 45.0 8.6% 218.0 9.0% 154.5 4.4% 115.0 8.6% 225.0 12.0% 30.3 3.4% 33.5 3.7% 33.5 8.2% 1055.7 8.0% 837.7 8.5% 1010.7 8.1% 830.7 7.1% 263.0 8.5% 792.7 3.1% 2.1% -4% 4.8% 2.25% EFTA01476328 4 5 0.6% -$1.10 1.05 -$50 -2.50 1.1% $125 All 2015/16 estimates are aggregate earnings representative of EPS 12.3% 132.8 12.2% 125.0 -0.8% 87.5 -59.9% 52.0 14.8% 230.0 13.4% 165.0 1.4% 117.0 7.3% 239.0 -7.5% 32.5 9.1% 32.5 0.7% 34.5 5.0% $122 8.3% 115.5 2.3% 85.5 15.6% 80.0 5.5% 218.0 6.8% 151.5 1.7% 112.2 6.2% 225.0 7.3% 31.4 -3.0% 33.5 3.1% 33.5 1.1% 1114.9 5.0% 1086.0 -2.3% 884.9 5.6% 868.0 8.1% 1062.9 5.2% 1006.0 -0.8% 875.9 -13.0% 282.0 6.4% 832.9 5.4% 861.0 7.2% 298.0 5.1% 788.0 3.5% 2.7% -4% 4.5% 2.75% 2 0.5% -$1.05 0.90 -$55 -2.75 EFTA01476329 <3% 0.75% $1.10-1.15 -$65 - 3.00 103% 100% 100% 178% 100% 98% 98% 100% 104% 100% 100% 103% 104% 100% 104% 113% 99% 2015E Y/Y 2016E Y/Y 2015E DB US Equity Strategy Y/Y 2016E Normalized 2015 Y/Y ($) % of 2015 EFTA01476330 US Equity Insights 20 November 2015 Page 6 Deutsche Bank Securities Inc. Figure 10: S&P EPS Model by industry (1 of 2) 2005A 2006A CONSUMER DISCRETIONARY ($bn) Auto Components Automobiles Distributors Diversified Consumer Services Hotels, Restaurants & Leisure Household Durables Internet & Catalog Retail Leisure Products Media Multiline Retail Specialty Retail Textiles, Apparel & Luxury Goods CONSUMER STAPLES ($bn) Beverages Food & Staples Retailing Food Products Household Products Personal Products Tobacco ENERGY ($bn) Energy Equipment & Services Oil, Gas & Consumable Fuels FINANCIALS ($bn) Capital Markets Banks Consumer Finance Diversified Financial Services Insurance Real Estate Investment Trusts (REITs) Real Estate Management & Development Thrifts & Mortgage Finance HEALTHCARE ($bn) Biotechnology Health Care Equipment & Supplies Health Care Providers & Services Health Care Technology Life Sciences Tools & Services Pharmaceuticals 53.9 2007A 52.5 1,423 3,454 EFTA01476331 434 567 7,420 5,352 692 700 13,078 5,131 15,042 2,269 51.6 10,386 10,759 7,801 10,956 251 11,485 94.0 6,038 133.8 15,673 69,061 5,600 3,165 1,533 (1,711) 472 428 8,153 3,788 577 746 5,931 2,817 57.0 1,939 519 502 427 9,029 (2,025) 909 859 5,528 2008A 2009A 2010A 40.9 1,354 (6,288) 472 494 9,208 EFTA01476332 (2,460) 1,158 655 4,344 3,393 66.8 48.6 332 396 501 74.1 2011A 2007 - 55.6 2,354 2014 shown below is aggregate net income, 2014 y/y is EPS growth: 69 12,291 471 438 8,480 10,326 (263) 1,549 831 5,023 3,383 68.9 1,384 2,123 1,016 15,151 16,986 16,265 15,425 18,574 6,196 16,045 14,639 12,310 12,847 14,779 3,236 61.1 4,099 73.6 11,407 13,256 14,398 14,586 16,411 11,879 13,960 15,323 15,742 16,462 8,266 8,625 268 8,928 10,298 11,651 13,058 14,777 16,354 16,955 16,521 256 222 118.7 143.8 141.5 243 59.0 12,135 10,242 11,529 11,062 12,137 114.3 EFTA01476333 94.5 10,634 14,712 19,272 12,769 12,051 173.1 (19.9) 129.0 22,636 20,810 10,948 17,073 20,564 78,646 54,072 (17,914) 6,707 2,288 6,320 3,082 30,279 9,386 198 398 69.1 5,062 13,260 12,599 76 1,179 36,969 428 480 3,216 394 8,867 179 609 87.7 8,010 159 2,326 388 51,586 7,189 8,806 13,138 51,613 47,404 (26,200) 20,581 26,359 10,526 11,160 299 422 6,688 94 611 73.7 6,259 82.6 7,046 127 89.4 9,220 178 EFTA01476334 102.5 9,949 13,706 15,061 17,284 18,656 20,079 14,952 16,835 15,183 15,859 17,985 98 1,458 Source: Deutsche Bank, IBES 2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth 2,326 2,500 2,103 2,756 37,226 41,208 44,533 43,409 51,559 220 9,293 206 644 382 84.0 3,566 12,310 559 393 11,867 1,986 2,343 1,096 22,014 6,987 16,018 4,887 78.0 17,613 17,336 12,715 15,795 485 14,025 129.7 14,886 132.3 15,695 55,025 9,910 2012A 90.4 3,782 10,832 642 415 12,003 EFTA01476335 3,597 2,042 1,209 25,579 7,302 17,370 5,671 78.7 17,300 19,249 10,963 16,064 572 14,531 122.1 16,874 87,976 103,680 103,941 122,236 46,261 82,431 114,789 56.6 11,536 27,881 12,463 288 (502) 110.9 11,009 21,631 20,796 283 3,278 53,915 162.6 18,152 67,599 10,824 13,752 36,495 14,899 344 500 114.1 12,292 22,952 22,813 366 3,544 52,089 2013A 99.5 4,616 11,678 646 105,211 EFTA01476336 452 12,536 5,643 2,980 1,225 27,898 6,680 18,721 6,379 84.2 18,055 20,396 13,666 16,617 674 14,794 113.9 17,681 96,265 188.8 23,804 76,558 12,217 15,412 43,545 16,466 409 415 119.5 14,114 18,523 24,935 433 3,619 57,897 2014A Y/Y 102.9 3% 5,156 12% 705 9% 474 5% 2015E Y/Y 2016E Y/Y 2015E 115.5 12.3% 132.8 15.0% 5,384 4.4% 702 -0.4% 545 14.8% 755 7.5% 115.5 EFTA01476337 639 17.3% Y/Y 6,255 16.2% 5,400 4.7% 700 -0.7% 550 16.0% 2016E 12.2% 125.0 Y/Y 5,800 7.4% 750 7.1% 600 9.1% Normalized 2015 ($) % of 2015 8.3% 115.5 100% 5,400 100% 9,867 -16% 14,184 43.7% 16,329 15.1% 14,000 41.9% 14,700 5.0% 14,000 100% 700 100% 550 100% 12,652 1% 4,350 -23% 3,391 14% 865 -29% 30,273 9% 7,300 9% 20,781 11% 7,048 10% 86.2 2% 18,510 3% 21,253 4% 14,968 10% 16,534 0% 685 2% 112.3 -1% 20,584 16% 189.9 0% 26,314 11% 12,199 0% 17,166 11% 21,969 33% 484 18% 412 -1% 13,627 7.7% 15,730 15.4% 13,700 8.3% 15,000 9.5% 13,700 100% 4,800 100% 4,850 11.5% 4,415 30.2% 815 -5.8% 7,589 4.0% 5,580 15.1% 4,800 10% 800 -7.5% 5,400 12.5% EFTA01476338 6,654 50.7% 4,800 41.6% 6,000 25.0% 927 13.8% 850 6.3% 8,328 9.7% 91.0 6.9% 7,500 2.7% 8,000 6.7% 7,900 9.7% 87.5 2.3% 4,800 100% 800 100% 32,747 8.2% 37,026 13.1% 33,000 9.0% 35,000 6.1% 33,000 100% 7,500 100% 23,331 12.3% 26,469 13.4% 23,000 10.7% 25,000 8.7% 23,000 100% 7,200 100% 100% 7,316 3.8% 85.1 -1.3% 8,152 11.4% 7,200 2.2% 85.5 -0.8% 85.5 18,361 -0.8% 19,513 6.3% 18,300 -1.1% 18,500 1.1% 18,300 100% 22,173 4.3% 23,256 4.9% 22,500 5.9% 23,300 3.6% 22,500 100% 14,029 -6.3% 15,722 12.1% 14,000 -6.5% 14,600 4.3% 14,000 100% 15,844 -4.2% 16,575 4.6% 16,000 -3.2% 16,500 3.1% 16,000 100% 700 100% 683 -0.3% 46.8 -58.4% 779 14.2% 46.8 0.1% 700 2.3% 800 14.3% 14,274 -4% 14,031 -1.7% 15,147 8.0% 14,000 -1.9% 13,800 -1.4% 14,000 100% 45.0 -59.9% 52.00 15.6% 80.0 216.8 14.2% 235.5 8.6% 218.0 178% 10,696 -48.0% 6,890 -35.6% 10,000 -51.4% 7,000 -30% 15,000 150% 91,707 -5% 36,065 -60.7% 39,930 10.7% 35,000 -61.8% 45,000 28.6% 65,000 186% 218.0 14.8% 230.0 5.5% 100% 27,020 2.7% 30,868 14.2% 27,300 3.7% 29,500 8.1% 27,300 100% 68,385 -11% 92,332 35.0% 98,156 6.3% 93,200 36.3% 98,000 5.2% 93,200 100% 11,887 -2.6% 12,637 6.3% 12,000 -1.6% 12,500 4.2% 12,000 100% 18,040 5.1% 21,396 18.6% 18,000 4.9% 19,500 8.3% 18,000 100% 42,951 -1% 43,172 0.5% 46,390 7.5% 43,100 0.3% 45,000 4.4% 43,100 100% 23,460 6.8% 25,009 6.6% 23,500 7.0% 24,500 4.3% 23,500 100% 600 100% 300 100% 98% EFTA01476339 586 21.0% 295 -28.4% 138.1 16% 26,719 89% 20,386 10% 26,541 6% 504 16% 4,464 23% 59,445 3% 667 14.0% 346 17.4% 155.0 12.3% 168.9 9.0% 600 23.9% 300 -27.2% 650 8.3% 350 16.7% 154.5 11.9% 165.0 6.8% 151.5 37,528 40.5% 40,218 7.2% 38,500 44.1% 43,000 11.7% 38,500 100% 19,364 -5.0% 21,291 10.0% 17,500 -14.2% 18,700 6.9% 17,500 100% 29,977 12.9% 33,541 11.9% 30,000 13.0% 31,500 5.0% 27,000 90% 632 25.5% 4,316 -3.3% 718 13.6% 650 29.0% 4,801 11.2% 4,350 -2.5% 750 15.4% 4,500 3.4% 650 100% 4,350 100% 63,174 6.3% 68,332 8.2% 63,500 6.8% 66,500 4.7% 63,500 100% EFTA01476340 US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 7 Figure 11: S&P EPS Model by industry (2 of 2) 2005A 2006A INDUSTRIALS ($bn) Aerospace & Defense Air Freight & Logistics Airlines Building Products Commercial Services & Supplies Construction & Engineering Electrical Equipment Industrial Conglomerates Machinery Professional Services Road & Rail Trading Companies & Distributors INFORMATION TECHNOLOGY ($bn) Communications Equipment Technology Hardware, Storage & Peripherals IT Services Software MATERIALS ($bn) Chemicals Metals & Mining Paper & Forest Products TELECOMMUNICATION SERVICES ($bn) UTILITIES ($bn) Electric Utilities Gas Utilities Multi-Utilities 71.0 2007A 83.9 13,997 4,924 (2,963) 958 5,897 414 3,025 22,232 10,111 713 3,215 663 83.6 11,360 EFTA01476341 17,783 Electronic Equipment, Instruments & Components 1,454 Internet Software & Services 3,551 14,226 Semiconductors & Semiconductor Equipment 15,276 19,948 17.4 Construction Materials Containers & Packaging 11,063 526 1,070 4,204 516 13.9 21.4 12,373 194 772 Independent Power and Renewable Electricity Producers 8,057 2008A 2009A 2010A 75.3 51.7 73.8 2011A 2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth: 63.2 16,143 21,089 21,283 17,753 20,532 5,553 (3,940) 882 5,114 546 3,631 797 5,754 1,464 659 3,296 844 4,029 4,721 (2,835) 109 3,580 1,242 4,111 857 3,452 EFTA01476342 (3,356) 25 3,277 1,176 2,687 4,752 2,591 56 3,612 867 3,835 24,932 27,201 22,830 15,318 17,891 11,980 12,641 12,380 882 6,747 11,764 (90) 4,616 790 97.6 5,085 908 121.4 6,060 928 122.1 4,215 495 105.6 151.4 13,448 13,708 13,448 12,992 15,777 26,262 38,703 38,380 21,589 34,033 1,961 5,162 3,616 7,128 13,172 14,879 24.8 3,808 8,466 9,832 21.0 3,000 4,828 9,197 11,789 16,461 18,598 21,833 23,225 27,369 8,163 23,992 21,096 24,800 26,316 27,394 33,620 21.2 13.2 12,009 13,313 12,173 716 EFTA01476343 709 1,081 6,786 630 18.0 23.4 1,093 8,406 Source: Deutsche Bank, IBES 2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth 1,516 8,338 950 26.4 25.9 211 1,260 9,176 360 1,559 6,108 843 27.0 26.9 208 1,959 9,449 1,328 2,995 371 21.8 26.6 223 1,670 24.9 8,405 15,424 102 (6) 1,438 7,168 878 23.2 28.2 13,646 15,204 15,261 14,857 16,442 213 1,178 9,888 10,358 238 920 6,264 728 EFTA01476344 88.2 23,118 5,745 1,563 7 3,650 1,062 4,848 20,687 17,511 1,324 7,648 1,060 175.2 17,039 47,528 4,530 13,955 30,354 23,937 37,905 31.7 20,512 (26) 1,297 8,540 1,332 22.4 29.5 17,508 236 1,138 10,605 2012A 94.3 23,181 5,984 2,400 112 3,396 1,366 5,051 22,656 18,886 1,557 8,280 1,427 185.7 18,963 57,598 3,754 EFTA01476345 16,068 31,272 19,351 38,660 29.2 20,796 46 1,296 5,858 1,155 23.9 29.8 17,984 290 986 10,544 2013A 102.5 26,449 5,992 5,724 474 3,645 1,390 5,821 23,844 16,710 1,744 9,002 1,689 193.1 21,367 53,981 3,780 19,854 35,794 20,165 38,190 30.5 22,693 128 1,444 4,819 1,401 25.1 30.4 18,830 304 555 10,741 2014A EFTA01476346 Y/Y 113.4 11% 29,332 11% 6,361 6% 10,010 75% 599 26% 3,839 5% 1,525 10% 6,174 6% 24,285 2% 17,199 3% 2,006 15% 10,146 13% 1,963 16% 209.8 9% 21,413 0% 58,701 9% 4,304 14% 24,308 22% 36,653 2% 27,382 36% 32.7 7% 24,473 8% 333 160% 2,193 52% 4,469 -7% 1,280 -9% 30.7 22% 33.2 9% 19,691 5% 563 85% 1,085 96% 11,879 11% 2015E Y/Y 116.3 2.6% 7,413 16.5% 4,013 4.5% 2016E Y/Y 121.5 4.4% 2015E Y/Y 115.0 1.4% 2016E Y/Y 117.0 1.7% 8,258 11.4% 7,300 14.8% 7,800 845 23.4% 4,289 6.9% 5,757 0.6% 6.8% EFTA01476347 700 16.9% 4,000 4.2% 750 7.1% 4,200 5.0% Normalized 2015 ($) % of 2015 112.2 17,091 70.7% 14,805 -13.4% 17,000 69.8% 15,000 -12% 15,300 684 14.3% 1,296 -15.0% 1,394 7.6% 5,723 -7.3% 1,300 -14.7% 1,300 0.0% 5,500 -10.9% 5,500 0.0% 2,410 11.6% 2,100 4.7% 2,300 9.5% 2,000 5.3% 239.0 6.2% 98% 29,413 0.3% 31,789 8.1% 29,300 -0.1% 31,000 5.8% 29,300 100% 7,300 100% 90% 700 100% 4,000 100% 1,235 5,225 95% 95% 21,279 -12.4% 24,367 14.5% 21,000 -13.5% 22,100 5.2% 21,000 100% 95% 15,350 -10.7% 14,752 -3.9% 15,000 -12.8% 14,500 -3.3% 14,250 2,160 7.7% 9,834 -3.1% 10,675 8.5% 2,088 6.3% 224.1 6.8% 2,171 4.0% 243.3 8.6% 9,900 -2.4% 10,500 6.1% 1,900 -3.2% 225.0 7.3% 225.0 2,100 100% 9,900 100% 1,900 100% 100% 21,374 -0.2% 22,026 3.1% 21,600 0.9% 22,500 4.2% 21,600 100% 70,219 19.6% 75,362 7.3% 70,800 20.6% 75,000 5.9% 70,800 100% 4,100 100% 4,179 -2.9% 4,510 7.9% 4,100 -4.7% 4,400 7.3% EFTA01476348 25,112 3.3% 29,979 19.4% 25,500 4.9% 28,600 12.2% 25,500 100% 38,022 3.7% 41,148 8.2% 38,000 3.7% 40,300 6.1% 38,000 100% 27,838 1.7% 29,248 5.1% 27,500 0.4% 28,500 3.6% 27,500 100% 36,992 -3% 37,325 0.9% 41,026 9.9% 37,500 1.4% 39,700 5.9% 37,500 30.3 -7.5% 30.6 -6.5% 532 59.8% 2,151 -1.9% 1,554 21.4% 33.7 9.8% 33.2 -0.1% 34.3 12.0% 864 62.3% 2,343 9.0% 500 50.1% 2,200 0.3% 32.5 7.3% 600 20.0% 2,300 4.5% 32.5 -3.0% 34.5 3.1% 375 7.1% 31.4 104% 24,522 0.2% 26,357 7.5% 24,500 0.1% 25,700 4.9% 24,500 100% 500 100% 1,857 -58.4% 3,054 64.4% 1,500 -66.4% 2,300 53.3% 1,665 7.2% 34.9 3.4% 34.4 3.7% 1,600 25.0% 1,600 0.0% 33.5 9.1% 33.5 0.7% 356 -36.7% 979 -9.8% 365 2.5% 1,033 5.6% 1,000 350 -37.8% -8% 1,100 10.0% 2,200 100% 2,625 175% 1,600 100% 100% 100% 33.5 33.5 19,889 1.0% 20,402 2.6% 20,000 1.6% 20,500 2.5% 20,000 100% 350 100% 1,000 100% 100% EFTA01476349 11,968 0.8% 12,615 5.4% 12,100 1.9% 12,500 3.3% 12,100 100% EFTA01476350 US Equity Insights 20 November 2015 Page 8 Deutsche Bank Securities Inc. Figure 12: S&P DPS Model by sector 2005 S&P 500 DPS (historical index) S&P 500 DPS (current constituents) Sector ($ billions) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities S&P 500 S&P 500 ex. Financials Financials and Tech S&P 500 ex. Financials and Tech S&P 500 Banks Source: Deutsche Bank, IBES DB US Equity Strategy Dividends 2006 2007 2008 2009 2010 2011 2012 2013 Payout Ratio (%) 2014 2007 2008 2009 2010 2011 2012 2013 2014 2015 $22.21 $24.89 $27.73 $28.38 $22.41 $22.73 $26.43 $31.24 $34.99 $39.44 33% 43% 37% 27% 27% 30% 32% 33% $23.24 $26.02 $29.40 $28.31 $22.48 $23.86 $27.13 $31.44 $35.78 $38.31 31% 39% 35% 27% 27% 30% 32% 33% $41 9.9 21.6 15.9 48.0 19.7 22.7 10.3 6.5 10.1 11.6 EFTA01476351 12.2 24.5 18.5 54.2 22.0 25.4 12.2 7.8 11.3 12.5 66.5 35.3 13.4 33.1 20.6 61.2 24.1 28.0 14.9 7.8 15.9 13.0 76.1 38.8 13.9 30.8 22.3 54.5 26.0 29.5 16.6 8.1 16.9 13.5 71.1 32.9 12.8 29.9 22.6 20.4 24.1 24.0 17.6 6.1 17.7 14.2 38.0 16.1 32.5 24.4 20.7 EFTA01476352