ARGUS MARKET DIGEST

Independent Equity Research Since 1934

2017 - DJIA: 24,719.22

TUESDAY, MARCH 13, 2018
1934 - DJIA: 104.04 MARCH 12, DJIA 25,178.61
DOWN 157.13

Good Morning. This is the Market Digest for Tuesday, March 13, 2018, with analysis of the financial markets and comments on
Cerner Corp., Noble Energy Inc., Autodesk Inc., Monster Beverage Corp., ServiceNow Inc. and Duke Energy Corp.

IN THIS ISSUE:
* Change in Rating: Cerner Corp.: Downgrading to HOLD as margins contract (Jasper Hellweg)
* Change in Rating: Noble Energy Inc.: Upgrading to BUY with $39 target (Bill Selesky)
* Growth Stock: Autodesk Inc.: Tough FY18 but improving guidance (Joseph Bonner)
* Growth Stock: Monster Beverage Corp.: Prospects remain favorable; maintaining BUY (John Staszak)
* Growth Stock: ServiceNow Inc.: Raising target price to $201 (Joseph Bonner)
* UtilityScope: Duke Energy Corp.: Disappointing EPS for 2017; maintaining HOLD (Gary Hovis)

MARKET REVIEW:
Insider sentiment remains bearish, which is the “historical norm” as corporate executives, directors and beneficial owners
typically sell more often then they buy on the open market. The degree of bearishness (or the occasional foray into outright bullish
sentiment) is what makes insider activity become more or less meaningful. Included in that analysis, obvious trends also help
determine if insiders are an optimistic, pessimistic or neutral crowd.
Pulling back to investors in general, one could reasonably argue that their current norm (seeing daily swings that are
measured in hundreds of DJIA points to the upside or the downside, depending on the joy or sorrow du jour) suggests there is
significant uncertainty. Unquestionably, there is no “obvious trend” for stocks these days — be that for a given week, month, or
even a single trading session.
So does current insider sentiment match the waffling view of the broader market? Based on data this week, we’d have
to say it does. Here are some specifics.
On the upside this week are Vickers’ benchmark NYSE/ASE sell/buy readings. These barometers examine purchases and
sales by insiders at companies listed on the NYSE and the NYSE Amex. The one-week sell/buy reading is currently 3.54. That’s
a bearish number, but an improvement over last week (by 90 basis points). The NYSE/ASE eight-week moving average also moved
in a positive manner this week, having improved by 15 basis points to land at 4.26.
Also positive this week is the eight-week Total Sell/Buy Ratio. This includes the NYSE/ASE transactions as well, but
adds in insider purchases and sales on the tech-heavy Nasdaq. The eight-week reading is currently 3.90, a seven basis-point gain
from 3.97 last week. That said, the one-week Total reading did not fare quite so well – which brings us to sentiment indicators from
Vickers that are down this week.
As discussed just above, the Total One-Week Sell/Buy Ratio has parted ways with its eight-week brethren and has moved
in a negative direction. It is currently at 3.74, an 11 basis-point deterioration since last week.
Also trending poorly this week is the overall Vickers Insider Index, which is currently at -15.13, down from -14.80 last
week. The reading has moved in a negative direction for four consecutive weeks and entered bearish territory on February 26.
With three positive and two negative sentiment moves, insiders seem as uncertain as anyone does in what has turned out
to be a turbulent early 2018. (David Coleman)

A R G U S R E S E A R C H C O M P A N Y • 6 1 B R O A D W- A
1 Y- • N E W Y O R K , N. Y. 1 0 0 0 6 • ( 2 1 2 ) 4 2 5 - 7 5 0 0
LONDON SALES & MARKETING OFFICE TEL 011-44-207-256-8383 / FAX 011-44-207-256-8363
 MARKET DIGEST
CERNER CORP. (NGS: CERN, $64.64) ................................................................................ HOLD
CERN: Downgrading to HOLD as margins contract
* Although Cerner posted record 4Q bookings, margins are falling. In addition, the company has not yet finalized
a major contract with the Department of Veterans Affairs that it hoped to sign in the fourth quarter.
* Management expects a lower effective tax rate to generate savings of $0.20-$0.24 per share in 2018, though only
$0.05 will flow to the bottom line.
* The company will use the remaining savings for R&D and other new projects, and expects to see returns on these
investments in 2019 as cash outflows moderate.
* We are trimming our 2018 EPS estimate to $2.60 from $2.69 based on the delay in signing the VA contract and
our expectations for temporarily weaker margins. We are also initiating a 2019 estimate of $2.94, implying growth
of 13.1% from our 2018 forecast.
ANALYSIS
INVESTMENT THESIS
We are lowering our 12-month rating on Cerner Corp. (NGS: CERN) to HOLD from BUY, but are maintaining our five-
year BUY rating. Although Cerner posted record 4Q bookings, margins are falling. In addition, the company has not yet finalized
a major contract with the Department of Veterans Affairs that it hoped to sign in the fourth quarter. Management also sees 2018
as an “investment year” as it positions the company for growth in 2019. Given the challenging outlook, we believe that a near-
term HOLD rating is now appropriate.
RECENT DEVELOPMENTS
Cerner stock has underperformed over the past three months, falling 7.8% while the S&P 500 has increased 4.6%. It has
also underperformed over the past year, with a gain of 16.9% versus an increase of 17.3% for the index, and over the past five years,
with a gain of 39.2% versus 79.4% for the index. The beta on CERN is 0.94.
Cerner reported 4Q17 results on February 6. Adjusted EPS fell to $0.58 from $0.61 in 4Q16. EPS missed management’s
guidance of $0.60-$0.62 and the consensus forecast of $0.61. GAAP net income rose to $336.7 million or $1.00 per share from
$149.7 million or $0.44 per share a year earlier. Total revenue rose to $1.314 billion from $1.258 billion, driven by a 6% gain in
services revenue, to $661 million; a 3% gain in system sales revenue, to $363 million; and a 3% gain in support and maintenance
revenue, to $262 million. On a geographic basis, domestic revenue rose 4% to $1.15 billion while non-U.S. revenue rose 10% to
$160 million.
The 4Q gross margin was 82.6%, down 30 basis points from the prior year and 150 basis points sequentially. Adjusted
operating expenses rose 9% to $815 million, reflecting higher personnel costs. The adjusted operating margin fell 280 basis points
to 20.5% due to lower technology resale margins, a more challenging revenue mix, and higher noncash expenses. However, the
company reported record bookings of $2.329 billion in 4Q17, up from $1.437 billion in 4Q16 and above management’s guidance
of $1.75-$2.00 billion. The quarter-end backlog was $17.55 billion, up 10% from the prior year.
For all of 2017, Cerner posted adjusted earnings of $2.38 per share, up from $2.30 in 2016. GAAP net income rose to
$867.0 million or $2.57 per diluted share from $636.5 million or $1.85 per share in 2016. Revenue increased to $5.14 billion from
$4.80 billion. The full-year gross margin was 83.4%, down from 83.8% a year earlier, while the adjusted operating margin was
22.4%, down from 23.6%. Bookings rose 16% to a record $6.325 billion.
During the 4Q earnings call, management provided first-quarter and full-year guidance for 2018. It expects 1Q revenue
of $1.315-$1.365 billion, implying 6.3% growth from 1Q17 at the midpoint of the range, and adjusted diluted EPS of $0.57-$0.59,
compared to $0.59 in 1Q17. It also looks for bookings of $1.25-$1.45 billion. For the full year, it projects revenue of $5.45-$5.65
billion, down from its previous estimate of $5.50-$5.70 billion and implying growth of 7.9% at the midpoint of the range. It projects
adjusted EPS of $2.57-$2.73, up from a prior $2.52-$2.68. The new guidance implies 10.9% growth at the midpoint of the range.
In early June 2017, the Department of Veterans Affairs awarded Cerner a contract to build its next-generation electronic
health records system. Cerner had previously assumed that the contract would be finalized in the fourth quarter of 2017, though
it has not yet been signed. The VA explained that it had delayed its signing in order to validate interoperability capabilities, and
Cerner believes it will sign the contract soon. The unsigned contract contributed to the 4Q earnings miss. It is also reflected in
the company’s 1Q guidance, though the impact is offset by a new lower tax rate. Cerner will need to revise its 2018 outlook if
the contract is not signed in the current quarter.

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 MARKET DIGEST
As part of its Department of Defense contract, Cerner is now providing services at four sites, including the Madigan Army
Medical Center. Services will begin to be rolled out at additional sites after an initial assessment period concludes in May.
EARNINGS & GROWTH ANALYSIS
Over the past 10 years, Cerner has generated compound annual growth rate of 13% for revenue and 19% for adjusted
EPS. It is targeting a long-term revenue growth rate of 7%-12% through 2025, representing revenues of $8.7-$12.4 billion by 2025.
It previously projected growth of 7%-11%. It is also targeting average adjusted operating margin expansion of 30-60 basis points
annually beginning in 2019. The company has a number-one or number-two market share in 10 of 11 global regions, and sees
significant opportunities for growth abroad. It also sees potential opportunities with the Coast Guard, the Department of Health
and Human Services, and the Department of State.
Cerner is treating 2018 as an “investment year.” Following a cash windfall from changes in the U.S. tax code, the
company will use most of the savings to grow the business. It expects a lower effective tax rate to generate savings of $0.20-$0.24
per share in 2018; however, only $0.05 will flow to the bottom line. The company will use the remaining savings for R&D and
other new projects. It expects to see returns on these investments in 2019 as cash outflows begin to moderate.
We are trimming our 2018 EPS estimate to $2.60 from $2.69 based on the delay in signing the VA contract and our
expectations for temporarily weaker margins. We are also initiating a 2019 estimate of $2.94, implying growth of 13.1% from
our 2018 estimate.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating for Cerner is High, the highest point on our five-point scale. The company had $371 million
in cash and cash equivalents at the end of 4Q17, up from $171 million at the end of 4Q16. The debt/equity ratio was 11.0%,
compared to 14.4% a year earlier. Full-year operating cash flow was $1.308 billion, compared to $1.156 billion in the year-earlier
period, while free cash flow was $671.4 million, up from $402.5 million.
Cerner does not pay a dividend.
MANAGEMENT & RISKS
Former Cerner Chairman and CEO Neal Patterson passed away in July 2017 after the resurgence of a previously disclosed
cancer. Mr. Patterson co-founded the company with two colleagues in 1979 and was one of the longest-serving CEO’s in the
country. Vice Chairman Cliff Illig, one of the other co-founders, was then named chairman and interim CEO. Brent Shafer became
the company’s new chairman and CEO on February 1. Mr. Shafer had previously served as CEO of Philips North America. Mr.
Illig has now resumed his previous position as vice chairman.
Cerner operates in a highly competitive industry, and client wins and losses may impact its financial performance. In
addition, healthcare IT is changing rapidly, and new technology may put Cerner at a disadvantage.
Cerner’s customers are highly regulated by the federal government and the states, and the company’s IT systems must
comply with a range of regulations. EMR and IT systems are being held to increasingly strict reporting and compliance standards.
COMPANY DESCRIPTION
Based in Kansas City, Missouri, Cerner provides a range of information software products, professional services, and
medical device integration and remote hosting services for healthcare providers at more than 27,000 facilities worldwide.
INDUSTRY
Our recommended weighting on the Healthcare sector is Over-Weight. The sector accounts for 14.2% of the S&P 500,
and includes companies in the pharmaceuticals, medical devices, healthcare services, and insurance industries. After underperforming
in 2015-2016, the sector bounced back in 2017 with a gain of 20.0%. It is slightly outperforming thus far in 2018, with a loss of
1.3%. While pharma stocks have attracted attention due to the high prices of certain specialty and oncology drugs, stocks of
medical device and insurance companies as a group have outperformed pharma stocks over the past year.
VALUATION
On a technical basis, CERN stock has seen many ups and downs over the past five years. The stock has at times climbed
rapidly over a period of several months, only to have half of its gains or more wiped out in a sudden selloff. In all, between March
2013 and the start of 2017, the stock rose just 2%, despite a gain of 63% in 2015. More recently, in February 2018, the stock’s
50-day moving average fell below its 200-day average.
CERN trades at 24.9-times our 2018 EPS estimate, below the five-year average of 29.9 but slightly above the average
of 24.3 for a healthcare services peer group that includes ATHN, MDRX, and MDSO. It is also trading at a price/sales ratio of
4.2, above the peer average of 4.0. Despite the company’s market leading position, strong 4Q bookings, and prospects for long-
term growth, we believe that caution is warranted in the near term and are lowering our 12-month rating to HOLD. Catalysts for
an upgrade could include an improvement in the technical picture, outperformance relative to management’s guidance, or a return
to margin growth.
On March 12, HOLD-rated CERN closed at $64.64, down $0.27. (Jasper Hellweg, 3/12/18)

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 MARKET DIGEST
NOBLE ENERGY INC. (NYSE: NBL, $30.88) ......................................................................... BUY
NBL: Upgrading to BUY with $39 target
* Noble has a diversified asset base, with onshore and offshore operations both overseas and in the U.S., and has
created value for shareholders by developing its core acreage position in the DJ basin.
* Looking ahead, we expect Noble to benefit from improving industry fundamentals, including reduced production
from OPEC members. In February, the company also announced a new $750 million stock buyback program.
* We believe that NBL shares have reached an inflection point amid improving industry fundamentals, and that they
continue to benefit from management’s efforts to reduce debt and “right-size” the portfolio.
* Our new target price of $39, combined with the dividend, implies a potential total return of 26% from current levels.
ANALYSIS
INVESTMENT THESIS
We are raising our rating on Noble Energy Corp. (NYSE: NBL) to BUY from HOLD. Noble has a diversified asset base,
with onshore and offshore operations both overseas and in the U.S., and has created value for shareholders by developing its core
acreage position in the DJ basin. It also has a successful exploration program, particularly in the Eastern Mediterranean, and should
benefit from the recent acquisition of Clayton Williams Energy. In addition, we expect Noble to benefit from improving industry
fundamentals, including reduced production from OPEC members. The company has also initiated a new stock buyback program.
Our target price of $39, combined with the dividend, implies a potential total return of 26% from current levels.
RECENT DEVELOPMENTS
NBL shares have increased 6.2% year-to-date, while the S&P 500 Energy index has dropped 5.9%. However, the shares
have underperformed over the past year, with a loss of 9.2%, compared to a decrease of 1.6% for the Energy index.
On February 20, Noble Energy reported an adjusted 4Q17 net profit of $156 million or $0.32 per share, up from $113
million or $0.26 per share in 4Q16. We had expected a loss of $0.04 per share. The consensus estimate was a profit of $0.04 per
share.
The increased earnings reflected higher realized prices for crude oil, condensate, natural gas and natural gas liquids
(NGLs), as well as lower exploration expenses.
Total 4Q17 revenue rose 19% from the prior year to $1.201 billion, again driven largely by higher realized commodity
prices. Total company 4Q volume fell 7% to 380,000 barrels of oil equivalent per day (boe/d). The decrease reflected disruptions
at third-party facilities, natural field declines, and planned maintenance work in October. Liquids accounted for 56% of 4Q
production, while natural gas accounted for 44%.
In April 2017, Noble Energy completed its acquisition of Clayton Williams Energy for $2.7 billion in cash and stock.
The deal will double the company’s Delaware Basin net resources to 2 billion barrels of oil equivalent,
In September 2016, Noble completed the spinoff of its wholly owned Noble Midstream Partners LP (NBLX) at $22.50
per share. Noble Midstream owns and develops midstream assets for Noble Energy, which retains a 55% stake in NBLX.
For all of 2017, the company reported an adjusted net profit of $147 million or $0.88 per share, compared to an adjusted
net loss of $248 million or $0.58 per share in 2016.
EARNINGS & GROWTH ANALYSIS
Along with its 4Q17 earnings report, Noble management projected annual capital expenditures of $2.7-$2.9 billion
through 2020, with nearly 70% allocated to the U.S. onshore program and more than 25% to the Eastern Mediterranean. It also
expects 2018 average production volume of 343,000-353,000 boe/d.
We are raising our 2018 EPS estimate to $0.61 from $0.03 based on our expectations for higher U.S. onshore production,
and our higher crude oil price forecast of $56 per barrel, up from $50 per barrel in 2017. The 2018 consensus EPS estimate is $0.74.
We are also setting a 2019 EPS estimate of $1.01, which assumes further commodity price increases next year. The 2019
consensus EPS estimate is $1.14.
FINANCIAL STRENGTH & DIVIDEND
We rate Noble’s financial strength as Medium, the midpoint on our five-point scale. The company’s debt is rated BBB/
negative by Standard & Poor’s and Baa3/stable by Moody’s.
At the end of 4Q17, NBL’s total debt/capitalization ratio was 39.3%, down from 43.0% a year earlier. The total debt/
cap ratio is in line with the peer average and has averaged 39.0% over the past five years.

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 MARKET DIGEST
Total debt outstanding at the end of 4Q17 was $6.887 billion, down from $7.247 billion at the end of 4Q16. The company
has an undrawn $4 billion credit facility.
Noble had cash and cash equivalents of $675 million at the end of 4Q17, compared to $1.180 billion at the end of 4Q16.
Cash from operating activities was $533 million in 4Q17, compared to $297 million in 4Q16. The company has about $4.5 billion
in total available liquidity. Its current interest in Noble Midstream is approximately $2.5 billion.
Noble’s annualized dividend of $0.40 yields about 1.3%. The company cut its quarterly payout by 44% to $0.10 in
January 2015 in order to conserve capital. Our dividend estimates are $0.40 for both 2018 and 2019.
On February 20, 2018, Noble Energy announced a $750 million stock buyback program.
MANAGEMENT & RISKS
CEO David Stover joined Noble Energy in 2002 and became president and COO in 2009. He previously held senior
management positions at BP America, Vastar Resources, and Atlantic Richfield.
As with any E&P company, the greatest risk for Noble is commodity price risk, and as has been seen over the last year,
commodity prices can move markedly higher or lower based on factors that go beyond market fundamentals. We believe that the
company’s strong balance sheet and new project opportunities will help to insulate it from the risks associated with such price
swings.
COMPANY DESCRIPTION
Noble Energy is a leading independent energy company engaged in worldwide oil and gas exploration and production.
The company operates primarily in the Rocky Mountains, the Marcellus shale, the Eagle Ford shale, the Permian basin and the
deepwater Gulf of Mexico, with key international operations in Israel, the U.K., and West Africa. The company was founded in
1932 and is based in Houston.
INDUSTRY
We have raised our rating on the Energy sector to Over-Weight from Market-Weight. Investors remain skeptical about
the sector despite prospects for significant earnings acceleration in 2018-2019. We also expect Energy stocks to benefit as OPEC
continues to limit production in order to boost oil prices. The sector accounts for 6.1% of the S&P 500. Over the past five years,
the weighting has ranged from 5% to 12%. We think that investors should consider allocating 6%-8% of their diversified portfolios
to the Energy group. The sector includes the major integrated firms, as well as exploration & production, refining, and oilfield
& drilling services companies. The sector is significantly underperforming in 2018, with a loss of 6.7%.
By our calculations, the projected P/E ratio on 2018 earnings is 23.8, above the market multiple of 18.7.
We forecast that West Texas Intermediate crude oil (WTI) will average $56 per barrel in 2018, up from $50 in 2017 and
$43 in 2016 but well below the average price of $93 in 2014. At the same time, we expect oil prices to remain volatile. We look
for a full-year price range of $48-$64 per barrel.
Our 2018 forecast for the average wellhead price of Henry Hub natural gas is $2.90 per MMbtu with a range of $2.75-
$3.05, compared to $3.00 per MMbtu in 2017.
VALUATION
NBL shares have traded between $22.99 and $35.74 over the past 12 months and are currently in the upper half of this
range. The shares are trading at 50.7-times our 2018 EPS forecast and at 30.6-times our 2019 forecast, compared to a five-year
annual average range of 33-54, reflecting our still relatively low earnings estimates for this year and next. The shares appear more
favorably valued based on other metrics. They are trading at a trailing price/book multiple of 1.5, below the low end of the historical
range of 1.6-2.5; at a price/sales multiple of 3.6, near the low end of the historical range of 3.4-5.2; and at a price/EBITDA multiple
of 7.4, compared to a range of 8.1-17.5. We believe that NBL shares have reached an inflection point amid improving industry
fundamentals, and that they continue to benefit from management’s efforts to reduce debt and “right-size” the portfolio. Our new
target price of $39, combined with the dividend, implies a potential total return of 26% from current levels.
On March 12, BUY-rated NBL closed at $30.88 down $0.20. (Bill Selesky, 3/12/18)

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 MARKET DIGEST
AUTODESK INC. (NGS: ADSK, $138.37)............................................................................. HOLD
ADSK: Tough FY18 but improving guidance
* Autodesk posted another dismal year in FY18 as it continues its transition to a software-as-a-service subscription
based model.
* However, management is looking for positive non-GAAP EPS in FY19 with an accelerating ramp in FY20.
* We are lowering our FY19 EPS estimate to $0.89 per share from $1.09 and establishing a FY20 EPS forecast at
$3.21.
ANALYSIS
INVESTMENT THESIS
Our rating on Autodesk Inc. (NGS: ADSK) remains HOLD. Management has accelerated the transition to its new
subscription-based business model after discontinuing the sale of perpetual software licenses in fiscal 2Q17 and new maintenance
licenses at the end of 4Q17. The accelerated led to another year of losses in FY18. However, management is looking for positive
non-GAAP EPS in FY19 with an accelerating ramp in FY20. We should know more when the company holds an investor day
in the next few weeks.
A key risk for Autodesk is its exposure to the construction and manufacturing sectors. While the Trump administration
initially made headlines with its support for increased infrastructure spending, it is unclear whether the policies (other than lower
corporate taxes) of the new administration will be positive or negative for Autodesk. The company is also sensitive to
macroeconomic volatility, particularly in Europe and emerging markets.
RECENT DEVELOPMENTS
Autodesk reported results for fiscal 4Q and FY18 (ended January 31) on March 6, beating the consensus non-GAAP loss
forecast by $0.02 per share.
Revenue rose 16% year-over-year to $554 million in 4Q18. The non-GAAP operating loss narrowed to $17.5 million
from $81.5 million a year earlier.
The non-GAAP loss of $0.09 per share narrowed from a loss of $0.28 per share in 4Q17. On a GAAP basis, Autodesk’s
4Q net loss was $0.79 per share compared to a loss of $0.78 per share in 4Q17. Non-GAAP results for all periods exclude stock-
option compensation, the amortization of purchased intangibles and developed technology, restructuring charges, and other
charges. The company is in the midst of a business model transition to ratable SaaS-oriented licenses from its traditional perpetual-
license model. During this transition, financial metrics are expected to decline as more revenue is deferred than under the
traditional perpetual license model.
For all of FY18, revenue rose 1% to $2.06 billion. Non-GAAP loss per share came to $0.48 in FY18, compared to a loss
of $0.50 in FY17.
In November 2017, the company announced a restructuring in which it will terminate 1,150 employees (13% of its
workforce) and close certain leased facilities. In connection with the restructuring, Autodesk expects to book $135-$149 million
in cash charges. The company booked $94 million of these charges in 4Q18 and expects to take the remainder in FY19. CEO
Andrew Anagnost explained the restructuring as a realignment that will help the company to focus on its strategic priorities.
Autodesk will invest in an expanded digital infrastructure, step up R&D spending on products for the construction market, and
maintain current spending levels on other core products. The company expects to divest businesses that do not align with these
priorities. It plans to keep overall “spend” flat in FY19, but to increase it at a single-digit rate in subsequent years. (The company
defines the non-GAAP term “spend” as cost of revenue plus operating expenses.)
In June 2017, Autodesk appointed 20-year company veteran Andrew Anagnost as CEO. Mr. Anagnost had been serving
as Co-CEO since Carl Bass stepped down in February 2017. He had served as chief marketing officer prior to his appointment
as co-CEO. Amar Hanspal, who had also served as co-CEO and as chief product officer, resigned from the company.
EARNINGS & GROWTH ANALYSIS
We are lowering our FY19 EPS estimate to $0.89 per share from $1.09 and establishing a FY20 EPS forecast of $3.21.
Management expects an accounting change to reduce FY19 EPS by $0.15. However, we expect both margin expansion and lower
tax rates to boost FY20 results. Our FY19 estimate is within management’s guidance range of $0.77-$0.95. Our long-term EPS
growth rate forecast is 10%. Autodesk has stopped selling perpetual software licenses and is transitioning to a fully subscription-
based business model.

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 MARKET DIGEST
CEO Andrew Anagnost has set forth three strategic priorities for Autodesk. The first is completing the transition to
subscription only. The second is “reimagining” manufacturing, construction, and production. Autodesk already has a strong
position in design for manufacturing but needs to move fast to capture the market as it develops and becomes more tightly
integrated with digital production. Third is the company’s focus on opportunities in the construction market. Over 30% of North
American subscriptions are currently generated through the company’s e-store.
In addition to moving to a ratable software-as-a-service or cloud-based model, the company has transitioned from
standalone offerings like its flagship AutoCAD products to product suites and most recently to “collections” of interrelated
software and cloud service offerings. Autodesk had been taking a slow, measured approach to this transition, in contrast with the
more aggressive approach of some other software makers, and critics have attacked it for being too slow. However, in FY17,
Autodesk increased the pace of its transition. It ended perpetual license sales on all products in 2Q17 and maintenance sales at
the end of the fiscal year. While FY17 may have been the trough year for its transition, FY18 was not much better though
management has provided healthy guidance for FY19 and has provided some general indications of a big bump in FY20. We can
expect more guidance on FY20 at the company’s investor day which should be schedule in the next few weeks.
Segment results are in line with the effects of the business model transition. Revenue in Architecture, Engineering and
Construction (AEC), the company’s largest segment, fell 2% to $867 million in FY18. AEC’s SaaS offering, BIM 360, has been
gaining traction with customers. In the Manufacturing group, sales were fell 6% to $589 million, and in the small Media &
Entertainment group, sales rose 10% to $153 million. The AutoCAD group saw sales rise 23% to $403 million as the company
has tried to rationalize pricing and incentivize customers to convert old perpetual licenses to the new SaaS model.
One obvious implication of the new business model is that during the transition period, a greater proportion of revenue
will flow into deferred revenue, making current revenue appear smaller relative to earlier periods. Autodesk is directing investors
to nontraditional metrics like Annualized Revenue per Subscription (ARPS) and Deferred Revenue. ARPS increased 5% in 4Q18
to $553. Deferred revenue rose 25% in 4Q18, to $2.28 billion. The company added 371,000 total subscription plan subscribers
(formerly called “new model” subscribers) in 4Q18. However, total subscriptions rose by a lesser 127,000 due to a decline in
maintenance subscriptions. Subscription plans are cannibalizing maintenance subscribers as they convert. Management believes
that the SaaS model will boost revenue and profit growth over time, while also delivering greater value to customers through more
flexible usage parameters and faster access to product upgrades. Management believes that new customers comprise one-third
of its new product subscriptions. We expect the company to continue to use promotions to incentivize perpetual license customers
to switch to subscriptions.
The company’s move to a SaaS business model should allow more customers to access Autodesk software and tools at
lower initial price points, while also increasing long-term value by attracting more customers, boosting usage and making
customers more loyal. Revenue should also become more consistent and predictable as the company will be able to avoid the boom-
and-bust product upgrade cycle. However, the accelerating transition is likely to remain painful in the near term, which could easily
spook investors.
FINANCIAL STRENGTH
Our financial strength rating for Autodesk is High. The credit agencies rate Autodesk in the high B’s, investment grade,
with stable outlooks.
Autodesk bought back 6.9 million shares for $690 million in FY18. The company repurchased 9.7 million shares for $632
million in FY17 and 8.5 million shares for $458 million in FY16. The share count has fallen about 1% over the last year. We do
not expect Autodesk to pay a dividend.
MANAGEMENT & RISKS
As Autodesk transitions to a SaaS business model, it may not be able to derive the same value from its products as it had
under the old perpetual license model. Customers may also be cautious about committing to the new business model. Investors
should also expect volatility in ADSK shares, in line with market conditions in the Technology sector. As the company has grown
internationally, it has also become sensitive to macroeconomic volatility overseas, particularly in Europe, Asia, and emerging
markets, as well as to fluctuations in exchange rates. A substantial portion of its revenue is derived from its flagship AutoCAD
and AutoCAD-related products. The company therefore has concentration risk in this product if innovations and updates are not
accepted by users.
The company also faces competition from rival design software providers, including Dassault Systems, Intergraph Corp.,
Parametric Technology, Siemens AG, and Bentley Systems.

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 MARKET DIGEST
COMPANY DESCRIPTION
Autodesk provides design software used in the building, manufacturing, infrastructure and digital media industries. Key
products include AutoCAD and AutoCAD LT 2D design software and Autodesk Inventor 3D design software. The media and
entertainment division sells software tools used in 3D modeling, animation, and visual effects as well as media editing and
finishing. Autodesk’s products are sold through ratable license agreements, directly through its online store, and through
distributors, and resellers.
VALUATION
ADSK shares have risen 63% over the last year, compared to a 17.5% increase in the S&P 500 and a 38% increase in
the S&P 500 Information Technology Index. The shares are trading at the high end of their 52-week range of $81-$138. The trailing
enterprise value/sales multiple of 15 is well above the peer group average of 8. ADSK’s forward EV/revenue multiple of 12 is
currently 48% above the peer average, well above its average premium of 33% over the past two years. Our rating remains HOLD.
On March 12, HOLD-rated ADSK closed at $138.37, down 0.99. (Joseph Bonner, CFA, 3/12/18)

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 MARKET DIGEST
MONSTER BEVERAGE CORP. (NGS: MNST, $58.43)............................................................ BUY
MNST: Prospects remain favorable; maintaining BUY
* On February 28, Monster reported adjusted 4Q17 earnings of $0.35 per share, unchanged from a year earlier and
in line with consensus.
* Our EPS estimate is now $1.85 for 2018, up from $1.80 previously. For 2019, we are setting an estimate of $2.10
per share. Both our estimates are above consensus. Our long-term EPS growth rate estimate remains 15%.
* The company has an impressive history of growth, with five-year compound annual sales and EPS growth rates
in the 13%-15% range.
* MNST’s valuations are on the rich side, but we believe that the stock deserves a premium given the company’s
growth history and outlook.
ANALYSIS
INVESTMENT THESIS
We are maintaining our BUY rating on Monster Beverage Corp. (NGS: MNST) with a target price of $68. Monster
Beverage is a marketer and distributor of energy drinks.
Despite disappointing fourth-quarter revenue, we expect MNST to continue its growth. We think most of the revenue
deceleration in the fourth quarter was attributable to temporary difficulties like inventory depletions and new product launches.
Revenue was up nearly 28% in January and we expect revenue to ramp up in the first quarter of 2018 driven by strong consumption
growth in international markets.
The company has an impressive history of growth, with five-year compound annual sales and EPS growth rates in the
13%-15% range. Looking ahead, we expect Monster to sustain its growth in the U.S. and to increase international sales and
margins. The company should also benefit from a transformative transaction with Coca-Cola Corp. (KO: HOLD). Monster’s
balance sheet is clean. MNST’s valuations are on the rich side, but we believe that the stock deserves a premium given the
company’s growth history and outlook.
Monster is focusing on one of the most rapidly growing beverage segments, energy drinks. In addition, management is
working to improve market share and margins in rapidly growing emerging markets. As such, our long-term rating is BUY.
RECENT DEVELOPMENTS
On February 28, Monster reported adjusted 4Q17 earnings of $0.35 per share, unchanged from a year earlier and $0.02
below consensus. Disappointing EPS reflected inventory reductions by distributors in Chile, Europe and Japan and costs related
to product launches in China and India. Operating income rose more than $15 million to $267 million. As a percentage of net sales,
distribution costs rose 40 basis points to 3.6%, above the consensus of 3.1%. Net sales rose 7.5% to $810 million, $32 million below
consensus due to inventory reductions by international distributors. On a more positive note, sales in the Europe, Middle East,
Africa region were up 10%, while revenue in Latin America increased more than 25%.
The fourth-quarter gross margin fell 400 basis points, to 62.1%, due primarily to increased sales in lower-margin
international markets. The decline also reflected higher COGS and a less favorable product mix. The consensus estimate had called
for a gross margin of 64.7%. The adjusted operating margin decreased to 33% from 33.4%, reflecting the lower gross margin, offset
in part by lower operating expenses as a percentage of revenue. Diluted shares outstanding fell from 580.5 million to 575.0 million.
For all of 2017, revenues rose 10% to approximately $3.4 billion and adjusted earnings rose from $1.28 to $1.33.
As discussed in a previous note, the company split its stock 3-for-1 on November 9, 2016 and began trading at the split-
adjusted price on November 10. Our earnings estimates and target price have been adjusted to reflect the split.
EARNINGS & GROWTH ANALYSIS
The company has an impressive history of growth, with five-year compound annual sales and EPS growth rates in the
13%-15% range.
Looking ahead, we expect Monster to sustain its growth in the U.S. and boost international sales and margins. To expand
distribution, the company is introducing new drinks in a range of categories, including low-calorie “Ultra,” fruit-juice-based
“Punch” and protein-based “Muscle.” We also expect international margins to improve as MNST begins local production in
Brazil, India, Japan, and South Africa. This increase in local production should lower production and transportation costs and
reduce foreign exchange risk. Although international margins will likely remain below U.S. margins in the near term, management
expects international margins to increase over time.

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 MARKET DIGEST
Turning to our estimates, we now expect the company to post nearly 13% revenue growth, to $3.77 billion in 2018. The
increase reflects accelerated growth attributable to Monster’s opportunity to expand international and U.S. distribution through
its partnership with Coca-Cola. Reflecting management’s ability to improve operating margins in emerging markets, we expect
the operating margin to increase modestly this year. We are raising our 2018 EPS estimates from $1.80 to $1.85 and setting an
estimate of $2.10 per share for 2019. Both our estimates are above consensus. Our long-term EPS growth rate estimate remains
15%.
FINANCIAL STRENGTH
We rate the financial strength of Monster as Medium-High, the second-highest mark on our five-point scale. The
company scores above-average on key tests such as debt levels, fixed-cost coverage, and profitability.
In its 4Q17 earnings release, management reauthorized a $500 million stock buyback program. In view of the company’s
substantial cash balance, we do not expect it to borrow to fund share repurchases.
At the end of 4Q17, cash and cash equivalents totaled $527 million, up from $378 million at the end of 2016. The company
had no long-term debt and reported no interest expense in the fourth quarter. The adjusted operating margin in 4Q17 was 33%,
down 40 basis points from 4Q16.
Monster does not pay a dividend.
MANAGEMENT & RISKS
The CEO of Monster is Rodney C. Sacks, 64. He has been with the company since 1990. The CFO is Hilton H. Schlosberg,
61.
Investors in Monster Beverage face numerous risks. The beverage industry is intensely competitive and includes larger,
well-funded companies such as PepsiCo, Dr. Pepper Snapple Group Inc., and Red Bull. The company also faces risks from new
health regulations, including efforts by state and local governments to limit beverage sizes and tax sugary drinks.
COMPANY DESCRIPTION
Monster Beverage Corp. is a holding company and conducts no operating business except through its consolidated
subsidiaries. The company’s subsidiaries market and distribute energy drinks.
VALUATION
We think that MNST shares remain undervalued at current prices near $58. As part of our valuation analysis, we typically
compare companies with peers. However, this exercise is less useful for Monster — a rare growth company in the mature
Consumer Staples sector. Instead, we focus more on historical multiples. Over the past three years, the shares have traded at
forward multiples between 12 and 48. At current prices, the shares are trading at a multiple of 31.5-times our revised 2018 earnings
estimate. We believe this multiple inadequately reflects the strength of the company’s brand, popular product category and ability
to improve margins in emerging markets. Our target price at $68 implies a multiple of 36.8-times our 2018 earnings estimate, in
our upper portion of the three year range At current prices, our target, if achieved, offers investors the prospect of an approximately
17% return.
On March 12, BUY-rated MNST closed at $58.43, up $0.37. (John Staszak, CFA, 3/12/18)

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 MARKET DIGEST
SERVICENOW INC. (NYSE: NOW, $174.43) .......................................................................... BUY
NOW: Raising target price to $201
* ServiceNow shares have risen strongly thus far in 2018 and recently surged past our former target price of $170.
* ServiceNow provides scalable IT services management to enterprises using a subscription-based, software-as-
a-service model. The company’s value proposition is to make IT services more manageable and efficient, thus
lowering the total cost of ownership for clients.
* ServiceNow reported another strong quarter in 4Q17, with 46% growth in non-GAAP EPS on 42% revenue growth.
* Even after a strong run, NOW stock appears favorably valued by historical standards. We see a solid revenue and
profit outlook over the next few years underpinning valuation.
ANALYSIS
INVESTMENT THESIS
We are reaffirming our BUY rating on ServiceNow Inc. (NYSE: NOW) and raising our target price to $201, as the stock
recently surged past our former target of $170. ServiceNow provides scalable IT services management to enterprises using a
subscription-based, software-as-a-service model. The company provides value to customers by making IT services, which touch
every area of a business from HR to field sales, more manageable and efficient — thus lowering the total cost of ownership.
ServiceNow’s offerings benefit from the secular trend away from the enterprise data center and toward the more easily scalable
and cost-effective cloud software-as-a service model.
ServiceNow remains unprofitable on a GAAP basis, but has posted non-GAAP earnings over the last 12 quarters. Stock-
based compensation is also falling as a percentage of revenue. Even after a strong run, NOW stock appears favorably valued by
historical standards. We see a solid revenue and profit outlook over the next few years underpinning valuation.
RECENT DEVELOPMENTS
On February 28, ServiceNow entered into a strategic alliance with Tenable Inc. The alliance links ServiceNow’s Security
Operations solution with Tenable’s Cyber Exposure Platform. The aim of the alliance is to “simplify and accelerate” how business
and government IT operations “understand, manage and reduce cyber risk.” Together, the companies’ solutions automatically
assess IT systems for vulnerabilities, prioritize issues for remediation, and confirm that the issues have been resolved. While a
strategic alliance is often just that, we will have to see whether Tenable, a small private IT security firm, ultimately becomes
ServiceNow’s next acquisition.
At a recent investor conference, CEO John Donohoe outlined key priorities, including two ongoing goals and three newer
interests. The first priority — no surprise — is to continue to develop the company’s core products and to extend its platform,
including mobile use. The second priority is to drive innovation in software and to strengthen the company’s “go-to-market”
capabilities through salesforce and geographic expansion. The three new priorities are, first, to invest in “customer success,” which
really means expanding ServiceNow’s customer wallet share; investing in new talent; and raising the profile of the ServiceNow
brand.
Our 2018 non-GAAP EPS estimate is $2.05 and our 2019 forecast is $3.01. Our 2018 estimate is above the consensus
of $1.97. ServiceNow typically outperforms consensus and its own guidance, and raises guidance through the year.
MANAGEMENT & RISKS
ServiceNow announced the appointment of John Donahoe as president and CEO on February 27, 2017. Mr. Donahoe
had served as CEO of eBay for seven years before it spun off PayPal in July 2015. Mr. Donahoe is the chairman of the board of
PayPal, and served as president and CEO of Bain & Co. earlier in his career. Former ServiceNow CEO Frank Slootman retained
his role as the company’s chairman after Mr. Donahoe took over as CEO on April 3.
ServiceNow is subject to the usual risks of a high-growth tech company. It must effectively manage the transition from
its current high growth to a period of slower growth, while also building its product portfolio and field sales force. The company
will likely continue to invest heavily in R&D and in scaling its marketing efforts, which may not produce the desired or expected
returns. In addition, as a cloud data management service, ServiceNow transmits and stores large amounts of customer data; it thus
runs the risk of a data breach due to its own errors or negligence or those of third parties. It must also ensure the reliability of its
service platform. ServiceNow relies on various third-party partners like systems integrators to help implement its solutions. If
these third parties fail to implement properly or turn to other vendors, NOW’s sales could be materially impacted. ServiceNow
already has a fairly long 6-9 month sales cycle, and economic disruption or concerns over technology spending could further
lengthen this cycle and negatively impact its results.

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 MARKET DIGEST
ServiceNow is consistently unprofitable on a GAAP basis. Market sentiment about GAAP unprofitability tends to move
through cycles, and investors could react negatively to results that are currently acceptable. ServiceNow’s high valuation as a
technology startup could also lead to a sharp selloff in the stock if the company reports inconsistent results or fails to meet investor
expectations.
ServiceNow operates in an industry with considerable patent and intellectual property development, and faces a range
of IP-related risks. In particular, adverse rulings in patent infringement cases could force the company to design patent
workarounds or abandon certain technologies. These additional technical and legal costs could have a substantial negative impact
on the company’s results. Competitors Hewlett-Packard and BMC Software have sued ServiceNow for patent infringement.
ServiceNow settled the HP suit in March 2016 with a payment of $270 million to HP.
ServiceNow was founded in 2004 by Frederic B. Luddy. Mr. Luddy served as president and CEO from 2004 until 2011,
when he assumed the role of chief product officer. Mr. Luddy retired at the end of 2016, but remains a consultant to the company
and continues to serve on the board. Frank Slootman joined the company in May 2011, replacing Mr. Luddy as president and CEO.
Mr. Slootman remains as chairman but ceded the role of CEO to John Donahoe on April 3, 2017. Michael Scarpelli is the CFO.
Mr. Scarpelli joined the company in 2011 and previously served as VP of Finance at EMC and as CFO at Data Domain. Board
member Charles Giancarlo is the lead independent director.
COMPANY DESCRIPTION
ServiceNow provides cloud-based software-as-a-service management applications to automate and track workflows
across the enterprise, including IT, human resources, facilities, and field service, among others. The company markets to
enterprises in industries ranging from financial services and consumer products to healthcare and technology. About 84% of
revenue comes from subscription software sales, with the remainder from professional services and “other.” About 30% of the
company’s revenue is generated outside of the U.S. ServiceNow went public on June 29, 2012 at $18 per share.
VALUATION
Our valuation methodology is multistage, including peer analysis, a multiple-analysis matrix applied to our proprietary
forecasts, and discounted cash flow modeling. NOW shares have traded between $83 and $176 over the past year, and are currently
near the high end of that range. The shares have almost doubled over the last year, compared to a 17% gain for the Russell 1000
and a 37% gain for the Russell 1000 Technology Index. The trailing EV/sales multiple of 15.5 is just above the high end of the
five-year historical average range of 12.0-15.0. On a forward basis, ServiceNow’s EV/revenue multiple of 11.1 is 85% above the
peer average, greater than the historical average premium of 70%. We are maintaining our BUY rating with a revised target price
of $201.
On March 12, BUY-rated NOW closed at $174.43, up $1.67. (Joseph Bonner, CFA, 3/12/18)

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 MARKET DIGEST
DUKE ENERGY CORP. (NYSE: DUK, $76.55)...................................................................... HOLD
DUK: Disappointing EPS for 2017; maintaining HOLD
* Adjusted EPS was $4.57 for 2017, compared to $4.69 for 2016. The difference between 2017 GAAP reported EPS
and adjusted EPS was largely due to costs associated with the Piedmont Natural Gas merger, partially offset by
the estimated impacts of the Tax Cuts and Jobs Act enacted in December 2017.
* Despite the company’s solid fundamentals, including a favorable regulatory environment and an expanding rate
base, we see an unexciting total return potential for DUK over the next 12 months.
* Due to the company’s infrastructure improvement program, we expect above-average rate base growth over the
next several years and view the company’s sale of nonregulated generating assets in the Midwest as a strong
positive.
* The annualized dividend of $3.56 yields about 4.7%, and may appeal to income-oriented investors.
ANALYSIS
INVESTMENT THESIS
Our rating on Duke Energy Corp. (NYSE: DUK) is HOLD, based primarily on valuation. DUK shares trade at 15.9-times
our 2018 EPS estimate of $4.78, near the average multiple for comparable electric utilities and the five-year historical average
of 14.3. Despite the company’s solid fundamentals, including a favorable regulatory environment and an expanding rate base, we
see an unexciting total return potential for DUK over the next 12 months.
At the same time, we are maintaining our long-term BUY rating. We expect above-average rate base growth over the
next several years and view the company’s recent sale of nonregulated generating assets in the Midwest as a strong positive. Other
positive fundamentals include the company’s improving balance sheet and well-managed nuclear-generating assets. The 2012
addition of Progress Energy has also generated significant cost synergies, and we expect the same with the October 2016 addition
of Piedmont Natural Gas Co.
The expected rise in Duke’s construction spending for new power plants, infrastructure improvements and alternative
energy projects should have little, if any, impact on long-term earnings growth. Duke is now benefiting from positive changes
in its regulated electric utility rate structures, an improving economy in its Carolina and Florida service areas, and moderate
kilowatt-hour sales growth. In our view, these factors make DUK shares a sound long-term holding for investors seeking moderate
share price appreciation and a solid dividend. We think the current annualized payout of $3.56 per share is secure and expect annual
dividend growth of 4.5%-to-5.0% over the next several years. The current yield is about 4.7%. In our view, these factors should
combine to generate total returns to shareholders of 5%-6% annually over the next 4-5 years.
RECENT DEVELOPMENTS
Over the past three months, DUK shares have fallen 12%, compared to a gain of 10% for the S&P 500. Over the past
52 weeks, the shares have gained 1%, compared to an increase of 24% for the index. The five-year track record shows an increase
of 13% for DUK, versus a gain of 91% for the S&P 500. The beta on DUK is 0.03.
On February 20, Duke Energy reported full-year 2017 GAAP earnings of $4.36 per share in 2017, compared to $3.11
in 2016.
Adjusted EPS was $4.57 for 2017, compared to $4.69 for 2016. Adjusted EPS excludes the impact of certain items that
are included in GAAP reported EPS. The difference between 2017 GAAP reported EPS and adjusted EPS was largely due to costs
to achieve the company’s Piedmont merger, charges related to regulatory settlements and Commercial Renewables impairments,
partially offset by the estimated impacts of the Tax Cuts and Jobs Act enacted in December 2017.
As well, full-year 2017 adjusted results were driven by unfavorable weather and the absence of International Energy,
which was sold in December 2016. Partially offsetting these drivers were growth in the electric and gas businesses, including the
addition of a full year’s earnings contribution from Piedmont Natural Gas, and ongoing cost management efforts.
The company posted 2017 operating revenues of $6.482 billion, compared with $6.576 billion in 2016.
Duke Energy’s 4Q17 adjusted earnings were $1.00 per share, compared to a loss per share of $0.33 for 4Q16. The loss
in 4Q16 was primarily driven by a loss on the sale of International Energy.
Adjusted EPS for 4Q17 was $0.94, compared to $0.81 for 4Q16. Higher quarterly results were driven by cost
management, the higher returns on infrastructure assets placed in service, and favorable weather; partially offset by the absence
of International Energy.

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 MARKET DIGEST
On an adjusted basis, Electric Utilities and Infrastructure posted 4Q17 adjusted segment income of $609 million,
compared to $483 million in 4Q16, an increase of $0.18 per share. Higher quarterly results at Electric Utilities and Infrastructure
were primarily due to favorable weather and lower O&M expense, driven by management’s ongoing cost management efforts and
for the company, higher spending on infrastructure assets in 2016.
The Gas Utilities and Infrastructure segment on an adjusted basis posted 4Q17 earnings of $114 million, compared to
$89 million in 4Q16. Higher quarterly results at this segment were driven by customer growth and increased investments at
Piedmont, as well as higher earnings from increased investment in the company’s Atlantic Coast Pipeline.
On an adjusted basis, the Commercial Renewables segment posted 4Q17 earnings of $15 million, compared to $10
million in 4Q16. Higher quarterly results at Commercial Renewables were primarily due to a new wind project brought on-line
in late 2016 along with improved wind resources.
The Other segment primarily includes interest expense on holding company debt and other unallocated corporate costs.
It also includes results from Duke Energy’s captive insurance company. On an adjusted basis, Other posted 4Q17 adjusted net
expense of $82 million, compared to adjusted net expense of $57 million. Lower quarterly results at Other in 4Q17 were primarily
due to higher income tax expense. In addition, Duke Energy’s consolidated adjusted effective tax rate for 4Q17 was 31.5%,
compared to 30.4% in 4Q16.
EARNINGS & GROWTH ANALYSIS
We think the company remains on track to achieve its 2018 adjusted earnings guidance of $4.55-$4.85 per share. The
company is expected to report 1Q18 financial results on May 7.
Our 2018 EPS estimate is $4.78 and for 2019, we are currently looking at an EPS estimate of $4.90. Both estimates take
into account expected higher depreciation and amortization expense as well as higher interest costs related to the financing of Duke
Energy’s Piedmont Natural Gas acquisition. In addition, the expected absence of earnings from the earlier sale of Duke Energy’s
International Energy segment and a continuation well into 2019 of lower investment tax credits in the company’s solar portfolio
are taken into account.
On the other hand, our long-term BUY rating takes into account generally favorable regulation in North and South
Carolina, clearer earnings visibility and the company’s infrastructure improvement program. In all, we believe these positives will
support our five-year EPS growth forecast of 5%.
We note that kilowatt-hour sales have improved in nearly all service territories, with sales now growing at a relatively
strong rate of 1.1%-1.2% annually. In addition, we look for Duke to benefit from effective management execution as well as from
continued improvement in its service area economies. Moreover, the company should benefit from future rate case filings in North
and South Carolina, cost-savings programs, and infrastructure improvements. Using 2017 as a base year, our five-year earnings
growth rate estimate for Duke Energy is 5%.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating for Duke Energy is Medium, the midpoint on our five-point scale. The company’s debt is
investment grade. At the end of 2017, common stock comprised 43% of Duke Energy’s permanent capitalization, and long-term
debt, 57%.
Long-term debt totaled $49.035 billion at the end of 2017, compared to $45.576 billion at the end of 2016. Earnings
covered interest on long-term debt by a factor of 3.5 in 2017. Cash and cash equivalents were $358.1 million at the end of 2017,
compared to $392.3 million at the end of 2016. Operating cash flow totaled $6.634 billion in 2017, compared to $6.817 billion
at the end of 2016.
While the company’s plant construction and upgrade schedule will require some external financing, we expect relatively
little pressure on the balance sheet. Indeed, the company’s overall financial position has steadily improved. Additional positive
factors are the efficiency of the company’s nuclear generating units, which are among the highest-rated in the industry; focused
cost controls; high-quality earnings; and balanced regulation.
In July 2017, Duke Energy raised its quarterly dividend by 4.1% to $0.89. The annualized rate is now $3.56. Based on
trailing 12-month adjusted EPS, the dividend payout ratio is about 72%. We expect the company to increase its dividend 4.5%-
5.0% annually over the next four to five years. Our dividend payout estimates are $3.56 for 2018 and $3.64 for 2019
MANAGEMENT & RISKS
Lynn J. Good is president and CEO of Duke Energy and the vice chairman of the board. Prior to assuming her current
role in July 2013, Ms. Good served as EVP and CFO.
Steven K. Young is EVP and CFO, and is responsible for the controller’s office, treasury, risk management, as well as
corporate strategy and development. Mr. Young joined Duke Power in 1980 as a financial assistant.

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 MARKET DIGEST
In general, Duke Energy management is committed to electric and gas service expansion strategies in its regulated service
territories. In terms of its nonregulated operations, management decided to lower the company’s profile in the competitive energy
business due to relatively low power prices. Note, too, that management will enter into the outside purchase of energy assets only
after thorough due diligence. In our view, the company’s platform for growth is solid, and we are confident in management’s ability
to provide shareholders with increased value over the long term.
Key risks for stocks in our electric utility universe include commodity price fluctuations, the effect of adverse weather
conditions on revenue, regulatory issues (especially construction cost recovery) and potential environmental and safety liabilities.
In addition, the capital-intensive nature of the utility industry creates ongoing liquidity risk that must be actively managed by each
company.
COMPANY DESCRIPTION
Duke Energy, the largest electric power holding company in the U.S., has a market cap of approximately $53.3 billion,
with total assets of more than $137 billion. Its regulated utility operations serve approximately 7.4 million electric customers in
six states in the Southeast and Midwest. The company’s nonregulated Commercial Renewables segment owns a growing portfolio
of renewable energy assets in the U.S. In October 2016, Duke acquired Piedmont Natural Gas Co. Including Piedmont, the
company now has approximately 1.4 million natural gas customers.
INDUSTRY
Our rating on the Utility sector is Under-Weight. The sector outperformed the S&P 500 in 2016, with a gain of 12.2%,
after underperforming in 2015, with a loss of 8.4%. It underperformed in 2017, with a gain of 8.3%, and is also underperforming
in 2018, with a loss of 6.3%.
The sector accounts for 2.7% of the S&P 500. Over the past five years, the weighting has ranged from 2.5% to 5.0%. We
think the sector should account for about 2% of diversified portfolios. The sector includes the electric, gas and water utility
industries.
By our calculations (using 2018 EPS), the sector price/earnings multiple is 16.8, below the market average of 18.7.
Earnings are expected to rise 6.6% in 2018 and 5.7% in 2017 after rising 21.5% in 2016 and falling 14.9% in 2015. The sector’s
debt-to-cap ratio is about 55%, above the market average. This represents a risk, given the current state of the credit markets,
particularly if corporate bond rates rise. The sector dividend yield of 2.6% is above the market average of 1.8%.
Utility stocks face headwinds from slow earnings growth and potential additional interest rate hikes. As the yields of
relatively safer bonds rise, dividend-yielding utility stocks become less attractive. That said, we believe that utilities with above-
average dividend growth will outperform peers with less dividend growth potential.
VALUATION
Over the past 52 weeks, DUK shares have traded between $73 and $92. The shares currently trade at 15.9-times our 2018
EPS estimate of $4.78, above the average for comparable electric utilities and the company’s five-year historical average of 14.2.
DUK also trades at a premium to peers based on price/sales and price/book. Based on these metrics, we believe a HOLD rating
is appropriate.
At the same time, we are maintaining our long-term BUY rating. We view the company’s visible forward earnings stream
and attractive integrated structure, along with management’s demonstrated execution ability, as compelling reasons for investors
to maintain their current positions. Added benefits are the company’s growing dividend, generally positive relations with
regulators, geographic diversity, and well-run electric generation and gas distribution facilities. In addition, the company
continues to add new customers despite some remaining economic weakness in its service areas. It has also generated significant
cost synergies from its 2012 merger with Progress Energy and we expect the same with the recent acquisition of Piedmont Natural
Gas. We believe these factors should combine to generate total annual returns for DUK shareholders of 5%-6% over the next four
to five years.
The annualized dividend of $3.56 per share yields about 4.7%, and may appeal to income-oriented investors.
On March 12, HOLD-rated DUK closed at $76.55, up $0.42. (Gary Hovis, 3/12/18)

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 MARKET DIGEST
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officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents
and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company’s stock.
Argus Investors’ Counsel (AIC), a portfolio management business based in Stamford, Connecticut, is a customer of Argus Research Co.
(ARC), based in New York.

Argus Investors’ Counsel pays Argus Research Co. for research used in the management of the AIC core equity strategy and model
portfolio and UIT products, and has the same access to Argus Research Co. reports as other customers. However, clients and prospective
clients should note that Argus Investors’ Counsel and Argus Research Co., as units of The Argus Research Group, have certain employees
in common, including those with both research and portfolio management responsibilities, and that Argus Research Co. employees
participate in the management and marketing of the AIC core equity strategy and UIT and model portfolio products.

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