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Financial Pacific - What if a Grey or Black skies lie ahead (third party)
 

Financial Pacific - What if a Grey or Black skies lie ahead (third party)

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    Financial Pacific - What if a Grey or Black skies lie ahead (third party) Financial Pacific - What if a Grey or Black skies lie ahead (third party) Document Transcript

    •  Global Equity Research Americas UBS Investment Research Equity Strategy US Equity Strategy Investment Strategy 16 August 2011 www.ubs.com/investmentresearch Jonathan Golub, CFA Strategist jonathan.golub@ubs.com +1-212-713 8673 Chip Miller, CFA Strategist chip.miller@ubs.com +1-203-719 3720 Manish Bangard, CFA Strategist manish.bangard@ubs.com +1-212-713 3036 “What if” Grey or Black Skies Lie Ahead? Daniel Murphy Strategist  We answer the question of “What if” we have a recession daniel-d.murphy@ubs.com +1-212-713 3186 In this report, we detail the stock-by-stock projections for earnings and valuations under both Grey Skies and Black Skies recession scenarios. In summary, the Grey Vishal Patel Associate Strategist Skies scenario reduces earnings by roughly 13% versus our base case and the vishal-a.patel@ubs.com Black Skies scenario reduces earnings by roughly 27% versus our base case. +1-212-713 4027  We estimate that a 40% chance of a recession is currently discounted Thomas M. Doerflinger, Ph.D. Equity markets have sold off sharply, volatility has spiked, and Treasury yields Strategist tom.doerflinger@ubs.com have collapsed to levels not seen since the depths of the financial crisis. Whether +1-212-713 2540 attributable to the S&P downgrade, European sovereign debt issues or decelerating macroeconomic indicators, we believe markets are now pricing in an increased Natalie Garner, CFA probability of recession. Using the target prices from our base case and valuations Strategist from our two scenarios defined below, we believe the market is pricing in a natalie.garner@ubs.com +1-212-713 4915 roughly 40% chance of a recession, allocated between a 30% chance of a Grey Skies recession and a 10% chance of a Black Skies recession. Maury N. Harris Economist  Nevertheless, we continue to believe a recession is unlikely maury.harris@ubs.com Our “base case” scenario assumes US real GDP grows 1.8% in 2011 and 2.3% in +1-212-713 2472 2012. In addition to recent constructive signs in the employment market, additional David A. Bleustein rationale for our “no recession” base case include (1) satisfactory credit flows; (2) Director of US Equities Research lower oil price circuit breakers ‘kicking in’; (3) home prices tentatively stabilizing david.bleustein@ubs.com as rents rise; (4) recent improvements in job quality, (5) the investing public’s +1-212-713 2615 ownership of rallying bonds (as well as retreating stocks); and (6) the back-end Ana Recinos loaded nature of the Budget Control Act of 2011. Analyst ana.recinos@ubs.com +1-212-713 9147 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 166. UBS does and seeks to do business with companies covered in its research reports. As a result, 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.
    • US Equity Strategy 16 August 201116 August 2011To our valued clients,Based on our discussions with you, one of the critical issues in your investmentprocess relates to the near-term economic outlook. The debate on the topic iscomplicated by a confluence of divergent factors, including regulatory and fiscalpolicy uncertainty, decelerating macroeconomic data points and the marketdecline itself on one side, but offset by numerous non-recessionary data points,the already depressed state of activity in key markets (auto/housing), solidcorporate balance sheets and a few key leading indicators of economic recovery.Although in this document we outline the rationale for our “base case” of norecession, the purpose of the document is to answer the question “What if” wehave either a normal (Grey Skies) or severe (Black Skies) recession.In this report, we have included our strategists’ analysis of S&P earnings andvaluations in the scenarios defined by our economists. We have also includedthe backbone of that analysis, which is the company-by-company projection ofearnings and valuations using the macroeconomic scenarios defined by oureconomists.The project led to projections for companies with over $9 trillion of marketcapitalization in the US alone. Over the last 8 days, we believe over 1,000 hourshave been invested in this analysis. We hope you find it helpful.With our thanks and regards,David BleusteinHead of U.S. Equities ResearchUBS Investment Research1285 Avenue of the AmericasNew York, NY 10019Phone: (212) 713-2615 E-mail: david.bleustein@ubs.com UBS 2
    • US Equity Strategy 16 August 2011Contents page Jonathan Golub, CFA StrategistExecutive Summary 5 jonathan.golub@ubs.com +1-212-713 8673 — We continue to expect growth in 2012 ................................................................... 6 Chip Miller, CFA — Is a moderate recession already priced in?............................................................ 7 Strategist — Consensus Estimates Would Fall Significantly in Either Recession Scenario ....... 9 chip.miller@ubs.com +1-203-719 3720The Current Recession Debate 12 Manish Bangard, CFA — Early Warnings ..................................................................................................... 12 Strategist — Signs Point to Weak Growth, Not Recession ....................................................... 13 manish.bangard@ubs.com — Tug-of-War ........................................................................................................... 16 +1-212-713 3036Scenario Analysis — Base Case, Grey & Black Skies 17 Daniel Murphy StrategistEarnings Drivers 20 daniel-d.murphy@ubs.com — Revenues Driven by Nominal GDP ...................................................................... 20 +1-212-713 3186 — Margins Driven by Capacity Utilization ................................................................. 21 Vishal Patel Associate StrategistValuations — The Long View 22 vishal-a.patel@ubs.com — Disco Regime: Inflation the Key Driver of Multiples ............................................. 22 +1-212-713 4027 — The Great Moderation: Interest Rates the Key Driver of Multiples....................... 22 Thomas M. Doerflinger, Ph.D. — The Millennium Regime: Baa Yields the Key Driver of Multiples ......................... 23 Strategist tom.doerflinger@ubs.comMarket Targets 24 +1-212-713 2540 — Analysts Underestimate Earnings Downside ....................................................... 24 Natalie Garner, CFA — Prices and Multiples Move Before EPS Estimates............................................... 25 Strategist natalie.garner@ubs.com — Market Targets in Base Case, Grey & Black Skies .............................................. 26 +1-212-713 4915Market Leadership 27 David A. Bleustein — Leadership Since February Slowdown ................................................................. 28 Director of US Equities ResearchStock Selection: By Scenario 30 david.bleustein@ubs.com +1-212-713 2615UBS Cyclical and Defensive Baskets 33 Ana Recinos — Historical Results.................................................................................................. 33 Analyst — Background .......................................................................................................... 34 ana.recinos@ubs.com +1-212-713 9147 — Construction Methodology.................................................................................... 35Appendix A: Additional Assumptions 36 — Global Economic Assumptions............................................................................. 36 — Commodity Price Assumptions............................................................................. 36 — Key End Market Demand Assumptions................................................................ 36Appendix B: UBS Return Drivers 37 — Computation ......................................................................................................... 37Appendix C: U.S. Style Indices 39Communications 41 — Cable & Satellite / Telecom Services ................................................................... 42 — Internet & Interactive Entertainment ..................................................................... 44 — Media & Entertainment ......................................................................................... 46Consumer 49 — Apparel, Footwear & Luxury ................................................................................. 50 — Beverages ............................................................................................................ 52 — Lodging, Cruise Lines and Leisure ....................................................................... 54 — Hardline Retail ...................................................................................................... 58 — Household & Personal Care and Tobacco ........................................................... 62 — Packaged Food .................................................................................................... 64 UBS 3
    • US Equity Strategy 16 August 2011 — Restaurants .......................................................................................................... 66 — Toys...................................................................................................................... 68Energy 71 — Electric Utilities & IPPs ......................................................................................... 72 — Independent Refiners ........................................................................................... 76 — Integrated & Regulated Natural Gas .................................................................... 78 — Integrated Oil / Oil & Gas E&P ............................................................................. 82 — Oil Services & Drilling ........................................................................................... 86Financials 89 — Brokers and Universal Banks ............................................................................... 90 — Consumer & Specialty Finance ............................................................................ 92 — Exchanges and E-Brokers.................................................................................... 94 — Homebuilders & Building Products ....................................................................... 96 — Insurance (Life)..................................................................................................... 98 — Insurance (Non Life) ........................................................................................... 100 — REITs.................................................................................................................. 102Healthcare 105 — Biotechnology ..................................................................................................... 106 — Healthcare Distribution ....................................................................................... 108 — Healthcare IT ...................................................................................................... 110 — Healthcare Providers/Hospitals .......................................................................... 112 — Large Cap Pharma, Specialty Pharma & Generics ............................................ 114 — Life Sciences & Diagnostic Tools ....................................................................... 118 — Managed Care.................................................................................................... 120 — Medical Supplies & Devices ............................................................................... 122Industrials 125 — Aerospace & Defense......................................................................................... 126 — Airfreight & Surface Transportation .................................................................... 128 — Airlines & OTAs .................................................................................................. 130 — Autos & Auto Parts ............................................................................................. 132 — Chemicals........................................................................................................... 134 — Coal and Metals & Mining................................................................................... 136 — Electrical Equipment & Multi-Industry................................................................. 138 — Engineering & Construction................................................................................ 140 — Machinery ........................................................................................................... 142 — Paper & Forest Products .................................................................................... 144 — Small/Mid Cap Industrials................................................................................... 146Technology 149 — Business, Education and Professional Services ................................................ 150 — Computer Services & IT Consulting ................................................................... 152 — Data Networking & Wireline Equipment ............................................................. 154 — IT Hardware........................................................................................................ 156 — SemiCap Equipment / Alternative Energy .......................................................... 158 — Semiconductors.................................................................................................. 160 — Software ............................................................................................................. 162 — Technology Supply Chain & Wireless Equipment .............................................. 164 UBS 4
    • US Equity Strategy 16 August 2011Executive SummaryOver the past few weeks, equity markets have sold off sharply, volatility has Markets are pricing in an increasedspiked, and Treasury yields have collapsed to levels not seen since the depths of probability of recessionthe financial crisis. Regardless of the root causes of the current pullback (e.g.,S&P downgrade, European sovereign debt issues, decelerating macroeconomicindicators, etc), we believe markets are now pricing in an increased probabilityof recession. Exhibit 1: S&P 500 Exhibit 2: 10-Year Treasury Yields 1400 4.0 1300 1200 3.5 1100 1000 3.0 900 800 2.5 700 2.0 Jan-09 Jul-09 Jan-10 Jul-10 Feb-11 Aug-11 Jan-09 Jul-09 Jan-10 Jul-10 Feb-11 Aug-11Source: S&P, FactSet and UBS Source: Federal Reserve, FactSet and UBSThis report contains scenario analyses against three economic outcomes: ourbase case scenario, our standard recession “Grey Sky” scenario and our deeprecession “Black Sky” scenario. For each scenario, our analysts have estimatedearnings and valuations for the stocks under coverage. Our strategists thencalculated both bottoms-up and top-down S&P earnings forecasts under eachscenario.What odds of a recession are already priced in?As we support later in the document, we believe a recession is unlikely… andmaintain the moderate growth “base case” scenario defined below. Nevertheless,given the recent market decline, we attempted to calculate what “odds” of arecession are already priced in. One complicating factor is the additionalquestion of the severity of any potential recession.With those caveats, using the target prices from our base case and valuationsfrom our two scenarios defined below, we believe the market is pricing in aroughly 40% chance of a recession, split between a 30% chance of a Grey Skiesrecession and a 10% chance of a Black Skies recession. Obviously, the samemarket level could be discounting a smaller chance of the deeper recession or alarger chance of a smaller recession, but our Economics team formed aconsensus around this analysis of what is being discounted by the market today.The algebra to get there was to solve for the percentages that made 1,200 thediscounted level today, or a 60% chance of an S&P 500 at 1,425 at year end(855), plus a 30% chance of an S&P 500 at 1,100 at year end (330), plus a 10%chance of an S&P 500 at 900 at year end (10), less the expected return betweennow and year end (75) = 1,200. Although this is not a UBS forecast or target UBS 5
    • US Equity Strategy 16 August 2011price, we use the 60/30/10 percentages throughout the document, notably in thestock selection section.We continue to expect growth in 2012One key historical driver of recessions — a severe credit shock — appearsunlikely. That said, downside risks have clearly increased, as many of theeconomic indicators we watch have decelerated, albeit not to the point ofindicating a contraction of economic activity. Exhibit 3: Non-Farm Payrolls Exhibit 4: ISM Manufacturing 400 60 200 55 0 50 -200 45 -400 40 -600 35 -800 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10Source: Dept. of Labor, FactSet and UBS Source: ISM, FactSet and UBS Note: Shaded areas mark recessionsIn this report, we examine the likely behavior of U.S. equities, including thebroad market, sectors, and individual stocks, under the following three economic In this report, we examine potentialscenarios: outcomes for the market, sectors, and Base Case Scenario. This scenario assumes modest, but positive growth stocks under three scenarios over the remainder of 2011 and 2012. UBSs current estimates and forecasts are based on this set of assumptions. Independent of this recession debate, we believe we have entered a lower multiple environment, reflecting more modest secular growth in coming years. We use a 12.5x NTM forward P/E as our baseline, applied to consensus EPS, to construct our base case S&P 500 target. Our current S&P 500 price target is 1,425 (12.5 * $113.67), 21% upside from current levels, with S&P 500 EPS estimates of $99.35 in 2011 and $108 in 2012. Grey Skies Scenario. This scenario assumes a GDP decline in-line with the post-war recession average of 2% beginning in 3Q11 and lasting four quarters. In such a scenario, we believe the S&P 500 would fall by roughly 7% through year-end to 1,100 and 15% to a trough of 1,000 in early 2012. We would expect S&P 500 earnings of $74 in 2012. Black Skies Scenario. This scenario assumes a more severe recession in both depth and duration. Beginning in 3Q11 and lasting six quarters, GDP would decline 4.1%. In this case, we believe the S&P 500 would fall by 24% through year-end to 900 and 34% to a trough of 775 in late 2012. We would expect S&P 500 earnings of $60 in 2012.The purpose of this scenario exercise is to evaluate "what if". To make thisprocess most pertinent, we applied this to the economy in the current quarter. UBS 6
    • US Equity Strategy 16 August 2011Fortunately, recent economic data appears non-recessionary. If a recession wereto hit in the current quarter, it would be quite abrupt, causing a substantialdisruption to corporate profits. As such, our Grey Skies and Black Skies EPSforecasts for 2011 of $87 and $85 reflect such a sharp back-half decline. Bycontrast, consensus estimates would be slower to adjust. Most importantly, webelieve that this scenario analysis provides a constructive starting point uponwhich to evaluate recent market movements and the future path for risk assets.Is a moderate recession already priced in?A wide variety of factors contribute to the onset of recessions, the most commonof which are credit events, the bursting of bubbles and oil supply shocks. Thefollowing exhibit shows the pattern of GDP growth in the post-war period. Exhibit 5: Real GDP 16 Real GDP growth, 4-quarter % chg 13 10 7 4 1 -2 -5 48 53 58 63 68 73 78 83 88 93 98 03 08Source: BEA and UBS Note: Shaded areas mark recessionsThere have been 11 recessions since the end of WWII. In our opinion, only twoof these periods would be defined as Black Skies (1973-75 and 2007-09). Moderate recessions: The nine more moderate recessions lasted 10 months on average and caused GDP to contract by 1.9% in real terms. The market tends to reach a high roughly eight months before the beginning of a moderate recession, with stocks falling 20%, on average, from peak-to- trough. The decline typically ends about halfway, or five months, into the downturn. Importantly, prices usually rebound sharply and make new highs within 12 months of the start of the recession. UBS 7
    • US Equity Strategy 16 August 2011 Exhibit 6: Average Market Price Change Around Moderate Recessions 1.15 During a moderate recession, the Market 1.10 market typically hits new highs within Recession Trough 12 months of its onset 1.05 Beginning 1.00 0.95 0.90 Market 0.85 Peak 0.80 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18Source: NBER, S&P, FactSet, and UBSNotes: The horizontal axis represents the number of months from the recession beginning. Market price indexed to1.0 at average market peak Severe recessions: The two severe recessions lasted 17 months on average and caused GDP to contract by 4.2% in real terms. Not surprisingly, the market decline around severe recessions tends to be much greater in both depth and duration. Just as with shallower economic downturns, the market generally tops out several months before the recession begins. However, the peak-to-trough decline is about 50%. On average, stock prices do not find a bottom until about a year after the recession begins. Notably, even two years after the onset of a downturn, the market is still more than 25% below the pre-recession peak. Exhibit 7: Average Market Price Change Around Severe Recessions 1.0 During a Black Skies recession, the Market market typically remains below peak 0.9 Trough levels 2 years following its onset 0.8 Market 0.7 Peak 0.6 Recession 0.5 Beginning 0.4 -9 -6 -3 0 3 6 9 12 15 18 21 24Source: NBER, S&P, FactSet, and UBSNotes: The horizontal axis represents the number of months from the recession beginning. Market price indexed to1.0 at average market peak UBS 8
    • US Equity Strategy 16 August 2011On average, in the post-War period, stocks have declined by 19.8% in moderaterecessions; 49.4% in severe downturns. Exhibit 8: Stock Performance in Post WWII Recessions S&P 500 Max. GDP Peak to Length Decline Trough Peak Trough (months) (%) (%) Nov-48 Oct-49 11 -1.6 -15.4 Jul-53 May-54 10 -2.6 -12.2 Aug-57 Apr-58 8 -3.7 -16.5 Apr-60 Feb-61 10 -1.6 -11.8 Dec-69 Nov-70 11 -0.6 -29.9 Nov-73 Mar-75 16 -3.2 -46.2 Jan-80 Jul-80 6 -2.2 -6.6 Jul-81 Nov-82 16 -2.9 -23.8 Black Jul-90 Mar-91 8 -1.4 -15.8 Skies Mar-01 Nov-01 8 -0.3 -46.3 Dec-07 Jun-09 18 -5.1 -52.6Average All 11 -2.3 -25.2Average Black Skies 17 -4.2 -49.4Average All Other 10 -1.9 -19.8Source: NBER, S&P, FactSet, and UBS Note: Peak-to-trough market decline based on month-end index pricesUsing the same scale, the stock market has pulled back roughly 13% from itspeak at the end of April, which supports a view that some component of amoderate recession is already priced in, although we believe that some of thedecline relates to discounting some chance of a more severe recession.Consensus Estimates Would Fall Significantlyin Either Recession ScenarioMuch like stocks, earnings generally fall dramatically in recessions, but alsosnap back quickly. On average, earnings fell by 20.1% in the past six recessions,which we believe is a fair estimate for a moderate recession scenario. EPS fell48.8% in the most recent period (2008/09), 35.6% excluding asset write-downs.Importantly, analysts’ forecasts tend to remain much too rosy in recessions andlag once the economy begins to recover. Revenues Driven by Nominal GDP. S&P 500 revenues are quite Revenues are roughly 3x more volatile economically sensitive, moving roughly 2.9% for every 1% shift in nominal than GDP GDP. Of the traditionally cyclical sectors, Energy and Materials are the most sensitive to changes in the economy. Margins Driven by Capacity Utilization. Operating leverage is a function of fixed costs, and is best explained by capacity utilization. On average, a 1% shift in revenues results in a 1.5% and 2.5% shift in operating and net income margins. UBS 9
    • US Equity Strategy 16 August 2011 Exhibit 9: Y/Y Nominal GDP Growth Exhibit 10: Capacity Utilization 20 90 16 85 12 80 8 75 4 70 0 65 -4 50 55 60 65 70 75 80 85 90 95 00 05 10 70 75 80 85 90 95 00 05 10Source: BEA, FactSet and UBS Note: Shaded areas mark recessions Source: Federal Reserve, FactSet and UBS Note: Shaded areas mark recessionsOur Bottoms-Up Estimates are Significantly Above theResults of Prior RecessionsThe backbone of our scenario analysis is the work of the single-stock analysts,who were asked to provide earnings estimates and valuations for 2012 under theGrey and Black Skies scenarios. The analysts were provided with a set ofmacroeconomic assumptions, the most significant of which was US and GlobalGDP. The following exhibit illustrates how real GDP in our base, Grey, andBlack Skies scenarios compares to the recent trend as well as the 2008-09 GreatRecession. Exhibit 11: Real GDP with UBS Scenarios 6 Estimates Real GDP growth, 4-quarter % chg 4 2 0 -2 -4 -6 Baseline Grey skies Black skies 06 07 08 09 10 11 12Source: BEA and UBS Note: Shaded areas mark recessions UBS 10
    • US Equity Strategy 16 August 2011While not a surprise, the bottoms-up aggregation of UBS analyst forecasts underthe two recessionary scenarios leads to a much rosier outlook than a top-downapproach. More specifically, UBS analysts project a fall in earnings of 4% and19% in 2012, versus the current base case estimates. Exhibit 12: UBS Change in Net Income Under 3 ScenariosTotal 2011-12 2011-12 2011-12Sector Base Case Grey Skies Black SkiesNet Income ($m) % Change % Change % ChangeEnergy -2% -23% -58%Materials 16% -38% -75%Industrials 18% -7% -27%Consumer Discretionary 15% 3% -13%Consumer Staples 8% 7% 3%Healthcare 4% 3% 1%Financials 25% 2% -19%Information Technology 9% -1% -10%Telecom Services 26% 5% 0%Utilities -2% -8% -12%Total 10% -4% -19%Source: S&P, Haver and UBSIn Exhibit 12, we detail the sector by sector net income projections for the 485stocks (with a combined market capitalization of over $9 trillion) for which theanalysts provided scenario-based forecasts. In order to present the percentages inan easy-to-compare format, the percentage change columns contain the growthrates (or rates of decline) in 2012 vs. our current 2011 forecasts. As expected,the segments that are most vulnerable to a Black Skies scenario are Energy,Materials, Industrials and Financials. The sectors that are most resilient includeConsumer Staples, Healthcare and Telecom Services.Of note, UBS has created two baskets; one designed to capture the market’s UBS has created baskets designed forupside should the economy strengthen, as in our base case, and the other to expansions and recessionsprovide protection on the downside should conditions deteriorate: the UBSCyclical (UBSECYC) and Defensive (UBSEDEF) Baskets. UBS 11
    • US Equity Strategy 16 August 2011The Current Recession DebateGiven historical stock declines around recessions, it’s no wonder that marketshave recently sold off sharply into rising fears of a double dip. While there are anumber of cautionary indicators pointing to a recession, we believe the overalldata is more consistent with modest growth.Early WarningsIn our May 6 report entitled Spring Break, we highlighted a number of potentialwarning signs including economic disappointments and defensive marketleadership.As illustrated below, the UBS U.S. Economic Surprise Index began todeteriorate in February. At the time, much of this weakness was attributed to asharp rise in oil prices and industrial weakness resulting from the Japanesenatural disasters. In other words, it was widely believed that the ‘soft patch’would be transitory. Exhibit 13: U.S. Economic Surprise Index 3 > 0 represents Positive Surprise Economic data began to surprise to the 2 downside in February 1 0 -1 -2 -3 < 0 represents Negative Surprise -4 06 07 08 09 10 11Source: Bloomberg and UBS Global Economics teamWhile the S&P 500 held up relatively well through May, the tone of the marketbegan to change in February as defensive stocks began outperforming their moreeconomically-sensitive peers. To that extent, the case could be made thatinvestor sentiment began to turn well before the market peak. Exhibit 14: S&P 500 vs. Cyclical Outperformance 1360 Feb 2011 95 While stocks held up well through May, Cycl. vs. ► investors began to position defensively 88 1185 Non-Cycl. in conjunction with weakening economic data 81 1010 74 835 ◄ S&P 500 67 660 60 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11Source: S&P, Haver, FactSet and UBS Note: Performance indexed to 100 as of Dec. 31, 2004 UBS 12
    • US Equity Strategy 16 August 2011Signs Point to Weak Growth, Not RecessionAs discussed above, while the skies may be darkening over the capital markets,UBS Chief U.S. Economist Maury Harris places the probability of a recession atjust 20%. As further outlined in the “Scenario Analysis” section, we do notbelieve that the preconditions of a downturn are currently in place.A Severe Credit Disruption Appears UnlikelyWhile it is possible that concerns surrounding the European sovereign debtsituation and/or S&P’s recent downgrade of U.S. debt could lead to a creditevent, we believe this remains unlikely.As illustrated by the TED spread (the difference between three month Treasuriesand LIBOR), there are few signs to date of stress in the U.S. inter-bank markets.This is in contrast to the tremendous strain experienced during the financialcrisis. Deterioration here could be swift, however, and is important to monitor. Exhibit 15: TED Spread 4.5 Funding markets show few signs of 4.0 strain 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 00 02 04 06 08 10Source: Federal Reserve, BBA, FactSet and UBSLikewise, the corporate credit environment has not deteriorated, as it did duringthe prior recession. This is evidenced by Baa bond spreads, which appear wellcontained, although they have been rising. Exhibit 16: Baa Bond Spreads 6 Corporate spreads remain well contained 5 4 3 2 00 02 04 06 08 10Source: Moody’s, Federal Reserve, FactSet and UBS UBS 13
    • US Equity Strategy 16 August 2011Traditional Recession Signals Have Not EmergedWhile it is conceivable that concerns over long-term global imbalances could Data is pointing to weak economicreduce demand to a level that leads to a contraction, this scenario is inconsistent growth – NOT a recessionwith history.We are particularly focused on economic data in three key areas for signs ofstability or further deterioration: (1) business activity; (2) employment; and(3) credit expansion. Recent readings in these areas are consistent with asubdued growth environment, but not recession.Business Activity: Decelerating, but not RecessionaryAs the exhibit below highlights, the most recent ISM manufacturing andservices sector reports point to a continued modest expansion. According toUBS economists, these combined scores are consistent with an economygrowing 1.8%. Exhibit 17: ISM Manufacturing & Non-Manufacturing >50 is Expansionary 60 ◄ ISM Non-Mfg Recent ISM readings are consistent with GDP growth of 1.8% 55 53.7 50 50.9 45 ◄ ISM Mfg 40 35 <50 is Contractionary 98 00 02 04 06 08 10Source: ISM, FactSet and UBSWhile economic data is extremely helpful in ascertaining the direction of the We cannot overemphasize theeconomy, we cannot overemphasize the importance of boots on the ground — importance of analyst insights atanalysts speaking to scores of line managers in every industry and region. At economic turning pointsthis time, the anecdotal evidence is consistent with slow growth and is bestdescribed as mixed: Amitabh Passi, Technology Analyst — Companies across the technology supply chain saw decelerating growth exiting the June quarter, with many reporting book-to-bill ratios at or just below 1. While companies are incrementally more cautious based on the financial and economic gyrations it does not yet appear many are seeing any major impact to their businesses day to day and the business environment appears more akin to a general softening than a major drop-off. Andy Cash, Chemicals Analyst — US-based chemical companies have experienced very, very strong gross profit improvement in the current cycle on volume and price. However, the pricing story has buoyed the gross profit more recently, and with volume slip-sliding away gross profit will very likely fall. The pricing story will collapse without the support of volume growth. Interestingly, the decline in volume has been across the globe. UBS 14
    • US Equity Strategy 16 August 2011 Henry Kirn, Machinery Analyst — Our rental survey continues to indicate improving business conditions and rental rates, corroborated by recent conference calls held by URI and RRR on August 5th and 8th, respectively. Both companies noted rental rates, volumes and utilization levels improved sequentially in July.Employment: No signs of Deterioration in Unemployment ClaimsEconomies don’t move in pretty sine waves and recessions don’t approachquietly. For this reason, it is important to focus on signposts that move rapidlyaround periods of economic change. Job conditions are such a signpost.Weekly jobless claims tend to rise and fall precipitously around recessions andrecoveries. Importantly, it is the direction of change rather than the level ofemployment that is most critical in this analysis. To date, we have not seensigns of deterioration in this important area. Exhibit 18: Weekly Unemployment Claims (4-Week Average) 700 Jobless claims spike around 600 recessions 500 400 4- 300 week avg. 200 405k 70 75 80 85 90 95 00 05 10Source: Department of Labor, FactSet and UBSLoan Volumes: Pointing to Continued GrowthSimilarly, commercial and industrial loan activity also tends to fall dramaticallyduring recessions due to a combination of falling loan demand and tighter creditstandards, as banks become fearful of accelerating loan losses. As Maury Harrispoints out with great regularity, this is a source of improvement in the economicpicture. Exhibit 19: C&I Loan Volumes 40 C&I loan volumes fall dramatically 30 during recessions 20 10 0 -10 -20 -30 73 77 81 85 89 93 97 01 05 09Source: Federal Reserve, Haver and UBS Note: 3-month moving average UBS 15
    • US Equity Strategy 16 August 2011Tug-of-WarWhile economic data and analyst expectations are not signaling a recession,capital markets seem to have a differing opinion.Typically, analysts’ projections are a function of incoming economic data aswell as guidance from management. With few signs of actual deterioration inthe economy and generally constructive, albeit cautious comments fromcompany managements, analysts have continued to ratchet their 12-monthforward earnings estimates higher.Stock multiples, by contrast, typically act in anticipation of longer-termevents/patterns. The exhibit below highlights this tug-of-war, with stockvaluations rolling while analyst estimates remain rosy. Exhibit 20: S&P 500 PE vs. NTM Bottom-Up Estimates 110 $109 15.0 Multiples have gotten crushed, while earnings estimates have remained 100 13.5 steady 90 12.0 Fwd P/E ► ◄ Fwd EPS ▼ 10.9x 80 10.5 70 9.0 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11Source: S&P, Thomson Financial, FactSet and UBS UBS 16
    • US Equity Strategy 16 August 2011Scenario Analysis — Base Case, Grey & BlackSkiesThis exercise begins with a series of assumptions developed by our U.S.Economics Team, and are summarized below. Please note that additionalassumptions including global GDP growth, key global indicators and end-market demand are provided in Appendix A of this note. Exhibit 21: U.S. Economic Scenario AssumptionsPercent change, except where noted Base Case Grey Black Annual change Annual change Annual change 2010A 2011E 2012E 2010A 2011E 2012E 2010A 2011E 2012EReal GDP (Chain) 3.0 1.8 2.3 3.0 0.9 -1.0 3.0 0.8 -2.5 Personal consumption expenditures 2.0 2.3 2.1 2.0 1.5 -0.4 2.0 1.4 -1.2 Business fixed investment 4.4 7.1 7.9 4.4 4.4 -3.8 4.4 2.9 -12.5 Government purchases 0.7 -2.3 -0.4 0.7 -2.3 -1.7 0.7 -2.5 -3.5 Private final demand 1.5 2.7 2.8 1.5 2.1 0.1 1.5 2.0 -1.0 Real domestic purchases 3.4 1.7 2.5 3.4 0.6 -1.7 3.4 0.3 -3.9 Nominal GDP 4.2 3.8 4.1 4.2 2.9 0.4 4.2 2.6 -2.3Key business indicators FRB industrial production index 5.3 4.2 4.5 5.3 2.4 -2.3 5.3 1.9 -5.3 Capacity utilization rate (%, level) 74.5 77.5 80.9 74.5 76.2 74.3 74.5 75.8 71.7 Civilian unemployment rate (%, level) 9.6 8.9 8.6 9.6 9.3 10.5 9.6 9.5 11.7Saving rate (%, level) 5.3 5.0 4.7 5.3 5.5 6.3 5.3 5.6 7.8Global real output 4.3 3.4 3.8 4.3 2.9 1.9 4.3 2.4 0.0Source: Department of Commerce, Federal Reserve Board, Bureau of Labor Statistics, Treasury Department, and UBS estimatesBase CaseDespite dramatic moves in the financial markets, we believe modest economicgrowth remains the most likely outcome. In our Base Case, economic growth ismodest but positive. Real GDP grows 1.8% this year and 2.3% in 2012,weighed down in part by a decline in government spending.As discussed earlier, the July payrolls report and other data points such asjobless claims and the ISM employment measure, point to continuingimprovement in the labor market, albeit with slower momentum than in 1Q.Meanwhile, average hourly earnings growth accelerated from 2.3% y/y in Julyfrom 2.0% the prior month and consumers continue to spend despite weakconsumer confidence gauges. Nominal retail sales rose 0.5% in July while Mayand June were revised up. Based on this retail sales data, we estimate realconsumer spending beginning 3Q up at about a 1¾% annual rate, a decentacceleration from the flattish readings for 2Q.Additional rationale for our “no recession” base case can be summarized asfollows, (1) credit flows remain satisfactory; (2) lower oil price circuit breakersare ‘kicking in’; (3) home prices are tentatively stabilizing as rents rise; (4) jobquality recently has been improving; (5) the investing public owns rallyingbonds as well as retreating stocks; and (6) the Budget Control Act of 2011 isback-end loaded. UBS 17
    • US Equity Strategy 16 August 2011Grey SkiesOur Grey Skies recession assumes that the GDP decline matches the post-warrecession average of 2%. The recession begins in 3Q11 and lasts for fourquarters. The unemployment rate rises to a quarterly peak of 10.7% in 2Q12.There are several differences to the “normal” post-war recession. First, federalfiscal policy cannot fill in to the degree it has in past dips. On the other hand,already-depressed residential investment is also unlikely to plunge to the samedegree. (Also, there are limited export impacts from the mainly homegrowndisaster.) In short, the recession is a consumption-led downturn, with associatedinventory correction and some weakness in capex.We see two main reasons why this scenario may play out: (1) low momentumUS recovery is more vulnerable to weakening European economy; and (2) fiscalausterity/policy uncertainties generate extreme caution.Main Differences with Our Base CaseRelative to our baseline forecast, real GDP growth is a bit less than a pointweaker in 2011 and a bit more than 3 points weaker in 2012. In 2011, weakerconsumer spending accounts for almost all of the deterioration, with slowerinventory accumulation also contributing. Employment effects limit incomegrowth; and weaker confidence and negative wealth effects push the saving rateup. Business and residential investment also decline, but with smaller impactson overall spending.In 2012, the drag from a weaker household sector continues as does theinventory correction. Together they account for about 80% of the downgrade tototal growth. The spillover into investment spending is also somewhat greaterthan in 2011.Black SkiesThe Black Skies recession repeats the severity of the most recent recession, withabout a 4% cumulative decline in real GDP. In comparison to the Grey Skiesscenario, the drop in GDP is sharper and lasts longer — with average quarterlydeclines of 2.75% at an annual rate, beginning in 3Q11 and continuing for sixquarters. Consumption weakness spills to a greater degree into capex, residentialspending, and inventory cuts, and there is also a bit more federal spendingweakness. In the Black Skies simulation, the unemployment rate reaches 12.5%at the end of 2012.Data points to watch for signs of deterioration towards either of these recessionscenarios include jobless claims, bank lending, and our all-economy ISM index.We see the following reasons why this scenario may play out: (1) Grey Skiesrecession reasons discussed above; (2) plus potential contagion effects from aEuropean banking crisis on US credit conditions. UBS 18
    • US Equity Strategy 16 August 2011Main Differences with Our Base CaseRelative to our baseline forecast, real GDP is 1% lower in 2011 and almost 5%weaker in 2012. In 2011, consumption accounts for 60% of the downgrade andinventories another 30% — with investment spending making up a bit more ofthe cut to GDP than in the grey skies simulation. That relative weakness ininvestment is a function of greater credit market strains than in our baseline orGrey Skies scenarios.The larger difference occurs in 2012. Consumption declines account for abouthalf of the overall downgrade and inventories for another quarter. However, aplunge in business fixed investment figures more importantly (almost half of theoverall downgrade to 2012). Government spending is also a more noticeabledrag as budgets are strained. Residential investment, although plunging, is asmall enough share of the economy that the overall GDP effects are not too great. UBS 19
    • US Equity Strategy 16 August 2011Earnings DriversCorporate earnings tend to follow a similar pattern as the economy. The tablebelow summarizes changes in S&P 500 EPS over the past 6 recessions.Earnings, on average, have declined by 20% during these instances, which webelieve is a fair representation of what to expect under the Grey Skies scenariorecession. For our Black Skies scenario, we assume a contraction of 35%,similar to that witnessed in the 2008-09 recession. Exhibit 22: S&P 500 EPS in Past Recessions S&P 500 EPS 4-Qtr 4-Qtr % Earnings have fallen by 20% on averageYear Peak Trough Peak Trough change during recessions1970 3Q69 4Q70 5.89 5.13 -12.91974-75 3Q74 3Q75 9.11 7.65 -16.01981-82 4Q81 1Q83 15.36 12.42 -19.11990-91 3Q90 4Q91 23.80 20.34 -14.5 EPS declined by 35% during the2000-01 3Q00 1Q02 56.71 44.19 -22.1 2008-09 recession2008-09 4Q07* 3Q09 93.41* 60.14* -35.6Average 5.3 qtrs -20.1Source: S&P, FactSet, First Call, UBSNote: 2008-09 EPS of $93.41 and $60.14 adds back $8.85 and $9.30, respectively, to account for extraordinarywrite-offs taken by the Financials sectorRevenues Driven by Nominal GDPAs expected, U.S. GDP and S&P 500 revenue growth are highly correlated overtime. However, S&P 500 revenue is significantly more volatile than the broadereconomy due to exposure to non-U.S. markets, a heavier weighting towardcyclical sectors, and other structural differences.For every 1% increase in nominal U.S. GDP, S&P 500 revenues rise 2.8x, witha correlation of roughly 81%. Exhibit 23: S&P 500 Revenues vs. Nominal GDP 18% YoY ◄ Revenues YoY 8% Revenues move roughly 3% for every 12% 1% shift in nominal GDP 6% 5% 0% 2% -6% -12% -1% -18% GDP ► -24% -4% 00 01 02 03 04 05 06 07 08 09 10 11Source: BEA, Compustat, S&P, and UBS Note: Universe excludes Financials UBS 20
    • US Equity Strategy 16 August 2011Based on this relationship, we can calculate sales growth under our threescenarios. More specifically, we can adjust our base case for a degradation inGDP growth. The following table provides projections based on theseassumptions. Exhibit 24: Revenue Growth Scenarios Base Case Grey Black 2011E 2012E 2011E 2012E 2011E 2012E 2012 revenues would decline byReal GDP (YoY) 1.8 2.3 0.9 -1.0 0.8 -2.5 roughly 13% in a Black Skies recessionNominal GDP (YoY) 3.8 4.1 2.9 0.4 2.6 -2.3S&P 500 Rev Growth 7.8 5.6 5.0 -5.4 4.2 -13.0Source: UBSMargins Driven by Capacity UtilizationGenerally speaking, changes in margins primarily result from fixed costs beingspread over higher or lower volumes. Margins are particularly variable in morecapital intensive industries with cyclical demand, such as Industrials, Autos,Semiconductors, Materials and Energy. These types of companies are muchmore prevalent in the S&P 500 than in the broader economy.Historically, the best proxy for this has been capacity utilization. Whilerevenues gyrate with GDP on a quarterly basis, margins and capacity utilizationmove in large sweeping cycles. Exhibit 25: S&P 500 Operating Margins vs. Capacity Utilization 15% 14.8% 82 14.6% Margins move as a function of capacity Capacity utilization Utilization ► 78 74.5 13% 74 70 11% ◄ S&P 500 (ex-Finl.) 66 Operating Margins 9.8% 9% 62 00 01 02 03 04 05 06 07 08 09 10 11Source: Federal Reserve Board, Compustat, S&P, and UBS Note: Note universe excludes FinancialsUnder our base case, we believe that margins can drift higher even though theyare near peak levels. Our analysis shows that while margins are near priorhighs, input costs should not be an impediment given low unit labor costs. Exhibit 26: Operating Margin Scenarios Base Case Grey Black 2011E 2012E 2011E 2012E 2011E 2012ENominal GDP (YoY) 3.8 4.1 2.9 0.4 2.6 -2.3Capacity Utilization 77.5 80.9 76.2 74.3 75.8 71.7S&P 500 EBIT Margin 15.9 16.2 14.6 13.0 14.5 11.6Source: UBS UBS 21
    • US Equity Strategy 16 August 2011Valuations — The Long ViewAccording to our work, stock multiples tend to become anchored on a singlevaluation variable for prolonged periods of time. To some, a single variableapproach to stock valuation may seem a bit simplistic. However, asdemonstrated below, there is an impressive fit between a single key valuationmetric and stock multiples for prolonged periods of time that we call InvestmentRegimes.Disco Regime: Inflation the Key Driver of MultiplesIn the 70’s, earnings yields moved in almost perfect lock-step with inflationexpectations, largely ignoring other factors. More specifically, we found a tightcorrelation between CPI (lagged by 3 months) plus 2% and S&P 500 earningsyields. Exhibit 27: CPI and S&P 500 Earnings Yield 16 Stock multiples were anchored to 14 inflation expectations in the 1970s Earnings Yield  12 Inflation  10 8 6 4 70 72 74 76 78 80Source: Dept of Labor, Standard and Poor’s, First Call, FactSet and UBSNote: Inflation is represented as CPI + 2%, lagged three months.The Great Moderation: Interest Rates the Key Driver of MultiplesWith inflation whipped and GDP relatively benign from 1980-1999, the ‘FedModel’ ruled the day, with equity valuations marching in almost perfect lock-step with the nominal level of interest rates. Exhibit 28: 10-Year Treasury Yield and S&P 500 Earnings Yield 16 ◄ Earnings Yield 14 After Paul Volcker squashed inflation, nominal yields drove stock multiples 12 10 8 6 10-year Yield ▲ 4 82 84 86 88 90 92 94 96 98Source: Federal Reserve, S&P, FactSet and UBS UBS 22
    • US Equity Strategy 16 August 2011The Great Moderation resulted in tremendous economic prosperity in generaland in asset values in particular. Ultimately, however, the combination ofoverly accommodative monetary policy, low inflation, and a stable economy,drove excessive risk taking by investors.The Millennium Regime: Baa Yields the Key Driver of MultiplesFollowing the implosion of the TMT bubble, the market began to use a full costof capital, including credit spreads, as the primary discounting mechanism forfuture stock earnings. Exhibit 29: Baa Bond Yield and S&P 500 Earnings Yield P/E anchored to Recessionary Slower Growth 10 Bond Yields Fears 9 8 Earnings Yield ► 7 6 ▲ Baa Yield 5 04 05 06 07 08 09 10 11Source: Moody’s, S&P, First Call, FactSet, and UBSThe relationship between corporate bond yields and stock multiples began to From Nov 09 to June 11, stockbreak down in November 2009 — six months following the markets post-crisis multiples implied weaker long termlows. growthOur work indicates that between November 2009 – June 2011, investors beganto discount slower growth. More specifically, our model suggests that with amultiple of 12.4 at the end of June, the market was discounting one-third slower More recently, multiples are signalinglong-term growth. recessionThe more recent fall in multiples, however, is most likely the result of investordisbelief in analyst forecasts given their recessionary concerns. UBS 23
    • US Equity Strategy 16 August 2011Market TargetsBelow, we discuss our methodology for developing market price targets in our Our price target is based on our P/EBase Case, Grey, and Black Skies scenarios. Our price targets are based upon forecast applied to expected consensus(1) our estimate of forward consensus earnings at a certain point in time, estimatesmultiplied by (2) a projected forward P/E multiple.Importantly, our process takes into account both how sell-side analysts and buy-side investors normally behave around recessions.Analysts Underestimate Earnings DownsideThe bars in the exhibit below compare each quarter’s actual S&P 500 operatingearnings to bottom-up consensus earnings estimates one year prior. Asillustrated, analysts tend to do a relatively good job of projecting companyresults in the middle innings of the economic cycle. However, they tend tosignificantly underestimate the magnitude of earnings declines that typicallyoccur during recessions. Exhibit 30: Percent Error in S&P 500 Next-Twelve-Months Consensus Expectations 100% > 0 is Overestimation Analysts remain too optimistic in 80% recessions 60% 40% 20% 0% -20% < 0 is Underestimation 01 02 03 04 05 06 07 08 09 10 11Source: Thomson Financial, FactSet and UBS Note: Black bars indicate quarters during a recessionAs such, our process for projecting consensus earnings estimates consists of twosteps. First, we project actual earnings using our revenue and marginframeworks (see pages 20-21). Second, we assume that analysts will continue tounderestimate the amount of earnings decline during a recession.More specifically, we ‘gross up’ our actual earnings forecasts for the amountthat we believe analysts will underestimate actual results. For both our Grey andBlack Skies scenarios, we assume that analysts will miss actual earnings by anamount similar to the 2001 recession.As illustrated below, even in the 2001 relatively moderate economic downturn,analysts’ forward estimates were considerably higher than reported actuals — attimes differing by more than 30%. UBS 24
    • US Equity Strategy 16 August 2011 Exhibit 31: S&P 500 Next-Twelve-Months Consensus EPS vs. Actuals Consensus 70 Analyst expectations can be more than Actual 63 63 30% too high in a recession 61 60 58 58 60 56 57 55 54 52 53 50 48 48 45 45 46 44 40 30 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02Source: S&P, Thomson Financial, FactSet and UBSWe have chosen not to apply a level of underestimation that typically occurs insevere recessions, such as the recent 2008-09 recession caused by the financialcrisis, as we do not expect a similar level of write-downs, even in our BlackSkies analysis.Prices and Multiples Move Before EPS EstimatesIn determining multiples to apply to projected consensus earnings, we considerthe difference in reaction time between investors and analysts to turns ineconomic data.While analyst estimates tend to lag behind underlying fundamentals aroundrecessions, stock prices and multiples tend to trade with leading indicators. Putdifferently, investors tend to sell stocks at the first signs of a significantdownturn, and load up when early signs of a bottom in economic activityemerge.By way of example, this dynamic was easily seen coming out of the 2008-09recession. As illustrated below, stocks began to rally in late-2008 on early signsof an economic recovery. While this trend was interrupted following Lehman’sbankruptcy, P/E’s continued to expand while consensus earnings estimatestrended down until mid-2009. Exhibit 32: S&P 500 P/E vs. NTM Bottom-Up Estimates ◄ Fwd EPS ▼ 100 Stock prices and multiples move well 14.5 before estimate changes 90 13.0 80 11.5 70 Fwd P/E ► 60 10.0 May-08 Sep-08 Jan-09 May-09 Sep-09Source: S&P, Thomson Financial, FactSet and UBS UBS 25
    • US Equity Strategy 16 August 2011In developing our market targets, we assume that a similar dynamic will occur infuture recessions. More specifically, we assume that, in a recession, P/Emultiples will bottom roughly one quarter ahead of a trough in trailing fourquarters earnings growth.Market Targets in Base Case, Grey & Black SkiesThe following bullets detail our price targets under each of the three scenarios.Our market targets are based upon (1) our estimate of forward consensusearnings at a certain point in time, multiplied by (2) a projected forward PEmultiple. Base Case. Our base case S&P 500 year-end 2011 price target of 1,425 Current target: 1,425 remains unchanged. This is based upon our projected P/E at year-end of 12.6x applied to 2012 consensus operating EPS of $113. (We assume that 2012 consensus remains unchanged from now until December 31.) Grey Skies. In our Grey Skies scenario, we project that the S&P 500 would Grey Skies year-end target: 1,100 end 2011 at 1,100, applying a forward P/E of 11.7x to projected 2012 consensus of $94. In this scenario, we project that the S&P 500 would trough in 1Q12 at 1,000 applying a trough P/E of 11.0x to forward consensus earnings of $91. Black Skies. In our Black Skies scenario, we project that the S&P 500 Black Skies year-end target: 900 would end 2011 at 900, applying a forward P/E of 11.3x to projected 2012 consensus of $79. In this scenario, we project that the S&P 500 would trough in 3Q12 at 775 applying a trough P/E of 10.5x to forward consensus earnings of $74. Exhibit 33: S&P 500 Price, Earnings and Valuation EstimatesS&P 500 Price Level Base Case Change Grey Change Black Change Current (at 8/12/2011) 1179 1179 1179 2011 Year-End Target Price 1425 20.9% 1100 -6.7% 900 -23.7% Market Trough Target Price 1000 -15.2% 775 -34.2% Market Trough Date 1Q12E 3Q12EUBS - Operating EPS Base Case Growth Grey Growth Black Growth 2010 Actual 85 37.3% 85 37.3% 85 37.3% 2011 Estimate 99 16.2% 87 1.6% 85 -0.2% NTM Estimate 106 72 65 2012 Estimate 108 8.7% 74 -14.8% 60 -29.8% Market Trough Fwd Est. 78 64Consensus - Operating EPS Base Case Premium Grey Premium Black Premium 2011 Estimate (at 8/12/2011) 99 99 99 NTM Estimate (at 8/12/2011) 108 108 108 2012 Estimate (at 12/31/2011) 113 4.6% 94 26.9% 79 32.7% Market Trough Fwd Est. (1Y Prior) 91 16.3% 74 16.3%Forward P/E on Consensus Current Yr End Current Yr End Current Yr End on Consensus 2011 EPS 11.9x 11.9x 11.9x on NTM Consensus EPS 10.9x 10.9x 10.9x on Consensus 2012 EPS 10.4x 12.6x 12.6x 11.7x 14.8x 11.3x Market Trough Fwd P/E 11.0x 10.5xSource: S&P, Thomson Financial, Bloomberg, FactSet and UBS UBS 26
    • US Equity Strategy 16 August 2011Market LeadershipWhile investors would love to build a portfolio of undervalued stocks, withstrong global franchises, employing little financial leverage, and experiencingstrong upward revisions, in reality these and other investment characteristics fallin and out of favor throughout the investment cycle.To this purpose, we regularly monitor a variety of factors including Size,Valuation, Growth, Earnings Revisions, Volatility, and more, to ascertain theirbehavior under different market conditions. We have dubbed these “UBSReturn Drivers.” We calculate these factors on a sector neutral basis. Please seeAppendix B for details.In the exhibit below, we break the investment cycles into three distinct phases,with a focus on which investment characteristics and sectors lead at eachparticular stage. Exhibit 34: UBS Market Leadership Framework I. Early Phase II. Middle Phase III. Late Phase Each investment characteristic behaves differently throughout the cycle Earnings Fundamentals Op Leverage Valuation Volatility Quality Cyclicals Non-CyclicalsSource: UBS Early Phase: In the initial phases of the investment cycle, investors reward the most volatile and economically-sensitive companies, and cyclical sectors outperform. Middle Phase: During the middle innings, earnings fundamentals and valuations become more important to investors. At the sector level, cyclicals and non-cyclicals tend to perform in-line with one another. Late Phase: The investment cycle usually ends with a recession or a significant economic slowdown. In such environments, investors rotate toward quality characteristics and less cyclical stocks. UBS 27
    • US Equity Strategy 16 August 2011The stark difference between defensive and cyclical leadership is highlighted inthe exhibit below which shows the relative performance of these investmentcharacteristics. Exhibit 35: Performance of UBS Return Drivers Feb08 - Feb09 20.2 Feb09 - Feb10 Defensive Leadership Cyclical Leadership Defensive characteristics led the market during the 2008 recession 9.9 7.8 4.5 2.8 Cyclical characteristics led during the recovery -7.7 -7.0 -9.4 -9.6 -10.4 ROE Fwd Earn Op Price Price Op Fwd Earn ROE PE Rev Levg Vol Vol Levg PE RevSource: S&P, Compustat, Thomson Financial, Worldscope, FactSet and UBSLeadership Since February SlowdownIn contrast to the cyclical leadership during the S&P 500s bounce in 2010 and2011, the tone of the market has turned much more recessionary since February.As the exhibits below highlight, Early Phase characteristics have rolled over andLate Phase characteristics are once again leading. This would indicate that themarket is already discounting continued economic weakness. Exhibit 36: Price Volatility and Operating Leverage Return Drivers 4% 3-Month Moving Avg ◄ Op Levg 2% 0% -2% ◄ Price Vol -4% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11Source: S&P, Compustat, Thomson Financial, Worldscope, FactSet and UBS UBS 28
    • US Equity Strategy 16 August 2011 Exhibit 37: ROE Return Driver 2% 3-Month Moving Avg Current market leadership is consistent 1% with a recession 0% -1% -2% ROE ► -3% -4% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11Source: S&P, Compustat, Thomson Financial, Worldscope, FactSet and UBSUnder our Base Case we would expect more speculative stocks to lead themarket higher. For those that are convinced — as we are — that this outcome isthe most likely case, we recommend tilting portfolios toward Early Phasecharacteristics such as Volatility and Operating Leverage.In the event of a downturn, Late Phase characteristics such as ROE andDividend Yield should do well. Our colleagues David Jessop and Berry Cox,heads of Global and U.S. Quantitative Research, also highlight low debt-to-enterprise value, high free cash flow yield, and high ROIC as additionaldefensive characteristics. Details of their work can be found in Appendix C. UBS 29
    • US Equity Strategy 16 August 2011Stock Selection: By ScenarioAs previously detailed, our analysts have calculated valuations in our base caseand two recession case scenarios. In this section we have utilized thosevaluations to screen for the stocks with the most upside or most downside ineach scenario, plus ran a screen which blends the three macroeconomicoutcomes based on the probability we believe the market is already discounting.In the vast majority of cases the results below are in sync with the analyst write-ups in the last section of the report.A common theme running through all modeled scenarios, with the exception ofthe least optimistic “Black Skies”, is UBS analysts’ search for Beta amongst the“Most Upside” stocks. The message here is that in many cases, the broad marketselloff that began in early July has taken economically sensitive shares to a pricelevel where UBS analysts view the potential reward as being extremelyattractive under all but the most dire global economic backdrop.Base Case. We screened for the stocks in UBS US coverage that offer both theMost and Least upside to the Analysts’ current price target in percentage terms.The stocks with the most downside are a diverse cross section of Neutral andSell rated shares, which include two utilities, ED and DTE, typically considereddefensive. The stocks with the most upside are somewhat skewed towardindustrials which have had large absolute and relative price declines during therisk reduction episode of July-August. Notable is that 6 of the 10 stocks with themost upside in the Base Case have Raw Betas in excess of 2.00. The Base Casestocks with the most upside can be monitored and traded via UBS GlobalSynthetic Equity Basket, Bloomberg ticker UBSBASEM, while the Base Casestocks with the most downside are available under ticker UBSBASEL. Exhibit 38: Base Case Scenario: Most Upside and Most Downside Raw Adj Current PriceTicker Company Analyst BETA BETA Price Target UpsideMost UpsideGNW Genworth Financial Kligerman 2.03 1.69 $6.67 $22.00 229.84%GGC Georgia Gulf Corp Cash 2.15 1.76 $19.29 $43.00 122.91%MU Micron Technology Orji 2.02 1.68 $6.48 $14.00 116.05%ANR Alpha Natural Resources Gershuni 2.31 1.87 $34.07 $71.00 108.39%TXT Textron Strauss 2.21 1.81 $17.14 $35.00 104.20%HIG Hartford Financial Kligerman 1.93 1.62 $20.70 $42.00 102.90%NAV Navistar International Kirn 1.60 1.40 $42.03 $85.00 102.24%ACI Arch Coal, Inc. Gershuni 2.27 1.85 $21.32 $42.00 97.00%F Ford Motor Co Langan 1.55 1.37 $11.35 $22.00 93.83%UAL United Continental Crissey 1.57 1.38 $18.26 $35.00 91.68%Most DownsideNFLX Netflix Inc Pitz 1.03 1.02 $246.28 $210.00 -14.73%CREE Cree Inc Chin 1.30 1.20 $37.11 $32.00 -13.77%AN Autonation Langan 1.27 1.18 $35.80 $31.00 -13.41%DLR Digital Realty Trust Nussbaum 0.83 0.88 $58.80 $51.00 -13.27%PSA Public Storage McElroy 0.93 0.96 $119.82 $112.00 -6.53%WLK Westlake Chemical Cash 2.05 1.70 $43.42 $41.00 -5.57%ESI ITT Educational Sokol 0.70 0.80 $74.05 $70.00 -5.47%WSO Watsco Inc Barry 0.86 0.90 $56.94 $54.00 -5.16%ED Consolidated Edison von Riesemann 0.46 0.64 $54.79 $52.00 -5.09%DTE DTE Energy von Riesemann 0.73 0.82 $48.36 $46.00 -4.88%Source: UBS Note: Current Price as o f market close 8/15/2011Grey Skies. The upside potential and downside risk to the current market pricewas calculated relative to the UBS Analysts’ “Grey Skies” Valuation. While the UBS 30
    • US Equity Strategy 16 August 2011stocks with the most upside are largely cyclical, pharmaceutical companiesWarner Chilcott and Valeant Pharmaceuticals screened as businesses largelyresistant to a Grey Skies scenario. As with the Base Case list of stocks with themost upside, analysts were still comfortable in reaching for Beta, with 5 of 10stocks scoring a Raw Beta exceeding 2.0. The stocks with the most downsidegenerally skew toward energy, consumer and specialty finance, and technology.These businesses can be expected to come under pressure due to pricing anddemand issues. The Grey Skies stocks with the most upside can be monitoredand traded via UBS Global Synthetic Equity Basket, Bloomberg tickerUBSGREYM, while the Grey Skies stocks with the most downside are availableunder ticker UBSGREYL. Exhibit 2: Grey Skies Scenario: Most Upside and Most Downside Raw Adj CurrentTicker Company Analyst BETA BETA Price Valuation UpsideMost UpsideGNW Genworth Financial Kligerman 2.03 1.69 $6.67 $15.34 129.91%GGC Georgia Gulf Corp Cash 2.15 1.76 $19.29 $42.00 117.73%ANR Alpha Natural Resources Gershuni 2.31 1.87 $34.07 $58.00 70.24%HIG Hartford Financial Services Kligerman 1.93 1.62 $20.70 $34.36 65.98%LNC Lincoln National Kligerman 1.88 1.59 $22.83 $36.85 61.41%WLT Walter Energy Gershuni 2.39 1.93 $84.98 $137.00 61.21%ACI Arch Coal Inc Gershuni 2.27 1.85 $21.32 $34.00 59.47%WCRX Warner Chilcott Goodman 1.04 1.03 $17.38 $27.00 55.35%HUN Huntsman Corp Cash 1.91 1.60 $14.30 $22.00 53.85%VRX Valeant Pharmaceuticals Goodman 1.00 1.00 $40.07 $61.00 52.23%Most DownsideRVBD Riverbed Technology Theodosopoulos 1.67 1.45 $26.13 $14.17 -45.76%MTD Mettler-Toledo International Arias 1.10 1.07 $155.49 $90.06 -42.08%ACAS American Capital Choksi 2.46 1.97 $8.66 $5.25 -39.38%CHK Chesapeake Energy Featherston 1.30 1.20 $32.29 $19.71 -38.97%PLCM Polycom Inc Monti 1.22 1.15 $26.21 $16.74 -36.14%ARCC Ares Capital Corp Choksi 1.19 1.13 $14.82 $9.50 -35.90%TDG Transdigm Group Strauss 1.07 1.05 $89.04 $58.46 -34.34%OHI Omega Healthcare Investors Nussbaum 1.17 1.11 $17.74 $12.00 -32.36%MDR McDermott Fisher 2.02 1.68 $15.16 $10.30 -32.06%SWKS Skyworks Solutions Agarwal 1.65 1.43 $23.11 $16.00 -30.77%Source: UBS Note: Current Price as o f market close 8/15/2011Black Skies. In the “Black Skies” scenario, UBS analysts’ valuationsrepresented the least optimistic outcome modeled. The stocks with the mostupside include a few cyclical businesses where UBS analysts believe the currentselloff has overdiscounted a negative economic scenario, as well as companiessuch as Validus Re whose business is assessed to be largely independent ofeconomic fluctuation. As “Black Skies” factors in a stark global economicpicture, it should be no surprise that there are only 2 stocks with Raw Betas over2.0 in the stocks with the most upside. Additionally, both Validus Re andLincare score below 1.0 – indicating a preference for safety and an element ofcapital preservation. The stocks with the most downside in the Black Skiesscenario include those that could come under both pricing and liquiditypressures should a global recession take hold. The Black Skies stocks with themost upside can be monitored and traded via UBS Global Synthetic EquityBasket, Bloomberg ticker UBSBLCKM, while the Black Skies stocks with themost downside are available under ticker UBSBLCKL. UBS 31
    • US Equity Strategy 16 August 2011 Exhibit 3: Black Skies Scenario: Most Upside and Most Downside Raw Adj CurrentTicker Company Analyst BETA BETA Price Valuation UpsideMost UpsideGGC Georgia Gulf Corp Cash 2.15 1.76 $19.29 $40.00 107.36%VRX Valeant Pharmaceuticals Goodman 1.00 1.00 $40.07 $60.00 49.74%WCRX Warner Chilcott Goodman 1.04 1.03 $17.38 $26.00 49.60%MHK Mohawk Industries Goldberg 1.57 1.38 $47.10 $69.29 47.10%VR Validus Holdings Meredith 0.67 0.78 $25.85 $38.00 47.00%WLT Walter Energy Gershuni 2.39 1.93 $84.98 $119.00 40.03%HUN Huntsman Corp Cash 1.91 1.60 $14.30 $20.00 39.86%LNCR Lincare Holdings Shankman 0.58 0.72 $22.13 $30.27 36.76%HOT Starwood Hotel & Resorts Farley 1.96 1.64 $45.83 $62.52 36.42%DOW Dow Chemical Cash 1.87 1.58 $30.08 $41.00 36.30%Most DownsideDYN Dynegy Dumoulin-Smith 1.08 1.05 $4.34 $0.50 -88.48%ACI Arch Coal Inc Gershuni 2.27 1.85 $21.32 $6.00 -71.86%SNDK SanDisk Corp Orji 1.82 1.55 $38.20 $12.00 -68.59%AVT Avnet Inc Passi 1.42 1.28 $28.61 $9.00 -68.54%ACAS American Capital Choksi 2.46 1.97 $8.66 $3.00 -65.36%CBS CBS Corp. Janedis 1.68 1.45 $25.00 $9.04 -63.83%FLEX Flextronics International Passi 1.59 1.39 $5.71 $2.10 -63.22%BRCM Broadcom Corp Orji 0.95 0.97 $34.83 $13.00 -62.68%OHI Omega Healthcare Investors Nussbaum 1.17 1.11 $17.74 $7.00 -60.54%ARCC Ares Capital Corp Choksi 1.19 1.13 $14.82 $6.00 -59.51%Source: UBS Note: Current Price as o f market close 8/15/2011Blended Scenario. In the Blended Scenario, we calculated the probabilityweighted valuations, applying a 60% weighting to the Base Case, a 30%weighting to the Grey Skies scenario and a 10% weighting to the Black Skiesscenario for each stock. We then recalculated upside potential or downside riskrelative to the weighted valuation. All the stocks with the most downside areeither UBS Sell or Neutral rated, generally with at or near-market Raw Betas,while all the stocks with the most upside are UBS Buy rated with well above-market Raw Beta levels. Exhibit 4: Blended Scenario: Most Upside and Most Downside Raw Adj CurrentTicker Company Analyst BETA BETA Price Valuation UpsideMost UpsideGNW Genworth Financial Kligerman 2.03 1.69 $6.67 $18.71 180.51%GGC Georgia Gulf Corp Cash 2.15 1.76 $19.29 $42.40 119.80%HIG Hartford Financial Kligerman 1.93 1.62 $20.70 $38.13 84.20%ANR Alpha Natural Resources Gershuni 2.31 1.87 $34.70 $62.20 79.25%WLT Walter Energy Gershuni 2.40 1.93 $84.98 $146.60 72.51%ACI Arch Coal, Inc. Gershuni 2.27 1.85 $21.32 $36.00 68.86%LNC Lincoln National Kligerman 1.88 1.59 $22.83 $38.55 68.86%MU Micron Tech Orji 2.02 1.68 $6.48 $10.90 68.21%MET MetLife Inc Kligerman 1.45 1.30 $34.42 $56.37 63.77%NAV Navistar International Kirn 1.60 1.40 $42.03 $68.30 62.50%Most DownsideCREE Cree Inc Chin 1.30 1.20 $37.11 $29.30 -21.05%AN Autonation Inc Langan 1.27 1.18 $35.80 $28.54 -20.28%NFLX Netflix Inc Pitz 1.03 1.02 $246.28 $199.50 -18.99%DLR Digital Realty Trust Nussbaum 0.83 0.88 $58.80 $48.10 -18.20%LSI LSI Corp Agarwal 1.23 1.15 $7.20 $6.00 -16.67%ESI ITT Educational Services Inc Sokol 0.70 0.80 $74.05 $63.70 -13.98%WSO Watsco Inc Barry 0.86 0.90 $56.94 $49.50 -13.07%PLCM Polycom Inc Monti 1.22 1.15 $26.21 $23.08 -11.94%OHI Omega Health Investors Nussbaum 1.17 1.11 $17.74 $15.70 -11.50%STLD Steel Dynamics Inc Gershuni 1.69 1.46 $13.04 $11.60 -11.04%Source: UBS Note: Current Price as o f market close 8/15/2011 UBS 32
    • US Equity Strategy 16 August 2011UBS Cyclical and Defensive BasketsIn our July 11 report Positioning for Slowdown or Recovery, we analyzed stock UBS has created baskets that shouldperformance around periods of economic acceleration and deterioration. The outperform in economic recoveriesreport detailed the construction of two UBS baskets, UBSECYC and (UBSECYC) or recessions (UBSEDEF)UBSEDEF, with the first designed to capture the market’s upside should theeconomy strengthen and the other to provide protection on the downside shouldconditions weaken.Historical ResultsAs the back-test results below indicate, the cyclical portfolio outperformed 71%of the time in periods of economic acceleration, beating the benchmark by 1.1%on average. Exhibit 39: Cyclical Portfolio Outperformance During Months of Economic Improvement 10 Outperformance During Acceleration Avg: 1.1% When Economic Surprise and ISM have 8 Max: 5.0% risen, the Cyclical List has 6 Min: -1.9% outperformed by 1.1% per month Months Outperforming: 25 of 35 4 2 0 -2 -4 1 7 13 19 25 31Source: S&P, ISM, FactSet and UBS Note: Returns relative to S&P 500 Equal-Weighted IndexLikewise, in periods of deceleration, the defensive portfolio outperformed by1.6%, beating the benchmark 80% of the time. Exhibit 40: Defensive Portfolio Outperformance During Months of Economic Deceleration 10 Outperformance During Deceleration Avg: 1.6% When Economic Surprise and ISM have 8 Max: 10.5% fallen, the Defensive List has 6 Min: -2.2% outperformed by 1.6% per month Months Outperforming: 20 of 25 4 2 0 -2 -4 1 7 13 19 25Source: S&P, ISM, FactSet and UBS Note: Returns relative to S&P 500 Equal-Weighted Index UBS 33
    • US Equity Strategy 16 August 2011BackgroundWhile economic activity might drive corporate profits, economic surprises movestock prices. As such, it comes as no coincidence that the UBS U.S. EconomicSurprise Index has among the highest correlations of any major economicindicator with the S&P 500. Exhibit 41: Correlation of Economic Indicators and Stocks Indl ISM UBS Econ Nonfarm S&P 500 Prod. ISM Non-Mfg Surp Payrolls Index Stocks are most highly correlated with the UBS U.S. Economic Surprise IndexIndustrial Production 1.00 and Non-Manufacturing ISMISM 0.11 1.00ISM Non-Mfg 0.02 0.27 1.00UBS Econ Surprise 0.18 0.25 0.16 1.00Nonfarm Payrolls 0.52 -0.06 0.03 0.21 1.00S&P 500 Index 0.08 0.25 0.28 0.47 0.20 1.00Source: S&P, ISM, US Department of Labor, FactSet and UBSNote: Correlations based on monthly pct. changes in indicators vs. monthly S&P 500 returns over the past 10 yearsAs the exhibit above highlights, while the UBS U.S. Economic Surprise Indexand Non-Manufacturing ISM have the highest correlations to stocks, they arenot highly correlated with each other. As a result, the combination of these twoindicators creates an even tighter fit to the S&P 500. Exhibit 42: UBS U.S. Economic Surprise Index & Non-Manufacturing ISM versus Stocks 40% 30% The combination of these indicators has an even greater correlation to 20% ▼ S&P 500 15% movements in the stock market 0% 0% -20% -15% US Econ Surprise & Non-Manufacturing ISM ► -40% -30% 99 00 01 02 03 04 05 06 07 08 09 10 11Source: S&P, ISM, FactSet and UBS Note: Rolling 3-month change UBS 34
    • US Equity Strategy 16 August 2011Construction MethodologyThe cyclical basket is designed to outperform during periods of economicimprovement as measured by UBS’s U.S. Economic Surprise Index and Non-Manufacturing ISM. Conversely, the defensive basket is structured tooutperform during periods of decelerating economic activity. Each basketincludes 30 equal-weighted stocks.Cyclical Basket A. Screen For Potential Candidates 1. Identify Periods of Economic Improvement/Deterioration. We define periods of economic improvement as those that have a positive change in both the UBS U.S. Economic Surprise Index and Non-Manufacturing ISM. We call these Acceleration Periods. We define Contraction Periods as those where both indicators fall. 2. Stocks Must Outperform in Acceleration Periods. We restrict the universe of potential holdings to those stocks which have outperformed the market in a clear majority of Acceleration Periods. 3. Stocks Must Underperform in Contraction Periods. Further, we restrict the universe of potential holdings to those stocks which have underperformed the market in a clear majority of Contraction Periods. B. Select Holdings Based on Best Fit. We then select the 30 stocks most sensitive to the UBS U.S. Economic Surprise Index and the market.Defensive Basket A. Screen For Potential Candidates 1. Identify Periods of Economic Improvement/Deterioration. See above. 2. Stocks Must Outperform in Contraction Periods. We restrict the universe of potential holdings to those stocks which have outperformed the market in a clear majority of Contraction Periods. 3. Stocks Must Underperform in Acceleration Periods. Further, we restrict the universe of potential holdings to those stocks which have underperformed the market in a clear majority of Acceleration Periods. B. Select Holdings Based on Best Fit. We then select the 30 stocks least sensitive to the UBS U.S. Economic Surprise Index and the market. UBS 35
    • US Equity Strategy 16 August 2011Appendix A: Additional AssumptionsThe assumptions below have been provided by our global economics, strategy,and sector teams.Global Economic Assumptions Exhibit 43: Global Economic Assumptions 2011 2012 Base Case Grey Black Base Case Grey BlackGDPGlobal 3.4% 2.9% 2.4% 3.8% 1.9% 0.0%US 1.8% 0.9% 0.8% 2.3% -1.0% -2.5%Eurozone 1.8% 1.4% 0.9% 2.0% 0.0% -2.3%UK 1.1% 0.7% 0.2% 2.1% 0.3% -1.6%Germany 2.6% 2.3% 0.2% 2.1% 1.9% -2.0%Source: UBSCommodity Price Assumptions Exhibit 44: Commodity Price AssumptionsOil & GasBrent (bbl) Jon Rigby / Bill Featherston $103.90 $95.00 $85.00 $60.00WTI (bbl) Jon Rigby / Bill Featherston $95.25 $87.00 $70.00 $50.00NatGas Bill Featherston / Ron Baron $4.40 $4.90 $4.25 $3.75CommoditiesGold (oz) Edel Tully / Julien Garran $1,500 $1,649 $1,749 $1,380 $2,000 $2,500Gold (Growth yoy) Edel Tully / Julien Garran 34.0% 42.0% 21.0% 43.0%Copper (c/lb) Julien Garran 414 385 375 370 250 150Copper (Growth yoy) Julien Garran 13.0% 2.4% -35.0% -57.0%Urea (tonnes) Joe Dewhurst $463.00 $400.00 $333.00 $508.00 $400.00 $300.00Phosphate (tonnes) Joe Dewhurst $650.00 $600.00 $525.00 $575.00 $488.00 $400.00Potash (tonnes FOB Vanc) Joe Dewhurst $465.00 $420.00 $373.00 $575.00 $380.00 $300.00Source: UBSKey End Market Demand Assumptions Exhibit 45: Key End Market Demand AssumptionsTechnologySemiconductor Revenue (US$ bn) Uche Orji / Nick Gaudois $310 $292 $289 $326 $257 $231Semiconductors (Growth yoy) Uche Orji / Nick Gaudois 4.0% -2.0% -3.0% 5.0% -12.0% -20.0%Handsets (Unit Growth) Gareth Jenkins 9.1% 6.9% 4.6% 6.1% 3.1% -0.3%Handsets (Revenue Growth) Gareth Jenkins 20.5% 16.1% 11.7% 5.9% 1.8% -3.1%PC Growth Maynard Um 4.5% 3.8% 3.2% 10.1% 5.0% 0.0%IndustrialsLg Commercial Aircraft Deliveries David Strauss 1,062 1,062 997 926World Air Traffic (Passenger volumeJarrod Castle 5.0% 4.0% 3.0% 5.0% 2.0% -2.0%Global Trade Dominic Edridge 9.0% 7.0% 4.9% 10.7% 2.8% -5.1%-Container Jarrod Castle 6.0% 4.5% 3.2% 7.6% 2.0% -3.6%-Airfreight Jarrod Castle 4.0% -2.0% -3.0% 6.0% -4.0% -8.0%Solar-Global Solar Demand (GW) Lu Yeung 21 20 19 22 21 19-Global Solar Module ASP ($/W) Lu Yeung $1.50 $1.40 $1.35 $1.30 $1.10 $1.00ConsumerGlobal Auto Sales Philippe Houchois 3.0% 1.1% -0.9% 4.7% -0.5% -5.2%Global Autos Production Forecasts Philippe Houchois 4.9% 2.3% 0.1% 6.9% -1.8% -7.3%Source: UBS UBS 36
    • US Equity Strategy 16 August 2011Appendix B: UBS Return DriversWe define market leadership by specific stock characteristics, such as Size (large vs. small), Valuation(expensive vs. cheap), Growth, Momentum, and Volatility. We track fourteen such characteristics, whichwe have dubbed “UBS Return Drivers.” UBS Return Drivers  Size (Capitalization)  Foreign Sales  Valuation (Forward P/E)  Volatility  Earnings Growth  Financial Leverage  Price Momentum  Operating Leverage  Earnings Revisions  Dividend Yield  Short Interest  Return on Equity  Earnings Surprise  Revenue SurpriseSource: UBSComputationEach Return Driver is calculated as a hypothetical long/short portfolio built around a single quantitativedecision variable. Our calculations assume monthly rebalancing and no transaction or borrowing costs.For each Return Driver, the computation process has four steps:(1) Break Stocks into Industry Groups. While our Return Drivers are reported at the sector and index level, our process starts by breaking the S&P 500 into its 24 GICS industry groups. S&P 500 GICS Sectors and Industry Groups Sectors Industry Groups Energy Energy Materials Materials Industrials Capital Goods; Commercial & Professional Services; Transportation Consumer Cyclicals Autos; Consumer Durables & Apparel; Consumer Services; Media; Retailing Consumer Staples Food & Staples Retailing; Food Beverage & Tobacco; Household & Personal Products Health Care Health Care Equipment & Services; Pharmaceuticals, Biotech & Life Sciences Financials Banks; Diversified Financials; Insurance; Real Estate Technology Software & Services; Hardware & Equipment; Semiconductors & Equipment Telecom Telecommunication Services Utilities UtilitiesSource: Standard and Poor’s and UBS(2) Rank Based on Return Drivers. Within each industry group, stocks are ranked from top to bottom by the Return Driver in question (e.g., largest to smallest market capitalization). The list is then broken into three groups: top-third, middle-third, and bottom-third. Our calculations assume that the top-third of stocks are bought and the bottom-third of stocks are sold. Ranking and Return Calculation Methodology Buy (Top 1/3). Top 1/3 Stock returns equal-weighted within industry group Middle 1/3 Sell (Bottom 1/3). Bottom 1/3 Stock returns equal-weighted within industry groupSource: UBS UBS 37
    • US Equity Strategy 16 August 2011(3) Calculate Returns. Monthly returns are then calculated by subtracting the returns of the bottom-third (sells) from the top-third (buys). The result is then divided by two to put the outperformance in a long-only context. This analysis is done on an equal-weighted basis within each Industry Group. Return Driver Calculation — Hypothetical Example Foreign Sales Calcualtion — Industry Group Example Long: Highest Foreign Sales Stocks (Top 1/3) 9.8% Short: Lowest Foreign Sales Stocks (Bottom 1/3) 4.6% Difference 5.2% Divide by 2 ÷2 Factor Result 2.6%Source: UBS(4) Aggregate Results. At the sector level, Returns Drivers are calculated as a weighted average of industry group returns based on S&P 500 index weights. S&P 500 index results are a weighted average of sector results. We also index monthly returns as a time series for further analysis. GICS Sectors and Industry Groups — S&P 500 Cap-weighted result S&P 500 of Sector Average Cap-weighted result of Sector Sector Industry Group Average Industry Group Industry GroupSource: Standard and Poor’s and UBS(5) Analytics. There are several ways that UBS Return Drivers can be used in investment decision making. We have listed a few below:  Identify Winning Investment Characteristics. UBS Return Drivers identify which specific equity characteristics have outperformed and underperformed during a specific time period. This data is available at the industry group, sector, and index level. Additionally, investors can get a sense for the magnitude of outperformance or underperformance of Return Drivers relative to one another.  Track Historical Trends. In our analysis, we track the performance of each one of our Return Drivers over time. This allows us to identify the types of market environments in which each Return Driver tends to outperform or underperform.  Avoid Crowded Trades. Our work also helps identify over-loved and under-loved investment themes. For each UBS Return Driver, we track the valuation spread between the top-third of companies and the bottom-third of companies over time. As such, we can help identify points when particular portfolio tilts or trades appear to be “crowded” or “priced in.” Alternatively, we can also identify points when upside opportunities appear outsized. UBS 38
    • US Equity Strategy 16 August 2011Appendix C: U.S. Style IndicesNote: This page is the work of the UBS Quantitative Team, led by David Jessopand Berry Cox.High quality stocks are a traditional haven during recessions, along with thosethat have high free cash flow yield and those where their earnings are beingrevised up (or at least revised down the least) by analysts. Our measures ofquality include low volatility, low debt to EV and high ROIC.We approached our analysis by making the assumption that what worked duringpast recessions could be a guide for what will work this time around (so historyat least rhyming) assuming our Black Skies scenario turns out to be the case.The table below shows the performance of a selection of our US styles. Thesewere chosen as those where the returns during recessions are positive and whichdid well during at least four out of the last five recessions. The quality styles thatwould have been consistently successful during economic downturns were: lowvolatility, low debt to EV and high ROIC. Low beta is also, perhapsunsurprisingly, a successful style during recessions.We did look at the valuation of our quality styles, and unlike in Europe wherequality is very expensive within the US the quality styles appear to be relativelyfairly valued (and this is the case whether one adjusts for sector membership ornot).We should note that the styles in the table below are not created to be sectorneutral and so part of their success could be due to selecting the right sectorsduring the downturns.Average difference in monthly return to US styles, during the last 5 recessions Not during a During any Jan 80 - Jul 81- Jul 90- Mar 01- Dec 07- Style recession recession Jul 80 Nov 82 Mar 91 Nov 01 Jun 09High free-cash flow yield minus low free cash-flow yield 0.26% 1.05% -0.02% 0.88% 1.04% 2.44% 0.94% High earnings revisions minus low earnings revisions 0.48% 0.59% 0.91% 1.42% 0.16% -0.54% 0.46% High ROIC minus low ROIC 0.08% 0.61% 0.40% 0.10% 1.26% 1.22% 0.56% Low beta minus high beta 0.04% 0.89% -0.46% 1.13% 0.02% 2.07% 1.02% Low volatility minus high volatility -0.15% 0.51% 0.45% 1.71% 0.02% 0.21% -0.15% Low debt to EV minus high debt to EV -0.14% 0.47% 0.33% 0.26% 1.12% 0.48% 0.38%Source: UBS Quantitative research, definitions of recessionary periods taken from the National Bureau of Economic Research UBS 39
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 40
    • US Equity Strategy 16 August 2011 Communications UBS 41
    • US Equity Strategy 16 August 2011Cable & Satellite / Telecom ServicesJohn C. Hodulik, CFA, 212-713-4226Batya Levi, 212-813-8824Within the telecom sector, we expect enterprise-focused companies to show revenue growth at GDP-like levels whilecompanies with more exposure to wireless and consumer are likely subject to secular trends. In our scenario analysis,we assumed companies with the largest exposure to business trends (such as Level 3 Comm.) could see a swing similarto the GDP forecast by the UBS economics team, while companies with consumer exposure (cable/satellite, RLECs)and wireless exposure (AT&T, Verizon, Sprint) could see less of an impact on top-line trends. We believe acceleratedsmartphone penetration and the need for speed in broadband continue to be the main themes in our sector, offsettingsome of the pressure from the weak macro environment. We believe the towers will see the least pressure due to thestability of their business models and cash flow generation. Under a grey/black skies scenario, we also believedefensive names with sustainable cash flow and attractive dividend yields will perform relatively better.Our preferred stocks in this environment are American Tower (AMT), Verizon, and Comcast. We believe short-termdeclines in GDP growth will have the least impact on AMT’s revenue and EPS growth due to its multi-year contractsand built-in escalators. While AMT’s leverage of 3.4x is higher than that of the telcos, the company has minimal short-term debt maturities and low exposure to variable rates. At the current stock price, we believe AMT is trading atassumptions similar to a black skies scenario. We believe Verizon could also perform relatively better under thisscenario, as it benefits from accelerating revenue growth in wireless, its 5.6% dividend yield, and leverage of just 1.3x.We believe Comcast, trading at just 4.6x 2012E EBITDA, is also factoring in black skies assumptions. In such anenvironment, we believe the company could still show revenue growth and expand margins while generating strongFCF as the capex cycle winds down, leaving room for shareholder-friendly returns.Our least preferred names in this environment are Windstream, Level 3, and Sprint. We believe Windstream and Level3 are susceptible to changes in the business cycle, which could lower top-line growth while limiting cost-cuttingopportunities. Meanwhile, the capital intensity of their businesses continues to pressure FCF. These companies alsohave high leverage and higher exposure to variable-rate debt securities. We believe Sprint is falling behind AT&T andVerizon in grabbing share in the postpaid wireless market while it increasingly caters to low-end customers. Thissegment will likely see increased churn and lower revenue per user as the macro environment worsens. We believeSprint also needs additional financing to support its 4G build-out, plans for which have not been finalized. Withmargins in the mid-teens and significant investment needs, we do not believe the company is well positioned to weathera downturn. UBS 42
    • US Equity Strategy 16 August 2011Table 46: Recession Scenario Analysis – Cable & Satellite / Telecom Services, John C. Hodulik, CFA and Batya LeviCable & Satellite / Telecom Services 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAmerican Tower AMT 9.5% 7.8% 7.1% 26.7% 19.4% 11.1% $60 $53 $47AT&T T 1.5% -0.5% -1.5% 8.8% -1.0% -4.3% $30 $26 $24Cablevision Systems CVC 1.7% 0.0% -0.7% 30.8% 5.0% 0.9% $28 $20 $16CenturyLink CTL -3.0% -5.5% -6.6% 7.9% -2.8% -11.3% $47 $39 $32Comcast CMCSA 5.1% 3.4% 2.7% 24.0% 16.6% 12.1% $30 $24 $19Crown Castle International CCI 10.3% 8.7% 7.9% 33.8% 21.7% 9.0% $47 $41 $34DirecTV DTV 8.7% 7.1% 6.3% 31.1% 23.4% 17.9% $55 $42 $35DISH Network DISH 5.0% 3.3% 2.6% 7.3% 3.6% 1.5% $33 $25 $19Frontier CZN -4.1% -6.6% -7.7% 51.1% 12.9% -9.7% $10 $7 $6Level 3 Communications LVLT 3.1% 0.6% -0.5% -11.6% -20.8% -36.5% $3 $2 $1MetroPCS PCS 6.9% 5.3% 4.5% 28.1% 3.4% -6.8% $15 $12 $8Sprint Nextel S 2.1% 0.2% -0.7% -27.3% -36.0% -40.0% $5 $4 $3Time Warner Cable TWC 4.1% 2.5% 1.7% 29.9% 18.8% 13.0% $82 $60 $45Verizon VZ 4.5% 2.4% 1.5% 20.5% 0.5% -8.1% $37 $30 $26Windstream WIN -0.9% -3.3% -4.5% 7.0% -1.0% -9.6% $13 $11 $9GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksAmerican Tower AMTVerizon VZComcast CMCSALeast 3 Preferred StocksWindstream WINLevel 3 LVLTSprint SBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksAmerican Tower AMTVerizon VZComcast CMCSALeast 3 Preferred StocksWindstream WINLevel 3 LVLTSprint SSource: UBS UBS 43
    • US Equity Strategy 16 August 2011Internet & Interactive EntertainmentBrian Pitz, 212-713-9310Brian Fitzgerald, 212-713-2851Even through the 2008-09 recession, we continued to see two major secular trends underpinning Internet growth: 1) thegradual shift of both Commerce and Advertising dollars to online channels; and 2) the shift from physical to digital. Atthe onset of the last recession, broader-based online indicators troughed quicker and in a more acute fashion than theoffline ecosystem, but recovered earlier – thus accelerating the shift from ‘atoms’ to ‘bytes’. We also note that the pastrecession had a smaller adverse effect on eCommerce growth than on offline retail growth. For many quarters now,eCommerce has been growing faster than brick-and-mortar as a percentage of total discretionary spending. Excludingautos, gas, and food/beverage, eCommerce grew roughly 3x faster (14% vs. 4%) than retail sales during Q211. Thelow-income segment (less than $50k/year) is exhibiting the strongest Y/Y growth in eCommerce activity since the lastrecession – up 23% Y/Y, on average, for the past five quarters, which is consistent with our view that eCommerce isone of the channels consumers utilize when confronted with limited budgets. According to comScore, 35% ofconsumers polled in July ‘11 said they are cutting shopping expenses by shopping online for deals.Assuming similar trends from the last economic downturn, we estimate that the immediate impact on our names,in terms of revenue/EPS growth differential, will be approximately 3% to 6% in a modest recession (grey skiesscenario) and about 9% to 11% in a deeper recession (black skies scenario). In terms of valuation impact, we takea more conservative stance, as we also expect a simultaneous margin and multiple compression in the sector – weestimate the valuation impact will be roughly 2x bigger than the revenue/EPS impact. As a result, we wouldexpect this to translate into valuation adjustments of about 10% in a modest recession (grey skies scenario) andabout 20% in a deeper recession (black skies scenario).While most Internet and Interactive Entertainment companies are investing for top-line growth and innovation, duringmore austere times, the best-of-breed companies have demonstrated an ability to effectively manage operating expensesand temper investment to better protect bottom-line earnings relative to the broader markets. We have also seentraditional brick-and-mortar industries actually lean more heavily on their respective online channels during times ofeconomic stress to clear inventory and optimize yields in a fast, efficient, and often opaque manner. This serves toprotect their pricing (think of Online Travel Agencies such as Priceline.com, with “the price negotiator”). Negativeimpacts to Internet companies’ top lines are partially muted because macro pressures weigh on the consumer – whothen leverages the Internet as a tool for: 1) product and price discovery; 2) comparison shopping; 3) free/discountedshipping; 4) daily deals/shopping clubs such as LivingSocial or Groupon; 5) tax breaks; and 6) finding an ideal vendoralong the “price-availability-location” curve (by utilizing location-based, real-time inventory mobile eCommerceapplications such as Red Laser).During a downturn, we favor larger cap names/best-of-breed players with scale. In tough economic environments,large-scale retailers such as Amazon are better able to spend more on marketing incentives and discounts because oftheir increased influence on the supply chain. Per comScore, the top 25 retailers gained 420 bps of market share fromsmaller retailers in online sales during Nov.-Dec. ‘09 vs. Nov.-Dec. ‘08. In addition, advertisers also need to be presentonline to capture market share as ad spend shifts from other channels to online/mobile.We believe several stocks within our coverage universe are better positioned for a downturn as digital channelscontinue to empower consumers to find the best prices, promotions, and discounts. The stocks that should weather adownturn best and go on to thrive are Google, Amazon, and eBay; we would expect the worst performance fromYahoo!, InterActive Corp, and Activision. UBS 44
    • US Equity Strategy 16 August 2011Table 47: Recession Scenario Analysis – Internet & Interactive Entertainment, Brian Pitz and Brian FitzgeraldInternet & Interactive Entertainment 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesGoogle GOOG 21.5% 16.5% 11.5% 17.4% 12.4% 7.4% $800 $720 $640Amazon AMZN 23.9% 18.9% 13.9% 65.0% 60.0% 55.0% $215 $194 $172eBay EBAY 16.0% 11.0% 6.0% 17.4% 12.4% 7.4% $45 $41 $36Yahoo! YHOO 9.0% 4.0% -1.0% 13.5% 8.5% 3.5% $17 $15 $14Netflix NFLX 31.1% 26.1% 21.1% 41.1% 36.1% 31.1% $210 $189 $168Interactive Corp IACI 10.7% 5.7% 0.7% 18.7% 13.7% 8.7% $43 $39 $34LinkedIn LNKD 40.5% 35.5% 30.5% 73.0% 68.0% 63.0% $115 $104 $92Activision ATVI 14.1% 9.1% 4.1% 13.8% 8.8% 3.8% $14 $13 $11Electronic Arts ERTS 7.4% 2.4% -2.6% 32.9% 27.9% 22.9% $30 $27 $24GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksGoogle GOOGeBay EBAYAmazon AMZNLeast 3 Preferred StocksYahoo! YHOOInteractive Corp IACIActivision ATVIBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksGoogle GOOGeBay EBAYAmazon AMZNLeast 3 Preferred StocksYahoo! YHOOInteractive Corp IACIActivision ATVISource: UBS UBS 45
    • US Equity Strategy 16 August 2011Media & EntertainmentJohn Janedis, CFA, 212-713-1064Under our grey skies scenario, we assumed a 500 bp hit to our current ‘12E advertising growth assumptions byadvertising medium and a 200 bp hit to our park revenue (Disney) growth assumption. We assumed no change to whatwe view as relatively stable, recession-resistant revenue streams (ie, affiliate fee, film, and circulation revenue). Underour black skies scenario, we assumed a greater 1000 bp hit to our current ‘12E advertising growth estimates byadvertising medium and a 500 bp hit to our park revenue growth estimate. We then assumed a 20% to 60% decrementalmargin on the lost revenue, with advertising agencies on the low end, at 20%, and traditional advertising revenues onthe high end (ie, local TV, newspapers, outdoor, and radio), at 60%. We used financial data from the past recession toarrive at our decremental margin assumptions, but we expect a somewhat smaller top-line decline, given the severity ofthe last recession, and fewer expense cuts, as most of the companies in our coverage universe significantly cut expensesless than three years ago.Based on these assumptions, our least preferred names in a grey skies scenario are: 1) Interpublic; 2) Gannett; and 3)CBS. Not surprisingly, these names also have the highest exposure to advertising in our group, at 100%, 75%, and 64%,respectively. Our most preferred names in a grey skies scenario are: 1) Scripps Networks; 2) Discovery; and 3) Viacom.The majority of earnings from each of these companies, 100%, 99%, and 89%, respectively, come from their cablenetwork businesses, which benefit from having recession-resistant affiliate fee revenue streams, in addition toadvertising, to help support their cost structures. Our grey skies valuations assume a 10% cut, on average, to our currenttarget multiples.Under our black skies scenario, our least preferred names are the same as under our grey skies scenario: CBS;Interpublic; and Gannett. Our most preferred names in a black skies scenario are: 1) Discovery; 2) Walt Disney; and 3)Scripps Networks. Discovery and Scripps should be somewhat sheltered by their more stable cable network exposure,while Disney has less advertising exposure than most in our group (less than 20%), and we are assuming park revenuewill not fall as much as advertising-related revenue. Our black skies valuations assume a 20% premium, on average, tothe trough multiples reached in the most recent recession. UBS 46
    • US Equity Strategy 16 August 2011Table 48: Recession Scenario Analysis – Media & Entertainment, John Janedis, CFAMedia & Entertainment 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesGannett Co. GCI 0.9% -2.7% -6.4% 5.9% -8.1% -22.0% $14 $11 $6Interpublic Group of Cos. IPG 5.5% 0.5% -4.5% 13.9% 1.3% -11.2% $13 $9 $4CBS Corp. CBS 5.7% 2.4% -0.8% 21.1% 9.7% -1.6% $31 $26 $9Omnicom Group OMC 5.8% 0.8% -4.2% 12.7% 3.1% -6.6% $50 $42 $28Scripps Networks SNI 4.5% 1.1% -2.2% 12.1% 7.9% 3.8% $52 $49 $41Walt Disney Co. DIS 4.7% 3.1% 2.7% 14.4% 10.3% 5.2% $42 $37 $24Time Warner, Inc. TWX 2.4% 1.3% 0.3% 10.0% 6.8% 3.7% $36 $32 $19Viacom, Inc. VIA.B 6.7% 4.9% 3.2% 12.2% 9.4% 6.5% $56 $51 $28Discovery Comm. DISCA 6.0% 3.8% 1.6% 17.3% 14.8% 12.3% $42 $39 $34GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksScripps Networks SNIDiscovery Comm. DISCAViacom, Inc. VIA.BLeast 3 Preferred StocksInterpublic Group of Cos. IPGGannett Co. GCICBS Corp. CBSBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksDiscovery Comm. DISCAWalt Disney Co. DISScripps Networks SNILeast 3 Preferred StocksCBS Corp. CBSInterpublic Group of Cos. IPGGannett Co. GCISource: UBS UBS 47
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 48
    • US Equity Strategy 16 August 2011 Consumer UBS 49
    • US Equity Strategy 16 August 2011Apparel, Footwear & LuxuryMichael Binetti, 212-713-3805To derive our revenue and EPS forecasts under the black skies scenario, we reviewed growth rates through the2008/2009 global recession. We adjusted prior trough growth rates to reflect significant changes in the business modelsof the companies in the apparel & footwear universe since the onset of the 2008 recession. For example: 1) Polo hasacquired its Asian operations from licensees; 2) Coach has a more significant percentage of revenues from its factoryoutlet channel (where fixed costs are lower than full priced stores); and 3) VF Corp has announced the acquisition ofTimberland (pending closing in September 2011), which offers visible EPS upside from deal synergies.We derive our black skies scenario target P/E multiples from the trough multiples these companies experienced in 2008.Our scenario valuations are simply black skies EPS estimates multiplied by the black skies target P/E. Our grey skiesrevenue and EPS estimates are approximated based on an average of our current base case estimates and our blackskies scenario estimates (with adjustments for deleverage assumptions on a company-by-company basis), and our greyskies scenario target multiples are the average of our current base case P/E and our black skies scenario P/E.Nike is our most preferred stock under both our black skies and grey skies scenarios. Nike has the highest exposure toemerging markets in the group, at ~33% of revenues. The company has also significantly streamlined its supply chain(eg, through consolidation around its most efficient manufacturing partners) since the 2008 downturn. Finally, thecompany has proven that it has a highly flexible cost structure relative to peers (Nike never reported a negative EPSyear through the ‘08/’09 recession). Accelerating revenue contribution from high-growth markets, expanding marketshare in new categories (eg, a renewed focus on global apparel), a strong brand with pricing power, and a world classflexible supply chain leave Nike at the top of our list in an economic downturn. Polo is a preferred stock in a downturndue to its significant scale advantages (with leading global market share in large global apparel categories), premiumbrand positioning (which fosters price increases and share gains in existing and new categories), accelerating sources ofinternational growth (eg, the recent acquisition of its Asia operations from licensees), and a flexible global supply chain(similar to Nike, Polo never reported a negative EPS year during the ‘08/’09 recession). Finally, we prefer VF Corp in ablack skies scenario with large exposure to low-fashion-risk categories (eg, low-priced jeans) and relative EPS upsidedue to the pending acquisition of Timberland (with $0.90 in cost synergies expected in 2012).We least prefer Under Armour in a black skies scenario. While Under Armour is a preferred long-term growth story,the company has been rapidly building out its sourcing, supply chain, and retail capacity in expectation of rapidconsumer growth. A sudden consumer downturn could cause significant deleverage on recent growth investments.Further, a history of supply chain execution issues adds near-term risk to an otherwise good long-term growth story.Foot Locker is our second least preferred in a black skies scenario. Foot Locker has come a long way in improving theprofitability of its retail fleet over the past year. That said, Foot Locker has a lower income core consumer, which wewould consider a risk into an economic downturn (with a decelerating job growth outlook more than offsetting ahousehold budget boost from lower gas prices). High fixed costs add EPS risk in a negative revenue scenario. Thepotential for an extended NBA lockout (basketball is a key category) or a deterioration in recently very strong newproduct innovation from brands add an element of uncertainty. A 3.9% current dividend yield offers some downsidesupport (Foot Locker maintained its dividend through the 2008/2009 recession). UBS 50
    • US Equity Strategy 16 August 2011Table 49: Recession Scenario Analysis – Apparel, Footwear & Luxury, Michael BinettiApparel, Footwear & Luxury Calendar 11 vs.12 % Revenue Change Calendar 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesCoach Inc. COH 11.9% 8.9% 1.9% 15.9% 9.9% 1.9% $65 $44 $24Foot Locker Inc FL 3.7% -1.3% -6.3% 8.3% -3.7% -13.7% $26 $17 $9Nike Inc. (Cl B) NKE 11.4% 8.4% 3.4% 15.8% 11.8% 5.8% $103 $79 $56Polo Ralph Lauren Corp. RL 10.7% 7.7% 2.7% 20.6% 15.6% 8.6% $150 $108 $69Under Armour Inc. (Cl A) UA 21.6% 15.6% 9.6% 22.5% 12.5% 2.5% $78 $52 $30VF Corp. VFC 8.5% 4.5% -1.5% 11.5% 5.5% -0.5% $135 $106 $67GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksNike Inc. NKEPolo Ralph Lauren Corp. RLVF Corp VFCLeast 2 Preferred StocksUnder Armour UAFoot Locker FLBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksNike Inc. NKEPolo Ralph Lauren Corp. RLVF Corp VFCLeast 2 Preferred StocksUnder Armour UAFoot Locker FLSource: UBS UBS 51
    • US Equity Strategy 16 August 2011BeveragesKaumil Gajrawala, 212-713-9318To determine EPS forecasts under a black skies scenario, we used the worst company-specific EPS growth ratesexperienced during the downturn of 2008/2009. We then applied those black skies growth rates to our 2011 EPSestimates. In order to choose a black skies multiple, we used the six-month trough multiples seen in late 2008/early2009. Our scenario valuations are simply the respective black skies EPS and black skies multiple. Our grey skiesestimates and valuations are based on the average of our current estimates/target multiples and black skiesestimates/multiples.Under our grey skies scenario, we see Constellation Brands, PepsiCo, and Molson Coors as the top performing names.Our black skies analysis shows PepsiCo, Molson Coors, and Brown-Forman as our most preferred names. Constellationis in a better position today than when we entered the 2008 recession. The portfolio of brands is stronger with bettermargins, distributor restructuring is behind the company, and it operates in relatively stronger categories than othernames. PepsiCo benefits from owning one of the world’s strongest packaged food businesses in Frito Lay andcontrolling its US bottlers, and, given the current multiple, we see less downside. Molson Coors volumes haven’timproved with the economy, but pricing remains very strong and rational. We assume many of the Molson Coorsconsumers haven’t improved in the last few years, so they have fewer gains to give back. Strong profit growth and analready depressed multiple limit downside. Brown-Forman enjoys strong brand equity in a category that is enjoyingrobust growth. Other segments are likely to be more affected than the spirits industry.Under our grey skies and black skies scenarios, our least preferred names are Dr Pepper, Coca-Cola, and Hansen. Thevast majority of Dr Pepper’s business is in the US and current EPS growth expectations are largely due to sharerepurchases, which will slow. The operational weakness in earnings growth would likely be punished if futureoperating profit generation is in doubt. Coca-Cola, while a strong company, currently has a robust multiple that wouldexperience significant contraction to reach 2008 levels. With Hansen, investors are paying for top-line growth in excessof 20%. If growth were to slow to 10-12%, as it did during the recession, multiple contraction could be dramatic. Whilewe think Hansen is in a strong place, given its balance sheet strength and ability to control most of its growth throughdistribution, for this exercise, we assumed the company’s worst period over the past few years as today’s black skiesscenario. UBS 52
    • US Equity Strategy 16 August 2011Table 50: Recession Scenario Analysis – Beverages, Kaumil GajrawalaBeverages 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesHansen Natural HANS 14.6% 11.3% 8.0% 22.1% 17.1% 12.0% $90 $66 $46Coca-Cola Company KO 5.1% -0.2% -5.5% 13.8% 5.3% -3.2% $78 $61 $49Coca-Cola Enterprises CCE 4.5% 2.3% 0.0% 12.2% 9.1% 6.0% $30 $25 $20PepsiCo Inc. PEP 5.6% 2.8% 0.0% 10.3% 5.6% 1.0% $79 $69 $60Dr Pepper Snapple DPS 3.9% 0.5% -3.0% 12.9% 5.9% -1.0% $40 $32 $25Molson Coors Brewing TAP 2.8% -1.1% -5.0% 10.9% 2.9% -5.0% $51 $43 $38Brown-Forman BFB 5.0% 1.0% -3.0% 8.4% 5.2% 2.0% $76 $65 $55Constellation STZ 4.4% -1.8% -8.0% 11.1% 2.1% -7.0% $28 $20 $13GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksConstellation Brands STZPepsiCo Inc. PEPMolson Coors TAPLeast 3 Preferred StocksDr Pepper Snapple DPSCoca-Cola Company KOHansen Natural HANSBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksPepsiCo Inc. PEPMolson Coors Brewing TAPBrown-Forman BFBLeast 3 Preferred StocksHansen Natural HANSDr Pepper Snapple DPSCoca-Cola Company KOSource: UBS UBS 53
    • US Equity Strategy 16 August 2011Lodging, Cruise Lines and LeisureRobin Farley, 212-713-2060LodgingThe recent market pullback, fears over a major macro-economic slowdown and declines in consumer confidence haveled us to consider, as a theoretical exercise, a grey skies and black skies scenario analysis for the lodging sector. Webelieve corporate profitability is the most meaningful driver of hotel revenue growth for lodging coverage: Marriott,Starwood and Host Hotels. UBS estimates 300bps of change in US corporate profitability for every 1% change in GDPgrowth.Our scenario analysis is based on lower revenue per available room (RevPAR) growth driven by reduced GDPforecasts in 2011 and 2012. Our reduced RevPAR estimates are based on a detailed statistical analysis of economicinputs, which we have been using to forecast US lodging demand.Our current grey skies model calls for roughly 100bps reduction in annual GDP growth forecast in 2011 and 380bps ofreduction in 2012 vs. current estimates, which equates to about an 80bp YOY North American RevPAR reduction in2011 and a 460bps reduction in 2012 from our current estimates. Our black skies model estimates roughly 120bps and640bps of reduction in gross domestic output for 2011 and 2012, respectively vs. current estimates, which equates toYOY North American RevPAR changes of 150bp and 820bp for 2011 and 2012, respectively. In short, our analysissheds some light on who should fare better in the event of a slight or a more meaningful macro pullback.While Marriott (MAR) is a more defensive stock vs. Starwood (HOT), as it remains more asset-light and has moreexposure to upper upscale vs. luxury segments of the chain, we believe HOT remains the most attractive in ourcoverage universe, implying most upside at the current levels under both grey skies and black skies scenarios. HOT’sgreater international exposure leaves it less exposed to a North American slowdown, as Starwood currently has ~50%of its rooms and 90% of its pipeline outside of North America, with roughly 20% of its exposure and 60% of itspipeline in Asia-Pacific. We believe HOT’s exposure to China could mitigate some RevPar declines. We estimateevery 100bps of RevPAR change represents $0.06 in EPS for HOT vs. $0.04 for MAR and FFO of $0.03 for HostHotels & Resorts (HST).Our grey skies and black skies scenario analysis implies comparable downside risk, roughly -6% and -11% respectively,for both MAR and HOT from their respective price targets. The same analysis implies roughly 8% downside risk forHST under grey skies and about 14% downside risk under black skies. At current stock prices, HOT has the mostupside under both scenarios among the three lodging names.Our grey skies scenario analysis could take $4/share off of HOTs current price target of $70/share (6% reduction),$2/share from MARs price target of $40/share (5% reduction) and $2/share for HSTs $19/share (11% reduction). Ourblack skies scenario assumptions, which shock-test our estimates against a much gloomier economic outlook, take$7/share (10% reduction) from HOTs price target, $4/share from MARs (10% reduction), and $3/share (16%reduction) from HST’s.Lodging stocks with high exposure to the franchise business model like Choice Hotels (CHH) can be a more defensivestance while remaining exposed to the lodging industry. While franchise and management fees tend to be more resilientthan earnings from owned hotels during a downturn, the higher operating and financial leverage of companies withsignificant property ownership (Starwood and lodging REITs like Host) normally offer the greatest upside during arecovery.We note that supply growth remains at historic lows. Average daily rate (ADR) is becoming a more meaningful driverof RevPAR growth as it helps supporting margins. UBS 54
    • US Equity Strategy 16 August 2011Cruise LinesFor the cruise lines, our grey skies and black skies scenarios are based on lower net yields on reduced GDP forecastsand significantly lower fuel prices starting in 2012. Before getting further into the details, we note that material changesin FX could move yields, and thus revenues, significantly. However, that would be partially offset by FX impact onexpenses as well, so that a net yield impact from FX fluctuations has only about 1/3 of the EPS impact that a net yieldfrom real demand changes would have on EPS. As the booking window for cruises is 3-6 months forward, and giventhat consumers have historically been reluctant to cancel when within the deposit penalty period, we are making onlyslight adjustments to 2011 net yields in either scenario. For 2012 yields, we have modeled our grey analysis using yieldconditions similar to those of 2010 for each company, given that our global forecast would call for Real GDP to beclose to 2010 levels. We used the trough year in 2009 as a black skies case, as it was a recent local trough during arecession and a global crisis, and our global forecast would call for real GDP to be within ~1% of 2009 levels. For 2012,we estimate a 600bp decrease in yields vs. our current estimates in a black skies scenario, which nets to a 300bp declinein 2012 yields vs. 2011. For the grey skies scenario, we estimate a 450bp decline in 2012 yields vs. our currentestimates, which nets a 150bp decline in 2012 yields vs. 2011. While the top line will be negatively impacted by netyield reductions, fuel prices could fall significantly, using the UBS assumption that WTI pricing could move to $70 and$50 per barrel in 2012 in the grey and black skies scenarios, respectively. Lower fuel prices could allow each companyto recoup some EPS lost from lower top line.We believe Carnival (CCL) is the more defensive stock in either scenario. Carnival has less operating and financialleverage, so every 1% move in constant currency net yield has a much more pronounced effect on Royal Caribbean’s(RCL) earnings than it does on Carnival’s. We estimate every 1% move in net yield represents $0.25 to RCL’s 2011EPS and $0.15 to CCL’s 2011 EPS. Conversely, Carnival is more sensitive to movements in fuel prices. WhileCarnival does not hedge its fuel consumption, RCL currently has 58% of its 2011 consumption and 55% of its 2012consumption hedged. Bottom line: Carnival is less negatively impacted from downward movements in top-line yieldand more positively impacted by sharp decreases in fuel. Thus, it is the more defensive stock.Interestingly, our scenario valuation for Carnival in both the grey and black skies scenarios would only take about $1(or 2%) off our $44 price target, as the UBS estimated drop in fuel prices more than offsets the reduction in yield.Royal would not receive the full benefit of a drop in fuel prices given their hedged status, so we believe our scenariovaluations could move to $28 (down 26%) and $25 (down 34%) in grey and black skies scenarios, respectively,compared with our current price target of $38.Harley-DavidsonFor Harley’s grey skies and black skies scenarios, although Harley shipments are not perfectly correlated withconsumer expenditures and GDP, we believe the company could sustain shipment volume similar to what itexperienced in the 2009 and 2010 trough years. We expect Harley may also experience volume-driven declines in grossprofit margin in the black skies scenario, which the company has been steadily trying to optimize by 2013 through itsextensive cost save program. Also, gross margin percentage reductions could be partly mitigated by lower commoditycosts. Our grey skies scenario would yield a scenario valuation of $37 (14% reduction) while our black skies scenariowould yield a scenario valuation of $31 (28% reduction) vs. our current price target of $43. UBS 55
    • US Equity Strategy 16 August 2011Table 51: Recession Scenario Analysis – Lodging, Cruise Lines & Leisure – Robin FarleyGaming & Lodging and Leisure 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesCruise LinesCarnival CCL 7.7% 3.0% 1.5% 25.7% 31.2% 41.4% $44 $43 $43Royal Caribbean RCL 5.0% 0.4% -1.2% 13.8% -11.1% -15.3% $38 $27 $23LeisureHarley Davidson HOG 16.9% -1.0% -6.3% 24.8% 14.4% -1.0% $43 $38 $31LodgingStarwood Hotels & Resorts Worldwide HOT 5.1% 2.2% -1.0% 26.3% 14.2% 4.5% $70 $66 $63Marriott International Inc. MAR 12.9% 10.2% 8.0% 47.3% 37.2% 29.2% $40 $38 $36Host Hotels & Resorts Inc. HST 8.4% 4.0% 0.5% 36.6% 24.8% 15.4% $19 $17 $16GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksCarnival CCLStarwood Hotels & Resorts Worldwide HOTMarriott International Inc. MARLeast 3 Preferred StocksRoyal Caribbean RCLHarley Davidson HOGHost Hotels & Resorts Inc. HSTBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksCarnival CCLStarwood Hotels & Resorts Worldwide HOTMarriott International Inc. MARLeast 3 Preferred StocksRoyal Caribbean RCLHarley Davidson HOGHost Hotels & Resorts Inc. HSTSource: UBS UBS 56
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 57
    • US Equity Strategy 16 August 2011Hardline RetailMichael Lasser, 212-713-2440For the Hardlines Retail sector, we used the guidelines on GDP and assumed that the challenging conditions result inweaker same-store sales for these companies. It is important to note that most of these stocks have been hit hard in therecent stock market volatility, so investors are already anticipating estimate reductions. Moreover, the companies thatwill be most impacted by a tough economic scenario are already trading at deeply discounted valuations (in many casesat distressed levels).Our current grey skies and black skies scenarios are based on: 1) lower US GDP assumptions; and 2) lower target P/Es.However, we firmly believe the market will not apply trough multiples to trough earnings. Therefore, that shouldprovide some support for the stocks.Least Affected Subsectors in Both Grey Skies and Black Skies: Auto Parts Retail Pet Supply RetailOur most preferred names for navigating through this more difficult environment include:O’Reilly Automotive (ORLY)Despite challenging comparisons in the second half, ORLY should continue to power ahead as it benefits from beingover-indexed to the DIFM market and as it gains share in its legacy CSK locations. It is important to note that thecompany has never experienced an annual comp decline in the last 20+ years. The other element to the story is theburgeoning free cash flow that should grow at a 25% clip for the next several years even if its same store sales take adip in a tough economic environment.PetSmart (PETM)PETM’s blend of having more than 50% of its sales derived from defensive, consumable items, along with the gentleinflationary benefit it will gain in the second half, means that it should hold up through a recessionary period. Thedrawback is the company’s discretionary sales could come under pressure, causing some gross margin erosion. Wehave assumed some of that in each scenario. Note that even during the depths of the last recession, the company’s compnever turned negative.Home Depot (HD)Home Depot is already operating at near a cyclically depressed level of earnings, is aggressively returning capital backto shareholders, has tangible asset value in the form of high real estate ownership (~90% of their stores), and has adeeply discounted valuation. In the last couple of years, the bulk of its sales have been for maintenance and repairrelated items, and that should continue. Also, it has some idiosyncratic gross margin drivers from the rollout of itsrecently completed distribution network. Plus, the stock has the added attraction of a 3.5% dividend yield. UBS 58
    • US Equity Strategy 16 August 2011Most Affected Subsectors in Both Grey Skies and Black Skies: Office Supply Retail Consumer ElectronicsWe believe the Office Supply and Consumer Electronics stocks face secular challenges that make them the mostvulnerable to a slowing economic environment. These subsectors can experience an exacerbated impact from e-commerce, since their offerings face greater commoditization and price transparency. Further, they are very exposed toa downturn in consumer spending, as the office supply stores are losing relevance and the consumer electronicscompanies are heavily dependent on the discretionary spending backdrop.The Office Supply subsegment is likely to be most negatively affected by a grey or black skies scenario, but the stocksare already priced for these potential outcomes, in our view. Plus, Office Depot and OfficeMax, which would see themost peril from a challenging economic environment, do not meet the minimum market cap thresholds of this analysis.Otherwise, our least preferred names in a grey or black sky scenario include:Best Buy (BBY)BBY is exposed to a downturn in consumer spending, as the share of wallet allocated to consumer electronics is highlydiscretionary. In addition, if we see a repeat of the last recession, the company’s sales will not be supported by themarket share it gained when Circuit City closed. Finally, the channel shift to the online-only retailers such as Amazoncould accelerate during a grey or black skies scenario.Williams Sonoma (WSM)We think that WSM faces risk in a slower consumer spending environment, as it sells discretionary, premium pricedproducts. WSM’s EBIT margin is at a peak level and we believe further merchandise margin gains are limited,particularly given the rise in sourcing costs. The stock is trading at a premium PE valuation, which is at risk ofcontracting, given decelerating sales trends and margin pressure.Bed Bath & Beyond (BBBY)We think BBBY would be more impacted in a tougher spending environment than it was in the most recent downturn,as it will not realize the benefit from the collapse of a large competitor, such as Linens N’ Things. In addition, BBBYhas merchandise margin risk, which was recently heightened in 1Q11 by the company’s 12.8% inventory growth rateversus sales growth of 9.7%, potentially leading to greater markdown risk in the coming quarters. The market is used tothe company beating expectations, creating greater risk for the stock in the face of a spending slowdown. UBS 59
    • US Equity Strategy 16 August 2011Table 52: Recession Scenario Analysis – Hardline Retail, Michael LasserHardline Retail 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesOReilly Automotive ORLY 7.7% 4.7% 3.7% 17.8% 10.2% 6.0% $70 $50 $44PetSmart PETM 5.8% 2.8% 1.8% 14.2% 5.8% 1.8% $52 $34 $30Home Depot HD 1.5% -0.5% -3.0% 20.1% 4.5% -1.9% $38 $27 $22Lowes LOW 1.1% -2.9% -4.9% 14.3% -1.3% -8.4% $25 $17 $14Bed Bath & Beyond BBBY 5.2% 3.0% 1.0% 12.8% 9.1% 7.0% $59 $46 $41AutoZone AZO 4.5% 2.1% -0.9% 13.3% 7.8% 1.4% $305 $220 $189Best Buy BBY -1.0% -4.6% -6.6% -0.2% -12.1% -19.4% $34 $18 $14Staples SPLS 2.0% -0.8% -2.3% 14.1% -1.0% -15.2% $19 $12 $9Advance Auto Parts AAP 3.7% 1.9% -0.1% 9.3% 3.5% 0.1% $55 $44 $39Dicks Sporting Goods DKS 8.5% 6.5% 3.5% 18.3% 9.5% 3.4% $44 $26 $23Williams-Sonoma WSM 4.2% 2.2% 0.2% 9.1% 0.5% -5.7% $38 $26 $22GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksPetSmart PETMOReilly Automotive ORLYHome Depot HDLeast 3 Preferred StocksBest Buy BBYBed Bath & Beyond BBBYWilliams-Sonoma WSMBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksPetSmart PETMOReilly Automotive ORLYHome Depot HDLeast 3 Preferred StocksBest Buy BBYBed Bath & Beyond BBBYWilliams-Sonoma WSMSource: UBS UBS 60
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 61
    • US Equity Strategy 16 August 2011Household & Personal Care and TobaccoNik Modi, 212-713-2204Our current "grey" and "black" scenarios are based on: 1) lower US GDP assumptions; and 2) lower target P/Es. Wefully acknowledge that our estimates could materially change depending on how the FX and commodities marketsmove. For instance, currently, Avon is one of the least affected names in our coverage due to its very low exposure tothe US. However, if the Brazilian Real devalues versus the dollar, it could have a material impact on Avons EPS power.Conversely, Clorox is currently one of the most negatively exposed companies under our scenarios. However, if thecommodities markets sell off, Clorox could see significantly higher earnings power despite a slower top line.For "black skies" we used the trough multiple from 2008, and for "grey skies" we used an average of the black skiesmultiple and our current target. In terms of the EPS impact, we assume sales and EPS come down by 100 bps for "greyskies" and 250 bps for "black skies" (in line with the decline in GDP).As for specific companies, we believe US Tobacco stocks are the best option for investors worried about our grey andblack skies scenarios. Tobacco stocks tend to outperform during risk averse periods, and we have significantconfidence that all the companies can maintain their healthy dividend payouts. Importantly, given building cash flow,we believe Tobacco companies have the added upside of significant buybacks in the event of large sell-offs. Lorillardremains our preferred name.We see Clorox, Estee Lauder and Energizer as the most exposed stocks on a negative side. Clorox and Energizer havesignificant exposure to the US market, and slowing category growth could weigh on sales and margins. However, wenote that our estimates for Energizer imply significant EPS accretion from buy backs. While Estee remains the bestfundamental story in our coverage, we believe the companys significant exposure to the high-income consumer couldturn from a tailwind to a headwind (as sell-offs in the market typically impact high-income consumer confidence). Withthat being said, we believe Estee still has a lot of flexibility on costs, which could cushion a slowdown in revenues. UBS 62
    • US Equity Strategy 16 August 2011Table 53: Recession Scenario Analysis – Household Products & Personal Care and Tobacco, Nik ModiHousehold Products & Personal Care and Tobacco 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesHPCProcter & Gamble Co. PG 6.0% 5.0% 3.5% 7.0% 6.0% 4.5% $72 $59 $47Colgate-Palmolive Co. CL 6.0% 5.0% 3.5% 10.0% 9.0% 7.5% $84 $77 $71Estee Lauder Cos. EL 8.0% 7.5% 7.0% 20.0% 15.0% 10.0% $118 $81 $47Avon Products Inc. AVP 5.0% 4.5% 4.0% 13.0% 12.5% 12.0% $33 $26 $20Church & Dwight Co. CHD 5.0% 4.5% 4.0% 12.0% 11.0% 10.0% $41 $37 $33Energizer Holdings Inc. ENR 4.0% 3.0% 1.5% 26.0% 21.0% 16.0% $92 $64 $39Clorox Co. CLX 3.0% 2.0% 0.5% 9.0% 7.0% 6.0% $75 $62 $49TobaccoAltria Group Inc. MO 3.0% 3.0% 2.5% 9.0% 9.0% 8.5% $30 $24 $18Lorillard Inc. LO 4.0% 4.0% 3.5% 9.0% 9.0% 8.5% $124 $105 $85Reynolds American Inc. RAI 4.0% 4.0% 3.5% 7.0% 7.0% 6.5% $42 $31 $20GREY SKIES RECESSION SCENARIOMost Preferred StocksHPCChurch & DwightAvonTobaccoLorillardReynolds AmericanAltriaLeast Preferred StocksHPCCloroxProcter & GambleTobaccoN/ABLACK SKIES RECESSION SCENARIOMost Preferred StocksHPCChurch & DwightAvonTobaccoLorillardReynolds AmericanAltriaLeast Preferred StocksHPCCloroxProcter & GambleTobaccoN/ASource: UBS UBS 63
    • US Equity Strategy 16 August 2011Packaged FoodDavid Palmer, 212-713-9315To project the performance of our covered companies under a “black skies” scenario, we first determined troughrevenue, EPS growth, and NTM P/E multiples by analyzing the performance of each company during the previousrecession. We then applied these levels to our current 2011 projections to arrive at our black skies EPS, P/E, andimplied valuation. More specifically, we applied each company’s trough EPS growth rate (currency-neutral) to ourcurrent 2011E EPS to arrive at our black skies 2012 EPS forecast. We then calculated the black skies implied valuationby applying 2008-2009 trough P/E multiple to our black skies EPS forecast.To determine our “grey skies” scenario we averaged our current 2012E EPS, revenue, and P/E multiples with our blackskies projections. We then applied our grey skies EPS to the average of our current 1-year target multiple and ourblack skies multiple for each company.Under our grey and black skies scenarios, we believe Hershey and Ralcorp will be the top performing names.Hershey’s products have a low unit price and tend to be viewed as an affordable luxury—even during difficult times. Inaddition, Hersheys industry leading demand growth underscores its fundamental brand momentum heading intopotentially darker skies. Hershey was down only slightly in 2008 relative to peers, and we believe that Hershey wouldonce again prove to be a relatively safe haven in a black skies scenario.We believe that the prospect of darker economic times may encourage consumers to seek out private label andcompanies to seek out M&A partners. Ralcorp is a play on both of these themes—please see our notes dated 8/9 and8/10 for details.In a grey or black sky scenario, we believe Campbell Soup and Heinz have relatively higher downside.Already, Campbell Soup seems to have a private label problem, and consumers reduced soup consumption during thelast recession. Prior to the 2008/2009 recession, many believed that soup was a recession-proof food category.However, soup proved to be vulnerable as lower end consumers cut out side dishes or traded down to private label. Webelieve that Campbell will be striving to improve the quality and packaging of its soups to increase relevancy, and thismay help minimize Campbell’s volume risk in a grey or black sky scenario.While Heinz has a diverse global business, it does have some relatively pro-cyclical segments. We believe that Heinz’sfrozen entrees and US food services businesses are somewhat sensitive to US employment and consumer confidence.In addition, we believe that Heinz faces relatively high private label exposure in Europe. UBS 64
    • US Equity Strategy 16 August 2011Table 54: Recession Scenario Analysis – Packaged Food, David PalmerPackaged Food 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesKraft KFT 4.9% 2.5% 0.0% 12.0% 7.0% 2.0% $42 $33 $29General Mills GIS 9.5% 2.0% -0.5% 8.6% 5.0% -5.0% $39 $35 $30Kellogg K 4.2% 3.0% 1.0% 8.4% 7.0% 1.0% $63 $53 $45Heinz HNZ 6.3% 0.0% -4.0% 11.5% 1.0% -3.0% $62 $46 $38Hershey HSY 4.5% 3.0% 1.5% 10.2% 8.0% 3.0% $58 $54 $48Campbell CPB 1.3% -2.0% -6.0% 2.4% -3.0% -8.0% $36 $28 $23ConAgra CAG 5.0% 1.0% -1.0% 9.6% 4.0% 0.0% $30 $21 $18Ralcorp RAH 7.6% 8.8% 10.0% 12.2% 8.0% 10.0% $91 $79 $71GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksHershey HSYRalcorp RAHLeast 2 Preferred StocksCampbell CPBHeinz HNZBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksHershey HSYKraft KFTLeast 2 Preferred StocksCampbell CPBHeinz HNZSource: UBS UBS 65
    • US Equity Strategy 16 August 2011RestaurantsDavid Palmer, 212-713-9315To project the performance of our covered companies under a “black skies” scenario, we first considered troughcurrency-neutral revenue growth, currency-neutral EPS growth, and NTM P/E multiples by analyzing the performanceof each company during the previous recession. We then adjusted prior trough growth rates to reflect significantchanges in the businesses of the companies since the onset of the 2008 recession. For example: 1) Starbucks hasrevived its brand, reduced its unit growth, and launched its consumer products group (CPG) growth effort; 2) Wendy’shas been improving its sales trends through core menu improvements, and recently divested its underperforming Arby’sconcept.To determine our “grey skies” scenario we averaged our current 2012E EPS, revenue, and P/E multiples with our blackskies projections. We then applied our grey skies EPS to the average of our current 1-year price target multiple and ourblack skies multiple for each company.Our most preferred stocks under a grey skies/black skies scenario are McDonald’s and Yum! Brands. Both are strongglobal franchises offering attractive value tiers allowing them to deliver consistent EPS growth in a variety of economicconditions. As an example, over the past eight years, McDonalds’ worst annual EPS growth was 8%. For Yum! Brands,its worst annual EPS growth over the same time period was 13%. During 2008, MCD stock rose 6%, while YUM stockdeclined 18%, outperforming the S&P’s 38.5% decline. This performance also underscores the relatively stable stockand business performance during a downturn. Please see our May 16th report “YUM & MCD: Better GlobalBusinesses?” for more detail.Darden Restaurants (DRI) and Brinker International (EAT) are our least preferred stocks under a grey skies/black skiesscenario. Relative to their fast food cousins, casual dining stocks can be more sensitive to economic downturns, given ahigher proportion of company-owned units and higher average tickets. Should a severe recession ensue, we wouldexpect an increasingly competitive environment as casual diners revisit the heavy promotional activity seen during thelast recession. Although productivity enhancements may provide Brinker with some margin protection, we expectinvestors to penalize the multiple of both casual dining names amid declining job growth and reduced consumerdiscretionary spending. UBS 66
    • US Equity Strategy 16 August 2011Table 55: Recession Scenario Analysis – Restaurants, David PalmerRestaurants 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesMcDonalds MCD 5.7% 2.0% 0.0% 12.4% 7.1% 1.8% $97 $85 $77Yum Brands YUM 6.0% 2.0% 0.0% 13.3% 9.1% 4.8% $63 $48 $35Starbucks SBUX 13.6% 4.0% 2.0% 26.9% 16.0% 11.0% $47 $36 $30Darden Restaurants DRI 6.1% 3.5% 1.0% 13.2% 5.0% -4.0% $54 $46 $37Wendys WEN 3.5% 1.5% -1.0% 170.0% 115.0% 60.0% $6 $5 $4Brinker Intl EAT 2.5% 1.0% -2.0% 17.8% 8.0% -2.0% $30 $20 $17GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksMcDonalds MCDYum! Brands YUMStarbucks SBUXLeast 3 Preferred StocksDarden Restaurants DRIWendys WENBrinker Intl EATBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksMcDonalds MCDYum! Brands YUMStarbucks SBUXLeast 3 Preferred StocksDarden Restaurants DRIWendys WENBrinker Intl EATSource: UBS UBS 67
    • US Equity Strategy 16 August 2011ToysRobert Carroll, 212-713-2434During the recession of 2008/2009, due to a highly fragmented US toy market and a strong product cycle, Hasbro(HAS) revenue and earnings growth outpaced that of Mattel (MAT) and the overall industry. Looking forward intopotential grey and black skies scenarios in 2011/2012 for the US and global economies, we would expect these roles toreverse. MAT now benefits from a strong product cycle and lower cost structure, while HAS is negatively impacted byhigher fixed costs associated with recent long-term investments and a product cycle that is currently struggling at retail.The profile of the overall toy industry is attractive during a recession due to the high FCF generation, low capitalintensity, and high value/price equation of products manufactured by toy companies. However, under both the grey andblack skies scenarios, we prefer MAT over HAS shares due to company-specific issues that will alter the operatingleverage of each P&L versus what was seen during the recession of 2008/2009. The US toy industry has provenresilient during prior recessions due to the hit-based nature of the industry, allowing product cycles to drive share gainsin a very fragmented market and a general lack of willingness among parents to enforce austerity measures on theiryoung children unless absolutely necessary. That said, to evaluate the downside potential of the stocks in this exercise,we assume that for each percentage point change in US GDP, our 2012 revenue estimates for each company areadjusted downward by a similar magnitude. This reduction in revenue growth adversely impacts HAS more than MATdue to recent long-term investments that will leave Hasbro with an inflated cost structure near term, which would bedifficult to reduce in the face of slowing sales. Additionally, due to a strong entertainment slate during 2012 that willdrive the boys toy category, we could see these lower profitability products cannibalize sales of Hasbro’s core brandswithin the boys category (~34% of HAS 2010 sales). Alternatively, MAT has recently implemented a cost reductionplan that is heavily geared toward 2012, reducing its operating leverage at a time when sales could be under pressureand providing a stable base for EPS growth.To determine downside risk for both companies, we took our 2012 EPS estimates reached under a black skies scenarioand applied the relative premium/discount that each stock traded at relative to the S&P500 between October 2008 andApril 2009 and applied it to the current S&P500 2012E market multiple of 10.6x to reach a black skies multiple forMAT of ~9x and for HAS of ~10x. Our grey skies valuation is based on the average of our current target multiple foreach company (~15x) and our black skies multiple applied to adjusted 2012E EPS. UBS 68
    • US Equity Strategy 16 August 2011Table 56: Recession Scenario Analysis – Toys, Robert CarrollToys 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesMattel, Inc. MAT 2.1% 1.1% -2.5% 14.1% 11.1% 8.5% $33 $29 $21Hasbro, Inc. HAS 5.2% 4.2% -1.0% 3.8% 0.0% -7.5% $46 $40 $31GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksMattel, Inc. MATHasbro, Inc. HASLeast Preferred StocksN/ABLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksMattel, Inc. MATHasbro, Inc. HASLeast Preferred StocksN/ASource: UBS UBS 69
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 70
    • US Equity Strategy 16 August 2011 Energy UBS 71
    • US Equity Strategy 16 August 2011Electric Utilities & IPPsJim von Riesemann, 212-713-4260Julien Dumoulin-Smith 212-713-9848How does the utility sector perform during recessionary times? Not surprisingly, quite well leading into and during it,both on a relative and absolute basis, as the low-beta defensive characteristics of the group are evident. This is drivenprincipally by the state and Federal regulatory compact that allows a utility to recover its costs of service plus areasonable profit. In most cases, the earnings power of each company is determined largely by underlying salesvolumes and maintaining sound cost controls.In our black and grey skies scenarios, we assume various assumptions (described more fully below) to determine thepotential underlying revenue, EPS, and scenario valuation changes. At the highest level, the key drivers in our twoscenarios changes are commercial and industrial sales volumes, and where appropriate, assumed commodity prices.For the regulated utilities, we calculate an average revenue change (2012 vs. 2011) of 2.9% and 2.2% for grey andblack skies scenarios, respectively. The corresponding EPS changes are 6.2% and 3.4%, respectively. For the scenariovaluations, our methodology is to use a baseline forward P/E multiple of 11.0x, which is consistent to the multiplesexperienced during the last three recessions, and then apply current relative P/E relationships off our scenario EPSfigures.How does the group perform during turbulent times? Our work indicates that the group exhibits relativeoutperformance to the S&P500 during the three- and six-month periods prior to economic contraction and relativeunderperformance during the same three and six, and twelve months following recessions.The companies that would be the preferred choices in both grey skies and black skies scenarios are PG&E Corp. andConsolidated Edison. PG&E Corp. and Consolidated Edison are not surprises, as their regulated operations aredelevered to underlying economic swings. PG&E’s only exposure is its Federal Energy Regulatory Commission(FERC) authorized businesses, and those have some revenue exposure due to electricity sales volumes. Natural gastransportation volumes also have some volumetric and hence earnings risk. We believe this exposure is approximatelyten cents of lost earnings power, or less than 3% of the consolidated figure, in a black skies scenario. ConEd is alsodecoupled, and while it has a small unregulated business, it represents about 5% of the earnings power under a sameworst case scenario.DTE Energy is decoupled as well but still has some exposure to unregulated businesses. Under a sum of the parts orrelative multiple P/E scenario, it falls outside of our criteria for preferred status. Unlike PG&E, ConEd, and DTE,Scana’s decoupling mechanism is limited to a weather normalization clause, leaving it still exposed to volumetric risk.TECO Energy stands out well in this grey skies environment. Its regulated utility operations account for 80% of theunderlying EPS and cash flow, while its coal production makes up most of the rest. Given these two disparatebusinesses, we value TECO under a sum of the parts basis. The combination of using the revised baseline P/E multipleand a lower commodity price deck produces muted downside. However, under a black skies scenario, where thedownturn in coal price assumptions is more severe, TECO fares as one of the poorer positioned amongst the utilities.American Electric Power (AEP) and Westar Energy do not stack well in either a grey or black skies scenario. AEP hassignificant industrial exposure, given its Ohio valley service territory and the loss of one large industrial customer givena high fixed cost structure. Kansas-based Westar faces the same issue but on a smaller scale.Importantly, we believe all of the dividends of these companies would be safe under both grey and black skiesscenarios presuming our underlying assumptions. UBS 72
    • US Equity Strategy 16 August 2011Our preferred commodity-exposed companies under a black skies scenario include PPL Corp and Calpine. We believePPL’s relatively more regulated earnings base provides stability to its overall earnings profile. Calpine has relativelyless exposure to a prolonged period of depressed natural gas prices, and its substantially hedged position in 2011 and2012 provides limited downside to EBITDA. We believe a key risk to our power thesis, should there be a prolongedblack skies scenario, is the delay in implementation of EPA regulations, which could lead to disproportionateunderperformance in the sector. However, we continue to believe that even under the context of a recession, EPAregulations will largely go forward as proposed. Our least preferred name would be Dynegy, as it is relatively moreexposed among its peers to any prolonged downturn, given its need to restructure debt and structural limitationsregarding interest payments under its new restricted payments basket. UBS 73
    • US Equity Strategy 16 August 2011Table 57: Recession Scenario Analysis – Electric Utilities, Jim von RiesemannElectric Utilities 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAmerican Electric Power AEP 4.7% 0.9% 0.9% 5.2% -2.0% -2.0% $37 $32 $29Consolidated Edison ED 4.0% 3.7% 3.3% 5.1% 4.9% 4.7% $52 $48 $46DTE Energy DTE 2.2% 2.1% 1.8% 5.2% 5.3% 5.5% $46 $42 $40Duke Energy DUK 2.6% 2.2% 1.7% 1.6% -0.3% -1.7% $19 $16 $15Northeast Utilities NU 2.1% 1.9% 1.6% 3.3% 4.1% 2.0% $36 $29 $28PG&E PCG 2.7% 2.1% 1.4% 4.9% 3.5% 10.8% $42 $38 $36Pinnacle West Capital PNW 3.2% 2.3% 2.1% 17.6% 11.3% 10.4% $43 $34 $33Progress Energy PGN 1.0% 1.6% 1.1% 2.0% -0.4% -9.4% $47 $39 $36SCANA Corp SCG 5.8% 5.2% 4.5% 4.0% 2.0% -0.5% $40 $33 $31Southern Company SO 2.9% 2.7% 2.4% 7.7% 6.5% 5.1% $41 $36 $34TECO Energy TE 5.2% 2.9% -1.6% 31.8% 18.2% -8.4% $19 $16 $14Westar Energy WR 6.6% 5.1% 4.8% 17.7% 17.2% 17.2% $26 $21 $20Wisconsin Energy WEC 5.0% 4.7% 4.4% 10.2% 10.2% 10.3% $35 $27 $26GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksPG&E Corp PCGSouthern Company SOTECO Energy TELeast 3 Preferred StocksWestar Energy WRPinnacle West PNWProgress Energy PGNBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksPG&E Corp PCGConsolidated Edison EDWisconsin Energy WECLeast 3 Preferred StocksAmerican Electric Power AEPPinnacle West Capital PNWWestar Energy WRSource: UBS UBS 74
    • US Equity Strategy 16 August 2011Table 58: Recession Scenario Analysis – Electric Utilities & IPPs, Julien Dumoulin-SmithElectric Utilities and IPPs 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAmeren AEE 1.7% -0.5% -2.5% -3.9% -30.9% -41.1% $28 $27 $24Constellation Energy CEG 0.2% 0.1% -0.5% -25.0% -26.1% -36.3% $42 $40 $38Entergy ETR -0.7% -1.6% -2.0% -12.5% -19.0% -22.2% $71 $63 $57Exelon EXC -24.5% -5.0% -6.2% -26.5% -30.8% -34.4% $50 $44 $41PPL Corp PPL 1.4% -0.9% -1.5% -10.4% -12.5% -16.2% $28 $25 $22PSEG PEG -23.7% -25.0% -27.1% -5.0% -13.0% -18.1% $35 $33 $30Calpine CPN 2.2% 2.2% 2.2% -234.6% -348.3% -390.0% $19 $15 $14Dynegy DYN -24.4% -27.6% -31.5% 8.6% 18.7% 29.6% $6 $5 $1GenOn GEN 2.4% -1.7% -6.5% 148.6% 213.7% 327.9% $4 $2 $2NRG NRG -24.3% -30.0% -35.0% 125.7% 48.3% -47.7% $26 $21 $16GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksAmeren AEEConstellation Energy CEGPSEG PEGLeast 3 Preferred StocksNRG NRGDynegy DYNGenOn GENBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksPPL Corp PPLCalpine CPNPSEG PEGLeast 3 Preferred StocksNRG NRGGenOn GENDynegy DYNSource: UBS UBS 75
    • US Equity Strategy 16 August 2011Independent RefinersCraig Weiland, 212-713-3654Our grey skies scenario encompasses a view that US composite refining margins decline to the mid-point between ourpresent forecasts and trough levels reached in 2009. We expect margins to fall materially for all regions of the country,but estimate PADD 2 (Mid Continent) margins continue to remain supported by an historically wide WTI-Brent crudeprice differential of $15/Bbl in 2012. We forecast 2012 composite margins to average $10.49/Bbl, with regionalmargins averaging the following: East Coast ($8.76/Bbl); Mid Continent ($19.75/Bbl); Gulf Coast ($4.93/Bbl); andWest Coast ($15.83/Bbl). Our grey skies scenario essentially represents a double-dip environment for gasoline anddistillate demand: we forecast gasoline demand to decline 1.6% YoY in 2012 and distillate demand to fall 6.8% YoY.For reference, our 2012 refining margin forecasts are as follows: composite ($11.63/Bbl); East Coast ($9.63/Bbl); MidContinent ($22.25/Bbl); Gulf Coast ($5.50/Bbl); West Coast ($17/Bbl). We forecast 2012 gasoline and distillatedemand to grow a respective 1.3%, and 2.8%.We believe VLO shares offer the least downside risk—and conversely, the most upside potential—in our grey skiesscenario. Shares are currently trading near $20, well below our grey skies valuation of $29. VLO shares haveunderperformed independent refiner peers by 37% year-to-date and 116% over the last 12 months. Under our grey skiesscenario, shares trade at 3.1x 2012E EV/EBITDA and 0.6x P/B (which is below the average through valuation of 0.7xachieved during 2009). We note that the smaller YoY decline in VLO’s EPS relative to peers is attributable to theexpected contribution of its announced Pembroke, UK refinery acquisition. VLO’s $4.1 billion of cash on the balancesheet ranks the highest amongst any refiner in our coverage universe and provides for financial flexibility. Its portfolioof 14 refineries (including the impending close of its Pembroke refinery acquisition) provides diversification andmeaningful exposure to both attractive Mid Continent refining margins and the Gulf Coast distillate export theme. Weare watching for signs of improvement to capture rates, operating costs, and utilization rates over the next 6 quarters asits series of economic improvement projects reach completion.Our black skies scenario encompasses a view that US composite refining margins decline through levels observedduring 2009 for all regions of the country except PADD 2 (Mid Continent). We expect Mid Continent refining marginsto be supported by a still historically wide WTI-Brent crude price differential of $10/Bbl in 2012. We forecast 2012composite margins to average $9.36/Bbl, with regional margins averaging the following: East Coast ($7.90/Bbl); MidContinent ($17.25/Bbl); Gulf Coast ($4.35/Bbl); and West Coast ($14.65/Bbl). Our black skies scenario essentiallyrepresents a recession-like environment for gasoline and distillate demand: we forecast gasoline demand to decline2.4% YoY in 2012 and distillate demand to fall 7% YoY.We also highlight VLO as our most preferred refiner equity in our black skies scenario for the reasons outlined above.Under a black skies scenario, we value VLO shares at $26 and estimate shares trade at 3.7x 2012E EV/EBITDA. Froma P/B basis, shares also trade at 0.6x—below the trough level achieved during 2009. UBS 76
    • US Equity Strategy 16 August 2011Table 59: Recession Scenario Analysis – Independent Refiners, Craig WeilandIndependent Refiners 11 vs.12 % Revenue Change* 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesValero VLO NA NA NA 16.2% -1.1% -21.1% $31 $29 $26Tesoro TSO NA NA NA -11.6% -32.5% -56.7% $25 $22 $20HollyFrontier HFC NA NA NA 7.0% -18.3% -32.7% $87 $76 $66*UBS does not forecast revenues for refinersGREY SKIES RECESSION SCENARIOMost Preferred StockValero VLOLeast Preferred StocksN/ABLACK SKIES RECESSION SCENARIOMost Preferred StockValero VLOLeast Preferred StocksN/ASource: UBS UBS 77
    • US Equity Strategy 16 August 2011Integrated & Regulated Natural GasRonald Barone, 212-713-3848Christopher P. Sighinolfi, CFA, 212-813-2239We think the impact of both a grey skies and a black skies type recession should be somewhat muted on the Integratedand Regulated Natural Gas groups. Of course, a black skies type recession would have a more profound impact on theearnings of both groups than a grey skies recession. Pipelines are well insulated against volumetric declines inthroughput, as the Federal Energy Regulatory Commission (FERC) uses a rate-making methodology under which 85-95% of revenues are in the demand change portion of customers’ bills. Hence, negative recessionary impacts onpipeline operations should be minimal.That said, most pipelines have diversified into exploration and production and/or midstream operations (gathering andprocessing). Either a grey skies or a black skies type recession result would likely create lower natural gas, oil, andnatural gas liquids (NGL) prices. We forecast a grey skies recession would result in 2012 NYMEX natural gas prices of$4.25/MMBtu and WTI prices of $70/Bbl, while a black skies type of recession would result in 2012 NYMEX naturalgas prices of $3.75/MMBtu and WTI prices of $50/Bbl. NGL prices are expected to decline in tandem with oil pricesunder both scenarios.The Regulated Natural Gas group consists of gas distribution companies that are regulated by local state commissions.Most gas distribution companies are fairly well insulated from volumetric change, as these companies, with changedregulatory approval, have implemented de-coupling mechanisms that de-couple volume sales from revenue. A numberof the gas distribution companies have relatively safe and attractive yields with a long-standing commitment to theirdividends.The company that we believe would be the most affected under these recessionary scenarios would be QEP Resources.QEP is a pure exploration and production company with midstream operations. Approximately 60% of 2012’sestimated natural gas production and 85% of 2012’s estimated oil production is unhedged. In addition, the company’sliquids midstream operations would also be impacted by lower NGL prices.We think the company that would be the least affected under either recessionary scenario would be Questar Corp.(STR). The largest component of this company is Wexpro, a regulated exploration and production company that sellsgas to its affiliated distribution company (Questar Gas) at prices that net Wexpro an unlevered, after-tax return of 19-20%. Questar Pipeline is FERC regulated and somewhat volume-change insulated by the previously mentioned rate-making methodology. Given these strong fundamentals, contracted growth projects completed in 2011, and a newlyauthorized $100 million share repurchase program, we project Questar Corp. EPS to grow ~7% year over year from2011 to 2012 in both recessionary scenarios. Additionally, as the payout ratio moves toward a stated 60% target, weproject dividend growth in excess of 8%.Master Limited Partnerships (MLP)The MLP group can be divided into five sub-sectors: 1) Energy Infrastructure; 2) Liquids Transportation & Storage; 3)Natural Gas Transportation & Storage; 4) Natural Gas Gathering & Processing; and 5) Exploration & Production.Energy InfrastructureBoth a grey skies and a black skies recession would have a negative earnings impact for all MLPs in the EnergyInfrastructure subsector, with a black skies recession having a much more severe impact. The impact on the individualMLPs would vary depending on the diversity of their businesses. UBS 78
    • US Equity Strategy 16 August 2011Liquids Transportation & StorageWe believe the Liquids Transportation & Storage business would be impacted, as there would be a lower demand forrefined products.Natural Gas Transportation & StorageNatural Gas Transportation & Storage would be the least impacted subsector, in our view, as major components ofearnings are derived from interstate transportation and, as described in the Integrated/Regulated Natural Gas Groupsection, pipelines are well insulated against volumetric declines in throughput because FERC uses a rate-makingmethodology under which 85-95% of revenues are in the demand charge portion of customers’ bills.Natural Gas Gathering & ProcessingThe Natural Gas Gathering & Processing subsector would be impacted materially by both types of recessions, as NGLprices move in tandem with oil prices and we believe WTI crude pricing would decline to $70/Bbl under a grey skiesscenario and $50/Bbl in a black skies scenario. Moreover, the demand for NGLs would also fall due to a globalslowdown in manufacturing activity.Exploration & ProductionFinally, the impact of these recessionary scenarios on the Exploration & Production MLPs would depend on therelative level of commodity hedges in place for 2012 production. For unhedged production, we forecast a NYMEXnatural gas price of $4.25/MMBtu under a grey skies scenario and $3.75/MMBtu under a black skies condition; aspreviously noted, WTI crude prices are also expected to decline.Aside from direct earnings implications, we note that MLPs are reliant on external financing to fund future growthprojects, as they pay out a large portion of cash flow annually in distributions. As such, it is important to highlight thatwe do not envision a shut-down in the capital markets, as was the case in the 2008-2009 recession, and also note thatbalance sheets are, in general, improved from that period. However, we also point out that MLPs are largely held byretail/individual investors and trading liquidity is limited; hence, unit prices are likely to gap down in periods of marketturmoil due to liquidity constraints.Most Affected NameBased on our forecasts and projections, Targa Resources (NGLS) would be the most negatively impacted by eitherrecession scenario due to its extensive natural gas processing operations.Least Affected Name(s)Conversely, under either grey skies or black skies conditions, we think El Paso Pipeline Partners (EPB) would besignificantly insulated from adverse earnings pressures, as its FERC-regulated natural gas transmission, storage, andLNG businesses are contracted under long-term demand charge arrangements with investment-grade counterparties. Assuch, EPB’s earnings and cash flows are largely insensitive to declines in throughput volumes. Furthermore, wehighlight a strong balance sheet, robust distribution coverage (~1.35x), and a strong commitment to distribution growth($0.02/quarter average increases over the previous six quarters).Although investor perception may be to discard units of Linn Energy (LINE) due to its operations in exploration andproduction, we highlight that the company is 100% hedged on its forecast natural gas production through 2015 (30%with put contracts) and 80% hedged on its planned oil production over the same period. Hence, its earnings and cashflows are relatively insensitive to anticipated recession-driven commodity price declines. UBS 79
    • US Equity Strategy 16 August 2011Table 60: Recession Scenario Analysis – Integrated & Regulated Natural Gas, Ronald Barone and Christopher P. Sighinolfi, CFAIntegrated & Regulated Natural Gas 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAGL Resources AGL 3.6% -0.8% -11.5% 3.5% -0.6% -5.4% $42 $41 $38Atmos Energy Corp ATO -3.0% -7.7% -18.6% 9.7% 6.2% 1.8% $33 $31 $29Centerpoint Energy CNP 3.3% -0.2% -12.0% 8.3% 2.8% -3.7% $21 $21 $20El Paso EP 9.0% 6.1% 3.8% 20.9% 10.6% 2.5% $25 $25 $25Energen Resources EGN 9.6% 6.1% -4.0% 6.9% -12.4% -16.9% $72 $70 $67EQT Corp EQT 27.7% 14.9% 4.4% 30.6% -1.1% -18.1% $72 $69 $64National Fuel Gas Corp NFG 19.9% 14.3% 8.7% 17.9% 3.7% -8.3% $80 $79 $77NiSource Inc NI 3.7% 0.2% -11.6% 5.2% -2.2% -9.6% $20 $19 $18QEP Resources QEP 9.0% -7.3% -14.6% 29.1% -15.2% -25.6% $53 $50 $47Questar Corp STR 10.2% 9.2% 5.0% 7.1% 7.1% 7.1% $19 $19 $19Spectra Energy Corp SE 2.9% 0.9% -1.6% -1.7% -12.1% -23.0% $31 $29 $27UGI Corp UGI -1.1% -4.5% -15.7% 18.1% 15.7% 12.4% $38 $38 $38Williams Cos. WMB -5.4% -9.5% -13.7% 6.7% -8.8% -21.4% $39 $36 $32GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksQuestar Corp STREl Paso EPWilliams Cos. WMBLeast 3 Preferred StocksNiSource Inc NISpectra Energy Corp SEQEP Resources QEPBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksQuestar Corp STREl Paso EPWilliams Cos. WMBLeast 3 Preferred StocksNiSource Inc NISpectra Energy Corp SEQEP Resources QEPSource: UBS UBS 80
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 81
    • US Equity Strategy 16 August 2011Integrated Oil / Oil & Gas E&PWilliam A. Featherston, 212-713-9701Our current UBS forecasts assume Brent oil prices of $95.00/Bbl in 2012, with WTI benchmarks averaging $87.00 in2012. Underpinning our price estimates are expectations of global crude oil demand growth slowing to +0.8% in 2012(vs. +1.6% in 2011). We forecast non-OECD demand to remain strong in 2012, at +3.1%, while the OECD shouldreturn to a modest decline of 1.4% in 2012.Grey skies: We assume Brent oil prices of $85.00/Bbl in 2012, with WTI benchmarks averaging $70.00/Bbl in 2012.This is based on: 1) 2012 global oil demand of +0.6%; and 2) OECD demand falling -1.7% in 2012, with non-OECDunchanged versus our current estimates.Black skies: We assume Brent oil prices of $60.00/Bbl in 2012, with WTI benchmarks averaging $50.00/Bbl in 2012.This is based on: 1) 2012 global oil demand of +0.5%; 2) OECD demand falling -1.9% in 2012, with non-OECDunchanged versus our current estimates. For reference, WTI averaged $62/Bbl in 2009 during the depth of the GreatRecession.With respect to natural gas, we currently forecast 2012 NYMEX prices of $5.00/MMBtu. Our forecast assumes robustproduction growth is driven by increased drilling efficiency in the development of domestic gas shale plays. Our greyskies scenario assumes a moderate fall in demand versus our current forecasts of 71 Bcfd in 2012, resulting in aNYMEX gas price of $4.25/Mcf. Our black skies scenario price of $3.75/Mcf assumes a more pronounced decline indemand, in line with 2009 levels, when gas demand slumped -1.6% YoY.Given the share declines in both the E&P and Integrated sectors over the last two weeks, we believe both subsectorsreflect valuations near a grey skies scenario. In fact, we still see price upside for several large cap E&Ps and three outof the four majors using grey skies prices. In an economic environment with greater risk toward lower oil and gasprices, we prefer companies that currently have strong FCF generation (and are, therefore, less vulnerable to cuttingcapex and growth targets), superior return on capital employed (ROCE), and attractive valuation compared to peers.We prefer Anadarko Petroleum, Noble Energy, and Occidental Petroleum, which offer a combination of financialdiscipline and attractive asset bases supporting visible long-term growth outlooks. Under a black skies scenario, we seemore value in gas-weighted E&Ps, given less relative downside in natural gas prices relative to oil. As natural gasprices are already depressed, given an oversupplied market, we see a 25% decline from our base price forecast under ablack skies scenario versus a nearly 40% decline in oil price. We favor Southwestern Energy and Range Resourcesamong the gas-weighted names, given their high-quality asset base and low cost structure in a black skies scenario.Additionally, we see the gas resource plays as potential takeout candidates in a low price environment, putting a softfloor on share prices. We also prefer majors Chevron and ExxonMobil in a low price scenario, given their strongbalance sheets, material FCF generation, and cheaper valuation compared to the E&Ps.To minimize risk in a falling oil and gas price environment, we would avoid companies with high net debt tocapitalization ratios and aggressive spending programs resulting in negative FCF even at high commodity pricescenarios. We note that E&Ps with above-average financial leverage underperformed peers in 2008-2009, wheninvestors fled from companies at risk of breaking debt covenants, and were more susceptible to capex cuts andreductions in growth forecasts. We believe companies with newly acquired acreage may be at an even higher financialrisk due to the need to drill to hold acreage, preventing producers from cutting back on capital programs even underlower price scenarios. We highlight Chesapeake Energy, SandRidge Energy, and EOG Resources with the mostdownside under both grey skies and black skies scenarios. UBS 82
    • US Equity Strategy 16 August 2011Table 61: Recession Scenario Analysis – Integrated Oil, William A. FeatherstonIntegrated Oil 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesHess HES NA NA NA -15.4% -54.3% -124.0% $90 $64 $35Chevron CVX NA NA NA -9.1% -26.6% -59.8% $127 $92 $77ConocoPhillips COP NA NA NA -13.5% -40.3% -81.7% $77 $62 $39ExxonMobil XOM NA NA NA -7.7% -22.2% -50.4% $90 $71 $66GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksChevron CVXExxonMobil XOMLeast 2 Preferred StocksConocophillips COPHess HESBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksChevron CVXExxonMobil XOMLeast 2 Preferred StocksConocophillips COPHess HESSource: UBS UBS 83
    • US Equity Strategy 16 August 2011Table 62: Recession Scenario Analysis – Oil & Gas Exploration and Production, William A. FeatherstonOil & Gas Exploration and Production 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAnadarko Petroleum APC 12.4% -5.0% -27.9% 7.2% -54.1% -131.6% $100 $74 $43Apache APA -1.3% -11.3% -28.7% -17.5% -36.7% -69.1% $146 $124 $85Chesapeake Energy CHK 9.5% -13.7% -35.7% -6.7% -48.8% -89.0% $36 $20 $15Devon Energy DVN 12.9% -3.8% -19.1% 14.9% -21.3% -54.8% $90 $63 $57EOG Resources EOG 15.5% -1.7% -20.7% -4.3% -76.5% -157.2% $110 $80 $49Marathon Oil MRO 0.6% -13.4% -37.1% -11.8% -51.7% -110.4% $38 $28 $23Murphy Oil MUR 3.5% -12.2% -36.0% -20.4% -65.2% -132.9% $68 $54 $32Newfield Exploration NFX 11.8% 3.9% -19.0% 9.7% -10.0% -66.8% $81 $63 $39Noble Energy NBL 17.0% 3.7% -14.5% 17.3% -17.0% -63.9% $113 $88 $53Occidental Petroluem OXY -5.1% -20.3% -43.4% -5.6% -32.5% -72.5% $121 $95 $57Pioneer Resources PXD 13.7% 3.3% -12.9% 3.8% -30.8% -84.7% $96 $76 $46Oasis OAS 84.1% 56.4% 18.4% 93.7% 32.7% -50.7% $33 $28 $20Range Resources RRC 29.5% 24.9% 23.4% 51.7% 33.2% 27.2% $65 $59 $50SandRidge Energy SD 29.7% 17.2% 4.8% nmf nmf nmf $10 $7 $4Southwestern Energy SWN 25.8% 14.4% 6.6% 26.8% -0.1% -18.5% $52 $45 $39Ultra Petroleum UPL 6.9% -10.0% -22.3% -5.4% -37.3% -60.3% $45 $35 $28GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksAnadarko Petroleum APCNoble Energy NBLOccidental Petroluem OXYLeast 3 Preferred StocksChesapeake Energy CHKSandRidge Energy SDEOG Resources EOGBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksSouthwestern Energy SWNRange Resources RRCAnadarko Petroleum APCLeast 3 Preferred StocksChesapeake Energy CHKSandRidge Energy SDEOG Resources EOGSource: UBS UBS 84
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 85
    • US Equity Strategy 16 August 2011Oil Services & DrillingAngie Sedita, 212-713-3587Our scenario analysis for revenue and margin assumptions is largely driven by E&P spending assumptions. Under agrey skies scenario, we forecast North American capex declines of 20%-25%, with a 5% pull-back internationally. Fora black skies scenario, we forecast North American capex declines of up to 45%, with a 7%-10% reductioninternationally. Our scenario analysis reflects the following 2012 commodity price assumptions: grey skies $70/BblWTI, $4.25/Mcf natural gas and black skies $50/Bbl WTI and $3.75/Mcf natural gas.For the oil service companies, we have used the recent downturn in 2008 to forecast the impact of a black skiesscenario, assuming a more significant decline in North American activity than international. Notably, our down-cycleforecasts for 2012 use our current 4Q11 estimates as a starting point. As such, given the sharp ramp inrevenues/earnings during 2011 (particularly NAM), the revenue/earnings decline for our forecast scenarios is relativelymuted.For the offshore and land drillers, we lowered our forecast dayrate assumptions to recent lows, as well as assuming anumber of rigs would become idle under a black skies scenario. However, again, the forecast decline inrevenues/earnings is muted by the addition of newbuild rigs entering the fleets in late 2011/2012.Our top three preferred stocks in a market downturn are Schlumberger, Transocean, and Baker Hughes. We thinkSchlumberger has by far the most protection in a down-cycle, given its size and global scale, a strong balance sheet,and market leading position across most of its product lines. Most importantly, the company is the least leveraged tothe North American market and the most exposed to the international markets (international at 70% of 2012E revenues).In a market downturn, the North American land markets would be the most impacted. We would anticipate NorthAmerican E&P spending to decline 20%-45% (grey skies to black skies scenarios), while international and deepwaterE&P spending would only decline 5%-10% (some areas likely flat). Transocean would also be relatively well protected,given its strong FCF backlog ($10.9bn) and 6% dividend yield. Baker Hughes would be our third preferred stock in adownturn, given an even balance between North American and international revenues.Our least preferred stocks would be Weatherford, Patterson-UTI, and Nabors Industries. Weatherford would be themost impacted by a downturn, given its high operating leverage, as well as its high debt load, at 42% net debt tocapitalization. Patterson-UTI and Nabors would also be highly impacted, given the high leverage to the more volatileNorth American land markets. In the US, the E&P companies will spend within cash flows. We would anticipate asharp drop in E&P cash flow under a black skies scenario, given the need for higher commodity prices to drive break-even (or attractive) field economics. UBS 86
    • US Equity Strategy 16 August 2011Table 63: Recession Scenario Analysis – Oil Services & Drilling, Angie SeditaOil Services & Drilling 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesOil ServicesBaker Hughes BHI 15.5% 0.5% -14.9% 34.2% 11.1% -32.0% $102 $62 $48Halliburton HAL 15.7% -0.6% -16.8% 28.2% 7.5% -35.0% $68 $45 $34Schlumberger SLB 21.1% 9.7% -5.0% 42.5% 28.4% -10.0% $110 $80 $65Weatherford Internatio WFT 18.7% 4.5% -9.6% 94.8% 49.5% -30.0% $28 $17 $12Offshore DrillersDiamond Offshore DO -3.0% -5.0% -13.2% -13.6% -19.0% -35.1% $82 $64 $49ENSCO International ESV 50.4% 45.4% 37.6% 61.2% 46.8% 32.1% $62 $48 $37Noble Corporation NE 32.3% 27.9% 21.7% 135.7% 114.2% 94.0% $50 $31 $24Rowan Companies RDC 51.2% 40.5% 26.8% 117.7% 76.5% 40.9% $50 $34 $27Transocean RIG 12.0% 9.4% 2.9% 72.0% 56.9% 31.1% $72 $58 $44Land DrillersHelmerich & Payne HP 20.4% 10.9% 4.0% 24.4% 8.9% -30.0% $75 $53 $43Nabors Industries NBR 22.6% 15.0% -1.0% 68.9% 2.0% -35.0% $27 $17 $14Patterson-UTI Energy PTEN 20.5% 5.0% -5.0% 28.5% -10.0% -55.0% $36 $21 $16GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksSchlumberger SLBTransocean RIGBaker Hughes BHILeast 3 Preferred StocksWeatherford WFTPatterson-UTI Energy PTENNabors Industries NBRBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksSchlumberger SLBTransocean RIGBaker Hughes BHILeast 3 Preferred StocksWeatherford WFTPatterson-UTI Energy PTENNabors Industries NBRSource: UBS UBS 87
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 88
    • US Equity Strategy 16 August 2011 Financials UBS 89
    • US Equity Strategy 16 August 2011Brokers and Universal BanksWilliam Tanona, CFA, 212-713-2325While the Brokers and Universal banks are extremely sensitive to macro trends and would likely suffer in either a blackor grey skies scenario, the companies are far better positioned in terms of capital and liquidity than prior to the financialcrisis. Therefore, we would see both scenarios as earnings events rather than capital-threatening situations. Bothscenarios would have a greater earnings impact on the universal banks, which would likely return to building lossreserves on top of higher charge-offs. We expect that in a grey skies scenario, charge-offs would move up slightlytowards the end of 2011 and would increase approximately 100bps in 2012, while in a black skies scenario we expectthat 2012 charge-off levels could return to near their 2009/2010 peak levels. However, the banks are substantially betterreserved than prior to the financial crisis, so the increased credit losses are likely to be manageable. Additionally, in theface of continued low interest rates, net interest margin (NIM) is likely to remain challenged through 2012, andcompanies with wealth management operations are likely to face lowered management fee income as a result ofdeclining AUM balances.We expect both investment banking (IB) and trading revenues would be pressured in either scenario, as loweredconfidence levels would lead clients to pull back on transaction levels, although trading volumes could increase abovethe dismal levels seen earlier this summer. We estimate that in a black skies scenario, IB revenues could declineapproximately 35% in 2012, with trading revenues down approximately 20%. Due to the already lowered marketconditions, most of our companies have already announced cost-reduction plans, which we would expect to beaccelerated in either a grey or black skies scenario. However, as the banks and brokers have increased their fixed coststructures, their ability to reduce costs will be more constrained than in prior downturns.We expect that JPMorgan and Goldman Sachs would navigate these scenarios more effectively than peers, as thesecompanies have the strongest capital markets operations and fewer legacy overhangs from the credit crisis. We seeBank of America facing the most concerns in these scenarios, with a downturn likely leading to further mortgage lossesand exacerbating the bank’s recent troubles. Morgan Stanley is still in the early stages of rebuilding its fixed income,currency and commodities (FICC) franchise and integrating Morgan Stanley Smith Barney (MSSB), and we expect thefirm’s turnaround would be challenged in a downturn scenario. UBS 90
    • US Equity Strategy 16 August 2011Table 64: Recession Scenario Analysis – Brokers and Universal Banks, William Tanona, CFABrokers and Universal Banks 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesBank of America BAC 19.4% 10.7% 2.5% nmf nmf nmf $11 $8 $5Citigroup C 6.6% 3.8% -0.1% 30.9% -19.3% -62.4% $56 $36 $25Goldman Sachs GS 10.0% 3.4% -5.5% 58.4% 49.0% 22.2% $200 $175 $120JPMorgan JPM 6.6% 1.6% -3.5% 15.4% -21.7% -59.4% $54 $33 $26Morgan Stanley MS 15.7% 6.0% 0.0% 46.1% 16.5% -10.8% $25 $19 $14GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksJP Morgan JPMGoldman Sachs GSLeast 2 Preferred StocksBank of America BACMorgan Stanley MSBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksJP Morgan JPMGoldman Sachs GSLeast 2 Preferred StocksBank of America BACMorgan Stanley MSSource: UBS UBS 91
    • US Equity Strategy 16 August 2011Consumer & Specialty FinanceDean Choksi, CFA, 212-713-2382To formulate our grey skies and black skies scenario analysis for Ares Capital and American Capital, we looked at howtheir portfolios performed from a credit and mark to market perspective during the 2008 and 2009 financial crises. Ourblack skies scenario was based on similar performance as in 2008 and 2009, while our grey skies scenario wasapproximately 50% “as bad” as our black skies analysis based on the cumulative GDP decline of 4.5% under a blackskies scenario and 2% under a grey skies scenario. For American Capital we assumed non-accruals were higher thanduring the last recession since its current non-accruals are still elevated. Our non-accruals and mark to marketassumptions for Ares Capital were also worse than its performance during the 2008-2009 recession, since we factoredthe greater deterioration that Allied Capital experienced on the remaining Allied assets in the current Ares Capitalportfolio.We were more optimistic in our scenario valuation/multiple assumptions. During the 2008-2009 recession businessdevelopment companies (BDCs) traded as low as 0.3x book value. We believe part of the reason the sector traded atsuch steep discounts to book value was because of near-term debt maturities (for American Capital) and solvencyissues at several large commercial banks that provided revolving credit facilities to the BDCs. As a sector, BDCs haveextended their weighted average debt maturities, and our scenario valuation multiples implicitly assume the marketdoes not price in the failure/liquidation of commercial banks with exposure to the sector. UBS 92
    • US Equity Strategy 16 August 2011Table 65: Recession Scenario Analysis – Consumer & Specialty Finance, Dean Choksi, CFAConsumer & Specialty Finance 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAmerican Capital ACAS 9.0% -31.0% -38.0% 0.0% -57.0% -72.0% $12 $5 $3Ares Capital ARCC 21.0% -8.0% -19.0% 15.0% -13.0% -38.0% $19 $10 $6GREY SKIES RECESSION SCENARIOMost Preferred StockAres Capital ARCCLeast Preferred StockN/ABLACK SKIES RECESSION SCENARIOMost Preferred StockAres Capital ARCCLeast Preferred StockN/ASource: UBS UBS 93
    • US Equity Strategy 16 August 2011Exchanges and E-BrokersAlex Kramm, CFA, 212-713-4060ExchangesTransaction volume represents the most significant top-line driver for exchanges. In the short term activity levels aredriven by a variety of factors, such as volatility and price level of the underlying instrument, which can have bothpositive and negative implications on volumes. Not surprisingly, the events of the last few weeks have demonstratedthat exchanges can actually perform very well in challenging times, as heightened volatility and uncertainty has drivenrecord volumes for many markets recently. Many exchanges also delivered strong earnings during the financial crisis oflate 2008, which makes it difficult to have high conviction in forecasting transaction volumes in our grey skies andblack skies scenarios. That said, we believe there is a decent relationship between macroeconomic activity and volumesin the medium and long term. Capital markets have historically grown at a rate of ~2x GDP in the US, and therefore,we would expect a period of macroeconomic declines to take a toll on the exchanges’ most important revenue driver.Our base-line assumptions for annual volume declines are 5% and 12.5% for grey skies and black skies scenarios,respectively. We have also adjusted these volume assumptions based on the underlying product type. For example, weexpect commodities volume to be much more levered to macroeconomic activity than other markets.E-BrokersE-Brokers are extremely sensitive to macro trends and would likely suffer in either a grey skies or black skies scenario.The companies’ most significant top-line drivers include retail trading volume, market performance, and net interestmargins (NIMs). We believe all of these drivers would likely be negatively impacted by a period of macroeconomicdeclines. Increased uncertainty would likely drive retail traders to the sidelines (grey skies: -5%, black skies: -12.5%),market declines would erode portfolio values, and a low-rate environment would continue to challenge NIMs.We expect defensive exchange operators to outperform in a period of macroeconomic declines. With only ~30% ofrevenue coming from transaction-related businesses, we believe NDAQ is best positioned in the exchange group ifvolumes are significantly challenged. The company is also trading at the lowest forward multiple in the group, whichshould keep multiple compression to a minimum. As the most diversified derivatives exchange, we also view CMEGroup (CME) as defensively positioned for a downturn. Commodities-heavy IntercontinentalExchange, Inc. (ICE)could be challenged. We prefer TD Ameritrade (AMTD) to Charles Schwab Corp. (SCHW) in a downturn scenario.AMTD has lower leverage to interest rates and client assets, while its significant trading operation is driven primarilyby active traders who have been resilient during challenging periods. UBS 94
    • US Equity Strategy 16 August 2011Table 66: Recession Scenario Analysis – Exchanges and E-Brokers, Alex Kramm, CFAExchanges and E-brokers 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesChicago Board Options Exchange CBOE 17.6% 4.2% -7.4% 30.2% 9.5% -11.1% $25 $18 $12CME Group CME 11.7% -4.4% -11.3% 17.8% -6.9% -18.3% $325 $218 $164IntercontinentalExchange ICE 13.0% -3.3% -8.8% 16.5% -7.9% -19.4% $140 $89 $67NASDAQ OMX Group, Inc. NDAQ 7.7% -3.3% -7.7% 15.2% -6.5% -17.8% $28 $20 $16NYSE Euronext NYX 7.8% -4.8% -10.5% 13.7% -16.2% -33.6% $48 $21 $15TD Ameritrade Holding Corp. AMTD 11.1% 0.8% -6.2% 25.6% 6.0% -13.3% $21 $15 $10The Charles Schwab Corp. SCHW 24.9% -2.2% -15.0% 59.0% -3.8% -34.7% $22 $10 $6LPL Investment Holdings LPLA 14.5% 2.5% -8.5% 30.3% 4.5% -20.2% $37 $25 $16Apollo Global Management LLC APO 79.1% 207.8% 14.6% 107.4% 639.1% nmf $21 $11 $6GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksTD Ameritrade Holding Corp. AMTDNASDAQ OMX Group, Inc. NDAQLPL Investment Holdings LPLALeast 3 Preferred StocksChicago Board Options Exchange CBOEIntercontinentalExchange ICEThe Charles Schwab Corp. SCHWBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksNASDAQ OMX Group, Inc. NDAQCME Group CMETD Ameritrade Holding Corp. AMTDLeast 3 Preferred StocksThe Charles Schwab Corp. SCHWChicago Board Options Exchange CBOELPL Investment Holdings LPLASource: UBS UBS 95
    • US Equity Strategy 16 August 2011Homebuilders & Building ProductsDavid Goldberg, 212-713-9427In estimating the impact to homebuilder results in this scenario, we assumed revenues decline 10%, with units and priceeach down 5%. Given that new home prices have declined nearly 20% from the peak, builders would be unable toreduce them much more and still generate a minimal profit. We assume builder operating margins under grey skiesretreat back to 2009-2010 levels. We believe the decline in revenues anticipated—coupled with builders’ efforts tofurther adjust their cost structures—would help minimize the impact to profits. Further, this assumption is in line withthe economic backdrop outlined by UBS’ Chief U.S. Economist Maury Harris and his team, given that growth over thistime (2009-2010) was similar to that assumed under the grey skies scenario. Regarding impairments, our analysisassumes impairments would equal 5% of inventories, in line with our projected price decline. In order to come up withour scenario valuations, we applied our current multiples to the adjusted book values (to reflect the additionalimpairments that would be incurred).For black skies, we expect revenues to decline 15%, with units down 5% and price down 10%. The increased severityof the economic conditions in this scenario would likely cause greater pricing pressure in the existing home market,which would force builders to implement further price declines/incentives. We assume builder operating margins underblack skies would retreat back to levels seen during the depths of the downturn (in 2008-2009). Our black skiesanalysis assumes impairments would equal 15% of inventories. Regarding valuation, we applied our current multiplesto the adjusted book values (to reflect the additional impairments that would be incurred). UBS 96
    • US Equity Strategy 16 August 2011Table 67: Recession Scenario Analysis – Homebuilders & Building Products, David GoldbergHomebuilders & Building Products 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesDR Horton DHI 13.9% -10.0% -15.0% nmf nmf nmf $13 $12 $11Lennar Corp LEN 15.8% -10.0% -15.0% 100.2% nmf nmf $21 $17 $17Masco Corp MAS 1.9% -3.0% -10.0% nmf nmf nmf $8 $6 $5Mohawk Industries MHK 5.1% -3.0% -10.0% 39.2% -2.0% -83.0% $75 $71 $69PulteGroup Inc. PHM 14.7% -10.0% -15.0% nmf nmf nmf $8 $7 $7Toll Brothers TOL 13.9% -10.0% -15.0% nmf nmf nmf $25 $24 $22GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksToll Brothers TOLLennar Corp LENDR Horton DHILeast 2 Preferred StocksMasco Corp MASPulte Group PHMBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksToll Brothers TOLMohawk Industries MHKDR Horton DHILeast 2 Preferred StocksMasco Corp MASPulte Group PHMSource: UBS UBS 97
    • US Equity Strategy 16 August 2011Insurance (Life)Andrew Kligerman, 212-713-2492The operating revenues/earnings of the U.S. life group are relatively resilient during recessions because the majority oftheir top/bottom lines comes from in-force business. Other macro factors—namely equity markets and, to a lesserextent, new money yields—likely will have a more immediate earnings and book value impact. a) For equity markets,our grey skies scenario assumes the S&P500 falls to 1,075 by year-end 2011 (from 1,321 at 2Q11-end), then rises to1,275 by year-end 2012. Our black skies scenario assumes the S&P500 drops to 1,075 by year-end 2011, then fallsfurther to 800 by 2Q12 before rising to 900 by year-end 2012. Potential equity market-driven deferred acquisition costand variable annuity reserve true-ups are not reflected in our operating EPS projections, but have been factored into ourbook value forecasts. b) We assumed that low new money yields would continue to exert pressure on our life insurers.More specifically, we assumed that the average of Moody’s Corporate Aa and A bond yields would fall and remain at4.75% and 4.25% under our grey skies and black skies scenarios, respectively. We also assumed that life insurerswould err on the side of prudence by halting their share repurchase plans under both scenarios.We favor life insurers with stronger capital positions because of their ability to weather challenging economic, equitymarket, interest rate, and credit conditions. During the last financial crises, it was the better-capitalized insurers thatwere better able to take advantage of acquisition and market share gain opportunities arising from distress at less-well-capitalized competitors.Our most preferred U.S. life stocks under the grey and black skies scenarios are Reinsurance Group of America,Ameriprise Financial, and MetLife—given their solid excess capital levels, sound investments, relatively favorablecombined sensitivity to lower equity markets, interest rates, and U.S. GDP growth, as well as geographicaldiversification.Our least preferred stock under these scenarios is Principal Financial, given its relative weakness on the factorsmentioned above and a less compelling valuation proposition. Although Genworth Financial’s earnings are the mostvulnerable under a recessionary scenario due to its U.S. mortgage insurance unit, we think downside risk is mitigatedby its extremely low current valuation of just ~0.25x trailing BVPS (ex-AOCI) and our belief that the market hasalready priced in a highly negative outlook, given questions about the solvency of its mortgage insurer competitor PMIGroup. UBS 98
    • US Equity Strategy 16 August 2011Table 68: Recession Scenario Analysis – Insurance (Life), Andrew KligermanInsurance (Life) 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAFLAC Inc. AFL 3.4% 1.9% 1.4% 4.9% 2.0% 1.5% $50 $46 $41AIG AIG 5.0% 3.6% 2.3% -3.3% -11.2% -18.6% $30 $26 $21Ameriprise AMP 8.5% 1.8% -8.7% 16.7% 2.5% -7.1% $76 $54 $44Genworth Financial GNW -0.6% -2.3% -3.8% 185.4% 154.4% 91.7% $22 $15 $9Hartford Financial HIG 2.3% -0.5% -5.6% 35.6% 26.9% 13.4% $42 $34 $26Lincoln National LNC 5.4% 3.8% 1.1% 1.2% -4.6% -12.3% $41 $37 $29MetLife MET 6.5% 3.1% 2.0% 11.3% 4.8% 1.6% $60 $52 $47Principal Financial PFG 6.3% 1.2% -7.1% 15.1% 5.2% -10.2% $33 $28 $22Prudential Financial PRU 5.3% 2.4% -0.8% 13.9% 4.1% -4.7% $77 $67 $56Reinsurance Group of America RGA 6.7% 2.5% 1.7% 10.1% 8.6% 8.0% $75 $74 $64GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksAmeriprise Financial AMPMetLife METReinsurance Group of America RGALeast Preferred StockPrincipal Financial PFGBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksAmeriprise Financial AMPMetLife METReinsurance Group of America RGALeast Preferred StockPrincipal Financial PFGSource: UBS UBS 99
    • US Equity Strategy 16 August 2011Insurance (Non Life)Brian Meredith, 203-719-2899The property casualty insurance industry is relatively insensitive to economic activity, with recessions having a modestimpact on top-line growth and minimal impact on profitability. Inflation is generally a bigger concern for propertycasualty insurers’ profitability, and the low interest rate environment will continue to pressure investment yields andROEs. For the personal lines insurers (Allstate and Progressive), we have taken a half a point/one point off personalauto premium growth for the grey/black skies scenarios, as consumers reduce the amount of coverage they purchase ina recession. As far as profitability, there is little correlation with insured losses and economic growth. A decline in oilprices can result in an increase in miles driven (resulting in more accidents); however, the weaker economy and higherunemployment will have a depressing impact on miles driven. For commercial lines insurers (ACE Ltd., Arch Capital,Axis Capital, Chubb, Travelers, W. R. Berkley, and XL Group), we have reduced our premium growth assumptionsmore for companies with larger workers’ compensation insurance exposure (which is sensitive to employment levels)and surety exposure (which is sensitive to construction activity). Additionally, it is less likely that casualty insurancepricing will improve in a recession. Like personal lines, there is not much evidence of changes in insured loss activityduring a recession, so our changes in profitability are minimal. Finally, the reinsurers (PartnerRe, EverestRe,RenaissanceRe, and Validus Holdings) have little, if any, impact from economic activity; therefore, we have notchanged revenue growth and profitability assumptions.The insurance brokers (Aon Corp, Marsh & McLennan, and Willis Group Holding) are more sensitive to economicactivity. Revenues will be impacted to the same extent as commercial lines insurance premiums; however, profitabilityis more impacted, as brokers have a fairly large fixed cost base, with lower revenues impacting margins. Additionally,Aon and Marsh & McLennan have consulting businesses that make up more than 40% of revenues and are moreimpacted by a recession.The least preferred stocks in a recession would be the insurance brokers, with Marsh & McLennan and Aon being themost impacted due to a heavy mix of consulting businesses. The most preferred are the property reinsurers, Validus andRenaissanceRe, which are largely insensitive to an economic slowdown. UBS 100
    • US Equity Strategy 16 August 2011Table 69: Recession Scenario Analysis – Insurance (Non-Life), Brian MeredithInsurance (Non-Life) 11 vs.12 % Revenue Change* 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesACE Limited ACE 3.7% 2.5% 1.1% 14.5% 13.3% 12.2% $77 $77 $76Allstate Corp. ALL 5.0% 4.7% 4.4% 185.6% 182.1% 178.4% $33 $33 $33AON Corp. AON 3.0% 1.7% 0.6% 11.6% 9.9% 5.8% $62 $61 $59Arch Capital ACGL 3.9% 3.5% 3.1% 45.0% 44.5% 44.0% $36 $36 $36Axis Capital AXS 3.8% 3.6% 3.4% nmf nmf nmf $39 $39 $39Chubb Corp. CB 2.2% 1.6% 1.0% 9.5% 9.3% 7.2% $73 $73 $73Marsh & McLennan MMC 5.5% 3.7% 2.0% 18.6% 13.0% 7.5% $33 $32 $30Progressive Corp. PGR 5.1% 4.6% 4.1% 13.8% 13.4% 13.0% $22 $22 $22PartnerRe Ltd. PRE -0.7% -0.7% -0.7% nmf nmf nmf $79 $79 $79Everest Re Group RE 2.6% 2.4% 2.0% 580.0% 578.0% 576.0% $106 $106 $106RenaissanceRe Holdings RNR 3.6% 3.6% 3.6% nmf nmf nmf $77 $77 $77Travelers Cos. TRV 3.0% 2.4% 1.8% 53.7% 52.7% 52.0% $66 $66 $66Validus Holdings VR 9.4% 9.4% 9.4% 287.0% 287.0% 287.0% $38 $38 $38W R Berkley Corp. WRB 6.4% 5.5% 4.0% 10.5% 10.2% 9.9% $33 $33 $33Willis Group WSH 4.5% 3.5% 2.8% 13.1% 11.0% 8.0% $42 $41 $40XL Capital XL 4.6% 4.0% 3.5% 63.2% 62.0% 61.0% $23 $23 $23* for P&C re/insurers, revenues = net premium writtenGREY SKIES RECESSION SCENARIOTop 3 Preferred StocksValidus Holdings VRAxis Capital AXSRenaissanceRe Holdings RNRLeast 3 Preferred StocksMarsh & McLennan MMCAON Corp. AONWillis Group WSHBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksValidus Holdings VRAxis Capital AXSRenaissanceRe Holdings RNRLeast 3 Preferred StocksMarsh & McLennan MMCAON Corp. AONWillis Group WSHSource: UBS UBS 101
    • US Equity Strategy 16 August 2011REITsRoss Nussbaum, 212-713-2484For the grey skies scenario, we generally assumed a more modest downturn in commercial real estate demandfundamentals than what was experienced during the recession of 2008-2009. Primary changes to demand assumptionsincluded: 1) 50-100 bp occupancy declines; 2) 0-5% declines in market rental rates; and 3) residual impacts to reducedoccupancy (ie, lower recoveries for retail REITs). We also assumed a +0-50 bp rise in capitalization (cap) rates in ourNAVs, highly dependent on quality of real estate (flat cap rates for the highest quality), to reflect the impact of higherlending spreads (and debt costs) on private market values.For the black skies scenario, we generally assumed a downturn in commercial real estate demand fundamentalsconsistent with what was experienced during the recession of 2008-2009. Primary changes to demand assumptionsincluded: 1) 200-300 bp occupancy declines; 2) 5-10% declines in market rental rates; and 3) higher residual impacts toreduced occupancy (ie, lower recoveries for retail REITs). We also assumed a +50-100 bp rise in cap rates in our NAVs,highly dependent on quality of real estate (+50 bp cap rates for the highest quality), to reflect the impact of higherlending spreads (and debt costs) on private market values.As the landlord to the economy, commercial real estate fundamentals are tied to underlying macroeconomic conditions.Slowdowns or reductions in job growth, consumer spending, and manufacturing would negatively impact occupancyand rental rates. However, due to the longer term nature of most REITs leases, the impact to cash flows occurs overtime, which mitigates the immediate hit from economic changes. A decline in property level cash flows could also havenegative valuation implications as investors require higher going-in yields to compensate for reduced growth prospects.Under a grey skies scenario, our most preferred stocks are as follows:Tanger Outlets (SKT) – We favor Tanger’s defensive portfolio of outlet centers, which proved an ability to continueto generate positive property-level net operating income (NOI) growth throughout the recession of 2008-2009. Retailerdemand for outlets remains very strong, and we would expect a focus on value to remain through a recession scenario.American Campus Communities (ACC) – We believe shares of student housing REIT ACC to be an attractivedefensive play on the economy, given the relatively stable and visible cash flows on highly occupied assets achieving3-4% annual rent increases. The macro factors supporting traditional multifamily demand (notably lack of supply) arealso benefiting student housing fundamentals. Meanwhile, an estimated 1.1% annual increase in enrollments over thenext several years should also help support demand and pricing trends. ACC’s assets are mostly located on or nearcollege campuses with some of the highest enrollment growth in the US.Camden Property Trust (CPT) – We believe CPT is an attractive way to play the recovery in the apartment sector, asshares trade at a relative discount to peers. Camden’s portfolio is primarily focused in the Sunbelt market (Washington,DC, Houston, Charlotte, Atlanta, etc.), which should continue to benefit from a declining homeownership rate andhistorically low turnover. UBS 102
    • US Equity Strategy 16 August 2011Our least preferred stocks under a grey skies scenario are as follows:Digital Realty (DLR) – As DLR is a global owner/operator of data centers, we would be concerned about a slowdownin leasing velocity in a recession scenario, which could lead to a reduction in cash flow projections and funds fromoperations per share (FFOPS) estimates. This would likely result in valuation compression, as DLR is currently valuedas a growth stock.DuPont Fabros (DFT) – As DFT is an owner/operator of data centers throughout the US, we would be concernedabout a slowdown in leasing velocity in a recession scenario, which could lead to a reduction in cash flow projectionsand FFOPS estimates. This would likely result in valuation compression, as DuPont is currently valued as a growthstock.DCT Industrial (DCT) – As DCT is a Class B, secondary-market owner of industrial assets, we are concerned aboutthe dividend in a recession scenario. DCT is not currently covering its dividend with cash flows and, as such, we wouldbe concerned about a cut and lower yield.Under a black skies scenario, our most and least preferred stocks remain almost the same as under a grey skies scenario,with the exception of Simon Property Group (SPG) replacing Camden Property Trust as a most preferred. SPG hasproven an ability to continue to grow cash flows through even the worst of times, managing to generate positive same-store NOI growth during the “great recession.” This is a testament not only to management’s capabilities and thequality and strength of the mall portfolio, but also to the defensive nature of the company’s outlet/value portfolio(Chelsea Premium Outlets and Mills), which comprises 40% of Simon’s portfolio NOI. UBS 103
    • US Equity Strategy 16 August 2011Table 70: Recession Scenario Analysis – REITs, Ross NussbaumREITs 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesOffice REITsAlexandria Real Estate ARE 4.3% 2.9% 0.7% 5.8% 3.8% 1.1% $80 $72 $63Biomed Realty Trust BMR 3.2% 2.1% -0.6% 8.6% 6.6% 1.6% $20 $17 $14Boston Properties BXP 1.0% 0.1% -0.9% 7.0% 5.9% 4.8% $104 $98 $91Brandywine Realty BDN 0.8% -0.8% -3.6% -1.1% -5.4% -12.6% $12 $10 $7Brookfield Office Properties BPO 3.6% 3.0% 2.6% 6.9% 5.6% 4.8% $19 $18 $16Douglas Emmett Inc DEI 1.2% -0.1% -3.1% 0.8% -1.1% -4.9% $20 $16 $13Kilroy Realty KRC 7.6% 6.5% 4.3% 13.4% 11.5% 7.8% $45 $42 $38Mack-Cali Realty CLI 0.8% -0.8% -3.6% 1.4% -1.1% -5.4% $36 $32 $27Parkway Properties PKY 0.8% -0.7% -2.7% 31.8% 25.1% 15.8% $18 $15 $11SL Green SLG 8.0% 6.9% 6.1% -10.1% -11.7% -12.9% $85 $77 $70Vornado Realty VNO 0.0% 1.8% 1.2% 2.3% 2.2% 1.3% $105 $96 $91Industrial REITsDCT Industrial Trust Inc DCT 2.7% 1.0% -1.5% 5.4% 2.1% -2.8% $6 $5 $4Duke Realty DRE 0.2% -1.0% -3.0% 3.7% 1.4% -2.8% $15 $12 $10EastGroup Properties EGP 2.5% 1.0% -1.3% 3.5% 1.1% -2.4% $47 $38 $32Liberty Property LRY 0.8% -0.6% -3.1% 1.7% -0.5% -4.4% $35 $31 $26ProLogis PLD 24.1% 22.4% 18.7% 17.3% 15.6% 11.8% $37 $34 $32STAG Industrial STAG 2.1% 0.4% -2.5% 6.0% 3.5% -0.7% $13 $12 $10Data CentersDigital Realty Trust DLR 6.1% 2.1% -1.1% 7.3% 5.0% 1.1% $51 $45 $40Dupont Fabros Technology DFT 2.6% 2.0% 1.1% 12.9% 9.1% 6.9% $22 $20 $19Student HousingAmerican Campus ACC 2.3% -2.5% -4.2% 11.1% 7.7% 5.2% $40 $33 $30Education Realty Trust EDR 4.9% -1.9% -3.9% 15.5% 9.8% 3.8% $10 $9 $8MultifamilyAIMCO AIV 3.4% -0.8% -1.4% 22.4% 17.3% 13.8% $26 $20 $19AvalonBay AVB 7.2% -1.8% -2.7% 21.9% 17.5% 15.3% $130 $113 $92BRE Properties BRE 5.5% -0.9% -1.8% 12.1% 9.9% 7.7% $50 $43 $40Colonial Properties CLP 5.2% -0.7% -1.3% 9.3% 7.1% 5.3% $21 $20 $20Camden Property CPT 6.1% -0.9% -1.5% 29.9% 27.1% 25.5% $71 $62 $57Equity Residential EQR 4.8% -1.2% -2.1% 17.4% 14.4% 11.9% $63 $54 $48Essex Property ESS 6.2% -1.1% -1.9% 12.6% 10.2% 7.8% $140 $120 $107Home Properties HME 4.1% -0.7% -1.2% 12.1% 10.2% 8.7% $62 $55 $50Post Properties PPS 4.7% -0.8% -1.4% 5.9% 3.7% 1.9% $42 $38 $37UDR, Inc UDR 6.6% -0.7% -1.8% 12.4% 10.7% 8.1% $25 $23 $21HealthcareHealth Care REIT HCN 12.2% -1.8% -9.2% 12.7% 9.1% -7.9% $57 $41 $27HCP, Inc. HCP 3.0% -1.4% -7.8% 10.1% 8.1% 1.2% $36 $34 $27Ventas, Inc. VTR 18.4% -1.7% -5.5% 8.5% 6.7% -1.0% $56 $46 $39Senior Housing Properties SNH 2.3% -1.8% -10.1% 8.2% 5.0% -8.3% $23 $21 $16Omega Healthcare Investors OHI 1.4% -5.0% -20.0% 3.6% -3.1% -23.0% $19 $12 $7Healthcare Realty HR 2.3% -1.0% -2.2% 17.2% 16.0% 14.8% $21 $15 $14Regional MallsCBL & Associates CBL 0.8% -0.9% -3.5% -0.9% -4.2% -9.6% $18 $16 $13General Growth GGP 2.0% 0.5% -1.7% 8.1% 4.4% -1.2% $15 $15 $13Macerich Co. MAC 2.7% 1.7% -0.5% 9.4% 8.1% 5.2% $52 $52 $47Tanger Factory SKT 3.2% 2.1% 0.0% 7.5% 5.8% 2.6% $29 $28 $26Simon Property SPG 2.7% 1.7% 0.0% 5.4% 3.9% 1.2% $125 $123 $112Taubman Centers TCO 3.7% 2.4% 0.5% 7.2% 5.1% 1.7% $60 $59 $53Shopping CentersDevelopers Diversified DDR 3.7% 1.6% -1.6% 10.5% 6.7% 1.1% $16 $15 $13Federal Realty FRT 3.3% 2.4% 0.2% 5.6% 4.1% 0.5% $89 $87 $80Kimco Realty KIM 2.7% 1.0% -2.6% 3.9% 1.8% -1.5% $20 $18 $17Regency Centers REG 2.2% 0.6% -2.1% 6.4% 3.5% -1.2% $46 $42 $38Weingarten Realty WRI 4.7% 2.7% -0.3% 3.1% -0.7% -6.5% $25 $23 $20Self-StoragePublic Storage PSA 2.7% -0.1% -3.3% 5.4% 3.2% -0.3% $112 $105 $97Net LeaseRealty Income O 14.4% 11.8% 9.3% 7.6% 4.8% 2.0% $33 $31 $30National Retail Properties NNN 12.6% 8.4% 4.2% 5.3% 0.0% -6.2% $26 $25 $24GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksTanger Outlets SKTAmerican Campus Communities ACCCamden Property Trust CPTLeast 3 Preferred StocksDigital Realty DLRDuPont Fabros DFTDCT Industrial DCTBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksTanger Outlets SKTAmerican Campus Communities ACCSimon Property Group SPGLeast 3 Preferred StocksDigital Realty DLRDuPont Fabros DFTDCT Industrial DCTSource: UBS UBS 104
    • US Equity Strategy 16 August 2011 Healthcare UBS 105
    • US Equity Strategy 16 August 2011BiotechnologyMatthew Roden, PhD, 212-713-2491The business model for biotechnology companies is to create cutting-edge life-saving technologies for devastatingdiseases for which currently available treatment approaches are lacking. Examples include novel cancer therapies, suchas Celgene’s (CELG’s) Revlimid, which has added years of disease-free survival time for patients with multiplemyeloma, and Gilead Sciences’ (GILD’s) all-in-one HIV therapies, which have enabled HIV+ individuals to lead anormal life with no detectable virus in the bloodstream. Because these treatment approaches are relatively non-discretionary, economic downturns tend to have little effect on operating results for the established large-cap biotechgroup. Accordingly, the large-cap group dramatically outperformed the broader markets leading into the troughs of2008 and 2009 (big biotech: +10% in 2008 vs. the S&P500: down 38%), although being counter-cyclical, the groupunderperformed in the recovery. Revenues and EPS continued to grow despite the Great Recession and, according toour discussions with biotech management teams, the damage was limited to those who lost insurance coverage asunemployment rose and healthcare utilization decreased.Under grey skies and black skies scenarios, we assume that each percentage point decrease in GDP results in a decreasein specialty drug demand by 1.3% based on the KGI for healthcare utilization. Therefore, a loss of nearly 2pp of GDPgrowth under a grey skies scenario translates into approximately 2.5% lower revenue in 2012 (ex-price increases),while a black skies scenario’s loss of nearly 4pp of growth translates into approximately 5% lower revenue in 2012.Despite high operating margins, we assume that EPS will be hit disproportionately under these scenarios, as the loss ofthe ability for patients to afford co-pays, or loss of insurance altogether, would result in lower realized price and anincrease in free drug given, which negatively impacts margins. Therefore, we assume a 4% and 7% EPS hit,respectively. In terms of valuation, we’ve added a half-point (grey) or full point (black) to our DCF discount rates toaccount for increased risk and uncertainty, which corresponds well to a multiple-based analysis whereby 2012E EPS isreduced by 4% and 7%, accordingly.Our preferred stocks in a grey skies scenario are CELG, GILD, and Pharmasset (VRUS). CELG is the highest qualityname in our space and has several catalysts in 1H12 that should keep investors engaged. Underlying demand forRevlimid has been growing steadily and was marginally impacted in the 2008-09 trough. GILD and VRUS havesignificant value-creating catalysts in 2H11, which we expect to drive outperformance relative to the group under achallenging environment. We see risk to Amgen (AMGN) (few catalysts), Seattle Genetics (SGEN) (upside depends oninsurance coverage of off-label drug usage, which is tough in a constrained environment), and Vertex Pharmaceuticals(VRTX) (demand could be impacted for the Incivek launch).Our preferred stocks in a black skies scenario are the most defensive names, while our least preferred are those that willneed to raise capital in the coming 1-2 years. The most defensive names: AMGN; Alexion Pharmaceuticals (ALXN);and CELG; the most in need of capital, in our view, in an extremely challenging environment: Incyte Pharmaceuticals(INCY); SGEN; and VRUS. UBS 106
    • US Equity Strategy 16 August 2011Table 71: Recession Scenario Analysis – Biotechnology, Matthew Roden, PhDBiotechnology 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAmgen AMGN 5.7% 3.0% 0.0% 9.7% 5.0% 2.0% $58 $55 $53Biogen BIIB 2.9% 0.0% -2.0% 5.0% 1.0% -2.0% $110 $105 $101Celgene CELG 11.2% 8.0% 6.0% 15.5% 11.0% 7.0% $71 $68 $66Gilead GILD 10.6% 8.0% 5.0% 14.4% 10.0% 7.0% $48 $47 $45Alexion ALXN 30.3% 27.0% 24.0% 39.4% 34.0% 30.0% $57 $53 $49Incyte INCY 209.6% 202.0% 134.0% nmf nmf nmf $22 $21 $19Seattle Genetics SGEN 259.6% 251.0% 242.0% nmf nmf nmf $21 $15 $14Pharmasset VRUS 909.1% 884.0% 859.0% nmf nmf nmf $160 $151 $142Vertex VRTX 140.1% 134.0% 128.0% nmf nmf nmf $56 $54 $52GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksCelgene CELGGilead GILDPharmasset VRUSLeast 3 Preferred StocksAmgen AMGNSeattle Genetics SGENVertex VRTXBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksAlexion ALXNAmgen AMGNCelgene CELGLeast 3 Preferred StocksIncyte INCYSeattle Genetics SGENPharmasset VRUSSource: UBS UBS 107
    • US Equity Strategy 16 August 2011Healthcare DistributionSteven Valiquette, 203-719-2347In general, the Pharmaceutical Services sector is relatively shielded from an economic downturn, with little changein overall prescription volumes in past economic downturns.By subsector, we believe the drug distributors have the least amount of impact, followed by the pharmacy benefitmanagers (PBMs). Then, the retail drug chains have a little more cyclical exposure, as “front-end” sales becomenegatively impacted by a slowdown in consumer sentiment (linked to a slowdown in GDP).The stock in our overall coverage universe least affected by a change in GDP is AmerisourceBergen (ABC, whichis a pharma pure-play), while Cardinal Health (CAH) and McKesson (MCK) have modest medical distributionexposure.By contrast, the Medical Distribution companies and Clinical Labs in our coverage universe have more cyclicalexposure than the Pharmaceutical Services companies. In previous downturns, we have witnessed volumesnegatively impacted by a rise in unemployment, which is a byproduct of lower GDP. Moreover, practitioners tendto dramatically curtail purchases of equipment when patient volumes start to slow. Thus, the company mostimpacted in our coverage universe is Patterson Companies (PDCO), followed closely by Quest Diagnostics (DGX).In our methodology, we assume some slowdown in revenue for most companies, with a slightly larger negativeimpact to EPS for each company due to the negative operating leverage associated with the fixed cost/scaledynamics for most of these businesses. Since every company in our coverage universe is valued using P/E (withthe exception of Rite Aid), we assume every company would still take some hit on valuation in conjunction withoverall market weakness (consistent with historical patterns). We assume one P/E multiple point compressionunder a grey skies scenario and two P/E multiple point compression under a black skies scenario. UBS 108
    • US Equity Strategy 16 August 2011Table 72: Recession Scenario Analysis – Healthcare Distribution, Steven ValiquetteHealthcare Distribution 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAmerisourceBergen Corp. ABC 4.0% 4.0% 3.5% 10.1% 10.1% 9.1% $46 $43 $40Cardinal Health Inc. CAH 4.3% 3.8% 3.3% 18.9% 17.9% 16.9% $51 $47 $44McKesson Corp. MCK 5.3% 4.8% 4.3% 15.3% 14.3% 13.3% $96 $88 $81Express Scripts ESRX 5.4% 4.9% 4.4% 31.7% 30.7% 29.7% $67 $62 $57Medco Health Solutions MHS 0.7% 0.2% -0.3% 15.2% 14.2% 13.2% $71 $66 $61SXC Health Solutions SXCI 27.1% 26.6% 26.1% 28.7% 27.7% 26.7% $61 $59 $56Omnicare Inc. OCR 1.0% 1.0% 0.5% 14.2% 14.2% 13.2% $31 $29 $26CVS Caremark CVS 5.6% 4.6% 3.6% 14.3% 12.8% 11.3% $45 $41 $37Walgreen Co. WAG 4.6% 3.1% 1.6% 14.3% 12.3% 10.3% $51 $47 $43Henry Schein Inc. HSIC 6.1% 4.6% 3.1% 11.7% 8.7% 5.7% $76 $70 $63Patterson Companies PDCO 4.2% 2.7% 1.2% 9.0% 6.0% 3.0% $36 $33 $30Laboratory Corp. America LH 5.0% 3.5% 2.0% 12.8% 9.8% 6.8% $101 $91 $82Quest Diagnostics Inc. DGX 3.0% 1.5% 0.0% 13.5% 10.5% 7.5% $58 $52 $46GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksCardinal Health Inc. CAHMcKesson Corp. MCKExpress Scripts ESRXLeast 2 Preferred StocksQuest Diagnostics Inc. DGXPatterson Companies PDCOBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksCardinal Health Inc. CAHMcKesson Corp. MCKExpress Scripts ESRXLeast 2 Preferred StocksQuest Diagnostics Inc. DGXPatterson Companies PDCOSource: UBS UBS 109
    • US Equity Strategy 16 August 2011Healthcare ITStephen Shankman, 212-713-8973We believe the non-cyclical Healthcare IT sector is somewhat insulated from an economic downturn due to positivetailwinds provided by the Health Information Technology for Economic and Clinical Health (HITECH) Act. TheHITECH Act earmarked over $30 billion to incentivize US hospitals and physicians to adopt electronic health records(EHR). With current EHR “meaningful use” adoption levels low, even under grey or black skies scenarios, we believethere will still be demand in the EHR marketplace during 2012. That said, an economic downturn could negativelyimpact healthcare utilization and ultimately pressure capital available to adopt or upgrade EHR; purchasing decisionsmay also be put on hold due to the economic uncertainty. While not directly contemplated in this exercise, we believepossible Medicare cuts (i.e., debt ceiling reduction) could potentially have a greater impact on healthcare distributionand IT companies than an economic downturn.As such, we model 1.5% (grey skies) and 3% (black skies) reductions in revenue for hospital/physician EHR players(Allscripts [MDRX] and Cerner [CERN]) and slightly greater reductions for Quality Systems’ (QSII) physician-focused EHR business. We believe Lincare Holdings’ (LNCR) home oxygen business is more correlated to patientdemographics and The Centers for Medicare & Medicaid Services (CMS) competitive bidding than economicconditions; thus, we assume a more muted impact to Lincare Holdings’ (LNCR) revenue under our recession scenarioanalysis. As a result of these revenue reductions and the fixed cost infrastructure needed to support these businesses, weassume a larger negative impact to EPS for all companies. Our primary valuation methodology is P/E, and consistentwith prior downturns, we estimate increasing multiple contraction as the growth outlook dims. We assume a greaternegative multiple impact for QSII due to its physician-focused business and lack of formal guidance and less of amultiple impact for LNCR, as it is already trading near trough valuations. UBS 110
    • US Equity Strategy 16 August 2011Table 73: Recession Scenario Analysis – Healthcare IT, Stephen ShankmanHealthcare IT 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAllscripts MDRX 9.9% 8.4% 6.9% 16.2% 13.2% 10.2% $25 $22 $19Cerner CERN 13.1% 11.6% 10.1% 21.2% 18.2% 15.2% $65 $59 $53Quality Systems QSII 17.6% 15.6% 13.6% 22.4% 18.4% 14.4% $88 $76 $64Lincare LNCR 7.8% 7.3% 6.8% 18.6% 17.6% 16.6% $35 $33 $30GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksAllscripts MDRXLincare LNCRCerner CERNLeast Preferred StockQuality Systems QSIIBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksAllscripts MDRXLincare LNCRCerner CERNLeast Preferred StockQuality Systems QSIISource: UBS UBS 111
    • US Equity Strategy 16 August 2011Healthcare Providers/HospitalsJustin Lake, CFA, 212-713-2765Under a more challenging macroeconomic backdrop, we see the greatest potential earnings headwind for the Hospitalsector coming from: 1) lower overall patient volumes, with hospital utilization historically dampened in periods of highunemployment (although typically with a 1-2 year time lag); and 2) deteriorating commercial patient mix due to thelower number of commercially insured lives.For our analysis of the potential earnings impact of lower overall patient volumes, we assume that every 1% change inunemployment represents -1.1x hospital volumes (in line with unemployment/admissions relations over the prior 20years); and, while historically, there has been a 1-2 year time lag, we base our estimated impact off our 2012 estimates.Relative to commercial payer mix deterioration, we assume that the uptick in unemployment would have a 1:1relationship for commercial non-elderly adult patient volumes but less so for children, given utilization patterns.Furthermore, we assume that the majority of the lost commercial volumes would be replaced by Medicaid volumes(where hospital reimbursement is considerably lower), with the remainder shifting to uninsured patient mix (wherehospitals do not collect the vast majority of billed revenues).Under a grey skies scenario, we estimate the average EBITDA headwind here to be 4-5% (although again, we note thatgiven the historical time lag between slowing economy and hospital utilization, the impact would likely be moremodest for 2012). We estimate the average EPS impact to be much more pronounced, at approximately 12%, given thegroup’s significant financial leverage, with Community Health Systems Inc. (CYH; -18%), Tenet Healthcare Corp.(THC; -15%), and HCA Inc. (HCA; -13%) estimated to have the largest potential EPS exposure.Under a black skies scenario, we estimate the average EBITDA impact to be closer to 7-8%, with an average EPSimpact of approximately 20%.From a valuation perspective, our grey skies scenario assumes a 15% average discount for the group versus theassumed 11x S&P multiple, while our black skies scenario embeds a 15% average discount versus the 10x S&Pmultiple.For dialysis service provider DaVita, we would expect treatment volumes to be largely unchanged despite potentialpressure on the broader economy, given the life-sustaining nature of dialysis care. Instead, we would expect the mainrisk here to be a deteriorating patient mix due to lower commercially insured patients (representing significantly higherrevenues/margins versus Medicaid treatments). We estimate an EPS headwind of ~3% for DaVita under a grey skiesscenario and -5% under black skies. UBS 112
    • US Equity Strategy 16 August 2011Table 74: Recession Scenario Analysis – Healthcare Providers/Hospitals, Justin Lake, CFAHealthcare Providers/Hospitals 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesHCA Healthcare HCA 6.2% 4.0% 2.3% 6.1% -7.1% -17.1% $36 $22 $18Community Health Systems CYH 7.1% 5.0% 3.4% 9.6% -9.9% -24.5% $36 $20 $15Tenet Healthcare THC 4.4% 2.4% 0.9% 13.0% -3.1% -15.4% $9 $4 $3Universal Health Services UHS 6.9% 5.8% 5.0% 18.5% 10.1% 3.7% $65 $41 $35LifePoint Hospitals LPNT 5.4% 3.4% 1.9% 8.9% 0.1% -6.5% $49 $29 $25Health Management Associates HMA 6.5% 4.5% 2.9% 10.4% -0.9% -10.2% $14 $7 $6DaVita DVA 10.2% 9.8% 9.5% 29.9% 26.0% 23.1% $100 $79 $70GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksDaVita DVAUniversal Health Services UHSHCA HCALeast 3 Preferred StocksTenet Healthcare THCCommunity Health Systems CYHLifePoint Hospitals LPNTBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksDaVita DVAUniversal Health Services UHSLeast Preferred StocksN/ASource: UBS UBS 113
    • US Equity Strategy 16 August 2011Large Cap Pharma, Specialty Pharma & GenericsMarc Goodman, 212-713-1342Ami Fadia, 212-713-3242Healthcare is a relatively defensive sector during declines in real GDP, as prescription growth and healthcare utilizationare relatively uncorrelated with GDP declines. Thus, for most of the stocks within our coverage, we would expect tosee relatively modest hits to revenues and EPS based upon the revised GDP forecasts (about 1-2% in grey skies and 2-3% in black skies).Importantly for pharma, the real concern isn’t slowing GDP but instead additional pricing pressure from thegovernment (in the US, the government is about 45% of every pharma dollar, while in Europe, it’s closer to 100%).Thus, as governments are forced to address their debt, the major concern is that they will again look to pharma as anarea to cut costs. For large pharma in the US, that negatively impacted revenues ~1-2% and EPS 3-5% in the last round(Obamacare). This uncertainty makes it easy for multiple contraction. However, generics and large diversified pharmagenerally should fare better, all else being equal.There are a few companies that have relatively high cash pay businesses (Allergan at 30% and Medicis at 25%), whichare more levered to consumer sentiment and thus consumer spending. In our analysis, we assumed these portions of thebusinesses were hit materially again, as they were in 2008. We would expect those names to have greater exposure toany GDP declines.On the opposite end, large diversified pharma companies (such as Bristol, which is entering a new product cycle withstrong pricing power based on new innovative products; and Pfizer, which, to a lesser extent, is a new product story;but both of which are also dramatically reducing government exposure through the loss of exclusivity of Plavix andLipitor, respectively) are much better positioned to handle slowing growth. Generic drug makers (Watson, Teva,Perrigo, and, to a lesser extent, Mylan, which has much more exposure to European pricing pressure) are also muchbetter positioned and could actually benefit from a slowing economy as insurers and patients look for cheaper drugs. UBS 114
    • US Equity Strategy 16 August 2011Table 75: Recession Scenario Analysis – Large Cap Pharma, Specialty Pharma & Generics, Marc GoodmanLarge Cap Pharma, Specialty Pharma and Generics 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesBristol Myers BMY -15.0% -16.0% -17.0% -16.5% -18.5% -20.5% $30 $30 $29Merck MRK 1.0% 0.0% -1.0% 4.0% 2.5% 1.0% $42 $41 $40Pfizer PFE -4.0% -5.0% -6.0% 0.0% -1.0% -2.0% $23 $23 $22Eli Lilly LLY -6.0% -7.0% -8.0% -14.0% -16.0% -18.0% $38 $37 $36Valeant VRX 31.0% 30.0% 29.0% 43.0% 42.0% 41.0% $63 $61 $60Forest Labs FRX -31.5% -32.6% -33.7% -68.0% -68.5% -69.0% $40 $38 $36Allergan AGN 10.0% 4.0% 2.0% 15.0% 10.0% 5.0% $95 $80 $74Medicis MRX 13.0% 6.0% 4.0% 10.0% 2.0% -2.0% $37 $32 $28Endo Pharmaceuticals ENDP 22.0% 21.0% 20.0% 24.0% 23.0% 22.0% $50 $48 $45Warner Chilcott WCRX 1.0% 0.0% 0.0% 8.0% 7.0% 7.0% $28 $27 $26Mylan MYL 15.0% 13.0% 11.0% 20.0% 17.0% 16.0% $28 $26 $24Teva TEVA 22.0% 20.0% 18.0% 16.0% 14.0% 13.0% $64 $60 $57Watson WPI 16.0% 15.5% 15.0% 34.0% 33.0% 32.0% $78 $75 $73GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksWatson WPIBristol BMYPfizer PFELeast 3 Preferred StocksAllergan AGNMedicis MRXEndo Pharmaceuticals ENDPBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksWatson WPIBristol BMYPfizer PFELeast 3 Preferred StocksAllergan AGNMedicis MRXEndo Pharmaceuticals ENDPSource: UBS UBS 115
    • US Equity Strategy 16 August 2011Table 76: Recession Scenario Analysis – Small-Mid Cap Specialty Pharma & Generics, Ami FadiaSmall-Mid Cap Specialty Pharma and Generics 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesPerrigo PRGO 13.5% 13.3% 13.0% 15.5% 15.0% 14.5% $100 $92 $82GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksPerrigo PRGOAuxilium AUXLPar PRXLeast 3 Preferred StocksCadence CADXMomenta MNTAImpax IPXLBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksPerrigo PRGOAuxilium AUXLPar PRXLeast 3 Preferred StocksCadence CADXMomenta MNTAImpax IPXLSource: UBS UBS 116
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 117
    • US Equity Strategy 16 August 2011Life Sciences & Diagnostic ToolsDaniel Arias, 212-713-2467The life sciences sector is exposed to multiple end-market types, with varying degrees of sensitivity to GDP. Industrialcustomers (ie, chemicals, mining, materials sciences, petroleum) represent the segment most sensitive tomacroeconomic cyclicality, while academic and government end-users, along with pharmaceutical and biotechnologycustomers, are somewhat less impacted due to more stable budgets for research tools. Within our analysis, we considercustomer mix as it relates to changes in demand, as well as each company’s operational flexibility in response to top-line pressure.In a grey skies scenario, we assume that companies focused primarily on the sale of capital equipment would see a lowsingle-digit year-over-year decline in organic revenues, while consumables-focused companies post low to mid-single-digit growth, driven primarily by a material reduction in demand from industrial end market users. In a black skiesscenario, we assume that companies selling life sciences tools see a more broad-based reduction in demand, with asharp decline in sales to industrial customers, but also reduced spending from academic and government scientistsresulting from federal spending cuts that put greater pressure on government research funding. We thus envision anorganic revenue growth scenario similar to 2009, when instrument-focused tools companies averaged a mid-single digitdecline (~6%), while growth for consumables-focused companies saw low single-digit growth of ~1%. We believemargins would see a greater degree of pressure than in 2009, due to leaner current operating models than those thatexisted prior to the recession, leaving less room for cost cutting. As such, we see earnings growth well below the levelsin 2009, when many companies were able to partially offset top-line pressures with expense reductions.On valuation: In a grey skies scenario, we assume stocks will trade at ~2 pts above their respective trough forward P/Emultiples, or ~11.5x on average. In a black skies scenario, we assume stocks will trade at the trough multiples reachedduring 2009, or ~9.5x on average. Our scenario valuations for each company are determined by applying thesemultiples to the corresponding FY12 EPS estimates.In both grey skies and black skies scenarios, we prefer companies with relatively low exposure to industrial end-markets, significant recurring revenue streams via the sale of consumables and services, and exposure to emergingmarket economies. Under a grey skies scenario, we most prefer Life Technologies (LIFE), Sigma-Aldrich (SIAL), andThermo Fisher (TMO), and least prefer Mettler-Toldeo (MTD), Waters (WAT), and PerkinElmer (PKI). Under a blackskies scenario, we most prefer LIFE, SIAL, and Illumina (ILMN), and again least prefer MTD, WAT, and PKI. UBS 118
    • US Equity Strategy 16 August 2011Table 77: Recession Scenario Analysis – Life Sciences & Diagnostic Tools, Daniel AriasLife Sciences & Diagnostic Tools 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesIllumina ILMN 21.0% 18.0% 12.2% 34.9% 26.7% 22.7% $85 $51 $44Life Technologies LIFE 6.4% 0.3% -1.4% 13.9% 4.8% 0.8% $55 $37 $30Sigma-Aldrich SIAL 7.4% 4.1% 2.4% 10.0% 6.5% 4.3% $77 $53 $44Thermo Fisher Scientific TMO 7.0% -0.1% -3.0% 14.2% 7.1% -0.7% $72 $47 $35Bruker Corp. BRKR 7.7% 2.1% 1.0% 21.1% 15.7% 6.7% $21 $11 $9Waters Corp. WAT 8.2% -2.2% -4.4% 14.3% 4.2% 1.5% $99 $58 $46Mettler Toledo MTD 6.5% -6.5% -9.5% 17.5% 7.6% 3.1% $200 $90 $70PerkinElmer PKI 7.0% -4.2% -6.2% 17.4% 0.6% -9.1% $28 $17 $12GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksLife Technologies LIFESigma-Aldrich SIALThermo Fisher Scientific TMOLeast 3 Preferred StocksMettler Toledo MTDPerkinElmer PKIWaters Corp. WATBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksLife Technologies LIFESigma-Aldrich SIALIllumina ILMNLeast 3 Preferred StocksMettler Toledo MTDPerkinElmer PKIWaters Corp. WATSource: UBS UBS 119
    • US Equity Strategy 16 August 2011Managed CareJustin Lake, CFA, 212-713-2765For diversified Managed Care plans, we see the greatest potential impact of a more muted macroeconomic backdropcoming from a lower number in the commercially insured membership, with the 160 bp uptick in the projectedunemployment rate in 2012 under a grey skies forecast representing a commercial membership headwind of -2.0% (280bp unemployment uptick under black skies is estimated to represent a -3.5% commercial membership headwind).While plans with Medicaid business would likely see some membership gains from beneficiaries that otherwise wouldhave been covered by employer-sponsored health insurance, given the lower revenues and assumed lower contributionmargins, we estimate that the earnings benefit here would be limited (0.5% of EPS).On average, for diversified Managed Care plans, we estimate that the EPS headwind would be 2% under a grey skiesscenario, with Aetna (-3.4%) and WellPoint (-2.7%) seeing the largest impact, while Medicare-levered Humana wouldsee the lowest impact (-0.5%). Under a black skies scenario, we estimate the EPS impact to be closer to -3.5%, onaverage.From a valuation perspective, the diversified Managed Care group is currently trading at ~8x our 2012 EPS estimates,and our grey skies scenario assumes a 20% discount to the S&P multiple of 11x. Our black skies scenario embeds a20% discount versus the S&P multiple of 10x.With regard to government-focused Managed Care plans (HealthSpring and Amerigroup), we would expect the impactfrom a challenging macroeconomic backdrop to be neutral to positive. Specifically, for Medicare-levered HealthSpring,a rising unemployment rate would likely be mostly neutral to the company, given a lack of exposure to thecommercially insured market. For Medicaid-focused Amerigroup, a rising unemployment rate would likely represent arevenue tailwind, given a corresponding increase in Medicaid membership rolls, although the impact on earnings is lessclear, given the likely increased pressure on state budgets to potentially drive lower rates/margins and representheadwind here. UBS 120
    • US Equity Strategy 16 August 2011Table 78: Recession Scenario Analysis – Managed Care, Justin Lake, CFAManaged Care 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAetna AET 5.0% 3.8% 2.8% 4.3% 0.7% -1.9% $47 $39 $35CIGNA CI 7.8% 7.0% 6.4% 5.9% 3.6% 1.8% $59 $47 $42Coventry CVH 9.9% 9.3% 8.8% 9.8% 7.5% 5.7% $35 $26 $23Health Net HNT 0.4% -0.1% -0.5% 7.3% 5.9% 4.9% $33 $26 $23Humana HUM 7.9% 7.7% 7.5% 0.6% 0.1% -0.3% $88 $81 $74WellPoint WLP 2.6% 1.6% 0.9% 9.9% 6.9% 4.7% $90 $67 $59UnitedHealth UNH 6.1% 5.7% 5.4% 9.1% 7.4% 6.2% $60 $46 $41HealthSpring HS 10.5% 10.5% 10.5% 2.6% 2.6% 2.6% $52 $37 $34Amerigroup AGP 19.1% 22.6% 25.3% 8.6% 8.6% 8.6% $49 $46 $42GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksHumana HUMHealthSpring HSUnitedHealth UNHLeast 2 Preferred StocksCoventry CVHAetna AETBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksHumana HUMHealthSpring HSUnitedHealth UNHLeast 2 Preferred StocksCoventry CVHAetna AETSource: UBS UBS 121
    • US Equity Strategy 16 August 2011Medical Supplies & DevicesRajeev Jashnani, CFA, 212-713-9127Broadly speaking, in Med Tech, all companies under our coverage have exposure to surgical procedure volumes;therefore, they are impacted by overall unemployment, as health insurance is often provided at the employer level inthe US. In Europe, continued economic weakness or worsening conditions may result in expanded austerity measuresthat would limit procedure volumes or mandate price cuts. That said, we can delineate between companies with greatereconomic sensitivity (eg, elective procedures that have come under increased pressure in the current downturn due tounemployment, higher co-pays, and worker reluctance to take time off work) and those with relative resiliency (eg,products used to treat chronic, symptomatic conditions). In addition, in the current US fiscal spending environment, wealso consider the potential for Medicare funding cuts, which could become a factor in either the sequestration scenarioor in the event that new government spending cuts are agreed upon. While it is not possible currently to determine theimpact of these funding cuts on hospital profitability, those with significant hospital capex exposure may be at somerisk, as well as those selling other high-margin products to hospitals.Given the dynamics discussed above, in a black skies scenario, we would strongly prefer Abbott Laboratories (ABT).ABT trades at 9x forward earnings with a 12% free cash flow yield and offers a 4% dividend yield. ABT is the onlylarge cap company in our space whose principal underlying end-market is materially accelerating (anti-TNFs). Further,ABT’s product in this market, Humira, is materially outgrowing the market. While utilization may decline in aworsening economy, the severe diseases treated by anti-TNF agents largely preclude substitution. Additionally, ABThas relatively low overall Medicare exposure (~5%) and relatively high emerging market exposure (>20%).Conversely, Zimmer (ZMH) may be among the most exposed to deteriorating economic conditions. ZMH derives~70% of revenues from hip and knee replacements, which have proven to be highly sensitive to current economicconditions. Also, declining hospital profitability could lead these institutions to ratchet up pricing pressure on inputcosts because improving their own efficiency is not a realistic near-term option. While ZMH can probably managethrough this risk over the long term by implementing changes to its selling model, we believe there is limitedopportunity to meaningfully revamp its cost structure in the near to intermediate term without sacrificing market share. UBS 122
    • US Equity Strategy 16 August 2011Table 79: Recession Scenario Analysis – Medical Supplies & Devices, Rajeev Jashnani, CFAMedical Supplies and Devices 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAbbott Laboratories ABT 4.4% 3.6% 3.0% 7.6% 6.1% 4.5% $59 $55 $52Baxter International Inc. BAX 4.5% 3.8% 2.6% 9.3% 8.1% 4.9% $67 $54 $50Boston Scientific Corp. BSX 0.8% -1.0% -2.0% 15.1% 11.0% 7.7% $8 $7 $7CareFusion Corp. CFN 3.2% 1.0% 0.0% 11.1% 6.1% 2.9% $26 $22 $22Edwards Lifesciences Corp. EW 21.1% 19.5% 18.0% 49.2% 46.4% 43.3% $92 $71 $64Johnson and Johnson JNJ 3.6% 2.9% 1.9% 5.5% 4.2% 2.0% $80 $62 $58Medtronic Inc. MDT 4.9% 2.5% 1.0% 5.7% 1.7% -1.5% $44 $37 $31St. Jude Medical Inc. STJ 6.3% 4.5% 3.0% 11.9% 9.0% 5.8% $60 $47 $40Stryker Corp. SYK 6.4% 4.5% 4.0% 11.3% 6.7% 5.4% $72 $53 $48Zimmer Holdings Inc. ZMH 4.2% 2.5% 1.5% 8.5% 4.7% 2.6% $68 $53 $50GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksBaxter International Inc. BAXAbbott Laboratories ABTJohnson and Johnson JNJLeast 3 Preferred StocksZimmer Holdings Inc. ZMHMedtronic Inc. MDTBoston Scientific Corp. BSXBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksAbbott Laboratories ABTJohnson and Johnson JNJBaxter International Inc. BAXLeast 3 Preferred StocksZimmer Holdings Inc. ZMHMedtronic Inc. MDTBoston Scientific Corp. BSXSource: UBS UBS 123
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 124
    • US Equity Strategy 16 August 2011 Industrials UBS 125
    • US Equity Strategy 16 August 2011Aerospace & DefenseDavid Strauss, 212-713-6185Under our grey skies scenario for the aerospace names, we assume production rates hold flat at current levels for bothair transport and business jets while the aftermarket drops 5% from current levels. For air transport, overall productionwould be slightly higher as 787 comes through, although we see Airbus and Boeing cancelling announced productionrate increases on their current in production models. While the aftermarket is still 5-10% below prior peak levelsdespite global flight hours being 10-15% higher, under our grey skies scenario we see the aftermarket dropping 5% asglobal airline capacity only grows low single digits. For defense, we assume the modernization budget declines 10%from current levels along with industry margins (pre-pension) moving 100bps lower from current peak levels to troughout around 10%.Under our black skies scenario for the aerospace names, we assume air transport production rates decline 15% fromcurrent levels while business jets decline another 10%. For air transport, we assume in production models decline 20%partially offset by the ramp in 787. We assume the aftermarket falls back 15% under a black skies scenario, basicallyback to where it bottomed in late 2009/early 2010. For defense, we assume the modernization budget declines 25%from current levels along with industry margins moving 200bps lower from current peak levels to trough out around9%.As for the stocks, under our grey skies scenario, we see aerospace multiples moving up from current levels at roughly11-12x (on current consensus expectations) to around 13x on average on lower earnings. Based on this we see verymodest 5-10% downside for the stocks on average under our grey skies scenario. Rockwell Collins (COL), Goodrich(GR), and Spirit AeroSystems Holdings (SPR) are our preferred names under our grey skies scenario. Under our blackskies scenario, we see aero multiples holding around 12x. Based on this we see 30-35% downside for the stocks onaverage under our black skies scenario. COL and United Technologies Corp. (UTX) are our preferred names under ourblack skies scenario. We see defense PE multiples troughing out around 7-8x in either scenario, modestly lower fromcurrent levels. UBS 126
    • US Equity Strategy 16 August 2011Table 80: Recession Scenario Analysis – Aerospace & Defense, David StraussAerospace and Defense 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesBoeing BA 11.0% 0.0% -12.5% 27.9% -1.3% -22.5% $73 $48 $35Goodrich GR 8.5% -2.3% -13.0% 18.2% -4.1% -23.7% $110 $78 $58Rockwell Collins COL 8.0% -2.5% -11.0% 17.3% -2.8% -17.0% $76 $47 $37Precision Castparts PCP 14.3% -1.3% -12.3% 22.5% -1.3% -18.8% $165 $119 $91BE Aerospace BEAV 14.6% -0.5% -14.0% 25.2% -2.2% -28.8% $45 $28 $19Spirit Aerosystems SPR 18.0% 5.0% -15.0% 20.2% 7.5% -30.0% $29 $22 $13TransDigm Group TDG 7.0% -2.3% -13.3% 22.3% -2.6% -13.8% $105 $58 $48Triumph Group TGI 6.8% 0.5% -13.0% 17.1% 1.0% -20.0% $60 $40 $29Textron TXT 9.0% -10.0% -25.0% 66.7% -29.8% -100.0% $35 $15 $10United Technologies UTX 5.7% -2.0% -5.0% 16.4% 0.0% -10.0% $101 $65 $55General Dynamics GD 4.0% -10.0% -24.0% 25.5% -11.6% -29.9% $85 $50 $35Lockheed Martin LMT 0.0% -10.0% -25.0% 42.0% 5.8% -21.0% $80 $63 $41Northrop Grumman NOC 0.0% -10.0% -25.0% 15.0% -27.5% -48.5% $65 $40 $25Raytheon RTN 0.0% -10.0% -25.0% 25.3% -2.1% -25.6% $47 $40 $27GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksRockwell Collins COLGoodrich GRSpirit Aerosystems SPRLeast 3 Preferred StocksNorthrop Grumman NOCLockheed Martin LMTRaytheon RTNBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksRockwell Collins COLUnited Technologies UTXLeast 3 Preferred StocksNorthrop Grumman NOCLockheed Martin LMTRaytheon RTNSource: UBS UBS 127
    • US Equity Strategy 16 August 2011Airfreight & Surface TransportationRick Paterson, 212-713-7944The two key macro assumptions used in our grey and black skies scenarios are: 1) US industrial production; and 2)oil prices.Industrial production has the highest correlation to US transportation volumes of any of the macroeconomic metrics,with greater than an 80% correlation over time, including both the short and long term. Oil prices are obviously afundamental input cost in the freight transportation sector—typically the second highest cost item after labor—and allcompanies try to pass through changes in fuel prices to customers via fuel surcharges, with varying degrees ofsuccess. Airfreight companies tend to be the most successful, with fuel surcharges recovering more than 95% of thechange in fuel prices with an average six-week time lag. Railroads have the weakest coverage, typically recoveringbetween 85-90% with a two-month lag. We’ve assumed $70 WTI in a grey skies scenario and $50 WTI in a blackskies scenario, and these commodity price declines work to partially offset the damage to earnings from negativeoperating leverage as volumes fall.The traditional pecking order of transportation stocks to avoid going into a recession is based on the degree of fixedcosts and operating leverage in the business model. The high fixed cost “airline-like” characteristics of UPS andFedEx render their earnings most at risk, followed by the railroads, with their extensive infrastructure. At the otherend of the spectrum are the pure non-asset-based brokers, specifically C.H. Robinson (CHRW) and Expeditors(EXPD). These freight brokers benefit from lower costs of purchased transportation in recessions relative to whatthey charge their own customers; hence, “net revenue” margins expand in recessions and compress in recoveries. Insome cases (eg, CHRW in the 2009 recession), the expansion in margins can more than offset the decline in grossrevenues and EPS can actually increase—albeit only marginally—in economic downturns. CHRW has demonstratedmuch more flexibility in this regard relative to EXPD. The truckers and asset-light companies such as JB Hunt andHub Group fall between these fixed cost/freight broker extremes. The only change to this historical pecking order inrecent times has come from the railroads, which have been able to extract secular pricing power since 2004, whichacted as a partial shock absorber in the last downturn. Recent advances in IT have also allowed these companies toflex the 25% of costs that are truly variable in real time and get at the other 25% semi-variable costs faster than theyhave done in the past, which also limits the damage from economic downturns.With regard to our most preferred and least preferred stocks, the list is the same under both scenarios. The naturalflex in CHRW’s business model gives it the best chance of maintaining healthy earnings through a downturn. JBHunt has the most powerful market share story—its intermodal unit, which managed to grow through the lastrecession and may be able to do so again. CSX is the railroad with the strongest pricing power and was the mostadept at managing its resources/costs through the 2009 recession. In terms of least preferred, we think the two bigairfreight companies, FedEx and UPS, in that order, are most vulnerable, given that they are, to a large degree,similar to fixed cost airlines. We also have railroad Kansas City Southern as a least preferred name due to its highvaluation relative to peers and high beta, both of which would work against it in the event of a deterioration in macrofundamentals. UBS 128
    • US Equity Strategy 16 August 2011Table 81: Recession Scenario Analysis – Airfreight & Surface Transportation, Rick PatersonAirfreight & Surface Transportation 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesUnion Pacific UNP 9.0% 0.1% -12.0% 19.0% 6.0% -17.0% $113 $88 $64CSX CSX 7.7% -0.2% -12.2% 20.0% 4.8% -18.8% $31 $25 $17Norfolk Southern NSC 6.0% 0.4% -11.8% 14.0% 5.5% -20.2% $83 $72 $50UPS UPS 4.9% -4.0% -8.0% 16.0% 4.0% -32.0% $85 $60 $40FedEx FDX 8.9% -0.3% -12.3% 35.0% -3.0% -24.0% $112 $69 $40Kansas City Southern KSU 10.0% -1.9% -10.0% 22.0% -7.0% -24.0% $61 $40 $25Expeditors EXPD 15.0% -6.0% -16.0% 16.0% 0.0% -13.0% $62 $45 $34CH Robinson CHRW 14.0% 5.0% -5.0% 17.0% 10.0% 3.0% $92 $74 $61JB Hunt JBHT 12.0% 2.0% -7.0% 23.0% 9.0% -6.0% $55 $45 $34GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksC.H. Robinson CHRWJB Hunt JBHTCSX CSXLeast 3 Preferred StocksFedEx FDXUPS UPSKansas City Southern KSUBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksC.H. Robinson CHRWJB Hunt JBHTCSX CSXLeast 3 Preferred StocksFedEx FDXUPS UPSKansas City Southern KSUSource: UBS UBS 129
    • US Equity Strategy 16 August 2011Airlines & OTAsKevin Crissey, 212-713-3562Under a grey skies scenario we estimate that revenue for the airlines would decline in the 4% to 5% range, which weapproximated based on the industry’s revenue downturn during the 1990-1991 recession. That’s a negative 9% to 10%pt. swing to our current revenue growth forecast. Under a grey sky scenario, we would still forecast profits in 2012 forthe carriers examined as earnings deterioration would be mitigated by lower fuel. Our fuel assumption of $70/bbl undergrey skies is about $30 lower than what we’re currently using as a cost input in 2012. Under a black skies scenario, theforecasted 12% topline decline (based on 2008/2009 industry performance) would drive meaningful losses despite a$50/bbl oil assumption.The counter-cyclicality aspects of the online travel agencies (OTAs) better enable them to deal with economicdownturns. In a grey skies scenario, we still forecast earnings and revenue growth in the high single-digit range. Whilelower hotel rates and air fares would be a drag on topline and earnings, we estimate the OTAs would compensate withhigher transaction volumes resulting from greater access to supplier (hotel and airline) inventory. Even under a blackskies scenario, the OTAs are relatively well-positioned and we forecast they would still be able to produce mid-singledigit topline and earnings growth.In a grey sky scenario, we would favor Delta, Expedia and Priceline. Our grey sky valuation for DAL is $8 per share,which represents 20% upside to the stock’s current price. We also believe the high-growth rates and internationaldiversity of the OTAs, in addition to potentially higher transaction volumes, better suits them in a grey sky economicdownturn. Under a black sky scenario, we would migrate solely to the OTAs as long ideas for the same reason.DAL’s market price would still trade at a discount to our reduced, grey skies scenario valuation of $8, which enables usto include it on our preferred list under that scenario. In general, however, given the high correlation between economicgrowth and airline profitability, we would shy away from the airline names under both grey skies and black skiesscenarios. Under either scenario, lower oil price inputs are not enough to compensate for estimated revenue declines. Alow to mid-single-digit decline in revenue would result in double-digit EPS declines for Southwest (LUV) and UnitedContinental (UAL) under grey skies. Under black skies, revenue and earnings would decline more for the corporate-travel-oriented UAL and DAL compared with the leisure-focused LUV. However, it is likely all of the airline nameswould see sharper downward revisions from our current price targets than would the preferred OTAs. UBS 130
    • US Equity Strategy 16 August 2011Table 82: Recession Scenario Analysis – Airlines & OTAs, Kevin CrisseyAirlines & OTAs 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesDelta Air Lines DAL 3.6% -4.8% -12.0% 101.0% -6.0% -165.0% $12 $8 $5United Continental UAL 6.1% -4.3% -12.0% 33.0% -73.0% -185.0% $35 $17 $10Southwest Airlines LUV 5.6% -3.7% -8.4% 115.0% -47.0% -42.0% $9 $6 $5Priceline PCLN 12.0% 9.0% 6.7% 13.0% 10.0% 7.0% $575 $500 $425Expedia EXPE 16.0% 7.5% 3.0% 18.0% 8.4% 4.0% $33 $25 $22GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksExpedia EXPEPriceline PCLNDelta Air Lines DALLeast 2 Preferred StocksSouthwest Airlines LUVUnited Continental UALBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksExpedia EXPEPriceline PCLNLeast 3 Preferred StocksUnited Continental UALSouthwest Airlines LUVDelta Air Lines DALSource: UBS UBS 131
    • US Equity Strategy 16 August 2011Autos & Auto PartsColin Langan, CFA, 212-713-9949Under a black skies scenario, we estimate that US sales would fall from our current 2011 and 2012 estimates of 13.0mand 14.5m to 11.7m and 10.0m, respectively. The 2012 downside is slightly lower than 2009 sales of 10.5m, as we areexcluding some of the 2009 cash for clunkers boost. The decline in sales would result in our 2011 and 2012 NorthAmerican production estimates falling from 13.0m and 14.3m to 11.7m and 9.7m, respectively. Our 2012 downsideestimate is higher than 2009 production of 8.6m, as inventories are currently near the ending levels in 2009, andtherefore destocking would be limited. We also assumed that European production would fall from our current 2011and 2012 estimates of 20.9m and 21.6m to 19.9m and 17.6m, respectively. Under a grey skies outlook, we assumed2011 and 2012 US sales would fall to 11.9m and 11.25m, North American production would fall to 11.9m and 11.1m,and European production would fall to 20.5m and 19.0m, respectively.The changes in global production would result in our 2012 sales estimates declining by 15% to 30%. We assume thatthe incremental lost profit on these sales would be about 15% for Johnson Controls, Lear, and Visteon and about 25%for BorgWarner. The incremental contribution margins for AutoNation are only 4% (consistent with 2009), as thehigher margin parts and services sales may be positively impacted (repair vs. replace). We expect impact on theautomakers would be more severe, as we estimate the incremental would be about 30% for Ford and 20% for GeneralMotors (GM). The biggest driver is the estimate of $9,000/unit incremental contribution per vehicle in North America.The other factor that significantly impacts our valuation of the automakers is the cash burn. Automakers have anegative cash conversion cycle, as they get paid from dealers before they pay their suppliers. Consequently, weestimate under a black skies scenario that GM and Ford would burn at least $5bn in cash. UBS 132
    • US Equity Strategy 16 August 2011Table 83: Recession Scenario Analysis – Autos & Auto Parts, Colin Langan, CFAAutos & Auto Parts 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker View Grey Skies Black Skies View Grey Skies Black Skies View Grey Skies Black SkiesJohnson Controls JCI 12.9% -1.7% -6.2% 38.0% -6.5% -15.3% $41 $30 $28BorgWarner BWA 15.5% 2.6% -6.6% 17.2% 0.0% -16.7% $87 $68 $60Lear LEA 9.6% -6.8% -10.6% 12.7% -37.2% -53.5% $68 $51 $43Visteon VC 8.0% -3.7% -8.1% 69.9% 31.5% -23.2% $88 $69 $53AutoNation AN 7.9% -3.8% -11.2% 4.0% -7.0% -14.3% $31 $25 $23Ford F 10.0% -3.2% -12.8% 32.4% -13.0% -64.3% $22 $11 $7GM GM 9.2% -9.1% -20.4% 15.9% -33.4% -100.0% $42 $30 $14GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksFord FVisteon VCGeneral Motors GMLeast 2 Preferred StocksAutoNation ANJohnson Controls JCIBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksVisteon VCLear LEABorgWarner BWALeast 2 Preferred StocksAutoNation ANGeneral Motors GMSource: UBS UBS 133
    • US Equity Strategy 16 August 2011ChemicalsAndrew Cash, 212-713-2210The chemical industry is an upstream process industry that converts raw materials such as gas, oil and a wide variety ofores into chemicals. These chemicals, in turn, are typically processed through a series of additional steps into a finalproduct. In short, there is normally a long supply chain between the chemical producers and the ultimate consumer.When the economy is improving, especially from recessionary levels to a recovery phase, demand for chemicalsincreases much faster than the increase in real GDP because the chemical processors all along the supply chain becomemore optimistic and begin to increase their inventory as well as need more chemicals to meet the demand thataccompanies the pick up in the economy.Demand for chemicals and their cyclicality varies greatly from one product class to another. Generally speaking, it istypical for chemical demand to increase twice as much as real GDP during the first year or two of recovery andcontract by a like amount relative to GDP during recessions. In our analysis of the grey skies and black skies scenarioswe used this historical relationship as our guide.Under a grey skies scenario our top 3 names are Mosaic, Huntsman and Dow Chemical, and our least preferred namesare Olin, Kraton and Westlake. In the grey skies analysis our preferences are driven by the change in our earnings pershare—because chemical stocks tend to react to changes in EPS over the short term.In a black skies analysis our top 3 names are Mosaic, Westlake and LyondellBasel, and our least preferred names areHunstman, Celanese and Georgia Gulf. The driver to our preferences was the balance sheet. In a very difficult economyas portrayed by a black skies scenario, we expect that investors will move to the strongest balance sheets, especiallyearly in a downturn. UBS 134
    • US Equity Strategy 16 August 2011Table 84: Recession Scenario Analysis – Chemicals, Andrew CashChemicals 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesCelanese CE -1.4% -6.0% -7.7% 4.8% -12.8% -26.7% $52 $43 $41Dow Chemical DOW 0.3% -4.2% -1.8% 16.9% -23.7% -58.3% $47 $44 $41Georgia Gulf GGC 18.0% 16.1% 15.1% 37.8% -27.6% -56.4% $43 $42 $40Huntsman HUN 0.8% -15.7% -31.8% 11.9% 2.4% -44.8% $23 $22 $20Kraton KRA 6.1% 3.8% -2.0% -35.9% -48.0% -77.6% $34 $34 $26LyondellBasell LYB 4.3% -10.3% -30.0% 1.1% -35.2% -59.5% $47 $42 $39Olin OLN 5.9% 2.1% 0.3% 41.2% -65.3% -97.6% $23 $17 $16Westlake WLK 8.3% -9.4% -29.1% -16.9% -45.8% -72.6% $41 $39 $35Mosaic MOS 25.0% 3.0% -11.8% 39.1% 2.8% -44.4% $80 $75 $72GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksMosaic MOSHuntsman HUNDow Chemical DOWLeast 3 Preferred StocksOlin OLNKraton KRAWestlake WLKBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksMosaic MOSWestlake WLKLyondellBassell LYBLeast 3 Preferred StocksHuntsman HUNCelanese CEGeorgia Gulf GGCSource: UBS UBS 135
    • US Equity Strategy 16 August 2011Coal and Metals & MiningShneur Z. Gershuni, CFA, 212-713-3974Grey SkiesFor our steel coverage, under this scenario, we assume low-volatility hard coking coal drops to $160 per ton (fromforecast $195), iron ore drops to $120 per ton (from forecast $185), and the steel industry utilization rate decreases to70% (in line with the slow recovery period of 2010). Based on this, we assume benchmark hot rolled coil (HRC) steelprices of $600 per ton. The average gross margin within our steel coverage drops from an estimated 19.3% (CLFforecast at 41%) to 9.4%, which reflects reduced pricing power on lower utilization and some fixed cost absorption.Our valuations apply average peak multiples from prior cycles to what we forecast to be a cyclical trough EBITDA.Regarding coal, we assume pricing for eastern thermal coal drops to roughly $60/t from 3Q11 to 4Q12 (mostcompanies have mostly contracted 2011; 2012 remains somewhat open for contract). Other regional prices are alsoassumed to fall, including the PRB ($11/t), Western Bit ($38/t), and ILB ($35/t). We assume met coal pricing falls toroughly $160/t for low-volatility hard coking coal. In the long term, we maintain our normalized pricing assumptions.Finally, our DCF-derived valuation was adjusted by increasing our market risk premium to 6% from 4%.Black SkiesFor our steel coverage, under this scenario, we assume low-volatility hard coking coal drops to $130 per ton (fromforecast $195), iron ore drops to $90 per ton (from forecast $185), and the steel industry utilization rate decreases to50%, which is in line with that experienced during late 2008 and early 2009. Based on this, we assume benchmarkHRC steel prices of $450 per ton. The average gross margin within our steel coverage drops from an estimated 19.3%(CLF forecast at 41%) to 4.5%, which reflects diminished pricing power, very low volumes, and significant fixed costabsorption. As multiples in the most recent downturn are generally not meaningful, we reference trough pricing as astarting point for our downside scenario and compare expected operating performance against that realized in 2009.Regarding coal, we assume pricing for eastern thermal coal drops to roughly $50/t over 3Q11 to 4Q12. Other regionalprices are also assumed to fall, including the PRB ($9/t), Western Bit ($35/t), and Midwest ($30/t). We assume metcoal pricing falls to roughly $130/t for low-volatility hard coking coal. In the long term, we reduced our normalizedpricing assumptions to reflect investors pricing in weak prices into perpetuity. This includes eastern thermal coal at$65/t, PRB at $12/t, Western Bit at $40/t, and ILB at $35/t. We maintained our long-term $160/t low-volatility metprice, as we believe this price will be supported by a structural supply shortage of met coal. Finally, our DCF-derivedvaluation was adjusted by increasing our market risk premium to 8% from 4%.Company AnalysisIn our steel coverage, we believe Nucor (NUE) has the least to lose in either a grey skies and black skies scenario.NUE’s stock price is not far from its trough realized in late 2008, and flexibility of operations (being able to quicklytake steel production offline) is a critical advantage in a sharp downturn. Cliffs would appear to have the most to lose,as it currently trades at nearly 7x its 2009 trough (when iron touched $71/ton, below our black skies forecast for ironore).For coal, Walter Energy appears to have the least amount of downside risk under both scenarios. The company isglobally diversified and, given our view that met coal pricing is set to sequentially decline as supply comes online, webelieve there is limited downside to our current earnings estimates. We think Arch Coal presents the most amount ofdownside risk under a black skies scenario due to its leverage to eastern thermal coal, PRB coal, and met coal. With itsrecent acquisition of ICO, the company acquired a relatively open contract book for both eastern thermal and met coal,exposing it further to falling prices. Given the ever increasing cost of mining in Appalachia and impact on terminalreserve value, the company’s valuation suffers from both lower cash flow and lower terminal reserve value. UBS 136
    • US Equity Strategy 16 August 2011Table 85: Recession Scenario Analysis – Coal and Metals & Mining, Shneur Z. Gershuni, CFACoal and Metals & Mining 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesCoalArch Coal, Inc. ACI 31.6% 12.9% -0.6% 65.9% -40.0% -137.1% $42 $34 $6Alpha Natural Resources ANR 16.0% 2.6% -12.0% -38.5% -147.0% -290.4% $71 $58 $22CONSOL Energy, Inc. CNX 5.5% -4.7% -14.3% 9.0% -46.4% -102.1% $74 $61 $27Walter Energy Inc WLT 11.5% 1.2% -12.9% -5.0% -42.6% -95.6% $156 $137 $119SteelU.S. Steel X 5.9% -26.6% -34.8% 223.0% -227.6% -508.8% $38 $26 $18Nucor NUE 7.8% -22.9% -31.5% 28.5% -93.0% -129.7% $35 $30 $28Steel Dynamics STLD 3.1% -32.5% -40.0% 3.3% -90.6% -133.2% $13 $10 $8Iron OreCliffs Natural Resources CLF 14.7% -20.9% -39.0% 4.4% -84.8% -117.0% $122 $55 $40GREY SKIES RECESSION SCENARIO Coal Steel/Iron OreTop 2 Preferred Stocks Top 2 Preferred StocksAlpha Natural Resources ANR Nucor NUEWalter Energy WLT U.S. Steel XLeast 2 Preferred Stocks Least 2 Preferred StocksConsol Energy CNX Cliffs Natural Resources CLFArch Coal ACI Steel Dynamics STLDBLACK SKIES RECESSION SCENARIO Coal Steel/Iron OreTop 2 Preferred Stocks Most Preferred StockWalter Energy WLT Nucor NUEAlpha Natural Resources ANRLeast 2 Preferred Stocks Least 2 Preferred StocksArch Coal ACI Cliffs Natural Resources CLFConsol Energy CNX U.S. Steel XSource: UBS UBS 137
    • US Equity Strategy 16 August 2011Electrical Equipment & Multi-IndustryJason Feldman, 212-713-4309We believe that the stocks in our sector are, on average, far better positioned for a recession than they were in late 2008and 2009. Consequently, even in a black skies scenario, earnings should show greater resilience than during the lastrecession. That said, this group’s underlying businesses are inherently cyclical, and most stocks would probably seeearnings decline in 2012 under both a grey skies or black skies scenario.In conjunction with the scenarios provided by UBS economists, we used the 2008/2009 recession as a starting point forour analysis. For each company, we took into account changes in cost structures, the degree to which each company’send markets have recovered (or not recovered), and changes to each company’s portfolio of businesses (eg, M&A post-2008).Factors that we believe will result in greater earnings resilience in a potential recession (across our coverage, ingeneral) include: (1) all companies in the sector improved their fixed cost structure during the last recession; (2)management teams learned valuable lessons during the last recession, which should enable them to respond morenimbly in the next recession; (3) balance sheets are in better shape today vs. late 2008, both in terms of total leverage,as well as debt structure and the restrictiveness of covenants; (4) we expect more aggressive cash deployment in thenext downturn (both repurchases and M&A), as we believe that management teams gained confidence during the2008/2009 downturn in their ability to manage cash flow in a deep recession; (5) many end markets—particularlyresidential and non-residential construction, and energy—are still at trough levels with fairly little room to fall further;(6) some companies have made substantial changes to reduce the cyclicality of their portfolios since 2009 (mostnotably Tyco’s partial divestiture of Electrical & Metal Products, Danaher’s acquisition of Beckman Coulter, andEmerson’s motors divestiture).On average, it appears that the group is already pricing in a grey skies scenario similar to the one described in thisreport. However, in a black skies scenario, we believe all of the stocks in our sector have further downside. Based oncurrent prices (considering most of these names have already sold off substantially), our preferred stocks in a grey skiesor black skies scenario include Danaher (DHR), General Electric (GE), and Ingersoll Rand (IR), followed by Tyco(TYC) and Honeywell (HON). For a grey skies scenario, we believe this list of preferred stocks is already somewhatoversold. Each of these preferred stocks has one or more of the following three characteristics: (1) typically exhibitssome degree of earnings resilience in a recession given substantial contribution from service, consumable, oraftermarket revenue; (2) primary end markets remain at or near “trough” levels; (3) recent portfolio changes (post-2009) materially reduced cyclicality, which may not be fully appreciated by investors who are using the 2008/2009time period as a reference point when evaluating potential recession performance.Least preferred stocks in a recession scenario include Rockwell (ROK), Emerson (EMR), Eaton (ETN), followed byCooper (CBE). These stocks all had greater than average peak-to-trough sales and/or earnings decline during the lastrecession, and sales are primarily capital goods with limited service, consumables, and/or recurring revenue streams.Based on management’s commentary over the last two years, we note that Cooper is among the stocks most likely todeploy cash more aggressively during another recession (repurchases and/or M&A); if it does, our recession scenarioearnings estimates may be overly bearish. Further, Rockwell arguably has the single strongest balance sheet in thegroup (net cash position), and Emerson and Eaton each have a reasonable amount of balance sheet flexibility. Thesestocks could also surprise to the upside if they use their balance sheet more aggressively than expected. UBS 138
    • US Equity Strategy 16 August 2011Table 86: Recession Scenario Analysis – Electrical Equipment & Multi-Industry, Jason FeldmanElectrical Equipment & Multi-Industry 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesGeneral Electric GE 0.0% -3.0% -5.0% 19.0% 0.0% -10.0% $23 $18 $133M MMM 7.0% -2.0% -8.0% 11.0% -6.0% -15.0% $103 $75 $58Emerson EMR 7.0% -5.0% -10.0% 11.0% -10.0% -20.0% $58 $38 $29Danaher DHR 17.0% 11.0% -1.0% 21.0% 11.0% -4.0% $60 $47 $38Honeywell HON 6.0% -3.0% -10.0% 11.0% -5.0% -15.0% $60 $45 $30Tyco TYC 5.0% 1.0% -4.0% 18.0% 5.0% -10.0% $50 $40 $30Eaton ETN 5.0% -7.0% -15.0% 13.0% -15.0% -35.0% $57 $42 $24Ingersoll Rand IR 6.0% -5.0% -10.0% 19.0% -15.0% -35.0% $45 $35 $23Cooper Industries CBE 7.0% -5.0% -12.0% 19.0% -10.0% -20.0% $70 $42 $28Rockwell Automation ROK 6.0% -7.0% -15.0% 19.0% -20.0% -35.0% $80 $45 $27GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksGeneral Electric GEDanaher DHRIngersoll Rand IRLeast 3 Preferred StocksEmerson EMRRockwell ROKCooper CBEBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksDanaher DHRGeneral Electric GEIngersoll Rand IRLeast 3 Preferred StocksRockwell ROKEmerson EMREaton ETNSource: UBS UBS 139
    • US Equity Strategy 16 August 2011Engineering & ConstructionSteven Fisher, CFA, 212-713-8634For a grey skies scenario, we assume that $70 oil, $2,000 gold, and $2.50 copper are sufficient to move most energyand mining projects forward, although deepwater and oil sands projects could get delayed. A generally slower pace ofactivity would reduce our estimates from current levels.With these conditions, we think a relatively diversified business with a solid backlog, and low exposure to non-war-related government work is most preferred. Fluor and KBR fit this description. If we had to add a third, it would beJacobs just based on valuation. Fluor: Diversified E&C, but currently driven by mining and upstream oil and gas.Highest backlog on record; assume no cancellations. KBR: Stable backlog from diversified sources and with increasingprofits in backlog.The least preferred would be companies with high non-war-related public sector exposure and high-cost oil projects (oilsands and deepwater). These stocks include URS and McDermott. URS generates roughly 70% of revenues fromgovernment sources, with little large oil/gas project exposure. McDermott is a pure play upstream oil and gasengineering and construction (E&C) firm, which would experience revenue declines and negative operating leverage ina $50 oil scenario.For most preferreds, we assume a premium to the market P/E given still elevated oil prices and the potential thatbacklog could still grow, but below-mid-cycle is appropriate because there is still some earnings headwind and becausethe market multiple is low.For least preferreds, we assume a depressed multiple due to higher risk premium and lower growth potential.We generally don’t want to own E&C stocks in a black skies scenario; however, on a relative basis, at $50 oil, and$1.50 copper, we would reach the crossover point where public sector and smaller project exposure look attractivecompared with large energy and mining project exposure.Most preferred are AECOM, URS and Babcock and Wilcox. AECOM is a diversified engineering and constructionmanagement firm, with little large project risk and 2/3 revenue exposure to government. URS generates roughly 70%of revenues from government sources, with little large oil/gas project exposure. Babcock & Wilcox generates roughlyhalf its profit from government sources. UBS 140
    • US Equity Strategy 16 August 2011Table 87: Recession Scenario Analysis – Engineering & Construction, Steven Fisher, CFAEngineering & Construction 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesFluor FLR 13.0% 0.0% -15.0% 19.0% -7.0% -25.0% $77 $52 $36Jacobs Engineering JEC 10.0% -4.0% -15.0% 15.0% -8.0% -20.0% $45 $32 $23KBR KBR -11.0% -15.0% -21.0% 0.0% -10.0% -24.0% $45 $34 $22Foster Wheeler FWLT 11.0% 5.0% -4.0% 27.0% 10.0% -7.0% $37 $22 $18McDermott MDR 15.0% -3.0% -25.0% 26.0% -5.0% -33.0% $23 $10 $7URS Corp URS 7.0% -5.0% -9.0% 10.0% -7.0% -12.0% $38 $30 $25AECOM ACM 6.0% -2.0% -5.0% 13.0% 0.0% -5.0% $31 $21 $18Shaw Group SHAW 7.0% 3.0% -4.0% nmf nmf nmf $37 $23 $19Babcock & Wilcox BWC 11.0% 5.0% -2.0% 44.0% 26.0% 17.0% $23 $20 $18GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksFluor FLRKBR KBRLeast 2 Preferred StocksURS URSMcDermott MDRBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksAECOM ACMURS URSBabcock & Wilcox BWCLeast 2 Preferred StocksMcDermott MDRFoster Wheeler FWLTSource: UBS UBS 141
    • US Equity Strategy 16 August 2011MachineryHenry Kirn, CFA, 212-713-4895We recognize companies in our coverage nearly all currently expect growth in 2012, so there is some risk that declinesin demand under both grey and black skies scenarios could catch companies off guard (and decremental margins couldbe worse than expected). That said, Machinery companies generally outperformed our expectations in managing the2009 downturn, and we believe management teams still have cost cutting levers at their disposal. In most cases, weestimate company results would give back the 2011 cyclical advancement in sales.For our grey skies analysis, we considered a decline in US GDP of 1.0% and a slowdown in global real output growthto 1.9% in 2012 and looked to previous recessions, particularly 2002, as a reference point for our valuationmethodology. In a grey skies scenario, we expect revenues to be well above 2009 levels, partly a result of strongerunderlying economic demand and partly a result of stronger replacement demand (more difficult to age fleets acrossmost capital goods categories in 2012 than it was in 2009). To arrive at earnings, we generally applied decrementalmargins as historically seen in weak recessions (as in 2002).For our black skies analysis, we considered a decline in US GDP of 2.5% and a slowdown in global real output to 0%growth, and looked to the declines in late 2008 and early 2009 as a reference point for our valuation methodology.While we would expect sales to be weaker than 2010 levels in many cases, we would still expect sales above 2009levels due to: 1) a now older fleet across many categories (as described above); and 2) likely more available financingin 2012 than in 2009. Additionally, we modeled decremental margins somewhat less severe than seen in 2009, as webelieve management teams’ experience handling the recent downturn leaves them better equipped to cut costs faster in2012 than they were able to in 2009.We believe ITW and DE are among the best positioned stocks to weather either a grey or black skies scenario. ITWbenefits from diversified end market exposures and is less likely to see as significant a decline in revenue and EPS asmany OEMs would be likely to under either economic scenario. Deere benefits from still elevated agriculturalcommodity prices, which supports farmer balance sheets, coupled with favorable market share in North America (thehighest margin geography for ag equipment) and European demand just beginning to recover from already depressedlevels. Additionally, given 60% aftermarket exposure in its legacy business and a strong backlog as of 2Q11, we seeJOYG as well positioned to weather a grey skies scenario.We see CAT and KMT as among the stocks most impacted under either a grey or black skies scenario. Caterpillar’srecent acquisitions (Bucyrus, MWM, EMD) and investment demonstrate the company’s clear commitment to growth(which remains our base case). However, should that growth not materialize, the company’s management ofdecremental margins could be challenged by the level of recent capacity and cost additions. On Kennametal, we notethat recessionary demand has historically been volatile and continued to fall throughout the previous downturn(rebounding at a lag to other equipment categories). UBS 142
    • US Equity Strategy 16 August 2011Table 88: Recession Scenario Analysis – Machinery, Henry Kirn, CFAMachinery 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAGCO AGCO 11.6% -7.3% -13.7% 16.9% -26.7% -45.7% $62 $43 $32Caterpillar CAT 19.1% -9.5% -14.5% 33.7% -28.4% -52.8% $114 $76 $57Cummins CMI 15.1% -12.8% -22.1% 13.9% -27.3% -44.6% $140 $100 $71CNH Global CNH 7.3% -8.2% -14.2% 7.3% -25.6% -53.4% $53 $41 $27Deere DE 8.1% -7.7% -15.2% 14.5% -14.8% -30.4% $115 $84 $69Illinois Tool Works ITW 9.1% -3.4% -7.3% 18.6% -8.0% -19.2% $63 $55 $47Joy Global JOYG 18.1% -2.5% -7.8% 25.5% -11.5% -26.6% $112 $91 $76Kennametal KMT 10.2% -11.6% -19.0% 22.7% -32.9% -49.5% $43 $29 $24Navistar NAV 20.0% -10.6% -21.4% 34.8% -29.4% -67.1% $85 $46 $35PACCAR PCAR 21.1% -11.9% -30.8% 50.9% -28.7% -79.6% $60 $39 $29Parker Hannifin PH 8.0% -3.2% -5.7% 13.9% -27.8% -44.2% $77 $67 $62GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksDeere DEJoy Global JOYGIllinois Tool Works ITWLeast 2 Preferred StocksCaterpillar CATKennametal KMTBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksDeere DEIllinois Tool Works ITWLeast 2 Preferred StocksCaterpillar CATKennametal KMTSource: UBS UBS 143
    • US Equity Strategy 16 August 2011Paper & Forest ProductsGail Glazerman, CFA, 212-713-3486Our preferred stocks in the space under a grey skies scenario are KMB and MWV. We prefer KMB under a black skiesscenario. Given the staple nature of KMB’s core products, the demand risk in a recession should be manageable. Thecompany should benefit from cost relief if global pressure on commodities such as pulp/oil is easing. MWV has somemodest underlying support from asset value and a fairly solid balance sheet. Their exposure to emerging marketsshould limit some of the pain from weaker domestic demand. They should also partially benefit from cost relief.Our least preferred stocks in the space under both grey skies and black skies scenarios are PCL and WY. While wewould expect US housing markets to weaken in a renewed downturn, PCL has some underlying support from its assets(c7mm acres of timberlands). They should maintain some income from continued/ongoing land sales, even during adownturn. WY has very heavy exposure to a turn in US housing and is at risk for material earnings pressure if themarkets turn. However, their base of 6mm acres of high value timber should also provide some underlying support toshares. UBS 144
    • US Equity Strategy 16 August 2011Table 89: Recession Scenario Analysis – Paper & Forest Products, Gail Glazerman, CFAPaper & Forest Products 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesMeadWestvaco MWV 2.7% -6.0% -13.5% 12.5% -35.0% -70.0% $37 $31 $28Plum Creek PCL 10.5% -7.5% -13.3% 13.0% -29.5% -43.0% $36 $35 $34Kimberly-Clark KMB 4.0% -3.0% -5.0% 9.5% -11.3% -14.0% $75 $65 $62Weyerhaeuser WY 4.0% -6.0% -15.0% 60.0% -45.0% -84.0% $18 $17 $16GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksKimberly-Clark KMBMeadWestvaco MWVLeast 2 Preferred StocksPotlatch PCLWeyerhaeuser WYBLACK SKIES RECESSION SCENARIOMost Preferred StockKimberly-Clark KMBLeast 2 Preferred StocksPotlach PCLWeyerhaeuser WYSource: UBS UBS 145
    • US Equity Strategy 16 August 2011Small/Mid Cap IndustrialsRobert Barry, 212-713-7980The small/mid-cap (SMID) industrial names we cover are all cyclical, and we think there would be a significantdeceleration in revenue and earnings growth in the event of mild or severe US and/or global recessions. That said, wethink some companies would fare better than others, and we think some would even see recession-driven growthopportunities (ie, W.W. Grainger Inc. [GWW] and Fastenal Co. [FAST]). In assessing downside scenarios we considerfactors that include company-specific growth opportunities, end market downside risk, Return on Invested Capital(ROIC), revenue and margin cyclicality, and balance sheet strength, with revenue growth opportunities and ROICranking higher than the other criteria — especially in a black skies scenario. We should flag that all the names in ouruniverse have strong balance sheets, many with 2010 or 2011E net cash positions, so we do not see any high-riskliquidity situations.Our most preferred names in a black skies scenario are Flowserve (FLS), FAST and GWW. All have healthy firm-specific growth opportunities, especially FAST and GWW, each has a strong balance sheet with 2010/2011E net cashpositions, and these three have the highest returns on capital in our universe. We’d flag GWW and FAST in particularas names with sizable share gain opportunities in a recession. Both operate in highly fragmented markets and havemuch greater financial and managerial resources than most of their smaller “mom & pop” competitors. Both sawsizable share gains through the last downturn, and we’d expect growth investments to remain strong — or evenaccelerate — in the face of another period of macro deceleration. In addition to the balance sheet and ROIC factors wementioned, we also prefer FLS because 40% of its business is a high-margin, less cyclical aftermarket business thatnever turned down in the last recession.In a grey skies scenario our most preferred names are FLS, Actuant Corp. (ATU) and IDEX Corp. (IEX). We swap outFAST and GWW for ATU and IEX because in a less severe downturn we think the upside/downside equation using ourcurrent estimates and valuation remains more relevant and IEX and ATU rank better (in part because FAST has beenoutperforming in recent months). We also de-emphasize the very defensive attributes of ROIC, net cash positions, andnon-M&A related firm-specific growth that favored GWW and FAST in the severe downturn scenario. UBS 146
    • US Equity Strategy 16 August 2011Table 90: Recession Scenario Analysis – Small/Mid Cap Industrials, Robert BarrySector: SMID Industrials 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesActuant ATU 6.2% -1.7% -9.3% 15.5% -1.8% -18.6% $31 $20 $16Ametek AME 6.8% -4.0% -15.6% 13.8% -3.5% -25.3% $47 $34 $25Crane CR 8.8% 0.0% -8.8% 19.3% 0.5% -26.8% $58 $34 $26Fastenal FAST 18.0% 1.0% -10.1% 24.2% -7.4% -23.8% $38 $27 $22Flowserve FLS 9.7% 3.0% -2.9% 12.1% 7.5% -5.3% $121 $83 $73Grainger GWW 7.5% -0.5% -8.5% 12.6% -1.5% -15.4% $167 $120 $102Idex IEX 10.3% -1.4% -12.6% 20.5% -1.0% -22.4% $52 $36 $24Lennox LII 5.1% -1.5% -7.8% 48.9% 0.6% -14.8% $38 $27 $23Pentair PNR 7.8% -1.9% -10.3% 17.8% 6.4% -25.7% $40 $27 $20Watsco WSO 4.5% -1.1% -5.8% 21.4% -17.0% -34.3% $54 $45 $36GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksFlowserve FLSActuant ATUIdex IEXLeast 3 Preferred StocksPentair PNRWatsco WSOLennox LIIBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksFlowserve FLSFastenal FASTGrainger GWWLeast 3 Preferred StocksPentair PNRWatsco WSOAmetek AMESource: UBS UBS 147
    • US Equity Strategy 16 August 2011 Intentionally Blank UBS 148
    • US Equity Strategy 16 August 2011 Technology UBS 149
    • US Equity Strategy 16 August 2011Business, Education and Professional ServicesAriel Sokol, 212-713-8450Data from the past 30 years suggests that institutions benefit from increased enrollments during a period of economiccontraction. However, we do not believe enrollments will uniformly rise following a modest or deep economiccontraction. Rather, we believe the sector could see new start declines. We ascribe this to the following: 1) Consumersare more conservative regarding leverage. 2) Institutions are more averse to taking on the “low-quality students” whotend to have high default rates and little cash pay yet account for the bulk of countercyclical demand. 3) Those mostlikely to enroll during a recession did so in 2009/2010. 4) “For-profit” institutions have incurred substantialreputational damage and might lose share to “Not-for-profit” institutions.For the above reasons, we believe that, at a minimum, a recession would not benefit enrollments in aggregate for “for-profit” operators as it has done in the past. If anything, a substantially deep economic contraction could reduce overallenrollments.We adjust the following levers to create grey skies and black skies scenarios: 1) New starts for online degrees dependmore on the affordability of the degree. 2) New starts up for career education programs. 3) Revenue per enrollmentdown due to price sensitive customers. 4) Sales and marketing costs down as a result of lower media cost. 5) Bad debtexpense increases. Based on these scenarios, we believe DeVry could outperform its peers in the event of a downturn,as it has amassed a diversified group of institutions that have both cyclical and countercyclical drivers. Exposure toacyclical healthcare programs could offset weakness in online degrees at the company’s core DeVry University.We believe ITT Educational Services (ESI) has the most downside risk of the companies we cover if a downturn occurs.In our opinion, a recession would greatly exacerbate ESI’s existing structural problems. Regulatory issues concerningstudent defaults could prevent the company from accepting additional countercyclical students, given its high cohortdefault rates. Also, given ESI’s high tuition, students could have difficulty financing their education if the company isunable to secure third-party private financing for student loans. The company could need to reduce tuition, providescholarships, or some other source of financing for students concerned with high tuitions. However, lower customeracquisition costs could mitigate some of ESI’s challenges. UBS 150
    • US Equity Strategy 16 August 2011Table 91: Recession Scenario Analysis – Business, Education and Professional Services, Ariel SokolBusiness, Education and Professional Services 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesApollo Group APOL -6.8% -7.4% -10.4% -28.4% -32.7% -39.1% $46 $44 $40DeVry DV 2.3% -3.0% -6.0% 3.9% -7.0% -11.0% $70 $60 $50Washington Post WPO -3.2% -5.5% -8.6% -12.7% -25.1% -36.3% $420 $360 $321ITT Educational Services ESI -9.4% -14.7% -17.3% -31.2% -44.7% -62.2% $70 $59 $40GREY SKIES RECESSION SCENARIOMost Preferred StockDeVry DVLeast 3 Preferred StocksITT Educational Services ESIApollo Group APOLWashington Post WPOBLACK SKIES RECESSION SCENARIOMost Preferred StockDeVry DVLeast 3 Preferred StocksITT Educational Services ESIApollo Group APOLWashington Post WPOSource: UBS UBS 151
    • US Equity Strategy 16 August 2011Computer Services & IT ConsultingArvind Ramnani, 212-713-3517IT Services is arguably somewhat of a lagging indicator versus the economy. At the onset of an economic downturn,existing projects generally continue until their scheduled completion, and if the vendor cannot backfill these revenuesby selling new work, that is when revenue/earnings growth deceleration becomes more evident. The obvious concern isthat if the economic weakness becomes more broad-based and pervasive, then IT budgets will logically become muchmore challenging and apt to significant pull-backs.Companies such as Cognizant and Accenture have a greater percentage of their revenues that are more mission-criticaland maintenance-related. This type of work tends to be difficult to cut even during a weak economic scenario. Incontrast, companies such as Sapient have greater pieces of their revenues that are discretionary and can be scaled backor cut during the downturn. UBS 152
    • US Equity Strategy 16 August 2011Table 92: Recession Scenario Analysis – Computer Services & IT Consulting, Arvind RamnaniComputer Services & IT Consulting 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAccenture plc ACN 9.0% 7.5% 6.0% 12.5% 11.0% 9.4% $64 $48 $37Amdocs Limited DOX 5.8% 3.0% 0.0% 12.5% 9.7% 6.5% $35 $28 $21Cognizant Technology Solutions Corp. CTSH 22.4% 15.0% 9.0% 21.3% 14.0% 8.1% $87 $60 $45Computer Sciences Corp. CSC 2.4% 0.0% -2.0% 0.5% -1.7% -3.7% $41 $28 $21Genpact G 20.0% 14.0% 8.0% 8.1% 16.5% 10.4% $21 $13 $9Sapient Corp. SAPE 19.2% 10.0% -2.0% 39.2% 28.0% 14.1% $15 $9 $6GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksCognizant Technology Solutions Corp. CTSHAccenture plc ACNAmdocs Limited DOXLeast 3 Preferred StocksSapient Corp. SAPEGenpact GComputer Sciences Corp. CSCBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksCognizant Technology Solutions Corp. CTSHAccenture plc ACNAmdocs Limited DOXLeast 3 Preferred StocksSapient Corp. SAPEGenpact GComputer Sciences Corp. CSCSource: UBS UBS 153
    • US Equity Strategy 16 August 2011Data Networking & Wireline EquipmentNikos Theodosopoulos, 212-713-3286Under a black skies scenario, we believe the 2008-2009 recession serves as a good proxy with meaningful declines toexpected revenues. A grey skies scenario is slightly more difficult to forecast, requiring a material cut to current growthestimates. In total, we expect revenue growth of ~5-25% for the companies under coverage being lowered to -3% to+10% in a grey skies environment, and -10% to +5% under black skies. More specifically, Cisco’s (CSCO) revenueshave the highest correlation to US/global GDP. Based on our proprietary UBS model, we estimate Cisco’s correlationat roughly 85% versus US/global GDP. Corning’s (GLW) demand drivers are more aligned to TV/LCD panels, whichare becoming more aligned with GDP as the technology matures. Other companies in the communicationsinfrastructure industry, including Juniper (JNPR), F5 Networks (FFIV), Riverbed (RVBD), and Polycom (PLCM),have less of a correlation to US/global GDP than Cisco. The lower correlations are due to a variety of factors, includingtheir: 1) smaller sizes; 2) corporate life-cycle stages; 3) higher growth profiles; and 4) slightly varied end-marketdemand drivers.The resulting impact on earnings is more difficult to forecast. Companies’ operating expense items are likely to receiveheightened scrutiny with slower revenue growth. Some companies may preserve more investment in research anddevelopment, others may work to retain as many sales and marketing professionals as possible, while others maydownsize significantly. Additionally, the timing of operating expense actions is difficult to forecast. Our assumptionsregarding management spending plans assume consistent company-by-company behavior versus prior downturns.Additionally, we expect the valuation multiples for larger cap companies to stay intact (and possibly expand) during adownturn, while smaller, more volatile companies will see multiple contraction. The net of this is that we believeCorning is the only company in our coverage universe that has potential upside under a grey skies scenario. Our view isCorning’s valuation on a price to book basis already discounts a recession, with only single-digit downside under ablack skies environment. We have a Buy rating on Corning. Cisco, given its relatively lower valuation on more recentcompany-specific execution issues, also has less downside than the group, in our view. We see Cisco’s potentialdownside as ~8% under grey skies and ~15% with black skies. We note that although there is Cisco downside, this ismeaningful outperformance versus other companies under coverage. Our sense is FFIV, RVBD, and PLCM have thehighest potential downside. When considering the potential for a moderate deceleration and sharp decline in US/globalGDP, we estimate potential valuation downside for FFIV, RVBD, and PLCM at 20%, 40%, and 30% for grey skies and25%, 45%, and 45% under black skies, respectively. UBS 154
    • US Equity Strategy 16 August 2011Table 93: Recession Scenario Analysis – Data Networking & Wireline Equipment, Nikos TheodosopoulosData Networking & Wireline Equipment 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesCisco CSCO 5.2% -3.0% -10.0% 9.0% -8.4% -15.2% $17 $13 $12Corning GLW 8.5% -2.8% -10.0% 4.4% -13.1% -22.2% $24 $16 $13Juniper JNPR 14.9% 8.0% -6.0% 22.0% 16.5% -15.5% $31 $19 $14F5 Networks FFIV 19.3% 8.0% 4.0% 16.8% 4.0% 6.1% $110 $63 $58Riverbed RVBD 25.2% 10.0% 5.0% 29.1% 5.8% 8.0% $33 $14 $13Polycom PLCM 18.7% 7.0% -7.0% 34.8% 2.5% -13.9% $28 $17 $13GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksCorning GLWCisco CSCOLeast 3 Preferred StocksF5 Networks FFIVRiverbed RVBDPolycom PLCMBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksCorning GLWCisco CSCOLeast 3 Preferred StocksF5 Networks FFIVRiverbed RVBDPolycom PLCMSource: UBS UBS 155
    • US Equity Strategy 16 August 2011IT HardwareMaynard Um, 212-713-3372We analyzed the relationship of GDP to each of our company’s sales and EPS under coverage. We assume the impactto revenue and EPS growth estimates per point of change in global GDP growth will be similar to the revisions we sawin the 2008/09 downturn. We also looked at the difference in margin profiles versus the last downturn. We notedownside in terms of multiple compression is lower this time, as the average multiple at the end of 2007 (~19.9x)declined to ~9.9x by March 9, 2009 (around the trough) versus the average multiple at the end of 2010 being ~14.4xand on August 8, 2011 being ~10.6x.IT Hardware companies with higher annuity revenue such as IBM have very weak relationships to GDP while thoseexposed to more transaction-based sales, such as EMC, NetApp, and Dell, have stronger relationships. Surprisingly,despite the more transaction-based orientation of Apple’s products, there is a weak relationship between GDP andApple’s revenue and EPS, given the demand even in the downturn. EPS correlation for transaction-based companies isrelatively low except for EMC, as these companies have executed well by managing expenses during a downturn.We see Apple as a relative safe haven, given its end-market demand trends, new product cycle, relatively low valuation(was trading near its trough multiple as of close on August 8, 2011), and strength in supply chain procurement andmanagement. We also see Hewlett-Packard as being fairly defensive, with good risk/reward despite some issues (whichwe ultimately expect resolution to), and see trends of vendor consolidation to larger OEMs by customers as favorableto the company. UBS 156
    • US Equity Strategy 16 August 2011Table 94: Recession Scenario Analysis – IT Hardware, Maynard UmIT Hardware 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesApple AAPL 22.5% 17.8% 13.2% 14.5% 12.2% 9.9% $510 $442 $431Dell DELL 2.2% -11.7% -25.6% 2.7% -11.2% -25.1% $19 $16 $16Hewlett Packard HPQ 4.8% 0.6% -3.7% 5.5% 0.0% -5.6% $45 $40 $37IBM IBM 4.8% 11.0% -4.6% 8.2% 6.4% 4.6% $180 $170 $166EMC EMC 6.5% 18.0% -6.2% 12.7% 3.2% -6.3% $33 $30 $26NetApp NTAP 12.5% 3.5% -5.4% 10.7% -2.7% -16.1% $67 $61 $58GREY SKIES RECESSION SCENARIOTop 2 Preferred StocksApple AAPLHewlett Packard HPQLeast Preferred StockIBM IBMBLACK SKIES RECESSION SCENARIOTop 2 Preferred StocksApple AAPLHewlett Packard HPQLeast Preferred StockIBM IBMSource: UBS UBS 157
    • US Equity Strategy 16 August 2011SemiCap Equipment / Alternative EnergyStephen Chin, 212-713-4111Semiconductor EquipmentIn the semiconductor equipment industry, our Key Global Indicator (KGI) is semiconductor capital spending, which wecurrently estimate at up +14% yoy in 2011 (mostly due to a strong 1H11 capex spend) and down -13% yoy for 2012. Inour grey skies scenario, we assume only modest downside risk, mostly from lower capex at foundry customers, as thesemiconductor equipment industry has already been in a normal down-cycle because industry semicap equipmentorders have been declining qoq since 4Q10. In our black skies scenario, we estimate 2011 industry capex could be up+9% yoy and 2012 could be down -35% yoy, mostly reflecting a decline from foundry and memory customers. Wenote that there are still several technology migrations that semiconductor customers will likely consider using capex on(such as gate-last, vertical NAND, and quadruple patterning) that could help limit the downside in this black skiesscenario compared to the 2009 downturn.In terms of the semiconductor equipment stocks, we believe KLA-Tencor (KLAC) will again prove to be the moredefensive semicap stock to own during this period of uncertainty. While KLAC has the highest percentage of ordersfrom foundry customers (40%), we believe the current stock price already discounts potentially weaker foundry orders.On the positive side, KLAC’s high levels of backlog at $1.4B could help limit significant downside on the stock. Wealso note that during normal down-cycles, KLAC has historically troughed at around 2.0x book value (the stock iscurrently trading at 2.0x). In a black skies scenario, we believe KLAC’s quarterly sales could trough higher than the$300M/quarter level that we saw in 2009 as the company has more success in new segments. We also estimate KLAC’scash break-even at about $300M/quarter, so the company should be at least cash flow neutral even on trough sales. Thisshould allow it to maintain its dividend payment (yield is 3.9%), which is another differentiator for this company in adownturn.Alternative EnergyOur alternative energy space is currently composed of two sub-industries: solar and LED. For solar, solar moduleprices are our KGI. In a grey skies scenario, we forecast that solar module prices will decline by 12% from our 2012base case, and that total solar demand will drop by 5%, resulting in 15% oversupply. In a black skies scenario, we see a20% decline from our 2012 base case, resulting in a 14% decline in total demand and an industry oversupply of 25%.In these scenarios, we believe First Solar is best positioned, given its cost and market share leadership. Specifically, weexpect First Solar to grow earnings at a faster pace than its peers in 2012, as 40% of its 2012 module shipments will gotoward its utility scale pipeline business, which commands a 75% ASP premium.For LED, our key industry assumptions are that LED TV penetration rates and growth rates of LED general lighting arethe two largest drivers of LED sales. We estimate LED TVs account for about 35% of the demand for LED chips (byarea) while general lighting uses about 25% of the LED chips (by area). In our grey skies scenario, our estimates do notchange much from our base case. We note that LED growth rates have slowed for about one year already, starting in3Q10, mostly due to lower sales of LED backlighting applications (TVs). The LED industry has also recently seenweaker demand for general lighting LED applications in 2Q11, which is why our grey skies scenario does not differ toomuch from our base case scenario. In a black skies scenario, we estimate LED TV penetration rates will be only 40% in2012, versus 65% in our baseline scenario. In a black skies scenario for lighting, although we note capacityunderutilization may lead to oversupply of LED and lower ASP, increased demand will likely offset this, to somedegree, as LED lighting becomes more cost competitive with incandescent and compact fluorescent bulbs. LED makerAixtron noted recently that a tipping point in LED adoption likely occurs when LED bulbs reach ~10x the incandescentbulb price, and that prices are already close to this level in Japan (12.5x) and Taiwan (13.9x). However, in terms of theLED stocks, there have been some early signs of industry stabilization and, as such, we believe Cree’s stock could have30-40% potential downside in a black skies scenario from lower LED general lighting demand and higher competition. UBS 158
    • US Equity Strategy 16 August 2011Table 95: Recession Scenario Analysis – SemiCap Equipment / Alternative Energy, Stephen ChinSemiCap Equipment / Alternative Energy 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesSemicap EquipmentApplied Materials AMAT -6.5% -14.9% -28.1% -7.2% -57.8% -93.0% $15 $14 $9Lam Research LRCX -5.0% -14.1% -27.9% -13.7% -50.4% -153.2% $55 $52 $33KLA-Tencor KLAC -5.8% -13.7% -27.5% -12.1% -46.3% -110.4% $50 $47 $30Novellus NVLS -17.5% -15.4% -29.7% -23.7% -57.9% -186.0% $34 $32 $20Teradyne TER -3.5% -16.2% -30.1% 4.0% -67.3% -148.4% $16 $15 $9Alternative Energy - SolarFirst Solar FSLR 48.5% 43.1% 36.4% 23.7% 4.0% -22.8% $150 $120 $85Alernative Energy - LEDCree CREE 30.5% 24.2% 21.5% 58.0% 34.5% 7.8% $32 $27 $20GREY SKIES RECESSION SCENARIOMost Preferred StocksSemicap Equipment KLA Tencor KLAC Lam Research LRCXAlternative Energy - Solar First Solar FSLRAlternative Energy - LED N/ALeast Preferred StocksSemicap Equipment Novellus NVLS Teradyne TERAlternative Energy - Solar N/AAlternative Energy - LED Cree CREEBLACK SKIES RECESSION SCENARIOMost Preferred StocksSemicap Equipment LAM Research LRCX KLA Tencor KLACAlternative Energy - Solar First Solar FSLRAlternative Energy - LED N/ALeast Preferred StocksSemicap Equipment Novellus NVLS Teradyne TER Applied Materials AMATAlternative Energy - Solar N/AAlternative Energy - LED Cree CREESource: UBS UBS 159
    • US Equity Strategy 16 August 2011SemiconductorsUche Orji, 212-713-4015In the last downturn, we had a more muted decline in semiconductor revenues relative to S&P500 earnings, as semicompanies were able to limit pricing declines by slashing wafer starts and cutting capacity. We expect similar behaviorto occur in the event of another major downturn. As a result, we believe global semiconductor revenues will declineless dramatically than the UBS Strategy Group expects S&P500 earnings to drop in the event of a slowdown in GDPgrowth. Specifically, we project that 2012 global semiconductor revenues will decline by 15% in a grey skies scenarioand 30% in a black skies scenario.We use this projected change in our semiconductor Key Global Indicator (KGI) to analyze potential changes to ourcompanies’ revenue forecasts and consider company-specific items in modeling leverage to project EPS. We believeMicrochip Technology (MCHP) is best positioned to weather the storm in a recessionary environment. MCHP has abroad-based microcontroller business with revenue trends likely to perform largely in line with the semiconductorindustry. However, we expect earnings to remain relatively resilient, given: 1) low leverage on COGS due to itsrelatively low fixed cost base; 2) operating expenses that can be modulated with the economic conditions (the entirecompany incurred a 10% pay cut and no bonuses that helped avoid layoffs during the 2008 downturn). Even as thedividend payout ratio could somewhat exceed 100% in a black skies scenario, the company has $1.5bn of cash &equivalents that should support maintaining the current $0.347/share quarterly dividend level (currently 4.4% yield).In the event of a recession, we are especially concerned about companies that have made large acquisitions recently,putting a strain on corporate resources and balance sheets during a challenging time. Specifically, Texas Instruments(TXN) recently acquired National Semiconductor for $6.5B in cash. TXN has taken on debt of $3.5B and used the cashon its balance sheet to fund the acquisition. After the close of the deal, the company will be cash neutral. Furthermore,integration of National raises the risk for the overall business; therefore, investors are not likely to perceive TXN as asafe haven (unlike in past downturns, when TXN was viewed by investors as a safe haven, given a cash rich balancesheet and steady cash flow analog business).ON Semiconductor (ONNN) recently acquired Sanyo’s semiconductor business. With its leveraged balance sheet withnegative cash position further compounded by a larger fixed cost foot print and relatively high capital intensity, ONNNis likely to face challenges in a recessionary environment. The timeframe for synergies from the Sanyo acquisition islikely to be pushed out and magnitude may not be in line with expectations. We believe that with declining revenue,ONNN is not likely to invest much in consolidating Sanyo’s manufacturing facilities and may be forced to abandon asizable part of Sanyo’s business. UBS 160
    • US Equity Strategy 16 August 2011Table 96: Recession Scenario Analysis – Semiconductors, Uche OrjiSemiconductors 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Gray Skies Black Skies GDP View Gray Skies Black Skies GDP View Gray Skies Black SkiesAdvanced Micro Devices AMD 5.8% -9.6% -17.8% 29.0% -18.7% -44.0% $7 $6 $5Altera ALTR 8.5% -7.3% -15.7% 3.6% -16.9% -25.2% $52 $42 $39Analog Devices ADI -0.9% -13.0% -22.0% -5.8% -24.9% -39.2% $43 $29 $25Atmel ATML 11.1% -5.1% -13.7% 20.6% -6.5% -18.8% $18 $15 $14Broadcom BRCM 9.9% -5.0% -16.0% 19.9% -15.3% -55.7% $45 $28 $13Cypress Semiconductor CY 20.7% -2.0% -10.1% 35.7% -7.8% -17.1% $26 $20 $19Intel INTC 8.3% -7.5% -15.9% 8.1% -20.7% -30.9% $29 $22 $20Linear Technology LLTC -9.1% -13.0% -18.0% -35.2% -27.2% -35.2% $31 $24 $20LSI LSI 7.5% -14% -22.0% 19.7% -28.1% -95.7% $7 $5 $3Marvell MRVL 13.8% -9.0% -20.0% 24.2% -24.7% -58.1% $18 $11 $6Maxim Integrated Products MXIM 4.8% -11.0% -20.0% 5.6% -8.7% -27.1% $27 $23 $19Microchip Technology MCHP 6.6% -8.9% -17.1% 9.9% -10.4% -19.2% $34 $29 $27Micron Technology MU 9.4% -10.0% -20.0% 144.7% -32.3% -347.3% $14 $7 $4NVIDIA NVDA 4.0% -11.1% -19.2% 5.3% -24.7% -38.9% $17 $13 $11ON Semiconductor ONNN 5.8% -14.0% -33.0% 12.8% -50.7% -111.8% $9 $6 $4Qualcomm QCOM 26.0% +0.0% -10.0% 20.5% -33.8% -52.3% $70 $37 $29SanDisk SNDK 16.0% -2.0% -16.0% 15.1% -27.3% -73.8% $62 $36 $12Skyworks Solutions SWKS 23.9% -5.0% -10.0% 28.3% -8.0% -20.7% $40 $16 $12Texas Instruments TXN 1.9% -14.0% -22.0% 5.0% -22.1% -37.3% $32 $23 $18Xilinx XLNX 5.3% -10.0% -18.2% 16.2% -16.1% -28.1% $36 $30 $27GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksIntel INTCQualcomm QCOMMicrochip Technology MCHPLeast 3 Preferred StocksON Semiconductor ONNNNVIDIA NVDATexas Instruments TXNBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksIntel INTCMicrochip Technology MCHPLinear Technology LLTCLeast 3 Preferred StocksON Semiconductor ONNNNVIDIA NVDAAdvanced Micro Devices AMDSource: UBS UBS 161
    • US Equity Strategy 16 August 2011SoftwareBrent Thill, 415-352-4694In the event of another downturn, we assume a similar IT spending pattern that occurred in the last recession will repeat.Our black skies scenario assumes a downturn similar to the 08/09 recession. Grey skies assume a difficult environment,but slightly better than a black skies scenario. Also, it is worth noting that specific software segments such as securityshould hold up better. In general, perpetual license revenue models are more at risk, while recurring revenue streamssuch as subscriptions or maintenance are relatively better protected.Our top three preferences under a black skies scenario are Oracle, Check Point Software, and Intuit. The companieshave heavier mixes of recurring revenues and higher priority spend categories (eg, security), and they held up well inthe last recession. Our three least preferred names under black skies are Autodesk, Adobe, and Citrix Systems. Thesecompanies have a lower mix of recurring revenues, coupled with valuation concerns. UBS 162
    • US Equity Strategy 16 August 2011Table 97: Recession Scenario Analysis – Software, Brent ThillSoftware 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesAdobe Systems ADBE 14.1% 4.3% -18.5% 12.4% -2.7% -33.5% $40 $31 $22Autodesk ADSK 13.0% -8.0% -18.3% 29.2% -7.2% -32.4% $52 $34 $24Check Point Software CHKP 12.5% 10.0% 8.7% 13.5% 11.1% 9.7% $68 $59 $51Citrix Systems CTXS 15.1% 11.0% 8.0% 15.2% 8.0% 3.4% $79 $66 $59Informatica INFA 17.0% 13.5% 9.9% 22.7% 19.0% 15.2% $67 $55 $45Intuit INTU 8.3% 6.9% 5.8% 8.6% 6.1% 4.7% $57 $51 $47Microsoft MSFT 9.4% 7.7% 5.7% 10.5% 6.5% 4.7% $33 $29 $25Microstrategy MSTR 13.4% 10.3% 4.8% 127.0% 120.8% 109.8% $190 $152 $125Nuance NUAN 14.0% 11.3% 7.9% 12.8% 9.1% 2.0% $24 $20 $17Oracle ORCL 8.0% 5.5% 4.0% 8.2% 5.4% 3.6% $40 $34 $30Qlik Technologies QLIK 20.2% 18.3% 16.0% 50.3% 48.0% 45.1% $37 $30 $26Red Hat RHT 15.7% 12.0% 9.4% 19.5% 12.6% 8.9% $54 $41 $33Salesforce.com CRM 23.8% 20.2% 18.8% 40.7% 31.5% 27.4% $184 $142 $121Symantec SYMC 5.9% 4.5% 3.5% 12.0% 10.1% 8.9% $22 $20 $16Vmware VMW 20.0% 15.0% 12.0% 19.0% 11.0% 7.0% $125 $104 $90GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksCheck Point CHKPOracle ORCLIntuit INTULeast 3 Preferred StocksCitrix CTXSQlik Technologies QLIKAutodesk ADSKBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksOracle ORCLCheck Point CHKPIntuit INTULeast 3 Preferred StocksAutodesk ADSKAdobe ADBECitrix CTXSSource: UBS UBS 163
    • US Equity Strategy 16 August 2011Technology Supply Chain & Wireless EquipmentAmitabh Passi, 415-352-5537We expect the revenue decline for our companies in the event of a downturn to be comparable to what we saw in the2008/09 timeframe. In completing our revenue and earnings sensitivity analysis for our coverage universe for twodifferent recession scenarios, we conducted a regression test comparing sub-sector revenue growth with GDP growth.As a result of this test and our sector-specific margin analysis, we have made the following core assumptions:Connector Companies: 1% GDP downside risk leads to 6.1% revenue downside risk for the connector companies (TEConnectivity, Amphenol, and Molex) and incremental/decremental operating margin of 25%.EMS Companies: 1% GDP downside risk leads to 5.4% revenue downside risk for the EMS companies (Flextronicsand Jabil Circuit), and incremental/decremental operating margin of 8%.Distributors Companies: 1% GDP downside risk leads to 7% revenue downside risk for the distributors (Arrow andAvnet), and incremental/decremental operating margin of 8%Wireless Handset Companies: 1% GDP downside risk leads to 8.5% unit downside risk for wireless handsets, withaverage selling prices declining another 5% (grey skies) and 10% (black skies) relative to our base case.For each company, we applied the anticipated impact to revenues and margins to our base case scenario, which differsin some cases for companies in the same sector, given each company’s unique growth trajectory, to determine thedownside risk to earnings and revenues. In estimating our valuations, for a black skies scenario, we did not quite revertto the multiples seen during the 08-09 recession, when some of our companies saw extremely depressed multiples onbalance sheet concerns. Many of those companies have meaningfully de-levered and we have, therefore, assumedmargins in those cases will likely not compress to the 08-09 levels.Under a black skies scenario, our two preferred names would be Amphenol (APH) and Motorola Mobility (MMI).While APH has some cyclical exposure as well, it has proven to be a relatively more defensive name in our coverageuniverse. During the 01-02 and 08-09 downturns, while revenues declined ~25% and ~15%, respectively, from peak totrough, operating margins remained relatively resilient, troughing at 15.7% in 01-02 and 16.8% in 08-09 (down 300bpspeak to trough). In addition, the company has 13.4m shares remaining in its share buy-back plan (through January2014) and we would expect management to be aggressive in buying shares should the environment turn for the worse.Management has consistently shown execution prowess and an ability to flex its business model to cope withdeteriorating conditions.We also prefer MMI, which we value on a sum-of-the-parts basis, given limited visibility into earnings power. Withlittle value being implied for the mobile device business already, $7-8/share for the Home business, $8/share indeferred tax assets, $11/share in cash, and a robust patent portfolio, we continue to believe there should be limiteddownside risk to the shares. MMI also has a robust patent portfolio (more than 21k wireless patents, owned andpending), and with increasing attention being placed in the marketplace on wireless patents, we believe shares will holdup relatively well in a black skies scenario.Tyco Electronics (TEL) rounds out our top three investment picks, given its broad-based end market exposure, strongsecular trends in global FTTx spending, incremental synergies anticipated from the ADC Telecommunications (ADCT)acquisition, strong free cash flow profile, attractive dividend, and valuation. While the company does have exposure tothe more cyclical automotive and industrial sectors, posing risk in any economic contraction, we note automotive salestrends remain below scrappage levels in the US, which coupled with better emerging markets trends, should limitdownside risk. We also note since the 2008-2009 recession, TEL has optimized its manufacturing footprint by reducingthe number of plants by 40-plus and delevered its balance sheet, putting it in a better position to cope with anydownturn. At less than 10x NTM PE and a FCF yield of 10-percent plus, we remain constructive on the shares. UBS 164
    • US Equity Strategy 16 August 2011Table 98: Recession Scenario Analysis – Technology Supply Chain & Wireless Equipment, Amitabh PassiTechnology Supply Chain & Wireless Equipment 11 vs.12 % Revenue Change 11 vs.12 % EPS Change Scenario Valuation Current Recession Scenario Current Recession Scenario Current Recession ScenarioName Ticker GDP View Grey Skies Black Skies GDP View Grey Skies Black Skies GDP View Grey Skies Black SkiesTE Connectivity TEL 5.4% -5.3% -16.4% 11.4% -10.5% -33.9% $45 $30 $18Amphenol APH 7.0% -3.9% -15.1% 8.7% -6.3% -22.0% $55 $37 $26Molex MOLX 4.9% -5.8% -16.9% 7.6% -14.8% -38.7% $24 $16 $9Flextronics FLEX -1.1% -10.0% -19.1% 8.0% -22.4% -55.8% $10 $5 $2Jabil JBL 9.0% -0.8% -10.9% 13.4% -7.9% -30.6% $23 $17 $9Arrow ARW -0.3% -12.0% -24.1% -1.3% -25.3% -51.1% $48 $30 $14Avnet AVT -0.7% -12.4% -24.5% -6.9% -33.7% -62.8% $44 $22 $9Motorola Mobility MMI 15.7% 6.8% -2.2% 163.8% 138.5% 112.5% $31 $29 $27Research In Motion RIMM 5.2% -5.8% -17.6% -2.0% -13.9% -27.4% $30 $24 $19GREY SKIES RECESSION SCENARIOTop 3 Preferred StocksMotorola Mobility MMIAmphenol Corp APHTE Connectivity Ltd. TELLeast 3 Preferred StocksFlextronics International Ltd. FLEXMolex Incorporated MOLXResearch In Motion Ltd. RIMMBLACK SKIES RECESSION SCENARIOTop 3 Preferred StocksMotorola Mobility MMIAmphenol Corp APHTE Connectivity Ltd. TELLeast 3 Preferred StocksFlextronics International Ltd. FLEXMolex Incorporated MOLXResearch In Motion Ltd. RIMMSource: UBS UBS 165
    • US Equity Strategy 16 August 2011 Analyst CertificationEach research analyst primarily responsible for the content of this researchreport, in whole or in part, certifies that with respect to each security or issuerthat the analyst covered in this report: (1) all of the views expressed accuratelyreflect his or her personal views about those securities or issuers and wereprepared in an independent manner, including with respect to UBS, and (2) nopart of his or her compensation was, is, or will be, directly or indirectly, relatedto the specific recommendations or views expressed by that research analyst inthe research report. UBS 166
    • US Equity Strategy 16 August 2011Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches andaffiliates are referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission.UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverage1 IB Services2 Buy Buy 54% 39% Neutral Hold/Neutral 39% 35% Sell Sell 7% 14% 3 UBS Short-Term Rating Rating Category Coverage IB Services4 Buy Buy less than 1% 33% Sell Sell less than 1% 25%1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided withinthe past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were providedwithin the past 12 months.Source: UBS. Rating allocations are as of 30 June 2011.UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 167
    • US Equity Strategy 16 August 2011KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not aforecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stocks price target and/or rating aresubject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect anychange in the fundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASESUK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:Negative on factors such as structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stocks volatility and the credit spread of the respective companysdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are notregistered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained inthe NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by aresearch analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,follows.UBS Securities LLC: Jonathan Golub, CFA; Chip Miller, CFA; Manish Bangard, CFA; Daniel Murphy; Vishal Patel; Thomas M.Doerflinger, Ph.D.; Natalie Garner, CFA; Maury N. Harris; David A. Bleustein; Ana Recinos. UBS 168
    • US Equity Strategy 16 August 2011Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date Abbott Laboratories4, 6a, 6c, 7, 8a, 16 ABT.N Buy N/A US$49.91 15 Aug 2011 Accenture plc4, 6a, 6b, 6c, 7, 16 ACN.N Buy N/A US$55.42 15 Aug 2011 Activision Blizzard Inc.4, 6a, 6b, 6c, 7, 16 ATVI.O Buy N/A US$11.00 15 Aug 2011 4, 6a, 6c, 7, 16 Actuant Corporation ATU.N Buy N/A US$20.59 15 Aug 2011 4, 6c, 7, 13, 16 Adobe Systems Inc. ADBE.O Buy N/A US$24.65 15 Aug 2011 13, 16, 20 Advanced Micro Devices AMD.N Neutral (CBE) N/A US$6.43 15 Aug 2011 1, 5, 16 AECOM Technology Corp. ACM.N Buy N/A US$19.94 15 Aug 2011 1, 2, 4, 5, 6a, 6b, 6c, 7, 16, 22 Aetna Inc. AET.N Neutral N/A US$38.35 15 Aug 2011 16 Alexion Pharmaceuticals, Inc. ALXN.O Neutral N/A US$53.13 15 Aug 2011 16 Allergan AGN.N Buy N/A US$74.75 15 Aug 2011 Allscripts Healthcare Solutions 2, 4, 5, 6a, 16 MDRX.O Buy N/A US$15.71 15 Aug 2011 Inc. 4, 5, 6a, 13, 16 Alpha Natural Resources ANR.N Buy N/A US$34.08 15 Aug 2011 16, 18h, 22 Altria Group MO.N Buy N/A US$25.70 15 Aug 2011 16, 18ap Amazon.com Inc AMZN.O Neutral N/A US$202.95 15 Aug 2011 5, 16 Amdocs Limited DOX.N Buy N/A US$27.83 15 Aug 2011 4, 5, 6a, 16 Ameren Corp. AEE.N Neutral N/A US$28.35 15 Aug 2011 16 American Campus Communities ACC.N Buy N/A US$37.23 15 Aug 2011 4, 5, American Electric Power, Inc. 6a, 6b, 6c, 7, 16, 22 AEP.N Neutral N/A US$37.49 15 Aug 2011 16 American Tower Corporation AMT.N Buy N/A US$51.48 15 Aug 2011 Ameriprise Financial, Inc.4, 5, 6a, 6b, 6c, 7, 16 AMP.N Buy N/A US$45.30 15 Aug 2011 16 Ametek, Inc. AME.N Neutral N/A US$38.85 15 Aug 2011 2, 4, 5, 6a, 6c, 7, 16, 22 Amgen Inc. AMGN.O Neutral N/A US$51.60 15 Aug 2011 16 Amphenol Corp APH.N Neutral N/A US$47.22 15 Aug 2011 Anadarko Petroleum Corp.4, 5, 6a, 6c, 7, 13, 16 APC.N Buy N/A US$74.32 15 Aug 2011 2, 4, 6a, 6b, 6c, 7, 16 Aon Corporation AON.N Buy N/A US$46.37 15 Aug 2011 5, 13, 16 Apollo Group Inc. APOL.O Neutral N/A US$45.85 15 Aug 2011 6c, 7, 16, 18a Apple Inc. AAPL.O Buy N/A US$383.41 15 Aug 2011 5, 16 Applied Materials Inc. AMAT.O Neutral N/A US$11.87 15 Aug 2011 4, 6a, 16 Arch Coal, Inc. ACI.N Buy N/A US$21.32 15 Aug 2011 Ares Capital Corporation2, 4, 6a, 6b, 7, 13, 16 ARCC.O Buy N/A US$14.82 15 Aug 2011 8a, 8b, 16 Autodesk Inc. ADSK.O Buy N/A US$30.09 15 Aug 2011 16 AutoNation Inc. AN.N Sell N/A US$35.80 15 Aug 2011 16 Auxilium Pharmaceuticals Inc AUXL.O Buy N/A US$15.17 15 Aug 2011 16 Avon Products AVP.N Buy N/A US$21.78 15 Aug 2011 16 Axis Capital Holdings Ltd. AXS.N Buy N/A US$29.60 15 Aug 2011 16 Babcock & Wilcox Co BWC.N Neutral N/A US$22.78 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 13, Baker Hughes Inc. 16 BHI.N Buy N/A US$64.57 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, Bank of America Corp. 7, 16, 22 BAC.N Neutral N/A US$7.76 15 Aug 2011 4, 5, 6a, 6c, 7, Baxter International Inc. 16, 22 BAX.N Buy N/A US$54.16 15 Aug 2011 16 Bed Bath & Beyond Inc. BBBY.O Neutral N/A US$54.60 15 Aug 2011 2, 4, 5, 6a, 6c, 7, 13, 16 Best Buy Co. Inc. BBY.N Neutral N/A US$24.53 15 Aug 2011 13, 16, 18i BorgWarner Inc. BWA.N Buy N/A US$71.32 15 Aug 2011 4, 5, 6a, 6c, 7, Boston Scientific Corp. 16, 22 BSX.N Neutral N/A US$6.53 15 Aug 2011 16 Brinker International EAT.N Buy N/A US$24.47 15 Aug 2011 2, 4, 6a, 6c, 7, 16 Bristol-Myers Squibb BMY.N Neutral N/A US$28.17 15 Aug 2011 UBS 169
    • US Equity Strategy 16 August 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date Brown-Forman Corp.16 BFb.N Neutral N/A US$68.58 15 Aug 2011 C.H. Robinson Worldwide16, 18j CHRW.O Buy N/A US$68.49 15 Aug 2011 16 Cadence Pharmaceuticals Inc CADX.O Neutral N/A US$7.15 15 Aug 2011 2, 4, 6a, 13, 16 Calpine Corporation CPN.N Buy N/A US$14.64 15 Aug 2011 Camden Property Trust1, 4, 5, 6a, 6b, 7, 16 CPT.N Buy N/A US$67.05 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, Campbell Soup Co. 16, 22 CPB.N Neutral N/A US$31.06 15 Aug 2011 2, 4, 6a, 6c, 7, 16, Cardinal Health, Inc. 18b, 22 CAH.N Buy N/A US$41.60 15 Aug 2011 6c, 7, 14, 16, 22 Carnival Corp. CCL.N Buy N/A US$31.56 15 Aug 2011 6b, 7, 13, 16, 18k, 22 Caterpillar Inc. CAT.N Neutral N/A US$91.37 15 Aug 2011 4, 6a, 16 CBOE Holdings Inc. CBOE.O Neutral N/A US$24.19 15 Aug 2011 4, 6a, 13, 16, 22 CBS Corp. CBS.N Buy N/A US$25.00 15 Aug 2011 6a, 16 Celanese Corporation CE.N Neutral N/A US$45.36 15 Aug 2011 6c, 7, 16 Celgene Corporation CELG.O Buy N/A US$55.74 15 Aug 2011 16 Cerner Corp. CERN.O Neutral N/A US$59.54 15 Aug 2011 Charles Schwab Corp3b, 4, 5, 6a, 6b, 6c, 7, 16, 18l SCHW.N Buy N/A US$12.48 15 Aug 2011 Check Point Software 16 CHKP.O Buy N/A US$56.73 15 Aug 2011 Technologies Ltd 4, 6a, 16 Chesapeake Energy Corp. CHK.N Neutral N/A US$32.29 15 Aug 2011 6b, 7, 16 Chevron Corp. CVX.N Buy N/A US$99.10 15 Aug 2011 16 Church & Dwight CHD.N Neutral N/A US$41.89 15 Aug 2011 2, 4, 6a, 6b, 6c, 7, 8a, Cisco Systems Inc. 13, 16, 18m CSCO.O Neutral N/A US$16.03 15 Aug 2011 16, 18n Citrix Systems Inc. CTXS.O Neutral N/A US$62.02 15 Aug 2011 16 Cliffs Natural Resources, Inc. CLF.N Buy N/A US$77.08 15 Aug 2011 16 Clorox CLX.N Neutral N/A US$69.95 15 Aug 2011 4, 5, 6a, 6c, 7, 16 CME Group Inc. CME.O Buy N/A US$260.58 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 13, 16 Coca-Cola Co. KO.N Buy N/A US$68.20 15 Aug 2011 Cognizant Technology Solutions 4, 6a, 6c, 7, 13, 16 CTSH.O Buy N/A US$63.93 15 Aug 2011 Corp. 4, 5, 6a, 6b, 6c, 7, Comcast Corporation 16 CMCSA.O Buy N/A US$21.27 15 Aug 2011 4, Community Health Systems, Inc. 6a, 16 CYH.N Buy N/A US$21.14 15 Aug 2011 4, 6a, 6c, 7, Computer Sciences Corp. 16, 22 CSC.N Neutral N/A US$30.07 15 Aug 2011 6a, 6b, 6c, 7, 16, 22 ConocoPhillips COP.N Neutral N/A US$67.48 15 Aug 2011 4, 5, 6a, 16 CONSOL Energy, Inc. CNX.N Buy N/A US$42.37 15 Aug 2011 4, 5, 6a, 6b, 7, 16 Consolidated Edison ED.N Neutral N/A US$54.79 15 Aug 2011 16 Constellation Brands Inc. STZ.N Buy N/A US$19.25 15 Aug 2011 Constellation Energy Group2, 4, 5, 6a, 6b, 6c, 7, 16, 19, 22 CEG.N Neutral (CBE) N/A US$37.23 15 Aug 2011 2, 4, 6a, 6c, 7, 16 Cooper Industries Inc. CBE.N Buy N/A US$49.53 15 Aug 2011 16, 20 Corning Inc. GLW.N Buy (CBE) N/A US$15.56 15 Aug 2011 Coventry Health Care2, 4, 5, 6a, 6b, 6c, 7, 16 CVH.N Neutral N/A US$31.32 15 Aug 2011 13, 16 Cree Inc. CREE.O Neutral N/A US$37.11 15 Aug 2011 2, 4, 5, 6a, 16, 22 CSX Corp. CSX.N Buy N/A US$22.98 15 Aug 2011 4, 5, 6a, 6b, 7, 16, 20 D.R. Horton Inc. DHI.N Neutral (CBE) N/A US$9.93 15 Aug 2011 2, 4, 5, 6a, 16 Danaher Corporation DHR.N Buy N/A US$44.72 15 Aug 2011 16 Darden Restaurants Inc. DRI.N Buy N/A US$48.96 15 Aug 2011 16 Davita Inc. DVA.N Buy N/A US$74.66 15 Aug 2011 16 DCT Industrial Trust Inc DCT.N Neutral N/A US$4.57 15 Aug 2011 16, 22 Deere & Co. DE.N Buy N/A US$76.50 15 Aug 2011 UBS 170
    • US Equity Strategy 16 August 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date Delta Air Lines Inc.2, 4, 5, 6a, 13, 16, 20 DAL.N Buy (CBE) N/A US$7.32 15 Aug 2011 DeVry Inc4, 5, 6a, 16 DV.N Buy N/A US$44.27 15 Aug 2011 4, 6a, 16 Digital Realty Trust DLR.N Sell N/A US$58.80 15 Aug 2011 16 Discovery Communications Inc DISCA.O Neutral N/A US$39.50 15 Aug 2011 5, 6a, 6b, 6c, 7, 13, 16, 22 Dow Chemical DOW.N Buy N/A US$30.08 15 Aug 2011 2, 4, Dr Pepper Snapple Group Inc. 6a, 6b, 6c, 7, 16 DPS.N Neutral N/A US$37.05 15 Aug 2011 5, 6a, 16 DuPont Fabros Technology DFT.N Neutral N/A US$22.77 15 Aug 2011 13, 16, 19 Dynegy, Inc. DYN.N Neutral (CBE) N/A US$4.34 15 Aug 2011 2, 4, 5, 6a, 6c, 7, 16, 18o Eaton Corporation ETN.N Neutral N/A US$42.68 15 Aug 2011 16, 20 eBay EBAY.O Buy (CBE) N/A US$30.89 15 Aug 2011 4, 5, 6a, 6b, 7, 13, 16 El Paso Corp. EP.N Buy N/A US$19.03 15 Aug 2011 4, 6a, 6c, 7, 16, 18p Emerson Electric Co. EMR.N Neutral N/A US$46.91 15 Aug 2011 Endo Pharmaceuticals Holdings6a, 16 ENDP.O Buy N/A US$33.09 15 Aug 2011 2, 4, 6a, 16, 22 EOG Resources EOG.N Neutral N/A US$96.29 15 Aug 2011 16, 20 Expedia Inc. EXPE.O Neutral (CBE) N/A US$29.63 15 Aug 2011 16 Express Scripts Inc. ESRX.O Buy N/A US$48.24 15 Aug 2011 3a, 4, 5, 6b, 7, 16, 18q ExxonMobil Corp. XOM.N Neutral N/A US$74.29 15 Aug 2011 16, 20 F5 Networks, Inc. FFIV.O Neutral (CBE) N/A US$83.65 15 Aug 2011 16 Fastenal Co. FAST.O Buy N/A US$32.77 15 Aug 2011 16 FedEx Corp. FDX.N Buy N/A US$81.85 15 Aug 2011 13, 16 First Solar Inc FSLR.O Buy N/A US$106.10 15 Aug 2011 4, 5, 6a, Flextronics International Ltd. 6b, 6c, 7, 16 FLEX.O Buy N/A US$5.71 15 Aug 2011 16 Flowserve Corp. FLS.N Neutral N/A US$92.18 15 Aug 2011 4, 6a, 6b, 6c, 7, 13, 16 Fluor Corporation FLR.N Buy N/A US$60.42 15 Aug 2011 16 Foot Locker Inc. FL.N Neutral N/A US$19.30 15 Aug 2011 4, 6a, 6b, 6c, 7, 13, 14, 16, Ford Motor Co. 18c F.N Buy N/A US$11.35 15 Aug 2011 5, 13, 16 Foster Wheeler Ltd. FWLT.O Buy N/A US$24.12 15 Aug 2011 16 Gannett Co. GCI.N Neutral N/A US$10.74 15 Aug 2011 General Electric Co.4, 5, 6a, 6b, 6c, 7, 16, 18r, 22 GE.N Buy N/A US$16.39 15 Aug 2011 4, 5, 6a, 6b, General Motors Company 6c, 7, 16 GM.N Buy N/A US$26.42 15 Aug 2011 16, 20 Genon Energy Inc. GEN.N Neutral (CBE) N/A US$3.23 15 Aug 2011 4, 5, 6a, 16 Genpact G.N Buy N/A US$16.04 15 Aug 2011 16 Georgia Gulf Corp. GGC.N Buy N/A US$19.29 15 Aug 2011 16 Gilead Sciences GILD.O Buy N/A US$37.27 15 Aug 2011 Goldman Sachs Group Inc.2, 4, 6a, 6b, 6c, 7, 13, 16, 18s, 22 GS.N Buy N/A US$119.13 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 22 Goodrich Corp. GR.N Buy N/A US$88.28 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18d Google Inc. GOOG.O Buy N/A US$557.23 15 Aug 2011 4, 5, 6a, 6c, 7, 16 H.J. Heinz Company HNZ.N Buy N/A US$51.83 15 Aug 2011 Hansen Natural Corporation5, 6b, 7, 13, 16 HANS.O Buy N/A US$81.05 15 Aug 2011 6c, 7, 16 Harley-Davidson Inc. HOG.N Neutral Buy US$38.20 15 Aug 2011 16 Hasbro Inc. HAS.O Neutral N/A US$37.88 15 Aug 2011 16 HCA Inc HCA.N Buy N/A US$22.58 15 Aug 2011 4, 6a, 16 HealthSpring Inc. HS.N Buy N/A US$36.22 15 Aug 2011 4, 6a, 13, 16 Hess Corp. HES.N Buy N/A US$60.21 15 Aug 2011 Hewlett-Packard Co.2, 4, 5, 6a, 6b, 6c, 7, 16, 22 HPQ.N Buy N/A US$32.43 15 Aug 2011 16 Home Depot Inc. HD.N Buy N/A US$31.47 15 Aug 2011 UBS 171
    • US Equity Strategy 16 August 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date Host Hotels & Resorts Inc.2, 4, 5, 6a, 16 HST.N Neutral N/A US$12.54 15 Aug 2011 6b, 7, 16 Humana Inc. HUM.N Buy N/A US$74.04 15 Aug 2011 16 Huntsman Corp. HUN.N Buy N/A US$14.30 15 Aug 2011 16, 18aq IAC/InterActive Corp IACI.O Neutral N/A US$38.37 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18e, 22 IBM Corp. IBM.N Neutral N/A US$172.99 15 Aug 2011 16 IDEX Corp. IEX.N Buy N/A US$37.30 15 Aug 2011 4, 5, 6a, 16 Illinois Tool Works ITW.N Buy N/A US$45.29 15 Aug 2011 16 Illumina Inc. ILMN.O Buy N/A US$54.10 15 Aug 2011 16 Impax Laboratories Inc. IPXL.OQ Neutral N/A US$19.11 15 Aug 2011 16, 20 Incyte Pharmaceuticals INCY.O Buy (CBE) N/A US$15.70 15 Aug 2011 16, 18aq, 22 Ingersoll-Rand Co. IR.N Neutral N/A US$31.40 15 Aug 2011 4, 5, 6b, 6c, 7, 8a, 13, 16, 18u Intel Corp. INTC.O Buy N/A US$20.89 15 Aug 2011 13, 16 IntercontinentalExchange, Inc. ICE.N Buy N/A US$116.43 15 Aug 2011 Interpublic Group of Companies, 1, 4, 5, 6a, 6c, 7, 13, 16, 22 IPG.N Buy N/A US$8.90 15 Aug 2011 Inc. 16 Intuit Inc. INTU.O Buy N/A US$43.13 15 Aug 2011 13, 16 ITT Educational Services ESI.N Sell N/A US$74.05 15 Aug 2011 4, 5, 6a, 16, 18v JB Hunt Transport JBHT.O Buy N/A US$40.69 15 Aug 2011 16, 18w Johnson & Johnson JNJ.N Buy N/A US$64.59 15 Aug 2011 13, 16 Johnson Controls Inc. JCI.N Neutral N/A US$32.89 15 Aug 2011 3c, 4, 6a, 13, 16, 20 Joy Global Inc. JOYG.O Buy (CBE) N/A US$81.98 15 Aug 2011 JPMorgan Chase & Co.4, 5, 6a, 6b, 6c, 7, 16, 18x JPM.N Buy N/A US$36.88 15 Aug 2011 2, 4, 6a, 16 Kansas City Southern KSU.N Neutral N/A US$56.02 15 Aug 2011 4, 6a, 6c, 7, 16 KBR, Inc. KBR.N Buy N/A US$30.69 15 Aug 2011 16 Kennametal Inc. KMT.N Neutral N/A US$35.61 15 Aug 2011 2, 4, 6a, 6b, 6c, 7, 16 Kimberly-Clark KMB.N Buy N/A US$66.10 15 Aug 2011 16 KLA-Tencor Corp. KLAC.O Buy N/A US$36.97 15 Aug 2011 4, 5, 6a, 6b, 6c, 7, 16, 18y, Kraft Foods Inc. 22 KFT.N Buy N/A US$34.68 15 Aug 2011 Kraton Performance Polymers, 2, 4, 6a, 16 KRA.N Buy N/A US$25.99 15 Aug 2011 Inc. 16 LAM Research Corp. LRCX.O Buy N/A US$39.83 15 Aug 2011 4, 6a, 6c, 7, 16 Lear Corporation LEA.N Buy N/A US$46.15 15 Aug 2011 2, 4, 6a, 6b, 7, 16, 20, 22 Lennar LEN.N Neutral (CBE) N/A US$14.92 15 Aug 2011 4, 6a, 16 Lennox International Inc. LII.N Neutral N/A US$32.09 15 Aug 2011 16, 20 Level 3 Communications LVLT.O Neutral (CBE) N/A US$1.99 15 Aug 2011 16 Life Technologies Corp. LIFE.O Buy N/A US$38.84 15 Aug 2011 16 LifePoint Hospitals, Inc. LPNT.O Buy N/A US$34.08 15 Aug 2011 16 Lincare Holdings, Inc. LNCR.O Buy N/A US$22.13 15 Aug 2011 16 Linear Technology Corp. LLTC.O Neutral N/A US$27.77 15 Aug 2011 4, 5, 6a, 6b, 6c, 7, Lockheed Martin Corp. 16, 22 LMT.N Neutral N/A US$70.26 15 Aug 2011 13, 16 Lorillard LO.N Buy N/A US$105.82 15 Aug 2011 2, 4, 6a, 16 LPL Investment Hldg Inc LPLA.O Neutral N/A US$27.12 15 Aug 2011 6b, 7, 16 LyondellBasell Industries LYB.N Buy N/A US$33.94 15 Aug 2011 16, 18z, 22 Marriott International, Inc. MAR.N Buy N/A US$28.82 15 Aug 2011 Marsh & McLennan Companies, 2, 4, 5, 6a, 6b, 6c, 7, 16, 22 MMC.N Buy N/A US$28.45 15 Aug 2011 Inc. 16 Masco Corp. MAS.N Sell N/A US$8.83 15 Aug 2011 16 Mattel Inc. MAT.O Buy N/A US$24.81 15 Aug 2011 5, 16 McDermott International MDR.N Buy N/A US$15.16 15 Aug 2011 6b, 7, 13, 16, 22 McDonalds Corp. MCD.N Buy N/A US$86.82 15 Aug 2011 16, 22 McKesson Corporation MCK.N Buy N/A US$78.92 15 Aug 2011 4, 6a, 6c, 7, 16, 22 MeadWestvaco MWV.N Buy N/A US$27.86 15 Aug 2011 UBS 172
    • US Equity Strategy 16 August 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date Medicis Pharmaceutical Corp.16 MRX.N Neutral N/A US$37.60 15 Aug 2011 Medtronic, Inc.4, 5, 6a, 6b, 6c, 7, 16 MDT.N Buy N/A US$32.03 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 13, 16 MetLife MET.N Buy N/A US$34.42 15 Aug 2011 Mettler-Toledo International Inc.4, 5, 6a, 6b, 6c, 7, 16 MTD.N Buy N/A US$155.49 15 Aug 2011 5, 16 Microchip Technology, Inc. MCHP.O Neutral N/A US$32.34 15 Aug 2011 16 Mohawk Industries, Inc. MHK.N Buy N/A US$47.10 15 Aug 2011 16 Molex Incorporated MOLX.O Neutral N/A US$21.30 15 Aug 2011 4, 5, 6a, 16 Molson Coors Brewing TAP.N Buy N/A US$44.29 15 Aug 2011 2, 4, Momenta Pharmaceuticals Inc 6a, 16 MNTA.O Neutral N/A US$17.37 15 Aug 2011 6b, 6c, 7, 16, 18aa, 22 Morgan Stanley MS.N Neutral N/A US$17.92 15 Aug 2011 2, 4, 5, 16 Mosaic Co MOS.N Buy N/A US$66.44 15 Aug 2011 Motorola Mobility Holding Inc13, 16, 19 MMI.N Neutral (CBE) N/A US$38.13 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 16 Nabors Industries NBR.N Restricted N/A US$19.98 15 Aug 2011 4, 6a, 6b, NASDAQ OMX Group, Inc. 6c, 7, 16 NDAQ.O Neutral N/A US$23.62 15 Aug 2011 16, 18ab Nike Inc. NKE.N Buy N/A US$85.13 15 Aug 2011 4, 6a, 6b, 7, 16, 18ac NiSource Inc. NI.N Neutral N/A US$20.41 15 Aug 2011 2, 4, 6a, 6c, 7, 16 Noble Energy, Inc. NBL.N Buy N/A US$89.85 15 Aug 2011 16, 22 Northrop Grumman Corp. NOC.N Neutral N/A US$53.05 15 Aug 2011 16 Novellus Systems Inc. NVLS.O Neutral N/A US$29.63 15 Aug 2011 13, 16 NRG Energy Inc. NRG.N Neutral N/A US$22.87 15 Aug 2011 16 Nucor Corp. NUE.N Neutral N/A US$34.79 15 Aug 2011 16 NVIDIA Corporation NVDA.O Neutral N/A US$13.37 15 Aug 2011 2, 4, 5, 6a, Occidental Petroleum Corp. 16, 18ad OXY.N Buy N/A US$89.31 15 Aug 2011 16 Olin Corp. OLN.N Neutral N/A US$20.07 15 Aug 2011 5, 6c, 7, 16 ON Semiconductor Corp ONNN.O Neutral N/A US$7.81 15 Aug 2011 16, 18ae Oracle Corporation ORCL.O Buy N/A US$27.64 15 Aug 2011 16 OReilly Automotive, Inc. ORLY.O Buy N/A US$60.74 15 Aug 2011 Par Pharmaceutical Companies 16 PRX.N Buy N/A US$30.03 15 Aug 2011 Inc. 16 Patterson Cos Inc PDCO.O Neutral N/A US$29.58 15 Aug 2011 16 Patterson-UTI Energy, Inc. PTEN.O Neutral N/A US$27.55 15 Aug 2011 4, 5, 6a, 16 Pentair Inc PNR.N Neutral N/A US$33.66 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18af PepsiCo Inc. PEP.N Buy N/A US$63.57 15 Aug 2011 4, 5, 16 PerkinElmer, Inc. PKI.N Buy N/A US$22.79 15 Aug 2011 16 Perrigo PRGO.O Buy N/A US$88.38 15 Aug 2011 16 PetSmart, Inc. PETM.O Buy N/A US$41.86 15 Aug 2011 6b, 7, 16, 22 Pfizer Inc. PFE.N Buy N/A US$18.34 15 Aug 2011 2, 4, 6a, 16 PG&E Corporation PCG.N Neutral N/A US$40.76 15 Aug 2011 16 Pharmasset Inc. VRUS.O Buy N/A US$129.00 15 Aug 2011 3d, 4, 6a, 16 Pinnacle West Capital Co. PNW.N Neutral N/A US$42.26 15 Aug 2011 16 Plum Creek PCL.N Neutral N/A US$36.72 15 Aug 2011 4, 6a, 16 Polo Ralph Lauren RL.N Buy N/A US$140.69 15 Aug 2011 16 Polycom, Inc. PLCM.O Neutral N/A US$26.21 15 Aug 2011 16 Potlatch PCH.O Sell N/A US$34.09 15 Aug 2011 2, 4, 5, 6a, 6c, 7, 16 PPL Corporation PPL.N Neutral N/A US$26.65 15 Aug 2011 16, 20 Priceline.com Inc PCLN.O Neutral (CBE) N/A US$514.35 15 Aug 2011 5, 6b, 7, 16 Principal Financial Group PFG.N Neutral N/A US$24.10 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, 8a, Procter & Gamble 16, 18ag PG.N Buy N/A US$61.88 15 Aug 2011 6a, 16, 22 Progress Energy Inc. PGN.N Neutral N/A US$46.88 15 Aug 2011 UBS 173
    • US Equity Strategy 16 August 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date Public Service Enterprise Group4, 6a, 6b, 7, 16 PEG.N Buy N/A US$32.37 15 Aug 2011 4, 6a, 6b, 7, 16, 20, 22 Pulte Homes PHM.N Neutral (CBE) N/A US$4.84 15 Aug 2011 16 QEP Resources Inc. QEP.N Buy N/A US$36.98 15 Aug 2011 16 Qlik Technologies QLIK.O Neutral N/A US$29.78 15 Aug 2011 16, 18f Qualcomm Inc. QCOM.O Buy N/A US$51.26 15 Aug 2011 16 Quality Systems, Inc. QSII.O Neutral N/A US$82.27 15 Aug 2011 16, 22 Quest Diagnostics DGX.N Neutral N/A US$48.95 15 Aug 2011 4, 5, 6a, 16 Questar Corp STR.N Neutral N/A US$18.90 15 Aug 2011 6b, 7, 16 Ralcorp Holdings Inc. RAH.N Buy N/A US$83.32 15 Aug 2011 2, 4, 6a, 16 Range Resources Corp. RRC.N Neutral N/A US$62.52 15 Aug 2011 2, 4, 6a, 6c, 7, 16, 22 Raytheon Co. RTN.N Neutral N/A US$41.24 15 Aug 2011 Reinsurance Group of America 4, 5, 6a, 6b, 7, 16 RGA.N Buy N/A US$51.49 15 Aug 2011 Inc. 6b, 6c, RenaissanceRe Holdings Ltd. 7, 16 RNR.N Buy N/A US$63.90 15 Aug 2011 13, 16, 20 Research in Motion Limited RIMM.O Neutral (CBE) N/A US$27.11 15 Aug 2011 16 Reynolds American RAI.N Buy N/A US$35.15 15 Aug 2011 6c, 7, 16, 20 Riverbed Technology RVBD.O Neutral (CBE) N/A US$26.13 15 Aug 2011 Rockwell Automation Inc.4, 6a, 6b, 6c, 7, 16, 18ah ROK.N Neutral N/A US$64.53 15 Aug 2011 4, 5, 6a, 6b, 6c, 7, Rockwell Collins Inc. 8a, 16, 18ai COL.N Buy N/A US$47.68 15 Aug 2011 16 Royal Caribbean RCL.N Neutral N/A US$26.59 15 Aug 2011 2, 4, 6a, 16 SandRidge Energy Inc SD.N Neutral N/A US$8.10 15 Aug 2011 16, 20 Sapient Corp. SAPE.O Neutral (CBE) N/A US$11.19 15 Aug 2011 16, 18aj Schlumberger Ltd. SLB.N Buy N/A US$80.07 15 Aug 2011 Scripps Networks Interactive 3e, 16 SNI.N Neutral N/A US$43.00 15 Aug 2011 Inc 16, 20 Seattle Genetics, Inc. SGEN.O Neutral (CBE) N/A US$15.37 15 Aug 2011 2, 4, 5, 6a, 16 Sigma-Aldrich Corp. SIAL.O Buy N/A US$64.55 15 Aug 2011 4, 5, 6a, 16 Simon Property Group SPG.N Buy N/A US$116.03 15 Aug 2011 2, 4, 6a, 16 Southern Company SO.N Neutral N/A US$40.41 15 Aug 2011 4, 6a, 6c, 7, 16, 22 Southwest Airlines LUV.N Neutral N/A US$8.50 15 Aug 2011 4, Southwestern Energy Company 6a, 16 SWN.N Neutral N/A US$39.88 15 Aug 2011 6a, 16 Spectra Energy Corp. SE.N Buy N/A US$25.32 15 Aug 2011 16 Spirit AeroSystems Holdings SPR.N Buy N/A US$15.96 15 Aug 2011 16, 20, 22 Sprint Nextel Corporation S.N Neutral (CBE) N/A US$3.48 15 Aug 2011 6a, 6b, 6c, 7, 13, 16, 18ak Starbucks Corp. SBUX.O Buy N/A US$38.42 15 Aug 2011 Starwood Hotels & Resorts 13, 16, 22 HOT.N Buy N/A US$45.83 15 Aug 2011 Worldwide, Inc 16 Steel Dynamics Inc. STLD.O Neutral N/A US$13.04 15 Aug 2011 16 Tanger Factory Outlet Centers SKT.N Buy N/A US$26.97 15 Aug 2011 6b, 7, 16 TD Ameritrade Holding Corp AMTD.O Neutral N/A US$14.86 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, TE Connectivity Ltd. 8a, 16, 18an TEL.N Buy N/A US$31.51 15 Aug 2011 6a, 16 TECO Energy Inc. TE.N Buy N/A US$17.56 15 Aug 2011 16, 20 Tenet Healthcare Corp. THC.N Buy (CBE) N/A US$5.07 15 Aug 2011 5, 16 Teradyne Inc. TER.N Neutral N/A US$12.47 15 Aug 2011 8a, 16 Texas Instruments Inc. TXN.N Neutral N/A US$27.49 15 Aug 2011 2, 4, 6a, 6b, 6c, 7, The Hershey Company 16, 18t HSY.N Neutral N/A US$56.73 15 Aug 2011 16, 18al Thermo Fisher Scientific Inc. TMO.N Buy N/A US$54.91 15 Aug 2011 16, 20 Toll Brothers TOL.N Buy (CBE) N/A US$16.83 15 Aug 2011 Transocean Ltd.2, 4, 5, 6a, 6c, 7, 13, 16, 18am, 22 RIG.N Buy N/A US$57.26 15 Aug 2011 UBS 174
    • US Equity Strategy 16 August 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date Under Armour, Inc.13, 16 UA.N Neutral N/A US$65.96 15 Aug 2011 United Continental Holdings Inc5, 13, 16, 18ar, 20 UAL.N Buy (CBE) N/A US$18.26 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, United Parcel Service 7, 16, 18g UPS.N Buy N/A US$65.88 15 Aug 2011 13, 16 United States Steel Corp X.N Buy N/A US$31.89 15 Aug 2011 United Technologies Corp.4, 8a, 16, 18ao UTX.N Buy N/A US$73.54 15 Aug 2011 2, 4, 5, 6a, 6b, 6c, 7, UnitedHealth Group 16 UNH.N Buy N/A US$45.94 15 Aug 2011 16, 22 Universal Health Services UHS.N Buy N/A US$40.00 15 Aug 2011 4, 6a, 16 URS Corporation URS.N Neutral N/A US$34.32 15 Aug 2011 16 V.F. Corp. VFC.N Buy N/A US$113.35 15 Aug 2011 Valero Energy Corporation4, 6a, 16, 22 VLO.N Buy N/A US$21.53 15 Aug 2011 4, 6a, 16 Validus Holdings, LTD. VR.N Buy N/A US$25.85 15 Aug 2011 Verizon Communications2, 4, 6a, 6c, 7, 16 VZ.N Neutral N/A US$35.05 15 Aug 2011 16 Vertex Pharmaceuticals Inc. VRTX.O Neutral N/A US$46.31 15 Aug 2011 2, 4, 6a, 6c, 7, 16 Viacom Inc. VIAb.N Buy N/A US$45.81 15 Aug 2011 16 Visteon Corp. VC.N Buy N/A US$52.27 15 Aug 2011 16 W.W. Grainger Inc GWW.N Neutral N/A US$138.57 15 Aug 2011 4, 6a, 6c, 7, 16, 22 Walt Disney Co. DIS.N Neutral N/A US$33.65 15 Aug 2011 16 Walter Energy Inc WLT.N Buy N/A US$84.98 15 Aug 2011 16 Washington Post WPO.N Neutral N/A US$361.11 15 Aug 2011 4, 5, 6a, 6b, 6c, 7, 16 Waters Corp. WAT.N Neutral N/A US$81.11 15 Aug 2011 16 Watsco Inc WSO.N Neutral N/A US$56.94 15 Aug 2011 16 Watson Pharmaceuticals Inc. WPI.N Buy N/A US$65.10 15 Aug 2011 2, 4, 5, Weatherford International Ltd. 6a, 16 WFT.N Buy N/A US$17.68 15 Aug 2011 4, 5, 6a, 16 Wendys-Arbys Group Inc. WEN.N Buy N/A US$5.06 15 Aug 2011 4, 5, 6a, 16 Westar Energy, Inc. WR.N Neutral N/A US$25.36 15 Aug 2011 16 Westlake Chemical Corp WLK.N Neutral N/A US$43.42 15 Aug 2011 16, 22 Weyerhaeuser WY.N Neutral N/A US$17.22 15 Aug 2011 13, 16, 22 Williams Cos Inc. WMB.N Buy N/A US$28.67 15 Aug 2011 16 Williams-Sonoma, Inc. WSM.N Neutral N/A US$31.65 15 Aug 2011 16 Willis Group Holdings Limited WSH.N Neutral N/A US$37.42 15 Aug 2011 16 Windstream Corporation WIN.O Neutral N/A US$12.10 15 Aug 2011 4, 6a, 16 Wisconsin Energy Corp. WEC.N Buy N/A US$30.62 15 Aug 2011 4, 5, 6a, 13, 16, 20 Yahoo Inc. YHOO.O Neutral (CBE) N/A US$13.47 15 Aug 2011 16 Zimmer Holdings, Inc. ZMH.N Buy N/A US$53.38 15 Aug 2011Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricingdate1. UBS Securities LLC is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates.2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.3a. UBS Ltd is acting as financial advisor to Royal Dutch Shell plc and ExxonMobil Corporation on the sale of certain underground gas storage facilities in Germany to GDF Suez3b. UBS Securities LLC is acting as Advisor to Charles Schwab on the $1bn acquisition of OptionsXpress Holding Inc.3c. UBS Securities LLC is acting as advisor to Joy Global Inc on the announced acquisition of a stake in International Mining Machinery.3d. UBS Securities LLC is acting as advisor to Pinnacle West Capital on its announced agreement to acquire a 48% undivided ownership interest in Units 4 and 5 at the Four Corners Power Plant from Southern California Edison UBS 175
    • US Equity Strategy 16 August 20113e. UBS Securities LLC is acting as advisor to Virgin Media Inc on its announced agreement to sell its stake in UKTv to Scripps Networks Interactive.4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.8a. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company.8b. The equity analyst covering this company, a member of his or her team, or one of their household members has a long options position in this company.13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).14. UBS Limited acts as broker to this company.16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Apple, Inc.18b. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Cardinal Health, Inc.18c. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Ford Motor, Co.18d. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Google, Inc.18e. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in International Business Machines.18f. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Qualcomm Inc.18g. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in United Parcel Service Inc.18h. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Altria Group.18i. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in BorgWarner Inc.18j. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in C.H. Robinson Worldwide.18k. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Caterpillar Inc.18l. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Charles Schwab Corp.18m. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Cisco Systems Inc.18n. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Citrix Systems Inc.18o. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Eaton Corp. UBS 176
    • US Equity Strategy 16 August 201118p. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Emerson Electric Co.18q. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Exxon Mobil Corp.18r. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in General Electric.18s. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Goldman Sachs.18t. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Hershey Co.18u. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Intel Corp.18v. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in JB Hunt Transport.18w. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Johnson & Johnson.18x. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in JPMorgan Chase & Co.18y. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Kraft Foods Inc.18z. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Marriott International, Inc.18aa. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Morgan Stanley.18ab. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Nike Inc.18ac. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in NiSource, Inc.18ad. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Occidental Petroleum Corp.18ae. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Oracle Corporation.18af. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in PepsiCo Inc.18ag. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Procter & Gamble Co.18ah. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Rockwell Automation Inc.18ai. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Rockwell Collins Inc.18aj. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Schlumberger.18ak. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Starbucks Corp.18al. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Thermo Electron Corp.18am. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Transocean Inc.18an. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Tyco Electronics Ltd.18ao. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in United Technologies Corp. UBS 177
    • US Equity Strategy 16 August 201118ap. The U.S. equity strategist, a member of his team, or one of their household members has a short common stock position in Amazon, Inc.18aq. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).18ar. UBS Securities LLC is acting as an advisor to Continental Airlines on its announced agreement to merge with UAL Corp.19. Because this company is an announced takeout candidate, UBS believes the security presents lower-than-normal risk. We have widened its rating band to +6%/-10% compared with +6%/-6%, respectively, under the normal rating system.20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.For a complete set of disclosure statements associated with the companies discussed in this report, including information onvaluation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention:Publishing Administration. UBS 178
    • US Equity Strategy 16 August 2011Global DisclaimerThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG isreferred to as UBS SA.This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy orrecommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for informationpurposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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