September 20, 2010
September 20, 2010




Directors DESKTOP

Our framework                                                ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
September 20, 2010                                                                                                        ...
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010
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Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010

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Financial Pacific: Capital Allocation & Buying Growth (third party) september 29.2010

  1. 1. September 20, 2010 September 20, 2010 Directors DESKTOP Our framework Our tactical tilt favors capital allocation With the macroeconomic environment A combination of macro fears and policy increasingly uncertain, we remain committed to uncertainty has driven total cash balances up over buying yield, and also advocate searching for 40% in the last two years. We believe this cash growth. Beyond that we remain tactical in our will be put to work and focus investors on: approach, with a focus on capital allocation to - M&A. We recommend our GSRHACQN basket help generate alpha. of potential M&A targets and identify stocks with IRRs over 15%. Anthony Carpet Continue to buy yield… (212) 902-6758 anthony.carpet@gs.com Building on a strategy we began in November - Buybacks. We highlight names with high Goldman Sachs & Co. 2009, we continue to seek out yield. We are authorizations relative to their market caps. Laura Conigliaro buyers of stocks that combine high yields and - Special dividends. Ahead of potential tax law (212) 902-5926 laura.conigliaro@gs.com dividend growth. We also turn our focus to changes we screen for potential special dividend Goldman Sachs & Co. companies where dividend yields exceed bond payers. The list includes MSFT, SNI and SYK. yields, among other strategies. Our top income Robert D. Boroujerdi ideas are BMY, CBL, CTL, SXL and T. (212) 902-9158 robert.boroujerdi@gs.com While we watch austerity and ag Goldman Sachs & Co. - Agriculture. With rising food inflation and …while also buying growth shifting supply dynamics in proteins we see Michael Chanin, CFA We seek out companies with the potential to opportunity in CF, MON, BEEF3.SA and SFD. (646) 446-1777 michael.chanin@gs.com outgrow peers regardless of the economic Goldman Sachs & Co. environment, as well as those levered to global - Government austerity. We expect continued budget pressure across all forms of government. Deep Mehta growth. Scarce in number but high in potential we (212) 357-8419 deep.mehta@gs.com are buyers of CMI, LULU, SAPE and SBAC as We sell our baskets of most exposed companies Goldman Sachs & Co. well as the Mobility and Aerospace themes. GSRHGOVT (all sectors) and GSRHGXHD (ex- healthcare and aero/defense). Thomas Craven, CFA (212) 902-6748 thomas.craven@gs.com Goldman Sachs & Co. The Goldman Sachs Group, Inc. 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. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research
  2. 2. September 20, 2010 Americas Table of contents Portfolio manager summary 3  Snapshot of our coverage views 5  Macro corner 6  The search for yield 7  Finding growth in single stocks and themes 12  Cash balances continue to balloon – what now? 16  Government Corner: Watching budget proposals and mid-term elections 21  Demographic opportunities 23  Current Americas sector views: Commodities 24  Current Americas sector views: Consumer 25  Current Americas sector views: Financials 26  Current Americas sector views: Healthcare 27  Current Americas sector views: Industrials 28  Current Americas sector views: TMT 29  Latin America – Brazil domestic and export momentum 30  Updating our volatility outlook for a more muted recovery 31  Americas Conviction List ideas 32  Appendix: Investment Profile Methodology 33  Stock selections in this document are based on individual analyst criteria. Prices in this document are based on the market close of September 16, 2010, except where noted. Goldman Sachs Global Investment Research 2
  3. 3. September 20, 2010 Americas Portfolio manager summary Against a backdrop of low interest rates and a recovery which is uneven and L-shaped in nature we choose not to complicate our positioning. Our framework is “barbell” in nature, whereby we seek out income in the form of high-yielding stocks and buy growth where the trajectory of the business is independent of macroeconomic trends and/or plays to rising global growth. Outside these two distinct views we advise clients to be tactical in their security selection, focusing on businesses where capital allocation decisions present opportunities and where companies exhibit some form of accelerating growth. Coloring this view is the lack of inflows into domestic equity funds this year, which is driving investors to sell a name to buy a name as they remain pretty close to fully invested. Indeed, with YTD domestic equity fund flows (through September 15) of -$50.1 billion versus -$39.4 billion in all of last year (per Investment Company Institute), the flow tailwind to appreciation appears limited. With that said, we like our money upfront (dividends) and favor scarcity value found in growth names. Keeping it simple Continue to buy yield… An opportunity to benefit from increased income to compensate for historically low interest rates remains at the forefront of our recommendation set. We provide a list of strategies by which our analysts estimate high dividend yields and sustainable payouts.  Yield plus dividend growth. We recommend owning a group of Buy-rated stocks with above-average yields, dividend growth, strong cash flows and low leverage, including Century Link, Home Depot and KLA-Tencor, among others.  Dividend versus bond yield. We leverage information from the bond market to identify equities with dividend yields that are likely to represent compelling risk/reward scenarios, such as Buy-rated AT&T, Bristol Myers and Philip Morris International. …while also buying growth For the intermediate to long term, we believe investors can: (1) invest in mobility, where we see an inflection coming in 4Q2010; and (2) buy Aerospace, where positive cyclical fundamentals combine with unique secular drivers. In addition, we also identify company-specific growth stories across our coverage by using the following strategies:  High growth. We highlight companies with consistently strong revenue growth and expanding operating margins. These growth leaders include CL-Buy rated Cummins, Sapient and SBA Communications, as well as Buy-rated lululemon athletica.  Global growth. We look at companies that are levered to global growth and utilize our proprietary Investment Profiling (IP) growth score to identify standouts. Our list includes CL-Buy rated Amazon and Boeing, and Buy-rated Citicorp. Our tactical tilt favors capital allocation A combination of macro fears and policy uncertainty coupled with healthy profits has pushed total cash balances across our coverage up 40% over the last two years, and total cash as a percentage of enterprise value to 9.3% from 5.5%. This provides companies with the ability to aggressively address capital allocation decisions. Goldman Sachs Global Investment Research 3
  4. 4. September 20, 2010 Americas  M&A is real. Historically high cash balances, a benign credit environment, compelling IRRs and $500 billion of dry powder with private equity, all make M&A an attractive proposition. We recommend two sets of strategies to monetize the M&A revival:  M&A target basket. Our refreshed 108-name basket (Bloomberg: GSRHACQN1) consists of names for which our analysts see more than 15% chance of take out over the next twelve months.  IRRs over 15%. We run an LBO analysis across our coverage and showcase 86 names with IRRs over 15%.  Buybacks: More than a “needle mover”. We identify a list of stocks that have the highest remaining repurchase authorizations as a percentage of their market cap. For these names, which include Buy-rated Home Depot, and Neutral-rated Aon and Novellus, the completion of existing programs has the potential to drive significant EPS and upside accretion.  Special dividends. With tax policy under review in Washington, we screen for potential special dividend payers on a purely quantitative model. We identify Buy-rated Microsoft, and Neutral-rated Scripps Networks Interactive and Stryker among others. While we watch austerity and ag  Agriculture. With rising food inflation and shifting supply dynamics in proteins we see opportunity in CL-Buy rated CF Industries and Monsanto, and Buy-rated Minerva and Smithfield Foods.  Government austerity. Despite the recently announced stimulus initiatives, we expect continued budget pressure across all forms of government. We sell our basket of the most exposed companies: GSRHGOVT (all sectors) and a second basket GSRHGXHD that excludes Healthcare and Defense stocks. Our core long-term theme  Demographic dynamics. We revisit one of our department’s anchor themes: focusing on stocks tied to long-term demographic trends – Retiring Baby Boomers, the expanding global middle class, and generational waves after the Baby Boom. See page 23 for more details. 1 Note: The ability to trade this basket will depend upon market conditions, including liquidity and borrow constraints at the time of trade. Goldman Sachs Global Investment Research 4
  5. 5. September 20, 2010 Americas Snapshot of our coverage views Core to our departmental approach is the breakdown of coverage into six distinct business units: Commodities, Consumer/Retail, Financials, Healthcare, Industrials and TMT. We analyze each sector with regard to its own drivers, valuation and place in the business cycle. Each business unit includes multiple senior analysts responsible for the coverage of specific sector groups. Since our last publication, dated April 12, 2010, we have made several changes to our coverage views (see Exhibit 1), including ten coverage view downgrades and three upgrades. In addition, we have initiated or re-organized coverage, resulting in six new coverage groups and views (noted in bold in the exhibit below). Exhibit 1: Summary of our coverage group views Arrows indicate upgrades or downgrades since our previous publication on April 12, 2010 Attractive Neutral Cautious Attractive Neutral Cautious Commodities Healthcare Coal Base Metals Gas Utilities Healthcare Supply Chain Healthcare IT Diversified Pipelines Clean Energy Managed HealthCare HealthCare Tech Facilities Integrated Oil Diversified Utilities Medical Technology Engineering & Construction Pharma Generic Exploration and Production Pharma Services-CROs Independent Power Producers Pharma Specialty Branded MLPs Energy Pharmaceuticals Oil Service Refining and Marketing Regulated Utilities Steel Consumer/Retail Industrials Autos, Auto Parts & Dealers Gaming Gaming Manufacturers Aerospace Chemicals Defense Beverages Households Food Air Freight Diversified Industrials Lodging Leisure Multi-Industry Environmental Services Rental Cars Retail Apparel Machinery Toys Retail Hardlines Paper & Forest Products Retail -Off-the-Mall Animal Proteins Retail -On-the-Mall Railroads Retail Specialty Apparel Specialty Packaging Retail Specialty Trucking Tobacco Financials TMT Large Banks Asset Managers InsuranceLife Internet Cable & Satellite Brokers & Advisors Specialty Finance IT Consulting and Outsourcing Communications Technology Building Products IT Supply Chain & Components Information Services Discount Brokers Media and Entertainment SMid-cap Internet and Entertainment Homebuilders Semi Cap Equipment Transaction Processors Insurance Brokers Semi Device Wireline Service Canada Insurance Non Life Software Wireline Services Market Structure Telecom Services: Towers Mortgage Insurance REITS Trust Banks Source: Goldman Sachs Research. Goldman Sachs Global Investment Research 5
  6. 6. September 20, 2010 Americas Macro corner We pay heed to our economists’ forecasts, which are above consensus on global and emerging market growth and below consensus in the United States. Goldman Sachs’ Chief US Economist Jan Hatzius does not expect a double-dip recession, but sees the risk of two consecutive quarters of negative GDP growth as being as high as 25-30%. We believe that consensus forecasts that the United States will return to above-trend growth next year are too ambitious.  Our Economics team expects US growth to slow to a 1.5% (annualized) rate in the second half of 2010 and early 2011, driving our full-year real GDP growth estimates of 2.6% for 2010 and 1.8% in 2011. This slowdown is driven by the waning contributions of the inventory cycle and fiscal policy. We expect the Fed to initiate quantitative easing measures (QE2), most likely through sizable purchases of Treasury securities, later this year or early in 2011.  Conversely, we expect growth outside the United States to be better than the market is pricing, especially in BRICs nations and emerging economies. For BRICs in aggregate we see 8.9% real GDP growth in 2010 and 8.7% in 2011, and our global growth forecast is 4.8% in 2010 and 4.6% in 2011. See Exhibit 2.  In China, inventory restocking and shifts in policy implementation likely contributed to the growth rebound in August, and we expect CPI inflation to moderate as food prices normalize along with weather conditions. We believe that the bottoming of the credit cycle will prove an important catalyst for rebuilding investment confidence, and against this backdrop we forecast a return to what we believe to be the country’s trend real GDP growth rate of 10% in 2011. See Exhibit 3. Exhibit 2: Goldman Sachs versus consensus real GDP growth Exhibit 3: China’s export growth has been driven by demand outside the G-3 As of September 16, 2010 Percentage point contribution to yoy China exports growth % yoy 2008 2009 2010 2011 GS Consensus* GS Consensus* ppt, 3mma USA 0.0 -2.6 2.6 2.7 1.8 2.4 30 USA Japan -1.2 -5.2 2.9 3.0 1.3 1.3 25 EU Euroland 0.4 -4.0 1.7 1.6 2.2 1.4 Developed Asia* UK -0.1 -4.9 1.7 1.5 2.8 2.1 20 Rest of the world Europe 0.5 -3.9 1.8 1.7 2.4 1.7 15 Canada 0.5 -2.5 3.1 3.1 2.5 2.5 China 9.6 8.7 10.1 9.9 10.0 9.0 10 India 6.7 7.4 8.2 8.3 8.7 8.3 5 Brazil 5.1 -0.2 7.8 7.2 4.5 4.4 0 Russia 5.2 -7.9 5.3 5.0 6.1 4.5 BRICs 7.8 5.3 8.9 8.7 8.7 7.9 -5 Advanced Economies 0.2 -3.1 2.7 2.7 2.3 2.2 -10 World 2.6 -0.6 4.9 4.7 4.6 4.2 -15 * Consensus Economics September 2010 97 98 99 00 01 02 03 04 05 06 07 08 09 10 * Developed Asia includes Japan, Korea and Taiwan. Source: Goldman Sachs Global ECS Research. Source: CEIC, GS Global ECS Research. Goldman Sachs Global Investment Research 6
  7. 7. September 20, 2010 Americas The search for yield We first highlighted various strategies for investing in stocks with high dividend yields in our report “SPOTLIGHT SERIES: Dividends” published on November 12, 2009, and continue to recommend this trade. In this report, we refresh our analysis and provide specific names for investors searching for high and sustainable yields amid a challenging economic environment. With rates remaining low and the Fed staying accommodative, the opportunity to benefit from increased income remains at the forefront of our recommendation set. To that end we list several dividend strategies to take advantage of this theme. To help better frame the current opportunity we step back and provide a snapshot of S&P 500 returns with and without dividends to highlight how income has contributed to the performance of stocks over various time periods in the last 20 years (see Exhibit 4). Amid the slowing economic environment and historically high cash balances in corporate America (discussed in depth on page 16), we believe that investors should continue to invest in companies whose dividend payouts will drive shareholder returns. Exhibit 4: Dividends enhanced S&P 500 returns across different time horizons Exhibit 5: Fixed income yields remain low by historical standards S&P 500 vs. S&P 500 Total Returns Index performance Yields for selected securities Security Yield S&P 500 with dividends  S&P 500 without dividends  3 month Treasury 0.16% (Total Returns Index) (Price Index) Total Returns Premium 90‐day AA non‐financial commercial paper 0.24% Last 20 years 439.3% 255.0% 184.3% 1 year Treasury 0.25% 3‐month LIBOR 0.29% Last 10 years ‐7.5% ‐23.3% 15.8% 90 day asset‐backed commercial paper 0.31% Last 5 years 1.0% ‐9.2% 10.1% 1‐year LIBOR 0.82% Since March 9, 2009 (recent  10 year TIPS 0.97% 71.7% 66.2% 5.5% 1 year CD 1.21% lowpoint) Last 12 Months 7.4% 5.2% 2.2% S&P 500 2.01% 3 Year CD 1.16% YTD 2.3% 0.9% 1.5% 10 year Treasury 2.77% ML Investment Grade Corporate Bond Index 3.86% Source: Bloomberg. Source: Federal Reserve, Bloomberg, Bankrate.com. Dividends are an important component of total return for the stocks under our coverage. This is particularly reflected in the YTD total returns of MLPs, Utilities, Telecom Services and Consumer Staples stocks, which were significantly enhanced by dividend returns (see Exhibit 6). We carve out MLPs and REITs separately from Energy and Financials for the purpose of this analysis, given that they either cater to a select investing audience, or have unique tax considerations. In Exhibit 7, we list the top ten sub-sectors under our coverage ranked by average 2011E dividend yield. We note that the average yield for six out of these ten sub-sectors is more attractive compared to the current 10-year treasury yield of 2.77%. Goldman Sachs Global Investment Research 7
  8. 8. September 20, 2010 Americas Exhibit 6: Dividends form an important part of sector total return in particular Exhibit 7: Dividend Yields of the top 10 sub-sectors under our coverage vs. for REITs, MLPS, Staples, Telecom and Utilities current 10-yr treasury yield % YTD Sector-average Price and Dividend returns for our rated coverage universe 2011E Dividend yield calculated for sub-sectors where at least 50% companies pay a dividend 24% 7% 20% 6% 16% 5% 12% 4% 8% 3% 4% 2% 0% 1% -4% 0% -8% REITs MLPs Consumer Consumer Telecom Information Industrials Materials Utilities Financials ex- Health care Energy ex- Staples Discretionary Services Technology REITs MLPs Price Returns Dividend Returns Source: FactSet, Goldman Sachs Research estimates. Source: Bloomberg, Goldman Sachs ECS Research, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 8
  9. 9. September 20, 2010 Americas Core yield investment strategies For investors searching for high and sustainable yields, we recommend two core strategies, namely stocks where our analysts estimate high yields with dividend growth and sustainable payouts; and companies with estimated dividend yields that surpass their bond yields. We provide a separate list with top yields for buy-rated names in REITs and MLPs. Yield Strategy #1: Yield plus dividend growth We recommend buying a group of names with above-average yields that have shown an ability to grow dividends and that possess a balance sheet that allows for sustainable payouts (see Exhibit 8). To this end, we have screened our coverage with the following criteria:  Dividend yield for 2011E greater than the current 10-year treasury yield of 2.77%.  We remove companies that cut dividends in 2010.  Include only those names that our analysts expect will grow dividends in 2011.  Cash flow is necessary to maintain sustainable dividend growth; we exclude companies with FCF yields below 5%.  Weak balance sheets limit both the capacity and propensity to pay and raise dividends; we remove companies with net debt/equity greater than 100%. Exhibit 8: Yield plus dividend growth Ticker Company Name Sector Rating Market Cap Price Target Price Upside to Target Price Div Yield DPS Growth DPS Growth FCF Yield Net debt/Equity ($ mn) ($) ($) Target Price Period 2011E 2010/09 2011/10 2011E 2011E CTL CenturyLink Inc. Telecom Tower Buy 11,447 38.08 42.00 10.3% 12 months 7.8% 3.6% 3.0% 13.5% 75.7% T AT&T Inc. Telecom Tower Buy 166,102 28.11 34.00 21.0% 12 months 6.4% 2.4% 7.0% 7.3% 65.5% BMY Bristol-Myers Squibb Company Pharma Buy 46,215 26.95 30.00 11.3% 12 months 4.8% 3.2% 2.0% 9.8% -19.7% HD The Home Depot, Inc. Retail Hardlines Buy 50,496 29.95 34.00 13.5% 12 months 3.4% 4.1% 5.9% 8.5% 42.4% KLAC KLA-Tencor Semiconductors Buy 5,323 31.08 41.00 31.9% 6 months 3.2% 33.3% 25.0% 9.7% -38.1% LLTC Linear Technology Corp. Semiconductors Buy 7,275 31.64 35.00 10.6% 6 months 3.2% 5.9% 6.4% 6.9% -58.8% ADI Analog Devices, Inc. Semiconductors Buy 9,026 29.48 38.00 28.9% 6 months 3.0% 5.2% 4.8% 9.8% -71.8% MMM 3M Company Multi-Industry Buy 60,581 84.95 104.00 22.4% 12 months 2.8% 3.0% 14.3% 6.3% -6.3% HAS Hasbro, Inc. HHPC CL-Buy 6,721 44.43 57.00 28.3% 12 months 2.8% 25.0% 25.0% 8.6% 45.9% BAX Baxter International, Inc. Medical Technology CL-Buy 27,528 44.98 57.00 26.7% 12 months 2.8% 15.2% 3.3% 6.1% 32.7% For important disclosures, please go to http://www.gs.com/research/hedge.html. For methodology and risks associated with price targets, please see analysts’ previously published research. Source: Goldman Sachs Research estimates. Yield Strategy #2: Dividend yields that surpass bond yields Maria Grant, CFA We leverage information from the bond market to identify equities with dividend yields that are likely to represent compelling John Marshall risk/reward scenarios. Continued strength in the bond market has driven corporate bond yields to 40-year lows, especially for many high-quality dividend paying companies. Low bond yields affirm that fixed income investors see cash flow as ample to pay the debts of a firm over the next several years. This cash flow cushion observed by credit investors could be used to support future dividend increases as well. In Exhibit 9, we highlight names where dividend yields appear attractive relative to bond yields based on the following criteria: • Dividend yield is above the yield to maturity on the closest to a 5-year senior non-convertible note. Goldman Sachs Global Investment Research 9
  10. 10. September 20, 2010 Americas • Our equity analyst expects the company to continue to maintain or increase the dividend in 2011. • Our equity analyst rates the equity Buy or Neutral and sees upside to their 6- or 12-month price target. Exhibit 9: We see strong risk/reward in dividend yields that are above bond yields Estimated 2011 dividend yield based on analyst estimates; market observed corporate bond yield for the closest to a 5 year senior note Equity Market Current Equity Target Upside to Target Price vidend Yie Bond yield Dividend yield - Div Growth Ticker Company name Sector Rating cap ($m) Price Price Target Price Period 2011E 5 year 5y Bond Yield 2011/2010 MO Altria Group, Inc. BevFoodTobacco Neutral 48,583 $23.47 $24.00 2% 12 months 6.9% 2.8% 4.1% 6.1% CTL CenturyLink Inc. TelecomTower Buy 11,447 $38.08 $42.00 10% 12 months 7.8% 4.1% 3.7% 3.0% VZ Verizon Communications TelecomTower Neutral 88,824 $31.42 $32.00 2% 12 months 6.4% 2.8% 3.6% 3.8% T AT&T Inc. TelecomTower Buy 166,102 $28.11 $34.00 21% 12 months 6.4% 2.8% 3.6% 7.0% PM Philip Morris International Inc. BevFoodTobacco Buy 104,985 $55.11 $58.00 5% 12 months 5.1% 2.7% 2.4% 14.9% EXC Exelon Corp. Utilities Neutral 27,897 $42.14 $44.00 4% 12 months 5.2% 2.8% 2.4% 3.0% BMY Bristol-Myers Squibb Company Pharma Buy 46,215 $26.95 $30.00 11% 12 months 4.8% 2.7% 2.1% 2.0% PFE Pfizer Inc. Pharma Buy 138,453 $17.17 $19.00 11% 12 months 4.7% 2.6% 2.1% 12.5% COP ConocoPhillips Integrated Oil/Refining Neutral 82,119 $55.36 $57.00 3% 6 months 4.2% 2.6% 1.6% 9.5% AEP American Electric Power Utilities Neutral 17,208 $36.00 $37.00 3% 12 months 5.0% 3.5% 1.5% 7.8% Source: Bloomberg, Goldman Sachs Research estimates. Yield Strategy #3: High yielding MLPs and REITs MLPs and REITs have among the highest sector average 2011E dividend yields in our coverage universe at 6.4% and 3.8%, respectively. Given their structure and tax or contractual requirements, MLPs and REITs have a high degree of visibility on near-term distributions, a key reason for their YTD outperformance in an uncertain economic environment. We note that MLP distributions are subject to ordinary income tax rates, and any negative adjustment to tax policy as a result of expiration of Bush-era tax cuts, where dividends are subject to 15% tax rate, may cause yield-oriented investors to rotate into this sector due to the increased relative attractiveness of MLPs. We provide below a list of highest yielding Buy-rated MLPs and REITs in Exhibit 10. Exhibit 10: Top yields for Buy-rated MLPs and REITs Stocks with 2011E dividend yield above 4% based on analyst estimates C Company Name Sector Rating Market Cap Price Target Price Upside to Target Price Div Yield DPS Growth DPS Growth FCF Yield Net debt/Equity ($ mn) ($) ($) Target Price Period 2011E 2010/09 2011/10 2011E 2011E ETP Energy Transfer Partners, L.P. MLPs Buy 8,556 47.50 54.00 13.7% 12 months 7.7% 0.0% 2.8% 1.5% 159.1% SXL Sunoco Logistics Partners L.P. MLPs CL-Buy 2,359 75.57 87.00 15.1% 12 months 6.7% 9.9% 9.5% -1.7% 153.3% EPD Enterprise Products Partners LP MLPs Buy 24,346 38.03 41.00 7.8% 12 months 6.5% 5.5% 6.3% 3.9% 103.0% MMP Magellan Midstream Partners MLPs Buy 5,617 49.86 55.00 10.3% 12 months 6.4% 4.0% 7.3% 2.2% 132.6% CBL CBL & Associates Properties REITS Buy 2,561 13.48 18.00 33.5% 12 months 5.9% 67.0% 0.0% 20.4% 318.2% HCP HCP, Inc. REITS Buy 10,997 36.72 33.00 -10.1% 12 months 5.1% 1.1% 0.0% 3.5% 90.5% SE Spectra Energy Corp. MLPs CL-Buy 14,131 21.74 26.00 19.6% 12 months 4.8% 0.0% 4.0% 2.7% 117.6% OKE ONEOK, Inc. MLPs Buy 4,768 44.21 53.00 19.9% 12 months 4.4% 7.1% 7.8% 18.1% 121.3% CPT Camden Property Trust REITS Buy 3,149 47.37 49.00 3.4% 12 months 4.0% -12.2% 5.0% 6.1% 130.9% Source: Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 10
  11. 11. September 20, 2010 Americas A word on taxes We readily acknowledge that the environment for paying dividends and the treatment of sentiment towards these strategies relies on outcomes of tax code policy in Washington. While we are not taking a stance on political outcomes, we do highlight (in a scenario setting) what the after-tax dollar amount of a dividend is on a 15%, 20%, 25% and 39.6% federal tax rate for the top 25 dividend yields in our Buy/Neutral rated Coverage (see Exhibit 11). We exclude state and local taxes from this analysis and base our scenario analysis on the current level of taxation, two of the more widely discussed levels, and finally what the rate would be if nothing was done to tax code. This is for purposes of comparison only. We also note that the current pre-tax yield for a 10-year treasury is 2.77%. Exhibit 11: Dividend yields in different tax scenarios Top 25 dividend yields (ex MLPs, REITs) for Buy/Neutral-rated stocks in our coverage under a 15%, 20%, 25% and 39.6% tax rate scenario Ticker Company Sector Rating Last Price Div Yld After tax Yld After tax Yld After tax Yld After tax Yld Pre-tax C2011E 15% tax rate 20% tax rate 25% tax rate 39.6% tax rate FTR Frontier Communications Corp. Telecom Tower Neutral 7.88 9.8% 8.3% 7.8% 7.3% 5.9% BGCP BGC Partners, Inc. Market Structure Neutral 5.67 8.8% 7.5% 7.0% 6.6% 5.3% CHH Choice Hotels International, Inc. Leisure Lodging Gaming Neutral 35.69 8.2% 7.0% 6.6% 6.2% 5.0% WIN Windstream Corp. Telecom Tower Neutral 12.32 8.1% 6.9% 6.5% 6.1% 4.9% CTL CenturyLink Inc. Telecom Tower Buy 38.08 8.0% 6.8% 6.4% 6.0% 4.8% ELNK EarthLink, Inc. SMid-Cap Internet Neutral 8.77 7.3% 6.2% 5.9% 5.5% 4.4% AB AllianceBernstein Holding L.P. Asset Managers Neutral 25.71 6.9% 5.8% 5.5% 5.2% 4.2% MO Altria Group, Inc. Beverage Food Tobacco Neutral 23.47 6.9% 5.8% 5.5% 5.2% 4.2% BX The Blackstone Group L.P. Asset Managers CL-Buy 10.77 6.9% 5.8% 5.5% 5.1% 4.1% T AT&T Inc. Telecom Tower Buy 28.11 6.5% 5.5% 5.2% 4.9% 3.9% VZ Verizon Communications Telecom Tower Neutral 31.42 6.4% 5.5% 5.1% 4.8% 3.9% LO Lorillard, Inc Beverage Food Tobacco CL-Buy 80.69 6.4% 5.5% 5.1% 4.8% 3.9% BKS Barnes and Noble, Inc. Retail Hardlines Neutral 15.92 6.3% 5.4% 5.1% 4.8% 3.8% CIE Cobalt International Energy, Inc. E&P Neutral 8.90 6.3% 5.4% 5.0% 4.7% 3.8% PGN Progress Energy Inc. Utilities Neutral 43.69 5.8% 5.0% 4.7% 4.4% 3.5% ISIL Intersil Corp. Semiconductors Neutral 10.71 5.8% 5.0% 4.7% 4.4% 3.5% WR Westar Energy Inc. Utilities Neutral 23.70 5.5% 4.7% 4.4% 4.1% 3.3% POR Portland General Electric Co. Utilities Neutral 20.14 5.5% 4.7% 4.4% 4.1% 3.3% RIG Transocean Ltd. Oil Service Neutral 59.86 5.3% 4.5% 4.2% 4.0% 3.2% Q Qwest Communications Intl. Telecom Tower Neutral 6.06 5.3% 4.5% 4.2% 4.0% 3.2% TU TELUS Corp. Telecom Tower Neutral 40.18 5.2% 4.4% 4.2% 3.9% 3.2% EXC Exelon Corp. Utilities Neutral 42.14 5.2% 4.4% 4.1% 3.9% 3.1% PM Philip Morris International Inc. Beverage Food Tobacco Buy 55.11 5.2% 4.4% 4.1% 3.9% 3.1% ED Consolidated Edison, Inc. Utilities Neutral 47.59 5.1% 4.4% 4.1% 3.8% 3.1% WY Weyerhaeuser Co. Paper Neutral 15.84 5.1% 4.3% 4.0% 3.8% 3.1% Source: Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 11
  12. 12. September 20, 2010 Americas Finding growth in single stocks and themes Against the backdrop of macro economic fear and slowing US GDP growth, we believe there are ample opportunities to invest in companies with superior growth profiles. Such stocks include names that outgrow their sector peers during economic duress, are product cycle winners and are levered to global growth. We present several intermediate and long- term strategies. Growth Strategy #1: High long-term growth We highlight growth leaders – the companies we expect to have among the highest growth and margin expansion over the next three years (see Exhibit 12). We screen for Buy-rated companies where our analysts have forecast revenue and operating profit growth in excess of 10% in each of the next three years. Exhibit 12: Companies we believe will have the highest growth in the coming years Buy-rated companies with expanding operating margins and sales and EBIT growth in excess of 10% through to 2012. Market Cap Price Upside To Sales Growth EBIT Growth OM Exp PEG Ticker Company Name Sector ($, mn) Rating ($) Target Price 2010/09 2011/10 2012/11 2010/09 2011/10 2012/11 2009-12 (EPS 2011/10) ANF Abercrombie & Fitch Retail Specialty 3,141 Buy 36.14 13% 17% 15% 13% 62% 40% 46% 6% 0.5 ARM ArvinMeritor, Inc. Automobiles 1,363 Buy 14.14 34% 18% 12% 11% 571% 86% 41% 6% 0.1 CMI Cummins, Inc. Machinery 16,589 CL-Buy 84.08 24% 23% 24% 11% 114% 37% 14% 7% 0.4 JNPR Juniper Networks, Inc. Comm Tech 16,028 CL-Buy 29.74 8% 22% 21% 17% 57% 35% 17% 7% 0.8 LULU lululemon athletica inc. Retail Specialty 3,002 Buy 43.40 6% 44% 22% 18% 69% 28% 22% 5% 1.3 RAX Rackspace Hosting, Inc. Telecom Tower 2,810 Buy 21.18 18% 24% 27% 24% 44% 71% 39% 7% 0.8 SAPE Sapient IT Services 1,547 CL-Buy 11.22 16% 28% 25% 25% 46% 60% 26% 4% 0.4 SBAC SBA Communications Corp. Telecom Tower 4,379 CL-Buy 37.86 14% 13% 13% 11% 51% 82% 45% 21% 0.3 V Visa Inc. IT Services 50,464 CL-Buy 68.38 36% 17% 16% 13% 24% 17% 14% 4% NM VMW VMware, Inc. Software 35,797 Buy 84.76 24% 40% 26% 23% 102% 51% 28% 10% 1.8 Source: Goldman Sachs Research estimates. Growth Strategy #2: Global growth Across our coverage, we favor stocks that are levered to global growth, especially to BRICs where Goldman Sachs economists forecast 8.9% and 8.7% real GDP growth in 2010 and 2011 respectively, versus 2.8% and 1.6% for the United States. To identify these names we screen for Buy-rated companies with the high international exposure (specifically over 15% exposure to Asia), and leverage our Investment Profiling (IP) framework to identify names with an IP Growth score in the top 30% of our coverage universe (See appendix for IP scores calculation methodology). We exclude ADRs and oil-related stocks (see Exhibit 13). Exhibit 13: Internationally exposed companies with high IP growth score Buy-rated companies with the international exposure and IP Growth above 70thth percentile (See appendix for IP scores calculation) Ticker Company Name Sector Rating Market Cap Price Target Price Upside to Target Price Sales-Asia (%) Sales-EMEA (%) IP Growth ($ mn) ($) (S) Target Price Period Last Reported Year Percentile KLAC KLA-Tencor Semiconductors Buy 5,323 31.08 41.00 32% 6 months 71% 7% 80 QCOM QUALCOMM, Inc. Comm Tech CL-Buy 68,915 41.97 46.00 10% 12 months 68% 17% 79 BUCY Bucyrus International Inc. Machinery Buy 5,568 69.12 70.00 1% 12 months 29% 12% 77 C Citigroup Inc. Banks Buy 116454.00 3.97 4.60 16% 12 months 22% 29% 73 JNPR Juniper Networks, Inc. Comm Tech CL-Buy 16,028 29.74 32.00 8% 12 months 20% 29% 77 AMZN Amazon.com Inc. Internet CL-Buy 67,399 148.13 150.00 1% 6 months 20% 28% 95 ARUN Aruba Networks, Inc. Comm Tech Buy 2,276 20.92 20.00 -4% 12 months 19% 15% 99 BA The Boeing Company Aer Defense CL-Buy 46,491 62.58 84.00 34% 12 months 18% 20% 78 VMW VMware, Inc. Software Buy 35,797 84.76 105.00 24% 12 months 16% 32% 93 Source: Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 12
  13. 13. September 20, 2010 Americas In addition to the quantitatively-derived, cross-sector opportunities above, we present three sector-specific themes that offer intermediate- to long-term drivers. Aerospace marries the cyclical to the secular Noah Poponak, CFA International air traffic and new aircraft order activity have both recovered, implying the next Aerospace cycle is underway. That said, Aerospace also benefits from multiple unique secular drivers that can create differentiated growth: (1) the unusually large backlogs of Boeing and Airbus after under-delivering to demand during the last order upturn, (2) an emerging market dominated demand profile, and (3) the 787 product cycle and R&D tailwind. Our top picks are CL-Buy rated Boeing and Precision Castparts.  Aerospace stocks are highly correlated with both international air traffic growth and new aircraft orders. Both have recovered faster than expected. Air traffic has now grown yoy at a double-digit rate for five of the past six months. New aircraft orders are on pace to show one of the strongest annual totals on record in the first year of a recovery.  In an effort to dampen the cyclicality of its business, Boeing and Airbus intentionally under-delivered to demand by only modestly raising production during the last order cycle (2004-2008) despite multiple consecutive years of record demand, exiting a recession with >8 years of production backlog. With the OEMs still needing to deliver on last cycle’s backlog, plus the surprise new order activity YTD, Boeing offers strong growth even if the macro environment deteriorates.  The 787 provides a unique product cycle that also offers growth regardless of the macroeconomic environment. Boeing has a backlog of 847 Dreamliner orders, versus the targeted annual production run-rate of 120 aircraft. Furthermore, many Aerospace companies will have a large R&D tailwind as the expense to develop Boeing’s 787 rolls off. See Exhibits 14-15. Exhibit 14: The Aerospace cycle has turned Exhibit 15: Boeing still needs to deliver on last cycle’s order demand Air traffic and new orders showing consistent improvement Backlog/sales still elevated even on the other side of the recession 160 50% 1,400 Record gap in 9x demand vs. supply leads to 140 40% no downturn 8x 1,200 7x 120 30% 36% trough 1,000 to peak 6x Backlog / Deliveries Air traffic yoy growth 100 20% 50% trough to peak BA Share price Aircraft deliveries 800 5x 80 10% 41% trough 4x 60 0% 600 to peak 43% trough 3x 40 -10% to peak 400 2x 20 -20% 200 1x 0 -30% 1997 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 0x 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012E 2015E Orders (indexed to 50) BA shares monthly yoy int'l traffic growth Source: IATA, Company data, FactSet, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 13
  14. 14. September 20, 2010 Americas Mobility continues to inflect higher in 4Q2010 Simona Jankowski, CFA One of the most significant trends in TMT is the rapid proliferation of wireless devices that allow always-on connectivity for an increasingly mobile and productive global population. We see a key inflection point in 4Q2010 due to the rise of tablets as a new category of wireless devices following the surprising success of Apple’s iPad, the move to fourth generation wireless technology (4G) at Verizon, and continued competition driving smartphone prices lower and penetration higher.  We estimate that smartphones and tablets will be two of the fastest-growing consumer electronics categories over the next three years and will rapidly cannibalize handsets and PCs, respectively. We estimate that smartphones will grow at a CAGR of 39% from 2010 through 2013 (see Exhibit 16), and that tablets will reach 16 mn units in 2010 and 35 mn in 2011. While forecasting the success of individual vendors is challenging given the competitive and rapidly evolving landscape, we recommend investing in the key enablers such as CL-Buy rated Qualcomm, which is the leader in cellular chipsets, and Buy- rated Broadcom, which is the leader in Wi-Fi and Bluetooth chipsets and is also expanding into cellular chipsets.  We also favor the towers given their leverage to mobile data growth. We believe wireless carriers’ growth prospects are tied to growth in data, facilitated by significant smartphone subsidies. Top picks in the space are CL-Buy rated SBA Communications and Crown Castle as well as Buy-rated American Tower.  In IT Services, we believe Buy-rated Syniverse is among the best positioned companies to benefit from the secular growth in mobile data, with nearly 80% of its revenue derived from wireless roaming and messaging. See Exhibit 17. Exhibit 16: Smartphone penetration is inflecting as ASPs decline Exhibit 17: New devices drive significantly higher data usage Smartphone unit, revenue and penetration estimates Estimated monthly data usage by device Estimated monthly data usage (MB) 1,000 50% 8,000 900 45% 7,000 2009-14E CAGR: 7,000 800 Units 39% 40% Revenues 21% ASPs -12% 6,000 700 35% 600 30% 5,000 Units (millions) 500 25% 4,000 400 20% 3,000 300 15% 200 10% 2,000 1,850 100 5% 1,000 1,000 0 0% 200 1 25 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 0 Feature phone Multimedia Smartphone iPad 3G data card 4G data card Smartphone Units Smartphone Penetration phone Source: Company data, IDC, and Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 14
  15. 15. September 20, 2010 Americas Agricultural stocks should satisfy your hunger for returns today and long-term Robert Koort, CFA Strain on the global supply and demand balance for grains has inspired a major run in agriculture commodities, with the spot prices Lindsay Drucker Mann, of wheat, corn and soybeans up 43%, 31% and 12%, respectively, over the past three months – all of which elements support robust CFA earnings growth for fertilizer and seed companies. In the global meat trade, shifting supply dynamics favor US pork and Brazilian beef suppliers over US chicken producers.  We remain bullish on fertilizer stocks as exceptional price momentum across the nutrient complex, combined with benign input costs, drives earnings upside. A favorable pricing backdrop for nitrogen and phosphate has emerged as banner returns expected by farmers from the upcoming harvest have driven demand against a very tight supply backdrop. CL-Buy rated CF Industries is our favorite way to trade this theme.  With farmer returns increasing and CL-Buy rated Monsanto trimming premiums for its cutting-edge RR2 soybean and SmartStax corn technology, we believe solid yield results this fall will lead to market share gains and improved sentiment for this ag biotech leader.  We favor hogs over chicken at this point in the meat cycle and have a Buy rating on Smithfield and a CL-Sell rating on Tyson. Very tight supply dynamics support another leg up in hog prices in 2011, while a modest oversupply situation is likely to keep chicken prices capped. Higher feed costs are a challenge for the group as vertically integrated producers struggle to immediately pass input cost inflation through.  We see strong demand for Brazilian beef in the short term, making up for lower exports from Argentina and Uruguay as well as other countries where tighter supply has hampered packers, including the United States and the EU. We therefore maintain our preference for stocks with high exposure to Brazilian beef, namely Buy-rated Minerva. See Exhibits 18-19. Exhibit 18: Futures prices suggest exceptional farmer returns Exhibit 19: Fertilizer demand outlook – best since 2007 Hypothetical forward farmer returns per bushel of corn based on futures Total fertilizer demand expected to increase 6.3% (1.3mn tons) in 2011 Fertilizer Year Basis N P K Total $3.00 (000 Nutrient Tons) $2.50 2007 13,194 4,572 5,133 22,899 $2.00 2008 12,561 4,247 4,660 21,468 $1.50 2009 12,027 3,647 3,265 18,939 $1.00 2010E 12,812 4,185 3,963 20,960 $0.50 2011E 13,189 4,419 4,666 22,274 $0.00 2010/11 change -$0.50 Percent 2.9% 5.6% 17.7% 6.3% Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Volume 377 234 703 1,314 Source: Iowa State University, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 15
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