Financial Pacific - Clearwire, too many questions remain unanswered (third party)
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Financial Pacific - Clearwire, too many questions remain unanswered (third party)

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Financial Pacific - Clearwire, too many questions remain unanswered (third party) Document Transcript

  • 1. ab Global Equity Research Americas UBS Investment Research Equity Strategy Morning Expresso - United States Market Comment 15 September 2011 www.ubs.com/investmentresearch U.S. Equity Product Management 212-713-2400 Thursday 15 September 2011 Morning Expresso This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 26. 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.
  • 2. Morning Expresso - United States 15 September 2011Morning Meeting AgendaUnion Pacific Rating: Buy Target: US$110.00 Price: US$88.76 RIC: UNP.N Prior: Neutral Prior: US$113.00 Mkt Cap: US$43.3bn BBG: UNP US Railroads Analyst: Rick Paterson Tel: +1-212-713 7944Recession or Not, Here We Come Even after tempering forecasts, stock looks undervalued; Upgrade to Buy While we see no evidence of a freight recession in volume data yet and do not currently expect one, we have updated our UP estimates to reflect a more modest economic growth outlook. With shares down more than 15% since late July and at 12.1x forward P/E, it appears a much more dismal macro scenario is being discounted. Significantly, the company has some defensive characteristics that make its earnings more resilient to potential cyclical weakness. We detect an opportunity here and upgrade UNP to Buy. UP management has shown its prowess in navigating a deep recession Based on how UP nimbly managed its network through the last recession, we have high conviction they could do so again if necessary. Given management’s aggressive rationalization of resources and cost reductions, UP was one of few transport companies able to expand operating margins and grow earnings during 2008-09. Furthermore, with rail traffic still materially below pre-recession peak levels, there is not as far to fall in the event of a double dip, making handling another downturn easier. Legacy contract repricing to bolster core price gains and margin growth Although we expect core pricing to remain robust for all Class I rails, UP has $750m of legacy contracts (i.e. not touched since at least 2004) to be repriced in Q4/11 and $300m in 2012, which will augment these price gains. In addition, absent escalators such as fuel surcharges will be added, improving UP’s ability to recover cost inflation. Valuation: New $110 price target (from $113) based on 13x forward PE After cutting our target multiple from 13.75x to 13x to reflect the dampened macro outlook, rolling our EPS basis one quarter forward (to Q4/12-Q3/13), and factoring in our new estimates, we lower our price target to $110 from $113. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$88.76 on 14 Sep 2011 18:42 EDTNorfolk Southern Rating: Neutral Target: US$74.00 Price: US$68.30 RIC: NSC.N Prior: Unchanged Prior: US$82.50 Mkt Cap: US$24.1bn BBG: NSC US Railroads Analyst: Rick Paterson Tel: +1-212-713 7944Tweaking Numbers Adjusting estimates based on fuel, slightly lower coal yields We are adjusting our 2H/2011 and 2012 earnings estimates slightly lower on reduced expectations for coal yield growth, an adjustment to our intermodal volume estimates, and somewhat higher than expected diesel prices in Q3. Volumes holding up relatively well While total US rail traffic has been flat QTD, NS has seen traffic rise +3.3% vs. our initial estimate for 3.8% Q3 growth. Norfolk’s commentary at industry conferences has been modestly positive despite mixed economic data and deteriorating investor sentiment on transport stocks. The loss of the Maersk intermodal contract to CSX beginning in January will likely constrain volume growth in 2012. Our view on the stock Norfolk posted solid results in 1H/2011, but we expect that the pace of both volume and yield growth, which will likely moderate in the coming quarters, could disappoint some investors, and increase the risk that earnings will come in below expectations. We view the risks to deceleration as higher at NS relative to the group and choose to remain on the sidelines. On slightly lower volume and coal yield expectations, we take our 2011 EPS estimate from $5.20 to $5.15, and our 2012 estimate from $5.90 to $5.75. Valuation: Neutral rating, lower price target to $74 from $82.50 Given our view that risks to deceleration are higher we cut our target multiple to 12x forward EPS estimates. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$68.30 on 14 Sep 2011 17:42 ESTSprint Nextel Rating: Neutral Target: US$4.00 Price: US$3.53 RIC: S.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$10.6bn BBG: S US Fixed-Line Communications Analyst: John C. Hodulik, CFA Tel: +1-212-713 4226Predictions for Sprint’s 4G analyst day Sprint to unveil 4G plan and update strategy at analyst meeting on Oct. 7 We expect Sprint to announce the iPhone, a faster rollout of Network Vision (NV) and an organic LTE build next month. While positive longer term, these changes will likely reduce near-term guidance. We do not expect a closer relationship with CLWR or a deal with SpectrumCo. We believe the day will be neutral to negative for S given lower numbers, negative for CLWR, and positive for cable and towers. New initiatives now expected to push FCF into the red for 2012 Given customer acquisition costs for the iPhone and higher expenses for acceleration of Network Vision, we now expect wireless margins of 14.0% in 2012 and 17.4% in 2013. With higher capex, driven by data traffic growth and NV infrastructure, we now expect an FCF loss of ~$650M at Sprint in 2012, before the company returns to the black in 2013. Each of these announcements may add to pressure on CLWR We believe Sprint continues to seek alternatives for 4G and wants to avoid assuming the $4B in debt on CLWR balance sheet, especially in front of heavy refinancing. Sales of the iPhone (instead of WiMAX devices), its own LTE network and faster completion of NV will give Sprint options for 4G, while potentially lowering payments to CLWR. For more, please see our companion note on CLWR, “Oct. 7 could be a negative catalyst,” also published today. Valuation: Maintain Neutral We remain on the sidelines with Sprint given uncertainty around Sprint’s 4G costs and timing. Our $4 PT is DCF-based (10% WACC, 0.5% perp growth). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$3.53 on 14 Sep 2011 18:42 EDT UBS 2
  • 3. Morning Expresso - United States 15 September 2011Clearwire Rating: Neutral Target: US$3.00 Price: US$2.73 RIC: CLWR.O Prior: Unchanged Prior: US$4.00 Mkt Cap: US$2.91bn BBG: CLWR US Wireless Communications Analyst: John C. Hodulik, CFA Tel: +1-212-713 4226Oct. 7 could be a negative catalyst Too many questions remain unanswered Clearwire shares remain under pressure given Sprint’s apparent unwillingness to take on CLWR debt and its potential alternatives for 4G. We expect Sprint to announce an organic LTE build, along with the iPhone and faster progress on Network Vision, at its Oct. 7 analyst meeting, which could be a negative catalyst for CLWR (see our note, “Predictions for Sprint’s analyst day,” also dated today). A Sprint LTE network will mean fewer wholesale subscribers for CLWR If Sprint builds its own LTE network, we believe the company will begin loading 4G subscribers onto that network in 2012, instead of paying Clearwire for wholesale capacity. We also believe a Sprint iPhone in 4Q will hurt Clearwire’s wholesale net adds as some customers take a 3G iPhone instead of a 4G device. Near-term pressure on Sprint fundamentals and Sprint’s financing needs make it unlikely the company announces an acquisition of Clearwire at the Oct. 7 meeting. Model now incorporates updated subscriber, wholesale ARPU guidance We have updated our model to reflect Clearwire’s pro forma reporting, its higher FY11 guidance for ~10M total subs, reclassification of int’l to discontinued ops and uncertainty over wholesale. We now expect wholesale ARPU to decline seq for the rest of 2011 from the pro forma $6.18 seen in 2Q. We continue to expect revenue to more than double in 2011E, but have cut 2012E revenue growth to 12% from 40%. We continue to expect positive EBITDA in 1Q12. Valuation: Maintain Neutral, New PT $3 Our $3 PT (prev. $4) is DCF-based (11% WACC, 3% perp growth). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$2.73 on 14 Sep 2011 18:42 EDTGlobal Paper & Forest Products Paper Products Analyst: Gail S. Glazerman, CFA Tel: +1-212-713 3486UBS paper/forest conf: day 1 highlights Uncertainty, but no sign of downturn yet 7 paper/forest companies, 2 industry suppliers and an industry consultant presented at day 1 of UBS’s annual paper/forest conference. Management teams indicated no material changes to demand trends in recent weeks despite prevailing economic uncertainty. UPM pointed out that label stock, which they view as an early indicator, has held up with a steady order book in all regions. The seasonal pickup in some publication grades has been more muted than typical, as anticipated. BKI continues to have some specialty fiber customers on allocation. LPX is cautious on near/medium term outlook for US housing recovery but maintains long-term potential is unscathed (and LPX reports potential to double volumes in some ops). Finding niches/growth and restructuring A recurring theme was identifying profitable niches, either products (mostly packaging-related) or regions (China, India, Brazil). Both MWV and Stora Enso see opportunity for paper-based packaging to reduce food waste. UPM sees turning paper profitability as their biggest opportunity and executing on the Myllykoski acquisition as a channel to accomplish this. They believe business cases can be made for deals similar to UPM/Myllykoski. Managements remain focused on taking out costs and ongoing restructuring, even in businesses with good margins. Flexibility Stora, UPM, Buckeye, AbitibiBowater and Boise each cited Debt/EBITDA at/below 2x (BKI only 0.5x). BZ completed $75mm Aug buyback and announced new $75mm auth. Many of these companies believe this affords them flexibility to take advantage of opportunities that might arise. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 14 September 2011Property Casualty Insurance Insurance, Property & Casualty Analyst: Brian Meredith Tel: +1-203-719 2899Earnings Drags from Low Interest Rates Protracted low interest rate environment putting pressure on earnings With the 10-year treasury yield at 2.0%, near a multi-year low, new-money yields on fixed income portfolios are well below book yields for most P&C re/insurers. This situation will continue to put downward pressure on earnings estimates and already low ROEs. Moreover, while commercial insurance pricing is improving (largely for property risks), we do not anticipate a broad- based “hard market” for at least another 12 months, which will continue to pressure underwriting results. Reducing 2012 and 2013 EPS estimates by 2.5% and 5.3% on average Given the expected pressure on investment yields, we are reducing EPS estimates for 14 re/insurers. We are cutting our 2012E EPS by 2.5% on average (ranging from -1% at PGR to -4.9% at AHL), assuming investment portfolio roll-off is reinvested 50 to 100 bps below current portfolio yields. For 2013, we assume investment yields will be roughly flat, which lead to a 5.3% average reduction to our EPS estimates. We are also lowering our price targets for 12 re/insurers, reflecting lower forecasted 2012 operating ROEs. Top picks include AON, ALL, RE, and VR Insurance brokers (AON is our favorite broker name) have very little earnings exposure to lower interest rates. ALL has modest interest rate sensitivity, and consensus EPS estimates appear too low for 2012 and 2013. VR is among the least sensitive to lower interest rates, should benefit from improved property reinsurance pricing, and is trading at a depressed valuation. RE carries excess capital, should benefit from improved property reinsurance pricing and trades at a depressed valuation. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 15 September 2011 UBS 3
  • 4. Morning Expresso - United States 15 September 2011MACRO AND STRATEGY RESEARCHUS Daily Economic Comment Economist: Maury N. Harris Tel: +1-212-713 2472Manufacturing gains? Preview: Flat IP but better manufacturing. CPI 0.3% est, core 0.2%. 1) Factory output (UBSe 0.3%) probably rose decently but utilities probably held back total industrial output in Aug (UBSe & cons 0.0%). We forecast increases in Sept in the headline indexes of the NY Fed manuf survey (UBSe -2.0, cons -4.0, after -7.7) and the Phila Fed survey (UBSe -10.0, cons -15.0, after -30.7). 2) The acceleration in the core CPI probably stalled in August. We forecast a 0.2% m/m increase (cons 0.2%), consistent with no pickup from July’s 2.5% year-to-date annual rate. Energy prices likely boosted the total CPI to a 0.3% rise (cons 0.2%). 3) Hurricane Irene likely delayed some jobless claims in the week of Sep 3 and temporarily boosted them in the week of Sep 10 (UBSe +20k to 434k, cons 410k). 4) The current account deficit probably stalled at 3.2% of GDP in Q2. 5) House Speaker Boehner will speak at 1pm on the President’s jobs plan. Review: Soft retail sales, PPI, & business inventories. Mortgage apps up. 1) Retail sales were 0.0% m/m in Aug (cons 0.2%, UBSe 0.3%), and the prior two months were revised down. Details also disappointed. However, the data imply real consumption (incl. services) rising at a decent 2¼-2½% annual rate so far in Q3. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 14 September 2011European Economic Focus Associate Analyst: Matteo Cominetta Tel: +44-20-7567 4652Italian austerity package finally approved Fourth time lucky After four rounds of modifications the austerity package has been finally approved by the Italian government this afternoon. The final version envisages EUR 55 bln worth of deficit reduction measures in the next three years. This should bring the Italian budget in balance by 2013 The positive side From a fiscal point of view, the package is certainly positive. The final version of the plan envisages EUR 55 bln of deficit reduction measures and renders budget balance a credible target for 2013 The negative side We have argued before that with no structural reform and a harsh austerity package, growth will likely suffer in Italy. We confirm this view in light of the final version of the package approved today. The government will probably have to revise downwards its growth projections. Plan still credible The Treasury’s optimistic growth assumptions may cast doubt over the credibility of the plan. We don’t think these doubts are justified. Lower-than-expected growth will probably reduce government revenues. However, this should not derail the austerity effort and still let the government achieve budget balance by 2013. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 14 September 2011 UBS 4
  • 5. Morning Expresso - United States 15 September 2011COMMUNICATIONEntertainment Entertainment Analyst: John Janedis, CFA Tel: +1-212-713 1064UBS’ Ratings Rundown What’s New? Upfront Breakage Minimal Coming out of Labor day week, we think the picture around upfront breakage is clearer - in the low single digit range and close to last years level. Overall, we think demand appears somewhat steady, though pricing is not as robust as it has been in the scatter market. Current 4Q scatter pricing needs to improve for the group to hit consensus estimates, in our view. While local auto appears to be coming back in 4Q, its unclear to what extent it will benefit national advertising. Late yesterday, CBS, DISCA, NWSA, & SNI, all stated that the strength in the ad market is ongoing. Comments from SNI’s management suggested scatter pricing for 3Q has slowed somewhat over the past month, though that expectation appears to have been baked into the 3Q guidance. Top picks: CBS, VIA.b. Broadcast Networks ABC primetime (PT) average household (HH) rating was +3% vs. a year ago, while P18-49 was -6%. (The 52 week season-to- date average is -4% and -9%, respectively.) CBS PT average HH rating was +6%; P18-49 was +12%. (‘10/11 ratings are -3%/-10%.) NBC PT average HH rating was -1%; P18-49 was +4%. (‘10/11 ratings are -12%/-13%.) Fox PT average HH rating was -21%; P18-49 was -20%. (‘10/11 ratings are - 8%/-10%). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 14 September 2011 UBS 5
  • 6. Morning Expresso - United States 15 September 2011CONSUMERHasbro Rating: Neutral Target: US$38.00 Price: US$37.06 RIC: HAS.O Prior: Unchanged Prior: US$46.00 Mkt Cap: US$5.25bn BBG: HAS US Toys Analyst: Robert W. Carroll Tel: +1-212-713 2434Reducing Estimates & Target Ouija Could Foretell Bumps In the Road For Entertainment Strategy Hasbro’s ‘08 Universal deal for development of at least 4 HAS brands into movies over 6 yrs is lucrative for HAS (zero capital commitment, minimal royalties on toy sales, and first dollar gross participation). Battleship (first movie from deal) will be released 5/18/12. But, news sources report that Ouija, the next scheduled film, has been put into “turnaround” (discontinued) with Universal paying a ~$5M penalty rather than develop the film. This penalty adds $0.02-0.03 to Q3 EPS, but comes at expense of $0.15 in ‘13 EPS and increases the risk of future earnings from the deal. Greater Uncertainty = Greater Advertising Spend? While the toy industry as a whole is normally resilient in difficult macroeconomic environments, HAS 2011 core earnings are increasingly dependant upon product redesigns and new marketing plans. We believe Street expectations are modest given a difficult H1’11, but believe greater uncertainty in H2’11 sales momentum is likely to translate into increased ad spending to ensure a successful holiday. Our increased H2’11 advertising assumptions reduce H2’11 earnings by $0.10. While H2’11 Expectations Are Low, ‘12/’13 Street Numbers Still Too High Anticipated ‘12/’13 EPS reductions in Street estimates from the cancellation of the Ouija film project should bring numbers closer to our est., however we continue to believe that there could be further pressure on 2012/2013 EPS as we believe Hasbro’s film slate and royalty structures for 2012/2013 are not being fully appreciated. Valuation Neutral Rating with $38 Price Target ($46 Previously) $38 based on 12x NTM EPS, in line with HAS’ historic multiple relative to SPX. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$37.06 on 14 Sep 2011 17:12 EDT UBS 6
  • 7. Morning Expresso - United States 15 September 2011HEALTHCAREUBS Hospital Survey Healthcare Providers Analyst: Justin Lake, CFA Tel: +1-212-713 2765UBS Hospital Survey – August 2011 Overall inpatient volumes down slightly YoY in August We are introducing our first monthly UBS Hospital Survey w/ data on volume trends and other key metrics for August 2011. Our data indicate that overall inpatient volumes were down -20 bps YoY (see Chart 1 below), a slight improvement over July, down -30 bps. Commercial admissions continue to be below average, w/ -90bps spread vs. overall, while outpatient metrics are up across the board, including outpatient surgeries, up 50 bps (inpatient surgeries down 30 bps). Uncompensated care volumes are up 1.9%, a slight uptick from July (+1.4%). Southeastern US Hospitals the only group with positive admission growth Hospitals in the southeastern US saw a 50 bps increase in inpatient admits, certainly a positive read thru for those hospital operators with a significant presence in Florida (HCA/HMA/THC). We note that HCA & THC both reported surprisingly strong volume statistics for Jul/Aug with HCA’s same store equivalent admits up 4.3% and THC’s same store inpatient admits up 1.8%. Consistent with recent company comments, smaller/rural facilities appear to be faring slightly worse than larger ones as hospitals w/ less than 100 beds are down -40 bps. Expect 2012 capex to be unchanged, Commercial contracting mixed Over a quarter of participants noted expectations for 2012 capital spending in line with 2011 while remainder were roughly split between planned increases and decreases. Given macroeconomic pressure & looming Super Committee Medicare/ Medicaid cuts, we asked hospitals if they have seen any change in tenor of managed care contracting, with majority indicating that this has remained unchanged while 30% note a deterioration and 12% indicating an improvement. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 14 September 2011Henry Schein Rating: Neutral Target: US$70.00 Price: US$63.86 RIC: HSIC.O Prior: Unchanged Prior: US$76.00 Mkt Cap: US$5.93bn BBG: HSIC US Healthcare Providers Analyst: Steven Valiquette Tel: +1-203-719 2347Mgmt Suggests 2H11 Stable; Lowering ‘12 Shares of HSIC have underperformed recently due to European concerns Despite the fact that Henry Schein remains one of the best-managed companies in our coverage universe, shares of HSIC are down 11% QTD, thereby slightly underperforming the S&P’s -9%. We believe the underperformance is tied to the fact that Schein has the most European operational exposure of any company in our coverage universe. The company’s international operations are expected to account for roughly 35% of total 2011 revenues (or $3.0 bil of the total $8.4 bil). Mgmt dismisses near-term Europe concerns; leaving ‘11E EPS unchanged Of note, HSIC mgmt has noted at recent investor conferences that it has not witnessed any slowdown in its European operations, and dental trends have remained ‘normal’ despite economic uncertainty in some European countries. Schein operates primarily in Germany, the U.K, and France, so well-documented economic issues in Greece and Italy are less problematic for the company. In light of this, we are leaving our 2011 EPS estimate of $4.00 unchanged. We are still above guidance range of $3.92- $3.98 and Street consensus of $3.97. Lowering 2012E EPS to Remain Conservative; Now Slightly Below Street While mgmt remains optimistic about 2011 prospects, we note that recent sluggish U.S. results from competitor Patterson, coupled with the risk that European issues could surface down the road, lead us to lower our global HSIC sales for 2012E, and lower our 2012E EPS from $4.47 to $4.40 to remain conservative (Street = $4.42). Valuation: Target from $76 to $70 (lower P/E by 1x and EBITDA by 0.5x) $70 target is based on a P/E of 16x (was 17x) ‘12E EPS of $4.40; = 8.5x EBITDA. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$63.86 on 14 Sep 2011 18:42 EDTLaboratory Corp. Rating: Neutral Target: US$92.00 Price: US$83.11 RIC: LH.N Prior: Unchanged Prior: US$101.00 Mkt Cap: US$8.68bn BBG: LH US Healthcare Providers Analyst: Steven Valiquette Tel: +1-203-719 2347Outlook Less Certain; Lowering Target Recent Underperformance Tempting, But Still Some Uncertainty Despite the fact that LH continues to generate organic volumes in the low-single digit range, and the fact that the company is posting better organic results than its primary competitors, macro indicators remain less favorable for the independent lab sector to continue to outperform. Further, the high probability of add’l industry Medicare cuts (via either a 20% patient co-pay or a straight ~2% cut for 9-10 yrs) starting in 2013 collectively leads us to lower our EPS estimates and target on LH. Monitoring the Deficit Reduction ‘Super Committee’ for Medicare Cuts Shares of LH are down 14% QTD, while the S&P is down 9%. It is difficult to decipher how much of the sell-off is tied to risk of a slowdown in organic volumes vs. the prospect of additional Medicare cuts in the clinical lab sector, but the combination is obviously not bullish. Whether Medicare cuts may be in the form of patient co-pays or direct fee schedule cuts is likely to be determined by level of success of gov’t ‘super committee’ vs. sequestration. We note that co-pays are unlikely to be part of a sequestration process. We hope to get clarity by year-end. Lower 2011-13 EPS estimates; Aug IMS doc visit data to be released 9/20 Given recent IMS doc visit data trends and pot’l M/E cuts longer-term, we lower our EPS estimates for 2011 from $6.40 to $6.31, 2012 from $7.21 to $7.11, and 2013 from $8.06 to $7.90 to remain conservative (UBS now slightly below Street). Valuation: Reducing LH Target to $92 (still suggest premium to DGX) Our $92 target (from $101) is based on a P/E of 13x (was 14x) our 2012 EPS estimate of $7.11 (was $7.21). This equates to 7.5x EBITDA (down from 8x). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$83.11 on 14 Sep 2011 18:42 EDT UBS 7
  • 8. Morning Expresso - United States 15 September 2011Quest Diagnostics Rating: Neutral Target: US$54.00 Price: US$49.35 RIC: DGX.N Prior: Unchanged Prior: US$60.00 Mkt Cap: US$8.48bn BBG: DGX US Healthcare Providers Analyst: Steven Valiquette Tel: +1-203-719 2347Smoke in the Air for the Lab Industry Clouds Continue to Form In the Shape of Soft Volumes and Medicare Cuts Following the company’s sluggish 2Q11 organic volumes, coupled with macro indicators that remain less favorable for labs to continue to generate solid growth in 2H11, and the high probability of additional Medicare cuts for the industry (via either a 20% patient co-pay or a straight ~2% cut for 9-10 yrs) starting in 2013, we are lowering our EPS estimates and price target on shares of DGX. Monitoring The Deficit Reduction ‘Super Committee’ For Medicare Cuts Despite the fact that Quest has consistently had one of the lowest valuations in our coverage universe, the stock has underperformed again in 3Q11 (-17% QTD versus LH’s -14% and S&P’s -9%). We think the sell-off is tied to risk of a volume slowdown and the prospect of add’l Medicare cuts. Cuts may be in the form of patient co-pays or direct fee schedule reductions, and is likely to be determined by level of success of gov’t ‘super committee’ vs. sequestration. We hope to get clarity by year-end. Mgmt Seems To Concede Tougher Times Ahead; Focused on Cost-Cutting Given recent IMS doc visit data trends and pot’l for M/E cuts longer- term, we are lowering our EPS estimates for 2011 from $4.25 to $4.23, 2012 from $4.82 to $4.70, and 2013 from $5.32 to $5.15 to remain conservative. Upon reviewing commentary from DGX mgmt at recent investor conferences, mgmt does not seem to be refuting the notion of softer volumes, and instead is focused on cost-cutting. Valuation: Lowering Price Target to $54; DGX Model on pgs 3-6 Our $54 target is based on an EV/EBITDA of ~7x our 2012 estimates (was 7.5x). This equals a P/E multiple of 11.5x our 2012 EPS estimate of $4.70 (was $4.82). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$49.35 on 14 Sep 2011 18:42 EDTImpax Labs Rating: Neutral Target: US$20.00 Price: US$18.77 RIC: IPXL.OQ Prior: Unchanged Prior: US$23.50 Mkt Cap: US$1.22bn BBG: IPXL UW Pharmaceuticals Analyst: Ami Fadia Tel: +1-212-713 3242Updating PT and Nos. for Recent Trends What’s new? Updating valuation and adjusting ests. for Rx Trends We are updating our valuation for IPXL to reflect continued pressure on equity markets and the limited visibility into resolution of FDA’s pending warning letter. We are also taking the opportunity to adjust our model for recent Rx trends. Key changes to the model: Updating for recent IMS Rx trends Performance of Adderall XR and resolution of FDA’s warning letter remain the key swing factors in the near term. Weekly IMS TRxs that Impax’s avg. share in the generic Adderall XR market was down to ~23.5% vs. ~29.4% in 2Q11. Based on this, we are slightly lowering our Adderall XR estimate from $65M to $60M in 3Q and from $70M to $57M in 4Q. We will re-visit our estimates as we get more clarity on the supply from management. This and other minor adjustments for Rx trends lowered our 2011 EPS est. from $1.01 to $0.95, in-line with consensus. Thoughts on the stock: FDA warning letter remains an overhang We expect the stock to struggle until we get better visibility into resolution of the warning letter or mgt. engages in business development to drive near term growth. Valuation: Maintaining Neutral rating and lowering PT to $20 Our PT is based on a DCF analysis using an 11.5% (10% prev.) WACC and a 2% terminal growth. We are raising our WACC estimate from 10% to 11.5% to reflect the higher equity risk premium. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$18.77 on 14 Sep 2011 16:12 EDTForest Labs Rating: Neutral Target: US$34.00 Price: US$33.12 RIC: FRX.N Prior: Unchanged Prior: US$40.00 Mkt Cap: US$9.54bn BBG: FRX US Pharmaceuticals Analyst: Marc Goodman Tel: +1-212-713 1342Updated Thoughts on Forest What’s new? Updating Price Target to reflect Icahn’s proxy loss In 2Q, FRX had risen to the high-30s on what we believe was strategic rather than fundamental concerns as Carl Icahn fought his proxy battle with management. As Icahn lost his proxy battle in late August, we believe FRX has retraced and now trades primarily on fundamentals. As such, we are adjusting our price target to reflect our fundamental valuation for Forest. Our takeaway: New product ramps still the dominate swing factor We continue to watch the key new product ramps, with Viibryd’s TRxs slightly above our expectations while Daliresp is slightly below. For F2016, we model ~$400M for Viibryd, ~$300M for Daliresp, ~$300M for Teflaro, ~$400M for Linaclotide and ~$200M for Aclidinium and Cariprazine each. While we believe Linaclotide has the potential to be much larger (i.e., $1B+), we have much more muted expectations for the rest of the pipeline. Thoughts on the stock: We remain on the sidelines After affording what we believe is substantial credit to the pipeline (~$1.7B in F2016 risk-adj sales) we are still unable to replace the lost revenue from the Lexapro patent expiration (~$2.3B in 2011E sales). In addition, it takes us until F2018/2019 to return to the current $4.00+ level of EPS given mgt.’s spending guidance. Thus, we still need a little more confidence in the pipeline to get more positive on the stock and we remain on the sidelines. Valuation: We maintain our Neutral and lower our PT to $34 from $40 Our price target is based upon a 17x P/E multiple (prior 20x) to our C2012E EPS of $1.96. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$33.12 on 14 Sep 2011 15:43 EDT UBS 8
  • 9. Morning Expresso - United States 15 September 2011Alexion Pharma Rating: Neutral Target: US$57.00 Price: US$60.09 RIC: ALXN.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$11.5bn BBG: ALXN US Biotechnology Analyst: Matthew Roden, PhD Tel: +1-212-713 2491New Data Support Further Label Expansion What’s new? Clinically meaningful trends in early MG study Alexion announced highly suggestive data from a small ph-II study of eculizumab in severe and refractory generalized myasthenia gravis (gMG). While a clinically meaningful trend in the primary endpt (improvement in Quantitative gMG disease severity score, or QMG) was observed vs. placebo, statistical significance was not reached. Given the small study size, this outcome is not surprising, and we note stat sig benefits across key secondary endpts as well as a positive trend in QMG. Incremental opportunity; path forward remains unclear however MG is estimated to affect ~36-60k patients in the US, and is the most common neuromuscular transmission disorder. Current therapies have lowered the mortality rate to ~0% for most patients, although Alexion is targeting the ultra-orphan subpopulation resistant or intolerant to treatment. Given the uncertainty of the clinical and regulatory path forward, and importantly, the size of the target subpopulation, we have yet to add MG to our model. Near-term focus remains on core market growth, aHUS launch Near-term focus will continue to be on the global launch of Soliris in PNH as well as the expected 4Q11 approval for Soliris in aHUS, whose launch will likely be a key driver of shares. Beyond geographic expansion and aHUS, we see relatively few meaningful catalysts in the near-term, and look to data from the registration-enabling transplant studies (expected YE2012) as the next major clinical catalyst. Valuation: Neutral with $57 price target We derive our PT using DCF and supported by revenue-based multiples. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$60.09 on 14 Sep 2011 18:42 EDTBiologic anti-inflammatories Advanced Medical Devices Analyst: Rajeev Jashnani, CFA Tel: +1-212-713 91273Q11 biologic anti-inflammatory update ABT: 12% Humira growth in August (13% in July; 12% in June) Thru Jul-Aug, Humira QTD TRx growth is 11%. Over the past 2 qtrs, realized price has been 6-7% implying 3Q11 sales growth of 18% vs. our 13% estimate ($855M). We model 2011 / 2012 sales growth of 14% / 5%; estimates seem conservative in light of current performance. Notably, we expect US approval for ulcerative colitis by YE11 which may sustain solid volume growth. ABT expects to launch additional indications over 2013-4, helping to offset impact from upcoming competitors. Currently, Humira is gaining share across 3 major physician specialties described below. JNJ: steady Stelara uptake; slower progress w/ Simponi Stelara QTD TRx growth is 72%; share in derm continues to improve (19% currently; +390bps YTD, mostly from Enbrel). We estimate 3Q11 US sales of $101M. Simponi QTD TRx growth was 18%; share in rheum is flattish at 5% (+20bps YTD). We estimate 3Q11 US Simponi sales of $70M. On Remicade, we model 3Q11 US sales of $883M (+3%). IMS sales declined by -1% in Jul. 9% sub-cu TRx market growth in August (10% in July; 9% in June) QTD market growth is robust at 8% (incl. Cimzia, Enbrel, Humira, Simponi & Stelara). QTD rheumatology growth stands at 5%; dermatology at 9%; & gastroenterology at 16%. Rheum / derm / gastro account for 53% / 16% / 9% of the sub-cu market. Humira share is stable in rheumatology / gastroenterology & improving in dermatology (+90bps YTD). Notably, Orencia sub-cu is now registering in the IMS audit but volumes are negligible. Importantly, sub-cu metrics exclude IV drugs (e.g. Remicade) & as such are incomplete indicators. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 14 September 2011 UBS 9
  • 10. Morning Expresso - United States 15 September 2011INDUSTRIALSRockwell Collins Rating: Buy Target: US$70.00 Price: US$49.94 RIC: COL.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$7.82bn BBG: COL US Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185Mid to High Single Digit Growth Ex Repo Guidance includes 6% EBIT growth COLs guidance represents 11% EPS growth at the midpoint and we estimate 17% adjusted for one time items and tax benefit in FY11. We estimate COLs guidance incorporates 6% segment EBIT growth (9% ex FY11 one time items) and 6-7% accretion from share repurchase partially offset by higher interest expense and higher tax rate. COL increased its share repo authorization by $700M and will use $250M in debt towards buyback. FCF guidance at $475-575M, equivalent to approx 80% NI, on working capital increase related to capitalized development. CS 12% growth; GS 3-4% decline Segment guidance mostly in line with our expectations. CS forecast to grow low double digits on low teens OE and low double digit aftermarket growth. CS margins forecast to expand 250bps, equivalent to 40-45% incremental margins. GS forecast down low single digits with flat margins on DAGR decline and roll off of FY11 cancelled programs. Guidance supports aftermarket thesis We think COLs guidance for still strong aftermarket growth is positive read through for the other aerospace suppliers. We continue to believe that the aftermarket can grow strongly in 2012 on increased flying of out of warranty aircraft despite slow capacity/economic growth. Valuation: $70 price target Our $70 PT reflects our DCF analysis (10% WACC). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$49.94 on 14 Sep 2011 18:42 EST UBS 10
  • 11. Morning Expresso - United States 15 September 2011TECHNOLOGYIntel Rating: Buy Target: US$28.50 Price: US$21.12 RIC: INTC.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$112bn BBG: INTC US Semiconductors Analyst: Uche Orji Tel: +1-212-713 4015Intel Developer Forum (IDF) – Day 2 Ultrabooks – Intel is focused on broad ecosystem vendor cost reductions To meet its ultrabook volume target (40% of consumer notebooks exiting 2012) Intel is working with the ecosystem to drive out costs of the key components: 1) sub-21mm case, 2) prismatic form-factor batteries, 3) low-height HDD (where an SSD is not used), 4) very thin keyboard, 5) 1.0-1.5mm display. Intel believes key to driving out costs is gaining scale, which it knows well, with no near-term break-throughs required. OEMs using the trademarked ultrabook designator will need to meet minimum requirements defined by Intel to ensure category consistency. Expect Intel gross margin to stay stable, even as ultrabooks go mainstream While Intel efforts to lower the bill-of-materials cost for ultrabooks should result in sub-$700 mainstream price points by 2013, we believe Intel can maintain its gross margin as it progresses from Sandy Bridge processors to Ivy Bridge in 2012 and Haswell in 2013. Helping to enable this is Intel’s modular chip design approach, introduced with Nehalem and refined since. Thus, with small increments in R&D, Intel can deliver product variants so that die sizes are optimized for core count, cache size and graphics capability to maximize gross margin at each price point. A vision beyond ultrabooks – key to driving replacement cycles, ASPs Driving growth and margins require not only Intel’s commitment to ultrabook success but also the follow-through to develop what’s next – in addition to form-factor, Intel is focused on more natural human interfaces: touch, gesture and voice. Valuation: $28.50 Price Target, Buy Rating Our DCF-based price target is $28.50 (11x our 2012 $2.57 EPS estimate). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$21.12 on 14 Sep 2011 18:42 EDT UBS 11
  • 12. Morning Expresso - United States 15 September 2011UBS Key Calls - USLive Key Call Portfolio Stock Name RIC Rating Price Target Date of call Current Price Analyst Apple Inc. AAPL.O Buy US$510 2-Jun-11 US$389.3 Maynard Um Baker Hughes Inc. BHI.N Buy US$102 7-Jun-11 US$58 Angie Sedita Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$41.58 Steven Valiquette Celgene Corporation CELG.O Buy US$71 9-Dec-10 US$60.23 Matthew Roden, PhD CONSOL Energy, Inc. CNX.N Buy US$84 4-Aug-11 US$42.48 Shneur Gershuni, CFA Deere & Co. DE.N Buy US$110 18-Jan-11 US$77.29 Henry Kirn, CFA Dow Chemical DOW.N Buy US$40 21-Mar-11 US$26.91 Andrew Cash Ford Motor Co. F.N Buy US$22 10-Jan-11 US$10.32 Colin Langan, CFA General Electric Co. GE.N Buy US$20 10-Jan-11 US$15.79 Jason Feldman Google Inc. GOOG.O Buy US$800 10-May-10 US$532.07 Brian Pitz Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$80.49 Henry Kirn, CFA Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$48.41 Andrew Kligerman Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$53.07 Parag Agarwal SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$42.66 Uche OrjiSource: Reuters, UBS. Prices as at market close on September 14, 2011. UBS 12
  • 13. Morning Expresso - United States 15 September 2011Rating & PT ChangesKey Rating and Price Target Changes: US Company Name Directional Indicator/Rationale Reuters Code Current New New PT Prior Prior PT Share Price Rating Rating ACE Limited Reiterate Buy, lower PT ACE.N US$61.32 Buy US$76 Buy US$77 Arch Capital Group Ltd. Maintain Neutral, lower PT ACGL.O US$33.26 Neutral US$34 Neutral US$36 Aspen Insurance Holdings Maintain Neutral, lower PT AHL.N US$23.12 Neutral US$25 Neutral US$27 Axis Capital Holdings Ltd. Reiterate Buy, lower PT AXS.N US$27.39 Buy US$36 Buy US$39 Chubb Corporation Reiterate Buy, lower PT CB.N US$59.66 Buy US$70 Buy US$73 Clearwire Corp Maintain Neutral, lower PT CLWR.O US$2.73 Neutral US$3 Neutral US$4 Everest Re Group, Ltd. Reiterate Buy, lower PT RE.N US$78.86 Buy US$103 Buy US$106 Forest Laboratories Maintain Neutral, lower PT FRX.N US$32.83 Neutral US$34 Neutral US$40 Hasbro Inc. Maintain Neutral, lower PT HAS.O US$37.06 Neutral US$38 Neutral US$46 Henry Schein Inc. Maintain Neutral, lower PT HSIC.O US$63.86 Neutral US$70 Neutral US$76 Impax Laboratories Inc. Maintain Neutral, lower PT IPXL.OQ US$18.71 Neutral US$20 Neutral US$23.5 Laboratory Corporation of Maintain Neutral, lower PT LH.N US$83.11 Neutral US$92 Neutral US$101 America Hldg Norfolk Southern Corp. Maintain Neutral, lower PT NSC.N US$68.3 Neutral US$74 Neutral US$82.50 PartnerRe Ltd. Reiterate Buy, lower PT PRE.N US$56.55 Buy US$72 Buy US$79 Quest Diagnostics Maintain Neutral, lower PT DGX.N US$49.35 Neutral US$54 Neutral US$60 RenaissanceRe Holdings Reiterate Buy, lower PT RNR.N US$66.7 Buy US$74 Buy US$77 Ltd. Travelers Companies Reiterate Buy, lower PT TRV.N US$48.94 Buy US$61 Buy US$66 Union Pacific Corp. Upgrade to Buy, lower PT UNP.N US$88.76 Buy US$110 Neutral US$113 Validus Holdings, LTD. Reiterate Buy, lower PT VR.N US$25.44 Buy US$36 Buy US$38 W. R. Berkley Corporation Maintain Neutral, lower PT WRB.N US$29.86 Neutral US$30 Neutral US$32 XL Group plc Maintain Neutral, lower PT XL.N US$19.49 Neutral US$21 Neutral US$23Source: Reuters, UBS. Prices as at market close on September 14, 2011. UBS 13
  • 14. Morning Expresso - United States 15 September 2011Markets, Events and NewsflowToday’s Company Events Company Name Event Reuters code Rating PT Notes KiOR Inc Earnings Release KIOR.O Buy US$28 Research in Motion Earnings Release RIMM.O Neutral US$32Source: Reuters, UBS. Prices as at market close on September 14, 2011.Today’s Macroeconomic Events: US Indicator Time (ET) UBS forecast Previous Consensus Jobless Claims (Sep 10)lvl 9:30 na na na Current Account Balance (Q2)lvl 9:30 na -$119.3 bil na Consumer Price Index (Aug)mom 9:30 na 0.5% na Core CPI (Aug)mom 9:30 na 0.2% na Empire State (Sep)index 9:30 na -7.72 na Industrial Production (Aug)mom 10:15 na 0.9% na Capacity Utilization (Aug)mom 10:15 na 77.5% na Philadelphia Fed (Sep)index 11:00 na -30.7 na Flow of Funds possible (Q2)qoq 13:00 na na naSource: Bloomberg, UBSToday’s UBS Hosted Corporate Roadshow: Company Event Location El Paso Corporation 1X meeting hosted by Ronald J. Barone Midwest NTELOS Holdings Corp 1X meeting hosted by Batya Levi Midwest Procter & Gamble 1X meeting hosted by Nik Modi Europe TE Connectivity 1X meeting hosted by Amitabh Passi UK Toll Brothers Inc 1X meeting hosted by David Goldberg Southeast UBS 14
  • 15. Morning Expresso - United States 15 September 2011Today’s UBS Hosted Fieldtrip: Company Event Location Morgan Stanley UBS Fieldtrip New York Nikos West Coast UBS Fieldtrip West Coast NetworkingToday’s UBS Hosted Conference: Company Event Location Global Paper and Forest UBS Conference New York Products Conference UBS 15
  • 16. Morning Expresso - United States 15 September 2011Latest Market Movements: Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change Americas United States Dow Jones 11246.7 1.27 -2.86 United States S&P 500 1188.7 1.35 -5.48 United States Nasdaq 2572.6 1.60 -3.03 United States S&P VIX 34.60 -6.25 Europe Europe FTSE Eurofirst300 926.7 1.47 -17.38 Belgium BEL 20 2132.1 1.69 -17.32 Germany DAX 5443.5 1.93 -21.27 France CAC 3007.8 1.99 -20.95 Italy MIB 30 14384.4 1.73 -28.70 Netherlands AEX 277.3 1.37 -21.79 Portugal PSI 20 6062.1 2.53 -20.11 Spain IBEX 8262.0 2.69 -16.20 Switzerland SMI 5453.3 0.65 -15.27 UK FTSE 100 5310.2 1.59 -10.00 Asia Hong Kong Hang Seng 19181.5 0.71 -16.73 India BSE Sensex 16778.7 0.41 -18.19 Japan Nikkei 225 8668.9 1.76 -15.25Source: UBS, Reuters. Indices in Americas as at market close on September 14, 2011. Indices in Europe and Asia as at 05:00 EDT on September 15, 2011Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change Euro €/$ 1.374 0.51% -4.9% 2.6% UK £/$ 1.576 -0.09% -3.8% 1.0% Canada CAD/$ 1.010 -0.44% -1.0% 0.7% Switzerland CHF/$ 1.141 0.36% -10.6% 6.6% China Yuan/$ 0.156 0.11% 0.0% 3.1% Brazil BRL/$ 0.583 -0.23% -7.2% -3.2% India INR/$ 0.021 -0.10% -4.8% -6.2% Mexico MXN/$ 0.077 -0.24% -5.4% -4.6% Japan $/JPY 0.767 -0.26% -0.2% -5.6% Australia AUD/$ 1.026 -0.51% -2.4% 0.3%Source: UBS, Reuters. Prices as at market close on September 14, 2011 UBS 16
  • 17. Morning Expresso - United States 15 September 2011Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change Gold ($/oz) 1818.30 -0.45 4.57 28.95 Brent Crude spot, $/bbl 112.93 0.47 5.78 23.14 WTI Crude spot, $bbl 88.35 -0.63 - - Natural Gas, $MMBTU 4.06 0.52 -2.22 -6.16Source: UBS, Reuters. Prices as at market close September 15, 2011. UBS 17
  • 18. Morning Expresso - United States 15 September 2011UBS Conferences and SeminarsFor the week of 12th to 16th September From To Event Location NoneUpcoming UBS Conferences and Seminars From To Event Location 12-Sep-2011 13-Sep-2011 Global Transport Conference 2011 London 14-Sep-2011 15-Sep-2011 Global Paper and Forest Products Conference New York 19-Sep-2011 21-Sep-2011 Global Life Sciences Conference New York 27-Sep-2011 30-Sep-2011 Global Oil & Gas Conference London 28-Sep-2011 28-Sep-2011 UBS Business Development Company (BDC) Conference New York 15-Nov-2011 16-Nov-2011 Global Macro CTA & FX Conference 2011 Zurich 15-Nov-2011 17-Nov-2011 Global Technology and Services Conference New York 29-Nov-2011 01-Dec-2011 Global Real Estate CEO conference LondonRecent events From To Event Location 22-Aug-2011 22-Aug-2011 Q2 UBS/Mercent eCommerce Update Conference Call State of the Life Insurance Industry Update and Outlook with 25-Aug-2011 25-Aug-2011 Conference Call Moody’s 25-Aug-2011 25-Aug-2011 MSFT: Top 10 Things To Watch for at BUILD Conference Conference Call 13-Sep-2011 13-Sep-2011 Global Utilities Sector Strategy Conference Call 13-Sep-2011 13-Sep-2011 U.S. Life Insurance Industry Update with S&P Conference Call 13-Sep-2011 13-Sep-2011 Implications of Media Fragmentation Conference Call 13-Sep-2011 13-Sep-2011 Latam Telco pay-TV Competition set to rise; Implications for DTV Conference Call*For further information on any of these events, please contact your UBS representative. Replay details may be available for recently concluded conference calls. UBS 18
  • 19. Morning Expresso - United States 15 September 2011Recent UBS Event ab Conference Call Global Utilities Sector Strategy On this call we discuss our sector outlook for global utilities for 2011 H2; highlighting our regional and sub-sector tilts. Although we are cautious on the sector as a whole, we do think current markets will favour visibility and defensiveness; and that a portfolio of hand picked utility stocks from across regions has the potential to outperform falling markets. On this call we highlight a portfolio of utility stocks with a regional spread. Speakers: Per Lekander - UBS Co-Global Utilities & Infrastructure Strategist Head of European Utilities Research Stephen Oldfield - UBS Co-Global Utilities & Infrastructure Strategist Head of Asia Utilities Research Jim von Riesemann - USA Utilities Research Lilyanna Yang - Brazilian Utilities Research Toshinori Ito - Japan Utilities Research David Leitch - Australia Utilities Research Date & Time: Tuesday, 13th September 12:30 London / 19:30 HK / 20:30 Tokyo / 21:30 Sydney / 07:30 NY Dial-in details: * International Dial-In Number + 6567239388 (Conference ID: 99615131) Local Dial-In Number(s) Australia , Sydney: 0280640614 / China , Domestic: 4006988181 / China , Domestic: 4001200712 China , Domestic: 8008700811 / Hong Kong: 85225618854 / India , Mumbai: 912230985679 Japan , Domestic 0120938044 International Toll Free Dial-in Number(s): Australia - 1800148543 France – 0800912768 S.Korea - 003086511392 Russia - 81080020192012 Austria - 0800295717 Germany – 08001822967 Malaysia - 1800801678 South Africa - 0800995588 Belgium - 080071841 Hong - Kong – 800965084 Mexico - 0018005146734 Sweden - 020794030 Canada - 18775806574 India – 180030105460 Netherlands - 08000223241 Switzerland - 0800835856 Chile 12300208934 Indonesia – 001803657434 New Zealand 0800448207 Taiwan - 00801232425 China Netcom - 108006110137 Ireland – 1800556602 Norway - 80013022 Thailand - 001800656198 ChinaTelecom- 108003610157 Israel – 1809452550 Philippines - 180016510618 UK - 08000322281 Colombia - 018005181462 Italy – 800873907 Poland - 008001124235 United States - 18664052350 Denmark - 80886356 Japan – 00531653988 Portugal - 800819858 UBS 19
  • 20. Morning Expresso - United States 15 September 2011Recent UBS Event ab Research Insight Conference Call U.S. Life Insurance Industry Update with S&P Host: Andrew Kligerman Global Insurance Strategist and U.S. Life Insurance Analyst Speaker: Kevin T. Ahern Senior Director – Analytical Manager, Standard & Poor’s Matthew T. Carroll Director, Standard & Poor’s Date & Time: Tuesday, September 13, 2011 // 10:00 am ET Dial-in Details: Toll Free: 800-773-5134 Toll / Int’l: 212-231-2905 Code: 21538019 Replay Details: Toll Free: 800-633-8284 Toll / Int’l: 402-977-9140 Code: 21538019 UBS 20
  • 21. Morning Expresso - United States 15 September 2011Recent UBS Event ab Expert Access Conference Call Implications of Media Fragmentation Host: John Janedis UBS Media Analyst Speaker: Brian Wieser CMO, Simulmedia Topic of Discussion • How can marketers accomplish reach goals in a fragmented world • Mix shifts between day parts to manage TV inflation rates • Solutions to the reach/frequency problem • Key drivers of media inflation • Winners and losers of fragmentation Date & Time: Tuesday, September 13, 2011 // 11:00am ET Dial-in Details: Toll Free: 800-894-8917 Toll / Int’l: 212-231-2909 Code: 21537526 Replay Details: Toll Free: 800-633-8284 Toll / Int’l: 402-977-9140 Code: 21537526 UBS 21
  • 22. Morning Expresso - United States 15 September 2011Recent UBS Event ab Research Insight Conference Call Latam Telco pay-TV Competition set to rise; Implications for DTV Host: Tomas Lajous - Latam Telco Analyst John Hodulik - US Telco Analyst Leslie Mallon - Telco/Media Sector Specialist Topic of Discussion • New Bill (PLC 116) signed into law on Monday September 12th will enable traditional telco players to offer wired pay TV services in Brazil • We believe as a result, competition is set to rise and that AMX will a primary beneficiary • Implications to DTV; Latin America has been the key driver to DTV’s overall growth and now accounts for ~ 25% of total EBITDA (majority from Brazil). Date & Time: Tuesday, September 13th, 2011 // 2:00 PM ET Dial-in Details: Toll Free: 800-926-7748 Toll / Int’l: 1-212-231904 Code: 21538289 Replay Details: Toll Free: 800-633-8284 Toll / Int’l: 1-402-977-9140 Code: 21538289 UBS 22
  • 23. Morning Expresso - United States 15 September 2011Today’s UBS Event ab Expert Conference Call Private Builder Conference Call Series: Phoenix Host: David Goldberg UBS Building & Building Products Analyst Guest Speaker: Jim Belfiore Belfiore Real Estate Consulting Date & Time: Thursday, September 15, 2011 // 11:00am ET Dial-in Details: 800-272-0419 or 303-223-2682 Confirmation Code: 21538327# Replay Details: 800-633-8284 or 402-977-9140 Replay Code: 21538327# UBS 23
  • 24. Morning Expresso - United States 15 September 2011Forthcoming UBS Event ab Expert Access Conference Call US Small Cap Equities Outlook – Strategy and Trading Host: Albert Aguiar Small Cap Specialist Speaker: Chip Miller US Small Cap Strategist and Steven Roney, Head of US Small Cap Execution Topic of Discussion Small Cap Strategy and Trading – Perspectives and Outlook Chip Miller, US Small Cap Strategist, will discuss the key headwinds for the small cap sector as we head into year-end and provide a sector/industry framework for the current market. Steve Roney, Head of US Small Cap Execution, will discuss trading flow in small caps and discuss emerging tactical trends in the space. Date & Time: Tuesday, September 20, 2011 // 2:00pm ET Dial-in Details: Toll Free: 800-785-6380 Toll: 212-231-2908 Code: 21538023 Replay Details: Toll Free: 800-633-8284 Toll: 402-977-9140 Code: 21538023 UBS 24
  • 25. Morning Expresso - United States 15 September 2011Further InformationMorning Expresso – United StatesWelcome to the Morning Expresso, an early morning summary of the key ideas and issues presented from UBS forthe day ahead. Its contents include: - key items from UBS’ United States Morning Meeting - highlighted recommendation and price target changes - today’s anticipated company, sector and macro-economic catalysts from the US Contextual Diary - company and client events, conferences and conference calls from UBS - overnight global market, forex and commodity movementsMorning Expresso is designed to give you all that you ‘need to know’ each morning.Data presented is accurate as at 06:00 EDT on Thursday, September 15, 2011.Contacts & FeedbackFor further details concerning today’s Morning Expresso – United States note, please visitwww.ubs.com/investmentresearch or speak to your UBS contact. This note is not intended to be static and it willevolve over time. Feedback welcomed on email toDL-USEquityProductManagement@ubs.com Statement of RiskForecasting earnings and corporate financial behavior is difficult because it isaffected by a wide range of economic, financial, accounting and regulatorytrends, as well as changes in tax policy. UBS 25
  • 26. Morning Expresso - United States 15 September 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 26
  • 27. Morning Expresso - United States 15 September 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 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 54% 39% Neutral Hold/Neutral 39% 35% Sell Sell 7% 14% 3 4 UBS Short-Term Rating Rating Category Coverage IB Services 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 27
  • 28. Morning Expresso - United States 15 September 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 28
  • 29. Morning Expresso - United States 15 September 2011Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date 4, 6a, 6c, 7, 8, 16 Abbott Laboratories ABT.N Buy N/A US$50.92 14 Sep 2011 5, 16, 22 ACE Limited ACE.N Buy N/A US$61.32 14 Sep 2011 16 Alexion Pharmaceuticals, Inc. ALXN.O Neutral N/A US$60.09 14 Sep 2011 6c, 7, 13, 16, 18a Apple Inc. AAPL.O Buy N/A US$389.30 14 Sep 2011 6b, 7, 16 Arch Capital Group Ltd. ACGL.O Neutral N/A US$33.26 14 Sep 2011 5, 16 Aspen Insurance Holdings AHL.N Neutral N/A US$23.12 14 Sep 2011 16 Axis Capital Holdings Ltd. AXS.N Buy N/A US$27.39 14 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 13, Baker Hughes Inc. 16 BHI.N Buy N/A US$58.00 14 Sep 2011 2, 4, 6a, 6c, 7, 16, Cardinal Health, Inc. 18b, 22 CAH.N Buy N/A US$41.58 14 Sep 2011 4, 6a, 13, 16, 22 CBS Corp. CBS.N Buy N/A US$23.36 14 Sep 2011 6c, 7, 16 Celgene Corporation CELG.O Buy N/A US$60.23 14 Sep 2011 6b, 7, 16, 22 Chubb Corporation CB.N Buy N/A US$59.66 14 Sep 2011 13, 16 Clearwire Corp CLWR.O Neutral N/A US$2.73 14 Sep 2011 4, 5, 6a, 16 CONSOL Energy, Inc. CNX.N Buy N/A US$42.48 14 Sep 2011 16, 22 Deere & Co. DE.N Buy N/A US$77.29 14 Sep 2011 16 Discovery Communications Inc DISCA.O Neutral N/A US$39.22 14 Sep 2011 5, 6a, 6b, 6c, 7, 13, 16, 22 Dow Chemical DOW.N Buy N/A US$26.91 14 Sep 2011 16 Everest Re Group, Ltd. RE.N Buy N/A US$78.86 14 Sep 2011 4, 6a, 6b, 6c, 7, 13, 14, 16, Ford Motor Co. 18c F.N Buy N/A US$10.32 14 Sep 2011 5, 16 Forest Laboratories FRX.N Neutral N/A US$32.83 14 Sep 2011 4, 5, 6a, 6b, 6c, 7, 16, General Electric Co. 18f, 22 GE.N Buy N/A US$15.79 14 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18d Google Inc. GOOG.O Buy N/A US$532.07 14 Sep 2011 16 Hasbro Inc. HAS.O Neutral N/A US$37.06 14 Sep 2011 16 Henry Schein Inc. HSIC.O Neutral N/A US$63.86 14 Sep 2011 16 Impax Laboratories Inc. IPXL.OQ Neutral N/A US$18.71 14 Sep 2011 4, 5, 6b, 6c, 7, 8, 16, 18g Intel Corp. INTC.O Buy N/A US$21.12 14 Sep 2011 16, 18h Johnson & Johnson JNJ.N Buy N/A US$63.73 14 Sep 2011 3a, 4, 6a, 13, 16, 20 Joy Global Inc. JOYG.O Buy (CBE) N/A US$80.49 14 Sep 2011 Laboratory Corporation of 4, 6a, 16, 18i LH.N Neutral N/A US$83.11 14 Sep 2011 America Hldg 4, 6a, 6b, 6c, 7, Norfolk Southern Corp. 16, 18j, 22 NSC.N Neutral N/A US$68.30 14 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 16 PartnerRe Ltd. PRE.N Buy N/A US$56.55 14 Sep 2011 2, 4, 5, 6a, 6b, Prudential Financial Inc. 6c, 7, 16, 22 PRU.N Buy N/A US$48.41 14 Sep 2011 16, 18e Qualcomm Inc. QCOM.O Buy N/A US$53.07 14 Sep 2011 16, 22 Quest Diagnostics DGX.N Neutral N/A US$49.35 14 Sep 2011 6b, 6c, RenaissanceRe Holdings Ltd. 7, 16 RNR.N Buy N/A US$66.70 14 Sep 2011 4, 5, 6a, 6b, 6c, 7, 8, Rockwell Collins Inc. 16, 18k COL.N Buy N/A US$49.94 14 Sep 2011 13, 16, 20 SanDisk Corp. SNDK.O Buy (CBE) N/A US$42.66 14 Sep 2011 Scripps Networks Interactive 3b, 16 SNI.N Neutral N/A US$41.56 14 Sep 2011 Inc 16, 20, 22 Sprint Nextel Corporation S.N Neutral (CBE) N/A US$3.53 14 Sep 2011 1, 2, 4, 5, 6a, 6b, 6c, Travelers Companies 7, 16, 18l TRV.N Buy N/A US$48.94 14 Sep 2011 16, 22 Union Pacific Corp. UNP.N Buy N/A US$88.76 14 Sep 2011 4, 6a, 16 Validus Holdings, LTD. VR.N Buy N/A US$25.44 14 Sep 2011 2, 4, 6a, 6c, 7, 16 Viacom Inc. VIAb.N Buy N/A US$45.34 14 Sep 2011 16 W. R. Berkley Corporation WRB.N Neutral N/A US$29.86 14 Sep 2011 UBS 29
  • 30. Morning Expresso - United States 15 September 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date 4, 5, 6a, 16, 20, 22 XL Group plc XL.N Neutral (CBE) N/A US$19.49 14 Sep 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 Securities LLC is acting as advisor to Joy Global Inc on the announced acquisition of a stake in International Mining Machinery.3b. 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.8. 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.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 Qualcomm Inc.18f. 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.18g. 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.18h. 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.18i. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Laboratory Corporation of America Hldg.18j. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Norfolk Southern Corp. UBS 30
  • 31. Morning Expresso - United States 15 September 201118k. 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.18l. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in The Travelers Companies Inc.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.Additional Prices: KiOR Inc, US$15.30 (14 Sep 2011); NetLogic Microsystems Inc, US$48.09 (14 Sep 2011); Procter & Gamble,US$62.34 (14 Sep 2011); Research in Motion Limited, US$29.72 (14 Sep 2011); Toll Brothers, US$15.82 (14 Sep 2011);Source: UBS. All prices as of local market close. UBS 31
  • 32. Morning Expresso - United States 15 September 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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