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Financial Pacific: Demographic Dynamics (third party), August 16.2010
 

Financial Pacific: Demographic Dynamics (third party), August 16.2010

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    Financial Pacific: Demographic Dynamics (third party), August 16.2010 Financial Pacific: Demographic Dynamics (third party), August 16.2010 Document Transcript

    • August 4, 2010 Demographic Dynamics: A case study for equity investors Demographic shifts offer robust investment opportunities RELATED RESEARCH With the macroeconomic outlook still clouded, we turn investor attention Global Economics Paper No: 170, “The to one of our core long-term departmental themes – namely, identifying Expanding Middle: The exploding World and investing across demographic trends. We believe that we are sitting at Middle Class and Falling Global Inequality” the intersection of three powerful, once-in-a-lifetime population shifts, each by Dominic Wilson, et al. (July 7, 2008) of which holds material investment implications. GS SUSTAIN, “Crossing the Rubicon: Our investment framework for the next decade” Baby Boomers begin to retire by Anthony Ling, et al. (February 26, 2010) The approaching retirement of the Baby Boomers (born 1946-1964) will Global Markets Institute, “The Power of the significantly alter the spending, saving and leisure patterns of the largest Purse: Gender Equality and Middle-Class Spending” by Sandra Lawson and Douglas generational cohort in US history. The economic and financial effects will Gilman (August 5, 2009) be far-ranging; we examine the investable consequences across the healthcare, financial and consumer sectors. We pay special attention to Stock selections in this report are based on Allergan, Ameriprise, Brookdale Senior Living, Express Scripts, individual analyst criteria. Financial Engines, McKesson, Mylan, Pfizer, T. Rowe Price and Zimmer. Investing in the “middle” The Goldman Sachs economics team coined the notion of the “expanding middle” to describe both a global shift toward middle-income economies and the growth of the middle-class population within these economies. We see continued growth in consumer and infrastructure demand driven by Anthony Carpet (212) 902-6758 anthony.carpet@gs.com the expanding middle and highlight Amazon.com, Banco Bradesco, Goldman Sachs & Co. Bucyrus, Citigroup, Hypermarcas, Monsanto, News Corp., Petrobras, Teck Resources and Visa as key beneficiaries. Laura Conigliaro (212) 902-5926 laura.conigliaro@gs.com Goldman Sachs & Co. Generational waves after the Baby Boom As Baby Boomers begin to exit the US labor force, generational dominance Robert D. Boroujerdi will shift in the United States for the first time in forty years. The rise of two (212) 902-9158 robert.boroujerdi@gs.com under-30 generational waves—the “Millennials” and “Generation Z”—to Goldman Sachs & Co. economic prominence will have significant consequences, particularly Thomas Craven, CFA within the Consumer and TMT sectors. Companies exposed include AT&T, (212) 902-6748 thomas.craven@gs.com Crown Castle International, Disney, Hasbro, Juniper, Mead Johnson Goldman Sachs & Co. Nutrition, Progressive, Qualcomm and Urban Outfitters. Michael Chanin, CFA (646) 446-1777 michael.chanin@gs.com Introducing GSRHDEMO Goldman Sachs & Co. We introduce a tradable basket of 42 names tied to these three demographic themes: Bloomberg ticker GSRHDEMO. Deep Mehta (212) 357-8419 deep.mehta@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
    • August 4, 2010 Americas Table of Contents Portfolio Manager’s Summary 3  Retiring Baby Boomers 9  Opportunity #1: An aging population provides a tailwind for the healthcare sector 13  Opportunity #2: Financial services are needed to address both pre-retirement and post-retirement needs 17  Opportunity #3: Baby Boomer spending declines and shifts from discretionary items to necessities 22  The expanding global middle class 25  Opportunity #1: Emerging markets are THE story in consumer staples for decades to come 30  Opportunity #2: Food, feed and fuel to drive agricultural demand growth 34  Opportunity #3: Increasing discretionary income to drive incremental demand across the TMT universe 37  Opportunity #4: While prosperity is rising, the highest growth regions remain financially underserved 41  Opportunity #5: Global infrastructure growth and rising commodity demand 43  Generational waves after the Baby Boom 49  Opportunity #1: Millennials are tech-savvy and connected 52  Opportunity #2: Millennials consume media differently 55  Opportunity #3: Millennial consumers embrace e-commerce 57  Opportunity #4: As Millennials become parents, Generation Z looms 61  Appendix 63  Analyst contributors Stephen Graham Ingrid Chung Marc Irizarry +55(11)3371‐0831 | stephen.graham@gs.com (212) 902‐2360 | ingrid.chung@gs.com (212) 902‐4175 | marc.irizarry@gs.com Goldman Sachs Brasil Bco Mult S.A. Goldman Sachs & Co. Goldman Sachs & Co. Robert P. Jones Chris Neczypor Noah Poponak, CFA (212) 902‐3336 | robert.p.jones@gs.com (212) 357‐8512 | christopher.necyzpor@gs.com (212) 357‐0954 | noah.poponak@gs.com Goldman Sachs & Co. Goldman Sachs & Co. Goldman Sachs & Co. Andrew Sawyer, CFA Brian Singer, CFA Randall Stanicky, CFA (212) 902‐5488 | andrew.sawyer@gs.com (212) 902‐8259 | brian.singer@gs.com (212) 357‐3292 | randall.stanicky@gs.com Goldman Sachs & Co. Goldman Sachs & Co. Goldman Sachs & Co. Michelle Tan, CFA John T. Williams (212) 902‐3099 | michelle.tan@gs.com (212) 357‐3948 | john.t.williams@gs.com Goldman Sachs & Co. Goldman Sachs & Co. Source: Goldman Sachs Research. Goldman Sachs Global Investment Research 2
    • August 4, 2010 Americas Portfolio Manager’s Summary With the macroeconomic outlook still clouded, we turn investor attention to one of our core long-term departmental themes – namely, identifying and investing across demographic trends. We believe that we are sitting at the intersection of three powerful, once-in-a- lifetime population shifts, each of which holds material investment implications. In this paper we seek to leverage our own research with the work of our Goldman Sachs’s economists, Global Markets Institute and colleagues in GS SUSTAIN to prosecute this opportunity via single stock and sector selection. Specifically we identify three material population trends and seek to provide investors with a roadmap to help navigate the changing demographic landscape. The trends are as follows:  How retiring Baby Boomers will impact the economy and specifically companies in our healthcare, financial and consumer stock universes.  How a global shift toward middle-income economies and the growth of the middle- class population within these economies will impact consumption, energy and infrastructure.  How the rise of two under-30 generational waves—the “Millennials” and “Generation Z”—will have significant consequences within the TMT, financial and consumer spaces. While the list of names that are affected is far-reaching and ever growing, we identify the companies in Exhibit 1 as those for which we see the most pronounced positive and negative impacts over the next few years. Exhibit 1: Stocks impacted by key demographic themes Commodities &  Population shift Industrials Consumer Financials Healthcare TMT AMP, BKD, FNGN,  AGN, ESRX, MCK,  Retiring Baby Boomers (‐) CHS, HOG WBMD TROW MYL, PFE, SYK, ZMH BA, BRFS3.SA, BTU,  AMZN, CSCO, DTV,  CL, HYPE3.SA, MJN,  BBD, BLK, C,  The expanding global middle class BUCY, FCX, JOYG,  JNPR, MA, NWSA,  NKE, PEP, PM  CIEL3.SA MON, PBR, PCP, TCK QCOM, V (+) AMT, BRCM, CCI,  DIS, HAS, MJN,  CSCO, JNPR, QCOM,  Generational waves after the Baby Boom PGR URBN SBAC, T  (‐) CTL, FTR, Q, WIN Source: Goldman Sachs Research. Population shift #1: Retiring Baby Boomers The “Baby Boomers”, those born in the United States between 1946 and 1964 and currently accounting for 26% of the population, make up the largest and most influential generational cohort in American history. Their childhood catalyzed the rapid growth of suburbs and homeownership rates, while their adolescence and adulthood reshaped consumption preferences—as well as social and political values—throughout the economy. With the oldest Baby Boomers turning 65 in 2011, the next transformational economic change in the United States will be precipitated by their retirement. We expect the impact Goldman Sachs Global Investment Research 3
    • August 4, 2010 Americas to be felt throughout the domestic economy, especially within the healthcare, financial and consumer sectors, and note the following sub-themes to prosecute this view:  Opportunity #1: An aging population provides a tailwind to the healthcare sector that helps offset secular headwinds including a lack of innovation and an increasingly challenging reimbursement environment. We see significant opportunities for companies exposed to an aging population that can also successfully navigate the changing healthcare landscape, and highlight in particular Allergan, Brookdale Senior Living, Express Scripts, McKesson, Mylan, Pfizer, Stryker, WebMD and Zimmer.  Opportunity #2: Opportunities exist for select financial services companies that can help Baby Boomers meet their pre-retirement and post-retirement needs. We believe Ameriprise, Financial Engines and T. Rowe Price are particularly well positioned to meet increased demand for retirement savings solutions.  Opportunity #3: According to the Bureau of Labor Statistics, US household consumer spending peaks between the ages of 55 and 64, dropping 17% after age 65. As the Baby Boomer cohort moves from peak spending years into retirement its total consumption will decline, and necessities will gain a greater share of expenditures relative to discretionary items. As a result, we believe that last decade’s “Boomer Buys” are this decade’s “Boomer Sells.” We expect companies like Chico’s FAS and Harley-Davidson to suffer as Baby Boomers retire. Population shift #2: The expanding global middle class The concept of the “expanding middle” was coined by Goldman Sachs economists to describe the global shift toward middle-income economies as well as the growth of the middle-class population within these economies. The developing world has spent the last fifty years industrializing, globalizing and westernizing, with the result that middle-income economies are now poised to take the mantle of global economic leadership from nations with higher per-capita wealth. The consequences across sectors are likely to be significant as higher standards of living drive increased consumer demand, and significant infrastructure and commodity investment is required to help meet that demand.  Opportunity #1: We see $10 trillion of potential growth between now and 2050 for the consumer packaged good industry alone due to increased household penetration in emerging markets. Consumer-facing multinationals exposed to rising middle-class wealth include Colgate-Palmolive, Mead Johnson Nutrition, Nike, Philip Morris International and in time PepsiCo. Local competitors are sure to compete for this market as well; we highlight Hypermarcas as a local franchise poised to grow in Brazil.  Opportunity #2: As global consumption increases, we see food, feed and fuel requirements combining to drive demand in the agricultural sector. We expect Monsanto, the global leader in agricultural biotechnology, to benefit from the need for increased yield as crop demand outpaces growth in arable land. Brasil Foods, the largest producer of processed foods, pork, and poultry in Brazil, is likely to profit directly from increased protein consumption as diets improve with higher incomes.  Opportunity #3: Higher discretionary income in emerging markets will similarly drive incremental demand across the tech, media and telecom universe. Companies poised to benefit include Amazon.com, DirecTV, News Corp. and Qualcomm.  Opportunity #4: We expect the world’s financially underserved population to increasingly move into the global financial system as wealth increases in middle- income countries. As a result, we see massive potential customer growth in banking, lending and asset management. Highlighted US stocks include BlackRock, Citigroup, Goldman Sachs Global Investment Research 4
    • August 4, 2010 Americas MasterCard and Visa; in Latin America we see opportunities for Banco Bradesco and Cielo.  Opportunity #5: Finally, global infrastructure growth and increased commodity demand will be necessary to facilitate the increased consumption spending of two billion additional middle class people aspiring to new standards of living over the next twenty years. The effects will be felt throughout the global industrial and commodity complex; we believe Boeing, Bucyrus, Freeport-McMoRan, Joy Global, Peabody Energy, Petrobras, Precision Castparts and Teck Resources are particularly well positioned. Population shift #3: Generational waves after the Baby Boom Less well understood than the Baby Boom but potentially equally important in the United States are population peaks in the 16-29 and 0-4 age ranges (which we are calling “Millennials” and “Generation Z,” respectively). While these generational waves are not as large as the Baby Boom in absolute terms, they are larger than the low birth years between 1965 and 1980. As a result, the Millennials are poised to assume the country’s first new demographic leadership in forty years as they enter the labor force and Baby Boomers retire. We expect this to have a profound impact on US companies, particularly within the TMT and consumer sectors.  Opportunity #1: Millennials came of age in the Information Era and are more tech- savvy and connected than prior generations. This creates opportunities for the enablers of connectivity, including American Tower, AT&T, Broadcom, Cisco, Crown Castle International, Juniper, Qualcomm, and SBA Communications.  Opportunity #2: Millennials also consume content differently than prior generations, creating disruptions for the media industry. We favor differentiated content producers that are able to navigate changing media habits, such as Disney.  Opportunity #3: Given a high degree of awareness of consumer choices (aided by online searches and reviews), preference for immediacy of service, and comfort transmitting payment electronically, younger generations are more likely than their forebears to make purchases online. We highlight apparel retailer Urban Outfitters and auto insurer Progressive as companies whose e-commerce franchises are particularly well positioned relative to evolving generational preferences.  Opportunity #4: As Millennials become parents, Generation Z (ages 0-4) looms as an emerging demographic wave. While the ultimate size and economic impact of this cohort remains unclear, the looming change in the under-18 demographic from a teen- dominated group to one where children under age 9 will greatly outnumber those ages 10-18 in the United States will have significant consequences for companies that target youth consumers and their parents. We expect Hasbro and Mead Johnson Nutrition to be among the names affected. Prosecuting the view For diversified exposure to stocks we believe are positively exposed to each of the three demographic themes outlined above, we introduce a 42-name tradable demographics basket, Bloomberg ticker GSRHDEMO (see Exhibit 2).1 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 5
    • August 4, 2010 Goldman Sachs Global Investment Research Exhibit 2: Selected financial data for stocks mentioned in this report Shaded entries are viewed as negatively impacted. Prices are as of the market close of August 3, 2010 Ticker Company Name Rating GSRHDEMO Last Close Target Upside to Target Price EBIT CAGR Sales CAGR P/E P/B EV/EBITDA FCF Yield basket Price Price target (%) Period 2009-12 2009-12 2010 2011 2010 2011 2010 2011 2010 2011 Retiring Baby Boomers AGN Allergan, Inc. CL-Buy √ $63.48 81.00 28% 12 months 14% 9% 20.0X 17.3X 3.5X 2.9X 11.0X 9.8X 5% 6% AMP Ameriprise Financial, Inc. Neutral √ $42.82 50.00 17% 12 months 29% 13% 10.2X 8.6X 1.1X 1.0X 5.3X 4.7X 12% 12% BKD Brookdale Senior Living Inc. Buy √ $15.30 22.00 44% 12 months 50% 6% NM NM 1.7X 1.8X 11.8X 10.2X 18% 20% CHS Chico's FAS, Inc. CL-Sell $9.03 8.00 -11% 6 months 24% 7% 13.8X 11.9X 1.5X 1.3X 5.3X 4.8X 6% 10% ESRX Express Scripts, Inc. Buy √ $46.32 62.00 34% 12 months 28% 23% 18.7X 14.2X 2.9X 2.2X 5.6X 4.4X 17% 15% FNGN Financial Engines, Inc. Neutral $15.24 17.00 12% 12 months 56% 24% 48.9X 41.6X 5.6X 4.8X 35.5X 21.1X 3% 5% HOG Harley-Davidson, Inc. Sell $27.39 26.00 -5% 6 months 78% 4% 21.3X 12.1X 4.7X 3.3X 6.8X 4.7X 2% 9% MCK McKesson Corp. CL-Buy √ $62.10 86.00 38% 12 months 6% 4% 12.7X 11.3X 2.4X 2.3X 5.9X 5.5X 8% 11% MYL Mylan Inc. Buy √ $17.48 26.00 49% 12 months 10% 8% 10.9X 9.0X 2.1X 1.8X 6.5X 6.4X 16% 12% PFE Pfizer Inc. Buy √ $16.34 18.00 10% 12 months 7% 6% 7.8X 7.4X 1.5X 1.4X 5.4X 5.4X 6% 12% SYK Stryker Corp. Neutral √ $47.76 55.00 15% 12 months 11% 6% 14.8X 13.3X 2.5X 2.2X 7.2X 6.7X 10% 9% TROW T. Rowe Price Group, Inc. Neutral √ $49.70 45.00 -9% 12 months 21% 14% 21.9X 19.1X 4.1X 3.8X 11.8X 10.5X 5% 5% WBMD WebMD Health Corp. Neutral √ $46.68 47.00 1% 6 months 47% 17% 35.2X 29.6X 3.8X 3.6X 14.4X 11.9X 3% 4% ZMH Zimmer Holdings, Inc. Buy √ $54.19 67.00 24% 12 months 7% 5% 12.7X 11.3X 1.7X 1.5X 6.6X 6.2X 9% 10% The expanding global middle class AMZN Amazon.com Inc. CL-Buy √ $122.42 150.00 23% 6 months 35% 29% 35.7X 27.5X 7.6X 5.7X 19.6X 15.5X 4% 6% BA The Boeing Company CL-Buy √ $69.54 84.00 21% 12 months 51% 4% 17.8X 13.8X 12.5X 47.3X 9.3X 8.4X -2% 6% BBD Banco Bradesco (ADR) Buy $18.43 21.30 16% 12 months 28% 12% 12.3X 10.9X 2.7X 2.5X NM NM NM NM BLK BlackRock, Inc. CL-Buy √ $160.84 173.00 8% 12 months 43% 29% 16.8X 14.6X 0.4X 0.4X 10.3X 9.0X 5% 7% BRFS3.SA BRF-Brasil Foods S.A. Neutral R$24.26 25.70 6% 12 months 101% 12% 34.0X 17.4X 1.6X 1.5X 11.0X 8.3X 2% 5% BTU Peabody Energy Corp. Buy √ $48.06 55.00 14% 6 months 23% 11% 16.0X 11.0X 2.9X 2.3X 7.8X 6.1X 5% 6% BUCY Bucyrus International Inc. Buy √ $63.10 70.00 11% 12 months 23% 19% 15.3X 10.9X 2.7X 2.2X 9.4X 7.2X 11% 7% C Citigroup Inc. Buy √ $4.13 4.50 9% 12 months NM 3% 14.0X 9.3X 0.8X 0.7X NM NM NM NM CIEL3.SA Cielo Neutral R$16.02 18.80 17% 12 months -3% 3% 11.7X 12.8X 50.5X 36.5X 7.3X 7.8X 9% 7% CL Colgate-Palmolive Company Neutral √ $78.14 86.00 10% 12 months 6% 4% 16.2X 15.0X 13.3X 12.5X 9.9X 9.5X 6% 7% CSCO Cisco Systems, Inc. Neutral √ $23.82 25.00 5% 12 months 17% 12% 18.4X 16.0X 3.0X 2.9X 13.5X 11.7X 6% 8% DTV The DIRECTV Group, Inc. Buy √ $37.24 46.00 24% 12 months 23% 8% 15.0X 12.1X 30.0X NM 6.3X 5.7X 8% 10% FCX Freeport-McMoRan Copper & Gold Inc. Neutral √ $74.03 79.00 7% 6 months 13% 13% 9.8X 8.4X 2.9X 2.1X 3.7X 3.2X 11% 16% HYPE3.SA Hypermarcas Buy R$22.95 27.10 18% 12 months 36% 35% 29.4X 23.1X 2.5X 2.3X 16.9X 12.4X 2% 6% JNPR Juniper Networks, Inc. CL-Buy √ $28.02 32.00 14% 12 months 36% 20% 28.1X 20.8X 2.1X 1.8X 13.9X 10.6X 4% 7% JOYG Joy Global Inc. Buy √ $60.29 65.00 8% 12 months 7% 5% 14.5X 12.7X 5.1X 4.4X 8.8X 7.9X 8% 6% MA Mastercard Inc. Buy √ $200.91 250.00 24% 12 months 16% 9% 15.5X 13.0X 5.4X 4.2X 8.3X 7.1X 4% 5% MJN Mead Johnson Nutrition Co. CL-Buy √ $53.30 61.00 14% 12 months 7% 9% 21.9X 19.0X NM NM 14.5X 12.9X 4% 5% MON Monsanto Co. CL-Buy √ $59.00 65.00 10% 12 months -5% 3% 22.8X 20.0X 3.0X 2.8X 11.5X 10.0X 5% 4% NKE Nike, Inc. CL-Buy √ $73.10 85.00 16% 6 months 10% 8% 16.6X 14.6X 3.4X 3.1X 10.5X 9.3X 6% 6% NWS__A The News Corp. (A) Buy √ $13.63 17.00 25% 12 months 15% 3% 14.0X 12.4X 1.3X 1.3X 7.2X 6.6X 6% 8% PBR Petroleo Brasileiro S.A. (ADR) Buy $38.18 47.00 23% 6 months 24% 18% 10.3X 8.4X 1.6X 1.4X 5.6X 4.5X -7% -2% PCP Precision Castparts Corp. CL-Buy √ $124.16 140.00 13% 12 months 15% 12% 16.8X 14.1X 2.5X 2.2X 9.8X 8.4X 6% 7% PEP PepsiCo, Inc. CL-Buy √ $65.77 76.00 16% 12 months 15% 14% 15.7X 13.9X 5.1X 4.8X 10.3X 9.4X 4% 6% PM Philip Morris International Inc. Buy √ $52.15 58.00 11% 12 months 10% 7% 13.8X 12.0X 42.3X 124.5X 9.4X 8.5X 7% 9% QCOM QUALCOMM, Inc. CL-Buy √ $38.46 44.00 14% 12 months 12% 11% 19.3X 16.6X 3.2X 2.9X 15.5X 13.5X 6% 7% TCK__B.TO Teck Resources Limited Neutral C$37.25 41.00 10% 6 months 25% 15% 14.6X 8.2X 1.3X 1.2X 6.5X 4.6X 4% 12% V Visa Inc. CL-Buy √ $73.00 93.00 27% 12 months 18% 15% 18.9X 15.3X 2.1X 2.0X 10.4X 8.9X 4% 6% Generational waves after the Baby Boom AMT American Tower Corp. Buy √ $46.46 53.00 14% 12 months 21% 11% 49.2X 38.1X 5.7X 7.9X 18.5X 16.1X 4% 5% BRCM Broadcom Corporation Buy √ $36.28 44.00 21% 6 months 93% 22% 16.9X 15.1X 3.9X 3.3X 13.6X 11.6X 6% 8% CCI Crown Castle International Corp. CL-Buy √ $40.76 46.00 13% 12 months 23% 9% NM 47.2X 5.0X 5.8X 15.9X 14.1X 2% 4% CSCO Cisco Systems, Inc. Neutral √ $23.82 25.00 5% 12 months 17% 12% 18.4X 16.0X 3.0X 2.9X 13.5X 11.7X 6% 8% CTL CenturyTel Inc. Neutral $35.87 38.00 6% 12 months 13% 10% 10.1X 9.9X 1.1X 1.1X 4.9X 5.1X 15% 13% DIS The Walt Disney Company Buy √ $34.21 42.00 23% 12 months 13% 4% 17.0X 13.7X 1.8X 1.7X 9.2X 7.7X 6% 8% FTR Frontier Communications Corp. Neutral $7.67 7.50 -2% 12 months 3% -6% 16.8X 14.5X 27.5X 35.3X 2.5X 2.5X 23% 23% HAS Hasbro, Inc. CL-Buy √ $42.43 55.00 30% 12 months 10% 4% 16.5X 12.1X 4.3X 4.2X 9.4X 7.9X 9% 9% JNPR Juniper Networks, Inc. CL-Buy √ $28.02 32.00 14% 12 months 36% 20% 28.1X 20.8X 2.1X 1.8X 13.9X 10.6X 4% 7% MJN Mead Johnson Nutrition Co. CL-Buy √ $53.30 61.00 14% 12 months 7% 9% 21.9X 19.0X NM NM 14.5X 12.9X 4% 5% PGR The Progressive Corporation Buy √ $19.61 23.00 17% 12 months -1% 4% 13.5X 12.8X 2.0X 1.9X NM NM NM NM Q Qwest Communications Intl. Neutral $5.65 5.75 2% 12 months -1% -3% 15.3X 15.4X NM NM 4.7X 5.0X 14% 21% QCOM QUALCOMM, Inc. CL-Buy √ $38.46 44.00 14% 12 months 12% 11% 19.3X 16.6X 3.2X 2.9X 15.5X 13.5X 6% 7% SBAC SBA Communications Corp. CL-Buy √ $36.03 43.00 19% 12 months 58% 12% NM NM 9.8X 11.6X 17.8X 14.9X -3% -1% T AT&T Inc. Buy √ $26.69 34.00 27% 12 months 8% 1% 11.3X 10.4X 1.5X 1.5X 5.4X 5.2X 8% 10% URBN Urban Outfitters Inc. Neutral √ $31.56 38.00 20% 6 months 25% 17% 18.9X 15.7X 3.4X 2.8X 8.8X 7.4X 5% 6% WIN Windstream Corp. Neutral $11.50 10.50 -9% 12 months 4% 1% 13.8X 13.5X 8.8X 14.6X 6.1X 6.1X 14% 14% Note: (1) For methodology and risks associated with price targets, please see analysts’ previously published research; (2) 2010 represents year ends from June 2010 to May 2011; 2011: June 2011 to May 2012. Americas Source: Goldman Sachs Research estimates. 6
    • August 4, 2010 Americas How to read this report For the benefit of the reader we note that this paper is broken down into three separate sections, each focused on one of the larger demographic trends we have described above. From there we frame each theme and provide several opportunity sets for investors to prosecute a view across sectors and single stocks. Goldman Sachs Global Investment Research 7
    • August 4, 2010 Americas Goldman Sachs Global Investment Research 8
    • August 4, 2010 Americas Retiring Baby Boomers Goldman Sachs Global Investment Research 9
    • August 4, 2010 Americas Retiring Baby Boomers The “Baby Boomers”, born in the United States between 1946 and 1964 and currently accounting for 26% of the US population, make up the largest and most influential generational cohort in American history. Their childhood catalyzed the rapid growth of suburbs and homeownership rates, while their adolescence and adulthood reshaped consumption preferences—as well as social and political values— throughout the economy. With the oldest Baby Boomers turning 65 in 2011, the next transformational economic change in the United States will be precipitated by their retirement. Over the next twenty years the percentage of the population over age 65 in the United States is expected to rise from 13% to nearly 20%, a net increase of 31 million retirement age people (see Exhibit 3). This is the result of both a demographic bulge—the Baby Boom—and increases in lifespan. The rapid growth in the number and proportion of the population over age 65 will have material consequences throughout the economy. We identify three investable opportunities in particular, highlighting companies affected in Exhibit 4:  Increased healthcare demand as the largest generation in United States history transitions into old age.  Meaningful opportunities for asset managers, financial advisors and insurers as Baby Boomers look to self-fund the bulk of their retirement income.  Declining Baby Boomer consumption and a shift in household spending from discretionary items toward necessities. Exhibit 3: The over-65 age group is expected to grow steadily over the next 20 years Estimated number in millions and percentage of US population over age 65 80 25% 70 20% 60 50 15% 40 30 10% 20 5% 10 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Population over age 65 (left axis) % of population over age 65 (right axis) Source: US Census Bureau International Data Base. Exhibit 4: Companies exposed to the retirement of the Baby Boomer generation Opportunity Impact Companies Increased healthcare demand + AGN, BKD, ESRX, MCK, MYL, PFE, SYK, WBMD, ZMH Retirement funding needs + AMP, FNGN, TROW Declining Boomer discretionary spending ‐ CHS, HOG Source: Goldman Sachs Research. Goldman Sachs Global Investment Research 10
    • August 4, 2010 Americas The relative size of The size of the Baby Boomer generation relative to adjacent cohorts is a function of the Baby Boomer moderating fertility rates through the 1960s and 1970s and increases in life expectancy generation is a over the past fifty years. function of fertility and longevity trends  Fertility. Total fertility in the United States, as defined by the average number of children per woman, fell from a peak of 3.7 between 1960 and 1965 to a trough of 1.8 between 1975 and 1980. This sharp decline was the result of changing social and economic trends, including urbanization and rising incomes throughout the 1960s and 1970s, and was sparked in part by the introduction of the combined oral contraceptive pill in 1960. Fertility rates in the United States have recovered over the past thirty years to an estimated 2.1 children per woman in 2010. This recovery has given rise to the Millennials and Generation Z discussed later in this report, though we note that fertility rates have consistently stayed more than 40% below peak Baby Boom levels and are likely to remain so for the foreseeable future (see Exhibit 5).  Longevity. Continuing advances in healthcare and living standards are contributing to a shift of mortality to older ages. In the United States, life expectancy at birth increased from 70 years in 1960 to an estimated 79 years in 2010. Life expectancy is forecast by the United Nations to increase further to 83 years by 2045, emphasizing the need for extended use of healthcare services and retirement planning. Exhibit 5: Declining fertility and increasing longevity contribute to an aging population Average number of children per woman and life expectancy at birth in the United States 4 100 3 80 2 60 1 40 1950‐55 1965‐70 1980‐85 1995‐00 2010‐15 2025‐30 2040‐45 Total fertility (children per woman) Life expectancy at birth (years) Source: United Nations World Population Prospects: The 2008 Revision (Medium Variant Projections). Immigration partially offsets aging trends In framing this reality of an aging population driven we note that the United States does not face a sharply declining workforce in absolute terms, as is currently the case in Japan, Russia and Western Europe. This is due to higher rates of immigration and a generational wave–the Millennials—now entering the workforce. In terms of immigration trends we show, in Exhibit 6, that the majority of persons obtaining legal permanent resident status in the United States are in the 20-44 age group. Goldman Sachs Global Investment Research 11
    • August 4, 2010 Americas Partly as a function of their age, these immigrants have higher labor-force participation rates than the broader domestic population, and for the first generation tend to have higher fertility rates as well. With more than a million new residents in this category each year and additional forms of immigration, legal and otherwise, new residents therefore have the potential to partially offset the aging of the labor force caused by declining fertility and increasing longevity (see Exhibit 7). However, the ultimate impact of immigration will depend on policy choices and relative economic growth. Exhibit 6: Most US immigrants are of working age Exhibit 7: Legal US immigration trends remain positive Persons obtaining legal permanent resident status (“green Persons obtaining legal permanent resident status in the card”) in the United States by age, FY 2009 United States, 1945-2009 60% 1,800,000  More than half of new  1,600,000  50% green card recipients  1,400,000  40% are between the ages  1,200,000  of 20 and 44. 30% 1,000,000  800,000  20% 600,000  10% 400,000  200,000  0% <20 20‐44 45‐64 65+ 0  1945  1948  1951  1954  1957  1960  1963  1966  1969  1972  1975  1978  1981  1984  1987  1990  1993  1996 1999 2002 2005 2008 Immigrants Total population Source: US Department of Homeland Security, US Census Bureau. Source: US Department of Homeland Security. Goldman Sachs Global Investment Research 12
    • August 4, 2010 Americas Opportunity #1: An aging population provides a tailwind for the healthcare sector As Baby Boomers live longer, they spend more on healthcare; as they spend more on healthcare, they live longer. This feedback loop is the continuation of a decades-long trend in the developed world, and is likely to continue as the massive Baby Boomer cohort moves into its peak healthcare spending years. The average life expectancy in the United States in 1945, when the first Baby Boomers were born, was around 66 years. These oldest Baby Boomers, now age 65, can expect to live an additional 18 years on average. This is a testament not just to actuarial survivorship, but also in large part to the advances of medicine. As these advances continue their decades-long trend of increasing life expectancy, younger Baby Boomers who reach age 65 will likely be able to expect to live even longer (see Exhibit 8). Exhibit 8: Life expectancy continues to increase US life expectancy at birth (left-axis) and at 65 (right-axis) 80 20 78 18 76 16 74 14 Medical advances over the lifetime of the Baby 72 Boomers have driven a 12 steady increases in life expectancy. 70 10 68 8 66 6 1950 1960 1970 1975 1980 1985 1990 1995 2000 2005 At birth (left-axis) At 65 (right-axis) Source: CDC/NCHS, National Vital Statistics System. Healthcare spending These increases in life expectancy come with a concurrent rise in medical costs, however. increases rapidly after As shown in Exhibit 9, healthcare spending increases rapidly after age 55, from an average age 55 of $2,930 per year in the 45-54 age group to $3,825 in the 45-64 age group and $4,605 for those older than 65. The increase is even more pronounced as a percentage of after-tax income, which more than triples from 3.7% for those ages between 45 and 54 to 11.9% for those older than the traditional retirement age of 65. At the same time, healthcare spending among those over age 65 has been increasing, and is very likely to continue to do so as the Baby Boomers move into this demographic. The number of treatment options available increases as medicine advances and previously untreatable ailments are targeted by expensive and specialized therapies. The steady increase in the average number prescriptions filled for Americans over age 65 is indicative of this trend, as shown in Exhibit 10. Goldman Sachs Global Investment Research 13
    • August 4, 2010 Americas Exhibit 9: Healthcare spending increases sharply after Exhibit 10: …and healthcare spending among the over-65 age 65… group has been increasing steadily over time Average annual dollar and % income spent on healthcare Per capita prescriptions filled by Americans over age 65 32 $5,000 14% 31 $4,500 30 12% On average, Americans over the  30 age of 65 filled 31 prescriptions  in  $4,000 2009, up 28% from 2003 10% 29 $3,500 28 28 $3,000 8% 26 $2,500 6% 26 26 $2,000 $1,500 4% 24 24 $1,000 2% $500 22 $0 0% 0‐25 25‐34 35‐44 45‐54 55‐64 65+ 20 Healthcare $ spent Healthcare % of after‐tax income 2003 2004 2005 2006 2007 2008 2009 Source: Bureau of Labor Statistics Consumer Expenditure Survey. Source: Kaiser Family Foundation. The positive demographic trend competes with secular headwinds in healthcare. While we remain positive on the impact of an aging population for the healthcare complex, we remind investors that the combination of an impending “patent cliff” in Major Pharma and a challenging reimbursement environment in the United States will provide near to medium term headwinds. The former, coupled with a lack of innovation, will pose the most significant challenge to the industry’s ability to grow organically. With that said, we do see unique opportunities for names leveraged to the impact of aging Baby Boomers in the areas of both products and services and facilities. Products  Within pharmaceuticals, companies with innovative drugs targeting diseases that affect the older population stand to benefit most. For 2010 we estimate that 43% of Buy-rated Pfizer’s sales are derived from drugs that target such diseases, including cardiovascular, arthritis, osteoporosis, glaucoma, erectile dysfunction and Alzheimer’s disease. This proportion will decline to 25% by 2015 as many of these drugs—including Lipitor, Celebrex and Viagra—lose patent exclusivity. However, the company is still clearly levered to an aging population over the long term, and its success will in large part be measured by its ability to execute on the demographic opportunity before it. The patent exclusivity drop-off is not a Pfizer-specific issue, but rather an industry-wide challenge (see Exhibits 11- 12).  As a record number of branded drugs go off patent in the next few years and pressures to contain healthcare costs continue to mount, generics become an increasingly important driver of revenue and earnings growth for a number of companies. We expect Buy-rated industry leader Mylan to benefit from greater prescription drug usage as the population ages, and see the company’s positioning in follow-on biologics as providing another avenue of growth to address the growing need for expensive biotech drugs at reduced costs. Goldman Sachs Global Investment Research 14
    • August 4, 2010 Americas Exhibit 11: 51% of current branded sales are poised to go Exhibit 12: The next three years should see the greatest generic within five years generic launch activity Estimated % of current branded sales to go generic $ billions $150 56% $15 % of 2009 non- Branded revenue of drugs subject to patent expiration (in the quarter of launch) $140 biotech pharma $14 HISTORICAL PROJECTED 52% market branded $13 $130 spend going 48% $12 $120 44% $11 $110 40% $10 $100 Over a third of 36% $9 $90 current branded spend will be 32% $8 $80 generic in 3 years 28% $7 $70 24% $6 $60 20% $5 $50 $4 16% $40 $3 $30 12% Cumulative expiring branded spend $2 $20 8% % of 2009 branded pharma market $1 $10 4% $0 4Q09E 1Q10E 2Q10E 3Q10E 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 $0 0% LAUNCHES BY QUARTER (ANNUAL SPEND under exclusivity) LAUNCHES BY QUARTER (multi-sourced) 4-quarter rolling average Source: IMS, company data, Goldman Sachs Research estimates. Source: IMS, company data, Goldman Sachs Research estimates.  CL-Buy rated Allergan’s story is unique within specialty pharmaceuticals, offering compelling long-term growth within a sector that has been squeezed by poor long- term visibility. The company is not only exposed to an aging population via its ophthalmology and medical aesthetics segments, but also to the secular trends of rising obesity via its Lap-Band product and growth in emerging markets across its franchise. These attributes position Allergan to succeed as a standalone company, but also potentially make it a strategically valuable asset for other companies seeking exposure to these positive trends.  For medical device manufacturers the biggest beneficiaries of people growing older and living longer are the companies most exposed to artificial joints. Buy- rated Zimmer is the market leader in the orthopedic device manufacturer market with 73% of revenues concentrated in artificial hips and knees. The combination of an aging population, increased prevalence of obesity (estimated at 30% in the United States by the Centers for Disease Control) and demand by younger patients to maintain activity levels should support accelerating volume growth. Neutral- rated Stryker, the number three company in the space, is also positively exposed to growth in the orthopedic device market. Services and Facilities  Within the supply chain we believe that all of the major drug wholesalers stand to benefit from increased volumes of drugs and medical supplies associated with the aging population. We see CL-Buy rated McKesson as best positioned for this trend given its concentrated exposure as the largest buyer of generics in the world. The company has a diverse distribution network that covers both pharmaceuticals and medical supplies and a sizable presence in the Healthcare IT sector that is set to become increasingly important as the government becomes more involved in reimbursement.  Buy-rated pharmacy benefit manager Express Scripts should also benefit from increased prescription use driving both drug volumes and the need to manage cost trends. In the context of the natural shift to greater volumes, Express Scripts is poised to enjoy greater profitability as generics become more prevalent. Increasing use of more complex and expensive specialty drugs to treat diseases common among the elderly also increases the need to manage cost trends and drive demand throughout the pharmacy benefit management industry. Goldman Sachs Global Investment Research 15
    • August 4, 2010 Americas  Beyond pharmaceutical needs, increases in the number of older people will drive demand for senior living facilities of all types. Buy-rated Brookdale Senior Living is the largest publicly traded owner/operator of senior living facilities in the United States, with 564 facilities serving over 52,000 residents. The key to our Buy thesis is compelling growth in the 75-plus age group over the next 5-10 years (4-5% CAGR versus 1% currently). Brookdale’s current portfolio serves the gamut of acuity needs from independent living to skilled nursing and memory care, and over 95% of its revenues are derived from private pay rent and fees, as opposed to Medicare reimbursement. As a result, we believe Brookdale is ideally positioned to take advantage of rising occupancy and potential rental rate spikes as resident demand begins to widely outstrip supply over the next three to five years (see Exhibits 13-14). Exhibit 13: Senior living supply growth is set to flatten ... Exhibit 14: . . . as the 75-plus population grows As of 4Q2009 Penetration rate = senior living units as % of 75+ population Units delivered Construction vs. inventory 75+ pop (mn) penetration rate 75,000 5.0% 25 12% 20 11% 60,000 4.0% 15 10% 45,000 3.0% 10 9% 30,000 2.0% 5 8% 15,000 1.0% 0 7% 0 0.0% 2010E 2015E 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E US Census - population 75+ (left) Penetration rate (right) Units delivered (left) Construction vs. inventory (right) Note Our penetration analysis assumes ramp back to 35k units / year (long-term average) beginning in 2012 Source: ASHA, NIC, Goldman Sachs Research estimates. Source: US Census Bureau, ASHA, NIC, Goldman Sachs Research estimates.  Finally, as a provider of healthcare information Neutral-rated WebMD should also see growth related to the aging Baby Boomer population. The Pew Internet & American Life survey revealed that 78% of Baby Boomers use the internet and social media to track down health-related information. WebMD meets this demand with the largest consumer-focused online health information site on the web, with over 70 million unique users. The company also operates MedScape, the dominant continuing-education portal for physicians, and is in the very early stages of capturing the offline-to-online shift in pharmaceutical advertising. We believe that increasing time spent online, an aging population searching more often for health- related information and increasingly difficult sales-related access to physicians may allow WebMD to approach 10% of total pharmaceutical advertising spend within 10 years, up from around 4% today. Goldman Sachs Global Investment Research 16
    • August 4, 2010 Americas Opportunity #2: Financial services are needed to address both pre- retirement and post-retirement needs With the oldest Baby Boomers next year turning age sixty-five, the traditional retirement age in America, we see meaningful opportunities for providers of financial services. We focus in particular on the opportunities presented by the pre- and post-retirement needs of the Baby Boomer generation for asset managers, financial advisors and insurers. The lay of the land Traditional retirement There are severe structural changes in the retirement landscape creating increased demand benefits are being for new retirement income sources as Baby Boomers approach retirement. A decline in replaced by self- traditional benefits is eroding historical retirement patterns, with social welfare programs funding facing long-term funding challenges and defined benefit pension plans having been overtaken by defined contribution schemes in the early 1990s (see Exhibits 15-16). Defined benefit assets under management as of year-end 2009 stood at $2.1 trillion compared to defined contribution assets of $4.1 trillion. With life expectancy increasing, the average Baby Boomer retirement may be as long as twenty to thirty years, requiring either greater savings or acceptance of reduced standards of living. Given the increased self-funding responsibility handed to retirees, the opportunity is clear for companies that can position themselves to manage Baby Boomer investments and provide retirement income vehicles that hedge against the new risks retirees face. Exhibit 15: Social Security faces long-term challenges Exhibit 16: DC plan growth continues to outpace DB Revenue less outlays as a percentage of GDP Assets in trillions 1.5 4.5 DC assets have grown DC 1.0 4.0 58% since 1998... 3.5 0.5 Assets in trillions Revenue - Outlays as % of GDP 3.0 0.0 2.5 (0.5) DB 2.0 ... while DB assets (1.0) 1.5 have only grown 11% (1.5) 1.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (2.0) 1985 1995 2005 2015 2025 2035 2045 Source: Congressional Budget Office. Source: Investment Company Institute. We view the “runway” for retirement services as long. As Exhibit 17 shows, weak asset returns and lengthening life expectancies have combined to push back expected retirement ages over the past ten years. Given that contributions and use of planning and administrative services ramp up in the years prior to retirement, the pipeline of employees saving for retirement should remain steady through 2020. Goldman Sachs Global Investment Research 17
    • August 4, 2010 Americas Exhibit 17: An increase in expected retirement age may “extend the runway” 2010 Retirement Confidence Survey: At what age do you expect to retire? All Workers Ages 55+ 2000 2010 2000 2010 Less than 60 22% 9% 12% 2% Ages 60-64 22% 19% 28% 17% Age 65 28% 24% 20% 19% Age 66 or older 19% 33% 20% 42% Never retire 4% 9% 8% 10% Don't know/refused 5% 6% 13% 9% Source: Employer Benefit Research Institute. With these trends in place, the growth of the pie appears certain. We project retirement assets to increase by 40% over the next four years alone (see Exhibit 18). The question for financial services providers then becomes one of how allocations will change going forward. We focus on target date funds, annuities and IRAs as key areas of growth as the Baby Boomers approach and enter retirement. Exhibit 18: Retirement asset mix continues to shift; assets expected to increase over 40% in next few years Retirement Assets: $7.0tn Retirement Assets: $14.4tn Estimated Retirement Assets: $20.4tn Annuities ? Government ? Annuities 9.7% Government 8.6% Pension Plans Pension Plans 25.7% 27.1% ? IRAs Private DB Plans 18.6% IRAs 25.7% Private DB Plans 13.9% ? 21.4% Other 401(k) Plans 13.1% 401(k) Plans Other DC Plans ? ? DC Plans 17.1% 7.9% 11.1% 1995 Today 2014 With retirement assets projected to grow over 40% in the next 4 years, the real question is this: How will retirement plan allocations change moving forward? Source: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, Internal Revenue Service Statistics of Income Division, Cerulli Associates, and Goldman Sachs Research. Target date fund Target date funds are perceived as the “do it for me,” self-contained retirement portfolio assets have grown at for average investors. Often named for the year an investor plans to retire, the funds are a 41% CAGR since the designed to automatically shift to a more conservative asset mix as retirement time nears. late 1990s In 2006, the Pension Protection Act sanctioned automatic enrollment for defined- contribution plans, and the Labor Department approved target-date funds as a default option for company retirement plans. As of May 2010, target date funds amounted to $259 billion in total assets, a 41% cumulative annual growth rate since they were initially introduced in the late 1990s (see Exhibit 19). Net new flows soared from $4 billion in 2002 to $56 billion in 2007 and remained positive through the downturn (see Exhibit 20). Goldman Sachs Global Investment Research 18
    • August 4, 2010 Americas Exhibit 19: Target date fund AUM continues to grow as Exhibit 20: Flows into target date funds remained % of total mutual fund industry… positive through the downturn $300 4.0% $60 56 CAGR:  41% 3.5% 51 $250 $50 3.0% 41 39 $200 $40 2.5% 34 $150 2.0% $30 1.5% 22 $100 $20 1.0% 14 $50 $10 0.5% 7 4 4 2 1 2 $0 0.0% $0 2010TD 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 *2010 AuM (in $ bn ‐‐ left axis) % of MF industry AuM (% ‐‐ right axis) *2010 numbers are annualized Source: Simfund, Goldman Sachs Research. Source: Simfund, Goldman Sachs Research. Annuities as a Annuities are a financial contract issued by a life insurance company that offers tax- percentage of deferred savings and a choice of payout options to meet an owner’s needs in retirement: retirement assets has income for life, income for a certain period of time or a lump sum. As a retirement product, remained stable at demand has historically been weak for annuities, with proliferation of unique product types around 9% occasionally outgrowing sales (see Exhibits 21-22). During the past 13 years annuities as a percent of retirement assets has generally remained stable at 9%, despite the significant expansion of products, declines in employer-sponsored defined benefit plans and increased education among those approaching retirement age. Exhibit 21: Annuity product innovation and changes Exhibit 22: Market pressures weakened sales growth, continue to take place but beginning to see sales recovery 70 The number of products sold are 4 1,500 60% # of companies selling variable annuities 1999 Year-over-year change in sales 65 times what they were 10 years ago 2000 despite industry consolidation reducing the number of 1,250 40% Average S&P 500 level 60 2001 companies selling VAs by 40% during the same period. 55 2002 1,000 20% 50 2003 2004 750 0% 45 2005 2006 40 2007 2008 500 (20%) 35 Number of unique products offered 250 (40%) 30 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 200 400 600 800 1,000 1,200 1,400 1,600 Source: Insured Retirement Institute. Source: Morningstar, FactSet, and LIMRA. Insurance companies can offer guarantees that differentiate their products from those of other financial services providers. As a result, variable annuities offer protection against the possibility of outliving assets. The Departments of Labor and Treasury have been exploring the subject of allowing annuities to become the default option for guaranteed income products, which could increase the uptake in election rates—as evidenced by the increase in target date flows once the funds were allowed to be default options. Goldman Sachs Global Investment Research 19
    • August 4, 2010 Americas Rollovers may help IRA growth is set to accelerate as Baby Boomers retire and rollover. As Baby Boomers drive IRA asset begin to retire, IRA rollovers are poised to accelerate and further increase the product’s growth from $4.0 presence in the retirement market. IRAs are already the fastest growing segment of the trillion to $5.8 trillion retirement market in the United States, with about $4.0 trillion in assets. This represents by 2014 over 26% of total retirement assets and is more than double the 10% represented by IRAs in 1985. According to Cerulli Associates IRA growth is expected to continue, with assets reaching $5.8 trillion by 2014, up about 60% from current levels. This growth largely driven by rollovers, as shown in Exhibit 23. Exhibit 23: Rollovers have been the largest source of IRA growth and are set to increase as more baby-boomers retire US traditional IRA asset growth components (data in $ trillions); Baby Boomer retirement progression 7.0 4.4 44% of Peak Year of beginning Retirements 36% of assets 5.84 6.0 +1.76 -0.95 +0.97 4.2 beginning assets Last Boomers 5.0 4.0 Retire Millions of Boomers +1.06 -0.38 3.95 +0.1 Withdrawl 3.8 4.0 -0.51 Market Contribution Rollovers +0.04 3.17 3.6 Withdrawl 2.96 3.0 Market Contribution Rollovers First Boomers 3.4 Retire 2.0 3.2 1.0 3.0 - 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2004 2008 2009 2014E Year of Retirement Source: Investment Company Institute data, Cerulli, US Census Bureau, Goldman Sachs Research estimates. Moreover, the importance of professional financial advice is becoming more critical during post-retirement years, particularly among mass-affluent investors. Mass-affluent investors are defined as those with greater than $200,000 in investible assets, a group whose holdings comprise the highest share of IRA assets (see Exhibits 24-25). Exhibit 24: Mass-affluent investors comprise the largest Exhibit 25: …with more seeking professional advice percentage of IRA assets… before making withdrawals IRA ownership by annual household income, $ thousands Type of advice by percentage used 8% 7% Professional FA 62% 7% IRS rules or 25% publications Mass-affluent Investors Did not consult any 14% 9% source Book/article 3% 42% Internet website 1% Financial software 1% 22% program <25 25-35 35-50 50-75 75-200 >200 0% 10% 20% 30% 40% 50% 60% 70% Source: Investment Company data, Goldman Sachs Research Source: Investment Company data, Goldman Sachs Research Neutral-rated Ameriprise should benefit from these trends through its advice-driven wealth management services, high exposure to the fast-growing IRA category and suite of Goldman Sachs Global Investment Research 20
    • August 4, 2010 Americas asset management and annuity products. Over 40% of the company’s $300 billion asset base is tied to retirement products, the majority of which are IRAs. With more mass- affluent investors (the company’s primary client base) seeking professional financial advice when it comes to retirement, Ameriprise is also well positioned to capture a higher share of retirement dollars through its 12,000 financial advisory force (the fourth-largest in the United States) and broad product suite ranging from traditional mutual funds to alternatives to annuities. We likewise believe that Neutral-rated T. Rowe Price, among the largest publicly traded asset managers, stands to benefit from continued growth in the defined contribution/401K market. The company manages over $100 billion in defined contribution assets and is particularly well-positioned for the growth of target date fund products. As of May, T. Rowe Price managed $43 billion in target date fund assets, accounting for 17% of the industry. Given the “sticky” nature of target date funds, the firm is well positioned to deliver continued organic growth strength despite the recent market volatility. Finally, Neutral-rated Financial Engines, which provides a platform for automatically managed 401K accounts with a focus on workers approaching age 50, is in a particularly good position to benefit from increasing 401K contributions. Average contributions increase 17% from $2,945 per year between the ages of 40 and 49 to $3,432 per year between 50 and 59. As more Baby Boomers enter this “red zone” prior to retirement, Financial Engines benefits from their escalating account contributions. The company is also developing a platform to manage assets during retirement, extending its relevance as Baby Boomers enter retirement. Goldman Sachs Global Investment Research 21
    • August 4, 2010 Americas Opportunity #3: Baby Boomer spending declines and shifts from discretionary items to necessities Over the past decade the Baby Boomer generational wave drove rapid population growth in the 55-64 year age bracket, the highest-earning and highest per-capita spending demographic among US households according the Bureau of Labor Statistics. The growth in 55-64 year olds is now set to decelerate sharply as the Baby Boomer wave approaches retirement years and population growth in the 65 and older demographic accelerates (see Exhibit 26). Exhibit 26: Aging Baby Boomers drive a dramatic shift in population growth trends Year-over-year growth in population 6.0% Population growth of 55‐64 year  5.0% olds poised to decelerate  sharply... 4.0% 3.0% 2.0% 1.0% ...as population growth of 65+  retirees  accelerates 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Population growth ‐ ages 55‐64 Population growth ‐ age 65+ Source: US Census Bureau, Bureau of Labor Statistics, Goldman Sachs Research Spending peaks The Bureau of Labor Statistics Consumer Expenditure Survey shows that household between ages 55 and spending per capita grows as the head of household ages and earnings increase. However, 64 this positive relationship between aging, earning and spending peaks between the ages of 55 and 64, and then declines sharply in retirement age (65-plus). As Exhibit 27 illustrates, income per capita falls by 32% and household spending by 17% when the head of household moves from the peak earning ages between 55 and 64 to the 65-plus age group. Goldman Sachs Global Investment Research 22
    • August 4, 2010 Americas Exhibit 27: The positive relationship between aging, earning and spending peaks between the ages of 55 and 64, and then declines sharply in retirement years (65+) Spend and income per household, divided by the average number of persons in the household $40,000  Household spending  per person  peaks  65 and over  at 55‐64, consistent  with the peak in  spending is 17%  $35,000  per person  household  income lower, driven by  32% less income $30,000  $25,000  $20,000  $15,000  $10,000  $5,000  $0  Under 25  25‐34 years 35‐44 years 45‐54 years 55‐64 years 65 years and  years older Avg annual household  expenditures  divided by avg number  of consumers  per household Avg household  pre‐tax  income divided by avg number  of consumers per household Source: Bureau of Labor Statistics Consumer Expenditure Survey; Goldman Sachs Research. After age 65, This decline in spending as consumers age is not uniform across categories, and healthcare spending discretionary spending is particularly hard hit. A greater proportion of total spending is increases at the directed toward basic necessities like healthcare and food at the expense of more expense of discretionary goods such as vehicles, alcohol, dining out and apparel (see Exhibit 28). For discretionary these categories, 65-plus households spend 25% less per person than 55-64 year olds (see Exhibit 29). Exhibit 28: Healthcare and necessities gain significant wallet share at the expense of discretionary categories post-65 Spend per household, divided by the average number of persons in the household 55‐64 years 65 years and older Spend per  Share of  Spend per  Share of  Change in Wallet  person Total person Total Share Healthcare 1,821 7% 2,709 12% 5.5% Food at home 1,767 7% 1,809 8% 1.6% Vehicle purchases (net outlay) 1,428 5% 884 4% ‐1.4% But overall wallet share  Food away from home 1,260 5% 951 4% ‐0.4% increases for necessities Household furnishings and equipment 902 3% 726 3% ‐0.1% like healthcare and food at  Apparel and services 772 3% 642 3% 0.0% home, at the expense of  Personal care products and services 300 1% 301 1% 0.2% more discretionary   Alcoholic beverages 250 1% 148 1% ‐0.3% categories Tobacco products and smoking supplies 169 1% 95 0% ‐0.2% Reading 75 0% 84 0% 0.1% When consumers retire, there is not a  dramatic shift in terms of largest vs. smallest  buckets of spend Source: Consumer Expenditure Survey; Goldman Sachs Research. Goldman Sachs Global Investment Research 23
    • August 4, 2010 Americas Exhibit 29: In the retirement years, spending is higher on necessities and 25% lower on key discretionary categories Average household spend per person; household ages 65-plus versus ages 55-64 Healthcare 49% Dollar spending on  Reading necessities  and  12% reading is higher  post retirment  Food at home 2% age... Personal care products and services 0% Apparel and services ‐17% ...while dollar  Household furnishings  and equipment ‐19% spending on key  discretionary  Food away from home ‐25% items is lower Vehicle purchases  (net outlay) ‐38% Change in dollars spent per person  ‐ Households ages 65+ vs. 55‐64 Source: Consumer Expenditure Survey; Goldman Sachs Research. Last decade’s discretionary Boomer Buys are this decade’s Boomer Sells As Baby Boomers age from their peak earnings years into retirement, demographics go from a driver to a drag for companies that cater to the pre-retirement cohort. As such, we see many of the same stocks that were demographic buy ideas last decade as downside plays over the coming years. Two Sell-rated names that fit this category are motorcycle manufacturer Harley-Davidson and apparel retailer Chico’s FAS. For Harley-Davidson we key off of average vehicle purchases, which fall 35-40% for consumers aged 65-plus versus those aged 55-64 years old. This further supports our thesis that end-market demand for heavyweight motorcycles will lag other big ticket consumer items. We believe that high sales levels over the course of the past decade have led to new bike saturation. It is our view that even if a bike market recovery is in the offing, an increasing proportion of the demand may be met through the used market, leaving new sales weak for a prolonged period. Spending on apparel, Chico’s FAS’s primary product category, likewise drops 15-20% for consumers aged 65-plus versus those in the 55-64 year old cohort. With a target demographic of women in their 50s, slowing population growth in the segment and the drop in apparel spending post-retirement represent notable headwinds. The company has recently executed an impressive turnaround, but expectations are now elevated and momentum appears to be cresting. Goldman Sachs Global Investment Research 24
    • August 4, 2010 Americas The expanding global middle class Goldman Sachs Global Investment Research 25
    • August 4, 2010 Americas The expanding global middle class For more discussion, We expect global consumer, infrastructure and commodity demands to continue to please refer to Global rise sharply due to the twin forces of (1) economic growth shifting to emerging Economics Paper No: middle-income economies and (2) the number of middle-income people increasing 170, “The Expanding within these countries. As the world’s economic center of gravity shifts towards the Middle: The exploding World Middle Class “expanding middle” over the coming decades, we believe that multinationals have a and Falling Global once-in-a-lifetime opportunity to position themselves for the growth of the global Inequality” by middle class. Dominic Wilson, et al. While one could write volumes on the impact of this profound global change, we have (July 7, 2008) as well as our previous report chosen in this report to focus on the investable consequences in the following areas: “The Day After  The $10 trillion of potential growth between now and 2050 in the consumer packaged Tomorrow, v1.0: The goods industry as household penetration rises in emerging markets. changing face of the consumer” (October  The impact of rising food, feed and fuel demand on the agricultural sector as protein 1, 2008) consumption increases with prosperity.  Incremental demand for multinationals across the tech, media and telecom universe.  Additional banking, lending and asset management clients as incomes rise and more people become customers of the global financial system.  Increased infrastructure investment and rising demand throughout the commodity complex to meet the growing needs of the expanding middle class. Exhibit 30: Companies exposed to the expanding global middle class Opportunity Impact Companies Consumer staples growth in emerging markets + CL, HYPE3.SA, MJN, NKE, PEP, PM Food, feed and fuel drive global ag demand + BRFS3.SA, MON Increased discretionary income drives TMT demand + AMZN, CSCO, DTV, JNPR, NWSA, QCOM More customers link into the global financial system + BBD, BLK, C, CIEL3.SA, MA, V Global infrastructure growth and rising commodity demand + BA, BTU, BUCY, FCX, JOYG, PCP, TCKb.TO Source: Goldman Sachs Research. Globalization continues to take hold Leveraging off the work of our colleagues in Economics Research, we project that the BRICs and the “Next 11” emerging economies will have a combined GDP of $37 trillion in 2020, on par with the GDP of the G7 countries.2 As seen in Exhibit 31, BRICs and N-11 economies currently have younger demographic profiles, lower per capita income, and higher rates of growth than their developed market peers. 2 The “Next 11” economies are Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. Goldman Sachs Global Investment Research 26
    • August 4, 2010 Americas Exhibit 31: Emerging market economies are set to outgrow their developed market peers Social and economic measures, grouped by current wealth bands GDP per Population Median age Labor force GDP growth Wealth capita Country level Total, mn Total, mn Real US$ CAGR 09- Years 2009 2009 2009 20E 0% 5% 10% 15% Bangladesh 164 23.3 76 512 7.5% Pakistan 170 20.8 59 948 5.6% Vietnam 90 27.4 44 969 9.7% Under India 1,203 25.3 457 1,083 8.4% US$2k Nigeria 155 19.0 47 1,228 7.0% Philippines 91 22.5 38 1,805 7.2% Egypt 78 24.8 25 1,850 6.5% Indonesia 237 27.6 106 2,081 6.5% US$2-5k China 1,344 34.1 731 3,117 11.0% Iran 73 27.0 29 4,800 7.1% US$5-10k Brazil 197 28.6 93 7,427 5.6% Mexico 109 26.3 43 9,280 5.8% Turkey 77 27.7 24 9,869 6.3% US$10-20k Russia 141 38.4 63 10,575 6.5% Korea 49 37.3 21 22,631 5.1% Japan 128 44.2 49 34,564 1.2% Italy 59 43.3 19 36,781 1.5% Germany 82 43.8 32 41,739 1.4% Over France 62 39.4 23 42,631 1.9% US$20k Canada 33 40.4 16 45,011 2.1% United States 312 36.7 139 46,626 2.2% United Kingdom 61 40.2 26 47,164 2.0% Source: World Bank, UN Population Division, CIA World Factbook, GS SUSTAIN. A prolonged period of high economic growth in these countries will transform the shape of the global economy. Today, just two of the BRICs (and none of the N-11) rank among the world’s largest ten economies. However, our economists forecast the landscape to be much different in 2050, with all four BRICs and three of the N-11 economies among the top ten (see Exhibit 32). Goldman Sachs Global Investment Research 27
    • August 4, 2010 Americas Exhibit 32: The GDP of the BRIC and N-11 economies is set to be on par with the G7 by 2050 GDP of the world’s largest 25 economies in 2009 and 2050E ($ trillions) China US India EU-5 Brazil Russia Indonesia Mexico UK Turkey Japan By 2050, China's economy will be over 10 France times larger than it was in 2009 and 4 times Germany the size of the 2009 US economy. GCC Nigeria Phillipines Canada Italy Korea Iran Several European countries Saudi Arabia will be replaced in the top 25 South Africa Thailand list by developing economies. Vietnam Venezuela Switzerland Sweden Spain Poland Norway Netherlands 2009 GDP 2050E GDP Belgium Australia 0 10 20 30 40 50 60 70 80 Note: Figures are only shown for the largest 25 economies for each year. Source: International Monetary Fund, Goldman Sachs Economic Research. Exhibit 33 further illustrates the trend: In 2007, the United States was the largest economy in the world and was ranked ninth on a per-capita GDP basis. By 2030 we estimate that China will have the largest economy in aggregate, but will have a per-capita GDP rank of 49th. India and Brazil are likewise projected to be among the five largest economies, yet to have per capita GDP rankings of 63rd and 47th, respectively. In just twenty years the world’s GDP will likely be dominated by countries in the “middle-income pack” and not by rich nations, as it is today. Exhibit 33: By 2050, the world’s biggest economies should be largely “middle-income” economies The top seven economies and their respective GDP per capita rank, by year 1980 2007 2030 2050 GDP Per GDP Per GDP Per GDP Per GDP Capita GDP Capita GDP Capita GDP Capita Rank Rank Rank Rank Rank Rank Rank Rank US 1 12 US 1 9 China 1 49 China 1 45 Japan 2 19 Japan 2 22 US 2 12 US 2 15 Germany 3 17 Germany 3 16 India 3 63 India 3 61 France 4 9 China 4 56 Japan 4 29 Brazil 4 46 UK 5 18 UK 5 10 Brazil 5 47 Russia 5 28 Italy 6 21 France 6 17 Russia 6 35 Indonesia 6 60 Canada 7 15 Italy 7 20 Germany 7 22 Mexico 7 44 Average GDP Per Capita Rank 16 21 37 43 Source: Goldman Sachs Economic Research estimates. Economic and demographic factors in these middle-income economies will simultaneously increase the size of the middle-class population worldwide. We estimate that the middle- class cross-section of the world’s population, which our Economics team defines as those Goldman Sachs Global Investment Research 28
    • August 4, 2010 Americas with incomes between $6,000 and $30,000 in purchasing power parity (PPP) terms, is currently growing at 90 million per year and is expected to increase from an estimated 1.9 billion people today to approximately 3.6 billion over the next twenty years (see Exhibit 34). The scale of the change is substantial. We expect 70% of China’s population will fit the middle class definition by 2020, and believe that by 2030 incomes in China and India will be close to the global average. Exhibit 34: The world’s middle class population is growing People with incomes between $6,000 and $30,000 (people in millions, income in 2009$) 4,500 4,000 World 3,500 3,000 World ex China and India 2,500 China 2,000 India 1,500 1,000 500 0 1960 1970 1980 1990 2000 2010 2020 2030 Source: Goldman Sachs Economics Research. Goldman Sachs Global Investment Research 29
    • August 4, 2010 Americas Opportunity #1: Emerging markets are THE story in consumer staples for decades to come The consumer For multinational consumer packaged goods (CPG) and select retail companies the packaged goods emerging market opportunity will likely dwarf all other drivers for the next several decades. market could grow as Household penetration remains low for most basic CPG categories outside of the much as $10 trillion developed world, and over the past five years emerging market growth has averaged 10- by 2050 12%. Our top-down analysis points to an opportunity for sustained 8-10% nominal dollar growth in emerging markets for the next forty years. This would take the market size from $1-2 trillion today to over $12 trillion by 2050 as income levels converge towards developed market averages—a $10 trillion long-term growth opportunity. As shown in Exhibit 35, the average American spends $2,000 per year on consumer packaged goods, consistent with spending levels in other developed markets like Western Europe and Australia. The average emerging market consumer spends only $200 on consumer packaged goods, and the number is an even lower $100-$150 per year in emerging Asia and Africa. Exhibit 35: Retail sales for consumer packaged goods could climb 10-fold as emerging markets become wealthier Summary of retail sales and per capita spending by region % of Global % of Global Spending in Segment Per Cap Index (Developed Mkt Avg = 100) $ per Cap Population Pkgd. FoodSoft Drinks HHPC Staples Pkgd. Food Soft Drinks HHPC Staples Staples Developed Markets W. Europe 7% 31% 25% 28% 29% 100% 78% 94% 94% $1,918 N. America 5% 20% 26% 20% 21% 94% 115% 94% 99% $2,011 Japan 2% 10% 12% 11% 10% 118% 147% 138% 129% $2,623 Australasia 0% 2% 1% 2% 1% 97% 66% 95% 90% $1,830 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Developed Markets 14% 62% 63% 61% 62% 100% 100% 100% 100% $2,041 Emerging Markets Asia ex Japan 54% 12% 14% 15% 13% 5% 6% 6% 6% $114 Mideast/Africa 18% 5% 6% 5% 5% 6% 7% 6% 7% $135 Latin America 9% 12% 13% 13% 12% 32% 34% 37% 33% $682 E. Europe 5% 8% 5% 6% 7% 39% 21% 30% 33% $678 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Emerging Markets 86% 38% 37% 39% 38% 10% 10% 11% 10% $207 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Global 100% 100% 100% 100% 100% 23% 23% 24% 23% $471 Emerging markets are 86% Emerging market consumers buy of global population but less 1/10th as much Staples product at than 40% of packaged goods roughly $200 per year versus $2,000 consumption. per year in developed markets. Source: Euromonitor, Goldman Sachs Research estimates. We expect a strong and steady increase in spending on CPG categories as incomes rise and improved purchasing power spurs lifestyle changes that increase staples use. As examples, parts of the emerging middle class will start buying packaged beverages for first time rather than using well water or home-brewing tea, and more people will begin brushing with toothpaste and using mouthwash rather than using green tea, twigs or salt to clean their teeth. Our analysis shows a clear relationship (R2 = 0.86) between per capita spending on CPG categories and per capita GDP (see Exhibit 36). Every $1,000 increase in per capita GDP drives an average increase in per capita spending on CPG products by $40 a year. Goldman Sachs Global Investment Research 30
    • August 4, 2010 Americas Exhibit 36: Rising incomes for the emerging middle class should drive meaningful growth in CPG spending Per capita GDP versus per capita spending on consumer packaged goods (CPG) for top 80 population countries, 2009 $2,500 Per capita spending on Japan CPG Per Capita Spending CPG categories rises $2,000 by $40 for every $1,000 of additional income. Spain USA $1,500 Portugal $1,000 Brazil Poland $500 Russia y = 0.04x + 248.36 R² = 0.86 China $0 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 Per Capita GDP Source: Euromonitor. Driven by this relationship, emerging markets have already been outpacing developed markets by a wide margin over the past half-decade. Growth in Latin America, emerging Asia and Eastern Europe has averaged 10-12% over the past five years, well ahead of the 3% developed market average (see Exhibit 37). Exhibit 37: Significant 800-900 bp growth rate gap for CPG industry in emerging markets relative to developed markets 5-year dollar sales CAGR for CPG industry by region, 2004-2009 LatAm 12% Emerging Asia 12% E. Europe 11% Mideast/Africa 9% World 6% Australasia 5% N. America 3% Emerging markets CPG sales growing low double-digits W. Europe 3% versus low single digits in Japan 2% developed markets 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% Source: Euromonitor. We expect this wide growth gap to persist, and not just in the intermediate term. There are literally decades of strong growth potential at these levels in these countries. Exhibit 38 highlights the scale. The global CPG industry currently generates $3.2 trillion in retail sales, including $1.2 trillion from emerging markets. Our economists expect emerging market incomes to rise to $25,000-$30,000 per capita by 2050, which should push per capita spending on consumer packaged goods to full penetration levels that roughly match current developed market norms. This category development would add $10 trillion to CPG industry sales, in constant dollars. Under this scenario, nominal growth for the CPG industry in emerging markets could average 8-10% for the next four decades. Goldman Sachs Global Investment Research 31
    • August 4, 2010 Americas Exhibit 38: $10 Trillion in retail sales growth potential over the decades Current retail sales for CPG categories vs potential emerging market sales if per capita levels reach developed market averages Developed Markets - Today $1,992,029 Emerging market sales are $1.2 Emerging Markets - Today $1,205,291 trillion in a $3.2 trillion global CPG industry today. Global CPG Sales - Today $3,197,320 Emerging markets could reach $12 trillion in constant dollars once fully penetrated. Emerging Market "Potential" $11,874,231 $0 $4,000,000 $8,000,000 $12,000,000 Source: Euromonitor, Goldman Sachs Research estimates. Established players We prefer consumer companies with well-established emerging market franchises. benefit from scale as Most companies in the retail-consumer universe are already pursuing an emerging market emerging markets strategy. In light of this intense competition, we strongly prefer businesses that have well- grow established franchises to those that are still in the nascent stages of development. In our view, consumer companies with an existing emerging market presence have two key advantages:  Business models are already profitable. Higher market share positions support more profitable growth, and companies that are new to emerging markets often operate at a loss until scale is achieved.  Per capita-driven growth rather than reliance on market share gains. Some newer entrants may have success in penetrating the key emerging markets. However, we are more comfortable investing behind franchises with already strong market share positions that are highly likely to participate in the per capita consumption growth we envision. Against this backdrop, our top consumer picks for exposure to the growth of the expanding middle include CL-Buy rated Nike and Mead Johnson Nutrition , Buy-rated Philip Morris International and Neutral-rated Colgate-Palmolive. Collectively these companies generate an average of 50% of sales from emerging markets (see Exhibit 39), and each is a leader in its respective product categories. Colgate has a 45% share of global toothpaste and Mead Johnson is the number two competitor in infant formula. Colgate, Mead Johnson and Philip Morris also have existing emerging market margin structures that are at or above those of the developed markets. Goldman Sachs Global Investment Research 32
    • August 4, 2010 Americas Exhibit 39: MJN, PM, and CL all generate around half of sales from emerging markets today, while NKE also ranks highly on this metric even against the multinational CPG companies Percent of sales generated from emerging markets, 2009 0% 10% 20% 30% 40% 50% 60% 70% AVP MJN PM TUP CL NKE KO PG ENR EL KMB PEP ACV K CLX JAH KFT NWL BFB DPS GIS SLE FO CPB CHD Source: Company data, Goldman Sachs Research estimates. On the rise For investors who prefer a name that is not currently an emerging market leader but has the potential to grow into one if it can gain share, we believe the strategies undertaken by CL-Buy rated PepsiCo could reap major rewards if successfully executed. Twenty percent of the company’s 2009 revenues were generated from emerging markets, with China accounting for less than 3-4%, but we see the potential for that to increase to 25-30% over the next five years. PepsiCo has stepped up its commitment to emerging markets with $1 billion invested in 2010 and another $2.5 billion planned for the next three years in China alone. The company has been active in both beverages and snacks, and its Frito-Lay brand has the potential to become a dominant snacking franchise globally. Direct exposure Domestic companies As the middle class expands in middle-income nations, emerging “domestic champions” will compete for share will increasingly challenge multinationals. The consumer-oriented companies that we see as markets grow gaining the most in these regions over the next few year offer inexpensive ways to participate in a middle class lifestyle, whether by consuming branded food and drink, using cosmetics or a good shampoo, or simply being able to afford basic household products. In the “sweet spot” for consumer upgrades as the middle class expands in Brazil is Buy- rated Hypermarcas, the country’s leading consumer products company. The self-styled “Procter & Gamble of Brazil,” Hypermarcas receives 80% of its revenue from brands that are either number one or two in their category. The company focuses on middle-to-low income consumers, with over 170 brands in diverse categories including sweeteners, antiseptics, nasal decongestant, condoms, nail polish, moisturizer, flu medicine and laxatives. Goldman Sachs Global Investment Research 33
    • August 4, 2010 Americas Opportunity #2: Food, feed and fuel to drive agricultural demand growth Fundamental changes in the diet of the expanding middle class are set to place increasing demands on the global agricultural complex in the decades to come. According to the International Policy Council’s 2007 Food and Agricultural Trade report, population growth, increased protein consumption in developing countries and the use of agricultural output in biofuel production will combine to double world agricultural demand by 2050. Population growth necessitates agricultural growth. The US Census Bureau’s International Data Base projects world population to grow by 35% over the next forty years, from an estimated 6.9 billion people in 2010 to 9.3 billion in 2050. This expected growth will come almost exclusively from what are classified as “less developed” regions, where projected growth of 40% is an order of magnitude higher than the 4% growth foreseen in more developed countries.3 Population growth is itself a function of increasing life expectancy, higher standards of living and better diets. Protein consumption As people become more prosperous they look to improve their diets with higher- increases with income quality foods. With more available disposable income, people tend to consume more protein in the form of beef, pork and poultry. While per-capita protein consumption has risen rapidly in developing countries over the past forty years, it still has room to more than double before reaching developed country levels (see Exhibits 40-41). Between 2009 and 2018 the UN’s Food and Agriculture Organization expects developing country consumption grow by more than 16%. We believe Neutral-rated Brasil Foods, the largest producer of processed foods, pork, and poultry in Brazil and the fifth-largest protein company in the world, is well-positioned to benefit. Exhibit 40: Meat consumption has risen rapidly in Exhibit 41: …but remains less than half that of developed developing countries over the past forty years… countries Developing countries daily caloric intake per person Developed countries daily caloric intake per person 3,500 3,500 3,000 3,000 2,500 Calories/Person/Day 2,500 Calories/Person/Day 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 1960's 1980's 2000's 1960's 1980's 2000's Meat, Eggs, Fish Fruits & Vegetables Cereals Other Meat, Eggs, Fish Fruits & Vegetables Cereals Other Source: FAO, Potash Corp. Source: FAO, Potash Corp. Increased protein consumption also creates a multiplier effect for agricultural demand due to the amount of grain required to produce a unit of meat. Depending on the protein, it takes between two and seven pounds of grain to produce one pound of meat (7 lbs per pound of beef, 4 per pound of pork and 2 per pound of poultry). As a result, more than 40% of globally harvested grain is consumed as animal feed. 3 Less developed regions are defined as Africa, Asia ex-Japan, Latin America and the Caribbean, Melanesia, Micronesia and Polynesia. More developed countries are defined as those in Europe and North America, plus Australia, New Zealand and Japan. Goldman Sachs Global Investment Research 34
    • August 4, 2010 Americas Biofuel production competes with food and feed for acreage. Biofuels made from agricultural inputs such as sugarcane and corn continue to receive government subsidy and support. In Brazil the government requires gasoline to contain between 20% and 25% ethanol, and in the United States the Renewable Fuels Standard (RFS) in the Energy Independence and Security Act of 2007 targets a more than four-fold increase in renewable fuel use from 2008 levels by 2022. Although the RFS also sets out a schedule for advanced biofuels (primarily cellulosic ethanol) to reach more than half of mandated 2022 volume, corn ethanol will remain the primary biofuel in the near term, competing with food and feed for acreage. Arable land growth With rising demand, agricultural supply will have to increase via either more arable land or has not kept pace higher crop yields. Due to ongoing urbanization and the environmental considerations that with population, go into agricultural conversion, we do not anticipate any meaningful increase in arable requiring increases in land. Indeed, global arable land acreage per person has been on a downward trend for yields decades, suggesting arable land growth alone is not enough to keep pace with demands of population growth, let alone changing diets and biofuels (see Exhibit 42). As a result, continued increases in crop yields will be imperative to ensure adequate food supply. Exhibit 42: Arable land growth has not kept pace with population Acres of arable land per person 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1970 1980 1990 2000 2010E Acres of arable land per person Source: International Fertilizer Association. We see yield improvements driven by biotech and hybrid adoption in developing regions as a likely source of increasing agricultural output. As seen in Exhibit 43, developed regions enjoy corn yields of nearly twice the world average. This is due to a combination of factors including better-performing seeds, superior fertilizer application, investments in irrigation, more advanced equipment, and viable credit and agricultural commodity markets. Each of these is transferable to developing regions over time, and as a result we see opportunity for companies that sell products that enhance yield. Goldman Sachs Global Investment Research 35
    • August 4, 2010 Americas Exhibit 43: Developed market corn yields lead globally Shaded regions have accelerated biotech and hybrid penetration Country Acreage (mn acres) Production (bn bu) Yield (bu/acre) US 77 12.0 154 China 73 6.3 85 Brazil 35 2.2 63 EU 21 2.3 108 Mexico 18 0.9 52 Argentina 6 0.7 117 World 386 30.9 79 Source: Informa, Goldman Sachs Research estimates. As the global leader in agricultural biotechnology, CL-Buy rated Monsanto sits in an enviable position to help solve the grain productivity challenge. The company believes it is possible to double US corn yields during the 30-year period from 2000-2030 with traditional breeding gains, improved agronomic practices and—most significantly—the benefits of biotechnology (see Exhibit 44). This should help drive continued adoption of its high-tech seeds and traits and ensure a growth path for its extensive pipeline of next generation yield technologies worldwide. Key potential growth markets include corn and soybeans in South America, cotton in India and rice in China. Exhibit 44: Monsanto plans to double US yield via breeding, agronomic and biotech gains US corn yield 300 US Yield Target (corn): Historic yield gain 2030 double 2000  280 Agronomic practice improvements baseline of 137 bushels  Breeding improvements per acre 260 Biotech improvements 240 220 200 180 160 140 120 2000 2005 2010 2015 2020 2025 2030 Source: Monsanto, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 36
    • August 4, 2010 Americas Opportunity #3: Increasing discretionary income to drive incremental demand across the TMT universe As income levels rise, people in emerging economies increasingly begin to consume technology, media and telecom in ways similar to those in developed markets (see Exhibit 45). Household penetration of personal computers continues to ramp, enabling online shipping and browsing as well as additional media consumption. We expect that next- generation smartphone and data services will also be adopted as the telecom infrastructure rises to meet a growing population, and increased availability of financial services will lead to more credit and debit transactions to process. Exhibit 45: Projected total middle class consumption, 2009-2030, top 10 countries (2005 PPP$) Consumption is expected to shift into emerging, nascent markets for TMT products and services. 2009 2020 2030 1 U.S $ 4,377 21% China $ 4,468 13% India $ 12,777 23% 2 Japan 1,800 8% U.S 4,270 12% China 9,985 18% 3 Germany 1,219 6% India 3,733 11% U.S 3,969 7% 4 France 927 4% Japan 2,203 6% Indonesia 2,474 4% 5 U.K 889 4% Germany 1,361 4% Japan 2,286 4% 6 Russia 870 4% Russia 1,189 3% Russia 1,448 3% 7 China 859 4% France 1,077 3% Germany 1,335 2% 8 Italy 740 3% Indonesia 1,020 3% Mexico 1,239 2% 9 Mexico 715 3% Mexico 992 3% Brazil 1,225 2% 10 Brazil 623 3% U.K 976 3% France 1,119 2% Source: Wolfensohn Center for Development at Brookings. One consequence of shifting consumption caused by the expanding middle class in middle income countries is increased demand for internet connectivity worldwide. According to the ITU World Telecommunications database, developed market internet access penetration was approximately 5X that of developing markets as of 2008 (see Exhibit 46). As of 2009 current internet penetration was by far the lowest in Africa, the Middle East, and Asia Pacific—regions that encompass twelve of the fifteen BRIC + N-11 nations we see driving global growth through 2050 (see Exhibit 47). Exhibit 46: Proportion of households with internet access Exhibit 47: Internet user penetration by region, 2009 60% 70% 62.9% 50% 60% 48.3% 40% 50% 40% 35.7% 30% 30% 20% 18.4% 19.3% 20% 10% 8.8% 10% 0% 2002 2003 2004 2005 2006 2007 2008 0% Africa Arab Asia & CIS Americas Europe Developed Developing World States Pacific Source: ITU World Telecommunication/ICT Indicators database. Source: ITU World Telecommunication/ICT Indicators database. We expect that increasing demand for internet connectivity will necessitate service provider capital expenditures to keep pace with global internet traffic growth. Neutral-rated Cisco forecasts a 34% cumulative annual growth rate in global IP traffic through 2014, and in our view 2009 was a year of massive underinvestment in core routing capacity, with Goldman Sachs Global Investment Research 37
    • August 4, 2010 Americas supply growth lagging demand by 25%. In addition to Cisco, we expect Buy-rated Juniper to substantially benefit from these trends as service providers invest more to meet rising capacity needs, as Juniper has the most direct exposure to service provider routing spend in our coverage at about 60% of sales. Coincident with increased internet penetration, the Goldman Sachs internet team expects e-commerce to grow by 21% yoy in 2010—with global e-commerce penetration of retail spending jumping to 5.0% (from 4.4% in 2009) on the heels of a 6% yoy increase in spending per buyer. Globally, we expect e-commerce sales to grow to over $1 trillion in 2012 from $667 billion currently, driven primarily by continued worldwide adoption of the online channel (see Exhibit 48). Exhibit 48: Global e-commerce revenue, 2007-2012E US$ billions $1,200 $1,000 $211.7 Global Online Sales ($ bn) $194.4 $800 $176.9 $156.1 $600 $141.3 $125.1 $400 $787.1 $722.8 $657.7 $580.4 $525.4 $465.1 $200 $0 2007 2008 2009E 2010E 2011E 2012E ROW US Online Sales Source: Forrester Research, company data, Goldman Sachs Research estimates. As faster GDP growth in emerging markets like China, India and Brazil drives expanding purchasing power among a growing middle class, and as internet and electronic payment penetration improve toward developed market levels, we see opportunity for skilled e- commerce merchants such as CL-Buy rated Amazon.com. We expect Amazon to benefit from price, selection and fulfillment advantages sharpened by years of experience in the world’s largest economies. The company’s China business has the potential to add $1 billion per year to revenue growth from 2011, and may contribute as much as 10% of global revenue by 2015. We forecast 20%-plus revenue, operating income and free cash flow growth for the next several years, and believe the company’s share price can compound in line with FCF growth. Mimicking the growth of internet penetration and e-commerce in developing markets, we expect a shift to next-generation handsets and smartphones to provide the next wave of growth for mobile hardware providers in heretofore untapped global markets. The migration from 2G to 3G and beyond will likely be accompanied by a meaningful uptick in data traffic as users scale up their monthly usage and consume more bandwidth-intensive multimedia content (see Exhibits 49-50). Goldman Sachs Global Investment Research 38
    • August 4, 2010 Americas Exhibit 49: Expect more rapid adoption of next- Exhibit 50: As users migrate to higher-end devices, data generation handsets as the middle class expands usage grows exponentially Global handset mix, 2006-2012E Estimated monthly data usage, in MB 120% 8,000  100% 7,000  30% 33% 37% 6,000  80% 43% 48% 52% 56% 5,000  60% 4,000  40% 70% 67% 63% 57% 3,000  52% 48% 20% 44% 2,000  0% 1,000  2006 2007 2008 2009 2010E 2011E 2012E 2G 3G ‐ Feature phone Multimedia  Smartphone 3G data card 4G data card phone Source: Goldman Sachs Research. Source: Company data, Goldman Sachs Research estimates. Developed market cell phone penetration rates are already high, with more cell phone subscriptions than people (see Exhibit 51). While developed market mobile broadband penetration is much lower in absolute terms, the rate is still more than 10X that of developing nations, where rapid growth has not yet begun to inflect (see Exhibit 52). Exhibit 51: Mobile cellular telephone subscriptions per Exhibit 52: Mobile broadband subscriptions per 100 100 inhabitants inhabitants 140% 45% 40% 120% 115.3% 35% 100% 39.9% 30% 80% 25% 68.2% 60% 57.9% 20% 15% 40% 10% 9.7% 20% 5% 3.1% 0% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Developed Developing World Developed Developing World Source: ITU World Telecommunication/ICT Indicators database. Source: ITU World Telecommunication/ICT Indicators database. We believe that greater penetration of mobile technology into the emerging middle class will increase smartphone adoption as hardware becomes more affordable and new consumers “leapfrog” trailing-edge devices. Among chipset providers, Buy-rated Qualcomm should benefit the most, given that it has the broadest smartphone platform offering and is the leading vendor for the Android operating system, which we see as a massive global share gainer through the smartphone disruption. While double-digit declines in smartphone ASPs will be a drag on Qualcomm’s royalty business, increased adoption in emerging markets as affordability increases and infrastructure comes online should help offset the impact. Greater penetration of communication technologies like mobile and internet will also accelerate the opening of middle-income economies to global media companies. We view Buy-rated News Corp. as the name most exposed through its ownership of cable networks located in international markets where the middle class is growing the fastest. Over the past several years News Corp. has launched new cable networks in emerging markets such Goldman Sachs Global Investment Research 39
    • August 4, 2010 Americas as Asia, Eastern Europe and Latin America, where growth in disposable income is driving higher pay television penetration. This benefits cable networks in the form of higher subscriber fees and advertising. Today, News Corp.’s international cable networks account for only 10% of operating income, but we estimate a 16% cumulative annual growth rate over the next three years, accounting for nearly one quarter of total operating income growth. Buy-rated DirecTV is another name that should benefit from growth in the middle class, particularly in Brazil. Brazil is the company’s fastest growing market and contributes an estimated 7% of the company’s consolidated revenues. We expect the pay television penetration in the country to increase substantially from 14% currently, with DirecTV benefitting from both an expanding customer base as well as greater premium service uptake given increased middle class spending. Goldman Sachs Global Investment Research 40
    • August 4, 2010 Americas Opportunity #4: While prosperity is rising, the highest growth regions remain financially underserved More than half of the According to a 2008 McKinsey study, 2.5 billion people—or more than 50% of the world’s world’s population adult population—do not use formal or semi-formal financial services. Nearly half that does not yet use unbanked population resides in East and South Asia, Sub-Saharan Africa and Latin financial services America. We view this disconnect as a substantial opportunity for increased financial services penetration. For consumer facing businesses it means increased growth in bank accounts, adoption and acceptance of plastic payments, and growth in consumer lending and asset management clients as disposable incomes grow over time. Institutionally, global investment banks stand to gain from both growing credit demand and expanding capital and hedging needs. Given their existing geographical footprints, infrastructure and financial institution relationships, we believe that CL-Buy rated Visa and Buy-rated MasterCard are among the best positioned companies to capitalize on the expanding growth (in terms of both dollars and transactions) and increasing financial connectivity of the global middle class. As the proportion of worldwide consumers entering or interacting with the banking system increases over the next several years, we believe that the Visa and MasterCard networks will be at the heart of that process, participating via increased demand deposit account and debit card penetration, revolving credit issuance, prepaid and gift card usage, remittances and emerging payments such as online, peer-to-peer and mobile. For Asia Pacific, Africa, Latin America and the Middle East we expect double-digit combined cards-in-force growth through 2012 (see Exhibit 53). Exhibit 53: We expect card growth to be strongest in financially underserved regions Visa and MasterCard cards-in-force growth (yoy), 2007-2012E 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 2010E 2011E 2012E ‐5% ‐10% V AP+CEMEA MA APMEA V Latin America MA Latin America Source: Company reports, Goldman Sachs Research estimates. For direct exposure, we expect Neutral-rated Brazilian merchant acquirer Cielo to benefit as well. Although Brazil has the most developed card market in Latin America, the use of cards for 23% of private consumption expenditure is well short of Spain (30%), the United States (34%), France (40%), and the United Kingdom (42%). Cielo accounted for 48% of total card transaction value in Brazil in 2009, and with a network of 1.7 million merchants the company is exposed to both increased consumer spend as incomes rise and increased credit card penetration as card usage approaches developed market levels. Exposed to both consumer and commercial trends in middle income economies, Buy-rated Citigroup has a client footprint that covers over 140 countries. Through its core franchise of Citicorp, the company has an extremely strong emerging markets presence and is well Goldman Sachs Global Investment Research 41
    • August 4, 2010 Americas positioned to benefit from faster-growing products and geographies. Emerging market economies accounted for 46% of both Citicorp revenues and net income in 2009. Owing to its long-established presence and relationships, Citigroup estimates that over 55% of potential revenue growth over the next three years will stem from these regions. Buy-rated Banco Bradesco, the largest insurance company and third-largest bank in Brazil, is also well positioned to benefit. The company has nearly 3500 branches in Brazil and US$110 billion in loans. With its Postal Bank franchise Bradesco offers financial services into all of the country’s 5000+ municipalities, exposing it directly to the areas with the fastest growth in new members of the middle class. As the leading underwriter in the developing life and health insurance segments, the company should be able to provide a full suite of financial services to those newly able to afford them as the middle class expands in Brazil. The rise of the global middle class is also likely to drive incremental supply of assets for asset managers. With GDP per capita growing and a favorable ratio of savers (35-44 years old) to total population, we expect the uptake of asset management products in emerging economies to rise. These secular underpinnings stand in contrast to the rapidly maturing US asset management market, which must address a growing retiree population and relatively slower economic output. As it stands today, over half of worldwide assets under management are outside the United States (see Exhibit 54). While competition for assets has been increasing internationally, the opportunity remains large for US-listed asset managers (see Exhibit 55). Exhibit 54: Most of Global AUM now resides outside US Exhibit 55: Public managers have been growing presence Global AUM composition by client domicile outside US 100% 90% 80% 70% 60% 48.1% 50% 51.9% 40% 30% 20% 10% 0% 2000 2006 2009 Source: GS Research; total AuM mkt-to-mkt = $51.8 trillion U.S. Rest of the World Source: Company data; cross-boader asset managers include AB, BEN, BLK Rest of the World U.S. Source: BCG, Goldman Sachs Research. Source: Company data, Goldman Sachs Research estimates. We believe CL-Buy rated BlackRock is among the US names that will benefit from the secular trend of emerging market asset growth driven by the expanding middle class. BlackRock manages over $3 trillion in assets, 40% on behalf of clients domiciled outside the United States. The firm’s current geographic reach is extensive, spanning over 100 countries with significant growth in several emerging asset management markets. In Latin America the company now manages over $21 billion in assets, up 83% from the prior year. In the Asia Pacific region alone the company manages over $350 billion in assets, and has formed joint ventures in China and India. We also note that the BlackRock’s institutional business includes sovereign wealth fund clients, relationships that may help the firm tap into several underdeveloped retail fund markets in the years to come. Goldman Sachs Global Investment Research 42
    • August 4, 2010 Americas Opportunity #5: Global infrastructure growth and rising commodity demand A richer and larger middle global middle class will have an effect beyond consumer-facing industries. Increased infrastructure investment will be needed to meet the growing consumption demands of two billion additional middle class people aspiring to new living standards over the next twenty years. The Goldman Sachs Global Economics team expects fixed investment spending in BRIC countries to grow 9.0% and 8.8% per annum in 2010 and 2011, respectively, consistent with historical periods of industrialization and urbanization in OECD countries. Infrastructure investment is both a cause and a consequence of economic growth, and investments in local roads, highways, rail and utilities are necessary to support the long-term growth of the expanding middle class. As an example, the Brazilian Growth Acceleration Programs (PACs) provide a glimpse as to the magnitude of recent and upcoming infrastructure investment in a rising nation. The first program (PAC 1) was launched in 2007 by the federal government to coordinate over $240 billion in public and private development financing. Its March 2010 follow-up (PAC 2) totals $727 billion and is scheduled to spend half of its funds by 2014—the same year Brazil will host the World Cup. Taken together, the PAC programs will result in over $1 trillion in planned development spending, including over 75,000 km of roads, 89 power plants, 21 ports, 14 air terminals and four new metropolitan subway systems. The impact of such massive investment spending on a global scale would likewise be felt throughout the commodity complex, as production capacity struggles to keep pace with rising demand. In this report we highlight investable consequences for companies in the oil, metals, mining and aerospace sectors. In contrast to developed markets, history has shown that increasing per capita GDP in emerging markets drives higher per capita oil consumption. As the middle class expands in middle income economies, we consequently expect an increase in per capita oil demand to drive total demand growth. Brazil, China and India are all at present well below the OECD’s per capita oil consumption levels, suggesting that—even accounting for efficiency gains—potential demand growth is not only significant but sustainable. To illustrate the scale of potential growth, the United States, Japan, and Europe currently consume about 22, 12, and 10 barrels per person each year, respectively; Brazil, China, and India consume just 5, 3, and 1 (see Exhibit 56). Non-OECD countries Given our expectation for flat OECD demand through 2013, our bullish global oil demand will drive oil global oil view is driven entirely by strong non-OECD growth, in large part due to increases from demand Brazil, India, and China. In our view the expected non-OECD strength, coupled with our outlook for constrained non-OPEC oil supply growth, will necessitate a return to demand rationing prices by 2012. That is, as oil inventories draw down and OPEC spare capacity dwindles, oil prices will have to increase in order to accommodate robust non-OECD demand growth, likely via “rationing” of OECD oil demand growth (see Exhibits 57-58). Goldman Sachs Global Investment Research 43
    • August 4, 2010 Americas Exhibit 56: Per-capita oil consumption rising for Brazil, Exhibit 57: Non-OECD is key driver of oil demand growth India and China but still well below OECD Global oil demand, thousand barrels per day Oil consumption per capital per year, barrels 18.0 100,000 16.0 90,000 14.0 80,000 12.0 10.0 70,000 '000 bbls/d 8.0 60,000 6.0 50,000 4.0 2.0 40,000 0.0 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013N 30,000 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013N Brazil China India OECD OECD Other Non-OECD Brazil India China Source: IEA, IMF, Goldman Sachs Economic Research. Source: IEA, Goldman Sachs Research estimates. Exhibit 58: Strong non-OECD demand + falling non-OPEC supply = higher oil prices Growth in oil supply and demand and WTI oil price path Non-OECD accounts for overwhelming majority of expected growth in 2010-2015. 3.0 3.0 2.0 2.0 Growth (mn b/d) 1.0 1.0 0.0 0.0 (1.0) (1.0) (2.0) (2.0) (3.0) (3.0) 2010E 2011E 2012E 2013E 2014E 2015E 2004 2005 2006 2007 2008 2009 OECD demand Non-OECD demand Global oil demand Non-OPEC supply WTI oil price (indexed to 1) Source: IEA, Bloomberg, Goldman Sachs Research estimates. For exposure to the “B” in BRICs, Petrobras remains a favorite. In addition to having substantial exposure to sizeable Brazilian offshore oil resources, Buy-rated Petrobras is also a large component of the Ibovespa—the main Brazilian equity market index. The company generates nearly all of its revenues and earnings in Brazil’s domestic market and is highly leveraged to strength in the Real (BRL) versus the US dollar. As Brazil’s middle class helps to drive Brazil GDP and oil demand growth, we expect Petrobras to benefit accordingly. Goldman Sachs Global Investment Research 44
    • August 4, 2010 Americas Petrobras already dominates Brazil’s significant offshore resources in the Campos, Santos, and Espirito Santo basins and will eventually have a minimum 30% working interest and operatorship over all future pre-salt leases assuming passage of the country’s proposed new pre-salt laws (for additional details see the February 21, 2010 report, “‘Crunch time’ on new pre-salt oil laws nears; assessing risk/reward” by Arjun Murti and team). We see the Brazilian deepwater as a global “win” zone due to substantial opportunity for oil production growth. Like oil, copper is supply-constrained, and China and other emerging economies still consume far less than developed economies on a per-capita basis. In our view, renewed GDP growth in these regions should cause a significant acceleration in per capita copper consumption. Copper is an important metal for growing economies and its demand accelerates dramatically when a country, like China, enters a significant developmental stage. World GDP is currently sitting in the “sweet spot” of the copper consumption curve, or the area in the curve in which copper consumption increases the fastest per increase in GDP per capita. As the world economy recovers, copper metals consumption is poised to sharply increase. In addition, two large population masses – China and India – are nearing the “sweet spots” of their own consumption curves, which we believe will dramatically increase world demand (see Exhibits 59-60). While all base metals exhibit the S-shaped curves, copper and aluminum stand out as the metals that are nearest maximum slope of their own curves. Copper, unlike aluminum, has limited spare supply to meet this growing demand, which sets the stage for strong price appreciation, in our view. Exhibit 59: Rising GDP/capita for BRICs… Exhibit 60: … puts copper in sweet spot of demand curve Expected GDP per capital for Brazil, China, India, Russia Metals consumption/capital at various levels of GDP/capita 20 World GDP 40% Aluminum Brazil Russia India China 18 $25,000 35% Percent of population at given GDP/capita level China/India 16 30% 14 Consumption per capita (kg) $20,000 25% 12 131% $15,000 10 20% Copper 8 15% 70% $10,000 6 Zinc 10% 235% 4 $5,000 5% 2 Nickel 127% 0 0% $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 $22,000 $24,000 $26,000 $28,000 $30,000 $32,000 $34,000 $36,000 $38,000 $40,000 $42,000 $44,000 $46,000 $48,000 $0 $0 2008 2010 2015 2020 2008 2010 2015 2020 2008 2010 2015 2020 2008 2010 2015 2020 GDP per capita ($) Source: Goldman Sachs Research estimates. Source: Brook Hunt, Rio Tinto, Goldman Sachs Research estimates. We see opportunities for Neutral-rated pure-play Freeport-McMoRan not only because of its copper exposure, but also because of the company’s potential to grow its business through brownfield expansions and continued successful execution of its growth projects. As discussed above, we believe copper will separate from other base metals as we see rapid acceleration in demand (primarily driven by emerging markets) and a supply-side hurdle in the exploration and commissioning of new projects. In the immediate term, copper is the metal whose price most tends to anticipate or reflect market expectations for world economic growth. Goldman Sachs Global Investment Research 45
    • August 4, 2010 Americas Beyond oil and copper, the need for new infrastructure drives strong global demand for steel, iron ore, zinc and metallurgical coal. We see metallurgical coal as most supply constrained, despite strong growth expected out of Australia. We also expect electricity demand growth in Asia will remain strong, leading to increased demand for natural gas and thermal coal. We see Neutral-rated Teck Resources as the name that is most levered to broader emerging market metals demand growth. Teck is a well-run company with a proven track record, attractive assets and exposure to a structural theme to which we subscribe – namely, that emerging markets demand coupled with supply constraints will drive commodities higher. Teck has combined three of the most China-levered commodities— iron ore, metallurgical coal (see Exhibit 61) and zinc—and has constructed a portfolio that has lower volatility than any of the constituent commodities on a standalone basis. The end result is a diversified mining portfolio that is not only highly levered to China growth, but also deserves a premium multiple for its relative stability. Exhibit 61: China has become a major player in the seaborne metallurgical coal market Global seaborne met coal supply-demand, MM MT unless otherwise noted 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E Seaborne imports China (net) (0) (0) (2) 1 (0) 30 35 42 50 Japan 56 55 52 54 54 45 48 50 51 Korea 15 12 12 16 19 15 19 21 22 India 0 21 22 24 25 25 27 31 34 Europe 51 51 54 59 61 41 53 57 58 South America 11 11 12 14 16 12 15 19 22 Other 42 50 40 42 43 31 35 41 44 Total 174 200 192 211 217 199 233 260 280 Seaborne exports Australia 117 125 124 137 134 134 143 160 177 USA 20 21 20 26 35 31 42 45 44 Canada 22 25 23 25 25 21 27 34 36 Other 15 29 24 23 23 13 21 22 23 Total 174 200 192 211 217 199 233 260 280 Asia hard coking coal, CY ($/MT) $58 $108 $118 $103 $250 $172 $195 $213 $175 Source: McCloskeys, Goldman Sachs Research estimates. Among coal stocks, we favor Buy-rated Peabody Energy for its unique Australian assets that provide growth and exposure to both global metallurgical coal and Pacific Basin thermal coal. Peabody has more organic growth projects in the development or evaluation phases than any other coal company under coverage, pursuing opportunities in Asia, the Illinois Basin and Powder River Basin. At its recent analyst meeting, Peabody introduced a goal of reaching 100 million metric tons (MM MT) of annual coal sales out of Asia in the next 10 years (vs 20 MM MT in 2009), to be driven by Australian organic projects, JVs in China, India and Indonesia and an expanding trading platform. While some investors have avoided Peabody’s shares due to the perception it is negatively levered to potential China slowdown, we actually see less downside risk to Peabody’s met coal volumes and pricing from China tightening, as it is North American volumes that are more marginal due to quality and distance. We expect Peabody to outperform on continued strong Pacific Basin thermal coal prices driven by demand that is ultimately caused by the growth of the middle class India and China. As a result of the same end demand, we expect mining capex growth to meaningfully outpace overall economic growth. This is consistent with prior periods of tight commodity fundamentals (see Exhibit 62). In our view, Buy-rated Bucyrus and Joy Global are uniquely positioned to benefit given that they operate in a duopoly market with high entry barriers. Goldman Sachs Global Investment Research 46
    • August 4, 2010 Americas Exhibit 62: Mining capex should meaningfully outpace overall economic growth US commodity investment spending vs. US GDP vs. inflation-adjusted oil prices Mining & oilfield machinery spending (left axis) Nominal GDP (left axis) 2,000 Oil - inflation adjusted (right axis) $110 Nominal GDP and Commodity investment spending, 1,800 $100 1972-1982: 2003 - 2008 1,600 Strong commodity Strong commodity prices $90 Oil price - inflation adjusted infrastructure investment drive commodity 1,400 cycle driven by oil supply infrastructure capacity $80 constraints increases indexed at 100 in 1972 1,200 $70 1986-2002: 1,000 15+ years of commodity $60 underinvestment driven by low 800 commodity prices $50 600 $40 400 $30 200 $20 0 $10 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010E Source: BEA, Goldman Sachs Research estimates. Aerospace is also a secular grower in emerging markets. Aerospace companies should benefit as air travel penetrates emerging economies and for the first time becomes affordable for members of the expanding middle class. Because air travel as a regularly utilized method of transportation has far from fully penetrated the emerging economies at present, we expect to see a multiplier effect as the size of the global middle class grows along with the percentage of the population that flies. Exhibit 63 shows that GDP and air traffic are correlated. A growing global middle class will drive demand for air travel, which will in turn generate demand for new aircraft, particularly in emerging economies. We highlight CL-Buy rated Precision Castparts as a company that is uniquely positioned to benefit from growth in the global middle class. Precision Castparts is a high-quality aerospace supplier that is levered to the large commercial original equipment market of Boeing and Airbus. The company also supplies similar parts to industrial gas turbine manufacturers and produces seamless extruded pipe, both of which are largely driven by emerging economies—particularly China, in the case of the latter. Goldman Sachs Global Investment Research 47
    • August 4, 2010 Americas Exhibit 63: Airline flights per capita vs. GDP per capita As emerging economies grow they will require substantially more aircraft 10 USA Trips per capita (2009) 1 Brazil Russia China 0.1 India 0.01 0 10,000 20,000 30,000 40,000 50,000 GDP per Capita (2009) Source: OAG, IMF. As Boeing operates in a duopoly with Airbus, it also stands to be a major beneficiary of the secular penetration of air travel in emerging economies. Exhibit 64 illustrates that Boeing’s current backlog is predominately derived from geographies outside of the traditional westernized markets that had dominated the backlog for decades. Exhibit 64: Traditional western markets are no longer the majority of Boeing’s backlog Boeing commercial airplane backlog by region/segment North America 12% Leasing & Gov't 22% L. America & Africa 7% Asia Pacific 13% ME, Central & S. Asia 12% China, East & SE Asia Europe 18% 16% Source: Boeing. Goldman Sachs Global Investment Research 48
    • August 4, 2010 Americas Generational waves after the Baby Boom Goldman Sachs Global Investment Research 49
    • August 4, 2010 Americas Generational waves after the Baby Boom Less well understood than the Baby Boom but potentially equally important in the United States are population peaks in the 16-29 and 0-4 age ranges (which we are calling “Millennials” and “Generation Z,” respectively). While these generational waves are not as large as the Baby Boom in absolute terms, they are larger than the low birth years between 1965 and 1980. As a result, the Millennials are poised to assume the country’s first new demographic leadership in forty years as they enter the labor force and Baby Boomers retire. This transition will have a profound impact on US companies, particularly within the TMT and consumer sectors (see Exhibit 65). Exhibit 65: Opportunities created by generational waves after the Baby Boom Opportunity Impact Companies Millennials are tech‐savvy and connected + AMT, BRCM, CCI, CSCO, JNPR, QCOM, SBAC, T ‐ CTL, FTR, Q, WIN Millennials consume media differently + DIS Millennial consumers embrace e‐commerce + PGR, URBN Retirement funding needs + HAS, MJN Source: Goldman Sachs Research. Like the Baby Boomers, the Millennial cohort is larger than the generations immediately older and younger, defined as “Generation X” and “Generation Y” in Exhibit 66. In contrast, the Millennials are smaller in number than their parents’ generation—the Baby Boomers—and as a result they have not been the dominant age group in the economy to date. However, as Baby Boomers exit the work force through a combination of retirement and mortality, the Millennials will become increasingly important in the labor force. Further, as the Millennials enter peak childbearing years the Census Bureau projects US births to continue to recover. We identify an additional emerging cohort in the 0-4 age range, which we are calling “Generation Z.” While it is too soon to predict this group’s ultimate size or impact, we do see near-term implications for youth-oriented companies. Goldman Sachs Global Investment Research 50
    • August 4, 2010 Americas Exhibit 66: Younger generational waves are poised to become more significant US population by age (thousands), June 2010 estimate Millenials (16‐29) and  Generation Z (0‐3) are gaining  5,000 economic signficance... ...while Baby  Boomers (46‐64)  4,000 are progressing into retirement. 3,000 2,000 1,000 Ge n Z Generation Y Millennials Generation X Baby Boomers 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100+ Source: US Census Bureau, Population Division. More educated, tech-savvy and connected As education leads income, Millennials are a group to be watched. Older Millennials (age 25-29) are more likely than their counterparts in the earlier generations to have completed high school and college (see Exhibit 67). Younger Millennials (age 16-24) look set to continue this trend, as evidenced by the college enrollment rate of recent high school graduates reaching an all-time high of 70.1% in October 2009 (see Exhibit 68). Exhibit 67: Older Millennials have higher education Exhibit 68: …and younger Millennials are all set to follow levels… suit Education levels for 25-29 year olds over the decades College enrollment rate of high school graduates (age 16 -24) 100% 80% 90% 80% 70% 70% 60% 60% 50% 50% 40% 30% 40% 20% 30% 10% 0% 20% 1969 1979 1989 1999 2009 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 Completed 4 Years of High School or more Completed 4 Years of College or more College enrollment rate Source: US Census Bureau. Source: Bureau of Labor Statistics. Higher levels of educational attainment generally delay entry into the labor force. However, as illustrated in Exhibit 69, after joining the work force higher education levels have also historically translated into higher incomes. Assuming this relationship continues to hold, Goldman Sachs Global Investment Research 51
    • August 4, 2010 Americas the Millennial generation looks well positioned to become an economic force in terms of both numbers and wealth. Exhibit 69: If history is a guide, higher education levels will translate to higher incomes Mean Earnings (in $) of Workers 18 Years and Over, by Educational Attainment 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Less than High School High School/Associate's degree Bachelor's degree or higher Source: US Census Bureau, Current Population Survey. Opportunity #1: Millennials are tech-savvy and connected Millennials came of age in the Information Era and use technology much more extensively than older generations. According to the Pew Research Center, 93% of the 18-29 year old age group in the United States is online, versus 74% for all adults (see Exhibit 70). Exhibit 70: Internet usage is much more widespread among younger adults Percentage of US population that goes online by age, 2009 100% 93% 90% 81% 80% 74% 70% Percentage online 70% 60% 50% 38% 40% 30% 20% 10% 0% All Adults 18+ 18-29 30-49 50-64 Adults 65+ Source: Pew Internet & American Life Survey, 2009. Results of the Goldman Sachs 2010 Internet Usage Survey, conducted in January 2010, indicate that the 18-29 age group uses the internet for a wide range of activities as well (see Exhibit 71). Millennials leverage the internet as a means of communication above and Goldman Sachs Global Investment Research 52
    • August 4, 2010 Americas beyond e-mail, interacting via instant messaging and social networking as well. More than 70% of the 18-29 year olds surveyed use social networking versus fewer than 50% of respondents older than 30. The 18-29 year old demographic is also 1.75X as likely to own a smartphone as the average US adult. Exhibit 71: Millennials are more active online than older generations Percent of respondents who spend time on the activity online in an average week Total A18-29 A30-49 A50+ Age Index Categories 2009 2010 2009 2010 2009 2010 2009 2010 A18-29 A30-49 A50+ Email 96% 97% 95% 96% 95% 98% 96% 98% 1.0x 1.0x 1.0x Reading news, sports, entertainment 69% 75% 67% 76% 70% 77% 69% 73% 1.0x 1.0x 1.0x Shopping/buying 58% 59% 58% 65% 61% 60% 56% 56% 1.1x 1.0x 0.9x Social networking 30% 45% 61% 71% 34% 52% 17% 33% 1.6x 1.2x 0.7x Health-related research 39% 39% 34% 34% 38% 38% 43% 41% 0.9x 1.0x 1.1x Playing casual games 38% 38% 31% 39% 40% 40% 38% 36% 1.0x 1.1x 0.9x Creating/watching UGC 20% 27% 32% 41% 25% 31% 12% 21% 1.5x 1.1x 0.8x Chatting via instant messenger 28% 25% 44% 40% 30% 30% 21% 18% 1.6x 1.2x 0.7x Making travel arrangements 16% 19% 17% 19% 15% 18% 17% 20% 1.0x 0.9x 1.1x Watching TV shows 15% 15% 24% 29% 17% 19% 10% 10% 1.9x 1.3x 0.7x Classroom/educational activities 13% 15% 24% 24% 12% 16% 11% 12% 1.6x 1.1x 0.8x Watching streamed movies/DVDs 14% 13% 27% 23% 15% 19% 9% 7% 1.8x 1.5x 0.5x Blogging 11% 12% 20% 22% 15% 16% 5% 6% 1.8x 1.3x 0.5x Playing massively multiplayer games 12% 9% 22% 14% 15% 11% 7% 6% 1.6x 1.2x 0.7x Dating services/online personals 6% 7% 8% 11% 8% 9% 5% 4% 1.6x 1.3x 0.6x Other 27% 48% 22% 43% 27% 46% 29% 50% 0.9x 1.0x 1.0x Source: Goldman Sachs Internet Usage Survey. As a result, as members of the Millennial generation gain greater purchasing power not only will they buy information, equipment and software—they will also have the financial means to upgrade more frequently as technology progresses. To take advantage of increased technology use and connectivity, we prefer the pipes and enablers. Hardware and software companies seeking to meet consumer tastes as technology and trends evolve will have to execute well in a competitive and ever-changing market, but the need for bandwidth will be a constant for all data-intensive communication.  As a distributor of bandwidth, we believe Buy-rated AT&T will be among the biggest beneficiaries. We estimate average revenue per user (ARPU) for smartphone users to be 2.5X that of feature phone subscribers, and as a result the Millennial preference for better and more data-enabled mobile devices should be a tailwind for wireless revenues.  Exposed to the same tailwind are the tower stocks, including CL-Buy rated Crown Castle International and SBA Communications and Buy-rated American Tower. As greater bandwidth usage strains networks, the most direct ways for carriers to improve network capabilities are via cell site additions and amendments, both of which directly benefit tower operators. Conversely we believe the RLEC (rural local exchange carrier) industry, including Neutral-rated Centurylink, Frontier Communications, Qwest and Windstream, should suffer from the Millennials’ preference for wireless voice services over wireline. According to our Internet team’s Internet Usage Survey from Feb 2010, only 56% of online consumers ages 18-29 have a landline phone, versus an 84% respondent average. In addition, we estimate total wireless-only homes now comprise 26% of US households with annual growth of 4-5 percentage points, and believe further wireless substitution will occur as Millennials age and grow in proportion among homeowners. This should put further pressure on voice revenues, disproportionately impacting RLECs given their greater exposure relative to more diversified telcos that have enterprise and wireless segments. Goldman Sachs Global Investment Research 53
    • August 4, 2010 Americas  In semiconductors, we believe that CL-Buy rated Qualcomm and Buy-rated Broadcom offer attractive exposure to the theme. Increased smartphone adoption benefits Qualcomm in three ways: (1) higher handset ASPs, on which Qualcomm earns a royalty; (2) better chipset ASPs and margins, and (3) greater chipset market share as a result of the company’s close alignment with Android, the fastest growing smartphone operating system.  For Broadcom, over 40% of revenue is derived from sales of semiconductors moving information over wireless networks, and the company’s technology is likely to enable future wireless communication growth as well. Broadcom components are used in everything from traditional PCs and handsets to emerging form factors such as smartphones, tablets, e-readers, and connected televisions.  Given the corresponding increase in internet traffic growth that will be necessary to enable such connectivity, we see CL-Buy rated Juniper and Neutral-rated Cisco as long-term beneficiaries as well. To the extent that service providers benefit from increased bandwidth demand, more capital spending will be needed to meet rising capacity needs. Juniper is the name within our coverage most directly exposed to service provider routing spend (approximately 60% of sales). Cisco, as the largest player in routers and switches with a potential secular growth engine in its unified communications segment, is clearly well-positioned for future technology usage trends as well. Goldman Sachs Global Investment Research 54
    • August 4, 2010 Americas Opportunity #2: Millennials consume media differently The Kaiser Family Foundation conducts a national survey of the media consumption habits of over 2,000 teenagers (defined as 8- to 18-year olds) every five years. The inaugural study was conducted in 1999 and the results from the 2009 study were published earlier this year. In addition to providing a snapshot of the current youth media consumption, the survey documents a decade of media evolution. The current snapshot shows that American teenagers are consuming more media than at any point in the past ten years. Average daily media consumption for teenagers is over 7.5 hours, and when multitasking is included approaches nearly 11 hours. Total consumption (inclusive of multitasking) is up 25% from 2004, with compound annual growth of 5%. In terms of media, the growth since 2004 has been driven by (in rank order): music, television, computers, and video games (see Exhibit 72). In terms of devices, the growth has almost exclusively been driven by increased use of portable devices, such as cell phones, iPods and handheld game players (see Exhibit 73). Exhibit 72: Youth media consumption continues to grow Exhibit 73: Portable devices drove most of the growth. Teenager average daily media consumption (in minutes) Teenager average daily media consumption (in minutes) 645 650 25 Teenager Daily Media Consumption (mins.) 600 38 550 514 73 500 25 Movies 449 43 89 450 18 Print 43 49 400 Video Games 26 62 350 27 151 Computer 300 108 104 Music 250 Television 200 150 269 227 231 100 50 0 1999 2004 2009 Source: The Kaiser Foundation, Goldman Sachs Research analysis. Source: The Kaiser Foundation, Goldman Sachs Research analysis. Millennial media habits are not simply affecting the amount of content consumed, but also the ways in which media is experienced. The proportion of media consumption that incorporates multitasking rose from 16% in 1999 to 26% in 2004 and 29% in 2009 (see Exhibit 74). Multitasking generated most of the media consumption growth between 1999 and 2004, and about half from 2004 to 2009. Simultaneous consumption of multiple media is most prevalent while listening to music, watching TV, and using a computer (see Exhibit 75). Goldman Sachs Global Investment Research 55
    • August 4, 2010 Americas Exhibit 74: Multitasking is nearly one-third of media Exhibit 75: Multitasking is most common with music, TV consumption and computers Teenager Average Daily Media Consumption (in minutes) Teens that use another medium “most”/“some” of the time Source: The Kaiser Foundation, Goldman Sachs Research analysis. Source: The Kaiser Foundation, Goldman Sachs Research analysis. The very nature of television viewership is also evolving, with teenagers watching 14% less live television than they did in 1999, but total consumption up 18% over the same time period thanks to new platforms and time shifting (DVR) technology. Print media consumption has meanwhile suffered from internet substitution among young people, with magazine readership falling from 47% to 35% while newspaper consumption fell from 42% to 23%. Against this backdrop of changing distribution, we favor differentiated content producers. For companies that own or can create differentiated multiplatform content, there will be an opportunity to monetize brands regardless of how media consumption habits evolve. As devices such as DVRs and iPads facilitate watching TV and movies on a delayed or portable basis overall entertainment consumption increases, adding value for producers of content. Technology changes such as cheaper satellite television (e.g., in India) and better 3D theatrical experiences (e.g., in Russia) likewise help US entertainment companies expand more swiftly to address a global audience. While technology changes also have the potential to disrupt the entertainment ecosystem, the industry’s proven ability to capture value in multiple formats—including Netflix payments, Hulu advertising, and iTunes revenue sharing—suggests that the current challenge is one of measured evolution, not looming extinction. In particular, we highlight Buy-rated Disney, which owns a collection of brands—including not just Mickey Mouse and Winnie the Pooh, but ABC, ESPN, Marvel and Pixar—that have proven profitable across numerous platforms. Because many of its products are youth- oriented, we believe Disney is far ahead of peers in understanding how younger generations interact with media and consumer brands. Beyond demographics, we view Disney as the media sector’s leader in size and scope, structurally differentiated by its dominance in categories such as consumer products, parks and televised sports. Goldman Sachs Global Investment Research 56
    • August 4, 2010 Americas Opportunity #3: Millennial consumers embrace e-commerce Given a high degree of awareness of consumer choices (aided by online searches and reviews), preference for immediacy of service, and comfort transmitting payment electronically, one of the most significant generational differences between Millennials and their forebears is in the propensity to make purchases online. This has significant implications for consumer-facing companies ranging from the retail and internet companies examined in our dotCommerce franchise to insurance providers competing in the direct to consumer channel. The transition to a more internet-driven consumer economy is already well underway and is likely to continue at a rapid pace. Over the next ten years we project that online will grow at five times the rate of traditional retailing. At this rate online consumer dollar growth will exceed off-line growth by 2019 (see Exhibit 76). An analysis of penetration by end market shows room to grow, as current online penetration remains low for most consumer categories (see Exhibit 77). We highlight apparel in particular as a segment where relatively low online penetration and a very large market size combine to form an attractive long- term growth driver. Exhibit 76: Online consumer dollar growth to eclipse off- Exhibit 77: Online penetration remains low for most line by 2019 categories Year-over-year change in sales by channel ($ mn) Online penetration by market Source: Goldman Sachs Research estimates. Source: Forrester Research, Goldman Sachs Research. As part of our aforementioned Internet Usage Survey we polled shoppers on their comfort level buying apparel online. Not surprisingly, we found that younger shoppers were most comfortable buying clothes online, with nearly two-thirds of respondents in the 18-29 demographic stating they were very or somewhat comfortable buying apparel online versus just over half of respondents over age 50. We also found that 26% of surveyed shoppers indicated that they are becoming more comfortable buying online, a trend validated by strong online growth across our coverage. Based on our dotCommerce framework for apparel companies, the full details of which were published in our May 24, 2010 report “dotCommerce: Online shifts apparel’s center of gravity,” a multi-channel strategy is the best approach for reaching technically adept Millennial consumers. We define a multi-channel strategy as one that incorporates stores, web and catalog distribution. Integrating these channels not only increases long-term customer loyalty by improving the customer experience, it also enhances profitability and returns. Online apparel sales are growing faster than traditional retail, and that growth is margin accretive for multi-channel operators because of lower operating costs online. We estimate the online business within a typical multi-channel model generate a margin that is around 1200 bp higher than retail store margins, as detailed in Exhibit 78. Goldman Sachs Global Investment Research 57
    • August 4, 2010 Americas Exhibit 78: Economics are most compelling for traditional retailers that also operate an online business P&L for three different apparel retail models based on sector average Apparel Retail Overall P&L Traditional Online within Online Only Retail Model Traditional Model Overall Retail Model Revenue 100% 100% 100% Product Costs Merchandise Costs 54% 45% 45% + for Traditional retailers Distribution & Freight 1% 2% 1% Higher mix of proprietary brands means Buying Costs 5% 6% 6% higher merchandise margins (both online Shipping Income -6% 0% -6% and offline) Shipping Costs 6% 0% 6% Total Product Costs 60% 53% 52% Store/Website Costs: Occupancy (Rent etc) 0% 9% 0% Staffing & Other Store Exp 0% 17% 0% Online Costs Fulfillment 10% 0% 10% + for Online only players Other Selling 5% 0% 5% Stores carry higher operating costs than Fees (Outsourced) 0% 0% 0% online Total Store/Website Costs 15% 26% 15% Other: + for Traditional retailers Advertising 8% 1% 1% Stores provide valuable marketing Corporate 8% 6% 6% vehicle D&A 2% 4% 4% Total Other Costs 18% 11% 11% EBIT 7% 10% 22% + Multi-channel model wins Either double or triple profitability of alternative models as blends best of both worlds Source: Company data, Goldman Sachs Research. In our view, the true test of a retailer’s online commitment is the online customer experience. To determine who is most aggressively embracing the long-term online opportunity, we evaluate retailer websites in our dotCommerce research using our proprietary Experience Scorecard based on the key drivers of where consumers shop online (shipping costs, ease of use, etc.). A leading example of a retail apparel multi-channel strategy with a commitment to online user experience using this framework is Neutral-rated Urban Outfitters. The company has been an early adopter of social networking and many key functionalities like user reviews and product suggestions, as illustrated in Exhibit 79. Urban’s online business now accounts for 17% of sales (well above the peer average of 10%) and is growing much faster than total sales (+40% in 1Q2010). It is no coincidence that the company targets customers in their teens through their late 20s, a demographic that overlaps directly with the 16-29 year old Millennial wave. Goldman Sachs Global Investment Research 58
    • August 4, 2010 Americas Exhibit 79: Advanced retail apparel websites include key features to facilitate the shopping experience urbanoutfitters.com rates highly on our Experience Scorecard 1) Multiple views lets shoppers see  item from various angles  2) Shoppers  can rate &  post  feedback on  items  3) Return  shipping is  free  4) “Ask &  Answer” gives  details on  sizing and fit  6) Site suggests  similar products  shoppers might  like  5) “Details” function describes fabrication and size  Source: urbanoutfitters.com; Goldman Sachs Research. The generational preference for e-commerce has far-ranging consequences outside of traditional retail consumer markets as well. In the insurance industry, for example, there is an ongoing secular change in the way that people find and buy personal auto policies. The direct-to-consumer channel, which consists of business sold via the internet and over the phone, has grown from 5% share in 1989 to 17% in 1997 and 25% in 2008. As shown in Exhibit 80, this growth has coincided with the increase in the driving population born after 1975. Given Millennial consumption preferences, we expect further increases in direct-to- consumer penetration as the generation of connectivity and consumer choice makes up an increasing proportion of the labor force over the coming years. In addition to being well positioned for changing consumer preferences, the economics of direct-to-consumer auto insurance are compelling as well. By selling directly, without traditional agents, branch offices or commissions, carriers can underwrite policies with lower overall expenses and leverage the fixed costs of web hosting and call centers as they increase in scale. We see Buy-rated Progressive as having the most direct exposure among the companies we cover. Progressive is currently achieving profitable growth and taking market share via its structural low cost advantage and favorable demographic exposure. Further, as auto insurance prices increase consumers tend to shop more, which may provide a near-term benefit for lower cost direct platforms such as Progressive as well. Goldman Sachs Global Investment Research 59
    • August 4, 2010 Americas Exhibit 80: Direct channel market share has increased with the number of young drivers Number of licensed drivers born after 1975 and direct channel market share Driving age population Driving age born after population 1975 as % Licensed born after licensed Year Drivers 1975 drivers Historical As the percent of the population born after 1975 1990 167,015 0 0% increases to almost 60% of licensed drivers-- 1995 176,628 18,374 10% and thus the online/direct buying trends of the 2000 190,625 39,348 21% last decade continue-- Progressive's direct 2005 200,665 61,633 31% policy count could increase significantly 2008 208,321 73,970 36% Forecasts 2010 210,855 85,367 40% 2015 221,273 108,891 49% 2020 232,452 134,078 58% 70% 30% % Market Share Total Direct Channel & PGR 2008 Driving Age Population Born After 1975 60% 58% 25% Total Direct Channel Market Share 2007 49% 50% 20% 1997 40% 40% 36% 15% 31% 30% 10% PGR 21% Market Share 2010 20% 5% 1989 2008 10% 2005 10% 2000 1995 0% 0% 0% 0% 10% 20% 30% 40% 1990 1995 2000 2005 2008 2010 2015 2020 Driving Age Population Born After 1975 as % Licensed Drivers Source: Company filings, US Census Bureau, Federal Highway Administration, Haver Analytics, Goldman Sachs Research. Goldman Sachs Global Investment Research 60
    • August 4, 2010 Americas Opportunity #4: As Millennials become parents, Generation Z looms According to the Pew Research Center, 75% of babies are born to mothers in the 20-34 age range, with birth rates peaking among women in their late 20s. The Millennial cohort will fully overlap the 20-34 age range in five years, and the “echo” effect on births is likely to shift what is currently a barbell population distribution in the 0-18 range (see Exhibit 81) to a much more lopsided grouping where children under age 9 will far outnumber those ages 10-18. We are calling this emerging cohort, which we see beginning with children born in 2006, “Generation Z”. Given that Millennials are still transitioning into peak childbearing years and the US Census Bureau is projecting a sustained recovery in the birth rate, the ultimate size and economic impact of the Generation Z cohort remains unclear. However, in the near term we see significant consequences in the changing makeup of the youth population for companies that sell to the under-18 demographic. Exhibit 81: The youth demographic will skew younger in coming years US residents by age (thousands), June 2010 estimate 4,600 The under‐18 ...and by  4,500 demographic in the  Millennials  US is dominated by  moving  4,400 Generation Z... into  adulthood. 4,300 4,200 4,100 4,000 3,900 3,800 3,700 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Source: US Census Bureau, Population Division. Recovering US births are a boon for companies that sell to the parents of infants Sales for companies that sell to new parents in the United States have risen since births bottomed in the late 1990s, though both 2008 and 2009 saw a 1-2% decline against the trend as economic weakness was factored into family planning decisions. Looking forward, the Census Bureau is projecting a recovery in 2010 and 1% average annual growth in US child births over the coming decade (see Exhibits 82-83). This should provide a better support for the industry than the 0.5% average growth seen from 2000-2010. Among names we expect to benefit, CL-Buy rated Mead Johnson stands out as the company most directly exposed to US birth trends. Mead is the manufacturer of Enfa brands, including Enfamil instant formula, and is the world’s largest pediatric nutrition company in the 0-12 month segment. While emerging markets are the principal revenue driver for the company—they represent in aggregate nearly 60% of sales—the United Goldman Sachs Global Investment Research 61
    • August 4, 2010 Americas States remains the company’s largest single market. Global sales growth could accelerate to 10-12% as economic growth in the United States returns to positive territory. Exhibit 82: We expect an upward trend in child-births Exhibit 83: The number of births could climb sharply over over the next decade the next few years coming off of a low 2008/2009 base Number of births in the US, millions % change in birth, year-on-year 4.500 4.0% Expect a steady climb in child-births as the 4.400 Millennials move into their 20's and 30's. 3.0% 4.300 4.200 2.0% 4.100 1.0% 4.000 0.0% 3.900 3.800 -1.0% 3.700 We see a sharp birth -2.0% rate recovery of f low 3.600 2009 base 3.500 -3.0% 2010E 2012E 2014E 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010E 2012E 2014E 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: US Census Bureau, Goldman Sachs Research. Source: US Census Bureau, Goldman Sachs Research. Youth preferences drive parent dollars According to Cotton Incorporated’s 2004 audit of the children’s apparel market, children have considerable say in what is bought for them. Fully 70% of mothers surveyed indicate that they purchase items specifically requested by their children. However, a child’s impact is strongly correlated to its age: 56% of 13-15 year-olds select all or most of their own clothing versus 30% of those aged 10-12 and only 15% of those in the 6-9 age group. We believe that increased media engagement and dotCommerce will amplify youth-directed expenditures across all ages over time, as it is becoming easier both to market to youth demographics via targeted advertising and for young people to identify specific products for their parents to buy. Toy sales have already accelerated, outpacing GDP growth during both the strong economy of 2006-2007 and the tough backdrop of 2008-2009. Currently over 70% of toy sales are targeted to children aged 0-9. With the Census Bureau projecting this age cohort to grow 7% to 44.3 million by 2020, ahead of the more moderate 4-5% growth in the 0-9 age group over the past decade, toy company sales should see a meaningful benefit. We view CL-Buy rated Hasbro as the best direct play on toy and game spending. Beyond demographics the company is poised to see accelerating sales growth from its strategy of leveraging toy brands in TV and movies, and the stock is supported by attractive valuation and an aggressive share repurchase program. Goldman Sachs Global Investment Research 62
    • August 4, 2010 Americas Appendix Goldman Sachs Global Investment Research 63
    • August 4, 2010 Americas Exhibit 84: Previously published research addressing demographic themes Retiring Baby Boomers The expanding global middle class Generation waves after the Baby Boom "The Day After Tomorrow, v1.0: The changing  Global Economics Paper No: 170, "The Expanding  "dotCommerce: Online shifts apparel's center of  face of the consumer" by Anthony Carpet and  Middle: The exploding World Middle Class and  gravity" by Adrianne Shapira et al.  (May 24,  Laura Conigliaro, et al.  (October 1, 2008) Falling Global Inequality" by Dominic Wilson, et  2010) al.  (July 7, 2008) "Follow the Flows: Potential policy implications  Global Markets Institute, "The Power of the  "Independent Insight: Eighth Annual Internet  for retirement services" by Christopher Neczypor,  Purse: Gender Equality and Middle‐Class  Usage Survey, 2010" by James Mitchell, CFA, et  et al.  (January 27, 2010) Spending" by Sandra Lawson and Douglas Gilman  al.  (February 22, 2010) (August 5, 2009) "The three stages of a sector recovery ‐ is an  Global Economics Paper No: 166, "Building the  GS SUSTAIN, "Crossing the Rubicon: Our  inflection point in R&D upon us?" by Jami Rubin,  World: Mapping Infrastructure Demand" by  investment framework for the next decade" by  et al.  (January 20, 2010) Sandra Lawson, et al.  (April 24, 2008) Anthony Ling, et al.  (February 26, 2010) "Sector challenges but stock opportunities; CL‐ "Investing in Brazil's New Middle Class" by  "The Rise of the iPad and tablet: Assessing  Buy AGN, Buy ENDP, and Sell KG" by Randall  Stephen Graham et al.  (April 26, 2010) winners and losers in the global TMT ecosystem"  Stanicky, et al.  (April 19, 2010) by James Covello and Jim Schneider, et al.   (July  12, 2010) Source: Goldman Sachs Research. Equity Basket Disclosure The Equities Division of the firm has previously introduced the basket of securities discussed in this report. The Equity Analyst may have been consulted as to the composition of the basket prior to its launch; however, the views expressed in this research and its timing were not shared with the Equities Division. Goldman Sachs Global Investment Research 64
    • August 4, 2010 Americas Reg AC We, Anthony Carpet, Laura Conigliaro, Robert D. Boroujerdi, Thomas Craven, CFA, Michael Chanin, CFA and Deep Mehta, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. Disclosures Coverage group(s) of stocks by primary analyst(s) Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research. Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research. Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 53% 16% 47% 44% 34% As of July 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,814 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below. Price target and rating history chart(s) Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research. Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co- managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Goldman Sachs Global Investment Research 65
    • August 4, 2010 Americas Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. 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European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at http://www.gs.com/client_services/global_investment_research/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the Kanto Financial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan (FFAJ). Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. 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The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs & Partners Australia Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs & Co. regarding Canadian equities and by Goldman Sachs & Co. 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    • August 4, 2010 Americas European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/publications/risks/riskchap1.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to http://360.gs.com. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. Copyright 2010 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research 67