Financial Pacific - Economic insights by George Magnus (third party)


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Financial Pacific - Economic insights by George Magnus (third party)

  1. 1. ab Global Equity Research Americas UBS Investment Research Equity Strategy Morning Expresso - United States Market Comment 13 September 2011 U.S. Equity Product Management 212-713-2400 Tuesday 13 September 2011 Morning Expresso This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 35. UK Takeover Panel Disclosure: UBS Limited is acting as joint financial advisor to Autonomy Corp Plc in respect of the announced recommended offer from Hewlett Packard Co UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
  2. 2. Morning Expresso - United States 13 September 2011Morning Meeting AgendaCoca-Cola Ent. Rating: Buy Target: US$30.00 Price: US$25.52 RIC: CCE.N Prior: Neutral Prior: Unchanged Mkt Cap: US$8.45bn BBG: CCE US Soft Drinks Analyst: Kaumil S. Gajrawala Tel: +1-212-713 9318Concerns are Not Reality – Upgrade to Buy Upgrade to Buy – Price Target $30 (~18% upside) Despite continuing to deliver results that outpace our coverage, CCE has under performed its peers (300bps in last month). We believe this is unjustified, and are upgrading CCE shares to Buy. In this note, we address key concerns such as 1) health of the consumer, 2) commodities, 3) macro concerns in Europe, and 4) proposed tax in France. We are confident in CCEs ability to manage these issues. Concerns Affecting CCE are not Warranted Four major concerns are weighing on the perceived operational ability of CCE. First, consumer health. Historically, consumer health hasn’t weighed too heavily on CCE and we think they can deliver in today’s environment. Second, worsening COGS. Since the 2Q call, most major input prices have fallen. Third, European instability. CCE’s operations have held up to disruptions thus far and are not correlated to GDP. Fourth, the proposed soda tax in France. We believe CCE can passthrough taxes, if enacted, and volume impact will be minimal. CCE Stronger than Peers yet Shares have Underperformed We remain confident that the Company can deliver above longer-term trend growth targets in 2011. CCE shares have underperformed their peer group over the last three months, despite delivering better organic growth and guidance. We believe this is irrational and that CCE shares are a compelling opportunity at these levels. Our 12EPSe is $2.37 from $2.39 on increased buyback but FX headwinds. Valuation: Upgrading to Buy; Price Target $30 Our $30 PT is 12.5x our 2012 EPS estimate of $2.37. (~9x EV/NTM EBITDA). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$25.52 on 12 Sep 2011 18:42 EDTOutdoor Advertising Advertising Analyst: Jaime Morris, CFA, CPA Tel: +1-212-713 9319Outdoor: Cautious on All Things Local We are initiating coverage of the out-of-home sector with a cautious view Our cautious view is driven by: 1) macro concerns, particularly on the local ad front, which accounts for ~70% of outdoor advertising; 2) increasing local market media fragmentation slowly taking share of outdoor advertising dollars and pressuring costs per thousand (CPMs), and 3) fears that digital is creating overcapacity in the industry. We rate Lamar Sell with a $16 price target Despite the 53% decline in LAMR shares year to date, we think there is further risk to the downside. We expect macroeconomic pressures, particularly for Lamar’s small, local customer base (80% of revenue), and local market media fragmentation to continue. Moreover, we think digital is creating overcapacity, particularly in Lamar’s smaller markets, which is weighing on occupancy and pricing. We rate Clear Channel Outdoor Neutral with an $11 price target We prefer Clear Channel’s (CCO) larger market exposure and more diversified national/ local revenue stream (40% national vs. 20% for LAMR). However, we think CCO also faces macro headwinds and increasing secular pressures, and believe the parent company’s leverage (10.7x at 6/30/11) and potential impact on CCO will remain an overhang for the near to intermediate term. Multiples below historical average, but we expect further compression The U.S.-based outdoor companies are trading at 7.9x our 2012E EBITDA, below their historical average of 10.8x and towards the lower end of a 6-15x range. However, given our expectation for slower top-line growth and muted margin expansion, we expect further compression from current levels. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011Leisure and Lodging Report Leisure Goods & Services Analyst: Robin M. Farley Tel: +1-212-713 2060By Land or By Sea: Cruise Yield vs. Lodging RevPAR Performance Lodging more sensitive to macro shifts than cruise net yields Since 1998, lodging yield growth outperformed cruise yield growth in periods of macro-economic growth and has underperformed cruise yields in macro declines. In that time frame, U.S. RevPAR has outperformed cruise industry net yields in periods of real YOY GDP growth and underperformed net yields in periods of real YOY GDP declines 35 of the last 54 quarters (since the beginning of 1998). U.S. RevPAR yields have more room for recovery to peak When adjusted for foreign currency, cruise industry yields were 7-8% below peak at the end of 2010, and as we expect yields to increase about 2% on a constant FX basis in 2011, we believe cruise yields could have 5-6% points of room for recovery back to 2008 levels by the end of 2011 vs. 7-8% points of room for recovery back to peak levels for U.S. RevPAR Cruise Yields Offer More Downside Protection As They Are More Elastic Lodging is driven by corporate activity, so it tends to be more price inelastic. However, cruise line yields have historically been more price elastic, as they are driven by leisure expenditures, so to the extent that a recovery is muted and there are macro concerns, cruise line yields could potentially be preferable as they offer downside protection and cruise lines would also be likely benefit more at the EPS line from a pull back in fuel price in a declining macro environment. Preferred names are Starwood and Carnival. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 13 September 2011 UBS 2
  3. 3. Morning Expresso - United States 13 September 2011HCA Rating: Buy Target: US$33.00 Price: US$18.40 RIC: HCA.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$9.83bn BBG: HCA US Healthcare Providers Analyst: Justin Lake, CFA Tel: +1-212-713 2765Update Mixed But Quarter On Plan Deep dive shows several factors impacting Q2, w/ half expected to continue While declines in case mix index singled out as culprit in Q2, HCA analysis shows acuity only about 40% of the $74m problem w/ changes in regulatory environment (72 hour rule, CT scans) 40% and cost report headwinds 20%. Much of headwind indicated as one-time in nature ($37m / 50%), although $25m mix impact may accelerate given 3Q decline before easier comps help in Q4 and beyond. While geography not main issue, half of acuity change related to cardiac surgery decline. While Q3 volumes looking strong, pricing yields continue to be pressured Based on the first two months of the quarter, same store adj. admits were strong at up 4.3% YoY (THC up 2.5%). Pricing, however, was well below companys +1% expectation at -0.9% cash revenue per adj. admit (Medicare CMI down -2.0%), yielding total cash revenues up 3.4% YoY (4.6% in Q2). Cost side was better than advertised at +0.3% vs. +1.0% expectation, leaving HCA on-plan for July/Aug from EBITDA perspective (flat to down slightly - UBS $1,362m, up 0.3% YoY). Mixed bag but we expect relief as "worst-case" co specific issues dismissed Tough pricing comps subside over next few quarters & cost mgmt will be key heading into 2012. Q3 payer mix provided w/ Medicaid admits up 5.8% (5.5% for THC), Medicare up 5.6%, commercial +0.9% & uninsured +10.1% (+10.6% Q2). 2011/2012 HealthONE accretion (10/31 close) is $0.01-$0.02/$0.15-$0.18. Interest expense tailwind meaningful at $358m annually or $0.33 incremental in 2012. Valuation: Buy Rating, $33 Price Target $33 PT based on target EV/EBITDA multiple of ~7.25x our 2012 est of $6,159m. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$18.40 on 12 Sep 2011 18:42 EST UBS 3
  4. 4. Morning Expresso - United States 13 September 2011MACRO AND STRATEGY RESEARCHUS Daily Economic Comment Economist: Maury N. Harris Tel: +1-212-713 2472Updates on small firms and consumers Preview: Data on small biz, consumer, Federal budget, import prices Tuesday’s data will give updates on small business, import prices, and the Federal budget, as well as a little more information on consumer sentiment and spending. The NFIB small business optimism index for Aug will be reported. Labor market details have already been released: A net 5% of firms planned to raise employment—the best reading, apart from Dec 2010, since before the recession. For Aug, we forecast some softening in import price pressures. Import prices probably fell 2.0% on energy. Prices excl. fuels likely edged up 0.1%, with declines in auto prices and only a modest increase for nonenergy commodities. In the IBD/TIPP economic optimism measure, declines have been led by the economic outlook and by assessments of economic policy. The President’s jobs speech does not appear to have caused a turnaround in the daily Rasmussen index.Store sales figures are holding up but were likely distorted by the hurricane. The Congressional Budget Office estimates an Aug budget deficit $41B larger than last year, with $28B of the widening caused by shifts in the timing of outlays.Manpower hiring plans broadly track growth in payrolls. However, they usually lag turning points in employment trends—limiting their usefulness (see chart). Review: The other shoe drops (on the jobs bil.). Fisher argues for … The White House released its plans to pay for the new job initiatives: limiting itemized deductions; treating carried interest as ordinary income; and taxing the petroleum industry and corporate jets. Unsurprisingly (FOMC dissenter) Dallas Fed Pres Fisher remains sceptical of the need for further Fed easing. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011Economic Insights - By George Economist: George Magnus Tel: +44-20-7568 3322Agenda - Setting at a Time of Crisis Now that the economic and market bungee jump out of the 2009 abyss is over, there is growing evidence that economic growth in the West, but also beyond, has slowed down, possibly threatening to turn into a contraction. The stall in growth this year was destined to happen, and especially as governments have now all fallen into line behind austerity. As is often pointed out (see, for example, Developed Markets and Deleveraging: Dating Japan, Economic Insights, 23rd June 2011), the levels of economic activity by and large everywhere remain quite low or depressed relative to where we were at the last cycle peak in Q1, 2008. This means that if there is a ‘recession’ or a ‘double dip’ in the next several months, it would actually be neither, but a continuation of the recession that began three years ago. Seen from this point of view, the contemporary economic policy discussion agenda is facile. Fixing public finance is of course necessary, especially the burden of our age-related spending liabilities is starting to weigh, and before it becomes really heavy from about 2018-2020. But few politicians acknowledge the limitations of what I have called ‘Deficit Attention Disorder’ (The Convulsions of Political Economy, Economic Insights, 16th August 2011). The private sector has no choice but to deleverage, exacerbating the economic impact of the loss of past growth drivers. Untimely financial attrition in the public sector, therefore, is going to add to the economic predicament. Framing the agenda as a public finance issue only isn’t going to produce economic stability and a return to sustainable growth. The problem needs to be considered more widely, encompassing our system’s lack of capacity to create jobs and strengthen income formation. And several major governments retain the ability to structure public finance in ways that can help both, while preserving a credible long-run programme to lower the public debt burden. President Obama recently proposed the former but the US lacks the latter, while the UK and others have the emphasis the other way round. Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011European Equity Strategy Strategist: Karen Olney, CFA Tel: +44-20-7568 8944Switzerland: Still be ‘haven’? SNB stands in way of a strong CHF The SNB ‘will no longer tolerate’ a EURCHF below 1.20. Our Economist Reto Huenerwadel shows the Purchasing Power Parity (PPP) fair value at EURCHF 1.34. He agrees with the SNB that the CHF is overvalued so thinks near term there is upside risk. FX analyst Beat Siegenthaler flags two risks: (i) buying euros could lead to big losses and (ii) inflation. But, saving the exporters took priority. Country score-card: Switzerland in only 12th place. A ‘haven’ for some… The Swiss franc was a successful ‘haven’. But, a pain for many: 2011E earnings momentum plunged to a ten-year low, dragging Switzerland down in our score-card. Bottom-up consensus tells us that 2011E earnings growth for Switzerland will be negative, when consensus for Europe is still at +8.0%. Do you buy Switzerland after announcement? Most say yes. We asked investors. The response was split: about 65%, largely those that were hedged, said they would increase exposure on an earnings turn-around that may not yet be in analysts’ numbers. We saw interest in pharmaceuticals, luxury goods and the beaten up cyclicals. Most thought Food & Beverage was too expensive. Switzerland will likely improve in its rank as EPS turns. We still like core Europe. Company data & country chart-book Stocks: See the fall in earnings momentum over 1, 3 and 6 months, along with performance and discount to 10-year PE. Companies like Lonza, Actelion, Adecco and Novartis are examples where price is down more than EPS and are at a large PE discount. Analysts’ CHF assumptions for 2012. Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011 UBS 4
  5. 5. Morning Expresso - United States 13 September 2011Global Risk Radar Strategist: Jeffrey Palma Tel: +1-203-719 1135Risk appetite dips again, remains low Risk Appetite Indicator falls further The UBS Equity Risk Appetite Indicator decreased last week to -2.21 as of Friday’s close versus -1.87 the week prior, as the MSCI AC World Index decreased by 3.4%. This marks the fifth consecutive week that the Indicator has been hovering around -2.0. Equity option volatility component decreases The VIX Index increased to 38.5 from 33.9 the week prior, which contributed to the fall in risk appetite. Equities positioning component falls The equities positioning component decreased as indicators were largely mixed. Among regions, Japan, US and Emerging markets outperformed while Europe ex UK underperformed significantly. Defensives slightly outperformed Cyclicals. Credit & FX component also decreases The credit & FX component decreased as FX volatility increased. Interest rate swap spreads and US corporate credit spreads widened, which also moved this component lower. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011 UBS 5
  6. 6. Morning Expresso - United States 13 September 2011GLOBAL SECTOR RESEARCHUBS Global I/O®:Telecom Equipment Communications Technology Analyst: Gareth Jenkins Tel: +44-20-7567 3950Feedback from China and India field trip Input: Meetings broadly encouraging for telecom equipment We held over 25 meetings in China and India, including all the leading telecom operators, local equipment vendors, retailers, distributors and regulators. We came back broadly encouraged on the capex environment, stable competition in wireless infrastructure as well as no signs of a macro impact on handset growth. Infrastructure: robust capex, network based differentiation, better mix Our meetings suggest a robust capex environment in China in H2 as well as stable spend in 2012 due to the emergence of network based differentiation. We believe a relatively more level playing field is likely in TD-LTE at China Mobile vs. TD-SCDMA, which is positive for Ericsson. In India, while there is greater focus on capital efficiency and hence overall capex may come down, we believe electronics spend is likely to remain healthy due to robust minutes growth and 3G upgrades. Handsets: no macro slow-down seen; Nokia turnaround in low-end Our checks indicate no signs of a macro slowdown in handset volumes. The local vendors, particularly ZTE, are seen as doing well in China in smartphones, with Samsung and HTC leading among the tier-1 vendors and Nokia absent. However, the latter is seeing a material pick-up in the low-end in India driven by the new dual-SIM products and regaining market share from the local branded vendors. Output: Stock conclusions Our meetings were generally supportive for Ericsson, which remains one of our most preferred names in infra. On the handset side, we came back encouraged on ZTE, Samsung and HTC as well as a turn-around in the low-end for Nokia. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 13 September 2011 UBS 6
  7. 7. Morning Expresso - United States 13 September 2011BASIC MATERIALSSteel Dynamics Rating: Neutral Target: US$13.00 Price: US$11.18 RIC: STLD.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$2.44bn BBG: STLD US Steel Analyst: Shneur Z. Gershuni, CFA Tel: +1-212-713 3974STLD 3Q Guidance Misses Cons STLD Guides to $0.18-$0.22 3Q EPS, below UBSe $0.26 STLD guided to $0.18-$0.22 3Q EPS, below cons $0.29 and UBSe $0.26. On the 2Q earnings call, CEO Keith Busse said he expected a 3Q EPS, “in the 30s.” Specifically, the company noted that weak sheet demand and pricing, combined with persistently high scrap prices, compressed margins. Structural & Bar Relatively Strong- Scrap Segment Continues Struggle STLD noted that structural and bar margins should improve q/q, and we note that these products, specifically Wide-Flanged Beams and Merchant Bar, did not fall as sharply as more widely quoted HRC. STLD stated improved economic clarity and low inventories could lead to improved results in 4Q. STLD also noted steel prices and margins have begun to improve, in-line with our expectations following recent hikes. STLD guided Metals Recycling as “consistent” with 2Q, a disappointing quarter, we look for mgmt commentary on improvement opportunities. NUE Read-Through We expect a negative reaction across our coverage to STLD demand/pricing commentary. NUE will also guide this week- expect similarly weak pricing and high scrap costs to pressure margins; we estimate 3Q EPS of $0.60 vs cons. $0.66. NUE has a slightly easier comp vs. 2Q due to weather outages earlier this Summer. Valuation We lower 3Q EPS est. to $0.22 from $0.26 and ‘11 to $1.30 from $1.36 on lower steel prices. We maintain our EV/EBITDA multiple derived price target of $13. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$11.18 on 12 Sep 2011 18:42 EST UBS 7
  8. 8. Morning Expresso - United States 13 September 2011COMMUNICATIONOnline Recruitment Internet Services Analyst: John Janedis, CFA Tel: +1-212-713 1064Early 2012 Look Not Encouraging More Cautious on Online Recruitment (OR) Sector We are incrementally more cautious on the Online Recruitment sector given channel checks/macro concerns and our belief that 2012 budgets will be under more pressure than we had previously expected and that this cycle will be shorter than trend. We are lowering our sector growth/estimates for DHX and MWW. We maintain our Neutral rating on DHX and Buy rating on MWW on valuation. Lowering Online Recruitment Sector Growth Estimates We now forecast overall OR industry revenues to grow 3% in 2012 vs. our prior estimate of +16%. We now estimate (DHX’s Tech & Clearance vertical) to grow 10% in 2012 (previously +16%) and MWW revenues to grow +2% in 2012 (previously +10%). Print should continue to lose share to the online players, and we forecast 2012 print help wanted growth of -7%. Adjusting Estimates & Price Targets We are lowering our 2012 and beyond estimates to reflect our slower growth assumptions and lowering our price targets for DHX and MWW (details in table below and following pages). We maintain our Neutral rating on DHX with a $10 price target (vs. prior $15), and lowered our PT on buy rated MWW to $11 (prior $18). Valuation Based on our revised estimates, DHX is trading at 16.8x and 7.6x our 2012 P/E and EV/EBITDA, while MWW is trading at 17.0x and 3.9x our 2012 P/E and EV/EBITDA, respectively. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 13 September 2011 UBS 8
  9. 9. Morning Expresso - United States 13 September 2011CONSUMERStarbucks Rating: Buy Target: US$47.00 Price: US$37.68 RIC: SBUX.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$28.2bn BBG: SBUX US Restaurants Analyst: David Palmer Tel: +1-212-713 9315Solid Demand Growth; Buy Same Store Sales Momentum On-Track for F4Q Based on our consumer panel data for the first two months of F4Q, we believe that Starbucks US same store sales (SSS) momentum remains solid and we see upside to our 6% SSS estimate for F4Q. Quarter-to-date sales trends suggest that 6-7% SSS growth is possible if momentum holds up in September. Significant Potential in Coffee at Home We continue to view company guidance regarding K-Cups as conservative and believe that K-Cups will be a meaningful source of EPS upside for the company in F2012 and F2013. We estimate that K-Cups, together with bagged coffee--which has been fully transitioned from Kraft (KFT, Buy)--could add $0.15+ to FY12E EPS. Strong Net Cash Position With approximately $1.5 billion in net cash and over $1 billion per year in cash flow, we continue to see a tremendous opportunity for the company to pursue acquisitions (and presumably leverage on its retail distribution and consumer base), dividend increases, and/or share repurchases, even after a potential payout to Kraft for bagged coffee. Valuation: Buy Rated; $47 PT Our PT is based on UBS VCAM and represents 23x calendar 2012E EPS. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$37.68 on 12 Sep 2011 16:15 EDTAirlines & OTAs Airlines Analyst: Kevin Crissey Tel: +1-212-713 3562Short Interest Update Airlines: Covering Delta, shorting LUV & UAL In the second half of August, shorting and covering of the airline names was mostly uneventful as share prices rose modestly. After seeing a 14% increase in the first half of Aug, DAL’s short interest declined 5% in the August 31 reporting period as the share price improved 3%. Alternatively, short interest in shares of UAL increased 7% in the period as UAL’s share price improved 2%. Among the low-cost carriers, investors increased negative positions in Southwest Airlines as short interest in shares of LUV increased 11%, or by 2.2 million shares. In aggregate, share prices improved 1% for the airlines during the period. Year-to-date through August, the legacies have declined 36% and the low-cost carriers are down 27%. Online travel agencies (OTAs): Shorting EXPE & PCLN The OTAs saw more shorting activity than did the airlines. Short interest for Expedia increased 21% in the back half of August as investors shorted 3.7 million shares. Short interest for PCLN shares increased 16% as the share price improved 5%. Shares of OWW saw some modest covering as short interest declined 7%, or by 200K shares. Overall, the OTAs saw their share prices improve 4% during the period and they are up 29% year-to-date through August. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011US Online Travel Agencies Sector Note Airlines Analyst: Kevin Crissey Tel: +1-212-713 3562U.S. website visitors decline 4% in August Online Travel Agencies (OTAs) – U.S. website visitor trends remain soft Unique visitors in the US to online travel agency websites declined 4% in August following a 7% decline in July. While the 2010 y/y comps are still running in double digits (Aug’10 unique visitors up 12%), the trend of international visitor growth outpacing domestic appears to be intact again this month. Additionally, excluding the growth from visitors to Expedia’s Tripadvisor unit, US unique visitors to the OTAs would have declined 10% in August, similar to the 9% decline in July ex-Trip. TripAdvisor visitors up 20% On the whole, US website traffic to Expedia declined 4% in August. However, TripAdvisor sites saw 20% visitor growth, whereas Expedia’s US web traffic fell 19%. US web traffic to Orbitz was down 10% in August, an improvement from the 20%ish declines in prior months. Priceline traffic was up 2%. Thoughts on the OTAs From a travel bookings perspective we expect a continuation of trend for now. International hotel bookings will be the growth story and domestic air bookings will remain challenged. We prefer EXPE to PCLN as the TripAdvisor spin provides growth at a reasonable price. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011 UBS 9
  10. 10. Morning Expresso - United States 13 September 2011UBS Commodity Comment Agriculture Analyst: Peter Hickson Tel: +852-2971 7564Blame the Weather Man Corn steals the show yet again: the USDA meet the market Persistent hot dry weather took its toll on a relatively immature crop reducing yield potential, according to the USDA today. US yields were trimmed to the low side of market expectations. While the bulk of the cuts to yields have been made, in our view, US areas remain too high and we anticipate further production cuts in Oct. Latin America is the focus for market participants searching for production upside. Give a little, take a little on soybeans While yields were slightly up, most believe areas will be trimmed in the Oct WASDE. Corn seems to be the undisputed front runner in the battle for acres in Latin America; USDA forecast areas remain broadly unchanged in Brazil. Stock levels were above market expectations but only mask the tightening USDA soybean balances – the stock-to-use ratio will hit its lowest level since 2008/09. Wheat and cotton keep the bears happy Global wheat production has improved markedly in Canada, the EU and the FSU, a bearish signal for the wheat market. US wheat export forecasts were reduced by the USDA, struggling to be competitive in global markets, primarily due to its faithful relationship to US corn prices. Cotton was faced with a more bearish outlook, with upward revisions to USDA global production estimates. Cotton stocks-to-use is now approaching the more comfortable level of 45%, from 40% in 2010/11. 3 month preferences We see corn (bullish) and soybeans (neutral) continuing to have the strongest outlook, followed by wheat (neutral/bearish) and cotton (bearish). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 13 September 2011 UBS 10
  11. 11. Morning Expresso - United States 13 September 2011ENERGYInergy L.P. Rating: Buy Target: US$31.00 Price: US$27.43 RIC: NRGY.N Prior: Neutral Prior: US$36.00 Mkt Cap: US$3.34bn BBG: NRGY US Gas Utilities Analyst: Ronald J. Barone Tel: +1-212-713 3848Upgrade to Buy on Attractive Yield We Expect Current Tough Fundamental Environment to Improve NRGY shares have underperformed due to ST weakness in its two primary segments: propane retailing/distribution and midstream natural gas and NGL storage (each should comprise ~50% of FY12 EBITDA). In propane, high costs and consumer conservation have hurt results, while in nat gas storage, a flat price curve has been damaging. We do not expect propane prices to continue to increase, and we believe the nat gas curve will steepen in time. As such, and given Inergy’s 10%+ yield, we are moving to a Buy rating while lowering our price target from $36 to $31. Business Simplification is a LT Positive but NT Headwind By combining its GP & LP units, Inergy eliminated IDRs and lowered its cost of equity. However, the NT result has been to push down distribution coverage to 0.8x-0.9x for FY11 and ~1.0x for FY12. While concerning, we believe the distribution is safe given projects coming online, and that today’s yield provides an attractive entry point. Solid Business Execution Leaves Us Positively Inclined We believe propane margins have held up reasonably well given the high cost of propane (up 46% over last 12 mo). Nat gas storage fundamentals remain weak due to: 1) compressed seasonal storage spread environment; 2) subdued market volatility; 3) increased storage capacity in No. America; and 4) a surplus supply. In our view, these factors could begin to work themselves out over the next 18 mo. Valuation: Buy Rating; PT Moves from $36 to $31 Our DDM-derived price target implies a 9.1% yield on our FY12e $2.82/unit distribution. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$27.43 on 12 Sep 2011 15:42 EDTPAA Natural Gas Rating: Buy Target: US$22.50 Price: US$16.40 RIC: PNG.N Prior: Neutral Prior: Unchanged Mkt Cap: US$1.17bn BBG: PNG US Pipelines Analyst: Ronald J. Barone Tel: +1-212-713 3848Upgrading to Buy on Valuation Weak Industry Fundamentals Contribute to 32% Pullback, but… PNG owns and operates 2 salt caverns (in Louisiana), 1 depleted reservoir (in Michigan) and natural gas storage fields with an aggregate capacity of 71 billion cubic feet. Natural gas storage fundamentals are weak due to: 1) a compressed seasonal storage spread; 2) subdued market volatility; 3) increased storage capacity; 4) the surplus supply situation. However, we believe the sell-off is overdone, and that the current 8.3% yield provides an attractive entry point for a quality company whose fundamentals should improve over the next 12-18 months. We upgrade our rating to Buy from Neutral. PNG is Well-Positioned PNG has contracted a high portion of storage at attractive rates: ~95% of its capacity for the 2011-12 storage season, ~80% for the 2012-13 season and ~50% for the 2013-14 season. These contracts have an average life of 3.5 years. PNG plans to increase 2012 capacity by ~23% by adding low-cost capacity that is attractive even in the current challenging environment. Strong Financial Position Long-term debt is 25% of capitalization and adjusted EBITDA/interest is 19.0x. Subordinated units provide substantial protection for the current $1.38 common unit distribution which is forecast to be increased to $1.43 by year-end. PNG has an excellent management team and a strong sponsor in Plains All American Pipeline (PAA) with solid alignment of interest. Valuation: Buy; Maintaining $22.50 Price Target Our DDM-derived price target, combined with its current 8.3% yield, provides a 41% total return potential. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$16.40 on 12 Sep 2011 16:15 EDTNat Fuel Gas Rating: Buy Target: US$75.00 Price: US$56.41 RIC: NFG.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$4.66bn BBG: NFG US Gas Utilities Analyst: Ronald J. Barone Tel: +1-212-713 3848With JV Catalyst Removed, A Show-me Story Analyst day provides an opportunity for a fresh review NFG’s September 9th analyst day provided an opportunity to speak with mgmt, get updates on various E&P, Pipeline, and Utility developments, and revisit our growth and valuation forecasts. We believe NFG presents a secure and growing dividend with nearly unparalleled Marcellus exposure. While its stock remains undervalued, in our view, the company’s recent decision not to pursue a Marcellus JV removed a potentially significant valuation catalyst and transformed NFG into a ‘show me’ story which we believe must now prove up the value of its extensive acreage via successful drilling results. Implied Marcellus value is depressed, but full development will take time We note that NFG’s current share price implies $2,000/acre for its 745,000 net acre Marcellus position, much less than the ~$6,000/acre median PV-implied price for Marcellus deals since Nov. 2008 and sharply lower than the ~$7,100/acre price implied by August’s NBL-CNX JV. While we recognize this wide acreage value disparity, we highlight that it will require a considerable period of time for NFG to drill up its estimated 5,000+ locations, particularly with plans to spud an average of 130 wells/year over its F2012-F2014 plan. Management presents its 3-year plan; Additional leverage required At Friday’s meeting, mgmt detailed a plan to grow F2011-14 production at a ~41% CAGR, boost pipeline throughput at a ~20% CAGR, and maintain a 55-65% equity structure. With plans to outspend cash flow each year, more leverage is required. Valuation: Maintain $75 SOP-derived price target We maintain our $75 SOP-derived price target and Buy rating on the shares. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$56.41 on 12 Sep 2011 14:42 EDT UBS 11
  12. 12. Morning Expresso - United States 13 September 2011Niska Gas Storage Rating: Neutral Target: US$13.00 Price: US$12.82 RIC: NKA.N Prior: Unchanged Prior: US$18.00 Mkt Cap: US$0.87bn BBG: NKA US Pipelines Analyst: Ronald J. Barone Tel: +1-212-713 3848Weak Fundamentals Persist; Neutral Weak Fundamentals Persist Niska owns and operates 3 natural gas storage facilities, including AECO Hub in Alberta; Wild Goose in CA; and Salt Plains in OK. It also contracts storage capacity on Natural Gas Pipeline Co of America. Natural gas storage fundamentals remain weak due to: 1) a compressed seasonal storage spread; 2) subdued market volatility; 3) increased storage capacity; 4) the surplus supply situation. Sponsor Aid Niskas private equity sponsor, Carlyle/Riverstone Funds, will invest the total distributions it expects to receive on its common and subordinated units for the next several quarters. The sponsor owns 16.3MM common and all of the 33.8MM subordinated units. This support increases Niska’s protection from debt covenant restrictions and maintains financial flexibility to continue its organic growth. Two Organic Growth Projects Should Increase Storage Capacity 8.3% Niska is increasing capacity at AECO Hub by 2 Bcf and at Wild Goose by 15 Bcf. These low-cash expansions are expected to be completed by FYE11 and be accretive despite current unfavorable market conditions. Valuation: Maintain Neutral Rating; Price Target Cut from $18 to $13 We maintain our Neutral rating given the well-above average yield. However, we are reducing our PT as distribution coverage is well-below average, sponsor support is necessary to maintain the distribution, and the growth outlook is bleak. We have lowered our forecast results to reflect NKA’s F1Q12 guidance update, which, along with an increased cost of equity reflecting greater business risk from difficult fundamental conditions, drives our PT change. Our DDM-derived $13 PT implies a 10.8% yield on our FY12e $1.40/unit distribution. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$12.82 on 12 Sep 2011 16:15 EDTStandard Pacific Rating: Buy Target: US$4.50 Price: US$2.33 RIC: SPF.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$0.60bn BBG: SPF US Home Construction Analyst: David Goldberg Tel: +1-212-713 9427Staying the Course CEO Transition Unlikely to Derail Strategy Last night, Standard Pacific announced that Scott Stowell will now assume day-to-day responsibilities & become CEO in 1/12, upon Ken Campbell’s resignation. In our opinion, this was largely expected, as Mr. Campbell had already executed his plan to put the co on the right course and that future operational improvements will depend more on execution of this strategy and a turn in the broader housing market. Further, in light of Mr. Stowell’s extensive experience in the industry and at SPF (he joined 25 yrs ago), we expect the transition to be seamless. Business Model Will Drive Outperformance As Conditions Recover Since the beginning of May, SPF has declined 39% vs the 34% avg decrease for the group and 15% drop in the S&P 500. In turn, it now trades at 1.0x tang BV. We continue to believe that the co’s differentiated approach— focusing on the move-up buyer and identifying opportunities for land acq at attractive prices, regardless of the stage of development—will drive outperformance. We maintain our Buy rating. Opportunities Arise as the New Home Market Bottoms Although we acknowledge that recent macro indicators may suggest weaker near term economic trends, we believe fundamentals in the new home market are at—or near—a trough. While visibility for a turnaround remains limited, we believe current valuations for selective builders offer attractive buying opportunities with minimal downside and significant upside potential. Valuation: $4.50 PT Based on 1.3x Our Trough BV Est. Our $4.50 PT is 1.3x our trough BV estimate, above the group average. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$2.33 on 12 Sep 2011 16:15 EDT UBS 12
  13. 13. Morning Expresso - United States 13 September 2011FINANCIALSAmerican Capital Mtg Rating: Buy Target: US$21.00 Price: US$17.09 RIC: MTGE.O Prior: Not Rated Prior: Not Rated Mkt Cap: US$0.17bn BBG: MTGE US Investment Services Analyst: Dean Choksi, CFA Tel: +1-212-713 2382Actively Managed Hybrid Mortgage REIT Initiating coverage with a Buy rating and $21 price target American Capital Mortgage (MTGE) is a hybrid mortgage REIT investing in agency mortgage-backed securities (MBS) and non-agency RMBS, as well as whole loans with leverage. It is externally managed by the same team that manages American Capital Agency (AGNC, not rated), a successful agency mortgage REIT utilizing an active asset selection and hedging strategy. Attractive returns on agency carry trade; more risk in non-agency The steep yield curve and the Fed’s pledge to maintain the Fed Funds at 0- 25bp through mid-2013 ensure a profitable agency MBS carry trade, particularly in a weak economy; 60% of capital is allocated to agency MBS. The non-agency strategy consists of two parts: 1) legacy securities; and 2) prime whole loans. The near-term opportunity is buying RMBS, while over the longer term, the strategy should shift to buying whole loans for securitization as the government sponsored enterprise’s (GSE’s) role in the mkt shrinks and the economics are more attractive. 3% dividend yield in 3Q rising to 19% by 1Q12, ex. potential capital gains We expect the dividend to increase to $0.80 by 1Q12, with potential upside depending on the level of capital gains. Valuation: Multiple expansion as portfolio ramps; $21 PT 1.05x BV of $19.90 At a 15% discount to book value, we think shares are attractively valued for a largely agency portfolio and cash; the multiple should expand as the remaining capital is deployed and the dividend target is set. A hybrid REIT-like MTGE is best suited for investors looking for yield and a housing / economic recovery. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$17.09 on 12 Sep 2011 16:42 EDT UBS 13
  14. 14. Morning Expresso - United States 13 September 2011HEALTHCAREManaged Care Healthcare Providers Analyst: Justin Lake, CFA Tel: +1-212-713 2765Updating MCO Price Targets Market realities drive Managed Care revaluation While continued modest cost trends leave favorable near-term Managed Care fundamentals, group continues to be pressured by broader market weakness coupled with overhang via ongoing debt ceiling debate. MCOs valuation multiples now ~9x (representing 20% discount vs. S&P), down from 11x (16% discount to S&P) at the start of July (please see pages 2-3 for historical MCO multiples on both absolute and relative value basis). Fundamentals remain solid, but stocks levered to multiple expansion We continue to be positively inclined on the MCO group given relatively modest exposure to potential broader economic slowdown vs. S&P in general (please see the Aug 16th UBS report “‘What if’ Grey or Black Skies Lie Ahead”, as well as our 8/17 Managed Care note “We See Modest Impact from Any Slowdown” for further color) with main headwinds on membership w/potential relief via lower med costs and ability to pass potential "Super-Committee" Medicare cuts thru to providers. As such, we cont to see favorable operating environment for plans in the near-term absent material med cost trend uptick (UBS checks showing no signs to date) and leave our 2011 / 2012 est. intact. That said, we take a more conservative view on target multiples and lower price targets across the group. Lowering UBS price targets for Managed Care, estimates intact Table 1 below highlights our updated PT / target multiples for the Managed Care space, with pages 2-3 highlighting historical PE multiples for the group. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011 UBS 14
  15. 15. Morning Expresso - United States 13 September 2011INDUSTRIALSEngineering & Construction Heavy Construction Analyst: Steven Fisher, CFA Tel: +1-212-713 8634Macro pressure creates headwinds UBS economists have reduced macro forecasts UBS has reduced macro forecasts for the US and Europe. UBS now expects US GDP growth of 1.6% in 2011 (was 2.6%) and 2.2% in 2012 (was 2.7%). In the Eurozone, UBS expects 1.8% in 2011 (unchanged) and 1.0% in 2012 (was 2.0%). Reducing earnings estimates; revenue and margin pressure expected We continue to expect a sluggish pace of growth, and we think a key implication of the lack of faster growth is margin pressure, as industry capacity remains a bit loose. We reduce EPS estimates for SHAW, JEC, URS, WG, and TPC to reflect margin pressure. Other stocks may have mitigating factors (i.e. buybacks). Micro level data points not all bad While the macro situation is creating headwinds, micro level data points are not all bad, and we provide some examples. ConocoPhillips’ refining spin off expects to spend $2-2.5b on refining in each of the next few years, which we believe is an increase from ~$1b annually under COP. JEC won a chemicals FEED for Aramco. Shaw was awarded a pipe fab contract for a new US manufacturing facility. The most negative data point we have seen is that Codelco indicated that some US and European customers have cancelled some copper orders due to macro uncertainty. Valuations are not particularly demanding, but macro overhangs The E&C group is trading at 10x 2012 consensus estimates, and many stocks in the group are trading near the lower end of a typical historical range. The primary challenges are that estimates might still be too high and that the macro situation is keeping a lid on upside potential for the time being. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011US Automakers Automobile Manufacturers Analyst: Colin Langan, CFA Tel: +1-212-713 9949UAW Contract Conference Call Takeways Changes could include upfront bonuses but no permanent wage increase Today, UBS hosted a call with Sean McAlinden on the UAW labor contract negotiations. This contract expires on Sept 14th. GM will likely be the first to reach a deal (near deadline), followed by Chrysler (next week) and then Ford (end of the month). Major changes in the agreement likely include large upfront bonuses of ~$8,000/worker at GM/Chrysler and $10,000 at Ford. About $5,000 of the bonus reflects the reinstatement of ‘07 bonuses that were eliminated in bankruptcy. Importantly, workers will likely receive annual bonuses instead of wage increases. Tier 2 utilization and wages are important for UAW and D3 Tier 2 employment explains ~64% of the $9/hour difference between Ford and Chrysler’s hourly wages. Moreover, ~33% of GM workers are near retirement, so the opportunity to replace these workers with lower cost Tier 2 workers is high. Sean expects this wage to increase from $14.50/hr today to $21-24/hr over the next 5 years. The UAW could trade Tier 2 constraints (ex. Orion) to keep plants open. UAW likely wins healthcare cost debate UAW workers pay only 8% of their healthcare costs while nationally workers pay 33% and transplant workers pay 20%. Chrysler is fighting to increase the 8%; however the UAW is unlikely to agree to any healthcare cost concessions. Reiterate Buy ratings on GM and Ford The expected large signing bonuses are disappointing and would negatively impact Q3 or Q4 EPS; however keeping the wages flat will ensure the long term viability of the D3 and the competitiveness of the UAW workforce. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011Commercial Aftermarket Monitor Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185Initial Look at Q1 Flight Hours See flight hour growth decelerating in Q4-Q1 Our latest review of global airline schedules provides an initial look at Q1, which reflects decelerating flight hour growth. Specifically, we forecast flight hours 4-5% higher in Q4-Q1, slower growth compared to 6-7% over the prior six quarters dating back to early 2010. Our Q1 2012 forecast reflects a roughly 2% seasonally-adjusted decline from peak levels in Q3. Flight hour growth decelerating across all regions We see decelerating flight hour growth across all regions as capacity cuts announced by US airlines come through and Asia/Middle East comps become progressively more difficult. We forecast Q4-Q1 flight hours flat to slightly lower in North America with Europe up roughly 7% on continued LCC growth (even as Ryanair slows) and the rest of the world up 7-8%. Flight hours well above prior peak, aftermarket still below While Q3 flight hours are 11% above the prior peak, aftermarket revenues are still below. So while flight hour growth is decelerating, we believe the aftermarket can grow at a faster rate. Most importantly, we see out-of-warranty flight hours, which are key to the aftermarket, growing faster than in-warranty (Chart 2). Prefer aftermarket exposed names We continue to favor the aftermarket names over OE as we think increased utilization of out-of-warranty aircraft can still drive high single digit aftermarket growth through 1H 2012 despite slow capacity/economic growth. Our top picks are COL/GR/TDG. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 13 September 2011 UBS 15
  16. 16. Morning Expresso - United States 13 September 2011U.S. Aerospace & Defense Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185Short Interest Update Short interest moves 3% higher 2H August On average, absolute short interest for our coverage group moved 3% higher in 2H August relative to 1H, while the stocks were up 4% on average over the same period. As a percentage of float, short interest for the group came in at 3.6% with aero at 3.6%, defense at 3.4% and multi-industry (TXT/UTX) at 4.1%. Aero/defense short interest higher Short interest up 4% for our aero names in 2H Aug, while up 1% for defense and up 4% for UTX/TXT. SI increased most notably at PCP (+30%), BA (+21%) and LMT (+12%), while declining at GR (-30%) and NOC (-19%). As a % of total float, SI is highest at TGI/TXT (~8%); lowest at BA/GD/UTX, all around 1%. Prefer aftermarket names We favor aftermarket names over OE as we think the aftermarket can continue to come through strong even with slowing economic/capacity growth on increased flying of out-of-warranty aircraft, while we view higher announced production rates at Airbus and BA as unsustainable. We prefer GR/COL/TDG. Defense budget cuts worse than indicated Our analysis of the Deficit Reduction Act indicates the cuts to defense are larger and more front end loaded than widely understood. We believe the DoD budget will be reduced by roughly $500B in a best case scenario with the base budget flat to down in FY12-13 and modernization likely 5-10% lower. If the Super Committee cant agree to additional cuts, we estimate defense will be reduced by $1T with the FY13 budget likely 10% lower and modernization down even more. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011 UBS 16
  17. 17. Morning Expresso - United States 13 September 2011TECHNOLOGYNetLogic Microsystem Rating: Neutral Target: US$50.00 Price: US$48.12 RIC: NETL.O Prior: Buy Prior: US$44.00 Mkt Cap: US$3.30bn BBG: NETL US Semiconductors Analyst: Steven Eliscu Tel: +1-415-352 5674Raise PT to $50, Downgrade to Neutral Downgrade to a Neutral rating on valuation Based on the announced agreement for Broadcom to acquire NetLogic for $50/share and expectations the deal will be completed essentially in its current form, we raise our price target to $50 and downgrade the stock to a Neutral rating, as it currently reflects a fair valuation. Synergies uniquely valuable to Broadcom likely limit additional bids We believe NetLogic brings Broadcom unique synergies: 1) significant boost to its investments in the MIPS architecture, where the only other multicore vendor supporting such is Cavium, 2) solution for switching based on NetLogic’s control plane processor and Broadcom’s Trident switch fabric, which is potentially matched only by Intel with its recently acquired Fulcrum Microsystems switch fabric coupled with its Xeon processors, 3) search processors to complement Broadcom custom network processor for Alcatel- Lucent (~10% of NetLogic sales). Overlap of the respective optical PHY businesses likely not a sticking point While there is overlap of the 10 Gbps optical physical layer (PHY) chip businesses, there will remain multiple direct competitors, including AppliedMicro, Cortina Systems and Vitesse along with indirect competitors, Altera and Xilinx (FPGAs can integrate optical PHY functionality). We also expect the optical segment to be overshadowed from 2012 by the likely much larger 10 Gbps copper PHY market (vendors include Broadcom, Marvell, Aquantia, PLX), as Intel moves the 10 Gbps PHY function onto the motherboard for its upcoming Romley server platform. Valuation: Raise Price Target to $50, Downgrade to Neutral from Buy We raise our PT to $50 from $44 based on Broadcom’s acquisition price of NetLogic. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$48.12 on 12 Sep 2011 19:42 EDTAtmel Rating: Buy Target: US$16.50 Price: US$9.05 RIC: ATML.O Prior: Unchanged Prior: US$18.00 Mkt Cap: US$4.13bn BBG: ATML US Semiconductors Analyst: Steven Eliscu Tel: +1-415-352 5674Lower Estimates, PT on Slowing Macro. Reiterate Buy as Thesis Stays Solid Stay constructive but derisk for macro impact to Industrial/Consumer biz On read-throughs from our companies providing updates and commentary on our recent bus tour as well as mixed macro data points, we lower our estimates and price target to $16.50 from $18.00, as we believe the combination of slowing orders and customers/channel pre-emptively destocking inventory in anticipation of macro weakness are the primary drivers. Nevertheless, Atmel remains among our top picks, and we reiterate our Buy rating, as we continue to believe Atmel is positioned to: 1) continue to lead the market in merchant touchscreen controllers, 2) gain share in the broader microcontroller market, 3) show operating leverage. Positive view reinforced by new active stylus solution for next gen tablets Based on our recent industry checks, we believe Atmel has developed viable low-cost active stylus capability for tablets, which we believe will help sustain high-end touch-screen controller leadership in 2012. Even excluding stylus capability, which is likely to be initially a niche, we expect Atmel’s new E-series touch controllers to sustain its market position, even vs Cypress’s latest TrueTouch Gen 4 products. Lower estimates on near-term macro headwinds, lower tablet sales We lower our 3Q11 sales/EPS estimates by 2%/5% to $482.3m/$0.18 and 2011 estimates by 2%/5% to $1,897m/$0.71. For 2012/13, we lower our sales estimates by 4% to $2,065m/$2,296m and EPS estimates by 7%/6% to $0.84/$0.99. Valuation: Lower Price Target to $16.50, Reiterate Buy Rating We lower our DCF-based PT to $16.50 (20x our 2012 $0.84 EPS est) from $18. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$9.05 on 12 Sep 2011 19:42 EDTJuniper Networks Rating: Neutral Target: US$24.00 Price: US$21.74 RIC: JNPR.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$11.9bn BBG: JNPR US Communications Technology Analyst: Nikos Theodosopoulos Tel: +1-212-713 3286Innovation Day Thoughts Highlighting Innovation, No Financial Update, T4000 Most Promising Juniper emphasized its focus and strong position for capitalizing on growth in the mobile internet and cloud computing. Although we did not hear anything requiring changes to our Juniper forecast at this time, we consider its T4000 launch as the most promising with relatively lower execution risk (4Q shipments). In the past Juniper seamlessly upgraded its core routers from the T640 to the T1600. New Product Acceptance May Take Time We continue to believe a meaningful revenue ramp of Juniper’s new products, including the PTX, MobileNext and QFrabric, are likely to take time. Each of these products are likely to require a more lengthy customer sales cycle, in our view, than some of Juniper’s prior product launches, and may not be meaningful until 2Q or 3Q of 2012. More significant architectural decisions are required for PTX and QFrabric. MobileNext in the mobile core has a lengthened sales cycle. Headcount Reduction Occurred This Past Week, But Modest In Size Juniper had a modest headcount reduction this past week, but that it was not material enough for the company to disclose publicly. In addition, Juniper still expects its headcount to be up by the end of 2011 vs. 2010, so it appears while there was a headcount reduction, it was more modest than we expected. Without more accelerated revenue growth, this likely lengthens the time for Juniper to achieve its long-term operating margin target of ~25%. Valuation—Neutral Rating Our $24 price target is based on ~16x our CY12 EPS estimate of $1.53 ex opts. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$21.74 on 12 Sep 2011 18:42 EDT UBS 17
  18. 18. Morning Expresso - United States 13 September 2011Cypress Rating: Buy Target: US$22.00 Price: US$15.90 RIC: CY.O Prior: Unchanged Prior: US$26.00 Mkt Cap: US$2.68bn BBG: CY US Semiconductors Analyst: Steven Eliscu Tel: +1-415-352 5674Lower Estimates, PT on Slower Macro, HP Device Exit. Expect Still Solid 2012 Growth Lower estimates, PT. Maintain Buy on solid +12% ‘12 sales, Nov catalysts On expectations the slowing macro will result in both OEM inventory destocking pre-empting a downturn as well as slowing end demand, we lower estimates and PT to $22 from $26. Likely to have particular impact to Cypress are: 1) the slow consumer/computing sectors, which are likely to show muted 2H seasonality, 2) the loss of the HP WebOS device business to hit from 4Q ($5m+/qtr), 3) some delays in wireless infrastructure spend. We maintain Buy, as we expect solid +12% 2012 growth and believe its Nov analyst meeting could be a catalyst as it updates touch design wins and discloses a new business that could be material to valuation. CY model well supported by multiple sales growth drivers and op leverage We lower our 2012 sales growth expectation to +12% from +20% but continue to view touchscreen controllers/microcontrollers and Emerging Tech businesses as key growth drivers. Even as we now model for slight y/y declines in SRAM and USB (assuming limited benefit from the USB 3.0 product cycle), stable gross margin and tight opex control should still drive 22% y/y non-GAAP EPS growth. Lower estimates mainly in touchscreen controllers, USB and SRAM For 3Q, we lower our sales/non-GAAP EPS estimate by 3%/6% to $264.9m/$0.34 and for 2011, we lower estimates by 4%/8% to $1,006m/$1.20. For 2012/13, we lower sales 10%/8% to $1,132m/$1,305m and pf EPS by 16%/11% to $1.47/$1.74. Valuation: Lower Price Target to $22, Maintain Buy Rating We lower our DCF-based PT to $22 (16x our $1.25 2012 pf EPS est) from $26. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$15.90 on 12 Sep 2011 18:42 EDTIntersil Rating: Neutral Target: US$11.00 Price: US$10.66 RIC: ISIL.O Prior: Unchanged Prior: US$12.00 Mkt Cap: US$1.34bn BBG: ISIL US Semiconductors Analyst: Uche Orji Tel: +1-212-713 4015Intersil lowers 3Q outlook; Maintain Neutral, lower PT to $11 Intersil lowers 3Q outlook As expected, ISIL lowered its revenue outlook for 3Q to $184-$188m (down 12-10% Q/Q), from previous guidance of $205-213m (down 2% to up 2%Q/Q). ISIL attributed the lowered outlook to broad-based weakness across end-markets and inventory adjustment. However, the company indicated that inventory is stabilizing and orders rate should improve going forward. We lower our estimates and reduce price target to $11. Few signs of bottoming, but limited visibility on demand While the inventory in the channel should bottom out by the end of the quarter, we don’t see any significant demand catalysts to drive revenue, and therefore we remain cautious on the analog sector. We would like to see stabilization in macro indicators such as ISM and improved demand visibility before turning positive on the group. Lowering estimates We lower 3Q Rev/EPS to $186m/10c, from $210m/16c. For 2011, we lower Rev/EPS to $784m/51c, from $836m/63c, and for 2012 to $766m/50c, from $882m/79c. Valuation: Maintain Neutral, lower price target to $11 We maintain Neutral rating and lower price target to $11 from $12. Our $11 PT is DCF-based (WACC: 10.4%, g: 2%); equates to 22x 2012E EPS. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$10.66 on 12 Sep 2011 18:42 ESTDiodes Inc. Rating: Neutral Target: US$20.00 Price: US$18.25 RIC: DIOD.O Prior: Unchanged Prior: US$22.00 Mkt Cap: US$0.83bn BBG: DIOD US Semiconductors Analyst: Steven Chin Tel: +1-415-352 5675Outlook Lowered on Persistent Softness Q3 revenue guidance unchanged but gross margin view lowered to 29.0% Diodes maintained its Sep ’11 quarter revenue outlook for a sales range of $160-170m, or flat to down -6%. However, it lowered its gross margin view to 29.0% +/- 150bps vs the prior midpoint of 32.0% due to unfavourable pricing and sales mix as Diodes maintains fab utilization rates. We believe Diodes continues to execute well and remains nimble despite the challenging end market demand conditions. Cost pressures from labor and metals expected to persist in medium term We expect Diodes’ design win pipeline, growing exposure to Asia consumers, and new standard logic products to help the company outperform peers on a relative basis and gain further share in discrete and standard analog. However, we believe the soft macro and rising manufacturing costs will continue to weigh on sentiment for the name. In addition to labor costs, Diodes’ ability to quickly move to copper from gold as a key chip packaging material will influence forward margin trends. Lowering C11/12E EPS by -9%/-4% on lower gross margin view Our Q3 sales forecast is unchanged at $163m but GAAP EPS declines to $0.26 from $0.32 on lower gross margin view and partly offset by reduced tax rate. We also reduce our Q4 gross margin forecast and leads to C11 EPS declining -9% to $1.39. C11 sales are unchanged at $661m. C12 sales remain at $695m but we trim 1H gross margins, resulting in EPS declining -4% to $1.59. Valuation: Lower Price Target to $20 from $22, Neutral rating Our new $20 DCF-based PT is equiv to 14x C11E EPS (11x non-GAAP) vs a historic range of 9-20x. We assume a WACC of 12.3% and terminal growth of 2%. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$18.25 on 12 Sep 2011 19:42 EDT UBS 18
  19. 19. Morning Expresso - United States 13 September 2011IT Hardware Computers Analyst: Maynard J. Um Tel: +1-212-713 3372Short Interest (Aug 31) & Catalyst Update NYSE & NASDAQ Short Interest Summary for the period ended 08/31/11 Short interest increased 11.2% prd/prd for IT Hardware companies under coverage while the market was up 1.2% in the prd. IBM (27.3%), NTAP (23.3%) & AAPL (20.9%) saw large increases while HPQ saw largest decrease at 6.4%. Catalysts include Intel Developer Conf., Microsoft Analyst day and RIMM earnings. AAPL & IBM see large short interest increases AAPL SI increased 20.9% while stock was flattish. We believe a new iPhone, iCloud initiative and strong demand for iPads and Macs should drive a seasonally strong 2H11 & expect seamless CEO transition. With strong trends and at 12x our FY12 EPS est., we see valuation compelling. IBM stk was also flat during the prd with SI up 27.3% (up 10% and 13.3% in last 2 prd). HPQ sees largest short interest decline; DELL’s SI increases HPQ SI was down 6.4% with stk declining 19.7% during the prd as HPQ lowered guidance and announced several strategic changes. HP’s challenges could take multiple quarters to resolve, in our view. Dell SI increased 8.1% in the prd as op. margin pressure and limited revenue growth (pruning of low-margin business) could potentially limit EPS upside near-term. EMC short interest decreases while NTAP’s increases EMC’s SI was dn 5.8% and its coverage ratio remained high at 3.18 days. NTAP’s SI saw a large increase of 23.3%likely reflecting its cautious public and fin. svcs sectors spending with July orders slowing to half the level that of May. L-T, we expect NetApp to perform well given favorable secular trends in NAS market. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 September 2011 UBS 19
  20. 20. Morning Expresso - United States 13 September 2011TRANSPORTATIONSwift Transportation Rating: Buy Target: US$13.50 Price: US$7.78 RIC: SWFT.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$0.57bn BBG: SWFT US Trucking Analyst: Rick Paterson Tel: +1-212-713 7944No Bad News is Good News Management affirms Street estimates, sees solid Q3 volumes, pricing SWFT held a mid-quarter update call tonight and management’s commentary should provide investors with a sigh of relief given the recent selloff in the shares. Trucking volumes will likely rise 4% y/y in Q3 with pricing coming in at +3-4% in 2H/2011. Management plans to dispose of tractors (~6% of truck count) and reduce capex spend in 2011 which will result in higher gains on sales in Q3. Affirmation of consensus expectations is a moral victory SWFT’s comfort with Street numbers and reiteration of positive volume and pricing trends is a moral victory – no big upside surprise – but given the reaction (we’d say overreaction) in the stock in recent weeks the lack of bad news is good news. We’ll watch the fleet count as the easing of tractor growth is prudent in this uncertain climate, but the move also seems somewhat at odds with commentary that Swift’s customers remain very positive on a strong holiday season. Top pick in the group SWFT remains our top pick in the space with the obvious caveat that all transport stocks would fall considerably in an economic worst case scenario. The risk/reward in SWFT looks very appealing given the attractive debt maturity profile (nothing large until 2016), limited near-term covenant hurdles, and valuation at just one turn over half that of the TL sector avg. (9x NTM EPS vs. 16x for the group ex-SWFT). Valuation Our $13.50 target is based on 13x our forward EPS estimates. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$7.78 on 12 Sep 2011 18:42 EDT UBS 20
  21. 21. Morning Expresso - United States 13 September 2011UBS Key Calls - USLive Key Call Portfolio Stock Name RIC Rating Price Target Date of call Current Price Analyst Apple Inc. AAPL.O Buy US$510 2-Jun-11 US$379.94 Maynard Um Baker Hughes Inc. BHI.N Buy US$102 7-Jun-11 US$57.7 Angie Sedita Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$39.93 Steven Valiquette Celgene Corporation CELG.O Buy US$71 9-Dec-10 US$60.32 Matthew Roden, PhD CONSOL Energy, Inc. CNX.N Buy US$84 4-Aug-11 US$43.23 Shneur Gershuni, CFA Deere & Co. DE.N Buy US$110 18-Jan-11 US$75.05 Henry Kirn, CFA Dow Chemical DOW.N Buy US$40 21-Mar-11 US$25.76 Andrew Cash Ford Motor Co. F.N Buy US$22 10-Jan-11 US$10.11 Colin Langan, CFA General Electric Co. GE.N Buy US$20 10-Jan-11 US$15.01 Jason Feldman Google Inc. GOOG.O Buy US$800 10-May-10 US$530.12 Brian Pitz Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$76.86 Henry Kirn, CFA Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$46.8 Andrew Kligerman Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$51.39 Parag Agarwal SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$40.02 Uche OrjiSource: Reuters, UBS. Prices as at market close on September 12, 2011. UBS 21
  22. 22. Morning Expresso - United States 13 September 2011Rating & PT ChangesKey Rating and Price Target Changes: US Company Name Directional Indicator/Rationale Reuters Code Current New New PT Prior Prior PT Share Price Rating Rating AECOM Technology Corp. Reiterate Buy, lower PT ACM.N US$20.73 Buy US$29 Buy US$31 American Capital Mortgage Initiation of Coverage at Buy MTGE.O US$17.09 Buy US$21 Not Rated Not Rated Atmel Corporation Reiterate Buy, lower PT ATML.O US$9.05 Buy US$16.5 Buy US$18 Cigna Corp. Reiterate Buy, lower PT CI.N US$43.68 Buy US$55 Buy US$59 Clear Channel Outdoor Initiation of Coverage at Neutral CCO.N US$10.39 Neutral US$11 Not Rated Not Rated Coca-Cola Enterprises Upgrade to Buy, maintain PT CCE.N US$25.52 Buy US$30 Neutral US$30 Coventry Health Care Maintain Neutral, lower PT CVH.N US$31.8 Neutral US$34 Neutral US$35 Cypress Semiconductor Reiterate Buy, lower PT CY.O US$15.9 Buy US$22 Buy US$26 Dice Holdings Inc Maintain Neutral, lower PT DHX.N US$9.13 Neutral US$10 Neutral US$15 Diodes Incorporated Maintain Neutral, lower PT DIOD.O US$18.25 Neutral US$20 Neutral US$22 Health Net Inc. Maintain Neutral, lower PT HNT.N US$23.77 Neutral US$26 Neutral US$33 HealthSpring Inc. Reiterate Buy, lower PT HS.N US$36.72 Buy US$48 Buy US$52 Humana Inc. Reiterate Buy, lower PT HUM.N US$73.5 Buy US$87 Buy US$88 Inergy L.P. Upgrade to Buy, lower PT NRGY.N US$27.79 Buy US$31 Neutral US$36 Intersil Inc. Maintain Neutral, lower PT ISIL.O US$10.655 Neutral US$11 Neutral US$12 Jacobs Engineering Group, Maintain Neutral, lower PT JEC.N US$34.85 Neutral US$38 Neutral US$45 Inc. Lamar Advertising Initiation of Coverage at Sell LAMR.O US$18.26 Sell US$16.5 Not Rated Not Rated Monster Worldwide Inc. Reiterate Buy, lower PT MWW.N US$8.09 Buy US$11 Buy US$18 NetLogic Microsystems Inc Downgrade to Neutral, increase PT NETL.O US$48.12 Neutral US$50 Buy US$44 Niska Gas Storage Partners Maintain Neutral, lower PT NKA.N US$12.82 Neutral US$13 Neutral US$18 LLC PAA Natural Gas Storage Upgrade to Buy, maintain PT PNG.N US$16.4 Buy US$22.5 Neutral US$22.5 LP Shaw Group Inc Reiterate Buy, lower PT SHAW.N US$23.22 Buy US$33 Buy US$37 Triple-S Management Maintain Neutral, lower PT GTS.N US$16.15 Neutral US$17.5 Neutral US$24 Corporation Tutor Perini Corp. Reiterate Buy, lower PT TPC.N US$13.32 Buy US$26 Buy US$28 UBS 22
  23. 23. Morning Expresso - United States 13 September 2011 UnitedHealth Group Reiterate Buy, lower PT UNH.N US$46.26 Buy US$58 Buy US$60 URS Corporation Maintain Neutral, lower PT URS.N US$31.69 Neutral US$35 Neutral US$38 WellPoint, Inc. Reiterate Buy, lower PT WLP.N US$63.38 Buy US$79 Buy US$90 Willbros Group, Inc. Maintain Neutral, lower PT WG.N US$5.91 Neutral US$6.5 Neutral US$9.25Source: Reuters, UBS. Prices as at market close on September 12, 2011. UBS 23
  24. 24. Morning Expresso - United States 13 September 2011Markets, Events and NewsflowToday’s Company Events Company Name Event Reuters code Rating PT Notes Best Buy Earnings Release BBY.N Neutral US$26Source: Reuters, UBS. Prices as at market close on September 12, 2011.Today’s Macroeconomic Events: US Indicator Time (ET) UBS forecast Previous Consensus Manpower Employment Survey (Q4)index 1:00 na na na NFIB Index (Aug)index 8:30 na 89.9 na Weekly ICSC Store Sales (Sep 10)wow 8:45 na na na Redbook Store Sales (Sep 10)mom 9:55 na na na Import Prices (Aug)mom 9:30 na 0.3% na TIPP/IBD Optimism Index (Sep)index 11:00 na 35.8 na Federal Budget (Aug)lvl 15:00 na na naSource: Bloomberg, UBSToday’s UBS Hosted Corporate Roadshow: Company Event Location Dell 1X meeting hosted by Maynard J. Um Europe / UK El Paso Corporation 1X meeting hosted by Ronald J. Barone Midwest Foot Locker, Inc. 1X meeting hosted by Michael Binetti Boston NTELOS Holdings Corp 1X meeting hosted by Batya Levi Southeast Questar Corp 1X meeting hosted by Christopher P. Sighinolfi EuropeToday’s UBS Hosted Fieldtrip: Company Event Location Amazon UBS Fieldtrip West CoastToday’s UBS Hosted Conference: Company Event Location None UBS 24
  25. 25. Morning Expresso - United States 13 September 2011Latest Market Movements: Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change Americas United States Dow Jones 11061.1 0.63 -4.46 United States S&P 500 1162.3 0.70 -7.58 United States Nasdaq 2495.1 1.10 -5.95 United States S&P VIX 38.59 0.18 Europe Europe FTSE Eurofirst300 885.8 -0.58 -21.03 Belgium BEL 20 2037.6 -0.75 -20.98 Germany DAX 5057.9 -0.28 -26.85 France CAC 2810.5 -1.55 -26.13 Italy MIB 30 13470.0 -0.03 -33.23 Netherlands AEX 265.9 -0.98 -25.02 Portugal PSI 20 5657.3 -2.38 -25.45 Spain IBEX 7603.5 -0.49 -22.88 Switzerland SMI 5320.2 0.32 -17.34 UK FTSE 100 5105.4 -0.47 -13.47 Asia Hong Kong Hang Seng 19030.5 0.00 -17.39 India BSE Sensex 16490.5 -0.07 -19.59 Japan Nikkei 225 8616.6 0.95 -15.76Source: UBS, Reuters. Indices in Americas as at market close on September 12, 2011. Indices in Europe and Asia as at 05:00 EDT on September 13, 2011Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change Euro €/$ 1.367 0.16% -4.0% 2.1% UK £/$ 1.586 0.17% -2.6% 1.6% Canada CAD/$ 1.008 0.48% -0.5% 0.6% Switzerland CHF/$ 1.135 0.33% -11.7% 6.1% China Yuan/$ 0.157 0.00% 0.0% 3.2% Brazil BRL/$ 0.587 -1.81% -5.4% -2.6% India INR/$ 0.021 -1.56% -3.9% -5.3% Mexico MXN/$ 0.078 -1.32% -4.3% -4.1% Japan $/JPY 0.771 -0.50% 0.6% -5.0% Australia AUD/$ 1.036 -0.51% 0.0% 1.2%Source: UBS, Reuters. Prices as at market close on September 12, 2011 UBS 25
  26. 26. Morning Expresso - United States 13 September 2011Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change Gold ($/oz) 1811.70 -0.09 5.65 30.05 Brent Crude spot, $/bbl 112.06 -0.17 7.32 24.11 WTI Crude spot, $bbl 88.45 0.29 - - Natural Gas, $MMBTU 3.87 -0.33 -5.04 -6.16Source: UBS, Reuters. Prices as at market close September 13, 2011. UBS 26