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Financial Pacific - Investment Research (third party)

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In today’s global economy it is important to be fully aware of the intricacies of international investments and the opportunities that these have to offer. Financial Pacific offers proven overseas …

In today’s global economy it is important to be fully aware of the intricacies of international investments and the opportunities that these have to offer. Financial Pacific offers proven overseas investment opportunities.

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  • 1. ab Global Equity Research UBS Investment Research U.S. Morning Meeting Highlights - 23 July 2010 http://www.ubs.com/investmentresearch Global Strategy Equity Strategy Thomas M. Doerflinger, p.32 Ph.D. US Equity Strategy Comment - Q2 2010 Earnings Season Weekly Update: Week 2 Economics Economics Maury N. Harris p.32 US Daily Economic Comment - A quiet Friday? Ratings Change Array BioPharma, ARRY.O Jeff Elliott, Ph.D. p.17 Upgrading to Buy on Valuation 12-month rating: Prior: Neutral => Buy * CBE , FY10E US$(1.58), FY11E US$(1.02), PT US$4.25, Mkt Cap US$0.16bn Estimate/Price Target Revisions Safeway, SWY.N Neil Currie p.9 2H2010 Assumptions Still Heroic? 12-month rating: Neutral (Unchanged), FY10E US$1.71=>US$1.45, FY11E US$1.90=>US$1.62, PT Prior: US$21.00 => US$20.00, Mkt Cap US$7.59bn SanDisk, SNDK.O Uche Orji p.30 Strong Secular Demand and Gross Margin Thesis Remains Intact. Reiterate Buy. 12-month rating: Buy * (Unchanged) CBE , FY10E US$3.46=>US$4.02, FY11E US$3.77=>US$4.40, PT US$55.00, Mkt Cap US$9.99bn Skyworks Solutions, SWKS.O Parag Agarwal p.28 New customer ramp drives solid results and outlook; Reiterate Buy, raise PT to $22 12-month rating: Buy (Unchanged), FY10E US$0.83=>US$0.81, FY11E US$1.22=>US$1.40, PT Prior: US$19.00 => US$22.00, Mkt Cap US$3.19bn JetBlue Airways, JBLU.O Kevin Crissey p.7 Thoughts After the Call 12-month rating: Neutral * (Unchanged) CBE , FY10E US$0.36=>US$0.45, FY11E US$0.45=>US$0.42, PT Prior: US$6.50 => US$7.00, Mkt Cap US$1.76bn Alaska Air, ALK.N Kevin Crissey p.7 Thoughts After the Call 12-month rating: Buy * (Unchanged) CBE , FY10E US$6.91=>US$6.31, FY11E US$7.26=>US$7.23, PT US$60.00, Mkt Cap US$1.76bn Continental Airlines, CAL.N Kevin Crissey p.8 Thoughts After the Call 12-month rating: Buy * (Unchanged) CBE , FY10E US$4.14=>US$3.32, FY11E US$4.87=>US$3.62, PT US$35.00, Mkt Cap US$3.38bn This package has been prepared by UBS Securities LLC UBS 1 ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 33 *Under review (UR) and/or exception to core rating bands (CBE) - see page : 33 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. U.S. Morning Meeting Highlights 23 July 2010 Mettler-Toledo, MTD.N Derik de Bruin, Ph.D. p.21 Big Q2 Beat, Raise Partly Hindered By F/X 12-month rating: Buy (Unchanged), FY10E US$6.41=>US$6.45, FY11E US$7.45=>US$7.40, PT US$150.00, Mkt Cap US$4.09bn Cepheid, CPHD.O Derik de Bruin, Ph.D. p.17 Margins Improve, Still Cautious Outlook 12-month rating: Neutral * (Unchanged) CBE , FY10E US$(0.26)=>US$(0.22), FY11E US$0.07=>US$0.11, PT US$20.00, Mkt Cap US$0.87bn Cypress, CY.O Steven Eliscu p.29 Strong Microcontroller Order Momentum and Sustainably Higher Gross Margin 12-month rating: Neutral (Unchanged), FY10E US$0.40=>US$0.44, FY11E US$0.53=>US$0.51, PT US$12.00, Mkt Cap US$1.76bn 3M Co., MMM.N Jason Feldman p.22 Continued Strong Performance in 2Q 12-month rating: Buy (Unchanged), FY10E US$5.60=>US$5.80, FY11E US$6.15=>US$6.40, PT US$100.00, Mkt Cap US$60.3bn Caterpillar, CAT.N Henry Kirn, CFA p.21 Raising ests, price target after impressive 2Q 12-month rating: Neutral (Unchanged), FY10E US$3.00=>US$3.60, FY11E US$4.00=>US$4.50, PT Prior: US$70.00 => US$74.00, Mkt Cap US$42.4bn AutoNation, AN.N Colin Langan, CFA p.6 Still Cautious Despite Beat 12-month rating: Sell (Unchanged), FY10E US$1.30=>US$1.50, FY11E US$1.40=>US$1.55, PT Prior: US$18.00 => US$20.00, Mkt Cap US$3.83bn Bristol-Myers, BMY.N Marc Goodman p.18 Bristol Knows How to Perform 12-month rating: Neutral (Unchanged), FY10E US$2.13=>US$2.15 , PT US$26.00, Mkt Cap US$42.7bn ProLogis, PLD.N Ross T. Nussbaum p.14 Navigating through choppy waters 12-month rating: Neutral (Unchanged), FY10E US$0.58=>US$0.62, FY11E US$0.85=>US$0.83, PT US$11.00, Mkt Cap US$5.23bn Nucor Corp., NUE.N Timna Tanners p.6 Tepid Demand, Rising Scrap Temper View 12-month rating: Neutral (Unchanged), FY11E US$2.35=>US$2.20, PT US$40.00, Mkt Cap US$12.5bn Tyco Electronics, TEL.N Amitabh Passi p.20 Solid Execution; Raising Estimates 12-month rating: Buy (Unchanged), FY10E US$2.48=>US$2.52, FY11E US$2.47=>US$2.66, PT Prior: US$32.00 => US$33.00, Mkt Cap US$11.7bn Zimmer, ZMH.N Bruce Nudell, PhD p.15 2Q10: it’s go time 12-month rating: Buy (Unchanged), FY10E US$4.29=>US$4.28, FY11E US$4.79=>US$4.72, PT US$72.00, Mkt Cap US$11.3bn Microsoft, MSFT.O Brent Thill p.24 Strong Q4: Kinecting w/ Enterprise Demand 12-month rating: Buy (Unchanged), FYE -, PT Prior: US$38.00 => US$35.00, Mkt Cap US$228bn SunTrust Banks, STI.N Heather Wolf, CFA p.13 EPS to Fall Short of Elevated Expectations 12-month rating: Sell (Unchanged), FY10E US$(1.65)=>US$(1.10), FY11E US$(0.65)=>US$(0.55), PT Prior: US$12.00 => US$14.00, Mkt Cap US$12.3bn Fifth Third Bancorp, FITB.O Heather Wolf, CFA p.14 Making Progress, But Still Headwinds 12-month rating: Sell (Unchanged), FY10E US$(0.30)=>US$0.25, FY11E US$0.30=>US$0.60, PT Prior: US$9.00 => US$10.00, Mkt Cap US$9.90bn UBS 2
  • 3. U.S. Morning Meeting Highlights 23 July 2010 Riverbed Technology, RVBD.O Nikos Theodosopoulos p.27 Nice Beat and Raise, Raising Tgt and Fcst 12-month rating: Neutral * (Unchanged) CBE , FY10E US$0.34=>US$0.41, FY11E US$0.50=>US$0.56, PT Prior: US$32.00 => US$35.00, Mkt Cap US$2.25bn Amazon.com, AMZN.O Brian Pitz p.25 Higher Fulfillment a Nice Problem to Have 12-month rating: Buy (Unchanged), FY10E US$2.99=>US$2.78, FY11E US$4.22=>US$4.20, PT Prior: US$170.00 => US$165.00, Mkt Cap US$53.4bn Calix, CALX.N Nikos Theodosopoulos p.28 Reports Solid 2Q10—Frontier and Broadband Stimulus Remain Catalysts 12-month rating: Buy (Unchanged), FY10E US$0.00=>US$(0.37), FY11E US$0.38=>US$0.10, PT US$14.50, Mkt Cap US$0.43bn Chubb Corp., CB.N Brian Meredith p.12 EPS In-Line Despite Heavy Cat Losses 12-month rating: Buy (Unchanged), FY10E US$5.28=>US$5.40, FY11E US$5.75=>US$5.90, PT US$59.00, Mkt Cap US$17.2bn Danaher, DHR.N Jason Feldman p.22 2Q: Selloff unjustified given solid results 12-month rating: Buy (Unchanged), FY11E US$2.50=>US$2.55, PT Prior: US$48.50 => US$45.00, Mkt Cap US$24.5bn Flextronics, FLEX.O Amitabh Passi p.20 Inching Along To The Target Model 12-month rating: Buy (Unchanged), FY11E US$0.77=>US$0.80, FY12E US$0.83=>US$0.90, PT US$9.50, Mkt Cap US$5.41bn Huntington Bancshare, HBAN.O Erika Penala p.13 Solid progress, but more to go 12-month rating: Sell (Unchanged), FY10E US$(0.26)=>US$(0.23) , PT US$4.00, Mkt Cap US$2.35bn Lilly, LLY.N Marc Goodman p.19 Bumping Numbers Upward, but Still Neutral 12-month rating: Neutral (Unchanged), FY10E US$4.44=>US$4.59, FY11E US$4.35=>US$4.38, PT US$36.00, Mkt Cap US$40.2bn Quicksilver Res., KWK.N William A. Featherston p.11 KGS Deal Relieves Liquidity Concerns and Very Accretive to NAV 12-month rating: Buy * (Unchanged) CBE , FY10E US$2.15=>US$2.10, FY11E US$2.20=>US$2.15, PT Prior: US$16.00 => US$18.00, Mkt Cap US$2.17bn Reliance Steel, RS.N Timna Tanners p.24 Q2 Beats, Steady Outlook Supports Buy 12-month rating: Buy * (Unchanged) CBE , FY10E US$2.80=>US$2.85, FY11E US$4.90=>US$4.75, PT US$57.00, Mkt Cap US$2.90bn Royal Caribbean, RCL.N Robin M. Farley p.8 RCL: Yield Outlook Hanging In There, Q2 Better Exp., H2 Exp. Unchanged 12-month rating: Neutral (Unchanged), FY10E US$1.87=>US$1.96 , PT Prior: US$34.00 => US$30.60, Mkt Cap US$5.96bn St. Jude Medical, STJ.N Bruce Nudell, PhD p.16 Solid execution 12-month rating: Buy (Unchanged), FY10E US$2.83=>US$2.88, FY11E US$3.19=>US$3.28, PT US$46.00, Mkt Cap US$11.5bn Company Update Cabot Oil & Gas, COG.N David Deckelbaum p.10 Eastern Promises Buoy Long-Term Value 12-month rating: Buy (Unchanged), FY10E US$5.38=>US$4.97, FY11E US$5.46=>US$4.88, PT US$43.00, Mkt Cap US$3.40bn UBS 3
  • 4. U.S. Morning Meeting Highlights 23 July 2010 Cavium Networks, CAVM.O Steven Eliscu p.29 2Q Results Preview: Expect Solid Growth on Strong Enterprise, Wireless Trends 12-month rating: Buy (Unchanged), FY10E US$0.20, FY11E US$0.62, PT US$32.00, Mkt Cap US$1.27bn NetLogic Microsystem, NETL.O Steven Eliscu p.30 2Q Preview: Expect Solid Results and Outlook on Secular Growth Trends 12-month rating: Buy (Unchanged), FY10E US$(0.03), FY11E US$0.59, PT US$34.50, Mkt Cap US$1.82bn Murphy Oil, MUR.N William A. Featherston p.11 MUR to Exit Refining Business…Finally 12-month rating: Neutral (Unchanged), FY10E US$12.67, FY11E US$13.33, PT US$60.00, Mkt Cap US$9.92bn Newfield Exploration, NFX.N William A. Featherston p.12 2Q Roughly In-Line; Fine Tuning Estimates 12-month rating: Buy (Unchanged), FY10E US$10.80=>US$10.65, FY11E US$11.05=>US$11.10, PT US$65.00, Mkt Cap US$6.96bn Cooper Industries, CBE.N Jason Feldman p.23 2Q beats, but guidance disappoints 12-month rating: Buy (Unchanged), FYE -, PT Prior: US$56.00 => US$51.00, Mkt Cap US$7.45bn AT&T Inc., T.N John C. Hodulik, CFA p.31 Raising EPS on stronger margins 12-month rating: Buy (Unchanged), FY10E US$2.40, FY11E US$2.55, PT US$31.00, Mkt Cap US$151bn Baxter International, BAX.N Bruce Nudell, PhD p.16 2Q10: BioScience work in progress 12-month rating: Buy (Unchanged), FYE -, PT US$56.00, Mkt Cap US$25.9bn Industry Update Heavy Construction Steven Fisher, CFA p.23 Engineering & Construction - E&C Q2 preview: Macro vs. Micro Mining & Metals Julien Garran p.5 UBS Global I/O: Commodity Price Review - Time to Accumulate Coal Shneur Z. Gershuni, CFA p.10 The Coal Miner - Valuations Attractive, Is It Time Yet? Diversified Technology Services Jason Kupferberg p.25 Payment Processing: UBS “Swipe” - V/MA: How much will C2Q results matter? Computer Services & IT Consulting Jason Kupferberg p.26 Computer Services & IT Consulting - AXP and COF card volumes follow the trend Computer Services & IT Consulting Jason Kupferberg p.26 Computer Services & IT Consulting - A big week for processors Healthcare Providers Justin Lake, CFA p.18 HealthCare Services – MCO/Hospitals - Q2’10 Earnings Preview for Week of 7/26 Precious Metals Brian MacArthur, CFA p.5 North American Precious Metal Producers - UBS updates metal price forecasts Real Estate Ross T. Nussbaum p.15 The Weekly REIT Appraisal - 2Q10 Earnings – Early Takeaways Technology Maynard J. Um p.27 IT Hardware - Read From MSFT's Jun. Qtr Results Healthcare Steven Valiquette p.19 U.S. Healthcare Distribution - Drug - More 2011 Generic Pipeline Analysis UBS 4
  • 5. U.S. Morning Meeting Highlights 23 July 2010 Basic Materials Brian MacArthur, CFA.................... +1-416-350 2229 North American Precious Metal Producers . Analyst UBS updates metal price forecasts brian.macarthur@ubs.com Precious metals forecasts up Onno Rutten.................................... +1 416 814-3663 UBS has revised its precious metals forecasts. The gold price forecasts have been raised Analyst between 4 and 13%, as our Commodity Strategist, Edel Tully, anticipates an extension of the onno.rutten@ubs.com . fear trade and uncertainty. This leaves us above consensus over all forecast periods. Our Chris Lichtenheldt, CFA.................+1-416-814 3719 forecasts for silver and platinum have also been modestly lifted. Analyst Base metals forecasts down chris.lichtenheldt@ubs.com We have also adjusted our models to reflect UBS’ updated base metals prices, where relevant. Dan Rollins...................................... +1 416 814 3694 As a result, UBS has reduced prices for 2010 and 2011 by around 5-10% for the base metals. . Analyst For more information on UBS’ metal updates, please see Julien Garran’s “UBS Global I/O: dan.rollins@ubs.com Commodity Price Review” dated July 22nd. Alana Johnston, CA.......................... +1 416 814 1449 EPS impact Associate Analyst On average, our gold equities EPS estimates are up 12% in 2010, 4% in 2011, and 17% in alana.johnston@ubs.com 2012; our silver / PGM equities EPS estimates are up 8% in 2010, down 2% in 2011, and up . 26% in 2012; and our royalty / stream equities EPS estimates are up 3% in 2010, 4% in 2011, Michael Tsada.................................. +1 416 814 3697 and 8% in 2012. Associate Analyst michael.tsada@ubs.com Valuation update There are only minor changes to price targets across our universe as we continue to value the companies using a flat $1250/oz gold price. We are upgrading Franco-Nevada from Neutral to Buy on share price depreciation. We continue to believe that investment and speculative flows are the greatest driver of gold and silver prices. - Julien Garran................................ +44-20-7568 3540 UBS Global I/O: Commodity Price Review . Analyst Time to Accumulate julien.garran@ubs.com Maximising risk/reward Tom Price..........................................+612 9324 2189 It is time to accumulate metals and mining stocks. But we also advise investors to take their Analyst time accumulating, using the inherent volatility of the market to maximise the risk/reward of their tom.price@ubs.com . investment. We review our five signal approach to maximise risk/reward investment Edel Tully........................................ +44 20756 76755 opportunities in the sector. Strategist Commodities to watch: thermal coal, copper, zinc & gold edel.tully@ubs.com We have only made modest changes to our commodity price forecasts. Short-term base metal prices are pared to reflect recent aggressive sell-downs; bulks’ forecasts are broadly unchanged; precious metals are marginally higher. Our preferred commodities over the short- to . medium-term are thermal coal, copper, zinc and gold. We still like copper and met-coal longer- term. Top equity picks (& least preferred) We introduce our Top 10 Global picks; BHP Billiton (BLT LN, Buy), Rio Tinto (RIO LN; Buy), Teck Resources (TCK/B CN; Buy); Sterlite (STLT IN; Buy); Newcrest (NCM AU; Buy); Barrick (ABX US; Buy); Alumina Ltd (AWC AU; Buy); Riversdale (RIV AU; Buy); Consol Energy (CNX US; Buy) and Adaro Energy (ADRO IJ; Buy). Our least preferred; Kumba (KIO SJ; Neutral); Nippon Steel (5401 JP: Neutral); Acerinox (ACX SM; Sell); Umicore (UMI BB) and Johnson Matthey (JMAT LN). - UBS 5
  • 6. U.S. Morning Meeting Highlights 23 July 2010 Timna Tanners................. +1-212-713 2927 Nucor Corp. (NUE.N) . Analyst Tepid Demand, Rising Scrap Temper View timna.tanners@ubs.com Maintain 2010, lower 2011/12 ests Price (22 Jul 2010)...................... US$39.67 We maintain our street-low 2010E $0.75, and expect Q3 pressure from scrap price recovery, 12-month rating......... Neutral (Unchanged) after we believe falling scrap boosted NUE’s Q2 margins. We think investors increasingly see 12m price target.......................... US$40.00 2010 consensus EPS at $1.36 as much too high after NUE earned $0.39 in a seasonally Mkt Cap......................................US$12.5bn . stronger H1. We drop our 2011E to $2.20 from $2.35 to incorporate gradual construction Full-Year EPS recovery, still well below consensus at $3.65. 2011E......................... US$2.35 => US$2.20 Liquidity/balance sheet position remain superior to most peers NUE’s 21% debt-to-cap ratio and 3.6% dividend yield remain superior to most peers, and remain a draw to more risk-averse investors, in our view. Mgmt suggested it was actively . looking at acquisition possibilities, which we think likely focus overseas and downstream. A cautious outlook can limit the size of any deal. Mgmt’s tone remained more dour than peers Mgmt suggested a “double-dip” was possible in markedly more cautious comments than peers . RS and STLD on calls this week. Perhaps this reflects a difference in personality or culture rather than a different NUE mkt reality, still, we found this tone unsettling. Valuation: No change to Neutral rating, valuation looks full Our $40 target reflects ~8.5x fwd 12-mo EV/EBITDA, and is based off a historical 6.4x EV/ EBITDA multiple on a more “normal” 2012E and discounting back. We model EPS in 2012E at $3.80, down from $4.05, still assuming a solid non-res construction (~60% of demand) rebound or strong contribution from an acquisition, neither of which is easy to anticipate at this time. We think consensus ’10 and ’11 ests look much too high. Generally earnings seasonally fall in H2. Consumer, Cyclical Colin Langan, CFA.......... +1-212-713 9949 AutoNation (AN.N) . Analyst Still Cautious Despite Beat colin.langan@ubs.com AN reports Q2 earnings of $0.38 per share, above consensus of $0.36. Price (22 Jul 2010)...................... US$22.54 AN reported EPS of $0.38, which excludes $0.07 related to debt refinancing costs. The beat vs. 12-month rating...............Sell (Unchanged) our $0.32 estimate was driven by higher P&S sales ($0.04), lower SG&A ($0.03), and a lower 12m price target..... Prior: US$18.00 => tax rate ($0.01). SG&A was 72.5% of gross profit, better than our 75.2% estimate. Same-store US$20.00 . Mkt Cap......................................US$3.83bn new unit sales were up 24.0% y/y, better than our 21% estimate. Same-store used unit sales were up 27.3% y/y, better than our 18% forecast. Full-Year EPS 2010E......................... US$1.30 => US$1.50 New and used margins disappoint; Small car mix risk to margins 2011E......................... US$1.40 => US$1.55 AN reported a 6.6% new gross margin, down 40 bps q/q and lower than our 7.0% forecast. Used margins were 9.4%, worse than our 9.6% estimate and 9.8% in Q1. AN attributed the q/q new margin decline to lower luxury mix. Going forward, AN said the increase in smaller vehicles . will put pressure on margins, but expects this to be offset by the recovery of pickup sales. However, this implies the shift toward cars would negatively impact new vehicle margins. Q2 beat the biggest factor in raising our 2010 and 2011 EPS estimates We are raising our 2010 and 2011 EPS estimates to reflect the following: 1) the Q2 beat; 2) . higher SG&A savings; 3) share repurchases; 4) new dealer additions; and 5) a more bullish used car sales outlook. Valuation: Maintain Sell; PT to $20 from $18 on estimate revisions Our new $20 price target is based on 13x our revised 2011 EPS estimate of $1.55. UBS 6
  • 7. U.S. Morning Meeting Highlights 23 July 2010 Kevin Crissey.................. +1-212-713 3562 JetBlue Airways (JBLU.O) . Analyst Thoughts After the Call kevin.crissey@ubs.com Solid Q2 and good guidance Kevin Grasmick................. +1 212 713 1233 Associate Analyst JBLU beat consensus in Q2 but more importantly guided Q3 revenue above expectations. Its kevin.grasmick@ubs.com 12-15% Q3 passenger unit revenue (RASM) outlook is strong and we believe reflects healthy demand in New York, among other regions. Q4 guidance for revenue appears to imply an Price (22 Jul 2010)........................ US$6.38 expectation of continued strong bookings. This may turn out to be the case but we’ve chosen 12-month rating.......Neutral * (Unchanged) . not to model above the company’s guidance (as we often do). Other sell-siders may, however, 12m price target..... Prior: US$6.50 => which could lead to higher than appropriate EPS expectations. US$7.00 Mkt Cap......................................US$1.76bn Headwinds receding somewhat Full-Year EPS JetBlue has faced a couple of unique challenges this year that are now behind them, including a 2010E......................... US$0.36 => US$0.45 JFK runway closure and a SABRE IT upgrade. Investors didn’t need more than that to stay 2011E......................... US$0.45 => US$0.42 . away from the stock, particularly when they could buy network airlines which offer much greater *Exception to core rating bands - see leverage to the return of corporate travel. page 33 Our view on the stock We remain on the sidelines regarding JBLU despite a reasonable valuation and an improved outlook because of our view that international demand trends are better than domestic leisure . trends. If you are going to buy an airline in this uncertain economic environment, we think there are probably better choices. Valuation We’ve increased our 12-month PT to $7.00 from $6.50 based on a blend of a 12x P/E and 7x EV/EBITDAR. Kevin Crissey.................. +1-212-713 3562 Alaska Air (ALK.N) . Analyst Thoughts After the Call kevin.crissey@ubs.com Solid Q2 beat Kevin Grasmick................. +1 212 713 1233 Associate Analyst Alaska reported Q2 EPS of $2.29 vs. the consensus of $2.12 and our estimate of $2.23. In our kevin.grasmick@ubs.com . view, this was an excellent quarter. Compared to our model the difference was a bit better regional revenue. Price (22 Jul 2010)...................... US$49.26 Managing the business effectively 12-month rating............ Buy * (Unchanged) 12m price target.......................... US$60.00 We take mgmt’s strategic review of Horizon as a positive sign that they are truly managing to Mkt Cap......................................US$1.76bn . ROIC targets and not just quoting statistics to investors. They’ve chosen to evaluate this business while posting record profits and heading toward their financial targets. Full-Year EPS 2010E......................... US$6.91 => US$6.31 Our view on the stock 2011E......................... US$7.26 => US$7.23 Based on our numbers, ALK remains cheap but we believe investors will question the financial *Exception to core rating bands - see upside to these strong results. Particularly concerning is the increase in competitive capacity in page 33 . Alaska’s markets. We see upside for the stock but not nearly at the same rate as over the last 12 months. Valuation We’ve lowered our 2010 EPS estimate to $6.31 from $6.91 as we incorporate a higher fuel price assumption. Our 12-month PT remains $60 based on a blend of 8x P/E and 5x EV/EBITDAR. UBS 7
  • 8. U.S. Morning Meeting Highlights 23 July 2010 Kevin Crissey.................. +1-212-713 3562 Continental Airlines (CAL.N) . Analyst Thoughts After the Call kevin.crissey@ubs.com Beat in Q2 Kevin Grasmick................. +1 212 713 1233 Associate Analyst Continental posted a strong Q2 and beat the Street as they often have. Revenue was kevin.grasmick@ubs.com . particularly strong in TransAtlantic and Pacific markets. Non-fuel costs were below guidance, up 2%. Price (22 Jul 2010)...................... US$24.14 Robust revenue guidance, unit costs guided higher 12-month rating............ Buy * (Unchanged) 12m price target.......................... US$35.00 Mgmt guided July passenger unit revenue (RASM) up 21%. This result is likely to be behind Mkt Cap......................................US$3.38bn only its merger partner United as the best result for the month. Our RASM forecast for the . quarter had already assumed healthy revenue so this guidance, while comforting, didn’t move Full-Year EPS 2010E......................... US$4.14 => US$3.32 our estimates higher. 2011E......................... US$4.87 => US$3.62 Our view on the stock *Exception to core rating bands - see We are concerned that Street expectations already incorporate an excellent revenue outcome page 33 for Q3 and therefore have little room to the upside if fuel prices increase beyond today’s levels. . This is true for CAL but also for many other airlines. We are more bullish over the next 12 months than we are in the short term. Valuation We’ve lowered our 2010 EPS estimate to $3.32 from $4.14 as we incorporated higher non-fuel costs and an elevated fuel price assumption. The bulk of the EPS change came in Q4. Our 12-month PT remains $35 on a merger-based 6-7x EV/EBITDAR. Robin M. Farley............... +1-212-713 2060 Royal Caribbean (RCL.N) Analyst . RCL: Yield Outlook Hanging In There, Q2 Better Exp., H2 Exp. robin.farley@ubs.com Unchanged Robert W. Carroll.............. +1-212-713 2434 Analyst RCL Maintained +4-5% ‘10 Constant FX Yield Guidance robert.carroll@ubs.com Reading mgmt's body language on follow-up questions, it seemed like close-in bookings aren't great but they were ahead enough from earlier in the year that they don't have to change Louise Cheung, CFA......... +1 212 713 3186 Associate Analyst guidance. We note that booking vols. in the last 3 months are up 11% yoy, just below the louise.cheung@ubs.com . 11-12% capacity for the forward 6 mths. Our +5% constant currency yield estimate remains unchanged. Price (22 Jul 2010)...................... US$27.56 12-month rating......... Neutral (Unchanged) Q2 Beat on Expenses…Which Drove 2010 EPS Guidance Raise 12m price target..... Prior: US$34.00 => Mgmt raised EPS range up by $0.10 to $2.25-2.35 but that EPS upside is driven by roughly US$30.60 . $0.05 from Q2’s true lower net cruise cost ex fuel (i.e. not just timing) and roughly $0.09 from Mkt Cap......................................US$5.96bn lower H2 fuel offset by an estimated $0.05 FX drag. Full-Year EPS Yield Read-Through for CCL and Adj. Est for FX Moves in Last Month 2010E......................... US$1.87 => US$1.96 CCL's constant FX yield guidance in late June of +2-3% is in line with RCL's 4-5% constant FX range (since ~200+ bps of RCL yield is from Oasis and Solstice premiums in the yield mix, so implies 2-3% of same-store.) So RCL's reiteration of guidance today supports our constant FX . yield assumption for CCL of +3%. We increase our CCL 2010 EPS estimate to $2.36 from prior $2.33 due to recent Euro & GBP strengthening Valuation: RCL 12 month PT lowered to $30.60, from $34 Our new $30.60 PT is based on ~13-14x (in line with historical discount to CCL's P/E at 10-20%), a “normalized” EPS, which we base on 2012 and PV to today. Our 2012 EPS is $2.86 vs. prior $2.96 reflects lower capacity days from drydocks & ship transfer. UBS 8
  • 9. U.S. Morning Meeting Highlights 23 July 2010 Consumer, Non-Cyclical Neil Currie........................ +1-203-719 3070 Safeway (SWY.N) . Analyst 2H2010 Assumptions Still Heroic? neil.currie@ubs.com Inline quarter, guidance cut not enough in our view Doug Cooper..................... +1 203 719 6059 Associate Analyst The company reported 2Q10 EPS of 37c, inline with the Street’s view, but took down sales and douglas.cooper@ubs.com EPS guidance for the year on a lower food inflation outlook, which we think was widely anticipated heading into the print. However, we feel guidance may still be lofty with 2H10 Krista Zuber.......................+1-212-713 2599 Associate Analyst . possibly still overly optimistic; further potential for a downside revision to guidance still exists in krista.zuber@ubs.com our view. Inflation not coming back quickly, and not easy to pass through Price (21 Jul 2010)...................... US$19.68 Deflation has taken some time to work through the system and inflation is only being seen in 12-month rating......... Neutral (Unchanged) 12m price target..... Prior: US$21.00 => several categories. At the same time PPI has come back strongly at a time when inflation cost US$20.00 pass through at retail is tepid at best, creating further pressure on gross margin in the absence Mkt Cap......................................US$7.59bn of further self-induced (price investments) pressures. While management comments about . Full-Year EPS inflation in 4Q and beyond seem fair, passing increases through to a shaky consumer may not 2010E......................... US$1.71 => US$1.45 be so. 2011E......................... US$1.90 => US$1.62 New guidance still lofty on several points The new FY10 guidance range of $1.50 to $1.70 ($1.65 to $1.85 prior) w/ID sales of -1.5% to - 1.0% (0.0% to 1.0% prior) still implies a stronger 2H2010, which we feel may look more like a repeat of 1H10. The new range assumes improvement or flat gross margin, improvement in . SG&A trends, and the return of inflation, all an optimistic scenario of improvement in our view, we prefer to be more cautious. Valuation: Neutral rating w/new $20PT, dropping estimates below range Our new $20 PT ($21 prior) is based on a P/E multiple of 12x our FY11 EPS estimate Our estimates for FY10 goes to $1.45 from $1.71 and FY11 to $1.62 from $1.90. UBS 9
  • 10. U.S. Morning Meeting Highlights 23 July 2010 Energy David Deckelbaum.......... +1-212-713 6138 Cabot Oil & Gas (COG.N) . Analyst Eastern Promises Buoy Long-Term Value david.deckelbaum@ubs.com Solid quarter but trepidation on spending as Marcellus picture improves Price (22 Jul 2010)...................... US$32.77 COG turned in a respectably inline quarter fuelled by a 13% sequential increase in production 12-month rating...............Buy (Unchanged) and provided bullish sentiment on go-forward operations by raising production guidance by 3% 12m price target.......................... US$43.00 for 2010 to 21-25% YoY. Shares reacted negatively to news of higher capex of $725m in 2010 Mkt Cap......................................US$3.40bn vs. $650m prior, underperforming the group by roughly 350bps. We do not believe the higher Full-Year EPS . spending translates into balance sheet disrepair and are encouraged by positive ops 2010E......................... US$5.38 => US$4.97 momentum across COG’s core Marcellus position. 2011E......................... US$5.46 => US$4.88 Marcellus activity encouraging Cabot has now produced over 180 MMcfe/D gross after the start-up of the Lathrop compressor in June, after a slight delay. Management expects to have capacity from Lathrop ramped from over 85 MMcfe/D to 125 MMcfe/D by early August. With 75 wells set to drill in PA in 2010 with a 7th rig added and 30 more wells completing now, we see ample upside to current production . forecasts. The only question remains execution and regulation that appears to be gradually easing. Lowering estimates on higher costs, accounting changes We are lowering our 2010/2011/2012 CFPS estimates to $4.97/$4.88/$6.41 from $5.38/$5.46/$6.90 prior. While our production estimates are now 4% higher for 2010 and 6% for . 2011 (24% and 18% YoY growth), our estimates are hampered by accounting changes that result in fewer exploration expense add backs to CFO. Valuation: Maintaining price target of $43 Our $43 target is based on our 1P and 2P NAVs, implying 8.5x our 2011 EBITDA estimate. Shneur Z. Gershuni, CFA............... +1-212-713 3974 The Coal Miner . Analyst Valuations Attractive, Is It Time Yet? shneur.gershuni@ubs.com . Met names sporting attractive valuations – time to revisit? Spiro M. Dounis, CPA..................... +1 212 713 2928 s Associate Analyst . spiro.dounis@ubs.com Thermal fundamentals continue to improve – news flow positive. s Tom Price..........................................+612 9324 2189 . Analyst Negative China policy signals moderate. tom.price@ubs.com s Thermal: ACI, CNX, JRCC; Met/Hybrids: WLT, MEE, ICO & ANR. s - UBS 10
  • 11. U.S. Morning Meeting Highlights 23 July 2010 William A. Featherston..... +1-212-713 Quicksilver Res. (KWK.N) . 9701 KGS Deal Relieves Liquidity Concerns and Very Accretive to NAV Analyst william.featherston@ubs.com Monetizes Quicksilver Gas Services MLP at attractive prices Betty Jiang.........................+1 212 713 1287 KWK agreed to sell all of its interests in Quicksilver Gas Services to First Reserve for $1 billion: Associate Analyst $701MM in cash, $72MM in earn-out payments over the next 2 years, and $228MM of betty.jiang@ubs.com consolidated debt associated with KGS that will be eliminated. We estimate KWK will receive an Margaret O'Connor............ +1 212 713 2257 . attractive 28-35x 2011E cash flow for the GP units. The transaction is expected to close in Associate Analyst October ’10, and KWK will use proceeds to pay down $528 MM on its $1.0 billion credit facility. margaret.o-connor@ubs.com Significantly accretive to NAV and materially reduces financial leverage We estimate the transaction adds $3/share to NAV. It should also reduce KWK’s financial Price (22 Jul 2010)...................... US$12.75 12-month rating............ Buy * (Unchanged) leverage from an uncomfortably high to manageable level: net debt to cap ratio will improve to 12m price target..... Prior: US$16.00 => 59% from 78% and net debt/2011E EBITDX will decline to 3.2x from 4.1x. We fine tuned EPS/ US$18.00 . CFPS estimates as the divestiture will result in higher GPM costs offset by lower interest, G&A Mkt Cap......................................US$2.17bn and DD&A expense. Full-Year EPS Potential next steps to further improve liquidity position: 2010E......................... US$2.15 => US$2.10 1) sale of BreitBurn units (17.7 MM units) worth ~$275 MM; or 2) sale of part or all of its Horn 2011E......................... US$2.20 => US$2.15 River Basin position, where it has 130,000 net acres (5.2 Tcfe of resource potential). Recent *Exception to core rating bands - see . press reports indicate Reliance may be a willing buyer, and KWK’s improved financial position page 33 should help its negotiating position. Valuation: increasing price target to $18 from $16 $18 PT assumes 0.8x 2PNAV of $23/sh, in-line w/ peer group’s current multiple. William A. Featherston..... +1-212-713 Murphy Oil (MUR.N) . 9701 MUR to Exit Refining Business…Finally Analyst william.featherston@ubs.com MUR to divest 3 refineries and UK retail sites Craig Weiland....................+1-212-713 3654 MUR plans to exit the refining business with the sale of its two domestic refineries (Meraux, LA Analyst and Superior, WI) and its Milford Haven U.K. refinery. MUR also plans to divest 230 retail sites craig.weiland@ubs.com in the UK; it will continue to operate its U.S. retail sites, which generate mid-teen returns. While Betty Jiang.........................+1 212 713 1287 we believe MUR will be challenged to sell its high cost Meraux refinery, we estimate divestitures Associate Analyst . could total $1.3 billion. As shown in Exhibit 1, we value the 3 refineries and associated inventory betty.jiang@ubs.com at $1.1 billion & the UK retail sites at $200 million. Price (22 Jul 2010)...................... US$51.82 Divestiture makes strategic sense; expect favourable stock price reaction 12-month rating......... Neutral (Unchanged) Given the low returns, negative FCF and lack of growth in MUR’s refining business, we believe 12m price target.......................... US$60.00 the Street will react favorably to the news. The R&M segment has consistently underperformed Mkt Cap......................................US$9.92bn MUR’s upstream portfolio, posting low-to-mid single digit returns while generating $100-200MM . Full-Year EPS in negative free cash flow. We outline the unattractive metrics of MUR’s R&M segment in Exhibit 2010E........................................... US$12.67 2. 2011E........................................... US$13.33 Expect proceeds to be directed toward North American shale plays While management may disclose intentions on its conference call, we expect proceeds from the divestiture to go toward the growth and development of its E&P resource plays: the Montney . tight gas play has 126,000 net acres with 3.1 Tcfe of net resource potential and its Eagle Ford shale position has 200,000 net acres with 3.4 Tcfe. Valuation: we rate MUR a Neutral with a $60 price target Our price target assumes 3.7x our normalized 2010 EBITDX estimate, or 0.9x NAV. UBS 11
  • 12. U.S. Morning Meeting Highlights 23 July 2010 William A. Featherston..... +1-212-713 Newfield Exploration (NFX.N) . 9701 2Q Roughly In-Line; Fine Tuning Estimates Analyst william.featherston@ubs.com 2Q operationally in line; EPS/CFPS just shy due to slightly higher tax rate Betty Jiang.........................+1 212 713 1287 2Q clean EPS/CFPS of $1.06/$2.57 was just shy of our $1.08/$2.63 estimate and below Associate Analyst $1.08/$2.72 consensus. 2Q highlights included: a 13% YoY increase in production to 73 Bcfe betty.jiang@ubs.com . (at the high end of the 70-73 Bcfe guidance range and in line with UBSe) & a 14% increase in Margaret O'Connor............ +1 212 713 2257 per-unit costs to $4.65/Mcfe (in line with our forecast but 5% below the peer average). Associate Analyst Reiterates ‘10 growth guidance, but raises US oil growth from 20% to 30% margaret.o-connor@ubs.com Yesterday, NFX reiterated its ‘10 volume target of 283-288 Bcfe, but raised US oil volumes as a % of the mix, effectively boosting revenue guidance. FY10 prod’n is now expected to reach mid- Price (22 Jul 2010)...................... US$52.21 12-month rating...............Buy (Unchanged) point of guidance (better than recent comments that it would be at low end). We estimate ’10 & 12m price target.......................... US$65.00 . ’11 volume growth of 11% and 9% with oil comprising 30%/34% of ’10/’11 volumes. After raising Mkt Cap......................................US$6.96bn estimates yesterday on increased oil mix, we’re dialing back estimates today on higher G&A. Full-Year EPS Appraisal results from two oil resource plays serve as near-term catalysts: 2010E..................... US$10.80 => US$10.65 1) NFX plans to drill 8 wells in the S. Alberta Bakken this year and the 2nd well has just reached 2011E..................... US$11.05 => US$11.10 total depth; and 2) NFX expects to complete its first Eagle Ford well next week and plans to drill . ~15 wells this year. We exclude Eagle Ford and S. Alberta potential from our NAV, but the 2 plays could be worth ~$2/share each. Valuation: trades roughly in line with peers Our $65 target is ~0.9x our NAV and assumes a 6.2x normalized '10E EBITDX. Financial Brian Meredith................. +1 203 719 2899 Chubb Corp. (CB.N) . Analyst EPS In-Line Despite Heavy Cat Losses brian.meredith@ubs.com Operating EPS of $1.41, in line with UBSe and consensus of $1.40 Marie Lunackova, CFA......+1-203-719 6605 Associate Analyst Higher than expected catastrophe losses ($0.29) were offset by higher than expected loss marie.lunackova@ubs.com reserve releases ($0.18) and lower accident year losses ($0.06). The results also benefited by $0.04 from a special dividend related to an equity investment. BVPS was up 2.5% sequentially Price (22 Jul 2010)...................... US$51.69 to $49.39, in line with our estimate. CB repurchased 12.4mm shares in the 2Q10 (UBSe of 12-month rating...............Buy (Unchanged) . 12mm), and plans to utilize the remaining 16.8mm shares on its current authorization by year- 12m price target.......................... US$59.00 end 2010. Mkt Cap......................................US$17.2bn Commercial lines price competition increases Full-Year EPS 2010E......................... US$5.28 => US$5.40 Chubb commercial lines renewal pricing was flat in 2Q10 (vs. up 1% in 1Q10), and professional 2011E......................... US$5.75 => US$5.90 . liability declined 3% in 2Q10 (vs. down 1% in 1Q10) as companies react to the current favorable loss cost environment. Terms and conditions also weakened in some lines of business. Adjusting our 2010/2011 EPS estimates We are raising our 2010 EPS estimate to $5.40 (from $5.28) and 2011 EPS estimate to $5.90 . (from $5.75), reflecting modestly better accident year combined ratios. Our 2010 estimate is within CB’s 2010 guidance of $5.15 - $5.55. Valuation: Continue to rate share a Buy Our price target of $59 assumes CB’s shares trade at 1.2x of our 12-month forward BVPS estimate ex-AOCI of $48.24. Its shares currently trade at 1.1x its BVPS x/ AOCI. With more than $2bb of excess capital, relatively attractive ROE’s, a strong balance sheet and likely upside to consensus estimates, we believe CB deserves a premium valuation to peers. UBS 12
  • 13. U.S. Morning Meeting Highlights 23 July 2010 Erika Penala.....................+1-212-713 1121 Huntington Bancshare (HBAN.O) . Analyst Solid progress, but more to go erika.penala@ubs.com Maintain cautious stance Elena Kim.......................... +1 212 713 4057 Associate Analyst We maintain our Sell rating on HBAN. Results marked continued solid progress. But, we believe elena.kim@ubs.com revenue headwinds are greater than expected, while credit quality tailwinds will likely taper in . 2H10. We are raising our EPS estimate for 2010 to ($0.23) from ($0.26) to account for the beat, Joshua Rogers.................. +1-212-713 2364 Associate Analyst but maintain our 2011 and 2012 estimates of $0.28 and $0.55, respectively. joshua.rogers@ubs.com Uncertain economic underpinnings could inhibit credit improvement HBAN’s sale of Franklin-rel. resi RE loans allowed for a $76mn reserve release. However, a Price (22 Jul 2010)........................ US$5.85 weak economy will likely inhibit similar-sized reserve releases until 4Q11. C&I credit trends 12-month rating...............Sell (Unchanged) 12m price target............................ US$4.00 should continue to improve, and we narrowed our estimates for auto losses. But, we expect Mkt Cap......................................US$2.35bn core resi RE trends to remain under pressure, especially as re-default rates rise in HBAN’s loan . mod portfolio (4% of 1st lien loans). Further, we expect term CRE credits to remain challenged Full-Year EPS 2010E.................... US$(0.26) => US$(0.23) through 2011. Pre-tax, pre-provision levels could be under pressure in 2H10 HBAN guided for pre-tax, pre-prov. levels in 2H10 to be in-line with 2Q. But, we believe this could prove difficult. NIM trends will likely stay flat, given a fading deposit re-pricing lever and increasing competition for new originations. Solid auto loan growth may not be able to offset scant corporate loan demand and problem portfolio run-off. Lastly, overdraft regs should . pressure dep. svc. charges from seasonally strong levels, and mortgage banking income strength should wane. Valuation still stretched HBAN trades at 14.1x the PV of our 2012 EPS estimate and 1.4x TBV. We believe EPS headwinds could pressure these multiples. Our 3-pronged valuation method drives our PT. Heather Wolf, CFA........... +1-212-713 4290 SunTrust Banks (STI.N) . Analyst EPS to Fall Short of Elevated Expectations heather.wolf@ubs.com Maintain Sell rating due to elevated expectations Elena Kim.......................... +1 212 713 4057 Associate Analyst We maintain our Sell rating. While STI’s fundamentals are clearly improving and surpassed our elena.kim@ubs.com ests, we think EPS expectations are too high. We are increasing our ’10E to ($1.10) from . ($1.65), and our ’11E to ($0.55) from ($0.65) to account for the beat, but maintaining our ’12-’14 Joshua Rogers.................. +1-212-713 2364 Associate Analyst ests. Our ’12 est is 75% below consensus. joshua.rogers@ubs.com Solid credit beat, but we see a slow recovery ahead STI reported improved NCOs and NPAs, well exceeding our est. But we think the pace of Price (22 Jul 2010)...................... US$24.58 improvement will slow, given: 1) Const NPLs remain at 29% and mgmt has stated their intent to 12-month rating...............Sell (Unchanged) 12m price target..... Prior: US$12.00 => continue bulk selling, which could drive greater discounts than current marks; 2) TDRs grew US$14.00 136% QoQ, and rising re-defaults could slow loss improvement; and 3) Term CRE migration will Mkt Cap......................................US$12.3bn . likely continue. Further, STI released reserves this qtr, but this trend could prove short-lived Full-Year EPS given below avg reserves/loans. 2010E.................... US$(1.65) => US$(1.10) Pre-tax, pre-provision headwinds ahead 2011E.................... US$(0.65) => US$(0.55) Lending revs surpassed our est., but we expect modest declines in 2H10 and ’11, given pressure from the flat rate environment, continued loan contraction, and deposit run-off. Also, . STI reported strong fee income this qtr, but reg reform, and lower MSR hedge, trading, and securities gains will weigh on these revs in 2H10. Valuation: Expect multiples to compress from EPS misses STI trades at 42x our ’12 est vs our target of 12x. It also trades at 1.1x trough TBV vs our target of 0.9x (based on forecasted ROTE < cost of equity). Our three-pronged valuation summary (P/E, P/TB, DCF) drives our $14 PT (was $12). UBS 13
  • 14. U.S. Morning Meeting Highlights 23 July 2010 Heather Wolf, CFA........... +1-212-713 4290 Fifth Third Bancorp (FITB.O) . Analyst Making Progress, But Still Headwinds heather.wolf@ubs.com Maintain Sell rating Elena Kim.......................... +1 212 713 4057 Associate Analyst FITB is making strong progress at managing thru the cycle, but we think the pace of credit elena.kim@ubs.com improvement will slow and revenue headwinds will persist. We increased our ests to account for the outperformance this qtr. We increased our ’10 est to $0.25 from ($0.30), our ’11 est to $0.60 Joshua Rogers.................. +1-212-713 2364 Associate Analyst . from $0.30, and our ’12 est to $1.15 from $0.95. But our ests remain ~30% below consensus. joshua.rogers@ubs.com Also, our ests do not include any dilution from a capital raise likely required to pay back TARP. Pace of credit improvement to slow Price (22 Jul 2010)...................... US$12.45 Mgmt suggested, and we concur, that the pace of credit improvement in 2H10 will unlikely 12-month rating...............Sell (Unchanged) 12m price target..... Prior: US$9.00 => match that posted 1H10. Construction and C&I losses should continue to recede, but resi and US$10.00 comm’l real estate losses should remain elevated. That said, given the credit improvement and Mkt Cap......................................US$9.90bn . an industry-wide trend for early reserve releases, we have pulled forward reserve releases from Full-Year EPS ’13 and ’14 into ’11 and ’12. 2010E.......................US$(0.30) => US$0.25 Not immune to revenue headwinds 2011E......................... US$0.30 => US$0.60 FITB is not immune to rev pressures. Lending revs missed our ests, and although we expect a . rebound in 2H10, a flat rate environment and sluggish loan growth will weigh on margins through ’11. Further, reg reform will weigh on fee revs in 2H10 and beyond. Valuation: Fundamentals don’t justify valuation FITB trades at 13x the PV of our ’12 est vs our forecast for 11x. It trades at 1.3x TBV, despite an ROTE < cost of equity post further dilution. Our three-pronged valuation methodology (P/E, P/TB, DCF) drives our target price of $10 (was $9). Ross T. Nussbaum.......... +1 212 713 2484 ProLogis (PLD.N) . Analyst Navigating through choppy waters ross.nussbaum@ubs.com Solid development leasing in 2Q10, but significant headwinds remain Robert Salisbury................ +1 212 713 4760 Analyst PLD reported a decent 2Q result that featured solid leasing in the development portfolio (nearly robert.salisbury@ubs.com 500 bps), which offset continued rent rolldowns (-15.7%) and tepid core occupancy (down 22 bps). We expect SSNOI to decline further in 2011 as leasing spreads remain negative, and with Vikas Patel.........................+1 212 713 1102 Associate Analyst a >150% dividend payout on 2011E FCF and fixed charge coverage at 1.76x (down from 1.92x vikas.patel@ubs.com . in 1Q), potential credit ratings pressure could ultimately result in an equity raise. We remain underweight the industrial REIT sector and prefer AMB, which has a better risk-reward profile. Price (21 Jul 2010)...................... US$10.97 12-month rating......... Neutral (Unchanged) Core NOI guidance likely reduced, overall earnings quality deteriorating 12m price target.......................... US$11.00 Core NOI guidance appears to have been reduced as FY10 FFO continues to become more Mkt Cap......................................US$5.23bn back-end weighted with diminished earnings quality, including $0.03 of expected pick-up in 2H10 from higher development fee revenue. While the FY10 Core FFO range of $0.55-0.60 Full-Year EPS . 2010E......................... US$0.58 => US$0.62 seems achievable, PLD’s goal of $700-800m of asset sales in the next 5 months could prove 2011E......................... US$0.85 => US$0.83 aggressive, in our opinion. Adjusting estimates for 2Q result, slower occupancy recovery We have adjusted our FY10/11 Core FFO estimates to $0.56/$0.73 from $0.54/$0.75, which . primarily reflects upside from the 2Q10 result, partially offset by a reduced occupancy assumption (we now expect flat occupancy in 2H10). Valuation: Discount to NAV still warranted PLD is trading at 7.6% implied cap rate and 21x our estimate of 2011 AFFO. A discount to NAV is warranted in light of the heightened balance sheet and fundamental risks, in our view. Our $11 target is based on a 5% discount to our new $11.50 fwd NAV estimate. UBS 14
  • 15. U.S. Morning Meeting Highlights 23 July 2010 Ross T. Nussbaum..........................+1 212 713 2484 The Weekly REIT Appraisal . Analyst 2Q10 Earnings – Early Takeaways ross.nussbaum@ubs.com A Rising Tide… Christy McElroy.............................. +1-203-719 7831 Despite an “unusually uncertain” economic outlook, REITs marched higher during the first week Analyst of 2Q earnings season. REITs remain higher-beta versions of the broad market, and a rising christy.mcelroy@ubs.com . tide lifted the REIT ship 4.0% on Thursday. The group has also been supported by a sub-3.0% Dustin Pizzo, CFA........................... +1 212 713 4847 10-year Treasury yield. Analyst Mixed Performance out of Industrial REITs dustin.pizzo@ubs.com We expected guidance cuts out of the industrial REITs this past week. AMB cooperated. Robert Salisbury............................. +1 212 713 4760 ProLogis did not. However, ProLogis’ 33% owned European cousin (PEPR), did cut guidance . Analyst by 11%. While PLD left guidance unchanged, we suspect NOI guidance was reduced. We robert.salisbury@ubs.com remain underweight industrial as we don’t see a 2H fundamental catalyst. Derek Bower..................................... +1 212 713 3402 A Peak At Multifamily Associate Analyst CLP kicked off 2Q multifamily earnings with an earnings beat and guidance raise. The read- derek.bower@ubs.com through we get is that guidance raises from the rest of the multifamily group are likely. But, will . the market care with the stocks trading at 22x our estimates of 2011 AFFO and 5.6% implied Vikas Patel........................................ +1 212 713 1102 nominal cap rates. We would look to take profits on further strength. Associate Analyst vikas.patel@ubs.com A One-Off Upgrade in Office Land We stepped out-of-the-box this week and upgraded our rating on micro-cap Parkway Properties Gabriel Hilmoe..................................+1-212-713 3876 (PKY) to Buy. Even after Thursday’s 9% rally, Parkway trades at a 10% implied cap rate and a Associate Analyst 25% discount to forward NAV. With the SOX claim from the former CFO withdrawn earlier this gabriel.hilmoe@ubs.com week, we see PKY closing the gap to NAV. We don’t mind a little hair at a 25% NAV discount. - Healthcare Bruce Nudell, PhD........... +1 212 713 2716 Zimmer (ZMH.N) . Analyst 2Q10: it’s go time bruce.nudell@ubs.com 2Q10 EPS beat, ‘10 EPS guidance maintained Rajeev Jashnani, CFA....... +1 212 713 9127 Analyst Mgmt maintained FY10 EPS/rev growth guidance of $4.15-$4.35/3-5% CC. ’10 GM guidance rajeev.jashnani@ubs.com was raised to 76-76.5% from 75-76% partially offset by SG&A (now 42% of sales from 41-42%). We updated our 2010 rev/EPS ests to $4.239/$4.28 from $4.247B/$4.29. ZMH reported 2Q10 Mike Duncan, CFA............ +1 212 713 3910 Associate Analyst . revs of $1.058B (cons. $1.068B), up 3.3% CC. EPS of $1.09 beat cons. of $1.05 on lower mike.duncan@ubs.com SG&A & better gross mgn. ZMH gave 3Q10 EPS guidance of $0.93-$0.98 (UBS est $0.98). 1H10 industry growth for major joints steady at + 5.6%US/+ 4.6%OUS Price (22 Jul 2010)...................... US$52.51 Though ZMH, like peers, noted deceleration in 2Q10 vs 1Q10 US market growth, 1H10 US revs 12-month rating...............Buy (Unchanged) 12m price target.......................... US$72.00 suggest steady ~5% mkt growth (w/ 85% of mkt reporting). ZMH suggested slower 2Q10 Mkt Cap......................................US$11.3bn . possibly tied to add’l 1Q10 billing days at JNJ although decrease in knee units typically used in younger patients suggests some macro impact. Full-Year EPS 2010E......................... US$4.29 => US$4.28 Profitability of commercial ortho patients positive for implant pricing 2011E......................... US$4.79 => US$4.72 Mgmt stated US pricing pressure has not ticked up (inline w/ SYK comments). Given profitability of commercial hip/knee procedures (1.5X Medicare) for US hospitals and cost-plus based implant reimbursement, we don’t see a step change in hospital incentive to increase pressure on implant pricing. ZMH confirmed price pressure originates in base implant (e.g., Medicare) . pricing. Contract carve-outs for high-end products (for young pts) & therefore mix opportunities persist (pg 2). Valuation: DCF based price target is $72 We expect the stock trajectory going forward to be tied to uptake of new hip products, ZMH 2Q10 US hip growth of 3% was inline with market for the first time since late 2006. UBS 15
  • 16. U.S. Morning Meeting Highlights 23 July 2010 Bruce Nudell, PhD........... +1 212 713 2716 St. Jude Medical (STJ.N) . Analyst Solid execution bruce.nudell@ubs.com ICD-driven topline beat, with solid spending control Rajeev Jashnani, CFA....... +1 212 713 9127 Analyst St. Jude reported 2Q10 rev of $1.313B (~11% reported & CC), about $23M above consensus. rajeev.jashnani@ubs.com . Adjusted EPS of $0.79 beat our and consensus estimate by $0.06, driven by higher sales and SG&A control (34.1% versus our estimate of 35.4%). Mike Duncan, CFA............ +1 212 713 3910 Associate Analyst ICD share gains expected going forward mike.duncan@ubs.com 2Q10 ICD sales were $300M in US (+12% ex. $15M from BSX ship hold) and $171M OUS (~17% CC growth). We model 2Q US ICD sales of $520M for MDT & US ICD market at Price (21 Jul 2010)...................... US$35.39 $1.058B (1H10 flat Y/Y). We model eroding US ICD market (-1% CAGR) through ‘14, given 12-month rating...............Buy (Unchanged) 12m price target.......................... US$46.00 declining de novo implants with WW CAGR at 2%. Offsetting this, we expect STJ to gain at Mkt Cap......................................US$11.5bn . least 200BP of WW share through 2014. Our WW ICD + Pacer market model shows ~2% CAGR through ’14. Full-Year EPS 2010E......................... US$2.83 => US$2.88 2010 EPS guidance upped $0.06 (2Q10 beat), absorbs $0.03-04 FX impact 2011E......................... US$3.19 => US$3.28 2010 rev guidance of $5.035-5.180B, is modestly lower than previous range due to FX, but expected CC growth increased (9-12% from 8-11%). We now model $5.082B (+$11M) w EPS @ $2.88 (up from $2.83). We model 2H EPS growth rates declining from 1H (~28% to ~9%), . due to worsening FX, waning ICD recall impact, integration of LightLab and moderating GM from absorption of remote pacers. Valuation - DCF-based target of $46; BSX trades at 11.1x our 2011E EPS STJ showed strong execution w ICD share gains/strong WW CC growth in Neuro (17%) and AF (12% CC) & unchanged longer term positive outlook for markets (despite current STJ sluggishness in US AF). We est. top/bottom line CAGRs for STJ at 6%/11% for ‘10-’14 despite conservative CRM market assumptions. Bruce Nudell, PhD........... +1 212 713 2716 Baxter International (BAX.N) . Analyst 2Q10: BioScience work in progress bruce.nudell@ubs.com Maintain sales / EPS estimates Rajeev Jashnani, CFA....... +1 212 713 9127 Analyst We maintain ‘10 / ‘11 sales estimates of $12.8B (+2%) / $13.3B (+4%) & EPS estimates of rajeev.jashnani@ubs.com $3.96 (+4%) / $4.26 (+8%). BAX maintained ‘10 sales growth guidance of 1-3% (FX neutral) & tightened EPS from $3.92-$4.00 to $3.93-$3.98, now incl +$0.03 from more aggressive share Mike Duncan, CFA............ +1 212 713 3910 Associate Analyst . repo (Table 1). Key assumption in ’11 is BioScience recovery; we model +3% from -2% in ’10 mike.duncan@ubs.com (+1% excl US HC reform & H1N1/vax). BioScience not out of woods Price (22 Jul 2010)...................... US$43.25 Recombinant ww CC growth of +1% (vs 5% est) due to UK tender & US HC reform (each 12-month rating...............Buy (Unchanged) 12m price target.......................... US$56.00 roughly -1% to ww growth); delayed tender in Eastern Europe also contributed. BAX took Mkt Cap......................................US$25.9bn Recombinant guidance to +4% CC (inline w/ 1H10) from 4-5%. US IVIG was inline but -17% YOY, w/ -4% due to US HC reform & balance ascribable to share / pricing. Ex-US IVIG solid at Full-Year EPS . +11% CC. Plasma Proteins soft; -7% US on albumin & -15% CC ex-US on pdFVIII / tough comp. Medication Delivery strong Med Del 2Q10 CC sales growth was +6% CC w/ strength in IV Therapies, Global Injectables, & . Infusion Systems (although benefited from Sigma sales; unlikely to persist in 2H10). Importantly, Med Del top line strength accompanied w/ margin expansion within segment. Valuation: DCF-based $56 price target We believe valuation is attractive but BioScience stability is needed. Longer term opportunity lies in mgmt ability to create a truly diversified model w/ strong contributions from Med Del & Renal. UBS 16
  • 17. U.S. Morning Meeting Highlights 23 July 2010 Derik de Bruin, Ph.D....... +1-212-713 3964 Cepheid (CPHD.O) . Analyst Margins Improve, Still Cautious Outlook derik.debruin@ubs.com Sales a bit above, but EPS ahead of consensus due to margin expansion Daniel Arias.......................+1-212-713 2467 Associate Analyst Total revenues were $49.6m (+21% y/y) vs. Street $49m. Industrial sales of $4.7m and daniel.arias@ubs.com Biothreat sales of $5.1m were inline with UBSe, but Clinical sales of $37.7m were below UBSe $39m. Adj. product gross margins were 50% (+610 bps y/y), well above UBSe 46%, on Rafael Tejada.................... +1-212-713 8657 Associate Analyst improved manufacturing & mix. The $0.02 loss per share was ahead Street ($0.10). Given the rafael.tejada@ubs.com impressive Q2 margin gains & the pullback in share price, we see CPHD trading up, but . enthusiasm may be curbed by the cautious Mgmt tone & disappointing news from other Price (22 Jul 2010)...................... US$14.77 diagnostic companies. 12-month rating.......Neutral * (Unchanged) 12m price target.......................... US$20.00 US capital spending environment stable, CPHD more cautious on EU Mkt Cap......................................US$0.87bn In the US (~80% of clinical sales), a longer sales cycle led to 37 system placements (vs. 36 in Q1), while overseas, austerity measures have caused some weakness in Europe yielding 69 Full-Year EPS . 2010E.................... US$(0.26) => US$(0.22) sys placements (vs. 88 in Q1). Also, the average number of modules per system trended down 2011E......................... US$0.07 => US$0.11 q/q to 4.5 and is below ’09 levels (5.7). *Exception to core rating bands - see FY10 sales guidance narrowed, but EPS raised; We raise our estimates page 33 While CPHD’s 2H10 outlook assumes an ongoing difficult economic landscape, mgmt now sees ‘10 sales at $200-205m (was $195-205m) & a net loss per share of $0.21-0.25 (prior $0.25-0.32). As PCR patents expire, CPHD believes ~50% is the new gross margin ‘floor’, pushing the company toward full profitability in FY11. For FY10, we forecast sales of $205m . (+20%) & a loss per share of $0.22 (was ($0.26)). For FY11, we see sales of $246m (+20%) & EPS of $0.11 (was $0.07). Valuation: Neutral rating, $20 price target Our price target is based on DCF analysis (using the UBS VCAM model) Jeff Elliott, Ph.D...............+1-212-713 8608 Array BioPharma (ARRY.O) . Analyst Upgrading to Buy on Valuation jeff.elliott@ubs.com Shares of ARRY attractive at current levels Christopher Schaefer, PhD..... +1-212-713 1847 We believe the business development activity over the last 6-9 months has put ARRY on solid Associate Analyst financial footing, which will allow the company to advance its programs to potential value- christopher.schaefer@ubs.com creating proof-of-concept results. Based on the recent share price decline, we feel the risk/ Andrew Peters................... +1 212 713 3241 . reward is attractive at current levels, and as a result are upgrading our rating on shares of Associate Analyst ARRY from Neutral to Buy. andrew.peters@ubs.com Additional deals still possible – likely just ex-US now We believe that ARRY’s broad development pipeline of wholly-owned assets could continue to Price (21 Jul 2010)........................ US$3.09 12-month rating...... Prior: Neutral => Buy * provide partnership opportunities, although given a lower need for capital, we anticipate the 12m price target............................ US$4.25 company may look to retain US rights in subsequent deals. ARRY has a relatively active Mkt Cap......................................US$0.16bn pipeline, with programs targeting KSP, ErbB2, RAF, Chk1 and mTOR inhibition. In our view, the . Full-Year EPS strong deals ARRY has already secured (with AMGN and NVS) validate the company’s 2010E........................................... US$(1.58) development prowess and should assist in attracting additional high-quality partners. 2011E........................................... US$(1.02) Upcoming catalysts *Exception to core rating bands - see Key upcoming catalysts for ARRY include: 1) report results from 3 phase 1b ARRY-543 combo page 33 trials (2010); 2) initiate a phase 2 ARRY-543 combo trial in pancreatic cancer (2010); 3) report results from phase 1b trial of ARRY-520 in AML (2010); 4) initiate a phase trial of ARRY-520 in . multiple myeloma (2010) and 5) report results from phase 1 ARRY-380 dose escalation trial (2010). Valuation: Buy with a $4.25 price target We derive our PT using our proprietary risk-adjusted NPV SOTP methodology. UBS 17
  • 18. U.S. Morning Meeting Highlights 23 July 2010 Justin Lake, CFA.............................. +1-212-713 2765 HealthCare Services – MCO/Hospitals . Analyst Q2’10 Earnings Preview for Week of 7/26 justin.lake@ubs.com Look for more on costs of healthcare reform benefit mandates on 2Q cc Ken LaVine, CFA.............................. +1-212-713 4237 While UNH acknowledged cost pressures w/out specifics, we expect AET, WLP and CVH to Associate Analyst offer more detail around impact of reform to commercial cost trends starting in Q4 for renewing kenneth.lavine@ubs.com . plans. Given mix of business, look for WLP to see largest impact at 300-500bps with AET/CVH more likely in the 200-300bps range. AET (7/27) / WLP (7/28) likely to continue trend of lower costs for MCOs With Aetna pre-announcing better than expected Q2 results due to positive Q1 PPD, we raise our EPS est. to $0.75 for Q2 from $0.68. With strong results a given, most interesting will be update for FY’10 EPS guidance as well as mgmt thoughts on trajectory of return to high-single digit margins over 2-3 yr period. For WLP, we look for PPD to be part of the story as well given . broad declines in trend, and expect company to reiterate guidance of “at least $6” ex-any potential positive PPD, despite accepting lower rates in CA individual book. UHS (7/26) likely to have second request from FTC on-hand for Q2 CC With UHS having re-filed PSYS with FTC on 6/25, starting 30-day clock, we would expect mgmt will have second request in hand for cc (likely but not 100%), potentially allowing co to give update on process and insight into areas of focus including # of markets where overlap may be of concern. Also look for thoughts on integration post close, including oversight/risk control . given PSYS regulatory issues & ability to close historical PSYS 200-250bps margin gap including timing. Q2 hospital volume weakness well understood, look for July update Hospital earnings likely in-line on cost cuts w/key focus areas including update on July volumes given June being particularly weak and thoughts on comm’l pricing. - Marc Goodman................ +1-212-713 1342 Bristol-Myers (BMY.N) . Analyst Bristol Knows How to Perform marc.goodman@ubs.com What we learned on the conference call Ami Fadia.......................... +1-212-713 3242 Analyst (1) Mgt. budgets 2-2.5% price decreases for Europe, but expects a modest add’l 2H10 impact ami.fadia@ubs.com and an add’l mid-single digit headwind for 2011. (2) Mgt. expects HC reform costs to grow in 2H due to 340B rebates and increased managed Medicaid rebates. (3) Mgt. reiterated its 2013 floor Price (21 Jul 2010)...................... US$24.93 EPS guidance of $1.95 in the face of EU pricing and US HC reform costs. It expressed 12-month rating......... Neutral (Unchanged) . confidence in pipeline revenues as well as additional cost savings to meet the target. (4) The 12m price target.......................... US$26.00 AVERROES study comparing Apixaban to Asprin will be presented at ESC on Aug 31. Mkt Cap......................................US$42.7bn Overall thoughts on the quarter: Solid quarter Full-Year EPS 2010E......................... US$2.13 => US$2.15 The key products are performing as expected and in our view mgt. continues to do a very good job keeping a tight hold on spending. We had previously reduced our EPS estimates due to FX . and European pricing pressures but it appears this impact will be partially offset by lower spending. We are slightly increasing our EPS forecast for 2010 by 2c. Thoughts on the stock: Key pipeline data in 2H10 2H10 will be a busy time for data releases with the Apixaban presentation at ESC on Aug 31, Dapaglifozin data at EASD in Sept., Sprycel’s first-line CML PDFUA on Oct 28, additional HepC . data at AASLD in Nov., and potential first-line Ipilimumab data in late 4Q10. Pipeline successes will likely be the main driver of the stock over 2H10. Valuation: PT of 26 based on DCF analysis Our DCF analysis assumes $20 for the base business and $6 for the pipeline. This implies a target P/E multiple of 11-12x on our EPS forecast for 2011 of $2.30. UBS 18
  • 19. U.S. Morning Meeting Highlights 23 July 2010 Marc Goodman................ +1-212-713 1342 Lilly (LLY.N) . Analyst Bumping Numbers Upward, but Still Neutral marc.goodman@ubs.com Key things we learned from the earnings call Ami Fadia.......................... +1-212-713 3242 Analyst (1) Impact of EU pricing changes on 2010 (-$90M) and 2011 ($-150M) revenues. (2) Positive FX ami.fadia@ubs.com impact on COGS. (3) HC reform impact on 2Q. (4) Cymbalta and Zyprexa benefitted from a gross-to-net true-up for 2Q US sales. (5) Alimta is the new leader in first line NSCLC and Price (21 Jul 2010)...................... US$34.95 . received a positive response from UK’s NICE for use as a maintenance therapy in NSCLC. (6) 12-month rating......... Neutral (Unchanged) Update on patent litigations. (7) Some pipeline updates. 12m price target.......................... US$36.00 Mkt Cap......................................US$40.2bn What we are watching in 2H10 We are waiting for approval of Bydureon in October, which we believe will be a key drug for Full-Year EPS 2010E......................... US$4.44 => US$4.59 Lilly, especially as the Byetta franchise continues to decline. We will look for guidance from the 2011E......................... US$4.35 => US$4.38 FDA on Cymbalta for chronic pain on August 19 panel. We also look forward to Phase II data . from BAFF antibody and JAK-1/JAK-2 at ACR, both of which are important pipeline products. Lastly, we will continue to monitor the Effient and Livalo ramps. Thoughts on the stock: No change to investment thesis Lilly beat consensus by 14 cents and raised guidance by only a dime, which is due partly to HC reform true-ups and impact from European pricing and FX on 2H10. Ultimately, there was . nothing in the quarter that will change the patent expiration/pipeline concern which we think is still the key issue for the stock. Valuation: We maintain our Neutral rating and $36 price target Our DCF-based price target implies an 8-9x multiple on our 2011E EPS of $4.38. Steven Valiquette............................+1-203-719 2347 U.S. Healthcare Distribution - Drug . Analyst More 2011 Generic Pipeline Analysis steven.valiquette@ubs.com New Analysis of ‘Number of Generics Per Drug’ Positive for Wholesalers Gavin Weiss.................................... +1-203-719 6006 Given the sell-off in several pharmaceutical services stocks Thursday, we have conducted Associate Analyst further analysis of the generic drug pipeline for 2011 by now determining whether each drug will gavin.weiss@ubs.com be an exclusive generic launch (positive for ABC, CAH, MCK) versus a multi-source (three or greater) generic launch, which is more positive for PBMs (CVS, ESRX, MHS, SXCI). Data . suggests wholesalers are clear-cut winners for 2011 in this regard (see Table 1 for further detail). 2011 Generic Pipeline Promising for Wholesalers on Sales Mix As Well 2011 generic pipeline channel data also suggests that ABC/CAH/MCK come out on top since . the ‘retail/hospital/clinical’ sales mix (critical for wholesalers) is higher than average, while ‘mail-order’ mix (critical for PBMs) is below average. CAH/MCK Still Compelling on EV/EBITDA; ESRX Compelling on 2011 While P/E multiples are currently 15x for MHS and 17x for ESRX on consensus 2010 EPS estimates vs. distributors at 13.5-14.5x, it is worth noting that PBMs use cash EPS. Thus, we use EV/EBITDA to compare groups: ESRX is 10x and MHS is 8x estimated 2010 EBITDA, while . CAH at 5.8x and MCK at 5.9x look more compelling (ABC a little loftier at 7.2x). ESRX interesting at 7.8x our ’11 estimate. Wholesalers Still Look Poised for EPS Upside; PBMs More Mixed Bottom line is that we continue to favor the drug distributors vs. PBMs in relation to potential EPS upside from the generic pipeline in 2H10 and full-year 2011. We believe Street numbers still need to come down a little for MHS in 2011, but the ESRX and CVS Caremark consensus estimates for 2011 appear safe, in our view. - UBS 19
  • 20. U.S. Morning Meeting Highlights 23 July 2010 Industrial Amitabh Passi................. +1-415-352 5537 Tyco Electronics (TEL.N) . Analyst Solid Execution; Raising Estimates amitabh.passi@ubs.com Sept guidance better than expected; Raising ests; Reiterate Buy Price (22 Jul 2010)...................... US$25.76 TEL delivered strong results for FY3Q10 (June qtr) and guided for flat Revs/EPS for Sept 12-month rating...............Buy (Unchanged) (typically seasonally down) in the range $3.05b-3.15b/$0.68-0.72 vs. UBSe (prior) $3b/$0.66. 12m price target..... Prior: US$32.00 => With better then expected Rev trends in the mid-late cycle businesses, particularly Network US$33.00 Mkt Cap......................................US$11.7bn Solutions, we raise our FY10/FY11 Revs/EPS ests to $12b/$2.52 and $12.3b/$2.66 from . $12b/$2.48 and $12b/$2.47. We remain cautious on FY11 across the supply chain, modelling Full-Year EPS 2% y/y rev growth for TEL. 2010E......................... US$2.48 => US$2.52 2011E......................... US$2.47 => US$2.66 Macro risks and ADCT acquisition likely weighing on sentiment Despite solid results, TELs stock underperformed the market today. We believe there are likely 2 major overhangs a) macro uncertainty and concerns over the auto segment b) the ADCT acquisition. It is our belief that barring another catastrophic decline as in 08/early 09 (auto sales down 50%+ in 2 qtrs), TELs model will prove to be more resilient in a “normal” cycle (up 5-10%, down 10-12%) and we believe margins will hold up well. As for ADCT, we believe consistent . execution coupled with renewed activity in FTTx builds globally could allay some of the concerns. Cash flow generation remains strong We now foresee TEL generating $1.2-$1.3b in FCF in FY10-12, $300m of which will be used to . pay dividends, and the rest available for either acquisitions or to be returned to shareholders over time via share buy-backs or potentially a higher div. Valuation: Maintain Buy; Raise price target to $33 PT based on VCAM: WACC 10%; LT rev growth 5-6%; LT EBIT margin 13-13.5%. PT moves up to $33 (was $32) primarily as near-term ests adjust higher. Amitabh Passi................. +1-415-352 5537 Flextronics (FLEX.O) . Analyst Inching Along To The Target Model amitabh.passi@ubs.com FY1Q11 frustrates: The positives – Good revenues; Share buy-back Price (22 Jul 2010)........................ US$6.56 FY1Q11 results frustrated a bit again with some positives that included: a) strong rev growth of 12-month rating...............Buy (Unchanged) 10.5% q/q and 13.5% y/y, with Revs/EPS of $6.6b/$0.19 in 1Q vs. cons/UBSe $6.4b/$0.18; and 12m price target............................ US$9.50 b) utilization of $135m of the $200m authorized share buy-back plan to repurchase shares in the Mkt Cap......................................US$5.41bn . qtr. FLEX also guided Revs/EPS of $6.8b-7.2b/$0.19-0.21 compared to cons at $6.7b/$0.20 and Full-Year EPS UBSe $6.6b/$0.19, implying 7% q/q rev growth vs. cons expectations of +5.5%. 2011E......................... US$0.77 => US$0.80 2012E......................... US$0.83 => US$0.90 The challenge – margins; components business struggles to turn around The disappointing aspect in the earnings report was OM of 2.9% vs. UBSe 3.1%, from a delay in the turn around of the components segment, and secondarily, opex creep and slightly higher labor costs in China. The components segments ($1.8b+) are being impacted by poor yields, . capacity additions, and sub-optimal performance, as rev recovery has been faster than anticipated (~+60% in 2 qtrs). Ests edge higher on higher revs; capex higher; component shortages still Our ests edge higher on higher revs. We model Revs/EPS of $28b/$0.80 and $30b/$0.90 for FY11/FY12, vs. $26.7b/$0.77 & $29b/$0.83 prev. Capex expected now at high-end of $350-400m (UBSe $391m) vs. prev guidance of $300-350m. Component shortages impacted . sales by $150-200m, of which ~$125m impacted telecom infra segment (+2.5% q/q). CSCO, ERIC, ALU, main segment customers. Valuation: Maintain Buy and price target of $9.50 PT based on UBS VCAM: Rev growth 6%; WACC 10%; LT EBIT margin 3.0%. The implied CY11 PE at our PT is 10.5x. UBS 20
  • 21. U.S. Morning Meeting Highlights 23 July 2010 Derik de Bruin, Ph.D....... +1-212-713 3964 Mettler-Toledo (MTD.N) . Analyst Big Q2 Beat, Raise Partly Hindered By F/X derik.debruin@ubs.com Strong organic revenues & margin expansion drive $0.22 of EPS upside Daniel Arias.......................+1-212-713 2467 Associate Analyst MTD continues to benefit from the economic rebound, as Q2 sales of $469M were above UBS daniel.arias@ubs.com & Street ests, with organic growth of 14% handily beating our 8% forecast & guidance of 7-9%. Gross and adjusted op. margins were up 200 bps y/y on operating leverage & price, as adj. EPS Rafael Tejada.................... +1-212-713 8657 Associate Analyst of $1.55 beat UBSe $1.32 & Street $1.33. Although MTD raised guidance, shares may be rafael.tejada@ubs.com . flattish / up slightly, as the big beat was partly offset by a greater than expected F/X impact (-$0.18) in 2H10. Price (22 Jul 2010).................... US$121.24 12-month rating...............Buy (Unchanged) Businesses improves across the board; MTD is cautiously optimistic 12m price target........................ US$150.00 MTD saw strong performance across all product lines, as Lab Products grew 17% organically, Mkt Cap......................................US$4.09bn while Industrial grew 16%, and Food Retail was up 13%. Business conditions continued to improve across all regions, with double-digit growth in the Americas (15%), Europe (10%), and Full-Year EPS 2010E......................... US$6.41 => US$6.45 Asia/ROW (27%). MTD has yet to see any real signs of slowing demand, however, they are 2011E......................... US$7.45 => US$7.40 . being conservative (as is typical) regarding the outlook, especially for Q4, citing the macroeconomic uncertainty (particularly in Europe) & F/X volatility. FY10 guidance raised; We raise FY10 EPS forecast, trim FY11 by $0.05 For FY10, MTD now sees local currency sales up 8-9% (was 6-7%), with EPS of $6.35-6.45 (was $6.26-6.36). For FY10-11, we project sales of $1,854M (+7.3%) & $1,910M respectively, . with EPS of $6.45 (was $6.41) & $7.40 (a bit lower due to F/X, but we are still well above consensus). We remain buyers of MTD shares. Valuation: Buy rating; $150 price target Our price target is based on a DCF analysis and implies ~20x our FY11 EPS est. Henry Kirn, CFA............... +1 212 713 4895 Caterpillar (CAT.N) . Analyst Raising ests, price target after impressive 2Q henry.kirn@ubs.com 2Q EPS of $1.09 vs. consensus of $0.85, but helped by $0.10 of tax items Eric Crawford.................... +1 212-713-8458 Associate Analyst Machinery & Engine sales increased 34% YoY in 2Q, while manufacturing op. profit was eric.crawford@ubs.com $939M, up from $388M in 2Q09 (excluding $85M in 2Q09 redundancy costs) on lower manufacturing costs, higher price realization & higher Machinery volumes. We calculate Price (21 Jul 2010)...................... US$68.00 . manufacturing incremental margins (ex. redundancies) improved to 22.3% on a YoY basis, up 12-month rating......... Neutral (Unchanged) from 18.8% in the year-ago period. Fin. Products op. profit declined 28% in 2Q. 12m price target..... Prior: US$70.00 => US$74.00 Raises 2010 EPS guidance to $3.15-$3.85, from $2.88 at midpoint (cons: $3.29) Mkt Cap......................................US$42.4bn Noting “continuing improvement” in demand, partially offset by F/X, CAT raised the low end of Full-Year EPS 2010 sales guidance to $39-$42B, from $38-$42B. At midpoint, CAT sees higher Machinery 2010E......................... US$3.00 => US$3.60 . sales, about flat Engine sales (including near record turbine sales), slightly higher Fin. Products 2011E......................... US$4.00 => US$4.50 profit before tax, and little change in dealer inventories. Raising our forward EPS estimates Given an improved demand outlook and demonstrated impact of cost takeouts, we are raising . our 2010E EPS to $3.60, from $3.00. We are raising our 2011E and 2012E to $4.50 and $6.00, from $4.00 and $5.50, respectively, reflecting a higher base year. Valuation: Raising our price target to $74, from $70; Maintain Neutral rating Our price target continues to reflect a 35-40% premium to the now lower market multiple (now 11.5x, was 12.0x) on our now higher 2011E EPS, plus ~$4 of cash. Although we expect higher production volumes in 2010 as demand recovers and CAT produces closer to in line with demand, and are explicitly recognizing demonstrated benefits from cost takeouts, our Neutral rating reflects our belief that some of this may be reflected in shares. UBS 21
  • 22. U.S. Morning Meeting Highlights 23 July 2010 Jason Feldman................ +1-212-713 4309 3M Co. (MMM.N) . Analyst Continued Strong Performance in 2Q jason.feldman@ubs.com EPS $1.54 vs. consensus $1.45; Organic growth remains extremely strong Winnie Clark, CFA.............+1-212-713 4103 Associate Analyst 3M delivered high-teens (+17%) organic growth for the second consecutive quarter. We believe winifred.clark@ubs.com that 2Q results are consistent with our view that the company has structurally improved its organic growth profile. Despite 3M’s size, we believe it can continue to outgrow both peers and Price (22 Jul 2010)...................... US$84.75 underlying end markets with its focus on R&D and its pyramid product strategy. New products 12-month rating...............Buy (Unchanged) . appear to be gaining traction, and we believe recent growth rates can only be explained by 12m price target........................ US$100.00 market share gains and/or penetration of new markets. Mkt Cap......................................US$60.3bn Continued improvement in margins Full-Year EPS 2010E......................... US$5.60 => US$5.80 3M’s adjusted operating margins were 23.7%, up 110bp YoY. Sequentially, margins improved 2011E......................... US$6.15 => US$6.40 90bp (~39% incremental margins). Notably, 3M also raised its FY10 operating margin guidance to 22.5%+, from 22.0%+. It is encouraging to see that 3M continues to improve margins while also aggressively investing in growth initiatives. The margin guidance was raised despite slightly . negative pricing (to gain market share), higher raw material costs, and increases in both R&D and marketing/advertising spend. 2010 EPS guidance raised to $5.65-$5.80 (prior $5.40-$5.60); cons. $5.62 . 3M now expects organic volume growth of 13%-15% for 2010 (was +10%-12%). We are raising our 2010 and 2011 EPS estimates to $5.80 (was $5.60) and $6.40 (was $6.15), respectively. Maintain PT of $100 and Buy rating; Risk / reward profile still favorable Our PT reflects a ~30% premium (unchanged) to the market multiple on our revised 2011 EPS estimate (was based on 2010). We maintain our Buy rating. Jason Feldman................ +1-212-713 4309 Danaher (DHR.N) . Analyst 2Q: Selloff unjustified given solid results jason.feldman@ubs.com Solid organic growth, and continued margin improvement Winnie Clark, CFA.............+1-212-713 4103 Associate Analyst DHR’s stock underperformed the S&P by roughly 3% yesterday, a move we believe was winifred.clark@ubs.com unwarranted given strong 2Q results. Some investors seemed disappointed that FY10 guidance wasn’t raised further. However, we were impressed by the substantial improvements in core Price (22 Jul 2010)...................... US$37.80 margins, higher organic growth rates, and the prospects for further near-term M&A. We also 12-month rating...............Buy (Unchanged) . note that guidance now includes incremental dilution associated with the Tools JV which 12m price target..... Prior: US$48.50 => probably wasn’t in consensus forecasts. US$45.00 Mkt Cap......................................US$24.5bn Focus was on costs of Tools JV, but little discussion of the likely LT benefits Full-Year EPS Yesterday, both DHR and CBE commented on the dilution associated with their new Tools JV. 2011E......................... US$2.50 => US$2.55 However, neither company reiterated the original justifications for the JV; consequently, we think some investors focused exclusively on the near-term dilution. Over the next few years, we . expect the JV to deliver significant synergies from purchasing leverage, geographic and channel footprint expansion, consolidation of facilities, and cross-branding. ‘10 EPS guidance raised to $2.16-2.23 (was $2.12-$2.20) vs. consensus $2.20 FY10 guidance now includes roughly $0.04 dilution related to the recently formed Tools JV, but excludes the expected 3Q one-time JV related gain. For 3Q, DHR expects EPS of $0.50-$0.55 . (including Tools JV dilution) vs. consensus $0.55. Management is likely to increase growth investments in the back half of the year. Valuation: Price target of $45 (was $48.5); Maintain Buy rating Our PT continues to reflect a ~45% premium to the market multiple on our revised 2011 EPS estimate (was based on 2010). We maintain our Buy rating. UBS 22
  • 23. U.S. Morning Meeting Highlights 23 July 2010 Jason Feldman................ +1-212-713 4309 Cooper Industries (CBE.N) . Analyst 2Q beats, but guidance disappoints jason.feldman@ubs.com EPS of $0.80 (ex-items) ahead of cons. $0.77 and guidance of $0.72-$0.77 Winnie Clark, CFA.............+1-212-713 4103 Associate Analyst Sales increased ~5.3% YoY (guidance +2%-5%) to $1.34B vs. consensus $1.30B. Core sales winifred.clark@ubs.com were up 4.8% YoY. Adjusted operating margins improved roughly 390bp YoY to 13.7% (and up ~70bp sequentially). While CBE reported a modest beat for 2Q and raised guidance, the stock Price (22 Jul 2010)...................... US$44.54 . sold off ~5% yesterday (S&P was up >2%), which we believe reflects investors’ heightened 12-month rating...............Buy (Unchanged) expectations into the print. 12m price target..... Prior: US$56.00 => US$51.00 CBE’s performance solid given later cycle end market exposure Mkt Cap......................................US$7.45bn While we understand that CBE’s guidance was below buy-side expectations, we think CBE Full-Year EPS delivered solid results given its later cycle end market exposure. While it’s hard to pinpoint exactly when the later cycle businesses will turn, we believe CBE’s improved market position, consistent execution, and strong balance sheet will materially benefit the company as the . recovery progresses. We also believe that CBE’s guidance reflects more conservative underlying macro assumptions than guidance provided by some other companies in the sector. 2010 EPS guidance raised to $2.95-$3.10, from $2.85-$3.00 (Cons: $3.09) Revised EPS guidance includes ~$0.06 of dilution related to the Tools JV, which we do not believe was reflected in the consensus estimates. On an “apples-to-apples” basis, the midpoint . of guidance was raised ~6%. For 3Q, CBE expects sales +2-5% and EPS of $0.75-$0.80 vs. consensus of $0.82. Valuation: Reducing price target to $51 from $56; Maintain Buy rating Our new PT reflects a ~15-20% premium to the now-lower market multiple on our 2011 EPS estimate (was based on 2010), plus ~$2 per share in “excess” cash (unchanged). Steven Fisher, CFA.........................+1-212-713 8634 Engineering & Construction . Analyst E&C Q2 preview: Macro vs. Micro steven.fisher@ubs.com Mixed expectations; awaiting color on 2H bookings and initial ’11 thoughts Brandon Verblow.............................. +1-212-713 9463 Next week we expect earnings from FLR, JEC, CBI, and KBR, with others following. Macro Associate Analyst concerns have dominated trading recently, and the Q2 results will indicate how the economic brandon.verblow@ubs.com backdrop is filtering to the industry/company level (we expect modest push-outs). We have been expecting aggregate backlogs to flatten, and we expect book/bill just under 1x on average, although we expect a few standouts to raise the average. We expect more clarity on f/x impact, . and expectations for 2H bookings (prior commentary suggested 2H would improve). We also expect some preliminary thoughts on 2011 earnings growth prospects. Expect solid bookings at FLR, FWLT, TPC; lighter awards at MDR, KBR We expect favorable bookings at FLR, FWLT, and TPC. We don't expect significant margin . deterioration for the group overall; only modest reductions. We see some earnings risk at JEC and WG. We see bookings risk at MDR and KBR. We are positive on FLR and TPC into the quarter on book to bill potential Into the quarter, we are positive on FLR (despite high bookings expectations) and TPC on good bookings potential, and we are also positive on URS on earnings stability (although bookings risk and deal costs may be factors). Laggards could include JEC on earnings risk, MDR on bookings risk, BWC on bookings and margin risk. Risks appear balanced at KBR (may raise guidance but stock outperformed and bookings may be light) and FWLT (upside from bookings balanced by near-term revenue and margin risk). - UBS 23
  • 24. U.S. Morning Meeting Highlights 23 July 2010 Timna Tanners................. +1-212-713 2927 Reliance Steel (RS.N) . Analyst Q2 Beats, Steady Outlook Supports Buy timna.tanners@ubs.com EPS of $0.83 tops consensus/UBS as volumes and prices rose Price (22 Jul 2010)...................... US$39.10 RS posted Q2 EPS of $0.83 vs consensus of $0.82 and UBSe $0.72. Tons sold regained 12-month rating............ Buy * (Unchanged) ground, up 4% q/q and 9% y/y, after falling 4% y/y in Q1. Prices per ton were up 19% y/y and 12m price target.......................... US$57.00 8% q/q. Gross profit margin of 25.7% compared with 26.1% in Q1 and UBSe 26.4% for Q2. The Mkt Cap......................................US$2.90bn . LIFO charge rose to $10M from $5M in Q1. Our stainless concerns proved unfounded as buying Full-Year EPS remained fairly steady. 2010E......................... US$2.80 => US$2.85 2011E......................... US$4.90 => US$4.75 Guidance light vs consensus but seems appropriately conservative Q3 EPS guidance of $0.65-$0.75 was below consensus’ $0.89 and mgmt noted seasonality *Exception to core rating bands - see could hurt and weaker prices. Its range may prove conservative but can rein in Street ests we page 33 . viewed too high for a while. We drop Q3e to $0.72 vs $0.79. UBSe ‘10 rises to $2.85 vs $2.80 and we think consensus at $3.20 needs to fall. Mgmt suggests acquisition timing may be nearing While mgmt has noted dry powder for acquisitions for several qtrs, with net-debt to cap of 26%, below its 35-40% target range, it hinted targets could be more interested in selling by year end. . Working capital use was $78.2M as inventory restocking continued. FCF turned positive at $2.5M vs the prior qtr’s -$77.3M. Valuation: Maintain Buy, valuation attractive and M&A could be catalyst Our $57 target uses RS’s 5-yr historical avg 6.3x EV/EBITDA multiple on a “normal” 2012E discounted back. vs an avg 10-yr 6.9x through the cycle multiple. Shrs look attractively valued at 4x our 2012E EV/EBITDA and 5.1x 2011E. We like the steady business model, leverage to economic, aerospace, and construction recovery, and potential acquisitions in the fragmented distribution space. Technology Brent Thill........................ +1-415-352 4694 Microsoft (MSFT.O) . Analyst Strong Q4: Kinecting w/ Enterprise Demand brent.thill@ubs.com Bookings the FQ4 Highlight Reid Menge.......................+1-415-352 4696 Associate Analyst Strong FQ4 with revenue, margins, cash flow, unearned revenue and EPS all above estimates. reid.menge@ubs.com Sentiment has been negative due mainly to uncertainty over the timing of MSFT’s enterprise upgrade cycle. However FQ4 bookings +27% y/y was its strongest bookings growth in 3 years, Price (22 Jul 2010)...................... US$25.84 and other metrics from greater than seasonal growth in MBD unearned revs, business premium 12-month rating...............Buy (Unchanged) mix improvements, and contracted not billed growth, suggests enterprise demand is finally 12m price target..... Prior: US$38.00 => . returning. No negative trends in Europe or government. FY11 setting up as a beat-and-raise US$35.00 Mkt Cap.......................................US$228bn year. Full-Year EPS Signs of Enterprise Demand Abound 1) MBD unearned revenue grew a much stronger than seasonal 24% q/q showing strong early enterprise demand for Office 2010, 2) Windows OEM business premium mix ticked up q/q to . 29% showing increasing demand for higher ASP SKUs, 3) contracted not billed balance of $15B +15% y/y (vs. flat in FY09). Maintain FY11/12 EPS Estimates Raising FY11 revenue estimate by $300M to $68.4B (+9.5%), but maintain EPS $2.40 (OM’s 39.3% +70bps y/y). Maintaining FY12E $74B/$2.75 (revenue +8% y/y OM’s 40.0% +70bps y/y). . Our $3B/quarter buyback estimate remains unchanged and is likely conservative even with the potential for a dividend increase which may be announced post the September board meeting. Valuation: Inexpensive at 10.8 FY11E EPS = 0.6 PEG FY09-12E CAGR Lowering PT to $35 PT = 14.5x FY11E EPS $2.40 (vs. 16x prior and 14x 5yr average) reflecting lower market multiples. UBS 24
  • 25. U.S. Morning Meeting Highlights 23 July 2010 Brian Pitz..........................+1-212-713 9310 Amazon.com (AMZN.O) . Analyst Higher Fulfillment a Nice Problem to Have brian.pitz@ubs.com Reiterate Buy and reduce PT to $165 price target Brian Fitzgerald................. +1-212-713 2851 Analyst AMZN’s investment in fulfillment capacity is a sign of healthy demand in the core retail business, brian.fitzgerald@ubs.com apparent in the Q3 guidance well above us and the Street at the mid-point. We believe the step function increase in Amazon’s fulfillment capacity (13 new fulfillment centers to 52 in total) in Kaizad Gotla......................+1-212-713 2603 Associate Analyst Q2-Q3 headed into the holiday season should yield significant positive leverage in Q4 and 2011 kaizad.gotla@ubs.com . due to accelerating revenue growth. We would use the after-hours pull-back in shares to build a position in the best eCommerce name. Price (22 Jul 2010).................... US$120.07 12-month rating...............Buy (Unchanged) Is this 05/06 Déjà vu? Our short answer is no 12m price target..... Prior: US$170.00 => We believe AMZN’s addition of fulfillment capacity into Q4 is due to an expectation of significant US$165.00 demand in its EGM category (based on current user/usage trends) and Fulfillment by Amazon Mkt Cap......................................US$53.4bn adoption trends among 3P sellers, areas where AMZN has a proven record. This contrasts to . Full-Year EPS the 05/06 tech and content investment that spooked some investors due to an uncertain return 2010E......................... US$2.99 => US$2.78 expectation – though this investment arguably paid off from 06-09. 2011E......................... US$4.22 => US$4.20 All of Amazon’s key operating metrics remain healthy Ex-FX revenue growth of 42% Y/Y in Q2 was flat from the previous qtr. and driven primarily by solid unit growth of 39% Y/Y (40% Y/Y in Q1), with Ex-FX ASP growth at +2% Y/Y accelerating . from 1% Y/Y in Q1. In addition, Amazon continues to grow units/customer (+11% Y/Y in Q2; 12% Y/Y in Q1). Valuation: Our $165 PT is based on our DCF (12% WACC; 4% LTGR) Moreover, our price target implies 17x our ’11E FCF vs. a 28% 3-yr FCF CAGR. Jason Kupferberg............................. +1-212-713 3559 Payment Processing: UBS “Swipe” . Analyst V/MA: How much will C2Q results matter? jason.kupferberg@ubs.com Near-term V/MA focus likely to remain on regulatory uncertainty Ramsey El-Assal.............................. +1-212-713 4146 We expect V and MA to report solid C2Q results on 7/28 and 8/3, respectively, and believe Associate Analyst there is more upside potential to V’s estimates because of less FX headwinds. However, ramsey.el-assal@ubs.com despite the fact that in our opinion the stocks have been oversold, a strong print may not be Arvind Ramnani................................ +1 212 713 3517 much of a catalyst, as investors' focus (at least for the near-term) is likely to remain more on Associate Analyst . regulatory uncertainty (Durbin amendment implementation and implications) than on arvind.ramnani@ubs.com fundamentals. Recent macro data points reinforce limited visibility on US consumer Recent US retail spending and consumer sentiment data points have been underwhelming, which may hinder visibility regarding near-term consumer spending trends. This dynamic is generally consistent with intra-quarter commentary by V and MA, suggesting that the latest volume trends remained encouraging, but that the spending environment is still somewhat . fragile. By C4Q10, y/y volume growth comps won't be as easy for V/MA, but the secular trend favoring electronic payments remains V/MA's friend. Lowering price targets given regulatory overhang; still prefer V We remain confident that our '10/'11 estimates for V/MA will not be materially impacted by the provisions of the Durbin amendment, given that implementation will take time, the business models will remain resilient, and V/MA will remain critical links in the payments value chain. However, given that new regulations will likely lower the valuation multiple range for V/MA, we lowered our price targets to $107/$270 from $115/$298 for V/MA, respectively. V and MA both remain Buy-rated but we retain a slight preference for V (mix, execution, valuation). - UBS 25
  • 26. U.S. Morning Meeting Highlights 23 July 2010 Jason Kupferberg............................. +1-212-713 3559 Computer Services & IT Consulting . Analyst AXP and COF card volumes follow the trend jason.kupferberg@ubs.com Modestly accelerating y/y growth for AXP’s 2Q card vols Ramsey El-Assal.............................. +1-212-713 4146 AXP, which represents ~22% of US network credit volume, reported 2Q earnings this evening. Associate Analyst Y/Y growth in the US card billed business increased 14% (vs. an 11% increase last quarter), ramsey.el-assal@ubs.com representing 300 bps of sequential improvement. International volumes were up 19% vs. last Arvind Ramnani................................ +1 212 713 3517 quarter’s substantial 27% y/y improvement (aided by FX). AXP indicated that worldwide July Associate Analyst . month-to-date y/y volume was up double-digits in constant currency, down slightly from June’s arvind.ramnani@ubs.com 14% due to a tougher y/y comp. Issues to consider when looking to AXP as a read-through for V/MA There are important differences between AXP and V/MA. AXP has: 1) a portfolio with high discretionary spend, 2) a high proportion of transactors, 3) high exposure to corporate T&E spend, 4) no debit volume, and 5) a smaller relative percentage of international volume. . Interestingly, AXP suggested on its call that alternative payments (via recent Revolution Money acquisition) and prepaid are increasingly becoming areas of long-term focus. COF purchase volume also accelerates modestly COF credit purchase volume increased 3.2% y/y in Q2 vs. a 1.9% y/y increase in Q1, representing 130bps of sequential improvement, roughly in-line with the average 230 bps of Q2 vs. Q1 improvement in y/y credit volume growth enjoyed by other issuers (See Table 1). We maintain Buy ratings on V and MA, recognizing that regulatory uncertainty could trump fundamental data points in the near-term. - Jason Kupferberg...........................+1-212-713 3559 Computer Services & IT Consulting . Analyst A big week for processors jason.kupferberg@ubs.com Expect strong print from Visa - how much will it matter? Arvind Ramnani................................ +1 212 713 3517 As highlighted in our "Swipe" report published separately today, we expect solid F3Q results Associate Analyst from Visa on 7/28 with potential for modest upside, and anticipate F10 and F11 guidance will be arvind.ramnani@ubs.com reiterated. But amid regulatory uncertainty related to the Durbin amendment, potential investor Ramsey El-Assal.............................. +1-212-713 4146 enthusiasm regarding positive fundamentals may be tempered. We think shares are oversold on Associate Analyst . regulatory concerns and maintain our Buy rating, but we lowered our price target to $107 from ramsey.el-assal@ubs.com $115 (lower multiple due to increased regulation). WU - focus on mixed macro data points, new CEO Ex. previously announced restructuring charges, our 2Q ests for WU (reporting 7/27) are in-line with the Street, and we remain comfortable the company can achieve its '10 guidance, which we believe is prudently conservative. Global macro data points (unemployment, housing, etc) are still mixed, which continues to limit visibility into WU's '11 growth potential, which we believe is . the key to shares. We remain on the sidelines, as it is still a bit premature to say whether WU could again be a value trap, or whether current levels will prove to be an attractive entry point. GPN may be most intriguing among other earnings (ADP, G, GIB) GPN will provide initial F11 guidance on 7/27. Our F11 estimates are a little bit ahead of the Street, but we see modest risk to projections given challenges related to Canada and N. American margins, plus uncertainty regarding the amount of margin benefit GPN can achieve from platform consolidation. We expect ADP, G, and GIB earnings to be relatively uneventful, but GIB is most exposed to FX volatility (C$). - UBS 26
  • 27. U.S. Morning Meeting Highlights 23 July 2010 Maynard J. Um................................+1-212-713 3372 IT Hardware . Analyst Read From MSFT's Jun. Qtr Results maynard.um@ubs.com Microsoft reports strong PC growth; consumer strong as enterprise ramps Daniel Doddo...................................+1 212 713 7929 Microsoft reported revs of $16.0b (Street: $15.3b), driven by continued strong consumer Associate Analyst demand & accelerating enterprise demand for Windows 7. Microsoft estimates the PC market daniel.doddo@ubs.com grew 22-24% (largely in line with our forecasts & recent IDC/Gartner data) with both strength in . Arun Sharma...................................+1-212-713 1033 consumer & enterprise. We maintain our 2010 PC unit growth forecast of 18.4%, which embeds Analyst a less than seasonal 2H. arun.sharma@ubs.com Enterprise refresh accelerating; Europe "healthy" Microsoft noted the business PC refresh cycle accelerated & expects it to continue through 2011, backing our views. Small & mid market segments also continued to see "robust growth". Geographically, the company noted emerging markets continue to be a significant driver of the . PC market (2x mature markets), though demand in Europe was "healthy" & US saw improvement. Continue to favor "cheap stocks" with some visible catalysts Earnings read-throughs thus far have been mixed, with tech companies reporting varying degrees of end-market demand from broad-based strength to slowing and from consumer to government. We continue to prefer "cheap stocks" with some visible catalysts with product play themes like Apple, IT budget priority plays like EMC & NetApp, and enterprise (rather than consumer) PC exposure plays given our views on the PC refresh like Dell. Valuations keep our ratings Buy on Hewlett Packard, Seagate & Western Digital. - Nikos Theodosopoulos..... +1-212-713 Riverbed Technology (RVBD.O) . 3286 Nice Beat and Raise, Raising Tgt and Fcst Analyst nikos.theodosopoulos@ubs.com Beat and Raise Qtr, Record Pipeline, Deferred Revs Only Up Slightly Jack Monti, CFA................ +1 212 713 4795 Riverbed reported a nice beat and raise 2Q with sales up 12% QoQ and 38% YoY. The pipeline Analyst continued to expand, now at record levels, with higher confidence across the business. Deferred jack.monti@ubs.com revs increased slightly up 1% QoQ after strong 4Q09 and 1Q10 renewals—product deferred . down but expected to rise. Close rates are tightening. 3Q guide implied slightly faster growth vs. Price (22 Jul 2010)...................... US$30.07 expectations (+6.2% vs. 5.9%), and we sense no meaningful change in guidance assumptions. 12-month rating.......Neutral * (Unchanged) 12m price target..... Prior: US$32.00 => New 10% Distributor, Rest Of World Leading YoY Growth US$35.00 Account penetration in the Forbes Global 100 was at 71 in the qtr (growing from around 60 last Mkt Cap......................................US$2.25bn qtr). Riverbed’s two tier go-to-market is on track—majority of NA VARs now on distributors. Full-Year EPS Arrow become a 10% distributor comprising just above 10% of sales. Rest of World continues 2010E......................... US$0.34 => US$0.41 leading YoY growth up 51% in 2Q from strength in Emerging Markets including Asia, Mexico, 2011E......................... US$0.50 => US$0.56 . Brazil and Argentina. EMEA followed ROW up 48% YoY. US lagged though still up strong 29% *Exception to core rating bands - see YoY. page 33 We Raise Our Estimates We now raise our sales and EPS estimates ex options for CY10 and CY11 to $518M (+31%) . and $1.00 and $630M (+22%) and $1.22, versus our prior $495M (+25%) and $0.92 and $602M (+22%) and $1.16. Valuation—Maintain Neutral, Raising Price Target to $35 We now raise our price target to $35 based on ~25x our new CY11 taxed OI estimates of $1.18 plus net cash of $5.50 per share. Our prior $32 price target was based on ~25x our prior taxed OI estimate of $1.10 plus prior net cash of ~$5. UBS 27
  • 28. U.S. Morning Meeting Highlights 23 July 2010 Nikos Theodosopoulos..... +1-212-713 Calix (CALX.N) 3286 . Reports Solid 2Q10—Frontier and Broadband Stimulus Remain Analyst Catalysts nikos.theodosopoulos@ubs.com Jack Monti, CFA................ +1 212 713 4795 Revenues and Margins Better Than Expected Analyst 2Q10 revs of $71.7M exceeded our est. of $68.9M and guidance of $66-71M. CALX saw jack.monti@ubs.com strength across its entire customer base with strong new product sales around the E7; 100 . customers have deployed the E7 in first two qtrs. Pro-forma GM of 42.3% vs. our est. of 37.3% Price (22 Jul 2010)...................... US$10.80 helped drive EPS of $0.14 vs. our est. of $0.03. 12-month rating...............Buy (Unchanged) 12m price target.......................... US$14.50 3Q10 Guidance Lower Than Our Estimates Mkt Cap......................................US$0.43bn 3Q10 rev. guidance of $70-74M and EPS of $0.04-0.08 was lower than our ests of $79M and Full-Year EPS $0.18 as it appears some 3Q rev. fell into 2Q and CALX is accelerating R&D expense. We 2010E.......................US$0.00 => US$(0.37) . maintain our full-year 2010 ests of $288M in revs and EPS of $0.39 and view the better 2Q and 2011E......................... US$0.38 => US$0.10 lower 3Q as lumpiness in CALX’s business. Accelerating R&D; Partly Telco Merger Driven CALX is accelerating R&D in our view to drive features to more quickly penetrate the 4.8M lines FTR recently purchased from VZ and potentially more quickly sell into Q as it merges with CTL. . We continue to view CALX as a beneficiary from the FTR line purchase and US broadband stimulus in late 2010 and throughout 2011. Valuation—Maintain Buy Rating and $14.50 Price Target We maintain our Buy rating and $14.50 target. Our target is based on ~20x our estimate of a more normal Calix earnings power of $0.70-0.75. Parag Agarwal..................+1 212 713 2563 Skyworks Solutions (SWKS.O) Analyst . New customer ramp drives solid results and outlook; Reiterate Buy, parag.agarwal@ubs.com raise PT to $22 Uche Orji............................+1 212 713 4015 Analyst Growing momentum as new customer programs ramp uche.orji@ubs.com SWKS results further support our view that the company should continue to grow revenue driven by share gains at Nokia (upside potential of ~$100m from current run rate of Price (22 Jul 2010)...................... US$18.05 $100m/year), ramp of new smartphone programs, and new products and markets such as 12-month rating...............Buy (Unchanged) smartmeters. Addition of Nokia and Foxconn (contract manufacturer for Apple) as new ~10% 12m price target..... Prior: US$19.00 => customers further indicates SWKS’ ability to grow its revenue and diversify its customer base. US$22.00 Mkt Cap......................................US$3.19bn . Along with revenue growth, margins should expand driven by mix and leverage. We reiterate our Buy rating, and raise our PT to $22. Full-Year EPS 2010E......................... US$0.83 => US$0.81 Details: Results and outlook handily beat estimates 2011E......................... US$1.22 => US$1.40 For F3Q, SWKS reported Rev/EPS(pf) of $275m(+16% Q/Q)/$0.32, versus UBS est of $268m/$0.30 and cons of $269m/$0.30. Gross margin(pf) expanded by 100bps Q/Q to 43.3% and oper margin(pf) expanded by 290 bps Q/Q to 23.4%. For F4Q, SWKS guided Rev/EPS(pf) . of $300m(+9% Q/Q)/$0.37, vs. UBS est of $284m/$0.33 (cons of $287m/$0.34), and continued gross and operating margin expansion. Raising estimates We raise our F4Q Rev/EPS(pf) estimates to $300m/$0.37 from $284m/$0.33. For F2011, we . raise our Rev/EPS(pf) estimates to $1,253m/$1.58 from $1,216m/$1.40. For F2012, we raise our EPS(pf) estimate to $1.76 from $1.62, while maintaining our revenue estimate of $1,444m. Valuation: Reiterate Buy, raise PT to $22 Our PT is based on a DCF (WACC 10.2% g 2%) and equates to NTM PE of 14x. UBS 28
  • 29. U.S. Morning Meeting Highlights 23 July 2010 Steven Eliscu...................+1-415-352 5674 Cypress (CY.O) Analyst . Strong Microcontroller Order Momentum and Sustainably Higher Gross steven.eliscu@ubs.com Margin Uche Orji............................+1 212 713 4015 Analyst At PSoC inflection point; gross margin likely holds against headwinds uche.orji@ubs.com Cypress’s 2Q results were ahead of estimates but showed limited PSoC growth. However, as the PSoC book-to-bill was 1.7, we expect strong PSoC growth in 2H10, especially on the ramp Price (22 Jul 2010)...................... US$10.95 of touch controller wins into 5 of the top 8 handset makers in 3Q. We also believe gross margin 12-month rating......... Neutral (Unchanged) will rise further (+340 bps q/q in 2Q) despite potential margin headwinds from: 1) likely more 12m price target.......................... US$12.00 aggressive price declines as semi supply constraints ease, 2) higher Emerging Tech sales, Mkt Cap......................................US$1.76bn . which are GM dilutive. We are incrementally more positive and raise ests, PT to $12 from Full-Year EPS $11.75. 2010E......................... US$0.40 => US$0.44 2011E......................... US$0.53 => US$0.51 2Q10 Results – Solid revenue and gross margin increase Cypress reported sales/non-GAAP EPS of $223.0m (+10.3% q/q)/$0.24 ($0.11 GAAP), ahead UBS estimates of $218.4m/$0.20 ($0.10 GAAP) and consensus of $218.6m/$0.20. GAAP gross . margin was 56.0% (59.3% non-GAAP), above our 53.3% estimate as COGS grew just 2% q/q, even as inventories declined 3% q/q. Raise estimates on higher sales, gross margin expectations We raise our 3Q10 sales/non GAAP EPS estimates by 1%/17% to $238.9m/$0.28 ($0.15 GAAP) and for the full year 2010 by 2%/16% to $899.2m/$0.94 ($0.44 GAAP). For 2011/12, we . raise our sales estimates by 4%/5% to $985m/$1,089m and non-GAAP EPS by 14%/15% to $1.03/$1.25 ($0.51/$0.72 GAAP). Valuation: Raise Price Target to $12, Maintain Neutral Rating We raise our 12-month PT to $12 (24x our $0.51 2011 EPS estimate) from $11.75 Steven Eliscu...................+1-415-352 5674 Cavium Networks (CAVM.O) Analyst . 2Q Results Preview: Expect Solid Growth on Strong Enterprise, steven.eliscu@ubs.com Wireless Trends Uche Orji............................+1 212 713 4015 Analyst 2Q10 Results: Expect solid revenue growth and design win momentum uche.orji@ubs.com For Cavium’s 2Q results (29-Jul), we expect sales/non-GAAP EPS of $49.2m (+18% q/q)/$0.19, in line with consensus of $49.1m/$0.19 on the strength of processor sales into enterprise and Price (22 Jul 2010)...................... US$29.07 wireless infrastructure applications, along with a recovery of sales into fiber broadband home 12-month rating...............Buy (Unchanged) routers. Key highlights for the quarter also include first samples of its Octeon II (next gen high- 12m price target.......................... US$32.00 . end processor) and single-chip PureVu (for video-over-Wi-Fi connectivity), which should begin Mkt Cap......................................US$1.27bn to materially contribute to revenue exiting 2010. We reiterate our Buy rating, $32 price target. Full-Year EPS 2010E............................................. US$0.20 3Q10 Outlook: New program ramps could offset macro concerns 2011E............................................. US$0.62 For 3Q, we expect sales/non-GAAP EPS of $54.0m (+10% q/q)/$0.22, slightly above consensus of $52.3m/$0.21, as we expect the ramp of new programs and continued improvements in . enterprise spending to offset potential macro weakness, especially as Cavium has limited exposure to consumer markets (<10% of sales). Econa, PureVu ARM processors should drive incremental growth We continue to view Cavium’s near-term opportunities in consumer applications as providing incremental growth with its focus on high-end networking, e.g. gaming routers, 2-drive network . attached storage, along with its PureVu video-over-WiFi processor family, which we believe can generate at least $5m sales in 2H10. Valuation: $32 Price Target, Buy Rating Our DCF-based price target is $32 (29x our $1.11 2011 non-GAAP EPS estimate). UBS 29
  • 30. U.S. Morning Meeting Highlights 23 July 2010 Steven Eliscu...................+1-415-352 5674 NetLogic Microsystem (NETL.O) Analyst . 2Q Preview: Expect Solid Results and Outlook on Secular Growth steven.eliscu@ubs.com Trends Uche Orji............................+1 212 713 4015 Analyst 2Q10 Results: Expect in line with continued design win growth uche.orji@ubs.com For NetLogic’s 2Q results (28-Jul), we expect sales/pf EPS of $95.8m (+11% q/q)/ $0.33, slightly above consensus of $94.5m/$0.32, as we expect improving enterprise spending trends Price (22 Jul 2010)...................... US$31.44 and wireless backhaul equipment deployments to drive near-term growth. We expect the drivers 12-month rating...............Buy (Unchanged) underlying these trends to remain for at least several more years, as enterprises & service 12m price target.......................... US$34.50 providers have an increased need for: 1) network intelligence for more services at a lower cost, Mkt Cap......................................US$1.82bn . 2) conversion to IPv6 for more end-point devices, 3) higher speeds for new services. Buy, Full-Year EPS $34.50 PT. 2010E........................................... US$(0.03) 2011E............................................. US$0.59 3Q10 Outlook: Expect +8% q/q sales from enterprise, wireless strength For 3Q, we expect sales/EPS of $103.2m/$0.38, above cons of $97.2m/$0.33, as NetLogic benefits from 2Q growth trends along with the ramp of high-end search processing into data . center switches and a broad array of higher volume NETLite-based designs that should enable growth above its +2% q/q 3Q/4Q guidance. Key challenge remains – new RMI 40nm processor family execution Even as NetLogic is making progress with its 40nm XLP processor, we believe it needs to show it can execute with samples in 3Q and subsequent design win momentum exiting 2010, . especially as key high-end competitor, Cavium, has sampled its latest generation processor, supporting its incumbent status at Cisco. Valuation: $34.50 Price Target, Reiterate Buy Rating Our 12-month DCF-based PT is $34.50 (25x our $1.39 2010 pf EPS estimate). Uche Orji...........................+1 212 713 4015 SanDisk (SNDK.O) Analyst . Strong Secular Demand and Gross Margin Thesis Remains Intact. uche.orji@ubs.com Reiterate Buy. Steven Chin.......................+1-415-352 5675 Analyst Thesis for strong secular demand, favorable ASP trends remains intact steven.chin@ubs.com Despite strong underlying demand, SNDK’s supply constraints led to in line revenues whilst margin improvement led SNDK to exceed our EPS est by 15%. On a slight sales increase, we Price (22 Jul 2010)...................... US$43.10 raise our C10/11E EPS by 12%/13% mainly on margin increases and better ASP outlook. We 12-month rating............ Buy * (Unchanged) believe the secular growth story remains intact and reiterate BUY with PT of $55. Separately, 12m price target.......................... US$55.00 . we are not concerned about the management transition, as CEO Eli Hariri hands over to Sanjay Mkt Cap......................................US$9.99bn Mehrorta (co-founder, COO, and 22 year veteran of SNDK) on Jan 1, 2011. Full-Year EPS 2010E......................... US$3.46 => US$4.02 Strong GM upside on better than expected cost reductions, OEM sales mix 2011E......................... US$3.77 => US$4.40 SNDK reported in line Q2 sales of $1.18b on higher bit sales that were aided by inventory drawdown (-17% q/q), but better than expected cost reductions and favorable mix led to non- *Exception to core rating bands - see page 33 GAAP EPS of $1.08, beating our $0.94 est. Due to tight supply, the Q3 sales view is . $1.175-1.250b - in line with our est. However, SNDK guided 2H10 GM of ~42% (UBSe: 38.5%) on favorable sales mix and price trends. Raise C10/11E Sales by 1%/3%, EPS by 12%/13% on solid demand & GM We raise our C10/11E sales 1%/3% to $4.95b/$5.92b on increased bit sales given solid . exposure to smartphones, tablets, and other devices. EPS rises 12%/13% to $4.38/$4.70 (GAAP: $4.02/$4.40) on higher gross and operating margin. Valuation: $55 12-month PT, Buy rating Our DCF-based PT of $55 (WACC: 9.4%, g: 2.0%) equates to 2.9x 2010E P/BV. UBS 30
  • 31. U.S. Morning Meeting Highlights 23 July 2010 Telecommunications John C. Hodulik, CFA..... +1-212-713 4226 AT&T Inc. (T.N) . Analyst Raising EPS on stronger margins john.hodulik@ubs.com EPS beats on better wireless and wireline margins Batya Levi......................... +1-212-713 8824 Analyst AT&T reported 2Q EPS of $0.61 (vs. our estimate of $0.58), excluding a one-time gain of $0.07. batya.levi@ubs.com Though revenues were lighter than expected (largely due to lower than expected equip rev), . impressive margin growth enabled the company to exceed our EPS estimate. We are now Marc Albanese...................+1 212 713 2555 Associate Analyst looking for higher margins in 2H though we believe 2Q was the peak for the year. marc.albanese@ubs.com Cost cutting, U-verse, and stabilizing business environment aids Wireline Wireline revenue declines improved thanks to growth in U-verse and a stabilizing business Price (22 Jul 2010)...................... US$25.51 environment while margins improved on aggressive cost cutting. Looking ahead, we continue to 12-month rating...............Buy (Unchanged) 12m price target.......................... US$31.00 expect consumer revs to remain stable though we are lowering our 2H broadband net adds. We Mkt Cap.......................................US$151bn . also believe that 2Q will be the high water mark for wireline margins as we expect the company to reinvest in efforts to boost broadband and video growth. Full-Year EPS 2010E............................................. US$2.40 Wireless margins continue to beat though subscriber adds were weaker 2011E............................................. US$2.55 Wireless margins of 43.1% were better than expected despite 3.2M iPhone activations. Revenues were lower than expected though on weaker net adds (including 130K losses in . wholesale). We expect net adds to pick up in 2H on ramping iPhone sales, a rebound in Tracfone, and accelerating iPad 3G activations. Valuation: Maintain Buy We are raising our ‘10 EPS to $2.40 from $2.32, equating to growth of 13% for the year. Our ‘11 estimate for $2.55 remains unchanged. AT&T trades at 4.7x 2011E EBITDA and 9.1x P/E. Our PT is DCF based (8% WACC, 2% Growth). UBS 31
  • 32. U.S. Morning Meeting Highlights 23 July 2010 Economics Maury N. Harris...............................+1-212-713 2472 US Daily Economic Comment . Economist A quiet Friday? maury.harris@ubs.com Preview: No data on Friday. EU stress test results due Drew T. Matus................................. +1-203-719 8378 . On Friday, no economic reports or Fed speeches are scheduled in the US. Financial markets Economist likely will focus on EU bank stress test results, expected at noon EST. drew.matus@ubs.com Review: Claims +37k to 464k; EHS -5.1%; LEI -0.2%; FHFA +0.5% Samuel D. Coffin.............................+1-203-719 1252 (1) Initial jobless claims jumped to 464k in the week of July 17 (cons 445k, UBSe 450k) from Economist 427k in the prior week (was 429k). Seasonally adjusted claims data have bounced around in samuel.coffin@ubs.com recent weeks, likely reflecting seasonal adjustment problems related to the timing of annual Kevin Cummins.............................. +1-203-719 1676 manufacturing shutdowns. This is the week of the July payroll survey (for the employment Economist report), and the four-week average of claims, at 456,000, was slightly lower from 464,000 in the kevin.cummins@ubs.com June survey week. That said, we would not read much into the recent claims data given the typical volatility this time of year. (2) Existing home sales fell less than expected in June: -5.1% m/m to 5.37M (cons -9.9% to 5.10M, UBSe -8.1% to 5.20M) from 5.66M in May and 5.79M in April. The declines in May and June represent payback for demand that was pulled forward by expiring housing tax credits. The pending home sales index (PHSI) fell 30% m/m in May, suggesting a further decline in existing home sales (EHS) in July. The PHSI, based on initial signings of sales contracts, tends to lead EHS, based on contract closings, by a month or two. Looking beyond this period of volatility, the outlook for housing will depend importantly on jobs. We continue to expect a strengthening labor market will provide support to sales later this year. (3) The index of leading economic indicators (LEI) was also a tad less weak than consensus expected: -0.2% in June (cons -0.3%, UBSe -0.2%), offsetting only part of the upward-revised 0.5% rise in May (revised from +0.4%). (4) The seasonally adjusted FHFA house price index was much better than expected: up 0.5% (cons -0.3%, UBSe -0.2%) in May after an upward- revised 0.9% gain in April (was +0.8%). (5) Mr. Bernanke’s testimony to the House was mostly a repeat of Tuesday’s testimony to the Senate nor were there any major surprises in Q&A (more below). (6) Also on Thursday, the House of Representatives voted in favor (272-152) of extending unemployment benefits through November. The $34 bil. bill was passed by the Senate earlier this week, and was being sent to the President for his signature. - Equity Strategy Thomas M. Doerflinger, Ph.D........ +1-212-713 2540 US Equity Strategy Comment . Strategist Q2 2010 Earnings Season Weekly Update: Week 2 tom.doerflinger@ubs.com Results Look Consistent with our Estimate Natalie Garner, CFA........................+1-212-713 4915 With 150 companies (43% of market cap) reporting, the Q2 S&P 500 bottom-up estimate is Strategist $20.47 The final number should be close to our $21.00 (Table 1). About 68% of firms are natalie.garner@ubs.com beating consensus EPS estimates, similar to Q1 (Table 2). Bottom-up estimates for Q3 and Q4 . Jonathan Golub, CFA....................... +1-212-713 8673 2010 have not changed much during Q2 earnings season. Our estimates for these quarters are Strategist close to consensus (Table 1). jonathan.golub@ubs.com Revenue Is In Line With Consensus Chip Miller, CFA, CPA...................... +1-212-713 3531 Revenue of 122 firms rose 6% yr/yr (Table 4); when all firms report (including energy, Strategist chemicals, etc.) the gain should be ~10%. The aggregate revenue of these 122 firms was 100% chip.miller@ubs.com of consensus; non-financials were 100.7% of consensus (Table 4). This is just slightly weaker . than Q1 when financials’ revenue was stronger and revenue for 479 firms was 101% of Manish Bangard................................+1 212 713 3036 consensus (Table 3). Strategist manish.bangard@ubs.com Cyclical Sectors with Global Exposure Are Strong In terms of both EPS surprises (Table 2) and EPS revisions (Chart 1), tech, industrials, consumer discretionary & financials are strongest (though earnings quality of big banks was poor, due to weak loan growth and trading results). Robust earnings of INTC, VMW, ETN, MMM, UTX etc. suggest global economy is healthy; managements are less gloomy than many equity investors. Defensive areas such as healthcare & domestic consumer staples have less momentum. Tech’s revenue growth is beating consensus by more than other sectors (Table 4). - UBS 32
  • 33. U.S. Morning Meeting Highlights 23 July 2010 Required Disclosures This package has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. This package contains summaries of UBS research content. For a complete copy of the non-summarized version, please contact your UBS sales representative. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverage[1] IB Services[2] Buy Buy 54% 41% Neutral Hold/Neutral 37% 32% Sell Sell 9% 24% UBS Short-Term Rating Rating Category Coverage[3] IB Services[4] Buy Buy less than 1% 22% Sell Sell less than 1% 0% 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 June 2010. UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from Buy the time the rating was assigned because of a specific catalyst or event. Sell: Stock price expected to fall within three months from Sell the time the rating was assigned because of a specific catalyst or event. KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance UBS 33
  • 34. U.S. Morning Meeting Highlights 23 July 2010 record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Company Disclosures Company Name Reuters 12-mo rating Short-term Price Price date rating 5b,6b,6c,7,16,18b 3M Company MMM.N Buy N/A US$84.75 22 Jul 2010 4a,6a,16 Accenture plc ACN.N Neutral N/A US$39.76 22 Jul 2010 16 Acerinox ACX.MC Sell N/A €13.09 21 Jul 2010 2a Adaro Energy ADRO.JK Buy N/A Rp2,025 22 Jul 2010 1c,5b,16 AECOM Technology Corp. ACM.N Buy N/A US$24.57 22 Jul 2010 5b,6b,6c,7,16 Aetna Inc. AET.N Neutral N/A US$28.27 22 Jul 2010 4b,16,20 Agnico-Eagle Mines Ltd. AEM.N Buy (CBE) N/A US$56.21 21 Jul 2010 4b Alamos Gold Inc. AGI.TO Buy N/A C$14.20 21 Jul 2010 5b,16,20 Alaska Air Group ALK.N Buy (CBE) N/A US$49.26 22 Jul 2010 16 Allegheny Technologies Inc. ATI.N Buy N/A US$47.30 21 Jul 2010 4a,5b,6a,16 Alpha Natural Resources ANR.N Buy N/A US$36.50 21 Jul 2010 4a,16 Alumina Limited AWC.AX Buy N/A A$1.51 22 Jul 2010 6c,16 Amazon.com Inc AMZN.O Buy N/A US$120.07 22 Jul 2010 16 AMB Property Corp. AMB.N Neutral N/A US$22.95 22 Jul 2010 5b,16 Amdocs Limited DOX.N Neutral N/A US$27.13 22 Jul 2010 16 AmerisourceBergen Corp. ABC.N Buy N/A US$29.63 22 Jul 2010 6c,16 Apple Inc. AAPL.O Buy N/A US$254.24 21 Jul 2010 16 Arch Coal, Inc. ACI.N Buy N/A US$20.56 21 Jul 2010 16,20 Array BioPharma Inc. ARRY.O Neutral N/A US$2.98 21 Jul 2010 (UR/CBE) 4a,6c,7,16,22 AT&T Inc. T.N Buy N/A US$25.51 22 Jul 2010 16 Automatic Data Processing ADP.O Neutral N/A US$41.46 22 Jul 2010 16 AutoNation Inc. AN.N Sell N/A US$22.54 22 Jul 2010 Barrick Gold ABX.N Buy (CBE) N/A US$41.73 21 Jul 2010 Corporation2a,2b,4a,4b,5b,6a,16,20 2a,4a,6a,6c,7,16 Baxter International Inc. BAX.N Buy N/A US$43.25 22 Jul 2010 4a,5b,16 BHP Billiton Plc BLT.L Buy N/A 1,919p 21 Jul 2010 6c,7,16 Bristol-Myers Squibb BMY.N Neutral N/A US$24.75 21 Jul 2010 16 Cabot Oil & Gas Corporation COG.N Buy N/A US$32.77 22 Jul 2010 16 CACI International CACI.N Buy N/A US$46.13 22 Jul 2010 2a,4a,6a,16 Calix Inc. CALX.N Buy N/A US$10.80 22 Jul 2010 4a,6a,6c,7,16,22 Cardinal Health, Inc. CAH.N Buy N/A US$33.26 22 Jul 2010 4a,5b,6c,7,14,16 Carnival Corp. CCL.N Buy N/A US$33.67 22 Jul 2010 5b,14,16 Carnival Plc CCL.L Buy N/A 2,306p 22 Jul 2010 6b,7,16,18c Caterpillar Inc. CAT.N Neutral N/A US$66.87 21 Jul 2010 16 Cavium Networks Inc CAVM.O Buy N/A US$29.07 22 Jul 2010 2b,4b,5c,20 Centerra Gold Inc. CG.TO Buy (CBE) N/A C$13.26 21 Jul 2010 16,20 Cepheid Inc. CPHD.O Neutral (CBE) N/A US$14.77 22 Jul 2010 16 CGI Group Inc. GIB.N Neutral N/A US$16.10 22 Jul 2010 6b,7,16 Chubb Corporation CB.N Buy N/A US$52.20 22 Jul 2010 16 Cloud Peak Energy Inc CLD.N Buy N/A US$14.20 21 Jul 2010 16,20 Coeur d'Alene Mines CDE.N Buy (CBE) N/A US$14.44 21 Jul 2010 Cognizant Technology Solutions CTSH.O Buy N/A US$54.10 22 Jul 2010 4a,6a,6c,7,16 Corp. 2a,4a,5b,6a,16 Colonial Properties Trust CLP.N Buy N/A US$15.75 22 Jul 2010 16 Community Health Systems, Inc. CYH.N Neutral N/A US$29.92 22 Jul 2010 6c,16 Computer Sciences Corp. CSC.N Neutral N/A US$46.40 22 Jul 2010 2a,4a,5b,6a,16 CONSOL Energy, Inc. CNX.N Buy N/A US$37.67 21 Jul 2010 2a,4a,6a,6b,7,16,18f,20 Continental Airlines CAL.N Buy (CBE) N/A US$24.14 22 Jul 2010 6c,16 Convergys Corp. CVG.N Neutral N/A US$10.54 22 Jul 2010 UBS 34
  • 35. U.S. Morning Meeting Highlights 23 July 2010 Company Disclosures Company Name Reuters 12-mo rating Short-term Price Price date rating 4a,5b,6c,16 Cooper Industries Inc. CBE.N Buy N/A US$44.54 22 Jul 2010 4a,6a,6b,6c,7,16 Coventry Health Care CVH.N Neutral N/A US$19.01 22 Jul 2010 16,18d CVS Caremark Corporation CVS.N Buy N/A US$29.92 22 Jul 2010 8,16 Cypress Semiconductor CY.O Neutral N/A US$10.95 22 Jul 2010 4a,5b,6a,16 Danaher Corporation DHR.N Buy N/A US$37.46 22 Jul 2010 4a,6a,6b,6c,7,16 Dell Inc. DELL.O Buy N/A US$13.07 21 Jul 2010 2b,4b,5b,5c Detour Gold DGC.TO Buy N/A C$23.30 21 Jul 2010 5c,20 Eastern Platinum Ltd ELR.TO Buy (CBE) N/A C$0.93 21 Jul 2010 16 EastGroup Properties, Inc. EGP.N Neutral N/A US$35.41 22 Jul 2010 16,20 Eldorado Gold Corporation Ltd. EGO.N Neutral (CBE) N/A US$15.69 21 Jul 2010 4a,5b,6a,6b,6c,7,16,18e EMC Corporation EMC.N Buy N/A US$19.48 21 Jul 2010 16 Express Scripts Inc. ESRX.O Buy N/A US$42.12 22 Jul 2010 6b,6c,7,16 Fifth Third Bancorp FITB.O Sell N/A US$12.45 22 Jul 2010 Flextronics International FLEX.O Buy N/A US$6.56 22 Jul 2010 Ltd.4a,5b,6a,6b,7,16 4a,5b,6a,6b,6c,7,16 Fluor Corporation FLR.N Buy N/A US$46.02 22 Jul 2010 5b,16 Foster Wheeler Ltd. FWLT.O Buy N/A US$23.18 22 Jul 2010 4b,5c,20 Franco-Nevada Corporation FNV.TO Neutral (CBE) N/A C$30.94 21 Jul 2010 2b,4b,5c,16,20 Gammon Gold GRS.N Neutral (CBE) N/A US$5.55 21 Jul 2010 2a,4a,16 Genpact G.N Neutral N/A US$15.46 22 Jul 2010 16 Global Payments GPN.N Neutral N/A US$38.79 22 Jul 2010 4b,5c,6a,16,20 Goldcorp Inc. GG.N Buy (CBE) N/A US$40.16 21 Jul 2010 16 Harris Corporation HRS.N Buy N/A US$45.92 22 Jul 2010 Health Management Associates, HMA.N Neutral N/A US$6.65 22 Jul 2010 Inc.16 4a,5b,16 HealthSpring Inc. HS.N Neutral N/A US$16.53 22 Jul 2010 16,20 Hecla Mining HL.N Buy (CBE) N/A US$4.70 21 Jul 2010 16,19a Hewitt Associates, Inc HEW.N Neutral (CBE) N/A US$47.53 22 Jul 2010 4a,5b,6a,6b,7,16 Hewlett-Packard Co. HPQ.N Buy N/A US$45.48 21 Jul 2010 16 Huntington Bancshares Inc. HBAN.O Sell N/A US$5.85 22 Jul 2010 4b,16 IAMGOLD Corp. IAG.N Buy N/A US$16.03 21 Jul 2010 4a,5b,6a,6b,6c,7,16 IBM Corp. IBM.N Neutral N/A US$125.27 21 Jul 2010 International Coal Group, ICO.N Buy (CBE) N/A US$4.10 21 Jul 2010 Inc2a,4a,6a,16,20 16 Jacobs Engineering Group, Inc. JEC.N Neutral N/A US$38.59 22 Jul 2010 James River Coal JRCC.O Buy (CBE) N/A US$16.98 21 Jul 2010 Company2a,4a,6a,16,20 4a,16,20 JetBlue Airways JBLU.O Neutral (CBE) N/A US$6.38 22 Jul 2010 16 Johnson Matthey JMAT.L Sell N/A 1,636p 21 Jul 2010 6c,16 KBR, Inc. KBR.N Buy N/A US$22.62 22 Jul 2010 4b,5c,16,20 Kinross Gold Corporation KGC.N Buy (CBE) N/A US$15.61 21 Jul 2010 16,22 Kumba Iron Ore KIOJ.J Neutral N/A RCnt36,250 21 Jul 2010 16 Layne Christensen Company LAYN.O Sell N/A US$26.01 22 Jul 2010 4a,5b,6a,6b,6c,7,16 Lilly (Eli) & Co. LLY.N Neutral N/A US$34.95 21 Jul 2010 Massey Energy MEE.N Buy (CBE) N/A US$28.42 21 Jul 2010 Company2a,4a,6a,6b,7,16,20 6c,16 MasterCard Inc. MA.N Buy N/A US$208.40 22 Jul 2010 5b,16 Maximus, Inc. MMS.N Not Rated N/A US$59.67 22 Jul 2010 16 McDermott International MDR.N Buy N/A US$24.22 22 Jul 2010 16 McKesson Corporation MCK.N Buy N/A US$64.55 22 Jul 2010 16 Medco Health Solutions Inc. MHS.N Buy N/A US$49.00 22 Jul 2010 Mettler-Toledo International MTD.N Buy N/A US$121.24 22 Jul 2010 Inc.4a,5b,6a,6b,7,16 2a,4a,5b,6a,6b,6c,7,16 Microsoft Corp. MSFT.O Buy N/A US$25.84 22 Jul 2010 16 Murphy Oil Corporation MUR.N Neutral N/A US$51.82 22 Jul 2010 Natural Resource Partners NRP.N Buy (CBE) N/A US$24.96 21 Jul 2010 LP2a,4a,6a,16,19b 16 NetApp Inc NTAP.O Buy N/A US$39.83 21 Jul 2010 UBS 35
  • 36. U.S. Morning Meeting Highlights 23 July 2010 Company Disclosures Company Name Reuters 12-mo rating Short-term Price Price date rating 16 NetLogic Microsystems Inc NETL.O Buy N/A US$31.44 22 Jul 2010 2a,4a,5a,5b,13,16 Newcrest Mining Limited NCM.AX Buy N/A A$32.92 22 Jul 2010 16 Newfield Exploration Co. NFX.N Buy N/A US$52.21 22 Jul 2010 5c,16 New Gold NGD.A Neutral N/A US$4.99 21 Jul 2010 2a,4a,5b,6a,6c,7,16 Newmont Mining Corp. NEM.N Buy N/A US$58.17 21 Jul 2010 4a,16 Nippon Steel 5401.T Neutral N/A ¥287 22 Jul 2010 13,16 Nucor Corp. NUE.N Neutral N/A US$39.67 22 Jul 2010 5c,20 Osisko Mining Corporation OSK.TO Buy (CBE) N/A C$11.75 21 Jul 2010 4b,16,20 Pan American Silver Corp PAAS.O Buy (CBE) N/A US$22.92 21 Jul 2010 4a,6a,16 Parkway Properties, Inc. PKY.N Buy N/A US$15.35 22 Jul 2010 4a,5b,6a,16,20 Patriot Coal Corp PCX.N Buy (CBE) N/A US$12.39 21 Jul 2010 6b,7,16 Paychex PAYX.O Neutral N/A US$26.32 22 Jul 2010 8,16 Peabody Energy Corp. BTU.N Buy N/A US$43.03 21 Jul 2010 4a,6a,6c,16,22 ProLogis PLD.N Neutral N/A US$10.97 22 Jul 2010 3,5b,16,20 Quicksilver Resources Inc. KWK.N Buy (CBE) N/A US$12.75 22 Jul 2010 Red Back Mining RBI.TO Buy N/A C$24.46 21 Jul 2010 16,20 Reliance Steel & Aluminum Co. RS.N Buy (CBE) N/A US$39.10 22 Jul 2010 4a,16,22 Rio Tinto Plc RIO.L Buy N/A 3,248p 21 Jul 2010 16,20 Riverbed Technology RVBD.O Neutral (CBE) N/A US$31.41 22 Jul 2010 1a,5a,5b,13 Riversdale Mining Limited RIV.AX Buy N/A A$10.10 22 Jul 2010 16 Royal Caribbean RCL.N Neutral N/A US$27.56 22 Jul 2010 2a,4a,5b,6a,16 Royal Gold Inc. RGLD.O Buy N/A US$43.47 21 Jul 2010 16,22 Safeway, Inc. SWY.N Neutral N/A US$20.22 21 Jul 2010 6b,7,16 SAIC Inc. SAI.N Neutral N/A US$16.83 22 Jul 2010 16,20 SanDisk Corp. SNDK.O Buy (CBE) N/A US$43.10 22 Jul 2010 6c,16,20 Sapient Corp. SAPE.O Sell (CBE) N/A US$10.99 22 Jul 2010 6b,7,16 Seagate Technology STX.O Buy N/A US$13.14 21 Jul 2010 4a,6a,16,20 Shaw Group Inc SHAW.N Neutral (CBE) N/A US$32.46 22 Jul 2010 13,16,20 Silvercorp Metals SVM.N Neutral (CBE) N/A US$6.25 21 Jul 2010 Silver Standard Resources SSRI.O Buy N/A US$16.03 21 Jul 2010 Inc2b,4b,13,16 2b,4b,5c,13,16,20 Silver Wheaton Corp. SLW.N Buy (CBE) N/A US$18.13 21 Jul 2010 16 Skyworks Solutions Inc. SWKS.O Buy N/A US$18.05 22 Jul 2010 16 SRA International SRX.N Neutral N/A US$21.81 22 Jul 2010 16 St. Jude Medical, Inc. STJ.N Buy N/A US$34.62 21 Jul 2010 16,20 Steel Dynamics Inc. STLD.O Buy (CBE) N/A US$14.11 21 Jul 2010 1b,5b,16,20 Sterlite Industries STRL.BO Buy (CBE) N/A Rs176.00 22 Jul 2010 4a,6a,6b,6c,7,16 SunTrust Banks Inc. STI.N Sell N/A US$24.58 22 Jul 2010 16 SXC Health Solutions Corp. SXCI.O Neutral N/A US$64.46 22 Jul 2010 5c,16,20 Teck Resources Ltd. TCKb.TO Buy (CBE) N/A C$35.14 21 Jul 2010 6c,7,16 The Western Union Company WU.N Neutral N/A US$16.04 22 Jul 2010 4a,5b,6a,16 Total System Services Inc. TSS.N Neutral N/A US$15.33 22 Jul 2010 16 Tutor Perini Corp. TPC.N Neutral N/A US$19.00 22 Jul 2010 5b,6b,6c,7,8,16,18a Tyco Electronics Ltd. TEL.N Buy N/A US$25.76 22 Jul 2010 5b Umicore UMI.BR Sell N/A €25.40 21 Jul 2010 6b,7,16 Unisys Corp. UIS.N Not Rated N/A US$22.29 22 Jul 2010 16 Universal Health Services UHS.N Buy N/A US$34.90 22 Jul 2010 16 URS Corporation URS.N Neutral N/A US$40.31 22 Jul 2010 6c,16 Visa Inc. V.N Buy N/A US$74.46 22 Jul 2010 16 Walter Energy Inc WLT.N Buy N/A US$68.76 21 Jul 2010 4a,5b,6a,6b,6c,7,16 WellPoint, Inc. WLP.N Buy N/A US$52.46 22 Jul 2010 5b,16 Willbros Group, Inc. WG.N Neutral N/A US$8.64 22 Jul 2010 4b,5c,16 Yamana Gold Inc. AUY.N Buy N/A US$9.36 21 Jul 2010 16 Zimmer Holdings, Inc. ZMH.N Buy N/A US$52.51 22 Jul 2010 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date UBS 36
  • 37. U.S. Morning Meeting Highlights 23 July 2010 1a. UBS AG, Australia Branch is acting as Sole Underwriter, Sole Bookrunner and Joint Lead Manager to Riversdale Mining Limited on the Entitlement Offer and Placement and will be receiving a fee for acting in this capacity. 1b. UBS Securities (India) Pvt. Ltd. is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates. 1c. UBS Securities LLC is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates. 2a. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 2b. UBS Securities Canada Inc or an affiliate has acted as manager/co-manager, underwriter or placement agent in regard to an offering of securities for this company/entity or one of its affiliates within the past 12 months. 3. UBS Securities LLC is acting as advisor to Quicksilver Resources Inc on its announced agreement to sells its interests in Quicksilver Gas Partners LP to Crestwood Midstream Partners II 4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 4b. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking services from this company/entity. 5a. UBS AG, Australia Branch or an affiliate expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 5b. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 5c. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end). 14. UBS Limited acts as broker to this company. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. The equity strategist covering this company, a member of his or her team, or one of their household members has a long common position in this company. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in 3M Company. 18c. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Caterpillar Inc. 18d. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in CVS Caremark Corporation. 18e. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in EMC Corporation. 18f. UBS Securities LLC is acting as an advisor to Continental Airlines on its announced agreement to merge with UAL Corp. 19a. Because this company is an announced takeout candidate, UBS believes the security presents lower-than-normal risk. We have widened its rating band to +6%/-10% compared with +6%/-6%, respectively, under the normal rating system. 19b. Because UBS believes this security presents lower-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 5% and Sell if the FSR is more than 5% below the MRA (compared with 6% and 6%, respectively, under the normal rating system). 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system). 22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end). This report was sent to the issuer prior to publication solely for the purpose of checking for factual accuracy, and no material changes were made to the content based on the issuer's feedback. UBS 37
  • 38. U.S. Morning Meeting Highlights 23 July 2010 Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration. Additional Prices: Acadia Realty Trust, US$17.84 (22 Jul 2010); Alexandria Real Estate, US$69.73 (22 Jul 2010); American Campus Communities, US$27.65 (22 Jul 2010); Apartment Investment & Management Comp., US$21.66 (22 Jul 2010); AvalonBay Communities, Inc., US$102.73 (22 Jul 2010); Boston Properties, Inc., US$79.14 (22 Jul 2010); Brandywine Realty Trust, US$10.78 (22 Jul 2010); BRE Properties, Inc., US$39.90 (22 Jul 2010); Brookfield Properties Corporation, US$15.13 (22 Jul 2010); Camden Property Trust, US$45.32 (22 Jul 2010); CBL & Associates Properties, Inc., US$13.43 (22 Jul 2010); DCT Industrial Trust Inc, US$4.40 (22 Jul 2010); Developers Diversified Realty, US$10.72 (22 Jul 2010); Digital Realty Trust, US$62.57 (22 Jul 2010); Douglas Emmett, Inc., US$15.20 (22 Jul 2010); DuPont Fabros Technology, US$25.03 (22 Jul 2010); Education Realty Trust, Inc., US$6.36 (22 Jul 2010); Equity One Inc., US$16.53 (22 Jul 2010); Equity Residential, US$44.92 (22 Jul 2010); Essex Property Trust, Inc., US$104.55 (22 Jul 2010); Excel Trust Inc, US$11.47 (22 Jul 2010); Extra Space Storage Inc., US$14.71 (22 Jul 2010); Federal Realty Investment Trust, US$75.64 (22 Jul 2010); HCP Inc., US$34.96 (22 Jul 2010); Health Care REIT Inc., US$44.81 (22 Jul 2010); Healthcare Realty Trust Inc., US$23.02 (22 Jul 2010); Kilroy Realty Corporation, US$31.31 (22 Jul 2010); Kimco Realty Corporation, US$14.40 (22 Jul 2010); Liberty Property Trust, US$30.21 (22 Jul 2010); Macerich Co, US$39.57 (22 Jul 2010); Mack-Cali Realty Corp., US$31.26 (22 Jul 2010); Medical Properties Trust, US$9.68 (22 Jul 2010); National Retail Properties, Inc, US$23.06 (22 Jul 2010); Nationwide Health Properties Inc., US$37.14 (22 Jul 2010); Omega Healthcare Investors Inc., US$22.45 (22 Jul 2010); Post Properties Inc., US$24.85 (22 Jul 2010); Public Storage, Inc., US$96.08 (22 Jul 2010); Realty Income Corporation, US$31.86 (22 Jul 2010); Regency Centers Corp., US$35.57 (22 Jul 2010); Senior Housing Properties Trust, US$21.74 (22 Jul 2010); Simon Property Group, US$86.33 (22 Jul 2010); SL Green Realty Corp, US$56.30 (22 Jul 2010); Sovran Self Storage Inc, US$35.35 (22 Jul 2010); Tanger Factory Outlet Centers, US$44.18 (22 Jul 2010); Taubman Centers, Inc., US$39.57 (22 Jul 2010); UDR Inc., US$20.38 (22 Jul 2010); U-Store-It Trust, US$7.84 (22 Jul 2010); Ventas Inc., US$49.83 (22 Jul 2010); Vornado Realty Trust, US$79.10 (22 Jul 2010); Weingarten Realty Investors, US$20.56 (22 Jul 2010); Source: UBS. All prices as of local market close. UBS 38
  • 39. U.S. Morning Meeting Highlights 23 July 2010 - Global Disclaimer This package has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries UBS AG is referred to as UBS SA. This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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