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Financial Pacific - Investment Research, Apple beyond the Chengdu set back (third party)

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  • 1. ab Global Equity Research Americas UBS Investment Research Equity Strategy Morning Expresso - United States Market Comment 23 May 2011 www.ubs.com/investmentresearch U.S. Equity Product Management 212-713-2400 Monday 23 May 2011 Morning Expresso This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 24. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
  • 2. Morning Expresso - United States 23 May 2011Morning Meeting AgendaPolo Ralph Lauren Rating: Buy Target: US$140.00 Price: US$130.21 RIC: RL.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$12.9bn BBG: RL US Retailers, Apparel Analyst: Michael Binetti Tel: +1-212-713 3805A Relative Outperformer in FY12; Buy Conservative Guidance Could Present a Buying Opportunity for RL Stock Our F4Q EPS of $0.90 (Street: $0.79) is based on +6% total rev growth (Street: +4.5%). Positive NPD data trends and sales upside from other premium retailers lately support our top line outlook. Conservative guidance is the norm, and could weigh on the stock NT. That said, we believe RL’s enviable combo of top line & margin drivers will make the company a relative outperformer in FY12—and we would likely view any guidance-related pullback as a stock buying oppy. Upcoming Price Increases (and Past Pricing Success) Boost FY12 Outlook In our view, RL is well positioned to offset higher input costs with pricing due to yrs of heavy investing to elevate its brand in the consumers’ mind. We believe RL is poised to raise prices on basics aggressively in July. Successful price increases in the past led to significant GM expansion, and could make our estimate for -60bp of GM compression in FY12 look overly conservative as the year progresses. Our FY12 Outlook for RL US revenues should con’t to benefit from shelf gains won during the recession, and internat’l revs should accelerate as the company integrates its Asia business. Further, RL has margin advantages vs apparel peers due to 1) strong pricing power, 2) accelerating ecommerce sales (RL’s highest margin business), and 3) expanding scale advantages. While accelerated investment spending is a stock risk, history has shown significant upside to buying RL’s stock during investment cycles. Valuation: Maintain $140 PT; Reiterate Buy Our $140 12-month PT is ~18x our CY12E EPS of $7.58 (+17.5% YOY). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$130.21 on 20 May 2011 19:36 EDTApple Rating: Buy Target: US$495.00 Price: US$335.22 RIC: AAPL.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$313bn BBG: AAPL US Computers Analyst: Maynard J. Um Tel: +1-212-713 3372Few Companies With Apple’s End Demand Hon Hai fire a minor set back Hon Hai acknowledged a fire at its Chengdu plant, which we believe is a secondary location for iPad production. Our checks & those of our Taiwanese tech analyst Arthur Hsieh indicate less than 20% of iPad volumes are produced at the Chengdu facility. Although the issue is unlikely to help supply issues to meet strong global demand, we see this issue as temporary and note there are few companies in our coverage that have as strong an end demand picture. Investors appear to be concerned with June qtr... Investors appear to be concerned by the June qtr given belief of limited upside to Street consensus due to 1) next gen iPhone likely shipping in Sept and 2) iPhone 3GS/4 supply chain order cuts. While the next gen iPhone launch is slightly later than normal, we expect building sentiment improvement heading into launch. Additionally, we note that prior gen iPhone cuts are very typical ahead of a new launch and we do not see this as a concern as demand remains strong. ...but still see upside to EPS We highlighted in the past Apple’s over-accrual relative to its warranty claims, which we see as potential upside. If Apple reduced its reserves in the same magnitude as it had in claims ($513mn) over the past 3 qtrs, pot’l forward EPS benefit could be ~$0.41, all else equal. We also see upside to iMac from an earlier refresh (~$0.03 to EPS assuming slightly lower gross margins and all else equal). Valuation: $495 tgt based on ~20x our CY11 EPS estimate Reiterate Buy on strong demand, pot’l EPS upside, & ahead of iPhone launch. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$335.22 on 20 May 2011 19:36 EDTOnline Travel Agencies (OTAs) Consumer Services Analyst: Kevin Crissey Tel: +1-212-713 3562Managing Corporate Travel: A Big Opportunity?...Two Years Later V-shaped corporate rebound Corporate travel has bounced back strongly since an awful 2009. Expedia’s Egencia and Orbitz for Business have both seen much improved trends. These businesses are relatively small for each company but we thought we’d do some channel checks to see if there is a big opportunity for long term growth. Survey results still suggest modest corporate opportunity Two years ago we asked corporate travel managers and others involved in corp travel buying a number of questions about the prospects for OTAs growing their corporate businesses. The survey results at that time were mixed to negative. We just updated the survey but come away with essentially the same conclusions – most travel managers do not think OTAs can manage their corporate programs. Implications for EXPE and OWW With TripAdvisor soon to be out of the income statement for Expedia, investors may over time take a closer look at Egencia. This survey does not suggest it will continue to be a rapid growth business. That said, it is very hard to care at the moment because recent IPO pricings suggest the TripAdvisor spin will create substantial value. We are raising our PT for EXPE from $27 to $32 – assuming Trip trades at or above 30x P/E (up from 20x) and Expedia core at 10x. Both could be conservative given market exuberance. For OWW, we are lowering our PT to $3 from $4.10 based on 5.5-6x EV/EBITDA - 0.5x lower as its multiple is likely to remain compressed as airlines cut capacity and negotiate distribution. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 2
  • 3. Morning Expresso - United States 23 May 2011Q-Series®: State & Local Fiscal Crisis Economist: Maury N. Harris Tel: +1-212-713 2472How Serious Is State and Local Fiscal Drag? How much harm from higher required state and local budget balancing? Every year, state and local governments must balance their budgets, and doing so is about to get harder. Their revenues are recovering with the economy. However, temporary Federal stimulus aid to state and local governments will expire this year, and states’ mandated Medicaid spending continues to spiral out of control. Consequently, heading into fiscal 2012, which starts in July 2011 for most states and localities, they will have to implement spending cuts and revenue hikes to rectify an estimated combined fiscal 2012 budget gap of just over $150 billion. In addition, the recently unsettled conditions in the municipal bond market probably will limit state and local construction spending even though it is not subject to the required balancing of current revenues and expenditures. New UBS economic stress indicator to signal evolving required austerity This report introduces a proprietary indicator of state and local fiscal economic stress-a key to pre-fiscal year budget forecasts that drive the state and local fiscal austerity necessitated by balanced budget requirements. Gauging such largely cyclical pressures on government revenue and spending is critical for understanding the evolving likelihood of future fiscal austerity measures. In early 2011, our indicator has been signaling less cyclically-related fiscal stress. Nevertheless, an offsetting factor for the upcoming fiscal 2012 is the imminent loss of Federal fiscal stimulus aid to state and local governments. However, once budgets are adjusted in fiscal 2012 to reflect lower Federal aid, our economic stress indicator should provide important guidance for prospective fiscal austerity in fiscal 2013, which begins in mid-2012. Necessary “heavy lifting” somewhat more than already exercised State and local deficit reduction steps already have been subtracting from GDP growth in recent years, but the continued necessary fiscal restraint should be more than during the past year. The estimated combined state and local fiscal deficit heading into in fiscal 2012 is approximately one percentage point of GDP. The related required incremental fiscal restraint is just around a third of one percent of GDP more than in fiscal 2011, when the estimated deficit heading into that year was around two-thirds of one percent of GDP. State and local job losses to mount With lesser reliance on tax hikes and Federal assistance and more emphasis on trimming spending, state and local job cuts should rise from an estimated almost 300,000 in fiscal 2011 to around 450,000 in fiscal 2012. Even deeper job losses are possible if there are not further meaningful restraints on public sector workers’ compensation gains-an important factor exacerbating the magnitude of state and local job losses over the past 2 ½ years. However, the economy’s ability to absorb such accelerated public sector job losses is improving with a stronger private sector. Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011US Economic Perspectives Economist: Maury N. Harris Tel: +1-212-713 2472Red Alert or Red Herring? Soft patch or patchy data? A good portion of the recent slowing probably reflects an unfortunate confluence of one-time events that are likely “transitory”. The two key events affecting the recent data are the particularly bad weather in the South and the effects of the disaster in Japan. We believe recent data disappointments are somewhat “fishy” and are overstating the overall weakness. The outlook remains reasonably healthy and continues to benefit from improvement in credit conditions and labor incomes. Watching inflation “closely” Core inflation has been moving higher with broad-based increases. Although we expect commodity-driven price pressures to diminish, unit labor costs are beginning to rise. These cross-currents suggest that inflation is the key to Fed policy. We look for inflation to continue to creep higher in 2011, while seeing some upside risk. The past week The monthly data for May got off to a rough start this week, as two key regional manufacturing surveys disappointed. Data for April were hardly inspiring: the leading economic indicator slipped; industrial production was unchanged; and housing activity data remained depressed. The April 27 FOMC minutes provided principles for normalizing policy. The week ahead We forecast a drop in durable goods orders in April, although much of that reflects seasonal adjustment flaws that have resulted in repeated weakening in the first month of a quarter. Home sales probably softened in April; new home sales were probably weaker than the pending home sales index because of a greater dependence on sales in the South. The FHFA home price index probably slipped again in March. In contrast to that weaker data, we expect the University of Michigan consumer sentiment index to hold on to its early May increases. And Q1 real GDP growth will likely be revised up 0.4 percentage point to a 2.2% annual rate, although most of the upward revision reflects inventories. Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 20 May 2011US Equity Strategy Strategist: Jonathan Golub, CFA Tel: +1-212-713 8673Leadership through the Soft Patch Market tone turns cautious Although the S&P 500 is only 2.2% off its recent peak, market leadership has turned decidedly more cautious since mid- February. Defensive sectors have led the market by a wide margin. Bond yields and commodities prices also signal less robust growth. Economic indicators point to soft patch A number of important economic indicators have recently turned south, pointing to a soft patch. More specifically, ISM Non-Manufacturing, the NFIB Small Business Optimism Index, weekly jobless claims, and the Empire State Survey have all weakened. Market favoring defensive characteristics Our proprietary UBS Return Drivers confirm the recent trend of investor caution. Pro-cyclical characteristics, such as Volatility and Operating Leverage, have lost steam, giving way to defensive characteristics like ROE. Pro-cyclical leadership should reassert itself in the back half of 2011 2010 experienced a similar soft patch, only to rebound in the latter part of the year. We believe that solid 2Q earnings will once again trump expectations, refocusing investors on strong fundamentals. Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 3
  • 4. Morning Expresso - United States 23 May 2011Global Equity Strategy Strategist: Jeffrey Palma Tel: +1-203-719 1135Using the ISM as a market signal Recurring patterns around cyclical inflection points In this note we revisit the link between equity markets and the ISM index. We find that equity markets display recurring patterns around cyclical inflection points. Market returns are typically quite strong during the early stages of an economic recovery, led by cyclical sectors, but moderate following a peak in ISM, with little difference between cyclical vs. defensive sector performance. Cyclicals vs. defensives and stages of the ISM On average, cyclical sectors struggle to outperform defensives when the ISM is at high levels but beginning to head lower. This is consistent with equity versus bond performance trends recently noted by our Global Asset Allocation team. It is also consistent with the current cycle’s trends, which have proven to be quite typical for an economic recovery when compared to the last 40 years. Base case expectations While soft-patch concerns are keeping tactical risks elevated, equity markets remain well supported over a more strategic horizon by expectations for continued economic expansion, healthy earnings growth and relatively low valuations. Increasingly shareholder-friendly (re- leveraging) activity is also supportive. No changes to our sector and region allocations We continue to advocate a sector allocation that is balanced between cyclical and defensive sectors. Our most recent sector changes were to downgrade Energy and Materials in April. Our current overweights are in Tech, Healthcare, and Telcos. Regionally, we favour GEM and US, and remain Underweight Europe. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 May 2011Global Emerging Markets Strategy Strategist: Nicholas Smithie Tel: +1 212 713 8679UBS GEM Select and Frontier Portfolio Tracking performance of UBS GEM Select Portfolio We review and update the performance of the UBS GEM Select, a 40 stock portfolio comprising our best emerging market stock ideas. Reflecting the recent changes to our country and sector allocations we adjusted the portfolio to align with our new positioning. In particular we downgraded Turkey and upgraded South Africa and Peru. On a sector basis we added to Healthcare and Utilities and cut Industrials and Consumer sectors to reflect a maturing cycle. As a result we made 10 changes to the UBS GEM Select. As of May 12, the model portfolio was up 19.6% since inception, compared to 17.4% return on the MSCI Emerging Markets Index. Changes at the Frontier Our UBS Frontier Markets Portfolio which consists of 43 stocks from the 15 markets we recommend. We added Kenya to this list most recently and included Safaricom, East African Breweries and Kenya Commercial Bank to the portfolio. As of May 12th, the Frontier portfolio was up 0.16% since inception, compared to -3.34% return on the MSCI Frontier Markets Index. Methodology: identifying value Our work is a heavy user of the Gordon Growth model which we apply to countries and sectors to determine which parts of the market represent the most value, based on their longer term growth and profitability fundamentals. Our work on styles also suggests a move up in size to the mid cap part of the market and towards growth stocks, which is also reflected in the UBS GEM Select portfolio. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 19 May 2011 UBS 4
  • 5. Morning Expresso - United States 23 May 2011MACRO AND STRATEGY RESEARCHWeekly Weight Watcher Economist: Larry Hatheway Tel: +44-20-7568 4053Is credit rich? Steady credit While equity and commodity markets have wobbled recently, credit has remained remarkably steady. Given low spreads and underlying interest rates, credit valuations might seem expensive, especially relative to equities. But we highlight that market-implied default rates suggest investors still discount a higher probability of corporate defaults than long-term historical averages. This seems at odds with solid credit fundamentals, and hence we offer an alternative insight into equity/credit valuations. The Merton approach We show how we can gauge relative valuations by using the Merton capital structure model. This model offers a simple framework in which ‘fair’ theoretical credit spreads can be inferred from equity prices, equity volatility and leverage. A low theoretical spread relative to observed CDS spreads would imply that equity markets are more optimistic on corporate default rates than credit markets, and vice-versa. We construct such measures for US investment grade and high-yield corporate bond indices. Is credit expensive? During the credit crisis, equity and equity options markets priced in a more pessimistic view of corporate default rates compared to the credit market. Currently we find that there isn’t a large disparity between equity implied theoretical spreads and the credit market. If anything, our model suggests that credit markets are somewhat more pessimistic in their outlook. In other words, our model suggests that credit is not particularly rich at present. Unchanged asset allocation stance These findings are consistent with our current asset allocation stance. We retain overweight allocations to high- yield credit and EM local currency sovereign debt, cash and soft commodities. We also maintain benchmark allocations to global equities and REITs, as well as cyclical commodities and precious metals. Our underweight recommendations in nominal and inflation-linked government bonds are also left unchanged. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 20 May 2011UBS Client Flow Watch Strategist: Thomas M. Doerflinger, Ph.D. Tel: +1-212-713 2540Net buying US equities US Client Flow: Long-only turned net buyers US clients increased their net buying, with much of the increase coming from long-only funds, which went from being net sellers to net buyers. While intermediaries also increased their net buying, corporate clients and hedge funds decreased their net buying; “other” clients were the only net sellers. At the same time, US clients continue to be net sellers of foreign equities for a fourth straight 4-week period. Sector details of US Client Flow: Concentrated net buying Although US clients continue to be net buyers, the net buying is concentrated in financials, media, healthcare, and technology (Chart 3). Overseas, while US clients are net sellers, they are net buyers of consumer and healthcare. US clients continue to increase net buying in US financials, while increasing net selling in foreign financials. Foreign Client Flow: Long-only increased net buying Long-only funds and “other” are the only foreign clients that are net buying, but overall, foreign clients continued to be net buyers for a sixth straight 4-week period (Table 4). Intermediaries and hedge funds increased net selling. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 20 May 2011 UBS 5
  • 6. Morning Expresso - United States 23 May 2011BASIC MATERIALSU.S. Paper & Forest Products Paper Products Analyst: Gail S. Glazerman, CFA Tel: +1 212 713 3486Some cracks in Western log markets? Western log prices under modest pressure Random Lengths reports Western log prices have declined $15 since April and anticipates further modest ($25-30) erosion over coming weeks. They attribute this weakness to several factors including: improved supply (weather allowing access to previously inaccessible stands), curtailments at lumber/plywood mills and weaker demand from China. They indicate Chinese buyers are ‘fielding offerings’ from other countries. Erosion is limited given base>$600-but trend bears watching. Wood product realizations remain low The Random Lengths lumber composite price has declined for 10 consecutive weeks, losing $39/mbf (13.5%) over this period. The current price is the lowest level since Oct-10. 2Q average of $269/mbf is off from $320 last year and $298 in 1Q. The current price is $12 below the 2Q average. Oriented strand board prices are off $40/msf versus February highs (19.5%). Current prices for OSB are the lowest level since Sept-10. The 2Q average of $171/msf compares to $199 last quarter and $295 last year. The current price is $6/msf below the 2Q average. No sign of spring building season – export log demand only bright spot Housing activity has disappointed in 2011. Most producers are not seeing signs of a spring building season and have lowered forecasts. Relative strength in Western log markets due to Chinese demand pull has been one of the few bright spots this year. We have been concerned this demand might not prove sustainable at current price levels and worried about the margin squeeze on domestic log consumers (high input costs/low wood product selling prices). We remain cautious on timber/ wood product companies. Shares appear overvalued vs. current fundamentals. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 May 2011U.S. Paper & Forest Products Paper Products Analyst: Gail S. Glazerman, CFA Tel: +1 212 713 3486May paper & board price update A bit of a mixed bag Pulp & Paper Week reported May paper/board prices this weekend. Trends were mixed. PPW reported some weakness in uncoated free and newsprint, stability in containerboard and continued slow recovery in other graphic grades. Commentary on packaging grades, such as kraft paper and coated recycled board, was positive. Containerboard Pulp & Paper Week generally noted stability in containerboard. This is in contrast to Official Board Markets (OBM), which reports box price erosion in recent weeks. OBM tends to have a bias favoring independents and we question the rationale for incremental price pressure with seasonally-stronger demand, tighter supply due to planned maintenance & IP’s Vicksburg outage. Export prices are rising with new hikes for Europe, Asia & Middle East. The RKT/SSCC deal could close this week. Graphic: ups and downs For 2nd straight month PPW lowered uncoated free cut size prices. We believe this could be overstating pressure. They continue to show modest recognition of April coated free, coated groundwood and uncoated groundwood hikes. PPW questions prospects for new July hike for these grades. PPW held East newsprint prices flat but lowered prices $5/t in the West. This brings East/West gap to $20/tonne. More increases pending: cautious on graphic paper positive on packaging There are new graphic paper and packaging price increases in the markets for June. Near-term focus will be on containerboard and if the industry will seek pricing this summer. We favor packaging grades and assume a $50/t linerboard hike for July. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 May 2011U.S. Paper & Forest Products Paper Products Analyst: Gail S. Glazerman, CFA Tel: +1 212 713 3486Weak final April print/write stats Final report confirms industry gave back much of March gains AF&PA released final April US printing & writing paper data after Friday’s close. The data was soft, with the 9% decline in overall shipments a bit weaker than the preliminary release and the weakest trend since fall 2009. Inventories rose 2.7% m/m-reversing 1/2 March decline. Net imports fell 3% y/y but were up 20% m/m. Uncoated free best trends Uncoated free posted the best shipment and inventory trends in the month. The 3.7% y/y drop in shipments (-4.2% ytd) compares to 12-15% declines for other grades. UCFS comps were much easier. UCFS inventories fell slightly m/m. Coated free shipments fell 15% y/y (-4.9% ytd). Inventories rose more than normal. Coated groundwood shipments fell 12.3% y/y (-3.4% ytd). Inventories rose to a 1.5-year high. Uncoated groundwood shipments fell 13.8% y/y (-6.9% ytd). Inventories rose to a 20-month high. Trade still generally positive Overall trade flows were generally improved year over year though modestly unfavorable compared to 12-month rolling averages. Currency and trade barriers are providing some protection. We see risk to coated free trade over time. Pricing Pulp & Paper Week reports more erosion in uncoated free cut size and modest improvement in other print/write grades. Looking out there are cut size, coated free, coated/uncoated groundwood hikes for June/July. We assume stable pricing. Uncoated free is our preferred graphic grade but we favor packaging over paper. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 May 2011 UBS 6
  • 7. Morning Expresso - United States 23 May 2011COMMUNICATIONJanedis’ Media Matters Entertainment Analyst: John Janedis, CFA Tel: +1-212 713 1064Post Upfront – Nets Positioned Well What’s New? We expect upfront negotiations to pick up the pace next week, with the TV network upfront wrapping by mid-June at the latest. Broadly, we think FOX/CBS/ABC are asking for CPM increases of +12%-16% vs. last year’s upfront, hoping the scatter market increases of the past two years impact the psychology of the negotiation. In the near term, we believe the mid teens market ask should translate to positive sentiment for the group. Top picks: CBS, DISCA, TWX, and VIA. Online Recruitment Conference Call – Contact your UBS salesperson Join us on Wednesday @ 11AM for an update on the sector from an industry thought leader on government budget impact, emerging competitors, etc. New York Times Linage +5% in May; WSJ +3% Through the third week of May, NYT linage is +5% with nat’l auto -11%, dept. stores +16%, telco - 19%, banks/financials +16%, tech +404% (Google/Acer) and movies +4%. Classifieds are -11%, with h/w +33%, r/e -18%, and auto -12%. May linage at the WSJ is trending +3% (+7% comp), on a same-day basis, vs. April which finished flat (+22%) Mar. -4% (+33% comp), Feb. -2% (+15%), Jan. +2% (+22%), Dec -2% (vs. +38%). Valuation Large-cap media is trading at 8.2x our estimated FTM EBITDA vs. 8.1x last week; mid-cap is trading at 9.9x vs. 10.0x; advertising is trading at 7.1x vs. 7.0x; online recruitment is trading at 10.3x vs. 11.6x; and publishing is trading at 4.5x vs. 4.4x. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 7
  • 8. Morning Expresso - United States 23 May 2011CONSUMERANN, Inc. Rating: Buy Target: US$37.00 Price: US$29.09 RIC: ANN.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.69bn BBG: ANN US Retailers, Specialty Analyst: Roxanne Meyer, CFA Tel: +1 212 713 86022Q Off to a Solid Start; Reiterate Buy Fundamentals are improving ANN remains a top pick based on attractive LT catalysts: 1) momentum at Ann Taylor / turn is there at LOFT, 2) best- positioned in terms of sourcing for ‘11, 3) accelerated store refreshes (higher sales productivity/lower cost model), 4) channel mix shift to higher margin factory/outlet & ecommerce businesses, 5) systems/IT initiatives, and 6) continued repurchase activity. 2Q off to a solid start; accelerated comps, fewer promos at both divisions While Loft’s 1Q comp of -1% disappointed, it was due to starved inventories and weakness in petites (15% of sales). In May, Loft stores are seeing significant improvement (particularly in knits/wovens) given right- sized inventories, with May the toughest monthly compare of 2Q. We are comfortable with expectations for gross margin expansion in 2Q given 1. improvement in Loft product, 2. the reduction in promotions needed in May thus far, and 3. the influence of higher outlet margins on the total margin, which becomes increasingly more influential. Reiterated sourcing cost mitigation – but now for all of 2011 ANN remains the only retailer to have mitigated ‘11 sourcing pressures with average unit costs planned flat. AT is not raising opening price points and will only increase price on select high-demand items in 3Q (such as suits); Loft will not raise prices. Lower depth of promotions/more targeted promotions are being tested. Valuation Our 2Q EPS estimate moves to $0.47 from $0.46, FY11E to $1.87 from $1.84. Our $37 price target is based on 15.7x our ‘12 EPS estimate of $2.35. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$29.09 on 20 May 2011 18:12 EDTBerth Control Recreational Products & Services Analyst: Robin M. Farley Tel: +1-212-713 2060Cruise Capacity Monitor Growth After 2011 Even Lower The North American capacity increase for 2010 was 6% and we estimate 2011 will be just under that level, which is approximately equivalent to the trailing 10 year average of just under 6%. ‘12 and ‘13 will almost certainly be below avg years at 3% and 4% growth, respectively, as all ordering for those yrs now done, and further withdrawals are likely to come. European capacity also expected to grow below the 9- 10% trailing average growth. What Could Come Into the Order Pipeline We believe CCL likely to order another ship this year for ‘14 delivery. We expect the next few newbuilds to still be ordered for European sourcing brands like Costa and AIDA, which have both been growing, and P&O which currently has no ships on order. An order for the Carnival brand is unlikely in the near term in our view. This goes along with Carnival’s stated plan for capacity growth of 2-3 ships per year, as there is currently only one order for delivery in Spring 2014 (for Princess). What Could Come Out of The Fleet We note CCL has 1 ship in its P&O Australia fleet and 2 ships in its Iberocruceros fleet that are 24+ years old, similar in vintage to other recent CCL fleet removals. Each of those two older Iberocruceros ships is ~1% of the Euro mkt. Although RCL has noted that it has no plans to remove the ship, we have heard trade commentary that RCI could be exploring alternatives for the Monarch of the Seas. We believe Monarch comprises ~1% of ‘11 North American capacity. More detail on other potential capacity changes in Europe and N America below. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011US Specialty Retail Retailers, Specialty Analyst: Roxanne Meyer, CFA Tel: +1 212 713 8602Roxyretail’s Rack Attack: Heightened Promotions Continue Across the Mall Continue to see aggressive promo levels in May; retailers focused on traffic We continue to see widespread promotional levels across the mall with nearly all of our retailers more promotional than LY and many more promotional than the prior week. ARO and AEO need to clear heavy inventory levels. We saw YOY upticks at: ANF, ARO, AEO, Banana, Old Navy, Urban Outfitters, and WHBM; only Banana Republic was less promotional. AEO: aggressive promotions continue; lowering our estimates and PT AEO remains highly promotional with 70-75% of the store marked-down (vs 40% LY) and an average depth of 30-40% off (vs 25-30% off LY). Newer product looked a bit too dark for spring/summer. We are maintaining our Q1 est of $0.13 (assuming lower gross margin is offset by share repurchase), but lowering Q2 est $0.10 from $0.13 and FY11 to $0.89 from $0.98. Our PT goes to $14 from $16 based on 13x our new ’12 est of $1.05 (previously 14x $1.12). TLB: assortment improving but promotional levels remain elevated We see signs of product improvement, but elevated promotional levels. TLB likely experienced some softness (like ANN) in last 3 wks of April (key selling season) due to weather, but we aren’t expecting real improvement until 2H anyway. Lowering price targets on ARO and GPS, maintaining neutral ratings ARO’s PT goes to $19 from $22 based on 9x our 12 est of $2.13. GPS’s PT goes to $20 from $22 based on 11x our 12 est of $1.81. No change to either multiple. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 8
  • 9. Morning Expresso - United States 23 May 2011ENERGYUS Oil Service & Drilling Oil Drilling, Equipment & Services Analyst: Angie Sedita Tel: 1-212-713 3587Angie’s Oil Service and Drilling Weekly Rowan sells LTI manufacturing at better than expected price Last week, Rowan announced it will sell its LeTourneau Technologies manufacturing business to Joy Global for $1.1 bil in cash. This is above the higher end of our prior valuation range for the manufacturing division of $800 mil. Most of the after-tax proceeds (~ $875 mil) will be re-invested in RDC’s offshore drilling business, which could include investments in its high spec jackup fleet or expansion into the ultra-deepwater market. Rowan has been meeting with South Korea shipyards regarding a potential order for up to three 12,000 ft dual activity drillships. We believe an order for two deepwater rigs is likely. Diamond announces 3rd deepwater rig; we believe dividend intact Last week, Diamond announced its 3rd newbuild ultra-deepwater drillship with Hyundai for $610 mil, delivery in Q2-14. Following the construction of three ultra-deepwater rigs and the purchase of two additional rigs, Diamond will have five ultra-deepwater newbuild rigs (plus 3 upgraded ultra-deepwater rigs). Based on our current free cash flow projections and the $1 bil of cash on hand we believe that Diamond can maintain the current dividend ($3.50 annual dividend, 5% yld) and internally fund the construction program. DO wins contracts for first two newbuild drillships under construction The contracts are with Anadarko at $495k/day, for 5 year terms. Contracts start late-2013 and early-2014 following shipyard delivery. We estimate an IRR of about 15%. Separately, DO received a 20 month extension for the semi Ocean Rover (8,000 ft – 2nd/5th gen, Malaysia) with Murphy at a dayrate in the mid $280k’s, which is below its current rate in the $370k’s and our forecast of $300k. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011US Electric Utilities & IPPs Electric Utilities Analyst: Jim von Riesemann Tel: +1-212-713-4260Nuclear Speedbump? NRC says more issues found in new reactor design NRC Chairman Jaczko stated that additional technical issues have been uncovered with respect to Westinghouse’s AP1000 reactor design that need to be resolved before it can begin considering the design certification. This design certification needs to occur before a construction and operating license (COL) can be issued. At this stage, it is unclear if these technical issues will result in a delay of the design approval process. The NRC will wait until it has received Westinghouse’s response before deciding if a 75-day public comment period is warranted. What’s the holdup? Westinghouse was required to perform further calculations to confirm the NRC staff’s technical analysis but during that process, additional questions arose about the containment shield building and thermal stress. Westinghouse is expected to submit additional information on the AP1000 design sometime in June following an inspection by the NRC staff next week. What does this do to the approval timeline? If the NRCs new concerns can be adequately addressed without raising material issues, then the NRC will likely move forward for a late 2011/early 2012 decision (design and COL done separately). However, if the concerns are deemed to be material, the 75 day public comment period will probably push out a final NRC decision by about five months, or into the 1Q of 2012, at the earliest. Enabling legislation is vehicle for regulatory recovery for SO and SCG Annual nuclear expenditure recovery is well defined under the law Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 20 May 2011 UBS 9
  • 10. Morning Expresso - United States 23 May 2011FINANCIALSProperty Casualty Insurance Insurance, Property & Casualty Analyst: Brian Meredith Tel: +1 203 719 2899Lowering EPS Estimates on April Storms Preliminary tallies for losses from April storms total $10.2bn Press reports indicate that ISO’s Property Claim Services shows preliminary losses from April storms of $10.2bn. Personal property represents 63%, commercial 23% and auto 14% of the total, with the largest losses in AL, TN, NC and TX. ALL and TRV have the largest market share in the hardest hit states We examined insurers’ homeowners, auto physical damage and commercial multi-peril property market shares in the nine states with the largest dollar damages from April storms (representing 78% of total losses). Of the companies in our coverage universe, ALL and TRV appear to have the largest market shares in these states, with much smaller shares at WRB and ACE. PGR is among the top 10 personal auto insurers in each of these states (and in the top five in six of them). Reducing EPS estimates for CB, TRV and WRB Based on market shares and expected industry losses, we are increasing our catastrophe loss estimates and reducing 2Q11E EPS for TRV (-36%), CB (-13%) and WRB (-3%). Our 2Q11 catastrophe loss estimate for TRV is higher than each quarterly cat loss TRV has reported since 3Q08. Our 2011 EPS estimate is ~3% below consensus for TRV and roughly in line for CB and WRB. ALL pre-announced its April cat loss estimate, and PGR reported April results (see Table 2). Reinsurers not likely to be significantly affected . . . . . .but some reinsurance programs might be triggered. CINF expects reinsurance recoveries on its losses, and ENH pre-announced $45-$55m in losses from its cat reinsurance book, mainly related to regional homeowner and farm mutual insurers. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 10
  • 11. Morning Expresso - United States 23 May 2011HEALTHCAREManaged Care – Consultant Symposium Healthcare Providers Analyst: Justin Lake, CFA Tel: +1-212-713 2765Consultant Views on Selling Season/Reform We recently hosted our 1st Consultant Symposium and 1x1 Conf in NYC Presentations by Aon Hewitt consultants across a variety of topics including 2012 selling season, future of HC, outlook for retiree HC and PBM among others. While 2012 unlikely to see major shifts, employers appear to be more willing to entertain ideas that drive meaningful change heading into 2014 HC reform implementation. Will employers shift from defined benefit to defined contribution in HC? One of the most interesting viewpoints came from consultant presenter Ken Sperling, who sees potential for employers to move HC spending toward defined contribution over time, with the analogy made several times to similar move in 1990s in retirement (pension to 401k). While this may prove challenging for active employees, it’s more likely in the pre-retiree/retiree space, especially should exchange market prove viable and provide affordable options to pre-65 retirees. Typical RFP pipeline in nat’l accts, signs of pricing aggression from AET No major new trends in nat’l account RFPs for 2012, with cost trend guarantees less aggressive. Some discussion of Aetna pricing aggression in mid-mkt segment by consultants, specifically in the north-east, which we also picked up via our NFP channel checks. That said, MLR floors make pricing data-points tough to interpret as plans have been transparent in strategy to price thru rebate for membership in low MLR regions (AET has indicated small group give-back in select markets). Aon Hewitt indicates PBM pricing trends improve YoY On avg PBM clients realizing 7-9% savings on typical 3-yr contracts on renewals for 2012, which appears less aggressive than last year’s avg. of 12-15%. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011US Specialty Pharmaceuticals Pharmaceuticals Analyst: Marc Goodman Tel: +1-212-713 1342Generics Product Series – Part 11:Micro-K & K-Dur (Potassium CL Caps/Tabs) What’s new? Eleventh issue of our series on key generics products We focus on products with significant sales potential, interesting patent situations or complex generic launches. We include an Rx-driven sales model as well as the projected EPS impact to the respective generic company for the new generic product. We detail our assumptions for generic Micro-K for Perrigo and Watson Micro-K has been an investor concern since KV re-entered the capsule market earlier this year and regained ~25% share, and now especially as Paddock/Perrigo received approval this week and is expected to launch in mid July. In the capsule market, we assume that Watson will be able to keep ~50% share (vs. ~75% now) with Perrigo and KV taking ~15% and ~30% share, respectively. Further, we assume that pricing drops by another 15% when Perrigo launches (pricing fell ~20% when KV re-entered). However, we had previously underestimated the impact of the tablet market where Watson has benefited from Merck’s price increases on the brand. There is a slow shift to tablets due to lower cost, and while that market is already established, Watson has been gaining share, and we believe it will be able to offset losses in capsules though its gains in tablets (see Table 1). Our takeaway: Opportunity for Perrigo; No net impact to Watson We estimate sales of $7M in F2012 and $9M in F2013 for Perrigo, resulting in an EPS contribution of $0.03 and $0.04, respectively. For Watson, we expect capsule losses to be offset by tablet increases such that the contribution from this franchise to our Watson estimates remains unchanged (see Tables 2 and 3 for projected EPS impact). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 May 2011 UBS 11
  • 12. Morning Expresso - United States 23 May 2011INDUSTRIALSActuant Corporation Rating: Neutral Target: US$29.00 Price: US$25.01 RIC: ATU.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.70bn BBG: ATU US Industrial, Diversified Analyst: Robert Barry Tel: +1-212-713 7980Weasler fits classic ATU deal criteria; Synergy potential, valuation look attractive ATU buys Weasler (engineered drivetrain components) for $155mn Weasler sells into the Ag, lawn/turf and industrial markets. Revenue mix is 85% NA, 85% levered to Ag, which has an attractive secular growth story, and splits 60/40 between OE/Aftermarket. On LTM sales of $85mn at 21% EBITDA margins valuation looks attractive at 8.7x vs. 9.2x for our SMID industrials peer group (on ‘11E). Weasler fits squarely in ATU’s wheelhouse, boding well for synergies We think Weasler fits where ATU has excelled – buying well-run makers of highly engineered products with dominant, but localized market positions, in less competitive niches, and globalizing them. We also see sourcing, R&D synergies with the Elliott (flex shafts) and Maxima (durable vehicle controls) businesses. Post Mastervolt we think investors will like the classic ATU deal traits In our view, Weasler should reassure investors who were concerned ATU strayed from its core M&A strategy with the recent Mastervolt deal (solar inverters). We think MV fit many of ATU’s M&A criteria and that LT prospects for solar are good, but a choppy demand outlook and MV’s lack of market dominance did raise concerns. Valuation: Weasler neutral to valuation on 2012E; See better LT upside Our price target reflects 17.2/15.5x P/E and 9.4/8.5x EBITDA multiples on our 2011/12 estimates, weighted 75/25% on 2011/12E. While likely modestly accretive to F12 (Aug), at 8% growth, a 21% EBITDA margin and an 8.5x one-year forward EBITDA multiple the deal is about neutral to our 2012E valuation. We’ll review our estimates post closing. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$25.01 on 20 May 2011 19:36 EDTCrane Rating: Buy Target: US$55.00 Price: US$47.72 RIC: CR.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$2.79bn BBG: CR US Industrial, Diversified Analyst: Robert Barry Tel: +1-212-713 7980Strong tailwinds at Crane Aerospace We visited CR Aerospace and remain confident in robust growth outlook We met last week with CR Aero management, who were very upbeat about the business. We think CR continues to gain share, including on Airbus and Embraer platforms and, more broadly, is benefiting from a still young, multi-year aerospace cycle. Our constructive thesis on CR shares is based partly on growing momentum in the firm’s predominantly late cycle end markets, including aerospace. We come away more confident in our 2011/12 revenue growth ests (10-12%) for Aerospace. Sizable progress on cost; Inflation, Japan supply chain are manageable We think stepped up LEAN initiatives during the downturn are paying dividends. The Burbank facility we toured is producing the same revenue (~$200mn, 50% segment sales) on one shift that it produced on two shifts at the prior peak. We believe wage inflation may be a larger risk than materials costs as the cycle develops. CR is also shedding suppliers that underinvested during the downturn and became less efficient. We’re starting to see upside to our 2012, 22% OP margin target for A&E. Management changes starting to yield results Since Aero President Mike Romito joined in 2009 all but three of his direct reports changed. Focus areas for new managers are LEAN, aggressive aftermarket growth, and expanding the global engineering offices footprint. We think strategically locating new facilities is fueling growth, including with Airbus and Embraer. Valuation Our $55 price target reflects a 14.5x P/E multiple and an 8.5x EBITDA multiple on our 2012 estimates, weighted 70:30 to P/E. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$47.72 on 20 May 2011 19:36 EDTShaw Group Rating: Buy Target: US$44.00 Price: US$39.32 RIC: SHAW.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$3.34bn BBG: SHAW US Heavy Construction Analyst: Steven Fisher, CFA Tel: +1-212-713 8634NRC comments, Westinghouse responds NRC indicates that further AP1000 technical issues need to be addressed NRC Chairman Jaczko stated that additional technical issues in Westinghouse’s AP1000 design need to be resolved before it can finalize the design certification. This certification needs to occur before a construction and operating license can be issued. At this stage, it is unclear if the technical issues will result in a delay of the design approval process. The NRC will wait until it has received Westinghouse’s response before deciding if a 75-day public comment period is warranted. Westinghouse (“WH”) is expected to submit additional info in June WH was required to perform further calculations to confirm the NRC’s technical analysis but during that process, further questions arose about the containment shield building and thermal stress. WH is expected to submit additional info on the AP1000 design in June following an inspection by the NRC staff next week. Westinghouse “emphasizes that issues are not safety significant” Following the NRC’s release, WH stated it “will continue to work with the NRC as part of the normal licensing process to address the few remaining confirmatory items, none of which are safety significant.” If the NRC’s new concerns can be adequately addressed without material issues, the NRC will likely move fwd for a late ‘11/early ‘12 decision. If the concerns are material, the 75-day comment period could push out a final NRC decision into 1Q of 2012, at the earliest. Valuation: Maintain our target of $44/share; maintain Buy rating In the wake of Fukushima, we already assumed a delay in our model for Shaws FY12. Target reflects 15x PE on FY12E+$4/sh of cash. 15*$2.65+$4=$44. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$39.32 on 16 May 2011 18:42 EDT UBS 12
  • 13. Morning Expresso - United States 23 May 2011E&C Weekly Blueprint Heavy Construction Analyst: Steven Fisher, CFA Tel: +1-212-713 8634Engineering & Construction Update Upcoming events: catalysts through the end of June; UBS oil sands trip We highlight some upcoming catalysts over the next several weeks: draft highway legislation (May/June); final version of CATR (June); Jubail refinery EPCM award for utilities and offsites (mid-June). UBS will be hosting a trip to the Canadian oil sands to meet with E&C customers (June 15-16). NRC comments on AP1000 design and Westinghouse (WH) responds On 5/20, the NRC noted that additional technical issues related to the AP1000 design need to be addressed. WH responded stating that the issues are not safety significant and several were self-identified by WH. The NRC is expected to review WH’s response when it receives it (likely early-mid June). If the NRC deems the issues are adequately addressed, the design and project approval could take place late 2011. Issued deemed material could cause a few months delay into Q1 2012. We have assumed a delay of a few months in our Shaw model. Industry data: E&C -3.3% last week; TPC weak on CEO share sale E&C stocks declined -3.3% on avg last week. The avg performance over the past two months is -2.9% from +2.8% last week. NTM P/E multiples for FLR, JEC, MDR, KBR, and TPC declined to lowest levels since Nov/Dec 2010. TPC was the weakest performer likely due to CEO share sales, Guam concerns, and low ABI. Sector view: Constructive on construction, despite competitive pressure We still focus on oil/int’l infrastructure weighted stocks. Over the next two years, we see multiple upside from the cycle tightening and believe thematic prospects will help orders. Buy ratings: MDR, FLR, KBR, FWLT, ACM, TPC, SHAW. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011U.S. Aerospace & Defense Playbook Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185The Week Ahead What’s next for Aerospace and Defense? Boeing Investor Day Mon/Tues in Seattle. While BA will show the 787 production line, unknown whether it will provide a look at the rework being performed. HEI will report its Q2 after close Tues, providing a mid-quarter read on the aftermarket. Several A&D companies will be speaking at a conference on Wed including GR/BEAV. We should also get bizjets cycles data this week followed by int’l airline traffic the following week, both of which will benefit from easy comp on Iceland volcano last April. On June 7, we host our annual Chicago Aero and Defense 1x1 conference with ATK/BBD/ERJ/GR/HEI/LMT/BA/TGI/UTX/WWD scheduled to attend. Congressional committees are making their first pass through the FY12 Defense Authorization Bill. ESL earnings June 1. Still prefer aero aftermarket Aero at a 13% premium to market is in line with similar point in prior up-cycles. We continue to favor the aftermarket names over OE as we think increased utilization of out of warranty aircraft can still drive high single digit aftermarket growth in ‘11 despite high oil prices and recent capacity cuts. GR/COL/TDG are our top picks. Risk to 2011 defense results on lower FY11-12 budgets We see risk to the companies 2011 guidance from half-year CR and final FY11 appropriations legislation that cuts $10B in modernization funding relative to DoD request, likely followed by further cuts in FY12. Valuations not overly attractive at 28% discount to market, high end of prior defense budget downturns. Our only Buy-rated defense stocks are GD/ATK. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 20 May 2011Electrical Equip. & Multi-Industry Update Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309What’s New and Notable for Industrials 24 multi-industry companies presented at EPG conference last Mon – Wed Presenters from our universe: 3M, GE, HON, DHR, ETN, IR, TYC, EMR, & CBE. Focus was largely on company-specific initiatives/targets, with most positive on the medium-term outlook for end markets. We note non- res is believed to have bottomed with growth forecast for 2H; price / cost dynamic is also expected to improve. EMR orders ex-currency moderate to +8% in Apr. vs. from +10% in Mar. Decline in trailing 3-mo. orders largely driven by tougher comps, with EMR noting continued strength in global capital goods mkts; Process and Ind. Automation orders still +>20%, Network Power improves to +5% (was flat in Mar.), and Climate orders moderated slightly on lower channel restocking. Res business remains weak at Tools. European industrial team hosts China trip; temporary slowdown expected Companies across industries in China (construction, mining equip., truck, auto, wind, and power gen, among others) currently anticipate a gvt. induced slowdown including a slower property market, tighter credit and inv. reductions. However, the slowdown is widely expected to be temporary given healthy underlying demand. Apr. Ind. Production below expectations; ABI index declines to below 50 The Architecture Billings Index (ABI) declined to 47.6 in April to 50.5 in March (a score >50 indicates increased demand for design services). The new projects inquiry index also declined to 55.0 in April from 58.7 in March, but remains above the 50 threshold. April IP was weaker than expected at flat, manufacturing production declined 0.4% (due to lower Auto production), and CAPU ticked down 0.1% to 76.9% (3.5% below the ’72-’10 avg.) vs. March. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 13
  • 14. Morning Expresso - United States 23 May 2011TECHNOLOGYApplied Materials Rating: Neutral Target: US$16.50 Price: US$14.52 RIC: AMAT.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$19.5bn BBG: AMAT US Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111Expect in-line results; reiterate FY11 guide Silicon orders likely tracking down in-line with its industry peers We estimate Applied’s Apr-11 sales and EPS were in-line with its guidance at $2.8B and $0.36 and estimate it reiterates its FY11 sales and EPS of $11B+ and $1.50+ and guides Jul-11 sales and EPS flattish q/q. We estimate Applied’s Silicon orders were +6% q/q to $1.9B given slow April (peers were +15%). We expect no Jul-11 Silicon order guidance (estimate -5% q/q) but reports similar pushouts from Foundries and highlights 2012 capex may decline y/y with DRAM a key wildcard. Estimate crystalline solar equipment orders track down q/q in 2H11 We estimate Applied’s Energy and Environmental Systems (Solar equipment) Apr-11 orders declined -36% q/q to $425M (14% of total orders) given solar demand uncertainty in Italy. Our checks find Applied’s solar orders are tracking down in 2H11 but will still be up yoy in FY11 as its top 5 China based customers continue to adopt new solar products in screen printing and wire-saws. Display orders improving in 2H11; fab services orders also tracking better We estimate Applied’s Apr-11 display orders were up +6% q/q at $150M (6% of total orders) as our checks find Jan-11 was likely the trough quarter from Korea and Taiwan. We estimate display orders likely grow 5- 10% q/q thru rest of CY11 as we still believe LCD investment in China is a 2H11 catalyst. Our checks find its Fab services orders tracked better than wafer starts, (flat q/q in Mar-11) and likely outgrow 2011 wafer starts (+5% yoy) as more equipment comes off warranty. Valuation: Maintain $16.50 price target Our PT is based on applying a 13x P/E multiple to our cross-cycle EPS of $1.27. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$14.52 on 16 May 2011 19:39 EDTPhotronics Inc. Rating: Buy Target: US$11.50 Price: US$9.25 RIC: PLAB.O Prior: Unchanged Prior: US$10.50 Mkt Cap: US$0.50bn BBG: PLAB US Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111Continues to execute at high-end Beats Apr-11 results on strong high-end IC sales and Japan orders Photronics reported Apr-11 sales and EPS of $133M and $0.24 compared to consensus at $120M and $0.16. 1Q11 sales included additional $5M orders from Japan mainly for mainstream IC product (IC/FPD:80/20). IC photomask sales in 1Q11 were up 14% q/q (or $12M) with high-end IC up 50% q/q (or $9M), and FPD photomask sales were flat despite a $5M pull-in in Jan-11. Photronics’ TTM EBITDA of $155M and 2Q11 operating margin of 15.9% were above its LT goals. Likely gains 2% market share (mostly in high-end) in IC to 13% in 2011 SEMI estimates 2011 Global IC photomask market to be roughly $3.17B (up 7% y/y) and grow another 2% y/y in 2012 to $3.24B in 2012. We estimate high-end, the fastest growing segment, is about 25% of the market. We note that Photronics’ 45nm and below business grew 74% q/q and 60nm and below grew 50% q/q. Raising estimates on higher margins and share gains Photronics guided 3Q11 sales and EPS of $131M and $0.19 and has set a new near-term OM target of 17.5%, similar to prior peak level. We believe Photronics can capture another 1-2% market share in 2012 from its momentum in high-end and its diversification beyond memory customers. We raise our FY11 and FY12 EPS estimates to $0.85 and $1.05 from $0.70 and $0.80 previously. Valuation: Maintain Buy and raise PT to $11.50 from $10.50 previously Our 12-month price target is based on applying an 11x multiple to our FY12 EPS estimate of $1.05. We believe Photronics will continue to benefit from its high-end investments as majority of new capacity and design $s are allocated to high-end. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$9.25 on 20 May 2011 19:36 EDTVeeco Instruments Rating: Buy Target: US$65.00 Price: US$54.79 RIC: VECO.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$2.30bn BBG: VECO US Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111More orders from Elec-Tech likely in 2012 Elec-Tech (Veeco’s #1 China customer) raising capital to expand in LED Elec-Tech has proposed to raise around $539M to fund 1.8M units of 4- inch LED wafer capacity in Wuhu, China. We note Elec-tech has about $225M of cash currently and any additional funds raised further lowers its dependency on MOCVD equipment subsidies, which we expect tail off thru 1H12. Elec-Tech’s big LED expansion likely means more Veeco orders in 1H12 Elec-Tech will use its new funds to purchase 150 MOCVD chambers in addition to the 36 it already has installed, which is consistent with our report on 5/18/11 titled “Customer momentum at Elec-Tech is solid”. While our proprietary LED fab tracker is now following 31 customers in China, we believe Elec-Tech’s big expansion plans (now 216 MOCVD chambers in total, up from 130 previously) will likely keep it one of Veeco’s top three customers. Estimate Veeco may earn another $0.70 in EPS in 2012/13 from Elec-Tech If we estimate Veeco can maintain its current 77% market share at Elec-Tech’s new 86 chamber expansion plan, we estimate this will require 16 more MaxBright tools ($9M each, 30% operating margin, 32% tax rate, 44M shares. Our 2011 and 2012 EPS estimate remains $5.25 and $4.75 (2012E does not include Elec-Tech’s 86 chamber expansion yet since its funds have not been raised yet). Valuation: Maintain Buy rating and 12-month price target of $65 Our PT is based on 12x our cross-cycle EPS of $4.00 plus $17/sh in net cash ending 2011. We expect a catalyst for the stock could be June 7th when Elec-Tech’s shareholders vote on this fund raising proposal. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$54.79 on 20 May 2011 19:36 HKT UBS 14
  • 15. Morning Expresso - United States 23 May 2011UBS SemiBytes Semiconductors Analyst: Uche Orji Tel: +1 212 713 4015Intel Gets More Aggressive than Expected with its Atom Processor Road Map Week Ahead: SIGM (25-May), MRVL results, call with Calxeda (26-May) For Marvell F1Q results, we expect sales/EPS of $838m/$0.31, above consensus of $826m/$0.30. We see potential downside risk to our F2Q outlook of $914m/$0.34 on TD-SCDMA weakness. We will host Karl Freund, VP Marketing at Calxeda to discuss how its power-efficient ARM solution addresses next gen data center challenges. Conf call: 10:00 am ET, (800) 785-6380/(212) 231-2900, #21524988. Charts: OECD CLI vs semi industry revenues, SOX index A slowing y/y OECD Composite Leading Indicator (CLI) supports our view for moderating semiconductor industry growth and in turn reinforces our Neutral view on the sector, as y/y SOX returns lead y/y semiconductor industry growth. Review: INTC Analyst meeting As we expected, Intel highlighted how it is monetizing the growth of smartphones and tablets through its data center business. What we did not expect was an aggressive Atom road map, where we believe investors will question less if Intel can defend itself vs ARM but rather increasingly ask if Intel can execute compelling products leveraging its Tri-Gate process advantage to gain meaningful share. We believe even in 2015 for smartphones, Intel’s 14nm Airmont, which would have its first full year of production, would optimistically add ~$0.10 (100m units) to our $2.90 EPS est. We believe more impactful is our view that investors will see reduced downside risk from ARM to longer-term earnings that could result in a rising P/E multiple (currently 10x 2011 EPS) towards our 12x target. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011Semiconductor Equipment Industry Update Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111Taiwanese semicap orders still very low Checks again find no new semicap orders from TSMC or UMC last week Our checks find TSMC has not placed any semicap orders for 4 consecutive weeks (last time saw this was in the Jun-10 quarter). Our analysis shows TSMC’s 2Q11 semicap orders so far in the quarter are only $286M or down -65% q/q if we assume its average weekly order pace remains the same for remainder of 2Q11. We note TSMC’s 1H11 semicap orders are only $1.8B, which is tracking well below its full-year capex guidance of $7.8B. Our checks find UMC has not placed any semicap order for 5 weeks in a row. Our own analysis shows UMC’s semicap orders in 2Q11 so far are only $23M, which are tracking down -70% q/q. Checks find Rexchip placed one DRAM semicap order last week Our checks find Rexchip placed a $17.5M semicap order with Applied Materials last week. Our analysis shows total Taiwanese DRAM semicap orders in 2Q11 are only $102M, tracking down -20% q/q. We are not as surprised with the weak DRAM semicap orders as we estimate DRAM capex in 2011 will be down -42% yoy and up slightly in 2012 at +14% yoy. Historically, Lam has the highest DRAM customer exposure at 38% of its total shipments (4-year average). Total Taiwanese semicap orders in 2Q11 tracking down -59% q/q so far Our analysis shows the 9 major semiconductor customers in Taiwan have only ordered $411M of semicap equipment in the first 7 weeks of 2Q11, down -59% q/q if weekly orders stay at this average for the remainder of 2Q11. We are surprised that total Taiwan foundry semicap orders are driving this weakness at only $309M in 2Q11 so far and tracking down -65% q/q. Historically, KLA has had the highest Foundry customer exposure at 42% of its total orders. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 May 2011US Internet and Interactive Entertainment Internet Services Analyst: Brian Pitz Tel: +1-212-713 9310Pitz & Fitz’s Internet / IE Weekly Apple launching cloud music service with support from record labels Apple is preparing to launch a cloud music service, which would allow users to listen to songs from an Internet connection. Apple is said to have reached agreements with all four major record labels – Warner Bros, Sony, EMI, and Universal. CNET reports that Apple still needs to come to terms with the publishers Warner/Chappell, EMI Publishing, and Sony/ATV. Apple could unveil its music service as early as June 6, the date of its developer conference. Microsoft offers free Xbox to students who purchase $699+ PC Between May 22 and September 3, Microsoft is offering a free Xbox 360 4GB console to high school, and college / university students who purchase a Windows 7 PC worth $699 or more. To qualify, the students must purchase the PC at select online retailers including Dell.com, HP.com or the Microsoft online store, as well as in-store at Best Buy or Microsoft Store retail locations. The deal is currently only available in the US; Canada and France rollouts are coming ‘soon’. Google raises $3B in bond sale In its first ever bond offering, Google raised $3B splitting the sale evenly between three-, five-, and ten-year notes. The 1.25% 3-year notes yield 33bps more than similar maturity Treasuries; the 2.125% 5-year notes pays a 43bps spread, and the 3.625% 10-year bond pays a 58bps spread. Google’s stockpile of $35B cash is said to have aided it to secure favorable terms. The average spread on AA rated bonds on May 13 was 105bps, higher than Google’s, which also has an AA rating (S&P). The offering is said to give GOOG more flexibility to spend cash in the US; roughly 46% of its total cash is offshore. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 May 2011 UBS 15
  • 16. Morning Expresso - United States 23 May 2011UBS Key Calls - USLive Key Call Portfolio Stock Name RIC Rating Price Target Date of call Current Price Analyst Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$44.92 Steven Valiquette Citigroup Inc C.N Buy US$56 3-May-11 US$41 William Tanona, CFA Celgene Corporation CELG.O Buy US$69 9-Dec-10 US$60.49 Matthew Roden, PhD Deere & Co. DE.N Buy US$115 18-Jan-11 US$84.75 Henry Kirn, CFA Dow Chemical DOW.N Buy US$46.5 21-Mar-11 US$36.01 Andrew Cash Ford Motor Co. F.N Buy US$22 10-Jan-11 US$15 Colin Langan, CFA General Electric Co. GE.N Buy US$23 10-Jan-11 US$19.64 Jason Feldman Google Inc. GOOG.O Buy US$765 10-May-10 US$524.03 Brian Pitz Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$90.35 Henry Kirn, CFA McDonalds Corp. MCD.N Buy US$93 9-Feb-11 US$82.33 David Palmer Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$63.61 Andrew Kligerman Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$57.38 Parag Agarwal SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$46.46 Uche OrjiSource: Reuters, UBS. Prices as at market close on May 20, 2011. UBS 16
  • 17. Morning Expresso - United States 23 May 2011Rating & PT ChangesKey Rating and Price Target Changes: US Company Name Directional Indicator/Rationale Reuters Code Current New New PT Prior Prior PT Share Price Rating Rating Aeropostale Inc. Maintain Neutral, lower PT ARO.N US$18.3 Neutral US$19 Neutral US$22 American Eagle Outfitters Maintain Neutral, lower PT AEO.N US$13.52 Neutral US$14 Neutral US$16 Inc. Expedia Inc. Maintain Neutral, increase PT EXPE.O US$27.57 Neutral US$32 Neutral US$27 Gap Inc. Maintain Neutral, lower PT GPS.N US$19.22 Neutral US$20 Neutral US$22 Orbitz Worldwide Inc Maintain Neutral, lower PT OWW.N US$2.59 Neutral US$3 Neutral US$4.1 Photronics Inc. Reiterate Buy, increase PT PLAB.O US$9.25 Buy US$11.5 Buy US$10.5Source: Reuters, UBS. Prices as at market close on May 20, 2011. UBS 17
  • 18. Morning Expresso - United States 23 May 2011Markets, Events and NewsflowToday’s Company Events Company Name Event Reuters code Rating PT Notes Campbell Soup Earnings Release CPB.N Neutral US$36 GT Solar Intl. Earnings Release SOLR.O Buy US$14 HiSoft Technology Earnings Release HSFT.O Neutral US$21Source: Reuters, UBS. Prices as at market close on May 20, 2011.Today’s Macroeconomic Events: US Indicator Time (ET) UBS forecast Previous Consensus NoneSource: Bloomberg, UBSToday’s UBS Hosted Corporate Roadshow: Company Event Location Stanley Black & Decker 1x1 meeting hosted by Jason Feldman United KingdomToday’s UBS Hosted Fieldtrip: Company Event Location Constellation Brands Inc UBS Fieldtrip New YorkToday’s UBS Hosted Conference: Company Event Location UBS Global Oil and Gas UBS Conference Austin Conference UBS 18
  • 19. Morning Expresso - United States 23 May 2011Latest Market Movements: Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change Americas United States Dow Jones 12512.0 -0.74 8.07 United States S&P 500 1333.3 -0.77 6.01 United States Nasdaq 2803.3 -0.71 5.67 United States S&P VIX 17.43 12.30 Europe Europe FTSE Eurofirst300 1123.1 -1.15 0.12 Belgium BEL 20 2689.6 -1.05 4.30 Germany DAX 7149.5 -1.62 3.40 France CAC 3929.1 -1.55 3.27 Italy MIB 30 20645.0 -2.79 2.34 Netherlands AEX 343.8 -1.29 -3.05 Portugal PSI 20 7633.3 -0.72 0.59 Spain IBEX 10083.1 -1.40 2.27 Switzerland SMI 6464.2 -1.02 0.44 UK FTSE 100 5865.1 -1.40 -0.59 Asia Hong Kong Hang Seng 22701.7 -2.15 -1.45 India BSE Sensex 17999.3 -1.78 -12.24 Japan Nikkei 225 9460.6 -1.52 -7.51Source: UBS, Reuters. Indices in Americas as at market close on May 20, 2011. Indices in Europe and Asia as at 05:00 EDT on May 23, 2011Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change Euro €/$ 1.415 -0.69% -2.5% 5.7% UK £/$ 1.623 -0.02% -1.0% 4.0% Canada CAD/$ 1.027 -0.67% -2.2% 2.4% Switzerland CHF/$ 1.140 0.38% 1.3% 6.5% China Yuan/$ 0.154 0.18% 0.5% 1.5% Brazil BRL/$ 0.616 -0.37% -3.5% 2.3% India INR/$ 0.022 0.06% -1.5% -0.5% Mexico MXN/$ 0.086 -0.12% -0.3% 6.0% Japan $/JPY 0.817 0.06% -1.0% 0.6% Australia AUD/$ 1.066 -0.12% -0.4% 4.2%Source: UBS, Reuters. Prices as at market close on May 20, 2011. UBS 19
  • 20. Morning Expresso - United States 23 May 2011Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change Gold ($/oz) 1508.90 0.00 -0.88 5.71 Brent Crude spot, $/bbl 110.11 -2.37 -10.34 19.34 WTI Crude spot, $bbl 99.49 1.07 - - Natural Gas, $MMBTU 4.05 -0.98 -6.47 -4.03Source: UBS, Reuters. Prices as at market close May 23, 2011. UBS 20
  • 21. Morning Expresso - United States 23 May 2011Today’s UBS Event ab Research Insight Conference Call State of the Tech Industry with UBS U.S. Tech Team Host: Nikos Theodosopoulos - Networking Uche Orji - Semiconductors Stephen Chin - Semi Capital Equipment Maynard Um - Hardware Amitabh Passi - Technology Supply Chain and Wireless Devices Brent Thill - Software Arvind Ramnani - Services Brian Pitz/Brian Fitzgerald - Internet Topic of Discussion: Please join UBS trading and research for a detailed update on the technology industry. Date & Time: Monday, May 23, 2011 // 11:00am ET / 8:00am PT Dial-in Details: Toll Free: +1 800-612-1052 Toll: 303-223-2680 Code: 21524017 Replay Details: Toll Free: +1 800-633-8284 Toll: +1 402-977-9140 Replay Code: 21524017 UBS 21
  • 22. Morning Expresso - United States 23 May 2011Forthcoming UBS Event ab Expert Access Conference Call Conference call with Calxeda (formerly Smooth-Stone) Host: Uche Orji US Semiconductor Analyst Speaker: Karl Freund VP of Marketing at Calxeda Please join the UBS semiconductor team along with Karl Freund, VP of Marketing at Calxeda to discuss problems in next generation data centers and how Calxeda’s low-power ARM based architecture addresses these problems. Calxeda, founded in 2008, was formerly known as Smooth-Stone and focuses on providing ARM based server processor solutions for Data Centers. Calxeda’s platform consumes a fraction of the power of today’s best in class servers, enabling data centers to realize significant reduction in capital expenses, power, space and cooling. The Calxeda platform is specifically designed for servers, scaling efficiently to thousands of nodes, with unique network and storage acceleration, and is enhanced with management technology to deliver true “energy-proportional” computing. Date & Time: Thursday, May 26, 2011 // 10:00am ET / 7:00am PT Dial-in Details: Toll Free: +1 800-785-6380 Toll: 212-231-2900 Code: 21524988 Replay Details: Toll Free: +1 800-633-8284 Toll: +1 402-977-9140 Replay Code: 21524988 UBS 22
  • 23. Morning Expresso - United States 23 May 2011Further InformationMorning Expresso – United StatesWelcome to the Morning Expresso, an early morning summary of the key ideas and issues presented from UBS forthe day ahead. Its contents include: - key items from UBS’ United States Morning Meeting - highlighted recommendation and price target changes - today’s anticipated company, sector and macro-economic catalysts from the US Contextual Diary - company and client events, conferences and conference calls from UBS - overnight global market, forex and commodity movementsMorning Expresso is designed to give you all that you ‘need to know’ each morning.Data presented is accurate as at 06:00 EDT on Monday, May 23, 2011.Contacts & FeedbackFor further details concerning today’s Morning Expresso – United States note, please visitwww.ubs.com/investmentresearch or speak to your UBS contact. This note is not intended to be static and it willevolve over time. Feedback welcomed on email toDL-USEquityProductManagement@ubs.com Statement of RiskForecasting earnings and corporate financial behavior is difficult because it isaffected by a wide range of economic, financial, accounting and regulatorytrends, as well as changes in tax policy. UBS 23
  • 24. Morning Expresso - United States 23 May 2011 Analyst CertificationEach research analyst primarily responsible for the content of this researchreport, in whole or in part, certifies that with respect to each security or issuerthat the analyst covered in this report: (1) all of the views expressed accuratelyreflect his or her personal views about those securities or issuers and wereprepared in an independent manner, including with respect to UBS, and (2) nopart of his or her compensation was, is, or will be, directly or indirectly, relatedto the specific recommendations or views expressed by that research analyst inthe research report. UBS 24
  • 25. Morning Expresso - United States 23 May 2011Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches andaffiliates are referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission.UBS Investment Research: Global Equity Rating Allocations 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 52% 41% Neutral Hold/Neutral 40% 37% Sell Sell 8% 20% 3 4 UBS Short-Term Rating Rating Category Coverage IB Services Buy Buy less than 1% 30% Sell Sell less than 1% 17%1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided withinthe past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were providedwithin the past 12 months.Source: UBS. Rating allocations are as of 31 March 2011.UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 25
  • 26. Morning Expresso - United States 23 May 2011KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not aforecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stocks price target and/or rating aresubject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect anychange in the fundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASESUK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:Negative on factors such as structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stocks volatility and the credit spread of the respective companysdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are notregistered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained inthe NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by aresearch analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,follows. UBS 26
  • 27. Morning Expresso - United States 23 May 2011Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date 4, 5, 6a, 6c, 7, 16 Actuant Corporation ATU.N Neutral N/A US$25.01 20 May 2011 1, 5, 16 AECOM Technology Corp. ACM.N Buy N/A US$27.77 20 May 2011 16 Aeropostale Inc. ARO.N Neutral N/A US$18.30 20 May 2011 16 Alliant Techsystems ATK.N Buy N/A US$72.79 20 May 2011 5, 6b, 6c, 7, 16 Allstate Corp. ALL.N Neutral N/A US$32.01 20 May 2011 16 American Eagle Outfitters Inc. AEO.N Neutral N/A US$13.52 20 May 2011 16, 20 ANN, Inc. ANN.N Buy (CBE) N/A US$29.09 20 May 2011 6c, 7, 16, 18a Apple Inc. AAPL.O Buy N/A US$335.22 20 May 2011 5, 16 Applied Materials Inc. AMAT.O Neutral N/A US$14.09 20 May 2011 2, 4, 6a, 6c, 7, 16, Cardinal Health, Inc. 18b, 22 CAH.N Buy N/A US$44.92 20 May 2011 5, 6c, 7, 14, 16 Carnival Corp. CCL.N Buy N/A US$39.59 20 May 2011 4, 6a, 13, 16, 22 CBS Corp. CBS.N Buy N/A US$26.99 20 May 2011 6c, 7, 16 Celgene Corporation CELG.O Buy N/A US$60.49 20 May 2011 6b, 7, 16 Chubb Corporation CB.N Buy N/A US$65.58 20 May 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 22 Citigroup Inc C.N Buy N/A US$41.00 20 May 2011 4, 5, 6a, 6c, 7, 16 Crane Co. CR.N Buy N/A US$47.72 20 May 2011 16 Deere & Co. DE.N Buy N/A US$84.75 20 May 2011 16 Diamond Offshore Drilling Inc. DO.N Buy N/A US$71.85 20 May 2011 16 Discovery Communications Inc DISCA.O Buy N/A US$44.73 20 May 2011 4, 6b, 6c, 7, 13, 16, 22 Dow Chemical DOW.N Buy N/A US$36.01 20 May 2011 13, 16, 20 Expedia Inc. EXPE.O Neutral (CBE) N/A US$27.57 20 May 2011 4, 5, 6a, 6b, 6c, 7, 13, 16 Fluor Corporation FLR.N Buy N/A US$67.33 20 May 2011 4, 6a, 6b, 6c, 7, 13, 14, 16, Ford Motor Co. 18c F.N Buy N/A US$15.00 20 May 2011 5, 16 Foster Wheeler Ltd. FWLT.O Buy N/A US$33.44 20 May 2011 16 Gap Inc. GPS.N Neutral N/A US$19.22 20 May 2011 16 General Dynamics Corp. GD.N Buy N/A US$73.03 20 May 2011 4, 5, 6a, 6b, 6c, 7, 8, General Electric Co. 16, 18e, 22 GE.N Buy N/A US$19.64 20 May 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18d Google Inc. GOOG.O Buy N/A US$524.03 20 May 2011 4, 5, 6b, 6c, 7, 8, 13, 16, 18f Intel Corp. INTC.O Buy N/A US$23.22 20 May 2011 4, 5, 6a, 13, 16, 20 Joy Global Inc. JOYG.O Buy (CBE) N/A US$90.35 20 May 2011 4, 6a, 6c, 7, 16 KBR, Inc. KBR.N Buy N/A US$35.59 20 May 2011 6c, Marvell Technology Group Ltd. 7, 16 MRVL.O Buy N/A US$14.34 20 May 2011 16 McDermott International MDR.N Buy N/A US$20.77 20 May 2011 6b, 7, 13, 16, 22 McDonalds Corp. MCD.N Buy N/A US$82.33 20 May 2011 5, 16, 20 Orbitz Worldwide Inc OWW.N Neutral (CBE) N/A US$2.59 20 May 2011 16 Perrigo PRGO.O Buy N/A US$85.50 20 May 2011 4, 6a, 16 Photronics Inc. PLAB.O Buy N/A US$9.25 20 May 2011 2, 4, 6a, 16 Polo Ralph Lauren RL.N Buy N/A US$130.21 20 May 2011 2, 4, 6a, 6b, 6c, Prudential Financial Inc. 7, 16, 22 PRU.N Buy N/A US$63.61 20 May 2011 16 Qualcomm Inc. QCOM.O Buy N/A US$57.38 20 May 2011 4, 5, 6a, 6b, 6c, 7, 8, Rockwell Collins Inc. 16, 18g COL.N Buy N/A US$61.66 20 May 2011 16, 22 Royal Caribbean RCL.N Neutral N/A US$40.01 20 May 2011 13, 16, 20 SanDisk Corp. SNDK.O Buy (CBE) N/A US$46.46 20 May 2011 4, 5, 6a, 16, 20 Shaw Group Inc SHAW.N Buy (CBE) N/A US$37.32 20 May 2011 16 Sigma Designs, Inc. SIGM.O Neutral N/A US$11.83 20 May 2011 16, 20 The Talbots, Inc. TLB.N Buy (CBE) N/A US$4.52 20 May 2011 2, 4, 5, 6a, 6b, 6c, 7, 15, Time Warner Inc. 16, 18i TWX.N Buy N/A US$36.79 20 May 2011 UBS 27
  • 28. Morning Expresso - United States 23 May 2011 Company Name Reuters 12-mo rating Short-term rating Price Price date 2, 4, 6a, 16 TransDigm Group Inc. TDG.N Buy N/A US$82.36 20 May 2011 1, 2, 4, 5, 6a, 6b, 6c, Travelers Companies 7, 16, 18h TRV.N Buy N/A US$62.25 20 May 2011 5, 16 Tutor Perini Corp. TPC.N Buy N/A US$19.86 20 May 2011 13, 16 Veeco Instruments Inc. VECO.O Buy N/A US$54.79 20 May 2011 2, 4, 5, 6a, 6c, 7, 16 Viacom Inc. VIAb.N Buy N/A US$51.29 20 May 2011 16 W. R. Berkley Corporation WRB.N Neutral N/A US$33.02 20 May 2011Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricingdate1. UBS Securities LLC is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates.2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company.13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).14. UBS Limited acts as broker to this company.15. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial instruments of this company.16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Apple, Inc.18b. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Cardinal Health, Inc.18c. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Ford Motor, Co.18d. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Google, Inc.18e. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in General Electric.18f. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Intel Corp.18g. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Rockwell Collins Inc.18h. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in The Travelers Companies Inc. UBS 28
  • 29. Morning Expresso - United States 23 May 201118i. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Time Warner Inc.20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.For a complete set of disclosure statements associated with the companies discussed in this report, including information onvaluation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention:Publishing Administration.Additional Prices: Campbell Soup Co., US$35.24 (20 May 2011); GT Solar International, Inc., US$12.32 (20 May 2011); HiSoftTechnology International Ltd, US$14.96 (20 May 2011); Source: UBS. All prices as of local market close. UBS 29
  • 30. Morning Expresso - United States 23 May 2011Global DisclaimerThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG isreferred to as UBS SA.This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy orrecommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for informationpurposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. Norepresentation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to informationconcerning UBS AG, its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. UBS does notundertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors shouldexercise prudence in making their investment decisions. The report should not be regarded by recipients as a substitute for the exercise of their own judgement. Past performance is notnecessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Any opinions expressed in thisreport are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria.Research will initiate, update and cease coverage solely at the discretion of UBS Investment Bank Research Management. The analysis contained herein is based on numerous assumptions.Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and otherconstituencies for the purpose of gathering, synthesizing and interpreting market information. UBS is under no obligation to update or keep current the information contained herein. UBS relieson information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, groups or affiliates of UBS. 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