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US Morning Meeting Highlights 26 July 2010


Under Armour, UA.N                                                    Michael...
US Morning Meeting Highlights 26 July 2010



Basic Materials
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US Morning Meeting Highlights 26 July 2010



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US Morning Meeting Highlights 26 July 2010



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Industrial
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US Morning Meeting Highlights 26 July 2010



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Telecommunications
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US Morning Meeting Highlights 26 July 2010



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US Morning Meeting Highlights 26 July 2010



Required Disclosures

This package has been prepared by UBS Securities LLC, ...
US Morning Meeting Highlights 26 July 2010


record, discount; Neutral: Neutral on factors such as structure, management, ...
Financial Pacific: Investment Research (third party), July 26,2010
Financial Pacific: Investment Research (third party), July 26,2010
Financial Pacific: Investment Research (third party), July 26,2010
Financial Pacific: Investment Research (third party), July 26,2010
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Financial Pacific: Investment Research (third party), July 26,2010

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Financial Pacific: Investment Research (third party), July 26,2010

  1. 1. ab Global Equity Research UBS Investment Research US Morning Meeting Highlights - 26 July 2010 http://www.ubs.com/investmentresearch Initiation of Coverage CBOE Holdings, CBOE.O Alex Kramm, CFA p.8 Industry Leader with Many Options 12-month rating: Prior: Not Rated => Neutral, FY10E US$1.12, FY11E US$1.60, PT - => US$29.00, Mkt Cap US$2.83bn Estimate / Price Target Revisions Ford, F.N Colin Langan, CFA p.3 Pricing, Not Mix, Boosts Results 12-month rating: Buy (Unchanged), FY10E US$1.35=>US$1.80, FY11E US$1.90=>US$2.25, PT Prior: US$15.00 => US$17.00, Mkt Cap US$42.8bn Johnson Controls, JCI.N Colin Langan, CFA p.4 A Rare Miss; Waiting for a Catalyst 12-month rating: Neutral (Unchanged), FY10E US$2.00=>US$1.98 , PT US$30.00, Mkt Cap US$19.6bn Kimberly-Clark, KMB.N Gail S. Glazerman, CFA p.6 Some optimism heading into second half 12-month rating: Buy (Unchanged), FY10E US$4.91=>US$4.85, FY11E US$5.37=>US$5.28, PT US$74.00, Mkt Cap US$26.5bn Honeywell Intl. Inc., HON.N Jason Feldman p.10 2Q Solid and Guidance Raised 12-month rating: Neutral (Unchanged), FYE -, PT Prior: US$42.00 => US$45.00, Mkt Cap US$32.4bn Ingersoll-Rand, IR.N Jason Feldman p.11 2Q results reflect incremental progress 12-month rating: Neutral (Unchanged), FY10E US$2.25=>US$2.35, FY11E US$2.70=>US$2.80, PT US$38.00, Mkt Cap US$12.0bn Schlumberger, SLB.N Angie Sedita p.7 International recovery slow and steady 12-month rating: Buy (Unchanged), FY10E US$2.79=>US$2.83, FY11E US$3.70=>US$3.77, PT US$86.00, Mkt Cap US$70.8bn Company Update Broadcom, BRCM.O Uche Orji p.13 Expecting Solid 2Q10 Results 12-month rating: Buy (Unchanged), FY10E US$1.82, FY11E US$2.00, PT US$41.00, Mkt Cap US$16.6bn Medtronic, MDT.N Bruce Nudell, PhD p.9 AMPLIFY: Focus on cancer signal 12-month rating: Buy (Unchanged), FY11E US$3.51, FY12E US$3.74, PT US$53.00, Mkt Cap US$40.4bn This package has been prepared by UBS Securities LLC UBS 1 ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 16 UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
  2. 2. US Morning Meeting Highlights 26 July 2010 Under Armour, UA.N Michael Binetti p.5 Solid Fall Orders Should Drive 2H Optimism 12-month rating: Buy (Unchanged), FYE -, PT US$38.00, Mkt Cap US$1.90bn Wal-Mart, WMT.N Neil Currie p.5 Back to the Future for Wal-Mart 12-month rating: Buy (Unchanged), FY11E US$3.92, FY12E US$4.30, PT US$60.00, Mkt Cap US$195bn Verizon, VZ.N John C. Hodulik, CFA p.14 Cost cutting drives increasing EPS outlook 12-month rating: Neutral (Unchanged), FY10E US$2.22, FY11E US$2.25, PT US$28.00, Mkt Cap US$79.2bn Industry Update Communications Technology Nikos Theodosopoulos p.12 Communications Equipment - AT&T and VZ Capex Updates and Thoughts Semiconductor Capital Equipment Stephen Chin p.12 Semiconductor Equipment Industry Update - More DRAM & Foundry orders from Taiwan Consumer, Non-Cyclical Nik Modi p.7 UBS Consumer Staples - Bentonville Moving Fast Semiconductors Uche Orji p.13 UBS SemiBytes - Results buoy secular growth names. Week 3: BRCM, RFMD, LSI, NETL, CAVM, MXIM Paper Products Gail S. Glazerman, CFA p.3 U.S. Paper & Forest Products - July paper and board price update Diversified Financial Alex Kramm, CFA p.8 US Exchanges - Will FCM Mandate Reshuffle the CDS Deck? Auto Parts Colin Langan, CFA p.4 US Auto Suppliers - HON Q2 Read Throughs for BWA & JCI Retailers, Specialty Roxanne Meyer, CFA p.6 US Specialty Retail - Sequential Downtick in Overall Promo Levels; Early BTS Teen Pricing Snapshot Aerospace David E. Strauss p.10 U.S. Aerospace & Defense Playbook - The Week Ahead UBS Global I/O Semiconductors Gareth Jenkins p.11 UBS Global I/O: Semiconductors - Microsoft licensing ARM IP Global Strategy Banks Philip Finch p.9 Global Banks Reality Check - Post stress test US Equity Strategy Equity Strategy Jonathan Golub, CFA p.14 US Equity Strategy - Great Results! Stealth Tightening? Equity Strategy Thomas M. Doerflinger, p.15 Ph.D. UBS Client Flow Watch - Even more net buying of US equities Economics Economics Maury N. Harris p.15 US Economic Perspectives - Bottom Fishing UBS 2
  3. 3. US Morning Meeting Highlights 26 July 2010 Basic Materials Gail S. Glazerman, CFA.................. +1 212 713 3486 U.S. Paper & Forest Products . Analyst July paper and board price update gail.glazerman@ubs.com General upward momentum continues Overall paper and paperboard pricing trends were stable to positive in July. The coated paper grades and uncoated groundwood finally gained some traction (+3-7% m/m). Newsprint pricing continues to edge up (11th consecutive increase). Bleached board added to recent gains . (+3.5% in July). Containerboard was steady ahead of the August price initiative. Uncoated free was stable after realizing at least 75% of the broad-based May hike. Containerboard, bleached board and uncoated free still have best trends While containerboard and uncoated free prices were flat in July, they have seen some of the strongest price performance during the downturn and subsequent recovery. Uncoated free, containerboard and bleached board prices have rebounded to levels above prior peak. This has . been supported by capacity closures (5-7% of each grade) and low inventories. In contrast, even after recent gains, coated paper and newsprint are still 14-20% below prior peaks. Next month’s decision on containerboard is key Pulp & Paper Week pricing decisions are most significant for containerboard since the majority of box prices are indexed off the newsletter’s reported pricing. We expect August pricing to be out the weekend of Aug 20th. Given high utilization, very low inventories and expectation for seasonally stronger demand ahead of the holidays, we expect at least partial recognition. Containerboard remains our preferred paper/board grade and International Paper our top pick. - Consumer, Cyclical Colin Langan, CFA.......... +1-212-713 9949 Ford (F.N) . Analyst Pricing, Not Mix, Boosts Results colin.langan@ubs.com Ford reported EPS of $0.68, better than our $0.47 and consensus of $0.40 Price (23 Jul 2010)...................... US$12.72 Ford’s auto pre-tax profit was $2.1bn, compared to a $1.0bn loss last year and a $1.3bn profit in 12-month rating...............Buy (Unchanged) Q1. The y/y improvement was driven by volume/mix ($1.5bn) and pricing ($1.1bn). The beat 12m price target..... Prior: US$15.00 => came from N America ($450m), Ford Credit ($380m), and Europe ($210m). Ford generated US$17.00 . Mkt Cap......................................US$42.8bn $2.6bn in auto CFO during the quarter and targets reaching a net cash position by the end of 2011. This implies at least a $5.4bn further reduction in debt. Full-Year EPS 2010E......................... US$1.35 => US$1.80 Car and truck profit gap shrinking; H2 earnings headwinds 2011E......................... US$1.90 => US$2.25 We were surprised by the small mix impact in Q2 despite the Super Duty launch. Traditionally, full-size pickups were one of the biggest factors impacting Ford’s earnings. This difference likely reflects the improved profitability of Ford’s car line-up. We expect global pre-tax earnings will be . relatively flat in the second half due to lower profits from Europe (-$870m y/y) and Ford Credit (-$490m y/y). However, we expect N American pre-tax profits to be up $1.2bn y/y. Raising EPS est to $1.80 from $1.35 (2010) and to $2.25 from $1.90 (2011) We are raising EPS estimates for 2010 to $1.80 from $1.35, 2011 to $2.25 from $1.90, and 2012 to $2.50 from $2.05. The 2010 increase is driven by the Q2 beat, improved pricing, and . better operating leverage. Increased EPS estimates for subsequent years reflect improved pricing and operating leverage. Valuation: Maintain Buy rating; raising price target from $15 to $17 Our new $17 price target is based on 5.0x our revised 2011 EBITDAP estimate. UBS 3
  4. 4. US Morning Meeting Highlights 26 July 2010 Colin Langan, CFA.......... +1-212-713 9949 Johnson Controls (JCI.N) . Analyst A Rare Miss; Waiting for a Catalyst colin.langan@ubs.com Adjusted Q3 EPS of $0.54 slightly below consensus estimates Price (23 Jul 2010)...................... US$29.11 Adjusted Q3 EPS of $0.54 missed our $0.56 estimate and consensus of $0.55. Revenues were 12-month rating......... Neutral (Unchanged) inline, driven by higher Auto Experience and Power Solutions sales, but offset by lower Building 12m price target.......................... US$30.00 Efficiency sales. JCI pointed to the high-end of its $1.90-$1.95 FY10 guidance, reflecting higher Mkt Cap......................................US$19.6bn N American production. Importantly, the company lowered its Building Efficiency guidance, Full-Year EPS . reducing sales growth expectations to 3%-5%, from 5% previously, and margins to 5.2% - 5.4% 2010E......................... US$2.00 => US$1.98 from 5.6% - 5.8% previously. Unclean quarter unusual for JCI JCI was negatively impacted by a few different items during the quarter. Some of these included: 1) an impairment charge; 2) costs associated with integrating Visteon; and 3) Mexican . work stoppages. While all of these were non-recurring, only the impairment was quantified. The net effect is “clean” EPS of ~$0.55. US stimulus related sales much slower than expected Earlier this year, JCI estimated stimulus spending would open up a $3bn opportunity to 2011 . and 2012 building efficiency sales. To date, however, only $430mm of this has been realized, which is significantly lower than expected. Slightly lower 2010 estimates; maintain Neutral and $30 PT We are slightly lowering our FY10 EPS from $2.00 to $1.98 on the lower Building Efficiency guidance, slightly offset by higher Auto Experience and Power Solutions. Despite the decrease, our new estimate is still above JCI’s raised FY10 guidance. Our $30 price target is based on 7.8x our 2011 EBITDA estimate. Colin Langan, CFA......................... +1-212-713 9949 US Auto Suppliers . Analyst HON Q2 Read Throughs for BWA & JCI colin.langan@ubs.com BWA: Q2 sales in-line with our forecast; Q3 guidance looks low HON competes with BWA in turbochargers, each accounting for about 35% of the global market. This Friday, HON reported a 30% y/y increase in Transportation Systems (TS) sales as well as a 180 bps q/q margin improvement. Turbo sales were up 41% y/y, and European diesel penetration continues to increase. Consistent with HON’s results, we are forecasting a 43% y/y increase in BWA’s engine segment and a 40 bps q/q margin increase. Our Q2 BWA EPS estimate of $0.68 is above consensus of $0.66. HON guided to 3-14% y/y Q3 TS sales growth, slightly lower than our 14% y/y Q3 forecast for BWA’s engine segment. HON’s YTD turbo wins are estimated at over $2bn in sales over the life of the programs. HON also reported that it is . gaining share in turbos; however we estimate that BWA's turbo sales were down less in 2009 than HON’s (BWA down ~24%, HON down 34%). JCI: HON guides to 3–6% y/y increase in Q3 ACS sales HON’s Automation and Controls Solutions (ACS) segment competes directly with JCI’s building efficiency division. ACS sales were up 7% y/y, better than JCI’s building efficiency growth of 2% in Q3. HON reported that conditions were improving in this segment and guided to a 3-6% y/y . increase in Q3 excluding acquisitions. This is significantly lower than JCI’s Q4 building efficiency guidance of 12-19% y/y. Like JCI, HON is seeing higher demand for energy efficient projects. Maintain Neutral rating on JCI and Buy rating on BWA Our $30 price target for JCI is based on 7.8x our 2011 EBITDA estimate, and our $50 price target for BWA is based on 7.0x our 2011 EBITDA estimate. - UBS 4
  5. 5. US Morning Meeting Highlights 26 July 2010 Michael Binetti.................+1-212-713 3805 Under Armour (UA.N) . Analyst Solid Fall Orders Should Drive 2H Optimism michael.binetti@ubs.com Forecasting $0.05 for UA in 2Q (Street: $0.03); Maintain Buy Rating John Proven...................... +1 212 713 1458 Associate Analyst Our 2QE EPS of $0.05 is based on 16% rev growth, +150bp in YOY GM improvement, and john.proven@ubs.com 90bp in SG&A inflation YOY. While 2Q is a low-volume quarter for UA, we believe that guidance for 2H will be the key driver of UA’s stock near term. Sporting goods contacts suggest that Price (23 Jul 2010)...................... US$37.42 orders for the important fall season have been accelerating lately. We believe a solid outlook for 12-month rating...............Buy (Unchanged) . back-to-school should allow UA to provide more constructive guidance for 2H, which should 12m price target.......................... US$38.00 support the stock in the near term. Mkt Cap......................................US$1.90bn Hoping to See Margin Trends Improve in 2Q Full-Year EPS While margin improvements have lagged our expectations for UA in recent quarters, we would hope to start seeing accelerating improvements in 2Q based on: 1) diminished levels of liquidations through low-margin third-party channels YOY; 2) higher rev growth contributions . from high-margin businesses (apparel & DTC); and 3) lapping the beginning of heavy footwear markdowns in 2Q09. Street Estimates Still Not Reflecting Emerging 2011 Growth Drivers In our May 26 upgrade note, we noted several 2011 EPS drivers that we believe are still not reflected in Street ests, including: 1) the launch of hybrid cotton apparel (US cotton athletic apparel is a $12B mkt, vs $2-3B for performance fabrics); 2) acquisition of the licensed hats/ bags business; and 3) strong initial orders of core performance apparel for spring 2011. We . forecast $1.38 in EPS for 2011, and believe that rising Street estimatess (currently at $1.29) will be a catalyst for UA shares in coming months. Valuation: Buy; $38 Price Target Our $38 PT is 28x our 2011 EPS estimate of $1.38 (+22% YOY) and implies a 1.7x PEG. Neil Currie........................ +1-203-719 3070 Wal-Mart (WMT.N) . Analyst Back to the Future for Wal-Mart neil.currie@ubs.com Rapid transformation…to what WMT used to look like Krista Zuber.......................+1-212-713 2599 Associate Analyst In a meeting with the company’s US buying team, we believe that senior WMT executives krista.zuber@ubs.com indicated a virtual U-turn in merchandising and pricing strategy. The company hopes to return to the Wal-Mart of three years ago in terms of assortment and rollback activity. Much of this has David Eads........................ +1 212 713 3630 Associate Analyst . already been highlighted in recent UBS reports, but we believe the intended changes will take david.eads@ubs.com place by the end of August Recent deep rollbacks, not the required return, but a start Price (23 Jul 2010)...................... US$51.67 We believe recent deep rollbacks, heavily funded by the company, did not achieve intended 12-month rating...............Buy (Unchanged) 12m price target.......................... US$60.00 targets but helped to kick-start Wal-Mart’s intention to improve its diminished price perception. Mkt Cap.......................................US$195bn . Future rollbacks, like those of three years ago, will be more broad-based and feature key traffic drivers. Full-Year EPS 2011E............................................. US$3.92 Better balance between sales and returns in prospect 2012E............................................. US$4.30 While Wal-Mart is set to revert to type as far as consumers and vendors are concerned (a good thing, we think) we believe it will retain many successful behind-the-scenes elements of Project . Impact and continue to push productivity and structural inventory programs. This should provide a better balance between ROI and top line performance. Valuation: Maintain Buy. Conference call Monday Our price target is based on a target P/E ratio of 14x our calendar 2011 EPS estimate. Along with our Staples Team, we will host a conference call at 2pm on Monday July 26 to discuss. Toll Free: 800-920-2905, Toll: 212-231-2928, Code: 21477437. UBS 5
  6. 6. US Morning Meeting Highlights 26 July 2010 Roxanne Meyer, CFA...................... +1 212 713 8602 US Specialty Retail Analyst . Sequential Downtick in Overall Promo Levels; Early BTS Teen Pricing roxanne.meyer@ubs.com Snapshot Janice Ong........................................+1 212 713 9325 Associate Analyst Increased focus on fall; week-to-week downtick in promo levels janice.ong@ubs.com We saw a sequential downtick in promotional levels last week; ironically, those we’d expect to . be cleaner for BTS saw an uptick. Less promotional: ANN, Banana Rep, CWTR, JCG, Urban, and WH|BM. More: ARO, AEO, EXPR and Gap. Early BTS Teen Pricing Snapshot (see Charts 1 & 2 inside) Looking at the 3 A’s, ARO remains the low priced leader with AEO and Hollister 1.6x more expensive and A&F 2.7x more. The spread has narrowed meaningfully vs LY when AEO was 1.8x, Hollister 2.0, and A&F 3.6x more than ARO. Compared to ARO, denim is 20-25% higher at . Hollister, 30-35% at AEO, and >2x at A&F; woven shirts are 70% higher at Hollister, ~2x at AEO, and ~3x at A&F. AEO: week-over-week uptick in promos; website issues last week AEO’s key promos: 1) try on any jeans, get a free phone (w/ 2 year plan) and 2) 20% off any purchase including 2+ pairs of jeans (7/21-27). All graphic tees were B1G1 50% and shorts . $29.95. AEO's website was down last Mon-Thurs due to external server issues; in response, offered free shipping through Sunday, 7/25. ANN: Seeing incremental improvement for fall; very low markdown levels ANN flowed in early fall, with a focus on animal print, neutrals and lower entry level price points (down double digits to LY). The in-store pant shop features 3 fits, starting at $88; some + Facebook chatter. Minimal clearance (breadth 10-15%; depth 50% off). Loft much less promotional to last week; new assortment strong. - Consumer, Non-Cyclical Gail S. Glazerman, CFA..... +1 212 713 Kimberly-Clark (KMB.N) . 3486 Some optimism heading into second half Analyst gail.glazerman@ubs.com 2Q EPS of $1.20 vs $0.97 in 2Q09 and consensus $1.13 KMB earned $1.20/share in 2Q10, up from $0.97 last year and $1.14 in 1Q10. Our estimate was Price (23 Jul 2010)...................... US$63.64 $1.15 and consensus was $1.13. Segment EBIT was lower than we expected with weaker 12-month rating...............Buy (Unchanged) Personal Care and Health Care only partially offset by higher Consumer Tissue/KC Pro EBIT. 12m price target.......................... US$74.00 Mkt Cap......................................US$26.5bn Corporate items were lower than we expected. Lower tax rate also helped 2Q. The comps were . easy as 2Q09 absorbed $0.19 hit from severance costs and 1Q10 saw $0.05 non-recurring tax Full-Year EPS items. 2010E......................... US$4.91 => US$4.85 2011E......................... US$5.37 => US$5.28 Improving outlook…holding guidance KMB has absorbed $305mm inflation ytd and expects $700-800 mm inflation in 2010. But pulp costs are falling, and should be lower in 2011. KMB sees potential for stronger volume in 2H10 vs 1H. There is some price recovery still coming through and management hopes to hold prices despite falling input costs. While KMB tweaked budget assumptions a bit they continue to . forecast 2010 EPS $4.80-5.00. They still see risk that EPS will fall towards the lower end of this range. A bit obscured by inflation, but delivering KMB is posting good results with new products (double digit growth in fem care & adult . incontinence). Chinese personal care volumes rose 25% y/y in 2Q. Lower 2010 volume guidance is mainly due to unique issues in Venezuela rather than slower market growth. Valuation Our price target is $74 which assumes the shares trade at 14x our 2011 EPS estimate. This reflects a modest discount to historic trend given macro uncertainty. UBS 6
  7. 7. US Morning Meeting Highlights 26 July 2010 Nik Modi...........................................+1-212-713 2204 UBS Consumer Staples . Analyst Bentonville Moving Fast nik.modi@ubs.com Change at Walmart = Positive for Consumer Staples Vendors David Palmer...................................+1-212-713 9315 As we indicated in our inaugural report on the implications of recent management changes at Analyst Walmart for consumer staples companies, we believe the mega retailer is likely to pursue a david-s.palmer@ubs.com more vendor-friendly philosophy going forward. This will mean: 1) rapid re-implementation of Kaumil S. Gajrawala....................... +1-212-713 9318 action alley (key for the many impulse categories in CPG), 2) no more surprise/deep rollbacks, . Analyst and 3) more collaboration between Walmart’s buyers and the vendor community. This should kaumil.gajrawala@ubs.com lead to better visibility/profitability for CPG vendors. Jeffrey Birnbaum, CFA..................... +1-212-713 2501 Field Work Uncovering Confirming Data Points By the Day Analyst Walmart is moving fast. We have picked up 3 incremental data points since our last report: 1) jeffrey.birnbaum@ubs.com the rollbacks did not meet Walmart’s internal return thresholds, 2) Walmart seems focused on moving back to a pre-Project Impact merchandising philosophy in very short order and 3) Michael Kwon................................... +1-212-713 7983 Walmart’s buyer community has been directed to “collaborate/listen/partner” with the vendor Associate Analyst . community—a reversal of the adversarial relationship that become the norm over the past 2 michael.kwon@ubs.com years. Zach Poelma.................................... +1-212-713 9307 Uniform Positive for Staples…with a Few Real Stand Outs Associate Analyst We believe all staples companies will benefit from these changes, with a few companies poised zachary.poelma@ubs.com to experience material, “needle moving” impact. We believe affected companies fall into one or Benjamin Schmid..............................+1 212 713 6268 more of the following categories: Companies that (1) were affected by the roll back initiative, (2) Associate Analyst will benefit from SKU re-stocking, and/or (3) have significant leverage to Walmart (% of sales). benjamin.schmid@ubs.com These companies, in order of importance, are: 1) Energizer, 2) Clorox, 3) Cott, 4) ConAgra, and 5) PepsiCo. Details by company are in the body of this report. - Energy Angie Sedita.......................1-212-713 3587 Schlumberger (SLB.N) . Analyst International recovery slow and steady angie.sedita@ubs.com Q2 EPS of $0.68 vs our $0.66 estimate – essentially in-line quarter Sasha Sanwal, CFA.......... +1-212-713 4907 Associate Analyst Q2 was helped by a lower tax rate (+$0.02) and share count (+$0.01). NAM revenues were sasha.sanwal@ubs.com . +2.4% better than our forecast, but Europe/CIS/Africa was -7% below. Total margins were in- line with our forecast, w/ NAM better than our ests. Alston Mason.................... +1-212-713 8696 Associate Analyst International outlook improving at a slow and steady pace alston.mason@ubs.com We believe that the international markets will show a gradual recovery for both revenues and margins. Increases in activity should drive revenues and margins, versus pricing. This recovery Price (22 Jul 2010)...................... US$59.35 will be more tempered than in past cycles, in our view. SLB sees Brazil, North Sea and Russia 12-month rating...............Buy (Unchanged) . 12m price target.......................... US$86.00 driving 2H-10. For a more robust recovery to occur we believe oil prices need to be higher and/ Mkt Cap......................................US$70.8bn or that IOCs and NOCs need to gain greater confidence in the global economic outlook. Full-Year EPS N.Am driven by strong US land, GOM reduces EPS $0.08-$0.10 in 2H-10 2010E......................... US$2.79 => US$2.83 SLB expressed confidence in the offshore markets outside of the US; however the GOM 2011E......................... US$3.70 => US$3.77 moratorium shaves $0.08-$0.10 off 2H-10. Impressive strength was seen in US land w/ a 35% gain in revenue and 15% increase in margins. Importantly SLB’s US reorganization should have . a larger impact in 2011, but starts in Q3-10. However, the outlook for US land in 2011 remains unclear given gas prices. Reiterate Buy, SLB trading at discount to historical premium of 20%-25% SLB’s historical multiple premium has been 20%-25% and is currently 10%. For long-term investors we believe these price levels offer a compelling opportunity to buy a high quality company without paying a sizable premium. Our $86 PT is based on a 23x ‘11E P/E multiple versus the group average of 19.5x. UBS 7
  8. 8. US Morning Meeting Highlights 26 July 2010 Financial Alex Kramm, CFA............ +1 212 713 4060 CBOE Holdings (CBOE.O) . Analyst Industry Leader with Many Options alex.kramm@ubs.com Initiating with a Neutral rating Price (23 Jul 2010)...................... US$27.15 We are initiating coverage of CBOE Holdings (CBOE) with a Neutral rating and a $29 price 12-month rating..... Prior: Not target. We have a favorable fundamental view of CBOE, as we believe the company represents Rated => Neutral a pure play on the secular growth in the US options business. We also believe CBOE’s industry 12m price target..................- => US$29.00 . Mkt Cap......................................US$2.83bn leadership and its near monopoly in the index options business sets the company apart from many peers. Full-Year EPS 2010E............................................. US$1.12 Attractive secular growth profile with upside potential from new market 2011E............................................. US$1.60 In addition to key growth drivers for CBOE’s base business, such as product innovation, market structure changes, and wider adoption of options by investors, we look for the company’s new options market “C2” to add an additional growth leg. We expect C2 to enable CBOE to compete . more effectively and potentially drive substantial upside from electronification of the index complex. Consolidation a potential exit strategy We believe the market is broadly viewing CBOE as an acquisition candidate. While we do not see potential buyers rushing to acquire CBOE in the near term, we believe M&A speculation will . likely 1) drive short-term volatility in the shares from time to time; and 2) result in the shares trading at a premium to what the market would otherwise consider fair value. Valuation: $29 price target only offers limited upside from current levels Our $29 price target applies an 18x multiple on our FY11 EPS estimate of $1.60. At 17x estimated 2011 earnings, the shares are trading at a significant premium to peers. We would look for more value elsewhere in the exchange group at present. Alex Kramm, CFA............................+1 212 713 4060 US Exchanges . Analyst Will FCM Mandate Reshuffle the CDS Deck? alex.kramm@ubs.com Financial regulatory reform bill requires FCM structure for cleared swaps Discussions with dealers suggest increased uncertainty around the future structure of the cleared swaps market. We believe section 724 (Swaps; Segregation and Bankruptcy Treatment) of the Dodd-Frank Act is intended to create a segregation and bankruptcy regime for cleared swaps that mirrors the current structure of the futures markets. Dealers that intend to . clear swaps for customers will have to register as FCMs and hold customer margin in segregated accounts. Time is ticking for ICE to restructure clearing model ICE’s CDS clearing model is an extension of the current OTC structure (DCM model) and we believe it would have to be restructured to conform with new legislation. We have said for a while that the OTC clearing model will likely evolve over time and therefore we believe ICE is prepared to adapt. That said, delays and uncertainty around a transition could result in the company losing some of its front-runner position on CDS and open the door for competitors. We . still believe ICE is positioned to see meaningful upside from buy-side clearing of CDS, but we believe uncertainties will have to be addressed in the very near term. A second act for CME on CDS clearing? We believe the current uncertainty could breathe some new life in CME’s struggling CDS venture. CME chose the FCM route for its CDS clearing model and we believe most dealers are ready to clear on the platform today. As the buy-side is starting to get ready for clearing of OTC swaps, we believe it could favor the certainty of CME’s model. We also believe CME is becoming more open to addressing push-back by FCMs on its default fund structure in regards to CDS. - UBS 8
  9. 9. US Morning Meeting Highlights 26 July 2010 Philip Finch.....................................+44-20-7568 3456 Global Banks Reality Check . Analyst Post stress test philip.finch@ubs.com European banking stress Alastair Ryan...................................+44 20 7568 3238 From a global banks perspective, we view the European banking stress test as a missed Analyst opportunity to raise large-scale capital needed to help address structural challenges in the alastair.ryan@ubs.com sector. While the stress test showed impressive regulatory co-ordination and good disclosure, John-Paul Crutchley....................... +44-20-7568 5037 . we question whether the framework was sufficiently robust, raising some concerns over its Analyst credibility. john-paul.crutchley@ubs.com Regulatory reforms Philipp Zieschang............................. +41-44-239 7414 With global rules under Basel III likely to be pushed out, what matters today are local Analyst regulations, which clearly vary from country to country, raising the prospect of an uneven philipp.zieschang@ubs.com regulatory playing field. While the new US financial sector legislation is a clear risk to industry . earnings power, in our view, the regulatory framework elsewhere (i.e., Asia and Canada) is Heather Wolf, CFA........................... +1-212-713 4290 likely to remain stable and supportive. Analyst heather.wolf@ubs.com Fundamental outlook With the second-quarter reporting season underway, we outline the following sector Matteo Ramenghi........................... +39-02-7210 0286 fundamental trends that we expect in the second half of this year: (1) top-line pressure; (2) Analyst . matteo.ramenghi@ubs.com peaking provisions; (3) capital markets headwinds; (4) increased capital-raisings; and (5) potential sector consolidation. Peter Carter.................................... +44 20 7568 4043 Analyst Investment strategy peter.carter@ubs.com Strategically, we maintain our underweight stance in Europe in light of structural headwinds, and prefer banks in emerging markets and Canada, which are better capitalised with strong deposit platforms and superior growth prospects. Reflecting this, our preferred list includes HSBC, Scotiabank, Akbank, Sberbank, Banco do Brasil and Punjab National Bank. - Healthcare Bruce Nudell, PhD........... +1 212 713 2716 Medtronic (MDT.N) . Analyst AMPLIFY: Focus on cancer signal bruce.nudell@ubs.com US BMP usage Rajeev Jashnani, CFA....... +1 212 713 9127 Analyst An FDA panel will discuss MDT’s Amplify (BMP) app for posterior lateral fusion (PLF) on 7/27. rajeev.jashnani@ubs.com US BMP sales have stalled at $800M following safety issues in cervical apps and high penetration in thoracic-lumbar fusion. Virtually all BMP use is spinal (95%+) and off-label Mike Duncan, CFA............ +1 212 713 3910 Associate Analyst . (90%+). We estimate that 85% of spinal use is for TL fusion, virtually all of this involves PLF, mike.duncan@ubs.com and that TL penetration is 40%+. Conventional non-inferiority endpoints met in 463 pt pivotal trial Price (23 Jul 2010)...................... US$36.58 Overall success (no neuro worsening, no revisions, no device related SAE, fusion success, and 12-month rating...............Buy (Unchanged) 12m price target.......................... US$53.00 disability index improvement) were similar between A and control (C; bone harvest) at 24 Mkt Cap......................................US$40.4bn months (60.5% A v. 55.5% C) and 60 months (43.9% A v. 35.1%). Fusion success was higher . with A at 24 months (95.9% v. 89.3%). The FDA was disturbed by the relatively low mid-term Full-Year EPS 2011E............................................. US$3.51 success rate in part because contribution of fusion (v decompression) to symptom relief is TBD. 2012E............................................. US$3.74 Cancer signal was FDA’s focus At 60 MO, there were 15 cancer events in 12 A patients versus 5 events in 5 C pts. Pooled MDT studies (1152 BMP pts v 1008 C pt; 3.3 yr FU) showed 27 cancer events in BMP arms v. 12 in C. HR was 1.50 (NS). Shorter term Wyeth studies showed less of signal. Given high A dose (3X) rel to current BMP, we expect a cancer surveillance study and a tougher label if approved. . Cancer signal makes panel a difficult call with asymmetric risk given our muted expectations for growth. Valuation Our DCF-based price target is $53. UBS 9
  10. 10. US Morning Meeting Highlights 26 July 2010 Industrial David E. Strauss............................. +1-212-713 6185 U.S. Aerospace & Defense Playbook . Analyst The Week Ahead david.strauss@ubs.com What’s next for aerospace and defense? Darryl Genovesi................................+1-212-713 4016 Big week for earnings with BEAV/BA/GD/HXL/GR/LLL/LMT/NOC/RTN/TGI all reporting, and Associate Analyst EADS reporting in Europe. We prefer BEAV/GD into earnings. We think BEAV can raise 2010 darryl.genovesi@ubs.com guidance Tuesday as Zodiac’s recent results and comments at Farnborough suggest the cabin retrofit market is beginning to recover. We think GD is likely to raise guidance Wednesday and . think Gulfstream bookings will show improvement over Q1. Conference call schedule and dial-in numbers are listed on page 3. Prefer the aftermarket names With production rate increases behind, we see more EPS upside with aftermarket than OE. While Q2 aftermarket results have been mixed, we think most noteworthy data point so far is HON’s expectation for aftermarket growth to double or triple flight hour growth in Q4, implying . the beginning of a reversal in spare parts inventory destocking and deferred maintenance. GR/ TDG/COL remain our top aero picks. Selective in defense For defense, we continue to think the base budget will hold up fairly well despite the difficult fiscal environment, including a FY12 base budget that includes modest real growth and a higher than expected FY12 supplemental request, which we think can provide upside for the stocks. However pension is risk. Our top picks are GD/NOC/ATK. - Jason Feldman................ +1-212-713 4309 Honeywell Intl. Inc. (HON.N) . Analyst 2Q Solid and Guidance Raised jason.feldman@ubs.com 2Q EPS of $0.60 vs. guidance update of $0.53-$0.57 (cons. $0.57) Winnie Clark, CFA.............+1-212-713 4103 Associate Analyst Sales of $8.2B increased 8% YoY (core also +8%, with M&A & FX flattish) vs. consensus of winifred.clark@ubs.com $8.0B and guidance of $7.8-$8.1B. Aerospace, Transportation, and Specialty Materials revenue . were all above HON’s expectations, while ACS was roughly in-line. Segment margins of 13.6% Price (22 Jul 2010)...................... US$43.50 improved 130bps YoY and 30bps QoQ. 12-month rating......... Neutral (Unchanged) 12m price target..... Prior: US$42.00 => ’10 Guidance raised to $2.40-$2.50 (was $2.30-$2.45) vs. consensus $2.48 US$45.00 Guidance now includes costs/dilution related to the pending Sperian acquisition. HON is Mkt Cap......................................US$32.4bn forecasting ’10 sales of $32.4-$32.9B (was $31.5-$32.3B) vs. consensus $32.2B. For 3Q, HON . Full-Year EPS expects $0.57-$0.62 (including $0.03-$0.04 in dilution from Sperian acq.) vs. consensus $0.66, with sales of $8.0-$8.3B vs. consensus $8.1B. Results show continued end market improvement and solid execution Revised guidance now includes a number of incremental non-operational headwinds (acquisition related costs, higher restructuring). Consequently, the outlook for HON’s underlying businesses improved more than is implied by the headline guidance number. We also believe there is growing evidence that later cycle end markets (most notably commercial aftermarket) are beginning to improve, which bodes well for ‘11. We caution that pension expense . (admittedly non-cash) could be a greater headwind than expected based on moves in the discount rate/ROA over the rest of ‘10. Raising PT to $45, from $42; Maintain Neutral rating Our revised PT reflects a ~30% premium (was 20%) to the mkt multiple on our ‘11 EPS est. (was based on ‘10). The larger premium reflects the incremental, non-cash pension headwind in ‘11 (premium roughly unchanged on pension-adjusted EPS). UBS 10
  11. 11. US Morning Meeting Highlights 26 July 2010 Jason Feldman................ +1-212-713 4309 Ingersoll-Rand (IR.N) . Analyst 2Q results reflect incremental progress jason.feldman@ubs.com 2Q EPS from cont. ops of $0.76 vs. preannounced $0.74-0.76 & cons. $0.72 Winnie Clark, CFA.............+1-212-713 4103 Associate Analyst EPS includes $0.04 restructuring and $0.02 from a divestiture. 2Q sales of $3.7B (+7% YoY, winifred.clark@ubs.com +8% ex-FX) were in-line with the July 16 preannouncement. U.S. sales grew 6%, with int’l +10% (11% ex-FX). 2Q tax rate (cont. ops.) was 18.8% vs. FY10 guidance of 18%. Orders increased Price (22 Jul 2010)...................... US$37.29 . ~10% in 2Q, with total backlog +15% YoY. Op margin increased 280bps YoY with ~49% YoY 12-month rating......... Neutral (Unchanged) incremental margins. 12m price target.......................... US$38.00 Mkt Cap......................................US$12.0bn Adj. FY10 EPS outlook now $2.18-2.38 (was $2.00-$2.35) vs. cons. $2.26 FY10 guidance still includes $0.25 of restructuring, but excludes the 1Q $0.12 Medicare Part D Full-Year EPS 2010E......................... US$2.25 => US$2.35 charge. IR expects FY10 sales +4-6% YoY ($13.7-13.9B) vs. prior +3-5% YoY ($13.6-13.8B). 2011E......................... US$2.70 => US$2.80 Segment FY10 sales growth targets were raised for Industrial and Climate, Residential was . unchanged, and Security was revised lower. 3Q EPS outlook is $0.70-0.80 (Cons $0.78), with sales of $3.65-3.75B (+5-8%). Signs of improvement, but a few challenges remain IR's 2Q results and revised guidance were roughly in-line with expectations following the company's 7/16 pre-announcement. There are signs of improvement in execution, and several of IR's predominantly later cycle end markets have begun to stabilize/improve. We remain Neutral given what we view as a fair valuation, and we continue to note execution related . challenges as productivity is expected to contribute a material portion of FY10 expected earnings. We maintain our $38 price target and Neutral rating Our PT reflects a ~10-15% premium to the market multiple on our revised 2011 EPS estimate (was based on 2010). We maintain our Neutral rating. Technology Gareth Jenkins..............................+44-20-7567 3950 UBS Global I/O: Semiconductors . Analyst Microsoft licensing ARM IP gareth.jenkins@ubs.com Input: Microsoft signs architectural licensing agreement with ARM Uche Orji..........................................+1 212 713 4015 Microsoft signed a multi-year architectural licensing agreement with ARM (which provides Analyst processor designs to semi manufacturers). Disclosure has been limited and although both have uche.orji@ubs.com . worked together since 1997, it is clear to us that this deal signals closer collaboration and Brent Thill........................................+1-415-352 4694 potentially Microsoft working on processor design. Analyst Output: Impact to ARM – US$10m to EBIT for each 10% market share brent.thill@ubs.com Working off ARM’s estimate for the computing segment in 2014 of 500m units (growing from Nicolas Gaudois............................. +82-2-3702 8801 30m in ’09), we estimate that every 10% market share ARM gains in the applications processor Analyst would contribute $10m in royalty revenues (US$15-20 chip ASP and 1-2% royalty rate) that nicolas.gaudois@ubs.com flows straight through to EBIT (c.100% gross margin). We also believe ARM is likely to earn . c.$0.20 per unit from peripheral chips representing a US$100m opportunity in a 500m unit Anuj Krishan...................................+44 20756 87105 market. Analyst anuj.krishan@ubs.com Output: Impact to Microsoft –rational for such a license We believe this is a response from Microsoft to the growth being seen in Apple/Linux based David Mulholland............................ 44 20 7568 4069 . tablets, and could be a response to the success Apple had in developing it’s own A4 processor Associate Analyst (also ARM-based). david.mulholland@ubs.com Output: Impact to Intel – we see no impact as it’s a new market If MSFT is working on its own chip, we see no impact to the established app processor suppliers. In the future, much will depend on product positioning and investment in a roadmap, which is non trivial. We do not think this deal will imply the use of ARM processors with the mainstream Windows OS in PCs; instead we see the potential in addressing a new market and so doesn’t impact AMD and Intel. - UBS 11
  12. 12. US Morning Meeting Highlights 26 July 2010 Nikos Theodosopoulos.....................+1-212-713 3286 Communications Equipment . Analyst AT&T and VZ Capex Updates and Thoughts nikos.theodosopoulos@ubs.com Second Half AT&T + VZ Capex Uninspiring, Except for Wireless Jack Monti, CFA................................+1 212 713 4795 AT&T and Verizon have uninspiring second half 2010 capital spending plans, in our view, Analyst except in the area of wireless which may continue to yield upside for vendors. UBS fcst AT&T’s jack.monti@ubs.com . 2H10 spending flat YoY, with wireless up 41%. Verizon 2H10 may be up 4% YoY on its guide with strength in wireless (LTE). UBS AT&T 2H Fcst Flattish YoY, 2Q Capex Inline, Wireless Upside In 2H10 AT&T has ~$9.8-$10.8B remaining on its capex guide of $18-$19B w/ ~$8.2B spent in 1H10. 2H10 capex could rise by 20%-32% vs. 1H, vs. 5 yr history of ~22% increases. UBS 2H . $10B fcst is +21% vs. 1H and flattish YoY vs. 2H09. 2Q $4.9B capex slightly above UBSe. Wireline below, Wireless above. VZ 2H10/ 2011 Wireline Pressured, 2Q Capex Inline, Wireless Upside VZ has $9.1-$9.5B remaining on its capex guide of $16.8-$17.2B ($7.7B in 1H10), possibly rising ~19-24% vs. 1H or 4% YoY vs. 2H09. If history is an indication it may increase 6% vs. 1H . and decrease 10% YoY, though LTE may preclude this scenario. 2Q $4.2B capex slightly above UBSe. Wireline below, Wireless above. Backhaul Vendors In Good 2H Position, Wireline Likely Sees Pressure Backhaul vendors in good position for 2H10 capex including JNPR, TLAB, CIEN on next-gen, and TLAB, ADTN, ALU on legacy at T. VZ LTE vendors may see tailwinds. While TLAB and CIEN are benefiting from backhaul spend at T, there is risk of share loss. At T ALU is pot’l gainer vs. TLAB, and CSCO is pursuing 2nd source to CIEN WWP. TLAB and CSCO are already selling psuedowire and aggregation products to T w/ ALU being tested in 3Q for pot’l shr gain vs. TLAB. - Stephen Chin.................................. +1-212-713 4111 Semiconductor Equipment Industry Update . Analyst More DRAM & Foundry orders from Taiwan stephen.chin@ubs.com New DRAM semicap orders from Powerchip and ProMOS last week Our review found ProMOS placed 2 equipment orders last week totaling $43M including $22M with Applied Materials and $21 with Lam Research. Our analysis shows these were ProMOS’ first semicap equipment orders since Aug-08. We also found Powerchip placed a $48M order . with ASML last week. Our analysis shows Powerchip has placed 3 orders with ASML so far in 2010 totaling $142M. UMC’s semicap orders were $77M last week, TSMC ordered $54M Our review found UMC placed 4 semicap orders last week, including $21M with Applied, $16M with KLA and $16M with Novellus. Our analysis shows UMC ordered $534M of total semicap equipment in 2Q10, up 115% q/q. Our review found TSMC placed 1 order last week with ASML . for $54M. Our own analysis shows TSMC ordered $1,129M of total semicap equipment in 2Q10, up 12% q/q. Total Taiwanese semicap equipment orders in 2Q10 were up 19% q/q Our analysis shows the 8 big Taiwanese semiconductor companies ordered $2.4B of semicap equipment in 2Q10. Our own analysis also shows 2Q10 semicap orders from Taiwanese . foundry customers were +32% q/q and DRAM orders up 2% q/q. Novellus had the most momentum in 2Q10 with its Taiwanese orders up 58% q/q. Shin-Etsu’s semiconductor wafer results had mixed read-thrus for MEMC Shin-Etsu reported Jun-10 results on July 22nd and showed semiconductor wafer sales were flat q/q as 300mm volumes were flat, which compares to our MEMC semi wafer sales estimate of +12% q/q growth in 2Q10. Shin-Etsu expects 10% semi wafer demand growth through year end, with a modest recovery in prices. - UBS 12
  13. 13. US Morning Meeting Highlights 26 July 2010 Uche Orji...........................+1 212 713 4015 Broadcom (BRCM.O) . Analyst Expecting Solid 2Q10 Results uche.orji@ubs.com Expect in line to above results on mobile & wireless strength Steven Chin.......................+1-415-352 5675 Analyst We expect BRCM to report Q2 sales/GAAP EPS of $1.62b (+11% q/q)/$0.46 vs cons of steven.chin@ubs.com $1.59b/$0.46. We model for product GM to decline 50bps q/q to 52.0% due to greater wireless sales mix, and EBIT margins to expand 190bps to 16.1% on greater operating leverage. We Price (23 Jul 2010)...................... US$37.76 believe key product sales drivers in Q2 include combo wireless SoCs in new consumer products 12-month rating...............Buy (Unchanged) . such as the iPad and iPhone 4, multi-touch controller, and baseband sales into Samsung and 12m price target.......................... US$41.00 Nokia. Mkt Cap......................................US$16.6bn Market uncertainty over 2H growth likely to be offset by product ramps Full-Year EPS 2010E............................................. US$1.82 For Q3, we model for sales/EPS of $1.70b (+5% q/q)/$0.48 vs cons of $1.66b/ $0.49. We 2011E............................................. US$2.00 expect product GM to remain flat at 51.9% on continued consumer wireless IC growth and offset by higher margin broadband IC sales as IPTV set-top box products for AT&T’s U-verse are . expected to start ramping. Other seasonal drivers we expect for Q3 include digital TV and Blu- ray/connected media players. Further operating leverage to be realized as opex remains tame We continue to expect new wireless and broadband product cycles will drive sales growth and ultimately operating leverage as 65nm cost reduction programs lead to improving mobile & . wireless division profitability and legal and stock-based comp expenses moderate. Call details: Tuesday 7/27 4:45pm ET, Dial: 847-619-6368. Valuation: $41 12-month Price Target, Buy rating Our DCF-based PT of $41 equates to 23x our 2010 GAAP EPS estimate of $1.81 (29x ex- royalties). We assume a WACC of 10.0% and terminal growth of 2.0%. Uche Orji..........................................+1 212 713 4015 UBS SemiBytes Analyst . Results buoy secular growth names. Week 3: BRCM, RFMD, LSI, NETL, uche.orji@ubs.com CAVM, MXIM Steven Eliscu.................................. +1-415-352 5674 Analyst Week Ahead: BRCM, RFMD, LSI, NETL, CAVM, MXIM results steven.eliscu@ubs.com For earnings season week 3, we expect solid Broadcom results and guidance, demonstrating continued operating leverage on sales growth led by consumer applications and baseband Parag Agarwal.................................+1 212 713 2563 sales into Samsung, Nokia. Given the recent share price appreciation for NetLogic and Cavium, Analyst we believe the stocks have limited near-term upside without solid double-digit q/q sales parag.agarwal@ubs.com . guidance. RFMD’s potential share losses at Nokia & Maxim’s potential capacity constraints Steven Chin.....................................+1-415-352 5675 keep us on the sidelines. Analyst Charts: Market share: few changes in processors but big shifts in chipsets steven.chin@ubs.com In 2Q10, Intel gained 20 bps of overall microprocessor unit market share on gains in server, . desktop processors to 82.0%. NVIDIA’s -32% q/q for C2Q chipset unit shipments is consistent with our F2Q -30% q/q MCP business sales estimate. Review: TXN, ALTR, LLTC, XLNX, ISIL, CY, SWKS, SNDK results With declining risk aversion on largely consistent positive earnings results, we saw a semi sector rebound accentuated by the strong growth and outlook of our secular growth names – Altera, Xilinx and Skyworks, which provided a boost to other secular growth names including Cavium, NetLogic and Atmel. While we remain Neutral on valuation, TI, Linear and Cypress also posted strong results with solid C3Q guidance on strong end-market trends in communications, smartphones and industrial applications. We remain positive on SanDisk based on: 1) better than expected gross margin, 2) strong secular trends driving NAND Flash demand to be in balance with supply, and 3) expectations of a smooth CEO transition. - UBS 13
  14. 14. US Morning Meeting Highlights 26 July 2010 Telecommunications John C. Hodulik, CFA..... +1-212-713 4226 Verizon (VZ.N) . Analyst Cost cutting drives increasing EPS outlook john.hodulik@ubs.com Similar to AT&T, EPS beats on wireless and wireline margins Batya Levi......................... +1-212-713 8824 Analyst We are raising our 2010 EPS estimate to $2.22 from $2.10 after baking in more aggressive cost batya.levi@ubs.com cutting efforts and the effects of the 11K headcount reductions. We are also increasing our 2011 . estimate to $2.25 from $2.10, previously, suggesting 7% EPS growth off the adjusted 2010 Marc Albanese...................+1 212 713 2555 Associate Analyst base. marc.albanese@ubs.com Wireless segment sees better than expected subscriber adds and margins Wireless margins of 47.5% were well ahead of expectations (UBSe 46.2%), shrugging off higher Price (23 Jul 2010)...................... US$28.02 than expected net adds and a higher than usual upgrade rate. Management was bullish on its 12-month rating......... Neutral (Unchanged) 12m price target.......................... US$28.00 ability to take share, grow adds and accelerate revenue growth while maintaining industry Mkt Cap......................................US$79.2bn . leading margins. Capex in the segment will continue to ramp as the company approaches its LTE launch in 4Q. Full-Year EPS 2010E............................................. US$2.22 Expect cost cutting to help offset Frontier sale in 2H wireline margins 2011E............................................. US$2.25 We expect margin declines from the Frontier sale to be partially offset by cost cutting efforts and believe wireline operating margins will remain in the black in 3Q. Enterprise trends continue to improve, turning positive in 2Q for the first time with the help of strong CPE sales. FiOS adds . came in as expected but net broadband adds were light. Coupled with the strong margins, this suggests management took its foot off the pedal, leaving the door open to cable share gains. Valuation: Maintain Neutral We maintain our PT of $28 per share. VZ trades at 5.7x 2011E EBITDA and 12.4x P/E, a 3% premium to the S&P500. Our PT is DCF based (8% WACC, 2% growth). Equity Strategy Jonathan Golub, CFA..................... +1-212-713 8673 US Equity Strategy . Strategist Great Results! Stealth Tightening? jonathan.golub@ubs.com Another quarter of strong results Chip Miller, CFA, CPA.................... +1-212-713 3531 Despite rising concerns coming into 2Q reports, companies are handily beating consensus Strategist . estimates and posting robust growth. Cyclicals have upsided expectations by 10% on the back chip.miller@ubs.com of 17% top-line and 72% bottom-line growth. Manish Bangard..............................+1 212 713 3036 Financials produced biggest surprises on lower credit losses Strategist Financials have missed top-line expectations due to lower trading volumes, tighter spreads, and manish.bangard@ubs.com tough investment banking comps. However, the sector has beaten bottom-line estimates by . Thomas M. Doerflinger, Ph.D........... +1-212-713 2540 27%, largely due to lower credit losses at the biggest banks. Management commentary points to Strategist a continuation of each of these trends over the remainder of the year. tom.doerflinger@ubs.com The key 2Q takeaway — big banks are reinforcing capital positions Natalie Garner, CFA......................... +1-212-713 4915 While results have been better than expected, the biggest takeaway from this earnings season Strategist has been comments from big bank CEOs and CFOs regarding their capital positions. More natalie.garner@ubs.com specifically, they describe actions taken to further shore up their balance sheets — guarding against uncertainties surrounding the recently passed Dodd-Frank Act and new Basel capital standards. These actions should lower bank ROEs, and may act as ‘Stealth Tightening’ for the broader economy — similar in many ways to additional Fed tightening. - UBS 14
  15. 15. US Morning Meeting Highlights 26 July 2010 Economics Maury N. Harris...............................+1-212-713 2472 US Economic Perspectives . Economist Bottom Fishing maury.harris@ubs.com Fishing for a Red Herring? Drew T. Matus................................. +1-203-719 8378 Neither recent data nor expected future inflation measures signal price deflation. Temporary Economist factors that have helped limit inflation over the last few months have begun to abate, suggesting drew.matus@ubs.com that the medium-term bias is toward modestly higher inflation. Overall, the evidence points . Samuel D. Coffin.............................+1-203-719 1252 toward very little inflation – but not deflation – this year, followed by a gradual rise in inflation Economist over the next few years. samuel.coffin@ubs.com The past week: public policymakers vs. business world Kevin Cummins.............................. +1-203-719 1676 Fed Chair Bernanke’s semiannual Monetary Policy Report to Congress testimony Economist communicated Fed policymakers’ “unusually uncertain” economic outlook. And the recent kevin.cummins@ubs.com behavior of Congress itself also has not inspired confidence in sustained economic recovery. On the other hand, the private sector’s behavior is becoming firmer ground for such confidence. . Q2 corporate earnings reports so far have been generally better than expected. For smaller firms, a hopeful sign is the apparent Q2 turnaround in business lending at smaller banks. The week ahead The market’s focus is likely to be on the Q2 GDP report due out on Friday, as concerns about a “double dip” and deflation continue to hold markets captive. We expect a modest slowing in Q2 growth relative to Q1 but look for a modest acceleration in final demand. The Fed’s Beige Book report of regional business conditions in early Q3 should provide some economic insight ahead of the upcoming July ISM and jobs reports in the first week of August. We will scrutinize Q2 housing vacancy data to determine how much vacant supplies for sale were trimmed by the expiring homebuyer tax credits. - Equity Strategy Thomas M. Doerflinger, Ph.D........ +1-212-713 2540 UBS Client Flow Watch . Strategist Even more net buying of US equities tom.doerflinger@ubs.com US Client Flow: Highest net buying in 22 weeks Natalie Garner, CFA........................+1-212-713 4915 US clients continued net buying US equities for a seventh straight week. The buying was broad- Strategist . based, with only intermediaries net selling. Hedge funds continued the net buying begun in the natalie.garner@ubs.com last four-week period. Jonathan Golub, CFA....................... +1-212-713 8673 Sector details: Broad-based increases in net buying Strategist Both US clients and foreign clients were net buyers of most US sectors. US clients increased jonathan.golub@ubs.com their net buying of financials, media, and telecoms and went from being net sellers to net buyers . Chip Miller, CFA, CPA...................... +1-212-713 3531 of consumer. Only healthcare and industrials were net sold by US clients. Foreign clients Strategist increased their net buying of most sectors, with only telecoms seeing net selling. chip.miller@ubs.com Foreign Client Flow: Only corporate clients are net selling Manish Bangard................................+1 212 713 3036 Foreign clients also continued net buying US equities for a seventh straight week. Both long Strategist only funds and intermediaries increased their net buying of US equities. Only corporate clients manish.bangard@ubs.com were net sellers. - UBS 15
  16. 16. US Morning Meeting Highlights 26 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 16
  17. 17. US Morning Meeting Highlights 26 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 16b Abercrombie & Fitch Co. ANF.N Neutral N/A US$36.80 23 Jul 2010 16b,20 Advanced Micro Devices AMD.N Neutral (CBE) N/A US$7.82 23 Jul 2010 16b Aeropostale Inc. ARO.N Neutral N/A US$30.88 23 Jul 2010 4a,16b Akbank AKBNK.IS Buy N/A TRY8.50 23 Jul 2010 16b Alberto-Culver ACV.N Neutral N/A US$29.40 23 Jul 2010 16b Alliant Techsystems ATK.N Buy N/A US$67.12 22 Jul 2010 4a,16b,18a,22 Altria Group MO.N Buy N/A US$22.12 23 Jul 2010 16b American Eagle Outfitters Inc. AEO.N Neutral N/A US$12.87 23 Jul 2010 2,4a,5a,5b,16b ANZ Banking Group ANZ.AX Buy N/A A$22.41 23 Jul 2010 5b,14,16b ARM Holdings Plc ARM.L Neutral N/A 353p 23 Jul 2010 16b Avon Products AVP.N Buy N/A US$29.44 23 Jul 2010 2,4a Banco de Sabadell SABE.MC Sell N/A €4.18 23 Jul 2010 16b,20,22 Banco do Brasil BBAS3.SA Buy (CBE) N/A R$29.48 23 Jul 2010 2,3b,4a,4b,6a,16b Bank of Nova Scotia BNS.TO Buy N/A C$50.12 23 Jul 2010 2,4a,5b,15,16b BBVA BBVA.MC Sell N/A €9.84 23 Jul 2010 16b,20 BE Aerospace Inc. BEAV.O Neutral (CBE) N/A US$29.11 22 Jul 2010 2,4a,5b,6a,6b,6c,7,8,16b Boeing Co. BA.N Neutral N/A US$66.60 22 Jul 2010 16b BorgWarner Inc. BWA.N Buy N/A US$42.97 23 Jul 2010 16b Broadcom Corporation BRCM.O Buy N/A US$37.76 23 Jul 2010 16b Brown-Forman Corp. BFb.N Neutral N/A US$63.08 23 Jul 2010 4a,5b,6a,6b,6c,7,16b Campbell Soup Co. CPB.N Neutral N/A US$36.25 23 Jul 2010 16b Cavium Networks Inc CAVM.O Buy N/A US$30.49 23 Jul 2010 2,4a,5b,6a,16b CBOE Holdings Inc. CBOE.O Not Rated N/A US$27.15 23 Jul 2010 16b,20 Chico's FAS Inc. CHS.N Neutral (CBE) N/A US$10.24 23 Jul 2010 16b Church & Dwight CHD.N Neutral N/A US$66.21 23 Jul 2010 16b Clorox CLX.N Buy N/A US$65.43 23 Jul 2010 2,4a,6a,6c,7,16b CME Group Inc. CME.O Neutral N/A US$286.56 23 Jul 2010 6b,6c,7,16b,22 Coca-Cola Co. KO.N Buy N/A US$54.75 23 Jul 2010 16b,20 Coldwater Creek Inc. CWTR.O Neutral (CBE) N/A US$3.89 23 Jul 2010 16b Colgate-Palmolive CL.N Buy N/A US$83.47 23 Jul 2010 2,4a,5b,14,16b,22 Commerzbank CBKG.DE Sell N/A €6.44 23 Jul 2010 4a,6a,6b,7,16b ConAgra Foods Inc. CAG.N Buy N/A US$23.93 23 Jul 2010 16b Constellation Brands Inc. STZ.N Buy N/A US$17.06 23 Jul 2010 16b Cott Corp. COT.N Buy N/A US$6.21 23 Jul 2010 2,4a,5b,16b Crédit Agricole CAGR.PA Neutral N/A €9.36 23 Jul 2010 8,16b Cypress Semiconductor CY.O Neutral N/A US$11.19 23 Jul 2010 16b Dean Foods Company DF.N Neutral N/A US$11.91 23 Jul 2010 2,4a,5b DnB NOR DNBNOR.OL Buy N/A NKr75.05 23 Jul 2010 Dr Pepper Snapple Group DPS.N Neutral N/A US$39.82 23 Jul 2010 Inc.2,4a,6a,6b,6c,7,16b,22 16b Energizer Holdings ENR.N Buy N/A US$53.59 23 Jul 2010 16b Estée Lauder EL.N Neutral N/A US$62.67 23 Jul 2010 16b Esterline Technologies Corp. ESL.N Neutral N/A US$48.81 22 Jul 2010 2,4a,5b,16b Express Inc EXPR.N Buy N/A US$18.63 23 Jul 2010 2,4a,5b,6a,6b,6c,7,14,16b Ford Motor Co. F.N Buy N/A US$12.72 23 Jul 2010 16b Gap Inc. GPS.N Neutral N/A US$18.41 23 Jul 2010 16b General Dynamics Corp. GD.N Buy N/A US$61.03 22 Jul 2010 6b,6c,7,16b General Mills Inc. GIS.N Buy N/A US$35.52 23 Jul 2010 2,4a,6a,6b,6c,7,16b Goodrich Corp. GR.N Buy N/A US$69.77 22 Jul 2010 4a,6a,6b,6c,7,16b H.J. Heinz Company HNZ.N Neutral N/A US$45.76 23 Jul 2010 UBS 17

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