Financial Pacific: Morning meeting recap (third party) september 15.2010

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Financial Pacific: Morning meeting recap (third party) september 15.2010

  1. 1. ab Global Equity Research UBS Investment Research US Morning Meeting Highlights - 15 September 2010 http://www.ubs.com/investmentresearch Rating and Recommendation Changes NetLogic Microsystem, NETL.O Steven Eliscu p.10 Upgrade to Buy as Near-term Correction is Overdone, Longer-term Outlook is Intact 12-month rating: Prior: Neutral => Buy, FY10E US$0.09, FY11E US$0.52, PT US$33.50, Mkt Cap US$1.55bn Rowan Companies, RDC.N Angie Sedita p.5 Upgrading to Buy on High Spec Jackup Mkt 12-month rating: Prior: Neutral => Buy, FY10E US$2.49=>US$2.40, FY11E US$1.60=>US$2.24, PT Prior: US$28.00 => US$42.00, Mkt Cap US$3.40bn Estimate / Price Target Revisions Kroger Co., KR.N Neil Currie p.4 Raising EPS On 2Q Beat, But More To Prove 12-month rating: Neutral (Unchanged), FY11E US$1.70=>US$1.75, FY12E US$1.86=>US$1.92, PT Prior: US$22.00 => US$23.00, Mkt Cap US$13.6bn Steel Dynamics, STLD.O Timna Tanners p.3 Q3 Guidance Light; Cutting Target to $20 12-month rating: Buy * (Unchanged) CBE , FY10E US$1.00=>US$0.80, FY11E US$1.85=>US$1.60, PT Prior: US$22.00 => US$20.00, Mkt Cap US$3.41bn Company Update Cardinal Health, CAH.N Steven Valiquette p.7 Further Debunking Generic Leverage Myths 12-month rating: Buy (Unchanged), FY10E US$2.22, FY11E US$2.55, PT US$43.00, Mkt Cap US$11.5bn Cisco Systems, CSCO.O Nikos Theodosopoulos p.10 Strategy Unchanged, Dividend Announced 12-month rating: Neutral (Unchanged), FY11E US$1.50, FY12E US$1.68, PT US$25.00, Mkt Cap US$123bn Edwards, EW.N Bruce Nudell, PhD p.6 PARTNER B: Medical management mortality 12-month rating: Buy (Unchanged), FY10E US$1.80, FY11E US$2.15, PT US$66.00, Mkt Cap US$6.35bn MasterCard, MA.N Jason Kupferberg p.8 $1B share buyback should be well-received 12-month rating: Buy (Unchanged), FY10E US$13.24, FY11E US$15.62, PT US$270.00, Mkt Cap US$26.2bn Protective Life, PL.N Andrew Kligerman p.5 Brief Post-call Comments on UILIC Deal 12-month rating: Buy (Unchanged), FY10E US$2.72, FY11E US$2.94, PT US$31.00, Mkt Cap US$1.81bn This package has been prepared by UBS Securities LLC UBS 1 ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 13 *Under review (UR) and/or exception to core rating bands (CBE) - see page : 13 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 15 September 2010 Oracle, ORCL.O Brent Thill p.9 Preview: Looking Beyond Q1; Maintain Buy 12-month rating: Buy (Unchanged), FY11E US$1.87, FY12E US$2.12, PT US$31.00, Mkt Cap US$127bn Industry Update Airlines Kevin Crissey p.4 US Airline Sector Note - The Revenue Edge: Sept softer, beyond is challenging to interpret Utilities Julien Dumoulin-Smith p.11 Utilities and E&C - Highlighting EPA Rule Opportunities Healthcare Providers Justin Lake, CFA p.6 Dialysis Providers - CMS Refutes OIG Argument on EPO Price Inflation Paper Products Gail S. Glazerman, CFA p.3 Global Paper & Forest Products - UBS global paper conference-day 1 Building Materials Timna Tanners p.9 US Building Materials Update - U.S. Highway Call: Mixed ’11 Fortunes Seen Aerospace David E. Strauss p.7 U.S. Defense - Bad, But Not Much New Aerospace David E. Strauss p.8 Global Parked Aircraft Update - Parked In Production Moves Higher Global Strategy Equity Strategy Jeffrey Palma p.11 Global Equity Strategy - Global Flow Watch: Summer trends mixed Equity Strategy Nicholas Smithie p.12 Global Emerging Market Equity Strategy - GEM Flow Watch: Summer Selling Economics Economics Maury N. Harris p.12 US Daily Economic Comment - Uneven acceleration in retail sales UBS 2
  3. 3. US Morning Meeting Highlights 15 September 2010 Basic Materials Gail S. Glazerman, CFA.................. +1 212 713 3486 Global Paper & Forest Products . Analyst UBS global paper conference-day 1 gail.glazerman@ubs.com Demand – generally trending as guided during 2Q earnings Myles Allsop................................... +44-20-756 81693 Commentary on demand in paper and forest markets was generally as discussed during 2Q Analyst earnings. For paper/board that is fairly encouraging. While acknowledging macro uncertainty, myles.allsop@ubs.com companies are still seeing y/y growth (at slower rate), solid backlogs and higher prices. This is Shohei Takahashi............................. +81-3-5208 7106 counter to financial market fears of a double dip. IP reported 3% improvement in box demand in Analyst Aug and a good start to Sept. MWV is seeing ‘good & strong mill backlogs.’ Fluff pulp demand shohei.takahashi@ubs.com remains strong. European paper markets are recovering, albeit slowly. Paper/board demand still lags pre-recession levels. Companies exposed to US housing were much less optimistic; . demand has generally remained at the low levels of Jun/July. Firms still see normal demand at 1.4-1.5mm starts-but admit it will take longer to get there. Strategy Companies are trying to cope with the pressures caused by cyclical and secular factors with a variety of strategies. Mix improvement either regionally (focusing on emerging markets) or product (higher value added grades) was a common refrain. Many companies see an . opportunity from new energy-related markets, though there is little consensus as to when this might start to materialize. Use of cash Many companies flagged their improving financial positions. In the US companies continue to guide towards a ‘balanced’ and conservative use of cash. To that end IP announced a further $650mm contribution to pension. MWV paid down $100mm in debt. While many acknowledge oversupply and the need for consolidation in Europe, visibility into how/when these will be addressed remains limited. - Timna Tanners................. +1-212-713 2927 Steel Dynamics (STLD.O) . Analyst Q3 Guidance Light; Cutting Target to $20 timna.tanners@ubs.com Mgmt guided Q3 EPS below consensus and UBSe, with $0.07e in 1x factors Brian Russo.......................+1-203-719 3692 Associate Analyst STLD on Tuesday guided Q3 EPS to $0.05-$0.10 in its mid-qtr update, below consensus $0.21 brian.russo@ubs.com and UBSe $0.22. Mgmt cited margin squeeze from falling steel prices and weak scrap volume. . It saw a $0.04/shr hit from its Mesabi Nugget scrap substitute project, up to $0.02 on tax-rate Price (14 Sep 2010)..................... US$14.53 true-ups, and a $0.01 rail tie charge. 12-month rating............ Buy * (Unchanged) 12m price target..... Prior: US$22.00 => Tone for Q4 was positive… US$20.00 CEO Keith Busse said STLD was seeing better sheet order entry, in a possible positive sign for Mkt Cap......................................US$3.41bn Q4, and scrap conditions were improving. We lower Q3e to $0.11 from $0.22 to reflect more Full-Year EPS challenging scrap mkts and lighter volume, and cut Q4 to $0.20 from $0.29. Our channel checks 2010E......................... US$1.00 => US$0.80 indicate steady demand, but scrap prices have begun to ease and we see risk steel price hikes 2011E......................... US$1.85 => US$1.60 . don’t stick in typically seasonally weaker Q4. We cut 2011e to $1.60 vs $1.85 on more cautious *Exception to core rating bands - see growth. page 13 …but disappointing Mesabi Nugget progress . We thought Mesabi costs would abate in H2, so were disappointed to see a steady Q3 hit q/q. Mgmt said it was still refining the process and we remain l-t positive. Valuation: Price target falls to $20, disappointment is tempered by 1xs Our newly lowered $20 target, down from $22, uses a discounted 6.5x ‘12E EV/EBITDA. Shares currently trade at 5.3x 2011E EV/EBITDA and 3.9x 2012E vs an average through-the-cycle 6.4x multiple. STLD shrs offer more relative upside to peers in our view and we are confident of strong cash flow generation and growth in coming yrs. While Q3’s light outlook is partly offset by special items, we lower ests and our target to incorporate a more cautious growth view. UBS 3
  4. 4. US Morning Meeting Highlights 15 September 2010 Consumer, Cyclical Kevin Crissey..................................+1-212-713 3562 US Airline Sector Note . Analyst The Revenue Edge: Sept softer, beyond is challenging to interpret kevin.crissey@ubs.com August is a wrap – International leads the way Kevin Grasmick...............................+1 212 713 1233 Our data indicate that August system passenger unit revenue (RASM) finished about 14.5% Associate Analyst higher than last year on roughly 1.5% capacity growth. At a regional level, we estimate domestic kevin.grasmick@ubs.com RASM increased just into double digits on less than 1% ASM growth and international was up just over 20% on 3% ASM growth. Atlantic and Pacific were again the strong performers . internationally, but South America continues to show very good sequential improvement with October shaping-up nicely. As hard as it gets forecasting revenue September looks like it’s booking a bit weak (particularly domestic) and likely more than comparisons can explain. However, as we look into Oct and Nov, the data look a little better . although it’s early and the comps get meaningfully tougher from here, so calculating where we end-up is a very tough exercise at this point. DAL investor update Delta’s updated guidance for 3Q indicates 12-13% operating margins in 3Q, compared to prior guidance of 10-12%. We’d already been forecasting 12.9% operating margins on 15% RASM growth. However, we have updated our estimates to reflect slightly lower cargo and other revenue offset somewhat by lower profit sharing expense in 3Q. Net result, we’ve lowered our 3Q EPS estimate from $0.99 to $0.97, which compares to $0.88 EPS consensus coming into today. Our price target remains $17.50 based on 6-7x fwd EV/EBITDAR. - Consumer, Non-Cyclical Neil Currie........................ +1-203-719 3070 Kroger Co. (KR.N) . Analyst Raising EPS On 2Q Beat, But More To Prove neil.currie@ubs.com KR 2Q beat shows what best of breed can do in a difficult environment Doug Cooper..................... +1 203 719 6059 Associate Analyst KR’s 41c in EPS beat Street views by 5c, a favorable tax rate contributed about 2c in EPS in the douglas.cooper@ubs.com quarter. The tax benefit derived from an IRS examination that resulted in adjustment to tax . contingency reserves. Despite the beat, 1H2010 results were in line with management views, Price (13 Sep 2010)..................... US$21.26 but economic uncertainty kept the company from raising its FY2010 view. 12-month rating......... Neutral (Unchanged) 12m price target..... Prior: US$22.00 => Deflation remains persistent, but sales remained stable US$23.00 Although product cost inflation was 1% in 2Q, deflation remained persistent within the grocery Mkt Cap......................................US$13.6bn department (~50% of sales), which excluding milk experienced 160bps of deflation, only Full-Year EPS improving 20bps sequentially from 1Q. Despite deflation sales remained steady at ~2.5% into 2011E......................... US$1.70 => US$1.75 . 3Q with broad based positive IDs across departments & geographies, 17 of 18 divisions 2012E......................... US$1.86 => US$1.92 reported positive IDs in 2Q. Model changes: raised FY2010 on beat, maintained 2H2010 view Our model remains relatively unchanged for 2H2010 with 31c and 44c EPS estimates for the 3rd/4th quarters, respectively. This assumes gross margin (ex fuel) improvements for the remaining quarters w/IDs running 2.5% (current run rate) for 3Q improving to 3.0% in 4Q on easier comparisons to LY; our FY2010 ID sales estimate is 2.7% compared to 2%-3% guidance. . We also raised our FY2011 EPS to $1.92 from $1.86 on improved gross margin and favorable compares to 1H2010. Valuation: Reiterate Neutral rating with a $23 price target Challenging to find catalyst to drive valuation above 12x in our view. Our new $23PT ($22 prior) is based on a P/E multiple of 12x our 2011 EPS est. of $1.92. UBS 4
  5. 5. US Morning Meeting Highlights 15 September 2010 Energy Angie Sedita.......................1-212-713 3587 Rowan Companies (RDC.N) . Analyst Upgrading to Buy on High Spec Jackup Mkt angie.sedita@ubs.com High specification jackup dayrates improving beyond our expectations Sasha Sanwal, CFA.......... +1-212-713 4907 Associate Analyst Dayrates in the high specification market have begun to exceed our expectations and we expect sasha.sanwal@ubs.com further increases ahead. RDC just signed two jackups with Saudi Aramco for 3-yr contracts at $275k & $220K, well above our $160k forecast. We believe RDC is likely to win additional Alston Mason.................... +1-212-713 8696 Associate Analyst awards at higher than expected rates and has 48% of its fleet up for renewal next year, plus 6 alston.mason@ubs.com . new rigs to be delivered. We believe earnings estimates should continue to trend up, particularly in 2012. Price (14 Sep 2010)..................... US$29.69 12-month rating........ Prior: Neutral => Buy Rowan offers the best play on the high specification jackup market 12m price target..... Prior: US$28.00 => Rowan offers the highest exposure to the high specification jackup market. Of RDC’s 31 US$42.00 jackups, 21 are high spec (or 68%). Also 55% of RDC’s jackup fleet is 10-years old or less, Mkt Cap......................................US$3.40bn which is increasingly important to customers. RDC also has a strong safety track record and Full-Year EPS highly respected operations. This will help RDC continue to win awards at better than market 2010E......................... US$2.49 => US$2.40 . rates, despite newbuilds entering in ‘10-‘11. RDC now derives 86% of its offshore earnings from 2011E......................... US$1.60 => US$2.24 international markets. Recent Skeie acquisition adds 15%-20% accretion in 2011 and 2012 . The acquisition of Skeie (3 high spec jackups) in July 2010 will become accretive in 2011 and offers substantial rate potential for new contract awards. Valuation: Trading at 20% discount to peers in 2012E, price target to $42 While RDC has already begun to outperform, we believe further upside remains and 2012 EPS has substantial upside potential. RDC is compelling in 2012 as new rigs are delivered and is trading at a 20% discount to its peers at 4.1x 2012 EV/EBITDA. We have set our PT at $42 or 7.3X of 2011E EV/EBITDA. Financial Andrew Kligerman.......... +1-212-713 2492 Protective Life (PL.N) . Analyst Brief Post-call Comments on UILIC Deal andrew.kligerman@ubs.com PL plans to acquire United Investors Life Insurance Co (UILIC) Julie Oh............................. +1-212-713 2513 Analyst PL plans to acquire 100% of UILIC common stock from TMK for $186M plus adj-statutory julie.oh@ubs.com surplus (or ~$318M in total). PL’s actual net capital investment will be a lower ~$260M, after . extracting capital in excess of that required for a 350% RBC ratio at UILIC. PL expects op EPS Jennifer Huang, CFA......... +1 212 713 6145 Associate Analyst accretion of $0.15-0.20/$0.18-0.22 in ’11/’12. jen.huang@ubs.com GAAP earnings accretion range understates UILIC deal’s true ROIC… In our view, the ROIC is much higher than the 7-9% return implied by PL’s ’11 GAAP income est Price (13 Sep 2010)..................... US$21.13 for UILIC ($29-36M pre-tax, ex transition costs) for various reasons. a) GAAP income reflects 12-month rating...............Buy (Unchanged) 12m price target.......................... US$31.00 value-of-business-acquired amortization (which is non-cash). Note UILIC’s statutory pre-tax Mkt Cap......................................US$1.81bn operating income was $81M in ’09. b) PL expects tax benefits not evident in GAAP income. Our . limited understanding is Section 338 election steps-up the tax bases of acquired assets to fair Full-Year EPS 2010E............................................. US$2.72 value (higher depreciation…lower taxable income)—otherwise, the old tax bases would remain. 2011E............................................. US$2.94 …PL has historically targeted double-digit unlevered returns on M&A We also think PL priced this deal for returns that are more in-line with its historical double-digit unlevered return target because of fairly rapid capital recovery—in part on lower RBC charges. . PL expects nearly half of its initial $260M investment to be returned in 3 years—with profits in year 10 looking similar to that in year 3. Valuation—Reiterate Buy; $31 PT represents 0.9x 2Q11E BVPS (ex-aoci) We view the UILIC deal favorably as it leverages PL’s block acquisition expertise, is EPS/ROE accretive, and puts capital to work at attractive returns. $31 PT reflects a discount to our 1.1x target life group P/B given PL’s lower ROE. UBS 5
  6. 6. US Morning Meeting Highlights 15 September 2010 Healthcare Bruce Nudell, PhD........... +1 212 713 2716 Edwards (EW.N) . Analyst PARTNER B: Medical management mortality bruce.nudell@ubs.com We’re expecting strong survival separation in PARTNER B (PB) Rajeev Jashnani, CFA....... +1 212 713 9127 Analyst We believe that the medical management (MM) and TAVI arms in PB will show good survival rajeev.jashnani@ubs.com . separation at mean follow-up (~18 months). We believed that the 12.5% TAVI advantage at mean F/U (modified) will be met. Matthew Keeler..................+1 212 713 9413 Associate Analyst 24 month medical management data published today in Circulation matthew.keeler@ubs.com In today’s journal Circulation, survival data for 362 high risk aortic stenosis patients who were ineligible for PB were published (Figure 1). 274 patients didn’t receive surgery, of whom, 177 Price (13 Sep 2010)..................... US$57.00 received balloon valvuloplasty (BV) in addition to optimal MM. The group of 274 had a STS 12-month rating...............Buy (Unchanged) . 12m price target.......................... US$66.00 Prom (STSP) risk score of 12.8 and a Logistic EuroScore (LE) of 42.4. This compares Mkt Cap......................................US$6.35bn reasonably with the STSP of 11 (lower is healthier) in PB (multiply by 3-3.5 to approximate LE). Full-Year EPS MM/BV death rate 39.6% & 53.4% at 1 & 2 years in Circulation 2010E............................................. US$1.80 The 1 yr mortality in the MM/BV arm of 39.6% was well above that for the transfemoral TAVI 2011E............................................. US$2.15 cohort in the Source Registry (19.1%) and the subset with LE’s of 20-40 (16.5%), or LE >40 (27.5%). We suspect that the 1 year mortality in the TAVI arm of PB will be around 20%. While the STSP’s in Circulation were slightly worse than in PB, we believe the results are . representative (w a 10+ point diff likely btwn TAVI + MM in PB at 1 yr). The shallow survival slopes in SOURCE from 6-12 mos are consistent w a widening mortality gap past 12 mo. Valuation We use VCAM (a form of DCF) to set our $66 PT. Justin Lake, CFA.............................. +1-212-713 2765 Dialysis Providers . Analyst CMS Refutes OIG Argument on EPO Price Inflation justin.lake@ubs.com DVA selloff today appears to center around OIG concerns on EPO pricing Martin Wales, PhD..........................+44-20-7568 8428 Bloomberg article released this afternoon highlighting Office of Inspector General's concerns on Analyst EPO price inflation left DVA down 2.1% vs. flat S&P 500. Specifically, OIG highlights EPO price martin.wales@ubs.com down 5% since 2003, ($8.82 per 1k units to $8.37 in 2009) while CMS bundling rule ties rates to Ken LaVine, CFA.............................. +1-212-713 4237 drug PPI which is typically up 4-7%, potentially resulting in overpayment to providers going Associate Analyst . forward under new bundled reimbursement in the mind of OIG. With EPO representing ~20% of kenneth.lavine@ubs.com total Medicare dialysis revenues/spending, this is clearly important to all parties. CMS argues that OIG's argument ignores context, clearly we concur Most importantly, CMS points out in its comment letter that the dialysis economics and incentives for EPO price negotiation since 2003 (flat rate to ASP to now bundling) likely distorting historical data. Most importantly, CMS notes EPO price up 4-5% since early ‘08, closer to in-line with Rx PPI (see Table 1 below), leaving agency content in using drug PPI to set bundled rate going forward, where we note pricing unlikely to be trending lower as AMGN . looks to protect its economics in face of providers pushing for utilization efficiencies post bundling. Would use near-term DVA weakness as buying opportunity We expect DVA may remain volatile in the NT given OIG report, potential VA cuts and concerns around 2011 guidance conservatism, potentially setting up compelling buying opportunity into 3Q results. While 2011 will be a “transition year” (UBS est. 2.8% EBIT growth) due to bundling transition, we also see it as setting trough earnings power before growth accelerates to mid- to-high teens in 2012-‘15 via efficiency gains & strong visibility on utilization and overall reimbursement (especially relative to HC peers.) - UBS 6
  7. 7. US Morning Meeting Highlights 15 September 2010 Steven Valiquette............ +1-203-719 2347 Cardinal Health (CAH.N) . Analyst Further Debunking Generic Leverage Myths steven.valiquette@ubs.com Confusion Related to Large Retail Drug Chain Customer Profits Gavin Weiss...................... +1-203-719 6006 Associate Analyst Following up on our CAH note from Aug 24, this note further addresses what we believe is a gavin.weiss@ubs.com major misconception that CAH has minimal leverage to the robust generic drug cycle since the company generates ~55% of its revenues from WAG, CVS, and ESRX. The notion is that these Price (13 Sep 2010)..................... US$31.82 customers buy their own generics direct from manufacturers, and thus, upon a new generic 12-month rating...............Buy (Unchanged) . launch, many investors believe CAH loses 100% of branded profits but only recaptures ~45% of 12m price target.......................... US$43.00 generic profit. Mkt Cap......................................US$11.5bn CAH Gains More From Generic Launches Than Perceived Full-Year EPS 2010E............................................. US$2.22 CVS & WAG are actually among CAH’s largest customers for GENERIC drugs as well. Thus, 2011E............................................. US$2.55 we believe CAH’s generic penetration rate is more like 60%, only slightly below MCK/ABC’s 70-80%. Moreover, CAH’s much higher ‘bulk sales’ mix vs. MCK/ABC means the company loses less brand profits upon new generic launches. The net result is CAH, MCK, & ABC have . the same profit leverage during generic launch of a hypothetical $1 bil branded drug (as shown in table 1). Incremental Generic Drug Leverage Should Drive EPS Upside This incremental generic leverage is one main reason why our EPS estimates are above . consensus for FY11-13 (UBS = $2.55, $2.94, and $3.35 vs. Street at $2.45, $2.74, & $3.00). We project 11% annual drug distr. EBIT growth over this period. Valuation: Reiterate Buy Rating; $43 Target Our projected 13-15% EPS growth over the next 3-5 years is unchanged. Our projected P/E of 15x our C2011 EPS estimate of $2.75 = $43 target (30%+ upside from current levels). Of note, a hypothetical conservative 13x P/E = ~15% upside. Industrial David E. Strauss............................. +1-212-713 6185 U.S. Defense . Analyst Bad, But Not Much New david.strauss@ubs.com Mostly reiterated prior themes that look bad for industry Darryl Genovesi................................+1-212-713 4016 DoD's efficiency initiative briefing detailed 23 actions, mostly reiterating prior themes that are Associate Analyst likely to put pressure on contractors’ margins and cash flow. These actions (outlined on pages darryl.genovesi@ubs.com 2-3) target increased program affordability, increased competition and tying profit and cash more directly to performance. Specifically, DoD called for performance based fee (rather than pre-determined), increased use of fixed price incentive contracts with a strict share line (50/50) and ceiling (120%) and adjusted progress payments to gain more favorable pricing. DoD will . examine programs for capabilities overlap that will likely yield further cancellations with a review of Integrated Air & Missile Defense specifically mentioned. Cash flow is biggest risk The full impact of these initiatives on contractors’ margins and cash flow likely won't be known for some time and the uncertainty is likely to be a big overhang on the stocks. We view DoD's acknowledgement that it's a quick bill payer as a bad sign, with it appearing increasing likely to . slow cash payment to industry. We see the potential for cash flow to come under pressure as the biggest risk for the stocks at current depressed levels. Emphasized opportunity in services DoD emphasized that it sees more opportunity for efficiency gains within services (IT, equipment maintenance, facilities management) than in weapons acquisition. Within services, DoD will specifically look to drive competition through shorter contract lengths and will also limit time and materials (T&M) contracting in favor of cost plus contracts. - UBS 7
  8. 8. US Morning Meeting Highlights 15 September 2010 David E. Strauss............................. +1-212-713 6185 Global Parked Aircraft Update . Analyst Parked In Production Moves Higher david.strauss@ubs.com Parked up 4% on Mexicana bankruptcy Avi Hoddes....................................+44-20-7568 0478 We count 2,653 parked commercial aircraft at the end of August, a 4% increase from July, Analyst entirely attributable to the recent Mexicana bankruptcy. Excluding Mexicana, we estimate avi.hoddes@ubs.com parked aircraft were roughly unchanged in August compared to a 1% average seasonal decline Darryl Genovesi................................+1-212-713 4016 during August over the past 10 years. Overall, the parked aircraft count remains near its all-time . Associate Analyst high in absolute terms, but at 11.8% of the installed base is 170 bps below the 2002 peak at darryl.genovesi@ubs.com 13.5%. Rami Myerson, CFA....................... +44-20 7568 4375 Parked in-production re-testing prior peak levels Analyst Parked in-production aircraft moved 19% higher this month (+4% ex Mexicana) and are now rami.myerson@ubs.com just 4% below the March peak (16% ex Mexicana). This month’s increase included . incrementally higher parked A320s, A330s, 767s, 747-4s and Embraer 190s, partially offset by Tasneem Azim..................................+1-416-814 3678 declines in parked A340s, 777s and CRJ-900s, while parked 737 NGs were unchanged. Analyst tasneem.azim@ubs.com Latin America still parking We estimate 15% of the North American fleet is currently parked, compared with 9% in Europe and 5% in Asia. Latin American operators have accounted for most of the aircraft parked over . the past year with North America, Africa and the Middle East also modestly higher and Europe/ Asia returning aircraft to service on net. Parked evidence of oversupply; favor aftermarket names We see the still large number of parked in-production aircraft as evidence of oversupply. We continue to favor the aero names with more exposure to the aftermarket - GR/TDG/COL in the US and Meggitt/Safran in Europe. - Jason Kupferberg........... +1-212-713 3559 MasterCard (MA.N) . Analyst $1B share buyback should be well-received jason.kupferberg@ubs.com Return of cash to shareholders should be positive for sentiment Ramsey El-Assal...............+1-212-713 4146 Associate Analyst After the close, MA announced a new $1B share buyback program, which is effectively ramsey.el-assal@ubs.com immediately but does not have a specific term. We believe the Street has been looking for more cash to be returned to shareholders, so this announcement should be positive for sentiment. We Arvind Ramnani................. +1 212 713 3517 Associate Analyst think investors will appreciate this vote of confidence in the stock amid ongoing regulatory arvind.ramnani@ubs.com . uncertainty. If executed ratably over the next 4 quarters at the current share price, we estimate this buyback program could be accretive to 2011 EPS by ~3%. Price (13 Sep 2010)................... US$199.75 12-month rating...............Buy (Unchanged) What else to look for at tomorrow’s analyst meeting 12m price target........................ US$270.00 We expect investors at tomorrow’s analyst meeting to focus on: 1) mid-quarter update on Mkt Cap......................................US$26.2bn volumes/transaction growth (V’s update last night reflected still healthy fundamentals), 2) incremental data points regarding the regulatory environment (we don’t expect much new Full-Year EPS 2010E........................................... US$13.24 tangible news on this front since the Fed is still in relatively early stages of its rule-making 2011E........................................... US$15.62 . process), and 3) growth initiatives (we think discussion here will most likely focus on emerging markets, prepaid, e-commerce, and mobile). New CEO is off to a solid start . In our opinion, new CEO Ajay Banga has made a positive initial impression on the Street, and today’s buyback announcement should help to further reinforce these views. Valuation: Maintain Buy and $270 PT (15x our C11 EPS & DCF) We believe shares are discounting too negative of a regulatory outcome. UK Takeover Panel Disclosure: UBS Limited is acting as Financial Adviser to DataCash in relation to the recommended cash offer from Mastercard. UBS 8
  9. 9. US Morning Meeting Highlights 15 September 2010 Timna Tanners................................ +1-212-713 2927 US Building Materials Update . Analyst U.S. Highway Call: Mixed ’11 Fortunes Seen timna.tanners@ubs.com UBS-hosted call with ARTBA revealed challenges and opportunities Steven Fisher, CFA.......................... +1-212-713 8634 We hosted a call Tuesday with The American Road & Transportation Builders Association Analyst (ARTBA) on the outlook for U.S. highway spending, probing the status of stimulus, future steven.fisher@ubs.com highway programs, and state financial health. ARTBA’s sr gov’t liaison was encouraged by . Brian Russo......................................+1-203-719 3692 Obama’s positive comments related to a new multi-yr highway program, but wary any further Associate Analyst $50B stimulus would be delayed. brian.russo@ubs.com Stimulus ebbing into 2011, state health challenges remain worrisome… ARTBA’s sr economist noted 2/3 of a total $28.5B allocated for transport was assigned, and after completion, comps can become more difficult. Some states dipped into funds intended for . transport. Lack of a multi-yr highway program and uncertainty over the current extension expiring as of Jan. challenges visibility …yet states appeared to match federal outlays, and spillover can prop ‘11 Yet ARTBA noted states all ultimately could afford their required match federal gov’t road outlays, albeit cutting it close to the Sept fiscal yr end, which may mean the spending impact . spills over to 2011. This supports our controversial view that aggregate volume grows into 2011, after poor 2010 progress in road spending. Conclusions: Visibility poor but some positives for rocks, E&Cs While gov’t spending visibility remains challenging, we were encouraged by ARTBA’s take on Obama’s apparent warming to road spending, some support for 2011 spending, and evidence states are matching federal spending. Short interest for MLM is 19% of the float and VMC’s has rebounded to 11%, and we like value amid trough earnings. For E&Cs, stronger airport and rail spending are positives. - Technology Brent Thill........................ +1-415-352 4694 Oracle (ORCL.O) . Analyst Preview: Looking Beyond Q1; Maintain Buy brent.thill@ubs.com Pass light seasonal FQ1 to annual conf, analyst day, & Mark Hurd intro John Byun..........................+1 415 352 4695 Associate Analyst FQ1 is seasonally softest qtr; we expect results in upper half of guid. range. Co. entered FQ1 john.byun@ubs.com with higher than historical license backlog (~30% of our license est. vs. 19% a yr ago), and we est. FX benefit of ~1% relative to guid. (worth $55-88M; analysis inside). After FQ1, focus shifts Price (13 Sep 2010)..................... US$25.38 . to user conf. next week, featuring analyst day, new co-pres. Hurd, and 40+ sessions on Fusion 12-month rating...............Buy (Unchanged) Apps (vs. 3 last year). 12m price target.......................... US$31.00 Mkt Cap.......................................US$127bn Evolution to full IT stack provider to pick up steam with new co-President ORCL’s strategy toward becoming a strategic provider of integrated hardware/software IT first Full-Year EPS 2011E............................................. US$1.87 emerged with Exadata, then with the Sun acquisition. Since new hire was announced, ORCL 2012E............................................. US$2.12 stock is up 11%, and now needs fundamental follow-through that we expect to drive the 22% . upside left to our $31 PT. ORCL’s 100% enterprise focus should shield from recent consumer tech weakness. Expect FQ1 results in upper half of guidance range Our $7,236M rev est. (Street $7,273M) rev est. implies 43% y/y growth vs. guid. +41-45%; EPS $0.36 (St. $0.37) vs. guid. $0.35-0.37. Checks suggest apps now in recovery phase, which should help drag along infrastructure sales. We assume overall license +8% y/y (apps 7%, infra. . 9%) vs. guid. 2-12% and easy yr ago comparison of -17%. In particular, EMEA has an easy license compare of a neg. 20% constant FX growth in yr ago FQ1. Valuation: Currently Trades at 12.8x CY11E P/E Our $31 PT is based on a P/E of 14.5x our PF EPS est. in 5-8 qtrs. P/E compares to 16x median in the last 5 years, and CY10E/11E EPS growth of 18%/12%. UBS 9
  10. 10. US Morning Meeting Highlights 15 September 2010 Nikos Theodosopoulos..... +1-212-713 Cisco Systems (CSCO.O) . 3286 Strategy Unchanged, Dividend Announced Analyst nikos.theodosopoulos@ubs.com Reiterates Growth Strategy, Emphasizing Architectural Approach Jack Monti, CFA................ +1 212 713 4795 Cisco reiterated its growth strategy at its financial analyst conference, indicating its Analyst comprehensive architectural approach is its key competitive advantage. Cisco is pleased with its jack.monti@ubs.com products and innovation, revamping its entire portfolio in the last 18 mths, with over 50 custom Shubho Ghosh.................. +1-212 713 9903 . ASICs. We see this as positive but note some competitors compete on software w/ standard Associate Analyst hardware, including FFIV & RVBD. shubho.ghosh@ubs.com Dividend Announced, Final Yield Expected In Spring, May Slow Buybacks Dividend announced w/ final yield decision expected this Spring, w/ 1% representing the Price (13 Sep 2010)..................... US$21.26 12-month rating......... Neutral (Unchanged) minimum, or US cash of ~$1.25B. The yield may be as high as 2%, but it depends on favorable 12m price target.......................... US$25.00 outcomes to US tax and repatriation policies. We estimate US FCF was ~$4B in FY10 (40% US, Mkt Cap.......................................US$123bn 60% intl), and may be ~$5B in FY11. Thus, we expect less in shr buybacks 2011 vs. 2010, . Full-Year EPS assuming no chg to repatriation law, which follows $7.8B and $3.6B in buybacks in FY10 and 2011E............................................. US$1.50 FY09. 2012E............................................. US$1.68 Long-Term Growth Targets Unchngd, We Continue to See as Challenging Cisco continues to see its long-term rate at 12-17%, w/ mgmt providing no update to the October qtr, but noted the US remains challenged while int’l is more robust. Breaking down its 12-17%, 9-10% is from the overall market, 3-4% from shr gain, 0-1% from emerging countries, and 0-2% from expansion into mkt adjacencies. We continue to view Cisco’s long-term tgts as . high given its historical organic growth of 8-9%, or total growth of ~11% since FY03. LT OM tgt remains 28-31%. Valuation—Maintain Neutral Rating and $25 Price Target Our $25 price target is based on ~14x our revised CY11 EPS estimate of $1.81. Steven Eliscu...................+1-415-352 5674 NetLogic Microsystem (NETL.O) Analyst . Upgrade to Buy as Near-term Correction is Overdone, Longer-term steven.eliscu@ubs.com Outlook is Intact Uche Orji............................+1 212 713 4015 Analyst Upgrade to Buy rating as correction is overdone; expect solid 4Q growth uche.orji@ubs.com NetLogic’s share price has retreated 25% since it reported 2Q results on 28-Jul based on: 1) concerns about slowing sales growth, 2) Cisco’s F1Q guidance and its commentary about Price (14 Sep 2010)..................... US$24.62 demand uncertainty, and 3) recent market speculation about a slowdown within the Cisco 12-month rating........ Prior: Neutral => Buy supply chain. We believe Cisco’s F1Q outlook and any resulting supply chain adjustments have 12m price target.......................... US$33.50 . been factored in NetLogic’s 3Q guidance and believe the outlook beyond 3Q is intact. With 36% Mkt Cap......................................US$1.55bn potential upside to our unchanged $33.50 price target, we upgrade NetLogic to a Buy rating. Full-Year EPS 2010E............................................. US$0.09 Key positives – Near-term trends in line; longer-term outlook intact 2011E............................................. US$0.52 Underlying our confidence about NetLogic’s outlook are: 1) improving enterprise spending trends, 2) in-line Cisco supply chain trends, 3) back-end year weighted wireless capex, 4) long- . tail for wireless backhaul spending, 5) longer-term multicore processor opportunity based on differentiation and execution. Key risks – limited near-term catalysts, limited operating leverage While we see limited near-term catalysts, we believe even an abatement of concerns of weak 4Q guidance would be positive. In addition, given expected limited operating leverage, earnings . growth will be dependent on sales growth, which we believe can be achieved given NetLogic’s solid execution track record. Valuation: Upgrade to Buy Rating, Maintain $33.50 Price Target Our DCF-based PT is $33.50 (20x our $1.70 2011 non-GAAP EPS estimate). UBS 10
  11. 11. US Morning Meeting Highlights 15 September 2010 Utilities Julien Dumoulin-Smith..................+1 212 -713 9848 Utilities and E&C . Analyst Highlighting EPA Rule Opportunities julien.dumoulin-smith@ubs.com Overview of various environmental initiatives yields multitude of angles Steven Fisher, CFA.........................+1-212-713 8634 With several pending new regulations looming over the utility industry, the sector may yet see Analyst the next wave of mandatory environmental capex through the next 5-7 year period. While we steven.fisher@ubs.com anticipate the level of investment remains largely a question of commodity prices, we direct . Jim von Riesemann........................+1-212-713-4260 investors’ attention to the recently drafted CATR rules and pending HAP MACT review, due in Analyst March 2011. jim.vonriesemann@ubs.com UBS “Leaders in Power” call series provides insights into opportunities Brandon Verblow.............................. +1-212-713 9463 Previous calls have highlighted Trona technology (May/10), IL generation with Mark Pruitt . Associate Analyst (June/2010), Activated Carbon with Calgon Carbon Corp. (July/10), and anticipated EPA policy brandon.verblow@ubs.com with law firm, Hunton & Williams (Aug/10). Upcoming event: 5th UBS conf. call to focus on bridging policy to capex On 9/16 at 2pm ET, we will host a call with ICF consultants, Chris MacCracken and Steve Fine, who will bridge policy mandates to capex expectations. We intend to focus this call specifically . on how various regulations could mesh, and what control technologies (and by when) will prove suitable to meet more stringent regs. E&C exposure: BWC/SHAW/URS/FLR; IPP’s: CPN and PEG benefit The most exposed in the E&C’s include SHAW, BWC, URS, FLR. Among utilities, we focus on merchant generators who do not have explicit recovery of investments, highlighting exposures: MIR/RRI, EIX, AEE, DYN and NRG. In applying an “apples-to-apples” comparison, we see AEE and NRG as having substantial remaining capex despite sizeable ongoing investments. We continue to highlight CPN and PEG as LT beneficiaries. - Equity Strategy Jeffrey Palma.................................. +1-203-719 1135 Global Equity Strategy . Strategist Global Flow Watch: Summer trends mixed jeffrey.palma@ubs.com Net selling intensifies through August Christopher Ferrarone................... +1-203-719 3727 UBS client equity flow data has been generally consistent with market trends in recent months Strategist as we saw net buying of equities in 6 of 8 weeks during June and July before markets christopher.ferrarone@ubs.com deteriorated in August and UBS clients became net sellers. Indeed net selling intensified . Trevor McDonough.........................+1-203-719 3600 through August as the MSCI AC World index dropped 3.7%, but stabilized along with markets in Associate Strategist the week ended 3 September. trevor.mcdonough@ubs.com Cyclical and Defensive activity mixed, Defensives more volatile We saw the strongest net buying in Consumer Discretionary, Telcos and Healthcare in the 4 weeks ending 3 September with the most net selling in Utilities, Consumer Staples and Technology. Generally speaking we have seen greater flow volatility within Defensives over the . last month with weekly net buying ranging from +3.2% to -8.8% (net selling) while the range in Cyclicals was -0.3% to -4.2%. Long-only clients bigger sellers than hedge funds Over the last several weeks we have seen considerably more net selling by long-only accounts . than hedge funds. Specifically, long-only accounts were net sellers in 5 of the last 6 weeks while hedge funds were net buyers in 5 of those 6 weeks. Buying N. America and selling the rest / GEM & Europe Flow Watch North America was the only major region to see net buying over the 4 weeks ending 3 September. The most net selling was in Emerging Markets, Japan and the UK. Our Global Emerging Market and European Strategy teams have also released their respective Flow Watch pieces today. - UBS 11
  12. 12. US Morning Meeting Highlights 15 September 2010 Economics Maury N. Harris...............................+1-212-713 2472 US Daily Economic Comment . Economist Uneven acceleration in retail sales maury.harris@ubs.com Preview: IP forecast flat in Aug but Empire expected up in Sep. Drew T. Matus................................. +1-203-719 8378 (1) Industrial output was probably unchanged in Aug (cons +0.2%), with weakness in auto and Economist utilities output, but we forecast an on-trend reading for manufacturing excluding autos (UBSe drew.matus@ubs.com 0.5%). (2) We also forecast a rise in the current activity index in the Empire State (UBSe 10.0, Samuel D. Coffin.............................+1-203-719 1252 cons 8.0, after 7.1). Regional manufacturing surveys, including the Empire State survey, had Economist been weaker than the national ISM index in August. (3) The rise in the mortgage applications samuel.coffin@ubs.com purchase index over the past eight weeks appears to signal the start of some recovery in home sales, albeit from extremely depressed levels. The upcoming week’s data include the Labor Day Kevin Cummins.............................. +1-203-719 1676 . holiday, which could add volatility. (4) Petroleum prices probably boosted total import prices in Economist Aug (UBSe 0.9%, cons 0.3%), with nonoil prices rising only marginally (UBSe 0.1%). kevin.cummins@ubs.com Review: Retail sales 0.4%, but durables spending slowed. Inventories 1.0% (1) Retail sales rose 0.4% in Aug (cons & UBSe 0.3%, after 0.4%). Some details of the report were stronger—with sales ex autos +0.6% (cons 0.3%, UBSe 0.6%) and sales ex autos and gas +0.5% (cons 0.4%, UBSe 0.5%). This report was broadly in line with our forecasts and better than consensus expectations. However, it also included signs of a hesitant consumer: Big-ticket items such as autos, furniture, and electronics were all soft, and the rise in overall spending was entirely accounted for by nondurables such as food, gasoline, and clothing. Even so, real consumer spending (including services) appears to have accelerated somewhat: We estimate that it is rising at a 2.2% annual rate in Q3 through Aug, up from the 1.9% pace in H1. (2) Business inventories rose 1.0% in Jul (cons 0.7%, UBSe 0.9%). That compares with a 0.3% per month average pace in Q2. The implication is more support from inventories for growth in Q3 than in Q2. It appears that the extra inventories growth was intended; sales also picked up. (3) The NFIB small business optimism index rose 0.8% in Aug after a 1.0% decline the prior month. The trend continues to be sideways at a low level. (4) The TIPP/IBD economic optimism index rose 2 points to 45.3 in Sep. - Equity Strategy Nicholas Smithie.............................+1 212 713 8679 Global Emerging Market Equity Strategy . Strategist GEM Flow Watch: Summer Selling nicholas.smithie@ubs.com New GEM flows product Stephen Mo....................................+44 20 7568 4840 Alongside our colleagues in Global Equity Strategy who published their inaugural Global Flow Strategist Watch product in June, we are now rolling out a GEM flows product in alignment with them on a stephen.mo@ubs.com . monthly basis. The data used is UBS equity client flow data which we aggregate by region and Jennifer Delaney, CFA................... +1-203-719 5926 sector and by investor type. Strategist Relating flows to market performance jennifer.delaney@ubs.com Net buying and selling of GEM equities does broadly align with market performance. The sell-off in late 2008 coincided with net outflows while the rally of 2009 coincided with net buying. However, this relationship has weakened this year. Market performance is flat and the net buying and selling of GEM along the way has not been a big driver of performance. We think . this is largely a function of total market volume which has been subdued this year. If this changes, then our flow data could be a more important feature of market performance. Net selling in August GEM saw net selling in August, a month where MSCI GEM was down 2.2%. GEM equities did outperform the developed world which was down 3.8% over the same time period. Net selling . was more pervasive by hedge fund investors which saw large outflows compared to long only investors. Region and sector implications Consumer sectors suffered from heavy net selling whereas Telecoms and Healthcare benefited from net buying. On a regional basis net selling was highest in Asia and LatAm with EMEA more insulated from outflows. - UBS 12
  13. 13. US Morning Meeting Highlights 15 September 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 13
  14. 14. US Morning Meeting Highlights 15 September 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 4,5,6a,16 Ameren Corp. AEE.N Neutral N/A US$28.15 14 Sep 2010 16 Babcock & Wilcox Co BWC.N Neutral N/A US$21.94 14 Sep 2010 6b,7,16 Calpine Corporation CPN.N Buy N/A US$12.79 14 Sep 2010 4,6a,6c,7,16 Cardinal Health, Inc. CAH.N Buy N/A US$31.60 13 Sep 2010 2,4,6a,6b,6c,7,8,13,16,18a Cisco Systems Inc. CSCO.O Neutral N/A US$21.26 13 Sep 2010 16 Davita Inc. DVA.N Buy N/A US$64.58 13 Sep 2010 2,3b,4,5,6a,13,16,20 Delta Air Lines Inc. DAL.N Buy (CBE) N/A US$10.67 13 Sep 2010 16,19 Dynegy, Inc. DYN.N Neutral (CBE) N/A US$5.04 14 Sep 2010 16 Edwards Lifesciences Corp EW.N Buy N/A US$57.41 13 Sep 2010 5,16,20 F5 Networks, Inc. FFIV.O Neutral (CBE) N/A US$98.87 13 Sep 2010 4,5,6a,6b,6c,7,16 Fluor Corporation FLR.N Buy N/A US$48.94 14 Sep 2010 5,16 Foster Wheeler Ltd. FWLT.O Buy N/A US$24.40 14 Sep 2010 2,4,5,6a,6b,6c,7,16 Goodrich Corp. GR.N Buy N/A US$71.35 13 Sep 2010 2,4,6a,6b,6c,7,16,22 International Paper IP.N Buy N/A US$22.68 14 Sep 2010 6c,16 KBR, Inc. KBR.N Buy N/A US$24.00 14 Sep 2010 16 Martin Marietta Materials Inc. MLM.N Buy N/A US$77.65 14 Sep 2010 3a,6c,16,17 MasterCard Inc. MA.N Buy N/A US$193.03 13 Sep 2010 4,6a,6c,7,16 MeadWestvaco MWV.N Buy N/A US$23.86 14 Sep 2010 13 Meggitt MGGT.L Buy N/A 293p 13 Sep 2010 16 Mirant Corp MIR.N Neutral N/A US$10.53 14 Sep 2010 16 NetLogic Microsystems Inc NETL.O Suspended N/A US$24.62 14 Sep 2010 13,16 NRG Energy Inc. NRG.N Neutral N/A US$21.65 14 Sep 2010 16,18b Oracle Corporation ORCL.O Buy N/A US$25.11 13 Sep 2010 5,6b,7,16 Protective Life Corp. PL.N Buy N/A US$21.08 13 Sep 2010 Public Service Enterprise PEG.N Buy N/A US$31.93 14 Sep 2010 Group5,6b,7,16 16,20 Riverbed Technology RVBD.O Neutral (CBE) N/A US$44.19 13 Sep 2010 4,5,6a,6b,6c,7,8,16,18c Rockwell Collins Inc. COL.N Buy N/A US$59.13 13 Sep 2010 2,4,5,6a,16 Rowan Companies Inc. RDC.N Neutral N/A US$29.69 14 Sep 2010 6b,7,16,20 RRI Energy Inc. RRI.N Neutral (CBE) N/A US$3.74 14 Sep 2010 4,5,16 Safran SA SAF.PA Buy N/A €20.25 13 Sep 2010 16,20 Shaw Group Inc SHAW.N Neutral (CBE) N/A US$33.18 14 Sep 2010 16,20 Steel Dynamics Inc. STLD.O Buy (CBE) N/A US$14.59 14 Sep 2010 6b,7,16 The Kroger Company KR.N Neutral N/A US$21.04 13 Sep 2010 2,4,6a,16 TransDigm Group Inc. TDG.N Buy N/A US$62.10 13 Sep 2010 16 URS Corporation URS.N Neutral N/A US$38.32 14 Sep 2010 4,6a,16 Vulcan Materials VMC.N Buy N/A US$37.87 14 Sep 2010 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 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. 3a. UBS Limited is acting as adviser to DataCash Group plc on the sale of the company to MasterCard Inc. 3b. UBS Securities LLC is acting as joint dealer-manager on the announced tender for specific Delta Airlines and Northwest Airlines bonds. 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. UBS 14
  15. 15. US Morning Meeting Highlights 15 September 2010 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). 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 17. UBS Limited is acting as Financial Adviser to DataCash in relation to the recommended cash offer from Mastercard. 18a. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Cisco Systems Inc. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Oracle Corporation. 18c. 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. 19. Because this company is an announced takeout candidate, UBS believes the security presents lower-than-normal risk. We have widened its rating band to +6%/-10% compared with +6%/-6%, respectively, under the normal rating system. 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system). 22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end). This report was sent to the issuer prior to publication solely for the purpose of checking for factual accuracy, and no material changes were made to the content based on the issuer's feedback. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration. UBS 15
  16. 16. US Morning Meeting Highlights 15 September 2010 - Global Disclaimer This package has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries UBS AG is referred to as UBS SA. This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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