Financial Pacific - Oil & Gas 2H11 catalyst guidebook (third party)


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Financial Pacific - Oil & Gas 2H11 catalyst guidebook (third party)

  1. 1. ab Global Equity Research Americas UBS Investment Research Equity Strategy Morning Expresso - United States Market Comment 6 September 2011 U.S. Equity Product Management 212-713-2400 Tuesday 6 September 2011 Morning Expresso This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 23. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
  2. 2. Morning Expresso - United States 6 September 2011Morning Meeting Agenda Mattel Rating: Buy Target: US$33.00 Price: US$26.23 RIC: MAT.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$9.25bn BBG: MAT US Toys Analyst: Robert W. Carroll Tel: +1-212-713 2434 Everything On Track Notes From the Road After spending much of last week with MAT management there were three main points we came away with: 1) despite recent economic uncertainty, 2011 continues to track in line with MAT internal expectations established at the start of the year; 2) H1 core/entertainment momentum appears to be carrying into seasonally more important H2; and 3) while double digit rev growth in ‘10 and YTD ‘11 will not be sustained into ‘12/’13, we believe the annual FCF generation afforded by this step function in revs will be, making further share repurchases and div. increases likely. FCF Story Remains Key Driver of Shares Trading at a ~9% FCF yield on 2011E, we believe MAT is a strong FCF stock with solid rev and EPS prospects. While revenue growth will likely revert to normalized levels beyond 2011, we believe the groundwork is set for further margin improvements driving earnings growth. We continue to believe management remains committed to returning cash generated by the revenue step function seen during ‘10 and (we expect) ‘11, thru divs and share repurchases. Continued Conviction In Our Above Street 2011/2012 EPS Estimates Raising Q3 EPS estimates to $0.88 (from $0.82 previously) on expectations for reduced legal spending during the quarter. We remain comfortable with our above Street EPS estimates for FY 2011 and 2012. Valuation: Reiterate Buy Rating with $33 Price Target $33 target based on 15x NTM EPS. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$26.23 on 02 Sep 2011 19:39 EDT Ingersoll-Rand Rating: Buy Target: US$43.00 Price: US$32.38 RIC: IR.N Prior: Neutral Prior: US$45.00 Mkt Cap: US$10.4bn BBG: IR US Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309 Highly attractive risk/reward profile Upgrading to Buy; Share price already discounting a recession Since the recent market selloff, IR has been among the worst performing stocks in the sector despite earnings and end markets that remain highly depressed relative to the group. While weak 2Q results explain much of the underperformance, we see the risk/reward profile for IR as attractive: with depressed end markets, IR should be able to fully participate in an economic recovery, yet there is less downside for end markets and earnings in a potential recession. Further, we believe IR is discounting a higher likelihood of a recession than most other industrials. Potential for substantial EPS growth in a ‘12 recovery/“Blue Sky” scenario… If the economic recovery continues (even with low growth), we expect substantial EPS growth in 2012 (to ~$4.00) driven by share repurchases (~$2 billion over 18 months on a ~$10.5B market cap), lower interest/corporate expenses, continued productivity improvements, and modest revenue growth. …but earnings would hold up far better than 2009 under “Black Skies” In a severe recession (similar to ‘08/’09), we estimate 2012 EPS of ~$2.55 vs. $1.65 in 2009 given share repurchases and substantial structural cost reductions over the last few years. Further, unlike late ‘08/early ’09, IR does not face any current liquidity issues. Valuation: Upgrading to Buy, from Neutral on scenario based analysis Our revised PT reflects a 50%/35%/15% blend of our Blue/Grey/Black sky scenarios, respectively (UBS strategists’ probabilities). We provide a sensitivity analysis for each of these scenarios, but note that our formal EPS ests reflect a "Blue Sky" scenario (continued recovery, albeit low growth), consistent with UBS economists forecasts. Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$32.38 on 02 Sep 2011 19:39 EDT Energy Sector Oil Companies, Major Analyst: William A. Featherston Tel: +1-212-713 9701 Oil & Gas 2H11 Catalyst Guidebook Oil and gas mileposts to watch heading into year end The last 4 months of the year typically contain a congested conference schedule, back-end loaded exploration programs, & disclosure of the next year’s capex/production targets. With investors returning from summer holiday, this report intends to provide mileposts to monitor heading into year end, and highlights where we expect positive/negative company catalysts in our universe. The most notable positive and negative catalysts to monitor On the positive side, we expect APC to reach settlements on Macondo & Algerian tax & likely revise guidance upward, SWN to raise its stale 2011 full year production guidance, CHK to announce a Utica JV in Sept and strong Utica well results, & NBL to host a bullish analyst meeting on 11/15. On the negative side, we believe EOG, MUR & PXD are at risk of lowering ’11 production guidance, while HES may lower guidance should Valhall production incur further delays. Exploration results to monitor APC has the most active exploration calendar in our universe, with ~25 wells over next 6-9 months. Near term, expect results from Montserrado in Liberia. NBL is also very active in 2H11 with Deep Blue results (MUR also) in Sept, spudding Bwabe wildcat offshore Cameroon in Oct, Leviathan appraisal results, and its Cyprus exploration well in 4Q. HES should have results from Andalan (Indonesia) and perhaps more details on its Australian gas discoveries. Valuation: Discounting $4.60/MMBtu and $74/Bbl Our top E&P picks are APC, NBL, OXY, & MRO, and CVX amongst Integrateds Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 UBS 2
  3. 3. Morning Expresso - United States 6 September 2011 US Daily Economic Comment Economist: Maury N. Harris Tel: +1-212-713 2472 Labor Day Forecast update The August jobs report has prompted us to lower our Q3 real GDP growth estimate to 1.5% from 2.5%. This lowers our estimate for 2011 calendar average growth to 1.6% from 1.8% and also results in our 2012 estimate falling to 2.2% from 2.3%. Our unemployment rate forecast for year-end 2011 increases to 9.0% from 8.8%. Our 2012 forecast inches up to 8.6% from 8.5%. For more, see the September 2 edition of US Economic Perspectives. Tuesday preview: Nonmfg ISM likely fell. 2nd-tier employment data due No data on Monday. On Tuesday, the nonmanufacturing ISM index for August will be released. We forecast a drop to 50.5 (cons: 51.0) from 52.7 in July. Another timely indicator of the service sector, the National Association of Credit Managers (NACM) service sector index, fell to 53.3 in August from 54.3 in July, suggesting some slowing in the ISM measure (see chart). The nonmanufacturing ISM index has tended to show some sensitivity to financial market turmoil, generally falling in months when equity markets declined. Most other indicators in August have been soft, including sharp declines in consumer confidence and the service sector’s hours worked data in the August employment report. The Conference Board’s employment trends index will also be released. Minneapolis Fed President Kocherlakota is scheduled to speak at 1:10pm (EST). Week ahead preview: Limited economic data in holiday-shortened week In the upcoming holiday-shortened workweek, the economic calendar is especially thin. The focus in financial markets will likely be centered on speeches on Sep 8 by the Fed Chair and President Obama. In addition, the Fed’s Beige Book will be published on Wednesday. Review: Disappointing payrolls and earnings Payroll employment was unchanged in August (cons 68k, UBSe 80k), and the prior two months were revised down by a cumulative 58k (55k of this downward revision was in government jobs). Private payrolls inched up only 17k (cons 95k, UBSe 105k). Even with the now-ended Verizon strike subtracting around 45k from private payrolls, this was exceptionally soft. Average hourly earnings fell 0.1%, partly weakened by a compositional shift toward lower-pay industries, although the Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 US Economic Perspectives Economist: Maury N. Harris Tel: +1-212-713 2472 Lowdown on the “slowdown” Slow but no recession The preliminary report of stalled job formation in August has prompted us to reduce our estimate of quarterly annualized real GDP growth from 2.5% to 1.5% for Q311. We maintain our forecast of 2.0% growth in Q411. However, slower than expected Q311 growth plus the earlier reported downward revision of Q211 growth mean that we are reducing our calendar average real GDP growth forecast for 2011 from 1.8% to 1.6%. (Also, arithmetic base effects from the Q311 forecast reduction reduce our 2012 calendar average real GDP growth forecast from 2.3% to 2.2%.) Fundamentally, consumer spending apparently is still not in panic mode, bank lending continues, and there is growing evidence of stabilizing home prices. Poor payrolls put policy in play The weakness in the payroll data raises the risk that the Fed will move ahead with further easing in September. We would expect any move to be initially signaled within Chairman Bernanke’s September 8 speech. A more divided FOMC Minutes to the last FOMC meeting displayed a Fed more uncertain about the outlook for growth and more aware of downside risks. Alternative policy responses were discussed, with some FOMC members favoring more and some favoring less accommodative policy than was announced in the August 9 FOMC statement. The past week The discouraging payroll report capped a week of data that was otherwise a bit more constructive. Consumption began Q3 solidly, factory output growth steadied in August, and construction data implied upward revision to still soft Q2 GDP. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 US Equity Strategy Strategist: Thomas M. Doerflinger, Ph.D. Tel: +1-212-713 2540 Cut S&P 500 EPS on Weaker Global GDP 2011 Goes from $99.35 to $95.00, 2012 from $108 to $101 Four reasons: A) UBS cut 2012E global GDP growth from 3.8% to 3.3%, including a 100 bps cut for Europe, which accounts for ~14% of S&P revenues. B) Sharp decline since April in ISM Manufacturing to ~50. C) Margin pressure from higher unit labor costs, which rose 1.1% sequentially in Q2 2011. D) Weaker revenue in 2012 if commodity prices decline and currency comparisons reverse. Rising GDP, Declining Profits: Not At All Unusual In Q2 2011 net margins were elevated & revenues strong (up 13% y/y), setting up tough comparisons. We expect profits for the next five quarters to be somewhat below Q2 2011 EPS (adjusted for BAC write-down and exceptionally high P&C losses) despite rising GDP. This is consistent with historical norms. In 1985, 1989, 1995, and 1998 the ISM Manufacturing fell below 50 and profits declined for several quarters despite solid GDP growth. One reason, which is relevant now: weaker commodity prices boost real GDP but reduce profits (which are nominal). Lowering S&P 500 2011 year-end target to 1350 from 1425 We are reducing our 2011 year-end price target for the S&P 500 index to 1350 from 1425 to reflect our updated 2012 earnings estimates. Our 1350 target leaves P/E multiples unchanged at 13.5x our $101 EPS estimate. We believe that current stock valuations reflect recessionary concerns that are not likely to materialize and expect equities to re-rate through year-end. Our new target implies 15% upside from current levels. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 5 September 2011 UBS 3
  4. 4. Morning Expresso - United States 6 September 2011 US Equity Strategy Strategist: Jonathan Golub, CFA Tel: +1-212-713 8673 Market Navigator — September 2011 Welcome To The Market Navigator This monthly guide provides a summary of the UBS US equity market outlook, as well as proprietary analytics and other useful information about market returns, corporate profits, valuation, sectors, the economy, and credit. Slow Growth But No Recession After dropping 13%, the market ended down 5% in August. We believe the economy will experience slow growth — not a recession. As such we expect stocks to advance through the end of the year. That said, we expect markets to remain quite volatile with European debt issues our main concern. While consumer and business survey data indicate a lack of confidence in the economy, more direct measures of activity such as retail sales and durable goods orders remain healthy. 14 Of The Past 9 Since the end of World War II, there have been 14 instances where the S&P 500 fell by more than 17%. Only nine of these were accompanied by recessions. Importantly, when recession was avoided, equities advanced an average of 15% during the first four months after reaching a trough and 28% over one year. Price Target Of 1,350 Represents 15% Upside We are trimming our 2011 and 2012 S&P 500 EPS estimates to $95.00 and $101.00 from $99.35 and $108.00 to reflect UBS’s recently lowered global growth outlook. Consistent with these changes, we are paring our year-end 2011 S&P 500 price target to 1,350 from 1,425. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 Global Equity Strategy Strategist: Jeffrey Palma Tel: +1-203-719 1135 Sector and Region Allocation Changes Deteriorating conditions In recent weeks, two developments have shaken market confidence. First, growth has deteriorated in the US and Europe. Indeed, purchasing managers’ surveys moved lower and nonfarm payroll data in the US suggest softer labor conditions. Meanwhile, the sovereign debt crisis in Europe has taken a turn for the worse, suggesting continued challenges in those markets. Given these conditions, our Global Asset Allocation team is moving to underweight in their Equity positioning. Regional allocation changes Clearly, our move to add to allocations in Europe in late-July was premature. Weaker macro data combined with renewed debt market concerns have resulted in Eurozone underperformance over the last month. With tensions in Europe on the rise and worries about the political obstacles to expand stabilization measures, we return to an underweight allocation in Europe. We are overweight GEM and US. Sector allocation changes Macro conditions suggest elevated volatility is apt to persist. As long as this is the case, valuations alone won’t be enough to drive market upside. As a result, we move to Underweight in Financials and Materials and move Consumer Staples to Neutral. Our overweight allocations remain Tech, Healthcare, and Telcos. The role of quality In addition to the challenging macro backdrop, we continue to expect investors to have to deal with falling earnings expectations in coming months and quarters. As a result, we retain a preference for ‘quality’ stocks in our portfolio. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 Global Economic Perspectives Economist: Stephane Deo Tel: +44-20-7568 8924 Euro break-up – the consequences The Euro should not exist (like this) Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change. Fiscal confederation, not break-up Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break-up, is considerably more costly and close to zero probability. Countries can not be expelled, but sovereign states could choose to secede. However, popular discussion of the break-up option considerably underestimates the consequences of such a move. The economic cost (part 1) The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year. The economic cost (part 2) Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 UBS 4
  5. 5. Morning Expresso - United States 6 September 2011 US Airline Sector Note Airlines Analyst: Kevin Crissey Tel: +1-212-713 3562 Corp Travel Survey Suggests Some Softening But Not a Collapse in Demand Tempered expectations for air travel spend in the remainder of 2011 We’ve asked corporate travel managers to assess what impact economic concerns are having on their corporate air travel programs. Almost half of the 109 respondents indicated their firm had either recently taken some action to reduce spend or planned to do so by year-end. Although this clearly has negative implications for demand, it is softened by the fact that among those firms that have enacted money-saving measures, half still anticipate air travel spend growing y/y in the balance of 2011. Changes in sentiment since May Since our last survey, in which we asked some of the same questions, expectations on future air travel spend have softened. Although 66% of corporate travel managers expect growth in air spend over the balance of the year, that figure is down from 80% in our May survey. Takeaways for the stocks We believe US airline stocks are currently priced based on an expectation for a sharp fall in travel demand. Our forward bookings data, which provides a near-term snapshot of revenue trends, actually shows a strengthening average fare environment (thanks to capacity cuts). This survey, which provides a somewhat longer-term outlook, is less bullish but does not indicate a pending collapse in corporate travel spend. Taken together, we remain positive on the group with our favorite stocks being UAL and DAL. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 UBS 5
  6. 6. Morning Expresso - United States 6 September 2011MACRO AND STRATEGY RESEARCH US Key Calls Update Strategist: Thomas M. Doerflinger, Ph.D. Tel: +1-212-713 2540 Remove McDonalds Corp. Remove MCD After a Period of Strong Performance We are removing McDonalds from the US Key Call list after recent strong stock price performance. Continued outperformance appears less likely in coming months. The stock continues to be rated Buy by David Palmer, with a $97 price target. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 Weekly Weight Watcher Economist: Larry Hatheway Tel: +44-20-7568 4053 Initiate underweight to global equities The cycle and Europe Risk assets have come under renewed pressure from weak economic data and a re-escalation in the European sovereign crisis. Sharp falls in business, consumer and investor confidence, alongside Friday’s disappointing US employment report, have raised the risk of stalling growth and the attendant risks to earnings. Alongside a deterioration of the Greek fiscal position, these developments suggest that rising risk premiums will push global equities lower in the period immediately ahead. The onus is on policy and politics The circuit breaker lies with policy and politics. The call on risk assets is linked to confidence (or the lack thereof) that policy makers will act and that their actions will spur growth. Investors are now discounting a higher probability that central banks will ease, in developed as well as emerging economies. While the options for fiscal easing in advanced economies are limited, investors could take comfort if a political consensus on the primacy of growth were to emerge in Washington and elsewhere. Justifiably, however, investors are worried that advanced economy monetary policy is all-but impotent and that fiscal easing will not materialize. The tail risk, which market prices must also reflect, is one of stalling growth without any meaningful policy ‘lifeline’. That scenario suggests lower equity valuations until either growth resumes or policy shifts meaningfully. Event risk The risks to markets don’t end there. September promises a calendar full of European political event risk. The coming weeks will say a lot about the state of the current Greek bailout package as well as the prospects for an extension of the European rescue funds (EFSF). The potential for an escalation of the sovereign crisis is likely to keep investors on edge. Tactical risk reduction Given the deterioration in economic and policy fundamentals, we find it difficult to see why equity markets should trade at more elevated levels than their summer lows. We therefore initiate a tactical underweight to global equities (retaining a preference for EM stocks) and reduce our allocation to high-yield credit. We increase allocations to both implied equity volatility and precious metals. Our other allocations remain unchanged--details can be found in the tables and charts at the end of this publication. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 UBS 6
  7. 7. Morning Expresso - United States 6 September 2011GLOBAL SECTOR RESEARCH Global Bank Perspectives Banks Analyst: Philip Finch Tel: +44-20-7568 3456 Sector downgrade Top-down caution Over the weekend, our global asset allocation team downgraded equities to a tactical underweight given renewed pressure from weak economic data and a re-escalation in the European sovereign crisis. Our global equity strategy team also cut its sector weighting for global financials to underweight from neutral. Growth concerns Alongside Friday’s disappointing US employment report, sharp falls in business and consumer confidence have raised concerns over stalling growth and earnings risk. For the banking sector, this has been evident in falling loan growth and ROE expectations especially in developed markets. Renewed debt worries Despite the ECB intervention in the secondary bond market, 10-year bond yields in Italy and Spain have been rising again, underlining market concerns that policy responses to date have not gone far enough to reduce contagion risk. This is undermining market confidence and creating stresses in funding markets, as evident by elevated EuroLibor spreads. Underweight Europe We reiterate our cautious stance on global banks, notably in Europe where we believe the sector is under-capitalised and faces funding challenges, especially with a re-escalation of the sovereign crisis. Given this, we only recommend banks that are well capitalised, with strong funding and good dividend payment potential: these include RBC, JPM, SHB, Standard Chartered, Lloyds, ICBC, Sberbank, and DBS. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 5 September 2011 UBS 7
  8. 8. Morning Expresso - United States 6 September 2011CONSUMERS Rating: Neutral (ST Harley-Davidson Target: US$39.00 Price: US$36.00 RIC: HOG.N Removed) Prior: Unchanged Prior: US$43.00 Mkt Cap: US$8.41bn BBG: HOG US Recreational Products & Services Analyst: Robin M. Farley Tel: +1-212-713 2060 August U.S. Retail Sales Up 2-3% YOY Removing Short-Term Buy; Maintain Neutral We are removing our short-term buy on Harley, while maintaining a long-term Neutral. We had initiated a short-term buy ahead of May retail sales reports given our expectation for double-digit increase in US dealer sales in May and June, with easy summer sales comps. We believe HOGs U.S. retail sales growth has slowed as comps have become more difficult in August on a peak-to-trough basis, despite the month facing comps vs last year of down -13%, similar to the July 10 comp that had helped fuel July 11 increase of +14-15%. We Believe Harley Brand U.S. Retail Unit Sales Up 2-3% In August We believe Harley brand U.S. retail sales at the dealer level have increased +2- 3% YOY in Aug after three straight months of double digit growth. This brings total Harley brand US retail sales YTD Aug up +5-6% YOY. We believe the motorcycle industry saw a decrease of -2.5% for the month, which brings YTD up +1-2%. Looking Ahead Into 2011 Looking at peak-to-trough declines in the 4-5 years since Harleys US retail sales peak in ‘06, the cumulative -43% decline in YTD Aug US retail sales since the peak could imply FY ‘11 sales are up +6%, while Q2’11 peak-to-trough declines of -45% could imply ‘11 US sales are up +5-6%. Aug 2011’s peak-to-trough decline of -40% is better than YTD July’s 43-44% decline from comparable period in ‘06. Valuation: Maintain Neutral ($39 from $43), Remove Short-Term Buy Target based on ~14-16x our 2013 motor company EPS and ~8x our 2013 financing segment EPS, discounted to today. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$36.00 on 02 Sep 2011 19:39 EDT LOréal Rating: Neutral Target: €96.00 Price: €77.01 RIC: OREP.PA Prior: Unchanged Prior: Unchanged Mkt Cap: €45.0bn BBG: OR FP Cosmetics Analyst: Eva Quiroga Tel: +44-20-7568 7519 1H11 results – first impressions EBIT margins down -50bps, given higher A&P L’Oréal reported 1H11 EBIT margins of 16.8% (down -50bps) as a small increase in gross margins (+20bps to 71.5%) was more than offset by slightly higher SG&A (+20bps), R&D (+20bps) and – most importantly – A&P (+40bps, unexpected as new product activity is expected to accelerate from 13% in 1H11 to 17% in 2H11). Luxury the only division with higher margins Margins were up in Luxury (+90bps, reflecting strong organic top-line growth), but down in all other Cosmetics divisions with Consumer -30bps (likely reflecting higher spending behind the all-important L’Oréal Paris brand), Active -60bps and Professional -140bps (reflecting soft organic top-line growth and, in the case of the latter, dilutive acquisitions). As for the other divisions, margins were down for the Body Shop (-130bps as it continues to struggle) and Dermatology (-430bps). Tomorrow’s meeting will be key With management outlook for FY11 traditionally vague (we confirm our ambition to outperform the market and improve the group’s profitability), we believe the meeting to be held tomorrow morning (9.00 Paris time) will be crucial to gauge i) whether underlying market growth remains at +4% and L’Oréal continues to outperform the market and ii) how operating costs are likely to be phased between 1H11 and 2H11, especially the crucial A&P line. Watch this space... Valuation We rate L’Oréal Neutral with a DCF-based price target of €96. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of €77.01 on 30 Aug 2011 19:09 EDT UBS 8
  9. 9. Morning Expresso - United States 6 September 2011ENERGY Natural Gas Storage Oil & Gas Exploration Analyst: William A. Featherston Tel: +1-212-713 9701 Forecasting a 55-65 Bcf Injection for Week Ended September 2nd Forecasting a 55-65 Bcf injection to be reported this week We expect the EIA reports a 55-65 Bcf injection, in line with the year ago’s 58 Bcf injection but below the 5-year average of 71 Bcf. We estimate inventories increased to 3,021 Bcf, narrowing the deficit vs. 2010 to 143 Bcf but widening the surplus to the 5-year average to 102 Bcf. Weather warmer vs the 5-year average and year ago last week Last week, weather was 2% warmer than the year ago week and 15% warmer than the 5-year average. Since May, weather has been 2% and 16% warmer than last year and the 5-year average, respectively. Approximately 19% of cooling degree days remain ahead of us this summer. Forecasting storage to enter next winter at 3.6 Tcf We estimate the weather-adjusted S/D balance was little changed WoW for the week ending 8/19, but has been roughly 2 Bcfd oversupplied vs. the 5-year average and 1 Bcfd oversupplied vs. 2010 over the last month. However, incredibly hot weather and larger than normal nuclear maintenance have obscured the looseness in the weather adjusted S/D balance this summer. We estimate storage volumes peak on October 31 at 3.6 Tcf (in line with the 5-year average). E&Ps are discounting $4.60/Mcf long-term, normalized natural gas prices This compares to the 2011 & long-dated (2015) futures curves of $4.16/MMBtu and $5.53/MMBtu. Our top E&P picks are: APC, NBL, OXY and MRO. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 North American E&P Weekly Analyst: William A. Featherston Tel: +1-212-713 9701 Weekly Summary Weak economic data today left crude up just slightly and gas down WoW Crude rose earlier in the week on potential hurricane risk in the Gulf of Mexico despite a crude inventory build reported by the DOE. However, oil gave back much of its gains today as payroll and employment data released this morning were weaker than expected. Oil prices ended the week up 1.2% at $86.45/Bbl. Despite a bullish storage report by the EIA, natural gas tumbled on today’s weak economic data, pushing prices down 1.5% WoW to $3.87/MMBtu. U.S. E&Ps outperform broader markets U.S. E&Ps gained 1.5% WoW, outperforming the S&P 500 which was about flat. Canadian E&Ps were up 2.1% WoW, underperforming the TSX’s 3.1% gain. Company news NBL is close to signing a long-term contract with Israel Electric Corporation to provide 270 MMcfd over 15 years from Tamar at $5.50/MMBtu. A judge in a LA District Court dismissed general maritime claims against APC & Mitsui, although they are subject to limited damages under OPA related to the Macondo spill. CHK expects a Utica JV to close by end of Sept or in Oct, earlier than prior expectations. MUR will sell its Meraux refinery to VLO for a higher than expected price of $625 MM including inventory. We are replacing SU with CNQ as a Key Call. A look at the week ahead We expect the EIA to report a 55-65 Bcf injection on Thursday. OXY will present on Thursday at UBS Best of Americas Conference in London. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 US Electric Utilities & IPPs Electric Utilities Analyst: Julien Dumoulin-Smith Tel: +1-212-713 9848 EPA Delay Has Minimal Impact White House requests EPA delay finalizing ozone standards until ‘13 In what we see as a rather uncontroversial move, the White House has requested the EPA delay implementation of NAAQS rules until 2013. The EPA had issued a revision of the March ‘08 standard of 75 ppb to a range of 60-70 ppb in Jan. 2010, ahead of its routine 5-year update of the standards. Following this relatively aggressive move, the EPA has since delayed finalization of these proposed rules several times, and we believe adoption of the least stringent 70 ppb remains likely in 2013. In the interim, it remains unclear under what timeframe or even if the EPA will pursue implementation of the existing 75 ppb ozone standard (proposed in March 2008 under the prior administration); this had been suspended with the proposal of the 60-70 ppb standards in Jan. 2010. Current ozone standards remain the 1997 target of 84 ppb. Neither we nor the Street have accounted for these regulations in our valuations. The actions today appear in large part political given the 2-year delay in rules that were already aimed for implementation likely beyond 2015. The new deadline has no impact on the existing MACT/CSAPR rules We remind investors the latest rules have no bearing on the HAP MACT implementation timeline or the CSAPR rules recently finalized by the EPA in July. While we believe there is some legitimacy to a delay in the HAP MACT rules (by a few months to allow for the full review of all comments submitted), we see the latest CSAPR rules as increasingly onerous. Latest market quotes suggest SO2 in Group 1 (i.e. Northeastern) states as costing $2,250-2,600/t or roughly twice the $1,100/t projected by the EPA for 2012. Seasonal and Annual NOx quotes for ‘12 continue to price at $3,500-4,200/t, several-fold above EPA projections. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 UBS 9
  10. 10. Morning Expresso - United States 6 September 2011FINANCIALS ICE Rating: Buy Target: US$140.00 Price: US$112.53 RIC: ICE.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$8.34bn BBG: ICE US Diversified Financial Analyst: Alex Kramm, CFA Tel: +1-212-713 4060 Strong Futures Volumes Drive 3Q11 EPS Higher; OTC Energy Still Appears Soft August volumes +26% m/m, +37% y/y; OTC model suggests $1.45mm/day ICE reported official August futures metrics on Friday, with quarter-to- date volumes running significantly ahead of our estimates for 3Q11 (Europe +15% and US +17%). While futures volumes are very strong, ICE’s OTC energy business seems to not be participating in the upside, with our live model suggesting a further decline in activity rates (we estimate QTD daily commissions of $1.45mm). Pricing metrics show a tick-down for financial futures August rolling 3-month revenue per contract (RPC) for ICE Europe was $1.58, slightly higher than $1.57 in July and in line with our 3Q estimate. ICE US Ag pricing ticked lower (August $2.38 vs. July $2.39 vs. 3Q11E $2.38), while Financials decreased significantly (August $0.86 vs. July $0.97 vs. 3Q11E $0.96). Raising estimates on strong futures volumes After updating our model to reflect recent volume and pricing trends, we are raising our 3Q11 EPS estimate to $1.59 from $1.54 (2011E EPS to $6.67 from $6.61). Upside to our previous estimate is primarily driven by strong Futures Europe volume, while most of the volume upside in the US business is offset by pricing declines. A lowered OTC energy estimate ($1.45mm/day vs. $1.50mm) also limits the upside. Valuation: Maintain Buy rating; $140 price target unchanged Our $140 price target assumes a ~18x multiple on our $7.75 2012 EPS estimate. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$112.53 on 02 Sep 2011 19:39 EDT CME Group Rating: Buy Target: US$325.00 Price: US$258.70 RIC: CME.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$17.3bn BBG: CME US Diversified Financial Analyst: Alex Kramm, CFA Tel: +1-212-713 4060 Raising Estimates on Record Volumes August volumes +35% m/m, +46% y/y; 17.1mm average a new record CME reported official August metrics on Friday, with quarter-to-date volumes running 17% ahead of our prior estimate for 3Q11. Relative to our forecast, most of the upside is being driven by equities (+41%) and interest rates (+17%). Open interest also continues to trend strongly (+7% y/y, +3% vs. 3 months ago). Mix shift drives slight pricing decline Total revenue per contract (RPC) for the three months ending in July decreased slightly to $0.796 from $0.807 (-1%) in the previous month. The decline was driven primarily by a mix shift, as lower-priced products (interest rates/equities) represented a higher percentage of the total. On a product-by-product basis interest rates, equities, and FX saw slight pricing decreases, while energy, commodities, and metals provided positive offsets. Raising estimates on strong volumes After updating our model to reflect recent volume and pricing trends, we are raising our 3Q11 EPS estimate to $4.59 from $4.10 (2011 EPS to $17.75 from $17.24). We are now modeling average daily volume of 14.3mm contracts in the 3Q vs. 12.8mm (+11%). The 14.3mm is ~5% lower than the 15.0mm quarter-to-date average. Valuation: Maintain Buy rating, $325 price target unchanged Our $325 price target assumes a ~16x multiple on our $20.37 2012 EPS estimate. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$258.70 on 02 Sep 2011 19:39 EDT UBS 10
  11. 11. Morning Expresso - United States 6 September 2011HEALTHCARE Gilead Sciences Rating: Buy Target: US$48.00 Price: US$38.82 RIC: GILD.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$34.5bn BBG: GILD US Biotechnology Analyst: Matthew Roden, PhD Tel: +1-212-713 2491 HCV Program Update Not a Concern What’s new? GS 9190 protocols amended on toxicity finding Gilead has amended ongoing protocols in their HCV program to discontinue dosing of the NS5B polymerase GS 9190 in combination with PEG-IFN and RBV. We spoke with Gilead, and the FDA agreed with HCV program head John McHutchison and R&D head Norbert Bischofberger that the serious adverse events appear attributable to PEG-IFN/RBV + 9190 combo. We note studies including 9190 without PEG-IFN will continue as planned, which suggests the FDA (and Gilead) is comfortable with 9190 in all-oral combos. 9190 continues as part of all-oral regimen The safety profile for 9190 has been relatively clean to date, so the rationale for continuing is that it should add incremental efficacy and another mechanism to all-oral regimens without adding side effects. Although GILD has 7 HCV pipeline candidates across all known mechanisms, the only recognizable all-oral regimen is the quad 9190, 5885, 9451, and RBV, which will have 2 additional phase-II trials ongoing by year-end. We speculate the cytopenia risk in this regimen is obviated by eliminating IFN, but anemia could still be a risk given RBV is still included. EASL next big event in HCV for GILD: could provide valuation step up With the 1st phase-II quad study nearing enrolment completion, we believe SVR12 data from the 12wk arms could be presented as soon as EASL. If the HCV quad is successful, specific value could begin to be ascribed to Gilead’s HCV pipeline. Valuation: Buy with $48 price target We derive our price target using a DCF-based scenario analysis. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$38.82 on 02 Sep 2011 19:39 EDT Endo Rating: Buy Target: US$50.00 Price: US$30.71 RIC: ENDP.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$3.77bn BBG: ENDP US Pharmaceuticals Analyst: Marc Goodman Tel: +1-212-713 1342 Thoughts on Upcoming Mesh Panel What’s new? Briefing docs (see inside for details) for mesh panel on 9/8-9/9 Late last week the FDA posted its mesh summary. Highlights were: (1) FDA raised concern with vaginal prolapse repair using vaginal entry (as opposed to abdominal entry). FDA would like to reclassify that mesh to Class III (requires PMA) and require vigorous post-marketing studies for approved devices. (2) Sacrocolpopexy (abdominal entry) mesh carries a more favorable risk/benefit than vaginal entry and should not be moved to PMA. (3) Stress urinary incontinence (SUI) mesh can remain 510(k), but add’l premarket studies will be needed for newer mini slings. Our takeaway: Limited impact; AMS’ focus on clinicals an advantage 2010 prolapse mesh revs were ~$65M (<2% of 2012 revs, single digit growth). Given that FDA is not advocating mesh removal, if the panel leads to lower utilization, a 10% rev decline (which we see as high) impacts EPS by only $0.05. SUI is the larger mkt (2010 revs of ~$110M) with mid-single digit growth and the FDA generally supportive of current mesh prods. Thus, overall we would expect the panel to have a limited impact on Endo and, potentially, the requirement for more clinical studies could actually be favorable to AMS allowing it to take share. Thoughts on the stock: Recent under performance confounding ENDP is down ~20% vs -5-6% for the IYH/DRG. While concerns on device utilization rates have weighed on shares, the pref. gap has more than discounted concerns. We see risk/reward as v. positive heading into YE Opana TRF approval. Valuation: We maintain our Buy rating and PT of $50 We apply a 9x P/E multiple to our 2012E EPS of $5.60. Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$30.71 on 02 Sep 2011 19:39 EDT US Medical Devices Advanced Medical Devices Analyst: Rajeev Jashnani, CFA Tel: +1-212-713 9127 JNJ & ABT : weekly Rx for wk ending 8/26 JNJ key product tracker Zytiga: absolute TRx / NRx were 906 / 363 (averages over the prior 4-wks: 899/ 419). Wkly Rx volume has been relatively steady over the past few wks; we expect improvement after summer months. Average implied run rate over past 4 wks at $245M. Stelara: TRx up 51% YoY. Among sub-cu products, mkt share in derm stands at 18.1% (-50 bps relative to 4-wk average; +340 bps YTD). Xarelto: posted TRx of 944, 764 & 554 over the past 3 wks. Implied annual run rate is immaterial at this level (<$5M). Product was approved for deep vein thrombosis in pts undergoing knee or hip replacement surgery on 7/1; key upcoming event is FDA a-fib panel on 9/8. We expect approval by year end and we continue to see Xarelto as competitive in a-fib despite solid data on Eliquis. HIV: Prezista/Intelence TRx grew 34%/18% YoY (12-wk moving average 34%/26%). Edurant posted TRx/NRx of 257/120 vs. 244/130 last week. Complera (GILD’s combo compound with Edurant) TRx/NRx was 222/221 vs. 85/85 last wk. ABT key product tracker Humira: YOY TRx growth 8% (12-wk moving average: 12%) relative to sub-cu market growth of 6% (12-wk moving average: 9%). We model 3Q11 sales of $855M; current brand performance suggests incremental sales upside of $30M (~$0.01-$0.02 benefit to EPS). Tricor franchise: TRx volumes remain weak at -12% (12-wk moving average: -15%). That said, ABT has managed revs effectively w/ sales +1% in 2Q11 despite -14% in TRx, which we attribute to pricing (+14% cumulatively) and lower performance rebates. Niaspan: TRx decline was -12% YoY. Barring further decline in volume, we think ABT can manage revs similar to Tricor. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 5 September 2011 UBS 11
  12. 12. Morning Expresso - United States 6 September 2011INDUSTRIALS Rockwell Collins Rating: Buy Target: US$70.00 Price: US$47.00 RIC: COL.N Prior: Unchanged Prior: US$76.00 Mkt Cap: US$7.36bn BBG: COL US Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185 What to Expect from Guidance Expect FY12 guidance week of Sept 12 We expect COL to provide initial FY12 guidance during the week of Sept 12. In advance of this, we are reducing our FY12 EPS estimate by $0.30 to $4.40 to reflect lower bizjet and defense growth along with our estimate for higher pension expense. While we expect guidance to come in below consensus expectations, we think the stock more than already reflects this trading at 10-11x P/E. 15% EPS growth adjusted for FY11 one time items Our revised estimate reflects nearly 10% EPS growth from the midpoint of COL’s FY11 guidance ($4.00-4.10), although nearly 15% EPS growth after accounting for one time items in FY11. COL benefitted by roughly $0.20 in FY11 from warranty reserve and customer incentive reversals along with a lower tax rate. We expect a lower incentive comp accrual will provide a tailwind in FY12. Forecast 30% CS EBIT growth Upside in FY12 will be driven by what we estimate will be 12-15% Comm Systems (CS) revenue growth on the back of 787 and bizjet market share gains that aren’t dependent on a recovery. COL will ramp on the BBD Global where we think its content is similar to 787. Along with 40-50% incremental margins and we think CS EBIT grows 30%+. We forecast Gov Systems (GS) lower on DAGR decline, flow through of weak budgets and at least partial year continuing resolution (CR). Valuation: Reducing PT to $70 We have reduced our price target to $70 on the back of our lower forecasts. Our PT continues to reflect our DCF analysis (3% terminal growth, 10% WACC). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$47.00 on 02 Sep 2011 19:39 EDT Colfax Rating: Neutral Target: US$27.00 Price: US$23.39 RIC: CFX.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.01bn BBG: CFX US Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309 Colfax considers Charter acquisition CFX in “preliminary discussions” with Charter; Others already involved On Sept. 4, CFX reported it was in "preliminary discussions regarding a possible all-cash offer to acquire Charter International plc." CFX noted the deal would be consistent with its acquisition strategy, and that it intends to take a “disciplined approach.” Mgmt noted Charter’s air and gas handling business is complementary to CFX’s current fluid handling business, while Charter’s welding/cutting business would be the basis of a new growth platform. Melrose has already offered 850p for Charter (part cash/part stock), and the press has reported that there are other potential bidders involved. Financing likely to rely heavily on equity (Charter market cap >2x CFX) CFX’s press release stated that the transaction would be financed with existing cash, new debt and new equity. Interestingly, CFX noted that the "the new equity would be provided, in whole or in part, by certain existing shareholders as well as long-term third-party investors that share Colfaxs values and vision." Size of potential deal a surprise, but valuation could still work We believe investors expected CFX to get more aggressive with acquisitions, but believe that many will be surprised by the size of deal (Charter mkt cap ~$2.1B vs. CFX ~$1B). That said, CFX believes the deal would be “significantly accretive” and that it could achieve double-digit ROIC in 3-5 years. Using consensus estimates, Melrose’s current 850p offer (~$2.5B EV) equates to ~8x and ~7x 2011 and 2012 EV/EBITDA, respectively (we believe CFX would need to bid above Melrose’s offer). Valuation: maintain $27 price target and Neutral rating Our price target is based on a ~10x multiple on our’12 EBITDA estimate. Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$23.39 on 02 Sep 2011 19:39 EDT E&C Weekly Blueprint Heavy Construction Analyst: Steven Fisher, CFA Tel: +1-212-713 8634 Engineering & Construction Update Upcoming events: LAYN results, BWC analyst day LAYN will report fiscal 2Q12 earnings (Sep. 7), and BWC will host its analyst day in NYC (Sep. 15). NRC will hold the final public hearing for Southern Company’s Plant Vogtle Units 3 and 4 (Sept 27). Highlight from this week: We initiated coverage of CB&I On 8/30, we initiated coverage of CBI with a Buy rating and a $41 price target. We think CBI is well positioned for growth in LNG, chemicals, refining, oil sands and upstream markets. Backlog is up roughly 140% since mid-2009, which gives some confidence in the earnings growth outlook. CBI has had execution challenges in the past, most recently during 2005-2008. However, fixed price mix has declined from 90% lump sum in 2006, to 40% fixed price today, with that 40% a mix of lump sum and hybrid. Industry data: construction spending in July U.S. non-res construction spending in July is down 0.4% from June but grew 5.7% y/y. Seasonally adjusted public construction spending in July was down 2% from June, and down 9% y/y. Declines y/y registered in education, transportation, highway and street, sewage, and water. Power was up y/y. Sector view: Constructive on construction, despite near term turbulence We expect some macro-driven weakness this summer, but we still think the cyclical drivers (oil prices and backlogs) are supportive, and we like the LNG/ upstream themes. Buy ratings: KBR, MDR, FLR, FWLT, SHAW, ACM, TPC. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 UBS 12
  13. 13. Morning Expresso - United States 6 September 2011TECHNOLOGY UBS SemiBytes Semiconductors Analyst: Uche Orji Tel: +1-212-713 4015 TXN, ALTR Kick-off Mid-Qtr Update Season Week Ahead: ALTR (6-Sep), TXN (8-Sep) 3Q11 mid-quarter updates Against a weak macro backdrop and back-end loaded nature of 3Q (Sep is ~39% of 3Q semi industry sales), this mid-quarter update season is crucial. During our Aug 25-26 bus tour, our companies indicated demand trends were on track, and thus we expect Altera to reiterate +4% q/q sales. However, we maintain our cautious view on the analog sector and expect TI to lower its +2.5% mid-point sales guidance. Altera’s strength is driven by wireless equipment (UBS raised its 2011 global wireless capex forecast to +9% from +8% on 31-Aug). Although the m/m manufacturing ISM index is stabilizing, we note recent declines are a headwind for industrial sales and consequently a concern for TI and the analog sector. Charts: 3Q industry vs Intel+AMD MPU sales, ALTR vs custom IC index Strong July industry processor sales support our 3Q Intel estimates, which should be in line, even if Aug, Sep m/m growth is half of historical. Altera and Xilinx continue to take share from custom ICs (2Q: Altera +2% q/q vs custom ICs -13%). SIA sales, ISM PMI, Durables data confirm what we knew about July/Aug Our companies reporting June/July quarter-end results and feedback from our recent bus tour confirm broader macro weakness: 1) July semi industry revenues of -3.8% y/y dipped into negative territory for the first time since Sep-09 and are +3% YTD, below our +4% 2011 forecast, 2) the y/y Mfg ISM PMI, which leads y/y semi industry revenues, suggested continued 3Q weakness (90% R2, pg 5), 3) July US durable goods revenue for US-made computer & electronics products sold in the US, which directionally lags semi industry growth, declined 3.1% y/y in July from +3.2% y/y in 2Q, with 39.5% inventory/backlog, the highest since late 2006. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 5 September 2011 Semiconductor Equipment Industry Update Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111 Taiwan orders below 2008 recession levels 3Q11 Taiwanese order trends indicate further downside risk Our analysis of 9 Taiwanese semi companies found that only $190M of total semicap orders were placed in the first 9 weeks of 3Q11 versus $1.1B and $2.0B in all of 2Q11 and 1Q11 tracking -76% q/q. Our analysis of the 3Q11 guidance of the semicap companies indicates a Wafer Fab Equipment (WFE) spend of -10% or $28B implied by the grey sky scenario (<2% global GDP growth). Our checks suggest 3Q11 WFE spend is tracking at -20% or $25B partially discounting the black sky scenario (flat global GDP growth). Our analysis of the black sky scenario suggests a WFE run rate of $20B implying a 20% downside from current levels. Checks found UMC placed 1 semicap order for $19M last week Our checks found UMC’s new semicap order was with Tokyo Electron, after no new orders were placed in the previous 5 weeks. Our analysis shows UMC’s total orders to date in 3Q11 are only $29M (down -72% q/q so far), compared to $148M in 2Q11 and $157M in 1Q11. We found TSMC did not place a new order last week and its total semicap orders so far in 3Q11 are only $126M versus $838M in 2Q11 and $1.6B in 1Q11. Total foundry semicap orders from Taiwan are tracking down 77% q/q at $225M compared to $292M in 4Q08 and total DRAM semicap orders are tracking down -62% q/q at $51M vs. $67M in 4Q08. July-11 Semi units down -12% m/m; still tracking at a healthy clip However, rolling 3M y/y IC unit growth continued to decline for 16th consecutive month to -0.3% after peaking at 60% in Mar-10. Historically, acceleration of y/y IC unit growth has been a leading indicator for higher semicap orders and we believe it likely inflects higher in 4Q11/1Q12. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 5 September 2011 Molex Rating: Neutral Target: US$21.00 Price: US$20.23 RIC: MOLX.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$3.57bn BBG: MOLX US Electric Components & Equipment Analyst: Amitabh Passi Tel: +1-415-352 5537 Highlights From Management Meeting Business Conditions Appear Generally In-Line With Expectations We hosted MOLX mgmt for a few meetings and came away with the impression that business conditions appear to be generally consistent with expectations. On the plus side, the consumer electronics segment seems to be doing a bit better as Japan recovers and holiday builds start, and auto does reasonably well. On the other hand, mobile phones remain patchy as a large customer undergoes a transition and industrial remains relatively weak with signs of some excess inventory still at Distis. All other markets appear to be in-line with Sept qtr guidance of (-1.5%) q/q. Visibility Limited; Expectations of Strong Seasonal Trends FY2Q/3Q Visibility remains limited at 1-2 months, but given a late start to consumer- related seasonal builds and Japan recovering, there is some expectation that FY2Q/3Q could be at the upper end (or better) of normal seasonality. We believe it is still premature to gauge FY2Q/3Q trends given much macro uncertainty. ASP erosion still appears to be below the normal range of -3-5% annually, while commodity cost increases, especially gold, are likely to remain a headwind, in our opinion. Capital Structure In Good Shape; Would Like to See Buy-Backs MOLX ended FY4Q with net cash of ~$200m and the recent $150m debt raise should add more certainty given its fixed rate. On M&A, we believe MOLX is more open to larger deals ($100m+), and we would like to see addl. excess cash be re-considered for class A share buy-backs (16% discount to MOLX common). Valuation: Maintain Neutral and Price Target (PT) of $21 PT based on VCAM (a form of DCF): WACC 10%; Rev growth 6.5%; across-cycle OM of 11%. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$20.23 on 02 Sep 2011 19:39 EDT UBS 13
  14. 14. Morning Expresso - United States 6 September 2011 ValueClick Rating: Neutral Target: US$17.00 Price: US$15.26 RIC: VCLK.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.27bn BBG: VCLK US Internet Services Analyst: Brian Fitzgerald Tel: +1-212-713 2851 VCLK Closes Dotomi Acquisition and Increases Buyback Authorization VCLK Completes Acquisition of Dotomi ValueClick announced it has closed its acquisition of Dotomi, in-line with our expectations for a late-August close. VCLK paid a total up-front consideration of $295MM (55% cash / 45% stock) for Dotomi, which is a provider of data-driven, intelligent display media for large retailers. VCLK Updates 3Q Guidance; Repurchased 3.5MM Shares Since Aug 5 For 3Q, Dotomi will contribute ~8.5MM revenue while adding $2MM in amortization expense and $1MM in stock based compensation expense. Based on these numbers, we are adding to our model Dotomi revenue of ~$31MM in 4Q and $124MM in F12 based on an expectation of ~50%+ Y/Y growth from 2011 est rev of ~$80MM. Revenue will be booked through the Media segment. Dotomi has gross margin modestly higher than VCLK average (low-70s vs. VCLK actual 68% in 2Q) and EBITDA around the company average (~30%). Repurchases 3.4MM Shares; Increases Buyback Authorization Since Aug 5, VCLK has repurchased 3.4MM shares for a total cost of $49.5MM (avg $14.56 / share). Additionally, the board has increased the share repurchase program authorization by $86MM, bringing the current share repurchase program authorization to $100MM. Valuation Our $17 PT is based upon our 10-year DCF (11% WACC; 3.5% LTGR). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$15.26 on 01 Sep 2011 19:42 EDT US Internet and Interactive Entertainment Internet Services Analyst: Brian Pitz Tel: +1-212-713 9310 Pitz & Fitz’s Internet / IE Weekly Google Apps has 40MM users; Adding 5K new companies per day Google Chairman Eric Schmidt, speaking at the annual Dreamforce conference, said Google Apps now has 40MM users. Additionally, Mr. Schmidt said more than 5K new firms are using Google Apps each day. Google Apps is Google’s cloud-based productivity suite (like Microsoft Office 365), which integrates Gmail with Google Docs (word processing, spreadsheets, etc), Google Calendar, Google Talk, Google Groups, and Google Sites. eBay’s GSI Commerce signs a deal with Dollar General GSI Commerce signed a new multi-year agreement with Dollar General, one of the largest US retailers, to provide the company with comprehensive eCommerce and marketing services for its online business. The new eCommerce-enabled website of Dollar General is scheduled to launch on September 8. GSI will provide eCommerce technology, payments, fulfilment, and customer care services, as well as a broad range of digital marketing services Google wins antitrust victory in Ohio Google won a legal victory in an Ohio case that involved antitrust claims related to charges Google used anti- competitive restrictions to block competition in the paid-search market. The case originated when Google lowered the quality score of AdWords customer myTriggers. With a lower quality score, the site had to increase its spending for traffic, but did not pay what it owed Google. Google eventually sued myTriggers to collect roughly $300K, and myTriggers filed the anti-trust suit in response. The Ohio court ruled myTriggers was only able to show harm to itself and not competition more generally. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 6 September 2011 UBS 14
  15. 15. Morning Expresso - United States 6 September 2011TELECOMMUNICATION Vodafone Group Rating: Buy Target: 190p Price: 162p RIC: VOD.L Prior: Unchanged Prior: Unchanged Mkt Cap: £85.4bn BBG: VOD LN Wireless Communications Analyst: Nick Lyall Tel: +44-20-756 86332 Raising to a Key Call We raise Vodafone to a Key Call, well positioned Vodafone EPS falls 3% due to our work on economic/structural issues, a lower fall than average. In our view, Vodafone Europe relative tariffs are better positioned than in 2008, its geographic exposure means growth can be sustained, and dividend payments from VZW are ongoing and will rise in our view. Management will discuss dividend further on 8th November which could act as a catalyst for shares. Please refer to today’s UBS Telcos sector note on economic and structural issues. Vodafone Europe better positioned, less than 50% Europe leads to growth Vodafone Europe organic service revenue fell -1.3% last quarter, ahead of the European market decline of -2.9%. Gradual price cuts place Vodafone at a mild discount to the incumbent in many markets, with strong, buy-through data packages in certain markets. Only 48% of Vodafone proportionate EBITDA comes from Europe. Stronger growth in India, South Africa and the US lead to growing proportionate EBITDA versus a decline for the average European Telco. VZW dividend resumption makes valuation extremely attractive The VZW dividend will resume in January 2012. The payment is earlier and larger than expected. It may not be a policy but our US analysts believe it is ongoing, and will increase from £2.8bn to £3.8bn in 2013. Dividend yield stands at 8.3% to March 2012 and 8.8% March 2013. Proportionate payout is low at 60%. Valuation – DCF-based SOTP reaches 190p PE 8.8x, cash 12%, 8.8% dividend yield to March 2013. Shares have outperformed since the VZW dividend announcement, but remain at a large discount. Notes: The stock is a key call in Europe Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of 162p on 02 Sep 2011 21:42 BST UBS 15
  16. 16. Morning Expresso - United States 6 September 2011UBS Key Calls - USLive Key Call Portfolio Stock Name RIC Rating Price Target Date of call Current Price Analyst Apple Inc. AAPL.O Buy US$510 02-Jun-11 US$374.05 Maynard Um Baker Hughes Inc. BHI.N Buy US$102 07-Jun-11 US$58.27 Angie Sedita Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$41.41 Steven Valiquette Celgene Corporation CELG.O Buy US$71 09-Dec-10 US$58.34 Matthew Roden, PhD Citigroup Inc C.N Buy US$56 03-May-11 US$28.4 William Tanona, CFA CONSOL Energy, Inc. CNX.N Buy US$87 04-Aug-11 US$44.78 Shneur Gershuni, CFA Deere & Co. DE.N Buy US$110 18-Jan-11 US$78.03 Henry Kirn, CFA Dow Chemical DOW.N Buy US$46.5 21-Mar-11 US$26.71 Andrew Cash Ford Motor Co. F.N Buy US$22 10-Jan-11 US$10.42 Colin Langan, CFA General Electric Co. GE.N Buy US$23 10-Jan-11 US$15.76 Jason Feldman Google Inc. GOOG.O Buy US$800 10-May-10 US$524.84 Brian Pitz Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$79.39 Henry Kirn, CFA Prudential Financial Inc. PRU.N Buy US$70 26-Apr-11 US$49.68 Andrew Kligerman Qualcomm Inc. QCOM.O Buy US$62 21-Mar-11 US$34.94 Parag Agarwal SanDisk Corp. SNDK.O Buy US$510 02-Jun-11 US$374.05 Uche OrjiSource: Reuters, UBS. Prices as at market close on September 2, 2011. UBS 16
  17. 17. Morning Expresso - United States 6 September 2011Rating & PT ChangesKey Rating and Price Target Changes: US Company Name Directional Indicator/Rationale Reuters Code Current New New PT Prior Prior PT Share Price Rating Rating Remove Short-Term Buy, lower PT HOG.N US$36 Neutral US$39 Neutral-Short US$43 Harley-Davidson Inc. Term Buy Ingersoll-Rand Co. Upgrade to Buy, lower PT IR.N US$32.38 Buy US$43 Neutral US$45 Rockwell Collins Inc. Reiterate Buy, lower PT COL.N US$47 Buy US$70 Buy US$76Source: Reuters, UBS. Prices as at market close on September 2, 2011.Markets, Events and NewsflowToday’s Company Events Company Name Event Reuters code Rating PT Notes NoneSource: Reuters, UBS. Prices as at market close on September 2, 2011.Today’s Macroeconomic Events: US Indicator Time (ET) UBS forecast Previous Consensus Non-Manufacturing ISM (Aug)index 11:00 na 52.7 51.3 Employment Trends Index (Aug) 11:00 na na na Fed Discount Rate Meeting Minutes 15:00 na na naSource: Bloomberg, UBS UBS 17
  18. 18. Morning Expresso - United States 6 September 2011Today’s UBS Hosted Corporate Roadshow: Company Event Location NoneToday’s UBS Hosted Fieldtrip: Company Event Location NoneToday’s UBS Hosted Conference: Company Event Location None UBS 18
  19. 19. Morning Expresso - United States 6 September 2011Latest Market Movements: Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change Americas United States Dow Jones 11240.3 -2.20 -2.91 United States S&P 500 1174.0 -2.53 -6.65 United States Nasdaq 2480.3 -2.58 -6.50 United States S&P VIX 33.92 6.6 Europe Europe FTSE Eurofirst300 921.7 1.28 -17.82 Belgium BEL 20 2142.1 1.16 -16.93 Germany DAX 5302.9 1.08 -23.30 France CAC 3033.9 1.15 -20.26 Italy MIB 30 14336.8 0.02 -28.93 Netherlands AEX 276.9 0.90 -21.90 Portugal PSI 20 6161.9 0.06 -18.80 Spain IBEX 8074.5 0.10 -18.10 Switzerland SMI 5404.3 5.08 -16.03 UK FTSE 100 5186.8 1.65 -12.09 Asia Hong Kong Hang Seng 19710.5 0.48 -14.43 India BSE Sensex 16758.0 0.27 -18.29 Japan Nikkei 225 8590.6 -2.21 -16.02Source: UBS, Reuters. Indices in Americas as at market close on September 2, 2011. Indices in Europe and Asia as at 05:00 EDT on September 6, 2011Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change Euro €/$ 1.420 -1.19% -0.9% 6.1% UK £/$ 1.622 0.22% -1.3% 3.9% Canada CAD/$ 1.015 -0.98% -2.5% 1.2% Switzerland CHF/$ 1.269 0.87% -2.5% 18.5% China Yuan/$ 0.157 -0.02% 0.8% 3.3% Brazil BRL/$ 0.609 -1.31% -4.8% 1.1% India INR/$ 0.022 -0.25% -3.2% -2.3% Mexico MXN/$ 0.081 -0.83% -4.7% -0.6% Japan $/JPY 0.768 -0.12% -0.3% -5.4% Australia AUD/$ 1.064 -0.77% -1.2% 4.0%Source: UBS, Reuters. Prices as at market close on September 2, 2011. UBS 19
  20. 20. Morning Expresso - United States 6 September 2011Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change Gold ($/oz) 1904.25 1.47 12.34 32.97 Brent Crude spot, $/bbl 110.85 0.70 2.64 24.82 WTI Crude spot, $bbl 84.5 -2.26 - - Natural Gas, $MMBTU 3.885 0.34 -3.29 -2.37Source: UBS, Reuters. Prices as at market close September 6, 2011. UBS 20
  21. 21. Morning Expresso - United States 6 September 2011UBS Conferences and SeminarsFor the week of 29th to 2nd September From To Event Location NoneUpcoming UBS Conferences and Seminars From To Event Location 30-Aug-2011 30-Aug-2011 All Lighting Conference Frankfurt 8-Sep-2011 9-Sep-2011 Best of Americas Conference 2011 London 12-Sep-2011 13-Sep-2011 Global Transport Conference 2011 London 14-Sep-2011 15-Sep-2011 Global Paper and Forest Products Conference New York 19-Sep-2011 21-Sep-2011 Global Life Sciences Conference New York 27-Sep-2011 30-Sep-2011 Global Oil & Gas Conference London 28-Sep-2011 28-Sep-2011 UBS Business Development Company (BDC) Conference New York 15-Nov-2011 16-Nov-2011 Global Macro CTA & FX Conference 2011 Zurich 15-Nov-2011 17-Nov-2011 Global Technology and Services Conference New York 29-Nov-2011 01-Dec-2011 Global Real Estate CEO conference LondonRecent events From To Event Location 17-Aug-2011 17-Aug-2011 What If...Grey or Black Skies Lie Ahead? Conference Call 19-Aug-2011 19-Aug-2011 TV/Radio/Newspaper M&A Market Update Conference Call 19-Aug-2011 19-Aug-2011 Which Shade? Conference Call 22-Aug-2011 22-Aug-2011 Q2 UBS/Mercent eCommerce Update Conference Call State of the Life Insurance Industry Update and Outlook with 25-Aug-2011 25-Aug-2011 Conference Call Moody’s 25-Aug-2011 25-Aug-2011 MSFT: Top 10 Things To Watch for at BUILD Conference Conference Call*For further information on any of these events, please contact your UBS representative. Replay details may be available for recently concluded conference calls. UBS 21
  22. 22. Morning Expresso - United States 6 September 2011Further InformationMorning Expresso – United StatesWelcome to the Morning Expresso, an early morning summary of the key ideas and issues presented from UBS forthe day ahead. Its contents include: - key items from UBS’ United States Morning Meeting - highlighted recommendation and price target changes - today’s anticipated company, sector and macro-economic catalysts from the US Contextual Diary - company and client events, conferences and conference calls from UBS - overnight global market, forex and commodity movementsMorning Expresso is designed to give you all that you ‘need to know’ each morning.Data presented is accurate as at 06:00 EDT on Tuesday, September 6, 2011.Contacts & FeedbackFor further details concerning today’s Morning Expresso – United States note, please or speak to your UBS contact. This note is not intended to be static and it willevolve over time. Feedback welcomed on email Statement of RiskForecasting earnings and corporate financial behavior is difficult because it isaffected by a wide range of economic, financial, accounting and regulatorytrends, as well as changes in tax policy. UBS 22
  23. 23. Morning Expresso - United States 6 September 2011 Analyst CertificationEach research analyst primarily responsible for the content of this researchreport, in whole or in part, certifies that with respect to each security or issuerthat the analyst covered in this report: (1) all of the views expressed accuratelyreflect his or her personal views about those securities or issuers and wereprepared in an independent manner, including with respect to UBS, and (2) nopart of his or her compensation was, is, or will be, directly or indirectly, relatedto the specific recommendations or views expressed by that research analyst inthe research report. UBS 23
  24. 24. Morning Expresso - United States 6 September 2011Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches andaffiliates are referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission.UBS Investment Research: Global Equity Rating Allocations 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 54% 39% Neutral Hold/Neutral 39% 35% Sell Sell 7% 14% 3 4 UBS Short-Term Rating Rating Category Coverage IB Services Buy Buy less than 1% 33% Sell Sell less than 1% 25%1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided withinthe past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were providedwithin the past 12 months.Source: UBS. Rating allocations are as of 30 June 2011.UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 24
  25. 25. Morning Expresso - United States 6 September 2011KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not aforecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stocks price target and/or rating aresubject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect anychange in the fundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASESUK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:Negative on factors such as structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stocks volatility and the credit spread of the respective companysdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are notregistered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained inthe NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by aresearch analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,follows. UBS 25