Financial Pacific - Payrolls +80k, unemployment holds at 9,1% (third party)
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Financial Pacific - Payrolls +80k, unemployment holds at 9,1% (third party)

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    Financial Pacific - Payrolls +80k, unemployment holds at 9,1% (third party) Financial Pacific - Payrolls +80k, unemployment holds at 9,1% (third party) Document Transcript

    • ab Global Equity Research Americas UBS Investment Research Equity Strategy Morning Expresso - United States Market Comment 2 September 2011 www.ubs.com/investmentresearch U.S. Equity Product Management 212-713-2400 Friday 2 September 2011 Morning Expresso This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 20. 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.
    • Morning Expresso - United States 2 September 2011Morning Meeting Agenda Commodities & Mining Q&A Mining & Metals Analyst: Julien Garran Tel: +44-20-7568 3540 Twister Q1. Are the mining stocks cheap here? Right now, BHP is trading at a 25% discount to fair value. Thats fully pricing in a mid- cycle slowdown in our view. If investors think thats all were facing, they should buy now. But we think theres around 20% downside to a global recession. And about 50% downside to a credit crunch. Q2. So, to buy we have to rule out a recession & a credit crunch? Yes, and credit crunches are rare. The last one was 2008, before that 1982. A mid-cycle slowdown, like May-August ’10, or Feb-May ’06 sees a moderate slowing of economic activity, but continued credit growth. But credit now is stressed, suggesting a more difficult outcome. Q3. Do you like the risk/reward in commodities & miners here? No – we think this could turn out to be a value trap. The problem now is that the risks of bank liquidity crises and a trade finance crunch are on the rise. We dont like the risk/reward balance here; were staying cautious, and we stay on the alert for evidence of deteriorating trade finance conditions. Q4. What can go wrong with the call? The first thing is that the short term rally in the commodities & the miners could run on into the FOMC meeting on 20/21 September in anticipation of Operation Twist, on the back of EFSF bond purchases and in recognition of solid internal Chinese demand. A greater upside risk for the commodities is that the Fed goes ‘quantitative’ with its easing, and there’s a run on the dollar. But we don’t believe that will happen before a greater downturn. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 Foot Locker Rating: Neutral Target: US$22.00 Price: US$20.27 RIC: FL.N Prior: Unchanged Prior: US$26.00 Mkt Cap: US$3.15bn BBG: FL US Footwear Analyst: Michael Binetti Tel: +1-212-713 3805 Updating our 2011/2012 Outlook; Neutral Raising EPS, but Trimming Valuation to Reflect Near-Term Uncertainties We are raising our F11E EPS to $1.73 (Street: $1.70) from $1.62 based on 1) a $0.10 F2Q EPS beat, 2) higher F3Q SSS of +6% (prev +5%), and 3) 3Q GM ests of +70bp YOY (+50bp prev). In this note we present a detailed analysis of potential scenarios amid an NBA lockout—which we believe could be a drag to FL’s sales. We trim our target P/E to reflect reduced NT industry sales visibility. Lower Price Target Emphasizes Near Term Uncertainties… Our lower target P/E reflects reduced athletic retail industry SSS visibility due to the pending NBA lockout (we estimate basketball=35% of FL’s sales). We don’t believe the NBA season will start on time—with potential for no season at all. History shows that industry SSS trends slowed by ~7pp during the ’98 lockout. Our new target P/E of 12x is based on a probability-weighted analysis of scenarios with different potential impacts to FL’s SSS amid an NBA lockout. …But We Would Get More Constructive Once SSS Risks Are Understood We have been impressed with FL’s SSS & margin improvements in the early stages of its turnaround. We believe the strong underlying fundamental drivers (strong footwear cycle, better inventory control, an improving apparel program) can drive EPS upside—and the multiple can re-expansion once NBA risk is better understood. We would view signs of stable basketball category trends as an opportunity to get more constructive on FL’s stock in coming months. Valuation: Trimming PT to $22 from $26 to Reflect Reduced NT Visibility Our $22 PT is based on our new target P/E of 12x our FY12E EPS (prev. 15x). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$20.27 on 01 Sep 2011 18:42 EDT UBS 2
    • Morning Expresso - United States 2 September 2011MACRO AND STRATEGY RESEARCH US Daily Economic Comment Economist: Maury N. Harris Tel: +1-212-713 2472 Expecting a decent payroll report Preview: Payrolls +80k, unemployment holds at 9.1% Our soft forecast for payrolls (UBSe 80k, cons 65k) reflects the impacts of the Verizon strike more than any rapid deterioration in the labor market. We estimate private payrolls up 105k after average gains of 144k since the beginning of Q2. The workweek was probably unchanged, and we estimate average hourly earnings rose 0.2%. The unemployment rate was probably flat at 9.1%. Although jobless claims continued to trend downward in Aug and NFIB indicated some improvement in small-firm employment, ADP suggested some slowing. At the same time, the plunge in consumer confidence in Aug appears to have reflected policy doubts more than job market weakness. (See our “Employment Preview”.) Review: ISM holds above 50, ULC jump higher, vehicle sales edge off (1) The manufacturing ISM index edged down to 50.6 in Aug (cons 48.5, UBSe 50.0) from 50.9 in July. The level appears consistent with only very slow growth in manufacturing output. However, actual growth could well be stronger, as it was in July, helped by motor vehicle production. Durables orders also appear stronger. (2) Jobless claims slipped to 409k (cons 410k, UBSe 400k) in the week of Aug 27. The prior week was raised to 421k from 417k. Strikes had resulted in a boost to claims in mid-Aug, but there were no special factors for claims in the latest week. After adjusting for strike-related claims, the four-week average was 404k, down from 408k a month ago and 427k two months ago. The claims data suggest continued gradual improvement in the labor market. (3) Construction spending fell 1.3% in July, but Jun was revised up to 1.6% from 0.2%. For Q2 GDP, this implies upward revision to a 1.2% annual rate from the currently reported 1.0% pace (including some small positive contribution from factory inventory revisions reported yesterday). Q3 construction spending got off to a weak start, though, with both public and private nonresidential spending swinging from rising to falling. Residential improvements also contributed to the Jun-Jul swing but are unreliable enough to be excluded from the GDP accounts. (4) Q2 nonfarm business productivity was cut to -0.7% from -0.3% (cons - 0.5%, UBSe -0.4%). Unit labor cost was raised to 3.3% from 2.2% (cons 2.4%, UBSe 3.5%). (5) Light vehicle sales slipped to an estimated 12.0 mil unit annual rate (cons: 12.1 mil, UBSe: 11.8 mil, after 12.2 mil). However, ICSC store sales maintained a solid 4.6% y/y pace, despite difficult comparisons with last August. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 US Economic Comment Economist: Maury N. Harris Tel: +1-212-713 2472 Employment preview: Slightly softer Softish payrolls (80k) and private payrolls (105k), but UE rate unchanged Our soft forecast for nonfarm payrolls (UBSe 80k, cons 65k) reflects the impacts of the Verizon strike more than any rapid deterioration in the labor market. We estimate private payrolls up 105k after average gains of 144k since the beginning of Q2. The workweek was probably unchanged, and we estimate average hourly earnings rose 0.2%. The unemployment rate was probably flat at 9.1%. Some signs of slower job creation despite downtrend in jobless claims Although jobless claims have continued to trend downward in August, ADP data suggested some marginal slowing. The plunge in consumer confidence in August appears to have reflected policy doubts more than labor market deterioration. Also, consumer spending held up fairly well, based on the monthly ICSC and auto sales figures—inconsistent with sudden labor market deterioration. Demographics, technical factors, and policy conspire to bias UE rate down Our forecast for no change in the unemployment rate partly reflects a catch-up for the household-survey measure of employment which, more volatile than the payroll-survey measure, has been running well below payrolls in recent months. We also expect continuing downward pressure on the unemployment rate from a falling labor force participation rate. And as eligibility for long-term unemployment benefits expires, some of the long-term unemployed probably are leaving the labor force. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 US Economic Comment Economist: Maury N. Harris Tel: +1-212-713 2472 ISM inches down to 50.6, claims fall Manufacturing ISM index straining to stay above 50 (-0.3 to 50.6 in Aug) The manufacturing ISM index edged down to 50.6 in Aug (cons 48.5, UBSe 50.0) from 50.9 in July. The level appears consistent with only very slow growth in manufacturing output. However, actual growth could well be stronger, as it was in July, helped by motor vehicle production. Durables orders also appear stronger. Claims, no longer strike-affected, slipped to 409k Jobless claims slipped to 409k (cons 410k, UBSe 400k) in the week of Aug 27. The prior week was raised to 421k from 417k. Strikes had resulted in a boost to claims in mid-Aug, but there were no special factors for claims in the latest week. Construction spending swings from +1.6% in June to -1.3% in July Construction spending fell 1.3% in July, but Jun was revised up to 1.6% from 0.2%. For Q2 GDP, this implies upward revision to a 1.2% annual rate from the currently reported 1.0% pace (including some small positive contribution from factory inventory revisions reported yesterday). Q3 construction spending got off to a weak start, though, with both public and private nonresidential spending swinging from rising to falling. Residential improvements also contributed to the Jun-Jul swing but are unreliable enough to be excluded from the GDP accounts. Productivity and costs revised unfavorably Q2 nonfarm business productivity was cut to -0.7% from -0.3% (cons -0.5%, UBSe -0.4%). Unit labor cost was raised to 3.3% from 2.2% (cons 2.4%, UBSe 3.5%). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 UBS 3
    • Morning Expresso - United States 2 September 2011COMMUNICATION Entertainment Entertainment Analyst: John Janedis, CFA Tel: +1-212-713 1064 UBS’ Reel Rundown This Weekend’s Top Releases This weekend’s releases include Apollo 18 (Weinstein / Dimension, UBSe opening weekend box office $20M), and Shark Night (Relativity, UBSe $10M). YTD box office revs are 4% below last year’s, and +3% 3Q to-date. This wknd, box office revs are comping against last yr’s new releases The American (Focus Features, $17M opening weekend), Machete (Fox, $14M opening weekend), and Going the Distance (Warner Bros., $9M opening weekend). QTD DVD / Blu-ray / Rental Market DVD revs are -20% QTD (wk ending 8/21), due to a 7% decline in units sold and a 14% decline in implied price/unit. Blu-ray revenues are +88% QTD (wk ending 8/21) with units sold +84%. On a combined basis, DVD and Blu-ray rev is +7% and units sold is +11% QTD. Rental rev is +28% QTD (wk ending 8/21). YTD DVD / Blu-ray Market DVD revs are -22% YTD (wk ending 8/21), due to an 11% decline in units sold and a 11% decline in implied average unit price. Blu-ray revs are +51% YTD (wk ending 8/21; units sold +50%). Combined, DVD and Blu-ray rev is -5% with units sold -1%. Rental rev is +11% YTD (wk ending 8/21). Company Data Detailed co. box office and home ent. rev info can be found on pages 5-8. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 UBS 4
    • Morning Expresso - United States 2 September 2011ENERGY PG&E Corp. Rating: Neutral Target: US$42.00 Price: US$42.35 RIC: PCG.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$15.7bn BBG: PCG US Electric Utilities Analyst: Jim von Riesemann Tel: +1-212-713-4260 Inexpensive or Just Not Timely? Highlights from California road trip We met with PCG CFO Kent Harvey, SVP Regulatory Thomas Bottoroff, and VP Energy Supply Roy Kuga. We also met with CPUC Commissioner Ferron’s energy policy advisors and key renewables policy makers. Our view of the meeting was that it was constructive in nature but it was short on incremental information; the company is serious about correcting its processes and procedures and will accept reasonable financial responsibility. The ball is in the CPUC’s court now Following the scathing NTSB report on the San Bruno pipeline explosion (see our note dated August 31 for more details), the regulators must now contemplate penalties that can be in the form of (1) rate of return penalties; (2) upfront fines; and /or (3) a sharing of costs going forward. Separately, the NTSB report indicated lax regulatory oversight was partially to blame suggesting to us that Governor Brown may need to make changes at the CPUC. Our view of California regulation remains cautious in nature. PCG stakeholders have already absorbed at least $2.0B Our calculation is based on a combination of lost enterprise value, the NPV of lost dividend increases, a reasonable and balanced financial fine and expectations for downward ROE adjustments. That said, we believe the CPUC is committed to keeping the company’s debt ratings at the BBB level. Valuation Our 12-month price target is based on a median regulated P/E average on our 2013E. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$42.35 on 31 Aug 2011 19:41 EDT US Electric Utilities & IPPs Electric Utilities Analyst: Jim von Riesemann Tel: +1-212-713-4260 Fresh Look at West Coast IPPs Latest California trip yields mixed update for IPPs We visited with regulators in California and walked away more mixed in our long term assessment of market dynamics. We believe a substantial wave of renewable investments is likely to come online sooner in California, as the CPUC presses utilities to select nearer-term, more viable projects; we anticipate a material impact to peak pricing, particularly to SP15. Offsetting the impact of new renewables, we continue to expect improved pricing from flexible dispatch products and capacity (CPM/RA). Improved clarity around renewable contracts (albeit at lower prices) for NRG and CPN as well as repowering contracts for units impacted by once through cooling should boost valuations once awarded. Latest renewables solicitation yields lower pricing and stricter terms PG&E’s latest renewables solicitation received over 1,400 offers, with the preponderance either solar PV and wind. Projects shortlisted have already been notified (although not disclosed); we believe CPN’s geothermal expansion is one such project. Pricing directionally has been reduced substantially, with a recent renegotiation of a 2009 PG&E Solar PV project reduced by 20% (the Northstar 60 MW PV project) following an initial rejection of the contract by the CPUC. We anticipate new projects will face greater scrutiny of ultimate viability, with only those having Phase I and II transmission approvals in place receiving the CPUC’s nod. Furthermore, we believe there is a clear preference for contracts with nearer term projected in-service dates (pre-2015). We believe NRG may yet see further solar projects, but are likely to be substantially smaller in scale relative to its existing pipeline. We continue to anticipate a selldown of its solar business in the near term and financial close of its CVSR solar project by 9/30. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 Murphy Oil Rating: Neutral Target: US$68.00 Price: US$53.54 RIC: MUR.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$10.4bn BBG: MUR US Oil Companies, Secondary Analyst: William A. Featherston Tel: +1-212-713 9701 Sells Meraux Refinery At Attractive Price MUR divests Meraux, Louisiana refinery at better than expected price MUR agreed to sell its 135 MBbld refinery in Meraux, LA for $325 MM excluding inventory, well above our estimate of ~$200 MM. Inventory will be valued based on prices at closing (currently at ~$300 MM, also above UBSe of ~$265 MM). We estimate MUR is receiving a Nelson complexity adjusted price of $370/Bbld, near the middle of the $200-$575/Bbld range for ‘10-‘11 deals but below the $755/Bbld high watermark set the by the sale of its Superior, WI refinery in July. Sale of UK assets likely delayed until 1H12 MUR will now focus on selling its UK refinery and retail assets. The sale of MUR’s Milford Haven refinery in UK is likely to be pushed into 2012. We value that refinery including inventory at $515 million. MUR also plans to divest 230 owned retail sites in the UK along with ~220 franchised dealers; it will continue to operate its U.S. retail sites, which generate mid-teen rates of return. We now estimate refining divestitures could total >$1.75 billion and we expect MUR to re-invest the sale proceeds into onshore NA resource plays. Expect proceeds to be directed toward North American shale plays. We expect proceeds from the recent refinery divestitures to go toward the growth and development of its E&P resource plays: 240,000 net acres in the Eagle Ford shale position, 145,000 net acres in the Montney tight gas play, and over 150,000 net acares in the Southern Alberta Bakken. Valuation: we rate MUR a Neutral with a $68 price target PT assumes 4.0x normalized ‘11E EBITDX (in line with hist avg), or 0.85x NAV. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$53.54 on 01 Sep 2011 17:42 EDT UBS 5
    • Morning Expresso - United States 2 September 2011 Natural Gas Storage Oil & Gas Exploration Analyst: William A. Featherston Tel: +1-212-713 9701 Bullish Injection; Weather Adjusted S/D Balance Unchanged Storage injection below consensus and UBSe Storage rose 55 Bcf, below consensus of a 60 Bcf injection and at the bottom of the UBSe range of a 55-65 Bcf injection. The injection was about in line with 2010’s 54 Bcf injection but below the 5-year average of a 63 Bcf injection due to warmer than normal weather. Inventories are now 2,961 Bcf, maintaining the deficit vs. 2010 at 145 Bcf but increasing the deficit vs. the 5-year average to 90 Bcf. Weather warmer than 5-year average and year ago last week Last week, weather was 7% warmer than the year ago week and 17% 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 25% of cooling degree days remain ahead of us this summer. Forecast injection of a 70-80 Bcf next week We forecast a 70-80 Bcf injection next week, above 2010’s 58 Bcf injection and the 5-year average of a 71 Bcf injection. The weather adjusted S/D balance has been 1.7 Bcfd oversupplied vs. the 5-year average over the last month and 0.9 Bcfd oversupplied vs. 2010. We forecast storage refills to 3.6 Tcf on 10/31 (about in line with the normal level). E&Ps discounting long term prices of $4.65/Mcf This compares to the 2011 futures strip of $4.24/MMBtu & the long dated (2015) strip of $5.54/MMBtu. Our top E&P picks are: APC, NBL, MRO, and OXY. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 US Natural Gas Insight Gas Utilities Analyst: Ronald J. Barone Tel: +1-212-713 3848 Injection Below Consensus Expectations Injection: 55 Bcf vs 60 Bcf cons; Storage deficit at 145 Bcf . Spot stood at $3.96/MMBtu; NYMEX Strip at $4.43/MMBtu . Weather: Below normal temps are expected in Northeast . Stock Watch: Large energy conference to be held in NYC next week . Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 UBS 6
    • Morning Expresso - United States 2 September 2011FINANCIALS Goldman Sachs Rating: Buy Target: US$200.00 Price: US$112.54 RIC: GS.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$59.3bn BBG: GS US Diversified Financial Analyst: William Tanona, CFA Tel: +1-212-713 2325 Review required to close the sale of Litton Fed announces investigation into Goldman’s mortgage servicing practices Right after Goldman announced it closed the sale of its Litton mortgage servicing business, the Fed issued a formal enforcement action against Goldman related to its former subsidiary. Specifically, Goldman is required to review foreclosures from 2009-2010, similar to enforcement measures imposed on 14 large servicers last April. Goldman retains Litton liability, but we don’t expect substantial exposures While GS remains responsible for penalties related to Litton’s practices while owned by the firm, we expect remediation expenses would be moderate. Litton services roughly $40 billion of mortgages, has 0.4% market share, and is the 25th largest mortgage servicer in the US, per Inside Mortgage Finance. Regulatory attention continues to weigh on the stock We were somewhat surprised by the stock’s sharp negative price action following this announcement, which we believe reflects heightened concern over GS’s regulatory exposures. We believe the relentless negative headlines have negatively affected Goldman’s reputation and market share. We believe Goldman’s results should show steady improvement once the firm can resolve these legal and regulatory issues and focus on execution. Valuation Our $200 price target assumes GS will trade at 1.5x our 1Q12 TBV estimate in 12 months (vs its 10-yr avg of 2.4x). We expect GS’s results will remain strong, but the risk of regulatory investigations may continue to weigh on shares. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$112.54 on 01 Sep 2011 15:42 EDT UBS 7
    • Morning Expresso - United States 2 September 2011HEALTHCARE Pharmasset Rating: Buy Target: US$80.00 Price: US$65.77 RIC: VRUS.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$4.92bn BBG: VRUS US Biotechnology Analyst: Matthew Roden, PhD Tel: +1-212-713 2491 Updating Model to Reflect Stock Split What’s new? Pharmasset announces 2-for-1 stock split Pharmasset announced a 2-for-1 stock split on August 9, which went into effect this morning. Prior to the split, there were approximately 37.7M shares outstanding (37.4M at the end of F3Q11), and following the transaction, Pharmasset announced there are approximately 75.4M shares outstanding. We have updated our model to reflect the new share count. AASLD represents the next catalyst for VRUS shares Data expected this fall could provide a meaningful valuation step-up as the best-case scenarios would remain on the table. Pharmasset will present two oral presentations at AASLD including SVR12 data from ELECTRON (12 week data from PSI-7977 + RBV arm), as well as SVR12 data from PROTON (abstract # 225) in genotype 1 patients (see http://aasld2011.abstractcentral.com/planner). We view these data as [1] showing an all-oral regimen anchored by PSI-7977 is still on the table and [2] PSI-7977 is effective in genotype 1 patients. Thoughts on the stock: Pharmasset our top pick in HCV We believe PROTON and ELECTRON data could drive VRUS shares meaningfully higher in 2H11, with QUANTUM being the longer term driver of valuation beyond the near-term catalysts. We continue to view a Pharmasset dual-nuc regimen as having the potential to become the standard in HCV, which we believe could drive a doubling of VRUS shares from current levels. Valuation: Buy with $80 price target by DCF We derive our price target using a risk-adjusted DCF-based 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$65.77 on 31 Aug 2011 19:41 EDT Auxilium Pharma Rating: Buy Target: US$30.00 Price: US$17.01 RIC: AUXL.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$0.81bn BBG: AUXL US Pharmaceuticals Analyst: Ami Fadia Tel: +1-212-713 3242 Xiaflex Progresses on New Indications What’s new? Mgt. announced path fwd. on Xiaflexs new indications AUXL and BioSpecifics (BTC) have resolved their dispute and have a plan fwd on new indications. Highlights of conf call: (1) AUXL has completed pilot studies in cellulite and lipoma (details inside) and has discussed path fwd with FDA. (2) AUXL to start Phase Ib for cellulite (early 2012) and a Phase IIa for frozen shoulder (4Q11) with data in 4Q12 and 1Q13, resp.; (3) BTC will start studies for lipoma in humans and canine shortly; (4) Peyronie’s data expected in 2Q12. Addl. highlights from the conf call: Impact of settlement on agreement (4) AUXL will bear Phase I dev costs for cellulite and will pay an opt-in fee to BTC after completion; (6) For lipoma, AUXL’s opt-in rights remain unchanged. (7) BTCs will now get milestones, a % of AUXLs royalties and a mark-up of COGS for sales o/s US, EU and Japan (subject to a cap). Thoughts on the stock: Progress should be viewed positively Resolution of the dispute with BTC and broad agreement with FDA on the path fwd for cellulite are imp. steps towards crystallizing Xiaflexs opp. in new indications which we believe could create shareholder value. That said, these indications are still early in dev. and investors will likely wait to see initial proof-of-concept data before giving credit to AUXL. We remain patient. Valuation: Maintaining Buy rating and PT of $30 Our price target is derived from a DCF analysis using a WACC of 12%, intermediate growth rate of 15%, and a terminal growth rate of 2%. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$17.01 on 31 Aug 2011 19:41 EDT UBS 8
    • Morning Expresso - United States 2 September 2011INDUSTRIALS US Monthly Sales Automobile Manufacturers Analyst: Colin Langan, CFA Tel: +1-212-713 9949 Sales Steady Despite Macro Concerns August SAAR of 12.1m - in-line with consensus and close to July’s 12.2m We are pleased that the SAAR beat our 11.8m forecast. The results indicate that many consumers are not delaying purchases despite the market decline and cautious economic news. Ford & GM reiterated their 13.0m- 13.5m sales guidance, again guiding to the low end of the range. Ford was more cautious than GM, indicating that pace of sales slowed through August. GM said the pace was steady. Chrysler and GM share winners; cautious Ford Q4 production guidance Of the major players, Chrysler gained the most share (+220bps y/y), followed by GM (+180bps), Nissan (+80bps), and Ford (+50bps). Ford guided to Q4 production of 645k, up 9% y/y but up only 2% q/q (normally up ~6% q/q due to seasonality). This conservative guidance likely reflects the current economic uncertainty. Ford’s fleet mix was higher than GM’s (30% vs. 26%); however its lower-profit rental fleet mix was lower (10% vs. 19%). Inventories remain low except GM pickups Toyota and Honda continue to be impacted by inventory shortages, reporting share losses of 280bps and 320bps, respectively. Ford also continues face car shortages. Ford Focus sales fell 9% y/y, as Ford was unable to get the new model to dealers fast enough. Although GM’s overall inventory is near decade averages, its GMT900 pickups remain high at ~106 days (decade average of 94 days). Reiterate Buys on F and GM We expect US sales to improve in Q4, driven by small but positive economic growth and pent-up demand from recent inventory shortages. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 U.S. Machinery Playbook Heavy Machinery Analyst: Henry Kirn, CFA Tel: +1-212-713 4895 The Week Ahead Preliminary truck orders likely out later today As 2011 build slots are close to sold out, we expect August Class 8 orders to be below Julys ~18,700 units. That said, we expect a 4Q order rebound in front of what still looks to be a strong 2012. NAV will report fiscal 3Q on Wednesday 9/7 (UBSe: $0.80) We believe investors will be focused on NAV’s updated FY11 guidance (currently EPS guidance is $5.50-$6.00 vs. UBSe: $5.75 and cons: $5.51), updated thoughts on the NA truck cycle (resilience of demand and market share/pricing) and commentary on its 15-liter engine, its military business and various JVs. Separately, last night NAV announced that 3Q11 results would include $60M in asset impairments related to announced plant closures. Please see page 4 for details. On Wednesday, JOYG reported 3Q EPS of $1.61 Net sales of $1.1B rose 34% YoY while op. margins of 23% improved 150bp YoY. Orders of $1.4B were ahead of our $1.2B expectation and support a stronger outlook going forward. JOYG also announced an agreement to sell the LeTourneau drilling products business to Cameron for $375M in cash. Please see page 3 for details. We remain constructive on Machinery overall We continue to see opportunities for outperformance, particularly among the ag equipment manufacturers, equipment rental companies and truck names in our group. Our channel checks have remained supportive of solid demand. In order to get an updated view on end markets, we intend to conduct our next rental and truck surveys, as well as a set of ag dealer visits, over the next few weeks. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 2 September 2011 UBS 9
    • Morning Expresso - United States 2 September 2011TECHNOLOGY Ciena Rating: Neutral Target: US$16.00 Price: US$14.57 RIC: CIEN.O Prior: Unchanged Prior: US$17.25 Mkt Cap: US$1.39bn BBG: CIEN US Communications Technology Analyst: Nikos Theodosopoulos Tel: +1-212-713 3286 3Q EPS Ahead But Profitability Pushed Out Investment Case Hinges on True Operating Profitability Our view is the investment case for Ciena still hinges upon the company’s true operating profitability. Our deep bottoms-up analysis suggests Ciena is likely to see challenges when working towards its long-term OM target of 7-10%, while most optical competitors have low single digit operating profits. Regarding 3Q, Ciena posted OM of 3.8% vs. our estimate of 1.8%, and guided its 4Q OM flattish. Optical Switch Ramp Should Help Though Questions Remain on Impact The 5400 ramp should help Ciena’s profitability with optical switching being its highest mgn business. Overall we continue to believe bullish investors are expecting too much. Post Nortel, although product cycles matter, Ciena’s business is very different. Optical Switching is now ~9% of revs, and it remains to be seen how aggressive carriers become in adopting Ciena’s architectural vision. We Lower Our Estimates, Profitability Pushed Out With softer customer spending and lengthening sales cycles in the EMEA, we lower our FY11 and FY12 rev estimates to $1.74B (+41%) and $1.92B (+10%) vs. our prior $1.77B (+43%) and $1.96B (+11%). With profitability being pushed out, we lower our margin assumptions and EPS estimates. Our FY11 and FY12E EPS ex options are now -$0.17 and $0.70 vs. prior -$0.23 and $0.85. Valuation—Neutral Rating, Price Target Lowered to $16 We continue to see Ciena’s stock exhibiting high volatility, trading at ~12-18x potential earnings power of $1.00. With business profitability pushed out, however, we now lower our target multiple to ~16x (from 17x) for a PT of $16 (from $17.25). Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$14.57 on 01 Sep 2011 14:42 EDT Juniper Networks Rating: Neutral Target: US$24.00 Price: US$20.93 RIC: JNPR.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$11.4bn BBG: JNPR US Communications Technology Analyst: Nikos Theodosopoulos Tel: +1-212-713 3286 Update On Juniper Headcount Outlook Still Expect Reduction, But Likely Modest in Size As a follow up to our note dated 8/30/11, we still believe JNPR is planning a headcount reduction, but it is likely at the lower end of estimate of “up to 10%”. Following our report, JNPR commented to the media that our estimate was inaccurate and overstated. At this point, we have no additional information as to actual size of the HC reduction, but based on JNPR’s comment we expect it to be more modest in size. Striving for Target Model Given Lower Growth Outlook In 2010, JNPR grew HC 21% with acquisitions vs. rev growth of 23%. Entering 2011, JNPR was likely targeting rev growth of 20%+, but lowered outlook to 12%-14% post 2Q11 results. We believe the potential HC reduction is likely part of plan to get back on track for 25%+ EBIT margin for 2012 (vs. ~22% for 1H11) under a lower revenue outlook. HC is up 6% YTD in 2011. Multiple Expansion Tied to New Product Ramp JNPR stock has sold off dramatically in the past couple of months due to its lowered 2011 rev target and weaker GM in 2Q11. In addition, ramping revenues of new products (PTX, Q-Fabric, MobileNext) are not likely to start until sometime in 2012. We view ramp/success of Q-Fabric as a key driver to JNPR stock and multiple expansion and will be watching this closely. Valuation—Neutral Rating Our Juniper price target is $24 based on ~16x our CY12 EPS estimate of $1.53 ex options. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$20.93 on 31 Aug 2011 19:41 EDT IBM Rating: Neutral Target: US$180.00 Price: US$171.91 RIC: IBM.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$210bn BBG: IBM US Diversified Technology Services Analyst: Maynard J. Um Tel: +1-212-713 3372 Expanding Business Analytics Capabilities IBM announces two acquisitions this week IBM announced two acquisitions in business analytics software and services segment – Algorithmics and i2. IBM plans to acquire Algorithmics, provider of risk analysis software to the financial services industry, for $387m. Algorithmics generated $163.7m in revs in FY10 (10.9% y/y growth) and EBITDA of $10.9m. At roughly 2.4x TTM sales, we believe valuation is reasonable. The financial terms of i2, provider of security analytics solutions, were undisclosed. Algorithmics and i2 Based in Toronto, Algorithmics is a member of Fitch Group and employs ~900 employees. Algorithmics claims 350+ clients in banking, insurance and investment companies, including 25 of top 30 banks. i2 is based in Cambridge, UK and develops security analytics solutions to prevent crime and fraud. i2 employs 350 employees and has over 4,500 customers. Although financial terms were not disclosed, we believe i2 was likely a small acquisition as the biz was acquired by private equity firm for $185m in 2008 from ChoicePoint, Inc. Continues to maintain leadership in business analytics solutions We believe IBM is well-positioned longer-term given industry dynamics and, near-term, believe its software and services mix will likely enable it to fair relatively well in a potentially slowing economy. However, at 12.9x our CY11 EPS, we view valuation in-line with longer-term EPS growth target. Valuation: Maintain Neutral and $180 Price Target Our price target of $180 is based on 13x our CY11 non-GAAP EPS estimate of $13.34. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$171.91 on 31 Aug 2011 19:41 EDT UBS 10
    • Morning Expresso - United States 2 September 2011 Salesforce.com Rating: Buy Target: US$169.00 Price: US$127.00 RIC: CRM.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$17.2bn BBG: CRM US Software Analyst: Brent Thill Tel: +1-415-352 4694 Keeps on Rockin’ In the SaaS World Growth Priority – We Think It Makes Sense; User Conference Takeaways While not providing any specific annual guidance, CRM talked about being in the high growth phase, which it defines at greater than 30%. This is a step up from the past, when it talked about 20%+, then 25%+ as being high growth. Our impression is that CRM wants to keep the 30% pace for as long as possible (and will spend heavily to drive that). Although we model 34% growth for this year (Street consensus 34.7%), we only model 22% for CY12 and 20% in CY13 (Street at 24% and 20%), which appear conservative relative to CRM’s aspirations. Land Grab Window Means No Improvement In Profit Margin In a high growth phase, CRM’s operating model calls for operating margins to be flat or down slightly as the company reinvests any revenue upside. We think this is a valid trade-off given the multiple greenfield opportunities, from further share gains in CRM/SFA and CRM/Customer Service to adoption of its platform to develop any type of on-demand applications. No Macro Slowdown; No Notable Hurricane Impact Dreamforce attendance hit a record this year: 45K registered, up 50% y/y; now the largest event in the software industry. We walked the showroom floor and spoke with many partners, and no one seemed to see any slowdown. Valuation: stock trades at 35x CY12 FCF/share, 6.4x EV/S $169 PT = 42x FCF/share in 5-8 qtrs, or 2x mult. on 3-yr CAGR of 21%. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$127.00 on 01 Sep 2011 18:42 EDT Netflix Rating: Sell Target: US$200.00 Price: US$233.27 RIC: NFLX.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$12.2bn BBG: NFLX US Internet Services Analyst: Brian Fitzgerald Tel: +1-212-713 2851 Starz (Deal) Falling Through Starz Entertainment Ends Contract Renewal Talks Yesterday, Starz President and CEO Chris Albrecht announced that the premium movie and original programming entertainment service provider has ended its contract renewal negotiations with Netflix. The current agreement expires on February 28, 2012 and after that date Starz will discontinue content distribution on the Netflix streaming platform. Disproportionate Impact from Loss of Starz Content Although Starz content accounts for approximately 8% of all streaming titles (~1k of the ~13k total streaming titles) and, according to Netflix CEO Hastings, for about 8% of domestic viewings, our analysis showed that 22 of the 100 currently most popular streaming titles on Netflix were from Starz. Given the still earlier state of the streaming library, we think the loss of Starz is significant -- potentially pushing NFLX deeper into the long tail and / or requiring them to bid for replacement content in a market with rising prices. Longer Term Concerns Continue We believe our longer term concerns continue to play out. Rising content costs and increasing competition from incumbent and new players alike remain our top concerns. In addition, the separation of DVD and Streaming into two distinct US plans became effective this month but anticipated increases in ARPU will not be realized until Sept 15 while higher churn should have impacted NFLX already. Valuation Our $200 PT is based on our DCF (10% WACC and 4.5% 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$233.27 on 01 Sep 2011 19:42 EDT Activision Blizzard Rating: Buy Target: US$14.00 Price: US$11.57 RIC: ATVI.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$13.9bn BBG: ATVI US Entertainment Analyst: Brian Fitzgerald Tel: +1-212-713 9310 Update from ATVI Analyst Day Incrementally Positive Following ATVI Analyst Day With attractive new games and continued emphasis on high-margin digital rev, Activision seems increasingly well positioned to grow revenue and margin in both the near- and long-term. COO / CFO Thomas Tippl outlined new ‘12–‘14 financial objectives, expecting a revenue CAGR in the mid-single digit range and EPS CAGR in the double-digit range. The outlook appears conservative as ATVI can likely achieve growth objectives solely through core game titles. Promising new games like Skylanders and the Bungie title thus represent incremental opportunity. Call of Duty (COD) Pre-Orders ‘Significantly Higher’ than Last Year ATVI confirmed COD Modern Warfare 3 pre-orders are significantly higher than last year’s COD Black Ops, the top-selling game of all time. The Nov 8 launch will be supported by the largest (ever) ad campaign for ATVI. Both COD and new kids game Skylanders (Oct 16) will feature innovative web / mobile services, which will facilitate direct relationships with consumers. Note, details of the free / paid Elite service will be announced today (Fri) at the COD XP keynote. Diablo 3 Beta-Test Begins September, Release-Date Still Unconfirmed Diablo 3, which has an unconfirmed release date (we model in 2012) will feature an in-game auction house where players spend real money for in-game items – ATVI takes a cut of each transaction. WoW subs were ~11.1MM at the end of 2Q, down from peak 12MM in 2010, as Blizzard looks to China and Brazil for growth. Valuation Our $14 price target is based on a 10-year DCF. (13% WACC; 2.5% 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$11.57 on 01 Sep 2011 19:42 EST UBS 11
    • Morning Expresso - United States 2 September 2011TRANSPORTATION UBS Railroads Weekly Railroads Analyst: Rick Paterson Tel: +1-212-713 7944 Demand Holding Up Over Summer Chart of the week: Carloads ex-coal and ag post a strong summer We’ve talked before about our preference for stripping out somewhat non- cyclical coal and grain (both weather influenced) from the US rail carloads data when trying to ascertain the health of the industrial economy and we think the results should raise a few eyebrows given the pervasive gloom and doom that overwhelmed investor sentiment in August. Chart 1 shows that carloads ex-coal and ag, which hit a new high for 2011 this week, displayed consistent strength throughout the summer, posting y/y gains of 3.3% in June, 7.0% in July, and 4.4% in August. Headline US carload numbers hit a plateau back in April, but the recent softness has been notably due to domestic coal. The period from late June to mid-August was the weakest it’s been for coal carloads in more than a decade (Midwest flooding contributed), but the more industrial commodities (autos, chemicals, metals, crushed stone) have held up nicely. Our conversations with several management teams in recent weeks echo the sentiment that contrary to popular belief, it’s really not that bad out there in terms of rail demand. US carloads -0.8%; intermodal -0.5% US carloads fell 0.8% y/y and 0.2% from last week. Strength in metals (+15%), auto (+13%), forest (+3.7%), and chem (+2.6%) was not enough to offset weakness in ag (-11%) and coal (-3.1%). Intermodal was down 0.5%. Canadian carloads +1.0%; intermodal -4.1% CA carloads were up 1.0% as minerals (+17%) and chem (+9.4%) more than offset weakness in metals (-3.8%), ag (-3.6%), and forest (-3.1%). IM was down 4.1%. Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 1 September 2011 UBS 12
    • Morning Expresso - United States 2 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 2-Jun-11 US$381.03 Maynard Um Baker Hughes Inc. BHI.N Buy US$102 7-Jun-11 US$59.83 Angie Sedita Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$42.18 Steven Valiquette Celgene Corporation CELG.O Buy US$71 9-Dec-10 US$59.535 Matthew Roden, PhD Citigroup Inc C.N Buy US$56 3-May-11 US$30 William Tanona, CFA CONSOL Energy, Inc. CNX.N Buy US$87 4-Aug-11 US$45.39 Shneur Gershuni, CFA Deere & Co. DE.N Buy US$110 18-Jan-11 US$79.89 Henry Kirn, CFA Dow Chemical DOW.N Buy US$46.5 21-Mar-11 US$27.6 Andrew Cash Ford Motor Co. F.N Buy US$22 10-Jan-11 US$10.85 Colin Langan, CFA General Electric Co. GE.N Buy US$23 10-Jan-11 US$16.2 Jason Feldman Google Inc. GOOG.O Buy US$800 10-May-10 US$532.5 Brian Pitz Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$82.06 Henry Kirn, CFA McDonalds Corp. MCD.N Buy US$97 9-Feb-11 US$90.07 David Palmer Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$48.87 Andrew Kligerman Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$51.06 Parag Agarwal SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$36.27 Uche OrjiSource: Reuters, UBS. Prices as at market close on September 1, 2011. UBS 13
    • Morning Expresso - United States 2 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 Ciena Corp. Maintain Neutral, lower PT CIEN.O US$14.71 Neutral US$16 Neutral US$17.25 Foot Locker Inc. Maintain Neutral, lower PT FL.N US$20.27 Neutral US$22 Neutral (UR) US$26Source: Reuters, UBS. Prices as at market close on September 1, 2011.Markets, Events and NewsflowToday’s Company Events Company Name Event Reuters code Rating PT Notes Campbell Soup Earnings Release CPB.N Neutral US$36Source: Reuters, UBS. Prices as at market close on September 1, 2011.Today’s Macroeconomic Events: US Indicator Time (ET) UBS forecast Previous Consensus Nonfarm Payrolls (Aug)change 09:30 na 117 k 100 k Private Payrolls (Aug)change 09:30 na 154 k 125 k Unemployment Rate (Aug)% 09:30 na 9.1% 9.1% Average Hourly Earnings (Aug)mom 09:30 na 0.4% 0.2% Average Weekly Hours (Aug)lvl 09:30 na 34.3 34.3Source: Bloomberg, UBS UBS 14
    • Morning Expresso - United States 2 September 2011Today’s UBS Hosted Corporate Roadshow: Company Event Location NoneToday’s UBS Hosted Fieldtrip: Company Event Location NoneToday’s UBS Hosted Conference: Company Event Location None UBS 15
    • Morning Expresso - United States 2 September 2011Latest Market Movements: Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change Americas United States Dow Jones 11493.6 -1.03 -0.73 United States S&P 500 1204.4 -1.19 -4.23 United States Nasdaq 2546.0 -1.30 -4.03 United States S&P VIX 31.82 0.63 Europe Europe FTSE Eurofirst300 956.3 -1.75 -14.74 Belgium BEL 20 2234.1 -1.44 -13.36 Germany DAX 5595.3 -2.36 -19.08 France CAC 3193.0 -2.23 -16.08 Italy MIB 30 15319.9 -2.24 -24.06 Netherlands AEX 289.1 -1.67 -18.48 Portugal PSI 20 6280.0 -0.38 -17.24 Spain IBEX 8549.4 -2.42 -13.28 Switzerland SMI 5382.9 -2.69 -16.36 UK FTSE 100 5327.1 -1.69 -9.71 Asia Hong Kong Hang Seng 20212.9 -1.81 -12.25 India BSE Sensex 16699.3 0.14 -18.58 Japan Nikkei 225 8950.7 -1.21 -12.50Source: UBS, Reuters. Indices in Americas as at market close on September 1, 2011. Indices in Europe and Asia as at 05:00 EDT on September 2, 2011Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change Euro €/$ 1.426 -1.22% 0.5% 6.5% UK £/$ 1.618 -0.38% -0.7% 3.7% Canada CAD/$ 1.025 0.19% -1.5% 2.2% Switzerland CHF/$ 1.258 1.42% -3.9% 17.5% China Yuan/$ 0.157 -0.04% 0.9% 3.3% Brazil BRL/$ 0.617 -1.90% -3.3% 2.4% India INR/$ 0.022 0.28% -3.1% -2.1% Mexico MXN/$ 0.081 0.10% -3.8% 0.3% Japan $/JPY 0.769 0.33% -0.5% -5.3% Australia AUD/$ 1.073 0.41% -0.5% 4.8%Source: UBS, Reuters. Prices as at market close on September 1, 2011. UBS 16
    • Morning Expresso - United States 2 September 2011Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change Gold ($/oz) 1846 0.95 11.19 29.13 Brent Crude spot, $/bbl 114.010 -0.52 0.91 25.15 WTI Crude spot, $bbl 88.47 -0.52 - - Natural Gas, $MMBTU 4.02 -0.67 -7.67 -5.92Source: UBS, Reuters. Prices as at market close September 2, 2011. UBS 17
    • Morning Expresso - United States 2 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 18
    • Morning Expresso - United States 2 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 Friday, September 2, 2011.Contacts & FeedbackFor further details concerning today’s Morning Expresso – United States note, please visitwww.ubs.com/investmentresearch or speak to your UBS contact. This note is not intended to be static and it willevolve over time. Feedback welcomed on email toDL-USEquityProductManagement@ubs.com Statement of RiskForecasting earnings and corporate financial behavior is difficult because it isaffected by a wide range of economic, financial, accounting and regulatorytrends, as well as changes in tax policy. UBS 19
    • Morning Expresso - United States 2 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 20
    • Morning Expresso - United States 2 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 www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission.UBS Investment Research: Global Equity Rating Allocations 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 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 21
    • Morning Expresso - United States 2 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 22
    • Morning Expresso - United States 2 September 2011Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date 4, 6a, 6b, 6c, 7, Activision Blizzard Inc. 16 ATVI.O Buy N/A US$11.57 01 Sep 2011 4, 5, 6a, 6c, Anadarko Petroleum Corp. 7, 13, 16 APC.N Buy N/A US$72.02 01 Sep 2011 6c, 7, 16, 18a Apple Inc. AAPL.O Buy N/A US$381.03 01 Sep 2011 16 Auxilium Pharmaceuticals Inc AUXL.O Buy N/A US$16.76 01 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 13, Baker Hughes Inc. 16 BHI.N Buy N/A US$59.83 01 Sep 2011 2, 4, 6a, 6c, 7, 16, Cardinal Health, Inc. 18b, 22 CAH.N Buy N/A US$42.18 01 Sep 2011 6c, 7, 16 Celgene Corporation CELG.O Buy N/A US$59.54 01 Sep 2011 13, 16, 18g, 20 Ciena Corp. CIEN.O Neutral (CBE) N/A US$14.71 01 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 22 Citigroup Inc C.N Buy N/A US$30.00 01 Sep 2011 4, 5, 6a, 16 CONSOL Energy, Inc. CNX.N Buy N/A US$45.39 01 Sep 2011 16, 22 Deere & Co. DE.N Buy N/A US$79.89 01 Sep 2011 5, 6a, 6b, 6c, 7, 13, 16, 22 Dow Chemical DOW.N Buy N/A US$27.60 01 Sep 2011 16 Foot Locker Inc. FL.N Neutral N/A US$20.27 01 Sep 2011 4, 6a, 6b, 6c, 7, 13, 14, 16, Ford Motor Co. 18c F.N Buy N/A US$10.85 01 Sep 2011 4, 5, 6a, 6b, 6c, 7, 16, General Electric Co. 18h, 22 GE.N Buy N/A US$16.20 01 Sep 2011 4, 5, 6a, 6b, General Motors Company 6c, 7, 16 GM.N Buy N/A US$23.03 01 Sep 2011 2, 4, 6a, Goldman Sachs Group Inc. 6b, 6c, 7, 13, 16, 18i, 22 GS.N Buy N/A US$112.16 01 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18d Google Inc. GOOG.O Buy N/A US$532.50 01 Sep 2011 2, 4, 5, 6a, 6b, 6c, 7, 16, 18e, 22 IBM Corp. IBM.N Neutral N/A US$170.33 01 Sep 2011 3, 4, 6a, 13, 16, 20 Joy Global Inc. JOYG.O Buy (CBE) N/A US$82.06 01 Sep 2011 5, 16, 18j Juniper Networks JNPR.N Neutral N/A US$21.14 01 Sep 2011 4, 6c, 7, 16 Marathon Oil Corporation MRO.N Buy N/A US$26.78 01 Sep 2011 6b, 7, 13, 16, 22 McDonalds Corp. MCD.N Buy N/A US$90.07 01 Sep 2011 16 Murphy Oil Corporation MUR.N Neutral N/A US$53.54 01 Sep 2011 4, 6a, 16 Navistar International NAV.N Buy N/A US$41.01 01 Sep 2011 13, 16, 20 Netflix Inc NFLX.O Sell (CBE) N/A US$233.27 01 Sep 2011 2, 4, 6a, 6c, 7, 16 Noble Energy, Inc. NBL.N Buy N/A US$87.57 01 Sep 2011 2, 4, 5, 6a, Occidental Petroleum Corp. 16, 18k OXY.N Buy N/A US$85.90 01 Sep 2011 2, 4, 6a, 16 PG&E Corporation PCG.N Neutral N/A US$42.09 01 Sep 2011 16 Pharmasset Inc. VRUS.O Buy N/A US$65.33 01 Sep 2011 2, 4, 6a, 6b, 6c, Prudential Financial Inc. 7, 16, 22 PRU.N Buy N/A US$48.87 01 Sep 2011 16, 18f Qualcomm Inc. QCOM.O Buy N/A US$51.06 01 Sep 2011 16 Salesforce.com CRM.N Buy N/A US$127.00 01 Sep 2011 13, 16, 20 SanDisk Corp. SNDK.O Buy (CBE) N/A US$36.27 01 Sep 2011Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricingdate2. 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.3. UBS Securities LLC is acting as advisor to Joy Global Inc on the announced acquisition of a stake in International Mining Machinery.4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. UBS 23
    • Morning Expresso - United States 2 September 20115. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).14. UBS Limited acts as broker to this company.16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Apple, Inc.18b. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Cardinal Health, Inc.18c. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Ford Motor, Co.18d. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Google, Inc.18e. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in International Business Machines.18f. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Qualcomm Inc.18g. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Ciena Corp.18h. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in General Electric.18i. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Goldman Sachs.18j. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Juniper Networks Inc.18k. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Occidental Petroleum Corp.20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.For a complete set of disclosure statements associated with the companies discussed in this report, including information onvaluation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention:Publishing Administration.Additional Prices: Campbell Soup Co., US$31.86 (01 Sep 2011); Source: UBS. All prices as of local market close. UBS 24
    • Morning Expresso - United States 2 September 2011Global DisclaimerThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG isreferred to as UBS SA.This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy orrecommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for informationpurposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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