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  • MORGAN STANLEY RESEARCH Morgan Stanley & Co. Incorporated , Morgan Stanley C.T.V.M.S.A.+ Companies Featured ADTN.O, ALXN.O, AMLN.O, APOL.O, AXP.N, BAX.N, CHK.N, CHKP.O, DWA.O, FHER3.SA, JPM.N, LLTC.O, PM.N, RIG.N October 14, 2010 Americas Equity Morning Summary What’s Changed Stock Rating Changes - Upgrades Stock Rating Price Target ModelWare Estimate Ticker Company From To From To From To (FY) Consensus* FHER3.SA Fertilizantes Heringer S.A. E O R$11.20 R$11.50 -- -- -- Stock Rating Changes – Downgrades GMR.N General Maritime Corporation E U NA $4.00 -- -- -- OSG.N Overseas Shipholding Grp. E U NA $25.00 -- -- -- Industry View Changes - Down Industry View Industry Name From To Report Headline Commodity Shipping I C The Tanker Abyss Estimates/Price Target Changes - Up Stock Rating Price Target ModelWare Estimate Ticker Company From To From To From To (FY) Consensus* ADTN.O ADTRAN Inc. -- E -- NA 1.59$ 1.66$(12/'10) 1.58$ 1.72$ 1.81$(12/'11) 1.80$ 1.91$ 1.99$(12/'12) 1.93$ FRO.N Frontline Ltd -- E NA $27.00 -- -- -- PM.N Philip Morris International Inc -- O $58.00 $62.00 $3.83 $3.89(12/'10) $3.79 $4.18 $4.45(12/'11) $4.16 $4.66 $4.94(12/'12) $4.62 TK.N Teekay Corporation -- E NA $28.00 -- -- -- TNK.N Teekay Tankers Ltd. -- E NA $10.00 -- -- -- Estimates/Price Target Changes - Down APOL.O Apollo Group -- O -- $60.00 $5.41 $4.95(8/'11) $5.54 $6.04 $5.60(8/'12) $6.14 Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary DWA.O Dreamworks Animation SKG, Inc. -- U $32.00 $31.00 $2.15 $2.09(12/'11) $2.32 $2.49 $2.36(12/'12) $2.56 LLTC.O Linear Technology -- O $33.00 $32.00 $2.49 $2.34(6/'11) $2.44 $2.68 $2.46(6/'12) $2.49 NAT.N Nordic American Tanker Shipping -- O $35.00 $29.50 -- -- -- STNG.N Scorpio Tankers Inc. -- O $16.50 $16.00 -- -- -- Estimates/Price Target Changes - Up/Down CHK.N Chesapeake Energy -- E -- NA 2.69$ 2.70$(12/'10) 2.95$ 2.33$ 2.45$(12/'11) 2.75$ 3.01$ 2.83$(12/'12) 2.94$ JPM.N J.P.Morgan Chase & Co. -- O -- $59.00 $3.68 $3.85(12/'10) $3.67 $4.26 $4.32(12/'11) $4.56 $5.18 $5.09(12/'12) $5.33 * First Call consensus estimate Today’s Earnings Reports Stocks covered by Morgan Stanley Research. Dates subject to change. Sources: Modelware, Factset, Firstcall. Morgan Stanley Consensus ModelWare Estimate Estimate Live/Replay Ticker Company ($) ($) Time (EST) Webcast Link AMD Advanced Micro Devices, Inc. 0.04 0.02 10/14 5:00PM http://quarterlyearnings.amd.com/ GOOG Google, Inc. 6.70 5.96 10/14 4:30PM http://investor.google.com/webcast.html GWW W.W. Grainger, Inc. 1.82 1.87 10/14 8:00AM http://invest.grainger.com/phoenix.zhtml? c=76754&p=irol-calendar SWY Safeway, Inc. 0.31 0.30 10/14 11:00AM http://phx.corporate-ir.net/phoenix.zhtml?p=irol-event Details&c=64607&eventID=3404852 Conference Calls No conference calls scheduled. Company/Industry Analysis ALXN.O, Alexion Pharmaceuticals ($67.19) /Confident in aHUS Data, Regulatory Rating: Overweight Biotechnology: In-Line Path, and Market Target: $75.00 David.Friedman@morganstanley.com, Sara.Slifka, Jeremy.Joseph 52-Week Range: $68.92-43.00 Mkt. Cap(mm): $6,671 A key driver of our OW thesis is the ability to expand the Soliris label to new diseases, effectively ModelWare EPS: $1.39 (FY 12/'10), $2.00 serving as their pipeline. We view atypical hemolytic uremic syndrome (aHUS), an ultra-orphan (FY 12/'11) kidney/blood disease ( >$1 bn peak sales potential), as Alexion’s first proof of principal for this strategy. We believe that consensus expectations are for successful data, but we wanted to put forward some of our sources of conviction for the data, regulatory path, and market. (See full note for further details.) AXP.N, American Express Company ($39.26) /Buy Now, The Catalysts are Rating: Overweight 2
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary Coming Banking - Large Cap Banks: Attractive Target: $52.00 Betsy.Graseck@morganstanley.com, Matthew.Kelley, Adam.Frisch, Glenn.Fodor 52-Week Range: $49.19-34.20 Mkt. Cap(mm): $47,468 Buy American Express ahead of 3Q10 earnings. We expect AXP’s results to show low, ModelWare EPS: $2.81 (FY 12/'10), $3.49 double-digit YoY spend growth, demonstrate its ability to lower expenses as recent above-trend (FY 12/'11) investments start to pay off, as well as another substantial improvement in credit trends. These catalysts should drive upside in the stock. Investors could also hear from management on the strategy surrounding the recent DOJ lawsuit. APOL.O, Apollo Group ($49.50) /Q410: Short-Term Pain, Long-Term Gain; Rating: Overweight Business & Education Services: In-Line Maintain OW Target: $60.00 Suzanne.Stein@morganstanley.com, Vance.Edelson 52-Week Range: $76.86-38.39 Mkt. Cap(mm): $7,338 While near-term results will deteriorate as Apollo manages the transition from associate to ModelWare EPS: $4.95 (FY 8/'11), $5.60 bachelor degrees, the implementation of quality initiatives, and the impact from negative press (FY 8/'12) and new regulations, we believe the current valuation overly discounts these risks. We recognize there is potential risk to our revised 2011 EPS forecast, given the uncertainties in this transitional year, but we see these issues as a temporary investment in a more predictable business model, and view the stock as attractive given the company’s longer-term prospects. We have cut our 2011 EPS forecast to $4.95 from $5.41 but maintain our longer-term forecast of low-single-digit revenue growth and mid-single-digit EPS growth. BAX.N, Baxter International ($49.39) /SCIG Share Shift Likely Rating: Overweight Medical Technology: In-Line David.R.Lewis@morganstanley.com, James.Francescone, Steve.Beuchaw Target: $52.00 52-Week Range: $61.88-40.26 Baxter’s subcutaneous IG product is likely to drive share gains and potentially mix in what has Mkt. Cap(mm): $29,004 been a relatively commoditized market after its launch in 2H11/1H12. Since its Vivaglobin launch ModelWare EPS: $3.98 (FY 12/'10), $4.15 in 1Q06, CSL has monopolized the SCIG market, which we estimate to be worth ~$250 mn, or (FY 12/'11) 4-5% of the total IG market. Baxter’s competitive response is somewhat overdue, but diligence suggests the launch will be competitive. Less frequent dosing may be the key competitive advantage. CSL’s products require weekly infusions for most patients. HyQ is likely to be dosed once per month, in line with current IV therapies. CHKP.O, Check Point Software Technologies Ltd ($39.74) /Momentum Building Rating: Overweight Software: In-Line into Q3 Target: $44.00 Keith.Weiss@morganstanley.com, Adam.Holt, Melissa.A.Gorham 52-Week Range: $39.50-28.82 Mkt. Cap(mm): $8,500 With an expanded product portfolio, improved positioning for multi-function network security ModelWare EPS: $2.01 (FY 12/'10), $2.35 devices, and an accelerating refresh of the network security gateway base, we expect CHKP to (FY 12/'11) report solid Q3 results that meet or exceed our Q3 estimates of $263.1 mn in revenues., +13% YoY, and EPS of $0.59. Checks suggest the acceleration in business CHKP saw in Q2 – organic revenue growth accelerating from +4% YoY to +8% YoY by our estimate – carried into Q3, and we think a return to double-digit organic revenue growth in 2011 is readily achievable. At just 10x EV/CY11e FCF vs. a 15x median for our large cap software names, we believe CHKP shares are undervaluing this reaccelerating and sustainable growth story, and we remain buyers. FHER3.SA, Fertilizantes Heringer S.A. (R$7.99) /Upgrading to OW after Strong Rating: Overweight LatAm Agribusiness: In-Line Underperformance and on Better Market Outlook Target: R$11.50 Morgan Stanley & Co. Incorporated 52-Week Range: R$12.54-5.98 Javier.Martinez.Olcoz@morganstanley.com Mkt. Cap(mm): R$390 Morgan Stanley C.T.V.M. S.A. 3
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary Alessandro.Baldoni@morganstanley.com We are upgrading FHER to OW following last 12 months of underperformance (46% vs. the market), missing recent sector rally and a better outlook for the fertilizer market in Brazil. We adjust EBITDA 2010e down -8%, 2011e up +3%, marginally moving our price target to R$11.5 from R$11.2. We believe the market is receptive to lagging, low-multiple, small EM plays. FHER is trading at the lowest multiples in the industry, as it completely missed the recent global sector rally and soft-commodity driven re-rating. JPM.N, J.P.Morgan Chase & Co. ($39.84) /Solid Quarter with Slowing NII Rating: Overweight Banking - Large Cap Banks: Attractive Declines and Faster Credit Improvement Target: $59.00 Betsy.Graseck@morganstanley.com, Cheryl.Pate, Michael.Cyprys 52-Week Range: $48.20-35.16 Mkt. Cap(mm): $157,100 JPM reported 3Q10 EPS of $1.01, better than our estimate of $0.89 and consensus of $0.90. The ModelWare EPS: $3.85 (FY 12/'10), $4.32 beat was driven by reserve release of 28c vs. our estimate of 16c. NPLs declined 4% QoQ (FY 12/'11) (consumer down 6%, commecial flat). We are raising EPS estimates by 17c in 2010 (most of which is related to 3Q’s beat) and increasing 2011 EPS by 6c (or 1.3%) to primarily factor in faster credit improvement in card and less NIM pressure in card than previously forecasted, due to diminished NII reversals and less balance transfers driving a better mix. We forecast 2013E EPS of $5.09. JPM is cheap at 6.2x P/E multiple on 2013 normalized earnings (or 7.6x disc 2013 EPS). LLTC.O, Linear Technology ($30.80) /Lowering Estimates on Inventory Rating: Overweight Semiconductors: Cautious Correction Target: $32.00 Mark.Lipacis@morganstanley.com, Nihal.Godambe 52-Week Range: $33.06-25.56 Mkt. Cap(mm): $7,117 C3Q revenues of $389 mn were in line with consensus, and EPS of $0.62 (ex 1x-charges, ModelWare EPS: $2.34 (FY 6/'11), $2.46 including stock-based comp) beat by $0.01. However, the company guided C4Q revenues to be (FY 6/'12) flat-to-down 4%, or $381 mn at the midpoint, below consensus of $390 mn, and we are lowering our CY11e EPS by $0.21 and our price target to $32. Over the next six months, we expect most semiconductor companies to see inventory-driven estimate cuts, and LLTC to outperform in this environment based on its high profitability, dividend yield (3%) and variable cost structure. PM.N, Philip Morris International Inc ($57.36) /FX Enhances Underlying Rating: Overweight Tobacco: In-Line Momentum & Buyback Flex Target: $62.00 Morgan Stanley & Co. Incorporated 52-Week Range: $57.29-42.97 David.Adelman@morganstanley.com, Matthew.C.Grainger Mkt. Cap(mm): $106,059 ModelWare EPS: $3.89 (FY 12/'10), $4.45 Morgan Stanley & Co. International plc (FY 12/'11) Toby.McCullagh@morganstanley.com Incorporating recent US dollar weakness, we are increasing our PM 2011 EPS estimate to $4.45 (7% above consensus at $4.16), and our 12-month price target from $58 to $62. If current foreign exchange rates broadly persist, PM may at least modestly accelerate its rate of share repurchases (e.g., $12 bn over three years), providing additional potential EPS favorability. We believe that PM’s relative valuation vs, its US tobacco peers remains very attractive – 9.1x 2011e adjusted EV/EBITDA, vs. MO at 9.4x – given the company’s superior growth profile and substantially lower long-term business risk (e.g., geographic diversification and no US exposure). RIG.N, Transocean ($66.83) /Research Tactical Idea Rating: Overweight Oil Services, Drilling & Equipment: Ole.Slorer@morganstanley.com, Igor.Levi Attractive 4
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary We believe the share price will rise in absolute terms over the next 60 days. We expect a couple of deepwater drilling permits to materialize before the end of the year, which we believe will act as a catalyst for the stock, as this would be constructive for RIG’s deepwater floaters operating in the GoM, with further positive implications on worldwide deepwater supply/demand dynamics. Despite recent strength, the stock has underperformed its peers by 2100 bps since Macondo, which represents ~$6 bn in market cap or ~$20/share, while we see risk of only $2-$5/share (adjusting for $1 bn of liability insurance). We estimate that there is about an 80%, or “highly likely”, probability for the scenario. ADTN.O, ADTRAN Inc. ($33.37) /Fundys Strong but Margins & HDSL Revenues Rating: Equal-weight Communications Equipment & Data Look Toppy and Still too Pricey; Reit EW Networking: In-Line Ehud.Gelblum@morganstanley.com, Kimberly.Watkins 52-Week Range: $36.85-20.34 Mkt. Cap(mm): $2,135 Adtran again reported a sizable beat in Q3, as HDSL revenue sailed $10 mn above our estimate ModelWare EPS: 1.66$ (FY 12/'10), driving a $0.05 EPS beat vs. our above-Street estimate of $0.45. Note however, that $0.02 of the 1.81$ (FY 12/'11) beat came from below the line, similar to last quarter. With the upside for the second straight quarter coming from surging HDSL revenue, a product category in secular decline, meaningful Broadband stimulus revenues still at last 6-12 months away, and op margin heading back down after two quarters of expansion, we believe the stock remains rich at 18.5x our new 2011 EPS estimate of $1.81 and remain EW. CHK.N, Chesapeake Energy ($23.24) /Improving Visibility on Liquids Growth Rating: Equal-weight Exploration & Production: In-Line Stephen.I.Richardson@morganstanley.com, Stuart.Young, Brian.Lasky 52-Week Range: $30.00-19.69 Mkt. Cap(mm): $15,223 We came away from yesterday’s Analyst Day with an improved view of the medium- and ModelWare EPS: 2.70$ (FY 12/'10), longer-term value proposition at CHK. While aggressive leasehold expenditures have been a 2.45$ (FY 12/'11) market concern, CHK has delivered on monetization efforts YTD. Partner carries continue to supplement the capital budget (expect $3.1 bn+ through 2011/2012) with more deals to come. Although major liquids plays remain in their early stages (10 Eagle Ford and 3 Niobrara wells on production, respectively), CHK provided better visibility on the development plan here and in legacy / emerging plays in the Anadarko and Permian basins. Given increased clarity, we expect market focus to shift to the build out of the liquids growth programs (well results, midstream) and execution on the plan to produce ~25% from liquids by 2016. AMLN.O, Amylin Pharmaceuticals ($21.12) /Setting Benchmarks for Bydureon Rating: Underweight Biotechnology: In-Line Approval/Launch Target: $14.00 David.Friedman@morganstanley.com, Sara.Slifka, Jeremy.Joseph 52-Week Range: $24.21-11.01 Mkt. Cap(mm): $2,994 Our UW Amylin thesis is that the Street is overestimating Bydureon’s commercial prospects and ModelWare EPS: $(0.85) (FY 12/'10), the growth of the GLP-1 market. Bydureon’s PDUFA date is October 22, and we and most on the $(1.15) (FY 12/'11) Street expect approval. However, post-approval, our IMS analysis using the MS Bydureon price estimate of a 15% premium to Byetta shows that for Bydureon to meet Street estimates it must have the best launch of any GLP-1 drug to date – we see this as unlikely. DWA.O, Dreamworks Animation SKG, Inc. ($33.60) /Remain Underweight Ahead Rating: Underweight Media: Attractive of 4Q10 DVD Releases, Megamind & 3Q10 Results Target: $31.00 David.Gober@morganstanley.com, Benjamin.Swinburne, Cynthia.Rupeka 52-Week Range: $44.77-26.61 Mkt. Cap(mm): $2,982 We remain UW DWA shares in the context of our Attractive view of the Media industry. Within the ModelWare EPS: $1.40 (FY 12/'10), $2.09 group, we continue to prefer stocks with exposure to TV and advertising driven assets with higher (FY 12/'11) growth and less earnings volatility than DWA. Since our last report, Shrek 4 has outperformed our 5
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary previous international box office estimates by $75 mn, resulting in ~$740 mn of total global receipts. As a result, we have increased our estimates for 3Q, from $0.33 in EPS to $0.39. However, DWA also announced that it will not be selling DVDs for its 2010 TV specials, reducing our 4Q EPS estimates from $0.56 to $0.50. Our 2010 EPS estimate remains at $1.40. Freight Transportation: Rail Valuation Model Reaffirms Attractive View Freight Transportation: Attractive William.Greene@morganstanley.com, John.Godyn, Adam.Longson Valuation across rails is attractive at current levels. In recent months, we’ve pointed out how much bearishness appears to still be priced into shares, despite the fact that rail stocks have performed relatively well this year. We recently added depth to our valuation work by examining the relationship between valuation multiples and a range of macro and industry factors. Balancing accuracy with simplicity, we isolated forward earnings growth and forward ROIC expectations as key determinants of rail P/E multiples. Applied to our own estimates, we believe rails are currently undervalued based on the trajectory of consensus earnings growth and ROIC forecasts; thus, we believe our valuation model reinforces our Attractive View on rails. Media: Pause Button Pre-Holiday Special: Dreaming of Digital Sell-Through, Media: Attractive While DVD Sales Ratios Keep Falling Benjamin.Swinburne@morganstanley.com, David.Gober, Cynthia.Rupeka DVD trends remain soft. Film remains one area of concern within the context of our Attractive Media industry view. Our analysis suggests DVD tie-ratios continue to decline while consumers migrate to low-cost rental channels like DVDs by mail and kiosks, a negative margin shift for studios. Accelerating these trends are continued brick and mortar store closures and a lack of consensus among movie studios around windowing. Near-term we estimate digital growth (video-on-demand and electronic sell-through) will not be enough to offset trends in the physical market, which still represents 80-85% of total 2010E home video revenues. Oil Services, Drilling & Equipment: The Iraq Oil Market Primer: Production Oil Services, Drilling & Equipment: Attractive Ramp May Drive $50B in Services Spending Ole.Slorer@morganstanley.com, Paulo.Loureiro Our analysis suggests Iraq will increase annual E&P capital spending 4x by 2016 to double oil production from today’s levels. To meet our base case production scenario of 4.2mb/d by 2016, Iraq likely will need to drill more than 1,700 new wells and perform 1,000 workovers. All told, we expect this very significant drilling and repair program to drive ~$50 bn in E&P capital spending through 2016, culminating with a $9 bn annual run-rate. Even so, our analysis does not support the assumption that Iraq will reach the 12mb/d production level implied by its oil contracts by 2017, and we believe even the Ministry of Planning’s recently revised target of 4.5mb/d by 2014, compared to 7.5mb/d implied by the contracts, is on the high side. Our base case calls for Iraq oil production to reach 4.2mb/d by 2016 and requires ~$50 bn in E&P capital spending from 2010-2016. Large Cap & Specialty Pharmaceuticals: 3QE FX Impact -1% vs. Prior -3% Large Cap & Specialty Pharmaceuticals: In-Line Estimate David.Risinger@morganstanley.com, Thomas.Chiu, Dana.Yi, Christopher.Caponetti The dollar’s weakening vs. euro since June helps 2Q:10E sales. We now estimate 3Q FX global top-line impact of -1% YoY vs. -3% previously. The USD’s YoY strength vs. euro but weakness vs. yen and other currencies yield-1% top-line FX impact in 3Q:10E. For the full year, we calculate 2010 top-line FX benefit of +1% using MS FX projections and +2% using current spot 6
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary rates (note benefit from 1Q:10 USD weakness). Note that the top-line impact may not be fully realized on the bottom line, due to natural and active hedging. Large Cap & Specialty Pharmaceuticals: Modest 3Q Upside Ahead; Events More Large Cap & Specialty Pharmaceuticals: In-Line Important David.Risinger@morganstanley.com, Thomas.Chiu, Dana.Yi, Christopher.Caponetti We expect 3Q upside from cost cutting and FX, but upcoming fundamental catalysts more important. 3Q results matter most for MRK ($37.16), PFE ($17.73), MRX ($30.79), and WCRX ($25.02), in our view. We expect a -1% FX impact on 3Q:10 global pharma revenues vs. a -3% impact previously. Retail, Food and Drug: Dollar Store Takeaways from Walmart Analyst Day Retail, Food and Drug: In-Line Joseph.Parkhill@morganstanley.com, Mark.Wiltamuth, Justin.Van.Vleck, Stephen.Shin Walmart’s analyst day confirmed our view that: 1) Walmart is not actively targeting dollar stores; and 2) dollar stores’ convenience offering is a key competitive advantage. Through our conversations with management and from the overall theme of the presentations, we believe Walmart continues to focus on the consumer’s stock-up trips, which differs from the dollar-store fill-in trip. We continue to be bullish on the dollar store channel as consumers continue to seek value and the dollar stores continue to improve its offerings. We prefer Morgan Stanley’s Best Idea Dollar General ($29.24), due to the most clear sales and margin drivers within the industry. Commodity Shipping: The Tanker Abyss Commodity Shipping: Cautious Ole.Slorer@morganstanley.com, Fotis.Giannakoulis We are reducing our shipping industry view to Cautious from In-Line on our negative outlook for crude tankers. We remain constructive on dry bulk and container shipping, given China’s continuing economic strength and growth in long haul trades. However, we expect crude tanker rates to be pressured by: 1) record vessel supply growth, 2) lack of floating storage demand, and 3) weak OECD long-haul ton-mile demand. We are downgrading OSG ($34.54) and GMR ($4.43) to UW and lowering several base case valuations. [TK ($27.15), NAT ($27.10), FRO ($28.62), TNK ($12.15) and STNG ($11.57)] Food: Thoughts from Walmart Visit Food: Cautious Vincent.Andrews@morganstanley.com, Jaclyn.Inglesby We are retaining our Cautious packaged food industry view following Walmart’s Annual Investor Event held in Arkansas on October 12-13 (i.e., store tours, management dinner and presentations). Most of what was discussed was consistent with our view that volume-driven top- line growth will remain difficult to achieve, and that trade down / trade out risk exists as packaged food companies attempt to dial back promotional spending in order deal with escalating input costs. Nonetheless, we believe that some in the market took great comfort in further detail about previously announced plans for the return of “action alley” / SKU addbacks, which will likely provide some players with a needed volume boost. 7
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary Strategy/Economics/Portfolio Changes 2010 Mall & Lifestyle Center Investors’ Handbook Paul.B.Morgan@morganstanley.com, Samir.Khanal, Swaroop.Yalla OurMall & Lifestyle Center Investors’ Handbook providesa framework thatcombines asset-level performance histories, proprietary tenant analyses, anddetailed trade area demographics to evaluate the competitive positioning andgrowth outlook for US regional malls and lifestyle centers.The Great Recessionand its associated consumer retrenchment have led mall-based retailers torethink their optimal store fleets. Their conclusions are neither uniform norcomplete, but three themes stand out: 1) more aggressively pruning weak storelocations; 2) increasing scale in the leading centers; and 3) diversifyinginternationally. Although operating performance should remain sluggish in 2011,REITs are generally wellpositioned to capitalize on these medium-term trends. Economics Calendar 10/14: Producer Price Index Core (September), forecast: + 0.1 % / + 0.1 % 10/14: Trade Balance Goods and Services, BOP basis (August), forecast: -$42.8 bil. 10/15: Consumer Price Index Core (September), forecast: + 0.3 % + 0.2 % 10/15: Retail Sales Ex Autos Control (September), forecast: + 0.6 % + 0.3 % + 0.3 % 10/15: Business Inventories (August), forecast: + 0.6 % For valuation methodology and risks associated with any price targets above, please email morganstanley.research@morganstanley.com with a request for valuation methodology and risks on a particular stock. This is a summary of overnight items. It may not include some items discussed at the morning meeting. 8
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification As to each company mentioned in this report, the respective primary research analyst or analysts covering that company hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Matthew Kelley - American Express Company (common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. A household member of the following analyst or strategist is an employee, officer, director or has another position at a company named within the research: Cheryl Pate; J.P.Morgan Chase & Co.. As of September 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Apollo Group, Baxter International, Digital River Inc, Mercadolibre Inc., Nordic American Tanker Shipping Ltd., Teekay Tankers Ltd., Transocean, Warner Chilcott Plc. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Chesapeake Energy, Nordic American Tanker Shipping Ltd., Overseas Shipholding Grp., Scorpio Tankers Inc., Teekay Tankers Ltd., Warner Chilcott Plc. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from American Express Company, Apollo Group, Chesapeake Energy, Dollar General Corporation, J.P.Morgan Chase & Co., Merck & Co., Inc., Nordic American Tanker Shipping Ltd., Orbitz Worldwide, Inc, Overseas Shipholding Grp., Pfizer Inc, Scorpio Tankers Inc., Teekay Corporation, Transocean, Warner Chilcott Plc. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from ADTRAN Inc., Alexion Pharmaceuticals, American Express Company, Amylin Pharmaceuticals, Apollo Group, Check Point Software Technologies Ltd., Chesapeake Energy, Dice Holdings, Inc., Digital River Inc, Dreamworks Animation SKG, Inc., General Maritime Corporation, J.P.Morgan Chase & Co., Linear Technology, Medicis Pharmaceuticals Corp., Mercadolibre Inc., Merck & Co., Inc., Nordic American Tanker Shipping Ltd., Orbitz Worldwide, Inc, Pfizer Inc, Scorpio Tankers Inc., TechTarget, Inc., Teekay Corporation, Teekay Tankers Ltd., Transocean, Warner Chilcott Plc. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from American Express Company, Apollo Group, Chesapeake Energy, J.P.Morgan Chase & Co., Merck & Co., Inc., Pfizer Inc, Transocean. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: ADTRAN Inc., Alexion Pharmaceuticals, American Express Company, Amylin Pharmaceuticals, Apollo Group, Check Point Software Technologies Ltd., Chesapeake Energy, Dice Holdings, Inc., Digital River Inc, Dollar General Corporation, Dreamworks Animation SKG, Inc., General Maritime Corporation, J.P.Morgan Chase & Co., Linear Technology, Medicis Pharmaceuticals Corp., Mercadolibre Inc., Merck & Co., Inc., Nordic American Tanker Shipping Ltd., Orbitz Worldwide, Inc, Overseas Shipholding Grp., Pfizer Inc, Scorpio Tankers Inc., TechTarget, Inc., Teekay Corporation, Teekay Tankers Ltd., Transocean, Warner Chilcott Plc. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: ADTRAN Inc., American Express Company, Apollo Group, Chesapeake Energy, Digital River Inc, General Maritime Corporation, J.P.Morgan Chase & Co., Linear Technology, Merck & Co., Inc., Overseas Shipholding Grp., Pfizer Inc, Teekay Corporation, Transocean, Warner Chilcott Plc. An employee, director or consultant of Morgan Stanley (not a research analyst or a member of a research analyst's household) is a director of Chesapeake Energy, Merck & Co., Inc.. Morgan Stanley & Co. Incorporated makes a market in the securities of ADTRAN Inc., Alexion Pharmaceuticals, American Express Company, Amylin Pharmaceuticals, Apollo Group, Baxter International, Check Point Software Technologies Ltd., Chesapeake Energy, Dice Holdings, Inc., Digital River Inc, Dollar General Corporation, Dreamworks Animation SKG, Inc., drugstore.com, Frontline Ltd, General Maritime Corporation, J.P.Morgan Chase & Co., Linear Technology, Medicis Pharmaceuticals Corp., Mercadolibre Inc., Merck & Co., Inc., Nordic American Tanker Shipping Ltd., Orbitz Worldwide, Inc, Overseas Shipholding Grp., Overstock.com Inc, Pfizer Inc, Philip Morris International Inc, Scorpio Tankers Inc., TechTarget, Inc., Teekay Corporation, Teekay Tankers Ltd., Transocean, Warner Chilcott Plc. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of September 30, 2010) 9
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1115 42% 394 43% 35% Equal-weight/Hold 1146 43% 413 45% 36% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 381 14% 99 11% 26% Total 2,656 910 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of American Express Company, Baxter International, Chesapeake Energy, Dollar General Corporation, J.P.Morgan Chase & Co., Merck & Co., Inc., Overseas Shipholding Grp., Pfizer Inc, Philip Morris International Inc, Teekay Corporation, Teekay Tankers Ltd.. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. The recommendations of Alessandro Baldoni in this report reflect solely and exclusively the analyst's personal views and have been developed independently, including from the institution for which the analyst works. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. The fixed income research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views 10
  • MORGAN STANLEY RESEARCH October 14, 2010 Americas Equity Morning Summary presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. 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