financial pacific, investment research (third party)

UBS Investment Research

Morning Expresso - United States

Friday 23 July 2010

Global Equity Research

Americas

Equity Strategy

Market Comment

23 July 2010

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U.S. Equity Product Management

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Morning Expresso

This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 30. 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.

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Morning Expresso - United States 23 July 2010

UBS 2

Morning Meeting Agenda U.S. Healthcare Distribution - Drug

Healthcare Analyst: Steven Valiquette Tel: +1-203-719 2347

More 2011 Generic Pipeline Analysis New Analysis of ‘Number of Generics Per Drug’ Positive for Wholesalers Given the sell-off in several pharmaceutical services stocks Thursday,

we have conducted further analysis of the generic drug pipeline for 2011 by now determining whether each drug will be an exclusive generic launch (positive for ABC, CAH, MCK) versus a multi-source (three or greater) generic launch, which is more positive for PBMs (CVS, ESRX, MHS, SXCI). Data suggests wholesalers are clear-cut winners for 2011 in this regard (see Table 1 for further detail).

2011 Generic Pipeline Promising for Wholesalers on Sales Mix As Well 2011 generic pipeline channel data also suggests that ABC/CAH/MCK come out on top since the ‘retail/hospital/clinical’ sales mix (critical for wholesalers) is higher than average, while ‘mail-order’ mix (critical for PBMs) is below average.

CAH/MCK Still Compelling on EV/EBITDA; ESRX Compelling on 2011 While P/E multiples are currently 15x for MHS and 17x for ESRX on consensus 2010 EPS estimates vs. distributors at 13.5-14.5x, it is worth noting that PBMs use cash EPS. Thus, we use EV/EBITDA to compare groups: ESRX is 10x and MHS is 8x estimated 2010 EBITDA, while CAH at 5.8x and MCK at 5.9x look more compelling (ABC a little loftier at 7.2x). ESRX interesting at 7.8x our ’11 estimate.

Wholesalers Still Look Poised for EPS Upside; PBMs More Mixed Bottom line is that we continue to favor the drug distributors vs. PBMs in relation to potential EPS upside from the generic pipeline in 2H10 and full-year 2011. We believe Street numbers still need to come down a little for MHS in 2011, but the ESRX and CVS Caremark consensus estimates for 2011 appear safe, in our view.

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 July 2010

Payment Processing: UBS “Swipe”

Diversified Technology Services Analyst: Jason Kupferberg Tel: +1-212-713 3559

V/MA: How much will C2Q results matter? Near-term V/MA focus likely to remain on regulatory uncertainty We expect V and MA to report solid C2Q results on 7/28 and 8/3, respectively,

and believe there is more upside potential to V’s estimates because of less FX headwinds. However, despite the fact that in our opinion the stocks have been oversold, a strong print may not be much of a catalyst, as investors' focus (at least for the near-term) is likely to remain more on regulatory uncertainty (Durbin amendment implementation and implications) than on fundamentals.

Recent macro data points reinforce limited visibility on US consumer Recent US retail spending and consumer sentiment data points have been underwhelming, which may hinder visibility regarding near-term consumer spending trends. This dynamic is generally consistent with intra-quarter commentary by V and MA, suggesting that the latest volume trends remained encouraging, but that the spending environment is still somewhat fragile. By C4Q10, y/y volume growth comps won't be as easy for V/MA, but the secular trend favoring electronic payments remains V/MA's friend.

Lowering price targets given regulatory overhang; still prefer V We remain confident that our '10/'11 estimates for V/MA will not be materially impacted by the provisions of the Durbin amendment, given that implementation will take time, the business models will remain resilient, and V/MA will remain critical links in the payments value chain. However, given that new regulations will likely lower the valuation multiple range for V/MA, we lowered our price targets to $107/$270 from $115/$298 for V/MA, respectively. V and MA both remain Buy-rated but we retain a slight preference for V (mix, execution, valuation).

source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 July 2010

The Coal Miner

Coal Analyst: Shneur Z. Gershuni, CFA Tel: +1-212-713 3974

Valuations Attractive, Is It Time Yet? Valuation vs. Catalyst Conundrum: With $150/ton for met coal implied, it suggests most of the Chinese demand loss negativity is baked into met

names. That said, historically it has been challenging for coal equities to outperform when benchmark prices decline. Additionally, negative earnings revisions tend to restrain valuations; in fact, we are lowering our 4Q10 met price deck to $190 from $220. A 4Q drop was anticipated due to seasonality and a post stimulus slow down; however, the price adjustment will be steeper than initially expected. Notably, our 1Q11 price view remains at $200 as we expect seasonal purchasing for 2011 to emerge late 4Q. Nonetheless, met names remain cheap on a FCF and EV/EBITDA basis.

Catalysts: Catalysts for met coal names will likely come from 1) a loosening of the recently implemented tightening policies in China; 2) basing and/or a modest recovery in steel prices; 3) signs of a steel activity pickup in other markets including Europe; and/or 4) a pick up in scrap pricing. Notably, Chinese steel pricing has moved up in recent days, and our steel analyst believes that we have already seen the bottom in scrap pricing with August scrap expected to be up $10-20/ton. Following a robust tightening in China, there have been several signs of a policy détente and we are moving our China policy signal to amber from red Other factors which could drive valuations would be share buybacks as many companies have significant cash balances, distant maturities and are generating free cash flow in 2010/11.

Thermal vs. Met: We believe we are in the early stage of a met coal equities recovery and expect an upward trend to emerge in 2H marked with volatility as conflicting data points emerge. Given the backdrop and our view of a large decline in utility stockpiles driven by production cuts, a modest recovery in generation and a partial reversal of fuel switching (4 straight months and counting), thermal sensitive names are likely to outperform. However, as investors become comfortable with our $200 pricing view for 1Q11, met names could regain the leader position. In the near term, inventory declines and rising spot thermal prices should provide investors with the confidence to step into thermal names. Moreover, as spot prices rise, positive earnings revisions for 2011 are likely (2011 PRB recently traded at $14, above our $13.50 forecast).

Top Picks: Thermal still in vogue (ACI, JRCC, & CNX); however, met/hybrids are attractive (WLT, MEE, ICO & ANR). Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 July 2010

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UBS 3

MACRO AND STRATEGY RESEARCH

US Equity Strategy Comment

Strategist: Thomas M. Doerflinger, Ph.D. Tel: +1-212-713 2540

Q2 2010 Earnings Season Weekly Update: Week 2 Results Look Consistent with our Estimate With 150 companies (43% of market cap) reporting, the Q2 S&P 500 bottom-up estimate is $20.47 The

final number should be close to our $21.00 (Table 1). About 68% of firms are beating consensus EPS estimates, similar to Q1 (Table 2). Bottom-up estimates for Q3 and Q4 2010 have not changed much during Q2 earnings season. Our estimates for these quarters are close to consensus (Table 1).

Revenue Is In Line With Consensus Revenue of 122 firms rose 6% yr/yr (Table 4); when all firms report (including energy, chemicals, etc.) the gain should be ~10%. The aggregate revenue of these 122 firms was 100% of consensus; non-financials were 100.7% of consensus (Table 4). This is just slightly weaker than Q1 when financials’ revenue was stronger and revenue for 479 firms was 101% of consensus (Table 3).

Cyclical Sectors with Global Exposure Are Strong In terms of both EPS surprises (Table 2) and EPS revisions (Chart 1), tech, industrials, consumer discretionary & financials are strongest (though earnings quality of big banks was poor, due to weak loan growth and trading results). Robust earnings of INTC, VMW, ETN, MMM, UTX etc. suggest global economy is healthy; managements are less gloomy than many equity investors. Defensive areas such as healthcare & domestic consumer staples have less momentum. Tech’s revenue growth is beating consensus by more than other sectors (Table 4).

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 22 July 2010 US Daily Economic Comment

Economist: Maury N. Harris Tel: +1-212-713 2472

A quiet Friday? Preview: No data on Friday. EU stress test results due On Friday, no economic reports or Fed speeches are scheduled in the US. Financial

markets likely will focus on EU bank stress test results, expected at noon EST. Review: Claims +37k to 464k; EHS -5.1%; LEI -0.2%; FHFA +0.5% (1) Initial jobless claims jumped to 464k in the week of July 17 (cons 445k, UBSe

450k) from 427k in the prior week (was 429k). Seasonally adjusted claims data have bounced around in recent weeks, likely reflecting seasonal adjustment problems related to the timing of annual manufacturing shutdowns. This is the week of the July payroll survey (for the employment report), and the four-week average of claims, at 456,000, was slightly lower from 464,000 in the June survey week. That said, we would not read much into the recent claims data given the typical volatility this time of year. (2) Existing home sales fell less than expected in June: -5.1% m/m to 5.37M (cons -9.9% to 5.10M, UBSe -8.1% to 5.20M) from 5.66M in May and 5.79M in April. The declines in May and June represent payback for demand that was pulled forward by expiring housing tax credits. The pending home sales index (PHSI) fell 30% m/m in May, suggesting a further decline in existing home sales (EHS) in July. The PHSI, based on initial signings of sales contracts, tends to lead EHS, based on contract closings, by a month or two. Looking beyond this period of volatility, the outlook for housing will depend importantly on jobs. We continue to expect a strengthening labor market will provide support to sales later this year. (3) The index of leading economic indicators (LEI) was also a tad less weak than consensus expected: -0.2% in June (cons -0.3%, UBSe -0.2%), offsetting only part of the upward-revised 0.5% rise in May (revised from +0.4%). (4) The seasonally adjusted FHFA house price index was much better than expected: up 0.5% (cons -0.3%, UBSe -0.2%) in May after an upward-revised 0.9% gain in April (was +0.8%). (5) Mr. Bernanke’s testimony to the House was mostly a repeat of Tuesday’s testimony to the Senate nor were there any major surprises in Q&A (more below). (6) Also on Thursday, the House of Representatives voted in favor (272-152) of extending unemployment benefits through November. The $34 bil. bill was passed by the Senate earlier this week, and was being sent to the President for his signature.

Notes:


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UBS 4

GLOBAL SECTOR RESEARCH UBS Global I/O: Commodity Price Review

Mining & Metals Analyst: Julien Garran Tel: +44-20-7568 3540

Time to Accumulate Maximising risk/reward It is time to accumulate metals and mining stocks. But we also advise investors to take their time accumulating, using the

inherent volatility of the market to maximise the risk/reward of their investment. We review our five signal approach to maximise risk/reward investment opportunities in the sector.

Commodities to watch: thermal coal, copper, zinc & gold We have only made modest changes to our commodity price forecasts. Short-term base metal prices are pared to reflect recent aggressive sell-downs; bulks’ forecasts are broadly unchanged; precious metals are marginally higher. Our preferred commodities over the short- to medium-term are thermal coal, copper, zinc and gold. We still like copper and met-coal longer-term.

Top equity picks (& least preferred) We introduce our Top 10 Global picks; BHP Billiton (BLT LN, Buy), Rio Tinto (RIO LN; Buy), Teck Resources (TCK/B CN; Buy); Sterlite (STLT IN; Buy); Newcrest (NCM AU; Buy); Barrick (ABX US; Buy); Alumina Ltd (AWC AU; Buy); Riversdale (RIV AU; Buy); Consol Energy (CNX US; Buy) and Adaro Energy (ADRO IJ; Buy). Our least preferred; Kumba (KIO SJ; Neutral); Nippon Steel (5401 JP: Neutral); Acerinox (ACX SM; Sell); Umicore (UMI BB) and Johnson Matthey (JMAT LN).

Notes:


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UBS 5

BASIC MATERIALS

Nucor Corp. Rating: Neutral Target: US$40.00 Price: US$39.67 RIC: NUE.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$12.5bn BBG: NUE US

Steel Analyst: Timna Tanners Tel: +1-212-713 2927

Tepid Demand, Rising Scrap Temper View Maintain 2010, lower 2011/12 ests We maintain our street-low 2010E $0.75, and expect Q3 pressure from scrap price recovery, after we believe

falling scrap boosted NUE’s Q2 margins. We think investors increasingly see 2010 consensus EPS at $1.36 as much too high after NUE earned $0.39 in a seasonally stronger H1. We drop our 2011E to $2.20 from $2.35 to incorporate gradual construction recovery, still well below consensus at $3.65.

Liquidity/balance sheet position remain superior to most peers NUE’s 21% debt-to-cap ratio and 3.6% dividend yield remain superior to most peers, and remain a draw to more risk-averse investors, in our view. Mgmt suggested it was actively looking at acquisition possibilities, which we think likely focus overseas and downstream. A cautious outlook can limit the size of any deal.

Mgmt’s tone remained more dour than peers Mgmt suggested a “double-dip” was possible in markedly more cautious comments than peers RS and STLD on calls this week. Perhaps this reflects a difference in personality or culture rather than a different NUE mkt reality, still, we found this tone unsettling.

Valuation: No change to Neutral rating, valuation looks full Our $40 target reflects ~8.5x fwd 12-mo EV/EBITDA, and is based off a historical 6.4x EV/EBITDA multiple on a more “normal” 2012E and discounting back. We model EPS in 2012E at $3.80, down from $4.05, still assuming a solid non-res construction (~60% of demand) rebound or strong contribution from an acquisition, neither of which is easy to anticipate at this time. We think consensus ’10 and ’11 ests look much too high. Generally earnings seasonally fall in H2.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$39.67 on 22 Jul 2010 19:16 EDT

Reliance Steel Rating: Buy Target: US$57.00 Price: US$39.10 RIC: RS.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$2.90bn BBG: RS US

Industrial Services Analyst: Timna Tanners Tel: +1-212-713 2927

Q2 Beats, Steady Outlook Supports Buy EPS of $0.83 tops consensus/UBS as volumes and prices rose RS posted Q2 EPS of $0.83 vs consensus of $0.82 and UBSe $0.72. Tons sold

regained ground, up 4% q/q and 9% y/y, after falling 4% y/y in Q1. Prices per ton were up 19% y/y and 8% q/q. Gross profit margin of 25.7% compared with 26.1% in Q1 and UBSe 26.4% for Q2. The LIFO charge rose to $10M from $5M in Q1. Our stainless concerns proved unfounded as buying remained fairly steady.

Guidance light vs consensus but seems appropriately conservative Q3 EPS guidance of $0.65-$0.75 was below consensus’ $0.89 and mgmt noted seasonality could hurt and weaker prices. Its range may prove conservative but can rein in Street ests we viewed too high for a while. We drop Q3e to $0.72 vs $0.79. UBSe ‘10 rises to $2.85 vs $2.80 and we think consensus at $3.20 needs to fall.

Mgmt suggests acquisition timing may be nearing While mgmt has noted dry powder for acquisitions for several qtrs, with net-debt to cap of 26%, below its 35-40% target range, it hinted targets could be more interested in selling by year end. Working capital use was $78.2M as inventory restocking continued. FCF turned positive at $2.5M vs the prior qtr’s -$77.3M.

Valuation: Maintain Buy, valuation attractive and M&A could be catalyst Our $57 target uses RS’s 5-yr historical avg 6.3x EV/EBITDA multiple on a “normal” 2012E discounted back. vs an avg 10-yr 6.9x through the cycle multiple. Shrs look attractively valued at 4x our 2012E EV/EBITDA and 5.1x 2011E. We like the steady business model, leverage to economic, aerospace, and construction recovery, and potential acquisitions in the fragmented distribution space.

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North American Precious Metal Producers

Precious Metals Analyst: Brian MacArthur, CFA Tel: +1-416-350 2229

UBS updates metal price forecasts Precious metals forecasts up UBS has revised its precious metals forecasts. The gold price forecasts have been raised between 4 and 13%, as our

Commodity Strategist, Edel Tully, anticipates an extension of the fear trade and uncertainty. This leaves us above consensus over all forecast periods. Our forecasts for silver and platinum have also been modestly lifted.

Base metals forecasts down We have also adjusted our models to reflect UBS’ updated base metals prices, where relevant. As a result, UBS has reduced prices for 2010 and 2011 by around 5-10% for the base metals. For more information on UBS’ metal updates, please see Julien Garran’s “UBS Global I/O: Commodity Price Review” dated July 22nd.

EPS impact On average, our gold equities EPS estimates are up 12% in 2010, 4% in 2011, and 17% in 2012; our silver / PGM equities EPS estimates are up 8% in 2010, down 2% in 2011, and up 26% in 2012; and our royalty / stream equities EPS estimates are up 3% in 2010, 4% in 2011, and 8% in 2012.

Valuation update There are only minor changes to price targets across our universe as we continue to value the companies using a flat $1250/oz gold price. We are upgrading Franco-Nevada from Neutral to Buy on share price depreciation. We continue to believe that investment and speculative flows are the greatest driver of gold and silver prices.

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UBS 6

COMMUNICATION AT&T Inc. Rating: Buy Target: US$31.00 Price: US$25.51 RIC: T.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$151bn BBG: T US

Fixed-Line Communications Analyst: John C. Hodulik, CFA Tel: +1-212-713 4226

Raising EPS on stronger margins EPS beats on better wireless and wireline margins AT&T reported 2Q EPS of $0.61 (vs. our estimate of $0.58), excluding a one-time gain of $0.07.

Though revenues were lighter than expected (largely due to lower than expected equip rev), impressive margin growth enabled the company to exceed our EPS estimate. We are now looking for higher margins in 2H though we believe 2Q was the peak for the year.

Cost cutting, U-verse, and stabilizing business environment aids Wireline Wireline revenue declines improved thanks to growth in U-verse and a stabilizing business environment while margins improved on aggressive cost cutting. Looking ahead, we continue to expect consumer revs to remain stable though we are lowering our 2H broadband net adds. We also believe that 2Q will be the high water mark for wireline margins as we expect the company to reinvest in efforts to boost broadband and video growth.

Wireless margins continue to beat though subscriber adds were weaker Wireless margins of 43.1% were better than expected despite 3.2M iPhone activations. Revenues were lower than expected though on weaker net adds (including 130K losses in wholesale). We expect net adds to pick up in 2H on ramping iPhone sales, a rebound in Tracfone, and accelerating iPad 3G activations.

Valuation: Maintain Buy We are raising our ‘10 EPS to $2.40 from $2.32, equating to growth of 13% for the year. Our ‘11 estimate for $2.55 remains unchanged. AT&T trades at 4.7x 2011E EBITDA and 9.1x P/E. Our PT is DCF based (8% WACC, 2% Growth).

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UBS 7

CONSUMER

Royal Caribbean Rating: Neutral Target: US$30.60 Price: US$27.56 RIC: RCL.N Prior: Unchanged Prior: US$34.00 Mkt Cap: US$5.96bn BBG: RCL US

Recreational Products & Services Analyst: Robin M. Farley Tel: +1-212-713 2060

RCL: Yield Outlook Hanging In There, Q2 Better Exp., H2 Exp. Unchanged RCL Maintained +4-5% ‘10 Constant FX Yield Guidance Reading mgmt's body language on follow-up questions, it seemed like close-in bookings

aren't great but they were ahead enough from earlier in the year that they don't have to change guidance. We note that booking vols. in the last 3 months are up 11% yoy, just below the 11-12% capacity for the forward 6 mths. Our +5% constant currency yield estimate remains unchanged.

Q2 Beat on Expenses…Which Drove 2010 EPS Guidance Raise Mgmt raised EPS range up by $0.10 to $2.25-2.35 but that EPS upside is driven by roughly $0.05 from Q2’s true lower net cruise cost ex fuel (i.e. not just timing) and roughly $0.09 from lower H2 fuel offset by an estimated $0.05 FX drag.

Yield Read-Through for CCL and Adj. Est for FX Moves in Last Month CCL's constant FX yield guidance in late June of +2-3% is in line with RCL's 4-5% constant FX range (since ~200+ bps of RCL yield is from Oasis and Solstice premiums in the yield mix, so implies 2-3% of same-store.) So RCL's reiteration of guidance today supports our constant FX yield assumption for CCL of +3%. We increase our CCL 2010 EPS estimate to $2.36 from prior $2.33 due to recent Euro & GBP strengthening

Valuation: RCL 12 month PT lowered to $30.60, from $34 Our new $30.60 PT is based on ~13-14x (in line with historical discount to CCL's P/E at 10-20%), a “normalized” EPS, which we base on 2012 and PV to today. Our 2012 EPS is $2.86 vs. prior $2.96 reflects lower capacity days from drydocks & ship transfer.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$27.56 on 22 Jul 2010 19:16 EDT Alaska Air Rating: Buy Target: US$60.00 Price: US$49.26 RIC: ALK.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.76bn BBG: ALK US

Airlines Analyst: Kevin Crissey Tel: +1-212-713 3562

Thoughts After the Call Solid Q2 beat Alaska reported Q2 EPS of $2.29 vs. the consensus of $2.12 and our estimate of $2.23. In our view, this was an excellent quarter.

Compared to our model the difference was a bit better regional revenue. Managing the business effectively We take mgmt’s strategic review of Horizon as a positive sign that they are truly managing to ROIC targets and

not just quoting statistics to investors. They’ve chosen to evaluate this business while posting record profits and heading toward their financial targets. Our view on the stock Based on our numbers, ALK remains cheap but we believe investors will question the financial upside to these strong results.

Particularly concerning is the increase in competitive capacity in Alaska’s markets. We see upside for the stock but not nearly at the same rate as over the last 12 months.

Valuation We’ve lowered our 2010 EPS estimate to $6.31 from $6.91 as we incorporate a higher fuel price assumption. Our 12-month PT remains $60 based on a blend of 8x P/E and 5x EV/EBITDAR.

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JetBlue Airways Rating: Neutral Target: US$7.00 Price: US$6.38 RIC: JBLU.O Prior: Unchanged Prior: US$6.50 Mkt Cap: US$1.76bn BBG: JBLU US

Airlines Analyst: Kevin Crissey Tel: +1-212-713 3562

Thoughts After the Call Solid Q2 and good guidance JBLU beat consensus in Q2 but more importantly guided Q3 revenue above expectations. Its 12-15% Q3 passenger

unit revenue (RASM) outlook is strong and we believe reflects healthy demand in New York, among other regions. Q4 guidance for revenue appears to imply an expectation of continued strong bookings. This may turn out to be the case but we’ve chosen not to model above the company’s guidance (as we often do). Other sell-siders may, however, which could lead to higher than appropriate EPS expectations.

Headwinds receding somewhat JetBlue has faced a couple of unique challenges this year that are now behind them, including a JFK runway closure and a SABRE IT upgrade. Investors didn’t need more than that to stay away from the stock, particularly when they could buy network airlines which offer much greater leverage to the return of corporate travel.

Our view on the stock We remain on the sidelines regarding JBLU despite a reasonable valuation and an improved outlook because of our view that international demand trends are better than domestic leisure trends. If you are going to buy an airline in this uncertain economic environment, we think there are probably better choices.

Valuation We’ve increased our 12-month PT to $7.00 from $6.50 based on a blend of a 12x P/E and 7x EV/EBITDAR. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$6.38 on 22 Jul 2010 19:16 EST





UBS 8

VF Corp. Rating: Buy Target: US$92.00 Price: US$78.40 RIC: VFC.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$8.75bn BBG: VFC US

Retailers, Apparel Analyst: Michael Binetti Tel: +1-212-713 3805

Calming Voice From An Apparel Bellwether Raising EPS Estimates on 2Q Beat and Our Positive 3Q Outlook We are raising our ‘10E EPS to $6.31 from $6.05 to reflect a $0.22 2Q beat and

better-than-expected top line and margin trends in the qtr. We are forecasting ~6% rev growth and ~100bp of GM expansion per qtr on avg in 2H. North Face is a key 2H profit driver, and industry checks (as well as comments from peers like COLM) suggest that orders remain solid heading into the important cold weather season.

A Calming Voice From an Apparel Bellwether We believe VFC has several structural advantages (owned-manufacturing, diverse brand portfolio, pricing power) to help it navigate the emerging risks to the apparel industry. We were comfortable that 2H guidance was appropriately conservative, and believe that VFC’s confidence in the flexibility of its sourcing & supply chain capabilities should help calm investor fears about emerging industry risks NT.

Heritage Businesses Stabilized, and Big Profit Contributors in 2Q We were particularly encouraged by progress in Jeans & Imagewear—which contributed 60% of total 2Q profit growth. We believe Jeans can continue to benefit in coming qtrs from multiple tailwinds, including: 1) an ongoing diminishing drag from exiting the Europe mass channel; and 2) expansion of the Wrangler & Riders brands at WMT.

Valuation: Maintain Buy Rating and $92 Price Target We are maintaining our $92 PT despite raising our ‘11E EPS to $6.79 from $6.62. We are trimming our target P/E to 13.5x (from 14x) to reflect slightly lower consumer spending and sourcing cost visibility NT.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$78.40 on 22 Jul 2010 19:16 EDT UBS Global Consumer Staples

Consumer, Non-Cyclical Analyst: Nik Modi Tel: +1-212-713 2204

Weekly World Navigator (16 – 22 July) The Global Consumer Weekly The UBS Global Consumer Staples Team is comprised of 25 analysts covering 120 consumer staples stocks. In this

new report we aggregate relevant research, UBS sponsored events, and corporate calendars in one place and on a global basis. Additionally, we add macro research and datapoints relevant to staples, as well as important news. Our goal is to assist you in navigating the breadth of UBS Global Consumer research--we welcome your feedback.

This Week’s Global Staples Research In the US, in addition to results related research, we've noted our belief that the recent management changes at Wal-Mart will lead to better visibility and profitability for CPG vendors. In Latam, the Mexican consumer pricing survey revealed food prices stabilized in July but there is intense price based competition in Hypermarkets. In Asia, raw milk prices increased 16% y/y in China. Linda Zhao visited Mengnui and Yili and their respective mgmt attributed the rise to recovery in demand and rising feed costs.

Highlighted Research – Japan Tobacco (Buy - 2914 -TKS - ¥300,000) We initiated on Japan Tobacco recently and although tobacco stocks are usually owned because they offer stable and predictable earnings growth and high cash returns, Japan tobacco doesn’t offer these qualities in the short term. However, we initiate with a buy because of: (1) low valuation; (2) forecast acceleration in earnings growth from FY3/12 and (3) the potential positive catalysts of acquisitions and/or regulatory changes.

Global Consumer Staples Key Calls The UBS Consumer Team identifies P&G (Buy), Coca-Cola (Buy) and Nestle (Buy) as "UBS Key Calls" from the consumer staples sector.

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UBS 9

ENERGY

Murphy Oil Rating: Neutral Target: US$60.00 Price: US$51.82 RIC: MUR.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$9.92bn BBG: MUR US

Oil Companies, Secondary Analyst: William A. Featherston Tel: +1-212-713 9701

MUR to Exit Refining Business…Finally MUR to divest 3 refineries and UK retail sites MUR plans to exit the refining business with the sale of its two domestic refineries (Meraux, LA and

Superior, WI) and its Milford Haven U.K. refinery. MUR also plans to divest 230 retail sites in the UK; it will continue to operate its U.S. retail sites, which generate mid-teen returns. While we believe MUR will be challenged to sell its high cost Meraux refinery, we estimate divestitures could total $1.3 billion. As shown in Exhibit 1, we value the 3 refineries and associated inventory at $1.1 billion & the UK retail sites at $200 million.

Divestiture makes strategic sense; expect favourable stock price reaction Given the low returns, negative FCF and lack of growth in MUR’s refining business, we believe the Street will react favorably to the news. The R&M segment has consistently underperformed MUR’s upstream portfolio, posting low-to-mid single digit returns while generating $100-200MM in negative free cash flow. We outline the unattractive metrics of MUR’s R&M segment in Exhibit 2.

Expect proceeds to be directed toward North American shale plays While management may disclose intentions on its conference call, we expect proceeds from the divestiture to go toward the growth and development of its E&P resource plays: the Montney tight gas play has 126,000 net acres with 3.1 Tcfe of net resource potential and its Eagle Ford shale position has 200,000 net acres with 3.4 Tcfe.

Valuation: we rate MUR a Neutral with a $60 price target Our price target assumes 3.7x our normalized 2010 EBITDX estimate, or 0.9x NAV.


ENSCO PLC Rating: Neutral Target: US$41.00 Price: US$41.20 RIC: ESV.N Prior: Unchanged Prior: US$38.00 Mkt Cap: US$5.84bn BBG: ESV US

Oil Drilling, Equipment & Services Analyst: Angie Sedita Tel: 1-212-713 3587

Less Demand for Std. Jackups vs Hi-Spec 2Q-10 clean EPS of $0.83 vs our $0.78 estimate ENSCO reported recurring EPS of $0.83 vs. our estimate of $0.78 and consensus of $0.81. The

beat was driven by taxes ($0.03) and higher-than-expected deepwater revenues ($0.02). Recurring EPS excludes $12 mil impairment for a barge rig net of an $11 mil break-up fee related to the tender offer for Scorpion Offshore. ENSCO’s effective tax-rate improved to 14% vs guidance in the 16%-17% range.

International jackup market challenging, but demand for high spec rigs Pressure remains on the standard jackups; however demand has been strong for higher specification rigs. In the international markets ESV has 32 jackups of which 8 are high spec. Demand is seen in Saudi, India, Indonesia and Malaysia for high spec rigs; w/ potential demand in Iran for 10 rigs. Most of the demand is being met by newbuild rigs or high spec existing rigs, while demand is less for standard rigs.

ENSCO’s deepwater GoM fleet well protected given strong contracts ESV will build a total of seven new deepwater rigs, and has three in the GoM, and will have four by year end. Two of the three are working on approved operations. Given that all four of the rigs are newbuilds, they have stringent contracts and to break them the customer would pay a “significant portion” of the future stream of revenues. Of ESV’s 7 jackups in the GOM, 6 are working today.

Valuation: Jackup market seeing some int’l demand, but lot of new supply We are seeing some increase in international jackup demand; however substantial rig supply is still entering the market. Thus dayrates have remained steady to modestly under pressure. Our $41 PT is based on a 5.2x ‘11 EV/EBITDA multiple.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$41.20 on 22 Jul 2010 19:16 EDT Cabot Oil & Gas Rating: Buy Target: US$43.00 Price: US$32.77 RIC: COG.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$3.40bn BBG: COG US

Oil Companies, Secondary Analyst: David Deckelbaum Tel: +1-212-713 6138

Eastern Promises Buoy Long-Term Value Solid quarter but trepidation on spending as Marcellus picture improves COG turned in a respectably inline quarter fuelled by a 13% sequential

increase in production and provided bullish sentiment on go-forward operations by raising production guidance by 3% for 2010 to 21-25% YoY. Shares reacted negatively to news of higher capex of $725m in 2010 vs. $650m prior, underperforming the group by roughly 350bps. We do not believe the higher spending translates into balance sheet disrepair and are encouraged by positive ops momentum across COG’s core Marcellus position.

Marcellus activity encouraging Cabot has now produced over 180 MMcfe/D gross after the start-up of the Lathrop compressor in June, after a slight delay. Management expects to have capacity from Lathrop ramped from over 85 MMcfe/D to 125 MMcfe/D by early August. With 75 wells set to drill in PA in 2010 with a 7th rig added and 30 more wells completing now, we see ample upside to current production forecasts. The only question remains execution and regulation that appears to be gradually easing.

Lowering estimates on higher costs, accounting changes We are lowering our 2010/2011/2012 CFPS estimates to $4.97/$4.88/$6.41 from $5.38/$5.46/$6.90 prior. While our production estimates are now 4% higher for 2010 and 6% for 2011 (24% and 18% YoY growth), our estimates are hampered by accounting changes that result in fewer exploration expense add backs to CFO.

Valuation: Maintaining price target of $43 Our $43 target is based on our 1P and 2P NAVs, implying 8.5x our 2011 EBITDA estimate. Notes:






UBS 10

Diamond Offshore Rating: Buy Target: US$80.00 Price: US$62.31 RIC: DO.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$8.62bn BBG: DO US

Oil Drilling, Equipment & Services Analyst: Angie Sedita Tel: 1-212-713 3587

Dividend cut + midwater conditions weak 2Q-10 EPS of $1.61 vs our $1.75 estimate… miss driven by mid-water Diamond reported EPS of $1.61 vs. our estimate of $1.75 and consensus of

$1.78. The miss was driven by lower than forecasted revenue from intermediate semisubmersibles ($0.07) and higher than anticipated tax rate ($0.05). Cut our EPS estimates last week by 13% for 2010 and 27% for 2011 Given the GoM moratorium, new rig supply, and a global slowing in deepwater

and midwater demand we cut our estimates sharply last week. We believe market conditions will remain tough over the next 6-9 months and that rates will stay under pressure. We are assuming all of DO’s three remaining floaters in the GoM become idle; however DO did a good job of recontracting two rigs in other markets. As a positive DO’s international semis and jackups should stay working despite near-term renewals.

Cutting quarterly special dividend again (by 54%), as expected DO cut their special qtrly cash dividend to $0.75 from $1.375, but maintained its regular quarterly dividend of $0.125 ($3.50 total annual dividend; 5.5% yield down from 9.4%). We had been expecting a cut in either Q3 or Q4 of this year. Over the next year we forecast DO as free cash flow positive for every qtr, but Q1-11.

Dividend cut expected, floater conditions to remain difficult The deepwater and midwater markets will remain difficult and we recently cut our estimates. We view the stock as a value stock, versus a growth one. For earnings growth we would look elsewhere. Our $80 PT is based on a 6.6x 2011E EV/EBITDA multiple.

Notes:




UBS 11

FINANCIALS

Associated Banc-Corp Rating: Neutral Target: US$13.00 Price: US$12.57 RIC: ASBC.O Prior: Unchanged Prior: US$14.00 Mkt Cap: US$1.61bn BBG: ASBC US

Banks, Ex-S&L Analyst: Erika Penala Tel: +1-212-713 1121

Challenges ahead, but priced in Maintain Neutral stance We maintain our Neutral rating post 2Q results. ASBC continues to face material EPS headwinds, but we believe the stock

accurately reflects this risk. We are raising our ‘10E to ($0.20) from ($0.27) to account for some of the 2Q beat. But, we are refining ‘11E to $0.60 from $0.62 and ‘12E to $1.35 from $1.38, as a less sanguine top-line view mitigates more aggressive reserve release assumptions.

Continuing to chop through credit, but further strain ahead While loss and NPL levels outpaced our ests., underlying trends were mixed. Ex. the impact of the 2Q NPL bulk sale, term CRE NPLs moved materially higher QoQ. Resi RE TDRs also rose significantly, likely aiding the QoQ decline in 30+ delinquencies. We expect continued NPL bulk sales to translate into elevated const. and term CRE losses, but such activity should spur further reserve releases.

Top-line generation also under strain We believe NIM trends should remain flat until ST rates rise and/or an upgrade of its debt ratings occur – both of which we view as likely late ’11 events. Balance sheet size should remain under pressure, as loan growth remains anemic through ’11 and deposit growth tapers off. Further, we expect Reg E to pressure 2H10 deposit service charges by 8% vs. 1H10 levels.

Valuation reflects credit, top-line challenges ASBC trades at 9x our ‘12E vs.14x for the median mid-cap bank. Further, we think ASBC’s P/TBV of 1.4x appropriately reflects long-term ROTCE prospects. Our three-prong valuation methodology drives our $13 PT (from $14, adjusted for EPS revisions).

Notes:


Huntington Bancshare Rating: Sell Target: US$4.00 Price: US$5.85 RIC: HBAN.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$2.35bn BBG: HBAN US

Banks, Ex-S&L Analyst: Erika Penala Tel: +1-212-713 1121

Solid progress, but more to go Maintain cautious stance We maintain our Sell rating on HBAN. Results marked continued solid progress. But, we believe revenue headwinds are

greater than expected, while credit quality tailwinds will likely taper in 2H10. We are raising our EPS estimate for 2010 to ($0.23) from ($0.26) to account for the beat, but maintain our 2011 and 2012 estimates of $0.28 and $0.55, respectively.

Uncertain economic underpinnings could inhibit credit improvement HBAN’s sale of Franklin-rel. resi RE loans allowed for a $76mn reserve release. However, a weak economy will likely inhibit similar-sized reserve releases until 4Q11. C&I credit trends should continue to improve, and we narrowed our estimates for auto losses. But, we expect core resi RE trends to remain under pressure, especially as re-default rates rise in HBAN’s loan mod portfolio (4% of 1st lien loans). Further, we expect term CRE credits to remain challenged through 2011.

Pre-tax, pre-provision levels could be under pressure in 2H10 HBAN guided for pre-tax, pre-prov. levels in 2H10 to be in-line with 2Q. But, we believe this could prove difficult. NIM trends will likely stay flat, given a fading deposit re-pricing lever and increasing competition for new originations. Solid auto loan growth may not be able to offset scant corporate loan demand and problem portfolio run-off. Lastly, overdraft regs should pressure dep. svc. charges from seasonally strong levels, and mortgage banking income strength should wane.

Valuation still stretched HBAN trades at 14.1x the PV of our 2012 EPS estimate and 1.4x TBV. We believe EPS headwinds could pressure these multiples. Our 3-pronged valuation method drives our PT.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$5.85 on 22 Jul 2010 19:16 EDT SunTrust Banks Rating: Sell Target: US$14.00 Price: US$24.58 RIC: STI.N Prior: Unchanged Prior: US$12.00 Mkt Cap: US$12.3bn BBG: STI US

Banks, Ex-S&L Analyst: Heather Wolf, CFA Tel: +1-212-713 4290

EPS to Fall Short of Elevated Expectations Maintain Sell rating due to elevated expectations We maintain our Sell rating. While STI’s fundamentals are clearly improving and surpassed our

ests, we think EPS expectations are too high. We are increasing our ’10E to ($1.10) from ($1.65), and our ’11E to ($0.55) from ($0.65) to account for the beat, but maintaining our ’12-’14 ests. Our ’12 est is 75% below consensus.

Solid credit beat, but we see a slow recovery ahead STI reported improved NCOs and NPAs, well exceeding our est. But we think the pace of improvement will slow, given: 1) Const NPLs remain at 29% and mgmt has stated their intent to continue bulk selling, which could drive greater discounts than current marks; 2) TDRs grew 136% QoQ, and rising re-defaults could slow loss improvement; and 3) Term CRE migration will likely continue. Further, STI released reserves this qtr, but this trend could prove short-lived given below avg reserves/loans.

Pre-tax, pre-provision headwinds ahead Lending revs surpassed our est., but we expect modest declines in 2H10 and ’11, given pressure from the flat rate environment, continued loan contraction, and deposit run-off. Also, STI reported strong fee income this qtr, but reg reform, and lower MSR hedge, trading, and securities gains will weigh on these revs in 2H10.

Valuation: Expect multiples to compress from EPS misses STI trades at 42x our ’12 est vs our target of 12x. It also trades at 1.1x trough TBV vs our target of 0.9x (based on forecasted ROTE < cost of equity). Our three-pronged valuation summary (P/E, P/TB, DCF) drives our $14 PT (was $12).

Notes:






UBS 12

Fifth Third Bancorp Rating: Sell Target: US$10.00 Price: US$12.45 RIC: FITB.O Prior: Unchanged Prior: US$9.00 Mkt Cap: US$9.90bn BBG: FITB US

Banks, Ex-S&L Analyst: Heather Wolf, CFA Tel: +1-212-713 4290

Making Progress, But Still Headwinds Maintain Sell rating FITB is making strong progress at managing thru the cycle, but we think the pace of credit improvement will slow and revenue

headwinds will persist. We increased our ests to account for the outperformance this qtr. We increased our ’10 est to $0.25 from ($0.30), our ’11 est to $0.60 from $0.30, and our ’12 est to $1.15 from $0.95. But our ests remain ~30% below consensus. Also, our ests do not include any dilution from a capital raise likely required to pay back TARP.

Pace of credit improvement to slow Mgmt suggested, and we concur, that the pace of credit improvement in 2H10 will unlikely match that posted 1H10. Construction and C&I losses should continue to recede, but resi and comm’l real estate losses should remain elevated. That said, given the credit improvement and an industry-wide trend for early reserve releases, we have pulled forward reserve releases from ’13 and ’14 into ’11 and ’12.

Not immune to revenue headwinds FITB is not immune to rev pressures. Lending revs missed our ests, and although we expect a rebound in 2H10, a flat rate environment and sluggish loan growth will weigh on margins through ’11. Further, reg reform will weigh on fee revs in 2H10 and beyond.

Valuation: Fundamentals don’t justify valuation FITB trades at 13x the PV of our ’12 est vs our forecast for 11x. It trades at 1.3x TBV, despite an ROTE < cost of equity post further dilution. Our three-pronged valuation methodology (P/E, P/TB, DCF) drives our target price of $10 (was $9).

Notes:


Chubb Corp. Rating: Buy Target: US$59.00 Price: US$51.69 RIC: CB.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$17.2bn BBG: CB US

Insurance, Property & Casualty Analyst: Brian Meredith Tel: +1 203 719 2899

EPS In-Line Despite Heavy Cat Losses Operating EPS of $1.41, in line with UBSe and consensus of $1.40 Higher than expected catastrophe losses ($0.29) were offset by higher than

expected loss reserve releases ($0.18) and lower accident year losses ($0.06). The results also benefited by $0.04 from a special dividend related to an equity investment. BVPS was up 2.5% sequentially to $49.39, in line with our estimate. CB repurchased 12.4mm shares in the 2Q10 (UBSe of 12mm), and plans to utilize the remaining 16.8mm shares on its current authorization by year-end 2010.

Commercial lines price competition increases Chubb commercial lines renewal pricing was flat in 2Q10 (vs. up 1% in 1Q10), and professional liability declined 3% in 2Q10 (vs. down 1% in 1Q10) as companies react to the current favorable loss cost environment. Terms and conditions also weakened in some lines of business.

Adjusting our 2010/2011 EPS estimates We are raising our 2010 EPS estimate to $5.40 (from $5.28) and 2011 EPS estimate to $5.90 (from $5.75), reflecting modestly better accident year combined ratios. Our 2010 estimate is within CB’s 2010 guidance of $5.15 - $5.55.

Valuation: Continue to rate share a Buy Our price target of $59 assumes CB’s shares trade at 1.2x of our 12-month forward BVPS estimate ex-AOCI of $48.24. Its shares currently trade at 1.1x its BVPS x/ AOCI. With more than $2bb of excess capital, relatively attractive ROE’s, a strong balance sheet and likely upside to consensus estimates, we believe CB deserves a premium valuation to peers.

Notes:





UBS 13

HEALTHCARE

Baxter International Rating: Buy Target: US$56.00 Price: US$43.25 RIC: BAX.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$25.9bn BBG: BAX US

Advanced Medical Devices Analyst: Bruce Nudell, PhD Tel: +1 212 713 2716

2Q10: BioScience work in progress Maintain sales / EPS estimates We maintain ‘10 / ‘11 sales estimates of $12.8B (+2%) / $13.3B (+4%) & EPS estimates of $3.96 (+4%) / $4.26

(+8%). BAX maintained ‘10 sales growth guidance of 1-3% (FX neutral) & tightened EPS from $3.92-$4.00 to $3.93-$3.98, now incl +$0.03 from more aggressive share repo (Table 1). Key assumption in ’11 is BioScience recovery; we model +3% from -2% in ’10 (+1% excl US HC reform & H1N1/vax).

BioScience not out of woods Recombinant ww CC growth of +1% (vs 5% est) due to UK tender & US HC reform (each roughly -1% to ww growth); delayed tender in Eastern Europe also contributed. BAX took Recombinant guidance to +4% CC (inline w/ 1H10) from 4-5%. US IVIG was inline but -17% YOY, w/ -4% due to US HC reform & balance ascribable to share / pricing. Ex-US IVIG solid at +11% CC. Plasma Proteins soft; -7% US on albumin & -15% CC ex-US on pdFVIII / tough comp.

Medication Delivery strong Med Del 2Q10 CC sales growth was +6% CC w/ strength in IV Therapies, Global Injectables, & Infusion Systems (although benefited from Sigma sales; unlikely to persist in 2H10). Importantly, Med Del top line strength accompanied w/ margin expansion within segment.

Valuation: DCF-based $56 price target We believe valuation is attractive but BioScience stability is needed. Longer term opportunity lies in mgmt ability to create a truly diversified model w/ strong contributions from Med Del & Renal.

Notes:


HealthCare Services – MCO/Hospitals

Healthcare Providers Analyst: Justin Lake, CFA Tel: +1-212-713 2765

Q2’10 Earnings Preview for Week of 7/26 Look for more on costs of healthcare reform benefit mandates on 2Q cc While UNH acknowledged cost pressures w/out specifics, we expect

AET, WLP and CVH to offer more detail around impact of reform to commercial cost trends starting in Q4 for renewing plans. Given mix of business, look for WLP to see largest impact at 300-500bps with AET/CVH more likely in the 200-300bps range.

AET (7/27) / WLP (7/28) likely to continue trend of lower costs for MCOs With Aetna pre-announcing better than expected Q2 results due to positive Q1 PPD, we raise our EPS est. to $0.75 for Q2 from $0.68. With strong results a given, most interesting will be update for FY’10 EPS guidance as well as mgmt thoughts on trajectory of return to high-single digit margins over 2-3 yr period. For WLP, we look for PPD to be part of the story as well given broad declines in trend, and expect company to reiterate guidance of “at least $6” ex-any potential positive PPD, despite accepting lower rates in CA individual book.

UHS (7/26) likely to have second request from FTC on-hand for Q2 CC With UHS having re-filed PSYS with FTC on 6/25, starting 30-day clock, we would expect mgmt will have second request in hand for cc (likely but not 100%), potentially allowing co to give update on process and insight into areas of focus including # of markets where overlap may be of concern. Also look for thoughts on integration post close, including oversight/risk control given PSYS regulatory issues & ability to close historical PSYS 200-250bps margin gap including timing.

Q2 hospital volume weakness well understood, look for July update Hospital earnings likely in-line on cost cuts w/key focus areas including update on July volumes given June being particularly weak and thoughts on comm’l pricing.

Notes:


Cepheid Rating: Neutral Target: US$20.00 Price: US$14.77 RIC: CPHD.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$0.87bn BBG: CPHD US

Biotechnology Analyst: Derik de Bruin, Ph.D. Tel: +1-212-713 3964

Margins Improve, Still Cautious Outlook Sales a bit above, but EPS ahead of consensus due to margin expansion Total revenues were $49.6m (+21% y/y) vs. Street $49m. Industrial

sales of $4.7m and Biothreat sales of $5.1m were inline with UBSe, but Clinical sales of $37.7m were below UBSe $39m. Adj. product gross margins were 50% (+610 bps y/y), well above UBSe 46%, on improved manufacturing & mix. The $0.02 loss per share was ahead Street ($0.10). Given the impressive Q2 margin gains & the pullback in share price, we see CPHD trading up, but enthusiasm may be curbed by the cautious Mgmt tone & disappointing news from other diagnostic companies.

US capital spending environment stable, CPHD more cautious on EU In the US (~80% of clinical sales), a longer sales cycle led to 37 system placements (vs. 36 in Q1), while overseas, austerity measures have caused some weakness in Europe yielding 69 sys placements (vs. 88 in Q1). Also, the average number of modules per system trended down q/q to 4.5 and is below ’09 levels (5.7).

FY10 sales guidance narrowed, but EPS raised; We raise our estimates While CPHD’s 2H10 outlook assumes an ongoing difficult economic landscape, mgmt now sees ‘10 sales at $200-205m (was $195-205m) & a net loss per share of $0.21-0.25 (prior $0.25-0.32). As PCR patents expire, CPHD believes ~50% is the new gross margin ‘floor’, pushing the company toward full profitability in FY11. For FY10, we forecast sales of $205m (+20%) & a loss per share of $0.22 (was ($0.26)). For FY11, we see sales of $246m (+20%) & EPS of $0.11 (was $0.07).

Valuation: Neutral rating, $20 price target Our price target is based on DCF analysis (using the UBS VCAM model) Notes:



http://research.ibb.ubs.com/pages/site/quicksearch.jsp?textquery=HealthCare Services – MCO/Hospitals



UBS 14

Zimmer Rating: Buy Target: US$72.00 Price: US$52.51 RIC: ZMH.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$11.3bn BBG: ZMH US


2Q10: it’s go time 2Q10 EPS beat, ‘10 EPS guidance maintained Mgmt maintained FY10 EPS/rev growth guidance of $4.15-$4.35/3-5% CC. ’10 GM guidance was

raised to 76-76.5% from 75-76% partially offset by SG&A (now 42% of sales from 41-42%). We updated our 2010 rev/EPS ests to $4.239/$4.28 from $4.247B/$4.29. ZMH reported 2Q10 revs of $1.058B (cons. $1.068B), up 3.3% CC. EPS of $1.09 beat cons. of $1.05 on lower SG&A & better gross mgn. ZMH gave 3Q10 EPS guidance of $0.93-$0.98 (UBS est $0.98).

1H10 industry growth for major joints steady at + 5.6%US/+ 4.6%OUS Though ZMH, like peers, noted deceleration in 2Q10 vs 1Q10 US market growth, 1H10 US revs suggest steady ~5% mkt growth (w/ 85% of mkt reporting). ZMH suggested slower 2Q10 possibly tied to add’l 1Q10 billing days at JNJ although decrease in knee units typically used in younger patients suggests some macro impact.

Profitability of commercial ortho patients positive for implant pricing Mgmt stated US pricing pressure has not ticked up (inline w/ SYK comments). Given profitability of commercial hip/knee procedures (1.5X Medicare) for US hospitals and cost-plus based implant reimbursement, we don’t see a step change in hospital incentive to increase pressure on implant pricing. ZMH confirmed price pressure originates in base implant (e.g., Medicare) pricing. Contract carve-outs for high-end products (for young pts) & therefore mix opportunities persist (pg 2).

Valuation: DCF based price target is $72 We expect the stock trajectory going forward to be tied to uptake of new hip products, ZMH 2Q10 US hip growth of 3% was inline with market for the first time since late 2006.

Notes:


Lilly Rating: Neutral Target: US$36.00 Price: US$34.95 RIC: LLY.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$40.2bn BBG: LLY US

Pharmaceuticals Analyst: Marc Goodman Tel: +1-212-713 1342

Bumping Numbers Upward, but Still Neutral Key things we learned from the earnings call (1) Impact of EU pricing changes on 2010 (-$90M) and 2011 ($-150M) revenues. (2) Positive FX

impact on COGS. (3) HC reform impact on 2Q. (4) Cymbalta and Zyprexa benefitted from a gross-to-net true-up for 2Q US sales. (5) Alimta is the new leader in first line NSCLC and received a positive response from UK’s NICE for use as a maintenance therapy in NSCLC. (6) Update on patent litigations. (7) Some pipeline updates.

What we are watching in 2H10 We are waiting for approval of Bydureon in October, which we believe will be a key drug for Lilly, especially as the Byetta franchise continues to decline. We will look for guidance from the FDA on Cymbalta for chronic pain on August 19 panel. We also look forward to Phase II data from BAFF antibody and JAK-1/JAK-2 at ACR, both of which are important pipeline products. Lastly, we will continue to monitor the Effient and Livalo ramps.

Thoughts on the stock: No change to investment thesis Lilly beat consensus by 14 cents and raised guidance by only a dime, which is due partly to HC reform true-ups and impact from European pricing and FX on 2H10. Ultimately, there was nothing in the quarter that will change the patent expiration/pipeline concern which we think is still the key issue for the stock.

Valuation: We maintain our Neutral rating and $36 price target Our DCF-based price target implies an 8-9x multiple on our 2011E EPS of $4.38. Notes:


Bristol-Myers Rating: Neutral Target: US$26.00 Price: US$24.93 RIC: BMY.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$42.7bn BBG: BMY US

Pharmaceuticals Analyst: Marc Goodman Tel: +1-212-713 1342

Bristol Knows How to Perform What we learned on the conference call (1) Mgt. budgets 2-2.5% price decreases for Europe, but expects a modest add’l 2H10 impact and an add’l

mid-single digit headwind for 2011. (2) Mgt. expects HC reform costs to grow in 2H due to 340B rebates and increased managed Medicaid rebates. (3) Mgt. reiterated its 2013 floor EPS guidance of $1.95 in the face of EU pricing and US HC reform costs. It expressed confidence in pipeline revenues as well as additional cost savings to meet the target. (4) The AVERROES study comparing Apixaban to Asprin will be presented at ESC on Aug 31.

Overall thoughts on the quarter: Solid quarter The key products are performing as expected and in our view mgt. continues to do a very good job keeping a tight hold on spending. We had previously reduced our EPS estimates due to FX and European pricing pressures but it appears this impact will be partially offset by lower spending. We are slightly increasing our EPS forecast for 2010 by 2c.

Thoughts on the stock: Key pipeline data in 2H10 2H10 will be a busy time for data releases with the Apixaban presentation at ESC on Aug 31, Dapaglifozin data at EASD in Sept., Sprycel’s first-line CML PDFUA on Oct 28, additional HepC data at AASLD in Nov., and potential first-line Ipilimumab data in late 4Q10. Pipeline successes will likely be the main driver of the stock over 2H10.

Valuation: PT of 26 based on DCF analysis Our DCF analysis assumes $20 for the base business and $6 for the pipeline. This implies a target P/E multiple of 11-12x on our EPS forecast for 2011 of $2.30.

Notes:






UBS 15

St. Jude Medical Rating: Buy Target: US$46.00 Price: US$35.39 RIC: STJ.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$11.5bn BBG: STJ US


Solid execution ICD-driven topline beat, with solid spending control St. Jude reported 2Q10 rev of $1.313B (~11% reported & CC), about $23M above consensus.

Adjusted EPS of $0.79 beat our and consensus estimate by $0.06, driven by higher sales and SG&A control (34.1% versus our estimate of 35.4%). ICD share gains expected going forward 2Q10 ICD sales were $300M in US (+12% ex. $15M from BSX ship hold) and $171M OUS (~17% CC

growth). We model 2Q US ICD sales of $520M for MDT & US ICD market at $1.058B (1H10 flat Y/Y). We model eroding US ICD market (-1% CAGR) through ‘14, given declining de novo implants with WW CAGR at 2%. Offsetting this, we expect STJ to gain at least 200BP of WW share through 2014. Our WW ICD + Pacer market model shows ~2% CAGR through ’14.

2010 EPS guidance upped $0.06 (2Q10 beat), absorbs $0.03-04 FX impact 2010 rev guidance of $5.035-5.180B, is modestly lower than previous range due to FX, but expected CC growth increased (9-12% from 8-11%). We now model $5.082B (+$11M) w EPS @ $2.88 (up from $2.83). We model 2H EPS growth rates declining from 1H (~28% to ~9%), due to worsening FX, waning ICD recall impact, integration of LightLab and moderating GM from absorption of remote pacers.

Valuation - DCF-based target of $46; BSX trades at 11.1x our 2011E EPS STJ showed strong execution w ICD share gains/strong WW CC growth in Neuro (17%) and AF (12% CC) & unchanged longer term positive outlook for markets (despite current STJ sluggishness in US AF). We est. top/bottom line CAGRs for STJ at 6%/11% for ‘10-’14 despite conservative CRM market assumptions.

Notes:




UBS 16

INDUSTRIALS Key Call: 3M Co. Rating: Buy Target: US$100.00 Price: US$84.75 RIC: MMM.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$60.3bn BBG: MMM US

Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309

Continued Strong Performance in 2Q EPS $1.54 vs. consensus $1.45; Organic growth remains extremely strong 3M delivered high-teens (+17%) organic growth for the second

consecutive quarter. We believe that 2Q results are consistent with our view that the company has structurally improved its organic growth profile. Despite 3M’s size, we believe it can continue to outgrow both peers and underlying end markets with its focus on R&D and its pyramid product strategy. New products appear to be gaining traction, and we believe recent growth rates can only be explained by market share gains and/or penetration of new markets.

Continued improvement in margins 3M’s adjusted operating margins were 23.7%, up 110bp YoY. Sequentially, margins improved 90bp (~39% incremental margins). Notably, 3M also raised its FY10 operating margin guidance to 22.5%+, from 22.0%+. It is encouraging to see that 3M continues to improve margins while also aggressively investing in growth initiatives. The margin guidance was raised despite slightly negative pricing (to gain market share), higher raw material costs, and increases in both R&D and marketing/advertising spend.

2010 EPS guidance raised to $5.65-$5.80 (prior $5.40-$5.60); cons. $5.62 3M now expects organic volume growth of 13%-15% for 2010 (was +10%-12%). We are raising our 2010 and 2011 EPS estimates to $5.80 (was $5.60) and $6.40 (was $6.15), respectively.

Maintain PT of $100 and Buy rating; Risk / reward profile still favorable Our PT reflects a ~30% premium (unchanged) to the market multiple on our revised 2011 EPS estimate (was based on 2010). We maintain our Buy rating.

Notes:


Danaher Rating: Buy Target: US$45.00 Price: US$37.80 RIC: DHR.N Prior: Unchanged Prior: US$48.50 Mkt Cap: US$24.5bn BBG: DHR US

Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309

2Q: Selloff unjustified given solid results Solid organic growth, and continued margin improvement DHR’s stock underperformed the S&P by roughly 3% yesterday, a move we believe was

unwarranted given strong 2Q results. Some investors seemed disappointed that FY10 guidance wasn’t raised further. However, we were impressed by the substantial improvements in core margins, higher organic growth rates, and the prospects for further near-term M&A. We also note that guidance now includes incremental dilution associated with the Tools JV which probably wasn’t in consensus forecasts.

Focus was on costs of Tools JV, but little discussion of the likely LT benefits Yesterday, both DHR and CBE commented on the dilution associated with their new Tools JV. However, neither company reiterated the original justifications for the JV; consequently, we think some investors focused exclusively on the near-term dilution. Over the next few years, we expect the JV to deliver significant synergies from purchasing leverage, geographic and channel footprint expansion, consolidation of facilities, and cross-branding.

‘10 EPS guidance raised to $2.16-2.23 (was $2.12-$2.20) vs. consensus $2.20 FY10 guidance now includes roughly $0.04 dilution related to the recently formed Tools JV, but excludes the expected 3Q one-time JV related gain. For 3Q, DHR expects EPS of $0.50-$0.55 (including Tools JV dilution) vs. consensus $0.55. Management is likely to increase growth investments in the back half of the year.

Valuation: Price target of $45 (was $48.5); Maintain Buy rating Our PT continues to reflect a ~45% premium to the market multiple on our revised 2011 EPS estimate (was based on 2010). We maintain our Buy rating.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$37.80 on 21 Jul 2010 19:40 EDT

Cooper Industries Rating: Buy Target: US$51.00 Price: US$44.54 RIC: CBE.N Prior: Unchanged Prior: US$56.00 Mkt Cap: US$7.45bn BBG: CBE US

Electric Components & Equipment Analyst: Jason Feldman Tel: +1-212-713 4309

2Q beats, but guidance disappoints EPS of $0.80 (ex-items) ahead of cons. $0.77 and guidance of $0.72-$0.77 Sales increased ~5.3% YoY (guidance +2%-5%) to $1.34B vs.

consensus $1.30B. Core sales were up 4.8% YoY. Adjusted operating margins improved roughly 390bp YoY to 13.7% (and up ~70bp sequentially). While CBE reported a modest beat for 2Q and raised guidance, the stock sold off ~5% yesterday (S&P was up >2%), which we believe reflects investors’ heightened expectations into the print.

CBE’s performance solid given later cycle end market exposure While we understand that CBE’s guidance was below buy-side expectations, we think CBE delivered solid results given its later cycle end market exposure. While it’s hard to pinpoint exactly when the later cycle businesses will turn, we believe CBE’s improved market position, consistent execution, and strong balance sheet will materially benefit the company as the recovery progresses. We also believe that CBE’s guidance reflects more conservative underlying macro assumptions than guidance provided by some other companies in the sector.

2010 EPS guidance raised to $2.95-$3.10, from $2.85-$3.00 (Cons: $3.09) Revised EPS guidance includes ~$0.06 of dilution related to the Tools JV, which we do not believe was reflected in the consensus estimates. On an “apples-to-apples” basis, the midpoint of guidance was raised ~6%. For 3Q, CBE expects sales +2-5% and EPS of $0.75-$0.80 vs. consensus of $0.82.

Valuation: Reducing price target to $51 from $56; Maintain Buy rating Our new PT reflects a ~15-20% premium to the now-lower market multiple on our 2011 EPS estimate (was based on 2010), plus ~$2 per share in “excess” cash (unchanged).

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$44.54 on 22 Jul 2010 19:16 EST





UBS 17

Precision Castparts Rating: Neutral Target: US$120.00 Price: US$116.00 RIC: PCP.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$16.4bn BBG: PCP US

Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185

Post Q1 Thoughts Sticks to its forecast for aero recovery We think the move higher in PCP despite another miss was mainly attributable to the slight sequential

improvement in its aerospace results and it confronting the LIFO and pass through issues head on. And for the first time in quite awhile, PCP did not delay its projection for an aerospace recovery, sticking to its 2H FY11 forecast. We think PCP is likely to trade a bit higher still given the beginning indications of an aero recovery in its numbers.

See same EPS progression beyond FY11 While our FY11 EPS forecast moves $0.15 lower, we are left with our same view of EPS progression beyond. We see PCP’s base business, which generated $7.00 at the peak in FY09, at $8.00 run rate as we exit FY11 given productivity and revert along with accretion from Carlton. We estimate the 787 ramp can provide $1.50 EPS upside while Chengde contributes $0.25-0.50 and further capital deployment can add $1.00-2.00 for $11-12 peak EPS. This yields $115-125 discounted back.

Aero moves back to prior peak in Q4 PCP’s aerospace business generated $840M in Q1 revenues as compared to $950M at the peak and slightly less than $700M at the trough. We expect revenues to recover to the $950M run rate by Q4 (including Carlton) with an additional $1B in annual upside from 787, 747-8 and higher narrowbody and 777 rates.

Neutral rating; $120 price target Our PT reflects a blend of 15x our forward EPS estimate at $8.00 and 15x our peak EPS estimate at $11 discounted back.

Notes:


Caterpillar Rating: Neutral Target: US$74.00 Price: US$68.00 RIC: CAT.N Prior: Unchanged Prior: US$70.00 Mkt Cap: US$42.4bn BBG: CAT US

Heavy Machinery Analyst: Henry Kirn, CFA Tel: +1 212 713 4895

Raising ests, price target after impressive 2Q 2Q EPS of $1.09 vs. consensus of $0.85, but helped by $0.10 of tax items Machinery & Engine sales increased 34% YoY in 2Q, while

manufacturing op. profit was $939M, up from $388M in 2Q09 (excluding $85M in 2Q09 redundancy costs) on lower manufacturing costs, higher price realization & higher Machinery volumes. We calculate manufacturing incremental margins (ex. redundancies) improved to 22.3% on a YoY basis, up from 18.8% in the year-ago period. Fin. Products op. profit declined 28% in 2Q.

Raises 2010 EPS guidance to $3.15-$3.85, from $2.88 at midpoint (cons: $3.29) Noting “continuing improvement” in demand, partially offset by F/X, CAT raised the low end of 2010 sales guidance to $39-$42B, from $38-$42B. At midpoint, CAT sees higher Machinery sales, about flat Engine sales (including near record turbine sales), slightly higher Fin. Products profit before tax, and little change in dealer inventories.

Raising our forward EPS estimates Given an improved demand outlook and demonstrated impact of cost takeouts, we are raising our 2010E EPS to $3.60, from $3.00. We are raising our 2011E and 2012E to $4.50 and $6.00, from $4.00 and $5.50, respectively, reflecting a higher base year.

Valuation: Raising our price target to $74, from $70; Maintain Neutral rating Our price target continues to reflect a 35-40% premium to the now lower market multiple (now 11.5x, was 12.0x) on our now higher 2011E EPS, plus ~$4 of cash. Although we expect higher production volumes in 2010 as demand recovers and CAT produces closer to in line with demand, and are explicitly recognizing demonstrated benefits from cost takeouts, our Neutral rating reflects our belief that some of this may be reflected in shares.

Notes:


AutoNation Rating: Sell Target: US$20.00 Price: US$22.54 RIC: AN.N Prior: Unchanged Prior: US$18.00 Mkt Cap: US$3.83bn BBG: AN US

Auto Parts Analyst: Colin Langan, CFA Tel: +1-212-713 9949

Still Cautious Despite Beat AN reports Q2 earnings of $0.38 per share, above consensus of $0.36. AN reported EPS of $0.38, which excludes $0.07 related to debt

refinancing costs. The beat vs. our $0.32 estimate was driven by higher P&S sales ($0.04), lower SG&A ($0.03), and a lower tax rate ($0.01). SG&A was 72.5% of gross profit, better than our 75.2% estimate. Same-store new unit sales were up 24.0% y/y, better than our 21% estimate. Same-store used unit sales were up 27.3% y/y, better than our 18% forecast.

New and used margins disappoint; Small car mix risk to margins AN reported a 6.6% new gross margin, down 40 bps q/q and lower than our 7.0% forecast. Used margins were 9.4%, worse than our 9.6% estimate and 9.8% in Q1. AN attributed the q/q new margin decline to lower luxury mix. Going forward, AN said the increase in smaller vehicles will put pressure on margins, but expects this to be offset by the recovery of pickup sales. However, this implies the shift toward cars would negatively impact new vehicle margins.

Q2 beat the biggest factor in raising our 2010 and 2011 EPS estimates We are raising our 2010 and 2011 EPS estimates to reflect the following: 1) the Q2 beat; 2) higher SG&A savings; 3) share repurchases; 4) new dealer additions; and 5) a more bullish used car sales outlook.

Valuation: Maintain Sell; PT to $20 from $18 on estimate revisions Our new $20 price target is based on 13x our revised 2011 EPS estimate of $1.55.

Notes:






UBS 18

Engineering & Construction

Heavy Construction Analyst: Steven Fisher, CFA Tel: +1-212-713 8634

E&C Q2 preview: Macro vs. Micro Mixed expectations; awaiting color on 2H bookings and initial ’11 thoughts Next week we expect earnings from FLR, JEC, CBI, and KBR, with

others following. Macro concerns have dominated trading recently, and the Q2 results will indicate how the economic backdrop is filtering to the industry/company level (we expect modest push-outs). We have been expecting aggregate backlogs to flatten, and we expect book/bill just under 1x on average, although we expect a few standouts to raise the average. We expect more clarity on f/x impact, and expectations for 2H bookings (prior commentary suggested 2H would improve). We also expect some preliminary thoughts on 2011 earnings growth prospects.

Expect solid bookings at FLR, FWLT, TPC; lighter awards at MDR, KBR We expect favorable bookings at FLR, FWLT, and TPC. We don't expect significant margin deterioration for the group overall; only modest reductions. We see some earnings risk at JEC and WG. We see bookings risk at MDR and KBR.

We are positive on FLR and TPC into the quarter on book to bill potential Into the quarter, we are positive on FLR (despite high bookings expectations) and TPC on good bookings potential, and we are also positive on URS on earnings stability (although bookings risk and deal costs may be factors). Laggards could include JEC on earnings risk, MDR on bookings risk, BWC on bookings and margin risk. Risks appear balanced at KBR (may raise guidance but stock outperformed and bookings may be light) and FWLT (upside from bookings balanced by near-term revenue and margin risk).

Notes:


U.S. Machinery Playbook

Heavy Machinery Analyst: Henry Kirn, CFA Tel: +1 212 713 4895

The Week Ahead A number of companies report quarterly results next week PCAR, AGCO, MTW, KMT and CMI (Buy-rated CMI is a UBS Key Call) are among

companies reporting next week. See our calendar inside on page 2. On Thursday, CAT beat 2Q and raised guidance, but expectations were high CAT reported 2Q EPS of $1.09 (cons: $0.85) and raised its 2010

EPS guidance to $3.15-$3.85, from $2.50-3.25, noting “While there are significant economic concerns around the world that we are watching closely, orders have continued to outpace our shipments, and we expect to increase production in the second half of the year.”

11th Quarterly European trucker survey shows improving conditions Business conditions and freight rates improved YoY, with truckers reporting higher rates for the first time since 4Q08. Additionally, the 2010 truck purchase outlook is also improving as 46% of truckers expect to buy more trucks in 2010 than they did in 2009 up from 21% of truckers who expected increased purchases in January. See our note titled “Eleventh Quarterly UBS European Truck Survey - Recovery gaining momentum,” published 7/21 for more details.

We are selective on the Machinery sector While we acknowledge investor expectations incorporate demand improvements over the next few years, we see opportunities for the group to advance as we believe expectations may not fully reflect the achievable improvements in results for many of the names. That said, we recognize continued risks from still challenging credit conditions and potential pricing headwinds stemming from ample industry capacity and used equipment availability (for certain equipment categories).

Notes:


http://research.ibb.ubs.com/pages/site/quicksearch.jsp?textquery=U.S. Machinery Playbook


UBS 19

REITS The Weekly REIT Appraisal

Real Estate Analyst: Ross T. Nussbaum Tel: +1 212 713 2484

2Q10 Earnings – Early Takeaways A Rising Tide… Despite an “unusually uncertain” economic outlook, REITs marched higher during the first week of 2Q earnings season. REITs

remain higher-beta versions of the broad market, and a rising tide lifted the REIT ship 4.0% on Thursday. The group has also been supported by a sub-3.0% 10-year Treasury yield.

Mixed Performance out of Industrial REITs We expected guidance cuts out of the industrial REITs this past week. AMB cooperated. ProLogis did not. However, ProLogis’ 33% owned European cousin (PEPR), did cut guidance by 11%. While PLD left guidance unchanged, we suspect NOI guidance was reduced. We remain underweight industrial as we don’t see a 2H fundamental catalyst.

A Peak At Multifamily CLP kicked off 2Q multifamily earnings with an earnings beat and guidance raise. The read-through we get is that guidance raises from the rest of the multifamily group are likely. But, will the market care with the stocks trading at 22x our estimates of 2011 AFFO and 5.6% implied nominal cap rates. We would look to take profits on further strength.

A One-Off Upgrade in Office Land We stepped out-of-the-box this week and upgraded our rating on micro-cap Parkway Properties (PKY) to Buy. Even after Thursday’s 9% rally, Parkway trades at a 10% implied cap rate and a 25% discount to forward NAV. With the SOX claim from the former CFO withdrawn earlier this week, we see PKY closing the gap to NAV. We don’t mind a little hair at a 25% NAV discount.

Notes:


ProLogis Rating: Neutral Target: US$11.00 Price: US$10.97 RIC: PLD.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$5.23bn BBG: PLD US

Real Estate Analyst: Ross T. Nussbaum Tel: +1 212 713 2484

Navigating through choppy waters Solid development leasing in 2Q10, but significant headwinds remain PLD reported a decent 2Q result that featured solid leasing in the

development portfolio (nearly 500 bps), which offset continued rent rolldowns (-15.7%) and tepid core occupancy (down 22 bps). We expect SSNOI to decline further in 2011 as leasing spreads remain negative, and with a >150% dividend payout on 2011E FCF and fixed charge coverage at 1.76x (down from 1.92x in 1Q), potential credit ratings pressure could ultimately result in an equity raise. We remain underweight the industrial REIT sector and prefer AMB, which has a better risk-reward profile.

Core NOI guidance likely reduced, overall earnings quality deteriorating Core NOI guidance appears to have been reduced as FY10 FFO continues to become more back-end weighted with diminished earnings quality, including $0.03 of expected pick-up in 2H10 from higher development fee revenue. While the FY10 Core FFO range of $0.55-0.60 seems achievable, PLD’s goal of $700-800m of asset sales in the next 5 months could prove aggressive, in our opinion.

Adjusting estimates for 2Q result, slower occupancy recovery We have adjusted our FY10/11 Core FFO estimates to $0.56/$0.73 from $0.54/$0.75, which primarily reflects upside from the 2Q10 result, partially offset by a reduced occupancy assumption (we now expect flat occupancy in 2H10).

Valuation: Discount to NAV still warranted PLD is trading at 7.6% implied cap rate and 21x our estimate of 2011 AFFO. A discount to NAV is warranted in light of the heightened balance sheet and fundamental risks, in our view. Our $11 target is based on a 5% discount to our new $11.50 fwd NAV estimate.

Notes:


http://research.ibb.ubs.com/pages/site/quicksearch.jsp?textquery=The Weekly REIT Appraisal



UBS 20

TECHNOLOGY Key Call: Amazon.com Rating: Buy Target: US$165.00 Price: US$120.07 RIC: AMZN.O Prior: Unchanged Prior: US$170.00 Mkt Cap: US$53.4bn BBG: AMZN US

Internet Services Analyst: Brian Pitz Tel: +1-212-713 9310

Higher Fulfillment a Nice Problem to Have Reiterate Buy and reduce PT to $165 price target AMZN’s investment in fulfillment capacity is a sign of healthy demand in the core retail business,

apparent in the Q3 guidance well above us and the Street at the mid-point. We believe the step function increase in Amazon’s fulfillment capacity (13 new fulfillment centers to 52 in total) in Q2-Q3 headed into the holiday season should yield significant positive leverage in Q4 and 2011 due to accelerating revenue growth. We would use the after-hours pull-back in shares to build a position in the best eCommerce name.

Is this 05/06 Déjà vu? Our short answer is no We believe AMZN’s addition of fulfillment capacity into Q4 is due to an expectation of significant demand in its EGM category (based on current user/usage trends) and Fulfillment by Amazon adoption trends among 3P sellers, areas where AMZN has a proven record. This contrasts to the 05/06 tech and content investment that spooked some investors due to an uncertain return expectation – though this investment arguably paid off from 06-09.

All of Amazon’s key operating metrics remain healthy Ex-FX revenue growth of 42% Y/Y in Q2 was flat from the previous qtr. and driven primarily by solid unit growth of 39% Y/Y (40% Y/Y in Q1), with Ex-FX ASP growth at +2% Y/Y accelerating from 1% Y/Y in Q1. In addition, Amazon continues to grow units/customer (+11% Y/Y in Q2; 12% Y/Y in Q1).

Valuation: Our $165 PT is based on our DCF (12% WACC; 4% LTGR) Moreover, our price target implies 17x our ’11E FCF vs. a 28% 3-yr FCF CAGR.

Notes:


Key Call: Microsoft Rating: Buy Target: US$35.00 Price: US$25.84 RIC: MSFT.O Prior: Unchanged Prior: US$38.00 Mkt Cap: US$228bn BBG: MSFT US

Software Analyst: Brent Thill Tel: +1-415-352 4694

Strong Q4: Kinecting w/ Enterprise Demand Bookings the FQ4 Highlight Strong FQ4 with revenue, margins, cash flow, unearned revenue and EPS all above estimates. Sentiment has been

negative due mainly to uncertainty over the timing of MSFT’s enterprise upgrade cycle. However FQ4 bookings +27% y/y was its strongest bookings growth in 3 years, and other metrics from greater than seasonal growth in MBD unearned revs, business premium mix improvements, and contracted not billed growth, suggests enterprise demand is finally returning. No negative trends in Europe or government. FY11 setting up as a beat-and-raise year.

Signs of Enterprise Demand Abound 1) MBD unearned revenue grew a much stronger than seasonal 24% q/q showing strong early enterprise demand for Office 2010, 2) Windows OEM business premium mix ticked up q/q to 29% showing increasing demand for higher ASP SKUs, 3) contracted not billed balance of $15B +15% y/y (vs. flat in FY09).

Maintain FY11/12 EPS Estimates Raising FY11 revenue estimate by $300M to $68.4B (+9.5%), but maintain EPS $2.40 (OM’s 39.3% +70bps y/y). Maintaining FY12E $74B/$2.75 (revenue +8% y/y OM’s 40.0% +70bps y/y). Our $3B/quarter buyback estimate remains unchanged and is likely conservative even with the potential for a dividend increase which may be announced post the September board meeting.

Valuation: Inexpensive at 10.8 FY11E EPS = 0.6 PEG FY09-12E CAGR Lowering PT to $35 PT = 14.5x FY11E EPS $2.40 (vs. 16x prior and 14x 5yr average) reflecting lower market multiples.

Notes:


Cypress Rating: Neutral Target: US$12.00 Price: US$10.95 RIC: CY.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.76bn BBG: CY US

Semiconductors Analyst: Steven Eliscu Tel: +1-415-352 5674

Strong Microcontroller Order Momentum and Sustainably Higher Gross Margin At PSoC inflection point; gross margin likely holds against headwinds Cypress’s 2Q results were ahead of estimates but showed limited PSoC

growth. However, as the PSoC book-to-bill was 1.7, we expect strong PSoC growth in 2H10, especially on the ramp of touch controller wins into 5 of the top 8 handset makers in 3Q. We also believe gross margin will rise further (+340 bps q/q in 2Q) despite potential margin headwinds from: 1) likely more aggressive price declines as semi supply constraints ease, 2) higher Emerging Tech sales, which are GM dilutive. We are incrementally more positive and raise ests, PT to $12 from $11.75.

2Q10 Results – Solid revenue and gross margin increase Cypress reported sales/non-GAAP EPS of $223.0m (+10.3% q/q)/$0.24 ($0.11 GAAP), ahead UBS estimates of $218.4m/$0.20 ($0.10 GAAP) and consensus of $218.6m/$0.20. GAAP gross margin was 56.0% (59.3% non-GAAP), above our 53.3% estimate as COGS grew just 2% q/q, even as inventories declined 3% q/q.

Raise estimates on higher sales, gross margin expectations We raise our 3Q10 sales/non GAAP EPS estimates by 1%/17% to $238.9m/$0.28 ($0.15 GAAP) and for the full year 2010 by 2%/16% to $899.2m/$0.94 ($0.44 GAAP). For 2011/12, we raise our sales estimates by 4%/5% to $985m/$1,089m and non-GAAP EPS by 14%/15% to $1.03/$1.25 ($0.51/$0.72 GAAP).

Valuation: Raise Price Target to $12, Maintain Neutral Rating We raise our 12-month PT to $12 (24x our $0.51 2011 EPS estimate) from $11.75 Notes:






UBS 21

SanDisk Rating: Buy Target: US$55.00 Price: US$43.10 RIC: SNDK.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$9.99bn BBG: SNDK US

Semiconductors Analyst: Uche Orji Tel: +1 212 713 4015

Strong Secular Demand and Gross Margin Thesis Remains Intact. Reiterate Buy. Thesis for strong secular demand, favorable ASP trends remains intact Despite strong underlying demand, SNDK’s supply constraints led to in

line revenues whilst margin improvement led SNDK to exceed our EPS est by 15%. On a slight sales increase, we raise our C10/11E EPS by 12%/13% mainly on margin increases and better ASP outlook. We believe the secular growth story remains intact and reiterate BUY with PT of $55. Separately, we are not concerned about the management transition, as CEO Eli Hariri hands over to Sanjay Mehrorta (co-founder, COO, and 22 year veteran of SNDK) on Jan 1, 2011.

Strong GM upside on better than expected cost reductions, OEM sales mix SNDK reported in line Q2 sales of $1.18b on higher bit sales that were aided by inventory drawdown (-17% q/q), but better than expected cost reductions and favorable mix led to non-GAAP EPS of $1.08, beating our $0.94 est. Due to tight supply, the Q3 sales view is $1.175-1.250b - in line with our est. However, SNDK guided 2H10 GM of ~42% (UBSe: 38.5%) on favorable sales mix and price trends.

Raise C10/11E Sales by 1%/3%, EPS by 12%/13% on solid demand & GM We raise our C10/11E sales 1%/3% to $4.95b/$5.92b on increased bit sales given solid exposure to smartphones, tablets, and other devices. EPS rises 12%/13% to $4.38/$4.70 (GAAP: $4.02/$4.40) on higher gross and operating margin.

Valuation: $55 12-month PT, Buy rating Our DCF-based PT of $55 (WACC: 9.4%, g: 2.0%) equates to 2.9x 2010E P/BV. Notes:


Skyworks Solutions Rating: Buy Target: US$22.00 Price: US$18.05 RIC: SWKS.O Prior: Unchanged Prior: US$19.00 Mkt Cap: US$3.19bn BBG: SWKS US

Semiconductors Analyst: Parag Agarwal Tel: +1 212 713 2563

New customer ramp drives solid results and outlook; Reiterate Buy, raise PT to $22 Growing momentum as new customer programs ramp SWKS results further support our view that the company should continue to grow revenue

driven by share gains at Nokia (upside potential of ~$100m from current run rate of $100m/year), ramp of new smartphone programs, and new products and markets such as smartmeters. Addition of Nokia and Foxconn (contract manufacturer for Apple) as new ~10% customers further indicates SWKS’ ability to grow its revenue and diversify its customer base. Along with revenue growth, margins should expand driven by mix and leverage. We reiterate our Buy rating, and raise our PT to $22.

Details: Results and outlook handily beat estimates For F3Q, SWKS reported Rev/EPS(pf) of $275m(+16% Q/Q)/$0.32, versus UBS est of $268m/$0.30 and cons of $269m/$0.30. Gross margin(pf) expanded by 100bps Q/Q to 43.3% and oper margin(pf) expanded by 290 bps Q/Q to 23.4%. For F4Q, SWKS guided Rev/EPS(pf) of $300m(+9% Q/Q)/$0.37, vs. UBS est of $284m/$0.33 (cons of $287m/$0.34), and continued gross and operating margin expansion.

Raising estimates We raise our F4Q Rev/EPS(pf) estimates to $300m/$0.37 from $284m/$0.33. For F2011, we raise our Rev/EPS(pf) estimates to $1,253m/$1.58 from $1,216m/$1.40. For F2012, we raise our EPS(pf) estimate to $1.76 from $1.62, while maintaining our revenue estimate of $1,444m.

Valuation: Reiterate Buy, raise PT to $22 Our PT is based on a DCF (WACC 10.2% g 2%) and equates to NTM PE of 14x. Notes:


Tyco Electronics Rating: Buy Target: US$33.00 Price: US$25.76 RIC: TEL.N Prior: Unchanged Prior: US$32.00 Mkt Cap: US$11.7bn BBG: TEL US

Electric Components & Equipment Analyst: Amitabh Passi Tel: +1-415-352 5537

Solid Execution; Raising Estimates Sept guidance better than expected; Raising ests; Reiterate Buy TEL delivered strong results for FY3Q10 (June qtr) and guided for flat Revs/EPS

for Sept (typically seasonally down) in the range $3.05b-3.15b/$0.68-0.72 vs. UBSe (prior) $3b/$0.66. With better then expected Rev trends in the mid-late cycle businesses, particularly Network Solutions, we raise our FY10/FY11 Revs/EPS ests to $12b/$2.52 and $12.3b/$2.66 from $12b/$2.48 and $12b/$2.47. We remain cautious on FY11 across the supply chain, modelling 2% y/y rev growth for TEL.

Macro risks and ADCT acquisition likely weighing on sentiment Despite solid results, TELs stock underperformed the market today. We believe there are likely 2 major overhangs a) macro uncertainty and concerns over the auto segment b) the ADCT acquisition. It is our belief that barring another catastrophic decline as in 08/early 09 (auto sales down 50%+ in 2 qtrs), TELs model will prove to be more resilient in a “normal” cycle (up 5-10%, down 10-12%) and we believe margins will hold up well. As for ADCT, we believe consistent execution coupled with renewed activity in FTTx builds globally could allay some of the concerns.

Cash flow generation remains strong We now foresee TEL generating $1.2-$1.3b in FCF in FY10-12, $300m of which will be used to pay dividends, and the rest available for either acquisitions or to be returned to shareholders over time via share buy-backs or potentially a higher div.

Valuation: Maintain Buy; Raise price target to $33 PT based on VCAM: WACC 10%; LT rev growth 5-6%; LT EBIT margin 13-13.5%. PT moves up to $33 (was $32) primarily as near-term ests adjust higher.

Notes:






UBS 22

Cavium Networks Rating: Buy Target: US$32.00 Price: US$29.07 RIC: CAVM.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.27bn BBG: CAVM US

Semiconductors Analyst: Steven Eliscu Tel: +1-415-352 5674

2Q Results Preview: Expect Solid Growth on Strong Enterprise, Wireless Trends 2Q10 Results: Expect solid revenue growth and design win momentum For Cavium’s 2Q results (29-Jul), we expect sales/non-GAAP EPS of

$49.2m (+18% q/q)/$0.19, in line with consensus of $49.1m/$0.19 on the strength of processor sales into enterprise and wireless infrastructure applications, along with a recovery of sales into fiber broadband home routers. Key highlights for the quarter also include first samples of its Octeon II (next gen high-end processor) and single-chip PureVu (for video-over-Wi-Fi connectivity), which should begin to materially contribute to revenue exiting 2010. We reiterate our Buy rating, $32 price target.

3Q10 Outlook: New program ramps could offset macro concerns For 3Q, we expect sales/non-GAAP EPS of $54.0m (+10% q/q)/$0.22, slightly above consensus of $52.3m/$0.21, as we expect the ramp of new programs and continued improvements in enterprise spending to offset potential macro weakness, especially as Cavium has limited exposure to consumer markets (<10% of sales).

Econa, PureVu ARM processors should drive incremental growth We continue to view Cavium’s near-term opportunities in consumer applications as providing incremental growth with its focus on high-end networking, e.g. gaming routers, 2-drive network attached storage, along with its PureVu video-over-WiFi processor family, which we believe can generate at least $5m sales in 2H10.

Valuation: $32 Price Target, Buy Rating Our DCF-based price target is $32 (29x our $1.11 2011 non-GAAP EPS estimate). Notes:


Riverbed Technology Rating: Neutral Target: US$35.00 Price: US$30.07 RIC: RVBD.O Prior: Unchanged Prior: US$32.00 Mkt Cap: US$2.25bn BBG: RVBD US

Communications Technology Analyst: Nikos Theodosopoulos Tel: +1-212-713 3286

Nice Beat and Raise, Raising Tgt and Fcst Beat and Raise Qtr, Record Pipeline, Deferred Revs Only Up Slightly Riverbed reported a nice beat and raise 2Q with sales up 12% QoQ and

38% YoY. The pipeline continued to expand, now at record levels, with higher confidence across the business. Deferred revs increased slightly up 1% QoQ after strong 4Q09 and 1Q10 renewals—product deferred down but expected to rise. Close rates are tightening. 3Q guide implied slightly faster growth vs. expectations (+6.2% vs. 5.9%), and we sense no meaningful change in guidance assumptions.

New 10% Distributor, Rest Of World Leading YoY Growth Account penetration in the Forbes Global 100 was at 71 in the qtr (growing from around 60 last qtr). Riverbed’s two tier go-to-market is on track—majority of NA VARs now on distributors. Arrow become a 10% distributor comprising just above 10% of sales. Rest of World continues leading YoY growth up 51% in 2Q from strength in Emerging Markets including Asia, Mexico, Brazil and Argentina. EMEA followed ROW up 48% YoY. US lagged though still up strong 29% YoY.

We Raise Our Estimates We now raise our sales and EPS estimates ex options for CY10 and CY11 to $518M (+31%) and $1.00 and $630M (+22%) and $1.22, versus our prior $495M (+25%) and $0.92 and $602M (+22%) and $1.16.

Valuation—Maintain Neutral, Raising Price Target to $35 We now raise our price target to $35 based on ~25x our new CY11 taxed OI estimates of $1.18 plus net cash of $5.50 per share. Our prior $32 price target was based on ~25x our prior taxed OI estimate of $1.10 plus prior net cash of ~$5.

Notes:


Computer Services & IT Consulting

Computer Services & IT Consulting Analyst: Jason Kupferberg Tel: +1-212-713 3559

AXP and COF card volumes follow the trend Modestly accelerating y/y growth for AXP’s 2Q card vols AXP, which represents ~22% of US network credit volume, reported 2Q earnings this

evening. Y/Y growth in the US card billed business increased 14% (vs. an 11% increase last quarter), representing 300 bps of sequential improvement. International volumes were up 19% vs. last quarter’s substantial 27% y/y improvement (aided by FX). AXP indicated that worldwide July month-to-date y/y volume was up double-digits in constant currency, down slightly from June’s 14% due to a tougher y/y comp.

Issues to consider when looking to AXP as a read-through for V/MA There are important differences between AXP and V/MA. AXP has: 1) a portfolio with high discretionary spend, 2) a high proportion of transactors, 3) high exposure to corporate T&E spend, 4) no debit volume, and 5) a smaller relative percentage of international volume. Interestingly, AXP suggested on its call that alternative payments (via recent Revolution Money acquisition) and prepaid are increasingly becoming areas of long-term focus.

COF purchase volume also accelerates modestly COF credit purchase volume increased 3.2% y/y in Q2 vs. a 1.9% y/y increase in Q1, representing 130bps of sequential improvement, roughly in-line with the average 230 bps of Q2 vs. Q1 improvement in y/y credit volume growth enjoyed by other issuers (See Table 1). We maintain Buy ratings on V and MA, recognizing that regulatory uncertainty could trump fundamental data points in the near-term.

Notes:





UBS 23

Computer Services & IT Consulting

Computer Services & IT Consulting Analyst: Jason Kupferberg Tel: +1-212-713 3559

A big week for processors Expect strong print from Visa - how much will it matter? As highlighted in our "Swipe" report published separately today, we expect solid F3Q

results from Visa on 7/28 with potential for modest upside, and anticipate F10 and F11 guidance will be reiterated. But amid regulatory uncertainty related to the Durbin amendment, potential investor enthusiasm regarding positive fundamentals may be tempered. We think shares are oversold on regulatory concerns and maintain our Buy rating, but we lowered our price target to $107 from $115 (lower multiple due to increased regulation).

WU - focus on mixed macro data points, new CEO Ex. previously announced restructuring charges, our 2Q ests for WU (reporting 7/27) are in-line with the Street, and we remain comfortable the company can achieve its '10 guidance, which we believe is prudently conservative. Global macro data points (unemployment, housing, etc) are still mixed, which continues to limit visibility into WU's '11 growth potential, which we believe is the key to shares. We remain on the sidelines, as it is still a bit premature to say whether WU could again be a value trap, or whether current levels will prove to be an attractive entry point.

GPN may be most intriguing among other earnings (ADP, G, GIB) GPN will provide initial F11 guidance on 7/27. Our F11 estimates are a little bit ahead of the Street, but we see modest risk to projections given challenges related to Canada and N. American margins, plus uncertainty regarding the amount of margin benefit GPN can achieve from platform consolidation. We expect ADP, G, and GIB earnings to be relatively uneventful, but GIB is most exposed to FX volatility (C$).

Notes:


IT Hardware

Technology Analyst: Maynard J. Um Tel: +1-212-713 3372

Read From MSFT's Jun. Qtr Results Microsoft reports strong PC growth; consumer strong as enterprise ramps Microsoft reported revs of $16.0b (Street: $15.3b), driven by

continued strong consumer demand & accelerating enterprise demand for Windows 7. Microsoft estimates the PC market grew 22-24% (largely in line with our forecasts & recent IDC/Gartner data) with both strength in consumer & enterprise. We maintain our 2010 PC unit growth forecast of 18.4%, which embeds a less than seasonal 2H.

Enterprise refresh accelerating; Europe "healthy" Microsoft noted the business PC refresh cycle accelerated & expects it to continue through 2011, backing our views. Small & mid market segments also continued to see "robust growth". Geographically, the company noted emerging markets continue to be a significant driver of the PC market (2x mature markets), though demand in Europe was "healthy" & US saw improvement.

Continue to favor "cheap stocks" with some visible catalysts Earnings read-throughs thus far have been mixed, with tech companies reporting varying degrees of end-market demand from broad-based strength to slowing and from consumer to government. We continue to prefer "cheap stocks" with some visible catalysts with product play themes like Apple, IT budget priority plays like EMC & NetApp, and enterprise (rather than consumer) PC exposure plays given our views on the PC refresh like Dell. Valuations keep our ratings Buy on Hewlett Packard, Seagate & Western Digital.

Notes:


http://research.ibb.ubs.com/pages/site/quicksearch.jsp?textquery=IT Hardware


UBS 24

Rating & PT Changes Key Rating and Price Target Changes: US

Company Name Directional Indicator/Rationale Reuters Code Current Share Price

New Rating New PT Prior

Rating Prior PT

Alcoa Inc. Maintain Neutral, lower PT AA.N US$10.82 Neutral US$12 Neutral US$12.85

Array BioPharma Inc. Upgrade to Buy, maintain PT ARRY.O US$3.09 Buy US$4.25 Neutral US$4.25

Associated Banc-Corp Maintain Neutral, lower PT ASBC.O US$12.57 Neutral US$13 Neutral US$14

AutoNation Inc. Reiterate Sell, increase PT AN.N US$22.54 Sell US$20 Sell US$18

Caterpillar Inc. Maintain Neutral, increase PT CAT.N US$68 Neutral US$74 Neutral US$70

Cooper Industries Inc. Reiterate Buy, lower PT CBE.N US$44.54 Buy US$51 Buy US$56

Danaher Corporation Reiterate Buy, lower PT DHR.N US$37.46 Buy US$45 Buy US$48.5

ENSCO PLC Maintain Neutral, increase PT ESV.N US$41.2 Neutral US$41 Neutral US$38

Fifth Third Bancorp Reiterate Sell, increase PT FITB.O US$12.45 Sell US$10 Sell US$9

Freeport-McMoRan Reiterate Buy, lower PT FCX.N US$68.78 Buy US$84 Buy US$88

JetBlue Airways Maintain Neutral, increase PT JBLU.O US$6.38 Neutral US$7 Neutral US$6.5

MasterCard Inc. Reiterate Buy, lower PT MA.N US$208.4 Buy US$270 Buy US$298

Microsoft Corp. Reiterate Buy, lower PT MSFT.O US$25.84 Buy US$35 Buy US$38

Quicksilver Gas Services LP Reiterate Buy, increase PT KGS.N US$21.32 Buy US$22.5 Buy US$20.5

Quicksilver Resources Inc. Reiterate Buy, increase PT KWK.N US$12.75 Buy US$18 Buy US$16

Riverbed Technology Maintain Neutral, increase PT RVBD.O US$31.41 Neutral US$35 Neutral US$32

Royal Caribbean Maintain Neutral, lower PT RCL.N US$27.56 Neutral US$30.6 Neutral US$34

Safeway, Inc. Maintain Neutral, lower PT SWY.N US$19.68 Neutral US$20 Neutral US$21

Skyworks Solutions Inc. Reiterate Buy, increase PT SWKS.O US$18.05 Buy US$22 Buy US$19

SunTrust Banks Inc. Reiterate Sell, increase PT STI.N US$24.58 Sell US$14 Sell US$12

Tyco Electronics Ltd. Reiterate Buy, increase PT TEL.N US$25.76 Buy US$33 Buy US$32

Visa Inc. Reiterate Buy, lower PT V.N US$74.46 Buy US$107 Buy US$115

Source: Reuters, UBS. Prices as at market close on July 22, 2010.


UBS 25

Markets, Events and Newsflow Today’s Company Events

Company Name Event Reuters code Rating PT Notes

Digital Realty Trust Earnings Release DLR.N Buy US$67

Enbridge Energy Earnings Release EEP.N Neutral US$53

Honeywell Intl. Inc. Earnings Release HON.N Neutral US$42

Ingersoll-Rand Earnings Release IR.N Neutral US$38

Johnson Controls Earnings Release JCI.N Neutral US$30

Kimberly-Clark Earnings Release KMB.N Buy US$74

McDonalds Earnings Release MCD.N Buy US$83

Schlumberger Earnings Release SLB.N Buy US$86

Verizon Earnings Release VZ.N Neutral US$28 Source: Reuters, UBS. Prices as at market close on July 22, 2010.


UBS 26

Today’s Macroeconomic Events: US Indicator Time (ET) UBS forecast Previous Consensus

None

Source: Bloomberg, UBS

Today’s UBS Hosted Corporate Roadshow:

Company Event Location

None

Today’s UBS Hosted Fieldtrip:

Company Event Location None

Today’s UBS Hosted Conference:

Company Event Location

None


UBS 27

Latest Market Movements:

Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change

Americas

United States Dow Jones 10322.3 1.99 -1.01

United States S&P 500 1093.7 2.25 -1.92

United States Nasdaq 2245.9 2.68 -1.03

United States S&P VIX 24.63 -3.9 -

Europe

Europe FTSE Eurofirst300 1039.9 0.05 -0.56

Belgium BEL 20 2509.3 0.32 -0.09

Germany DAX 6161.3 0.31 3.42

France CAC 3606.8 0.17 -8.37

Italy MIB 30 20606.9 -0.42 -11.36

Netherlands AEX 336.8 0.47 0.43

Portugal PSI 20 7245.8 -0.59 -14.39

Spain IBEX 10318.2 0.15 -13.58

Switzerland SMI 6163.5 -0.49 -5.84

UK FTSE 100 5297.2 -0.31 -2.14

Asia

Hong Kong Hang Seng 20815.3 1.10 -4.83

India BSE Sensex 18145.4 0.18 3.90

Japan Nikkei 225 9431.0 2.28 -10.58

Source: UBS, Reuters. Indices in Americas as at market close on July 22 2010. Indices in Europe and Asia as at 05:00 EDT on July 23, 2010.

Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change

Euro €/$ 1.290 0.12% 5.2% -10.0%

UK £/$ 1.527 0.55% 3.0% -5.6%

Canada CAD/$ 0.965 1.13% -0.8% 1.5%

Switzerland CHF/$ 0.959 0.75% 6.2% -0.8%

China Yuan/$ 0.147 -0.04% 0.5% 0.7%

Brazil BRL/$ 0.569 1.30% 1.7% -0.8%

India INR/$ 0.021 0.08% -2.3% -1.5%

Mexico MXN/$ 0.078 0.87% -1.0% 2.7%

Japan $/JPY 0.871 0.19% -3.8% -6.4%

Australia AUD/$ 0.894 2.00% 2.7% -0.4%

Source: UBS, Reuters. Prices as at market close on July 22, 2010


UBS 28

Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change

Gold ($/oz) 1200.40 0.40 -3.60 7.93

Brent Crude spot, $/bbl 77.44 0.18 0.14 3.13

WTI Crude spot, $bbl 79.03 3.63 - -

Natural Gas, $MMBTU 4.68 -0.43 -3.49 -19.24

Source: UBS, Reuters. Prices as at market close July 23, 2010


UBS 29

Further Information

Morning Expresso – United States Welcome to the Morning Expresso, an early morning summary of the key ideas and issues presented from UBS for the 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 movements

Morning 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, July 23, 2010.

Contacts & Feedback For further details concerning today’s Morning Expresso – United States note, please visit www.ubs.com/investmentresearch or speak to your UBS contact. This note is not intended to be static and it will evolve over time. Feedback welcomed on email to

[email protected]

Statement of Risk

Forecasting earnings and corporate financial behavior is difficult because it is affected by a wide range of economic, financial, accounting and regulatory trends, as well as changes in tax policy.


UBS 30

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


UBS 31

Required Disclosures This 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.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 54% 41%Neutral Hold/Neutral 37% 32%Sell Sell 9% 24%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 22%Sell Sell less than 1% 0%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 June 2010. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 32

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows.


UBS 33

Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date 3M Company5b, 6b, 6c, 7, 16, 18b MMM.N Buy N/A US$84.75 22 Jul 2010 Acerinox16 ACX.MC Sell N/A €13.16 22 Jul 2010 Adaro Energy2a ADRO.JK Buy N/A Rp2,025 22 Jul 2010 Aetna Inc.5b, 6b, 6c, 7, 16 AET.N Neutral N/A US$28.27 22 Jul 2010 AGCO Corp.16 AGCO.N Sell N/A US$32.01 22 Jul 2010 Alaska Air Group5b, 16, 20 ALK.N Buy (CBE) N/A US$49.26 22 Jul 2010 Alcoa Inc.6b, 6c, 7, 16 AA.N Neutral N/A US$10.82 22 Jul 2010 Alpha Natural Resources4a, 5b, 6a, 16 ANR.N Buy N/A US$39.23 22 Jul 2010 Alumina Limited4a, 16 AWC.AX Buy N/A A$1.51 22 Jul 2010 Amazon.com Inc6c, 16 AMZN.O Buy N/A US$120.07 22 Jul 2010 American Express4a, 6a, 6b, 6c, 7, 16, 18c AXP.N Not Rated N/A US$43.19 22 Jul 2010 Arch Coal, Inc.16 ACI.N Buy N/A US$22.03 22 Jul 2010 Array BioPharma Inc.16, 20 ARRY.O Buy (CBE) N/A US$3.09 22 Jul 2010 Associated Banc-Corp2a, 4a, 6a, 16 ASBC.O Neutral N/A US$12.57 22 Jul 2010 AT&T Inc.4a, 6c, 7, 16, 22 T.N Buy N/A US$25.51 22 Jul 2010 Automatic Data Processing16 ADP.O Neutral N/A US$41.46 22 Jul 2010 AutoNation Inc.16 AN.N Sell N/A US$22.54 22 Jul 2010 Barrick Gold Corporation2a, 2b, 4a, 4b,

5b, 6a, 16, 20 ABX.N Buy (CBE) N/A US$42.23 22 Jul 2010

Baxter International Inc.2a, 4a, 6a, 6c,

7, 16 BAX.N Buy N/A US$43.25 22 Jul 2010

BHP Billiton Plc4a, 5b, 16 BLT.L Buy N/A 1,965p 22 Jul 2010 Bristol-Myers Squibb6c, 7, 16 BMY.N Neutral N/A US$24.93 22 Jul 2010 Cabot Oil & Gas Corporation16 COG.N Buy N/A US$32.77 22 Jul 2010 Capital One Financial Corp.6b, 7, 16 COF.N Not Rated N/A US$42.08 22 Jul 2010 Cardinal Health, Inc.4a, 6a, 6c, 7, 16, 22 CAH.N Buy N/A US$33.26 22 Jul 2010 Caterpillar Inc.6b, 7, 16, 18d CAT.N Neutral N/A US$68.00 22 Jul 2010 Cavium Networks Inc16 CAVM.O Buy N/A US$29.07 22 Jul 2010 Cepheid Inc.16, 20 CPHD.O Neutral (CBE) N/A US$14.77 22 Jul 2010 CGI Group Inc.16 GIB.N Neutral N/A US$16.10 22 Jul 2010 Chubb Corporation6b, 7, 16 CB.N Buy N/A US$52.20 22 Jul 2010 Coca-Cola Co.6b, 6c, 7, 16, 22 KO.N Buy N/A US$54.26 22 Jul 2010 Colonial Properties Trust2a, 4a, 5b, 6a,

16 CLP.N Buy N/A US$15.75 22 Jul 2010

CONSOL Energy, Inc.2a, 4a, 5b, 6a, 16 CNX.N Buy N/A US$39.22 22 Jul 2010 Cooper Industries Inc.4a, 5b, 6c, 16 CBE.N Buy N/A US$44.54 22 Jul 2010 Coventry Health Care4a, 6a, 6b, 6c, 7, 16 CVH.N Neutral N/A US$19.01 22 Jul 2010 Cummins Engine Co.16, 18e CMI.N Buy N/A US$75.90 22 Jul 2010 CVS Caremark Corporation16, 18f CVS.N Buy N/A US$29.92 22 Jul 2010 Cypress Semiconductor8, 16 CY.O Neutral N/A US$10.95 22 Jul 2010 Danaher Corporation4a, 5b, 6a, 16 DHR.N Buy N/A US$37.46 22 Jul 2010 Diamond Offshore Drilling Inc.16 DO.N Buy N/A US$62.31 22 Jul 2010 ENSCO PLC16 ESV.N Neutral N/A US$41.20 22 Jul 2010 Express Scripts Inc.16 ESRX.O Buy N/A US$42.12 22 Jul 2010 Fifth Third Bancorp6b, 6c, 7, 16 FITB.O Sell N/A US$12.45 22 Jul 2010 Fluor Corporation4a, 5b, 6a, 6b, 6c, 7, 16 FLR.N Buy N/A US$46.02 22 Jul 2010 Foster Wheeler Ltd.5b, 16 FWLT.O Buy N/A US$23.18 22 Jul 2010 Franco-Nevada Corporation4b, 5c, 20 FNV.TO Buy (CBE) N/A C$31.13 22 Jul 2010 Freeport-McMoRan13, 16, 20 FCX.N Buy (CBE) N/A US$68.78 22 Jul 2010 Genpact2a, 4a, 16 G.N Neutral N/A US$15.46 22 Jul 2010 Hewlett-Packard Co.4a, 5b, 6a, 6b, 7, 16 HPQ.N Buy N/A US$46.07 22 Jul 2010 Huntington Bancshares Inc.16 HBAN.O Sell N/A US$5.85 22 Jul 2010 International Coal Group, Inc2a, 4a, 6a, 16, 20 ICO.N Buy (CBE) N/A US$4.43 22 Jul 2010


UBS 34

Company Name Reuters 12-mo rating Short-term rating Price Price date Jacobs Engineering Group, Inc.16 JEC.N Neutral N/A US$38.59 22 Jul 2010 James River Coal Company2a, 4a, 6a,

16, 20 JRCC.O Buy (CBE) N/A US$17.56 22 Jul 2010

JetBlue Airways4a, 16, 20 JBLU.O Neutral (CBE) N/A US$6.38 22 Jul 2010 Johnson Matthey16 JMAT.L Sell N/A 1,665p 22 Jul 2010 KBR, Inc.6c, 16 KBR.N Buy N/A US$22.62 22 Jul 2010 Kumba Iron Ore16, 22 KIOJ.J Neutral N/A RCnt37,500 22 Jul 2010 Lilly (Eli) & Co.4a, 5b, 6a, 6b, 6c, 7, 16 LLY.N Neutral N/A US$35.15 22 Jul 2010 Massey Energy Company2a, 4a, 6a, 6b, 7, 16, 20 MEE.N Buy (CBE) N/A US$29.91 22 Jul 2010

MasterCard Inc.6c, 16 MA.N Buy N/A US$208.40 22 Jul 2010 McDermott International16 MDR.N Buy N/A US$24.22 22 Jul 2010 McKesson Corporation16 MCK.N Buy N/A US$64.55 22 Jul 2010 Medco Health Solutions Inc.16 MHS.N Buy N/A US$49.00 22 Jul 2010 Microsoft Corp.2a, 4a, 5b, 6a, 6b, 6c, 7, 16 MSFT.O Buy N/A US$25.84 22 Jul 2010 Murphy Oil Corporation16 MUR.N Neutral N/A US$51.82 22 Jul 2010 Nestlé2a, 4a, 5b, 13, 15, 16, 22 NESN.VX Buy N/A CHF53.55 22 Jul 2010 Newcrest Mining Limited2a, 4a, 5a, 5b,

13, 16 NCM.AX Buy N/A A$32.92 22 Jul 2010

Nippon Steel4a, 16 5401.T Neutral N/A ¥287 22 Jul 2010 Nucor Corp.13, 16 NUE.N Neutral N/A US$39.67 22 Jul 2010 PACCAR Inc4a, 6a, 6b, 6c, 7, 16 PCAR.O Neutral N/A US$45.81 22 Jul 2010 Parkway Properties, Inc.4a, 6a, 16 PKY.N Buy N/A US$15.35 22 Jul 2010 Precision Castparts Corp.6b, 7, 16 PCP.N Neutral N/A US$116.00 22 Jul 2010 Procter & Gamble2a, 4a, 5b, 6a, 6b, 6c, 7,

8, 16, 18g, 22 PG.N Buy N/A US$61.37 22 Jul 2010

ProLogis4a, 6a, 6c, 16, 22 PLD.N Neutral N/A US$10.97 22 Jul 2010 Quicksilver Gas Services LP2a, 3, 4a,

5b, 6a, 16, 19 KGS.N Buy (CBE) N/A US$21.32 22 Jul 2010

Quicksilver Resources Inc.3, 5b, 16,

20 KWK.N Buy (CBE) N/A US$12.75 22 Jul 2010

Reliance Steel & Aluminum Co.16,

20 RS.N Buy (CBE) N/A US$39.10 22 Jul 2010

Rio Tinto Plc4a, 16, 22 RIO.L Buy N/A 3,315p 22 Jul 2010 Riverbed Technology16, 20 RVBD.O Neutral (CBE) N/A US$31.41 22 Jul 2010 Riversdale Mining Limited1a, 5a, 5b,

13 RIV.AX Buy N/A A$10.10 22 Jul 2010

Royal Caribbean16 RCL.N Neutral N/A US$27.56 22 Jul 2010 Safeway, Inc.16, 22 SWY.N Neutral N/A US$19.68 22 Jul 2010 SanDisk Corp.16, 20 SNDK.O Buy (CBE) N/A US$43.10 22 Jul 2010 Seagate Technology6b, 7, 16 STX.O Buy N/A US$13.18 22 Jul 2010 Skyworks Solutions Inc.16 SWKS.O Buy N/A US$18.05 22 Jul 2010 St. Jude Medical, Inc.16 STJ.N Buy N/A US$35.39 22 Jul 2010 Sterlite Industries1b, 5b, 16, 20 STRL.BO Buy (CBE) N/A Rs176.00 22 Jul 2010 SunTrust Banks Inc.4a, 6a, 6b, 6c, 7, 16 STI.N Sell N/A US$24.58 22 Jul 2010 SXC Health Solutions Corp.16 SXCI.O Neutral N/A US$64.46 22 Jul 2010 Teck Resources Ltd.5c, 16, 20 TCKb.TO Buy (CBE) N/A C$36.42 22 Jul 2010 The Manitowoc Company, Inc16, 20 MTW.N Neutral (CBE) N/A US$10.17 22 Jul 2010 Tutor Perini Corp.16 TPC.N Neutral N/A US$19.00 22 Jul 2010 Tyco Electronics Ltd.5b, 6b, 6c, 7, 8, 16,

18a TEL.N Buy N/A US$25.76 22 Jul 2010

Umicore5b UMI.BR Sell N/A €26.15 22 Jul 2010 UnitedHealth Group4a, 5b, 6a, 6b, 6c, 7,

16 UNH.N Neutral N/A US$31.00 22 Jul 2010

Universal Health Services16 UHS.N Buy N/A US$34.90 22 Jul 2010 V.F. Corp.16 VFC.N Buy N/A US$78.40 22 Jul 2010


UBS 35

Company Name Reuters 12-mo rating Short-term rating Price Price date Visa Inc.6c, 16 V.N Buy N/A US$74.46 22 Jul 2010 Walter Energy Inc16 WLT.N Buy N/A US$72.35 22 Jul 2010 WellPoint, Inc.4a, 5b, 6a, 6b, 6c, 7, 16 WLP.N Buy N/A US$52.46 22 Jul 2010 Western Digital Corp16 WDC.N Buy N/A US$28.16 22 Jul 2010 Zimmer Holdings, Inc.16 ZMH.N Buy N/A US$52.51 22 Jul 2010

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 1a. UBS AG, Australia Branch is acting as Sole Underwriter, Sole Bookrunner and Joint Lead Manager to Riversdale Mining

Limited on the Entitlement Offer and Placement and will be receiving a fee for acting in this capacity. 1b. UBS Securities (India) Pvt. Ltd. is acting as manager/co-manager, underwriter, placement or sales agent in regard to an

offering of securities of this company/entity or one of its affiliates. 2a. 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. 2b. UBS Securities Canada Inc or an affiliate has acted as manager/co-manager, underwriter or placement agent in regard

to an offering of securities for this company/entity or one of its affiliates within the past 12 months. 3. UBS Securities LLC is acting as advisor to Quicksilver Resources Inc on its announced agreement to sells its interests in

Quicksilver Gas Partners LP to Crestwood Midstream Partners II 4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity. 4b. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking

services from this company/entity. 5a. UBS AG, Australia Branch or an affiliate expect to receive or intend to seek compensation for investment banking

services from this company/entity within the next three months. 5b. 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. 5c. UBS Securities Canada Inc or an affiliate 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. 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long

common stock position in this company. 13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity

securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

15. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial instruments of this company.

16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. The equity strategist covering this company, a member of his or her team, or one of their household members has a long

common position in this company. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in 3M Company. 18c. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in American Express. 18d. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Caterpillar Inc.


UBS 36

18e. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Cummins Engine Co.

18f. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in CVS Caremark Corporation.

18g. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Procter & Gamble Co.

19. Because UBS believes this security presents lower-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 5% and Sell if the FSR is more than 5% below the MRA (compared with 6% and 6%, respectively, under the normal rating system).

20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).

22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).

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 on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration. Additional Prices: Digital Realty Trust, US$62.57 (22 Jul 2010); Enbridge Energy Partners, US$58.13 (22 Jul 2010); Honeywell International Inc., US$42.66 (22 Jul 2010); Ingersoll-Rand Co., US$36.80 (22 Jul 2010); Johnson Controls Inc., US$30.48 (22 Jul 2010); Kimberly-Clark, US$62.96 (22 Jul 2010); McDonalds Corp., US$71.40 (22 Jul 2010); Schlumberger Ltd., US$61.30 (22 Jul 2010); Verizon Communications, US$27.00 (22 Jul 2010); Source: UBS. All prices as of local market close.


UBS 37

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