demographic dynamics: a case study for equity · pdf fileaugust 4, 2010 americas goldman sachs...
TRANSCRIPT
August 4, 2010
Demographic Dynamics:
A case study for equity investors
Demographic shifts offer robust investment opportunities
With the macroeconomic outlook still clouded, we turn investor attention
to one of our core long-term departmental themes – namely, identifying
and investing across demographic trends. We believe that we are sitting at
the intersection of three powerful, once-in-a-lifetime population shifts, each
of which holds material investment implications.
Baby Boomers begin to retire
The approaching retirement of the Baby Boomers (born 1946-1964) will
significantly alter the spending, saving and leisure patterns of the largest
generational cohort in US history. The economic and financial effects will
be far-ranging; we examine the investable consequences across the
healthcare, financial and consumer sectors. We pay special attention to
Allergan, Ameriprise, Brookdale Senior Living, Express Scripts,
Financial Engines, McKesson, Mylan, Pfizer, T. Rowe Price and Zimmer.
Investing in the “middle”
The Goldman Sachs economics team coined the notion of the “expanding
middle” to describe both a global shift toward middle-income economies
and the growth of the middle-class population within these economies. We
see continued growth in consumer and infrastructure demand driven by
the expanding middle and highlight Amazon.com, Banco Bradesco,
Bucyrus, Citigroup, Hypermarcas, Monsanto, News Corp., Petrobras,
Teck Resources and Visa as key beneficiaries.
Generational waves after the Baby Boom
As Baby Boomers begin to exit the US labor force, generational dominance
will shift in the United States for the first time in forty years. The rise of two
under-30 generational waves—the “Millennials” and “Generation Z”—to
economic prominence will have significant consequences, particularly
within the Consumer and TMT sectors. Companies exposed include AT&T,
Crown Castle International, Disney, Hasbro, Juniper, Mead Johnson
Nutrition, Progressive, Qualcomm and Urban Outfitters.
Introducing GSRHDEMO
We introduce a tradable basket of 42 names tied to these three
demographic themes: Bloomberg ticker GSRHDEMO.
RELATED RESEARCH
Global Economics Paper No: 170, “The
Expanding Middle: The exploding World
Middle Class and Falling Global Inequality”
by Dominic Wilson, et al. (July 7, 2008)
GS SUSTAIN, “Crossing the Rubicon: Our
investment framework for the next decade”
by Anthony Ling, et al. (February 26, 2010)
Global Markets Institute, “The Power of the
Purse: Gender Equality and Middle-Class
Spending” by Sandra Lawson and Douglas
Gilman (August 5, 2009)
Stock selections in this report are based on
individual analyst criteria.
Anthony Carpet
(212) 902-6758 [email protected] Goldman Sachs & Co.
Laura Conigliaro
(212) 902-5926 [email protected] Goldman Sachs & Co.
Robert D. Boroujerdi
(212) 902-9158 [email protected] Goldman Sachs & Co.
Thomas Craven, CFA
(212) 902-6748 [email protected] Goldman Sachs & Co.
Michael Chanin, CFA
(646) 446-1777 [email protected] Goldman Sachs & Co.
Deep Mehta
(212) 357-8419 [email protected] Goldman Sachs & Co.
The Goldman Sachs Group, Inc. 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. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
August 4, 2010 Americas
Goldman Sachs Global Investment Research 2
Table of Contents
Portfolio Manager’s Summary 3
Retiring Baby Boomers 9
Opportunity #1: An aging population provides a tailwind for the healthcare sector 13
Opportunity #2: Financial services are needed to address both pre-retirement and post-retirement needs 17
Opportunity #3: Baby Boomer spending declines and shifts from discretionary items to necessities 22
The expanding global middle class 25
Opportunity #1: Emerging markets are THE story in consumer staples for decades to come 30
Opportunity #2: Food, feed and fuel to drive agricultural demand growth 34
Opportunity #3: Increasing discretionary income to drive incremental demand across the TMT universe 37
Opportunity #4: While prosperity is rising, the highest growth regions remain financially underserved 41
Opportunity #5: Global infrastructure growth and rising commodity demand 43
Generational waves after the Baby Boom 49
Opportunity #1: Millennials are tech-savvy and connected 52
Opportunity #2: Millennials consume media differently 55
Opportunity #3: Millennial consumers embrace e-commerce 57
Opportunity #4: As Millennials become parents, Generation Z looms 61
Appendix 63
Analyst contributors
Source: Goldman Sachs Research.
Stephen Graham
+55(11)3371‐0831 | [email protected]
Goldman Sachs Brasil Bco Mult S.A.
Ingrid Chung
(212) 902‐2360 | [email protected]
Goldman Sachs & Co.
Marc Irizarry
(212) 902‐4175 | [email protected]
Goldman Sachs & Co.
Robert P. Jones
(212) 902‐3336 | [email protected]
Goldman Sachs & Co.
Chris Neczypor
(212) 357‐8512 | [email protected]
Goldman Sachs & Co.
Noah Poponak, CFA
(212) 357‐0954 | [email protected]
Goldman Sachs & Co.Andrew Sawyer, CFA
(212) 902‐5488 | [email protected]
Goldman Sachs & Co.
Brian Singer, CFA
(212) 902‐8259 | [email protected]
Goldman Sachs & Co.
Randall Stanicky, CFA
(212) 357‐3292 | [email protected]
Goldman Sachs & Co.
Michelle Tan, CFA
(212) 902‐3099 | [email protected]
Goldman Sachs & Co.
John T. Williams
(212) 357‐3948 | [email protected]
Goldman Sachs & Co.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 3
Portfolio Manager’s Summary
With the macroeconomic outlook still clouded, we turn investor attention to one of our core
long-term departmental themes – namely, identifying and investing across demographic
trends. We believe that we are sitting at the intersection of three powerful, once-in-a-
lifetime population shifts, each of which holds material investment implications. In this
paper we seek to leverage our own research with the work of our Goldman Sachs’s
economists, Global Markets Institute and colleagues in GS SUSTAIN to prosecute this
opportunity via single stock and sector selection. Specifically we identify three material
population trends and seek to provide investors with a roadmap to help navigate the
changing demographic landscape. The trends are as follows:
How retiring Baby Boomers will impact the economy and specifically companies in
our healthcare, financial and consumer stock universes.
How a global shift toward middle-income economies and the growth of the middle-
class population within these economies will impact consumption, energy and
infrastructure.
How the rise of two under-30 generational waves—the “Millennials” and
“Generation Z”—will have significant consequences within the TMT, financial and
consumer spaces.
While the list of names that are affected is far-reaching and ever growing, we identify the
companies in Exhibit 1 as those for which we see the most pronounced positive and
negative impacts over the next few years.
Exhibit 1: Stocks impacted by key demographic themes
Source: Goldman Sachs Research.
Population shift #1: Retiring Baby Boomers
The “Baby Boomers”, those born in the United States between 1946 and 1964 and
currently accounting for 26% of the population, make up the largest and most influential
generational cohort in American history. Their childhood catalyzed the rapid growth of
suburbs and homeownership rates, while their adolescence and adulthood reshaped
consumption preferences—as well as social and political values—throughout the economy.
With the oldest Baby Boomers turning 65 in 2011, the next transformational economic
change in the United States will be precipitated by their retirement. We expect the impact
Population shift
Commodities &
Industrials Consumer Financials Healthcare TMT
Retiring Baby Boomers (‐) CHS, HOGAMP, BKD, FNGN,
TROW
AGN, ESRX, MCK,
MYL, PFE, SYK, ZMHWBMD
The expanding global middle class
BA, BRFS3.SA, BTU,
BUCY, FCX, JOYG,
MON, PBR, PCP, TCK
CL, HYPE3.SA, MJN,
NKE, PEP, PM
BBD, BLK, C,
CIEL3.SA
AMZN, CSCO, DTV,
JNPR, MA, NWSA,
QCOM, V
Generational waves after the Baby BoomDIS, HAS, MJN,
URBNPGR
(+) AMT, BRCM, CCI,
CSCO, JNPR, QCOM,
SBAC, T
(‐) CTL, FTR, Q, WIN
August 4, 2010 Americas
Goldman Sachs Global Investment Research 4
to be felt throughout the domestic economy, especially within the healthcare, financial and
consumer sectors, and note the following sub-themes to prosecute this view:
Opportunity #1: An aging population provides a tailwind to the healthcare sector that
helps offset secular headwinds including a lack of innovation and an increasingly
challenging reimbursement environment. We see significant opportunities for
companies exposed to an aging population that can also successfully navigate the
changing healthcare landscape, and highlight in particular Allergan, Brookdale Senior
Living, Express Scripts, McKesson, Mylan, Pfizer, Stryker, WebMD and Zimmer.
Opportunity #2: Opportunities exist for select financial services companies that can
help Baby Boomers meet their pre-retirement and post-retirement needs. We believe
Ameriprise, Financial Engines and T. Rowe Price are particularly well positioned to
meet increased demand for retirement savings solutions.
Opportunity #3: According to the Bureau of Labor Statistics, US household consumer
spending peaks between the ages of 55 and 64, dropping 17% after age 65. As the
Baby Boomer cohort moves from peak spending years into retirement its total
consumption will decline, and necessities will gain a greater share of expenditures
relative to discretionary items. As a result, we believe that last decade’s “Boomer
Buys” are this decade’s “Boomer Sells.” We expect companies like Chico’s FAS and
Harley-Davidson to suffer as Baby Boomers retire.
Population shift #2: The expanding global middle class
The concept of the “expanding middle” was coined by Goldman Sachs economists to
describe the global shift toward middle-income economies as well as the growth of the
middle-class population within these economies. The developing world has spent the last
fifty years industrializing, globalizing and westernizing, with the result that middle-income
economies are now poised to take the mantle of global economic leadership from nations
with higher per-capita wealth. The consequences across sectors are likely to be significant
as higher standards of living drive increased consumer demand, and significant
infrastructure and commodity investment is required to help meet that demand.
Opportunity #1: We see $10 trillion of potential growth between now and 2050 for the
consumer packaged good industry alone due to increased household penetration in
emerging markets. Consumer-facing multinationals exposed to rising middle-class
wealth include Colgate-Palmolive, Mead Johnson Nutrition, Nike, Philip Morris
International and in time PepsiCo. Local competitors are sure to compete for this
market as well; we highlight Hypermarcas as a local franchise poised to grow in Brazil.
Opportunity #2: As global consumption increases, we see food, feed and fuel
requirements combining to drive demand in the agricultural sector. We expect
Monsanto, the global leader in agricultural biotechnology, to benefit from the need for
increased yield as crop demand outpaces growth in arable land. Brasil Foods, the
largest producer of processed foods, pork, and poultry in Brazil, is likely to profit
directly from increased protein consumption as diets improve with higher incomes.
Opportunity #3: Higher discretionary income in emerging markets will similarly drive
incremental demand across the tech, media and telecom universe. Companies poised
to benefit include Amazon.com, DirecTV, News Corp. and Qualcomm.
Opportunity #4: We expect the world’s financially underserved population to
increasingly move into the global financial system as wealth increases in middle-
income countries. As a result, we see massive potential customer growth in banking,
lending and asset management. Highlighted US stocks include BlackRock, Citigroup,
August 4, 2010 Americas
Goldman Sachs Global Investment Research 5
MasterCard and Visa; in Latin America we see opportunities for Banco Bradesco and
Cielo.
Opportunity #5: Finally, global infrastructure growth and increased commodity
demand will be necessary to facilitate the increased consumption spending of two
billion additional middle class people aspiring to new standards of living over the next
twenty years. The effects will be felt throughout the global industrial and commodity
complex; we believe Boeing, Bucyrus, Freeport-McMoRan, Joy Global, Peabody
Energy, Petrobras, Precision Castparts and Teck Resources are particularly well
positioned.
Population shift #3: Generational waves after the Baby Boom
Less well understood than the Baby Boom but potentially equally important in the United
States are population peaks in the 16-29 and 0-4 age ranges (which we are calling
“Millennials” and “Generation Z,” respectively). While these generational waves are not as
large as the Baby Boom in absolute terms, they are larger than the low birth years between
1965 and 1980. As a result, the Millennials are poised to assume the country’s first new
demographic leadership in forty years as they enter the labor force and Baby Boomers
retire. We expect this to have a profound impact on US companies, particularly within the
TMT and consumer sectors.
Opportunity #1: Millennials came of age in the Information Era and are more tech-
savvy and connected than prior generations. This creates opportunities for the
enablers of connectivity, including American Tower, AT&T, Broadcom, Cisco, Crown
Castle International, Juniper, Qualcomm, and SBA Communications.
Opportunity #2: Millennials also consume content differently than prior generations,
creating disruptions for the media industry. We favor differentiated content producers
that are able to navigate changing media habits, such as Disney.
Opportunity #3: Given a high degree of awareness of consumer choices (aided by
online searches and reviews), preference for immediacy of service, and comfort
transmitting payment electronically, younger generations are more likely than their
forebears to make purchases online. We highlight apparel retailer Urban Outfitters
and auto insurer Progressive as companies whose e-commerce franchises are
particularly well positioned relative to evolving generational preferences.
Opportunity #4: As Millennials become parents, Generation Z (ages 0-4) looms as an
emerging demographic wave. While the ultimate size and economic impact of this
cohort remains unclear, the looming change in the under-18 demographic from a teen-
dominated group to one where children under age 9 will greatly outnumber those ages
10-18 in the United States will have significant consequences for companies that target
youth consumers and their parents. We expect Hasbro and Mead Johnson Nutrition
to be among the names affected.
Prosecuting the view
For diversified exposure to stocks we believe are positively exposed to each of the three
demographic themes outlined above, we introduce a 42-name tradable demographics
basket, Bloomberg ticker GSRHDEMO (see Exhibit 2).1
1 Note: The ability to trade this basket will depend upon market conditions, including liquidity and
borrow constraints at the time of trade.
August 4, 2010
Am
ericas
Goldm
an Sachs Global Investm
ent Research
6
Exhibit 2: Selected financial data for stocks mentioned in this report
Shaded entries are viewed as negatively impacted. Prices are as of the market close of August 3, 2010
Note: (1) For methodology and risks associated with price targets, please see analysts’ previously published research; (2) 2010 represents year ends from June 2010 to May 2011; 2011: June 2011 to May 2012.
Source: Goldman Sachs Research estimates.
Ticker Company Name Rating Last Close Target Upside to Target Price EBIT CAGR Sales CAGRPrice Price target (%) Period 2009-12 2009-12 2010 2011 2010 2011 2010 2011 2010 2011
Retiring Baby BoomersAGN Allergan, Inc. CL-Buy √ $63.48 81.00 28% 12 months 14% 9% 20.0X 17.3X 3.5X 2.9X 11.0X 9.8X 5% 6%
AMP Ameriprise Financial, Inc. Neutral √ $42.82 50.00 17% 12 months 29% 13% 10.2X 8.6X 1.1X 1.0X 5.3X 4.7X 12% 12%
BKD Brookdale Senior Living Inc. Buy √ $15.30 22.00 44% 12 months 50% 6% NM NM 1.7X 1.8X 11.8X 10.2X 18% 20%
CHS Chico's FAS, Inc. CL-Sell $9.03 8.00 -11% 6 months 24% 7% 13.8X 11.9X 1.5X 1.3X 5.3X 4.8X 6% 10%
ESRX Express Scripts, Inc. Buy √ $46.32 62.00 34% 12 months 28% 23% 18.7X 14.2X 2.9X 2.2X 5.6X 4.4X 17% 15%
FNGN Financial Engines, Inc. Neutral $15.24 17.00 12% 12 months 56% 24% 48.9X 41.6X 5.6X 4.8X 35.5X 21.1X 3% 5%
HOG Harley-Davidson, Inc. Sell $27.39 26.00 -5% 6 months 78% 4% 21.3X 12.1X 4.7X 3.3X 6.8X 4.7X 2% 9%
MCK McKesson Corp. CL-Buy √ $62.10 86.00 38% 12 months 6% 4% 12.7X 11.3X 2.4X 2.3X 5.9X 5.5X 8% 11%
MYL Mylan Inc. Buy √ $17.48 26.00 49% 12 months 10% 8% 10.9X 9.0X 2.1X 1.8X 6.5X 6.4X 16% 12%
PFE Pfizer Inc. Buy √ $16.34 18.00 10% 12 months 7% 6% 7.8X 7.4X 1.5X 1.4X 5.4X 5.4X 6% 12%
SYK Stryker Corp. Neutral √ $47.76 55.00 15% 12 months 11% 6% 14.8X 13.3X 2.5X 2.2X 7.2X 6.7X 10% 9%
TROW T. Rowe Price Group, Inc. Neutral √ $49.70 45.00 -9% 12 months 21% 14% 21.9X 19.1X 4.1X 3.8X 11.8X 10.5X 5% 5%
WBMD WebMD Health Corp. Neutral √ $46.68 47.00 1% 6 months 47% 17% 35.2X 29.6X 3.8X 3.6X 14.4X 11.9X 3% 4%
ZMH Zimmer Holdings, Inc. Buy √ $54.19 67.00 24% 12 months 7% 5% 12.7X 11.3X 1.7X 1.5X 6.6X 6.2X 9% 10%
The expanding global middle classAMZN Amazon.com Inc. CL-Buy √ $122.42 150.00 23% 6 months 35% 29% 35.7X 27.5X 7.6X 5.7X 19.6X 15.5X 4% 6%
BA The Boeing Company CL-Buy √ $69.54 84.00 21% 12 months 51% 4% 17.8X 13.8X 12.5X 47.3X 9.3X 8.4X -2% 6%
BBD Banco Bradesco (ADR) Buy $18.43 21.30 16% 12 months 28% 12% 12.3X 10.9X 2.7X 2.5X NM NM NM NM
BLK BlackRock, Inc. CL-Buy √ $160.84 173.00 8% 12 months 43% 29% 16.8X 14.6X 0.4X 0.4X 10.3X 9.0X 5% 7%
BRFS3.SA BRF-Brasil Foods S.A. Neutral R$24.26 25.70 6% 12 months 101% 12% 34.0X 17.4X 1.6X 1.5X 11.0X 8.3X 2% 5%
BTU Peabody Energy Corp. Buy √ $48.06 55.00 14% 6 months 23% 11% 16.0X 11.0X 2.9X 2.3X 7.8X 6.1X 5% 6%
BUCY Bucyrus International Inc. Buy √ $63.10 70.00 11% 12 months 23% 19% 15.3X 10.9X 2.7X 2.2X 9.4X 7.2X 11% 7%
C Citigroup Inc. Buy √ $4.13 4.50 9% 12 months NM 3% 14.0X 9.3X 0.8X 0.7X NM NM NM NM
CIEL3.SA Cielo Neutral R$16.02 18.80 17% 12 months -3% 3% 11.7X 12.8X 50.5X 36.5X 7.3X 7.8X 9% 7%
CL Colgate-Palmolive Company Neutral √ $78.14 86.00 10% 12 months 6% 4% 16.2X 15.0X 13.3X 12.5X 9.9X 9.5X 6% 7%
CSCO Cisco Systems, Inc. Neutral √ $23.82 25.00 5% 12 months 17% 12% 18.4X 16.0X 3.0X 2.9X 13.5X 11.7X 6% 8%
DTV The DIRECTV Group, Inc. Buy √ $37.24 46.00 24% 12 months 23% 8% 15.0X 12.1X 30.0X NM 6.3X 5.7X 8% 10%
FCX Freeport-McMoRan Copper & Gold Inc. Neutral √ $74.03 79.00 7% 6 months 13% 13% 9.8X 8.4X 2.9X 2.1X 3.7X 3.2X 11% 16%
HYPE3.SA Hypermarcas Buy R$22.95 27.10 18% 12 months 36% 35% 29.4X 23.1X 2.5X 2.3X 16.9X 12.4X 2% 6%
JNPR Juniper Networks, Inc. CL-Buy √ $28.02 32.00 14% 12 months 36% 20% 28.1X 20.8X 2.1X 1.8X 13.9X 10.6X 4% 7%
JOYG Joy Global Inc. Buy √ $60.29 65.00 8% 12 months 7% 5% 14.5X 12.7X 5.1X 4.4X 8.8X 7.9X 8% 6%
MA Mastercard Inc. Buy √ $200.91 250.00 24% 12 months 16% 9% 15.5X 13.0X 5.4X 4.2X 8.3X 7.1X 4% 5%
MJN Mead Johnson Nutrition Co. CL-Buy √ $53.30 61.00 14% 12 months 7% 9% 21.9X 19.0X NM NM 14.5X 12.9X 4% 5%
MON Monsanto Co. CL-Buy √ $59.00 65.00 10% 12 months -5% 3% 22.8X 20.0X 3.0X 2.8X 11.5X 10.0X 5% 4%
NKE Nike, Inc. CL-Buy √ $73.10 85.00 16% 6 months 10% 8% 16.6X 14.6X 3.4X 3.1X 10.5X 9.3X 6% 6%
NWS__A The News Corp. (A) Buy √ $13.63 17.00 25% 12 months 15% 3% 14.0X 12.4X 1.3X 1.3X 7.2X 6.6X 6% 8%
PBR Petroleo Brasileiro S.A. (ADR) Buy $38.18 47.00 23% 6 months 24% 18% 10.3X 8.4X 1.6X 1.4X 5.6X 4.5X -7% -2%
PCP Precision Castparts Corp. CL-Buy √ $124.16 140.00 13% 12 months 15% 12% 16.8X 14.1X 2.5X 2.2X 9.8X 8.4X 6% 7%
PEP PepsiCo, Inc. CL-Buy √ $65.77 76.00 16% 12 months 15% 14% 15.7X 13.9X 5.1X 4.8X 10.3X 9.4X 4% 6%
PM Philip Morris International Inc. Buy √ $52.15 58.00 11% 12 months 10% 7% 13.8X 12.0X 42.3X 124.5X 9.4X 8.5X 7% 9%
QCOM QUALCOMM, Inc. CL-Buy √ $38.46 44.00 14% 12 months 12% 11% 19.3X 16.6X 3.2X 2.9X 15.5X 13.5X 6% 7%
TCK__B.TO Teck Resources Limited Neutral C$37.25 41.00 10% 6 months 25% 15% 14.6X 8.2X 1.3X 1.2X 6.5X 4.6X 4% 12%
V Visa Inc. CL-Buy √ $73.00 93.00 27% 12 months 18% 15% 18.9X 15.3X 2.1X 2.0X 10.4X 8.9X 4% 6%
Generational waves after the Baby BoomAMT American Tower Corp. Buy √ $46.46 53.00 14% 12 months 21% 11% 49.2X 38.1X 5.7X 7.9X 18.5X 16.1X 4% 5%
BRCM Broadcom Corporation Buy √ $36.28 44.00 21% 6 months 93% 22% 16.9X 15.1X 3.9X 3.3X 13.6X 11.6X 6% 8%
CCI Crown Castle International Corp. CL-Buy √ $40.76 46.00 13% 12 months 23% 9% NM 47.2X 5.0X 5.8X 15.9X 14.1X 2% 4%
CSCO Cisco Systems, Inc. Neutral √ $23.82 25.00 5% 12 months 17% 12% 18.4X 16.0X 3.0X 2.9X 13.5X 11.7X 6% 8%
CTL CenturyTel Inc. Neutral $35.87 38.00 6% 12 months 13% 10% 10.1X 9.9X 1.1X 1.1X 4.9X 5.1X 15% 13%
DIS The Walt Disney Company Buy √ $34.21 42.00 23% 12 months 13% 4% 17.0X 13.7X 1.8X 1.7X 9.2X 7.7X 6% 8%
FTR Frontier Communications Corp. Neutral $7.67 7.50 -2% 12 months 3% -6% 16.8X 14.5X 27.5X 35.3X 2.5X 2.5X 23% 23%
HAS Hasbro, Inc. CL-Buy √ $42.43 55.00 30% 12 months 10% 4% 16.5X 12.1X 4.3X 4.2X 9.4X 7.9X 9% 9%
JNPR Juniper Networks, Inc. CL-Buy √ $28.02 32.00 14% 12 months 36% 20% 28.1X 20.8X 2.1X 1.8X 13.9X 10.6X 4% 7%
MJN Mead Johnson Nutrition Co. CL-Buy √ $53.30 61.00 14% 12 months 7% 9% 21.9X 19.0X NM NM 14.5X 12.9X 4% 5%
PGR The Progressive Corporation Buy √ $19.61 23.00 17% 12 months -1% 4% 13.5X 12.8X 2.0X 1.9X NM NM NM NM
Q Qwest Communications Intl. Neutral $5.65 5.75 2% 12 months -1% -3% 15.3X 15.4X NM NM 4.7X 5.0X 14% 21%
QCOM QUALCOMM, Inc. CL-Buy √ $38.46 44.00 14% 12 months 12% 11% 19.3X 16.6X 3.2X 2.9X 15.5X 13.5X 6% 7%
SBAC SBA Communications Corp. CL-Buy √ $36.03 43.00 19% 12 months 58% 12% NM NM 9.8X 11.6X 17.8X 14.9X -3% -1%
T AT&T Inc. Buy √ $26.69 34.00 27% 12 months 8% 1% 11.3X 10.4X 1.5X 1.5X 5.4X 5.2X 8% 10%
URBN Urban Outfitters Inc. Neutral √ $31.56 38.00 20% 6 months 25% 17% 18.9X 15.7X 3.4X 2.8X 8.8X 7.4X 5% 6%
WIN Windstream Corp. Neutral $11.50 10.50 -9% 12 months 4% 1% 13.8X 13.5X 8.8X 14.6X 6.1X 6.1X 14% 14%
FCF YieldGSRHDEMO basket
P/E P/B EV/EBITDA
August 4, 2010 Americas
Goldman Sachs Global Investment Research 7
How to read this report
For the benefit of the reader we note that this paper is broken down into three separate
sections, each focused on one of the larger demographic trends we have described above.
From there we frame each theme and provide several opportunity sets for investors to
prosecute a view across sectors and single stocks.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 8
August 4, 2010 Americas
Goldman Sachs Global Investment Research 9
Retiring Baby Boomers
August 4, 2010 Americas
Goldman Sachs Global Investment Research 10
Retiring Baby Boomers
The “Baby Boomers”, born in the United States between 1946 and 1964 and currently
accounting for 26% of the US population, make up the largest and most influential
generational cohort in American history. Their childhood catalyzed the rapid growth
of suburbs and homeownership rates, while their adolescence and adulthood
reshaped consumption preferences—as well as social and political values—
throughout the economy. With the oldest Baby Boomers turning 65 in 2011, the next
transformational economic change in the United States will be precipitated by their
retirement.
Over the next twenty years the percentage of the population over age 65 in the United
States is expected to rise from 13% to nearly 20%, a net increase of 31 million retirement
age people (see Exhibit 3). This is the result of both a demographic bulge—the Baby
Boom—and increases in lifespan. The rapid growth in the number and proportion of the
population over age 65 will have material consequences throughout the economy. We
identify three investable opportunities in particular, highlighting companies affected in
Exhibit 4:
Increased healthcare demand as the largest generation in United States history
transitions into old age.
Meaningful opportunities for asset managers, financial advisors and insurers as Baby
Boomers look to self-fund the bulk of their retirement income.
Declining Baby Boomer consumption and a shift in household spending from
discretionary items toward necessities.
Exhibit 3: The over-65 age group is expected to grow steadily over the next 20 years
Estimated number in millions and percentage of US population over age 65
Source: US Census Bureau International Data Base.
Exhibit 4: Companies exposed to the retirement of the Baby Boomer generation
Source: Goldman Sachs Research.
0%
5%
10%
15%
20%
25%
0
10
20
30
40
50
60
70
80
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Population over age 65 (left axis) % of population over age 65 (right axis)
Opportunity Impact Companies
Increased healthcare demand + AGN, BKD, ESRX, MCK, MYL, PFE, SYK, WBMD, ZMH
Retirement funding needs + AMP, FNGN, TROW
Declining Boomer discretionary spending ‐ CHS, HOG
August 4, 2010 Americas
Goldman Sachs Global Investment Research 11
The size of the Baby Boomer generation relative to adjacent cohorts is a function of
moderating fertility rates through the 1960s and 1970s and increases in life expectancy
over the past fifty years.
Fertility. Total fertility in the United States, as defined by the average number of
children per woman, fell from a peak of 3.7 between 1960 and 1965 to a trough of 1.8
between 1975 and 1980. This sharp decline was the result of changing social and
economic trends, including urbanization and rising incomes throughout the 1960s and
1970s, and was sparked in part by the introduction of the combined oral contraceptive
pill in 1960. Fertility rates in the United States have recovered over the past thirty years
to an estimated 2.1 children per woman in 2010. This recovery has given rise to the
Millennials and Generation Z discussed later in this report, though we note that fertility
rates have consistently stayed more than 40% below peak Baby Boom levels and are
likely to remain so for the foreseeable future (see Exhibit 5).
Longevity. Continuing advances in healthcare and living standards are contributing to
a shift of mortality to older ages. In the United States, life expectancy at birth increased
from 70 years in 1960 to an estimated 79 years in 2010. Life expectancy is forecast by
the United Nations to increase further to 83 years by 2045, emphasizing the need for
extended use of healthcare services and retirement planning.
Exhibit 5: Declining fertility and increasing longevity contribute to an aging population
Average number of children per woman and life expectancy at birth in the United States
Source: United Nations World Population Prospects: The 2008 Revision (Medium Variant Projections).
Immigration partially offsets aging trends
In framing this reality of an aging population driven we note that the United States does
not face a sharply declining workforce in absolute terms, as is currently the case in Japan,
Russia and Western Europe. This is due to higher rates of immigration and a generational
wave–the Millennials—now entering the workforce.
In terms of immigration trends we show, in Exhibit 6, that the majority of persons
obtaining legal permanent resident status in the United States are in the 20-44 age group.
40
60
80
100
1
2
3
4
1950‐55 1965‐70 1980‐85 1995‐00 2010‐15 2025‐30 2040‐45
Total fertility (children per woman) Life expectancy at birth (years)
The relative size of the Baby Boomer generation is a function of fertility and longevity trends
August 4, 2010 Americas
Goldman Sachs Global Investment Research 12
Partly as a function of their age, these immigrants have higher labor-force participation
rates than the broader domestic population, and for the first generation tend to have higher
fertility rates as well. With more than a million new residents in this category each year
and additional forms of immigration, legal and otherwise, new residents therefore have the
potential to partially offset the aging of the labor force caused by declining fertility and
increasing longevity (see Exhibit 7). However, the ultimate impact of immigration will
depend on policy choices and relative economic growth.
Exhibit 6: Most US immigrants are of working age Persons obtaining legal permanent resident status (“green
card”) in the United States by age, FY 2009
Exhibit 7: Legal US immigration trends remain positive Persons obtaining legal permanent resident status in the
United States, 1945-2009
Source: US Department of Homeland Security, US Census Bureau.
Source: US Department of Homeland Security.
0%
10%
20%
30%
40%
50%
60%
<20 20‐44 45‐64 65+
Immigrants Total population
More than half of new green card recipients are between the ages of 20 and 44.
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
August 4, 2010 Americas
Goldman Sachs Global Investment Research 13
Opportunity #1: An aging population provides a tailwind for the
healthcare sector
As Baby Boomers live longer, they spend more on healthcare; as they spend more on
healthcare, they live longer. This feedback loop is the continuation of a decades-long trend
in the developed world, and is likely to continue as the massive Baby Boomer cohort
moves into its peak healthcare spending years.
The average life expectancy in the United States in 1945, when the first Baby Boomers
were born, was around 66 years. These oldest Baby Boomers, now age 65, can expect to
live an additional 18 years on average. This is a testament not just to actuarial survivorship,
but also in large part to the advances of medicine. As these advances continue their
decades-long trend of increasing life expectancy, younger Baby Boomers who reach age 65
will likely be able to expect to live even longer (see Exhibit 8).
Exhibit 8: Life expectancy continues to increase US life expectancy at birth (left-axis) and at 65 (right-axis)
Source: CDC/NCHS, National Vital Statistics System.
These increases in life expectancy come with a concurrent rise in medical costs, however.
As shown in Exhibit 9, healthcare spending increases rapidly after age 55, from an average
of $2,930 per year in the 45-54 age group to $3,825 in the 45-64 age group and $4,605 for
those older than 65. The increase is even more pronounced as a percentage of after-tax
income, which more than triples from 3.7% for those ages between 45 and 54 to 11.9% for
those older than the traditional retirement age of 65. At the same time, healthcare spending
among those over age 65 has been increasing, and is very likely to continue to do so as the
Baby Boomers move into this demographic. The number of treatment options available
increases as medicine advances and previously untreatable ailments are targeted by
expensive and specialized therapies. The steady increase in the average number
prescriptions filled for Americans over age 65 is indicative of this trend, as shown in Exhibit
10.
6
8
10
12
14
16
18
20
66
68
70
72
74
76
78
80
1950 1960 1970 1975 1980 1985 1990 1995 2000 2005
At birth (left-axis) At 65 (right-axis)
Medical advances over the lifetime of the Baby Boomers have driven a steady increases in life expectancy.
Healthcare spending increases rapidly after age 55
August 4, 2010 Americas
Goldman Sachs Global Investment Research 14
Exhibit 9: Healthcare spending increases sharply after
age 65… Average annual dollar and % income spent on healthcare
Exhibit 10: …and healthcare spending among the over-65
group has been increasing steadily over time Per capita prescriptions filled by Americans over age 65
Source: Bureau of Labor Statistics Consumer Expenditure Survey.
Source: Kaiser Family Foundation.
The positive demographic trend competes with secular headwinds in healthcare.
While we remain positive on the impact of an aging population for the healthcare complex,
we remind investors that the combination of an impending “patent cliff” in Major Pharma
and a challenging reimbursement environment in the United States will provide near to
medium term headwinds. The former, coupled with a lack of innovation, will pose the
most significant challenge to the industry’s ability to grow organically. With that said, we
do see unique opportunities for names leveraged to the impact of aging Baby Boomers in
the areas of both products and services and facilities.
Products
Within pharmaceuticals, companies with innovative drugs targeting diseases
that affect the older population stand to benefit most. For 2010 we estimate
that 43% of Buy-rated Pfizer’s sales are derived from drugs that target such
diseases, including cardiovascular, arthritis, osteoporosis, glaucoma, erectile
dysfunction and Alzheimer’s disease. This proportion will decline to 25% by 2015
as many of these drugs—including Lipitor, Celebrex and Viagra—lose patent
exclusivity. However, the company is still clearly levered to an aging population
over the long term, and its success will in large part be measured by its ability to
execute on the demographic opportunity before it. The patent exclusivity drop-off
is not a Pfizer-specific issue, but rather an industry-wide challenge (see Exhibits 11-
12).
As a record number of branded drugs go off patent in the next few years and
pressures to contain healthcare costs continue to mount, generics become an
increasingly important driver of revenue and earnings growth for a number of
companies. We expect Buy-rated industry leader Mylan to benefit from greater
prescription drug usage as the population ages, and see the company’s
positioning in follow-on biologics as providing another avenue of growth to
address the growing need for expensive biotech drugs at reduced costs.
0%
2%
4%
6%
8%
10%
12%
14%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
0‐25 25‐34 35‐44 45‐54 55‐64 65+
Healthcare $ spent Healthcare % of after‐tax income
24
26
26
28
29
30
31
20
22
24
26
28
30
32
2003 2004 2005 2006 2007 2008 2009
On average, Americans over the age of 65 filled 31 prescriptions in
2009, up 28% from 2003
August 4, 2010 Americas
Goldman Sachs Global Investment Research 15
Exhibit 11: 51% of current branded sales are poised to go
generic within five years Estimated % of current branded sales to go generic
Exhibit 12: The next three years should see the greatest
generic launch activity $ billions
Source: IMS, company data, Goldman Sachs Research estimates.
Source: IMS, company data, Goldman Sachs Research estimates.
CL-Buy rated Allergan’s story is unique within specialty pharmaceuticals, offering
compelling long-term growth within a sector that has been squeezed by poor long-
term visibility. The company is not only exposed to an aging population via its
ophthalmology and medical aesthetics segments, but also to the secular trends of
rising obesity via its Lap-Band product and growth in emerging markets across its
franchise. These attributes position Allergan to succeed as a standalone company,
but also potentially make it a strategically valuable asset for other companies
seeking exposure to these positive trends.
For medical device manufacturers the biggest beneficiaries of people growing
older and living longer are the companies most exposed to artificial joints. Buy-
rated Zimmer is the market leader in the orthopedic device manufacturer market
with 73% of revenues concentrated in artificial hips and knees. The combination of
an aging population, increased prevalence of obesity (estimated at 30% in the
United States by the Centers for Disease Control) and demand by younger patients
to maintain activity levels should support accelerating volume growth. Neutral-
rated Stryker, the number three company in the space, is also positively exposed
to growth in the orthopedic device market.
Services and Facilities
Within the supply chain we believe that all of the major drug wholesalers stand to
benefit from increased volumes of drugs and medical supplies associated with the
aging population. We see CL-Buy rated McKesson as best positioned for this trend
given its concentrated exposure as the largest buyer of generics in the world. The
company has a diverse distribution network that covers both pharmaceuticals and
medical supplies and a sizable presence in the Healthcare IT sector that is set to
become increasingly important as the government becomes more involved in
reimbursement.
Buy-rated pharmacy benefit manager Express Scripts should also benefit from
increased prescription use driving both drug volumes and the need to manage
cost trends. In the context of the natural shift to greater volumes, Express Scripts
is poised to enjoy greater profitability as generics become more prevalent.
Increasing use of more complex and expensive specialty drugs to treat diseases
common among the elderly also increases the need to manage cost trends and
drive demand throughout the pharmacy benefit management industry.
0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
44%
48%
52%
56%
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
$130
$140
$150
Cumulative expiring branded spend
% of 2009 branded pharma market
% of 2009 non-biotech pharma market branded
spend going
Over a third of current branded
spend will be generic in 3 years
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
E
1Q
10
E
2Q
10
E
3Q
10
E
4Q
10
E
1Q
11
E
2Q
11
E
3Q
11
E
4Q
11
E
1Q
12
E
2Q
12
E
3Q
12
E
4Q
12
E
1Q
13
E
2Q
13
E
3Q
13
E
4Q
13
E
1Q
14
E
2Q
14
E
3Q
14
E
4Q
14
E
1Q
15
E
2Q
15
E
3Q
15
E
4Q
15
E
Bra
nd
ed r
even
ue
of d
rug
s su
bje
ct to
pat
ent e
xpir
atio
n (i
n th
e q
uar
ter
of l
aun
ch)
LAUNCHES BY QUARTER (ANNUAL SPEND under exclusivity) LAUNCHES BY QUARTER (multi-sourced) 4-quarter rolling average
HISTORICAL PROJECTED
August 4, 2010 Americas
Goldman Sachs Global Investment Research 16
Beyond pharmaceutical needs, increases in the number of older people will drive
demand for senior living facilities of all types. Buy-rated Brookdale Senior Living
is the largest publicly traded owner/operator of senior living facilities in the United
States, with 564 facilities serving over 52,000 residents. The key to our Buy thesis
is compelling growth in the 75-plus age group over the next 5-10 years (4-5%
CAGR versus 1% currently). Brookdale’s current portfolio serves the gamut of
acuity needs from independent living to skilled nursing and memory care, and
over 95% of its revenues are derived from private pay rent and fees, as opposed to
Medicare reimbursement. As a result, we believe Brookdale is ideally positioned to
take advantage of rising occupancy and potential rental rate spikes as resident
demand begins to widely outstrip supply over the next three to five years (see
Exhibits 13-14).
Exhibit 13: Senior living supply growth is set to flatten ...As of 4Q2009
Exhibit 14: . . . as the 75-plus population grows Penetration rate = senior living units as % of 75+ population
Source: ASHA, NIC, Goldman Sachs Research estimates.
Source: US Census Bureau, ASHA, NIC, Goldman Sachs Research estimates.
Finally, as a provider of healthcare information Neutral-rated WebMD should also
see growth related to the aging Baby Boomer population. The Pew Internet &
American Life survey revealed that 78% of Baby Boomers use the internet and
social media to track down health-related information. WebMD meets this demand
with the largest consumer-focused online health information site on the web, with
over 70 million unique users. The company also operates MedScape, the dominant
continuing-education portal for physicians, and is in the very early stages of
capturing the offline-to-online shift in pharmaceutical advertising. We believe that
increasing time spent online, an aging population searching more often for health-
related information and increasingly difficult sales-related access to physicians
may allow WebMD to approach 10% of total pharmaceutical advertising spend
within 10 years, up from around 4% today.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0
15,000
30,000
45,000
60,000
75,000
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9E
201
0E
201
1E
Construction vs. inventory
Units delivered
Units delivered (left) Construction vs. inventory (right)
NoteOur penetration analysis assumes ramp back to 35k units / year (long-term average) beginning in 2012
7%
8%
9%
10%
11%
12%
0
5
10
15
20
25
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
20
10E
20
15E
penetration rate75+ pop (mn)
US Census - population 75+ (left) Penetration rate (right)
August 4, 2010 Americas
Goldman Sachs Global Investment Research 17
Opportunity #2: Financial services are needed to address both pre-
retirement and post-retirement needs
With the oldest Baby Boomers next year turning age sixty-five, the traditional retirement
age in America, we see meaningful opportunities for providers of financial services. We
focus in particular on the opportunities presented by the pre- and post-retirement needs of
the Baby Boomer generation for asset managers, financial advisors and insurers.
The lay of the land
There are severe structural changes in the retirement landscape creating increased demand
for new retirement income sources as Baby Boomers approach retirement. A decline in
traditional benefits is eroding historical retirement patterns, with social welfare programs
facing long-term funding challenges and defined benefit pension plans having been
overtaken by defined contribution schemes in the early 1990s (see Exhibits 15-16). Defined
benefit assets under management as of year-end 2009 stood at $2.1 trillion compared to
defined contribution assets of $4.1 trillion. With life expectancy increasing, the average
Baby Boomer retirement may be as long as twenty to thirty years, requiring either greater
savings or acceptance of reduced standards of living.
Given the increased self-funding responsibility handed to retirees, the opportunity is clear
for companies that can position themselves to manage Baby Boomer investments and
provide retirement income vehicles that hedge against the new risks retirees face.
Exhibit 15: Social Security faces long-term challenges Revenue less outlays as a percentage of GDP
Exhibit 16: DC plan growth continues to outpace DB Assets in trillions
Source: Congressional Budget Office.
Source: Investment Company Institute.
We view the “runway” for retirement services as long. As Exhibit 17 shows, weak asset
returns and lengthening life expectancies have combined to push back expected retirement
ages over the past ten years. Given that contributions and use of planning and
administrative services ramp up in the years prior to retirement, the pipeline of employees
saving for retirement should remain steady through 2020.
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
1985 1995 2005 2015 2025 2035 2045
Rev
enu
e -
Ou
tlay
s as
% o
f G
DP
DB
DC
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ass
ets
in tr
illio
ns
... while DB assets have only grown 11%
DC assets have grown 58% since 1998...
Traditional retirement benefits are being replaced by self-funding
August 4, 2010 Americas
Goldman Sachs Global Investment Research 18
Exhibit 17: An increase in expected retirement age may “extend the runway” 2010 Retirement Confidence Survey: At what age do you expect to retire?
Source: Employer Benefit Research Institute.
With these trends in place, the growth of the pie appears certain. We project retirement
assets to increase by 40% over the next four years alone (see Exhibit 18). The question for
financial services providers then becomes one of how allocations will change going
forward. We focus on target date funds, annuities and IRAs as key areas of growth as the
Baby Boomers approach and enter retirement.
Exhibit 18: Retirement asset mix continues to shift; assets expected to increase over 40% in next few years
Source: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, Internal Revenue Service Statistics of Income Division, Cerulli Associates, and Goldman Sachs Research.
Target date funds are perceived as the “do it for me,” self-contained retirement portfolio
for average investors. Often named for the year an investor plans to retire, the funds are
designed to automatically shift to a more conservative asset mix as retirement time nears.
In 2006, the Pension Protection Act sanctioned automatic enrollment for defined-
contribution plans, and the Labor Department approved target-date funds as a default
option for company retirement plans. As of May 2010, target date funds amounted to $259
billion in total assets, a 41% cumulative annual growth rate since they were initially
introduced in the late 1990s (see Exhibit 19). Net new flows soared from $4 billion in 2002
to $56 billion in 2007 and remained positive through the downturn (see Exhibit 20).
2000 2010 2000 2010Less than 60 22% 9% 12% 2%Ages 60-64 22% 19% 28% 17%Age 65 28% 24% 20% 19%Age 66 or older 19% 33% 20% 42%Never retire 4% 9% 8% 10%Don't know/refused 5% 6% 13% 9%
All Workers Ages 55+
IRAs25.7%
Annuities9.7% Government
Pension Plans25.7%
Private DB Plans13.9%
Other DC Plans
7.9%
401(k) Plans17.1%
Today
?
??
?
? ?
2014
With retirement assets projected to grow over 40% in the next 4 years, the real question is this: How will retirement plan allocations change moving forward?
IRAs18.6%
401(k) Plans13.1%Other
DC Plans11.1%
Private DB Plans21.4%
Government Pension Plans
27.1%
Annuities8.6%
1995
Retirement Assets: $7.0tn Retirement Assets: $14.4tn Estimated Retirement Assets: $20.4tn
Target date fund assets have grown at a 41% CAGR since the late 1990s
August 4, 2010 Americas
Goldman Sachs Global Investment Research 19
Exhibit 19: Target date fund AUM continues to grow as
% of total mutual fund industry…
Exhibit 20: Flows into target date funds remained
positive through the downturn
Source: Simfund, Goldman Sachs Research.
Source: Simfund, Goldman Sachs Research.
Annuities are a financial contract issued by a life insurance company that offers tax-
deferred savings and a choice of payout options to meet an owner’s needs in retirement:
income for life, income for a certain period of time or a lump sum. As a retirement product,
demand has historically been weak for annuities, with proliferation of unique product types
occasionally outgrowing sales (see Exhibits 21-22). During the past 13 years annuities as a
percent of retirement assets has generally remained stable at 9%, despite the significant
expansion of products, declines in employer-sponsored defined benefit plans and
increased education among those approaching retirement age.
Exhibit 21: Annuity product innovation and changes
continue to take place
Exhibit 22: Market pressures weakened sales growth,
but beginning to see sales recovery
Source: Insured Retirement Institute.
Source: Morningstar, FactSet, and LIMRA.
Insurance companies can offer guarantees that differentiate their products from those of
other financial services providers. As a result, variable annuities offer protection against
the possibility of outliving assets. The Departments of Labor and Treasury have been
exploring the subject of allowing annuities to become the default option for guaranteed
income products, which could increase the uptake in election rates—as evidenced by the
increase in target date flows once the funds were allowed to be default options.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
$0
$50
$100
$150
$200
$250
$300
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010TD
AuM (in $ bn ‐‐ left axis) % of MF industry AuM (% ‐‐ right axis)
CAGR: 41%
2 1 24 4
7
14
22
34
56
41 39
51
$0
$10
$20
$30
$40
$50
$60
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
*2010
*2010 numbers are annualized
19992000
2001
2002
20032004
2005
20062007 2008
30
35
40
45
50
55
60
65
70
200 400 600 800 1,000 1,200 1,400 1,600
Number of unique products offered
# o
f co
mp
an
ies
selli
ng
va
ria
ble
an
nu
itie
s The number of products sold are 4 times what they were 10 years ago despite industry consolidation reducing the number of companies selling VAs by 40% during the same period.
(40%)
(20%)
0%
20%
40%
60%
250
500
750
1,000
1,250
1,500
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
Yea
r-o
ver
-yea
r ch
an
ge
in s
ale
s
Ave
rag
e S
&P
50
0 le
vel
Annuities as a percentage of retirement assets has remained stable at around 9%
August 4, 2010 Americas
Goldman Sachs Global Investment Research 20
IRA growth is set to accelerate as Baby Boomers retire and rollover. As Baby Boomers
begin to retire, IRA rollovers are poised to accelerate and further increase the product’s
presence in the retirement market. IRAs are already the fastest growing segment of the
retirement market in the United States, with about $4.0 trillion in assets. This represents
over 26% of total retirement assets and is more than double the 10% represented by IRAs
in 1985. According to Cerulli Associates IRA growth is expected to continue, with assets
reaching $5.8 trillion by 2014, up about 60% from current levels. This growth largely driven
by rollovers, as shown in Exhibit 23.
Exhibit 23: Rollovers have been the largest source of IRA growth and are set to increase as more baby-boomers retire
US traditional IRA asset growth components (data in $ trillions); Baby Boomer retirement progression
Source: Investment Company Institute data, Cerulli, US Census Bureau, Goldman Sachs Research estimates.
Moreover, the importance of professional financial advice is becoming more critical during
post-retirement years, particularly among mass-affluent investors. Mass-affluent investors
are defined as those with greater than $200,000 in investible assets, a group whose
holdings comprise the highest share of IRA assets (see Exhibits 24-25).
Exhibit 24: Mass-affluent investors comprise the largest
percentage of IRA assets… IRA ownership by annual household income, $ thousands
Exhibit 25: …with more seeking professional advice
before making withdrawals Type of advice by percentage used
Source: Investment Company data, Goldman Sachs Research
Source: Investment Company data, Goldman Sachs Research
Neutral-rated Ameriprise should benefit from these trends through its advice-driven
wealth management services, high exposure to the fast-growing IRA category and suite of
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2004 2008 2009 2014E
+0.04
Con
trib
utio
n
Rol
love
rs
With
dra
wl
Mar
ket
Con
trib
utio
n
Ro
llove
rs
With
draw
l
Ma
rket
+1.06 -0.38
-0.51
+0.1
+1.76 -0.95 +0.97
2.963.17
3.95
5.84
Peak Year of Retirements
First Boomers Retire
Last Boomers Retire
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041Year of Retirement
Mill
ions
of
Boo
mer
s
36% of beginning
assets
44% of beginning
assets
7%
7%
14%
22%
8%
42%
<25 25-35 35-50 50-75 75-200 >200
Ma
ss-a
fflu
en
t In
vest
ors
1%
1%
3%
9%
25%
62%
0% 10% 20% 30% 40% 50% 60% 70%
Financial softwareprogram
Internet website
Book/article
Did not consult anysource
IRS rules orpublications
Professional FA
Rollovers may help drive IRA asset growth from $4.0 trillion to $5.8 trillion by 2014
August 4, 2010 Americas
Goldman Sachs Global Investment Research 21
asset management and annuity products. Over 40% of the company’s $300 billion asset
base is tied to retirement products, the majority of which are IRAs. With more mass-
affluent investors (the company’s primary client base) seeking professional financial advice
when it comes to retirement, Ameriprise is also well positioned to capture a higher share of
retirement dollars through its 12,000 financial advisory force (the fourth-largest in the
United States) and broad product suite ranging from traditional mutual funds to
alternatives to annuities.
We likewise believe that Neutral-rated T. Rowe Price, among the largest publicly traded
asset managers, stands to benefit from continued growth in the defined contribution/401K
market. The company manages over $100 billion in defined contribution assets and is
particularly well-positioned for the growth of target date fund products. As of May, T. Rowe
Price managed $43 billion in target date fund assets, accounting for 17% of the industry.
Given the “sticky” nature of target date funds, the firm is well positioned to deliver
continued organic growth strength despite the recent market volatility.
Finally, Neutral-rated Financial Engines, which provides a platform for automatically
managed 401K accounts with a focus on workers approaching age 50, is in a particularly
good position to benefit from increasing 401K contributions. Average contributions
increase 17% from $2,945 per year between the ages of 40 and 49 to $3,432 per year
between 50 and 59. As more Baby Boomers enter this “red zone” prior to retirement,
Financial Engines benefits from their escalating account contributions. The company is also
developing a platform to manage assets during retirement, extending its relevance as Baby
Boomers enter retirement.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 22
Opportunity #3: Baby Boomer spending declines and shifts from
discretionary items to necessities
Over the past decade the Baby Boomer generational wave drove rapid population growth
in the 55-64 year age bracket, the highest-earning and highest per-capita spending
demographic among US households according the Bureau of Labor Statistics. The growth
in 55-64 year olds is now set to decelerate sharply as the Baby Boomer wave approaches
retirement years and population growth in the 65 and older demographic accelerates (see
Exhibit 26).
Exhibit 26: Aging Baby Boomers drive a dramatic shift in population growth trends
Year-over-year growth in population
Source: US Census Bureau, Bureau of Labor Statistics, Goldman Sachs Research
The Bureau of Labor Statistics Consumer Expenditure Survey shows that household
spending per capita grows as the head of household ages and earnings increase. However,
this positive relationship between aging, earning and spending peaks between the ages of
55 and 64, and then declines sharply in retirement age (65-plus). As Exhibit 27 illustrates,
income per capita falls by 32% and household spending by 17% when the head of
household moves from the peak earning ages between 55 and 64 to the 65-plus age group.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Population growth ‐ ages 55‐64 Population growth ‐ age 65+
Population growth of 55‐64 year olds poised to decelerate sharply...
...as population growth of 65+ retirees accelerates
Spending peaks between ages 55 and 64
August 4, 2010 Americas
Goldman Sachs Global Investment Research 23
Exhibit 27: The positive relationship between aging, earning and spending peaks between
the ages of 55 and 64, and then declines sharply in retirement years (65+) Spend and income per household, divided by the average number of persons in the household
Source: Bureau of Labor Statistics Consumer Expenditure Survey; Goldman Sachs Research.
This decline in spending as consumers age is not uniform across categories, and
discretionary spending is particularly hard hit. A greater proportion of total spending is
directed toward basic necessities like healthcare and food at the expense of more
discretionary goods such as vehicles, alcohol, dining out and apparel (see Exhibit 28). For
these categories, 65-plus households spend 25% less per person than 55-64 year olds (see
Exhibit 29).
Exhibit 28: Healthcare and necessities gain significant wallet share at the expense of discretionary categories post-65
Spend per household, divided by the average number of persons in the household
Source: Consumer Expenditure Survey; Goldman Sachs Research.
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Under 25 years
25‐34 years 35‐44 years 45‐54 years 55‐64 years 65 years and older
Avg annual household expenditures divided by avg number of consumers per household
Avg household pre‐tax income divided by avg number of consumers per household
Household spending per person peaks at 55‐64, consistent with the peak in
per person household income
65 and over spending is 17% lower, driven by 32% less income
Spend per
person
Share of
Total
Spend per
person
Share of
Total
Change in Wallet
Share
Healthcare 1,821 7% 2,709 12% 5.5%
Food at home 1,767 7% 1,809 8% 1.6%
Vehicle purchases (net outlay) 1,428 5% 884 4% ‐1.4%
Food away from home 1,260 5% 951 4% ‐0.4%
Household furnishings and equipment 902 3% 726 3% ‐0.1%
Apparel and services 772 3% 642 3% 0.0%
Personal care products and services 300 1% 301 1% 0.2%
Alcoholic beverages 250 1% 148 1% ‐0.3%
Tobacco products and smoking supplies 169 1% 95 0% ‐0.2%
Reading 75 0% 84 0% 0.1%
55‐64 years 65 years and older
When consumers retire, there is not a dramatic shift in terms of largest vs. smallest
buckets of spend
But overall wallet share increases for necessities
like healthcare and food at home, at the expense of
more discretionary categories
After age 65, healthcare spending increases at the expense of discretionary
August 4, 2010 Americas
Goldman Sachs Global Investment Research 24
Exhibit 29: In the retirement years, spending is higher on necessities and 25% lower on
key discretionary categories Average household spend per person; household ages 65-plus versus ages 55-64
Source: Consumer Expenditure Survey; Goldman Sachs Research.
Last decade’s discretionary Boomer Buys are this decade’s Boomer Sells
As Baby Boomers age from their peak earnings years into retirement, demographics go
from a driver to a drag for companies that cater to the pre-retirement cohort. As such, we
see many of the same stocks that were demographic buy ideas last decade as downside
plays over the coming years. Two Sell-rated names that fit this category are motorcycle
manufacturer Harley-Davidson and apparel retailer Chico’s FAS.
For Harley-Davidson we key off of average vehicle purchases, which fall 35-40% for
consumers aged 65-plus versus those aged 55-64 years old. This further supports our
thesis that end-market demand for heavyweight motorcycles will lag other big ticket
consumer items. We believe that high sales levels over the course of the past decade have
led to new bike saturation. It is our view that even if a bike market recovery is in the offing,
an increasing proportion of the demand may be met through the used market, leaving new
sales weak for a prolonged period.
Spending on apparel, Chico’s FAS’s primary product category, likewise drops 15-20% for
consumers aged 65-plus versus those in the 55-64 year old cohort. With a target
demographic of women in their 50s, slowing population growth in the segment and the
drop in apparel spending post-retirement represent notable headwinds. The company has
recently executed an impressive turnaround, but expectations are now elevated and
momentum appears to be cresting.
‐38%
‐25%
‐19%
‐17%
0%
2%
12%
49%
Vehicle purchases (net outlay)
Food away from home
Household furnishings and equipment
Apparel and services
Personal care products and services
Food at home
Reading
Healthcare
Change in dollars spent per person ‐ Households ages 65+ vs. 55‐64
Dollar spending on necessities and reading is higher post retirment
age...
...while dollar spending on key discretionary items is lower
August 4, 2010 Americas
Goldman Sachs Global Investment Research 25
The expanding global middle class
August 4, 2010 Americas
Goldman Sachs Global Investment Research 26
The expanding global middle class
We expect global consumer, infrastructure and commodity demands to continue to
rise sharply due to the twin forces of (1) economic growth shifting to emerging
middle-income economies and (2) the number of middle-income people increasing
within these countries. As the world’s economic center of gravity shifts towards the
“expanding middle” over the coming decades, we believe that multinationals have a
once-in-a-lifetime opportunity to position themselves for the growth of the global
middle class.
While one could write volumes on the impact of this profound global change, we have
chosen in this report to focus on the investable consequences in the following areas:
The $10 trillion of potential growth between now and 2050 in the consumer packaged
goods industry as household penetration rises in emerging markets.
The impact of rising food, feed and fuel demand on the agricultural sector as protein
consumption increases with prosperity.
Incremental demand for multinationals across the tech, media and telecom universe.
Additional banking, lending and asset management clients as incomes rise and more
people become customers of the global financial system.
Increased infrastructure investment and rising demand throughout the commodity
complex to meet the growing needs of the expanding middle class.
Exhibit 30: Companies exposed to the expanding global middle class
Source: Goldman Sachs Research.
Globalization continues to take hold
Leveraging off the work of our colleagues in Economics Research, we project that the
BRICs and the “Next 11” emerging economies will have a combined GDP of $37 trillion in
2020, on par with the GDP of the G7 countries.2 As seen in Exhibit 31, BRICs and N-11
economies currently have younger demographic profiles, lower per capita income, and
higher rates of growth than their developed market peers.
2 The “Next 11” economies are Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan,
Philippines, Turkey and Vietnam.
Opportunity Impact Companies
Consumer staples growth in emerging markets + CL, HYPE3.SA, MJN, NKE, PEP, PM
Food, feed and fuel drive global ag demand + BRFS3.SA, MON
Increased discretionary income drives TMT demand + AMZN, CSCO, DTV, JNPR, NWSA, QCOM
More customers link into the global financial system + BBD, BLK, C, CIEL3.SA, MA, V
Global infrastructure growth and rising commodity demand + BA, BTU, BUCY, FCX, JOYG, PCP, TCKb.TO
For more discussion, please refer to Global Economics Paper No: 170, “The Expanding Middle: The exploding World Middle Class and Falling Global Inequality” by Dominic Wilson, et al. (July 7, 2008) as well as our previous report “The Day After Tomorrow, v1.0: The changing face of the consumer” (October 1, 2008)
August 4, 2010 Americas
Goldman Sachs Global Investment Research 27
Exhibit 31: Emerging market economies are set to outgrow their developed market peers Social and economic measures, grouped by current wealth bands
Source: World Bank, UN Population Division, CIA World Factbook, GS SUSTAIN.
A prolonged period of high economic growth in these countries will transform the shape of
the global economy. Today, just two of the BRICs (and none of the N-11) rank among the
world’s largest ten economies. However, our economists forecast the landscape to be
much different in 2050, with all four BRICs and three of the N-11 economies among the top
ten (see Exhibit 32).
Population Median age Labor forceGDP per capita
Total, mn2009
YearsTotal, mn
2009Real US$
2009CAGR 09-
20E
Bangladesh 164 23.3 76 512 7.5%Pakistan 170 20.8 59 948 5.6%Vietnam 90 27.4 44 969 9.7%India 1,203 25.3 457 1,083 8.4%Nigeria 155 19.0 47 1,228 7.0%Philippines 91 22.5 38 1,805 7.2%Egypt 78 24.8 25 1,850 6.5%Indonesia 237 27.6 106 2,081 6.5%China 1,344 34.1 731 3,117 11.0%Iran 73 27.0 29 4,800 7.1%Brazil 197 28.6 93 7,427 5.6%Mexico 109 26.3 43 9,280 5.8%Turkey 77 27.7 24 9,869 6.3%Russia 141 38.4 63 10,575 6.5%Korea 49 37.3 21 22,631 5.1%Japan 128 44.2 49 34,564 1.2%Italy 59 43.3 19 36,781 1.5%Germany 82 43.8 32 41,739 1.4%France 62 39.4 23 42,631 1.9%Canada 33 40.4 16 45,011 2.1%United States 312 36.7 139 46,626 2.2%United Kingdom 61 40.2 26 47,164 2.0%
GDP growth
Under US$2k
US$2-5k
US$5-10k
US$10-20k
Over US$20k
Wealth level
Country
0% 5% 10% 15%
August 4, 2010 Americas
Goldman Sachs Global Investment Research 28
Exhibit 32: The GDP of the BRIC and N-11 economies is set to be on par with the G7 by
2050 GDP of the world’s largest 25 economies in 2009 and 2050E ($ trillions)
Note: Figures are only shown for the largest 25 economies for each year.
Source: International Monetary Fund, Goldman Sachs Economic Research.
Exhibit 33 further illustrates the trend: In 2007, the United States was the largest economy
in the world and was ranked ninth on a per-capita GDP basis. By 2030 we estimate that
China will have the largest economy in aggregate, but will have a per-capita GDP rank of
49th. India and Brazil are likewise projected to be among the five largest economies, yet to
have per capita GDP rankings of 63rd and 47th, respectively. In just twenty years the world’s
GDP will likely be dominated by countries in the “middle-income pack” and not by rich
nations, as it is today.
Exhibit 33: By 2050, the world’s biggest economies should be largely “middle-income”
economies The top seven economies and their respective GDP per capita rank, by year
Source: Goldman Sachs Economic Research estimates.
Economic and demographic factors in these middle-income economies will simultaneously
increase the size of the middle-class population worldwide. We estimate that the middle-
class cross-section of the world’s population, which our Economics team defines as those
0 10 20 30 40 50 60 70 80
AustraliaBelgium
NetherlandsNorwayPoland
SpainSweden
SwitzerlandVenezuela
VietnamThailand
South AfricaSaudi Arabia
IranKorea
ItalyCanada
PhillipinesNigeria
GCCGermany
FranceJapan
TurkeyUK
MexicoIndonesia
RussiaBrazilEU-5India
USChina
2009 GDP 2050E GDP
SeveralEuropean countries will be replaced in the top 25 list by developing economies.
By 2050, China's economy will be over 10 times larger than it was in 2009 and 4 times the size of the 2009 US economy.
GDPRank
GDP Per CapitaRank
GDPRank
GDP Per CapitaRank
GDPRank
GDP Per CapitaRank
GDPRank
GDP Per CapitaRank
US 1 12 US 1 9 China 1 49 China 1 45Japan 2 19 Japan 2 22 US 2 12 US 2 15Germany 3 17 Germany 3 16 India 3 63 India 3 61France 4 9 China 4 56 Japan 4 29 Brazil 4 46UK 5 18 UK 5 10 Brazil 5 47 Russia 5 28Italy 6 21 France 6 17 Russia 6 35 Indonesia 6 60Canada 7 15 Italy 7 20 Germany 7 22 Mexico 7 44
16 21 37 43
2007 2030 2050
Average GDPPer Capita Rank
1980
August 4, 2010 Americas
Goldman Sachs Global Investment Research 29
with incomes between $6,000 and $30,000 in purchasing power parity (PPP) terms, is
currently growing at 90 million per year and is expected to increase from an estimated 1.9
billion people today to approximately 3.6 billion over the next twenty years (see Exhibit 34).
The scale of the change is substantial. We expect 70% of China’s population will fit the
middle class definition by 2020, and believe that by 2030 incomes in China and India will be
close to the global average.
Exhibit 34: The world’s middle class population is growing
People with incomes between $6,000 and $30,000 (people in millions, income in 2009$)
Source: Goldman Sachs Economics Research.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1960 1970 1980 1990 2000 2010 2020 2030
World
World ex China and India
China
India
August 4, 2010 Americas
Goldman Sachs Global Investment Research 30
Opportunity #1: Emerging markets are THE story in consumer
staples for decades to come
For multinational consumer packaged goods (CPG) and select retail companies the
emerging market opportunity will likely dwarf all other drivers for the next several decades.
Household penetration remains low for most basic CPG categories outside of the
developed world, and over the past five years emerging market growth has averaged 10-
12%. Our top-down analysis points to an opportunity for sustained 8-10% nominal dollar
growth in emerging markets for the next forty years. This would take the market size from
$1-2 trillion today to over $12 trillion by 2050 as income levels converge towards developed
market averages—a $10 trillion long-term growth opportunity.
As shown in Exhibit 35, the average American spends $2,000 per year on consumer
packaged goods, consistent with spending levels in other developed markets like Western
Europe and Australia. The average emerging market consumer spends only $200 on
consumer packaged goods, and the number is an even lower $100-$150 per year in
emerging Asia and Africa.
Exhibit 35: Retail sales for consumer packaged goods could climb 10-fold as emerging markets become wealthier
Summary of retail sales and per capita spending by region
Source: Euromonitor, Goldman Sachs Research estimates.
We expect a strong and steady increase in spending on CPG categories as incomes rise
and improved purchasing power spurs lifestyle changes that increase staples use. As
examples, parts of the emerging middle class will start buying packaged beverages for first
time rather than using well water or home-brewing tea, and more people will begin
brushing with toothpaste and using mouthwash rather than using green tea, twigs or salt
to clean their teeth.
Our analysis shows a clear relationship (R2 = 0.86) between per capita spending on CPG
categories and per capita GDP (see Exhibit 36). Every $1,000 increase in per capita GDP
drives an average increase in per capita spending on CPG products by $40 a year.
% of Global % of Global Spending in Segment Per Cap Index (Developed Mkt Avg = 100) $ per CapPopulation Pkgd. FoodSoft Drinks HHPC Staples Pkgd. Food Soft Drinks HHPC Staples Staples
Developed MarketsW. Europe 7% 31% 25% 28% 29% 100% 78% 94% 94% $1,918
N. America 5% 20% 26% 20% 21% 94% 115% 94% 99% $2,011
Japan 2% 10% 12% 11% 10% 118% 147% 138% 129% $2,623
Australasia 0% 2% 1% 2% 1% 97% 66% 95% 90% $1,830
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Developed Markets 14% 62% 63% 61% 62% 100% 100% 100% 100% $2,041
Emerging MarketsAsia ex Japan 54% 12% 14% 15% 13% 5% 6% 6% 6% $114
Mideast/Africa 18% 5% 6% 5% 5% 6% 7% 6% 7% $135
Latin America 9% 12% 13% 13% 12% 32% 34% 37% 33% $682
E. Europe 5% 8% 5% 6% 7% 39% 21% 30% 33% $678
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Emerging Markets 86% 38% 37% 39% 38% 10% 10% 11% 10% $207----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Global 100% 100% 100% 100% 100% 23% 23% 24% 23% $471
Emerging market consumers buy
1/10th as much Staples product at
roughly $200 per year versus $2,000
per year in developed markets.
Emerging markets are 86%
of global population but less
than 40% of packaged goods
consumption.
The consumer packaged goods market could grow as much as $10 trillion by 2050
August 4, 2010 Americas
Goldman Sachs Global Investment Research 31
Exhibit 36: Rising incomes for the emerging middle class should drive meaningful growth in CPG spending Per capita GDP versus per capita spending on consumer packaged goods (CPG) for top 80 population countries, 2009
Source: Euromonitor.
Driven by this relationship, emerging markets have already been outpacing developed
markets by a wide margin over the past half-decade. Growth in Latin America, emerging
Asia and Eastern Europe has averaged 10-12% over the past five years, well ahead of the
3% developed market average (see Exhibit 37).
Exhibit 37: Significant 800-900 bp growth rate gap for CPG industry in emerging markets relative to developed markets 5-year dollar sales CAGR for CPG industry by region, 2004-2009
Source: Euromonitor.
We expect this wide growth gap to persist, and not just in the intermediate term. There are
literally decades of strong growth potential at these levels in these countries. Exhibit 38
highlights the scale. The global CPG industry currently generates $3.2 trillion in retail sales,
including $1.2 trillion from emerging markets. Our economists expect emerging market
incomes to rise to $25,000-$30,000 per capita by 2050, which should push per capita
spending on consumer packaged goods to full penetration levels that roughly match
current developed market norms. This category development would add $10 trillion to CPG
industry sales, in constant dollars. Under this scenario, nominal growth for the CPG
industry in emerging markets could average 8-10% for the next four decades.
China
Japan
Poland
Russia
Brazil
USA
Portugal
Spain
y = 0.04x + 248.36R² = 0.86
$0
$500
$1,000
$1,500
$2,000
$2,500
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
CP
G P
er
Cap
ita S
pen
din
g
Per Capita GDP
Per capita spending on CPG categories rises
by $40 for every $1,000
of additional income.
12%
12%
11%
9%
6%
5%
3%
3%
2%
0.0% 3.0% 6.0% 9.0% 12.0% 15.0%
LatAm
Emerging Asia
E. Europe
Mideast/Africa
World
Australasia
N. America
W. Europe
Japan
Emerging markets CPG sales growing low double-digits
versus low single digits in
developed markets
August 4, 2010 Americas
Goldman Sachs Global Investment Research 32
Exhibit 38: $10 Trillion in retail sales growth potential over the decades Current retail sales for CPG categories vs potential emerging market sales if per capita levels reach developed market averages
Source: Euromonitor, Goldman Sachs Research estimates.
We prefer consumer companies with well-established emerging market franchises.
Most companies in the retail-consumer universe are already pursuing an emerging market
strategy. In light of this intense competition, we strongly prefer businesses that have well-
established franchises to those that are still in the nascent stages of development. In our
view, consumer companies with an existing emerging market presence have two key
advantages:
Business models are already profitable. Higher market share positions support more
profitable growth, and companies that are new to emerging markets often operate at a
loss until scale is achieved.
Per capita-driven growth rather than reliance on market share gains. Some newer
entrants may have success in penetrating the key emerging markets. However, we are
more comfortable investing behind franchises with already strong market share
positions that are highly likely to participate in the per capita consumption growth we
envision.
Against this backdrop, our top consumer picks for exposure to the growth of the expanding
middle include CL-Buy rated Nike and Mead Johnson Nutrition , Buy-rated Philip Morris
International and Neutral-rated Colgate-Palmolive. Collectively these companies generate
an average of 50% of sales from emerging markets (see Exhibit 39), and each is a leader in
its respective product categories. Colgate has a 45% share of global toothpaste and Mead
Johnson is the number two competitor in infant formula. Colgate, Mead Johnson and
Philip Morris also have existing emerging market margin structures that are at or above
those of the developed markets.
$1,992,029
$1,205,291
$3,197,320
$11,874,231
$0 $4,000,000 $8,000,000 $12,000,000
Developed Markets - Today
Emerging Markets - Today
Global CPG Sales - Today
Emerging Market "Potential"
Emerging market sales are $1.2 trillion in a $3.2 trillion global
CPG industry today.
Emerging markets could reach $12 trillion in constant dollars
once fully penetrated.
Established players benefit from scale as emerging markets grow
August 4, 2010 Americas
Goldman Sachs Global Investment Research 33
Exhibit 39: MJN, PM, and CL all generate around half of sales from emerging markets today, while NKE also ranks
highly on this metric even against the multinational CPG companies Percent of sales generated from emerging markets, 2009
Source: Company data, Goldman Sachs Research estimates.
On the rise
For investors who prefer a name that is not currently an emerging market leader but has
the potential to grow into one if it can gain share, we believe the strategies undertaken by
CL-Buy rated PepsiCo could reap major rewards if successfully executed. Twenty percent
of the company’s 2009 revenues were generated from emerging markets, with China
accounting for less than 3-4%, but we see the potential for that to increase to 25-30% over
the next five years. PepsiCo has stepped up its commitment to emerging markets with $1
billion invested in 2010 and another $2.5 billion planned for the next three years in China
alone. The company has been active in both beverages and snacks, and its Frito-Lay brand
has the potential to become a dominant snacking franchise globally.
Direct exposure
As the middle class expands in middle-income nations, emerging “domestic champions”
will increasingly challenge multinationals. The consumer-oriented companies that we see
gaining the most in these regions over the next few year offer inexpensive ways to
participate in a middle class lifestyle, whether by consuming branded food and drink, using
cosmetics or a good shampoo, or simply being able to afford basic household products.
In the “sweet spot” for consumer upgrades as the middle class expands in Brazil is Buy-
rated Hypermarcas, the country’s leading consumer products company. The self-styled
“Procter & Gamble of Brazil,” Hypermarcas receives 80% of its revenue from brands that
are either number one or two in their category. The company focuses on middle-to-low
income consumers, with over 170 brands in diverse categories including sweeteners,
antiseptics, nasal decongestant, condoms, nail polish, moisturizer, flu medicine and
laxatives.
0% 10% 20% 30% 40% 50% 60% 70%
AVPMJNPM
TUPCL
NKEKOPG
ENREL
KMBPEPACV
KCLXJAHKFT
NWLBFBDPSGISSLEFO
CPBCHD
Domestic companies will compete for share as markets grow
August 4, 2010 Americas
Goldman Sachs Global Investment Research 34
Opportunity #2: Food, feed and fuel to drive agricultural demand
growth
Fundamental changes in the diet of the expanding middle class are set to place increasing
demands on the global agricultural complex in the decades to come. According to the
International Policy Council’s 2007 Food and Agricultural Trade report, population growth,
increased protein consumption in developing countries and the use of agricultural output
in biofuel production will combine to double world agricultural demand by 2050.
Population growth necessitates agricultural growth. The US Census Bureau’s
International Data Base projects world population to grow by 35% over the next forty years,
from an estimated 6.9 billion people in 2010 to 9.3 billion in 2050. This expected growth will
come almost exclusively from what are classified as “less developed” regions, where
projected growth of 40% is an order of magnitude higher than the 4% growth foreseen in
more developed countries.3 Population growth is itself a function of increasing life
expectancy, higher standards of living and better diets.
As people become more prosperous they look to improve their diets with higher-
quality foods. With more available disposable income, people tend to consume more
protein in the form of beef, pork and poultry. While per-capita protein consumption has
risen rapidly in developing countries over the past forty years, it still has room to more
than double before reaching developed country levels (see Exhibits 40-41). Between 2009
and 2018 the UN’s Food and Agriculture Organization expects developing country
consumption grow by more than 16%. We believe Neutral-rated Brasil Foods, the largest
producer of processed foods, pork, and poultry in Brazil and the fifth-largest protein
company in the world, is well-positioned to benefit.
Exhibit 40: Meat consumption has risen rapidly in
developing countries over the past forty years… Developing countries daily caloric intake per person
Exhibit 41: …but remains less than half that of developed
countries Developed countries daily caloric intake per person
Source: FAO, Potash Corp.
Source: FAO, Potash Corp.
Increased protein consumption also creates a multiplier effect for agricultural demand due
to the amount of grain required to produce a unit of meat. Depending on the protein, it
takes between two and seven pounds of grain to produce one pound of meat (7 lbs per
pound of beef, 4 per pound of pork and 2 per pound of poultry). As a result, more than 40%
of globally harvested grain is consumed as animal feed.
3 Less developed regions are defined as Africa, Asia ex-Japan, Latin America and the Caribbean,
Melanesia, Micronesia and Polynesia. More developed countries are defined as those in Europe and
North America, plus Australia, New Zealand and Japan.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1960's 1980's 2000's
Cal
orie
s/P
ers
on/D
ay
Meat, Eggs, Fish Fruits & Vegetables Cereals Other
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1960's 1980's 2000's
Cal
orie
s/P
erso
n/D
ay
Meat, Eggs, Fish Fruits & Vegetables Cereals Other
Protein consumption increases with income
August 4, 2010 Americas
Goldman Sachs Global Investment Research 35
Biofuel production competes with food and feed for acreage. Biofuels made from
agricultural inputs such as sugarcane and corn continue to receive government subsidy
and support. In Brazil the government requires gasoline to contain between 20% and 25%
ethanol, and in the United States the Renewable Fuels Standard (RFS) in the Energy
Independence and Security Act of 2007 targets a more than four-fold increase in renewable
fuel use from 2008 levels by 2022. Although the RFS also sets out a schedule for advanced
biofuels (primarily cellulosic ethanol) to reach more than half of mandated 2022 volume,
corn ethanol will remain the primary biofuel in the near term, competing with food and
feed for acreage.
With rising demand, agricultural supply will have to increase via either more arable land or
higher crop yields. Due to ongoing urbanization and the environmental considerations that
go into agricultural conversion, we do not anticipate any meaningful increase in arable
land. Indeed, global arable land acreage per person has been on a downward trend for
decades, suggesting arable land growth alone is not enough to keep pace with demands of
population growth, let alone changing diets and biofuels (see Exhibit 42). As a result,
continued increases in crop yields will be imperative to ensure adequate food supply.
Exhibit 42: Arable land growth has not kept pace with population Acres of arable land per person
Source: International Fertilizer Association.
We see yield improvements driven by biotech and hybrid adoption in developing regions
as a likely source of increasing agricultural output. As seen in Exhibit 43, developed regions
enjoy corn yields of nearly twice the world average. This is due to a combination of factors
including better-performing seeds, superior fertilizer application, investments in irrigation,
more advanced equipment, and viable credit and agricultural commodity markets. Each of
these is transferable to developing regions over time, and as a result we see opportunity
for companies that sell products that enhance yield.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1970 1980 1990 2000 2010E
Acres of arable land per person
Arable land growth has not kept pace with population, requiring increases in yields
August 4, 2010 Americas
Goldman Sachs Global Investment Research 36
Exhibit 43: Developed market corn yields lead globally Shaded regions have accelerated biotech and hybrid penetration
Source: Informa, Goldman Sachs Research estimates.
As the global leader in agricultural biotechnology, CL-Buy rated Monsanto sits in an
enviable position to help solve the grain productivity challenge. The company believes it is
possible to double US corn yields during the 30-year period from 2000-2030 with traditional
breeding gains, improved agronomic practices and—most significantly—the benefits of
biotechnology (see Exhibit 44). This should help drive continued adoption of its high-tech
seeds and traits and ensure a growth path for its extensive pipeline of next generation yield
technologies worldwide. Key potential growth markets include corn and soybeans in South
America, cotton in India and rice in China.
Exhibit 44: Monsanto plans to double US yield via breeding, agronomic and biotech gains US corn yield
Source: Monsanto, Goldman Sachs Research estimates.
Country Acreage (mn acres) Production (bn bu) Yield (bu/acre)US 77 12.0 154China 73 6.3 85Brazil 35 2.2 63EU 21 2.3 108Mexico 18 0.9 52Argentina 6 0.7 117World 386 30.9 79
120
140
160
180
200
220
240
260
280
300
2000 2005 2010 2015 2020 2025 2030
Historic yield gain
Agronomic practice improvements
Breeding improvements
Biotech improvements
US Yield Target (corn):2030 double 2000 baseline of 137 bushels per acre
August 4, 2010 Americas
Goldman Sachs Global Investment Research 37
Opportunity #3: Increasing discretionary income to drive
incremental demand across the TMT universe
As income levels rise, people in emerging economies increasingly begin to consume
technology, media and telecom in ways similar to those in developed markets (see Exhibit
45). Household penetration of personal computers continues to ramp, enabling online
shipping and browsing as well as additional media consumption. We expect that next-
generation smartphone and data services will also be adopted as the telecom infrastructure
rises to meet a growing population, and increased availability of financial services will lead
to more credit and debit transactions to process.
Exhibit 45: Projected total middle class consumption, 2009-2030, top 10 countries (2005 PPP$)
Consumption is expected to shift into emerging, nascent markets for TMT products and services.
Source: Wolfensohn Center for Development at Brookings.
One consequence of shifting consumption caused by the expanding middle class in middle
income countries is increased demand for internet connectivity worldwide. According to
the ITU World Telecommunications database, developed market internet access
penetration was approximately 5X that of developing markets as of 2008 (see Exhibit 46).
As of 2009 current internet penetration was by far the lowest in Africa, the Middle East, and
Asia Pacific—regions that encompass twelve of the fifteen BRIC + N-11 nations we see
driving global growth through 2050 (see Exhibit 47).
Exhibit 46: Proportion of households with internet access Exhibit 47: Internet user penetration by region, 2009
Source: ITU World Telecommunication/ICT Indicators database.
Source: ITU World Telecommunication/ICT Indicators database.
We expect that increasing demand for internet connectivity will necessitate service
provider capital expenditures to keep pace with global internet traffic growth. Neutral-rated
Cisco forecasts a 34% cumulative annual growth rate in global IP traffic through 2014, and
in our view 2009 was a year of massive underinvestment in core routing capacity, with
2009 2020 2030
1 U.S 4,377$ 21% China 4,468$ 13% India 12,777$ 23%
2 Japan 1,800 8% U.S 4,270 12% China 9,985 18%
3 Germany 1,219 6% India 3,733 11% U.S 3,969 7%
4 France 927 4% Japan 2,203 6% Indonesia 2,474 4%
5 U.K 889 4% Germany 1,361 4% Japan 2,286 4%
6 Russia 870 4% Russia 1,189 3% Russia 1,448 3%
7 China 859 4% France 1,077 3% Germany 1,335 2%
8 Italy 740 3% Indonesia 1,020 3% Mexico 1,239 2%
9 Mexico 715 3% Mexico 992 3% Brazil 1,225 2%
10 Brazil 623 3% U.K 976 3% France 1,119 2%
0%
10%
20%
30%
40%
50%
60%
2002 2003 2004 2005 2006 2007 2008
Developed Developing World
8.8%
18.4% 19.3%
35.7%
48.3%
62.9%
0%
10%
20%
30%
40%
50%
60%
70%
Africa Arab
States
Asia &
Pacific
CIS Americas Europe
August 4, 2010 Americas
Goldman Sachs Global Investment Research 38
supply growth lagging demand by 25%. In addition to Cisco, we expect Buy-rated Juniper
to substantially benefit from these trends as service providers invest more to meet rising
capacity needs, as Juniper has the most direct exposure to service provider routing spend
in our coverage at about 60% of sales.
Coincident with increased internet penetration, the Goldman Sachs internet team expects
e-commerce to grow by 21% yoy in 2010—with global e-commerce penetration of retail
spending jumping to 5.0% (from 4.4% in 2009) on the heels of a 6% yoy increase in
spending per buyer. Globally, we expect e-commerce sales to grow to over $1 trillion in
2012 from $667 billion currently, driven primarily by continued worldwide adoption of the
online channel (see Exhibit 48).
Exhibit 48: Global e-commerce revenue, 2007-2012E US$ billions
Source: Forrester Research, company data, Goldman Sachs Research estimates.
As faster GDP growth in emerging markets like China, India and Brazil drives expanding
purchasing power among a growing middle class, and as internet and electronic payment
penetration improve toward developed market levels, we see opportunity for skilled e-
commerce merchants such as CL-Buy rated Amazon.com. We expect Amazon to benefit
from price, selection and fulfillment advantages sharpened by years of experience in the
world’s largest economies. The company’s China business has the potential to add $1
billion per year to revenue growth from 2011, and may contribute as much as 10% of
global revenue by 2015. We forecast 20%-plus revenue, operating income and free cash
flow growth for the next several years, and believe the company’s share price can
compound in line with FCF growth.
Mimicking the growth of internet penetration and e-commerce in developing markets, we
expect a shift to next-generation handsets and smartphones to provide the next wave of
growth for mobile hardware providers in heretofore untapped global markets. The
migration from 2G to 3G and beyond will likely be accompanied by a meaningful uptick in
data traffic as users scale up their monthly usage and consume more bandwidth-intensive
multimedia content (see Exhibits 49-50).
$465.1$525.4
$580.4$657.7
$722.8$787.1
$125.1
$141.3
$156.1
$176.9
$194.4
$211.7
$0
$200
$400
$600
$800
$1,000
$1,200
2007 2008 2009E 2010E 2011E 2012E
Glo
bal
On
line
Sal
es (
$ b
n)
ROW US Online Sales
August 4, 2010 Americas
Goldman Sachs Global Investment Research 39
Exhibit 49: Expect more rapid adoption of next-
generation handsets as the middle class expands Global handset mix, 2006-2012E
Exhibit 50: As users migrate to higher-end devices, data
usage grows exponentially Estimated monthly data usage, in MB
Source: Goldman Sachs Research.
Source: Company data, Goldman Sachs Research estimates.
Developed market cell phone penetration rates are already high, with more cell phone
subscriptions than people (see Exhibit 51). While developed market mobile broadband
penetration is much lower in absolute terms, the rate is still more than 10X that of
developing nations, where rapid growth has not yet begun to inflect (see Exhibit 52).
Exhibit 51: Mobile cellular telephone subscriptions per
100 inhabitants
Exhibit 52: Mobile broadband subscriptions per 100
inhabitants
Source: ITU World Telecommunication/ICT Indicators database.
Source: ITU World Telecommunication/ICT Indicators database.
We believe that greater penetration of mobile technology into the emerging middle class
will increase smartphone adoption as hardware becomes more affordable and new
consumers “leapfrog” trailing-edge devices. Among chipset providers, Buy-rated
Qualcomm should benefit the most, given that it has the broadest smartphone platform
offering and is the leading vendor for the Android operating system, which we see as a
massive global share gainer through the smartphone disruption. While double-digit
declines in smartphone ASPs will be a drag on Qualcomm’s royalty business, increased
adoption in emerging markets as affordability increases and infrastructure comes online
should help offset the impact.
Greater penetration of communication technologies like mobile and internet will also
accelerate the opening of middle-income economies to global media companies. We view
Buy-rated News Corp. as the name most exposed through its ownership of cable networks
located in international markets where the middle class is growing the fastest. Over the
past several years News Corp. has launched new cable networks in emerging markets such
70% 67% 63% 57% 52% 48% 44%
30% 33% 37% 43% 48% 52% 56%
0%
20%
40%
60%
80%
100%
120%
2006 2007 2008 2009 2010E 2011E 2012E
2G 3G‐
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Feature phone Multimedia phone
Smartphone 3G data card 4G data card
115.3%
57.9%
68.2%
0%
20%
40%
60%
80%
100%
120%
140%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Developed Developing World
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Developed Developing World
39.9%
9.7%
3.1%
August 4, 2010 Americas
Goldman Sachs Global Investment Research 40
as Asia, Eastern Europe and Latin America, where growth in disposable income is driving
higher pay television penetration. This benefits cable networks in the form of higher
subscriber fees and advertising. Today, News Corp.’s international cable networks account
for only 10% of operating income, but we estimate a 16% cumulative annual growth rate
over the next three years, accounting for nearly one quarter of total operating income
growth.
Buy-rated DirecTV is another name that should benefit from growth in the middle class,
particularly in Brazil. Brazil is the company’s fastest growing market and contributes an
estimated 7% of the company’s consolidated revenues. We expect the pay television
penetration in the country to increase substantially from 14% currently, with DirecTV
benefitting from both an expanding customer base as well as greater premium service
uptake given increased middle class spending.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 41
Opportunity #4: While prosperity is rising, the highest growth
regions remain financially underserved
According to a 2008 McKinsey study, 2.5 billion people—or more than 50% of the world’s
adult population—do not use formal or semi-formal financial services. Nearly half that
unbanked population resides in East and South Asia, Sub-Saharan Africa and Latin
America. We view this disconnect as a substantial opportunity for increased financial
services penetration. For consumer facing businesses it means increased growth in bank
accounts, adoption and acceptance of plastic payments, and growth in consumer lending
and asset management clients as disposable incomes grow over time. Institutionally,
global investment banks stand to gain from both growing credit demand and expanding
capital and hedging needs.
Given their existing geographical footprints, infrastructure and financial institution
relationships, we believe that CL-Buy rated Visa and Buy-rated MasterCard are among the
best positioned companies to capitalize on the expanding growth (in terms of both dollars
and transactions) and increasing financial connectivity of the global middle class. As the
proportion of worldwide consumers entering or interacting with the banking system
increases over the next several years, we believe that the Visa and MasterCard networks
will be at the heart of that process, participating via increased demand deposit account and
debit card penetration, revolving credit issuance, prepaid and gift card usage, remittances
and emerging payments such as online, peer-to-peer and mobile. For Asia Pacific, Africa,
Latin America and the Middle East we expect double-digit combined cards-in-force growth
through 2012 (see Exhibit 53).
Exhibit 53: We expect card growth to be strongest in financially underserved regions
Visa and MasterCard cards-in-force growth (yoy), 2007-2012E
Source: Company reports, Goldman Sachs Research estimates.
For direct exposure, we expect Neutral-rated Brazilian merchant acquirer Cielo to benefit as
well. Although Brazil has the most developed card market in Latin America, the use of
cards for 23% of private consumption expenditure is well short of Spain (30%), the United
States (34%), France (40%), and the United Kingdom (42%). Cielo accounted for 48% of
total card transaction value in Brazil in 2009, and with a network of 1.7 million merchants
the company is exposed to both increased consumer spend as incomes rise and increased
credit card penetration as card usage approaches developed market levels.
Exposed to both consumer and commercial trends in middle income economies, Buy-rated
Citigroup has a client footprint that covers over 140 countries. Through its core franchise
of Citicorp, the company has an extremely strong emerging markets presence and is well
‐10%
‐5%
0%
5%
10%
15%
20%
25%
30%
2007 2008 2009 2010E 2011E 2012E
V AP+CEMEA MA APMEA V Latin America MA Latin America
More than half of the world’s population does not yet use financial services
August 4, 2010 Americas
Goldman Sachs Global Investment Research 42
positioned to benefit from faster-growing products and geographies. Emerging market
economies accounted for 46% of both Citicorp revenues and net income in 2009. Owing to
its long-established presence and relationships, Citigroup estimates that over 55% of
potential revenue growth over the next three years will stem from these regions.
Buy-rated Banco Bradesco, the largest insurance company and third-largest bank in Brazil,
is also well positioned to benefit. The company has nearly 3500 branches in Brazil and
US$110 billion in loans. With its Postal Bank franchise Bradesco offers financial services
into all of the country’s 5000+ municipalities, exposing it directly to the areas with the
fastest growth in new members of the middle class. As the leading underwriter in the
developing life and health insurance segments, the company should be able to provide a
full suite of financial services to those newly able to afford them as the middle class
expands in Brazil.
The rise of the global middle class is also likely to drive incremental supply of assets for
asset managers. With GDP per capita growing and a favorable ratio of savers (35-44 years
old) to total population, we expect the uptake of asset management products in emerging
economies to rise. These secular underpinnings stand in contrast to the rapidly maturing
US asset management market, which must address a growing retiree population and
relatively slower economic output. As it stands today, over half of worldwide assets under
management are outside the United States (see Exhibit 54). While competition for assets
has been increasing internationally, the opportunity remains large for US-listed asset
managers (see Exhibit 55).
Exhibit 54: Most of Global AUM now resides outside USGlobal AUM composition by client domicile
Exhibit 55: Public managers have been growing presence
outside US
Source: BCG, Goldman Sachs Research.
Source: Company data, Goldman Sachs Research estimates.
We believe CL-Buy rated BlackRock is among the US names that will benefit from the
secular trend of emerging market asset growth driven by the expanding middle class.
BlackRock manages over $3 trillion in assets, 40% on behalf of clients domiciled outside the
United States. The firm’s current geographic reach is extensive, spanning over 100
countries with significant growth in several emerging asset management markets. In Latin
America the company now manages over $21 billion in assets, up 83% from the prior year.
In the Asia Pacific region alone the company manages over $350 billion in assets, and has
formed joint ventures in China and India. We also note that the BlackRock’s institutional
business includes sovereign wealth fund clients, relationships that may help the firm tap
into several underdeveloped retail fund markets in the years to come.
48.1%
51.9%
U.S. Rest of the WorldSource: GS Research; total AuM mkt-to-mkt = $51.8 trillion
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2006 2009Rest of the World U.S.Source: Company data; cross-boader asset managers include AB, BEN, BLK
August 4, 2010 Americas
Goldman Sachs Global Investment Research 43
Opportunity #5: Global infrastructure growth and rising commodity
demand
A richer and larger middle global middle class will have an effect beyond consumer-facing
industries. Increased infrastructure investment will be needed to meet the growing
consumption demands of two billion additional middle class people aspiring to new living
standards over the next twenty years. The Goldman Sachs Global Economics team expects
fixed investment spending in BRIC countries to grow 9.0% and 8.8% per annum in 2010 and
2011, respectively, consistent with historical periods of industrialization and urbanization in
OECD countries. Infrastructure investment is both a cause and a consequence of economic
growth, and investments in local roads, highways, rail and utilities are necessary to
support the long-term growth of the expanding middle class.
As an example, the Brazilian Growth Acceleration Programs (PACs) provide a glimpse as to
the magnitude of recent and upcoming infrastructure investment in a rising nation. The
first program (PAC 1) was launched in 2007 by the federal government to coordinate over
$240 billion in public and private development financing. Its March 2010 follow-up (PAC 2)
totals $727 billion and is scheduled to spend half of its funds by 2014—the same year Brazil
will host the World Cup. Taken together, the PAC programs will result in over $1 trillion in
planned development spending, including over 75,000 km of roads, 89 power plants, 21
ports, 14 air terminals and four new metropolitan subway systems.
The impact of such massive investment spending on a global scale would likewise be felt
throughout the commodity complex, as production capacity struggles to keep pace with
rising demand. In this report we highlight investable consequences for companies in the oil,
metals, mining and aerospace sectors.
In contrast to developed markets, history has shown that increasing per capita GDP
in emerging markets drives higher per capita oil consumption. As the middle class
expands in middle income economies, we consequently expect an increase in per capita oil
demand to drive total demand growth. Brazil, China and India are all at present well below
the OECD’s per capita oil consumption levels, suggesting that—even accounting for
efficiency gains—potential demand growth is not only significant but sustainable. To
illustrate the scale of potential growth, the United States, Japan, and Europe currently
consume about 22, 12, and 10 barrels per person each year, respectively; Brazil, China, and
India consume just 5, 3, and 1 (see Exhibit 56).
Given our expectation for flat OECD demand through 2013, our bullish global oil demand
view is driven entirely by strong non-OECD growth, in large part due to increases from
Brazil, India, and China. In our view the expected non-OECD strength, coupled with our
outlook for constrained non-OPEC oil supply growth, will necessitate a return to demand
rationing prices by 2012. That is, as oil inventories draw down and OPEC spare capacity
dwindles, oil prices will have to increase in order to accommodate robust non-OECD
demand growth, likely via “rationing” of OECD oil demand growth (see Exhibits 57-58).
Non-OECD countries will drive oil global oil demand
August 4, 2010 Americas
Goldman Sachs Global Investment Research 44
Exhibit 56: Per-capita oil consumption rising for Brazil,
India and China but still well below OECD Oil consumption per capital per year, barrels
Exhibit 57: Non-OECD is key driver of oil demand growth Global oil demand, thousand barrels per day
Source: IEA, IMF, Goldman Sachs Economic Research.
Source: IEA, Goldman Sachs Research estimates.
Exhibit 58: Strong non-OECD demand + falling non-OPEC supply = higher oil prices Growth in oil supply and demand and WTI oil price path
Source: IEA, Bloomberg, Goldman Sachs Research estimates.
For exposure to the “B” in BRICs, Petrobras remains a favorite. In addition to having
substantial exposure to sizeable Brazilian offshore oil resources, Buy-rated Petrobras is
also a large component of the Ibovespa—the main Brazilian equity market index. The
company generates nearly all of its revenues and earnings in Brazil’s domestic market and
is highly leveraged to strength in the Real (BRL) versus the US dollar. As Brazil’s middle
class helps to drive Brazil GDP and oil demand growth, we expect Petrobras to benefit
accordingly.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013N
Brazil China India OECD
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013N
'000
bb
ls/d
OECD Other Non-OECD Brazil India China
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
2004
2005
2006
2007
2008
2009
2010
E
2011
E
2012
E
2013
E
2014
E
2015
E
Gro
wth
(mn
b/d
)
OECD demand Non-OECD demandGlobal oil demand Non-OPEC supplyWTI oil price (indexed to 1)
Non-OECD accounts for overwhelming majority of
expected growth in 2010-2015.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 45
Petrobras already dominates Brazil’s significant offshore resources in the Campos, Santos,
and Espirito Santo basins and will eventually have a minimum 30% working interest and
operatorship over all future pre-salt leases assuming passage of the country’s proposed
new pre-salt laws (for additional details see the February 21, 2010 report, “‘Crunch time’ on
new pre-salt oil laws nears; assessing risk/reward” by Arjun Murti and team). We see the
Brazilian deepwater as a global “win” zone due to substantial opportunity for oil
production growth.
Like oil, copper is supply-constrained, and China and other emerging economies still
consume far less than developed economies on a per-capita basis. In our view,
renewed GDP growth in these regions should cause a significant acceleration in per capita
copper consumption. Copper is an important metal for growing economies and its demand
accelerates dramatically when a country, like China, enters a significant developmental
stage.
World GDP is currently sitting in the “sweet spot” of the copper consumption curve, or the
area in the curve in which copper consumption increases the fastest per increase in GDP
per capita. As the world economy recovers, copper metals consumption is poised to
sharply increase. In addition, two large population masses – China and India – are nearing
the “sweet spots” of their own consumption curves, which we believe will dramatically
increase world demand (see Exhibits 59-60).
While all base metals exhibit the S-shaped curves, copper and aluminum stand out as the
metals that are nearest maximum slope of their own curves. Copper, unlike aluminum, has
limited spare supply to meet this growing demand, which sets the stage for strong price
appreciation, in our view.
Exhibit 59: Rising GDP/capita for BRICs… Expected GDP per capital for Brazil, China, India, Russia
Exhibit 60: … puts copper in sweet spot of demand curveMetals consumption/capital at various levels of GDP/capita
Source: Goldman Sachs Research estimates.
Source: Brook Hunt, Rio Tinto, Goldman Sachs Research estimates.
We see opportunities for Neutral-rated pure-play Freeport-McMoRan not only because of
its copper exposure, but also because of the company’s potential to grow its business
through brownfield expansions and continued successful execution of its growth projects.
As discussed above, we believe copper will separate from other base metals as we see
rapid acceleration in demand (primarily driven by emerging markets) and a supply-side
hurdle in the exploration and commissioning of new projects. In the immediate term,
copper is the metal whose price most tends to anticipate or reflect market expectations for
world economic growth.
$0
$5,000
$10,000
$15,000
$20,000
$25,000 Brazil Russia India China
70%
131%
127%
235%
2008 2010 2015 2020 2008 2010 2015 2020 2008 2010 2015 2020 2008 2010 2015 2020
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
2
4
6
8
10
12
14
16
18
20
$0
$2
,00
0
$4
,00
0
$6
,00
0
$8
,00
0
$1
0,0
00
$1
2,0
00
$1
4,0
00
$1
6,0
00
$1
8,0
00
$2
0,0
00
$2
2,0
00
$2
4,0
00
$2
6,0
00
$2
8,0
00
$3
0,0
00
$3
2,0
00
$3
4,0
00
$3
6,0
00
$3
8,0
00
$4
0,0
00
$4
2,0
00
$4
4,0
00
$4
6,0
00
$4
8,0
00
Perc
ent o
f po
pu
latio
n at g
iven
GD
P/ca
pita lev
el
Co
ns
um
pti
on
per
cap
ita
(kg
)
GDP per capita ($)
World GDP
China/India
Copper
Aluminum
Nickel
Zinc
August 4, 2010 Americas
Goldman Sachs Global Investment Research 46
Beyond oil and copper, the need for new infrastructure drives strong global demand for
steel, iron ore, zinc and metallurgical coal. We see metallurgical coal as most supply
constrained, despite strong growth expected out of Australia. We also expect electricity
demand growth in Asia will remain strong, leading to increased demand for natural gas
and thermal coal.
We see Neutral-rated Teck Resources as the name that is most levered to broader
emerging market metals demand growth. Teck is a well-run company with a proven track
record, attractive assets and exposure to a structural theme to which we subscribe –
namely, that emerging markets demand coupled with supply constraints will drive
commodities higher. Teck has combined three of the most China-levered commodities—
iron ore, metallurgical coal (see Exhibit 61) and zinc—and has constructed a portfolio that
has lower volatility than any of the constituent commodities on a standalone basis. The
end result is a diversified mining portfolio that is not only highly levered to China growth,
but also deserves a premium multiple for its relative stability.
Exhibit 61: China has become a major player in the seaborne metallurgical coal market
Global seaborne met coal supply-demand, MM MT unless otherwise noted
Source: McCloskeys, Goldman Sachs Research estimates.
Among coal stocks, we favor Buy-rated Peabody Energy for its unique Australian assets
that provide growth and exposure to both global metallurgical coal and Pacific Basin
thermal coal. Peabody has more organic growth projects in the development or evaluation
phases than any other coal company under coverage, pursuing opportunities in Asia, the
Illinois Basin and Powder River Basin. At its recent analyst meeting, Peabody introduced a
goal of reaching 100 million metric tons (MM MT) of annual coal sales out of Asia in the
next 10 years (vs 20 MM MT in 2009), to be driven by Australian organic projects, JVs in
China, India and Indonesia and an expanding trading platform. While some investors have
avoided Peabody’s shares due to the perception it is negatively levered to potential China
slowdown, we actually see less downside risk to Peabody’s met coal volumes and pricing
from China tightening, as it is North American volumes that are more marginal due to
quality and distance. We expect Peabody to outperform on continued strong Pacific Basin
thermal coal prices driven by demand that is ultimately caused by the growth of the middle
class India and China.
As a result of the same end demand, we expect mining capex growth to meaningfully
outpace overall economic growth. This is consistent with prior periods of tight commodity
fundamentals (see Exhibit 62). In our view, Buy-rated Bucyrus and Joy Global are uniquely
positioned to benefit given that they operate in a duopoly market with high entry barriers.
2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESeaborne imports China (net) (0) (0) (2) 1 (0) 30 35 42 50 Japan 56 55 52 54 54 45 48 50 51 Korea 15 12 12 16 19 15 19 21 22 India 0 21 22 24 25 25 27 31 34 Europe 51 51 54 59 61 41 53 57 58 South America 11 11 12 14 16 12 15 19 22 Other 42 50 40 42 43 31 35 41 44Total 174 200 192 211 217 199 233 260 280
Seaborne exports Australia 117 125 124 137 134 134 143 160 177 USA 20 21 20 26 35 31 42 45 44 Canada 22 25 23 25 25 21 27 34 36 Other 15 29 24 23 23 13 21 22 23Total 174 200 192 211 217 199 233 260 280
Asia hard coking coal, CY ($/MT) $58 $108 $118 $103 $250 $172 $195 $213 $175
August 4, 2010 Americas
Goldman Sachs Global Investment Research 47
Exhibit 62: Mining capex should meaningfully outpace overall economic growth US commodity investment spending vs. US GDP vs. inflation-adjusted oil prices
Source: BEA, Goldman Sachs Research estimates.
Aerospace is also a secular grower in emerging markets. Aerospace companies should
benefit as air travel penetrates emerging economies and for the first time becomes
affordable for members of the expanding middle class. Because air travel as a regularly
utilized method of transportation has far from fully penetrated the emerging economies at
present, we expect to see a multiplier effect as the size of the global middle class grows
along with the percentage of the population that flies.
Exhibit 63 shows that GDP and air traffic are correlated. A growing global middle class will
drive demand for air travel, which will in turn generate demand for new aircraft,
particularly in emerging economies.
We highlight CL-Buy rated Precision Castparts as a company that is uniquely positioned
to benefit from growth in the global middle class. Precision Castparts is a high-quality
aerospace supplier that is levered to the large commercial original equipment market of
Boeing and Airbus. The company also supplies similar parts to industrial gas turbine
manufacturers and produces seamless extruded pipe, both of which are largely driven by
emerging economies—particularly China, in the case of the latter.
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
E
Oil
pri
ce -
infla
tion
ad
just
ed
Mining & oilfield machinery spending (left axis)
Nominal GDP (left axis)
Oil - inflation adjusted (right axis)
1986-2002:15+ years of commodity underinvestment driven by low commodity prices
1972-1982:Strong commodity infrastructure investment cycle driven by oil supply constraints
No
min
al G
DP
an
d C
om
mo
dity
inve
stm
ent
spen
din
g,
ind
exe
d a
t 1
00 in
197
2
2003 - 2008Strong commodity prices drive commodity infrastructure capacity increases
August 4, 2010 Americas
Goldman Sachs Global Investment Research 48
Exhibit 63: Airline flights per capita vs. GDP per capita As emerging economies grow they will require substantially more aircraft
Source: OAG, IMF.
As Boeing operates in a duopoly with Airbus, it also stands to be a major beneficiary of the
secular penetration of air travel in emerging economies. Exhibit 64 illustrates that Boeing’s
current backlog is predominately derived from geographies outside of the traditional
westernized markets that had dominated the backlog for decades.
Exhibit 64: Traditional western markets are no longer the majority of Boeing’s backlog Boeing commercial airplane backlog by region/segment
Source: Boeing.
India
China
Russia
Brazil
USA
0.01
0.1
1
10
0 10,000 20,000 30,000 40,000 50,000
Tri
ps
pe
r c
ap
ita
(2
00
9)
GDP per Capita (2009)
Leasing & Gov't22%
ME, Central & S. Asia12%
Europe16%
China, East & SE Asia18%
Asia Pacific 13%
L. America & Africa7%
North America12%
August 4, 2010 Americas
Goldman Sachs Global Investment Research 49
Generational waves after the Baby Boom
August 4, 2010 Americas
Goldman Sachs Global Investment Research 50
Generational waves after the Baby Boom
Less well understood than the Baby Boom but potentially equally important in the
United States are population peaks in the 16-29 and 0-4 age ranges (which we are
calling “Millennials” and “Generation Z,” respectively). While these generational
waves are not as large as the Baby Boom in absolute terms, they are larger than the
low birth years between 1965 and 1980. As a result, the Millennials are poised to
assume the country’s first new demographic leadership in forty years as they enter
the labor force and Baby Boomers retire. This transition will have a profound impact
on US companies, particularly within the TMT and consumer sectors (see Exhibit 65).
Exhibit 65: Opportunities created by generational waves after the Baby Boom
Source: Goldman Sachs Research.
Like the Baby Boomers, the Millennial cohort is larger than the generations immediately
older and younger, defined as “Generation X” and “Generation Y” in Exhibit 66. In
contrast, the Millennials are smaller in number than their parents’ generation—the Baby
Boomers—and as a result they have not been the dominant age group in the economy to
date. However, as Baby Boomers exit the work force through a combination of retirement
and mortality, the Millennials will become increasingly important in the labor force.
Further, as the Millennials enter peak childbearing years the Census Bureau projects US
births to continue to recover. We identify an additional emerging cohort in the 0-4 age
range, which we are calling “Generation Z.” While it is too soon to predict this group’s
ultimate size or impact, we do see near-term implications for youth-oriented companies.
Opportunity Impact Companies
Millennials are tech‐savvy and connected + AMT, BRCM, CCI, CSCO, JNPR, QCOM, SBAC, T
‐ CTL, FTR, Q, WIN
Millennials consume media differently + DIS
Millennial consumers embrace e‐commerce + PGR, URBN
Retirement funding needs + HAS, MJN
August 4, 2010 Americas
Goldman Sachs Global Investment Research 51
Exhibit 66: Younger generational waves are poised to become more significant US population by age (thousands), June 2010 estimate
Source: US Census Bureau, Population Division.
More educated, tech-savvy and connected
As education leads income, Millennials are a group to be watched. Older Millennials
(age 25-29) are more likely than their counterparts in the earlier generations to have
completed high school and college (see Exhibit 67). Younger Millennials (age 16-24) look
set to continue this trend, as evidenced by the college enrollment rate of recent high school
graduates reaching an all-time high of 70.1% in October 2009 (see Exhibit 68).
Exhibit 67: Older Millennials have higher education
levels… Education levels for 25-29 year olds over the decades
Exhibit 68: …and younger Millennials are all set to follow
suit College enrollment rate of high school graduates (age 16 -24)
Source: US Census Bureau.
Source: Bureau of Labor Statistics.
Higher levels of educational attainment generally delay entry into the labor force. However,
as illustrated in Exhibit 69, after joining the work force higher education levels have also
historically translated into higher incomes. Assuming this relationship continues to hold,
0
1,000
2,000
3,000
4,000
5,000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100+
Millenials (16‐29) and Generation Z (0‐3) are gaining economic signficance...
...while Baby Boomers (46‐64) are progressinginto retirement.
Baby BoomersMillennialsGen Z GenerationXGenerationY
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1969 1979 1989 1999 2009
Completed 4 Years of High School or more Completed 4 Years of College or more
20%
30%
40%
50%
60%
70%
80%
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
College enrollment rate
August 4, 2010 Americas
Goldman Sachs Global Investment Research 52
the Millennial generation looks well positioned to become an economic force in terms of
both numbers and wealth.
Exhibit 69: If history is a guide, higher education levels will translate to higher incomes Mean Earnings (in $) of Workers 18 Years and Over, by Educational Attainment
Source: US Census Bureau, Current Population Survey.
Opportunity #1: Millennials are tech-savvy and connected
Millennials came of age in the Information Era and use technology much more extensively
than older generations. According to the Pew Research Center, 93% of the 18-29 year old
age group in the United States is online, versus 74% for all adults (see Exhibit 70).
Exhibit 70: Internet usage is much more widespread among younger adults Percentage of US population that goes online by age, 2009
Source: Pew Internet & American Life Survey, 2009.
Results of the Goldman Sachs 2010 Internet Usage Survey, conducted in January 2010,
indicate that the 18-29 age group uses the internet for a wide range of activities as well (see
Exhibit 71). Millennials leverage the internet as a means of communication above and
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Less than High School High School/Associate's degree
Bachelor's degree or higher
74%
93%
81%
70%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All Adults 18+ 18-29 30-49 50-64 Adults 65+
Per
cen
tag
e o
nlin
e
August 4, 2010 Americas
Goldman Sachs Global Investment Research 53
beyond e-mail, interacting via instant messaging and social networking as well. More than
70% of the 18-29 year olds surveyed use social networking versus fewer than 50% of
respondents older than 30. The 18-29 year old demographic is also 1.75X as likely to own a
smartphone as the average US adult.
Exhibit 71: Millennials are more active online than older generations Percent of respondents who spend time on the activity online in an average week
Source: Goldman Sachs Internet Usage Survey.
As a result, as members of the Millennial generation gain greater purchasing power not
only will they buy information, equipment and software—they will also have the financial
means to upgrade more frequently as technology progresses.
To take advantage of increased technology use and connectivity, we prefer the pipes
and enablers. Hardware and software companies seeking to meet consumer tastes as
technology and trends evolve will have to execute well in a competitive and ever-changing
market, but the need for bandwidth will be a constant for all data-intensive communication.
As a distributor of bandwidth, we believe Buy-rated AT&T will be among the biggest
beneficiaries. We estimate average revenue per user (ARPU) for smartphone users to
be 2.5X that of feature phone subscribers, and as a result the Millennial preference for
better and more data-enabled mobile devices should be a tailwind for wireless
revenues.
Exposed to the same tailwind are the tower stocks, including CL-Buy rated Crown
Castle International and SBA Communications and Buy-rated American Tower. As
greater bandwidth usage strains networks, the most direct ways for carriers to improve
network capabilities are via cell site additions and amendments, both of which directly
benefit tower operators.
Conversely we believe the RLEC (rural local exchange carrier) industry, including
Neutral-rated Centurylink, Frontier Communications, Qwest and Windstream, should
suffer from the Millennials’ preference for wireless voice services over wireline.
According to our Internet team’s Internet Usage Survey from Feb 2010, only 56% of
online consumers ages 18-29 have a landline phone, versus an 84% respondent
average. In addition, we estimate total wireless-only homes now comprise 26% of US
households with annual growth of 4-5 percentage points, and believe further wireless
substitution will occur as Millennials age and grow in proportion among homeowners.
This should put further pressure on voice revenues, disproportionately impacting
RLECs given their greater exposure relative to more diversified telcos that have
enterprise and wireless segments.
Categories 2009 2010 2009 2010 2009 2010 2009 2010 A18-29 A30-49 A50+
Email 96% 97% 95% 96% 95% 98% 96% 98% 1.0x 1.0x 1.0xReading news, sports, entertainment 69% 75% 67% 76% 70% 77% 69% 73% 1.0x 1.0x 1.0xShopping/buying 58% 59% 58% 65% 61% 60% 56% 56% 1.1x 1.0x 0.9xSocial networking 30% 45% 61% 71% 34% 52% 17% 33% 1.6x 1.2x 0.7xHealth-related research 39% 39% 34% 34% 38% 38% 43% 41% 0.9x 1.0x 1.1xPlaying casual games 38% 38% 31% 39% 40% 40% 38% 36% 1.0x 1.1x 0.9xCreating/watching UGC 20% 27% 32% 41% 25% 31% 12% 21% 1.5x 1.1x 0.8xChatting via instant messenger 28% 25% 44% 40% 30% 30% 21% 18% 1.6x 1.2x 0.7xMaking travel arrangements 16% 19% 17% 19% 15% 18% 17% 20% 1.0x 0.9x 1.1xWatching TV shows 15% 15% 24% 29% 17% 19% 10% 10% 1.9x 1.3x 0.7xClassroom/educational activities 13% 15% 24% 24% 12% 16% 11% 12% 1.6x 1.1x 0.8xWatching streamed movies/DVDs 14% 13% 27% 23% 15% 19% 9% 7% 1.8x 1.5x 0.5xBlogging 11% 12% 20% 22% 15% 16% 5% 6% 1.8x 1.3x 0.5xPlaying massively multiplayer games 12% 9% 22% 14% 15% 11% 7% 6% 1.6x 1.2x 0.7xDating services/online personals 6% 7% 8% 11% 8% 9% 5% 4% 1.6x 1.3x 0.6xOther 27% 48% 22% 43% 27% 46% 29% 50% 0.9x 1.0x 1.0x
A50+ Age IndexTotal A18-29 A30-49
August 4, 2010 Americas
Goldman Sachs Global Investment Research 54
In semiconductors, we believe that CL-Buy rated Qualcomm and Buy-rated Broadcom
offer attractive exposure to the theme. Increased smartphone adoption benefits
Qualcomm in three ways: (1) higher handset ASPs, on which Qualcomm earns a
royalty; (2) better chipset ASPs and margins, and (3) greater chipset market share as a
result of the company’s close alignment with Android, the fastest growing smartphone
operating system.
For Broadcom, over 40% of revenue is derived from sales of semiconductors moving
information over wireless networks, and the company’s technology is likely to enable
future wireless communication growth as well. Broadcom components are used in
everything from traditional PCs and handsets to emerging form factors such as
smartphones, tablets, e-readers, and connected televisions.
Given the corresponding increase in internet traffic growth that will be necessary to
enable such connectivity, we see CL-Buy rated Juniper and Neutral-rated Cisco as
long-term beneficiaries as well. To the extent that service providers benefit from
increased bandwidth demand, more capital spending will be needed to meet rising
capacity needs. Juniper is the name within our coverage most directly exposed to
service provider routing spend (approximately 60% of sales). Cisco, as the largest
player in routers and switches with a potential secular growth engine in its unified
communications segment, is clearly well-positioned for future technology usage trends
as well.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 55
Opportunity #2: Millennials consume media differently
The Kaiser Family Foundation conducts a national survey of the media consumption habits
of over 2,000 teenagers (defined as 8- to 18-year olds) every five years. The inaugural study
was conducted in 1999 and the results from the 2009 study were published earlier this year.
In addition to providing a snapshot of the current youth media consumption, the survey
documents a decade of media evolution.
The current snapshot shows that American teenagers are consuming more media than at
any point in the past ten years. Average daily media consumption for teenagers is over 7.5
hours, and when multitasking is included approaches nearly 11 hours. Total consumption
(inclusive of multitasking) is up 25% from 2004, with compound annual growth of 5%.
In terms of media, the growth since 2004 has been driven by (in rank order): music,
television, computers, and video games (see Exhibit 72). In terms of devices, the growth
has almost exclusively been driven by increased use of portable devices, such as cell
phones, iPods and handheld game players (see Exhibit 73).
Exhibit 72: Youth media consumption continues to growTeenager average daily media consumption (in minutes)
Exhibit 73: Portable devices drove most of the growth. Teenager average daily media consumption (in minutes)
Source: The Kaiser Foundation, Goldman Sachs Research analysis.
Source: The Kaiser Foundation, Goldman Sachs Research analysis.
Millennial media habits are not simply affecting the amount of content consumed, but also
the ways in which media is experienced. The proportion of media consumption that
incorporates multitasking rose from 16% in 1999 to 26% in 2004 and 29% in 2009 (see
Exhibit 74). Multitasking generated most of the media consumption growth between 1999
and 2004, and about half from 2004 to 2009. Simultaneous consumption of multiple media
is most prevalent while listening to music, watching TV, and using a computer (see Exhibit
75).
227 231 269
108 104
151 27 62
89
26
49
73
43
43
38
18
25
25
0
50
100
150
200
250
300
350
400
450
500
550
600
650
1999 2004 2009
Tee
nag
er D
aily
Med
ia C
on
sum
pti
on (m
ins.
)
Movies
Video Games
Computer
Music
Television
449
514
645
August 4, 2010 Americas
Goldman Sachs Global Investment Research 56
Exhibit 74: Multitasking is nearly one-third of media
consumption Teenager Average Daily Media Consumption (in minutes)
Exhibit 75: Multitasking is most common with music, TV
and computers Teens that use another medium “most”/“some” of the time
Source: The Kaiser Foundation, Goldman Sachs Research analysis.
Source: The Kaiser Foundation, Goldman Sachs Research analysis.
The very nature of television viewership is also evolving, with teenagers watching 14% less
live television than they did in 1999, but total consumption up 18% over the same time
period thanks to new platforms and time shifting (DVR) technology. Print media
consumption has meanwhile suffered from internet substitution among young people, with
magazine readership falling from 47% to 35% while newspaper consumption fell from 42%
to 23%.
Against this backdrop of changing distribution, we favor differentiated content
producers. For companies that own or can create differentiated multiplatform content,
there will be an opportunity to monetize brands regardless of how media consumption
habits evolve. As devices such as DVRs and iPads facilitate watching TV and movies on a
delayed or portable basis overall entertainment consumption increases, adding value for
producers of content. Technology changes such as cheaper satellite television (e.g., in
India) and better 3D theatrical experiences (e.g., in Russia) likewise help US entertainment
companies expand more swiftly to address a global audience. While technology changes
also have the potential to disrupt the entertainment ecosystem, the industry’s proven
ability to capture value in multiple formats—including Netflix payments, Hulu advertising,
and iTunes revenue sharing—suggests that the current challenge is one of measured
evolution, not looming extinction.
In particular, we highlight Buy-rated Disney, which owns a collection of brands—including
not just Mickey Mouse and Winnie the Pooh, but ABC, ESPN, Marvel and Pixar—that have
proven profitable across numerous platforms. Because many of its products are youth-
oriented, we believe Disney is far ahead of peers in understanding how younger
generations interact with media and consumer brands. Beyond demographics, we view
Disney as the media sector’s leader in size and scope, structurally differentiated by its
dominance in categories such as consumer products, parks and televised sports.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 57
Opportunity #3: Millennial consumers embrace e-commerce
Given a high degree of awareness of consumer choices (aided by online searches and
reviews), preference for immediacy of service, and comfort transmitting payment
electronically, one of the most significant generational differences between Millennials and
their forebears is in the propensity to make purchases online. This has significant
implications for consumer-facing companies ranging from the retail and internet
companies examined in our dotCommerce franchise to insurance providers competing in
the direct to consumer channel.
The transition to a more internet-driven consumer economy is already well underway and
is likely to continue at a rapid pace. Over the next ten years we project that online will grow
at five times the rate of traditional retailing. At this rate online consumer dollar growth will
exceed off-line growth by 2019 (see Exhibit 76). An analysis of penetration by end market
shows room to grow, as current online penetration remains low for most consumer
categories (see Exhibit 77). We highlight apparel in particular as a segment where relatively
low online penetration and a very large market size combine to form an attractive long-
term growth driver.
Exhibit 76: Online consumer dollar growth to eclipse off-
line by 2019 Year-over-year change in sales by channel ($ mn)
Exhibit 77: Online penetration remains low for most
categories Online penetration by market
Source: Goldman Sachs Research estimates.
Source: Forrester Research, Goldman Sachs Research.
As part of our aforementioned Internet Usage Survey we polled shoppers on their comfort
level buying apparel online. Not surprisingly, we found that younger shoppers were most
comfortable buying clothes online, with nearly two-thirds of respondents in the 18-29
demographic stating they were very or somewhat comfortable buying apparel online
versus just over half of respondents over age 50. We also found that 26% of surveyed
shoppers indicated that they are becoming more comfortable buying online, a trend
validated by strong online growth across our coverage.
Based on our dotCommerce framework for apparel companies, the full details of which
were published in our May 24, 2010 report “dotCommerce: Online shifts apparel’s center of
gravity,” a multi-channel strategy is the best approach for reaching technically adept
Millennial consumers. We define a multi-channel strategy as one that incorporates stores,
web and catalog distribution. Integrating these channels not only increases long-term
customer loyalty by improving the customer experience, it also enhances profitability and
returns. Online apparel sales are growing faster than traditional retail, and that growth is
margin accretive for multi-channel operators because of lower operating costs online. We
estimate the online business within a typical multi-channel model generate a margin that is
around 1200 bp higher than retail store margins, as detailed in Exhibit 78.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 58
Exhibit 78: Economics are most compelling for traditional retailers that also operate an online business P&L for three different apparel retail models based on sector average
Source: Company data, Goldman Sachs Research.
In our view, the true test of a retailer’s online commitment is the online customer
experience. To determine who is most aggressively embracing the long-term online
opportunity, we evaluate retailer websites in our dotCommerce research using our
proprietary Experience Scorecard based on the key drivers of where consumers shop
online (shipping costs, ease of use, etc.).
A leading example of a retail apparel multi-channel strategy with a commitment to online
user experience using this framework is Neutral-rated Urban Outfitters. The company has
been an early adopter of social networking and many key functionalities like user reviews
and product suggestions, as illustrated in Exhibit 79. Urban’s online business now accounts
for 17% of sales (well above the peer average of 10%) and is growing much faster than
total sales (+40% in 1Q2010). It is no coincidence that the company targets customers in
their teens through their late 20s, a demographic that overlaps directly with the 16-29 year
old Millennial wave.
Online Only Model
Traditional Retail Model
Overall
Online within Traditional
Retail Model
Revenue 100% 100% 100%
Product CostsMerchandise Costs 54% 45% 45%Distribution & Freight 1% 2% 1%Buying Costs 5% 6% 6%Shipping Income -6% 0% -6%Shipping Costs 6% 0% 6%
Total Product Costs 60% 53% 52%
Store/Website Costs:Occupancy (Rent etc) 0% 9% 0%Staffing & Other Store Exp 0% 17% 0%Online Costs
Fulfillment 10% 0% 10%Other Selling 5% 0% 5%Fees (Outsourced) 0% 0% 0%
Total Store/Website Costs 15% 26% 15%
Other:Advertising 8% 1% 1%Corporate 8% 6% 6%D&A 2% 4% 4%
Total Other Costs 18% 11% 11%
EBIT 7% 10% 22%
Apparel Retail Overall P&L
+ Multi-channel model winsEither double or triple profitability of alternative models as blends best of both worlds
+ for Traditional retailers Higher mix of proprietary brands means higher merchandise margins (both online and offline)
+ for Online only players Stores carry higher operating costs than online
+ for Traditional retailersStores provide valuable marketing vehicle
August 4, 2010 Americas
Goldman Sachs Global Investment Research 59
Exhibit 79: Advanced retail apparel websites include key features to facilitate the shopping experience urbanoutfitters.com rates highly on our Experience Scorecard
Source: urbanoutfitters.com; Goldman Sachs Research.
The generational preference for e-commerce has far-ranging consequences outside of
traditional retail consumer markets as well. In the insurance industry, for example, there is
an ongoing secular change in the way that people find and buy personal auto policies. The
direct-to-consumer channel, which consists of business sold via the internet and over the
phone, has grown from 5% share in 1989 to 17% in 1997 and 25% in 2008. As shown in
Exhibit 80, this growth has coincided with the increase in the driving population born after
1975. Given Millennial consumption preferences, we expect further increases in direct-to-
consumer penetration as the generation of connectivity and consumer choice makes up an
increasing proportion of the labor force over the coming years.
In addition to being well positioned for changing consumer preferences, the economics of
direct-to-consumer auto insurance are compelling as well. By selling directly, without
traditional agents, branch offices or commissions, carriers can underwrite policies with
lower overall expenses and leverage the fixed costs of web hosting and call centers as they
increase in scale. We see Buy-rated Progressive as having the most direct exposure
among the companies we cover. Progressive is currently achieving profitable growth and
taking market share via its structural low cost advantage and favorable demographic
exposure. Further, as auto insurance prices increase consumers tend to shop more, which
may provide a near-term benefit for lower cost direct platforms such as Progressive as well.
6) Site suggests similar products shoppers might
like
1) Multiple views lets shoppers see item from various angles
3) Return shipping is free
4) “Ask & Answer” gives details on sizing and fit
5) “Details” function describes fabrication and size
2) Shoppers can rate & post feedback on items
August 4, 2010 Americas
Goldman Sachs Global Investment Research 60
Exhibit 80: Direct channel market share has increased with the number of young drivers Number of licensed drivers born after 1975 and direct channel market share
Source: Company filings, US Census Bureau, Federal Highway Administration, Haver Analytics, Goldman Sachs Research.
0%
10%
21%
31%
36%
40%
49%
58%
0%
10%
20%
30%
40%
50%
60%
70%
1990 1995 2000 2005 2008 2010 2015 2020
Dri
vin
g A
ge
Po
pu
lati
on
Bo
rn A
fter
197
5
1989
1997
2007
2008
19952000
2005 2008
2010
0%
5%
10%
15%
20%
25%
30%
0% 10% 20% 30% 40%
% M
arke
t S
har
e T
ota
l D
irec
t C
han
nel
& P
GR
Driving Age Population Born After 1975 as % Licensed Drivers
Total Direct Channel Market Share
PGR Market Share
YearLicensed Drivers
Driving age population born after
1975
Driving age population born after 1975 as % licensed drivers
Historical1990 167,015 0 0%1995 176,628 18,374 10%2000 190,625 39,348 21%2005 200,665 61,633 31%2008 208,321 73,970 36%Forecasts2010 210,855 85,367 40%2015 221,273 108,891 49%2020 232,452 134,078 58%
As the percent of the population born after 1975 increases to almost 60% of licensed drivers--
and thus the online/direct buying trends of the last decade continue-- Progressive's direct policy count could increase significantly
August 4, 2010 Americas
Goldman Sachs Global Investment Research 61
Opportunity #4: As Millennials become parents, Generation Z looms
According to the Pew Research Center, 75% of babies are born to mothers in the 20-34 age
range, with birth rates peaking among women in their late 20s. The Millennial cohort will
fully overlap the 20-34 age range in five years, and the “echo” effect on births is likely to
shift what is currently a barbell population distribution in the 0-18 range (see Exhibit 81) to
a much more lopsided grouping where children under age 9 will far outnumber those ages
10-18. We are calling this emerging cohort, which we see beginning with children born in
2006, “Generation Z”.
Given that Millennials are still transitioning into peak childbearing years and the US Census
Bureau is projecting a sustained recovery in the birth rate, the ultimate size and economic
impact of the Generation Z cohort remains unclear. However, in the near term we see
significant consequences in the changing makeup of the youth population for companies
that sell to the under-18 demographic.
Exhibit 81: The youth demographic will skew younger in coming years
US residents by age (thousands), June 2010 estimate
Source: US Census Bureau, Population Division.
Recovering US births are a boon for companies that sell to the parents of infants
Sales for companies that sell to new parents in the United States have risen since births
bottomed in the late 1990s, though both 2008 and 2009 saw a 1-2% decline against the
trend as economic weakness was factored into family planning decisions. Looking forward,
the Census Bureau is projecting a recovery in 2010 and 1% average annual growth in US
child births over the coming decade (see Exhibits 82-83). This should provide a better
support for the industry than the 0.5% average growth seen from 2000-2010.
Among names we expect to benefit, CL-Buy rated Mead Johnson stands out as the
company most directly exposed to US birth trends. Mead is the manufacturer of Enfa
brands, including Enfamil instant formula, and is the world’s largest pediatric nutrition
company in the 0-12 month segment. While emerging markets are the principal revenue
driver for the company—they represent in aggregate nearly 60% of sales—the United
3,700
3,800
3,900
4,000
4,100
4,200
4,300
4,400
4,500
4,600
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
The under‐18demographic in the US is dominated by Generation Z...
...and by Millennials moving into adulthood.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 62
States remains the company’s largest single market. Global sales growth could accelerate
to 10-12% as economic growth in the United States returns to positive territory.
Exhibit 82: We expect an upward trend in child-births
over the next decade Number of births in the US, millions
Exhibit 83: The number of births could climb sharply over
the next few years coming off of a low 2008/2009 base % change in birth, year-on-year
Source: US Census Bureau, Goldman Sachs Research.
Source: US Census Bureau, Goldman Sachs Research.
Youth preferences drive parent dollars
According to Cotton Incorporated’s 2004 audit of the children’s apparel market, children
have considerable say in what is bought for them. Fully 70% of mothers surveyed indicate
that they purchase items specifically requested by their children. However, a child’s impact
is strongly correlated to its age: 56% of 13-15 year-olds select all or most of their own
clothing versus 30% of those aged 10-12 and only 15% of those in the 6-9 age group. We
believe that increased media engagement and dotCommerce will amplify youth-directed
expenditures across all ages over time, as it is becoming easier both to market to youth
demographics via targeted advertising and for young people to identify specific products
for their parents to buy.
Toy sales have already accelerated, outpacing GDP growth during both the strong
economy of 2006-2007 and the tough backdrop of 2008-2009. Currently over 70% of toy
sales are targeted to children aged 0-9. With the Census Bureau projecting this age cohort
to grow 7% to 44.3 million by 2020, ahead of the more moderate 4-5% growth in the 0-9
age group over the past decade, toy company sales should see a meaningful benefit. We
view CL-Buy rated Hasbro as the best direct play on toy and game spending. Beyond
demographics the company is poised to see accelerating sales growth from its strategy of
leveraging toy brands in TV and movies, and the stock is supported by attractive valuation
and an aggressive share repurchase program.
3.500
3.600
3.700
3.800
3.900
4.000
4.100
4.200
4.300
4.400
4.500
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010E
2012E
2014E
Expect a steady climb in child-births as the Millennials move into their 20's and 30's.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010E
2012E
2014E
We see a sharp birth rate recovery of f low
2009 base
August 4, 2010 Americas
Goldman Sachs Global Investment Research 63
Appendix
August 4, 2010 Americas
Goldman Sachs Global Investment Research 64
Exhibit 84: Previously published research addressing demographic themes
Source: Goldman Sachs Research.
Equity Basket Disclosure
The Equities Division of the firm has previously introduced the basket of securities
discussed in this report. The Equity Analyst may have been consulted as to the
composition of the basket prior to its launch; however, the views expressed in this research
and its timing were not shared with the Equities Division.
Retiring Baby Boomers The expanding global middle class Generation waves after the Baby Boom"The Day After Tomorrow, v1.0: The changing
face of the consumer" by Anthony Carpet and
Laura Conigliaro, et al. (October 1, 2008)
Global Economics Paper No: 170, "The Expanding
Middle: The exploding World Middle Class and
Falling Global Inequality" by Dominic Wilson, et
al. (July 7, 2008)
"dotCommerce: Online shifts apparel's center of
gravity" by Adrianne Shapira et al. (May 24,
2010)
"Follow the Flows: Potential policy implications
for retirement services" by Christopher Neczypor,
et al. (January 27, 2010)
Global Markets Institute, "The Power of the
Purse: Gender Equality and Middle‐Class
Spending" by Sandra Lawson and Douglas Gilman
(August 5, 2009)
"Independent Insight: Eighth Annual Internet
Usage Survey, 2010" by James Mitchell, CFA, et
al. (February 22, 2010)
"The three stages of a sector recovery ‐ is an
inflection point in R&D upon us?" by Jami Rubin,
et al. (January 20, 2010)
Global Economics Paper No: 166, "Building the
World: Mapping Infrastructure Demand" by
Sandra Lawson, et al. (April 24, 2008)
GS SUSTAIN, "Crossing the Rubicon: Our
investment framework for the next decade" by
Anthony Ling, et al. (February 26, 2010)
"Sector challenges but stock opportunities; CL‐
Buy AGN, Buy ENDP, and Sell KG" by Randall
Stanicky, et al. (April 19, 2010)
"Investing in Brazil's New Middle Class" by
Stephen Graham et al. (April 26, 2010)
"The Rise of the iPad and tablet: Assessing
winners and losers in the global TMT ecosystem"
by James Covello and Jim Schneider, et al. (July
12, 2010)
August 4, 2010 Americas
Goldman Sachs Global Investment Research 65
Reg AC
We, Anthony Carpet, Laura Conigliaro, Robert D. Boroujerdi, Thomas Craven, CFA, Michael Chanin, CFA and Deep Mehta, hereby certify that all of
the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also
certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this
report.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for
in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research.
Company-specific regulatory disclosures
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research.
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 31% 53% 16% 47% 44% 34%
As of July 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,814 equity securities. Goldman Sachs assigns stocks as
Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.
Price target and rating history chart(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research.
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a
market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 66
Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an
officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may
not be associated persons of Goldman Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on
communications with subject company, public appearances and trading securities held by the analysts.
Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in
prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs
website at http://www.gs.com/research/hedge.html.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws
and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act. Canada: Goldman Sachs & Co. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it
relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the
company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may
be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this
research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject
company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports
distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product
promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further
information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number:
198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their
own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as
retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction
with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by
Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from
Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available
at http://www.gs.com/client_services/global_investment_research/europeanpolicy.html which states the European Policy for Managing Conflicts of
Interest in Connection with Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the Kanto
Financial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan
(FFAJ). Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific
disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese
Securities Finance Company.
Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as
a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a
global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage
group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment
recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each
report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook
on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following
12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the
following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an
advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman
Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for
determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and
price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended
coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information
is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant
to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on
industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in
Australia by Goldman Sachs & Partners Australia Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs & Co.
regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman
Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul
Branch; in New Zealand by Goldman Sachs & Partners New Zealand Limited on behalf of Goldman Sachs; in Russia by OOO Goldman Sachs; in
Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co.
Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.
August 4, 2010 Americas
Goldman Sachs Global Investment Research 67
European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in
connection with its distribution in the European Union and United Kingdom; Goldman Sachs & Co. oHG, regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our
proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our
proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views
expressed in this research.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/publications/risks/riskchap1.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and
sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to
http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
Copyright 2010 The Goldman Sachs Group, Inc.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.