UBS Investment Research

Morning Expresso - United States

Friday 8 July 2011

Global Equity Research

Americas

Equity Strategy

Market Comment

8 July 2011

www.ubs.com/investmentresearch

U.S. Equity Product Management

212-713-2400

Morning Expresso

This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 23. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

Morning Expresso - United States 8 July 2011

UBS 2

Morning Meeting Agenda US Equity Strategy

Strategist: Jonathan Golub, CFA Tel: +1-212-713 8673

2Q11 Results – Strong Despite Soft Patch Initial Results Strong 2010’s mid-year funk demonstrated that slower economic activity does not necessarily lead to weak financial results — a trend

that has been echoed in early 2Q11 reports. Twenty-five companies have announced results to date, beating aggregate earnings expectations by 4.2% and sales by 1.6%. Although fading operating leverage is likely to produce smaller earnings surprises in comparison to 1Q, we still expect solid results this reporting season.

Three Sectors to Watch Energy, Health Care, and Financials are likely to play significant roles in shaping 2Q results. In the Energy sector, a steep increase in earnings estimates accompanied by a fall-off in oil prices could lead to relatively weak surprises. Within Health Care, managed care companies have significantly beaten profit expectations over the past five quarters, and weak revisions suggest a repeat performance. In Financials, large releases from loan loss reserves should drive positive surprises once again, but investors are unlikely to reward companies for these gains.

Foreign Exposure Boosts Growth, Not Surprises A weak dollar and more robust economic activity outside the U.S. are driving faster earnings growth among companies that generate much of their top lines overseas. However, analysts seem to be accounting for this in their profit forecasts. In 1Q11, companies with high foreign sales exposure beat consensus earnings estimates by 6.1%, but those with less revenue from abroad beat by even more — 7.2%.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 8 July 2011

Genworth Financial Rating: Buy Target: US$22.00 Price: US$10.68 RIC: GNW.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$5.24bn BBG: GNW US

Insurance, Life Analyst: Andrew Kligerman Tel: +1-212-713 2492

Positioned to Withstand US-MI Pressures Investors questioning monoline mortgage insurers’ reserve adequacy Investors question the reserve adequacy of mortgage insurers MTG, RDN

and PMI, as reflected in Barron’s June 25th article “Next Mortgage Bombshell”. While GNW’s U.S. mortgage insurance (US-MI) unit is unlikely to be profitable until ’13, we think pressures will be manageable for GNW and its US-MI business.

GNW US-MI better reserved than peers; any additional losses manageable We estimate GNW’s existing reserves could cover ~64% of the total losses (under the severe scenario that all of its delinquent loans go to claim), vs. ~57% average for its peers*—note this assumption is extreme as it provides no offset from cures, etc. GNW’s reserves also compare favourably when we take into account the interplay between delinquency age and cure rates. [*MTG, RDN, and PMI]

GNW also has stronger overall capital and diversified business mix GNW’s capital base and diversified business mix should allow it to manage the challenges in US-MI. a) GNW had ~$1.1B of capital above min capital ratios across its Int’l and Retirement/Protection units at 12/31/10—and, an add’l ~$240M will be freed in 4Q11 when its medicare supplement sale closes. b) In spite of heavy US-MI losses, GNW has turned an operating profit every year since its IPO.

Valuation: Compelling valuation proposition; adj est’s on US-MI loss ratio a) Our $22 PT reflects a 20-25% discount to our target 1.1x forward life group P/B. Our S-O-P implies a lower value of ~$17.50, and ~$15.10 (ex US-MI), which we view as a floor valuation, given the low peer group multiples we assign. b) Adjusting estimates to reflect higher US-MI loss ratio given economic and housing weakness.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$10.68 on 07 Jul 2011 18:42 EDT

PetSmart Rating: Buy Target: US$52.00 Price: US$46.16 RIC: PETM.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$5.23bn BBG: PETM US

Retailers, Broadline Analyst: Michael Lasser Tel: +1-212-713 2440

Will Pet Parents Turn to the Web? We think PETM faces a minimal intermediate-term threat from the web The recent launch of wag.com has raised the question of how the online-

only channel might affect PetSmart. So far, the company has seen very little impact from the threat of these direct-to-consumer competitors. We expect that this will continue to be the case for the foreseeable future. To the extent that this perceived risk weighs on the stock, we think it will simply create an opportunity to be even more aggressive.

PETM’s core consumers have not shown a heavy appetite to shop online Over the last couple of years, PETM’s overall market share has remained stable at 14%. Also, website traffic to PetSmart.com and PETCO.com has grown at a far slower rate than other hardline companies and online-only retailers. We interpret these as signs that core pet specialty customers find value in the bricks and mortar experience.

If eCommerce becomes more prevalent for pet supplies, PETM will benefit Comparing PetSmart.com to wag.com shows that PETM prices are 3.5% lower across a wide basket of products (our pricing study is enclosed). Also, each of these retailers offers a similar number of SKUs through the web (~10,000). PETM has the added advantage of well-developed supply chain and deep relationships with key pet specialty vendors.

Valuation: PETM is trading at 7.5x C’11 EBITDA est, an attractive level Our $52 price target is based on a blend of a DCF and multiple analysis (18x our CY’12E EPS of $2.83). We continue to like the risk-reward of PETM’s shares.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$46.16 on 07 Jul 2011 18:42 EDT

Morning Expresso - United States 8 July 2011

UBS 3

MACRO AND STRATEGY RESEARCH Global Equity Strategy

Strategist: Jeffrey Palma Tel: +1-203-719 1135

World Inc: Strength in numbers Corporate fundamentals remain strong In this latest edition of World Inc., our focus turns back to the corporate backdrop, where fundamentals for

the non-financial corporate sector remain strong, buffeted by robust earnings growth and profitability, and attractive valuations. The 2012 earnings yield on World Inc. is an attractive 9%.

Resource sectors & maturing cycle the key drivers The global earnings growth forecast of 14.8% this year is being driven by the energy and materials sectors with growth of 28.2% & 35.0%, respectively. For 2012, a forecast slowdown to 7.6%, while reflective of the normal maturation of the cycle, is also being impacted by a sharp slowdown in the resources sectors, as underlying commodity prices are forecast to drop from recent peaks. Ex. the resource sectors, World Inc. shows earnings growth of 8.3% and 9.6% for 2011/12.

Re-leveraging picking up The corporate sector continues to loosen the purse strings, with forecasts for capex, dividends and buybacks all increasing. Most strikingly, the 2011 global capex growth estimate has increased to 10.8%, from the -2% reading at the end of last year. Dividend growth is also strong at 12%.

Emerging market strength and Japan resilience EM sales, earnings and dividend growth is outpacing the world through next year, and doing so at a meaningful valuation discount and with a stronger balance sheet. And Japan, which was highlighted in the last World Inc. for severe downgrades, is showing strong resilience with sales, dividends and capex forecasts all rebounding.

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011 Global Emerging Markets Strategy

Strategist: Nicholas Smithie Tel: +1-212-713 8679

GEM Inc July 2011: Earnings resilience in the face of slower growth 2011 expectations stable, 2012 numbers should be revised up Earnings growth expectations for this year are unchanged over the past quarter at

17%, despite fears of an economic soft patch. The growth rate should be achievable, given the strong contribution made by top line growth and a modest 40bps of margin expansion. 2012 earnings expectations look low - below 10% - and we anticipate upward revisions.

Bigger role for dividends Gearing ratios for the GEM universe are expected to fall to record lows, halving from 34% in 2003 to just 17% expected in 2012. The consequence of such balance sheet inefficiency will be lower ROE unless dividend payouts are raised. Dividend growth should therefore exceed earnings growth from 2012.

What is worrying the banks? Despite attractive valuations and fundamentals, performance of banks has been restrained by rising interest rates and reserve requirement ratios, slowing loan growth, and the risk of contagion from the banking system in Europe.

The asset class offers value GEM valuations look attractive to us, trading on a multiple of 10.2 and 9.4 times 2011 and 2012 earnings estimates, respectively. These valuations are a discount to the world, below the long term average multiple of 13.1 times and beneath our estimate of fair value of 16.5 times forward earnings.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011

US Daily Economic Comment

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

Jobs likely recovering from spring shocks Preview: Payrolls est unrevised at 135k, unempl rate flat at 9.1% (1) Employment indicators released since last Friday have generally been

positive, with little change in the nonmanufacturing ISM employment index and a surge in the ADP estimate of private payrolls. These data have reinforced our assessment that the May slowing in employment growth was a temporary effect of storms, floods, the Japan disaster, and perhaps some seasonal adjustment problems relating to calendar shifts. In turn, we have maintained our forecast for a rebound in employment in June. For payrolls, we forecast a 135k rise; consensus is 105k but the consensus among those who updated their forecasts today is about 125k. For private payrolls, we forecast a 160k increase. The unemployment rate was probably unchanged at 9.1% and the workweek unchanged at 34.4 hours. We project a 0.2% rise in average hourly earnings. (2) Nonmortgage consumer credit probably rose $4.0B in May (cons $4.0B, after $6.3B).

Review: ADP private payrolls +157k, claims slip, monthly ICSC surges (1) ADP estimates that private payrolls rose 157k (consensus: 70k) in June, a rebound from the 36k pace in May. (May was revised from 38k.) The ADP estimate was right in line with our 160k forecast for the official Bureau of Labor Statistics (BLS) data, but we would not read too much into that point estimate as ADP errors can be large and can swing sharply. (2) Initial jobless claims fell to 418k in the week of July 2 (cons: 420k, UBSe: 430k) from 432k in the previous week. The decline came despite a temporary boost of about 2500 because of state employee layoffs in Minnesota, which are likely to accelerate in the coming week’s data. The four-week average of new jobless claims edged down to 425k from 428k a week earlier. It was unchanged from a month earlier and down from 438k two months earlier. Claims have been falling gradually since the late-April surge but have yet to fully reverse it. (The four-week average was 395k at the end of March.) (3) The monthly ICSC store sales measure accelerated to 6.9%y/y in June from 5.4%y/y in May, implying stronger core retail sales. However, other measures have not been as strong, and autos and gasoline likely weighed heavily on June retail sales.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011

Morning Expresso - United States 8 July 2011

UBS 4

European Weekly Economic Focus

Economist: Stephane Deo Tel: +44-20-7568 8924

Euro crisis: Crunch-time nearing? Crunch-time nearing? We maintain our long-held view that the euro area will move towards some kind of fiscal union, because break-up is not an

option. So far there has been a lack of political will to move more decisively in the direction of further integration, but time now appears to be running out as electorates in AAA-rated economies lose faith in the euro. This might mean that, instead of a gradual move towards fiscal union, the latter might come in one fell swoop. In this note, we look at why the policies pursued thus far have failed, why soft debt restructuring is also unlikely to work, and why another severe emergency may well force politicians to opt for an extreme solution: a ‘big bang’-like transition to some form of fiscal union. While not our core scenario, such an outcome has, in our view, become more likely of late.

Next week in Europe EU finance ministers meet in Brussels on Monday, and the European Commission releases its quarterly report for the Euro Area on Wednesday. Data-wise, May industrial production for the Euro Zone is due on Wednesday; we expect growth in IP improved marginally to 5.30% YoY from 5.20% in April. Inflation data for June is due during the week – we expect inflation for the Euro Area (Thursday) to come in at 2.80% YoY, with final German inflation (due Tuesday) likely remaining unchanged from the advance readings of 0.10% MoM and 2.30% YoY.

In the UK, trade balance and inflation data are due Tuesday; we expect the visible and total trade balance deficits to have narrowed slightly in May, to GBP7000m and to GBP2600m respectively, while June CPI and RPI may fall marginally to 4.4% YoY from 4.5% previously, and to 5.1% YoY from 5.20%. UK labour market numbers are due Wednesday; we expect a June claimant count rate of 4.70%, little changed from May, and the number of jobless claims to have increased by 10,000. Average weekly earnings are likely to have increased by 2.00% 3M-YoY in May from 1.80%, with weekly earnings ex-bonus improving slightly to 2.10% from 2.00%. We expect the three-month average ILO unemployment rate (May) to remain unchanged at 7.70%.

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 8 July 2011

Morning Expresso - United States 8 July 2011

UBS 5

ENERGY Chesapeake Energy Rating: Neutral Target: US$34.00 Price: US$30.51 RIC: CHK.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$20.1bn BBG: CHK US

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

Royalty Trust Sale Improves Liquidity Raising ~$584 MM via IPO of part of its Colony Granite Wash acreage. CHK is planning a ~$584 MM IPO of a portion of its Colony Granite Wash

assets via a trust ("CHKR"). CHK will convey to CHKR a 90% royalty interest on PDPs (16.6 MMBoe) and a 50% royalty interest on PUDs (26.6 MMBoe) on ~28,700 net acres. CHK will own 42.5% of CHKR (assuming overallotment), with the public owning 57.5%. CHK will drill 122 wells using 4-5 rigs by 3/31/15. Adjusted for the PV of the capex commitment, CHK is receiving $475 MM in pre-tax proceeds, implying a $19/Boe 1P multiple, inline with the multiple for the SDT IPO.

Asset sales continue ahead of pace; 25% debt reduction on track by YE12 CHK plans to use proceeds to pay down its credit facility. CHK has now announced $7 BN in asset sales this year, making its 25% debt reduction target within sight by YE11. We expect CHK to generate an “organic” FCF deficit of $5.6 BN and $3.6 BN in 2011-12, which will be entirely funded by asset sales. We are lowering 2012 EPS/CFPS due to production sold to $2.70/$5.40 from $2.75/$5.45. Our 2P NAV is little changed at ~$57/share.

Expect asset sale and Utica update with 2Q results on July 28th We expect CHK to provide an update on the timing of its asset sales when it reports 2Q results on 7/28. CHK plans to proceed with 2 new JVs in the Utica & Horizontal Mississippian by YE11. Perhaps more important, investors will likely focus on Utica well results and the potential NAV benefit from this emerging play.

Valuation: premium to peers on 2011-12` cash flow multiples. Our $34 PT assumes 7.4x normalized 2011 EBITDX or 0.6x NAV. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$30.51 on 07 Jul 2011 18:42 EDT US Electric Utilities & IPPs

Electric Utilities Analyst: Julien Dumoulin-Smith Tel: +1-212-713 9848

EPA Finalizes Transport Rules EPA issues final rules under Cross-State Air Pollution Rule (CSAPR) Tweaking its name slightly, the final CATR rules issued under the title Cross-

State Air Pollution Rule (CSAPR) was issued by the EPA yesterday. While nominally more stringent than those proposed last year (73/54% reduction in SO2/NOx vs. 71/52% previously), there were a host of rules changes and allocation shifts.

Allocations suggest scrubbed units receive less; MACT should still dictate While reductions in SO2 emissions are material, we believe MACT regulations will lead to more significant investments in CAPP/NAPP coal-areas given the relatively more stringent acid gas (HCl) standards. In IL, we reiterate our view that state level SO2 standards will drive greater reductions. In TX, without too much of an impact from MACT, the CSAPR SO2 standards could drive some investments. Ultimately, CSAPR targets accelerate the need for reductions relative to MACT.

NOx reductions also meaningful; will likely result in SCR investments While less capital intensive, NOx reductions appear meaningful and will drive investment, reiterating our belief others will follow GEN in installing SCRs.

Incremental challenges, but should be reflected in improved forwards EPA projects allowances will be worth $1,100/t in Group 1 states (most), $700/t in Group 2 (incl. TX) for SO2 and $500-600/t respectively for NOx by 2014. Coal on the margin regions should generally be able to pass through both SO2 and NOx costs, while generators in gas markets (i.e. TX) should pass on just NOx costs. Based on these ests., power prices should increase by ~5-10% in coal heavy regions to reflect partial passthrough of costs (biased towards PJM).

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 8 July 2011

Morning Expresso - United States 8 July 2011

UBS 6

FINANCIALS P/C Insurance: 2Q Earnings Preview

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

BV Growth Despite Heavy U.S. Cat Losses BVPS up 2.8% on average, mainly on positive investment marks Mainly reflecting moderate-sized, favorable investment marks, we estimate 2Q11

sequential BVPS growth of 2.8% on average for the P/C insurers we cover, ranging from 4.8% growth for AXS to a catastrophe-driven 1.1% decrease for ALL.

Improved outlook for property reinsurance pricing We expect company managements to be modestly more upbeat about the outlook for commercial lines insurance and reinsurance pricing on the upcoming earnings calls in light of continued heavy catastrophe losses and catastrophe model changes. At mid-year renewals, pricing for property catastrophe reinsurance rose roughly 5%-10% in the U.S. and substantially more in loss impacted regions (New Zealand, Japan) and will likely continue to rise through Jan. 1, 2012 renewals.

Likely some caution through earnings season; positive on brokers Property casualty insurance stocks have generally underperformed during 2Q earnings seasons due in part to fear going into the heart of hurricane season. While pricing commentary may be modestly better, we do not see any catalysts to change the trend this earnings season. AON and MMC should see margin expansion resume in the quarter and will benefit from exposure growth, improved commercial insurance pricing and favorable FX.

We like ACE and VR into 2Q results VR should have among the best top line growth of reinsurers with a very bullish outlook while ACE will also have strong top line, solid growth in BVPS and potentially better than expected EPS.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011

Morning Expresso - United States 8 July 2011

UBS 7

HEALTHCARE Alkermes Rating: Neutral Target: US$20.50 Price: US$18.70 RIC: ALKS.O Prior: Unchanged Prior: US$19.00 Mkt Cap: US$1.77bn BBG: ALKS US

Pharmaceuticals Analyst: Ami Fadia Tel: +1-212-713 3242

Bydureon Passes the tQTc Test What’s new? Bydureon demonstrated no prolongation of tQTc interval The study evaluated Exenatide at and above therapeutic levels in healthy

individuals. All QT correction methods (QTcP, QTcF and QTcI) demonstrated that Bydureon did not increase the 95% confidence interval of the upper bound of the placebo corrected QTc above 10 milliseconds (the FDA hurdle). Amylin/Lilly plan to submit the data to FDA in 3Q11.

Our takeaways: Closer to approval; still cautious on peak sales potential The results have come ~3 months earlier than expected and assuming a 6 month turnaround we now expect a 2Q12 launch (vs. 3Q12 prev.) and are reducing the risk adjus’t to Bydureon’s sales from 75% to 85%. Given Bydureon’s development history (multiple CRLs) and FDA’s high bar for approving these types of drugs, we will wait until final approval to give full credit to the product in our model. Further, we remain cautious about Bydureon’s commercial success given the DURATION-6 data (2016E sales of ~$500M, or 15% GLP-1 mkt. share).

Thoughts on the stock: Expect positive momentum to continue QTc was the key hurdle to approval and this is an important de-risking event for the stock. Given the recent momentum in the stock and the fact that we (and probably most others) already had Bydureon partially factored into the numbers, we would expect about 5-8% upside to ALKS on the news.

Valuation: Maintaining Neutral rating and raising PT to $20.50 from $19 Our price target is derived from a DCF analysis using a WACC of 12%, an intermediate growth rate of 15%, and a terminal growth rate of 2%.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$18.70 on 06 Jul 2011 19:42 EDT

Alexion Pharma Rating: Neutral Target: US$53.00 Price: US$48.46 RIC: ALXN.O Prior: Unchanged Prior: US$55.00 Mkt Cap: US$9.31bn BBG: ALXN US

Biotechnology Analyst: Matthew Roden, PhD Tel: +1-212-713 2491

Adjusting Model for 2Q Developments Higher OpEx throughout 2011 leads to softer bottom line We are adjusting our 2011 R&D estimates to account for the 2Q11 initiation of a trial

evaluating eculizumab in patients with STEC-HUS, following the E. coli outbreak in Germany. We applaud mgmt for initiating the study, which will modestly impact 2Q earnings (increasing 2Q11e R&D by $1M and FY11 R&D by $4M). We’re also modestly increasing our 2Q and FY11 SG&A estimate to account for the aHUS patient identification program. Accordingly, our new 2Q EPS estimate is $0.26 (previous $0.27) and our FY11 EPS $1.11 (previous $1.14).

Modest headwinds in Japan, Greece, but expect stronger 2H11 Soliris 2Q11 revenue will likely reflect modest April weakness following the March 11th Fukushima earthquake. Mgmt expects business to recover, as the most heavily impacted area only represents ~2-3% of Japanese sales, and the national supply chain was largely unaffected. Political and economic turmoil in Greece may also impact 2Q11 revenues, although the company’s total exposure remains small (we estimate <$5M in 2010 sales).

Limited near term catalysts, but still positively biased longer term Among the 2011 events, we are focused on the transplant program initiation and the aHUS launch. Initiation of the transplant trials should be near term and could yield data within a year. On aHUS, our model assumes 59 patients treated in 2011, slightly more than the 37 known pts Alexion says will covert to commercial in 4Q.

Valuation: Neutral with $53 price target ($55 previously on higher OpEx) We derive our PT using DCF and supported by revenue-based multiples. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$48.46 on 07 Jul 2011 18:42 EDT

Pfizer Rating: Buy Target: US$23.00 Price: US$20.23 RIC: PFE.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$163bn BBG: PFE US

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

Thinking About the New Numbers What’s new? More thorough analysis of accretion from strategic review We revisited the Pfizer model, and examined the potential impact on EPS

of the sale of the Animal Health and Nutrition businesses to fund share repurchases (see Table 1). Also, we provide an accretion sensitivity table based on the potential assumed purchase multiples of both businesses (see Table 2).

Our takeaway: 3-5% accretion from 2013 We assumed the deals close by the end of 2012 and an Animal Health op margin of 25% and a Nutrition op margin of 20%. We varied the Animal Health multiple from 10-15x and the Nutrition multiple from 15-20x in the sensitivity analysis. We assume that the 2 businesses currently contribute roughly 5-6% of EPS and at our assumed base case deal multiples of 12x for Animal Health and 17x for Nutrition, Pfizer could buy back 8-9% of its shrs in 2013. Hence, the 3% assumed accretion.

Thoughts on the Stock: 2-3% hit was a little more than we expected We had thought that the recent underperformance in PFE was partly due to investors starting to question dramatic change based on recent mgt. commentary. However, there was clearly more pressure on PFE than expected, and we believe it was coming from more than just special situation, event-driven investors, but also as other investors repositioned. While it may take a little time for investors to get comfortable with the new Pfizer, we still believe the stock is undervalued and that sentiment on the pipeline will continue to improve and help PFE.

Valuation: We maintain our Buy rating and $23 PT based on our DCF The implied P/E multiple from our DCF is 10x our 2012E EPS of $2.26. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$20.23 on 07 Jul 2011 18:12 EDT

Morning Expresso - United States 8 July 2011

UBS 8

US Large Cap Pharmaceuticals

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

Bydureon Crosses Another Hurdle What’s new? No QT signal found in Bydureon The study evaluated Exenatide in 75 pts at and above therapeutic levels in healthy volunteers and

was conducted in response to FDA’s request following a CRL for Bydureon’s NDA. The companies plan to submit the results to the FDA in 3Q11. Importantly, all QT correction methods (QTcP, QTcF and QTcI) demonstrated that Bydureon did not increase the 95% confidence interval of the upper bound of the placebo corrected QTc above 10 milliseconds (the FDA hurdle).

Our takeaway: Closer to approval; we’re still cautious on comm. prospects The QTc was the major hurdle in front of approval, so this is clearly good news. Assuming a 6 month turnaround at FDA we now expect a launch in 2Q12 (vs. 3Q12 prev.) and have reduced the risk adjustment from 75% to 85% in our model to reflect the news. Given Bydureon’s development history (multiple CRLs) and FDA’s increased caution with drug approvals, we will wait until final approval to give full credit to the product in our model. Further, we remain cautious about Bydureon commercial success given the DURATION-6 data (we assume 2016E sales of ~$500M, or 15% GLP-1 market share).

Thoughts on LLY: Incremental positive Bydureon approval will represent another step in the right direction for Lilly’s renewed commitment to diabetes. However, the earlier-than-expected refiling with the FDA and the change in risk adjustment isn’t material so our EPS estimates remain unchanged.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011

Morning Expresso - United States 8 July 2011

UBS 9

INDUSTRIALS TransDigm Rating: Buy Target: US$105.00 Price: US$93.75 RIC: TDG.N Prior: Unchanged Prior: US$90.00 Mkt Cap: US$4.69bn BBG: TDG US

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

Running Ahead With More to Come Raising EPS etsimates We are raising our EPS estimates on faster than expected progress at McKechnie, where we now think profit doubles in two

years. Beyond our revised estimates, we see further upside on continued aftermarket strength and capital deployment. Despite its recent outperformance, TDG still only trades at a modest 15% premium to its peer group.

McKechnie margins >40% with more room to go We estimate McKechnie will exit FY11 at low-to-mid 40% EBITDA margins as compared to low 30% range when it acquired and rest of TDG in low 50% range. We believe upside is being driven by higher volumes, improved productivity and pricing and facility consolidation. We believe McKechnie’s 30%+ productivity gap ($225K revenue/employee) to TDG has narrowed, but that there is further room to go.

Additional acquisitions increasingly likely We do not expect TDG to sit on its large cash balance, likely close to $12 per share by year end, for long and believe that additional acquisitions are increasingly likely given McKechnie progress. We estimate an additional $0.50-0.75 in earnings power, currently not in our estimates, from using excess cash towards additional acquisitions.

Valuation: $105 price target from $90 New $105 PT reflects blend of our DCF analysis (10% WACC) and 18x our higher FY13 EPS estimate (same as where TDG currently trades on FY12).

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$93.75 on 07 Jul 2011 18:42 EDT Engineering & Construction

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

EPA Publishes Cross-State Pollution Rule CSAPR replaces the Clean Air Interstate Rule (CAIR) Earlier today, the EPA published a final rule addressing SO2 and NOx emissions in selected

states. The Cross-State Air Pollution Rule (CSAPR) aims to reduce emissions in states that are down-wind from other pollution producing states. Fewer states but more reductions expected; three approaches to comply The draft rule was issued in July 2010, and covered 31 states plus DC.

The final rule covers 27 states only. The final rule is expected to reduce coal-fired power plant emissions of SO2 by 73% and cut nitrogen oxide by 54% over 2005 levels by 2014. The draft suggested 71% for SO2 and 52% for NOx. The EPA anticipates that plants will run clean units more than otherwise, use lower sulfur coal, or install low NOx burners or scrubbers. EPA estimates $1.6b of annual capex to comply.

Texas added, but likely to fight; more rules to come The final rule adds Texas to covered states (SNL indicates there are 20 coal plants in TX, 7 of which are unscrubbed; others may require updates). Articles suggest that Texas’ Governor will fight federal efforts. The EPA also announced a proposal that six additional states will have to meet seasonal NOx reduction requirements.

Positive step for BWC, URS, SHAW, FLR, FWLT, KBR in a long process The finalization of this rule was expected, and is a step in the right direction for potential air quality awards. We continue to expect one-off projects to be awarded until broader spending decisions are made with final Mercury and Air Toxics Standards (MATS) in November. At that point, we would expect timing (extent of any delays) to become more clear.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011 U.S. Machinery Playbook

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

The Week Ahead Ag equipment industry sales likely out 7/11; WASDE out 7/12 AEM is likely to report June NA farm equipment sales on Monday 7/11. May R3M

row crop tractor sales were down 1% YoY while combine sales were up 12%. Also, USDA will release its monthly WASDE report on Tuesday. Look for our 100th rental survey, out next week Look for the 100th installment of our monthly equipment rental survey, out next week, with a timely

read not only for the rental companies, but also for the construction equipment businesses of CAT, TEX, DE and CNH. June preliminary net truck orders were in line with our expectations June Class 8 net orders rose 33% YoY, but were down 9% sequentially to

21,200 units. YTD Class 8 net orders annualize to ~326k units, supportive of demand well ahead of our 2011 build forecast of 255k units. We believe as 2011 build slots are closer to sold out, orders will pull back over the next few months, before rebounding in front of what looks to be a strong 2012.

We remain constructive on Machinery We have been impressed by the strength of recent demand improvements and company execution across the group has generally exceeded our expectations. While investor expectations already incorporate improving demand, we see opportunities for the group to advance as we believe expectations may not fully reflect the achievable improvements in results for many of the names.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 8 July 2011

Morning Expresso - United States 8 July 2011

UBS 10

REITS The Weekly REIT Appraisal

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

The Rubber Band Snaps Back New YTD Highs for REITs REITs, along with the broad equity market, continued their impressive rebound over the past week. While the S&P 500 is

just shy of its early May highs, the 8% surge in REITs over the past three weeks has pushed the group to a new YTD high. 2Q Earnings A Repeat of 1Q We expect news flow to be quiet next week, ahead of the start of 2Q earnings - the week of July 18th. While we’ll save

our official earnings preview for the next edition, we would offer up the following overly simplistic summation: 2Q results should generally look and feel much like 1Q results.

Will REITs Go on Vacation? If the market is already expecting solid earnings, and the stocks have just rallied to new highs, will REIT shares go on vacation for the rest of Summer? We think so. It is hard to see results exceeding already elevated expectations.

P.S. Are We the Only Ones Worried About Low Dividend Yields? We previously opined in The Appraisal that REIT dividend yields are currently flirting with an all-time low of 3.3%. Low Treasury yields certainly explain most of the low REIT yield, but the spread between REIT dividend yields and the 10-year Treasury has also narrowed to a tight 19 basis points – well below the 107 bp long term average. We do expect outsized dividend growth of 8% over the next few years, but the question remains - will this be enough?

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 7 July 2011

Morning Expresso - United States 8 July 2011

UBS 11

UBS Key Calls - US Live Key Call Portfolio

Stock Name RIC Rating Price Target Date of call Current Price Analyst Apple Inc. AAPL.O Buy US$510 2-Jun-11 US$357.2 Maynard Um

Baker Hughes Inc. BHI.N Buy US$95 7-Jun-11 US$75.38 Angie Sedita

Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$46.83 Steven Valiquette

Celgene Corporation CELG.O Buy US$69 9-Dec-10 US$61.68 Matthew Roden, PhD

Citigroup Inc C.N Buy US$56 3-May-11 US$42.63 William Tanona, CFA

Deere & Co. DE.N Buy US$115 18-Jan-11 US$86.44 Henry Kirn, CFA

Dow Chemical DOW.N Buy US$46.5 21-Mar-11 US$37.17 Andrew Cash

Ford Motor Co. F.N Buy US$22 10-Jan-11 US$14.12 Colin Langan, CFA

General Electric Co. GE.N Buy US$23 10-Jan-11 US$19.3 Jason Feldman

Google Inc. GOOG.O Buy US$765 10-May-10 US$546.6 Brian Pitz

Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$98.91 Henry Kirn, CFA

McDonalds Corp. MCD.N Buy US$93 9-Feb-11 US$86.06 David Palmer

Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$65.26 Andrew Kligerman

Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$59.26 Parag Agarwal

SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$43.62 Uche Orji

Source: Reuters, UBS. Prices as at market close on July 7, 2011.

Morning Expresso - United States 8 July 2011

UBS 12

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

Company Name Directional Indicator/Rationale Reuters Code Current Share Price

New Rating New PT Prior

Rating Prior PT

Alexion Pharmaceuticals, Inc. Maintain Neutral, lower PT ALXN.O US$48.46 Neutral US$53 Neutral US$55

Alkermes Inc. Maintain Neutral, increase PT ALKS.O US$19.23 Neutral US$20.5 Neutral US$19

TransDigm Group Inc. Reiterate Buy, increase PT TDG.N US$93.75 Buy US$105 Buy US$90

Source: Reuters, UBS. Prices as at market close on July 7, 2011.

Markets, Events and Newsflow Today’s Company Events

Company Name Event Reuters code Rating PT Notes

None

Source: Reuters, UBS. Prices as at market close on July 7, 2011.

Today’s Macroeconomic Events: US

Indicator Time (ET) UBS forecast Previous Consensus

Nonfarm Payrolls (Jun)change 9:30 na 54 k 86 k

Private Payrolls (Jun)change 9:30 na 83 k 110 k

Unemployment Rate (Jun)% 9:30 na 9.1% 9.1%

Average Weekly Hours (Jun)lvl 9:30 na 34.4 34.4

Average Hourly Earnings (Jun)mom 9:30 na 0.3% 0.2%

Wholesale Trade (May)mom 11:00 na 0.8% 0.7%

Consumer Credit (May)lvl 16:00 na $6.25 bil $5.50 bil

Source: Bloomberg, UBS

Morning Expresso - United States 8 July 2011

UBS 13

Today’s UBS Hosted Corporate Roadshow: Company Event Location None

Today’s UBS Hosted Fieldtrip:

Company Event Location

None

Today’s UBS Hosted Conference:

Company Event Location

None

Morning Expresso - United States 8 July 2011

UBS 14

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

Americas

United States Dow Jones 12719.5 0.74 9.86

United States S&P 500 1353.2 1.05 7.60

United States Nasdaq 2872.7 1.36 8.28

United States S&P VIX 15.95 -2.38

Europe

Europe FTSE Eurofirst300 1126.0 0.24 0.39

Belgium BEL 20 2579.1 0.24 0.02

Germany DAX 7497.2 0.34 8.43

France CAC 3994.2 0.36 4.98

Italy MIB 30 19751.0 0.08 -2.09

Netherlands AEX 346.2 0.29 -2.37

Portugal PSI 20 7298.1 0.60 -3.82

Spain IBEX 10223.3 0.27 3.69

Switzerland SMI 6222.2 0.18 -3.32

UK FTSE 100 6065.2 0.18 2.80

Asia

Hong Kong Hang Seng 22724.1 0.86 -1.35

India BSE Sensex 19070.1 -0.04 -7.02

Japan Nikkei 225 10137.7 0.66 -0.89

Source: UBS, Reuters. Indices in Americas as at market close on July 7, 2011. Indices in Europe and Asia as at 05:00 EDT on July 8, 2011

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

Euro €/$ 1.436 -0.45% -2.3% 7.2%

UK £/$ 1.597 -0.22% -2.9% 2.4%

Canada CAD/$ 1.043 0.61% 1.6% 4.0%

Switzerland CHF/$ 1.183 -0.69% -1.0% 10.5%

China Yuan/$ 0.155 0.03% 0.3% 1.9%

Brazil BRL/$ 0.644 1.05% 1.8% 6.9%

India INR/$ 0.023 0.45% 0.9% 1.0%

Mexico MXN/$ 0.087 0.72% 1.9% 6.9%

Japan $/JPY 0.812 0.38% 1.4% 0.0%

Australia AUD/$ 1.077 0.66% 0.5% 5.2%

Source: UBS, Reuters. Prices as at market close on July 7, 2011

Morning Expresso - United States 8 July 2011

UBS 15

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

Gold ($/oz) 8.60 -0.13 -1.13 8.31

Brent Crude spot, $/bbl 117.95 -0.54 -2.55 21.09

WTI Crude spot, $bbl 98.49 -0.18 - -

Natural Gas, $MMBTU 4.14 0.19 -10.14 2.84

Source: UBS, Reuters. Prices as at market close July 8, 2011.

Morning Expresso - United States 8 July 2011

UBS 16

Recent UBS Event

ab

Research Insight Conference Call

State of the Consumer Sector with the UBS Consumer Team

Host:

David Palmer – Restaurants & Packaged Food Robin Farley – Gaming & Lodging; Cruise Lines

Nik Modi – Household Personal Care; Tobacco Kaumil Gajrawala – Beverages

Michael Binetti – Apparel, Footwear & Luxury Retail Robert Carroll – Toys

Michael Lasser – Hardline Retail

Topic of Discussion Please join the UBS Consumer research team for a detailed update on the consumer

sector

Date & Time:

Thursday, July 7, 2011 // 10:00 AM ET

Dial-in Details: Toll free: 800-926-5230

Toll: 212-271-4651 Code: 21528632

Replay Details:

Toll Free: 800-633-8284 Toll: 402-977-9140

Code: 21528632

Morning Expresso - United States 8 July 2011

UBS 17

Recent UBS Event

ab

Research Insight Conference Call

US Debt Ceiling Negotiations: Scenarios and Consequences

Host: Maury Harris - UBS Chief US Economist

Michael Schumacher - UBS Head of Global Rates Strategy

Featured Speakers: John Savercool - UBS US Office of Public Policy

Drew Matus - US Economics Chris Ahrens - US Rates Strategy

Gareth Berry - FX Strategy George Bory - Head of Global Credit Strategy Jeffrey Palma - Chief Global Equity Strategist

Date & Time:

Thursday, July 7, 2011 – 10:00am New York // 15:00pm London Live Dial-In Details – Pin Code: 899108#

Australia 1800 029 956 Hungary +36 618 893 218 Portugal 800 782 053 Austria 0800 005 165 India 000800 100 3542 Singapore +65 68 232 172 Belgium +32 22 901 412 Indonesia 0018 030 441 1308 Spain +34 917 889 902 China +86 105 904 4819 Ireland +353 14 364 109 Spain 900 801 888 China 10800 744 1377 Italy +39 023 0350 9006 Sweden +46 850 520 115 Czech Republic 800 700 954 Japan 00663 381 2557 Switzerland +41 225 927 012 Denmark +45 32 714 612 Luxembourg 352 270 007 3419 Taiwan +886 221 626 704 Finland +358 923 139 203 Malaysia 1-800-813-766 Thailand 001800 442 205 France +33 170 993 213 Netherlands +31 207 965 013 UK +44 20 7162 0135 Germany +49 695 8999 0510 New Zealand 0800 451 356 UK 0500 551 089 Hong Kong 800 903 870 Norway +47 21 563 123 United States 1 877 491 0063

Replay Details: Access Code: 899108#

UK 020 7031 4064 US 1-954-334-0342 France +33 (0) 170993529

Austria +43 (0) 26822056415 Australia +61(0)2 82239748 Germany +49 (0) 30726167224

Spain +34 917889714 Hong Kong +852 30114552 Ireland +353 (0) 14367610 Sweden +46 (0) 850520333 Singapore +65 66221306 Italy +39 02303509364 Switzerland +41 (0) 225927181 India 0008001003597 Netherlands +31 (0) 207965345 Norway +47 21501292 Denmark +45 32714892 Japan +81366451264

Morning Expresso - United States 8 July 2011

UBS 18

Today’s UBS Event

ab

Corporate Access Conference Call

Understanding Water Permitting for Indian Pt Relicensing

A Conversation with Whiteman Osterman & Hanna on SPDES and WQC Permits

Host: Julien Dumoulin-Smith - UBS US Electric Utilities and IPPs Analyst

Jim von Riesemann - UBS US Electric Utilities Analyst

Guest Speakers: Philip H. Gitlen

Elizabeth Grisaru Terresa M. Bakner Peter C. Trimarchi

Date & Time: Friday, July 8, 2011 at 1:00 PM EST

Dial-in Details:

Toll Free: 800-908-9173 Toll: 212-231-2902

Code: 21531025

Replay Details: Toll Free: 800-633-8284

Toll: 402-977-9140 Code: 21531025

Morning Expresso - United States 8 July 2011

UBS 19

Today’s UBS Event

ab

Expert Access Conference Call

2011 Food Cost Outlook Series

Wheat, Corn and Sugar with Jim Sullivan of Informa Economics

Host:

David Palmer UBS Restaurants and Packaged Food Analyst

Date & Time:

Friday, July 8, 2011, 10 AM ET

Dial-in Details: Toll Free: 800-772-8907

Toll: 212-231-2922

Code: 21529090

Morning Expresso - United States 8 July 2011

UBS 20

Forthcoming UBS Event

ab

Expert Access Conference Call

2011 Food Cost Outlook Series

Dairy with Jerry Dryer of Dairy Market Analyst

Host: David Palmer

UBS Restaurants and Packaged Food Analyst

Date & Time: Monday, July 11, 2011, 11 AM ET

Dial-in Details:

Toll Free: 800-772-8907 Toll: 212-231-2922

Code: 21529085

Morning Expresso - United States 8 July 2011

UBS 21

Forthcoming UBS Event

ab

Expert Access Conference Call

2011 Food Cost Outlook Series

Beef and Chicken with Kevin Good of CattleFax

Host: David Palmer

UBS Restaurants and Packaged Food Analyst

Date & Time: Monday, July 11, 2011, 2 PM

Dial-in Details:

Toll Free: 800-772-8907 Toll: 212-231-2922

Code: 21529091

Morning Expresso - United States 8 July 2011

UBS 22

Further Information

Morning Expresso – United States Welcome to the Morning Expresso, an early morning summary of the key ideas and issues presented from UBS for the day ahead. Its contents include:

- key items from UBS’ United States Morning Meeting

- highlighted recommendation and price target changes

- today’s anticipated company, sector and macro-economic catalysts from the US Contextual Diary

- company and client events, conferences and conference calls from UBS

- overnight global market, forex and commodity movements

Morning Expresso is designed to give you all that you ‘need to know’ each morning.

Data presented is accurate as at 06:00 EDT on Friday, July 8, 2011.

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

DL-USEquityProductManagement@ubs.com

Statement of Risk

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

Morning Expresso - United States 8 July 2011

UBS 23

Analyst Certification

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

Morning Expresso - United States 8 July 2011

UBS 24

Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

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

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 54% 39%Neutral Hold/Neutral 39% 35%Sell Sell 7% 14%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 33%Sell Sell less than 1% 25%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 June 2011. UBS Investment Research: Global Equity Rating Definitions

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

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

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

Morning Expresso - United States 8 July 2011

UBS 25

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

Morning Expresso - United States 8 July 2011

UBS 26

Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date ACE Limited5, 16 ACE.N Buy N/A US$66.16 07 Jul 2011 Alexion Pharmaceuticals, Inc.16 ALXN.O Neutral N/A US$48.46 07 Jul 2011 Alkermes Inc.16 ALKS.O Neutral N/A US$19.23 07 Jul 2011 Allstate Corp.6b, 6c, 7, 16 ALL.N Neutral N/A US$30.92 07 Jul 2011 Aon Corporation2, 4, 6a, 6b, 6c, 7, 16 AON.N Buy N/A US$51.83 07 Jul 2011 Apple Inc.6c, 7, 16, 18a AAPL.O Buy N/A US$357.20 07 Jul 2011 Axis Capital Holdings Ltd.16 AXS.N Buy N/A US$31.08 07 Jul 2011 Babcock & Wilcox Co16 BWC.N Neutral N/A US$27.51 07 Jul 2011 Baker Hughes Inc.2, 4, 6a, 6b, 6c, 7, 13, 16 BHI.N Buy N/A US$75.38 07 Jul 2011 Cardinal Health, Inc.2, 4, 6a, 6c, 7, 16, 18b, 22 CAH.N Buy N/A US$46.83 07 Jul 2011

Caterpillar Inc.3, 6b, 7, 13, 16, 18e CAT.N Neutral N/A US$111.63 07 Jul 2011 Celgene Corporation6c, 7, 16 CELG.O Buy N/A US$61.68 07 Jul 2011 Chesapeake Energy Corp.2, 4, 6a, 16 CHK.N Neutral N/A US$30.51 07 Jul 2011 Citigroup Inc2, 4, 5, 6a, 6b, 6c, 7, 16 C.N Buy N/A US$42.63 07 Jul 2011 CNH Global NV4, 6a, 6b, 6c, 7, 16, 20 CNH.N Buy (CBE) N/A US$39.04 07 Jul 2011 Deere & Co.16 DE.N Buy N/A US$86.44 07 Jul 2011 Dow Chemical5, 6a, 6b, 6c, 7, 13, 16, 22 DOW.N Buy N/A US$37.17 07 Jul 2011 Fluor Corporation4, 6a, 6b, 6c, 7, 13, 16 FLR.N Buy N/A US$66.78 07 Jul 2011 Ford Motor Co.4, 6a, 6b, 6c, 7, 13, 14, 16,

18c F.N Buy N/A US$14.12 07 Jul 2011

Foster Wheeler Ltd.5, 16 FWLT.O Buy N/A US$30.08 07 Jul 2011 General Electric Co.4, 5, 6a, 6b, 6c, 7, 16,

18g, 22 GE.N Buy N/A US$19.30 07 Jul 2011

Genworth Financial4, 5, 6a, 6b, 6c, 7, 16,

22 GNW.N Buy N/A US$10.68 07 Jul 2011

Google Inc.2, 4, 5, 6a, 6b, 6c, 7, 16, 18d GOOG.O Buy N/A US$546.60 07 Jul 2011 Joy Global Inc.4, 6a, 13, 16, 20 JOYG.O Buy (CBE) N/A US$98.91 07 Jul 2011 KBR, Inc.4, 6a, 6c, 7, 16 KBR.N Buy N/A US$38.69 07 Jul 2011 Lilly (Eli) & Co.4, 5, 6a, 6b, 6c, 7, 16, 18f LLY.N Neutral N/A US$37.85 07 Jul 2011 Marsh & McLennan Companies, Inc.4, 6a, 6b, 6c, 7, 16 MMC.N Buy N/A US$31.46 07 Jul 2011

McDonalds Corp.6b, 7, 13, 16 MCD.N Buy N/A US$86.06 07 Jul 2011 PetSmart, Inc.16 PETM.O Buy N/A US$46.16 07 Jul 2011 Pfizer Inc.6b, 6c, 7, 16, 18i, 22 PFE.N Buy N/A US$20.23 07 Jul 2011 Prudential Financial Inc.2, 4, 6a, 6b, 6c,

7, 16, 22 PRU.N Buy N/A US$65.26 07 Jul 2011

Qualcomm Inc.16 QCOM.O Buy N/A US$59.26 07 Jul 2011 SanDisk Corp.13, 16, 20 SNDK.O Buy (CBE) N/A US$43.62 07 Jul 2011 Shaw Group Inc4, 6a, 16, 20 SHAW.N Buy (CBE) N/A US$28.43 07 Jul 2011 Terex Corporation4, 5, 6a, 16, 18h, 20 TEX.N Neutral (CBE) N/A US$28.98 07 Jul 2011 TransDigm Group Inc.2, 4, 6a, 16 TDG.N Buy N/A US$93.75 07 Jul 2011 URS Corporation4, 6a, 16 URS.N Neutral N/A US$45.89 07 Jul 2011 Validus Holdings, LTD.4, 6a, 16 VR.N Buy N/A US$31.23 07 Jul 2011

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

this company/entity or one of its affiliates within the past 12 months. 3. UBS Securities LLC is acting as advisor to Bucyrus International Inc. on its announced agreement to be acquired by

Caterpillar Inc. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity.

Morning Expresso - United States 8 July 2011

UBS 27

5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.

6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.

6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.

6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.

7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.

13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

14. UBS Limited acts as broker to this company. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common

stock position in Apple, Inc. 18b. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common

stock position in Cardinal Health, Inc. 18c. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common

stock position in Ford Motor, Co. 18d. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common

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

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

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

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

in Terex Corp. 18i. UBS Securities LLC is providing financing to Kohlberg Kravis Roberts & Co.(KKR) on its announced agreement to

acquire Pfizer's Capsugel business 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR

exceeds the MRA by 10% (compared with 6% under the normal rating system). 22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end

(or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end). Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration.

Morning Expresso - United States 8 July 2011

UBS 28

Global Disclaimer This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG is referred to as UBS SA. This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning UBS AG, its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. UBS does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. The report should not be regarded by recipients as a substitute for the exercise of their own judgement. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. Research will initiate, update and cease coverage solely at the discretion of UBS Investment Bank Research Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. UBS is under no obligation to update or keep current the information contained herein. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, groups or affiliates of UBS. The compensation of the analyst who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of UBS Investment Bank as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither UBS nor any of its affiliates, nor any of UBS' or any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. For financial instruments admitted to trading on an EU regulated market: UBS AG, its affiliates or subsidiaries (excluding UBS Securities LLC and/or UBS Capital Markets LP) acts as a market maker or liquidity provider (in accordance with the interpretation of these terms in the UK) in the financial instruments of the issuer save that where the activity of liquidity provider is carried out in accordance with the definition given to it by the laws and regulations of any other EU jurisdictions, such information is separately disclosed in this research report. UBS and its affiliates and employees may have long or short positions, trade as principal and buy and sell in instruments or derivatives identified herein. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can or could have been effected at those prices and any prices do not necessarily reflect UBS's internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions, by UBS or any other source, may yield substantially different results. United Kingdom and the rest of Europe: Except as otherwise specified herein, this material is communicated by UBS Limited, a subsidiary of UBS AG, to persons who are eligible counterparties or professional clients and is only available to such persons. The information contained herein does not apply to, and should not be relied upon by, retail clients. UBS Limited is authorised and regulated by the Financial Services Authority (FSA). UBS research complies with all the FSA requirements and laws concerning disclosures and these are indicated on the research where applicable. France: Prepared by UBS Limited and distributed by UBS Limited and UBS Securities France SA. UBS Securities France S.A. is regulated by the Autorité des Marchés Financiers (AMF). Where an analyst of UBS Securities France S.A. has contributed to this report, the report is also deemed to have been prepared by UBS Securities France S.A. Germany: Prepared by UBS Limited and distributed by UBS Limited and UBS Deutschland AG. UBS Deutschland AG is regulated by the Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin). Spain: Prepared by UBS Limited and distributed by UBS Limited and UBS Securities España SV, SA. UBS Securities España SV, SA is regulated by the Comisión Nacional del Mercado de Valores (CNMV). Turkey: Prepared by UBS Menkul Degerler AS on behalf of and distributed by UBS Limited. Russia: Prepared and distributed by UBS Securities CJSC. Switzerland: Distributed by UBS AG to persons who are institutional investors only. Italy: Prepared by UBS Limited and distributed by UBS Limited and UBS Italia Sim S.p.A.. UBS Italia Sim S.p.A. is regulated by the Bank of Italy and by the Commissione Nazionale per le Società e la Borsa (CONSOB). Where an analyst of UBS Italia Sim S.p.A. has contributed to this report, the report is also deemed to have been prepared by UBS Italia Sim S.p.A.. South Africa: UBS South Africa (Pty) Limited (Registration No. 1995/011140/07) is a member of the JSE Limited, the South African Futures Exchange and the Bond Exchange of South Africa. UBS South Africa (Pty) Limited is an authorised Financial Services Provider. Details of its postal and physical address and a list of its directors are available on request or may be accessed at http:www.ubs.co.za. United States: Distributed to US persons by either UBS Securities LLC or by UBS Financial Services Inc., subsidiaries of UBS AG; or by a group, subsidiary or affiliate of UBS AG that is not registered as a US broker-dealer (a 'non-US affiliate'), to major US institutional investors only. UBS Securities LLC or UBS Financial Services Inc. accepts responsibility for the content of a report prepared by another non-US affiliate when distributed to US persons by UBS Securities LLC or UBS Financial Services Inc. All transactions by a US person in the securities mentioned in this report must be effected through UBS Securities LLC or UBS Financial Services Inc., and not through a non-US affiliate. Canada: Distributed by UBS Securities Canada Inc., a subsidiary of UBS AG and a member of the principal Canadian stock exchanges & CIPF. A statement of its financial condition and a list of its directors and senior officers will be provided upon request. Hong Kong: Distributed by UBS Securities Asia Limited. Singapore: Distributed by UBS Securities Pte. Ltd [mica (p) 039/11/2009 and Co. Reg. No.: 198500648C] or UBS AG, Singapore Branch. Please contact UBS Securities Pte Ltd, an exempt financial advisor under the Singapore Financial Advisers Act (Cap. 110); or UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. The recipient of this report represent and warrant that they are accredited and institutional investors as defined in the Securities and Futures Act (Cap. 289). Japan: Distributed by UBS Securities Japan Ltd to institutional investors only. Where this report has been prepared by UBS Securities Japan Ltd, UBS Securities Japan Ltd is the author, publisher and distributor of the report. Australia: Distributed by UBS AG (Holder of Australian Financial Services License No. 231087) and UBS Securities Australia Ltd (Holder of Australian Financial Services License No. 231098) only to 'Wholesale' clients as defined by s761G of the Corporations Act 2001. New Zealand: Distributed by UBS New Zealand Ltd. An investment adviser and investment broker disclosure statement is available on request and free of charge by writing to PO Box 45, Auckland, NZ. Dubai: The research prepared and distributed by UBS AG Dubai Branch, is intended for Professional Clients only and is not for further distribution within the United Arab Emirates. Korea: Distributed in Korea by UBS Securities Pte. Ltd., Seoul Branch. This report may have been edited or contributed to from time to time by affiliates of UBS Securities Pte. Ltd., Seoul Branch. Malaysia: This material is authorized to be distributed in Malaysia by UBS Securities Malaysia Sdn. Bhd (253825-x).India : Prepared by UBS Securities India Private Ltd. 2/F,2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai (India) 400051. Phone: +912261556000 SEBI Registration Numbers: NSE (Capital Market Segment): INB230951431 , NSE (F&O Segment) INF230951431, BSE (Capital Market Segment) INB010951437. The disclosures contained in research reports produced by UBS Limited shall be governed by and construed in accordance with English law. UBS specifically prohibits the redistribution of this material in whole or in part without the written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. Images may depict objects or elements which are protected by third party copyright, trademarks and other intellectual property rights. © UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

ab