financial pacific - investment research (third party)

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UBS Investment Research

U.S. Morning Meeting Highlights

Global Equity Research

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Global StrategyEquity Strategy Thomas M. Doerflinger,

Ph.D.p.32

US Equity Strategy Comment - Q2 2010 Earnings Season Weekly Update: Week 2

EconomicsEconomics Maury N. Harris p.32

US Daily Economic Comment - A quiet Friday?

Ratings ChangeArray BioPharma, ARRY.O Jeff Elliott, Ph.D. p.17Upgrading to Buy on Valuation12-month rating: Prior: Neutral => Buy * CBE , FY10E US$(1.58), FY11E US$(1.02),PT US$4.25, Mkt Cap US$0.16bn

Estimate/Price Target RevisionsSafeway, SWY.N Neil Currie p.92H2010 Assumptions Still Heroic?12-month rating: Neutral (Unchanged), FY10E US$1.71=>US$1.45, FY11EUS$1.90=>US$1.62, PT Prior: US$21.00 => US$20.00, Mkt Cap US$7.59bnSanDisk, SNDK.O Uche Orji p.30Strong Secular Demand and Gross Margin Thesis Remains Intact. Reiterate Buy.12-month rating: Buy * (Unchanged) CBE , FY10E US$3.46=>US$4.02, FY11EUS$3.77=>US$4.40, PT US$55.00, Mkt Cap US$9.99bnSkyworks Solutions, SWKS.O Parag Agarwal p.28New customer ramp drives solid results and outlook; Reiterate Buy, raise PT to $2212-month rating: Buy (Unchanged), FY10E US$0.83=>US$0.81, FY11EUS$1.22=>US$1.40, PT Prior: US$19.00 => US$22.00, Mkt Cap US$3.19bnJetBlue Airways, JBLU.O Kevin Crissey p.7Thoughts After the Call12-month rating: Neutral * (Unchanged) CBE , FY10E US$0.36=>US$0.45, FY11EUS$0.45=>US$0.42, PT Prior: US$6.50 => US$7.00, Mkt Cap US$1.76bnAlaska Air, ALK.N Kevin Crissey p.7Thoughts After the Call12-month rating: Buy * (Unchanged) CBE , FY10E US$6.91=>US$6.31, FY11EUS$7.26=>US$7.23, PT US$60.00, Mkt Cap US$1.76bnContinental Airlines, CAL.N Kevin Crissey p.8Thoughts After the Call12-month rating: Buy * (Unchanged) CBE , FY10E US$4.14=>US$3.32, FY11EUS$4.87=>US$3.62, PT US$35.00, Mkt Cap US$3.38bn

23 July 2010http://www.ubs.com/investmentresearch

This package has been prepared by UBS Securities LLC UBS 1ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 33*Under review (UR) and/or exception to core rating bands (CBE) - see page : 33UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may havea conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.

http://www.ubs.com/investmentresearch

Mettler-Toledo, MTD.N Derik de Bruin, Ph.D. p.21Big Q2 Beat, Raise Partly Hindered By F/X12-month rating: Buy (Unchanged), FY10E US$6.41=>US$6.45, FY11EUS$7.45=>US$7.40, PT US$150.00, Mkt Cap US$4.09bnCepheid, CPHD.O Derik de Bruin, Ph.D. p.17Margins Improve, Still Cautious Outlook12-month rating: Neutral * (Unchanged) CBE , FY10E US$(0.26)=>US$(0.22), FY11EUS$0.07=>US$0.11, PT US$20.00, Mkt Cap US$0.87bnCypress, CY.O Steven Eliscu p.29Strong Microcontroller Order Momentum and Sustainably Higher Gross Margin12-month rating: Neutral (Unchanged), FY10E US$0.40=>US$0.44, FY11EUS$0.53=>US$0.51, PT US$12.00, Mkt Cap US$1.76bn3M Co., MMM.N Jason Feldman p.22Continued Strong Performance in 2Q12-month rating: Buy (Unchanged), FY10E US$5.60=>US$5.80, FY11EUS$6.15=>US$6.40, PT US$100.00, Mkt Cap US$60.3bnCaterpillar, CAT.N Henry Kirn, CFA p.21Raising ests, price target after impressive 2Q12-month rating: Neutral (Unchanged), FY10E US$3.00=>US$3.60, FY11EUS$4.00=>US$4.50, PT Prior: US$70.00 => US$74.00, Mkt Cap US$42.4bnAutoNation, AN.N Colin Langan, CFA p.6Still Cautious Despite Beat12-month rating: Sell (Unchanged), FY10E US$1.30=>US$1.50, FY11EUS$1.40=>US$1.55, PT Prior: US$18.00 => US$20.00, Mkt Cap US$3.83bnBristol-Myers, BMY.N Marc Goodman p.18Bristol Knows How to Perform12-month rating: Neutral (Unchanged), FY10E US$2.13=>US$2.15 , PT US$26.00,Mkt Cap US$42.7bnProLogis, PLD.N Ross T. Nussbaum p.14Navigating through choppy waters12-month rating: Neutral (Unchanged), FY10E US$0.58=>US$0.62, FY11EUS$0.85=>US$0.83, PT US$11.00, Mkt Cap US$5.23bnNucor Corp., NUE.N Timna Tanners p.6Tepid Demand, Rising Scrap Temper View12-month rating: Neutral (Unchanged), FY11E US$2.35=>US$2.20, PT US$40.00,Mkt Cap US$12.5bnTyco Electronics, TEL.N Amitabh Passi p.20Solid Execution; Raising Estimates12-month rating: Buy (Unchanged), FY10E US$2.48=>US$2.52, FY11EUS$2.47=>US$2.66, PT Prior: US$32.00 => US$33.00, Mkt Cap US$11.7bnZimmer, ZMH.N Bruce Nudell, PhD p.152Q10: it’s go time12-month rating: Buy (Unchanged), FY10E US$4.29=>US$4.28, FY11EUS$4.79=>US$4.72, PT US$72.00, Mkt Cap US$11.3bnMicrosoft, MSFT.O Brent Thill p.24Strong Q4: Kinecting w/ Enterprise Demand12-month rating: Buy (Unchanged), FYE -, PT Prior: US$38.00 => US$35.00, MktCap US$228bnSunTrust Banks, STI.N Heather Wolf, CFA p.13EPS to Fall Short of Elevated Expectations12-month rating: Sell (Unchanged), FY10E US$(1.65)=>US$(1.10), FY11EUS$(0.65)=>US$(0.55), PT Prior: US$12.00 => US$14.00, Mkt Cap US$12.3bnFifth Third Bancorp, FITB.O Heather Wolf, CFA p.14Making Progress, But Still Headwinds12-month rating: Sell (Unchanged), FY10E US$(0.30)=>US$0.25, FY11EUS$0.30=>US$0.60, PT Prior: US$9.00 => US$10.00, Mkt Cap US$9.90bn

U.S. Morning Meeting Highlights 23 July 2010

UBS 2

Riverbed Technology, RVBD.O Nikos Theodosopoulos p.27Nice Beat and Raise, Raising Tgt and Fcst12-month rating: Neutral * (Unchanged) CBE , FY10E US$0.34=>US$0.41, FY11EUS$0.50=>US$0.56, PT Prior: US$32.00 => US$35.00, Mkt Cap US$2.25bnAmazon.com, AMZN.O Brian Pitz p.25Higher Fulfillment a Nice Problem to Have12-month rating: Buy (Unchanged), FY10E US$2.99=>US$2.78, FY11EUS$4.22=>US$4.20, PT Prior: US$170.00 => US$165.00, Mkt Cap US$53.4bnCalix, CALX.N Nikos Theodosopoulos p.28Reports Solid 2Q10—Frontier and Broadband Stimulus Remain Catalysts12-month rating: Buy (Unchanged), FY10E US$0.00=>US$(0.37), FY11EUS$0.38=>US$0.10, PT US$14.50, Mkt Cap US$0.43bnChubb Corp., CB.N Brian Meredith p.12EPS In-Line Despite Heavy Cat Losses12-month rating: Buy (Unchanged), FY10E US$5.28=>US$5.40, FY11EUS$5.75=>US$5.90, PT US$59.00, Mkt Cap US$17.2bnDanaher, DHR.N Jason Feldman p.222Q: Selloff unjustified given solid results12-month rating: Buy (Unchanged), FY11E US$2.50=>US$2.55, PT Prior:US$48.50 => US$45.00, Mkt Cap US$24.5bnFlextronics, FLEX.O Amitabh Passi p.20Inching Along To The Target Model12-month rating: Buy (Unchanged), FY11E US$0.77=>US$0.80, FY12EUS$0.83=>US$0.90, PT US$9.50, Mkt Cap US$5.41bnHuntington Bancshare, HBAN.O Erika Penala p.13Solid progress, but more to go12-month rating: Sell (Unchanged), FY10E US$(0.26)=>US$(0.23) , PT US$4.00, MktCap US$2.35bnLilly, LLY.N Marc Goodman p.19Bumping Numbers Upward, but Still Neutral12-month rating: Neutral (Unchanged), FY10E US$4.44=>US$4.59, FY11EUS$4.35=>US$4.38, PT US$36.00, Mkt Cap US$40.2bnQuicksilver Res., KWK.N William A. Featherston p.11KGS Deal Relieves Liquidity Concerns and Very Accretive to NAV12-month rating: Buy * (Unchanged) CBE , FY10E US$2.15=>US$2.10, FY11EUS$2.20=>US$2.15, PT Prior: US$16.00 => US$18.00, Mkt Cap US$2.17bnReliance Steel, RS.N Timna Tanners p.24Q2 Beats, Steady Outlook Supports Buy12-month rating: Buy * (Unchanged) CBE , FY10E US$2.80=>US$2.85, FY11EUS$4.90=>US$4.75, PT US$57.00, Mkt Cap US$2.90bnRoyal Caribbean, RCL.N Robin M. Farley p.8RCL: Yield Outlook Hanging In There, Q2 Better Exp., H2 Exp. Unchanged12-month rating: Neutral (Unchanged), FY10E US$1.87=>US$1.96 , PT Prior:US$34.00 => US$30.60, Mkt Cap US$5.96bnSt. Jude Medical, STJ.N Bruce Nudell, PhD p.16Solid execution12-month rating: Buy (Unchanged), FY10E US$2.83=>US$2.88, FY11EUS$3.19=>US$3.28, PT US$46.00, Mkt Cap US$11.5bn

Company UpdateCabot Oil & Gas, COG.N David Deckelbaum p.10Eastern Promises Buoy Long-Term Value12-month rating: Buy (Unchanged), FY10E US$5.38=>US$4.97, FY11EUS$5.46=>US$4.88, PT US$43.00, Mkt Cap US$3.40bn


UBS 3

Cavium Networks, CAVM.O Steven Eliscu p.292Q Results Preview: Expect Solid Growth on Strong Enterprise, Wireless Trends12-month rating: Buy (Unchanged), FY10E US$0.20, FY11E US$0.62, PT US$32.00,Mkt Cap US$1.27bnNetLogic Microsystem, NETL.O Steven Eliscu p.302Q Preview: Expect Solid Results and Outlook on Secular Growth Trends12-month rating: Buy (Unchanged), FY10E US$(0.03), FY11E US$0.59, PTUS$34.50, Mkt Cap US$1.82bnMurphy Oil, MUR.N William A. Featherston p.11MUR to Exit Refining Business…Finally12-month rating: Neutral (Unchanged), FY10E US$12.67, FY11E US$13.33, PTUS$60.00, Mkt Cap US$9.92bnNewfield Exploration, NFX.N William A. Featherston p.122Q Roughly In-Line; Fine Tuning Estimates12-month rating: Buy (Unchanged), FY10E US$10.80=>US$10.65, FY11EUS$11.05=>US$11.10, PT US$65.00, Mkt Cap US$6.96bnCooper Industries, CBE.N Jason Feldman p.232Q beats, but guidance disappoints12-month rating: Buy (Unchanged), FYE -, PT Prior: US$56.00 => US$51.00, MktCap US$7.45bnAT&T Inc., T.N John C. Hodulik, CFA p.31Raising EPS on stronger margins12-month rating: Buy (Unchanged), FY10E US$2.40, FY11E US$2.55, PT US$31.00,Mkt Cap US$151bnBaxter International, BAX.N Bruce Nudell, PhD p.162Q10: BioScience work in progress12-month rating: Buy (Unchanged), FYE -, PT US$56.00, Mkt Cap US$25.9bn

Industry UpdateHeavy Construction Steven Fisher, CFA p.23

Engineering & Construction - E&C Q2 preview: Macro vs. MicroMining & Metals Julien Garran p.5

UBS Global I/O: Commodity Price Review - Time to AccumulateCoal Shneur Z. Gershuni, CFA p.10

The Coal Miner - Valuations Attractive, Is It Time Yet?Diversified Technology Services Jason Kupferberg p.25

Payment Processing: UBS “Swipe” - V/MA: How much will C2Q results matter?Computer Services & IT Consulting Jason Kupferberg p.26

Computer Services & IT Consulting - AXP and COF card volumes follow the trendComputer Services & IT Consulting Jason Kupferberg p.26

Computer Services & IT Consulting - A big week for processorsHealthcare Providers Justin Lake, CFA p.18

HealthCare Services – MCO/Hospitals - Q2’10 Earnings Preview for Week of 7/26Precious Metals Brian MacArthur, CFA p.5

North American Precious Metal Producers - UBS updates metal price forecastsReal Estate Ross T. Nussbaum p.15

The Weekly REIT Appraisal - 2Q10 Earnings – Early TakeawaysTechnology Maynard J. Um p.27

IT Hardware - Read From MSFT's Jun. Qtr ResultsHealthcare Steven Valiquette p.19

U.S. Healthcare Distribution - Drug - More 2011 Generic Pipeline Analysis


UBS 4

Basic MaterialsNorth American Precious Metal Producers Brian MacArthur, CFA.................... +1-416-350 2229

[email protected]

Onno Rutten....................................+1 416 [email protected]

Chris Lichtenheldt, CFA.................+1-416-814 [email protected]

Dan Rollins...................................... +1 416 814 [email protected]

Alana Johnston, CA.......................... +1 416 814 1449Associate [email protected]

Michael Tsada.................................. +1 416 814 3697Associate [email protected]

UBS updates metal price forecasts. Precious metals forecasts upUBS has revised its precious metals forecasts. The gold price forecasts have been raisedbetween 4 and 13%, as our Commodity Strategist, Edel Tully, anticipates an extension of thefear trade and uncertainty. This leaves us above consensus over all forecast periods. Ourforecasts for silver and platinum have also been modestly lifted.. Base metals forecasts downWe have also adjusted our models to reflect UBS’ updated base metals prices, where relevant.As a result, UBS has reduced prices for 2010 and 2011 by around 5-10% for the base metals.For more information on UBS’ metal updates, please see Julien Garran’s “UBS Global I/O:Commodity Price Review” dated July 22nd.. EPS impactOn average, our gold equities EPS estimates are up 12% in 2010, 4% in 2011, and 17% in2012; our silver / PGM equities EPS estimates are up 8% in 2010, down 2% in 2011, and up26% in 2012; and our royalty / stream equities EPS estimates are up 3% in 2010, 4% in 2011,and 8% in 2012.. Valuation updateThere are only minor changes to price targets across our universe as we continue to value thecompanies using a flat $1250/oz gold price. We are upgrading Franco-Nevada from Neutral toBuy on share price depreciation. We continue to believe that investment and speculative flowsare the greatest driver of gold and silver prices.

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UBS Global I/O: Commodity Price Review Julien Garran................................ +44-20-7568 [email protected]

Tom Price..........................................+612 9324 [email protected]

Edel Tully........................................ +44 20756 [email protected]

Time to Accumulate. Maximising risk/rewardIt is time to accumulate metals and mining stocks. But we also advise investors to take theirtime accumulating, using the inherent volatility of the market to maximise the risk/reward of theirinvestment. We review our five signal approach to maximise risk/reward investmentopportunities in the sector.. Commodities to watch: thermal coal, copper, zinc & goldWe have only made modest changes to our commodity price forecasts. Short-term base metalprices are pared to reflect recent aggressive sell-downs; bulks’ forecasts are broadlyunchanged; precious metals are marginally higher. Our preferred commodities over the short- tomedium-term are thermal coal, copper, zinc and gold. We still like copper and met-coal longer-term.. Top equity picks (& least preferred)We introduce our Top 10 Global picks; BHP Billiton (BLT LN, Buy), Rio Tinto (RIO LN; Buy),Teck Resources (TCK/B CN; Buy); Sterlite (STLT IN; Buy); Newcrest (NCM AU; Buy); Barrick(ABX US; Buy); Alumina Ltd (AWC AU; Buy); Riversdale (RIV AU; Buy); Consol Energy (CNXUS; Buy) and Adaro Energy (ADRO IJ; Buy). Our least preferred; Kumba (KIO SJ; Neutral);Nippon Steel (5401 JP: Neutral); Acerinox (ACX SM; Sell); Umicore (UMI BB) and JohnsonMatthey (JMAT LN).

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UBS 5

mailto:[email protected]









http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=NUE.N


Nucor Corp. (NUE.N) Timna Tanners.................+1-212-713 [email protected]

Price (22 Jul 2010)...................... US$39.6712-month rating......... Neutral (Unchanged)12m price target..........................US$40.00Mkt Cap......................................US$12.5bn

Full-Year EPS2011E......................... US$2.35 => US$2.20

Tepid Demand, Rising Scrap Temper View. Maintain 2010, lower 2011/12 estsWe maintain our street-low 2010E $0.75, and expect Q3 pressure from scrap price recovery,after we believe falling scrap boosted NUE’s Q2 margins. We think investors increasingly see2010 consensus EPS at $1.36 as much too high after NUE earned $0.39 in a seasonallystronger H1. We drop our 2011E to $2.20 from $2.35 to incorporate gradual constructionrecovery, still well below consensus at $3.65.. Liquidity/balance sheet position remain superior to most peersNUE’s 21% debt-to-cap ratio and 3.6% dividend yield remain superior to most peers, andremain a draw to more risk-averse investors, in our view. Mgmt suggested it was activelylooking at acquisition possibilities, which we think likely focus overseas and downstream. Acautious outlook can limit the size of any deal.. Mgmt’s tone remained more dour than peersMgmt suggested a “double-dip” was possible in markedly more cautious comments than peersRS and STLD on calls this week. Perhaps this reflects a difference in personality or culturerather than a different NUE mkt reality, still, we found this tone unsettling.. Valuation: No change to Neutral rating, valuation looks fullOur $40 target reflects ~8.5x fwd 12-mo EV/EBITDA, and is based off a historical 6.4x EV/EBITDA multiple on a more “normal” 2012E and discounting back. We model EPS in 2012E at$3.80, down from $4.05, still assuming a solid non-res construction (~60% of demand) reboundor strong contribution from an acquisition, neither of which is easy to anticipate at this time. Wethink consensus ’10 and ’11 ests look much too high. Generally earnings seasonally fall in H2.

Consumer, CyclicalAutoNation (AN.N) Colin Langan, CFA.......... +1-212-713 9949

[email protected]

Price (22 Jul 2010)...................... US$22.5412-month rating...............Sell (Unchanged)12m price target.....Prior: US$18.00 =>US$20.00Mkt Cap......................................US$3.83bn

Full-Year EPS2010E......................... US$1.30 => US$1.502011E......................... US$1.40 => US$1.55

Still Cautious Despite Beat. AN reports Q2 earnings of $0.38 per share, above consensus of $0.36.AN reported EPS of $0.38, which excludes $0.07 related to debt refinancing costs. The beat vs.our $0.32 estimate was driven by higher P&S sales ($0.04), lower SG&A ($0.03), and a lowertax rate ($0.01). SG&A was 72.5% of gross profit, better than our 75.2% estimate. Same-storenew unit sales were up 24.0% y/y, better than our 21% estimate. Same-store used unit saleswere up 27.3% y/y, better than our 18% forecast.. New and used margins disappoint; Small car mix risk to marginsAN reported a 6.6% new gross margin, down 40 bps q/q and lower than our 7.0% forecast.Used margins were 9.4%, worse than our 9.6% estimate and 9.8% in Q1. AN attributed the q/qnew margin decline to lower luxury mix. Going forward, AN said the increase in smaller vehicleswill put pressure on margins, but expects this to be offset by the recovery of pickup sales.However, this implies the shift toward cars would negatively impact new vehicle margins.. Q2 beat the biggest factor in raising our 2010 and 2011 EPS estimatesWe are raising our 2010 and 2011 EPS estimates to reflect the following: 1) the Q2 beat; 2)higher SG&A savings; 3) share repurchases; 4) new dealer additions; and 5) a more bullishused car sales outlook.. Valuation: Maintain Sell; PT to $20 from $18 on estimate revisionsOur new $20 price target is based on 13x our revised 2011 EPS estimate of $1.55.


UBS 6

http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=NUE.N


http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=AN.N


http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=JBLU.O

JetBlue Airways (JBLU.O) Kevin Crissey.................. +1-212-713 [email protected]

Kevin Grasmick................. +1 212 713 1233Associate [email protected]

Price (22 Jul 2010)........................ US$6.3812-month rating.......Neutral * (Unchanged)12m price target.....Prior: US$6.50 =>US$7.00Mkt Cap......................................US$1.76bn


*Exception to core rating bands - seepage 33

Thoughts After the Call. Solid Q2 and good guidanceJBLU beat consensus in Q2 but more importantly guided Q3 revenue above expectations. Its12-15% Q3 passenger unit revenue (RASM) outlook is strong and we believe reflects healthydemand in New York, among other regions. Q4 guidance for revenue appears to imply anexpectation of continued strong bookings. This may turn out to be the case but we’ve chosennot to model above the company’s guidance (as we often do). Other sell-siders may, however,which could lead to higher than appropriate EPS expectations.. Headwinds receding somewhatJetBlue has faced a couple of unique challenges this year that are now behind them, including aJFK runway closure and a SABRE IT upgrade. Investors didn’t need more than that to stayaway from the stock, particularly when they could buy network airlines which offer much greaterleverage to the return of corporate travel.. Our view on the stockWe remain on the sidelines regarding JBLU despite a reasonable valuation and an improvedoutlook because of our view that international demand trends are better than domestic leisuretrends. If you are going to buy an airline in this uncertain economic environment, we think thereare probably better choices.. ValuationWe’ve increased our 12-month PT to $7.00 from $6.50 based on a blend of a 12x P/E and 7xEV/EBITDAR.

Alaska Air (ALK.N) Kevin Crissey.................. +1-212-713 [email protected]


Price (22 Jul 2010)...................... US$49.2612-month rating............ Buy * (Unchanged)12m price target..........................US$60.00Mkt Cap......................................US$1.76bn



Thoughts After the Call. Solid Q2 beatAlaska reported Q2 EPS of $2.29 vs. the consensus of $2.12 and our estimate of $2.23. In ourview, this was an excellent quarter. Compared to our model the difference was a bit betterregional revenue.. Managing the business effectivelyWe take mgmt’s strategic review of Horizon as a positive sign that they are truly managing toROIC targets and not just quoting statistics to investors. They’ve chosen to evaluate thisbusiness while posting record profits and heading toward their financial targets.. Our view on the stockBased on our numbers, ALK remains cheap but we believe investors will question the financialupside to these strong results. Particularly concerning is the increase in competitive capacity inAlaska’s markets. We see upside for the stock but not nearly at the same rate as over the last12 months.. ValuationWe’ve lowered our 2010 EPS estimate to $6.31 from $6.91 as we incorporate a higher fuel priceassumption. Our 12-month PT remains $60 based on a blend of 8x P/E and 5x EV/EBITDAR.


UBS 7

http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=JBLU.O



http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=ALK.N



http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=CAL.N



Continental Airlines (CAL.N) Kevin Crissey.................. +1-212-713 [email protected]





Thoughts After the Call. Beat in Q2Continental posted a strong Q2 and beat the Street as they often have. Revenue wasparticularly strong in TransAtlantic and Pacific markets. Non-fuel costs were below guidance, up2%.. Robust revenue guidance, unit costs guided higherMgmt guided July passenger unit revenue (RASM) up 21%. This result is likely to be behindonly its merger partner United as the best result for the month. Our RASM forecast for thequarter had already assumed healthy revenue so this guidance, while comforting, didn’t moveour estimates higher.. Our view on the stockWe are concerned that Street expectations already incorporate an excellent revenue outcomefor Q3 and therefore have little room to the upside if fuel prices increase beyond today’s levels.This is true for CAL but also for many other airlines. We are more bullish over the next 12months than we are in the short term.. ValuationWe’ve lowered our 2010 EPS estimate to $3.32 from $4.14 as we incorporated higher non-fuelcosts and an elevated fuel price assumption. The bulk of the EPS change came in Q4. Our12-month PT remains $35 on a merger-based 6-7x EV/EBITDAR.

Royal Caribbean (RCL.N) Robin M. Farley............... +1-212-713 [email protected]

Robert W. Carroll.............. +1-212-713 [email protected]

Louise Cheung, CFA......... +1 212 713 3186Associate [email protected]

Price (22 Jul 2010)...................... US$27.5612-month rating......... Neutral (Unchanged)12m price target.....Prior: US$34.00 =>US$30.60Mkt Cap......................................US$5.96bn


RCL: Yield Outlook Hanging In There, Q2 Better Exp., H2 Exp.Unchanged. RCL Maintained +4-5% ‘10 Constant FX Yield GuidanceReading mgmt's body language on follow-up questions, it seemed like close-in bookings aren'tgreat but they were ahead enough from earlier in the year that they don't have to changeguidance. We note that booking vols. in the last 3 months are up 11% yoy, just below the11-12% capacity for the forward 6 mths. Our +5% constant currency yield estimate remainsunchanged.. Q2 Beat on Expenses…Which Drove 2010 EPS Guidance RaiseMgmt raised EPS range up by $0.10 to $2.25-2.35 but that EPS upside is driven by roughly$0.05 from Q2’s true lower net cruise cost ex fuel (i.e. not just timing) and roughly $0.09 fromlower H2 fuel offset by an estimated $0.05 FX drag.. Yield Read-Through for CCL and Adj. Est for FX Moves in Last MonthCCL's constant FX yield guidance in late June of +2-3% is in line with RCL's 4-5% constant FXrange (since ~200+ bps of RCL yield is from Oasis and Solstice premiums in the yield mix, soimplies 2-3% of same-store.) So RCL's reiteration of guidance today supports our constant FXyield assumption for CCL of +3%. We increase our CCL 2010 EPS estimate to $2.36 from prior$2.33 due to recent Euro & GBP strengthening. Valuation: RCL 12 month PT lowered to $30.60, from $34Our new $30.60 PT is based on ~13-14x (in line with historical discount to CCL's P/E at10-20%), a “normalized” EPS, which we base on 2012 and PV to today. Our 2012 EPS is $2.86vs. prior $2.96 reflects lower capacity days from drydocks & ship transfer.


UBS 8

http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=CAL.N



http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=RCL.N




http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=SWY.N

Consumer, Non-CyclicalSafeway (SWY.N) Neil Currie........................ +1-203-719 3070

[email protected]

Doug Cooper..................... +1 203 719 6059Associate [email protected]

Krista Zuber.......................+1-212-713 2599Associate [email protected]



2H2010 Assumptions Still Heroic?. Inline quarter, guidance cut not enough in our viewThe company reported 2Q10 EPS of 37c, inline with the Street’s view, but took down sales andEPS guidance for the year on a lower food inflation outlook, which we think was widelyanticipated heading into the print. However, we feel guidance may still be lofty with 2H10possibly still overly optimistic; further potential for a downside revision to guidance still exists inour view.. Inflation not coming back quickly, and not easy to pass throughDeflation has taken some time to work through the system and inflation is only being seen inseveral categories. At the same time PPI has come back strongly at a time when inflation costpass through at retail is tepid at best, creating further pressure on gross margin in the absenceof further self-induced (price investments) pressures. While management comments aboutinflation in 4Q and beyond seem fair, passing increases through to a shaky consumer may notbe so.. New guidance still lofty on several pointsThe new FY10 guidance range of $1.50 to $1.70 ($1.65 to $1.85 prior) w/ID sales of -1.5% to -1.0% (0.0% to 1.0% prior) still implies a stronger 2H2010, which we feel may look more like arepeat of 1H10. The new range assumes improvement or flat gross margin, improvement inSG&A trends, and the return of inflation, all an optimistic scenario of improvement in our view,we prefer to be more cautious.. Valuation: Neutral rating w/new $20PT, dropping estimates below rangeOur new $20 PT ($21 prior) is based on a P/E multiple of 12x our FY11 EPS estimate Ourestimates for FY10 goes to $1.45 from $1.71 and FY11 to $1.62 from $1.90.


UBS 9

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=COG.N


EnergyCabot Oil & Gas (COG.N) David Deckelbaum.......... +1-212-713 6138

[email protected]

Price (22 Jul 2010)...................... US$32.7712-month rating...............Buy (Unchanged)12m price target..........................US$43.00Mkt Cap......................................US$3.40bn


Eastern Promises Buoy Long-Term Value. Solid quarter but trepidation on spending as Marcellus picture improvesCOG turned in a respectably inline quarter fuelled by a 13% sequential increase in productionand provided bullish sentiment on go-forward operations by raising production guidance by 3%for 2010 to 21-25% YoY. Shares reacted negatively to news of higher capex of $725m in 2010vs. $650m prior, underperforming the group by roughly 350bps. We do not believe the higherspending translates into balance sheet disrepair and are encouraged by positive opsmomentum across COG’s core Marcellus position.. Marcellus activity encouragingCabot has now produced over 180 MMcfe/D gross after the start-up of the Lathrop compressorin June, after a slight delay. Management expects to have capacity from Lathrop ramped fromover 85 MMcfe/D to 125 MMcfe/D by early August. With 75 wells set to drill in PA in 2010 with a7th rig added and 30 more wells completing now, we see ample upside to current productionforecasts. The only question remains execution and regulation that appears to be graduallyeasing.. Lowering estimates on higher costs, accounting changesWe are lowering our 2010/2011/2012 CFPS estimates to $4.97/$4.88/$6.41 from$5.38/$5.46/$6.90 prior. While our production estimates are now 4% higher for 2010 and 6% for2011 (24% and 18% YoY growth), our estimates are hampered by accounting changes thatresult in fewer exploration expense add backs to CFO.. Valuation: Maintaining price target of $43Our $43 target is based on our 1P and 2P NAVs, implying 8.5x our 2011 EBITDA estimate.

The Coal Miner Shneur Z. Gershuni, CFA............... +1-212-713 [email protected]

Spiro M. Dounis, CPA..................... +1 212 713 2928Associate [email protected]

Tom Price..........................................+612 9324 [email protected]

Valuations Attractive, Is It Time Yet?. Met names sporting attractive valuations – time to revisit?s. Thermal fundamentals continue to improve – news flow positive.s. Negative China policy signals moderate.s. Thermal: ACI, CNX, JRCC; Met/Hybrids: WLT, MEE, ICO & ANR.s

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UBS 10

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=KWK.N




Quicksilver Res. (KWK.N) William A. [email protected]

Betty Jiang.........................+1 212 713 1287Associate [email protected]

Margaret O'Connor............+1 212 713 2257Associate [email protected]

Price (22 Jul 2010)...................... US$12.7512-month rating............ Buy * (Unchanged)12m price target.....Prior: US$16.00 =>US$18.00Mkt Cap......................................US$2.17bn



KGS Deal Relieves Liquidity Concerns and Very Accretive to NAV. Monetizes Quicksilver Gas Services MLP at attractive pricesKWK agreed to sell all of its interests in Quicksilver Gas Services to First Reserve for $1 billion:$701MM in cash, $72MM in earn-out payments over the next 2 years, and $228MM ofconsolidated debt associated with KGS that will be eliminated. We estimate KWK will receive anattractive 28-35x 2011E cash flow for the GP units. The transaction is expected to close inOctober ’10, and KWK will use proceeds to pay down $528 MM on its $1.0 billion credit facility.. Significantly accretive to NAV and materially reduces financial leverageWe estimate the transaction adds $3/share to NAV. It should also reduce KWK’s financialleverage from an uncomfortably high to manageable level: net debt to cap ratio will improve to59% from 78% and net debt/2011E EBITDX will decline to 3.2x from 4.1x. We fine tuned EPS/CFPS estimates as the divestiture will result in higher GPM costs offset by lower interest, G&Aand DD&A expense.. Potential next steps to further improve liquidity position:1) sale of BreitBurn units (17.7 MM units) worth ~$275 MM; or 2) sale of part or all of its HornRiver Basin position, where it has 130,000 net acres (5.2 Tcfe of resource potential). Recentpress reports indicate Reliance may be a willing buyer, and KWK’s improved financial positionshould help its negotiating position.. Valuation: increasing price target to $18 from $16$18 PT assumes 0.8x 2PNAV of $23/sh, in-line w/ peer group’s current multiple.

Murphy Oil (MUR.N) William A. [email protected]

Craig Weiland....................+1-212-713 [email protected]



Full-Year EPS2010E........................................... US$12.672011E........................................... US$13.33

MUR to Exit Refining Business…Finally. MUR to divest 3 refineries and UK retail sitesMUR plans to exit the refining business with the sale of its two domestic refineries (Meraux, LAand Superior, WI) and its Milford Haven U.K. refinery. MUR also plans to divest 230 retail sitesin the UK; it will continue to operate its U.S. retail sites, which generate mid-teen returns. Whilewe believe MUR will be challenged to sell its high cost Meraux refinery, we estimate divestiturescould total $1.3 billion. As shown in Exhibit 1, we value the 3 refineries and associated inventoryat $1.1 billion & the UK retail sites at $200 million.. Divestiture makes strategic sense; expect favourable stock price reactionGiven the low returns, negative FCF and lack of growth in MUR’s refining business, we believethe Street will react favorably to the news. The R&M segment has consistently underperformedMUR’s upstream portfolio, posting low-to-mid single digit returns while generating $100-200MMin negative free cash flow. We outline the unattractive metrics of MUR’s R&M segment in Exhibit2.. Expect proceeds to be directed toward North American shale playsWhile management may disclose intentions on its conference call, we expect proceeds from thedivestiture to go toward the growth and development of its E&P resource plays: the Montneytight gas play has 126,000 net acres with 3.1 Tcfe of net resource potential and its Eagle Fordshale position has 200,000 net acres with 3.4 Tcfe.. Valuation: we rate MUR a Neutral with a $60 price targetOur price target assumes 3.7x our normalized 2010 EBITDX estimate, or 0.9x NAV.


UBS 11

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=MUR.N




http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=NFX.N


Newfield Exploration (NFX.N) William A. [email protected]


Margaret O'Connor............+1 212 713 2257Associate [email protected]


Full-Year EPS2010E..................... US$10.80 => US$10.652011E..................... US$11.05 => US$11.10

2Q Roughly In-Line; Fine Tuning Estimates. 2Q operationally in line; EPS/CFPS just shy due to slightly higher tax rate2Q clean EPS/CFPS of $1.06/$2.57 was just shy of our $1.08/$2.63 estimate and below$1.08/$2.72 consensus. 2Q highlights included: a 13% YoY increase in production to 73 Bcfe(at the high end of the 70-73 Bcfe guidance range and in line with UBSe) & a 14% increase inper-unit costs to $4.65/Mcfe (in line with our forecast but 5% below the peer average).. Reiterates ‘10 growth guidance, but raises US oil growth from 20% to 30%Yesterday, NFX reiterated its ‘10 volume target of 283-288 Bcfe, but raised US oil volumes as a% of the mix, effectively boosting revenue guidance. FY10 prod’n is now expected to reach mid-point of guidance (better than recent comments that it would be at low end). We estimate ’10 &’11 volume growth of 11% and 9% with oil comprising 30%/34% of ’10/’11 volumes. After raisingestimates yesterday on increased oil mix, we’re dialing back estimates today on higher G&A.. Appraisal results from two oil resource plays serve as near-term catalysts:1) NFX plans to drill 8 wells in the S. Alberta Bakken this year and the 2nd well has just reachedtotal depth; and 2) NFX expects to complete its first Eagle Ford well next week and plans to drill~15 wells this year. We exclude Eagle Ford and S. Alberta potential from our NAV, but the 2plays could be worth ~$2/share each.. Valuation: trades roughly in line with peersOur $65 target is ~0.9x our NAV and assumes a 6.2x normalized '10E EBITDX.

FinancialChubb Corp. (CB.N) Brian Meredith................. +1 203 719 2899

[email protected]

Marie Lunackova, CFA......+1-203-719 6605Associate [email protected]



EPS In-Line Despite Heavy Cat Losses. Operating EPS of $1.41, in line with UBSe and consensus of $1.40Higher than expected catastrophe losses ($0.29) were offset by higher than expected lossreserve releases ($0.18) and lower accident year losses ($0.06). The results also benefited by$0.04 from a special dividend related to an equity investment. BVPS was up 2.5% sequentiallyto $49.39, in line with our estimate. CB repurchased 12.4mm shares in the 2Q10 (UBSe of12mm), and plans to utilize the remaining 16.8mm shares on its current authorization by year-end 2010.. Commercial lines price competition increasesChubb commercial lines renewal pricing was flat in 2Q10 (vs. up 1% in 1Q10), and professionalliability declined 3% in 2Q10 (vs. down 1% in 1Q10) as companies react to the current favorableloss cost environment. Terms and conditions also weakened in some lines of business.. Adjusting our 2010/2011 EPS estimatesWe are raising our 2010 EPS estimate to $5.40 (from $5.28) and 2011 EPS estimate to $5.90(from $5.75), reflecting modestly better accident year combined ratios. Our 2010 estimate iswithin CB’s 2010 guidance of $5.15 - $5.55.. Valuation: Continue to rate share a BuyOur price target of $59 assumes CB’s shares trade at 1.2x of our 12-month forward BVPSestimate ex-AOCI of $48.24. Its shares currently trade at 1.1x its BVPS x/ AOCI. With more than$2bb of excess capital, relatively attractive ROE’s, a strong balance sheet and likely upside toconsensus estimates, we believe CB deserves a premium valuation to peers.


UBS 12

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=CB.N



http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=HBAN.O


Huntington Bancshare (HBAN.O) Erika Penala.....................+1-212-713 [email protected]

Elena Kim.......................... +1 212 713 4057Associate [email protected]

Joshua Rogers.................. +1-212-713 2364Associate [email protected]

Price (22 Jul 2010)........................ US$5.8512-month rating...............Sell (Unchanged)12m price target............................US$4.00Mkt Cap......................................US$2.35bn

Full-Year EPS2010E.................... US$(0.26) => US$(0.23)

Solid progress, but more to go. Maintain cautious stanceWe maintain our Sell rating on HBAN. Results marked continued solid progress. But, we believerevenue headwinds are greater than expected, while credit quality tailwinds will likely taper in2H10. We are raising our EPS estimate for 2010 to ($0.23) from ($0.26) to account for the beat,but maintain our 2011 and 2012 estimates of $0.28 and $0.55, respectively.. Uncertain economic underpinnings could inhibit credit improvementHBAN’s sale of Franklin-rel. resi RE loans allowed for a $76mn reserve release. However, aweak economy will likely inhibit similar-sized reserve releases until 4Q11. C&I credit trendsshould continue to improve, and we narrowed our estimates for auto losses. But, we expectcore resi RE trends to remain under pressure, especially as re-default rates rise in HBAN’s loanmod portfolio (4% of 1st lien loans). Further, we expect term CRE credits to remain challengedthrough 2011.. Pre-tax, pre-provision levels could be under pressure in 2H10HBAN guided for pre-tax, pre-prov. levels in 2H10 to be in-line with 2Q. But, we believe thiscould prove difficult. NIM trends will likely stay flat, given a fading deposit re-pricing lever andincreasing competition for new originations. Solid auto loan growth may not be able to offsetscant corporate loan demand and problem portfolio run-off. Lastly, overdraft regs shouldpressure dep. svc. charges from seasonally strong levels, and mortgage banking incomestrength should wane.. Valuation still stretchedHBAN trades at 14.1x the PV of our 2012 EPS estimate and 1.4x TBV. We believe EPSheadwinds could pressure these multiples. Our 3-pronged valuation method drives our PT.

SunTrust Banks (STI.N) Heather Wolf, CFA...........+1-212-713 [email protected]




Full-Year EPS2010E.................... US$(1.65) => US$(1.10)2011E.................... US$(0.65) => US$(0.55)

EPS to Fall Short of Elevated Expectations. Maintain Sell rating due to elevated expectationsWe maintain our Sell rating. While STI’s fundamentals are clearly improving and surpassed ourests, we think EPS expectations are too high. We are increasing our ’10E to ($1.10) from($1.65), and our ’11E to ($0.55) from ($0.65) to account for the beat, but maintaining our ’12-’14ests. Our ’12 est is 75% below consensus.. Solid credit beat, but we see a slow recovery aheadSTI reported improved NCOs and NPAs, well exceeding our est. But we think the pace ofimprovement will slow, given: 1) Const NPLs remain at 29% and mgmt has stated their intent tocontinue bulk selling, which could drive greater discounts than current marks; 2) TDRs grew136% QoQ, and rising re-defaults could slow loss improvement; and 3) Term CRE migration willlikely continue. Further, STI released reserves this qtr, but this trend could prove short-livedgiven below avg reserves/loans.. Pre-tax, pre-provision headwinds aheadLending revs surpassed our est., but we expect modest declines in 2H10 and ’11, givenpressure from the flat rate environment, continued loan contraction, and deposit run-off. Also,STI reported strong fee income this qtr, but reg reform, and lower MSR hedge, trading, andsecurities gains will weigh on these revs in 2H10.. Valuation: Expect multiples to compress from EPS missesSTI trades at 42x our ’12 est vs our target of 12x. It also trades at 1.1x trough TBV vs our targetof 0.9x (based on forecasted ROTE < cost of equity). Our three-pronged valuation summary(P/E, P/TB, DCF) drives our $14 PT (was $12).


UBS 13

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=STI.N




Fifth Third Bancorp (FITB.O) Heather Wolf, CFA...........+1-212-713 [email protected]




Full-Year EPS2010E.......................US$(0.30) => US$0.252011E......................... US$0.30 => US$0.60

Making Progress, But Still Headwinds. Maintain Sell ratingFITB is making strong progress at managing thru the cycle, but we think the pace of creditimprovement will slow and revenue headwinds will persist. We increased our ests to account forthe outperformance this qtr. We increased our ’10 est to $0.25 from ($0.30), our ’11 est to $0.60from $0.30, and our ’12 est to $1.15 from $0.95. But our ests remain ~30% below consensus.Also, our ests do not include any dilution from a capital raise likely required to pay back TARP.. Pace of credit improvement to slowMgmt suggested, and we concur, that the pace of credit improvement in 2H10 will unlikelymatch that posted 1H10. Construction and C&I losses should continue to recede, but resi andcomm’l real estate losses should remain elevated. That said, given the credit improvement andan industry-wide trend for early reserve releases, we have pulled forward reserve releases from’13 and ’14 into ’11 and ’12.. Not immune to revenue headwindsFITB is not immune to rev pressures. Lending revs missed our ests, and although we expect arebound in 2H10, a flat rate environment and sluggish loan growth will weigh on marginsthrough ’11. Further, reg reform will weigh on fee revs in 2H10 and beyond.. Valuation: Fundamentals don’t justify valuationFITB trades at 13x the PV of our ’12 est vs our forecast for 11x. It trades at 1.3x TBV, despitean ROTE < cost of equity post further dilution. Our three-pronged valuation methodology (P/E,P/TB, DCF) drives our target price of $10 (was $9).

ProLogis (PLD.N) Ross T. Nussbaum.......... +1 212 713 [email protected]

Robert Salisbury................ +1 212 713 [email protected]

Vikas Patel.........................+1 212 713 1102Associate [email protected]



Navigating through choppy waters. Solid development leasing in 2Q10, but significant headwinds remainPLD reported a decent 2Q result that featured solid leasing in the development portfolio (nearly500 bps), which offset continued rent rolldowns (-15.7%) and tepid core occupancy (down 22bps). We expect SSNOI to decline further in 2011 as leasing spreads remain negative, and witha >150% dividend payout on 2011E FCF and fixed charge coverage at 1.76x (down from 1.92xin 1Q), potential credit ratings pressure could ultimately result in an equity raise. We remainunderweight the industrial REIT sector and prefer AMB, which has a better risk-reward profile.. Core NOI guidance likely reduced, overall earnings quality deterioratingCore NOI guidance appears to have been reduced as FY10 FFO continues to become moreback-end weighted with diminished earnings quality, including $0.03 of expected pick-up in2H10 from higher development fee revenue. While the FY10 Core FFO range of $0.55-0.60seems achievable, PLD’s goal of $700-800m of asset sales in the next 5 months could proveaggressive, in our opinion.. Adjusting estimates for 2Q result, slower occupancy recoveryWe have adjusted our FY10/11 Core FFO estimates to $0.56/$0.73 from $0.54/$0.75, whichprimarily reflects upside from the 2Q10 result, partially offset by a reduced occupancyassumption (we now expect flat occupancy in 2H10).. Valuation: Discount to NAV still warrantedPLD is trading at 7.6% implied cap rate and 21x our estimate of 2011 AFFO. A discount to NAVis warranted in light of the heightened balance sheet and fundamental risks, in our view. Our$11 target is based on a 5% discount to our new $11.50 fwd NAV estimate.


UBS 14

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=PLD.N




The Weekly REIT Appraisal Ross T. Nussbaum..........................+1 212 713 [email protected]

Christy McElroy.............................. +1-203-719 [email protected]

Dustin Pizzo, CFA........................... +1 212 713 [email protected]

Robert Salisbury............................. +1 212 713 [email protected]

Derek Bower..................................... +1 212 713 3402Associate [email protected]

Vikas Patel........................................+1 212 713 1102Associate [email protected]

Gabriel Hilmoe..................................+1-212-713 3876Associate [email protected]

2Q10 Earnings – Early Takeaways. A Rising Tide…Despite an “unusually uncertain” economic outlook, REITs marched higher during the first weekof 2Q earnings season. REITs remain higher-beta versions of the broad market, and a risingtide lifted the REIT ship 4.0% on Thursday. The group has also been supported by a sub-3.0%10-year Treasury yield.. Mixed Performance out of Industrial REITsWe expected guidance cuts out of the industrial REITs this past week. AMB cooperated.ProLogis did not. However, ProLogis’ 33% owned European cousin (PEPR), did cut guidanceby 11%. While PLD left guidance unchanged, we suspect NOI guidance was reduced. Weremain underweight industrial as we don’t see a 2H fundamental catalyst.. A Peak At MultifamilyCLP kicked off 2Q multifamily earnings with an earnings beat and guidance raise. The read-through we get is that guidance raises from the rest of the multifamily group are likely. But, willthe market care with the stocks trading at 22x our estimates of 2011 AFFO and 5.6% impliednominal cap rates. We would look to take profits on further strength.. A One-Off Upgrade in Office LandWe stepped out-of-the-box this week and upgraded our rating on micro-cap Parkway Properties(PKY) to Buy. Even after Thursday’s 9% rally, Parkway trades at a 10% implied cap rate and a25% discount to forward NAV. With the SOX claim from the former CFO withdrawn earlier thisweek, we see PKY closing the gap to NAV. We don’t mind a little hair at a 25% NAV discount.

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HealthcareZimmer (ZMH.N) Bruce Nudell, PhD........... +1 212 713 2716

[email protected]

Rajeev Jashnani, CFA....... +1 212 713 [email protected]

Mike Duncan, CFA............ +1 212 713 3910Associate [email protected]



2Q10: it’s go time. 2Q10 EPS beat, ‘10 EPS guidance maintainedMgmt maintained FY10 EPS/rev growth guidance of $4.15-$4.35/3-5% CC. ’10 GM guidancewas raised to 76-76.5% from 75-76% partially offset by SG&A (now 42% of sales from 41-42%).We updated our 2010 rev/EPS ests to $4.239/$4.28 from $4.247B/$4.29. ZMH reported 2Q10revs of $1.058B (cons. $1.068B), up 3.3% CC. EPS of $1.09 beat cons. of $1.05 on lowerSG&A & better gross mgn. ZMH gave 3Q10 EPS guidance of $0.93-$0.98 (UBS est $0.98).. 1H10 industry growth for major joints steady at + 5.6%US/+ 4.6%OUSThough ZMH, like peers, noted deceleration in 2Q10 vs 1Q10 US market growth, 1H10 US revssuggest steady ~5% mkt growth (w/ 85% of mkt reporting). ZMH suggested slower 2Q10possibly tied to add’l 1Q10 billing days at JNJ although decrease in knee units typically used inyounger patients suggests some macro impact.. Profitability of commercial ortho patients positive for implant pricingMgmt stated US pricing pressure has not ticked up (inline w/ SYK comments). Given profitabilityof commercial hip/knee procedures (1.5X Medicare) for US hospitals and cost-plus basedimplant reimbursement, we don’t see a step change in hospital incentive to increase pressureon implant pricing. ZMH confirmed price pressure originates in base implant (e.g., Medicare)pricing. Contract carve-outs for high-end products (for young pts) & therefore mix opportunitiespersist (pg 2).. Valuation: DCF based price target is $72We expect the stock trajectory going forward to be tied to uptake of new hip products, ZMH2Q10 US hip growth of 3% was inline with market for the first time since late 2006.


UBS 15








http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=ZMH.N




St. Jude Medical (STJ.N) Bruce Nudell, PhD........... +1 212 713 [email protected]





Solid execution. ICD-driven topline beat, with solid spending controlSt. Jude reported 2Q10 rev of $1.313B (~11% reported & CC), about $23M above consensus.Adjusted EPS of $0.79 beat our and consensus estimate by $0.06, driven by higher sales andSG&A control (34.1% versus our estimate of 35.4%).. ICD share gains expected going forward2Q10 ICD sales were $300M in US (+12% ex. $15M from BSX ship hold) and $171M OUS(~17% CC growth). We model 2Q US ICD sales of $520M for MDT & US ICD market at$1.058B (1H10 flat Y/Y). We model eroding US ICD market (-1% CAGR) through ‘14, givendeclining de novo implants with WW CAGR at 2%. Offsetting this, we expect STJ to gain atleast 200BP of WW share through 2014. Our WW ICD + Pacer market model shows ~2%CAGR through ’14.. 2010 EPS guidance upped $0.06 (2Q10 beat), absorbs $0.03-04 FX impact2010 rev guidance of $5.035-5.180B, is modestly lower than previous range due to FX, butexpected CC growth increased (9-12% from 8-11%). We now model $5.082B (+$11M) w EPS@ $2.88 (up from $2.83). We model 2H EPS growth rates declining from 1H (~28% to ~9%),due to worsening FX, waning ICD recall impact, integration of LightLab and moderating GMfrom absorption of remote pacers.. Valuation - DCF-based target of $46; BSX trades at 11.1x our 2011E EPSSTJ showed strong execution w ICD share gains/strong WW CC growth in Neuro (17%) and AF(12% CC) & unchanged longer term positive outlook for markets (despite current STJsluggishness in US AF). We est. top/bottom line CAGRs for STJ at 6%/11% for ‘10-’14 despiteconservative CRM market assumptions.

Baxter International (BAX.N) Bruce Nudell, PhD........... +1 212 713 [email protected]




Full-Year EPS

2Q10: BioScience work in progress. Maintain sales / EPS estimatesWe maintain ‘10 / ‘11 sales estimates of $12.8B (+2%) / $13.3B (+4%) & EPS estimates of$3.96 (+4%) / $4.26 (+8%). BAX maintained ‘10 sales growth guidance of 1-3% (FX neutral) &tightened EPS from $3.92-$4.00 to $3.93-$3.98, now incl +$0.03 from more aggressive sharerepo (Table 1). Key assumption in ’11 is BioScience recovery; we model +3% from -2% in ’10(+1% excl US HC reform & H1N1/vax).. BioScience not out of woodsRecombinant ww CC growth of +1% (vs 5% est) due to UK tender & US HC reform (eachroughly -1% to ww growth); delayed tender in Eastern Europe also contributed. BAX tookRecombinant guidance to +4% CC (inline w/ 1H10) from 4-5%. US IVIG was inline but -17%YOY, w/ -4% due to US HC reform & balance ascribable to share / pricing. Ex-US IVIG solid at+11% CC. Plasma Proteins soft; -7% US on albumin & -15% CC ex-US on pdFVIII / toughcomp.. Medication Delivery strongMed Del 2Q10 CC sales growth was +6% CC w/ strength in IV Therapies, Global Injectables, &Infusion Systems (although benefited from Sigma sales; unlikely to persist in 2H10). Importantly,Med Del top line strength accompanied w/ margin expansion within segment.. Valuation: DCF-based $56 price targetWe believe valuation is attractive but BioScience stability is needed. Longer term opportunitylies in mgmt ability to create a truly diversified model w/ strong contributions from Med Del &Renal.


UBS 16

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http://clientportal.ibb.ubs.com/portal/index.jsp?page=eqrschstockrschcompany&RicCode=BAX.N




Cepheid (CPHD.O) Derik de Bruin, Ph.D....... +1-212-713 [email protected]

Daniel Arias.......................+1-212-713 2467Associate [email protected]

Rafael Tejada.................... +1-212-713 8657Associate [email protected]

Price (22 Jul 2010)...................... US$14.7712-month rating.......Neutral * (Unchanged)12m price target..........................US$20.00Mkt Cap......................................US$0.87bn

Full-Year EPS2010E.................... US$(0.26) => US$(0.22)2011E......................... US$0.07 => US$0.11


Margins Improve, Still Cautious Outlook. Sales a bit above, but EPS ahead of consensus due to margin expansionTotal revenues were $49.6m (+21% y/y) vs. Street $49m. Industrial sales of $4.7m andBiothreat sales of $5.1m were inline with UBSe, but Clinical sales of $37.7m were below UBSe$39m. Adj. product gross margins were 50% (+610 bps y/y), well above UBSe 46%, onimproved manufacturing & mix. The $0.02 loss per share was ahead Street ($0.10). Given theimpressive Q2 margin gains & the pullback in share price, we see CPHD trading up, butenthusiasm may be curbed by the cautious Mgmt tone & disappointing news from otherdiagnostic companies.. US capital spending environment stable, CPHD more cautious on EUIn the US (~80% of clinical sales), a longer sales cycle led to 37 system placements (vs. 36 inQ1), while overseas, austerity measures have caused some weakness in Europe yielding 69sys placements (vs. 88 in Q1). Also, the average number of modules per system trended downq/q to 4.5 and is below ’09 levels (5.7).. FY10 sales guidance narrowed, but EPS raised; We raise our estimatesWhile CPHD’s 2H10 outlook assumes an ongoing difficult economic landscape, mgmt now sees‘10 sales at $200-205m (was $195-205m) & a net loss per share of $0.21-0.25 (prior$0.25-0.32). As PCR patents expire, CPHD believes ~50% is the new gross margin ‘floor’,pushing the company toward full profitability in FY11. For FY10, we forecast sales of $205m(+20%) & a loss per share of $0.22 (was ($0.26)). For FY11, we see sales of $246m (+20%) &EPS of $0.11 (was $0.07).. Valuation: Neutral rating, $20 price targetOur price target is based on DCF analysis (using the UBS VCAM model)

Array BioPharma (ARRY.O) Jeff Elliott, Ph.D...............+1-212-713 [email protected]

Christopher Schaefer, PhD..... +1-212-7131847Associate [email protected]

Andrew Peters................... +1 212 713 3241Associate [email protected]

Price (21 Jul 2010)........................ US$3.0912-month rating...... Prior: Neutral => Buy *12m price target............................US$4.25Mkt Cap......................................US$0.16bn

Full-Year EPS2010E...........................................US$(1.58)2011E........................................... US$(1.02)


Upgrading to Buy on Valuation. Shares of ARRY attractive at current levelsWe believe the business development activity over the last 6-9 months has put ARRY on solidfinancial footing, which will allow the company to advance its programs to potential value-creating proof-of-concept results. Based on the recent share price decline, we feel the risk/reward is attractive at current levels, and as a result are upgrading our rating on shares ofARRY from Neutral to Buy.. Additional deals still possible – likely just ex-US nowWe believe that ARRY’s broad development pipeline of wholly-owned assets could continue toprovide partnership opportunities, although given a lower need for capital, we anticipate thecompany may look to retain US rights in subsequent deals. ARRY has a relatively activepipeline, with programs targeting KSP, ErbB2, RAF, Chk1 and mTOR inhibition. In our view, thestrong deals ARRY has already secured (with AMGN and NVS) validate the company’sdevelopment prowess and should assist in attracting additional high-quality partners.. Upcoming catalystsKey upcoming catalysts for ARRY include: 1) report results from 3 phase 1b ARRY-543 combotrials (2010); 2) initiate a phase 2 ARRY-543 combo trial in pancreatic cancer (2010); 3) reportresults from phase 1b trial of ARRY-520 in AML (2010); 4) initiate a phase trial of ARRY-520 inmultiple myeloma (2010) and 5) report results from phase 1 ARRY-380 dose escalation trial(2010).. Valuation: Buy with a $4.25 price targetWe derive our PT using our proprietary risk-adjusted NPV SOTP methodology.


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HealthCare Services – MCO/Hospitals Justin Lake, CFA.............................. +1-212-713 [email protected]

Ken LaVine, CFA.............................. +1-212-713 4237Associate [email protected]

Q2’10 Earnings Preview for Week of 7/26. Look for more on costs of healthcare reform benefit mandates on 2Q ccWhile UNH acknowledged cost pressures w/out specifics, we expect AET, WLP and CVH tooffer more detail around impact of reform to commercial cost trends starting in Q4 for renewingplans. Given mix of business, look for WLP to see largest impact at 300-500bps with AET/CVHmore likely in the 200-300bps range.. AET (7/27) / WLP (7/28) likely to continue trend of lower costs for MCOsWith Aetna pre-announcing better than expected Q2 results due to positive Q1 PPD, we raiseour EPS est. to $0.75 for Q2 from $0.68. With strong results a given, most interesting will beupdate for FY’10 EPS guidance as well as mgmt thoughts on trajectory of return to high-singledigit margins over 2-3 yr period. For WLP, we look for PPD to be part of the story as well givenbroad declines in trend, and expect company to reiterate guidance of “at least $6” ex-anypotential positive PPD, despite accepting lower rates in CA individual book.. UHS (7/26) likely to have second request from FTC on-hand for Q2 CCWith UHS having re-filed PSYS with FTC on 6/25, starting 30-day clock, we would expect mgmtwill have second request in hand for cc (likely but not 100%), potentially allowing co to giveupdate on process and insight into areas of focus including # of markets where overlap may beof concern. Also look for thoughts on integration post close, including oversight/risk controlgiven PSYS regulatory issues & ability to close historical PSYS 200-250bps margin gapincluding timing.. Q2 hospital volume weakness well understood, look for July updateHospital earnings likely in-line on cost cuts w/key focus areas including update on July volumesgiven June being particularly weak and thoughts on comm’l pricing.

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Bristol-Myers (BMY.N) Marc Goodman................ +1-212-713 [email protected]

Ami Fadia.......................... +1-212-713 [email protected]



Bristol Knows How to Perform. What we learned on the conference call(1) Mgt. budgets 2-2.5% price decreases for Europe, but expects a modest add’l 2H10 impactand an add’l mid-single digit headwind for 2011. (2) Mgt. expects HC reform costs to grow in 2Hdue to 340B rebates and increased managed Medicaid rebates. (3) Mgt. reiterated its 2013 floorEPS guidance of $1.95 in the face of EU pricing and US HC reform costs. It expressedconfidence in pipeline revenues as well as additional cost savings to meet the target. (4) TheAVERROES study comparing Apixaban to Asprin will be presented at ESC on Aug 31.. Overall thoughts on the quarter: Solid quarterThe key products are performing as expected and in our view mgt. continues to do a very goodjob keeping a tight hold on spending. We had previously reduced our EPS estimates due to FXand European pricing pressures but it appears this impact will be partially offset by lowerspending. We are slightly increasing our EPS forecast for 2010 by 2c.. Thoughts on the stock: Key pipeline data in 2H102H10 will be a busy time for data releases with the Apixaban presentation at ESC on Aug 31,Dapaglifozin data at EASD in Sept., Sprycel’s first-line CML PDFUA on Oct 28, additional HepCdata at AASLD in Nov., and potential first-line Ipilimumab data in late 4Q10. Pipeline successeswill likely be the main driver of the stock over 2H10.. Valuation: PT of 26 based on DCF analysisOur DCF analysis assumes $20 for the base business and $6 for the pipeline. This implies atarget P/E multiple of 11-12x on our EPS forecast for 2011 of $2.30.


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Lilly (LLY.N) Marc Goodman................ +1-212-713 [email protected]

Ami Fadia.......................... +1-212-713 [email protected]



Bumping Numbers Upward, but Still Neutral. Key things we learned from the earnings call(1) Impact of EU pricing changes on 2010 (-$90M) and 2011 ($-150M) revenues. (2) Positive FXimpact on COGS. (3) HC reform impact on 2Q. (4) Cymbalta and Zyprexa benefitted from agross-to-net true-up for 2Q US sales. (5) Alimta is the new leader in first line NSCLC andreceived a positive response from UK’s NICE for use as a maintenance therapy in NSCLC. (6)Update on patent litigations. (7) Some pipeline updates.. What we are watching in 2H10We are waiting for approval of Bydureon in October, which we believe will be a key drug forLilly, especially as the Byetta franchise continues to decline. We will look for guidance from theFDA on Cymbalta for chronic pain on August 19 panel. We also look forward to Phase II datafrom BAFF antibody and JAK-1/JAK-2 at ACR, both of which are important pipeline products.Lastly, we will continue to monitor the Effient and Livalo ramps.. Thoughts on the stock: No change to investment thesisLilly beat consensus by 14 cents and raised guidance by only a dime, which is due partly to HCreform true-ups and impact from European pricing and FX on 2H10. Ultimately, there wasnothing in the quarter that will change the patent expiration/pipeline concern which we think isstill the key issue for the stock.. Valuation: We maintain our Neutral rating and $36 price targetOur DCF-based price target implies an 8-9x multiple on our 2011E EPS of $4.38.

U.S. Healthcare Distribution - Drug Steven Valiquette............................+1-203-719 [email protected]

Gavin Weiss.................................... +1-203-719 6006Associate [email protected]

More 2011 Generic Pipeline Analysis. New Analysis of ‘Number of Generics Per Drug’ Positive for WholesalersGiven the sell-off in several pharmaceutical services stocks Thursday, we have conductedfurther analysis of the generic drug pipeline for 2011 by now determining whether each drug willbe an exclusive generic launch (positive for ABC, CAH, MCK) versus a multi-source (three orgreater) generic launch, which is more positive for PBMs (CVS, ESRX, MHS, SXCI). Datasuggests wholesalers are clear-cut winners for 2011 in this regard (see Table 1 for furtherdetail).. 2011 Generic Pipeline Promising for Wholesalers on Sales Mix As Well2011 generic pipeline channel data also suggests that ABC/CAH/MCK come out on top sincethe ‘retail/hospital/clinical’ sales mix (critical for wholesalers) is higher than average, while‘mail-order’ mix (critical for PBMs) is below average.. CAH/MCK Still Compelling on EV/EBITDA; ESRX Compelling on 2011While P/E multiples are currently 15x for MHS and 17x for ESRX on consensus 2010 EPSestimates vs. distributors at 13.5-14.5x, it is worth noting that PBMs use cash EPS. Thus, weuse EV/EBITDA to compare groups: ESRX is 10x and MHS is 8x estimated 2010 EBITDA, whileCAH at 5.8x and MCK at 5.9x look more compelling (ABC a little loftier at 7.2x). ESRXinteresting at 7.8x our ’11 estimate.. Wholesalers Still Look Poised for EPS Upside; PBMs More MixedBottom line is that we continue to favor the drug distributors vs. PBMs in relation to potentialEPS upside from the generic pipeline in 2H10 and full-year 2011. We believe Street numbersstill need to come down a little for MHS in 2011, but the ESRX and CVS Caremark consensusestimates for 2011 appear safe, in our view.

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IndustrialTyco Electronics (TEL.N) Amitabh Passi................. +1-415-352 5537

[email protected]

Price (22 Jul 2010)...................... US$25.7612-month rating...............Buy (Unchanged)12m price target.....Prior: US$32.00 =>US$33.00Mkt Cap......................................US$11.7bn


Solid Execution; Raising Estimates. Sept guidance better than expected; Raising ests; Reiterate BuyTEL delivered strong results for FY3Q10 (June qtr) and guided for flat Revs/EPS for Sept(typically seasonally down) in the range $3.05b-3.15b/$0.68-0.72 vs. UBSe (prior) $3b/$0.66.With better then expected Rev trends in the mid-late cycle businesses, particularly NetworkSolutions, we raise our FY10/FY11 Revs/EPS ests to $12b/$2.52 and $12.3b/$2.66 from$12b/$2.48 and $12b/$2.47. We remain cautious on FY11 across the supply chain, modelling2% y/y rev growth for TEL.. Macro risks and ADCT acquisition likely weighing on sentimentDespite solid results, TELs stock underperformed the market today. We believe there are likely2 major overhangs a) macro uncertainty and concerns over the auto segment b) the ADCTacquisition. It is our belief that barring another catastrophic decline as in 08/early 09 (auto salesdown 50%+ in 2 qtrs), TELs model will prove to be more resilient in a “normal” cycle (up 5-10%,down 10-12%) and we believe margins will hold up well. As for ADCT, we believe consistentexecution coupled with renewed activity in FTTx builds globally could allay some of theconcerns.. Cash flow generation remains strongWe now foresee TEL generating $1.2-$1.3b in FCF in FY10-12, $300m of which will be used topay dividends, and the rest available for either acquisitions or to be returned to shareholdersover time via share buy-backs or potentially a higher div.. Valuation: Maintain Buy; Raise price target to $33PT based on VCAM: WACC 10%; LT rev growth 5-6%; LT EBIT margin 13-13.5%. PT movesup to $33 (was $32) primarily as near-term ests adjust higher.

Flextronics (FLEX.O) Amitabh Passi................. +1-415-352 [email protected]

Price (22 Jul 2010)........................ US$6.5612-month rating...............Buy (Unchanged)12m price target............................US$9.50Mkt Cap......................................US$5.41bn


Inching Along To The Target Model. FY1Q11 frustrates: The positives – Good revenues; Share buy-backFY1Q11 results frustrated a bit again with some positives that included: a) strong rev growth of10.5% q/q and 13.5% y/y, with Revs/EPS of $6.6b/$0.19 in 1Q vs. cons/UBSe $6.4b/$0.18; andb) utilization of $135m of the $200m authorized share buy-back plan to repurchase shares in theqtr. FLEX also guided Revs/EPS of $6.8b-7.2b/$0.19-0.21 compared to cons at $6.7b/$0.20 andUBSe $6.6b/$0.19, implying 7% q/q rev growth vs. cons expectations of +5.5%.. The challenge – margins; components business struggles to turn aroundThe disappointing aspect in the earnings report was OM of 2.9% vs. UBSe 3.1%, from a delayin the turn around of the components segment, and secondarily, opex creep and slightly higherlabor costs in China. The components segments ($1.8b+) are being impacted by poor yields,capacity additions, and sub-optimal performance, as rev recovery has been faster thananticipated (~+60% in 2 qtrs).. Ests edge higher on higher revs; capex higher; component shortages stillOur ests edge higher on higher revs. We model Revs/EPS of $28b/$0.80 and $30b/$0.90 forFY11/FY12, vs. $26.7b/$0.77 & $29b/$0.83 prev. Capex expected now at high-end of$350-400m (UBSe $391m) vs. prev guidance of $300-350m. Component shortages impactedsales by $150-200m, of which ~$125m impacted telecom infra segment (+2.5% q/q). CSCO,ERIC, ALU, main segment customers.. Valuation: Maintain Buy and price target of $9.50PT based on UBS VCAM: Rev growth 6%; WACC 10%; LT EBIT margin 3.0%. The impliedCY11 PE at our PT is 10.5x.


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Mettler-Toledo (MTD.N) Derik de Bruin, Ph.D....... +1-212-713 [email protected]

Daniel Arias.......................+1-212-713 2467Associate [email protected]

Rafael Tejada.................... +1-212-713 8657Associate [email protected]

Price (22 Jul 2010).................... US$121.2412-month rating...............Buy (Unchanged)12m price target........................US$150.00Mkt Cap......................................US$4.09bn


Big Q2 Beat, Raise Partly Hindered By F/X. Strong organic revenues & margin expansion drive $0.22 of EPS upsideMTD continues to benefit from the economic rebound, as Q2 sales of $469M were above UBS& Street ests, with organic growth of 14% handily beating our 8% forecast & guidance of 7-9%.Gross and adjusted op. margins were up 200 bps y/y on operating leverage & price, as adj. EPSof $1.55 beat UBSe $1.32 & Street $1.33. Although MTD raised guidance, shares may beflattish / up slightly, as the big beat was partly offset by a greater than expected F/X impact(-$0.18) in 2H10.. Businesses improves across the board; MTD is cautiously optimisticMTD saw strong performance across all product lines, as Lab Products grew 17% organically,while Industrial grew 16%, and Food Retail was up 13%. Business conditions continued toimprove across all regions, with double-digit growth in the Americas (15%), Europe (10%), andAsia/ROW (27%). MTD has yet to see any real signs of slowing demand, however, they arebeing conservative (as is typical) regarding the outlook, especially for Q4, citing themacroeconomic uncertainty (particularly in Europe) & F/X volatility.. FY10 guidance raised; We raise FY10 EPS forecast, trim FY11 by $0.05For FY10, MTD now sees local currency sales up 8-9% (was 6-7%), with EPS of $6.35-6.45(was $6.26-6.36). For FY10-11, we project sales of $1,854M (+7.3%) & $1,910M respectively,with EPS of $6.45 (was $6.41) & $7.40 (a bit lower due to F/X, but we are still well aboveconsensus). We remain buyers of MTD shares.. Valuation: Buy rating; $150 price targetOur price target is based on a DCF analysis and implies ~20x our FY11 EPS est.

Caterpillar (CAT.N) Henry Kirn, CFA............... +1 212 713 [email protected]

Eric Crawford.................... +1 212-713-8458Associate [email protected]



Raising ests, price target after impressive 2Q. 2Q EPS of $1.09 vs. consensus of $0.85, but helped by $0.10 of tax itemsMachinery & Engine sales increased 34% YoY in 2Q, while manufacturing op. profit was$939M, up from $388M in 2Q09 (excluding $85M in 2Q09 redundancy costs) on lowermanufacturing costs, higher price realization & higher Machinery volumes. We calculatemanufacturing incremental margins (ex. redundancies) improved to 22.3% on a YoY basis, upfrom 18.8% in the year-ago period. Fin. Products op. profit declined 28% in 2Q.. Raises 2010 EPS guidance to $3.15-$3.85, from $2.88 at midpoint (cons: $3.29)Noting “continuing improvement” in demand, partially offset by F/X, CAT raised the low end of2010 sales guidance to $39-$42B, from $38-$42B. At midpoint, CAT sees higher Machinerysales, about flat Engine sales (including near record turbine sales), slightly higher Fin. Productsprofit before tax, and little change in dealer inventories.. Raising our forward EPS estimatesGiven an improved demand outlook and demonstrated impact of cost takeouts, we are raisingour 2010E EPS to $3.60, from $3.00. We are raising our 2011E and 2012E to $4.50 and $6.00,from $4.00 and $5.50, respectively, reflecting a higher base year.. Valuation: Raising our price target to $74, from $70; Maintain Neutral ratingOur price target continues to reflect a 35-40% premium to the now lower market multiple (now11.5x, was 12.0x) on our now higher 2011E EPS, plus ~$4 of cash. Although we expect higherproduction volumes in 2010 as demand recovers and CAT produces closer to in line withdemand, and are explicitly recognizing demonstrated benefits from cost takeouts, our Neutralrating reflects our belief that some of this may be reflected in shares.


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3M Co. (MMM.N) Jason Feldman................ +1-212-713 [email protected]

Winnie Clark, CFA.............+1-212-713 4103Associate [email protected]

Price (22 Jul 2010)...................... US$84.7512-month rating...............Buy (Unchanged)12m price target........................US$100.00Mkt Cap......................................US$60.3bn


Continued Strong Performance in 2Q. EPS $1.54 vs. consensus $1.45; Organic growth remains extremely strong3M delivered high-teens (+17%) organic growth for the second consecutive quarter. We believethat 2Q results are consistent with our view that the company has structurally improved itsorganic growth profile. Despite 3M’s size, we believe it can continue to outgrow both peers andunderlying end markets with its focus on R&D and its pyramid product strategy. New productsappear to be gaining traction, and we believe recent growth rates can only be explained bymarket share gains and/or penetration of new markets.. Continued improvement in margins3M’s adjusted operating margins were 23.7%, up 110bp YoY. Sequentially, margins improved90bp (~39% incremental margins). Notably, 3M also raised its FY10 operating margin guidanceto 22.5%+, from 22.0%+. It is encouraging to see that 3M continues to improve margins whilealso aggressively investing in growth initiatives. The margin guidance was raised despite slightlynegative pricing (to gain market share), higher raw material costs, and increases in both R&Dand marketing/advertising spend.. 2010 EPS guidance raised to $5.65-$5.80 (prior $5.40-$5.60); cons. $5.623M now expects organic volume growth of 13%-15% for 2010 (was +10%-12%). We are raisingour 2010 and 2011 EPS estimates to $5.80 (was $5.60) and $6.40 (was $6.15), respectively.. Maintain PT of $100 and Buy rating; Risk / reward profile still favorableOur PT reflects a ~30% premium (unchanged) to the market multiple on our revised 2011 EPSestimate (was based on 2010). We maintain our Buy rating.

Danaher (DHR.N) Jason Feldman................ +1-212-713 [email protected]




2Q: Selloff unjustified given solid results. Solid organic growth, and continued margin improvementDHR’s stock underperformed the S&P by roughly 3% yesterday, a move we believe wasunwarranted given strong 2Q results. Some investors seemed disappointed that FY10 guidancewasn’t raised further. However, we were impressed by the substantial improvements in coremargins, higher organic growth rates, and the prospects for further near-term M&A. We alsonote that guidance now includes incremental dilution associated with the Tools JV whichprobably wasn’t in consensus forecasts.. Focus was on costs of Tools JV, but little discussion of the likely LT benefitsYesterday, both DHR and CBE commented on the dilution associated with their new Tools JV.However, neither company reiterated the original justifications for the JV; consequently, we thinksome investors focused exclusively on the near-term dilution. Over the next few years, weexpect the JV to deliver significant synergies from purchasing leverage, geographic and channelfootprint expansion, consolidation of facilities, and cross-branding.. ‘10 EPS guidance raised to $2.16-2.23 (was $2.12-$2.20) vs. consensus $2.20FY10 guidance now includes roughly $0.04 dilution related to the recently formed Tools JV, butexcludes the expected 3Q one-time JV related gain. For 3Q, DHR expects EPS of $0.50-$0.55(including Tools JV dilution) vs. consensus $0.55. Management is likely to increase growthinvestments in the back half of the year.. Valuation: Price target of $45 (was $48.5); Maintain Buy ratingOur PT continues to reflect a ~45% premium to the market multiple on our revised 2011 EPSestimate (was based on 2010). We maintain our Buy rating.


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Cooper Industries (CBE.N) Jason Feldman................ +1-212-713 [email protected]



Full-Year EPS

2Q beats, but guidance disappoints. EPS of $0.80 (ex-items) ahead of cons. $0.77 and guidance of $0.72-$0.77Sales increased ~5.3% YoY (guidance +2%-5%) to $1.34B vs. consensus $1.30B. Core saleswere up 4.8% YoY. Adjusted operating margins improved roughly 390bp YoY to 13.7% (and up~70bp sequentially). While CBE reported a modest beat for 2Q and raised guidance, the stocksold off ~5% yesterday (S&P was up >2%), which we believe reflects investors’ heightenedexpectations into the print.. CBE’s performance solid given later cycle end market exposureWhile we understand that CBE’s guidance was below buy-side expectations, we think CBEdelivered solid results given its later cycle end market exposure. While it’s hard to pinpointexactly when the later cycle businesses will turn, we believe CBE’s improved market position,consistent execution, and strong balance sheet will materially benefit the company as therecovery progresses. We also believe that CBE’s guidance reflects more conservativeunderlying macro assumptions than guidance provided by some other companies in the sector.. 2010 EPS guidance raised to $2.95-$3.10, from $2.85-$3.00 (Cons: $3.09)Revised EPS guidance includes ~$0.06 of dilution related to the Tools JV, which we do notbelieve was reflected in the consensus estimates. On an “apples-to-apples” basis, the midpointof guidance was raised ~6%. For 3Q, CBE expects sales +2-5% and EPS of $0.75-$0.80 vs.consensus of $0.82.. Valuation: Reducing price target to $51 from $56; Maintain Buy ratingOur new PT reflects a ~15-20% premium to the now-lower market multiple on our 2011 EPSestimate (was based on 2010), plus ~$2 per share in “excess” cash (unchanged).

Engineering & Construction Steven Fisher, CFA.........................+1-212-713 [email protected]

Brandon Verblow.............................. +1-212-713 9463Associate [email protected]

E&C Q2 preview: Macro vs. Micro. Mixed expectations; awaiting color on 2H bookings and initial ’11 thoughtsNext week we expect earnings from FLR, JEC, CBI, and KBR, with others following. Macroconcerns have dominated trading recently, and the Q2 results will indicate how the economicbackdrop is filtering to the industry/company level (we expect modest push-outs). We have beenexpecting aggregate backlogs to flatten, and we expect book/bill just under 1x on average,although we expect a few standouts to raise the average. We expect more clarity on f/x impact,and expectations for 2H bookings (prior commentary suggested 2H would improve). We alsoexpect some preliminary thoughts on 2011 earnings growth prospects.. Expect solid bookings at FLR, FWLT, TPC; lighter awards at MDR, KBRWe expect favorable bookings at FLR, FWLT, and TPC. We don't expect significant margindeterioration for the group overall; only modest reductions. We see some earnings risk at JECand WG. We see bookings risk at MDR and KBR.. We are positive on FLR and TPC into the quarter on book to bill potentialInto the quarter, we are positive on FLR (despite high bookings expectations) and TPC on goodbookings potential, and we are also positive on URS on earnings stability (although bookingsrisk and deal costs may be factors). Laggards could include JEC on earnings risk, MDR onbookings risk, BWC on bookings and margin risk. Risks appear balanced at KBR (may raiseguidance but stock outperformed and bookings may be light) and FWLT (upside from bookingsbalanced by near-term revenue and margin risk).

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Reliance Steel (RS.N) Timna Tanners.................+1-212-713 [email protected]




Q2 Beats, Steady Outlook Supports Buy. EPS of $0.83 tops consensus/UBS as volumes and prices roseRS posted Q2 EPS of $0.83 vs consensus of $0.82 and UBSe $0.72. Tons sold regainedground, up 4% q/q and 9% y/y, after falling 4% y/y in Q1. Prices per ton were up 19% y/y and8% q/q. Gross profit margin of 25.7% compared with 26.1% in Q1 and UBSe 26.4% for Q2. TheLIFO charge rose to $10M from $5M in Q1. Our stainless concerns proved unfounded as buyingremained fairly steady.. Guidance light vs consensus but seems appropriately conservativeQ3 EPS guidance of $0.65-$0.75 was below consensus’ $0.89 and mgmt noted seasonalitycould hurt and weaker prices. Its range may prove conservative but can rein in Street ests weviewed too high for a while. We drop Q3e to $0.72 vs $0.79. UBSe ‘10 rises to $2.85 vs $2.80and we think consensus at $3.20 needs to fall.. Mgmt suggests acquisition timing may be nearingWhile mgmt has noted dry powder for acquisitions for several qtrs, with net-debt to cap of 26%,below its 35-40% target range, it hinted targets could be more interested in selling by year end.Working capital use was $78.2M as inventory restocking continued. FCF turned positive at$2.5M vs the prior qtr’s -$77.3M.. Valuation: Maintain Buy, valuation attractive and M&A could be catalystOur $57 target uses RS’s 5-yr historical avg 6.3x EV/EBITDA multiple on a “normal” 2012Ediscounted back. vs an avg 10-yr 6.9x through the cycle multiple. Shrs look attractively valued at4x our 2012E EV/EBITDA and 5.1x 2011E. We like the steady business model, leverage toeconomic, aerospace, and construction recovery, and potential acquisitions in the fragmenteddistribution space.

TechnologyMicrosoft (MSFT.O) Brent Thill........................ +1-415-352 4694

[email protected]

Reid Menge.......................+1-415-352 4696Associate [email protected]

Price (22 Jul 2010)...................... US$25.8412-month rating...............Buy (Unchanged)12m price target.....Prior: US$38.00 =>US$35.00Mkt Cap.......................................US$228bn

Full-Year EPS

Strong Q4: Kinecting w/ Enterprise Demand. Bookings the FQ4 HighlightStrong FQ4 with revenue, margins, cash flow, unearned revenue and EPS all above estimates.Sentiment has been negative due mainly to uncertainty over the timing of MSFT’s enterpriseupgrade cycle. However FQ4 bookings +27% y/y was its strongest bookings growth in 3 years,and other metrics from greater than seasonal growth in MBD unearned revs, business premiummix improvements, and contracted not billed growth, suggests enterprise demand is finallyreturning. No negative trends in Europe or government. FY11 setting up as a beat-and-raiseyear.. Signs of Enterprise Demand Abound1) MBD unearned revenue grew a much stronger than seasonal 24% q/q showing strong earlyenterprise demand for Office 2010, 2) Windows OEM business premium mix ticked up q/q to29% showing increasing demand for higher ASP SKUs, 3) contracted not billed balance of $15B+15% y/y (vs. flat in FY09).. Maintain FY11/12 EPS EstimatesRaising FY11 revenue estimate by $300M to $68.4B (+9.5%), but maintain EPS $2.40 (OM’s39.3% +70bps y/y). Maintaining FY12E $74B/$2.75 (revenue +8% y/y OM’s 40.0% +70bps y/y).Our $3B/quarter buyback estimate remains unchanged and is likely conservative even with thepotential for a dividend increase which may be announced post the September board meeting.. Valuation: Inexpensive at 10.8 FY11E EPS = 0.6 PEG FY09-12E CAGRLowering PT to $35 PT = 14.5x FY11E EPS $2.40 (vs. 16x prior and 14x 5yr average) reflectinglower market multiples.


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Amazon.com (AMZN.O) Brian Pitz..........................+1-212-713 [email protected]

Brian Fitzgerald................. +1-212-713 [email protected]

Kaizad Gotla......................+1-212-713 2603Associate [email protected]

Price (22 Jul 2010).................... US$120.0712-month rating...............Buy (Unchanged)12m price target.....Prior: US$170.00 =>US$165.00Mkt Cap......................................US$53.4bn


Higher Fulfillment a Nice Problem to Have. Reiterate Buy and reduce PT to $165 price targetAMZN’s investment in fulfillment capacity is a sign of healthy demand in the core retail business,apparent in the Q3 guidance well above us and the Street at the mid-point. We believe the stepfunction increase in Amazon’s fulfillment capacity (13 new fulfillment centers to 52 in total) inQ2-Q3 headed into the holiday season should yield significant positive leverage in Q4 and 2011due to accelerating revenue growth. We would use the after-hours pull-back in shares to build aposition in the best eCommerce name.. Is this 05/06 Déjà vu? Our short answer is noWe believe AMZN’s addition of fulfillment capacity into Q4 is due to an expectation of significantdemand in its EGM category (based on current user/usage trends) and Fulfillment by Amazonadoption trends among 3P sellers, areas where AMZN has a proven record. This contrasts tothe 05/06 tech and content investment that spooked some investors due to an uncertain returnexpectation – though this investment arguably paid off from 06-09.. All of Amazon’s key operating metrics remain healthyEx-FX revenue growth of 42% Y/Y in Q2 was flat from the previous qtr. and driven primarily bysolid unit growth of 39% Y/Y (40% Y/Y in Q1), with Ex-FX ASP growth at +2% Y/Y acceleratingfrom 1% Y/Y in Q1. In addition, Amazon continues to grow units/customer (+11% Y/Y in Q2;12% Y/Y in Q1).. Valuation: Our $165 PT is based on our DCF (12% WACC; 4% LTGR)Moreover, our price target implies 17x our ’11E FCF vs. a 28% 3-yr FCF CAGR.

Payment Processing: UBS “Swipe” Jason Kupferberg............................. +1-212-713 [email protected]

Ramsey El-Assal.............................. +1-212-713 4146Associate [email protected]

Arvind Ramnani................................ +1 212 713 3517Associate [email protected]

V/MA: How much will C2Q results matter?. Near-term V/MA focus likely to remain on regulatory uncertaintyWe expect V and MA to report solid C2Q results on 7/28 and 8/3, respectively, and believethere is more upside potential to V’s estimates because of less FX headwinds. However,despite the fact that in our opinion the stocks have been oversold, a strong print may not bemuch of a catalyst, as investors' focus (at least for the near-term) is likely to remain more onregulatory uncertainty (Durbin amendment implementation and implications) than onfundamentals.. Recent macro data points reinforce limited visibility on US consumerRecent US retail spending and consumer sentiment data points have been underwhelming,which may hinder visibility regarding near-term consumer spending trends. This dynamic isgenerally consistent with intra-quarter commentary by V and MA, suggesting that the latestvolume trends remained encouraging, but that the spending environment is still somewhatfragile. By C4Q10, y/y volume growth comps won't be as easy for V/MA, but the secular trendfavoring electronic payments remains V/MA's friend.. Lowering price targets given regulatory overhang; still prefer VWe remain confident that our '10/'11 estimates for V/MA will not be materially impacted by theprovisions of the Durbin amendment, given that implementation will take time, the businessmodels will remain resilient, and V/MA will remain critical links in the payments value chain.However, given that new regulations will likely lower the valuation multiple range for V/MA, welowered our price targets to $107/$270 from $115/$298 for V/MA, respectively. V and MA bothremain Buy-rated but we retain a slight preference for V (mix, execution, valuation).

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Computer Services & IT Consulting Jason Kupferberg............................. +1-212-713 [email protected]



AXP and COF card volumes follow the trend. Modestly accelerating y/y growth for AXP’s 2Q card volsAXP, which represents ~22% of US network credit volume, reported 2Q earnings this evening.Y/Y growth in the US card billed business increased 14% (vs. an 11% increase last quarter),representing 300 bps of sequential improvement. International volumes were up 19% vs. lastquarter’s substantial 27% y/y improvement (aided by FX). AXP indicated that worldwide Julymonth-to-date y/y volume was up double-digits in constant currency, down slightly from June’s14% due to a tougher y/y comp.. Issues to consider when looking to AXP as a read-through for V/MAThere are important differences between AXP and V/MA. AXP has: 1) a portfolio with highdiscretionary spend, 2) a high proportion of transactors, 3) high exposure to corporate T&Espend, 4) no debit volume, and 5) a smaller relative percentage of international volume.Interestingly, AXP suggested on its call that alternative payments (via recent Revolution Moneyacquisition) and prepaid are increasingly becoming areas of long-term focus.. COF purchase volume also accelerates modestlyCOF credit purchase volume increased 3.2% y/y in Q2 vs. a 1.9% y/y increase in Q1,representing 130bps of sequential improvement, roughly in-line with the average 230 bps of Q2vs. Q1 improvement in y/y credit volume growth enjoyed by other issuers (See Table 1). Wemaintain Buy ratings on V and MA, recognizing that regulatory uncertainty could trumpfundamental data points in the near-term.

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Computer Services & IT Consulting Jason Kupferberg...........................+1-212-713 [email protected]



A big week for processors. Expect strong print from Visa - how much will it matter?As highlighted in our "Swipe" report published separately today, we expect solid F3Q resultsfrom Visa on 7/28 with potential for modest upside, and anticipate F10 and F11 guidance will bereiterated. But amid regulatory uncertainty related to the Durbin amendment, potential investorenthusiasm regarding positive fundamentals may be tempered. We think shares are oversold onregulatory concerns and maintain our Buy rating, but we lowered our price target to $107 from$115 (lower multiple due to increased regulation).. WU - focus on mixed macro data points, new CEOEx. previously announced restructuring charges, our 2Q ests for WU (reporting 7/27) are in-linewith the Street, and we remain comfortable the company can achieve its '10 guidance, which webelieve is prudently conservative. Global macro data points (unemployment, housing, etc) arestill mixed, which continues to limit visibility into WU's '11 growth potential, which we believe isthe key to shares. We remain on the sidelines, as it is still a bit premature to say whether WUcould again be a value trap, or whether current levels will prove to be an attractive entry point.. GPN may be most intriguing among other earnings (ADP, G, GIB)GPN will provide initial F11 guidance on 7/27. Our F11 estimates are a little bit ahead of theStreet, but we see modest risk to projections given challenges related to Canada and N.American margins, plus uncertainty regarding the amount of margin benefit GPN can achievefrom platform consolidation. We expect ADP, G, and GIB earnings to be relatively uneventful,but GIB is most exposed to FX volatility (C$).

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IT Hardware Maynard J. Um................................+1-212-713 [email protected]

Daniel Doddo...................................+1 212 713 7929Associate [email protected]

Arun Sharma...................................+1-212-713 [email protected]

Read From MSFT's Jun. Qtr Results. Microsoft reports strong PC growth; consumer strong as enterprise rampsMicrosoft reported revs of $16.0b (Street: $15.3b), driven by continued strong consumerdemand & accelerating enterprise demand for Windows 7. Microsoft estimates the PC marketgrew 22-24% (largely in line with our forecasts & recent IDC/Gartner data) with both strength inconsumer & enterprise. We maintain our 2010 PC unit growth forecast of 18.4%, which embedsa less than seasonal 2H.. Enterprise refresh accelerating; Europe "healthy"Microsoft noted the business PC refresh cycle accelerated & expects it to continue through2011, backing our views. Small & mid market segments also continued to see "robust growth".Geographically, the company noted emerging markets continue to be a significant driver of thePC market (2x mature markets), though demand in Europe was "healthy" & US sawimprovement.. Continue to favor "cheap stocks" with some visible catalystsEarnings read-throughs thus far have been mixed, with tech companies reporting varyingdegrees of end-market demand from broad-based strength to slowing and from consumer togovernment. We continue to prefer "cheap stocks" with some visible catalysts with product playthemes like Apple, IT budget priority plays like EMC & NetApp, and enterprise (rather thanconsumer) PC exposure plays given our views on the PC refresh like Dell. Valuations keep ourratings Buy on Hewlett Packard, Seagate & Western Digital.

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Riverbed Technology (RVBD.O) Nikos Theodosopoulos.....+1-212-7133286Analystnikos.theodosopoulos@ubs.com

Jack Monti, CFA................ +1 212 713 [email protected]

Price (22 Jul 2010)...................... US$30.0712-month rating.......Neutral * (Unchanged)12m price target.....Prior: US$32.00 =>US$35.00Mkt Cap......................................US$2.25bn



Nice Beat and Raise, Raising Tgt and Fcst. Beat and Raise Qtr, Record Pipeline, Deferred Revs Only Up SlightlyRiverbed reported a nice beat and raise 2Q with sales up 12% QoQ and 38% YoY. The pipelinecontinued to expand, now at record levels, with higher confidence across the business. Deferredrevs increased slightly up 1% QoQ after strong 4Q09 and 1Q10 renewals—product deferreddown but expected to rise. Close rates are tightening. 3Q guide implied slightly faster growth vs.expectations (+6.2% vs. 5.9%), and we sense no meaningful change in guidance assumptions.. New 10% Distributor, Rest Of World Leading YoY GrowthAccount penetration in the Forbes Global 100 was at 71 in the qtr (growing from around 60 lastqtr). Riverbed’s two tier go-to-market is on track—majority of NA VARs now on distributors.Arrow become a 10% distributor comprising just above 10% of sales. Rest of World continuesleading YoY growth up 51% in 2Q from strength in Emerging Markets including Asia, Mexico,Brazil and Argentina. EMEA followed ROW up 48% YoY. US lagged though still up strong 29%YoY.. We Raise Our EstimatesWe now raise our sales and EPS estimates ex options for CY10 and CY11 to $518M (+31%)and $1.00 and $630M (+22%) and $1.22, versus our prior $495M (+25%) and $0.92 and $602M(+22%) and $1.16.. Valuation—Maintain Neutral, Raising Price Target to $35We now raise our price target to $35 based on ~25x our new CY11 taxed OI estimates of $1.18plus net cash of $5.50 per share. Our prior $32 price target was based on ~25x our prior taxedOI estimate of $1.10 plus prior net cash of ~$5.


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Calix (CALX.N) Nikos Theodosopoulos.....+1-212-7133286Analystnikos.theodosopoulos@ubs.com

Jack Monti, CFA................ +1 212 713 [email protected]


Full-Year EPS2010E.......................US$0.00 => US$(0.37)2011E......................... US$0.38 => US$0.10

Reports Solid 2Q10—Frontier and Broadband Stimulus RemainCatalysts. Revenues and Margins Better Than Expected2Q10 revs of $71.7M exceeded our est. of $68.9M and guidance of $66-71M. CALX sawstrength across its entire customer base with strong new product sales around the E7; 100customers have deployed the E7 in first two qtrs. Pro-forma GM of 42.3% vs. our est. of 37.3%helped drive EPS of $0.14 vs. our est. of $0.03.. 3Q10 Guidance Lower Than Our Estimates3Q10 rev. guidance of $70-74M and EPS of $0.04-0.08 was lower than our ests of $79M and$0.18 as it appears some 3Q rev. fell into 2Q and CALX is accelerating R&D expense. Wemaintain our full-year 2010 ests of $288M in revs and EPS of $0.39 and view the better 2Q andlower 3Q as lumpiness in CALX’s business.. Accelerating R&D; Partly Telco Merger DrivenCALX is accelerating R&D in our view to drive features to more quickly penetrate the 4.8M linesFTR recently purchased from VZ and potentially more quickly sell into Q as it merges with CTL.We continue to view CALX as a beneficiary from the FTR line purchase and US broadbandstimulus in late 2010 and throughout 2011.. Valuation—Maintain Buy Rating and $14.50 Price TargetWe maintain our Buy rating and $14.50 target. Our target is based on ~20x our estimate of amore normal Calix earnings power of $0.70-0.75.

Skyworks Solutions (SWKS.O) Parag Agarwal..................+1 212 713 [email protected]

Uche Orji............................+1 212 713 [email protected]



New customer ramp drives solid results and outlook; Reiterate Buy,raise PT to $22. Growing momentum as new customer programs rampSWKS results further support our view that the company should continue to grow revenuedriven by share gains at Nokia (upside potential of ~$100m from current run rate of$100m/year), ramp of new smartphone programs, and new products and markets such assmartmeters. Addition of Nokia and Foxconn (contract manufacturer for Apple) as new ~10%customers further indicates SWKS’ ability to grow its revenue and diversify its customer base.Along with revenue growth, margins should expand driven by mix and leverage. We reiterateour Buy rating, and raise our PT to $22.. Details: Results and outlook handily beat estimatesFor F3Q, SWKS reported Rev/EPS(pf) of $275m(+16% Q/Q)/$0.32, versus UBS est of$268m/$0.30 and cons of $269m/$0.30. Gross margin(pf) expanded by 100bps Q/Q to 43.3%and oper margin(pf) expanded by 290 bps Q/Q to 23.4%. For F4Q, SWKS guided Rev/EPS(pf)of $300m(+9% Q/Q)/$0.37, vs. UBS est of $284m/$0.33 (cons of $287m/$0.34), and continuedgross and operating margin expansion.. Raising estimatesWe raise our F4Q Rev/EPS(pf) estimates to $300m/$0.37 from $284m/$0.33. For F2011, weraise our Rev/EPS(pf) estimates to $1,253m/$1.58 from $1,216m/$1.40. For F2012, we raiseour EPS(pf) estimate to $1.76 from $1.62, while maintaining our revenue estimate of $1,444m.. Valuation: Reiterate Buy, raise PT to $22Our PT is based on a DCF (WACC 10.2% g 2%) and equates to NTM PE of 14x.


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Cypress (CY.O) Steven Eliscu...................+1-415-352 [email protected]




Strong Microcontroller Order Momentum and Sustainably Higher GrossMargin. At PSoC inflection point; gross margin likely holds against headwindsCypress’s 2Q results were ahead of estimates but showed limited PSoC growth. However, asthe PSoC book-to-bill was 1.7, we expect strong PSoC growth in 2H10, especially on the rampof touch controller wins into 5 of the top 8 handset makers in 3Q. We also believe gross marginwill rise further (+340 bps q/q in 2Q) despite potential margin headwinds from: 1) likely moreaggressive price declines as semi supply constraints ease, 2) higher Emerging Tech sales,which are GM dilutive. We are incrementally more positive and raise ests, PT to $12 from$11.75.. 2Q10 Results – Solid revenue and gross margin increaseCypress reported sales/non-GAAP EPS of $223.0m (+10.3% q/q)/$0.24 ($0.11 GAAP), aheadUBS estimates of $218.4m/$0.20 ($0.10 GAAP) and consensus of $218.6m/$0.20. GAAP grossmargin was 56.0% (59.3% non-GAAP), above our 53.3% estimate as COGS grew just 2% q/q,even as inventories declined 3% q/q.. Raise estimates on higher sales, gross margin expectationsWe raise our 3Q10 sales/non GAAP EPS estimates by 1%/17% to $238.9m/$0.28 ($0.15GAAP) and for the full year 2010 by 2%/16% to $899.2m/$0.94 ($0.44 GAAP). For 2011/12, weraise our sales estimates by 4%/5% to $985m/$1,089m and non-GAAP EPS by 14%/15% to$1.03/$1.25 ($0.51/$0.72 GAAP).. Valuation: Raise Price Target to $12, Maintain Neutral RatingWe raise our 12-month PT to $12 (24x our $0.51 2011 EPS estimate) from $11.75

Cavium Networks (CAVM.O) Steven Eliscu...................+1-415-352 [email protected]



Full-Year EPS2010E............................................. US$0.202011E............................................. US$0.62

2Q Results Preview: Expect Solid Growth on Strong Enterprise,Wireless Trends. 2Q10 Results: Expect solid revenue growth and design win momentumFor Cavium’s 2Q results (29-Jul), we expect sales/non-GAAP EPS of $49.2m (+18% q/q)/$0.19,in line with consensus of $49.1m/$0.19 on the strength of processor sales into enterprise andwireless infrastructure applications, along with a recovery of sales into fiber broadband homerouters. Key highlights for the quarter also include first samples of its Octeon II (next gen high-end processor) and single-chip PureVu (for video-over-Wi-Fi connectivity), which should beginto materially contribute to revenue exiting 2010. We reiterate our Buy rating, $32 price target.. 3Q10 Outlook: New program ramps could offset macro concernsFor 3Q, we expect sales/non-GAAP EPS of $54.0m (+10% q/q)/$0.22, slightly above consensusof $52.3m/$0.21, as we expect the ramp of new programs and continued improvements inenterprise spending to offset potential macro weakness, especially as Cavium has limitedexposure to consumer markets (<10% of sales).. Econa, PureVu ARM processors should drive incremental growthWe continue to view Cavium’s near-term opportunities in consumer applications as providingincremental growth with its focus on high-end networking, e.g. gaming routers, 2-drive networkattached storage, along with its PureVu video-over-WiFi processor family, which we believe cangenerate at least $5m sales in 2H10.. Valuation: $32 Price Target, Buy RatingOur DCF-based price target is $32 (29x our $1.11 2011 non-GAAP EPS estimate).


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NetLogic Microsystem (NETL.O) Steven Eliscu...................+1-415-352 [email protected]



Full-Year EPS2010E...........................................US$(0.03)2011E............................................. US$0.59

2Q Preview: Expect Solid Results and Outlook on Secular GrowthTrends. 2Q10 Results: Expect in line with continued design win growthFor NetLogic’s 2Q results (28-Jul), we expect sales/pf EPS of $95.8m (+11% q/q)/ $0.33,slightly above consensus of $94.5m/$0.32, as we expect improving enterprise spending trendsand wireless backhaul equipment deployments to drive near-term growth. We expect the driversunderlying these trends to remain for at least several more years, as enterprises & serviceproviders have an increased need for: 1) network intelligence for more services at a lower cost,2) conversion to IPv6 for more end-point devices, 3) higher speeds for new services. Buy,$34.50 PT.. 3Q10 Outlook: Expect +8% q/q sales from enterprise, wireless strengthFor 3Q, we expect sales/EPS of $103.2m/$0.38, above cons of $97.2m/$0.33, as NetLogicbenefits from 2Q growth trends along with the ramp of high-end search processing into datacenter switches and a broad array of higher volume NETLite-based designs that should enablegrowth above its +2% q/q 3Q/4Q guidance.. Key challenge remains – new RMI 40nm processor family executionEven as NetLogic is making progress with its 40nm XLP processor, we believe it needs to showit can execute with samples in 3Q and subsequent design win momentum exiting 2010,especially as key high-end competitor, Cavium, has sampled its latest generation processor,supporting its incumbent status at Cisco.. Valuation: $34.50 Price Target, Reiterate Buy RatingOur 12-month DCF-based PT is $34.50 (25x our $1.39 2010 pf EPS estimate).

SanDisk (SNDK.O) Uche Orji...........................+1 212 713 [email protected]

Steven Chin.......................+1-415-352 [email protected]




Strong Secular Demand and Gross Margin Thesis Remains Intact.Reiterate Buy.. Thesis for strong secular demand, favorable ASP trends remains intactDespite strong underlying demand, SNDK’s supply constraints led to in line revenues whilstmargin improvement led SNDK to exceed our EPS est by 15%. On a slight sales increase, weraise our C10/11E EPS by 12%/13% mainly on margin increases and better ASP outlook. Webelieve the secular growth story remains intact and reiterate BUY with PT of $55. Separately,we are not concerned about the management transition, as CEO Eli Hariri hands over to SanjayMehrorta (co-founder, COO, and 22 year veteran of SNDK) on Jan 1, 2011.. Strong GM upside on better than expected cost reductions, OEM sales mixSNDK reported in line Q2 sales of $1.18b on higher bit sales that were aided by inventorydrawdown (-17% q/q), but better than expected cost reductions and favorable mix led to non-GAAP EPS of $1.08, beating our $0.94 est. Due to tight supply, the Q3 sales view is$1.175-1.250b - in line with our est. However, SNDK guided 2H10 GM of ~42% (UBSe: 38.5%)on favorable sales mix and price trends.. Raise C10/11E Sales by 1%/3%, EPS by 12%/13% on solid demand & GMWe raise our C10/11E sales 1%/3% to $4.95b/$5.92b on increased bit sales given solidexposure to smartphones, tablets, and other devices. EPS rises 12%/13% to $4.38/$4.70(GAAP: $4.02/$4.40) on higher gross and operating margin.. Valuation: $55 12-month PT, Buy ratingOur DCF-based PT of $55 (WACC: 9.4%, g: 2.0%) equates to 2.9x 2010E P/BV.


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TelecommunicationsAT&T Inc. (T.N) John C. Hodulik, CFA..... +1-212-713 4226

[email protected]

Batya Levi......................... +1-212-713 [email protected]

Marc Albanese...................+1 212 713 2555Associate [email protected]

Price (22 Jul 2010)...................... US$25.5112-month rating...............Buy (Unchanged)12m price target..........................US$31.00Mkt Cap.......................................US$151bn

Full-Year EPS2010E............................................. US$2.402011E............................................. US$2.55

Raising EPS on stronger margins. EPS beats on better wireless and wireline marginsAT&T reported 2Q EPS of $0.61 (vs. our estimate of $0.58), excluding a one-time gain of $0.07.Though revenues were lighter than expected (largely due to lower than expected equip rev),impressive margin growth enabled the company to exceed our EPS estimate. We are nowlooking for higher margins in 2H though we believe 2Q was the peak for the year.. Cost cutting, U-verse, and stabilizing business environment aids WirelineWireline revenue declines improved thanks to growth in U-verse and a stabilizing businessenvironment while margins improved on aggressive cost cutting. Looking ahead, we continue toexpect consumer revs to remain stable though we are lowering our 2H broadband net adds. Wealso believe that 2Q will be the high water mark for wireline margins as we expect the companyto reinvest in efforts to boost broadband and video growth.. Wireless margins continue to beat though subscriber adds were weakerWireless margins of 43.1% were better than expected despite 3.2M iPhone activations.Revenues were lower than expected though on weaker net adds (including 130K losses inwholesale). We expect net adds to pick up in 2H on ramping iPhone sales, a rebound inTracfone, and accelerating iPad 3G activations.. Valuation: Maintain BuyWe are raising our ‘10 EPS to $2.40 from $2.32, equating to growth of 13% for the year. Our ‘11estimate for $2.55 remains unchanged. AT&T trades at 4.7x 2011E EBITDA and 9.1x P/E. OurPT is DCF based (8% WACC, 2% Growth).


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EconomicsUS Daily Economic Comment Maury N. Harris...............................+1-212-713 2472

[email protected]

Drew T. Matus................................. +1-203-719 [email protected]

Samuel D. Coffin.............................+1-203-719 [email protected]

Kevin Cummins.............................. +1-203-719 [email protected]

A quiet Friday?. Preview: No data on Friday. EU stress test results dueOn Friday, no economic reports or Fed speeches are scheduled in the US. Financial marketslikely will focus on EU bank stress test results, expected at noon EST.. Review: Claims +37k to 464k; EHS -5.1%; LEI -0.2%; FHFA +0.5%(1) Initial jobless claims jumped to 464k in the week of July 17 (cons 445k, UBSe 450k) from427k in the prior week (was 429k). Seasonally adjusted claims data have bounced around inrecent weeks, likely reflecting seasonal adjustment problems related to the timing of annualmanufacturing shutdowns. This is the week of the July payroll survey (for the employmentreport), and the four-week average of claims, at 456,000, was slightly lower from 464,000 in theJune survey week. That said, we would not read much into the recent claims data given thetypical volatility this time of year. (2) Existing home sales fell less than expected in June: -5.1%m/m to 5.37M (cons -9.9% to 5.10M, UBSe -8.1% to 5.20M) from 5.66M in May and 5.79M inApril. The declines in May and June represent payback for demand that was pulled forward byexpiring housing tax credits. The pending home sales index (PHSI) fell 30% m/m in May,suggesting a further decline in existing home sales (EHS) in July. The PHSI, based on initialsignings of sales contracts, tends to lead EHS, based on contract closings, by a month or two.Looking beyond this period of volatility, the outlook for housing will depend importantly on jobs.We continue to expect a strengthening labor market will provide support to sales later this year.(3) The index of leading economic indicators (LEI) was also a tad less weak than consensusexpected: -0.2% in June (cons -0.3%, UBSe -0.2%), offsetting only part of the upward-revised0.5% rise in May (revised from +0.4%). (4) The seasonally adjusted FHFA house price indexwas much better than expected: up 0.5% (cons -0.3%, UBSe -0.2%) in May after an upward-revised 0.9% gain in April (was +0.8%). (5) Mr. Bernanke’s testimony to the House was mostly arepeat of Tuesday’s testimony to the Senate nor were there any major surprises in Q&A (morebelow). (6) Also on Thursday, the House of Representatives voted in favor (272-152) ofextending unemployment benefits through November. The $34 bil. bill was passed by theSenate earlier this week, and was being sent to the President for his signature.

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Equity StrategyUS Equity Strategy Comment Thomas M. Doerflinger, Ph.D........ +1-212-713 2540

[email protected]

Natalie Garner, CFA........................+1-212-713 [email protected]

Jonathan Golub, CFA....................... +1-212-713 [email protected]

Chip Miller, CFA, CPA...................... +1-212-713 [email protected]

Manish Bangard................................+1 212 713 [email protected]

Q2 2010 Earnings Season Weekly Update: Week 2. Results Look Consistent with our EstimateWith 150 companies (43% of market cap) reporting, the Q2 S&P 500 bottom-up estimate is$20.47 The final number should be close to our $21.00 (Table 1). About 68% of firms arebeating consensus EPS estimates, similar to Q1 (Table 2). Bottom-up estimates for Q3 and Q42010 have not changed much during Q2 earnings season. Our estimates for these quarters areclose to consensus (Table 1).. Revenue Is In Line With ConsensusRevenue of 122 firms rose 6% yr/yr (Table 4); when all firms report (including energy,chemicals, etc.) the gain should be ~10%. The aggregate revenue of these 122 firms was 100%of consensus; non-financials were 100.7% of consensus (Table 4). This is just slightly weakerthan Q1 when financials’ revenue was stronger and revenue for 479 firms was 101% ofconsensus (Table 3).. Cyclical Sectors with Global Exposure Are StrongIn terms of both EPS surprises (Table 2) and EPS revisions (Chart 1), tech, industrials,consumer discretionary & financials are strongest (though earnings quality of big banks waspoor, due to weak loan growth and trading results). Robust earnings of INTC, VMW, ETN,MMM, UTX etc. suggest global economy is healthy; managements are less gloomy than manyequity investors. Defensive areas such as healthcare & domestic consumer staples have lessmomentum. Tech’s revenue growth is beating consensus by more than other sectors (Table 4).

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Required Disclosures

This package has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates arereferred to herein as UBS.

This package contains summaries of UBS research content. For a complete copy of the non-summarized version, please contact your UBSsales representative.

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

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage[1] IB Services[2]Buy Buy 54% 41%Neutral Hold/Neutral 37% 32%Sell Sell 9% 24%

UBS Short-Term Rating Rating Category Coverage[3] IB Services[4]Buy Buy less than 1% 22%Sell Sell less than 1% 0%

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

UBS 12-Month Rating DefinitionBuy 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

BuyBuy: Stock price expected to rise within three months fromthe time the rating was assigned because of a specificcatalyst or event.

SellSell: Stock price expected to fall within three months fromthe time the rating was assigned because of a specificcatalyst or event.

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, theequity 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 topossible 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 thefundamental 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


UBS 33

record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors suchas 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, stocksdeemed 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, theywill be identified in the Company Disclosures table in the relevant research piece.

Company DisclosuresCompany Name Reuters 12-mo rating Short-term

ratingPrice Price date

3M Company5b,6b,6c,7,16,18b MMM.N Buy N/A US$84.75 22 Jul 2010Accenture plc4a,6a,16 ACN.N Neutral N/A US$39.76 22 Jul 2010Acerinox16 ACX.MC Sell N/A €13.09 21 Jul 2010Adaro Energy2a ADRO.JK Buy N/A Rp2,025 22 Jul 2010AECOM Technology Corp.1c,5b,16 ACM.N Buy N/A US$24.57 22 Jul 2010Aetna Inc.5b,6b,6c,7,16 AET.N Neutral N/A US$28.27 22 Jul 2010Agnico-Eagle Mines Ltd.4b,16,20 AEM.N Buy (CBE) N/A US$56.21 21 Jul 2010Alamos Gold Inc.4b AGI.TO Buy N/A C$14.20 21 Jul 2010Alaska Air Group5b,16,20 ALK.N Buy (CBE) N/A US$49.26 22 Jul 2010Allegheny Technologies Inc.16 ATI.N Buy N/A US$47.30 21 Jul 2010Alpha Natural Resources4a,5b,6a,16 ANR.N Buy N/A US$36.50 21 Jul 2010Alumina Limited4a,16 AWC.AX Buy N/A A$1.51 22 Jul 2010Amazon.com Inc6c,16 AMZN.O Buy N/A US$120.07 22 Jul 2010AMB Property Corp.16 AMB.N Neutral N/A US$22.95 22 Jul 2010Amdocs Limited5b,16 DOX.N Neutral N/A US$27.13 22 Jul 2010AmerisourceBergen Corp.16 ABC.N Buy N/A US$29.63 22 Jul 2010Apple Inc.6c,16 AAPL.O Buy N/A US$254.24 21 Jul 2010Arch Coal, Inc.16 ACI.N Buy N/A US$20.56 21 Jul 2010Array BioPharma Inc.16,20 ARRY.O Neutral

(UR/CBE)N/A US$2.98 21 Jul 2010

AT&T Inc.4a,6c,7,16,22 T.N Buy N/A US$25.51 22 Jul 2010Automatic Data Processing16 ADP.O Neutral N/A US$41.46 22 Jul 2010AutoNation Inc.16 AN.N Sell N/A US$22.54 22 Jul 2010Barrick GoldCorporation2a,2b,4a,4b,5b,6a,16,20

ABX.N Buy (CBE) N/A US$41.73 21 Jul 2010

Baxter International Inc.2a,4a,6a,6c,7,16 BAX.N Buy N/A US$43.25 22 Jul 2010BHP Billiton Plc4a,5b,16 BLT.L Buy N/A 1,919p 21 Jul 2010Bristol-Myers Squibb6c,7,16 BMY.N Neutral N/A US$24.75 21 Jul 2010Cabot Oil & Gas Corporation16 COG.N Buy N/A US$32.77 22 Jul 2010CACI International16 CACI.N Buy N/A US$46.13 22 Jul 2010Calix Inc.2a,4a,6a,16 CALX.N Buy N/A US$10.80 22 Jul 2010Cardinal Health, Inc.4a,6a,6c,7,16,22 CAH.N Buy N/A US$33.26 22 Jul 2010Carnival Corp.4a,5b,6c,7,14,16 CCL.N Buy N/A US$33.67 22 Jul 2010Carnival Plc5b,14,16 CCL.L Buy N/A 2,306p 22 Jul 2010Caterpillar Inc.6b,7,16,18c CAT.N Neutral N/A US$66.87 21 Jul 2010Cavium Networks Inc16 CAVM.O Buy N/A US$29.07 22 Jul 2010Centerra Gold Inc.2b,4b,5c,20 CG.TO Buy (CBE) N/A C$13.26 21 Jul 2010Cepheid Inc.16,20 CPHD.O Neutral (CBE) N/A US$14.77 22 Jul 2010CGI Group Inc.16 GIB.N Neutral N/A US$16.10 22 Jul 2010Chubb Corporation6b,7,16 CB.N Buy N/A US$52.20 22 Jul 2010Cloud Peak Energy Inc16 CLD.N Buy N/A US$14.20 21 Jul 2010Coeur d'Alene Mines16,20 CDE.N Buy (CBE) N/A US$14.44 21 Jul 2010Cognizant Technology SolutionsCorp.4a,6a,6c,7,16

CTSH.O Buy N/A US$54.10 22 Jul 2010

Colonial Properties Trust2a,4a,5b,6a,16 CLP.N Buy N/A US$15.75 22 Jul 2010Community Health Systems, Inc.16 CYH.N Neutral N/A US$29.92 22 Jul 2010Computer Sciences Corp.6c,16 CSC.N Neutral N/A US$46.40 22 Jul 2010CONSOL Energy, Inc.2a,4a,5b,6a,16 CNX.N Buy N/A US$37.67 21 Jul 2010Continental Airlines2a,4a,6a,6b,7,16,18f,20 CAL.N Buy (CBE) N/A US$24.14 22 Jul 2010Convergys Corp.6c,16 CVG.N Neutral N/A US$10.54 22 Jul 2010


UBS 34



Cooper Industries Inc.4a,5b,6c,16 CBE.N Buy N/A US$44.54 22 Jul 2010Coventry Health Care4a,6a,6b,6c,7,16 CVH.N Neutral N/A US$19.01 22 Jul 2010CVS Caremark Corporation16,18d CVS.N Buy N/A US$29.92 22 Jul 2010Cypress Semiconductor8,16 CY.O Neutral N/A US$10.95 22 Jul 2010Danaher Corporation4a,5b,6a,16 DHR.N Buy N/A US$37.46 22 Jul 2010Dell Inc.4a,6a,6b,6c,7,16 DELL.O Buy N/A US$13.07 21 Jul 2010Detour Gold2b,4b,5b,5c DGC.TO Buy N/A C$23.30 21 Jul 2010Eastern Platinum Ltd5c,20 ELR.TO Buy (CBE) N/A C$0.93 21 Jul 2010EastGroup Properties, Inc.16 EGP.N Neutral N/A US$35.41 22 Jul 2010Eldorado Gold Corporation Ltd.16,20 EGO.N Neutral (CBE) N/A US$15.69 21 Jul 2010EMC Corporation4a,5b,6a,6b,6c,7,16,18e EMC.N Buy N/A US$19.48 21 Jul 2010Express Scripts Inc.16 ESRX.O Buy N/A US$42.12 22 Jul 2010Fifth Third Bancorp6b,6c,7,16 FITB.O Sell N/A US$12.45 22 Jul 2010Flextronics InternationalLtd.4a,5b,6a,6b,7,16

FLEX.O Buy N/A US$6.56 22 Jul 2010

Fluor Corporation4a,5b,6a,6b,6c,7,16 FLR.N Buy N/A US$46.02 22 Jul 2010Foster Wheeler Ltd.5b,16 FWLT.O Buy N/A US$23.18 22 Jul 2010Franco-Nevada Corporation4b,5c,20 FNV.TO Neutral (CBE) N/A C$30.94 21 Jul 2010Gammon Gold2b,4b,5c,16,20 GRS.N Neutral (CBE) N/A US$5.55 21 Jul 2010Genpact2a,4a,16 G.N Neutral N/A US$15.46 22 Jul 2010Global Payments16 GPN.N Neutral N/A US$38.79 22 Jul 2010Goldcorp Inc.4b,5c,6a,16,20 GG.N Buy (CBE) N/A US$40.16 21 Jul 2010Harris Corporation16 HRS.N Buy N/A US$45.92 22 Jul 2010Health Management Associates,Inc.16

HMA.N Neutral N/A US$6.65 22 Jul 2010

HealthSpring Inc.4a,5b,16 HS.N Neutral N/A US$16.53 22 Jul 2010Hecla Mining16,20 HL.N Buy (CBE) N/A US$4.70 21 Jul 2010Hewitt Associates, Inc16,19a HEW.N Neutral (CBE) N/A US$47.53 22 Jul 2010Hewlett-Packard Co.4a,5b,6a,6b,7,16 HPQ.N Buy N/A US$45.48 21 Jul 2010Huntington Bancshares Inc.16 HBAN.O Sell N/A US$5.85 22 Jul 2010IAMGOLD Corp.4b,16 IAG.N Buy N/A US$16.03 21 Jul 2010IBM Corp.4a,5b,6a,6b,6c,7,16 IBM.N Neutral N/A US$125.27 21 Jul 2010International Coal Group,Inc2a,4a,6a,16,20

ICO.N Buy (CBE) N/A US$4.10 21 Jul 2010

Jacobs Engineering Group, Inc.16 JEC.N Neutral N/A US$38.59 22 Jul 2010James River CoalCompany2a,4a,6a,16,20

JRCC.O Buy (CBE) N/A US$16.98 21 Jul 2010

JetBlue Airways4a,16,20 JBLU.O Neutral (CBE) N/A US$6.38 22 Jul 2010Johnson Matthey16 JMAT.L Sell N/A 1,636p 21 Jul 2010KBR, Inc.6c,16 KBR.N Buy N/A US$22.62 22 Jul 2010Kinross Gold Corporation4b,5c,16,20 KGC.N Buy (CBE) N/A US$15.61 21 Jul 2010Kumba Iron Ore16,22 KIOJ.J Neutral N/A RCnt36,250 21 Jul 2010Layne Christensen Company16 LAYN.O Sell N/A US$26.01 22 Jul 2010Lilly (Eli) & Co.4a,5b,6a,6b,6c,7,16 LLY.N Neutral N/A US$34.95 21 Jul 2010Massey EnergyCompany2a,4a,6a,6b,7,16,20

MEE.N Buy (CBE) N/A US$28.42 21 Jul 2010

MasterCard Inc.6c,16 MA.N Buy N/A US$208.40 22 Jul 2010Maximus, Inc.5b,16 MMS.N Not Rated N/A US$59.67 22 Jul 2010McDermott International16 MDR.N Buy N/A US$24.22 22 Jul 2010McKesson Corporation16 MCK.N Buy N/A US$64.55 22 Jul 2010Medco Health Solutions Inc.16 MHS.N Buy N/A US$49.00 22 Jul 2010Mettler-Toledo InternationalInc.4a,5b,6a,6b,7,16

MTD.N Buy N/A US$121.24 22 Jul 2010

Microsoft Corp.2a,4a,5b,6a,6b,6c,7,16 MSFT.O Buy N/A US$25.84 22 Jul 2010Murphy Oil Corporation16 MUR.N Neutral N/A US$51.82 22 Jul 2010Natural Resource PartnersLP2a,4a,6a,16,19b

NRP.N Buy (CBE) N/A US$24.96 21 Jul 2010

NetApp Inc16 NTAP.O Buy N/A US$39.83 21 Jul 2010


UBS 35



NetLogic Microsystems Inc16 NETL.O Buy N/A US$31.44 22 Jul 2010Newcrest Mining Limited2a,4a,5a,5b,13,16 NCM.AX Buy N/A A$32.92 22 Jul 2010Newfield Exploration Co.16 NFX.N Buy N/A US$52.21 22 Jul 2010New Gold5c,16 NGD.A Neutral N/A US$4.99 21 Jul 2010Newmont Mining Corp.2a,4a,5b,6a,6c,7,16 NEM.N Buy N/A US$58.17 21 Jul 2010Nippon Steel4a,16 5401.T Neutral N/A ¥287 22 Jul 2010Nucor Corp.13,16 NUE.N Neutral N/A US$39.67 22 Jul 2010Osisko Mining Corporation5c,20 OSK.TO Buy (CBE) N/A C$11.75 21 Jul 2010Pan American Silver Corp4b,16,20 PAAS.O Buy (CBE) N/A US$22.92 21 Jul 2010Parkway Properties, Inc.4a,6a,16 PKY.N Buy N/A US$15.35 22 Jul 2010Patriot Coal Corp4a,5b,6a,16,20 PCX.N Buy (CBE) N/A US$12.39 21 Jul 2010Paychex6b,7,16 PAYX.O Neutral N/A US$26.32 22 Jul 2010Peabody Energy Corp.8,16 BTU.N Buy N/A US$43.03 21 Jul 2010ProLogis4a,6a,6c,16,22 PLD.N Neutral N/A US$10.97 22 Jul 2010Quicksilver Resources Inc.3,5b,16,20 KWK.N Buy (CBE) N/A US$12.75 22 Jul 2010Red Back Mining RBI.TO Buy N/A C$24.46 21 Jul 2010Reliance Steel & Aluminum Co.16,20 RS.N Buy (CBE) N/A US$39.10 22 Jul 2010Rio Tinto Plc4a,16,22 RIO.L Buy N/A 3,248p 21 Jul 2010Riverbed Technology16,20 RVBD.O Neutral (CBE) N/A US$31.41 22 Jul 2010Riversdale Mining Limited1a,5a,5b,13 RIV.AX Buy N/A A$10.10 22 Jul 2010Royal Caribbean16 RCL.N Neutral N/A US$27.56 22 Jul 2010Royal Gold Inc.2a,4a,5b,6a,16 RGLD.O Buy N/A US$43.47 21 Jul 2010Safeway, Inc.16,22 SWY.N Neutral N/A US$20.22 21 Jul 2010SAIC Inc.6b,7,16 SAI.N Neutral N/A US$16.83 22 Jul 2010SanDisk Corp.16,20 SNDK.O Buy (CBE) N/A US$43.10 22 Jul 2010Sapient Corp.6c,16,20 SAPE.O Sell (CBE) N/A US$10.99 22 Jul 2010Seagate Technology6b,7,16 STX.O Buy N/A US$13.14 21 Jul 2010Shaw Group Inc4a,6a,16,20 SHAW.N Neutral (CBE) N/A US$32.46 22 Jul 2010Silvercorp Metals13,16,20 SVM.N Neutral (CBE) N/A US$6.25 21 Jul 2010Silver Standard ResourcesInc2b,4b,13,16

SSRI.O Buy N/A US$16.03 21 Jul 2010

Silver Wheaton Corp.2b,4b,5c,13,16,20 SLW.N Buy (CBE) N/A US$18.13 21 Jul 2010Skyworks Solutions Inc.16 SWKS.O Buy N/A US$18.05 22 Jul 2010SRA International16 SRX.N Neutral N/A US$21.81 22 Jul 2010St. Jude Medical, Inc.16 STJ.N Buy N/A US$34.62 21 Jul 2010Steel Dynamics Inc.16,20 STLD.O Buy (CBE) N/A US$14.11 21 Jul 2010Sterlite Industries1b,5b,16,20 STRL.BO Buy (CBE) N/A Rs176.00 22 Jul 2010SunTrust Banks Inc.4a,6a,6b,6c,7,16 STI.N Sell N/A US$24.58 22 Jul 2010SXC Health Solutions Corp.16 SXCI.O Neutral N/A US$64.46 22 Jul 2010Teck Resources Ltd.5c,16,20 TCKb.TO Buy (CBE) N/A C$35.14 21 Jul 2010The Western Union Company6c,7,16 WU.N Neutral N/A US$16.04 22 Jul 2010Total System Services Inc.4a,5b,6a,16 TSS.N Neutral N/A US$15.33 22 Jul 2010Tutor Perini Corp.16 TPC.N Neutral N/A US$19.00 22 Jul 2010Tyco Electronics Ltd.5b,6b,6c,7,8,16,18a TEL.N Buy N/A US$25.76 22 Jul 2010Umicore5b UMI.BR Sell N/A €25.40 21 Jul 2010Unisys Corp.6b,7,16 UIS.N Not Rated N/A US$22.29 22 Jul 2010Universal Health Services16 UHS.N Buy N/A US$34.90 22 Jul 2010URS Corporation16 URS.N Neutral N/A US$40.31 22 Jul 2010Visa Inc.6c,16 V.N Buy N/A US$74.46 22 Jul 2010Walter Energy Inc16 WLT.N Buy N/A US$68.76 21 Jul 2010WellPoint, Inc.4a,5b,6a,6b,6c,7,16 WLP.N Buy N/A US$52.46 22 Jul 2010Willbros Group, Inc.5b,16 WG.N Neutral N/A US$8.64 22 Jul 2010Yamana Gold Inc.4b,5c,16 AUY.N Buy N/A US$9.36 21 Jul 2010Zimmer Holdings, Inc.16 ZMH.N Buy N/A US$52.51 22 Jul 2010

Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stockpricing date


UBS 36

1a. UBS AG, Australia Branch is acting as Sole Underwriter, Sole Bookrunner and Joint Lead Manager to Riversdale Mining Limitedon the Entitlement Offer and Placement and will be receiving a fee for acting in this capacity.

1b. UBS Securities (India) Pvt. Ltd. is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offeringof securities of this company/entity or one of its affiliates.

1c. UBS Securities LLC is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securitiesof this company/entity or one of its affiliates.

2a. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of thiscompany/entity or one of its affiliates within the past 12 months.

2b. UBS Securities Canada Inc or an affiliate has acted as manager/co-manager, underwriter or placement agent in regard to anoffering of securities for this company/entity or one of its affiliates within the past 12 months.

3. UBS Securities LLC is acting as advisor to Quicksilver Resources Inc on its announced agreement to sells its interests inQuicksilver Gas Partners LP to Crestwood Midstream Partners II

4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services fromthis company/entity.

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

5a. UBS AG, Australia Branch or an affiliate expect to receive or intend to seek compensation for investment banking services fromthis company/entity within the next three months.

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

5c. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking services fromthis 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 servicesare being, or have been, provided.

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

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

8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long commonstock position in this company.

13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as oflast 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. The equity strategist covering this company, a member of his or her team, or one of their household members has a long commonposition in this company.

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

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

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

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

18f. UBS Securities LLC is acting as an advisor to Continental Airlines on its announced agreement to merge with UAL Corp.

19a. Because this company is an announced takeout candidate, UBS believes the security presents lower-than-normal risk. We havewidened its rating band to +6%/-10% compared with +6%/-6%, respectively, under the normal rating system.

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

20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds theMRA 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 theprior month`s end if this report is dated less than 10 working days after the most recent month`s end).

This report was sent to the issuer prior to publication solely for the purpose of checking for factual accuracy, and no material changes weremade to the content based on the issuer's feedback.


UBS 37

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

ANALYST CERTIFICATION

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

For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk,please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration.

Additional Prices: Acadia Realty Trust, US$17.84 (22 Jul 2010); Alexandria Real Estate, US$69.73 (22 Jul 2010); American CampusCommunities, US$27.65 (22 Jul 2010); Apartment Investment & Management Comp., US$21.66 (22 Jul 2010); AvalonBay Communities,Inc., US$102.73 (22 Jul 2010); Boston Properties, Inc., US$79.14 (22 Jul 2010); Brandywine Realty Trust, US$10.78 (22 Jul 2010); BREProperties, Inc., US$39.90 (22 Jul 2010); Brookfield Properties Corporation, US$15.13 (22 Jul 2010); Camden Property Trust, US$45.32(22 Jul 2010); CBL & Associates Properties, Inc., US$13.43 (22 Jul 2010); DCT Industrial Trust Inc, US$4.40 (22 Jul 2010); DevelopersDiversified Realty, US$10.72 (22 Jul 2010); Digital Realty Trust, US$62.57 (22 Jul 2010); Douglas Emmett, Inc., US$15.20 (22 Jul 2010);DuPont Fabros Technology, US$25.03 (22 Jul 2010); Education Realty Trust, Inc., US$6.36 (22 Jul 2010); Equity One Inc., US$16.53 (22Jul 2010); Equity Residential, US$44.92 (22 Jul 2010); Essex Property Trust, Inc., US$104.55 (22 Jul 2010); Excel Trust Inc, US$11.47(22 Jul 2010); Extra Space Storage Inc., US$14.71 (22 Jul 2010); Federal Realty Investment Trust, US$75.64 (22 Jul 2010); HCP Inc.,US$34.96 (22 Jul 2010); Health Care REIT Inc., US$44.81 (22 Jul 2010); Healthcare Realty Trust Inc., US$23.02 (22 Jul 2010); KilroyRealty Corporation, US$31.31 (22 Jul 2010); Kimco Realty Corporation, US$14.40 (22 Jul 2010); Liberty Property Trust, US$30.21 (22 Jul2010); Macerich Co, US$39.57 (22 Jul 2010); Mack-Cali Realty Corp., US$31.26 (22 Jul 2010); Medical Properties Trust, US$9.68 (22 Jul2010); National Retail Properties, Inc, US$23.06 (22 Jul 2010); Nationwide Health Properties Inc., US$37.14 (22 Jul 2010); OmegaHealthcare Investors Inc., US$22.45 (22 Jul 2010); Post Properties Inc., US$24.85 (22 Jul 2010); Public Storage, Inc., US$96.08 (22 Jul2010); Realty Income Corporation, US$31.86 (22 Jul 2010); Regency Centers Corp., US$35.57 (22 Jul 2010); Senior Housing PropertiesTrust, US$21.74 (22 Jul 2010); Simon Property Group, US$86.33 (22 Jul 2010); SL Green Realty Corp, US$56.30 (22 Jul 2010); SovranSelf Storage Inc, US$35.35 (22 Jul 2010); Tanger Factory Outlet Centers, US$44.18 (22 Jul 2010); Taubman Centers, Inc., US$39.57 (22Jul 2010); UDR Inc., US$20.38 (22 Jul 2010); U-Store-It Trust, US$7.84 (22 Jul 2010); Ventas Inc., US$49.83 (22 Jul 2010); VornadoRealty Trust, US$79.10 (22 Jul 2010); Weingarten Realty Investors, US$20.56 (22 Jul 2010); Source: UBS. All prices as of local marketclose.


UBS 38

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