Visit our website for more information: http://www.investingpacific.com/Financial Pacific: “The Right Wave to Invest”In today’s global economy it is important to be fully aware of the intricacies of international investments and the opportunities that these have to offer. Financial Pacific offers proven overseas investment opportunities.If you are interested in a reliable investment institution look no further because Financial Pacific provides: Wealth Management, Online Trading, Institutional Services and Corporate Finance. With cutting edge technology we are capable to support highly specialized derivatives instruments such as: CFDs, ETFs, CFDs on Commodities, ETCs, Futures and Options. In addition investors have access to a wide range of investment opportunities through: Structured Notes, Fixed Income, Reverse Convertibles, Preferred Stocks, and Institutional Hedge Funds.Fully regulated by Comisión Nacional de Valores de Panama since 2003; allow us to provide you with the necessary tools to take advantage of the global markets.
ab UBS Investment Research US Morning Meeting Highlights Global Equity Research - Rating and Recommendation Changes Motorola Mobility, MMI.N Amitabh Passi p.9 Downgrading MMI to Neutral 12-month rating: Prior: Buy => Neutral * CBE , FY11E US$0.59, FY12E US$1.56, PT Prior: US$31.00 => US$40.00, Market cap. US$11.2bn Estimate/Price Target Revisions Estée Lauder, EL.N Nik Modi p.4 Beyond The Numbers: Reiterate Buy 12-month rating: Buy (Unchanged), FY11E US$3.69=>US$3.70, FY12E US$4.42=>US$4.40, PT US$118.00, Market cap. US$20.2bn Lowe's, LOW.N Michael Lasser p.3 Long-term gain, short-term pain? 12-month rating: Buy (Unchanged), FY12E US$1.62=>US$1.60, FY13E US$1.84=>US$1.76, PT Prior: US$26.00 => US$25.00, Market cap. US$25.9bn Pfizer, PFE.N Marc Goodman p.6 Pfizer Wins Viagra; Bumping Estimates 12-month rating: Buy (Unchanged), FY12E US$2.26=>US$2.30, PT US$23.00, Market cap. US$147bn Company Update Boeing, BA.N David E. Strauss p.7 Tracking Dreamlifter Activity 12-month rating: Neutral (Unchanged), FY11E US$4.30, FY12E US$5.50, PT US$73.00, Market cap. US$45.7bn Danaher, DHR.N Jason Feldman p.8 Agilent’s F3Q results consistent with outlook for DHR’s Test & Measurement unit 12-month rating: Buy (Unchanged), FY11E US$2.80, FY12E US$3.40, PT US$60.00, Market cap. US$28.9bn Google Inc., GOOG.O Brian Pitz p.10 Google to Acquire Motorola Mobility 12-month rating: Buy (Unchanged), FY11E US$35.92, FY12E US$42.19, PT US$800.00, Market cap. US$178bn HiSoft Technology, HSFT.O Arvind Ramnani p.9 Solid June quarter results; guidance raised 12-month rating: Buy (Unchanged), FY11E US$0.80, FY12E US$1.02, PT US$21.00, Market cap. US$0.36bn Transocean, RIG.N Angie Sedita p.5 Acquiring Aker Drilling (4 Ultra-deep rigs) 12-month rating: Buy (Unchanged), FY11E US$3.71, FY12E US$6.38, PT US$72.00, Market cap. US$18.3bn 16 August 2011 http://www.ubs.com/investmentresearch This package has been prepared by UBS Securities LLC UBS 1 ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 15 *Under review (UR) and/or exception to core rating bands (CBE) - see page : 15 UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Company UpdateBoeing, BA.N David E. Strauss p.7Tracking Dreamlifter Activity12-month rating: Neutral (Unchanged), FY11E US$4.30, FY12E US$5.50, PTUS$73.00, Market cap. US$45.7bnDanaher, DHR.N Jason Feldman p.8Agilent’s F3Q results consistent with outlook for DHR’s Test & Measurement unit12-month rating: Buy (Unchanged), FY11E US$2.80, FY12E US$3.40, PT US$60.00,Market cap. US$28.9bnGoogle Inc., GOOG.O Brian Pitz p.10Google to Acquire Motorola Mobility12-month rating: Buy (Unchanged), FY11E US$35.92, FY12E US$42.19, PTUS$800.00, Market cap. US$178bnHiSoft Technology, HSFT.O Arvind Ramnani p.9Solid June quarter results; guidance raised12-month rating: Buy (Unchanged), FY11E US$0.80, FY12E US$1.02, PT US$21.00,Market cap. US$0.36bnTransocean, RIG.N Angie Sedita p.5Acquiring Aker Drilling (4 Ultra-deep rigs)12-month rating: Buy (Unchanged), FY11E US$3.71, FY12E US$6.38, PT US$72.00,Market cap. US$18.3bn
16 August 2011http://www.ubs.com/investmentresearch
This package has been prepared by UBS Securities LLC UBS 1ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 15*Under review (UR) and/or exception to core rating bands (CBE) - see page : 15UBS 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.
Lisa L. Friedman.........................+1-212-713 2589Associate [email protected]
Broadband makes up for weakening video. Video losses doubled vs. a year agoWe estimate the industry’s video losses were 436K in 2Q, more than twice the 204K lost a yearago. Cable and satellite providers blamed the economy and increased competition for theweaker than expected results. Telcos continued to improve penetration of homes passed (VZ at30%, AT&T at 16%), capturing a total of 7.3% market share vs. 5.6% a year ago. Satelliteproviders gained 40 bps of share, reaching 33.5%, while cable’s share was 59.3%, down 200bps yoy.. Video ARPU still growing, but at a slower rate—OTT to blame?We believe the lackluster housing market continues to be the main reason for the weakness invideo adds. While cord-cutting is likely impacting results at the margin, we believe the impact ofover-the-top is more prevalent in ARPU trends. Cable MSOs’ video ARPU growth deceleratedto 3.9% from 4.6% in 1Q, resulting in just 0.7% video revenue growth, half of the 1Q rate. Weestimate total industry video revenues grew 5.2% yoy, down from 5.7% in 1Q and 6.5% a yearago.. Cable leads in broadband; Data ARPU growth acceleratesBroadband subs grew 6.3% yoy in 2Q, in-line with the last four quarters. Cable continued totake a majority of the flow share, capturing 84% in 2Q vs. 66% in 1Q and over 100% a year ago.We expect this trend to continue with cable garnering 75% of flow share in 2012. Cable is alsobenefiting from the improved mix of higher-speed subs, boosting ARPU growth to 2.5% from1.9% in 1Q. Cable VoIP adds slowed to 307K from 407K a year ago. This helped improve theannual declines in telco voice lines to 9.1% in 2Q from 9.4% in 1Q and 9.8% a year ago.
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Lowe's (LOW.N) Michael Lasser................ +1-212-713 [email protected]
Chris Weng....................... +1-212-713 2951Associate [email protected]
Long-term gain, short-term pain?. LOW 2Q was better than feared & provided more fodder for the debateDespite a difficult sales result (including a -0.3% comp decline vs. our flat est and theconsensus est of 1.2%), Lowe’s was able to achieve a decent profitability outcome for thequarter with EPS of $0.68 (ex. charges), which was ahead of our (and the consensus) estimateof $0.66.. Lowe’s is maintaining its more aggressive stance to close the gap with HDAs part of the strategy, LOW will expand its list of benchmark items that it prices competitively.While this is likely to cause some incremental gross margin pressure in the near term, thecompany expects that it will drive traffic gains and greater expense leverage over the long term.We think the jury is still out on the cost-benefit analysis, but the market does not appear to beascribing a high probability of success based on the discounted valuation vs. HD.. Several near-term factors should support the stockWe think there are several appealing factors for LOW’s near-term investment case: Thecompany has set a lower bar for 2H’11 by guiding to flat comps (note that comps are runningpositive QTD). Also, we expect LOW should see less of a drag from soft appliance trends. Thiscaused a ~50 bps comp drag in 2Q’11. Lastly, we believe Lowe’s should continue to generatestrong expense leverage (2Q’11 op margin expanded 34 bps).. Valuation: LOW trading at a 9% FCF yield & less than 6x ‘11E EBITDAIn our view, LOW’s attractive valuation should provide some potential downside support even asits gross margin outlook is more uncertain. Our $25 target is based on a blend of a DCF andmultiple analysis (equates to 14x our CY’12 EPS est of $1.76).
Beyond The Numbers: Reiterate Buy. A Pattern Forming...Why Take Numbers Down to Take Them Up Again?As we indicated in our “First Read” earlier today, Estée management has a history of providingextremely conservative initial fiscal year guidance (the company has managed to beat revenue,gross and operating margin targets as well as EPS by an average of 50% since 2009). Over thepast 2 years, consensus estimates for the following year have gone down post June Q resultsonly to rise dramatically a few quarters later (see charts in body). While consensus may comedown due to guidance of $4.00-$4.20, we estimate Estee can deliver FY12 EPS of $4.40.. Did You Miss the EL Run…Sell Off Creates Entry PointLooking back to past 4Q reports, the stock has underperformed the market by close to 300 bps(usually because of conservative guidance). Investors who took advantage of these one day selloffs, experienced significant outperformance (19%/27% outperformance over 180/360 days).We continue to believe the stock sell off today was due to FY12 EPS guidance, which webelieve is conservative.. What is Long Term EPS Power at Estee Lauder?Driven by accelerated category growth, share gains, white space expansion, positive price/mix,operating leverage and incremental cost savings, we estimate 13-14% EPS growth through2015. We expect the company to be the next “10 in 10” story. That is, the company would beable to deliver high quality 10% EPS growth every year for the next 10 years.. Valuation: $118 Price Target Derived via DCFOur target implies 24x our CY12 EPS of $4.83.
Acquiring Aker Drilling (4 Ultra-deep rigs). Total offer price $3.13 bil (incl cash + acq’d net debt + construction capex)RIG will acquire Aker Drilling for a total consideration of $3.13 bil ($1.43 bil in cash + $800 milassumed Aker debt + $900 mil in remaining CAPEX to complete the construction of the twonewbuild drillships). On a valuation basis RIG paid the construction costs of the rigs ($3.1 bilconstruction costs); however, on a NAV basis we estimate a slight premium of 10%-12% to NAV(still looks reasonable).. Aker brings 4 new high spec ultra-deepwater rigs + 2 optionsAker operates two harsh environment, ultra-deepwater, 6th gen semi-submersible rigs on long-term contract in Norway (adds $1 bil in backlog). Aker also has two ultra-deepwater drillshipsunder construction at the Daewoo Shipyard in Korea, expected to be delivered late-2013. Thetwo drillships will cost $600 mil to build and are both uncontracted. The two harsh-environmentsemis were constructed for $950 mil each. Aker also has two attractively priced drillship optionsat $600 mil with 25% due at signing and the remainder at completion, options expire Oct 11.. View deal as modest positive, adds high quality rigs to fleetWe view the deal as a modest positive given: 1) a seemingly reasonable valuation based onconstruction costs; 2) the high specification nature of the rig fleet; 2) greater exposure toattractive and steady Norway market; 3) the strong free cash flow position of RIG; 4)Transocean’s unwillingness to build without contract and thus a method to expand the fleet; 5)the well priced options for two more ultra-deepwater rigs.. Valuation: Maintain Buy Rating – RIG trading at 12% disc to peers on ‘12EOur $72 price target is based on a 6.6x 2012E EV/EBITDA multiple.
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FinancialUS Brokers and Universal Banks William Tanona, CFA................ +1-212-713 2325
David Eads................................ +1-212-713 3630Associate [email protected]
July Master Trust: early stage delinquencies begin to stabilize. Credit card charge-offs should start to show signs of normalizingJuly master trust filings show stabilizing early stage delinquencies, which means improvementsin charge-offs should begin to moderate in a few quarters. On average, 30-89 day delinquencieswere stable, while 90+ day delinquencies dropped 9 bps m/m. Default rates fell m/m forJPMorgan and ticked up modestly for BofA and Citigroup (up 17 bps for each) after falling over100 bps last month.. No change to our outlook for credit card lossesGiven overall credit trends in credit card master trust data, we remain comfortable with ourquarterly loss estimates for our coverage universe (5.15% for JPM, 6.59% for BAC and 9.10%for Citi).. Delinquency trends indicate NCO improvements should start to moderateHalf of the master trust filings we analyze showed a modest uptick in 30-59 day delinquencies.While this data can be noisy, moderating improvements in early stage delinquencies imply thepace of credit improvements should begin to slow.. Sector attractive, but a long-term view is requiredWhile we continue to believe the sector has compelling upside potential over a two to three yeartime period, the near-term could remain extremely volatile given global macro stresses anduncertain economic growth. The group trades at 0.8x TBV, which we view as attractive giventhe group’s potential to generate low teens ROTE in a more normalized environment.
Pfizer Wins Viagra; Bumping Estimates. What’s new? District Court rules in Pfizer’s favor against TevaPfizer initially sued Teva for patent infringement on the ‘012 patent in March 2010. On Friday,the US District Court in Virginia ruled that Teva did not show the ‘012 patent to be invalid forobviousness nor for double-patenting, and that Pfizer did not commit inequitable conduct. Thus,the patent is valid and enforceable until October 2019 (excluding pediatric exclusivity).. Our takeaway: Upside to Pfizer, we had been expecting genericsThe fact that Pfizer will retain Viagra until 2019 is a substantial positive and counter to ourexpectations that Teva would enter sooner. We have updated our model to reflect patentprotection through 2019, which on its own represents an upside in EPS of ~$0.08-0.12 per yearthrough 2016. For now, we assume 50% of this upside will flow to the bottom line, with the restbeing reinvested in spending, resulting in an increase of ~$0.04-0.06 per year in our numbers.. Thoughts on the stock: Further upside in an already undervalued stockWe believe PFE is undervalued and the Viagra win is substantial upside to our existingnumbers. We look for Apixaban data at ESC and Tofacitinib data at ACR to be the majorcatalysts for the remainder of the year.. Valuation: We maintain our Buy rating and $23 PT based on our DCFThe implied P/E multiple from our DCF is 10x our 2012E EPS of $2.30.
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U.S. Pharmaceuticals Marc Goodman......................... +1-212-713 [email protected]
Ami Fadia................................... +1-212-713 [email protected]
Matthew Harrison....................... +1-212-713 2429Associate [email protected]
Weekly Rx Tracker. Issuing weekly Rx tracker for week ending August 05, 2011This report tracks the weekly Rx trends and the required growth rates to meet our salesforecasts for upcoming quarters for key new launches and switches.. Our takeaways for this week for specialty pharmaceuticalsFor AGN, Latisse (-11% Y/Y) declined as did CEPH’s Amrix (-85% Y/Y). FRX’s Bystolic (+34%Y/Y) and Savella (+20% Y/Y) grew while PFE’s Embeda (-100% Y/Y) continued to fall strongly(due to recalls on March 15). WPI’s Gelnique (+1% Y/Y) & Rapaflo (+95%) continued theirgrowth. Lastly, WCRX’s Actonel (-33% Y/Y) and Asacol (-12% Y/Y) continued to decline.. Our takeaways for this week for large cap pharmaceuticalsFor MRK, Dulera (+6% sequential) and Saphris (+102% Y/Y) grew. BMY’s Orencia (-24% Y/Y)declined. LLY’s Effient grew (+126% Y/Y). For NVO, Victoza (+104% Y/Y) increased. Lastly,PFE’s Chantix (-16% Y/Y), Lipitor (-4% Y/Y) and Lyrica (-1% Y/Y) continued to decline asexpected.. Our takeaways for key switches we are watchingFor Asacol-Asacol HD, Asacol HD’s share increased to 25.1% of NRxs from 25.4% last weekwhile for Provigil/Nuvigil, Nuvigil’s share decreased to 47.9% of NRxs vs 48.5% last week. In theDPP-IV market, NRxs grew 25% Y/Y. Onglyza/Kombiglyze XR/Tradjenta gained modest sharewith Januvia/Janumet holding at 82.6% share vs 82.7% last week. Xifaxan’s NRxs increased0.4% Y/Y and the switch trend continued with 550mg now at 73.0% of NRxs vs 72.1% lastweek. Additionally, generic Concerta had 78.9% of NRxs (vs 77.1% last week).
JNJ & ABT : weekly Rx for wk ending 8/5. JNJ: Zytiga, Stelara & novel anti-coagulant updatesZytiga: absolute TRx / NRx were 856 / 422 (averages over the prior 4-wks: 762/ 404). Wkly Rxvolume has been relatively steady over the past few wks; we expect improvement after summermonths. Implied run rate currently stands at $235M. Stelara: TRx up 86%. Among sub-cuproducts, mkt share in derm stands at 19.1% (+90 bps relative to 4-wk average; +440 bps YTD).Xarelto: posted TRx of 406, 231 & 96 over the past 3 wks. Implied annual run rate is immaterialat this level (<$5M). Product was approved for deep vein thrombosis in pts undergoing knee orhip replacement surgery on 7/1; key upcoming event is FDA a-fib panel on 9/8. Notably, in thenovel anti-coagulant space, Pradaxa penetration is still hovering in 7-8% range; we expectedbetter uptake.. ABT: Humira growth solid; Niaspan declines may be manageableHumira: YOY TRx growth 11% (12-wk moving average: 12%) relative to sub-cu market growthof 8% (12-wk moving average: 9%). We model 3Q11 sales of $855M; current brandperformance suggests incremental sales upside of $30M (~$0.01-$0.02 benefit to EPS). Tricorfranchise: TRx volumes remain weak at -15% (12-wk moving average: -15%). That said, ABThas managed revs effectively w/ sales +1% in 2Q11 despite -14% in TRx, which we attribute topricing (+14% cumulatively) and lower performance rebates. Niaspan: YOY TRx declines seemto have moderated at -10%. Despite soft volumes, we think ABT can manage revs similar toTricor.
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IndustrialBoeing (BA.N) David E. Strauss..............+1-212-713 6185
Tracking Dreamlifter Activity. Watching flights into Paine Field in EverettWe are tracking movements of Boeing’s modified 747 “Dreamlifter” fleet to gauge the progressof 787 production. Specifically, we are monitoring Dreamlifter flights into Snohomish CountyPaine Field Airport, adjacent to 787 production, to gauge the pace of shipments from thestructural suppliers. 787 structural components are delivered via the Dreamlifter fleet to Boeingin Everett, WA for final assembly. We are now also monitoring Dreamlifter deliveries intoCharleston associated with the opening of the second production line.. Flights into Everett resumeWe have tracked five Dreamlifter arrivals in total into Everett so far in August. This is well abovethe prior month’s pace as Boeing has resumed component deliveries into Everett following aroughly three-week pause, although still lower than levels seen in early 2010. We have alsotracked one flight into Charleston for the second production line so far in August.. Need to see increase in Dreamlifter activityWe think the still slow pace of structural component deliveries reflects supply-chain problemsand rework necessary on early aircraft. Dreamlifter activity had been relatively consistent at15-20 monthly arrivals into Everett since the Machinists strike in late 2008. However, activityhas been slow since mid-2010 with Boeing now having halted component deliveries into Everettfive times.. Valuation: Neutral Rating, $73 price targetOur $73 PT reflects our DCF analysis (10% WACC, 3% terminal growth rate).
USDA Crop Progress Report Henry Kirn, CFA........................+1-212-713 [email protected]
Eric Crawford..............................+1-212-713 8458Associate [email protected]
Corn crop condition still slightly below normal. Corn crop steady at 60% in “good” or “excellent” conditionToday, USDA reported 60% of the corn crop is in “good” or “excellent” condition, in line with lastweek’s 60%, but below last year’s 69%. See page 2 for a chart depicting this year’s corn cropcondition compared with that of prior years.. Corn, soybeans and wheat futures prices rose last weekCorn prices increased 5% last week and are 74% above year-ago levels, while soybean pricesrose 3% last week and are up 30% YoY. Wheat prices were 9% higher over the past week andare up 7% YoY.. We see solid farm profitability as catalyst for farm equipment demandWe note corn, soybean and wheat prices remain well above historical averages. USDAforecasts farm cash net income to increase 8% YoY in 2011, and we see the strength in farmprofitability as likely to drive strong farm equipment demand through 2012.. We continue to favor Key Call Buy-rated DE for exposure to the NA ag cycleWe remain bullish on the farm equipment cycle, as our channel checks indicate both improvingdemand and pricing. DE remains a UBS Key Call and our preferred way to play the farmequipment cycle as we continue to see beats over the next few quarters as a catalyst foroutperformance. Additionally, we maintain our Buy ratings on AGCO and CNH as we expectrecent strength in farm commodity prices to be a likely positive catalyst for shares.
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Danaher (DHR.N) Jason Feldman................ +1-212-713 [email protected]
Price (15 Aug 2011).....................US$44.7212-month rating...............Buy (Unchanged)12m price target..........................US$60.00Market cap.................................US$28.9bn
Agilent’s F3Q results consistent with outlook for DHR’s Test &Measurement unit. Agilent’s F3Q results (July) relevant for DHR’s Test & Measurement unitWe believe Agilent’s Electronic Measurement Group (EMG) is a good comp for DHR’s Tektronixbusiness (Tek is roughly half of DHR’s T&M segment, which is ~1/5 of DHR sales pro forma forBEC). Their product mix is similar, including key products like oscilloscopes and other electronictest & measurement equipment.. Agilent expects +11% YoY sales growth in F4Q ending in OctoberAt the mid-point, Agilent’s F4Q (October-end) sales guidance implies +11% YoY growth. Mgmt’soverall outlook was relatively positive; while softer vs last quarter, unless gov’t spending ismaterially cut, underlying demand is “expected to be roughly the same.” In F3Q, Agilentreported organic revenue growth of 19% YoY, and +14% YoY ex-FX (down slightly vs 21% YoYin F2Q). EMG revenues grew 24% YoY on an organic basis in F3Q, down slightly vs 26% inF2Q. Europe was weak (unsurprisingly) and declined 1% organically in F3Q vs +19% YoY inF2Q.. Agilent’s results/commentary consistent with DHR’s guidanceIn DHR’s 2Q (June-end vs. July-end for Agilent) the T&M segment had organic sales growth of~13.5% (+9.5% core, excluding +4% from FX). We believe Agilent’s results are consistent withoverall expectations for T&M, as well as DHR’s formal FY2011 guidance (+6-8% organic growthacross DHR ex-FX).. Valuation: Buy rating and $60 price targetPT reflects a ~45-50% premium to the market multiple on our 2011 EPS estimate.
Downgrading MMI to Neutral. Downgrade to Neutral on Google Takeout OfferWe downgrade MMI to Neutral from Buy following the $40/share, all-cash, take out offer fromGoogle which we consider fair. As we had previously written, our $31 price target, based on asum-of-the parts analysis, gave no credit to the $8/share in DTAs MMI has. Ex-cash/DTAs thebusiness is being valued at 0.5x TTM sales or 0.4x 2012 sales @ $40/share. The deal alsoseems fair to CEO, Dr. Sanjay Jha, who has ~5.2m options and 0.9m RSUs outstanding (~4.6moptions at strike price of $35.37), and should be satisfactory to activist investor Carl Icahn.. Many Questions Remain Unanswered – More from Google’s perspectiveWe believe many questions remain unanswered on the longer-term implications of this deal,especially from Google’s perspective, and include whether MMI’s tax-free spin-off nature wouldbe affected by the deal; how cross-license agreements will be maintained under change ofcontrol; impact to other Android OEM partners; Google’s longer-term HW aspirations for bothmobile devices and video infra. (does Google move to an integrated device model?). We don’tanticipate any major regulatory roadblocks to prevent this deal from going through.. Deal Bids Up Shares of Others Handset Players; Question Size of MovesOn the back of this deal, shares of other handset makers such as Nokia and RIMM havereacted favourably. We think the scarcity premium diminishes with each IP-related deal andremain sceptical of a take out of RIMM at current levels.. Valuation: Downgrade to Neutral; Price Target to $40PT based on Google’s takeout offer price for MMI.
Solid June quarter results; guidance raised. Strong June quarter resultsAs we had anticipated in our preview note on 8/5, HSFT posted strong F2Q results. F2Q revs.of $50.9M (+46.6% y/y and 14.8% q/q) was well ahead of UBSe/Street est. of $47.2M, and adj.EPS of $0.18 was in-line with our ests & 0.01 ahead of St. ests. Employee headcount increasedby 464, from 5,946 in F1Q to 6,410 in F2Q. Revenue growth was driven by quicker thanexpected recovery of its Japanese business (consistent with our checks) & strong growth fromits domestic China business (+272% y/y). 2Q adj margins of 11.2% was 20bps ahead of ourestimates.. Impressive guidance raiseF11 revenue guidance was upped to “at least” $212M (+44.6% y/y) from “at least” $194.5M(+32.7%) well above UBSe/St’s estimates of $200.2M/$197.9M. EPS guidance was upped to$0.80-$0.84 from $0.76-$0.80, above UBSe/St.’s estimates of $0.79/$0.78. F3Q revenueguidance of $56M-$57M is well above UBSe/St’s $51.3M/$50.7M and EPS guidance of$0.22-$0.23 is in-line with UBSe of $0.22 and slightly above Street estimates of $0.21.. Key questions for 6:00pm ET call today (Dial-in 800-860-2442)1) Impact of macro headwinds on demand trends; 2) How much of a buffer (in terms of apotential double-dip recession) does 2011 guidance have; 3) Spending pattern among top-10clients; 4) Update on Japan business.. Valuation: Buy rating and $21 PT (based on 18x C12 P/E and DCF)We will review our model after the 6pm ET call.
2012 Recession? We’ve Got You Covered. Shelter from the StormTo help us handicap the best performing software stocks should the economy enter into arecession we screened our software coverage universe based on 4 criteria; 1) stocks thatoutperformed in 2008-09, 2) a recession scenario analysis on 2012E EPS, 3) exposure toEurope and public sector, and 4) current vs. trough valuations.. Software #1 Tech Sub-Sector in 2008-09 RecessionSoftware stocks are likely to outperform other areas of technology in a potential recessionsimilar to 2008-09. Compared to the rest of technology, software companies tend to be moreresilient with revenue and profit less cyclical due to higher levels of recurring revenue in theform of maintenance or subscription-based business models.. Earnings and PT Scenario AnalysisWe examined the 2012E revenue, earnings and PT sensitivities of our coverage universe undermild and severe recession scenarios representing 2 different magnitudes of deterioration in theeconomic climate.. Top Recession Picks – Assumes Recession on Par with 2008-09Our top 3 ‘most preferred’ severe recession picks are ORCL, CHKP and INTU, with heaviermixes of recurring revenues, higher priority spend categories (e.g., security), and relativelybetter fundamentals in the last recession. Our top 3 ‘least preferred’ severe recession picks areADSK, ADBE and CTXS, with a lower mix of recurring revenues, companies more reliant onbetter environments to sell products, coupled with some valuation concerns.
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Google Inc. (GOOG.O) Brian Pitz..........................+1-212-713 [email protected]
Google to Acquire Motorola Mobility. MMI Acquisition to be Marginally Accretive by End-2011, Early-2012GOOG will acquire MMI for $40/share cash (63% premium to Aug 12 close) for totalconsideration of $12.5B. The deal has been approved by both companies’ boards and isexpected be marginally accretive when it closes by end-2011 or early 2012. Android partnersSamsung, HTC, LG, and Sony publically support the deal.. MMI’s Deep Patent Portfolio Likely the Primary InterestGiven recent patent lawsuits, we believe GOOG’s primary interest is MMI’s deep patent portfolioconsisting of ~17,000 patents and 7,500 patent applications. Google will keep the OS open, andbelieves this transaction should be positive for the ecosystem with all partners benefitting.Although GOOG does not anticipate regulatory or partner problems, it could address potentialconcerns by spinning off MMI (but keeping patents), which will be run as a separate entity. Wenote GOOG’s mission statement is: To organize the world’s information and make it universallyaccessible and useful.. Price Looks FairGOOG will pay $40 / share in cash, but will receive ~$11 / share cash and $8 / share fordeferred tax assets. Thus the value ascribed to the operating groups and patents is ~$21 /share, or ~$6.3B. On a TTM basis, GOOG is paying ~0.5x sales and 12x EBITDA (ex-cash,DTAs). And forecasted improvements in mobile profitability per UBS Tech Analyst AmitabhPassi imply 0.4x ‘13 sales and 6.3x ‘13 EBITDA, a fair price in our view.. Valuation: Attractive Entry PointAt ~10x 2012 Oper P/E (ex-cash) we view this as an attractive entry point. Our $800 PT isbased on a DCF (12% WACC, 3.5% LTGR). Our model is unchanged as we wait for an initialread on the regulatory environment.
Brian Fitzgerald........................ +1-212-713 [email protected]
Implications of Google’s acquisition of MMI. Input: Google to acquire MMI for $40/share, a 63% premium to last closeGoogle announced that it will acquire MMI for $40/share (63% premium) or total price of$12.5bn (EV of c$9.5bn), which translates to 0.6x 2012E EV/sales and 14x EV/EBIT. The dealis expected to close by end-2011 or early 2012.. Output: risks for other Android OEMs? Unlikely as Google needs scaleWhile MMI will be run as a separate business and Android will remain open, we believe thisdoes raise risks of conflict of interest as well as Google competing head on with other AndroidOEMs. Having said that, Google needs scale and as such should be largely neutral for otherAndroid OEMs. Irrespective, Samsung, HTC may look to de-risk their OS strategy byemphasizing more on WP7, which will be positive for Microsoft, but will likely increasecompetition for Nokia.. Output: Does Microsoft feel compelled to own hardware?We believe this will again raise questions of a handset acquisition by MSFT given integratedhardware-software business models of Apple and now Google. We believe GOOG’s move ismotivated more by IP rather than an integrated model and for MSFT we believe it is likely tocontinue to focus on its software strategy and wait and watch on the success of WP7 before anystrategic move.. Output: highlights value of IP in the industryThe value of IP comes to the fore again and we believe will lend valuation support to NOK,ERIC, ALU. In handsets our preference is for AAPL, QCOM, SEC, Spirent; least preferred areGemalto, MediaTek, LGE, and Silitech. We also have Buy ratings on GOOG, MSFT, anddowngrade MMI to Neutral from Buy on the back of this deal.
Some Signs of Life in US Back to School. Recent retail checks indicate some increased PC sales activityOur recent checks suggest that the Back-To-School PC demand began to show better relativesigns of life in late July & into August. While still too early to call a positive turn, the checks areat least encouraging relative to prior data points & could result in some positive news for once ifthe trends are more broad-based.. Non-iPad Tablet Sell-through Still Appears to Be LaggingNon-iPad tablet sales appear to continue to lag based on our checks. Perhaps as evidence ofthis, a number of vendors have reduced price – HP Touchpad & ViewSonic G-Tablet droppedby $100, Acer Iconia Tab A500 by $50 at Best Buy & Wal-Mart, & the Vizio 8 inch tablet by $50at Wal-Mart. Asus Transformer & Toshiba Thrive appear most popular of non-iPads (thoughiPad still dominates).. SKU count/avg ASP increase though largely due to higher DRAM configsThe number of SKUs held by retailers generally increased month over month, though largelydue to higher DRAM configurations of same models (4GB & 6GB). However, on a like-for-likePC basis, ASPs have generally been flat to down $200 into the August Back-to-School push.. Most & Least PreferredsAcross the PC Hardware companies, Apple, Dell & Lenovo are our most preferreds while Acerand Compal Electronics are our least preferreds given their respective end market exposuresand momentum. While a further deceleration in the macro-economy would have impacts totransaction-based hardware companies, we maintain our view of enterprise & emerging marketsover developed consumer.
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UtilitiesUS Electric Utilities & IPPs Julien Dumoulin-Smith............ +1-212-713 9848
Examining the Possibilities in NJ. NJ BPU: Settlement discussions underway, but we remain doubtfulFollowing the FERC’s conference on Minimum Offer Price Rules (MOPR), the NJ BPU and PJMhave engaged in settlement discussions. Parties remain fixated on a solution for long termprocurement under the RPM capacity auction (BPU suggests 10-yr contracts are a min.); anextended New Entry (NEPA) mechanism to 7-9 years remains a viable compromise in our view,allowing for new and incumbent generators to lock in capacity prices (election of this optionmust be chosen ahead of a given auction, likely limiting use by existing generators). That said,NJ’s insistence on nearer term solutions outside of RPM likely prevent an amenable resolution;unconvincingly, the BPU suggested in meetings that reliability was threatened as PJM’s reservemargin and demand projections were too low.. LCAPP #2: Coming soon, and with a twist that could improve its chancesWe believe a second (~1GW) LCAPP solicitation is likely forthcoming. While terms areambiguous, we anticipate the state to subsidize capacity through economic development funds,tax abatement, and municipal financing arrangements among other “options” being consideredby the BPU, designed specifically to allow bidders to apply for an exemption under the MOPR.Enabling legislation is needed and would likely be approved (albeit with slimmer support fromDemocrats). While LCAPP #2 would supplement the original procurement, we believe thewinning bids under the original LCAPP SOCA agreements would never be developed, allowingfor these assets to be re-procured under the latest solicitation. As a consequence, we believe itconceivable (although certainly not definite) new capacity under LCAPP could clear the RPMmarket in MAAC at current levels.
Banks eased standards more broadly in Jul. Broader easing in July than in April, and stronger loan demandIn the Fed's senior loan officer opinion survey for July, banks reported easing standards on alltypes of loans. For almost all categories of loans, the net percentage of banks easing lendingstandards was larger at the start of Q3 than it had been at the start of Q2. For example, 21.8%of banks on net reported easing standards for large business C&I loans, up from 16.4% the priorquarter. Business lenders cited "aggressive competition" as the reason for easing.There was some net easing of residential mortgage standards, commercial real estatestandards, C&I standards, and nonmortgage consumer loans standards. Although a smaller netpercentage of banks eased standards for small business loans (7.8% vs 13.5%) and forconsumer credit cards (9.3% versus 20.5%) than had in the prior quarter, these were relativelysmall steps backward within a broader expansion of bank credit easing.Demand for loans also strengthened, with the exception of residential mortgages. Also slightlysoft—demand by small businesses was fairly restrained.. Broader easing is more supportive of Q3 growth and hiringThe net easing in lending standards and strengthening in loan demand suggests support forspending at the start of Q3. The survey ran from July 12 to 26—fairly recent although it missedthe grand finale of the Federal debt negotiations.We focus on the Senior Loan Officer Survey because lending standards tend to lead growthbroadly and hiring in particular. Also, the small business sector, key to hiring activity, dependsdisproportionately on banks for credit.The leading relationship with growth and hiring is probably partly causal (easier credit makes foreasier investment spending) and partly a function of an economic/business outlook shared bybanks and businesses. But the net of this report is that bank credit was boosting overall activitymore at the start of Q3 than it had been at the start of Q2. The pattern of recent easing appearshistorically consistent with private-sector job growth of about 200k per month—versus a 164kper month average year to date.
Better SLOOS, flat HMI, NY mfg weakens. Preview: IP +1.0%est. Steady single-family housing activity.(1) Motor vehicles, utilities, and mining probably pushed industrial and manufacturing productionto a solid rise in July. We forecast industrial production +1.0% (cons 0.5% after 0.2%) andmanufacturing +0.6%, but manuf. ex autos up a softer 0.2%.(2) The ICSC store sales measure softened in the first week of August. The Redbook indexpicked up. Despite slipping prices, sales indexes have shown some net re-acceleration recently(see chart on page 4).(3) After a surge in multi-family starts in June, we forecast a partial reversal in July, with single-family starts little changed. Permits likely followed a similar pattern, albeit with a smaller swing inmulti-family. (Starts UBSe 595k, cons 600k, after 629k.)(4) Falling natural gas and nonenergy petroleum prices probably weighed on import prices inJuly (UBSe 0.0%, cons -0.1%, after -0.5%).. Review: Empire -7.7 after -3.8. Improved lending. HMI unchanged at 15.(1) The S&P 500 rose 2.2% on Monday and has fully reversed the weakening of last week.Even so, it remains down 9.1% from the July average.(2) The current activity index in the Empire State manufacturing survey fell to -7.7 in early Aug(cons & UBSe 0.0) from -3.8 in early Jul. The moderate inventory correction of the end of Q2and the supply disruptions related to Japan still appear to be weighing on output. Forwardindicators in the Empire survey generally dropped, with declines in new orders and the outlookfor activity and capex. However, the employment and shipments indexes picked up slightly.(3) In the Fed's Senior Loan Officer Opinion Survey for July, banks reported easing standardson all types of loans. For almost all categories of loans, the net percentage of banks easinglending standards was larger at the start of Q3 than it had been at the start of Q2. Demand alsopicked up. The general improvement is corroborated by faster bank lending recently.(4) The housing market index was unchanged at 15 in early Aug, in line with consensus. That'slittle changed from the recent trend. If anything, details were marginally improved, with presentsales index up to 16 from 15 and buyer traffic to 13 from 12. The data suggest no newdeterioration but a still weak new home sales pace.(5) Atlanta Fed President Lockhart remains “cautious” about further monetary accommodationand continues to expect re-acceleration in activity. But he emphasized that the Fed still hasplenty of tools to increase monetary stimulus if needed.
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UBS Investment Research: Global Equity Rating Allocations
UBS Short-Term Rating Rating Category Coverage[3] IB Services[4]Buy Buy less than 1% 33%Sell Sell less than 1% 25%
1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12months.Source: UBS. Rating allocations are as of 30 June 2011.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
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UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performancerecord, 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-month rating Short-term
Windstream Corporation 16 WIN.O Neutral N/A US$12.10 15 Aug 2011
Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stockpricing date
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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).
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18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stockposition in Apple, Inc.
18b. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stockposition in Google, Inc.
18c. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stockposition in Qualcomm 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 Alcatel-Lucent.
18e. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in BoeingCo.
18f. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in CitrixSystems Inc.
18g. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position inJohnson & Johnson.
18h. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position inMicrosoft Corp.
18i. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in OracleCorporation.
18j. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position inTransocean Inc.
19. 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.
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).
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Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.
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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 were prepared in an independent manner, including with respect to UBS, and (2) no part of his or hercompensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analystin 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: Home Depot Inc., US$31.47 (15 Aug 2011); Source: UBS. All prices as of local market close.
Additional Prices: Bristol-Myers Squibb, US$27.97 (12 Aug 2011); Lilly (Eli) & Co., US$34.86 (12 Aug 2011); Merck & Co., US$31.34 (12Aug 2011); Pfizer Inc., US$17.86 (12 Aug 2011); Source: UBS. All prices as of local market close.
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