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UBS Investment Research Morning Expresso - United States Monday 23 May 2011 Global Equity Research Americas Equity Strategy Market Comment 23 May 2011 www.ubs.com/investmentresearch U.S. Equity Product Management 212-713-2400 Morning Expresso This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 24. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. ab
Financial Pacific - Investment Research, Apple beyond the Chengdu set back (third party)
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1. ab Global Equity Research Americas UBS Investment Research
Equity Strategy Morning Expresso - United States Market Comment 23
May 2011 www.ubs.com/investmentresearch U.S. Equity Product
Management 212-713-2400 Monday 23 May 2011 Morning Expresso This
report has been prepared by UBS Securities LLC ANALYST
CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 24. 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.
2. Morning Expresso - United States 23 May 2011Morning Meeting
AgendaPolo Ralph Lauren Rating: Buy Target: US$140.00 Price:
US$130.21 RIC: RL.N Prior: Unchanged Prior: Unchanged Mkt Cap:
US$12.9bn BBG: RL US Retailers, Apparel Analyst: Michael Binetti
Tel: +1-212-713 3805A Relative Outperformer in FY12; Buy
Conservative Guidance Could Present a Buying Opportunity for RL
Stock Our F4Q EPS of $0.90 (Street: $0.79) is based on +6% total
rev growth (Street: +4.5%). Positive NPD data trends and sales
upside from other premium retailers lately support our top line
outlook. Conservative guidance is the norm, and could weigh on the
stock NT. That said, we believe RLs enviable combo of top line
& margin drivers will make the company a relative outperformer
in FY12and we would likely view any guidance-related pullback as a
stock buying oppy. Upcoming Price Increases (and Past Pricing
Success) Boost FY12 Outlook In our view, RL is well positioned to
offset higher input costs with pricing due to yrs of heavy
investing to elevate its brand in the consumers mind. We believe RL
is poised to raise prices on basics aggressively in July.
Successful price increases in the past led to significant GM
expansion, and could make our estimate for -60bp of GM compression
in FY12 look overly conservative as the year progresses. Our FY12
Outlook for RL US revenues should cont to benefit from shelf gains
won during the recession, and internatl revs should accelerate as
the company integrates its Asia business. Further, RL has margin
advantages vs apparel peers due to 1) strong pricing power, 2)
accelerating ecommerce sales (RLs highest margin business), and 3)
expanding scale advantages. While accelerated investment spending
is a stock risk, history has shown significant upside to buying RLs
stock during investment cycles. Valuation: Maintain $140 PT;
Reiterate Buy Our $140 12-month PT is ~18x our CY12E EPS of $7.58
(+17.5% YOY). Notes: Source: The content presented above reflects a
front page summary of UBS Research content, UBS estimates based on
a share price of US$130.21 on 20 May 2011 19:36 EDTApple Rating:
Buy Target: US$495.00 Price: US$335.22 RIC: AAPL.O Prior: Unchanged
Prior: Unchanged Mkt Cap: US$313bn BBG: AAPL US Computers Analyst:
Maynard J. Um Tel: +1-212-713 3372Few Companies With Apples End
Demand Hon Hai fire a minor set back Hon Hai acknowledged a fire at
its Chengdu plant, which we believe is a secondary location for
iPad production. Our checks & those of our Taiwanese tech
analyst Arthur Hsieh indicate less than 20% of iPad volumes are
produced at the Chengdu facility. Although the issue is unlikely to
help supply issues to meet strong global demand, we see this issue
as temporary and note there are few companies in our coverage that
have as strong an end demand picture. Investors appear to be
concerned with June qtr... Investors appear to be concerned by the
June qtr given belief of limited upside to Street consensus due to
1) next gen iPhone likely shipping in Sept and 2) iPhone 3GS/4
supply chain order cuts. While the next gen iPhone launch is
slightly later than normal, we expect building sentiment
improvement heading into launch. Additionally, we note that prior
gen iPhone cuts are very typical ahead of a new launch and we do
not see this as a concern as demand remains strong. ...but still
see upside to EPS We highlighted in the past Apples over-accrual
relative to its warranty claims, which we see as potential upside.
If Apple reduced its reserves in the same magnitude as it had in
claims ($513mn) over the past 3 qtrs, potl forward EPS benefit
could be ~$0.41, all else equal. We also see upside to iMac from an
earlier refresh (~$0.03 to EPS assuming slightly lower gross
margins and all else equal). Valuation: $495 tgt based on ~20x our
CY11 EPS estimate Reiterate Buy on strong demand, potl EPS upside,
& ahead of iPhone launch. Notes: Source: The content presented
above reflects a front page summary of UBS Research content, UBS
estimates based on a share price of US$335.22 on 20 May 2011 19:36
EDTOnline Travel Agencies (OTAs) Consumer Services Analyst: Kevin
Crissey Tel: +1-212-713 3562Managing Corporate Travel: A Big
Opportunity?...Two Years Later V-shaped corporate rebound Corporate
travel has bounced back strongly since an awful 2009. Expedias
Egencia and Orbitz for Business have both seen much improved
trends. These businesses are relatively small for each company but
we thought wed do some channel checks to see if there is a big
opportunity for long term growth. Survey results still suggest
modest corporate opportunity Two years ago we asked corporate
travel managers and others involved in corp travel buying a number
of questions about the prospects for OTAs growing their corporate
businesses. The survey results at that time were mixed to negative.
We just updated the survey but come away with essentially the same
conclusions most travel managers do not think OTAs can manage their
corporate programs. Implications for EXPE and OWW With TripAdvisor
soon to be out of the income statement for Expedia, investors may
over time take a closer look at Egencia. This survey does not
suggest it will continue to be a rapid growth business. That said,
it is very hard to care at the moment because recent IPO pricings
suggest the TripAdvisor spin will create substantial value. We are
raising our PT for EXPE from $27 to $32 assuming Trip trades at or
above 30x P/E (up from 20x) and Expedia core at 10x. Both could be
conservative given market exuberance. For OWW, we are lowering our
PT to $3 from $4.10 based on 5.5-6x EV/EBITDA - 0.5x lower as its
multiple is likely to remain compressed as airlines cut capacity
and negotiate distribution. Notes: Source: The content presented
above reflects a front page summary of UBS Research content, UBS
commentary as at 23 May 2011 UBS 2
3. Morning Expresso - United States 23 May 2011Q-Series: State
& Local Fiscal Crisis Economist: Maury N. Harris Tel:
+1-212-713 2472How Serious Is State and Local Fiscal Drag? How much
harm from higher required state and local budget balancing? Every
year, state and local governments must balance their budgets, and
doing so is about to get harder. Their revenues are recovering with
the economy. However, temporary Federal stimulus aid to state and
local governments will expire this year, and states mandated
Medicaid spending continues to spiral out of control. Consequently,
heading into fiscal 2012, which starts in July 2011 for most states
and localities, they will have to implement spending cuts and
revenue hikes to rectify an estimated combined fiscal 2012 budget
gap of just over $150 billion. In addition, the recently unsettled
conditions in the municipal bond market probably will limit state
and local construction spending even though it is not subject to
the required balancing of current revenues and expenditures. New
UBS economic stress indicator to signal evolving required austerity
This report introduces a proprietary indicator of state and local
fiscal economic stress-a key to pre-fiscal year budget forecasts
that drive the state and local fiscal austerity necessitated by
balanced budget requirements. Gauging such largely cyclical
pressures on government revenue and spending is critical for
understanding the evolving likelihood of future fiscal austerity
measures. In early 2011, our indicator has been signaling less
cyclically-related fiscal stress. Nevertheless, an offsetting
factor for the upcoming fiscal 2012 is the imminent loss of Federal
fiscal stimulus aid to state and local governments. However, once
budgets are adjusted in fiscal 2012 to reflect lower Federal aid,
our economic stress indicator should provide important guidance for
prospective fiscal austerity in fiscal 2013, which begins in
mid-2012. Necessary heavy lifting somewhat more than already
exercised State and local deficit reduction steps already have been
subtracting from GDP growth in recent years, but the continued
necessary fiscal restraint should be more than during the past
year. The estimated combined state and local fiscal deficit heading
into in fiscal 2012 is approximately one percentage point of GDP.
The related required incremental fiscal restraint is just around a
third of one percent of GDP more than in fiscal 2011, when the
estimated deficit heading into that year was around two-thirds of
one percent of GDP. State and local job losses to mount With lesser
reliance on tax hikes and Federal assistance and more emphasis on
trimming spending, state and local job cuts should rise from an
estimated almost 300,000 in fiscal 2011 to around 450,000 in fiscal
2012. Even deeper job losses are possible if there are not further
meaningful restraints on public sector workers compensation
gains-an important factor exacerbating the magnitude of state and
local job losses over the past 2 years. However, the economys
ability to absorb such accelerated public sector job losses is
improving with a stronger private sector. Source: The content
presented above reflects a front page summary of UBS Research
content, UBS commentary as at 23 May 2011US Economic Perspectives
Economist: Maury N. Harris Tel: +1-212-713 2472Red Alert or Red
Herring? Soft patch or patchy data? A good portion of the recent
slowing probably reflects an unfortunate confluence of one-time
events that are likely transitory. The two key events affecting the
recent data are the particularly bad weather in the South and the
effects of the disaster in Japan. We believe recent data
disappointments are somewhat fishy and are overstating the overall
weakness. The outlook remains reasonably healthy and continues to
benefit from improvement in credit conditions and labor incomes.
Watching inflation closely Core inflation has been moving higher
with broad-based increases. Although we expect commodity-driven
price pressures to diminish, unit labor costs are beginning to
rise. These cross-currents suggest that inflation is the key to Fed
policy. We look for inflation to continue to creep higher in 2011,
while seeing some upside risk. The past week The monthly data for
May got off to a rough start this week, as two key regional
manufacturing surveys disappointed. Data for April were hardly
inspiring: the leading economic indicator slipped; industrial
production was unchanged; and housing activity data remained
depressed. The April 27 FOMC minutes provided principles for
normalizing policy. The week ahead We forecast a drop in durable
goods orders in April, although much of that reflects seasonal
adjustment flaws that have resulted in repeated weakening in the
first month of a quarter. Home sales probably softened in April;
new home sales were probably weaker than the pending home sales
index because of a greater dependence on sales in the South. The
FHFA home price index probably slipped again in March. In contrast
to that weaker data, we expect the University of Michigan consumer
sentiment index to hold on to its early May increases. And Q1 real
GDP growth will likely be revised up 0.4 percentage point to a 2.2%
annual rate, although most of the upward revision reflects
inventories. Source: The content presented above reflects a front
page summary of UBS Research content, UBS commentary as at 20 May
2011US Equity Strategy Strategist: Jonathan Golub, CFA Tel:
+1-212-713 8673Leadership through the Soft Patch Market tone turns
cautious Although the S&P 500 is only 2.2% off its recent peak,
market leadership has turned decidedly more cautious since mid-
February. Defensive sectors have led the market by a wide margin.
Bond yields and commodities prices also signal less robust growth.
Economic indicators point to soft patch A number of important
economic indicators have recently turned south, pointing to a soft
patch. More specifically, ISM Non-Manufacturing, the NFIB Small
Business Optimism Index, weekly jobless claims, and the Empire
State Survey have all weakened. Market favoring defensive
characteristics Our proprietary UBS Return Drivers confirm the
recent trend of investor caution. Pro-cyclical characteristics,
such as Volatility and Operating Leverage, have lost steam, giving
way to defensive characteristics like ROE. Pro-cyclical leadership
should reassert itself in the back half of 2011 2010 experienced a
similar soft patch, only to rebound in the latter part of the year.
We believe that solid 2Q earnings will once again trump
expectations, refocusing investors on strong fundamentals. Source:
The content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 23 May 2011 UBS 3
4. Morning Expresso - United States 23 May 2011Global Equity
Strategy Strategist: Jeffrey Palma Tel: +1-203-719 1135Using the
ISM as a market signal Recurring patterns around cyclical
inflection points In this note we revisit the link between equity
markets and the ISM index. We find that equity markets display
recurring patterns around cyclical inflection points. Market
returns are typically quite strong during the early stages of an
economic recovery, led by cyclical sectors, but moderate following
a peak in ISM, with little difference between cyclical vs.
defensive sector performance. Cyclicals vs. defensives and stages
of the ISM On average, cyclical sectors struggle to outperform
defensives when the ISM is at high levels but beginning to head
lower. This is consistent with equity versus bond performance
trends recently noted by our Global Asset Allocation team. It is
also consistent with the current cycles trends, which have proven
to be quite typical for an economic recovery when compared to the
last 40 years. Base case expectations While soft-patch concerns are
keeping tactical risks elevated, equity markets remain well
supported over a more strategic horizon by expectations for
continued economic expansion, healthy earnings growth and
relatively low valuations. Increasingly shareholder-friendly (re-
leveraging) activity is also supportive. No changes to our sector
and region allocations We continue to advocate a sector allocation
that is balanced between cyclical and defensive sectors. Our most
recent sector changes were to downgrade Energy and Materials in
April. Our current overweights are in Tech, Healthcare, and Telcos.
Regionally, we favour GEM and US, and remain Underweight Europe.
Notes: Source: The content presented above reflects a front page
summary of UBS Research content, UBS commentary as at 22 May
2011Global Emerging Markets Strategy Strategist: Nicholas Smithie
Tel: +1 212 713 8679UBS GEM Select and Frontier Portfolio Tracking
performance of UBS GEM Select Portfolio We review and update the
performance of the UBS GEM Select, a 40 stock portfolio comprising
our best emerging market stock ideas. Reflecting the recent changes
to our country and sector allocations we adjusted the portfolio to
align with our new positioning. In particular we downgraded Turkey
and upgraded South Africa and Peru. On a sector basis we added to
Healthcare and Utilities and cut Industrials and Consumer sectors
to reflect a maturing cycle. As a result we made 10 changes to the
UBS GEM Select. As of May 12, the model portfolio was up 19.6%
since inception, compared to 17.4% return on the MSCI Emerging
Markets Index. Changes at the Frontier Our UBS Frontier Markets
Portfolio which consists of 43 stocks from the 15 markets we
recommend. We added Kenya to this list most recently and included
Safaricom, East African Breweries and Kenya Commercial Bank to the
portfolio. As of May 12th, the Frontier portfolio was up 0.16%
since inception, compared to -3.34% return on the MSCI Frontier
Markets Index. Methodology: identifying value Our work is a heavy
user of the Gordon Growth model which we apply to countries and
sectors to determine which parts of the market represent the most
value, based on their longer term growth and profitability
fundamentals. Our work on styles also suggests a move up in size to
the mid cap part of the market and towards growth stocks, which is
also reflected in the UBS GEM Select portfolio. Notes: Source: The
content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 19 May 2011 UBS 4
5. Morning Expresso - United States 23 May 2011MACRO AND
STRATEGY RESEARCHWeekly Weight Watcher Economist: Larry Hatheway
Tel: +44-20-7568 4053Is credit rich? Steady credit While equity and
commodity markets have wobbled recently, credit has remained
remarkably steady. Given low spreads and underlying interest rates,
credit valuations might seem expensive, especially relative to
equities. But we highlight that market-implied default rates
suggest investors still discount a higher probability of corporate
defaults than long-term historical averages. This seems at odds
with solid credit fundamentals, and hence we offer an alternative
insight into equity/credit valuations. The Merton approach We show
how we can gauge relative valuations by using the Merton capital
structure model. This model offers a simple framework in which fair
theoretical credit spreads can be inferred from equity prices,
equity volatility and leverage. A low theoretical spread relative
to observed CDS spreads would imply that equity markets are more
optimistic on corporate default rates than credit markets, and
vice-versa. We construct such measures for US investment grade and
high-yield corporate bond indices. Is credit expensive? During the
credit crisis, equity and equity options markets priced in a more
pessimistic view of corporate default rates compared to the credit
market. Currently we find that there isnt a large disparity between
equity implied theoretical spreads and the credit market. If
anything, our model suggests that credit markets are somewhat more
pessimistic in their outlook. In other words, our model suggests
that credit is not particularly rich at present. Unchanged asset
allocation stance These findings are consistent with our current
asset allocation stance. We retain overweight allocations to high-
yield credit and EM local currency sovereign debt, cash and soft
commodities. We also maintain benchmark allocations to global
equities and REITs, as well as cyclical commodities and precious
metals. Our underweight recommendations in nominal and
inflation-linked government bonds are also left unchanged. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS commentary as at 20 May 2011UBS Client
Flow Watch Strategist: Thomas M. Doerflinger, Ph.D. Tel: +1-212-713
2540Net buying US equities US Client Flow: Long-only turned net
buyers US clients increased their net buying, with much of the
increase coming from long-only funds, which went from being net
sellers to net buyers. While intermediaries also increased their
net buying, corporate clients and hedge funds decreased their net
buying; other clients were the only net sellers. At the same time,
US clients continue to be net sellers of foreign equities for a
fourth straight 4-week period. Sector details of US Client Flow:
Concentrated net buying Although US clients continue to be net
buyers, the net buying is concentrated in financials, media,
healthcare, and technology (Chart 3). Overseas, while US clients
are net sellers, they are net buyers of consumer and healthcare. US
clients continue to increase net buying in US financials, while
increasing net selling in foreign financials. Foreign Client Flow:
Long-only increased net buying Long-only funds and other are the
only foreign clients that are net buying, but overall, foreign
clients continued to be net buyers for a sixth straight 4-week
period (Table 4). Intermediaries and hedge funds increased net
selling. Notes: Source: The content presented above reflects a
front page summary of UBS Research content, UBS commentary as at 20
May 2011 UBS 5
6. Morning Expresso - United States 23 May 2011BASIC
MATERIALSU.S. Paper & Forest Products Paper Products Analyst:
Gail S. Glazerman, CFA Tel: +1 212 713 3486Some cracks in Western
log markets? Western log prices under modest pressure Random
Lengths reports Western log prices have declined $15 since April
and anticipates further modest ($25-30) erosion over coming weeks.
They attribute this weakness to several factors including: improved
supply (weather allowing access to previously inaccessible stands),
curtailments at lumber/plywood mills and weaker demand from China.
They indicate Chinese buyers are fielding offerings from other
countries. Erosion is limited given base>$600-but trend bears
watching. Wood product realizations remain low The Random Lengths
lumber composite price has declined for 10 consecutive weeks,
losing $39/mbf (13.5%) over this period. The current price is the
lowest level since Oct-10. 2Q average of $269/mbf is off from $320
last year and $298 in 1Q. The current price is $12 below the 2Q
average. Oriented strand board prices are off $40/msf versus
February highs (19.5%). Current prices for OSB are the lowest level
since Sept-10. The 2Q average of $171/msf compares to $199 last
quarter and $295 last year. The current price is $6/msf below the
2Q average. No sign of spring building season export log demand
only bright spot Housing activity has disappointed in 2011. Most
producers are not seeing signs of a spring building season and have
lowered forecasts. Relative strength in Western log markets due to
Chinese demand pull has been one of the few bright spots this year.
We have been concerned this demand might not prove sustainable at
current price levels and worried about the margin squeeze on
domestic log consumers (high input costs/low wood product selling
prices). We remain cautious on timber/ wood product companies.
Shares appear overvalued vs. current fundamentals. Notes: Source:
The content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 22 May 2011U.S. Paper &
Forest Products Paper Products Analyst: Gail S. Glazerman, CFA Tel:
+1 212 713 3486May paper & board price update A bit of a mixed
bag Pulp & Paper Week reported May paper/board prices this
weekend. Trends were mixed. PPW reported some weakness in uncoated
free and newsprint, stability in containerboard and continued slow
recovery in other graphic grades. Commentary on packaging grades,
such as kraft paper and coated recycled board, was positive.
Containerboard Pulp & Paper Week generally noted stability in
containerboard. This is in contrast to Official Board Markets
(OBM), which reports box price erosion in recent weeks. OBM tends
to have a bias favoring independents and we question the rationale
for incremental price pressure with seasonally-stronger demand,
tighter supply due to planned maintenance & IPs Vicksburg
outage. Export prices are rising with new hikes for Europe, Asia
& Middle East. The RKT/SSCC deal could close this week.
Graphic: ups and downs For 2nd straight month PPW lowered uncoated
free cut size prices. We believe this could be overstating
pressure. They continue to show modest recognition of April coated
free, coated groundwood and uncoated groundwood hikes. PPW
questions prospects for new July hike for these grades. PPW held
East newsprint prices flat but lowered prices $5/t in the West.
This brings East/West gap to $20/tonne. More increases pending:
cautious on graphic paper positive on packaging There are new
graphic paper and packaging price increases in the markets for
June. Near-term focus will be on containerboard and if the industry
will seek pricing this summer. We favor packaging grades and assume
a $50/t linerboard hike for July. Notes: Source: The content
presented above reflects a front page summary of UBS Research
content, UBS commentary as at 22 May 2011U.S. Paper & Forest
Products Paper Products Analyst: Gail S. Glazerman, CFA Tel: +1 212
713 3486Weak final April print/write stats Final report confirms
industry gave back much of March gains AF&PA released final
April US printing & writing paper data after Fridays close. The
data was soft, with the 9% decline in overall shipments a bit
weaker than the preliminary release and the weakest trend since
fall 2009. Inventories rose 2.7% m/m-reversing 1/2 March decline.
Net imports fell 3% y/y but were up 20% m/m. Uncoated free best
trends Uncoated free posted the best shipment and inventory trends
in the month. The 3.7% y/y drop in shipments (-4.2% ytd) compares
to 12-15% declines for other grades. UCFS comps were much easier.
UCFS inventories fell slightly m/m. Coated free shipments fell 15%
y/y (-4.9% ytd). Inventories rose more than normal. Coated
groundwood shipments fell 12.3% y/y (-3.4% ytd). Inventories rose
to a 1.5-year high. Uncoated groundwood shipments fell 13.8% y/y
(-6.9% ytd). Inventories rose to a 20-month high. Trade still
generally positive Overall trade flows were generally improved year
over year though modestly unfavorable compared to 12-month rolling
averages. Currency and trade barriers are providing some
protection. We see risk to coated free trade over time. Pricing
Pulp & Paper Week reports more erosion in uncoated free cut
size and modest improvement in other print/write grades. Looking
out there are cut size, coated free, coated/uncoated groundwood
hikes for June/July. We assume stable pricing. Uncoated free is our
preferred graphic grade but we favor packaging over paper. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS commentary as at 22 May 2011 UBS
6
7. Morning Expresso - United States 23 May
2011COMMUNICATIONJanedis Media Matters Entertainment Analyst: John
Janedis, CFA Tel: +1-212 713 1064Post Upfront Nets Positioned Well
Whats New? We expect upfront negotiations to pick up the pace next
week, with the TV network upfront wrapping by mid-June at the
latest. Broadly, we think FOX/CBS/ABC are asking for CPM increases
of +12%-16% vs. last years upfront, hoping the scatter market
increases of the past two years impact the psychology of the
negotiation. In the near term, we believe the mid teens market ask
should translate to positive sentiment for the group. Top picks:
CBS, DISCA, TWX, and VIA. Online Recruitment Conference Call
Contact your UBS salesperson Join us on Wednesday @ 11AM for an
update on the sector from an industry thought leader on government
budget impact, emerging competitors, etc. New York Times Linage +5%
in May; WSJ +3% Through the third week of May, NYT linage is +5%
with natl auto -11%, dept. stores +16%, telco - 19%,
banks/financials +16%, tech +404% (Google/Acer) and movies +4%.
Classifieds are -11%, with h/w +33%, r/e -18%, and auto -12%. May
linage at the WSJ is trending +3% (+7% comp), on a same-day basis,
vs. April which finished flat (+22%) Mar. -4% (+33% comp), Feb. -2%
(+15%), Jan. +2% (+22%), Dec -2% (vs. +38%). Valuation Large-cap
media is trading at 8.2x our estimated FTM EBITDA vs. 8.1x last
week; mid-cap is trading at 9.9x vs. 10.0x; advertising is trading
at 7.1x vs. 7.0x; online recruitment is trading at 10.3x vs. 11.6x;
and publishing is trading at 4.5x vs. 4.4x. Notes: Source: The
content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 23 May 2011 UBS 7
8. Morning Expresso - United States 23 May 2011CONSUMERANN,
Inc. Rating: Buy Target: US$37.00 Price: US$29.09 RIC: ANN.N Prior:
Unchanged Prior: Unchanged Mkt Cap: US$1.69bn BBG: ANN US
Retailers, Specialty Analyst: Roxanne Meyer, CFA Tel: +1 212 713
86022Q Off to a Solid Start; Reiterate Buy Fundamentals are
improving ANN remains a top pick based on attractive LT catalysts:
1) momentum at Ann Taylor / turn is there at LOFT, 2) best-
positioned in terms of sourcing for 11, 3) accelerated store
refreshes (higher sales productivity/lower cost model), 4) channel
mix shift to higher margin factory/outlet & ecommerce
businesses, 5) systems/IT initiatives, and 6) continued repurchase
activity. 2Q off to a solid start; accelerated comps, fewer promos
at both divisions While Lofts 1Q comp of -1% disappointed, it was
due to starved inventories and weakness in petites (15% of sales).
In May, Loft stores are seeing significant improvement
(particularly in knits/wovens) given right- sized inventories, with
May the toughest monthly compare of 2Q. We are comfortable with
expectations for gross margin expansion in 2Q given 1. improvement
in Loft product, 2. the reduction in promotions needed in May thus
far, and 3. the influence of higher outlet margins on the total
margin, which becomes increasingly more influential. Reiterated
sourcing cost mitigation but now for all of 2011 ANN remains the
only retailer to have mitigated 11 sourcing pressures with average
unit costs planned flat. AT is not raising opening price points and
will only increase price on select high-demand items in 3Q (such as
suits); Loft will not raise prices. Lower depth of promotions/more
targeted promotions are being tested. Valuation Our 2Q EPS estimate
moves to $0.47 from $0.46, FY11E to $1.87 from $1.84. Our $37 price
target is based on 15.7x our 12 EPS estimate of $2.35. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS estimates based on a share price of
US$29.09 on 20 May 2011 18:12 EDTBerth Control Recreational
Products & Services Analyst: Robin M. Farley Tel: +1-212-713
2060Cruise Capacity Monitor Growth After 2011 Even Lower The North
American capacity increase for 2010 was 6% and we estimate 2011
will be just under that level, which is approximately equivalent to
the trailing 10 year average of just under 6%. 12 and 13 will
almost certainly be below avg years at 3% and 4% growth,
respectively, as all ordering for those yrs now done, and further
withdrawals are likely to come. European capacity also expected to
grow below the 9- 10% trailing average growth. What Could Come Into
the Order Pipeline We believe CCL likely to order another ship this
year for 14 delivery. We expect the next few newbuilds to still be
ordered for European sourcing brands like Costa and AIDA, which
have both been growing, and P&O which currently has no ships on
order. An order for the Carnival brand is unlikely in the near term
in our view. This goes along with Carnivals stated plan for
capacity growth of 2-3 ships per year, as there is currently only
one order for delivery in Spring 2014 (for Princess). What Could
Come Out of The Fleet We note CCL has 1 ship in its P&O
Australia fleet and 2 ships in its Iberocruceros fleet that are 24+
years old, similar in vintage to other recent CCL fleet removals.
Each of those two older Iberocruceros ships is ~1% of the Euro mkt.
Although RCL has noted that it has no plans to remove the ship, we
have heard trade commentary that RCI could be exploring
alternatives for the Monarch of the Seas. We believe Monarch
comprises ~1% of 11 North American capacity. More detail on other
potential capacity changes in Europe and N America below. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS commentary as at 23 May 2011US
Specialty Retail Retailers, Specialty Analyst: Roxanne Meyer, CFA
Tel: +1 212 713 8602Roxyretails Rack Attack: Heightened Promotions
Continue Across the Mall Continue to see aggressive promo levels in
May; retailers focused on traffic We continue to see widespread
promotional levels across the mall with nearly all of our retailers
more promotional than LY and many more promotional than the prior
week. ARO and AEO need to clear heavy inventory levels. We saw YOY
upticks at: ANF, ARO, AEO, Banana, Old Navy, Urban Outfitters, and
WHBM; only Banana Republic was less promotional. AEO: aggressive
promotions continue; lowering our estimates and PT AEO remains
highly promotional with 70-75% of the store marked-down (vs 40% LY)
and an average depth of 30-40% off (vs 25-30% off LY). Newer
product looked a bit too dark for spring/summer. We are maintaining
our Q1 est of $0.13 (assuming lower gross margin is offset by share
repurchase), but lowering Q2 est $0.10 from $0.13 and FY11 to $0.89
from $0.98. Our PT goes to $14 from $16 based on 13x our new 12 est
of $1.05 (previously 14x $1.12). TLB: assortment improving but
promotional levels remain elevated We see signs of product
improvement, but elevated promotional levels. TLB likely
experienced some softness (like ANN) in last 3 wks of April (key
selling season) due to weather, but we arent expecting real
improvement until 2H anyway. Lowering price targets on ARO and GPS,
maintaining neutral ratings AROs PT goes to $19 from $22 based on
9x our 12 est of $2.13. GPSs PT goes to $20 from $22 based on 11x
our 12 est of $1.81. No change to either multiple. Notes: Source:
The content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 23 May 2011 UBS 8
9. Morning Expresso - United States 23 May 2011ENERGYUS Oil
Service & Drilling Oil Drilling, Equipment & Services
Analyst: Angie Sedita Tel: 1-212-713 3587Angies Oil Service and
Drilling Weekly Rowan sells LTI manufacturing at better than
expected price Last week, Rowan announced it will sell its
LeTourneau Technologies manufacturing business to Joy Global for
$1.1 bil in cash. This is above the higher end of our prior
valuation range for the manufacturing division of $800 mil. Most of
the after-tax proceeds (~ $875 mil) will be re-invested in RDCs
offshore drilling business, which could include investments in its
high spec jackup fleet or expansion into the ultra-deepwater
market. Rowan has been meeting with South Korea shipyards regarding
a potential order for up to three 12,000 ft dual activity
drillships. We believe an order for two deepwater rigs is likely.
Diamond announces 3rd deepwater rig; we believe dividend intact
Last week, Diamond announced its 3rd newbuild ultra-deepwater
drillship with Hyundai for $610 mil, delivery in Q2-14. Following
the construction of three ultra-deepwater rigs and the purchase of
two additional rigs, Diamond will have five ultra-deepwater
newbuild rigs (plus 3 upgraded ultra-deepwater rigs). Based on our
current free cash flow projections and the $1 bil of cash on hand
we believe that Diamond can maintain the current dividend ($3.50
annual dividend, 5% yld) and internally fund the construction
program. DO wins contracts for first two newbuild drillships under
construction The contracts are with Anadarko at $495k/day, for 5
year terms. Contracts start late-2013 and early-2014 following
shipyard delivery. We estimate an IRR of about 15%. Separately, DO
received a 20 month extension for the semi Ocean Rover (8,000 ft
2nd/5th gen, Malaysia) with Murphy at a dayrate in the mid $280ks,
which is below its current rate in the $370ks and our forecast of
$300k. Notes: Source: The content presented above reflects a front
page summary of UBS Research content, UBS commentary as at 23 May
2011US Electric Utilities & IPPs Electric Utilities Analyst:
Jim von Riesemann Tel: +1-212-713-4260Nuclear Speedbump? NRC says
more issues found in new reactor design NRC Chairman Jaczko stated
that additional technical issues have been uncovered with respect
to Westinghouses AP1000 reactor design that need to be resolved
before it can begin considering the design certification. This
design certification needs to occur before a construction and
operating license (COL) can be issued. At this stage, it is unclear
if these technical issues will result in a delay of the design
approval process. The NRC will wait until it has received
Westinghouses response before deciding if a 75-day public comment
period is warranted. Whats the holdup? Westinghouse was required to
perform further calculations to confirm the NRC staffs technical
analysis but during that process, additional questions arose about
the containment shield building and thermal stress. Westinghouse is
expected to submit additional information on the AP1000 design
sometime in June following an inspection by the NRC staff next
week. What does this do to the approval timeline? If the NRCs new
concerns can be adequately addressed without raising material
issues, then the NRC will likely move forward for a late 2011/early
2012 decision (design and COL done separately). However, if the
concerns are deemed to be material, the 75 day public comment
period will probably push out a final NRC decision by about five
months, or into the 1Q of 2012, at the earliest. Enabling
legislation is vehicle for regulatory recovery for SO and SCG
Annual nuclear expenditure recovery is well defined under the law
Notes: Source: The content presented above reflects a front page
summary of UBS Research content, UBS commentary as at 20 May 2011
UBS 9
10. Morning Expresso - United States 23 May
2011FINANCIALSProperty Casualty Insurance Insurance, Property &
Casualty Analyst: Brian Meredith Tel: +1 203 719 2899Lowering EPS
Estimates on April Storms Preliminary tallies for losses from April
storms total $10.2bn Press reports indicate that ISOs Property
Claim Services shows preliminary losses from April storms of
$10.2bn. Personal property represents 63%, commercial 23% and auto
14% of the total, with the largest losses in AL, TN, NC and TX. ALL
and TRV have the largest market share in the hardest hit states We
examined insurers homeowners, auto physical damage and commercial
multi-peril property market shares in the nine states with the
largest dollar damages from April storms (representing 78% of total
losses). Of the companies in our coverage universe, ALL and TRV
appear to have the largest market shares in these states, with much
smaller shares at WRB and ACE. PGR is among the top 10 personal
auto insurers in each of these states (and in the top five in six
of them). Reducing EPS estimates for CB, TRV and WRB Based on
market shares and expected industry losses, we are increasing our
catastrophe loss estimates and reducing 2Q11E EPS for TRV (-36%),
CB (-13%) and WRB (-3%). Our 2Q11 catastrophe loss estimate for TRV
is higher than each quarterly cat loss TRV has reported since 3Q08.
Our 2011 EPS estimate is ~3% below consensus for TRV and roughly in
line for CB and WRB. ALL pre-announced its April cat loss estimate,
and PGR reported April results (see Table 2). Reinsurers not likely
to be significantly affected . . . . . .but some reinsurance
programs might be triggered. CINF expects reinsurance recoveries on
its losses, and ENH pre-announced $45-$55m in losses from its cat
reinsurance book, mainly related to regional homeowner and farm
mutual insurers. Notes: Source: The content presented above
reflects a front page summary of UBS Research content, UBS
commentary as at 23 May 2011 UBS 10
11. Morning Expresso - United States 23 May
2011HEALTHCAREManaged Care Consultant Symposium Healthcare
Providers Analyst: Justin Lake, CFA Tel: +1-212-713 2765Consultant
Views on Selling Season/Reform We recently hosted our 1st
Consultant Symposium and 1x1 Conf in NYC Presentations by Aon
Hewitt consultants across a variety of topics including 2012
selling season, future of HC, outlook for retiree HC and PBM among
others. While 2012 unlikely to see major shifts, employers appear
to be more willing to entertain ideas that drive meaningful change
heading into 2014 HC reform implementation. Will employers shift
from defined benefit to defined contribution in HC? One of the most
interesting viewpoints came from consultant presenter Ken Sperling,
who sees potential for employers to move HC spending toward defined
contribution over time, with the analogy made several times to
similar move in 1990s in retirement (pension to 401k). While this
may prove challenging for active employees, its more likely in the
pre-retiree/retiree space, especially should exchange market prove
viable and provide affordable options to pre-65 retirees. Typical
RFP pipeline in natl accts, signs of pricing aggression from AET No
major new trends in natl account RFPs for 2012, with cost trend
guarantees less aggressive. Some discussion of Aetna pricing
aggression in mid-mkt segment by consultants, specifically in the
north-east, which we also picked up via our NFP channel checks.
That said, MLR floors make pricing data-points tough to interpret
as plans have been transparent in strategy to price thru rebate for
membership in low MLR regions (AET has indicated small group
give-back in select markets). Aon Hewitt indicates PBM pricing
trends improve YoY On avg PBM clients realizing 7-9% savings on
typical 3-yr contracts on renewals for 2012, which appears less
aggressive than last years avg. of 12-15%. Notes: Source: The
content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 23 May 2011US Specialty
Pharmaceuticals Pharmaceuticals Analyst: Marc Goodman Tel:
+1-212-713 1342Generics Product Series Part 11:Micro-K & K-Dur
(Potassium CL Caps/Tabs) Whats new? Eleventh issue of our series on
key generics products We focus on products with significant sales
potential, interesting patent situations or complex generic
launches. We include an Rx-driven sales model as well as the
projected EPS impact to the respective generic company for the new
generic product. We detail our assumptions for generic Micro-K for
Perrigo and Watson Micro-K has been an investor concern since KV
re-entered the capsule market earlier this year and regained ~25%
share, and now especially as Paddock/Perrigo received approval this
week and is expected to launch in mid July. In the capsule market,
we assume that Watson will be able to keep ~50% share (vs. ~75%
now) with Perrigo and KV taking ~15% and ~30% share, respectively.
Further, we assume that pricing drops by another 15% when Perrigo
launches (pricing fell ~20% when KV re-entered). However, we had
previously underestimated the impact of the tablet market where
Watson has benefited from Mercks price increases on the brand.
There is a slow shift to tablets due to lower cost, and while that
market is already established, Watson has been gaining share, and
we believe it will be able to offset losses in capsules though its
gains in tablets (see Table 1). Our takeaway: Opportunity for
Perrigo; No net impact to Watson We estimate sales of $7M in F2012
and $9M in F2013 for Perrigo, resulting in an EPS contribution of
$0.03 and $0.04, respectively. For Watson, we expect capsule losses
to be offset by tablet increases such that the contribution from
this franchise to our Watson estimates remains unchanged (see
Tables 2 and 3 for projected EPS impact). Notes: Source: The
content presented above reflects a front page summary of UBS
Research content, UBS commentary as at 22 May 2011 UBS 11
12. Morning Expresso - United States 23 May
2011INDUSTRIALSActuant Corporation Rating: Neutral Target: US$29.00
Price: US$25.01 RIC: ATU.N Prior: Unchanged Prior: Unchanged Mkt
Cap: US$1.70bn BBG: ATU US Industrial, Diversified Analyst: Robert
Barry Tel: +1-212-713 7980Weasler fits classic ATU deal criteria;
Synergy potential, valuation look attractive ATU buys Weasler
(engineered drivetrain components) for $155mn Weasler sells into
the Ag, lawn/turf and industrial markets. Revenue mix is 85% NA,
85% levered to Ag, which has an attractive secular growth story,
and splits 60/40 between OE/Aftermarket. On LTM sales of $85mn at
21% EBITDA margins valuation looks attractive at 8.7x vs. 9.2x for
our SMID industrials peer group (on 11E). Weasler fits squarely in
ATUs wheelhouse, boding well for synergies We think Weasler fits
where ATU has excelled buying well-run makers of highly engineered
products with dominant, but localized market positions, in less
competitive niches, and globalizing them. We also see sourcing,
R&D synergies with the Elliott (flex shafts) and Maxima
(durable vehicle controls) businesses. Post Mastervolt we think
investors will like the classic ATU deal traits In our view,
Weasler should reassure investors who were concerned ATU strayed
from its core M&A strategy with the recent Mastervolt deal
(solar inverters). We think MV fit many of ATUs M&A criteria
and that LT prospects for solar are good, but a choppy demand
outlook and MVs lack of market dominance did raise concerns.
Valuation: Weasler neutral to valuation on 2012E; See better LT
upside Our price target reflects 17.2/15.5x P/E and 9.4/8.5x EBITDA
multiples on our 2011/12 estimates, weighted 75/25% on 2011/12E.
While likely modestly accretive to F12 (Aug), at 8% growth, a 21%
EBITDA margin and an 8.5x one-year forward EBITDA multiple the deal
is about neutral to our 2012E valuation. Well review our estimates
post closing. Notes: Source: The content presented above reflects a
front page summary of UBS Research content, UBS estimates based on
a share price of US$25.01 on 20 May 2011 19:36 EDTCrane Rating: Buy
Target: US$55.00 Price: US$47.72 RIC: CR.N Prior: Unchanged Prior:
Unchanged Mkt Cap: US$2.79bn BBG: CR US Industrial, Diversified
Analyst: Robert Barry Tel: +1-212-713 7980Strong tailwinds at Crane
Aerospace We visited CR Aerospace and remain confident in robust
growth outlook We met last week with CR Aero management, who were
very upbeat about the business. We think CR continues to gain
share, including on Airbus and Embraer platforms and, more broadly,
is benefiting from a still young, multi-year aerospace cycle. Our
constructive thesis on CR shares is based partly on growing
momentum in the firms predominantly late cycle end markets,
including aerospace. We come away more confident in our 2011/12
revenue growth ests (10-12%) for Aerospace. Sizable progress on
cost; Inflation, Japan supply chain are manageable We think stepped
up LEAN initiatives during the downturn are paying dividends. The
Burbank facility we toured is producing the same revenue (~$200mn,
50% segment sales) on one shift that it produced on two shifts at
the prior peak. We believe wage inflation may be a larger risk than
materials costs as the cycle develops. CR is also shedding
suppliers that underinvested during the downturn and became less
efficient. Were starting to see upside to our 2012, 22% OP margin
target for A&E. Management changes starting to yield results
Since Aero President Mike Romito joined in 2009 all but three of
his direct reports changed. Focus areas for new managers are LEAN,
aggressive aftermarket growth, and expanding the global engineering
offices footprint. We think strategically locating new facilities
is fueling growth, including with Airbus and Embraer. Valuation Our
$55 price target reflects a 14.5x P/E multiple and an 8.5x EBITDA
multiple on our 2012 estimates, weighted 70:30 to P/E. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS estimates based on a share price of
US$47.72 on 20 May 2011 19:36 EDTShaw Group Rating: Buy Target:
US$44.00 Price: US$39.32 RIC: SHAW.N Prior: Unchanged Prior:
Unchanged Mkt Cap: US$3.34bn BBG: SHAW US Heavy Construction
Analyst: Steven Fisher, CFA Tel: +1-212-713 8634NRC comments,
Westinghouse responds NRC indicates that further AP1000 technical
issues need to be addressed NRC Chairman Jaczko stated that
additional technical issues in Westinghouses AP1000 design need to
be resolved before it can finalize the design certification. This
certification needs to occur before a construction and operating
license can be issued. At this stage, it is unclear if the
technical issues will result in a delay of the design approval
process. The NRC will wait until it has received Westinghouses
response before deciding if a 75-day public comment period is
warranted. Westinghouse (WH) is expected to submit additional info
in June WH was required to perform further calculations to confirm
the NRCs technical analysis but during that process, further
questions arose about the containment shield building and thermal
stress. WH is expected to submit additional info on the AP1000
design in June following an inspection by the NRC staff next week.
Westinghouse emphasizes that issues are not safety significant
Following the NRCs release, WH stated it will continue to work with
the NRC as part of the normal licensing process to address the few
remaining confirmatory items, none of which are safety significant.
If the NRCs new concerns can be adequately addressed without
material issues, the NRC will likely move fwd for a late 11/early
12 decision. If the concerns are material, the 75-day comment
period could push out a final NRC decision into 1Q of 2012, at the
earliest. Valuation: Maintain our target of $44/share; maintain Buy
rating In the wake of Fukushima, we already assumed a delay in our
model for Shaws FY12. Target reflects 15x PE on FY12E+$4/sh of
cash. 15*$2.65+$4=$44. Notes: Source: The content presented above
reflects a front page summary of UBS Research content, UBS
estimates based on a share price of US$39.32 on 16 May 2011 18:42
EDT UBS 12
13. Morning Expresso - United States 23 May 2011E&C Weekly
Blueprint Heavy Construction Analyst: Steven Fisher, CFA Tel:
+1-212-713 8634Engineering & Construction Update Upcoming
events: catalysts through the end of June; UBS oil sands trip We
highlight some upcoming catalysts over the next several weeks:
draft highway legislation (May/June); final version of CATR (June);
Jubail refinery EPCM award for utilities and offsites (mid-June).
UBS will be hosting a trip to the Canadian oil sands to meet with
E&C customers (June 15-16). NRC comments on AP1000 design and
Westinghouse (WH) responds On 5/20, the NRC noted that additional
technical issues related to the AP1000 design need to be addressed.
WH responded stating that the issues are not safety significant and
several were self-identified by WH. The NRC is expected to review
WHs response when it receives it (likely early-mid June). If the
NRC deems the issues are adequately addressed, the design and
project approval could take place late 2011. Issued deemed material
could cause a few months delay into Q1 2012. We have assumed a
delay of a few months in our Shaw model. Industry data: E&C
-3.3% last week; TPC weak on CEO share sale E&C stocks declined
-3.3% on avg last week. The avg performance over the past two
months is -2.9% from +2.8% last week. NTM P/E multiples for FLR,
JEC, MDR, KBR, and TPC declined to lowest levels since Nov/Dec
2010. TPC was the weakest performer likely due to CEO share sales,
Guam concerns, and low ABI. Sector view: Constructive on
construction, despite competitive pressure We still focus on
oil/intl infrastructure weighted stocks. Over the next two years,
we see multiple upside from the cycle tightening and believe
thematic prospects will help orders. Buy ratings: MDR, FLR, KBR,
FWLT, ACM, TPC, SHAW. Notes: Source: The content presented above
reflects a front page summary of UBS Research content, UBS
commentary as at 23 May 2011U.S. Aerospace & Defense Playbook
Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185The Week
Ahead Whats next for Aerospace and Defense? Boeing Investor Day
Mon/Tues in Seattle. While BA will show the 787 production line,
unknown whether it will provide a look at the rework being
performed. HEI will report its Q2 after close Tues, providing a
mid-quarter read on the aftermarket. Several A&D companies will
be speaking at a conference on Wed including GR/BEAV. We should
also get bizjets cycles data this week followed by intl airline
traffic the following week, both of which will benefit from easy
comp on Iceland volcano last April. On June 7, we host our annual
Chicago Aero and Defense 1x1 conference with
ATK/BBD/ERJ/GR/HEI/LMT/BA/TGI/UTX/WWD scheduled to attend.
Congressional committees are making their first pass through the
FY12 Defense Authorization Bill. ESL earnings June 1. Still prefer
aero aftermarket Aero at a 13% premium to market is in line with
similar point in prior up-cycles. We continue to favor the
aftermarket names over OE as we think increased utilization of out
of warranty aircraft can still drive high single digit aftermarket
growth in 11 despite high oil prices and recent capacity cuts.
GR/COL/TDG are our top picks. Risk to 2011 defense results on lower
FY11-12 budgets We see risk to the companies 2011 guidance from
half-year CR and final FY11 appropriations legislation that cuts
$10B in modernization funding relative to DoD request, likely
followed by further cuts in FY12. Valuations not overly attractive
at 28% discount to market, high end of prior defense budget
downturns. Our only Buy-rated defense stocks are GD/ATK. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS commentary as at 20 May 2011Electrical
Equip. & Multi-Industry Update Industrial, Diversified Analyst:
Jason Feldman Tel: +1-212-713 4309Whats New and Notable for
Industrials 24 multi-industry companies presented at EPG conference
last Mon Wed Presenters from our universe: 3M, GE, HON, DHR, ETN,
IR, TYC, EMR, & CBE. Focus was largely on company-specific
initiatives/targets, with most positive on the medium-term outlook
for end markets. We note non- res is believed to have bottomed with
growth forecast for 2H; price / cost dynamic is also expected to
improve. EMR orders ex-currency moderate to +8% in Apr. vs. from
+10% in Mar. Decline in trailing 3-mo. orders largely driven by
tougher comps, with EMR noting continued strength in global capital
goods mkts; Process and Ind. Automation orders still +>20%,
Network Power improves to +5% (was flat in Mar.), and Climate
orders moderated slightly on lower channel restocking. Res business
remains weak at Tools. European industrial team hosts China trip;
temporary slowdown expected Companies across industries in China
(construction, mining equip., truck, auto, wind, and power gen,
among others) currently anticipate a gvt. induced slowdown
including a slower property market, tighter credit and inv.
reductions. However, the slowdown is widely expected to be
temporary given healthy underlying demand. Apr. Ind. Production
below expectations; ABI index declines to below 50 The Architecture
Billings Index (ABI) declined to 47.6 in April to 50.5 in March (a
score >50 indicates increased demand for design services). The
new projects inquiry index also declined to 55.0 in April from 58.7
in March, but remains above the 50 threshold. April IP was weaker
than expected at flat, manufacturing production declined 0.4% (due
to lower Auto production), and CAPU ticked down 0.1% to 76.9% (3.5%
below the 72-10 avg.) vs. March. Notes: Source: The content
presented above reflects a front page summary of UBS Research
content, UBS commentary as at 23 May 2011 UBS 13
14. Morning Expresso - United States 23 May
2011TECHNOLOGYApplied Materials Rating: Neutral Target: US$16.50
Price: US$14.52 RIC: AMAT.O Prior: Unchanged Prior: Unchanged Mkt
Cap: US$19.5bn BBG: AMAT US Semiconductors Analyst: Stephen Chin
Tel: +1-212-713 4111Expect in-line results; reiterate FY11 guide
Silicon orders likely tracking down in-line with its industry peers
We estimate Applieds Apr-11 sales and EPS were in-line with its
guidance at $2.8B and $0.36 and estimate it reiterates its FY11
sales and EPS of $11B+ and $1.50+ and guides Jul-11 sales and EPS
flattish q/q. We estimate Applieds Silicon orders were +6% q/q to
$1.9B given slow April (peers were +15%). We expect no Jul-11
Silicon order guidance (estimate -5% q/q) but reports similar
pushouts from Foundries and highlights 2012 capex may decline y/y
with DRAM a key wildcard. Estimate crystalline solar equipment
orders track down q/q in 2H11 We estimate Applieds Energy and
Environmental Systems (Solar equipment) Apr-11 orders declined -36%
q/q to $425M (14% of total orders) given solar demand uncertainty
in Italy. Our checks find Applieds solar orders are tracking down
in 2H11 but will still be up yoy in FY11 as its top 5 China based
customers continue to adopt new solar products in screen printing
and wire-saws. Display orders improving in 2H11; fab services
orders also tracking better We estimate Applieds Apr-11 display
orders were up +6% q/q at $150M (6% of total orders) as our checks
find Jan-11 was likely the trough quarter from Korea and Taiwan. We
estimate display orders likely grow 5- 10% q/q thru rest of CY11 as
we still believe LCD investment in China is a 2H11 catalyst. Our
checks find its Fab services orders tracked better than wafer
starts, (flat q/q in Mar-11) and likely outgrow 2011 wafer starts
(+5% yoy) as more equipment comes off warranty. Valuation: Maintain
$16.50 price target Our PT is based on applying a 13x P/E multiple
to our cross-cycle EPS of $1.27. Notes: Source: The content
presented above reflects a front page summary of UBS Research
content, UBS estimates based on a share price of US$14.52 on 16 May
2011 19:39 EDTPhotronics Inc. Rating: Buy Target: US$11.50 Price:
US$9.25 RIC: PLAB.O Prior: Unchanged Prior: US$10.50 Mkt Cap:
US$0.50bn BBG: PLAB US Semiconductors Analyst: Stephen Chin Tel:
+1-212-713 4111Continues to execute at high-end Beats Apr-11
results on strong high-end IC sales and Japan orders Photronics
reported Apr-11 sales and EPS of $133M and $0.24 compared to
consensus at $120M and $0.16. 1Q11 sales included additional $5M
orders from Japan mainly for mainstream IC product (IC/FPD:80/20).
IC photomask sales in 1Q11 were up 14% q/q (or $12M) with high-end
IC up 50% q/q (or $9M), and FPD photomask sales were flat despite a
$5M pull-in in Jan-11. Photronics TTM EBITDA of $155M and 2Q11
operating margin of 15.9% were above its LT goals. Likely gains 2%
market share (mostly in high-end) in IC to 13% in 2011 SEMI
estimates 2011 Global IC photomask market to be roughly $3.17B (up
7% y/y) and grow another 2% y/y in 2012 to $3.24B in 2012. We
estimate high-end, the fastest growing segment, is about 25% of the
market. We note that Photronics 45nm and below business grew 74%
q/q and 60nm and below grew 50% q/q. Raising estimates on higher
margins and share gains Photronics guided 3Q11 sales and EPS of
$131M and $0.19 and has set a new near-term OM target of 17.5%,
similar to prior peak level. We believe Photronics can capture
another 1-2% market share in 2012 from its momentum in high-end and
its diversification beyond memory customers. We raise our FY11 and
FY12 EPS estimates to $0.85 and $1.05 from $0.70 and $0.80
previously. Valuation: Maintain Buy and raise PT to $11.50 from
$10.50 previously Our 12-month price target is based on applying an
11x multiple to our FY12 EPS estimate of $1.05. We believe
Photronics will continue to benefit from its high-end investments
as majority of new capacity and design $s are allocated to
high-end. Notes: Source: The content presented above reflects a
front page summary of UBS Research content, UBS estimates based on
a share price of US$9.25 on 20 May 2011 19:36 EDTVeeco Instruments
Rating: Buy Target: US$65.00 Price: US$54.79 RIC: VECO.O Prior:
Unchanged Prior: Unchanged Mkt Cap: US$2.30bn BBG: VECO US
Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111More
orders from Elec-Tech likely in 2012 Elec-Tech (Veecos #1 China
customer) raising capital to expand in LED Elec-Tech has proposed
to raise around $539M to fund 1.8M units of 4- inch LED wafer
capacity in Wuhu, China. We note Elec-tech has about $225M of cash
currently and any additional funds raised further lowers its
dependency on MOCVD equipment subsidies, which we expect tail off
thru 1H12. Elec-Techs big LED expansion likely means more Veeco
orders in 1H12 Elec-Tech will use its new funds to purchase 150
MOCVD chambers in addition to the 36 it already has installed,
which is consistent with our report on 5/18/11 titled Customer
momentum at Elec-Tech is solid. While our proprietary LED fab
tracker is now following 31 customers in China, we believe
Elec-Techs big expansion plans (now 216 MOCVD chambers in total, up
from 130 previously) will likely keep it one of Veecos top three
customers. Estimate Veeco may earn another $0.70 in EPS in 2012/13
from Elec-Tech If we estimate Veeco can maintain its current 77%
market share at Elec-Techs new 86 chamber expansion plan, we
estimate this will require 16 more MaxBright tools ($9M each, 30%
operating margin, 32% tax rate, 44M shares. Our 2011 and 2012 EPS
estimate remains $5.25 and $4.75 (2012E does not include Elec-Techs
86 chamber expansion yet since its funds have not been raised yet).
Valuation: Maintain Buy rating and 12-month price target of $65 Our
PT is based on 12x our cross-cycle EPS of $4.00 plus $17/sh in net
cash ending 2011. We expect a catalyst for the stock could be June
7th when Elec-Techs shareholders vote on this fund raising
proposal. Notes: Source: The content presented above reflects a
front page summary of UBS Research content, UBS estimates based on
a share price of US$54.79 on 20 May 2011 19:36 HKT UBS 14
15. Morning Expresso - United States 23 May 2011UBS SemiBytes
Semiconductors Analyst: Uche Orji Tel: +1 212 713 4015Intel Gets
More Aggressive than Expected with its Atom Processor Road Map Week
Ahead: SIGM (25-May), MRVL results, call with Calxeda (26-May) For
Marvell F1Q results, we expect sales/EPS of $838m/$0.31, above
consensus of $826m/$0.30. We see potential downside risk to our F2Q
outlook of $914m/$0.34 on TD-SCDMA weakness. We will host Karl
Freund, VP Marketing at Calxeda to discuss how its power-efficient
ARM solution addresses next gen data center challenges. Conf call:
10:00 am ET, (800) 785-6380/(212) 231-2900, #21524988. Charts: OECD
CLI vs semi industry revenues, SOX index A slowing y/y OECD
Composite Leading Indicator (CLI) supports our view for moderating
semiconductor industry growth and in turn reinforces our Neutral
view on the sector, as y/y SOX returns lead y/y semiconductor
industry growth. Review: INTC Analyst meeting As we expected, Intel
highlighted how it is monetizing the growth of smartphones and
tablets through its data center business. What we did not expect
was an aggressive Atom road map, where we believe investors will
question less if Intel can defend itself vs ARM but rather
increasingly ask if Intel can execute compelling products
leveraging its Tri-Gate process advantage to gain meaningful share.
We believe even in 2015 for smartphones, Intels 14nm Airmont, which
would have its first full year of production, would optimistically
add ~$0.10 (100m units) to our $2.90 EPS est. We believe more
impactful is our view that investors will see reduced downside risk
from ARM to longer-term earnings that could result in a rising P/E
multiple (currently 10x 2011 EPS) towards our 12x target. Notes:
Source: The content presented above reflects a front page summary
of UBS Research content, UBS commentary as at 23 May
2011Semiconductor Equipment Industry Update Semiconductors Analyst:
Stephen Chin Tel: +1-212-713 4111Taiwanese semicap orders still
very low Checks again find no new semicap orders from TSMC or UMC
last week Our checks find TSMC has not placed any semicap orders
for 4 consecutive weeks (last time saw this was in the Jun-10
quarter). Our analysis shows TSMCs 2Q11 semicap orders so far in
the quarter are only $286M or down -65% q/q if we assume its
average weekly order pace remains the same for remainder of 2Q11.
We note TSMCs 1H11 semicap orders are only $1.8B, which is tracking
well below its full-year capex guidance of $7.8B. Our checks find
UMC has not placed any semicap order for 5 weeks in a row. Our own
analysis shows UMCs semicap orders in 2Q11 so far are only $23M,
which are tracking down -70% q/q. Checks find Rexchip placed one
DRAM semicap order last week Our checks find Rexchip placed a
$17.5M semicap order with Applied Materials last week. Our analysis
shows total Taiwanese DRAM semicap orders in 2Q11 are only $102M,
tracking down -20% q/q. We are not as surprised with the weak DRAM
semicap orders as we estimate DRAM capex in 2011 will be down -42%
yoy and up slightly in 2012 at +14% yoy. Historically, Lam has the
highest DRAM customer exposure at 38% of its total shipments
(4-year average). Total Taiwanese semicap orders in 2Q11 tracking
down -59% q/q so far Our analysis shows the 9 major semiconductor
customers in Taiwan have only ordered $411M of semicap equipment in
the first 7 weeks of 2Q11, down -59% q/q if weekly orders stay at
this average for the remainder of 2Q11. We are surprised that total
Taiwan foundry semicap orders are driving this weakness at only
$309M in 2Q11 so far and tracking down -65% q/q. Historically, KLA
has had the highest Foundry customer exposure at 42% of its total
orders. Notes: Source: The content presented above reflects a front
page summary of UBS Research content, UBS commentary as at 22 May
2011US Internet and Interactive Entertainment Internet Services
Analyst: Brian Pitz Tel: +1-212-713 9310Pitz & Fitzs Internet /
IE Weekly Apple launching cloud music service with support from
record labels Apple is preparing to launch a cloud music service,
which would allow users to listen to songs from an Internet
connection. Apple is said to have reached agreements with all four
major record labels Warner Bros, Sony, EMI, and Universal. CNET
reports that Apple still needs to come to terms with the publishers
Warner/Chappell, EMI Publishing, and Sony/ATV. Apple could unveil
its music service as early as June 6, the date of its developer
conference. Microsoft offers free Xbox to students who purchase
$699+ PC Between May 22 and September 3, Microsoft is offering a
free Xbox 360 4GB console to high school, and college / university
students who purchase a Windows 7 PC worth $699 or more. To
qualify, the students must purchase the PC at select online
retailers including Dell.com, HP.com or the Microsoft online store,
as well as in-store at Best Buy or Microsoft Store retail
locations. The deal is currently only available in the US; Canada
and France rollouts are coming soon. Google raises $3B in bond sale
In its first ever bond offering, Google raised $3B splitting the
sale evenly between three-, five-, and ten-year notes. The 1.25%
3-year notes yield 33bps more than similar maturity Treasuries; the
2.125% 5-year notes pays a 43bps spread, and the 3.625% 10-year
bond pays a 58bps spread. Googles stockpile of $35B cash is said to
have aided it to secure favorable terms. The average spread on AA
rated bonds on May 13 was 105bps, higher than Googles, which also
has an AA rating (S&P). The offering is said to give GOOG more
flexibility to spend cash in the US; roughly 46% of its total cash
is offshore. Notes: Source: The content presented above reflects a
front page summary of UBS Research content, UBS commentary as at 23
May 2011 UBS 15
16. Morning Expresso - United States 23 May 2011UBS Key Calls -
USLive Key Call Portfolio Stock Name RIC Rating Price Target Date
of call Current Price Analyst Cardinal Health, Inc. CAH.N Buy US$51
18-Jan-11 US$44.92 Steven Valiquette Citigroup Inc C.N Buy US$56
3-May-11 US$41 William Tanona, CFA Celgene Corporation CELG.O Buy
US$69 9-Dec-10 US$60.49 Matthew Roden, PhD Deere & Co. DE.N Buy
US$115 18-Jan-11 US$84.75 Henry Kirn, CFA Dow Chemical DOW.N Buy
US$46.5 21-Mar-11 US$36.01 Andrew Cash Ford Motor Co. F.N Buy US$22
10-Jan-11 US$15 Colin Langan, CFA General Electric Co. GE.N Buy
US$23 10-Jan-11 US$19.64 Jason Feldman Google Inc. GOOG.O Buy
US$765 10-May-10 US$524.03 Brian Pitz Joy Global Inc. JOYG.O Buy
US$112 28-Feb-11 US$90.35 Henry Kirn, CFA McDonalds Corp. MCD.N Buy
US$93 9-Feb-11 US$82.33 David Palmer Prudential Financial Inc.
PRU.N Buy US$77 19-Apr-10 US$63.61 Andrew Kligerman Qualcomm Inc.
QCOM.O Buy US$70 26-Apr-11 US$57.38 Parag Agarwal SanDisk Corp.
SNDK.O Buy US$62 21-Mar-11 US$46.46 Uche OrjiSource: Reuters, UBS.
Prices as at market close on May 20, 2011. UBS 16
17. Morning Expresso - United States 23 May 2011Rating & PT
ChangesKey Rating and Price Target Changes: US Company Name
Directional Indicator/Rationale Reuters Code Current New New PT
Prior Prior PT Share Price Rating Rating Aeropostale Inc. Maintain
Neutral, lower PT ARO.N US$18.3 Neutral US$19 Neutral US$22
American Eagle Outfitters Maintain Neutral, lower PT AEO.N US$13.52
Neutral US$14 Neutral US$16 Inc. Expedia Inc. Maintain Neutral,
increase PT EXPE.O US$27.57 Neutral US$32 Neutral US$27 Gap Inc.
Maintain Neutral, lower PT GPS.N US$19.22 Neutral US$20 Neutral
US$22 Orbitz Worldwide Inc Maintain Neutral, lower PT OWW.N US$2.59
Neutral US$3 Neutral US$4.1 Photronics Inc. Reiterate Buy, increase
PT PLAB.O US$9.25 Buy US$11.5 Buy US$10.5Source: Reuters, UBS.
Prices as at market close on May 20, 2011. UBS 17
18. Morning Expresso - United States 23 May 2011Markets, Events
and NewsflowTodays Company Events Company Name Event Reuters code
Rating PT Notes Campbell Soup Earnings Release CPB.N Neutral US$36
GT Solar Intl. Earnings Release SOLR.O Buy US$14 HiSoft Technology
Earnings Release HSFT.O Neutral US$21Source: Reuters, UBS. Prices
as at market close on May 20, 2011.Todays Macroeconomic Events: US
Indicator Time (ET) UBS forecast Previous Consensus NoneSource:
Bloomberg, UBSTodays UBS Hosted Corporate Roadshow: Company Event
Location Stanley Black & Decker 1x1 meeting hosted by Jason
Feldman United KingdomTodays UBS Hosted Fieldtrip: Company Event
Location Constellation Brands Inc UBS Fieldtrip New YorkTodays UBS
Hosted Conference: Company Event Location UBS Global Oil and Gas
UBS Conference Austin Conference UBS 18
19. Morning Expresso - United States 23 May 2011Latest Market
Movements: Country/Region Market Latest Price/Last Close 1-day %
Change YTD % Change Americas United States Dow Jones 12512.0 -0.74
8.07 United States S&P 500 1333.3 -0.77 6.01 United States
Nasdaq 2803.3 -0.71 5.67 United States S&P VIX 17.43 12.30
Europe Europe FTSE Eurofirst300 1123.1 -1.15 0.12 Belgium BEL 20
2689.6 -1.05 4.30 Germany DAX 7149.5 -1.62 3.40 France CAC 3929.1
-1.55 3.27 Italy