Financial Pacific - Dell, raising EPS estimates (third party)

UBS Investment Research

Morning Expresso - United States

Monday 15 August 2011

Global Equity Research

Americas

Equity Strategy

Market Comment

15 August 2011

www.ubs.com/investmentresearch

U.S. Equity Product Management

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Morning Expresso

This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 22. 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.

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Morning Expresso - United States 15 August 2011

UBS 2

Morning Meeting Agenda Ralcorp Holdings Rating: Buy Target: US$91.00 Price: US$79.02 RIC: RAH.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$4.39bn BBG: RAH US

Food Products Analyst: David Palmer Tel: +1-212-713 9315

Higher Price; Higher Risk? Ralcorp Rejects Revised Offer Since Friday's close, Ralcorp's board of directors made public its unanimous rejection of ConAgra's privately delivered

$94 all cash bid—less than 24 hours after receiving the revised proposal. In ConAgra's offer letter, the company noted that it had tried to engage Ralcorp on numerous occasions since February, including most recently in late July. We are maintaining our $91 price target, which is based on a blend of probability weighted scenarios.

Can Post Go It Alone? In our view, the spin off of Post only makes sense if it leads to an acquisition of that company. A highly levered standalone Post seems like an unlikely and risky long term reality—particularly with its shaky momentum (-14% Post vol in F3Q). While PepsiCo might want to increase its healthy food scale with Post, it is unclear if any other large caps can acquire Post in the current regulatory environment.

An Increasing Risk Profile to RAH Pre-market trading implies that Ralcorp's stock price will trade up towards the mid $80's. Stock risk could be higher if the stock approaches $90 and becomes more dependent on the willingness of the Ralcorp board to engage ConAgra. We believe the best case scenario for Ralcorp remains a cash (or mostly cash) acquisition in the near term. We still believe it is possible that ConAgra raises its bid further or bids for the private label part of the business after a break-up of the company.

Valuation: Buy Rating; Maintaining $91 PT Our PT represents 15x our non-deal CY12E EPS of $6.04 and is based on a 25% chance of a $97 pre-spin cash take-out, a 25% post-spin sale of the PL business ($98), and a 50% chance of a spin and standalone companies ($83).

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$79.02 on 12 Aug 2011 19:39 EDT

Dell Rating: Buy Target: US$19.00 Price: US$14.87 RIC: DELL.O Prior: Unchanged Prior: US$18.70 Mkt Cap: US$28.6bn BBG: DELL US

Computers Analyst: Maynard J. Um Tel: +1-212-713 3372

FY2Q12 Preview: Raising EPS Ests & Target Raising EPS estimates; comfortable with revenue forecast We are raising our FY2Q12 EPS estimate to $0.54 from $0.48 (Street: $0.49) due to

gross margin upside potential. We now forecast blended gross margin of 22.6% from 21.7%. We are comfortable with our revenue forecast of $15.7bn (Street: $15.8bn), largely in line with management expectation of mid-single-digit sequential growth (UBSe: 4.5%) though we see potential upside in our server revenue. As a consequence of our FY2QE revision, we raise our FY12E EPS to $1.92 from $1.87.

Market commentary and outlook will be important Dell’s direct channel business has historically given it some early visibility to market turns. We expect Dell to at least maintain current annual guidance (5-9% y/y revenue growth and 12-18% operating income growth) but still highlight broader macro volatility. We note that our and Street estimates for revenue growth are at/below the low end of guidance (UBSe: +4.5%).

Our thoughts on the macro impact to Dell We believe there is some risk in a downturn given the transactional nature of its business vs. annuities. However, we note a few differences from 08/09 that we believe should mitigate the same type of decline: 1) diversification with services mix (higher annuity stream rev) ~20% of the mix from mid teens and lower % of profits from PCs, 2) we expect less end market/component pricing pressures than in the past, & 3) unlike 08/09, enterprise demand is better with relatively strong underlying trends.

Valuation: Raise price target slightly to $19 from $18.70 Our $19 price target is based on ~10x our revised FY12 EPS estimate of $1.92. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$14.87 on 12 Aug 2011 19:39 EDT Oasis Petroleum Rating: Buy Target: US$33.00 Price: US$26.17 RIC: OAS.N Prior: Neutral Prior: Unchanged Mkt Cap: US$2.42bn BBG: OAS US

Oil Companies, Secondary Analyst: Betty Jiang Tel: +1-212-713 1287

A Better Year Ahead; Upgrading to Buy Upgrading to Buy on improved ‘12 growth outlook & attractive valuation While OAS’ shares recovered ~18% in the last three trading sessions

from its 9-month low, we see additional upside potential as prices still imply an attractive 0.70x on 2P NAV. With 2Q results season addressing concerns around OAS’ ‘11 production & capex, we believe investors will shift focus to the ‘12 growth outlook driven by an increase in drilling activity & well performance. We now estimate ‘12 volumes of 24.0 MBoed under a 10-12 rig program (up from 22.4 MBoed), above consensus of 21.3 MBoed. We raised our ‘12E EPS/CFPS to $1.95/$4.95 from $1.75/$4.45.

Infrastructure build out should lift earnings in 2H11 1) natural gas/NGL gathering line start-up in 3Q11 could nearly triple high BTU natural gas volumes (currently flared) by 4Q11 at no additional operating costs; 2) 4Q11 start-up of salt water disposal could reduce LOE by ~$1.00/Bbl; & 3) oil gathering line should improve price realizations beginning in 4Q11 to 1Q12.

Risks to our upgrade While OAS’ near term cash flow is protected (~71% & ~48% of its oil volumes are hedged in ‘11 and ’12), we estimate OAS’ 2P NAV of $38/sh (based on NYMEX strip prices) would decline to $29/sh & $23/sh under normalized WTI prices of $80/Bbl & $70/Bbl, respectively. Additionally, higher than expected ‘12 capex (estimated at $750-$800 MM) would put strain on funding, although we believe the current projected level can be funded by cash and an expanded revolver in ‘12.

Valuation: trading at ~0.70x 2P NAV under current NYMEX strips We are maintaining our price target of $33, which is based on 0.9x our 2P NAV. Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$26.17 on 12 Aug 2011 19:39 EDT

http://research.ibb.ubs.com/doc/200266756?doc=200266756




UBS 3

US Automakers & Suppliers

Automobiles Analyst: Colin Langan, CFA Tel: +1-212-713 9949

Autos Pricing In Mild Recession Sector valuations generally look reasonable for mild recession We performed a sensitivity analysis on the auto companies to better understand

the impact of a recession. We looked at two downside scenarios, a mild recession based on 2012 US sales of 11.3m and a severe recession based on US sales of 10.0m. Based on our analysis, we believe the auto companies are largely pricing in a mild recession but are still at risk in a severe recession.

Still downside risk based on severe recession scenario If we enter a severe recession, we estimate there is close to 10% downside risk for some suppliers and over 30% downside risk for the automakers. The more severe impact for the automakers reflects higher incremental contributions on lost sales as well as higher cash burn. We expect most suppliers will have incremental contributions of 15%, vs. 20%-30% for Ford/GM.

Prefer OEMs, VC, and LEA in mild case, but LEA & VC in severe case If the US economy avoids a severe recession, we believe automakers would recover solidly from current levels. We also believe that suppliers like LEA and VC remain good value. That said, we believe only LEA and VC have no downside in a severe recession.

Increasingly cautious given economic uncertainty UBS is forecasting very low GDP growth, rather than a full recession. Consequently, our analysis would indicate that current valuations more than reflect this scenario, and therefore we remain bullish. That said, near-term downside risk is high given the macro uncertainty.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 15 August 2011

Key Call: Cardinal Health Rating: Buy Target: US$51.00 Price: US$40.92 RIC: CAH.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$14.4bn BBG: CAH US

Healthcare Providers Analyst: Steven Valiquette Tel: +1-203-719 2347

Cardinal May Be a Counter-Cyclical? Commodity Costs May Be Swing Factor To CAH F2012 Earnings Upside Following F4Q11 results and initial F2012 guidance, CAH’s commodity

cost exposure remains a major swing factor to potential earnings upside (mainly in the medical distribution segment). CAH F2012 cash EPS guidance of $3.04-3.19 assumes incremental gross commodity costs at $80 mil, which equates to a $0.14-0.15 EPS hit. However, based on current oil price trends (and other commodities), CAH could see $0.10+ EPS upside vs. the current guidance, as described below.

Current Commodity Price Trends Vs. CAH’s 33% Inflation Guidance Given CAH’s dependence on diesel fuel and latex during mfg and distribution of medical/surgical products, we analyzed current price trends to compare to CAH’s $80 mil headwind guidance, which assumes oil at ~$105 per barrel. However, current crude oil (WTI) prices are only ~$80-85 per barrel, and could trend lower with a weaker economy. Diesel and latex prices have also recently rescinded.

We believe lower COGS would trump any mild surgical volume softness Given the general view among investors and UBS colleagues that a softening in GDP could lead to deflation in key commodity costs such as oil, we believe that the associated savings to CAH would more than offset any related potential mild weakness in hospital/surgical volumes such that CAH’s overall EPS could actually improve if we do indeed witness commodity deflation related to GDP softening.

Valuation: Reiterate Buy Rating and $51 Price Target We reiterate our Buy rating and $51 price target based on a P/E of 14x our CY2012 Cash EPS estimate of $3.52. CAH remains the cheapest stock in our coverage on EV/EBITDA at 5.8x our CY12 estimate.


US Daily Economic Comment

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

A bit more momentum in July growth data Preview: Stabilizing manufacturing, better lending conditions, weak HMI (1) The current activity index in the NY Fed manufacturing survey

indicated contraction in July albeit at a slower pace than in June. The downturn was probably a temporary effect of Japan supply disruptions and a temporary inventory correction after disappointing growth in H1. We forecast a 0.0 reading (cons 0.0 after -3.8) for the NY Fed manufacturing measure in August. (2) The Fed’s Senior Loan Officer Opinion Survey (SLOOS) for July will likely be released at 2pm. We are counting on it to show continued easing of bank lending standards. (3) The housing market index probably fell in early August (UBSe 13, cons 15, after 15). The S&P homebuilders index has fallen about 19% since early July. (4) TICs data for June will document net inflows to US long-term securities.

The week ahead: Strength in IP. Stability in housing. CPI est 0.6%, core 0.3% This week’s data should put some brighter colors up against the dark backdrop of faltering financial markets. We believe industrial production probably rose in July, with large increases in motor vehicle, utility, and mining output; and early August indicators of regional manufacturing activity are likely to steady. In the housing sector, we forecast a small rise in existing home sales and stability in single-family starts and permits, although the housing market index probably fell. Forward-looking indicators probably were improving through July, with another gain in the index of leading economic indicators and further bank easing reported in the SLOOS. However, we forecast a large rise in the CPI (0.6%), with spiking energy prices plus another 0.3% increase in core prices.

Review: Retail therapy Equity markets responded positively (S&P 500 up 0.5%) to solid retail sales and ignored a plunge in the University of Michigan consumer sentiment index. Retail sales rose 0.5% (cons 0.5%, UBSe 0.7%), sales ex autos rose 0.5% (cons 0.3%, UBSe 0.5%), and prior months were revised up. The data suggested a decent start to Q3 spending. That momentum contrasted with an 8.8 pt plunge in the University of Michigan consumer sentiment index to 54.9 (cons 62.0, UBSe 59.5). UofM analysts pointed to policy concerns as a major cause.

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 12 August 2011



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UBS 4

US Economic Perspectives

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

Facts and Fears No recession: “Only thing to fear is fear itself” Lower public confidence looks only temporary to us, as recession fears should abate with still

expected non-recessionary economic news. Non-mortgage credit continues flowing satisfactorily as the earlier oil price shock recedes. FOMC statement not the whole story Although the Aug. 9 Federal Open Market Committee (FOMC) statement has been the focus of market

participants, the potentially more important news is the reasoning behind the dissent of three FOMC members. These dissents now appear to be in response to the Fed’s apparent focus on financial markets rather than the real economy in the policy announced on Tuesday. This shift in focus suggests that the Fed may be more reactive in coming months and may have more tolerance for higher inflation when setting policy.

The past week—“escapist” consumer spending in July Financial market volatility overwhelmed mostly decent economic news and probably played a key role in the FOMC’s decision to extend the extended period language. Despite depressed consumer confidence reports, July retail sales were solid. In early August, weekly jobless claims continued to drift lower, while weekly chain store sales data have been OK.

The week ahead This week’s data should put some brighter colors up against the dark backdrop of faltering financial markets. Industrial production probably rose in July, with large increases in motor vehicle, utility, and mining output; and early August indicators of regional manufacturing activity are likely to steady. In the housing sector, we forecast a small rise in existing home sales and stability in single-family starts and permits, although the housing market index probably fell. Forward-looking indicators probably were rising solidly through July, with another gain in the index of leading economic indicators and further bank easing reported in the Fed’s Senior Loan Officer Opinion Survey. However, we forecast a large 0.6% July CPI rise, with higher energy prices until more recently plus another 0.3% core price gain.

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UBS 5

MACRO AND STRATEGY RESEARCH

Macro Keys

Economist: Larry Hatheway Tel: +44-20-7568 4053

Taking stock We take stock of events of the past week. Broadly, three interrelated factors are responsible for the recent sharp declines in risk assets and

accompanying volatility. First, after several months of weaker-than-expected data, shocks to confidence from the twin sovereign crises (Europe and the US) together with global portfolio wealth destruction of over $2 trillion have investors fretting about the risk of a stalling global economy, perhaps even a double-dip recession. Second, as market participants peer into the abyss of a global slump they question whether policymakers can offer effective lifelines. Last week the Fed could only give conditional assurances that policy would remain unchanged until 2013, and even that decision prompted a larger-than-usual dissent (3 voters). Meanwhile, political divisions in Washington, exposed during the debt-ceiling standoff, create the impression that stalemate precludes any pro-growth initiatives, should the economy falter. Lastly, the spreading Eurozone sovereign and banking crisis has intensified. With France and French banks now ‘in play’, investors seem unnerved by the prospect that Germany has inherited the role it abhors—sovereign creditor of last resort. Rising frictions within the German government and criticism of the ECB’s bond buying from the Bundesbank reinforce doubts about Germany’s resolve to keep the Eurozone intact.

So there’s plenty to worry about. And that’s why we think it is too soon to move aggressively back into risk assets, despite knocked down prices. But are things really as bad as the pessimists contend? Probably not, for the following reasons: First, despite all shocks, the US economy continues to

grow. Recent high-frequency data, such as falling jobless claims and better-than-expected retail sales, suggest the economy is not stalling. Credit conditions continue to gradually ease, a factor our US team cites as critical to the sustainability of the recovery. And falling energy prices will bolster purchasing power. Second, global policy can still respond to signs of undue weakness. When Congress reconvenes, an extension of last year’s payroll tax cut will probably be on the agenda. And for all the focus on deficit reduction (including the forthcoming deliberations of the new ‘Super Committee’), all incumbents in Washington know their re-election prospects hinge on an improving economy. A consensus may therefore still form around tax cuts. Also, China has the capacity to boost growth, should that be necessary.


Global Risk Radar

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

Another drop in risk appetite Risk Appetite Indicator hits another YTD low The UBS Equity Risk Appetite Indicator dropped again last week, falling to -2.36 as of Friday’s close

versus -1.57 the week prior. The credit and FX volatility component and the equity option volatility component both declined last week while equities’ positioning was flat. The low level of the week -2.45 was recorded on Thursday, 11 August. While this marks the lowest level since January 2009, we have yet to reach ‘extreme’ territory.

Credit & FX component drops The credit & FX component saw the biggest drop last week as FX volatility increased and corporate credit spreads widened. In the US, Moody’s BAA spread (vs. US 10-year yield) widened to 329bps (the widest since November 2010). Partially offsetting this was a narrowing of interest rate swap spreads, which came primarily from more favorable trends in Europe last week.

Equity option volatility falls The VIX Index settled last week at 36 after closing at 48 on Monday. Despite the intra-week fall, the close on Friday was above the prior week’s. The option volatility component remains the most risk-averse measure of the indicator.

Equities positioning flat The equities positioning component was mixed last week as a positive move in regional trends was offset by declines in sector performance with defensives slightly outperforming cyclicals.


Equity Analytics

Analyst: Austin H. Burkett, CFA Tel: +1-212-713 3235

U.S. Share Repurchase Announcements Recent growing interest in share repurchases Recent market declines have caused companies to consider share repurchases as a means of

growing shareholder value, and given generally large corporate cash balances currently, they are certainly possible. Share repurchase authorizations provide companies the ability to repurchase shares that they believe are undervalued.

We have examined share repurchase announcements for U.S. companies In this report, we provide data for share repurchase announcements made year to date amongst companies in the S&P 500 and the Russell 2000. We examine what percentage of outstanding share the announced repurchase authorization implies, and we look at the year to date trends in repurchase announcements.

Largest repurchases as % of shares outstanding Given repurchase announcements year to date, the largest announcements in S&P 500 companies as a percent of shares outstanding have come from Best Buy, R.R. Donnelly & Sons, Northrop Grumman, CSX, Harris Corp., and Patterson Cos. Largest announcements in Russell 2000 companies have come from Central Garden & Pet, Nutrisystem, Stage Stores, Resources Connection, and Journal Communications.


http://research.ibb.ubs.com/servlet/SrchDoc/421221.pdf?doc=421221&f=aug11/uer99068.pdf

http://research.ibb.ubs.com/servlet/SrchDoc/200266753.pdf?doc=200266753&f=aug11/uea13696.pdf



UBS 6

Global Economic Perspectives

Economist: Paul Donovan Tel: +44-20-7568 3372

Political Issues The return of the political economy The greater involvement of politics in economics and the day to day operations of financial markets is a central

theme of UBS. Since our last “Political Issues” (7 June, 2011) the world economy has been marked by an increase in policy risk (in its various forms) most notably in the United States and in Europe. In both economies, the political separation of powers (between Congress and Presidency in the US, and between the various sovereign entities that make up the Euro) has been a source of concern for markets. The electoral cycle has assumed less importance to investors.

The power of politicians The trend of the last few months has been for investors to increasingly challenge the political status quo. Markets have reacted strongly to political decisions, or more frequently to political indecision. However, before investors become wedded to a ‘Masters of the Universe’ complex, it is worth remembering where the power really lies. Time and again history has demonstrated that when markets create an extreme environment, politics is capable of responding with an extreme reaction. This includes changing well-established ‘rules of the game’, leaving investors without the profits, positions or protection that they thought they had. Markets are allowed to create crises only so long as politicians believe the markets offer more value in the long run than the costs they impose in the short run. If that condition no longer holds, politicians will tend to act in an extreme fashion.

Recent elections The electoral calendar has not really been the market focus, when it comes to politics. Rather attention has been focused on the legacy of past elections (for instance, the enduring consequences of the last US mid term elections in the political dynamics of Washington). However, elections were held in Turkey and Thailand, both with important results. Morocco held its constitutional referendum.

Forthcoming elections Elections in September are not terribly important, of themselves. More significant is the likelihood that markets will look to local elections as votes on the popularity of national governments and their policies.

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Global Emerging Markets Fund Flows

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

Capitulation? Outflows everywhere Total GEM funds experienced strong outflows of around $7.7 billion over the last week, the biggest outflow after January 2008.

All the regions saw strong net selling on the back of the US sovereign credit downgrade and more general worries over the European debt crisis and global slowdown. On a 4-week moving average basis, we have seen outflows of $709 million from Asia ex Japan; outflows of $1047 million from Dedicated GEM with EMEA and LatAm seeing outflows of $389 million and $307 million, respectively.

Strong outflows in non-ETF continues; ETF seeing outflows too Non-ETF funds have seen another week of strong outflows this week. ETF funds are not far behind; it saw its largest outflow since last six months. On a 4-WMA basis, ETF saw outflows of $755 million compared to outflows of $1,696 million in the non-ETF segment. ETF flows typically makes up 41% of total flow.

Money flows out from all countries except Philippines We also look at the biggest movers within the geographical focused funds. The top five destinations for flows over the past week (as a percent of AUM) were Philippines, Hungary, China, Brazil and Czech Republic. The biggest net losers of funds were Colombia, Malaysia, Mexico, Chile and Indonesia.

Net selling year to date compared to strong inflows last year Total GEM fund flows year-to-date amount to a withdrawal of $14.1 billion of funds. This compares to total inflows of $84.1 billion into GEM in 2010. On a cumulative basis over $158bn has flowed into GEM funds since January 2006.

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UBS 7

BASIC MATERIALS North American Gold Producers

Mining & Metals Analyst: Brian MacArthur, CFA Tel: +1-416-350 2229

A perfect storm for gold producers? Bullion benefiting once again from global macro concerns With global markets shaken by concerns over sovereign debt issues, a potential slow

down in economic activity, and intervention by Swiss and Japanese central banks to weaken their respective currencies, gold has once again benefited from safe haven flows which have driven the price of bullion to record highs. With the price of gold now trading around $1,740/oz, gold producers are set to rack-up even stronger revenues given the quarter-to-date average price of $1,615/oz is well above the Q2/2011 average of $1,509/oz and Q1/2011 average of $1,388/oz.

Same factors could help rein in cost inflation and further boost margins Given the potential for the USD to strengthen against commodity currencies (UBS house view) and a pull-back in oil prices, the same factors aiding bullion could help rein in inflationary pressures especially for producers with operations that are heavily reliant on oil and those with operations in countries whose local currencies have strengthened relative to the USD. Overall, we think concerns over the state of the global economy and sovereign debt issues could result in a perfect storm for gold producers, one in which producers benefit from both higher gold prices and lower than expected inflationary cost pressures, subject to operational execution.

The portfolio approach: The preferred way to invest in gold equities In our view, it is best to use a portfolio approach when investing in gold equities as this approach helps diversify operational, acquisition and geopolitical risk. The portfolio approach also allows investors to layer in attributes which match their investment objectives. Within our balanced equity basket we include Goldcorp, Newmont, Kinross, Iamgold, Osisko, Semafo, AuRico, and Guyana Goldfields.

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UBS 8

COMMUNICATION Janedis’ Media Matters

Entertainment Analyst: John Janedis, CFA Tel: +1-212-713 1064

Looking For Direction What’s New? After three wild weeks, we look forward to more normal stock movement into the end of the summer. However, at this point, we don’t

think advertisers have yet reacted to the market volatility and disappointing consumer confidence. We should have a much better sense of how the rest of the year is trending by Labor day, though our cautious stance on the sector is ongoing. While it’s hard to know if there’s any correlation or if it’s a leading indicator, we note that linage at NYT weakened from +19% in week 1 of Aug to -17% in week 2. Top picks: VIA/CBS.

Media M&A Conference Call – Friday, August 19th @ 11AM Join us this Friday for a conference call with two industry experts to discuss the current M&A environment for the TV, radio, and newspaper sectors. Please contact your UBS salesperson for details.

New York Times Linage -2% in August; WSJ Trending Up 4% Through the second wk of August, Linage at the NYT is -2% with nat’l auto -86%, dept. stores +15%, telco flat, banks/financials -16%, and movies -18%. Classifieds are flat, with h/w -28%, r/e -13%, and auto +39%. Linage at the WSJ is trending up 4% in Aug (+23% comp), vs. July +3% (+21%), June +2% (+17% comp), May +8% (+7% comp), and April flat (+22% comp).

Valuation Large-cap media is trading at 7.2x our FTM EBITDA vs. 7.2x last week; mid-cap is trading at 8.7x vs. 8.3; advertising is trading at x vs. 5.9x; online recruitment is trading at x vs. 6.9x; and publishing is trading at x vs. 3.9x.

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UBS 9

CONSUMER Harley-Davidson Rating: Neutral (ST Buy) Target: US$43.00 Price: US$37.59 RIC: HOG.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$8.78bn BBG: HOG US

Recreational Products & Services Analyst: Robin M. Farley Tel: +1-212-713 2060

June U.S. Used:New Ratio At 2.0x; 2.4x YTD Ratio of Used:New HOG Unit Sales 2.0x for June ‘11; ratio is 2.4x YTD During June ‘11 there were 2.0 used units sold for every 1 new Harley sold

in U.S. This compares against used:new U.S. Harley ratios of 2.6x for May ‘11, 2.3x for Q2’11 and 2.2x for June ‘10. Ratio for HD brand bikes ~2.4x YTD through June. Management had previously indicated that it would like to see the ratio move closer to 1:1 – a ratio last seen in ‘08 – before production growth would be resumed. Recall management had raised FY11 production guidance in July to +8-+12% from +2-8% previously.

Harley U.S. June Used Unit Sales +13%; Total U.S. HD Demand +15% Based on Polk sales data, U.S. unit sales of used HD bikes +13% YOY in June. Combined with June U.S. retail sales of new units at dealer level, which we believe were +17% YOY, total U.S. HOG unit demand was +15% YOY in June and +9% YTD through June.

Industry Used:New Ratio in U.S. Up to 2.4x for June 2011 Industry used sales up +11% in June and up +11% YTD through June ‘11. This represents a June used:new ratio of 2.4x for the U.S. industry vs. 2.3x for June ‘10. The industry used:new ratio YTD through June ‘11 is 2.7x vs. 2.5x for the comparable 2010 period.

Valuation: Price Target $43 (Neutral – Short-Term Buy) Price target based on ~14-16x our 2013 normalized motor company EPS estimate and ~8x our 2013 financing segment EPS estimate, discounted to today.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$37.59 on 12 Aug 2011 19:39 EDT

Lorillard Rating: Buy Target: US$124.00 Price: US$100.58 RIC: LO.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$16.0bn BBG: LO US

Tobacco Analyst: Nik Modi Tel: +1-212-713 2204

$750 M More In Buybacks For LO Lorillard Issues A New $750 M Buyback Program This afternoon Lorillard announced a $750 M share buyback program after completing its prior

$1.4B buyback program (implying the company bought back the $241M remaining in the prior program since it reported last quarter). Given the sell off in LO shares and management's positive tone in a series of conference calls hosted by UBS, we suspect this incremental $750 mm program could be completed by the end of calendar 2011. Prior to today's announcement our model was only embedding $375 mm in buybacks.

2H11 EPS Growth Should Remain Robust Despite Inventory Dynamics We believe Lorillard management was right to point out the several inventory headwinds that will affect 3Q11 during its June Q call. We believe July was a weak month as wholesalers depleted excess inventory and note that there was a trade load in 3Q10 (in anticipation of another price hike). This is likely to impact volumes and pricing (since trade loads are mostly un-promoted volumes). We still expect 14%+ EPS growth in 2H11 with 2-3% volumes, 3% pricing and buybacks.

Still Our Top Pick In US Tobacco We continue to believe there is more upside to Lorillard's EPS (via its more aggressive Newport expansion initiative) and are bullish on the company’s strategy of “Bringing Newport Pleasure to All Adult Smokers”.

Valuation: Buy, $120 Price Target Derived via Blended Valuation 1) DCF ($120 value), 2) FDA risk ($60), 3) div yield ($126) and 4) M&A ($145). Notes:





UBS 10

FINANCIALS US Brokers and Asset Managers

Diversified Financial Analyst: Alex Kramm, CFA Tel: +1-212-713 4060

Lowering eBroker EPS on Rates/Market Fed likely on hold longer than previously expected We are lowering our FY12 EPS estimates for the rate-sensitive companies in our coverage,

namely AMTD, SCHW, and LPLA. When we last updated our earnings models our economics team was still looking for a rate hike in early 2012 (changed since then). With the Fed likely on hold until at least mid-2013, we have now removed rate upside from our models going forward. We have also reflected recent rate declines and the sell-off in the equity markets, which puts additional pressure on our estimates. A near-term reversal of these factors could be a positive catalyst.

AMTD: Lowering FY12e EPS to $1.18 from $1.38 We are now looking for a yield on IDA assets of 1.46% vs. 1.66% previously. We are lowering our price target to $16 from $21. Our new price target assumes a 13x target multiple on our CY12 EPS estimate of $1.23.

SCHW: Lowering FY12e EPS to $0.85 from $1.28 Our new net interest margin forecast is 1.78% vs. 2.33% previously. In addition, we expect money market fee waivers of $560mm vs. our prior estimate of $250mm. We are lowering our price target to $14 from $22. Our new price target assumes a 16x target multiple on our FY12 EPS estimate of $0.85.

LPLA: Lowering FY12e EPS to $2.16 from $2.48 Our estimate reduction is primarily driven by recent market declines and the impact of lower rates on asset-based fees. We are lowering our price target to $30 from $37. Our new price target assumes a 14x target multiple on our FY12 EPS estimate of $2.16.


Business Development Companies (BDCs)

Financial Services Analyst: Dean Choksi, CFA Tel: +1-212-713 2382

UBS Conference to Explore Crosscurrents Macro outlook casts a cloud over the BDCs The BDCs seemed well positioned heading into 3Q after pulling back from lending in 1H11 due to

competition from the high yield and syndicated loan markets. Balance sheets were underleveraged with healthy borrower fundamentals, and fixed rate term debt replaced revolving credit facilities. New M&A pipelines were increasing while competition from capital markets was decreasing. The key question is whether the outlook changed in August. Will the current pipeline close and will sponsors launch new deals? How are borrowers performing? What are the sources of growth when stocks are below NAV? Where will spreads go?

Still, the sector is better positioned than before BDCs are better positioned than in 2007 when they had 0.7x leverage and a higher mix of equity, mezz and short term funding. Ironically, the sector was preparing for higher rates by issuing fixed rate term debt which now reduces liquidity risk. U.S. banks – who lend to BDCs – are also in better shape.

UBS BDC Conference to explore these issues and more Please join us Wednesday, September 28 at 1285 Avenue of the Americas in NYC for a ½ day of panel discussions with ARCC, ACAS, GBDC, FSC, PNNT, and MVC along with senior members from UBS fixed income research, trading, and investment banking. A full schedule and registration link are on the next page.

Valuation: Attractive over the longer term at 0.9x BV & 11% div ylds Valuations are attractive over a long term horizon, but we think it is more difficult to gauge where book value and multiples settle in the near term as investors shed risk.

Notes:





UBS 11

HEALTHCARE Express Scripts Rating: Buy Target: US$67.00 Price: US$46.69 RIC: ESRX.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$25.1bn BBG: ESRX US


Lower ‘Buyback’ Estimate Due to Merger Recent Stock Weakness May Be Tied to Lower Buyback Assumptions Our sense is that shares of both ESRX and MHS have come under

pressure recently as investors may have become more concerned with the prospect of lower share buyback activity by both ESRX and MHS while the merger is pending. Our 2011-13 EBITDA estimates for ESRX standalone are essentially unchanged, but we are now modeling lower EPS for each period due to a higher share count stemming from less repurchase activity in 2H11 and ’12 than previously projected.

ESRX Now More Inclined To Preserve the Balance Sheet for MHS Deal Based on recent discussions with ESRX mgmt, our sense is that the majority of the share repurchase activity for 2011 has already been completed with the ‘ASR’ in 2Q11, and now the company is more inclined to preserve the balance sheet for financing the proposed Medco merger. As such, we now model the full-year 2011 average share count at 506 mil vs. our previous projection of 504 mil. As such, our 2011 EPS estimate is tweaked down slightly from $3.17 to $3.15.

Adjusting 2012 & 2013 EPS for higher shares; proforma EPS $5.40 in ‘13 Similar to 2011, our 2012 EPS estimate is lowered from $4.17 to $4.00 as we now model 20 mil higher shares at 478 mil, and our 2013 EPS estimate is reduced from $4.75 to $4.63 on 15 mil higher shares. But we still foresee ~$0.75-0.80 accretion and proforma EPS of $5.40 in 2013 if the MHS merger is completed (see table 1).

Valuation: Reiterate ESRX Buy rating; 35%+ upside from current levels ESRX target tweaked down from $67 to $64 to reflect same 16x P/E on our 2012 stand-alone EPS estimate of $4.00 (down from $4.17). With ESRX now trading at $47, we believe the buyback issue has been more than factored into valuation.


Medco Health Rating: Buy Target: US$73.00 Price: US$53.94 RIC: MHS.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$23.6bn BBG: MHS US


Lower ‘Buyback’ Estimates due to Merger MHS Merger Agreement Restricts Buybacks; Lowering EPS Accordingly Our sense is that both shares MHS and ESRX have come under

pressure as investors contemplate the EPS run rate of each company with less buybacks due to the merger. The merger agreement dictates that Medco cannot repurchase shares while the merger is pending unless ESRX gives permission (which has not been granted based on mgmt discussions). We are adjusting our MHS model for this, but note our 2011-2013 EBITDA estimates are essentially unchanged (see Table 4).

Lower 2011 EPS from $4.12 to $.09; Lower 2012 EPS from $4.75 to $4.60 While we assume that the merger will be completed, investors seem to be adjusting the valuation of MHS for a lower EPS run rate if merger is not completed due to forgone buybacks over the next 2-4 quarters. We lower our 2011 EPS from $4.12 to $4.09 to reflect a higher share base in 2011 (406 mil vs. 403 mil previously). For 2012, we lower our EPS estimate from $4.75 top $4.60 as we now assume shares of 395 mil vs. 380 mil previously. We also lower 2013 EPS from $5.00 to $4.90.

Introducing 2012 ‘Quarterly’ Financial Model and Estimates (Tables 1-2) We have also introduced our 2012 quarterly projections in conjunction with this note. We assume no buybacks in 1Q12, but a resumption in 2Q12 and beyond as this is likely to occur regardless of whether the merger is completed (see table 2).

Valuation: Price Target of $73 Unchanged; Reflects Some Merger Risk Based on merger terms: MHS is worth ~$29/share in cash plus 0.81 ESRX shares, which = $81 for MHS based on our 12-mth ESRX target. However, our $73 target is unchanged to reflect some risk the merger is not completed w/in 12 mths.





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INDUSTRIALS U.S. Aerospace & Defense Playbook

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

The Week Ahead What’s next for Aerospace and Defense? Relatively quiet week ahead highlighted by HII analyst day and shipyard tour Wed/Thurs in Pascagoula,

MS. We will get US residential construction data Tues and then Architectural Billings Index (ABI) Wed (UTX). We could potentially also see US airline traffic and business jet cycles later in the week. DoD appears likely to begin FY12 on a continuing resolution with Congress out on recess through end of August and likely to wait for deficit reduction Super Committee and DoD roles and missions review before re-marking FY12 budget under new discretionary caps.

Aero stocks pricing in flat to down EPS next year Correction has taken aero down 20%, more than the market, with group now at roughly 12x 2012 consensus estimates that call for 18% growth on average (down from 31% in 2011). Aero typically trades at mid-teens forward multiple, which we believe is appropriate assuming cycle holds up, implying that stocks now reflect expectations for flat to down EPS in 2012. Anything but a double dip recession and we think EPS growth is much better than this and the group recovers.

Defense budget cuts worse than indicated Our analysis of the Deficit Reduction bill indicates the cuts to defense are larger and more front end loaded than widely understood. We believe the DoD budget will be reduced by roughly $500B in a best case scenario with the base budget flat to down in FY12-13 and modernization likely 5-10% lower. If the Super Committee can't agree to additional cuts, we estimate defense will be reduced by $1T with the FY13 budget likely 10% lower and modernization down even more. Our only Buy-rated defense stocks are GD/ATK.

Notes:




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TECHNOLOGY

Analog Devices Rating: Neutral Target: US$32.00 Price: US$31.50 RIC: ADI.N Prior: Unchanged Prior: US$43.00 Mkt Cap: US$9.38bn BBG: ADI US

Semiconductors Analyst: Uche Orji Tel: +1-212-713 4015

Reducing estimates and target ahead of results; Maintain Neutral Macro headwinds to impact near to mid-term outlook Based on macro data such as PMI, which has been a reliable leading indicator of industrial

semi revenue with R2 of 79%, & comments from ADI’s peers such as LLTC, we believe that in near to mid term, ADI is likely to face significant headwinds. With exposure to comm infrastructure (24% of rev) & high end autos (10% of rev), which have been relatively resilient, ADI could modestly outperform its peers, but still we see downside risk. Lower PT to $32, maintain Neutral.

Strong balance sheet and cash flow offer relative safety Though macro concerns are likely to dominate the near to mid term stock performance, with a robust balance sheet with net cash of ~$2.5B(26% of mkt cap) & a steady cash flow, ADI offers relative safety. Also a highly diversified customer base, & low capital intensity (~6%) should help in mitigating volatility.

Reducing estimates For F4Q, we expect ADI to guide Rev/EPS of $748m/$0.67 (cons $785m/$0.73), down from $790m/$0.74. For F2012, we lower our Rev/EPS estimates to $3,019m/$2.74 (cons $3,223m/$3.01), from $3,301m/$3.05, and for FY2013, to $3,167m/$2.88(cons $3,436m/$3.29), from $3,507m/$3.24.

Valuation: Lower PT to $32 from $43, maintain Neutral Our PT is based on DCF (WACC 9.6% g 2%) & equates to ~11x NTM EPS. Conference call: 706-634-7193/ADI at 5:00 PM ET on August 16th.


Applied Materials Rating: Neutral Target: US$12.50 Price: US$11.60 RIC: AMAT.O Prior: Unchanged Prior: US$15.00 Mkt Cap: US$15.5bn BBG: AMAT US

Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111

Expect in-line results but near term choppy Silicon orders likely trending down in-line with industry peers We estimate Applied’s Jul-11 sales and EPS were in-line with its guidance at $2.7B

and $0.34 but expect it guides Oct-11 sales and EPS down -10% q/q (consensus at flat q/q). We estimate Applied’s Jul-11 Silicon orders were $1.6B (-10% q/q) and similar to its peers. We estimate Applied’s Oct-11 Silicon orders are down -20% q/q due to pushouts at Foundry customers and a weak DRAM market.

Estimate its solar equipment orders are trending down slightly in 2H11 We estimate Applied reports Energy and Environmental System orders down -35% q/q in Jul-11 given continued capacity digestion at its customers. We believe Applied’s EES orders trend down in 2H11 but up in 2012 as its big China based customers continue to adopt new solar products in screen printing and wire-saws.

Flat panel orders tracking down in 2H11; Services below seasonal trends We estimate Applied’s Display orders were up 18% q/q to $300M in Jul-11 quarter, driven by OLED and touch panels. We estimate Display orders likely track down –14% in calendar 2H as customers push out traditional flat panel equipment on weak demand. Our checks find Fab services orders tracking wafer starts that are below seasonal trends at +1% q/q and -1% q/q in calendar 3Q11/4Q11.

Valuation: Lowering our 12-month price target to $12.50 from $15.00 Our PT is based on applying a 10x P/E multiple to our cross cycle EPS of $1.25

Notes:


Semiconductor Equipment Industry Update

Semiconductors Analyst: Stephen Chin Tel: +1-212-713 4111

Semicap orders & wafer starts still weak 3Q11 semicap orders from Taiwan are tracking down -78% q/q Our own analysis of 9 Taiwanese semiconductor companies shows only $112M of

total semicap orders were placed at the half-way point of 3Q11 versus $1.1B and $2.0B in all of 2Q11 and 1Q11. Total foundry orders from Taiwan are tracking down -83% and total DRAM orders are tracking down -43% q/q.

Checks found TSMC placed a $19M order with Novellus last week Our analysis shows TSMC’s semicap orders so far in 3Q11 are only $66M versus $820M in 2Q11 and $1.6B in 1Q11 but are likely bottoming as they are lower than its recession level ordering patterns of $300M/qtr in the 2Q08-4Q08 period. Our most preferred stock is KLA-Tencor as we believe foundry orders recover first in 2012 and expect KLA benefits most (foundry is 40%+ of its total).

Jul-11 semi wafer starts in Taiwan stable with wafer price up 11% m/m Our checks find external 300mm semi wafer demand from Taiwan in the month of Jul-11 was flat m/m at 710k wafers per month on a 3-month moving average. We note 300mm wafer demand has been stable in the 650-700k range since Jan-11. Our analysis shows the average price for a 300mm wafer rose 11% m/m to $86/piece after bottoming in April at $72/piece as more epi wafers are purchased.

2Q11 global semicap orders declined -1% q/q; we estimate 1Q12 bottom Our analysis of the WWSEMS data shows total global semicap orders in Jun-11 were $3,584M (-9% m/m) while front end semicap orders were down -5% q/q (-11% m/m). We believe the semicap industry is in a normal downcycle that started in 4Q10 with foundry and DRAM orders likely troughing in 4Q11 or 1Q12.






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UBS SemiBytes

Semiconductors Analyst: Uche Orji Tel: +1-212-713 4015

Flat but Wild Week for Semis as Positive Data Points Balance Macro Concerns CSCO, NVDA July data encouraging. Ahead: ADI, IRF, MRVL (see pg 5) We were encouraged by the positive commentary from Cisco and NVIDIA,

especially as July was solid, reflecting still positive trends in enterprise, service provider and high-end consumer partly offset by notable public sector weakness. While the +2% w/w performance for the SOX was quite ordinary, the VIX at 36, having settled back from as high as 48, underlies larger macro concerns. While we believe valuations represent an attractive entry point for our Buy-rated names, we don’t discount the risk of further downside, especially with the spike in volatility, which historically has been a negative leading indicator for semi returns (Chart 1).

Charts: y/y VIX leads y/y SOX. Diodes’ y/y unit shipments lead global GDP The y/y VIX historically has been a leading directional indicator of the y/y SOX (negatively correlated). Diodes’ y/y units, which have historically led global GDP (74% R2), suggest 2H11 macro weakness coupled with inventory digestion.

Results Review: DIOD, NVDA results NVIDIA results and outlook were ahead of expectations, echoing Cisco, which saw strength in July, a month when many of our names, including Diodes, have cited continued weakness. While the dichotomy might be explained by lagging trends that NVIDIA has yet to see, we believe the degree to which companies see weakness depends a lot on end-market/customer base as well as the degree those markets/customers need to digest excess inventory, as the tail of late 2010 OEM inventory rebalancing had been extended well into 2011 post the Japan disaster.


IT Hardware

Technology Analyst: Maynard J. Um Tel: +1-212-713 3372

Generally Expect DELL, HPQ & NTAP Earnings to Be Catalysts Checks & analysis point to solid enterprise trends Based on our checks/analysis (see analysis in note), we generally believe earnings for DELL,

HPQ, & NTAP should be positive catalysts. While shrs have generally recovered off respective bottoms, shrs remain off levels from July-end. While we are cognizant of macro concerns & expect mgmts to recognize broader macro volatility, we do not believe there was impact in the July qtrs (expect solid qtrs) & believe guidance may not reflect bear case scenarios implied in shr pullbacks (expect co’s to maintain outlooks), which we think may be viewed positively.

DELL: raise EPS estimate on gross margins; raised target to $19 We raised our FY2Q12 EPS estimate to $0.54 from $0.48 due to higher gross margin expectations due to favorable component pricing, efficiencies in supply chain, solutions sales & despite cont’d transformational investments. We raised our target to $19 from $18.70. We believe sales outlook commentary will be important as Dell’s direct channel has historically given it some early visibility to market turns. However, we expect Dell to maintain it FY outlook.

HPQ/NTAP: slight upside potential; expect co’s to maintain FY guidance We expect HP to report results in-line with our rev/EPS ests of $31.1b/$1.10 (Street: $31.2b/$1.09) though any aggressive share repurchases in the quarter could drive upside to our EPS estimates. We are comfortable with our revenue and EPS estimates for NetApp of $1.5bn/$0.57 (Street= $1.5bn/$0.55) and see potential for slight upside. We expect HPQ & NTAP to maintain their respective FY outlooks.

Notes:


Electronics Supply Chain Insider

Electric Components & Equipment Analyst: Amitabh Passi Tel: +1-415-352 5537

8/8-8/1211: Eerie Resemblance to 2008 Roller Coast Week – Eerie Resemblance to 2008 (Chart 1); Elevated Risk This past week US markets ebbed and flowed in a manner very similar

to the week after Lehman collapsed (Chart 1). We believe risk remains elevated and the key concern for us is the prospect of another credit crisis morphing into economic malaise; this time potentially emanating in Europe. Since late July 6m-LIBOR has started creeping up (Chart 3) though the move has been modest (10bps). We continue to monitor LIBOR given the variable debt exposure (Chart 2) for our cos.

… but Valuations Undemanding with Healthier Balance Sheets Fortunately, with undemanding valuations and healthier balance sheets our cos. appear better positioned relative to 2008. Buy-rated TEL and FLEX were two companies especially hit hard in 2008 over balance sheet concerns; net debt at FLEX is now $667m down from ~$2b in 1H08 while net debt at TEL is $1.4b down from ~$2.5b in 1H08 (was $423m pre-ADC acq). We believe these levels of debt are manageable. 75% of TEL’s debt matures post-2014 while FLEX’s debt matures 2012-14. We expect FLEX to refinance/partially pay down its debt.

… and Cos. Returning Capital; Recent Insider Buy Back Activity Up Further, we have seen an increasing willingness to return capital to shareholders especially via share buy-backs. We show in parenthesis amounts spent by our cos. in 1H11 buying stock. FLEX ($232m + $200m newly authorized); AVT ($500m newly authorized); ARW (~$100m + $100m newly authorized); TEL ($495m); APH ($361m + $600m+ remaining). Further, APH’s Chairman/Ex-CEO also just bought ~$5m of stock (first time at least since 2007) while Corning’s CFO recently purchased ~$1m of stock.






UBS 15

US Internet and Interactive Entertainment

Internet Services Analyst: Brian Pitz Tel: +1-212-713 9310

Pitz & Fitz’s Internet / IE Weekly Google adding games to Google Plus Google announced the launch of games to its Google Plus social network. Google Plus will now have a

Games Page that allows users to see the latest game updates from circles and browse game invites they have received. Google will keep the service friendly to those not interested in games by keeping the main stream focused on conversations with those in users’ circles. Games that will be available include Angry Birds, Zynga Poker, and Bejeweled Blitz.

Facebook releases mobile messaging app Facebook has just launched Facebook Messenger which provides users the ability to exchange messages even if they are not friends on Facebook. The social network designed the service so that users are aware of messages right away through notifications and texts. Users can also use the app to send messages to multiple contacts at once. The app currently runs on both Android and iOS.

US retail e-commerce spending rises According to comScore, online retail spending rose +14 Y/Y in 2Q, the largest increase since 4Q 07. comScore noted that one out of every ten dollars of discretionary spending now occurs online, and during the quarter, 70% of all Internet users made at least one online purchase. Consumer electronics, computer hardware and software, and event tickets were among the top sellers.

Notes:




UBS 16

UBS Key Calls - US Live Key Call Portfolio

Stock Name RIC Rating Price Target Date of call Current Price Analyst Apple Inc. AAPL.O Buy US$510 2-Jun-11 US$376.99 Maynard Um

Baker Hughes Inc. BHI.N Buy US$102 7-Jun-11 US$61.76 Angie Sedita

Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$40.87 Steven Valiquette

Celgene Corporation CELG.O Buy US$71 9-Dec-10 US$54.43 Matthew Roden, PhD

Citigroup Inc C.N Buy US$56 3-May-11 US$29.85 William Tanona, CFA

CONSOL Energy, Inc. CNX.N Buy US$74 4-Aug-11 US$40.58 Shneur Gershuni, CFA

Deere & Co. DE.N Buy US$115 18-Jan-11 US$74.97 Henry Kirn, CFA

Dow Chemical DOW.N Buy US$46.5 21-Mar-11 US$29.43 Andrew Cash

Ford Motor Co. F.N Buy US$22 10-Jan-11 US$11.06 Colin Langan, CFA

General Electric Co. GE.N Buy US$23 10-Jan-11 US$15.88 Jason Feldman

Google Inc. GOOG.O Buy US$800 10-May-10 US$563.77 Brian Pitz

Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$80.49 Henry Kirn, CFA

McDonalds Corp. MCD.N Buy US$97 9-Feb-11 US$86.5 David Palmer

Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$50.95 Andrew Kligerman

Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$50.5 Parag Agarwal

SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$38.09 Uche Orji

Source: Reuters, UBS. Prices as at market close on August 12, 2011.


UBS 17

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

Company Name Directional Indicator/Rationale Reuters Code Current Share Price

New Rating New PT Prior

Rating Prior PT

Analog Devices Inc. Maintain Neutral, lower PT ADI.N US$31.49 Neutral US$32 Neutral US$43

Applied Materials Inc. Maintain Neutral, lower PT AMAT.O US$11.6 Neutral US$12.5 Neutral US$15

Charles Schwab Corp Reiterate Buy, lower PT SCHW.N US$12.29 Buy US$14 Buy US$22

Dell Inc. Reiterate Buy, increase PT DELL.O US$14.87 Buy US$19 Buy US$18.7

LPL Investment Hldg Inc Maintain Neutral, lower PT LPLA.O US$27.84 Neutral US$30 Neutral US$37

Oasis Petroleum Inc Upgrade to Buy, maintain PT OAS.N US$26.17 Buy US$33 Neutral US$33

TD Ameritrade Holding Corp Maintain Neutral, lower PT AMTD.O US$14.66 Neutral US$16 Neutral US$21


Markets, Events and Newsflow Today’s Company Events

Company Name Event Reuters code Rating PT Notes

Estée Lauder Earnings Release EL.N Buy US$118

HiSoft Technology Earnings Release HSFT.O Buy US$21

Lowe's Earnings Release LOW.N Buy US$26



UBS 18

Today’s Macroeconomic Events: US

Indicator Time (ET) UBS forecast Previous Consensus

Senior Loan Officer Opinion survey (Jul) (likely this week) na na na

Empire State Manufacturing Survey (Aug)index 9:30 na -3.8 1.0

Net Treas. I'ntl. Cap (TIC) Flows (Jun)lvl 10:00 na $23.6 bil na

Housing Market Index (Aug)index 11:00 na 15 15

Source: Bloomberg, UBS

Today’s UBS Hosted Corporate Roadshow: Company Event Location IDEX Corp 1X1 meeting hosted by Robert Barry New York

MGM Resorts International 1X1 meeting hosted by Robin Farley Boston

Today’s UBS Hosted Fieldtrip:

Company Event Location New Jersey Utility Regulator Site Tour

UBS Fieldtrip New York

Today’s UBS Hosted Conference: Company Event Location

None


UBS 19

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

Americas

United States Dow Jones 11269.0 1.13 -2.66

United States S&P 500 1178.8 0.53 -6.27

United States Nasdaq 2508.0 0.61 -5.46

United States S&P VIX 36.36 -6.76

Europe

Europe FTSE Eurofirst300 971.6 0.35 -13.38

Belgium BEL 20 2287.0 1.06 -11.31

Germany DAX 6083.9 1.44 -12.01

France CAC 3243.9 0.93 -14.74

Italy MIB 30 15888.6 0.00 -21.24

Netherlands AEX 294.9 1.02 -16.83

Portugal PSI 20 6296.0 1.51 -17.03

Spain IBEX 8697.4 0.58 -11.78

Switzerland SMI 5369.4 2.22 -16.57

UK FTSE 100 5353.3 0.62 -9.27

Asia

Hong Kong Hang Seng 20260.1 3.26 -12.05

India BSE Sensex 16839.6 0.00 -17.89

Japan Nikkei 225 9086.4 1.37 -11.17

Source: UBS, Reuters. Indices in Americas as at market close on August 12, 2011. Indices in Europe and Asia as at 05:00 EDT on August 15, 2011

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

Euro €/$ 1.425 0.61% 0.5% 6.4%

UK £/$ 1.628 0.24% 0.7% 4.3%

Canada CAD/$ 1.013 -0.34% -3.0% 1.1%

Switzerland CHF/$ 1.285 -2.09% 4.3% 20.1%

China Yuan/$ 0.157 0.07% 1.2% 3.1%

Brazil BRL/$ 0.621 1.01% -2.2% 3.0%

India INR/$ 0.022 0.03% -1.9% -1.5%

Mexico MXN/$ 0.081 -0.18% -4.9% 0.2%

Japan $/JPY 0.767 -0.23% -2.9% -5.6%

Australia AUD/$ 1.035 0.10% -3.7% 1.2%

Source: UBS, Reuters. Prices as at market close on August 12, 2011


UBS 20

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

Gold ($/oz) 1744.40 0.10 9.39 23.10

Brent Crude spot, $/bbl 108.70 0.62 -8.34 15.64

WTI Crude spot, $bbl 85.75 0.43 - -

Natural Gas, $MMBTU 4 -1.26 -7.13 -1.18

Source: UBS, Reuters. Prices as at market close August 15, 2011.


UBS 21

Further Information

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

- key items from UBS’ United States Morning Meeting

- highlighted recommendation and price target changes

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

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

- overnight global market, forex and commodity movements

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

Data presented is accurate as at 06:00 EDT on Monday, August 15, 2011.

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

[email protected]

Statement of Risk

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


UBS 22

Analyst Certification

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


UBS 23

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

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

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

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

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

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

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

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

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


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


UBS 25

Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date Alliant Techsystems16 ATK.N Buy N/A US$57.95 12 Aug 2011 American Capital Ltd.5a, 6a, 16 ACAS.O Buy N/A US$8.34 12 Aug 2011 Amphenol Corp16 APH.N Neutral N/A US$46.50 12 Aug 2011 Analog Devices Inc.16 ADI.N Neutral N/A US$31.49 12 Aug 2011 Apple Inc.6c, 7, 16, 18a AAPL.O Buy N/A US$376.99 12 Aug 2011 Applied Materials Inc.5a, 16 AMAT.O Neutral N/A US$11.60 12 Aug 2011 Ares Capital Corporation2a, 4a, 6a, 6b,

7, 13, 16 ARCC.O Buy N/A US$14.35 12 Aug 2011

AuRico Gold Inc4b, 5b, 16 AUQ.N Buy N/A US$12.42 12 Aug 2011 Baker Hughes Inc.2a, 4a, 5a, 6a, 6b, 6c, 7,

13, 16 BHI.N Buy N/A US$61.76 12 Aug 2011

Best Buy Co. Inc.2a, 4a, 5a, 6a, 6b, 6c, 7,

13, 16 BBY.N Neutral N/A US$23.68 12 Aug 2011

Cardinal Health, Inc.2a, 4a, 6a, 6c, 7, 16,

18b, 22 CAH.N Buy N/A US$40.87 12 Aug 2011

CBS Corp.4a, 6a, 13, 16, 22 CBS.N Buy N/A US$24.93 12 Aug 2011 Celgene Corporation6c, 7, 16 CELG.O Buy N/A US$54.43 12 Aug 2011 Charles Schwab Corp3a, 4a, 5a, 6a, 6b,

6c, 7, 16, 18f SCHW.N Buy N/A US$12.29 12 Aug 2011

Citigroup Inc2a, 4a, 5a, 6a, 6b, 6c, 7, 16, 22 C.N Buy N/A US$29.85 12 Aug 2011 CONSOL Energy, Inc.4a, 5a, 6a, 16 CNX.N Buy N/A US$40.58 12 Aug 2011 CSX Corp.2a, 4a, 5a, 6a, 16, 22 CSX.N Buy N/A US$22.60 12 Aug 2011 Deere & Co.16, 22 DE.N Buy N/A US$74.97 12 Aug 2011 Dell Inc.2a, 4a, 6a, 6b, 6c, 7, 16 DELL.O Buy N/A US$14.87 12 Aug 2011 Diodes Incorporated5a, 16, 20 DIOD.O Neutral (CBE) N/A US$19.68 12 Aug 2011 Dow Chemical5a, 6a, 6b, 6c, 7, 13, 16, 22 DOW.N Buy N/A US$29.43 12 Aug 2011 Express Scripts Inc.16 ESRX.O Buy N/A US$46.69 12 Aug 2011 Fifth Street Finance Corp2a, 4a, 5a, 6a, 13, 16 FSC.N Buy N/A US$9.57 12 Aug 2011

Flextronics International Ltd.4a, 5a, 6a, 6b, 6c, 7, 16 FLEX.O Buy N/A US$5.55 12 Aug 2011

Ford Motor Co.4a, 6a, 6b, 6c, 7, 13, 14, 16,

18c F.N Buy N/A US$11.06 12 Aug 2011

General Dynamics Corp.16 GD.N Buy N/A US$61.18 12 Aug 2011 General Electric Co.4a, 5a, 6a, 6b, 6c, 7,

16, 18g, 22 GE.N Buy N/A US$15.88 12 Aug 2011

General Motors Company4a, 5a, 6a,

6b, 6c, 7, 16 GM.N Buy N/A US$25.75 12 Aug 2011

Goldcorp Inc.4b, 5b, 16 GG.N Buy N/A US$49.95 12 Aug 2011 Golub Capital BDC, Inc2a, 4a, 6a, 6b, 7,

16 GBDC.O Buy N/A US$14.72 12 Aug 2011

Google Inc.2a, 4a, 5a, 6a, 6b, 6c, 7, 16, 18d GOOG.O Buy N/A US$563.77 12 Aug 2011 Guyana Goldfields Inc. GUY.TO Buy N/A C$7.96 12 Aug 2011 Harley-Davidson Inc.6c, 7, 16 HOG.N Neutral Buy US$37.59 12 Aug 2011 Hewlett-Packard Co.2a, 4a, 5a, 6a, 6b, 6c,

7, 16, 22 HPQ.N Buy N/A US$32.32 12 Aug 2011

IAMGOLD Corp.13, 16 IAG.N Buy N/A US$19.10 12 Aug 2011 Joy Global Inc.3b, 4a, 6a, 13, 16, 20 JOYG.O Buy (CBE) N/A US$80.49 12 Aug 2011 Kinross Gold Corporation4b, 5b, 6a,

16 KGC.N Buy N/A US$15.60 12 Aug 2011

KLA-Tencor Corp.16 KLAC.O Buy N/A US$35.93 12 Aug 2011 Lear Corporation4a, 6a, 6c, 7, 16 LEA.N Buy N/A US$45.61 12 Aug 2011 Lorillard13, 16 LO.N Buy N/A US$101.62 12 Aug 2011 LPL Investment Hldg Inc2a, 4a, 6a, 16 LPLA.O Neutral N/A US$27.84 12 Aug 2011 Marvell Technology Group Ltd.6c,

7, 16 MRVL.O Buy N/A US$12.58 12 Aug 2011


UBS 26

Company Name Reuters 12-mo rating Short-term rating Price Price date McDonalds Corp.6b, 7, 13, 16, 22 MCD.N Buy N/A US$86.50 12 Aug 2011 Medco Health Solutions Inc.2a, 4a,

6a, 6b, 6c, 7, 16 MHS.N Buy N/A US$53.94 12 Aug 2011

MVC Capital Inc.16 MVC.N Buy N/A US$11.69 12 Aug 2011 NetApp Inc13, 16 NTAP.O Buy N/A US$43.42 12 Aug 2011 Newmont Mining Corp.4a, 5a, 6a, 6c, 7,

16 NEM.N Buy N/A US$57.44 12 Aug 2011

Northrop Grumman Corp.16, 22 NOC.N Neutral N/A US$51.89 12 Aug 2011 NVIDIA Corporation16 NVDA.O Neutral N/A US$12.88 12 Aug 2011 Oasis Petroleum Inc2a, 4a, 6a, 16 OAS.N Buy N/A US$26.17 12 Aug 2011 Osisko Mining Corporation2b OSK.TO Buy N/A C$13.26 12 Aug 2011 Patterson Cos Inc16 PDCO.O Neutral N/A US$29.04 12 Aug 2011 PennantPark Investment Corporation6b, 7, 13, 16 PNNT.O Not Rated N/A US$9.79 12 Aug 2011

Prudential Financial Inc.2a, 4a, 6a, 6b, 6c, 7, 16, 22 PRU.N Buy N/A US$50.95 12 Aug 2011

Qualcomm Inc.16, 18e QCOM.O Buy N/A US$50.50 12 Aug 2011 Ralcorp Holdings Inc.6b, 7, 16 RAH.N Buy N/A US$79.02 12 Aug 2011 Regions Financial Corp.5a, 6b, 6c, 7, 16 RF.N Not Rated N/A US$4.30 12 Aug 2011 SanDisk Corp.13, 16, 20 SNDK.O Buy (CBE) N/A US$38.09 12 Aug 2011 Semafo Inc.5b SMF.TO Buy N/A C$8.17 12 Aug 2011 TD Ameritrade Holding Corp6b, 7, 16 AMTD.O Neutral N/A US$14.66 12 Aug 2011 TE Connectivity Ltd.2a, 4a, 5a, 6a, 6b, 6c,

7, 8, 16, 18h TEL.N Buy N/A US$30.67 12 Aug 2011

United Technologies Corp.4a, 8, 16, 18i UTX.N Buy N/A US$72.45 12 Aug 2011

Viacom Inc.2a, 4a, 6a, 6c, 7, 16 VIAb.N Buy N/A US$46.07 12 Aug 2011 Visteon Corp.16 VC.N Buy N/A US$51.09 12 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 stock pricing date 2a. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

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

to an offering of securities for this company/entity or one of its affiliates within the past 12 months. 3a. UBS Securities LLC is acting as Advisor to Charles Schwab on the $1bn acquisition of OptionsXpress Holding Inc. 3b. UBS Securities LLC is acting as advisor to Joy Global Inc on the announced acquisition of a stake in International Mining

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

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

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

from this company/entity within the next three months. 5b. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking

services from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking

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

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

services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than

investment banking services from this company/entity.


UBS 27

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

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

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

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

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

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

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

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

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

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

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

in United Technologies Corp. 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR

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

(or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end). Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration. Additional Prices: Estée Lauder, US$100.85 (12 Aug 2011); HiSoft Technology International Ltd, US$10.62 (12 Aug 2011); Lowe's Companies, Inc., US$19.51 (12 Aug 2011); Source: UBS. All prices as of local market close.


UBS 28

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