Financial Pacific - More stable than you think, U.S. Homebuilding (third party)

UBS Investment Research

Morning Expresso - United States

Wednesday 31 August 2011

Global Equity Research

Americas

Equity Strategy

Market Comment

31 August 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 18. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

Morning Expresso - United States 31 August 2011

UBS 2

Morning Meeting Agenda

U.S. Homebuilding

Home Construction Analyst: David Goldberg Tel: +1-212-713 9427

More Stable Than You Think We Believe Conditions in the New Home Market Have Bottomed After declining by an avg of ~20% since mid July—vs. the S&P 500 -9%—the HB

stocks now trade at 0.9x tang BV, at the low end of their range the last few years. Although we’d readily admit that the recent macro news has increased the potential for further downside in the broader housing market, we believe new homes are less susceptible to meaningful declines off current levels.

What Investors Are Missing Within this report, we expand on this view that conditions for new homes have bottomed, focusing on the following: 1) mortgage underwriting; 2) foreclosure activity and overall supply levels; & 3) the potential for increased government support. Additionally, we discuss how the public builders are positioning themselves to minimize their exposure to broader weakness and how this is increasingly creating a bifurcation relative to existing homes. Finally, we highlight the early indicators we focus on to predict the eventual turn.

Upgrading LEN and DHI to Buy Reflecting Favorable Risk Reward At the same time, signs of a turnaround have yet to materialize, leaving us cautious about the group generally. That said, the pullback has created attractive entry points for some builders that are better positioned to outperform even in a slow/no growth environment. Specifically, we’re upgrading LEN & DHI to Buy from Neutral, as we believe these stocks offer compelling reward/risk profiles.

Valuation: Our PT are Based on 1.0x Tangible Book Value The stocks currently trade at 0.9x tang BV (adjusted for deferred tax allowances). Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 31 August 2011

D.R. Horton Rating: Buy Target: US$13.00 Price: US$10.60 RIC: DHI.N Prior: Neutral Prior: Unchanged Mkt Cap: US$3.77bn BBG: DHI US


Valuation Provides Attractive Opportunity Strategic Focus Well Aligned With Core Competency Since 7/19 DHI -11% vs. the S&P 500 -9%. In turn, it currently trades at 1.1x tang BV.

Although this is above peers, we expect D.R. Horton to outperform in the early part of the cycle. Our view is based on the co’s: 1) operating strategy, focusing on sales growth, which should generate a higher return on capital; & 2) robust liquidity, which will support growth as a recovery unfolds. As such, we are upgrading DHI to Buy from Neutral. We maintain our $13 PT.

Operating Acumen Offers Downside Protection As the downturn has persisted, we’ve been impressed by D.R. Horton’s ability to rebuild profitability, driven by mgmt’s: 1) efforts to continually reduce costs; 2) focus on driving volumes, including emphasizing spec construction, without sacrificing profitability. In turn, we expect the company to be profitable in F11 despite the weak housing mkt. Further, we believe additional BV erosion is unlikely, even if conditions stagnate for an extended period of time.

Opportunities Arise as the New Home Market Bottoms Although we acknowledge that macro indicators over the last few weeks could suggest weaker near term economic trends, we believe fundamentals in the new home market are at—or near—a trough. While visibility for a turnaround remains limited, we believe current valuations for selective builders offer attractive buying opportunities with minimal downside and significant upside potential.

Valuation: $13 PT 1.2x Our Trough BV Estimate Our $13 PT is based on 1.2x our trough BV est., above the group average. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$10.60 on 30 Aug 2011 19:41 EDT

Lennar Rating: Buy Target: US$21.00 Price: US$14.66 RIC: LEN.N Prior: Neutral Prior: Unchanged Mkt Cap: US$2.71bn BBG: LEN US


Valuation Provides Attractive Opportunity Operating Strategy Limits Potential Downside Since 7/19 LEN -21% vs the S&P 500 -19%. In turn, it now trades at 1.0x tang BV, relatively in line

with peers, which we believe reflects an attractive buying opportunity. Specifically, we expect the co to remain profitable even in a slow/no growth environment, driven by its operating strength combined with opportunities generated by Rialto (Lennar’s distressed asset subsidiary). As such, we’re upgrading LEN to Buy from Neutral; we maintain our $21 PT.

Focusing On Rialto Overlooks Lennar’s Operating Acumen Although we view Rialto as an opportunistic vehicle to invest cash until the housing recovery accelerates, we believe investors are too focused on this segment and are underemphasizing mgmt’s operating acumen. We’d note that the co has made considerable strides to reduce costs and cycle times through the downturn; in turn its HB operations are again profitable despite the challenging environment. Further, these efforts will drive accelerated EPS growth as housing recovers.

Opportunities Arise as the New Home Market Bottoms While we acknowledge that macro indicators over the last few weeks could suggest weaker near term economic trends, we believe fundamentals in the new home market are at—or near—a trough. Despite limited visibility for the timing of a turnaround, we believe current valuations for selective builders offer attractive buying opportunites with minimal downside and significant upside potential.

Valuation: $21 PT is Based on 1.1x Trough BV Forecast Our PT is 1.1x our trough BV est. (adj. for Rialto), slightly above the group avg. Notes:


http://research.ibb.ubs.com/doc/200267416?doc=200267416

http://research.ibb.ubs.com/servlet/SrchDoc/200267410.pdf?doc=200267410&f=aug11/uea14308.pdf



UBS 3

Meritage Corp. Rating: Neutral Target: US$19.00 Price: US$18.75 RIC: MTH.N Prior: Sell Prior: Unchanged Mkt Cap: US$0.60bn BBG: MTH US


Upgrading to Neutral on Valuation Recent Pull-back Leaves MTH Fairly Valued Since 2/18, MTH has declined ~31% ahead of the -27% group average and the S&P 500 down ~10%.

In turn, the stock now trades at 1.1x tang BV. As such, we believe MTH’s current valuation fairly reflects fundamentals in the new home market; we are upgrading our rating to Neutral from Sell.

More Defensive Operating Strategy Limits Downside Through the downturn, we expected Meritage’s more defensive strategy would outperform peers. We expect this to hold true again, even in a slow/no growth environment, given its: 1) land light model, which focuses on optioning lots; 2) efforts to reposition its product, especially its Green Building initiatives; & 3) sufficient liquidity. In our opinion, this should limit further downside.

Despite Recent Weakness, We Continue to Expect a Gradual Recovery Although conditions in the economy have become more uncertain recently, we continue to believe the new home market has already reached a trough. As such, we do not expect the sales pace or prices to decline meaningfully. This is reflected in our recent channel checks that suggest conditions have returned to normal seasonal patterns following the disruptions earlier in Aug. That said, we believe investors should focus on those stocks that offer the most attractive risk/reward.

Valuation: $19 PT Based on 1.1x our Trough BV Estimate We are revising our EPS est to reflect MTH’s 2Q results & our assumptions for the broader housing market. Our ‘11E EPS goes to ($0.02) from ($0.05); ‘12E is now $0.55 from $0.70. Fwd years have also been adjusted.

Notes:


U.S. Aerospace

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

Why Aftermarket Still Stands to Do Well We see more favorable aftermarket outlook Many of those we speak with believe the aftermarket will be hard hit in a slow growth environment while

OE will hold up. We believe the outlook for the aftermarket is more favorable than widely understood for three reasons: (1) positive fleet age dynamics, (2) still wide gap between flight hours and aftermarket volumes, and (3) initial 787 and 747-8 sparing.

Favorable fleet age dynamics We believe favorable fleet age dynamics can continue to drive solid aftermarket growth even in a slow economic environment. We estimate that the in warranty fleet of the airlines, which accounts for one quarter of the total fleet, will grow at a slow 2-3% rate in 2011-12, well below 4-5% in 2008-09. Combined with peak utilization rates and we estimate the in warranty fleet can only contribute 1% capacity growth, leaving the airlines little opportunity to reduce usage of their out of warranty aircraft that are key to the aftermarket.

Wide gap between flight hours and aftermarket volumes Aftermarket volumes are still below prior peak levels even though flight hours are 10-15% above. We believe this gap is indicative of limited airline spares restocking thus far. So even though flight hour growth is likely to decelerate to low levels, we believe the aftermarket still has room to grow at a faster rate.

Initial 747-8 & 787 sparing We believe initial 747-8 and 787 sparing will benefit the aftermarket in 2012. We estimate initial sparing could add 100-200 bps to aftermarket growth.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 31 August 2011 AOL Rating: Buy Target: US$20.00 Price: US$12.81 RIC: AOL.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.36bn BBG: AOL US

Internet Services Analyst: Brian Fitzgerald Tel: +1-212-713 2851

Reiterate Buy on New Initiatives Driving Growth and Attractive Valuation Reiterate Buy for AOL We reiterate our Buy rating on AOL as we believe its Subscriber business (despite expectations for 20%+ Y/Y declines in the

next couple of years) remains a potent cash cow that will continue to support investments in AOL’s Online Advertising business and help the company re-establish itself as a top player in the sector.

Subs Churn Moderating While New Initiatives Drive Growth We remain positive on AOL as we see increasing signs of a turnaround (i.e. first Y/Y ad rev growth since 2Q08) along with decelerating Subs loss in the access business. Streamlined properties are driving improvement in engagement and monetization which we expect will lead to above avg ad rev growth. TechCrunch expects record traffic in August. Notably, Project Devil display ad impressions were up +100% Y/Y in 2Q; these ads generate a disproportionate amount of value.

Investment Thesis Outlined in Slide / Comment Format To highlight our investment thesis, we include easily digestible slides and comments starting on page 2. Recent insider (AOL Directors) stock purchases and $250MM Stock Repurchase program lend further support to our thesis.

Valuation – Our SOTP Suggests AOL Looks Attractive at Current Levels Our $20 price target is based on our DCF (12% WACC; 3.0% LTGR) and supported by our SOTP valuation. AOL trades at ~16x our 2012E EPS vs. ’11-14 CAGR of 45% (PEG of 0.4 – the lowest among our Internet Advertising names).

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$12.81 on 24 Aug 2011 19:49 EDT





UBS 4

MACRO AND STRATEGY RESEARCH US Daily Economic Comment

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

A more divided FOMC Preview: Factory orders & inventories, ADP, Challenger on tap (1) Durables orders have already been reported up 4.0% in July, despite a 1.5%

decline in core capex orders. We estimate a small rise in orders for nondurable goods and a 1.9% increase in total factory orders. Inventories are worth watching: June showed a sharp slowing in inventory investment. That correction may explain some of the recent weakness in factory surveys for August. However, with low inventory/shipment ratios, we doubt that the inventory correction will last long unless demand is weakening much more broadly than we forecast. (2) The ADP private payrolls data are mostly useful for offering detail on small, medium, and large-sized businesses that is absent from the official BLS payroll data. However, on a month-to-month basis, the ADP private payroll estimate is frustratingly unreliable as a predictor of private payrolls in the Employment Report: sometimes a +100k miss, as in June; sometimes a 40k miss in the opposite direction, as in July; and little to signal when the errors change direction. (3) Challenger layoffs and mortgage applications will also be reported.

Review: Conference Board confidence index plunges in Aug (1) The Conference Board consumer confidence index plunged in Aug, falling to 44.4 (UBSe 51.0, cons 52.0) from 59.2. Through July, it had not shown nearly as much weakness as the Univ of Michigan or Rasmussen measures. Now it does. The drop in the index mostly reflected expectations, although current labor market assessments also deteriorated a bit. (2) The S&P/Case Shiller home price index slipped 0.1% in June (UBSe 0.5% cons 0.0%). Through June, prices have fallen 4.5%y/y. However, they are no longer trending down: prices rose at a 1.3% annual rate in the three months through June. (3) The FOMC minutes displayed a Fed more uncertain about the outlook for growth and more aware of downside risks, although “participants did not anticipate a downturn.” Alternative policy responses were discussed, with some FOMC members favoring more accommodative policy than was announced and some favoring no change from the prior FOMC statement’s characterization of the policy outlook.

Notes:


US Economic Comment

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

Conference Board confidence plunges Conference Board confidence plunges 14.8 pts to 44.4 in August The Conference Board consumer confidence index plunged in August, falling to

44.4 (UBSe 51.0, cons 52.0) from 59.2 in July (revised from 59.5). Through July, the Conference Board measure had not shown nearly as much weaknesss as the Univ of Michigan or Rasmussen measures. Now it does. The headline index was the lowest since Apr 2009.

There was noticable discord among the components of the index: The expectations index fell 23.0 points. In contrast, the present situation index slipped only 2.4 points, and spending plans for appliances and vacations actually improved to the best levels since late last year. That said, there was some deterioration in household assessments of the current labor market, with a net 44.4% of respondents indicating jobs were hard to get versus 39.7% a month earlier. That measure of labor market tightness has been moving roughly sideways—until this month improving marginally to average 37.7% in Q2 from 40.6% in Q1 and 41.7% in 2010.

The resilience in retail sales in July—when most confidence measures began to deteriorate seriously—is a reminder that spending can deviate from confidence, as it appears to have so far in Q3. The decline in the Conference Board measure in August partly was catch-up to weakness already shown in other confidence measures (see charts on page 2), and it undoubtedly reflected households' negative reactions to the debt deal and S&P downgrade in late July/early August and the stock market sell off earlier this month. (The cutoff date for the Conference Board survey was August 18th.)

SP/CS index edges down 0.1% in June The S&P/Case Shiller home price index slipped 0.1% in June (UBSe 0.5% cons 0.0%), and May was revised to -0.1% from 0.0%. Through June, prices have fallen 4.5%y/y. However, they are no longer declining consistently, notwithstanding the slippage in June: prices rose at a 1.3% annual rate in the three months through June.

Store sales still holding up In the last week of August, store sales were affected by Hurricane Irene both positively and negatively: negatively because of an interruption of back to school shopping; positively because of hurricane-related precautionary buying.

Notes:


http://research.ibb.ubs.com/servlet/SrchDoc/422366.pdf?doc=422366&f=aug11/xrm45048.pdf

http://research.ibb.ubs.com/servlet/SrchDoc/422357.pdf?doc=422357&f=aug11/xrm45045.pdf


UBS 5

COMMUNICATION Comcast Corporation Rating: Buy Target: US$30.00 Price: US$21.32 RIC: CMCSA.O Prior: Unchanged Prior: Unchanged Mkt Cap: US$60.2bn BBG: CMCSA US

Broadcasting Analyst: John C. Hodulik, CFA Tel: +1-212-713 4226

Revisiting the investment case Comcast continues to be a top pick Comcast shares are down 6% since 2Q results on Aug. 3 given concern about the weak macro environment

and cord-cutting, which may lead to accelerating video losses. At the same time, product maturation and wireless substitution are reducing voice adds. Still, we are encouraged by Comcast’s strong metrics in broadband and Commercial, and believe the company’s investment in content through NBCU helps hedge against the disruptive impact of new technologies such as over the top.

Expect cable to continue to outperform Comcast is the largest U.S. cable MSO and the only one to report accelerating revenue growth (ex-advertising) in 2Q. Given the company’s size and footprint, and its near-completion of the DOCSIS 3.0 rollout to enable faster broadband speeds, we expect Comcast’s cable business to continue to outperform.

Cash returns to continue We expect Comcast to complete its $7B repurchase authorization by YE11 and model an incremental $2.1B in buybacks in 2012E. The company’s gross leverage ratio was 2.2x at the end of 2Q, within mgmt’s 2.0-2.5x target range, and we forecast gross leverage of 2.0x at YE12, even with a new buyback program.

Valuation very attractive; Reiterate Buy rating and $30 PT Comcast trades at 4.9x 2012E EBITDA on a proportionate basis (i.e. incl. its 51% stake in NBCU). Using the large-cap media average of 6.4x on 2012E for NBCU would equate to 4.7x EBITDA for Comcast cable vs. 5.3x for TWC and 5.7x for CVC. We reiterate our Buy rating and $30 PT based on DCF (9% WACC, 2% perp growth).

Notes:




UBS 6

CONSUMER O'Reilly Automotive Rating: Buy Target: US$73.00 Price: US$65.15 RIC: ORLY.O Prior: Unchanged Prior: US$70.00 Mkt Cap: US$8.98bn BBG: ORLY US

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

Highlighting Its Consistency During a volatile time, ORLY's story is a refreshing source of stability This consistency was reinforced from the company's analyst day where it

discussed the differentiation of its model, its sales and profitability opportunities, and the development of its free cash flow engine. While these were similar messages that ORLY offered at the same event last year, the company has backed up its message with strong performance since that time. We expect this will continue.

ORLY repeated its goal of having a 15% operating margin by 2013 Though, we think this is conservative and it will probably be closer to 16% by that time. While much of the expansion will come from operating expense leverage, it still has room to improve its gross margin from such factors as improving the efficiency of its new DCs and rolling out price optimization.

Growing FCF and more aggressive buybacks are underappreciated ORLY remains committed to deploying its excess free cash for repurchasing its shares. Management pointed out that the company only needs $20 mm to $30 mm of cash on its balance sheet to manage its day-to-day operations. Anything above and beyond that will be used for buybacks.

Valuation: Stock will be driven by strong EPS growth & a consistent P/E We think ORLY’s shares will continue to garner a premium valuation and we reiterate our Buy rating on the stock. Our new $73 PT (up from $70) reflects 17.2x our CY’12 EPS estimate of $4.25. We think that ORLY is well situated to grow independent of the sector and rapidly scale up its FCF.

Notes:




UBS 7

ENERGY PG&E Corp. Rating: Neutral Target: US$42.00 Price: US$41.93 RIC: PCG.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$15.6bn BBG: PCG US

Electric Utilities Analyst: Jim von Riesemann Tel: +1-212-713-4260

NTSB blames PCG for pipeline explosion Final NTSB report released; tone is decidedly negative The final NTSB report following the Sept 2010 San Bruno pipeline explosion states that the

original work done on the pipeline in 1956 “did not meet generally accepted industry quality control and welding standards then in effect.” The NTSB also found that the 2008 sewer line installation near the rupture did not damage the pipeline, refuting claims that others may share some liability. Also, the NTSB cited that PCG’s “response time was excessively long and contributed to the severity and extent…” which may pique more questions on insurance coverage, in our view.

All questions, no answers at this point (1) What are the number of violations, the start date of those violations, and the potential fines/penalties and is there a maximum limit; (2) Does PCG’s pipeline modernization plan (unveiled last week) meet the compliance threshold; (3) What is the appropriate cost allocation between shareholders and customers in order to bring PCG into compliance; (4) How will compliance be measured and over what time period?

The state and regulators appear to have great latitude Based on our read of the report, the NTSB directs Gov Brown to make sure the CPUC has the legal authority and ability to investigate, evaluate, and implement any and all pipeline safety processes and procedures as well the ability to impose financial penalties for non-compliance.

Valuation - $42 target; Neutral rating Our price target reflects a group median P/E multiple on our 2013E. Notes:




UBS 8

HEALTHCARE Johnson & Johnson Rating: Buy Target: US$74.00 Price: US$65.77 RIC: JNJ.N Prior: Unchanged Prior: US$80.00 Mkt Cap: US$181bn BBG: JNJ US

Advanced Medical Devices Analyst: Rajeev Jashnani, CFA Tel: +1-212-713 9127

Benchmarking early Zytiga launch Comparing Zytiga to other oral small molecule oncology drugs IMS sales for Zytiga were $16M in July, inline w/ $16M in June & above $6M in

May (Zytiga was approved on 4/28 for chemo-exp'd prostate cancer). For 1st 3 mo’s, Zytiga IMS sales of $38M are tracking above Tarceva & Sutent, which both had sales of $18M in the 1st 3 mo’s (launched in '04 & '06). Tarceva & Sutent both had 1st FY US sales of $0.3B w/ ‘10 US sales of $0.5B / $0.3B (ww: $1.3B / $1.1B). That said, based on TRx data, Zytiga (6.5k) is tracking below initial Gleevec performance (9.6k; ‘10 US / ww sales of $1.3B / $4.3B). Notably, these simple comparisons ignore differences in pt populations, pricing, etc.

Maintaining Zytiga sales estimates We estimate ‘12 / ‘15 US Zytiga sales of $0.3B / $1.0B (ww: $0.6B / $2.0B). Initial IMS data on Zytiga appears encouraging, especially considering that mkt opportunity for chemo-exp’d PC is much smaller than the chemo-naïve opportunity (data in chemo-naïve expected in ~1H12). Importantly, additional data points are needed to confirm correlation between IMS & actual sales. 2Q11 actual Zytiga ww sales were ~$50M but delta relative to IMS data may be related to US stocking & ex-US early access.

Thoughts on competitive environment On the competitive landscape we recognize MDVN’s MDV3100 as a key upcoming competitor; docs we’ve consulted with expect efficacy similar to Zytiga but envision MDV3100 being used in combination w/ Provenge, facilitating earlier use (Zytiga is incompatible w/ Provenge due to steroid co-administration). That said, multi-year survival for CRPC patients should facilitate substantial opportunity even for later lines of treatment.

Valuation – reiterate Buy rating; DCF-based price target to $74 from $80 JNJ currently trading at 12.6x 2012E EPS. Our revised target corresponds to 13x 2013E EPS. We lowered our target in light of lower market multiples.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$65.77 on 30 Aug 2011 18:42 EDT

Valeant Rating: Buy Target: US$63.00 Price: US$44.66 RIC: VRX.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$7.09bn BBG: VRX US

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

Adding to Canada OTC Biz What’s new? Valeant agrees to acquire Afexa Valeant will pay ~$76M to acquire Afexa which sells cold & flu treatments in Canada and had

~C$40M in 2010 sales. Afexa had been previously approached by Paladin Labs with a hostile bid and as a result of the Valeant offer Afexa has a 30-day go-shop period (ends 9/29/2011) with a $3.75M break-up fee for a superior offer.

Our takeaway: Should be $0.04-0.05 accretive (see Table 1) We like the deal as it appears to be an inexpensive (~2x 2010 sales) way to incr. OTC exposure in Canada. Afexa sales are highly seasonal due to the flu severity with revs of C$47.8M, C$57.4M and C$38.4M in 2008, 2009 and 2010, resp. (2010 was impacted by the 2009 H1N1 scare). Thus, assuming sales can grow ~5% annually (should be reasonable through pricing alone), a stable GM of ~68%, flat SG&A+R&D of ~C$27M and ~C$12.5M in synergies (C$10M in G&A is cut and ~C$2.5M of the ~C$13M S&M is cut) yields ~$0.05 accretion with an 8% tax rate.

Thoughts on the stock: Nice tuck-in; Highlights mgt. aggressiveness We like the deal and believe it highlights that Valeant will continue to be aggressive on both small and large deals. While investors are likely to remain focused on organic growth heading into 3Q, the add’l $300M in share repurchase and the early closing of Sanitas should give mgt. plenty of EPS levers for 2011. While mgt. has an agreement with the Afexa board, given the go-shop we will wait for the acquisition to close before formally adding it to our model.

Valuation: We maintain our Buy rating and PT of $63 Based upon DCF and implies a P/E multiple of 14x our 2013E cash EPS of $4.38. Notes:





UBS 9

INDUSTRIALS Beazer Homes Rating: Buy Target: US$5.50 Price: US$2.19 RIC: BZH.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$0.13bn BBG: BZH US


Despite EPS Revisions, We’re Optimistic Operating Strategy Remains Focused on Top Line Growth On their F3Q conf call, Beazer’s mgmt team discussed their strategy to drive revenue

growth, despite underlying fundamentals. In turn, the co will focus on improving its sales pace to 2+ homes/community from ~1.5, which it has realized over the last year, helping its cash generation and efforts to expand profitability. Additionally, mgmt will work to increase its community count at a modest rate annually. In our opinion, these two factors will help Beazer thrive, even if conditions remain uncertain in the NT.

Revising EPS Estimates to Reflect Economic Backdrop Despite our belief that the new home market is at, or near, a trough, we’re reducing our EPS ests to reflect the potential impact from the more recent econ uncertainty. Our F11E goes to ($1.60) from ($1.55); F12E is now ($0.90) from ($0.80). Fwd years have also been adjusted. These changes are insufficient to impact our PT.

Maintain Buy Rating: We Expect Valuation Discount to Narrow While visibility into the timing for a turnaround in housing remains limited, we believe Beazer has preserved substantial financing capacity, allowing it to weather the storm. Further, we continue to believe the co’s underperformance relative to peers will reverse over time given: 1) its improved liquidity position—which is enabling mgmt to increasingly focus on profitability, and 2) greater operating discipline. As such, we maintain our Buy rating.

Valuation: $5.50 PT is 1.0x our Trough BV Estimate Our price target is 1.0x our trough BV estimate, in line with the group avg. Notes:


KB Home Rating: Neutral Target: US$7.00 Price: US$6.74 RIC: KBH.N Prior: Unchanged Prior: US$11.00 Mkt Cap: US$0.52bn BBG: KBH US


Reducing PT to Reflect Lower Profitability Although Concerns Are Likely Overdone, We Remain Cautious Since 7/19, KBH -29%, well ahead of the -19% group avg, driven by concerns

around the robustness of its capital structure. Although these worries are likely overdone, we’re reducing our PT to $7 from $11, reflecting our view that profitability will remain below peers as new home sales “bounce” along the bottom before eventually recovering. Our Neutral rating is unchanged as we believe the current valuation appropriately reflects this potential underperformance.

Why We Expect Underperformance In a “Flat” Housing Market Despite our view that KB Home has sufficient liquidity to support its existing operations, we expect profitability to trail better positioned peers. This view is based on: 1) mgmt’s commitment to a build-to-order model, which will likely lead to slower growth in a stable housing market; & 2) the fact that >50% of KB’s adj tang BV comes from tax benefits (the DTA allowance is ~$11/sh), which will inherently take longer to monetize, dragging ROE lower.

Liquidity Becomes a Constraint Once Conditions Improve Although KB’s liquidity affords flexibility [relative to the timing for a capital raise], we believe it will constrain growth as housing recovers. While visibility around the structure of a future transaction is limited, we believe concerns over dilution will continue to weigh on the stock, limiting upside.

Valuation: $7 PT Based on 0.4x our Trough BV Estimate Our $7 PT is 0.4x our trough BV est., below the peer avg of 1.0x. Our target multiple has been reduced from 0.7x previously, as we now forecast a lower ROE.

Notes:


USDA 2011 Farm Income Forecast

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

USDA raises 2011 net farm income forecast USDA raises its forecast of 2011 farm income by roughly 9% USDA raised its forecast of 2011 U.S. net farm income to $103.6B, up from $94.7B

(+9%) in its initial forecast on February 14. The revised 2011 net farm income forecast is now 31% above USDA’s slightly revised 2010 net farm income forecast, with USDA noting “net farm income and net cash income are both projected to exceed $100 billion for the first time in 2011. The 2011 forecast of net farm income is the second highest inflation-adjusted value recorded since 1973.”

Cash receipts revised 9% higher on higher livestock revenues USDA increased its forecast for 2011 livestock cash receipts by 12% to $163.8 billion. USDA also increased its 2011 crop cash receipt forecast to $206.5 billion, up 6% from its initial forecast, and up 19% from 2010 levels.

We see strong farm profitability as catalyst for farm equipment demand USDA now forecasts farm cash net income to increase 16% YoY in 2011 (up from 8% previously), and we see the strength in farm profitability as likely to drive strong farm equipment demand through 2012.

We continue to favor Key Call Buy-rated DE for exposure to the NA ag cycle We remain bullish on the farm equipment cycle, as our channel checks indicate both improving demand and pricing. DE remains a UBS Key Call and our preferred way to play the farm equipment cycle as we continue to see beats over the next few quarters as a catalyst for outperformance. Additionally, we maintain our Buy ratings on AGCO and CNH as we expect strength in farm commodity prices as a positive catalyst.

Notes:






UBS 10

TECHNOLOGY VMware Rating: Buy Target: US$125.00 Price: US$90.71 RIC: VMW.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$39.0bn BBG: VMW US

Software Analyst: Brent Thill Tel: +1-415-352 4694

Update from User Conference FQ3/FY11 On Track, Macro Headwinds Not Blowing in Vegas This Week No signs of macro slowdown at VMworld 2011. CFO reconfirmed FQ3

and FY11 guidance based on customer and sales feedback over past 6 weeks (though we’d note FQ3 is heavily back-end loaded with Europe on Holiday until Sept). With attendee count +12% y/y (+52% over 2009) many of the product sessions were sold out. Customer and partner engagement show the increasing value of VMW’s product stack and vision. Interesting to note VMworld attendance is now 50% of Oracle OpenWorld attendance, yet VMW has only 25% of ORCL’s market cap.

Encouraging Medium-Term Outlook Bookings on a $4bn run rate (up 4x since 2007) represent only 13% of VMW’s own estimated 2014 TAM of $30bn (and we think that’s low). Next-gen infrastructure management, application development, end-user computing and hybrid cloud build-outs are nascent bookings contributors and remain big revenue opps. Management attach rate remains low but product revisions in next 12 months should act as a demand catalyst. License bookings growth in emerging markets is outpacing overall with the virtualization journey in those regions just starting.

Positive Customer/Partner Tone We spoke with numerous customers/partners who cited VMW's multi-dimensional ROI as a reason for increased investment. Customers/partners appear satisfied with VMW’s proactive revisions to the updated vSphere pricing model.

Valuation: 23x FY12 FCF/sh, 36x PE (1.5x PEG), 8.0x EV/sales Reiterate Buy, $125 PT based on 29x forward NTM FCF/share. Notes:




UBS 11

UBS Key Calls - US Live Key Call Portfolio

Stock Name RIC Rating Price Target Date of call Current Price Analyst Apple Inc. AAPL.O Buy US$510 2-Jun-11 US$389.99 Maynard Um

Baker Hughes Inc. BHI.N Buy US$102 7-Jun-11 US$59.52 Angie Sedita

Cardinal Health, Inc. CAH.N Buy US$51 18-Jan-11 US$42.2 Steven Valiquette

Celgene Corporation CELG.O Buy US$71 9-Dec-10 US$59.53 Matthew Roden, PhD

Citigroup Inc C.N Buy US$56 3-May-11 US$30.93 William Tanona, CFA

CONSOL Energy, Inc. CNX.N Buy US$87 4-Aug-11 US$45.48 Shneur Gershuni, CFA

Deere & Co. DE.N Buy US$110 18-Jan-11 US$80.02 Henry Kirn, CFA

Dow Chemical DOW.N Buy US$46.5 21-Mar-11 US$28.26 Andrew Cash

Ford Motor Co. F.N Buy US$22 10-Jan-11 US$10.87 Colin Langan, CFA

General Electric Co. GE.N Buy US$23 10-Jan-11 US$16.12 Jason Feldman

Google Inc. GOOG.O Buy US$800 10-May-10 US$540.7 Brian Pitz

Joy Global Inc. JOYG.O Buy US$112 28-Feb-11 US$82.54 Henry Kirn, CFA

McDonalds Corp. MCD.N Buy US$97 9-Feb-11 US$90.78 David Palmer

Prudential Financial Inc. PRU.N Buy US$77 19-Apr-10 US$49.33 Andrew Kligerman

Qualcomm Inc. QCOM.O Buy US$70 26-Apr-11 US$51.24 Parag Agarwal

SanDisk Corp. SNDK.O Buy US$62 21-Mar-11 US$37.09 Uche Orji

Source: Reuters, UBS. Prices as at market close on August 30, 2011.


UBS 12

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

Company Name Directional Indicator/Rationale Reuters Code Current Share Price

New Rating New PT Prior

Rating Prior PT

D.R. Horton Inc. Upgrade to Buy, maintain PT DHI.N US$10.6 Buy US$13 Neutral US$13

Johnson & Johnson Reiterate Buy, lower PT JNJ.N US$65.77 Buy US$74 Buy US$80

KB Home Maintain Neutral, lower PT KBH.N US$6.74 Neutral US$7 Neutral US$11

Lennar Upgrade to Buy, maintain PT LEN.N US$14.66 Buy US$21 Neutral US$21

Meritage Corporation Upgrade to Neutral, maintain PT MTH.N US$18.75 Neutral US$19 Sell US$19

O'Reilly Automotive, Inc. Reiterate Buy, increase PT ORLY.O US$65.15 Buy US$73 Buy US$70

Source: Reuters, UBS. Prices as at market close on August 30, 2011.

Markets, Events and Newsflow Today’s Company Events

Company Name Event Reuters code Rating PT Notes

Brown-Forman Earnings Release BFb.N Neutral US$76

Coldwater Creek Earnings Release CWTR.O Suspended #N/A

Joy Global Earnings Release JOYG.O Buy US$112

Source: Reuters, UBS. Prices as at market close on August 30, 2011. Today’s Macroeconomic Events: US

Indicator Time (ET) UBS forecast Previous Consensus

ADP Employment Report (Aug)lvl 9:15 na 114 k 105 k

Factory Orders (Jul)mom 11:00 na -0.8% 1.0%

Online Help Wanted (Aug) 11:00 na na na

Chicago PMI (Aug)index 10:45 na 58.8 54.0

Source: Bloomberg, UBS


UBS 13

Today’s UBS Hosted Corporate Roadshow: Company Event Location Mattel Inc 1X1 meeting hosted by Robert Carroll Mid Atlantic

Time Warner Cable 1X1 meeting hosted by John C. Hodulik Europe

Today’s UBS Hosted Fieldtrip:

Company Event Location None

Today’s UBS Hosted Conference:

Company Event Location

None


UBS 14

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

Americas

United States Dow Jones 11560.0 0.18 -0.15

United States S&P 500 1212.9 0.23 -3.56

United States Nasdaq 2576.1 0.55 -2.89

United States S&P VIX 32.89 1.89

Europe

Europe FTSE Eurofirst300 946.6 0.70 -15.61

Belgium BEL 20 2220.3 0.35 -13.90

Germany DAX 5694.6 0.90 -17.64

France CAC 3185.6 0.82 -16.27

Italy MIB 30 15299.4 1.28 -24.16

Netherlands AEX 286.1 0.85 -19.32

Portugal PSI 20 6221.1 0.78 -18.02

Spain IBEX 8529.3 1.00 -13.49

Switzerland SMI 5463.4 0.26 -15.11

UK FTSE 100 5291.6 0.43 -10.31

Asia

Hong Kong Hang Seng 20468.7 1.31 -11.14

India BSE Sensex 16676.8 0.00 -18.69

Japan Nikkei 225 8955.2 0.01 -12.45

Source: UBS, Reuters. Indices in Americas as at market close on August 30, 2011. Indices in Europe and Asia as at 05:00 EDT on August 31, 2011

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

Euro €/$ 1.444 -0.37% 0.6% 7.9%

UK £/$ 1.631 -0.65% -0.7% 4.5%

Canada CAD/$ 1.022 -0.23% -2.4% 2.0%

Switzerland CHF/$ 1.220 -0.52% -4.2% 13.9%

China Yuan/$ 0.157 0.01% 0.9% 3.3%

Brazil BRL/$ 0.626 -0.32% -3.0% 4.0%

India INR/$ 0.022 -0.08% -4.1% -3.0%

Mexico MXN/$ 0.080 -0.50% -6.4% -1.5%

Japan $/JPY 0.768 -0.13% 0.0% -5.5%

Australia AUD/$ 1.068 0.15% -2.9% 4.4%

Source: UBS, Reuters. Prices as at market close on August 30, 2011


UBS 15

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

Gold ($/oz) 1833.70 0.21 12.07 29.41

Brent Crude spot, $/bbl 114.01 -0.01 -1.35 22.26

WTI Crude spot, $bbl 88.81 -0.10 - -

Natural Gas, $MMBTU 3.88 -0.59 -7.75 -6.87

Source: UBS, Reuters. Prices as at market close August 31, 2011.


UBS 16

UBS Conferences and Seminars For the week of 29th to 2nd September

From To Event Location None

Upcoming UBS Conferences and Seminars From To Event Location 30-Aug-2011 30-Aug-2011 All Lighting Conference Frankfurt 8-Sep-2011 9-Sep-2011 Best of Americas Conference 2011 London 12-Sep-2011 13-Sep-2011 Global Transport Conference 2011 London 14-Sep-2011 15-Sep-2011 Global Paper and Forest Products Conference New York 19-Sep-2011 21-Sep-2011 Global Life Sciences Conference New York 27-Sep-2011 30-Sep-2011 Global Oil & Gas Conference London 28-Sep-2011 28-Sep-2011 UBS Business Development Company (BDC) Conference New York 15-Nov-2011 16-Nov-2011 Global Macro CTA & FX Conference 2011 Zurich 15-Nov-2011 17-Nov-2011 Global Technology and Services Conference New York 29-Nov-2011 01-Dec-2011 Global Real Estate CEO conference London

Recent events

From To Event Location 17-Aug-2011 17-Aug-2011 What If...Grey or Black Skies Lie Ahead? Conference Call 19-Aug-2011 19-Aug-2011 TV/Radio/Newspaper M&A Market Update Conference Call 19-Aug-2011 19-Aug-2011 Which Shade? Conference Call 22-Aug-2011 22-Aug-2011 Q2 UBS/Mercent eCommerce Update Conference Call

25-Aug-2011 25-Aug-2011 State of the Life Insurance Industry Update and Outlook with Moody’s Conference Call

25-Aug-2011 25-Aug-2011 MSFT: Top 10 Things To Watch for at BUILD Conference Conference Call *For further information on any of these events, please contact your UBS representative. Replay details may be available for recently concluded conference calls.

http://links.mkt2438.com/servlet/MailView?ms=MzcyNjUwNwS2&r=MTU0MDY0MTcwMDIS1&j=MjIwNzc4MjA4S0&mt=1&rt=0


UBS 17

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 Wednesday, August 31, 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 18

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 19

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.


UBS 20

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 21

Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date AGCO Corp.13, 16 AGCO.N Buy N/A US$43.00 30 Aug 2011 AOL Inc13, 16 AOL.N Buy N/A US$15.31 30 Aug 2011 Apple Inc.6c, 7, 16, 18a AAPL.O Buy N/A US$389.99 30 Aug 2011 Baker Hughes Inc.2, 4, 5, 6a, 6b, 6c, 7, 13,

16 BHI.N Buy N/A US$59.52 30 Aug 2011

Beazer Homes4, 6a, 13, 16, 20 BZH.N Buy (CBE) N/A US$2.19 30 Aug 2011 Cardinal Health, Inc.2, 4, 6a, 6c, 7, 16,

18b, 22 CAH.N Buy N/A US$42.20 30 Aug 2011

Celgene Corporation6c, 7, 16 CELG.O Buy N/A US$59.53 30 Aug 2011 Citigroup Inc2, 4, 5, 6a, 6b, 6c, 7, 16, 22 C.N Buy N/A US$30.93 30 Aug 2011 CNH Global NV4, 6a, 6b, 6c, 7, 16, 20 CNH.N Buy (CBE) N/A US$32.22 30 Aug 2011 Comcast Corporation4, 5, 6a, 6b, 6c, 7,

16 CMCSA.O Buy N/A US$21.32 30 Aug 2011

CONSOL Energy, Inc.4, 5, 6a, 16 CNX.N Buy N/A US$45.48 30 Aug 2011 D.R. Horton Inc.4, 5, 6a, 6b, 7, 16, 20 DHI.N Buy (CBE) N/A US$10.60 30 Aug 2011 Deere & Co.16, 22 DE.N Buy N/A US$80.02 30 Aug 2011 Dow Chemical5, 6a, 6b, 6c, 7, 13, 16, 22 DOW.N Buy N/A US$28.26 30 Aug 2011 Ford Motor Co.4, 6a, 6b, 6c, 7, 13, 14, 16,

18c F.N Buy N/A US$10.87 30 Aug 2011

General Electric Co.4, 5, 6a, 6b, 6c, 7, 16,

18f, 22 GE.N Buy N/A US$16.12 30 Aug 2011

Google Inc.2, 4, 5, 6a, 6b, 6c, 7, 16, 18d GOOG.O Buy N/A US$540.70 30 Aug 2011 Johnson & Johnson16, 18g JNJ.N Buy N/A US$65.77 30 Aug 2011 Joy Global Inc.3, 4, 6a, 13, 16, 20 JOYG.O Buy (CBE) N/A US$82.54 30 Aug 2011 KB Home13, 16, 20 KBH.N Neutral (CBE) N/A US$6.74 30 Aug 2011 Lennar2, 4, 6a, 6b, 7, 16, 20, 22 LEN.N Buy (CBE) N/A US$14.66 30 Aug 2011 McDonalds Corp.6b, 7, 13, 16, 22 MCD.N Buy N/A US$90.78 30 Aug 2011 Meritage Corporation4, 16, 20 MTH.N Neutral (CBE) N/A US$18.75 30 Aug 2011 O'Reilly Automotive, Inc.16 ORLY.O Buy N/A US$65.15 30 Aug 2011 PG&E Corporation2, 4, 6a, 16 PCG.N Neutral N/A US$41.93 30 Aug 2011 Prudential Financial Inc.2, 4, 6a, 6b, 6c,

7, 16, 22 PRU.N Buy N/A US$49.33 30 Aug 2011

Qualcomm Inc.16, 18e QCOM.O Buy N/A US$51.24 30 Aug 2011 SanDisk Corp.13, 16, 20 SNDK.O Buy (CBE) N/A US$37.09 30 Aug 2011 Valeant Pharmaceuticals International16, 20 VRX.N Buy (CBE) N/A US$44.39 30 Aug 2011

VMware, Inc5, 16 VMW.N Buy N/A US$90.71 30 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 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

this company/entity or one of its affiliates within the past 12 months. 3. UBS Securities LLC is acting as advisor to Joy Global Inc on the announced acquisition of a stake in International Mining

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

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

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

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

banking securities-related services are being, or have been, provided.


UBS 22

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

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

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

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

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

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

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

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

in Johnson & Johnson. 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: Brown-Forman Corp., US$73.48 (30 Aug 2011); Coldwater Creek Inc., US$1.04 (30 Aug 2011); Source: UBS. All prices as of local market close.


UBS 23

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

ab