Financial Pacific: Morning meeting recap (third party) september 15.2010

ab

UBS Investment Research

US Morning Meeting Highlights

Global Equity Research

-

Rating and Recommendation ChangesNetLogic Microsystem, NETL.O Steven Eliscu p.10Upgrade to Buy as Near-term Correction is Overdone, Longer-term Outlook is Intact12-month rating: Prior: Neutral => Buy, FY10E US$0.09, FY11E US$0.52, PTUS$33.50, Mkt Cap US$1.55bnRowan Companies, RDC.N Angie Sedita p.5Upgrading to Buy on High Spec Jackup Mkt12-month rating: Prior: Neutral => Buy, FY10E US$2.49=>US$2.40, FY11EUS$1.60=>US$2.24, PT Prior: US$28.00 => US$42.00, Mkt Cap US$3.40bn

Estimate / Price Target RevisionsKroger Co., KR.N Neil Currie p.4Raising EPS On 2Q Beat, But More To Prove12-month rating: Neutral (Unchanged), FY11E US$1.70=>US$1.75, FY12EUS$1.86=>US$1.92, PT Prior: US$22.00 => US$23.00, Mkt Cap US$13.6bnSteel Dynamics, STLD.O Timna Tanners p.3Q3 Guidance Light; Cutting Target to $2012-month rating: Buy * (Unchanged) CBE , FY10E US$1.00=>US$0.80, FY11EUS$1.85=>US$1.60, PT Prior: US$22.00 => US$20.00, Mkt Cap US$3.41bn

Company UpdateCardinal Health, CAH.N Steven Valiquette p.7Further Debunking Generic Leverage Myths12-month rating: Buy (Unchanged), FY10E US$2.22, FY11E US$2.55, PT US$43.00,Mkt Cap US$11.5bnCisco Systems, CSCO.O Nikos Theodosopoulos p.10Strategy Unchanged, Dividend Announced12-month rating: Neutral (Unchanged), FY11E US$1.50, FY12E US$1.68, PTUS$25.00, Mkt Cap US$123bnEdwards, EW.N Bruce Nudell, PhD p.6PARTNER B: Medical management mortality12-month rating: Buy (Unchanged), FY10E US$1.80, FY11E US$2.15, PT US$66.00,Mkt Cap US$6.35bnMasterCard, MA.N Jason Kupferberg p.8$1B share buyback should be well-received12-month rating: Buy (Unchanged), FY10E US$13.24, FY11E US$15.62, PTUS$270.00, Mkt Cap US$26.2bnProtective Life, PL.N Andrew Kligerman p.5Brief Post-call Comments on UILIC Deal12-month rating: Buy (Unchanged), FY10E US$2.72, FY11E US$2.94, PT US$31.00,Mkt Cap US$1.81bn

15 September 2010http://www.ubs.com/investmentresearch

This package has been prepared by UBS Securities LLC UBS 1ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 13*Under review (UR) and/or exception to core rating bands (CBE) - see page : 13UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may havea conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.

http://www.ubs.com/investmentresearch

Oracle, ORCL.O Brent Thill p.9Preview: Looking Beyond Q1; Maintain Buy12-month rating: Buy (Unchanged), FY11E US$1.87, FY12E US$2.12, PT US$31.00,Mkt Cap US$127bn

Industry UpdateAirlines Kevin Crissey p.4

US Airline Sector Note - The Revenue Edge: Sept softer, beyond is challenging tointerpretUtilities Julien Dumoulin-Smith p.11

Utilities and E&C - Highlighting EPA Rule OpportunitiesHealthcare Providers Justin Lake, CFA p.6

Dialysis Providers - CMS Refutes OIG Argument on EPO Price InflationPaper Products Gail S. Glazerman, CFA p.3

Global Paper & Forest Products - UBS global paper conference-day 1Building Materials Timna Tanners p.9

US Building Materials Update - U.S. Highway Call: Mixed ’11 Fortunes SeenAerospace David E. Strauss p.7

U.S. Defense - Bad, But Not Much NewAerospace David E. Strauss p.8

Global Parked Aircraft Update - Parked In Production Moves Higher

Global StrategyEquity Strategy Jeffrey Palma p.11

Global Equity Strategy - Global Flow Watch: Summer trends mixedEquity Strategy Nicholas Smithie p.12

Global Emerging Market Equity Strategy - GEM Flow Watch: Summer Selling

EconomicsEconomics Maury N. Harris p.12

US Daily Economic Comment - Uneven acceleration in retail sales

US Morning Meeting Highlights 15 September 2010

UBS 2

Basic MaterialsGlobal Paper & Forest Products Gail S. Glazerman, CFA.................. +1 212 713 3486

[email protected]

Myles Allsop................................... +44-20-756 [email protected]

Shohei Takahashi............................. +81-3-5208 [email protected]

UBS global paper conference-day 1. Demand – generally trending as guided during 2Q earningsCommentary on demand in paper and forest markets was generally as discussed during 2Qearnings. For paper/board that is fairly encouraging. While acknowledging macro uncertainty,companies are still seeing y/y growth (at slower rate), solid backlogs and higher prices. This iscounter to financial market fears of a double dip. IP reported 3% improvement in box demand inAug and a good start to Sept. MWV is seeing ‘good & strong mill backlogs.’ Fluff pulp demandremains strong. European paper markets are recovering, albeit slowly. Paper/board demand stilllags pre-recession levels. Companies exposed to US housing were much less optimistic;demand has generally remained at the low levels of Jun/July. Firms still see normal demand at1.4-1.5mm starts-but admit it will take longer to get there.. StrategyCompanies are trying to cope with the pressures caused by cyclical and secular factors with avariety of strategies. Mix improvement either regionally (focusing on emerging markets) orproduct (higher value added grades) was a common refrain. Many companies see anopportunity from new energy-related markets, though there is little consensus as to when thismight start to materialize.. Use of cashMany companies flagged their improving financial positions. In the US companies continue toguide towards a ‘balanced’ and conservative use of cash. To that end IP announced a further$650mm contribution to pension. MWV paid down $100mm in debt. While many acknowledgeoversupply and the need for consolidation in Europe, visibility into how/when these will beaddressed remains limited.

-

Steel Dynamics (STLD.O) Timna Tanners.................+1-212-713 [email protected]

Brian Russo.......................+1-203-719 3692Associate [email protected]

Price (14 Sep 2010).....................US$14.5312-month rating............ Buy * (Unchanged)12m price target.....Prior: US$22.00 =>US$20.00Mkt Cap......................................US$3.41bn

Full-Year EPS2010E......................... US$1.00 => US$0.802011E......................... US$1.85 => US$1.60

*Exception to core rating bands - seepage 13

Q3 Guidance Light; Cutting Target to $20. Mgmt guided Q3 EPS below consensus and UBSe, with $0.07e in 1x factorsSTLD on Tuesday guided Q3 EPS to $0.05-$0.10 in its mid-qtr update, below consensus $0.21and UBSe $0.22. Mgmt cited margin squeeze from falling steel prices and weak scrap volume.It saw a $0.04/shr hit from its Mesabi Nugget scrap substitute project, up to $0.02 on tax-ratetrue-ups, and a $0.01 rail tie charge.. Tone for Q4 was positive…CEO Keith Busse said STLD was seeing better sheet order entry, in a possible positive sign forQ4, and scrap conditions were improving. We lower Q3e to $0.11 from $0.22 to reflect morechallenging scrap mkts and lighter volume, and cut Q4 to $0.20 from $0.29. Our channel checksindicate steady demand, but scrap prices have begun to ease and we see risk steel price hikesdon’t stick in typically seasonally weaker Q4. We cut 2011e to $1.60 vs $1.85 on more cautiousgrowth.. …but disappointing Mesabi Nugget progressWe thought Mesabi costs would abate in H2, so were disappointed to see a steady Q3 hit q/q.Mgmt said it was still refining the process and we remain l-t positive.. Valuation: Price target falls to $20, disappointment is tempered by 1xsOur newly lowered $20 target, down from $22, uses a discounted 6.5x ‘12E EV/EBITDA. Sharescurrently trade at 5.3x 2011E EV/EBITDA and 3.9x 2012E vs an average through-the-cycle 6.4xmultiple. STLD shrs offer more relative upside to peers in our view and we are confident ofstrong cash flow generation and growth in coming yrs. While Q3’s light outlook is partly offset byspecial items, we lower ests and our target to incorporate a more cautious growth view.


UBS 3

mailto:[email protected]



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



Consumer, CyclicalUS Airline Sector Note Kevin Crissey..................................+1-212-713 3562

[email protected]

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

The Revenue Edge: Sept softer, beyond is challenging to interpret. August is a wrap – International leads the wayOur data indicate that August system passenger unit revenue (RASM) finished about 14.5%higher than last year on roughly 1.5% capacity growth. At a regional level, we estimate domesticRASM increased just into double digits on less than 1% ASM growth and international was upjust over 20% on 3% ASM growth. Atlantic and Pacific were again the strong performersinternationally, but South America continues to show very good sequential improvement withOctober shaping-up nicely.. As hard as it gets forecasting revenueSeptember looks like it’s booking a bit weak (particularly domestic) and likely more thancomparisons can explain. However, as we look into Oct and Nov, the data look a little betteralthough it’s early and the comps get meaningfully tougher from here, so calculating where weend-up is a very tough exercise at this point.. DAL investor updateDelta’s updated guidance for 3Q indicates 12-13% operating margins in 3Q, compared to priorguidance of 10-12%. We’d already been forecasting 12.9% operating margins on 15% RASMgrowth. However, we have updated our estimates to reflect slightly lower cargo and otherrevenue offset somewhat by lower profit sharing expense in 3Q. Net result, we’ve lowered our3Q EPS estimate from $0.99 to $0.97, which compares to $0.88 EPS consensus coming intotoday. Our price target remains $17.50 based on 6-7x fwd EV/EBITDAR.

-

Consumer, Non-CyclicalKroger Co. (KR.N) Neil Currie........................ +1-203-719 3070

[email protected]

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

Price (13 Sep 2010).....................US$21.2612-month rating......... Neutral (Unchanged)12m price target.....Prior: US$22.00 =>US$23.00Mkt Cap......................................US$13.6bn


Raising EPS On 2Q Beat, But More To Prove. KR 2Q beat shows what best of breed can do in a difficult environmentKR’s 41c in EPS beat Street views by 5c, a favorable tax rate contributed about 2c in EPS in thequarter. The tax benefit derived from an IRS examination that resulted in adjustment to taxcontingency reserves. Despite the beat, 1H2010 results were in line with management views,but economic uncertainty kept the company from raising its FY2010 view.. Deflation remains persistent, but sales remained stableAlthough product cost inflation was 1% in 2Q, deflation remained persistent within the grocerydepartment (~50% of sales), which excluding milk experienced 160bps of deflation, onlyimproving 20bps sequentially from 1Q. Despite deflation sales remained steady at ~2.5% into3Q with broad based positive IDs across departments & geographies, 17 of 18 divisionsreported positive IDs in 2Q.. Model changes: raised FY2010 on beat, maintained 2H2010 viewOur model remains relatively unchanged for 2H2010 with 31c and 44c EPS estimates for the3rd/4th quarters, respectively. This assumes gross margin (ex fuel) improvements for theremaining quarters w/IDs running 2.5% (current run rate) for 3Q improving to 3.0% in 4Q oneasier comparisons to LY; our FY2010 ID sales estimate is 2.7% compared to 2%-3% guidance.We also raised our FY2011 EPS to $1.92 from $1.86 on improved gross margin and favorablecompares to 1H2010.. Valuation: Reiterate Neutral rating with a $23 price targetChallenging to find catalyst to drive valuation above 12x in our view. Our new $23PT ($22 prior)is based on a P/E multiple of 12x our 2011 EPS est. of $1.92.


UBS 4



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



EnergyRowan Companies (RDC.N) Angie Sedita.......................1-212-713 3587

[email protected]

Sasha Sanwal, CFA.......... +1-212-713 4907Associate [email protected]

Alston Mason.................... +1-212-713 8696Associate [email protected]

Price (14 Sep 2010).....................US$29.6912-month rating........ Prior: Neutral => Buy12m price target.....Prior: US$28.00 =>US$42.00Mkt Cap......................................US$3.40bn


Upgrading to Buy on High Spec Jackup Mkt. High specification jackup dayrates improving beyond our expectationsDayrates in the high specification market have begun to exceed our expectations and we expectfurther increases ahead. RDC just signed two jackups with Saudi Aramco for 3-yr contracts at$275k & $220K, well above our $160k forecast. We believe RDC is likely to win additionalawards at higher than expected rates and has 48% of its fleet up for renewal next year, plus 6new rigs to be delivered. We believe earnings estimates should continue to trend up, particularlyin 2012.. Rowan offers the best play on the high specification jackup marketRowan offers the highest exposure to the high specification jackup market. Of RDC’s 31jackups, 21 are high spec (or 68%). Also 55% of RDC’s jackup fleet is 10-years old or less,which is increasingly important to customers. RDC also has a strong safety track record andhighly respected operations. This will help RDC continue to win awards at better than marketrates, despite newbuilds entering in ‘10-‘11. RDC now derives 86% of its offshore earnings frominternational markets.. Recent Skeie acquisition adds 15%-20% accretion in 2011 and 2012The acquisition of Skeie (3 high spec jackups) in July 2010 will become accretive in 2011 andoffers substantial rate potential for new contract awards.. Valuation: Trading at 20% discount to peers in 2012E, price target to $42While RDC has already begun to outperform, we believe further upside remains and 2012 EPShas substantial upside potential. RDC is compelling in 2012 as new rigs are delivered and istrading at a 20% discount to its peers at 4.1x 2012 EV/EBITDA. We have set our PT at $42 or7.3X of 2011E EV/EBITDA.

FinancialProtective Life (PL.N) Andrew Kligerman.......... +1-212-713 2492

[email protected]

Julie Oh............................. +1-212-713 [email protected]

Jennifer Huang, CFA......... +1 212 713 6145Associate [email protected]

Price (13 Sep 2010).....................US$21.1312-month rating...............Buy (Unchanged)12m price target..........................US$31.00Mkt Cap......................................US$1.81bn

Full-Year EPS2010E............................................. US$2.722011E............................................. US$2.94

Brief Post-call Comments on UILIC Deal. PL plans to acquire United Investors Life Insurance Co (UILIC)PL plans to acquire 100% of UILIC common stock from TMK for $186M plus adj-statutorysurplus (or ~$318M in total). PL’s actual net capital investment will be a lower ~$260M, afterextracting capital in excess of that required for a 350% RBC ratio at UILIC. PL expects op EPSaccretion of $0.15-0.20/$0.18-0.22 in ’11/’12.. GAAP earnings accretion range understates UILIC deal’s true ROIC…In our view, the ROIC is much higher than the 7-9% return implied by PL’s ’11 GAAP income estfor UILIC ($29-36M pre-tax, ex transition costs) for various reasons. a) GAAP income reflectsvalue-of-business-acquired amortization (which is non-cash). Note UILIC’s statutory pre-taxoperating income was $81M in ’09. b) PL expects tax benefits not evident in GAAP income. Ourlimited understanding is Section 338 election steps-up the tax bases of acquired assets to fairvalue (higher depreciation…lower taxable income)—otherwise, the old tax bases would remain.. …PL has historically targeted double-digit unlevered returns on M&AWe also think PL priced this deal for returns that are more in-line with its historical double-digitunlevered return target because of fairly rapid capital recovery—in part on lower RBC charges.PL expects nearly half of its initial $260M investment to be returned in 3 years—with profits inyear 10 looking similar to that in year 3.. Valuation—Reiterate Buy; $31 PT represents 0.9x 2Q11E BVPS (ex-aoci)We view the UILIC deal favorably as it leverages PL’s block acquisition expertise, is EPS/ROEaccretive, and puts capital to work at attractive returns. $31 PT reflects a discount to our 1.1xtarget life group P/B given PL’s lower ROE.


UBS 5

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




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




HealthcareEdwards (EW.N) Bruce Nudell, PhD........... +1 212 713 2716

[email protected]

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

Matthew Keeler..................+1 212 713 9413Associate [email protected]



PARTNER B: Medical management mortality. We’re expecting strong survival separation in PARTNER B (PB)We believe that the medical management (MM) and TAVI arms in PB will show good survivalseparation at mean follow-up (~18 months). We believed that the 12.5% TAVI advantage atmean F/U (modified) will be met.. 24 month medical management data published today in CirculationIn today’s journal Circulation, survival data for 362 high risk aortic stenosis patients who wereineligible for PB were published (Figure 1). 274 patients didn’t receive surgery, of whom, 177received balloon valvuloplasty (BV) in addition to optimal MM. The group of 274 had a STSProm (STSP) risk score of 12.8 and a Logistic EuroScore (LE) of 42.4. This comparesreasonably with the STSP of 11 (lower is healthier) in PB (multiply by 3-3.5 to approximate LE).. MM/BV death rate 39.6% & 53.4% at 1 & 2 years in CirculationThe 1 yr mortality in the MM/BV arm of 39.6% was well above that for the transfemoral TAVIcohort in the Source Registry (19.1%) and the subset with LE’s of 20-40 (16.5%), or LE >40(27.5%). We suspect that the 1 year mortality in the TAVI arm of PB will be around 20%. Whilethe STSP’s in Circulation were slightly worse than in PB, we believe the results arerepresentative (w a 10+ point diff likely btwn TAVI + MM in PB at 1 yr). The shallow survivalslopes in SOURCE from 6-12 mos are consistent w a widening mortality gap past 12 mo.. ValuationWe use VCAM (a form of DCF) to set our $66 PT.

Dialysis Providers Justin Lake, CFA.............................. +1-212-713 [email protected]

Martin Wales, PhD..........................+44-20-7568 [email protected]

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

CMS Refutes OIG Argument on EPO Price Inflation. DVA selloff today appears to center around OIG concerns on EPO pricingBloomberg article released this afternoon highlighting Office of Inspector General's concerns onEPO price inflation left DVA down 2.1% vs. flat S&P 500. Specifically, OIG highlights EPO pricedown 5% since 2003, ($8.82 per 1k units to $8.37 in 2009) while CMS bundling rule ties rates todrug PPI which is typically up 4-7%, potentially resulting in overpayment to providers goingforward under new bundled reimbursement in the mind of OIG. With EPO representing ~20% oftotal Medicare dialysis revenues/spending, this is clearly important to all parties.. CMS argues that OIG's argument ignores context, clearly we concurMost importantly, CMS points out in its comment letter that the dialysis economics andincentives for EPO price negotiation since 2003 (flat rate to ASP to now bundling) likelydistorting historical data. Most importantly, CMS notes EPO price up 4-5% since early ‘08,closer to in-line with Rx PPI (see Table 1 below), leaving agency content in using drug PPI toset bundled rate going forward, where we note pricing unlikely to be trending lower as AMGNlooks to protect its economics in face of providers pushing for utilization efficiencies postbundling.. Would use near-term DVA weakness as buying opportunityWe expect DVA may remain volatile in the NT given OIG report, potential VA cuts and concernsaround 2011 guidance conservatism, potentially setting up compelling buying opportunity into3Q results. While 2011 will be a “transition year” (UBS est. 2.8% EBIT growth) due to bundlingtransition, we also see it as setting trough earnings power before growth accelerates to mid-to-high teens in 2012-‘15 via efficiency gains & strong visibility on utilization and overallreimbursement (especially relative to HC peers.)

-


UBS 6

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







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

Cardinal Health (CAH.N) Steven Valiquette............ +1-203-719 [email protected]

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



Further Debunking Generic Leverage Myths. Confusion Related to Large Retail Drug Chain Customer ProfitsFollowing up on our CAH note from Aug 24, this note further addresses what we believe is amajor misconception that CAH has minimal leverage to the robust generic drug cycle since thecompany generates ~55% of its revenues from WAG, CVS, and ESRX. The notion is that thesecustomers buy their own generics direct from manufacturers, and thus, upon a new genericlaunch, many investors believe CAH loses 100% of branded profits but only recaptures ~45% ofgeneric profit.. CAH Gains More From Generic Launches Than PerceivedCVS & WAG are actually among CAH’s largest customers for GENERIC drugs as well. Thus,we believe CAH’s generic penetration rate is more like 60%, only slightly below MCK/ABC’s70-80%. Moreover, CAH’s much higher ‘bulk sales’ mix vs. MCK/ABC means the companyloses less brand profits upon new generic launches. The net result is CAH, MCK, & ABC havethe same profit leverage during generic launch of a hypothetical $1 bil branded drug (as shownin table 1).. Incremental Generic Drug Leverage Should Drive EPS UpsideThis incremental generic leverage is one main reason why our EPS estimates are aboveconsensus for FY11-13 (UBS = $2.55, $2.94, and $3.35 vs. Street at $2.45, $2.74, & $3.00). Weproject 11% annual drug distr. EBIT growth over this period.. Valuation: Reiterate Buy Rating; $43 TargetOur projected 13-15% EPS growth over the next 3-5 years is unchanged. Our projected P/E of15x our C2011 EPS estimate of $2.75 = $43 target (30%+ upside from current levels). Of note,a hypothetical conservative 13x P/E = ~15% upside.

IndustrialU.S. Defense David E. Strauss............................. +1-212-713 6185

[email protected]

Darryl Genovesi................................+1-212-713 4016Associate [email protected]

Bad, But Not Much New. Mostly reiterated prior themes that look bad for industryDoD's efficiency initiative briefing detailed 23 actions, mostly reiterating prior themes that arelikely to put pressure on contractors’ margins and cash flow. These actions (outlined on pages2-3) target increased program affordability, increased competition and tying profit and cashmore directly to performance. Specifically, DoD called for performance based fee (rather thanpre-determined), increased use of fixed price incentive contracts with a strict share line (50/50)and ceiling (120%) and adjusted progress payments to gain more favorable pricing. DoD willexamine programs for capabilities overlap that will likely yield further cancellations with a reviewof Integrated Air & Missile Defense specifically mentioned.. Cash flow is biggest riskThe full impact of these initiatives on contractors’ margins and cash flow likely won't be knownfor some time and the uncertainty is likely to be a big overhang on the stocks. We view DoD'sacknowledgement that it's a quick bill payer as a bad sign, with it appearing increasing likely toslow cash payment to industry. We see the potential for cash flow to come under pressure asthe biggest risk for the stocks at current depressed levels.. Emphasized opportunity in servicesDoD emphasized that it sees more opportunity for efficiency gains within services (IT,equipment maintenance, facilities management) than in weapons acquisition. Within services,DoD will specifically look to drive competition through shorter contract lengths and will also limittime and materials (T&M) contracting in favor of cost plus contracts.

-


UBS 7

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





Global Parked Aircraft Update David E. Strauss............................. +1-212-713 [email protected]

Avi Hoddes....................................+44-20-7568 [email protected]

Darryl Genovesi................................+1-212-713 4016Associate [email protected]

Rami Myerson, CFA....................... +44-20 7568 [email protected]

Tasneem Azim..................................+1-416-814 [email protected]

Parked In Production Moves Higher. Parked up 4% on Mexicana bankruptcyWe count 2,653 parked commercial aircraft at the end of August, a 4% increase from July,entirely attributable to the recent Mexicana bankruptcy. Excluding Mexicana, we estimateparked aircraft were roughly unchanged in August compared to a 1% average seasonal declineduring August over the past 10 years. Overall, the parked aircraft count remains near its all-timehigh in absolute terms, but at 11.8% of the installed base is 170 bps below the 2002 peak at13.5%.. Parked in-production re-testing prior peak levelsParked in-production aircraft moved 19% higher this month (+4% ex Mexicana) and are nowjust 4% below the March peak (16% ex Mexicana). This month’s increase includedincrementally higher parked A320s, A330s, 767s, 747-4s and Embraer 190s, partially offset bydeclines in parked A340s, 777s and CRJ-900s, while parked 737 NGs were unchanged.. Latin America still parkingWe estimate 15% of the North American fleet is currently parked, compared with 9% in Europeand 5% in Asia. Latin American operators have accounted for most of the aircraft parked overthe past year with North America, Africa and the Middle East also modestly higher and Europe/Asia returning aircraft to service on net.. Parked evidence of oversupply; favor aftermarket namesWe see the still large number of parked in-production aircraft as evidence of oversupply. Wecontinue to favor the aero names with more exposure to the aftermarket - GR/TDG/COL in theUS and Meggitt/Safran in Europe.

-

MasterCard (MA.N) Jason Kupferberg........... +1-212-713 [email protected]

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

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

Price (13 Sep 2010)...................US$199.7512-month rating...............Buy (Unchanged)12m price target........................US$270.00Mkt Cap......................................US$26.2bn

Full-Year EPS2010E........................................... US$13.242011E........................................... US$15.62

$1B share buyback should be well-received. Return of cash to shareholders should be positive for sentimentAfter the close, MA announced a new $1B share buyback program, which is effectivelyimmediately but does not have a specific term. We believe the Street has been looking for morecash to be returned to shareholders, so this announcement should be positive for sentiment. Wethink investors will appreciate this vote of confidence in the stock amid ongoing regulatoryuncertainty. If executed ratably over the next 4 quarters at the current share price, we estimatethis buyback program could be accretive to 2011 EPS by ~3%.. What else to look for at tomorrow’s analyst meetingWe expect investors at tomorrow’s analyst meeting to focus on: 1) mid-quarter update onvolumes/transaction growth (V’s update last night reflected still healthy fundamentals), 2)incremental data points regarding the regulatory environment (we don’t expect much newtangible news on this front since the Fed is still in relatively early stages of its rule-makingprocess), and 3) growth initiatives (we think discussion here will most likely focus on emergingmarkets, prepaid, e-commerce, and mobile).. New CEO is off to a solid startIn our opinion, new CEO Ajay Banga has made a positive initial impression on the Street, andtoday’s buyback announcement should help to further reinforce these views.. Valuation: Maintain Buy and $270 PT (15x our C11 EPS & DCF)We believe shares are discounting too negative of a regulatory outcome.

UK Takeover Panel Disclosure: UBS Limited is acting as Financial Adviser toDataCash in relation to the recommended cash offer from Mastercard.


UBS 8






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




US Building Materials Update Timna Tanners................................ +1-212-713 [email protected]

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

Brian Russo......................................+1-203-719 3692Associate [email protected]

U.S. Highway Call: Mixed ’11 Fortunes Seen. UBS-hosted call with ARTBA revealed challenges and opportunitiesWe hosted a call Tuesday with The American Road & Transportation Builders Association(ARTBA) on the outlook for U.S. highway spending, probing the status of stimulus, futurehighway programs, and state financial health. ARTBA’s sr gov’t liaison was encouraged byObama’s positive comments related to a new multi-yr highway program, but wary any further$50B stimulus would be delayed.. Stimulus ebbing into 2011, state health challenges remain worrisome…ARTBA’s sr economist noted 2/3 of a total $28.5B allocated for transport was assigned, andafter completion, comps can become more difficult. Some states dipped into funds intended fortransport. Lack of a multi-yr highway program and uncertainty over the current extensionexpiring as of Jan. challenges visibility. …yet states appeared to match federal outlays, and spillover can prop ‘11Yet ARTBA noted states all ultimately could afford their required match federal gov’t roadoutlays, albeit cutting it close to the Sept fiscal yr end, which may mean the spending impactspills over to 2011. This supports our controversial view that aggregate volume grows into 2011,after poor 2010 progress in road spending.. Conclusions: Visibility poor but some positives for rocks, E&CsWhile gov’t spending visibility remains challenging, we were encouraged by ARTBA’s take onObama’s apparent warming to road spending, some support for 2011 spending, and evidencestates are matching federal spending. Short interest for MLM is 19% of the float and VMC’s hasrebounded to 11%, and we like value amid trough earnings. For E&Cs, stronger airport and railspending are positives.

-

TechnologyOracle (ORCL.O) Brent Thill........................ +1-415-352 4694

[email protected]

John Byun..........................+1 415 352 4695Associate [email protected]

Price (13 Sep 2010).....................US$25.3812-month rating...............Buy (Unchanged)12m price target..........................US$31.00Mkt Cap.......................................US$127bn


Preview: Looking Beyond Q1; Maintain Buy. Pass light seasonal FQ1 to annual conf, analyst day, & Mark Hurd introFQ1 is seasonally softest qtr; we expect results in upper half of guid. range. Co. entered FQ1with higher than historical license backlog (~30% of our license est. vs. 19% a yr ago), and weest. FX benefit of ~1% relative to guid. (worth $55-88M; analysis inside). After FQ1, focus shiftsto user conf. next week, featuring analyst day, new co-pres. Hurd, and 40+ sessions on FusionApps (vs. 3 last year).. Evolution to full IT stack provider to pick up steam with new co-PresidentORCL’s strategy toward becoming a strategic provider of integrated hardware/software IT firstemerged with Exadata, then with the Sun acquisition. Since new hire was announced, ORCLstock is up 11%, and now needs fundamental follow-through that we expect to drive the 22%upside left to our $31 PT. ORCL’s 100% enterprise focus should shield from recent consumertech weakness.. Expect FQ1 results in upper half of guidance rangeOur $7,236M rev est. (Street $7,273M) rev est. implies 43% y/y growth vs. guid. +41-45%; EPS$0.36 (St. $0.37) vs. guid. $0.35-0.37. Checks suggest apps now in recovery phase, whichshould help drag along infrastructure sales. We assume overall license +8% y/y (apps 7%, infra.9%) vs. guid. 2-12% and easy yr ago comparison of -17%. In particular, EMEA has an easylicense compare of a neg. 20% constant FX growth in yr ago FQ1.. Valuation: Currently Trades at 12.8x CY11E P/EOur $31 PT is based on a P/E of 14.5x our PF EPS est. in 5-8 qtrs. P/E compares to 16xmedian in the last 5 years, and CY10E/11E EPS growth of 18%/12%.


UBS 9




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



Cisco Systems (CSCO.O) Nikos Theodosopoulos.....+1-212-7133286Analystnikos.theodosopoulos@ubs.com

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

Shubho Ghosh.................. +1-212 713 9903Associate [email protected]

Price (13 Sep 2010).....................US$21.2612-month rating......... Neutral (Unchanged)12m price target..........................US$25.00Mkt Cap.......................................US$123bn


Strategy Unchanged, Dividend Announced. Reiterates Growth Strategy, Emphasizing Architectural ApproachCisco reiterated its growth strategy at its financial analyst conference, indicating itscomprehensive architectural approach is its key competitive advantage. Cisco is pleased with itsproducts and innovation, revamping its entire portfolio in the last 18 mths, with over 50 customASICs. We see this as positive but note some competitors compete on software w/ standardhardware, including FFIV & RVBD.. Dividend Announced, Final Yield Expected In Spring, May Slow BuybacksDividend announced w/ final yield decision expected this Spring, w/ 1% representing theminimum, or US cash of ~$1.25B. The yield may be as high as 2%, but it depends on favorableoutcomes to US tax and repatriation policies. We estimate US FCF was ~$4B in FY10 (40% US,60% intl), and may be ~$5B in FY11. Thus, we expect less in shr buybacks 2011 vs. 2010,assuming no chg to repatriation law, which follows $7.8B and $3.6B in buybacks in FY10 andFY09.. Long-Term Growth Targets Unchngd, We Continue to See as ChallengingCisco continues to see its long-term rate at 12-17%, w/ mgmt providing no update to theOctober qtr, but noted the US remains challenged while int’l is more robust. Breaking down its12-17%, 9-10% is from the overall market, 3-4% from shr gain, 0-1% from emerging countries,and 0-2% from expansion into mkt adjacencies. We continue to view Cisco’s long-term tgts ashigh given its historical organic growth of 8-9%, or total growth of ~11% since FY03. LT OM tgtremains 28-31%.. Valuation—Maintain Neutral Rating and $25 Price TargetOur $25 price target is based on ~14x our revised CY11 EPS estimate of $1.81.

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

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

Price (14 Sep 2010).....................US$24.6212-month rating........ Prior: Neutral => Buy12m price target..........................US$33.50Mkt Cap......................................US$1.55bn


Upgrade to Buy as Near-term Correction is Overdone, Longer-termOutlook is Intact. Upgrade to Buy rating as correction is overdone; expect solid 4Q growthNetLogic’s share price has retreated 25% since it reported 2Q results on 28-Jul based on: 1)concerns about slowing sales growth, 2) Cisco’s F1Q guidance and its commentary aboutdemand uncertainty, and 3) recent market speculation about a slowdown within the Ciscosupply chain. We believe Cisco’s F1Q outlook and any resulting supply chain adjustments havebeen factored in NetLogic’s 3Q guidance and believe the outlook beyond 3Q is intact. With 36%potential upside to our unchanged $33.50 price target, we upgrade NetLogic to a Buy rating.. Key positives – Near-term trends in line; longer-term outlook intactUnderlying our confidence about NetLogic’s outlook are: 1) improving enterprise spendingtrends, 2) in-line Cisco supply chain trends, 3) back-end year weighted wireless capex, 4) long-tail for wireless backhaul spending, 5) longer-term multicore processor opportunity based ondifferentiation and execution.. Key risks – limited near-term catalysts, limited operating leverageWhile we see limited near-term catalysts, we believe even an abatement of concerns of weak4Q guidance would be positive. In addition, given expected limited operating leverage, earningsgrowth will be dependent on sales growth, which we believe can be achieved given NetLogic’ssolid execution track record.. Valuation: Upgrade to Buy Rating, Maintain $33.50 Price TargetOur DCF-based PT is $33.50 (20x our $1.70 2011 non-GAAP EPS estimate).


UBS 10

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




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



UtilitiesUtilities and E&C Julien Dumoulin-Smith..................+1 212 -713 9848

[email protected]

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

Jim von Riesemann........................+1-212-713-4260Analystjim.vonriesemann@ubs.com

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

Highlighting EPA Rule Opportunities. Overview of various environmental initiatives yields multitude of anglesWith several pending new regulations looming over the utility industry, the sector may yet seethe next wave of mandatory environmental capex through the next 5-7 year period. While weanticipate the level of investment remains largely a question of commodity prices, we directinvestors’ attention to the recently drafted CATR rules and pending HAP MACT review, due inMarch 2011.. UBS “Leaders in Power” call series provides insights into opportunitiesPrevious calls have highlighted Trona technology (May/10), IL generation with Mark Pruitt(June/2010), Activated Carbon with Calgon Carbon Corp. (July/10), and anticipated EPA policywith law firm, Hunton & Williams (Aug/10).. Upcoming event: 5th UBS conf. call to focus on bridging policy to capexOn 9/16 at 2pm ET, we will host a call with ICF consultants, Chris MacCracken and Steve Fine,who will bridge policy mandates to capex expectations. We intend to focus this call specificallyon how various regulations could mesh, and what control technologies (and by when) will provesuitable to meet more stringent regs.. E&C exposure: BWC/SHAW/URS/FLR; IPP’s: CPN and PEG benefitThe most exposed in the E&C’s include SHAW, BWC, URS, FLR. Among utilities, we focus onmerchant generators who do not have explicit recovery of investments, highlighting exposures:MIR/RRI, EIX, AEE, DYN and NRG. In applying an “apples-to-apples” comparison, we see AEEand NRG as having substantial remaining capex despite sizeable ongoing investments. Wecontinue to highlight CPN and PEG as LT beneficiaries.

-

Equity StrategyGlobal Equity Strategy Jeffrey Palma.................................. +1-203-719 1135

[email protected]

Christopher Ferrarone................... +1-203-719 [email protected]

Trevor McDonough.........................+1-203-719 3600Associate [email protected]

Global Flow Watch: Summer trends mixed. Net selling intensifies through AugustUBS client equity flow data has been generally consistent with market trends in recent monthsas we saw net buying of equities in 6 of 8 weeks during June and July before marketsdeteriorated in August and UBS clients became net sellers. Indeed net selling intensifiedthrough August as the MSCI AC World index dropped 3.7%, but stabilized along with markets inthe week ended 3 September.. Cyclical and Defensive activity mixed, Defensives more volatileWe saw the strongest net buying in Consumer Discretionary, Telcos and Healthcare in the 4weeks ending 3 September with the most net selling in Utilities, Consumer Staples andTechnology. Generally speaking we have seen greater flow volatility within Defensives over thelast month with weekly net buying ranging from +3.2% to -8.8% (net selling) while the range inCyclicals was -0.3% to -4.2%.. Long-only clients bigger sellers than hedge fundsOver the last several weeks we have seen considerably more net selling by long-only accountsthan hedge funds. Specifically, long-only accounts were net sellers in 5 of the last 6 weeks whilehedge funds were net buyers in 5 of those 6 weeks.. Buying N. America and selling the rest / GEM & Europe Flow WatchNorth America was the only major region to see net buying over the 4 weeks ending 3September. The most net selling was in Emerging Markets, Japan and the UK. Our GlobalEmerging Market and European Strategy teams have also released their respective Flow Watchpieces today.

-


UBS 11








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

[email protected]

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

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

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

Uneven acceleration in retail sales. Preview: IP forecast flat in Aug but Empire expected up in Sep.(1) Industrial output was probably unchanged in Aug (cons +0.2%), with weakness in auto andutilities output, but we forecast an on-trend reading for manufacturing excluding autos (UBSe0.5%). (2) We also forecast a rise in the current activity index in the Empire State (UBSe 10.0,cons 8.0, after 7.1). Regional manufacturing surveys, including the Empire State survey, hadbeen weaker than the national ISM index in August. (3) The rise in the mortgage applicationspurchase index over the past eight weeks appears to signal the start of some recovery in homesales, albeit from extremely depressed levels. The upcoming week’s data include the Labor Dayholiday, which could add volatility. (4) Petroleum prices probably boosted total import prices inAug (UBSe 0.9%, cons 0.3%), with nonoil prices rising only marginally (UBSe 0.1%).. Review: Retail sales 0.4%, but durables spending slowed. Inventories 1.0%(1) Retail sales rose 0.4% in Aug (cons & UBSe 0.3%, after 0.4%). Some details of the reportwere stronger—with sales ex autos +0.6% (cons 0.3%, UBSe 0.6%) and sales ex autos and gas+0.5% (cons 0.4%, UBSe 0.5%). This report was broadly in line with our forecasts and betterthan consensus expectations. However, it also included signs of a hesitant consumer: Big-ticketitems such as autos, furniture, and electronics were all soft, and the rise in overall spending wasentirely accounted for by nondurables such as food, gasoline, and clothing. Even so, realconsumer spending (including services) appears to have accelerated somewhat: We estimatethat it is rising at a 2.2% annual rate in Q3 through Aug, up from the 1.9% pace in H1. (2)Business inventories rose 1.0% in Jul (cons 0.7%, UBSe 0.9%). That compares with a 0.3% permonth average pace in Q2. The implication is more support from inventories for growth in Q3than in Q2. It appears that the extra inventories growth was intended; sales also picked up. (3)The NFIB small business optimism index rose 0.8% in Aug after a 1.0% decline the prior month.The trend continues to be sideways at a low level. (4) The TIPP/IBD economic optimism indexrose 2 points to 45.3 in Sep.

-

Equity StrategyGlobal Emerging Market Equity Strategy Nicholas Smithie.............................+1 212 713 8679

[email protected]

Stephen Mo....................................+44 20 7568 [email protected]

Jennifer Delaney, CFA................... +1-203-719 [email protected]

GEM Flow Watch: Summer Selling. New GEM flows productAlongside our colleagues in Global Equity Strategy who published their inaugural Global FlowWatch product in June, we are now rolling out a GEM flows product in alignment with them on amonthly basis. The data used is UBS equity client flow data which we aggregate by region andsector and by investor type.. Relating flows to market performanceNet buying and selling of GEM equities does broadly align with market performance. The sell-offin late 2008 coincided with net outflows while the rally of 2009 coincided with net buying.However, this relationship has weakened this year. Market performance is flat and the netbuying and selling of GEM along the way has not been a big driver of performance. We thinkthis is largely a function of total market volume which has been subdued this year. If thischanges, then our flow data could be a more important feature of market performance.. Net selling in AugustGEM saw net selling in August, a month where MSCI GEM was down 2.2%. GEM equities didoutperform the developed world which was down 3.8% over the same time period. Net sellingwas more pervasive by hedge fund investors which saw large outflows compared to long onlyinvestors.. Region and sector implicationsConsumer sectors suffered from heavy net selling whereas Telecoms and Healthcare benefitedfrom net buying. On a regional basis net selling was highest in Asia and LatAm with EMEA moreinsulated from outflows.

-


UBS 12








Required Disclosures

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

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

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

UBS Investment Research: Global Equity Rating Allocations

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

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

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

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

UBS Short-Term Rating Definition

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

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

KEY DEFINITIONS

Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months.Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, theequity risk premium).Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject topossible change in the near term, usually in response to an event that may affect the investment case or valuation.Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in thefundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.

EXCEPTIONS AND SPECIAL CASES

UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance


UBS 13

record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors suchas structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC).Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocksdeemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, theywill be identified in the Company Disclosures table in the relevant research piece.

Company DisclosuresCompany Name Reuters 12-mo rating Short-term

ratingPrice Price date

Ameren Corp.4,5,6a,16 AEE.N Neutral N/A US$28.15 14 Sep 2010Babcock & Wilcox Co16 BWC.N Neutral N/A US$21.94 14 Sep 2010Calpine Corporation6b,7,16 CPN.N Buy N/A US$12.79 14 Sep 2010Cardinal Health, Inc.4,6a,6c,7,16 CAH.N Buy N/A US$31.60 13 Sep 2010Cisco Systems Inc.2,4,6a,6b,6c,7,8,13,16,18a CSCO.O Neutral N/A US$21.26 13 Sep 2010Davita Inc.16 DVA.N Buy N/A US$64.58 13 Sep 2010Delta Air Lines Inc.2,3b,4,5,6a,13,16,20 DAL.N Buy (CBE) N/A US$10.67 13 Sep 2010Dynegy, Inc.16,19 DYN.N Neutral (CBE) N/A US$5.04 14 Sep 2010Edwards Lifesciences Corp16 EW.N Buy N/A US$57.41 13 Sep 2010F5 Networks, Inc.5,16,20 FFIV.O Neutral (CBE) N/A US$98.87 13 Sep 2010Fluor Corporation4,5,6a,6b,6c,7,16 FLR.N Buy N/A US$48.94 14 Sep 2010Foster Wheeler Ltd.5,16 FWLT.O Buy N/A US$24.40 14 Sep 2010Goodrich Corp.2,4,5,6a,6b,6c,7,16 GR.N Buy N/A US$71.35 13 Sep 2010International Paper2,4,6a,6b,6c,7,16,22 IP.N Buy N/A US$22.68 14 Sep 2010KBR, Inc.6c,16 KBR.N Buy N/A US$24.00 14 Sep 2010Martin Marietta Materials Inc.16 MLM.N Buy N/A US$77.65 14 Sep 2010MasterCard Inc.3a,6c,16,17 MA.N Buy N/A US$193.03 13 Sep 2010MeadWestvaco4,6a,6c,7,16 MWV.N Buy N/A US$23.86 14 Sep 2010Meggitt13 MGGT.L Buy N/A 293p 13 Sep 2010Mirant Corp16 MIR.N Neutral N/A US$10.53 14 Sep 2010NetLogic Microsystems Inc16 NETL.O Suspended N/A US$24.62 14 Sep 2010NRG Energy Inc.13,16 NRG.N Neutral N/A US$21.65 14 Sep 2010Oracle Corporation16,18b ORCL.O Buy N/A US$25.11 13 Sep 2010Protective Life Corp.5,6b,7,16 PL.N Buy N/A US$21.08 13 Sep 2010Public Service EnterpriseGroup5,6b,7,16

PEG.N Buy N/A US$31.93 14 Sep 2010

Riverbed Technology16,20 RVBD.O Neutral (CBE) N/A US$44.19 13 Sep 2010Rockwell Collins Inc.4,5,6a,6b,6c,7,8,16,18c COL.N Buy N/A US$59.13 13 Sep 2010Rowan Companies Inc.2,4,5,6a,16 RDC.N Neutral N/A US$29.69 14 Sep 2010RRI Energy Inc.6b,7,16,20 RRI.N Neutral (CBE) N/A US$3.74 14 Sep 2010Safran SA4,5,16 SAF.PA Buy N/A €20.25 13 Sep 2010Shaw Group Inc16,20 SHAW.N Neutral (CBE) N/A US$33.18 14 Sep 2010Steel Dynamics Inc.16,20 STLD.O Buy (CBE) N/A US$14.59 14 Sep 2010The Kroger Company6b,7,16 KR.N Neutral N/A US$21.04 13 Sep 2010TransDigm Group Inc.2,4,6a,16 TDG.N Buy N/A US$62.10 13 Sep 2010URS Corporation16 URS.N Neutral N/A US$38.32 14 Sep 2010Vulcan Materials4,6a,16 VMC.N Buy N/A US$37.87 14 Sep 2010

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

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

3a. UBS Limited is acting as adviser to DataCash Group plc on the sale of the company to MasterCard Inc.

3b. UBS Securities LLC is acting as joint dealer-manager on the announced tender for specific Delta Airlines and Northwest Airlinesbonds.

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

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


UBS 14

6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking servicesare being, or have been, provided.

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

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

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

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

16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.

17. UBS Limited is acting as Financial Adviser to DataCash in relation to the recommended cash offer from Mastercard.

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

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

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

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

20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds theMRA by 10% (compared with 6% under the normal rating system).

22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or theprior month`s end if this report is dated less than 10 working days after the most recent month`s end).

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

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

ANALYST CERTIFICATION

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

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


UBS 15

-


Global Disclaimer

This package 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 asUBS 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 issuitable 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 beconstrued 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 thesecurities, 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. Pastperformance 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 reportare 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 andcease 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 compensationis 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 isconsidered 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 notnecessarily 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, tradeexecution 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 lossor 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 UBSCapital 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 iscarried 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 mayhave 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 effectedat 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 othersource, 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 andis 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). UBSresearch 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 UBSSecurities 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 tohave 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 furFinanzdienstleistungsaufsicht (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 delMercado 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 topersons 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 CommissioneNazionale 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 SouthAfrica (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 authorisedFinancial 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 UBSSecurities 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 investorsonly. 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 FinancialServices 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: Distributedby 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 providedupon 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. Pleasecontact 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 institutionalinvestors 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 AustralianFinancial 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. NewZealand: 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 researchprepared 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., SeoulBranch. 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 SecuritiesMalaysia Sdn. Bhd (253825-x).

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 depictobjects or elements which are protected by third party copyright, trademarks and other intellectual property rights. © UBS 2010. The key symbol and UBS are among the registered and unregistered trademarks of UBS. Allrights reserved.