Financial Pacific: Equity Research (third party), July 29.2010

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UBS Investment Research

U.S. Morning Meeting Highlights

Global Equity Research

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Global StrategyEquity Strategy Jeffrey Palma p.13

Global Equity Strategy - Positioning for a more positive tone

EconomicsEconomics Maury N. Harris p.14

US Economic Comment - Mixed June durables & mortg apps up more

Rating and Recommendation ChangesNetLogic Microsystem, NETL.O Steven Eliscu p.13In Line 2Q Results and 2H Outlook, Limited Near-term Catalysts. Downgrade toNeutral12-month rating: Prior: Buy => Neutral, FY10E US$(0.03)=>US$0.09, FY11EUS$0.59=>US$0.52, PT Prior: US$34.50 => US$33.50, Mkt Cap US$2.06bn

Company UpdateMcDermott, MDR.N Steven Fisher, CFA p.10A view of stand-alone EPS and valuation12-month rating: Buy (Unchanged), FYE -, PT US$30.00, Mkt Cap US$5.60bnDarden Restaurants, DRI.N David Palmer p.5Shrimp and Sales12-month rating: Buy (Unchanged), FY11E US$3.40, FY12E US$3.81, PT US$54.00,Mkt Cap US$5.97bnExpress Scripts, ESRX.O Steven Valiquette p.8Everything On Track; Golden Opportunity12-month rating: Buy (Unchanged), FYE -, PT US$63.00, Mkt Cap US$23.5bnLAM Research Corp., LRCX.O Stephen Chin p.12Big beneficiary of capacity expansions12-month rating: Buy (Unchanged), FY11E US$3.75=>US$5.35, FY12EUS$4.60=>US$4.20, PT Prior: US$51.00 => US$56.00, Mkt Cap US$5.27bnCVS Caremark Corp., CVS.N Neil Currie p.5Validation Of Retail/PBM Business Model?12-month rating: Buy (Unchanged), FY10E US$2.84=>US$2.73, FY11EUS$3.22=>US$3.16, PT US$46.00, Mkt Cap US$43.5bnLas Vegas Sands Corp, LVS.N Robin M. Farley p.6Singapore Slings Estimates Higher12-month rating: Buy * (Unchanged) CBE , FY10E US$0.61=>US$0.77, FY11EUS$1.15=>US$1.35, PT Prior: US$30.00 => US$32.00, Mkt Cap US$17.6bnInternational Paper, IP.N Gail S. Glazerman, CFA p.3An overreaction?12-month rating: Buy (Unchanged), FY10E US$1.80=>US$1.95, FY11EUS$3.40=>US$3.25, PT US$43.00, Mkt Cap US$10.5bn

29 July 2010http://www.ubs.com/investmentresearch

This package has been prepared by UBS Securities LLC UBS 1ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 15*Under review (UR) and/or exception to core rating bands (CBE) - see page : 15UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may havea conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.

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Ryland Group, RYL.N David Goldberg p.4Despite Order Decline, We’re Optimistic12-month rating: Buy * (Unchanged) CBE , FY10E US$(0.38)=>US$(0.45), FY11EUS$0.45=>US$0.40, PT US$22.00, Mkt Cap US$0.72bnMeritage Corp., MTH.N David Goldberg p.4Upgrading to Neutral on Valuation12-month rating: Prior: Sell => Neutral * CBE , FY10E US$(0.08), FY11E US$0.60, PTUS$17.00, Mkt Cap US$0.54bnCognizant Corp., CTSH.O Jason Kupferberg p.11Can the growth train speed up more?12-month rating: Buy (Unchanged), FY10E US$2.12, FY11E US$2.36, PT US$57.00,Mkt Cap US$16.7bnVisa Inc., V.N Jason Kupferberg p.9F3Q shows strength of fundamentals12-month rating: Buy (Unchanged), FY10E US$3.94, FY11E US$4.91, PT US$107.00,Mkt Cap US$56.2bnAetna, AET.N Justin Lake, CFA p.7Even PBM Deal Viewed as Glass Half-empty12-month rating: Neutral (Unchanged), FY10E US$3.02=>US$3.20 , PT US$30.00,Mkt Cap US$11.7bnArrow Electronics, ARW.N Amitabh Passi p.9Strong Q2 results; Raising Estimates12-month rating: Buy (Unchanged), FY10E US$3.08=>US$3.85, FY11EUS$2.74=>US$3.61, PT Prior: US$30.00 => US$31.00, Mkt Cap US$2.95bnCommScope, CTV.N Amitabh Passi p.102Q10 Review: Margins, Guidance Fall Short12-month rating: Neutral (Unchanged), FY10E US$1.89=>US$1.71, FY11EUS$2.39=>US$2.16, PT Prior: US$29.00 => US$28.00, Mkt Cap US$2.78bnZions Bancorporation, ZION.O Erika Penala p.6Capital Moves Don’t Erase EPS Headwinds12-month rating: Sell (Unchanged), FY10E US$(3.26)=>US$(3.25), FY11EUS$(0.25)=>US$(0.30), PT US$12.00, Mkt Cap US$3.20bnAmazon.com, AMZN.O Brian Pitz p.11New Kindles should accelerate H/W and S/W sales12-month rating: Buy (Unchanged), FY10E US$2.78, FY11E US$4.20, PT US$165.00,Mkt Cap US$52.1bnCorning, GLW.N Nikos Theodosopoulos p.12Re-Iterate Buy Following 2Q Results12-month rating: Buy * (Unchanged) CBE , FY10E US$2.08=>US$2.18, FY11EUS$1.96=>US$2.06, PT US$25.00, Mkt Cap US$27.9bn

Industry UpdateAutomobile Manufacturers Colin Langan, CFA p.3

July 2010 Dealer Survey - Dealers Cautious on New SalesHealthcare Steven Valiquette p.8

U.S. Healthcare Distribution - PBMs - Update on PBM Industry Re: CVS/AET Deal

U.S. Morning Meeting Highlights 29 July 2010

UBS 2

Basic MaterialsInternational Paper (IP.N) Gail S. Glazerman, CFA..... +1 212 713

[email protected]

Price (28 Jul 2010)...................... US$24.1212-month rating...............Buy (Unchanged)12m price target..........................US$43.00Mkt Cap......................................US$10.5bn

Full-Year EPS2010E......................... US$1.80 => US$1.952011E......................... US$3.40 => US$3.25

An overreaction?. Share weakness seems an overreactionYesterday’s steep 5.5% drop in IP shares seems an overreaction to IP’s earnings report/outlook. Netting out puts & takes we view 2Q earnings quality as solid. We expect furthermomentum ahead as rising prices flow to the bottom line. IP’s markets remain tight with USbleached board and containerboard running >95% of capacity. While demand growth could/should slow as comps toughen and US macro growth moderates, volumes are still improving.. Raising estimatesWe are raising our 3Q EPS estimate to $0.82 from $0.75. This incorporates $50 mm expectedincome from land sale announced last week, offset by $95mm higher costs, mainly due tocompensation accruals. The key drivers of the expected 50% q/q pickup are higher pricing andlower maintenance expense. We have assumed relatively modest input cost relief. Our 2010e isnow $1.95 up from $1.80.. Showing disciplineEnding 2Q cash balance rose $122mm q/q to $1.87bn, fairly flat with year end. Debt is downabout $100mm from year end. IP just made a $500mm voluntary pension contribution. Theyreceived a further $34mm dividend from Ilim. Ilim’s investments in new pulp/paper capacity willbe self-funded. IP is investing $55mm cash in new paperboard capacity in China.. ValuationWe expect good earnings and disciplined use of cash as results improve. Our target remains$43-this assumes shares trade at 7x blend 2011e/normalized EV/EBITDA.

Consumer, CyclicalJuly 2010 Dealer Survey Colin Langan, CFA......................... +1-212-713 9949

[email protected] Cautious on New Sales. Forecast 12.0m July SAAR vs. 11.2m last year

Based on feedback from 48 survey respondents, we expect July SAAR of 12.0m, up 7% Y/Y.Our forecast falls right within the range of major industry estimates: we are higher than Ward’s(11.6m), but slightly below JD Power (12.2m).. Majority of conquesting from GM & Toyota; Ford remains well-positionedSurveyed dealers reported that 88% of conquested sales are coming from GM, Chrysler, andsurprisingly, Toyota. Relative to the last time we asked (October ’09), dealers that believe theyhave conquested sales from Toyota have increased from 11% to 33%, illustrating the negativerecall impact. Importantly, reports of Ford conquesting are much lower, at a stabilized 7% - 9%in the last year.. Dealers surprisingly bullish on P&S and bearish on full-year SAARSurprisingly, the majority of dealers expect both July and full-year P&S sales to be higher Y/Y.This is more bullish than we would expect, given our view that fewer cars sold in 2009 shouldlead to fewer servicing opportunities this year. Further, most dealers pointed to an annual SAARrange of 10.6m – 11.0m, well below our 11.7m estimate for 2010.. Despite dealer perspective, we remain bullish on a 2010 sales recoveryWhile we are slightly cautious of the bearish survey results, we continue to believe sales willrecover in 2010, especially given the selling rate is still below scrappage (12.3m). We maintainour Buys on Ford and SAH, and our Sell on AN.

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UBS 3

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mailto:[email protected]


Ryland Group (RYL.N) David Goldberg............... +1-212-713 [email protected]

Susan Maklari................... +1-212-713 [email protected]

Price (28 Jul 2010)...................... US$16.3412-month rating............ Buy * (Unchanged)12m price target..........................US$22.00Mkt Cap......................................US$0.72bn

Full-Year EPS2010E.................... US$(0.38) => US$(0.45)2011E......................... US$0.45 => US$0.40

*Exception to core rating bands - seepage 15

Despite Order Decline, We’re Optimistic. 2Q EPS In Line with ExpectationsRyland reported 2Q EPS of ($0.08), ex the loss related to debt repurchases & based on anormal tax rate, ahead of our ($0.09) forecast. HB operations outperformed our expectations, assales +37% YOY (vs. our +15% est.) & EBIT margins ex charges were 5.4% (~300bps ahead ofour est.). Although these factors added ~$0.15 to EPS, they were largely offset by greaterlosses in financial services, reducing EPS by ~$0.07. Finally, higher than expected impairmentreduced EPS by ~$0.05.. Lower Orders Reflect More Cautious ApproachUnit orders were -44% YOY, below our -5% forecast, reflecting the impact of Ryland’s moreconservative build to order operating strategy. Although we believe this will drive LT benefits, ithas negatively impacted NT results as we believe the co. lost sales to competitors with morestanding spec to satisfy demand generated by the tax credit expiration. We continue to believethis conservative approach will prove prudent over time as conditions stabilize.. Revising Estimates; Maintain PT and Buy RatingReflecting the impact from weaker order growth, we are reducing our ‘10E EPS to ($0.45) from($0.38); our ‘11E EPS goes to $0.40 from $0.45. Forward years are unchanged. Further, thesechanges are not sufficient to impact our $22 PT. We maintain our Buy rating, as we believe therisk/reward trade off remains attractive.. Valuation: PT $22 is 1.2x our Trough Book Value ForecastOur $22 PT is 1.2x our trough BV est., ahead of the group avg. Mgmt will host a call today at12pm, Dial: (877) 644-1284.

Meritage Corp. (MTH.N) David Goldberg............... +1-212-713 [email protected]

Susan Maklari................... +1-212-713 [email protected]

Price (28 Jul 2010)...................... US$16.8412-month rating...... Prior: Sell => Neutral *12m price target..........................US$17.00Mkt Cap......................................US$0.54bn

Full-Year EPS2010E...........................................US$(0.08)2011E............................................. US$0.60


Upgrading to Neutral on Valuation. Recent Pull-Back Leaves MTH Fairly ValuedSince the beginning of May, MTH has declined 33% vs the -29% group avg. In turn, the stocknow trades at 0.9x tang BV. Although this pullback has made us more constructive, we expectnear-term catalysts for housing will be negative, leaving us on the sidelines. That said, webelieve Meritage’s current valuation fairly reflects fundamentals. In turn, we are upgrading ourrating to Neutral from Sell.. More Defensive Operating Strategy Limits DownsideThrough the downturn, we expected Meritage’s more defensive strategy would outperformpeers. We expect this to hold true again, as conditions adjust following the expiration of the taxcredit, given the company’s: 1) land light model, which focuses on optioning lots; 2) increasingsales in newer communities, which carry margins 500-600bps higher than legacyneighborhoods; and 3) sufficient liquidity, with no debt due until 2015. In our opinion, this shouldlimit further downside.. Despite Recent Weakness, We Continue to Expect a Gradual RecoveryWe continue to believe fundamentals in housing are approaching a trough. That said, underlyingconditions have weakened recently, reflecting the pull forward in demand experienced from thetax credit and declining consumer confidence. Further, we anticipate continued uncertainty overthe near term. This should ease, however, toward the end of the year as signs ofstabilization—and a gradual recovery—become evident.. Valuation: $17 PT Based on 0.9x our Trough BV EstimateOur $17 PT is 0.9x our trough book value estimate, slightly below the average.


UBS 4

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Darden Restaurants (DRI.N) David Palmer................... +1-212-713 [email protected]

Stefan Karlsson................. +1 212 713 2228Associate [email protected]


Full-Year EPS2011E............................................. US$3.402012E............................................. US$3.81

Shrimp and Sales. Higher Shrimp Prices Unlikely to Impact DardenThere still seems to be some concern that higher shrimp prices—currently up 30% YOY—couldbe a significant negative for Darden. Hypothetically, this increase (with shrimp representing10%+ of food costs) could create a hit to margins ex-price increases. However, we believehigher shrimp prices will prove temporary and that prices will ease well before contracted supplyruns out at the end of FY11.. What is Going on with the Shrimp Market?2010 has been an unusual year for shrimp producers. A combination of disease in Indonesiaand Mexico, hot and dry weather during the seeding season in Asia, and the gulf oil spill, ledbuyers to panic—exacerbating a market that was already coping with short supply. However,higher prices and a strong dollar are attracting more production, and Thailand has provenparticularly resilient at filling supply gaps. Based on this and a ~3 month growth period forshrimp, we believe the fundamental pressure on shrimp prices should ease by the end of CY10.. Sales Momentum Improving Lately,We believe it is likely that F1Q sales started out below Darden’s target of 2-3% same storesales growth, but have subsequently risen to at or above that level. With almost half the quarterstill remaining, it is not clear to us yet whether the company will achieve this targeted level.However, if recent improved industry trends continue, the result would likely be EPS and stockupside.. Valuation: $54 Price Target; Buy RatingOur $54 price target is based on UBS VCAM and equals 15x our CY11 EPS estimate.

CVS Caremark Corp. (CVS.N) Neil Currie........................ +1-203-719 [email protected]

Steven Valiquette.............. +1-203-719 [email protected]

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



Validation Of Retail/PBM Business Model?. CVS 2Q OK despite retail sales softness, guidance takes minimal hitCVS reported an inline quarter of 68c (ex items) in spite of a challenging environment, butrevised guidance downward - partially (~50% of revision) due to lower estimated retail sales for2010, the remainder in legal costs and dilution of the Aetna deal. On the whole, we view the tworecent events as validation of the combined CVS/Caremark business model and we maintainour Buy rating.. PBM back on trackExcluding the Aetna deal, the company has so far won $1.2B in gross new business and $350Mof net new business for 2011. Including the Aetna deal the company has won $8.6B in net newbusiness, a shot in the arm for a business that stumbled a year ago. Maintenance Choicecontinues to gain acceptance, with 525 clients now signed, covering 6.3M lives. Moreover, therapid settlement of the WAG/CVS dispute caused minimal impact to the PBM business, quietingfears.. New EPS guidance indicates minimal impact of operations, model changesCVS 2010 EPS guides to a range of $2.68 to $2.73 from a range of $2.77 to $2.84, whichincludes an assumption of 4c in legal accrual, 4c impact of softer retail sales and 1c-2c in theinitial dilution of the Aetna deal. Our model EPS changes are as follows; FY2010 EPS to $2.73from $2.84, w/ no repurchases, FY2011 to $3.16 from $3.22, w/ completion of the current $2Brepurchase authorization. Earlier repurchase activity could provide upside to current estimates.. Valuation: Reiterate Buy rating and $46 price targetOur $46 price target is comprised of about a 14x P/E assumption on our 2011 $3.16 EPSestimate.


UBS 5

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Las Vegas Sands Corp (LVS.N) Robin M. Farley............... +1-212-713 [email protected]

Robert W. Carroll.............. +1-212-713 [email protected]

Louise Cheung, CFA......... +1 212 713 3186Associate [email protected]

Price (27 Jul 2010)...................... US$26.6912-month rating............ Buy * (Unchanged)12m price target.....Prior: US$30.00 =>US$32.00Mkt Cap......................................US$17.6bn



Singapore Slings Estimates Higher. Reiterate Buy Rating on Strong Q2’10 ResultsLVS reported Q2’10 adj. EPS of $0.17 vs. UBSe $0.15 and cons. $0.09. Property EBITDA was$474M vs. UBSe $464M and cons $415M. Strength driven primarily by Singapore with Macauand LV in line with expectations. We maintain our optimistic view on the Singapore mkt andreiterate our Buy rating on LVS shares.. Singapore Only Getting Warmed UpSingapore net revs $216M vs our est of $294M, but $25M lower from low hold and hotel not fullyramped up in its opening qtr. Margin much stronger than our est, so EBITDA of $95M roughly inline with our $97M est. and well ahead of $66M cons. After adj for poor VIP hold, we estEBITDA could have been closer to $117M, with EBITDA margin in high 40% range rather thanthe reported 43.7%. Given the expected ramp up in hotel revs, gaming hold and gaming vols,we believe MBS is likely only just getting warmed up & will cont. to ramp thru ‘10.. Raising 2011 Singapore EstimatesRaising ‘11 Singapore EBITDA est. to $989M vs prev $870M on higher EBITDA margin of 50%vs. prev 44%, with no change to rev outlook. LV EBITDA also up slightly as RevPAR and hold-adjusted margin slightly better than we expected. 2010e EPS now $0.77 (up from $0.61) with2011e EPS of $1.35 (up from $1.15).. Valuation: Raising Target to $32 (Up from $30)Target based on 9-10x LV 2010E EBITDA, 14.5x Macau EBITDA, 15x Singapore EBITDA aswell as PV of royalty stream from LVS’ Macau operations to the parent, PV of LVS’ share ofSites 5&6 and Four Seasons condo sales.

FinancialZions Bancorporation (ZION.O) Erika Penala.....................+1-212-713 1121

[email protected]

Elena Kim.......................... +1 212 713 4057Associate [email protected]

Joshua Rogers.................. +1-212-713 2364Associate [email protected]

Price (28 Jul 2010)...................... US$21.2612-month rating...............Sell (Unchanged)12m price target..........................US$12.00Mkt Cap......................................US$3.20bn

Full-Year EPS2010E.................... US$(3.26) => US$(3.25)2011E.................... US$(0.25) => US$(0.30)

Capital Moves Don’t Erase EPS Headwinds. Maintain Sell ratingWe maintain our Sell rating, following ZION’s entry into swaps that transfer credit risk from$1.2bn in TRUPs CDOs to its counterparty. This move could decrease the size of any TARP-rel.capital raise. But, our rating is predicated upon shares not reflecting a slow EPS recovery andlower “normal” returns, as our ests. do not include dilution. No mat’l change to ’10E but we lower’11E to ($0.30) from ($0.25) and ’12E to $0.85 from $1.00. The swap spread offsets our cum.est. losses for the TRUPs book, and we assume TARP will be repaid in ’11 not ’12.. Capital maneuvers may not stave off dilutionThe swaps reduce the risk weight for these secs. to 20% from 455%, accretive to 2Q tier 1 by112bp. Still, this does not take potential dilution of 7% to ‘12E (if ZION had to raise 50% ofTARP) from a common issuance off the table as it is unclear that regulators will allow TARPredemption without an accompanying issuance. Moreover, the global focus on capital standardreform implies that absolute levels, composition of tier 1 capital, and risk weighting definitionsremain moving targets.. Slow earnings recovery, challenged “normal” returns underpins cautionWe believe that: 1) slower credit heal due to a protracted recovery in CRE values and debt svc;and 2) muted top-line power, given a difficult interest rate backdrop, NIM “noise” from sub-debtconversions, and slow recovery towards net loan growth will drive material EPSdisappointments to consensus estimates.. Valuation: Still not signaling valueZION trades at 1.2x TBV and 28x our 2012E. Our 3-prong method drives our PT.


UBS 6

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HealthcareAetna (AET.N) Justin Lake, CFA............. +1-212-713 2765

[email protected]

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

Price (28 Jul 2010)...................... US$27.5512-month rating......... Neutral (Unchanged)12m price target..........................US$30.00Mkt Cap......................................US$11.7bn

Full-Year EPS2010E......................... US$3.02 => US$3.20

Even PBM Deal Viewed as Glass Half-empty. Second half guidance appears to bake in very conservative assumptionsPost ~$0.30 Q2 beat, AET increases FY’10 EPS outlook to $3.05-$3.15 (+$0.36 vs. prior exPBM impact), including only $1.04-$1.14 of earnings power in second half of year (vs. $1.81 in1H ex-PYD), which appears to embed very conservative assumptions. Notably, despite costtrend outlook coming down by 100bps, implied 2H’10 comm’l MLR guidance remainsunchanged at ~84.5% as company takes cautious view around sustainability of recent declinesin utilization. Our FY’10 EPS estimate goes to $3.20 (from $3.02) to reflect Q2 upside, whileFY’11E intact at $3.04.. PBM contract not perfect, but certainly didn’t seem disappointing at 9xWhile we would have liked to see a cash component to PBM deal w/ CVS, this morning’sreaction somewhat puzzling at current valuation. Delayed earnings accretion probably didn’thelp, with modest dilution in 2010 of $0.06, no impact to ‘11 until upside comes through in 2012at $0.30. While WLP received $4.7B upfront coupled w/ $350m annual drug savings w/ its PBMsale, AET did retain ownership. Lack of cash component not a positive read-thru for Cigna givencompany’s need for cash to offset under-funded pension (~$1B) or use to re-insure/ring-fenceVADBe.. AET acknowledges reform cost pressures, NAIC may be pushed backWhile not giving point specific #’s mgmt did acknowledge pressure on cost/rates from reformcost trend mandates (UBS est. 2-4%) but reiterated commitment to comm’l margin improvementstrategy in ‘11. Finally, NAIC announced updated CC schedule including calls thru 8/23, likelypushing rule to early Sept at earliest.. Valuation: Neutral Rating, $30 Price TargetOur $30 price target is based on a target multiple of ~10x our 2011 EPS estimate of $3.04.


UBS 7

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Express Scripts (ESRX.O) Steven Valiquette............ +1-203-719 [email protected]

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


Full-Year EPS

Everything On Track; Golden Opportunity. 2010 Earnings Remain On Track for All PBMsExpress Scripts reported 2Q10 EPS of $0.60 Wed night that exceed the Street consensus by apenny, and the company raised full-year guidance. This comes on the heels of both Medco’s2Q10 EPS beat and full-year guidance raise, and CVS Caremark’s in line 2Q10 results andunchanged full-year PBM guidance. Thus, PBM industry earnings are fully on track in 2010, andwe believe continued stock weakness relates more to 2011 from both a pricing and generic Rxperspective.. PBM Industry Consultant Says No Pricing Issues in 2011 Selling SeasonBased on discussions with our PBM industry consultant, we still believe that pricing in theongoing 2011 selling season is not any more aggressive than normal industry levels, and thusbelieve concerns on this are overblown. This follows both CVS and MHS stating on their 2Qcalls that they are not seeing more aggressive pricing for ‘11, and we expect to hear the samefrom ESRX Thurs morning as well.. 33% EPS Growth in 2Q10; 40% Expected in 2010; 26% Expected in 2011ESRX upped 2010 guidance to $2.45-2.50. Our $2.50 est. (+40%) is unchanged.. Valuation: Adding ESRX to UBS Alpha Preferences ListWe continue to believe that ESRX is the PBM least dependent on the generic drug pipeline togrow EPS in 2011 due to the expected Next Rx synergies, which should contribute $0.65-$0.70of incremental EPS over the next 18 months ($600 mil incremental EBITDA). We believeinvestors will ultimately share our view that ‘11 pricing is not an issue, and thus we add ESRX tothe UBS ‘Alpha Preferences’ list. Our $63 price target is based on a P/E of 20x our $3.15 EPSestimate for ‘11.

U.S. Healthcare Distribution - PBMs Steven Valiquette............................+1-203-719 [email protected]

Neil Currie....................................... +1-203-719 [email protected]

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

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

Update on PBM Industry Re: CVS/AET Deal. CVS/Aetna PBM Deal comparison to ESRX/WLP PBM DealThe CVS Caremark / Aetna deal announced today is somewhat different than the ExpressScripts / WellPoint (NextRx) deal announced last year. While ESRX paid over $4 bil for theability to recognize the full NextRx PBM annual profits for the next 10 years, CVS Caremark isactually paying $0 upfront, and instead will recognize only a portion of the profits from the AetnaPBM operations over 12 years. Aetna will retain mfr rebates and potentially other economics aswell.. Initial Aetna EBITDA/claim ~$0.50 for CVS in Year 1 but ramps to ~$2.00Table 1 on the next page shows an accretion/dilution table to back into the approximateEBITDA/claim for the AET book of business for CVS starting 1/1/2011. Given that Aetna willkeep some economics, we estimate that this new business will have approximately ~$0.50 inEBITDA/claim in 2011 for CVS, but will ramp to approximately $2.00 in EBITDA/claim through2014.. Implications for ESRX and MHS from this CVS/AET TransactionIn our view, there is no expected impact on either ESRX or MHS as a result of this transaction.Both companies could benefit from some PBM customer attrition, but it is unlikely to be material.Some investors may have thought that MHS would be more likely to strike a deal with Aetnathan CVS, but this was not part of our investment thesis on MHS and thus does not change ourview. By contrast, we think this additional ‘structure’ of an independent/captive PBM deal couldactually increase the probability of a MHS/UNH deal. Finally, the 2010 guidance revisions fromCVS today had nothing to do with its PBM operations, and thus there is no negative read-through for ESRX when they report after the close today, in our view.

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UBS 8

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IndustrialArrow Electronics (ARW.N) Amitabh Passi................. +1-415-352 5537

[email protected]

Price (28 Jul 2010)...................... US$24.4412-month rating...............Buy (Unchanged)12m price target.....Prior: US$30.00 =>US$31.00Mkt Cap......................................US$2.95bn


Strong Q2 results; Raising Estimates. Q2 Results above seasonality; Q3 at low-end of seasonality for IT systemsARW reported Q2 Revs/EPS of $4.6b/$1.01 vs. UBSe $4.4b/$0.79 and cons at $4.4b/$0.81(Revs up 9% q/q; 36% y/y), with both Components (GC) and IT systems (GECS) aboveseasonality. Proprietary servers were strong in Q2 (+21% q/q), and we foresee strength in 2Hdue to product ramp at a big supplier. For Q3, the company guided GECS to low end ofseasonality and GC above seasonality.. Btb again above 1.1, flat vs. Q210; lead times stretched out furtherBookings increased continually in the qtr and GC Btb was 1.1+ across geographies, flat q/q.Average lead times stretched further to 11-19 wks from last Qtr’s 10-18 wks (normal ~ 8-10 wks)with increases in discretes, analog and electromechanical, while passives came in by 1.5weeks. For Q3, the company expects lead times to be stable to up for analog, EM, passives anddiscretes, albeit at elevated levels.. Inventory up on tight supply, healthy demand, and strategic investmentsWe believe the 22% q/q inventory build in absolute terms (DOI + 2 days q/q to 37) was primarilydue to fulfilment of orders of longer lead time components towards the end of the Qtr and due tosome strategic investments for Q3. We believe inventory from acquisitions did not have anymaterial impact. This bears watching.. Valuation: Maintain Buy; Price target goes to $31We are raising our ests and our new CY10/CY11 Rev/EPS ests go to $18.3b/$3.85 and$17.4b/$3.61, from $17.1b/$3.08 and $16b/$2.74, respectively. We raise our PT to $31 (from$30) based on VCAM: WACC 10%; LT rev growth 6%; LT EBIT margin 3.8%. Our PT moves upon higher near-term estimates.

Visa Inc. (V.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 (27 Jul 2010)...................... US$75.7012-month rating...............Buy (Unchanged)12m price target........................US$107.00Mkt Cap......................................US$56.2bn


F3Q shows strength of fundamentals. P&L and key metrics look solid for F3QV’s print looks in-line to slightly better than expected. Global payment volume growth of +14%(const currency) edged up slightly last quarter and was in-line with UBSe – while US paymentvolume of 13.7% seems to imply a modest slowdown in June vs. Apr/May, Asia/Pac, LatAm,and CEMEA performed better than UBSe. Net revs of $2.03B beat UBSe/Street by 3%(cross-border had biggest beat vs. UBSe), rebates at 16.2% of net revs were 130 bps betterthan UBSe, and EPS of $0.97 beat our model/Street by $0.03/$0.04 (helped by lower tax rate).. F10/F11 guidance reiterated, as anticipatedV reiterated F10 guidance (high end of 11-15% net rev growth, high end of 16-17% rebates/incentives, mid-high 50% op margin, >20% EPS growth) and its F11 outlook for >20% EPSgrowth. We believe this was expected, and would anticipate more detailed F11 guidance(including top-line) next quarter.. Key questions for today’s 5pm ET call (888-790-4410; Pwd: 072810)1) July MTD volume and txn growth trends (y/y comps maybe a little tougher, as cited by AXP),2) any additional commentary on regulatory impacts (probably not much given sensitive natureof the subject and the fact that the Fed has 9 months to act, 3) will higher professional/consulting expense in F3Q persist, 4) updates on financial impact of CYBS acquisition, 5) coloron key growth initiatives (prepaid, e-commerce, emerging markets, commercial). Valuation: Maintain Buy; $107 PT (based on 19x C11E EPS/DCF)We will revisit our model after today’s call.


UBS 9

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McDermott (MDR.N) Steven Fisher, CFA......... +1-212-713 [email protected]

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


Full-Year EPS

A view of stand-alone EPS and valuation. MDR and BWC are trading when-issuedWith MDR and BWC now trading on a when-issued (W/I) basis, we publish this report toaddress some of the frequently asked questions we have received, to provide a view of stand-alone EPS and to preview Q2 (light bookings).. McDermott (MDR): Oil prices/capex and execution key driversKey growth drivers are oil prices and upstream capex. While the global macro outlook reflectsmodest growth, oil prices remain supportive of upstream capex, rig counts are rising, and capexforecasts indicate growth. We present a low, medium and high EPS scenario analysis, whichsuggests stand alone ’11 EPS could range from $0.98-1.30. Key prospects include Barzan,Liwan, GOM. Peers trade at 13x ‘11 EPS on avg. The W/I trades at 11x, a slight discount to themid-case scenario.. B&W (BWC): Defense spending, power demand, energy policy key driversWe assume solid growth from Navy submarine pgm, nuclear fuels improvement, and stableDOE/NNSA profits. We assume pent up demand for utility maint is released, and air qualityspending ramps up over the next 12-18 mos. We assume US/European new boilers struggle,but emerging markets could add modestly. Stand alone EPS could be in a range of $1.44-1.90.Peer co’s trade at 13x ‘11 EPS. The W/I trades at 14x, a premium to the mid-case scenario.. Valuation: Our $30/share target reflects sum of parts and P/E analysisThe P/E based analysis uses 14-15x on 2011e EPS (hist P/E 5-30x).

TechnologyCommScope (CTV.N) Amitabh Passi................. +1-415-352 5537

[email protected]

Price (28 Jul 2010)...................... US$26.0712-month rating......... Neutral (Unchanged)12m price target.....Prior: US$29.00 =>US$28.00Mkt Cap......................................US$2.78bn


2Q10 Review: Margins, Guidance Fall Short. 2Q10 Revs/EPS $838m/$0.55 (incl $0.05 benefit from lower taxes)CTV 2Q10 Revs/EPS of $838m/$0.55 compared to UBS-e of $828m/$0.52 and cons at$833m/$0.54. GM of 29.5% came in below our est of 30.3%, with OM of 12% also shy of our12.5% est. The $0.55 reported EPS figure included a $0.05 benefit from a lower tax-rate.Margins came in below expectations in all segments with the exception of WNS, affected bylower pricing, higher costs and mix. We believe WNS margins benefited from strength in indoorwireless business.. Enterprise / NA Wireless trends good; Intl wireless soft spotAs we recently wrote in our CTV preview note, we expected good revenue trends for Enterpriseand NA wireless partially offset by supply chain constraints, lacklustre intl wireless sales, andsome seasonality. We believe these factors affected 2Q results and are affecting 3Q guidance.We believe CTV sales in the Indian wireless market were weaker than expected in 2Q10,~$25m lower in 2Q10 compared to last year’s qtrly levels. Activity in China remained weak too.Both markets hold the potential of an uptick in sales in 2H10.. Adjust estimates; look for addl clarity on demand drivers and timingOur CY10/CY11 Revs/EPS ests go to $3.2b/$1.71, $3.4b/$2.16 from $3.2b/$1.89 and$3.4b/$2.39, resp. Should perf. targets miss, lower bonus accruals could lower SG&A in 2H10,with modest addl savings in 2011 from Omaha plant closure.. Valuation: Maintain Neutral; lower price target to $28PT based on VCAM: WACC 10% (was 9.5%); LT rev growth 3.9% (was 4%); and LT EBITmargin 11.5-12% (was 12%). The implied CY11 PE is 13x.


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Amazon.com (AMZN.O) Brian Pitz..........................+1-212-713 [email protected]

Brian Fitzgerald................. +1-212-713 [email protected]

Kaizad Gotla......................+1-212-713 2603Associate [email protected]

Price (28 Jul 2010).................... US$117.1312-month rating...............Buy (Unchanged)12m price target........................US$165.00Mkt Cap......................................US$52.1bn


New Kindles should accelerate H/W and S/W sales. Amazon launches two new versions of the KindleAmazon launched the third generation of its 3G Kindle (originally launched in 07), including asleeker form factor, lighter weight, up to one month of battery life, and 2x the storage space.Amazon had previously noted the growth rate of Kindle device unit sales had tripled since itreduced the price from $259 to $189 in June. We expect today’s announcement to drive furtheracceleration of Kindle hardware and software units. Please see page 3 for a detailed eReadercomparison.. Wi-Fi only Kindle a good idea for reaching the casual readerThe new Kindle Wi-Fi at $139 competes directly with B&N’s Nook which is priced at $149. Webelieve the lower price point should drive further adoption among casual readers or infrequenttravellers that don’t require a 3G connection. In addition, integration with FaceBook and Twitterincreases the stickiness of the device(s).. Kindle can now compete as a stand-alone eReaderWith some of the lowest prices, best features, and a selection of over 630k titles, we believeKindle is now well-positioned to take share from other eReaders. In addition, we believecompetition from higher price point multi-use tablets is somewhat mitigated as the Kindlecompetes as a stand-alone eReader.. ValuationOur $165 PT is based on our DCF (12% WACC; 4% LTGR).

Cognizant Corp. (CTSH.O) Jason Kupferberg........... +1-212-713 [email protected]

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

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



Can the growth train speed up more?. A solid beat and raise quarter should be enough to sustain sharesSentiment and expectations are relatively high heading into CTSH's 2Q results on 8/3,especially following stronger than expected volume growth reported by offshore comps. In ourview, if CTSH can beat 2Q rev guidance by ~2% (see Charts 1 & 2) and raise '10 revenuegrowth guidance by ~3% (a realistic scenario), that should sustain shares. We expectmanagement to continue sounding a vigilant tone regarding Europe and discretionary spending(already reflected in guidance).. Next year's top-line growth is key to the stockIn our view, the Street does not see much suspense associated with '10 results for CTSH. Sothe key to the stock over the next 6-12 months is CTSH's 2011 revenue growth - sell-sideconsensus is currently 21%, which would reflect deceleration vs. '10. However, if CTSH canultimately achieve 25%+ revenue growth next year, then we believe the stock still has ampleheadroom. We are also mindful that EPS growth will slow next year because of likely India taxholiday expiration.. Key 2Q topics: pricing, wage inflation, Europe (only 7-8% revs from euro)We expect CTSH to reiterate its expectation for a slight pricing tailwind in 2H (price actionsalready taken). We do not believe the recent resurgence of wage inflation in India will impedeCTSH's ability to achieve its traditional 19-20% operating margin range (offsets are pricing,utilization, onshore/offshore mix).. Valuation: Maintain Buy and $57 PT (based on 23x C11E EPS/DCF)CTSH remains the best growth story in IT Services, but upside to our price target has becomemore limited.


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

Corning (GLW.N) Nikos Theodosopoulos.....+1-212-7133286Analystnikos.theodosopoulos@ubs.com

Amitabh Passi................... +1-415-352 [email protected]

Price (27 Jul 2010)...................... US$17.6212-month rating............ Buy * (Unchanged)12m price target..........................US$25.00Mkt Cap......................................US$27.9bn



Re-Iterate Buy Following 2Q Results. Gorilla Glass Ramping StronglyGLW revised upward its 2010 target for Gorilla glass to $250m from $200m, up from $80m in2009. The first TV cover glass win will add several hundred million in incremental 2011 revssupporting our $600m est for Gorilla glass in 2011. While lower than corporate average GM,Gorilla is incremental to existing LCD business and a driver for multiple expansion in our viewgiven the large new market oppty.. LCD Drivers Intact; Short Term Inventory Overhangs StockWe expect 27% LCD volume growth for 2010 (up from 25%) for GLW and 16% for 2011 givenglobal growth of TVs (up ~30% in 2010). We see upside to 2011 volume forecast if TVreplacement cycles shrink in the US and Europe as we have seen in Japan. Inventory buildgoing into 3Q at retail and panel makers, however, is creating overhang on stock. GLW guidefor flat LCD growth in 3Q, however, is below seasonally strong 3Q limiting risk of adisappointment in our view.. Capex Rising, Free Cash Flow Generation Remains IntactGLW capex forecast of $1.2B in 2010 and $2B+ for 2011 to support expansion in China formultiple businesses (primary focus in LCD and Auto) and ramping Gorilla capacity is supportiveof growth in China and Gorilla globally. We still see CFO exceeding capex by $1.8B in 2010 and$550M in 2011.. Valuation: Maintain Buy and $25 price targetPT based on DCF: WACC 10%; LT Rev growth 7%; LT EBIT margin 20%.

LAM Research Corp. (LRCX.O) Stephen Chin................... +1-212-713 [email protected]

Price (28 Jul 2010)...................... US$41.6612-month rating...............Buy (Unchanged)12m price target.....Prior: US$51.00 =>US$56.00Mkt Cap......................................US$5.27bn


Big beneficiary of capacity expansions. Solid Jun-10 results; Guides shipments up q/q for both Sep-10 and Dec-10Lam’s Jun-10 sales and EPS of $695M and $1.17 exceeded its guidance of $650M and $0.94with EPS upside due to $0.14 from higher than expected sales/ops and $0.09 from a lower taxrate of 15% (versus 20% in Mar-10). Lam’s Jun-10 shipments of $694M were just below its$700M guidance due to 4 customer push outs. Lam guided Sep-10 shipments to $810M (up17% q/q) and expects Dec-10 shipments to be up q/q as it likely ships tools to all of itscustomers.. Well positioned to benefit from foundry and logic customers in 2H10While Lam estimates 2H10 could see capacity expansion by memory customers of 300k wafersper month, Lam expects stronger shipments growth from its foundry customers (likely TSMC)and logic customers (likely Samsung’s fab in Austin) where Lam enjoys dominant share. Lamalso reported that its Sep-10 gross margin is flattish q/q at 46.5% despite the 10% q/q salesgrowth but its Dec-10 quarter should see greater improvement and track back above its 47%+long term model.. Raising estimates given better outlook for steady shipments thru 1H11Lam guided Sep-10 sales and EPS to $790M and $1.35 which was much higher than with thepre-call consensus of $670M and $0.98. We adjusted our FY11 and FY12 EPS estimates to$5.35 and $4.20 compared to $3.75 and $4.60 previously.. Maintain Buy rating: Increasing price target to $56 from $51Our new 12-month price target is based on applying a 12x P/E multiple to our CY11 EPS of$4.65 (up from 4.25 previously). We note that Lam has $7.54/share in net cash and estimate itcan generate another $5/share in free cash flow FY11.


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

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

Price (28 Jul 2010)...................... US$32.8012-month rating........ Prior: Buy => Neutral12m price target.....Prior: US$34.50 =>US$33.50Mkt Cap......................................US$2.06bn

Full-Year EPS2010E.......................US$(0.03) => US$0.092011E......................... US$0.59 => US$0.52

In Line 2Q Results and 2H Outlook, Limited Near-term Catalysts.Downgrade to Neutral. Downgrade to Neutral, as fairly valued, tweak down PT on lowered EBITeAs NetLogic reported in line 2Q10 results and 2H10 outlook, our revised revenue estimates arelargely unchanged, as we believe its secular growth drivers are intact. However, we see limitednear-term catalysts that could provide an upside surprise to growth based on expectations for:1) muted macro improvements, 2) the ramp of NetLogic content-laden LTE wirelessinfrastructure and IPv6 switch/routers as well as its XLP processor to more likely be 2011/12events. Thus, as we believe NetLogic’s stock is reflecting a fair valuation, we downgrade to aNeutral rating.. 2Q10 Results: In line sales, ahead on margins and EPSNetLogic reported sales/non-GAAP EPS of $95.0m/$0.38, in line on sales with UBS/consensusof $95.8m/$95.1m but ahead on EPS of $0.33, mainly on higher gross margin and lower opex.Gross margin of 68.9% (incl. SBC) was 280 bps above our estimate on a favorable product mix.We believe improved gross margin can be sustained, but we also expect higher opex onaccelerated new programs.. Lower EPS estimates on lower operating leverage expectationsWe slightly lower our 3Q sales/non-GAAP EPS estimates by 3%/5% to $100.0m/ $0.36. ForF2010, we lower our sales estimate by 1% to $386.6m and raise EPS by 2% to $1.42. ForF2011/12, we lower non-GAAP EPS by 9%/18% to $1.70/$1.92.. Valuation: Lower Price Target to $33.50, Downgrade to Neutral RatingWe lower our DCF-based PT to $33.50 (24x our $1.42 F10E pf EPS) from $34.50.

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]

Positioning for a more positive tone. Within a trading range, a more constructive backdropIncoming news flow has turned more positive over the last several weeks. Earnings have beenrobust, European stress tests (while not as tough as hoped) did not deliver negative surprises,European macro data have surprised to the upside, and China appears to be taking its foot offthe brakes. In addition, risk appetite has begun to recover, but remains well below levels seenearlier this year.. Allocation changes and sector preferencesGiven the importance of swings in risk appetite and sentiment as markets remain in ranges,tactical allocation becomes more important. To reflect our view that equities have more room torun given fundamentals and valuations, we make several allocation changes. In sectors, weupgrade Materials to Overweight and downgrade Healthcare to Neutral. We continue to arguefor balanced cyclical vs. defensive positioning. But, our analysis shows that sector returndifferences tend to be significant even as cyclicals and defensives move in line with each other.. Regional preferencesGiven strong growth and attractive valuations, GEM remains our preferred Overweight. Weincrease ‘Rest of World’ to Overweight. Additionally, we lift Europe/UK to Neutral. Wedowngrade the US to Neutral and Japan to Underweight (both from Overweight).. Global Top 40 stock list changesWe are adding EMC, Teck Resources, EDF, Svenska Cellulosa, and Banco do Brasil. Weremove Tokyo Electron, Ricoh, E.On, Li & Fung, and Goldman Sachs.

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EconomicsUS 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]

Mixed June durables & mortg apps up more. Durables -1.0%; ex trans -0.6% but core capital goods orders +0.6%Durable goods orders fell 1.0% in June (consensus and UBSe +1.0%), and May was reviseddown slightly: to -0.8% from an earlier reported 0.6% decline. But most of the decline stemmedfrom a 25.6% drop in (volatile) civilian aircraft orders. Orders ex transport slipped 0.6%(consensus 0.4%, UBSe: 0.0%), only partly offsetting the 1.2% gain in May (was 1.6%). Otherparts of the report were firmer: Orders excluding aircraft and defense edged up 0.3% in Juneafter a 1.0% gain in May (was +1.2%). Similarly, orders for the key nondefense capital goods exaircraft series rose 0.6%m/m (UBSe: 0.0%) after an upward-revised 4.6% gain in May (was3.9%). As a result, core capital goods orders rose at a 25.1% annual rate in Q2 after a 15%pace in Q1. The rapid pace of Q2 orders will provide some support to equipment investmentspending in Q3.. Mortgage applications recovering?The weekly mortgage applications purchase index rose 2.0%w/w in the week of July 23 after a3.4% w/w rise the prior week—the first back-to-back increase in the index since prior to theexpiration of the homebuyer tax credits at the end of April. Within the details of the report,purchase applications using conventional loans rose 3.8%w/w (after +0.3% in the prior week),while applications using government-backed loans edged down 0.3%w/w (after +8.0%w/w). Ofcourse additional improvement in the weekly purchase index will be necessary, but the latestback-to-back gains lend support to the idea that the plunge in home sales in the wake of theexpiration of the tax credits may be over. More generally, we continue to expect a strengtheninglabor market and low mortgage rates will provide support to sales later this year.

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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 15

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

3M Company5a,6b,6c,7,16b,18a MMM.N Buy N/A US$86.80 27 Jul 2010ACE Limited4a,5a,6a,16b ACE.N Buy N/A US$53.47 27 Jul 2010Aetna Inc.5a,6b,6c,7,16b AET.N Neutral N/A US$27.55 28 Jul 2010Allianz4a,5a,6a,13,15,16b ALVG.DE Buy N/A €89.50 27 Jul 2010Amazon.com Inc6c,16b AMZN.O Buy N/A US$117.13 28 Jul 2010America Movil5a,16b,20 AMXL.MX Buy (CBE) N/A P32.37 27 Jul 2010Apache Corporation6c,16b APA.N Buy N/A US$94.92 27 Jul 2010Arrow Electronics, Inc.16b ARW.N Buy N/A US$24.44 28 Jul 2010AutoNation Inc.16b AN.N Sell N/A US$24.25 27 Jul 2010Banco do Brasil16b,20,22 BBAS3.SA Buy (CBE) N/A R$28.70 27 Jul 2010Bank of Nova Scotia2a,3b,4a,4b,6a,16b BNS.TO Buy N/A C$51.19 27 Jul 2010Barrick GoldCorporation2a,2b,4a,4b,5a,6a,16b,20

ABX.N Buy (CBE) N/A US$40.03 27 Jul 2010

Bed Bath & Beyond Inc.16b BBBY.O Buy N/A US$37.98 27 Jul 2010Cognizant Technology SolutionsCorp.4a,6a,6c,7,16b

CTSH.O Buy N/A US$54.33 28 Jul 2010

CommScope Inc.4a,6a,16b CTV.N Neutral N/A US$26.07 28 Jul 2010Corning Inc.16b,20 GLW.N Buy (CBE) N/A US$18.00 27 Jul 2010CSX Corp.4a,6a,16b CSX.N Buy N/A US$52.99 27 Jul 2010CVS Caremark Corporation16b,18b CVS.N Buy N/A US$30.60 27 Jul 2010Darden Restaurants Inc.16b DRI.N Buy N/A US$43.18 27 Jul 2010DBS Group Holdings Ltd.4a,16b DBSM.SI Buy N/A S$14.52 28 Jul 2010E.ON4a,5a,15,16b EONGn.DE Neutral N/A €22.95 27 Jul 2010East Japan Railway16b 9020.T Buy N/A ¥5,900 28 Jul 2010EDF4a,5a,16b,22 EDF.PA Buy N/A €32.24 27 Jul 2010E I du Pont de Nemours andCo2a,4a,5a,6a,6b,6c,7,16b,18c

DD.N Not Rated N/A US$40.38 27 Jul 2010

EMC Corporation4a,5a,6a,6b,6c,7,16b,18d EMC.N Buy N/A US$20.29 27 Jul 2010Express Scripts Inc.16b ESRX.O Buy N/A US$42.20 28 Jul 2010Ford Motor Co.2a,4a,5a,6a,6b,6c,7,14,16b F.N Buy N/A US$13.03 27 Jul 2010Goldman Sachs GroupInc5a,6b,6c,7,13,16b,18e

GS.N Not Rated N/A US$147.23 27 Jul 2010

Hewlett-Packard Co.4a,5a,6a,6b,7,16b HPQ.N Buy N/A US$47.57 27 Jul 2010HSBC2a,4a,5a,6a,16a,16b,22 HSBA.L Buy N/A 666p 27 Jul 2010Illinois Tool Works4a,5a,16b ITW.N Buy N/A US$43.58 27 Jul 2010International Paper2a,4a,6a,6b,6c,7,16b,22 IP.N Buy N/A US$24.12 28 Jul 2010LAM Research Corp.16b LRCX.O Buy N/A US$41.66 28 Jul 2010Las Vegas Sands Corp.2a,4a,16b,20 LVS.N Buy (CBE) N/A US$25.28 27 Jul 2010Li & Fung16a,16b 0494.HK Sell N/A HK$36.45 28 Jul 2010Lukoil2a,5a,16b,20 LKOHyq.L Buy (CBE) N/A US$56.00 27 Jul 2010McDermott International16b MDR.N Buy N/A US$24.24 28 Jul 2010McDonalds Corp.6b,7,16b MCD.N Buy N/A US$70.40 27 Jul 2010Medco Health Solutions Inc.16b MHS.N Buy N/A US$49.28 27 Jul 2010Meritage Corporation16b,20 MTH.N Sell (CBE) N/A US$16.84 28 Jul 2010Microsoft Corp.2a,4a,5a,6a,6b,6c,7,16b MSFT.O Buy N/A US$26.16 27 Jul 2010Nestlé2a,4a,5a,13,15,16b,22 NESN.VX Buy N/A CHF52.80 27 Jul 2010NetLogic Microsystems Inc16b NETL.O Buy N/A US$32.80 28 Jul 2010Novartis2a,4a,5a,6a,13,15,16b NOVN.VX Buy N/A CHF51.40 27 Jul 2010Occidental Petroleum Corp.4a,6a,16b OXY.N Buy N/A US$79.94 27 Jul 2010PepsiCo Inc.2a,4a,5a,6a,6b,6c,7,16b,18f PEP.N Buy N/A US$65.69 27 Jul 2010


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Company DisclosuresCompany Name Reuters 12-mo rating Short-term

ratingPrice Price date

PetroChina1,3a,5a,16a,16b 0857.HK Buy N/A HK$8.94 28 Jul 2010Procter &Gamble2a,4a,5a,6a,6b,6c,7,8,16b,18g,22

PG.N Buy N/A US$63.08 27 Jul 2010

Prudential FinancialInc.2a,4a,5a,6a,6b,6c,7,16b

PRU.N Buy N/A US$55.76 27 Jul 2010

Ricoh16b 7752.T Buy N/A ¥1,228 28 Jul 2010Rio Tinto Plc4a,16b,22 RIO.L Buy N/A 3,356p 27 Jul 2010Ryland Group16b,20 RYL.N Buy (CBE) N/A US$16.34 28 Jul 2010Samsung Electronics16b,22,23a,23c,23d,23f005930.KS Buy N/A Won837,000 28 Jul 2010Schlumberger Ltd.3c,16b,18h SLB.N Buy N/A US$58.93 27 Jul 2010SK Telecom4a,16b,22,23b,23e 017670.KS Buy N/A Won166,000 28 Jul 2010Sonic Automotive Inc.16b,20 SAH.N Buy (CBE) N/A US$10.14 27 Jul 2010Sumitomo Mitsui FinancialGroup2a,4a,6a,16b

8316.T Buy N/A ¥2,679 28 Jul 2010

Svenska Cellulosa16b SCAb.ST Buy N/A SKr106.40 27 Jul 2010Teck Resources Ltd.5b,16b,20 TCKb.TO Buy (CBE) N/A C$35.90 27 Jul 2010Teva Pharmaceuticals5a,16b TEVA.O Buy N/A US$50.07 27 Jul 2010Thermo Fisher Scientific Inc.16b,18i TMO.N Buy N/A US$46.17 27 Jul 2010Tokyo Electron16b 8035.T Buy N/A ¥4,790 28 Jul 2010Visa Inc.6c,16b V.N Buy N/A US$76.61 27 Jul 2010Wal-Mart Stores2a,4a,5a,6a,6b,6c,7,16b WMT.N Buy N/A US$50.96 27 Jul 2010ZionsBancorporation2a,4a,5a,6a,6b,6c,7,16b

ZION.O Sell N/A US$21.26 28 Jul 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

1. UBS Securities Co. Limited is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering ofsecurities of this company/entity or one of its affiliates.

2a. 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.

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

3a. UBS AG Australia Branch is acting as financial adviser to Arrow Energy Limited in relation to its response to a non-bindingconditional proposal by PetroChina and Royal Dutch Shell to acquire Arrow and may be paid a fee for this service.

3b. UBS Securities LLC is acting as advisor to Royal Bank of Scotland Group Plc on its announced agreement to sell its wholesalebanking operations in Colombia to The Bank of Nova Scotia(Scotiabank).

3c. UBS Securities LLC is acting as advisor to Smith International on its announced agreement to be acquired by Schlumberger.

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

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

5a. 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.

5b. UBS Securities Canada Inc or an affiliate expect to receive or intend to seek compensation for investment banking services fromthis 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 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.


UBS 17

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).

14. UBS Limited acts as broker to this company.

15. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial instrumentsof this company.

16a. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company.

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

18a. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in 3MCompany.

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

18c. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in El duPont de Nemours & Co.

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

18e. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position inGoldman Sachs.

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

18g. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Procter& Gamble Co.

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

18i. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position inThermo Electron Corp.

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).

23a. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned3,296,450 units of DAISHINSECURITIES ELW 9999 (Samsung Electronics call warrants) as of 27 Jul 2010.

23b. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned3,347,500 units of DAISHINSECURITIES ELW 0447 (SK Telecom call warrants) as of 27 Jul 2010.

23c. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned3,361,260 units of HANADAETOOSECURITIES ELW 0248 (Samsung Electronics call warrants) as of 27 Jul 2010.

23d. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned3,370,930 units of HANADAETOOSECURITIES ELW 0416 (Samsung Electronics call warrants) as of 27 Jul 2010.

23e. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned3,400,000 units of HANADAETOOSECURITIES ELW 0246 (SK Telecom call warrants) as of 27 Jul 2010.

23f. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned3,599,550 units of HANADAETOOSECURITIES ELW 0415 (Samsung Electronics call warrants) as of 27 Jul 2010.

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.

Additional Prices: BorgWarner Inc., US$42.38 (27 Jul 2010); Johnson Controls Inc., US$28.12 (27 Jul 2010); Lear Corporation, US$76.04(27 Jul 2010); Source: UBS. All prices as of local market close.

Additional Prices: Beazer Homes, US$4.04 (28 Jul 2010); Meritage Corporation, US$16.84 (28 Jul 2010); Pulte Homes, US$8.59 (28 Jul2010); Standard Pacific Corp., US$3.87 (28 Jul 2010); Toll Brothers, US$16.86 (28 Jul 2010); Source: UBS. All prices as of local market


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close.

Additional Prices: Beazer Homes, US$4.04 (28 Jul 2010); Pulte Homes, US$8.59 (28 Jul 2010); Ryland Group, US$16.34 (28 Jul 2010);Standard Pacific Corp., US$3.87 (28 Jul 2010); Toll Brothers, US$16.86 (28 Jul 2010); Source: UBS. All prices as of local market close.

Additional Prices: Cigna Corp., US$30.37 (28 Jul 2010); CVS Caremark Corporation, US$31.54 (28 Jul 2010); WellPoint, Inc., US$50.83(28 Jul 2010); Source: UBS. All prices as of local market close.


UBS 19

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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. Any opinionsexpressed 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. Researchwill 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 inmaterially 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 andinterpreting 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 areaswithin 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 includinginvestment 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 andtrading are a part.

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Financial Pacific: Equity Research (third party), July 29.2010

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Transcript of Financial Pacific: Equity Research (third party), July 29.2010