financial pacific - valuation provides attractive opportunity, d.r. horton (dhi.n) (third party)

ab

UBS Investment Research

US Morning Meeting Highlights

Global Equity Research

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Rating and Recommendation ChangesD.R. Horton, DHI.N David Goldberg p.3Valuation Provides Attractive Opportunity12-month rating: Prior: Neutral => Buy * CBE , FY11E US$0.04, FY12E US$0.40, PTUS$13.00, Market cap. US$3.77bnLennar, LEN.N David Goldberg p.4Valuation Provides Attractive Opportunity12-month rating: Prior: Neutral => Buy * CBE , FY11E US$0.38, FY12E US$0.75, PTUS$21.00, Market cap. US$2.71bnMeritage Corp., MTH.N David Goldberg p.5Upgrading to Neutral on Valuation12-month rating: Prior: Sell => Neutral * CBE , FY11E US$(0.05)=>US$(0.02), FY12EUS$0.70=>US$0.55, PT US$19.00, Market cap. US$0.60bn

Estimate/Price Target RevisionsBeazer Homes, BZH.N David Goldberg p.5Despite EPS Revisions, We’re Optimistic12-month rating: Buy * (Unchanged) CBE , FY11E US$(1.55)=>US$(1.60), FY12EUS$(0.80)=>US$(0.90), PT US$5.50, Market cap. US$0.13bnJohnson & Johnson, JNJ.N Rajeev Jashnani, CFA p.10Benchmarking early Zytiga launch12-month rating: Buy (Unchanged), FY11E US$4.99, FY12E US$5.24, PT Prior:US$80.00 => US$74.00, Market cap. US$181bnKB Home, KBH.N David Goldberg p.6Reducing PT to Reflect Lower Profitability12-month rating: Neutral * (Unchanged) CBE , FY11E US$(1.55), FY12E US$0.00, PTPrior: US$11.00 => US$7.00, Market cap. US$0.52bnO'Reilly Automotive, ORLY.O Michael Lasser p.8Highlighting Its Consistency12-month rating: Buy (Unchanged), FY11E US$3.61, FY12E US$4.25, PT Prior:US$70.00 => US$73.00, Market cap. US$8.98bn

Company UpdateAOL, AOL.N Brian Fitzgerald p.13Reiterate Buy on New Initiatives Driving Growth and Attractive Valuation12-month rating: Buy (Unchanged), FY11E US$0.32, FY12E US$0.75, PT US$20.00,Market cap. US$1.36bnComcast Corporation, CMCSA.O John C. Hodulik, CFA p.7Revisiting the investment case12-month rating: Buy (Unchanged), FY11E US$1.54, FY12E US$1.93, PT US$30.00,Market cap. US$60.2bn

31 August 2011http://www.ubs.com/investmentresearch

This package has been prepared by UBS Securities LLC UBS 1ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17*Under review (UR) and/or exception to core rating bands (CBE) - see page : 17UBS 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

PG&E Corp., PCG.N Jim von Riesemann p.14NTSB blames PCG for pipeline explosion12-month rating: Neutral (Unchanged), FY11E US$3.51, FY12E US$3.68, PTUS$42.00, Market cap. US$15.6bnValeant, VRX.N Marc Goodman p.9Adding to Canada OTC Biz12-month rating: Buy * (Unchanged) CBE , FY11E US$2.77, FY12E US$3.95, PTUS$63.00, Market cap. US$7.09bnVMware, VMW.N Brent Thill p.12Update from User Conference12-month rating: Buy (Unchanged), FY11E US$2.10, FY12E US$2.50, PT US$125.00,Market cap. US$39.0bn

Industry UpdateHome Construction David Goldberg p.6

U.S. Homebuilding - More Stable Than You ThinkHeavy Machinery Henry Kirn, CFA p.11

USDA 2011 Farm Income Forecast - USDA raises 2011 net farm income forecastAerospace David E. Strauss p.11

U.S. Aerospace - Why Aftermarket Still Stands to Do Well

EconomicsEconomics Maury N. Harris p.15

US Daily Economic Comment - A more divided FOMCEconomics Maury N. Harris p.16

US Economic Comment - Conference Board confidence plunges

US Morning Meeting Highlights 31 August 2011

UBS 2

Consumer, CyclicalD.R. Horton (DHI.N) David Goldberg............... +1-212-713 9427

[email protected]

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

Price (30 Aug 2011).....................US$10.6012-month rating...... Prior: Neutral => Buy *12m price target..........................US$13.00Market cap.................................US$3.77bn

Full-Year EPS2011E............................................. US$0.042012E............................................. US$0.40

*Exception to core rating bands - seepage 17

Valuation Provides Attractive Opportunity. Strategic Focus Well Aligned With Core CompetencySince 7/19 DHI -11% vs. the S&P 500 -9%. In turn, it currently trades at 1.1x tang BV. Althoughthis is above peers, we expect D.R. Horton to outperform in the early part of the cycle. Our viewis based on the co’s: 1) operating strategy, focusing on sales growth, which should generate ahigher return on capital; & 2) robust liquidity, which will support growth as a recovery unfolds. Assuch, we are upgrading DHI to Buy from Neutral. We maintain our $13 PT.. Operating Acumen Offers Downside ProtectionAs the downturn has persisted, we’ve been impressed by D.R. Horton’s ability to rebuildprofitability, driven by mgmt’s: 1) efforts to continually reduce costs; 2) focus on driving volumes,including emphasizing spec construction, without sacrificing profitability. In turn, we expect thecompany to be profitable in F11 despite the weak housing mkt. Further, we believe additionalBV erosion is unlikely, even if conditions stagnate for an extended period of time.. Opportunities Arise as the New Home Market BottomsAlthough we acknowledge that macro indicators over the last few weeks could suggest weakernear term economic trends, we believe fundamentals in the new home market are at—ornear—a trough. While visibility for a turnaround remains limited, we believe current valuationsfor selective builders offer attractive buying opportunities with minimal downside and significantupside potential.. Valuation: $13 PT 1.2x Our Trough BV EstimateOur $13 PT is based on 1.2x our trough BV est., above the group average.

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UBS 3

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

mailto:[email protected]


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



Lennar (LEN.N) David Goldberg............... +1-212-713 [email protected]


Price (30 Aug 2011).....................US$14.6612-month rating...... Prior: Neutral => Buy *12m price target..........................US$21.00Market cap.................................US$2.71bn



Valuation Provides Attractive Opportunity. Operating Strategy Limits Potential DownsideSince 7/19 LEN -21% vs the S&P 500 -19%. In turn, it now trades at 1.0x tang BV, relatively inline with peers, which we believe reflects an attractive buying opportunity. Specifically, weexpect the co to remain profitable even in a slow/no growth environment, driven by its operatingstrength combined with opportunities generated by Rialto (Lennar’s distressed assetsubsidiary). As such, we’re upgrading LEN to Buy from Neutral; we maintain our $21 PT.. Focusing On Rialto Overlooks Lennar’s Operating AcumenAlthough we view Rialto as an opportunistic vehicle to invest cash until the housing recoveryaccelerates, we believe investors are too focused on this segment and are underemphasizingmgmt’s operating acumen. We’d note that the co has made considerable strides to reduce costsand cycle times through the downturn; in turn its HB operations are again profitable despite thechallenging environment. Further, these efforts will drive accelerated EPS growth as housingrecovers.. Opportunities Arise as the New Home Market BottomsWhile we acknowledge that macro indicators over the last few weeks could suggest weakernear term economic trends, we believe fundamentals in the new home market are at—ornear—a trough. Despite limited visibility for the timing of a turnaround, we believe currentvaluations for selective builders offer attractive buying opportunites with minimal downside andsignificant upside potential.. Valuation: $21 PT is Based on 1.1x Trough BV ForecastOur PT is 1.1x our trough BV est. (adj. for Rialto), slightly above the group avg.

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UBS 4

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



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



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


Price (30 Aug 2011).....................US$18.7512-month rating...... Prior: Sell => Neutral *12m price target..........................US$19.00Market cap.................................US$0.60bn

Full-Year EPS2011E.................... US$(0.05) => US$(0.02)2012E......................... US$0.70 => US$0.55


Upgrading to Neutral on Valuation. Recent Pull-back Leaves MTH Fairly ValuedSince 2/18, MTH has declined ~31% ahead of the -27% group average and the S&P 500 down~10%. In turn, the stock now trades at 1.1x tang BV. As such, we believe MTH’s currentvaluation fairly reflects fundamentals in the new home market; we are upgrading our rating toNeutral 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, even in a slow/no growth environment, given its: 1)land light model, which focuses on optioning lots; 2) efforts to reposition its product, especiallyits Green Building initiatives; & 3) sufficient liquidity. In our opinion, this should limit furtherdownside.. Despite Recent Weakness, We Continue to Expect a Gradual RecoveryAlthough conditions in the economy have become more uncertain recently, we continue tobelieve the new home market has already reached a trough. As such, we do not expect thesales pace or prices to decline meaningfully. This is reflected in our recent channel checks thatsuggest conditions have returned to normal seasonal patterns following the disruptions earlier inAug. That said, we believe investors should focus on those stocks that offer the most attractiverisk/reward.. Valuation: $19 PT Based on 1.1x our Trough BV EstimateWe are revising our EPS est to reflect MTH’s 2Q results & our assumptions for the broaderhousing market. Our ‘11E EPS goes to ($0.02) from ($0.05); ‘12E is now $0.55 from $0.70. Fwdyears have also been adjusted.

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Beazer Homes (BZH.N) David Goldberg............... +1-212-713 [email protected]


Price (30 Aug 2011).......................US$2.1912-month rating............ Buy * (Unchanged)12m price target............................US$5.50Market cap.................................US$0.13bn

Full-Year EPS2011E.................... US$(1.55) => US$(1.60)2012E.................... US$(0.80) => US$(0.90)


Despite EPS Revisions, We’re Optimistic. Operating Strategy Remains Focused on Top Line GrowthOn their F3Q conf call, Beazer’s mgmt team discussed their strategy to drive revenue growth,despite underlying fundamentals. In turn, the co will focus on improving its sales pace to 2+homes/community from ~1.5, which it has realized over the last year, helping its cashgeneration and efforts to expand profitability. Additionally, mgmt will work to increase itscommunity count at a modest rate annually. In our opinion, these two factors will help Beazerthrive, even if conditions remain uncertain in the NT.. Revising EPS Estimates to Reflect Economic BackdropDespite our belief that the new home market is at, or near, a trough, we’re reducing our EPSests to reflect the potential impact from the more recent econ uncertainty. Our F11E goes to($1.60) from ($1.55); F12E is now ($0.90) from ($0.80). Fwd years have also been adjusted.These changes are insufficient to impact our PT.. Maintain Buy Rating: We Expect Valuation Discount to NarrowWhile visibility into the timing for a turnaround in housing remains limited, we believe Beazerhas preserved substantial financing capacity, allowing it to weather the storm. Further, wecontinue to believe the co’s underperformance relative to peers will reverse over time given: 1)its improved liquidity position—which is enabling mgmt to increasingly focus on profitability, and2) greater operating discipline. As such, we maintain our Buy rating.. Valuation: $5.50 PT is 1.0x our Trough BV EstimateOur price target is 1.0x our trough BV estimate, in line with the group avg.

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UBS 5

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



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



KB Home (KBH.N) David Goldberg............... +1-212-713 [email protected]


Price (30 Aug 2011).......................US$6.7412-month rating.......Neutral * (Unchanged)12m price target.....Prior: US$11.00 =>US$7.00Market cap.................................US$0.52bn

Full-Year EPS2011E........................................... US$(1.55)2012E............................................. US$0.00


Reducing PT to Reflect Lower Profitability. Although Concerns Are Likely Overdone, We Remain CautiousSince 7/19, KBH -29%, well ahead of the -19% group avg, driven by concerns around therobustness of its capital structure. Although these worries are likely overdone, we’re reducingour PT to $7 from $11, reflecting our view that profitability will remain below peers as new homesales “bounce” along the bottom before eventually recovering. Our Neutral rating is unchangedas we believe the current valuation appropriately reflects this potential underperformance.. Why We Expect Underperformance In a “Flat” Housing MarketDespite our view that KB Home has sufficient liquidity to support its existing operations, weexpect profitability to trail better positioned peers. This view is based on: 1) mgmt’s commitmentto a build-to-order model, which will likely lead to slower growth in a stable housing market; & 2)the fact that >50% of KB’s adj tang BV comes from tax benefits (the DTA allowance is ~$11/sh),which will inherently take longer to monetize, dragging ROE lower.. Liquidity Becomes a Constraint Once Conditions ImproveAlthough KB’s liquidity affords flexibility [relative to the timing for a capital raise], we believe itwill constrain growth as housing recovers. While visibility around the structure of a futuretransaction is limited, we believe concerns over dilution will continue to weigh on the stock,limiting upside.. Valuation: $7 PT Based on 0.4x our Trough BV EstimateOur $7 PT is 0.4x our trough BV est., below the peer avg of 1.0x. Our target multiple has beenreduced from 0.7x previously, as we now forecast a lower ROE.

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U.S. Homebuilding David Goldberg.........................+1-212-713 [email protected]

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

More Stable Than You Think. We Believe Conditions in the New Home Market Have BottomedAfter declining by an avg of ~20% since mid July—vs. the S&P 500 -9%—the HB stocks nowtrade at 0.9x tang BV, at the low end of their range the last few years. Although we’d readilyadmit that the recent macro news has increased the potential for further downside in thebroader housing market, we believe new homes are less susceptible to meaningful declines offcurrent levels.. What Investors Are MissingWithin this report, we expand on this view that conditions for new homes have bottomed,focusing on the following: 1) mortgage underwriting; 2) foreclosure activity and overall supplylevels; & 3) the potential for increased government support. Additionally, we discuss how thepublic builders are positioning themselves to minimize their exposure to broader weakness andhow this is increasingly creating a bifurcation relative to existing homes. Finally, we highlight theearly indicators we focus on to predict the eventual turn.. Upgrading LEN and DHI to Buy Reflecting Favorable Risk RewardAt the same time, signs of a turnaround have yet to materialize, leaving us cautious about thegroup generally. That said, the pullback has created attractive entry points for some buildersthat are better positioned to outperform even in a slow/no growth environment. Specifically,we’re upgrading LEN & DHI to Buy from Neutral, as we believe these stocks offer compellingreward/risk profiles.. Valuation: Our PT are Based on 1.0x Tangible Book ValueThe stocks currently trade at 0.9x tang BV (adjusted for deferred tax allowances).

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UBS 6

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





Comcast Corporation (CMCSA.O) John C. Hodulik, CFA..... +1-212-713 [email protected]

Batya Levi......................... +1-212-713 [email protected]

Lisa L. Friedman............... +1-212-713 2589Associate [email protected]

Price (30 Aug 2011).....................US$21.3212-month rating...............Buy (Unchanged)12m price target..........................US$30.00Market cap.................................US$60.2bn


Revisiting the investment case. Comcast continues to be a top pickComcast shares are down 6% since 2Q results on Aug. 3 given concern about the weak macroenvironment and cord-cutting, which may lead to accelerating video losses. At the same time,product maturation and wireless substitution are reducing voice adds. Still, we are encouragedby Comcast’s strong metrics in broadband and Commercial, and believe the company’sinvestment in content through NBCU helps hedge against the disruptive impact of newtechnologies such as over the top.. Expect cable to continue to outperformComcast is the largest U.S. cable MSO and the only one to report accelerating revenue growth(ex-advertising) in 2Q. Given the company’s size and footprint, and its near-completion of theDOCSIS 3.0 rollout to enable faster broadband speeds, we expect Comcast’s cable business tocontinue to outperform.. Cash returns to continueWe expect Comcast to complete its $7B repurchase authorization by YE11 and model anincremental $2.1B in buybacks in 2012E. The company’s gross leverage ratio was 2.2x at theend of 2Q, within mgmt’s 2.0-2.5x target range, and we forecast gross leverage of 2.0x at YE12,even with a new buyback program.. Valuation very attractive; Reiterate Buy rating and $30 PTComcast trades at 4.9x 2012E EBITDA on a proportionate basis (i.e. incl. its 51% stake inNBCU). Using the large-cap media average of 6.4x on 2012E for NBCU would equate to 4.7xEBITDA for Comcast cable vs. 5.3x for TWC and 5.7x for CVC. We reiterate our Buy rating and$30 PT based on DCF (9% WACC, 2% perp growth).

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UBS 7

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




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



O'Reilly Automotive (ORLY.O) Michael Lasser................ +1-212-713 [email protected]

Chris Weng....................... +1-212-713 2951Associate [email protected]

Price (30 Aug 2011).....................US$65.1512-month rating...............Buy (Unchanged)12m price target.....Prior: US$70.00 =>US$73.00Market cap.................................US$8.98bn


Highlighting Its Consistency. During a volatile time, ORLY's story is a refreshing source of stabilityThis consistency was reinforced from the company's analyst day where it discussed thedifferentiation of its model, its sales and profitability opportunities, and the development of itsfree cash flow engine. While these were similar messages that ORLY offered at the same eventlast year, the company has backed up its message with strong performance since that time. Weexpect this will continue.. ORLY repeated its goal of having a 15% operating margin by 2013Though, we think this is conservative and it will probably be closer to 16% by that time. Whilemuch of the expansion will come from operating expense leverage, it still has room to improveits gross margin from such factors as improving the efficiency of its new DCs and rolling outprice optimization.. Growing FCF and more aggressive buybacks are underappreciatedORLY remains committed to deploying its excess free cash for repurchasing its shares.Management pointed out that the company only needs $20 mm to $30 mm of cash on itsbalance sheet to manage its day-to-day operations. Anything above and beyond that will beused for buybacks.. Valuation: Stock will be driven by strong EPS growth & a consistent P/EWe think ORLY’s shares will continue to garner a premium valuation and we reiterate our Buyrating on the stock. Our new $73 PT (up from $70) reflects 17.2x our CY’12 EPS estimate of$4.25. We think that ORLY is well situated to grow independent of the sector and rapidly scaleup its FCF.

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UBS 8

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



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




HealthcareValeant (VRX.N) Marc Goodman................ +1-212-713 1342

[email protected]

Ami Fadia.......................... +1-212-713 [email protected]

Matthew Harrison.............. +1-212-713 2429Associate [email protected]

Price (29 Aug 2011).....................US$44.6612-month rating............ Buy * (Unchanged)12m price target..........................US$63.00Market cap.................................US$7.09bn



Adding to Canada OTC Biz. What’s new? Valeant agrees to acquire AfexaValeant will pay ~$76M to acquire Afexa which sells cold & flu treatments in Canada and had~C$40M in 2010 sales. Afexa had been previously approached by Paladin Labs with a hostilebid and as a result of the Valeant offer Afexa has a 30-day go-shop period (ends 9/29/2011)with a $3.75M break-up fee for a superior offer.. Our takeaway: Should be $0.04-0.05 accretive (see Table 1)We like the deal as it appears to be an inexpensive (~2x 2010 sales) way to incr. OTC exposurein Canada. Afexa sales are highly seasonal due to the flu severity with revs of C$47.8M,C$57.4M and C$38.4M in 2008, 2009 and 2010, resp. (2010 was impacted by the 2009 H1N1scare). Thus, assuming sales can grow ~5% annually (should be reasonable through pricingalone), a stable GM of ~68%, flat SG&A+R&D of ~C$27M and ~C$12.5M in synergies (C$10Min G&A is cut and ~C$2.5M of the ~C$13M S&M is cut) yields ~$0.05 accretion with an 8% taxrate.. Thoughts on the stock: Nice tuck-in; Highlights mgt. aggressivenessWe like the deal and believe it highlights that Valeant will continue to be aggressive on bothsmall and large deals. While investors are likely to remain focused on organic growth headinginto 3Q, the add’l $300M in share repurchase and the early closing of Sanitas should give mgt.plenty of EPS levers for 2011. While mgt. has an agreement with the Afexa board, given the go-shop we will wait for the acquisition to close before formally adding it to our model.. Valuation: We maintain our Buy rating and PT of $63Based upon DCF and implies a P/E multiple of 14x our 2013E cash EPS of $4.38.

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UBS 9

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




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



Johnson & Johnson (JNJ.N) Rajeev Jashnani, CFA..... [email protected]

Nishit Verma......................+1-212-713 2686Associate [email protected]

Price (30 Aug 2011).....................US$65.7712-month rating...............Buy (Unchanged)12m price target.....Prior: US$80.00 =>US$74.00Market cap..................................US$181bn


Benchmarking early Zytiga launch. Comparing Zytiga to other oral small molecule oncology drugsIMS sales for Zytiga were $16M in July, inline w/ $16M in June & above $6M in May (Zytiga wasapproved on 4/28 for chemo-exp'd prostate cancer). For 1st 3 mo’s, Zytiga IMS sales of $38Mare tracking above Tarceva & Sutent, which both had sales of $18M in the 1st 3 mo’s (launchedin '04 & '06). Tarceva & Sutent both had 1st FY US sales of $0.3B w/ ‘10 US sales of $0.5B /$0.3B (ww: $1.3B / $1.1B). That said, based on TRx data, Zytiga (6.5k) is tracking below initialGleevec performance (9.6k; ‘10 US / ww sales of $1.3B / $4.3B). Notably, these simplecomparisons ignore differences in pt populations, pricing, etc.. Maintaining Zytiga sales estimatesWe estimate ‘12 / ‘15 US Zytiga sales of $0.3B / $1.0B (ww: $0.6B / $2.0B). Initial IMS data onZytiga appears encouraging, especially considering that mkt opportunity for chemo-exp’d PC ismuch smaller than the chemo-naïve opportunity (data in chemo-naïve expected in ~1H12).Importantly, additional data points are needed to confirm correlation between IMS & actualsales. 2Q11 actual Zytiga ww sales were ~$50M but delta relative to IMS data may be related toUS stocking & ex-US early access.. Thoughts on competitive environmentOn the competitive landscape we recognize MDVN’s MDV3100 as a key upcoming competitor;docs we’ve consulted with expect efficacy similar to Zytiga but envision MDV3100 being used incombination w/ Provenge, facilitating earlier use (Zytiga is incompatible w/ Provenge due tosteroid co-administration). That said, multi-year survival for CRPC patients should facilitatesubstantial opportunity even for later lines of treatment.. Valuation – reiterate Buy rating; DCF-based price target to $74 from $80JNJ currently trading at 12.6x 2012E EPS. Our revised target corresponds to 13x 2013E EPS.We lowered our target in light of lower market multiples.

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UBS 10

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






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

[email protected]

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

Ryan Thackston......................... +1-212-713 3321Associate [email protected]

Why Aftermarket Still Stands to Do Well. We see more favorable aftermarket outlookMany of those we speak with believe the aftermarket will be hard hit in a slow growthenvironment while OE will hold up. We believe the outlook for the aftermarket is more favorablethan widely understood for three reasons: (1) positive fleet age dynamics, (2) still wide gapbetween flight hours and aftermarket volumes, and (3) initial 787 and 747-8 sparing.. Favorable fleet age dynamicsWe believe favorable fleet age dynamics can continue to drive solid aftermarket growth even ina slow economic environment. We estimate that the in warranty fleet of the airlines, whichaccounts for one quarter of the total fleet, will grow at a slow 2-3% rate in 2011-12, well below4-5% in 2008-09. Combined with peak utilization rates and we estimate the in warranty fleet canonly contribute 1% capacity growth, leaving the airlines little opportunity to reduce usage of theirout of warranty aircraft that are key to the aftermarket.. Wide gap between flight hours and aftermarket volumesAftermarket volumes are still below prior peak levels even though flight hours are 10-15%above. We believe this gap is indicative of limited airline spares restocking thus far. So eventhough flight hour growth is likely to decelerate to low levels, we believe the aftermarket still hasroom to grow at a faster rate.. Initial 747-8 & 787 sparingWe believe initial 747-8 and 787 sparing will benefit the aftermarket in 2012. We estimate initialsparing could add 100-200 bps to aftermarket growth.

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USDA 2011 Farm Income Forecast Henry Kirn, CFA........................+1-212-713 [email protected]

Eric Crawford..............................+1-212-713 8458Associate [email protected]

USDA raises 2011 net farm income forecast. USDA raises its forecast of 2011 farm income by roughly 9%USDA raised its forecast of 2011 U.S. net farm income to $103.6B, up from $94.7B (+9%) in itsinitial forecast on February 14. The revised 2011 net farm income forecast is now 31% aboveUSDA’s slightly revised 2010 net farm income forecast, with USDA noting “net farm income andnet cash income are both projected to exceed $100 billion for the first time in 2011. The 2011forecast of net farm income is the second highest inflation-adjusted value recorded since 1973.”. Cash receipts revised 9% higher on higher livestock revenuesUSDA increased its forecast for 2011 livestock cash receipts by 12% to $163.8 billion. USDAalso increased its 2011 crop cash receipt forecast to $206.5 billion, up 6% from its initialforecast, and up 19% from 2010 levels.. We see strong farm profitability as catalyst for farm equipment demandUSDA now forecasts farm cash net income to increase 16% YoY in 2011 (up from 8%previously), and we see the strength in farm profitability as likely to drive strong farm equipmentdemand through 2012.. We continue to favor Key Call Buy-rated DE for exposure to the NA ag cycleWe remain bullish on the farm equipment cycle, as our channel checks indicate both improvingdemand and pricing. DE remains a UBS Key Call and our preferred way to play the farmequipment cycle as we continue to see beats over the next few quarters as a catalyst foroutperformance. Additionally, we maintain our Buy ratings on AGCO and CNH as we expectstrength in farm commodity prices as a positive catalyst.

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UBS 11






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

TechnologyVMware (VMW.N) Brent Thill........................ +1-415-352 4694

[email protected]

Reid Menge.......................+1-415-352 4696Associate [email protected]

Price (30 Aug 2011).....................US$90.7112-month rating...............Buy (Unchanged)12m price target........................US$125.00Market cap.................................US$39.0bn


Update from User Conference. FQ3/FY11 On Track, Macro Headwinds Not Blowing in Vegas This WeekNo signs of macro slowdown at VMworld 2011. CFO reconfirmed FQ3 and FY11 guidancebased on customer and sales feedback over past 6 weeks (though we’d note FQ3 is heavilyback-end loaded with Europe on Holiday until Sept). With attendee count +12% y/y (+52% over2009) many of the product sessions were sold out. Customer and partner engagement show theincreasing value of VMW’s product stack and vision. Interesting to note VMworld attendance isnow 50% of Oracle OpenWorld attendance, yet VMW has only 25% of ORCL’s market cap.. Encouraging Medium-Term OutlookBookings on a $4bn run rate (up 4x since 2007) represent only 13% of VMW’s own estimated2014 TAM of $30bn (and we think that’s low). Next-gen infrastructure management, applicationdevelopment, end-user computing and hybrid cloud build-outs are nascent bookingscontributors and remain big revenue opps. Management attach rate remains low but productrevisions in next 12 months should act as a demand catalyst. License bookings growth inemerging markets is outpacing overall with the virtualization journey in those regions juststarting.. Positive Customer/Partner ToneWe spoke with numerous customers/partners who cited VMW's multi-dimensional ROI as areason for increased investment. Customers/partners appear satisfied with VMW’s proactiverevisions to the updated vSphere pricing model.. Valuation: 23x FY12 FCF/sh, 36x PE (1.5x PEG), 8.0x EV/salesReiterate Buy, $125 PT based on 29x forward NTM FCF/share.

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




AOL (AOL.N) Brian Fitzgerald............... +1-212-713 [email protected]

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

Timothy O'Shea.................+1-212-713 2140Associate [email protected]

Price (30 Aug 2011).....................US$12.8112-month rating...............Buy (Unchanged)12m price target..........................US$20.00Market cap.................................US$1.36bn


Reiterate Buy on New Initiatives Driving Growth and AttractiveValuation. Reiterate Buy for AOLWe reiterate our Buy rating on AOL as we believe its Subscriber business (despite expectationsfor 20%+ Y/Y declines in the next couple of years) remains a potent cash cow that will continueto support investments in AOL’s Online Advertising business and help the company re-establishitself as a top player in the sector.. Subs Churn Moderating While New Initiatives Drive GrowthWe remain positive on AOL as we see increasing signs of a turnaround (i.e. first Y/Y ad revgrowth since 2Q08) along with decelerating Subs loss in the access business. Streamlinedproperties are driving improvement in engagement and monetization which we expect will leadto above avg ad rev growth. TechCrunch expects record traffic in August. Notably, Project Devildisplay ad impressions were up +100% Y/Y in 2Q; these ads generate a disproportionateamount of value.. Investment Thesis Outlined in Slide / Comment FormatTo highlight our investment thesis, we include easily digestible slides and comments starting onpage 2. Recent insider (AOL Directors) stock purchases and $250MM Stock Repurchaseprogram lend further support to our thesis.. Valuation – Our SOTP Suggests AOL Looks Attractive at Current LevelsOur $20 price target is based on our DCF (12% WACC; 3.0% LTGR) and supported by ourSOTP valuation. AOL trades at ~16x our 2012E EPS vs. ’11-14 CAGR of 45% (PEG of 0.4 – thelowest among our Internet Advertising names).

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




UtilitiesPG&E Corp. (PCG.N) Jim von Riesemann........ +1-212-713-4260

[email protected]

Julien Dumoulin-Smith...... +1-212-713 [email protected]

Aileen Long....................... +1-212-713 3475Associate [email protected]

Price (30 Aug 2011).....................US$41.9312-month rating......... Neutral (Unchanged)12m price target..........................US$42.00Market cap.................................US$15.6bn


NTSB blames PCG for pipeline explosion. Final NTSB report released; tone is decidedly negativeThe final NTSB report following the Sept 2010 San Bruno pipeline explosion states that theoriginal work done on the pipeline in 1956 “did not meet generally accepted industry qualitycontrol and welding standards then in effect.” The NTSB also found that the 2008 sewer lineinstallation near the rupture did not damage the pipeline, refuting claims that others may sharesome liability. Also, the NTSB cited that PCG’s “response time was excessively long andcontributed to the severity and extent…” which may pique more questions on insurancecoverage, in our view.. All questions, no answers at this point(1) What are the number of violations, the start date of those violations, and the potential fines/penalties and is there a maximum limit; (2) Does PCG’s pipeline modernization plan (unveiledlast week) meet the compliance threshold; (3) What is the appropriate cost allocation betweenshareholders and customers in order to bring PCG into compliance; (4) How will compliance bemeasured and over what time period?. The state and regulators appear to have great latitudeBased on our read of the report, the NTSB directs Gov Brown to make sure the CPUC has thelegal authority and ability to investigate, evaluate, and implement any and all pipeline safetyprocesses and procedures as well the ability to impose financial penalties for non-compliance.. Valuation - $42 target; Neutral ratingOur price target reflects a group median P/E multiple on our 2013E.

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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]

A more divided FOMC. Preview: Factory orders & inventories, ADP, Challenger on tap(1) Durables orders have already been reported up 4.0% in July, despite a 1.5% decline in corecapex orders. We estimate a small rise in orders for nondurable goods and a 1.9% increase intotal factory orders. Inventories are worth watching: June showed a sharp slowing in inventoryinvestment. That correction may explain some of the recent weakness in factory surveys forAugust. However, with low inventory/shipment ratios, we doubt that the inventory correction willlast long unless demand is weakening much more broadly than we forecast. (2) The ADPprivate payrolls data are mostly useful for offering detail on small, medium, and large-sizedbusinesses that is absent from the official BLS payroll data. However, on a month-to-monthbasis, the ADP private payroll estimate is frustratingly unreliable as a predictor of privatepayrolls in the Employment Report: sometimes a +100k miss, as in June; sometimes a 40k missin the opposite direction, as in July; and little to signal when the errors change direction. (3)Challenger layoffs and mortgage applications will also be reported.. Review: Conference Board confidence index plunges in Aug(1) The Conference Board consumer confidence index plunged in Aug, falling to 44.4 (UBSe51.0, cons 52.0) from 59.2. Through July, it had not shown nearly as much weakness as theUniv of Michigan or Rasmussen measures. Now it does. The drop in the index mostly reflectedexpectations, although current labor market assessments also deteriorated a bit. (2) TheS&P/Case Shiller home price index slipped 0.1% in June (UBSe 0.5% cons 0.0%). ThroughJune, prices have fallen 4.5%y/y. However, they are no longer trending down: prices rose at a1.3% annual rate in the three months through June. (3) The FOMC minutes displayed a Fedmore uncertain about the outlook for growth and more aware of downside risks, although“participants did not anticipate a downturn.” Alternative policy responses were discussed, withsome FOMC members favoring more accommodative policy than was announced and somefavoring no change from the prior FOMC statement’s characterization of the policy outlook.

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UBS 15









US Economic Comment Maury N. Harris.........................+1-212-713 [email protected]

Drew T. Matus........................... [email protected]

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

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

Conference Board confidence plunges. Conference Board confidence plunges 14.8 pts to 44.4 in AugustThe Conference Board consumer confidence index plunged in August, falling to 44.4 (UBSe51.0, cons 52.0) from 59.2 in July (revised from 59.5). Through July, the Conference Boardmeasure had not shown nearly as much weaknesss as the Univ of Michigan or Rasmussenmeasures. Now it does. The headline index was the lowest since Apr 2009.There was noticable discord among the components of the index: The expectations index fell23.0 points. In contrast, the present situation index slipped only 2.4 points, and spending plansfor appliances and vacations actually improved to the best levels since late last year. That said,there was some deterioration in household assessments of the current labor market, with a net44.4% of respondents indicating jobs were hard to get versus 39.7% a month earlier. Thatmeasure of labor market tightness has been moving roughly sideways—until this monthimproving marginally to average 37.7% in Q2 from 40.6% in Q1 and 41.7% in 2010.The resilience in retail sales in July—when most confidence measures began to deteriorateseriously—is a reminder that spending can deviate from confidence, as it appears to have so farin Q3. The decline in the Conference Board measure in August partly was catch-up toweakness already shown in other confidence measures (see charts on page 2), and itundoubtedly reflected households' negative reactions to the debt deal and S&P downgrade inlate July/early August and the stock market sell off earlier this month. (The cutoff date for theConference Board survey was August 18th.). SP/CS index edges down 0.1% in JuneThe S&P/Case Shiller home price index slipped 0.1% in June (UBSe 0.5% cons 0.0%), and Maywas revised to -0.1% from 0.0%. Through June, prices have fallen 4.5%y/y. However, they areno longer declining consistently, notwithstanding the slippage in June: prices rose at a 1.3%annual rate in the three months through June.. Store sales still holding upIn the last week of August, store sales were affected by Hurricane Irene both positively andnegatively: negatively because of an interruption of back to school shopping; positively becauseof hurricane-related precautionary buying.

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UBS 16





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 Securities Co. Limited is licensed to conduct securities investment consultancybusinesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage[1] IB Services[2]Buy Buy 54% 39%Neutral Hold/Neutral 39% 35%Sell Sell 7% 14%

UBS Short-Term Rating Rating Category Coverage[3] IB Services[4]Buy Buy less than 1% 33%Sell Sell less than 1% 25%

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


UBS 17

UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performancerecord, 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-month rating Short-term

ratingPrice Price date

AGCO Corp. 13, 16 AGCO.N Buy N/A US$41.91 29 Aug 2011

AOL Inc 13, 16 AOL.N Buy N/A US$15.31 30 Aug 2011

Beazer Homes 4, 6a, 13, 16, 20 BZH.N Buy (CBE) N/A US$2.19 30 Aug 2011

Cablevision Systems 2, 4, 5, 6a, 16 CVC.N Neutral N/A US$17.98 30 Aug 2011

CNH Global NV 4, 6a, 6b, 6c, 7, 16, 20 CNH.N Buy (CBE) N/A US$30.70 29 Aug 2011

Comcast Corporation 4, 5, 6a, 6b, 6c, 7, 16 CMCSA.O Buy N/A US$21.32 30 Aug 2011

D.R. Horton Inc. 4, 5, 6a, 6b, 7, 16, 20 DHI.N Buy (CBE) N/A US$10.60 30 Aug 2011

Deere & Co. 16, 22 DE.N Buy N/A US$78.91 29 Aug 2011

DIRECTV Group Inc. 2, 4, 6a, 6b, 6c, 7, 16 DTV.O Buy N/A US$43.78 30 Aug 2011

DISH Network Corp. 16 DISH.O Neutral N/A US$23.34 30 Aug 2011

Johnson & Johnson 16, 18 JNJ.N Buy N/A US$65.77 30 Aug 2011

KB Home 13, 16, 20 KBH.N Neutral (CBE) N/A US$6.74 30 Aug 2011

Lennar 2, 4, 6a, 6b, 7, 16, 20, 22 LEN.N Buy (CBE) N/A US$14.66 30 Aug 2011

Meritage Corporation 4, 16, 20 MTH.N Neutral (CBE) N/A US$18.75 30 Aug 2011

O'Reilly Automotive, Inc. 16 ORLY.O Buy N/A US$65.15 30 Aug 2011

PG&E Corporation 2, 4, 6a, 16 PCG.N Neutral N/A US$41.93 30 Aug 2011

Time Warner Cable Inc. 2, 3, 4, 5, 6a, 16 TWC.N Buy N/A US$65.51 30 Aug 2011

Toll Brothers 16, 20 TOL.N Buy (CBE) N/A US$17.18 30 Aug 2011

Valeant PharmaceuticalsInternational 16, 20

VRX.N Buy (CBE) N/A US$44.66 29 Aug 2011

VMware, Inc 5, 16 VMW.N Buy N/A US$90.71 30 Aug 2011

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

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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.

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

13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as 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).


UBS 18

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

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

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).

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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 were prepared in an independent manner, including with respect to UBS, and (2) no part of his or hercompensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analystin 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: Beazer Homes, US$2.19 (30 Aug 2011); Pulte Homes, US$4.95 (30 Aug 2011); Ryland Group, US$11.86 (30 Aug2011); Standard Pacific Corp., US$2.71 (30 Aug 2011); Toll Brothers, US$17.18 (30 Aug 2011); Source: UBS. All prices as of localmarket close.

Additional Prices: Beazer Homes, US$2.19 (30 Aug 2011); Pulte Homes, US$4.95 (30 Aug 2011); Ryland Group, US$11.86 (30 Aug2011); Standard Pacific Corp., US$2.71 (30 Aug 2011); Toll Brothers, US$17.18 (30 Aug 2011); Source: UBS. All prices as of localmarket close.

Additional Prices: Beazer Homes, US$2.19 (30 Aug 2011); Hovnanian Enterprises, US$1.75 (30 Aug 2011); Lennar, US$14.66 (30 Aug2011); Meritage Corporation, US$18.75 (30 Aug 2011); Pulte Homes, US$4.95 (30 Aug 2011); Ryland Group, US$11.86 (30 Aug 2011);Standard Pacific Corp., US$2.71 (30 Aug 2011); Toll Brothers, US$17.18 (30 Aug 2011); Source: UBS. All prices as of local market close.

Additional Prices: BE Aerospace Inc., US$35.22 (30 Aug 2011); Boeing Co., US$66.03 (30 Aug 2011); Goodrich Corp., US$87.89 (30Aug 2011); Honeywell International Inc., US$47.29 (30 Aug 2011); Precision Castparts Corp., US$165.66 (30 Aug 2011); RockwellCollins Inc., US$50.53 (30 Aug 2011); United Technologies Corp., US$73.76 (30 Aug 2011); Source: UBS. All prices as of local marketclose.


UBS 19

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ab


UBS 20

financial pacific - valuation provides attractive opportunity, d.r. horton (dhi.n) (third party)

Business

fy11e us

fy12e us

consistency12month rating

optimistic12month rating

unchanged cbe

investment case12month

user conference12month

pt prior