You are on page 1of 15

MORGAN STANLEY RESEARCH

February 1, 2007 Research North America

Seven “Big Ideas” for 2007
US Portfolio Strategy

Henry H. McVey Chief US Investment Strategist henry.mcvey@morganstanley.com 212-761-7201

Salesforce Update

Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. [Customers of Morgan Stanley in the U.S. can receive independent, third-party research on the company covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800624-2063 to request a copy of this research.]

For analyst certification and other important disclosures, refer to Disclosure Section.

and we favor companies that are selling retirement products to aging populations. As such. 2007 US Portfolio Strategy What’s the Punch Line? Updating our Big Ideas: We have narrowed our sector bets for 2007. and ACE.” If Doug is correct (and we think he is). Unlike the late 1990s. but ideas worth mentioning on this score include MO. MRK. makes this sector a back-door play on globalization. but the Focus List is still levered to several key longterm trends. we have seven big ideas that we think are money makers for 2007 and beyond. #6 Moderating Litigation Risk: In a reversal of the prevailing trend during 2003-1H05.com 1 . providing real pricing power. our goal is to focus on companies that can grow reasonably well and deliver a brand promise to customers that is worth paying for. It should also lead to increased demand for non-traditional drilling and services offerings. #2 US Financials with Exposure to International Growth. they will come” delusions. today we actually see declining litigation risks as a positive catalyst for several parts of the market. McVey (212) 761-7201 henry. Not surprisingly.MORGAN STANLEY RESEARCH February 1. Our bull case on defense names is that they are morphing into tech companies that enjoy scale advantages and limited global competition. and popular acceptance. We also believe that international growth will continue to outpace domestic. #1 Extended Aerospace and Defense Cycle: What we like about aerospace—Boeing and its suppliers in particular—is that surging demand for wide-body aircraft. Henry H. Demographics. lack of reserve growth should lead to a positive re-rating of companies that can deliver low cost production growth. In fact. Some are holdovers from last year. #3 Network Ubiquity: Everywhere we look. We see two ways to play this theme: buy high-yielding dividend stocks with solid growth characteristics or buy the retirement providers that should benefit from higher contribution rates. advice provision. #7 The Long Cycle in Commodities: We are still of the mindset that energy can enjoy what our colleague Doug Terreson calls “The Long Cycle. but all still warrant investor attention in our view. we favor the Makers. in some cases.mcvey@morganstanley. #4 Pension Protection Act of 2006: Our punch line is that this recent legislation should lead to increased flows into 401(k)s and eventually IRAs. The “Long Cycle” should also favor bio-fuels plays like Monsanto and Deere. though. See our full note for details. and Capital Markets: We believe that we are in a bull market for transfer of risks off balance sheets and into capital markets. Excess demand is creating stiff bottlenecks that are rewarding innovation and. #5 Defendable American Brands with International Growth Opportunities: We continue to believe that globalization is dividing the economy into the Price Makers and the Price Takers. vendors are no longer suffering from “if you build it. especially in China. IT providers are working to allow customers to drive more content through their pipes.

3% 8.0% 4.8% 1.1% e NA 14. McVey (212) 761-7201 henry. Marathon Oil Corp.56 80.54 44.4% 6. Schlumberger Ltd.258 40. McDonald's Corp.4% NA 19. Yum! Brands Inc.130 23.8% -4. MP FL. (Cl A) General Dynamics Corp.9% NA 13.91 50.1% e NA 20.9% e -1. American International Group Inc.60 40. NA = Not Available.3% 5.7% 18.705 23.24 68.0% 14. Cl B State Street Corp.58 34. EOG Resources Inc.8% 7.8% e NA 7.59 88.7% 8.06 89.4% 3.0% 4.7% 9.4% e 23.135 7. AT&T Inc.780 23.8% e NA 1.627 23.0% NA 37.8% -10. American Tower Corp. Rockwell Collins Corp.9% NA 24.5% 2. Raytheon Co. Cisco Systems Inc.4% 4.4% 20.5% NA 18.2% e 13.2% e NA 8.2% 6.88 70.9% 22.8% 3.5% 18.3% NA 20.8% -1.6% 7.78 30.2% e 3.1% 0.2% 5.5% NA 31.9% 8.5% 4.921 42.18 94.8% 10.4% 4.5% -2.926 3.3% 13.5% 56.00 39.9% 11.1% 6. Inc.1% -9.7% 9.57 37.651 14.3% e -2. DST Systems Inc.569 31.253 12.6% -0. ConocoPhillips Merck & Co.3% e 3.8% NA 16.4% 5.56 29.5% 23.708 30. Monsanto Co. T.24 51.2% e 8.6% NA 454. MP MP MP MP FL.148 8.22 77.0% 59.2% -4.0% e NA 15.6% 18.364 3.6% 31. Merck & Co. Polo Ralph Lauren Corp.350 23.7% -12.4% e 3.43 47.MORGAN STANLEY RESEARCH February 1.2% 23.7% 3. Deere & Co. Hartford Financial Services Group Inc. CBS Corp.00 34.8% 2.92 YTD Return -3.1% MS Net Income 3yr CAGR ('07 -'09) 23.3% NA 5.4% NA 16. E = Equal-Weight.1% 14.780 16.386 183.8% 26. Stock Rating: O = Overweight.9% 10.399 16.40 87. Charles Schwab Corp.8% 23.0% e 7.3% 31. Prudential Financial Inc. Rowe Price Group Inc.8% 0. I = In-Line.31 55.02 70.0% 26. GICS Industry Group Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Insurance Diversified Financials Diversified Financials Insurance Technology Hardware & Equipment Telecommunication Services Telecommunication Services Telecommunication Services Software & Services Food Beverage & Tobacco Energy Pharmaceuticals Biotechnology & Life Sciences Diversified Financials Insurance Telecommunication Services Consumer Services Media Diversified Financials Diversified Financials Diversified Financials Software & Services Consumer Services Consumer Services Consumer Services Consumer Durables & Apparel Food Beverage & Tobacco Pharmaceuticals Biotechnology & Life Sciences Insurance Energy Energy Energy Energy Energy Materials Capital Goods "Big Ideas" Median S&P 500 Median* Price 1/30/07 86.03 96.2% Market Value (millions) 65.7% -1.350 177. Merrill Lynch & Co.3% e NA 7. Weatherford International Ltd.045 97. V = More Volatile.631 31.9% 16. Industry View: A= Attractive.444 97.3% 6.7% e 3.8% e 9.656 74.4% e 6.5% 18.3% e 11.7% e 2. MP FL FL.466 81.1% -3. Spirit AeroSystems Holdings Inc.0% 5.5% e 6.1% 2. MP MP Defendable American Consumer Brands With International Growth Opportunities Moderating Litigation Risks The "Long Cycle" in Commodities FL * For S&P 500 we use ModelWare data for 308 companies representing 79% of the index market capitalization.24 18. Source: FactSet.com 2 .76 70.546 22.5% 16. XTO Energy Inc.206 MS Revenue 3yr CAGR ('07 -'09) 10.3% -3. ACE Ltd.0% 3. Screened as of January 29.267 159. MP FL Focus List / Model Portfolio Extended Aerospace & Defense Cycle FL.570 173.599 29.0% -8.128 2.5% 6. 2007.9% 9.20 63.101 13. Altria Group Inc.20 59. Altria Group Inc. International Game Technology Starbucks Corp.570 19.5% NA 27. U = Underweight.1% 14. SBA Communications Corp.7% 27.878 22.20 26.1% 34.410 11.3% 3.3% e 18.1% e 8. 2007 US Portfolio Strategy Selected Stocks as Representative of Seven Morgan Stanley Themes Ticker BA COL SPR GD LMT RTN PRU MER STT AIG CSCO TWTC AMT SBAC DOX MO COP MRK JPM HIG T MCD CBS STT SCHW TROW DST YUM IGT SBUX RL MO MRK ACE WFT SLB XTO EOG MRO MON DE Company Name Boeing Co.1% 18.28 68.3% 11.7% 15.46 50.615 4.mcvey@morganstanley. Amdocs Ltd.01 99.09 43.7% e 8.574 142. MP FL Network Ubiquity Pension Protection Act FL. Inc. Morgan Stanley Research.3% 19.229 183.5% e 1.0% 4.770 18.0% 1.5% 7.1% 9.65 44.4% 14.9% NA -8.8% e 7.5% e 11.1% 6.1% e 16. Henry H.8% -1.06 44. NR = Not Rated. Time Warner Telecom Inc.77 31.7% -3.2% e 15.25 23.533 54.9% 4.00 67.4% 12.825 16.3% -0.4% Average '06-'08 Modelware ROE 24.0% -3.6% e 16. Inc.96 87.1% NA 10.444 108. C = Cautious.9% NA 27. JPMorgan Chase & Co.1% Morgan Stanley Rating O/A O/A O-V / A O/A O/A O/A O/I NR U/I O/I O-V / I O/I O/I O/I E/I O/A O/I O/I O/I O/I O/I O/I E/A U/I E/I NR O/I E/I O/I NR O/C O/A O/I O/I O/A O/A O-V / A O/A O/I NR O/I FL.4% 18.97 92.2% 15. MP Global Financials FL.2% e NA -3.54 65.91 58.3% 6.2% -4.0% 15.3% 33. Lockheed Martin Corp. State Street Corp.5% e 9.5% -2.6% 1.899 26.640 15.4% NA 11.

DoD Comptroller Henry H. Source: Company data. Defense Spending Only in Mid-Range of Last 50 Years ($B) $300 WWII Ends 1945 Vietnam $200 Budget Authority Outlays $100 DoD Weapons Spending Trends (BA and Outlays. Morgan Stanley Research On a Constant Dollar Basis.MORGAN STANLEY RESEARCH February 1. McVey (212) 761-7201 henry.mcvey@morganstanley. 2007 US Portfolio Strategy #1: Extended Aerospace and Defense Cycle Aerospace Still Ramping Up 1250 1000 750 500 250 0 2003A 2004A 2005A 2006E 2007E 2008E 2009E 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Commercial Aircraft Deliveries by OEM 1990-2010E Just at mid-cycle Peak in 2010/11 Boeing Airbus Total 2010E 2011E 2012E OEM = Original Equipment Manufacturer. FY2007 Dollars) FY2007 Request Authority: $157.com 3 .4B Reagan Buildup Berlin Wall Falls FY04A $0 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 Source: Morgan Stanley Aerospace & Defense Research.

McVey (212) 761-7201 henry. and Capital Markets #3: Network Ubiquity We Are in a Bull Market for Risk Transfer Network Ubiquity: Everyone’s Getting Connected 500 450 400 350 300 250 200 150 100 50 1998 Global Derivatives Markets: Notional Amounts Oustanding ($Trillions) Exchange-Traded OTC 1. Source: Morgan Stanley Research Henry H.400 1.mcvey@morganstanley.200 1.MORGAN STANLEY RESEARCH February 1. 2007 US Portfolio Strategy #2: Financials Exposed to International Growth.com 4 . Demographics. Morgan Stanley Research e = Morgan Stanley Research estimates.000 800 600 400 200 0 147 162 2005 153 168 2006e 160 173 2007e 166 180 2008e 171 187 2009e 501 647 Emerging Markets North America Western Europe Worldwide Handset Shipment (Millions) 734 799 849 901 179 190 2010e 1999 2000 2001 2002 2003 2004 2005 2006 Source: BIS.

77 Renminbi/$. Morgan Stanley Research Note: China PCE converted at 1/25/07 exchange rate of 7. China National Bureau of Statistics. Source: Company data. 2005 ($Bn) 913 Wal-Mart global sales equivalent to more than 1/3 of China Total PCE! 15 11 5 12 11 12 16 312 Wal-Mart Global Sales 2006e 2007e 2008e 2009e 2010e 2011e 2012e China Personal Consumption Expenditures e = Morgan Stanley Research estimates. Haver.mcvey@morganstanley. 2007 US Portfolio Strategy #4: Pension Protection Act of 2006 #5: Defendable American Brands With International Growth Opportunities Raising Our Outlook for Defined Contribution Flows Talk About Tough Comparisons! DC Net Inflows ($Billions): Morgan Stanley Forecast New Old 30 32 37 35 33 Consumer Spending Comparison. Source: Dept of Labor — EBSA Private Pension Plan Bulletin. McVey (212) 761-7201 henry.com 5 . Morgan Stanley Research Henry H.MORGAN STANLEY RESEARCH February 1.

6% 30.5% 3/31/06 -4.000 35. McVey (212) 761-7201 henry.000 10.000 ESP AUT GER ITL FRA UK KOR CAN BEL JPN US S&P 100 Relative Performance vs.com 6 .00 0 IRN RUS ZAR CHN TKY BRA IND UKR MEX 5.08 0.01 0.3% 1/30/07 -2.MORGAN STANLEY RESEARCH February 1.10 0. Datastream.06 0. EIU.mcvey@morganstanley. S&P 500 (12/31/95 = 0%) 15% 10% 5% 0% -5% -10% 95 96 97 98 99 00 01 02 03 04 05 06 3/31/00 14.03 0.02 0. Morgan Stanley Research Henry H.07 0. 2007 US Portfolio Strategy #6: Moderating Litigation Risk #7: The Long Cycle in Commodities Amid Moderating Litigation Risk.04 0.05 0.000 40.000 25.000 45. Morgan Stanley Research Source: British Petroleum. Some Sleeping Giants Are Beginning to Stir Oil consumption per urban person 2005 (barrels per day) Emerging Market Growth Provides Long-Term Opportunity 0.000 20.000 15.000 PPP GDP per capita 2005 (US$) Source: Factset.09 0.

Cap. about 52% (262) of the S&P 500 companies – representing 61% of the index market cap – have reported 4Q06 earnings.9%) Earnings Revisions – Of the 24 S&P 500 industry groups.8% below and 15. see our weekly earnings publications. the overall percentage of companies meeting or beating expectations is in-line with the average ratio during the past two years – In aggregate. 22 0. Diversified Financials (+21%).com 7 . McVey (212) 761-7201 henry. Groups with countertrend positive revisions include Pharma & Biotech (+22%). Henry H. and Materials (5. At the sector level. areas where earnings have come in notably above expectations so far include Info Tech (7. Banks (-19%).1% above expectations. At 78.1 0. Energy (5. The breadth of downward revisions was this great only two other times in the past five years.2 0.0 12/28 1/4 1/11 3Q06 63 63 16 12 8 4 1Q06 1Q07 2/1 2/8 3/1 1/18 1/25 2/15 2/22 3/8 3/15 3/22 3/29 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 0 12/29/00 3/30/01 6/29/01 9/28/01 12/28/01 3/28/02 6/28/02 9/27/02 12/27/02 3/28/03 6/27/03 9/26/03 12/26/03 3/26/04 6/23/04 9/22/04 12/22/04 3/24/05 6/22/05 9/21/05 12/21/05 03/22/06 06/21/06 09/20/06 12/20/06 For further detail.2% 34% 22% 8% 22% 14% 25% 13% 26% 50% 27% 21.0% 66% 78% 92% 78% 86% 75% 87% 74% 50% 73% 78. 62 companies have issued guidance for 1Q07. and 44 guided downward.2%. Reported Sector Reported Reported Surprise Ratios Above At/Above Below • Cons Discretionar Consumer Staples Energy Financials Health Care Industrials Info Tech Materials Telecom Services Utilities S&P 500 32 18 12 58 28 32 46 23 2 11 262 88 38 31 87 55 52 78 29 10 32 500 36% 47% 39% 67% 51% 62% 59% 79% 20% 34% 52% 32% 54% 28% 75% 78% 76% 68% 81% 55% 44% 61% 56% 72% 83% 59% 68% 59% 63% 70% 50% 55% 63. Telecom Services (-13%).2% in-line. Morgan Stanley Research. earnings for the companies that have reported have been 4. 63.3 0. the ratio of positiveto-negative guidance is firmly below the ratio that prevailed at this time the previous two quarters and below the level in 1Q06 (see lower right chart) Ratio of Positive-to-Negative S&P 500 Guidance 4Q06 Percentage of S&P 500 Companies Reporting Positive EPS Surprise 75 70 65 60 55 50 56 58 65 In-line with 4Q05 and 4Q04 Number of Industry Groups With Negative Revisions Over The Past Week 71 63 24 20 10/05/01. 21. Insurance (+19%). and Capital Goods (+19%) Earnings Guidance – To date.7%).0% have reported above expectations. 22 had weekly declines in earnings revisions.5 0.mcvey@morganstanley. and Utilities (-11%). (see lower left chart) – Industry groups with negative revisions include Energy (-36%). At 0.4 0. Of that total.11. 22 7/07/04. 2007 US Portfolio Strategy Overview: Earnings — January 2007 S&P 500 4Q06 Preliminary Earnings Analysis Sector # Cos % of% of Sector # Cos in Co's Mkt.9%). Growth estimates based on consensus bottom-up aggregates. 13 guided in-line. Financials (6. 5 companies issued positive guidance.8% • • 4Q06 Earnings Update – To date.2%).6 0. Semis & Semi Equipment (-18%). Source: Thomson Financial. 21 1/24/07. Of these.MORGAN STANLEY RESEARCH February 1.

8 14.7 Total Return: 12/31/06 .7 3.2 2.mcvey@morganstanley.9 16.3 3.12/31/06 24.0 2.2 13.7 1.12/31/06 Total Return: 12/31/06 .7 17.7 2.5 2.8 2.5 6.5 16.2 S&P Small Caps S&P Mid Caps S&P 500 A+ Highest Div Yield 2nd Quintile 3rd Quintile 4th Quintile No Div Yield A A- B C S&P Common Stock Rating High Beta Outpaced Low Beta In January Total Return: 12/31/05 .12/31/06 Total Return: 12/31/06 .5 22.12/31/06 22.5 1. Morgan Stanley Research. Source: Factset.1 16.6 13.8 Moderate Dividend Yielders Did Best Total Return: 12/31/05 .1/31/07 Total Return: 12/31/06 .1 2.7 10. 2007 US Portfolio Strategy Performance: What’s Working Small/Mid Caps Outperform In January Total Return: 12/31/05 .2 2.1/31/07 17.1/31/07 24.5 16.9 2.1 High EPS Revisions Continue To Work Total Return: 12/31/05 .MORGAN STANLEY RESEARCH February 1.1 S&P 100 1.8 18. McVey (212) 761-7201 henry.4 2.0 B+ 2.7 2.3 5.8 13.9 12. Henry H.8 1.12/31/06 Total Return: 12/31/06 .8 2.3 10.4 0.1 1.1 3.3 17.6 Highest 24 2nd Quintile 3rd Quintile 4th Quintile Mo Beta Lowest 24 Mo Beta Highest Earnings Revisions 2nd Quintile 3rd Quintile 4th Quintile Highest 2nd Quintile 3rd Quintile 4th Quintile Lowest FY2/FY1 FY2/FY1 EPS Growth EPS Growth For the S&P 500 universe except the market cap chart.0 9.6 10.com 8 .1/31/07 Low Quality Stocks Are Outperforming Total Return: 12/31/05 .2 Lowest Earnings Revisions Moderate Growth Expectations Did Best Total Return: 12/31/05 .1/31/07 16.3 2.4 1.6 12.1/31/07 18.7 1.12/31/06 Total Return: 12/31/06 .3 16.7 2.2 2.12 15.8 12.4 B- 3.06 1.6 2.1 14.9 2.1 16.5 15.

P. Yum! Brands. Inc. Altria Group.. T. Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in this report (including where guarantor of the securities): ACE Limited. Inc.morganstanley. SBA Communications. American Tower Corp.com 9 . State Street Corporation.. In the next 3 months. Merrill Lynch & Co. ConocoPhillips. Boeing Company. Prudential Financial. strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS. Cisco Systems (common stock).P. Prudential Financial. Weatherford International. Polo Ralph Lauren Corp. Monsanto Company.. AMDOCS. McDonald's. J.com/institutional/research/conflictpolicies. Time Warner Inc.Morgan Chase & Co.Altria Group. (common stock).. Hartford Fin. Weatherford International. McDonald's. McVey (212) 761-7201 henry. or research associate (or a household member) owns securities in a company that he or she covers or recommends in this report: Frances Lim . Hartford Fin. Raytheon. Morgan Stanley has received compensation for investment banking services from Altria Group. 2007 US Portfolio Strategy Important US Regulatory Disclosures Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Henry McVey. Henry McVey . the individuals listed on the cover page of this report are research analysts. McDonald's. Weatherford International. Weatherford International.. Within the last 12 months.. Important US Regulatory Disclosures on Subject Companies The following analyst. Weatherford International. Schlumberger. General Dynamics. IGT. Merrill Lynch & Co. ACE Limited. EOG Resources... Unless otherwise stated. Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger. Schlumberger. Cisco Systems. American Int'l Grp. State Street Corporation. American Int'l Grp. Spirit AeroSystems Holdings Inc... Morgan Stanley managed or co-managed a public offering of securities of Cisco Systems. Prudential Financial. Inc..Cisco Systems (common stock). Merck & Co. fund distribution or other involuntary acquisition. Marathon Oil Corporation. Marathon Oil Corporation. Henry H. Time Warner Inc.. Rockwell Collins. Rowe Price Group Inc. American Int'l Grp (common stock).. As of December 29. Raytheon. Polo Ralph Lauren Corp. Rockwell Collins. Services Grp. Inc. Merrill Lynch & Co. Hartford Fin..P. Boeing Company. Marathon Oil Corporation.. American Tower Corp. Altria Group." which was developed by and is the exclusive property of MSCI and S&P). Time Warner Inc. J. State Street Corporation.P. American Tower Corp.. 2006. Merck & Co. J. As of December 29. strategist. Time Warner Inc. ConocoPhillips. Morgan Stanley expects to receive or intends to seek compensation for investment banking services from 3Com. Services Grp. Time Warner Inc. ConocoPhillips. Altria Group... Services Grp. which is available at www. The following company employs a household member of a research analyst or associate who covers or recommends its securities: Cisco Systems. Raytheon.. (common stock). SBA Communications. Cisco Systems. McDonald's. Spirit AeroSystems Holdings Inc. Yum! Brands. Morgan Stanley policy prohibits research analysts..Morgan Chase & Co.mcvey@morganstanley. Schlumberger...MORGAN STANLEY RESEARCH February 1. Global Research Conflict Management Policy This research has been published in accordance with our conflict management policy. Merck & Co.Morgan Chase & Co.. Within the last 12 months. CBS Corporation. Hartford Fin. Prudential Financial. Monsanto Company. EOG Resources. Raytheon. Services Grp. American Int'l Grp. IGT. 2006. Inc..Morgan Chase & Co. ConocoPhillips (common stock). Merrill Lynch & Co. (common stock). CBS Corporation... Schlumberger. AMDOCS. Merck & Co. IGT. J. Boeing Company.. General Dynamics. American Tower Corp. Prudential Financial. EOG Resources. Monsanto Company. Merck & Co.. Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: 3Com.

. J. Weatherford International. Inc. Cisco Systems...Morgan Chase & Co. ACE Limited.. J. Schlumberger. Spirit AeroSystems Holdings Inc. Altria Group.P. AMDOCS. Services Grp.. Cisco Systems.. ConocoPhillips. State Street Corporation. investor client feedback. is a director of Marathon Oil Corporation. 2007 US Portfolio Strategy Important US Regulatory Disclosures Within the last 12 months.MORGAN STANLEY RESEARCH February 1. Time Warner Inc. Schlumberger. or research associates principally responsible for the preparation of this research report have received compensation based upon various factors.. the following companies covered in this report: 3Com. Prudential Financial. McVey (212) 761-7201 henry.mcvey@morganstanley. Incorporated and/or Morgan Stanley DW Inc. State Street Corporation. Raytheon. or has an investment banking client relationship with. Merrill Lynch & Co. General Dynamics. Hartford Fin. ACE Limited. J. Marathon Oil Corporation. Morgan Stanley has either provided or is providing non-securities related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following companies covered in this report: Hartford Fin. American Int'l Grp. Within the last 12 months. Altria Group. Cisco Systems. McDonald's. T. Merck & Co. Charles Schwab Corporation. Marathon Oil Corporation. Within the last 12 months. stock picking. Raytheon. An employee or director of Morgan Stanley & Co. Morgan Stanley & Co. securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following companies covered in this report: 3Com. Weatherford International. Services Grp.. ConocoPhillips. ConocoPhillips. Rowe Price Group Inc. Services Grp.. Charles Schwab Corporation. Inc. Weatherford International. Cisco Systems.. Morgan Stanley has either provided or is providing non-investment banking.. Services Grp.. Monsanto Company. Time Warner Inc. Merrill Lynch & Co. McDonald's. IGT. Incorporated makes a market in the securities of 3Com. Incorporated has received compensation for products and services other than investment banking services from ACE Limited. EOG Resources. General Dynamics.P. McDonald's. competitive factors. Schlumberger. The research analysts. Prudential Financial. strategists. AMDOCS. Merck & Co.. Hartford Fin. Merrill Lynch & Co. EOG Resources.. American Tower Corp. T.P. Prudential Financial. SBA Communications. American Int'l Grp. Boeing Company. Boeing Company. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions Henry H. Marathon Oil Corporation.Morgan Chase & Co. EOG Resources. Schlumberger. General Dynamics. Morgan Stanley has provided or is providing investment banking services to. Rowe Price Group Inc.Morgan Chase & Co. Hartford Fin. Charles Schwab Corporation. T. Boeing Company. State Street Corporation.... including quality of research. CBS Corporation. SBA Communications. firm revenues and overall investment banking revenues. Merck & Co. Rowe Price Group Inc. Rockwell Collins.com 10 . Morgan Stanley & Co.. Within the last 12 months. Inc. Time Warner Inc. Yum! Brands. Altria Group.

or in the analyst's view. it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. Unless otherwise specified. 2007 US Portfolio Strategy Ratings Distribution Table STOCK RATINGS Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. More volatile (V). investors should carefully read the entire research report and not infer its contents from the rating alone. In addition. over the next 12-18 months. We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month. on a risk-adjusted basis. the time frame for price targets included in this report is 12 to 18 months. on a risk-adjusted basis.MORGAN STANLEY RESEARCH February 1.mcvey@morganstanley.187 Investment Banking Clients (IBC) % of Count Total IBC 288 305 90 683 42% 45% 13% % of Rating Category 35% 41% 24% % of Total 37% 46% 17% Data include common stock and ADRs currently assigned ratings. on a risk-adjusted basis. McVey (212) 761-7201 henry. hold and sell is not equivalent to our rating system. The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe. ratings (or research) should not be used or relied upon as investment advice. Analyst Stock Ratings Overweight (O). We note that securities that we do not currently consider "more volatile" can still perform in that manner. A rating system using terms such as buy. 2007 Coverage Universe Stock Rating Category Overweight Equal-weight Underweight Total Count 814 966 377 2. Global Stock Ratings (as of January 31. The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe. over the next 12-18 months. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Equal-weight (E).com 11 . Underweight (U). For example. over the next 12-18 months. since the research report contains more complete information concerning the analyst's views. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). Investors should carefully read the definitions of all ratings used in each research report. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. based on a quantitative assessment of historical data. Henry H. Morgan Stanley uses a relative rating system including terms such as Overweight. Equal-weight or Underweight (see definitions below). In any case. The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe.

the contents of this publication in Canada. comprehensive information. 67 003 734 576.. To our readers in Taiwan: Information on securities that trade in Taiwan is distributed by Morgan Stanley & Co. This publication is disseminated in Japan by Morgan Stanley Japan Limited. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. and has agreed to take responsibility for. 233742. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Seoul Branch. 2007 US Portfolio Strategy Other Important Disclosures With the exception of information regarding Morgan Stanley. which accept responsibility for its contents. in Hong Kong by Morgan Stanley Dean Witter Asia Limited (which accepts responsibility for its contents). holder of Australian financial services licence No. and may not reflect information known to. International Limited.com 12 . Morgan Stanley & Co. which has approved of.. which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations. There may be time limitations on the exercise of options or other rights in your securities transactions. professionals in other Morgan Stanley business areas. Facts and views presented in this report have not been reviewed by. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H). S. a Morgan Stanley group company.MORGAN STANLEY RESEARCH February 1. please contact our Hong Kong sales representatives. Unless otherwise stated. International Limited. The Branch may not execute transactions for clients in these securities.N. Henry H.A. Estimates of future performance are based on assumptions that may not be realized. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. Past performance is not necessarily a guide to future performance. Incorporated and Morgan Stanley DW Inc. regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin).mcvey@morganstanley. Frankfurt am Main. the cover page provides the closing price on the primary exchange for the subject company's securities.B.. securities prices or market indexes. authorized and regulated by Financial Services Authority. in India by JM Morgan Stanley Securities Private Limited. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. in Germany by Morgan Stanley Bank AG. reports prepared by Morgan Stanley research personnel are based on public information. in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte. but we make no representation that it is accurate or complete. McVey (212) 761-7201 henry. regulated by the Monetary Authority of Singapore. in Spain by Morgan Stanley. S. If you have any queries concerning this publication. Such information is for your reference only. in Korea by Morgan Stanley & Co International Limited. Morgan Stanley Dean Witter Asia Limited as part of its regulated activities in Hong Kong. including investment banking personnel. in the United States by Morgan Stanley & Co. in Australia by Morgan Stanley Dean Witter Australia Limited A. Morgan Stanley makes every effort to use reliable. which accepts responsibility for its contents. and is attributable to. Taipei Branch (the "Branch"). in Canada by Morgan Stanley Canada Limited. operational or financial conditions of companies or other factors.V. which accepts responsibility for its contents.

research which has been prepared by any of its affiliates. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. in printed form.mcvey@morganstanley. In Australia. The trademarks and service marks contained herein are the property of their respective owners. investors should obtain the advice of their Morgan Stanley & Co. Third-party data providers make no warranties or representations of any kind relating to the accuracy. 2007 US Portfolio Strategy Other Important Disclosures disseminates in the UK research that it has prepared. McVey (212) 761-7201 henry. This report or any portion hereof may not be reprinted. Additional information on recommended securities is available on request. Morgan Stanley research is disseminated and available primarily electronically.com 13 . and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000. or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. this report.MORGAN STANLEY RESEARCH February 1. in some cases.K. International Limited representative about the investments concerned. and any access to it. Henry H. completeness. Private U. and. sold or redistributed without the written consent of Morgan Stanley.

MORGAN STANLEY RESEARCH February 1. NY 10036-8293 United States Tel: +1 (1)212 761 4000 Europe 25 Cabot Square.mcvey@morganstanley. McVey (212) 761-7201 henry.com 14 . Ebisu 4-chome Shibuya-ku. Canary Wharf London E14 4QA United Kingdom Tel: +44 (0)20 7425 8000 Japan 20-3. Tokyo 150-6008. Japan Tel: +81 (0)3 5424 5000 Asia/Pacific Three Exchange Square Central Hong Kong Tel: +852 2848 5200 Henry H. 2007 US Portfolio Strategy The Americas 1585 Broadway New York.