ab Global Equity Research

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UBS Investment Research Equity Strategy

US Research Market Comment

2013 Sector Themes & Analyst Top Picks 19 December 2012

„ Top 1Q stock ideas www.ubs.com/investmentresearch

UBS’ US Research Analysts have provided two key sector themes for 2013 as well
as their most preferred and least preferred stocks in their coverage universe for the
first quarter of 2013. Each investment idea in this report includes an investment U.S. Equity Product Management
thesis, current valuation as well as upside/downside scenarios, and risks.
212-713-2400
„ US Equity Strategy Sector Recommendations
We are overweight Discretionary and Staples into a gradually improving
employment picture, lower consumer debt burdens, and a housing recovery. We
also like Health Care, given the potential for volumes to produce upside surprises.
We’re underweight Financials given weak fundamentals and increased regulation,
and Telecom and Utilities due to expensive valuations and weak earnings growth.

„ Sector Preferences Most and Least Preferred Stocks

Our most preferred Consumer stocks in this report include ANN, ENR, FL, LOW
(US Key Call), LVS, MNST (US Key Call), SBUX, and WFM. Healthcare most
preferred stocks are BMRN, CFN, CYH, GILD, JAZZ, MCK, TMO, and WCRX.
Least preferred Sell-rated Financial stocks include CBL, LAZ, and LPLA, while
TE and DYN are Sell-rated Utilities.

„ Options Strategy
Please see the companion Derivatives Strategy report “Top Trades for Top Picks:
1Q2013” for options strategies related to this report.

Table 1: UBS US Equity Strategy: S&P 500 – Sector Recommendations

OVERWEIGHT MARKET WEIGHT UNDERWEIGHT
Consumer Discretionary Technology Financials

Consumer Staples Industrials Telecom

Health Care Energy Utilities

Materials

Source: Standard & Poor’s and UBS

This report has been prepared by UBS Securities LLC

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 110.
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
US Research 19 December 2012

Contents page U.S. Equity Product Management

Communications 7 212-713-2400

Consumer 14
Energy 31
Financials 46
Healthcare 62
Industrials 76
Technology 97

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Table 2: UBS US Analysts Most Preferred

Current Price Upside to YTD

Sector Stock Ticker Analyst Rating Price Target Target Return

COMMUNICATIONS

Cable & Satellite / Telecom

Comcast Corporation CMCSA John Hodulik, CFA Buy $37.54 $41 9.2% 58.3%
Svcs

Cable & Satellite / Telecom

American Tower Corporation AMT Batya Levi Buy $76.90 $83 7.9% 28.1%
Svcs

Entertainment and Publishing

Time Warner Inc. TWX John Janedis, CFA Buy $47.94 $50 4.3% 32.7%
& Advertising Agencies

CONSUMER

Apparel, Footwear & Textiles Foot Locker Inc. FL Michael Binetti Buy $33.31 $41 23.1% 39.7%

Beverages Monster Beverage Corp. MNST Kaumil S. Gajrawala Buy $52.76 $77 45.9% 14.5%

Cosmetics, Household &

Personal Care Products and Energizer Holdings ENR Nik Modi Buy $80.09 $90 12.4% 3.4%
Tobacco

Food and Restaurants Starbucks Corp. SBUX David Palmer Buy $54.58 $59 8.1% 18.6%

Food and Drug Retail Whole Foods Market, Inc. WFM Jason DeRise, CFA Buy $89.84 $111 23.6% 29.1%

Gaming & Lodging and Leisure Las Vegas Sands Corp. LVS Robin Farley Buy $46.57 $50 7.4% 9.0%

Retailing/Hardlines Lowe’s Companies, Inc. LOW Michael Lasser Buy $35.85 $39 8.8% 41.3%

Retailing/Specialty Retail ANN, Inc. ANN Roxanne Meyer, CFA Buy $33.49 $43 28.4% 35.1%

ENERGY/UTILITIES

Electric Utilities Avista Corp AVA Jim von Riesemann Buy $24.33 $28 15.1% -5.5%

Diversified Natural Gas Targa Resources Partners, L.P NGLS Christopher Sighinolfi, CFA Buy $34.88 $51 46.2% -6.4%

Independent Power Producers PPL Corporation PPL Julien Dumoulin-Smith Buy $29.27 $31 5.9% -0.5%

Integrated Oil and Oil & Gas

Anadarko Petroleum Corp. APC William Featherston Buy $74.88 $105 40.2% -1.9%
Exploration & Production

Small-Mid Cap Exploration &

Continental Resources CLR Betty Jiang, CFA Buy $73.14 $96 31.3% 9.6%
Production

Natural Gas & MLPs EQT Corporation EQT Ronald Barone Buy $57.28 $65 13.5% 4.5%

Oil Services & Equipment Halliburton Co. HAL Angie Sedita Buy $33.54 $44 31.2% -2.8%

US Refiners Tesoro Corp. TSO Craig Weiland Buy $44.69 $50 11.9% 91.3%

FINANCIALS

Brokers & Asset Managers JPMorgan Chase & Co. JPM Brennan Hawken, CPA Buy $43.48 $46 5.8% 30.8%

Consumer Finance Newcastle Investment NCT Matthew Howlett Buy $8.66 $10 15.5% 86.2%

Exchanges and eBrokers CME Group Inc. CME Alex Kramm, CFA Buy $51.61 $64 24.0% 5.9%

Insurance/Life Lincoln National Corp. LNC Suneet Kamath, CFA Buy $26.00 $31 19.2% 33.9%

Insurance/Non-Life The Hartford Financial Services Group HIG Brian Meredith Buy $22.05 $31 40.6% 35.7%

Large Cap & Trust Banks U.S. Bancorp USB Greg Ketron Buy $32.09 $38 18.4% 18.6%

Mid Cap Banks KeyCorp KEY Stephen Scinicariello, CFA Buy $8.39 $10 19.2% 9.1%

REITs Tanger Factory Outlet Centers SKT Ross Nussbaum Buy $33.55 $38 13.3% 14.4%

HEALTHCARE

Biotechnology Gilead Sciences GILD Matthew Roden, PhD Buy $75.46 $87 15.3% 84.4%

Small/Mid Cap Biotechnology BioMarin Pharmaceutical BMRN Matthew Harrison Buy $49.70 $53 6.6% 44.6%

Healthcare Technology &

McKesson Corporation MCK Steven Valiquette Buy $98.63 $105 6.5% 26.6%
Distribution

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Healthcare Services Community Health Systems CYH A.J. Rice Buy $30.32 $39 28.6% 73.8%

Life Sciences & Diagnostic

Thermo Fisher Scientific Inc. TMO Daniel Arias Buy $64.80 $72 11.1% 44.1%
Tools

Medical Supplies & Devices CareFusion Corporation CFN Rajeev Jashnani, CFA Buy $28.26 $32 13.2% 11.2%

Pharmaceuticals Warner Chilcott WCRX Marc Goodman Buy $11.60 $24 106.9% -23.3%

Pharmaceuticals Jazz Pharmaceuticals PLC JAZZ Ami Fadia Buy $50.93 $64 25.7% 31.8%

INDUSTRIALS

Aerospace & Defense Textron Inc. TXT David Strauss Buy $24.35 $30 23.2% 31.7%

Airlines, Airfreight & Surface

Delta Air Lines Inc. DAL Kevin Crissey Buy $11.23 $16 42.5% 38.8%
Transportation

Autos & Auto Parts Ford Motor Co. F Colin Langan, CFA Buy $11.39 $15 31.7% 5.9%

Chemicals Dow Chemical DOW Gregg Goodnight Buy $31.82 $34 6.9% 10.6%

Coal and Metals & Mining Reliance Steel & Aluminum RS Shneur Gershuni, CFA Buy $59.94 $65 8.4% 23.1%

Electrical Equipment & Multi-

General Electric Co. GE Jason Feldman Buy $21.93 $24 9.4% 22.4%
Industry

Engineering & Construction CB&I CBI Steven Fisher, CFA Buy $41.80 $48 14.8% 10.6%

Homebuilders & Building

Mohawk Industries, Inc. MHK David Goldberg Buy $81.96 $90 9.8% 36.9%
Products

Machinery United Rentals, Inc URI Eric Crawford Buy $42.54 $55 29.3% 44.0%

Paper & Packaging International Paper IP Gail Glazerman, CFA Buy $38.16 $44 15.3% 28.9%

TECHNOLOGY

Alternative Energy / Semi Cap

KLA-Tencor Corp. KLAC Stephen Chin Buy $47.35 $54 14.0% -1.9%
Equipment

Technology Supply Chain &

Infoblox Inc. BLOX Amitabh Passi Buy $18.25 $25 37.0% -
Wireless Equipment

IT Hardware EMC Corporation EMC Steven Milunovich, CFA Buy $25.27 $30 18.7% 17.3%

Semiconductors NVIDIA Corporation NVDA Steven Eliscu Buy $12.54 $16.50 31.6% -9.6%

Software Informatica Corporation INFA Brent Thill Buy $30.33 $40 31.9% -17.9%

Transaction Processing &

VeriFone Systems PAY John T. Williams Buy $28.82 $39 35.3% -18.9%
Financial Technology

S&P 500 13.7%

Nasdaq 15.6%
Source: UBS US Research Department, prices as of 12/17/2012

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Table 3: UBS US Analysts Least Preferred

Current Price Upside YTD

Sector Stock Ticker Analyst Rating Price Target to Target Return

COMMUNICATIONS

Cable & Satellite / Telecom

DIRECTV Group Inc. DTV John Hodulik, CFA Neutral $50.56 $54 6.8% 18.2%
Svcs

Cable & Satellite / Telecom

Windstream Corporation WIN Batya Levi Neutral $8.82 $10 13.4% -24.9%
Svcs

Entertainment and Publishing

New York Times Co. NYT John Janedis, CFA Neutral $8.41 $9 7.0% 8.8%
& Advertising Agencies

CONSUMER

Apparel, Footwear & Textiles JC Penney Company, Inc. JCP Michael Binetti Neutral $20.64 $21 1.7% -41.3%

Beverages The Boston Beer Co. SAM Kaumil S. Gajrawala Sell $138.87 $111 -20.1% 27.9%

Cosmetics, Household &

Personal Care Products and Avon Products AVP Nik Modi Sell $13.98 $13 -7.0% -20.0%
Tobacco

Food and Drug Retail Safeway, Inc. SWY Jason DeRise, CFA Sell $17.81 $14 -21.4% -15.4%

Gaming & Lodging and

MGM Resorts International MGM Robin Farley Neutral $11.42 $11 -3.7% 9.5%
Leisure

Retailing/Hardlines RadioShack Corporation RSH Michael Lasser Sell (CBE) $2.41 $1.50 -37.8% -75.2%

Retailing/Specialty Retail Aeropostale Inc. ARO Roxanne Meyer, CFA Neutral $13.76 $14 1.7% -9.8%

ENERGY/UTILITIES

Electric Utilities TECO Energy Inc. TE Jim von Riesemann Sell $16.83 $15 -10.9% -12.1%

Diversified Natural Gas Oneok Partners OKS Christopher Sighinolfi, CFA Neutral $52.89 $56 5.9% -8.4%

Independent Power
Dynegy, Inc. DYN Julien Dumoulin-Smith Sell $18.84 $16 -15.1% 580.1%
Producers

Integrated Oil and Oil & Gas

ConocoPhillips COP William Featherston Sell $58.28 $47 -19.4% 4.9%
Exploration & Production

Small-Mid Cap Exploration &

Midstates Petroleum Company MPO Betty Jiang, CFA Neutral $7.37 $7 -5.0% -
Production

Natural Gas & MLPs Ferrellgas Partners FGP Ronald Barone Sell $17.79 $16.50 -7.3% -6.2%

US Refiners Western Refining WNR Craig Weiland Neutral $31.04 $26 -16.2% 133.6%

FINANCIALS

Brokers & Asset Managers Lazard LAZ Brennan Hawken, CPA Sell $30.13 $25 -17.0% 15.4%

Brokers & Asset Managers Annaly Capital Management NLY Matthew Howlett Neutral $14.19 $14 -1.3% -11.1%

Exchanges and eBrokers LPL Financial Holdings Inc LPLA Alex Kramm, CFA Sell $28.01 $25 -10.7% -8.3%

Insurance/Life Principal Financial Group PFG Suneet Kamath, CFA Neutral $27.85 $30 7.7% 13.2%

Insurance/Non-Life Progressive Corporation PGR Brian Meredith Neutral $21.27 $21 -1.3% 9.0%

Large Cap & Trust Banks Regions Financial Corp. RF Greg Ketron Neutral $6.91 $7 1.3% 60.7%

REITs CBL & Associates Properties, Inc. CBL Ross Nussbaum Sell $21.34 $20 -6.3% 35.9%

HEALTHCARE

Biotechnology Seattle Genetics, Inc. SGEN Matthew Roden, PhD Neutral $23.90 $27 13.0% 43.0%

Small/Mid Cap Biotechnology Immunogen Inc IMGN Matthew Harrison Sell $12.95 $9 -30.5% 11.8%

Healthcare Technology &

Owens & Minor Inc. OMI Steven Valiquette Sell $28.17 $25 -11.3% 1.4%
Distribution

Healthcare Services AMN Healthcare Services AHS A.J. Rice Sell $11.80 $8 -32.2% 166.4%

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Life Sciences & Diagnostic

Affymetrix Inc. AFFX Daniel Arias Neutral $3.32 $4.25 28.2% -18.9%
Tools

Medical Supplies & Devices Edwards Lifesciences Corp EW Rajeev Jashnani, CFA Sell $91.87 $82 -10.7% 29.9%

Pharmaceuticals Bristol-Myers Squibb BMY Marc Goodman Neutral $32.80 $34 3.7% -6.9%

Pharmaceuticals Hospira Inc. HSP Ami Fadia Sell $31.89 $28 -12.2% 5.0%

INDUSTRIALS

Aerospace & Defense Hexcel Corporation HXL David Strauss Sell $25.81 $20 -22.5% 6.6%

Airlines, Airfreight & Surface

Kansas City Southern KSU Kevin Crissey Sell $82.49 $76 -7.9% 21.3%
Transportation

Autos & Auto Parts BorgWarner Inc. BWA Colin Langan, CFA Neutral $66.46 $67 0.8% 4.3%

Chemicals Olin Corp. OLN Gregg Goodnight Neutral $21.54 $22 2.1% 9.6%

Coal and Metals & Mining AK Steel Holding Corp AKS Shneur Gershuni, CFA Neutral (CBE) $4.48 $4 -10.7% -45.8%

Electrical Equipment & Multi-

Emerson Electric Co. EMR Jason Feldman Neutral $52.25 $52 -0.5% 12.1%
Industry

Engineering & Construction Layne Christensen Company LAYN Steven Fisher, CFA Sell $23.41 $17 -27.4% -3.3%

Homebuilders & Building

Meritage Corporation MTH David Goldberg Sell (CBE) $38.11 $23 -39.6% 64.3%
Products

Machinery Kennametal Inc. KMT Eric Crawford Neutral $39.64 $36 -9.2% 8.5%

Paper & Packaging Louisiana-Pacific LPX Gail Glazerman, CFA Sell $17.69 $12 -32.2% 119.2%

TECHNOLOGY

Alternative Energy / Semi

ATMI, Inc. ATMI Stephen Chin Sell $20.18 $16 -20.7% 0.7%
Cap Equipment

Technology Supply Chain &

Tellabs Inc. TLAB Amitabh Passi Neutral $3.29 $3 -8.8% -18.6%
Wireless Equipment

IT Hardware Hewlett-Packard HPQ Steven Milunovich, CFA Sell $14.21 $11 -22.6% -44.8%

Semiconductors Intersil Inc. ISIL Steven Eliscu Neutral $8.07 $6.75 -16.4% -22.7%

Software ServiceNow Inc NOW Brent Thill Sell $31.10 $30 -3.5% -

Transaction Processing &

MasterCard Inc. MA John T. Williams Sell $489.32 $412 -15.8% 31.2%
Financial Technology

S&P 500 13.7%

Nasdaq 15.6%
Source: UBS US Research Department, prices as of 12/17/2012

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Communications

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Cable & Satellite / Telecom Services

John C. Hodulik, CFA – 212-713-4226

Key Themes for 2013:

• We expect cable stocks to continue to outperform in 2013 as they continue to take share from the Telcos
driven by cable’s superior speeds and network capabilities.
• We look for another year of record wireless margins as the competitive environment remains benign until
4Q13 when the big four’s LTE networks will be lit.

Most Preferred
Comcast Corporation CMCSA Buy
Thesis: We believe there is upside to Comcast shares given expectations for further improvement in Price Target: $41
cable and continuing progress in the turnaround of NBC’s broadcast business. On the cable side, we
believe video sub losses will continue to improve YoY in 2013, with 4Q12 the first period of net
growth in video subscribers in five years. Also in 2013, Comcast should continue to dominate in high-
speed Internet access, helping push Telco competitors as a group into the red in fixed broadband for
the first time. At NBC, Comcast should continue to benefit from the strong performance of new shows
such as “The Voice” and “Smash” and “Revolution” in broadcast. Comcast should complete its $6.5B
share repurchase authorization this year. With continued cable FCF growth, $2B in after-tax
SpectrumCo proceeds and a leverage ratio below the low end of the company’s target range, this
suggests a 2013 buyback of at least $4B, in-line with our estimates.
Valuation: $41 Price Target. Comcast has the lowest leverage amongst its peers at 2x gross
debt/EBITDA and trades at 6.3x 2013E EBITDA and 6.0x 2014E on a proportionate basis. This
compares to Time Warner Cable at 6.2x/5.9x, Cablevision at 6.5x/6.5x and Charter at 6.3x/5.8x. Our
$41 PT is DCF-based (9% WACC, 2% perp growth).
Upside Scenario: $50/share. If Primary Service Unit (PSU) and ARPU growth trends improve faster
than we expect, and the housing market begins to grow again we see Comcast rising to $50 over the
next 12 months. This would equate to 7.8x 2014E.
Downside Scenario: $30/share. If NBCU requires additional investment to realize the turnaround and
PSU and ARPU trends worsen, we see Comcast falling to $30 over the next 12 months. This would
equate to 5.1x 2014E.
Risks: Risks specific to Comcast include competition from AT&T, Verizon, DISH Network, and
DirecTV; potentially dilutive acquisitions of cable networks or additional cable systems and
subscribers; and the 33 1/3% nondilutable voting power held by Chairman and CEO Brian Roberts,
through his ownership of Class B shares. Risks related to the cable and pay-TV sector overall include:
operational and financial leverage, potentially adverse regulatory rulings, changes in technology,
increasing competition, reliance upon increased penetration of new services for cash flow growth, and
exposure to economic cycles.

Least Preferred
DIRECTV Group Inc. DTV Neutral
Thesis: We believe there is downside to DirecTV shares given the company’s stated interest in Price Target: $54
potentially buying Brazilian triple-play overbuilder GVT, which Vivendi may sell. Press reports have
indicated that DirecTV was among the companies that submitted preliminary, non-binding offers for
GVT last month, with final bids due in January. UBS European Telco/media analyst Polo Tang
projects $2.1B in 2012 sales for GVT (+31% YoY) and $865M in EBITDA (+9.6% YoY) but the
business has significant capex needs (guidance of $1.1B for 2012E, similar in 2014-16) and does not
generate positive free cash flow. A purchase of GVT could force DirecTV to reduce or end its share
repurchase plan, which has totaled $5B+ in each of the past three years. In addition, we expect net
subscriber losses in the U.S. in 2013E, for the first time ever. DirecTV lacks the terrestrial
infrastructure that allows the cable MSOs to provide the triple play, limiting the company’s ability to

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blunt the impact of rising content costs with increasing sales of new services.
Valuation: $54 Price Target. DirecTV trades at 5.6x 2013E EBITDA and 5.4x 2014E, roughly half a
turn below its cable peers and half a turn above DISH Network, which serves lower-end customers.
Our $54 PT is DCF-based (9% WACC, 2% perp growth).
Upside Scenario: $65/share. If U.S. subscriber trends worsen less than we expect in 2013 and
DirecTV does not successfully bid for GVT, we believe the shares could rise to $65. This equates to
6.6x 2014E.
Downside Scenario: $45/share. If U.S. subscriber trends weaken more than we expect in 2013 and
DirecTV bids for GV in part due to greater slowing of the LatAm business, we believe the shares
could fall to $45. This equates to 5.0x 2014E.
Risks: Risks specific to DirecTV include competition from Telco video, cable companies and DISH
Network. In addition, DirecTV’s planned expansion of its HD channel line-up could be jeopardized if
its D12 satellite malfunctions. Risks related to the cable and pay-TV sector include: operational and
financial leverage, potentially adverse regulatory rulings, changes in technology, increasing
competition, reliance upon increased penetration of new services for cash flow growth, and exposure
to economic cycles.

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Cable & Satellite / Telecom Services

Batya Levi – 212-713-8824

Key Themes for 2013:

• The cable trade isn’t done yet and we expect cable stocks to continue to outperform in 2013 as they
continue to take share from the Telcos driven by cable’s superior speeds and network capabilities.
• We look for another year of record wireless margins as the competitive environment remains benign until
4Q13 when the big four’s LTE networks will be lit.

Most Preferred
American Tower Corporation AMT Buy
Thesis: We anticipate increased carrier activity in 1Q given recent T-Mobile/MetroPCS and Price Target: $83
Sprint/Clearwire deals, each of which will invest more in their networks on a combined basis than we
had forecast they would alone. Additionally we expect AT&T’s VIP investment plan to drive higher
activity as well. Data traffic continues to grow rapidly and the need for ever increasing speeds and
network quality is paramount to wireless customers. Carriers are now competing more than ever on the
strength and resilience of their networks. We anticipate this trend to continue to benefit AMT in 1Q.
Valuation: $83 Price Target. DCF-based (7% WACC, 3% perp growth) and equates to 24x 2013E
AFFO per share.
Upside Scenario: $90/share. We envision possible upside to our estimates would be driven by
increased investment in wireless networks. In the event of increased investment plans by T-
Mobile/MetroPCS and Sprint/Clearwire we see AMT stock possibly getting as high as $90 over the
next 12 months. This would equate to 26x 2013E AFFO per share.
Downside Scenario: $70/share. We envision possible downside for AMT to $70 which would be
driven by lease terminations and reduced carrier activity as a result of industry consolidation over the
longer term. While we anticipate the T-Mo/PCS and Sprint/Clearwire will be positive for the towers in
2013, over the longer term, reduced investment and additional consolidation still remain a risk. This
would equate to 20x 2013E AFFO per share.
Risks: American Tower has the following risks: Customer concentration, potential for continued
wireless industry consolidation, leverage, and technological substitution from emerging technologies.
In addition, the company faces economic, regulatory, currency and political risks in its international
operations.

Least Preferred
Windstream Corporation WIN Neutral
Thesis: Windstream is in the process of integrating multiple acquisitions made in the last few years. Price Target: $10
While these have shifted its revenue mix to emphasize Business (now >60% of total), we are cautious
on the integration process and related operating and capital intensity. In addition, in 2013 we expect
Windstream to post a significant decline in FCF driven by higher cash taxes and for its payout to rise
to above 90%.
Valuation: $10 Price Target. Windstream trades at 5.9x 2013E vs. 5.9x for CenturyLink and 5.2x for
Frontier. Our $10 PT is DCF-based (9% WACC, 0.5% perp growth).
Upside Scenario: $11/share. In an upside scenario, we envision WIN shares trading up to $11 if
revenue and margin trends improve and if the company is able to continue to avoid paying larger sums
of cash taxes. $11 would equate to 6.5x our 2013 EBITDA estimate.
Downside Scenario: $6/share. If trends worsen, we envision WIN’s dividend payments exceeding its
free cash flow over time, causing the company to cut its dividend. We would anticipate that WIN
could trade down to $6 in this scenario and could see its multiple contract to 5.25x our 2013 EBITDA
estimate
Risks: Risks to Windstream include a lack of opportunity to participate in a transformational M&A

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transaction due to the change of control provision in its debt and potential changes to USF/switched
and special access regulations, as well as integration risk associated with the Paetec deal. Sector risks
include operational and financial leverage, potentially adverse regulatory rulings, changes in
technology, increasing competition, and exposure to economic cycles.

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Entertainment and Publishing &

Advertising Agencies
John Janedis, CFA – 212-713-1064

Key Themes for 2013:

• Cable networks continue to be better positioned relative to TV networks, with more resilient ratings,
ongoing high single digit to double digit affiliate fee growth, as well as better advertising growth.
• Content monetization opportunities via subscription video on demand (SVOD) will continue, but growth
will be at a lower rate in 2013, with potential declines in 2014.

Most Preferred
Time Warner Inc. TWX Buy
Thesis: We believe TWX shares are in the early stages of a two-plus year cycle of peer group Price Target: $50
outperformance driven by: 1) the upcoming affiliate fee renegotiation cycle (starting at year-end
2013); 2) an upswing in ratings benefitting from improved programming, leading to peer-like ad
growth; and 3) multiple expansion driven by improved earnings growth and stability vis-à-vis peers.
We expect positive earnings revisions for Time Warner over the next several quarters, as the Street
better appreciates the earnings potential from the upcoming affiliate fee cycle, and the positive ratings
momentum at TNT as the network launches its new original programming.
Valuation: $50 Price Target. Our $50 price target is based on an average of a 13x P/E multiple, an
8.5x EV/EBITDA multiple, and a 13x P/FCF multiple on our 2013 estimates, which is in line with our
sum of the parts analysis.
Upside Scenario: $55/share. Our upside scenario assumes TWX is able to reach its targeted 14%
affiliate rev increase from 2013-2016 (we currently assume ~9%), ratings improvement at Turner
results in stronger than anticipated ad growth and a continued benefit from sports programming. In
this scenario, we believe the stock could trade up to 9x and 15x our 2013 EBITDA and EPS, arriving
at an upside valuation of $55/share.
Downside Scenario: $42/share. Our downside scenario assumes affiliate fee negotiations don’t garner
as much of a premium as anticipated and soft ratings at TBS persist while ratings at TNT turn soft
when it begins to comp against last year’s NBA season, resulting in lower ad growth. In this scenario,
we believe the stock could trade at 8x and 10x our 2013 EBITDA and EPS, arriving at a downside
valuation of $42/share.
Risks: The biggest near term risk to the story would be if ratings don’t improve at TWX’s key TNT
network, which could lead to increased programming expense beyond our current mid single digit
expectation. Also, while TWX has less exposure to advertising than peers (~20% vs. 40% average for
group), a meaningful deceleration in the macro environment could result in downside to our estimates.

Least Preferred
New York Times Co. NYT Neutral
Thesis: We are cautious on the overall 2013 advertising environment and think that national print Price Target: $9
advertising will bear the brunt of a pull back in advertising along with the continued shift of ad dollars
from print to online and other media. More broadly, we expect national advertising to recover only
modestly in 1Q13 and with ~65% of News Media advertising from national, the company is the most
exposed within the newspaper industry. While the paywall at The New York Times has been
successful and NYT now earns ~50% of its revenue from circulation, further weakening in advertising
will blunt the positive impact, in our view.
Valuation: $9 Price Target. Our $9 price target for NYT is based on an average of 5.0x and 11.0x
2013 estimated EV/EBITDA and P/FCF
Upside Scenario: $11/share. Our upside scenario assumes improvement in print ad declines and
continued stronger circulation rev growth in the mid-single digit to high-single digit range in 2013

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driven by digital sub acquisitions. In this scenario, we believe the stock could trade at 6x and 14x
2013 EBITDA and FCF/share, arriving at an upside valuation of $11/share.
Downside Scenario: $6/share. Our downside scenario assumes the ad market remains soft and print
ad revenue declines remain in the high single digit - low double digit range through 2013. It also
assumes circulation ad growth declines sooner than anticipated should the New York Times miss its
expectations for digital sub growth as it is now lapping paywall comps. In this scenario, we believe
the stock could trade at 3x and 8x 2013 EBITDA and FCF/share, arriving at a downside valuation of
$6/share.
Risks: Risks to our thesis include: stronger than anticipated advertising environment; higher digital
subscriber and advertising growth than expected; and better expense management than forecasted.

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Consumer

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Apparel, Footwear, & Textiles

Michael Binetti – 212-713-3805

Key Themes for 2013:

• Athletic sportswear innovation pipeline looks very compelling making this category a key pocket of growth
within the US retail sector in 2013. On the margin side, lower input costs should continue as a gross margin
tailwind for footwear/apparel manufacturers in 1H13.
• Slowing retail sales trends (November - early December) and an unseasonably warm winter to date bring
increased product markdown risk to 4Q and 1Q margins. Additionally, many retailers are operating at or
near pre-recession “peak” sales productivity and operating margins, which could limit the potential for
significant upside EPS surprises in 2013. Within department stores, we believe the mid-tier retailers will
remain very promotional in 2013 as stores become more reliant on transaction growth to drive SSS (vs.
price increases in 2012).

Most Preferred
Foot Locker Inc. FL Buy
Thesis: We view FL as a “most improved” retailer that is well positioned to deliver better-than- Price Target: $41
expected sales and EPS in FY12 (January-end). Following several beat and raise quarters and a new
five-year financial target roadmap (announced at FL’s March analyst day), bearish investors believe
that the opportunity to deliver earnings “upside” has diminished - but we disagree. We believe Foot
Locker is in the middle innings of a multi-year footwear innovation cycle, where branded footwear
partners (and Nike in particular) are delivering a consistent pipeline of compelling new footwear (e.g.,
lightweight running, exclusive basketball launches, Nike FlyKnit, Under Armour Spine, Vans LXVI
etc.). A consistent flow of new product is stimulating solid shopping frequency from core customers
and driving a favorable mix benefit as these innovative lines carry higher price points. We see earnings
upside to our above-consensus FY12 EPS estimates of $2.58 (vs. Street $2.56) as we believe better-
than-expected same store sales results will yield higher incremental margins, and apparel
merchandising/supply chain initiatives will drive improved merchandise profitability. Under-
appreciated potential catalysts include: the company’s ability to improve sales productivity at existing
retail assets (e.g., new NFL shop partnership with Nike, store reimaging programs, new premium
women’s concept Six:02), and a sizeable share repurchase plan given the company’s strong balance
sheet (~$4.5 net cash per share), which could repurchase ~15% of the float at an average price of $32
per share.
Valuation: $41 Price Target. Our $41 PT is based on 14x FY14E EPS of $2.99. Our 14x target P/E is
slightly below FL’s five year average P/E of 15.0x. We believe Street estimates will likely rise
throughout the year as FL’s positive same store sales momentum and operating margin expansion
result in positive Consensus earnings revisions. In our base case scenario, we assume +4% SSS
growth, +10bp of YOY gross margin improvement, and $2.76 EPS in 2013.
Upside Scenario: $48/share. Our upside scenario is based on stronger than expected U.S. and
European footwear demand, which could result in robust same store sales and higher merchandise
margins relative to our current forecasts. Our upside scenario assumes +7% SSS growth, +50bp of
YOY gross margin improvement, and $2.95 EPS in 2013. Our $48/share upside valuation is based on
14x our FY14E EPS of $3.40.
Downside Scenario: $30/share. Our downside scenario assumes strong US footwear trends of the
past three years decelerate and European trends remain negative through 2013. Our downside scenario
would result in sluggish same store sales and lower merchandise margins relative to our current
forecasts. Our downside scenario assumes 0% SSS growth, -50bp of YOY gross margin decline, and
$2.49 EPS in 2013. Our $30/share downside valuation is based on 12x our FY14E EPS of $2.48.
Risks: The most visible near-term risk for FL is a meaningful sales deceleration in Europe, which
represents ~20% of FL sales. In F1Q (April-end), Foot Locker’s European sales trends were a key
concern as unfavorable winter weather and macro headlines weighed on sales through early April
when a significant merchandise refresh hit stores and sales inflected positive through early May. We
will continue to monitor trends in Europe closely going forward.

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Least Preferred
JC Penney Company, Inc JCP Neutral
Thesis: While we are hopeful that JCP can create its vision for the future of retail and have been Price Target: $21
impressed with the aesthetics of the remodeled shop-in-shops (Levi’s, Arizona, IZOD, etc.), there is
little tangible evidence thus far that this costly transformation is achieving any of its interim
expectations. With only 11% of square footage converted to the new shop-in-shop format, we believe
the impact from JCP’s transformation is not yet meaningful enough to offset negative traffic trends
related to the company’s risky new coupon-less strategy. As we look to 2H12 we expect sales trends
will remain negative (comparable to 1H) as the company struggles to stimulate store traffic under the
new pricing strategy and ad campaign. With increasingly disparate potential outcomes over the next
2yrs, we believe it is important for JCP to begin exceeding its publicly stated financial targets and
attract prominent national brands. We would look for improving customer traffic trends, improved
gross margin performance, and positive free cash flow growth before revisiting our view on the stock.
Valuation: $21 Price Target. Our $21 PT is based on 6x our FY14E EBITDA of $1.2 billion
excluding qualified pension expense. Our base case analysis assumes +1% SSS growth in 2013 and
+5% SSS growth in 2014 (embeds significant comp improvement from new shop in shop success),
gives JCP credit for the company’s $900 million in targeted cost savings and models 3.9% operating
margins in 2014.
Upside Scenario: $33/share. Our upside scenario is based on stronger than expected same store sales
growth and improved profitability relative to our current forecasts. Our upside scenario assumes +5%
SSS growth in 2013 and 2014 and models 5.7% operating margins in 2014. Our $33/share upside
valuation is based on 6x our FY14E EBITDA of $1.6 billion.
Downside Scenario: $10/share. Our downside scenario is based on weaker than expected same store
sales and deteriorating profitability relative to our current forecasts. Our downside scenario assumes
-2% SSS growth in 2013 and 2014 and models 3.5% operating margins in 2014. Our $10/share
downside valuation is based on 4x our FY14E EBITDA (ex-pension) of $1.1 billion.
Risks: JCP is undertaking a bold retail transformation that is causing meaningful deterioration to store
traffic levels, same store sales growth, profit margins and vendor relationships. If JCP’s turnaround
strategy results in further sales declines in 2013 and beyond, the company’s deteriorating profitability
and cash flow position could strain relationships with key vendors.

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Beverages
Kaumil S. Gajrawala – 212-713-9318

Key Themes for 2013:

• Increased spending by KO and PEP in US will put margin pressure on one another, and volume pressure on
the smaller players such as Dr Pepper and Cott.
• ABI/Modelo/STZ: ABI’s proposed acquisition of Modelo is awaiting regulatory approval in the US. STZ
would be a big beneficiary of a completed deal, so this process will be closely monitored by many players.
We continue to believe the deal will close, maybe with some minor modifications.

Most Preferred
Monster Beverage Corp. MNST Buy
Thesis: We believe Monster remains an attractive buying opportunity. While headline regulatory risk Price Target: $77
could remain, fundamentals continue to be strong. We expect Monster to deliver earnings growth over
20%, providing attractive returns even without multiple expansion. We believe regulatory concerns
overstate fundamental risk and believe MNST will begin voluntarily disclosing more information on
its labels to allay misguided safety concerns. Monster’s growth is well diversified, coming from: 1)
organic growth of core products in the US; 2) international rollout into new countries with large
addressable markets; and 3) new products like Zero Ultra in the US to help lap last year’s success of
Rehab. Monster’s commitment to do more local manufacturing in its international markets will turn
those countries into profitable markets, which will help consolidated margins expand. This should lead
to meaningful earnings surprises, as thus far International has been an earnings drag. Additionally,
access to the large Latin American market has been limited, but with a new deal with AmBev in
Brazil, Monster’s potential dramatically increases
Valuation: $77 Price Target. Despite solid earnings growth expectations (30% EPS for 2013 and
24% for 2014, respectively), Monster shares are trading at 23x consensus 2013. We believe this type
of earnings growth, largely driven by top line, deserves a 30.5x multiple, which is how we derive our
$77 target (25-times 2014e EPS).
Upside Scenario: $100/share. We are above consensus on operational metrics, but if Zero Ultra and
its line extension perform better than anticipated, our numbers are beatable. International profitability
could also surprise to the upside if local manufacturing in international markets happens sooner or is
bigger than expected. While unlikely, a takeout would provide max upside. Using takeout multiples
for other high growth staples names (~20x EV/EBITDA), a takeout could occur for as much as
$100/share.
Downside Scenario: $37/share. While unlikely, if Monster is 1) unable to lap Rehab (i.e., Zero Ultra
is unsuccessful), 2) core green can opportunities have peaked/new products are cannibalizing green
can, or 3) international expansion into markets such as Japan don’t gain consumer acceptance, growth
rates will slow and investor concerns will increase. Under this scenario, the multiple could re-rate to as
low as 16x. On downside earnings of $2.33, MNST could trade at $37/share. We note that should this
scenario occur, Monster will likely accelerate buybacks and decelerate international growth to support
would profit growth despite a slowdown in top line.
Risks: Regulatory headlines are likely to continue. The FDA, Senators, State AG’s, and lawsuits have
all made recent headlines. While we believe they are largely without merit and issues could be
resolved simply through better disclosure, shares are likely to be volatile around such news.

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Least Preferred
The Boston Beer Co. SAM Sell
Thesis: Boston Beer’s growth is reliant on new product innovation (Angry Orchard) and distribution Price Target: $111
gains (Twisted Tea). Its core performance in Beer remains at low single digits, but the incremental
cases help the company deliver low double digit growth. At 27x 2013 cons estimates, SAM is
expensive for a 10-15% growth, despite the lack of visibility on the sustainability of those trends. As
we lap full Twisted Tea distribution in the Spring, its contribution to growth will become negative.
Angry will be a positive contributor into fall 2013. In Beer, the competitive environment is also
becoming more difficult (small players in Craft and big players pretending to be Craft). The rapid
increase in new brewers has forced the Craft segment to begin competing on price to obtain retail
space. It is unlikely Boston Beer can continue taking 3% pricing. Additionally consumer tastes are
becoming more exploratory, which will make it hard for well recognized Boston Lager.
Valuation: $111 Price Target. After Boston Beer raised guidance intra-quarter last week, we raised
our numbers and our target multiple. We think a higher multiple is warranted given stronger than
estimated depletion expectations. But without commentary on why depletion guidance was raised, it is
not clear if the improvement is from the core beer portfolio. Our $111 Price Target represents 23x our
2013 EPSe.
Upside Scenario: $150/share. Boston Beer would beat our expectations if core beer improved. While
Boston Lager has been on the decline and Seasonals have been flat aside from Octoberfest, a reversal
in these trends would force us to reconsider our thesis. Additionally, SAM has been a very successful
innovator. We believe 2013 will see new products that also do well, but not to the degree that Angry
Orchard has. To maintain growth rates, SAM now needs another Angry Orchard. If they find another
Angry Orchard, our thesis of breaking growth will not materalize. Upside scenario would be $5.00 in
2013 EPS and a 30x multiple for $150/share.
Downside Scenario: $76/share. If Boston Beer can’t replace incremental cases of Twisted Tea and
Angry Orchard, growth will come only from the Beer portfolio. The Beer portfolio is barely growing,
and as a stand alone, would not command such a rich multiple. Under this scenario, we believe 17x is
an appropriate multiple on roughly $4.50 in earnings, resulting in a valuation of $76/share.
Risks: Competitive Dynamics in Beer and Cider are increasing. Additional SAM is very reliant on
innovation to continue its run of growth.

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Cosmetics, Household & Personal Care

Products & Tobacco
Nik Modi – 212-713-2204

Key Themes for 2013:

• Rising Cost of Competition in EM: We expect the cost of business will continue to rise in emerging
markets as multinational and local HPC players spend at increasing rates to gain share over the same
emerging market consumers.
• P&G Restructuring: Given P&G’s intention to regain share in its critical US business (60% of profits),
we believe Church & Dwight, Energizer, and Colgate will face a rising cost of doing business. Historically,
these names have been able to offset increased competitive pressure through reducing costs and reinvesting
back behind its brands (and keeping price gaps at attractive levels).

Most Preferred
Energizer Holdings ENR Buy
Thesis: We believe ENR’s move upwards is more in the early innings than the end. The heart of our Price Target: $90
thesis is grounded in the view that Energizer will deliver more consistent earnings aided by its $200
mm cost savings program. At CAGNY the week of February 18th, we expect Energizer will provide
conservative long-term EPS guidance of 6-8% and 8-10% total return—an algorithm we believe is
very achievable and even beatable due to: 1) upside to cost savings, 2) cushion from share repurchases,
and 3) improvements in top line due to heavier reinvestment. We also believe Energizer will pass
down at least $150M in cost savings to the bottom line since 1) Energizer has an A&P ratio that is
already in line with peers (we think the issue is getting a higher ROI on spending rather than spending
more) and 2) we actually see upside to cost saves (allowing ENR to absorb any incremental spending).
Valuation: $90 Price Target. We look at valuations in 2015 under our various scenarios and discount
back to the present. We weight our base case 50%; upside case and downside case, 25% each. This
method has led us to a $90 12-month price target, which is 12.8x our current CY13 estimate of $7.01.
Upside Scenario: $150/share. In our upside scenario, we would assume a 15.7x 2015 EPS multiple
(in-line with HPC peers). ENR would achieve nearly $300 mm in cost savings or 40% of its current
EBIT, the same achievement marked by Gillette during its restructuring. This scenario would lead to
EPS of $9.54 driven by 260 bps of operating margin expansion by 2015. Battery sales growth would
be flat, while wet shave sales would grow 5% through 2015 under this upside scenario.
Downside Scenario: $70/share. In our downside scenario, ENR will hold its current multiple 10.7x
and earn $6.53 in CY15 EPS. Our $6.53 EPS estimate assumes Energizer would fail to successfully
execute on its cost savings programs and fails to deliver more consistent and high quality EPS
delivery. Under this scenario we expect global Household segment sales to decline -1% and Personal
Care sales to improve only 4% annually through 2015.
Risks: Weaker than expected top-line growth due to the declining battery category, misexecution of
the announced $200M cost savings program, failure to launch new 2013 personal care product
innovations.

Least Preferred
Avon Products AVP Sell
Thesis: While we can understand investor appetite for restructuring/turnaround stories, we believe Price Target: $13
buying AVP at current levels has a negatively skewed risk-to-reward profile. Unlike most turnaround
stories (that are usually selling at depressed valuations), we note that AVP shares are currently trading
at 21x our 2013 EPS estimates. Currently our 2013 estimate is 25% below consensus, but we expect
consensus to move closer to our number once 3Q12 results are fully digested.
Valuation: $13 Price Target. Our $13 price target implies 19x our CY13 EPS of $0.69.
Upside Scenario: $15/share. In our upside scenario we see AVP at current levels, 15x CY13 EPS of
$1.00 where AVP is on track to deliver its 2016 goals of mid-single-digit EPS growth and 10%+ EBIT

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margin by reinvesting less in its business than we are anticipating.

Downside Scenario: $10/share. In our downside scenario, AVP will trade at 15x (in-line with
consumer staples) our CY13 estimate of $0.69 where AVP will be required to reinvest more than the
company and consensus are anticipating to sustainably fix its business.
Risks: Headline risk regarding a possible takeout of the company and if Avon were required to spend
in-line with or less than their current expectations to sustainably fix their business.

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Food and Restaurants

David Palmer – 212-713-9315

Key Themes for 2013:

• The food inflation cycle will likely remain relatively favorable for US packaged food companies through
the first half of 2013, which should help drive industry volume growth and margin expansion—particularly
given easy volume and weather comparisons.
• For the US restaurant industry, difficult comparisons in 1H due to weather and other factors should ease by
mid-year, just as higher food inflation should begin to benefit global franchised fast food restaurants

Most Preferred
Starbucks Corp. SBUX Buy
Thesis: We are forecasting 20% and 23% EPS growth in fiscal 2013 and 2014 as Starbucks pursues Price Target: $59
multiple areas of growth. For FY13, just some of the company’s earnings drivers include: 1) favorable
coffee costs, 2) EMEA margin recovery, 3) stepped up China/ Asia Pacific development, 4) ongoing
domestic SSS growth, and 5) high-margin Channel Development growth (formerly CPG). With
declining YOY coffee costs (likely through FY15), we believe favorable cost comparisons resulting
from last year’s investments in 1) the on-boarding bagged coffee and 2) the reinvestment behind K-
Cups will create a margin opportunity for the CPG segment. And solid SSS momentum driven in part
by web marketing seems to be helping Starbucks control its own momentum, rather than following the
trend of the high income consumer mood.
Valuation: $59 Price Target. SBUX is currently trading at 19x our calendar 2014 EPS estimate.
Starbucks’ free cash flow yield and dividend yield are approximately 5% and 1.6%, respectively. We
are forecasting EPS growth of 20% and 23% in FY13 and FY14, respectively. We believe our $59
price target represents a FY14 P/E to growth ratio of approximately ~1.0x (using a growth rate of
20%), which we feel is reasonable given our expectation for consecutive years of ~20% EPS growth.
Our $59 PT equates to ~21.5x our CY14 EPS estimate.
Upside Scenario: $74/share. Our upside scenario assumes that over the next year, Starbucks will
maintain its current high-single digit same store sales growth and ongoing CPG momentum. Beyond
general macroeconomic improvement, including job growth, consumer confidence, and discretionary
spending, we believe that upside to current US same store sales and CPG growth estimates could likely
be the result of increased adoption of the Verismo system. In addition, the substitution of “Naked”
juice with “Evolution Fresh” branded juices could represent an easy win for store-level profitability. In
this upside scenario, we see increased profitability of juices sold in coffeehouses and pose that within
2-3 years Verismo could overtake K-Cups to become the largest driver of CPG growth. Our upside
scenario assumes FY13 Americas SSS growth of 8%, and CPG growth of 40%. In addition, our upside
scenario assumes that EMEA margins accelerate to the mid-single digit range as the company executes
its plan to restructure the portfolio. Summing it all up, our upside scenario valuation equates to 27x our
upside scenario FY14 EPS estimate of $2.73 (+25 YOY).
Downside Scenario: $45/share. Our downside scenario assumes that over the next year, both global
same store sales growth and CPG momentum decelerate as a result of deteriorating key
macroeconomic indicators affecting high-income consumers. Our downside case assumes same store
sales growth decelerates into the low single digit range and CPG growth decelerates to 0% as Verismo
fails to gain market share of single serve coffee and K-Cup growth more closely resembles that of
bagged coffee. Our downside scenario also assumes that EMEA profit margins remain in the low
single digit range and the company’s portfolio optimization strategy fails to generate sustainable
momentum as SSS growth remains flat. Our downside scenario valuation per share over the next 12
months equates to 18x our downside scenario FY14 EPS estimate of $2.49 (+18 YOY). Longer-term
should coffee costs begin to grind higher in FY14 and beyond, we see downside risk to our long-term
margin estimates.
Risks: Macro Uncertainty/ Taxes: Increased uncertainty about higher taxes targeting the high end
consumer could cause a pullback in spending by Starbucks’ core demographic. High valuation:
Starbucks’ forward valuation of ~20x is approximately ~1.5x that of the market. This high relative
valuation heightens volatility risk and downside risk should any factors threaten the perceived
sustainability to growth. Food safety or quality issues: As with most restaurant stocks, negative

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publicity aimed at food safety or quality could damage the company’s image and would be a serious
blow to the brand. Food and Labor Inflation: Though the company’s coffee costs have been locked
in for the next 12+ months, we believe rising spot prices in coffee could affect the long term earnings
growth outlook. Growing Competition from At-Home Single Serve Brewing: The growing
popularity of single serve brewing at home might ultimately lead to diminishing growth in coffee
occasions away from home. This could hurt both same store sales growth and restaurant margins as
customers substitute away from home occasions with at home consumption

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Food and Drug Retail

Jason DeRise, CFA – 212-713-8825

Key Themes for 2013:

• Haves and have nots to further diverge: Food & Drug retailers with competitive edge continue to
outperform the retailers without clear differentiation.
• Fiscal Cliff or restructured agreement, middle class likely to continue to be squeezed. Low end should
benefit while high outperforms.

Most Preferred
Whole Foods Market, Inc. WFM Buy
Thesis: Natural and Organic high growth trend continues on its path to greater mainstream adoption Price Target: $111
benefiting Whole Foods as it unlocks the two barriers: access and affordability. The last quarter
showed all growth drivers intact, yet the shares have traded off on a lack of “beat and raise”. We
believe the next set of results have the potential to beat consensus as sales growth remains high and
SG&A leverage improves from the last quarter when pre-opening costs meant SG&A was higher than
consensus expected. Those pre-opening expenses should normalize, but the benefit of successful
openings should allow for strong revenue and profits.
Valuation: $111 Price Target. Our DCF based, target price implies 30x forward earnings in 1 year’s
time and an 11x EV/EBITDAR.
Upside Scenario: $120/share. Whole Foods could repeat its FY2012 performance, consistently
beating both consensus and our estimates materially, driving up earnings, and correspondingly moving
the share price higher. In the last 12 months, consensus EPS estimates have increased 12% primarily
on better than expected gross margin and sales. Our FY2013 EPS is already 5% above consensus.
Should a 12% increase in consensus estimates happen again, we could see WFM shares being worth
$120 a share by year end.
Downside Scenario: $80/share. If the fiscal cliff occurs affecting consumer confidence of WFM’s
core consumers or high taxes affect the spending of WFM’s core consumers more than we would
anticipate, sales growth could be weaker than expected. Specifically, a scenario of comp sales slowing
all the way to 3% from 8% for one year would imply flat EPS YoY in 13FY justifying a low $80 share
price vs. its current price.
Risks: Deterioration in consumer spending, particularly in high income populations, could affect same
store sales. In FY2009, comparable sales fell -3%YoY. Whole Foods could attempt to expand faster
than it is capable of managing, causing poor execution and deterioration in profitability. Whole Foods
could decide to push mark ups higher, which would open the potential for competitors to take share
from Whole Foods. We believe the near term profit benefit of this strategy would not outweigh the
long-term negative implications of competition. Consumers’ adoption of fresh, natural, organic and
local products may have already peaked vs. our view of increased mass acceptance and purchasing of
products driven by improved affordability. Commodity prices fluctuate regularly, which could drive
periods of excess inflation or deflation. Food retailers do best when inflation is slightly positive. Co-
CEO and founder John Mackey could retire early. We believe his role with the company is critical for
the company’s culture

Least Preferred
Safeway, Inc. SWY Sell
Thesis: Consensus estimates are too optimistic in our view. Despite its last four quarter trend of EBIT Price Target: $14
falling -17% on an underlying basis, consensus models EBIT to only contract slightly in 2013.
Moreover, consensus assumes EPS growth, which we infer implies consensus is assuming buybacks.
Our view is that sales are 1% too high, corresponding to ~7% to aggressive EBIT (operating leverage)
and that SWY cannot buyback anymore shares or it risks a credit downgrade. Therefore, our EPS is
approximately 10% below consensus. SWY will report its Q4 2012 results in February. We believe the
Q4 trend will be weak and not support consensus estimates in 2013.

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Valuation: $14 Price Target. Our DCF based target price is $14. Our target price implies a 5.4x
2013E EV/EBITDAR and 7.4x 2013E PE. This includes a $1.4bn valuation of Blackhawk, which
implies the core business should trade on just 5x EV/EBITDA. This low valuation reflects our view
that core profits will continue to decline long-term.
Upside Scenario: $18/share. The upside scenario is that the non-core drives upside including the
monetization of its real estate. We see a low probability of a large scale real estate transaction like
Loblaw recently announced. However, should SWY pull off a large single tenant REIT that creates
value, it would significantly hurt SWY’s long term for a near term, 1x gain. As we wrote in our Dec
7th note, if SWY would hypothetically do a “Loblaw-Style” 80%/20% structure it could create ~6%
upside to its fair value ~$15 per share. If it put 100% of its owned real estate into a REIT it could
create 30% upside to its fair value, for a share price of $18 (currently slightly below this level).
Downside Scenario: $12/share. If SWY cannot accelerate its identical store sales growth above its
fixed cost inflation, and non-core businesses such as real estate or Blackhawk cannot fill the cash flow
gap, SWY could see its credit rating downgraded. In order to avoid it, SWY could start to take steps
that meet near term budgets, but sacrifice the long-term. This includes cutting staff out of the store (our
research shows revenues are directly related to SG&A/square feet) while simultaneously increasing
prices (while hoping customers don’t notice). Since investors have seen these tactics before, we
believe the market will penalize SWY shares for hitting targets in a way that jeopardizes its future. PE
multiple could begin to contract toward the Supervalu (SVU) current PE at 5.8x forward 12 month
consensus EPS. At 5.8x consensus 2013 EPS SWY would trade on ~$12.
Risks: Deterioration in the consumer economy, particularly skewing to the West Coast could hurt its
sales growth and the operating leverage needed to maintaining EBIT. Safeway’s ability to drive
comparable sales growth faster than cost inflation could deteriorate further if it under invests in the
business. Safeway’s “non core” growth business could be contributing more to the company profits
than we currently assume, implying the growth of the company LT could be better than we anticipate.
Commodity prices fluctuate regularly, which could drive periods of excess inflation or deflation. Food
retailers do best when inflation is slightly positive. Safeway’s earnings are increasingly dependent on
fuel station sales. Fuel prices are volatile, which could disrupt profitability. If the “sweet spot” of low
inflation and high consumer confidence occurs, Safeway’s would generate strong profit growth, even
if it continued to lose share in the process.

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Gaming & Lodging and Leisure

Robin Farley – 212-713-2060

Key Themes for 2013:

• In Cruise lines, key themes will center around yield recovery from the industry-wide after-effects of the
Concordia incident, with YOY comparisons becoming easier starting from Q2’13. The 2013 wave
season will set the tone for how fast a recovery might occur.
• In Gaming, key theme is the mass market growth in Macau as well as the importance of new capacity in a
supply-constrained market. Even with a muted VIP growth outlook, mass revenues have grown at a
double-digit rate and we believe that will continue in 2013, particularly driven by the addition of new hotel
rooms extending the average length of stay.

Most Preferred
Las Vegas Sands Corp. LVS Buy
Thesis: LVS is our top pick in the gaming space going into 2013. The company is best positioned in Price Target: $50
Macau for 2013-2014 given its solid footprint in the mass segment, a market that continues to grow at
a double-digit rate in Macau, even with stagnant VIP growth. LVS’ Sands Cotai Central is the only
new capacity in that market for the next 2-3 years. We expect LVS to grow mass market share to ~33-
34% in FY’14E, from ~31% in FY’13, solid improvement from Q3’12 levels of ~26% market share in
this segment.
Valuation: $50 Price Target. Price target is based on ~10x LV EBITDA, ~12-13x Macau EBITDA,
~10x Singapore EBITDA.
Upside Scenario: $54/share. Our upside scenario is based on current estimates combined with
EBITDA multiples for Singapore and Macau at the high end of the range. Assuming 11x for Singapore
and 13x for Macau suggest a $54/share upside scenario.
Downside Scenario: $40/share. Our downside scenario is based on current estimates combined with
EBITDA multiples for Singapore and Macau at the low end of the range. Assuming 9x for Singapore
and 10x for Macau suggest a $40/share downside scenario.
Risks: The major risk to Las Vegas Sands is a slowdown in growth in China, and generally Chinese
wealth creation. Gaming operators with large exposure to Macau are also exposed to risks in the junket
system, which is responsible for driving the vast majority of VIP play in the region. Although Las
Vegas is now a smaller piece of the company’s business model than it has been in the past, the
company is still exposed to a decline in visitation to Las Vegas, particularly in continued softness in
convention bookings.

Least Preferred
MGM Resorts International MGM Neutral
Thesis: MGM still remains the name most heavily exposed to Las Vegas out of all the names in our Price Target: $11
coverage universe. The company is on pace to deliver only 2-3% RevPAR growth in ‘12. Additionally,
YTD Nevada gaming revenues are only up 2% YOY through October. In terms of growth prospects in
Macau, MGM continues to have the smallest asset base of the six operators in a market that will
continue to remain supply-constrained in the mid to long-term. Even after MGM opens its property on
Cotai no sooner, we believe, than after 2016, the scope of it will be significantly smaller than other
projects coming online before and after. With only 5% of hotel room keys and 8% of table capacity
after LVS’ opening of phase 1 of Cotai Central, we expect MGM’s Macau market share to move
toward the 8-9% range for FY’14-15 from the 10-11% we saw the company deliver in 2011-2012.
Valuation: $11 Price Target. We rate MGM Neutral with a price target of $11/share. Our SOTP-
driven price target is based on PV of ~10x LV EBITDA, ~11x Macau EBITDA, land value and our
estimate of proceeds from sale of Borgata interest.
Upside Scenario: $15/share. Our upside scenario is based current on estimates combined with
EBITDA multiples for Las Vegas and Macau at the high end of the range. Assuming 11x for Las

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Vegas and 13x for Macau suggest a $15/share upside scenario.

Downside Scenario: $8/share. Our downside scenario is based current estimates combined with
EBITDA multiples for Las Vegas and Macau at the low end of the range. Assuming 9x for Las Vegas
and 10x for Macau suggest an $8/share downside scenario.
Risks: Mid-term macro concerns combined with ongoing credit tightening and property price declines
in Macau remain a key aggregate factor that at some levels could start weighing on Macau growth, and
especially on premium mass and VIP. Some other risks include issues with junket capitalization,
financing and ability of room operators to keep up with already high-turnover productivity of cage
capital (which is at an all-time high). We believe the biggest risk for MGM, in an intensifying
competitive environment, is its less sticky VIP business, and less exposure to the mass market (higher
margin, higher growth segment) vs. Las Vegas Sands. MGM also remains the highest levered name
among its peers.

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Retailing/Hardlines
Michael Lasser – 212-713-2440

Key Themes for 2013:

• The impact of the housing recovery on the Hardlines sub-sectors.
• The impact of eCommerce on the sector and how the companies will build out their omni-channel
capabilities.

Most Preferred
Lowe’s Companies, Inc. LOW Buy
Thesis: We think LOW is nearing an inflection point where the combination of its repositioning Price Target: $39
efforts and the housing recovery will drive significant earnings acceleration. For the last year or so,
Lowe’s has not seen the type of performance one would expect from a company whose underlying
market is seeing a resurgence. However, we think that will change in the coming quarters. Starting in
the back half of ‘12 & moving into ‘13, its transformative actions should move from a hindrance to a
help. In particular: 1) the company’s gross margin trajectory should improve as the benefit of its
remerchandising activities rolls in over the coming quarters; 2) Lowe’s should realize improved comp
performance as our proximity analysis of LOW’s stores shows that housing activity is picking up in
the markets where LOW has a presence; 3) LOW has a vigorous capital allocation plan given that it
remains committed to distributing $18 billion back to shareholders by 2015; and 4) the cooperative
housing market should provide a tailwind. We believe that LOW has the potential to achieve EPS of
~$3 by ‘14 (vs. $1.73 in ‘12e).
Valuation: $39 Price Target. Our price target of $39 equates to 18x our CY’13E EPS and is based on
a blend of a DCF and multiple analysis. We think Lowe’s recent rally has legs and we recommend
buying the stock. The company is reaching a crossroads where it is set to generate better performance.
In addition, the stock’s downside should be supported by a 7.3% free cash flow yield.
Upside Scenario: $47/share. Assumes the 5% comp lift that LOW has experienced from its initial
remerchandising activities extends into FY’13 and that its operating margin improves at a faster pace.
In addition, this scenario assumes that the improvement in the housing market continues to gain steam.
Under this scenario, we could see LOW appreciating to a P/E of 19x, which implies a share price of
$47.
Downside Scenario: $28/share. Assumes that LOW does not continue to gain traction from its
remerchandising activities and experiences flat comp growth over the next two years as well as more
modest operating margin improvement. In this case, we would apply a 15x P/E multiple.
Risks: Weaker than expected execution of its remerchandising activities may impact the company’s
ability to improve its sales growth and close the performance gap with Home Depot. In addition, a
slowdown in the housing recovery could negatively impact its outlook.

Least Preferred
RadioShack Corporation RSH Sell
Thesis: We view RSH as our “least preferred” retailer as a combination of poor fundamental trends, Price Target: $1.50
questions about strategic direction, and vacancies of key executive positions will weigh on its shares in
the near term. RSH’s transition to a convenience & service oriented retailer of mobility products has
not resonated with consumers and its cost structure can not tolerate the different profit profile.
Moreover, we are skeptical of RSH’s turn-around plan as its efforts to address its problems do not
reflect a meaningful change in its strategy. While the company has aimed to tweak its promotional
messaging, we think its positioning will remain hindered by its merchandising and its imaging. Lastly,
we expect RSH’s relationship with TGT to not continue as it has been difficult to improve the
profitability of this partnership.
Valuation: $1.50 Price Target. We think RSH will continue to face negative comps over the next few
years along with operating margin contraction. The CE industry will remain pressured as online
competition increases and the lack of meaningful product innovation continues. We expect the

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company to experience net losses over the next couple of years. Our $1.50 price target equates to 7x
our CY’13E EBITDA and is based on a DCF analysis.
Upside Scenario: $5/share. Our upside scenario expects low single-digit comp increases over the next
couple of years along with modest operating margin improvement. Under this scenario, an 8x EBITDA
multiple would equate to a $5 price per share based on $93 million in CY’13E EBITDA.
Risks: The most visible near-term risk for RSH is that expectations have declined for the stock. There
may be risk to the upside if RSH takes bolder steps to improve its strategy. The market would likely
favorably view announcements about rationalizing its store operations by streamlining its SKU count,
focusing on price optimization, or expanding its online assortment.

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Retailing/Specialty Retail
Roxanne Meyer, CFA – 212-713-8602

Key Themes for 2013:

• As sourcing cost tailwinds diminish, we would expect the focus to shift to top-line growers and comps.
• After years of playing defense (recession through sourcing pain), retailers will play offense and focus on
growth; we see this culminating through a more aggressive multi-channel push, accelerated footage growth
(international/outlets leading), and increased marketing spend to drive traffic.

Most Preferred
ANN, Inc. ANN Buy
Thesis: We see numerous catalysts to drive continued comp and margin gains for ANN in Q1. Based Price Target: $43
on our preliminary product preview, we believe both brands are well positioned for spring. We look
for a continuation of sourcing cost tailwinds in Q1 and believe that the spring calendar will be
favorable for women’s retailers, as an earlier Easter will help drive incremental traffic (barring a cold
early spring). Additionally, unlike for the majority of retailers, comp and margin compares are easier
for ANN. Other catalysts that continue to be in early innings and should support improved productivity
and margins include the optimization of price points, product mix, and product quality; the impact of
Ann Taylor brand store remodels; the continued channel mix shift to the higher-margin ecommerce
and outlet businesses; and benefits from the rollout of omni-channel inventories, which just piloted in
fall.
Valuation: $43 Price Target. As both Ann Taylor and Loft brands prove they can continue to comp
simultaneously, it should drive ANN’s multiple from the low teens to high teens, as has occurred
historically. Our $43 price target is based on 16x our ‘13 estimate of $2.66 (vs. historical 3-year
median of 13x).
Upside Scenario: $47/share. Our upside scenario is based on greater than expected customer response
to ANN’s product at both brands, fewer than expected markdowns, and additional benefits from the
launch of omni-channel inventories (just piloted in fall) and Ann Taylor store refreshes, many of which
were recently completed. Our upside scenario assumes 2013 comp growth of +9.5% (vs. our current
base case of +5.8%) and gross margin gains of +140 bps (vs. our current base case of +80 bps).
Applying a 16x forward multiple (vs. a 16-19x multiple historically when both concepts are working)
and ‘13 EPS of $2.98 derives a valuation per share of $47.
Downside Scenario: $22/share. Our downside scenario is based on weaker than expected customer
response to ANN’s product at one or both divisions which could lead to greater than expected
markdowns, as well as lower than expected growth resulting from omni-channel inventory. Our
downside scenario assumes that 2013 comp growth is +1.5% (vs. our current base case of 5.8%) and
flat gross margins (vs. our current base case of +80 bps). Applying a 10x multiple (slightly above
trough 8-9x) and ‘13 EPS of $2.24 derives a valuation per share of $22.
Risks: Weaker than expected customer response to either Ann Taylor or Loft product, which could
lead to greater than expected markdowns; operational issues related to the launch of omni-channel
inventory.

Least Preferred
Aeropostale Inc. ARO Neutral
Thesis: We believe ARO will continue to be a market share donor given the aggressive promotional Price Target: $14
environment (which minimizes the pricing gap vs. its peers) and ARO’s outsized exposure to basics,
which continue to face significant pricing pressure. While the fashion part of the assortment has been
improving, it is not meaningful enough to offset the weakness in core basics (~60% of mix). Until we
see more of a change in competitive behavior (which we aren’t expecting near-term), we believe
ARO’s margins will continue to be pressured. In the meantime, defensive measures (including cost
cutting and share repurchase) seem more limited.
Valuation: $14 Price Target. Based on 12.6x our 2013 estimate of $1.11 (historical 3-year median

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P/E 10x, peak 17.6x, trough 6x).

Upside Scenario: $19/share. Our upside scenario is based on faster-than-expected growth of the
fashion portion of the assortment and less-than-expected pricing pressure on core basics from ARO’s
competitors. Our upside scenario assumes 2013 comp growth of +4% (vs. our current base case of
+2%) and gross margin gains of +180 bps (vs. our current base case of +115 bps). Based on a 15x
multiple and ‘13 EPS of $1.29, that derives a valuation per share of $19 (Historical 3-year median P/E
10x, peak 17.6x, trough 6x).
Downside Scenario: $8/share. Our downside scenario is based on continued pressure on core basics
pricing, driving comp and margin weakness. Our downside scenario assumes comps of -1% in 2013
(vs. our current base case of +2%) and gross margin gains of +50 bps (vs. our current base case of
+115 bps). Based on a 9x multiple and ‘13 EPS of $0.92, that derives a valuation per share of $8
(Historical 3-year median P/E 10x, peak 17.6x, trough 6x).
Risks: The key risks for ARO are: 1) promotional pricing pressure on core basics from its competitors,
2) fashion risk/inability to execute on new merchandise strategy, and 3) inventory risk. The biggest
upside risk would stem from the ability to grow earnings from recouping significant margin pressure
as inventory plans become more conservative.

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Energy

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Electric Utilities
Jim von Riesemann – 212-713-4260

Key Themes for 2013:

ƒ Who needs to issue equity given the expiration of bonus depreciation? This was a major source of cash
flow and kept most companies out of the public markets and allowed large capital spending plans to be
funded internally.
ƒ Does the economy recover or do we go into a recession? Rising risk should lead to a collapse in the yield
spread, hence, utility outperformance, but a bullish economic outlook could result in the group being a
source of funds as investors seek beta elsewhere.

Most Preferred
Avista Corp AVA Buy
Thesis: With the Washington regulatory case now behind them, we see two key issues facing AVA Price Target: $28
over the next several quarters. In the regulatory arena, the company is likely to complete its Idaho
proceeding by April, perhaps with a constructive settlement as in years past. All told, the utility
operation, notwithstanding an anemic economic environment in the inland Pacific Northwest,
continues to redeploy lower-risk capital at its core transmission and distribution operation and is
expected to deliver approximately 5% per annum rate base growth. The kicker with the AVA story is
through its Ecova subsidiary, the unregulated energy efficiency and cost management business. We see
roughly $3.00-6.50 of value per AVA share in the Ecova business. At some point, the Board will need
to determine whether or not to seek a public valuation for it in order to use lower-cost Ecova currency
rather than higher cost AVA paper as a way to further expand the business. We think that time is
quickly approaching
Valuation: $28 Price Target. Our price target is predicated on a sum of the parts valuation
methodology. We also look at other methodologies (P/E, DDM, DCF) to triangulate and to look for
anomalies. We use group average utility multiples and EV/EBITDA multiples in our sum of the parts
analysis. We expect annual dividend growth of $0.08 a share, or approximately 7%, per annum over
our five year forecast horizon.
Upside Scenario: $30/share. Our upside scenario is based on better-than-expected economic outlook,
as demonstrated through higher customer growth at the regulated business, a better-than-expected
regulatory outcome in the Idaho rate case, and an increase in public comparables for the Ecova unit.
Our dividend discount models are driven largely by underlying risk free rate expectations and dividend
growth assumptions of 8-9% range.
Downside Scenario: $20/share. Our downside scenario is based on continued weakness in the
company’s service territory, a poor regulatory outcome in the Idaho regulatory proceeding, and
ongoing weakness at the Ecova unit. Management must execute and integrate recent acquisitions and
drive margins at Ecova. Refraining from seeking a public multiple could also be a pause for concern,
perhaps not down to our downside scenario, but one especially if management doesn’t take steps to
unlock the hidden value we currently see.
Risks: Service territory growth, weak weather creating adverse carrying charges for fuel recovery,
poor regulatory outcomes, ongoing operational and integration issues at Ecova.

Least Preferred
TECO Energy Inc. TE Sell
Thesis: We believe TE will continue to remain under pressure given its coal exposure and ongoing Price Target: $15
concerns regarding the nearly $1.1B in parent level debt and associated interest expense. With the coal
market having decompressed of late – TE is now selling roughly 45% less tons than it was two years
ago – this had an impact on cash flow. TE is expected to remain a 2% cash taxpayer through 2015 and
have enough cash flow to support the dividend and meet parent level interest obligations, but the cash
flow cushion is declining, which gives us pause for concern. On the regulatory front, we look for a
rate filing to improve its declining earned ROE profile. That request could come during 1Q13.

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Valuation: $15 Price Target. Our target is based on the average of six valuation methodologies: P/E
multiple, sum-of-the-parts, 2 dividend discount approaches, yield support, and price-to-tangible book.
The average of all of these produces a Base case valuation of $15, a Downside scenario to $13.70, and
a $17.15 valuation under the Upside scenario.
Upside Scenario: $17.15/share. Our upside scenario is based on faster-than-expected growth of coal
production and favorable pricing. An increase in the earned return and a favorable outcome in a
regulatory proceeding, i.e., 10.5% allowed ROE with generation cost recovery would also be viewed
favorably. We utilize the average of these six valuation methodologies but expect higher utility growth
to translate into a 0.5x higher P/E multiple turn. Our coal outlook utilizes an EV/EBITDA at 0.5x turn
higher than prevailing long-term multiples.
Downside Scenario: $13.70/share. Our downside scenario is based on continued pressure on coal and
unfavorable regulatory outcome. Our downside case is the converse of our upside outlook. The coal
business shuts down and the valuation multiple becomes a 10-15% discount to the group average P/E
multiple on 2014E.
Risks: The key risks for TE are: 1) changes in the dividend; 2) lower cash flow to support both the
dividend and meet parent interest expense obligations; 3) lower than expected customer growth at the
regulated operations; 4) absence of meaningful rate relief. The key upside considerations are: 1) coal
market rebound; 2) paydown or restructuring of parent-level obligations; 3) economic rebound driving
new customer growth in Florida; 4) favorable regulatory treatment.

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Diversified Natural Gas

Christopher Sighinolfi, CFA – 212-713-2239

Key Themes for 2013:

• Natural gas liquid (NGL) prices will remain a source of investor interest in 2013 as the lack of a developed,
liquid futures market means all key industry participants remain exposed to price fluctuations. While field-
level supplies grew rapidly in 2012 and we project will continue to ramp in 2013, there are many demand
drivers which could keep certain product markets in check.
• The DOE’s approval process for LNG export to countries which lack free trade agreements (FTAs) with
the US will be another key area of investor focus in 2013. Following the NERA’s positive macroeconomic
assessment study in December, we expect the DOE to resume its approval process by the end of 1Q. As
facilities are licensed, investors will pay close attention to contract terms and construction awards; however,
as these facilities will take several years to build and bring into service, no immediate pricing effect should
result from DOE action.

Most Preferred
Targa Resources Partners, LP NGLS Buy
Thesis: Over the last two months, NGLS units are off ~19%, underperforming the midstream MLP Price Target: $51
group by 760 bps. While the company’s sizable Bakken acquisition ($950mm) and follow-on equity
raise contributed to the unit-price weakness, we believe sustained pressure is unwarranted given
current valuation and 2013 distribution expectations relative to peers. In addition, the company’s
current ~7.6% yield and projected 10-12% 2013 distribution growth present downside protection. With
deal close expected by year-end, NGLS is our top pick in 1Q13.
Valuation: $51 Price Target. Derived via Distribution Discount Model (DDM) analysis. NGLS
presently carries a 7.6% distribution yield and we project a 3-year distribution CAGR of roughly 9.6%
vs. the group average of ~8.4%. Despite strong cash flow growth prospects, a higher current yield and
expected distribution growth relative to the group, NGLS continues to trade at a peer-low 2013 and
2014 EV/EBITDA multiples of 7.2x and 5.8x, respectively (vs. the group’s respective 11.1x and 8.9x
average).
Upside Scenario: $55/share. We see incremental upside to our base case if NGL prices were to
strengthen more than we currently anticipate. For example, if NGL prices were to reach ~$1.25/gallon,
the Partnership’s coverage ratio would rise further, allowing for a faster pace of distribution increases.
Maintaining our expected 1.20x coverage ratio under a $1.25/gallon NGL price dynamic would imply
NGLS unit value of ~$55.
Downside Scenario: $30/share. Conversely, if NGL prices were to decline materially and the recent
Bakken acquisition was not as accretive as management anticipated at closing, NGLS may have to
temper its expected pace of distribution growth. For example, if NGLS were to trade at a distribution
yield similar to its G&P peers that are commodity exposed and have had difficulty transitioning newly
acquired assets, NGLS could trade at a ~9% yield. Under this scenario, if the units implied value
would decline to $30/unit.
Risks: Low Natural Gas Liquid (NGL) prices and the threat of MLP tax structure changes remain
Targa’s two biggest risks. Hence, as was experienced in 2H12, low NGL prices reduced Targa’s cash
flows and forced management to operate with lower than expected coverage ratios. Moreover, Targa
remains exposed to interest rate risk as any potential changes to the federal tax code could alter the
favorable corporate tax treatment presently enjoyed by MLPs.

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Least Preferred
Oneok Partners OKS Neutral
Thesis: We view OKS as one of the more expensive Diversified MLPs due to its low distribution Price Target: $56
yield, tight distribution coverage, and sharp sell-off in its optimization business (realizing ethane price
differentials between Conway and Mt. Belvieu market hubs). After having ~40% excess cash after
distributions in 2011, OKS’s distribution coverage ratio sharply compressed to ~1.05x in 2012, and
will remain tight from 2013-2017. While OKS plans on offsetting the decrease in its optimization
business with incremental NGL pipeline and fractionator buildouts, it will take meaningful equity
raises ($950mm assumed in 2013) in order to maintain its targeted 50/50 debt/cap structure.
Valuation: $56 Price Target. Derived via a Distribution Discount Model (DDM) which incorporates
an approximate 7% distribution CAGR through 2017, a 7.8% cost of equity, and a 2.0% terminal
distribution growth rate. Despite a lackluster distribution coverage ratio, OKS continues to trade at a
premium to its peers on a yield basis (5.1% vs. 6.0% peer average).
Upside Scenario: $59/share. We see limited upside to our base case given our expectations for a
muted recovery of NGL prices. If NGL prices were to reach ~$1.25/gallon, OKS’s coverage ratio
would slightly increase, thus allowing the Partnership to raise its distributions at a faster pace than we
presently assume. Maintaining our expected 1.0-1.05x coverage ratio under this scenario, we believe
OKS could be worth up to $59/unit.
Downside Scenario: $47/share. If NGL prices were to decline materially, the cash flow generation of
OKS’s G&P business would weaken. For example, if NGL prices were to average ~$0.75/gallon, we
do not believe OKS would be able to cover even its 4Q12 distribution through 2013; hence, in the
absence of growth, we would expect the distribution yield to rise. If it were to rise to the level of peers
(6.0%) on the base of 4Q12 distribution run-rate ($2.84 annually), it would imply a unit value of just
$47.
Risks: Rising Natural Gas Liquid (NGL) prices and the blowout of ethane pricing spread are the
largest risks to our ONEOK investment thesis. While the current ethane price spread between the two
market hubs is ~6¢/gal, pricing differentials reached levels as high as 56¢/gal in 4Q11. Moreover, a
larger than anticipated increase in NGL prices could materially benefit OKS’s gathering & processing
business, allowing OKS to increase distributions more than we currently forecast.

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Independent Power Producers

Julien Dumoulin-Smith – 212-713-9848

Key Themes for 2013:

• Texas power market reforms will continue to drive upside to CPN and NRG shares (both Buy-rated) with a
positive resolution expected late Spring.
• Continued power asset transactions with FE looking to sell assets to meet debt reduction targets and AES,
D, PPL, amongst others potentially selling assets to remove earnings drags and simplify the business model.

Most Preferred
PPL Corporation PPL Buy
Thesis: We see PPL continuing to beat Street expectations on the back of stronger than expected Price Target: $31
performance at its UK segment as well as capex cuts at its KY utilities and its Power Supply business.
We expect modestly above consensus 2013 guidance of $2.50 vs. $2.40 consensus, driven by stronger
UK guidance and a better than expected awarded ROE in PA; a positive result compared to misses and
lowered expectations at many US-only utilities during the 3Q (and likely to continue into 4Q). We also
see a potential for PPL to further derisk the business by selling its MT Power assets accretively as the
MT segment is currently breakeven to a modest drag on EPS. Finally, we believe PPL will continue to
look to cut costs at its Power business, further driving earnings upside and lowering equity needs.
Valuation: $31 Price Target. We value PPL via business by business SOP based on a P/E metric for
the US utilities; EV/EBITDA for the Power business; and a blend of P/E, premium to RAV, and
EV/EBITDA for the UK utilities. We expect shares to react positively to 2013 guidance as well as
execution on either cost cuts or asset sales.
Upside Scenario: $33.50/share. We assume that PPL is able to earn its allowed 10.4% ROE in PA
($0.06 EPS improvement), sell down its MT power assets for roughly $0.50.shr, achieve $75M of
further supply cost cutting, and continue to outperform at the UK ($0.10 EPS) driving a ~$3/shr
improvement in valuation.
Downside Scenario: $28/share. In the event that the NRC requires hardened vents at all US nuclear
units due to Fukushima, we estimate incremental capex of $30M. Additionally if the company is
unable to repair the blade cracking issue at Susquehanna, there would likely be an ongoing $0.03-
$0.04 annual cost to continually repair the cracked blades.
Risks: PPL’s largest risk is its Susquehanna nuclear unit, which has had blade cracking issues.
Management believes they have determined the root cause of the issue and can permanently fix the
problem in 2013 at a likely cost of $25-30M, similar to what they had spent in 2012. PPL’s other
looming risk are regulatory review at its utilities with the UK implementing a new tariff in 2015 and
the PA/KY utes needing to file continuous rate cases.

Least Preferred
Dynegy, Inc. DYN Sell
Thesis: We see DYN as our least preferred name ahead of 2013 EBITDA guidance, which we see as Price Target: $16
likely disappointing at $347Mn UBSe vs. $377Mn consensus. We expect guidance to come either at
the Analyst Day in early January, the company’s first since emergence from bankruptcy Oct 1st, or on
the 4Q earnings call, likely in mid February. At the Analyst Day, we also expect DYN to announce
that they will not refinance the CoalCo business at the parent company, a negative given some investor
expectations for share buybacks following refinancing of the GasCo and CoalCo term loans and
freeing up cash from the cash collateral accounts by moving to a first lien hedging structure. Although
we do believe the company will successfully refinance at lower interest rate, we believe that excess
cash may be trapped at the operating companies if all the assets are not refinanced at the parent;
further, management’s most likely use of any excess cash will be to keep it on the balance sheet as a
commodity buffer and at best see the cash used for further debt paydowns. Secondly, we expect
Dynegy to announce the early retirement of Morro Bay in 2013 as they have been unsuccessful
contracting the asset. With negative catalysts looming and DYN trading expensive at ~11x

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EV/EBITDA vs peers NRG and CPN at 7-9 EV/EBITDA over the past few quarters, we see DYN
shares as a Sell.
Valuation: $16 Price Target. We value the company at 9x EV/EBITDA for GasCo, implying $13/shr
and at $100 per kW of installed capacity for CoalCo, given minimal EBITDA from those assets and
implying $3/shr for CoalCo.
Upside Scenario: $19/share. Natural gas increases to $5.00/mmcf driving $50Mn of EBITDA
improvement and $3/share upside to our current $16 PT.
Downside Scenario: $13/share. No power market recovery in Illinois and the PJM gas assets are hurt
by an influx of new, more efficient gas plants that receive below Henry Hub natural gas due to being
built on top of the Marcellus and Utica shales.
Risks: The risks to our sell rating are natural gas prices rising as well as implementation of robust
MISO capacity markets, where CoalCo operates. Additionally, should California delay its Once-
through-cooling laws, DYN’s California assets may not retire in 2013-2017 as we currently assume.

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Integrated Oil and Oil & Gas Exploration &

Production
Bill Featherston – 212-713-9701

Key Themes for 2013:

• Oil-weighted E&Ps generally offer better value than gassy E&Ps as the latter have re-rated upward YTD to
reflect an expected rise in natural gas prices.
• Differentiating between E&Ps that can grow cash flow without overburdening the balance sheet, judged by
debt-adjusted production and cash flow per share growth and recycle ratios.

Most Preferred
Anadarko Petroleum Corp. APC Buy
Thesis: APC offers both an attractive longer-term growth profile and more meaningful exploration Price Target: $105
upside than its large-capitalization peers, and should provide a steady stream of exploration prospects
and stock catalysts throughout 2013. APC is delivering above average cash flow per debt adjusted
share growth in 2012-13 and has a huge inventory of unbooked international discoveries and
unconventional resources in the US that should enable ~7% per annum production growth for the next
several years while generating a modest low-single digit free cash flow yield. Anadarko has
underperformed peers during 2012 despite superior operational results because of concerns related to
its Tronox liability, with the stock discounting an apparent $5 billion liability, above APC’s estimate
of $0-$1.4 billion. We expect a resolution of the Tronox court case in 1Q13 with APC paying ~$1.5
billion (which would only affect its multiple by 0.15x). Every 0.5x turn move in APC’s equity should
move its shares 15%, and we see no reason it shouldn’t re-coup its traditional 0.5x turn premium once
the Tronox uncertainty is resolved. A resolution should enable investors to re-focus on Anadarko’s
merits: 1) a >50% discount to NAV which is well below its historical average of a 30% discount to
NAV; 2) ‘12-16 cash flow and production per debt adjusted share growth well above the peer
averages; 3) superior capital efficiency relative to peers; 4) arguably the best exploration program
amongst independents with an active calendar providing numerous catalysts; 5) several assets that
could be monetized forcing investors to recognize NAV discount; and 6) one of the most attractive
acquisition takeout candidates at a period when we expect consolidation in the sector to accelerate.
Valuation: $105 Price Target. Our $105 target assumes 0.65x our 2P NAV or 6.0x normalized
2013E DACF.
Upside Scenario: $140/share. Our upside case assumes APC is acquired. In an environment where
Super-Majors have under-invested in both global exploration and US unconventional shales, Anadarko
offers a one-stop solution and its management is a willing seller. With most transactions historically
done at NAV, we should note that our NAV estimate for APC assuming current NYMEX/ICE oil and
gas futures prices is ~$140/share, implying ~85% upside from current levels.
Downside Scenario: $65/share. Our downside case scenario assumes lower normalized oil and gas
prices of $80/Bbl WTI, $90/Bbl Brent and $3.50/MMBtu gas and an adverse outcome of the Tronox
case requiring APC to pay out $5 billion in cash. In that case, our NAV estimate would fall to
~$105/share, implying a stock price move to the mid-$60’s.
Risks: Near-term risks to our thesis include a further decline in oil prices (oil production generates
nearly 70% of companywide revenues) as well as an unfavorable outcome of the Tronox lawsuit,
which we would define as over $5 billion. APC believes its worst case payment is $1.4 billion and a
judgment will likely come in 1Q13.

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Least Preferred
ConocoPhillips COP Sell
Thesis: We believe increased transparency following the recent spin-off of COP’s downstream assets Price Target: $47
will likely lead to multiple contraction in its E&P business due to four factors: 1) COP’s upstream long
term target growth rate of 3-5% is well below the large-cap E&P peers average of ~8-9%; 2) its
upstream business will likely be re-valued downwards as investors shift to using cash flow multiples
(primary metric for pure play E&Ps) from earnings multiples (generally used for Majors); 3) COP’s
free cash flow deficit has eliminated share buybacks, removing a steady buyer of 8-9% of trading
volume over the last 2 years, unless asset sales are materially increased, and its dividend could be at
risk in a cyclical oil price pullback; and 4) lack of attractive growth relative to the pure play E&Ps
could prompt the new CEO to make a material acquisition to boost its growth profile and attract E&P
investor interest. Despite below average growth and margins as well as a large FCF deficit unless WTI
exceeds ~$125/Bbl, COP appears very expensive trading at a 1-1.5 turn premium to its E&P peers on
EV/DACF.
Valuation: $47 Price Target. We rate COP a Sell with a 12-month price target of $47, which assumes
4.8x normalized 2013E DACF.
Upside Scenario: $60/share. Our upside scenario assumes that COP completes its targeted $8-10
billion asset sale program by year-end 2013 and improves its capital efficiency profile to enable
longer-term cashflow per debt adjusted share growth in line with peers. Under this scenario, we could
see COP appreciating to 5.7x normalized 2013E DACF, in line with the peer group target multiple and
implying a value of ~$60/share.
Downside Scenario: $35/share. Our downside scenario assumes COP fails meet its targeted 3-5%
production growth target and continues to materially outspend cash flow, along with lower normalized
oil and gas prices of $80/Bbl WTI, $90/Bbl Brent and $3.50/MMBtu gas. Under this scenario, we
could see COP’s multiple declining to a low growth peer multiple of 4.3 2013E DACF, or ~$35/share.
Risks: Any increase in its planned $8-$10 billion of asset sales by year-end 2013 could be a positive
catalyst for the stock, and we expect an update on divestiture progress throughout 1H13. Given the size
of the cash flow deficits, timeliness of future asset dispositions is becoming increasingly important for
the company.

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Small-Mid Cap Exploration & Production

Betty Jiang, CFA 212-713-1287

Key Themes for 2013:

• Oil-weighted E&Ps generally offer better value than gassy E&Ps as the latter have re-rated upward YTD to
reflect an expected rise in natural gas prices.
• Differentiating between E&Ps that can grow cash flow without overburdening the balance sheet, judged by
debt-adjusted production and cash flow per share growth and recycle ratios

Most Preferred
Continental Resources CLR Buy
Thesis: Having achieved its targets set in its prior 5 year plan 18 months ahead of schedule, CLR’s Price Target: $96
new goal of tripling production again by 2017 offers unparalleled 5-year growth outlook among the
mid-to-large cap E&Ps. While this growth plan requires the company to outspend cash flow over the
period, we believe it’s the right strategy to increase NAV and that the deficit is manageable
considering the relative growth of its oil-driven cash flow and low cost of capital. CLR’s debt-adjusted
production and cash flow per share growth of 21% and 26% in 2012-2015 are above the SMID-cap
group averages of 15% and 23%, respectively, and the highest among the mid-to-large cap oily E&Ps.
CLR’s shares have been materially de-rated this year as its YTD equity performance has been
essentially flat while its 2013 consensus CFPS revision has been revised up by ~22%. This, in our
view, is an over-reaction to concerns around a rapidly increasing capex and funding ability; we expect
these concerns to subside as CLR shows reducing well costs and increasing operational efficiency,
which would improve its already sector leading capital efficiency ratios going forward.
Valuation: $96 Price Target. With its attractive production, cash flow growth and unbooked resource
inventory, we expect CLR to maintain its EBITDX premium relative to peers and see considerable
room for long term share price appreciation with an estimated ~30% per annum EBITDX growth over
the 2012-2017 period. Our $96 price target is based on 0.8x our 2P NAV of $120/share and implies
7.8x 2013.
Upside Scenario: $112/share. Assumes execution in the Bakken/Three Forks development program
leads to an upward revision to 2013 production growth. Under this scenario, we could see Continental
appreciating to its historical average multiple of 8.5x 2013E EBITDX, which implies a share price of
$105/share. Assuming oil and gas prices increase by $5/Bbl and $0.50/MMBtu from our current
forecast level, our upside valuation could increase to $112 per share.
Downside Scenario: $57/share. Assumes that disappointing execution, unplanned downtime or
adverse weather conditions in the Williston Basin or SCOOP lead to a downward revision to 2013
production growth. Under this scenario, we could see CLR’s multiple compress by 0.5x to 5.5x 2013E
EBITDX (which is at a >3 turn discount to its historical multiple), implying a downside price of
$61/share. Assuming oil and gas prices decrease by $5/Bbl and $0.50/MMBtu from our current
forecast level, our downside valuation would decline to $57 per share
Risks: CLR’s leverage to the Williston Basin exposes the company to risks associated with extreme
weather conditions such as freezing temperatures and flooding, the availability of oil services
equipment/personnel, and an adverse movement in the Bakken -WTI crude oil spread which impacts
realizations. It also subject to execution risk associated with its position in the emerging SCOOP
development in the Anadarko Woodford Basin

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Least Preferred
Midstates Petroleum Company MPO Neutral
Thesis: Since its April IPO, Midstates had missed its production guidance for two out of three quarters Price Target: $7
due to mechanical issues in Louisiana, prompting the market’s concerns over its ability to execute as
well as over the prospectivity of its Upper Gulf Coast Tertiary assets. Meanwhile, in the Mississippian
Lime, a play the company had just recently entered via acquisition of Eagle Energy, MPO holds
~76,000 net acres in the core part of the play. The addition of Mississippian Lime assets offers
diversification and more predictable performance, but it also dilutes oil mix and materially increases
leverage. Despite Midstates having already been de-rated given disappointing production performance
and a shift in corporate strategy, we believe shares would likely remain range bound (despite a solid
debt-adjusted production and cash flow growth of 25% and 27% in 2012-2015, respectively) until the
company can deliver a consistent execution track record in both the Upper Gulf Coast Tertiary Trend
and the horizontal Mississippian.
Valuation: $7 Price Target. With the >20% run up in share prices in the past month, we believe MPO
is now fairly valued on P/2P NAV with shares trading at 0.77x our risked 2P NAV under strip prices,
in line with the oily SMID-cap peer group average of 0.79x. Our price target of $7 is based on 0.8x our
2P NAV under strip prices.
Upside Scenario: $11/share. 1) several quarters of meeting or exceeding production guidance enables
the market to regain confidence in the Upper Gulf Coast Tertiary Trend asset and increases risk factors
in the NAV; 2) successful horizontal exploration tests meaningfully contribute to production and
improve capital efficiency of future development program; and 3) solid well performance in the
Mississippian Lime play and smooth integration of Eagle assets. Under this scenario, we could see
MPO appreciating to 1.0x our current “highly risked” 2P NAV of $9/share under strip prices. An
increase of $5.00/Bbl in oil and $0.50/MMBtu in gas prices would lift our upside analysis to $11/share
Downside Scenario: $4/share. Our downside case scenario assumes: 1) Louisiana production
continues to fall short of expectations; 2) uneconomic horizontal development in Upper Gulf Coast
Tertiary Trend; and 3) Mississippian well performance below expectations. Under this scenario, we
could see MPO depreciating to 0.6x 2P NAV, or $5/share. Given its high leverage, we also see risk of
equity issuance should lower commodity prices cause a liquidity squeeze. A decrease of $5.00/Bbl in
oil and $0.50/MMBtu in gas prices would lower our downside analysis to $4/share.
Risks: Continued operational difficulties in the Upper Gulf Coast Tertiary would raise more questions
around the prospectivity of the asset and potentially lead to negative reserve revisions, while worse
than expected performance in the Mississippian Lime play or potential issues integrating the Eagle
assets and team could impact production. With little leeway on the balance sheet, MPO is prone to cut
capex and production in 2013 if oil prices weaken.

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Natural Gas & MLPs

Ron Barone – 212-713-3848
Key Themes for 2013:
• Domestic natural gas production declines and natural gas prices increase by ~$1.00.
• Propane prices rise over the course of the year due to increasing exports and declining gas production.

Most Preferred
EQT Corporation EQT Buy
Thesis: We believe EQT Corp will be a major beneficiary of our expected increase in natural gas Price Target: $65
prices. EQT holds approximately 530,000 acres in the Marcellus, of which 35% is “wet”. The
company has 5.4 Tcfe of proven reserves (35 years R/P), 21.4 Tcfe of 3P (150 years R/P), and a total
resource base of 34 Tcfe (200 years R/P). Production growth volumes are estimated to approximate
29% in 2012 and 30% in 2013. EQT has enormous growth potential in the Marcellus as well as 7.7
Tcfe of 3P in the Huron. EQT is a low-cost operator with three-year finding & development costs of
$1.13/Mcfe (versus industry mean of $2.07/Mcfe) and per unit operating expenses of $0.78/Mcfe
(versus industry mean of $1.55/Mcfe). EQT’s new frac design (air drilling) is resulting in 40% higher
IP rates, 20-25% higher EURs and over 100% return on incremental investment at a $4 NYMEX price.
Valuation: $65 Price Target. Our Sum-of-the-Parts (SOP) valuation yields a $65 price target. A
major input in our valuation is proven reserves and, thus, we believe 1P reserves will increase
significantly with the year-end reserve report which, in turn, will result in an upward revision to our
target next year.
Upside Scenario: $75/share. Assumes a significant increase in year-end reserves and/or funding to
develop the Huron through the sale of coal bed methane acreage, swapping or selling Tioga County
acres, selling its distribution properties or doing a drop-down to EQM.
Downside Scenario: $52/share. Assumes substantial decline in natural gas prices and/or restrictive
drilling legislation in the Marcellus and Huron plays.
Risks: Risks to our estimates and price target include: lower natural gas prices, shifting sources of
supply and demand, unexpected changes in basis differentials, mild weather, lower than expected gas
production, delays in expansion projects, unsuccessful well attempts and unfavorable regulatory
decisions.

Least Preferred
Ferrellgas Partners FGP Sell
Thesis: The propane industry is dependent on weather conditions. Organic volume growth is minimal Price Target: $16.50
due to pipeline encroachment. Growth is achieved by “roll-up” acquisitions and cost reductions. Last
winter, the industry suffered margin pressure due to escalating propane prices and warm weather.
Margins improved in the first quarter of fiscal 2013; however, margins may erode from current levels
due to expected increases in propane exports. FGP consistently has poor distribution coverage and has
never raised its distribution (FGP’s initial public offering was in 1994). Based on our projections, we
estimate the distribution coverage in fiscal 2013 will amount to 0.83x. Moreover, FGP’s net
debt/EBITDA ratio was 5.98x in fiscal 2012 and 5.69x in the first quarter of fiscal 2013, both well-
above the industry average.
Valuation: $16.50 Price Target. Our Distribution Discount Model (DDM) yields a price target of
$16.50. At that level, the yield would be 12%. We believe such a yield is appropriate given the
minimal organic growth and weather-dependent nature of the business and FGP’s consistently weak
distribution coverage ratios and above-industry average leverage.
Upside Scenario: $20/share. Assumes propane margins improve further and FGP’s distribution
coverage improves to 1.0x and net debt /EBITDA improves to around the 4.5x range.
Downside Scenario: $13/share. Assumes a further deterioration in margins and/or a much warmer
than normal winter which, in turn, results in a reduction in the annual distribution rate to $1.50.
Risks: Risks to our estimates and price target include: mild weather, a sluggish economy, commodity
price risk/ financial market volatility and environmental regulations.

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Oil Services & Equipment

Angie Sedita – 212-713-3587

Key Themes for 2013:

• Strong FCF yields for Diversified Oil Service Companies - We believe we are entering a New Era for the
diversified oil service companies where significant and consistent free cash flow generation (3-6% yields)
will likely result in returning capital to shareholders through potential dividend increases and share
buybacks.
• Strong growth prospects in International markets, however flattish North America – Our outlook for 2013
in the International markets is for solid growth for both revenues and margins driven by higher activity
levels and new ultra-deepwater rigs. Although we expect the North American market to bottom in early
2013, we forecast a slow recovery with continued overcapacity limiting any significant improvement in
earnings power.

Most Preferred
Halliburton Co. HAL Buy
Thesis: We believe Halliburton offers: (1) Strong Free Cash Flow & returning capital to Price Target: $44
shareholders: We are entering a “new era” where HAL will generate significant and consistent free
cash flow (FCF), in our view. We forecast FCF generation of $1 bil in 2013 and almost $2 bil in 2014.
We expect HAL will consider both a share buyback and potentially raising its dividend in 2013,
regardless of whether a settlement on Macondo is announced (settlement could ultimately take years
for a full resolution). (2) Still strong EPS growth, yet compelling valuations: We forecast EPS
growth of about 10%-15% in the coming years with growth stemming from International & deepwater
markets. Valuation (relative, price to tangible book, and absolute) remains compelling with HAL
trading at a 12% discount to BHI and 25% to SLB on 2013E P/E, which we believe is unjustified and
well above historical norms.
Valuation: $44 Price Target. Our $44 price target is based on a 14x 2013 P/E multiple vs. HAL’s 10-
year historical average forward multiple of 17x. On 2013E P/E, Halliburton is trading at a 12%
discount to BHI and 25% to SLB. Additionally, HAL is currently trading at 2.4x price to tangible book
today, essentially in-line with its recent trough at 2.4x in 2008 and 5-year average ratio of 3.8x.
Upside Scenario: $53/share. Our $53 upside scenario is based on a 16x 2013 P/E multiple, in-line
with HAL’s historical average multiple of 17x. This scenario assumes a significant pick-up in North
American oilfield services activity driven by strong commodity prices, specifically a recovery in
natural gas prices. Under this scenario, HAL also continues to execute well Internationally across all
regions.
Downside Scenario: $27/share. Our $27 downside scenario is based on a 9x 2013 P/E multiple or a
45% discount to HAL’s historical average multiple of 16x. This scenario assumes a pull-back in North
American oilfield services activity driven by lower oil prices, as well as a much slower than expected
pick-up in activity Internationally.
Risks: Key risks include (1) continued margin pressure and lower that expected revenues in North
America from ongoing pricing deterioration and lower utilization levels (including pressure pumping),
(2) lower than expected results Internationally, including unexpected start-up costs related to new
award wins (Brazil etc), and (3) potential for a larger than expected liability from the Macondo
incident with the Plaintiffs (HAL has not been cited for Clean Water Act violations by the Department
of Justice).

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US Refiners
Craig Weiland – 212-713-3654

Key Themes for 2013:

• The restart of Atlantic Basin refinery capacity in late 2012/early 2013 (Motiva, Port Arthur, Port Reading,
Bayway, Amuay) should further pressure Gulf and East Coast refining margins. Given gasoline inventories
are already significantly above normal levels for this time of year, incremental refinery output is likely to
exacerbate gasoline cracks in the Atlantic Basin, prompting a cut in throughput rates in early 2013.
• The start up of phase 2 of the Seaway pipeline in late 1Q13 should provide temporary relief for congested
crude oil inventories in the Midwest. Similarly, the commencement of operations of several West Texas-
Gulf Coast pipelines during 1Q13-2Q13 should provide an outlet valve for building Permian crude
production in West Texas.

Most Preferred
Tesoro Corporation TSO Buy
Thesis: We expect momentum in TSO shares to continue given its attractive valuation and risk reward Price Target: $50
profile. We expect TSO to announce the divestiture of its Hawaii refinery in early January, which
could generate proceeds of $240-$330MM and act as modest catalyst. TSO has also signaled it is
studying logistics oriented projects designed to move discounted crudes to its California refineries;
improved clarity on this is possible around mid-2013. Additionally, we think it is likely that TSO will
receive FTC approval for its acquisition of BP’s Carson refinery sometime in 1H13; given a healthy
dose of investor skepticism whether TSO can gain FTC clearance, we believe an approval would be a
meaningful positive for shares. Finally, TSO trades at an attractive 4.0x 2013 EV/EBITDA, below
peers’ 5.1x.
Valuation: $50 Price Target. Our $50 price target is based on a sum-of-the-parts analysis, implying a
target multiple of 4.5x 2013E EBITDA of $1.8 billion.
Upside Scenario: $60/share. Our upside scenario is assumes a 5.3x multiple for 2013E EV/EBITDA
in 2013-14—above our present assumptions of 4.5x. We believe investors may credit TSO with a
higher multiple on earnings should it receive FTC approval and if management reveals meaningful
logistics oriented projects designed to move discounted crudes to its West Coast refineries. Under our
sum-of-the-parts price target methodology, we estimate shares could be worth $60 in an “upside”
scenario.
Downside Scenario: $37/share. Our downside scenario assumes TSO is unable to received FTC
approval for its Carson refinery acquisition and thus does not received crude oil feedstock discounts
associated with synergies and larger delivery volumes of VLCC carriers. Additionally, we envision
lower investor sentiment as it relates to the stock, which prompts a lower EV/EBITDA multiple (3.5x
2013E EBITDA) Under our sum-of-the-parts price target methodology, we estimate shares could be
worth $37 in a “downside” scenario.
Risks: In our view, the largest risk to shares would be the failure of TSO to close on its recently
announced acquisition of BP’s Carson, CA refinery. Additionally, a potential near-term return to
service of CVX’s 260 MBbld Richmond, CA could prompt a rebuilding of PADD 5 (West Coast)
product inventories. This could present near-term headwinds for West Coast refining margins.

Least Preferred
Western Refining WNR Neutral
Thesis: During 4Q12, Western’s gross margins have benefited from a meaningful dislocation in Price Target: $26
Permian Basin crude oil differentials, which saw WTI-Midland crude oil prices trade as wide as
$22/Bbl versus WTI-Cushing. We believe this differential will narrow materially during 1Q13-2Q13
on the back of the commencement of multiple pipelines designed to debottleneck the West Texas
crude oil market. These pipelines include: 1) Magellan’s Longhorn Phase 1 reversal (135 MBbld of
capacity; startup timing: 1Q13); 2) SXL’s Permian Express Phase 1 (120 MBbld of capacity; startup
timing: 1Q13); 3) Magellan’s Longhorn Phase 2 reversal (90 MBbld of capacity; startup timing: mid-

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2013). Given near-term sentiment for shares has been strong on the back of the 4Q dislocation in WTI-
Midland crude oil differentials, we estimate a correction could come in tandem with the narrowing of
these differentials in late 1Q13.
Valuation: $26 Price Target. Our $26 PT is based on a sum-of-the-parts analysis, implying a target
multiple of 4.6x 2013E EBITDA of $590 million.
Upside Scenario: $29/share. Our upside scenario assumes a wider than assumed WTI-Midland vs.
WTI-Cushing differential of $5/Bbl during 2013-14 (our present assumptions are for a $1-$1.50/Bbl
differential). This assumes the aforementioned pipelines are delayed significantly and that crude oil
production growth in the Permian region exceeds 1.3-1.4 MMBbld during 1Q13. These items would
likely prompt crude oil differentials in the southwestern U.S. to stay wider than anticipated and prompt
upward revisions to our 2013 EBITDA forecasts. Under our sum-of-the-parts price target
methodology, we estimate shares could be worth $29 in an “upside” scenario, reflecting a 5.2
EV/EBITDA multiple.
Downside Scenario: $22/share. Our downside scenario assumes a narrower than assumed WTI-
Midland vs. WTI-Cushing differential of $0.50/Bbl in 1Q13 (presently, we are forecasting a $1.50/Bbl
differential). This assumes the aforementioned pipelines commence operations on schedule and have a
more pronounced impact on Permian crude differentials. Additionally, this scenario incorporates a
lower segment target EV/EBITDA multiple of 3.9x which reflects a less optimistic market view
towards WNR’s earnings stream. Under our sum-of-the-parts price target methodology, we estimate
shares could be worth $22 in a “downside” scenario.
Risks: The key risk for WNR is concentration risk, given 90-95% of companywide EBITDA is
generated by just two refineries; should either of these assets experience unplanned downtime or
maintenance, earnings would be significantly impacted.

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Financials

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Brokers & Asset Managers

Brennan Hawken, CPA – 212-713-9439

Key Themes for 2013:

• Stocks are currently pricing in a relatively optimistic revenue outlook for capital markets businesses,
despite continued macro concerns and an uncertain regulatory environment. Further, some swaps will
become centrally cleared in 2013, which could pose a headwind to activity levels and profitability of
certain FICC businesses.
• We expect universal banks will begin making progress on bringing down legacy mortgage related costs in
2013, although the pace of improvement is uncertain and could vary between firms.

Most Preferred
JP Morgan Chase &Co JPM Buy
Thesis: Given our view that the operating environment remains difficult for the universal banks and Price Target: $46
brokers and the risk / reward balance is less attractive at current valuations, we believe JPM shares
offer the greatest stability if macro concerns resurface. JPM has far greater certainty in its earning
power compared to peers, and reductions in legacy mortgage costs could happen faster than is
currently expected by the market and reflected in our estimates.
Valuation: $46 Price Target. Our $46 price target assumes JPM will trade at 1.1x our 3Q13 TBV
estimate in 12 months (vs. 10-year avg. of 1.9x). JPM remains the strongest franchise in the group, and
we believe they can maintain this share. In the current difficult operating environment, we believe
JPM’s ability to execute will provide an advantage, providing upside to the current valuation.
Upside Scenario: $54/share. Our upside scenario for JPM includes a recovery in risk appetite, which
would likely drive stronger capital markets activity levels and higher interest rates. The primary levers
we adjusted for JPM in this scenario were IB revenues and NIM, which increases our adjusted 2013
EPS estimate to roughly $6.25, a 16% upside to our current estimate. This would generate a ROTE of
nearly 16% and our implied valuation would be $54, representing 1.25x our YE 2013E TBV.
Downside Scenario: $35/share. Our downside scenario for JPM would likely be driven by a macro
shock or a return of risk aversion, resulting in a downturn in capital markets activity and further
declines in interest rates. In this scenario, we have reduced our estimates for IB revenues and NIM, and
our adjusted 2013 EPS estimate would be roughly $4.15, a 23% downside to our current estimate. This
would generate a ROTE of just over 10% and our implied valuation would be $35, representing 0.85x
our YE 2013E TBV.
Risks: If the environment remains positive for the group, JPM could perform well on an absolute basis
but underperform compared to firms with more earnings leverage to cost reduction plans and
improving capital markets revenue opportunities. Additionally, we believe the move to central clearing
in early 2013 could disrupt certain FICC markets, which could have a particularly large impact on JPM
due to its prominence in these markets.

Least Preferred
Lazard LAZ Sell
Thesis: LAZ is in the process of implementing an aggressive cost savings program to reach its margin Price Target: $25
targets in the current difficult M&A environment, but we are concerned that LAZ does not have a
history of strong cost discipline and the revenue impact from these cuts could be worse than currently
expected. Further, we believe much of the upside from this initiative has already been reflected in
current valuations, while considerable execution risk remains.
Valuation: $25 Price Target. Our $25 price target assumes the stock will trade at 15x our 2013
estimate over the next twelve months. LAZ’s current valuation is well above its historic average, while
peers are trading considerably below their historic average. This valuation is particularly puzzling to us
given LAZ’s reliance on cost cutting to drive EPS.
Upside Scenario: $32/share. Our upside scenario for LAZ includes an uptick in M&A activity driving

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stronger revenue opportunities and a more rapid reduction in operating expenses. In this scenario, we
estimate 2013 EPS of roughly $2.00, an 18% increase over our current estimate, and our implied
valuation would be $32, based on a 16x P/E multiple. Importantly, we believe this is a very unlikely
outcome.
Downside Scenario: $18/share. Our downside scenario for LAZ includes a moderate decline in M&A
revenues, driven by a more severe revenue headwind from the expense reduction plan or a worse than
expected deal environment. In this scenario, we estimate 2013 EPS of $1.30, 24% below our current
estimate, and our implied valuation would be $18, based on a 14x P/E multiple.
Risks: If LAZ is able to meet its expense reduction targets without impairing revenue as much as
expected, this could drive additional earnings upside. Additionally, LAZ’s asset management and
restructuring platforms are strong and could provide greater stability than peers if the deal market
deteriorates sharply.

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Consumer Finance
Matthew Howlett – 212-713-2382

Key Themes for 2013:

• As mortgage rates decline and Fed MBS buying increases, we expect rising prepayment speeds and
continued narrowing of agency MBS purchase yields to compress spreads for the Agency Mortgage REIT
space.
• Rising residential home and commercial property prices should result in continued appreciation on
RMBS/CMBS assets. Basel III requirements will likely result in continued Bank asset sales.

Most Preferred
Newcastle Investment NCT Buy
Thesis: We expect NCT’s book value to grow 21% over the next 12 months through a combination of Price Target: $10
asset appreciation and debt repurchases, the majority of which occur inside NCT’s legacy CDOs. Full
capital deployment and higher accrual yields (mainly on MSR assets) should drive a higher cashflow
stream. On back of this, we expect NCT to lift its dividend 13% in 2013 to $0.99. The second part of
our investment thesis is the potential for multiple expansion in conjunction with the spin out of its
residential unit. We believe a sum-of-all parts valuation could improve NCT to $12 (20%) if the spin
off of the residential unit is successful based on a peer group analysis which implies a higher valuation
for independent residential mortgage/servicers. In addition, earnings would be higher on the new
mortgage company based on our expectation for greater financial leverage and faster growth as a
standalone operating structure.
Valuation: $10 Price Target. We have a 12 month price target of $10 which reflects a blend of a
10.5% dividend yield on our 2013 dividend estimate ($0.99) and a 1.03x price to book multiple on our
4Q13 NAV estimate of $9.80. Our price target is based on comparable valuation metrics for a blend of
residential and commercial mortgage REITs, which NCT is largely measured against today.
Upside Scenario: $14/share. As NCT demonstrates the stability of returns over time the stock could
trade up to a yield consistent with more established REITs and servicing companies. Moreover,
potential valuation enhancement could coincide with greater appreciation of the separated companies if
the spin-off is successful. In addition, if investors were to require an 8% yield on our base case
dividend (combined entities) estimate of $1.16 in 2014, the stock could trade up to $14. Additional
upside could include stronger earnings performance and/or higher financial leverage which could
increase earnings approximately 20%.
Downside Scenario: $5/share. If prepayments increase greater than our expectation and
commercial/residential losses increase more than our forecast, NCT’s earnings and book value could
decline. Our downside modeling indicates NCT’s earnings and book value could fall approximately
25%. NCT’s dividend would likely decline by a commensurate amount. In the event of this operating
climate, we would expect NCT to trade approximately 20% below our downside case book value of $6
resulting in a $5 valuation.
Risks: Faster than expected prepayments would hurt cashflow and book value on the company’s
servicing portfolio. Higher credit losses on the company’s commercial assets would negatively impact
book value and earnings. Capital raising would likely be difficult under scenario.

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Least Preferred
Annaly Capital Management NLY Neutral
Thesis: We remain Neutral on NLY as elevated prepayments in the near term should pressure Price Target: $14
earnings. At the same time, we are concerned with current accrual yields on the portfolio which may
not accurately be incorporate higher lifetime prepayment assumptions. In addition, NLY’s sheer size
($100B+) forces substantial reinvestment activity at current CPR rates.
Valuation: $14 Price Target. Our $14 price target represents a 13% yield on our 2013 dividend
estimate of $1.80
Upside Scenario: $17/share. Our upside scenario is based on slower than expected prepayment
speeds and higher reinvestment yields. Our upside scenario assumes earnings increase about 20% over
our base case forecast of $1.80. This would result in a $2.21 dividend payment for 2013. Applying a
13% yield results in our $17 upside valuation scenario.
Downside Scenario: $11/share. Our downside scenario is based on higher prepayment speeds and
lower reinvestment yields. Our downside scenario assumes earnings fall 25% to $1.35 and book value
falls to $13.20. Based on a 12% yield requirement for our projected quarterly dividend run rate of
$1.35, we arrive at an $11 valuation.
Risks: The key risks to our thesis are: 1) a steepening of the yield curve which could increase
reinvestment spreads, 2) slower prepayments which would lower amortization expense, and 3) and
decline in funding cost due to lower liability pricing on repo rates. The biggest risk would stem from
NLY’s ability to grow book value through accretive stock buybacks or continued appreciation on its
portfolio.

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Exchanges & Brokers

Alex Kramm, CFA – 212-713-4060

Key Themes for 2013:

• Regulation - The implementation of new OTC reforms is expected to create new revenue opportunities as
clearing becomes mandated in 1Q13.
• Volumes - With the prevailing low-volume environment, exchanges are likely to continue to diversify their
business models to be less reliant on volumes.

Most Preferred
CME Group Inc. CME Buy
Thesis: Our most preferred name is CME, which we believe is poised to benefit from the approaching Price Target: $64
implementation of new OTC reforms. Mandated clearing in the U.S. is expected to start in early 2013
and we believe interest rate swaps alone could add $500 million in revenue medium term (~$0.90 or
25% relative to 2013 EPS). We believe there is an additional revenue opportunity from a potential
migration to futures-based alternatives, given the expected collateral requirements (a cleared swap will
likely be 2-3x more expensive). A 1x1 conversion of interest rate swaps to futures would create a
revenue pool of more than $2bn (vs. $3bn CME total revenue today). With new rules nearly in place
and the CFTC mandated clearing for Interest Rate swaps set to start in early ‘13, we believe CME is
likely to see upside in 1Q13 as clients begin adhering to the new rules.
Valuation: $64 Price Target. Assumes an 18.5x multiple on our FY13 EPS estimate of $3.44. Our
target multiple is in line with where CME was trading in 2010 as we believe the opportunity from
current OTC reforms will drive CME’s multiple back to the levels seen during the Dodd-Frank rule
writing.
Upside Scenario: $76/share. Instead of $50mm in OTC clearing revenue, OTC clearing revenues
grow to $250mm, which would boost our 2013 EPS estimate to $3.81. Assuming a 20x multiple
(growth rate accelerating) would result in a valuation of ~$76.
Downside Scenario: $38/share. Volumes stay at 4Q12 run-rate levels and a 16x multiple is placed on
the stock. Annualized 4Q12 estimated EPS of $0.60 would result in 2013 EPS of $2.40 under this
scenario. Applying a lower 16x multiple would result in a downside valuation of ~$38.
Risks: Risks include additional regulation, increased competition, negative pricing pressures, and
earnings sensitivity to volumes.

Least Preferred
LPL Financial Holdings Inc. LPLA Sell
Thesis: The following issues drive our negative thesis on LPLA: 1) The business environment Price Target: $25
continues to be tough. While markets have been more constructive lately, advisors and end clients
continue to be on the sidelines. We believe numbers could come down more as activity remains muted.
We also believe advisor growth could slow as advisors are hesitant to move to a new platform in the
current climate. 2) Margins are under pressure. Not only is the top-line being challenged, margins are
also coming down as the company is increasingly paying up for new advisors. We believe this is a sign
that the business is getting increasingly commoditized. The company is also spending on a variety of
new initiatives that have not yet paid off, depressing near-term earnings. The company has historically
guided for 30-40bps of margin expansion, while margins are now deteriorating. 3) LPLA is facing
increased scrutiny from investors. Earnings quality has always been a concern, which is even more
important as value investors look at the stock. In addition, we are becoming more concerned about
trends in key product areas such as variable annuities and non-traded REITS, which are increasingly
coming under the microscope and recently resulted in the filing of a lawsuit by the state of
Massachusetts.
Valuation: $25 Price Target. Assumes a 12x multiple on our 2013 EPS estimate of $2.08.
Additionally, we believe there could be multiple compression as the company’s growth profile is
increasingly questioned, particularly as LPLA was positioned as a 20% EPS grower and we are now

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looking for a slight decline in EPS this year and just 10% growth next year.
Upside Scenario: $33/share. The company is able to further grow its advisor base without
overpaying, which would increase margins and GAAP earnings. Under this assumption it would be
feasible for LPLA to trade at the average 16x multiple it has traded at since going public, which would
result in an upside valuation of ~$33 based on our current $2.08 2013 EPS estimate.
Downside Scenario: $17/share. Additional lawsuits develop as a result of poor product suitability
standards and aggressive sales techniques and growth slows to the mid single digit range. Investors
also increasingly discount the companies numerous non-GAAP adjustments to earnings, resulting in
the use of the lower GAAP earnings, rather than adjusted earnings, in valuating the company. Under
this scenario the company could trade down to a 10x multiple on our 2013 estimated GAAP earnings
of $1.74, resulting in a price of ~$17.
Risks: Risks for LPL include earnings sensitivity to market conditions, moderation in advisor growth,
increased regulatory scrutiny of its primary products, regulation, sensitivity to interest rates, and
competition.

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Insurance/Life
Suneet Kamath, CFA – 212-713-1355

Key Themes for 2013:

• Low interest rates continue to pressure industry returns, likely limiting price / book value multiple
expansion. We continue to see book value per share growth as the primary share price catalyst in 2013.
• Continued uncertainty around incremental government regulation for potential non-bank SIFI insurers
limits their ability to deploy capital to shareholders, increasing the relative attractiveness of insurers with a
low potential likelihood for additional regulation that could impede capital management.

Most Preferred
Lincoln National Corp. LNC Buy
Thesis: Given 1) the regulatory overhang potentially limiting capital management of the largest U.S. Price Target: $31
life insurers, and 2) our expectation for limited multiple expansion due to low interest rates, we favor
companies like LNC that can generate strong book value per share growth through accretive share
repurchases. Specifically, LNC’s strong balance sheet, disciplined growth strategy through its
industry-leading distribution platform and disciplined product design, and attractive valuation, should
combine to drive 16% annual book value per share growth through 2016, among the highest rates in
our coverage space. LNC’s aggressive share repurchase program, which is particularly accretive given
its ~0.6x price-to-book multiple, is supported by its industry-leading risk-based capital ratio, stable
operating ROE, and a low potential likelihood for additional regulation that could impede capital
management going forward. LNC’s disclosures around the financial impact of low interest rates are
much less onerous than what the market appears to have priced into the stock. We estimate the current
valuation discount to LNC’s ROE implies an overly onerous $3+ billion reserve build, in contrast to
the $0.7-0.8 billion reduction in capital margin implied by LNC under a stress case scenario. While a
rise in long-term interest rates would be a positive catalyst for the stock, even if rates do not rise, we
believe that LNC’s ongoing share repurchases should give investors comfort in the company’s reserve
adequacy, creating a positive surprise relative to what appears to be priced into the stock
Valuation: $31 Price Target. Our price target is based on an equal-weighted approach using a)
regression of forecasted ROE / cost of equity vs. P/B and b) a P/E target relative to the S&P 500 of
50%.
Upside Scenario: $35/share. An upside case for LNC would be a rise in long-term interest rates,
which would improve its valuation multiple and ease investors’ concerns over reserve adequacy. Our
upside case assumes the onerous interest rate-related multiple discount that the market currently puts
on LNC dissipates, and the stock will see a ~40% increase in its P/B multiple (to ~0.85x from 0.6x
currently) mirroring the expansion that the company experienced in 1Q:12 when rates were rising and
investors were more bullish about the interest rate environment
Downside Scenario: $21/share. Our downside case for LNC would be a further decline in long-term
interest rates. In this scenario, we assume LNC would see P/B multiple compression mirroring the
decline that took place in 2Q:12 when the 10-year Treasury experienced a shock decline. This lower
valuation implies a P/B multiple of ~0.5x, or a 17% drop from the current multiple
Risks: Investment risks include adverse mortality and morbidity; unfavorable interest rate and credit
spread shifts; weaker-than-expected equity market performance; increased regulatory and rating
agency capital requirements; and legislation that undermines demand for its insurance products or
reduces its dividends-received-deduction federal tax benefits.

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Least Preferred
Principal Financial Group PFG Neutral
Thesis: PFG is our least preferred name in the U.S. life insurance space in 1Q:13, given ongoing fee / Price Target: $30
margin pressure in its flagship RIS Accumulation business and its current valuation premium to life
peers despite its in-line ROE. PFG recently issued disappointing 2013 guidance, with an EPS midpoint
6% below consensus, driven by a weak outlook for RIS Accumulation. While management previously
commented that pricing on retained Full Service Accumulation business has declined by 10-12%, 2013
guidance indicated that this business is facing even more revenue growth and margin pressure than we
had previously forecasted. These headwinds appear to be compressing the company’s ROE and growth
prospects, with 2013 operating earnings guidance 2% lower than the comparable 2012 figure implied
by last year’s guidance, despite the subsequent increase in equity market levels, strong 2012 year-to-
date net flows and expected accretion from the recent Cuprum acquisition. We argue that this
weakened financial outlook does not appear to be reflected in PFG’s valuation, as the stock trades at a
~20% price / book multiple premium to the life insurance sector median, despite its 10.6% 2013 ROE
guidance, which is in-line with life peers’ -- we expect this valuation gap to narrow going forward into
1Q:13.
Valuation: $30 Price Target. Our price target is based on a sum-of-the parts valuation using 2013E
segment earnings. This analysis implies a consolidated 9.6x multiple on our $3.17 EPS estimate
Upside Scenario: $33/share. Our upside case for PFG assumes segment P/E multiples near the upper-
end of peer comparables in our sum-of-the-parts analysis. This implies that PFG is recognized by the
market for its business mix shift towards asset accumulation businesses. This scenario implies a
consolidated P/E multiple of 10.5x on our 2013E EPS
Downside Scenario: $22/share. A downside case for PFG assumes 1) the ongoing fee/interest rate
pressure will hamper the company’s capital generation, eliminating its share buyback in 2013; and 2)
its life insurance-type ROE causes the stock to be valued as a life insurer rather than an asset
accumulation / life insurance hybrid. Using our life industry P/B-ROE regression and PFG’s adjusted
ROE (i.e., elimination of buybacks from our estimates), we arrive at a P/B multiple of 0.9x.
Additionally, we assume PFG sees multiple compression mirroring the decline took place in 2Q:12
when the 10-year Treasury fell sharply. This lower valuation implies a P/B multiple of ~0.8x.
Risks: Key risks to our investment thesis include a better-or-worse than anticipated economic
recovery (particularly, unemployment rates or wage increases, which could raise 401(k) deposits),
commercial real estate market credit performance, and equity market returns. Other investment risks
include the impact of interest rates, currency exchange rates, changing 401(k) fee disclosure
regulation, and mortality/morbidity underwriting results.

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Insurance/Non-Life
Brian Meredith – 203-719-2899

Key Themes for 2013:

• Limited ROE improvement, as underwriting margin expansion (on modest additional acceleration in
pricing) is offset by continued downward pressure on investment yields.
• Limited multiple expansion for most names, as we believe insurance and reinsurance pricing is unlikely to
surprise on the upside. Rising interest rates would be favorable fundamentally but likely would lead to the
P/C group’s underperformance vs. other financial names.

Most Preferred
The Hartford Financial Services Group HIG Buy
Thesis: We expect price-to-book multiple expansion from the currently steep discount to BV through Price Target: $31
improvements in ROE and the company’s risk profile as the insurer is transformed from a multi-line
insurer to a pure property casualty insurer (sales and discontinuation of businesses, expense reductions
and capital management). Also, HIG has improved the profitability of go-forward units (P/C insurance,
group benefits and mutual funds). The sales of the Retirement Plans and Individual Life units are
slated to close during or before 1Q13. Some of the proceeds will be used for share repurchases (very
accretive to BVPS at the stock’s current valuation, which offers, in our view, favorable risk/reward).
Announcement of the company’s capital plan and 2013 outlook (scheduled for February 5) is a
potential strong catalyst.
Valuation: $31 Price Target. We see upside of roughly 40% (10% from BVPS growth and 30% from
multiple expansion) for HIG shares in the next 12 months. HIG shares currently trade at 0.48x 3Q12
BVPS excluding AOCI. Our $31 price target is based on a P/B multiple of 0.63x and our 12-month
forward estimate of $49.10 for BVPS excluding AOCI. The target multiple reflects our estimates of
7.6% for 2014 ROE excluding AOCI and 13% for the company’s equity cost of capital, as well as our
expectation of improvement in the perceived risk profile of the company from further progress in the
transformation process.
Upside Scenario: $37/share. Assumes that greater-than-expected reduction in the run-off annuity
business will free up more capital and result in a lower equity cost of capital, leading to P/B multiple
expansion. We could also see better-than-expected improvement in the P&C combined ratio versus our
base of 96.7% for 2013 and 96.0% for 2014, resulting in higher ROEs. Our upside P/B multiple
increases to 0.75x vs. the base-case 0.63x, reflecting: (1) a decrease in our equity cost of capital
assumption by 200bp to 11% from 13%; and (2) improvement in our P/C combined ratio assumption
by 200bp vs. the base case (raising our forecasts of P/C insurance ROE by 100bp and consolidated
ROE by 50bp). Applying the upside multiple to our upside 12-month forward BVPS forecast of $49.36
leads to upside valuation of $37/share.
Downside Scenario: $21/share. Assumes lower-than-expected share repurchases (to $500mn in 2013
and $500mn in 2014, down from our base-case assumptions of $1.05bn and $800mn, respectively) and
100bp of deterioration versus our base-case P/C loss ratio estimates of 96.7% for 2013 and 96.0% for
2014. Our downside scenario estimate of 12-month forward BVPS x/AOCI would indicate lackluster,
6%-7% growth. More importantly, compared to our base case, the 50bp of ROE deterioration and the
300bp increase in our equity cost of capital assumption (to 16% from 13%) would reduce the upside
target multiple to 0.44x (down from 0.63x in the base case). Applying the downside multiple to our
downside 12-month forward BVPS forecast of $47.80 leads to downside valuation of $21/share.
Risks: Vulnerable to sizable additional statutory capital requirements and deferred acquisition cost
write-downs in the event of a sharp equity market downturn. Execution risk for management’s current
major transformation strategy, including investors’ reaction to the size of use of proceeds from
business dispositions. Adverse interest rate, equity market and currency exchange movements
(USD/JPY). Weaker-than-expected pricing in P/C insurance and possible P/C reserve charges
(especially related to HIG’s relatively large asbestos exposure).

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Least Preferred
Progressive Corporation PGR Neutral
Thesis: Difficult year/year loss cost comparisons in 1Q13 coupled with a resurgence in advertising Price Target: $21
spending as PGR attempts to re-ignite growth, we believe, may result in worse than expected
underlying underwriting margins resulting in an earnings miss and downward EPS revisions. Also, we
expect the slowdown in top-line growth will persist in both the Agency and Direct distribution
segments as rate increases continue to work through the book. We believe the extent and duration of
the slowdown in growth of policies in force could cause a negative surprise.
Valuation: $21 Price Target. PGR shares currently trade at 2.4x November 30, 2012, BVPS
excluding FAS 115 (unrealized investment gains and losses). Our $21 price target is based on a P/B
multiple of 2.3x and our 12-month forward estimate of $9.16 for BVPS excluding FAS 115. The target
multiple reflects our estimates of 17.5% for 2014 ROE excluding FAS 115 and 8% for the company’s
equity cost of capital (considerably better than the average of 9.6x for our P/C re/insurance coverage
universe).
Upside Scenario: $26/share. Assumes growth in policies in force rebounds sooner than expected,
leading to an additional 300bp of net written premium growth as compared to our base-case scenario,
as well as assumes 200bp of improvement versus our base-case P/C loss ratio estimates of 94.1% for
2013 and 93.8% for 2014. At $9.53, our upside scenario estimate of 12-month forward BVPS x/FAS
115 would indicate favorable, 10% growth. Furthermore, the enhanced ROE would raise the upside
target multiple to 2.7x (up from 2.3x in the base case), leading to an upside valuation of $26/share.
Downside Scenario: $15/share. Assumes slowdowns in growth in policies in force persist longer than
expected, leading to 300bp less of net written premium growth as compared to our base-case scenario,
as well as assumes 200bp of deterioration versus our base-case P/C loss ratio estimates of 94.1% for
2013 and 93.8% for 2014. At $8.80, our downside scenario estimate of 12-month forward BVPS
x/FAS 115 would indicate lackluster, 2% growth. Furthermore, the less favorable ROE would decrease
the downside target multiple to 1.7x (down from 2.3x in the base case), leading to a downside
valuation of $15/share.
Risks: Continuation of trend of deterioration in underwriting profitability, with upcoming difficult
year/year comparisons for loss costs in 1Q13. Growth in policies in force and the lack of share
repurchases both have surprised on the negative side in recent months, and additional disappointments
remain possible. Further decreases in interest rates likely would lead to lower-than-expected
investment income.

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Large Cap & Trust Banks

Greg Ketron – 212-713-4290

Key Themes for 2013:

• With CCAR 2013 coming early in the year and with more clarity surrounding regulatory capital standards,
capital deployment will be a focus for 2013.
• Differentiating between banks with the ability to offset the bottoming out of liability down pricing and
grow net interest income in the low rate environment.

Most Preferred
U.S. Bancorp USB Buy
Thesis: USB has been growing loans at an above average pace and though we expect net interest Price Target: $38
margin contraction for 4Q12 earnings, the bank has less NIM pressures versus peers and has the
balance sheet growth to drive net interest income growth. Also, we expect USB to benefit more from
the positive mortgage environment with another quarter of elevated core production income. Lastly,
USB was a top performer for CCAR 2012. CCAR 2013 results will be announced late in the quarter
and we expect USB to again be a top performer and capital deployer.
Valuation: $38 Price Target. The company is trading at 1.8x P/BV. We estimate narrow multiple
expansion to 1.9x and book value growth of over 10% to $20/share for a steady performer. Also, we
believe the bank will be able to increase its dividend yield to 3.0% in conjunction with CCAR 2013.
Upside Scenario: $44/share. Assumes the company is able to post superior commercial loan growth
for 4Q12 earnings increasing total earning asset growth to nearly 10%, USB is approved as part of
CCAR 2013 for higher share repurchases and dividends than expected, and the NIM expands by 10
bps. This would increase our long-term ROCE estimate for the company and justify multiple
expansion to 2.2x from the current 1.8x P/BV.
Downside Scenario: $28/share. Investor focus will be on net interest margin contraction for 4Q12.
We currently forecast a contraction of mid-to-low single digits. This scenario assumes a 20 bps decline
in NIM for 2013 versus our current estimate of down mid-to-low single digits and a ROCE of 15%.
Using our net asset valuation approach this translates to 1.4x P/BV.
Risks: A set-back in US economic trends adversely impacts economic growth significantly, as well as
reversing improving credit and housing/real estate trends.

Least Preferred
Regions Financial Corp. RF Neutral
Thesis: RF has been a solid recovery play over the last year, with the stock leading the group at up Price Target: $7
60% for the year. The run-up has been driven by risk-reducing catalysts such as selling Morgan
Keegan to free up liquidity and capital and also for TARP redemption, in addition to improving credit
metrics. We believe the recovery story for RF is priced into the stock, and that a significant driver of
earnings will continue to be reserve releases that are not sustainable longer-term. We believe RF will
find it challenging to replace this diminishing source of earnings until a more favorable environment
ensues.
Valuation: $7 Price Target. We estimate RF’s long-term ROCE is 8.5% which translate to 0.6x P/BV
on our net asset valuation approach. We estimate 4Q13 BV of $12 translating to a $7 PT.
Upside Scenario: $10/share. This assumes RF is approved for higher than expected share repurchases
and dividends in conjunction with CCAR 2013. Also, RF has had more ability to down price liabilities
as its balance sheet has shrank. If RF is able to maintain this trend for 2013, this would reflect
positively for the stock. This scenario assumes the NIM increases 10 bps versus current levels, ~90%
total payout ratio in conjunction with CCAR 2013, and modest balance sheet growth which translates
to 0.8x P/BV on our net asset valuation approach.

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Downside Scenario: $5/share. One of the positive points for RF is that the bank has been able to
maintain its NIM, though its ability to down price liabilities is slowing. This scenario assumes 10 bps
of NIM pressure and a 5% decline in average earning assets translating to 0.4x P/BV on our net asset
valuation approach.
Risks: The stock has been trading with a high beta, and a run-up in equity markets and/or economic
trends improve at a rate faster than anticipated could lead to a higher stock price.

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Mid-Cap Banks
Stephen Scinicariello, CFA – 212-713-1841

Key Themes for 2013:

• Margin pressure should continue to present a headwind but compression could prove to be less than feared
due to: (1) the deployment of significant excess liquidity (note: the use of half of excess liquidity could
mitigate 60% of repricing pressure), (2) better than expected loan growth as regional banks continue to
garner market share, and (3) balance sheet management.
• Capital deployment should accelerate post CCAR 2013 and we view this as a positive catalyst
demonstrating the degree of overcapitalization of the regional banks.

Most Preferred
KeyCorp KEY Buy
Thesis: KeyCorp is our top pick in the mid-cap regional bank sector. KEY is one of the best Price Target: $10
capitalized banks in our coverage with significant excess capital relative to Basel III even with a SIFI
surcharge and excluding trust preferreds (~270bps). KEY performed strongly on the 2012 CCAR
exercise, with 67% total payout ratio. These provide underappreciated flexibility and capacity for
deployment. Liquidity also provides earnings leverage as an increase in the loan/deposit ratio from
86% to 95% translates into 15% higher ‘12 EPS estimates. We believe KeyCorp is ~75% through the
loss recognition phase, is prudently managing expenses, and is in the early stages of enhancing the
performance of its franchise under the leadership of a new CEO. Further, regulatory risks appear
manageable.
Valuation: $10 Price Target. Our multi-pronged valuation methodology supports our $10 price target
(P/TBV, P/E, FCFE model). KEY trades well below peers with P/TBV of only 0.8X TBV and P/E of
9.3X 2012E EPS. We project TBV growth >6% in 2012. Expected returns support a materially higher
valuation. Importantly, our CLEAR ranking framework supports our positive view as does our
scenario analysis.
Upside Scenario: $16/share. Assuming further NIM expansion of 10bps, a 15% provision decline
from expected levels, 8% growth in earning assets, and improved valuation metrics more in-line with
historical levels, our upside valuation could improve to $16/share (1.75X TBV, 12.5X ‘13E EPS of
$1.32).
Downside Scenario: $7/share. Assuming 10bps of NIM compression, 17% higher provision expense,
and 5% lower earning assets at more trough valuations, our downside valuation could move to $7
(0.75X TBV, 7X ‘13E EPS of $0.93).
Risks: Risks include: (1) a significantly weaker than expected economic environment that translates
into lower levels of overall activity for an extended period; (2) credit performance materially worse
than our expectations; (3) severe regulatory reform that drives a greater than expected reduction in
revenue streams and/or higher than expected operating costs; (4) higher than expected capital
requirements and/or constraints on growth; (5) more conservative deployment of excess capital; (6)
greater than anticipated margin pressure; (7) greater than expected competition; (8) a material rise in
risk premiums that depresses longer term valuations; and (9) management execution.

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REITs
Ross Nussbaum – 212-713-2484

Key Themes for 2013:

• On a macro level, we believe that the combination of low interest rates, modest economic growth, and a
healthy spread between commercial real estate capitalization rates and borrowing costs sets the stage for
another year of positive returns in 2013 (we expect the MSCI REIT Index (RMZ) to realize a 9% total
return in 2013).
• At the company level, we expect healthy AFFO growth for the REIT industry of 9% in 2013, driven by a
combination of factors including 3-4% same store NOI growth, continued acquisitions, modest
contributions from development, and the benefit of refinancing higher cost debt (this growth rate compares
quite favorably to the 4% EPS growth outlook for the S&P 500 in 2013).

Most Preferred
Tanger Factory Outlet Centers SKT Buy
Thesis: We favor Buy-rated Tanger Factory Outlets (SKT) as our top pick in the group given an Price Target: $38
attractive relative and absolute valuation and a compelling internal and external growth profile. SKT is
the only pure-play in the outlet center asset class, a niche that has seen robust demand from retailers in
recent years. Retailers have increasingly discovered outlets as a valuable distribution channel for their
merchandise and outlets are driving the bulk of new store opening plans in the U.S. This, in turn, has
led to nearly 100% occupancy levels and 20%+ releasing spreads for Tanger. We expect continued
strong fundamental performance, successful development openings and new development
announcements will act as positive catalysts for the shares.
Valuation: $38 Price Target. SKT trades at a 6.1% implied cap rate and at 7-11% discounts to
forward NAV and DCF. Our $38 PT is based on an average of a 10% premium to our $36 forward
NAV (assuming a 6.25% applied cap rate) and our $37 DCF.
Upside Scenario: $42/share. Assumes: 1) 200bp upside to same-store NOI growth, driven by a
stronger fundamental outlook and/or better than expected execution on leasing; 2) an additional 200bp
upside to AFFOPS growth driven by greater than expected acquisition and development activity; and
3) 25bps of cap rate compression, driven by continued improvements in cost of capital and higher
expectations for cash flow growth.
Downside Scenario: $30/share. Assumes: 1) 200bps downside to same-store NOI growth driven by a
weaker fundamental outlook and/or poor execution on leasing; 2) delays in and/or lower than expected
yields on new development projects, driving an additional 200bps of lower AFFOPS growth; and 3) a
25bp rise in cap rates, driven by higher costs of capital (if interest rates rise and/or borrowing spreads
widen) and reduced expectations for cash flow growth.
Risks: Risks to the downside include a more pronounced slowdown in consumer spending, which
would impact rent and occupancy trends, as well as slower than expected lease-up of development.
Risks to the upside include significantly better than expected leasing fundamentals. Trends in the costs
and availability of capital would influence the stock in either direction.

Least Preferred
CBL & Associates Properties, Inc. CBL Sell
Thesis: We remain cautious on fundamentals for Class B/C malls (vs. Class A malls) given lower NOI Price Target: $20
and sales growth and greater risk of obsolescence. We don’t see this trend improving – lower-
productivity malls continue to lose market share to higher quality malls and internet retail, evident in
slower sales growth. Longer-term this will continue to impact CBL’s ability to raise gross rents.
Notably, CBL’s recent releasing spreads have been positive but below average and expense recoveries
have been on a declining trend. We also see risk associated with a change in balance sheet strategy for
CBL. We are forecasting an equity raise in 2013 (either a common equity raise or through joint
ventures), which will be dilutive to earnings. Given the risks associated with Class B/C malls
fundamentals and the balance sheet shift, we rate the stock a Sell.

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Valuation: $20 Price Target. At close to a four-year high, the stock looks expensive to us, trading at
a 7.4% implied cap rate, a 3% premium to forward NAV and a 15% premium to DCF. Our $20 target
is based on the average of a 5% discount to our forward NAV of $21 (assuming a 7.75% applied cap
rate) and our DCF of $19.
Upside Scenario: $23/share. Assumes: 1) 200bp upside to same-store NOI growth, driven by a
stronger fundamental outlook and/or better than expected execution on leasing; 2) a quicker than
expected transition of the balance sheet and achievement of an investment grade rating; and 3) 25bps
of cap rate compression, driven by continued improvement in costs of capital and higher expectations
for cash flow growth.
Downside Scenario: $18/share. Assumes: 1) 200bp downside to same-store NOI growth, driven by a
weaker fundamental outlook and/or poor execution on leasing (both of which could occur if sales
trends at Class B-/C malls weaken); 2) a 25bp higher cap rate, driven by higher costs of capital (if
interest rates rise and/or borrowing spreads widen) and reduced expectations for cash flow growth; and
3) weakness in the CMBS market, which would restrict access to secured debt.
Risks: Risks to the downside include a more pronounced slowdown in consumer spending and or
greater loss in market share to Class A malls and internet retailers, which would impact rent and
occupancy trends, as well as slower than expected lease-up of redevelopment. Risks to the upside
include significantly better than expected leasing fundamentals. Trends in the costs and availability of
capital would influence the stock in either direction.

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Healthcare

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Biotechnology
Matthew Roden, PhD – 212-713-2491

Key Themes for 2013:

• Drug pricing trends. Can biotech preserve pricing power?
• Regulatory advancement: Will the FDA become more technical and innovative in its drug reviews?

Most Preferred
Gilead Sciences GILD Buy
Thesis: We are positive on Gilead’s core HIV base business and believe that the Stribild launch will Price Target: $87
beat expectations and grow to become a preferred first-line agent in HIV. While the base business
provides strong cash flow, the key focus right now is on Hepatitis C and phase 3 asset GS-7977. We
are meaningfully above consensus on 2014-16 revenue and EPS, which is primarily driven by our
above consensus outlook on the HCV market opportunity. Beyond HCV the company’s oncology
program may provide a call option if data are successful, further driving an upside scenario on Gilead
shares. Further we see the company as somewhat downside protected on the strength of the HIV
business, and continue to view shares as attractive from a risk/reward standpoint.
Valuation: $87 Price Target. We derive our $87 price target using a DCF-based scenario analysis.
Upside Scenario: $100/share. Predicated on a more robust launch in HCV, generating in excess of
$9B in peak GS-7977 sales while maintaining continued strength in the HIV market and reflecting a
less severe impact from the loss of tenofovir patent exclusivity in 2018.
Downside Scenario: $68/share. Assumes lower a capture of the HCV market reflecting increased
competition and lower treatment rates, with peak GS-7977 sales of $4.8B. In this scenario lower HCV
revenues fail to offset negative revenue growth from the 2018 HIV patent cliff.
Risks: Risks to our estimates include: weakness in the Stribild launch, GS-7977 phase 3 clinical risk,
investor concerns about an out-year patent cliff, continued focus on business development which has
potential to distract management away from key near-term priority in launch of GS-7977.

Least Preferred
Seattle Genetics, Inc. SGEN Neutral
Thesis: We are positive on Seattle’s ADC technology platform and its peak sales potential for lead Price Target: $27
product Adcetris, but SGEN is our least preferred near term. Although we expect the “Adcetris is just
the tip of the iceberg” thesis to be more broadly adopted with the advancement of targets partnered
with Roche, we believe that lack of near term catalysts may be an obstacle to further appreciation near
term, as the current valuation already implies label expansion and cannot be supported by its current
relapsed/refractory Hodgkin lymphoma (HL) and ALCL labels alone. Further, although unlikely, we
see potential for pressure on shares if label expansion strategies are not successful, if pipeline
programs struggle to advance, and if competition looks to be a threat as competitive drugs advance in
the clinic. We are Neutral on SGEN shares as we see no visible downside catalysts that can break the
long-term bull case on SGEN shares.
Valuation: $27 Price Target. We derive our $27 price target using a blended DCF-based and take-out
premium analysis.
Upside Scenario: $43/share. Represents a takeout scenario, in which the base-case revenues are
leveraged by an organization with redundant R&D and SG&A capabilities.
Downside Scenario: $18/share. Assumes limited label expansion of Adcetris and minimal technology
value.
Risks: Risks to our estimates include: clinical trial failure in Adcetris label expansion opportunities
such as frontline HL and other CD-30+ lymphomas, failure to commercialize additional ADC pipeline
candidates, success or failure of early-stage programs targeting non-CD30 markers, and the emergence
of competitive therapies.

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Small/Mid Cap Biotechnology

Matthew Harrison – 212-713-2429

Key Themes for 2013:

• Continuing M&A as a key driver of biotech valuation.
• Launches, pipeline data to drive valuations in 2013.

Most Preferred
BioMarin Pharmaceutical BMRN Buy
Thesis: We believe BioMarin has a very solid base business and see the recent GALNS data as Price Target: $53
providing a new floor value in the shares. That said, we believe consensus does not appreciate the
pipeline potential and see upcoming catalysts from Pompe (1Q) and PARP (mid-year) potentially
driving revisions to the upside. Further, we think the potential for PEG-PAL and Batten’s disease
treatment remains underappreciated.
Valuation: $53 Price Target. Our Price Target is based on our sum-of-the-parts analysis and includes
value for all currently marketed products plus GALNS.
Upside Scenario: $60/share. Our upside scenario is based on greater appreciation of the BioMarin
pipeline including Pompe, PARP, PEG-PAL and Battens. Including Pompe and PARP in our model as
well as minor contributions for PEG-PAL and Battens pushes our valuation to $60.
Downside Scenario: $44/share. Our downside scenario is based on a failure in Pompe, but continued
strong demand for the base business (Naglazyme, Aldurazyme and Kuvan) as well as a slightly below
consensus launch for GALNS.
Risks: Pipeline failures, specifically for Pompe or PARP and a weaker-than-expected launch for
GALNS.

Least Preferred
ImmunoGen Inc. IMGN Sell
Thesis: We believe T-DM1, ImmunoGen’s key asset partnered with Roche will achieve lower than Price Target: $9
consensus sales as it will only be used in the metastatic setting and NOT the adjuvant setting until
adjuvant data are product in the second half of the decade. This coupled with the low-single-digit
royalty make the value to ImmunoGen lower than the current stock price.
Valuation: $9 Price Target. Our price target is based on our sum-of-the-parts analysis.
Upside Scenario: $15/share. ImmunoGen’s wholly-own compound IMGN901 achieves signs of
clinical efficacy in its Phase II study and is progressed into Phase III. In this setting we would need to
add value for this asset which increases our valuation.
Downside Scenario: $4/share. Our downside estimate contemplates value only for T-DM1. In this
case, ImmunoGen’s pipeline value and the value of its other partnered programs are not included.
Risks: The key risks include an upside launch of T-DM1 and better-than-expected data on IMGN901.

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Healthcare Technology & Distribution

Steven Valiquette – 203-719-2347

Key Themes for 2013:

• The generic drug pipeline slows in 2013 from an all time high in 2012, but carry-over impact from generics
launched in late-2012 should continue to benefit PBM stocks in early calendar 2013.
• Drug distributor stocks should begin to see a lift as investors look forward (stocks tend to trade a year
ahead of generic trends) to a re-acceleration of the generic drug launch cycle in 2014, which favors drug
distributors (relative to group) because many of the drugs being launched are limited-source rather than
multi-source, which tends to be relatively more profitable for drug distributors.

Most Preferred
McKesson Corporation MCK Buy
Thesis: We believe McKesson’s recently announced deal to acquire PSS World Medical (PSSI) could Price Target: $105
prove to be more accretive to the company (not currently included in our model) than originally
thought by investors. Additionally, drug distributors are poised to profit in early calendar 2013 from
the carry-over benefits of generic drugs launched in late-2012. Meanwhile, investors will begin to
anticipate the next wave of the generic drug pipeline coming in 2014 that favors traditional drug
distributors (relative to PBMs and drug retailers) due to a larger portion of the 2014 generics launching
limited-source versus multi-source, which is relatively more profitable for drug distributors.
Valuation: $105 Price Target. Our $105 price target is based on a 13.5x P/E multiple to our calendar
2013 EPS estimate of $7.81, which equates to a 7.5x EV/EBITDA multiple.
Upside Scenario: $110/share. MCK management highlighted that the PSSI transaction could be
$0.15-0.25 accretive to EPS if one assumes the transaction is financed with debt at 4% interest.
However, we believe MCK has enough cash on the balance sheet to finance the majority of this
transaction with existing cash on the balance sheet. If they choose the cash route (instead of debt), the
company could save an incremental $50-60 mil in incremental financing costs, which means the
transaction could be even $0.10-0.15 more accretive than the initial $0.15-0.25 provided by the
company. Based on the additional accretion of the potential acquisition (at 13.5x) we see upside to
$110/share.
Downside Scenario: $90/share. Further FTC review of the potential acquisition of PSS World
Medical (PSSI) by McKesson could hinder the closing of the deal and limit the amount of initial
accretion of the deal. Additionally, the potential loss of the CVS Caremark contract (primarily PBM
portion only) which comes up for renewal mid-2013 could impact earnings by 5%. Together, these two
scenarios could impact EPS by $0.70 to $0.80 at our target P/E multiple, which could translate to a
$90/share valuation.
Risks: The risks to our investment thesis for MCK include: 1) buy-side pricing environment may
change; 2) the overall health of the pharmaceutical industry; 3) the pace of generic introductions; 4)
the ability of manufacturers to continue increasing drug prices; 5) the threat of drug re-importation; 6)
the impact of the Medicare drug benefit plan on price structure; and 7) emergence of alternative
distribution channels.

Least Preferred
Owens & Minor Inc. OMI Sell
Thesis: We view Owens & Minor as the most growth-challenged company within our universe. The Price Target: $25
company distributes commodity-like products predominantly to the U.S. hospital industry, an industry
currently experiencing slow organic growth. Owens & Minor management has been slower to
diversify into the faster growing U.S. physician office distribution marketplace as many of its
competitors have, which has led to slower EPS growth relative to its peers. However, the company just
recently purchased a European 3PL healthcare distribution business (Movianto) as a means to
diversify. But, the region is currently in the midst of economic turmoil, plus management not having
experience with international operations in the past increases the company’s risks. The acquisition is

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expected to be neutral to the company’s earnings in 2013. Also the company faces a number of large
GPO contract renewals in 2013 and consequentially greater re-pricing risks.
Valuation: $25 Price Target. Our $25 price target is based on a P/E of 13x our 2013E EPS of $1.94
which equates to a 6.5x EV/EBITDA multiple.
Upside Scenario: $29/share. Our upside scenario is based on improvement in hospital utilization
trends and procedures domestically, and better than expected integration of the European business and
traction on sales momentum in the region. Given this scenario we could see the Movianto deal being
modestly accretive to earnings (vs. guidance of neutral to EPS) combined with better domestic trends
we anticipate potential EPS of $2.05 on a 14x P/E for a $29/share valuation.
Downside Scenario: $22/share. Our downside scenario is based on continued pressure on hospital
utilization trends domestically and inability for management to realize meaningful customer wins in its
newly acquired European 3PL healthcare distribution business. Additionally, contract re-pricing risk
could weaken the company’s core domestic profitability. We see added risks of the international
business and earnings growth prospects compressing the multiple to 12x on a lower 2013 EPS estimate
of $1.85 for a valuation of $22/share.
Risks: Risks to our thesis includes improvement in the organic growth of the U.S. hospital industry
and the potential for enhancing profitability through further penetration of their lower-priced, higher
margin private label products.

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Healthcare Services
AJ Rice – 212-713-4299

Key Themes for 2013:

• As providers of last resort to those without insurance, acute care hospitals should be important beneficiaries
of Affordable Care Act (“ACA”). Certainly, the “fiscal cliff” must be addressed. However, the election has
strengthened the position of those who have generally been most supportive of hospitals and the
sequestration cuts have already been factored into the current outlook.
• Recent economic reports have suggested that employment trends may be finally modestly improving. A
better economy would help hospitals in three ways: 1) by reducing bad debt; 2) by potentially driving
increased patient volumes; and 3) through a positive shift in payer mix trends.

Most Preferred
Community Health Systems CYH Buy
Thesis: CYH has reported improving volume trends in the recent quarters, and we expect SS Price Target: $39
admissions to likely turn positive in 2013. The implementation of the ACA will be particularly
favorable for CYH given its exposure to the states with relatively higher percentage of uninsured
population and the company’s financial leverage. In addition to the strong acquisition pipeline, CYH
sees strong margin upside for the 12-13 hospitals acquired in recent years ($1.3-$1.4bln of revenues),
which still operate at single digit margins.
Valuation: $39 Price Target. CYH trades at a very low 7.4x 2013 projected EPS and 6.0x
EV/EBITDA estimates. Our price target of $39 is based on 6.5x our 2013 EBITDA estimate (or 9.8x
our 2013 EPS estimate), in-line with its 5-year historical average of 6.5x.
Upside Scenario: $51/share. Our upside scenario assumes that with a clear path to the
implementation of the ACA, the hospital group, including CYH, gravitate toward the historical
EV/EBITDA multiple range of 7.0-8.0x. Our upside scenario valuation is based on 7.0x our 2013
EBITDA estimate.
Downside Scenario: $24/share. As fiscal deficit related discussions start to gain momentum next
year, hospitals could be back in the firing line of efforts to reduce the Federal deficit by cutting
entitlement spending growth. While our estimates assume a 2% Medicare reimbursement reductions
under sequestration, any entitlement cuts beyond those could hurt investor psychology (even if there
are no significant fundamental changes) and valuations could be pushed down to 5.0-6.0x
EV/EBITDA multiple. Our downside scenario valuation is based on 5.8x our 2013 EBITDA estimate.
Risks: Community Health is the subject of on-going Medicare and Medicaid inquiries. While we do
not expect these inquiries to change the operating outlook for CYH materially, it is possible that they
could well result in a payment to the government.

Least Preferred
AMN Healthcare Services AHS Sell
Thesis: AMN has benefited from several company-specific and temporary factors in 2012. We believe Price Target: $8
investors may have attributed these factors to the overall greater strength in the market. In fact, the key
drivers of long-term demand in medical staffing still remain sluggish. Instead, AMN earnings in 2012
were driven by the capture of a $15 million annual revenue MSP contract win in New York from its
nearest competitor (CCRN) in 4Q11. The benefit of this MSP contract will anniversary in 4Q12.
Another driver to AMN’s strong earnings in 2012 has been a boost in medical staffing demand being
driven by hospitals’ EHR-related efforts to become “meaningful-use” compliant. Some hospital
operators have indicated that 2012 will be the peak year for EHR incentive payments before declining
in 2013. As incentive payments generally follow the related spending (costs including labor), the
temporary boost in nursing demand attributable to EHR-related efforts would at least appear to be
moderating.
Valuation: $8 Price Target. AHS trades at 21.6x 2013 projected EPS and 9.7x EV/EBITDA
estimates. Our price target of $8 is based on 15.4x our 2013 EPS estimate (or 7.7x our 2013 EBITDA

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estimate), a discount to the 5-year historical average forward P/E of 18.0x.

Upside Scenario: $13/share. A quicker than currently expected rebound in the economy could lead
for increased demand for medical staffing and potential incremental hospitals volumes from ACA
implementation, both of which could drive upside relative to our expectations and more significant
price appreciation than we anticipate.
Downside Scenario: $5.50/share. Our basic operating assumption is that trends continue to stabilize
and even improve going into 2013. However, if the economy softens again, it could lead to further
pressure on the business outlook for the medical staffing companies. Were this to happen, we believe
our estimates for AMN Healthcare could prove difficult to achieve.
Risks: AHS shares are low priced and highly volatile. Only investors that have the tolerance for above
average volatility should consider these securities.

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Life Sciences & Diagnostic Tools

Daniel Arias – 212-713-2467

Key Themes for 2013:

• Signs of macro improvement bode well for organic growth potential in ‘13, while a Sequestration
reconfiguration as a part of a fiscal cliff deal remains a key question for the sector.
• Operational efficiency efforts (low-cost manufacturing; supply chain improvement) and share re-purchases
continue to drive EPS gains in a low-growth environment.

Most Preferred
Thermo Fisher Scientific Inc. TMO Buy
Thesis: TMO has outperformed in 2013, with shares up 44% YTD vs. +31% return the life sciences Price Target: $72
group and +13% for the S&P 500. We believe shares continue to do well in 1Q. Contributions from
high-quality acquisitions, market share gains, and continued operational efficiency efforts have
improved the performance of the business, and the stock is benefitting from momentum gained
through multiple quarters of strong execution (in contrast to several peers). Going forward, we believe
TMO’s relatively low NIH exposure and high percentage of revenues coming from recurring revenue
sources (consumables and services) position the company well for 4Q results that bare risk from the
potential for shaky academic spending trends, and we think 2013 estimates look reasonable – with the
potential for upside should macro conditions continue to improve. Valuation remains highly
compelling, in our view, as TMO trades at a discount on forward P/E to not only the life sciences
group (12x vs. 15x for peers), but the S&P 500.
Valuation: $72 Price Target. Our $72 price target is based on 13x our FY13 EPS estimate of $5.48,
which is driven by organic revenue growth of 3.5% and 50 bps of EBIT margin expansion.
Upside Scenario: $83/share. Assumes improving macro/end market conditions allow for organic
revenue growth acceleration to 5% (up from our 3.5% estimate for 2012), while EBIT margins expand
by 80 bps on higher volume and lower pricing pressure, which drives EPS of $5.70. Multiple
expansion to 14.5x from ~12x currently yields a valuation of ~$83.
Downside Scenario: $52/share. Assumes a deterioration of macro conditions and end market demand,
with poor academic spending trends resulting from a high-single digit cut to the NIH budget in 2013.
Organic revenue growth and EBIT margins are flat y/y, which drives EPS of $5.20. Multiple
contraction to 10x from ~12x currently yields a valuation of ~$52.
Risks: In our view, the primary risk to our bullish thesis centers on the potential for declining end
market conditions marked by a deteriorating macroeconomic picture and challenging academic
research funding environment, as well as pricing pressure in Thermo’s more competitive markets.

Least Preferred
Affymetrix Inc. AFFX Neutral
Thesis: AFFX is in the midst of a strategic turn-around following several years of sales decline. The Price Target: $4.25
company has brought in new management, developed new products organically, and made a strategic
acquisition that will improve growth. While this could enable a stabilization of the top-line in the mid-
term, the company’s most results were below Street expectations, as end market trends have been
unfavorable. With shares down 20% YTD and the stock currently below $4, we acknowledge that
sentiment is likely to be bottoming, but we view risk on 4Q results (late Jan/early Feb) for AFFX to be
highest in the group in light of the potential for continued share loss to next-gen sequencing and
overall poor spending by academic researchers (where exposure is well above average). Given this
risk, we take a cautious view of shares in the near term.
Valuation: $4.25 Price Target. Our $4.25 price target is based on DCF analysis using the UBS
VCAM model. Our model assumes a 5% organic sales decline in 2013, with 14% total growth
including contributions from the acquired eBioscience business. On an EV/Sales basis, shares trade at
a discount to the group (0.5x vs. 2.5x for the tools group).
Upside Scenario: $4.50/share. Our upside scenario assumes better than expected 4Q results and

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outlook on 2013, and an improving longer-term sales outlook that (along with a lower discount rate)
drives a higher DCF valuation.
Downside Scenario: $3/share. Our downside scenario assumes a 4Q miss and poor outlook for
academic research funding. Our valuation is derived via DCF analysis that assumes continued top-line
deterioration and a higher WACC to account for greater risk to the business.
Risks: Risks to our thesis would include a significant positive change in the outlook for academic
funding and faster-than-expected uptake of new products.

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Medical Supplies & Devices

Rajeev Jashnani, CFA – 212-713-9127

Key Themes for 2013:

• We do not expect significant improvement in procedure rates, which seem to be depressed due to
macroeconomic as well as secular trends.
• Pricing pressure could intensify modestly as physicians are increasingly displaced by hospital
administrators as key decision makers for medical devices.

Most Preferred
CareFusion Corporation CFN Buy
Thesis: Underlying business performance has been solid in C2H12. The Dispensing business model Price Target: $32
provides some buffer against cap-ex concerns and HSP’s ship-hold also provides some opportunities in
Infusion. In early November HSP placed Symbiq on ship-hold for new customers and issued a
voluntary recall for some already deployed pumps. Further, we see upside from capital deployment
and mgmt seems comfortable with pulling a variety of levers to create shareholder value, including
using the balance sheet for ASR or more aggressive share repo. That said, additional repo is not the
priority given M&A expectations and we think the company is poised to make some accretive deals.
We also note limited exposure to Europe and insulation from pricing pressure as attractive attributes
given the current environment.
Valuation: $32 Price Target. Our $32 price target is based on a DCF analysis, and equates to 8.0x
our 2013E EBITDA estimate.
Upside Scenario: $34/share. M&A is an important part of our thesis, and in an upside scenario CFN
would close on an accretive deal. We believe CFN may be looking at deals up to $500M in either capital
or consumables segments. Comparable deals in developed markets are being completed at 10-12x EBITDA;
$500M in deals at 12x EBITDA adds ~5% to FY cash EPS. Applying our current target multiple of ~13x on
resulting 2014 “cash” EPS estimate of $2.62 would drive a valuation in the $34 range.
Downside Scenario: $27/share. Assuming a slowdown in general economic conditions (and assuming
lack of capital deployment), we could see revenue decline -2% in 2014 (UBS: +2.6%). Under this
scenario, 2014E EPS would fall from $2.37 to $2.32. At ~11.5x EPS, we believe we could see CFN
trade in the $27-range.
Risks: Inability to effectively allocate capital to bolster the growth profile of the company presents a
risk to our thesis.

Least Preferred
Edwards Lifesciences Corp EW Sell
Thesis: One month after Oct’s 3Q negative pre-announcement (and guidance cut), EW issued 2013 Price Target: $82
guidance which, in our view, set an unexpectedly high bar. While transapical reimbursement & Cohort
1A label expansion will clearly help, we have concerns that current reimbursement is unlikely to
stimulate aggressive demand at the hospital level, and uptake among the surgically ineligible cohort
could be slower than expected. In Europe, the market has slowed probably more so for
macroeconomic considerations rather than any clinical issues, but given current pressure on
hospital budgets we are unsure of the pace of the recovery. Expectations have been reset at a higher
level and at 4.8x EV/sales, valuation leaves little room for error.
Valuation: $82 Price Target. Our $82 DCF-based price target assumes an 8.5% cost of equity and a
terminal growth rate of 3%. As a base case, we model 2012-17 US / Ex-US TAVI market growth of
27% / 10%, respectively. We model 2012-17 EW sales / EPS growth of 7% / 17%, respectively. With
the stock trading at 4.8x EV/Sales, the risk/reward still seems unfavorable to us.
Upside Scenario: $101/share. “Upside DCF” drives a valuation of $101/share. Upside scenario
embeds 2012-17 US / Ex-US TAVI market growth of 35% / 11%, respectively. Assuming market
share in-line with our base case would result in EW sales / EPS growth of 9% /19% from 2012-17,

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respectively.
Downside Scenario: $71/share. “Downside DCF” drives a valuation of $71/share. This scenario
assumes 2012-17 US / Ex-US TAVI market growth of 20% / 5%, respectively. Assuming market share
in-line with our base case would result in sales / EPS growth of 4% /15% from 2012-17, respectively.
Risks: Slower than expected uptake among the surgically ineligible population in the US, and changes
in reimbursement rates present downside risks.

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Pharmaceuticals
Marc Goodman – 212-713-1342

Key Themes for 2013:

• Consolidation within the specialty pharmaceutical industry (too much capacity within manufacturing, R&D,
commercial).
• Continuing payor pressure for companies to develop innovative products with proven advantages (or else
payors will not reimburse).

Most Preferred
Warner Chilcott WCRX Buy
Thesis: We believe WCRX’s cash flows are underappreciated and this name has many catalysts in Price Target: $24
1H13 that could drive the stock materially higher. It current trades at a ~3x P/E multiple on next year’s
earnings and management has continually pointed to the upcoming potential approvals of a new OC
and GI product next year that could be a big upside to the stock. Additional catalysts include the
potential for a BD deal (which management has also pointed to), a pre-NDA meeting on udenafil and
Phase II tetracycline data (both in 1Q13).
Valuation: $24 Price Target. Our price target is based on DCF and implies a P/E multiple of 6-7x on
our $3.80 2013E EPS.
Upside Scenario: $28/share. Our upside scenario is if an OC/GI product is approved, we believe the
stock would deserve another 1x multiple as investors will be less concerned about the sustainability of
the Asacol and Loestrin franchises. Thus, it is based on a 7.5x multiple on our $3.80 2013E EPS.
Downside Scenario: $10/share. We believe that the stock already reflects overly bearish views on the
genericization of Loestrin and Asacol, but if these fears intensify, the downside of the stock could be
$10 which is ~2-3x P/E on our 2013E EPS of $3.80.
Risks: Risks include regulatory risk on the OC/GI products that have been submitted to FDA, the
possibility of Asacol going generic, and the lack of a deal that most investors believe is needed to
generate excitement about this name.

Least Preferred
Bristol-Myers Squibb BMY Neutral
Thesis: We believe that Bristol’s valuation appropriately prices in the high expectations for new Price Target: $34
products (especially Eliquis, PD-1). Overall, we struggle to see much EPS growth over the next few
yrs as these assets really just replace lost sales from the patent expiries and from the incremental
competition in HIV, CML, RA, and diabetes.
Valuation: $34 Price Target. Our DCF analysis assumes $27 for the base business and $7 for the
pipeline, which yields our $34 price target.
Upside Scenario: $37/share. Our upside scenario if is Eliquis beats expectations (taking a larger
percentage of new patients) and Forxiga receives a positive FDA panel. Thus, we would attribute a
value of $10 to the pipeline added to our $27 for the base business.
Downside Scenario: $31/share. Our downside scenario is if the Eliquis launch is disappointing and
thus the pipeline would be worth ~$4, added to the $27 for the base business.
Risks: The key risks for BMY are: 1) the regulatory risk on Eliquis (March 17 PDUFA date), 2) the
regulatory risks on Forxiga which should be partially answered by the possibility of an upcoming FDA
panel, and 3) the commercial pressure from new competitors in HIV, CML, RA and diabetes.

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Pharmaceuticals
Ami Fadia – 212-713-3242

Key Themes for 2013:

• We expect continued shortages in specialty injectables to drive additional investments in manufacturing
capabilities.
• We continue to see consolidation in the specialty pharma sector.

Most Preferred
Jazz Pharmaceuticals PLC JAZZ Buy
Thesis: Jazz’s shares have weakened into the year-end with profit-taking following the positive Price Target: $64
Markman ruling in late 3Q and no positive news on the regulatory front. It currently trades at 9x
2013E consensus (vs. 13x for comps) due to concerns around competition for the lead product, Xyrem.
We do not expect FDA to approve Roxane’s generic Xyrem anytime soon given the political issues
around its abuse as a ‘date rape’ drug. We do not expect an approval at the expiry of Roxane’s 30-
month hatch Waxman stay in April following which, we would expect investors to start become more
comfortable with the sustainability of Xyrem. Further, we expect multiple expansion as the company
delivers high double-digit earnings growth in 2013 driven by (1) high single/low double-digit Xyrem
volume growth coupled with favorable pricing and managed care environment, and (2) growth in
Erwinase, an orphan drug launched last year. Additionally, we expect management to leverage the
company’s low tax rate in the mid 20s to do additional business development in 2013 which should be
another catalyst for the stock.
Valuation: $64 Price Target. We use a DCF based valuation methodology which uses a weighted
average cost of capital of 12% derived by the capital asset pricing model. We have projected free cash
flows through 2028 to capture the erosion of Xyrem sales post 2019 and use a 0% terminal growth
rate. Our DCF-based price target is $64 per share which implies an 11x P/E multiple on our 2013 EPS
estimate of $5.80 and 11.5x P/E multiple on the consensus EPS estimate of $5.67. We believe that a
P/E multiple of ~11x is very reasonable compared to the average of ~13x for the comparables. We
expect to see multiple expansion in the stock as we get better visibility into the sustainability of Xyrem
sales.
Upside Scenario: $80/share. Our key assumptions in this scenario are as follows: (1) Xyrem goes
generic post the expiry of its last patent in 2024. Further we assume that Jazz takes conservative price
increases on Xyrem of 15% in 2013/2014, 10% in 2015/2016 and 5% per year thereafter. (2) Erwinaze
grows to ~$200M by 2015 and ~$240M by 2018. (3) Jazz downsizes its sales force by ~80 reps once
Xyrem goes generic in 2024, thereby saving $30M.
Downside Scenario: $45/share. Our key assumptions in this scenario are as follows: (1) Xyrem goes
generic in 2017. Under this scenario we assume that Jazz reaches a settlement with Roxane. We take a
settlement date of 2017 assuming a settlement is reached in 2013 and with 6 years left for its method
of use patents Jazz agrees to allow Roxane to launch about 3 years before expiry of its method of use/
process patents. We acknowledge that this is an arbitrary date but there are several other ways in which
Jazz may be able to protect its franchise (e.g., a price cut to keep a greater than usual brand market
share, negotiate a delayed settlement date for a royalty payment, etc), and we use this to illustrate a
downside scenario where Jazz has to explore the option of a settlement before 2020. Further, we
assume that Jazz takes aggressive price increases on Xyrem of 30% in 2013, 20% in 2014, 15% in
2015 and 10% in 2016. (2) Erwinaze grows to >$175M by 2015 and >$200M by 2018. (3) Jazz
downsizes its sales force by ~80 reps once Xyrem goes generic in 2017 thereby saving $30M.
Risks: (1) Earlier than expected generic competition for Xyrem; (2) Inability to take price increases on
Xyrem; (3) Increase in the corporate tax rate; and (4) Negative FDA action on the pending Warning
Letter.

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Least Preferred
Hospira Inc. HSP Sell
Thesis: HSP has held up at ~$32 despite the continued manufacturing issues at Hospira’s various Price Target: $28
manufacturing plants. However, we do not believe investors have visibility into the earnings headwind
into 2013/2014 due to greater than expected remediation costs, impact on US device sales due to
FDA’s import hold and generic competition for Precedex in 2014. We expect Hospira’s 4Q12 earnings
call to be an important catalyst for the stock as management is expected to provide its 2013 guidance at
the call. We think this should prompt consensus numbers to come down and investors to understand
the limited upside to earnings over the next 12-18 months.
Valuation: $28 Price Target. Our price target is based on a P/E multiple of 11x on our 2013E EPS
estimate of $2.49.
Upside Scenario: $36/share. Our key assumptions in this scenario are as follows: (1) Mid to high
single-digit sales growth over the next 5 years. (2) Gross margin expansion into the low 40s. And (3)
R&D ratio of 6-7% and SG&A ratio of 14-15%.
Downside Scenario: $23/share. Our key assumptions in this scenario are as follows: (1) Flat sales
growth over the next 5 years. (2) Gross margin remains in the high 30s. And (3) R&D ratio of 7-9%
and SG&A ratio in the high teens.
Risks: (1) Faster than expected resolution of manufacturing issues; (2) Faster than expected recovery
of growth in both generic injectables and infusion devices; (3) Higher than expected cost reduction by
management.

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Industrials

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Aerospace & Defense

David Strauss – 212-713-6185

Key Themes for 2013:

• Within aerospace, we see the most upside to 2013 expectations for the aftermarket and business jet, which
we view as low coming off of weak performances in 2012.
• We are relatively cautious with regard to new commercial aircraft production exposure given backlogs that
we see as over ordered and what is likely to be a more expensive financing environment for aircraft given
changes to Export Credit (ECA) rates that go into effect in 2013.

Most Preferred
Textron Inc. TXT Buy
Thesis: TXT offers exposure to the still-depressed business jet market, while trading at a meaningful Price Target: $30
discount to peers that are exposed to the more mature large commercial aerospace cycle. While we
believe initial 2013 guidance will come in below consensus, we think the stock trading at below 12x
our 2012 EPS estimate already reflects relatively flat EPS in 2013 along with low expectations for
bizjets and defense looking out. We believe North American bizjet is improving off the bottom led by
the low end of the market with Cessna most exposed to North America among the manufacturers.
Meanwhile, recent competitive wins have helped shore up the outlook at Systems, while we see long-
term defense contracts and civil helicopter growth limiting downside risk at Bell. We see potential for
a dividend announcement and the restart of share repurchases as potential upside catalysts in 2013.
Valuation: $30 Price Target. Our price target is based on our DCF and is equivalent to roughly 13x
our 2013 EPS estimate at $2.35. This is slightly above where TXT trades now on 2012, although
below the 14x multiple seen in early 2012 when business jet expectations were higher. Our base case
EPS estimate incorporates 3% organic growth with 10% operating margins (30% incrementals),
including 5% growth at Cessna with 6% operating margins (50% incrementals).
Upside Scenario: $40/share. We see upside to $2.65 in 2013 EPS and think a recovery at Cessna can
drive TXT’s PE multiple to 15x, roughly in line with where the aerospace group trades now on 2013.
Our upside scenario incorporates 5% organic growth (10% at Cessna) with mid-10% operating
margins as Cessna margins recover to 8% on higher volume vs. 6% in our base case.
Downside Scenario: $13/share. With stock already near the bottom of its recent trading range, we see
little further downside from here barring a meaningful slowdown in global economic growth. Even in
recession scenario, we see EPS troughing in the $1.60 range given smaller finance business now
compared to 2008-09. Assuming trough 8x multiple on trough $1.60 in EPS, we peg downside for
stock at around $13.
Risks: The main risk for Textron is prolonged business jet market weakness.

Least Preferred
Hexcel Corporation HXL Sell
Thesis: HXL trades at a premium to aerospace peers despite having a back-end loaded growth profile Price Target: $20
with relatively little exposure to 787, which will drive revenue growth for many of the other aerospace
suppliers over the next few years. Most of the growth we see for HXL will come from A350, which
won’t enter service until 2014 at the earliest, while we see HXL’s 747 and A380 business declining.
We continue to see announced higher production rates at Boeing and Airbus as unsustainable, and see
risk to HXL’s $2.5B 2017 revenue target as a result. HXL appears to be assuming mid teens
compound annual aerospace growth over the next five years which we see as unlikely.
Valuation: $20 Price Target. Our price target is based on our DCF, and is equivalent to 11x our 2013
EPS estimate at $1.78. We see relatively flat EPS through 2016 as A350 ramp offsets overall aero
production decline.
Upside Scenario: $36/share. We see upside risk to $36 if aero production holds up and HXL remains
on track to hit its 2017 revenue and EPS targets with meaningful cash flow improvement.

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Downside Scenario: $14/share. Our downside scenario assumes little to no improvement in HXL’s
cash generation and execution issues on capacity expansion projects, resulting in several points of PE
multiple contraction to 8x, similar to where SPR now trades. HXL sees its free cash flow improving
from 2012 at a use of $50M (midpoint) to positive $40M in 2013 with further improvement looking
out.
Risks: Renewed support for wind energy, including an extension of the Production Tax Credit in the
US, provides potential upside risk for HXL.

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Airlines, Airfreight & Surface

Transportation
Kevin Crissey – 212-713-3562

Key Themes for 2013:

• Airlines - the airline sector will be driven by industry consolidation - with results hinging on whether or not
US Airways-AMR combine, how well United and Southwest perform post their integrations, and how
Delta-Virgin Atlantic progress through regulatory reviews.
• Freight Transport - Hopes for improvement in overall freight volume, coal, and agricultural commodities
along with continued expansion of crude by rail are likely to dominate discussions in 2013.

Most Preferred
Delta Air Lines Inc. DAL Buy
Thesis: We believe the airline industry has improved to the point where it can be considered investable Price Target: $16
(cyclical troughs no longer ending in bankruptcies and ROIC frequently above WACC). Consolidation
and capacity constraint have resulted in legacy airline earnings oscillating above breakeven cyclically
and free cash flow used to reduce leverage and then returned to shareholders. We don’t believe this
view is captured in Delta’s valuation, which has compressed over time. Specifically, Delta is
generating substantial free cash flow (17% yield on 2013 estimates), has paid down $5B in net debt
over the last few years, and plans to start returning cash to shareholders in the next year – yet its
market cap is effectively unchanged.
Valuation: $16 Price Target. DAL is trading below its normal 5-6x EV/EBITDAR. Our $16 price
target is based on 5x 2013E EV/EBITDAR.
Upside Scenario: $32/share. Airline stocks are owned by a limited number of funds. We believe that
if the concept of investability takes hold, the stocks will rally and many new investors will come into
the space. In times when this has happened in the past, airline stocks have started to trade on P/E rather
than EV/EBITDAR. We estimate Delta could be worth about $32 by the end of 2013 as investors give
a 10x 2014E P/E multiple.
Downside Scenario: $6/share. Airline earnings are often volatile and there are scenarios where
Delta’s FCF is erased by rapidly rising fuel prices. We see little overall liquidity risk for Delta but
retracing back to $6-ish is possible in a bad scenario. Investor interest in the group could remain
confined to its current, limited buy-side base and the investable sector argument could be called into
question.
Risks: The primary risks for Delta are fuel price spikes caused by supply disruptions (new troubles in
the Middle East) and a sudden drop in corporate travel.

Least Preferred
Kansas City Southern KSU Sell
Thesis: Kansas City Southern is a growing railroad in a transportation sector severely lacking top-line Price Target: $76
improvement stories. Management has clearly outlined the prospects for crude by rail in the US and
intermodal and automotive growth from Mexico. We are believers in these stories but we find the
stock’s valuation troublingly high and believe investor expectations are lofty. We think a miss could be
punished more heavily than a beat would be rewarded.
Valuation: $76 Price Target. KSU trades at 20x our 2013E EPS. This is 7x higher than the other
railroads and 10x the cheapest. Our price target of $76 is based on 17x estimated forward EPS.
Upside Scenario: $100/share. If the US economy recovers, KSU would likely see improvement in
most commodities. This would help pricing and is likely not captured in consensus expectations. In
such a scenario, KSU’s multiple might not compress from 20x but earnings estimates could rise from
current $4.09 in 2013 to perhaps $5.
Downside Scenario: $60/share. Mexico has been performing well and the Street (and UBS) is

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modeling this to continue for KSU. Should this not be the case, due perhaps to a US fiscal cliff
recession, KSU’s earnings could fall importantly as cross-border intermodal and auto sales would
slump. We would also expect a multiple contraction.
Risks: KSU has significant exposure to Mexico. Changes in the value of the peso impact EPS results
but more importantly Mexico-US trade needs to remain healthy for KSU to perform well.

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Autos & Auto Parts

Colin Langan, CFA – 212-713-9949

Key Themes for 2013:

• GM and Ford should continue to see solid growth in North America in 2013 driven by underlying demand
strength in the US and share gains on the back of tough y/y comps for the Japanese OEMs and new
products launches (Ford Fusion and Escape, GM Silverado and Sierra).
• European auto production will be a headwind for Europe-exposed suppliers in 2013. Driven by a weak
demand and excess inventory, European automotive production will remain weak in 2013; the declines will
be more severe at the German luxury OEMs.

Most Preferred
Ford Motor Company F Buy
Thesis: We remain bullish on Ford’s 2013 earnings. Despite the slowdown in Europe, we expect Price Target: $15
global production to increase 5% y/y. The key driver of Ford’s earnings growth will continue to be
North America, which is tracking at historically high margins; South America and Asia profits are also
expected to improve modestly in 2013. Although Europe is expected to remain unprofitable in 2013,
we believe Ford has provided directional color on European profitability and the risk is largely
reflected in consensus expectations limiting the downside. Further, Ford’s recently announced EU
restructuring plan could restore margins to the 6-8% level long term. Currently trading at a historically
low valuation of 3.2x 2013E EV/EBITDA, we believe that Ford stock offers significant upside
potential.
Valuation: $15 Price Target. Our $15 price target is based on 4x our 2013E EBITDA. Ford currently
trades at an EV/EBITDA multiple of 3.2x, well below the 10-year average of 4.7x.
Upside Scenario: $20/share. If 2013 production in each region is 5% higher vs. our current forecasts,
it would suggest an EPS of $2, implying ~ $0.45 upside to our 2013 EPS estimate of $1.55. The higher
revenue growth and improving European margins could also drive multiple expansion at Ford.
Assuming a modestly higher EV/EVITDA multiple of 4.5x, the potentially higher earnings suggest a
valuation of $20 per share.
Downside Scenario: $9/share. If Ford’s production in each region comes in 5% below our current
estimates, it could drive a ~$0.45 reduction in our EPS estimate. We also suspect further multiple
contraction in case the production outlook deteriorates. Assuming a lower 3x EV/EBITDA multiple,
the weaker earnings would imply a valuation of $9. Slower than expected restructuring in Europe
could drive further downside to the stock.
Risks: Key risk to the Ford stocks include a weaker than expected automotive production particularly
in Europe, North America and South America where Ford has a sizeable market share. Macro
pressures could hurt demand in the near-term in these regions. In addition, if GM’s recently launched
pickup trucks significantly displace Ford’s market share, it could result in lower N American earnings.
Other risks include a sharp rise in commodity costs, in particular hot rolled steel, or a decline in
interest rates potentially causing an increase in pension liability and expense.

Least Preferred
BorgWarner Inc. BWA Neutral
Thesis: Despite the best long-term growth outlook of the US auto suppliers given its exposure to fuel Price Target: $67
savings technologies, BWA faces significant near-term challenges to earnings due to expected
production declines in Europe (over 50% of sales). Further, BWA’s high exposure to the German
luxury OEMs will likely exacerbate the impact of European cuts as content on a luxury vehicle is
significantly higher than average (could be as much as 6x). The evidence of weakening European
outlook was seen recently when BWA cut its backlog expectations for 2013-15. At the Detroit Auto
Show in January, we see the risk of BWA’s 2013 guidance coming in below current consensus
estimates. With limited near-term earnings momentum, multiple expansion will likely be challenged.
While we like the long-term outlook for the company, we believe the shares are currently fairly valued

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and maintain our Neutral rating.

Valuation: $67 Price Target. Our $67 price target is based on 6.5x our revised EBITDA estimate.
Our target multiple is within BWA’s historic range of 5.9x to 9.4x. We believe the high multiple seen
in the past could narrow given the near-term production headwinds.
Upside Scenario: $74/share. If 2013 European and North American automotive production come in
5% above our current forecasts, it could drive EPS higher by ~$0.50 vs. our current estimate of $5.05.
The better than expected revenue growth could also drive a modest multiple expansion. Assuming a 7x
EV/EBITDA multiple, the higher earnings could drive the stock price to $74 in our view.
Downside Scenario: $60/share. If 2013 European and North American automotive production come
in 5% below our current estimates, we estimate it would reduce BWA’s 2013E EPS by ~$0.50 vs. our
current estimate of $5.05. Assuming an unchanged 6.5x EV/EBITDA multiple, the lower earnings
could drive the stock down to $60 in our view.
Risks: A sharp increase in automotive demand, particularly in Europe could drive stronger than
expected production and drive the stock up. In particular, if there is a sharp increase in production at
the German luxury OEM production, BWA stock could benefit strongly. A significant decrease in
commodity costs, particularly nickel, could help BWA’s earnings.

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Chemicals
Gregg Goodnight – 713-654-0209
Bill Carroll – 212-713-6188

Key Themes for 2013:

• Ethane prices have continued to decline, hitting 5-year lows recently at levels below the floor price for
NGLs set by the price of natural gas. This dynamic has boosted the profitability of ethylene producers. The
direction of ethane prices will have an important impact on the fortunes of commodity chemical companies
over the next 12 months.
• Demand for the majority of commodity chemicals is closely correlated with global GDP growth. The pace
of economic activity in the major developed and developing economies will play a key role in determining
the profitability of commodity chemical companies in 2013.

Most Preferred
Dow Chemical DOW Buy
Thesis: With capability to consume about one-fourth of all domestically-produced ethane, DOW Price Target: $34
appears well positioned to benefit from the ongoing shale gas bonanza in the US. Ethane prices have
been hovering around a 5-year low, enabling the company to enjoy healthy operating profit margins.
Should petrochemical earnings falter, DOW has a high level of profit protection from its specialty
chemicals portfolio. The company’s worldwide presence also provides leverage to faster-growing
economies outside the US. Persistent global macroeconomic sluggishness, however, has led DOW to
undertake additional restructuring moves recently. We believe feductions in headcount and
discretionary spending should preserve sufficient cash to support DOW’s large capital projects
(including the Sadara Saudi Arabian joint venture). Additionally, we believe the company’s above-
average dividend yield of 4.0% remains well supported. Furthermore, DOW expects to receive its
$2.16B award (before accrued interest and legal fees) associated with the breakup fee from the aborted
K-Dow venture in 1Q13. The company may use a portion of these funds to retire some of its preferred
stock, which carries a hefty 8.5% coupon rate.
Valuation: $34 Price Target. Our $34 price target is based on our two-stage DCF model that assumes
a WACC of 8.6%, a terminal growth rate of 3.0%, and normal EBITDA of $9.5B/year. Based on 2013
consensus estimates, DOW currently trades at 12.9x P/E and 6.5x EV/EBITDA. While its current
valuation represents a 10% premium to its commodity chemical peers, DOW is also priced at nearly a
20% discount to large, hybrid chemical companies such as DD, EMN, and PPG.
Upside Scenario: $45/share. Our upside scenario (derived from our DCF model) is based on greater-
than-expected macroeconomic growth leading to higher operating rates (90-95% vs. 86-89% in our
base case), increased production volumes (+10-15% vs. base case), greater realized selling prices (+5-
10% vs. base case), and profit margin expansion (+200 basis points vs. 11.0% average operating
margin) versus our current assumptions. Higher cash flow generation than currently projected for
major projects under development also contributes to share price upside.
Downside Scenario: $26/share. Our downside scenario (derived from our DCF model) is based on
weaker-than-anticipated global economic conditions leading to decreased demand, lower operating
rates (70-75% vs. 86-89% in base case), reduced fixed cost absorption, and profit margin contraction
(-500 basis points vs. 11.0% average operating margin) versus our existing projections. Additionally,
delayed/cancelled long-term projects would also pressure the stock lower.
Risks: Higher-than-anticipated ethane prices could reduce DOW’s cost advantage and diminish its
currently strong operating profit margins. Weaker-than-expected global economic growth could
pressure earnings. Escalating oil prices could hurt consumer spending and, hence, demand for DOW’s
products. Lower-than-forecast cash flow generation could slow improvement in the company’s credit
quality metrics.

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Least Preferred
Olin Corp OLN Neutral
Thesis: OLN is the third-largest producer of chlorine and caustic soda in the US as well as the largest Price Target: $22
domestic merchant supplier of chlorine. Although the company produces some specialty products –
including ammunition – its earnings are driven largely by commodity chemicals. It has less exposure
to the vinyls (PVC) chain than its peers, and is thus less leveraged to upside in the commercial and
residential construction markets. Additionally, the recent surge in demand for ammunition products
appears to have ended. We project the company’s 4Q12 chlor-alkali operating rate to fall to the mid-
70% range from 83% in 3Q12 due to planned maintenance and seasonal weakness. For its ammunition
business, we also project 4Q12 earnings will decline sequentially as a result of a seasonal lull.
Valuation: $22 Price Target. Our $22 price target is based on our two-stage DCF model that assumes
a WACC of 9.8%, a terminal growth rate of 3.0%, and normal EBITDA of $400MM/year. Based on
2013 consensus estimates, OLN currently trades at 10.0x P/E and 5.5x EV/EBITDA. The company’s
current valuation is inline with its commodity chemical peers.
Upside Scenario: $24/share. Our upside scenario (derived from our DCF model) is based on greater-
than-anticipated industrial production leading to higher chlor-alkali operating rates (95% vs. 90% in
base case), increased sales volumes (+10-15% vs. base case), greater realized selling prices (+5-10%
vs. base case), and profit margin expansion (+250 basis points vs. 12.5% average operating margin)
versus our existing assumptions. Higher ammunition volumes (+10-15% vs. base case) and lower-
than-forecast metals and energy costs also contribute to our upside share price scenario.
Downside Scenario: $18/share. Our downside scenario (derived from our DCF model) is based on
weaker-than-expected industrial production leading to reduced demand, lower operating rates (75-80%
vs. 90% in base case), decreased fixed cost absorption, and profit margin compression (-350 basis
points vs. 12.5% average operating margin) versus our current projections. Declining ammunition
shipments (-15-20% vs. base case) as well as higher-than-anticipated metals and energy prices would
also pressure shares downward.
Risks: Weaker-than-expected global economic growth and, hence, industrial production rates, could
hurt earnings. Greater-than-projected chlor-alkali capacity additions by competitors could lead to
lower shipments for OLN. Tax treatment revisions in 2013 could make dividends less attractive to
investors, thereby pressuring OLN’s stock price.

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Coal and Metals & Mining

Shneur Gershuni, CFA – 212-713-3974

Key Themes for 2013:

• We expect management teams to be more focused on the hazards of pricing incentives leading to imports.
Capacity utilization improvements should benefit.
• Things are getting better on the demand side - we should see some volume growth and given the move in
building permits a recovery in Non-Res construction could be in the making

Most Preferred
Reliance Steel & Aluminum RS Buy
Thesis: RS is a steel service center that achieves consistent margins relatively independent of steel Price Target: $65
pricing. Rather, the company achieves higher profitability through higher volumes, inventory
management, and strategic acquisitions. Over the last quarter, steel pricing has increased due to 3
rounds of price hikes; however, there is concern that steel pricing is now flat-lining with some
downside risk. On the volume side, however, our Steel Intensive Leading Indicators continue to point
to positive economic momentum. We believe this creates an environment where RS is able to
outperform steel companies by holding margins throughout a falling/flat price environment while
capturing profits through additional volumes. The company consistently posts the strongest inventory
turn and cash conversion metrics – a strategic advantage should pricing fall or become volatile due to
uncertainty surrounding the fiscal cliff. The company believes it can grow 2-3% faster than GDP as a
result of its ability to increase market share through strategic acquisitions that are usually immediately
accretive.
Valuation: $65 Price Target. On consensus ‘13 EBITDA, RS is currently trading at 6.1x, slightly
above its historic average of 5.9x. We value the company at 6.5x EV/EBITDA on 2013 EBITDA. This
is roughly 0.5x below the company’s +1 standard deviation trading range. We see meaningful
EBITDA growth in 2014 EBITDA and believe investors will begin to shift focus to 2014 over the next
few quarters. At 6.1x 2014 EBITDA, RS could trade up to $65/share by YE 2013, 17% appreciation
from current trading levels.
Upside Scenario: $78/share. Under this scenario, we assume the company is able to grow volumes
7% in 2013 (vs. 2012), 3% stronger than what would be considered strong GDP growth at 4%. With
the economic growth, we would also assume steel pricing returns to the strong levels seen in 1Q12
(HRC @ $710/t). Under this scenario we derive EBITDA of $1.05 million. By applying a 6.5x
multiple, we derive a valuation of $78/share.
Downside Scenario: $52/share. Under this scenario we assume the company is able to grow volumes
2% in 2013 (vs. 2012), 2-3% stronger than a recession or no-growth economy. With slow or negative
growth, we would assume steel pricing falls to the levels seen in early 4Q12 (HRC @ 600/t). Under
this scenario we derive EBITDA of $724 million. By applying a 6.5x multiple, we derive a valuation
of $52/share.
Risks: Uncertainty surrounding the fiscal cliff and potential for a recession in early 2013 are risks to
our thesis. No or negative economic growth will place downward pressure on steel pricing and
volumes. Capital markets may also be difficult to access, creating a potential hurdle to acquiring
accretive targets. A major slowdown in the automotive and aerospace markets would also drive
reduced earnings and margins for RS.

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Least Preferred
AK Steel Holding Corp AKS Neutral
Thesis: AK Steel has been unable to meaningfully expand margins, even when its utilization rate was Price Target: $4
above 81% in 4Q11. Industry utilization rates are currently below 75% and the risk of flat-lining or
falling steel prices poses a risk to achieving profitability in the near-term. Until a recent refinancing
that expanded the company’s liquidity (at the cost of significant equity dilution), the company’s
viability was a significant concern for investors as the company used remaining liquidity to vertically
integrate (Magnetation and AK Coal). While integration may ultimately prove to be a cost saver, met
coal prices have fallen to marginal levels and iron ore pricing is slated to fall sequentially as a massive
supply wave hits over the next 5 years. One of AKS’s specialized products, stainless steel, is now
under pressure from new supply (TKS’s new Alabama melt shop) which is expected to capture some
market share. According to trade news, the market for stainless steel is oversupplied and demand
remains week.
Valuation: $4 Price Target. Our target is based on an EV/EBITDA multiple of 8.75x, the highest
multiple in our space (adjusted for pension liabilities/expense). We see little room for margin
expansion and recent concerns of stagnant pricing offer subdued optimism that margins will expand.
On consensus EV/EBITDA, AKS is trading at 4.9x, slightly above the 4.3x five-year average.
Upside Scenario: $14/share. Under this scenario we lift capacity utilization to 85%, a healthy but
achievable run-rate in a growing economy. We assume steel pricing returns to 1Q12 levels (HRC @
$710/t). Under this scenario we derive EBITDA of $650 million which results in a valuation of
$14/share using an 8.5x multiple.
Downside Scenario: $2/share. Under this scenario we drop capacity utilization to 75%, slightly below
where AKS has been producing but closer to the industry average. We assume steel pricing returns to
4Q12 levels (HRC @ $600/t). Sustained weakness at this level would consume the company’s
remaining cash and starve the Magnetation and AK Coal projects. We believe this would create strong
concern over the company’s liquidity which may cause it to trade like an option rather than on
fundamentals. We have a downside scenario valuation of $2/share.
Risks: A strong move in steel pricing to +$700/t and strong economic growth are risks to the neutral
thesis as AKS has strong leverage to steel pricing and is a higher beta stock.

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Electrical Equipment & Multi-Industry

Jason Feldman – 212-713-4309

Key Themes for 2013:

• Given our expectation for a low growth environment, we expect investors to increasingly favor stocks
where a greater portion of earnings growth is within the company’s control (e.g., large backlogs, M&A and
restructuring stories).
• We expect continued heavy emphasis on portfolio rationalization (e.g., divestitures), M&A driven by tax
and offshore cash considerations, and other strategic actions (e.g., spin-offs).

Most Preferred
General Electric Co. GE Buy
Thesis: We believe that the risk/reward profile for GE is among the best in the multi-industry space. Price Target: $24
GE’s Industrial equipment and Finance businesses are rebounding from highly depressed levels, and
we believe the growth potential for the high margin services business is underappreciated. We expect
double digit EPS growth for the next several years as key equipment end markets (oil & gas, aviation,
power generation) begin to recover, service revenue grows driven by an aging installed base where
utilization rates are rising, and GE’s finance business continues to capitalize on the highly attractive
competitive environment (retrenchment of key competitors following the financial crisis). Further, we
believe that EPS growth could shift above the low-teens trend rate if we see a wave of new power
generation investment in the U.S., China, and/or Russia. We note that GE is shrinking Capital fairly
aggressively, providing additional capital for share repurchases.
Valuation: $24 Price Target. GE has among the highest dividend yields in the space (>3%) and
trades roughly in-line with the group’s average multiple (~12.5x 2013 earnings) despite having among
the latest cycle end markets in the space. Our $24 price target reflects a ~10% premium to the market
multiple on our 2012 EPS estimate. We expect some degree of multiple expansion as the Industrial
business contributes an increasing share of total earnings vs. the Finance business.
Upside Scenario: $26/share. If economic conditions stablize, and if GE effectively deploys its cash,
we believe earnings of $1.75 are feasible in 2013 (consensus $1.69; UBSe $1.70). A group average
multiple (rather than GE’s current discount) on $1.75 in 2013 EPS would result in stock price in the
mid-$20s. We believe multiple expansion for GE is quite plausible if the company continues to reduce
the size of its finance business and remains disciplined with capital allocation.
Downside Scenario: $20/share. We believe earnings could be as low as $1.60-$1.65 if GE
experiences material backlog cancelations, extended push-outs of equipment servicing, and higher than
expected losses at GE Capital. In this scenario, some multiple compression is likely; however, given
the dividend yield, we believe a stock price below $20 for any period of time is highly unlikely (~12x
$1.65 in downside EPS).
Risks: The key risk for GE is its European exposure within the Finance business (both consumer and
commercial lending). Additional risks include an increasingly challenging competitive environment
for power generation equipment (wind and gas) and acquisitions (risks from both integration and
investor sentiment).

Least Preferred
Emerson Electric EMR Neutral
Thesis: We consider Emerson to be a premier conglomerate with substantial exposure to global Price Target: $52
infrastructure and above average exposure to emerging markets. However, the company has been
facing headwinds in several of its businesses (notably Network Power) that could take time to resolve,
orders have remained weak, and we believe that EMR is the among the most dependent in our group
on a rebound in China. We also believe that investors may be overly optimistic about the prospects for
substantial operating leverage / incremental margins as the cycle progresses.
Valuation: $52 Price Target. Our $52 price target reflects a 10-15% premium to the market multiple

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on our Fiscal 2013 earnings per share estimate of $3.60, roughly consistent with Emerson’s long-term
average.
Upside Scenario: $57/share. Emerson is the only company in the Multi-industry sector with front-end
weighted guidance (they assume a weaker second half of FY13, albeit, largely driven by comps). If the
business capital spending environment improves over the next several months, we believe Emerson’s
FY13 EPS could be as high as $3.80, and multiple expansion is likely on evidence of improving end
market conditions. In this scenario, we could see Emerson trade at its historical (5-year average)
multiple of ~15x on $3.80 in FY13 EPS, or roughly $57 per share.
Downside Scenario: $46/share. Further rationalization at Network Power, market share loss at
Climate, and weaker global capex spending could reasonably result in FY13 EPS of ~$3.45. An
earnings disappointment of that magnitude would lead to some degree of multiple compression (to
~13x), with a likely share price in the mid-$40s.
Risks: If issues in the companies Network Power segment persist, EMR could potentially divest
underperforming assets which could be dilutive to earnings in the near-term. Further, continued
weakening of business capital spending worldwide could create further headwinds across EMR’s
businesses.

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Engineering & Construction

Steven Fisher, CFA – 212-713-8634

Key Themes for 2013:

• The battle of the LNG projects: As government support for US expansion of LNG for gas export seems to
improve, we look for the potential of further announcements and awards. That said, we expect to see
increased competition among LNG projects in the US, Canada, Australia, and Africa.
• We continue to see strength in upstream, downstream, electric transmission, LNG, and chemicals.
Headwinds are likely to continue for mining and government exposed names

Most Preferred
CB&I CBI Buy
Thesis: We see a very favorable market outlook for CBI, driven by strength in North American Price Target: $48
Petrochemical EPC, robust opportunities in LNG (several possible bookings in 2013 with 5 FEED’s
completed) and sequential improvement in Steel Plate and Lummus Technology. In addition to steady
growth in the company’s small to mid size projects, the booking of larger projects would drive some
upside. These could include Yamal, Freeport, Browse or other projects.
Valuation: $48 Price Target. Given the relative strength in end markets and existing backlog, we
expect CBI to maintain its premium to E&C peers, and apply a 14x P/E to our $3.45 2013 estimate.
Upside Scenario: $60/share. Our upside scenario assumes stronger earnings than currently expected
on better execution, in excess of $4/shr. Winning one or two major awards would allow backlog to
grow in excess of $30 billion, which would support a premium P/E valuation, between 14-15x. This
would imply a valuation of $60 per share.
Downside Scenario: $34/share. The downside scenario is that CBI’s backlog declines, pricing and
margins are under pressure, mitigating some of the revenue growth, and the Shaw impact is neutral to
slightly dilutive, rather than accretive. In this scenario, we assume CBI earns $3.20 per share, and at a
10-11x multiple, the stock trades at roughly $34 per share.
Risks: CBI is not able to win any significant new large awards and small to mid size projects are
insufficient to maintain the current backlog. The Shaw impact worsens as the key Vogtle nuclear
project faces execution challenges, weakening CBI’s historic premium. CBI’s excellent upstream
capabilities do give the name additional relative exposure to changes in oil prices; weakness in pricing
could drag shares.

Least Preferred
Layne Christensen Company LAYN Sell
Thesis: We expect earnings are going to continue to come under pressure from weakening mining Price Target: $17
markets, combined with still weak conditions in municipal water markets, affecting LAYN’s Heavy
Civil business. We do expect a positive turn for Heavy Civil, from current levels, and Water should get
support from recent droughts, but improvements seem to be baked into the current share price and any
execution hiccup presents further downside. Expenses incurred with the planned HQ relocation will
pressure forward year earnings, and might not be fully captured in the consensus outlook.
Valuation: $17 Price Target. Our $17 price target reflects slightly higher multiples (peer trading)
offset by higher net debt. We use a 3-4x multiple on $110m FY14E EBITDA, $44m cash, $118m debt,
and 19.8m shares, averaged with a P/E of 10x (discount to the E&C group) on FY14E EPS.
Upside Scenario: $21/share. Stronger metals pricing, driven by emerging market restocking into the
Chinese New Year, could significantly improve the outlook for the currently troubled Mining
Exploration segment. A continuation of drought conditions could give further support to Water
projects, and Heavy Civil could see strong improvement as negative margin legacy contracts roll off
into FY14. In aggregate, we could envision forward EPS at $1.75 and a trading multiple between 11-
12x P/E, implying a $21 share price.
Downside Scenario: $12/share. Mining Exploration could continue to worsen in the coming year and

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execution on Heavy Civil could underwhelm despite lifting the burden of legacy contracts. Water and
Inliner could remain steady, but might not see significant sequential improvements. Expenses
associated with a corporate HQ relocation could exceed expectations. In aggregate we could envision
EPS of $1.20 and a trading multiple at 10x P/E, implying a $12 share price.
Risks: Expectations should now be low for mining results, particularly following a disappointing FY
Q3 result and weak guide into fiscal year end. Results from the Water and Inline segments have been
strong and this could continue. A positive turn in Heavy Civil could exceed our expectations.

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Homebuilders & Building Products

David Goldberg – 212-713-9427

Key Themes for 2013:

• Over the next 6-9 months, we expect upside surprise from home prices, given the shortage of inventory in
prime locations and robust affordability.
• As we transition into the next stage of the recovery, which we expect to begin in the second half of 2013,
we’d expect volume growth and pricing to be more inversely correlated.

Most Preferred
Mohawk Industries MHK Buy
Thesis: Mohawk is our top pick heading into the first quarter of 2013. We continue to believe the Price Target: $90
company is well positioned to realize greater EPS growth as the housing recovery unfolds, especially if
home price appreciation is more robust than expected. Specifically, we’d point to management’s
efforts around: 1) reducing costs and improving efficiencies, which should lead to greater operating
leverage; and 2) product and geographic expansion. Further, we expect robust FCF generation in the
next few years, which will provide the financial flexibility to pursue opportunistic growth.
Valuation: $90 Price Target. Based on a DCF analysis, assuming: 1) 3% terminal growth; 2) 10%
EBIT margins; and 3) a weighted average cost of capital of 9%.
Upside Scenario: $125/share. Our upside scenario is based on a more robust recovery in housing,
which will lead to greater repair and remodel spending, both in the aggregate and on a per home basis.
More specifically, in our most optimistic scenario, the company’s EBIT margin would rise to around
12% in the next few years— close to the historical peak—before gradually subsiding. Additionally, we
assume a 4% terminal growth rate. In this scenario, we believe a fair value for MHK would be closer
to $125.
Downside Scenario: $65/share. Our downside scenario assumes slower growth and less price
appreciation. In this scenario, we believe MHK would be worth approximately $65 a share.
Risks: Downside risks for Mohawk include a more significant deterioration in consumer spending for
residential construction and remodeling, driven by a more sizable deterioration in home prices.
Additional risks that would cause the company to underperform our expectations include higher raw
material costs and an inability to pass these costs through in higher prices.

Least Preferred
Meritage Corporation MTH Sell
Thesis: Although Meritage is well positioned for the housing recovery, we do not believe it possesses Price Target: $23
the EPS power needed to justify the current valuation. This reflects: 1) our view that the recovery in
the broader housing market will be gradual, reflecting the absence of more pro-cyclical underwriting;
2) Texas represents approximately 40% of closings; the markets in this state have fared better in the
upturn. As such, it will be challenging to drive accelerated growth; and 3) over the last few years,
Meritage has been able to acquire finished lots in prime locations at attractive valuations. Our channel
checks suggest this is becoming increasingly difficult as well located lots are scarce. Given the
market’s focus on the company’s ability to generate lofty performance in a more normalized
environment (which is unlikely to materialize until 2015-2016) at the earliest, we believe a slowdown
in the rate of order growth or margin expansion in the near term will act as a negative catalyst. We
expect this could happen throughout 2013, given challenging comparisons and rising input costs.
Valuation: $23 Price Target. Our $23 price target is based on 1.4x the current tangible book value
adjusted for future tax benefits, below the 2.0x group average.
Upside Scenario: $55/share. In our upside scenario, MTH is worth approximately $55 today,
representing nearly 50% upside to the current valuation. This is based on the company achieving
“normalized” EPS of just over $7 in 2016, which compares to our forecast of $0.55 for 2012. This
level of profitability is based on the following inputs: 1) total closings of around 11,500 homes (28.5%

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CAGR); 2) an average sales price of just under $320k (3.7% CAGR); and 3) operating margins of
11.3% (up from an estimated 4.3% in 2012). Additionally, we assume that Meritage’s current liquidity
can support this level of growth and that additional capital raises are therefore unnecessary.
Downside Scenario: $20/share. In our downside scenario, MTH is worth approximately $20,
representing approximately 46% downside. This is based on the company achieving “normalized” EPS
of ~$2.50 in 2016, which compares to our $0.55 forecast for 2012. This level of profitability is based
on the following inputs: 1) total closings of around 7,550 homes (15.5% CAGR); 2) an average sales
price of just under $265k (-1.0% CAGR); and 3) operating margins of 7.7% (up from an estimated
4.3% in 2012). Additionally, we assume that Meritage’s current liquidity can support this implied
growth and that additional capital raises are therefore unnecessary.
Risks: The primary risk facing Meritage to the upside is that loosening underwriting standards
materialize, driving a more robust housing recovery relative to our expectations. Additional risks
include: 1) the pressure from rising input costs—be it land, labor or materials—is less significant than
we currently expect; and 2) Meritage is able to support faster growth through the use of land options,
more in line with trends seen in the last recovery.

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Machinery
Eric Crawford – 312-525-6430

Key Themes for 2013:

• Earnings power within companies control given potential sluggish environment.
• Portfolio rationalization and M&A

Most Preferred
United Rentals URI Buy
Thesis: We are impressed by URI’s execution in integrating RSC, and see further upside to shares as Price Target: $55
URI continues its transformation as the leading player in an increasingly consolidated industry. We
continue to see URI as well positioned to benefit from improving demand, driven by a secular shift to
rental from ownership and some improvement in the North American economy. Additionally, URI’s
efforts to increase its value proposition with customers, coupled now with its broader, more enviable
footprint, suggest the company is well positioned to profitably take share from competitors.
Meanwhile, any cyclical uptick in non-res construction remains a meaningful potential tailwind.
Valuation: $55 Price Target. Our price target reflects a 5.9x EV/EBITDA multiple on our 2013
EBITDA estimate. The 5.9x multiple remains roughly in the middle of URI’s 5.0x-6.50x trading range
during 2004 (on 2005 consensus EV/EBITDA), the early stage of last cycle’s recovery (an
environment we see as somewhat similar to today).
Upside Scenario: $60/share. Assumes rental rate growth does not moderate from 2012 pace (+7.0%,
~2% above base case scenario), and fleet on rent (based on original equipment cost), grows $80
million above base case, contributing to a 200bp improvement in dollar utilization. Under this
scenario, we see EBITDA growing to $2.3B and shares appreciating to $60 based on the same 5.9x
EV/EBITDA multiple used in our base case price target methodology.
Downside Scenario: $35/share. Assumes that end market conditions deteriorate such that rental rates
only improve low single digits above 2012 levels (~2% below base case scenario), and that fleet on
rent grows $80 million below base case. Under this downside scenario, we see EBITDA growing to
$2.1B, but believe a 5.9x EV/EBITDA multiple under such a downside scenario is unlikely. Rather,
shares are likely to trade at the lower end of the 5.0x-6.50x range cited above. Our downside scenario
price target of $35 is based on a 5.25x EV/EBITDA multiple.
Risks: We believe the key risk for United Rentals is the potential for a weaker than expected
macroeconomic environment to pressure rental rates and used equipment prices, which could reduce
profitability. Also, while the integration of RSC Holdings has thus far gone smoothly, full integration
is not yet complete and therefore risk remains.

Least Preferred
Kennametal Inc. KMT Neutral
Thesis: R3M organic orders have declined YoY for five consecutive months, and November’s 8% Price Target: $36
decline accelerated from October’s 6% decline. We see continued near-term demand headwinds,
resulting in unfavorable operating leverage. KMT’s current guidance expects FY13 sales of flat to
down 3%. As such, without a meaningful uptick in 1H calendar 2013, we see risk to Kennametal
guidance and potential EPS estimates. That said, we believe these risks are mostly priced into shares,
and our Neutral rating on the stock reflects a balanced risk/reward profile at current levels.
Valuation: $36 Price Target. Our price target reflects a 25-30% discount to the market multiple on
FY13E EPS.
Upside Scenario: $45/share. 1) A meaningful uptick in industrial production, which correlates highly
to Kennametal’s organic orders, would likely contribute to an uptick in shares, helping the company
achieve its current FY13 guidance. Under such a scenario, we believe Kennametal could achieve flat
sales and the high end of its $3.40-3.70 guidance. The $45 valuation in this scenario assumes a 5-10%
discount to the market multiple (13x), as investors are less likely to apply as large a discount to results

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that reflect improving fundamentals. That said, as Kennametal’s orders are generally short cycle,
limiting forward visibility, we continue to believe shares will trade at a discount to the S&P 500.
Downside Scenario: $29/share. Our downside case scenario assumes organic sales decline 6%, also
adversely impacting operating leverage. Under this scenario, we believe EPS could fall short of current
guidance (potentially $3.30). Our $29 valuation reflects a 30-35% discount to the market multiple on
$3.30.
Risks: Continued headwinds in industrial end markets could dampen results as well as share
performance. Conversely, an improvement in these end markets would likely be a tailwind to shares.

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Paper & Packaging

Gail Glazerman, CFA – 212-713-3486

Key Themes for 2013:

• Will housing recover enough to justify current valuations?
• Can the paper/packaging industry drive earnings recovery if the economy remains stagnant?

Most Preferred
International Paper IP Buy
Thesis: International Paper is the largest producer of containerboard, a grade which we believe has an Price Target: $44
attractive long-term opportunity based on the North American industry’s strong global competitive
advantage which we expect to expand over time. The company recently broadened its containerboard
footprint via the acquisition of Temple-Inland, the third largest producer. IP has performed well
generating targeted synergies from the acquisition with the balance expected over the next year. In
addition, the company has just completed a wave of investment projects (fluff pulp, coated paperboard
in China, pulp in Russia, energy in Brazil). These investments should start to contribute in 2013.
Valuation: $44 Price Target. Our 12-month target assumes the shares trade at 7x a blend of
2013e/normalized EV/EBITDA. The company is trading at a double-digit free cash flow yield on our
2013 estimate.
Upside Scenario: $49/share. The containerboard market is currently tight with 95%+ utilization and
low inventories. A demand surprise could tighten the market further and allow for incremental pricing-
this is not in our forecast. A $50 per ton price increase is worth about $650 million in annual EBITDA.
Were there another price increase announced for the spring it would add $325 million in EBITDA and
raise our valuation to $49 (still assuming a 7x multiple).
Downside Scenario: $38/share. Strong returns in containerboard could attract attention and capital
leading to excess supply. Incremental capacity without demand or offsetting closures could disrupt
market balance. If investors lose confidence in the industry they might pay a lower multiple. At 6.5x
2013E EV/EBITDA our valuation would be $38.
Risks: Overall, the paper and forest products industry is highly sensitive to shifts in supply and
demand. Consequently, the key risks for International Paper are weak demand, as evidenced by
general economic conditions, or increases in supply, in the form of capacity additions. We believe
these could cause market imbalances and lead to price declines. Severe input cost inflation can also
reduce industry profitability. The paper/forest industry uses significant financial leverage and weaker
profitability can impede their ability to service their debt burden.

Least Preferred
Louisiana-Pacific LPX Sell
Thesis: Louisiana-Pacific is the largest producer of oriented strand board in North America, a product Price Target: $12
heavily exposed to the US housing cycle. While housing markets appear to be recovering, the North
American OSB market remains materially oversupplied, running at only about 70% of capacity. With
housing demand still a fraction of normal, we expect this capacity overhang to prove a constraint on
price and ultimately earnings recovery over the next few years until supply/demand reaches better
balance.
Valuation: $12 Price Target. Our 12-month price target assumes the shares trade at 7x a blend of
2013e and normalized EV/EBITDA. On an EV/EBITDA basis the shares are trading at over 9x our
normalized estimate
Upside Scenario: $16/share. The return of capacity to the market could trail demand growth, allowing
for stronger pricing trends during the recovery. Each $10 per thousand square feet is worth about $0.30
in EPS. Assuming prices rise as much in 2013 as they did it 2012 our valuation would rise to $16 (still
applying 7x a blend of 2013e/normalized).
Downside Scenario: $7/share. Current prices are about $100, or 50% above the long-term average

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despite low utilization. Attractive pricing could lead producers to accelerate the re-introduction of
capacity to the market, pressuring prices. Reverting back to normal pricing would effectively erase
earnings gains made in 2012. This would reduce our valuation to $7 (still using 7x normalized).
Risks: Overall, the paper and forest products industry is highly sensitive to shifts in supply and
demand. Consequently, the key risks for Louisiana-Pacific are weak demand, as evidenced by general
economic conditions, or increases in supply, in the form of capacity additions. We believe these could
cause market imbalances and lead to price declines. Severe input cost inflation can also reduce
industry profitability. The paper/forest industry uses significant financial leverage and weaker
profitability can impede their ability to service their debt burdens. Louisiana-Pacific is particularly
exposed to the US housing market and its core market of oriented strand board is materially
oversupplied.

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Technology

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Alternative Energy/Semi Cap Equipment

Stephen Chin – 212-713-4111

Key Themes for 2013:

• Expect semiconductor capex industry spending of around $30B on wafer fab equipment (4th consecutive
year of strong spending) driven by foundry customer capex (mostly from TSMC).
• Expect to see NAND flash capex spend possibly materializing in 2H13 depending on the success of new
products in tablets, smartphones and SSDs.

Most Preferred
KLA-Tencor Corp. KLAC Buy
Thesis: We expect KLA’s strong performance related to foundry capex spend to continue in 2013 Price Target: $54
(60% of sales to foundry) as foundry customers ramp 28nm capacity in 1H13 and start early
development on the 20nm node in 2H13. We believe process control equipment segment can outgrow
our 2013 wafer fab equipment spend estimate of -2% YoY in 2013, and expect KLA to maintain its
modest share gains in its core process control equipment markets due to its superior product portfolio.
We expect the official 2013 capex updates from Intel, Samsung and TSMC at the end of January to be
a key catalyst for the semicap stocks.
Valuation: $54 Price Target. Our price target of $54 is based on applying a 12.5x P/E multiple to our
CY14 EPS of $4.36
Upside Scenario: $65/share. Assuming a 10% growth in WFE to $32-33B on a stronger than
expected NAND flash recovery if bit growth is above 60% YoY, we believe that KLA can generate
CY13 EPS of $4.30. Historically, front-end semicap stocks trade at 10-15x NTM P/E, and with the
earnings momentum associated with the upside, we estimate KLA’s upside valuation at 15x CY13
EPS of $4.30, or $65.
Downside Scenario: $34/share. We estimate that KLA can generate $3.40 in a WFE scenario of
down -10% or $26-27B which could occur if foundry capex spending slows due to weaker smartphone
related demand. Assuming a 10x NTM P/E in a downside case, KLA’s valuation could decline to $34
(10x CY13 EPS of $3.40).
Risks: KLA-Tencor dominates the process diagnostics market (estimate at about 12-15% of WFE),
but is facing increasing competition from Applied Materials. Also, KLA’s customer base is very
concentrated with TSMC, Intel and Samsung each accounting for more than 10% of its sales which
creates added volatility in quarterly order trends for KLA.

Least Preferred
ATMI, Inc ATMI Sell
Thesis: Semiconductor wafer starts likely drive ATMI’s stock and the near term uncertainty in wafer Price Target: $16
start visibility could remain a headwind. We estimate 90% of ATMI’s sales are tied to semiconductor
wafer starts, which we believe peaked in 3Q12. Our checks find that 300mm semi wafer demand in
Taiwan in 4Q12 is tracking down 15% q/q. We estimate 4Q12 global semi wafer demand is down -
10% q/q on lower 4Q12 fab utilization rates, which we expect to trough in 1Q13. We estimate 2013
wafer starts to be up 3% YoY, well below its 5-7% YoY growth historically.
Valuation: $16 Price Target. Our price target is based on applying a 10x P/E multiple to our 2014
EPS estimate of $1.60. We look for ATMI’s sales $’s per wafer start to grow again before
reconsidering our investment stance
Upside Scenario: $22/share. In our base case, we estimate that ATMI can generate $1.40 of EPS in
FY13, assuming 3% YoY growth in wafer starts. In a upside scenario of wafer starts up by 7% YoY,
we estimate that ATMI can generate an EPS of $1.60 in FY13. Historically, semicap material stocks
trade in a range of 9-14x NTM P/E, and estimate that ATMI upside valuation at $22 (14x FY13 EPS
of $1.60).
Downside Scenario: $11/share. In a flattish YoY growth scenario for wafer starts, we estimate that

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ATMI can generate EPS of $1.20 in FY13, implying a downward scenario valuation of $11 (9x FY13
EPS of $1.20)
Risks: Stronger than expected growth in ATMI’s Life Sciences business (about 10% of sales) could
offset marginal weakness in its semi wafer related business.

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Technology Supply Chain & Wireless

Equipment
Amitabh Passi – 415-352-5537

Key Themes for 2013:

• Mobility: the proliferation of a myriad of mobile devices driving much higher data consumption and a need
for networks to be more dynamic and support anytime, anywhere communications
• Cloud: the desire to drive economies of scale in network resources, and a shift from capex-centric to opex-
centric models that scale better with demand patterns.

Most Preferred
Infoblox Inc. BLOX Buy
Thesis: Infloblox remains a market leader in DDI (DNS, DHCP, and IP address management), an area Price Target: $25
of increasing importance especially as organizations adopt key trends such as virtualization, bring-
your-own-device, and enterprise mobility. With these trends there is an increasing need to assign, de-
assign, and manage large IP addresses efficiently. We think Infoblox remains the best pure play vendor
in DDI with a market share topping 40 percent, while other competitors are either large conglomerates
(eg alcatel-Lucent, BT, Microsoft) or private companies. We foresee a market TAM of $6 billion-plus
and a CAGR of 20%-plus. The company just delivered solid results in its most recent quarter and we
believe the company has momentum behind it.
Valuation: $25 Price Target. Our price target of $25 is based on an EV/Sales multiple of 5.5x, well
below other high multiple, fast growing software entities, and implies a PE multiple of 20-25x on
normalized earnings power of $1-plus.
Upside Scenario: $30/share. Our upside scenario forecasts earnings power for Infoblox approaching
$1.30 based on the company growing top-line at 25% annually over the next 3-4 years, and with
operating margin at the high end of the company’s target range of 18-22%. Under this scenario, we
believe the market would accord Infoblox an earnings multiple of 25x given the company’s growth
profile, target model, and earnings power.
Downside Scenario: $12/share. Our downside case for Infoblox assumes that the company is only
able to grow revenues at 15% per year annually over the next 3-4 years, despite 2013 revenue guidance
implying ~23% growth in a very tough macro environment. In this scenario, we forecast operating
margin of 18%, at the lower end of the company’s target range of 18-22%, earnings power of $0.82,
and believe the market would accord Infoblox an earnings multiple of 15x given the company’s
growth profile, target model, and earnings power.
Risks: We believe the primary risks to our investment case include: a) tough competition from both
larger public companies such as Alcatel-Lucent, Microsoft, and BT, and smaller private companies
such as Blue Cat; b) failure to realize the target model of 18-22% operating margin; c) overall TAM
being smaller than currently forecast at $6b-plus; d) disruptive pricing as potentially more of the DDI
functionality is integrated in broader competitive offerings.

Least Preferred
Tellabs Inc. TLAB Neutral
Thesis: We have Tellabs as a least preferred among our picks. We think Tellabs fundamentals will be Price Target: $3
challenged by a general weak climate for wireline customers spending early in the year and difficulty
winning new business in the optical and Ethernet markets. Furthermore, Tellabs has recently seen
business decline at AT&T, and with AT&T one of the few wireline carriers likely to increase spending
in 2013, we think this bodes poorly for their chances of winning new business in this account. Tellabs
shares have rallied 24 percent from mid-November lows following the announcement of a one time
$1/share cash dividend and substantial stock repurchase, neither of which addresses the company’s
core market challenges and could weaken its ability to acquire or invest in new technologies.
Valuation: $3 Price Target. Our PT is based on 0.2x FY 13 EV/Sales.

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Upside Scenario: $4/share. Our upside scenario is based on better than expected customer traction for
optical, Ethernet, and access products driving improved top line growth and operating margin. Under
this scenario we assume revenues grow from the current ~$1B level toward the ~$1.3B generated
in 2011 and that operating margin can again approach ~10%, more in keeping with prior levels when
Tellabs was seeing good Tier-1 customer traction for its TITAN 5500 digital cross connect. Applying
a 14x multiple (in keeping with higher growth optical peers) to our upside scenario earnings (post
share repurchases) would imply $4/share valuation.
Downside Scenario: $1/share. Our downside scenario is based on generally weak customer wins in
new optical/Ethernet products further exacerbating current pricing pressure from its generally low
market share in a highly competitive market. Upon completing its one-time dividend payment of
$1/share and its planned repurchase of ~$225m shares, Tellabs will have ~$1/share in net cash. Tellabs
shares have historically troughed near cash value, while other optical equipment providers with weak
market positions have also traded as low as cash value.
Risks: (1) low market share and numerous (larger) competitors across its core optical, Ethernet, and
access business; (2) lack of customer traction for its new products and an inability to leverage its
installed base of digital cross connects to win new business with customers; (3) increased pricing
pressure driven by larger competitors such as Huawei and ZTE; and (4) an overall weak economy
causing service providers to further reduce wireline capital expenditures.

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IT Hardware
Steve Milunovich, CFA – 212-713-3372
Key Themes for 2013:
• Owning or partnering for the stack is important as users want lower cost and simplified computing. We
expect continued IT budget pressure.
• We see Big Data efforts gaining traction to help customer revenue while cloud infrastructure increasingly is
employed to reduce costs.

Most Preferred
EMC Corporation EMC Buy
Thesis: We expect EMC to remain the storage leader and to grow its 30% share of the storage market. Price Target: $30
Its large installed base and ability to incorporate new technologies will enable it to defend itself from
the converged infrastructure attack of server vendors and disruptive threats such as flash. New
midrange products over the coming year should help growth, though double-digit revenue growth
every year may be a stretch. EMC appears to be going for a larger portion of the IT budget with its
Pivotal Initiative, which it hopes will be another success like VMware (of which EMC owns 80%).
EMC is well positioned to lead in Big Data with Greenplum, Isilon, and Pivotal, but Cloud
Infrastructures prove to be a challenge as lower cost storage services from Amazon and Microsoft
mature.
Valuation: $30 Price Target. We expect EMC to grow 12% next year (more than 2x the storage
market rate) with a rising gross margin (up 70 bps to 65%). We see room for multiple expansion as
the potential for its new flash products and Big Data offerings come to light. Our $30 price target is
based on 13x our 2013 FCF estimate of $2.49/share, which would bring its EV/FCF multiple back in
line with recent experience of 11-13x.
Upside Scenario: $38/share. Assumes EMC’s product refreshes (Atmos, Isilon, VNX) and new
product introductions (flash and Big Data) enable its core storage divisions to take more share while
VMware is able to find new markets for its server virtualization products. Under this scenario, both the
storage threats (NetApp, HP, IBM, and flash startups) and virtualization threats (Microsoft) are
mitigated. We could see revenue growth return to the 18% level of 2011 and margin expand to 14x
2013 EV/FCF (FCF goes to $2.63/share). Our upside valuation for the scenario would increase to $38
per share.
Downside Scenario: $20/share. Assumes EMC’s size starts to limit its growth, its partnership with
Cisco deteriorates, and its new products are delayed while VMware’s growth slows as Microsoft’s
HyperV (included with Windows Serer 2012) starts gaining traction. Under this scenario both the
storage and virtualization threats start to impact results. We could see revenue growth slow to 2% and
margin contract to 9x 2013 EV/FCF (FCF goes to $2.31/share). Our downside valuation for the
scenario would decline to $20 per share.
Risks: Key risks to our EMC thesis include (1) IT spending weakness due to economic concerns, (2)
difficulty sustaining growth and margins as server vendors push a converged infrastructure approach,
NAS gains share from SAN, and NetApp attempts to move into the data center, (3) disruptive
technologies emerge such as flash, (4) potential management turnover when CEO Tucci retires and a
new chief is picked, and (5) earnings issues at VMware, which provides 25% of EMC profits.

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Least Preferred
Hewlett-Packard HPQ Sell
Thesis: We see HP continuing as the universal share donor across most of its product lines in 2013 as Price Target: $11
it retools its product offerings, realigns its workforce and go-to-market strategy, and rebuilds its
balance sheet. Much of HP’s issues are known and we are incrementally encouraged by recent
comments that the contribution of non-labor savings could buffer bottom line by $0.25 in 2H/13.
Despite these points, we remain cautious near term as (1) the company cannot provide assurance that
revenue declines have bottomed in most businesses, and (2) there is a disparity between declining
printer hardware declines and supplies revenue growth, which likely narrows by profitable supplies
sales decelerating in coming quarters, and (3) Technology Services (maintenance) is 25% of profits
and tied to declining hardware sales. HP also faces challenges in repairing its balance sheet with all of
its term debt in USD but with the vast majority of existing cash and FCF generation off-shore. With
this dynamic we expect the company to roll the majority of its USD debt at a higher cost over the next
two years with only marginal pay downs and limited dividend/repurchase flexibility.
Valuation: $11 Price Target. Our price target of $11 is based on an EV/FCF ratio of 6.5x our F14E
FCF (with financing debt). The stock appears inexpensive with a F13E P/E of 3.5x and yield of 4.4%,
but we see it underperforming given expected weak 1H results.
Upside Scenario: $22/share. We argue that HP should be broken up, probably into enterprise and
PCs/printers. In our view, full value won’t be realized by just improving execution. Given the
company’s balance sheet issues, it’s unlikely that such a move is even feasible over the near term,
though our sum-of-the-parts analysis indicates that HP is worth north of $20 per share. Right now,
investors are getting the PC and printer businesses for free. That valuation assumes, however, that
HP’s businesses are independent, which they are not. We believe this fallacy of independence explains
the gap between intrinsic and realized value. The burden of corporate management, systems, and brand
erosion argue that improving unit results isn’t sufficient—we believe HP should break up.
Downside Scenario: $8/share. Assumes a more rapid deterioration in printing supplies growth, IPG
pre-tax margin, and knock-on effects on the services business stemming from weaker-than-expected
hardware sales. Coupled with poor restructuring execution, F2013 FCF could fall another 10% from an
already low $5bn run-rate and imply that achieving a normalized $6b FCF run-rate in F2014 is
unlikely. Under this scenario, we would expect further multiple contraction and perhaps increasing
concerns relating to USD liquidity. Our downside scenario would see the stock moving towards $8 per
share, an EV/FCF ratio of 5-6x on F14 FCF of $5.5b.
Risks: Key risks to our negative HP thesis include (1) a recovery in IT spending linked to improving
GDP growth, (2) a weaker dollar, (3) positive growth in PC revenue combined with success in
Windows tablets, (4) better-than expected printer profits led by emerging market printer acceptance
and large format success, and (5) share gains in enterprise computing driven by cloud computing wins,
storage growth, and mix shift toward software.

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Semiconductors
Steven Eliscu – 415-352-5674
Stephen Chin – 212-713-4111

Key Themes for 2013:

• Expectations of a 4Q12/1Q13 cycle trough with stronger y/y growth industry momentum, especially in
2H13, which is typically led by the SOX index, for which we have a 454 12-month target.
• Secular shift to mobile computing with increasing market concentration by Apple/Samsung; however, 2013
could represent a significant slowing of the shift of share of wallet from PCs to mobile as Windows 8 and
new power-optimized PC processors enable much more compelling Windows devices. While Qualcomm
likely maintains its leadership in applications processors overall, we expect NVIDIA to maintain a leading
position in ARM-based non-Apple/Samsung tablets.

Most Preferred
NVIDIA Corporation NVDA Buy
Thesis: Our positive view of NVIDIA is based on our belief it will drive: 1) sustained revenues in its Price Target: $16.50
graphics business (as share gains and rising ASPs offset an expected gradual decline in PC attach
rates), 2) continued growth in its professional business, with upside growth based on its cloud
opportunities, 3) leadership in ARM-based processors for tablets, with an upside opportunity in
smartphones.
Valuation: $16.50 Price Target. Our $16.50 DCF-based price target equates to 12x our F2014 $0.94
EPS estimate ex-$5/share cash.
Upside Scenario: $21/share. Assumes: 1) Graphics can incrementally grow as attach rate declines
are limited and mix shifts upwards, 2) Professional Solutions grows based on sustained trends in
graphics, NVIDIA holds its own in the computing market vs. Intel’s Xeon Phi high-performance
computing card, and cloud initiatives become a major source of new growth, 3) Applications
processors maintain a dominant position in non-Apple/Samsung tablets and benefit from acceptance of
Windows RT, while NVIDIA gains new growth from smartphones by achieving differentiated cost &
performance with baseband integration vs. both Qualcomm and MediaTek.
Downside Scenario: $12/share. Assumes: 1) F2013 was a peak year for graphics processor sales and
the market enters a period of protracted secular decline, 2) Professional Solutions faces headwinds,
especially vs. Intel’s Xeon Phi high-performance computing card, as well as cloud initiatives fail to
take hold, 3) applications processors face secular headwinds as Apple/Samsung continue to gain share
and NVIDIA gets squeezed by Qualcomm on the high-end and MediaTek on the lower end, and it
struggles to integrate baseband.
Risks: NVIDIA faces secular market shifts, as: 1) the computing market shifts from PCs to mobile
devices and PC market growth slows, 2) the integration of the graphics function into the PC processor,
which is a market dominated by Intel and AMD. NVIDIA faces competitive threats in the
Professional market from Intel with its Xeon Phi high-performance computing card and in the
applications processor market from Qualcomm, Samsung (which sells its chips to other
smartphone/tablet makers) MediaTek, Broadcom, Marvell, ST-Ericsson and Spreadtrum.

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Least Preferred
Intersil Inc. ISIL Neutral
Thesis: Our Neutral view is based our belief that Intersil’s strategy for growth needs to be updated, as Price Target: $6.75
its current plan around 10 key market opportunities has not sufficiently developed to offset macro
weakness and market specific weakness in PCs – of primary concern is that Intersil’s under-
performance vs. the Analog industry has actually increased. We believe key issues have been: 1)
continued dependency on PC power management, which will likely remain challenged (even with new
tablets/ultrabooks), 2) expansion into a disparate set of new market areas with limited evidence of
sales/opex synergies. At the heart of the issue, we believe Intersil is faced with the challenge of driving
enough growth to support an opex structure that cannot be sustained with the current strategy, which
has shown limited results.
Valuation: $6.75 Price Target. Our $6.75 DCF-based price target is based using key assumptions:
10.5% WACC, 2% terminal growth.
Upside Scenario: $8.25/share. Assumes: Intersil’s board chooses a new CEO to replace the current
interim CEO who will sharpen the focus of the strategy and lessen dependence on the PC market.
While it may take time to show results, a strong leader with a prior track record of results could
instill new confidence that could support the shares.
Downside Scenario: $5.25/share. Assumes: The strategy in place by the former CEO results in
continued underperformance vs. the semiconductor industry, leading to the need for additional
restructuring and opex cuts, resulting in underinvestment that clouds the earnings outlook for several
years until a new more successful strategy can take hold.
Risks: On the negative side is the potential for sustained underperformance of revenue growth vs. the
industry, where a new CEO fails to materially reverse the trend. On the positive side, in addition to its
6% dividend yield, Intersil is a sizeable analog vendor, and as such, it is a potential acquisition
candidate for a larger rival looking to augment organic growth.

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Software
Brent Thill – 415-352-4694
Key Themes for 2013:
• We expect the software sector to remain a favored investment area and continue to see support thanks to
high recurring revenue, high profit margins, and rapid innovation; but beware of the seasonal Q1 black ice.
• 2013 could be a big year for ELAs (enterprise license agreements), driving an outsized volume of large
deals. ELAs dried up in the 2008/09 recession and saw some rebound in 2010. As many ELA contracts
have 3-year terms, we could see a large number of them come up for renewal in 2013. In addition, software
vendors are increasingly offering ELAs as buyers like the flexibility and one-stop shopping simplicity.

Most Preferred
Informatica Corporation INFA Buy
Thesis: After meeting or exceeding expectations for 31 quarters in a row, INFA had two unexpected Price Target: $40
earnings misses in 2012 (Q2 and Q3), beating down shares to a level we haven’t seen since 2010.
Sentiment is poor, with many investors surmising there is product demand or competitive issues.
However, we believe fundamentals haven’t changed, and most of the issues stem from disruptive sales
force changes that can be fixed over the next 2-3 quarters (sales leadership changes, move from a
territory to tiered sales organization, overlays turned into field reps). Plus, going into Q4 earnings
expectations have been somewhat reset, with the Street at 9% y/y sales growth for CY13E. INFA has a
strong management team, products that are critical to enterprises’ core IT infrastructure, and is one of
the last independent data integration companies of size.
Valuation: $40 Price Target. Shares are still inexpensive at 3.3x CY13E EV/Sales. We believe if
they can fix sales issues and have a couple consecutive quarters of consistent positive results, INFA
can return to $40. Our price target equates to 4.7x EV/Sales.
Upside Scenario: $50/share. If INFA can reach similar 20%+ top line growth rates they saw in 2010-
2011, we believe they can trade back to $50, implying 5.5x CY13E EV/Sales.
Downside Scenario: $25/share. If there are product demand issues and INFA is stuck at a single digit
growth rate henceforth, then our downside scenario is $25, which implies a 2.5x CY13E EV/Sales
multiple.
Risks: 1) If issues remain and they miss Q4 earnings; 2) if INFA is unable to reach better productivity
with their sales reps; 3) if macro affects them more than anticipated (Europe was down -19% y/y in
Q3); 4) if newer products don’t contribute as much as expected; 5) if the new sales head changes don’t
work out; and 6) if fundamentals change.

Least Preferred
ServiceNow Inc. NOW Sell
Thesis: There is no disputing NOW’s strong growth rates, disruptive technology and growing Price Target: $30
customer base. However, we think the stock is overvalued as the 2nd most expensive name in our
group at 12.5x FY13 EV/sales and growth is set to decelerate meaningfully in FY13. In addition, in its
core SaaS IT service management market NOW is attracting increased competition and its cloud
platform (PaaS) will likely take longer to become a meaningful contributor to financials than Street
expectations. Finally, as a recent IPO, there are multiple share lockup expirations coming in Q1 with
92M shares becoming eligible for sale (vs. 700k ADTV).
Valuation: $30 Price Target. Based on 9.0x EV/sales forward NTM revs estimate of $507M.
Upside Scenario: $39/share. Our upside scenario is based on faster-than-expected billings growth of
70% in FY13 which would be consistent growth with FY12 versus our estimate for +50%. This may
occur if NOW achieves strong upsell and faster than expected billings contribution from its cloud
platform. Based on 10x EV/sales NTM revenue, that derives a valuation per share of $39.
Downside Scenario: $24/share. Our downside scenario is based on slower-than-expected billings
growth and cutting the billings growth rate in half in FY13 to 35% from FY12’s estimated 70%. This
may occur if NOW sees increased pricing pressure from competitors, if upsell fails to materialize as

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the company fails to penetrate its customer base with its broader SaaS IT management tool portfolio,
and if cloud platform adoption fails to materialize. Based on 8x EV/sales forward NTM revenue, that
derives a valuation per share of $24.
Risks: The key risks for NOW include: 1) Valuation appears to be pricing in future potential success,
embeds high growth expectations, and should attract increasing competition, 2) Long-term growth
assumptions dependent upon deeper customer penetration and PaaS adoption which is nascent, 3)
increased competition which could turn the industry into a red (vs. blue) ocean, 4) CEO/CFO/CTO/
head of sales all relatively new to NOW. The biggest upside risk would stem from faster than
expected billings growth due to faster than expected adoption of the cloud platform and better than
expected upsell into its install base.

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Transaction Processing & Financial

Technology
John T. Williams – 212-713-3559
Key Themes for 2013:
• Given our views that consumer spending and credit card issuance are likely at or near their cyclical peaks,
we would be underweight FinTech names predominantly exposed to traditional consumer spending and
overweight non/low consumer-exposed names.
• Mobile and emerging payments will remain key areas of focus and will continue to grow and evolve,
though the entire space will (1) remain chaotic as established and emerging companies aggressively vie for
positioning and (2) be largely uninvestable as a discrete theme for equity market investors (emerging
payments will be minimally impactful in FY13 for the traditional players) as most innovation will emerge
from companies that are early-stage and/or privately held.

Most Preferred
VeriFone Systems PAY Buy
Thesis: Despite recent noise and concerns, we believe the longer-term secular growth story is largely Price Target: $39
intact given the constant terminal upgrade cycle and rollouts of EMV (in the US) and NFC (global)
technologies. While dongles (i.e. Square and its competitors) are potentially disruptive in the medium-
term, we think the threat is exaggerated for now as large and medium merchants require more
complex/integrated POS options to support their higher volumes. We also believe that improved
transparency and disclosures should provide investors with additional comfort that has been lacking in
recent quarters. Considering that PAY holds a POS terminal duopoly with Ingenico, has a growing,
higher margin services component, and is exposed to favorable secular payments trends, we think the
shares are attractive at their current 9.7x CY13E EPS and 10.3x EV/EBITDA, and view the
risk/reward as very attractive at current levels.
Valuation: $39 Price Target. Our $39 price target is supported by our five-part valuation
methodology (CY13E P/E, CY13E EV/EBITDA, DCF, industry framework, and M&A premium). Our
price target implies a CY13E P/E of 11.3x and CY13E EV/EBITDA of 11.2x, vs. the group averages
of 13.9x/7.8x.
Upside Scenario: $47/share. The upside case incorporates more aggressive assumptions for revenue
growth in each global region, a slightly faster mix shift towards services (and away from pure
hardware), and modestly better gross margins. Under this scenario, FY13 EPS would be 6% higher
than current estimates and could potentially support an expanded multiple of 14x.
Downside Scenario: $24/share. The downside case is essentially the converse of the upside case - less
aggressive assumptions for revenue growth in each global region (notably N. America and LatAm), a
slower mix shift towards services, and modestly worse gross margins vs. our base case. Under this
scenario, FY13 EPS would be 11% lower than current estimates, implying a $24 valuation assuming
the multiple contracts by an additional 10% from the current 9.3x.
Risks: Risks include a significantly weaker economic environment that drives lower adoption of new
POS terminal solutions and services (no direct consumer exposure but merchant spending decisions
are indirectly influenced by spending), integration challenges related to Hypercom and Point, pricing
pressure and/or competition from lower-priced Asian POS terminal makers, FX headwinds, emergence
of alternative or disruptive payment technologies, and ability/inability to grow/penetrate services
offerings.

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Least Preferred
Mastercard Inc. MA Sell
Thesis: MA shares are supported by favorable secular trends and increased penetration of electronic Price Target: $412
payments, but we remain very cautious with shares pinned near their all-time highs given (1) clearly
slowing global spending growth (MA has posted two consecutive quarters where all regions have
slowed YoY and QoQ; recall also that MA is 100% exposed to consumer spending), (2) the company’s
considerable European spending exposure (27% of purchase volume; MA’s cross-border revenues tend
to correlate very highly with Eurozone GDP), and (3) an ongoing shift from top-line driven
outperformance to lower quality expense-leverage driven results (3Q12 results were particularly weak,
in our view, as MA’s beat was a function of lower marketing expense and a lower tax rate). Shares
trade at 18.8x our FY13E EPS and appear extended (or at least full) by many measures—considering
the continued deceleration in global consumer spending, a minimal dividend (0.25% yield), and what
we perceive as an overly complacent investor base, we think the risk/reward is extremely unfavorable
at present.
Valuation: $412 Price Target. Our $412 PT is derived via a five-stage methodology and implies a
FY13E P/E of 16.0x and FY13E EV/EBITDA of 9.0x, vs. the group averages of 14.9x/7.9x.
Upside Scenario: $557/share. Our upside case incorporates more favorable assumptions for spending
volumes (+300bps vs. our base case) and transaction growth (+200bps), lower rebates (-50bps), and
faster cross-border revenue growth (+100bps), driving net revenue growth to +13.8% (+270bps from
our +11.1% base case). On the expense side, our upside case assumes MA can drive an additional 300
bps of marketing expense leverage (i.e. -5% vs. FY12, vs. our base case -2%). Our upside scenario
analysis yields a YoY operating margin expansion of 446bp and EPS of $26.94, which represents 21%
EPS growth and implies a $557 valuation assuming 10% multiple expansion using the higher upside
scenario EPS estimate.
Downside Scenario: $393/share. Our downside case incorporates less aggressive assumptions: on the
revenue side, we factor in lower volume (-200bps vs. our base case) and transaction growth (-200bps),
modestly higher rebates (+50bps), and slower cross-border revenue growth (-300bps), driving net
revenue growth to +8.4% (-270bps from our +11.1% base case). On the expense side, our downside
case assumes MA’s FY13 marketing expense is down just 1% vs. FY12 (vs. our base case -2%). Note,
though, that this is unlikely since MA is most able to flex this line item to drive operating leverage.
The net result of our downside scenario analysis is YoY operating margin expansion of 206bp and
EPS of $24.57, which represents 11% EPS growth and implies a $393 valuation assuming a 15%
multiple contraction that is slightly more harsh than our base case.
Risks: Risks include a significantly stronger economic environment that drives higher dollar volume
and transaction levels; additional legislative oversight or regulation that negatively impacts credit (or
debit) interchange; financial institution customer pricing pressure and/or rebates growth; challenges in
integrating acquired businesses; emergence of alternative or disruptive payment technologies; and FX
shifts.

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Q Statement of Risk
Forecast earnings and corporate financial behaviour is difficult
because it is affected by a wide variety of economics, financial,
accounting, and regulatory trends, as well as changes in tax policy.

Q Analyst Certification
Each research analyst primarily responsible for the content of this
research report, in whole or in part, certifies that with respect to each
security or issuer that the analyst covered in this report: (1) all of the
views expressed accurately reflect his or her personal views about
those securities or issuers and were prepared in an independent
manner, including with respect to UBS, and (2) no part of his or her
compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by that research analyst
in the research report.

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Required Disclosures

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries,
branches and affiliates are referred to herein as UBS.
For information on the ways in which UBS manages conflicts and maintains independence of its research
product; historical performance information; and certain additional disclosures concerning UBS research
recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts
refer to the past; past performance is not a reliable indicator of future results. Additional information will
be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment
consultancy businesses by the China Securities Regulatory Commission.
UBS Investment Research: Global Equity Rating Allocations
1 2
UBS 12-Month Rating Rating Category Coverage IB Services
Buy Buy 50% 31%
Neutral Hold/Neutral 41% 31%
Sell Sell 9% 20%
3 4
UBS Short-Term Rating Rating Category Coverage IB Services
Buy Buy less than 1% 33%
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 12 months.

Source: UBS. Rating allocations are as of 30 September 2012.

UBS Investment Research: Global Equity Rating Definitions
UBS 12-Month Rating Definition
Buy FSR is > 6% above the MRA.
Neutral FSR is between -6% and 6% of the MRA.
Sell FSR is > 6% below the MRA.
UBS Short-Term Rating Definition
Buy: Stock price expected to rise within three months from the time the rating was assigned
Buy
because of a specific catalyst or event.
Sell: Stock price expected to fall within three months from the time the rating was assigned
Sell
because of a specific catalyst or event.

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

EXCEPTIONS AND SPECIAL CASES

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

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not
registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in
the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a
research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,
follows.

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Company Disclosures
Company Name Reuters 12-mo rating Short-term rating Price Price date
16
Aeropostale Inc. ARO.N Neutral N/A US$13.76 17 Dec 2012
16
Affymetrix Inc. AFFX.O Neutral N/A US$3.32 17 Dec 2012
2, 4, 5, 6a, 16, 20
AK Steel Holding Corp AKS.N Neutral (CBE) N/A US$4.48 17 Dec 2012
16
American Tower Corporation AMT.N Buy N/A US$76.90 17 Dec 2012
6b, 7, 16
AMN Healthcare Services AHS.N Sell N/A US$11.80 17 Dec 2012
4, 5, 6a, 6c,
Anadarko Petroleum Corp.
7, 13, 16, 22 APC.N Buy N/A US$74.88 17 Dec 2012
16
ANN, Inc. ANN.N Buy N/A US$33.49 17 Dec 2012
2, 4, 5,
Annaly Capital Management
6a, 6b, 6c, 7, 16 NLY.N Neutral N/A US$14.19 17 Dec 2012
16
ATMI, Inc. ATMI.O Sell N/A US$20.18 17 Dec 2012
1, 4, 5, 6a, 6c, 7, 16
Avista Corp AVA.N Buy N/A US$24.33 17 Dec 2012
16
Avon Products AVP.N Sell N/A US$13.98 17 Dec 2012
5, 16
BioMarin Pharmaceutical BMRN.O Buy N/A US$49.70 17 Dec 2012
16, 18b
BorgWarner Inc. BWA.N Neutral N/A US$66.46 17 Dec 2012
2, 4, 6a, 6c, 7, 16
Bristol-Myers Squibb BMY.N Neutral N/A US$32.80 17 Dec 2012
6a, 16
Calpine Corporation CPN.N Buy N/A US$17.93 17 Dec 2012
4, 6a, 6c, 7, 16
CareFusion Corporation CFN.N Buy N/A US$28.26 17 Dec 2012
4, 6a, 16
CB&I CBI.N Buy N/A US$41.80 17 Dec 2012
CBL & Associates Properties,
16 CBL.N Sell N/A US$21.34 17 Dec 2012
Inc.
2, 4, 5, 6a, 6c, 7, 12, 16
CME Group Inc. CME.O Buy N/A US$51.61 17 Dec 2012
2, 4, 5, 6a, 6c, 7, 16
Comcast Corporation CMCSA.O Buy N/A US$37.54 17 Dec 2012
2, 4, 6a,
Community Health Systems
16 CYH.N Buy N/A US$30.32 17 Dec 2012
2, 4, 5, 6a, 6b, 6c, 7, 16
ConocoPhillips COP.N Sell N/A US$58.28 17 Dec 2012
6a, 16
Constellation Brands Inc. STZ.N Buy N/A US$35.55 17 Dec 2012
2, 4, 6a, 16
Continental Resources CLR.N Buy N/A US$73.14 17 Dec 2012
4, 5, 6a, 6c, 7, 16
Delta Air Lines Inc. DAL.N Buy N/A US$11.23 17 Dec 2012
2, 4, 5, 6a, 6c, 7, 13,
DIRECTV Group Inc.
16, 22 DTV.O Neutral N/A US$50.56 17 Dec 2012
6a, 6b, 6c, 7, 16
Dow Chemical DOW.N Buy N/A US$31.82 17 Dec 2012
16
Dynegy, Inc. DYN.N Sell N/A US$18.84 17 Dec 2012
16
Edwards Lifesciences Corp EW.N Sell N/A US$91.87 17 Dec 2012
4, 5, 6a, 6b, 6c, 7, 16, 18c
EMC Corporation EMC.N Buy N/A US$25.27 17 Dec 2012
6a, 6c, 7, 16, 18d
Emerson Electric Co. EMR.N Neutral N/A US$52.25 17 Dec 2012
16
Energizer Holdings ENR.N Buy N/A US$80.09 17 Dec 2012
4, 6a, 16
EQT Corporation EQT.N Buy N/A US$57.28 17 Dec 2012
16
Ferrellgas Partners FGP.N Sell N/A US$17.79 17 Dec 2012
16
Foot Locker Inc. FL.N Buy N/A US$33.31 17 Dec 2012
6a, 6b, 6c, 7, 14, 16, 18a
Ford Motor Co. F.N Buy N/A US$11.39 17 Dec 2012
2, 4, 5, 6a, 6b, 6c, 7,
General Electric Co.
16, 18e, 22 GE.N Buy N/A US$21.93 17 Dec 2012
16
Gilead Sciences GILD.O Buy N/A US$75.46 17 Dec 2012
13, 16
Halliburton Co. HAL.N Buy N/A US$33.54 17 Dec 2012
2, 4, 5, 6a, 6b, 6c, 7, 16, 22
Hewlett-Packard HPQ.N Sell N/A US$14.21 17 Dec 2012
16
Hexcel Corporation HXL.N Sell N/A US$25.81 17 Dec 2012
16
Hospira Inc. HSP.N Sell N/A US$31.89 17 Dec 2012
16
Immunogen Inc IMGN.O Sell N/A US$12.95 17 Dec 2012
2, 4, 5, 6a, 16
Infoblox Inc. BLOX.N Buy N/A US$18.25 17 Dec 2012
16
Informatica Corporation INFA.O Buy N/A US$30.33 17 Dec 2012
4, 6a, 6b, 6c, 7, 16, 22
International Paper IP.N Buy N/A US$38.16 17 Dec 2012
16
Intersil Inc. ISIL.O Neutral N/A US$8.07 17 Dec 2012
16
Jazz Pharmaceuticals PLC JAZZ.O Buy N/A US$50.93 17 Dec 2012

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Company Name Reuters 12-mo rating Short-term rating Price Price date
13, 16
JC Penney Company, Inc. JCP.N Neutral N/A US$20.64 17 Dec 2012
2, 4, 5, 6a, 6b,
JPMorgan Chase & Co.
6c, 7, 16, 18f, 22 JPM.N Buy N/A US$43.48 17 Dec 2012
5, 16
Kansas City Southern KSU.N Sell N/A US$82.49 17 Dec 2012
16
Kennametal Inc. KMT.N Neutral N/A US$39.64 17 Dec 2012
6b, 6c, 7, 16
KeyCorp KEY.N Buy N/A US$8.39 17 Dec 2012
16
KLA-Tencor Corp. KLAC.O Buy N/A US$47.35 17 Dec 2012
4, 6a, 13, 16
Las Vegas Sands Corp. LVS.N Buy N/A US$46.57 17 Dec 2012
16
Layne Christensen Company LAYN.O Sell N/A US$23.41 17 Dec 2012
6b, 6c, 7, 16
Lazard LAZ.N Sell N/A US$30.13 17 Dec 2012
4, 5, 6a, 6b, 6c, 7,
Lincoln National Corp.
16 LNC.N Buy N/A US$26.00 17 Dec 2012
16
Louisiana-Pacific LPX.N Sell N/A US$17.69 17 Dec 2012
16
Lowe's Companies, Inc. LOW.N Buy N/A US$35.85 17 Dec 2012
6a, 6b, 7,
LPL Financial Holdings Inc
16 LPLA.O Sell N/A US$28.01 17 Dec 2012
4, 5, 6a, 6c, 7, 16
MasterCard Inc. MA.N Sell N/A US$489.32 17 Dec 2012
16
McKesson Corporation MCK.N Buy N/A US$98.63 17 Dec 2012
16, 20
Meritage Corporation MTH.N Sell (CBE) N/A US$38.11 17 Dec 2012
2, 4, 5, 6a,
MGM Resorts International
13, 16, 22 MGM.N Neutral N/A US$11.42 17 Dec 2012
2, 4,
Midstates Petroleum Company
5, 6a, 16 MPO.N Neutral N/A US$7.37 17 Dec 2012
16
Mohawk Industries, Inc. MHK.N Buy N/A US$81.96 17 Dec 2012
16
Monster Beverage Corp. MNST.O Buy N/A US$52.76 17 Dec 2012
16
New York Times Co. NYT.N Neutral N/A US$8.41 17 Dec 2012
2, 4, 5, 6a, 6b, 7,
Newcastle Investment
16 NCT.N Buy N/A US$8.66 17 Dec 2012
16
NRG Energy Inc. NRG.N Buy N/A US$23.45 17 Dec 2012
16
NVIDIA Corporation NVDA.O Buy N/A US$12.54 17 Dec 2012
16
Olin Corp. OLN.N Neutral N/A US$21.54 17 Dec 2012
2, 4, 5, 6a, 6c, 7, 13, 16
Oneok Partners OKS.N Neutral N/A US$52.89 17 Dec 2012
16
Owens & Minor Inc. OMI.N Sell N/A US$28.17 17 Dec 2012
2, 4, 6a, 6c, 7, 16
PPL Corporation PPL.N Buy N/A US$29.27 17 Dec 2012
2, 4, 5, 6a,
Principal Financial Group
6b, 7, 16 PFG.N Neutral N/A US$27.85 17 Dec 2012
6b, 7, 16
Progressive Corporation PGR.N Neutral N/A US$21.27 17 Dec 2012
16, 20
RadioShack Corporation RSH.N Sell (CBE) N/A US$2.41 17 Dec 2012
2, 4, 5, 6a, 6b,
Regions Financial Corp.
6c, 7, 16 RF.N Neutral N/A US$6.91 17 Dec 2012
6a, 16
Reliance Steel & Aluminum RS.N Buy N/A US$59.94 17 Dec 2012
16
Safeway, Inc. SWY.N Sell N/A US$17.81 17 Dec 2012
5, 16
Seattle Genetics, Inc. SGEN.O Neutral N/A US$23.90 17 Dec 2012
2, 4, 5, 6a, 16
ServiceNow Inc NOW.N Sell N/A US$31.10 17 Dec 2012
6c, 7, 16, 18g
Starbucks Corp. SBUX.O Buy N/A US$54.58 17 Dec 2012
2, 4,
Tanger Factory Outlet Centers
6a, 16 SKT.N Buy N/A US$33.55 17 Dec 2012
2, 4,
Targa Resources Partners, L.P
5, 6a, 13, 16 NGLS.N Buy N/A US$34.88 17 Dec 2012
6a, 16
TECO Energy Inc. TE.N Sell N/A US$16.83 17 Dec 2012
16
Tellabs Inc. TLAB.O Neutral N/A US$3.29 17 Dec 2012
2, 4, 5, 6a, 16
Tesoro Corp. TSO.N Buy N/A US$44.69 17 Dec 2012
6c, 7, 16, 18h
Textron Inc. TXT.N Buy N/A US$24.35 17 Dec 2012
16
The Boston Beer Co. SAM.N Sell N/A US$138.87 17 Dec 2012
The Hartford Financial Services
2, 4, 6a, 6b, 6c, 7, 13, 16 HIG.N Buy N/A US$22.05 17 Dec 2012
Group
16, 18i
Thermo Fisher Scientific Inc. TMO.N Buy N/A US$64.80 17 Dec 2012

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Company Name Reuters 12-mo rating Short-term rating Price Price date
2, 4, 5, 6a, 6c, 7, 16, 18j
Time Warner Inc. TWX.N Buy N/A US$47.94 17 Dec 2012
5, 6b, 6c, 7, 16
U.S. Bancorp USB.N Buy N/A US$32.09 17 Dec 2012
13, 16
United Rentals, Inc URI.N Buy N/A US$42.54 17 Dec 2012
16
VeriFone Systems PAY.N Buy N/A US$28.82 17 Dec 2012
4, 6a, 16
Warner Chilcott WCRX.O Buy N/A US$11.60 17 Dec 2012
16
Western Refining WNR.N Neutral N/A US$31.04 17 Dec 2012
16, 18k
Whole Foods Market, Inc. WFM.O Buy N/A US$89.84 17 Dec 2012
16
Windstream Corporation WIN.O Neutral N/A US$8.82 17 Dec 2012
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing
date

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

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18j. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position
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valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention:
Publishing Administration.

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