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					                                                                                              MORGAN STANLEY RESEARCH
                                                                                              Morgan Stanley & Co. LLC

          MARCH 21, 2012

North                                                                                                    HIGHLIGHTS

                                                                                              19 Chemicals Gases — Risk Is on,
                                                                                                 but Some Gas Should Be Too

          PERSPECTIVES                                                                              Vincent Andrews, Charles A. Dan, Ian Bennett

                                                                                              31 Medical Technology
                                                                                                 The Day After Alzheimer’s
                                                                                                    David R. Lewis, James Francescone,
                                                                                                    Karl Bradshaw, Sean Laaman

                                                                                              33 Telecom Services
                                                                                                 Verizon Wireless:
                                                                                                 A $100 Billion Valuation ‘Prize’
                                                                                                    Simon Flannery, Nick Delfas

          Strategy and Economics                                                             Opinion Changes: Downgrades p
           3    Morgan Stanley Best Ideas List                                                13    IHS Inc. Lift from Crude Prices May be Fleeting;
           5    US Equity Strategy                                                                  Move to Equal-weight
                Correlations, Conflicts and                                                         Suzanne E. Stein, Toni Kaplan
                Three Pair-Trading Themes                                                     15    Red Hat Story Clearly Strong;
                Adam S. Parker et al.                                                               Further Outperformance Less Clear
           7    US Economics                                                                        Adam Holt, Keith Weiss, Jonathan Parker
                The Unemployment Rate Puzzle                                                  17    Vertex Pharmaceuticals Valuation Concerns,
                David Greenlaw                                                                      Pipeline Risks Lead Us to Downgrade
           9    US Credit Strategy                                                                  David Friedman, Marshall Urist, Sara Slifka, Brienne Kugler
                Three Changes in the Market Structure of                                     New Coverage
                High Grade Credit
                                                                                              19    Chemicals Gases — Risk Is On,
                Rizwan Hussain, Peter Mallik
                                                                                                    but Some Gas Should Be Too
          11    Global Cross-Asset Strategy                                                         Vincent Andrews, Charles A. Dan, Ian Bennett
                Correlation Regime Change
                                                                                              21    Computer Services & IT Consulting
                Gregory Peters et al.
                                                                                                    Fed IT: Opportunity for Stock Picking;
                                                                                                    Overweight BAH and CACI
                                                                                                    Nathan Rozof, Glenn T. Fodor, Matt Lipton

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                                                                                     MORGAN STANLEY RESEARCH
                                                                                     March 21, 2012
                                                                                     Investment Perspectives — US and the Americas

Table of Contents (Continued)
Industry Analysis                                                                  Company Analysis
 23   Internet Survey Says:                                                         35   Chevron
      Upside in Priceline’s European Bookings Growth                                     Compelling Long-Term (2014-plus) Major Story
      Scott Devitt, Nishant Verma, Jordan Monahan, Andrew Ruud,                          Evan Calio, Marko Lazarevic, Todd Firestone, Jacob Dweck
      Zachary Arrick                                                                37   Colgate-Palmolive Addressing Bear Concerns
 25   Large-Cap Banks Raising the Bar                                                    Dara Mohsenian, Ruma Mukerji, Kevin Grundy, Alison M. Lin
      Betsy L. Graseck, Michael J. Cyprys                                           39   New York Community Bancorp
 27   Machinery The Global Mining Machinery Handbook                                     Why NYB Might Cut Its Dividend (and Might Not)
      Vance H. Edelson, Vikram Malhotra, Mili Pothiwala,                                 Ken A. Zerbe, Josh Wheeler, Jonathan Katz, Giselle Cheung
      Guillermo Peigneux, Stephanie Tan                                             41   VF Corp. The North Face: Pinnacle of
 29   Managed Care March Madness…SCOTUS Edition                                          VFC’s Portfolio and Key Driver of Growth
      Doug R. Simpson, Melissa McGinnis, Colin Weiner                                    Joseph Parkhill, Jane Zhao, Joseph Wyatt
 31   Medical Technology The Day After Alzheimer’s                                 International
      David R. Lewis, James Francescone,
                                                                                    43   Localiza Rent A Car Good Story, but Fully Priced
      Karl Bradshaw, Sean Laaman
                                                                                         Nicolai Sebrell, Augusto Ensiki, Ricardo L. Alves
 33   Telecom Services Verizon Wireless:
                                                                                    45   Samsung Electronics
      A $100 Billion Valuation ‘Prize’
                                                                                         All About Smartphones; Overweight
      Simon Flannery, Nick Delfas
                                                                                         Young Suk Shin, Keon Han
                                                                                    47   Telstra Corporation Sustainable Dividend and
                                                                                         Earnings Growth - Assuming Coverage at Overweight
                                                                                         Mark Goodridge, Andrew McLeod

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                                    US Economic Outlook
                                    Value                                   2010      2011e     2012e      2013e

                                    Real GDP Growth (4Q/4Q, %)               3.1         1.6       2.2        1.7
                                    Core CPI Inflation (4Q/4Q, %)            0.6         2.2       2.3        2.2
                                    e = Morgan Stanley Research estimates

                                                                                     MORGAN STANLEY RESEARCH

                                                                                     March 21, 2012
                                                                                     Investment Perspectives — US and the Americas


  Best Ideas
Best Ideas are our leading stock investment insights — the                           corroborate our analysts' investment theses and drive a dis-
best combination of highly differentiated research, favorable                        cernable change in market perceptions.
risk-reward profiles, and clear catalysts:                                           Additions and removals of stocks are published as part of
Differentiated research. We seek out-of-consensus thinking                           regular, stock-specific reports.
that incorporates fresh data and analysis. Analysts are ex-                          Important Note: Best Ideas is not and should not be con-
pected to identify "what's in the price" and present a compelling                    sidered a portfolio. Each investment idea is chosen based on
challenge to market assumptions on key investment debates.                           its own merit and without any consideration of the other in-
Favorable risk-reward profiles. Scenario analysis lies at the                        vestment ideas chosen. Specifically, there has been no effort
heart of our disciplined approach to research, so we look be-                        to mitigate the risks of investing in any collective group of Best
yond single-point estimates and price targets. We examine the                        Ideas. Concepts important to a balanced portfolio, such as
full risk-reward profile of the investment, assessing the range of                   negative correlation and diversification, have not been con-
plausible outcomes and the scenario skew as indicators of                            sidered. Treating Best Ideas as a portfolio will subject you to
analyst conviction.                                                                  the risk of losing all or a substantial portion of your investments.
Clear catalysts. We require a clear roadmap for upcoming                             Morgan Stanley Research
data and events in the following few months that can help                            Stock Selection Committee
                                                                                                     Consensus  Growth
                                      Mar 20    Price         Valuations ($)            EPS ($)*       EPS ($)* in EPS*      P/E*                    P/B
Company                    Ticker     Price($) Target       Bull Base Bear           2012 2013      2012 2013 2012-2014 2.12    2013             2012 2013
 Apple                     AAPL.O      605.96       720      960       720    405 46.52e 57.57e 43.10e 48.29e       19.9%       13.0      10.5   4.7       3.2
 BorgWarner                BWA.N         83.43       88      100        88     50 5.70e 6.67e 5.47e 6.46e           11.1%       14.6      12.5   3.4       2.6
 CBS Corp.                 CBS.N         31.70       34       42        34     22 2.39e 2.77e 2.34e 2.68e           11.4%       13.3      11.4   2.0       1.8
 CenturyLink               CTL.N         39.15       50       55        50     34 2.45e 2.55e 2.40e 2.42e           (0.8%)      16.0      15.3   1.2       1.2
 RenaissanceRe             RNR.N         74.59       87      104        90     60 9.63e 11.03e 8.21e 8.97e          14.0%          7.7    6.8    1.1       1.0
 Schlumberger              SLB.N         75.71      100      140       100     54 4.69e 6.03e 4.69e 5.72e               –       16.1      12.5   2.8       2.5
 Teradata                  TDC.N         66.78       75      100        75     50 2.71e 3.20e 2.62e 3.02e           15.1%       24.6      20.9   6.1       4.8
 Target                    TGT.N         58.01       64       70        64     42 4.23e 4.76e 4.23e 4.82e           18.1%       13.7      12.2   2.5       2.5
 Under Armour              UA.N          96.58      106      130       106     62 2.34e 3.30e 2.32e 2.99e           35.2%       41.3      29.3   6.5       5.3
 Union Pacific             UNP.N       111.84       132      144       132     94 8.20e 9.40e 8.08e 9.24e           14.5%       13.6      11.9   2.8       2.5

                                           Dividend Yield          FCF Yield Ratio               RNOA             Net Debt/EBITDA           Interest Cover
Company                    Ticker         2012      2013        2012         2013         2012        2013       2012        2013        2012       2013
 Apple                     AAPL.O           0.0%      0.0%         8.8%      10.4%        NM            NM       NM          NM          NM          NM
 BorgWarner                BWA.N            0.0%      0.0%         3.9%        5.5%     22.4%e      23.8%e       0.0e        NM          NM          NM
 CBS Corp.                 CBS.N            1.3%      1.4%         9.5%      11.6%      11.1%e      12.5%e       1.7e        1.3e        21.0e     23.4e
 CenturyLink               CTL.N            7.4%      7.4%         18.1%     12.8%       5.7%e       6.3%e       2.5e        2.4e        7.1e       8.1e
 RenaissanceRe             RNR.N            1.4%      1.5%           NM         NM      16.4%e      16.7%e       1.4e        1.3e        28.4       30.0
 Schlumberger              SLB.N            1.5%      1.5%         3.6%        3.7%     15.7%e      18.6%e       0.6e        0.5e        32.6       41.3
 Teradata                  TDC.N            0.0%      0.0%         2.8%        4.1%     41.6%e      45.3%e       NM          NM          NM          NM
 Target                    TGT.N            2.2%      2.5%         6.7%      24.1%       9.6%e       9.4%e       2.6e        2.0e         5.8        7.2
 Under Armour              UA.N             0.0%      0.0%         0.5%        2.3%     20.1%e      23.8%e       NM          NM           NA         NA
 Union Pacific             UNP.N            2.2%      2.5%         4.8%        5.3%     15.3%e      16.2%e       1.2         1.1         12.4       14.1
Source: Thomson Reuters, Morgan Stanley Research
* Uses consensus methodology; all other metrics use ModelWare methodology. For valuation methodology and risks associated with any price targets above,
please email with a request for valuation methodology and risks on a particular stock.

                                                                      MORGAN STANLEY RESEARCH

                                                                      March 21, 2012
                                                                      Investment Perspectives — US and the Americas


 Best Ideas
Research Updates on Best Ideas
Apple (AAPL, $605.96, Overweight, In-Line Industry view)                                                         Katy L. Huberty
Return of cash broadens investor base. Apple announced a $2.65 per share quarterly dividend, implying a 1.8% annual yield,
which is at the low end of expectations. However, a $3 billion-plus annual share repurchase program is incremental to our original
expectations and increases the payout ratio toward what we ascertained to be the midpoint of buy-side expectations. A dividend is
the most favorable outcome for shareholders, in our opinion, as it could boost long-term stock performance and expand the investor
base. Since 2002, the top one-third of tech stocks ranked by dividend yield has outperformed the bottom third by 14%, according to
data from Morgan Stanley’s US Equity Strategy team. Additionally, Apple’s shareholder base has a lower exposure to income and
yield funds compared to tech peers, according to Thomson Reuters, suggesting the dividend could attract new investors.

                                                                             See “Return of Cash Broadens Investor Base”, March 19, 2012

CenturyLink (CTL, $39.15, Overweight, In-Line Industry view)                                                     Simon Flannery
4Q11 Tracker: A solid year in prospect for the industry. Most carriers provided some 2012 guidance with 4Q11 results, which
was broadly in line with expectations. Companies are generally expecting stable to improved trends this year, with capex remaining
under control. Among the stocks we continue to favor are higher yielding names such as CenturyLink.

                                          See “4Q11 Tracker: Margins Squeezed as iPhones Ramp, Better Enterprise Trends”, March 19, 2012

Pension/OPEB: Cash contributions in prospect. CenturyLink’s net pension and OPEB deficit CenturyLink expanded in 2011,
driven by a combination of weak asset returns and a lower discount rate. The pension funding level is much better than for OPEB,
although CenturyLink, at 87%, has the strongest pension funding position. The company plans to contribute some $50 million to
pension plans in 2012, but this could rise to $500 million next year. We note that CenturyLink faces important union negotiations this
year, which could push more of the healthcare burden onto employees and retirees.

                                                 See “Pension / OPEB Deficits Rise Again, Watch Labor Negotiations in 201”, March 16, 2012

                                                                                           MORGAN STANLEY RESEARCH

                                                                                           March 21, 2012
                                                                                           Investment Perspectives — US and the Americas

Strategy and Economics
January 22, 2012                                                                           Exhibit 2
                                                                                           30-Day Correlation Between the S&P 500 and the
US Equity Strategy                                                                         Dollar/Euro Shows a Sharp Decline YTD
Correlations, Conflicts and Three                                                             100%
                                                                                                                        30-Day Rolling Correlation:
                                                                                                                      S&P 500 & $/Euro Daily Returns

Pair-Trading Themes                                                                            80%             EUR

Morgan Stanley & Co. LLC       Adam S. Parker, Ph.D.
                               Brian T. Hayes, Antonio Ortega, Adam Gould,
                               Phillip Neuhart, Yaye Aida Ba

Our US equity market exposures have been far too defensive                                    (40%)
year-to-date. However, from our vantage point, global assets
are sending mixed signals, and the fundamentals do not com-                                           07         08           09            10         11   12
pletely support a risk-on trade. For example, thus far this year
                                                                                           Source: Bloomberg, Morgan Stanley Research
the S&P 500 has risen sharply, the 10-year Treasury yield has
moved sideways until a recent breakout, gold is up year-to-date                            Oil: In the crude oil market, Brent is trading near $125, up 16%
but fallen from its highs, and crude has trended higher (Exhibit                           year-to-date. Inflections between the correlation of S&P 500
1). Does the very recent spike in the 10-year yield represent a                            returns and Brent oil have defined new risk regimes. We know
catch-up with risk assets like equities and crude, or is it solely                         that rising Brent oil can ultimately impact S&P 500 returns (see
Fed policy related? Doesn’t the dollar need to weaken for US                               March 12th, 2012: High Oil / Gas at the Pump: What’s the
companies to make more money? Is “peak” oil a problem for                                  Impact on Stocks?). We are mindful that the correlation be-
the US economy?                                                                            tween Brent and the S&P 500 seems to be modestly inflecting
                                                                                           and may signal a new, more risk-averse regime. Last week
Exhibit 1                                                                                  there was some supportive price action for risk, however, as
Is the Recent Spike in the 10-Year Treasury Yield a                                        there were a few days when Brent was modestly down and the
Catch-Up with Risky Assets or Something Else?                                              S&P 500 rallied. We think a lower correlation between oil and
                                Year-to-Date Performance                                   the S&P 500 is necessary for further market appreciation (i.e.,
                                 Through March 15, 2012
                                                                                           we don’t think the S&P 500 can continue to rally if oil continues
                                                                                           to rally).
                                                                                           Exhibit 3

                                                                                           Correlation between Brent Oil and S&P Remains
                                                                                           High, and Prior Inflections Were Telling
                                                                                                                        100-Day Rolling Correlation:
                                                                                                                       S&P 500 & Brent Daily Returns
    2%                                                                                         80%

    0%                                                                                         60%
              Brent         S&P 500          Gold          $/Euro       10-Yr Yield*
Source: Bloomberg, Morgan Stanley Research. *Change in 10-year yield is a YTD difference
Dollar/Euro: Year-to-date, the US dollar-euro exchange rate is                                  0%
essentially unchanged, even as the S&P 500 has rallied 11.5%
through the 1400 level. Over recent years, rising equity values
have usually been associated with a weakening dollar, and vice
versa. The 30-day rolling correlation between the S&P 500 and                                 (60%)
                                                                                                      07         08           09            10         11   12
the dollar/euro shows that the high correlation that held for
                                                                                           Source: Bloomberg, Morgan Stanley Research
much of 2009-2011 has broken down. Our prior work has
shown that for every 1% the dollar strengthens against a                                   Industrial metals: The correlation between industrial metals
trade-weighted basket of currencies, S&P 500 earnings are                                  and the S&P 500, which is the highest it has been since 1980,
negatively impacted by 97 basis points. Hence, the dollar’s                                indicates that the risk trade persists. (Remember, correlation
holding flat against the euro is not consistent with the big move                          does not mean that rates of return have been equivalent, it
in the US stock market.                                                                    simply means that on a day-to-day basis the assets tend to

                                                                                                MORGAN STANLEY RESEARCH

                                                                                                March 21, 2012
                                                                                                Investment Perspectives — US and the Americas

Strategy and Economics
move in the same direction. Industrial metals have actually                                     Our conclusion is that the correlations between the US
been a bit soft of late and have risen less rapidly than we would                               equity market and other major asset classes don’t indicate
have expected given the risk-on trading environment).                                           that we should remain in a risk-seeking environment.

This high correlation indicates that growth is important today,                                 What do the underlying data show? In our judgment the data
which is why we have recently focused on China as a potential                                   don't generally support adding additional risk today, and a
growth driver and why we think upside risk to our defensive                                     bar-belled approach to risk is probably more tactically prudent.
positioning likely stems from a stronger-than-expected Q2 for                                   Further, our conviction in some of the structural bear case
the Chinese economy. At present (famous last words) we are                                      remains firm.
less worried about being “carried out” from surprisingly strong
US or European economic data than we are from a strength-                                       Pair trade ideas. Given the balanced near-term economic
ening China.                                                                                    news and lack of near-term negative catalysts, we think a
                                                                                                bar-belled investment strategy is likely prudent and recom-
Exhibit 4                                                                                       mend three pair-trading themes.
Industrial Metals and Equities Are Very Correlated
                                 100-Day Rolling Correlation:                                   Trade idea 1: Semiconductors over Machinery: Semiconduc-
                           S&P 500 & Industrials Metals Daily Returns
    80%                                                                                         tors have all guided down while machinery companies continue
                                                                                                to beat and raise. We prefer technology over industrials given
                                                                                                better capital deployment, lower growth expectations and more
    40%                                                                                         compelling valuation, and think the risk-reward of semicon-
    20%                                                                                         ductors is better than machinery.

                                                                                                Trade idea 2: Banks over Domestic Consumer Companies:
   (20%)                                                                                        Generally, banks and consumer discretionary stocks have
                                                                                                exposure to the same parts of the US economy, namely em-
           80   82   84   86   88   90   92   94   96   98   00   02   04   06   08   10   12   ployment, housing, and interest rates. While banks have rallied
Source: Bloomberg, Morgan Stanley Research                                                      year-to-date, they are far behind the recovery in many con-
                                                                                                sumer discretionary areas since the lows of 2009. Given the
Gold and Fed action: The correlation between the S&P 500
                                                                                                harsh pressure on banks’ multiples until recently due to regu-
and gold has been very high, something that had been trou-
                                                                                                latory issues, and with Moody’s not weighing in with potential
bling to some gold bugs looking for diversification away from
                                                                                                ratings changes until May 15th, pressure might continue to
the S&P 500. Recently, however, the correlation has broken
                                                                                                abate on the banks in the near term. The capital markets
down as the S&P 500 has broken out while gold has modestly
                                                                                                activities will also likely result in reasonably strong quarters.
retreated. Our view as expressed in the Cross-Asset Navigator
                                                                                                Longing banks as a trade against select restaurants and re-
product has been to like gold, as we don’t think deflation,
                                                                                                tailers appears prudent.
without further government intervention, is likely. That is the
case against gold that would resonate most with us. The less
                                                                                                Trade idea 3: Aerospace and Defense over Major Oil Com-
dovish FOMC minutes have led the consensus to believe that
                                                                                                panies: We continue to be underweight energy, as we wrote
further unconventional policy easing is unlikely. Our Chief US
                                                                                                about last week. The specter of rising oil prices due to supply
Economist Vincent Reinhart believes that further Federal Re-
                                                                                                constraints makes it difficult for us to see an oil price that will be
serve action has a 75% chance of happening by the middle of
                                                                                                good for the energy equities. Low sentiment persists for de-
the year, an increasingly contrarian call.
                                                                                                fense. We like BA and GD over XOM and COP.

The 10-Year Treasury: Last week, the 10-year Treasury yield                                     Stock prices: Boeing (BA $75), General Dynamics (GD, $73), ExxonMobil (XOM, $86),
                                                                                                ConocoPhillips (COP, $77)
rose over 25 basis points and may be beginning to break out of
its multi-month channel. The breakout has caused the 100-day
correlation between 10-year total return and the S&P to mod-
erate slightly from its extreme lows. As we have written about
extensively, extreme 10-year real yields have historically been
coincident with lower price-to-forward earnings multiples for the
S&P 500.

                                                                                   MORGAN STANLEY RESEARCH

                                                                                   March 21, 2012
                                                                                   Investment Perspectives — US and the Americas

Strategy and Economics
March 15, 2011                                                                     This is why many economists – and some Fed policymakers –
                                                                                   believe the unemployment rate could rise in the months ahead
US Economics                                                                       even if job growth continues to pick up.
The Unemployment Rate Puzzle
                                                                                   2) Demographics. Another fairly conventional explanation
Morgan Stanley & Co. LLC            David Greenlaw                                 involves demographic factors. Certain segments of the popu-
                                                                                   lation have different degrees of attachment to the labor market.
The unemployment rate hit 10% in October 2009. Since that                          For example, older individuals are more likely to be retired,
time, the rate has moved steadily lower and now stands at                          younger folks are more likely to be pursuing an education, and
8.3%. The sharp decline in the jobless rate has been somewhat                      women of child-bearing age tend to be somewhat less likely to
puzzling because GDP growth has averaged just +2.5% since                          be in the job market than men of a similar age. This means that
the fourth quarter of 2009 – a pace that is presumed to be close                   a shift in the mix of the population can change the overall par-
to the economy’s potential and thus should leave the jobless                       ticipation rate. Researchers at the New York Fed recently
rate little changed. Moreover, since the end of 2010, the un-                      published an analysis of the demographic influence on the
employment rate has declined by more than one full percent-                        participation rate (see “Labor Force Exits Are Complicating
age point although real GDP rose just 1.6% during 2011. As is                      Unemployment Rate Forecasts” by Peach, Bethards and Song,
widely known, the recent disconnect between GDP growth and                         December 28, 2011). Their analysis indicates that much – but
the unemployment rate is attributable to a sharp decline in the                    certainly not all – of the decline in the participation rate in the
labor force participation.                                                         past few years can be attributed to demographic shifts.
                                                                                   Moreover, the study finds that the unexplained portion of the
Exhibit 1                                                                          drop in the participation rate is concentrated in classifications
Labor Force Participation Rate Has Been Declining                                  such as older folks and males with less than a high school
                                                                                   education. Using Census Bureau estimates for population
       Civilian Participation Rate: 16 yr +
       (Percent, SA)
                                                                                   growth, we extrapolated the “trend” line calculation through the
                                                                                   end of 2013. The downward impetus in participation associ-
 66                                                                                ated with demographic factors should begin to moderate over
 65                                                                                coming quarters, assuming these population forecasts are
                                                                                   3) Disability Insurance. The third reason for the drop in the
                                                                                   participation rate is related to a sharp jump in disability insur-
 61                                                                                ance beneficiaries. There are currently 8.6 million individuals
 60                                                                                receiving disability insurance – up from about 7 million at the
                                                                                   start of the recession in late 2007. The distinction between a
                                                                                   “normal” discouraged worker and a disability insurance re-
      65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11      cipient is important because while the former might well renew
Note: Shaded areas indicate recession.        Source: Bureau of Labor Statistics
                                                                                   their job search at some point if conditions improve, the latter
                                                                                   are highly unlikely to return to the labor market. We suspect
Why has the participation rate declined so much in recent                          that the most important explanation for the surge in DI appli-
years and where will it go from here? Two of the reasons                           cations is the dramatic extension of unemployment benefits
we cite are fairly conventional, while the third is somewhat                       during the latest recession. As Fed Chairman Bernanke has
unusual and has important implications for the future course of                    pointed out, the duration of unemployment is an important
labor force participation.                                                         factor in determining the likelihood that an individual will be-
                                                                                   come reemployed. Since March 2009, individuals in most
1) Discouraged workers. The most obvious explanation for                           states have been eligible for 99 weeks of unemployment
the decline in the labor force participation rate is that some                     benefits. As individuals with relatively dim prospects for re-
unemployed individuals have become so disenchanted with                            employment get closer to exhausting these benefits, they seem
their prospects for finding a new job that they have stopped                       to be gravitating to the DI program.
looking – the so-called discouraged worker effect. Presuma-
bly, many of these individuals could reenter the job market if
they became convinced that their job prospects have improved.

                                                                      MORGAN STANLEY RESEARCH

                                                                      March 21, 2012
                                                                      Investment Perspectives — US and the Americas

Strategy and Economics
Recall that the NY Fed study discussed earlier found that the         What about the unemployment rate? Both the household
biggest unexplained declines in participation involved older          and establishment survey measures of employment show
workers and males with a low education. These cohorts seem            average monthly employment gains of about +155,000 in 2011
to be among the most likely to pursue disability insurance. In        (adjusting the household employment series to a payroll con-
the case of older workers, reemployment options might be              cept). Assuming that the participation rate rises gradually to
limited and DI would offer a bridge to social security. In the        64.2% over 2012, employment would need to average
case of less-educated males, there may be limited opportuni-          +185,000 per month to keep the jobless rate steady at 8.3%. If
ties for high-wage-paying jobs.                                       the participation rate holds steady from there, the economy
                                                                      would need to generate about 120,000 jobs per month to
For purposes of understanding the link between the labor force        maintain a stable unemployment rate. Alternatively, if job
participation rate and DI, it’s important to keep in mind that an     growth were to average 200,000 per month and we apply the
individual receiving unemployment benefits is almost certain to       same assumptions for population growth and participation
respond to an inquiry from the Labor Department by indicating         rates, the unemployment rate would be 8.2% at the end of 2012
that they are actively searching for work. So these folks will be     and 7.6% at the end of 2013. Various combinations of par-
included in the tally of the labor force. However, an individual      ticipation rates and job growth assumptions are shown in Ex-
who has applied for or is considering applying for DI is almost       hibit 2, along with the implied unemployment rate at the end of
certain to say they are not actively searching for a job. Thus,       2013. The shaded cells are the ones that seem most rea-
they will be excluded from the labor force count.                     sonable. (There could still be a fair amount of noise in the
What does all this mean for the participation rate? Since             monthly data because the household survey is based on a
the beginning of the Great Recession in November 2007, the            relatively small sample size.)
labor force participation rate has declined by more than two full     The degree of slack in the economy is going to be a criti-
percentage points (from 66.0 in November 2007 to 63.9 in              cal determinant of monetary policy. And perceptions re-
February 2012). A significant portion of this move can be             garding the amount of slack are closely linked to the unem-
explained by structural trends and shifts in the make-up of the       ployment rate. While some believe that the unemployment rate
population. We estimate these factors account for 0.8 per-            could move significantly higher as discouraged workers reenter
centage point (about one-third) of the overall decline in the         the labor market, we suspect that any upside in participation
participation rate. Our analysis of disability claims suggests        will be relatively modest. Thus, if the recent run of employment
that perhaps 700,000 individuals have dropped out of the labor        gains continues, the unemployment rate should continue to
force in recent years and are now claiming disability. So, the        gradually drift lower. Of course, that’s a big “if.” Mild weather
disability factor may account for 0.3 percentage point of the         and other temporary factors may be contributing to the recent
drop in the participation rate. Finally, we estimate that the         strength in employment growth. The employment results over
discouraged worker effect accounts for about 1.5 million indi-        the next few months should help to clarify the degree of un-
viduals – or 0.6 percentage point.                                    derlying momentum in job creation.
Labor Department statistics suggest that a portion of the “dis-       Exhibit 2
couraged workers” are not looking for work because they be-           Unemployment Rate at End of 2013 Under Alterna-
lieve no jobs are available. These are the folks who may well         tive Scenarios
reenter the labor force at some point. However, some indi-
                                                                                                         Average Monthly Job Growth (000's)
viduals in this classification are not currently looking because of
family responsibilities, lack of transportation, etc. As a rough          Participation
                                                                              Rate (%)                 100             150             200             250
approximation, we suspect that about one-half of those in the
discouraged worker classification will reenter the labor market                      63.6             8.1%            7.4%            6.7%            6.0%
if conditions were to improve modestly (i.e., job growth running                     63.8             8.4%            7.7%            7.0%            6.3%
at a pace of 200,000 per month). A somewhat larger share                             64.0             8.7%            8.0%            7.3%            6.6%
would be likely to reenter if job growth were stronger. However,                     64.2             9.0%            8.3%            7.6%            6.9%
almost all of those who are in the disability insurance program
                                                                                     64.4             9.3%            8.6%            7.9%            7.2%
are not coming back. And there is little reason to believe that
                                                                                     64.6             9.6%            8.9%            8.2%            7.5%
individuals who currently don’t want a job will reenter the labor
                                                                                     64.8             9.8%            9.2%            8.5%            7.8%
market. Thus, we suspect that the participation rate might rise       Source: Morgan Stanley calculations (shaded cells indicate most likely outcomes for a given
only a few tenths of a percent as job prospects improve – far         pace of job growth)

less than some believe is likely.

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

Strategy and Economics
March 16, 2012                                                       correlate a bit better with the projected Tier 1 ratios (with no
                                                                     capital actions) under the Fed’s CCAR than today’s actual
US Credit Strategy                                                   values. While there’s more to valuing financials than a simple
                                                                     capital ratio, credit investors continue to give a non-zero
Three Changes in the Market                                          probability to tail risks developing when pricing credit.
Structure of High-Grade Credit
                                                                     Secular change #1: Lower return/higher risk as the world
Morgan Stanley & Co. LLC   Rizwan Hussain
                                                                     delevers. Sharpe, Sortino and Treynor – these are terms
                           Peter Mallick                             familiar to investors looking to calibrate risk and reward. To
                             non-market participants, the concept is more simply known as
We saw some more evidence of a healthy move to a more                ‘there’s no free lunch’. Either way, we’ve long believed that a
‘idiosyncratic’ risk environment in credit markets in the past       post-crisis secular deleveraging could very possibly result in
week. While many looked to the release of the Federal Re-            higher volatility across both the real economy and, perhaps
serve’s CCAR results as having ‘systemic’ consequences, the          more importantly, our day-to-day financial markets. Disrup-
reality has been emerging valuation differentiation among the        tions, slowdowns and contractions could no longer be navi-
19 tested banks based on those results. The refreshing refo-         gated by spending or leveraging through a cycle, as had often
cus on single-name stories that we now sense among credit            been the case during the most recent recessions.
investors is occurring against a backdrop of three large secular
changes in the way we all value and invest in credit overall. We     Today, that higher volatility is resulting in a less appealing
discuss them below. But first, the CCAR.                             reward/risk proposition for credit, industrials and financials
                                                                     alike relative to pre-crisis levels, as we show in Exhibit 1.
The 2012 CCAR: Less systemic, more idiosyncratic. In our
                                                                     Exhibit 1
2012 Outlook, we noted the potential for the Fed’s 2012 CCAR
results to be a tailwind for bank credit, despite continuing
                                                                     A Fairly Different Reward/Risk Proposition
regulatory and fundamental challenges that would continue to         Post-Crisis in Both Credit and Equities
pressure ROEs and keep large-cap financial spreads wide of            200
industrials in 2012. However, this test is very different from        160
either the Fed’s CCAR of 2009 or last year’s European banking         140
system stress test.                                                   120
For the Fed’s 2009 CCAR, the value in the results came from            60
highlighting (both in aggregate and by specific institution) that      40
approximately $75 billion of capital would need to be raised            0
imminently across the US financial system, given the distress           Apr-03              Apr-05                Apr-07         Apr-09             Apr-11
on balance sheets courtesy of 2008’s crisis and resulting lack                   IG Ind                 IG Util                 IG Fin                  IG Corp
of confidence in financials. That clarity helped systemic risk                   S&P                    IG Ind Avg              IG Util Avg             IG Fin Avg

premiums to recede, capital raises to proceed, and ultimately                    IG Corp Avg            S&P Avg

provided for a broader and sustained relief rally in risky assets.   Notes: For Industrials, Utilities, Finance, and IG Corporates, line is end of month spread
                                                                     divided by the realized volatility of the previous 12 months’ excess returns. For the S&P, line is
                                                                     earnings yield divided by the previous 12 months’ excess returns x 100. Averages are since
For last year’s European banking system stress tests, the value      2003.
                                                                     Source: Morgan Stanley, Bloomberg, Yieldbook.
in the exercise was not in identifying who ‘passed’ or ‘failed’,
but the clarity provided investors about each European institu-      This has also been true of equities (using earnings yield as an
tion’s sovereign holdings, as well as the margin by which            analog to spreads) though equity volatility has fallen compara-
‘passing’ banks actually passed. The 2012 CCAR differs from          tively further. The relationship between the two is somewhat
both of these in that the results are more a reflection of the       expected as they have tracked each other well historically.
banks’ ability to execute on plans to return capital to share-
holders under a stress scenario given that current capital levels    The resulting question then is can we see materially tighter
are healthy across the industry.                                     spreads despite the secularly higher volatility we have seen
                                                                     over the last several years? Perhaps some investors will be
That is not to say that credit valuations are not influenced by      proven right, and there may be a massive and sustained de-
the CCAR results. Quite the contrary, as we’ve seen a beta           cline in financial market volatility – European concerns could
relief rally across the space. In addition, today’s valuations       finally fade and US macro could continue to surprise to the

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

Strategy and Economics
upside. However, we believe that as deleveraging remains a           market as the nominal yield on the IG Cash Index less the 10Y
persistent theme across the private sector, while the opposite       breakeven rate. We found that we’re not yet at a 0% real yield
occurs across the public sector, we should expect higher levels      on corporate credit, but getting uncomfortably close.
of volatility overall. That dampens some of the allure credit has
                                                                     The real risk to investment grade lies in the potential that
historically had from a reward/risk perspective, and risky-asset
                                                                     monetary authorities achieve their stated (and unstated goals):
investors may need to reset expectations of risk/reward metrics
                                                                     1) drive inflation expectations higher and 2) keep term risk-free
on this basis. Indeed any structurally higher level of govern-
                                                                     yields low (through policy including quantitative easing or ex-
ment yields as ‘risk-free’ benchmarks makes valuing corporate
                                                                     tension of maturity of the Fed’s holdings). That form of ‘financial
credit that much more problematic, as the risky-asset proposi-
                                                                     repression’ is one that most modern day credit investors have
tion is increasingly being driven by bigger changes in the
                                                                     not contended with, and yet one that is hardly impossible to
‘risk-free’ level.
                                                                     envision in today’s environment.
Secular change #2: Morphing liquidity picture. Much has
                                                                     The ultra credit bulls will point to Japan, where corporate credit
been made of the drop in corporate bond inventories, and how
                                                                     spreads tightened for years following their financial crisis.
much of the decline can be attributed to pending regulatory
                                                                     Indeed, the ‘Japanification’ potential outcome for credit globally
changes. TRACE volumes have indeed snapped back to
                                                                     is one our global credit strategy team has outlined in the past.
healthy absolute levels this year – even more impressively
                                                                     However, in addition to a number of structural differences
when scaled to much lower corporate bond dealer inventories.
                                                                     between the US and Japan, perhaps one glaring contrast is the
However, a moderately different message emerges when                 inflation backdrop. Persistent and stubborn deflationary trends
scaling TRACE volumes to the overall size of the IG cash bond        in Japan left the real yield proposition of all stripes of fixed
market. TRACE volumes scaled to the overall size of the IG           income assets obviously appealing. However, as US monetary
cash market are essentially at the 30 percentile since 2005.         authorities look to prevent a Japan-style outcome, narrowing
The decline we’ve seen in the June 2009 peak is likely more          real credit yields are suggesting a potentially less bullish out-
secular than cyclical, in our view. Prospects for a sustained        come for US credit overall compared to the Japanese experi-
uplift in dealer-held corporate bonds are relatively challenging,    ence, at least in the near term.
as is continued growth of the IG credit market overall. We
                                                                     So what? Changes will challenge recent history’s valua-
believe investors will likely need to shift modestly from being
                                                                     tion frameworks. While the tone of the above-noted chal-
‘renters’ to being ‘owners’ of credit, as the liquidity dynamic of
                                                                     lenges is negative for credit markets, there are some glimmers
credit investing has changed. Lower liquidity doesn’t neces-
                                                                     of hope. The recent outsized back-up in Treasury yields has
sarily imply wider risk premiums, as a look to other investment
                                                                     created a better entry point for long credit positions, and this
classes would confirm, but this is likely a multiyear phenome-
                                                                     relieves some of the tensions we have regarding ‘real yields’.
non investors will contend with.
                                                                     More convincing adding of risk will come with some stability in
Secular change #3: Financial repression’s effect on credit.          risk-free yields at these levels, not just higher absolute levels.
This effect is admittedly hotly debated in economic circles, with
                                                                     But ultimately, the three noted challenges above will test the
far-ranging consequences in financial markets. But essentially
                                                                     reliance on historical credit valuation frameworks. Indeed,
it comes down to assessing whether formal policy or actions
                                                                     much of the aggregate spread premium in investment grade
are ‘taxing’ bondholders and savers to liquidate public and
                                                                     isn’t necessarily driven by expectations of defaults or even
private debt. Typically, financial repression involves a strong
                                                                     ratings transition. Liquidity considerations and other factors
connection between financial institutions, a central bank and
                                                                     play an outsized role. Many market participants indeed make
government policy. While there is no outright policy today,
                                                                     parallels to the early 1990s credit markets and suggest today’s
elements of that connection may be prevalent.
                                                                     credit markets are moving toward a similar market structure.
But for credit investors, what’s the real near-term impact?          Smaller new issue transactions, a wider breadth of issuers,
Despite the constructive view on credit we outlined in our 2012      less ‘renting’ of financial assets replaced by more ‘ownership’
Outlook, we also believed that investment grade would un-            against a backdrop of moderating returns as leverage leaves
derperform high yield in 2012. More pointedly, with the Fed          the system – these will all be healthy outcomes. But the ad-
likely to be looking to prop up inflation expectations while at-     justment process will take some time and serve as a headwind
tempting to cap longer-term yields, encouraging both borrow-         to spreads now, given the outsized rally we’ve seen in just a
ing and consumption, the prospects for increasingly narrow           few short months. (For full details, please see our Credit Basis
real yields on IG credit can’t be dismissed. That outcome            Report of March 16, 2012.)
would certainly leave HY that much more attractive just given
the materially higher nominal yields in high yield markets today.
In our full report, we approximated the real yield of the IG

                                                                        MORGAN STANLEY RESEARCH

                                                                        March 21, 2012
                                                                        Investment Perspectives — US and the Americas

Strategy and Economics
March 19, 2012                                                          Yet correlation estimates can be effectively hijacked by dif-
                                                                        ferentials in incremental step size or daily volatility.
Global Cross-Asset Strategy                                             An example best illustrates this. In Exhibit 1, we plot two par-
Correlation Regime Change                                               allel lines, y1 and y2, to represent the price time series of two
                           Gregory Peters
                                                                        securities. The correlation between the two is obviously 1.
Morgan Stanley & Co. LLC
                                 Now if we add some noise to y2 (using a random draw from a
                           Neil McLeish, Gerard Minack, Jason           uniform distribution bounded by 0 and 10) and call this new line
                           Draho                                        y3, the correlation between y1 and y3 is still very close to 1.
                                                                        This correlation measure seemingly works well except that if
Determining whether the market rally will continue is not as            we examine daily returns instead, y1’s correlation with y2 is
simple as asking whether it will continue to be ‘risk on’.              0.70, but its correlation with y3 is only 0.18. Despite the low
Recent price actions in equities, Treasuries, the USD and gold          daily return correlation of y3 and y1, the investor still ends up
are making it difficult to determine whether it’s even still risk on.   with the same return over the holding period. Thus, while cor-
We think the markets may be at a point at which the                     relations have a real tangible effect on portfolio performance,
cross-asset correlations that defined the risk-on/risk-off para-        an investor’s experience can differ significantly from what the
digm are changing into a new (or maybe old) regime. We find             reported correlation would imply.
this potential breakdown in risk-on/-off investing to be a healthy      Exhibit 1
development, putting the focus back on micro foundations,               Impact to Correlation from Volatility Differentials
idiosyncratic stories, and signals less systemic risk.
                                                                             160               y1
Investors now have to reassess how they interpret                                              y2
                                                                                               y3 = y2 + U(0,10)
cross-asset correlations to project market performance,                      120

both on an absolute and relative basis. Under the risk-on/off                100
regime, correlations were both high in absolute terms and
generally consistent in their patterns. In a risk-on environment,             40

the strategy is to buy risky assets like equities, credit and                 20
commodities that would all move higher. When it’s risk off, the                     0     20        40       60     80     100   120   140
assets to own are Treasuries, Bunds, the USD and JPY, and
usually gold, though it seemed to rally no matter what. This            Correlation with y1
                                                                                                                   Level               Return
produced a negative correlation between equity and Treasury             y2                                         1.000                0.701
returns. The recent jump in Treasury yields would thus suggest          y3                                         0.997                0.185
risk on, but the potential for financial repression to keep rates       Source: Morgan Stanley Research

low complicates that relationship. The USD also had a nega-
                                                                        We examine what we believe are the important cross-asset
tive correlation with equities, but it now may be becoming a
                                                                        relationships and emphasize the key components of different
pro-cyclical currency; thus, a positive correlation would be
                                                                        risk regimes that affect pairwise relationships and correlations
consistent with risk on. Lastly, gold oscillated between a posi-
                                                                        – and thus portfolio performance.
tive and negative correlation with equities, rallying on both fear
and inflation concerns as growth improved. Now a bigger                 What correlations matter. When the macro risk environment
sell-off in gold may be the best indicator of the risk rally con-       does change, one of the keys to improving portfolio perform-
tinuing, as it would indicate further normalization.                    ance is recognizing or anticipating how cross-asset return
                                                                        correlations will play out. While we can evaluate the correla-
The rise and misuse of ‘correlation’. We don’t question the
                                                                        tions across various pairs of assets, a small subset captures
statistical importance of correlation, but we are not convinced it
                                                                        the most fundamental relationships, changing along with (and
adequately explains portfolio performance. While there may be
                                                                        defining) the contemporaneous risk regime. Five asset classes
intense investor focus on correlations, our cynical take is that
                                                                        bear the closest watching: US equities, the 10y Treasury, oil,
most don’t appreciate either the computational or interpretation
                                                                        gold, and the USD (and implicitly the EUR). There have been
challenges in evaluating cross-asset relationships. For in-
                                                                        only five months in the past five years when the first four all
stance, there’s the seemingly simple issue of whether price
                                                                        rose together, and in three of the previous occasions equities
levels or returns should be used to measure the correlation
                                                                        subsequently corrected significantly. As for other risk assets,
between two assets. Presumably, if the two are highly corre-
                                                                        the S&P 500 is a reasonable proxy for equities generally, given
lated, it shouldn’t make much difference how it’s measured.
                                                                        its high correlation with other major equity indices globally; and

                                                                       MORGAN STANLEY RESEARCH

                                                                       March 21, 2012
                                                                       Investment Perspectives — US and the Americas

Strategy and Economics
credit, especially high yield, also has a fairly high return cor-      QE3 or a possible extension of Operation Twist. At a minimum,
relation with equities.                                                the market is now pricing the first Fed rate hike for April 2014,
                                                                       up from July 2014 a week ago and much sooner than the offi-
Risk regimes and correlations. The risk-on/risk-off termi-
                                                                       cial policy of the end of 2014. But this doesn’t rule out the very
nology for judging market sentiment entered the finance lexi-
                                                                       real possibility that Treasuries are also now pricing in a better
con only a few years ago. Its widespread adoption stems from
                                                                       growth outcome. Deciphering this price action and its causes
risk assets seeming to rally or sell off together. It’s just another
                                                                       is tantamount to determining whether the correlation between
way of saying cross-asset correlations are high – a ‘market of
                                                                       equities and Treasuries is still highly negative. Since further
one’. Of course, it’s lazy to assume all risk assets are moving
                                                                       rate increases should indicate a better growth outlook, also
together, with only the direction determined by the risk regime.
                                                                       positive for equities, the correlation between becoming more
For one, the regime is often neither ‘on’ nor ‘off’, but better
                                                                       negative would be a risk-on signal.
described as risk neutral with no strong risk bias.
                                                                       The Fed and other central banks could keep rates artificially
Maybe the most relevant correlation from a portfolio perspec-
                                                                       low for an extended period – by not raising rates, through
tive is that between equities and Treasuries. It’s not just the
                                                                       measures like QE, or by implicitly forcing financial institutions to
actual correlation that matters, but how it has changed from
                                                                       buy and hold sovereign debt. Given the unsustainability of
pre- to post-financial crisis, and most important, how it could
                                                                       rising interest costs at current debt levels, this is a real possi-
evolve with the economic environment and different risk re-
                                                                       bility. And that means rates may not rise, even with better
gimes. From the early 1980s to 2007, US equity and Treasury
                                                                       growth, confounding the correlation risk signal.
returns were positively correlated, reflecting the bull market in
both stocks and bonds. But since the crisis, this correlation has      The risk-on signal from the correlation between the USD
reversed, with bond yields, not prices, rallying with equities.        and equities is the opposite of Treasuries. It has been
With rates so low, when the economic data started to suggest a         mostly negative for the past few years, consistent with the
sustainable improvement in US growth, both Treasury yields             USD’s safe haven status. However, the correlation has been
and equities moved higher. The move up in yields was rein-             trending higher, and in March the USD has rallied with other
forced by the debate on Fed policy shifting from the form of           risk assets. This raises the possibility of the USD becoming a
further easing to when tightening may start.                           pro-cyclical asset-driven currency again. If the rising USD is
                                                                       signaling better growth ahead, then a positive correlation with
Interpreting inflections in correlations and the risk regime.
                                                                       equities would be a sign for risk on.
Since the current rally began in October, risk-on/risk-off in-
vesting has started to break down, correlations have fallen and        Two other correlations to watch are those between equi-
performance dispersion has increased. Declining macro and              ties and oil and equities and gold. The first has historically
systemic tail risks are a big reason, with the sovereign debt          been relatively low, but post-crisis equities and oil have tended
turmoil in Europe stabilizing for now and the US growth outlook        to move higher together, driven jointly by better growth. Re-
improving. For investors accustomed to operating under the             cently though, the correlation has fallen. While the drop is not
assumption of cross-asset correlations consistent with                 nearly as large as a year ago, both situations coincided with the
risk-on/risk-off investing, this breakdown – despite offering          price of oil rising near demand-destructive levels. At the cur-
greater alpha-generating opportunities – poses new chal-               rent Brent price of about US$125/bbl, the correlation is likely to
lenges: interpreting price action won’t be as easy.                    continue to fall, as higher oil prices would be a negative for
                                                                       growth and thus equities.
The recent price moves in Treasuries and US equities highlight
this challenge. Equity and Treasury returns’ years-long nega-          The correlation between equities and gold has oscillated be-
tive correlation started to moderate in October. While the S&P         tween positive and negative in the past few years. This reflects
500 is up 28% from its low, the 10y Treasury yield remained            gold’s dual nature, fluctuating between being a risk-off
around 2% up to a week ago. Why is a matter of debate, but             flight-to-safety asset and being an inflation hedge when growth
the main explanations are bond investor skepticism about               starts to improve. The correlation staying in positive territory
improving growth and Fed policy (either Operation Twist or             could be a risk-on indicator. However, if better growth means
QE3 ) keeping yields artificially low.                                 less expansionary monetary policy, the price of gold could fall,
                                                                       potentially sharply, as it has done recently. If tail risks remain
What then to make of the 35bp move higher in the 10y since
                                                                       contained, a negative correlation could be the true indicator of
the end of February? A less dovish tone in Chairman Ber-
                                                                       risk on, contrary to the past few years. For details see our
nanke’s Congressional testimony and especially the latest
                                                                       Cross-Asset Navigator of March 19.
FOMC statement have caused the market to perhaps price out

                                                                        MORGAN STANLEY RESEARCH

                                                                        March 21, 2012
                                                                        Investment Perspectives — US and the Americas

Opinion Changes
March 14, 2012
                                                                        Stock Rating: Equal-weight                   Reuters: IHS.N Bloomberg: IHS US

IHS Inc.                                                                Price target
                                                                        Shr price, close (Mar 13, 2012)
Lift from Crude Prices May be                                           Mkt cap, curr(mm)
                                                                        52-Week Range

Fleeting; Move to Equal-weight                                          Fiscal Year ending                      11/11       11/12e      11/13e       11/14e
Morgan Stanley & Co. LLC   Suzanne E. Stein                             Revenue, net($mm)                       1,331        1,537       1,684        1,832
                                                                        EBITDA($mm)**                             401          493         573          655
                                                                        ModelWare EPS($)                         2.16         2.86        3.76         4.86
                           Toni Kaplan
                                                                        EPS($)**                                 3.44         4.00        4.99         6.21
                                                                        Consensus EPS($)§                        3.33         3.86        4.69         5.80
                                                                        § = Consensus data is provided by Thomson Reuters Estimates.
We have downgraded IHS to Equal-weight from Overweight,                 ** = Based on consensus methodology
and maintain a price target of $96. While we continue to be-            e = Morgan Stanley Research estimates

lieve IHS has the best potential in our coverage to achieve             Price Performance
strong revenue growth and margin expansion, we find valua-
tion fair at this level, and if oil reverses, we believe the stock
may be pressured.

IHS shares have outperformed the S&P 500 over the past 6
months (+29% vs. +19% since 9/13/11) as the stock rose after
strong results in early January, and recently, rising oil prices
have likely been a positive catalyst. Though we believe IHS
should trade at a premium to peers, we find that the current
premium reflects the company’s strong prospects: IHS trades
at 15x F13E standardized EV/EBITDA vs. the peer group me-
dian of 11x. The stock has risen to levels in line with our base            Company Description
case valuation, and we believe other names in the analytics                 IHS, Inc. is a leading global source of critical information and insight. The
                                                                            company's products and services span four information domains of En-
space currently offer a better risk-reward profile.                         ergy, Product Lifecycle, Security, and Environment.
                                                                            Industry View: In-Line — Business & IT Services
Risks to the upside: We remain confident in the long-term
prospects for revenue growth and margin expansion, and our
model is unchanged. Our assumptions call for a 5-yr CAGR of             Revenue Growth: Still Accelerating, but Priced In
10% rev growth (F11 – F16E) and an adj. EBITDA margin of                Since the first quarter of 2010, IHS has seen a reacceleration in
39% by 2016 (vs. 30% for F11). This may prove conservative if           organic growth to the 6-9% level. We believe that growth will
IHS is able to achieve organic growth at the higher end of its          continue to accelerate; however, we think that this is already
9-15% target range over the next few years, as management               priced into investor models, and view the downside risk of
expects. While we believe our model captures the revenue and            missing revenue growth estimates to be greater than upside
margin expansion benefits from completing its major initiatives         risk of additional growth. We expect 9% organic growth for
(such as Vanguard, Newton, etc), it is possible that the model          F12. IHS has had a strong track record of growing its top line
will scale above expectations.                                          since its IPO. Growth is driven organically, by acquisitions, and
                                                                        FX. Because of the high subscription component of the busi-
Risks to the downside: We believe that there would be                   ness model (77% in F11), overall revenue visibility is high.
greater downside risk to the stock if IHS were to miss expec-           Management guidance calls for 7-10% organic growth in 2012
tations than upside risk if results were to beat. Furthermore,          (the long-term organic growth goal is 9-15%, with roughly 3-5%
MS Research’s Commodities team is bearish on the funda-                 related to value realization, 2-3% from wallet share, and 2-3%
mentals of crude oil, which could translate into pressure on            from new customers, and 2-4% from new products, per the
IHS’ stock price if oil prices fall, as the two are often correlated.   company’s guidance call).
The team expects an average price of $105/bbl for Brent Crude
in 2012.                                                                Initiatives, Scale Drive Continued Margin Expansion
                                                                        IHS is working on a number of initiatives that should drive
                                                                        margin improvement such as Vanguard, its state-of-the-art

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

Opinion Changes
ERP system. Vanguard is in the process of being deployed,           IHS: Potential for Revenue Growth and
and the company already has a number of systems on the              Margin Expansion
platform. On top of new initiatives, margins should expand due      $140

to the operating leverage of the business model. Typically,                                                                                                  $124.00 (+28%)
once a product has been developed, little further capital in-
                                                                                                                                        $ 96.70
vestment is required. The company has increased its adjusted         100
                                                                                                                                                                $96.00 (-1%)

EBITDA margins from 18.2% in 2005, when the company went              80

public, to over 30% in 2011. We continue to believe that the
                                                                      60                                                                                        $61.00 (-37%)
company’s prospects for margin expansion are greater than
peers’, as current margins are low compared to the group,             40

translating into higher opportunity for improvement.

If Brent Price Falls, IHS Shares Could Be Pressured                   0
                                                                      Mar-10              Sep-10    Mar-11             Sep-11           Mar-12         Sep-12                        Mar-13
Morgan Stanley’s Commodities team is bearish on the fun-                   Price Target (Mar-13)         Historical Stock Performance             Current Stock Price   WARNINGDONOTEDIT_RRS4RL~IHS.N

damentals for crude oil: They believe demand is weak and high        Price Target $96              Scenarios derived from our 10-year DCF model
                                                                                                   using a WACC of 8% and a terminal multiple of 8x
prices are likely to exacerbate demand rationing and support
                                                                     Bull             16x          Organic and acquisitions drive revenue growth,
elevated levels of OPEC production. Prices have been driven          Case             Bull Case    margin improvement. The company uses its cash
by supply outages and geopolitical concerns, but barring a           $124             2012e Adj.   flow to acquire other companies and organic growth
                                                                                      EBITDA       picks up, reflected in our terminal multiple. 6-yr
supply shock, our team believes upside is limited. The team                                        revenue CAGR (2011-2016E) of 12% and Adj.
believes that crude oil (Brent) will trade at an average of                                        EBITDA margins of 42% in 2016.
                                                                     Base             14x          Organic growth picks up, and margins improve.
$105/bbl in 2012. We have found that IHS’ stock price has            Case             Base Ca-     Assumes no significant acquisitions. Vanguard pro-
been strongly correlated to the Brent price and the S&P 500.         $96              se 2012e     ject drives margin expansion starting in 2012. 6-yr
                                                                                      Adj.         revenue CAGR (2011 – 2016E) of 10% and Adj.
Over the past month, IHS has been more correlated to crude                            EBITDA       EBITDA margins of 39% in 2016.
than the market (86% vs. 55%), though over the past year, it         Bear             11x          Difficult environment in end markets result in
has been more correlated to the market than crude (77% vs.           Case             Bear Case    lower than anticipated growth and margins.
                                                                     $61              2012e Adj.   Assumes organic growth weakness, and margins
40%). Over IHS’s trading history, IHS and the S&P 500 have                            EBITDA       improve less than expected. 5-yr revenue CAGR of
only a 14% correlation, while IHS and Brent Crude have an                                          6% and 36% Adj. EBITDA margins in 2016.
                                                                    Source: Thomson Reuters, Morgan Stanley Research.
82% correlation.
                                                                    We maintain our $96 price target. Assuming a WACC of 8%
Should Crude Matter?                                                and an 8x terminal multiple, we derive a DCF value of $96. We
While Energy is IHS’ largest segment, lower oil prices should       anticipate that the company will generate ~$300mm in free
theoretically not translate into lower operating fundamentals for   cash flow in 2012, which we believe will be used predominantly
IHS. IHS provides products and services that are critical to        for acquisitions. Risks to our price target include:
customers’ operations, and are needed whether oil prices are
                                                                    x Stagnation in organic growth due to lower renewal rates or
going up or down. Additionally, IHS has customers that benefit
                                                                      new sales driven by lower energy prices, economic weak-
from low oil prices (i.e., shipping and transportation compa-
                                                                      ness, or shifts in customer demand.
nies), though other customers (i.e., energy exploration com-
                                                                    x High energy prices pressure some customer segments
panies) may have lower demand for data due to low prices.
                                                                      where energy is a large cost component. Sharp drops in
                                                                      energy prices may impact business from small new drilling
                                                                      and producers.
                                                                    x Exchange rate fluctuations could impact revenue, as much
                                                                      of the business is conducted outside of the US.

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

Opinion Changes
March 16, 2012
                                                                    Stock Rating: Equal-weight                 Reuters: RHT.N Bloomberg: RHT US
Red Hat                                                             Shr price, close (Mar 15, 2012)
                                                                    Mkt cap, curr(mm)
Story Clearly Strong; Further                                       52-Week Range                                                   $53.42-31.77

Outperformance Less Clear                                           Fiscal Year ending                      02/11       02/12e     02/13e   02/14e
                                                                    Revenue($mm)**                            909        1,127      1,322    1,511
Morgan Stanley & Co. LLC   Adam Holt                                Sales, consensus($mm)                     900        1,127      1,301    1,498
                               EPS($)**                                 0.83         1.08       1.19     1.38
                           Keith Weiss, CFA                         P/E**                                    49.5         46.0       42.7     36.7
                                                                    Consensus EPS($)§                        0.79         1.07       1.15     1.37
                                                                    ModelWare EPS($)                         0.55         0.73       0.76     0.91
                           Jonathan Parker
                                                                    § = Consensus data is provided by Thomson Reuters Estimates.
                                                                    ** = Based on consensus methodology
                                                                    e = Morgan Stanley Research estimates
While 4Q results should be strong and we still like the story,
                                                                    Price Performance
RHT has outperformed (rising by +24% YTD), is at the higher
end of its valuation range, will invest in growth, and faces de-
celerating FCF and billings in F2013, which makes further
outperformance harder. As such, we move to Equal-weight.

Downgrade to Equal-weight from Overweight — we expect
a strong 4Q, but this may be priced in, and we are entering a
period of potentially decelerating billings and FCF growth in
F2013. Our conversations with partners/industry contacts and
our fieldwork lead us to believe that 4Q results should be strong
with 4Q upside and positive revisions looking forward. The
stock has been an outperformer — up 24% YTD versus the
                                                                        Company Description
average large-cap software company’s +20% and the                       Red Hat is the leading distributor of open source software. Red Hat’s
NASDAQ’s +17%. However, it now trades toward the higher                 core offering is a server operating system named Red Hat Enterprise
end of its historical levels at 21x C2013 EV/FCF on our esti-           Linux, which is based on the Linux OS. Red Hat has expanded into
                                                                        middleware, virtualization, systems management, and security.
mates (or 1.6x EV/FCF Growth), leaving risk-reward more
                                                                        Industry View: In-Line — Software
balanced, on our numbers. In mid cap, we prefer Sales-, VMware, and Citrix Systems, which hold more
upside potential to our base-case valuation estimates.              …but F2013 faces emerging headwinds. Looking toward
                                                                    F2013, while Red Hat’s top line and billings still have room to
We are still believers in the RHEL upgrade cycle, believe that      move higher, several headwinds are emerging which may
RHEV is potentially a huge opportunity, think JBoss continues       weigh on growth rates next year: (1) Red Hat meaningfully
to gain share of workloads, and believe the renewal base re-        benefited from currency tailwinds in 1H12, which contributed
mains underappreciated. Still, given the likelihood of billings     ~500bps to Y/Y growth, and this turns to a 200+bps headwind
and FCF deceleration near term, investments in Gluster and          in 1H13. (2) Red Hat had a very strong renewal year in F2012
limited potential for multiple expansion from here, we are          (including some one time catch-ups driving a 150% renewal
moving to the sidelines near term.                                  rate in the top 25 customers in Q2) and this may not continue.
                                                                    (3) The company is starting to anniversary RHEL 6.0 price
4Q results likely to be strong… Our reseller and survey             increases. (4) Red Hat will likely guide margins conservatively
work suggests a very good 4Q, with most partners meeting or         and below consensus, and while this is largely expected (and
exceeding targets on RHEL, JBoss strength, and large deals.         probably far too low), it means revisions will be limited. (5) The
Partners look for their Red Hat business to accelerate from         company is likely to see less relative improvement in operating
+21% Y/Y in C2011 to +24% in C2012. Our 4Q constant cur-            cash flow and free cash flow vs. operating income growth.
rency billings growth of +15% Y/Y (vs. consensus of +16%
Y/Y), or +14% Q/Q, is above average seasonality of +10% but
implies new billings growth is negative off a steep +50% comp
in 4Q11—which is likely low.

                                                                                                  MORGAN STANLEY RESEARCH

                                                                                                  March 21, 2012
                                                                                                  Investment Perspectives — US and the Americas

Opinion Changes
Exhibit 1                                                                                         Exhibit 4
RHT Trading at Premium on Consensus Estimates                                                     RHT: Good Secular Growth Story — but Priced In
                           Rev CAGR   EV/Sales        EV/FCF          FCF CAGR    EV/FCF/Growth   $80
Company                     '11-'13 2012E 2013E    CY12E CY13E         '11-'13E   CY12E CY13E
                                                                                                   70                                                                                    $69.00 (+36%)

High Growth Comps                                                                                  60
Autodesk                      10%    3.2x   2.9x   13.3x      12.1x     12%        1.1x   1.0x                                                                    $ 50.73                 $54.00 (+6%)
Citrix Systems                13%    5.4x   4.8x   19.7x      17.1x     18%        1.1x   1.0x     50

Fortinet                      19%    8.0x   6.8x   24.7x      20.7x     24%        1.0x   0.9x
Intuit                         9%    4.1x   3.7x   17.2x      15.3x     10%        1.7x   1.5x
Qlik Technologies             26%    6.2x   5.0x    NM         NM       NM         NM     NM
                                                                                                   30                                                                                     $30.00 (-41%)                27%    7.0x   5.6x   40.9x      30.4x     24%        1.7x   1.2x
VMware                        19%    9.4x   8.0x   21.7x      17.7x     24%        0.9x   0.7x
Average                       18%    6.2x   5.2x   22.9x      18.9x     19%        1.3x   1.1x

Red Hat                       16%    7.0x   6.0x   24.0x      21.0x     14%        1.7x   1.5x
Source: Thomson Reuters Consensus, Morgan Stanley Research. Note: These are based on                0
consensus estimates, which differ from Morgan Stanley estimates.                                    Mar-10           Sep-10   Mar-11            Sep-11            Mar-12         Sep-12                         Mar-13
                                                                                                         Base Case (Mar-13)        Historical Stock Performance             Current Stock Price   WARNINGDONOTEDIT_RRS4RL~RHT.N

                                                                                                   Bull: $69  Emergence as a cloud player. Red Hat continues to gain
Exhibit 2                                                                                          EV/FCF =   share in the OS and middleware markets, while new virtual-
RHT’s Forward FCF/Growth Multiple Nearing Highs                                                    25x F2014e ization technologies gain traction, significantly raising ASPs
                                                                                                   Adjusted   and opening new market opportunities. This drives a new
 EV/FCF Growth                                                                                     FCF of     billings CAGR of ~20% thru F2014, enabling total billings
        3.0                                                                                        $2.54      growth of 20-25% Y/Y. Billings strength helps offset recent
                                                                                                              investments and fuels 50-100 bps of margin expansion an-
        2.5                                                                                                   nually, sustaining mid-twenties FCF growth. Stock trades at
                                                                                                              25x our F2014 adjusted FCF estimate of $2.54 per share, plus
        2.0                                                                                                   $6 in cash.
                                                                                                   Base: $54 Broadening product portfolio sustains growth. The low
        1.5                                                                                        EV/FCF =   cost/high performance value proposition of open source and
                                                                                                   22x F2014e continued traction with JBoss, combined with continued op-
        1.0                                                                                        Adjusted   erational improvements, sustains 18% annualized total bill-
                                                                                                   FCF of     ings growth from F2011 thru F2014. We forecast 60-90 bps of
        0.5                                                                                        $2.19      core operating margin improvements annually as RHEV starts
                                                                                                              yielding returns, though investment in Gluster weighs on
        0.0                                                                                                   short-term overall margins. RHEL ASPs continue to improve
                                                                                                              and the renewal business grows as a percentage of overall
      M 09
      Ju 10

      Ju 11
      Ju 07

      M 07
      Ju 08

      M 08
      Ju 09

      M 10

      M 11
      D 07

      Se 08
      D 08

      Se 09
      D 09

      Se 10
      D 10

      Se 11
      Se 07

      D 11


                                                                                                              billings, yielding 16% FCF growth in F2013 and 17% in F2014

























                                                                                                              v. 28% in F2012. This growth sustains an EV multiple at 22x
                    +/- 1 St Dev.             +/- 2 St Dev.                   Average                         our F2014 adjusted FCF, in line with other high-growth soft-
Source: Thomson Reuters, Morgan Stanley Research                                                              ware companies, plus $6 in cash.
                                                                                                   Bear: $30 Open source yields no defense against weak server
                                                                                                   EV/FCF =   sales. Slowing server growth in F2013 has a significant im-
Exhibit 3                                                                                          14x F2014e pact on RHT’s core business. The middleware and virtual-
Growth Likely Decelerates Over the Next Few                                                        Adjusted   ization segments fail to boost new billings, which are close to
                                                                                                   FCF of     flat Y/Y, yielding a total billings CAGR of 12% Y/Y thru F2014,
Quarters against Difficult Comparisons                                                             $1.58      and muting any potential margin expansion as the Gluster
                                                                                                              investments move margins lower. The stock trades at 14x our
                                                                                                              F2014 adjusted FCF of $1.58, in line with the value of the
                                                           Billings Growth
                                                                                                              installed subscription base, plus $6 in cash.
                                                                                                  Source: Thomson Reuters, Morgan Stanley Research
                                                           Revenue Growth
                                                                                                  Key Concerns
 YoY Growth

              30%                                                                                 x Execution risk on virtualization, in a market dominated by
                                                                                                  x Microsoft Windows 2008 Server product cycle.
              10%                                                                                 x Heavy investments in recently acquired technology

                                                                                                  Companies mentioned: (CRM, $152.43, Over-














                                                                                                  weight), VMware (VMW, $108.90, Overweight), and Citrix Systems
                                                                                                  (CTXS, $79.19, Overweight).
Source: Company Data, Morgan Stanley Research

                                                                   MORGAN STANLEY RESEARCH

                                                                   March 21, 2012
                                                                   Investment Perspectives — US and the Americas

Opinion Changes
March 19, 2012
                                                                   Stock Rating: Underweight               Reuters: VRTX.O Bloomberg: VRTX US
Vertex Pharmaceuticals                                             Price target
                                                                   Shr price, close (Mar 16, 2012)
Valuation Concerns, Pipeline Risks                                 Mkt cap, curr(mm)
                                                                   52-Week Range
Lead Us to Downgrade                                               Fiscal Year ending                      12/11       12/12e     12/13e       12/14e
Morgan Stanley & Co. LLC   David Friedman, M.D.                    ModelWare EPS($)                         1.15         2.21       2.68         1.52
                         Prior ModelWare EPS($)                      -            -       2.66         1.51
                           Marshall Urist, M.D., Ph.D.             EPS($)**                                 0.14         2.17       2.68         1.52
                                                                   Consensus EPS($)§                        0.12         3.29       3.39         2.71
                           Sara Slifka                             § = Consensus data is provided by Thomson Reuters Estimates.
                                                                   ** = Based on consensus methodology
                                                                   e = Morgan Stanley Research estimates
                           Brienne Kugler
                         Price Performance

We are downgrading VRTX (no PT/estimate change) as we
believe the stock reflects a more optimistic view of the com-
pany’s pipeline than ours (specifically for cystic fibrosis).

We are downgrading VRTX from Equal-weight to Under-
weight (no PT/estimate change, model updated for 10K) in
advance of the Ph 2b combo CF trial. Thoughts on key
debates are below.

Valuation: Our DCF-based PT is $30. An NPV sum of parts
(SOP, details inside) for us and consensus is $22-23/sh. The           Company Description
stock has risen ~60% over the past 4 months. (from $26 to $42)         Vertex is a biotechnology company with a product pipeline focused on
without a clear fundamental catalyst. To us, this implies that         viral diseases, cystic fibrosis, inflammation and autoimmune diseases.
                                                                       Vertex's lead asset is telaprevir, a novel protease inhibitor for treatment
pipeline value may be up to 50% of the current stock price,            of hepatitis C. Other assets include VX-770 and VX-809 for cystic fibro-
with combo CF (where we are negatively biased) likely                  sis and, VX-509, a JAK3 inhibitor being investigated for potential treat-
being the main focus.                                                  ment of multiple immune-mediated inflammatory diseases.
                                                                       Industry View: In-Line — Biotechnology

VX-770/VX-809 (Combo CF): We do not believe the Ph 2b
combo CF trial will yield positive results (see concerns below),   5) Rectal biopsies for VX-809 in Ph 2a showed little CFTR
with poor data (no FEV1 benefit) potentially removing much of      channel at the surface. 6) The F508 heterozygotes that are
the embedded pipeline value and bringing the stock to our PT.      enrolled in the study should not positively impact the outcome.
While our bull case ($55) includes broad CF approval, we
suspect the Street’s bull case (CF combo success) may be           Other Pipeline: 1) Alios (HCV nukes): 7-day data at EASL
higher as many on the Street see combo success as the key          will inform early efficacy, but 12-week safety and 4-wk efficacy
step towards a $2-3+ billion CF franchise. Thus, strong CF         are key landmarks for nukes given the poor hit rate broadly.
data, which could bring the stock >$60, serves as the biggest      Thus, we do not see strong EASL data as a major positive
risk to our Underweight rating.                                    stock event. Also, we have concern that including Incivek or
                                                                   VX-222 in an all oral regimen may hurt tolerability – a key issue
Our six key concerns for the combo CF trial are: 1) VX-809         given the competitor regimens in development. 2) VX-787
dose increases may not help outcomes, with some evi-               (flu): Ph 1 healthy data will provide limited competitive profile
dence to suggest it could worsen them. 2) VX-809 may al-           info on this drug. 3) VX-509 (JAK): A Ph 2b 6-month trial was
ready have sufficient tissue penetration to preclude higher        planned to start this quarter – it is unlikely we will see data this
doses from helping. 3) A timing analysis implies the prior         year. 4) VX-661 (CF): A Ph 2a is ongoing, with an unclear
combo trial may have been long enough to see SC and                benefit vs. VX-809, where data have disappointed.
FEV1 changes. 4) “Super-responders” in the prior combo
trial are better than their peers, but that may not be enough.

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

Opinion Changes
Our sum of the parts analyses show that we and con-
                                                                     Exhibit 1
sensus value VRTX as a whole similarly (MS value
                                                                     MS vs. Consensus SoP
~$22/share vs. consensus ~$23/share). While consensus                                                                  MS           Consensus
                                                                                                                                                      (Consensus) - (MS)
values for VX-770 and Incivek/VX-222 are above ours, higher                                                            Est.            Est.
                                                                      US Incivek (+ VX-222 for consensus)               $8              $11                          $4
spending levels for consensus offset this difference.                          EU Incivek Royalty                       $5               $5                          $0
                                                                                 Global VX-770                         $15              $18                          $4
                                                                                    Net Cash                            $4               $4                          $0
To be clear, this analysis ascribes no revenue to pipeline
                                                                               Unallocated Costs                       -$9             -$16                         -$7
candidates. It is meant to analyze the value of the base                             Total                             $22              $23                          $1
business as it stands, with pipeline revenue being the clearest      Source: Company data, Morgan Stanley Research estimates, First Order Analytics

driver of the delta between the stock and NPV.
                                                                     Exhibit 2

1) VX-770: Consensus post-2013 estimates are on average              VRTX: Success for VX-809/661 in CF drives upside;
1.3x ours. We believe the Street may be too aggressive here          Slow Incivek growth drives downside
as 1) VX-770 only worked in 75% of G551d pts, 2) efficacy in
non-G551d pts is pending, and 3) some of the new-to-test               60

mutations (e.g. R117H) are mild and may not broadly warrant                                                                                                       $55.00 (+28%)

such an expensive therapy.                                                                                                                 $ 42.94


2) HCV: Estimates for 2014 and beyond drive our delta vs.              30                                                                                         $30.00 (-30%)
consensus, as consensus expects >$1bn in WW HCV revenue
(Incivek and VX-222) through 2016. Incivek IMS is weakening            20

                                                                                                                                                                   $15.00 (-65%)
and both PEG/R-based and all oral competitors are coming.              10

We expect consensus HCV estimates to continue to decline
with time. We do not model VX-222 revenue as we are not                 Mar-10             Sep-10    Mar-11            Sep-11              Mar-12         Sep-12                          Mar-13
                                                                             Price Target (Mar-13)        Historical Stock Performance               Current Stock Price
confident that the drug, or Incivek, will be part of a competitive                                                                                                         WARNINGDONOTEDIT_RRS4RL~VRTX.O

                                                                      Price Target $30: Derived from a discounted cash flow analysis using a
oral regimen – nuke-based or otherwise.                               WACC of 10% and a terminal growth rate of 0% post 2028.
                                                                      Bull      HCV competitive threats wane; Incivek in combination is a
3) Unallocated Expenses: The expense base for Vertex is               Case      success; VX-809 or 661 works in CF. The bull case assumes
                                                                      $55       peak WW Incivek sales of ~$3bn in 2014. In addition,
high and remains a focus for investors. Our model reflects                      VX-809/VX-770 or VX-661/VX-770 succeeds in F508del CF pts
declining OpEx over time – we expect the company may need                       with a launch in 2015 and peak WW sales for the two CF drugs
                                                                                of ~$2.5bn. Additional data on the Incivek combo trials, the pace
to reduce spending as it leaves 2012 if the current pipeline                    of Incivek launch, and VX-770//809/661 combo data are key.
drugs are not successful this year.                                   Base      Incivek struggles to grow beyond 2012; VX-809 and 661
                                                                      Case      combos fail in CF. Our base case assumes peak Incivek WW
                                                                      $30       sales of ~$2.7bn in 2013 followed by meaningful declines from
Our SoP Valuation and our DCF Valuation Differ by ~$8 (SoP                      competitive pressures. We do not model VX-809/661 sales and
                                                                                have G551D mutation and moderate off-label sales for VX-770,
~$22, DCF $30). Our SoP valuation allows us to model the                        which yields total CF sales of ~$800mn in 2018.
intermediate and terminal growth rates for each drug sepa-            Bear      Incivek and VX-770 struggle commercially. Our bear case
rately. Our DCF valuation employs an intermediate and ter-            Case      assumes Incivek share declines rapidly as other novel agents
                                                                      $15       make it to market. Also, VX-770 struggles to gain commercial
minal growth rate for the whole business, which is based on the                 traction outside of G551D. We assume total CF sales of
trailing revenue and EPS growth rates. The difference be-                       ~$500mn at peak.
                                                                     Source: Thomson Reuters, Morgan Stanley Research.                   All valuations are DCF-based.
tween these valuation methods is largely due to the difference
in growth rates beyond 2018 and the future credit we imply in
our DCF terminal value for current pipeline spending.                Risks to our price target: 1) HCV treatment rates and/or
                                                                     Incivek share of the DAA market remain higher than our ex-
                                                                     pectations; 2) other HCV drugs in development trailing Incivek
                                                                     fail; 3) VX-809 or 661 surprises to the upside (currently only in
                                                                     our bull case); 4) another pipeline drug surprises to the upside.

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

New Coverage
March 20, 2012                                                       posure to industrial gases as we enter 2H12 is likely to improve
                                                                     the overall risk/reward profile of a chemicals portfolio (i.e., there
Chemicals                                                            is ~40% downside to our LYB Bear Case versus 20% downside
                                                                     on average to our US gases Bear Cases).
Gases — Risk Is On, but
Some Gas Should Be Too                                               Higher earnings multiples and lower FCF yields, but more
                                                                     reliable growth. Industrial gas stocks currently trade at
Morgan Stanley & Co. LLC   Vincent Andrews
                                                                     15.5–18.8 times 2012e EPS vs. commodity chemicals at
                           Charles A. Dan                            8.9–13.2 times. Due to asset intensity of the industrial gas
                              industry a substantial portion of cash generation must be re-
                           Ian Bennett                               invested in the business to sustain growth. Coupled with
                                                                     valuations that reflect this attractive growth profile, industrial
                                                                     gas FCF yields are far less attractive than commodity chemi-
Overweight Airgas: We believe that the market is overlooking
                                                                     cals FCF yields (i.e., 3.8% versus 6.6%, respectively, on our
relative growth prospects and hidden EPS power from SAP.
Equal-weight Praxair: Valuation looks reasonable, and mean-
ingful Brazil opportunity is still some time off, in our view.       Exhibit 1
Relative Underweight Air Products: Valuation overhangs ap-           We See Less Risk and Less Reward in
pear more likely to be resolved in 2013.                             Industrial Gases vs. Chemicals Peers
                                                                      100%                                                                           88%
A Chemicals portfolio should include at least one indus-               80%                                                                                                      BULL

trial gas equity. As companies and investors have increas-             60%                                                                                            53%
ingly discounted a 2H12 recovery, we think it is sensible to own       40%                        35%
                                                                                                                  22%           22%
a gas stock to mitigate the risk of a 2H12 disappointment. We          20%
                                                                                                                                8%         6%                          3%       BASE

could make a compelling argument to own any of the three              price
                                                                                  -18%                                                                                              PT
US-listed gas stocks, but our ratings reflect company-specific        -40%
                                                                                                                  -24%          -23%
dynamics that we expect will define relative share price per-         -60%
                                                                                                                                                                      -50%      BEAR

                                                                                 Airgas          Praxair     Air Products     Monsanto    DuPont    Lyondell          Dow
formance within industrial gases.                                                                                                                    Basell

Perennially defensive industrial gas equities have lagged              80%
                                                                                    80%                                                                                        BULL

the broader Chemicals group by ~7% year to date as in-                 60%
                                                                                                           62%                                                 62%

                                                                                                                              43%            44%
vestors have reverted to “risk on” trades such as Over-                40%
                                                                                    36%                    33%
weight-rated LyondellBasell (up ~35% YTD versus the gases              20%

+5%). However, as we exit a 1Q marked by optimism about              current
2H12 — based on both hard data (US economic data) and                 -20%
                                                                                    -20%                                                                                        PT
                                                                                                           -22%               -24%
perceptions (is the US housing recovery finally getting started,      -40%

or is it just the warmest winter since 1900?) — there is naturally    -60%                                                                                                     BEAR
                                                                               Intrepid Potash           Mosiac             Potash         Agrium      CF Industries
risk that 2H12 disappoints (see 2H11). We think visibility re-
                                                                     Source: Thomson Reuters, Morgan Stanley Research estimates
mains limited on 2H, and we believe it is sensible to have an        For valuation methodology and risks associated with any price targets above, please email
                                                            with a request for valuation methodology and
Overweight position in industrial gases to mitigate this risk.       risks on a particular stock.

                                                                     Exhibit 2
Less reward in gases, but also far less risk. If one simply          Industrial Gases Exhibit Higher Multiples
examines our Bull Case for commodity chemicals versus our            and Lower FCF Yields
Bull Case for industrial gases, it is very clear that we see far                                                                                                      FCF Yield Ex -
more upside in commodity chemicals (i.e., there is ~90% up-                                                            P/E           EV/EBITDA FCF Yield              Growth Capex
                                                                     Agriculture & Fertilizers                         13.2              6.1     5.7%
side to our LYB Bull Case vs. 35% upside on average to our US        Commodity Chemicals                               11.5              6.9     6.6%
gases Bull Cases). Yet this upside for LYB and other com-            Industrial Gases                                  17.4              9.2     3.8%                        7.4%
                                                                     Source: Company Data, Morgan Stanley Research. Agriculture & Fertilizers: Potash, Mosaic,
modity chemicals stocks relies on an economic recovery that          Monsanto, CF Industries, Intrepid Potash, Agrium; Commodity Chemicals: LyondellBasell,
we think consensus assumes will begin as we enter 2H12. It           Dow, DuPont; Industrial Gases: Airgas, Air Products, Praxair

also relies on China. This is where it makes sense to examine
                                                                             Industry View : Attractive
the Bear Cases and recognize that unless one has extreme                     US Chemicals
conviction in the 2H12 economic recovery story, adding ex-

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

New Coverage
Industrial gases is the most defensive sub-industry in               long term: Oxycombustion, carbon capture, and coal gasifica-
Chemicals, in our view, for four reasons. First, the on-site         tion (coal-to-liquids and coal-to-chemicals).
component of the tonnage business (~30% of revenues) op-
erates based on 15-year take-or-pay contracts and the mer-           Increase in project backlogs in 2010-11 likely to result in a
chant business (~30% of revenues) typically operates on 3-5          2013+ revenue acceleration. Capital expenditures generally
year contracts. Second, industrial gases contractually pass on       take 12-24 months to translate into revenue, while project
natural gas and electricity price increases to their customers,      backlog generally take 24-48 months. Difficult economic con-
so their cash flows do not suffer from changes in their main raw     ditions in 2009 led to a decline in capex in 2010/11 and there-
materials. Third, sales into the healthcare market are largely       fore led to a gap in revenue growth in 2011 and 2012. Until
unaffected by the economy. Fourth, much of the demand                2011, capex spend had either remained constant or declined at
growth for industrial gases comes from their use in helping to       each company from 2008 to 2010 levels. In 2011, capex growth
achieve ever-tightening environmental legislation.                   accelerated and the absolute amount of capex came close to
                                                                     that of previous peak levels. We project industrial gas com-
Our Investment Recommendations                                       panies will invest record levels into new capex projects in
Core gases thesis well understood, so stock picking                  2012–14 that will cause revenue growth from new contracts to
should be a function of company-specific dynamics. There             accelerate in 2013 and 2014, relative to the levels we wit-
are good reasons to prefer any of the three US industrial gases      nessed during 2010-11, however we believe this is well un-
names: APD is the cheap stock, on our estimates; PX is the           derstood and reflected within consensus forecasts.
highest-quality, in our opinion; and ARG has no exposure to
Europe, etc. We focus on company-specific dynamics that we           Given our positive outlook for contract signings over the next
think could drive relative share price performance in the next 12    two years, we could envision a 19% backlog/sales ratio sce-
months.                                                              nario, where sales grow by 75% and backlogs increase by 35%
x    Overweight Airgas, which offers the greatest earnings           by 2015 (medium term +15% sales CAGR vs. long-term
growth of the three companies through 2013. The company is           guidance of 11-12% and our base case forecast of +10%)
100% leveraged to the US market where we expect a contin-
ued manufacturing rebound. Further, we believe the market            Emerging markets may slow, but should still be better
discounts the risks from the company’s ongoing SAP imple-            than Developed markets. The industrial gas industry has
mentation, but not the reward. We think there could be mean-         long grown at an average of 1.5-2.0x global GDP growth, rep-
ingful upside to management’s SAP benefit forecast.                  resenting an average of around 1.5x GDP in developed
                                                                     economies and 2-3x GDP growth in emerging markets. Our
x   Equal-weight Praxair, which should see positive                  global economics team projects slowing growth in both DM and
outer-year EPS revisions from an underappreciated hydrogen           EM in 2012. Our Base Case calls for 5.7% growth in emerging
opportunity in Brazil: Petrobras is likely to construct several      markets compared to 1.2% growth in G10. Praxair and Linde
new refineries, and a substantial infrastructure build-out is        are advantaged by having the largest exposure to EM in the
required ahead of the 2014 World Cup and the 2016 Summer             industrial gas space.
Olympics that could materially increase oxygen demand.
Brazil contributes ~20% of Praxair’s sales, and the company’s        Companies mentioned: Agrium (AGU, $86.74, Equal-weight),
~60% market share there is a differentiator.                         Air Products (APD, $92.01, Underweight), Airgas (ARG, $85, Over-
x    Underweight Air Products: We see Europe, electronics,           weight), CF Industries (CF, $183.17, Overweight), DuPont (DD,
and ROE/ROIC as the key drivers of the APD’s 16% discount            $53.25, Equal-weight), Dow Chemical (DOW, $35.44, Equal-weight),
to PX, but do not expect an inflection point in the next 12          Intrepid Potash (IPI, $24.75, Equal-weight), LyondellBasell (LYB,
months. Debate around 2015 financial targets and a likely lack       $42.54, Overweight), Monsanto (MON, $79.97, Overweight), Mosaic
of incremental cash return could also hold valuation back.           (MOS, $57.48, Overweight), Potash Corp of Sask. (POT, $45.17,
                                                                     Overweight), and Praxair (PX, $111.18, Equal-weight).
What are the ‘game changers’ for industrial gases? A
number of big new applications for industrial gas companies
have the potential to transform the industrial gas industry in the

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

New Coverage
March 14, 2012                                                       Exhibit 1
                                                                     Overweight BAH and CACI; Underweight MANT
Computer Svcs. & IT Consulting                                           Key Stock Statistics
                                                                         Ticker           Price       Target     Mkt cap    F12 EPS    F13 EPS
Fed IT: Opportunity for Stock Pick-                                      BAH             $17.10       $23.00      $2,425      $1.60      $1.77
                                                                         CACI            $61.15       $75.00      $1,668      $5.86      $6.21
ing; Overweight BAH and CACI                                             SAI             $12.84           NA      $4,224      $1.36      $1.38
Morgan Stanley & Co. LLC   Nathan Rozof, CFA                             MANT            $33.56       $33.00      $1,236      $3.50      $3.45
                           Glenn T. Fodor, CFA                                                                                        BULL
                           Matt Lipton, CFA
                                   40%        35%
                                                                             20%                                                      BASE
Valuations appear to price in secular decline. However, we                   current
think growth is still achievable in an age of budgetary austerity.                                                          -2%
We therefore reiterate our Overweight rating on BAH and ini-                                                                           PT
tiate coverage of three additional Federal IT stocks – CACI
(Overweight), SAI (Equal-weight), and MANT (Underweight).                   -60%                                                      BEAR
                                                                                       BAH         CACI          SAI       MANT

We affirm our Overweight rating on BAH and initiate cov-             Source: CMAI, Bloomberg, Morgan Stanley Research

erage of CACI (Overweight), MANT (Underweight), and SAI
                                                                     market share losses relative to our budget model – an outcome
(Equal-weight). Now is the time to rethink Federal IT services
                                                                     we think is unlikely. We are confident that business mix and
stocks, in our view. We like the setup ahead of the US presi-
                                                                     scale can sustain the group’s share gains from medium-sized
dential election — investors have largely avoided this group
since Washington’s fiscal challenges gained prominence in
2010. As a result, valuations have fallen and compressed to a
                                                                     We think it is still too early to buy the group as a whole
tight range. We see potential for multiples to expand and
                                                                     and instead advocate stock picking. For investors with time
decouple as budgetary clarity emerges through the election
                                                                     horizons longer than 12 months, valuations look compelling;
cycle. However, downside risk to estimates remains as the
                                                                     but for those with shorter horizons, we recommend pair trades
government spending outlook remains uncertain, and Con-
                                                                     based on our ratings.
gress’s upcoming debt limit / budget debates may pressure
                                                                     What to own? We favor shares of Booz Allen Hamilton and
                                                                     CACI. Our analysis indicates that both can continue to capture
Our proprietary budget model gives us a unique top-down
                                                                     significant market share, but valuations appear low relative to
benchmark for company estimates. Our consensus-based
                                                                     their fundamental growth outlook. We think the two are best
approach to forecast forward federal budgets incorporates the
                                                                     positioned for multiple expansion as budgetary clarity in-
Administration’s proposal and industry estimates.
                                                                     creases and valuations decouple.
Expect federal IT services companies to continue to gain
                                                                     What to avoid? ManTech looks fairly valued in our base
share of Federal spending, boosting growth rates. Over
                                                                     case, but faces the highest probability of downside risk in
the past five years, Federal IT services companies have taken
                                                                     our bear case, in our view. As US engagements in Iraq and
share as a percentage of discretionary federal contract outlays.
                                                                     Afghanistan wind down, we think the overhang from Man-
Historically, services contracts have grown 6% annually since
                                                                     Tech’s large contract for the Mine Resistant Ambush Protected
the early 1990’s versus 4% for the overall Department of De-
                                                                     (MRAP) vehicles will increase. If it loses the contract and
fense (DoD), and scale advantages have enabled larger Fed-
                                                                     sequestration (i.e., mandatory across-the-board cuts) is not
eral IT services companies to take share from mid-sized play-
                                                                     overturned, ManTech’s F2013 revenues could fall 20-25% Y/Y
ers. We expect these share gains to continue, creating poten-
                                                                     in our bear case scenario.
tial upside to the growth implied by our model.
                                                                        Industry View : In-Line
However, with the stocks’ valuations near all-time lows,                Computer Services & IT Consulting
the market appears to be pricing in significant downside to
estimates and zero to negative forward growth. This implies

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

New Coverage
Key Debate: Likelihood of Further DoD Budget Cuts                   Exhibit 2
Will additional budget cuts be enacted beyond those in              Long-term growth rates implied by today’s prices
the DoD’s government fiscal year (GFY) 2013 proposal, as                                            0.0%

                                                                      Implied Terminal Growth (%)
sequestration would require? (Sequestration refers to man-
datory across-the-board cuts legislated during the last debt
ceiling debate and triggered by the lack of implementable                                           -1.0%
actions from the Super-Committee.)                                                                  -1.5%

Market’s View: Significant budget austerity. The preliminary
DoD budget includes ~$500 billion in budget cuts over 10 years                                      -2.5%
as mandated by the Budget Control Act (BCA) of 2011 but does
not include an additional ~$500 billion in cuts stipulated by                                               MANT   BAH   SAI   CACI
sequestration. While sell-side consensus estimates also seem
to overlook sequestration, with the group trading at 9.7x con-      Source: Morgan Stanley Research

sensus CY12 EPS, the market is arguably pricing in significant
                                                                    Valuation Methodology and Risks
government austerity.
                                                                    BAH Price Target $23: Derived from a 75/25 blend of our base
                                                                    case and bull case scenarios, in order to reflect our conviction
Our View: A more thoughtful approach is likely, which
                                                                    in the potential upside to our estimates and associated multiple
could be a positive catalyst for the stocks. We agree with
the market that additional cuts relative to the President’s
budget are likely. However, we think that Congress will take a      Risks: Government spending uncertainty may create an
more thoughtful approach than is contemplated by sequestra-         on-going overhang; less flexibility in managing costs in F2013
tion. In our base case budget scenario, Congress eventually         than management expects; and post-IPO lockup expired
rewrites the current law to avoid sequestration-related cuts that   mid-May, which may increase the supply of shares.
could threaten the economic recovery. Estimates remain
static. Sequestration is avoided in exchange for more thought-      CACI Price Target $75: Our price target is derived from our
ful measures (including additional DoD cuts, but not to the         base case. Our DCF analysis assumes a 7.8% discount rate
depth contemplated in sequestration), and sentiment toward          and a 1.3% terminal growth rate.
the group improves with increased budget clarity. However, we
                                                                    Risks: Finding new acquisitions/executing on recent deals can
see the potential for Fed IT services stocks to come under
                                                                    be a positive catalyst or potential risk; F2013 guidance will
pressure in C2H12 as the specter of sequestration on January
                                                                    most likely be released during the next earnings call; govern-
1, 2013 looms larger. We think that it will create a positive
                                                                    ment spending uncertainty may be an ongoing overhang.
catalyst if Congress reaches a compromise that includes a
more thoughtful approach to budget reductions than seques-
                                                                    MANT Price Target $33: Our price target is derived from our
                                                                    base case. Our DCF analysis assumes an 8.5% discount rate
                                                                    and a 1.3% terminal growth rate.
Where we could be wrong: Sequestration could take place,
negatively affecting estimates for the stocks. On the other         Risks: MRAP deal is extended into 2013 and spending on
hand, the avoidance of sequestration and any further austerity      overseas contingency operations is not reduced as we expect;
measures could cause the stocks to run, including the names         New conflicts leave the DoD little choice but to expand its
where we are less constructive.                                     budget again; updates on the MRAP renewal and S3
                                                                    re-compete with F1Q earnings.
We combined a top-down and a bottom-up approach to
identify potential mispricing of future growth.                     SAIC base case valuation $14: Assumes the stock’s multiple
                                                                    is little unchanged.
x   Top-down: Our estimates are driven by our budget model
    and each company’s potential for share gain/loss. Multiple      Risks: Looming risk of sequestration pressures sentiment in
    budget scenarios help us gauge risk/reward.                     C2H12; SAIC acquires additional capabilities improving the
                                                                    growth outlook.
x   Bottom-up – We analyzed each company’s business mix
    and backlog to test its ability to grow: we then compared
    our outlook to consensus and that implied by stock prices.

                                                                  MORGAN STANLEY RESEARCH

                                                                  March 21, 2012
                                                                  Investment Perspectives — US and the Americas

Industry Analysis
March 16, 2012                                                    Exhibit 1
                                                         Accounts for Almost Half of European
Internet                                                          Online Travel Agency Bookings
Survey Says: Upside in Priceline’s                                                             100%
                                                                                               90%               18%                     19%                   17%

                                                                   European OTA market share
European Bookings Growth                                                                       80%
                                                                                                                 12%                     8%
Morgan Stanley & Co. LLC   Scott Devitt                                                        60%
                                                                                                                 15%                     16%
                                                       50%                                                             13%
                           Nishant Verma                                                       40%

                                                                                                                 45%                     47%                   41%
                           Jordan Monahan                                                      20%
                           Andrew Ruud                                                          --%
                                                                                                                 Total               Independent               Chain
                                                                                             (PCLN)       HRS             (EXPE)
                           Zachary Arrick                                                    (EXPE) (EXPE)        Other OTA's
                                                                  Source: AlphaWise Survey, Morgan Stanley Research

Our proprietary AlphaWise survey of 120 European hotel ex-        (2) Optimism among European hotels: 50% of hotels stated
ecutives leaves us incrementally positive on the online travel    bookings have significantly or somewhat increased in the past
agency (OTA) space, particularly on Priceline’s ability to con-   3 months in comparison to the same period a year ago. Hotels
tinue to gain European market share.                              provided an even more optimistic outlook, as 63% expect
                                                                  bookings to significantly or somewhat increase in the next six
Changes to our view:                                              months compared to the same period a year ago. We view this
                                                                  data favorably for online travel agents, as it appears that weak
(1) – We have increased our 2012e / 2013e           European macro conditions are having a minimal impact on
international bookings to $24.1B / $32.4B from $23.8B / $31.5B    European accommodation bookings.
and our price target to $775 from $725 on increased comfort
around’s dominant competitive positioning in          Exhibit 2
Europe.                                                           63% of Hotels Expect Bookings to Significantly or
(2) Expedia – Even though Expedia trails in           Somewhat Increase Y/Y in the Next 6 Months
Europe, we believe that optimism among European hotels
                                                                   100%                                         1%                     1%                     --%
renders our booking estimates too low. Therefore, we have                                                       8%                     6%                     10%
increased our 2012e / 2013e international bookings to $12.6B /
                                                                              80%                              28%                    30%                     25%
$14.1B from $12.4B / $13.7B and our price target to $30 from
(3) TripAdvisor – While our survey provides additional com-                   50%
fort on the quality of TripAdvisor’s review content, we believe               40%                              46%                    44%                     50%
monetization will continue to be challenging and leave our                    30%
estimates unchanged.                                                          20%
                                                                              10%                              18%                    19%                     15%
Three key takeaways:
                                                                                                               Total             Independent                  Chain
(1) is driving 45% of Europe OTA bookings,
                                                                                                 Will significantly increase    Will somewhat increase         No change
followed by Expedia (including its sister brands) at 22%.                                        Will somewhat decrease         Will significantly decrease
While we expected to emerge as the dominant
European OTA, we are more bullish on Priceline’s ability to       Source: AlphaWise Survey, Morgan Stanley Research. Figures are rounded.

continue to gain market share, as 41% of hotels plan to in-
crease their usage of in the next 12 months while
22% / 29% plan to increase their usage of Expedia / other
OTAs, respectively.
                                                                                               Industry View : Attractive

                                                                      MORGAN STANLEY RESEARCH

                                                                      March 21, 2012
                                                                      Investment Perspectives — US and the Americas

Industry Analysis
                                                                      (3) Hotels satisfied with TripAdvisor reviews: 81% of hotels
                                                                      are aware of their reviews listed on TripAdvisor, and 75% of
Core Questions for Evidence Research                                  those hotels are somewhat or very satisfied with their TripAd-
     What is the market share among European online travel            visor overall review ranking. We are positively surprised that
      agencies and how is this share expected to change?              the vast majority of hotels are satisfied with their TripAdvisor
     What are the drivers for preferring one online travel            reviews, as we expected a number of hotels to complain that
      agency to another?                                              reviews on TripAdvisor lack verification. We believe our survey
     What are current and anticipated booking trends among            highlights that the scale of TripAdvisor’s review database (over
      European hotels?                                                60 million) helps alleviate concerns of unverified reviews,
     Are hotels satisfied with their TripAdvisor reviews and do       leaving hoteliers satisfied with the overall accuracy of their
       they spend advertising dollars with TripAdvisor?               TripAdvisor reviews/ranking.
The Evidence                                                          Exhibit 3

     Priceline is the clear market leader with 45% of reser-          High satisfaction of TripAdvisor reviews among
     vations; Expedia’s sites account for 22%                         European hotels’s share of reservations ranges between 34%           100%                            6%                    5%
                                                                                  12%                           14%                 8%
         among hotels with 100+ rooms and 51% among those              90%                  16%                            10%                21%
                                                                                                      14%                           12%
         with less than 50 rooms; higher penetration among in-         80%        13%                           14%
         dependents (47%) vs. chain (41%)                              70%                                                                    17%
     Expedia’s sites account for 29% of chains’ OTAs reserva-          60%
         tions in comparison to 18% of independents’ OTAs              50%                            57%                  65%
                                                                                  54%       52%                                      65%      31%
         bookings                                                                                                59%
     Priceline is the market leader in UK, France and Spain but
         trails HRS in Germany
     Larger customer base drives preference for Priceline              10%        21%       19%       23%                  20%
                                                                                                                14%                 15%
     over Expedia’s sites                                               --%
     86% of those who use point to the fact that the                  Total Independent Chain       France   Germany    Spain     UK
        site has higher website traffic than others                                     Very satisfied                   Somewhat satisfied
     High distribution cost is the main deterrent for 45% of hotels                     Somewhat dissatisfied            Very dissatisfied
        that do not use                                   Source: Company Data, Morgan Stanley Research

     Priceline likely to see the most booking gains in the
                                                                      Valuation methodology and risks
     next 12 months
                                                                      Our $30 price target for EXPE is based on 5.5x Base case
     41% of respondents expect to increase usage of Book-, and 22% are planning to increase usage of             2013e EV/EBITDA (5-year gross bookings CAGR (C2011-16e)
       Expedia’s sites                                                of 7%, Adjusted EBITDA margin contracts to 19% in 2015e).
                                                                      Upside/downside risks: Expedia’s ability to overcome global
     Upbeat outlook for bookings in the next 6 months
                                                                      competitive threats due to its scale and strong brand aware-
     50% of European hotels have seen an increase in bookings
       in the past 3 months and 63% expect bookings to sig-           ness; extent of’s conversion benefits on its new
       nificantly/somewhat increase Y/Y in the next 6 months          platform; degree of pressure on take rates from air suppliers
What Gives Us Confidence                                              and stabilizing airfares.
     Survey of 120 European hotel executives responsible for
      managing booking channels (80 independent, 40 chain)            Our $775 price target for PCLN is based on 14x Base case
      across France, Germany, Spain, and the UK during                2013e EV/EBITDA (5-year gross bookings CAGR (C2011-16e)
      February 2012
                                                                      of 21%, adjusted EBITDA margin of 49% in 2015e). Risks:
     Hotels surveyed have an average of 90 rooms and ma-              Persistent European economic weakness can impair growth
      jority are classified as urban/city center hotels               trajectory; Y/Y comps becoming more challenging; FX fluctua-
                                                                      tions, particularly in the euro, pose headline risk; Air business
                                                                      could struggle due to a push by air suppliers for direct bookings
                                                                      over third-party distribution; Margin upside could be restrained
                                                                      by Asia/Pacific investments.

                                                                      Companies mentioned: Expedia (EXPE, $33.27, Underweight),
                                                             (PCLN, $657.25, Overweight), and TripAdvisor (TRIP,
                                                                      $32.47, Underweight).

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

Industry Analysis
March 18, 2012                                                      Exhibit 1
                                                                    Price Target Changes
Large-Cap Banks                                                                                        Price Target
                                                                                   Rating      Old         New      Upside
Raising the Bar                                                     BAC             EW         $7          $9        -8%
                                                                    C               EW         $30         $42       14%
Morgan Stanley & Co. LLC   Betsy L. Graseck, CFA
                                                                    JPM             OW         $45         $60       35%
                           Michael J. Cyprys, CFA, CPA              GS              EW        $112        $125        2%
                          Source: Morgan Stanley Research.

                                                                    Exhibit 2
Risk-on trade buoys flows and positive marks driving up our         EPS Estimate Changes
2012 EPS estimates by a median 14%. Stronger consumer                                     1Q12E                               2012E
credit and mortgage servicer spread add an incremental boost.                    Old      New % Change                 Old    New % Change
Price targets up median 31%.                                        BAC          0.01     0.03  170%                   0.40    0.47 18%
                                                                    C            0.66     0.88   34%                   3.34    3.67 10%
                                                                    JPM          1.07     1.22   14%                   4.46    4.88  9%
Estimates raised significantly for money center banks.
                                                                    GS           2.16     3.25   50%                   9.37   11.10 18%
The risk-on trade has driven upside to capital-markets firms,
                                                                                        2013E                                 2014E
and we have raised our median 1Q12 EPS estimates by 42%
                                                                                 Old    New % Change                Old        New    % Change
and our median full-year 2012 estimates by 14%. Stronger            BAC         0.89     0.91  2%                   1.43       1.46      2%
flows and positive marks dominate, but we expect Q/Q growth         C            4.15    4.40  6%                   5.03       5.29      5%
rates to fade as spreads stabilize. We expect better markets to     JPM          5.20    5.63  8%                   6.30       6.71      6%
drive stronger underwriting volumes into 2Q12.                      GS          12.19   13.21  8%                  15.55      16.03      3%
                                                                    Source: Morgan Stanley Research Estimates

Post changes to our EPS estimates, for 1Q12 we are above            Exhibit 3
consensus for JPM and GS and below for C and BAC. For               We are Above Consensus on JPM and GS in 1Q12,
2012 and 2013, we are above the Street for JPM, below for the       Below on BAC and Citi
other firms. We are below consensus primarily on higher                            1Q12E
expense for C and GS, and lower revenue for BAC.                           MS Est Consensus Difference
                                                                    BAC     0.03     0.11     -73%
Extra boost from continued consumer credit improvement              C       0.88     0.95      -8%
(in particular credit card). HARP 2 (the second Home Af-            JPM     1.22     1.11      10%
fordable Refinance Program) is driving up refinancing activity,     GS      3.25     3.03       7%
a big benefit to large mortgage servicers, while long-end vola-     Median                      0%
tility is not a meaningful concern for us. We expect servicers to
                                                                           MS Est Consensus Difference
absorb this effect through an incrementally thinner gain-on-sale
                                                                    BAC     0.47     0.69     -32%
spread, which is near historic highs.
                                                                    C       3.67     4.03      -9%
                                                                    JPM     4.88     4.70       4%
Our price targets rise by a median of 31% as we reduce              GS      11.10   11.44      -3%
valuation haircuts to reflect moderating regulatory overhang        Median                     -6%
and greater risk taking market sentiment.                                           2013E
JPM is our top pick among money center bank stocks. We                     MS Est Consensus Difference
favor banks with ability to take share in a capital constrained     BAC     0.91     1.07     -15%
environment, manage expenses and return sizeable capital to         C       4.40     4.70      -6%
shareholders in 2012. We think JPM’s best-in-class franchise        JPM     5.63     5.40       4%
is well positioned to take share and win through this environ-      GS      13.21   13.19       0%
ment and buyback $12 billion of stock in 2012.                      Median                     -3%
                                                                    Source: Thomson Reuters, Morgan Stanley Research

                                                                         Industry View: In-Line
                                                                         Banking - Large Cap Banks

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

Industry Analysis
Valuation Methodology and Risks                                     For GS, downside risks to our forecasts include: (1) litigation
Our price targets are based residual income valuation using a       and government investigations; (2) regulation, including rule
normalized beta and cost of equity capital. For money center        making for Dodd-Frank on derivatives and the Volcker Rule;
banks (BAC, C, JPM, GS), our price targets are based on             (3) financial market and economic deterioration, including a
probability weighted residual income valuation and bear case        double dip, which could drive significant trading and principal
valuation. We expect that the market will start to value banks      losses; (4) ineffective risk management that drives lower earn-
off of longer-term, normalized earnings as credit improves,         ings/losses; (5) liquidity affected by inability to access capital
required capital is determined, and loan growth inflects posi-      markets, including short-term repo funding; (6) counterparty
tively (2011 for Commercial & Industrial, 4Q11 for card, 2H12       credit quality; (7) negative publicity and increased regula-
for residential mortgage, and 2013 for commercial real estate).     tory/public scrutiny; (8) acquisition risk given cheap market
We assume a 5.0% risk-free rate and a 4.5% equity market risk       valuations; (9) an inability to do buybacks; and (10)
premium.                                                            credit-rating downgrade risk. Upside risks to our forecasts
                                                                    include: (1) stronger and faster economic recovery driving
For BAC shares specifically, downside risks to our thesis and       greater client activity levels and top line; (3) favorable litigation
price target include higher cumulative losses, particularly in      outcomes; (4) broader and more lenient regulations, including
residential mortgage; lower home prices than expected; a hard       Dodd-Frank rule making relating to derivatives and the Volcker
landing in Europe; US slipping into recession; higher legal and     Rule; and (5) positive publicity.
reps/warranties costs; and credit ratings (Moody’s said its will
announce actions the week of May 14). Upside risks include          For JPM shares specifically, upside risks include faster loan
eliminating reps/warranties costs; higher home prices; lower        growth, faster expense reductions, faster card improvement,
consumer losses; and realization of any of several different        more reserve release, slower deterioration in housing credit
investments.                                                        losses, and credit-rating downgrade risk. Downside risks in-
                                                                    clude stricter than expected regulatory interpretation of finan-
For C shares specifically downside risks include euro volatility;   cial reform legislation (especially derivatives), higher credit
emerging market slowdown; rising losses in non-core; delayed        losses than we are currently anticipating, stymied market share
capital return; and credit-rating downgrade risk. Upside risks      gains in global markets, higher foreclosure, legal / regulatory
include lower card losses than we are anticipating; faster in-      related costs, thinner net interest margins and inability to
ternational growth; reserve bleed out of Citi Holdings              buyback shares.
(non-core); and retaining Citi Holdings Businesses and strate-
gic actions.                                                        Prices of stocks mentioned: Bank of America (BAC, $9.80,
                                                                    Equal-weight), Citigroup (C, $36.69 Equal-weight), Goldman Sachs
                                                                    Group (GS, $122.93 Equal-weight), J.P.Morgan Chase (JPM, $44.57

                                                                    Citigroup may be deemed to control Morgan Stanley Smith Barney LLC
                                                                    due to ownership, board membership, or other relationships. Morgan
                                                                    Stanley Smith Barney LLC may participate in, or otherwise have a fi-
                                                                    nancial interest in, the primary or secondary distribution of securities
                                                                    issued by Citigroup or an affiliate of Citigroup that is controlled by or
                                                                    under common control with Morgan Stanley Smith Barney LLC.

                                                                   MORGAN STANLEY RESEARCH

                                                                   March 21, 2012
                                                                   Investment Perspectives — US and the Americas

Industry Analysis
March 14, 2012                                                     best niche positioning in exploration, underground, and hard
                                                                   rock mining.
Machinery                                                          Exhibit 1
The Global Mining Machinery                                        Who Is Best Positioned Globally?
Handbook                                                            Most Largest circle =
                                                                                            broadest product                                                 ATLAS

                                                                      Commodity Diversity
                                                                                            offering         SANDVIK
Morgan Stanley & Co. LLC   Vance H. Edelson                                                                                                             CAT
                           Vikram Malhotra
                           Mili Pothiwala                                                                         JOY
Morgan Stanley & Co.       Guillermo Peigneux
International plc+    Least
                           Stephanie Tan                                                    Least                Geographic Diversity                              Most
                                                                   Source: Morgan Stanley Research

After analyzing capex by commodity for 117 mining companies        Exhibit 2
worldwide and assessing the strengths and weaknesses of our        Global Mining Capex ($Bn)
individual Machinery names, we present our Global Mining             $200
Machinery Handbook. CAT emerges a clear winner, while our
findings are more neutral for Atlas Copco and Joy.                   $160

We see global mining capex expanding 14% to record                   $120

levels this year, benefiting all our mining-exposed names,
including Caterpillar, Joy Global, Sandvik, Atlas Copco, Metso
and Outotec. A more mixed picture in 2013 will likely favor only
those best positioned, based on individual strengths by min-
eral, geography, and product offering.                                            $0












Mineral, aftermarket mix in flux: A near-term shift toward
copper and to a lesser extent iron ore, away from coal, favors     Source: Company data, Morgan Stanley Research E = Morgan Stanley Research Estimates
Caterpillar and Atlas Copco. The longer-term shift toward
                                                                   Key Company-Related Takeaways
natural gas from thermal coal is a Caterpillar positive but a
                                                                   Caterpillar (Mining represents one-third of total exposure)
concern for Joy. Higher maintenance spending over the next
                                                                   x   Broadest product range of both surface and underground
two years should boost Atlas Copco and Joy, but is a concern
                                                                   equipment and the market leader in mining trucks.
for Outotec. Atlas Copco and Sandvik are niche plays on
                                                                   x   Strong growth expected in its key markets — South
underground mining, while iron ore 2013 capex uncertainties
                                                                   America and Asia Pacific.
are a concern for Metso.
                                                                   x   Fairly diverse by mineral: We estimate coal is 45% of
The right global footprint is key… We see coal still growing       exposure, copper 23%, and iron ore 15%.
in China, copper across South America, and iron ore in Brazil      x   Highest exposure to surface mining versus its larger
and Australia. In general, Caterpillar, Atlas Copco and Metso      peers: we believe most new copper, iron ore, and coal
have the most favorable geographic mix, in our view. Our full      (ex-China) mines will be on the surface.
56-page handbook includes a special section on China, con-         x   Aims to grow its aftermarket business — currently at 50%
cluding that fundamentals are best for copper and mixed for        of mining revenue — by using its dealers to sell CAT parts and
iron ore and coal amid slowing infrastructure growth.              services to Bucyrus equipment owners.

… but product line-up also counts. Our Handbook includes
a 40-year look at mining equipment trends as well as our
Mining Equipment Guide. Post the Bucyrus acquisition, Cat-
erpillar offers the broadest range of products, with honorable                       Industry Views
                                                                                     US Machinery — In-Line
mention to Joy and Sandvik. We highlight Atlas as having the                         Europe Capital Goods — Cautious

                                                                   MORGAN STANLEY RESEARCH

                                                                   March 21, 2012
                                                                   Investment Perspectives — US and the Americas

Industry Analysis
                                                                   Metso (Mining represents 30% of total exposure)
Joy Global (Pure-play mining equipment company)
                                                                   x    Metso Mining focuses on surface mining. It also focuses
x    A pure-play — therefore most exposed to positive and
                                                                   on soft and hard-rock minerals. Competes with Caterpillar and
negative changes in the mining group.
                                                                   Joy Global in its surface exposure, but focuses mainly in Ma-
x    Offers a strong underground and surface portfolio but
                                                                   terials Handling and Crushing, Screening and Grinding.
lacks a hydraulic excavator offering.
                                                                   x    Latam (28%) and Asia/Australia (25%) are the most im-
x    Most exposed to North America versus its peers but is
                                                                   portant regions. NAFTA represent 13% of total revenue.
growing its footprint in other emerging markets such as China.
                                                                   x    Metso is fairly concentrated in it Iron Ore exposure (c.60%
x    By mineral, it has the highest exposure to coal versus
                                                                   of total mineral exposure). Copper represents roughly 15% and
peers: recent weakness in the US coal market poses a
                                                                   Nickel, Gold and Diamond are all at or below 10%.
near-term risk.
                                                                   x    Metso mining is focused on hard rock and soft rock and its
x    JOY has more exposure to underground than surface
                                                                   majority goes to surface equipment driven by its mid-stream
mining. In China, over 80% of coal is mined underground; and
                                                                   focus on the mining value chain.
we expect this trend to continue over the next several years,
                                                                   x    Aftermarket represents 50% of sales.
which bodes well for JOY.
x    Has a strong aftermarket business (60% of revenues), a
                                                                   Outotec (Metals & Mining represents 80% of total exposure)
buffer in the event of a downturn
                                                                   x    Focuses on engineering solutions for processing of rock
                                                                   into ores and from there into some metals. Main competitor of
Atlas Copco (Mining represents 35% of total exposure)
                                                                   Outotec´s business are mining in-house engineering services.
x    Atlas Copco Mining and Rock Excavation Technique
                                                                   x    Europe (over 28%, including CIS) and Latam (~22%) are
(MRET) is focused on underground and hard-rock minerals
                                                                   the most important regions for Outotec. NAFTA represent
and is the market leader in most of its product categories.
                                                                   about 9% of total revenue. EM is two-thirds of revenue.
x    Asia/Australia are the strongest markets for Atlas Copco
                                                                   x    Fairly diverse exposure by mineral: a third devoted to
(~30% of sales). Americas, 34% of revenue (NA 21%).
                                                                   copper, 15% iron ore, 10% precious metals, and ~9% to alu-
x    Fairly diverse by mineral: copper represents 33%, iron ore
                                                                   minum and ferroalloys.
15%, precious metals 10%, and aluminum and alloys 9%.
                                                                   x    Outotec is focused on the concentration and refining
x    MRET purely focused on hard rock and its majority goes to
                                                                   phases of the value chain using mechanical and metallurgical
underground equipment (~80%). Most mines globally are
                                                                   processes. Its deliveries range from single equipment to
surface, but Atlas benefits from niche underground positioning.
                                                                   manufacturing lines and turn-key plants.
x    Aftermarket represents 55% of sales, of which consum-
                                                                   x    Aftermarket represents 25% of sales.
ables represent 22%.
                                                                   Stocks Mentioned
Sandvik (Mining represents 34% of total exposure)                  Company (Ticker, Price)                 Rating Ind.View      Analyst
x    Sandvik Mining focuses mainly on underground but also         Caterpillar (CAT.N, $113.30)              O        I         V. Edelson
has some surface mining. It also focuses on soft and hard-rock     Joy Global Inc (JOY.N, $82.01)            E        I         V. Edelson
                                                                   Atlas Copco (ATCOa.ST, SKr169.9)          E        C         G. Peigneux
minerals. Co-leads the market for underground equipment with
                                                                   Sandvik (SAND.ST, SKr96.65)               U        C         G. Peigneux
Atlas Copco. Competes with Caterpillar and Joy Global in its       Metso (MEO1V.HE, €35.66)                  U        C         G. Peigneux
surface exposure.                                                  Outotec Oyj (OTE1V.HE, €44.30)            U        C         G. Peigneux
x    Asia/Australia (35–40%) and Africa/ME (~25%) are the          Source: Morgan Stanley Research

most important regions for Sandvik. Americas represent 25%         In putting together this analysis, we have leveraged work done by a
of revenue (NA ~13%).                                              number of Morgan Stanley global research teams. We would like to
x    Fairly diverse by mineral with large exposure to coal (over   give special thanks to our Metals and Mining teams in the following
                                                                   regions: North America, Australia, Europe, and Latin America, whose
25%). Iron ore, copper, and precious metals all account be-
                                                                   input has been particularly helpful in reaching our conclusions.
tween 13% and 17% of Sandvik exposure.
x    Sandvik Mining focused on hard rock and soft rock (mainly     Morgan Stanley is acting as financial advisor to Finning International,
coal): majority goes to underground equipment (70-80%).            Inc. ("Finning") in relation to its agreement to acquire from Caterpillar,
                                                                   Inc. the distribution and support business formerly operated by Bucyrus
Sandvik benefits from niche positioning in underground.
                                                                   International in portions of South America and Western Canada and in
x    Aftermarket represents 50% of sales.                          the U.K., as announced on January 18, 2012. The transaction is sub-
                                                                   ject to customary closing conditions. Finning has agreed to pay fees to
                                                                   Morgan Stanley for its financial services that are contingent upon the
                                                                   consummation of the proposed transaction. Please refer to the notes at
                                                                   the end of the report.

                                                                                   MORGAN STANLEY RESEARCH

                                                                                   March 21, 2012
                                                                                   Investment Perspectives — US and the Americas

Industry Analysis
March 16, 2012                                                                     review of U.S. healthcare reform law, we believe the probability
                                                                                   of maintaining the risk pool (i.e. with the mandate/guaranteed
Managed Care                                                                       issuance/community rating standing or falling together) re-
                                                                                   mains higher than not. This bodes well for MCO sentiment and
March Madness…SCOTUS Edition                                                       could lift the group 5-10%. If we are wrong (and only the
Morgan Stanley & Co. LLC       Doug R. Simpson                                     mandate falls by itself), the group could dip 5 - 10% on the
                                           news. However, we view any weakness as a buying opportu-
                               Melissa McGinnis, CFA                               nity as the business model should demonstrate flexibility (both
                               Colin Weiner                                        price and cost) as it has with initial reform provisions in 2011
                                           and market changes broadly over the last decade.

The Supreme Court will hear oral arguments on 4 key issues                         Base case is for reform to stand. It is obviously difficult to
regarding the constitutionality of PPACA over 3 days in late                       discern exactly what the judges will eventually decide, so this
March. We outline the various scenarios and how our stocks                         paper walks through the variety of possible outcomes. At this
could react.                                                                       point, our base case view is the PPACA is likely upheld and
                                                                                   either 1) the mandate to buy insurance is upheld along with it or
SCOTUS will review and decide on 4 key issues:                                     2) the mandate is removed with the adjusted community ratings
1) Whether the Anti-Injunction Act prevents a decision on the                      and guaranteed issuance provisions. We see the application of
constitutionality of the individual mandate until 2014, 2) If the                  the Anti-Injunction Act to this case as unlikely. We also expect
AIA does not apply, whether the mandate is constitutional,                         the Medicaid expansion to stand and we do not see risk to the
3) If the mandate is found to be constitutional, whether it is                     Dual Demo under any SCOTUS outcome.
severable from the rest of PPACA, and 4) Whether the Medi-
                                                                                       Industry View : Attractive
caid expansion is constitutional (and if not, is it severable).
                                                                                       Managed Care

Favor MCOs into SCOTUS review. We like the short-term
and long-term risk/reward for MCOs. Under the SCOTUS

Exhibit 1
Scenarios Flow Chart (4 Areas of Review: Anti-Injunction Act, Individual Mandate, Severability, Medicaid Ex-

                                                                                 Struck Down
                                                                     Medicaid                         Not Severable
                                                   Applies                                                              Mandate Pushed
                                                                                                                            'til '15


                           Anti Injuction Act                                    Struck Down
                                                                     Medicaid                         Not Severable

                                                Does Not Apply

                                                                                 Struck Down                              Severable


                                                                                                                         Not Severable

Source: Kaiser, Morgan Stanley Research

                                                                                                                                               MORGAN STANLEY RESEARCH

                                                                                                                                               March 21, 2012
                                                                                                                                               Investment Perspectives — US and the Americas

Industry Analysis
Exhibit 2
Scenarios and Potential Impact on Stocks (Upon Decision)*
                 Outcome                    Probability                                  Next Steps                                             Short-term Stock Implications                                      Longer term Stock Implications

                                                          Decision on constitutionality of individual mandate pushed until 2015;     MCOs & Hospitals: both modestly down 0 - 5% on anti- MCOs & Hospitals: Longer term focus shifts back to fundaments and this
Anti Injunction Act applies                   ~10%        Medicaid expansion constitutionality still decided                         climatic outcome                                     remains more of a background issue

                                                          Constitutionality of individual mandate and Medicaid expansion
Anti Injunction Act does not apply            ~90%        decided                                                                    Focus shifts to mandate (see below)                  See below

                                                                                                                                     MCOs & Hospitals: both groups up 5%, commercial
                                                          Mandate is constitutional; constitutionality of Medicaid expansion still   MCOs stand to gain (high leverage to commercial      Positive for both groups longer term, MCO stocks to benefit include WLP, AET,
Individual mandate upheld                     ~45%        TBD (see below)                                                            market with minimal 'caid leverage)                  CVH, and 'caid names

                                                          Mandate is unconstitutional, but fully severable from the law              MCOs: down 5 - 10%, WLP, AET, CVH likely hit the     MCOs: would buy stocks on weakness as likely will prove maneagable
Individual mandate struck down, fully                     (community ratings and guaranteed issuance remain                          hardest given mix and perception                     Hospitals: skew of mandate to healthier populous limits long term impact of its
severable                                     ~16%        intact);constitutionality of Medicaid expansion still TBD (see below)      Hospitals: down 5%                                   absence on acute care volumes

                                                          Mandate is unconstitutional, but partially severable from the law,      MCOs: up 5 - 10%, WLP, AET, CVH as short term           MCOs: positive for group overall including carriers levered to national accounts
Individual mandate struck down, partially                 community ratings and guaranteed issuance will also fall along with the trades                                                  business (eg CI)                                       Hospitals: payor cross
severable                                     ~25%        mandate; constitutionality of Medicaid expansion still TBD (see below) Hospitals: down 5+%                                      subsidization strain remains an issue

                                                                                                                                                                                          After an initial bounce back, we may get a renewed focus on the possibility for
                                                                                                                                     Medicaid MCOs: trade down 20+%, AGP, CNC, and        subsequent reform proposals (ie PPACA 2.0) and related uncertainty. However,
                                                                                                                                     MOH best plays                                       we believe the political reality is that a decision to strike down the law would likely
Individual mandate struck down, not                       Mandate is unconstitutional and not severable from the law, therefore      Commercial MCOs: up 5 - 10%                          weigh on any subsequent attempted federal efforts for reform for foreseeable
severable                                      ~5%        all other PPACA provisions will fall                                       Hospitals: down 5 - 10%                              future. Expect continued focus on longer term funding challenges.

                                                                                                                                     Medicaid MCOs: up 5%                                 No foreseeable long term impacts. Medicaid expansion remains 1 of 3 main
                                                                                                                                     Commercial MCOs: little impact                       drivers of the view that 'caid MCOs can double/triple their revenues and earnings
Medicaid expansion upheld                      95%        Medicaid expansion deemed constitutional, no further rulings               Hospitals: up 0 - 5%                                 base
                                                          Medicaid expansion ruled unconstitutional; since the court will then
                                                          decide whether the provision is severable or not severable, there is a                                                          We'd be buyers of Medicaid MCOs on a pullback of this magnitude given strong
                                                          possibility all of PPACA falls if not severable (see above on severability Medicaid MCOS: down 20+%                             prospects of dual opportunities and RFP pipeline. Note - we do not view the duals
Medicaid expansion struck down                 5%         issue)                                                                     Hospitals: down 5%                                   are at any risk to SCOTUS outcome

Source: Morgan Stanley Research estimates Probabilities for the scenarios are illustrative, and are assigned subjectively based on our assessment of the relative likelihood of each scenario.
* We have tried to assess implications of all major outcomes, but not all combinations of outcomes (e.g., we consider outcomes for the mandate and Medicaid separately, but not the combinations).

                                                                       MORGAN STANLEY RESEARCH

                                                                       March 21, 2012
                                                                       Investment Perspectives — US and the Americas

Industry Analysis
March 20, 2012                                                         both primary endpoints) could drive 15-20% upside for Baxter,
                                                                       80%-plus upside for Grifols, and 30-35% upside for CSL, with
Medical Technology                                                     more bullish scenarios driving even stronger price apprecia-
                                                                       tion. Risk-adjusting for a 25% chance of success, we estimate
The Day After Alzheimer’s                                              the potential NPV of Alzheimer’s is ~$2.50 per share for Baxter,
Morgan Stanley & Co. LLC   David R. Lewis                              ~€3/$1.50 per (Class A/ADR) share for Grifols, and A$3 for
                              CSL. If the trial were successful, our estimate would rise to $10
                           James Francescone                           for Baxter, ~€13/$7 for Grifols, and A$11 for CSL. In our view,
Morgan Stanley & Co.       Karl Bradshaw, PhD                          investors are (correctly) assigning a value of $2-3 per share for
International plc+             AD for Baxter, but may be only incorporating a ~€1-2 valuation
Morgan Stanley Australia   Sean Laaman                                 for Grifols. More importantly, investors may not fully appreciate
                                                                       the magnitude of potential upside.

IVIG in Alzheimer’s is the biggest potential plasma industry           Exhibit 1

catalyst in years. If Phase III data is positive in 1H13, we see       Risk/Reward Heading into PIII Is Skewed Upwards
potential upside of 15-20% for Baxter, 80%+ for Grifols, and            AD NPV % Current Market Cap                          Risk-adjusted 25%    PIII Success

30-35% for CSL. We’d own BAX and GRFS into the data, but                100%
commercialization may be more complicated than consensus                 90%

appreciates.                                                             80%
IVIG as a treatment for Alzheimer’s Disease (AD) is the                  60%
largest potential catalyst in the plasma space in years.                 50%
Phase III data releases from J&J/Pfizer’s bapineuzumab                   40%
(mid-2012) and Lilly’s solanezumab (3Q12) will offer                     30%
read-through to intravenous immunoglobulin (IVIG). Positive              20%
efficacy results would support the beta amyloid hypothesis and           10%
may bode well for IVIG. The mechanism of action for IVIG in                0%
                                                                                            BAX                        CSL                        GRFS
AD is not known, but beta amyloid is the leading hypothesis.
Any safety problems would likely work in Baxter’s favor given                                        Failure       Base   Bull #1 Bull #2 Bull #3
IVIG’s benign safety profile. The clinical outcome remains an          Probability                       75%         10%       9%      5%      1%
unknown, but is by nature a binary event. Less binary, and             Baxter DCF Value                $0.00        $0.60        $9.46       $20.04       $55.46
more challenging to evaluate, is the impact of a successful trial        % Market Cap                     0%           1%         16%          34%          94%
on the industry. In this piece, we consider the significant
                                                                       Grifols DCF Value                € 0.00      € 0.77      € 12.44      € 26.12      € 72.54
clinical, financial, and market uncertainties around quantifying         % Market Cap                      0%          5%          88%         184%         512%
the potential value of a successful Alzheimer’s trial for Baxter,
                                                                       CSL DCF Value                   $0.00        $0.60       $10.86       $21.55       $61.39
Grifols, and CSL.                                                       % Market Cap                      0%           2%         32%          63%         181%
                                                                       Source: Morgan Stanley Research estimates The probabilities shown are only illustrative.
The primary purpose of this analysis is to assess the market           They do not forecast a precise series of events and do not account for all possible outcomes
opportunity if clinical results were positive, not to predict likely   but instead illustrate our sense of the relative plausibility of selected scenarios

outcomes of Baxter’s Phase III trial. Heading into Phase III trial     Our analysis suggests significant potential in Alzheimer’s
results, we do see a favorable risk-reward for IVIG versus key         but also reveals a more complicated and expensive path
competitive products bapineuzumab (Pfizer/J&J) and solane-             to commercial success than we think consensus appre-
zumab (Lilly). However, clinical uncertainty is high, and the          ciates. Key conclusions include:
long list of failed drugs in Alzheimer’s suggests predictions
about clinical outcomes have limited probative value. The              x    Total market potential could be in the tens of billions.
27-page report from which this summary is extracted focuses            We assume an addressable market opportunity of diagnosed
more on the operational and commercial implications given a            mild to moderate AD patients of 3.5 million in the US, 4.0 million
successful AD trial than the probability of clinical success.          in the EU, and 1.5 million in Japan. To reach $10 billion in
                                                                       sales and considering only the US market, we estimate total
Investors seeking exposure should consider GRFS over
BAX, as Grifols is five times as levered to AD. Our analysis                    Industry View : In-Line
suggests strong clinical results (i.e., a Phase III trial that meets            US Medical Technology

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

Industry Analysis
penetration needs to be only 5%. For comparison, current             forward valuations for hospital supply peers of 12-14x. Risks
therapies such as Aricept have 20%+ penetration rates.               include (1) next-generation rFVIII therapies under development
                                                                     at competitors threaten Baxter’s leading franchise; (2) ag-
x    Incremental profitability for treating AD may be lower
                                                                     gressive competition from Octapharma pressuring pricing; and
than investors appreciate. As demand for IVIG grows, it’s
                                                                     (3) the European environment has become more challenging
unlikely demand for other fractions would keep pace. This
                                                                     and could deteriorate further.
would limit fractionators’ ability to make the best use of their
expensive raw material, human plasma, by selling multiple
                                                                     For Grifols Class A shares, we have increased our price
different products from each liter they collect. Subsequently,
                                                                     target to €18.22 from €14.48. This assumes a multiple of
declining incremental revenue with constant or rising incre-
                                                                     13.3x our 2014 EPS estimate of €1.24, discounted back one
mental costs implies profitability will fall unless prices rise.
                                                                     year at 10%, plus €3.23 in risk-adjusted NPV for Alzheimer’s.
x    Capital expenditure requirements will be substantial            The multiple is in line with the broader hospital supply group at
in dollars and time. We estimate $300 million in capex will be       12-14x and our BAX price target at 13.2x. We then discount
required for every $1 billion in IVIG sold for AD. A bull case       this value back one year at 10%. For Grifols ADRs, our price
could require industry capacity to more than double, but             target of $9 reflects a 25% valuation discount versus the Class
bringing new capacity online takes about 4-5 years.                  A shares. As a reminder, Grifols ADRs have substantially
                                                                     equivalent economic rights to Class A shares, but trade in
x    Fractionators will need to recruit a small army of
                                                                     dollars instead of euros, and are convertible into Class B
plasma donors to support a successful AD launch. To
                                                                     shares at a ratio of two ADRs for one Class B share. For Gri-
supply one patient on the higher dose used in Baxter’s trial
                                                                     fols ADRs, our price target equates to a multiple of 10.0x our
would require 12 donors donating twice a month. In our more
                                                                     2014 EPS estimate of $0.82, discounted back one year at 10%,
bullish scenarios, fractionators could need to recruit millions of
                                                                     plus a risk-adjusted AD NPV of $1.60. It’s worth noting that our
additional donors. This could require increased payments to
                                                                     price targets now assume the Grifols ADR/Class A valuation
donors, potentially compressing margins.
                                                                     discount narrows to 25% from roughly 33% today. Previously,
x     Price may be the most critical driver of value. His-           we assumed the discount would narrow to 15%. Risks include
torically, pricing in the IVIG market has been volatile. Current     (1) failure to realize expected merger cost synergies; (2) more
prices of ~$75 per gram may support only minimal profitability if    EU fiscal austerity; and (3) increasing financial pressure on
fractionators are unable to sell other products from the plasma      Octapharma spurring aggressive competition.
collected to meet high IVIG demand or if they need to pay
donors more to increase collections. A large demand shock            Morgan Stanley Australia Healthcare analyst Sean
could certainly put upward pressure on price. Upside may be          Laaman has increased his CSL price target to A$32.49
more challenging past ~$125 per gram, when annual therapy            from A$29.76. He now includes $2.73 in risk-adjusted value
cost begins to approach $100,000, a level that payors may find       from IVIG in Alzheimer’s trials. His CSL DCF valuation is
difficult to support.                                                A$29.76 assuming his Base case scenario, a cost of equity of
                                                                     11.0% (risk-free rate of 6.0%, a risk premium of 5%, a beta of
We’ve increased our price targets for Baxter and Grifols,            1.0) and a weighted average cost of capital of 8.6%. Upside
though we’ve left our models unchanged. To arrive at our             risks to CSL’s price target include (1) industry destocking and
price targets, we use earnings multiples to value the base           possible price increases; (2) rapid further uptake of Berinert in
business, then add in a risk-adjusted value for the Alzheimer’s      the US; and (3) success in PIII IVIG in Alzheimer’s trials.
opportunity. For Baxter, our base business (ex-AD) valuation         Downside risks to CSL’s price target include (1) Alzheimer’s
is based on 2013e P/E. For Grifols, our base business valua-         Phase III trial fails; (2) slowing progress for Privigen/Hizentra
tion is based on 2014e P/E to fully capture earnings accretion       uptake; and (3) Octapharma returning to market before 2H12.
from merger synergies and balance sheet deleveraging, dis-           Companies mentioned: Baxter International (BAX, $59.55,
counted back one year at a cost of equity of 10%. We look out        Overweight), Grifols (GRFS.N, $7.33, Overweight), and CSL Ltd.
farther to 2014 to better capture the effects of merger synergies    (CSL.AX, A$33.61, rated Equal-weight by Sean Laaman in the context
and deleveraging on the P&L. In our AD valuation, we assume          of an In-Line industry view for Australia Health Care).
a 25% chance of Phase III trial success.                             Morgan Stanley is acting as a financial advisor to Pfizer Inc. ("Pfizer") in
                                                                     relation to its review of strategic alternatives for its Nutrition business.
For Baxter, our new price target of $68 (up from $58)                Pfizer will pay fees to Morgan Stanley for its services, including
equates to 13.2x our 2013 EPS estimate of $4.97 plus $2.47 in        transaction fees that will be subject to the consummation of any re-
                                                                     sulting transaction. Please refer to the notes at the end of the report
risk-adjusted NPV for AD. This is in line with current one-year

                                                                                                   MORGAN STANLEY RESEARCH

                                                                                                   March 21, 2012
                                                                                                   Investment Perspectives — US and the Americas

Industry Analysis
March 20, 2012                                                                                     levered basis, which would take the EV to $180 billion and
                                                                                                   Vodafone’s trading price to 205p.
Telecom Services                                                                                   It is hard to see what drivers would close the gap. Global
Verizon Wireless:                                                                                  funds’ arbitraging could close the value gap, but transatlantic/
                                                                                                   global funds are relatively small (average assets under man-
A $100 Billion Valuation ‘Prize’                                                                   agement of $1.1 billion) compared to domestically focused
Morgan Stanley & Co. LLC        Simon Flannery                                                     accounts (AUM average of $3.8 billion). VZ shares could be
                                                         impacted by possible increases in US dividend taxation, or
Morgan Stanley & Co.            Nick Delfas                                                        Vodafone shares could rise, driven by the next VZW dividend.
International plc+    
                                                                                                   A fourth possibility is M&A. In theory, large-scale M&A looks
We estimate there is a $100 billion gap in the value of Verizon                                    like the ultimate solution to close it, but any transaction would
Wireless (VZW) as implied by Vodafone’s and Verizon’s equity                                       be hard for investors to time and the gap itself makes an
prices; VOD is the clearly more attractively valued share. We                                      agreed merger less likely. The classical resolution would be for
see four drivers to close the gap.                                                                 the more highly rated JV partner to buy out the lesser-valued
                                                                                                   one. Barriers to such an event would be the quantum of debt
We estimate there is more than a $100 billion gap in the
                                                                                                   funding required for any cash portion, and whether interna-
value of VZW as implied by Vodafone’s and Verizon’s
                                                                                                   tional diversification on this scale is desirable.
share prices… Verizon Wireless, the 55%/45% JV between
Verizon and Vodafone respectively, has continued to grow to                                        Key debating points. The key debating points in this analysis
the point where it accounts for 62% of Verizon and 39% of                                          are the multiples for VZ fixed and Vodafone Europe, as there
Vodafone proportionate EBITDA. The contribution to EPS is                                          are few pure-play equivalents. Most large caps are integrated
higher, as VZW is essentially unlevered.                                                           fixed and mobile operators. For Vodafone Europe, we adopt a
                                                                                                   discount to the Europe sector, to adjust for the fact that the
In order to calculate the market-implied value of Verizon Wire-
                                                                                                   sector should have better growth on average than Vodafone
less within the Verizon and Vodafone equity prices, we price
                                                                                                   Europe owing to emerging market and US assets. In addition,
the other divisions at market-related multiple and see what is
                                                                                                   the inclusion of pension and OPEB deficits in our analysis
left for the valuation of VZW.
                                                                                                   makes a significant difference (~$20 billion post tax).
x    The implied value at Vodafone for 100% of VZW (EV is
                                                                                                   All told, however, we believe that, if anything, the valua-
very similar to equity value as the business will be run with zero
                                                                                                   tion disparity could be even higher than our figures. This
net cash/debt, per Verizon policy) is $120 billion;
                                                                                                   is because our multiple for VZ fixed is relatively generous on
x     The implied value at VZ on the same basis is $230 billion.                                   EV/opFCF compared to CTL or indeed the Europe compara-
…and that VOD is the clearly more attractively valued                                              bles, and any reduction in this multiple would imply a higher
share of the two. We also believe that a more reasonable                                           VZW valuation. Inclusion of a holding company discount would
                                                                                                   further increase the implied value of stand-alone VZW.
value for VZW would imply at least an 8.0% FCFE yield on a

                  Valuing VZW at $230bn implies the rest of Vodafone’s assets are trading at 2.5x EBITDA
                                                             Pence     FY13e                                                                                                  Implied
                                                 Value    per share   EBITDA   Multiple   Comment                                                                           EV/opFCF
           Europe inc common functions          24,153           49    9,838        2.5   Implied by other divisions at market                                                   4.2
           Other ops ex India                    7,630           16    3,108        2.5   Implied by other divisions at market
           India                                 7,806           16    1,247        6.3   In line with Bharti                                                                   13.8
           Verizon Wireless                     65,746          134    8,117        8.1   Implied by Verizon share price                                                        13.1

           Bharti Airtel                           821            2                       Market price
           Common functions                                                               Included within Europe
           Softbank loan note                      -              0                       Residual, to be paid April 2012
           Total EV                            106,156          217
           Remaining tax liability                 -              0                       India
           Prop net debt 13e                   (24,063)         -49
           Total equity value                   82,093          168
           NOSH                                 48,962
           Value per share                        1.68
           VZW implied equity value             64,505
           Implied VZW EV (100%, $m)           229,234

           VZW share of FCFE                     3,449
           Implied FCFE yield                     5.3%                                    Note VZW is entirely unlevered - FCFE yield on a levered basis would be higher.
           Implied FCFE yield at 2x leverage      5.9%
           Source: Morgan Stanley Research estimates

                                                                                                                                MORGAN STANLEY RESEARCH

                                                                                                                                March 21, 2012
                                                                                                                                Investment Perspectives — US and the Americas

Industry Analysis
Verizon (VZ.N, $39.57, Equal-weight/In-Line Industry View):                                                                     Vodafone (VOD.L, Overweight/Attractive Industry View):
Stock Continues to Show a Downward Risk Skew                                                                                    Proportionate Growth and EPS upside
$45                                                                                                                              p250
                                                                 $ 39.57                                                                                                                                                   235p (+41%)
 40                                                                                      $40.00 (+1%)
                                                                                                                                                                                                                          210p (+26%)
                                                                                        $34.00 (-14%)
                                                                                         $26.00 (-34%)                                                                                                                     145p (-13%)




  0                                                                                                                                0
  Mar-10           Sep-10    Mar-11            Sep-11            Mar-12         Sep-12                       Mar-13                Mar-10            Sep-10     Mar-11            Sep-11           Mar-12        Sep-12                         Mar-13
       Base Case (Mar-13)         Historical Stock Performance             Current Stock Price   WARNINGDONOTEDIT_RRS4RL~VZ.N           Base Case (Mar-13)          Historical Stock Performance            Current Stock Price   W ARNINGDONOTEDIT_RRS4RL~VOD.L

 Bull Case:  Hitting on all cylinders: FiOS helps lift wireline EBITDA                                                           Price Target 210p             Derived from DCF-based analysis assuming blended
 $40         margins and lower capex boosts wireline FCF. A faster than                                                                                        WACC of 8.0% and terminal growth of 1%.
 5.2%        expected economic recovery boosts the Enterprise segment,                                                           Bull             6.1%         VZW growth extends into Dec 13 (10p); Vodafone
 Div. Yield  which in turn leads to higher wireline EBITDA and FCF.                                                              Case             F2013e       Europe modest growth (1.3% pa EBITDA) (13p); no
             iPhone upgrades add momentum to the stock; the percentage                                                           235p             Div. Yield   India tax (2p).
             of new customers to Verizon is higher than anticipated, im-
             plying that most of the activations are incremental revenue to                                                      Base             6.9%         Vodafone Europe delivers flat % revenue CAGR in
             the company. Wireless service revenue growth edges on the                                                           Case             F2013e       FY10-17, with 12% capex / sales. VZW grows 7% to
             double-digit mark, a growth rate not seen since 2008.                                                               210p             Div. Yield   Dec 11 and 4.3% to Dec 12.
 Base Case Wireless keeps hanging on: FiOS pressure on wireline                                                                  Bear             10.0%        VZW service revenue margins fall to 40% (-16p);
 $34         margins eases somewhat in 2012, and capital intensity im-                                                           Case             F2013e       Vodafone Europe sees -4.5% EBITDA CAGR (-35p);
                                                                                                                                 145p             Div. Yield   spectrum costs rise from £5 billion to £9 billion
 13.0x 2013e proves with less focus on FiOS penetration. However, the job                                                                                      FY12-14 (-8p); further EM de-rating (-6p).
 P/E         market continues to lag the economic recovery, preventing
             Enterprise revenue growth from turning positive. In 2012,                                                          Source: Thomson Reuters (historical share price data), Morgan Stanley Research estimates
             Verizon sells ~13mn iPhones, 90% of these activations are
             upgrades; and 35% of upgrades are new to data.                                                                     Risks: The pace of voice price declines as mobile termination
 Bear Case: Wireline Pressure: FiOS growth stalls as a result of com-                                                           rates fall remains an issue, capex is rising slightly, and the
 $26         mercial agreements in the SpectrumCo/Cox acquisitions.
 8.0%        Enterprise trends take a negative turn. In wireless, iPhone                                                        trajectory of Verizon Wireless is key.
 Div. Yield  activations skew overwhelmingly to current subscribers, the
             majority of which already have a data plan. As a result,
             revenue accretion in 2012 is rather muted.                                                                         Morgan Stanley is currently acting as financial advisor to Coinstar, Inc.
                                                                                                                                ("Coinstar") with respect to the creation of a joint venture between
Source: Thomson Reuters (historical share price data), Morgan Stanley Research estimates
                                                                                                                                Redbox Automated Retail, LLC, a wholly owned subsidiary of Coinstar,
                                                                                                                                and Verizon Communications, Inc., as announced on February 6,
Risks: (1) Increasing economic pressure on Enterprise; (2)                                                                      2012. Coinstar has agreed to pay fees to Morgan Stanley for its fi-
Increased regulatory oversight; (3) Competitive price pressure                                                                  nancial advice. Please refer to the notes at the end of the report.
from wireless competitors; (4) Greater than expected impact
from prepaid wireless impacting both Verizon’s wireline and
wireless businesses; (5) Incremental pension/OPEB expense;
(6) Diminishing SMS revenues; (7) A prepaid iPhone

                                                                  MORGAN STANLEY RESEARCH

                                                                  March 21, 2012
                                                                  Investment Perspectives — US and the Americas

Company Analysis
March 13, 2012
                                                                  Stock Rating: Overweight                      Reuters: CVX.N Bloomberg: CVX US
Chevron                                                           Price target
                                                                  Shr price, close (Mar 13, 2012)
Compelling Long-Term                                              Mkt cap, curr(mm)
                                                                  52-Week Range
(2014-Plus) Major Story                                           Fiscal Year ending                          12/11         12/12e    12/13e      12/14e
Morgan Stanley & Co. LLC   Evan Calio                             ModelWare EPS($)                            13.44          11.31     12.10       13.18
                            Prior ModelWare EPS($)                      13.69          11.42     12.25       13.11
                           Marko Lazarevic                        P/E                                           7.9             9.8       9.2         8.4
                                                                  Consensus EPS($)§                           13.44          12.79     13.37       13.24
                                                                  Div yld(%)                                    2.9             3.0       3.1         3.3
                           Todd Firestone
                                                                  § = Consensus data is provided by Thomson Reuters Estimates.
                                                                  e = Morgan Stanley Research estimates
                           Jacob Dweck
                           Price Performance

CVX reiterated production growth of 4-5%/year in 2014-17 —
top among peers — at its Analyst Day. We see modest pro-
duction upside potential in 2013, 2012 dividend increase, Brent
leverage, best balance sheet, and lowest multiple supporting
our Overweight rating.

We believe Chevron’s production growth profile of 4-5%
per year in 2014-17 is the best among the Majors. We
expect returns and FCF yield to improve post-2014 as over
25% of capital employed in growth projects begins to generate
returns.                                                                 Company Description
                                                                         Chevron develops, explores for, refines, and transports crude oil and
We think CVX stock becomes a must-own within large                       gas. It also makes and sells chemical products under various brands.
caps in mid-2013 in front of outsized oil-levered growth and             Industry View: Attractive — Integrated Oil
higher capital efficiency in 2014-17. On our estimates, CVX is
at the peer group’s lowest multiple (3.1x 2012e EV/EBITDA at
strip commodity vs. 3.7x on average) with the most Brent lev-
erage of peers, the highest net cash position of peers (defen-    Exhibit 1
sive), and higher current dividend yield than XOM. Share-         CVX Investment Reduces FCF Yield in 2013E,
holders should be rewarded for owning CVX with potential          Yet Above XOM in 2014E Onwards
upside from relative multiple expansion.
                                                                                                              CVX               XOM
XOM vs. CVX. CVX has outperformed XOM ($87,
Equal-weight) by 47% since mid-2009. We see less differen-
tiation in the near term as CVX has higher long-term growth yet
higher 2013 capex ($34-35 billion) for peak Australia LNG
                                                                     FCF Yield

spend, while XOM has a lower growth profile yet a higher                         5.0%

projected near-term FCF increase due to sooner completion of                     4.0%

growth projects. We view both stocks as defensive with likely                    3.0%

higher dividend increases in 2012.                                               2.0%

Following analyst day, we believe there could be growth
upside in 2013, driven by a large North American liquids-rich                    0.0%
                                                                                        2010   2011   2012E         2013E     2014E   2015E     2016E
position along with a higher global exploration budget adding
upside. CVX’s US portfolio includes substantial Permian and       Source: Company Data, Morgan Stanley Research e = Morgan Stanley Research Estimates
                                                                  Estimates reflect strip commodity prices
Utica acreage, where we think higher production could in-
crease growth in 2013, the “bridge year” to outsized growth in

                                                                                                                                    MORGAN STANLEY RESEARCH

                                                                                                                                    March 21, 2012
                                                                                                                                    Investment Perspectives — US and the Americas

Company Analysis
Exhibit 2                                                                                                                           Investment thesis
CVX: Large-Cap Combo of Growth and Leverage                                                                                         x Improved project execution and higher oil leverage and
$180                                                                                                                                   oil/oil-linked project start-ups are transforming company
 160                                                                                     $162.00 (+46%)                                reputation and driving returns accretion, supporting multiple
 140                                                                                     $137.00 (+23%)
                                                                                                                                       expansion and a closure of the relative multiple gap to
 120                                                               $ 111.19                                                            peer-leader XOM.
                                                                                                                                    x Production growth will accelerate in 2014-17 to 4-5% per
                                                                                            $87.00 (-22%)                              year from startup of oil-linked projects (deepwater GoM and
                                                                                                                                       Australia LNG). Growth will be higher than Super Major
                                                                                                                                       peers and comparable to most large cap E&Ps.
                                                                                                                                    x Expect FCF and capital efficiency to improve as over 25% of
                                                                                                                                       capital employed begins earnings returns.
  Mar-10              Sep-10   Mar-11             Sep-11           Mar-12          Sep-12                         Mar-13
                                                                                                                                    x Highest net income per barrel produced of peers, where free
       Price Target (Mar-13)        Historical Stock Performance              Current Stock Price   WARNINGDONOTEDIT_RRS4RL~CVX.N
                                                                                                                                       cash flow will relatively improve as CVX completes Australia
 Bull         10% multiple Higher crude and production increases relative                                                              LNG projects.
 Case         expansion    performance.
 $162         Bull         2012 volume growth surprises on upside (+1% Y/Y)                                                         x Overweight exposure to crude oil (~70% of production, ~90%
              commodity    2012: Brent, $120; HH, $4.90; GC3:2:1 LLS, $7.00.                                                           of which is Brent-linked) and underweight lower-return
              deck         N. American unconventionals support production
                           growth as higher Brent increase FCF, leading to                                                             business segments: North American natural gas and Inter-
                           higher relative valuation.                                                                                  national refining.
 Base         4.7x 2012e   Upstream drives margin improvement; in-line
 Case         EV/EBITDA volume growth                                                                                               Potential Catalysts
 $137         Base         2012 volume growth in-line (+0% Y/Y)                                                                     x Continued leading per-barrel profitability and further execu-
              commodity    2012: Brent, $98/$90 LT; HH, $3.90/$4.50 LT;
                           GC3:2:1 LLS, $7.00. Oil-weighted portfolio drives                                                           tion on upstream projects lead to multiple rerating.
                           positive margin improvement and startup of Austra-                                                       x Higher production from Lower 48 unconventionals, with over
                           lia LNG projects on track for 2014-16. Our target
                           multiple is derived from historical correlations be-                                                        3 million acres including Permian and Utica with increase
                           tween ROCE and EV/EBITDA.                                                                                   exploration budget in 2012.
 Bear         10% multiple Lower commodity, weak production reduce FCF                                                              x Receives permanent injunction on Ecuador case.
 Case         compression 2012 vol. growth surprises on downside (-2% Y/Y)
 $87          Bear         2012: Brent, $80; HH, $2.90; GC3:2:1 LLS, $7.00.                                                         x Higher dividend increase in 2012, where CVX raised divi-
              commodity    Lower oil price and production issues while CVX at                                                          dend twice in 2011.
              deck         peak spending reduce buyback and free cash flow,
                           leading to lower multiple.                                                                               Risks to Our Price Target
Source: Thomson Reuters, Morgan Stanley Research                                                                                    xCost overruns and delays at LNG projects and deepwater
                                                                                                                                      GoM fields.
                                                                                                                                    xLower commodity prices, and lower crude oil price relative to
                                                                                                                                      nat gas.

                                                                   MORGAN STANLEY RESEARCH

                                                                   March 21, 2012
                                                                   Investment Perspectives — US and the Americas

Company Analysis
March 20, 2012
                                                                   Stock Rating: Overweight                        Reuters: CL.N Bloomberg: CL US
Colgate-Palmolive                                                  Price target
                                                                   Shr price, close (Mar 19, 2012)
Addressing Bear Concerns                                           Mkt cap, curr(mm)
                                                                   52-Week Range

Morgan Stanley & Co. LLC   Dara Mohsenian, CFA
                                                                   Fiscal Year (Dec)                       12/10        12/11    12/12e     12/13e
                           Ruma Mukerji, CFA                       ModelWare EPS($)                         4.84         5.03      5.43       5.95
                                                                   P/E                                      16.6         18.4      17.6       16.0
                                                                   Div yld(%)                                2.5          2.6        2.8        3.1
                           Kevin Grundy, CPA
                           e = Morgan Stanley Research estimates

                           Alison M. Lin, CFA                      Price Performance

We rate CL Overweight as: (1) we expect 2012 EPS upside vs.
consensus, (2) we believe Colgate will post higher long-term
growth than peers given its EM skew, and (3) we believe the
stock’s premium valuation is too low given the company’s
advantages vs. peers.

We remain Overweight CL here, and it is our top large cap
pick. While there is less upside potential in the stock after CL
significantly outperformed its large cap peers (PG/KO/PEP) by
an average of 820 bps since the market bottom in August, and
                                                                       Company Description
1,510 bps on average since the beginning of 2011, we still like
                                                                       Colgate-Palmolive is an $11 billion manufacturer of consumer products,
the stock here. We expect EPS upside short-term due to both            including toothpaste, toothbrushes, deodorants, soap, dish detergent,
gross margin upside and robust top-line trends, and higher             household cleaners, laundry detergents, and pet nutrition. The com-
                                                                       pany's products are sold under such names as Colgate, Palmolive,
long-term growth than peers given Colgate’s skew to emerging
                                                                       Mennen, Ajax and Science Diet.
                                                                       Industry View: In-Line — Household & Personal Care

We also believe CL’s premium valuation should be higher
considering Colgate’s advantages vs. peers, including a supe-      slower rate with higher disposable income in Colgate’s key oral
rior business mix skewed toward emerging markets and per-          care category than other categories.
sonal care, a superior balance sheet, higher returns, and
                                                                   (2) Competitive risk from P&G: We believe this is a valid
greater strategic potential. Given a higher market multiple, we
                                                                   concern, given P&G’s aggressive oral care push, and
have raised our price target by $6 to $107 (based on an 18
                                                                   longer-term P&G cost savings will likely be at least partially
times P/E multiple and 11.5 times EV/EBTIDA on our 2013
                                                                   used to fund market share gains.
estimates), offering 15% total return potential including a 2.5%
dividend yield.                                                    (3) Gross margin risk: Not a valid concern, in our view.
                                                                   Given 157 bps of GM compression in FY11, the market is
We believe most bear concerns are overblown. Given the             concerned whether Colgate can hit 2012 GM guidance of
stock run-up, we think analyzing the bear arguments becomes        +75-125 bps. However, our gross margin walk analysis shows
important in determining if there is additional upside. We also    there is high visibility that Colgate can post at least 125 bps of
note that given very negative sell-side sentiment on CL, with      GM expansion in 2012. Consensus seems to be missing that
only 17% of analysts recommending the name, well below 48%         GM guidance is conservative.
for its large cap Staples peers, we think the bear arguments
                                                                   (4) Ad spend pullback: Not a valid concern, in our view.
tend to be a focus point of discussion on Colgate. We think that
                                                                   Colgate reduced ad spend as a percentage of sales in 2011 by
some are valid (Nos. 1 and 2), but that most are not (Nos. 3, 4,
                                                                   27 bps, but we are less concerned given Colgate continued to
5, and 6).
                                                                   gain market share despite the pullback, and we expect Colgate
(1) Colgate’s categories offer lower growth potential              to increase ad spend by 75 bps in F2012.
within EM: We believe this is a valid concern, as our
analysis shows EM per capita consumption increases at a

                                                                       MORGAN STANLEY RESEARCH

                                                                       March 21, 2012
                                                                       Investment Perspectives — US and the Americas

Company Analysis
(5) Weak F2012 EPS: Not a valid concern, in our view.                  CL: High EM Exposure Warrants Premium Valuation
Colgate guided to 6% F2012 EPS growth (below its                       $130

low-double-digits long-term target), but we believe Colgate can         120
                                                                                                                                                             $118.00 (+24%)
post upside and the highest growth in our large cap coverage.
                                                                                                                                                             $107.00 (+12%)
(6) Valuation premium makes CL expensive: Not a valid
concern, in our view. CL might not appear attractive on the                                                                             $ 95.37

surface, at a 10% 2012e P/E premium vs. Staples peers. But               90

our key point is that Colgate’s higher emerging markets mix                                                                                                      $84.00 (-12%)
alone justifies this premium, and investors are essentially get-
ting other positives “for free.”                                         70

                                                                          Mar-10           Sep-10    Mar-11            Sep-11           Mar-12          Sep-12                      Mar-13
Why Overweight?                                                               Base Case (Mar-13)         Historical Stock Performance             Current Stock Price

x Short term: Above-consensus in 2012. Our analysis

                                                                        Bull            19.0x       Topline upside drives multiple expansion. 75 bps
shows that 7% consensus EPS growth in 2012 is too low, as               Case            Bull Case   of volume upside from share gains and 75 bps of
                                                                        $118            2013e       pricing upside drive multiple expansion to 19x our
we forecast 8% EPS growth, and a large 75-bp jump in ad                                 EPS         bull case 2013e EPS (implies 12.0x EV/EBITDA).
spend. The key point consensus appears to be missing is that                            of $6.21
Colgate’s gross margin guidance is conservative. We also                Base            18.0x       EPS reaccelerates to HSD growth in FY12. We
                                                                        Case            Base        forecast 4-5% 2012-13e organic top line growth and
expect continued emerging markets strength, and                         $107            Case        HSD EPS growth in FY12/13 and apply an 18x P/E
non-operating EPS drivers in 2012 (Sanex accretion and in-                              2013e       multiple (implies 11.5x 2013e EV/ EBITDA), in-line
                                                                                        EPS         with CL’s 18x NTM five-year historical average.
cremental cost-cutting).                                                                of $5.95
x Long term; Higher EPS growth than peers. Colgate’s                    Bear            15.0x       Sales growth slowdown. Weak macros and indus-
                                                                        Case            Bear Case   try competitive pressure drive 75 bps of volume
~53% profit mix in emerging markets (25% at P&G) and higher             $84             2013e       downside and 75 bps of pricing downside, and
margins (Colgate’s EM margins are 200-300 bps higher than                               EPS         Venezuela FX devalues by 20%. We apply a 15.0x
                                                                                        of $5.58    2013e P/E multiple (implies 9.5x EV/EBITDA).
developed markets vs. a negative 700-800-bp gap at P&G)
                                                                       Source: Thomson Reuters, Morgan Stanley Research
means if geographic results are the same, Colgate will post
~200 bps of higher profit growth annually than PG, all else            Key risks to our investment thesis and price target include
equal. If this gap closes to 50 bps from a terminal growth             pricing, currency movements (80% of Colgate’s 2011 sales
standpoint, it still explains more than all of CL’s valuation          were derived from outside the US), Venezuelan bolivar de-
premium vs. PG, according to our analysis.                             valuation risk (Venezuela generated ~4% of 2011 revenue and
x Highest EPS growth of large-cap Staples peers. We are                ~5% of 2011 profit), oral care share, aggressive increases in
1% above consensus EPS on Colgate in 2012, but also fore-              marketing spend, variance from projected cost savings, eco-
cast Colgate will post the highest EPS growth in our large-cap         nomic conditions, and commodity costs.
staples coverage at 8%, vs. 7% for P&G, 6% for Coca-Cola,
and –6% for PepsiCo.                                                   Morgan Stanley is currently acting as a financial advisor to The Procter
x Valuation looks attractive. CL is trading at only a slight           & Gamble Company ("P&G") in relation to its agreement to divest its
                                                                       Snacks business to The Kellogg Company, as announced on February
premium vs. Staples peers on an EV/EBITDA basis, despite its           15, 2012. The proposed transaction is subject to required regulatory
superior growth profile, higher EM exposure, better earnings           approvals and other customary closing conditions. P&G has agreed to
visibility, higher return on invested capital, and greater strategic   pay fees to Morgan Stanley for its services that are subject to the
potential.                                                             consummation of the proposed transaction. Please refer to the notes at
x Balance sheet can be monetized to drive shareholder                  the end of the report.
value, in our view. Colgate has a strong balance sheet, and
we expect it will continue its track record of returning cash to
shareholders. We estimate that Colgate could add 3% to its
EPS over the next 12 months if it elects to lever to 2.0 times net
debt/EBITDA and repurchase shares ratably over this time

                                                                  MORGAN STANLEY RESEARCH

                                                                  March 21, 2012
                                                                  Investment Perspectives — US and the Americas

Company Analysis
March 16, 2012
                                                                  Stock Rating: Equal-weight                 Reuters: NYB.N Bloomberg: NYB US
New York Community Bancorp                                        Price target
                                                                  Shr price, close (Mar 15, 2012)
Why NYB Might Cut Its Dividend                                    Mkt cap, curr(mm)
                                                                  52-Week Range
(and Might Not)                                                   Fiscal Year ending                      12/11       12/12e     12/13e    12/14e
Morgan Stanley & Co. LLC   Ken A. Zerbe, CFA                      ModelWare EPS($)                         1.08         1.01       1.05      1.26
                             Consensus EPS($)§                        1.10         1.05       1.10      1.25
                           Josh Wheeler, CFA                      Div yld(%)                                8.1           7.4        7.4       7.4
                                                                  BV/shr, basic($)                        12.74        12.76      12.79     13.04
                                                                  P/BV, basic                               1.0          1.1        1.1       1.0
                           Jonathan Katz
                                                                  Tang BV/shr, basic($)                    7.04         7.09       7.02      7.19
                                                                  P/Tang BV, basic                          1.8           1.9        1.9       1.9
                           Giselle Cheung
                                                                  § = Consensus data is provided by Thomson Reuters Estimates.
                                                                  e = Morgan Stanley Research estimates

We expect NYB to be able to maintain its dividend (yield =        Price Performance
7.4%), but its margin for error is low. We examine several
reasons why it may cut its dividend and what management
might try to do to offset them. The most plausible solution, in
our view, is an accretive acquisition.

The biggest debate on New York Community: Can it sus-
tain its $0.25 quarterly dividend? This is a relevant question
given we expect NYB to earn just $0.25 in each of the next
three quarters — for a dividend payout ratio of 100% (it was
93% in 4Q11) — driven by downward pressure on its margin
due to persistent low interest rates. Given the regulatory en-
vironment and our earnings expectations, it is possible that
NYB will cut its $0.25 dividend.                                      Company Description
                                                                      New York Community Bancorp, Inc. is a bank holding company. It has
                                                                      two bank subsidiaries: New York Community Bank, a thrift with 242
Our base case assumption is that its dividend will not be             branches serving customers throughout metropolitan New York, New
cut, although we see several scenarios in which it would.             Jersey, Ohio, Florida, and Arizona, and New York Commercial Bank, with
                                                                      34 branches serving customers in Manhattan, Queens, Brooklyn, Long
In this report, we discuss different scenarios under which NYB        Island, and Westchester County in New York.
may have to cut its dividend, as well as the potential offsets        Industry View: In-Line — Mid-cap Banks
management has to avoid a dividend cut.

Note that New York Community’s management team ap-                (2) Lower prepayment penalty fees. We expect prepay fees
pears the most committed to maintaining its dividend of               to remain strong, but volatility (down $15 million relative to
any Midcap Bank we cover. This will drive choices and be-             what we model) could result in up to $0.02 of lower EPS in
haviors we cannot model through analysis alone, and we can-           any given quarter. We assume roughly $0.03 per quarter in
not dismiss this qualitative aspect when evaluating the quan-         fees in 2012, in line with recent levels.
titative scenarios below.                                         (3) Lower mortgage banking originations. An increase in
                                                                      interest rates could drive up to $0.02 in lower mortgage
Five reasons NYB may cut its dividend:                                banking income in a given quarter relative to our model as
(1) Steeper decline in core net interest margin (NIM) than            originations slow. The value of its mortgage servicing rights
    we forecast. A further decline in loan spreads (100 bps)          (MSR), however, could increase. Our base case includes
    could cause another 7-8 bps in NIM compression beyond             $0.03 of mortgage banking income each quarter in 2012.
    what is currently modeled. This could drive a $0.01 reduc-    (4) Increase in provision expense. A spike in provision
    tion in the next quarter’s EPS. Spreads on its multi-family       expense, due to weakening credit quality or unusually high
    loans are around 330 bps (over the five-year Constant             charge-offs in a quarter, could reduce EPS by up to $0.02.
    Maturity Treasury Index, or CMT), well above the 2007 low
    of 150 bps.

                                                                                               MORGAN STANLEY RESEARCH

                                                                                               March 21, 2012
                                                                                               Investment Perspectives — US and the Americas

Company Analysis
(5) Longer-term slowdown in loan growth. A reasonable                                          multi-family loan growth in NYC, and sell any acquired loans (or
    bear case scenario might be a slowdown in quarterly loan                                   allow them to run off).
    growth to just 1%. If it remained at 1% per quarter for three                              Ultimately, regulators will decide. Despite all the analysis
    quarters, the impact on 3Q12 EPS would be $0.02.                                           that we may do, if NYB reports quarterly earnings below the
Offsets available to prevent a dividend cut:                                                   $0.25 threshold (100% payout ratio), regulators will ultimately
                                                                                               determine its fate. We do not believe that a one-quarter
(1) Redeploying cash into securities. NYB has $2 billion in                                    shortfall, in isolation, will necessitate a dividend cut, particularly
    cash it could use to buy securities. If fully redeployed in                                if it is caused by unusual items. But… if the reason for the EPS
    long-duration securities, this could add $0.02 in quarterly                                shortfall is more structural (i.e., a much weaker-than-expected
    EPS. But we doubt the market would view this favorably,                                    and persistently low NIM), then it would reflect negatively on its
    as it would make NYB much more liability-sensitive.                                        future earnings capacity. Either way, an in-depth conversation
                                                                                               with regulators would likely occur — the outcome of which, in
(2) Harvesting security gains. As a one-time solution, NYB
                                                                                               our view, would be based on how well management can con-
    could realize security gains if rates were to decline further.
                                                                                               vince regulators that it can quickly bring down its payout back
    Currently, it only has $2 million of net unrealized gains, so
                                                                                               below 100%. We note that NYB’s payout ratio was well above
    this is an unlikely solution, in our view. Depending on the                                100% from 2006 to 2008, but that was a different regulatory
    rate decline, we see a potential EPS benefit of up to $0.02.                               environment, in our view.

No single factor should be considered in isolation. Any                                        We remain Equal-weight. We like NYB’s strong credit quality
one of these factors, by itself, could easily result in a sub-$0.25                            and solid core loan growth but expect material NIM compres-
EPS in a given quarter, but results are never so clean-cut. We                                 sion from low interest rates and increased competition.
would fully expect management to counter any shortfalls with                                   Our $14 price target is derived using the residual income
gains in other areas, if possible. A possible scenario is shown                                model, applying a 10% cost of equity, and assuming ROE
in Exhibit 1.                                                                                  declines to 10.5% in perpetuity after 2019. General risks to our
                                                                                               price target include slower-than-expected economic growth,
Exhibit 1                                                                                      which would drive slower commercial credit growth and higher
Hypothetical Bear Case Scenario                                                                net charge-offs (NCOs) than we forecast. For NYB specifically,
               Lower Core    Lower   Higher Prov Cash    Securities   Mtg Bnking               risks include deterioration in its margin, slower-than-expected
                  NIM     Prepay Fees Expense Deployment   Gains        Range
                                                                                               multi-family loan growth, mortgage banking income volatility,
                                                                       0.01                    and higher credit costs.
     0.25                                        0.02
                 -0.01                                                                         Exhibit 2
                           -0.02                                                    0.22-
                                      -0.02                                                    NYB: Risk-Reward View

                                                                                                                                                                     $18.00 (+33%)
                                                                                                                                                       $ 13.55
                                                                                                                                                                      $14.00 (+3%)

    MS EPS,                                                                        Pro Forma      10
                                                                                                                                                                       $9.00 (-34%)
   1Q12-3Q12                                                                          EPS

Source: Company data, Morgan Stanley Research estimates                                            5

Acquisitions — Always Looming as an Offset. The one                                               0
variable that is perhaps the most plausible offset to any divi-                                   Mar-10        Sep-10        Mar-11         Sep-11    Mar-12        Sep-12       Mar-13
                                                                                                      Price Target (Mar-13)      Historical Stock Performance         Current Stock Price
dend cut, yet the hardest to model, is acquisitions. In our view,
                                                                                                Bull Case: $18         2011E EPS: $1.20                   Net Interest Income: $1.23 bil
M&A is the clearest solution management has to prevent a                                        Sharp Recovery           NCO Ratio: 9 bps                 Expense Ratio:        39.3%
dividend cut (aside from simply earning more in its core busi-                                                           Provision Expense: $11 mil       2012 P/E              15.0x
ness). Management has been very vocal about its interest in                                     Base Case: $14           2011E EPS: $1.01                 Net Interest Income: $1.14 bil
pursuing additional acquisitions. Indeed, its strategy is clearly                               Slow Recovery            NCO Ratio: 19 bps                Expense Ratio:       42.0%

designed to solve the exact issue we are discussing. NYB says                                                            Provision Expense: $54 mil       2012 P/E              13.9x
                                                                                                Bear Case: $9            2011E EPS: $0.83                 Net Interest Income: $1.08 bil
it will only make acquisitions that are EPS accretive and will
                                                                                                W-Shaped                 NCO Ratio: 29 bps                Expense Ratio:        44.2%
add to its capital position following any necessary equity raise.                               Recovery                 Provision Expense: $121 mil      2012 P/E              10.8x
Its M&A model is to acquire deposits, which it uses to fund                                    Source: Thomson Reuters (historical price data), Morgan Stanley Research

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

Company Analysis
March 15, 2012
                                                                    Stock Rating: Overweight                    Reuters: VFC.N Bloomberg: VFC US
VF Corp                                                             Price target
                                                                    Shr price, close (Mar 14, 2012)
The North Face: Pinnacle of VFC’s                                   Mkt cap, curr(mm)
                                                                    52-Week Range
Portfolio and Key Driver of Growth                                  Fiscal Year ending                      12/11       12/12e     12/13e    12/14e
Morgan Stanley & Co. LLC   Joseph Parkhill                          EPS($)**                                 8.03         9.49      11.11     12.87
                         P/E                                      16.0         15.5       13.4      11.4
                           Jane Zhao                                Consensus EPS($)§                        8.18         9.36      10.79     12.34
                                                                    ModelWare EPS($)                         7.91         9.45      10.98     12.88
                                                                    Div yld(%)                                2.1           2.0        2.3       2.4
                           Joseph Wyatt
                                                                    RNOA(%)                                  20.5         16.9       19.1      21.8
                                                                    § = Consensus data is provided by Thomson Reuters Estimates.
                                                                    ** = Based on consensus methodology
We believe The North Face continues to be the most important        e = Morgan Stanley Research estimates
revenue growth driver of VF Corp. and expect it to contribute
                                                                    Price Performance
~30% of the growth over the next 5 years. Our February Al-
phaWise survey indicates that The North Face still has a lot of
momentum in the US.

Mid teens growth for The North Face (TNF) in the near
term comes from a variety of areas, but mostly from the
US. We believe The North Face brand (currently ~$1.6 billion
in sales) can continue to grow in the mid-teens over the next
five years, driven by US and international growth, and con-
tribute to 30% of the company’s total organic revenue growth.
While long-term growth opportunities are largest internation-
ally, we still believe 60% of the near-term growth will come from
the US, driven by overall strength in the brand (survey results         Company Description
support this), retail expansion, and category/product expan-            VF Corporation is a global leader in branded apparel with more than 30
                                                                        brands. The company’s brands include The North Face, Wrangler, Tim-
sion. Projected sources of growth (which are not mutually               berland, Vans, Lee, and Nautica.
exclusive) include US (10%), international (6%); core growth            Industry View: In-Line — Retail, Branded Apparel
(~5%), increased retail presence (~5%), new specialty distri-
bution (2%), and category/product (3%) expansion. Outerwear
                                                                    trading at a 20-30% discount to its peers. As VFC’s portfolio
continues to be pivotal for growth; however, The North Face is
                                                                    continues to move toward faster-growing, higher-margin out-
also entering into new athletic apparel categories such as
                                                                    door and action sports, we believe the stock can continue to
running and yoga and introducing innovative products such as
                                                                    re-rate higher. We also highlight that our 2012 estimates
Flash Dry to continue its growth trajectory.
                                                                    conservatively estimate 11-12% Outdoor & Action revenue
                                                                    growth, but if the company can achieve 15-16% growth in the
Our AlphaWise survey showed The North Face can con-
                                                                    segment, our EPS estimates would be $0.20-0.25 higher.
tinue to take share. TNF (in a tie with Under Armour) showed
the largest increase in purchase intentions versus last year (5%
                                                                    The North Face still has momentum in the US. Our Al-
increase). Customers regarded The North Face as one of the
                                                                    phaWise survey found that the brand has the highest increase
top 5 favorite athletic apparel brands. Consumers already saw
                                                                    in intent to buy versus purchases last year. The percent of new
the brand as high quality, trendy, high performance, unique,
                                                                    customers who plan to buy The North Face next year is 5%,
and innovative – all important attributes when considering
                                                                    compared to the next highest percentage of 3% for Lululemon
which brand to buy.
                                                                    and an average of 1.5% for all other brands. TNF’s brand
                                                                    attributes parallel what consumers value, according to our
Similar growth profile to Nike and Ralph Lauren, but at a
                                                                    survey. When comparing attributes customers consider when
20-30% discount. All three companies’ near-term growth
                                                                    buying athletic apparel to attributes associated with The North
algorithm includes high-single-digit / low-double-digit revenue
                                                                    Face, many overlapped, including high quality, trendy, every-
growth coupled with double-digit EPS growth; yet, VFC is
                                                                    day casual wear, and high performance. Some of the lowest

                                                                                                                             MORGAN STANLEY RESEARCH

                                                                                                                             March 21, 2012
                                                                                                                             Investment Perspectives — US and the Americas

Company Analysis
scores include “a brand for men” and “a brand for women,”                                                                    In China, The North Face is one of the only brands where
which we view as a positive, as this means that the brand is                                                                 desirability is higher than its brand awareness, according to our
equally regarded among men and women. One major attribute                                                                    July China AlphaWise survey. We believe this is a good indi-
where it’s trailing peer competitors is in price. However, we                                                                cation of the brand’s strength in resonating with its consumers
believe the brand’s qualities are strong enough to earn the                                                                  and a large ability to improve its brand presence within the
premium price – as demonstrated by their ability to sustain high                                                             country. The brand’s attributes in China also looked the most
growth, even through a mild winter season.                                                                                   differentiated from peers – leading for high quality, unique,
                                                                                                                             exclusive, and high performance.
Exhibit 1
The North Face: Highest Increase in Intent to Buy (tied                                                                      Our price target of $167 is based on 15x our 2013 EPS
with Under Armour)                                                                                                           estimate (current 2012e multiple moved forward to 2013).
 Athletic Apparel                                                                                                            Although 15x is higher than VFC’s 5-year historical average of
 40%                                                                                                                         12.9x, we believe this premium is warranted as VFC has
                                                                                                                             transformed into a higher-growth company

 20%                                                                                                                         Risks to our price target include potential for sales to slow
                                                                                                                             and margin pressures creating shortfalls vs. our estimates. We
                                                                                                                             have found that USD/Euro futures and Y/Y changes in con-
   0%                                                                                                                        sumer confidence can impact VFC’s valuation as well.
                                                                                   New Bal









                                                                                                                             Exhibit 2
    Bought LTM         Intend to Buy                                                                                         VFC: Faster Growth Should Drive Re-Rating
Source: AlphaWise, Morgan Stanley Research                                                                                   $250

Current growth should still be driven by outerwear… As                                                                        200
                                                                                                                                                                                                                       $205.00 (+39%)

outerwear apparel makes up the largest portion of The North
                                                                                                                                                                                                                       $167.00 (+14%)
Face’s revenues (roughly 80% of TNF sales per SportScan), it                                                                  150
                                                                                                                                                                                                 $ 146.98

remains the current largest driver for The North Face’s 20-30%                                                                                                                                                          $130.00 (-12%)

sales growth. Despite its leading market share in outerwear                                                                   100
apparel, the brand is still growing 15%-plus in the category and
continues to gain share. Furthermore, we believe the brand’s                                                                   50
reputation of being high quality in outerwear/fleeces will carry
over to other categories, giving it an advantage to be suc-                                                                    0
cessful in new categories.                                                                                                     Mar-10              Sep-10    Mar-11             Sep-11           Mar-12          Sep-12                         Mar-13
                                                                                                                                    Price Target (Mar-13)         Historical Stock Performance              Current Stock Price   WARNINGDONOTEDIT_RRS4RL~VFC.N

                                                                                                                              Bull             15x Bull     Positive mix shift from success in higher margin
…but there are new category opportunities. Although                                                                           Case             Case 13e     international & outdoor/action sports. Revenues
                                                                                                                              $205             EPS of       grow mid teens as Outdoor & Action Sports (OAS)
outerwear is the current anchor for TNF, the brand has recently                                                                                $13.77       continues on its strong growth trend and Timberland
begun building their brand in athletic apparel. TNF’s athletic                                                                                              integration is successful. Margins expand towards
                                                                                                                                                            15% in 2013.
apparel and running in particular have been growing rapidly
                                                                                                                              Base             15x Base     Core business continues to execute and Tim-
with Athletic Tees growing 45% and running apparel growing                                                                    Case             Case 13e     berland acquisition a success. Timberland and
100%-plus in sales for the past two months. Although running                                                                  $167             EPS of       core business grows EPS 17% as outdoor continues
                                                                                                                                               $11.11       to grow mid teens in 2013. Operating margin expand
and performance tees currently make up a small percentage of                                                                                                to 14% in 2013.
the brand’s sales (~2%), the categories offer future growth for                                                               Bear             13x Bear     Sales slow significantly and operating margins
The North Face, as the markets are roughly $1 billion and $500                                                                Case             Case 13e     delever. Slowdown in Europe brings OAS growth
                                                                                                                              $130             EPS of       down to single digits, Jeanswear, Sportswear, and
million in size, respectively. If The North Face can achieve                                                                                   $10.00       Contemporary businesses grow at low single digits.
3-5% market share, these two categories alone will add ~3-7%                                                                                                Operating margins contract to 13% producing EPS
                                                                                                                                                            of $10.00.
to revenue growth.                                                                                                           Source: Thomson Reuters, Morgan Stanley Research

                                                                       MORGAN STANLEY RESEARCH

                                                                       March 21, 2012
                                                                       Investment Perspectives — US and the Americas

March 20, 2012
                                                                       Stock Rating: Overweight                                                                     Reuters: RENT3.SA Bloomberg: RENT3 BZ

Localiza Rent A Car SA                                                 Price target
                                                                       Shr price, close (Mar 19, 2012)
Good Story, but Fully Priced                                           Mkt cap, curr(mm)
                                                                       52-Week Range
                                                                       Avg daily trading value(mm)                                                                                                US$13.7
Morgan Stanley C.T.V.M.   Nicolai Sebrell, CFA
                                                                       Fiscal Year ending                                                                                    12/10                          12/11e                            12/12e                       12/13e
                          Augusto Ensiki
                                                                       Revenue(R$mm)**                                                                                       2,551                           2,980                             3,618                        4,367
                                                                       EBITDA(R$mm)**                                                                                          650                             821                               947                        1,147
                          Ricardo L. Alves
                                                                       Net income(R$mm)**                                                                                      251                             292                               349                          430
                                                                       EPS(R$)**                                                                                              1.24                            1.45                              1.73                         2.12
                                                                       P/E**                                                                                                  21.2                            17.6                              19.6                         16.0
Following 33% YTD appreciation, RENT3’s valuation fully                ModelWare EPS(R$)                                                                                      1.24                            1.45                              1.73                         2.12
                                                                       Div yld(%)                                                                                               0.7                             1.5                               1.1                          1.3
reflects strong growth prospects and lower interest rates, in our
                                                                       ** = Based on consensus methodology
view. Risk-reward looks balanced here, and we have down-               e = Morgan Stanley Research estimates
graded the stock to Equal-weight.
                                                                       Price Performance

Valuation looks reasonable, but not attractive. Deprecia-
tion concerns have largely passed and the stock price is now
almost within 10% of our prior year-end R$37 price target.
RENT3 currently trades at a 2012e P/E of 19.6x, above its
long-term average of 17.5x forward earnings. Its 2012e
EV/EBITDA of 8.8x is slightly below its long-term average. Our
base case shows potential upside to be slightly below cost of
equity going forward, indicating that the stock looks fully priced
at this point. Our estimates are mostly in line with consensus.

We believe Localiza is still a high-quality company with
room to grow next few years. We expect top-line growth in              Source: Thomson Reuters

the high teens over the next two years. Localiza is the largest                              Company Description
rental car player in Brazil, with an estimated 24% market share                              Based in Brazil, Localiza is South America's largest car rental company.
in rental car and corporate fleet businesses combined. The                                   Through its subsidiaries, the company manages and franchises car
                                                                                             rental, fleet rental, and used car sales businesses.
next largest player, Unidas, has an estimated 7% share.
                                                                                             Industry View: In-Line — Latin America Transportation & Infrastr.

Management continues to sell down its stake. The con-
trolling shareholders sold about 1 million shares of their out-        Exhibit 1

standing total over the last 4 months, moving the controlling          RENT3 Tends to Perform Poorly
stake from 34.23% of the company, to 33.78%.                           in Rising Interest Rate Environments
                                                                                                                                          RENT3 vs SELIC Change
                                                                                             200%                                                                                                                                                                      1200
Beware of interest rate sensitivity. A positive outlook ap-                                                                                                                                                                                 RENT3
pears priced in, however, lower interest rates and/or higher                                 150%                                                                                                                                           SELIC                      900
                                                                                                                                                                                                                                                                              SELIC bps y-y change
                                                                        RENT3 % y-y change

GDP growth than forecast could push the stock value toward
                                                                                             100%                                                                                                                                                                      600
our Bull-case scenario of R$49 (see Exhibit 3, next page).
Conversely, if rising inflation triggers rate hikes, it would likely                           50%                                                                                                                                                                     300

act as a negative catalyst toward our Bear-case scenario, in                                    0%                                                                                                                                                                     0
our view, as nearly all of Localiza’s debt is linked to the SELIC.
                                                                                              -50%                                                                                                                                                                     -300
That said, with hikes not expected until late 2012, according to
Morgan Stanley’s Latin America Economics team, near-term                                     -100%                                                                                                                                                                     -600











growth may offset concerns until then.

                                                                       Source: Thomson Reuters, Morgan Stanley Research

                                                                                   MORGAN STANLEY RESEARCH

                                                                                   March 21, 2012
                                                                                   Investment Perspectives — US and the Americas

Exhibit 2                                                                          Exhibit 3
Higher Rates in 2H12 and 2013 Could be a Concern                                   RENT3.SA: Positive Outlook Priced In; Balanced
                   MS Economics Brazil Interest Rate Forecast                      Upside / Downside Ahead
 16%                                                                               R$60

                              13.75%                                    SELIC
 14%   13.19%
                                                                                     50                                                                                  R$49.00 (+44%)
 12%                 11.25%                    10.75%   11%               11%
                                                               9.75%                 40
 10%                                   8.75%                                                                                                       R$ 34.00               R$37.00 (+9%)


  6%                                                                                                                                                                      R$24.00 (-29%)








                                                                                     Mar-10           Sep-10   Mar-11            Sep-11            Mar-12          Sep-12                        Mar-13
                                                                                          Base Case (Mar-13)        Historical Stock Performance              Current Stock Price

Source: Company Data, Morgan Stanley Research                                       Bull        18.1x Bull Borrowing costs improve more than expected
                                                                                    Case        Case 2013e and depreciation drops, helping the bottom line.
Potential Drivers/Catalysts                                                         R$49        EPS of     The SELIC falls to 8% and used car prices rise, re-
x GDP and air travel growth. Localiza should benefit from                                       R$2.70     ducing depreciation. Growth also surprises with
                                                                                                           revenue up 25%. EBTIDA growth exceeds 27%..
3.5% GDP growth (the forecast of Morgan Stanley’s LatAm                             Base        17.5x Base Rental car revenue rises 20% and depreciation
Economics team) and high-single-digit air travel growth in                          Case        Case 2013e continues to be a headwind. Lower depreciation
Brazil in 2012.                                                                     R$37        EPS of     due to strong used car sales helps the bottom line.
                                                                                                R$2.12     EBITDA grows 21%. 17.5x P/E valuation is in line
x Used car sales. The company is expected to open 14                                                       with RENT3’s long-term average.
dealerships in 2012, following 11 opened last year, for a total of                  Bear        15.5x Bear Interest rates reverse course before year-end
                                                                                    Case        Case 2013e followed by a slowdown in rental demand. Used
80 used car dealers.                                                                R$24        EPS of     car sales founder, forcing Localiza to cut back on
x Reasonable but not attractive valuation, in our view.                                         R$1.55     growth plans as car depreciation rises. Inflation
                                                                                                           concerns turn into interest rates hikes earlier than
Forward P/E is trading above its historical average; the stock                                             expected, further impacting Localiza’s bottom line.
has re-rated over the past few months.                                                                     EBITDA is flattish relative to 2011.
                                                                                   Source: Thomson Reuters, Morgan Stanley Research
x Cash intensive growth/interest rate exposure. The
company requires debt to finance growth beyond 10-15%, in
our view. RENT3 tends to perform poorly in a rising interest
rate environment.
x Depreciation for 1-year old cars rose from 10% in 2007, to
about 17% this year, we estimate.
x Share sales by management. Since 2008, controlling
shareholders have sold down from a 34.23% stake, to a
33.78% stake.
x Used car prices. Falling used car prices means greater
depreciation (which is in our model).

                                                                     MORGAN STANLEY RESEARCH

                                                                     March 21, 2012
                                                                     Investment Perspectives — US and the Americas

March 19, 2012
                                                                     Stock Rating: Overweight        Reuters: 005930.KS Bloomberg: 005930 KS
Samsung Electronics                                                  Price target
                                                                     Up/downside to price target(%)
All About Smartphones;                                               Shr price, close (Mar 15, 2012)
                                                                     52-Week Range
Overweight                                                           Sh out, dil, curr(mn)
                                                                     Mkt cap, curr(bn)
                                                                     EV, curr(bn)                                                   W160,120
Morgan Stanley & Co.       Young Suk Shin                            Avg daily trading value(bn)                                        W350
International plc, Seoul
Branch+                    Shawn Kim
                                                                     Fiscal Year ending                        12/11     12/12e         12/13e     12/14e
                                                                     ModelWare EPS(W)                         92,387    136,361        146,039    154,186
                                                                     Prior ModelWare EPS(W)                   92,363    117,910        130,032           -
What's Changed                                                       Revenue, net(Wbn)                       165,002    203,869        225,672    248,239
Price Target                              W1,350,000 to W1,500,000   EBITDA(Wbn)                              30,852     41,352         45,888     50,015
                                                                     ModelWare net inc(Wbn)                   13,608     20,086         21,511     22,711
                                                                     P/E                                        11.5         9.2            8.6        8.1
We rate Samsung Electronics Overweight with a new price              P/BV                                         1.5        1.5            1.3        1.2
                                                                     e = Morgan Stanley Research estimates
target of W1.5mn, implying 20% upside potential. Strong
smartphone momentum, coupled with robust growth of new
businesses, should drive further ROE expansion.
                                                                            Company Description
                                                                            Samsung Electronics (SEC) is the flagship of the Samsung Group and
OW rating with new PT of W1.5mn: Driven by robust mo-                       the largest diversified electronics company in Asia, ex-Japan. With a
mentum of the handset, system LSI and OLED divisions, cou-                  market capitalization of over W100tn, SEC is the largest company on the
                                                                            Korea Stock Exchange and represents over 10% of the KOSPI index.
pled with recovery of commodity businesses, we forecast core                The company's core products include semiconductors, TFT-LCDs,
OP growth of 48% YoY and ROE expansion to 20% in 2012.                      telecom equipment, and consumer electronics.
Despite an 18% increase in the absolute share price and 6%                  S. Korea Semiconductors
outperformance vs KOSPI YTD, we believe the market has yet                  Industry View: Attractive

to fully reflect earnings growth potential of telecom and new
businesses. Given the company’s growth momentum and
reasonable valuation at 1.5x P/B, we recommend investors             Exhibit 1
accumulate on any share price correction. Based on a stronger        SEC: Contribution from Handset OP (50%+ in 2012)
performance outlook for the handset, System LSI and OLED                         8,000                                                            100%
divisions, we have raised our EPS estimates 16% for 2012e                                                                                         90%
and 12% for 2013e. We expect consensus estimates to con-                                                                                          80%

                                                                                                                                                         % of Handset OP to Total OP
tinue to rise going into 1Q12.                                                                                                                    70%
                                                                        KRW bn

All about smartphones: Driven by a strong pipeline of new                        4,000                                                            50%

product offerings, we expect SEC’s healthy momentum to                           3,000

continue well into 2012. We have raised our annual smart-                                                                                         30%
phone volume forecast for Samsung to 200mn for 2012 with its                                                                                      20%
penetration rising to 49%. Given its rapidly growing smart-                                                                                       10%

                                                                                    0                                                             0%
phone volume as well as a steady rise in blended ASPs, the


                                                                                   1Q 11
                                                                                   2Q E
                                                                                   3Q E
                                                                                   4Q 2E
                                                                                   1Q E
                                                                                   2Q E
                                                                                   3Q E
                                                                                   4Q E

company should be able to maintain OP margin of high-teen



levels throughout the year. We forecast telecom OP to grow                                  Handset OP       Total OP    Handset OP / Total OP

58% YoY to W13trn in 2012, being a key driver for core OP            Source: Company data, Morgan Stanley Research, E = Morgan Stanley Research estimates
growth of 48% YoY. Robust smartphone growth outlook should
also drive secular growth of System LSI and OLED divisions
and justify their aggressive CAPEX plans as demand for APs
and OLED panels should remain strong.

Recovery of commodity business: We expect recovery of
traditional commodity businesses (DRAM, NAND and

                                                                                                 MORGAN STANLEY RESEARCH

                                                                                                 March 21, 2012
                                                                                                 Investment Perspectives — US and the Americas

TFT-LCD) to provide an earnings boost starting 2Q12. Al-                                         our residual income model include cost of equity of 11.5%,
though the magnitude of recovery should vary, improving de-                                      terminal growth rate of 5%, and beta of 1.00. Overall, we pro-
mand along with supply conditions should trigger margin re-                                      ject that ROE can expand to 20% in 2012.
covery for all three divisions, in our view. Especially for DRAM,
a recent corporate reorganization announcement by Elpida                                         Risks to our price target include:
paints a more favorable industry supply/demand outlook in
                                                                                                 x       Global consumption slowdown: Growth prospects are
2H12 for the remaining players, especially for the Koreans. As
                                                                                                         dependent on overall consumer spending, mainly on
for NAND and TFT-LCD, a more gradual margin recovery is
                                                                                                         handsets (smartphones/tablet PCs), TVs, PCs and ap-
expected. However, SEC should maintain its cost leadership
through technology migration and efficiency improvements.
                                                                                                 x       FX movement: Sudden changes in FX especially rapid
To derive our price target, we take the average of our P/B                                               movements USD/EUR vs. KRW could posi-
and residual income valuations. We round up the result                                                   tively/negatively affect the company’s profits.
(base case average of W1,490,554 per share) and present a
                                                                                                 x       Potential legal disputes: Ongoing patent disputes
base case scenario value and target price of W1,500,000. For
                                                                                                         among mobile telecommunications companies could af-
target P/B multiple, we apply 1.6x given its revenue/earnings
                                                                                                         fect Samsung’s earnings.
growth momentum. This reflects the better profitability outlook
for handsets and faster than anticipated growth of the System
LSI business. Improvement in product mix for both businesses
should expand OPM faster than anticipated. Key parameters in

Samsung Electronics (005930.KS) Risk-Reward View: Strong Earnings Growth from Mobile Strength
     1,800,000                                                                                                                                 Bull    Macro environment rapidly recovers; fur-
                                                                                                                                               Case    ther upside for handset division: Demand for
                                                                                                  1,620,000 (+30%)                             W1,620K consumer electronic goods recovers quickly
                                                                                                                                                       with stabilization of macro environment. Com-
                                                                                                 1,500,000 (+20%)                                      pany’s smartphone shipments grow at a faster
     1,400,000                                                                                                                                         rate while capacity ramp-up at System LSI
                                                                                                                                                       accelerates further. DRAM and TFT-LCD
     1,200,000                                                                                                                                         supply/demand dynamics improve significantly.
                                                                                                                                               Base    Mobile strength drives strong earnings
     1,000,000                                                                                                                                 Case    growth: Handset division continues to gener-
                                                                                                     900,000 (-28%)                            W1,500K ate over 50% of core profits. System LSI busi-
                                                                                                                                                       ness leads semiconductor growth via acceler-
                                                                                                                                                       ated wafer growth from aggressive capacity
                                                                                                                                                       expansion. OLED strength also continues with
       600,000                                                                                                                                         new product offerings and adoption into larger
                                                                                                                                                       panels such as tablet PCs. Traditional com-
       400,000                                                                                                                                         modity businesses also sees recovery into
       200,000                                                                                                                                 Bear      Prolonged consumption slowdown into
                                                                                                                                               Case      2012: Further deterioration in macro conditions
            0                                                                                                                                  W900K     stalls global consumption of IT products in
            Mar-10              Sep-10     Mar-11             Sep-11        Mar-12             Sep-12                      Mar-13
                                                                                                                                                         2012. Demand for smartphones deteriorates
                                                                                                                                                         significantly, impairing the company’s profit-
           Base Case (Mar-13)                Historical Stock Performance               Current Stock Price
Source: Thomson Reuters, Morgan Stanley Research

                                                                    MORGAN STANLEY RESEARCH

                                                                    March 21, 2012
                                                                    Investment Perspectives — US and the Americas

March 19, 2012
                                                                    Stock Rating: Overweight                   Reuters: TLS.AX Bloomberg: TLS AU
Telstra Corporation                                                 Price target
                                                                    Up/downside to price target(%)
Sustainable Dividend and Earnings                                   Shr price, close (Mar 16, 2012)
                                                                    52-Week Range
Growth - Assume Coverage                                            Sh out, dil, curr(mn)
                                                                    Mkt cap, curr(mn)
at Overweight                                                       EV, curr(mn)
                                                                    Avg daily trading value(mn)

Morgan Stanley Australia   Mark Goodridge
                                                                    Fiscal Year ending                       06/11      06/12e     06/13e    06/14e
                           Andrew McLeod                            ModelWare EPS(A$)                         0.26        0.28       0.29      0.31
                                                                    Consensus EPS(A$)§                        0.25        0.28       0.29      0.30
                                                                    Revenue, net(A$mn)                      24,983      25,385     25,534    25,471
                                                                    EBITDA(A$mn)                            10,151      10,372     10,564    10,786
TLS is an income stock with a sustainable dividend, which we        ModelWare net inc(A$mn)                  3,269       3,514      3,613     3,821
feel is in a rare sweet spot with earnings growth underpinned       P/E                                       11.0        11.5       11.2      10.6
                                                                    ROE(%)                                    25.7        29.1       29.8      31.1
by a dominant mobile business and expected NBN cash flows.          Div yld (%)                                 9.7         8.6        8.6       8.6
Our A$3.60 target price implies a FY12 P/E of ~12x.                 § = Consensus data is provided by Thomson Reuters Estimates.
                                                                    e = Morgan Stanley Research estimates

We like TLS for three main reasons:

1. A strong sustainable dividend: TLS’s current dividend                Company Description
yield is 8.6%, a 4.9% spread above the 10-year government               Telstra Corporation Ltd is the full-service incumbent telecommunications
bond. This spread is approaching all-time highs and we think            provider in Australia. The company offers a full range of local, domestic
                                                                        and international voice, video (including pay-TV through Foxtel) and data
that TLS offers investors an alternative to investing in bonds.         services. Telstra operates national GSM and CDMA mobile networks.
We expect a 28c per TLS share dividend to be maintained over            Australia/NZ Telecommunications
the medium term, underpinned by over A$12bn of generated                Industry View: In-Line
free cash flow (FCF) to equity holders over FY12-14, organic
and NBN payments. We forecast FCF yield of 11.1% in FY12,
9.6% in FY13 and 9.7% in FY14.
                                                                    be trading at A$3.78. Note that TLS’s management has not
                                                                    commented on the possibility of share buybacks, and we have
2. Undervalued mobile business: We believe TLS is in a
                                                                    not included this buyback potential in our base case scenario.
strong position to capitalize on its recent strong market share
gains (38% in FY10 to 44% in 1H12) because of: 1) its
                                                                    Other market concerns and opportunities include:
first-to-market LTE (4G) network; 2) a stabilizing pricing envi-
ronment; and 3) increasing tablet and smartphone penetration        1. Declining Sensis earnings: Sensis, TLS’s advertising and
driving data usage. Also, if TLS is able to maintain its share of   directories business, faces significant structural decline as
the consumers’ wallet, consensus may be underestimating             classifieds and directories’ dollars shift from Sensis’s print
FY15 mobile revenue by 17%, our bull case scenario.                 assets to online. This is already a well entrenched trend. We
                                                                    assume Sensis’s EBITDA declines by almost 50% over
3. Expected A$1bn share buyback announcement: We,                   FY12-16. Investors are increasingly attaching less importance
and the market, anticipate potential for a share buyback be-        to this issue… We expect Sensis to represent only ~6% of
cause of TLS’s significant FCF – but we differ on the amount.       TLS’s EBITDA in FY12 and 4% in FY15. The sensitivity of
We believe TLS could buy back up to A$1bn of its shares over        TLS’s EPS to changes in Sensis’s revenue: All else equal,
the next 2.5 years: A$300m worth of stock in FY12, which            +/-1% change in Sensis’s revenue changes EPS by +/-0.3%.
would be 0.6% EPS accretive in FY12; A$300m worth of stock
in FY13, which would be 1.2% EPS accretive in FY13; and             2. Potential acceleration of fixed line declines: TLS, like
A$400m worth of stock in FY14, which would be 2.3% EPS              many telcos around the world, faces the threat of accelerated
accretive in FY14. If TLS was to buy back A$1bn worth of stock      fixed line declines. TLS’s PSTN revenue decline can be at-
by FY14 and maintained our target P/E multiple of 12x, it would     tributed to both volume and price declines. Volumes, or the no.
                                                                    of access lines, declined at a -3% CAGR over the past five

                                                                                               MORGAN STANLEY RESEARCH

                                                                                               March 21, 2012
                                                                                               Investment Perspectives — US and the Americas

years FY07-FY11. We expect this to accelerate to -4% CAGR                                      3-year planned timeline. If this run rate continues, TLS could
over the next five years FY12-FY16. Prices increased at a                                      exact another A$1bn of productivity benefits over the next 1.5
CAGR of +0.3% over the past years, over FY07-FY11, but                                         years. Areas that have been identified include increasing online
declined in real terms. We expect this decline to accelerate to                                interactions, process delivery implementation and labour pro-
-2% price CAGR over the next 5 years FY12-FY16. The sen-                                       ductivity costs.
sitivity of TLS’s EPS to changes in PSTN access line decline:
All else equal, +/-1% change in PSTN access line decline                                       We derive our rounded price target by averaging our three
changes EPS by +/-0.6%.                                                                        valuation methodologies: P/E (A$3.50), EV/EBITDA-
                                                                                               based sum of the parts (A$3.37), and DCF (A$3.75). We use
3. Additional capex requirements: Telecommunication firms                                      an average of all three because we think the DCF captures the
are highly capital intensive. Yet TLS has seen its capex as a %                                increasing uncertainty of TLS’s terminal value whereas P/E
of sales decrease from 25% in FY07 down to an expected 14%                                     and EV/EBITDA multiple methods focus on short-term earn-
in FY12. TLS would argue that this number should continue to                                   ings, and historical norms appear to support these earnings.
decrease with the capex saving due to the decommissioning of
its fixed line copper network. We also recognize that the shift                                The key downside risks to our price target are:
from 3G to 4G is likely to require fewer tower upgrades com-
                                                                                               x       TLS loses mobile market share to its competitors. This
pared with the shift from 2G to 3G. This is because the LTE
                                                                                                       results in faster-than-expected ARPU declines in post-paid
upgrade is mostly evolutionary, rather than the revolutionary
                                                                                                       mobiles and broadband mobile.
transition to 3G … i.e. backhaul, sheds and towers require
fewer upgrades. We have been conservative and maintained                                       x       TLS’s fixed line business experiences greater-than- ex-
TLS’s long-term capex requirements at 14% of sales because                                             pected market share losses, and margins decline further
costs often exceed expectations when upgrading a mobile                                                than the expected long-term 25% EBITDA margin.
                                                                                               x       Increased regulation in the telecommunication industry,
                                                                                                       which forces TLS to divest its media assets. We do not
4. Cost-out opportunities: Project New has delivered TLS
                                                                                                       expect this to occur.
~A$1bn in productivity benefits over the past 1.5 years and
according to management is running ahead of its original

Telstra Corporation (TLS.AX) Risk-Reward View: Strong sustainable cash flows
   A$4.50                                                                                                                                     Bull     Re-rating led by reduced fixed line decline
                                                                                                   A$4.30 (+32%)                              Case     and TLS maintains wallet share of the con-
                                                                                                                                              A$4.30   sumer: Fixed Line EBITDA margins fall only to
     4.00                                                                                                                                              30% over the next 15 years, and TLS retains
                                                                                                                                                       50% Fixed Line market share. TLS maintains is
                                                                                                                                                       current 1.4% share of the consumer’s wallet to
                                                                                                   A$3.60 (+10% )
     3.50                                                                   A$ 3.26                                                                    FY15.

                                                                                                                                              Base     Fixed line declines and mobile grows: Fixed
                                                                                                                                              Case     Line EBITDA margins fall to 25%, and TLS
                                                                                                    A$2.60 (-20%)                             A$3.60   retains 50% Fixed Line market share. TLS
                                                                                                                                                       reduces its current 1.4% share of the con-
                                                                                                                                                       sumer’s wallet to 1.2% FY15.

                                                                                                                                              Bear     De-rating due to fixed line collapse and
     1.50                                                                                                                                     Case     mobile stalls: Fixed Line EBITDA margins fall
                                                                                                                                              A$2.60   to 15%, and TLS retains 50% Fixed Line market
                                                                                                                                                       share. TLS reduces its current 1.4% share of
     1.00                                                                                                                                              the consumer’s wallet to 1% FY15.
        Mar-10              Sep-10      Mar-11             Sep-11           Mar-12          Sep-12                        Mar-13
            Price Target (Mar-13)            Historical Stock Performance             Current Stock Price   WARNINGDONOTEDIT_RRS4RL~TLS.AX~

Source: Thomson Reuters, Morgan Stanley Research

                                                                                MORGAN STANLEY RESEARCH

                                                                                March 21, 2012
                                                                                Investment Perspectives — US and the Americas

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                                                       basis. ModelWare also emphasizes the separation of operating performance of a company
                                                       from its financing for a more complete view of how a company generates earnings.

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                                                                                MORGAN STANLEY RESEARCH

                                                                                March 21, 2012
                                                                                Investment Perspectives — US and the Americas

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                                                                                 MORGAN STANLEY RESEARCH

                                                                                 March 21, 2012
                                                                                 Investment Perspectives — US and the Americas

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                                           % of                   % of % of Rating
Stock Rating Category          Count       Total     Count Total IBC Category
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Equal-weight/Hold              1229       42%         449        42%         37%
Not-Rated/Hold                  105        4%          24         2%         23%
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Total                         2,918                  1058

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                                                                                 MORGAN STANLEY RESEARCH

                                                                                 March 21, 2012
                                                                                 Investment Perspectives — US and the Americas

Stock Price, Price Target and Rating History (See Rating Definitions)

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                                                                                  MORGAN STANLEY RESEARCH

                                                                                  March 21, 2012
                                                                                  Investment Perspectives — US and the Americas

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                                                                               MORGAN STANLEY RESEARCH

                                                                               March 21, 2012
                                                                               Investment Perspectives — US and the Americas

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                                                                                      MORGAN STANLEY RESEARCH

                                                                                      March 21, 2012
                                                                                      Investment Perspectives — US and the Americas

North America
Director of Research                     Softlines                                  REITs Strategy
Stephen Penwell        1+212-761-1466    Kimberly Greenberger      1+212-761-6284   Paul Morgan                1+415-576-2627   MEDIA
Associate Director of Research           Jay Sole                  1+212-761-5866   Chris Caton                1+415-576-2637   Cable & Satellite
Sharon Pearson         1+212-761-3159       Laura Ross             1+212-761-6117   Swaroop Yalla              1+415-576-2361   Benjamin Swinburne        1+212-761-7527
Michelle Teitsch       1+212 761-4192       Peter Kahgn            1+212-761-5156      Jorel Guilloty          1+415 576-2631
                                                                                                                                Ryan Fiftal               1+212-761-3005
Management                                                                             Stephen Bakke           1+415-576-8913
Gail Alvarez           1+212-761-7650
                                         CONSUMER STAPLES                                                                          Hersh Khadilkar        1+212 761-5120
                                                                                    HEALTHCARE                                     Bernard McTernan       1+212-761-4786
Aaron Finnerty         1+212 761-0064    Tobacco/Packaged Food
                                                                                    Biotechnology                                  Emmy Mathews           1+212-761-1740
MACRO                                    David J. Adelman          1+212-761-6382
                                         Matthew Grainger          1+212-761-8023   Marshall Urist             1+212-761-8055   Entertainment & Broadcasting
Accounting                                 Jaclyn Inglesby         1+212 761-3667   David Friedman             1+212 761-4217   Benjamin Swinburne        1+212-761-7527
Gregory Jonas          1+212 761-7345      Vinay Ayala             1+212-761-1758   Yigal Nochomovitz          1+212 761-0790     Micah Nance             1+212-761-7688
John Mark Warren       1+212 761-0430    Agricultural Products                         Sara Slifka             1+212 761-3920
   Todd Castagno       1+212-761-6893                                                  Brienne Kugler          1+212 761-6209   TECHNOLOGY
                                         Vincent Andrews           1+212-761-3293
   Snehaja Mogre       1+212-761-5289                                               Healthcare Services & Distribution
                                            Greg Van Winkle        1+212-761-4968                                               Communications Equipment
Economics                                                                           Ricky Goldwasser           1+212-761-4097
                                         Beverages/HPC                                                                          Ehud Gelblum              1+212-761-8564
Vincent Reinhart       1+212-761-3537                                               Donald Hooker              1+212-761-6837
                                         Dara Mohsenian            1+212-761-6575   Andrew Schenker            1+212-761-6857   Kimberly Watkins          1+415-576-2060
David Greenlaw         1+212-761-7157
                                         Ruma Mukerji              1+212-761-6754      Zachary Sopcak          1+212-761-4002   Jeremy David              1+212-761-1738
Ted Wieseman           1+212-761-3407
   Dane Vrabac         1+212-761-1929    Kevin Grundy              1+212-761-3645   Hosp. Supplies & Medical Tech                  Stanley Kovler         1+212-761-3501
U.S. Strategy                               Alison Lin             1+212-761-7250   David Lewis                1+415-576-2324
                                                                                                                                Enterprise Software
Adam Parker            1+212-761-1755    ENERGY & UTILITIES                         Steve Beuchaw              1+212-761-6672
                                                                                                                                Adam Holt                 1+415 576-2320
Brian Hayes            1+212-761-7991                                                  Jonathan Demchick       1+212-761-4847
                                                                                                                                Jennifer A. Swanson       1+212-761-3665
Antonio Ortega         1+212-761-4783    Clean Tech                                    James Francescone       1+212-761-3222
                                                                                                                                Keith Weiss               1+212-761-4149
Adam Gould             1+212-761-1821    Smittipon Srethapramote   1+212-761-3914      William Carlile         1+415-576-2690
                                                                                                                                   Melissa Gorham         1+212-761-3607
Phillip Neuhart        1+212-761-8584    Vidya Adala               1+212-761-6476   Life Sciences
    Yaye Aida Ba       1+212-761-6537                                                                                              Jon Parker             1+212-761-4223
                                            Timothy Radcliff       1+212-761-4139   Daniel Brennan             1+212-761-5578
Commodities                                                                                                                        Elena Ackley           1+415 576-2321
                                         Integrated Oil                               Aaron Gorin              1+212-761-6519
Hussein Allidina       1+212-761-4150                                                                                           Enterprise Systems & PC Hardware
                                         Evan Calio                1+212-761-6472   Managed Care
Adam Longson           1+212-761-4061                                                                                           Kathryn Huberty           1+212-761-6249
                                            Marko Lazarevic        1+212-761-3692   Doug Simpson               1+212-761-7323
  Chris Corda          1+212-761-6005                                                 Melissa McGinnis         1+212-761-8535   Scott Schmitz             1+617-856-8074
                                            Todd Firestone         1+212-761-7674
  Tai Liu              1+212-761-3585                                                 Colin Weiner             1+212 761-6184   Dan Dolev                 1+212-761-3206
                                            Jacob Dweck            1+212-761-6172
  Bennett Meier        1+212-761-4967                                               Pharmaceuticals                                Jerry Liu              1+212-761-3735
  Tian Yu              1+212-761-8582                                               David Risinger             1+212-761-6494
                                         Stephen J. Maresca        1+212-761-8343                                                  Natalia Kogay          1+212-761-1750
  Alan Lee             1+212-761-3266
                                         Robert Kad                1+212-761-6385   Thomas Chiu                1+212-761-3688   Internet & PC Application Software
                                                                                       Dana Yi                 1+212-761-8713
Sectors                                     Brian Lasky            1+212-761-7249
                                                                                       Christopher Caponetti   1+212-761-6235
                                                                                                                                Scott Devitt              1+212-761-3365
                                            Shaan Sheikh           1+212-761-4573                                                  Andrew Ruud            1+212-761-5978
CONSUMER DISCRETIONARY/RETAIL            Oil Services & Equipment                   INDUSTRIALS                                    Zachary Arrick         1+212-761-4226
                                         Ole Slorer                1+212-761-6198                                                  Jordan Monahan         1+212-761-8094
RETAIL                                   Fotis Giannakoulis        1+212-761-3026   Aerospace & Defense
Autos & Auto-Related                                                                                                               Nishant Verma          1+212-761-6320
                                            Igor Levi              1+212-761-3232   Heidi Wood                 1+212-761-4407
Adam Jonas             1+212-761-1726                                                  Michael Sang            1+212-761-7092      John Egbert            1+212-761-7678
                                            Benjamin Swomley       1+212-761-4248
Ravi Shanker           1+212-761-6350       Jacob Ng               1+212-761-5676      Giuseppe Incitti        1+212-761-4717   Payment/Processing Technology
  Yejay Ying           1+212-761-7096    Utilities                                  Business & IT Services                      Glenn Fodor               1+212-761-0071
Branded Apparel                          Stephen Byrd              1+212-761-3865   Suzanne Stein              1+212-761-0011   Nathan Rozof              1+212-761-4682
Joseph Parkhill        1+212-761-0766    Rajeev Lalwani            1+212-761-8518   Thomas Allen               1+212-761-3356      Matthew Lipton         1+212-761-6980
   Jane Zhao           1+212-761-8576       Farris Hassan          1+212-761-1672      Toni Kaplan             1+212-761-3620      Vasundhara Govil       1+212-761-3609
   Joseph Wyatt        1+212-761-4206                                                  Keith Paxton            1+212-761-3731   Semiconductors
Department Stores                        FINANCIALS                                 Industrial Conglomerates                    Sanjay Devgan             1+415-576-2382
Michelle Clark          1+212-761-4018                                              Nigel Coe                  1+212-761-5574
                                         Banks/Large/Mid Cap Banks                                                              Sean Hazlett              1+415-576-2388
   Heather Balsky      1+212-761--3265   Betsy Graseck, CFA        1+212-761-8473   Nicole DeBlase             1+212-761-8151
                                                                                                                                  Michael Kim             1+415-576-2614
Food & Drug                              Michael Cyprys            1+212-761-7619      Claire Diesen           1+212-761-1736
Mark Wiltamuth         1+212-761-8589       Peter Newman           1+212-761-6412      Jiayan Zhou             1+212-761-5766   TELECOM
  Stephen Shin         1+212-761-1863    Ken Zerbe                 1+212-761-7417   Machinery
Gaming & Lodging                                                                                                                Wireline & Wireless Telecom Services
                                            Joshua Wheeler         1+212-761-7567   Vance Edelson              1+212-761-0078
Mark Strawn            1+212-761-4990                                               Vikram Malhotra            1+212-761-7064   Simon Flannery            1+212-761-6432
                                            Giselle Cheung         1+212-761-0982
  Amir Markowitz       1+212-761-5949       Jonathan Katz          1+212-761-0474      Mili Pothiwala          1+212-761-1811      Daniel Rodriguez       1+212-761-6648
  Daniel Fuss          1+212-761-4669    Brokers, Asset Managers &                                                                 Armintas Sinkevicius   1+212-761-3270
Hardlines                                Exchanges                                  MATERIALS                                      Lisa Lam               1+212-761-4487
David Gober            1+212-761-6616    Matthew Kelley            1+212-761-8201   Agricultural Chemicals
  Cynthia Rupeka       1+212-761-7151      Kevin Kaczmarek         1+212-761-0531                                               TRANSPORTATION
                                                                                    Vincent Andrews            1+212-761-3293
  Shaun Kolnick        1+212-761-5921      Tom Whitehead           1+212-761-5672      Ted Drangula            1+212-761-4958   Airlines & Freight Transportation
                                         Consumer Finance/Canadian Banks            Chemicals                                   Bill Greene               1+212-761-8017
                                         Cheryl Pate             1+212 761-3324     Vincent Andrews            1+212-761-3293   John Godyn                1+212-761-6605
John S. Glass          1+617-856-8752      Timothy Skiendzielewski
Jon M. Tower           1+617-856-8750                            1+212-761-0930     Charles Dan                1+212-761-4793        Elizabeth Thys       1+212-761-8002
David Dorfman          1+617-856-8751      Vincent Caintic       1+212-761-6983        Ian Bennett             1+212-761-0031        Alexander Vecchio    1+212-761-6233
                                         Insurance/Life & Annuity                   Nonferrous Metals, Gold                          Matthew Parker       1+212-761-0271
                                         Nigel Dally               1+212-761-4132   Paretosh Misra             1+212-761-3590
                                         Hayley M. Locker          1+212-761-6271      Alexander Levy          1+212-761-1734
                                         Insurance/Property & Casualty                 Piyush Sood             1+212-761-3789
                                         Gregory W. Locraft Jr.    1+212-761-0040   Steel
                                         Kai Pan                   1+212-761-8711   Evan Kurtz                 1+212-761-7583
                                            Quentin McMillan       1+212-761-3731   Coal
                                                                                    Wes Sconce                 1+212-761-6004

                                                                                                MORGAN STANLEY RESEARCH

                                                                                                March 21, 2012
                                                                                                Investment Perspectives — US and the Americas

Director of Asian Research                           Dustin Wei             +852 2239-7823    S. Korea                                      MATERIALS
Neil Perry                    +852 2848 8877         Xing Zong              +852 2239-1753    Sangkyoo Park                +82 2 399-4846   Building Materials
Deputy Director of Asian Research               Robert Lin                  +852 2848-5835    Capital Goods                                 Australia
Marcus Walsh                  +852 2848-5912         Philip Yang            +852 2239-7824    India                                         Phil Bare                  +61 3 9256 8932
                                                Lillian Lou                 +852 2848-6502    Akshay Soni                +91 22 6118-2212
Associate Director of ASEAN Research                 Mark Yuan              +852 3963-4687       Aarti Shah              +91 22 6118-2211
Hozefa Topiwalla               +65 6834-6439                                                                                                Akshay Soni               +91 22 6118-2212
                                                S. Korea                                         Pratima Swaminathan     +91 22 6118-2213       Aarti Shah            +91 22 6118-2211
Associate Director of Australia Research        Kelly Kim                   +82 2 399-4837    Cement / Glass / Auto Components / Steel          Pratima Swaminathan   +91 22 6118-2213
Lou Pirenc                    +61 2 9770-1569        Michelle Kim           +82 2 399-4938    India                                         Chemicals
Head of China / Hong Kong Research              Gaming / Multi-Industry                       Akshay Soni                +91 22 6118-2212   India
Marcus Walsh                  +852 2848-5912    ASEAN                                         Ashish Jain                +91 22 6118-2240   Vinay Jaising†            +91 22 6118-2252
Associate Director of Hong Kong Research        Xin Jing Lin                 +65 6834-6295       Aarti Shah              +91 22 6118-2211       Anirban Roy           +91 22 6118-2254
                                                China / Hong Kong                                Pratima Swaminathan     +91 22 6118-2213       Rakesh Sethia         +91 22 6118-2253
Angela Moh                    +852 2848-5405                                                  Taiwan
                                                Praveen Choudhary           +852 2848-5068                                                  S. Korea
Associate Director of India Research                 Corey Chan             +852 2848-5911    Jeremy Chen                +886 2 2730-2876   Harrison Hwang              +82 2 399-4916
Ridham Desai                 +91 22 6118-2222        Katherine Sun          +852 2239-7832       Lily Chen               +886 2 2730-2871       Kyle Kim                +82 2 399-4994
Associate Director of South Korea               Leisure & Lodging                             Developers & Contractors                      Materials
Research                                        China                                         Australia                                     ASEAN, Greater China
Shawn Kim                      +82 2 399-4940   Lin He                    +86 21 2099-6678    Nick Robison                +61 2 9770-1536   Charles Spencer†            +65 6834-6825
Associate Director of Taiwan Research           Praveen Choudhary          +852 2848-5068
                                                                                                                                            Mean Phil Chong             +65 6834-6194
Jasmine Lu                    +852 2239-1348         Ying Guo             +86 21 2099-6676                                                  Rachel Zhang               +852 2239-1520
                                                India                                         Xin Jing Lin                  +65 6834-6295       John Lam               +852 2848-5412
MACRO                                           Parag Gupta               +91 22 6118-2230    China / Hong Kong                             India
Strategy                                             Satyam Thakur        +91 22 6118-2231    Praveen Choudhary            +852 2848-5068   Nillai Shah               +91 22 6118-2244
                                                                                                 Corey Chan                +852 2848-5911   S. Korea
Asia/Pacific (ex. Japan) / GEMs                 ENERGY                                           Katherine Sun             +852 2239-7832
Jonathan Garner              +852 2848-7288     Fertilizer                                                                                  Charles Spencer             +65 6834-6825
                                                                                              Transportation & Infrastructure               Metals & Mining
   Yang Bai                  +852 2239-7685     Taiwan                                        Regional
   Manas Dwivedi             +852 2239-7836     Jeremy Chen               +886 2 2730-2876                                                  Australia
                                                                                              Sophie Loh                    +65 6834-6823   Brendan Fitzpatrick        +61 2 9770-1148
   Pankaj Mataney            +852 2239-7830         Lily Chen             +886 2 2730-2871       Chin Ser Lee               +65 6834-6735
ASEAN                                                                                                                                           Stefan Hansen          +61 2 9770-1390
                                                Oil & Gas                                     Australia                                         Sarah Lester           +61 3 9256-8436
Hozefa Topiwalla              +65 6834-6439     Australia                                     Scott Kelly                 +61 2 9770-1583
   Trong Tri Tran             +65 6834-6317                                                                                                 India
                                                Stuart Baker               +61 3 9256-8929       Celine Parle             +61 2 9770-1136   Vipul Prasad              +91 22 6118-2238
Australia                                           Cameron O’Neil         +61 3 9256-8936       Julia Weng               +61 2 9770-1197       Ritish Rangwalla      +91 22 6118-2258
Gerard Minack                +61 2 9770-1529    China                                         China
   Antony Conte              +61 2 9770-1544    Wee-Kiat Tan                +852 2848-7488    Edward Xu                    +852 2239-1521   PROPERTY
China / Hong Kong                                   Sara Chan               +852 2848-5292    Andy Meng                    +852 2239-7689   Australia
Jonathan Garner              +852 2848-7288         Josh Du                 +852 2239-7593       Li Mao                    +852 2239-1523   Lou Pirenc                 +61 2 9770-1569
Corey Ng                     +852 2848-5523     India                                            Victoria Wong             +852 2239-7817   Todd McFarlane             +61 2 9770-1316
India                                           Vinay Jaising†            +91 22 6118-2252    Kate Zhu                     +852 2848-6843       John Meredith          +61 2 9770-1317
Ridham Desai                +91 22 6118-2222        Rakesh Sethia         +91 22 6118-2253       Kevin Luo                 +852 2239-1527   ASEAN
                                                Thailand                                         Cedric Shi              +86 21 2033-6653    Sean Gardiner              +65 6834-6838
   Amruta Pabalkar          +91 22 6118-2225                                                                                                    Wilson Ng               +65 6834-6345
   Utkarsh Khandelwal       +91 22 6118-2226    Mayank Maheshwari            +65 6834-6719    India
                                                                                              Parag Gupta                +91 22 6118-2230   China
S. Korea                                        FINANCIALS                                       Satyam Thakur           +91 22 6118-2231   Brian Leung                +852 2848-5220
Shawn Kim                     +82 2 399-4940    Banks                                                                                           Angus Chan             +852 2848-5259
   HyunTaek Lee               +82 2 399-9854    ASEAN                                         INFORMATION TECHNOLOGY                            Jacky Chan             +852 2848 5973
Taiwan                                          Nick Lord                    +65 6834-6746    Hardware Components                           Hong Kong
Jeremy Chen                 +886 2 2730 2876        Edward Goh               +65 6834-8975    China / Hong Kong                             Praveen Choudhary          +852 2848-5068
                                                    Daniel Ng                +65 6834-6594    Jasmine Lu                 +852 2239-1348         Angus Chan             +852 2848-5259
   Lily Chan                +886 2 2730 6871                                                  Tim Hsiao                  +852 2848-1975
Economics                                       Australia                                                                                       Jacky Chan             +852 2848 5973
                                                Richard Wiles              +61 2 9770-1537    Grace Chen                +886 2 2730-2890    India
Asia/Pacific                                    Arvid Streimann            +61 2 9770-1658         Terence Cheng        +886 2 2730-2873
Chetan Ahya                   +852 2239-7812                                                                                                Sameer Baisiwala          +91 22 6118-2214
                                                    David Shi              +61 2 9770-1187    Bill Lu                    +852 2848-5214         Arunabh Chaudhari     +91 22 6118-2216
   Derrick Kam                +852 2239-7826    China                                         Charlie Chan               +852 2848-5636
   Jenny Zheng                +852 3963-4015                                                                                                    Harshal Pandya        +91 22 6118-2217
                                                Minyan Liu                  +852 2848-6729    S. Korea
ASEAN                                           Katherine Lei               +852 2239-1830    Young Suk Shin              +82 2 399-9907    SMALL AND MID CAP
Deyi Tan                       +65 6834-6703        Jocelyn Yang            +852 2239-1568    Taiwan                                        Emerging Companies
   Seen Meng Chew              +65 6834-6739    Hong Kong                                     Jasmine Lu                 +852 2239-1348     Australia
Australia                                       Anil Agarwal†               +852 2848-5842    Tim Hsiao                  +852 2848-1975     Christopher Nicol          +61 3 9256-8909
Gerard Minack                 +61 2 9770-1529       Isabella He             +852 2848-8168         Po-Ling Chen           +852 2239 7816    David Evans                +61 2 9770-1504
   Katie Hill                 +61 2 9770-9290   India                                         Sharon Shih               +886 2 2730-2865    James Bales                +61 2 9770-1603
China / Hong Kong                               Anil Agarwal               +852 2848-5842          Brad Lin             +886 2 2730-2989    Mid Cap
Helen Qiao                    +852 2848-0603    Mihir Sheth               +91 22 6118-2232    Grace Chen                +886 2 2730-2890    China
                                                    Subramanian Iyer      +91 22 6118-2234         Terence Cheng        +886 2 2730-2873    Lin He                    +86 21 2326-0016
Denise Yam                    +852 2848-5301                                                                                                    Ying Guo              +86 21 2326-0018
Yuande Zhu                    +852 2848 -7820       Mansi Shah            +91 22 6118-2262    Internet / Media
                                                    Reshma Seth           +91 22 6118-2233    Australia                                     Taiwan
   Ernest Ho                  +852 2239-7818                                                  Andrew McLeod              +61 2 9770-1591    Jeremy Chen               +886 2 2730-2876
India                                           S. Korea
                                                Joon Seok                   +82 2 399-4934         Mark Goodridge        +61 2 9770-1761        Lily Chen             +886 2 2730-2871
Chetan Ahya                   +852 2239-7812                                                  China
   Upasana Chachra           +91 22 6118-2246       James Kwon              +82 2 399-4888                                                  TELECOMMUNICATIONS
                                                Taiwan                                        Richard Ji                 +852 2848-6926     ASEAN / Greater China
S. Korea / Taiwan                               Lily Choi                  +852 2848-6564     Philip Wan                 +852 2848-8227     Navin Killa†               +852 2848-5422
Sharon Lam                    +852 2848-8927        Daniel Yang           +886 2 2730-2875    Timothy Chan               +852 2239-7107     Gary Yu                    +852 2848-6918
   Jason Liu                  +852 2848-6882    Insurance                                          Gillian Chung         +852 2848-5456        Surabhi Chandna          +65 6834-6517
Commodities                                     Australia                                          Yu-Heng Fan           +852 2239-7822        Andri Ngaserin          +852 2848-7221
Peter Richardson              +61 3 9256-8943   Daniel Toohey              +61 2 9770-1315         Alvin Jiang          +86 21 2033-6672    India
Joel Crane                    +61 3 9256-8961       Andrei Stadnik         +61 2 9770 1684    India                                         Vinay Jaising             +91 22 6118-2252
                                                China                                         Vipul Prasad              +91 22 6118-2238       Vanessa D’Souza        +91 22 6118-2245
CONSUMER DISCRETIONARY                          Ben Lin                     +852 2848-5830         Ritish Rangwalla     +91 22 6118-2258    S. Korea
Automobiles                                         Christy He              +852 2239-7827    South Korea                                   Sam Min                     +82 2 399-4936
China                                               Jenny Jiang             +852 2848-7152    Shawn Kim                   +82 2 399-4940       Jessica Bang             +82 2 399-1408
Kate Zhu                      +852 2848-6843    India                                              HyunTaek Lee           +86 2 399-9854
                                                                                              Semiconductors                                UTILITIES
    Bin Hu                   +86 21 2326-0024   Sumeet Kariwala           +91 22 6118-2235
    Kevin Luo                 +852 2239-1527    S. Korea                                      S. Korea                                      Australia
    Cedric Shi               +86 21 2326-0015   Sara Lee                    +82 2 399-4836    Young Suk Shin              +82 2 399-9907    Stuart Baker               +61 3 9256-8929
                                                    Dana Kang               +82 2 399-4843    Taiwan                                        Phil Bare                  +61 3 9256 8932
India                                                                                                                                          Cameron O’Neil          +61 3 9256-8936
Binay Singh                  +91 22 6118-2218   Taiwan                                        Bill Lu                    +852 2848-5214
                                                Lily Choi                  +852 2848-6564     Charlie Chan               +852 2848-5636     China / Hong Kong
    Shreya Gaunekar          +91 22 6118-2219                                                 Software & Services                           Simon Lee                  +852 2848-1985
S. Korea                                            Daniel Yang           +886 2 2730-2875
                                                                                              China                                            Vincent Chow            +852 2239-1588
Sangkyoo Park                  +82 2 399-4846   HEALTH CARE                                        Alvin Jiang          +86 21 2326-0153       Eva Hou                +86 21 2326-0031
Consumer / Retail                               Australia                                     India                                            Jacky Pang              +852 2848-5289
ASEAN                                           Sean Laaman                +61 2 9770-1559    Vipin Khare               +91 22 6118-2236       Ivy Lu                  +852 2239-7814
Divya Gangahar Kothiyal        +65 6834-6438       James Rutledge          +61 2 9770-1659         Gaurav Rateria       +91 22 6118-2237    India
Australia                                       China                                                                                       Parag Gupta               +91 22 6118-2230
Thomas Kierath                +61 2 9770-1578   Bin Li                      +852 2239-7596                                                     Satyam Thakur          +91 22 6118-2231
    Crystal Wang              +61 2 9770-1195      Christopher Lui          +852 2239-1883
Mark Christensen              +61 2 9770-1582      Yolanda Hu               +852 2848-5649
    Ben Tedder                +61 2 9770-1513   India
India                                           Sameer Baisiwala          +91 22 6118-2214
Nillai Shah                  +91 22 6118-2244      Saniel Chandrawat      +91 22 6118-2215
    Girish Achhipalia        +91 22 6118-2243   INDUSTRIALS
    Sanath Sudarsan            +91 6119-2242    Capital Goods / Shipbuilding
Greater China                                   China / Hong Kong
Angela Moh†                   +852 2848-5405    Andy Meng                    +852 2239-7689
    Robby Gu                  +852 3963-0277    Kate Zhu                     +852 2848-6843
    Penny Tu                  +852 2848-5874       Kevin Luo                + 852 2239-1527
    Jessica Wang              +852 2848-5887       Cedric Shi              +86 21 2326-0015

                                                                                               MORGAN STANLEY RESEARCH

                                                                                               March 21, 2012
                                                                                               Investment Perspectives — US and the Americas

Director of Research                         ENERGY/UTILITIES                                MEDIA
Rupert Jones          +44 (0)20 7425 4271                                                                                                 MIDDLE EAST NORTH AFRICA
Associate Director of Research               Oil & Gas                                       Media & Internet
Juliet Estridge       +44 (0)20 7425 8160    Martijn Rats           +44 (0)20 7425 6618      Patrick Wellington    +44 (0)20 7425 8605    Economics
Matthew Ostrower      +44 (0)20 7425 8560    Haythem Rashed         +44 (0)20 7425 9943      Julien Rossi          +44 (0)20 7425 9755    Financials
Mitzi Frank           +44 (0)20 7425 8022                                                                                                 Dan Cowan                 +971 4 709 7165
                                               Jamie Maddock        +44 (0)20 7425 4405          Chris Sellers     +44 (0)20 7425-4013
Product Development & SSC                                                                                                                   Suha Urgan              +971 4 709 7240
                                               Albina Sadykova +44 (0) 20 7425 7502
Ben Britz             +44 (0)20 7425 3055      Sasikanth Chilukuru +44 (0)20 7425 3016       PROPERTY                                     Infrastructure
Michael O’Byrne       +44 (0)20 7425 3664                                                                                                 Muneeba Kayani            +971 4 709 7117
                                               Aaditya Chintalapati +44 (0)20 7425 9761
Management                                   Oil Services                                    Property                                     Saul Rans                 +971 4 709 7110
Sarah Waugh           +44 (0)20 7425 8154                                                    Bart Gysens           +44 (0)20 7425 5862      Nida Iqbal              +971 4 709 7103
                                             Martijn Rats             +44 (0)20 7425 6618
Sharon Reid           +44 (0)20 7677 6101    Rob Pulleyn              +44 (0)20 7425 4388    Chris Fremantle       +44 (0)20 7425 5761    Telecoms/Media
Media Relations                                                                              Bianca Riemer         +44 (0)20 7425 2646    Edward Hill-Wood       +44 (0)20 7425 9224
                                               James Lamb             +44 (0)20 7425 0749
Sebastian Howell      +44 (0)20 7425 5324                                                                                                 Madhvendra Singh          +971 4 709 7122
                                             Utilities                                       RETAIL
MACRO                                        Bobby Chada              +44 (0)20 7425 5238
                                             Nicholas Ashworth        +44 (0)20 7425 7770    Retailing/Brands
Equity Strategy                                  Arsalan Obaidullah   +44 (0)20 7425 4267    Louise Singlehurst    +44 (0)20 7425 7239    Economics
Ronan Carr            +44 (0)20 7425 4944    Igor Kuzmin              +44 (0)20 7425 8371       Emily Tam          +44 (0)20 7425 4055    Jacob Nell                +7 495 287-2134
Matthew Garman        +44 (0)20 7425 3595    Emmanuel Turpin          +44 (0)20 7425 6863       Anna Frogner       +44 (0)20 7425-6620       Alina Slyusarchuk   +44 (0)20 7677 6869
Graham Secker         +44 (0)20 7425 6188    Anna Maria Scaglia          +39(0)276335486        Pallavi Das        +44 (0)20 7425 2644    Metals & Mining
   Hanyi Lim          +44 (0)20 7425-1437        Carolina Dores       +44 (0)20 7677 7167    Retailing                                    Dmitriy Kolomytsyn        +7 495 589 9942
   Krupa Patel        +44 (0)20 7425-4013        Anne N. Azzola       +44 (0)20 7425-6230    Geoff Ruddell         +44 (0)20 7425 8954      Kirill Prudnikov        +7 495 287-2314
Economics                                    Clean Energy                                    Edouard Aubin         +44 (0)20 7425 3160    Oil & Gas
Joachim Fels           +44 (0)20 7425 6138   Allen Wells              +44 (0)20 7425 4146      Gillian Robb        +44 (0)20 7425 5207    Matt Thomas            +44 (0)20 7425 5387
    Manoj Pradham      +44 (0)20 7425 3805                                                     Anisha Singhal      +44 (0)20 7425 7526
                                             FINANCIALS                                                                                     Timur Salikhov       +44 (0)20 7425-5354
    Spyros Andreopoulos                                                                                                                   Telecoms/Media
                       +44 (0)20 7677 0528   Banks/ Diversified Financials                   TECHNOLOGY                                   Ed Hill-Wood        +44 (0)20 7425 9224
Elga Bartsch           +44 (0)20 7425 5434   Huw van Steenis          +44 (0)20 7425 9747                                                 Cesar Tiron         +44 (0)20 7425 8846
Daniele Antonucci      +44 (0)20 7425 8943      Alice M. Timperley     +44 (0)20 74259094    Technology                                      Polina Ugryumova    +7 495 589 9944
Olivier Bizimana       +44 (0)20 7425 6290   Steven Hayne             +44 (0)20 7425 8332    Adam Wood             +44 (0)20 7425 4450    Transport
Melanie Baker          +44 (0)20 7425 8607   Bruce Hamilton            +44 (0)20 7425 7597   Ashish Sinha          +44 (0)20 7425 2363    Menno Sanderse         +44 (0)20 7425 6148
    Jonathan Ashworth +44 (0)20 7425 1820       Anil Sharma           +44 (0)20 7425 8828    Francois Meunier      +44 (0)20 7425-6603    Utilities
Tevfik Aksoy           +44 (0)20 7677 6917      Chloe Donegan         +44 (0) 20 7425 6240   Andrew Humphrey       +44 (0)20 7425 2630
                                                                                                                                          Bobby Chada            +44 (0)20 7425 5238
Pasquale Diana         +44 (0)20 7677 4183   Chris Manners            +44 (0)20 7425 3917       Sunil George       +44 (0)20 7425 3436
                                                                                                                                          Igor Kuzmin            +44 (0)20 7425 8371
    Jarek Strzalkowski +44 (0)20 7425-9035   Hubert Lam               +44 (0)20 7425 3734
Jacob Nell                +7 495 287-2134    Francesca Tondi           +44 (0)20 7425 9721   TELECOMS                                     SOUTH AFRICA -
    Alina Slyusarchuk +44 (0)20 7677 6869       Adrian Reibert        +44 (0)20-7425-2138
Michael Kafe              +27 11 507 0891                                                    Telecommunications Services                  RMB MORGAN STANLEY
                                             Thibault Nardin          +44 (0)20 7677 3787
    Andrea Masia          +27 11 507 0887       Sara Minelli          +44 (0)20 7425-5628    Nick Delfas           +44 (0)20 7425 6611
                                                                                             Luis Prota               +34 91 412 1217     Head of Research/Strategy
Derivatives and Portfolios                   Alvaro Serrano            +44 (0)20 7425 6942                                                Vaughan Henkel            +27 11 282 8260
Neil Chakraborty      +44 (0)20 7425 2571                                                    Saroop Purewal           +81 3 5424-5326
                                                                                                Terence Tsui       +44 (0)20 7425 4399    Economics
Peter Joos            +44 (0)20 7425 4763    Henrik Schmidt           +44 (0)20 7425 8808                                                 Michael Kafe              +27 11 507 0891
Praveen Singh         +44 (0)20 7425 7833                                                       Ryan Fox           +44 (0)20 7425 5413
                                             Insurance                                                                                       Andrea Masia           +27 11 507 0887
                                             Jon Hocking          +44 (0)20 7425 2307        TRANSPORTATION                               Financials
                                             Farooq Hanif         +44 (0)20 7425 6477                                                     Magdalena Stoklosa        +27 11 282 1082
Sectors                                      Adrienne Lim         +44 (0)20 7425 6679        Transport                                    Greg Saffy                +27 11 282-4228
                                             Maciej Wasilewicz    +44 (0)20 7425 9104        Penny Butcher         +44 (0)20 7425 6698       Derinia Chetty         +27 11 282 8553
CONSUMER DISCRETIONARY/                         Damien Kingsley-Tomkins                      Jaime Rowbotham       +44 (0)20 7425 5409    Food Producers
INDUSTRIALS                                                       +44 (0)20 7425 1830           Suzanne Todd       +44 (0)20 7425 8316    Vikhyat Sharma            +27 11 282 1940
                                                David Andrich     +44 (0)20 7425-2449           Doug Hayes         +44 (0)20 7425 3831    Industrials
Aerospace & Defence                                                                             Daniel Ruivo       +44 (0)20 7425 5816
                                             HEALTHCARE                                                                                   Anthony de la Cour        +27 11 282 8139
Rupinder Vig         +44 (0)20 7425 2687
                                                                                                                                          Roy Campbell              +27 11 282 1499
  Izabela Ciborowska +44 (0)20 7425 8754                                                     EMERGING MARKETS
Autos & Auto Parts                           Biotech & Medical Technology                                                                 Insurance & Property
                                             Michael Jungling         +44 (0)20 7425 5975    Equity Strategy (Global)                     Vincent Anthonyrajah      +27 11 282 1593
Stuart Pearson        +44 (0)20 7425 6654
   Edoardo Spina      +44 (0)20 7425 0664    Karl Bradshaw            +44 (0)20 7425 6573    Jonathan Garner            +852 2848 7288    Mining
                                             Andrew Olanow            +44 (0)20 7425 4107    Marianna V. Kozintseva +44 (0)20 7425 5534   Simon Kendall             +27 11 282 4932
Laura Lembke          +44 (0)20 7425-7944
                                                Clare Spinks           +44(0)20 7677 0209    Economics                                    Leigh Bregman             +27 11 282 8969
Business & Employment Services
Jessica Alsford       +44 (0)20 7425 8985    Pharmaceuticals                                 Tevfik Aksoy          +44 (0)20 7677 6917      Christopher Nicholson   +27 11 282-1154
David Hancock         +44 (0)20 7425 3752
                                             Peter Verdult            +44 (0)20 7425 2244    Pasquale Diana        +44 (0)20 7677 4183    Retail
                                             Simon Mather             +44 (0)20 7425 3227       Jarek Strzalkowski +44 (0)20 7425-9035    Natasha Moolman           +27 11 282 8489
   Simone Porter Smith+44 (0)20 7425 3893
                                                Chris Eccles          +44 (0)20 7425 2272                                                 Antoinette Coetzee        +27 11 282 8489
   Virginie Ducruc    +44 (0)20 7425-7761
                                                                                             Banks/ Diversified Financials                   Qaqambile Dwayi        +27 11 282 4146
Capital Goods
Ben Uglow            +44 (0) 20 7425 8750                                                    Magdalena Stoklosa    +44 (0)20 7425 3933    TMT
                                             MATERIALS                                         Samuel Goodacre     +44 (0)20 7677 0759    Peter Takaendesa          +27 11 282 8240
   Robert Davies     +44 (0)20 7425 2057
   Lucie Carrier     +44 (0) 20 7677 0884    Building & Construction                           Hadrien de Belle    +44 (0)20 7425 4466
Guillermo Peigneux   +44 (0)20 7425 7225                                                     Consumer                                     TURKEY
                                             Alejandra Pereda            +34 91 412 1747
   Stephanie Tan     +44 (0)20 7425 2044     Yuri Serov               +44 (0)20 7425 1467    Daniel Wakerly     +44 (0)20 7425 4389       Sayra Can Altuntas     +44 (0)20 7425 2365
Leisure/Hotels                               Chemicals                                         Maryia Berasneva +44 (0) 20 7425 7502      Erol Danis             +44 (0)20 7425 7123
Jamie Rollo           +44 (0)20 7425 3281    Paul Walsh               +44 (0)20 7425 4182    Telecoms/Media                                  Batuhan Karabekir     +44(0) 207425 3346
Vaughan Lewis         +44 (0)20 7425 3489    Peter J. Mackey          +44 (0)20 7425 4657    Ed Hill-Wood          +44 (0)20 7425 9224    Economics
   Andrea Ferraz      +44 (0)20 7425 7242    Amy Walker               +44 (0)20 7425 0640    Cesar Tiron           +44 (0)20 7425 8846    Tevfik Aksoy           +44 (0)20 7677 6917
   Patrick Wood       +44 (0)20 7425 9867       Christian Stiefel     +44 (0)20 7425 9491                                                 Banks
CONSUMER STAPLES                             Metals & Mining                                                                              Magdalena Stoklosa     +44 (0)20 7425 3933
                                             Menno Sanderse      +44 (0)20 7425 6148                                                      Telecoms/Media
Beverages                                    Alain Gabriel       +44 (0)20 7425 8959                                                      Ed Hill-Wood           +44 (0)20 7425 9224
Michael Steib         +44 (0)20 7425 5263       Adedapo Oguntade +44 (0)20 7425 2127                                                      Cesar Tiron            +44 (0)20 7425 8846
David Belaunde        +44 (0)20 7425-5392    Paper & Packaging
Eileen Khoo             +44 20 7425-1838     Markus Almerud           +44 (0)20 7425 9870
    Eveline Varin     +44 (0)20 7425 5717
Food Producers/HPC
Michael Steib         +44 (0)20 7425 5263
Toby McCullagh        +44 (0)20 7425 6636
Erik Sjogren          +44 (0)20 7425 3935
    Audrey Borius     +44 (0)20 7425 7242
Toby McCullagh        +44 (0)20 7425 6636

                                                                                          MORGAN STANLEY RESEARCH

                                                                                          March 21, 2012
                                                                                          Investment Perspectives — US and the Americas

Head of Japan Research/Institutional
Equity Distribution                          CONSUMER STAPLES                           MATERIALS                                   TECHNOLOGY
Stefan Pendert            +813-5424-5689
                                             Food / Household & Personal Care           Glass & Ceramics / Chemicals                Information Technology
Deputy Head of Japan Research                                                           Lalita Gupta             +813-5424-5909     Masaharu Miyachi        +813-5424-5321
Dennis Yamada             +813-5424-5397
                                             Taizo Demura             +813-5424-5333        Hiroshi Kawaguchi    +813-5424-5347       Hiroko Ando           +813-5424-5324
                                                Haruka Miyake         +813-5424-5918        Mitsuhiro Kojima     +813-5424-5342     Technology: Consumer Electronics /
Macro                                           Kayo Sano             +813-5424-5332        Kaori Ikeda          +813-5424-5921     Precision Instruments
                                                                                        Steel / Nonferrous Metals/ Wire & Cable     Masahiro Ono            +813-5424-5362
Economics                                    ENERGY/UTILITIES                           Harunobu Goroh           +813-5424-5343     Takumi Kakazu           +813-5424-5929
Robert A. Feldman         +813-5424-5385                                                   Akira Morimoto        +813-6422-8650        Hiroshi Taguchi      +813-5424-5339
Takehiro Sato             +813-5424-5367     Oil & Coal Products                           Leigha Miyata         +813-6422-8671        Sachie Uchida        +813-5424-5369
Takeshi Yamaguchi         +813-5424-5387     Lalita Gupta             +813-5424-5909       Li Luo               +86 21 2326 6675    Technology: Electronic Components
   Maki Uchikoga          +813-5424-5344         Hiroshi Kawaguchi    +813-5424-5347       Emiko Ishikawa        +813-5424-5376     Shoji Sato              +813-5424-5303
   Chie Takita            +813-5424-5913         Mitsuhiro Kojima     +813-5424-5342                                                  Hitoshi Isozaki       +813-5424-5927
Equity Strategy                                  Kaori Ikeda          +813-5424-5921    MEDIA                                         Midori Takeuchi       +813-5424-5315
Yohei Yamada              +813-5424-5923     Utilities                                                                              Technology: Interactive Entertainment
   Maki Uchikoga          +813-5424-5344     Yuka Matayoshi           +813-5424-5910    Media                                       Mia Nagasaka            +813-5424-5309
                                                Hikaru Ishikawa       +813-5424-5378    Hironori Tanaka          +813-5424-5336        Hiroshi Taguchi      +813-5424-5339
                                                Junko Yamamoto        +813-5424-5334       Atsuko Watanabe       +813-5424-5338
Sectors                                                                                                                             Technology: Japan Semiconductors
                                                                                                                                    Kazuo Yoshikawa         +813-5424-5389
                                             FINANCIALS                                 PROPERTY/CONSTRUCTION
CONSUMER DISCRETIONARY/                                                                                                                Ryotaro Hayashi      +813-5424-5327
INDUSTRIALS                                  Banks                                      Construction                                   Midori Takeuchi      +813-5424-5315
                                             Hideyasu Ban             +813-5424-5381    Atsushi Takagi           +813-5424-5380
Autos                                           Takaaki Nishino       +813-5424-5907       Rina Asano            +813-5424-5925     TELECOMS
Ryosuke Hoshino           +813-5424-5916        Ayako Kubodera        +813-5424-5323    Real Estate / J-REIT / Housing
   Keita Suzuki           +813-5424-5903                                                                                            Telecommunications
                                                Ikuko Matsumoto       +813-5424-5366    Tomoyoshi Omuro          +813-5424-5386     Tetsuro Tsusaka         +813-5424-5901
Auto Parts                                   Financial Services / Insurance               Keisuke Kumagai        +813-5424-5312
Shinji Kakiuchi           +813-5424-5914                                                                                               Sumiko Hamaguchi     +813-5424-5379
                                             Hideyasu Ban             +813-5424-5381      Makiko Matsuki         +813-5424-5304
   Kaori Morishita        +813-5424-5924        Ayako Kubodera        +813-5424-5323
   Naoko Hosaka           +813-5424-5388                                                                                            TRANSPORTATION
                                                Naoko Hatakeyama      +813-5424-5348    RETAIL
Machinery and Capital Goods                                                                                                         Transportation / Logistics
Yoshinao Ibara           +813-5424-5302      HEALTHCARE                                 Retailing: Specialty                        Takuya Osaka            +813-5424-5915
Yusuke Yoshida           +813-6422-8652                                                 Yukimi Oda               +813-5424-5328        Shino Takahashi      +813-5424-5314
   Jin Sup Park          +813-6422-8670      Healthcare/Pharmaceuticals                    Sai Aoyama            +813-5424-5331
   Li Luo               +86 21 2326 6675     Mayo Mita                +813-5424-5319
   Masako Kusano         +813-5424-5917      Shinichiro Muraoka       +813-5424-5926
Yuka Matayoshi           +813-5424-5910         Yukihiro Koike        +813 5424-5316
   Hikaru Ishikawa       +813-5424-5378         Ayako Fukuda          +813 5424-5928
   Junko Yamamoto        +813-5424-5334         Kaoru Wada            +813 5424-5382

Latin America
Dario Lizzano             1+212-761-3936
                                             Sectors                                    RETAIL                                      TRANSPORTATION &
Associate Director of Research                                                                                                      INFRASTRUCTURE
Jorge Kuri                1+212-761-6341     AEROSPACE & DEFENSE                        Retail
                                                                                        Lore Serra            1+212-761-7954        Nicolai Sebrell, CFA   +55-11-3048-6133
Macro                                        Heidi Wood               1+212-761-4407       Jeronimo De Guzman 1+212-761-7084           Augusto Ensiki       +1 212 761-3914
Economics                                    CONSUMER STAPLES/BEVERAGE                     Franco Abelardo    +55 11-048-9609
                                                                                                                                    ENERGY & UTILITIES
Gray Newman                 1+212-761-6510   Lore Serra            1+212-761-7954       SMALL AND MID CAPS
                                                                                                                                    Oil Services & Equipment
Arthur Carvalho           +55-11-3048-6272      Jerônimo De Guzman 1+212-761-7084
   Luis A. Arcentales, CFA 1+212-761-4913                                               Javier Martinez de Olcoz Cerdan             Ole Slorer              1+212-761-6198
                                                Franco Abelardo    +55 11-048-9609                                1+212 761-4542       Igor Levi            1+212-761-3232
   Daniel Volberg           1+212-761-0124
                                             FINANCIALS                                 Wesley Brooks              1+212-761-8285      Benjamin Swomley     1+212-761-4248
GEMs Equity Strategy
Jonathan Garner          44+207-425-9237                                                TECHNOLOGY                                  Utilities
                                             Financial Services                                                                     Tatiana Feldman        +55-11-3048-9620
Guilherme Paiva           1+212-761-8295     Jorge Kuri               1+212-761-6341    Tatiana Feldman         +55-11-3048-9620       Miguel F. Rodrigues +55-11-3048-6016
Cesar Medina              1+212-761-7027     Jorge Chirino            1+212-761-0324
   Nikolaj Lippmann     +52-55-5282-6778                                                TELECOMS & MEDIA
   Regiane Yamanari     +55-11-3048 6295     MATERIALS
                                             Homebuilders & Real Estate                 Michel Morin              1+212-761-0328
                                             Rafael Pinho            +55-11-3048-6216   Jennifer Leonard         1+212-761-4075
                                             Nonferrous Metals & Mining, Coal
                                             Carlos de Alba            1+212-761-4927
                                                Bruno Montanari      +55-11-3048-6225
                                                Alfonso Salazar      +52-55-5282-6745

                                                                                        MORGAN STANLEY RESEARCH

                                                                                        March 21, 2012
                                                                                        Investment Perspectives — US and the Americas

Fixed Income Research and Global Economics
Global Director of Fixed Income            Structured Credit Strategy                 Europe                                        EM Fixed Income and Foreign
Research                                   Sivan Mahadevan          1+212 761-1349    Laurence Mutkin             44+20 7677-4029   Exchange Strategy
Neil McLeish         +44 (0)20 7677 7481   Ashley Musfeldt          1+212 761-1727    Anthony O’Brien             44+20 7677-7748   North America
Deputy Global Director of Fixed            Vishwas Patkar           1+212 761 -8041   Anton Heese                 44+20 7677-6951   Vitali Meschoulam     1+212 761-1889
Income Research
Michael Eastwood         1+212-761-8015    Securitized Products Strategy              Leef Dierks                 44+20 7677-1475   Juha Seppala          1+212 761-1949
                                           Vishwanath Tirupattur     1+212 761-1043   Elaine Lin                  44+20 7677-0579   Sian Griffiths        1+212-761-1884
COO of Fixed Income Research and                                                      Corentin Rordorf            44+20 7677-0518   Robert Habib          1+212-761-1875
Economics                                  Richard Parkus            1+212 761-1444
                                           Andy Bernard              1+212 761-7880   Rachael Featherstone        44+20 7677-7764   Europe
Fizzah Jafri             44+20 677-1971
                                           James Egan                1+212 761-4715   Jason Somerville            44+20 7425-7602   Rashique Rahman       44+20 7677-7295
                                           Jose Cambronero           1+212 761-4909   Japan                                         Paolo Batori, CFA     44+20 7677-7971
Fixed Income Research                      San Francisco                              Takehiro Sato                81+3 5424-5367   Vanessa Barrett       44+20 7677-9569
                                           Oliver Chang              1+415 576-2395   Le Ngoc Nhan                 81+3 5424-7698   Mihail Bozinov        44+20 7056-0810
Global Cross-Asset Strategy
                                           Europe                                     Miho Ohashi                  81+3 5424-7904   Regis Chatellier      44+20 7677-6982
Gregory Peters          1+212 761-1488
                                           Srikanth Sankaran        44+20 7677-2969   Asia Pacific                                  James Lord            44+20 7677-3254
Jason Draho             1+212 761-7893
                                           Vasundhara Goel          44+20 7677-0693   Pieter Van Der Schaft        +852 3963-0550   Kristina Obrtacova    44+20 7677-7597
Jerry Chen              1+212-761-8591
                                                                                      Kritika Kashyap              +852 2239-7179   Robert Tancsa         44+20 7677-6671
Liz Golden              1+212-761-1479     Currency Strategy                                                                        Meena Bassily         44+20 7677-0031
Credit Strategy                            North America                              Credit Research                               Sean McGrath          44+20 7425-7601
North America                              Gabriel de Kock           1+212 761-5154   Europe – Financials
                                           Ron Leven                 1+212 761-3413   Jackie Ineke                 41+44 220-9246   Chief International Economist
Sivan Mahadevan         1+212 761-1349                                                                                              Joachim Fels          44+20 7425-6138
Rizwan Hussain          1+212 761-1494     Yilin Nie                 1+212 761-2886   Marcus Rivaldi              44+20 7677-1464
Peter Mallik            1+212-761-0896     Evan Brown                1+212 761-2786   Lee Street                  44+20 7677-0406   Chief US Economist
                                                                                      Natacha Blackman            44+20 7425-7967   Vincent Reinhart      1+212-761-3537
Adam Richmond           1+212 761-1485     Europe
Michael Zezas           1+212 761-8609     Hans Redeker             44+20 7425-2430   Charlie Glyn                44+20 7677-3745   COO of Fixed Income Research and
Julie Powers            1+212-761-0138     Ian Stannard             44+20 7677-2985   Asia Pacific – Financials                     Economics
Jason Ng                1+212-761-8261     Calvin Tse               44+20 7677-0761                                                 Fizzah Jafri           44+20 677-1971
                                                                                      Desmond Lee                  +852 2239-1575
Europe                                     Dara Blume               44+20 7425-5749   Fiona Simpson                +852 2239-1766
Andrew Sheets            44+20 7677-2905   Asia Pacific                               Commodities Strategy
Phanikiran Naraparaju    44+20 7677-5065   Stewart Newnham           852+2848-5320    Hussein Allidina, CFA       1+212 761-4150
                                                                                                                                    Global Economic
Serena Tang              44+20 7677-1149   Yee Wai Chong             852+2239-7117    Adam Longson                1+212-761-4061    Research
Jonathan Graber          44+20 7425 0577                                              Chris Corda                 1+212 761-6005
                                           Interest Rate Strategy                                                                   Joachim Fels          44+20 7425-6138
Joerund Holterud Aarsnes 44+20 7677 0898   North America                              Tai Liu                     1+212 761-3585
                                                                                      Alan Lee                    1+212 761-3266    Arnaud Marès          44+20 7677-6302
Japan                                      Matthew Hornbach         1+212 761-1837
                                                                                      Bennett Meier               1+212 761-4967    Manoj Pradhan         44+20 7425-3805
Hidetoshi Ohashi         81+3 5424-7908    Subadra Rajappa          1+212 761-2983
                                                                                      Tian Yu                     1+212 761-8582    Spyros Andreopoulos   44+20 7056-8584
Tomoyuki Hirose          81+3 5424-7912    Vipul Jain               1+212 761-2647
                                                                                                                                    Patryk Drozdzik       44+20 7425-7483
Asia Pacific                               Janaki Rao               1+212 761-1711
                                                                                                                                    Sung Woen Kang        44+20 7425-8995
Viktor Hjort             +852 2848-7479    Jonathan Marymor         1+212 761-2056
Kelvin Pang              +852 2848-8204    George Azarias           1+212 761-3267
Nishant Sood             +852 2239-1597    Ankur Shah               1+212-761-1909
                                           Tiffany Wilding          1+212-761-4415
                                           Guneet Dhingra           1+212-761-1445

                                                         MORGAN STANLEY RESEARCH

The Americas              Europe                         Japan                        Asia/Pacific
1585 Broadway             20 Bank Street, Canary Wharf   4-20-3, Ebisu , Shibuya-ku   1 Austin Road West
New York, NY 10036-8293   London E14 4AD                 Tokyo 150-6008               Kowloon
United States             United Kingdom                 Japan                        Hong Kong
Tel: +1 (1)212 761 4000   Tel: +44 (0)20 7425 8000       Tel: +81 (0)3 5424 5000      Tel: +852 2848 5200

© 2012 Morgan Stanley                                                                               MSR 80041 #11

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