Americas Morning Summary
June 9, 2010
The Goldman Sachs Group, Inc.
Focus Items
This document contains comments
related to the following stocks: Boston Scientific Corp. (BSX): Removing from CL following underperformance;
1
remains Sell
BMC Software, Inc. (BMC) Dr Pepper Snapple Group (DPS): Investor Day highlights solid fundamentals and
2
Boston Scientific Corp. (BSX) strong cash returns
Citrix Systems Inc. (CTXS)
Dean Foods Company (DF) Americas: Technology: Desktop virtualization update: Customer interest levels
3
Dr Pepper Snapple Group (DPS) higher, market leaning to CTXS
Endo Pharmaceuticals Holdings Inc. Molex Inc. (MOLX): Meetings highlight sharp improvement in opex management;
(ENDP) 4
Jones Apparel Group (JNY)
Buy
Marriott International (MAR)
Microsoft Corp. (MSFT) Key Data Changes
Molex Inc. (MOLX)
Pinnacle Entertainment Inc. (PNK) Investment List Removals
Tanger Factory Outlet Centers, Inc. Investment List Removals
Company Ticker
(SKT)
Texas Instruments Inc. (TXN) Boston Scientific Corp. BSX Americas Conviction Sell List
VMware, Inc. (VMW)
Rating and price target changes
Rating/
Price Target Estimates
Coverage view
Company Ticker New Old New Old % chg Current Year Next Year Fiscal y/e
Jones Apparel Group JNY N/N NR $19.00 -- -- $1.66 $1.82 Dec
Estimate changes
Rating/ Current Year Next Year
Fiscal y/e
Company Ticker Coverage view New Old % chg New Old % chg
Endo Pharmaceuticals Holdings Inc. ENDP B/N ↑ $3.20 $3.19 0.3% ↑ $3.56 $3.30 7.9% Dec
Jones Apparel Group JNY N/N ↑ $1.66 $1.65 0.9% ↓ $1.82 $1.90 (4.1%) Dec
Tanger Factory Outlet Centers, Inc. SKT N/N ↓ $2.48 $2.68 (7.3%) ↓ $2.72 $2.80 (2.9%) Dec
Other Headlines
Equity Trading Strategies
Global: Equity Trading Strategies: Tradewinds: Mixed Signals 5
Options Research
Weekly Options Watch: WOW June 9 - June 15, 2010 6
Consumer Cyclicals
Americas: Gaming: Conference Day 2: MAR indicates strong Q2; others also constructive 7
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Global Investment Research
Jones Apparel Group (JNY): Reinstate with Neutral rating; trimming 2011 EPS 8
Consumer Staples
Dean Foods Company (DF): Near-term visibility remains limited after meeting with management 9
Financial Services
Tanger Factory Outlet Centers, Inc. (SKT): Revising estimates based on debt issuance: maintain
10
Neutral
Healthcare
Endo Pharmaceuticals Holdings Inc. (ENDP): Raising estimates following Opana ER settlement -
11
Maintain Buy
Technology
Texas Instruments Inc. (TXN): Better guidance underscores robust industry, company dynamics 12
BMC Software, Inc. (BMC): Investor meetings highlight stability, emerging opportunities 13
Reports Published
Americas Morning Summary June 9, 2010
Focus Items
Boston Scientific Corp. (BSX): Removing from CL following underperformance; remains Sell 1
BSX, $5.59 David H. Roman (New York): david.roman@gs.com, (212) 902-7839
Market cap $8,497 mn
Goldman Sachs & Co.
Nikhil Hanmantgad (New York): nikhil.hanmantgad@gs.com, (212) 357-4031
Target price $5.50
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Kunal Singh, CFA (Bangalore): kunal.singh@gs.com, (212) 934-6546
EPS ($) 0.25 0.34 Goldman Sachs & Co.
P/E 22.4X 16.4X
EPS Quarter/Interim
*
0.02 0.13
What happened
With shares of Boston Scientific (BSX) approaching our $5.50 price target, we remove the stock from the
Investment Lists Americas Conviction List. Since being added to the Conviction List on 3/16/10, BSX is down 21.2% vs. the
Americas Sell List S&P Healthcare Equipment Index at -9.3% and the S&P 500 at -9.9%. Over the past 12 months, BSX is
Coverage view Neutral down 41.4% vs. the S&P HC Equip Index up 20.9% and the S&P 500 up 11.9%. We see limited downside
absent further deterioration in end-user markets and market share. Still, recent clinical data indicates
*Current and a year ago
potential for share erosion in the drug eluting stent business (21% of sales) that we do not think is reflected in
consensus numbers.
Current view
Despite the recent share price underperformance, we retain our Sell rating on BSX within the context of our
Neutral coverage view of the US Medical Technology sector. For 2010 and 2011, we still see 11% and 17%
EPS downside, respectively, relative to consensus for Boston Scientific. We also see 2% downside to BSX
vs. an average upside of 16% for our coverage universe. Over the immediate term, the key for Boston
Scientific will be the amount of US implantable cardioverter defibrillator (ICD, 15% of sales) market share the
company loses as a result of the March 15, 2010 announced 30-day ship hold. Our view has been that the
company would lose 60% of the market share foregone while the ICD was off the market. This is reflected in
the company’s revised 2010 guidance issued in April. The key reason for our numbers being below
consensus relates to continued pricing pressure on cardiovascular devices, as hospitals gain increased
leverage over medical device companies through vendor consolidation initiatives.
Valuation: Our 12-month $5.50 price target is based on an equal weighting of comparable P/E multiples,
EV/EBITDA multiples, and a DCF analysis.
Risks: (1) Recovery in stent and ICD pricing; (2) better-than-expected share gains in stents; and (3) strategic
activity that could improve the company’s financial position or growth rate.
Dr Pepper Snapple Group (DPS): Investor Day highlights solid fundamentals and strong cash returns 2
DPS, $36.54 Judy E. Hong (New York): judy.hong@gs.com, (212) 902-0490
Market cap $9,281 mn
Goldman Sachs & Co.
Tyler Walling (New York): tyler.walling@gs.com, (212) 934-0495
Target price $39.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E
EPS ($) 2.42 2.80 What's changed
P/E 15.1X 13.1X Dr Pepper Snapple (DPS) hosted it 2010 Investor Day today at its headquarters in Plano, Texas, where the
company highlighted growth opportunities across NA, cost savings through supply chain optimization, and
EPS Quarter/Interim* 0.69 0.62
detailed its longer-term financial goals.
Investment Lists
Implications
Neutral We maintain our Neutral rating on the stock and came away from the meeting with generally positive
Coverage view Attractive takeaways and a view that solid business momentum should continue over the foreseeable future. First, the
company should be able to continue to leverage it strong flavored CSD brand portfolio to gain CSD share on
*Current and a year ago
continued brand investment broadly, and see sustainability of the improvement behind the recent restage of
Snapple. Second, DPS sees significant opportunity to reduce costs throughout the company over the next
several years driven by a stepped focus behind LEAN manufacturing, network optimization and six sigma.
Third, free cash generation conversion should remain peer leading, driven by working capital improvement
and lower upfront cost saving expenses into 2011, which should support further cash deployment. Fourth,
DPS management implied that its long-term EPS growth target of high single digits could be conservative, as
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
DPS delivers 3%-5% top-line growth, margin expansion from cost savings and 4-5pts leverage from share
buybacks.
Valuation
We remain generally constructive on the DPS story as the company continues to gain market share and cash
returns are compelling. We maintain a $39, 12-month, P/E and DCF-based price target which applies a 14X
target P/E.
Key risks
Upside if market share trends accelerate; downside if pricing deteriorates.
Americas: Technology: Desktop virtualization update: Customer interest levels higher, market leaning to 3
CTXS
Sarah Friar (San Francisco): sarah.friar@gs.com, (415) 249-7436
Goldman Sachs & Co.
Derek R. Bingham (San Francisco): derek.bingham@gs.com, (415) 249-7435
Goldman Sachs & Co.
Stephanie Withers, CFA (San Francisco): stephanie.withers@gs.com, (415) 249-7470
Goldman Sachs & Co.
Gonzalo Cavenaghi (San Francisco): gonzalo.cavenaghi@gs.com, (415) 249-7438
Goldman Sachs & Co.
Ventsi Stoichev (San Francisco): ventsi.stoichev@gs.com, (415) 249-7440
Goldman Sachs & Co.
Geo John (Bangalore): geo.john@gs.com, (212) 934-6386
Goldman Sachs India SPL
Lifting VDI markets estimates slightly: $1.9 bn market opportunity by 2013
Our Virtual Desktop Infrastructure (VDI) market model shifts up once again as we revisit unit penetration
(which moves up) but balance this out with a slightly more conservative view on pricing. Our VDI estimates
for 2010 and 2011 increase to $332 mn and $785 mn, respectively, from $306 mn and $754 mn suggesting
181% and 136% yoy growth. Our new estimates result in a total addressable VDI market of $1.9 bn by 2013
(previously $1.8 bn), a 100% 4-year CAGR. Our more positive view is driven by datapoints from: (1) Citrix
and VMware 1Q results; (2) Recent user events including Citrix Synergy; (3) Management meetings with the
two largest vendors in the VDI space – Citrix and VMware; (4) Broad industry checks; and, (5) Our 100-
person CIO survey.
We see upside to CTXS estimates from VDI
Our VDI model implies upside of $0.02 and $0.06 to our CY2010 and CY2011 Citrix non-GAAP EPS
estimates. For VMware, we believe the VDI opportunity is reflected in our current estimates.
Market share shifting towards CTXS; VMW still a key vendor
We believe Citrix and VMware will dominate the VDI market for the foreseeable future, with close to 90% of
the market between the two. However, momentum is diverging currently in favor of Citrix. Hence, we have
updated our model to reflect increasing market share for Citrix increasing from 42% in CY2009 to 50% in
CY2013. VMware’s share moves from 51% to 39% over the same timeframe. Previously we had both
vendors with equal share in CY2013.
Virtual desktop opportunity top of mind for customers
We believe an increasing proportion of enterprise customers are assessing their desktop strategy as they
implement next generation datacenters, and upgrade PC hardware. While still more in the seeding stage,
both Citrix and VMware are seeing an increase in deployments of over 1,000 seats and in some cases over
10,000 seats. In addition, Microsoft has aligned itself closer with Citrix and has taken steps to open the
market by simplifying its licensing policies.
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
Molex Inc. (MOLX): Meetings highlight sharp improvement in opex management; Buy 4
MOLX, $19.59 Craig Hettenbach (New York): craig.hettenbach@gs.com, (212) 902-9959
Market cap $3,425 mn
Goldman Sachs & Co.
David C. Bailey (New York): david.c.bailey@gs.com, (212) 902-6834
Target price $30.00
Goldman Sachs & Co.
Fiscal y/e Jun 2010E 2011E Brian Cho (New York): brian.cho@gs.com, (212) 357-7710
EPS ($) 1.09 1.69 Goldman Sachs & Co.
P/E 17.9X 11.6X
EPS Quarter/Interim
*
0.38 (0.10)
What's changed
We hosted Martin Slark (CEO) and Steve Martens (IR) for meetings with investors in Boston the past two
Investment Lists days. The tone of the business was upbeat, similar to the meetings we hosted with Tyco Electronics last
Americas Buy List week, although the line of investor questioning speaks to the increasing market fears of macro risk and
Coverage view Attractive potential economic slowdown.
*Current and a year ago
Implications
With stocks continuing to sell off aggressively no matter how positive companies sound, we want to focus on
structural improvements to Molex’s business that we believe are being overlooked during this period of
heightened stock market volatility, keeping us a Buy. Specifically, Molex’s global restructuring (initiated mid-
2007 and expanded in 2008/09) should be completed this summer, resulting in $205 mn in cost savings. As a
result, Molex is within striking distance of its LT target of 14% operating margin, posting a March quarter
operating margin of 10.5% , which we expect to expand to 12.2% in the June quarter. More important, we
think Molex can comfortably deliver incremental operating profit contribution in the 30%-40% range longer
term, with the mid point of this range in line with our model for FY11 (June year end), but 500 bp above for
FY12, pointing to possible upside. On top of a significantly better cost structure this cycle, Molex should
benefit from (1) stronger relative growth in emerging markets, with the APAC region representing 60% of
sales and (2) and very strong momentum in new focus accounts—26% of sales in the March quarter, double
the percentage from just 3 years ago. Lastly, MOLX’s valuation looks attractive at EV/sales of just below 1X
(vs 1.7X for peers).
Valuation
Our 12-month target price of $30 is based on a combination of P/E, EV/sales, and EV/EBITDA and equates
to a 1.5X EV/sales on CY10E.
Key risks
Execution in achieving the company's 14% long-term operating margin.
Other Headlines
Equity Trading Strategies
Global: Equity Trading Strategies: Tradewinds: Mixed Signals 5
Noah Weisberger (New York): noah.weisberger@gs.com, (212) 357-6261
Goldman Sachs & Co.
Kamakshya Trivedi (London): kamakshya.trivedi@gs.com, +44(20)7051-4005
Goldman Sachs International
Dominic Wilson (New York): dominic.wilson@gs.com, (212) 902-5924
Goldman Sachs & Co.
Aleksandar Timcenko (New York): aleksandar.timcenko@gs.com, (212) 357-7628
Goldman Sachs & Co.
Our core forecasts, biases, and (remaining) trade recommendations are still mostly constructive, but we
admit that the forward macro outlook is as uncertain as it has been in this recovery, and therefore market
risks remain two-sided.
Our long DAX recommendation has been chopping around its opening level, and whereas the German data
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
are supportive, broader risk considerations continue to predominate, and we are actively assessing the risk-
rewards of staying in the position here.
Setting aside the price action itself, it is the mixed signals from the macro data that are currently our biggest
bugbear. Is the softening in cyclical data across the world a genuine loss of momentum or simply a payback
for a broad-based surge in 1Q, along a basically improving trend?
Somewhat frustratingly, the macro data are not as yet providing clean answers. In a number of places it does
appear that the momentum in the economic recovery may indeed be softening, albeit from very good levels.
But there are also places like the German industrial sector, and the service sector PMIs that we discuss in
greater detail in this week’s Tradewinds, which have been more resilient.
Service sector PMIs – which typically receive less attention than the manufacturing counterparts but affect a
bigger share of the economy – suggest that in substantial parts of advanced economies the recovery is not
yet losing steam in the way that some manufacturing indicators suggest.
Options Research
Weekly Options Watch: WOW June 9 - June 15, 2010 6
John Marshall (New York): john.marshall@gs.com, (212) 902-6848
Goldman Sachs & Co.
Maria Grant, CFA (New York): maria.grant@gs.com, (212) 855-0070
Goldman Sachs & Co.
Amy Wu (New York): amy.wu@gs.com, (212) 902-8960
Goldman Sachs & Co.
Options Insight: Sell puts on TMT stocks where buybacks are likely
High cash balances, debt capacity and stable earnings outlooks provide a favorable backdrop for a potential
for a wave of buybacks across the Technology sector. Recent developments shape our analysts’ view that
we may see a broad wave of buybacks across TMT in the months ahead. Given high options prices across
Technology stocks, we believe this presents an opportunity to sell puts in select stocks. We highlight 10
stocks where investors can collect 10% on average for selling 6-month 95% puts; TER, PCLN, EXPE, NVLS,
GLW, DELL, QCOM, CCI, CSCO, and ACN.
Focus Trade Ideas: ADBE, UPS
Adobe Systems (ADBE) — Buy calls. Upcoming earnings are a potentially positive catalyst for ADBE as this
will be the first look at sales from the key Creative Suite 5 product launch. CS5 should benefit from several
tailwinds including a robust PC refresh cycle, pent-up CS4 demand and MSFT and AAPL operating system
upgrades. Option prices have declined and appear attractive compared to Software peers as well as realized
volatility.
United Parcel Service (UPS) — Buy call spreads. FDX earnings on 16-Jun should provide positive read-
through for Conviction Buy-rated UPS as our analyst expects strong air traffic trends and improving freight
rates. This should benefit both companies while UPS does not suffer from regulatory risk from the FAA
Reauthorization Bill given an already unionized work force (vs. FDX). Option prices are reasonable but not
inexpensive. Consider call spreads to mitigate cost.
Consumer Cyclicals
Americas: Gaming: Conference Day 2: MAR indicates strong Q2; others also constructive 7
Steven Kent, CFA (New York): steven.kent@gs.com, (212) 902-6752
Goldman Sachs & Co.
Neil Portus, CFA (New York): neil.portus@gs.com, (212) 902-2077
Goldman Sachs & Co.
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
Eli Hackel (New York): eli.hackel@gs.com, (212) 902-9672
Goldman Sachs & Co.
Afua Ahwoi (New York): afua.ahwoi@gs.com, (212) 902-1760
Goldman Sachs & Co.
Sinu Padmanabhan (Bangalore): sinu.padmanabhan@gs.com, (212) 934-8950
Goldman Sachs India SPL
Industry context
Day 2 of our conference was well attended. Investors were again very focused on company specific
questions. Some companies indicated near term deceleration in operating trends, but it was not widespread.
Gaming operators: Regional gaming trends stable, no real pick-up
The three regional gaming operators that presented today all indicated that they are not seeing any real
improvement in consumer trends. Visitation is largely flat to down, and spend per visit is still down yoy.
Gaming equipment: Bally slightly more optimistic than peers
Bally’s tone was a little more optimistic than its competitors that presented yesterday with regards to the
replacement cycle. They mentioned that they are seeing some positive signs with regards to a pick up in
replacement sales and expect a lift in late 2010 into early 2011.
Lodging companies: Recovery on track; international still a focus
Marriott, Wyndham and Choice all discussed global growth opportunities as US unit expansion has ground to
a halt across nearly all price points and brands. Marriott was very constructive on RevPAR trends and stated
that RevPAR growth QTD was running at 7.3%. Importantly, there are some signs of actual price increases
and not just occupancy gains.
Cruise lines: Norwegian focuses on how they are “different”; Industry supply rational
Norwegian Cruise gave a strong presentation on how they differentiate their product relative to their peers.
They stated that they have strong bookings for the balance of 2010 and into the out years but have noticed a
slight slowdown in activity the past few weeks (this may be seasonal). They also mentioned that the supply
outlook beyond 2011 looks rational but cautioned that there could be new ship build announcements given
the favorable cost environment.
Car rental: Commercial demand is strong
Avis indicated that commercial demand is strong and there seems to be a near industry wide price increase
starting June 1.
Jones Apparel Group (JNY): Reinstate with Neutral rating; trimming 2011 EPS 8
JNY, $17.09 Benjamin H. Rowbotham, CFA (New York): benjamin.rowbotham@gs.com, (212) 902-7832
Market cap $1,425 mn
Goldman Sachs & Co.
Adrianne Shapira (New York): adrianne.shapira@gs.com, (212) 357-4174
Target price $19.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Morry Brown, CFA (New York): morry.brown@gs.com, (212) 357-0648
EPS ($) 1.66 1.82 Goldman Sachs & Co.
Scott Kaufman-Ross (New York): scott.kaufman-ross@gs.com, (212) 934-4206
P/E 10.3X 9.4X
Goldman Sachs & Co.
EPS Quarter/Interim* 0.40 0.29
Investment Lists
What's changed
Neutral We have removed the NR designation from JNY shares. We have a Neutral rating and a price target $19.
Coverage view Neutral Following the completion of Jones’ acquisition of Stuart Weitzman (SW) we continue to believe Jones will
benefit from further portfolio diversification toward higher end, affordable luxury labels versus their typical
*Current and a year ago
mid-tier forte. Pending the firm’s bond issuance (target $200 mn), we believe SW will provide +$0.03-$0.05 of
EPS accretion annually. That said, we do see higher sourcing costs as a burgeoning headwind for 2011 as
indicated by recent guidance from Polo (calendar 1Q11 gross margin guided down several hundred basis
points in part due to sourcing pressure). While our estimates for JNY did factor in some inflationary costs, we
are further lowering our GM forecast to reflect a yoy decline of 58 bp vs 8 bp prior, in-line with peers (RL and
PVH). The net impact of these two drivers, SW accretion and lower GM, pushes our 2010 estimate up to
$1.66 vs $1.65 prior, while our 2011/2012 forecasts move lower to $1.82/$2.02 vs $1.90/$2.10 prior.
Implications
Following a sharp pullback across discretionary retail over the last week (JNY shares off 10%; dept stores off
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
7%), we see JNY’s risk/reward as much improved with shares trading at 11X 2010E EPS, below LT average
of 12X. That said, inflationary cost pressures and potential revenue headwinds are on the rise. As such, we
continue to see better relative upside in the dept store sector, which carries less macro exposure to the
former issue.
Valuation
We reinstate a 12 month price target of $19 (+12% upside) based on a target PE multiple of 10.5X applied to
our 2011 EPS of $1.82. Our target multiple lies below LT averages of 12X, but above trough levels of 8X,
given rising macro volatility and EPS risk.
Key risks
Better than expected sell through rates and sourcing cost pressures.
Consumer Staples
Dean Foods Company (DF): Near-term visibility remains limited after meeting with management 9
DF, $10.59 Judy E. Hong (New York): judy.hong@gs.com, (212) 902-0490
Market cap $1,941 mn
Goldman Sachs & Co.
Lindsay Drucker Mann, CFA (New York): lindsay.mann@gs.com, (212) 357-4993
Target price $11.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Tyler Walling (New York): tyler.walling@gs.com, (212) 934-0495
EPS ($) 1.15 1.25 Goldman Sachs & Co.
P/E 9.2X 8.4X
EPS Quarter/Interim* 0.25 0.43
What's changed
We recently met with Dean Foods (DF, Neutral) CEO Gregg Engles, COO Joe Scalzo, and CFO Jack
Investment Lists Callahan. We came away from the meeting with continued caution in the near term, as the macro
Neutral environment is structurally challenging the business model. While stepped up focus on cost savings could
Coverage view Attractive lead to increased competitive advantage over time, it remains unclear when we start to see inflection in
fundamentals.
*Current and a year ago
Implications
Key takeaways from the meeting are as follow. (1) DF management remains cautious about the industry
fundamentals in the near term, as retailers continue use private label milk as a loss leader to drive traffic. A
few retailers have tried to take pricing up but none has stuck so far. This is causing continued trading down,
as the price gap between branded and private label remains wide. (2) DF has shifted its strategy on the
branded side and is tactically taking prices up, rather than attempting to price promote branded to compete
against private labels. This could mitigate some of the margin pressure we saw in 1Q10. (3) There are some
signs that capacity is being taken out in the processing industry, but it seems to be happening in small
increments and could take a long time for capacity to better align with demand. (4) In the meantime, DF is
stepping up its focus on cost cutting efforts and is hoping to further gain competitive advantage over time on
improved cost footprint. (5) Perhaps the biggest positive takeaway is the confidence management expressed
in its ability to refinance and change the covenants. This could ease concern over DF’s capital structure,
which could be modestly positive for the stock.
Valuation
We remain Neutral rated on DF shares. Our 12-month price target of $11 remains unchanged and
incorporates 8X-9X P/E and 6X-7X EV/EBITDA.
Key risks
Upside if downtrading abates and downside if raw milk prices spike.
Impact on related securities
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
Financial Services
Tanger Factory Outlet Centers, Inc. (SKT): Revising estimates based on debt issuance: maintain Neutral 10
SKT, $38.97 Jonathan Habermann (New York): jonathan.habermann@gs.com, (917) 343-4260
Market cap $1,800 mn
Goldman Sachs & Co.
Target price $41.00
What's changed
Fiscal y/e Dec 2010E 2011E
SKT announced yesterday its revised 2010 FFO/sh assumptions of $2.37 to $2.47 from $2.57 to $2.67 due
EPS ($) 2.48 2.72 to the issuance of $300 mn of 6.125% senior notes due 2020. The estimated net proceeds of $295.5mn will
P/E 15.7X 14.3X be used to (1) repay a $235 mn unsecured term loan due 2011, (2) pay approximately $6.1 mn ($0.15/sh) to
*
terminate two interest rate swap agreements associated with the term loan and non-cash charge of $0.6 mn
EPS Quarter/Interim 0.49 0.80
to write-off unamortized loan origination costs, and (3) repay borrowings under its lines of credit.
Investment Lists Implications
Neutral We are lowering our 2010/11/12 FFO/share estimates to $2.48/$2.72/$2.82 from $2.68/$2.80/$2.90 based on
Coverage view Neutral the increase in interest expense and the associated one-time charges. With the announced transaction, the
company has pushed out its maturities to 2015 (not including about 11% outstanding on its credit facility) and
*Current and a year ago
we believe the company is well positioned for external growth opportunities based on its strong balance
sheet. Pro forma for this transaction, the company has debt/EV of 30% and debt/EBITDA of 4.4X. In addition,
given consolidation in the outlet segment (SKT, Chelsea, and Prime), we believe the company will need to
source new development projects to sustain its desired level of growth. However, we maintain our Neutral
rating on the factory outlet REIT, given that the company is trading at a wide premium of 53% to its long-term
average of 10.2X. We continue to look for stable growth in its operating performance, given long lease terms
and associated stable cash flow.
Valuation
We maintain our 12-month price target of $41 based on a 10% premium to our NAV estimate of $37
(assumes cap rate of 7.75%), implying a 10.3% return potential.
Key risks
Risks to our view and price target include rising cap rates, lower development yields, and higher funding
costs.
Healthcare
Endo Pharmaceuticals Holdings Inc. (ENDP): Raising estimates following Opana ER settlement - Maintain 11
Buy
ENDP, $20.76 Gregory Waterman, CFA (New York): gregory.waterman@gs.com, (212) 855-7725
Market cap $2,432 mn
Goldman Sachs & Co.
Randall Stanicky, CFA (New York): randall.stanicky@gs.com, (212) 357-3292
Target price $27.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Stephan Stewart (New York): stephan.stewart@gs.com, (212) 934-4218
EPS ($) 3.20 3.56 Goldman Sachs & Co.
P/E 6.5X 5.8X
EPS Quarter/Interim* 0.82 0.73
What's changed
We are raising our EPS estimates to reflect the announced settlement of litigation with Impax over Opana
Investment Lists ER. The settlement allows for Impax generic entry in January 2013 for strengths that cover over 90% of
Americas Buy List Opana ER prescription volume. This extends exclusivity by 1.5 years relative to our previous assumption of
Coverage view Neutral generic entry in mid-2011, in addition to eliminating the risk of a near-term generic launch, which had been an
overhang for shares. Our new 2010-2013 EPS estimates are $3.20, $3.56, $4.11, and $3.75, respectively
*Current and a year ago
(from $3.19, $3.30, $3.34, $3.52).
Implications
Our Buy rating has rested on: (1) attractive valuation; (2) expectations that cash would be put to work on
opportunities that were shareholder friendly and focused on long-term sustainable growth; (3) our belief that
Opana ER risk could be managed; (4) healthy trends for key products; (5) potential EPS upside from share
repurchases and cost control. We note recent data points are largely supportive of this view—the announced
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
HealthTronics acquisition was immediately accretive, according to management, and provides strategic value
and diversification; Lidoderm, Opana ER, Voltaren Gel prescription trends remain solid; the 1Q report
demonstrated cost control and share buybacks; and the Opana ER settlement eliminated near-term risk and
extended exclusivity relative to expectations. We still see an attractive risk/reward with shares trading at a
30%+ discount to the group.
Valuation
We retain our 12-month price target of $27—on 42.5% cash P/E weighting, 42.5% EV/EBITDA and 15%
M&A. Shares trade at 5.8X our 2011 EPS (32% discount to the group) and 3.2X our 2011 EBITDA (39%
discount).
Key risks
Key risks include: (1) an earlier-than-expected loss of Lidoderm exclusivity (though not a 2010 risk); (2)
failures in the pipeline; (3) lower-than expected revenues; and (4) higher-than-anticipated spending.
Technology
Texas Instruments Inc. (TXN): Better guidance underscores robust industry, company dynamics 12
TXN, $23.88 James Covello (New York): james.covello@gs.com, (212) 902-1918
Market cap $29,754 mn
Goldman Sachs & Co.
James Schneider, Ph.D. (New York): james.schneider@gs.com, (917) 343-3149
Target price $34.00
Goldman Sachs & Co.
Fiscal y/e Dec 2010E 2011E Ian Eigenbrod (New York): ian.eigenbrod@gs.com, (212) 902-0695
EPS ($) 2.40 2.50 Goldman Sachs & Co.
P/E 9.9X 9.5X
EPS Quarter/Interim* 0.62 0.25
What's changed
Texas Instruments raised its revenue and EPS guidance in its mid-quarter update after the close on June 8.
Investment Lists Management updated its revenue guidance to $3,450 mn-$3,590 mn (up 8% to 12% qoq) from $3,310 mn-
Americas Buy List $3,590 mn (up 3% to 12% qoq) previously, and raised EPS guidance to $0.60 to $0.64 from the prior range
Coverage view Attractive of $0.56 to $0.64. Importantly, management noted that TI continues to make progress toward reducing lead
times and that customer order patterns have in fact increased even as lead times have come down. Upside in
*Current and a year ago
the quarter was broad based, and management noted the strongest growth in analog and embedded
processing. In terms of end markets, TI noted that broad-based strength continues but that industrial is likely
to remain the strongest area of growth in the quarter.
Implications
We continue to see healthy fundamental dynamics for TI—especially orders remaining strong during a period
of declining lead times—and recommend that investors Buy the stock. We see TI’s above-seasonal strength
(especially in analog) as positive for both TI and the sector, and we believe this should benefit results for
several quarters. We think the market is undervaluing the company’s margin potential through 2011 and
underestimating TI’s share gains in analog over the next 2-3 years. Importantly, we expect TI’s analog share
gains to accelerate in 1H11, given its significantly lower cost structure that is being enabled by its new
300mm analog fab. We are leaving our estimates unchanged, as TI’s increased guidance is essentially
consistent with our above-consensus estimates: 2010/2011/2012 EPS estimates remain at
$2.40/$2.50/$2.70.
Valuation
Our six-month price target remains unchanged at $34 and is based on 15X our 2011 EPS estimate
(excluding baseband) of $2.25.
Key risks
Key risks are revenue declines in wireless and excess inventory.
Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
BMC Software, Inc. (BMC): Investor meetings highlight stability, emerging opportunities 13
BMC, $35.61 Derek R. Bingham (San Francisco): derek.bingham@gs.com, (415) 249-7435
Market cap $6,613 mn
Goldman Sachs & Co.
Gonzalo Cavenaghi (San Francisco): gonzalo.cavenaghi@gs.com, (415) 249-7438
Target price $43.00
Goldman Sachs & Co.
Fiscal y/e Mar 2011E 2012E
EPS ($) 2.53 2.86 What's changed
P/E 14.1X 12.5X We hosted investor meetings with CFO Steve Solcher and VP of IR Derrick Vializ.
EPS Quarter/Interim
*
0.53 0.51 Implications
Consistent with most commentary we have been hearing from other tech companies, BMC has not yet
Investment Lists
observed a significant impact to business from fiscal worries in Europe. Given the company’s dollar functional
Neutral deferred revenue balance, BMC will also likely see one of the more modest currency-related headwinds in
Coverage view Attractive our coverage. We continue to expect roughly 100 bp of operating margin expansion in FY2011, given some
incremental investment taking place to capitalize on growth opportunities. We also would expect to see an
*Current and a year ago
increased pace of share repurchase near term. Our view is that the prospect of BMC’s growing pipeline of
infrastructure deals with cloud operators is a more interesting near-term opportunity than the Cisco
partnership, which receives greater focus. BMC’s best-in-class operations management portfolio is well
positioned to serve as “picks and shovels” for the current public cloud build-out rush. We also believe the
company’s recent strides in SaaS may be underappreciated. With a lowered bar and a head start on 1Q, we
continue to believe the risk/reward profile looks favorable. Though our current investment positioning favors
growth, BMC remains our favorite value idea.
Valuation
BMC trades at 13X CY10E non-GAAP EPS, below the group at 18X. Our 12-month price target of $43.00 is
based on historical P/E multiples, current EV/adjusted FCF/growth multiples, DCF, and an M&A premium.
Key risks
Downside risks: macro sluggishness and large competitors. Upside risks: stronger-than-expected
acceleration in IT infrastructure spending.
Reports Published
Brazil - Real GDP Growth Accelerated to 2.7% QoQ and 9.0% YoY in 1Q2010
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Goldman Sachs Global Investment Research
Americas Morning Summary June 9, 2010
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